Case Law Details
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.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
1. Aforesaid appeal by Revenue for Assessment Year (AY) 2017-18 arises out of an order of learned Commissioner of Income Tax (Appeals)-19, Chennai [CIT(A)] dated 17-04-2023 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 147 of the Act on 31-03-2022. The grounds raised by the Revenue read as under:
1. The order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law.
2. The Ld.CIT(A) erred in deleting the addition of Rs.254,55,24,025/ made towards shares, being bonus shares received without consideration, against the fair market value of shares as “Income from other sources” by invoking provision u/s.56(2)(viia)
2.1 The Ld.CIT(A) failed to appreciate the intent behind the insertion of clause (vii) in Sec.56(2), as an anti abuse provision to prevent the practice of transferring shares of a specified company for no or inadequate consideration. If the assessee being a company in which the public are not substantially interested received property, being the shares of a company not being the company in which the public are not substantially interested, the difference between actual consideration and fair market value of shares is to be treated as ” Income from other sources” under this clause.
2.2 The ld.CIT(A) failed to appreciate that the AO has adopted fair market value of shares @ Rs.275 per share based on the value on which M/s. Updater Services Pvt ltd bought back shares from M/s. Tangi facility business Solutions in the same financial year. Further during the AY 2015-16 also, M/s. ICICI Ventures and transferred 41,31,989 shares of M/s. UDS to M/s. TFSPL for Rs.113,00,16,352, at Rs.273.48 per share.
Hence, the AO correctly adopted fair market value of share @ Rs.275 per share while assessing the income from other sources u/s.56(2)(viia).
2.3 The Ld.CIT(A) erred in observing that the provisions of Sec.56(2) and 56(2)(viia) for purpose of taxing under the head “Income from other sources and quantifying the amount of dividend income are inapplicable to the facts of the case. The Ld.CIT(A) failed to appreciate that the AO relied on Sec.56(2)(viia) to tax the value of shares received under the head “Income from other sources” since the shares were acquired without any consideration as against the fair market value of Rs.254,55,24,025/-.
As is evident, the sole issue that arises for our consideration is addition made by Ld. AO u/s 2(22)(b) r.w.s. 56(2)(viia) of the Act. Having heard rival submissions, our adjudication would be as under. The assessee being resident corporate assessee is stated to be engaged in the business of facility management and making investment. Though the assessee was assessed u/s 143(3), the case was reopened upon formation of belief of escapement of income and notice u/s 148 was issued on 23.03.2021. The assessee did not file any return of income in response to the same.
Assessment Proceedings
2.1 The case was reopened on the observation that the assessee was holding 41,31,989 number of shares of group entity by the name M/s Updater Services Pvt. Ltd. (USPL). M/s USPL bought back 20,75,000 shares from the assessee @Rs.275/- per share. Later on 92,56,451 shares were received by the assessee in the ratio of 45 shares for every 10 shares held by it. The Ld. AO formed an opinion that bonus shares as received by the assessee were nothing but dividend received by the assessee.
2.2 The assessee submitted that bonus is nothing but increase in number of shares without any corresponding increase in the value. The assessee did not receive any income or increase in the value of asset due to bonus shares. In fact, individual share cost shall reduce in accounting parlance but overall cost shall remain the same. The assessee referred to the decision of Hon’ble Supreme Court in CIT vs. Dalmia Investment Co. Ltd. (52 ITR 567) as well as in Hansur Plywood Works Ltd. vs CIT (229 ITR 112) holding that bonus shares do not amount to distribution of accumulated profit of the company. It was further submitted that the bonus was not from profit but out of securities premium account which could not be used for paying dividend. 2.2 However, Ld. AO, considering the provisions of Sec. 2(22)(b) held that bonus was to be considered as dividend in the hands of the company. These provisions provide that any distribution to its shareholders by company of debentures, debenture-stock or deposit certificates in any form, whether with or without interest and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalized or not, would amount to dividend.
2.3 Further the provisions of Sec. 56(2) provide that dividend would be chargeable to tax. Therefore applying the value of Rs.275/- per share to number of bonus shares as received by the assessee, Ld. AO held that the amount of Rs.254.55 Crores would be taxable in the hands of the assessee as dividend. The value of Rs.275/- was justified in the background of the fact that during AY 2015-16, one of the shareholder M/s ICICI Ventures had transferred 41,31,989 shares of USPL to the assessee at Rs.273.48 per share. M/s USPL bought back the shares under a scheme as sanctioned by Hon’ble High Court of Madras in CP No.122 of 2016. The Ld. AO also noted the provisions of Sec. 56(2)(viia) which provide that if any company has received any property during the year beings shares of company, not being a company in which the public are substantially interested, the same has to be taxed as ‘income from other sources’. The assessee acquired the shares at ‘nil’ value as against FMV of Rs.275 per share. Therefore, the benefit received by the assessee would be taxable as ‘income from other sources’. Finally, the assessment was framed adding impugned dividend of Rs.254.55 Crores which was subjected to further challenge before first appellate authority.
Appellate Proceedings
3.1 After considering assessee’s submissions, Ld. CIT(A) observed that Sec. 2(22)(b) has two parts i.e.(i) any distribution to shareholders of debentures, debenture-stock or deposit certificates in any form, whether with or without interest to the extent to which the company possesses accumulated profits, whether capitalized or not; (ii) any distribution to preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalized or not. Thus the distribution of bonus shares to the equity shareholders was not included in the scope of dividend. It was very much clear from the financial statements that the assessee received bonus shares in the capacity of equity shareholder and therefore, such distribution could not come under the scope of dividend as defined in Sec. 2(22)(b). Accordingly, the application of this section by Ld. AO was not sustainable. The same was further supported by the fact that in terms of provisions of Sec. 55(2)(aa), the cost of acquisition of such shares was to be taken as ‘nil’. If the receipt of bonus shares was construed as dividend and subjected to tax, then the income so taxed was required to be treated as the cost of acquisition at the time of sale of the said bonus shares. Therefore, the issue of bonus shares to equity shareholders would not represent dividend income in the hands of the shareholders.
3.2 In the case of CIT vs. Dalmia Investment Co. Ltd. (52 ITR 567), it was held by Hon’ble Apex Court that the issue of bonus shares by the company to its 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. In the decision of Hon’ble Karnataka High Court in PCIT vs. Dr. Ranjan Pai (ITA No.501 of 2016 dated 15-12-2020) it was held that the provisions of Sec.56(2)(vii) would not apply in the case of bonus shares since the money remains with the company and nothing comes to the shareholders as there is no transfer of any property.
3.3 Considering all these facts, it was held by Ld. CIT(A) that issue of bonus shares could not be regarded as dividend u/s 2(22)(b). Accordingly, Ld. AO was directed to delete the impugned addition against which the revenue is in further appeal before us.
Our findings and Adjudication
4. We find that the basic facts are not in dispute. Admittedly, the assessee acquired 41,31,989 number of shares of USPL in AY 2015-16 at Rs.273.48 per share. During this year, USPL bought back 20,75,000 shares from the assessee @Rs.275/- per share. Later on 92,56,451 shares were received by the assessee as bonus shares in the ratio of 45 shares for every 10 shares held by it. The bonus thus received by the assessee was held to be dividend by Ld. AO u/s 2(22)(b). However, Ld. CIT(A), in our considered opinion, has correctly appreciated the provisions of Sec.2(22)(b). The issue of bonus shares to preference shares is covered as dividend but issue of bonus shares to equity shares in not covered as dividend u/s 2(22)(b). The revenue could not dispute the fact that the assessee was holding equity shares and not the preference shares. Since the bonus to equity shareholders is not covered within the ambit of Sec. 2(22)(b), the same has rightly been held by Ld. CIT(A) to be not applicable to the facts of the case. In such a situation, the same could not be brought to tax u/s 56(2).
5. We are of the opinion 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. These case laws apply to the facts of present case before us. In the absence of any contrary decision shown to us, we find no reason to interfere in the impugned order.
6. The appeal stand dismissed.
Order pronounced on 3rd June, 2024
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