TaxTMI 
TaxTMI 
2013 (11) TMI 1312
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....re certain issues in the assessment of each of 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 mino....
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....hip firm was entered into. This Deed of re-constitution was only for 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 part....
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....ddy(HUF) 1,22,089 2. V.Vikram Reddy (HUF) 42,394 3. V.Shobha Reddy(Indl.) (On her marriage to T.N.Vijayanarayana Reddy She is referred to as 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....
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....d company has to file the same with the registrar of companies concerned. 18. On 22.3.2006, the 13 partners of the firm BVRE in a meeting held at the office of the firm at Chittoor, Andhra Pradesh, resolved that one of the partner viz., Mr.V.Madhusudan Reddy, be recognized as registered owner of the shares of NCCPL held by them (which were brought in by them as their capital contribution 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.....
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.... the agreement by Shri V.Vikram Reddy, for and on behalf of the Reddy family, as sellers and party of the second part, agreed with GBFL to sell all the shares held by the Reddy family in NCCPL. NCCPL represented by Mr.Vikram Reddy was also a confirming party to this agreement and described as party of the third part. Annexure-I to this Memorandum of Understanding gives the names of 16 persons referred 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....
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....m immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of succession; (c) the partners of the firm do not receive any consideration or benefit directly or indirectly, in any form or manner, other than by way of allotment of shares in the company; and (d) the aggregate of the shareholding in the company 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 pur....
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....ng Term Capital gain Rs.47,99,46,220 Rs.12,07,61,484 Less: Long term Capital Gain already offered Tax in AY 06-07by the Assessee Rs.6,30,73,160 Rs.1,35,86,518 Long term capital gain assessed in AY 07-08 Rs.41,68,73,060 Rs.10,71,74,966 29. In the assessment of V.Vikram Reddy (Individual) and V.Vikram Reddy (HUF), for AY 07-08, the AO held that direct sale of shares by the shareholders to Godrej would have resulted in huge long 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....
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....ause in the course of assessment, the Assessees were not able to show the details of transport receipts or interest receipts of the firm BVRE which was claimed to be its source of income. He also held that as per the deed of partnership dated 24.3.2006 there was no clause which required that the partners should contribute the shares held by them in NCCPL as their capital contribution to the firm BVRE. He also held that the reconstituted firm BVRE was illegal and non-est for the following reasons: 1. According to the CIT(A), the HUF of V.Vikram Reddy was a partner 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 dec....
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....kram Reddy (b) Smt.Nithya Reddy (Wife) (c) Binduvasini(Daughter) (d) Bhanyatini(Daughter) 3. Sri.V.Madhusudan Reddy (HUF) (a)Sri.V.Madhusudan Reddy (b)Smt.Soumini Reddy (Wife) (c)Nachiketa(Son) 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 ....
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....assessment of the respective partners for AY 06-07. (ii) The transaction of take-over of the business of the firm BVRE by the company NCSPL was held to not chargeable to capital gains tax as all conditions prescribed u/s.47(xiii) of the Act had been satisfied. (iii) It was also held that for AY 07-08 capital gain or loss on sale of shares of NCCPL to GBFL, had to be computed in the assessment of NCSPL/BVREPL by adopting the cost of acquisition at Rs.270,07,53,000/-. The Assessee thus argued that for AY 07-08, there could be no assessment of any capital gain in the hands of the Assessees as has been 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....
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....impugned order it is evident that the learned Commissioner did not apply his mind independently, but merely followed the decision of the learned Commissioner of Income Tax (Appeals)-I dated 28.01.2011 in the case of Shri Vikram Reddy. (4) When the firm had been treated as valid and genuine in the earlier years, on the same facts situation the principle of res judicata in a limited sense will apply. (5) Without prejudice, the firm BVRE was genuine and valid in all respects during the year ending 31st March 2006. (6) The firm had been treated as genuine and valid by the Assessing Officer at Tirupathi for all 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....
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....affect the validity of transfer to the firm in any way. (16) It should have been appreciated that the memorandum between the members of the Reddy Group and Godrej only reflects the position as per the desire of the members to transfer the shares in NCCPL to Godrej as on 01.03.2006 and nothing more and did not affect the manner in which the transaction was ultimately put through." 38. We have heard the elaborate submissions of Mr.Ashok Kulkarni, Advocate for the appellants/Assessees and Mr.Indra Kumar, Senior Advocate for the Revenue. 39. Before we set out their rival contentions, we must make a reference to an important statutory amendment to the Act with 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 ass....
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....ns the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in clause (i) or clause (ii) or clause (iii) or clause (iv)] of this sub-section." The provisions of Sec.49(1)(iii)(e) makes a reference capital gain arising under any such transfer as is referred to in Clause (xiii) of Sec.47 of the Act and it lays down that when a transfer takes place in the above manner then the cost of acquisition of the assets shall be deemed to be the cost for which the previous owner of the property acquired it. This amendment by which the cost of acquisition of capital assets have to be reckoned for computing capital gain when a transfer of capital asset takes place in 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 cons....
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....of the shares of NCCPL brought in by the 13 partners as their share of capital contribution to the firm BVRE which value was recorded in the books of the firm BVRE at Rs.35,27,48,000 was enhanced to Rs.270,07,53,000. This was claimed to be for the reason that prior to sale of firm BVRE as a going concern to NCSPL, the shares of NCCPL held by the firm were valued by adopting their intrinsic value which was arrived at by adding the share capital, Reserves and Surplus of NCCPL and dividing the same by the paid up capital of NCCPL which was 6,71,823 shares. Prior to 5.5.2006 the date on which NCSPL succeeded to the business of the firm BVRE, the capital account of the partners had been credited with the value of the shares as arrived 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. Tran....
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....CPL by NCSPL/BVREPL, would get taxed in the hands of NCSPL/BVREPL. The series of steps taken for transfer of shares of NCCPL to GBFL, assuming to be legal, will not confer any benefits in terms of paying taxes on a lesser sum of capital gain, because of the aforesaid statutory amendment. In the assessment of the Assessees in these appeals, the entire approach of the revenue has been only on the aspect of the various steps taken before the shares held by individuals ultimately got transferred to GBFL being colorable device, having been adopted to avoid payment of tax on the correct quantum of capital gain. That concern of the revenue has now been addressed by a statutory amendment. We also notice that the Revenue has brought to tax the same capital gain in the hands of the Assessees as well as in 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 i....
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....he 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 to mitigate its tax burden and therefore can the series of transactions be ignored and can the revenue 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? 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....
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....of the documents filed before us cannot be disputed or doubted. We therefore consider it appropriate to take cognizance of these documents filed by the assessee at our instance and directions. 50. It is clear from the documents available before us that the firm BVRE has been accepted to be genuine by the revenue in the orders passed u/s. 185 of the Act for the AYs 1980-81 & 1984-85. In fact, for AY 2006-07, the firm BVRE has filed return of income before the ACIT-I(1), Tirupathi on 30.10.2006. The said return has been accepted by the revenue. Thus, prima facie, the revenue has accepted the genuineness and existence of the firm BVRE. The revenue cannot now say that the firm BVRE is not genuine or that it was defunct firm. In any event, the AO while assessing the assessees for AY 2007-08 has no jurisdiction to render a finding 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 acc....
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.... to become a partner as such in the firm. It was argued that the conclusions of the revenue authorities that since HUF was a partner, the existence of the partnership firm is not valid, cannot be accepted. Our attention was drawn to the decision of the Hon'ble Supreme Court in the case of Ram Laxman Sugar Mills Vs. Commissioner Of Income Tax & Anr. 66 ITR 613 (SC) wherein the Hon'ble Supreme Court had an occasion to examine the question as to how one has to ascertain the intention of a person who is shown as a partner in the partnership deed, that he represents a HUF. The Hon'ble Supreme Court held as follows:- "An HUF is undoubtedly a "person" within the meaning of the Indian IT Act: It is, however, not a juristic person for all purposes, and cannot enter into an agreement of partnership with either another undivided 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 partners....
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....ting 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." 53. It was submitted that the above partners as and when they were acting in their capacity as Member/Kartha of HUF, had filed returns of income, in which the share income from the firm has been shown as the income of the HUF. Thus vis-à-vis the firm they acted in their individual capacity and vis-à-vis the HUF they were acting in their representative capacity on behalf of the HUF. It was pointed out that the Revenue has accepted such returns so filed by the HUF. It was submitted that the revenue cannot now turn around and say that HUF was partner 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 consider....
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....ady been given in para-3 to 15 of this order. A partner may be the Karta of a Joint Hindu family, he may be a trustee, he may be a representative of a group of persons, he may be a benamidar for another. In all such cases he occupies a dual position; qua the partnership, he functions in his personal capacity; qua the third parties, in his representative capacity; third parties, whom one of the partners represents, cannot enforce their rights against the other partners, nor can the other partners do so against the said third parties. Their right is only to a share in the profits of their partners who (qua them) was representative. It is thus clear that HUF was never partner in the firm BVRE and the conclusions to the contrary by the CIT(A) cannot be sustained. Thus it is held on issue No.(2) that HUF was not partner of the firm BVRE and 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 ....
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.... the firm is concerned but as between them and the members of the HUF of which they were representing, they were acting as partners in their representative capacity on behalf of the HUF. Out of the aforesaid four persons, three partners viz., V.Dwarakanath Reddy, V.Vikram Reddy and V.Madhusudan Reddy were representing in their individual capacity also. The three persons have thus signed the deed of partnership in dual capacity. Thus they were to be reckoned as 7 partners (4 HUFs and 3 individuals) for the purpose of applying the provisions of Sec.11 of the Companies Act, 1956. It was argued that Sec.11(2) of the Companies Act, 1956 uses the expression "Person" and not "Partners" and therefore when V.Dwarakanath Reddy, V.Vikram Reddy and V.Madhusudan Reddy sign the partnership deed in their capacity as representing HUF and when they sign the partnership deed in their individual capacity, 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....
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....the firm cannot be denied registration on the ground that there are more than 20 partners if the members of the families are included. 58. Alternatively, it was submitted that out of the names of members given by the CIT(A) in his order, minors have to be excluded for the purpose of computing number of persons u/s.11(2) of the Companies Act, 1956. The expression used in Sec.11(3) of the Companies Act, 1956 is "member of a joint family" and not "co-parceners of joint family" and therefore all the members- male and female, other than minors have alone to be reckoned. It was pointed out that Keerthana, Nachiketha and Tarun were minors and they are to be excluded. If done so, the number of persons vis-à-vis the 4 HUFs would be 12 (15 - 3). Since Sec.11(2) of the Companies Act, 1956 uses the expression "Person", the number of persons who have signed the partnership deed in two 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 ....
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....of NCCPL held by the Assessees in favour of the firm BVRE during the previous year relevant to AY 06-07? The factual details in this regard as narrated in para-15 to 23 of this order are not disputed by the revenue. On those admitted facts it has to be held that there was a valid transfer of shares of NCCPL held by the Assessees in favour of the firm BVRE during the previous year relevant to AY 06-07. We should also add that the shares are registered in the name of Madhusudan Reddy in the share register of the company NCCPL though the shares belong to the firm BVRE. This is because a firm cannot hold shares in a company and cannot be shown as a registered share holder because firm has no legal existence and is a mere compendious name to describe its partners. The declaration u/s.187-C of the Companies Act, 1956 clearly shows that the beneficial owner of the shares standing in the name of 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 reite....
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....s the entire share capital of NCCPL viz., 6,71,823 equity shares. The 13 partners of the firm holding 6,65,325 equity shares had already transferred their share holding to the firm BVRE. BVRE was taken over as a going concern by NCSPL and thus NCSPL was the seller of shares of 6,625,325 in the share purchase agreement dated 10.6.2006 and has been described as seller No.1 in the said agreement. The three other persons listed at Sl.No.14 to 16 are described in Par-A of Annexure-I to the share purchase agreement dated 10.6.2006. They are described as other sellers. Seller No.1 and Other sellers are together described as "Sellers" under the share purchase agreement dated 10.6.2006. The 13 partners of the firm BVRE are described in the share purchase agreement dated 10.6.2006 as confirming party and are shown in Part-B of Annexure-I to the share purchase agreement dated 10.6.2006. Clause-3 of the Agreement which refers to the transfer of shares, makes a reference to sale of shares by the sellers to the 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 ....
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....&H) and the Hon'ble Karnataka High Court in the case of State of Karnataka Vs. M/S.Videocon International Ltd. STRP No.4 of 2000 dated 14.7.2010. It was his submission that the Hon'ble High Courts have explained the decisions of the Hon'ble Supreme Court on the aspect of tax avoidance/tax planning in the aforesaid decisions. Our attention was drawn to the following passage from the decision of the Hon'ble Karnataka High Court in the case of M/S. Videocon International Ltd. (supra). "It is now well settled that a citizen is entitled to arrange his affairs as not to attract taxes imposed by the State, so far he can do so within the law. Every man is entitled to order his affairs in such a manner that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure the said result, his ingenuity is to be respected and he cannot be compelled to pay an increased tax. He may legitimately claim the advantage of any express terms or of any 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 ful....
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....ble Punjab & Haryana High Court has held that even though the decision of the Hon'ble Supreme Court in the case of Mc.Dowell (supra) was of a larger, yet the decision of smaller Bench of the Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra) explaining the decision in the case of Mc.Dowell (supra) is binding. The following relevant observations of the Hon'ble Punjab & Haryana High Court in this regard, were brought to our notice: "20. The argument of the learned counsel for the Revenue respondent based on the judgment rendered in the case of McDowell & Co. Ltd. (supra) cannot be accepted because the judgment rendered by Hon'ble Mr. Justice O. Chinnappa Reddy in McDowell's case (supra) has been explained in detail by the later judgment of Hon'ble the Supreme Court in the case of Azadi Bachao Andolan (supra). It is well-settled that if a smaller Bench of Hon'ble the Supreme Court has later on explained its earlier Larger Bench then the later judgment is binding on the High Court. In that 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 th....
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....ced by the Revenue respondent. Accordingly, the second question is also answered against the Revenue respondent and in favour of the assessee-appellant." 66. The learned Counsel for the Assessee drew our attention to the following passage from the decision of the Hon'ble Supreme Court in the case of Walfort Share & Stock Brokers (P) Ltd. (supra): "20. The real objection of the Department appears to be that the assessee is getting tax-free dividend; that at the same time it is claiming loss on the sale of the units; that the assessee had purposely and in a planned manner entered into a pre-meditated transaction of buying and selling units yielding exempted dividends with full knowledge about the fall in the NAV after the record date and the payment of tax-free dividend and, therefore, loss on sale was not genuine. We find no merit in the above argument of the Department. At the outset, we may state that we have two sets of cases before us. The lead matter covers assessment years before insertion of s. 94(7) 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 w....
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....authorities that capital gain is chargeable to tax in the hands of the Assessees proportionate to their share-holding in NCCPL, is correct. In this regard he drew our attention to the sequence of events by which the shares which stood in the name of 13 partners of the firm BVRE were ultimately transferred to GBFL. The sequence of events has been narrated in earlier part of this order and is not being repeated. By way of recapitulation, we give briefly the broader sequence of events. (a) 13 persons held collectively held 6,65,325 equity shares of a company by name NCCPL, out of the total paid up capital was 6,71,823 equity shares. The remaining shares of NCCPL were held by Mr.V.Dinesh Reddy (Indl.) 375 shares, Ms.Binduvasini 5,760 shares, S.Vasudevan 363 shares. Out of the 13 persons 6 persons were already partners in a firm BVRE which came into existence as early as in the year 1971. The remaining 7 persons were admitted as partners of the firm BVRE on 24.3.2006. (b) On the very same day they brought 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 want....
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....ontribution of the firm. He drew our attention to the statement of Mr.V.Vikram Reddy recorded on 31.10.2008 by the DCIT, C-1(1), Bangalore, the AO of V.Vikram Reddy and V.Vikram Reddy(HUF) in the course of assessment proceedings wherein he has in answer to Q.No.5 whether there was transaction in respect of shares in NCCPL prior to the transaction with Godrej group, he had stated "whatever the shares we are holding in NCCPL were directly transferred to Godrej group during the year 2006-07". According to him these circumstances clearly go to show that it was the individuals who wanted to sell the shares held by them in NCCPL to GBFL. The intermediary transactions of the shares becoming property of the firm BVRE, BVRE being taken over as a going concern by NCSPL and thereafter selling the shares to GBFL are all transactions with no legal sanctity and done purely as an afterthought to avoid payment of legitimate taxes due on sale of shares of NCCPL. 68. The learned Senior Advocate for the revenue drew our attention to the decision of the Hon'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, wa....
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....l business or the record shows that there was no real need for the partnership firm for such capital contribution from the assessee. All these and other pertinent considerations may be taken into regard when the ITO enters upon a scrutiny of the transaction, for, in the task of determining whether a transaction is a sham or illusory transaction or a device or ruse he is entitled to penetrate the veil covering it and ascertain the truth." (emphasis laid) It was his submission that in the present case there was no necessity to bring in the shares of NCCPL as capital of the firm BVRE. The transfer of the personal asset of the 13 individuals viz., shares which they held in NCCPL was nothing but a device or ruse to convert the personal asset into money substantially for the benefit of the Assessee while evading tax on capital gain. In this regard, he pointed out that the capital of the partnership under the deed dated 24.3.2006 was Rs.10,000/- by each partner and there was no clause in the partnership deed which states that the shares of NCCPL held by the partners should be brought in as capital of the firm. There was no business exigency established/shown which necessitated brining ....
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....able profits for payment of bonus stood reduced. The Hon'ble Court after referring to the decision in the case Mc.Dowell(supra) held that it was the duty of Courts in every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke-screen and discover the true state of affairs. On the question of evidence necessary to conclude that a particular course of action was a device to avoid tax or welfare legislation the Hon'ble Court, made the following observations: "If we now look at the facts of the case, what do we find? A new company is created wholly owned by the principal company, with no assets of its own except those transferred to it by the principal company, with no business or income of its own except receiving dividends from shares transferred to it by the principal company and serving no purpose whatsoever except to reduce the gross profits of the principal company. These facts speak for themselves. There cannot be direct evidence that the second company was formed as a device to reduce the gross profits of the principal company for whatever purpose. An obvious purpose that is served and which stares one in the face is ....
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.... liable to tax. The Assessees instead of issuing tickets, issued invitation cards based on which entry for the programme was permitted. The Hon'ble Supreme Court upheld the levy of tax holding that the Assessee used a device to evade payment of entertainment duty. 74. Reference was made to the decision of the Hon'ble Supreme Court in the case of Vodafone International Holdings B.V. Vs. UOI 341 ITR 1 (SC) wherein the Hon'ble Supreme Court has reiterated the position that artificial and colourable devices for avoiding tax cannot be resorted to. Our attention was drawn to page-36 of 341 ITR last paragraph where the Hon'ble Court has explained that if the revenue establishes that a transaction is a sham or tax avoidant then it can ignore the transaction. 75. The learned Senior Advocate for the Revenue drew our attention to the following observations from the decision of the Court of Appeals in the case of Howard De Walden (Lord) Vs. Inland Revenue Commissioners (1942) All ELR Annotated Vol-I page 287 wherein the Court of appeals in a case involving tax planning (at page 289 third paragraph): ".... For years a battle of maneuver has been waged between the legislatu....
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....de of a case (or a negotiation) is, the greater will be the value to the opposing party of having a good lawyer on his side. Since better quality of lawyers may conduce to better quality of decisions, quality completion among lawyers is not a zero-sum game. If cartelization results in higher-quality lawyers who produce higher-quality briefs, judge's decisions will tend to be of higher quality and this will confer benefits on the community as a whole-maybe. "Quality" is an elusive concept when one is speaking of legal services. Highly intelligent lawyers may create intricate doctrinal structures that, while ingenious, even in a sense rigorous, have no social utility. For example, brilliant lawyers create, discover, and enlarge tax loopholes. This activity is purely redistributive; there is no social gain. In fact there is a net social loss, not only because lawyer's time has an opportunity cost but also because their beayer-like activities require more carefully drafted and complex tax codes. Social welfare might increase if the IQs of all tax lawyers could be reduced by 10 per cent." 78. In his rejoinder the learned counsel for the Assessee submitted that the decision of the Hon....
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....r principle is dead]. (ii) That, Azadi Bachao failed to read paras 41-45 and 46 of McDowell in entirety. If so read, the only conclusion one could draw is that four learned judges speaking through Misra, J. agreed with the observations of Chinnappa Reddy, J. as to how in certain circumstances tax avoidance should be brought within the tax net. (iii) That, subsequent to McDowell, another matter came before the Constitution Bench of five Judges in Mathuram Agrawal vs. State of Madhya Pradesh (1999) 8 SCC 667, in which Westminster principle was quoted which has not been noticed by Azadi Bachao. Our Analysis 58. .......... to 63...... 64. The majority judgment in McDowell (supra) held that "tax planning may be legitimate provided it is within the framework of law" (para 45). In the latter part of para 45, it held that "colourable device cannot be a part of tax planning and it is wrong to encourage the belief that it is honourable to avoid payment of tax by resorting to dubious methods". It is the obligation of every citizen to pay the taxes without resorting to subterfuges. The above observations should be ....
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.... Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purposes. Justice Reddy also opined that no one can get away with the tax avoidance project with the mere statement that there is nothing illegal about it. Justice Reddy has also opined that the ghost of Westminster (in the words of Lord Roskill) has been exorcised in England. In our view, what transpired in England is not the ratio of McDowell and cannot be and remains merely an opinion or view. 111. Confusion arose (see para 46 of the judgment) when Justice Mishra has stated after referring to the concept of tax planning as follows : "On this aspect, one of us Chinnappa Reddy, J. has proposed a separate and detailed opinion with which we agree." 112. Justice Reddy, we have already indicated, himself has stated that he is entirely agreeing with Justice Mishra and has only supplemented what Justice Mishra has stated on tax avoidance, therefore, we have to go by what Justice Mishra has spoken on tax avoidance. 113. Justice Reddy has depreciated the practice of sett....
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.... that all tax planning is not illegal/illegitimate/impermissible. It is only when colourable or dubious devices are employed or transactions are sham or when arrangements are a mere subterfuge, as part of tax planning can it be said that they are illegal, illegitimate, and impermissible. For ascertaining what the real intention of the parties was, it is permissible to "go behind" the documents. Generally one must proceed on the basis of the intention as expressed in the transaction or document. If that is challenged as not true on good grounds then the real intention can be looked into. If it is found that the arrangement is a make-believe affair, or a dubious device and the real intention was tax evasion then the arrangement need not be given effect to. In cases where transactions or arrangement are evidenced by written agreement/arrangement it is not possible to rewrite the agreement/arrangement. The right of the parties to enter into transactions according to their free will and choice has always been protected, the only rider being that both the professed intention and the real intention should be the same. Any transaction in which the professed intention and the intention gath....
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....t the corporate veil just for the asking. A case of defrauding the revenue has to be made out. The question is as to whether the course of action adopted by the Assessee was permissible or not. The answer to the question would be that there were two ways in which the shares of NCCPL held by the 13 partners of BVRE could have been transferred to GBFL. One way was that the 13 partners in their individual capacity could have transferred the shares of NCCPL held by them to GBFL at a price at which they were ultimately sold to GBFL through NCSPL. The other way was the manner in which the Assessees have transferred the shares through the medium of the firm BVRE. The latter course would certainly result in lesser tax burden to the Assessees but that is a course which the law permits. The Assessees have altered their legal rights under the various documents. It is not possible to ignore the legal effects of all the actions carried out by the Assessees and proceed on the basis that it is the Assessees who sold their share-holding in NCCPL to GBFL during the previous year relevant to AY 07-08. 83. Much emphasis has been laid by the Learned Senior Advocate for the revenue on the fact that ....
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....re was a lacuna in the law which has now been filled up by a retrospective statutory amendment to the provisions of law. That only shows that the course adopted by the Assessees was legally valid. Even the Assessee in the written submissions dated 2.1.2013 has accepted the position that in view of the retrospective statutory amendment there is no tax advantage at all. In that view of the matter, we are of the view that on issue No.6, we have to hold that the entire series of transactions by which the shares of NCCPL were ultimately transferred to GBFL were all valid. Even if it were to be considered that they 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, such a course was permitted and within the framework of law. On issue No.7, we have to hold that the series of transactions by which the shares of NCCPL were ultimately transferred to GBFL were not colourable or dubious device or subterfuge and were legal and valid. The consequence of the same, even if it results in reduction of tax burden, is that they cannot be ignored and the revenue cannot bring to tax the quantum of ....
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....s income of the assessee cannot be sustained. In particular, the assessee pointed out that out of the balances shown as outstanding in the balance sheet, a sum of Rs.7,37,101 was an advance received by the assessee for sale of shares of NCCPL to M/s. Nestle India Ltd. and since the shares were ultimately sold to GBFL, this sum was an outstanding liability payable to M/s. Nestle India Ltd. The CIT(A) however held that since no evidence was furnished, it was reasonable to presume that the liability of the assessee for repayment of all the outstanding debts has ceased and he therefore sustained the addition made by the AO. 90. Before us, the ld. counsel for the assessee submitted that the addition cannot be sustained because u/s. 41(1) of the Act, because there was no evidence to show that the assessee has received any benefit by way of remission of liability. In particular, it was submitted that as far as the outstanding payable to Nestle India Ltd. is concerned, the same was not claimed as deduction in the past and therefore, section 41(1) cannot apply. 91. The ld. DR relied on the order of the CIT(A). 92. We have considered the rival submissions. From a perusal of the orde....
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.... for the assessee submitted that it was in the business of supply of iron ore. During the earlier period, it had supplied iron ore to M/s. Adani Exports. The sale to Adani Exports was duly reflected in the books of account as per the mercantile system of accounting. During the previous year, Adani Exports claimed that there was shortage of supply of iron ore supplied by the assessee in the earlier period and therefore they were debiting the account of the assessee in their books of accounts by a sum of Rs.4,25,577. The assessee submitted that there was no debit note issued by Adani Exports as such and that the copy of the accounts of the assessee as appearing in the books of Adani Exports is the only evidence available. The assessee submitted that the copy of accounts was received by the assessee during the previous year and therefore the claim of the assessee ought to be allowed. 96. We have considered the submissions of the assessee. The claim of the assessee before us is not substantiated by any evidence. Even the copy of the account of the assessee as appearing in the books of Adani Exports has not been filed, nor the evidence to show that the copy of the said books of accou....
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.... the interest receipts were less during the previous year, interest expenses cannot be disallowed. It was also argued that the AO has not disputed that the borrowing on which interest was paid was not for the purpose of business of money lending. 103. The ld. DR relied on the order of the CIT(A). 104. We have considered the rival submissions. Perusal of the order of the AO shows that the AO did not dispute the incurring of the interest expenses in connection with funds that was borrowed for money lending business. He was of the view that because interest receipts were only from two persons, the assessee cannot be said to be engaged in the business of money lending and therefore the AO sought to bring to tax interest income under the head 'income from other sources'. The CIT(A) had called for a remand report from the AO on the submission of the assessee that the interest income from money lending business was less because of the reduced scale of business, whereas the old borrowings for the purpose of money lending business continued and therefore the interest expenses were incurred for the purpose of business of the assessee. The AO seems to have asked for evidence regarding t....
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....rcumstances of the case could not have been treated as deemed dividend u/s. 2(22)(e)." 110. The assessee was a director of a company by name Hamsa Minerals Pvt. Ltd. during the previous year relevant to A.Y. 2007-08. As per the account copy of the assessee in the books of the said company, a sum of Rs.1,70,029 had been availed of as a loan by the assessee from the aforesaid company. The assessee was holding 43.6% voting power in the company and the company had reserved some surplus as on 31.3.2007 of Rs.5.72 crores. In those circumstances, the AO invoking the provisions of section 2(22)(e) of the Act, treated the loan as a payment of dividend and brought the same to tax as income of the assessee. The assessee's stand before the AO was that he had advanced loans to third parties on behalf of the company and later the company reimbursed the same to the assessee and therefore there was no loan given by the company to the assessee. On the above plea by the assessee, the AO found that the two persons to whom the assessee claimed to have given loan on behalf of the company viz., Shri Hanuman Singhji Rana and Shri N. Chandrashekara Reddy were already reflected as loan debtors in the bo....
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....s. The assessee claimed that he had given a sum of Rs.7.22 crores and Rs.2,35,02,550 to Hamsa Minerals & Exports in which he was a partner and that this loan was given owing to commercial expediency. The AO on the above plea found that the assessee has received interest of only Rs.56,594 from Hamsa Mineral and Exports. The AO also found that the assessee on the one hand had advanced a sum of Rs.9,57,02,550 (7.22 crores + 2,35,02,550) and on the other hand took a loan from the very same firm to the extent of Rs.16,61,44,269 on which interest of Rs.29,85,296 was paid. On the above state of affairs, the AO came to the conclusion that the plea of interest payment having been made owing to commercial expediency had not been established by the assessee. For the above reasons, the AO was of the view that interest expenses claimed should be disallowed. The AO found that the assessee was paying 12% interest on funds borrowed. He had lent those funds but collected interest on such lending only a sum of Rs.1,97,969. The interest expenses claimed by the assessee was Rs.1,50,70,266. After deducting the interest received, the AO disallowed a sum of Rs.1,48,72,287 and added the same to the total ....
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....on that the so called/claimed money lender assessee has given loan of such high amount without any interest is contradiction in terms or a paradox. Hence the arguments are not accepted. The assessee has admittedly incurred expenditure from the borrowed funds. This expenditure is established to be not for the purpose of business. Therefore the AO has rightly disallowed and added the same under the head "Not related to business". The addition is upheld. Ground of appeal dismissed." 118. Before us, the ld. counsel for the assessee reiterated the submissions as were made before the CIT(A). 119. We are of the view that the stand taken by the assessee has been inconsistent. While before the AO, the assessee pleaded that borrowed funds on which interest was paid had been given to sister concerns owing to commercial expediency and therefore the same should be allowed as deduction. Before CIT(A), the assessee took a stand that the borrowed funds were invested and that all investments were for the purpose of earning income under the provisions of the Act. The claim of the assessee in the return of income was for deduction of interest expenses against interest income which was declared ....