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2020 (11) TMI 263
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....Rs. 2111,22,65,347/- being the amounts credited in the capital reserve, which was treated by ld. AO as income u/s.56 of the Act, in the facts and circumstances of the instant case. 3. The brief facts of this issue are that the assessee originally was a partnership firm under the name and style of M/s.Shrilekha Financial Services (SFS) engaged in the business of financing and holding investments. The return of income for the A.Y.2015-16 was filed on 31/08/2015 declaring total loss of Rs. 21,970/-. As on 01/04/2014, the assessee firm comprised of four partners namely Shriram Ownership Trust (SOT) with 99.97% share and three individual investors with 0.01% share each. The total partners capital was Rs. 7,49,926/- of which, SOT contributed capital of Rs. 7,49,701/- and other three partners contributed 225 at Rs. 75/- each. SOT's capital contribution in SFS as adopted in its books in terms of Section 45(3) of the Act are as under:- 1. 74,970 shares of Shriram Financial Vendor Capital Pvt. Ltd. (SFVCPL) of Rs. 10/- each - Rs. 7,49,700/- 2. 95747200 shares of Shriram Capital Ltd., (SFL) - Rs. 1/- Total Rs. 7,49,701/- 3.1 Piramal Enterprises Ltd (PEL....
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....m i.e SFS against the payment received from SFS. 3.6 In turn, Novus invested the fund in 11,91,64,806 shares of Shriram Capital Ltd (SCL) through private placement. SCL increased its authorised and paid up equity share capital to enable it to issue shares to Novus through private placement. 3.7 Novus merged/amalgamated with SCL w.e.f 1.4.2014 vide order of Hon'ble High Court of Madras dated 31.3.2015. In lieu of merger/amalgamation of Novus with it, SCL allotted its shares to SFS which were earlier held by Novus. Post amalgamation of Novus with SCL, shares of SCL stood allotted to SFS on private placement basis. 3.8. The aforesaid narration of facts together with its sequence of events remain undisputed before us. 4. The ld. AO during the pendency of assessment proceedings proceeded to gather some more details of real intention of M/s. PEL in infusing such a huge capital in a small firm like Shrilekha Business Services (assessee herein) whose total balance sheet value is only Rs. 15.51 lakhs as on 31/03/2014. The first source of information collected by the ld. AO was a "press release" issued by M/s. Shriram Capital which reads as under:- "Press Release ....
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....ii) the number of shares and/or the quantum of equity or ownership interests of any intermediate entity(ies) through which such investment may be made; that would provide the Company an effective 20% equity stake in Shriram, and till matters incidental, related or consequential thereto; d) To finalize and approve the mode and manner in which such 20% equity stake in Shriram is to be held by the Company, whether directly by the Company and/or through any of its existing or new subsidiaries and for this purpose, if thought fit, to approve the incorporation of such new subsidiaries as may be deemed necessary and to approve all matters connected therewith or consequential thereto; e) To approve and authorize the execution of all agreements and documents required to be executed for or in connection with the Transaction; f) To consider and approve modifications, if any, in the terms and conditions of the Transaction and in this regard, to authorize the execution of necessary agreements and documents to give effect to the same; 4.2. The extract of second Board Resolution dated 06/08/2014 asked by PEL is as under:- CERTIFIED TRUE COPY OF THE ....
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....n aggregate consideration of Rs. 2100/- Crores. Accordingly, the AO concluded that submission of the assessee firm that PEL infused Rs. 2014.20 Crores as capital into the firm to acquire 74% stake in assessee firm is factually incorrect. The ld. AO also observed that the submission of the assessee was also not correct on the basis of total partner's capital of the firm. He observed that the total capital of the firm of Rs. 8.30 Crores, out of which, Rs. 2.08 Crores is invested by one of the partners M/s. Shriram Ownership Trust. He observed that to acquire 74% of Rs. 8.30 Crores what is required to be contributed by M/s. PEL is only Rs. 6.22 Crores. This fact is also proved from the balance sheet of the assessee firm. Hence, whatever, the additional amount of Rs. 2111.23 Crores received by the assessee firm was over and above the required capital of Rs. 6.22 Crores. Accordingly, he concluded that the submission of the assessee that PEL infused capital of Rs. 2014.20 Crores into the firm to acquire 74% stake in the firm as factually incorrect statement. The ld. AO understood the basis of amount of Rs. 2014 Crores as mentioned in the press release issued by SCL by placing reliance on....
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....., Srilekha Financial Services Amount received by the assessee firm (Rs. in Cr.) Date on which the transfer took place from assessee i.e., Srilekha Financial Services to Novus Cloud Solutions Amount transferred by the assessee firm (Rs. in Cr.) 17/04/2014 1000.00 17/04/2014 1000.00 21/04/2014 1016.20 21/04/2014 1015.70 27/08/2014 103.83 27/08/2014 103.25 TOTAL 2120.03 2118.95 4.6. The date of allotment of shares with other details by M/s. Novus Cloud Solutions Pvt. Ltd. to the assessee firm is as under: Date Particulars No. of Shares Total No. of Shares Value in Cr. Share Certificate details Remarks 31/03/2014 Total No. of shares as at 31/03/2014 (Opening Balance) 10,000 (100%) 10,000 (100%) 0.01 No.1, 4, 9 and 10 Held by Srilekha Financial Servces 17/04/2014 Shares allotment 1,00,00,00,000 1,00,00,10,000 1000 No. 5 and 6 Allotted to SFS in the name of its partners 21/04/2014 Shares allotment 1,01,57,00,000 2,01,57,10,000 (1,00,00,00,000 + 1,01,57,00,000) 1015.71 No. 7 and 8 Allotted to SFS in the name of its partners 28/08/2014 ....
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....nd 3.14 of assessment order). (iv) To avoid tax liability on transfer of shares of SCL indirectly to PEL, SFS devised a new method (Para 3.15 and 3.16 of assessment order) as under:- • SFS received money from PEL as capital reserve. • SFS invested the entire fund in the shares of Novus. • Novus in turn invested the fund in the shares of SCL. • Subsequently, Novus got merged with SCL. • SCL allotted its shares to SFS consequent to merger of Novus. (v) PEL achieved its objective of acquiring 20 % stake in SCL. But, what escaped is the liability to pay tax by the Shriram group on the aggregate consideration of Rs. 2111.23 cr received from PEL (para 3.21 of the assessment order). The treatment of Rs. 2111.23 cr as reserves of the partnership clearly shows that the partners have gifted the said amount to the firm (Para 3.22. v of the assessment order). (vi) The amount of Rs. 2111.23 cr was received as capital reserve from PEL without any obligation to pay back: • It is liable to be taxed. • It is nothing but a gift to the assessee firm as it was received without adequate....
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....share capital by way of allotment of shares on private placement basis only to its existing shareholders or to any other Shriram group companies and could not allot any shares to any outsiders directly. This was due to the fact that SCL already had certain other investors who had imposed such a condition that no shares could be allotted to any party other than Shriram group concerns. 5.1. The assessee submitted that the money brought in by PEL into assessee firm constitute capital contribution by a partner in the firm irrespective of its allocation to capital account and capital reserve account. It submitted that the amount received towards capital contribution from a partner cannot at any stretch of imagination be construed as income as defined in Section 2(24) of the Act. It vehemently argued that unless a particular receipt falls within the definition of income u/s.2(24) of the Act, it cannot be brought to tax under the head of income specified in Section 14 of the Act. In other words, what is not income under the Income Tax Act cannot be taxed u/s.56(1) too. It is a residual head for charging to tax 'income' as per the provisions of Income Tax Act and not falling under the h....
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....d M/s.Piramal Enterprises Limited (New partner). f) Details of investment in M/s. Shrilekha Financial Services (Partnership Firm) issued by M/s. Piramal Enterprises limited g) Ledger accounts of Capital reserves, investments, partner's capital accounts, cash book and bank books of M/s. Shrilekha Financial Service was submitted h) Petition filed by M/s. Novus cloud Solutions Pvt Ltd for amalgamation before the Hon'ble High Court of Madras i) Amalgamation order issued by Hon'ble High Court of Madras for the amalgamation of M/s. Novus cloud Solutions Pvt Ltd with Shriram Capital ltd j) Annual Accounts of M/s.Shriram Capital ltd as on 31.03.2015 k) Shareholding pattern of M/s. Piramal Enterprises limited as on 31.03.2014 and 30.06.2014 l) Form MGIT filed by M/s.Shriram Capital ltd with ROC for the FY 2014- 15 m) Axis Bank account statement of M/s. Shrilekha Financial Services for the period from 01.04.2014 to 31.03.2015 6. The ld. CIT(A) sought for a remand report on 02/03/2018 from the ld. AO. The ld. AO submitted a remand report dated 17/04/2018 before the ld. CIT(A) with regard to each of the grou....
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....t order, by considering the submissions of the assessee and by considering the remand report of the ld. AO together for its rejoinder from the assessee. The crux and the basis of ld. CIT(A) deleting the addition could be summarised as under:- I. Capital reserves are created from capital receipts meant for capital investments and/or large anticipated expenses. II. AO's contention that funds cannot be brought under the head 'capital reserve' is against the principles of accountancy of firms. III. SFS is not a conduit. The AO's contention that income has to be taxed in the hands of 'conduit' and not in the hands of the recipient is incorrect and it has no basis. IV. The question of income from other sources arises only if there was 'income'. As there was no income, sec 56(1) is not applicable. V. The process adopted was in the nature of strategic and systematic investment by one industrial group in another group to synergise their mutual strengths. 6.3. The ld. CIT(A) also observed that no colourable devise / tax planning had been adopted by the assessee firm in as much as the assessee firm had taken a systematic approach to the acquisit....
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....sessee firm. 2. Being aggrieved, the assessee preferred appeal before the Id. Commissioner of Income Tax(Appeals)-1, Hyderabad. The Ld. CIT(A)- 1,Hyderabad has called for remand report in the matter in letter in F.No.CIT(A)-l/Hyd//RR/2017-18 dt.12.03.2018 followed by reminder dated 06.04.2018. In pursuance of the same, a detailed remand report was submitted on 17.04.2018. 3. After receipt of the remand report, the Ld. CIT(A) disposed off the appeal vide order in Appeal No.0131/CIT(AH/Hyd/2017-18/2018-19 dated 27.04.2018 deleting the entire addition of Rs. 2111,22,65,347/-made by the Assessing Officer. 4. In the appellate order, the Ld. CIT(A) has observed in para No.10.3 of page Nos.55 and 56 of the appellate order dated 27.04.2018 that the money received from M/s.PEL by the assessee firm was for future investments and accordingly the same can be treated as "capital reserve". The Ld. CIT(A) further held that there is no bar on the quantum of monies that can be brought in by the partners of the firm. On the basis of the same, the Id. CIT(A) gave a finding that the funds received by the firm for future investments cannot be termed as tax evasion and the sam....
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....pital Limited, a group company of the assessee firm. 7. (i) The Board's Resolution of M/s.PEL dated 01.04.2014,(ii) the various clauses/terms of reconstituted partnership deed dated 17-4-2014 between the existing partner of the assessee firm M/s. SOT with the new partner M/s.PEL, (iii) the exact amount of Rs. 2014,20,00,000 required for acquiring 20% stake in M/s.SCL @ Rs. 98.54 per share for acquiring 20,44,04,648( 20% of 102,20,23,239 shares of M/s. SCL as on 31-3-2014) & receipt of the required amount of Rs. 2014.20 crores by the assessee firm on 17.4.2014 ( Rs. 1000 crores) and 21.04.2014 ( Rs. 1014.20 crores) undisputedly establishes the fact that the money received by the assessee firm is only to fulfill its obligation towards new partner M/s. PEL. The value of each share of M/s.SCL was fixed at Rs. 98.54 is nothing but average price per share which is ranging between Rs. 96.95 to Rs. 100.73. The same is evident from the para no.6.2 of the valuation report of Shri V.S.Saptharishi, CA dated 09.04.2014 who was asked to determine the price of each share of M/s. SCL just a week before the actual transaction. 8. The discussion in the preceeding parag....
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.... total share base of 7,47,943 shares in M/s. SFVCPL had become the owner of 47,87,84,725 shares of M/s. SCL (5,00,000 / 7,47,943 x 71,62,07,367) c(i) By way of receiving 74,970 shares of M/s. SFVCPL from SOT, the assessee firm had in turn become the owner of 7,17,88,982 shares Of M/s. SCL. [74,970 / 5,00,000 x 47,87,84,725] . d) By way of the above two transactions between M/s.SOT and the assessee firm, the assessee firm had become the owner of 16,75,36,182 (9,57,47,200 + 7,17,88,982) shares of M/s.Shriram Capital Limited as on 27.03.2014. e) Having ensured that the assessee firm is already the owner of 16,75,86,192 shares of M/s. SCL, M/s.PEL passed a Board's Resolution on 01.04.2014 ( just 4 days after 27-3-2014 ) approving in principle for acquisition of effective 20% equity stake in M/s.SCL for an aggregate consideration not exceeding Rs. 2100 crores (copy of Board's Resolution is enclosed herewith this Paper Book). f) As discussed in the preceding paragraphs, the basis for arriving at the consideration not exceeding Rs. 2100 crores, is that M/s.PEL wanted to acquire 20% stake in M/s.Shriram Capital Limited. It was also mentioned that....
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.... and M/s. PEL respectively as required under clause 5.2 of Reconstituted partnership deed dated 17-4-2014. k(i) It may please be noted that the ratios of partners in the assessee firm between SOT and PEL latter through deed of amendment dated 27-11-2014 as changed to 25.049% : 74.95%. Accordingly, the shares of SCL were also rearranged in the ratio of 2,39,84,674 : 7,17,62,526. l) In the same way the assessee firm also rearranged 74,970 shares of SFVCPL in the profit sharing ratio of 25.997% : 74% between SOT and PEL. Accordingly, 74,970 shares were now rearranged in the ratio of 19,472 : 55,478 in favour of M/s. SOT and M/s. PEL respectively as required under clause 5.2 of Reconstituted partnership deed dated 17-4- 2014. l(i)The rearrangement of shares of SFVCPL in turn resulted rearrangement of shares of 7,17,88,982 shares of SCL held by the assessee firm through M/s. SFVCPL in the ratio of 25.999% : 74%. Accordingly, the shares of M/s. SCL held by the assessee firm through M/s. SFVCPL was now rearranged in the ratio of 1,86,64,417 ; 5,31,24,565 l(ii) It may please be noted that the ratios of partners in the assessee firm between SOT and PEL la....
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....to acquire the balance shares to fulfil its obligation towards M/s. PEL a partner who paid the assessee an amount of Rs. 2014.20 crores. q(i) As a first step the authorised share capital of M/s. NCSPL which is Rs. 1,00,000/- only was increased to Rs. 2200,00,00,000. After increasing the authorised share capital of its insignificant subsidiary of the assessee firm M/s.NCSPL, the entire consideration received by the assessee firm from M/s. PEL was utilised for subscribing shares of M/s. NCSPL. Accordingly, an amount of Rs. 2015.70 crores ( Rs. 1000 crores on 17-4-2014 and Rs. 1015.70 crores on 21-4-2014) was transferred by the assessee firm into the bank account of M/s. NCSPL. On receipt of this amount M/s. NCSPL had allotted 100,00,00,000 shares on 17-4-2014 and 101,57,00,000 shares on 21-4-2014 of NCSPL @ Rs. 10/- per share. r) M/s.NCSPL who had received an amount of Rs. 2015.70 crores from the assessee firm in turn used part of the money to acquire the balance 10,86,86,315 shares of SCL to make shortfall in the process of making PEL the beneficial owner of 20% equity stake holder in SCL. Accordingly, M/ s. NCSPL had applied for fresh allotment of 10,86,86,828 sha....
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....nk account on 27-8-2014. On the same day the assessee firm utilised this money for subscribing shares of NCSPL @ Rs. 10/- per share. On receipt of the money, in its bank account, M/s. NCSPL had allotted 10,32,49,995 shares to the assessee firm. V(i)M/s.NCSPL who had received the money amounting to Rs. 103,24,99,952 from the assessee firm had in turn made application for allotment of scares of M/s. SCL. On the receipt of request by SCL from NCSPL, M/s. SCL had made allotment of additional 1,04,77,798 shares of SCL @ Rs. 98.54 per share to NCSPL on 27-8-2014 itself. These additional shares were acquired by the assessee firm through its insignificant subsidiary M/s. NCSPL to fill the shortfall for PEL consequent to increase of share capital of SCL from 102,20,23,239 as on 31-3-2014 to 107,44,11,829. W) Thus, the assessee firm is the owner of shares of SCL as per the details given below : i) Received from SOT on 26-3-2014 9,57,47,200 ii) Received from SOT on 27-3-2014 (indirectly through SFVCPL) 7,17,88,982 iii) Acquired through NCSPL on 21-4-2014) 10,86,86,828 iv) Acquired through NCSPL on 27-8-2014 1,04,77,798 Total s....
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....ded for future investment cannot be accepted and is devoid of merit. In sum and substance, the amount of Rs. 2111,22,65,347/- was towards consideration received for acquiring 20% shareholding in M/s.Shriram Capital Limited by M/s.PEL. With this object only, M/s.PEL has paid consideration of Rs. 2117,44,99,952/- to the assessee firm for acquiring 21,48,82,256 shares @ Rs. 98.54 per share [equivalent to 20% stake in M/s.SCL] and the assessee firm on its part, discharged the obligation of making M/s.PEL the beneficial owner to the aforesaid extent. 10.3. It is pertinent to note that M/s. NCSPL which is an insignificant subsidiary of the assessee firm and through which the assessee firm had acquired 11,91,54,806 shares (10,86,86,828 on 21-4-2014 + 1.04,77,798 on 27-8-2014 ) of M/s. SCL through allotment @ 98.54 per share from M/s. SCL was latter amalgamated in M/s. SCL through a court order dated 31- 3-2015. In the process whatever the aggregate consideration paid by M/s. PEL to the assessee firm amounting to Rs. 2117,44,99,952/-was also transferred to M/s. SCL. 10.4 Shriram Capita! Limited is the flagship company of M/s. Shriram group of companies wherein the assesse....
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....ce Sheet of the assessee firm. Thus, the submission of the assessee firm at the stage of assessment as well as during appellate proceedings that the said monies represented capital reserve is devoid of merit and the same is factually incorrect. The assessee's submissions apart, the findings of the learned CIT(A) in not giving any finding whether the said receipt is taxable or not taxable. Further, the Id, CIT(A)'s order holding the same as a capital reserve, is also erroneous and factually incorrect. 14. In view of the submissions made above, it is humbly prayed that the decision of the Ld. CIT(A) holding the aggregate consideration received by the assessee firm as capital reserve intended for future investment, shall not be accepted and the action of the Assessing Officer in bringing the same to tax, may please be upheld. 15. The Hon'ble Tribunal is humbly prayed to give a finding whether the consideration received by the assessee firm by way of foregoing 21,48,82,256 shares of M/s. SCL out of 28,67,00,828 shares held by the firm during the year and making M/s. PEL a beneficial owner to the extent of 21,48,82,256 shares of M/s. SCL is a taxable receip....
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....comes taxable in the hands of the recipient. In this regard, the ld. AR clarified the various apprehensions raised by the ld. CIT DR in his arguments which are also reflected in the written submissions reproduced supra. 8.2. The ld. AR referred to the Board Resolution of PEL dated 01/04/2014 which is also reproduced supra, wherein it was explained that from the beginning, the understanding between two groups were clear and categorical that, PEL would get "only an effective stake" and not shares of SCL in its name directly. Specific attention was drawn by the ld. AR to Clause C and Clause B of the said resolution which also included setting up of sub-committee of Directors to finalise and approve the mode of investment, intermediate entity(ies) through which such investments should be made, mode and extent of ownership interest of the intermediate entity(ies) to be acquired etc., to show that PEL plan to acquire equity of SCL "effectively" and not directly. As per the mandate given, the sub-committee passed a resolution on 17/04/2014 which is enclosed in page 24 of the assessee's paper book approving acquisition of equity interest of SCL by investing in SFS, a partnership firm ho....
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....h had invested in the shares of SCL for the first time. He also submitted that the private equity partners who already held shares in SCL had imposed a condition that SCL shall not allot any shares to any outside player other than its own group companies / group entities (i.e Shriram group entities). He argued that this is a crucial point which had apparently and admittedly missed the attention of the ld. AO that SCL could not have allotted shares to PEL directly on private placement basis. This was the reason that the assessee firm had to come into picture as an intermediate entity. Hence, he argued that the transactions of receipt of monies from PEL cannot be taxed as income in the hands of the assessee firm. 8.6. The ld. DR had argued that the receipt of capital reserve by assessee firm from PEL is a scheme devised and adopted by Shriram group to avoid its tax liability on transfer of 20% equity of SCL. The ld. DR had also argued that the capital reserve belongs to the firm and the partner does not get its share out of such reserve at the time of retirement. In this regard, the ld. AR defended the purpose of creating capital reserve, rights of the partners etc., in the follow....
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....y or LLP. When converted into company, 'capital reserve' shall be credited as 'share premium/capital reserve' in the books of the company (para 18.3 of the deed at page 158 of revenue's paper book). Accordingly, capital reserve was created as a precursor to following the accountancy norms of the company in advance. The capital reserve was duly reflected in the financial statements of the successor company i.e Shrilekha Business Consultancy Pvt Ltd (Page 28A to 28C of assessee's paper book) and hence the understanding of the ld. AO and ld. CIT DR that the capital reserve shall remain with the firm is totally baseless and incorrect. (v) The Ld. AR invited our attention to para 19 of the partnership deed (Page 158 of revenue's paper book) containing the clause regarding dissolution of the firm. As per the said para, it was stated that the net assets of the firm shall be divided between the partners in the ratio of their respective interest. (vi) It was explained that both Piramal and Shriram groups are highly successful unrelated big business houses and both are aware of their rights and liabilities. It is a business decision to make strategic investments in the mann....
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....17 wherein the ld. AO proposed to tax Shriram Ownership Trust (SOT) for relinquishing its rights in assessee's firm to the extent of 528.88 Crores u/s.2(47) r.w.s. 45(4) of the Act. The assessee gave a detailed reply dated 15/12/2017 before the ld. AO as to how the said provisions are not applicable and later the ld. AO dropped his proposal to tax SOT u/s.2(47) r.w.s.45(4) of the Act. Further, yet another show-cause notice was issued by the ld. AO vide letter dated 14/12/2017 seeking to tax the amount lying in the capital reserve amounting to Rs. 2111.23 Crores as benefit derived by the assessee warranting taxability u/s.28(iv) of the Act. The assessee gave a detailed reply dated 18/12/2017 making lot of factual and legal submissions as to how the provisions of Section 28(iv) of the Act cannot be made applicable. The ld. AO on going through this reply dropped his proposal of taxing the amounts lying in the capital reserve and u/s.28(iv) of the Act. Later, the same sum was ultimately taxed by the ld. AO u/s.56(1) of the Act being the residual head. Not being satisfied with the said addition, the ld. AO made the same addition alternatively u/s.56(2)(viia) of the Act without even g....
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....le to tax. It is mandatory that tax has to be collected from right hands only. Reliance in this regard was placed on the decision of Hon'ble Supreme Court in the case of ITO vs. Ch. Atchaiah reported in 218 ITR 239 (SC). (iii) If the capital contribution was for no or inadequate consideration, Section 56(1) of the Act does not apply. (iv) In any case, accounting entries and nomenclature of the account in the books of the assessee would not determine the taxability of any receipt. Reliance in this regard was placed on the decision of the Hon'ble Supreme Court in the case of The Peerless General Finance & Investment Company Ltd., vs. CIT reported in 107 Taxmann.com 228 (SC). (v) The ld. AO cannot hold the entry regarding the investment recorded in the books of PEL as factually incorrect as he is not the AO assessing PEL and the said allegation levelled by the ld. AO is absolutely without basis. (vi) The ld. AO did not realise that every receipt of consideration for transfer of shares is not liable to tax as a general rule. Taxability depends on facts in other case whether the shares were allotted by the company or purchased from third parties. More....
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....n the decision of the Hon'ble Karnataka High Court in the case of CIT vs. Wipro Limited reported in 227 Taxman 244 10. We have heard the rival submissions and perused the materials available on record. We have also gone through the detailed written submissions of the ld DR and the power point presentation of the ld AR submitted at the time of hearing before us and later filed in email by him. The sole issue to be decided in this appeal of the revenue for A.Y.2015-16 is as to whether the capital contribution made by PEL in assessee firm which was kept partly in capital account and partly in capital reserve account in the books of the assessee firm is correct and balance lying in capital reserve account could be brought to tax as income from other sources u/s.56(1) of the Act or alternatively u/s.56(2)(viia) of the Act in the facts and circumstances of the case. 10.1. The transactions carried out by the assessee and PEL are as under:- a) Assessee firm comprised of four partners viz SOT holding 99.97% and three individuals holding 0.01% each b) Assessee was holding 100% shares in Novus c) PEL invested its capital contribution in assessee firm. ....
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....only on private placement basis. Moreover, since there is already a private equity investor prevailing in SCL who had imposed a condition that no shares shall be allotted by SCL to any outside players other than to their own group companies or group entities, that is why PEL chose to invest in assessee firm which eventually held shares of SCL through Novus. Pursuant to this precondition imposed by the private equity investors, practically SCL cannot allot shares to PEL directly. Hence, the observation made by the ld. AO that shares could have been allotted directly to PEL by SCL is incorrect and would only result in impossibility of performance. We are only reminded of a famous legal maxim in this regard "Lex Non Cogit Ad Impossibilia" , meaning thereby - 'that the law cannot compel a person to do an act which he cannot possibly perform'. Hence, effectively it could be seen that PEL had merely made capital contribution in assessee firm in the capacity of partner. This transaction, in our considered opinion, cannot give raise to any taxable income in any manner whatsoever under any provisions of the Income Tax Act, as the transaction is only in the capital field. 10.4. From th....
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....rder to avoid such imbalance, the assessee firm consciously took a decision to retain only Rs. 6.22 Crores in capital account and remaining amount of Rs. 2111.23 Crores in capital reserve account. We also find that the creation of capital reserve have been duly mentioned in the reconstituted partnership deed itself as agreed among the existing partners and PEL at the time of its capital contribution in the assessee firm. With regard to the observation made by the ld. AO and the ld. DR that capital reserve belongs to the firm and would remain with the firm at the time of dissolution and that the same would not get distributed to the account of the partners, we are afraid that we are unable to accept to this proposition made by the revenue before us. On perusal of the entire reconstituted partnership deed which is part of the revenue paper book filed before us, we find that para 19 thereon speak about dissolution of the firm, wherein it is categorically stated that on dissolution, the net assets of the firm shall be divided between the partners in the ratio of their respective interest. Moreover, the Indian Partnership Act provides that all the activities of the firm i.e. the conduct....
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....s.2(47) r.w.s. 45(4) of the Act which was later dropped by him. Subsequently, the ld. AO also had sought to tax the amounts credited in the capital reserve account of the assessee firm as the benefit derived u/s.28(iv) of the Act which was also dropped by the ld. AO and as a last resort, the ld. AO had chosen to tax the said amounts under the residuary head 'income from other sources' u/s.56(1) of the Act. We find that the ld. AO had strangely arrived at a conclusion that since the sum of Rs. 2111.23 Crores was credited in capital reserve account of the partnership firm, the same would tantamount to gift given by a partner to the firm. This is basically on the premise of the ld. AO that the capital reserve belongs to the firm and not to the partners. We have already addressed this aspect hereinabove that capital reserve is reflected correspondingly in the form of some assets of the firm on which partners have got rights and interest in proportion to their profit sharing ratio. One more reason canvassed by the ld. AO for taxing the said sum u/s.56(1) of the Act is that the assessee had acted as a conduit of PEL for indirect transfer of money to SCL and to acquire its 20% stake. In t....
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.... shares of SCL (pursuant to merger of Novus with SCL) thereby giving 20% effective stake to PEL in SCL. We find that the ld. AO had not made out any case to drive home the point vis-à-vis the facts of the case as to whether the shares of SCL were transferred, how and who transferred and to whom it was transferred? Even if so, whether the transaction attracts tax liability and in whose hands. We find that there is absolutely no finding regarding these questions. 10.11. We also find that the entire receipt of capital contribution lying in capital reserve account was sought to be taxed by the ld. AO u/s.56(1) of the Act on the ground that the same only represents share sale consideration for issue of shares in SCL. 10.12. We find that the ld. DR has also fairly agreed before us that assessee would be entitled for deduction towards cost of shares / cost of investment in terms of Section 57(iii) of the Act. We find that even this deduction was not granted by the ld. AO in the instant case. 10.13. With regard to alternative addition made by the ld. AO u/s.56(2)(viia) of the Act, the only observation of the ld. AO is that the assessee firm had received monies from PEL and ....
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....t the ld. AR had filed his written submissions on the ground that the ld. AO who framed the assessment does not have any jurisdiction and that the assessment was framed in the hands of non-existent entity in as much as the assessee firm was converted into private limited company before the completion of assessment. We find that only revenue has preferred appeal before us and there is no appeal or cross objections preferred by the assessee before us. Infact, there is no petition under Rule 27 of the ITAT Rules also preferred by the assessee before us. Hence, we deem it fit not to adjudicate this aspect of the written submissions preferred by the ld. AR for want of proper grounds for adjudication before us in that regard. 12. In the result, appeal of the revenue for A.Y.2015-16 is dismissed. 13. Now let us take the appeal of the revenue for A.Y.2014-15. The revenue has raised the following grounds:- 1. "The CIT(A) erred in facts and circumstances of the case and in law in deleting the addition of made u/s. 56(2)(viia) of Rs. 413,80,30,734/- 2. The CIT(A) erred in holding that the applicable provisions to the facts of the case are sec.45(3) and not Sec. 56(2....
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....roceedings for A.Y.2015-16. The ld. AO examined profit and loss account, balance sheet alongwith all schedules, the list of various shareholders of Shriram Capital Ltd. (SCL) as on 31/03/2013 and 31/03/2014. The shareholding pattern of shareholders of SCL holding more than 5% stake as on 31/03/2013 and 31/03/2014 are as under:- Name of the shareholder No of shares as on 31/03/2013 No of shares as on 31/03/2014 Shriram Ownership Trust 9,57,47,300 100 M/s. TPG India Inv. (Mauritius) 10,13,80,344 10,13,80,344 M/s. Shriram Financial Ventures 71,62,07,367 71,62,07,367 M/s. Shrilekha Financial Services NIL 9,57,47,200 Others 1,200 1,200 Total 91,33,36,411 91,33,36,411 14.3. From the above table, it could be seen that SOT had transferred 9,57,47,200/- shares of SCL to the assessee firm during A.Y.2014-15 on 26/03/2014. The assessee submitted that the shares held by SOT in SCL and SFVCPL were reflected at Rs. 1/- and Rs. 749700/- respectively in the books of the assessee firm as capital contribution of SOT in accordance with the provisions of Section 45(3) of the Act. The ld. AO however, ignored the submission of the assesse....
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....the aggregate fair market value (FMV) of such property shall be chargeable to tax under the head 'Income from other sources'; or * for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration shall be chargeable to tax under the head 'Income from other sources;. 7.2 When a person becomes a partner in a firm contribution his capital, he acquires various rights in the firm. 7.3 He has interest in each and every asset of the firm including goodwill even during the subsistence of the firm, though during subsistence he cannot claim specific share in any particular asset. Such rights, inter alia, include right to take part in the conduct of the business, right to share in the profits, right to settlement of accounts at the time of retirement and if not share in the subsequent profits and interest etc. 7.4 As per section 14 of the Partnership Act, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm or acquir....
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....nstitutes adequate consideration and it cannot be restricted to the credit entry in the books except for the purpose of Section 45(3) where the particular statutory provision restricts it artificially. 7.10 From the above, it is abundantly clear that the consideration at the time of contribution of assets into the firm by a partner is not determinable to invite section 56(2)(viia). 8 Partnership interest is a valuable and adequate consideration 8.1 We wish to submit that the right in the partnership to which a partner becomes on contribution of capital always constitutes 'valuable consideration for the purpose of section 56(2)(viia) of the Act and will not fail to be considered as a case without consideration or as a case where the consideration is less than the Fair Market Value. 8.2 In sum, therefore, in the case of a partnership firm, the 'consideration' for the subsistence of the partnership to get his share of profits from to time and after the dissolution of the partnership or with his retirement from the partnership to get his accounts settled. 8.3 Thus, in the instant case, the partnership interest to which SOT (i.e 9....
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.... d. The date of transfer has to be on or after 01/06/2010. In this case, the transferee is a firm, the asset transferred is shares of a company in which public are not substantially interested; the date of transfer is 26/03/2014 and 27/03/2014 which is after 01/06/2010 and more importantly, the transferor can be 'any person' as defined u/s.2(31) of the Act. Thus, in this case, all the above conditions laid down for the purpose of invoking provisions of Section 56(2)(viia) of the Act are fulfilled. 3. The assessee's submission that the partner's interest in the firm is a valuable asset, which constitute adequate consideration and it cannot be restricted to the credit entries in the books of accounts except for the purpose of Section 45(3) of the Act, is also not applicable. The provisions of Section 45(3) are part and parcel of computation of income under the head 'capital gains' whereas the instant case deals with the computation of income u/s.56(2)(viia) of the Act which is a deeming provision for computation of income under the head 'income from other sources'. 4. The explanatory notes to Finance Act 2010 with regard to insertion of Section 56(2)(viia) ....
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.... Hence, provisions of Section 56(2)(viia) does not come into picture. * Since there is no consideration received by the appellant firm, therefore there is no issue of lesser consideration * Therefore, as per above discussions in detail, I am of the opinion that provisions of Section 56(2)(viia) does not apply in this case. * When once the provisions of Section 56(2)(viia) does not apply, then there is no question of valuing the shares at Fair Market Value. 12. Therefore, the additions made by the Assessing Officer by reworking shares at Fair Market Value by applying provisions of Section 56(2)(viia) is not correct. Hence, additions made by the AO deleted." 15.1. The ld. CIT(A) further observed that Section 45(3) of the Act deals with capital contribution by a partner and its capital gains liability in the hands of the transferor (i.e partner in the instant case). The legislature never intended to adopt a different consideration in the hands of the transferee (i.e. firm in the instant case). Moreover, the provisions of Section 56(2)(viia) of the Act were introduced as a counter mechanism to prevent / counter money laundering. No finding was giv....
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....ty of the partner u/s.45(3) of the Act whereas the instant case before us speaks about the taxability of the recipient firm u/s.56(2)(viia) of the Act. He argued that provisions of section 45(3) and 56(2)(viia) of the Act are independent sections as the former deals with the transferor (i.e partner) under the head 'capital gains' and the latter deals with the transferee (i.e firm) under the head 'income from other sources'. Accordingly, the issue of taxability in the hands of two distinct persons does not envisage existence of any non-obstante clause. 17.2. With regard to yet another important observation made by the ld. CIT(A) in his order that SOT as a partner had introduced shares of SCL and SFVCPL as its capital contribution in the assessee firm; that the firm had not received any consideration for shares which had only received capital contribution in the form of shares of two companies from its partner; that the partner's capital is not a consideration to be considered as per Section 56(2)(viia) of the Act; since there is no consideration, there is no benefit or loss to the assessee firm; since there is no benefit to the assessee, there is no question of any gift and hence....
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....re reproduced hereunder:- "(viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010 but before the 1st day of April, 2017, any property, being shares of a company not being a company in which the public are substantially interested,- (i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property; (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration : Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47. Explanation.-For the purposes of this clause, "fair market value" of a property, being shares of a company not being a company in which the public are substantially interested,....
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....er retires from the firm, he does not walk away with the credit balance in his capital account alone, instead he would be entitled to the share of the profits / losses besides assets of the firm. The provisions of the Section 56(2)(viia) deals with transaction / contract between the existing 'firm' and 'any person' which are not in the nature of capital contribution. Hence, "any person" mentioned in section 56(2)(viia) of the Act, in our considered opinion, does not cover the partner in respect of his capital contribution. Yet another crucial point which needs to be understood is whether any contract exists between firm and partner in the case of capital contribution. We find that there is no contract between the firm and the partner in the case of capital contribution. "Firm" is a concern created consequent to a contract of partnership deed among partners to contribute capital, to carry on business and share profits and assets in pre-determined ratio. Pursuant to the capital contribution made by the partners only, the partnership firm comes into existence and becomes capable of entering into all the transactions / contracts thereafter. The provisions of Section 56(2)(viia) covers ....
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.... partners capital account does not represent the true value of the consideration and that it is only a notional entry intended to be taken into account at the time of determining value of partners share in net assets of the firm at the time of dissolution of the firm. Hence, in these circumstances, the Hon'ble Supreme Court held that consideration which a partner acquires on making over his personal asset to the partnership firm as his contribution to its capital account does not fall within the terms of Section 48 of the Act. The aforesaid reasoning and observations of the Hon'ble Supreme Court could be made applicable to the facts of the instant case in as much as "consideration" in respect of capital contribution made by a partner is "indeterminate" for the purpose of Section 56(2)(viia) of the Act also. When consideration is indeterminate, computation provisions of Section 56(2)(viia) of the Act to determine inadequacy or otherwise of 'such consideration' also fail. Hence, on this count also, provisions of Section 56(2)(viia) of the Act cannot be made applicable to capital contribution of a partner made in the firm. 18.5. The CBDT vide its circular No.495 dated 22/09/1987 ha....
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....ld become redundant and operation of that section would be rendered otiose. Such interpretation of law should always be avoided. We find the transfer of asset by a partner to the firm as the capital contribution, no doubt constitutes a transfer in the hands of the partner, but the value recorded in the books of the firm by way of credit to the partners capital account would be conclusive proof of consideration received in the hands of the partner towards transfer of capital asset. Reliance in this regard is placed on the decision of the Hon'ble Madras High Court in the case of ACIT vs. Dr. D. Ramamurthy reported in 410 ITR 236. In view of the aforesaid observations, we have no hesitation to hold that the provision of Section 56(2)(viia) of the Act could not be made applicable at all in the case of capital contribution made by a partner in the form in kind. Accordingly, we do not find any infirmity in the order of the ld. CIT(A) granting relief to the assessee and the grounds raised by the revenue in this regard are dismissed. 19. We find that the ld. AR had filed his written submissions on the ground that the ld. AO who framed the assessment does not have any jurisdiction and....