No Income Tax Payable On Bonus Shares Under The Head ‘Income From Other Sources’: ITAT

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that income tax is not chargeable on bonus shares under the heading ‘income from other sources’.

The bench of Anubhav Sharma (Judicial Member) and M. Balaganesh (Accountant Member) has observed that the bonus shares are issued only out of the capitalization of existing reserves in the company. The AO had not disputed the fact that the overall wealth of a shareholder, post-bonus or pre-bonus, remains the same. It is wrong on his part to invoke the provisions of Section 56(2)(vii)(c) of the Income Tax Act on the ground that there is a double benefit derived by the assessee due to bonus shares.

The respondent/assessee is an individual and had filed her return of income, declaring a total income of Rs 8,56,57,000. 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 to show cause as to why the addition under Section 56(2)(vii)(c) of the Income Tax Act 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 they are merely capitalised 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., which 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. 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) and added a sum of Rs. 36,10,63,656.

At what stage some shares are to be sold is at the absolute discretion of the person holding the shares. There is no compulsion by law that an assessee should sell his total holdings immediately upon the allotment of bonus shares. Therefore, the AO’s assumption that the assessee would get double benefits is completely devoid of any merit and has no basis.

The assessee made various legal submissions before the CIT (A) to drive home the point that no benefit is derived by a shareholder immediately on allotment of bonus shares and further submitted that allotment of bonus shares would not be income at all. The cost of bonus shares would be nil in terms of Section 55(2)(aa)(i).

The CIT (A) held that AO also erred in concluding that the provisions of section 55(2)(aa)(i) are not applicable in the case of determining the cost of acquisition of bonus shares. The AO failed to recognise that, had the legislature intended so, the exclusion would have been provided for the non-applicability of the provisions of Section 55(2)(aa)(i) with respect to the issuance of bonus shares to the transactions referred to in Section 56(2).

The ITAT upheld that order passed by the CIT (A) and relied on the decision of the Karnataka High Court in the case of Principal Commissioner of Income Tax vs Dr Ranjan Pai in which it was held that when there was an 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) is not attracted.

Case Title: DCIT Versus Smt Aruna Chandhok

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

Date: 05/09/2023

Counsel For Appellant: Pradeep Dinodia

Counsel For Respondent: P. Praveen Sidharth

Click Here To Read The Order