Issuance Of Bonus Shares Does Not Amount To Transfer Of Property And Does Not Attract Section 56(2)(vii)(c): ITAT

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that in the issue of bonus shares, the money remains with the company and nothing comes to the shareholders as there is no transfer of the property and the provisions of Section 56(2)(vii)(c) of the Income Tax Act.

The bench of Anubhav Sharma (Judicial Member) and M. Balaganesh (Accountant Member) has observed that when a shareholder gets bonus shares, the value of the original share held by him goes down, and the market value as well as the intrinsic value of two shares put together will be the same or nearly the same as the value of the original share before the issue of bonus shares. Thus, any profit derived by the assessee on account of the receipt of bonus shares is adjusted by depreciation in the value of equity shares held by him.

The respondent/assessee is an individual and had filed her return of income, declaring total income. The assessee had shown income from salary, income from house property, income from capital gains, and other sources. The assessee received bonus shares and bonus units from M/s Tech Mahindra Ltd. and JM Arbitrage Advantage Fund-Bonus Options.

The assessee was asked to show cause as to why the addition should not be made in respect of these bonus shares and bonus units. The assessee submitted that the provisions of Section 56(2)(vii)(c) would not apply to bonus shares at all, as it is merely done by capitalising profits. The value of the shares would remain the same, there would be no increase in the wealth of the shareholders on account of the bonus issue, and his percentage of holding the shares in the company would remain constant. It was explained that pursuant to bonus shares and bonus units, the share or unit gets divided in the same proportion for all the shareholders. There would be no receipt of any property by the shareholder, and what is received is only split shares out of her own holding.

The assessee relied on the decision of the Supreme Court in the case of CIT vs. General Insurance Corporation Ltd., in which it was held that the issuance of bonus shares by a company does not result in any inflow of fresh funds and nothing comes to the shareholders. It was also submitted that the market price of any share after the bonus issue gets reduced almost in proportion to the bonus issue, and hence there would be no increase in the market value of shares held by the assessee pursuant to the bonus issue. The overall wealth of a shareholder post-bonus or pre-bonus remains the same. Hence, the assessee received no additional benefit or income on the allotment of bonus shares because it was only a split of his total rights in the wealth of the company, which remained the same even after the bonus issue.

The AO, however, did not heed the contentions of the assessee and proceeded to treat the bonus shares or bonus units issued as being taxed under Section 56(2)(vii)(c) of the Income Tax Act and added a sum of Rs 36,10,63,656.

The assessee appealed before the CIT (A). The CIT (A) granted the relief to the assessee and held that the AO incorrectly ignored the fact that an assessee "receives" no additional benefit or income on allotment of bonus shares because it is only a case of a split of his total rights in the wealth of a company, which remains the same even after bonus issue.

The tribunal, while upholding the order passed by the CIT (A), held that the bonus shares are issued only out of the capitalization of existing reserves in the company. In the instant case, the AO had not disputed the fact that the overall wealth of a shareholder post- or pre-bonus remains the same. Having held so, it is wrong on AO's part to invoke the provisions of Section 56(2)(vii)(c) on the ground that there is a double benefit derived by the assessee due to bonus shares.

Case Title: DCIT Versus Aruna Chandhok

Case No.: ITA No. 387/Del/2021

Date: 05/09/2023

Counsel For Appellant: Pradeep Dinodia

Counsel For Respondent: P. Praveen Sidharth

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