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Income Tax Appellate Tribunal, BANGALORE BENCH C, BANGALORE
Before: SHRI. ABRAHAM P. GEORGE & SHRI. GEORGE GEORGE K
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IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'C', BANGALORE BEFORE SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI. GEORGE GEORGE K, JUDICIAL MEMBER I.T.A No.1290/Bang/2015 (Assessment Year : 2012-13) Deputy Commissioner of Income-tax, Central Circle -2(2), Bengaluru .. Appellant v. Dr. Rajan Pai, Block No.1B, Jakkur Plantation Village, Yelahanka Main Road, Bengaluru .. Respondent PAN : AGBPP2795G Assessee by : Shri. Sajjan Kumar Tulsiyan, Advocate Revenue by : Shri. Sanjay Kumar, CIT -III Heard on : 12.04.2016 Pronounced on : 29.04.2016 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
In this appeal filed by Revenue, it assails an order dt.04.08.2015, of CIT(A)-11, Bengaluru, by which he deleted an 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
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(‘MEMG’ in short), as income under the head ‘Income from Other Sources’.
Apropos facts are that assessee, a medical professional, had filed his return declaring income of Rs.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 Rs.10/- each. AO was of the opinion that assessee having not paid any consideration for the bonus shares, he was obliged to offer the fair market value as ‘income from other sources’ u/s.56(2)(vii)(c) of the Income-tax Act, 1961 (‘the Act’ in short). When the assessee was put on notice, assessee took a stand that bonus shares were taxable only when the beneficiary received the shares and not on allotment. Assessee also relied on a circular No.6/2014, dt.11.02.2014 by CBDT. However, the AO was not impressed. According to him, circular referred by the assessee was in relation to Section 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
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short). He applied Rule 11UA and determined the fair market value of the 1,00,00,000 number of bonus shares at Rs.12,49,00,000/-. The addition was made u/s.56(2)(vii)(c) of the Act, under the head ‘other sources’.
Aggrieved, assessee moved in appeal before the CIT (A). Argument of the assessee was that Section 56(2)(vii) of the Act, did not apply to bonus shares because bonus shares represented capitalisation of profits by the issuing company and did not result in any increase or decrease in the wealth of the shareholder. Contention of the assessee was that as a shareholder, his percentage in the total equity shares of the company remained constant before and after the issue of the bonus shares. As per the assessee, until 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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Ld.CIT (A), after going through the submissions of the assessee was of the opinion that assessee had to succeed. According to him, the issue whether any income should be attributed for bonus shares issued to a beneficiary was considered by the Mumbai Bench of the Tribunal in the case of Sudhir Menon HUF (Supra). As per the CIT (A), view taken by the Mumbai bench was supported by judgment of Hon’ble Apex Court in the case of CIT v. General Insurance Corporation [286 ITR 232]. He held that 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.
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 Section 56(2) of the Act. As per the Ld. DR, clause (vii) was inserted by Finance (No.2) Act, 2009, w.e.f. 01.10.2009. According to him, the question before Mumbai bench of the Tribunal in the case of Sudhir Menon HUF (supra) relied on by the assessee was on the cost of right shares and not of bonus shares. Its observation regarding bonus shares, according to
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the Ld. DR, was mere obiter. Further as per the Ld. DR, 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. 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. DR, sub-clause(c) of clause (vii) of Section56(2) of the Act, mentioned clearly that any property other than immovable property received by an assessee without consideration has to be valued and considered as income. It was for the specific purpose of valuation of such property, Rule 11U and 11UA were introduced in the Rule Book. As per the Ld. DR, Rule 11UA, gave the method of valuing shares and equities. Such method included one for valuing equity shares which were not quoted also. As per the Ld. 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.
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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, would clearly show that the said clauses were brought in for the purpose of addressing the situation arising from abolishment of Gift-tax. In other words, according to the Ld. AR, gift was made taxable in the hands of the donee as a part of ‘income from other sources’. As per the Ld.AR, these were anti-abuse provisions to rope in those cases where there was under-statement of value of an asset in the hands of recipient. According to him, if Section 56(2)(vii) was applied to bonus shares, it would create 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 be charged to tax, taking the whole consideration, ignoring the cost attributed to it by operation of Section 56(2)(vii)(c) of the Act. In any case, as per the Ld. AR, decision of Mumbai bench in the case of
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Sudhir Menon HUF (supra) was directly on the value to be attached to bonus shares. Ld. AR further submitted that bonus shares did not add up to the value of share holder in any manner and thus no benefit whatsoever was received. Thus according to him, CIT (A) was justified in deleting the addition.
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 generality of the provisions of sub-section (1), the following incomes shall be chargeable to income-tax under the head "Income from other sources", namely:-- i).... ii)... iii)... iv)... (v) where any sum of money exceeding twenty-five thousand rupees is received without consideration by an individual or a Hindu undivided family from any person on or after the 1st day of September, 2004, but before the 1st day of April, 2006, the whole 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 the individual ; or(c) under a will or by way of
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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 any trust or institution registered under section 12AA. Explanation For the purposes of this clause, “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 persons referred to in clauses (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 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 any trust or institution registered under section 12AA.
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Explanation For the purposes of this clause, “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 year, from any person or persons on or after the 1st day of October, 2009,— (a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum ; (b) any immovable property, without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property ; (c) any property, other than immovable property,— (i) without consideration, the aggregate fair market value of which exceeds 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 Assessing Officer may refer the valuation of such property to a Valuation Officer, and
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the provisions of section 50C and sub-section (15) of section 155 shall, as far as may be, apply in relation to the stamp duty value of such property for the purpose of sub-clause (b) as they apply for valuation of capital asset under those sections : Provided further that this clause shall not apply to any sum of money or any property 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 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 For the purposes of this clause,— (a) “assessable” shall have the meaning assigned to it in the Explanation 2 to sub-section (2) of section 50C ; (b) “fair market value” of a property, other than an immovable property, means the value determined in accordance with the method as may be prescribed ; (c) “jewellery” shall have the meaning assigned to it in the Explanation to sub-clause (ii) of clause (14) of section 2 ; (d) “property” means— (i) immovable property being land or building or both ; (ii) shares and securities ; (iii) jewellery ; (iv) archaeological collections ; (v) drawings ; (vi) paintings ;
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(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 property ;
To answer the question raised before us, it is necessary to have a walk through the legislative history behind clause (v) to (vii) of section 56(2) reproduced above. The genesis for the introduction of the above clauses was apparently the abuse arising out of abolishment of tax on gift. By virtue of clause (3) to Section 3 of Gift-tax Act, 1958 inserted through Finance (No.2) Act, 1998, provisions of the Gift-tax Act ceased to apply on any gifts made after first October, 1998. Before this, 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
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or inadequate consideration were made taxable in the hands of the recipient assessee Subsequent clause (vi) introduced by Taxation Laws (Amendment) Act, 2006 w.e.f. 01.04.2007 and clause (vii) by Finance (No.2) Act, 2009 w.e.f.01.10.2009 were only extrapolation of the above intention, while widening its scope to ensure that where a person received a property without consideration, or for a consideration less than its fair market value, was levied tax on the value thereof, as a part of his ‘income from other sources’.
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 introduced in Section 56(2), subsequent to the repeal of the Gift-tax Act, for redressing the vacuum created on account of such repeal, can we say that legislative intention was to include therein items which were not within the ambit of Gift-tax Act also ? The answer obviously is no.
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A careful study of clause (c) of Section 56(2)(vii) of the Act, would show that two situations are considered therein. First is where a property is received without consideration and second where it is received for a 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 Rs.10/- each, with a reserve and surplus of Rs.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
Equity shares @ Rs. 1,000 Fixed & Current Rs.11,000 100 x Rs.10/- assets Reserves & Rs.10,000 surplus Rs.11,000 Rs.11,000 BALANCE SHEET WOULD AFTER ISSUE OF BONUS SHARES Equity Rs.200 Rs. 2,000 Fixed & Current Rs.11,000 x10 assets Reserves & Rs. 9,000 Surplus Rs.11,000 Rs.11,000
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Value of one equity share before the issue of bonus shares will be Rs.11,000 ÷ 100 = ��. 110. Value of the equity share after the issue of bonus share will be equal to Rs.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 Rs.110) is the same as value of 20 shares (20 x Rs.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 by the recipient share holder, through the depression in the value of the shares held by him. There is indeed a consideration flowing out which is exactly counter balanced by the value of the bonus shares received. The simple reason is that when bonus shares are issued by capitalising a portion of reserves and surplus, there is no increase in the asset value of a company, in any manner. What really happens is that the value of equity shares goes down prorata. Total value of equity shares held along 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
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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 conclude our discussion on this aspect of the matter, dilate on the application of the provision to the transaction of the nature under reference. The provision, firstly, would not apply to bonus shares, and the argument alluding thereto arises only on account of misconception in respect thereof. Though the shares under reference are admittedly not bonus shares, we consider it relevant to dwell thereon, not only to meet the argument in their respect, made emphatically before us, but also to demonstrate 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 factor of two in case of a 1:1 bonus issue. Reference in this regard may be made to the decision in CIT vs. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC) as well as in Khoday Distilleries Ltd. (supra), wherein reference stands made to the former, also quoting there-from, besides inter alia to Hunsur Plywood Works Ltd. vs. CIT [1998] 229 ITR 112 (SC), where the same were referred to as ‘capitalization shares’. In other words, there is no receipt of any property by the shareholder, and what stands 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 more accessible for transactions and, thus, trading, i.e., considered
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from the holders’ point of view. We may though add a note of caution. There could be a case of bonus issue coupled with the release of assets (of the issuing company) in favour of the shareholders. The same would fall to be considered as dividend u/s. 2(22)(a) of the Act.”
Hon’ble Apex Court in the case of CIT v. Dalmia Investment Co. Ltd [(1964) 252 ITR 567] had as early as 1964 held that bonus shares if they ranked pari passu 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 case, has shown that in 1945 when the price of shares became stable it was Rs. 9 per share, while the value of the shares before the issue of bonus shares was Rs. 18 per share. In other words, by the issue of bonus shares pro rata, which ranked pari passu 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 shares do not rank pari passu and we shall deal with that case separately. 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:
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"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 stock-holder 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, either before or after the dividend. What he retains no longer entitles him to the same proportion of future dividends as before the sale. His part in the control of the company likewise is diminished." Swan Brewery's case**, it may be pointed out, was distinguished here also on the basis of the extended definition. It follows that the bonus shares cannot be said to have cost nothing to the shareholder because on the issue of the bonus shares, there is an instant loss to him in the value 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 shares or may be different. The method of cost accounting may have to be different in each case but in essence and principle there is no difference. One possible method is to ascertain the exact fall in the market price of the shares already held and attribute that fall to the price of the bonus shares. This market price must be the middle price
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and not as represented by any unusual fluctuation. The other method is to take the amount spent by the shareholder in acquiring his original shares and to 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 end of the present discussion. This simple method may present difficulties when the shares do not rank pari passu or are of a different kind. In such cases, it may be necessary to compare the resultant price of the two kinds of shares in the market to arrive at a proper cost valuation. In other words, if the shares do not rank pari passu, assistance may have to be taken of other evidence to fix the cost price of the bonus shares. It may then be necessary to examine the result as reflected in the 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 Rs. 100 in Ambica Mills Ltd. and Arvind Mills Ltd. These two companies then declared a bonus and issued preference shares in the proportion of two to one of the face value of Rs. 100 each. These preference shares were sold by the assessee and if the face value was taken as the cost, there was small profit. The department contended that the entire sale proceeds were liable to be taxed, because the assessee had paid nothing for the bonus shares and everything received by it was profit. The assessee'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
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difficulty in the High Court's decision. The preference shares and the ordinary shares could hardly be valued in the proportion of their face value. The ordinary shares and the preference shares do not rank pari passu. The next case is Emerald Co. Ltd. v. Commissioner of Income-tax*. In that case, the assessee had, at the beginning of the year, 350 shares of which 50 shares were bonus shares and all were of the face value of Rs. 250 each. The assessee sold 300 shares and claimed a loss of Rs. 35,801 by valuing the bonus shares at face value. The department arrived at a loss of Rs. 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 Rs. 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 department was proper but this court, on appeal, held that in that case the method adopted by the Tribunal was correct. This court did not decide which of the four methods was the proper one to apply, leaving that question open. The reason was that the assessee originally held 50 shares in 1950; in 1951, it received 50 bonus shares. It sold its original holding three days later and then purchased another 100 shares after two months. In the financial year 1950-51 (assessment year 1951-52), the Income-tax Officer averaged the price of 150 shares and found a profit of Rs. 1,060 on the sale of 50 shares instead of a loss of Rs. 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 Rs. 35,801. The Income-tax Officer computed the loss at Rs. 27,766 and the Tribunal computed the loss at Rs. 27,748. The Tribunal, however, did not disturb the loss as computed by the Income-tax Officer in view of the slender difference of Rs. 18. The High Court's decision was reversed by this court because the High Court ignored all intermediate transactions and averaged the 300 shares with the 50 bonus shares. The shares in respect of which the bonus shares were issued were already averaged with the bonus shares. This was not a case of bonus
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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.'s case* however lends support to the view which we have expressed here. The bonus shares can be valued by spreading the cost of the old shares over the old shares and the new issue taken together, if the shares rank pari passu. When they do not, the price may have to be adjusted either in the proportion of the face value they bear (if there is no other circumstance differentiating them) or on equitable considerations based on the market price before and after the issue.” Hon’ble Apex Court not only held that bonus shares can never be given nil value but also held that its value has to be worked out by the principle of averaging. In any case, the principle enunciated is simple. It is that for every bonus share issued, there is a corresponding reduction in the actual fair market value of the equity share originally held. This being the situation we are of the opinion 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 value. A consideration has flown out from the holder of the shares, may be unknown to him, which is reflected in the
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depression in the intrinsic value of the original shares held by him. Thus in our view, Section 56(2)(v), (vi) and (vii) brought in to the Act for addressing the vacuum caused due to withdrawal of the Gift-tax Act cannot be used for the purpose of taxing the value of bonus shares received by an assessee. Valuation of unquoted shares set out in Rule 11 UA(B) will have applicability 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 sub- clause (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.
In the result, appeal of the Revenue stands dismissed.
Sd/- Sd/- (GEORGE GEORGE K) (ABRAHAM P GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER MCN Copy to: 1. The assessee 2. The Assessing Officer 3. The Commissioner of Income-tax 4. Commissioner of Income-tax(A) 5. DR 6. GF, ITAT, Bangalore By Order Assistant Registrar