Allotment of rights shares is creation of shares, not a transfer; no gift under Section 2(xii); renouncers liable

SC held that allotment of rights shares constitutes creation of shares, not a transfer, so no gift arose under Section 2(xii) on allotment; liability for any gift tax would lie on shareholders who renounced their rights, not the company. The Court found departmental confusion and failure to invoke the Gift-tax Act against renouncers. The impugned HC decision was set aside and the assessee's appeal allowed.

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Issues: (i) Whether allotment of rights issue amounted to a "gift" within Section 2(xii)/Section 4(1)(a) of the Gift-tax Act, 1958; (ii) Whether issuance of bonus shares (ratio 1:23) involved an element of "gift" under Section 2(xii) of the Gift-tax Act, 1958.

Issue (i): Whether the allotment of right shares to existing shareholders/investment companies constituted a transfer or a creation attracting gift-tax under Section 4(1)(a) of the Gift-tax Act, 1958.

Analysis: The concept of "allotment" denotes appropriation out of unappropriated capital and results in creation of shares which did not exist prior to allotment. A distinction exists between issuing new shares (creation) and transferring existing shares (transfer of chose in action). Renunciation by a shareholder may, in certain factual settings, create a transferable existing right; liability under the Gift-tax Act normally lies on the donor (renouncer) rather than on the company effecting allotment. Prior authority establishes that initial allotment creates shares and is not a transfer of existing property; therefore Section 4(1)(a) is not attracted on allotment to the company as donee in these facts.

Conclusion: Allotment of right shares in the facts before the Tribunal did not amount to a "gift" under Section 4(1)(a) and Section 2(xii) of the Gift-tax Act, 1958; conclusion is in favour of the assessee and against the Revenue.

Issue (ii): Whether issuance of fully paid bonus shares (capitalisation of reserves) to shareholders constituted a gift under Section 2(xii) of the Gift-tax Act, 1958.

Analysis: Bonus shares represent capitalization of undistributed profits and are a redistribution within the companys capital structure rather than a distribution of assets to shareholders. The issuance increases share certificates but does not release company assets to shareholders; the proportional interest remains the same and the market/intrinsic value of holdings is adjusted. Authorities recognize bonus shares as capitalization and not a distribution yielding taxable gift.

Conclusion: Issuance of bonus shares in the stated ratio did not constitute a "gift" under Section 2(xii) of the Gift-tax Act, 1958; conclusion is in favour of the assessee and against the Revenue.

Final Conclusion: The impugned decision taxing the company for allotment of right shares and for issuance of bonus shares is set aside; the legal effect is that neither the allotment of rights nor the bonus issue, on the facts before the adjudicating authorities, gives rise to gift-tax liability on the company.

Ratio Decidendi: Allotment of shares from unappropriated capital constitutes creation (not transfer) of shares and bonus shares are capitalization of reserves; consequently neither allotment nor bonus issue, in the described facts, attracts gift-tax under the Gift-tax Act, 1958.

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