Constitutionality of cost of bonus shares treated differently

Madhu Mittal (Querist) 10 March 2017 This query is : Resolved
As per Income tax section 55 2 iiia cost of bonus shares is to be taken nil w.e.f 01.04.1996.
Now finance act 2017, Further, for assets purchased before 1st April 2001, the cost of acquisition is either the fair market value of the asset as on 1st April 2001 or the actual cost, at the option of the Assessee.
So now from 01.04.2017 if bonus shares is allotted in 1999, the cost of acquisition can be taken fair market value of the asset as on 1st April 2001.
If Yes and my understanding is correct, whether it is constitutional that bonus shares are treated differently as far as cost of acquisition is related.

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Guest (Expert) 13 March 2017
Taxation query better refer same company other portal CAclubindia

Guest (Expert) 22 September 2018
Great, what a chance, Madhu's question is answered by another Madhu. However, guided rightly to the supposed talented person.

Anyway, the question has no relevance with Constitutional Law.

Madhu Mittal (Querist) 22 September 2018
Respected Sir Dhingaji,
If you say no relevance with Constitutional Law, Ok, I have no choice, you have better knowledge. But still please give a rethink, whether it is constitutional that cost of acquisition shares issued as Bonus shares at different time, is treated differently as some times it is taken nil and sometimes it is taken Fair Market Value. I mean either it should be taken Nil always or at Fair Market Value. Here as per my understanding, matter is constitutional. If wrong , please correct once again .

Guest (Expert) 22 September 2018
Dear Madhu Mittal,

Better discuss your real problem. Discussion for academic purpose may be different as based on the hypothesis of each participating individual that too with half baked knowledge with possibility of raising more and more confusions.

On the contrary, practical implication of law is considered relevant only with specific reference to the nature, characteristics and the circumstances of the real problem, if there be any.

Bonus is always a free substance. But for accounting purpose, being a free substance, it has no intrinsic value. However if you have derived benefit out of that in the shape of profit by selling that, the gets an intrincic value for the purpose of taxation of the income you derived out of that.

Also, for academic discussions without any real time problem, anyone can miss linkage of the relevant inter-related sections of law, while discussing on a particularly isolated section of law, but with particular reference to a real time problem, the inter-related sections have important roles to play according to their own implications.

For example, in your own query case, section 55, in itself, has no independent application of its own unless associated with some other basic sections. The implication of the said section 55 and its sub-sections is solely driven by the provisions of 2 other sections, i.e., section 48 & section 49, as the case may be, without which quotation of section 55 does not bear any relevance.

Moreover, if you re-read the section 55, as a whole, section '55 2 iiia' does not have any existence in the Act. The really quotable section is "55(2) (aa) (B) (iiia)", not that, as you tried to quote.

I don't know, how far you are acquainted with the provisions of the IT Act, but, in my view, the said Act can be called to be a dense forest not to allow a person to come out of that easily. Even several IT officials, who deal the subject matter on day to day basis, may also be feeling confused on several sections of that Act.

You must have noted, virtually nobody responded to your query for the last more than 18 months. The only one member, who responded directed you to the other portal, i.e., the CAClub. The reason is quite apparent that nobody wants to get involved in an unending wasteful debate with each other's half baked knowledge that too in the absence of any specific problem needing to be solved.

So, please discuss, what exactly is the problem with reference to which you want any clarification.

Madhu Mittal (Querist) 22 September 2018
Respected Sir Dhingraji,
It is real problem which is being faced, and it is not academic problem.
As reqiored facts are about taxability of Bonus Shares sold through National Stock Exchange after paying STT within one year of date of allotment.
Facts are these:
On 30.07.1994 I(Individual) had purchased 10 shares of Kotak Bank @
Rs. 150 each. Face Value Rs. 10 each.
On 21.01.1995 received 10 bonus shares. Face Value Rs. 10 each.
On 31.03.2000 purchased 5 shares @ Rs. 100 each. Face Value Rs. 10
each. On 28.08.2004 received 25 bonus shares. Face Value Rs. 10 each.
On 30.08.2005 received 75 bonus shares. Face Value Rs. 10 each.
On 11.05.2010 shares were split into Face value of Rs. 5 each. The
numbeer of shares became 250. i.e. Double of (10+10+5+25+75=125).
On 05.05.2015 company announced bonus of 250 shares. So the total
becomes 500 shares.
Now On 23.03.2016 all these 500 shares were sold in stock exchange by
paying STT @ Rs. 660 each.
Now 250 shares upto 04.05.2015 Long term capital Gain. O.K. No Problem.

But there is problem about Short term Capital Gain and Tax on it

But about 250 shares Bonus shares got on 05.5.2015 and sold on 23.03.2016 @ 660/- each . so question arises regarding these shares?
1. If I go by the article written by CA Sir Dev Kumar Kothari of http://taxguru.in/income-tax/bonus-share-point-view-capital-gain-tax-cost-nil-ascertainable.html
Cost of acquisition being nil, No short term Capital Gain.
2. If I go by other expert on the same thread, there will be 15% tax on sale 165000/-=Rs. 24750/-
3. Third opinion is that cost of acquisition should be taken, at fair market value of shares as on 05.05.2015 i.e. of 250 bonus shares as Market value got reduced proportionately.
Rs.1342/-(Market price ,lowest value on that date) /2 =Rs. 641.00 per share.
In this option one will have to pay only Rs. 660/- - Rs. 641/- = Rs. 19/- per share ,
short term Gain will be 250 bonus shares *19 = 4750,
Pay tax 15 % on it. Rs. 712.50 for 250 bonus shares.

Some parts of decision regarding Bonus Shares:
1.Can it be fought on the ground to recover 15% short term capital gain i.e Fair market value should be taken as cost of acquisition for all bonus share whether given before 01.04.81 or 01.04.2000 or thereafter on the ground of equality also, in addition to this since in a case Supreme Court kept it open which method is proper ( named Commissioner of Income Tax, Bihar vs. Dalmia Investment Co. Ltd. MANU/SC/0103/1964, AIR1964SC1464 11. How then is the cost of the bonus shares to be determined ?.... 22. It will be seen from the above that there are four possible methods for determining the cost of bonus shares.. 36…. This Court did not decide which of the four methods was the proper one to apply, leaving that question open. )
Why not Fair Market Value of the bonus shares to be taken as cost of acquisition as investor had to give up half the price of Market value, because whenever bonus is issued normally Market Value is halved. In another words cum bonus rate is about 500/- per share, bonus is 1:1, ex bonus normally is 250/- per share, so share holder has to give up Rs. 250/- for getting another share in the form of bonus. Cost means even anything given up for getting something. i.e. before Bonus for one share he gets Rs. 500/-, after bonus he gets two shares Rs. 500/- same amount, but when sold before bonus, complete is free as long term capital gain. But after bonus, there are two shares, so one shares of earlier date is free from tax, but another bonus share is to be taxed @ 15% if sold with one year of date of allotment. If FMV of another share is taken, then in second position(after bonus) also there will be no cost.

2. prior to 01.04.1996, most of the Courts including Supreme Court gave reasoning that since cost of bonus shares can not be taken NIL , that is why Capital Gain on Bonus share is taxable. Now when by law amending section 55 (2) (aa) B (iiia), it has been recognized ground reality that cost of bonus shares to be taken nil in another words there should not be dispute about cost of bonus shares between the assessee and Income Tax department , why now short term capital gain is taxable, as most of the courts took views before amendment that since cost can not be Nil, that is why, bonus is taxable, now cost is nil as been recognized by law, why tax bonus now ?
3. in case of bonus shares, date of acquisition is taken as date of allotment giving reasoning that before that they are not in existence, o.k. agreed, for all other purpose, this reasoning seems correct, but for the income tax purpose, it seems not correct, as bonus is given out of the profits of previous years, so for the purpose of income tax, date of purchase of original shares or at least the years within which profit accrued should be recognized as date/year of acquisition. As before amendment 1996 in section 55(2) (aa) B (iiia), cost of purchase of original shares are divided between old shares and bonus shares.

4. I have seen an article in which even after amendment, it is held by court “a jurisdictional fact which cannot be wished away” about penalty u/s 271 (1) ( c ) dated 28.08.2015 at below thread:
http://lunawat.com/downloads/Penalty_under_section_271(1)(c)_of_Income_Tax_Act_1961.pdf
at page 4, following is written:
Due to divergent views on recording of satisfaction by the AO in the assessment order being sine qua non for initiating penalty proceedings the legislature inserted sub-section (1B) in section 271by Finance Act 2008 w.e.f. 1.4.89 which provides that a direction for initiation of penalty proceeding in the order of assessment shall be deemed to constitute such satisfaction. The constitutional validity of the said provision was challenged in Madhushree Gupta & British Airways 317 ITR 143(Del) has held that:
“Presence of prima facie satisfaction for initiation of penalty proceedings was and remains a jurisdictional fact which cannot be wished away as the provision stands even today, i.e post amendment.”
Therefore the satisfaction of the tax authority is still a condition precedent which must be
discernible from the order of assessment

5. Some important judgment on issue of cost of acquisition:
6..In CIT V Pushpraj Singh (1998) 232 ITR 754 (MP) is was held: at para 4…….The Tribunal held that the cost of acquisition of the shares and securities was nil to the respondent/assessee and, therefore, no capital gain could be levied thereon….
6. We have considered the matter and after going through the record, we find that the Tribunal has correctly approached the matter and rightly held in the light of the decisions in the case of CIT v. H. H. Maharaja Sahib Shri Lokendra Singhji [1986] 162 ITR 93 (MP) and CIT v. Markapa-kula Agamma [19871 165 ITR 386 (AP). Therefore, no question of law arises for answer by this court as the questions which have been agitated in this reference have already been answered by this court.
7. An another named DEPUTY COMMISSIONER OF INCOME TAX vs. GIRNAR INVESTMENT LTD. ITAT, DELHI ‘F’ BENCH Sikander Khan, A.M. & Y.K. Kapur, J.M. ITA No. 4330/Del/1998 17th July, 2003 (2005) 92 TTJ (Del) 711 :(2004) 88 ITD 419 (Del) that belongs to Section 45, 48, 55(2)(iiia), Asst. Year 1995-96, in which it was stated in last para:
“This brings us to the last submission of the assessee that the amendment carried
out in s. 55 by incorporation of sub-s. (iiia) clarifies the grey area as by virtue of the amendments the cost of bonus shares has been mandated to be taken as nil. The submission of the assessee was that on account amendment which has been carried out to clear doubt, the benefit of same should be given to the assessee. When we examined this contention of the assessee, we found that the amendment is operative from 1st April, 1996. It has no retrospective effect.”
By my understanding:
In the above said citation, it is clarified that “But we must say that in view of the clear and to the point judgment of the Bombay High Court in Seth Rajesh Family Trust No. 1 case (supra), the reliance placed by the assessee on the said rulings do not advance the case of the assessee and have thus no hesitation in holding the B.C. Srinivasa Shetty’s case (supra) has no application where it comes to the question of taxability of receipts on account of sale of bonus shares, as capital gains.
By my understanding: But in case of Seth Rajesh Family Trust No. 1 case (supra) reasoning is based on the legal position is that the cost of the bonus shares cannot be taken to be nil and that legal position is nullified by amendment effected from 01.04.1996 that Cost of Bonus shares to be taken Nil, so when the Cost of Bonus shares to be taken Nil, B.C. Srinivasa Shetty’s case (supra) has fully application and there was no Capital Gain. It was stated in its {Seth Rajesh Family Trust No. 1 case (supra)}para 6 :
6. We have carefully considered the contention of the assessee and the order of the Tribunal. We have also perused the decision of the Supreme Court in CIT v. B. C. Srinivasa Setty MANU/SC/0285/1981 : [1981]128ITR294(SC) on which reliance is placed by the assessee. We are, however, of the clear opinion that the ratio of the said decision has no application to gains arising from sale of bonus shares because of the well-settled legal position that the cost of the bonus shares cannot be taken to be nil. Such shares have to be valued by spreading the cost of the old shares over the old shares and the bonus shares taken together treating the bonus shares as accretions to the old, if they rank pari passu. If they do not, the price may have to be adjusted either in proportion to the face blue they bear or on equitable considerations based on the market price before and the after issue.
8.From Girnar cad can it be easily deduced that if the A.y. had been 1997-98 or later years, the benefit must have been given to assesse and there will not be any tax on short term capital gain on shares in the said Girnar Case?

Guest (Expert) 22 September 2018
Dear madhu Mittal,

First of all question arises, whether you agree with my earlier views or not?

A second, but very crucial question arises, in what way the case of FY: 2015-16 (AY: 2016-17) is still relevant even after 3 years of the case pertaining to the FY: 2018-19 (AY: 2019-20)?

Thirdly, even if still unsettled, where it is lying pending and what is the present status of the case?

Fourthly, since the IT laws continue to change year after year in every fiscal year, if there is no doubt about the position of the bonus shares pertaining to earlier than 05.05.2015, where is the logic of going back to the laws or the judgments prevailing prior to 2015 and on what analogy of the law pertaining to several years back earlier to the year of 2015, unless the provisions sill exist? Needless to emphasize, every judgment is made with particular reference of the year of event, nature of the event, and the circumstances of the event with particular reference to the laws prevailing on the date of the event.

Fifthly, if the case is not sub-judice, yours not being an ordinary issue of casual nature, it requires very deep analysis with reference to all researched legal material vis a vis the provisions of the IT Act & Rules applicable on the date of event. So, being quite a time consuming job and also if it is your personal case, please don't mind, my sincere advice to you is to take personal consultancy locally from some very experienced Taxation expert CA or a Tax practitioner lawyer. At least, I won't prefer to spare so much time to go through the issue involving tricky legal provisions pertaining to so many years and various judgments at this juncture and busy schedules for several days together.

Otherwise, I have already stated in brief, if monetary advantage has been derived out of a free substance, like bonus shares, the income so earned would be taxable.

BUT ONE THING IS QUITE INTRIGUING AND BEYOND UNDERSTANDING, UNDER WHAT SPECIFIC CIRCUMSTANCES THE BONUS SHARES WERE SOLD AFTER 10 1/2 MONTHS AND THAT TOO AT THE FAG END OF THE FINANCIAL YEAR 2015-16 TO ATTRACT SHORT TERM CAPITAL GAIN?

Madhu Mittal (Querist) 22 September 2018
Respected Sir,
First , I could not understand which earlier views, if in this thread itself, you wrote it is academic, I did not agree, You asked for problem, I agree, I wrote narrating facts about problem, I am agreeable to everybody’s view which ones are reasoned because it is not finally me who is to be convinced, it is for the some other who is to be convinced i.e. this time, Income tax Department, in one of my previous thread SEBI. So Here matter is of interpretation of at least Girnar Case.
Secondly and thirdly, it is still relevant because case is under scrutiny case.
Fourthly, going back to years, because in law if something is settled back and favourable to you, it can be used today itself if interpretation is favorable to you.
Fifthly, as advised services of CA sir is already being taken. You devoted your valuable time , I am thankful to you.
It is not free, it is given as bonus from your already own shares. Say before bonus, shares are 10000 and networth is Rs. 50000/-, after bonus shares (1:1), shares are 20000 and networth is Rs. 50000/-, so before bonus one is having one share which is valued At Rs.5/-, after bonus one is having two shares valued at Rs. 5/- i.e. Rs. 2.5 per shares.
But one thing….. It is due to only lapse/lack of knowledge or again interpretation of law, no share were purchased within one year of selling them. So it is understood/misunderstood that no tax will be there, as long term capital Gain is free from tax, but at the filing of income tax return(after 31.03.2016), it is said that it does not matter whether one purchased shares or acquired the bonus shares, for the income tax purpose it will be the date of acquision/ issue of bonus shares (though date again debatable) and that is within one year of selling, so there will be short term Capital Gain though the bonus is given out of the profit accumulating in past several years.
If you give your interpretation only and only on the base of Girnar case, it will be more than sufficient to me, because it will be from the person who is expert, it does not make any difference whether it is in my favour or otherwise, I want only interpretation so guide point 8 analyzing point 7, if you can save some more time.
Girnar Case can be seen at : https://indiankanoon.org/doc/509548/

Guest (Expert) 22 September 2018
Dear Madhu Mittal,

In view of my previously expressed frank opinion I don't think I should get in to unending frivolous debate that may make you more confused.

However, for clarification sake, just a few words can be added.

My so called earlier views were those, on response of which you posted detail of the case. I don't think there could have been any difference between the words, 'earlier' and 'previous' views.

Whether going back to the earlier years' theories and practices is right or wrong, favorable or unfavorable, you or your CA is least required to convince me. It is the scrutiny authority, whom you have to satisfy. Even if I ditto your views, you won't be able to get any benefit if the scrutinizing authority is not convinced on any such plea. So far my belief is concerned, no judgment remains ever green in view of the changing laws and the dates of their effect, more particularly those changed year after year, like the Income Tax, Sales Tax (VAT or GST, whatever you may call) and the Customs and Excise Tax. So far as your quote about date of acquisition of bonus shares is concerned, I don't think, there is any difference, if I used the term, date of event for that.

About the query, if that does not represent the real problem and that is made just like a question set in the examination paper, that can well be termed as an academic query.

Rest depends upon your own understanding, perception and wisdom. No more comments or clarification is desirable.

Anyway, have faith on your CA and wait for the result.

Wish you the best.

Madhu Mittal (Querist) 22 September 2018
Respected Sir,
“Even if I ditto your views……”
One has to take decision, again scrutinizing Authority is to be convinced, if decision is in my favour, it is ok. If he can not be convinced, matter is not over here, If one has confidence that one is correct, matter can be fought upto Supreme Court level. But if one knows that one is incorrect, matter can be dropped without further going to upper forum. From where this confidence comes, when experts (who are not interested in you anyway i.e. independent opinion) say, this is correct. Ok now there is a meaning in fighting upto top level. All of us know many decisions are reversed by Upper courts and in judicial system decisions keep on changing. One who has confidence with experts’ opinion, can know what is correct and what is not correct, whatever may be decision.
I have full faith in my CA sir, but still there is no harm in getting confirmed from experts what is correct in their opinion.
So please guide on Girnar Case only,

Guest (Expert) 23 September 2018
OK, you may feel free to go ahead.

But, I wonder to kbnow, by stretching the thread, why do you feel the need to convince me. Your arguments need be placed not before me or any other expert at LCI, but before the scrutiny officer and there after before the competent courts of law if decided against you.

In nutshell, I am not convinced about any sort of constitutionality, as you raised question on constitutionality of the issue. Constitution cannot be dragged over every issue.

Madhu Mittal (Querist) 23 September 2018
Respected Sir,
Thanks for giving your valuable time in attending my querty

Guest (Expert) 23 September 2018
You are welcome. ....

Constitutionality of cost of bonus shares treated differently

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