DCIT, Bangalore V. Dr. Rajan Pai, Bangalore

ITA 1290/BANG/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0418 (ITAT-BANGALORE)
• Duration Of Justice: 6 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2012-2013
• Appeal Filed On: 20-10-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SAJJAN KUMAR TULSIYAN
• Keywords: Sale consideration of property below Jantri Value; Capital asset; Gift; Cost of acquisition; Fair market value
• Section: 50C; 56(2); 56; 10

Judgement Text

ITA.1290/BANG/2015 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'C', BANGALORE BEFORE SHRI. ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI. GEORGE GEORGE K, JUDICIAL MEMBER I.T.A NO.1290/BANG/2015 (ASSESSMENT YEAR : 2012-13) DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE -2(2), BENGALURU .. APPELLANT V. DR. RAJAN PAI, BLOCK NO.1B, JAKKUR PLANTATION VILLAGE, YELAHANKA MAIN ROAD, BENGALURU .. RESPONDENT PAN : AGBPP2795G ASSESSEE BY : SHRI. SAJJAN KUMAR TULSIYAN, ADVOCATE REVENUE BY : SHRI. SANJAY KUMAR, CIT -III HEARD ON : 12.04.2016 PRONOUNCED ON : 29.04.2016 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY REVENUE, IT ASSAILS AN ORD ER DT.04.08.2015, OF CIT(A)-11, BENGALURU, BY WHICH HE DELETED AN ADDITI ON MADE BY THE AO, CONSIDERING THE FAIR MARKET VALUE OF THE BONUS SHAR ES RECEIVED BY THE ASSESSEE FROM ONE M/S. MANIPAL EDUCATION & MEDICAL GROUP (INDIA) P. LTD ITA.1290/BANG/2015 PAGE - 2 (MEMG IN SHORT), AS INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. 02. APROPOS FACTS ARE THAT ASSESSEE, A MEDICAL PROF ESSIONAL, HAD FILED HIS RETURN DECLARING INCOME OF RS.3,22,43,332/-. DURIN G THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTED BY THE AO THAT ASSESSEE HAD RECEIVED 1,00,00,000 NUMBER OF EQUITY SHARES FROM MEMG, AS B ONUS SHARES AGAINST HIS HOLDING OF 5,000 FULLY PAID UP EQUITY SHARES IN THE SAID COMPANY. FACE VALUE OF SHARE WAS RS.10/- EACH. AO WAS OF THE OPI NION THAT ASSESSEE HAVING NOT PAID ANY CONSIDERATION FOR THE BONUS SHA RES, HE WAS OBLIGED TO OFFER THE FAIR MARKET VALUE AS INCOME FROM OTHER S OURCES U/S.56(2)(VII)(C) OF THE INCOME-TAX ACT, 1961 (THE ACT IN SHORT). WHEN THE ASSESSEE WAS PUT ON NOTICE, ASSESSEE TOOK A STAND THAT BONUS SHA RES WERE TAXABLE ONLY WHEN THE BENEFICIARY RECEIVED THE SHARES AND NOT ON ALLOTMENT. ASSESSEE ALSO RELIED ON A CIRCULAR NO.6/2014, DT.11.02.2014 BY CBDT. HOWEVER, THE AO WAS NOT IMPRESSED. ACCORDING TO HIM, CIRCULAR R EFERRED BY THE ASSESSEE WAS IN RELATION TO SECTION 115R OF THE ACT, WHICH D EALT WITH BONUS UNITS ISSUED BY A MUTUAL FUND HOUSE. AS PER THE AO, FAIR MARKET VALUE OF THE BONUS SHARES ISSUED BY MEMG WAS REQUIRED TO BE COMP UTED IN ACCORDANCE WITH RULE 11U AND 11UA OF THE INCOME-TAX RULES, 196 2 (THE RULES IN ITA.1290/BANG/2015 PAGE - 3 SHORT). HE APPLIED RULE 11UA AND DETERMINED THE FA IR MARKET VALUE OF THE 1,00,00,000 NUMBER OF BONUS SHARES AT RS.12,49,00,0 00/-. THE ADDITION WAS MADE U/S.56(2)(VII)(C) OF THE ACT, UNDER THE HE AD OTHER SOURCES. 03. AGGRIEVED, ASSESSEE MOVED IN APPEAL BEFORE THE CIT (A). ARGUMENT OF THE ASSESSEE WAS THAT SECTION 56(2)(VII) OF THE ACT, DID NOT APPLY TO BONUS SHARES BECAUSE BONUS SHARES REPRESENTED CAPIT ALISATION OF PROFITS BY THE ISSUING COMPANY AND DID NOT RESULT IN ANY INCRE ASE OR DECREASE IN THE WEALTH OF THE SHAREHOLDER. CONTENTION OF THE ASSES SEE WAS THAT AS A SHAREHOLDER, HIS PERCENTAGE IN THE TOTAL EQUITY SHA RES OF THE COMPANY REMAINED CONSTANT BEFORE AND AFTER THE ISSUE OF THE BONUS SHARES. AS PER THE ASSESSEE, UNTIL AND UNLESS THERE WAS A DISPROPO RTIONATE ALLOTMENT OF SHARES, THERE COULD BE NO SPECIFIC VALUE THAT COULD BE ATTACHED TO SUCH BONUS SHARES AND SECTION 56(2)(VII)(C) OF THE ACT, WOULD NOT GET ATTRACTED. AS PER THE ASSESSEE, THOUGH CIRCULAR NO.6/2016, DT. 11.02.2014 OF CBDT WAS ISSUED IN RELATION TO SECTION 115R(2) OF THE AC T, ANALOGY THEREIN WOULD APPLY HERE ALSO. RELIANCE WAS ALSO PLACED ON A DEC ISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF SUDHIR MENON H UF V. ACIT [(2014) 148 ITD 260]. ITA.1290/BANG/2015 PAGE - 4 04. LD.CIT (A), AFTER GOING THROUGH THE SUBMISSION S OF THE ASSESSEE WAS OF THE OPINION THAT ASSESSEE HAD TO SUCCEED. ACCOR DING TO HIM, THE ISSUE WHETHER ANY INCOME SHOULD BE ATTRIBUTED FOR BONUS S HARES ISSUED TO A BENEFICIARY WAS CONSIDERED BY THE MUMBAI BENCH OF T HE TRIBUNAL IN THE CASE OF SUDHIR MENON HUF (SUPRA). AS PER THE CIT ( A), VIEW TAKEN BY THE MUMBAI BENCH WAS SUPPORTED BY JUDGMENT OF HONBLE A PEX COURT IN THE CASE OF CIT V. GENERAL INSURANCE CORPORATION [286 I TR 232]. HE HELD THAT WHEN THERE WAS AN ISSUE OF BONUS SHARES, THE MONEY REMAINED WITH COMPANY AND NOTHING CAME TO THE SHAREHOLDER. HE HE LD THAT SUB-CLAUSE (C) OF CALUSE (VII) OF SUB-SECTION (2) OF SECTION 56 OF THE ACT COULD NOT BE APPLIED TO BONUS SHARES AND DELETED THE ADDITION MA DE BY THE AO. 05. NOW BEFORE US, LD. DR STRONGLY ASSAILING THE OR DER OF THE CIT (A), SUBMITTED THAT THE JUDGMENT OF HONBLE APEX COURT I N THE CASE OF GENERAL INSURANCE CORPORATION (SUPRA) WAS PRIOR TO INTRODUC TION OF CLAUSE (VII) TO SECTION 56(2) OF THE ACT. AS PER THE LD. DR, CLAUS E (VII) WAS INSERTED BY FINANCE (NO.2) ACT, 2009, W.E.F. 01.10.2009. ACCOR DING TO HIM, THE QUESTION BEFORE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF SUDHIR MENON HUF (SUPRA) RELIED ON BY THE ASSESSEE WAS ON THE CO ST OF RIGHT SHARES AND NOT OF BONUS SHARES. ITS OBSERVATION REGARDING BON US SHARES, ACCORDING TO ITA.1290/BANG/2015 PAGE - 5 THE LD. DR, WAS MERE OBITER. FURTHER AS PER THE LD . DR, WHEN THE BONUS SHARES WERE ALLOTTED TO A SHAREHOLDER EVEN THOUGH T HE PRICE OF THE ORIGINAL SHARES HELD BY HIM WENT DOWN, DEPRESSION IN THE PRI CE WAS OFFSET BY THE VALUE OF THE BONUS SHARES. THEREFORE, AS PER THE L D. DR, THE BONUS SHARES WERE AUTOMATICALLY IMBIBED WITH A VALUE. COST COUL D BE EASILY WORKED OUT BY DIVIDING THE VALUE OF SHARES EARLIER HELD WITH T OTAL NUMBER OF SHARES INCLUDING THE BONUS SHARES. IN ANY CASE, ACCORDING TO HIM, THE VIEW TAKEN BY THE CIT (A) THAT SECTION 56(2)(VII) OF THE ACT, COULD NOT BE APPLIED FOR ISSUE OF BONUS SHARES, WAS INCORRECT. AS PER THE L D. DR, SUB-CLAUSE(C) OF CLAUSE (VII) OF SECTION56(2) OF THE ACT, MENTIONED CLEARLY THAT ANY PROPERTY OTHER THAN IMMOVABLE PROPERTY RECEIVED BY AN ASSESS EE WITHOUT CONSIDERATION HAS TO BE VALUED AND CONSIDERED AS IN COME. IT WAS FOR THE SPECIFIC PURPOSE OF VALUATION OF SUCH PROPERTY, RUL E 11U AND 11UA WERE INTRODUCED IN THE RULE BOOK. AS PER THE LD. DR, RU LE 11UA, GAVE THE METHOD OF VALUING SHARES AND EQUITIES. SUCH METHOD INCLUDED ONE FOR VALUING EQUITY SHARES WHICH WERE NOT QUOTED ALSO. AS PER THE LD. DR, AO HAD FOLLOWED THE MANDATE OF THE ACT AND HAD MADE CO RRECT VALUATION OF THE BONUS SHARES. SUCH VALUE, BY VIRTUE OF SECTION 56( 2)(VII)(C) OF THE ACT, WAS A PART OF INCOME FROM OTHER SOURCES OF THE ASSES SEE. ITA.1290/BANG/2015 PAGE - 6 05. PER CONTRA AND IN SUPPORT OF THE ORDER OF CIT ( A), LD. AR SUBMITTED THAT LEGISLATIVE HISTORY OF SECTION 56(2)(V) INSERT ED BY FINANCE (NO.2) ACT, 2004 AND SUBSEQUENT ADDITION OF CLAUSE (VI), W.E.F. 01.04.2007 AND CLAUSE (VII) THROUGH FINANCE (NO.2) ACT, 2009, W.E.F. 01.1 0.2009, WOULD CLEARLY SHOW THAT THE SAID CLAUSES WERE BROUGHT IN FOR THE PURPOSE OF ADDRESSING THE SITUATION ARISING FROM ABOLISHMENT OF GIFT-TAX. I N OTHER WORDS, ACCORDING TO THE LD. AR, GIFT WAS MADE TAXABLE IN THE HANDS O F THE DONEE AS A PART OF INCOME FROM OTHER SOURCES. AS PER THE LD.AR, THE SE WERE ANTI-ABUSE PROVISIONS TO ROPE IN THOSE CASES WHERE THERE WAS U NDER-STATEMENT OF VALUE OF AN ASSET IN THE HANDS OF RECIPIENT. ACCORDING T O HIM, IF SECTION 56(2)(VII) WAS APPLIED TO BONUS SHARES, IT WOULD CR EATE AN APPARENT CONFLICT WITH SECTION 55(2)(AA)(IIIA). LATTER SECTION SPECI FY THAT COST OF ACQUISITION OF ANY ASSET ALLOTTED TO AN ASSESSEE WITHOUT ANY PA YMENT SHALL BE TAKEN AS NIL. IF WE APPLY SECTION 56(2)(VII)(C) OF THE ACT, TO BONUS SHARES AND MAKE A VALUATION THEREOF TAKING THE FAIR MARKET VALUE, T HEN IT WOULD IMPLY THAT A COST WAS NECESSARILY INCURRED FOR THE PURPOSE OF AC QUIRING THE BONUS SHARES. IT WOULD RESULT IN A SITUATION WHERE CAPITAL GAINS ARISING OUT OF SALE OF BONUS SHARES WOULD BE CHARGED TO TAX, TAKING THE WHOLE CO NSIDERATION, IGNORING THE COST ATTRIBUTED TO IT BY OPERATION OF SECTION 5 6(2)(VII)(C) OF THE ACT. IN ANY CASE, AS PER THE LD. AR, DECISION OF MUMBAI BEN CH IN THE CASE OF ITA.1290/BANG/2015 PAGE - 7 SUDHIR MENON HUF (SUPRA) WAS DIRECTLY ON THE VALUE TO BE ATTACHED TO BONUS SHARES. LD. AR FURTHER SUBMITTED THAT BONUS SHARES DID NOT ADD UP TO THE VALUE OF SHARE HOLDER IN ANY MANNER AND THUS NO BENEFIT WHATSOEVER WAS RECEIVED. THUS ACCORDING TO HIM, CIT (A) WAS JUSTI FIED IN DELETING THE ADDITION. 06. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONTENTIONS. SECTION 56(1) AND (2), IN SO FAR AS IT IS RELEVANT ON THE I SSUE ON HAND, IS REPRODUCED BELOW : (1) INCOME OF EVERY KIND WHICH IS NOT TO BE EXCLUDE D FROM THE TOTAL INCOME UNDER THIS ACT SHALL BE CHARGEABLE TO INCOME -TAX UNDER THE HEAD 'INCOME FROM OTHER SOURCES' IF IT IS NOT CHARGEABLE TO INCOME-TAX UNDER ANY OF THE HEADS SPECIFIED IN SECTION 14, ITEMS A T O E. (2) IN PARTICULAR, AND WITHOUT PREJUDICE TO THE GEN ERALITY OF THE PROVISIONS OF SUB-SECTION (1), THE FOLLOWING INCOME S SHALL BE CHARGEABLE TO INCOME-TAX UNDER THE HEAD 'INCOME FROM OTHER SOU RCES', NAMELY:-- I).... II)... III)... IV)... (V) WHERE ANY SUM OF MONEY EXCEEDING TWENTY-FIVE TH OUSAND RUPEES IS RECEIVED WITHOUT CONSIDERATION BY AN INDIVIDUAL OR A HINDU UNDIVIDED FAMILY FROM ANY PERSON ON OR AFTER THE 1ST DAY OF S EPTEMBER, 2004, BUT BEFORE THE 1ST DAY OF APRIL, 2006, THE WHOLE OF SUCH SUM : PROVIDED THAT THIS CLAUSE SHALL NOT APPLY TO ANY SU M OF MONEY RECEIVED(A) FROM ANY RELATIVE ; OR (B) ON THE OCCA SION OF THE MARRIAGE OF THE INDIVIDUAL ; OR(C) UNDER A WILL OR BY WAY OF ITA.1290/BANG/2015 PAGE - 8 INHERITANCE ; OR(D) IN CONTEMPLATION OF DEATH OF TH E PAYER ; OR(E) FROM ANY LOCAL AUTHORITY AS DEFINED IN THE EXPLANATION T O CLAUSE (20) OF SECTION 10 ; OR(F) FROM ANY FUND OR FOUNDATION OR U NIVERSITY OR OTHER EDUCATIONAL INSTITUTION OR HOSPITAL OR OTHER MEDICA L INSTITUTION OR ANY TRUST OR INSTITUTION REFERRED TO IN CLAUSE (23C) OF SECTION 10 ; OR(G) FROM ANY TRUST OR INSTITUTION REGISTERED UNDER SECT ION 12AA. EXPLANATION FOR THE PURPOSES OF THIS CLAUSE, RELAT IVE MEANS (I) SPOUSE OF THE INDIVIDUAL ; (II) BROTHER OR SISTER OF THE INDIVIDUAL ; (III) BROTHER OR SISTER OF THE SPOUSE OF THE INDIVI DUAL ; (IV) BROTHER OR SISTER OF EITHER OF THE PARENTS OF THE INDIVIDUAL ; (V) ANY LINEAL ASCENDANT OR DESCENDANT OF THE INDIV IDUAL ; (VI) ANY LINEAL ASCENDANT OR DESCENDANT OF THE SPOU SE OF THE INDIVIDUAL ; (VII) SPOUSE OF THE PERSONS REFERRED TO IN CLAUSES (II) TO (VI). (VI) WHERE ANY SUM OF MONEY, THE AGGREGATE VALUE OF WHICH EXCEEDS FIFTY THOUSAND RUPEES, IS RECEIVED WITHOUT CONSIDER ATION, BY AN INDIVIDUAL OR A HINDU UNDIVIDED FAMILY, IN ANY PREV IOUS YEAR FROM ANY PERSON OR PERSONS ON OR AFTER THE 1ST DAY OF AP RIL, 2006, BUT BEFORE THE 1ST DAY OF OCTOBER, 2009 THE WHOLE OF TH E AGGREGATE VALUE OF SUCH SUM : PROVIDED THAT THIS CLAUSE SHALL NOT APPLY TO ANY SU M OF MONEY RECEIVED (A) FROM ANY RELATIVE ; OR(B) ON THE OCCA SION OF THE MARRIAGE OF THE INDIVIDUAL ; OR(C) UNDER A WILL OR BY WAY OF INHERITANCE ; OR(D) IN CONTEMPLATION OF DEATH OF TH E PAYER ; OR(E) FROM ANY LOCAL AUTHORITY AS DEFINED IN THE EXPLANATION T O CLAUSE (20) OF SECTION 10 ; OR(F) FROM ANY FUND OR FOUNDATION OR U NIVERSITY OR OTHER EDUCATIONAL INSTITUTION OR HOSPITAL OR OTHER MEDICA L INSTITUTION OR ANY TRUST OR INSTITUTION REFERRED TO IN CLAUSE (23C) OF SECTION 10 ; OR(G) FROM ANY TRUST OR INSTITUTION REGISTERED UNDER SECT ION 12AA. ITA.1290/BANG/2015 PAGE - 9 EXPLANATION FOR THE PURPOSES OF THIS CLAUSE, RELAT IVE MEANS (I) SPOUSE OF THE INDIVIDUAL ; (II) BROTHER OR SISTER OF THE INDIVIDUAL ; (III) BROTHER OR SISTER OF THE SPOUSE OF THE INDIVI DUAL ; (IV) BROTHER OR SISTER OF EITHER OF THE PARENTS OF THE INDIVIDUAL ; (V) ANY LINEAL ASCENDANT OR DESCENDANT OF THE INDIV IDUAL ; (VI) ANY LINEAL ASCENDANT OR DESCENDANT OF THE SPOU SE OF THE INDIVIDUAL ; (VII) SPOUSE OF THE PERSON REFERRED TO IN CLAUSES ( II) TO (VI). (VII) WHERE AN INDIVIDUAL OR A HINDU UNDIVIDED FAMI LY RECEIVES, IN ANY PREVIOUS YEAR, FROM ANY PERSON OR PERSONS ON OR AFT ER THE 1ST DAY OF OCTOBER, 2009, (A) ANY SUM OF MONEY, WITHOUT CONSIDERATION, THE AG GREGATE VALUE OF WHICH EXCEEDS FIFTY THOUSAND RUPEES, THE WHOLE O F THE AGGREGATE VALUE OF SUCH SUM ; (B) ANY IMMOVABLE PROPERTY, WITHOUT CONSIDERATION, THE STAMP DUTY VALUE OF WHICH EXCEEDS FIFTY THOUSAND RUPEES, THE S TAMP DUTY VALUE OF SUCH PROPERTY ; (C) ANY PROPERTY, OTHER THAN IMMOVABLE PROPERTY, (I) WITHOUT CONSIDERATION, THE AGGREGATE FAIR MARKE T VALUE OF WHICH EXCEEDS FIFTY THOUSAND RUPEES, THE WHOLE OF THE AGG REGATE FAIR MARKET VALUE OF SUCH PROPERTY ; (II) FOR A CONSIDERATION WHICH IS LESS THAN THE AGG REGATE FAIR MARKET VALUE OF THE PROPERTY BY AN AMOUNT EXCEEDING FIFTY THOUSAND RUPEES, THE AGGREGATE FAIR MARKET VALUE OF SUCH PROPERTY AS EXCEEDS SUCH CONSIDERATION : PROVIDED THAT WHERE THE STAMP DUTY VALUE OF IMMOVAB LE PROPERTY AS REFERRED TO IN SUB-CLAUSE (B) IS DISPUTED BY THE AS SESSEE ON GROUNDS MENTIONED IN SUB-SECTION (2) OF SECTION 50C, THE AS SESSING OFFICER MAY REFER THE VALUATION OF SUCH PROPERTY TO A VALUA TION OFFICER, AND ITA.1290/BANG/2015 PAGE - 10 THE PROVISIONS OF SECTION 50C AND SUB-SECTION (15) OF SECTION 155 SHALL, AS FAR AS MAY BE, APPLY IN RELATION TO THE S TAMP DUTY VALUE OF SUCH PROPERTY FOR THE PURPOSE OF SUB-CLAUSE (B) AS THEY APPLY FOR VALUATION OF CAPITAL ASSET UNDER THOSE SECTIONS : PROVIDED FURTHER THAT THIS CLAUSE SHALL NOT APPLY T O ANY SUM OF MONEY OR ANY PROPERTY RECEIVED(A) FROM ANY RELATIVE ; OR (B) ON THE OCCASION OF THE MARRIAGE OF THE INDIVIDUAL ; OR(C) UNDER A WILL OR BY WAY OF INHERITANCE ; OR(D) IN CONTEMPLATION OF DEAT H OF THE PAYER OR DONOR, AS THE CASE MAY BE ; OR(E) FROM ANY LOCAL AU THORITY AS DEFINED IN THE EXPLANATION TO CLAUSE (20) OF SECTION 10 ; O R(F) FROM ANY FUND OR FOUNDATION OR UNIVERSITY OR OTHER EDUCATIONAL IN STITUTION OR HOSPITAL OR OTHER MEDICAL INSTITUTION OR ANY TRUST OR INSTITUTION REFERRED TO IN CLAUSE (23C) OF SECTION 10 ; OR(G) F ROM ANY TRUST OR INSTITUTION REGISTERED UNDER SECTION 12AA. EXPLANATION FOR THE PURPOSES OF THIS CLAUSE, (A) ASSESSABLE SHALL HAVE THE MEANING ASSIGNED TO IT IN THE EXPLANATION 2 TO SUB-SECTION (2) OF SECTION 50C ; (B) FAIR MARKET VALUE OF A PROPERTY, OTHER THAN A N IMMOVABLE PROPERTY, MEANS THE VALUE DETERMINED IN ACCORDANCE WITH THE METHOD AS MAY BE PRESCRIBED ; (C) JEWELLERY SHALL HAVE THE MEANING ASSIGNED TO IT IN THE EXPLANATION TO SUB-CLAUSE (II) OF CLAUSE (14) OF SE CTION 2 ; (D) PROPERTY MEANS (I) IMMOVABLE PROPERTY BEING LAND OR BUILDING OR BO TH ; (II) SHARES AND SECURITIES ; (III) JEWELLERY ; (IV) ARCHAEOLOGICAL COLLECTIONS ; (V) DRAWINGS ; (VI) PAINTINGS ; ITA.1290/BANG/2015 PAGE - 11 (VII) SCULPTURES ; OR (VIII) ANY WORK OF ART ; #OR (IX) BULLION ; (E) RELATIVE SHALL HAVE THE MEANING ASSIGNED TO I T IN THE EXPLANATION TO CLAUSE (VI) OF SUB-SECTION (2) OF TH IS SECTION ; (F) STAMP DUTY VALUE MEANS THE VALUE ADOPTED OR A SSESSED OR ASSESSABLE BY ANY AUTHORITY OF THE CENTRAL GOVERNME NT OR A STATE GOVERNMENT FOR THE PURPOSE OF PAYMENT OF STAMP DUTY IN RESPECT OF AN IMMOVABLE PROPERTY ; 07. TO ANSWER THE QUESTION RAISED BEFORE US, IT IS NECESSARY TO HAVE A WALK THROUGH THE LEGISLATIVE HISTORY BEHIND CLAUSE (V) TO (VII) OF SECTION 56(2) REPRODUCED ABOVE. THE GENESIS FOR THE INTROD UCTION OF THE ABOVE CLAUSES WAS APPARENTLY THE ABUSE ARISING OUT OF ABO LISHMENT OF TAX ON GIFT. BY VIRTUE OF CLAUSE (3) TO SECTION 3 OF GIFT-TAX AC T, 1958 INSERTED THROUGH FINANCE (NO.2) ACT, 1998, PROVISIONS OF THE GIFT-TA X ACT CEASED TO APPLY ON ANY GIFTS MADE AFTER FIRST OCTOBER, 1998. BEFORE T HIS, TAXABLE GIFTS MADE BY A PERSON WAS CHARGED AT THE RATE OF 30% IN THE HAND S OF THE DONOR. THEN, THERE WAS A PERIOD OF FREE FOR ALL, WHEN NEITHER TH E DONOR NOR THE DONEE HAD TO PAY TAX ON THE GIFTS AND THE SAID PERIOD RAN FRO M OCTOBER 1998 TO AUGUST, 2004. TO REDRESS THE SITUATION, FINANCE AC T (NO.2), 2004, INSERTED CLAUSE (V) TO SECTION 56(2) WITH EFFECT FROM 01.04. 2005, AND CLAUSE (XIII) TO SECTION 2(24) OF THE ACT, BY VIRTUE OF WHICH RECEIP TS WITHOUT CONSIDERATION ITA.1290/BANG/2015 PAGE - 12 OR INADEQUATE CONSIDERATION WERE MADE TAXABLE IN TH E HANDS OF THE RECIPIENT ASSESSEE SUBSEQUENT CLAUSE (VI) INTRODUCED BY TAXAT ION LAWS (AMENDMENT) ACT, 2006 W.E.F. 01.04.2007 AND CLAUSE (VII) BY FINANCE (NO.2) ACT, 2009 W.E.F.01.10.2009 WERE ONLY EXTRAPO LATION OF THE ABOVE INTENTION, WHILE WIDENING ITS SCOPE TO ENSURE THAT WHERE A PERSON RECEIVED A PROPERTY WITHOUT CONSIDERATION, OR FOR A CONSIDERAT ION LESS THAN ITS FAIR MARKET VALUE, WAS LEVIED TAX ON THE VALUE THEREOF, AS A PART OF HIS INCOME FROM OTHER SOURCES. 08. KEEPING IN MIND THE ABOVE LEGISLATIVE HISTORY, WE NEED TO HAVE A CLOSE LOOK TO CLAUSE (VII) TO SECTION 56(2), FOR AS CERTAINING WHETHER IT COULD BE APPLIED TO BONUS SHARES. PRIOR TO THE INTRODUCT ION OF CLAUSES (V), (VI) AND (VII), AND DURING THE PERIOD GIFT-TAX ACT WAS APPLI CABLE, ISSUE OF BONUS SHARES WAS NEVER CONSIDERED AS GIFT BY A COMPANY TO ITS SHARE HOLDER AND NEVER SUBJECTED TO GIFT-TAX IN THE HANDS OF THE COM PANY CONSIDERING IT TO BE A DONOR. WHEN CLAUSES (V), (VI) AND (VII), WERE INT RODUCED IN SECTION 56(2), SUBSEQUENT TO THE REPEAL OF THE GIFT-TAX ACT, FOR R EDRESSING THE VACUUM CREATED ON ACCOUNT OF SUCH REPEAL, CAN WE SAY THAT LEGISLATIVE INTENTION WAS TO INCLUDE THEREIN ITEMS WHICH WERE NOT WITHIN THE AMBIT OF GIFT-TAX ACT ALSO ? THE ANSWER OBVIOUSLY IS NO. ITA.1290/BANG/2015 PAGE - 13 09. A CAREFUL STUDY OF CLAUSE (C) OF SECTION 56(2)( VII) OF THE ACT, WOULD SHOW THAT TWO SITUATIONS ARE CONSIDERED THEREIN. F IRST IS WHERE A PROPERTY IS RECEIVED WITHOUT CONSIDERATION AND SECOND WHERE IT IS RECEIVED FOR A CONSIDERATION LESS THAN THE FAIR MARKET VALUE. SI TUATION CAN BE BETTER ILLUSTRATED THROUGH AN EXAMPLE. LET US CONSIDER TH E CASE OF A COMPANY HAVING 100 EQUITY SHARES OF RS.10/- EACH, WITH A RE SERVE AND SURPLUS OF RS.10,000/-. IF THE COMPANY CONSIDERING ITS IMMENS E RESERVES AND SURPLUS, DECIDES TO ISSUE BONUS SHARES IN THE RATIO OF 1 : 1 , HOW WOULD ITS BALANCE SHEET LOOK BEFORE AND AFTER SUCH ISSUE ? HYPOTHETI CALLY IT SHOULD BE AS UNDER : BALANCE SHEET PRIOR TO ISSUE OF BONUS SHARES EQUITY SHARES @ 100 X RS.10/- RS. 1,000 FIXED & CURRENT ASSETS RS.11,000 RESERVES & SURPLUS RS.10,000 RS.11,000 RS.11,000 BALANCE SHEET WOULD AFTER ISSUE OF BONUS SHARES EQUITY RS.200 X10 RS. 2,000 FIXED & CURRENT ASSETS RS.11,000 RESERVES & SURPLUS RS. 9,000 RS.11,000 RS.11,000 ITA.1290/BANG/2015 PAGE - 14 VALUE OF ONE EQUITY SHARE BEFORE THE ISSUE OF BONUS SHARES WILL BE RS.11,000 100 = .110 . VALUE OF THE EQUITY SHARE AFTER THE ISSUE OF BONUS SHARE WILL BE EQUAL TO RS.11,000 200 = .55. IF A PERSON WAS HAVING 10 EQUITY SHARES OF THE ABOVE COMPANY WITH H IM, AFTER THE BONUS SHARES ISSUE, IT WOULD BECOME 20. HOWEVER VALUE OF THE TEN EQUITY SHARES (10 X RS.110) IS THE SAME AS VALUE OF 20 SHARES (20 X RS.55) AFTER THE BONUS SHARES ISSUE. THIS IN OTHER WORDS WOULD MEAN THAT T HERE IS A PRORATA DECREASE IN THE VALUE OF EQUITY SHARES WHEN THERE I S AN ISSUE OF BONUS SHARES. THUS WHEN THERE IS AN ISSUE OF BONUS SHARE S THERE IS A DETRIMENT SUFFERED BY THE RECIPIENT SHARE HOLDER, THROUGH THE DEPRESSION IN THE VALUE OF THE SHARES HELD BY HIM. THERE IS INDEED A CONSI DERATION FLOWING OUT WHICH IS EXACTLY COUNTER BALANCED BY THE VALUE OF T HE BONUS SHARES RECEIVED. THE SIMPLE REASON IS THAT WHEN BONUS SHA RES ARE ISSUED BY CAPITALISING A PORTION OF RESERVES AND SURPLUS, THE RE IS NO INCREASE IN THE ASSET VALUE OF A COMPANY, IN ANY MANNER. WHAT REAL LY HAPPENS IS THAT THE VALUE OF EQUITY SHARES GOES DOWN PRORATA. TOTAL VA LUE OF EQUITY SHARES HELD ALONG WITH BONUS SHARES REMAINS THE VERY SAME. THU S ANY PROFIT DERIVED BY THE ASSESSEE ON ACCOUNT OF RECEIPT OF BONUS SHARES IS THEORETICALLY OFFSET BY THE DEPRESSION IN THE VALUE OF THE EQUITY SHARES AL READY HELD BY HIM. BONUS SHARES DOES NOT RESULT IN RECIPIENT GETTING A PROPE RTY WITHOUT CONSIDERATION ITA.1290/BANG/2015 PAGE - 15 OR FOR INADEQUATE CONSIDERATION. IT IS FOR THIS R EASON THAT MUMBAI BENCH IN THE CASE OF SUDHIR MENON HUF (SUPRA) MADE THE FOLLO WING OBSERVATION IN PARA 4.2 OF ITS ORDER : ......WE MAY, BEFORE WE CONCLUDE OUR DISCUSSION ON THIS ASPECT OF THE MATTER, DILATE ON THE APPLICATION OF THE PROVIS ION TO THE TRANSACTION OF THE NATURE UNDER REFERENCE. THE PROV ISION, FIRSTLY, WOULD NOT APPLY TO BONUS SHARES, AND THE ARGUMENT A LLUDING THERETO ARISES ONLY ON ACCOUNT OF MISCONCEPTION IN RESPECT THEREOF. THOUGH THE SHARES UNDER REFERENCE ARE ADMITTEDLY NOT BONUS SHARES, WE CONSIDER IT RELEVANT TO DWELL THEREON, NOT ONLY TO MEET THE ARGUMENT IN THEIR RESPECT, MADE EMPHATICALLY BEFORE US, BUT ALSO TO DEMONSTRATE THE WHOLESOMENESS OF THE PROVISION, WHI CH IS IN FACT WHAT WAS BEING SOUGHT TO BE IMPUGNED. ISSUE OF BONU S SHARES IS BY DEFINITION CAPITALIZATION OF ITS PROFIT BY THE ISSU ING-COMPANY. THERE IS NEITHER ANY INCREASE NOR DECREASE IN THE WEALTH OF THE SHAREHOLDER (OR OF THE ISSUING COMPANY) ON ACCOUNT OF A BONUS ISSUE, AND HIS PERCENTAGE HOLDING THEREIN REMAINS C ONSTANT. WHAT IN EFFECT TRANSPIRES IS THAT A SHARE GETS SPLIT (IN TH E SAME PROPORTION FOR ALL THE SHAREHOLDERS), AS FOR EXAMPLE BY A FACT OR OF TWO IN CASE OF A 1:1 BONUS ISSUE. REFERENCE IN THIS REGARD MAY BE MADE TO THE DECISION IN CIT VS. DALMIA INVESTMENT CO. LTD. [196 4] 52 ITR 567 (SC) AS WELL AS IN KHODAY DISTILLERIES LTD. (SUPRA) , WHEREIN REFERENCE STANDS MADE TO THE FORMER, ALSO QUOTING T HERE-FROM, BESIDES INTER ALIA TO HUNSUR PLYWOOD WORKS LTD. VS. CIT [1998] 229 ITR 112 (SC), WHERE THE SAME WERE REFERRED TO A S CAPITALIZATION SHARES. IN OTHER WORDS, THERE IS N O RECEIPT OF ANY PROPERTY BY THE SHAREHOLDER, AND WHAT STANDS RECEIV ED BY HIM IS THE SPLIT SHARES OUT OF HIS OWN HOLDING. IT WOULD BE AK IN TO SOMEBODY EXCHANGING A ONE THOUSAND RUPEE NOTE FOR TWO FIVE H UNDRED OR TEN HUNDRED RUPEE NOTES. THERE IS, ACCORDINGLY, NO QUES TION OF ANY GIFT OF OR ACCRETION TO PROPERTY; THE SHARE-HOLDER GETTI NG ONLY THE VALUE OF HIS EXISTING SHARES, WHICH STANDS REDUCED TO THE SAME EXTENT. THE SAME HAS THE EFFECT OF REDUCING THE VALUE PER SHARE , INCREASING ITS MOBILITY AND, THUS, LIQUIDITY, IN THE SENSE THAT TH E SHARES BECOME MORE ACCESSIBLE FOR TRANSACTIONS AND, THUS, TRADING , I.E., CONSIDERED ITA.1290/BANG/2015 PAGE - 16 FROM THE HOLDERS POINT OF VIEW. WE MAY THOUGH ADD A NOTE OF CAUTION. THERE COULD BE A CASE OF BONUS ISSUE COUPL ED WITH THE RELEASE OF ASSETS (OF THE ISSUING COMPANY) IN FAVOU R OF THE SHAREHOLDERS. THE SAME WOULD FALL TO BE CONSIDERED AS DIVIDEND U/S. 2(22)(A) OF THE ACT. 10. HONBLE APEX COURT IN THE CASE OF CIT V. DALMIA INVESTMENT CO. LTD [(1964) 252 ITR 567] HAD AS EARLY AS 1964 HELD THAT BONUS SHARES IF THEY RANKED PARI PASSU WITH THE ORIGINAL SHARES, HA D TO BE VALUED AT AVERAGE OF BOTH BONUS AND THE ORIGINAL SHARES. PARAS 14 TO 17 OF THE ABOVE JUDGMENT OF HONBLE APEX COURT, IS REPRODUCED HEREU NDER : CAN WE THEN SAY THAT THE BONUS SHARES ARE A GIFT A ND ARE ACQUIRED FOR NOTHING? AT FIRST SIGHT, IT LOOKS AS IF THEY AR E SO, BUT THE IMPACT OF THE ISSUE OF BONUS SHARES HAS TO BE SEEN TO REALISE THAT THERE IS AN IMMEDIATE DETRIMENT TO THE SHAREHOLDER IN RESPECT O F HIS ORIGINAL HOLDING. THE INCOME-TAX OFFICER, IN THIS CASE, HAS SHOWN THAT IN 1945 WHEN THE PRICE OF SHARES BECAME STABLE IT WAS RS. 9 PER SHARE, WHILE THE VALUE OF THE SHARES BEFORE THE ISSUE OF BONUS S HARES WAS RS. 18 PER SHARE. IN OTHER WORDS, BY THE ISSUE OF BONUS SHARES PRO RATA, WHICH RANKED PARI PASSU WITH THE EXISTING SHARES, THE MAR KET PRICE WAS EXACTLY HALVED, AND DIVIDED BETWEEN THE OLD AND THE BONUS SHARES. THIS WILL ORDINARILY BE THE CASE BUT NOT WHEN THE S HARES DO NOT RANK PARI PASSU AND WE SHALL DEAL WITH THAT CASE SEPARAT ELY. WHEN THE SHARES RANK PARI PASSU THE RESULT MAY BE STATED BY SAYING THAT WHAT THE SHAREHOLDER HELD AS A WHOLE RUPEE COIN IS HELD BY HIM, AFTER THE ISSUE OF BONUS SHARES, IN TWO 50 NP. COINS. THE TOT AL VALUE REMAINS THE SAME, BUT THE EVIDENCE OF THAT VALUE IS NOT IN ONE CERTIFICATE BUT IN TWO. THIS WAS EXPRESSED FORCEFULLY BY THE SUPREME COURT OF THE UNITED STATES OF AMERICA, QUOTING FROM AN EARLIER CASE, IN EISNER V. MACOMBER* THUS: ITA.1290/BANG/2015 PAGE - 17 'A STOCK DIVIDEND REALLY TAKES NOTHING FROM THE PRO PERTY OF THE CORPORATION, AND ADDS NOTHING TO THE INTERESTS OF T HE SHAREHOLDERS. ITS PROPERTY IS NOT DIMINISHED, AND THEIR INTERESTS ARE NOT INCREASED...THE PROPORTIONAL INTEREST OF EACH SHAREHOLDER REMAINS T HE SAME. THE ONLY CHANGE IS IN THE EVIDENCE WHICH REPRESENTS THAT INT EREST, THE NEW SHARES AND THE ORIGINAL SHARES TOGETHER REPRESENTIN G THE SAME PROPORTIONAL INTEREST THAT THE ORIGINAL SHARES REPR ESENTED BEFORE THE ISSUE OF THE NEW ONES....IN SHORT, THE CORPORATION IS NO POORER AND THE STOCK-HOLDER IS NO RICHER THAN THEY WERE BEFORE.... .IF THE PLAINTIFF GAINED ANY SMALL ADVANTAGE BY THE CHANGE, IT CERTAI NLY WAS NOT AN ADVANTAGE OF 417,450 THE SUM UPON WHICH HE WAS TA XED....WHAT HAS HAPPENED IS THAT THE PLAINTIFF'S OLD CERTIFICATES H AVE BEEN SPLIT UP IN EFFECT AND HAVE DIMINISHED IN VALUE TO THE EXTENT O F THE VALUE OF THE NEW. ...IF A SHAREHOLDER SELLS DIVIDEND STOCK, HE NECESS ARILY DISPOSES OF A PART OF HIS CAPITAL INTEREST, JUST AS IF HE SHOULD SELL A PART OF HIS OLD STOCK, EITHER BEFORE OR AFTER THE DIVIDEND. WHAT HE RETAINS NO LONGER ENTITLES HIM TO THE SAME PROPORTION OF FUTURE DIVID ENDS AS BEFORE THE SALE. HIS PART IN THE CONTROL OF THE COMPANY LIKEWI SE IS DIMINISHED.' SWAN BREWERY'S CASE**, IT MAY BE POINTED OUT, WAS D ISTINGUISHED HERE ALSO ON THE BASIS OF THE EXTENDED DEFINITION. IT FO LLOWS THAT THE BONUS SHARES CANNOT BE SAID TO HAVE COST NOTHING TO THE S HAREHOLDER BECAUSE ON THE ISSUE OF THE BONUS SHARES, THERE IS AN INSTA NT LOSS TO HIM IN THE VALUE OF HIS ORIGINAL HOLDING. THE EARNING CAPACITY OF THE CAPITAL EMPLOYED REMAINS THE SAME, EVEN AFTER THE RESERVE I S CONVERTED INTO BONUS SHARES. BY THE ISSUE OF THE BONUS SHARES THER E IS A CORRESPONDING FALL IN THE DIVIDENDS ACTUAL OR EXPEC TED AND THE MARKET PRICE MOVES ACCORDINGLY. THE METHOD OF CALCULATION WHICH PLACES THE VALUE OF BONUS SHARES AT NIL CANNOT BE CORRECT. THIS LEAVES FOR CONSIDERATION THE OTHER TWO METHODS . HERE WE MAY POINT OUT THAT THE NEW SHARES MAY RANK PARI PASSU W ITH OLD SHARES OR MAY BE DIFFERENT. THE METHOD OF COST ACCOUNTING MAY HAVE TO BE DIFFERENT IN EACH CASE BUT IN ESSENCE AND PRINCIPLE THERE IS NO DIFFERENCE. ONE POSSIBLE METHOD IS TO ASCERTAIN THE EXACT FALL IN THE MARKET PRICE OF THE SHARES ALREADY HELD AND ATTRIBU TE THAT FALL TO THE PRICE OF THE BONUS SHARES. THIS MARKET PRICE MUST B E THE MIDDLE PRICE ITA.1290/BANG/2015 PAGE - 18 AND NOT AS REPRESENTED BY ANY UNUSUAL FLUCTUATION. THE OTHER METHOD IS TO TAKE THE AMOUNT SPENT BY THE SHAREHOLDER IN A CQUIRING HIS ORIGINAL SHARES AND TO SPREAD IT OVER THE OLD AND N EW SHARES TREATING THE NEW AS ACCRETIONS TO THE OLD AND TO TREAT THE C OST OLD PRICE OF THE ORIGINAL SHARES AS THE COST PRICE OF THE OLD SHARES AND BONUS SHARES TAKEN TOGETHER. THIS METHOD IS SUGGESTED BY THE DEP ARTMENT IN THIS CASE. SINCE THE BONUS SHARES IN THIS CASE RANK PARI PASSU WITH THE OLD SHARES THERE IS NO DIFFICULTY IN SPREADING THE ORIG INAL COST OVER THE OLD AND THE NEW SHARES AND THE CONTENTION OF THE DEPART MENT IN THIS CASE IS RIGHT. BUT THIS IS NOT THE END OF THE PRESENT DI SCUSSION. THIS SIMPLE METHOD MAY PRESENT DIFFICULTIES WHEN THE SHARES DO NOT RANK PARI PASSU OR ARE OF A DIFFERENT KIND. IN SUCH CASES, IT MAY BE NECESSARY TO COMPARE THE RESULTANT PRICE OF THE TWO KINDS OF SHA RES IN THE MARKET TO ARRIVE AT A PROPER COST VALUATION. IN OTHER WORDS, IF THE SHARES DO NOT RANK PARI PASSU, ASSISTANCE MAY HAVE TO BE TAKEN OF OTHER EVIDENCE TO FIX THE COST PRICE OF THE BONUS SHARES. IT MAY THEN BE NECESSARY TO EXAMINE THE RESULT AS REFLECTED IN THE MARKET TO DE TERMINE THE EQUITABLE COST. IN ENGLAND PARAGRAPH 10 OF SCHEDULE IX TO THE FINANCE ACT, 1962, PROVIDES FOR SUCH MATTERS AND FO R VALUING RIGHTS ISSUE BUT WE ARE NOT CONCERNED WITH THESE MATTERS A ND NEED NOT EXPRESS AN OPINION. IT REMAINS TO REFER TO THREE CASES TO WHICH WE HAVE ALREADY REFERRED IN PASSING AND ON WHICH SOME RELIANCE WAS PLACED. IN C OMMISSIONER OF INCOME- TAX V. MANECKLAL CHUNNILAL AND SONS LTD.* T HE ASSESSEE HELD CERTAIN ORDINARY SHARES OF THE FACE VALUE OF RS. 10 0 IN AMBICA MILLS LTD. AND ARVIND MILLS LTD. THESE TWO COMPANIES THEN DECLARED A BONUS AND ISSUED PREFERENCE SHARES IN THE PROPORTIO N OF TWO TO ONE OF THE FACE VALUE OF RS. 100 EACH. THESE PREFERENCE SH ARES WERE SOLD BY THE ASSESSEE AND IF THE FACE VALUE WAS TAKEN AS THE COST, THERE WAS SMALL PROFIT. THE DEPARTMENT CONTENDED THAT THE ENT IRE SALE PROCEEDS WERE LIABLE TO BE TAXED, BECAUSE THE ASSESSEE HAD P AID NOTHING FOR THE BONUS SHARES AND EVERYTHING RECEIVED BY IT WAS PROF IT. THE ASSESSEE'S VIEW WAS THAT THE COST WAS EQUAL TO THE FACE VALUE OF THE SHARES. THE HIGH COURT REJECTED BOTH THESE CONTENTIONS AND HELD THAT THE COST OF THE SHARES PREVIOUSLY HELD MUST BE DIVIDED BETWEEN THOSE SHARES AND THE BONUS SHARES IN THE SAME PROPORTION AS THEIR FA CE VALUE AND THE PROFIT OR LOSS SHOULD THEN BE FOUND OUT BY COMPARIN G THE COST PRICE CALCULATED ON THIS BASIS WITH THE SALE PRICE. IN OU R OPINION, THERE IS ITA.1290/BANG/2015 PAGE - 19 DIFFICULTY IN THE HIGH COURT'S DECISION. THE PREFER ENCE SHARES AND THE ORDINARY SHARES COULD HARDLY BE VALUED IN THE PROPO RTION OF THEIR FACE VALUE. THE ORDINARY SHARES AND THE PREFERENCE SHARE S DO NOT RANK PARI PASSU. THE NEXT CASE IS EMERALD CO. LTD. V. COMMISSIONER O F INCOME-TAX*. IN THAT CASE, THE ASSESSEE HAD, AT THE BEGINNING OF TH E YEAR, 350 SHARES OF WHICH 50 SHARES WERE BONUS SHARES AND ALL WERE OF T HE FACE VALUE OF RS. 250 EACH. THE ASSESSEE SOLD 300 SHARES AND CLAI MED A LOSS OF RS. 35,801 BY VALUING THE BONUS SHARES AT FACE VALUE. T HE DEPARTMENT ARRIVED AT A LOSS OF RS. 27,766 BY THE METHOD OF AV ERAGING THE COST, FOLLOWING THE EARLIER CASE OF THE BOMBAY HIGH COURT JUST REFERRED TO. THE TRIBUNAL SUGGESTED A THIRD METHOD. IT IGNORED T HE 50 SHARES AND THE LOSS WAS CALCULATED BY CONSIDERING THE COST OF 300 SHARES AND THEIR SALE PRICE. THE LOSS WORKED OUT AT RS. 27,748 BUT T HE TRIBUNAL DID NOT DISTURB THE ORDER OF THE APPELLATE ASSISTANT COMMIS SIONER IN VIEW OF THE SMALL DIFFERENCE. THE HIGH COURT HELD THAT THE METHOD ADOPTED BY THE DEPARTMENT WAS PROPER BUT THIS COURT, ON APPEAL , HELD THAT IN THAT CASE THE METHOD ADOPTED BY THE TRIBUNAL WAS CORRECT . THIS COURT DID NOT DECIDE WHICH OF THE FOUR METHODS WAS THE PROPER ONE TO APPLY, LEAVING THAT QUESTION OPEN. THE REASON WAS THAT THE ASSESSEE ORIGINALLY HELD 50 SHARES IN 1950; IN 1951, IT RECE IVED 50 BONUS SHARES. IT SOLD ITS ORIGINAL HOLDING THREE DAYS LAT ER AND THEN PURCHASED ANOTHER 100 SHARES AFTER TWO MONTHS. IN THE FINANCI AL YEAR 1950-51 (ASSESSMENT YEAR 1951-52), THE INCOME-TAX OFFICER A VERAGED THE PRICE OF 150 SHARES AND FOUND A PROFIT OF RS. 1,060 ON TH E SALE OF 50 SHARES INSTEAD OF A LOSS OF RS. 1,365 WHICH WAS CLAIMED. T HE ASSESSEE DID NOT APPEAL. IN THE FINANCIAL YEAR 1951-52 (ASSESSMENT Y EAR 1952-53) THE ASSESSEE STARTED WITH 150 SHARES (100 PURCHASED AND 50 BONUS). IT THEN PURCHASED 200 SHARES IN TWO LOTS AND SOLD 300 SHARES, LEAVING 50 SHARES. THE ASSESSEE COMPANY CLAIMED A LOSS OF RS. 35,801. THE INCOME-TAX OFFICER COMPUTED THE LOSS AT RS. 27,766 AND THE TRIBUNAL COMPUTED THE LOSS AT RS. 27,748. THE TRIBUNAL, HOWE VER, DID NOT DISTURB THE LOSS AS COMPUTED BY THE INCOME-TAX OFFI CER IN VIEW OF THE SLENDER DIFFERENCE OF RS. 18. THE HIGH COURT'S DECI SION WAS REVERSED BY THIS COURT BECAUSE THE HIGH COURT IGNORED ALL IN TERMEDIATE TRANSACTIONS AND AVERAGED THE 300 SHARES WITH THE 5 0 BONUS SHARES. THE SHARES IN RESPECT OF WHICH THE BONUS SHARES WER E ISSUED WERE ALREADY AVERAGED WITH THE BONUS SHARES. THIS WAS NO T A CASE OF BONUS ITA.1290/BANG/2015 PAGE - 20 SHARES ISSUED IN THE YEAR OF ACCOUNT. IT INVOLVED P URCHASE AND SALE OF SOME OF THE SHARES. THE AVERAGE COST PRICE OF THE O RIGINAL AND BONUS SHARES WAS ALREADY FIXED IN AN EARLIER YEAR BY THE DEPARTMENT AND THIS FACT SHOULD HAVE BEEN TAKEN INTO ACCOUNT. NO DOUBT, CHAGLA C.J. OBSERVED THAT IT WAS NOT KNOWN WHICH OF THE SEVERAL SHARES WERE SOLD IN THE YEAR OF ACCOUNT, BUT IN THE STATEMENT OF THE CASE IT WAS CLEARLY STATED THAT BONUS SHARES WERE UNTOUCHED. THE DECISION OF THIS COURT IN EMERALD CO.'S CASE* H OWEVER LENDS SUPPORT TO THE VIEW WHICH WE HAVE EXPRESSED HERE. T HE BONUS SHARES CAN BE VALUED BY SPREADING THE COST OF THE OLD SHAR ES OVER THE OLD SHARES AND THE NEW ISSUE TAKEN TOGETHER, IF THE SHA RES RANK PARI PASSU. WHEN THEY DO NOT, THE PRICE MAY HAVE TO BE ADJUSTED EITHER IN THE PROPORTION OF THE FACE VALUE THEY BEAR (IF THERE IS NO OTHER CIRCUMSTANCE DIFFERENTIATING THEM) OR ON EQUITABLE CONSIDERATIONS BASED ON THE MARKET PRICE BEFORE AND AFTER THE ISSU E. HONBLE APEX COURT NOT ONLY HELD THAT BONUS SHARES CAN NEVER BE GIVEN NIL VALUE BUT ALSO HELD THAT ITS VALUE HAS TO BE WORKED OUT BY THE PRINCIPLE OF AVERAGING. IN ANY CASE, THE PRINCIPLE ENUNCIATED I S SIMPLE. IT IS THAT FOR EVERY BONUS SHARE ISSUED, THERE IS A CORRESPONDING REDUCTION IN THE ACTUAL FAIR MARKET VALUE OF THE EQUITY SHARE ORIGINALLY HE LD. THIS BEING THE SITUATION WE ARE OF THE OPINION THAT AN ASSESSEE WH O RECEIVED BONUS SHARES COULD NEVER BE CONSIDERED AS RECEIVING SOMETHING WI THOUT CONSIDERATION OR FOR A CONSIDERATION LESS THAN THE FAIR MARKET VALUE OF THE PROPERTY. WHEN BONUS SHARES ARE RECEIVED, IT IS NOT SOMETHING WHIC H HAS BEEN RECEIVED FREE OR FOR A LESSER FAIR MARKET VALUE. A CONSIDERATION HAS FLOWN OUT FROM THE HOLDER OF THE SHARES, MAY BE UNKNOWN TO HIM, WHICH IS REFLECTED IN THE ITA.1290/BANG/2015 PAGE - 21 DEPRESSION IN THE INTRINSIC VALUE OF THE ORIGINAL S HARES HELD BY HIM. THUS IN OUR VIEW, SECTION 56(2)(V), (VI) AND (VII) BROUGHT IN TO THE ACT FOR ADDRESSING THE VACUUM CAUSED DUE TO WITHDRAWAL OF T HE GIFT-TAX ACT CANNOT BE USED FOR THE PURPOSE OF TAXING THE VALUE OF BONU S SHARES RECEIVED BY AN ASSESSEE. VALUATION OF UNQUOTED SHARES SET OUT IN RULE 11 UA(B) WILL HAVE APPLICABILITY ONLY ON RECEIPT OF SHARES AS GIFT OR FOR INADEQUATE CONSIDERATION. BONUS SHARES CAN NEVER BE CONSIDERE D AS RECEIVED WITHOUT CONSIDERATION OR FOR INADEQUATE CONSIDERATION CALLI NG FOR APPLICATION OF SUB- CLAUSE (C) OF CLAUSE (VII) OF SECTION 56(2) OF THE ACT. WE HAVE NO HESITATION TO UPHOLD THE ORDER OF CIT (A) DELETING THE ADDITIO N MADE BY THE AO. 11. IN THE RESULT, APPEAL OF THE REVENUE STANDS DIS MISSED. SD/- SD/- (GEORGE GEORGE K) (ABRAHAM P GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER MCN COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME-TAX 4. COMMISSIONER OF INCOME-TAX(A) 5. DR 6. GF, ITAT, BANGALORE BY ORDER ASSISTANT REGISTRAR