Ita/291/2013 Of Commissioner Of Income Tax v. Shri. Vikram Reddy

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 27 DAY OF FEBRUARY 2071.PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’‘’BLE MR. JUSTICE NATARAJ RANGASW AILT.A. NO.291 OF 2013 BETWEEN: 1.|COMMISSIONER OF INCOME TAX| C.R. BUILDINGS -III QUEENS ROAD BANGALORE-560001. 2 |ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1(1) ITO WARD 1(2), BANGALORE. (BY SRI. E.R. INDRAKUMAR, SR. COUNSEL A/W SRI. E.I. SANMATHI, ADV.,) .., APPELLANTS. AND" SHRI. VIKRAM REDDY|(INDIVIDUAL)NO.6A, REGENCY HEIGHTS3/2-1, CLEAVELAND ROADFRAZER TOWN, BANGALORE-560005. .., RESPONDENT (BY SRI. ASHOK A. KULKARNI, ADV.)| THIS I.T.A. IS FILED UNDER SEC. J6O0-A OF INCOME TAXACT 1961, ARISING OUT OF ORDER DATED 08.02.2013 PASSEDIN ITA NO.158/BANG/2011, PRAYING TO: (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW,STATED THEREIN. | (ii) SET ASIDE THE APPELLATE ORDER OF THE ITAT, ‘A’)BENCH,|BANGALORE.IN|APPEAL|PROCEEDINGS»TTA!NO.158/BANG/2011 DATED 8.2.2013, AS SOUGHT FOR IN THIS”APPEAL. THIS ILT.A. COMING ON FOR’ HEARING, THIS DAY, | ALOK ARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short)has been preferred by the revenue. The subject matter|of the appeal pertains to the Assessment year 2007-08.The appeal was admitted by a bench of this Court videorder dated 13.08.2013 on the following substantial|questions of law:| “(D)WhetherOf)thefacts|and|circumstances of the case, the Tribunal iscorrect in law in not recognizing the colourabledevice employed by the assessee as envisagedby the Hon'ble Apex Court in case of McDowell& Co Ltd (reported in 158 ITR page 148) whichresulted in massive tax evasion in the guise oftax|planninglaced.withmultilayeredtransactions 2". “(i)WhetherOf)thefacts|and|circumstances of the case, the Tribunal iscorrect in law in not considering the fact thatthe shares belonging to the assessee wereultimately transferred to Godrej Group as partof sale of business of the Nutrine Group toGodgrej Group, routed through a series of|transactions including the reconstitution of thedefunt firm M/s. B.V. Reddy enterprises toaccommodate the shareholders of M/s. Nutrineconfectionery Co. P. Ltd and _ guising thnumerous transactions as genuine in quick spanof time, with a sheer motive of avoidance Ofpayment of actual capital gain?’.| “(CHD)”WhetherOf)thefacts|and|circumstances of the case, the Tribunal iscorrect in law in holding that the entire series oftransactions by which the shares of NCCPL wereultimately transferred to GBFL were all validand such an arrangement to avoid payment oftaxes on account of correct quantum of capital|gain that would result on transfer of shares ofNCCPL to GBFL was permitted and within theframework of law?".. “(lv) Whether in the given facts andcircumstances of the case, the Tribunal iscorrect in law in holding that the entire series oftransactions by which the shares of WNutrineConfectionaryCo.PpLtdwereultimatelytransferred to GBFL were all valid and such acourse was permitted and within the frame workOf law and that the transaction was not!colourable or dubious device or subterfuge and|werelegaland|validwithoutcompletelyappreciating the complete though process andmotive behind the series of transactions enteredin to by the assessee and family members?". “(V)Whether in the given facts and.circumstances of the case, the Tribunal iscorrect in law in allowing the appeal of theassessee with reference to addition on accountof non existent liability amount to Rs.1,77,77/8/-without appreciating that the assessee had notbeen able to prove the same beyond doubt?". 2 |Facts leading to filing of this appeal brieflystated are that M/s Neuprine Confectionary Company P..Ltd. (Hereinafter referred to as the NCCPL’ for short). “(V)Whether in the given facts and.circumstances of the case, the Tribunal iscorrect in law in allowing the appeal of theassessee with reference to addition on accountof non existent liability amount to Rs.1,77,77/8/-without appreciating that the assessee had notbeen able to prove the same beyond doubt?". 2 |Facts leading to filing of this appeal brieflystated are that M/s Neuprine Confectionary Company P..Ltd. (Hereinafter referred to as the NCCPL’ for short). was incorporated on 14.02.1952. The said company was.engaged in the business of manufacture and sale ofconfectionary products under the brand name Neutrine..Thereafter on 14.07.1971, M/s B.V.Reddy Enerprises(Firm) was formed at Chittoor in the State of AndhraPradesh (hereinafter referred to as the BVRE for short).The.aforesaidpartnershipfirm.comprisedofSri.Madhusudnhan Reday, Sri.Vikram Reddy, Smt.ShobhaReddy, Smt.Sandhya Reddy, Smt.Anitha Reddy andSri.Dinesh Reddy. Out of the aforesaid three partners.viz., Smt.Sandhya Reddy,|Smt.Anitha Reddy and|Sri.DineshReddy|wereMInors.On25.06.1979,Smt.Anitha Reddy and Smt.Sandhya Reddy attained thedate of majority and a fresh deed of partnership wasexecuted with the same partners. Again on 30.12.1982.a new deed of partnership was drawn with same sixpartners, as Sri.Dinesnh Reddy attained the age ofmajority. On 28.12.2005, a company M/s NeutrineConfectionaryand|SweetsPvt.Ltd.,|(hereinafter referred to as the NCSPL’ for short) was incorporated.On 22.03.2013, 10 separate persons but 13 in numberas out of 10 partners 3 were shown to be in dualCapacity executed a Memorandum of Understanding|(MoU). Thereafter, on 24.03.2006 the partners Droughtin the shares held by them in NCCPL as their share ofcapital contribution to firm BVRE and their valuerecorded at the agreed figure on which capital gains.have been returned and tax for Assessment Year JOO6-O07 under Section45(3) of the Act and accepted in aproceeding under Section 143(3) of the Act. The.resolution was forwarded on the same date i.e.,24.03.2006 to the company secretary of NCCPL withsignature of the partners showing different status in.which they were partners including their dual capacity.All the 13 partners delivered share transfer formstransferring the shares so brought in as capital in favour|of Sri.Madhusudhan Reddy on 24.03.2006 and name of.Sri.Madhusudhan Reddy was entered as_ registered Shareholder of NCCPL in pursuance of the resolutionpassed by the firm. 3Sri.Madhusudhan Reddy filed a declarationunder Section 18/7C of the Companies Act, 1956 on27.03.2006 stating that beneficial owners of the shares|NCCPL held by him were 13 partners of the firm viz.,BVRE. Similar declaration under Section 18/7C of theCompanies Act was given by 13 partners. The NCCPL on29.03.7006|entered|In|thebooksthenameofSri.Madhusudhan Reddy as shareholder on behalf of.various partners of BVRE as per provision of theCompanies Act. On 29.03.2006, a non binding MoUpetween the members of the Reddy family and GodrejBeverages and Foods Ltd. was executed with referenceto the position prevailing on 01.03.2006 contemplating|transfer of shares to Godrej Beverages and Foods Ltd. for a sum of Rs.270 Crores. NCCPL also filed a similar.declaration under Section 18/C of the Companies Act,1956 on 29.03.2006. With effect from 05.05.2006, the| firm viz., BVRE was succeeded by NCSPL taking over the|entire business lock stock and barrel including all itsassets and liabilities for a consideration of Rs.2/70 Croresin accordance with provisions of Chapter IX of theCompanies Act, 1956. Thereafter, under a sharepurchase agreement dated 10.06.2006, the shares in.NCCPL were transferred Dy NCSPL to Godrej Beverages|and Foods Ltd. for a consideration of Rs.265 Crores and.the transfer of snares was effective witn effect from.29.06.2006. On 18.08.2006, M/s NCSPL changed itsname to M/s B.V.R.E.P.L. firm viz., BVRE was succeeded by NCSPL taking over the|entire business lock stock and barrel including all itsassets and liabilities for a consideration of Rs.2/70 Croresin accordance with provisions of Chapter IX of theCompanies Act, 1956. Thereafter, under a sharepurchase agreement dated 10.06.2006, the shares in.NCCPL were transferred Dy NCSPL to Godrej Beverages|and Foods Ltd. for a consideration of Rs.265 Crores and.the transfer of snares was effective witn effect from.29.06.2006. On 18.08.2006, M/s NCSPL changed itsname to M/s B.V.R.E.P.L. 4The aforesaid NCSPL / B.V.R.E.P.L filed the.return of income for tne Assessment Year 200/-08.declaring the capital loss on sale of snares of NCCPL ofRs.33,22,/0,041/-. The Assessing Officer by an order.dated 30.12.2009 inter alia held that entire exercise of.transfer of snares held by the assessee in NCCPL to firmviz., BVRE as capital contribution and subsequent take.over of the firm by NCSPL and the final sale of snares Dy NCSPL to Godrej Beverages and Foods Ltd. were.colorable devices adopted and were sham transactions.for evading tax liability. The short term capital gains ofRs.222,26,14,953/- was taxed under Section 45 readwith Section 49(1) of the Act and Short Term CapitalGains was computed taking the actual cost foracquisition of sales at Rs.35.27 Crores instead of.Rs.2/0,07,53,000/- as claimed by the B.V.R.E.P.L. 5.|The assessee thereupon filed an appealbefore the Commissioner of Income Tax (Appeals) who.by an order dated 28.01.2011 inter alia held that thefirm viz., BVRE is not a genuine firm and dismissed theappeal. Tne assessee thereupon filed an appeal beforethe Income Tax Appellate TridDunal (nereinafter referredto as the tribunal for short). The tribunal vide orderdated 08.02.2013 inter alia held that the firm BVRE wasgenuine and was not defunct but was a legally existingpartnersnip firm. It was further held that a personshown in the partnersnip deed as a partner representing the HUF, does not become the partner and therefore,HUF was not the partner of BVRE and therefore, the firm.BVRE cannot be said to be tnvalid. It was further held.that there was a valid transfer of shares by NCCPL heldby the assessee in favour of the firm BVRE during the.previous year relevant to Assessment Year 2006-07 anddeclaration under Section 18/7C of the Companies Act,1956 clearly shows that the beneficial owner of the!Shares was Sri.Madnusudnan Reday in the firm BVRE. Itwas further held that the course adopted by theassessee was within the framework of law and waspermissible. Accordingly, the appeal preferred by |theaforesaidfactualbackground, the revenue has filed this appeal. 6.|Learned counsel for the revenue submittedthat in reality shares of NCCPL were sold by 13 partners.of firm viz., BVRE to Godrej) Beverages and Foods Ltd.during previous year relevant to Assessment Year 200/708 and therefore, the conclusion of the authorities that capital gains is chargeable to tax in the hands of theassessee proportionate of their share holding in NCCPLis correct. It is pointed out that MoU dated 29.03.2006reflects the real intention of the parties and MoU wassigned by Vikram Reddy representing 16 persons who)held the entire paid up capital of NCCPL. It is alsopointed out that from perusal of Annexure-1 to MoU, itis evident that aforesaid 16 persons were shareholders.of NCCPL. The finding recorded by the tridDunal that MoUhas been superseded with share purchase agreement is.perverse and in the MoU details have been given about.the consideration to be paid for transfer of shares andthe same Is based on the details contained in Annexure-2 to the agreement. It is also submitted that MoUcontains a non compete clause and provides time limitfor transfer of shares. Our attention has also been.invited to clause 8.1. of the MoU and it has beenurged|that the MoU is not binding until duly authorized bydefinitive agreements to be executed by both the parties and the fact that ultimately the transfer of shares tookplace on the same terms which are contained in Mou. Ithas also been pointed out that the deed of partnership.does not contain any clause by which 13 partners wereto bring in their shareholding in NCCPL as capitalcontribution of the firm. 7It is further submitted that Mr.V.VikramReddy and Mr.V.Vikram Reddy (HUF) in the course ofassessment proceedings in answer to question No.5 has-submitted that there was transaction in respect ofShares in NCCPL prior to transaction with Godrej.Beverages and Foods Ltd. and nas further stated thatwnatever shares they were holding in NCCPL weredirectly transferred to Godrej Beverages and Foods Ltd.In the year 2006-07. Therefore, the individuals havesold the shares held by them in NCCPL to GodrejBeverages and Foods Ltd. It is further contended tnatagainst the order passed by the Income Tax AppellateTribunal, Cnennai dated 31.04.2004 the revenue nas preferred an appeal before High Court of Madras, which|is pending. It is contended that there were notransactions in books of accounts of BVRE except bookentries with a view to give transaction the colour thatNCAPL has taken over BVRE. Even in NCSPL there wereno financial transactions except the book entries and theassessee and his family members were allotted theShares in NCSPL in proportion to their capital. It is alsourged that entire series of transaction is only a colorable.device to evade the tax, which is evident from the factthat assessee and his family members had entered intoMoU with Godrej) Beverages and Foods Ltd. on29.03.2006 as mentioned in share purchase agreement.petween NCCPL and Godrej) Beverages and Foods Ltd.Dated 10.06.2006. The family members signed theShare purchase agreement as confirming parties butpara 11.11 contains non compete clause. It is alSo urgedthat the tribunal without appreciating the facts of thecase nas deleted addition of a sum of Rs.1,/77,/7/78/- a the Assessing Authority and the Commissioner ofIncome Tax (Appeals) have rightly held that theassessee had failed to appreciate the advance receivedfrom Nestle was returned and as such, it was income of.the assessee. In support of aforesaid submissions,reliance has been placed on decisions inSUNILSIDDHARTHBHAI VS. CIT, 156 ITR 509 (SC),WORKMEN OF ASSOCIATED RUBBER INDSUTRY|LTD. VS. ASSOCIATED RUBBER INDSUTRY LTD.AND ANOTHER, 157 ITR 77 (SC) AND KILLICK.NIXON LTD VS. DCIT, (2012) 81 CCH 0066 MUMHC. 8 _On the other hand, learned counsel for theassessee submitted that transfer of shares by theassessee in favour of the firm viz., BVRE during theprevious year relevant to Assessment Year 2006-07 isaccepted by the revenue and is assessed to tax which isnot disputed by the revenue. It is also submitted thatrevenue has brought to tax gains arising out of sale of Shares of NCCPL to Godrej Beverages and Foods Ltd.Both in the hands of assessee (individual / HUF) as wellas in the hands of B.V.R.E.P.L. and the revenue has not.disputed the existence of B.V.R.E.P.L or its genuineness.Therefore, the aforesaid issue has reached finality. It is”also submitted that it is open to the assessee to mitigateits tax burden instead of adopting a particular mode of carrying out a transaction, he adopts another mode)whereby transaction is carried out as desired but with alesser tax burden. It Is also contended that the assesseehas not contravened any statutory provision and has.adopted tax planning which is within four corners of law|and the transaction is neither sham nor unreal. It Is”pointed out that after noticing the loophole tnat byFinance Act, 2012, Clause (xiii) in Sub Clause (3) ofSection 49(1) with effect from 01.04.1999 has beeninserted and as per the aforesaid clause, the cost ofacquisition of capital asset has to be reckoned from thedate of computing capital gains when a transfer of capital gains take place in the manner referred to in|Clause (xiii) of Section 47 of the Act. It is also pointedoutthat|duringthepreviousYEdrrelevant.CO Assessment Year 2007-08, there is no transfer of sharesby the assessee (individual / HUF) in favour of Godre]|Beverages and Foods Ltd. It is also submitted that the.matter stands concluded against the revenue by findingof fact and no substantial question of law arises forconsideration in this appeal. In Support of aforesaidSubmissions, reliance has been placed on decisions in.COMMISSIONER OF INCOME-TAX VS, WALFORT|SHARE AND STOCK BROKERS P. LTD., (2010) 326.ITR 1 (SC), UNION OF INDIA AND ANOTHER VS.AZADI BACHAO ANDOLAN AND ANOTHER, 263 ITR706 (SC), STATE OF KARNATAKA VS. VIDEOCONINTERNATIONAL LTD., STRP NO.4/2000 DATED14,07.2010 9 |We have considered the SUDMISSIONS made§by learned counsel for the parties and nave perused the record. Before proceeding further, it is apt to take note.of statutory provisions viz., relevant extract of Section2(47), 45(3), and relevant extracts of 47(xill) Section 48.and 49(1)(e) read as under: (47) ‘transfer’, in relation to a capital|asset, includes, — (i) the sale, exchange or relinguishment|of the asset ; or| (ii) the extinguishment of any rights|tnerein ; or 45 Capital Gains. (3) The profits or gains arising from the|transfer of a capital asset by a person to a firm.or other association of persons or boay of.individuals (not being a company or a co-operative society) in which he Is or becomes a.partnerOrmember,by Wayofcapitalcontribution or otherwise, shall be chargeable|to tax as his income of the previous year in.which such transfer takes place and, for thepurposes of section 48, the amount recorded inthe books of account of the firm, association orbody as the value of the capital asset shall be| deemedtO.be|thefullvalueoftheconsideration received or accruing as a result.of the transfer of the capital asset. 47. Nothing contained in section 45 shall|apply to the following transfers :— (xiii) any transfer of a capital asset or|intangible asset by a firm to a company as aresult of succession of the firm by a company.in the business carried on by the firm, or any.transfer of a capital asset to a company in thecourse of demutualisation or corporatisation of|a recognised stock exchange in India as aresult of which an association of persons or|body of individuals is succeeded by such.COMpPany . 48. Tne income chargeable under tne|head “Capital gains” shall be computed, by.deductingfromthefullvalue|oftheconsideration received or accruing as a resultof the transfer of the capital asset the followingamounts, namely :—_ (i) expenditure incurred wholly and|exclusively in connection with such transfer; (ii) the cost of acquisition of the asset|and the cost of any improvement thereto: 49. (1) Where the capital asset became|the property of the assessee—_ (e) under any such transfer as_ Is|referred to in clause (iv) or clause (v) or clause(vi) or clause (via) or clause (viaa) or clause(viab) or clause (vib) or clause (vic) or clause|(vica) or clause (vicb) or clause (vicc) or clause(xiii) or clause (xiiib) or clause (xiv) of section|4 / The cost of acquisition of the asset shall|be deemed to be the cost for which the.previous owner of the property acquired it, as_increased by the cost of any improvement of.the assets incurred or borne by the previousowner or tne assessee, as the case may De. 10. =AfterNaving—noticed|relevant.statutory|provisions, we may advert to the legal principles. The.Supreme Court in AZADI BACHAO ANDOLAN supra heldthat an act wnicn ts otnerwise valid in law cannot be.treated as non est merely on the basis of some (e) under any such transfer as_ Is|referred to in clause (iv) or clause (v) or clause(vi) or clause (via) or clause (viaa) or clause(viab) or clause (vib) or clause (vic) or clause|(vica) or clause (vicb) or clause (vicc) or clause(xiii) or clause (xiiib) or clause (xiv) of section|4 / The cost of acquisition of the asset shall|be deemed to be the cost for which the.previous owner of the property acquired it, as_increased by the cost of any improvement of.the assets incurred or borne by the previousowner or tne assessee, as the case may De. 10. =AfterNaving—noticed|relevant.statutory|provisions, we may advert to the legal principles. The.Supreme Court in AZADI BACHAO ANDOLAN supra heldthat an act wnicn ts otnerwise valid in law cannot be.treated as non est merely on the basis of some underlyingmotive supposedlyresultingInSomeeconomic detriment or prejudice to the national interest.The aforesaid view has quoted with approval inWALFORT SHARE AND STOCK BROKERS P,, LTDSUDid.-Thereafter, a division bench of this court in M/sVideocon Iternational Ltd. Supra by taking into accountthe law laid down by the Supreme Court in|A/JADIBACHAO ANDOLAN supraheld that as long asarrangement of the assessee to avoid payment of tax do.not contravene any statutory provision and the same is.within four corners of law it cannot be found fault with. 11. In the backdrop of aforesaid well settled legalprinciples, we may advert to the facts of the case. From.the material on record and in particular para 50 of theorder passed by the tribunal, it is evident that theexistence of the firm viz., BVRE has been accepted to be.genuine by the revenue in the orders passed underSection 185 of the Act for Assessment Years 1980-811and 1984-85. It is also noteworthy that the firm BVRE had filed the return for the Assessment Year 2006-07,|which has been accepted on 30.10.2006 and theAssessing Officer while assessing the assessee for.Assessment Year 2007-08 has no jurisdiction to record afinding that the firm was not in existence or the same|was defunct. It is pertinent to note that the aforesaidfinding cannot be sustained in the eye of law without|putting the firm BVRE to notice before recording such|conciusion against the firm. Thus, the existence of thefirm BVRE has been accepted as genuine, legal and|valid. From the material on record as well as para 81 of.the order passed by the tribunal, it is evident that there|was transfer of ownership in shares from 13 individuals.in favour of firm BVRE as on 24.03.2006 when tne firm.made necessary pDook entries and when the partnersmade their intentions clear that shares were to be.treated as property of the firm in the form of resolution.There is nothing on record to suggest that real intentionof the parties was to treat the assessee as owner of the shares even after transfer of the shares to the firm. The|course adopted by the assessee for transfer of shares.does not disclose any violation of the provision of law.There were two ways in which the shares of NCCPL held.by 13 partners of BVRE to be transferred to Godrej.Beverages and Foods Ltd., firstly, that 13 partners in|their individual capacity could transfer the shares to.NCCPL held by them to Godrej Beverages and Foods Ltd.at a price the shares were ultimately sold to GodrejBeverages and Foods Ltd. through NCSPL and secondly,|the manner in which the assesses have transferred the|Shares through medium of the firm BVRE. The later|course would definitely result in lesser tax burden to theassessee Dut the aforesaid course is permissible in law.It is pertinent to note that there was a lacuna in law.which has been addressed by Finance Act, 2012 byintroducing clause (xiii) to sub clause(e) of Section|49(1) with effect from 01.04.1999. Before the aforesaidamendment, the assessment was complete. It is also. pertinent to mention that during the previous year|relevant to Assessment Year 2007-08, there is no)transfer of shares by the assessee (individual /HUF) in-favour of Godrej) Beverages and Foods Ltd. The tribunalon the basis of meticulous appreciation of evidence on.record has recorded a conclusion in favour of the.assessee in para 84 of the order. In our consideredview, the aforesaid finding which is a finding of fact can|be termed as perverse. It is the cardinal principle of law.that tribunal is fact finding authority and a decision on|facts on the tribunal can be gone into by the High Court|only if a question has been referred to it, which says thefinding of the tribunal is perverse.|SEE:"“SUDARSHANSILKS & SAREES VS. CIT’, 300 ITR 205 SCC @211|and"MANGALORE GANESH BEEDI WORKSVS. CIT’, 378 ITR 640 (SC) @ 648J.Therefore,the substantial questions of law 1 to 4 are answered.against the revenue and in favour of the assessee. 12. Now we may advert to the fifth substantial|question of law. The tribunal para 92 of its order hasheld that the Assessing Officer has not invoked any.Specific provision of law for making the addition ofRs.1,7/7,/7/8/-The|Commissioner|Of Income.Tax!(Appeals) has sustained the addition by resorting tyo|Section 41(1) of the Act. It has been held by thetribunal that for invoking the aforesaid provision there|snould be benefit to the assessee by way of remission orcessation of liability and there is no evidence on recordto show that assessee has received any benefit by wayof remission or cessation of liability and therefore,addition under Section 41(1) of the Act cannot be madeon assumptions and presumptions. Therefore, in the factsituation of the case the provision of Section 41(1) ofthe Act are not attracted. Therefore, the addition ofRs.1,/7/7,/7/8/- has been deleted. The aforesaid findinis based on proper appreciation of the material availableon record. Tne aforesaid finding cannot be termed to be perverse. In the result, the fifth substantial question oflaw is also answered against the revenue and in favourof the assessee. In the result, we do not find any merit in this|appeal, the same fails and is hereby dismissed. Sd/-JUDGE. SS| Sd/-—JUDGE.