Tax Insights
from India Tax & Regulatory Services
Receipt of bonus shares not subject
to tax under section 56(2)(vii)
June 2, 2016
In brief
The Bangalore Income-tax Appellate Tribunal (Tribunal) recently held that receipt by an individual
shareholder of bonus shares issued by the company would not be subject to tax in the recipient’s
hands although the same was received without consideration.
In detail
Background
The taxpayer1, an individual,
was a shareholder of a private
limited company (the
Company). During the
assessment year (AY) 2012-13,
the taxpayer had received
1,00,00,000 equity shares as
bonus against his holding of
5,000 fully paid up equity
shares in the Company. During
assessment proceedings, the
Tax Officer (TO) added the
receipt of such bonus shares
under the head ‘Income from
Other Sources’ under section
56(2)(vii)(c) of the Income-tax
Act, 1961 (the Act) on the basis
that the taxpayer had received
the same without
consideration. The TO made
the addition on the basis of the
fair market value computed
under Rule 11UA of the
Income-tax Rules, 1962 (the
Rules). Aggrieved, the taxpayer
filed an appeal with the
Commissioner of Income-tax
(Appeal) (CIT(A)) and argued
that issuance of bonus shares
amounted to capitalisation of
profits, and did not result in
1
TS-299-ITAT-2016(BangaloreTribunal)
any increase or decrease in the
shareholder’s wealth. Further,
since the bonus shares were
issued proportionately, no
particular value could be
attached to such bonus shares
under section 56(2)(vii)(c).
The CIT(A) ruled in favour of
the taxpayer, relying upon the
judgment of the Special Bench
of the Mumbai Tribunal in
Sudhir Menon HUF2. The
Revenue filed an appeal with
the Bangalore Tribunal against
this order of the CIT(A).
Revenue’s contentions
The Revenue argued that the
judgment in the case of Sudhir
Menon HUF2 pertained to
determination of cost of rights
shares, and was
distinguishable on facts since
the present case pertained to
bonus shares. Further, it
contended that when the
bonus shares were allotted to a
shareholder, even though the
price of the original shares
held by him went down,
depression in the price was
offset by the value of the bonus
shares and therefore, the
bonus shares were
automatically imbibed with a
value. It was contended that
once any property was received
without consideration, it had
to be valued as per the
prescribed rules and had to be
considered as income.
Taxpayer’s contentions
The amendments to section
56(2)(vii) were carried out to
bring to tax net income arising
on certain transactions which
were undertaken at understated values in the recipient’s
hands of. In the present
scenario, if receipt of bonus
shares were to be considered
as taxable, there would be an
apparent conflict while
computing capital gains tax
liability on sale of such shares.
Relying on the case of Sudhir
Menon HUF2, the taxpayer
also argued that the bonus
shares did not add to the value
of the shareholding in any
manner and thus no benefit
whatsoever was received.
Tribunal’s ruling
Delving into the legislative
history of section 56(2)(vii) of
2
Sudhir Menon HUF v. ACIT [2014]
162 TTJ 425 (Mumbai - Trib.)
www.pwc.in
Tax Insights
the Act, the Tribunal observed
that this provision was primarily
introduced to address abuse
arising out of abolition of the Gift
Tax Act, 1958. It also observed
that the erstwhile Gift Tax Act
never included within its ambit
issue of bonus shares issued by a
company to its shareholders as
gift. Further, it also observed that
bonus issue was detrimental to
the shareholder in terms of value
per share, which was counterbalanced by the additional
number of bonus shares received.
Therefore, the total value of
equity shares post issuance of
bonus shares remained the same.
Since the issue of bonus shares
was by capitalising profits of the
company, it did not result in
increase in asset value of the
company. Also, any profit derived
by the taxpayer on account of
receipt of bonus shares was
theoretically offset by the
depression in the value of the
equity shares already held by him.
Therefore, it did not result in the
taxpayer getting a property
without consideration. Relying on
the case of Sudhir Menon HUF2
and also on the SC decision in the
case of Dalmia Investment Co.
Ltd3, it observed that the bonus
shares were ranked pari passu
with the original shares, and they
had to be valued at the average of
both bonus and the original
shares, with the total value of all
shares remaining the same.
Therefore, the Bangalore Tribunal
held that in case of issuance of
bonus shares, consideration had
indeed flown out from the holder
of the shares, which was reflected
in the depression in the intrinsic
value of the original shares held
by him, and the bonus shares
could thereby not be said to have
been received without
consideration.
The takeaways
This is a welcome ruling by the
Bangalore Tribunal which
reiterates the position in law that
the deeming provisions of section
56(2)(vii) were introduced as
anti-abusive provisions.
Therefore, in cases where a
taxpayer received some property
without consideration, a closer
look needed to be given to such a
transaction, and whether such
benefit was offset by any
consequential decline in the
intrinsic value of asset originally
held.
Let’s talk
For a deeper discussion of how
this issue might affect your
business, please contact:
Tax & Regulatory Services –
Mergers and Acquisitions
Gautam Mehra, Mumbai
+91-22 6689 1154
[email protected]
Hiten Kotak, Mumbai
+91-22 6689 1288
[email protected]
3
CIT v. Dalmia Investment Co. Ltd (1964)
252 ITR 567
PwC
Page 2
Tax Insights
Our Offices
Ahmedabad
Bangalore
Chennai
1701, 17th Floor, Shapath V,
Opp. Karnavati Club,
S G Highway,
Ahmedabad, Gujarat 380051
+91-79 3091 7000
6th Floor
Millenia Tower ‘D’
1 & 2, Murphy Road, Ulsoor,
Bangalore 560 008
Phone +91-80 4079 7000
8th Floor
Prestige Palladium Bayan
129-140 Greams Road
Chennai 600 006
+91 44 4228 5000
Hyderabad
Kolkata
Mumbai
Plot no. 77/A, 8-2-624/A/1, 4th
Floor, Road No. 10, Banjara Hills,
Hyderabad – 500034,
Andhra Pradesh
Phone +91-40 44246000
56 & 57, Block DN.
Ground Floor, A- Wing
Sector - V, Salt Lake
Kolkata - 700 091, West Bengal
+91-033 2357 9101/
4400 1111
PwC House
Plot No. 18A,
Guru Nanak Road(Station Road),
Bandra (West), Mumbai - 400 050
+91-22 6689 1000
Gurgaon
Pune
For more information
Building No. 10, Tower - C
17th & 18th Floor,
DLF Cyber City, Gurgaon
Haryana -122002
+91-124 330 6000
7th Floor, Tower A - Wing 1,
Business Bay, Airport Road,
Yerwada, Pune – 411 006
+91-20 4100 4444
Contact us at
[email protected]
About PwC
At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157
countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax
services. Find out more and tell us what matters to you by visiting us at www.pwc.com.
In India, PwC has offices in these cities: Ahmedabad, Bangalore, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai
and Pune. For more information about PwC India's service offerings, visit www.pwc.com/in
PwC refers to the PwC International network and/or one or more of its member firms, each of which is a separate,
independent and distinct legal entity in separate lines of service. Please see www.pwc.com/structure for further
details.
©2016 PwC. All rights reserved
Follow us on:
For private circulation only
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information
contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness
of the information contained in this publication, and, to the extent permitted by law, PwCPL, its members, employees and agents accept no liability, and disclaim all
responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based
on it. Without prior permission of PwCPL, this publication may not be quoted in whole or in part or otherwise referred to in any documents.
© 2016 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company
in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each
member firm of which is a separate legal entity.