TMI Blog2020 (11) TMI 263X X X X Extracts X X X X X X X X Extracts X X X X ..... rship belongs to partners only and no distinction could be drawn between partnership firm and partners in this regard. Hence, the apprehensions of the revenue in this regard deserve to be squarely dismissed. Assessee partnership firm had been subsequently converted into a private limited company i.e. Shrilekha Business Consultancy Pvt. Ltd., and the capital reserve lying in the books of the assessee firm had been duly credited as such in the financial statements of the successor company under the head reserves and surplus - reconstituted partnership deed also provides this clause about the subsequent event which may happen regarding the fact of conversion of the partnership firm into a private limited company or limited liability partnership (LLP) - dismiss the arguments advanced by the revenue before us that capital reserve belongs to the firm and not to the partners. Hence, there cannot be any allegation that can be levelled on the assessee in the instant case that the capital reserve was created as part of a scheme to avoid tax liability and is part of any colourable device. We also agree with the arguments advanced before us that pursuant to assessee firm receiving capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 56(2)(viia) of the Act. Certainly, it is not the case of the AO that money received thereon is without any consideration or for inadequate consideration, hence, the provisions of Section 56(2)(viia) of the Act cannot be made applicable to the facts of the assessee s case and the contentions of the ld. AO deserves to be dismissed at the threshold level itself. - there cannot be any taxability either u/s.56(1) or u/s.56(2)(viia) of the Act in the hands of the assessee firm. - Decide against revenue. Addition u/s 45(3) or 56(2) - Whether consolation received on transfer of shares from the partner by the assessee is ' capital contribution ' and cannot be considered as 'consideration' for the purpose of Sec. 56(2) (viia) ? - HELD THAT:- We find that the value of the shares were recorded by way of credit to the partners capital account in the form of capital contribution in terms of Section 45(3) of the Act. Though the provisions of Section 45(3) of the Act are applicable for levy of capital gains in the hands of the transferor i.e. partner in the instant case, the consideration fixed thereon cannot be different in the hands of transferee i.e. the assessee firm as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith 0.01% share each. The total partners capital was ₹ 7,49,926/- of which, SOT contributed capital of ₹ 7,49,701/- and other three partners contributed 225 at ₹ 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 ₹ 10/- each - ₹ 7,49,700/- 2. 95747200 shares of Shriram Capital Ltd., (SFL) - ₹ 1/- Total ₹ 7,49,701/- 3.1 Piramal Enterprises Ltd (PEL), a Mumbai based company decided to acquire an effective 20% equity stake in M/s Shriram Capital Ltd (SCL) vide their Board resolution dated 01.04.2014. 3.2 Simultaneously, PEL formed a Committee of Directors with a mandate to finalise and approve the structure, mode, manner and tranches in which such acquisition was to be made, including the intermediate entity(ies) through which such investment should be made. It was decided by the Committee of Directors on 17.04.2014 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 PIRAMAL ENTERPRISES LIMITED ( PIRAMAL ) AGREES TO ACQUIRE 20% EQUITY STAKE IN SHRIRAM CAPITAL LIMITED ( SHRIRAM CAPITAL ) Mumbai, 17 April 2014: Piramal Enterprises Ltd. ( Piramal, NSE; PEL, BSE:500302) today announced that it has agreed to acquire an effective 20% equity stake in Shriram Capital Limited ( Shriram Capital or Company ) a financial services company, for an aggregate consideration of ₹ 2,014 Cr. 4.1. The ld. AO observed that the information ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 RESOLUTION PASSED AT THE MEETING OF THE BOARD OF DIRECTORS OF PIRAMAL ENTERPRISES LIMITED HELD ON 6TH AUGUST, 2014 WHEREAS: A. Pursuant to the resolution passed by the Board at its meeting on 1st April, 2014, the Company had acquired an effective 20% equity interest in Shriram Capital Limited ('Shriram Capital'), consequent to which, the equity interest of one of the existing shareholders of Shriram Capital i.e. Sanlam Limited ('Sanlam') that then held an effective equity interest of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved that to acquire 74% of ₹ 8.30 Crores what is required to be contributed by M/s. PEL is only ₹ 6.22 Crores. This fact is also proved from the balance sheet of the assessee firm. Hence, whatever, the additional amount of ₹ 2111.23 Crores received by the assessee firm was over and above the required capital of ₹ 6.22 Crores. Accordingly, he concluded that the submission of the assessee that PEL infused capital of ₹ 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 ₹ 2014 Crores as mentioned in the press release issued by SCL by placing reliance on the valuation report of SCL which valued the total worth of SCL to be ₹ 10071 Crores (comprising of 1022023239 shares). The 20% of the same would work out to ₹ 2014.20 Crores. The amounts received in the bank account of the assessee on 17/04/2014 and 21/04/2014 was ₹ 2015 Crores which was same as the cost for 20% of the shares of SCL and which was also the aggregate consideration payable by M/s. PEL. Accordingly, the ld. AO concluded that what was shown as reserve in the balance sheet amountin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SFS. (para 3.3 of assessment order). The real intention of PEL was to acquire 20% stake in Shriram Capital Ltd (SCL) for an aggregate consideration of ₹ 2114 cr through SFS. (iii) What is shown as reserve of ₹ 2111.23 cr in the balance sheet of SFS( assessee herein) is not at all the reserves but it is aggregate consideration received on behalf of SCL for acquisition of shares by PEL (Para 3.13 and 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 ₹ 2111.23 cr received from PEL (para 3.21 of the assessment order). The treatment of ₹ 2111.23 cr as reserves of the partnership clearly shows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sources (Para 3.43 of the assessment order). (xii) Alternatively, the same is liable to be taxed u/s 56(2)(viia) as the money received from PEL was utilised on the same day for acquisition of shares of Novus (Para 3.44 of the assessment order). 5. The assessee had submitted that SCL could increase its 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .04.2014 between Shriram Ownership Trust (SOT), Mr.D.V.Ravi, Mr.S.Murali, Mr. KJagadish and M/s.Piramal Enterprises Limited (New partner) e) Deed of Amendment in Partnership deed dated 26.11.2014 between Shriram Ownership Trust (SOT), Mr.D.V.Ravi, Mr.S.Murali, Mr. KJagadish and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in SCL to enable PEL to have 20% interest in SCL while remaining as a partner in Shrilekha. 6.2. The ld. CIT(A) deleted the addition by meeting all the allegations levelled by the ld. AO in his assessment 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. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficial owner, the said amount of ₹ 2111,22,65,347/- received by the assessee firm was treated as income of the assessee and the same was taxed as Income from Other Sources' of the assessee 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 ₹ 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion @ 98.54 per share of M/s. SCL in its bank account, but also fulfilled its obligation on the same day (17-4-2014) and made M/s.PEL a beneficial owner of 20% equity stake M/s.Shriram Capital 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 ₹ 2014,20,00,000 required for acquiring 20% stake in M/s.SCL @ ₹ 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 ₹ 2014.20 crores by the assessee firm on 17.4.2014 ( ₹ 1000 crores) and 21.04.2014 ( ₹ 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 ₹ 98.54 is nothing but average price per share which is ranging between ₹ 96.95 to ₹ 100.73. The same is evident from the para no.6.2 of the val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee firm on 27-3-2014. c) M/s. SFVCPL is a private Limited Company is in turn a shareholder in M/s. SCL by holding 71,62,07,367 shares. By way of this SOT who is the owner of 5,00,000 shares out of 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 ₹ 2100 crores (copy of Board's Resolution is enclosed herewith this Paper Book). f) As discu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers were made the beneficial owner of 9,57,47,200 SCL shares in their profit sharing ratio of 25.997% : 74 % between SOT and PEL. Accordingly, 9,57,47,200 shares were now rearranged in the ratio of 2,48,94,272 : 7,08,52,928 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. 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 sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orth of M/s. NCSPL as on 31-3-2014 is only ₹ 69,100/. q) Having taken a decision by the assessee firm to acquire the balance shares through M/s. NCSPL, the assessee firm resorted to number of steps to acquire the balance shares to fulfil its obligation towards M/s. PEL a partner who paid the assessee an amount of ₹ 2014.20 crores. q(i) As a first step the authorised share capital of M/s. NCSPL which is ₹ 1,00,000/- only was increased to ₹ 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 ₹ 2015.70 crores ( ₹ 1000 crores on 17-4-2014 and ₹ 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 @ ₹ 10/- per share. r) M/s.NCSPL who had received an amount of ₹ 2015.70 crores from the assessee firm in turn used part of the mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of 20% of SCL was also changed. The required number of shares for PEL to become 20% share holder has now gone upto 21,48,82,366 ( 20% of 107,44,11,829 ) from the existing requirement of 20,44,04,648(20% of 102,20,23,239). V) To fulfil the new obligation casted on the assessee firm to make M/s. PEL 20% equity stakeholder and the increased share capital base of M/s. SCL, the assessee firm received further sum of ₹ 103,24,99,952 in its rank account on 27-8-2014. On the same day the assessee firm utilised this money for subscribing shares of NCSPL @ ₹ 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 ₹ 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 @ ₹ 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is constitutes 20% effective stake '20% of 107,44,11,829 ) as required by M/s. PEL in its Board's Resolution dated 1- 4-2014 and 16-8-2014. The consideration required -or acquiring the same is ₹ 2117,45,10,710 (21,48,82,390 shares x ₹ 98.54 per share ). 10. PEL paid the said consideration to the assessee firm to enable the assessee firm to make 20% stake holder in M/s SCL in the following manner : SI. No. Date Amount [Rs] 1. 17.04.2014 1000,00,00,000/- 2. 21.04.2014 1014,20,00,000/- 3. 27.08.2014 103,24,99,952/- 2117,44,99,952/- 10.1. Out of the above aggregate amount received, the assessee firm has shown an amount of ₹ 6,22,34,605/- towards capital contribution by M/s.PEL and the remaining amount of ₹ 2111,22,65,347/- was shown as capital reserve . The assessee firm claimed that the capital reserve is meant for future investment. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the facts and in the circumstances of the case. The said amount so received from M/s.PEL was rightly brought to tax in the hands of the assessee firm in the assessment order passed for the assessment year 2015-16. 12. It is also pertinent to bring to the notice of the Hon'ble Tribunal that in recent newspaper reports published in Economic Times on 23.04.2019, Business Standard on 23.04.2019 and Eenadu Telugu Newspaper on 24.04.2019, it was mentioned that the new partner M/s. Piramal Enterprises Limited intends to sell its 20% stake in M/s.SCL to prospective buyer. It can therefore be said that M/s.PEL can express its intention only when it is the owner of the shares. This fact also proves that M/s. PEL had become owner of 21,48,82,256 shares of SCL or 20% of effective stake holder in SCL ( 20% of 107,44,11,829 shares ) only after making the requisite aggregate consideration of ₹ 2117,44,99,950/- to the assessee firm. The word to word mention i the Board's Resolutions of M/s. PEL date 1-4-2014 and 6-8-2014 also says the payment is an aggregate consideration and the same is paid for acquiring 20% state in SCL. [copy of the Board's Resolutions were made part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow did the aggregate consideration (as held by the ld. AO) become income of the firm ? (ii) Whether the ld. AO presumed that there was no cost of acquisition of shares and the assessee firm got it for free? In the same assessment order, the ld. AO had repeatedly stated that the entire money received from PEL has landed with SCL through Novus for the purpose of allotment of its shares by diluting its equity. Having given such a finding, there is absolutely no basis for making a presumption. He argued that if the ld. AO is of the view that there is no cost of acquisition to the shares, the ld. AO should have stated so giving proper reasoning for reaching such conclusion. If entire consideration (as held by the ld. AO) was held income, what would happen to the cost and when and how would the cost of such shares would get set off in the hands of the assessee? (iii) How was the receipt taxed under the head income from other sources when shares were part of the firm s investments? 8.1. At the outset, the ld. AR submitted that during the course of arguments made by the ld. DR, a reference was made to the Board Resolution of PEL dated 01/04/2014 based on which, the ld. DR emphat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt was only in the capital field. He also argued that allotment of shares through IPO, rights issue, private placement etc., are legally permissible methods available for any company. In the present case, no entity transferred shares of SCL to PEL. SCL allotted its shares to Novus through private placement basis by duly enhancing its authorised and paid up capital. The ld. AR referred to pages 25-27 of his paper book containing the relevant pages of the financial statements to prove the fact that authorised capital and paid up capital of SCL was duly increased. The ld. AR further submitted that on amalgamation of Novus with SCL, shares allotted earlier to Novus were allotted to SFS (assessee firm). On the amount received by SCL from Novus for the allotment of shares, no income arises in its hands leave alone its taxability. 8.5. The ld. AR also argued that even if SCL allotted shares to PEL directly on private placement basis, still no tax liability would arise in the hands of any entity. He also stated on record which could be construed as a statement made from the bar that this was not the first time SCL had made allotment of shares in an effective way. He submitted that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce sheet, capital reserve was created as agreed upon in the partnership deed. The allocation of capital contribution of PEL between partner s capital account and capital reserve was agreed among the partners vide para 6.2 of partnership deed dated 17.04.2014 (copy of partnership deed is enclosed in page 152 of revenue s paper book). (ii) Capital reserve revaluation reserve in firms and Capital reserve , share premium , reserves and surplus etc., under Companies Act are analogous accounting concepts. The only difference being, it is codified under Companies Act whereas it is not done under Indian Partnership Act (IPA). IPA does not provide for any particular method(s) to maintain accounts by a firm unlike the Companies Act. Capital reserve is very much in vogue in the accountancy norms being followed by the companies. Accountancy norms of companies are formalised in the form of accounting standards recognised under the Companies Act and are always considered as that of higher standards. There is nothing wrong in following accountancy norms of higher standards and the same cannot be viewed adversely. (iii) The IPA provides that all activities viz: conduct of business, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, SFS (assessee firm herein) is only a concern controlled, managed by Piramal group and not Shriram group. The ld. AO wanted to tax some entity in Shriram group somehow but finally ended up taxing Piramal group on its capital contribution. 8.8. The ld. AR addressed yet another misconception of the ld. AO that the entire transaction was devised in such a manner that there is absolutely no liability to pay tax by the Shriram group on the aggregate consideration of ₹ 2111.23 Crores received from PEL. The ld. AR also drew our attention to para 3.4 of the assessment order wherein the ld. AO had stated that it is an undisputed fact that Shriram group is liable to pay tax of ₹ 2100/- crores of the consideration received . Further in para 3.37 of the assessment order, the ld. AO had also mentioned that it is an undisputed fact that the consideration so received from PEL for getting shares of SCL is to be taxed somewhere down the line . The ld. AR submitted that the aforesaid observations of the ld. AO are casual, vague, baseless, unlawful and do not deserve to be taken into cognizance and is purely based on surmise and conjuncture. The ld. AR stated that the ld. AO cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 2111.23 Crores was made by the ld. AO u/s.56(1) of the Act by adducing the following reasons:- (a) Treatment of ₹ 2111.23 Crores as reserves of the partnership shows that the partner had gifted the said amount to the firm. (b) The assessee was a conduit of PEL for indirect transfer of money to SCL and to acquire its 20% stake. (c) Confirmation given by PEL that its investment in the assessee firm was recorded in its books as investment as factually incorrect. (d) Money was paid as consideration for acquiring 20% stake in SCL as per Board Resolution of PEL and consideration received directly or indirectly for transfer of shares is liable for tax under the Income Tax Act. (e) As the sum received by assessee firm inturn helped to fulfil the objective of PEL, the same will form part of assessee s income. (f) PEL used assessee and Novus as vehicles to acquire stake in SCL to do away with incidence of taxation. (g) Definition of income u/s.2(24) is inclusive and it takes care of receipts which does not contain any element of profit or gain. 8.11. The ld. AR met each of the aforesaid reasoning in the following manner:- (i) There cannot be a gift o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.12. The ld. AR without prejudice to aforesaid arguments also submitted that in any case, the ld. AO had made addition u/s.56(1) of the Act taxing the entire receipt as income from other sources even without making any deduction towards cost of shares / cost of investment which was eligible for deduction in terms of 57(iii) of the Act. He argued that if the said deduction towards cost is given then it would set off the entire addition and nothing would remain. With regard to addition made by the ld. AO alternatively u/s.56(2)(viia) of the Act, he argued that the monies received by the assessee from PEL and utilised on the same day by investing in Novus. The ld. AR argued that the provisions of Section 56(2)(viia) of the Act does not cover these type of transactions. 9. In defence, the ld. DR argued that pursuant to receipt of monies from PEL, there was sacrificing of interest by the existing partners in favour of PEL. The consideration attributable to this sacrifice of interest is retained in capital reserve. Hence, the same is liable to be taxed u/s.56(1) of the Act. He fairly agreed that deduction however, should be given for cost of shares in terms of 57(iii). 9.1. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Resolution dated 01/04/2014 of PEL contemplated setting up of sub-committee of Directors who had been given the task of finalising of approving the mode of investment, identifying the 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., This clearly shows the intention of PEL to have only effective stake in SCL through intermediate entities and not directly. Hence, the primary contention of the revenue is that PEL had paid monies to assessee for ultimately holding stake in SCL need to be appreciated in the context of the aforesaid resolution which specifies the intention of PEL. 10.3. We find that shares of SCL were never transferred nor allotted to PEL by any entity. The ld. AR also submitted that the name of PEL never figured in the shareholders register of SCL and similarly, the name of SCL never figured in the books of PEL. The books of PEL reflect investment made in SFS assessee firm alone. This fact stated by the ld. AR was not controverted by the ld. DR before us. We also find lot of force in the argument advanced by the ld. AR that PEL cannot make direct inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are prevented from making any allotment of shares even on private placement basis other than to its group concerns. We find that this fact had missed attention of the ld. AO while considering entire gamut of transactions. Hence, the allegations levelled by the ld. AO which was strongly supported by the ld. DR that the entire transaction is a colourable device are hereby rejected. Accordingly, the case law relied upon by the ld. AR need not be gone into by us. 10.5. With regard to the creation of capital reserve in the books of assessee firm and substantial amount received from PEL towards capital contribution getting credited to such reserve account in the books of assessee firm, we find that the ld. AR had duly explained its purpose of creating such capital reserve and had met each and every allegation levelled by the ld. AO in his assessment order and subsequently in his remand report. We find that the existing partner in assessee firm SOT holding 25% partnership share had contributed only ₹ 7,49,001/-, whereas PEL had contributed ₹ 2117.45 Crores for its 75% share in the assessee firm. This apparently gives a lopsided picture of the financial statements of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd., and the capital reserve lying in the books of the assessee firm had been duly credited as such in the financial statements of the successor company under the head reserves and surplus. Infact reconstituted partnership deed also provides this clause about the subsequent event which may happen regarding the fact of conversion of the partnership firm into a private limited company or limited liability partnership (LLP). Hence, we summarily dismiss the arguments advanced by the revenue before us that capital reserve belongs to the firm and not to the partners. Hence, there cannot be any allegation that can be levelled on the assessee in the instant case that the capital reserve was created as part of a scheme to avoid tax liability and is part of any colourable device. 10.6. We also agree with the arguments advanced before us that pursuant to assessee firm receiving capital contribution from PEL to the tune of ₹ 2117.45 Crores, PEL had become 75% partner in the assessee firm. Hence, for all practical purposes, the assessee firm belongs to Piramal group and not to Shriram group as understood by the ld. AO in her assessment order. 10.7. We find that the transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also goes in consonance with the actual intention of PEL which is approved in the Board Resolution dated 01/04/2014 as PEL always intended to have only effective stake of 20% in SCL and not direct stake thereon. We find that the ld. AO had summarily disregarded this confirmation given from PEL without any basis. 10.9. In any case, we find that the entire transactions carried out by the assessee, PEL and SCL does not fall within the ambit of definition of income u/s.2(24) of the Act in any manner whatsoever, as the entire transactions are only in the capital field. These transactions do not have any incidence of taxation at all. It is not in dispute that PEL had actually made capital contribution of ₹ 2117.45 Crores in assessee firm, which is partly kept in capital account and partly kept in capital reserve account. Hence there cannot be any gift of capital by a partner to the partnership firm as PEL would not like to lose its rights and interest in partnership firm for the capital contributed by them. Hence it would be totally unfair and baseless to state that PEL had actually gifted or parted with its capital lying in capital reserve to the firm. 10.10. The one f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR before us, viz, decision of the Hon ble Allahabad High Court in the case of CIT vs. Carlton Hotel Pvt. Ltd., reported in 399 ITR 611(All) and the decision of Hon ble Karnataka High Court in the case of CIT vs. Wipro Ltd., 227 Taxman 244(Kar) are concerned, the said decisions are factually distinguishable in as much as they were concerned with the taxability of capital gains. The ld. DR had also argued before us that there cannot be any levy of capital gains in the instant case as assessee is not engaged in the business activity of purchase and sale of shares and hence, there cannot be any business income or capital gains. Kind reference is drawn to arguments advanced by the ld. DR in this regard which is considered in para 7.1. supra. Hence, the decisions relied upon by the ld. DR hereinabove, does not advance the case of the revenue. 10.16. In view of the aforesaid observations, we categorically hold that there cannot be any taxability either u/s.56(1) or u/s.56(2)(viia) of the Act in the hands of the assessee firm. We find that the ld. CIT(A) had duly appreciated the facts of the assessee in right perspective which in our considered opinion do not warrant any interference. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit sharing ratio. During the assessment year under consideration, Shriram Ownership Trust (SOT) joined the firm as fourth partner with 99.97% share and above three individuals continued as partners with 0.01% share each. The re-constituted partnership deed was duly prepared in this regard and as per the said deed, SOT s contribution towards capital was as under:- i. 74,970 shares of Shriram Financial Venture Capital Pvt Ltd (SFVCPL) - Value was taken at ₹ 7,49,700/- @ ₹ 10/- u/s 45(3) of the Act and credited to capital account of SOT. ii. 9,57,47,200 shares of Shriram Capital Ltd (SCL) - Value was adopted at ₹ 1/- u/s 45(3) of the Act and credited to capital account of SOT. 14.1. Pursuant to the above, total partner s capital as on 31/03/2014 was ₹ 7,49,926/-. The break-up of the sum are as under:- SOT capital contribution - ₹ 74,9701/- Other three partners capital contribution - ₹ 225/- Total ₹ 7,49,926 14.2. The return of income for the A.Y.2014-15 was filed in the status of firm on 30/09/2014 decla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 867/- (₹ 74,970 x ₹ 22,396.09). Accordingly, the ld. AO concluded that the assessee firm received the shares of SCL and SFVCPL from SOT for an inadequate consideration of ₹ 245,97,45,567/- (₹ 245,97,45,568/- ₹ 1) and ₹ 167,82,85,167/- (₹ 167,90,34,867/- ₹ 7,49,700/-) respectively and sought to invoke the provisions of Section 56(2)(viia) of the Act for making total addition of ₹ 413,80,30,734/- (₹ 245,97,45,567/- + 167,82,85,167/-) and accordingly concluded that income of the assessee had escaped assessment. Accordingly, the ld. AO after obtaining prior approval from Additional Commissioner of Income Tax-Range 4, Hyderabad on 22/03/2018 for escapement of income, issued notice u/s.148 of the Act dated 22/03/2018 for A.Y.2014-15. In response to the said notice, the assessee firm filed its return of income on 04/04/2018 admitting the same total income originally declared at ₹ 27,630/-. The assessee also filed a letter dated 09/04/2018 alongwith copy of acknowledgement of return, balance sheet, profit and loss account for the year ending 31/03/2014. Consequently, a notice u/s.143(2) and 142(1) of the Act were issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing to the partnership form the realization of this property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in clause (a) and sub-clauses (i),(ii), and (iii) of clause (b) of section 48. 7.6 A partner's interest in the firm is a valuable property. The Estate Duty Act when it was in force provided for passing of such intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l evaluation. The partnership interest of 99.97% obtained by SOT pursuant to the capital contribution should by itself constitute 'adequate consideration' for the purpose of section 56(2)(viia) of the Act. 9. For the above reasons, we submit that section 56(2)(viia) is not applicable in our case and request you to drop the Section 147 proceedings initiated by you. 14.5. The assessee also submitted that the capital contribution was brought in by SOT (partner) in the form of shares held by it in SCL and SFVCPL at the price mutually agreed upon between the partners and the assessee firm in terms of Section 45(3) of the Act. The crux of the entire observations of the ld. AO for framing the addition u/s.56(2)(viia) of the Act after meeting these submissions of the assessee could be summarised in the following manner:- 1. Here the issue is not about what is the value of the asset brought in by the partner to be recorded in the books of the firm. This issue of recording value of asset in the books of accounts comes into picture in the case of calculation of capital gains liable to be paid to the transferor as governed under Section 45(3) of the Act whereas t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47. 14.6. Accordingly, he observed that what is included is the transactions pertaining to a situation where transfer of shares in a demerged foreign company, transfer of shares in a co-operative bank, transfer of shares in a demerged Indian company and transfer of shares in a scheme of amalgamation. The submission of the assessee that when a partner transfers shares to the firm for inadequate consideration, does not fall under any of those exclusions. 14.7. With the above observations, the ld. AO made an addition of ₹ 413,80,30,734/- towards shares received from SOT for an inadequate consideration u/s.56(2)(viia) of the Act under the head income from other sources. 15. The ld. CIT(A) deleted the addition made u/s.56(2)(viia)of the Act by observing as under:- The appellant is a partnership firm and SOT is partner in the firm. The SOT as a partner introduced shares of two companies namely, M/s.Shriram Capital Ltd and M/s.Shriram Financial Venture (Chennai) Pvt Ltd, during this assessment year 2014-15 as a capital contribution in the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 24/06/2019, specifically argued that the submissions of the assessee with respect to provisions of Section 56(2)(viia) of the Act will not apply in the case where the partner introduced an asset in the firm as capital contribution, holds no water. He argued that the issue under consideration here is not the partner contributing the asset into a firm, but the issue whether the fair market value of the asset contributed by the partner is same as per the recipient records in its books of accounts. He submitted that once a partner contributes the asset in the partnership firm, the firm automatically becomes the owner of such asset and when such firm receives the assets for inadequate consideration than its fair market value, the provisions of Section 56(2)(viia) of the Act will automatically apply. 17.1. The ld. CIT DR also argued that apart from the facts, the ld. CIT(A) had also placed reliance on the decision of the Hon ble Supreme Court in the case of Sunil Siddharthbhai vs.CIT reported in 156 ITR 509 to delete the addition made u/s.56(2) (viia) of the Act. The ld. CIT DR argued that the said Hon ble Supreme Court s decision was rendered in the context of applicability of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He argued that transferor and transferee are two distinct entities and once, the transactions between two different entities takes place, the recipient will be owner of the asset. In this case, the assessee firm being the recipient had become the owner of the shares whose fair market value is ₹ 413,87,80,435/- as against the consideration recorded in the books of the assessee firm at ₹ 7,49,701/- only thereby resulting in inadequate consideration warranting taxing u/s.56(2)(viia) of the Act for the differential sum. 18. 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. It is not in dispute that SOT being the partner in the assessee firm had brought in shares held by it in SCL and SFVCPL as capital contribution. The assessee had pleaded that pursuant to this capital contribution in the form of shares in the assessee firm, the assessee firm had become the owner of the shares of SCL and SFVCPL in terms of Section 14 of the Indian Partnership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime of dissolution of the firm. On this aspect itself, it could be safely concluded that what has been received by the partner in the form of capital contribution cannot be equated with the term consideration within the meaning of Section 56(2)(viia) of the Act. Admittedly, the receipt of capital contribution from a partner either in cash or in kind would be transaction in the capital field and not in the revenue field at all, for the simple reason that the said capital is always repayable at the time of retirement / resignation of the partners or at the time of dissolution of the firm. 18.2. We find that the other key words in the Section 56(2)(viia) are firm , receives and any person . It contemplates a contract / transaction between the firm and any person who transferred shares for consideration. In any contract, consideration pre-supposes an enforceable right to recover money due from one party by the other. As there is no contract / transaction between the partner and the firm in respect of capital contribution, the partner cannot sue the firm for recovery of the same. In case of capital contribution, the partner cannot claim / recover the capital balance f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contribution. There cannot be any consideration from the firm to the partner in respect of capital contribution as long as the firm subsists. Capital contribution happens before firm comes into existence and consideration for partner arises after dissolution of the firm or retirement or resignation of partner. Hence, it could be safely concluded that the term person mentioned in Section 56(2)(viia) of the Act does not cover partner in respect of capital contribution and accordingly, Section 56(2)(viia) of the Act cannot be made applicable in the case of capital contribution made by a partner to the firm. 18.4. We are inclined to accept the arguments advanced by the ld. AR by placing reliance on the decision of the Hon ble Supreme Court in the case of Kartikeya V Sarabhai vs. CIT reported in 228 ITR 163 (SC) and Sunil Sidharthbai vs.CIT reported in 156 ITR 509 (SC), wherein the Hon ble Supreme Court had held that part of the ownership rights in the property gets transferred to other partners and hence, such contribution amounts to transfer of capital asset u/s.45 of the Act ; Consideration for capital contribution is share in the profits of the firm during its subsistence and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act in the statute. Still the legislature in its wisdom did not deem it fit to make it determinate for the purpose of Section 56(2)(viia) of the Act consciously unlike it was done for Section 45(3) of the Act. 18.6. We find that the value of the shares were recorded by way of credit to the partners capital account in the form of capital contribution in terms of Section 45(3) of the Act. Though the provisions of Section 45(3) of the Act are applicable for levy of capital gains in the hands of the transferor i.e. partner in the instant case, the consideration fixed thereon cannot be different in the hands of transferee i.e. the assessee firm as the same is emanating from the same transaction. We find that the provisions of Section 45(3) is a special provision and a specific provision, whereas, the provisions of Section 56(2)(viia) is a general provision. It is the accepted rule of construction that special provisions would prevail over general provisions as per the famous latin maxim Generalia Specialibus Non Derogant . The ld. AR also placed reliance on the decision of the Hon ble Supreme Court in the case of DR Yadhav vs. R K Singh reported in (2003) 7 SCC 110 wherein i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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