Ita/501/2016 Of Pr. Commissioner Of Income Tax v. Dr. Ranjan Pai

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 15 DAY OF DECEMBER 2070PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD BETWEEN: ILT.A. NO.501 OF 2016 1.|PR. COMMISSIONER OF INCOME TAX CENTRAL, QUEENS ROAD| BANGALORE. 2.|THE DEPUTY COMMISSIONER OF INCOME TAXCENTRAL CIRCLE 2(2), BANGALORE.|CENTRAL CIRCLE 2(2), BANGALORE.| .., APPELLANTS~ (BY SRI. T.N.C. SRIDHAR, SR. COUNSEL FOR SRI. JEEVAN J. NEERALGI, ADV.,) AND* DR. RANJAN PALBLOCK NO.1B, JAKKURPLANTATION VILLAGEYELAHANKA MAIN ROADBENGALURU -64PAN: AGBPP2/95G. (BY SRI. R.V. EASWAR, SR. COUNSEL FOR)SRI. CHYTHANYA K.K. ADV.) .., RESPONDENT THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,|1961 ARISING OUT OF ORDER DATED 29.04.2016 PASSED IN ITA.NO.1290/BANG/2015 FOR THE ASSESSMENT YEAR 2012-13,PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW AND/OR_ SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BYTHE HON'BLE COURT AS DEEMED FIT AND SET ASIDE THE'APPELLATE ORDER DATED 29-04-2016 PASSED BY THE ITAT, CC.BENCH,|BENGALURUIN|APPEAL|PROCEEDINGS|IN|ITANO.1290/BANG/2015 FOR ASSESSMENT YEAR 2012-13, ASSOUGHT FOR IN THIS APPEAL AND TO GRANT SUCH OTHER.RELIEF AS DEEMD FIT, IN THE INTEREST OF JUSTICE. THIS|ITACOMING|ONFOR.HEARING,|THISALOK ARADHE J.,DELIVERED THE FOLLOWING: | DAY, | JUDGMENT This appeal under Section 260A of the Income TaxAct, 1961 (hereinafter referred to as the Act for short)has been preferred by the revenue. The subject matter|of the appeal pertains to the Assessment year 2012-13.The appeal was admitted by a bench of this Court videorder dated 24.10.201/70n the following substantialquestions of law:| WMhether under the facts and In the’circumstances of the case, the Tribunal wasrignt in law in holding that the assessingauthority is not correct in determining the fairmarket value as per Rule 11A UA of the ITRules at Rs.12,49,00,000/- on 1,00,00,000bonus shares received by assessee and bringthe same to tax under the head [ncome from other sources by holding that section 56(2)(v)and (vii) cannot be invoked by assessingauthority even when the assessing authorityhas rightly invoked the said provision as allthe ingredients are satisfied to invoke saidprovision?” 2.|Thefactualbackground,In|whichtheaforesaidsubstantialquestion.oflawarises.for.consideration needs mention. The assessee Is ansindividual engaged in the.business of medicalprofession. The assessee filed the return of income for.Assessment Year 2012-13 on 28.09.2012 declaring totalincome of Rs.3,22,43,330/-. A search and seizure)operation under Section 132 of the Act was conducted in-the premises of the assessee on 12.04.2011 and duringthe course of the search, some books of accounts, notes.and materials were seized. The statement of the'assessee was also recorded on 10.06.2011 and after§considering the seized material, the assessee admittedan amount of Rs.127.03 Crores as an undisclosed income for.therelevant.Yed&s.However,theaSS@e@SSEincorporated the additional income disclosed in thereturn—ofincomefor.AssessmentYear|2011-17.Thereafter notice under Section 142(1) of the Act dated30.07.2013 was issued to the assessee by which he was.asked to file the return of income for the Assessment|Year 2011-12. The assessee vide communication dated03.09.2013 stated that the original return filed by him|under Section 139(1) on 28.09.2012 be treated asreturn. The case was taken up for scrutiny and noticeunder Section 143(2) was served on the assessee on.22.08.2013. The Assessing Officer by an order dated|06.03.7014 inter alia held that the assessee had|received 1,00,00,000/- bonus shares issued by M/s.Manipal Education and Medical Group (India) Pvt. Ltd.The Assessing Officer invoked Section 56(2)(vii) of the|Act and treated the receipt of bonus shares as incomefrom other sources and assessed the fair market value|of the bonus shares at Rs.12,49,00,000/-. 3The assessee thereupon filed an appealbefore the Commissioner of Income Tax (Appeals) who.by an order dated 04.08.2015 allowed the appealpreferred by the assessee inter alia on the ground that.conversion of reserve into capital did not involve release.of profit and therefore, provisions of Section 56(2)(vii)|of the Act are not applicable to the assessee anddirected deletion of a sum of Rs.127.49 Crores. Therevenue thereuponapproachedtneIncome.TaxAppellate Tribunal (hereinafter referred to as ‘thetribunal for short) by filing an appeal. The tribunal vide|order dated 22.10.2016 by placing reliance on the|decision of the Supreme Court in'CIT VS. DALMIA|INVESTMENT CO. LTD., 252 ITR 567held tnatprovisions of Section 56(2)(vil) of the Act are notattracted to the fact situation of the case and dismissedthe appeal preferred by the revenue. In the aforesaidfactual background, the revenue has approached thiscourt. 4Learned Senior counsel for the revenuesubmitted that|theaSS@SSCEChadnotpaidanyconsideration for bonus shares and therefore, he was.under an obligation in law to offer the market value as|income from other sources under Section 56(2)(vii)(c) ofthe Act. It is also submitted that the tribunal erred iInrelying on the decision of the Supreme Court in DALMIA|INVESTMENT CO. LTD. supra which is not applicable to.the fact situation of tne case. It Is also contended tnat|the tribunal erred in law in holding that the assessing|authority is not correct in determining the market value|as per Rule 11A UA of the Income Tax Rules atRs.12,49,00,000/-—ON)1,00,00,000|DONUS.shares.received by the assessee and Dring the same to taxunder the head income from other sources Dy nolding.that Section 56(2)(v) and (vii) of the Act cannot beinvoked by the assessing authority. 5.|On the other hand, learned Senior counsel forthe assessee submitted that there is no receipt in case. of allotment of bonus shares and when bonus shares areallotted, they are not received but are created in thehands of the allottees shareholders. It is also submitted.that shares do not exist at all until they are allotted andthere is a difference between creation of shares and/transfer thereof. It is also urged that company cannot beregarded as holding its own shares and when the|company issues for the first time, there is no question ofproperty already possessed by tne company being:thereby transferred to the allottee. It is also argued that|if an assessee subscribes to shares there can be no.receipt from the company as there is no transfer when.an allotment of share is made and In case of allotment|of bonus snares, no benefit accrues to the shareholders. It is also argued that Section 56(2) of the Act is a partof anti abuse provision and has to be interpreted bearingin mind the object of the provision. It is also urged that.the intention of the provision is to tax a benefit receivedby tne sharenoider and since, no benefit accrues to the Shareholder on issuance of bonus shares, the same.cannot be taxed. It Is also contended that if.interpretation placed by the department is accepted,there would be conflict between Section 56(2)(vii) of theAct and Section 55 of the Act. In support of aforesaidsubmissions, reliance has been placed on decisions in."KHODAYDISTELLERIESLTD,VS.COMMISSIONEROF INCOME TAX, 307 ITR 312(SC),"THESECRETARYTO|JHEBOARDOFREVENUE,SEPARATEREVENUE,MADRAS,REFERRING|OFFICERVS,MADURAMILLSCOMPANY LTD.', ILR 1937 MAD 559, ‘'HUNSURPLYWOOD WORKS LTD. VS, COMMISSIONER OF|INCOME-TAX', (1998) 229 ITR 112 (SC), ‘WOODCRAFT PRODUCTS LID VS. COMMISSIONEROF|INCOME-TAX', (1993) 204 ITR 545 (CALCUTTA),‘COMMISSIONER OF INCOME-TAX, MADRAS VS.AIlAIV,RAMACHANDRACHETTIAR,,52ITR|96, K.P. VARGHESE VS. INCOME TAX OFFICER,| (1981) 131 ITR 597 (SC)as well as.CIRCULARNO.6/2014,CIRCULARNO.05/2005DATED15.07.3005,CIRCULARNO.1/2011DATED|06.04.2011. (1981) 131 ITR 597 (SC)as well as.CIRCULARNO.6/2014,CIRCULARNO.05/2005DATED15.07.3005,CIRCULARNO.1/2011DATED|06.04.2011. 6.|We have considered the submissions made.by learned counsel for the parties and have perused therecord. The issue which arises for consideration in this.appeal is ‘as to whether the fair market value of bonusshares computed as per Rule 11U and Rule 11UA of theIncome Tax Rules can be considered as income from|other sources as per Section 56(2)(vii) of the Act. A.careful scrutiny of Section 56(2)(vil) of tne Actcontemplates two contingencies firstly, wnere tneproperty is received without consideration and secondly,where it Is received for consideration less than the fair!marketvalue.The.Issue|OF bDONnUshares.by capitalization of reserves is merely a reallocation of thecompanies funds. There is no inflow of fresh funds or.increase in the capital employed, which remains tne same. The total funds available with the companyremains the same and issue of bonus shares does not.result in any change in respect of capital structure of the|company. [See: ‘GENERAL INSURANCE CORPORATION.supra]. Thus, there is no addition or alteration to theprofit making apparatus and the total funds available|with the company remain the same. In substance,|when a shareholder gets a bonus shares, the value of the original share held by him goes down and themarket value as well as intrinsic value of two shares puttogether will be the same or nearly the same as per the.value of original share before the issue of bonus shares.Thus, any profit derived by the assessee on account of.receipt of Donus shares is adjusted by depreciation in.the value of equity shares held by him. In the instantcase, there is no material on record to infer that bonus.shares have been transferred with an intention to evade|tax, which is the object of the provision in question.Therefore, the Commissioner of Income Tax (Appeals). as well as the tribunal have rightly held that when there|is an issue of bonus shares, the money remains with the.company and nothing comes to the shareholders as|there is no transfer of the property and the provisions ofSection under Section 56(2)(vii)(c) of the Act are notattracted to the fact situation of the case. In view of preceding analysis, the substantialquestion of law framed by a bench of this court areanswered against the revenue and in favour of the.assessee. In the result, we do not find any merit in thisappeal, the same fails and is hereby dismissed. Sd/-—JUDGE. SS| Sd/-JUDGE.