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TMI Blog2014 (3) TMI 1135X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. - ITA No.152(Mds)/2011 And ITA No.250(Mds)/2011 - - - Dated:- 3-3-2014 - Dr. O.K.Narayanan And Shri Vikas Awasthy, JJ. Assessee by : Shri S. Sridhar, Advocate Revenue by : Shri Shaji P. Jacob, IRS, Addl. CIT ORDER Dr. O.K. Narayanan, These two appeals are filed by the assessee and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 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/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47,70,767 Takeover value ₹ 270,00,00,000 12. 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 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 alr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The partners of the firm do not receive any consideration or benefit, directly or indirectly, 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CCPL 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x 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 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 leadin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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