Income Tax, Issue Update

Receipt of bonus shares: Taxability under section 56(2)(vii)?

Case: Dy. CIT vs. Smt. Kajal Goyal, Jaipur ITAT

The issue that arises is whether the bonus shares are also included within the ambit of the word ‘shares’ in section 56(2)(vii) of the Act.

Jaipur ITAT placed reliance  on the decision of Mumbai Income Tax Appellate Tribunal in the case of ACIT Vs Subodh Menon, wherein it was concluded that only when a higher than a proportionate allotment of fresh shares issued by a company was received by a shareholder, the provisions of section 56(2)(vii) get attracted; provisions of section 56(2)(vii) were not applicable to the facts of the case. See Facts & Key Points.

Facts

  • The Assessee was allotted 11.20 lakhs shares at the rate of Rs. 10/- per share whereas the Assessing Officer determined the fair market value of the share at Rs. 20.37 per share and made an addition of Rs. 1.16 crore being the difference calculated between fair market value and that of face value under section 56(2)(vii)(c) of the Act.

Key points

  • Reliance was placed on the decision of Mumbai Income Tax Appellate Tribunal in the case of ACIT Vs Subodh Menon, wherein it was concluded that only when a higher than a proportionate allotment of fresh shares issued by a company was received by a shareholder, the provisions of section 56(2)(vii) get attracted; provisions of section 56(2)(vii) were not applicable to the facts of the case.
  • In the present case, the existing shareholders of the company were allotted additional shares below book value assessee held 1.04 lakhs shares which was equivalent to 34.57% of total issued share capital, based on the existing shareholding of 34.57 % the Assessee was offered 21.78 lakhs shares at face value of Rs 100 per share. Assessee accepted part offer of the shares only to the extent of 20.94 lakhs shares. Consequently, his shareholding came down from 34.57 % to 33.30 %. The addition under 56(2)(vii)(c) being the difference between alleged fair market value of shares and the subscribed value of shares was not sustainable. It was only when a higher than proportionate allotment of fresh shares issued by a company was received by a shareholder, the provisions of section 56(2)(vii) get attracted.

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