TaxTMI 
TaxTMI 
2013 (11) TMI 1312
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....f the assessees. All these appeals were heard together and we deem it convenient to pass a consolidated order. 3. First we shall take up the common issue that arises for consideration in all these appeals. The assessees are members of Reddy family of Chittoor, Andhra Pradesh. There was a firm by name M/s B.V.Reddy Enterprises (BVRE). BVRE was formed for the purpose of carrying on business in partnership viz., the business of purchase and sale of milk, milk products, condensed milk, other food products, milk processing, rice hulling and shelling on own account or by taking on lease and/or such other business or businesses as may be agreed upon by the partners. Some of the members of the Reddy family were partners of the firm when it was started. The firm of BVRE came into existence on 14-07-1971. On this date the partnership firm of BVRE was formed. The following were the partners under the partnership deed. 1. Shri V. Madhusudhan Reddy 2. Shri V.Vikram Reddy 3. Smt. Shobha Reddy Besides the above, the Smt. V. Anitha Reddy, V.Sandhya Reddy and V. Dinesh were also partners but were minors. They were admitted as partners entitled to the bene....
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....r the purpose of change of accounting year and the six partners continued to be the partners of the firm. 11. It is also worthwhile mentioning that for the AY: 1980-81 the partnership firm BVRE was granted the registration by an order passed u/s 185 of the Act, for AY: 1980-81. This order became necessary because of the Deed of re-constitution dated 25-06-1979. Similarly, there was a Deed of re-constitution on 30-12-1982 and an order u/s 185 was passed granting registration to the partnership firm as reconstituted for the AY: 1984-85. 12. Thus the partnership consisted of the following 6 partners as on 24.3.2006. 1. V.Madhusudhan Reddy (HUF) 2. V.Vikram Reddy (HUF) 4. V.Shobha Reddy (On her marriage to T.N.Vijayanarayana Reddy She is referred to as T.N.Shobha Reddy in some of the documents). 4. V.Anitha Reddy 5. V.Sandhya Reddy 6. V.Dinesh Reddy (HUF). 13. On 24.03.2006, seven other members of the Reddy became partners of the firm "BVRE". A Deed of reconstitution dated 24-03-2006 was entered into between the parties. As per this Deed of reconstitution, the following seven persons were admitted as....
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....T.N.Shobha Reddy in some of the documents). 2,950 4. V.Anitha Reddy(Indl.) 21,589 5. V.Sandhya Reddy(Indl.) 13,480 6. V.Dinesh Reddy (HUF). 1,67,599 New Partners: 7. V .Dwarakanath Reddy(Indl.) 1,02,948 8. V. Indira Reddy (Indl.) 6,891 9. V. Nithya Reddy (Indl.) 43,578 10. V. Saumini Reddy(Indl.) 31,388 11. V Dwarakanath Reddy (HUF) 29,920 12. V. Vikram Reddy(Indl.) 36,181 13. V.Madhusudhan Reddy(Indl.) 44,318 6,65,325 Others: 14. Mr.V.Dinesh Reddy (Indl.) 375 15. Ms.Binduvasini 5,760 16. S.Vasudevan 363 Total 6,71,823 16. The existing partners and the new partners also brought in the shares held by them in NCCPL as their share of capital contribution to the firm "BVRE". The shares so brought in were valued at a sum of Rs.35.27 Crores as on 24-03-2006. Necessary entries were passed in the books of accounts on 24.3.06, recording the shares as property of the firm and crediting the capital account of the respective partners with the respective value of the shares brought in by them as their share of capital. The following amounts were credited to the capital account of the pa....
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....on to the firm BVRE) in the register of members of NCCPL. It was also resolved that V.Madhusudan Reddy will hold those shares for and on behalf of the firm. 19. On 24.3.2006, the shares of NCCPL brought in as capital contribution by the partners were recognized as the property of the firm. On the very same date the 13 partners signed and delivered share transfer forms transferring the shares so brought in as capital in favour of V.Madhusudan Reddy. Mr.V.Madhusudan Reddy's name was entered as registered shareholder of the shares of NCCPL in the register of members of NCCPL. 20. On 27.3.2006, V.Madhusudan Reddy filed a declaration u/s.187-C of the Companies Act, 1956 with NCCPL declaring that the beneficial owner of the 6,65,325 shares of NCCPL held by him were the 13 partners of the firm BVRE. In the said declaration it has further mentioned the nature of the beneficial interest as partner in Partnership firm. The reason for the shares not having been registered in the name of the beneficial owner has been declared by him as owing to the fact that all partners name could not be entered in the register of members. 21. Similarly the 13 partners on 29.3.2006 gave similar declaration....
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....d to in para-15 of this order as share-holders of NCCPL as on 01-03-2006. The consideration for transfer of the entire ownership and control of the NCCPL together with business of the company was agreed at a sum of Rs.270 Crores. 25. As per the aforesaid MOU it was agreed that the entire ownership of the NCCPL will be transferred to GBFL for a consideration of Rs.270/- Crores, subject to due diligence and obtaining of requisite approvals. It was also agreed that the parties will structure the transaction in such a manner as to be mutually beneficial. It was also agreed that the transaction would be completed before 15.06.2006. 26. There was a company by name M/S. Nutrine Confectionery & Sweets Pvt.Ltd. (NCSPL). NCSPL, under a business transfer agreement dated 5.5.2006 succeeded to the business carried on by the firm BVRE and thereby became owner of capital assets/intangible assets owned by the firm, including 6,65,325 equity shares of NCCPL that were brought in as capital contribution by the 13 partners of BVRE. The consideration for such transfer was a sum of Rs.270 Crores. The same was arrived at as follows: Sundry Debtors Rs. 40,03,424.49 Andhra Bank Balance Rs. 13,710.04 ....
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....ny of the partners of the firm is not less than fifty per cent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession;..........." 27. Under a share purchase agreement dated 10.6.2006, GBFL purchased 6,71,823 shares of NCCPL, out of which 6,62,325 shares were held by NCSPL and 375 shares held by Mr.V.Dinesh Reddy (Indl.), 5,760 shares held by Ms.Binduvasini and 363 shares held by S.Vasudevan for a consideration of Rs.265,00,00,000/-. We have already seen that the entire paid up capital of NCCPL were held by the firm and consequent to succession of the firm by NCSPL the entire paid up capital was held by NCSPL and three others. Under the share purchase agreement dated 10.6.2006, the three others who sold the shares of NCCPL held by them to GBFL were described as other sellers and NCSPL was described as Seller No.1. GBFL and other sellers were together described as sellers. The 13 partners of the firm BVRE were described as confirming parties in this share purchase agreement. NCCPL was also made a party to this agreement though the subject matter of the transfer under this agreement is the en....
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....ong term capital gains in their hands. He held that various transactions were artificially created to circumvent the law and avoid paying taxes to the Government. The AO held that when a MOU dated 29.3.06 was signed by the members of the Reddy family they knew the tax implications and therefore they resorted to various colourable devices to avoid paying tax. According to the AO the MOU dated 29.3.2006 was the starting point of the transaction and the same has been recognised even in the share purchase agreement dated 10.6.2006 whereby NCSPL sold shares of NCCPL to Godrej group. The AO also made a reference to the statement of V.Vikram Reddy recorded u/s.131 of the Act which was to the effect that the Godrej group contacted the family members and the family members decided to sell the shares directly to Godrej group. According to the AO if the shares of NCCPL were held by NCSPL/BREVPL, then there was no requirement of the Reddy family signing MOU dated 29.3.2006. This according to the AO proved that the corporate veil required to be ignored. The firm BVRE, companies NCCPL and NCSPL were all required to be seen only as family members of Reddy family. The book entries and the series o....
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.... in the firm BVRE as on 24.3.2006. In this regard he referred to the fact that in the partnership deed dated 24.3.2006, in Sl.No.2 of the list of partners V.Vikram Reddy was shown as an existing partner and has been described as "continuing partner in his HUF Capacity". In Sl.No. 12 of the list of partners, V.Vikram Reddy has again been referred to as "new partner in his individual capacity". According to the CIT(A), the above description in the partnership deed showed that V.Vikram Reddy HUF was partner in the firm. He held that a HUF cannot be enter into a partnership and in this regard referred to the decision of the Hon'ble Supreme Court in the case of CIT Vs. Kalu Babu Lal Chand 37 ITR 123 (SC). He also held that the principle as laid down above by the Hon'ble Supreme Court has been reiterated in the decision of Agrawal & Co. Vs. CIT 77 ITR 10 (SC). In the later decision the Hon'ble Supreme Court reiterated the principle laid down by the Hon'ble Supreme Court in Kalu Babu Lal Chand's case (supra) that a HUF cannot as such enter into a contract of partnership with another person or persons, went on to hold that the question as to whether a partner joined the firm as a beneficia....
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....n) 4. Sri.V.Dinesh Reddy (HUF) (a)Sri.V.Dinesh Reddy (b)Smt.Sruthi Reddy (Wife) (c) Kirtana(Son) (d)Tanna(Daughter) According to the CIT(A), the number of members of the 4 HUFs were 15 and the total number of partners would therefore exceed 20 and hence there would be violation of the provisions of Sec.11(2) of the Companies Act, 1956. 32. The CIT(A) also endorsed the view of the AO that the MOU dated 29.3.2006 reveals the real nature of the transaction viz., sale of shares held by the various members of the Reddy family to GBFL. All other intermediate transactions were all colorable device to evade payment of proper capital gains tax on sale of shares. 33. We have already seen that ultimately on 10.6.2006 i.e., in the previous year relevant to AY 07-08, 6,65,325 shares of NCCPL were sold by NCSPL/BVREPL to GBFL. We have also seen that NCSPL/BVREPL declared capital loss on sale of such shares in th....
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....held by the CIT(A)-III, Chennai in the assessment of NCSPL/BVREPL for AY 07-08. 35. On the above submission, the CIT(A) in the impugned order held as follows: "9.4 I find it is better to peruse the order of CIT(Appeals),- III, Chennai, on the issue to discover whether he has differed from the view of AOs either at Chennai or Bangalore. In fact, I find the views of AOs at Bangalore had not been put before him for consideration and therefore he got no occasion to form an opinion thereon. Therefore, on facts presented to him, he has held that the Company BVREPL or erstwhile company NCSPL had fulfilled all conditions envisaged in Section 47(xiii) while succeeding the firm BVRE and therefore BVRE, NSCPL, BVREPL, is not liable to pay tax on such transaction. Thus, there is no occasion for any difference of opinion between the AOs of Bangalore and the Officers at Chennai because both are dealing with apparently different timings of the different transactions in the same continuum but actually one transaction made to look like a series of transactions by the tax planning of the appellants. In view of this, the ground of appeal is dismissed." 36. It was also submitted on beh....
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.... the earlier assessment years and there was no change in the facts situation and hence it cannot be said that the firm was revived for the purpose of tax planning. (7) It should have been appreciated that for this assessment year 2007-08 the firm had been treated as genuine and valid by the CIT (A) at Chennai in its appellate order for 2007-08 and the same does not appear to have been challenged by the department. (8) The records of the department themselves show that the firm of BVRE filed its returns before the jurisdictional officer at Thirupathi for the A.Y. 2003-04, 2004-05, 2005-06 and 2006-07 in the calendar years 2003, 2004, 2005, 2006 and were obviously accepted and this effectively rebuts the allegation that the firm of BVRE which was dead was revived only for the purpose of introduction of shares as capital on 25/03/2006 which is the correct date of such introduction. (9) The appellant affirms that identical documents and information was furnished to all the authorities including the Commissioners and the Assessing Officers at Bangalore and also to the Commissioner at Chennai and if it was the case of the Commissioner that differ....
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.... retrospective effect, which has a bearing on the transaction of sale of shares of NCCPL by NCSPL/BVREPL. Under the Act, Capital Gain is computed in the manner laid down in Sec.48 of the Act. Sec.48 of the Act, in so far as it is relevant for the present case, is as follows: 'Sec.48: Mode of computation: The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :- (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement thereto:.............. Sec.49 of the Act lays down the manner in which Cost with reference to certain modes of acquisition have to be reckoned for the purpose of computing capital gain u/s.48 of the Act. It reads thus: "Sec.49: Cost with reference to certain modes of acquisition. (1)] Where the capital asset became the property of the assessee- (i) o....
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....n the manner referred to in clause (xiii) of Sec.47 of the Act, was made by the Finance Act, 2012 (w.r.e.f. 1-4-1999). Prior to the above retrospective amendment, the cost of acquisition was to be reckoned as the cost for which the capital assets were acquired by the transferor of the capital asset and not the cost for which the previous owner i.e., the person from whom the transferor acquired the capital asset. The change in law with retrospective effect has far reaching consequences as far as the present case is concerned, which we will explain the subsequent paragraphs. 40. We shall now recapitulate the entire sequence of transactions by which the shares of NCCPL were transferred to GBFL. We will classify the sequence of events into three categories, viz., I. Transaction by which the shares of NCCPL, held by 13 individuals, were brought into the firm of BVRE as capital contribution of the 13 partners of BVRE; II. Transaction by which NCSPL/BVREPL succeeded to the business of BVRE u/s.47(xiii) of the Act. III. Transaction by which NCSPL/BVREPL sold the shares of NCCPL to GBFL. I. Transaction by which the shares of NCCPL, held by 13 indi....
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....ived at by adopting their intrinsic value at Rs.270,07,53,000/-. After succession, shares of NCSPL were allotted to the 13 partners in the same proportion in which their capital accounts stood in the books of the firm. This transfer by way of succession of the firm BVRE by NCSPL/BVREPL was not a transfer of a capital asset giving raise to incidence of capital gain chargeable to tax under the Act because of the provisions of Sec.47(xiii) of the Act. III. Transaction by which NCSPL/BVREPL sold the shares of NCCPL to GBFL. 43. Under a share purchase agreement dated 10.6.2006, GBFL purchased 6,71,823 shares of NCCPL, out of which 6,62,325 shares were held by NCSPL/BVREPL and 375 shares held by Mr.V.Dinesh Reddy (Indl.), 5,760 shares held by Ms.Binduvasini and 363 shares held by S.Vasudevan for a consideration of Rs.265,00,00,000/-. NCSPL received a consideration of Rs.257,52,32,953 for sale of 6,65,325 shares of NCCPL held by it to GBFL. This transaction of sale of shares of NCCPL took place during the previous year relevant to AY 07-08. NCSPL/BVREPL in the return of income filed for AY 07-08 declared a capital loss on sale of shares of NCCPL as follows: Full value of consideration ....
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....the hands of NCSPL/BVREPL. The assessments in the case of the Assessees as well NCSPL/BVREPL is on a substantive basis. The effect of the above statutory amendment was brought to the notice of the learned counsel for the Assessee in the course of hearing of the appeals. His submission on the above aspect was that the issue has to be addressed only in the assessment of NCSPL/BVREPL and not in these appeals. 45. It was the plea of the Revenue in the present appellate proceedings that it would be ideal that the appeal in the case of NCSPL/BVREPL for AY 07-08 which are stated be pending before the ITAT, Chennai Benches and the appeals of the Assessees in these appeals should be heard together. The Assessees have been objecting to such clubbing of appeals on the ground that the issues involved in these appeals and the appeal pending before ITAT Chennai Benches are different in their memo filed before Tribunal on 31.7.2012. The stay of recovery of outstanding demand against the Assessees in these appeals could not be stayed by the Tribunal beyond a period of 365 days because as per the decision of Hon'ble Karnataka High Court on interpretation of provisions of Sec.254 of the Act, the tr....
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....ng carried out by the assessees directly to GBFL instead of through NCSPL/BVREPL? 47. As far as issue No.(1) is concerned, the ld. counsel for the assessee drew our attention to the various documents under which the partnership firm BVRE came into existence and how the 13 partners of the BVRE holding shares of NCCPL brought in those shares as capital contribution of the firm BVRE. These details are not being repeated here and they can be found from the description of facts, which we have narrated from paragraphs 2 to 14 of this order. In particular, our attention was drawn to the fact that the department has passed orders u/s. 185 of the Act for AYs 1980-81 & 1984-85 granting registration to the firm. Our attention was drawn to the fact that the firm BVRE had filed returns of income for the AYs 2004-05, 2005-06 & 2006-07 before the ACIT-I (1), Tirupathi, where the firm is regularly assessed to tax. It was submitted that it is not correct on the part of the revenue authorities to say that this firm has become defunct. The Ld. Counsel for the Assessee brought to our notice the fact that the partnership firm had shown receipts from hiring out trucks. In the course of assessment of th....
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....inding that the firm BVRE was not in existence or that the same was defunct, without putting the firm BVRE on notice on the grounds on which the AO wants to come to such conclusions. In the light of the evidence available on the record, we hold that the firm BVRE was genuine, legal and valid, was not defunct and was legally an existing partnership firm. We hold accordingly on issue No.(1). 51. As far as the second issue with regard to whether the HUF was the partner of the firm BVRE, it was submitted by the ld. counsel for the assessee that in the partnership deed dated 24.03.2006, partners 1, 2, 6 & 11 (i.e., V.Madhusudhan Reddy, V.Vikram Reddy, V.Dinesh Reddy and V.Dwarakanath Reddy (HUF) ) are respectively described as continuing partners "in his HUF capacity". It was submitted that such description was only to highlight the fact that these persons were also partners in their individual capacity and to make it clear that they were also partners in their capacity as Kartha of the HUF. Partners in Sl.No.7, 12 & 13 (i.e., V.Dwarakanath Reddy, V.Vikram Reddy and V.Madhusudan Reddy) were partners in their individual capacity also. It was submitted that it is open for a partner to be....
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....ndivided family or individual. It is open to the manager of a joint Hindu family as representing the family to agree to become a partner with another person. The partnership agreement in that case is between the manager and the other person, and by the partnership agreement no members of the family except the manager acquires a right or interest in the partnership. The junior member of the family may make a claim against the manager for treating the income or profits received from the partnership as a joint family asset, but they cannot claim to exercise the rights of partners nor be liable as partners. From the mere fact that the manager of an HUF describing himself as representing the family entered into an agreement of partnership with other persons, it cannot be inferred that an agreement of partnership was intended contrary to law between an HUF consisting of all adult members, females, minors and even unborn persons and strangers to the family. The intention disclosed by the deed was that L was to be a partner, and he was described as manager and he signed the document in that capacity; it did not thereby seek to bring into existence a relationship of partners between the HUF....
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....artner in the firm. It was therefore submitted that the intention of the parties was that HUF was never sought to be made as a partner of the firm. It was submitted that the firm BVRE cannot be held to be not legal, valid because HUFs were partners in the said firm. 54. The ld. DR relied on the order of the CIT(A) on this issue. 55. We have considered the rival submissions. The CIT(A) has accepted the legal position that when a person is shown in the partnership deed as partner representing the HUF, the HUF does not become the partner. The CIT(A) has however proceeded on the basis that the description in the partnership deed in the present case showed that HUF was the partner. Thereafter, the CIT(A) applied the proposition that HUF cannot enter the partnership and carry on business and finally concluded that the partnership itself is illegal as HUF was a partner of the firm. In our view, the CIT(A) has not properly appreciated the true effect of the description in the partnership deed. As far as V.Madhusudan Reddy, V.Vikram Reddy and V.Dinesh Reddy are concerned, they were shown as partners in their individual capacity in all the partnership deeds prior to 24.3.2006. The fact tha....
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.... therefore the firm BVRE cannot be said to be not valid. 56. The third issue that arises for consideration is as whether there were more than 20 persons as partners in the firm BVRE, and consequently the firm is not valid? Sec.11 of the Companies Act, 1956 provides that no partnership shall consist of more than 10 persons if it carries on business of banking and 20 persons in the case of any other business. The firm BVRE was not carrying on banking business and therefore could have 20 partners and on this there is no dispute. A Partnership firm if it violates the above provisions will be considered illegal. The CIT(A) in his order found that there four of the partners who were described as representing their HUFs viz., V.Madhusudhan Reddy, V.Vikram Reddy, V.Dinesh Reddy and V.Dwarakanath Reddy. He also listed members of each of the HUFs as follows: I. V.Dwarakanath Reddy (HUF) (a) Sri.V.Dwarakanath Reddy (b) SriV.Dinesh Reddy (Son) (c ) Smt.V.Anita Reddy (Daughter) (d) Smt.V.Sandhya Reddy (Daughter) II. ....
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....apacity, they have to be counted together only as 3 "persons" and not as 6 "partners". It was submitted that even if it they were to be considered as "Partners", then the number of partners will only be 7 partners (4 HUFs + 3 individuals). In this regard reference was made to instruction in F.No.278 dated 12.7.1978 of the CBDT accepting the decision of the Hon'ble Bombay High Court in the case of Raghavji Anandji & Co., 100 ITR 246(Bom) wherein it was accepted and the officers were instructed to accept the view that where partnership is constituted by two or more persons, one or more of such persons may sign the deed in dual capacity without making the partnership invalid and that the ITO can grant registration to such a firm but for the purpose of computing the number of partners, the person who becomes partner in two capacities will be counted as two. Reliance was placed by the learned counsel for the Assessee on the decision of the Hon'ble Supreme Court in the case of Agarwal & Co. Vs. CIT 77 ITR 10 (SC). In the aforesaid decision the ITO, the AAC as well as the Tribunal were of the opinion that some partners of the assessee-firm having entered into the partnership as representa....
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....o capacities have to be reckoned as "one person". If so done, the V.Madhusudan Reddy, V.Vikram Reddy and V.Dwarakanath Reddy who signed in their individual capacity apart from their capacity on behalf of the HUF have to be excluded. Then the number would become 9. (12-3). The other partners are 6 (13-7 (7 = 4 HUFs + 3 individual capacity). Thus the number of persons would only be 15 (9 + 6) and therefore there is no violation of the provisions of Sec.11(2) of the Companies Act, 1956. 59. The learned DR relied on the order of the CIT(A) on the issue. 60. We have considered the rival contentions. While deciding issue No.2 we have already held that the 4 HUFs were not partners in the firm BVRE and that V.Madhusudhan Reddy, V.Vikram Reddy, V.Dinesh Reddy and V.Dwarakanath Reddy signed their deed in their individual capacity vis-àvis the firm and vis-à-vis the HUF they were accountable to the share of profits which they receive from the firm BVRE. It therefore follows that the number of partners would only be 13. Even assuming the revenue is right in its conclusion that for the purpose of computing the number of partners, the adult female and male members of the HUF have....
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....f Madhusudan Reddy is the firm BVRE. Apart from the above, the factum of transfer by the Assessees in favour of the firm has been accepted by the revenue and the capital gain declared in AY 06-07 has been taxed in the hands of the Assessees by the revenue in those years. This fact has also been reiterated in the assessment orders of the Assessees for AY 07- 08(which is the subject of the present appeals) wherein the revenue has taxed only the difference between the actual capital gain (according to the revenue that accrues in AY 07-08) and the capital gain already taxed in the hands of the Assessees for AY 06-07. We therefore hold on issue No.4, that there was a valid transfer of shares by the Assessees in favour of the firm BVRE in the previous year relevant to AY 06-07. 62. The fifth issue that arises for consideration is the issue as to whether there was a transfer of shares of NCCPL by the assessees in favour of GBFL during the previous year relevant to A.Y. 2007-08, so as to bring to tax capital gain on transfer of such shares u/s. 45 of the Act in the hands of the assessee? This issue might overlap with issue 6 and 7 which we have framed for consideration. To the extent that....
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....purchasers (GBFL) and there is no reference to the confirming parties to the agreement selling shares to GBFL. The confirming parties only confirm the fact that they have transferred the shares of NCCPL held by them to the firm BVRE and that they have no right, title or interest whatsoever over the shares so transferred. Thus it cannot be said that there was any transfer of shares of NCCPL by the Assessees to GBFL during the previous year relevant to AY 07-08. This issue is decided accordingly. 63. Issue No.6 and 7 can be taken up together. These issues are: "(6) Can it be said that the entire series of transactions by which the shares of NCCPL were ultimately transferred to GBFL were all not valid and in any event were arranged in such a manner so as to avoid payment of tax on the correct quantum of capital gain that would result on transfer of shares of NCCPL to GBFL? (7) If the series of transactions by which the shares of NCCPL were ultimately transferred to GBFL were not colourable transactions and are considered to be legal and valid, can it be said that the entire series of transactions were planned consciously and deliberately by the assessees t....
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.... omission that he can find in his favour in taxing statutes. His legal right so to dispose off his capital and income as to attract upon himself the least amount of tax is fully recognized. The law does not oblige a trader to make the maximum profit that he can out of his trading transactions. The legal right of a tax payer to decrease the amount of what otherwise would be his taxes, or altogether to avoid them, by means which the law permits, cannot be doubted. The basic proposition underlining this taxation law is that any tax payer is entitled so as to order his affairs in such a manner as to see that his liability to tax is as low as possible. If the tax payer is in a position to carry through a transaction in two alternative ways, one of which will result in a liability to tax and the other of which will not, is at liberty to choose the latter and to do so effectively in the absence of any specific tax avoidance provision. The fact that the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides. Every person is entitled to so arrange his affairs as to avoid taxation. but the arrangement should be real and genuine and not a....
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.... regard reliance may be placed on a Full Bench judgment of this Court rendered in the case of State of Punjab vs. Teja Singh (1971) 78 PLR 433 (P&H)(FB). Speaking for the Bench, Hon'ble Mr. Justice S.S. Sandhawalia observed as under : "Now it is trite learning to say that when an earlier judgment of the Supreme Court is analysed and considered by a latter Bench of that Court then the view taken by the latter as to the true ratio of the earlier case is authoritative. In any case latter view is binding on the High Courts. ......" Likewise, reliance may be placed on another Full Bench judgment of this Court in Daulat Ram Trilok Nath vs. State of Punjab AIR 1976 P&H 304. In para 16, speaking for the Full Bench, Hon'ble Mr. Justice S.S. Sandhawalia held that "the construction which the Supreme Court itself places on an earlier precedent is obviously binding and authoritative .......". The aforesaid view has also been followed by another Full Bench of this Court in the case of Subhash Chander Kamlesh Kumar vs. State of Punjab (1990-2) 98 PLR 666 (P&H)(FB). In that case the Full Bench was considering the ratio of the judgment rendered by....
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....) vide Finance Act, 2001 w.e.f. 1st April, 2002. With regard to such cases we may state that on facts it is established that there was a "sale". The sale-price was received by the assessee. That, the assessee did receive dividend. The fact that the dividend received was tax-free is the position recognized under s. 10(33) of the Act. The assessee had made use of the said provision of the Act. That such use cannot be called "abuse of law". Even assuming that the transaction was pre-planned there is nothing to impeach the genuineness of the transaction. With regard to the ruling in McDowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC), it may be stated that in the later decision of this Court in Union of India vs. Azadi Bachao Andolan & Anr. (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) it has been held that a citizen is free to carry on its business within the four corners of the law. That, mere tax planning, without any motive to evade taxes through colourable devices is not frowned upon even by the judgment of this Court in McDowell & Co. Ltd.'s case (supra)......" It was submitted that in the light of the later decisions on the issue, it is no longer op....
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.... in the shares held by them in NCCPL as capital contribution of the firm BVRE. (c) On 29.3.2006 a MOU was signed between GBFL (which wanted to buy the entire paid up capital of NCCPL) and V.Vikram Reddy who represented the 16 shareholders of NCCPL and who belonged to the Reddy family, whereby it was agreed that the entire paid up share capital of NCCPL would be sold to GBFL for a consideration of Rs.270 Crores. The MOU (Clause-2.2) specifically provides that the parties shall endeavor to structure the Transaction in such a manner as to be mutually beneficial. (d) On 5.5.2006 the NCSPL by way of succession took over the business and firm BVRE lock, stock and barrel. Thus they became owners of the shares of NCCPL held by the 13 partners of BVRE which had become the property of the firm on being brought in by the partners as their capital contribution to the firm BVRE. (e) On 10.6.2006 NCSPL sold the shares to GBFL. According to him the MOU dated 29.3.2006 reflects the real intention of the parties. He pointed out that the MOU was signed by Vikram Reddy as representing the 16 persons who held the entire paid up capital of NCCPL. The names of ....
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....ble Supreme Court in the case of Sunil Siddharthbhai Vs. CIT 156 ITR 509 (SC). The question in the aforesaid case which related to AY 73-74, was as to whether when a partner introduces capital asset belonging to him as his capital contribution to a firm is there a transfer giving raise to incidence of tax on capital gain on transfer of a capital asset. The Hon'ble Supreme Court held that there was a transfer in such an event but the value recorded in the books as value of capital brought in by the partner was only notional and therefore not full value of consideration received on transfer u/s.48. Since the full value of consideration could not be determined it was held that the computation provision viz., Sec.48 fails and therefore the charge to tax also fails. The learned Senior Advocate for the revenue drew our attention to the following observations of the Hon'ble Supreme Court in the penultimate paragraphs: "20. We have decided these appeals on the assumption that the partnership firm in question is a genuine firm and not the result of a sham or unreal transaction, and that the transfer by the partner of his personal asset to the partnership firm represents a genu....
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....d by the partners should be brought in as capital of the firm. There was no business exigency established/shown which necessitated brining in shares of NCCPL as capital contribution by the partners. It was also pointed out that on 5.5.2006 (within a period of just 42 days) the firm was taken over by NCSPL and thereafter on 10.6.2006 the shares of NCCPL were sold by NCSPL to GBFL. According to him all the circumstances referred to above would only go to show that the revenue authorities were right in coming to the conclusion that in reality during the previous year relevant to AY 07-08, shares were in fact sold by the 13 partners of the firm BVRE to GBFL and that all the intermediary steps are nothing but a device or ruse to avoid payment of legitimate tax on capital gain on transfer of shares of NCCPL. 69. It was next submitted by the learned Senior Advocate for the Revenue that the decision of the Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra) will not be of any assistance to the plea of the revenue. In this regard he drew our attention to page 759 para 3 last 6 lines of ITR Volume 263 wherein the Hon'ble Supreme Court explained it's conclusions on Mc.Dowells c....
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....oss profits of the principal company for whatever purpose. An obvious purpose that is served and which stares one in the face is to reduce the amount to be paid by way of bonus to workmen. It is such an obvious device that no further evidence, direct or circumstantial, is necessary........." It was thus contended that in the present case, the facts speak for themselves and the device employed by the Assessees should be held to be a smoke-screen and the real transaction was sale of shares by the 13 partners of BVRE to GBFL. 71. The learned Senior Advocate for the revenue placed reliance on the decision of the House of Lords in the case of Revenue and Customs Commissioners Vs. Total Network SL (2008) 2 All ER 413. It was a case where by a tax avoidance scheme taxes lawfully payable to the state were avoided by employing missing traders as intermediaries. The Revenue and Customs Commissioners proceeded to institute civil suit for damages against one of the available conspirator liable for the value added tax which was avoided, alleging that he was liable to be proceeded against the tort of conspiracy where the unlawful means alleged was the common law offence of cheating the public ....
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.... page 289 third paragraph): ".... For years a battle of maneuver has been waged between the legislature and those who are minded to throw the burden of taxation off their own shoulders on to those of their fellow subjects. In that battle the legislature has often been worsted by the skill, determination and resourcefulness of its opponents, of whom the present appellant has not been the least successful. It would not shock us in the least to find that the legislature has determined to put an end to the struggle by imposing the severest of penalties. It scarcely lies in the mouth of the taxpayer who plays with fire to complain of burnt fingers. ...... 76. Our attention was also drawn to the following observations in the decision of the Hon'ble Supreme Court in the case of Keshavji Ravji and Co. Vs. CIT 183 ITR 1 (SC) : "Artificial and unduly latitudinarian rules of construction, which with their general tendency to "give the taxpayer the breaks", are out of place where the legislation has a fiscal mission. Indeed, taxation has ceased to be regarded as an "impertinent intrusion into the sacred rights of private property" and it is now increasingly regarde....
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....ent." 78. In his rejoinder the learned counsel for the Assessee submitted that the decision of the Hon'ble Supreme Court in the case of Sunil Siddharthbai (supra) has now been superseded by a statutory amendment and therefore those observations are no longer relevant. It was pointed out that the Assessees have offered to tax capital gain u/s.45(3) of the Act, on introduction of the shares of NCCPL as capital contribution to the firm BVRE in AY 06-07 and the revenue has accepted the same. It was therefore submitted that those observations are not of any help to the revenue in the present case. It was reiterated that all steps taken by the Assessee were legal, real and genuine, may be with the ultimate result of a lesser tax burden, but that cannot be a ground to regard the transactions as either colourable, dubious device to avoid tax or subterfuge. The series of transactions cannot also be said to be sham. Finally it was submitted that the revenues apprehension of tax avoidance are all without any basis in view of the amendment to the law by the Finance Act. 2012. The amendment to the law and its effect on the tax liability in the hands of NCSPL/BVREPL has been set out in paragrap....
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....en to pay the taxes without resorting to subterfuges. The above observations should be read with para 46 where the majority holds "on this aspect one of us, Chinnappa Reddy, J. has proposed a separate opinion with which we agree". The words "this aspect" express the majority's agreement with the judgment of Reddy, J. only in relation to tax evasion through the use of colourable devices and by resorting to dubious methods and subterfuges. Thus, it cannot be said that all tax planning is illegal/illegitimate/impermissible. Moreover, Reddy, J. himself says that he agrees with the majority. In the judgment of Reddy, J. there are repeated references to schemes and devices in contradistinction to "legitimate avoidance of tax liability" (paras 7-10, 17 and 18). In our view, although Chinnappa Reddy, J. makes a number of observations regarding the need to depart from the "Westminster" and tax avoidance these are clearly only in the context of artificial and colourable devices. Reading McDowell (supra), in the manner indicated hereinabove, in cases of treaty shopping and/or tax avoidance, there is no conflict between McDowell (supra) and Azadi Bachao (supra) or between McDowell (supra) and ....
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....; 113. Justice Reddy has depreciated the practice of setting up of tax avoidance projects, in our view, rightly because the same is/was the situation in England and Ramsay and other judgments had depreciated the tax avoidance schemes. 114. In our view, the ratio of the judgment is what is spoken by Justice Mishra for himself and on behalf of three other judges, on which Justice Reddy has agreed. Justice Reddy has clearly stated that he is only supplementing what Justice Mishra has said on tax avoidance. 115. Justice Reddy has endorsed the view of Lord Roskill that the ghost of Westminster had been exorcised in England and that one should not allow its head rear over India. If one scans through the various judgments of the House of Lords in England, which we have already done, one thing is clear that it has been a cornerstone of law, that a tax payer is enabled to arrange his affairs so as to reduce the liability of tax and the fact that the motive for a transaction is to avoid tax does not invalidate it unless a particular enactment so provides (Westminster principle). Needless to say if the arrangement is to be effective, it is essential that the ....
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.... which the professed intention and the intention gathered from the documentation are the same must be considered to be genuine. 81. We shall now turn to the facts of the present case to see if the proposed intention and the intention gathered from the documentation are the same. For this purpose, we need to confine ourselves only to the first set of transactions by which the shares of NCCPL held by the 13 partners of the firm BVRE in their names were transferred to the firm BVRE. On this aspect we have already narrated the facts in paragraphs 16 to 23 of this order and are not being repeated again. Suffice it to say that there was a valid transfer of shares of NCCPL by the 13 individuals to the firm BVRE. The law is well settled whatever is brought in by the partners as capital contribution or treated as property of the firm becomes the property of the firm. The evidence on record clearly indicate that there was a transfer of ownership in shares from the 13 individuals in favour of the firm BVRE as on 24.3.2006 when the firm made the necessary book entries and when the partners made their intentions clear that the shares were to be treated as the property of the Firm in the form o....
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....nior Advocate for the revenue on the fact that the MOU dated 29.3.2006 depicts the true intention of the parties and that ultimately it was that intention which in a different form was put through in the form of a share purchase agreement dated 10.6.2006. It was his submission that all other steps taken, before the shares of NCCPL were ultimately transferred to GBFL, are all steps taken with a view to avoid payment of legitimate tax on the correct quantum of capital gain and therefore deserve to be ignored. He also highlighted the quick span of time within which the various transactions had been carried out and argued that the intention was to avoid payment of tax on the correct quantum of capital gain on sale of shares of NCCPL to GBFL. As far as the MOU dated 29.3.2006 is concerned it may be true that it has all ingredients of a valid agreement and the bargain between the parties as contained in this agreement was ultimately reflected in the share purchase agreement dated 10.6.2006. The MOU gives the particulars of the shareholders as on 1.3.2006. As early as 24.3.2006 the shares of NCCPL held by the 13 partners were already transferred to the firm BVRE as capital contribution of....
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....e revenue cannot bring to tax the quantum of capital gain which would have resulted, had the transactions of sale of shares of NCCPL to GBFL being carried out by the assessees directly to GBFL instead of through NCSPL/BVREPL. We hold accordingly on issue No.6 and 7. The other decisions referred to by the learned Senior Advocate for the revenue are not being adverted to as the decision of the Hon'ble Supreme Court in the case of Vodafone (supra) is the law on the subject, which has been the basis for our conclusions as above. The conclusion on the common issue that arises for consideration in these appeals by the Assessees is that the order of the revenue authorities bringing to tax capital gain on sale of shares of NCCPL to Godrej by NCSPL in the hands of the Assessees cannot be sustained and the addition made by the revenue authorities in the case of the Assessees is directed to be deleted. The relevant grounds of appeal of the Assessees in their appeals are allowed. 85. Now we will take up for consideration the other issues in the respective appeals of the assessee. ITA No.149/Bang/2011 - B. Madhusudan Reddy (HUF) AY 2007-08 86. The assessee has filed concise grounds of appeal....
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....rom a perusal of the order of the AO, it transpires that he has not invoked any specific provision of law for making the impugned addition. The CIT(A) has, however, sustained the addition by resorting to the provisions of section 41(1) of the Act. For invoking the aforesaid provisions, there should be a benefit to the assessee by way of remission or cessation of liability. There is no evidence on record to show that the assessee had received any such benefit by way of remission or cessation of liability. An addition u/s. 41(1) cannot be made on presumptions and assumptions. The fact remains that the assessee continues to recognize the outstanding balances as its liability. Unless there is evidence to show that the provisions of section 41(1) are attracted, the addition made cannot be sustained. We accordingly direct that the addition sustained by the CIT(A) deserves to be deleted and accordingly the same is hereby deleted. Ground No.21 is accordingly allowed. 93. Concise ground No.21 raised by the assessee reads as follows:- "The addition in a sum of Rs.4,25,577/- with respect to the appellants dealing with M/s. Adani Exports who had raised a debit note on the appell....
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.... books of accounts was received by the assessee only during the previous year. In such circumstances, we are of the view that the conclusions drawn by the revenue authorities do not call for any interference. Consequently, ground No. 21 is dismissed. 97. In the result, ITA 149/Bang/2011 is partly allowed. ITA No.150/Bang/2012 - Smt. V. Soumini Reddy AY 2007-08 98. The assessee in this appeal is an individual. She carries on the business of money lending, besides income from other sources. The assessee has filed concise grounds of appeal. Ground Nos. 1 to 19 raised by the assessee is with regard to the common issue i.e., capital gains on sale of shares of NCCPL by NCSPL to GBFL. This issue has already been decided in the earlier paragraphs. For the reasons stated therein, these grounds are allowed. 99. Concise ground No.20 raised by the assessee reads as follows:- "There was no ground for disallowance of loss of Rs.1,81,235/- in money-lending business on the ground that no evidence was produced as there was no enquiry made even during the making of the remand report." 100. The assessee claimed that she had incurred a loss of Rs.1,81,235 from money lending business....
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....aim of the assessee. We find that this was not the case of the AO in the order of assessment. However, we also do not find any evidence filed by the assessee to show that the interest income was from the business of money lending, which business, according to the assessee, was carried on by the assessee in the past and also in the subsequent assessment years. We therefore set aside the order of the CIT(A) and remand the issue to the AO for fresh consideration with liberty to the assessee to substantiate her case that interest income in question was from the business of money lending. 105. Concise ground No.21 raised by the assessee reads as follows:- "21) The sum of Rs. 1,77,778/- was merely advance towards share purchase which never materalised and merely because it was outstanding for a long time, under no provision of law could it have been treated as income for the current assessment year. 106. This ground is identical to ground No.21 in ITA No.149/Bang/2011, the only difference being that the outstanding amount shown in the balance sheet of the assessee was sum due and payable to M/s. Nestle India Pvt. Ltd. as advance for purchase of shares of NCCPL held by the....
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.... AO therefore did not accept the plea of the assessee. The CIT(A) confirmed the order of the AO. 111. Before us, the same plea as was put forth before the revenue authorities was reiterated. 112. We are of the view that in the light of the admitted position that the assessee could not substantiate his plea that the amount shown as loan in his account in the books of the company was reimbursement of the loan given on behalf of the company to two persons, the addition deserved to be sustained. Accordingly ground No.17 raised by the assessee is dismissed. 113. Ground No.18 raised by the reads as follows:- "The disallowance of Rs.1,48,78,299/- is unwarranted by law as the assessee was carrying on money lending business and it is not shown that any part of the borrowed amount interest on which is the subject matter of disallowance was lent for non-business purposes or diverted as such." 114. During the previous year, the assessee had shown receipt of interest of Rs.1,97,969 under the head 'income from other sources'. The interest had been received from two debtors viz., Shri Vasudevan and Hamsa Mineral Exports. Against the aforesaid income, the assessee claimed expense....
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....e the CIT(A), the assessee submitted that he had invested a sum of Rs.59,74,31,660 and the borrowed funds had been used for the said purpose. Since the loans were used for the purpose of earning income, no disallowance of interest could be made. The assessee also placed reliance on the decision of the Hon'ble Supreme Court in the case of CIT v. S.A. Builders 288 ITR 1 (SC). 117. The CIT(A) did not agree with the submissions of the assessee and he held as follows:- "12.2 I have gone through the above. M/s. S.A. Builders' case had in fact been set aside to the High Court to verify the veracity of the new evidence provided by the respondent M/s. S.A. Builders to justify that the amount given as interest free loan to its sister concern M/s. SAB was entirely from its own funds and not a pie from any borrowed funds on which interest had been paid. This is not the case here at all. Admittedly loan had been borrowed from Bank on which interest had been paid and such borrowed funds had been diverted to some persons as loan on which interest has not been charged. Hence facts differ. However, obiter dicta of the Apex Court is also binding. In the obiter dicta of the S.A. Builde....
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....terms of section 57(iii) of the Act, it is only expenses laid out or expended wholly or exclusively for the purpose of earning or making income declared under the head income from other sources, that can be allowed as a deduction. We are therefore of the view that the disallowance made by revenue authorities was justified and calls for no interference. Consequently ground No.18 raised by the assessee is dismissed. 120. Ground No.19 raised by the assessee is with regard to charging of interest u/s. 234A of the Act. The charging of interest is consequential and the AO is directed to give consequential relief. 121. In the result, ITA No.158 is partly allowed. ITA No.159/Bang/2011 - V. Vikram Reddy (HUF) 122. The assessee is a HUF. The assessee has filed concise grounds of appeal. Ground Nos. 1 to 16 raised by the assessee is with regard to the common issue i.e., capital gains on sale of shares of NCCPL by NCSPL to GBFL. This issue has already been decided in the earlier paragraphs. For the reasons stated therein, these grounds are allowed. 123. Ground No.17 raised by the assessee is with regard to charging of interest u/s. 234A of the Act. The charging of interest is consequentia....