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Issues: (i) Whether allotment of rights issue shares to existing shareholders or their nominees constituted a gift under the Gift-tax Act, 1958; (ii) Whether issue of bonus shares in the ratio of 1:23 amounted to a gift liable to gift tax.
Issue (i): Whether allotment of rights issue shares to existing shareholders or their nominees constituted a gift under the Gift-tax Act, 1958.
Analysis: Allotment of shares was treated as creation of shares by appropriation out of unappropriated capital, not as transfer of an existing property. The distinction between creation and transfer was decisive, and the liability, if any, in a case of renunciation would lie against the renouncing shareholder and not the company making the allotment. The deeming provision relating to gift therefore did not apply to the company on these facts.
Conclusion: The issue was answered in favour of the assessee and against the Department.
Issue (ii): Whether issue of bonus shares in the ratio of 1:23 amounted to a gift liable to gift tax.
Analysis: Bonus shares were held to be capitalisation of accumulated profits and not a distribution of money or property by the company. The shareholder may derive a benefit, but the original shareholding correspondingly loses value and no transfer of wealth from the company to the shareholder takes place. Such issuance therefore did not answer the statutory concept of gift.
Conclusion: The issue was answered in favour of the assessee and against the Department.
Final Conclusion: The gift tax demand could not be sustained on either the rights issue allotment or the bonus issue, and the assessee's appeal succeeded.
Ratio Decidendi: Allotment of shares is a process of creation, not transfer, and bonus shares are merely capitalisation of reserves; neither constitutes a taxable gift absent a transfer of existing property by the donor.
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