Taxability of Issuance of Bonus Shares: Supreme Court to Hear Matter [Read Judgement]

The case arises from a judgment of the Madras High Court in Commissioner of Income Tax, Central Circle 2(3) v. M/s Tangi Facility Solutions Pvt. Ltd., where the High Court ruled in favour of the assessee and held that bonus shares do not constitute taxable income.

The Revenue department filed an appeal before the Supreme Court challenging the Madras High Court’s decision dated 4 November 2024 in TCA No. 259 of 2024. The High Court had dismissed the department’s appeal and upheld the order of the Income Tax Appellate Tribunal (ITAT), which had earlier ruled that bonus shares issued to shareholders are only a capitalization of reserves and not income liable to tax.

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Before the High Court, the Revenue’s counsel argued that the ITAT erred in excluding the value of bonus shares from the scope of Section 56(2)(viia) of the Act. The counsel argued that the shares in question were issued without consideration, even though they carried a fair market value of over Rs. 2,500 crore.

The department also relied on CBDT Circular No. 3/2019, which states that excluding bonus shares from taxation would go against legislative intent and could result in misuse.

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The Division Bench of Justice R. Suresh Kumar and Justice C. Saravanan observed that the issue had already been settled by earlier judgments. The court referred to CIT v. Dalmia Investment Co. Ltd. (52 ITR 567), Hunsur Plywoods Ltd. v. CIT (229 ITR 112), and PCIT v. Dr. Ranjan Pai (ITA No. 501 of 2016), which had all held that bonus shares do not represent income.

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The High Court explained that issuing bonus shares only restructures the capital of a company and does not generate any new income for the shareholder.

The High Court pointed out that since the Tribunal had relied on binding precedents and no contrary judgment existed, there was no substantial question of law for consideration. It upheld the ITAT’s ruling in favour of the assessee and dismissed the Revenue’s appeal.

The Supreme Court has now granted leave to appeal and will determine whether the issuance of bonus shares can be treated as taxable income under the provisions of the Income Tax Act.

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