Section 56 IFOS On Bonus Shares

This query is : Resolved

Sunil (Querist)
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24 October 2009 Effective 1/10/2009 individuals receiving immovable or movable property above Rs.50000 have to pay tax on IFOS for such receipts as well as on purchase of these properties for below FMV.

What is the position of Bonus Shares issued by the listed companies. Is the receipt of Bonus Shares an adequate consideration? It is after all reducing the value of the existing shares also.

A recent Supreme court judgement in 2008 for the erstwhile Gift tax act states that An allotment of shares is a “creation” of shares and not a “transfer” of shares. There is a vital difference between the two. An “allotment” is the creation of shares by appropriation out of the unappropriated share capital to a particular person.

Dose that hold good for section 56 for receiving shares?

Dividend is exempt income. In definitions as per Act Dividend includes bonus shares on preference shares but nothing is clearly mentioned about bonus shares on equity shares. Would that fall under dividend distribution and does one have to declare it under exempted incomes?

Juzer Sadikot

Juzer Sadikot (Expert)
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09 November 2009 Dear Sunil,

Very well raised.

I think Equity Share in a company is Capital Assets in nature of right in properties/profits of a company.

Nw as u have rightly said that issue of Bonus will dilute pre-bonus value of share, can I say issue of bonus is extinguishment (transfer) of existing right (partly) and in consideration to that my rights are restored by issue of bonus shares?

Nw one may say that, if right is extinguished without effecting any reciept then it may amount to capital loss, however, issue of Bonus Shares by company to individual/HUF shall be taxed as Income from other source at fair value.

The question is still open that how deal with this type transaction?

Regards
Juzer

Sunil

Sunil (Querist)
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10 November 2009 Dear Juzer,

My only contention is that Section 56 is for sums or property received for other than adequate consideration.

Could it be rightly assumed that receiving a Bonus share is an adequate consideration against distribution of shareholders proportionate stake in the reserves & surplus of the company?

As you say, matter is open. We have to study the supreme court judgment and see if it affects this clause:-
An “allotment” is the creation of shares by appropriation out of the unappropriated share capital to a particular person.
The question is whether the unappropriated share capital is deemed an adequate consideration for issue of bonus.

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