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Issues: Interpretation of Wealth-tax Act, 1957 regarding the assessability of bonus shares received by donees, the impact of irrevocable transfer on the ownership of assets, and the applicability of Companies Act provisions in determining wealth tax liability.
Analysis: The judgment by the High Court of Kerala addressed a crucial question referred by the Income-tax Appellate Tribunal concerning the assessability of bonus shares received by donees in 1967, who were in possession of shares transferred to them in 1961 by the assessee. The court deliberated on whether the bonus shares should be considered assets in the hands of the transferees or the transferor under the Wealth-tax Act, 1957. The court noted that bonus shares were issued to the transferees based on the shares they held, signifying an accretion to the original shares. Despite being issued in the names of the transferees, the bonus shares were intricately linked to the original shares, leading to the conclusion that they should follow the same ownership as the original shares as per the transfer instruments. The court highlighted that the transfer of shares must comply with the Companies Act provisions, but the tax liability is governed by the Wealth-tax Act. The court referred to Section 4(5) of the Act, emphasizing that assets under an irrevocable transfer become assessable in the transferor's hands when the power to revoke arises, regardless of the actual retransfer under the Companies Act. The court rejected the argument that bonus shares issued to transferees should not be assessable in the hands of the transferor, contrary to the decision of the Madras High Court in a similar case. The court clarified that under the Wealth-tax Act, bonus shares revert to the transferor upon the power to revoke arising, even if the actual retransfer has not yet occurred. This interpretation aligns with the statutory provisions and ensures that the transferor is liable for wealth tax on such assets when the power to revoke materializes. The court's decision favored the Revenue, emphasizing the importance of statutory provisions over contrary interpretations by other High Courts. In conclusion, the judgment provided a comprehensive analysis of the interplay between bonus shares, transfer of assets, and wealth tax liability under the Wealth-tax Act, 1957. By interpreting the statutory provisions in conjunction with transfer instruments and Companies Act requirements, the court clarified that bonus shares issued to transferees are deemed to revert to the transferor for wealth tax assessment purposes upon the power to revoke arising, irrespective of the actual retransfer process.
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