Issue of bonus shares by capitalization of reserves is merely reallocation of company’s funds. It does not entail outflow of any funds or change the capital structure of the company. The value of the original share goes down and the intrinsic value of the original and the bonus share remains the same. Therefore, there is no transfer of any property. In any event, there was no allegation of intention to evade taxes, which is the object of the provision. For these reasons, section 56(2)(vii)(c) was not applicable.
PCIT v. Dr. Ranjan Pai (2021) 431 ITR 250/197 DTR 314/ 318 CTR 603/ 278 Taxman 138 (Karn) (HC)
S.56 : Income from other sources – Property received without consideration or for consideration less than its fair market value — Issue of bonus shares by capitalization of reserves does not result in inflow of any funds or property and is not assessable under section 56(2)(vii)(c)[ S.56 (2)(vii)(c)]