Allotment of bonus shares is not taxable: Karnataka HC1 min read . Updated: 05 Mar 2021, 06:44 PM IST
- When a company allots bonus shares, it does not result in any change in the capital structure of the company
The Karnataka High Court has held that the allotment of bonus shares is not taxable as income from other sources. This is because when a company allots bonus shares, it does not result in any change in the capital structure of the company. Also, when a shareholder receives a bonus share, the value of the original share that it holds reduces pro-rata.
According to a note from PwC India, an individual taxpayer had received 10 million bonus equity shares from a private limited company without the payment of any consideration.
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The tax officer invoked Section 56(2)(vii) of the Act and levied tax on the fair value of bonus shares as income from other sources. The provision of this section deals with deemed income. According to the officer, the individual should pay tax on the bonus shares, which was received without consideration.
When the matter went to the income tax appellate tribunal (ITAT), it ruled in favour of the assessee. The tax department then appealed in the high court against the ITAT ruling.
The high court agreed with ITAT's orders. It observed that post the issuance of bonus shares, the market value and the intrinsic value of the original shares and bonus shares put together, will be nearly the same as per the value of the original share before the issue of bonus shares. Thus, any profit derived by the taxpayer from the receipt of bonus shares is adjusted by the depreciation in the value of the equity shares held, according to PwC note.
It also said that there is no material on record to infer that bonus shares have been transferred with an intention to evade tax, which is the objective of Section 56(2)(vii) of the Income-Tax Act.
Tax experts, too, said that when a company issues bonus shares, the capital structure remains the same. "On allotment, there shouldn't be any taxability. However, when the individual transfers or sells those shares, he will need to pay tax on the gains," said a tax expert.
When bonus shares are sold, the buying price is considered nil, which means the entire selling price of bonus shares is considered as gains.