Dy. CIT v. Rajan Pai [ITA No. 1290/Bang/2015, dt. 29-4-2016] : 2016 TaxPub(DT) 2220 (Bang-Trib)

Bonus allotment whether hit by section 56(2)(vii)

Facts:

Assessee doctor was allotted bonus shares from Manipal Education and Medical Group (MEMG) 1,00,00,000 bonus against his holding of 5000 shares of Rs. 10 each. Assessing Officer took a stand that the assessee was obligated to offer fair value of this under section 56(2)(vii), thus took fair value of the bonus issue at 12.49 crores which was added in this income. On appeal Commissioner (Appeals) negated the addition. On further appeal:

Held in favour of the assessee that section 56(2)(vii) does not cover a bonus issue. In a bonus issue it is only the existing shares which are divided with no consideration flowing from the company to the shareholder. The provisions of section 56(2)(vii) were inserted to combat the removal of gift tax act, 1958. The same cannot be used to apply section 56(2) (v), (vi) and (vii) in a bonus issue. Valuation of unquoted shares vide rule 11UA(B) can apply only on receipt of shares as gift or for inadequate consideration and not for bonus issue. There is no consideration flowing in a bonus issue thus no benefit arose in the hands of the assessee to be taxed under section 56(2)(vii).

Sudhir Menon HUF v. ACIT (2014) 148 ITD 260 (Mumbai-ITAT)--Upheld.