Foundation — Bonus shares, share splits, consolidations and buybacks

A family of four is served a cake. The host then cuts each slice in half, so there are now eight pieces. Has anyone been given more cake? Obviously not — the same cake, in smaller pieces.

That is why the workbook says no tax implication arises either in the hands of the company or in the hands of the shareholders AT THE TIME OF ALLOTMENT of bonus shares. Nothing was received. The market price adjusts down to match the larger share count, and the shareholder's proportionate stake is exactly what it was.

But here the analogy has a sting the cake does not. When the shares are eventually sold, the bonus shares carry a cost of NIL, and their holding period runs from the DATE OF ALLOTMENT, not from the original purchase.

So in the workbook's Example 1, Mr A sells 15,000 shares on one day at one price — and the 10,000 original shares give a Rs 1,50,000 LONG-TERM gain taxed at Rs 3,125, while the 5,000 bonus shares give a Rs 6,00,000 SHORT-TERM gain taxed at Rs 1,20,000.

Same cake, same day, same price — and the halves that were cut later are taxed thirty-eight times as heavily.

And the fix was a single month of patience: the bonus shares were eleven months old when sold.

You hand a cashier a Rs 2,000 note and ask for change. He gives you twenty Rs 100 notes. Later you hand back twenty Rs 100 notes and he returns a Rs 2,000 note.

At no point did your wealth change, and at no point would anyone imagine a taxable event had occurred. You did not sell anything. You changed the denomination.

That is precisely a share split and a consolidation, and the workbook's reasoning matches the intuition: splitting or consolidation of shares is NOT COVERED WITHIN THE DEFINITION OF TRANSFER, and section 55 provides that the cost shall be determined with reference to the cost of acquisition of the shares FROM WHICH SUCH ASSET IS DERIVED.

Notice the arithmetic in both directions. Rs 1,50,000 spent on 1,000 shares, split into 2,000 — cost becomes Rs 75 each. Rs 2,00,000 spent on 2,000 shares, consolidated into 1,000 — cost becomes Rs 200 each. The numerator never moves; only the denominator does.

And because nothing was received, the clock does not restart: the holding period runs from the date of acquisition of the ORIGINAL shares.

Compare the bonus share, where the clock DOES restart. The difference is that a bonus share is a genuinely new share issued free, while a split share is the same interest, differently divided.

Imagine a vegetable seller at a mandi being told: "Your tax is on your SALES, not your profit. Your purchase cost will be noted separately, and you may use it only against future vegetable sales."

He bought for Rs 50,000 and sold for Rs 62,500 — a profit of Rs 12,500. At 30 per cent he expects Rs 3,750 of tax. Instead he is taxed on the whole Rs 62,500 — Rs 18,750, and handed a Rs 50,000 slip he may never be able to use.

That is the buyback position from 1 October 2024, and it is the workbook's own Example 5 in different words. Buyback proceeds shall be taxed as DIVIDEND under income from other sources. NO deduction for expenses OR THE COST OF ACQUISITION shall be available. And the cost of acquisition will be treated as CAPITAL LOSS — long-term or short-term depending upon the period of holding.

Mr X held his shares from August 2019 to February 2025, so his Rs 50,000 becomes a LONG-TERM capital loss — the less useful kind, since it can meet only long-term capital gains.

Contrast the position before 1 October 2024: the COMPANY paid 20 per cent plus 12 per cent surcharge and 4 per cent cess, and the shareholder was EXEMPT under section 10(34A).

The whole incidence reversed on a single date. An adviser who had not read that date would have advised a client straight into a tax bill larger than the profit.

A shopkeeper announces that regular customers may buy a scarce item at Rs 250 when it sells outside for Rs 500. He issues tokens. A customer who does not want the item sells his token to someone else for Rs 200.

What did he sell? Not the item — he never had it. He sold a right to buy, and he paid nothing for that right.

The Act treats it exactly so. Any right available to a shareholder to subscribe to shares is treated as a CAPITAL ASSET. The cost of acquisition of the rights so renounced shall be NIL. And the holding period shall be reckoned FROM THE DATE OF OFFER MADE BY THE COMPANY TO THE DATE OF RENOUNCEMENT.

Because a rights offer is open for weeks, not years, the workbook draws the obvious conclusion: in all practical aspect, the rights will be held for a short period which is likely to be less than even 12 months and hence ALWAYS LIKELY TO BE A SHORT-TERM CAPITAL ASSET.

And there is a sting in the rate. Even where the rights entitlement is itself listed and traded, the workbook is explicit: even if the rights are listed, IT IS NOT A LISTED EQUITY SHARE and hence NOT COVERED BY SECTION 111A.

Nil cost, short period, slab rate. The whole Rs 1,00,000 in the workbook's Example 7 is taxed at Mr Paul's normal rate — no 20 per cent concession, no threshold.

You board a bus in Nagpur with a through ticket to Pune. Halfway, the operator transfers all passengers to a newer bus. Your journey has not restarted. Your ticket is unchanged. You did not buy a new fare.

An amalgamation works the same way for a shareholder who held shares as a capital asset. There will be NO TAX IMPLICATION at the time of allotment of shares of the amalgamated company in lieu of shares in the amalgamating company, as such transactions are NOT REGARDED AS TRANSFER AS PER SECTION 47(vii).

And when you finally get off: the cost of acquisition of the shares acquired in the amalgamated company shall be THE AMOUNT PAID BY THE SHAREHOLDER AT THE TIME OF ACQUISITION OF ORIGINAL SHARES of the amalgamating company, and the period of holding is reckoned FROM THE DATE OF ACQUISITION OF ORIGINAL SHARES.

The workbook's Example 8 shows how much this is worth. Mr X paid Rs 5,80,000 for 10,000 shares of A Ltd in April 2023, received only 8,000 shares of AB Ltd, and sold in September 2024. The holding period is 17 months — LONG TERM, counted from the original purchase, and the cost is the full Rs 5,80,000, not some value at the merger date.

Fewer shares, full cost, unbroken clock. And the definition of amalgamation itself has a numeric condition worth memorising: shareholders holding NOT LESS THAN 75 PER CENT IN VALUE of the shares in the amalgamating company must become shareholders of the amalgamated company.

Your neighbour asks to borrow five kilos of rice and promises to return five kilos next week. He will bring back different grains — not the very ones you handed over — and he will add a small thank-you payment.

Have you sold rice? Plainly not. You have lent it, and you expect it back.

The Act agrees. Any lending of scrips or security is not treated as exchange EVEN IF THE LENDER DOES NOT RECEIVE BACK SAME DISTINCTIVE NUMBERS of scrip or security certificate. The transaction would not result in TRANSFER for the purpose of invoking the provisions relating to capital gains, pursuant to SECTION 47(xv), and the department has clarified that transactions done in the SLB segment will not be treated as transfer.

But the thank-you payment is income. The workbook: the fee earned from lending business shall be taxable under the head PROFITS AND GAINS FROM BUSINESS OR PROFESSION OR INCOME FROM OTHER SOURCES — depending on whether the lender is in that business.

On the other side of the fence, the borrower is in a different position entirely. He purchases the stocks with the objective of SELLING them, so his gains or losses are capital gains or PGBP, and the fee he paid may be claimed as a deduction.

One transaction, two participants, two completely different tax positions — and the clue is what each of them intends to do with the shares.

A passenger holding a sleeper-class ticket upgrades to AC on the same train, same journey, same destination. He has not begun a new trip.

Section 47(xb) provides that any conversion of preference shares of a company into equity shares OF THAT COMPANY would not amount to TRANSFER.

Note the words "of that company" — the upgrade must be on the same train. Swapping preference shares of Company A for equity of Company B would be an exchange, and the workbook is clear that any conversion of an asset into another asset is an EXCHANGE, falls within the definition of transfer, and consequently capital gain tax shall be charged.

The consequences of the exemption are exactly what you would expect of an upgrade: when a person subsequently sells the equity shares, THE COST OF ACQUISITION SHALL BE THE SAME AS THAT OF THE PREFERENCE SHARE, and the period of holding shall be reckoned FROM THE DATE OF ACQUISITION OF THE PREFERENCE SHARES.

The workbook's Example 11 shows how powerful this is. Mr X bought preference shares in January 2010, converted in January 2023, and sold in August 2024. His holding period is 14+ YEARS, not 20 months — and the fair market value of Rs 25 on the conversion date is simply ignored. His cost stays at the Rs 2,00,000 he paid in 2010.

Same train, same ticket price, same departure time.

A family buys a sack of provisions for Rs 15,000. One item inside turns out to be spoiled. The shopkeeper does not refund anything — he puts the spoiled item in a separate bag and hands both bags back.

The family still owns everything it owned a moment ago. But the Rs 15,000 must now be split between two bags, and the split has to be fair.

That is a mutual fund segregated portfolio — created when a credit event hits one holding. All the existing unit holders in the affected scheme as on the day of the credit event shall be allotted EQUAL NUMBER OF UNITS in the segregated portfolio as held in the main portfolio.

The apportionment formula does the fair split: cost of acquisition of units in the total portfolio, multiplied by the NAV of the asset transferred to the segregated portfolio, divided by the NAV of the total portfolio immediately before segregation.

In the workbook's Example 15: Rs 15,000 × (Rs 2 ÷ Rs 12) = Rs 2,500 goes into the segregated bag, and the cost of the main portfolio falls to Rs 12,500. Rs 15,000 in, Rs 15,000 out — nothing created, nothing lost.

And the clock does not restart on either bag: the period for which the ORIGINAL UNITS were held in the main portfolio is ALSO INCLUDED in the period of holding of the units acquired in the segregated portfolio.