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2020 (11) TMI 263 - AT - Income TaxAddition being the amounts credited in the capital reserve - income u/s.56 - whether the capital contribution made by PEL in assessee firm which was kept partly in capital account and partly in capital reserve account in the books of the assessee firm is correct and balance lying in capital reserve account could be brought to tax as income from other sources u/s.56(1) of the Act or alternatively u/s.56(2)(viia)? - AO observed that the information gathered from available source show that M/s. PEL was contemplating to acquire 20% stake in SCL for an aggregate consideration of ₹ 2014 Crores is contrary to the submissions of the assessee who had stated that PEL was acquiring 74% stake in the assessee firm - CIT(A) deleted the addition - HELD THAT -The view point of the ld AO that the capital reserve belongs to firm may be to some extent true in the case of limited companies, but not in the case of a firm , where a group of persons come together for doing business in the name of partnership and all the assets and liabilities of the partnership 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 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. One more reason canvassed by the ld. AO for taxing the said sum u/s.56(1) of the Act is that the assessee had acted as a conduit of PEL for indirect transfer of money to SCL and to acquire its 20% stake. In this regard, we have already held hereinabove the clear purpose behind assessee coming into picture for routing this transaction for the simple reason that SCL is prevented by its private equity investors from not making any allotment of shares to any outsiders other than to its group companies. We have also held hereinabove that the said receipt of capital contribution by the assessee from PEL and subsequent allotment of shares of SCL to assessee through Novus cannot be construed as a colourable device. Hence all the reasons canvassed by the ld. AO and by the ld .CIT DR for framing addition u/s 56(1) of the Act does not hold any water. In these circumstances, the said transaction cannot be brought to tax in terms of Section 56(1) of the Act. 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. - With regard to alternative addition made by the ld. AO u/s.56(2)(viia) of the Act, the only observation of the ld. AO is that the assessee firm had received monies from PEL and utilised the same by making payments to Novus on the same day. We find that these type of transactions are not at all covered in the provisions of Section 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 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. Transfer of asset by a partner to the firm as the capital contribution, no doubt constitutes a transfer in the hands of the partner, but the value recorded in the books of the firm by way of credit to the partners capital account would be conclusive proof of consideration received in the hands of the partner towards transfer of capital asset. Provision of Section 56(2)(viia) of the Act could not be made applicable at all in the case of capital contribution made by a partner in the form in kind. Revenue appeal dismissed.
Issues Involved:
1. Whether the CIT(A) was justified in deleting the addition made by the AO in the sum of ?2111,22,65,347/- credited in the capital reserve, treated as income u/s.56 of the Income Tax Act, 1961. 2. Whether the provisions of Section 56(2)(viia) of the Act apply to the capital contribution made by a partner in the form of shares. Issue-Wise Detailed Analysis: 1. Deletion of Addition of ?2111,22,65,347/- Credited in Capital Reserve: - Facts: - The assessee was originally a partnership firm engaged in financing and holding investments. - For A.Y.2015-16, the assessee declared a total loss of ?21,970/-. - Piramal Enterprises Ltd (PEL) joined the firm as a partner, bringing in a capital contribution of ?2,014.20 crores, of which ?5.92 crores was allocated to the partner’s capital account, and ?2008.28 crores was credited to the 'capital reserve' account. - The AO treated the amount credited to the capital reserve as income u/s.56 of the Act, alleging it was a consideration received for indirect transfer of 20% equity stake in Shriram Capital Ltd (SCL). - AO’s Observations: - The AO concluded that the aggregate consideration received was for acquiring 20% stake in SCL and not as a capital contribution. - The AO viewed the transaction as a colorable device to avoid tax liability. - The AO added the amount as income from other sources u/s.56(1) and alternatively u/s.56(2)(viia). - Assessee’s Contentions: - The capital contribution from PEL was for acquiring a stake in the firm and not directly in SCL. - The amount credited to the capital reserve was part of a strategic investment and not income. - The capital contribution cannot be taxed as income under Section 56(1) or 56(2)(viia). - CIT(A)’s Findings: - The CIT(A) deleted the addition, stating that the capital reserve was created from capital receipts meant for capital investments. - The CIT(A) held that the firm acted as an intermediary and the funds received were for future investments, not for tax evasion. - The CIT(A) emphasized that no income arose from the transaction to be taxed under Section 56(1). - Tribunal’s Decision: - The Tribunal upheld the CIT(A)’s decision, agreeing that the transaction was in the capital field and not taxable as income. - The Tribunal noted that the capital reserve was created to avoid imbalance in the balance sheet. - The Tribunal found no basis for treating the capital contribution as income and dismissed the AO’s allegations of a colorable device. 2. Applicability of Section 56(2)(viia) to Capital Contribution: - Facts: - For A.Y.2014-15, Shriram Ownership Trust (SOT) joined the firm as a partner, contributing shares of SCL and SFVCPL as capital. - The AO invoked Section 56(2)(viia), treating the contribution as received for inadequate consideration and added ?413,80,30,734/- as income. - AO’s Observations: - The AO argued that the shares were received for inadequate consideration and hence taxable under Section 56(2)(viia). - Assessee’s Contentions: - The assessee argued that the capital contribution by a partner is not a transaction for consideration but for acquiring partnership rights. - The contribution of shares was in the capital field and not taxable under Section 56(2)(viia). - CIT(A)’s Findings: - The CIT(A) deleted the addition, stating that the capital contribution is not consideration under Section 56(2)(viia). - The CIT(A) emphasized that the provisions of Section 45(3) prevail over Section 56(2)(viia) as a special provision. - Tribunal’s Decision: - The Tribunal upheld the CIT(A)’s decision, agreeing that the capital contribution by a partner is not consideration under Section 56(2)(viia). - The Tribunal noted that the consideration for capital contribution is indeterminate and cannot be taxed under Section 56(2)(viia). - The Tribunal concluded that the provisions of Section 45(3) prevail as a special provision over the general provisions of Section 56(2)(viia). Conclusion: The Tribunal dismissed the revenue’s appeals for both A.Y.2014-15 and A.Y.2015-16, upholding the CIT(A)’s decisions that the amounts credited to the capital reserve and the capital contribution in the form of shares were not taxable under Sections 56(1) or 56(2)(viia) of the Income Tax Act.
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