AI Drafter 
TaxTMI 
TaxTMI 
2019 (7) TMI 646
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....eized material and submissions filed by he assessee, it was noticed that assessee had invested in the shares of M/s. Bestech India Pvt. Ltd. During the assessment year under appeal, she was allotted 10,000 equity shares @ Rs. 400/- on 18.03.2010 and further 6,29,428 bonus shares were allotted to the assessee on 31.03.2010 without taking any consideration for these shares and 1,47,357 right shares were allotted to the assessee on 23.03.2010 at the face value of Rs. 10/- by M/s. Bestech India Pvt. Ltd. The details are notedin the assessment order. For arriving out of fair market value of the shares of M/s. Bestech India Pvt. Ltd., as on 31.03.2012 Rule 11UA of the I.T. Rule was applied and book value of equity share was calculated which comes to Rs. 22.63/-. Detailed working is noted in the order. M/s. Bestech India Pvt. Ltd., have allotted bonus shares at Nil consideration to its share holders when the book value as per Rule 11UA is Rs. 22.63/- and Rs. 31.50/- respectively as on 31.03.2010. The A.O. therefore, noted that there is net accretion of wealth as per book value in the hands of the assessee due to receipt of bonus shares. Thus the provisions of section 56(2)(vii)(c) a....
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....head 'income from other sources'. However, receipts from relatives or on the occasion of marriage or under a will are outside the scope of this provision. The existing definition of property for the purposes of section 56 (2)(vii) includes immovable property being land or building or both, shares and securities, jewellery, archeological collection, drawings, paintings, sculpture or any work of art. A. These are anti-abuse provisions which are currently applicable only if an individual or an HUF is the recipient. Therefore, transfer of shares of a company to a firm or a company, instead of an individual or an HUF, without consideration or at a price lower than the fair market value does not attract the anti-abuse provision. In order to prevent the practice of transferring unlisted shares at prices much below their fair market value, it is proposed to amend section 56 to also include within its ambit transactions undertaken in shares of a company (not being a company in which public are substantially interested) either for inadequate consideration or without consideration where the recipient is a firm or a company (not being a company in which ....
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.... case of a 1:1 bonus issue. (iv) Reference in this regard may be to the decision in CIT vs Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC) as well as in Khoday Distilleries Ltd. (Supra), wherein reference stands made to the former, also quoting there from besides inter alia to Hunsur Plywood Works Ltd vs CIT[ 1998] 229 ITR 112 (SC), where the same were referred to as 'capitalization shares'. (v) In other words, there is no receipt of any property by the shareholder, and what stands received by him is the split shares out of his own holding. It would be akin to somebody exchanging a one thousand rupee note for two five hundred or ten hundred rupee notes. There is, accordingly, no question of any gift of or accretion to property; the share holder getting only the value of his existing value per share, increasing its mobility and, thus, liquidity, in the sense that the shares become more accessible for transactions and, thus, trading, i.e. considered from the holders' point of view. We may though add a note of caution. There could be a case of bonus issue coupled with the release of assets (of the issuing company) in favour of the shareholders. The same would fall ....
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....th rule 11UA of the Act. 14. Ld. AR submits that Provisions of Section 56(2)(vii) would not be applicable to a transaction as the one under consideration whereas Ld. DR submits that section 56 (2) get attracted when an individual or HUF receives without any consideration property, the FMV of which is in excess of Rs. 50,000/-, or where the consideration, paid is less/more than FMV. The issue that needs to be addressed is in respect of applicability of section 56 (2) (vii) of the Act to the facts of the case before us. 15. Reference was made by Ld. AR of the legislative intent towards background and insertion of section 56 (2) (vii) of the Act which is as under: " History of section 56 (2) After the abolition of Gift Tax, Finance (No. 2) Act 2005 brought gifts into income tax by introduction of clause (v) to section 56(2) whereby receipt of any sum of money exceeding Rs. 25,000/- without consideration by Individual and HUF was made taxable in the hands of recipient. Finance Act 2006 introduced clause (vi) to section 56(2) which almost replicate clause (v) however, the minimum limit has been increased from Rs. 25,000/- to Rs. 50,000/- . Th....
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....erty; (ii) for a consideration 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: The legislative intent behind introduction of this provision was to curb laundering of unaccounted income under the pretext of gifts by preventing practice of transferring shares of an unlisted company without consideration or at a price lower than the Fair Market Value (FMV) and to bring it under the tax net. Hence, these provisions are in the nature of anti-abuse provisions. Legislator has also opened up its intention at page no. 7 of Explanatory Memorandum to Finance Bill 2010 which is being re produced below. "Taxation of certain transactions without consideration Or for inadequate consideration": Under the existing provisions of section 56(2}(vii), any sum of money or any property in kind which, is received without consideration or for inadequate consideration (in excess of the prescribed limit of Rs. 50,000/-) by an individual or an HUF is chargeable to income fax in the hands of recipient under the head 'in....
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.... shares are allotted have to pay nothing. The purpose is to capitalise profits which may be available for division. Bonus shares go by the modern name of "capitalisation shares". If the articles of a company empowers the company, it can capitalise profits or reserves and issue fully paid-up shares of nominal value, equal to the amount capitalised to its shareholders. The idea behind issue of bonus shares is to bring the nominal share capital into line with the excess of assets over liabilities. A company would like to have more working capital but it need not go into the market for obtaining fresh capital by issuing fresh shares. The necessary money is available with it and this money is converted into shares which really means that the undisturbed profit, have been ploughed back into the business and converted into share capital. Therefore fully paid-up bonus shares are merely a distribution of capitalised undivided profit. It would be a misnomer to call the recipients of bonus shares as donees of the shares from the company." Hon'ble Supreme Court further held as under: "when a shareholder gets a bonus shares the value of the original share held by him ....
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....ropertly by the shareholder, and what stand received by him is the split shares out of his own holding. It would be akin to somebody exchanging the a one thousand rupee note for two five hundred or ten hundred rupee notes." "There is, accordingly, no question of any gift of or accretion to property; the shareholder getting only the value of his existing shares, which stands reduced to the same extent. The same has the effect of reducing the value per share, increasing its mobility and, thus liquidity, in the sense that the shares become more accessible for transactions and, thus, trading." 22. The issue in hand stands covered by this order of the co-ordinate bench. The sum and substance of the decision of Hon'ble Supreme Court in the case of Khoday Distilleries Ltd., (supra) is that, no properties being conveyed to a shareholder by issue of bonus/right shares inasmuch as the property therein is comprised in the existing shareholding of the allottee. Similarly no property however is being passed on to the assessee in the instant case before us on allotment of bonus/right shares and the no addition could be made by applying provisions of section 56 (2) (vii) as the ....