2013 (11) TMI 1312 - AT - Income Tax

Legality of existence of firm BVRE Held that - Clear from documents available that firm BVRE has been accepted to be genuine by revenue in orders passed u/s. 185 of Act for AYs 1980-81 & 1984-85 - For AY 2006-07, firm BVRE has filed return of income before ACIT-I(1), Tirupathi on 30.10.2006. The said return has been accepted by revenue. Thus, prima facie, revenue has accepted genuineness and existence of firm BVRE - In light of evidence available on record, firm BVRE was genuine, legal and valid, was not defunct and was legally an existing partnership firm. Whether HUF was partner of firm BVRE - Intention of parties is very clear that individual is a partner of firm as far as firm is concerned. As far as members of HUF are concerned, he is acting on their behalf in a representative capacity. This fact is also corroborated by fact that share income of V.Madhusudan Reddy, V.Vikram Reddy and V.Dinesh Reddy, who were shown as individuals in partnership deeds prior to 24.3.2006, concerned individual offered to tax in hands of HUF and taxed in hands of respective HUFs - A partner may be Karta of a Joint Hindu family, he may be a trustee, he may be a representative of a group of persons, he may be a benamidar for another. In all such cases he occupies a dual position; qua partnership, he functions in his personal capacity; qua third parties, in his representative capacity; third parties, whom one of partners represents, cannot enforce their rights against other partners, nor can other partners do so against said third parties - Their right is only to a share in profits of their partners who (qua them) was representative. It is thus clear that HUF was never partner in firm BVRE and conclusions to contrary by CIT(A) cannot be sustained. Applicability of section 11(2) of Companies act, 1956 Validity of firm as it consists of more than 20 partners Held that - Already held that 4 HUFs were not partners in firm BVRE and that V.Madhusudhan Reddy, V.Vikram Reddy, V.Dinesh Reddy and V.Dwarakanath Reddy signed deed in their individual capacity vis- -vis firm and vis- -vis HUF they were accountable to share of profits which they receive from firm BVRE Therefore, number of partners would only be 13 - Assuming revenue is right in its conclusion that for purpose of computing number of partners, adult female and male members of HUF have to be reckoned, then number of persons in partnership as distinct from number of partners , would only be 15. Expression used in Sec.11(3) of Companies Act, 1956 is member of a joint family and not co-parceners of joint family and therefore all members- male and female, other than minors have alone to be reckoned. Sec.11(3) of Companies Act, 1956 specifically excludes minors while determining number of members of a HUF. Keerthana, Nachiketha and Tarun were minors and they are to be excluded. If done so, number of persons vis- -vis 4 HUFs would be 12 (15 3). Since Sec.11(2) of Companies Act, 1956 uses expression Person , number of persons who have signed partnership deed in two capacities have to be reckoned as one person . If so done, V.Madhusudan Reddy, V.Vikram Reddy and V.Dwarakanath Reddy who signed in their individual capacity apart from their capacity on behalf of HUF have to be excluded. Then number of persons in partnership, would become 9. (12-3). Other partners are 6 (13-7 ( 7 4 HUFs 3 individual capacity). Thus number of persons would only be 15 (9 6) and therefore there is no violation of provisions of Sec.11(2) of Companies Act, 1956 BVRE is a valid partnership. Validity of transfer of shares of NCCPL held by Assessees in favour of firm BVRE Held that - On basis of facts produced, it has been held that there was a valid transfer of shares of NCCPL held by Assessees in favour of firm BVRE during previous year relevant to AY 06-07 - Shares are registered in name of Madhusudan Reddy in share register of company NCCPL though shares belong to firm BVRE because a firm cannot hold shares in a company and cannot be shown as a registered share holder because firm has no legal existence and is a mere compendious name to describe its partners - Declaration u/s.187-C of Companies Act, 1956 clearly shows that beneficial owner of shares standing in name of Madhusudan Reddy is firm BVRE - Factum of transfer by Assessees in favour of firm has been accepted by revenue and capital gain declared in AY 06-07 has been taxed in hands of Assessees by revenue in earlier years. This fact reiterated in assessment orders of Assessees for AY 07- 08 wherein revenue taxed only difference between actual capital gain and capital gain already taxed in hands of Assessees for AY 06-07 Therefore, transfer of shares is a valid transfer. Whether there was a transfer of shares of NCCPL by assessees in favour of GBFL, so as to bring to tax capital gain on transfer of such shares u/s. 45 of Act in hands of assessee Held that - 13 partners of firm BVRE are described in share purchase agreement dated 10.6.2006 as confirming party to share purchase agreement dated 10.6.2006. Clause in Agreement which refers to transfer of shares, makes a reference to sale of shares by sellers to purchasers (GBFL) and there is no reference to confirming parties to agreement selling shares to GBFL - Confirming parties only confirm fact that they have transferred shares of NCCPL held by them to firm BVRE and that they have no right, title or interest whatsoever over shares so transferred Thus, there was no any transfer of shares of NCCPL by Assessees to GBFL. Colourable transaction - Whether entire series of transactions by which shares of NCCPL were ultimately transferred to GBFL were all not valid Held that - There is nothing on record to suggest real intention of parties was to treat Assessee as owner of shares even after transfer of shares to firm - 13 partners signed agreement only to confirm fact that they had already transferred shares held by them to firm BVRE as capital contribution and they have no other rights over business of NCCPL or as shareholders of NCCPL - It is only NCSPL that transferred shares together with 3 other shareholders of entire paid up share capital of NCCPL - There were two ways in which shares of NCCPL held by 13 partners of BVRE could have been transferred to GBFL. One way was that 13 partners in their individual capacity could have transferred shares of NCCPL held by them to GBFL at a price at which they were ultimately sold to GBFL through NCSPL. Other way was manner in which Assessees have transferred shares through medium of firm BVRE. Latter course would certainly result in lesser tax burden to Assessees but that is a course which law permits. Series of transactions by which shares of NCCPL held by Assessee ultimately was transferred to GBFL were intended to lessen tax burden on capital gain on transfer of shares - Course adopted by Assessees was within framework of law and was permissible Thus, entire series of transactions by which shares of NCCPL were ultimately transferred to GBFL were all valid as it is permitted within framework of law. Series of transactions by which shares of NCCPL were ultimately transferred to GBFL were not colourable or dubious device or subterfuge and were legal and valid. Consequence of same, even if it results in reduction of tax burden, is that they cannot be ignored and revenue cannot bring to tax quantum of capital gain which would have resulted, had transactions of sale of shares of NCCPL to GBFL being carried out by assessees directly to GBFL instead of through NCSPL/BVREPL Decided in favor of Assessee.

Summary

Issues Involved:
1. Validity and genuineness of the firm BVRE.
2. Whether HUFs were partners in BVRE.
3. Legality of the firm BVRE having more than 20 partners.
4. Validity of the transfer of shares of NCCPL to BVRE.
5. Whether the transfer of shares to GBFL by the assessees occurred in AY 2007-08.
6. Whether the series of transactions were colorable devices for tax avoidance.
7. Tax planning and its legitimacy.

Issue-Wise Analysis:

1. Validity and Genuineness of the Firm BVRE:
The firm BVRE was found to be genuine, legal, and valid. The firm had filed returns for AYs 2004-05, 2005-06, and 2006-07, which were accepted by the Revenue. The AO, while assessing the assessees for AY 2007-08, had no jurisdiction to conclude that the firm was defunct without putting the firm on notice. The Tribunal held that the firm BVRE was not defunct and was legally existing.

2. Whether HUFs Were Partners in BVRE:
It was held that HUFs were not partners in the firm BVRE. The individuals represented their HUFs in a representative capacity but were partners in their individual capacity vis-`a-vis the firm. The intention was clear that HUFs were not partners, and the firm was validly constituted.

3. Legality of the Firm BVRE Having More Than 20 Partners:
The Tribunal concluded that the firm BVRE did not have more than 20 persons as partners. The expression used in Sec.11(3) of the Companies Act, 1956, is "member of a joint family" and not "co-parceners of joint family," thus excluding minors. The number of persons vis-`a-vis the 4 HUFs was 12. The number of partners was 13, and even considering the members of the HUFs, the total number of persons was 15, which did not exceed the statutory limit.

4. Validity of the Transfer of Shares of NCCPL to BVRE:
The Tribunal held that there was a valid transfer of shares of NCCPL held by the assessees to the firm BVRE during the previous year relevant to AY 06-07. The shares were registered in the name of Madhusudan Reddy in the share register of NCCPL, and the declaration u/s.187-C of the Companies Act, 1956, showed that the beneficial owner was the firm BVRE.

5. Whether the Transfer of Shares to GBFL by the Assessees Occurred in AY 2007-08:
The Tribunal concluded that there was no transfer of shares of NCCPL by the assessees to GBFL during the previous year relevant to AY 07-08. The shares were transferred to GBFL by NCSPL/BVREPL, and the 13 partners of BVRE were only confirming parties in the share purchase agreement.

6. Whether the Series of Transactions Were Colorable Devices for Tax Avoidance:
The Tribunal held that the series of transactions by which the shares of NCCPL were ultimately transferred to GBFL were valid and within the framework of law. The transactions were not colorable or dubious devices or subterfuge and were legal and valid. The retrospective statutory amendment addressed the revenue's concern about tax avoidance.

7. Tax Planning and Its Legitimacy:
The Tribunal acknowledged that tax planning within the framework of law is permissible. The transactions carried out by the assessees were legally valid and resulted in a lesser tax burden, which was permissible. The Tribunal relied on the decision of the Hon'ble Supreme Court in Vodafone International Holdings B.V. Vs. UOI, which clarified that not all tax planning is illegal, and only colorable or dubious devices are impermissible.

Conclusion:
The Tribunal allowed the appeals of the assessees on the common issue of capital gains on the sale of shares of NCCPL by NCSPL to GBFL, holding that the addition made by the revenue authorities could not be sustained. The Tribunal also addressed other specific grounds raised by the assessees in their respective appeals, providing relief where justified and dismissing grounds where the revenue's stance was upheld.