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Deputy Commissioner of Income-tax Versus Dr. Rajan Pai

2016 (5) TMI 216 - ITAT BANGALORE

Income from Other Sources - addition made by the AO, considering the fair market value of the bonus shares received by the assessee from one M/s. Manipal Education & Medical Group (India) P. Ltd - Held that:- An assessee who received bonus shares could never be considered as receiving something without consideration or for a consideration less than the fair market value of the property. When bonus shares are received, it is not something which has been received free or for a lesser fair market v .....

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only on receipt of shares as gift or for inadequate consideration. Bonus shares can never be considered as received without consideration or for inadequate consideration calling for application of subclause (c) of clause (vii) of Section 56(2) of the Act. We have no hesitation to uphold the order of CIT (A) deleting the addition made by the AO. - Decided in favour of assessee - I.T.A No. 1290/Bang/2015 - Dated:- 29-4-2016 - Shri. Abraham P. George, Accountant Member And Shri. George George K, Ju .....

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Income from Other Sources . 02. Apropos facts are that assessee, a medical professional, had filed his return declaring income of ₹ 3,22,43,332/-. During the course of assessment proceedings, it was noted by the AO that assessee had received 1,00,00,000 number of equity shares from MEMG, as bonus shares against his holding of 5,000 fully paid up equity shares in the said company. Face value of share was ₹ 10/- each. AO was of the opinion that assessee having not paid any consideratio .....

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ection 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 ₹ 12,49,00,000/-. The addition was made u/s.56(2)(vii)(c) of the Act, under the head other sources . 03. Aggrieved, asses .....

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l and unless there was a disproportionate allotment of shares, there could be no specific value that could be attached to such bonus shares and Section 56(2)(vii)(c) of the Act, would not get attracted. As per the assessee, though Circular No.6/2016, dt.11.02.2014 of CBDT was issued in relation to Section 115R(2) of the Act, analogy therein would apply here also. Reliance was also placed on a decision of the Mumbai Bench of the Tribunal in the case of Sudhir Menon HUF v. ACIT [(2014) 148 ITD 260 .....

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when there was an issue of bonus shares, the money remained with company and nothing came to the shareholder. He held that sub-clause (c) of caluse (vii) of sub-section (2) of Section 56 of the Act could not be applied to bonus shares and deleted the addition made by the AO. 05. Now before us, Ld. DR strongly assailing the order of the CIT (A), submitted that the judgment of Hon ble Apex Court in the case of General Insurance Corporation (supra) was prior to introduction of clause (vii) to Secti .....

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nal 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. D .....

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d. 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 the assessee. 05. Per contra and in support of the order of CIT (A), Ld. AR submitted that legislative history of Section 56(2)(v) inserted by Finance (No.2) Act, 2004 and subsequent addition of clause (vi), w.e.f. 01.04.2007 and clause (vii) through Finance (No.2) Act, 2009, w.e.f. 01.10.2009, woul .....

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ate an apparent conflict with Section 55(2)(aa)(iiia). Latter section specify that cost of acquisition of any asset allotted to an assessee without any payment shall be taken as nil. If we apply Section 56(2)(vii)(c) of the Act, to bonus shares and make a valuation thereof taking the fair market value, then it would imply that a cost was necessarily incurred for the purpose of acquiring the bonus shares. It would result in a situation where capital gains arising out of sale of bonus shares would .....

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ddition. 06. We have perused the orders and heard the rival contentions. Section 56(1) and (2), in so far as it is relevant on the issue on hand, is reproduced below : (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources" if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the general .....

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o 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 .....

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s (ii) to (vi). (vi) where any sum of money, the aggregate value of which exceeds fifty thousand rupees, is received without consideration, by an individual or a Hindu undivided family, in any previous year from any person or persons on or after the 1st day of April, 2006, but before the 1st day of October, 2009 the whole of the aggregate value 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 th .....

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ause, 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 either of the parents of the individual ; (v) any lineal ascendant or descendant of the individual ; (vi) any lineal ascendant or descendant of the spouse of the individual ; (vii) spouse of the person referred to in clauses (ii) to (vi). (vii) where an individual or a Hindu undivided family receives, in any previous y .....

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eeds fifty thousand rupees, the whole of the aggregate fair market value of such property ; (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 : 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 Asses .....

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dividual ; 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 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 Fo .....

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and securities ; (iii) jewellery ; (iv) archaeological collections ; (v) drawings ; (vi) paintings ; (vii) sculptures ; or (viii) any work of art ; #or (ix) bullion ; (e) relative shall have the meaning assigned to it in the Explanation to clause (vi) of sub-section (2) of this section ; (f) stamp duty value means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable proper .....

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is, taxable gifts made by a person was charged at the rate of 30% in the hands of the donor. Then, there was a period of free for all, when neither the donor nor the donee had to pay tax on the gifts and the said period ran from October 1998 to August, 2004. To redress the situation, Finance Act (No.2), 2004, inserted clause (v) to Section 56(2) with effect from 01.04.2005, and clause (xiii) to Section 2(24) of the Act, by virtue of which receipts without consideration or inadequate consideratio .....

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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 introd .....

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consideration less than the fair market value. Situation can be better illustrated through an example. Let us consider the case of a company having 100 equity shares of ₹ 10/- each, with a reserve and surplus of ₹ 10,000/-. If the company considering its immense reserves and surplus, decides to issue bonus shares in the ratio of 1 : 1, how would its balance sheet look before and after such issue ? Hypothetically it should be as under : BALANCE SHEET PRIOR TO ISSUE OF BONUS SHARES Eq .....

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7; 11,000 ÷ 200 = . 55. If a person was having 10 equity shares of the above company with him, after the bonus shares issue, it would become 20. However value of the ten equity shares (10 x ₹ 110) is the same as value of 20 shares (20 x ₹ 55) after the bonus shares issue. This in other words would mean that there is a prorata decrease in the value of equity shares when there is an issue of bonus shares. Thus when there is an issue of bonus shares there is a detriment suffered .....

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long with bonus shares remains the very same. Thus any profit derived by the assessee on account of receipt of bonus shares is theoretically offset by the depression in the value of the equity shares already held by him. Bonus 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 c .....

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strate 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 gets split (in the same proportion for all the shareholders), as for example by a .....

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nds 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 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 m .....

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su with the original shares, had to be valued at average of both bonus and the original shares. Paras 14 to 17 of the above judgment of Hon ble Apex Court, is reproduced hereunder : Can we then say that the bonus shares are a gift and are acquired for nothing? At first sight, it looks as if they are so, but the impact of the issue of bonus shares has to be seen to realise that there is an immediate detriment to the shareholder in respect of his original holding. The Income-tax Officer, in this c .....

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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 o .....

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r is no richer than they were before.....If the plaintiff gained any small advantage by the change, it certainly was not an advantage of £ 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. ...If a shareholder sells dividend stock, he necessarily disposes of a part of his capital interest, just as if he should sell a part of his old stock, .....

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e of his original holding. The earning capacity of the capital employed remains the same, even after the reserve is converted into bonus shares. By the issue of the bonus shares there is a corresponding fall in the dividends actual or expected and the market price moves accordingly. The method of calculation which places the value of bonus shares at nil cannot be correct. This leaves for consideration the other two methods. Here we may point out that the new shares may rank pari passu with old s .....

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o spread it over the old and new shares treating the new as accretions to the old and to treat the cost old price of the original shares as the cost price of the old shares and bonus shares taken together. This method is suggested by the department in this case. Since the bonus shares in this case rank pari passu with the old shares there is no difficulty in spreading the original cost over the old and the new shares and the contention of the department in this case is right. But this is not the .....

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e 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 ₹ 10 .....

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#39;s view was that the cost was equal to the face value of the shares. The High Court rejected both these contentions and held that the cost of the shares previously held must be divided between those shares and the bonus shares in the same proportion as their face value and the profit or loss should then be found out by comparing the cost price calculated on this basis with the sale price. In our opinion, there is difficulty in the High Court's decision. The preference shares and the ordin .....

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ed at a loss of ₹ 27,766 by the method of averaging the cost, following the earlier case of the Bombay High Court just referred to. The Tribunal suggested a third method. It ignored the 50 shares and the loss was calculated by considering the cost of 300 shares and their sale price. The loss worked out at ₹ 27,748 but the Tribunal did not disturb the order of the Appellate Assistant Commissioner in view of the small difference. The High Court held that the method adopted by the depar .....

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tax Officer averaged the price of 150 shares and found a profit of ₹ 1,060 on the sale of 50 shares instead of a loss of ₹ 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 ₹ 35,801. The Income-tax Officer computed the loss at ₹ .....

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s 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, Chagla C.J. observed that it was not known which of the several shares were sold in the year of account, but in the statement of the case it was clearly stated that bonus shares were untouched. The decision of this court in Emerald Co. .....

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