• Notification Date: 22-09-2023
• Notification No: N/A

ITAT Quashes Appeal, Ruling Section 56(2)(vii)(3) of Income Tax Act Not Applicable for Bonus Shares

The New Delhi bench of ITAT quashed the appeal by Deputy Commissioner of Income Tax (DCIT), (the appellant) for levying Income tax from Aruna Chandhok, (the respondent) for the bonus shares she received, as per section 56(2)(vii)(3) of the Income Tax Act, 1961. The appeal was filed against the order by the Commissioner of Income Tax (Appeals) (CIT(A)) regarding the assessment of Aruna Chandhok for the bonus shares she received. Her income for the year was Rs 8,56, 57,000/- and received bonus shares and units from Tech Mahindra Ltd and JM Arbitrage Advantage Fund-Bonus Options. She was show caused as to why the addition under section 56(2)(vii)(c) of the Income Tax Act should not be made for the bonus shares she had received. 

The Counsel for the assessee heading the show cause notice issued, submitted the provisions of the section 56(2)(vii)(3) of the Income Tax Act would not apply to bonus shares as it was merely done by capitalization of profits and the value of shares would remain the same and there would be no increase in the wealth of the shareholders on account of bonus issue and his percentage of holding the shares in the company will remain the same. The Counsel also relied on the decision by the Hon’ble Supreme Court in the case of CIT vs. General Insurance Corporation Ltd which held that issuance of bonus shares by a company would not result in any inflow of fresh funds, and nothing came to the shareholders. 

The Assessing Officer (AO) however did not head to the contentions of Aruna Chadhok and proceeded to treat the bonus shares/bonus units issued to be taxed under section 56(2)(vii)(3) oh the Income Tax Act and added a sum of Rs 36,10,63,656/-. The assessee  submitted before the CIT(A) that at what stage some shares are to be sold is the absolute discretion of the shareholder and there is no legal compulsion by law that an assessee should sell his total holding immediately on allotment of bonus shares. Therefore, the AO’s assumption that the assessee would get the double benefit is completely devoid of any merits and had no basis. The CIT(A) granted relief to Aruna Chandhok. 

A two-member bench consisting of M.Balganesh (Accountant Member) and Anubhava Sharma (Judicial Member) after hearing both sides held the CIT(A) had rightly appreciated the contentions of Aruna Chandhok and granted relief to her. The appeal was hence dismissed by the Tribunal.