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
