आयकर अपील य अ धकरण, ’डी’ यायपीठ, चेनई
IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, CHENNAI डॉ.ओ.के. नारायणन, उपाय एवं ी वकास अव!थी, या#यक सद!य केसम BEFORE Dr. O.K.NARAYANAN, VICE-PRESIDENTAND SHRI VIKAS AWASTHY, JUDICIAL MEMBER
आयकर अपील सं./ITA No.152(Mds)/2011 #नधा&रण वष& /Assessment Year : 2007-08
M/s BV Reddy Enterprises Pvt. Ltd., 232, Kilpauk Garden Road, Chennai - 600 010.
v.
PAN : AAACN 2252 L (अपीलाथ)) (Appellant)
The Income Tax Officer (OSD), Company Circle – I(2), Chennai - 600 034.
(+,यथ)) (Respondent)
आयकर अपील सं./ITA No.250(Mds)/2011 #नधा&रण वष& /Assessment Year : 2007-08
The Assistant Commissioner of Income Tax, Company Circle – I(2), Chennai - 600 034. (अपीलाथ)) (Appellant)
v.
M/s BV Reddy Enterprises Pvt. Ltd., 232, Kilpauk Garden Road, Chennai - 600 010. (+,यथ)) (Respondent)
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I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
#नधा&-रती क/ ओर से/Assessee by : Shri S. Sridhar, Advocate राज!व क/ ओर से/Revenue by
: Shri Shaji P. Jacob, IRS, Addl. CIT
सन ु वाई क/ तार ख/Date of Hearing
: 23rd January, 2014
घोषणा क/ तार ख/Date of Pronouncement : 3rd March, 2014 आदे श /O R D E R PER Dr.O.K.NARAYANAN, VICE-PRESIDENT These two appeals are filed by the assessee and the Revenue.
The relevant previous year is 2007-08.
These cross
appeals are directed against the order of Commissioner of Income Tax (Appeals)-III at Chennai, passed on 26.11.2010. The appeals arise out of the assessment completed under Section 143(3) of the Income-tax Act, 1961. 2.
In its appeal filed by the assessee, it has raised three issues
for consideration of the Tribunal. Besides the general objections raised against the order of the Commissioner of Income Tax (Appeals),
the
assessee
has
specifically
objected
to
the
observations made by the Commissioner of Income Tax (Appeals) that the assessee was resorting to avoidance/evasion of tax by successively transferring shares from individuals to a company through the media of partnership firm and company. The second
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I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
issue raised by the assessee is that the Commissioner of Income Tax (Appeals) has erred in not deleting the notional addition made by the Assessing Officer under Section 14A. The third issue is that the Commissioner of Income Tax (Appeals) has erred in confirming the disallowance made by the Assessing Officer under Section 35D of the Income-tax Act, 1961. 3.
The grounds raised in the appeal filed by the Revenue relate
to two issues. The first issue is that the Commissioner of Income Tax (Appeals) has erred in adopting the revalued cost of acquisition of shares as against the actual cost of acquisition incurred by the firm which has transferred the shares to the assessee-company. The second issue is that the Commissioner of Income Tax (Appeals) has erred in holding that Rule 8D is not applicable for the impugned assessment year 2007-08. 4.
In the facts and circumstances leading to these appeals, the
most important issue to be considered is the issue of determining the cost of acquisition of shares for the purpose of computing capital gains taxable in the hands of the assessee-company. Therefore, at the first instance, we proceed to consider the appeal filed by the Revenue in I.T.A. No. 250/Mds/2011.
4
5.
I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
One B.V. Reddy family had formed a company by name
Nutrine Confectionary Co. Pvt. Ltd. (NCCPL), in 1952.
This
company was the biggest player in Indian confectionary industry. This dominant position enjoyed by NCCPL continued till its business was sold to M/s Godrej Beverages and Foods Limited (GBFL) on 10th June, 2006.
Thirteen members of B.V. Reddy family held
almost the entire shareholding of NCCPL; more than 99%. 6.
A few members of B.V. Reddy family were partners of a firm
by name B.V. Reddy Enterprises (BVRE). The members who held the share of NCCPL together decided to join the firm BVRE for which purpose, the firm BVRE was reconstituted on 24.3.2006. The reconstituted firm BVRE with 13 members of B.V. Reddy family came into existence on 24.3.2006.
Immediately thereafter, on
29.3.2006, all the 13 partners, who joined the BVRE firm, transferred their individual shareholding in M/s NCCPL to the firm BVRE. The shares were transferred by the partners as the share of their capital contribution in joining the firm BVRE. The partners, when joined the firm, contributed their capital in the form of shares held by them in M/s NCCPL. The partners were, in turn, allotted their capital accounts in the firm BVRE in proportion to the value of the shares brought in by them.
The total value of the NCCPL
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shares brought in by the partners was ` 35,27,48,000/-. This value represented 6,65,325 shares held by the partners in M/s NCCPL. Accordingly, the position in the books of accounts of the firm BVRE stood as on 29.3.2006, as shares in M/s NCCPL at ` 35,27,48,000/in the Asset side and partners’ capital account ` 35,27,48,000/- in the Liability side. 7.
Another company was incorporated by Reddy family on
21.12.2005 under the name and style of Nutrine Confectionary and Sweets Pvt. Ltd. (NCSPL). This company M/s NCSPL succeeded the firm BVRE on 5.5.2006 by taking over all the assets and liabilities of the firm BVRE. When the firm BVRE was taken over and succeeded by the company M/s NCSPL on 5.5.2006, the shareholdings held by the firm BVRE in NCCPL came into the possession of the company NCSPL. Thereafter the name of the company M/s NCSPL was changed to B.V. Reddy Enterprises Pvt. Ltd. (BVREPL). 18.8.2006.
The change of name was made effective from
This company M/s BVREPL, formerly known by the
name M/s NCSPL, is the assessee in the present case. 8.
While dealing with these cases, it is to be seen that M/s
NCCPL and M/s NCSPL are different companies. Likewise, the firm
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I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
BVRE and the company BVREPL are different entities.
All are
relating to B.V. Reddy family. 9.
This case involves a series of share transfers.
We have
already seen the transfer of shares by the partners to the firm BVRE when they joined the reconstituted firm on 24.3.2006.
This
transaction of transferring shares from personal account to the account of the firm BVRE was the first such transfer of shares. As the partners have shown the value of shares transferred to the firm BVRE at ` 35,27,48,000/-, they were liable for capital gain taxation under Section 45(3) of the Income-tax Act, 1961. Accordingly, the partners paid the capital gain tax for the assessment year 2006-07.
10.
The firm BVRE, which was reconstituted on 24.3.2006 was
taken over and succeeded by M/s NCSPL (the name of the company changed to BVREPL with effect from 18.8.2006), acquiring of all assets and liabilities, including the shares of NCCPL. The takeover was made on the basis of business transfer agreement on 5.5.2006. 11.
The above takeover of the firm BVRE by NCSPL made on
5.5.2006 fell in the previous year relevant to the assessment year
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2007-08. The takeover consideration due from NCSPL to the firm BVRE was ` 270 Crores, as follows:(i) (ii) (iii) (iv)
12.
Sundry debtors Bank balances Cash in hand Shares in NCCPL Total Less: Sundry creditors Takeover value
` 40,03,424 ` 13,710 ` 633 ` 270,07,53,000 ` 270,47,70,767 ` 47,70,767 ` 270,00,00,000
The consideration of takeover of ` 270 Crores was satisfied
by allotting shares to the partners of the firm BVRE in the assesseecompany, namely, NCSPL / BVREPL. The shares were allotted to the partners in the same proportion in which their capital accounts stood in the books of the firm BVRE. 13.
It is to be seen that the firm BVRE acquired the shares of
NCCPL on 5.5.2006, when the partners assigned their shares to the firm BVRE as their capital contribution. As already stated, that was the first transfer in which the partners were liable for capital gains taxation. That tax was paid. The firm BVRE acquired the shares from its partners for ` 35,27,48,000/- (for 6,65,325 shares). This was on 29.3.2006. The value assigned by NCSPL / BVREPL for the NCCPL shares was ` 270,07,53,000/-. This was the value as on 5.5.2006, when the firm BVRE was succeeded by NCSPL / BVREPL, by way of succession. The value of shares of NCCPL
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I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
was satisfied by allotting shares to the partners in NCSPL / BVREPL for ` 270,07,53,000/-. The value of NCCPL shares at the time of transfer by the partners to the firm BVRE was, as already stated, ` 35,27,48,000/-. The value of same NCCPL shares paid by NCSPL to the firm BVRE was ` 270,07,53,000/-. Thus there is an increase in the value of NCCPL shares at ` 234,80,05,000/-. This increase in the value of NCCPL shares was on account of the revaluation of NCCPL shares made by the firm BVRE. 14.
The partners were allotted shares in NCSPL / BVREPL as
the takeover consideration of ` 270 Crores, proportionate to their capital accounts in the firm BVRE, i.e. shares in NCSPL / BVREPL were allotted to the partners of the firm BVRE on the revaluation amount of NCCPL shares in the same proportion in which the capital accounts of the partners were held in the firm BVRE. 15.
The takeover of shares of NCCPL from the firm BVRE by
NCSPL / BVREPL, by way of succession, is the second instance of transfer in a series of transfers made in the case of NCCPL shares. The firm BVRE has transferred the NCCPL shares to M/s NCSPL / BVREPL and therefore, the transaction was between the firm BVRE and the company NCSPL / BVREPL.
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16.
I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
As transfer of shares was made as a result of succession of
the business of the firms taken over by the company M/s NCSPL / BVREPL, the firm BVRE claimed exemption from levy of capital gain tax under Section 47(xiii).
Thus, the second instance of
transfer of NCCPL shares was sought tax-free. 17.
Section 47 excludes certain transactions from the ambit of
“transfer” and excluded such transactions from Section 45, which charges the capital gains tax. Section 47 deals with different such transactions not regarded as “transfer”. Clause (xiii) of Section 47 deals with taking over of a firm by a company, as happened in the present case. Clause (xiii) provides that Section 45 shall not apply to any transfer of a capital asset by a firm to a company as result of the succession of the firm by the company in the business carried on by the firm. Certain conditions have to be satisfied for claiming the above exemption. They are:(i)
(ii)
(iii)
All the assets and liabilities of the firm relating to the business immediately before the succession become the assets and liabilities of the company. 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 the succession. The partners of the firm do not receive any consideration or benefit, directly or indirectly,
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I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
in any form or in any manner other than by way of allotment of shares in the company. 18.
As already stated, the firm BVRE claimed exemption from
the capital gains taxation attributable to the above takeover transaction, i.e. succession of the firm BVRE by the company NCSPL / BVREPL.
The exemption was claimed under Section
47(xiii). 19.
Thereafter, the assessee-company M/s NCSPL / BVREPL
entered into an agreement on 10.6.2006 with M/s Godrej Beverages and Foods Limited (GBFL) for the sale of its shareholdings in the company M/s NCCPL.
The assessee-company M/s NCSPL /
BVREPL has acquired more than 99% of the shares of M/s NCCPL through takeover of the firm BVRE on 5.5.2006.
Certain other
individuals also held some shares in the company M/s NCCPL, totalling to less than 1% of total paid up capital of M/s NCCPL. The assessee-company M/s NCSPL / BVREPL alongwith those individuals, jointly entered into a share purchase agreement on 10.6.2006 with M/s GBFL on the basis of which, the entire NCCPL shares were sold to GBFL for a total consideration of ` 265 Crores. The sale took place on 29.6.2006, which fell in the impugned assessment year 2007-08.
11
20.
I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
This third transaction of sale of NCCPL shares by the
assessee-company to M/s GBFL is a transfer liable for capital gains taxation under Section 45. The assessee-company acquired the NCCPL shares on 5.5.2006 by taking over the firm BVRE. Those shares were sold to GBFL on 29.6.2006. Both happened in the previous year relevant to the impugned assessment year 2007-08. Therefore, capital gains, if any, arising in the third instance of transaction, would be short term capital gains. 21.
Accordingly, the assessee-company computed the short
term capital gains for the impugned assessment year 2007-08 pertaining to sale of NCCPL shares to M/s GBFL. The assesseecompany has adopted the acquisition cost of NCCPL shares at ` 270,07,53,000/- for which value, among other things, the assesseecompany has taken over the NCCPL shares from the firm BVRE on 5.5.2006. The assessee-company also worked out the stamp cost of ` 67,50,000/- for the transfer of shares to M/s GBFL. Out of the total consideration paid by GBFL at ` 265 Crores, the consideration due to NCCPL shares was ` 257,52,32,953/-. Thus the assesseecompany worked out the capital gains in the following manner:-
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22.
I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
Acquisition cost of NCCPL shares Add: Stamp cost
: :
` `
Less: Consideration received from M/s GBFL Short term capital loss
:
`
270,07,53,000 ___67,50,000 270,75,03,000 257,52,32,953
:
`
13,22,70,047
The above computation of the assessee-company resulting
in a loss was not acceptable to the assessing authority.
She
observed that the value of NCCPL shares was shown on 31.3.2006 at ` 35,26,18,000/- in the books of the firm M/s BVRE. When the firm BVRE was succeeded by the assessee-company NCSPL / BVREPL on 5.5.2006, the value of NCCPL shares has been enhanced by revaluation. The revaluation has fixed the share value at ` 270,07,53,000/-.
It is on the basis of this increased share
value, shares have been allotted to the partners of the firm BVRE in the assessee-company NCSPL / BVREPL. There is no basis for this upward revaluation of share value.
The assessee has
explained that the revaluation was made to bring into account, the intrinsic value of NCCPL shares. 23.
The Assessing Officer observed that in the above scenario,
the assessee-company has violated the provisions of Section 47(xiii)(b) & (c). The firm BVRE has claimed exemption from capital gain taxation on the ground of succession under Section 47(xiii).
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I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
The exemption no longer held good as the assessee-company has violated provisions of clauses (b) and (c) of Section 47(xiii). The partners were not allotted shares in the company in the same proportion as of the balance in their capital accounts in the firm BVRE. But, the partners were allotted more shares over and above the actual balance of their capital accounts. This was on the basis of a boosted notional revaluation of NCCPL shares.
This is a
violation of condition laid down in Section 47(xiii)(b). The partners have received benefit to the extent of ` 234.80 Crores [270.07 Crores (-) 35.20 Crores] indirectly on account of the revaluation. This is a violation of Section 47(xiii)(c). 24.
As the conditions laid down in Section 47(xiii) have not been
fulfilled, the Assessing Officer held that the capital gains is taxable in the hands of the assessee-company by virtue of Section 47A(3) of Income-tax Act, 1961. Section 47A(3) provides for taxing of the successor company on the capital gains due on succession, if the conditions laid down in Section 47(xiii) are violated. 25.
The
Assessing
Officer has raised another alternate
objection to the computation of capital gains made by the assesseecompany. As per Section 49(1), the cost of acquisition in the hands of the assessee-company is the cost in the hands of the previous
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I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
owner. The firm BVRE is the previous owner. The said firm has acquired the shares from its partners for ` 35,27,48,000/-. Section 49(1) provides that the cost of acquisition of capital asset in the case of succession shall be deemed to be the cost of acquisition for which the previous owner acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. In the present case, either the firm BVRE or its partners have not incurred or borne cost of any improvement to increase the value of shares of NCCPL from ` 35,27,48,000/- to ` 257,00,52,353/-. The value of NCCPL shares acquired by the firm BVRE has been boosted to ` 250,52,32,953/by a notional revaluation. No basis has been explained to justify the upward revaluation of shares.
Therefore, inflated value of `
250,52,32,953/- cannot be the actual cost of acquisition in the hands of the firm BVRE, which is the previous owner in this case, for the purpose of Section 49(1).
Actual cost, therefore, to be
adopted is ` 35,27,48,000/-. The Assessing Officer has therefore held that the cost of acquisition could be allowed only as stated above and the capital gains can be computed under Section 45 read with Section 49(1), even without taking recourse to Section 47A(3).
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26.
I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
Accordingly, combining both Section 47A(3) and Section 45
read with Section 49(1), though alternatively, the assessing authority computed the short term capital gains taxable in the hands of the assessee-company. The Assessing Officer has adopted the cost of acquisition at ` 35,26,18,000/- as against ` 35,27,48,000/stated elsewhere. The computation stood as follows:Sale of NCCPL shares to GBFL : (-) purchase value : Profit on sale of shares being short : term capital gains
27.
` ` `
257,52,32,953 _35,26,18,000 222,26,14,953
Accordingly, the Assessing Officer disallowed the short term
capital loss of ` 13,22,17,047/- as claimed by the assesseecompany and instead added the profit of ` 222,26,14,953/- in the nature of short term capital gains. 28.
Among other things, the computation of short term capital
gains arising out of transfer of NCCPL shares was also challenged in first appeal before the Commissioner of Income Tax (Appeals). 29.
The Commissioner of Income Tax (Appeals) has considered
the issue in an extensive manner, after going through the facts of the case and after examining the provisions of law governing the issue.
The whole order of the Commissioner of Income Tax
(Appeals) comes to 38 pages; out of which this issue alone has
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taken 30 pages from pp.07 to pp. 36. The Commissioner of Income Tax (Appeals) has found that a very similar issue was adjudicated by ITAT, Ahmedabad Bench in the case of Dharmshi Bhai B. Shah v. ITO (2009) 126 TTJ (Ahd) 721. In the said decision, the Tribunal has held that the revaluation of the shares would also be treated as consideration for the purpose of computation of capital gains in the hands of the partners under Section 45(3) of the Income-tax Act, 1961.
In that case, the assessee had converted its proprietary
concern into partnership with effect from 1.4.1994. On 31.3.1995, the assets of the firm were revalued and capital accounts of the partners were credited by the revaluation surplus.
The Tribunal
held that Section 45(3) does not state that the amount recorded in the books of the firm on the date or at the time when the person brought capital asset may be deemed to be the full value of consideration.
The Tribunal concluded that since the firm had
recorded the capital assets at the revalued figure on 31st March, 1995, the said value has to be taken to be the full value of consideration. 30.
In view of the above case, the Commissioner of Income Tax
(Appeals) held that not only the initial value of the shares in the books of the firm but also the subsequent enhanced value, due to
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revaluation, needs to be considered as the full value of the consideration for the purpose of computation of capital gains. As the subsequent revaluation of shares cannot be ignored, the enhanced value should be considered as value of the assets which were brought in by the partners as capital contribution for the purpose of computation of capital gains under Section 45(3). The full value of consideration does not mean the initial value credited in the books. He accordingly held that the cost of acquisition of shares in the hands of the firm BVRE shall be taken at revalued amount of ` 270,07,53,000/-.
31.
The Commissioner of Income Tax (Appeals) has examined
the scope of invoking Section 47A(3) against the assessee. The exemption of capital gains taxation in a case of succession of a firm by a company is subject to certain conditions. The first condition as provided in proviso (a) to clause (xiii) of Section 47 is that “all the assets and liabilities of the firm relating to the business immediately before the succession become the assets and liabilities of the company”. The Commissioner of Income Tax (Appeals) held that the assets and liabilities of the firm BVRE were taken over by NCSPL / BVREPL and as such, there is no violation of proviso (a) to clause (xiii) of Section 47.
18
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The second condition provided in proviso (b) is that “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 the succession”. The Commissioner of Income Tax (Appeals) found that all the partners of the firm BVRE have become the shareholders of NCSPL / BVREPL. He also found that shares have been allotted to the partners in the assessee-company in the same proportion of their capital accounts stood in the books on the date of succession. He held that the assessing authority went wrong in going by the amounts credited in the capital accounts before and after the revaluation of NCCPL shares. The case of the assessing authority is that the partners’ capital accounts have been inflated by the revaluation of shares and shares have been allotted on that inflated amounts, which is much higher than the amount in their capital accounts. When they joined the firm, the value of shares was ` 35,27,48,000/-; whereas shares in the company were allotted to the partners on a higher amount of ` 270,07,53,000/-.
The
Commissioner of Income Tax (Appeals) held that the condition stipulated in the allotment of shares is “in the same proportion” and not the “same amount”. When the partners contributed the NCCPL
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shares held by them to the BVRE firm as their capital, their capital accounts were credited proportionate to the value of shares brought in by them. The proportionate allotment was made at that stage itself. When the shares were revalued at ` 270,07,53,000/-, the surplus was allocated in the same proportion in their capital accounts. When the firm BVRE was taken over by the assesseecompany, shares were allotted to the partners in the same proportion in which their capital accounts stood in the books of the firm on the date of succession. Even the Assessing Officer has not disputed regarding the proportion of allotment. Her only case was that higher amount was credited in the capital accounts of the partners. Accordingly, the Commissioner of Income Tax (Appeals) held that there is no violation of proviso (b) to Section 47(xiii). 33.
Proviso (c) provides that “the partners of the firm do not
receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the new company”. The Commissioner of Income Tax (Appeals) has found that consideration for taking over was satisfied only by way of allotment of shares to the partners in the company and partners have not received any benefit or consideration directly or indirectly.
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Accordingly, he held that there is no violation of proviso (c) to Section 47(xiii). 34.
Thus the Commissioner of Income Tax (Appeals) has held
that assessee has not violated the proviso (a), (b) and (c) of Section 47(xiii) and as such, invoking of Section 47A(3) is not justified. 35.
In short, the Commissioner of Income Tax (Appeals) has
ultimately concluded as under (p.35 / para 11.8):“(a) The assessee-company has fulfilled the conditions of proviso (a), (b) and (c) of Section 47(xiii) and hence invoking of provisions of Section 47A(3) is not correct. (b) Section 49(1)(iii)(a) is applicable to the assessee-company in respect of transfer of assets by the firm BVRE. (c) The revaluation of assets (share of NCCPL) without any new factors contributing towards enhanced value after its introduction in their books of BVRE shall be a component of the full value of the consideration received or accruing for the purpose of taxation under Section 45(3)”. 36.
Accordingly, the Commissioner of Income Tax (Appeals)
held that the cost of acquisition for computing capital gains is the revalued cost of ` 270,07,53,000/- and not the initial amount of ` 35,27,48,000/-. As such the addition of ` 222,26,14,953/- made on
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account of short term capital gains, on sale of shares of NCCPL was deleted. The loss of ` 13,22,70,047/- has been accepted.
37.
The Revenue is aggrieved on the order of Commissioner of
Income Tax (Appeals) on the issue of cost of acquisition of NCCPL shares, for the purpose of Section 47(xiii) and therefore, this appeal before us. 38.
Shri Shaji P. Jacob, the learned Additional Commissioner of
Income Tax, appearing for the Revenue, argued the case at length. Relying on the provisions of law stated in Section 49, the learned Additional Commissioner of Income Tax argued that the cost of acquisition of the asset shall be deemed to be cost for which the previous owner of the property acquired it in a case where the capital asset became the property of the assessee by succession. He explained that in the present case, the firm BVRE had acquired the shares of NCCPL from B.V. Reddy family members for a consideration of ` 35,27,48,000/- and thereafter, the firm has sold the shares to M/s GBFL for an amount of ` 257,52,32,953/-. Instead of selling the NCCPL shares directly by the members of B.V. Reddy family, they first formed a partnership and transferred the shares to the firm as their capital and thereafter the firm was succeeded by M/s NCSPL / BVREPL (assessee-company) with an
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inflated value of shares at ` 270,07,53,000/- and thereafter, they claimed a loss on sale of shares on the basis of the inflated value booked in the accounts of the assessee. The learned Additional Commissioner of Income Tax explained that there is no basis for such a valuation of shares. The assessee has not explained the basis on which the value of shares has been increased from ` 35,27,48,000/- to ` 270,07,53,000/- within a matter of days or weeks. This is a scheme made out by the concerned parties to bring down the instance of capital gains taxation. 39.
The learned Additional Commissioner of Income Tax
explained that it is in these circumstances, we have to examine what is the cost of acquisition of the asset in the hands of the previous owner of the property. Previous owner of the property is the firm BVRE.
The cost of acquisition always remained at `
35,27,48,000/- but for the empty formality of valuation of shares at ` 270,07,53,000/-.
Section 49 provides for computing the cost of
acquisition in a very clear manner.
As per the law, the cost of
acquisition of the previous owner could be increased only by two items; by the cost of any improvement of the asset incurred by the previous owner or incurred by the assessee and any cost of improvement of the assets borne by the previous owner or the
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assessee. The cost must be incurred or borne for improvement of the assets acquired by the previous owner. In the present case, the firm BVRE has not incurred or borne any amount so as to result in the improvement of the asset. In that way, as the assets are in the nature of shares, the previous owner, the firm BVRE could not have brought any improvement either. Neither the assessee-company has incurred or borne any such cost of improvement. Therefore, inspite of the technical formality of revaluation of shares, the acquisition cost of shares always remained at ` 35,27,48,000/- for which value the shares were acquired by the firm BVRE from the members of B.V. Reddy family.
He, therefore, submitted that
Section 49 is very clear and inflexible to confirm that in the present case, the cost of the previous owner means the cost for which the firm BVRE acquired the shares of NCCPL from the members of B.V. Reddy family. 40.
The learned Additional Commissioner of Income Tax further
referred to the amendment brought in by Finance Act, 2010 whereby clause (xiii) of Section 47 has also been brought under the jurisdiction of Section 49. Section 47(xiii) deals with the succession of business of a firm by a company. The Finance Act, 2010 has specifically clarified through amendment that clause (xiii) of Section
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I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
47 dealing with succession of a business of a firm is also brought under Section 49, whereby in a case of succession as well, the cost of acquisition of the asset shall be deemed to be cost at which the previous owners of the property acquired it. The learned Additional Commissioner of Income Tax explained that as the amendment is in the nature of clarification, its effect is retrospective and therefore, the said amendment brought in by Finance Act, 2010 applies to impugned assessment year 2007-08 as well. 41.
The learned Additional Commissioner of Income Tax
supported his arguments in the light of the following judicial pronouncements:1. CIT v. K.H. Chambers 55 ITR 674 (SC) 2. CIT v. B.C. Srinivasa Setty 128 ITR 294 (SC) pp 300 3. CIT v. S. Krishnamurthy 152 ITR 669 (Mad) 4. CIT v. Jaideo Oil Mills 194 ITR 495 (Bom.) 5. ITO v. Ch. Atchaiah 218 ITR 239 (SC) 6. Prakash Electric Co. v. ITO 22 SOT 382 (Bang)
42.
Advocate S.Sridhar, the learned counsel appearing for the
assessee contended that the Commissioner of Income Tax (Appeals) has rightly adopted the amount of `270,07,53,000/- as the acquisition cost of the shares in the hands of the firm BVRE vis-à-
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I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
vis in the hands of the assessee-company NCSPL / BVREPL. The learned counsel explained that the amendment brought in by Finance Act, 2010 in Section 49, highlighted by the Revenue, does not impair the case of the assessee-company. The amendment pointed out by the learned Additional Commissioner of Income Tax states that the cost of acquisition of asset in the case of a succession also has to be considered as the cost of acquisition in the hands of the previous owner subject to adjustment of cost of improvement. This position brought in by Finance Act, 2010 does not prejudice the case of the assessee for the reason that the assessee has no quarrel in adopting the cost of acquisition in the hands of the previous owner. In the present case, the previous owner of the shares is the firm BVRE. The only dispute is regarding the correct amount of cost of acquisition of the NCCPL shares in the hands of the firm BVRE. There is no dispute on the principle of adopting the cost of acquisition in the hands of the previous owner; the dispute is only on the value. 43.
The learned counsel explained that the members of B.V.
Reddy family, who held shares in NCCPL, joined the firm BVRE on the basis of the shares assigned by them in favour of the firm as their capital contribution. When the family members joined the firm
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BVRE, their shares were assigned a value of ` 35,27,48,000/-, which was correspondingly reflected in the capital accounts of the partners. Thereafter, the firm BVRE has revalued the shares at par with the intrinsic worth of the shares of M/s NCCPL. Shares must actually represent the intrinsic worth of the company. There is a clear nexus between the share value and the intrinsic business value of the company. This is an universally accepted principle of share valuation.
Therefore, if the firm BVRE had revalued its
shares so as to reflect the intrinsic worth of M/s NCCPL, there is nothing wrong in that either in fact or in law. In fact, a multinational company, by name M/s Actis, had carried out negotiations with the shareholders during financial year 2005-06, for the purchase of shares held by them in M/s NCCPL. This fact is acknowledged in the order passed by the Commissioner of Income Tax (Appeals) even though the Commissioner of Income Tax (Appeals) has referred to that point to find fault with the assessee. But, the fact remains on record. The initial offer made by M/s Actis was USD 62.5 million. This offer made by M/s Actis itself showed that the intrinsic value of NCCPL shares held by the members of B.V. Reddy family always had much higher value than the amount of ` 35,27,48,000/- for which the shares were contributed by the partners as their capital in the firm BVRE. Thereafter, the sale of
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I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
shares was finalized by the assessee-company with M/s GBFL and there also M/s GBFL has paid a sum of ` 257,52,32,953/- as consideration for the acquisition of shares. These two instances clearly show that the valuation made by the firm BVRE is fully justified and the valuation was not a notional exercise as alleged by the Revenue. By revaluing the shares, the firm BVRE has fairly stated the actual value of the shares at par with the intrinsic value of the business of M/s NCCPL. 44.
On the basis of the worthwhile valuation, the firm BVRE has
revised the capital accounts of the partners by crediting the differential amount to their capital accounts. This is not an empty formality.
When the value of the shares has increased from `
35,27,48,000/- to ` 270,07,53,000/-, the capital accounts of the partners also have increased. The firm BVRE has thus incurred the cost of differential capital credited to the partners’ account. The differential amount arose out of the share valuation. It amounts to the cost of improvement borne by the firm BVRE, within the meaning of Section 49 of the Income-tax Act, 1961. It is on the basis of this increased cost of acquisition that shares were allotted to the partners of the firm BVRE, in the share capital of the assessee-company NCSPL / BVREPL.
When the assessee-
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I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
company has taken over the firm BVRE, the shares were acquired at the value reflected in the books of the firm BVRE. That value of shares reflected in the books of the firm BVRE is the cost of acquisition of those shares in the hands of the firm. Therefore, the Commissioner of Income Tax (Appeals) has rightly adopted the cost of acquisition in the hands of the firm at ` 270,07,53,000/-.
45.
The learned counsel concluded that there is nothing wrong in
the order of the Commissioner of Income Tax (Appeals) in holding that the cost has been correctly adopted by the assessee-company for the purpose of Section 49. 46.
Regarding the alternate contention of the Assessing Officer
under Section 47A(3) read with Section 47(xiii), the learned counsel explained that all the conditions of succession were completed in the present case, as provided in clause (xiii) of Section 47. The first condition of succession for availing exemption of capital gains taxation is that all the assets and liabilities of the firm relating to the business immediately before the succession become the assets and liabilities of the company.
In the present case, the assessee-
company has acquired the business of the firm BVRE in lock, stock, and barrel and has complied with the first condition. The second condition is that all the partners of the firm immediately before the
29
I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
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. In the present case, all the partners of the firm have become the shareholders of the assesseecompany. Shares have been allotted to the partners in the same proportion to their capital accounts reflected in the books of the firm. The Revenue is targeting on the higher amount reflected in the capital account by virtue of the share value increased as a result of revaluation. The total amount for which the shares are allotted to a partner is not the issue to be considered for the purpose of the second condition. It is not the value but it is the proportion. Shares have to be allotted in the new company “in the same proportion” in which the capital accounts stood in the books of the firm. In the present case also, shares were allotted in the assessee-company exactly in the same proportion in which the capital accounts of the partners stood in the books of the firm BVRE. Second condition is also satisfied. The third condition is that the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company.
In the present case also the partners were allotted
shares in the assessee-company and they received no other benefit or consideration either directly or indirectly. This condition is also
30
I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
satisfied. As all the necessary conditions applicable to the present case have been complied with, Section 47A does not apply to the assessee, as rightly held by the Commissioner of Income Tax (Appeals). 47.
Therefore, the learned counsel appearing for the assessee
submitted that the order of the Commissioner of Income Tax (Appeals) on this ground of cost of acquisition of shares be upheld. 48.
We heard both sides in detail and examined the issue
carefully.
We need not repeat the provisions of law stated in
Section 49, as the same has already been sufficiently discussed in earlier paragraphs of this order. So, we straightaway go into the issue to decide whether the cost of acquisition arrived by the assessee in computing the capital gains is acceptable or not. The history of the transfers of shares is already before us.
The
members of B.V. Reddy family joined the firm BVRE by contributing their shareholding in M/s NCCPL as their capital contribution. At the time of entering the partnership, the value of the shares was assigned at ` 35,27,48,000/-. Thereafter, the shares were revalued at higher amount of ` 270,07,53,000/-. The first question is whether the revaluation is justified or not. It cannot be disputed that the value of the share of a company should reasonably represent the
31
intrinsic business worth of the company.
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There must be parity
between the share value and the company’s business worth. If the revaluation of the share in the present case is examined in the light of the above principle, we find that the firm BVRE was justified in revaluing the shares of NCCPL, held by it. As pointed out by the Commissioner of Income Tax (Appeals) in his order and also argued by the learned counsel appearing for the assessee at the time of hearing, earlier, there was an offer made by M/s Actis to buy the shares of M/s NCCPL from the members of B.V. Reddy family. The offer made at that time was USD 62.5 million. This offer was far higher than the amount of ` 35,27,48,000/- for which the shares were initially assigned by the Reddy family members to the firm BVRE. It clearly shows that the amount of ` 35,27,48,000/- did not reflect the correct value assignable to the shares on the basis of the net worth of the business owned by M/s NCCPL. As argued by the learned counsel, M/s GBFL purchased shares of M/s NCCPL from the assessee-company for a sum of ` 257,52,32,953/-.
This
purchase consideration is very near to the revaluation price of ` 270,07,53,000/- worked out by the firm BVRE.
From these two
instances, it is reasonably proved that the value of the shares of NCCPL held by the firm BVRE was revolving around the revalued amount of ` 270,07,53,000/-. The earlier purchase offer made by
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M/s Actis was for an amount very near to this revaluation figure; so also the purchase price paid by GBFL. 49.
In the light of the above facts, it is to be reasonably
understood that the firm BVRE was justified in revaluing the shares of NCCPL held by it. It is also to be seen that the valuation has been properly made by the firm BVRE bringing the revaluation figure to ` 270,07,53,000/-.
50.
In short, it is apparent on record that there were sufficient
reasons for the firm BVRE to revalue the shares of NCCPL and the firm has rightly revalued the shares at ` 270,07,53,000/-.
51.
Next is the question whether this revalued figure should be
accepted as the cost of acquisition of NCCPL shares in the hands of BVRE. The answer is “yes”. This is because the capital accounts of the partners of the firm BVRE have been revised with their proportionate share in the increased amount of share value resulted by the revaluation of shares. capital
accounts
of
its
The firm BVRE has credited the
partners
with
additional
amounts
corresponding to the share value increased by revaluation. In that way, the firm BVRE has borne the cost of additions credited in the capital accounts of the partners of the firm. Therefore, it is to be
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I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
seen that the revaluation has not been made by the firm BVRE gratuitously. The revaluation has been made for a cost. The cost of revaluation is the additional amount of capital credited in the capital accounts of the partners of the firm. The firm BVRE has suffered that incremental liability against the enhanced value reflected in the capital accounts of the partners of the firm. Therefore, it is to be seen that the firm BVRE has borne the liability of revaluation which should be added to the cost of acquisition of shares made from B.V. Reddy family members. Therefore, as far as the firm BVRE, the previous owner of the shares, is concerned, the cost of acquisition of shares is ` 270,07,53,000/-.
52.
Moreover, when the firm BVRE was taken over and
succeeded by the assessee-company M/s NCSPL / BVREPL, the value of NCCPL shares in the books of the firm BVRE was ` 270,07,53,000/-. It is for that amount, the shares were taken over by the assessee-company.
The partners of the firm BVRE
absorbed this higher amount of revaluation in proportion to the capital accounts stood in the books of the firm. Therefore, the cost of the shares in the hands of the firm BVRE as well as the cost of acquisition incurred by the assessee-company, is ` 270,07,53,000/-. Therefore, it is to be seen that the cost of shares in the hands of the
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I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
firm BVRE, being the previous owner, is correctly computed by the assessee which is upheld by the Commissioner of Income Tax (Appeals) at ` 270,07,53,000/-.
53.
Regarding invoking Section 47A, we agree with the findings
of the Commissioner of Income Tax (Appeals).
The conditions
specified in Section 47(xiii) have been complied in the present case. All the assets and liabilities of the firm relating to the business immediately before the succession had become the assets and liabilities of the company. There is no dispute on this fact. The first condition is satisfied. All the partners of the firm BVRE became the shareholders of the assessee-company in the same proportion in which their capital accounts stood in the books of the firm on the date of succession. Regarding proportionate allocation of shares, there is no dispute at all. The only objection pointed out by the Assessing Officer is that the capital accounts of the partners were credited with higher amounts resulting from share revaluation. The objection of the Assessing Officer is on the quantum of the amount and not on the proportion in which shares were allotted.
The
principle laid down in proviso (b) to Section 47(xiii) is that the partners become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the
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firm on the date of succession. The requirement is the satisfaction of the proportion.
It is not the quantum of the amount.
In the
present case, the proportion has been complied with. Therefore, this condition is also satisfied. Regarding the third condition, it is a matter on record that the partners of the firm BVRE did not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in assesseecompany. 54.
As such, we have to hold that the Commissioner of Income
Tax (Appeals) has correctly held that there was no violation of the conditions laid down in Section 47(xiii) and as such, there is no justification in invoking Section 47A(3) against the assessee. The Commissioner of Income Tax (Appeals) has also rightly held that for the purpose of Section 49, the cost of acquisition in the hands of the previous owner is ` 270,07,53,000/-.
55.
The partners of the firm BVRE had filed appeals before the
Income Tax Appellate Tribunal, Bangalore, in connection with their individual assessments, wherein this issue of transfer of shares had also come up for consideration. The Appellate Tribunal, inter alia, held as follows:-
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“84. As already stated the series of transactions by which the shares of NCCPL held by the assessee ultimately was transferred to GBFL were intended to lessen the tax burden on capital gain on transfer of shares. The course adopted by the assessees was within the framework of law and was permissible. In fact there was a lacuna in the law which has now been filled up by a retrospective statutory amendment to the provisions of law. That only shows that the course adopted by the assessees was legally valid. Even the assessee in the written submissions dated 2.1.2013 has accepted the position that in view of the retrospective statutory amendment, there is no tax advantage at all. In that view of the matter, we are of the view that on issue No.6, we have to hold that the entire series of transactions by which the shares of NCCPL were ultimately transferred to GBFL were all valid. Even if it were to be considered that they were arranged in such a manner so as to avoid payment of tax on the correct quantum of capital gain that would result on transfer of shares of NCCPL to GBFL, such a course was permitted and within the framework of law. On issue No.7, we have to hold that the series of transactions by which the shares of NCCPL were ultimately transferred to GBFL were not colourable or dubious device or subterfuge and were legal and valid. The consequence of the same, even if it results in reduction of tax burden, is that they cannot be ignored and the revenue cannot bring to tax the quantum of 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. We hold accordingly on issue No.6 and 7. The other decisions referred to by the learned Senior Advocate for the revenue are not being adverted to as the
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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.” 56.
When there is a finding by the Income Tax Appellate
Tribunal, Bangalore, in the case of the partners, that all these transactions are within the four walls of the law, we have to follow the said finding of the Tribunal. The result is that we have to accept the contentions of the assessee in these appeals that all the factors leading to the successive transactions are valid and they are legitimate and therefore acceptable in law. Therefore, we cannot go beyond the facts apparent on records and examine the question of colourable device, as argued by the Revenue. 57.
Accordingly, the first issue raised by the Revenue regarding
the cost of acquisition of shares is held against it. 58.
The next issue raised by the Revenue is regarding the
retrospective effect of Rule 8D of Income-tax Rules, 1962.
The
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I.T.A. No. 152/Mds/2011 I.T.A. No. 250/Mds/2011
Commissioner of Income Tax (Appeals) has held that Rule 8D is not retrospective and is applicable only from the assessment year 200809 by relying on the judgment of Hon’ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd vs. Dy. CIT (328 ITR 81) (Bom.).
Therefore, there is no infirmity in the order of the
Commissioner of Income Tax (Appeals) on this point. This issue is also decided against the Revenue. 59.
Revenue fails in its appeal.
60.
Next, we will consider the appeal filed by the assessee. The
first issue raised by the assessee is that the Commissioner of Income Tax (Appeals) has made certain observations in his order alleging that the assessee was resorting to tax avoidance/evasion of tax by successively transferring shares from individuals to a company, through the media of partnership firm and company. In fact, the Commissioner of Income Tax (Appeals) has made these observations quite substantially in his order. The ITAT Bangalore “A” Bench, while considering the appeals filed by the partners of the B.V. Reddy family in I.T.A. Nos.149 & 150(Bng.)/2011 and others, has held in their common order dated 8th February, 2013, as under in paragraph 84:-
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“84. As already stated, the series of transactions by which the shares of NCCPL held by the assessee ultimately was transferred to GBFL were intended to lessen the tax burden on capital gains on transfer of shares. The course adopted by the assessees was within the framework of law and was permissible. ………..”. 61.
In the light of the above observation made by the Tribunal, it
is sufficient for us to say that the observations made by the Commissioner of Income Tax (Appeals) in his order were uncalled for. 62.
The second issue raised by the assessee is against the
disallowance of 2% made by the Commissioner of Income Tax (Appeals) under Section 14A. The Assessing Officer has in fact applied Rule 8D. The Commissioner of Income Tax (Appeals) has rightly held that Rule 8D is not applicable for the impugned assessment year. Accordingly, as consistently done in many cases, the Commissioner of Income Tax (Appeals) has made a reasonable disallowance
towards
corresponding
expenditure.
The
Commissioner of Income Tax (Appeals) has made a disallowance of 2%. We find it is very reasonable. This contention of the assessee is, therefore, rejected.
40
63.
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The third issue raised by the assessee is regarding the
disallowance of the claim made by it under Section 35D. This issue was not seriously pursued at the time of hearing. This ground is accordingly rejected. 64.
Assessee also fails in its appeal.
65.
In the result, the appeal filed by the Revenue and the appeal
filed by the assessee, both are dismissed. Orders pronounced on Monday, the 3rd of March, 2014 at Chennai.
sd/(Vikas Awasthy) Judicial Member Chennai, Dated, the 3rd March, 2014. Kri.
Copy to:
1. Assessee 2. Assessing Officer 3. CIT, Chennai-I, Chennai 4. CIT(A)-III, Chennai 5. DR 6. GF.
sd/(Dr. O.K.Narayanan) Vice-President
