TMI Blog2013 (11) TMI 1312X X X X Extracts X X X X X X X X Extracts X X X X ..... in hands of HUF and taxed in hands of respective HUFs - A partner may be 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 partnership, he functions in his personal capacity; qua third parties, in his representative capacity; third parties, whom one of partners represents, cannot enforce their rights against other partners, nor can other partners do so against said third parties - Their right is only to a share in profits of their partners who (qua them) was representative. It is thus clear that HUF was never partner in firm BVRE and conclusions to contrary by CIT(A) cannot be sustained. Applicability of section 11(2) of Companies act, 1956 – Validity of firm as it consists of more than 20 partners – Held that:- Already held that 4 HUFs were not partners in firm BVRE and that V.Madhusudhan Reddy, V.Vikram Reddy, V.Dinesh Reddy and V.Dwarakanath Reddy signed deed in their individual capacity vis-à-vis firm and vis-à-vis HUF they were accountable to share of profits which they receive from firm BVRE – Therefore, number ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es for AY 07- 08 wherein revenue taxed only difference between actual capital gain and capital gain already taxed in hands of Assessees for AY 06-07 – Therefore, transfer of shares is a valid transfer. Whether there was a transfer of shares of NCCPL by assessees in favour of GBFL, so as to bring to tax capital gain on transfer of such shares u/s. 45 of Act in hands of assessee – Held that:- 13 partners of firm BVRE are described in share purchase agreement dated 10.6.2006 as confirming party to share purchase agreement dated 10.6.2006. Clause in Agreement which refers to transfer of shares, makes a reference to sale of shares by sellers to purchasers (GBFL) and there is no reference to confirming parties to agreement selling shares to GBFL - Confirming parties only confirm fact that they have transferred shares of NCCPL held by them to firm BVRE and that they have no right, title or interest whatsoever over shares so transferred – Thus, there was no any transfer of shares of NCCPL by Assessees to GBFL. Colourable transaction - Whether entire series of transactions by which shares of NCCPL were ultimately transferred to GBFL were all not valid – Hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007-08. The appeals are in relation to two assessees namely Shri V.Madhusudhan Reddy(HUF) and Smt.V.Soumini Reddy(individual). 2. ITA Nos.158 159(B)/2011 are appeals by the assessees against the common order dated 28-01-2011 of CIT(A)-I, Bangalore relating to assessment years 2007-08. These appeals are in relation to two assessees by name Shri V.Vikram Reddy (Individual) and Shri V. Vikram (HUF). A common issue arising out of same facts and circumstances arises for consideration in all these appeals. Apart from the common issue there are 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his interest in the partnership firm i.e. BVRE which was held by him continued to be held in vis- -vis the firm in his individual capacity and vis- -vis the HUF in representative capacity representing the HUF consisting of himself and his wife. A copy of the order of assessment for the AY: 1995-96 has been filed which shows that income from the firm BVRE has been declared by Shri V. Dinesh Reddy(HUF). 10. On 08-02-1988 a Deed of re-constitution of partnership 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.V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e capital of a company by name M/S. Nutrine Confectionery Company Private Limited (NCCPL). NCCPL was incorporated on 14.2.1952. It was in the business of manufacture and sale of confectionery product under the brand name Nutrine . The issued, subscribed and paid up capital of NCCPL was 6,71,823 equity shares of Rs.100/- each. The shareholders and the number of shares held by them were as follows: Existing Partners: 1. V.Madhusudhan Reddy(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 (HU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As far as the Partnership Act, 1932 is concerned; Sec.16 of the said Act contemplates mere book entries recognizing the fact that the firm is the owner of the shares and was brought in as capital contribution of the firm by the partners. This formality has duly been complied with by BVRE. As far as the provisions of the Companies Act, 1956 is concerned, a firm is not a legal entity and therefore cannot be recognized as a shareholder in the register of members of a company. Sec.25(4) of the Companies Act., 1956 by implication prohibits a firm from being recognized as registered owner of shares. Sec.187C of the Companies Act, 1956 however provides that when a registered owner of shares is not the beneficial owner of the shares then the registered owner as well as the beneficial owner of the shares can give a declaration to the concerned company mentioning the particulars of the beneficial interest. Once such a declaration is filed, the concerned 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal asset. It is not in dispute that all the four assesses declared Long Term Capital Gain (LTCG) arising as a result of the transfer of the shares of NCCPL as capital contribution of the firm BVRE and paid tax on such LTCG. In fact in the case of V.Vikram Reddy (individual) ROI filed for AY 06-07 declaring LTCG on transfer of shares of NCCPL as capital contribution of the firm BVRE, in which he was a partner was accepted in proceedings u/s.143(3) of the Act by order dated 31.12.2006. 24. M/s Godrej Beverage and Foods Ltd.,(GBFL) wanted to takeover entire business of NCCPL by acquiring all the shares of NCCPL. There was a Memorandum of Understanding dated 29-03-2006 between GBFL and the Reddy family. As per the aforesaid Memorandum of Understanding, M/S.GBFL as purchaser and party of the first part agreed to purchase from the Reddy family comprising of the 16 persons set out in para-15 of this order, the 16 persons being represented in 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 confirm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 was claimed to be 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. Sec.47(xiii) provides as follows: "Where a firm is succeeded by a company in the business carried on by it as a result of which the firm sells or otherwise transfers any capital asset or intangible asset to the company : Provided that- (a) all the assets and liabilities of the firm or of the AOP or BOI relating to the business immediately before the succession become the assets and liabilities of the company; (b) all the partners of the firm 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay of shares on sale of the firm BVRE as a going concern to NCSPL/BVREPL. According to the AO, this amount ought to have been offered to tax by the Assessee. He held that the entire exercise of transferring shares held by the Assessee in NCCPL to a firm as capital contribution and the subsequent take-over of the firm by NCSPL and the final sale of shares of NCCPL by NCSPL to Godrej were all colourable devices adopted and were sham transactions for evading tax liability. Accordingly the AO held that the income earned on sale of shares of NCCPL to Godrej is liable to assessed in the hands of both the aforesaid Assessee as follows: V.Madhusudan Reddy (HUF) Smt.V.Soumini Reddy No. of Shares held 1,22,089 31,388 Total Sale Consideration(Rs.3944.50 Per Share) Rs.48,15,80,060 Rs.12,38,09,966 Less: Cost of Acquisition of the shares as per the working given alongwith the Return of Income for AY 06-07. Rs.16,33,840 Rs.30,48,482 Long 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 832 Long Term Capital gain Rs.14,06,58,132.00 Rs.17,74,69,786 Less: Long term Capital Gain already offered Tax in AY 06-07 by the Assessee Rs.1,70,46,507.00 Rs.2,16,34,068 Long term capital gain assessed in AY 07-08 Rs.12,36,11,625 Rs.15,58,35,718 30. Aggrieved by the orders of the AO, the Assessees preferred appeal before CIT(A). Before CIT(A) the Assessees contended that they had effected transfer of the shares of NCCPL held by them to the firm BVRE during the previous year relevant to AY 06-07. The capital gain on such transfer was also offered to tax as per the provisions of Sec.45(3) of the Act and taxed by the Revenue. Thus the Assessees right to the shares got divested on 24.3.2006 when the shares were introduced as capital contribution to the firm BVRE. Therefore it is not proper on the part of the AO in AY 07-08 to hold that the Assessees transferred shares of NCCPL to Godrej group during the previous year relevant to AY 07-08. 31. On the above submission, the CIT(A) held that the firm BVRE was not genuine because in the course of assessment, the Assessees were not able to show the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Deed dated 24.3.2006 and therefore the partnership is illegal and non-est in law. 2. He also held that the number of partners in the firm BVRE as per the reconstitution deed dated 24.3.2006 exceeded 20. He held that as per Sec.11(2) (3) of the Companies Act, 1956, if the number of partners exceed 20 in the case of Non-Banking business then the partnership is illegal. The CIT(A) computed the number of partners as per the deed of reconstitution of partnership dated 24.3.2006 as follows: 1. Sri. V.Dwarakanath Reddy (HUF) (a) Sri.V.Dwarakanath Reddy (b) Sri.V. Dinesh Reddy (Son) (c) Smt.V.Anita Reddy (Daughter) (d) Smt.V.Sandhya Reddy (Daughter) 2. Sri.V.Vikram Reddy (HUF) (a) SriV.Vikram 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(S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not Rs.35,26,18,000/-. He held that the proportionate share of the 13 partners in the sum of Rs.270,07,53,000/- should be reckoned as the full value of consideration received on transfer in the 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 Bangalo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ineness of the firm M/s. BVRE or the transfer of shares in NCCPL to it during the year ending 31.03.2006. (3) From the 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dity 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 asset the following amounts, namely :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med 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 consequences as far as the present case is concerned, which we will explain the subsequent paragraphs. 40. We shall now recapitulate the entire sequence of transactions by which the shares of NCCPL were transferred to GBFL. We will classify the sequence of events into three categories, viz., I. Transaction by which the shares of NCCPL, held by 13 individuals, were brought into the firm of BVRE as capital contribution of the 13 partners of BVRE; II. Transaction by which N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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. Transaction by which NCSPL/BVREPL sold the shares of NCCPL to GBFL. 43. Under a share purchase agreement dated 10.6.2006, GBFL purchased 6,71,823 shares of NCCPL, out of which 6,62,325 shares were held by NCSPL/BVREPL and 375 shares held by Mr.V.Dinesh Reddy (Indl.), 5,760 shares held by Ms.Binduvasini and 363 shares held by S.Vasudevan for a consideration of Rs.265,00,00,000/-. NCSPL received a consideration of Rs.257,52,32,953 for sale of 6,65,325 shares of NCCPL held by it to GBFL. This transaction of sale of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 in these appeals. 45. It was the plea of the Revenue in the present appellate proceedings that it would be ideal that the appeal in the case of NCSPL/BVREPL for AY 07-08 which are stated be pending before the ITAT, Chennai Benches and the appeals of the Assessees in these appeals should be heard together. The Assessees have been objecting to such clubbing of appeals on the ground that the issues involved in these appeals and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tire 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 firm BVRE. These details are not being repeated here and they can be found from the description of facts, which we have narrated from paragraphs 2 to 14 of this order. In particular, our attention was drawn to the fact that the department has passed orders u/s. 185 of the Act for AYs 1980-81 1984-85 granting registration to the firm. Our attention was drawn to the fact that the firm BVRE had filed returns of income for the AYs 2004-05, 2005-06 2006-07 before the ACIT-I (1), Tirupathi, where the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturn 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 accordingly on issue No.(1). 51. As far as the second issue with regard to whether the HUF was the partner of the firm BVRE, it was submitted by the ld. counsel for the assessee that in the partnership deed dated 24.03.2006, partners 1, 2, 6 11 (i.e., V.Madhusudhan Reddy, V.Vikram Reddy, V.Dinesh Reddy and V.Dwarakanath Reddy (HUF) ) are respectively described as continuing partners in his HUF capacity . It was submitted that such description was only to highlight the fact that these persons were also par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 partnership. The junior member of the family may make a claim against the manager for treating the income or profits received from the partnership as a joint family asset, but they cannot claim to exercise the rights of partners nor be liable as partners. From the mere fact that the manager of an HUF describing himself as representing the family entered into an agreement of partnership with other persons, it cannot be inferred that an agreement of partnership was intended contrary to law between an HUF consisting of all adult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acted in their individual capacity and vis- -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 considered the rival submissions. The CIT(A) has accepted the legal position that when a person is shown in the partnership deed as partner representing the HUF, the HUF does not become the partner. The CIT(A) has however proceeded on the basis that the description in the partnership deed in the present case showed that HUF was the partner. Thereafter, the CIT(A) applied the proposition that HUF cannot enter the partnership and carry on business and finally concluded that the partnership itself is illegal as HUF was a partner of the firm. In our view, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of banking and 20 persons in the case of any other business. The firm BVRE was not carrying on banking business and therefore could have 20 partners and on this there is no dispute. A Partnership firm if it violates the above provisions will be considered illegal. The CIT(A) in his order found that there four of the partners who were described as representing their HUFs viz., V.Madhusudhan Reddy, V.Vikram Reddy, V.Dinesh Reddy and V.Dwarakanath Reddy. He also listed members of each of the HUFs as follows: I. V.Dwarakanath Reddy (HUF) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber of partners will only be 7 partners (4 HUFs + 3 individuals). In this regard reference was made to instruction in F.No.278 dated 12.7.1978 of the CBDT accepting the decision of the Hon ble Bombay High Court in the case of Raghavji Anandji Co., 100 ITR 246(Bom) wherein it was accepted and the officers were instructed to accept the view that where partnership is constituted by two or more persons, one or more of such persons may sign the deed in dual capacity without making the partnership invalid and that the ITO can grant registration to such a firm but for the purpose of computing the number of partners, the person who becomes partner in two capacities will be counted as two. Reliance was placed by the learned counsel for the Assessee on the decision of the Hon ble Supreme Court in the case of Agarwal Co. Vs. CIT 77 ITR 10 (SC). In the aforesaid decision the ITO, the AAC as well as the Tribunal were of the opinion that some partners of the assessee-firm having entered into the partnership as representatives of their respective HUFs, the adult members of those families should be taken into consideration for determining whether or not the total number of partners exceeded tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r capacity on behalf of the HUF have to be excluded. Then the number would become 9. (12-3). The other partners are 6 (13-7 (7 = 4 HUFs + 3 individual capacity). Thus the number of persons would only be 15 (9 + 6) and therefore there is no violation of the provisions of Sec.11(2) of the Companies Act, 1956. 59. The learned DR relied on the order of the CIT(A) on the issue. 60. We have considered the rival contentions. While deciding issue No.2 we have already held that the 4 HUFs were not partners in the firm BVRE and that V.Madhusudhan Reddy, V.Vikram Reddy, V.Dinesh Reddy and V.Dwarakanath Reddy signed their deed in their individual capacity vis- vis the firm and vis- -vis the HUF they were accountable to the share of profits which they receive from the firm BVRE. It therefore follows that the number of partners would only be 13. Even assuming the revenue is right in its conclusion that for the purpose of computing the number of partners, the adult female and male members of the HUF have to be reckoned, then the number of persons in the partnership as distinct from the number of partners , would only be 15. The expression used in Sec.11(3) of the Companies Act, 1956 is me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been taxed in the hands of the Assessees by the revenue in those years. This fact has also been reiterated in the assessment orders of the Assessees for AY 07- 08(which is the subject of the present appeals) wherein the revenue has taxed only the difference between the actual capital gain (according to the revenue that accrues in AY 07-08) and the capital gain already taxed in the hands of the Assessees for AY 06-07. We therefore hold on issue No.4, that there was a valid transfer of shares by the Assessees in favour of the firm BVRE in the previous year relevant to AY 06-07. 62. The fifth issue that arises for consideration is the issue as to whether there was a transfer of shares of NCCPL by the assessees in favour of GBFL during the previous year relevant to A.Y. 2007-08, so as to bring to tax capital gain on transfer of such shares u/s. 45 of the Act in the hands of the assessee? This issue might overlap with issue 6 and 7 which we have framed for consideration. To the extent that the issue relates to tax avoidance/evasion by tax planning as contended by the revenue, we will deal with them while dealing with those grounds. The discussion on issue No.5 will therefore be limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 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 shares of NCCPL held by them to the firm BVRE and that they have no right, title or interest whatsoever over the shares so transferred. Thus it cannot be said that there was any transfer of shares of NCCPL by the Assessees to GBFL during the previous year relevant to AY 07-08. This issue is decided accordingly. 63. Issue No.6 and 7 can be taken up together. These issues are: (6) Can it be said that the entire series of transactions by which the shares of NCCPL were ultimately transferred to GBFL were all not valid and in any event were arranged in such a manner so as to avoid payment of tax on the correct quantum of capital gain that would result on transfer of shares of NCCPL to GBFL? (7) If the series of transactions by which the shares of NCCPL were ultimately transferred to GBFL were not colourable transactions and are considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spected 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 fully recognized. The law does not oblige a trader to make the maximum profit that he can out of his trading transactions. The legal right of a tax payer to decrease the amount of what otherwise would be his taxes, or altogether to avoid them, by means which the law permits, cannot be doubted. The basic proposition underlining this taxation law is that any tax payer is entitled so as to order his affairs in such a manner as to see that his liability to tax is as low as possible. If the tax payer is in a position to carry through a transaction in two alternative ways, one of which will result in a liability to tax and the other of which will not, is at liberty to choose the latter and to do so effectively in the absence of any specific tax avoidance provision. The fact that the motive for a transaction may be to avoid tax does not invalidate it unless a particular enactment so provides. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 the Bench, Hon ble Mr. Justice S.S. Sandhawalia observed as under : "Now it is trite learning to say that when an earlier judgment of the Supreme Court is analysed and considered by a latter Bench of that Court then the view taken by the latter as to the true ratio of the earlier case is authoritative. In any case latter view is binding on the High Courts. " Likewise, reliance may be placed on another Full Bench judgment of this Court in Daulat Ram Trilok Nath vs. State of Punjab AIR 1976 P H 304. In para 16, speaking for the Full Bench, Hon ble Mr. Justice S.S. Sandhawalia held that "the construction which the Supreme Court itself places on an earlier precedent is obviously binding and authoritative .". The aforesaid view has also been followed by another Full Bench of this Court in the case of Subhash Chander Kamlesh Kumar vs. State of Punjab (1990-2) 98 PLR 666 (P H)(FB). In that case the Full Benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs 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 was received by the assessee. That, the assessee did receive dividend. The fact that the dividend received was tax-free is the position recognized under s. 10(33) of the Act. The assessee had made use of the said provision of the Act. That such use cannot be called "abuse of law". Even assuming that the transaction was pre-planned there is nothing to impeach the genuineness of the transaction. With regard to the ruling in McDowell Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC), it may be stated that in the later decision of this Court in Union of India vs. Azadi Bachao Andolan Anr. (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) it has been held that a citizen is free to carry on its business within the four corners of the law. That, mere tax planning, without any motive to evade taxes through colourable devices is not frowned upon even by the judgment of this Court in McDowell Co. Ltd. s case (supra) It was submitted that in the light of the late ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 wanted to buy the entire paid up capital of NCCPL) and V.Vikram Reddy who represented the 16 shareholders of NCCPL and who belonged to the Reddy family, whereby it was agreed that the entire paid up share capital of NCCPL would be sold to GBFL for a consideration of Rs.270 Crores. The MOU (Clause-2.2) specifically provides that the parties shall endeavor to structure the Transaction in such a manner as to be mutually beneficial. (d) On 5.5.2006 the NCSPL by way of succession took over the business and firm BVRE lock, stock and barrel. Thus they became owners of the shares of NCCPL held by the 13 partners of BVRE which had become the property of the firm on being brought in by the partners as their capital contribution to the firm BVRE. (e) On 10.6.2006 NCSPL sold the shares to GBFL. According to him the MOU dated 29.3.2006 reflects the real intention of the parties. He pointed out that the MOU was signed by Vikram Reddy as representing the 16 persons who held the entire paid up capital of NCCPL. The names of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ble Supreme Court in the case of Sunil Siddharthbhai Vs. CIT 156 ITR 509 (SC). The question in the aforesaid case which related to AY 73-74, was as to whether when a partner introduces capital asset belonging to him as his capital contribution to a firm is there a transfer giving raise to incidence of tax on capital gain on transfer of a capital asset. The Hon ble Supreme Court held that there was a transfer in such an event but the value recorded in the books as value of capital brought in by the partner was only notional and therefore not full value of consideration received on transfer u/s.48. Since the full value of consideration could not be determined it was held that the computation provision viz., Sec.48 fails and therefore the charge to tax also fails. The learned Senior Advocate for the revenue drew our attention to the following observations of the Hon ble Supreme Court in the penultimate paragraphs: 20. We have decided these appeals on the assumption that the partnership firm in question is a genuine firm and not the result of a sham or unreal transaction, and that the transfer by the partner of his personal asset to the partnership firm represents a genuine int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he partners should be brought in as capital of the firm. There was no business exigency established/shown which necessitated brining in shares of NCCPL as capital contribution by the partners. It was also pointed out that on 5.5.2006 (within a period of just 42 days) the firm was taken over by NCSPL and thereafter on 10.6.2006 the shares of NCCPL were sold by NCSPL to GBFL. According to him all the circumstances referred to above would only go to show that the revenue authorities were right in coming to the conclusion that in reality during the previous year relevant to AY 07-08, shares were in fact sold by the 13 partners of the firm BVRE to GBFL and that all the intermediary steps are nothing but a device or ruse to avoid payment of legitimate tax on capital gain on transfer of shares of NCCPL. 69. It was next submitted by the learned Senior Advocate for the Revenue that the decision of the Hon ble Supreme Court in the case of Azadi Bachao Andolan (supra) will not be of any assistance to the plea of the revenue. In this regard he drew our attention to page 759 para 3 last 6 lines of ITR Volume 263 wherein the Hon ble Supreme Court explained it s conclusions on Mc.Dowells case ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cipal company for whatever purpose. An obvious purpose that is served and which stares one in the face is to reduce the amount to be paid by way of bonus to workmen. It is such an obvious device that no further evidence, direct or circumstantial, is necessary It was thus contended that in the present case, the facts speak for themselves and the device employed by the Assessees should be held to be a smoke-screen and the real transaction was sale of shares by the 13 partners of BVRE to GBFL. 71. The learned Senior Advocate for the revenue placed reliance on the decision of the House of Lords in the case of Revenue and Customs Commissioners Vs. Total Network SL (2008) 2 All ER 413. It was a case where by a tax avoidance scheme taxes lawfully payable to the state were avoided by employing missing traders as intermediaries. The Revenue and Customs Commissioners proceeded to institute civil suit for damages against one of the available conspirator liable for the value added tax which was avoided, alleging that he was liable to be proceeded against the tort of conspiracy where the unlawful means alleged was the common law offence of cheating the public revenue. The question befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ph): . For years a battle of maneuver has been waged between the legislature and those who are minded to throw the burden of taxation off their own shoulders on to those of their fellow subjects. In that battle the legislature has often been worsted by the skill, determination and resourcefulness of its opponents, of whom the present appellant has not been the least successful. It would not shock us in the least to find that the legislature has determined to put an end to the struggle by imposing the severest of penalties. It scarcely lies in the mouth of the taxpayer who plays with fire to complain of burnt fingers. 76. Our attention was also drawn to the following observations in the decision of the Hon ble Supreme Court in the case of Keshavji Ravji and Co. Vs. CIT 183 ITR 1 (SC) : Artificial and unduly latitudinarian rules of construction, which with their general tendency to "give the taxpayer the breaks", are out of place where the legislation has a fiscal mission. Indeed, taxation has ceased to be regarded as an "impertinent intrusion into the sacred rights of private property" and it is now increasingly regarded as a potent fiscal tool of State policy to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision of the Hon ble Supreme Court in the case of Sunil Siddharthbai (supra) has now been superseded by a statutory amendment and therefore those observations are no longer relevant. It was pointed out that the Assessees have offered to tax capital gain u/s.45(3) of the Act, on introduction of the shares of NCCPL as capital contribution to the firm BVRE in AY 06-07 and the revenue has accepted the same. It was therefore submitted that those observations are not of any help to the revenue in the present case. It was reiterated that all steps taken by the Assessee were legal, real and genuine, may be with the ultimate result of a lesser tax burden, but that cannot be a ground to regard the transactions as either colourable, dubious device to avoid tax or subterfuge. The series of transactions cannot also be said to be sham. Finally it was submitted that the revenues apprehension of tax avoidance are all without any basis in view of the amendment to the law by the Finance Act. 2012. The amendment to the law and its effect on the tax liability in the hands of NCSPL/BVREPL has been set out in paragraph-39 to 44 of this order. As a consequence the real capital gain on sale of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, Chinnappa Reddy, J. has proposed a separate opinion with which we agree". The words "this aspect" express the majority's agreement with the judgment of Reddy, J. only in relation to tax evasion through the use of colourable devices and by resorting to dubious methods and subterfuges. Thus, it cannot be said that all tax planning is illegal/illegitimate/impermissible. Moreover, Reddy, J. himself says that he agrees with the majority. In the judgment of Reddy, J. there are repeated references to schemes and devices in contradistinction to "legitimate avoidance of tax liability" (paras 7-10, 17 and 18). In our view, although Chinnappa Reddy, J. makes a number of observations regarding the need to depart from the "Westminster" and tax avoidance these are clearly only in the context of artificial and colourable devices. Reading McDowell (supra), in the manner indicated hereinabove, in cases of treaty shopping and/or tax avoidance, there is no conflict between McDowell (supra) and Azadi Bachao (supra) or between McDowell (supra) and Mathuram Agrawal (supra). His Lordship Mr.Justice K.S.Radhakrishnan in his concurring but separate judgment had the following to say the principle laid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he judgment is what is spoken by Justice Mishra for himself and on behalf of three other judges, on which Justice Reddy has agreed. Justice Reddy has clearly stated that he is only supplementing what Justice Mishra has said on tax avoidance. 115. Justice Reddy has endorsed the view of Lord Roskill that the ghost of Westminster had been exorcised in England and that one should not allow its head rear over India. If one scans through the various judgments of the House of Lords in England, which we have already done, one thing is clear that it has been a cornerstone of law, that a tax payer is enabled to arrange his affairs so as to reduce the liability of tax and the fact that the motive for a transaction is to avoid tax does not invalidate it unless a particular enactment so provides (Westminster principle). Needless to say if the arrangement is to be effective, it is essential that the transaction has some economic or commercial substance. Lord Roskill s view is not seen as the correct view so also Justice Reddy s, for the reasons we have already explained in earlier part of this judgment. 116. A five Judges Bench judgment of this Court in Mathuram Agrawal vs. State of Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfine ourselves only to the first set of transactions by which the shares of NCCPL held by the 13 partners of the firm BVRE in their names were transferred to the firm BVRE. On this aspect we have already narrated the facts in paragraphs 16 to 23 of this order and are not being repeated again. Suffice it to say that there was a valid transfer of shares of NCCPL by the 13 individuals to the firm BVRE. The law is well settled whatever is brought in by the partners as capital contribution or treated as property of the firm becomes the property of the firm. The evidence on record clearly indicate that there was a transfer of ownership in shares from the 13 individuals in favour of the firm BVRE as on 24.3.2006 when the firm made the necessary book entries and when the partners made their intentions clear that the shares were to be treated as the property of the Firm in the form of resolution, declaration u/s.187-C of the Companies Act, 1956. Thus the Assessees could no longer be considered as owners of shares of NCCPL brought in as capital of the firm, on and from 24.3.2006. There is nothing on record to suggest real intention of the parties was to treat the Assessee as owner of the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the shares of NCCPL were ultimately transferred to GBFL, are all steps taken with a view to avoid payment of legitimate tax on the correct quantum of capital gain and therefore deserve to be ignored. He also highlighted the quick span of time within which the various transactions had been carried out and argued that the intention was to avoid payment of tax on the correct quantum of capital gain on sale of shares of NCCPL to GBFL. As far as the MOU dated 29.3.2006 is concerned it may be true that it has all ingredients of a valid agreement and the bargain between the parties as contained in this agreement was ultimately reflected in the share purchase agreement dated 10.6.2006. The MOU gives the particulars of the shareholders as on 1.3.2006. As early as 24.3.2006 the shares of NCCPL held by the 13 partners were already transferred to the firm BVRE as capital contribution of the partners. It is not possible to hold that the transaction of transfer by the partners of the shares of NCCPL as capital contribution on 24.3.2006 was not contemporaneous and that it was an after-thought. There is no evidence on record to that effect. Further the MOU dated 29.3.2006 stands superseded by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned Senior Advocate for the revenue are not being adverted to as the decision of the Hon ble Supreme Court in the case of Vodafone (supra) is the law on the subject, which has been the basis for our conclusions as above. The conclusion on the common issue that arises for consideration in these appeals by the Assessees is that the order of the revenue authorities bringing to tax capital gain on sale of shares of NCCPL to Godrej by NCSPL in the hands of the Assessees cannot be sustained and the addition made by the revenue authorities in the case of the Assessees is directed to be deleted. The relevant grounds of appeal of the Assessees in their appeals are allowed. 85. Now we will take up for consideration the other issues in the respective appeals of the assessee. ITA No.149/Bang/2011 B. Madhusudan Reddy (HUF) AY 2007-08 86. The assessee has filed concise grounds of appeal. Ground Nos. 1 to 19 raised by the assessee is with regard to the common issue i.e., capital gains on sale of shares of NCCPL by NCSPL to GBFL. This issue has already been decided in the earlier paragraphs. For the reasons stated therein, these grounds are allowed. 87. Concise ground No.20 reads as fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit to the assessee by way of remission or cessation of liability. There is no evidence on record to show that the assessee had received any such benefit by way of remission or cessation of liability. An addition u/s. 41(1) cannot be made on presumptions and assumptions. The fact remains that the assessee continues to recognize the outstanding balances as its liability. Unless there is evidence to show that the provisions of section 41(1) are attracted, the addition made cannot be sustained. We accordingly direct that the addition sustained by the CIT(A) deserves to be deleted and accordingly the same is hereby deleted. Ground No.21 is accordingly allowed. 93. Concise ground No.21 raised by the assessee reads as follows:- The addition in a sum of Rs.4,25,577/- with respect to the appellants dealing with M/s. Adani Exports who had raised a debit note on the appellant that was duly reflected in the accounts on account of shortage of Iron Ore is not justified. 94. The assessee HUF carries on the business of dealing in granites and money lending. In the course of assessment proceedings, the AO noticed that the assessee was running the business of dealing in granites as propr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.150/Bang/2012 - Smt. V. Soumini Reddy AY 2007-08 98. The assessee in this appeal is an individual. She carries on the business of money lending, besides income from other sources. The assessee has filed concise grounds of appeal. Ground Nos. 1 to 19 raised by the assessee is with regard to the common issue i.e., capital gains on sale of shares of NCCPL by NCSPL to GBFL. This issue has already been decided in the earlier paragraphs. For the reasons stated therein, these grounds are allowed. 99. Concise ground No.20 raised by the assessee reads as follows:- There was no ground for disallowance of loss of Rs.1,81,235/- in money-lending business on the ground that no evidence was produced as there was no enquiry made even during the making of the remand report. 100. The assessee claimed that she had incurred a loss of Rs.1,81,235 from money lending business. On verification of the details, the AO noticed that the assessee had received interest from two persons amounting to Rs.1,20,000. She claimed that she had borrowed those funds and had paid interest on such borrowing of Rs.1,81,106. The AO was of the view that the assessee was not carrying on the business of money l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st and also in the subsequent assessment years. We therefore set aside the order of the CIT(A) and remand the issue to the AO for fresh consideration with liberty to the assessee to substantiate her case that interest income in question was from the business of money lending. 105. Concise ground No.21 raised by the assessee reads as follows:- 21) The sum of Rs. 1,77,778/- was merely advance towards share purchase which never materalised and merely because it was outstanding for a long time, under no provision of law could it have been treated as income for the current assessment year. 106. This ground is identical to ground No.21 in ITA No.149/Bang/2011, the only difference being that the outstanding amount shown in the balance sheet of the assessee was sum due and payable to M/s. Nestle India Pvt. Ltd. as advance for purchase of shares of NCCPL held by the assessee. The revenue invoked the provisions of section 41(1) of the Act and brought a sum of Rs.1,77,778 to tax on the ground that the liability shown in the balance sheet no longer exists. The order of the AO was confirmed by the CIT(A). We have already held while deciding similar ground in ITA No.149/Bang/2011 that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt shown as loan in his account in the books of the company was reimbursement of the loan given on behalf of the company to two persons, the addition deserved to be sustained. Accordingly ground No.17 raised by the assessee is dismissed. 113. Ground No.18 raised by the reads as follows:- The disallowance of Rs.1,48,78,299/- is unwarranted by law as the assessee was carrying on money lending business and it is not shown that any part of the borrowed amount interest on which is the subject matter of disallowance was lent for non-business purposes or diverted as such. 114. During the previous year, the assessee had shown receipt of interest of Rs.1,97,969 under the head income from other sources . The interest had been received from two debtors viz., Shri Vasudevan and Hamsa Mineral Exports. Against the aforesaid income, the assessee claimed expenses to the tune of Rs.1,50,70,266 as interest paid on borrowings and declared a loss of Rs.1,49,27,013. According to the assessee, the borrowings on which interest was paid, was used to give loans to persons from whom interest income was received. 115. In the course of assessment proceedings, the AO called for the details of loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of CIT v. S.A. Builders 288 ITR 1 (SC). 117. The CIT(A) did not agree with the submissions of the assessee and he held as follows:- 12.2 I have gone through the above. M/s. S.A. Builders case had in fact been set aside to the High Court to verify the veracity of the new evidence provided by the respondent M/s. S.A. Builders to justify that the amount given as interest free loan to its sister concern M/s. SAB was entirely from its own funds and not a pie from any borrowed funds on which interest had been paid. This is not the case here at all. Admittedly loan had been borrowed from Bank on which interest had been paid and such borrowed funds had been diverted to some persons as loan on which interest has not been charged. Hence facts differ. However, obiter dicta of the Apex Court is also binding. In the obiter dicta of the S.A. Builders case, the Honorable Court has enunciated the principles of commercial expediency. It is stated therein that the revenue authorities is not allowed to sit in the chair of the businessman to decide which expenditure is to be incurred for the purpose of business. In other words, if some nexus between the expenditure and the business c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for no interference. Consequently ground No.18 raised by the assessee is dismissed. 120. Ground No.19 raised by the assessee is with regard to charging of interest u/s. 234A of the Act. The charging of interest is consequential and the AO is directed to give consequential relief. 121. In the result, ITA No.158 is partly allowed. ITA No.159/Bang/2011 V. Vikram Reddy (HUF) 122. The assessee is a HUF. The assessee has filed concise grounds of appeal. Ground Nos. 1 to 16 raised by the assessee is with regard to the common issue i.e., capital gains on sale of shares of NCCPL by NCSPL to GBFL. This issue has already been decided in the earlier paragraphs. For the reasons stated therein, these grounds are allowed. 123. Ground No.17 raised by the assessee is with regard to charging of interest u/s. 234A of the Act. The charging of interest is consequential and the AO is directed to give consequential relief. 124. In the result, ITA No.159/Bang/2011 is partly allowed. 125. In the result, all the appeals are partly allowed. Order pronounced in the open court on 8.2.2013. Details of the constitution under the four Patnership deeds drawn up with respect to the firm of BVRE ..... X X X X Extracts X X X X X X X X Extracts X X X X
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