Court rules dividend income on bonus shares held by wife not taxable under Income-tax Act

The court ruled that dividend income on bonus shares held by the assessee's wife was not taxable under section 64(iii) of the Income-tax Act, 1961 for assessment years 1968-69 and 1969-70. The court emphasized that the legislation did not intend to tax income arising from accretions to assets transferred to family members. The court referred to previous decisions and held in favor of the assessee, directing the Commissioner to pay the costs of the reference to the assessee.

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Issues:
1. Taxability of dividend income on bonus shares under section 64(iii) of the Income-tax Act, 1961 for assessment year 1968-69.
2. Taxability of dividend income on bonus shares under section 64(iii) of the Income-tax Act, 1961 for assessment year 1969-70.

Analysis:
The case involved a reference under section 256(1) of the Income-tax Act, 1961 regarding the taxability of dividend income on bonus shares held by the assessee's wife. The assessee had transferred 400 shares to his wife, who later received 160 bonus shares. The Income Tax Officer (ITO) contended that the entire 560 shares should be considered assets transferred by the assessee, and the dividend income should be included in the assessee's income under section 64 of the Act. However, the Appellate Assistant Commissioner (AAC) and the Income-tax Appellate Tribunal ruled in favor of the assessee, holding that the dividend income on the bonus shares was not taxable under section 64(iii) of the Act.

The court referred to a previous Division Bench decision where it was held that income from bonus shares allotted to a minor child could not be taxed in the hands of the transferor under the Income Tax Act, 1922. Although the provisions differed, the court found the principles applicable to the current case. The court emphasized that the legislation did not intend to tax income arising from accretions to assets transferred to family members. Citing another case, the court reiterated that the same principle applied under section 64(1)(iv) of the Income-tax Act, 1961.

Consequently, the court answered both questions regarding the taxability of dividend income on bonus shares in the negative, ruling against the Revenue. The Commissioner was directed to pay the costs of the reference to the assessee.

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