Sec 56(2)(vii)(b) cannot be invoked presuming that assessee had derived double benefit from issue of bonus shares

Deciding upon the issue of application of Section 56(2)(vii)(b) of the Income Tax Act 1961 on issue of bonus shares and bonus units, the New Delhi Income Tax Appellate Tribunal remarked that bonus shares were issues only out of capitalization of existing reserves in the issuing company.

A Division Bench of Mr. M Balaganesh, Accountant Member, and Mr. Anubhav Sharma, Judicial Member, observed that the AO concurred with the Assessee’s argument about the overall wealth remaining the same even after issue of bonus shares. In these circumstances, the Bench observed that the provisions of Section 56(2)(vii)(b) could not be invoked, based on the premise that the Assessee had derived some double benefit from issue of bonus shares. 

The Appellant-Revenue was represented by Mr. P. Praveen Sidharth, CIT (DR), whereas the Respondent-Assessee was represented by Mr. Pradeep Dinodia, CA.

The Assessee filed Income Tax Return (ITR) for the relevant period, declaring total income of about Rs 8.56 Crores, which included income from salary, house property, capital gains and income from other sources. The Assessee also received bonus shares and bonus units from two companies.  The Assessing Officer (AO) issued Show Cause Notice (SCN) to the Assessee proposing to frame addition under Section 56(2)(vii)(c) of the Income Tax Act, in respect of the bonus shares.

In response to the notice, the Assessee claimed that the provisions of Section 56(2)(vii)(c) would not apply to bonus shares since bonus shares were the result of capitalisation of profit and the value of the shares remained the same, due to which there was no increase in the wealth of the shareholders on account of bonus issue. Moreover, the percentage of holding within the company remained the same, it was canvassed.

The contentions of the Assessee were rejected by the AO, who proceeded to treat the bonus shares/units under Section 56(2)(vii)(c) of the Act & framed addition of about Rs 36.10 Crores. On appeal, the CIT(A) settled the issue in favour of the Assessee, having distinguished the judgments relied on by the AO.

On hearing the contentions of both parties, the Bench observed that issue at hand had been resolved in the judgment of the Karnataka High Court in the case of Principal Commissioner of Income Tax vs Dr Ranjan Pai in ITA No. 501 of 2016 wherein it was held that in case of issue of bonus shares, the money remained with the issuing company and no money came into the hands of the shareholders, since there was no transfer of property.

In these circumstances, the provisions of Section 56(2)(vii)(b) were inapplicable, the Court had observed.

Following this judgment of the Karnataka High Court, the Bench concurred with the findings of the CIT(A) in setting aside the additions framed by the AO under Section 56(2)(vii)(b) of the Act.

Cause Title: DCIT, Circle-16(1), New Delhi vs Smt. Aruna Chandhok [ITA No. 387/Del/2021 / 2023-Enterslice-19-ITAT-Del]

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DCIT-verses-Aruna-Chandhok