Section 56(2)(vii)(c) – Provisions of section 56(2) (vii)(c) do not apply to a bonus issue. The provisions are not attracted in case of an issue of shares by a company to its existing shareholders on a proportionate basis.
Facts:
As on 01-04-2009, the assessee held 15,000 shares in Dorf Ketal Chemicals Pvt. Ltd. which represented 4.98% of the share capital (3,01,316 shares). The assessee was offered 3,13,624 additional shares, on a proportionate basis, at the face value of Rs. 100 per share. The assessee subscribed to and was allotted 1,94,000 shares on 28-01-2010. The other shareholders were allotted shares, on the same terms, not only the shares similarly offered to them on a proportionate basis, but also those not subscribed by the other shareholders as 1,19,624 (3,13,624 minus 1,94,000) shares by the assessee. The shares were received by the assessee on 10-02-2010. The book value of the shares so allotted/ received was Rs. 1,538 as on 31-03-2009.
Since the book value of the shares so received by the assessee was more than the face value thereof, the Assessing Officer held that the shares were received by the assessee for an inadequate consideration. He treated the difference between the fair market value of the shares and their face value as being chargeable to tax u/s. 56(2)(vii)(c) read with applicable rules.
Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the action of the AO.
Aggrieved, the revenue preferred an appeal to the Tribunal.
Held:
The provision, firstly, would not apply to bonus share Issue of bonus shares is by definition, a capitalisation of its profits 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. 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 shareholder 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 from the holders’ point of view.
The premise on which we found the issue of bonus shares as not applicable would, to the extent pari materia, apply in equal measure to the issue of additional shares, i.e., where and to the extent it is proportional to the existing shareholding.
Therefore, as long as 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 large 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.
A higher than proportionate or a non-uniform allotment though would, and on the same premise, attract the rigour of the provision. This is only understandable in as much as the same would only be to the extent of the disproportionate allotment and, further, by suitably factoring in the decline in the value of the existing holding. We emphasise equally on a uniform allotment as well. This is as a disproportionate allotment could also result on a proportionate offer, where on a selective basis, i.e., with some shareholders abstaining from exercising their rights (wholly or in part) and, accordingly, transfer of value/property. Take, for example, a case of a shareholding distributed equally over two shareholder groups, i.e., at 50% for each. A 1 : 1 rights issue, abstained by one group would result in the other having a 2/3rd holding. A higher proportion of `rights’ shares (as 2:1, 3:1, etc.) would, it is easy to see, yield a more skewed holding in favour of the resulting dominant group. We observe no absurdity or unintended consequences as flowing from the per se application of the provision of section 56(2)(vii) (c) to right shares, which by factoring in the value of the existing holding operates equitably. It would be noted that the section, as construed, would apply uniformly for all capital assets, i.e., drawing no exception for any particular class or category of the specified assets, as the `right’ shares.
The Tribunal held that no addition u/s. 56(2)(vii)(c) would arise in the facts of the present case.
The appeal filed by assessee was allowed.
