Bonus share

Bonus Share- A Point of View – No capital gain tax if the cost is nil or

not ascertainable

Section 45- charging section for capital gains:

Section 45 is charging section. Various sub-sections of this section provide for charging of any profit

or gains and in some specified exceptions even „capital value‟ is also deemed to be capital gain

taxable under the head.

There are different provisions for computation of capital gains in case of short-term capital assets,

long-term capital assets, depreciable assets, slump sale, and for additional compensation when

original compensation was assessed, etc.

Charging section and computation provisions are integral code:

It is now well settled that charging section and provisions for computation of taxable matter and / or

amount of tax are integral code and in case a computation cannot be made as per prescribed

provisions for computation, then the charging section shall also not apply.

Capital assets having no cost of acquisition:

In case a capital asset is one which was acquired without incurring any cost of acquisition, then sale

value of such assets minus nil is sale value or capital value of assets. In such cases it cannot be said

that the sale value is profit or gain. The concept of profit or gain is based on sale value or

consideration minus total cost incurred.

Cot nil cannot be inflated:

The amount of cost of acquisition or cost of improvement cannot be inflated if such cost is factually

nil or deemed to be nil. Suppose a shareholder has received bonus shares, in relation to 100 original

shares having cost of Rs. 10000 acquired on 01.01.2005, as follows:

Bonus in ratio of 1:1 on 100 allotted on 01.04.05 100 total holding 200






Suppose the shareholder sells entire shares on 25.03.13 @ 150 per share.

http://taxguru.in/income-tax/bonus-share-point-view-capital-gain-tax-cost-nil-ascertainable.html

http://taxguru.in/income-tax/bonus-share-point-view-capital-gain-tax-cost-nil-ascertainable.html

For computing capital gains of original shares his cost of Rs.10000/- incurred on 01.01.2005 will be

inflated as 10000 / 480 X 852 =17750/- which will be allowed against sale price of Rs.15000/- and

he will be allowed long-term capital loss of Rs.2750/-

For 4700 bonus shares he realize @ Rs.150/- per share total Rs.705000/-

Shares allotted on 01.04.12 and 01.01.13 are short term of capital assets as on the day of transfer that

is 25.03.13 therefore cost inflation index is not applicable.

For bonus shares allotted earlier, the holding period is more than 12 months and those shares are

long term capital asset having different number of years held. Therefore, as per computation

provisions the cost need to be inflated with applicable cost inflation index for the year of allotment

and year of transfer.

The cost of acquisition is factually nil because shareholder did not pay any cost to acquire bonus

shares. Such cost is also deemed to be nil vide section 55. If we take cost as nil, then in case of all

bonus shares cost inflation index cannot be applied and different CII cost cannot be computed,

because zero or nil will always remain nil irrespective of any multiplier.

Thus the sale value minus zero will remain sale value and there will be no change in the remaining

amount due to change of period of holding. The provision for computing long-term capital gain for

long term capital asset cannot be applied. Therefore, computation provision fails.

Even for short term bonus shares, sale value minus zero is sale value and there is no element of

profit or gain.

The sale value of each bonus share also remain to be sale value or capital value, and there is no

element of profit or gain which can be taxed u/s 45 (1). Any other charging provision is also not

applicable. Therefore, sale value of bonus shares is not taxable as „capital gains‟.

In some of reported cases which have been decided after amendment of S. 55, prescribing cost as nil,

the above contentions were not raised in relation to assets having no cost of acquisition. Therefore,

Tribunal and High Court could not consider and decide the issue in light of above contentions.

Route permits and improvement:

About route permits the AP High Court in case of Ganapathi Raju Jegi, [1979] 119 ITR 715 held

that “ It is obvious that, at the time when a route permit is granted, no amount is paid by the operator

for the purpose of acquiring it and it is only over a number of years that, because of various factors,

viz., the development of the roads, the passenger traffic on the road, the frequency of the buses

plying on the road, etc., that the route permit acquires some value. This case, therefore, is similar to

the case of a transfer of goodwill where goodwill as such has no cost of acquisition, but at the time

when the goodwill is transferred, it has come to acquire some value, particularly in the case of a

business which has been started by the transferor himself.”

In this case in absence of cost of acquisition the sale value was held capital receipt and not profit or

gain.

Computation cannot be made by taking cost and cost of improvement as nil:

The scheme of tax on capital gains and its computation have salient features like:

The date of acquisition must be known so that nature of asset as to short term or long term can be

ascertained.

The cost of acquisition, and cost of improvement and year in which such costs were incurred must be

known so that computation of allowable inflated cost of acquisition and cost of improvement can be

ascertained by applying relevant cost inflation index.

There is difference in amount of capital gains based on years of holding. Similar assets having

similar cost , sold at the same time but acquired in different years will attract different computation

mode and tax treatment. Because an asset can be short term, another can be long term asset held for

say five years, and yet another asset held for say more than ten years. Thus the period of holding

may vary which will have effect on allowable CII cost. As per computation provisions, gains in each

case will be different because cost of acquisition / cost of improvement will have to be inflated with

different CII depending on different years of acquisition or different period of incurring cost of

improvement. This computation will not be possible in case cost of acquisition or cost of

improvement is taken to be nil. Because number of years for which the asset is held or number of

years before which improvement took place will make no difference. Because in such case allowable

cost of acquisition and cost of improvement, even after multiplication of CII factors shall remain nil.

And in ultimate analysis sale value will be capital value.

There will be not tax on profit or gains because, sale value minus nil ( inflated cost of acquisition

and cost of improvement) remains sale value or capital value, and that cannot be brought in taxable

category u/s 45(1), and no other clause can be applied even after amendment of section 55.

As a computation as contemplated in the scheme of capital gains cannot be made distinguishing

between short term capital gain and long term capital gain and also by differentiating amount of

taxable capital gains based on period of holding, it cannot be said that a computation can be made as

per the computation provisions and scheme of the Act. When a computation cannot be made as per

computation provision the charge must fail. This is well settled in B.C.Sriniwasa Setty V CIT (1981)

128 ITR 294 (SC).

Therefore, it can be said that even after amendment of section 55 prescribing that cost of acquisition

(for the purpose of section 48 and 49) shall be nil, it is extremely doubtful, whether sale value of

such an assets can be brought in taxable capital gains category under section 45(1).

Word of caution:

In case of assets having no cost of acquisition or cost of improvement claim for exemption can be

made, for consideration of the A.O. With a view to play safe it is desirable to include gains in

income, and pay tax under protest and without prejudice so that matter can be carried in further

appeal and clients do not loose the chance of claiming refund in due course if the courts decide in

favor of any assessee.

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