Can bonus shares received by shareholders be taxable under the head ‘Income from other sources as per the provisions of section 56(2)(x), as they are received without consideration? Let’s see the latest judgment given by Hight Court on whether Bonus Shares Received by Shareholders Be Taxable.
The issue of bonus shares by the capitalization of reserves is merely a reallocation of the company’s funds.
There is no inflow of fresh funds or increase in the capital employed, which remains the same. Thus, there is no addition or alteration to the profit-making apparatus and the total funds available to the company remain the same.
On the other hand, when a shareholder gets bonus shares, the value of the original shares held by him goes down and the market value, as well as the intrinsic value of the two shares put together, will be the same or nearly the same as the value of original share before the issue of bonus shares.
Thus, any profit derived by the assessee shareholder on account of receipt of bonus shares is adjusted by depreciation in the value of equity shares originally held by him.
Accordingly, the decision is given by the High Court in the case PCIT v. Dr. Ranjan Pai (2021) 431 ITR 250 (Kar) held that the bonus shares were not issued in order to evade any tax so as to attract the provisions of section 56(2)(x).
Hence, the provisions of section 56(2)(x) would not be attracted in the hands of the recipient shareholders on receipt of bonus shares.
This decision was rendered in the context of section 56(2)(vii).
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