Case Law Details
ITO Vs Goldflag Holdings Private Limited (ITAT Bangalore)
The Bangalore ITAT held that bonus shares received on shares held as stock-in-trade do not automatically become stock-in-trade themselves, and can be independently treated as capital assets depending upon the assessee’s intention and accounting treatment. Accordingly, the Tribunal upheld the assessee’s claim that gains arising on sale of bonus shares of Infosys Ltd. were taxable as exempt long-term capital gains and not as business income.
The assessee, engaged in stock and commodity trading, had originally held Infosys shares as stock-in-trade. After receiving bonus shares, the original shares were sold, while the bonus shares were separately reflected as non-current investments from the date of allotment itself. Since bonus shares carry nil cost of acquisition, their value did not appear in the balance sheet, but the assessee consistently disclosed them under the investment schedule and held them for more than 12 months before sale.
The AO treated the sale proceeds of ₹3.55 crore as business income on the ground that the bonus shares merely inherited the character of the original shares. However, the CIT(A) and the Tribunal rejected this approach by relying upon CBDT Circular No. 6/2016, which states that where listed shares are held for more than 12 months and the assessee treats the gains as capital gains, the AO should not dispute such treatment.
The Tribunal also relied upon the Supreme Court ruling in CIT vs. Madan Gopal Radhey Lal and the Bombay High Court decision in PCIT vs. Ashok Apparels Pvt. Ltd., holding that bonus shares are normally received as capital assets and do not ipso facto become stock-in-trade merely because the original shares were trading stock. What matters is the assessee’s intention and conduct. Since the assessee had consistently treated the bonus shares as investments, the resultant gains were rightly assessable as exempt LTCG.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. ITA No. 932/Bang/2025 is filed by the Income Tax Officer, Ward – 3(1)(1), Bengaluru against the Appellate Order passed by the National Faceless Appeal Centre, Delhi (the Ld. CIT(A)) for Assessment Year 2017-18 on 03.04.2024 wherein the Appeal filed by the Assessee against the Assessment Order passed u/s. 143(3) of the Income Tax Act, 1961 (the Act) on 28.12.2019 by the Income Tax Officer, Ward – 3(1)(1), Bengaluru (the Ld. Assessing Officer) was allowed. The Ld. Assessing Officer is aggrieved and is in Appeal before us.
2. The only issue involved in this Appeal is the addition of Rs. 3,55,40,675/-added by the Ld. Assessing Officer from sale of bonus shares of Infosys Limited as part of business income of the Assessee instead of exempt long term capital gain.
3. The Ld. Assessing Officer has raised 6 grounds of Appeal stating that sale proceedings arising on sale of bonus shares which were issued in respect of shared forming part of the Assessee’s stock in trade are liable to inclusion in total income of the Assessee as profits of the share dealing business.
4. Assessee is in a business of stock trading, commodity trading etc., filed its return of income on 23.10.2017 at a loss of Rs. 174,10,569/-. The case of the Assessee was selected for scrutiny.
5. The brief facts show that the Assessee has claimed a long term capital gain of Rs. 3,55,40,675/- from sale of investments and this income has been treated as exempt by the Assessee. The claim of the Assessee is that it has sold 30,000 shares of Infosys Limited for Rs. 3,55,40,675/- which were received by the Assessee as bonus shares and same were treated as investment by the Assessee.
6. The Ld. Assessing Officer noted that Assessee has not shown any non-current investments in the return of income. Thus, according to the Ld. Assessing Officer the amount of Rs. 3.55 crores should be chargeable to tax as business income. The Ld. Assessing Officer noted the balance sheet of the Assessee and held that this amount of bonus shares was not shown as non-current investment by the Assessee and hence the bonus shares allotted to the Assessee will par take the same character as that of the original shares purchased by the Assessee. As the original shares of the Assessee were treated as stock in trade, the bonus shared should also be treated as stock in trade. Accordingly, Rs. 3,55,40,875/- was treated as business income of the Assessee.
7. The Assessee preferred an Appeal before the Ld. CIT(A). The Assessee submitted the details of the original shares undisputedly held as stock in trade which were also already sold in Financial Year 2014-15. But the bonus shares received and the same were treated as non-current investment from the date of share of bonus shares till same were sold. Thus, the claim of the Assessee was that the bonus shares were invested by the Assessee whose cost is 0/-. The Assessee further submitted that in the balance sheet stock is required to be disclosed on cost of acquisition. Therefore, its value in balance sheet as non-current investment was nil/-. Thus, the claim of the Assessee is that in the balance sheet Assessee has classified the bonus shares as a capital asset right from the date of allotment Bonus shares are undisputedly held by the Assessee for more than the period of 12 months. The Assessee also relied on CBDT circular no. 4/2007 and circular no. 6/2016.
8. The Ld.CIT (A) based on the above submission categorically held that the bonus shares of Infosys limited are non-current investment of the Assessee held for more than 12 months disclosed in the balance sheet as investment and therefore in terms of circular no. 6/2016 as well as the decision of Hon’ble Bombay High Court in case of PCIT v/s. Ashok Apparels and decision of the Hon’ble Supreme Court in case of CIT v/s. Madan Gopal Radhey Lal 73 ITR 652 allowed the Appeal of the Assessee. He held that amount of Rs. 3,55,40,675/- received by the Assessee on sale of bonus shares of Infosys is chargeable to tax in the hands of the Assessee as exempt long term capital gain.
9. The Ld. Assessing Officer is aggrieved and is in Appeal before us.
10. The Ld. Departmental Representative Shri Balusamy N, JCIT vehemently supported the orders of the Ld. Assessing Officer. He submitted that when the shares of Infosys Limited were held by the Assessee as stock in trade and on those shares, the Assessee has received the bonus shares. Therefore, the bonus shares will also par take the character of stock in trade of the Assessee. As the bonus shares are sold by the Assessee, it results into stock in trade by the Assessee which is chargeable to tax under the head business income and thus there is no infirmity in the order of the Ld. Assessing Officer.
11. The Ld. Authorized Representative Shri N. R. Suresh, CA vehemently supported the submissions made by the Assessee before the Ld. CIT(A). He reiterated the submission made by the Ld. CIT(A) stating that Assessee was admittedly holding shares of Infosys Limited as stock in trade. On that shares, the Assessee has received the bonus shared. The original shares sold by the Assessee in Financial Year 2014-15. The Assessee has stated that the original shares on which bonus is issued are stock in trade but the bonus shares received by the Assessee are treated as capital investment as stock in trade. In the non-current investment schedule of the balance sheet of the Assessee, the cost of these shares being zero but are disclosed therein. Therefore, the annual accounts of the Assessee also say that these are investment of the Assessee. He further stated that there is no dispute that Assessee has already held these shares for more than 12 months. He further referred to the various circulars issued by the Central Board of Direct Taxes wherein it is stated that where the Assessee shows the profit on sale of shares as a capital gain, no dispute is required to be raised by the Ld. Assessing Officer. He therefore submitted that the Ld. CIT(A) after considering the circulars have allowed the claim of the Assessee for exempt long term capital gain.
12. We have carefully considered the rival contention and perused the orders of the Ld. lower authorities. The facts stated above are clear that Assessee was having shares of Infosys Limited which were held by it as stock in trade. These shares were sold in Financial Year 2014-15. On these shares, the Assessee received bonus shares. These bonus shares were classified by the Assessee from the date of allotment itself as non-current investment. Admittedly, as bonus shares do not have any cost, in the balance sheet there is no value for disclosing those shares. These shares were held by the Assessee beyond 12 months andlater on sold. Thus, apparently the Assessee earned long term capital gain on sale of those shares. According to circular no. 6/16 issued by the CBDT it clearly says that in respect of listed shares and securities held for a period of more than 12 months before transfer, if the Assessee desires to treat the income arising from the transfer thereof as capital gain, the same shall not be put to dispute by the Ld. Assessing Officer. This circular covers the issue in favor of the Assessee.
13. The Ld. CIT(A) has dealt this issue as under:-
“6. Ground 1 – The Assessing Officer was incorrect in observing that the shares on which the long term capital gains has been claimed, were not shown as noncurrent investments in the return of income from assessment year AY 2014-15 onwards, despite the fact that the same is evidenced by the balance sheets filed for the assessment years 2014-15 to 2016-17. The Assessing Officer was wrong in coming to the conclusion that the bonus shares received by the assessee on the shares held as stock in trade also partakes the character of stock-in trade despite the fact, that the intention of the assessee to hold it as long term investment and is accordingly reflected by disclosing it as noncurrent investments in the books balance sheet. 6.1 I have carefully considered the submission of the appellant, facts of the case and impugned order.
6.2 Finding of the AO:
During the year under consideration, the assessee had sold 30,000 bonus shares of M/s. Infosys Limited for an amount of Rs 3,55,40,675/- and claimed LTCG earned on sale of these shares amounting to Rs. 3,55,40,675/- as exempt. The AO observed from the balance sheet as on 31/03/2015 that the original shares of Infosys purchased by the assessee on which bonus shares were allotted to the assessee were not shown as non-current investment by the assessee and the same was treated as part on inventory; that even as on 31/03/2015, investment under the head non-current investment was nil. The AO held that the bonus shares allotted to the assessee will partake the same character as that of the original shares purchased by the assessee. Therefore, as the original shares purchased by the assessee was treated as stock in trade/inventory by the assessee, the AO held that even the bonus shares allotted to the assessee will take the character of stock in trade/inventory for the assessee. Therefore, the AO treated the gain of Rs. 3,55,40,675/- from sale of bonus shares of Infosys as part of business income of the assessee as against the claim of the assessee treating it as exempt long term capital gain.
6.3 During the appellate proceedings and during VC, it was submitted that the assessee had acquired 60,000 original shares of Infosys Ltd in FY 2014-15 and also received 60,000 bonus shares in FY 2014-15; that the original shares, which were held as stock in trade, were sold in FY 2014-15 but the bonus shares were treated as non-current investments from the date of allotment till its sale; that bonus shares had been disclosed under non-current investments with cost as zero (pursuant to the provision of Income Tax Act that the cost of bonus shares is zero) and the market value had been disclosed as on the reporting date i.e, 31.03.2015 and, 31.03.2016 as required under the Companies Act. The assessee submitted the relevant pages of balance sheet for year ending 31.03.2015, 31.03.2016 and 31.03.2017. Therefore, it is submitted that the assessee had classified the bonus shares as capital assets right from the date of allotment and had held them for more than a period of twelve months and hence had treated it as long term capital gain. The assessee thus contended that the profit on sale of bonus shares issued by M/s. Infosys, based on the treatment adopted by the Assessee, therefore requires to be assessed as long term capital gains in line with above cited CBDT circulars 4 of 2007 and Cir 6 of 2016 and decisions as cited above. The assessee submitted that the decision of the Supreme Court in Madam Gopal Radhey Lal is applicable to its case.
6.4 On carefully going through the submission of the appellant and documents filed, I am inclined to agree with the contentions of the assessee. It is clear that bonus shares of Infosys had been disclosed under non-current investments by the assessee in its balance sheet for year ending 31.03.2015 and 31.03.2016. The scan copy of relevant part of the balance sheet is as under:
6.5 In Circular No.6/2016, CBDT has given instruction in Paragraph No. Poin o) which sexracted be 3,
“3(b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer…”
It is held in various cases by the Courts, few of which are quoted above as relied upon by the assessee, that the directions in circulars issued by the CBDT would be binding on the income-tax authorities even though they deviate from the provisions of the Act.
6.6 The Hon’ble High Court of Bombay in the case of Principal Commissioner of Income Tax (Central) Vs Ashok Apparels (P.) Ltd., (supra) has dealt with identical issue and following the decision of Hon’ble Supreme Court in the case of CIT v. Madan Gopal Radhey Lal [1969] 73 ITR 652 (SC), held that bonus shares given by company in proportion to holding of equity capital by shareholders would, in absence of express provision to contrary be treated as capital and not income. The Relevant para is as under: of Madan
12. A very similar situation was examined by the Supreme Court in case Gopal Radhey Lal (supra). It is also a case where the assessee was holding certain shares for the purpose of business. These shares gave rise to bonus shares which the assessee received and treated them as his investment. The revenue objected to this position. Full bench of Allahabad High Court held in favour of the assessee. At the hands of the revenue the issue reached the Supreme Court. The Supreme Court referring to a decision of the House of Lords in case of Commissioners of Inland Revenue v. John Blott [1921] 8 T.C. 101 held and observed as under:-
‘The principle of the case was affirmed by the Judicial Committee in a case arising under the Indian Income-tax Act, 1922, Commissioner of Income-tax v. Mercantile Bank of India. Accordingly, bonus shares given by a company in proportion to the holding of equity capital by a shareholder are, in the absence of any express provision to the contrary, liable to be treated We are as capital and not income.
We are unable to agree with the judgment of the Bombay High Court (to which reference was made by the Tribunal) in Commissioner of Income-tax v. Maniklal Chunnilal and Sons Ltd. (I.T. Reference No. 16 of 1948) that bonus shares received by a shareholder who carries on business in shares and securities “ipso facto become accretion to his stok-in-trade.” Bonus shares would normally be deemed to be distributed by the company as capital and the shareholder receives the shares as capital. The bonus shares are accretions to the shares in respect of which they are issued, but on that account those shares do not become stock-in-trade of the business of the shareholder. A trader may acquire a commodity in which he is dealing for his own purposes and hold it apart from the stock-in-trade of his business. There is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the purpose of his business; in each case the question is one of intention to be gathered from the evidence of conduct and dealings by the acquirer with the commodity.
Bonus shares having been received by the assessees in respect of their stock-in- trade did not, therefore, become part of their stock-in-trade, merely because they were accretions to the stock-in-trade. The bonus shares were received as capital; they could be converted by the assessees into their stock-in-trade or retained as their capital asset.’
13. We do not think any distinction is possible to be made in the present case. The facts are virtually identical. As observed by the Supreme Court in the said case shares given by company in proportion to the holding of equity capital by share-holders would, in the absence of express provision to be contrary be treated as capital and not income. The Assessing Officer has merely proceeded on the basis that the origin of the bonus shares being the shares held by the assessee by way of stock-in-trade, necessarily the bonus shares would also partake the same character.”
6.7 In view of the Circular 6 of 2016 and following the above decisions, the contention of the assessee that the profit on sale of bonus shares issued by M/s. Infosys, based on the treatment adopted by the assessee, requires to be assessed as long term capital gains is found to be acceptable. Therefore, the AO was not justified in holding that as the original shares purchased by the assessee were treated as stock in trade/inventory by the assessee, the bonus shares allotted to the assessee will take the character of stock in trade/inventory for the assessee and therefore erred in treating the gain of Rs. 3,55,40,675/- from sale of bonus shares of Infosys as part of business income of the assessee, instead of as exempt long term capital gain. Accordingly, the ground no.1 is allowed.”
14. The Ld. Departmental Representative could not point out any reason why the circular no. 6/2016 does not bind the Ld. Assessing Officer. In view of this we hold that there is no infirmity in the order of the Ld. CIT(A) in holding that capital gain arising on the sale of bonus shares of Infosys Limited in case of the Assessee shall be chargeable to tax as a long term capital gain which is exempt for the impugned Assessment Year.
15. In the result all the grounds raised by the Ld. Assessing Officer are dismissed.
Order pronounced in the open court on 22ndMay, 2026.
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