The Bangalore bench of the Income Tax Appellate Tribunal ( ITAT )dismissed the valuation of bonus shares under Section 55(2)(aa)B of the Income Tax Act, 1961 as the taxpayer admitted to not paying any price for acquiring them.
The bonus shares were allotted to the assessee M/s. Zash Traders without payment’ and on the basis of his holding the original shares so as to bring the case of the assessee within the ambit of sub-clause (iiia). At the outset, it may be mentioned that it has never been the case of the assessee, at any stage of the proceedings either before the authorities below, that he has made any payment to the company for allotment of bonus shares. He has also not led any evidence or filed details to show that any payment as such was made to the company for allotment of bonus shares.
The bonus issue is made out of free reserves built out of the genuine profits of share premium collected in cash only.” The idea behind the issue of bonus shares is to bring the nominal share capital into line with the true excess of assets over liabilities. The necessary money is already available with the company in the form of free reserves. It is this money which is converted into bonus shares with the result that the undistributed profits lying with the company in the form of free reserves get permanently ploughed back into the business and converted into share capital.
The bench observed that the provision of sub-clause (i) of clause (b) in section 55(2)(b) of the Income Tax Act is in respect of financial assets, where a purchase price has been paid by an assessee for acquiring such financial asset. Whereas, in present facts, the assessee has admittedly not paid any price for acquiring the bonus shares. Under such circumstances, the specific provision relating to acquisition of financial assets under Section 55(2)(aa)B(iiia) of the Income Tax Act, without any cost would be applicable.
As the legislature has expressly provided for cost of acquisition to be at ‘Nil’, in a situation where the financial asset is allotted to an assessee without any payment, upholding the argument of the assessee to apply sub-clause (i) of clause (b) to section 55(2)(b) of the Act will make sub-clause (iiia) to section 55(2)(aa)B of the Act redundant.
Further, it was noted that section 55(2)(b) of the Income Tax Act talks of other capital asset, which segregates from sub-clause (iiia) to Section 55(2)(aa)B of the Income Tax Act, that talks about Bonus shares specifically. The decisions relied on by the A.R has not considered being this distinguishing feature between these two provisions Thus, the two member bench of the tribunal comprising Soundararajan K (Judicial Member) and Chandra Poojari (Accountant Member) found no merits in the arguments of A.R. and all the grounds of appeal raised by the assessee were dismissed. Accordingly, the appeal of the assessee was dismissed
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