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Recently, the Mumbai Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Sudhir Menon HUF held that since shares were allotted on pro-rata basis to the shareholders based on their existing holdings, additional property was not received by them. It was only an apportionment of the value of their existing holding over a larger number of shares. Accordingly, Section 56(2)(vii)(c) of the Income-tax Act, 1961 (the Act) does not get attracted in the present case.
With respect to right shares if they are allotted to a person not against his existing shareholding or if they are allotted to existing shareholders but disproportionately, there is a scope for value or property being passed on to him and would attract Section 56(2)(vii)(c) of the Act.
Further in case of bonus shares, there is neither any increase nor decrease in the wealth of the shareholder and therefore, the provisions of Section 56(2)(vii)(c) would not apply to bonus shares.
The Tribunal analysed the tax implication under two categories i.e. allotment on a proportionate basis and on a disproportionate basis. The Tribunal held that as regards proportionate allotment there is no taxability under Section 56(2)(vii)(c) of the Act. However, in case of disproportionate issue of additional shares, these provisions may get attracted.