AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (5) TMI 194
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....appeal before us. 4. Heard the parties and perused the material available on record. The ld. DR relied upon the order passed by the AO, whereas the ld. AR supported the impugned order while relying upon CBDT Circulars and various decisions of the Hon'ble Apex Court, High Courts and Tribunal to the effect that provisions of section u/s 56(2)(vii)(c) of the Act would not apply to bonus shares. 4.1 The only issue involved in the instant case relates to acquiring of bonus shares and applicability of the provisions of section 56(2)(vii)(c) of the Act to the same. 4.2 The AO computed the FMV of bonus share by HCL Technologies Ltd in terms of Rule 11UA of the Rules to the tune of Rs. 47,21,93,975/- and consequently, added the said amount in the total income of the Assessee by applying the provisions of section 56(2)(vii)(c) of the Act. The AO further observed that section u/s 56(2)(vii)(c) read with section 2(24)(xv) is charging section which created entirely new charge of tax on the case of the individuals and HUF on receipt of property without consideration or at a consideration which is less than fair market value. The provision applies only when the recipient of the property is an ....
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.... of his holding. Accordingly, there is no gift or accretion to property. The shareholder is getting only the value of his/her existing shares, which stands reduced to the same extent. The same has the effect of reducing the value per share. Further, it is submitted that there is a specific Section 55(2)(aa)(iiia) of the IT Act which provides that for the purposes of section 48 and 49, the cost of acquisition in relation to the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial asset (i.e. Bonus" shares etc), shall be taken to be Nil. Hence, specific provision would prevail over the general provisions. Cost of bonus shares shall be considered as Nil and subsequent sale of such bonus shares shall be liable for capital gain tax as per then provision of the IT Act. Further, since the cost of bonus shares is Nil in the hands of recipient, there is no benefit / income being availed by recipient on receipt of bonus shares. The appellant has submitted that bonus shares are not something which has been received free or for a lesser FMV. Consideration has flown out from the holder of the shares, which is reflected in the depression....
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....ence of income in qualitative sense. It is also submitted that there is no "transfer" involved in allotment of shares by a company to the share applicants as has been observed by the Hon'ble Supreme Court in the case of Khoday Distilleries Ltd. vs. CIT (civil appeal no. 6654 of 2008 dated 14-11- 2008). The Supreme Court in this case observed that the bonus shares are nothing but mere capitalisation of the profits of the Company in respect of which certificates are issued to the shareholders entitling them to participate in the amount of the reserve. It doesn"t involve release of assets either as income or as capital. 5.4 The assessment order and the submission of the appellant have duly been considered. It is noted that the AO has not given any adverse finding in respect of transactions of purchase and sale of shares / bonus shares. The crux of the matter is that since bonus shares were received without any consideration, the provisions of Section 56(2)(vii)(c) are applicable. The " AO has also given the finding that the appellant has tried to take benefit of the loss on sale of original shares twice. The first benefit or first set off was claimed in A.Y. 2015-16 as the appellant....
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....It is held that when bonus shares are received, it is not something, which has been received free or for a lesser FMV. Consideration has flown out from the holder of the shares, may be unknown to him/her, which is reflected in the depression in the intrinsic value of the original shares held by him/her. The relevant observations of the Hon'ble ITAT in the case of Dr. RajanPai are reproduced as under:- "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 get split (in the same proportion of all the shareholder), as for example by a factor of two in case of a 1:1 bonus issue. Reference in this regard may be made 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 therefrom, besides inter alia to Hunsur Plywood Works Ltd. vs. CIT [1998] 229 ITR 112 (SC), where the same were referred to as 'capitalization shares'. In other words, there is no receipt of any property by the shar....
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....that provisions of section u/s 56(2)(vii)(c) are not applicable to the case of the Assessee, also followed the judgment of the Hon'ble Apex Court in the case of CIT Vs. Dalmia Investment Co. Ltd (1964) 52 ITR 567 (SC) wherein, it was held as under:- "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 stockholder is no richer than they were before. ...If the plaintiff gained any small advantage by the change, it certainly was not an advantage of Rs 417,450 the sum upon which he was taxed. ... What has happened is that the plaintiff's old certificates have been split up in effect and have diminished in value to the extent of the value of the new." .........................................
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....rvations of the Hon'ble Tribunal in the case of Rajan Pai Bangalore Vs. Department of Income Tax (Supra) are reproduced herein below:- "It is easy to see that the new share partakes a part of the value of the existing share, which is only on the basis of the underlying assets on the company's books. The excess (over face value), or Rs. 1,400/-, gets apportioned over two shares as against one earlier, which is aIready the shareholders" property. This is also the basis and the premise of the decisions in ie case of DhunDadabhoyKapadia vs. CIT [1967] 63 ITR 651 (SC) and H. Hoick Larsen vs. IT [1972] 85 ITR 285 (Bom), relied upon and referred to by the parties before us. As long as, therefore, there is no disproportionate allotment, i.e. shares are allotted pro-rata to the shareholders, based on their existing holdings, there is no scope for any property being received by them on the said allotment of shares: there being only an apportionment of the value of their existing holding over a larger number of shares. There is, accordingly, no question of section 56(2)(vii)(c), though per se applicable to the transaction, i.e., of this genre, getting attracted in such a case." 4.7 We ....