The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) on 22 May held that gains arising from the sale of bonus shares can be treated as exempt long-term capital gains where the assessee had consistently classified such shares as investments, even though the original shares were held as stock-in-trade. A Bench comprising Vice-President Prashant Maharishi and Judicial Member Soundararajan K. dismissed the Revenue’s appeal against M/s Goldflag Holdings Private Limited and upheld the order of the Commissioner of Income Tax (Appeals).

The dispute arose for AY 2017-18, where the assessee, engaged in stock and commodity trading, claimed exempt long-term capital gains of Rs 3.55 crore from the sale of 30,000 bonus shares of Infosys Limited. The Assessing Officer (AO) treated the amount as business income on the ground that the original Infosys shares, on which bonus shares were allotted, were held as stock-in-trade. According to the AO, the bonus shares also assumed the same character as stock-in-trade and therefore the gains were taxable as business profits.

Before the CIT(A) and the Tribunal, the assessee contended that although the original Infosys shares were held as stock-in-trade and sold in FY 2014-15, the bonus shares received thereafter were separately treated as non-current investments from the date of allotment itself. The assessee also pointed out that since bonus shares carry nil acquisition cost, they were disclosed as investments in the balance sheet with zero value. The Tribunal pointed out that, “There is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the purpose of his business.”

The Tribunal noted that the assessee had held the bonus shares for more than 12 months and had consistently reflected them as investments in its financial statements. It further relied on CBDT Circular No. 6/2016, which provides that where listed shares are held for more than 12 months, and the assessee treats the gains as capital gains, the same should not ordinarily be disputed by the AO.

“Bonus shares having been received by the assessees in respect of their stock-in-trade did not, therefore, become part of their stock-in-trade, merely because they were accretions to the stock-in-trade.”

The Bench also referred to the decisions of the Supreme Court in CIT v. Madan Gopal Radhey Lal and the Bombay High Court in PCIT v. Ashok Apparels Pvt. Ltd., observing that bonus shares are ordinarily treated as capital assets unless specifically converted into stock-in-trade. It held that the AO was not justified in treating the gains from the sale of bonus shares as business income merely because the original shares were once held as stock-in-trade.

Thus, the Tribunal upheld the order of the CIT(A) and held that the Rs. 3.55 crore earned on the sale of bonus shares of Infosys Limited was assessable as exempt long-term capital gain.