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Income Tax Appellate Tribunal, DELHI BENCH “A”: NEW DELHI
Before: SHRI R.K. PANDA & SHRI N. K. CHOUDHRY
O R D E R PER N.K. CHOUDHRY, J. M.: 1. The Revenue Department has preferred the instant appealagainst the order dated 30.01.2018 impugned herein passed by the Commissioner of Income Tax (Appeals)-10, New Delhi (hereinafter called in short as “Ld. Commissioner”) for the assessment year 2015-16 , u/s.250(6) of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟).
In this case, the AO made the addition of Rs 17,89,84,786/- u/s 56(2)(vii)(c) of the Act against which the Assessee has preferred first appeal before the ld.Commissioner, who vide impugned order deleted the same, against which the revenue department is in appeal before us.
Heard the parties and perused the material available on record. The ld. DR relied upon the order passed by the AO, whereas the ld. AR supported the impugned order while relying upon various decisions of the Hon‟ble Tribunal to the effect that provision of section u/s 56(2)(vii)(c) of the Act would not apply to bonus shares.
3.1 The only issue involved in the instant case relates to acquiring of bonus shares and applicability of the provisions of section 56(2)(vii)(c) of the Act to the same.
3.2 The AO while making the addition of Rs. 17,89,84,786/- applied the provisions of section 56(2)(vii)(c) of the Act, on the basis of following two counts: i. Bonus units were issued by JM Arbitrage Advantage Fund and wasacquired by the Assessee t without any consideration. ii. The Assessee has set off the loss of sale of original units twice.
It was further held by the AO that section u/s 56(2)(vii)(c) read with section 2(24)(xv) is charging section which created entirely new charge of taxon the case of the individuals and HUF on receipt of property without consideration or at a consideration which is less than fair market value. The provision applies only when the recipient of the property is an individual or HUF. Further, it is observed that the taxable event is receipt of property without consideration or for a consideration which is less than the fair market value.
The AO also observed that from the plain reading of the provision of the Act it is clear that section 55 seeks to define „cost of acquisition‟ for the purpose of computation of capital gains. Section 55 does not apply for the purpose of the computation of income under head “income from other sources”.
3.3 TheLd. Commissioner in the impugned order, while deleting the said addition made by AO U/s 56(2)(vii)(c) of the Act, observed as under:
“ That the observation of the AO is that appellant has set off the loss against the long and short term capital gains twice cannot be construed adversely against the appellant as the appellant is permitted by the Act to claim set off of short term loss on sale of equity shares and mutual fund against long and short term capital gain on sale of shares and the issue of bonus units cannot be deemed to result in double set off of claim of loss against long and short term capital gains. It is noted that issue of bonus units is by definition capitalization of its profits by the issuing Fund. There is neither any increase nor decrease in the wealth of the unit holder or of the issuing Fund on account of issue of bonus units and as a result the value of existing unit gets split in existing and new bonus units. There is no receipt of any property by the unit holder, and what stands received by him is the split units out of his existing holding of units. As a result, there is no gift or accretion to the property Bonus units are not something which has been received free or for a lesser FMV Consideration has flown out from the holder of the units, which is reflected in the decrease in the intrinsic value of the original units held by him. The finding of the AO that the acquisition of bonus units' should be subjected to income from other sources under the provisions of section 56(2)(vii(c) of the Act does not seem to be legally correct in view of the judicial pronouncements in this regard. On perusal of the provisions of Section 56(2)(vii)(c) it is noted that any property other than immoveable property without consideration or consideration which is less than the aggregate fair market value of the property is subjected to deemed income under this head. In the present case, the allotment of bonus units was made to the appellant on the basis of his holding of the original units of the said fund. In this regard reliance is placed on the decision of the Hon‟ble Supreme Court in the case of CIT v. Dalmia Investment Co. Ltd. (1964) 52 ITR 567 (SC).”
3.4 We observe that the ld.CIT(A) while controverting the finding of the AO and coming to the conclusion that provisions of section u/s 56(2)(vii)(c) are not applicable to the case of the Assessee, also followed the judgment of the Hon‟ble Apex Court in the case of CIT Vs. Dalmia Investment Co. Ltd (1964) 52 ITR 567 (SC) wherein, it was held as under:-
"A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished, and their interests are not increased. ... The proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones. ...In short, the corporation is no poorer and the stockholder is no richer than they were before. ...If the plaintiff gained any small advantage by the change, it certainly was not an advantage of Rs 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." ………………………………… …………………………………. ………………………………… “In other words, by the issue of bonus shares pro rata, which ranked paripassu with the existing shares, the market price was exactly halved, and divided between the old and the bonus shares. This will ordinarily be the case but not when the share do not rank paripassu and we shall deal with that case separately. When the shares rank paripassu 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 share, 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." ……………………………….… Page | 4
…………………………………. ……………………………….… “It follow that though profits are profits in the hands of the company, when they are disposed of by converting them into capital instead of paying them over to the shareholders, no income can be said accrue to the shareholder because the new shares confer a title to a larger proportion of the surplus assets at a general distribution. The floating capital used in the company which formerly consisted of subscribed capital and the reserves now becomes the subscribed capital."
3.5 The ld.Commissioner while deciding the issue, also relied upon the orders passed by the Hon‟ble Tribunal in the case of Dr. Rajan Vs. Department of Income Tax { wherein, the judgment referred above of the Hon‟ble Apex Court in the case of the CIT Vs. Dalmia Investment Co Ltd (Supra) was also relied upon by the Hon‟ble Tribunal and in the case of Sudhir Menon HUF in ITA No. 4887/Mum/2013 wherein, it was clearly held by the Hon‟ble Tribunal that allotment of bonus shares cannot be considered as received for an inadequate consideration and therefore, it is not taxable as income from other sources u/s 56(2)(vii)(c) of the Act. Further, the issue of bonus share is by capitalization of its profit by the issuing company and when the bonus shares are received it is not something which has been received free or for a lesser FMV. Consideration has flown out from the holder of the shares may be unknown to him/her, which is reflected in the depression in the intrinsic value of the original shares held by him/ her. 3.6 For ready reference the observations of the Hon‟ble Tribunal in the case of Rajan Pai Bangalore Vs. Department of Income Tax (Supra) are reproduced herein below:-
“It is easy to see that the new share partakes a part of the value of the existing share, which is only on the basis of the underlying assets on the company's books. The excess (over face value), or Rs. 1,400/-, gets apportioned over two shares as against one earlier, which is already the shareholders‟ property. This is also the basis and the premise of the decisions in ie case of Dhun Dadabhoy Kapadia vs. CIT [1967] 63 ITR 651 (SC) and H. Hoick Larsen vs. IT [1972] 85 ITR 285 (Bom), relied upon and referred to by the parties before us. As long as, therefore, there is no disproportionate allotment, i.e. shares are allotted pro-rata to the shareholders, based on their existing holdings, there is no scope for any property being received by them on the said allotment of shares: there being only an apportionment of the value of their existing holding over a larger number of shares. There is, accordingly, no question of section 56(2)(vii)(c), though per se applicable to the transaction, i.e., of this genre, getting attracted in such a case."
3.7 We find that the issue under consideration has been elaborately considered by the Hon‟ble Tribunal in various cases such as Rajan Pai Bangalore Vs. Department of Income Tax and Sudhir Menon HUF (supra) and even by the Hon‟ble Apex Court in the case of CIT v. Dalmia Investment Co. Ltd. (Supra) as relied upon by the Ld. Commissioner while holding that the provisions of section 56(2)(vii)(c) of the Act are not applicable to the bonus shares.
3.8 Even otherwise we do not find any material and reason to controvert the findings of the ld. Commissioner therefore in view of aforesaid analysis and respectfully following the Judgments referred above of the Hon‟ble Apex Court and the Hon‟ble tribunal, the appeal of the revenue is liable to be dismissed. Hence, ordered accordingly.