TaxTMI 
TaxTMI 
2016 (5) TMI 216
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.... share was Rs. 10/- each. AO was of the opinion that assessee having not paid any consideration for the bonus shares, he was obliged to offer the fair market value as 'income from other sources' u/s.56(2)(vii)(c) of the Income-tax Act, 1961 ('the Act' in short). When the assessee was put on notice, assessee took a stand that bonus shares were taxable only when the beneficiary received the shares and not on allotment. Assessee also relied on a circular No.6/2014, dt.11.02.2014 by CBDT. However, the AO was not impressed. According to him, circular referred by the assessee was in relation to Section 115R of the Act, which dealt with bonus units issued by a mutual fund house. As per the AO, fair market value of the bonus shares issued by MEMG was required to be computed in accordance with Rule 11U and 11UA of the Income-tax Rules, 1962 ('the Rules' in short). He applied Rule 11UA and determined the fair market value of the 1,00,00,000 number of bonus shares at Rs. 12,49,00,000/-. The addition was made u/s.56(2)(vii)(c) of the Act, under the head 'other sources'. 03. Aggrieved, assessee moved in appeal before the CIT (A). Argument of the assessee was that Section 56(2)(vii) of the Act,....
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....l shares held by him went down, depression in the price was offset by the value of the bonus shares. Therefore, as per the Ld. DR, the bonus shares were automatically imbibed with a value. Cost could be easily worked out by dividing the value of shares earlier held with total number of shares including the bonus shares. In any case, according to him, the view taken by the CIT (A) that Section 56(2)(vii) of the Act, could not be applied for issue of bonus shares, was incorrect. As per the Ld. DR, sub-clause(c) of clause (vii) of Section56(2) of the Act, mentioned clearly that any property other than immovable property received by an assessee without consideration has to be valued and considered as income. It was for the specific purpose of valuation of such property, Rule 11U and 11UA were introduced in the Rule Book. As per the Ld. DR, Rule 11UA, gave the method of valuing shares and equities. Such method included one for valuing equity shares which were not quoted also. As per the Ld. DR, AO had followed the mandate of the Act and had made correct valuation of the bonus shares. Such value, by virtue of Section 56(2)(vii)(c) of the Act, was a part of 'income from other sources' of ....
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....r the head "Income from other sources", namely:-- i).... ii)... iii)... iv)... (v) where any sum of money exceeding twenty-five thousand rupees is received without consideration by an individual or a Hindu undivided family from any person on or after the 1st day of September, 2004, but before the 1st day of April, 2006, the whole of such sum : Provided that this clause shall not apply to any sum of money received-(a) from any relative ; or (b) on the occasion of the marriage of the individual ; or(c) under a will or by way of inheritance ; or(d) in contemplation of death of the payer ; or(e) from any local authority as defined in the Explanation to clause (20) of section 10 ; or(f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10 ; or(g) from any trust or institution registered under section 12AA. Explanation For the purposes of this clause, "relative" means- (i) spouse of the individual ; (ii) brother or sister of the individual ; (iii) brother or sister of the spouse of the individual ; (iv) brother or sister of ....
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....which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration : Provided that where the stamp duty value of immovable property as referred to in sub-clause (b) is disputed by the assessee on grounds mentioned in sub-section (2) of section 50C, the Assessing Officer may refer the valuation of such property to a Valuation Officer, and the provisions of section 50C and sub-section (15) of section 155 shall, as far as may be, apply in relation to the stamp duty value of such property for the purpose of sub-clause (b) as they apply for valuation of capital asset under those sections : Provided further that this clause shall not apply to any sum of money or any property received-(a) from any relative ; or(b) on the occasion of the marriage of the individual ; or(c) under a will or by way of inheritance ; or(d) in contemplation of death of the payer or donor, as the case may be ; or(e) from any local authority as defined in the Explanation to clause (20) of section 10 ; or(f) from any fund or foundation or university or other educational institution or ho....
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....4.2007 and clause (vii) by Finance (No.2) Act, 2009 w.e.f.01.10.2009 were only extrapolation of the above intention, while widening its scope to ensure that where a person received a property without consideration, or for a consideration less than its fair market value, was levied tax on the value thereof, as a part of his 'income from other sources'. 08. Keeping in mind the above legislative history, we need to have a close look to clause (vii) to Section 56(2), for ascertaining whether it could be applied to bonus shares. Prior to the introduction of clauses (v), (vi) and (vii), and during the period Gift-tax Act was applicable, issue of bonus shares was never considered as gift by a company to its share holder and never subjected to gift-tax in the hands of the company considering it to be a donor. When clauses (v), (vi) and (vii), were introduced in Section 56(2), subsequent to the repeal of the Gift-tax Act, for redressing the vacuum created on account of such repeal, can we say that legislative intention was to include therein items which were not within the ambit of Gift-tax Act also ? The answer obviously is no. 09. A careful study of clause (c) of Section 56(2)(vii) of t....
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....nus shares does not result in recipient getting a property without consideration or for inadequate consideration. It is for this reason that Mumbai bench in the case of Sudhir Menon HUF (Supra) made the following observation in para 4.2 of its order : "......We may, before we conclude our discussion on this aspect of the matter, dilate on the application of the provision to the transaction of the nature under reference. The provision, firstly, would not apply to bonus shares, and the argument alluding thereto arises only on account of misconception in respect thereof. Though the shares under reference are admittedly not bonus shares, we consider it relevant to dwell thereon, not only to meet the argument in their respect, made emphatically before us, but also to demonstrate the wholesomeness of the provision, which is in fact what was being sought to be impugned. Issue of bonus shares is by definition capitalization of its profit by the issuing-company. There is neither any increase nor decrease in the wealth of the shareholder (or of the issuing company) on account of a bonus issue, and his percentage holding therein remains constant. What in effect transpires is that a share ge....
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....lved, and divided between the old and the bonus shares. This will ordinarily be the case but not when the shares do not rank pari passu and we shall deal with that case separately. When the shares rank pari passu the result may be stated by saying that what the shareholder held as a whole rupee coin is held by him, after the issue of bonus shares, in two 50 nP. coins. The total value remains the same, but the evidence of that value is not in one certificate but in two. This was expressed forcefully by the Supreme Court of the United States of America, quoting from an earlier case, in Eisner v. Macomber* thus: "A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished, and their interests are not increased...The proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones....In short, the corporation is no poorer and the stock-holder is no richer than th....
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....nd the contention of the department in this case is right. But this is not the end of the present discussion. This simple method may present difficulties when the shares do not rank pari passu or are of a different kind. In such cases, it may be necessary to compare the resultant price of the two kinds of shares in the market to arrive at a proper cost valuation. In other words, if the shares do not rank pari passu, assistance may have to be taken of other evidence to fix the cost price of the bonus shares. It may then be necessary to examine the result as reflected in the market to determine the equitable cost. In England paragraph 10 of Schedule IX to the Finance Act, 1962, provides for such matters and for valuing rights issue but we are not concerned with these matters and need not express an opinion. It remains to refer to three cases to which we have already referred in passing and on which some reliance was placed. In Commissioner of Income- tax v. Manecklal Chunnilal and Sons Ltd.* the assessee held certain ordinary shares of the face value of Rs. 100 in Ambica Mills Ltd. and Arvind Mills Ltd. These two companies then declared a bonus and issued preference shares in the ....
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....ares and found a profit of Rs. 1,060 on the sale of 50 shares instead of a loss of Rs. 1,365 which was claimed. The assessee did not appeal. In the financial year 1951-52 (assessment year 1952-53) the assessee started with 150 shares (100 purchased and 50 bonus). It then purchased 200 shares in two lots and sold 300 shares, leaving 50 shares. The assessee company claimed a loss of Rs. 35,801. The Income-tax Officer computed the loss at Rs. 27,766 and the Tribunal computed the loss at Rs. 27,748. The Tribunal, however, did not disturb the loss as computed by the Income-tax Officer in view of the slender difference of Rs. 18. The High Court's decision was reversed by this court because the High Court ignored all intermediate transactions and averaged the 300 shares with the 50 bonus shares. The shares in respect of which the bonus shares were issued were already averaged with the bonus shares. This was not a case of bonus shares issued in the year of account. It involved purchase and sale of some of the shares. The average cost price of the original and bonus shares was already fixed in an earlier year by the department and this fact should have been taken into account. No doubt,....