2014 (3) TMI 1135 - AT - Income Tax

Computing capital gains taxable in the hands of the assessee-company - determining the cost of acquisition of shares - 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 - avoidance/evasion of tax by successively transferring shares from individuals to a company through the media of partnership firm and company - Held that - 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. Accordingly, the first issue raised by the Revenue regarding the cost of acquisition of shares is held against it. Disallowance u/s 14A r.w.r. 8D - disallowance of 2% u/s 14A - AO has in fact applied Rule 8D - Held that - CIT (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. Disallowance of the claim made by it under Section 35D - Held that - This issue was not seriously pursued at the time of hearing. This ground is accordingly rejected.

Summary

Issues Involved:

1. Determination of the cost of acquisition of shares for computing capital gains.
2. Applicability of Rule 8D for the assessment year 2007-08.
3. Allegations of tax avoidance/evasion by the assessee.
4. Disallowance under Section 14A.
5. Disallowance under Section 35D.

Detailed Analysis:

1. Determination of the Cost of Acquisition of Shares for Computing Capital Gains:

The most critical issue was determining the cost of acquisition of shares for capital gains computation. The case involved multiple transfers of shares within the B.V. Reddy family entities. Initially, the shares of Nutrine Confectionary Co. Pvt. Ltd. (NCCPL) were transferred to a partnership firm, B.V. Reddy Enterprises (BVRE), and subsequently to a company, Nutrine Confectionary and Sweets Pvt. Ltd. (NCSPL), later renamed B.V. Reddy Enterprises Pvt. Ltd. (BVREPL).

The firm BVRE revalued the NCCPL shares from Rs. 35,27,48,000 to Rs. 270,07,53,000 before transferring them to NCSPL/BVREPL. The Revenue argued that the revaluation was baseless and aimed at reducing capital gains tax, asserting that the cost of acquisition should be the original Rs. 35,27,48,000. However, the Commissioner of Income Tax (Appeals) and the Tribunal upheld the revalued cost of Rs. 270,07,53,000, citing that the revaluation reflected the intrinsic worth of NCCPL shares, supported by a prior purchase offer and the final sale price to Godrej Beverages and Foods Limited (GBFL).

The Tribunal also agreed that the firm BVRE had borne the cost of revaluation by crediting the partners' capital accounts with the increased value, thus justifying the revalued cost as the cost of acquisition.

2. Applicability of Rule 8D for the Assessment Year 2007-08:

The Revenue contended that Rule 8D of the Income-tax Rules, 1962, should apply retrospectively. However, the Commissioner of Income Tax (Appeals) held, relying on the Bombay High Court's judgment in Godrej and Boyce Mfg. Co. Ltd vs. Dy. CIT, that Rule 8D is applicable only from the assessment year 2008-09. This position was upheld by the Tribunal.

3. Allegations of Tax Avoidance/Evasion by the Assessee:

The Commissioner of Income Tax (Appeals) made observations suggesting that the assessee was involved in tax avoidance by transferring shares through a partnership firm and a company. However, the ITAT Bangalore Bench, in related cases involving the partners, held that the transactions were within the legal framework and permissible, even if they were structured to reduce the tax burden. The Tribunal in the present case echoed this view, stating that the observations by the Commissioner were uncalled for.

4. Disallowance under Section 14A:

The Assessing Officer applied Rule 8D to disallow certain expenses under Section 14A. The Commissioner of Income Tax (Appeals) rejected the application of Rule 8D for the impugned year but made a reasonable disallowance of 2% towards corresponding expenditure. The Tribunal found this disallowance reasonable and upheld it.

5. Disallowance under Section 35D:

The assessee's claim under Section 35D was disallowed by the Assessing Officer and upheld by the Commissioner of Income Tax (Appeals). The issue was not seriously pursued during the hearing before the Tribunal, which subsequently rejected this ground.

Conclusion:

Both the Revenue's and the assessee's appeals were dismissed. The Tribunal upheld the revalued cost of Rs. 270,07,53,000 for computing capital gains, confirmed the non-applicability of Rule 8D for the assessment year 2007-08, dismissed the allegations of tax avoidance, and found the disallowance under Section 14A reasonable. The disallowance under Section 35D was also upheld.