TaxTMI 
TaxTMI 
2014 (3) TMI 1135
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....ade by the Commissioner of Income Tax (Appeals) that the assessee was resorting to avoidance/evasion of tax by successively transferring shares from individuals to a company through the media of partnership firm and company. The second issue raised by the assessee is that the Commissioner of Income Tax (Appeals) has erred in not deleting the notional addition made by the Assessing Officer under Section 14A. The third issue is that the Commissioner of Income Tax (Appeals) has erred in confirming the disallowance made by the Assessing Officer under Section 35D of the Income-tax Act, 1961. 3. The grounds raised in the appeal filed by the Revenue relate to two issues. The first issue is that the Commissioner of Income Tax (Appeals) has erred in adopting the revalued cost of acquisition of shares as against the actual cost of acquisition incurred by the firm which has transferred the shares to the assessee-company. The second issue is that the Commissioner of Income Tax (Appeals) has erred in holding that Rule 8D is not applicable for the impugned assessment year 2007-08. 4. In the facts and circumstances leading to these appeals, the most important issue to be considered is the i....
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....fter the name of the company M/s NCSPL was changed to B.V. Reddy Enterprises Pvt. Ltd. (BVREPL). The change of name was made effective from 18.8.2006. This company M/s BVREPL, formerly known by the name M/s NCSPL, is the assessee in the present case. 8. While dealing with these cases, it is to be seen that M/s NCCPL and M/s NCSPL are different companies. Likewise, the firm BVRE and the company BVREPL are different entities. All are relating to B.V. Reddy family. 9. This case involves a series of share transfers. We have already seen the transfer of shares by the partners to the firm BVRE when they joined the reconstituted firm on 24.3.2006. This transaction of transferring shares from personal account to the account of the firm BVRE was the first such transfer of shares. As the partners have shown the value of shares transferred to the firm BVRE at Rs. 35,27,48,000/-, they were liable for capital gain taxation under Section 45(3) of the Income-tax Act, 1961. Accordingly, the partners paid the capital gain tax for the assessment year 2006-07. 10. The firm BVRE, which was reconstituted on 24.3.2006 was taken over and succeeded by M/s NCSPL (the name of the company changed to....
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....revaluation amount of NCCPL shares in the same proportion in which the capital accounts of the partners were held in the firm BVRE. 15. The takeover of shares of NCCPL from the firm BVRE by NCSPL / BVREPL, by way of succession, is the second instance of transfer in a series of transfers made in the case of NCCPL shares. The firm BVRE has transferred the NCCPL shares to M/s NCSPL / BVREPL and therefore, the transaction was between the firm BVRE and the company NCSPL / BVREPL. 16. As transfer of shares was made as a result of succession of the business of the firms taken over by the company M/s NCSPL / BVREPL, the firm BVRE claimed exemption from levy of capital gain tax under Section 47(xiii). Thus, the second instance of transfer of NCCPL shares was sought tax-free. 17. Section 47 excludes certain transactions from the ambit of "transfer" and excluded such transactions from Section 45, which charges the capital gains tax. Section 47 deals with different such transactions not regarded as "transfer". Clause (xiii) of Section 47 deals with taking over of a firm by a company, as happened in the present case. Clause (xiii) provides that Section 45 shall not apply to any transfe....
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....dingly, the assessee-company computed the short term capital gains for the impugned assessment year 2007-08 pertaining to sale of NCCPL shares to M/s GBFL. The assesseecompany has adopted the acquisition cost of NCCPL shares at Rs. 270,07,53,000/- for which value, among other things, the assesseecompany has taken over the NCCPL shares from the firm BVRE on 5.5.2006. The assessee-company also worked out the stamp cost of Rs. 67,50,000/- for the transfer of shares to M/s GBFL. Out of the total consideration paid by GBFL at Rs. 265 Crores, the consideration due to NCCPL shares was Rs. 257,52,32,953/-. Thus the assesseecompany worked out the capital gains in the following manner:- Acquisition cost of NCCPL shares : Rs. 270,07,53,000 Add: Stamp cost : Rs.___67,50,000 270,75,03,000 Less: Consideration received from M/s GBFL : Rs. 257,52,32,953 Short term capital loss : Rs. 13,22,70,047 22. The above computation of the assessee-company resulting in a loss was not acceptable to the assessing authority. She observed that the value of NCCPL shares was shown on 31.3.2006 at Rs. 35,26,18,000/- in the books of the firm M/s BVRE. When the ....
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....on for which the previous owner acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. In the present case, either the firm BVRE or its partners have not incurred or borne cost of any improvement to increase the value of shares of NCCPL from Rs. 35,27,48,000/- to Rs. 257,00,52,353/-. The value of NCCPL shares acquired by the firm BVRE has been boosted to Rs. 250,52,32,953/- by a notional revaluation. No basis has been explained to justify the upward revaluation of shares. Therefore, inflated value of Rs. 250,52,32,953/- cannot be the actual cost of acquisition in the hands of the firm BVRE, which is the previous owner in this case, for the purpose of Section 49(1). Actual cost, therefore, to be adopted is Rs. 35,27,48,000/-. The Assessing Officer has therefore held that the cost of acquisition could be allowed only as stated above and the capital gains can be computed under Section 45 read with Section 49(1), even without taking recourse to Section 47A(3). 26. Accordingly, combining both Section 47A(3) and Section 45 read with Section 49(1), though alternatively, the assessing authority ....
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....al value of the shares in the books of the firm but also the subsequent enhanced value, due to revaluation, needs to be considered as the full value of the consideration for the purpose of computation of capital gains. As the subsequent revaluation of shares cannot be ignored, the enhanced value should be considered as value of the assets which were brought in by the partners as capital contribution for the purpose of computation of capital gains under Section 45(3). The full value of consideration does not mean the initial value credited in the books. He accordingly held that the cost of acquisition of shares in the hands of the firm BVRE shall be taken at revalued amount of Rs. 270,07,53,000/-. 31. The Commissioner of Income Tax (Appeals) has examined the scope of invoking Section 47A(3) against the assessee. The exemption of capital gains taxation in a case of succession of a firm by a company is subject to certain conditions. The first condition as provided in proviso (a) to clause (xiii) of Section 47 is that "all the assets and liabilities of the firm relating to the business immediately before the succession become the assets and liabilities of the company". The Commissio....
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....ii). 33. Proviso (c) provides that "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 new company". The Commissioner of Income Tax (Appeals) has found that consideration for taking over was satisfied only by way of allotment of shares to the partners in the company and partners have not received any benefit or consideration directly or indirectly. Accordingly, he held that there is no violation of proviso (c) to Section 47(xiii). 34. Thus the Commissioner of Income Tax (Appeals) has held that assessee has not violated the proviso (a), (b) and (c) of Section 47(xiii) and as such, invoking of Section 47A(3) is not justified. 35. In short, the Commissioner of Income Tax (Appeals) has ultimately concluded as under (p.35 / para 11.8):- "(a) The assessee-company has fulfilled the conditions of proviso (a), (b) and (c) of Section 47(xiii) and hence invoking of provisions of Section 47A(3) is not correct. (b) Section 49(1)(iii)(a) is applicable to the assessee-company in respect of transfer of assets by the firm BVRE. (c) The revaluation of ....
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....n. 39. The learned Additional Commissioner of Income Tax explained that it is in these circumstances, we have to examine what is the cost of acquisition of the asset in the hands of the previous owner of the property. Previous owner of the property is the firm BVRE. The cost of acquisition always remained at Rs. 35,27,48,000/- but for the empty formality of valuation of shares at Rs. 270,07,53,000/-. Section 49 provides for computing the cost of acquisition in a very clear manner. As per the law, the cost of acquisition of the previous owner could be increased only by two items; by the cost of any improvement of the asset incurred by the previous owner or incurred by the assessee and any cost of improvement of the assets borne by the previous owner or the assessee. The cost must be incurred or borne for improvement of the assets acquired by the previous owner. In the present case, the firm BVRE has not incurred or borne any amount so as to result in the improvement of the asset. In that way, as the assets are in the nature of shares, the previous owner, the firm BVRE could not have brought any improvement either. Neither the assessee-company has incurred or borne any such cost o....
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....learned Additional Commissioner of Income Tax states that the cost of acquisition of asset in the case of a succession also has to be considered as the cost of acquisition in the hands of the previous owner subject to adjustment of cost of improvement. This position brought in by Finance Act, 2010 does not prejudice the case of the assessee for the reason that the assessee has no quarrel in adopting the cost of acquisition in the hands of the previous owner. In the present case, the previous owner of the shares is the firm BVRE. The only dispute is regarding the correct amount of cost of acquisition of the NCCPL shares in the hands of the firm BVRE. There is no dispute on the principle of adopting the cost of acquisition in the hands of the previous owner; the dispute is only on the value. 43. The learned counsel explained that the members of B.V. Reddy family, who held shares in NCCPL, joined the firm BVRE on the basis of the shares assigned by them in favour of the firm as their capital contribution. When the family members joined the firm BVRE, their shares were assigned a value of Rs. 35,27,48,000/-, which was correspondingly reflected in the capital accounts of the partners....
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....t, 1961. It is on the basis of this increased cost of acquisition that shares were allotted to the partners of the firm BVRE, in the share capital of the assessee-company NCSPL / BVREPL. When the assessee company has taken over the firm BVRE, the shares were acquired at the value reflected in the books of the firm BVRE. That value of shares reflected in the books of the firm BVRE is the cost of acquisition of those shares in the hands of the firm. Therefore, the Commissioner of Income Tax (Appeals) has rightly adopted the cost of acquisition in the hands of the firm at Rs. 270,07,53,000/-. 45. The learned counsel concluded that there is nothing wrong in the order of the Commissioner of Income Tax (Appeals) in holding that the cost has been correctly adopted by the assessee-company for the purpose of Section 49. 46. Regarding the alternate contention of the Assessing Officer under Section 47A(3) read with Section 47(xiii), the learned counsel explained that all the conditions of succession were completed in the present case, as provided in clause (xiii) of Section 47. The first condition of succession for availing exemption of capital gains taxation is that all the assets and ....
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....ficiently discussed in earlier paragraphs of this order. So, we straightaway go into the issue to decide whether the cost of acquisition arrived by the assessee in computing the capital gains is acceptable or not. The history of the transfers of shares is already before us. The members of B.V. Reddy family joined the firm BVRE by contributing their shareholding in M/s NCCPL as their capital contribution. At the time of entering the partnership, the value of the shares was assigned at Rs. 35,27,48,000/-. Thereafter, the shares were revalued at higher amount of Rs. 270,07,53,000/-. The first question is whether the revaluation is justified or not. It cannot be disputed that the value of the share of a company should reasonably represent the intrinsic business worth of the company. There must be parity between the share value and the company's business worth. If the revaluation of the share in the present case is examined in the light of the above principle, we find that the firm BVRE was justified in revaluing the shares of NCCPL, held by it. As pointed out by the Commissioner of Income Tax (Appeals) in his order and also argued by the learned counsel appearing for the assessee at th....
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....redited in the capital accounts of the partners of the firm. The firm BVRE has suffered that incremental liability against the enhanced value reflected in the capital accounts of the partners of the firm. Therefore, it is to be seen that the firm BVRE has borne the liability of revaluation which should be added to the cost of acquisition of shares made from B.V. Reddy family members. Therefore, as far as the firm BVRE, the previous owner of the shares, is concerned, the cost of acquisition of shares is Rs. 270,07,53,000/-. 52. Moreover, when the firm BVRE was taken over and succeeded by the assessee-company M/s NCSPL / BVREPL, the value of NCCPL shares in the books of the firm BVRE was Rs. 270,07,53,000/-. It is for that amount, the shares were taken over by the assessee-company. The partners of the firm BVRE absorbed this higher amount of revaluation in proportion to the capital accounts stood in the books of the firm. Therefore, the cost of the shares in the hands of the firm BVRE as well as the cost of acquisition incurred by the assessee-company, is Rs. 270,07,53,000/-. Therefore, it is to be seen that the cost of shares in the hands of the firm BVRE, being the previous owne....
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....sue of transfer of shares had also come up for consideration. The Appellate Tribunal, inter alia, held as follows:- "84. As already stated the series of transactions by which the shares of NCCPL held by the assessee ultimately was transferred to GBFL were intended to lessen the tax burden on capital gain on transfer of shares. The course adopted by the assessees was within the framework of law and was permissible. In fact there 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 N....
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....se of Godrej and Boyce Mfg. Co. Ltd vs. Dy. CIT (328 ITR 81) (Bom.). Therefore, there is no infirmity in the order of the Commissioner of Income Tax (Appeals) on this point. This issue is also decided against the Revenue. 59. Revenue fails in its appeal. 60. Next, we will consider the appeal filed by the assessee. The first issue raised by the assessee is that the Commissioner of Income Tax (Appeals) has made certain observations in his order alleging that the assessee was resorting to tax avoidance/evasion of tax by successively transferring shares from individuals to a company, through the media of partnership firm and company. In fact, the Commissioner of Income Tax (Appeals) has made these observations quite substantially in his order. The ITAT Bangalore "A" Bench, while considering the appeals filed by the partners of the B.V. Reddy family in I.T.A. Nos.149 & 150(Bng.)/2011 and others, has held in their common order dated 8th February, 2013, as under in paragraph 84:- "84. As already stated, the series of transactions by which the shares of NCCPL held by the assessee ultimately was transferred to GBFL were intended to lessen the tax burden on capital gains on tr....