9911796707
TMI Blog2020 (11) TMI 263X X X X Extracts X X X X X X X X Extracts X X X X ..... ersons 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 colourabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 7,49,926/- of which, SOT contributed capital of ₹ 7,49,701/- and other three partners contributed 225 at ₹ 75/- each. SOT's capital contribution in SFS as adopted in its books in terms of Section 45(3) of the Act are as under:- 1. 74,970 shares of Shriram Financial Vendor Capital Pvt. Ltd. (SFVCPL) of ₹ 10/- each - ₹ 7,49,700/- 2. 95747200 shares of Shriram Capital Ltd., (SFL) - ₹ 1/- Total ₹ 7,49,701/- 3.1 Piramal Enterprises Ltd (PEL), a Mumbai based company decided to acquire an effective 20% equity stake in M/s Shriram Capital Ltd (SCL) vide their Board resolution dated 01.04.2014. 3.2 Simultaneously, PEL formed a Committee of Directors with a mandate to finalise and approve the structure, mode, manner and tranches in which such acquisition was to be made, including the intermediate entity(ies) through which such investment should be made. It was decided by the Committee of Directors on 17.04.2014 to have an effective 20% equity stake in SCL by joining SFS as a partner with 75% share and making investment through it. 3.3 Consequently, on 17.04.2014 i.e during FY 2014-15, PEL joined SFS as a 5th partner. After PEL joined SFS, ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us. 4. The ld. AO during the pendency of assessment proceedings proceeded to gather some more details of real intention of M/s. PEL in infusing such a huge capital in a small firm like Shrilekha Business Services (assessee herein) whose total balance sheet value is only ₹ 15.51 lakhs as on 31/03/2014. The first source of information collected by the ld. AO was a "press release" issued by M/s. Shriram Capital which reads as under:- "Press Release PIRAMAL ENTERPRISES LIMITED ("PIRAMAL") AGREES TO ACQUIRE 20% EQUITY STAKE IN SHRIRAM CAPITAL LIMITED ("SHRIRAM CAPITAL") Mumbai, 17 April 2014: Piramal Enterprises Ltd. ("Piramal, NSE; PEL, BSE:500302) today announced that it has agreed to acquire an effective 20% equity stake in Shriram Capital Limited ("Shriram Capital" or "Company") a financial services company, for an aggregate consideration of ₹ 2,014 Cr. 4.1. The ld. 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. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on with the Transaction; f) To consider and approve modifications, if any, in the terms and conditions of the Transaction and in this regard, to authorize the execution of necessary agreements and documents to give effect to the same; 4.2. The extract of second Board Resolution dated 06/08/2014 asked by PEL is as under:- CERTIFIED TRUE COPY OF THE RESOLUTION PASSED AT THE MEETING OF THE BOARD OF DIRECTORS OF PIRAMAL ENTERPRISES LIMITED HELD ON 6TH AUGUST, 2014 "WHEREAS: A. Pursuant to the resolution passed by the Board at its meeting on 1st April, 2014, the Company had acquired an effective 20% equity interest in Shriram Capital Limited ('Shriram Capital'), consequent to which, the equity interest of one of the existing shareholders of Shriram Capital i.e. Sanlam Limited ('Sanlam') that then held an effective equity interest of 26% in Shriram Capital prior to the Company's investment, got diluted; and B. In view of Sanlam. expressing its desire to restore its effective equity interest in Shriram Capital to 26% by infusing additional funds for this purpose; and C. In order to maintain the Company's effective equity interest in Shriram Capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingly, he concluded that the submission of the assessee that PEL infused capital of ₹ 2014.20 Crores into the firm to acquire 74% stake in the firm as factually incorrect statement. The ld. AO understood the basis of amount of ₹ 2014 Crores as mentioned in the press release issued by SCL by placing reliance on the valuation report of SCL which valued the total worth of SCL to be ₹ 10071 Crores (comprising of 1022023239 shares). The 20% of the same would work out to ₹ 2014.20 Crores. The amounts received in the bank account of the assessee on 17/04/2014 and 21/04/2014 was ₹ 2015 Crores which was same as the cost for 20% of the shares of SCL and which was also the aggregate consideration payable by M/s. PEL. Accordingly, the ld. AO concluded that what was shown as reserve in the balance sheet amounting to ₹ 2111.23 Crores was not at all reserves but instead consideration received by the assessee on behalf of the SCL from PEL. 4.4. The ld. AO observed that Shriram Group as a whole is supposed to pay tax on the aggregate consideration received of ₹ 2100 Crores from M/s. PEL and that in order to avoid tax liability on the same, Shriram Capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,00,000 1,00,00,10,000 1000 No. 5 and 6 Allotted to SFS in the name of its partners 21/04/2014 Shares allotment 1,01,57,00,000 2,01,57,10,000 (1,00,00,00,000 + 1,01,57,00,000) 1015.71 No. 7 and 8 Allotted to SFS in the name of its partners 28/08/2014 Shares allotment 10,32,49,995 2,11,89,59,995 (2,01,57,10,000 + 10,32,49,995) 103.25 No. 11 and 12 Allotted to SFS in the name of its partners Total No. of Shares as at 31/03/2015 2,11,89,59,995 4.7. The ld. AO observed that by avoiding tax liability on the aggregate consideration received from M/s. PEL by Shriram Group for diluting the stake to the extent of 20% in SCL, the group had first received money in the assessee firm to the tune of ₹ 6.22 Crores as capital and balance ₹ 2111.23 as reserves and thereafter, the money was transferred to M/s. Novus Cloud Solutions Pvt.Ltd. (Novus) and finally M/s. Novus got merged with M/s.SCL. The ld. AO further observed that this entire gamut of operations to M/s. PEL had acquired an effective 20% equity interest in SCL by virtue of Board Resolution dated 01/04/2014 which was further reconfirmed vide another Board Resolution dated 06/08/2014. 4.8. The ld. AO fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay back: * It is liable to be taxed. * It is nothing but a gift to the assessee firm as it was received without adequate consideration (Para 3.33 of the assessment order). (vii) The modus operandi adopted by the assessee is a convoluted tax planning and a colourable device to avoid tax liability. Relied upon the SC decision in the case of Mc Dowell and Co Ltd (154 ITR 148) (Para 3.23 of the assessment order) . (viii) Even though PEL confirmed their contribution to the firm as investment as recorded in their books of account along with a copy of their investment account, AO held it as factually incorrect referring to their Board resolution dated 1.4.2014 (Para 3.35 & 3.36 of the assessment order). (ix) The consideration received by a person directly or through another person for transfer of shares is liable for taxation under the provisions of the Income Tax Act (Para 3.37 of the assessment order). It is an undisputed fact that the consideration so received from PEL for getting shares of SCL is to be taxed somewhere down the line (para 3.37 of the assessment order). It is also an undisputed fact that Shriram group is liable to pay tax on ₹ 2100 cr of the consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arging to tax 'income' as per the provisions of Income Tax Act and not falling under the head capital A to capital E specified in Section 14 of the Act. It is not a residual head for charging to tax 'any receipt' `which does not constitute 'income' as per the provisions of the Act. The sum of money brought in by the partner is a capital receipt in the case of the firm and certainly not a receipt in the revenue field. To support this contention, the assessee had also filed a confirmation from Piramal Enterprises Ltd., (PEL) confirming their contribution to the assessee firm as investments which has also duly recorded in their financial statements. The assessee also pleaded that the burden to show a particular receipt as income is always on the revenue, which burden remain undischarged by the ld. AO in the entire assessment order. 5.2. The assessee also submitted before the ld. CIT(A) that the transactions between PEL and SCL was not a clandestine transaction as it was a simple transaction of PEL investing in SCL through the assessee firm in order to get rid of the difficulties that would otherwise arise due to the presence of other investors in the firm of private equity partners i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the assessee before the ld. CIT(A) and the various factual and legal submissions made by the assessee before the ld. CIT(A) as summarised hereinabove. The copy of the said remand report dated 17/04/2018 of the ld. AO is placed on record by the ld. DR in his paper book submitted dated 06/05/2019 vide pages 40-62 thereon . 6.1. The assessee filed a rejoinder to the remand report submitted by the ld. AO and further made the following submissions: (i) The assessee further submitted that the relation of partnership arises from contract. All rights and liabilities between or among the partners vis a vis the partnership are subject to contract between the partners. That is the reason for many sections dealing with partners mutual rights and liabilities, conduct of business, property of the firm, application of the property of the firm, introduction of a partner, dissolution of a firm etc., in the Indian Partnership Act to open with the phrase "Subject to contract between the partners". (ii) In this particular case, PEL became a partner in the firm Shrilekha with a view to acquire 20% stake in Shriram Capital Ltd. At the time when PEL was inducted into the firm as a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / merger / take over between two industrial houses i.e M/s. Piramal Group and M/s. Shriram Group had been through systematic investments. He also observed that in any case assessee was ultimately allotted shares from SCL (pursuant to merger of Novus with SCL) out of the capital contribution received by the assessee from PEL which was inturn invested in Novus and since Novus was already holding shares of SCL, pursuant to its merger of Novus with SCL, the assessee was allotted shares from SCL. There is absolutely no dispute that SCL had originally allotted shares to Novus on private placement basis which enabled Novus to have stake in the form of shareholding in SCL. 7. The ld. DR filed detailed written submissions which are enclosed in pages 1-12 of the paper book dated 06/05/2019 filed before us. The ld. DR at the time of arguments before us took us to each and every aspect mentioned in the written submissions referred to supra hence, the entire essence of his arguments could be captured from his written submissions itself which are reproduced herein below for the sake of convenience:- "1. In the present case, assessment u/s.143(3) was completed on 30.12.2017 determining the tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome in the hands of the assessee firm. Accordingly, the entire addition of ₹ 2111,22,65,347/-was deleted. 5. The observations of the Id. CIT(A) as contained in page nos. 55 and 56 of appellate order are reproduced as under : "To conclude, the contention of the Assessing Officer that this investment of ₹ 2111.23 crores is an income in the hands of appellant's firm being a conduit of the transaction, has no stand. Investment between business houses were made through different investing companies. In the present case, appellant's firm is a just an Intermediary between the actual transfer of funds. It is pertinent to note that the funds which were received from M/s. Piramal Enterprise Limited were kept as Capital Reserve. As per Accounting Principles, Capital Reserve is meant for specified investment and it cannot be distributed or used by the business unit for any other purpose than what it has been created for. This clarifies the stand of the appellant that the funds were meant for investment and appellant did not use for the business purpose for its own. Being a partnership firm, the partners can bring in funds for specified purposes and future inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to, the number of shares required for making M/s. PEL 20% effective stake holder, the amount required for each share as decided by valuation report of Shri Saptharishi, CA and the exact amount paid by M/s.PEL to the assessee firm on the same day as on the date of reconstituted partnership deed dated 17- 4-2014 is exactly in conformity with the fact that whatever money was received by the assessee firm, is for the intended acquisition of shares of M/s.Shriram Capital Limited, but not for future investment, as held by the Id. CIT(A)-1, Hyderabad. The clause 3.4 and clause 5.2 of the reconstituted partnership deed dated 17-4-2014 also confirms the fact that the assessee firm has to make new partner the beneficial owner within 3 working days of the "EFFECTIVE DATE " i.e. within 3 working days of the new partner makes its payment/contribution to the assessee firm. 9. The chronology of events which led to receipt of consideration by the assessee firm from M/s.PEL to finally M/s. PEL becoming a beneficial owner of 20% stake in M/s.Shriram Capital Limited, a group company of the assessee firm is as discussed in detail herein below: a) M/s.Shriram Ownership Trust [SOT] which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.SCL as on 31-3-2014 is 102,20,23,239. The number of shares required for intended acquisition is 20,44,04,648 (20% of 102,20,23,239 shares). It was further mentioned that the price per share of M/s.SCL as per the Valuation Report of Shri V.S.Saptharishi, CA vide his report dated 09.04.2014 was fixed at ₹ 98.54 per share, (copy of valuation report is enclosed herewith this Paper Book). g) M/s.PEL now worked out the consideration to be paid for acquisition of 20% equity in M/s. SCL or 20,44,04,648 shares of M/s. SCL at ₹ 2014,20,34,014/- i.e. [20,44,04,648 shares x ₹ 98.54 per share]. h) Having known about the availability of 16,75,26,182 shares of M/s.SCL with assessee firm as discussed, M/s. PEL chooses to become a partner in the assessee firm and through the assessee firm M/s. PEL want to become 20% beneficial owner of the SCL shares. i) Accordingly, M/s.PEL has entered as a new partner in the assessee firm through reconstituted partnership deed dt.17.04.2014. Till 31.03.2014 the partners of the firm is M/s.SOT 99.97%, Shri S.Murali 0.01%, Shri Jagadish 0.01% and Shri D.V.Ravi 0.01%. Consequent to the entry of M/s.PEL as a new partner in the assessee firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 25.049% : 74.95%. Accordingly, the shares of SCL were also rearranged in the ratio of 1,79,83,050 : 5,38,05,842 m)It was mentioned in the preceding paragraphs that the firm was already the owner of 16,75,36,182 shares of M/s.SCL which were received from M/s. SOT on 26-3-2014 (9,57,47,200 shares directly and 7,17,88,982 shares of M/s.SCL through M/s. SFVCPL indirectly. It was also mentioned that the total number of shares of M/s. SCL required by M/s. PEL to become 20% stake holder as on 31-3-2014 is 20,44,04,648. It was also mentioned that M/s. PEL is 74% shareholder of the assessee firm (prior to the deed of amendment dated 27-11-2014). n) To make M/s. PEL a beneficial owner of 20,44,04,648, the firm requires 27,62,22,497 shares of M/s. SCL (i.e. 100 / 74 x 20,44,04,648). In the event of firm becoming the owner of 27,62,22,497 shares of SCL only, the firm can make PEL the beneficial owner to the extent of 20,44,04,628. n(i) As brought out in the preceding paragraphs the total number of shares of M/s. SCL held by the firm before the entry of PEL is 16,75,36,182. However, the firm requires 27,62,22,497 shares of SCL to fulfil the obligation of making PEL the beneficial ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... about the price per share on the basis valuer report of Sri V.S. Saptharishi, CA dated 9-4-2014 who fixed the same at ₹ 98.54 per share. The price to be paid to SCL is arrived at ₹ 1071 crores ( 10,86,86,828 x ₹ 98.54 ) r(i) Accordingly, M/s. NCSPL out of ₹ 2015.70 crores received from the assessee firm had paid an amount of ₹ 1071 crores to M/s. SCL. On receipt of the same M/s.SCL has made allotment of 10,86,86,828 shares @ ₹ 98.54 per share on 21.04.2014. [copy of share allotment letter dt.21.04.2014 is made part of the Paper Book]. s) Thus, the assessee firm had become the owner of required 27,62,23,010 snares of SCL to enable to fulfil its obligation towards PEL after receipt of consideration of ₹ 2014.20 crores on 17-4-2014 and 21-4-2014. The breakup of SCL shares held by the assessee as on 21-4-2014 are as under : i) Received from SOT 9,57,47,200 ii) Received from SOT (indirectly through SFVCPL) 7,17,88,982 iii) Acquired through NCSPL 10,86,86,828 Total shares 27,62,23,010 t)In the assessment year under consideration the reconstituted partnership firm dated 17-4-2014 which envisages 25.999%: 74% in favour of M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 74.95% through deed of amendment dated 27-11-2014 from the existing ratios of 25.999% ; 74% as envisaged earlier in the partnership deed dated 17-4-2014. Accordingly, the assessee firm made the new partner M/s. PEL the beneficial owner of shares of SCL as per amended partnership deed. The details of the same are as under : S. No Source of the shares Total shares PEL 74.95% SOT 25. 049% 1 Received from SOT on 26-3-2014 9,57,47,200 7,17,62,526 2,39,84,675 2. Received from SOT on 27-3-2014 (indirectly through SFVCPL) 7,17,88,982 5,38,05,842 1,79,83,140 3. Acquired through NCSPL on 21-4-2014 10,86,86,828 8,14,60,778 2,71,93,445 4. Acquired through NCSPL on 27-8-2014 1,04,77,978 78,53,244 26,24,734 Total 28,67,00,828 21,48,82,390 7,18,18,438 Y)In the manner described above, the assessee firm had acquired 28,67,00,828 shares of M/s SCL and made PEL the beneficial owner to the extent of 21,48,82,390. This constitutes 20% effective stake '20% of 107,44,11,829 ) as required by M/s. PEL in its Board's Resolution dated 1- 4-2014 and 16-8-2014. The consideration required -or acquiring the same is ₹ 2117,45,10,710 (21,48,82,390 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s. PEL the beneficial owner of 20% effective equity in M/s. SCL by the assessee firm had finally transferred to M/s. SCL by using an insignificant subsidiary of the assessee firm M/s. Novus Clouds Solutions Private Limited without even suffering a rupee of tax. The whole issue raised during the remand proceedings whether the said receipt is taxable receipt or non taxable receipt was not addressed by the Ld. CIT(A). 11. Therefore, the order of the learned Commissioner of Income-tax(Appeals) accepting the claim of the assessee, that the said receipt represents capital reserve and the same brought in by the partner for future investment is erroneous on the facts and in the circumstances of the case. The said amount so received from M/s.PEL was rightly brought to tax in the hands of the assessee firm in the assessment order passed for the assessment year 2015-16. 12. It is also pertinent to bring to the notice of the Hon'ble Tribunal that in recent newspaper reports published in Economic Times on 23.04.2019, Business Standard on 23.04.2019 and Eenadu Telugu Newspaper on 24.04.2019, it was mentioned that the new partner M/s. Piramal Enterprises Limited intends to sell its 20% s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares and hence, it cannot be business income or capital gains. Accordingly, the said receipt gets taxable under the residuary head u/s.56 of the Act being the income from other sources. 8. The ld. AR at the time of virtual hearing started addressing the bench by making a power point presentation by sharing the screen to the bench as well as to the ld. DR. This Power Point Presentation was later submitted in email also to the bench as directed by the bench at the time of hearing. The ld. AR submitted that the decision of the ld. AO is primafacie fundamentally flawed as it does not answer the following basic issues:- (i) How did the aggregate consideration (as held by the ld. AO) become income of the firm ? (ii) Whether the ld. AO presumed that there was no cost of acquisition of shares and the assessee firm got it for free? In the same assessment order, the ld. AO had repeatedly stated that the entire money received from PEL has landed with SCL through Novus for the purpose of allotment of its shares by diluting its equity. Having given such a finding, there is absolutely no basis for making a presumption. He argued that if the ld. AO is of the view that there is no cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (assessee firm alone). It is also a fact that PEL cannot deal with the shares of SCL held by assessee and it can do only that much which could be done by a partner. 8.4. The ld. AR vehemently argued that SCL allotted shares to Novus on private placement basis. The assessee held 100% shareholding in Novus. He explained that every transaction involving acquisition of shares would not result in taxable income. For example, in the case of acquisition of shares through Initial Public Offer (IPO), rights issue, private placement etc, there is no taxable income in the hands of the recipient of consideration as such receipt was only in the capital field. He also argued that allotment of shares through IPO, rights issue, private placement etc., are legally permissible methods available for any company. In the present case, no entity transferred shares of SCL to PEL. SCL allotted its shares to Novus through private placement basis by duly enhancing its authorised and paid up capital. The ld. AR referred to pages 25-27 of his paper book containing the relevant pages of the financial statements to prove the fact that authorised capital and paid up capital of SCL was duly increased. The ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sum of ₹ 7,49,001/- to its capital account. After PEL joining the firm with 75% share, SOT has a share of 25% with others having negligible share. PEL brought in capital of ₹ 2117.45 crores towards its 75% share. In the books of the firm, partner's capital of SOT with 25% share would reflect a very nominal amount of ₹ 7,49,001/- whereas the partner's capital of PEL with 75% share would show capital of ₹ 2,117.45 crores. This would give a very lopsided picture of the financial statements of the firm when the same are presented before any agency. To avoid such an imbalance in the balance sheet, capital reserve was created as agreed upon in the partnership deed. The allocation of capital contribution of PEL between partner's capital account and capital reserve was agreed among the partners vide para 6.2 of partnership deed dated 17.04.2014 (copy of partnership deed is enclosed in page 152 of revenue's paper book). (ii) 'Capital reserve' & 'revaluation reserve' in firms and 'Capital reserve', 'share premium', 'reserves and surplus' etc., under Companies Act are analogous accounting concepts. The only difference being, it is codified under Companies Act whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a scheme to avoid tax liability. The view of the Ld. AO as mentioned in the order and the arguments made by the Ld. CIT DR do not stand the scrutiny of law and may be rejected. 8.7. The ld. AR also pointed out yet another misconception of the ld. AO wherein the ld. AO had stated that assessee firm is a concern of Shriram group. In this regard, the ld. AR pointed out that PEL is a company of Mumbai based Piramal group, which has control having 75% stake in assessee firm in the form of partner's capital. The remaining 25% share is held by Shriram Ownership Trust (SOT), a concern of Shriram group. Hence, SFS (assessee firm herein) is only a concern controlled, managed by Piramal group and not Shriram group. The ld. AO wanted to tax some entity in Shriram group somehow but finally ended up taxing Piramal group on its capital contribution. 8.8. The ld. AR addressed yet another misconception of the ld. AO that the entire transaction was devised in such a manner that there is absolutely no liability to pay tax by the Shriram group on the aggregate consideration of ₹ 2111.23 Crores received from PEL. The ld. AR also drew our attention to para 3.4 of the assessment order wherein t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a categorical finding as to whether the said receipt falls within the ambit of "income" u/s.2(24) of the Act. 8.9. The ld. AR vehemently argued that the assessee had complied with due legal provisions of the Act and the transaction carried out by the assessee cannot be construed as a colourable device to avoid tax liability. He also argued that at the outset there is absolutely no incidence of tax liability at all in this entire gamut of transactions, as ultimately PEL had only made its capital contribution in the assessee firm as a partner. 8.10. The ld. AR stated that the addition of ₹ 2111.23 Crores was made by the ld. AO u/s.56(1) of the Act by adducing the following reasons:- (a) Treatment of ₹ 2111.23 Crores as reserves of the partnership shows that the partner had gifted the said amount to the firm. (b) The assessee was a conduit of PEL for indirect transfer of money to SCL and to acquire its 20% stake. (c) Confirmation given by PEL that its investment in the assessee firm was recorded in its books as investment as factually incorrect. (d) Money was paid as consideration for acquiring 20% stake in SCL as per Board Resolution of PEL and consideration r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entity just by introducing certain vehicles in between. If that was legally possible then, every assessee would attempt the same. (viii) Capital contribution made by a partner into the firm is definitely on the capital field and does not fall within the scope of definition of income u/s.2(24) of the Act. (ix) The ld. AR also argued that the ld. AO was not clear about the facts of the case as regards whether shares of SCL were transferred, how and who transferred and to whom it was transferred ? If so, whether the transaction attracts tax liability and in whose hands? 8.12. The ld. AR without prejudice to aforesaid arguments also submitted that in any case, the ld. AO had made addition u/s.56(1) of the Act taxing the entire receipt as income from other sources even without making any deduction towards cost of shares / cost of investment which was eligible for deduction in terms of 57(iii) of the Act. He argued that if the said deduction towards cost is given then it would set off the entire addition and nothing would remain. With regard to addition made by the ld. AO alternatively u/s.56(2)(viia) of the Act, he argued that the monies received by the assessee from PEL and utili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otment of shares, PEL was effectively able to have 20% stake in SCL as it was holding 75% partnership stake in assessee firm. The above primary facts are not in dispute. 10.2. On perusal of the Board Resolution of PEL dated 01/04/2014 which is reproduced supra, we find that PEL actually decided to acquire effective equity stake of 20% in SCL. In fact it was never the intention of PEL to hold shares of SCL in its own name directly as is very much evident from its Board Resolution dated 01/04/2014. Infact, we also find that Clause C and Clause B of Resolution dated 01/04/2014 of PEL contemplated setting up of sub-committee of Directors who had been given the task of finalising of approving the mode of investment, identifying the intermediate entity (ies) through which such investments should be made, mode and extent of ownership interest of the intermediate entity (ies) to be acquired etc., This clearly shows the intention of PEL to have only effective stake in SCL through intermediate entities and not directly. Hence, the primary contention of the revenue is that PEL had paid monies to assessee for ultimately holding stake in SCL need to be appreciated in the context of the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... coming into play in order to escape tax liability. Hence, we hold that the entire transactions between PEL, assessee and SCL through Novus was all done by duly complying with all legal procedures and formalities and there is absolutely no escapement of tax in this entire gamut of transactions. The ld. AR also vehemently submitted that it is not the first time shares were allotted by SCL in this fashion. In fact the presence of private equity player i.e. TPG India Investments (II) INC (FII Investor) had caused some difficulty to SCL as they are prevented from making any allotment of shares even on private placement basis other than to its group concerns. We find that this fact had missed attention of the ld. AO while considering entire gamut of transactions. Hence, the allegations levelled by the ld. AO which was strongly supported by the ld. DR that the entire transaction is a colourable device are hereby rejected. Accordingly, the case law relied upon by the ld. AR need not be gone into by us. 10.5. With regard to the creation of capital reserve in the books of assessee firm and substantial amount received from PEL towards capital contribution getting credited to such reserve ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. We also find that 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. Infact 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). Hence, we summarily 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons 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. 10.8. One of the most clinching fact is that PEL had duly filed its confirmation before the ld. AO stating that the monies invested by them in assessee firm was shown as capital contribution made in assessee firm only. The said confirmation nowhere talked about PEL having any direct stake in equity of SCL. This also goes in consonance with the actual intention of PEL which is approved in the Board Resolution dated 01/04/2014 as PEL always intended to have only effective stake of 20% in SCL and not direct stake thereon. We find that the ld. AO had summarily disregarded this confirmation given from PEL without any basis. 10.9. In any case, we find that 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various arguments of the ld. AR, the ld. DR argued that pursuant to receipt of monies from PEL, there was sacrificing of interest by the existing partners in favour of PEL and that the consideration attributable to this sacrifice of interest is retained in the capital reserve. This has got absolutely nothing to do with the assessee firm as apparently the sacrifice of interest, even if any, had happened between partners and the firm cannot be taxed for such action. 10.15. With regard to two case laws relied upon by the ld. DR before us, viz, decision of the Hon'ble Allahabad High Court in the case of CIT vs. Carlton Hotel Pvt. Ltd., reported in 399 ITR 611(All) and the decision of Hon'ble Karnataka High Court in the case of CIT vs. Wipro Ltd., 227 Taxman 244(Kar) are concerned, the said decisions are factually distinguishable in as much as they were concerned with the taxability of capital gains. The ld. DR had also argued before us that there cannot be any levy of capital gains in the instant case as assessee is not engaged in the business activity of purchase and sale of shares and hence, there cannot be any business income or capital gains. Kind reference is drawn to arguments a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng deemed income as per provision s of Sec.56(2) (viia). 4. The CIT(A) erred in equating the provisions of Sec,56(2) (viia) and 56(2) (viib) which are applicable for different contexts. 5. Any other ground that may be urged at the time of hearing." 14. The brief facts of this appeal are that the assessee was a firm and as on 01/04/2013 consisted of three individual partners namely Shri D.V.Ravi, Shri S Murali and Shri K Jagdeesh with total capital of ₹ 225/- @75/- each having equal profit sharing ratio. During the assessment year under consideration, Shriram Ownership Trust (SOT) joined the firm as fourth partner with 99.97% share and above three individuals continued as partners with 0.01% share each. The re-constituted partnership deed was duly prepared in this regard and as per the said deed, SOT's contribution towards capital was as under:- i. 74,970 shares of Shriram Financial Venture Capital Pvt Ltd (SFVCPL) - Value was taken at ₹ 7,49,700/- @ ₹ 10/- u/s 45(3) of the Act and credited to capital account of SOT. ii. 9,57,47,200 shares of Shriram Capital Ltd (SCL) - Value was adopted at ₹ 1/- u/s 45(3) of the Act and credited to capital account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34,867/- (₹ 74,970 x ₹ 22,396.09). Accordingly, the ld. AO concluded that the assessee firm received the shares of SCL and SFVCPL from SOT for an inadequate consideration of ₹ 245,97,45,567/- (₹ 245,97,45,568/- - ₹ 1) and ₹ 167,82,85,167/- (₹ 167,90,34,867/- - ₹ 7,49,700/-) respectively and sought to invoke the provisions of Section 56(2)(viia) of the Act for making total addition of ₹ 413,80,30,734/- (₹ 245,97,45,567/- + 167,82,85,167/-) and accordingly concluded that income of the assessee had escaped assessment. Accordingly, the ld. AO after obtaining prior approval from Additional Commissioner of Income Tax-Range 4, Hyderabad on 22/03/2018 for escapement of income, issued notice u/s.148 of the Act dated 22/03/2018 for A.Y.2014-15. In response to the said notice, the assessee firm filed its return of income on 04/04/2018 admitting the same total income originally declared at ₹ 27,630/-. The assessee also filed a letter dated 09/04/2018 alongwith copy of acknowledgement of return, balance sheet, profit and loss account for the year ending 31/03/2014. Consequently, a notice u/s.143(2) and 142(1) of the Act were issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing to the partnership form the realization of this property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in clause (a) and sub-clauses (i),(ii), and (iii) of clause (b) of section 48." 7.6 A partner's interest in the firm is a valuable property. The Estate Duty Act when it was in force provided for passing of such interest of the deceased par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 99.97% obtained by SOT pursuant to the capital contribution should by itself constitute 'adequate consideration' for the purpose of section 56(2)(viia) of the Act. 9. For the above reasons, we submit that section 56(2)(viia) is not applicable in our case and request you to drop the Section 147 proceedings initiated by you." 14.5. The assessee also submitted that the capital contribution was brought in by SOT (partner) in the form of shares held by it in SCL and SFVCPL at the price mutually agreed upon between the partners and the assessee firm in terms of Section 45(3) of the Act. The crux of the entire observations of the ld. AO for framing the addition u/s.56(2)(viia) of the Act after meeting these submissions of the assessee could be summarised in the following manner:- 1. Here the issue is not about what is the value of the asset brought in by the partner to be recorded in the books of the firm. This issue of recording value of asset in the books of accounts comes into picture in the case of calculation of capital gains liable to be paid to the transferor as governed under Section 45(3) of the Act whereas the issue involved in the present case is deemed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) or clause (vicb) or clause (vid) or clause (vii) of section 47." 14.6. Accordingly, he observed that what is included is the transactions pertaining to a situation where transfer of shares in a demerged foreign company, transfer of shares in a co-operative bank, transfer of shares in a demerged Indian company and transfer of shares in a scheme of amalgamation. The submission of the assessee that when a partner transfers shares to the firm for inadequate consideration, does not fall under any of those exclusions. 14.7. With the above observations, the ld. AO made an addition of ₹ 413,80,30,734/- towards shares received from SOT for an inadequate consideration u/s.56(2)(viia) of the Act under the head 'income from other sources. 15. The ld. CIT(A) deleted the addition made u/s.56(2)(viia)of the Act by observing as under:- • "The appellant is a partnership firm and SOT is partner in the firm. • The SOT as a partner introduced shares of two companies namely, M/s.Shriram Capital Ltd and M/s.Shriram Financial Venture (Chennai) Pvt Ltd, during this assessment year 2014-15 as a capital contribution in the appellant firm. • The appellant firm not receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the assessee with respect to provisions of Section 56(2)(viia) of the Act will not apply in the case where the partner introduced an asset in the firm as capital contribution, holds no water. He argued that the issue under consideration here is not the partner contributing the asset into a firm, but the issue whether the fair market value of the asset contributed by the partner is same as per the recipient records in its books of accounts. He submitted that once a partner contributes the asset in the partnership firm, the firm automatically becomes the owner of such asset and when such firm receives the assets for inadequate consideration than its fair market value, the provisions of Section 56(2)(viia) of the Act will automatically apply. 17.1. The ld. CIT DR also argued that apart from the facts, the ld. CIT(A) had also placed reliance on the decision of the Hon'ble Supreme Court in the case of Sunil Siddharthbhai vs.CIT reported in 156 ITR 509 to delete the addition made u/s.56(2) (viia) of the Act. The ld. CIT DR argued that the said Hon'ble Supreme Court's decision was rendered in the context of applicability of Section 2(47) r.w.s.45 & 48 of the Act and not with Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entities and once, the transactions between two different entities takes place, the recipient will be owner of the asset. In this case, the assessee firm being the recipient had become the owner of the shares whose fair market value is ₹ 413,87,80,435/- as against the consideration recorded in the books of the assessee firm at ₹ 7,49,701/- only thereby resulting in inadequate consideration warranting taxing u/s.56(2)(viia) of the Act for the differential sum. 18. We have heard the rival submissions and perused the materials available on record. We have also gone through the detailed written submissions of the ld DR and the power point presentation of the ld AR submitted at the time of hearing before us and later filed in email by him. It is not in dispute that SOT being the partner in the assessee firm had brought in shares held by it in SCL and SFVCPL as capital contribution. The assessee had pleaded that pursuant to this capital contribution in the form of shares in the assessee firm, the assessee firm had become the owner of the shares of SCL and SFVCPL in terms of Section 14 of the Indian Partnership Act. At the outset, we find that provisions of Section 56(2)(vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concluded that what has been received by the partner in the form of capital contribution cannot be equated with the term "consideration" within the meaning of Section 56(2)(viia) of the Act. Admittedly, the receipt of capital contribution from a partner either in cash or in kind would be "transaction in the capital field and not in the revenue field" at all, for the simple reason that the said capital is always repayable at the time of retirement / resignation of the partners or at the time of dissolution of the firm. 18.2. We find that the other key words in the Section 56(2)(viia) are "firm" , "receives" and "any person". It contemplates a contract / transaction between the "firm" and "any person" who transferred shares for consideration. In any contract, consideration pre-supposes an enforceable right to recover money due from one party by the other. As there is no contract / transaction between the partner and the firm in respect of capital contribution, the partner cannot sue the firm for recovery of the same. In case of capital contribution, the partner cannot claim / recover the capital balance from the firm as long as he continues as a partner. In the case of capital contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of capital contribution as long as the firm subsists. Capital contribution happens before firm comes into existence and consideration for partner arises after dissolution of the firm or retirement or resignation of partner. Hence, it could be safely concluded that the term "person" mentioned in Section 56(2)(viia) of the Act does not cover "partner" in respect of capital contribution and accordingly, Section 56(2)(viia) of the Act cannot be made applicable in the case of capital contribution made by a partner to the firm. 18.4. We are inclined to accept the arguments advanced by the ld. AR by placing reliance on the decision of the Hon'ble Supreme Court in the case of Kartikeya V Sarabhai vs. CIT reported in 228 ITR 163 (SC) and Sunil Sidharthbai vs.CIT reported in 156 ITR 509 (SC), wherein the Hon'ble Supreme Court had held that part of the ownership rights in the property gets transferred to other partners and hence, such contribution amounts to transfer of capital asset u/s.45 of the Act ; Consideration for capital contribution is share in the profits of the firm during its subsistence and share in assets after its dissolution ; 'Consideration' is 'indeterminate' and as su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it "determinate" for the purpose of Section 56(2)(viia) of the Act consciously unlike it was done for Section 45(3) of the Act. 18.6. 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. It is the accepted rule of construction that special provisions would prevail over general provisions as per the famous latin maxim "Generalia Specialibus Non Derogant". The ld. AR also placed reliance on the decision of the Hon'ble Supreme Court in the case of DR Yadhav vs. R K Singh reported in (2003) 7 SCC 110 wherein it was held that when two conflicting provisions of law operate in the same field, the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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