Bonus of Equity Shareholders not Covered under S.2(22)(b) of Income Tax Act, not Taxable as “Other Income” u/s 56(2): ITAT [Read Order]

Concerning the latest case, the Chennai bench of the Income Tax Appellate Tribunal ( ITAT ) dismissed the appeal made by the assessee as the tribunal agreed to the findings made by the Commissioner of Income Tax (Appeals). The Tribunal held that bonuses of equity shareholders are not covered under section 2(22)(b) of the Income Tax Act,1961 and are not taxable as “other income” under Section 56(2) of the Act.

Tangi Facility Solutions Pvt. Ltd., the assessee- respondent who is a resident corporate had been running a business of facility management and investing. The assessee had held 41,31,989 shares of a company named M/s Updater Services Pvt. Ltd. ( USPL ). 20,75,000 of these shares were bought back at Rs.275 per share by USPL.  Later, the assessee received 92,56,451 additional shares in the ratio of 45 new shares for every 10 shares they had already owned from USPL. So, The Income Tax assessing officer ( AO ) believed that the bonus shares received by the assessee needed to be considered as dividends and hence the case was reopened.

The assessee conceded that the bonus was nothing but the increase in the number of shares without an increase in the value and also referred to the decisions made by the Supreme Court CIT vs. Dalmia Investment Co. Ltd. as well as in Hansur Plywood Works Ltd. vs CIT., wherein holding that bonus shares do not amount to distribution of accumulated profit of the company. The AO considered Section 2(22)(b) and section 56(2) of the  Incomr Tax Act where the former states that the bonus was to be considered as dividend in the hands of the company and the latter states that dividends are taxable. 

The AO held that the amount of Rs.254.55 Crores would be taxable as a dividend by applying the value of Rs. 275 per share for the bonus shares received by the assessee.  The aforementioned value was justified by a previous transaction where shares were transferred to the assessee at Rs. 273.48 per share by one of the shareholder ( M/s ICICI Ventures ) during the AY 2015-16. The AO also considered the provisions of Section 56(2)(viia) which taxes any property received by a company ( like shares ) from another company not widely held by the public, the same has to be taxed as ‘income from other sources’.  Later the assessee contested at the first appellate authority as the assessment included Rs.254.55 Crores as taxable income.

The CIT(A) considered the assessee’s contentions and stated that the assessee received bonus shares in the capacity of equity shareholder and therefore such distribution does not come under S.2(22)(b) where the scope of dividend is defined. The AO’s application of section was found unreasonable and the CIT(A) concluded that the issue of bonus shares cannot be considered as dividend under Section 2(22)(aa).  The AO was directed to delete the contested addition.

Even though the AO initially treated these bonus shares as dividends under section 2(22)(b) later the CIT(A) correctly interpreted the law. It was observed that since bonus shares to equity shareholders do not fall under section 2(22)(b), they cannot be taxed under section 56(2) of the Income Tax Act either.

The two-member bench of Mahavir Singh(Vice President) and Manoj Kumar Aggarwal ( Accountant Member ) found that there is no reason to reverse the CIT(A)’s decision in this case based on the legal precedents and rulings.

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