Sec 56(2)(vii)(c) not attracted to bonus shares if issuance of bonus shares is merely capitalization of existing reserves

While dismissing the Revenue’s appeal, The Delhi Bench of Income Tax Appellate Tribunal held that the provisions of Section 56(2)(vii)(c) are not attracted to bonus shares received by the Assessee since the issuance of bonus shares are merely capitalization of the existing reserves and does not render the additional benefits nor alters the wealth of the shareholder.

Relying on Karnataka HC ruling in the case of Principal Commissioner of Income Tax vs Dr Ranjan Pai in ITA No. 501 of 2016, a Division Judge Bench of Justice Anubhav Sharma and Accountant Member M. Balaganesh observed that “when there is an issue of bonus shares, the money remains with the company and nothing comes to the shareholders as there is no transfer of the property, hence, the provisions of Sec.56(2)(vii)(c) are not attracted.”

Advocate P. Praveen Sidharth appeared for the Petitioner whereas Advocate Pradeep Dinodia appeared for the Respondent.

The brief facts of the case were that the Assessee is an individual and had filed her return of income for the AY 2015-16. Assessee received bonus shares/units of Rs.36.10 Cr from M/s Tech Mahindra Ltd. and JM Arbitrage Advantage Fund Bonus Options (Investment Company). Revenue issued show cause notice as to why the addition under Section 56(2)(vii)(c) should not be made in respect of the said bonus shares/bonus units in response to which Assessee relied on SC ruling in CIT Vs. General Insurance Corporation Ltd. objected on the premise that Section 56 (2)(vii) does not apply in the case of bonus shares since there is no change in the value of those shares post-bonus issue and it is merely done for capitalization of profits. Revenue rejected Assessee’s appeal and taxed bonus shares/bonus units under Section 56(2)(vii)(c). The assessee appealed before CIT(A) and her appeal was allowed. Now, here Revenue approached the Bench. 

After considering the submission, the Bench noted that the bonus shares are issued only out of capitalization of existing reserves in the company.

The Bench stated that the Revenue has not disputed the fact that the overall wealth of the shareholder post-bonus or pre-bonus remains the same.

“Therefore, finds it wrong on the Revenue’s part to invoke the provisions of Section 56(2)(vii)(c) on the ground that there is a double benefit derived by the Assessee due to bonus shares/units”, added the Bench. 

Accordingly, the Bench holds that CIT(A) rightly accepted the contentions of the Assessee and dismissed the Revenue’s appeal.

Cause Title: DCIT Vs. Smt Aruna Chandhok [ITA No. 387/Del/2021 / 2023-Enterslice-33-ITAT-Del]

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DCIT-Vs-Aruna-Chandhok