sec. 56(2) unintended consequences

[satyanveshi]

Sometimes, the amendments made will extend to cover the unintended situations also. Only to prevent the persons from introducing his own unaccounted money ( either in the form of cash or in kind) in the form of bogus gifts received from non relatives, sec. 56(2)(vii) has been enacted. But now the incometax AOs say that the provision also covers  the situations wherein the existing share holders receives bonus shares and  the  promoters were allotted shares for a less consideration than the consideration received from other persons other than the promoters.  It is very difficult to argue with them going by the language used to frame the section.  The possibility of such additions being confirmed by appellate authorities is also very high in the present legal system. Some AOs also  argue that the said section covers situations wherein the partner retires from the firm and takes away more amount than the amount in his capital account credit or takes away an asset, the value ( as per books ) of which is equivalent to capital in the firm but the fair market value of the said property is more than the value in the books of accounts even though the Apex Court long back has held that there are no capital gains in the hands of the partner when a partner retires from the firm in a decision reported in 247 ITR 801.  How to argue such cases.   

[sivaiah G]

The provisions of sec. 56(2) are introduced as anti abusive measures to counter evasive mechanism and to prevent laundering of income. Though some AOs wanted to tax the amounts under the circumstances mentioned in the problem, in my personal opinion, it may not get the support of appellate forum as circular no. 5/2005, circular 1/2011 and cir 3/2012 clearly enunciated  the parameters under which these provisions were enacted. To comprehend the provisions correctly, sometimes, the intention of the legislature is also required to be noted. In the given examples, though the incometax AOs wanted to extend their arms to cover the transactions, the intended goal may not be achieved by them, if the real intention behind enacting the provisions are correctly brought out by legal luminaries. Anyhow, let us wait and see how such transactions are treated and how the experts will argue..............................

[sai prasad]

bonus shares are   no-cost so the issue of  consideration or inadequate consideration doesnot arise. the sub-section to sec.56 is not applicable to bonus shares.

[satyanveshi]

suppose a listed company, the  share of which was quoted in stock exchanges at a particular rate, issues bonus shares then as stated by Sai Prasad garu, the said bonus shares are deemed to have been alloted at a value of  nil where as fair market value of such share is the price quoted in stock exchanges, then the individual is liable to be taxed for the difference amount of share rate  in the stock exchange on that particular date (ie., listed share price on that date - Nil) as per the provisions of sec. 56(2)(vii)(c). With this intention only, the incometax AOs are arguing that bonus shares are also covered by this provision.  Will the answer now change. 

[sai prasad]

what one has to cosider is that bonus shares are not cost bearing. the market rates on the exchange  are not relevant because of the basic characteristics of the  item involved. we can take  clues or draw an analogy from already decided matters. let us explore .

[vsaiyar]

What one needs to understand is that the bonus shares are not paid for by the receipient, but does have a cost.  The price of shares quoted before bonus if is X exbonus the valus the shares is halved.   One needs to go through the taxation of bonus shares in the past so that the matter will be come clear.  In view of this the argument of the AO will not be sustained.

[vsaiyar]

What one needs to understand is that the bonus shares are not paid for by the receipient, but does have a cost.  The price of shares quoted before bonus if is X exbonus the valus the shares is halved.   One needs to go through the taxation of bonus shares in the past so that the matter will be come clear.  In view of this the argument of the AO will not be sustained.