Sudhir Menon HUF vs. ACIT (ITAT Mumbai)

S. 56(2)(vii) does not apply to bonus & rights shares offered on a proportionate basis even if the offer price is less than the FMV of the shares

The assessee held 15,000 shares in Dorf Ketal Chemicals Pvt. Ltd representing 4.98% of the share capital. Pursuant to a further issue, it was allotted 1,94,000 shares at the face value rate of Rs.100 each, on a proportionate basis. The AO held that as the book value of the shares was Rs.1,538 per share, computed under Rules 11U & 11UA), the difference of Rs.1,438 per share (aggregating Rs. 27.89 crore) was “inadequate consideration” and assessable to tax u/s 56(2)(vii)(c). This was upheld by the CIT(A). On appeal by the assessee to the Tribunal HELD allowing the appeal:

S. 56(2)(vii)(c) (ii) provides that where an individual or a HUF receives any property for a consideration which is less than the FMV of the property, the difference shall be assessed as income of the recipient. S. 56(2)(vii) does not apply to the issue of bonus shares because there is a mere capitalization of profit by the issuing-company and there is neither any increase nor decrease in the wealth of the shareholder as his percentage holding remains constant. The same argument applies pari materia to the issue of additional shares to the extent it is proportional to the existing share-holding because to the extent the value of the property in the additional shares is derived from that of the existing shareholding, on the basis of which the same are allotted, no additional property can be said to have been received by the shareholder. The fall in the value of the existing holding has to be taken into account. As long as there is no disproportionate allotment, i.e., shares are allotted pro-rata to the shareholders, based on their existing holdings, there is no scope for any property being received by them on the said allotment of shares; there being only an apportionment of the value of their existing holding over a larger number of shares. There is, accordingly, no question of s. 56(2)(vii)(c) getting attracted in such a case. A higher than proportionate or a non-uniform allotment though would attract the rigor of the provision to the extent of the disproportionate allotment and by suitably factoring in the decline in the value of the existing holding