DCIT Vs Tangi Facility Solutions Pvt Ltd (ITAT Chennai)
ITAT held that Ld. CIT(A) has correctly relied on the cited decisions of Hon’ble Apex Court in CIT vs. Dalmia Investment Co. Ltd. (52 ITR 567) holding that issuance of bonus shares to equity shareholders do not amount to payment of dividend since the conversion of reserves into capital by issue of bonus shares do not involve release of profits to the shareholders and the said profits remain employed in the business. Similarly in Hansur Plywood Works Ltd. vs. CIT (229 ITR 112), it was held by Hon’ble Supreme Court that issuance of bonus shares does not amount to distribution of accumulated profits of a company. So far as the applicability of Sec. 56(2)(viia) is concerned, Hon’ble Karnataka High Court in the case of PCIT vs. Dr. Ranjan Pai (ITA No.501 of 2016 dated 15-12-2020), considering both these decisions, has held that a careful scrutiny of Section 56(2)(vii) of the Act 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 capitalization of reserves is merely a reallocation of the companies 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 remains the same and issue of bonus shares does not result in any change in respect of capital structure of the company. Thus, there is no addition or alteration to the profit making apparatus and the total funds available with the company remain the same. In substance, when a shareholder gets a bonus shares, the value of the original share held by him goes down and the market value as well as intrinsic value of two shares put together will be the same or nearly the same as per the value of 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. When there is an issue of bonus shares, the money remains with the company and nothing comes to the shareholders as there is no transfer of the property and the provisions of Section u/s 56(2)(vii)(c) of the Act are not attracted in such a situation.
