Income from other sources – Section 56(2)(vii) – Property received without consideration or for consideration less than its fair market value – Scope of section 56(2)(vii) – Bonus shares – Fair market value of bonus shares not normally assessable as income from other sources

Income from other sources – Section 56(2)(vii) – Property received without consideration or for consideration less than its fair market value – Scope of section 56(2)(vii) – Bonus shares – Fair market value of bonus shares not normally assessable as income from other sources

 

The assessee was an individual engaged in the medical profession. For the A.Y. 2012-13, the A.O. found that the assessee had received 1,00,00,000 bonus shares issued by M Ltd. The A.O. invoked section 56(2)(vii) and treated the receipt of bonus shares as income from other sources and assessed the fair market value of the bonus shares as income of the year.

The Tribunal held that the provisions of section 56(2)(vii) were not attracted to the fact situation of the case and deleted the addition.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

‘i) A careful scrutiny of section 56(2)(vii) contemplates two contingencies; firstly, where the property is received without consideration, and secondly, where it is received for consideration less than the fair market value. The issue of bonus shares by capitalisation of reserves is merely a reallocation of the company’s funds. There is no inflow of fresh funds or increase in the capital employed, which remains the same. The total funds available with the company remain the same and the issue of bonus shares does not result in any change in respect of the capital structure of the company. In substance, when a shareholder gets bonus shares, the value of the original shares held by him goes down and the market value as well as the intrinsic value of the two shares put together will be the same or nearly the same as per the value of the original share before the issue of bonus shares. Thus, any profit derived by the assessee on account of receipt of bonus shares is adjusted by depreciation in the value of equity shares held by him. Hence, the fair market value of bonus shares is not normally assessable as income from other sources.

ii) There was no material on record to infer that bonus shares had been transferred with an intention to evade tax. The provisions of section 56(2)(vii)(c) were not attracted to the fact situation of the case.

iii)   In view of the preceding analysis, the substantial question of law framed by a Bench of this Court is answered against the Revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed.’