Tribunal upholds capital treatment of bonus shares in reconstruction scheme appeal

The Tribunal dismissed the Departmental appeal, upholding the CIT(A)'s decision regarding the treatment of shares received by the assessee as part of a reconstruction scheme. The shares were deemed not to result in any income until sold, with their value considered nil for profit computation. The Tribunal ruled that the allotment of shares, received free of cost to compensate for share value decline, did not generate any gain or perquisite for the assessee. Case laws were cited to support the capital treatment of bonus shares, rejecting the argument that the transaction constituted income under the IT Act.

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Issues involved:
1. Treatment of shares received by the assessee as income under s. 28(iv) of the IT Act.
2. Whether the shares received free of cost can be considered a benefit or perquisite arising from business.
3. Applicability of judgments in similar cases to determine the treatment of bonus shares.

Analysis:

1. The Departmental appeal revolved around the deletion of an addition of Rs. 53,51,500 on account of shares of a company received by the assessee. The assessee argued that the shares were received as part of a scheme of reconstruction and arrangement between two companies and should not be treated as income. The AO, however, considered the shares as a benefit arising from business and treated them as income under s. 28(iv). The CIT(A) held in favor of the assessee, stating that the shares did not result in any gain or profit until they were sold in the market. The Tribunal upheld the CIT(A)'s decision, directing the AO to consider the value of the shares as nil for computing profits upon sale.

2. The key issue was whether the shares received free of cost by the assessee could be treated as income under s. 28(iv). The Tribunal analyzed the nature of the transaction and concluded that the shares were allotted to compensate for the fall in the value of shares of the company disposing of its unit. The Tribunal emphasized that the allotment was based on the valuation of the unit disposed of and the shares of both companies, approved by the High Court. It was established that no gain or perquisite accrued to the shareholder due to the allotment of shares. The Tribunal rejected the AO's argument and held that the treatment of the shares as capital profit did not result in any income to the assessee.

3. The Tribunal referred to relevant case laws, including CIT vs. Madan Gopal Radhey Lal and CIT vs. Groz-Beckert Saboo Ltd., to support the assessee's contention that bonus shares or shares received free of cost should be treated as capital and not income. The Tribunal distinguished the AO's reliance on the judgment in CIT vs. Bhavnagar Bone & Fertiliser Co. Ltd. and held that the transaction did not result in any benefit or perquisite to the assessee. The Tribunal also dismissed the AO's reliance on the principle of colorable device from the case of McDowell & Co. Ltd. vs. CTO, emphasizing that the assessee was not involved in the transaction between the two companies.

In conclusion, the Tribunal dismissed the Departmental appeal, upheld the CIT(A)'s decision, and deemed the cross-objection filed by the assessee as infructuous. The judgment clarified the treatment of shares received free of cost by the assessee, emphasizing that no income or gain arose from the transaction until the shares were sold in the market.

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