Income Tax Officer, Ward-4(5), Hyderabad V. Shrilekha Financial Services (Presently known as M/s Shrilekha Business Consultancy), Hyderabad

ITA 1371/Hyd/2018

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 3878 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 4 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-11-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB-B
• Assessment Year: 2015-2016
• Appeal Filed On: 29-06-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: Y V S T SAI
• Keywords: Capital asset; Gift; Business income; Search and seizure; Share purchase agreement; Deemed to accrue or arise in india; Cost of acquisition; Fair market value; Valuation report; Scheme of amalgamation; Capital receipt; Capital Gains
• Section: 147; 56; 142(1); 56(2); 64; 43; 48; 73; 72; 13; 22; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (VIRTUAL C OURT), B BENCH HYDERABAD BEFORE SHRI C.N.PRASAD, JM & SHRI M.BALAGANESH, AM ITA NO.1371/HYD/2018 (ASSESSMENT YEAR :2015-16 ) & ITA NO.1041/HYD/2019 ( ASSESSMENT YEAR :2014-15 ) INCOME TAX OFFICER, WARD 4(5) HYDERABAD VS. M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., (PAN NO.AAYCS0021L) (FORMERLY M/S. SHRILEKHA FINANCIAL SERVICES INITIALLY AND SUBSEQUENTLY M/S. SHRILEKHA BUSINESS CONSULTANCY, BOTH ARE WITH PAN:AACFS9088A 3-6-478, IV F LOOR, ANAND ESTATE, LIBERTY ROAD, HIMAYATH NAGAR HYDERABAD PAN/GIR NO . AACFS9088A (APPELLANT ) .. (RESPONDENT ) REVENUE BY SHRI Y V S T SAI, CIT DR ASSESSEE BY SHRI V. NAGA PRASAD, AR DATE OF HEARING 03 / 09 /2020 DATE OF PRONOUNCEMENT 04/11 / 2020 / O R D E R PER M. BALAGANESH (A.M) : THESE APPEALS IN ITA NO.1371/HYD/2018 & 1041/HYD/2 019 FOR A.YRS.2014-15 & 2015-16 RESPECTIVELY ARISE OUT OF T HE ORDER BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-I, HYDERABAD I N APPEAL NO.0131/CIT(A)-1/HYD/2017-18/2018-19 DATED 27/04/20 18 (LD. CIT(A) IN SHORT) AGAINST THE ORDER OF ASSESSMENT PASSED U/S.1 43(3) OF THE INCOME ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 2 TAX ACT, 1961 (HEREINAFTER REFERRED TO AS ACT) DATE D 30/12/2017 BY THE LD. INCOME TAX OFFICER, WARD-4(5), HYDERABAD (HEREINAFT ER REFERRED TO AS LD. AO). 2. WITH THE CONSENT OF BOTH THE PARTIES, THE APPEAL FOR A.Y.2015-16 IS TAKEN FIRST. THE ONLY ISSUE TO BE DECIDED IN THIS A PPEAL IS AS TO WHETHER THE LD. CIT(A) WAS JUSTIFIED IN DELETING THE ADDITI ON MADE BY THE LD. AO IN THE SUM OF RS.2111,22,65,347/- BEING THE AMOUNTS CR EDITED IN THE CAPITAL RESERVE, WHICH WAS TREATED BY LD. AO AS INCOME U/S. 56 OF THE ACT, IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE. 3. THE BRIEF FACTS OF THIS ISSUE ARE THAT THE ASSES SEE ORIGINALLY WAS A PARTNERSHIP FIRM UNDER THE NAME AND STYLE OF M/S.SH RILEKHA FINANCIAL SERVICES (SFS) ENGAGED IN THE BUSINESS OF FINANCING AND HOLDING INVESTMENTS. THE RETURN OF INCOME FOR THE A.Y.2015- 16 WAS FILED ON 31/08/2015 DECLARING TOTAL LOSS OF RS.21,970/-. AS ON 01/04/2014, THE ASSESSEE FIRM COMPRISED OF FOUR PARTNERS NAMELY SHR IRAM OWNERSHIP TRUST (SOT) WITH 99.97% SHARE AND THREE INDIVIDUAL INVEST ORS WITH 0.01% SHARE EACH. THE TOTAL PARTNERS CAPITAL WAS RS.7,49,926/- OF WHICH, SOT CONTRIBUTED CAPITAL OF RS.7,49,701/- AND OTHER THRE E PARTNERS CONTRIBUTED 225 AT RS.75/- EACH. SOTS CAPITAL CONTRIBUTION IN SFS AS ADOPTED IN ITS BOOKS IN TERMS OF SECTION 45(3) OF THE ACT ARE AS U NDER:- 1. 74,970 SHARES OF SHRIRAM FINANCIAL VENDOR CAPITAL P VT. LTD. (SFVCPL) OF RS.10/- EACH - RS.7,49,700/- 2. 95747200 SHARES OF SHRIRAM CAPITAL LTD., (SFL) - R S. 1/- -------------------- TOTAL RS.7,49,701/- ========= ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 3 3.1 PIRAMAL ENTERPRISES LTD (PEL), A MUMBAI BASED COMPA NY DECIDED TO ACQUIRE AN EFFECTIVE 20% EQUITY STAKE IN M/S SHRIRA M 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 INVESTM ENT 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 5 TH PARTNER. AFTER PEL JOINED SFS, CAPITAL CONTRIBUTIO N OF THE PARTNERS STOOD AS UNDER: I. PIRAMAL ENTERPRISES LTD (PEL) JOINED AS A NEW PARTN ER WITH 74% SHARE BY BRINGING IN CAPITAL CONTRIBUTION OF RS . 2,014.20 CRORES. II. OUT OF THE CAPITAL CONTRIBUTION, AS PER PARTNERSHIP DEED, AN AMOUNT OF RS. 5.92 CRORES WAS ALLOCATED TO PARTNER S CAPITAL ACCOUNT AND THE REMAINING AMOUNT OF RS. 2008.28 CRORES WAS CREDITED TO THE CAPITAL RESERVE ACCOUNT. III. SOT BROUGHT IN FRESH CAPITAL OF RS. 2,00,50,299/- T AKING ITS TOTAL CAPITAL CONTRIBUTION TO RS. 2.08 CRORES WITH SHARE OF 25.9997%. IV. CAPITAL OF OTHER 3 PARTNERS REMAINED THE SAME @ RS. 75/- WITH SHARE OF 0.0001% EACH. 3.4 ON 27.08.2014, THERE WAS INFUSION OF FURTHER CAPITA L AND READJUSTMENT OF PROFIT SHARING RATIO AMONG PARTNERS AS MENTIONED BELOW: ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 4 I. PEL MADE A FURTHER CAPITAL CONTRIBUTION OF RS. 1 03.25 CRORES INCREASING ITS SHARE IN SFS TO 74.95%. II. OUT OF RS. 103.25 CRORES, RS. 0.30 CR WAS ALLOCATED TO PELS CAPITAL ACCOUNT AND THE REMAINING AMOUNT OF RS. 102 .95 CR WAS ALLOCATED TO CAPITAL RESERVE OF THE FIRM. III. AFTER FRESH INFUSION OF CAPITAL CONTRIBUTION BY PEL , BALANCE IN ITS CAPITAL ACCOUNT STOOD AT RS. 6.22 CR AND BALAN CE IN CAPITAL RESERVE ACCOUNT STOOD AT RS. 2111.23 CR. IV. SHARES OF PARTNERS GOT READJUSTED TO PEL WITH 74.95 %, SOT WITH 25.0497 AND THE REMAINING 3 PARTNERS WITH 0.00 01% EACH. 3.5 OUT OF THE CAPITAL CONTRIBUTION BROUGHT INTO THE FI RM BY THE PARTNERS, AN AMOUNT OF RS. 2118.96 CRORES WAS UTILI SED TO MAKE INVESTMENT IN THE SHARES OF NOVUS CLOUD SOLUTIONS P VT LTD (NOVUS). NOVUS ALLOTTED ITS SHARES OF RS. 10/- EACH AT PAR TO THE ASSESSEE FIRM I.E SFS AGAINST THE PAYMENT RECEIVED FROM SFS. 3.6 IN TURN, NOVUS INVESTED THE FUND IN 11,91,64,806 SH ARES OF SHRIRAM CAPITAL LTD (SCL) THROUGH PRIVATE PLACEMENT. SCL IN CREASED ITS AUTHORISED AND PAID UP EQUITY SHARE CAPITAL TO ENABLE IT TO IS SUE SHARES TO NOVUS THROUGH PRIVATE PLACEMENT. 3.7 NOVUS MERGED/AMALGAMATED WITH SCL W.E.F 1.4.2014 VI DE ORDER OF HONBLE HIGH COURT OF MADRAS DATED 31.3.2015. IN LI EU OF MERGER/AMALGAMATION OF NOVUS WITH IT, SCL ALLOTTED ITS SHARES TO SFS WHICH WERE EARLIER HELD BY NOVUS. POST AMALGAMATION OF NOVUS WITH SCL, SHARES OF SCL STOOD ALLOTTED TO SFS ON PRIVATE PLAC EMENT BASIS. ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 5 3.8. THE AFORESAID NARRATION OF FACTS TOGETHER WITH ITS SEQUENCE OF EVENTS REMAIN UNDISPUTED BEFORE US. 4. THE LD. AO DURING THE PENDENCY OF ASSESSMENT PRO CEEDINGS PROCEEDED TO GATHER SOME MORE DETAILS OF REAL INTEN TION OF M/S. PEL IN INFUSING SUCH A HUGE CAPITAL IN A SMALL FIRM LIKE S HRILEKHA BUSINESS SERVICES (ASSESSEE HEREIN) WHOSE TOTAL BALANCE SHEE T VALUE IS ONLY RS.15.51 LAKHS AS ON 31/03/2014. THE FIRST SOURCE O F 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 A CQUIRE 20% EQUITY STAKE IN SHRIRAM CAPITAL LIMITED (SHRIR AM CAPITAL) MUMBAI, 17 APRIL 2014: PIRAMAL ENTERPRISES LTD. ( PIRAMAL, NSE; PEL, BSE:500302) TODAY ANNOUNCED THAT IT HAS AGREED TO A CQUIRE AN EFFECTIVE 20% EQUITY STAKE IN SHRIRAM CAPITAL LIMITED (SHRIRAM C APITAL OR COMPANY) A FINANCIAL SERVICES COMPANY, FOR AN AGGREGATE CON SIDERATION OF RS.2,014 CR. 4.1. THE LD. AO OBSERVED THAT THE INFORMATION GATHE RED FROM AVAILABLE SOURCE SHOW THAT M/S. PEL WAS CONTEMPLATING TO ACQU IRE 20% STAKE IN SCL FOR AN AGGREGATE CONSIDERATION OF RS.2014 CRORE S IS CONTRARY TO THE SUBMISSIONS OF THE ASSESSEE WHO HAD STATED THAT PEL WAS ACQUIRING 74% STAKE IN THE ASSESSEE FIRM. ACCORDINGLY, THE ASSESS EE WAS REQUESTED TO SUBMIT A COPY OF BOARD RESOLUTION OF M/S. PEL ON TH E BASIS OF WHICH PEL HAD INVESTED IN SCL. IN REPLY, THE ASSESSEE SUBMITT ED TWO BOARD RESOLUTIONS DATED 01/04/2014 AND 06/08/2014. THE EX TRACTS OF FIRST BOARD RESOLUTION DATED 01/04/2014 ARE AS UNDER:- CERTIFIED COPY OF THE RESOLUTION PASSED BY THE BOAR D OF DIRECTORS OF PIRAMAL ENTERPRISES LIMITED ON APRIL 1, 2014. SHRIRAM CAPITAL LIMITED ACQUISITION OF EQUITY INT EREST. ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 6 RESOLVED THAT IN ACCORDANCE WITH THE PROVISIONS OF SECTION 186 OF THE COMPANIES ACT,2013 AND SUBJECT TO COMPLIANCE WITH O THER APPLICABLE STATUTORY AND REGULATORY REQUIREMENTS, THE BOARD HE REBY APPROVES, IN PRINCIPLE, ACQUISITION OF AN EFFECTIVE 20% EQUITY S TAKE IN SHRIRAM CAPITAL LIMITED ('SHRIRAM'} FOR AN AGGREGATE CONSIDERATION NOT EXCEEDING RS. 21 00 CRORES (RUPEES TWO THOUSAND ONE HUNDRED CRORES) ('THE TRANSACTION'); RESOLVED FURTHER THAT THE COMMITTEE OF DIRECTORS (A UTHORISATIONS) BE AND IS HEREBY EMPOWERED TO DO THE FOLLOWING ACTS , DEEDS, MATTERS AND THINGS; A) TO FURTHER DELIBERATE AND TAKE FINAL DECISION WITH REGARD TO THE TRANSACTION; B) TO FINALISE AND APPROVE THE TERMS AND CONDITION S RELATING TO THE TRANSACTION, INCLUDING THE AMOUNT OF CONSIDERATION TO BE PAID AND THE MODE AND MANNER OF PAYMENT THEREOF; C) TO FINALIZE AND APPROVE: I) THE STRUCTURE, MODE, MANNER AND TRANCHES IN WHICH SUCH ACQUISITION OF AN EFFECTIVE 20% EQUITY STAKE IN SHRIRAM IS TO BE M ADE, INCLUDING WHERE APPLICABLE, THE INTERMEDIATE ENTITY(IES) THROUGH WH ICH SUCH INVESTMENT, SHOULD BE MADE; II) THE NUMBER OF SHARES AND/OR THE QUANTUM OF EQUITY OR OWNERSHIP INTERESTS OF ANY INTERMEDIATE ENTITY(IES) THROUGH W HICH SUCH INVESTMENT MAY BE MADE; THAT WOULD PROVIDE THE COMPANY AN EFFECTIVE 20% EQU ITY STAKE IN SHRIRAM, AND TILL MATTERS INCIDENTAL, RELATED OR CONSEQUENTI AL THERETO; D) TO FINALIZE AND APPROVE THE MODE AND MANNER IN WHICH SUCH 20% EQUITY STAKE IN SHRIRAM IS TO BE HELD BY THE COMPANY, WHET HER DIRECTLY BY THE COMPANY AND/OR THROUGH ANY OF ITS EXISTING OR NEW S UBSIDIARIES AND FOR THIS PURPOSE, IF THOUGHT FIT, TO APPROVE THE INCORPORATI ON OF SUCH NEW SUBSIDIARIES AS MAY BE DEEMED NECESSARY AND TO APPROVE ALL MATTE RS CONNECTED THEREWITH OR CONSEQUENTIAL THERETO; E) TO APPROVE AND AUTHORIZE THE EXECUTION OF ALL AGREEMENTS AND DOCUMENTS REQUIRED TO BE EXECUTED FOR OR IN CONNECTION WITH T HE TRANSACTION; F) TO CONSIDER AND APPROVE MODIFICATIONS, IF ANY, I N 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 ; ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 7 4.2. THE EXTRACT OF SECOND BOARD RESOLUTION DATED 0 6/08/2014 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 6 TH AUGUST, 2014 ___________________________________________________ ___________ 'WHEREAS: A. PURSUANT TO THE RESOLUTION PASSED BY THE BOARD A T ITS MEETING ON 1 ST APRIL, 2014, THE COMPANY HAD ACQUIRED AN EFFECTIVE 20% EQU ITY INTEREST IN SHRIRAM CAPITAL LIMITED ('SHRIRAM CAPITAL'), CONSEQUENT TO WHICH, THE EQUITY INTEREST OF ONE OF THE EXISTING SHAREHOLDERS OF SHRIRAM CAPI TAL I.E. SANLAM LIMITED ('SANLAM') THAT THEN HELD AN EFFECTIVE EQUITY INTEREST OF 26% IN SHRIRAM CAPITAL PRIOR TO THE COMPANY'S INVESTMENT, GOT DILU TED; AND B. IN VIEW OF SANLAM. EXPRESSING ITS DESIRE TO RES TORE ITS EFFECTIVE EQUITY INTEREST IN SHRIRAM CAPITAL TO 26% BY INFUSING ADDI TIONAL FUNDS FOR THIS PURPOSE; AND C. IN ORDER TO MAINTAIN THE COMPANY'S EFFECTIVE EQU ITY INTEREST IN SHRIRAM CAPITAL AT 20%; AND D. IN ACCORDANCE WITH THE APPLICABLE PROVISIONS OF SECTION 186 OF THE COMPANIES ACT, 2013 AND SUBJECT TO COMPLIANCE WITH OTHER APPLICABLE STATUTORY AND REGULATORY REQUIREMENTS; IT IS RESOLVED THAT THE BOARD HEREBY APPROVES, IN P RINCIPLE, INVESTMENT OF AN ADDITIONAL SUM NOT EXCEEDING RS. 105 CRORES ( RUPEES ONE HUNDRED AND FIVE CRORES) FOR THE PURPOSE MAINTAINING THE COMPAN Y'S EFFECTIVE EQUITY INTEREST IN SHRIRAM CAPITAL AT 20% ('THE TRANSACTION'). RESOLVED FURTHER THAT THE COMMITTEE OF DIRECTORS (A UTHORISATIONS) BE AND IS HEREBY EMPOWERED TO DO THE FOLLOWING ACTS , DEEDS, MATTERS AND THINGS: A) TO FURTHER DELIBERATE AND TAKE FINAL DECISION WITH REGARD TO THE TRANSACTION; B) TO FINALISE AND APPROVE THE TERMS AND CONDITIONS RELATING TO THE TRANSACTION, INCLUDING THE QUANTUM OF AMOUNT TO BE INVESTED AND THE MODE AND MANNER IN WHICH SUCH INVESTMENT IS TO BE MADE; ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 8 C) TO FINALIZE AND APPROVE: 1. THE STRUCTURE, MODE, MANNER AND TRANCHES IN WH ICH THE TRANSACTION IS TO BE IMPLEMENTED, INCLUDING WHERE APPLICABLE, THE INT ERMEDIATE ENTITY(IES) THROUGH WHICH SUCH INVESTMENT SHOULD BE MADE; 2. THE NUMBER OF SHARES AND/OR THE QUANTUM OF EQU ITY OR OWNERSHIP INTERESTS OF ANY INTERMEDIATE ENTITY(IES) THROUGH WHICH SUCH INVESTMENT MAY BE MADE; AND MATTERS INCIDENTAL OR CONSEQUENTIAL THERETO; 4.3. THE LD. AO FROM THE AFORESAID TWO BOARD RESOLU TIONS OBSERVED THAT M/S. PEL DECIDED ITSELF ON 01/04/2014 TO ACQUIRE 2 0% STAKE IN SCL FOR AN AGGREGATE CONSIDERATION OF RS.2100/- CRORES. ACCORD INGLY, THE AO CONCLUDED THAT SUBMISSION OF THE ASSESSEE FIRM THAT PEL INFUSED RS.2014.20 CRORES AS CAPITAL INTO THE FIRM TO ACQUI RE 74% STAKE IN ASSESSEE FIRM IS FACTUALLY INCORRECT. THE LD. AO AL SO OBSERVED THAT THE SUBMISSION OF THE ASSESSEE WAS ALSO NOT CORRECT ON THE BASIS OF TOTAL PARTNERS CAPITAL OF THE FIRM. HE OBSERVED THAT THE TOTAL CAPITAL OF THE FIRM OF RS.8.30 CRORES, OUT OF WHICH, RS.2.08 CRORES IS INVESTED BY ONE OF THE PARTNERS M/S. SHRIRAM OWNERSHIP TRUST. HE OBSERVED THAT TO ACQUIRE 74% OF RS.8.30 CRORES WHAT IS REQUIRED TO BE CONTRIBUTE D BY M/S. PEL IS ONLY RS.6.22 CRORES. THIS FACT IS ALSO PROVED FROM THE B ALANCE SHEET OF THE ASSESSEE FIRM. HENCE, WHATEVER, THE ADDITIONAL AMOU NT OF RS.2111.23 CRORES RECEIVED BY THE ASSESSEE FIRM WAS OVER AND A BOVE THE REQUIRED CAPITAL OF RS.6.22 CRORES. ACCORDINGLY, HE CONCLUDE D THAT THE SUBMISSION OF THE ASSESSEE THAT PEL INFUSED CAPITAL OF RS.2014 .20 CRORES INTO THE FIRM TO ACQUIRE 74% STAKE IN THE FIRM AS FACTUALLY INCOR RECT STATEMENT. THE LD. AO UNDERSTOOD THE BASIS OF AMOUNT OF RS.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 T O BE RS.10071 CRORES (COMPRISING OF 1022023239 SHARES). THE 20% OF THE S AME WOULD WORK OUT TO RS.2014.20 CRORES. THE AMOUNTS RECEIVED IN T HE BANK ACCOUNT OF THE ASSESSEE ON 17/04/2014 AND 21/04/2014 WAS RS.20 15 CRORES WHICH ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 9 WAS SAME AS THE COST FOR 20% OF THE SHARES OF SCL A ND WHICH WAS ALSO THE AGGREGATE CONSIDERATION PAYABLE BY M/S. PEL. AC CORDINGLY, THE LD. AO CONCLUDED THAT WHAT WAS SHOWN AS RESERVE IN THE BAL ANCE SHEET AMOUNTING TO RS.2111.23 CRORES WAS NOT AT ALL RESER VES 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 WH OLE IS SUPPOSED TO PAY TAX ON THE AGGREGATE CONSIDERATION RECEIVED OF RS.2100 CRORES FROM M/S. PEL AND THAT IN ORDER TO AVOID TAX LIABILITY O N THE SAME, SHRIRAM CAPITAL LTD., (SCL) AND ASSESSEE FIRM HAD DEVISED N EW METHOD TO AVOID TAX LIABILITY BY APPLYING THE FOLLOWING MODUS OPERA NDI:- (1) IN THE FIRST STEP, M/S. PIRAMAL ENTERPRISES LTD . HAD INVESTED RS. 6.22CR. AS PARTNER'S CAPITAL AND RS. 2111.23 CR. AS CAPITAL RESERVE IN THE ASSESSEE FIRM M/S. SHRILEKHA FINANCIAL SERVICES ON 17/04/2014 (RS.1000 CR.), 21/04/2014 (RS.1016 CR.) AND 27/08/2014 (RS,1 03.83 CR.); (2) IN THE SECOND STEP, M/S. SHRILEKHA FINANCIAL SE RVICES, THE ASSESSEE FIRM HAD TRANSFERRED THESE MONIES SO RECEIVED TO M/ S. NOVUS CLOUD SOLUTIONS PVT. LTD. ON 17/04/2014 (RS. 1000 CR.), 2 1/04/2014 (RS. 1015.70 CR.) AND 27/08/2014 (RS.103.25CR.); (3) IN THE THIRD STEP, M/S. NOVUS CLOUD SOLUTIONS P VT. LTD. WHICH IS A GROUP COMPANY OF SHRIRAM WHOSE NET WORTH IS ONLY RS . 69,073/- AS ON 31/03/2014 ALLOTS 2118959995 SHARES TO ASSESSEE FIR M AT FACE VALUE OF RS.10/- FOR TOTAL CONSIDERATION RECEIVED OF RS. 211 8,95,99,950/- (OUT OF THE SAME, THE CONTRIBUTION OF ONE OF THE PARTNER SH RIRAM OWNERSHIP TRUST IS RS. 2,08,00,000/- ONLY AND THE BALANCE CONTRIBUT ION OF RS. 2116,87,99,950/- FROM M/S. PIRAMAL ENTERPRISES LTD. ); ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 10 (4) FINALLY, M/S. NOVUS CLOUD SOLUTIONS PVT. LTD. G OT MERGED WITH M/S.SHRIRAM CAPITAL LTD W.E.F. 01/04/2014. 4.5. THE DATES ON WHICH THE ASSESSEE FIRM RECEIVE D MONEY FROM M/S. PEL AND THE DATES ON WHICH THE ASSESSEE FIRM TRANSF ERRED THE MONEY TO M/S. NOVUS CLOUD SOLUTIONS PVT. LTD. ARE REPRODUCED AS UNDER: DATE ON WHICH THE TRANSFER TOOK PLACE FROM PEL TO THE ASSESSEE I.E., SRILEKHA FINANCIAL SERVICES AMOUNT RECEIVED BY THE ASSESSEE FIRM (RS. IN CR.) DATE ON WHICH THE TRANSFER TOOK PLACE FROM ASSESSEE I.E., SRILEKHA FINANCIAL SERVICES TO NOVUS CLOUD SOLUTIONS AMOUNT TRANSFERRED BY THE ASSESSEE FIRM (RS. IN CR.) 17/04/2014 1000.00 17/04/2014 1000.00 21/04/2014 1016.20 21/04/2014 1015.70 27/08/2014 103.83 27/08/2014 103.25 TOTAL 2120.03 2118.95 4.6. THE DATE OF ALLOTMENT OF SHARES WITH OTHER DE TAILS BY M/S. NOVUS CLOUD SOLUTIONS PVT. LTD. TO THE ASSESSEE FIRM IS A S UNDER: DATE PARTICULARS NO. OF SHARES TOTAL NO. OF SHARES VALUE IN CR. SHARE CERTIFICATE DETAILS REMARKS 31/03/2014 TOTAL NO. OF SHARES AS AT 31/03/2014 (OPENING BALANCE) 10,000 (100%) 10,000 (100%) 0.01 NO.1, 4, 9 AND 10 HELD BY SRILEKHA FINANCIAL SERVCES 17/04/2014 SHARES ALLOTMENT 1,00,00,00,000 1,00,00,10,000 1000 NO. 5 AND 6 ALLOTTED TO SFS IN THE NAME OF ITS PARTNERS ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 11 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 LIABI LITY ON THE AGGREGATE CONSIDERATION RECEIVED FROM M/S. PEL BY SHRIRAM GRO UP FOR DILUTING THE STAKE TO THE EXTENT OF 20% IN SCL, THE GROUP HAD FI RST RECEIVED MONEY IN THE ASSESSEE FIRM TO THE TUNE OF RS.6.22 CRORES AS CAPITAL AND BALANCE RS.2111.23 AS RESERVES AND THEREAFTER, THE MONEY WA S 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 FURTHER OBSERVED THAT BRINGING HUGE AMOUNT OF MONEY BY PEL INTO THE ASSESSEE FIRM FOR GETTING THE SHARES O F M/S.NOVUS WHOSE NET WORTH WAS ONLY RS.69,073/- AS ON 31/03/2014 TO FINA LLY ACQUIRE 20% OF THE SHAREHOLDING OF SCL, BY VIRTUE OF MERGER WAS CO NVOLUTED TAX PLANNING AND COLOURABLE DEVICE TO AVOID TAX LIABILITY ON THE AGGREGATE CONSIDERATION RECEIVED FROM PEL. 4.9. THE ENTIRE CRUX OF THE VARIOUS OBSERVATIONS MA DE BY THE LD. AO FOR TAXING THE AMOUNT CREDITED IN THE CAPITAL RESERVE C OULD BE SUMMARISED AS UNDER:- ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 12 (I) THERE IS NO CONCEPT OF CAPITAL RESERVE (OTHER THA N ACCUMULATED PROFITS) IN THE PARTNERSHIP FIRM (PARA 2.5. OF ASSE SSMENT ORDER). IF A PARTNER CONTRIBUTES CAPITAL, IT HAS TO BE PAID BACK TO THE PARTNER IN THE EVENT OF DISSOLUTION, WHEREAS THERE IS NO SUCH OBLI GATION FOR CAPITAL RESERVES . THE CAPITAL RESERVE BELONGS TO THE FIRM. (II) THE INTENTION OF PEL IN INVESTING RS. 6.22 CR AS CAPITAL AND RS. 2111.23 CR AS CAPITAL RESERVE WAS TO ACQUIRE 75% ST AKE IN SFS. (PARA 3.3 OF ASSESSMENT ORDER). THE REAL INTENTION OF PEL WAS TO ACQUIRE 20% STAKE IN SHRIRAM CAPITAL LTD (SCL) FOR AN AGGREGATE CONSI DERATION OF RS. 2114 CR THROUGH SFS. (III) WHAT IS SHOWN AS RESERVE OF RS. 2111.23 CR IN THE BALANCE SHEET OF SFS( ASSESSEE HEREIN) IS NOT AT ALL THE RESERVES B UT IT IS AGGREGATE CONSIDERATION RECEIVED ON BEHALF OF SCL FOR ACQUISI TION OF SHARES BY PEL (PARA 3.13 AND 3.14 OF ASSESSMENT ORDER). (IV) TO AVOID TAX LIABILITY ON TRANSFER OF SHARES O F SCL INDIRECTLY TO PEL, SFS DEVISED A NEW METHOD (PARA 3.15 AND 3.16 OF ASS ESSMENT ORDER) AS UNDER:- SFS RECEIVED MONEY FROM PEL AS CAPITAL RESERVE. SFS INVESTED THE ENTIRE FUND IN THE SHARES OF NOVUS . NOVUS IN TURN INVESTED THE FUND IN THE SHARES OF SC L. SUBSEQUENTLY, NOVUS GOT MERGED WITH SCL. SCL ALLOTTED ITS SHARES TO SFS CONSEQUENT TO MERGER OF NOVUS. (V) PEL ACHIEVED ITS OBJECTIVE OF ACQUIRING 20 % ST AKE IN SCL. BUT, WHAT ESCAPED IS THE LIABILITY TO PAY TAX BY THE SHRIRAM GROUP ON THE AGGREGATE CONSIDERATION OF RS. 2111.23 CR RECEIVED FROM PEL ( PARA 3.21 OF THE ASSESSMENT ORDER). THE TREATMENT OF RS. 2111.23 CR AS RESERVES OF THE ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 13 PARTNERSHIP CLEARLY SHOWS THAT THE PARTNERS HAVE GI FTED THE SAID AMOUNT TO THE FIRM (PARA 3.22. V OF THE ASSESSMENT ORDER). (VI) THE AMOUNT OF RS. 2111.23 CR WAS RECEIVED AS C APITAL RESERVE FROM PEL WITHOUT ANY OBLIGATION TO PAY 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 AS SESSMENT ORDER). (VII) THE MODUS OPERANDI ADOPTED BY THE ASSESSEE IS A CONVOLUTED TAX PLANNING AND A COLOURABLE DEVICE TO AVOID TAX LIABI LITY. RELIED UPON THE SC DECISION IN THE CASE OF MC DOWELL AND CO LTD (154 I TR 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 AL ONG WITH A COPY OF THEIR INVESTMENT ACCOUNT, AO HELD IT AS FACTUALLY I NCORRECT 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 DIRECTL Y OR THROUGH ANOTHER PERSON FOR TRANSFER OF SHARES IS LIABLE FOR TAXATIO N UNDER THE PROVISIONS OF THE INCOME TAX ACT (PARA 3.37 OF THE ASSESSMENT ORD ER). IT IS AN UNDISPUTED FACT THAT THE CONSIDERATION SO RECEIVED FROM PEL FOR GETTING SHARES OF SCL IS TO BE TAXED SOMEWHERE DOWN THE LIN E (PARA 3.37 OF THE ASSESSMENT ORDER). IT IS ALSO AN UNDISPUTED FACT THAT SHRIRAM GROUP IS LIABLE TO PAY TAX ON RS. 2100 CR OF THE CONSIDERATI ON RECEIVED (PARA 3.24 OF THE ASSESSMENT ORDER). ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 14 (X) AS THE SUM WAS RECEIVED BY SFS WHICH IN TURN HE LPED TO FULFIL THE OBJECTIVE OF PEL, THE SAID SUM WILL FORM PART OF TH E ASSESSEES INCOME (PARA 3.37 OF THE ASSESSMENT ORDER). PEL USED THE A SSESSEE FIRM AND NOVUS AS VEHICLES TO ACQUIRE THE INTENDED STAKE IN SCL TO OVERCOME THE RIGOURS OF LAW AND TO DO AWAY WITH THE INCIDENCE OF TAXATION (PARA 3.41 OF THE ASSESSMENT ORDER) . WHAT IS TO BE TAXED IN THE HANDS OF SCL FOR DILUTING ITS STAKE WAS INTRODUCED AS CAPITAL RESERV E AND REACHED SCL THROUGH A SERIES OF STEPS (PARA 3.31 OF THE ASSESSM ENT ORDER). (XI) THE AMOUNT OF RS. 2111.23 CR RECEIVED FROM PEL REPRESENTS AGGREGATE CONSIDERATION FOR INDIRECT TRANSFER OF 20 % STAKE IN SCL BY USING SFS AS A CONDUIT , HAS TO BE TREATED AS INCOME FROM OTHER SOURCES U/ S 56(1) OF THE ACT (PARA 3.34 OF THE ASSESSMENT ORDER ). THE SUBMISSIONS OF THE ASSESSEE ARE REJECTED AND THE AMOUNT OF RS. 211 1.23 CR IS TREATED AS INCOME FROM OTHER SOURCES (PARA 3.43 OF THE ASSESSM ENT ORDER). (XII) ALTERNATIVELY, THE SAME IS LIABLE TO BE TAXED U/S 56(2)(VIIA) AS THE MONEY RECEIVED FROM PEL WAS UTILISED ON THE SAME DA Y FOR ACQUISITION OF SHARES OF NOVUS (PARA 3.44 OF THE ASSESSMENT ORDER) . 5. THE ASSESSEE HAD SUBMITTED THAT SCL COULD INCREA SE ITS SHARE CAPITAL BY WAY OF ALLOTMENT OF SHARES ON PRIV ATE PLACEMENT BASIS ONLY TO ITS EXISTING SHAREHOLDERS OR TO ANY O THER SHRIRAM GROUP COMPANIES AND COULD NOT ALLOT ANY SHARES TO A NY OUTSIDERS DIRECTLY. THIS WAS DUE TO THE FACT THAT SCL ALREADY HAD CERTAIN OTHER INVESTORS WHO HAD IMPOSED SUCH A CONDITION TH AT NO SHARES COULD BE ALLOTTED TO ANY PARTY OTHER THAN SHRIRAM G ROUP CONCERNS. ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 15 5.1. THE ASSESSEE SUBMITTED THAT THE MONEY BROUGHT IN BY PEL INTO ASSESSEE FIRM CONSTITUTE CAPITAL CONTRIBUTION BY A PARTNER IN THE FIRM IRRESPECTIVE OF ITS ALLOCATION TO CAPITAL ACCOUNT A ND CAPITAL RESERVE ACCOUNT. IT SUBMITTED THAT THE AMOUNT RECEIVED TOWA RDS CAPITAL CONTRIBUTION FROM A PARTNER CANNOT AT ANY STRETCH O F IMAGINATION BE CONSTRUED AS INCOME AS DEFINED IN SECTION 2(24) OF THE ACT. IT VEHEMENTLY ARGUED THAT UNLESS A PARTICULAR RECEIPT FALLS WITHI N THE DEFINITION OF INCOME U/S.2(24) OF THE ACT, IT CANNOT BE BROUGHT TO TAX U NDER THE HEAD OF INCOME SPECIFIED IN SECTION 14 OF THE ACT. IN OTHER WORDS, WHAT IS NOT INCOME UNDER THE INCOME TAX ACT CANNOT BE TAXED U/S .56(1) TOO. IT IS A RESIDUAL HEAD FOR CHARGING TO TAX INCOME AS PER T HE 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 FO R 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 FILE D A CONFIRMATION FROM PIRAMAL ENTERPRISES LTD., (PEL) CONFIRMING THEIR CO NTRIBUTION TO THE ASSESSEE FIRM AS INVESTMENTS WHICH HAS ALSO DULY RE CORDED IN THEIR FINANCIAL STATEMENTS. THE ASSESSEE ALSO PLEADED THA T THE BURDEN TO SHOW A PARTICULAR RECEIPT AS INCOME IS ALWAYS ON THE REV ENUE, WHICH BURDEN REMAIN UNDISCHARGED BY THE LD. AO IN THE ENTIRE ASS ESSMENT ORDER. 5.2. THE ASSESSEE ALSO SUBMITTED BEFORE THE LD. CIT (A) THAT THE TRANSACTIONS BETWEEN PEL AND SCL WAS NOT A CLANDEST INE TRANSACTION AS IT WAS A SIMPLE TRANSACTION OF PEL INVESTING IN SCL TH ROUGH THE ASSESSEE FIRM IN ORDER TO GET RID OF THE DIFFICULTIES THAT W OULD OTHERWISE ARISE DUE TO THE PRESENCE OF OTHER INVESTORS IN THE FIRM OF PRIV ATE EQUITY PARTNERS IN SCL AS REFERRED SUPRA. THE ASSESSEE FURTHER SUBMITT ED THAT MONEY ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 16 BROUGHT IN BY A PARTNER AS CAPITAL CANNOT BE TAXED AS INCOME OF THE FIRM IN AS MUCH AS THE CAPITAL CONTRIBUTED BY A PARTNER IS ALWAYS FOR VALUABLE CONSIDERATION IN THE FIRM OF PARTNERS RIGHTS IN TH E FIRM; THE RIGHT TO SHARE IN THE PROFITS; RIGHT TO SETTLEMENT AT THE TIME OF RETIREMENT / EXIT AND RIGHT TO SHARE ASSETS AT THE TIME OF DISSOLUTION OF THE F IRM. ACCORDINGLY, IT PLEADED THAT THE RECEIPT OF CAPITAL CONTRIBUTION FR OM A PARTNER BY THE ASSESSEE FIRM CANNOT BE TAXED EITHER U/S.56(1) OR U /S.56(2)(VIIA) OF THE ACT. 5.3. THE ASSESSEE ALSO SUBMITTED THE FOLLOWING DOC UMENTS:- A) ANNUAL ACCOUNTS OF M/S. SHRILEKHA FINANCIAL SERV ICE FOR THE AY 2015-16 B) AXIS BANK ACCOUNT OF M/S. SHRILEKHA FINANCIAL SE RVICE FOR THE PERIOD FROM 01.04.2014 TO 31.03.2015 C) CITY UNION BANK ACCOUNT OF M/S. SHRILEKHA FINANC IAL SERVICE FOR THE PERIOD FROM 01,04.2014 TO 02.04.2015 D) PARTNERSHIP DEED DATED 17.04.2014 BETWEEN SHRIRA M OWNERSHIP TRUST (SOT), MR.D.V.RAVI, MR.S.MURALI, MR. KJAGADISH AND M/S.PIRAMAL ENTERPRISES LIMITED (NEW PARTNER) E) DEED OF AMENDMENT IN PARTNERSHIP DEED DATED 26. 11.2014 BETWEEN SHRIRAM OWNERSHIP TRUST (SOT), MR.D.V.RAVI, MR.S.MU RALI, MR. KJAGADISH AND M/S.PIRAMAL ENTERPRISES LIMITED (NEW PARTNER). F) DETAILS OF INVESTMENT IN M/S. SHRILE KHA FINANCIAL SERVICES (PARTNERSHIP FIRM) ISSUED BY M/S. PIRAMAL ENTERPRIS ES LIMITED ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 17 G) LEDGER ACCOUNTS OF CAPITAL RESERVES, INVE STMENTS, PARTNER'S CAPITAL ACCOUNTS, CASH BOOK AND BANK BOOKS OF M/S. SHRILEKHA FINANCIAL SERVICE WAS SUBMITTED H) PETITION FILED BY M/S. NOVUS CLOUD S OLUTIONS PVT LTD FOR AMALGAMATION BEFORE THE HON'BLE HIGH COURT OF MADRA S I) AMALGAMATION ORDER ISSUED BY HON'BLE HIGH COUR T OF MADRAS FOR THE AMALGAMATION OF M/S. NOVUS CLOUD SOLUTIONS PVT LTD WITH SHRIRAM CAPITAL LTD J) ANNUAL ACCOUNTS OF M/S.SHRIRAM CAPITAL LTD AS ON 31.03.2015 K) SHAREHOLDING PATTERN OF M/S. PIRAMAL ENTERPRISES LIMITED AS ON 31.03.2014 AND 30.06.2014 L) FORM MGIT FILED BY M/S.SHRIRAM CAPITAL LTD WIT H ROC FOR THE FY 2014- 15 M) AXIS BANK ACCOUNT STATEMENT OF M/S. SHRILEKHA F INANCIAL SERVICES FOR THE PERIOD FROM 01.04.2014 TO 31.03.2015 6. THE LD. CIT(A) SOUGHT FOR A REMAND REPORT ON 02/ 03/2018 FROM THE LD. AO. THE LD. AO SUBMITTED A REMAND REPORT DATED 17/04/2018 BEFORE THE LD. CIT(A) WITH REGARD TO EACH OF THE GROUNDS RAISED BY THE ASSESSEE BEFORE THE LD. CIT(A) AND THE VARIOUS FACTUAL AND L EGAL 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 ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 18 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 R EPORT SUBMITTED BY THE LD. AO AND FURTHER MADE THE FOLLOWING SUBMISSIO NS: (I) THE ASSESSEE FURTHER SUBMITTED THAT THE RELATIO N OF PARTNERSHIP ARISES FROM CONTRACT. ALL RIGHTS AND LIABILITIES BE TWEEN OR AMONG THE PARTNERS VIS A VIS THE PARTNERSHIP ARE SUBJECT TO C ONTRACT BETWEEN THE PARTNERS. THAT IS THE REASON FOR MANY SECTIONS DEAL ING WITH PARTNERS MUTUAL RIGHTS AND LIABILITIES, CONDUCT OF BUSINESS, PROPERTY OF THE FIRM, APPLICATION OF THE PROPERTY OF THE FIRM, INTRODUCTI ON OF A PARTNER, DISSOLUTION OF A FIRM ETC., IN THE INDIAN PARTNERSH IP 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 PARTNER, THE FI RM SHRILEKHA DID NOT HAVE AS ITS PROPERTY ADEQUATE EXTENT OF SHARE-HOLDI NG IN SCL EITHER DIRECTLY OR INDIRECTLY THROUGH ANOTHER COMPANY OR E VEN IN COMBINATION THEREOF TO ENABLE PEL TO HAVE 20% STAKE IN SCL. SO THERE WAS IMPERATIVE NEED FOR THE FIRM SHRILEKHA TO INVEST IN SCL SHARES DIRECTLY OR INDIRECTLY AND FOR THAT PURPOSE NECESSARY FUNDS HAD TO BE EARM ARKED. III) SUCH EARMARKING WAS DONE FOR FUNDS TO BE USED FOR INVESTMENT OUT OF MONIES BROUGHT IN BY PEL INTO THE FIRM SHRILEKHA AN D THE LABEL 'CAPITAL RESERVE' WAS AFFIXED TO THAT. THAT IS ALL. IT IS AN UNDERSTANDING BETWEEN THE PARTNERS FOR CONVENIENCE. THERE IS NO OTHER SIG NIFICANCE TO IT. THERE IS NOTHING SPECIAL ABOUT IT FROM INCOME TAX PERSPECTIV E. WHATEVER NAME IS ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 19 ASSIGNED, WHATEVER LABEL IS AFFIXED, THE AMOUNTS BR OUGHT IN BY A PARTNER CONSTITUTE PROPERTY OF THE FIRM UNDER SECTION 14 OF THE PARTNERSHIP ACT. THUS IT WAS DEPLOYED BY SHRILEKHA FOR EVENTUALLY GE TTING ADEQUATE STAKE IN SCL TO ENABLE PEL TO HAVE 20% INTEREST IN SCL WH ILE REMAINING AS A PARTNER IN SHRILEKHA. 6.2. THE LD. CIT(A) DELETED THE ADDITION BY MEETING ALL THE ALLEGATIONS LEVELLED BY THE LD. AO IN HIS ASSESSMENT ORDER, BY CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND BY CONSIDERING THE REMAND REPORT OF THE LD. AO TOGETHER FOR ITS REJOINDER FROM THE ASSESSEE . THE CRUX AND THE BASIS OF LD. CIT(A) DELETING THE ADDITION COULD BE SUMMAR ISED AS UNDER:- I. CAPITAL RESERVES ARE CREATED FROM CAPITAL RECEIPTS MEANT FOR CAPITAL INVESTMENTS AND/OR LARGE ANTICIPATED EXPENSES. II. AOS CONTENTION THAT FUNDS CANNOT BE BROUGHT UNDER THE HEAD CAPITAL RESERVE IS AGAINST THE PRINCIPLES OF ACCO UNTANCY OF FIRMS. III. SFS IS NOT A CONDUIT. THE AOS CONTENTION THAT INCO ME HAS TO BE TAXED IN THE HANDS OF CONDUIT AND NOT IN THE HAND S OF THE RECIPIENT IS INCORRECT AND IT HAS NO BASIS. IV. THE QUESTION OF INCOME FROM OTHER SOURCES ARISES ON LY IF THERE WAS INCOME. AS THERE WAS NO INCOME, SEC 56(1) IS NOT APPLICABLE. V. THE PROCESS ADOPTED WAS IN THE NATURE OF STRATEGIC AND SYSTEMATIC INVESTMENT BY ONE INDUSTRIAL GROUP IN ANOTHER GROUP TO SYNERGISE THEIR MUTUAL STRENGTHS. ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 20 6.3. THE LD. CIT(A) ALSO OBSERVED THAT NO COLOURABL E DEVISE / TAX PLANNING HAD BEEN ADOPTED BY THE ASSESSEE FIRM IN A S MUCH AS THE ASSESSEE FIRM HAD TAKEN A SYSTEMATIC APPROACH TO TH E ACQUISITION THROUGH ALL THE LEGAL PROCEDURES AND THE INVESTMENT / MERGE R / TAKE OVER BETWEEN TWO INDUSTRIAL HOUSES I.E M/S. PIRAMAL GROUP AND M/ S. SHRIRAM GROUP HAD BEEN THROUGH SYSTEMATIC INVESTMENTS. HE ALSO OBSERV ED THAT IN ANY CASE ASSESSEE WAS ULTIMATELY ALLOTTED SHARES FROM SCL (P URSUANT TO MERGER OF NOVUS WITH SCL) OUT OF THE CAPITAL CONTRIBUTION REC EIVED BY THE ASSESSEE FROM PEL WHICH WAS INTURN INVESTED IN NOVUS AND SIN CE NOVUS WAS ALREADY HOLDING SHARES OF SCL, PURSUANT TO ITS MERG ER 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 WH ICH 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 EA CH AND EVERY ASPECT MENTIONED IN THE WRITTEN SUBMISSIONS REFERRED TO SU PRA HENCE, THE ENTIRE ESSENCE OF HIS ARGUMENTS COULD BE CAPTURED FROM HIS WRITTEN SUBMISSIONS ITSELF WHICH ARE REPRODUCED HEREIN BELOW FOR THE SA KE OF CONVENIENCE:- 1. IN THE PRESENT CASE, ASSESSMENT U/S.143(3) WAS COMPLETED ON 30.12.2017 DETERMINING THE TOTAL INCOME AT RS.2111, 22,94,30/- AND THE DEMAND PAYABLE WAS DETERMINED AT RS.961,59,31,800/- . IN THE SAID ASSESSMENT PROCEEDINGS, IT WAS NOTICED THAT THE ASS ESSEE HAS SHOWN AN AMOUNT OF RS.2111,22,65,347/- UNDER THE HEAD 'CAPIT AL RESERVE'. DURING THE COURSE OF ASSESSMENT PROCEEDINGS/REMAND PROCEEDINGS , THE RELEVANT DETAILS WERE CALLED FOR AND THE SAME WERE EXAMINED. ON EXAM INATION, IT WAS FOUND THAT THE SAID AMOUNT OF RS.2111,22,65,347/- WHICH W AS SHOWN AS 'CAPITAL RESERVE' WAS INFACT RECEIVED BY THE ASSESSEE FIRM F ROM ONE OF THE PARTNERS M/S.PIRAMAL ENTERPRISES PRIVATE LIMITED (FOR SHORT 'M/S.PEL') TOWARDS FULFILLING ITS INTENTION TO BECOME 20% BENEFICIAL O WNER IN M/S.SHRIRAM ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 21 CAPITAL LIMITED (SCL), A GROUP COMPANY OF THE ASSES SEE FIRM THIS WAS ALSO EVIDENT FROM THE RESOLUTION DATED 01-04-2014 OR THE BOARD OF DIRECTORS OF M/S. PEL. SINCE THE MONEY WAS RECEIVED BY THE ASSES SEE FIRM FOR SPECIFIC PURPOSE OF MAKING M/S.PEL A BENEFICIAL OWNER, THE S AID AMOUNT OF RS.2111,22,65,347/- RECEIVED BY THE ASSESSEE FIRM W AS TREATED AS INCOME OF THE ASSESSEE AND THE SAME WAS TAXED AS 'INCOME FROM OTHER SOURCES' OF THE ASSESSEE FIRM. 2. BEING AGGRIEVED, THE ASSESSEE PREFERRED APPEAL B EFORE THE ID. COMMISSIONER OF INCOME TAX(APPEALS)-1, HYDERABAD. T HE LD. CIT(A)- 1,HYDERABAD HAS CALLED FOR REMAND REPORT IN THE MAT TER IN LETTER IN F.NO.CIT(A)-L/HYD//RR/2017-18 DT.12.03.2018 FOLLOWE D BY REMINDER DATED 06.04.2018. IN PURSUANCE OF THE SAME, A DETAILED RE MAND REPORT WAS SUBMITTED ON 17.04.2018. 3. AFTER RECEIPT OF THE REMAND REPORT, THE LD. CI T(A) DISPOSED OFF THE APPEAL VIDE ORDER IN APPEAL NO.0131/CIT(AH/HYD/ 2017-18/2018-19 DATED 27.04.2018 DELETING THE ENTIRE ADDITION OF RS .2111,22,65,347/-MADE BY THE ASSESSING OFFICER. 4. IN THE APPELLATE ORDER, THE LD. CIT(A) HAS OBSER VED IN PARA NO.10.3 OF PAGE NOS.55 AND 56 OF THE APPELLATE ORDER DATED 27. 04.2018 THAT THE MONEY RECEIVED FROM M/S.PEL BY THE ASSESSEE FIRM WAS FOR FUTURE INVESTMENTS AND ACCORDINGLY THE SAME CAN BE TREATED AS 'CAPITAL RES ERVE'. THE LD. CIT(A) FURTHER HELD THAT THERE IS NO BAR ON THE QUANTUM OF MONIES THAT CAN BE BROUGHT IN BY THE PARTNERS OF THE FIRM. ON THE BASI S OF THE SAME, THE ID. CIT(A) GAVE A FINDING THAT THE FUNDS RECEIVED BY TH E FIRM FOR FUTURE INVESTMENTS CANNOT BE TERMED AS TAX EVASION AND THE SAME CANNOT BE TAXED AS INCOME IN THE HANDS OF THE ASSESSEE FIRM. ACCORD INGLY, THE ENTIRE ADDITION OF RS2111,22,65,347/-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 OFFIC ER THAT THIS INVESTMENT OF RS.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 THROUG H 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. P IRAMAL ENTERPRISE LIMITED WERE KEPT AS CAPITAL RESERVE. AS PER ACCOUN TING PRINCIPLES, CAPITAL RESERVE IS MEANT FOR SPECIFIED INVESTMENT A ND IT CANNOT BE DISTRIBUTED OR USED BY THE BUSINESS UNIT FOR ANY OT HER PURPOSE THAN WHAT IT HAS BEEN CREATED FOR. THIS CLARIFIES THE ST AND OF THE APPELLANT THAT THE FUNDS WERE MEANT FOR INVESTMENT AND APPELL ANT DID NOT USE FOR ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 22 THE BUSINESS PURPOSE FOR ITS OWN. BEING A PARTNERSH IP FIRM, THE PARTNERS CAN BRING IN FUNDS FOR SPECIFIED PURPOSES AND FUTUR E INVESTMENTS. THERE IS NO BAR IN THE QUANTUM OF MONIES THAT CAN BE BROU GHT IN BY THE PARTNERS OF THE PARTNERSHIP FIRM. IN THE PRESENT CA SE ALSO, THE APPELLANT FIRM RECEIVED FUNDS FOR FUTURE INVESTMENT AND THIS CANNOT BE TERMED AS TAX EVASION. HENCE, I AGREE WITH THE APPELLANT THAT THE FUNDS RECEIVED CANNOT BE TAXED AS INCOME IN THE HANDS OF THE APPEL LANT'S FIRM.' 6. AGGRIEVED BY THE ORDERS OF LD. CIT(A), THE REVEN UE IS BEFORE THE HON'BLE ITAT WITH THE PRESENT APPEAL FOR CORRECT APPRECIATI ON OF THE FACTS. THE ORDER OF THE ID. CIT(A) IS ERRONEOUS FOR NOT CONSID ERING THE DETAILED REMAND REPORT. IN THE REMAND REPORT, IT WAS CLEARLY BROUGHT TO THE NOTICE OF THE ID. CIT(A) THAT THE AMOUNT OF RS.2111.23 CRORES WAS RECEIVED BY THE ASSESSEE FIRM FROM ONE OF THE PARTNERS. M/S.PEL WAS IN FACT FOR THE PURPOSE OF ACQUIRING 20% STAKE IN M/S.SHRIRAM CAPITAL LIMIT ED FOR WHICH THE ASSESSEE FIRM ACTED AS A FACILITATOR. THE ASSESSEE FIRM NOT ONLY RECEIVED THE EXACT CONSIDERATION @ 98.54 PER SHARE OF M/S. SCL IN ITS BANK ACCOUNT, BUT ALSO FULFILLED ITS OBLIGATION ON THE SAME DAY (17-4-2014) AND MADE M/S.PEL A BENEFICIAL OWNER OF 20% EQUITY STAKE M/S.SHRIRAM CAPITAL LIMITED, A GROUP COMPANY OF THE ASSESSEE FIRM. 7. (I) THE BOARD'S RESOLUTION OF M/S.PEL DATED 01.0 4.2014,(II) THE VARIOUS CLAUSES/TERMS OF RECONSTITUTED PARTNERSHIP DEED DAT ED 17-4-2014 BETWEEN THE EXISTING PARTNER OF THE ASSESSEE FIRM M/S. SOT WITH THE NEW PARTNER M/S.PEL, (III) THE EXACT AMOUNT OF RS. 2014,20,00,0 00 REQUIRED FOR ACQUIRING 20% STAKE IN M/S.SCL @ RS. 98.54 PER SHAR E FOR ACQUIRING 20,44,04,648( 20% OF 102,20,23,239 SHARES OF M/S. S CL AS ON 31-3-2014) & RECEIPT OF THE REQUIRED AMOUNT OF RS. 2014.20 CRO RES BY THE ASSESSEE FIRM ON 17.4.2014 ( RS. 1000 CRORES) AND 21.04.2014 ( RS . 1014.20 CRORES) UNDISPUTEDLY ESTABLISHES THE FACT THAT THE MONEY RE CEIVED BY THE ASSESSEE FIRM IS ONLY TO FULFILL ITS OBLIGATION TOWARDS NEW PARTNER M/S. PEL. THE VALUE OF EACH SHARE OF M/S.SCL WAS FIXED AT RS. 98. 54 IS NOTHING BUT AVERAGE PRICE PER SHARE WHICH IS RANGING BETWEEN RS . 96.95 TO RS. 100.73. THE SAME IS EVIDENT FROM THE PARA NO.6.2 OF THE VAL UATION REPORT OF SHRI V.S.SAPTHARISHI, CA DATED 09.04.2014 WHO WAS ASKED TO DETERMINE THE PRICE OF EACH SHARE OF M/S. SCL JUST A WEEK BEFORE THE ACTUAL TRANSACTION. 8. THE DISCUSSION IN THE PRECEEDING PARAGRAPH WITH REGARD TO, THE NUMBER OF SHARES REQUIRED FOR MAKING M/S. PEL 20% EFFECTIV E STAKE HOLDER, THE AMOUNT REQUIRED FOR EACH SHARE AS DECIDED BY VALUAT ION REPORT OF SHRI SAPTHARISHI, CA AND THE EXACT AMOUNT PAID BY M/S.PE L TO THE ASSESSEE FIRM ON THE SAME DAY AS ON THE DATE OF RECONSTITUTED PAR TNERSHIP 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 ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 23 PARTNERSHIP DEED DATED 17-4-2014 ALSO CONFIRMS THE FACT THAT THE ASSESSEE FIRM HAS TO MAKE NEW PARTNER THE BENEFICIAL OWNER W ITHIN 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 BECO MING 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 IS AN EX ISTING PARTNER OF THE ASSESSEE FIRM IS ALSO A SHAREHOLDER IN M/S. SCL BY HOLDING 9,57,37,300 SHARES OF M/S. SCL. ONE WEEK PRIOR TO THE INTENTION OF M/S.PEL THROUGH ITS BOARD'S RESOLUTION DATED 1-4-2014 FOR ACQUIRING 20% EFFECTIVE STAKE IN M/S. SCL, THE EXISTING PARTNER OF THE ASSESSEE FIRM M/S. SOT HAD TRANSFERRED 9,57,37,200 OUT OF ITS TOTAL SHARES OF 9,57,37,3000 HELD IN THE COMPANY M/S. SCL ON 26.03.2013. B) APART FROM THE ABOVE, M/S. SOT IS ALSO HOLDING 5 ,00,000 SHARES OF M/S.SHRIRAM FINANCIAL VENTURES CHENNAI PRIVATE LIMI TED [FOR SHORT 'M/S.SFVCPL']. THE TOTAL SHARE - BASE OF M/S.SFVCPL AS ON 31.03.2013 IS 7,47,943 SHARES OF RS.10/- FACE VALUE. IN THE SAME WAY ONE WEEK PRIOR TO THE INTENTION OF M/S.PEL THROUGH ITS BOARD'S RESOLU TION DATED 1-4-2014 FOR ACQUIRING 20% EFFECTIVE STAKE IN M/S. SCL, THE EXIS TING PARTNER M/S. SOT WHO IS THE OWNER OF 5,00,000 SHARES OF M/S. SFVCPL HAD TRANSFERRED 74,970 SHARES OF M/S. SFVCPL TO THE ASSESSEE FIRM ON 27-3-2014. C) M/S. SFVCPL IS A PRIVATE LIMITED COMPANY IS IN T URN A SHAREHOLDER IN M/S. SCL BY HOLDING 71,62,07,367 SHARES. BY WAY OF THIS SOT WHO IS THE OWNER OF 5,00,000 SHARES OUT OF TOTAL SHARE BASE OF 7,47,943 SHARES IN M/S. SFVCPL HAD BECOME THE OWNER OF 47,87,84,725 SHARES OF M/S. SCL (5,00,000 7,47,943 X 71,62,07,367) C(I) BY WAY OF RECEIVING 74,970 SHARES OF M/S. SFVC PL FROM SOT, THE ASSESSEE FIRM HAD IN TURN BECOME THE OWNER OF 7,17,88,982 SHARES OF M/S. SCL. [74,970 5,00,000 X 47,87,84,725] . D) BY WAY OF THE ABOVE TWO TRANSACTIONS BETWEEN M/S .SOT AND THE ASSESSEE FIRM, THE ASSESSEE FIRM HAD BECOME THE OWNER OF 16,75,36,182 (9,57,47,200 + 7,17,88,982) SHARES OF M/S.SHRIRAM CAPITAL LIMITE D AS ON 27.03.2014. E) HAVING ENSURED THAT THE ASSESSEE FIRM IS ALREADY THE OWNER OF 16,75,86,192 SHARES OF M/S. SCL, M/S.PEL PASSED A B OARD'S RESOLUTION ON 01.04.2014 ( JUST 4 DAYS AFTER 27-3-2014 ) APPROVING IN PRINCI PLE FOR ACQUISITION OF EFFECTIVE 20% EQUITY STAKE IN M/S.SC L FOR AN AGGREGATE ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 24 CONSIDERATION NOT EXCEEDING RS.2100 CRORES (COPY OF BOARD'S RESOLUTION IS ENCLOSED HEREWITH THIS PAPER BOOK). F) AS DISCUSSED IN THE PRECEDING PARAGRAPHS, THE BA SIS FOR ARRIVING AT THE CONSIDERATION NOT EXCEEDING RS.2100 CRORES, IS THAT M/S.PEL WANTED TO ACQUIRE 20% STAKE IN M/S.SHRIRAM CAPITAL LIMITED. I T WAS ALSO MENTIONED THAT THE TOTAL SHARE BASE OF M/S.SCL AS ON 31-3-201 4 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 THA T THE PRICE PER SHARE OF M/S.SCL AS PER THE VALUATION REPORT OF SHRI V.S.SAP THARISHI, CA VIDE HIS REPORT DATED 09.04.2014 WAS FIXED AT RS.98.54 PER SHARE, (COPY OF VALUATION REPORT IS ENCLOSED HEREWITH THIS PAPER BO OK). G) M/S.PEL NOW WORKED OUT THE CONSIDERATION TO BE P AID FOR ACQUISITION OF 20% EQUITY IN M/S. SCL OR 20,44,04,648 SHARES OF M/ S. SCL AT RS.2014,20,34,014/- I.E. [20,44,04,648 SHARES X RS.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 T O 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 PARTNE R IN THE ASSESSEE FIRM THROUGH RECONSTITUTED PARTNERSHIP DEED DT.17.04.201 4. TILL 31.03.2014 THE PARTNERS OF THE FIRM IS M/S.SOT 99.97%, SHRI S.MURA LI 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 ON 17 .04.2014, THE SHAREHOLDING OF THE FIRM NOW CHANGED TO M/S.SOT 25.997%, M/S.PEL 74%, D.V. RAVI 0.0001%, S. MURALI 0.0001%, K JAGADISH 0. 0001%. THE PARTNERS ALSO DECIDED TO HAVE THEIR REGISTERED OFFICE AT D.NO. 3-6-478, 4 TH FLOOR, ANAND ESTATES, LIBERTY ROAD, HIMAYATNAGAR, HYDERABA D (CLAUSE 4.4 OF RECONSTITUTED PARTNERSHIP DEED DATED 17-4-2014). J) HAVING ARRIVED AT THE CONSIDERATION TO BE PAID F OR ACQUISITION OF 20% EQUITY STAKE IN M/S.SCL WHICH IS RS.2014,20,34,014/- ( I.E. 20,44,04,648 SHARES X RS. 98.54 PER SHARE), THE NEW PARTNER M/S. PEL HAS SAID THE CONSIDERATION IN TWO INSTALMENTS VIZ. RS.1000,00,00 ,000/- ON 17.04.2014 AND RS.1014,20,00,000/- ON 24.04.2014 TOTALLING TO RS.2014,20,00,000 INTO THE BANK ACCOUNT OF THE ASSESSEE FIRM MAINTAINED WI TH AXIS BANK, T-NAGAR, CHENNAI. K) ON RECEIPT OF THE MONEY BY THE FIRM FROM M/S. PE L, THE ASSESSEE FIRM IMMEDIATELY ACTED AND THE PARTNERS WERE MADE THE BE NEFICIAL OWNER OF 9,57,47,200 SCL SHARES IN THEIR PROFIT SHARING RATI O OF 25.997% : 74 % BETWEEN SOT AND PEL. ACCORDINGLY, 9,57,47,200 SHARE S WERE NOW REARRANGED IN THE RATIO OF 2,48,94,272 : 7,08,52,92 8 IN FAVOUR OF M/S. SOT ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 25 AND M/S. PEL RESPECTIVELY AS REQUIRED UNDER CLAUSE 5.2 OF RECONSTITUTED PARTNERSHIP DEED DATED 17-4-2014. K(I) IT MAY PLEASE BE NOTED THAT THE RATIOS OF PART NERS IN THE ASSESSEE FIRM BETWEEN SOT AND PEL LATTER THROUGH DEED OF AMENDMEN T DATED 27-11-2014 AS CHANGED TO 25.049% : 74.95%. ACCORDINGLY, THE SH ARES OF SCL WERE ALSO REARRANGED IN THE RATIO OF 2,39,84,674 : 7,17,62,52 6. L) IN THE SAME WAY THE ASSESSEE FIRM ALSO REARRANG ED 74,970 SHARES OF SFVCPL IN THE PROFIT SHARING RATIO OF 25.997% : 74% BETWEEN SOT AND PEL. ACCORDINGLY, 74,970 SHARES WERE NOW REARRANGED IN THE RATIO OF 19,472 : 55,478 IN FAVOUR OF M/S. SOT AND M/S. PEL RESPECTIVELY AS REQUIRED UNDER CLAUSE 5.2 OF RECONSTITUTED PARTNERS HIP DEED DATED 17-4- 2014. L(I)THE REARRANGEMENT OF SHARES OF SFVCPL IN TURN R ESULTED REARRANGEMENT OF SHARES OF 7,17,88,982 SHARES OF SCL HELD BY THE ASSESSEE FIRM THROUGH M/S. SFVCPL IN THE RATIO OF 25.999% : 74%. ACCORDIN GLY, THE SHARES OF M/S. SCL HELD BY THE ASSESSEE FIRM THROUGH M/S. SFV CPL WAS NOW REARRANGED IN THE RATIO OF 1,86,64,417 ; 5,31,24,56 5 L(II) IT MAY PLEASE BE NOTED THAT THE RATIOS OF PAR TNERS IN THE ASSESSEE FIRM BETWEEN SOT AND PEL LATTER THROUGH DEED OF AMENDMEN T DATED 27-11-2014 AS CHANGED TO 25.049% : 74.95%. ACCORDINGLY, THE SH ARES OF SCL WERE ALSO REARRANGED IN THE RATIO OF 1,79,83,050 : 5,38,05,84 2 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 W ERE 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. I T WAS ALSO MENTIONED THAT THE TOTAL NUMBER OF SHARES OF M/S. SCL REQUIRE D 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 A SSESSEE 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 OW NER OF 27,62,22,497 SHARES OF SCL ONLY, THE FIRM CAN MAKE PEL THE BENEF ICIAL 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 PE L IS 16,75,36,182. HOWEVER, THE FIRM REQUIRES 27,62,22,497 SHARES OF S CL TO FULFIL THE OBLIGATION OF MAKING PEL THE BENEFICIAL OWNER TO TH E EXTENT OF ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 26 20,44,04,628. ACCORDINGLY, THE SHORTAGE IN THE HAND S OF THE ASSESSEE FIRM IS ARRIVED AT 10,86,86,315 ( 27,62,22,497 -20,44,04,64 8 ). O) HAVING RECEIVED THE CONSIDERATION OF RS.2014,20, 00,000/- IN ITS BANK ACCOUNT, THE ASSESSEE FIRM WAS UNDER OBLIGATION TO ACQUIRE THE BALANCE SHARES TO MAKE GOOD OF THE SHORTFALL AND MAKE M/S.P EL THE BENEFICIAL OWNER TO THE EXTENT OF 20% IN M/S.SCL. P) IT APPEARS THE ASSESSEE FIRM INSTEAD OF ACQUIRIN G THE BALANCE 10,88,86,315 SHARES OF M/S.SCL EITHER FROM THE EXIS TING SHAREHOLDERS OF SCL OR BY WAY OF APPLYING FOR FRESH ALLOTMENT FROM M/S. SCL WISHES TO ACQUIRE THE SAME THROUGH ITS INSIGNIFICANT SUBSIDIA RY M/S, NCSPL. P(I) M/S. NOVUS CLOUD SOLUTIONS PRIVATE LIMITED [M/ S.NCSPL] IS AN HUNDRED PERCENT SUBSIDIARY OF THE ASSESSEE FIRM. TH E TOTAL AUTHORISED SHARE CAPITAL OF THE COMPANY IS RS.1,00,000/-. THE TOTAL NET WORTH OF M/S. NCSPL AS ON 31-3-2014 IS ONLY RS.69,100/. Q) HAVING TAKEN A DECISION BY THE ASSESSEE FIRM TO ACQUIRE THE BALANCE SHARES THROUGH M/S. NCSPL, THE ASSESSEE FIRM RESORT ED TO NUMBER OF STEPS TO ACQUIRE THE BALANCE SHARES TO FULFIL ITS OBLIGAT ION TOWARDS M/S. PEL A PARTNER WHO PAID THE ASSESSEE AN AMOUNT OF RS. 2014 .20 CRORES. Q(I) AS A FIRST STEP THE AUTHORISED SHARE CAPITAL O F M/S. NCSPL WHICH IS RS. 1,00,000/- ONLY WAS INCREASED TO RS. 2200,00,00,000 . AFTER INCREASING THE AUTHORISED SHARE CAPITAL OF ITS INSIGNIFICANT SUBSI DIARY OF THE ASSESSEE FIRM M/S.NCSPL, THE ENTIRE CONSIDERATION RECEIVED BY THE ASSESSEE FIRM FROM M/S. PEL WAS UTILISED FOR SUBSCRIBING SHARES OF M/S . NCSPL. ACCORDINGLY, AN AMOUNT OF RS. 2015.70 CRORES ( RS. 1000 CRORES O N 17-4-2014 AND RS. 1015.70 CRORES ON 21-4-2014) WAS TRANSFERRED BY THE ASSESSEE FIRM INTO THE BANK ACCOUNT OF M/S. NCSPL. ON RECEIPT OF THIS AMOU NT M/S. NCSPL HAD ALLOTTED 100,00,00,000 SHARES ON 17-4-2014 AND 101, 57,00,000 SHARES ON 21-4-2014 OF NCSPL @ RS. 10/- PER SHARE. R) M/S.NCSPL WHO HAD RECEIVED AN AMOUNT OF RS. 2015 .70 CRORES FROM THE ASSESSEE FIRM IN TURN USED PART OF THE MONEY TO ACQ UIRE THE BALANCE 10,86,86,315 SHARES OF SCL TO MAKE SHORTFALL IN THE PROCESS OF MAKING PEL THE BENEFICIAL OWNER OF 20% EQUITY STAKE HOLDER IN SCL. ACCORDINGLY, M/ S. NCSPL HAD APPLIED FOR FRESH ALLOTMENT OF 10,86,86,8 28 SHARES (THROUGH THE EXACT SHORTFALL IS 10,86,86,315) OF SCL. THE ASSESS EE FIRM IS AWARE ABOUT THE PRICE PER SHARE ON THE BASIS VALUER REPORT OF S RI V.S. SAPTHARISHI, CA DATED 9-4-2014 WHO FIXED THE SAME AT RS. 98.54 PER SHARE. THE PRICE TO BE PAID TO SCL IS ARRIVED AT RS. 1071 CRORES ( 10,86,8 6,828 X RS. 98.54 ) R(I) ACCORDINGLY, M/S. NCSPL OUT OF RS. 2015.70 CRO RES RECEIVED FROM THE ASSESSEE FIRM HAD PAID AN AMOUNT OF RS.1071 CRORES TO M/S. SCL. ON ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 27 RECEIPT OF THE SAME M/S.SCL HAS MADE ALLOTMENT OF 1 0,86,86,828 SHARES @ RS.98.54 PER SHARE ON 21.04.2014. [COPY OF SHARE AL LOTMENT 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 TO WARDS PEL AFTER RECEIPT OF CONSIDERATION OF RS. 2014.20 CRORES ON 17-4-2014 AN D 21-4-2014. THE BREAKUP OF SCL SHARES HELD BY THE ASSESSEE AS O N 21-4-2014 ARE AS UNDER : I)RECEIVED FROM SOT 9,57,47,200 II)RECEIVED FROM SOT 7,17,88,982 (INDIRECTLY THROUGH SFVCPL) III) ACQUIRED THROUGH NCSPL 10,86,86,828 TOTAL SHARES 27,62,23,010 T)IN THE ASSESSMENT YEAR UNDER CONSIDERATION THE RE CONSTITUTED PARTNERSHIP FIRM DATED 17-4-2014 WHICH ENVISAGES 25.999%: 74% I N FAVOUR OF M/S. SOT AND M/S. PEL GOT AMENDED THROUGH DEED OF AMENDM ENT DATED 26-11- 2014. CONSEQUENT TO THE SAME THE PARTNERSHIP RATIO HAS NOW BEEN CHANGED TO 25.049% : 74.95% IN FAVOUR OF SOT AND PEL AS AGA INST EXISTING RATIOS OF 25.999 : 74%. U ) FURTHER, IN THE ASSESSMENT YEAR UNDER CONSIDERATION THE TOTAL SHARE CAPITAL RASE OF M/S. SHRIRAM CAPITAL LIMITED HAD AL SO CHANGED. THE SHARE CAPITAL CASE OF M/S. SCL WHICH IS 102,20,23,239 AS ON 31-3-2014 GOT INCREASED ;O 107,44,11,829 AS ON 31-3-2015. UI)CONSEQUENT TO THE CHANGE OF CAPITAL BASE M/S. SC L, THE REQUIREMENT OF THE FIRM TO MAKE M/S. PEL A BENEFICIAL OWNER TO THE EXTENT OF 20% OF SCL WAS ALSO CHANGED. THE REQUIRED NUMBER OF SHARES FOR PEL TO BECOME 20% SHARE HOLDER HAS NOW GONE UPTO 21,48,82,366 ( 20% OF 107,44,11,829 ) FROM THE EXISTING REQUIREMENT OF 20,44,04,648(20% OF 102,20,23,239). V) TO FULFIL THE NEW OBLIGATION CASTED ON THE ASSES SEE FIRM TO MAKE M/S. PEL 20% EQUITY STAKEHOLDER AND THE INCREASED SHARE CAPITAL BASE OF M/S. SCL, THE ASSESSEE FIRM RECEIVED FURTHER SUM OF RS. 103,24,99,952 IN ITS RANK ACCOUNT ON 27-8-2014. ON THE SAME DAY THE ASSESSEE FIRM UTILISED THIS MONEY FOR SUBSCRIBING SHARES OF NCSPL @ RS. 10/- PE R SHARE. ON RECEIPT OF THE MONEY, IN ITS BANK ACCOUNT, M/S. NCSPL HAD A LLOTTED 10,32,49,995 SHARES TO THE ASSESSEE FIRM. ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 28 V(I)M/S.NCSPL WHO HAD RECEIVED THE MONEY AMOUNTING TO RS. 103,24,99,952 FROM THE ASSESSEE FIRM HAD IN TURN MA DE APPLICATION FOR ALLOTMENT OF SCARES OF M/S. SCL. ON THE RECEIPT OF REQUEST BY SCL FROM NCSPL, M/S. SCL HAD MADE ALLOTMENT OF ADDITIONAL 1, 04,77,798 SHARES OF SCL @ RS. 98.54 PER SHARE TO NCSPL ON 27-8-2014 ITS ELF. THESE ADDITIONAL SHARES WERE ACQUIRED BY THE ASSESSEE FIRM THROUGH I TS INSIGNIFICANT SUBSIDIARY M/S. NCSPL TO FILL THE SHORTFALL FOR PEL CONSEQUENT TO INCREASE OF SHARE CAPITAL OF SCL FROM 102,20,23,239 AS ON 31 -3-2014 TO 107,44,11,829. W) THUS, THE ASSESSEE FIRM IS THE OWNER OF SH ARES OF SCL AS PER THE DETAILS GIVEN BELOW : I) RECEIVED FROM SOT ON 26-3-2014 9,57,4 7,200 II) RECEIVED FROM SOT ON 27-3-2014 7,17,88, 982 (INDIRECTLY THROUGH SFVCPL) III) ACQUIRED THROUGH NCSPL ON 21-4-2014) 10,86,86,828 IV) ACQUIRED THROUGH NCSPL ON 27-8-2014 1,04,77,798 TOTAL SHARES 28,67,00,828 X) AS BROUGHT OUT IN THE PRECEDING PARAGRAPHS THE SHARE H OLDING PATTERN BETWEEN SOT AND PEL IN THE ASSESSEE FIRM HAD CHANGE D TO 25.049% : 74.95% THROUGH DEED OF AMENDMENT DATED 27-11-2014 F ROM 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 AMENDE D 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 ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 29 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 BEN EFICIAL OWNER TO THE EXTENT OF 21,48,82,390. THIS CONSTITUTES 20% EFFECT IVE STAKE '20% OF 107,44,11,829 ) AS REQUIRED BY M/S. PEL IN ITS BOAR D'S RESOLUTION DATED 1- 4-2014 AND 16-8-2014. THE CONSIDERATION REQUIRED -O R ACQUIRING THE SAME IS RS. 2117,45,10,710 (21,48,82,390 SHARES X RS. 98 .54 PER SHARE ). 10. PEL PAID THE SAID CONSIDERATION TO THE ASSESSEE FIRM TO ENABLE THE ASSESSEE FIRM TO MAKE 20% STAKE HOLDER IN M/S SCL I N THE FOLLOWING MANNER : SI. NO. DATE AMOUNT [RS] 1. 17.04.2014 1000,00,00,000/- 2. 21.04.2014 1014,20,00,000/- 3. 27.08.2014 103,24,99,952/- 2117,44,99,952/- 10.1. OUT OF THE ABOVE AGGREGATE AMOUNT RECEIVED, T HE ASSESSEE FIRM HAS SHOWN AN AMOUNT OF RS.6,22,34,605/- TOWARDS CAPITAL CONTRIBUTION BY M/S.PEL AND THE REMAINING AMOUNT OF RS.2111,22,65,3 47/- WAS SHOWN AS 'CAPITAL RESERVE'. THE ASSESSEE FIRM CLAIMED THAT T HE CAPITAL RESERVE IS MEANT FOR FUTURE INVESTMENT. BUT, THE FACTS DISCUSS ED ABOVE CLEARLY SHOW THAT M/S.PEL PAID THE SAID AMOUNT FOR ACQUIRING 20% STAKE IN M/S.SCL. ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 30 10.2. IN THE LIGHT OF THE FACTS DISCUSSED ABOVE, TH E ASSESSEE'S CLAIM THAT THE AMOUNT OF RS.2111,22,65,347/- REPRESENTED CAPITAL R ESERVE INTENDED FOR FUTURE INVESTMENT CANNOT BE ACCEPTED AND IS DEVOID OF MERIT. IN SUM AND SUBSTANCE, THE AMOUNT OF RS.2111,22,65,347/- WAS TO WARDS CONSIDERATION RECEIVED FOR ACQUIRING 20% SHAREHOLDING IN M/S.SHRI RAM CAPITAL LIMITED BY M/S.PEL. WITH THIS OBJECT ONLY, M/S.PEL HAS PAID CONSIDERATION OF RS.2117,44,99,952/- TO THE ASSESSEE FIRM FOR ACQUIR ING 21,48,82,256 SHARES @ RS.98.54 PER SHARE [EQUIVALENT TO 20% STAKE IN M/ S.SCL] AND THE ASSESSEE FIRM ON ITS PART, DISCHARGED THE OBLIGATIO N OF MAKING M/S.PEL THE BENEFICIAL OWNER TO THE AFORESAID EXTENT. 10.3. IT IS PERTINENT TO NOTE THAT M/S. NCSPL WHIC H IS AN INSIGNIFICANT SUBSIDIARY OF THE ASSESSEE FIRM AND THROUGH WHICH T HE ASSESSEE FIRM HAD ACQUIRED 11,91,54,806 SHARES (10,86,86,828 ON 21-4- 2014 + 1.04,77,798 ON 27-8-2014 ) OF M/S. SCL THROUGH ALLOTMENT @ 98.5 4 PER SHARE FROM M/S. SCL WAS LATTER AMALGAMATED IN M/S. SCL THROUGH A CO URT ORDER DATED 31- 3-2015. IN THE PROCESS WHATEVER THE AGGREGATE CONSI DERATION PAID BY M/S. PEL TO THE ASSESSEE FIRM AMOUNTING TO RS. 2117,44,9 9,952/-WAS ALSO TRANSFERRED TO M/S. SCL. 10.4 SHRIRAM CAPITA! LIMITED IS THE FLAGSHIP COMPAN Y OF M/S. SHRIRAM GROUP OF COMPANIES WHEREIN THE ASSESSEE IS ONE OF T HE MANY ENTITIES CONTROLLED BY M/S. SHRIRAM CAPITAL LIMITED. 10.5. THUS, THE AGGREGATE CONSIDERATION PAID BY M/S . PEL AMOUNTING TO RS. 2117,44,99,952/- FOR ACQUIRING 21,48,82,256 SHARES ( @ 98.54) OF M/S. SCL TO THE ASSESSEE FIRM TO MAKE M/S. PEL THE BENEFICIA L 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 ASSESSE E 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 ADDR ESSED BY THE LD. CIT(A). 11. THEREFORE, THE ORDER OF THE LEARNED COMMISSIONE R OF INCOMETAX(APPEALS) ACCEPTING THE CLAIM OF THE ASSES SEE, THAT THE SAID RECEIPT REPRESENTS CAPITAL RESERVE AND THE SAME BRO UGHT 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 ASSESS MENT 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 ECONO MIC TIMES ON 23.04.2019, BUSINESS STANDARD ON 23.04.2019 AND EEN ADU TELUGU NEWSPAPER ON 24.04.2019, IT WAS MENTIONED THAT THE NEW PARTNER M/S. ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 31 PIRAMAL ENTERPRISES LIMITED INTENDS TO SELL ITS 20% STAKE IN M/S.SCL TO PROSPECTIVE BUYER. IT CAN THEREFORE BE SAID THAT M/ S.PEL CAN EXPRESS ITS INTENTION ONLY WHEN IT IS THE OWNER OF THE SHARES. THIS FACT ALSO PROVES THAT M/S. PEL HAD BECOME OWNER OF 21,48,82,256 SHARES OF SCL OR 20% OF EFFECTIVE STAKE HOLDER IN SCL ( 20% OF 107,44,11,82 9 SHARES ) ONLY AFTER MAKING THE REQUISITE AGGREGATE CONSIDERATION OF RS. 2117,44,99,950/- TO THE ASSESSEE FIRM. THE WORD TO WORD MENTION I THE BOARD 'S RESOLUTIONS OF M/S. PEL DATE 1-4-2014 AND 6-8-2014 ALSO SAYS THE PAYMEN T IS AN AGGREGATE CONSIDERATION AND THE SAME IS PAID FOR ACQUIRING 20 % STATE IN SCL. [COPY OF THE BOARD'S RESOLUTIONS WERE MADE PART OF THE AS SESSMENT ORDER AS ATTACHMENT - II]. 13. IT IS ALSO CONCLUSIVELY ESTABLISHED THAT THE EN TIRE GAMUT OF TRANSACTION WAS AIMED AT DOING AWAY WITH TAXATION B Y THE ASSESSEE FIRM IN THE GUISE OF SHOWING THE SAID CONSIDERATION AS 'CAP ITAL RESERVE' IN BALANCE SHEET OF THE ASSESSEE FIRM. THUS, THE SUBMISSION OF THE ASSESSEE FIRM AT THE STAGE OF ASSESSMENT AS WELL AS DURING APPELLATE PRO CEEDINGS THAT THE SAID MONIES REPRESENTED CAPITAL RESERVE IS DEVOID OF MER IT AND THE SAME IS FACTUALLY INCORRECT. THE ASSESSEE'S SUBMISSIONS APA RT, THE FINDINGS OF THE LEARNED CIT(A) IN NOT GIVING ANY FINDING WHETHER TH E SAID RECEIPT IS TAXABLE OR NOT TAXABLE. FURTHER, THE ID, CIT(A)'S ORDER HOL DING THE SAME AS A CAPITAL RESERVE, IS ALSO ERRONEOUS AND FACTUALLY IN CORRECT. 14. IN VIEW OF THE SUBMISSIONS MADE ABOVE, IT IS HU MBLY PRAYED THAT THE DECISION OF THE LD. CIT(A) HOLDING THE AGGREGATE CO NSIDERATION RECEIVED BY THE ASSESSEE FIRM AS CAPITAL RESERVE INTENDED FOR F UTURE INVESTMENT, SHALL NOT BE ACCEPTED AND THE ACTION OF THE ASSESSING OFFICER IN BRINGING THE SAME TO TAX, MAY PLEASE BE UPHELD. 15. THE HON'BLE TRIBUNAL IS HUMBLY PRAYED TO GIVE A FINDING WHETHER THE CONSIDERATION RECEIVED BY THE ASSESSEE FIRM BY WAY OF FOREGOING 21,48,82,256 SHARES OF M/S. SCL OUT OF 28,67,00,828 SHARES HELD BY THE FIRM DURING THE YEAR AND MAKING M/S. PEL A BENEFICI AL OWNER TO THE EXTENT OF 21,48,82,256 SHARES OF M/S. SCL IS A TAXABLE RECEIPT OR NON TAXABLE RECEIPT ( REFERENCE - GROUND NO. 12 OF GROUNDS OF APPEAL). 7.1. WITH REGARD TO TREATING THE RECEIPT OF CAPITAL CONTRIBUTION FROM PEL BY THE ASSESSEE AS INCOME U/S.56 OF THE ACT, THE LD . DR ALSO SUBMITTED THAT THE ASSESSEE FIRM IS NOT IN THE BUSINESS OF PU RCHASE AND SALE OF SHARES AND HENCE, IT CANNOT BE BUSINESS INCOME OR C APITAL GAINS. ACCORDINGLY, THE SAID RECEIPT GETS TAXABLE UNDER TH E RESIDUARY HEAD U/S.56 OF THE ACT BEING THE INCOME FROM OTHER SOURCES. ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 32 8. THE LD. AR AT THE TIME OF VIRTUAL HEARING STARTE D ADDRESSING THE BENCH BY MAKING A POWER POINT PRESENTATION BY SHARI NG THE SCREEN TO THE BENCH AS WELL AS TO THE LD. DR. THIS POWER POINT PR ESENTATION 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 ANSW ER 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 REPEATEDL Y STATED THAT THE ENTIRE MONEY RECEIVED FROM PEL HAS LANDED WITH SCL THROUGH NOVUS FOR THE PURPOSE OF ALLOTMENT OF ITS S HARES BY DILUTING ITS EQUITY. HAVING GIVEN SUCH A FINDING, T HERE IS ABSOLUTELY NO BASIS FOR MAKING A PRESUMPTION. HE AR GUED THAT IF THE LD. AO IS OF THE VIEW THAT THERE IS NO COST OF ACQUISITION TO THE SHARES, THE LD. AO SHOULD HAVE S TATED SO GIVING PROPER REASONING FOR REACHING SUCH CONCLUSIO N. IF ENTIRE CONSIDERATION (AS HELD BY THE LD. AO) WAS HE LD INCOME, WHAT WOULD HAPPEN TO THE COST AND WHEN AND HOW WOUL D THE COST OF SUCH SHARES WOULD GET SET OFF IN THE HANDS OF THE ASSESSEE? (III) HOW WAS THE RECEIPT TAXED UNDER THE HEAD INCOME FR OM OTHER SOURCES WHEN SHARES WERE PART OF THE FIRMS INVESTMENTS? ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 33 8.1. AT THE OUTSET, THE LD. AR SUBMITTED THAT DURIN G THE COURSE OF ARGUMENTS MADE BY THE LD. DR, A REFERENCE WAS MADE TO THE BOARD RESOLUTION OF PEL DATED 01/04/2014 BASED ON WHICH, THE LD. DR EMPHATICALLY ARGUED THAT PEL DECIDED TO ACQUIRE 20% EQUITY IN SCL AND PAID AN AMOUNT OF RS.2217.45 CRORES TO ASSESSEE ONL Y TO ACQUIRE SUCH STAKE. AS THE AMOUNT WAS PAID TO ACQUIRE SHARES OF SCL, THE LD. DR ARGUED THAT IT REPRESENTED CONSIDERATION AND BECOME S TAXABLE IN THE HANDS OF THE RECIPIENT. IN THIS REGARD, THE LD. AR CLARIFIED THE VARIOUS APPREHENSIONS RAISED BY THE LD. CIT DR IN HIS ARGUM ENTS WHICH ARE ALSO REFLECTED IN THE WRITTEN SUBMISSIONS REPRODUCED SUP RA. 8.2. THE LD. AR REFERRED TO THE BOARD RESOLUTION OF PEL DATED 01/04/2014 WHICH IS ALSO REPRODUCED SUPRA, WHEREIN IT WAS EXPL AINED THAT FROM THE BEGINNING, THE UNDERSTANDING BETWEEN TWO GROUPS WER E CLEAR AND CATEGORICAL THAT, PEL WOULD GET ONLY AN EFFECTIVE STAKE AND NOT SHARES OF SCL IN ITS NAME DIRECTLY. SPECIFIC ATTENTION WAS DR AWN BY THE LD. AR TO CLAUSE C AND CLAUSE B OF THE SAID RESOLUTION WHICH ALSO INCLUDED SETTING UP OF SUB-COMMITTEE OF DIRECTORS TO FINALISE AND AP PROVE THE MODE OF INVESTMENT, INTERMEDIATE ENTITY(IES) THROUGH WHICH SUCH INVESTMENTS SHOULD BE MADE, MODE AND EXTENT OF OWNERSHIP INTERE ST OF THE INTERMEDIATE ENTITY(IES) TO BE ACQUIRED ETC., TO SH OW THAT PEL PLAN TO ACQUIRE EQUITY OF SCL EFFECTIVELY AND NOT DIRECTL Y. AS PER THE MANDATE GIVEN, THE SUB-COMMITTEE PASSED A RESOLUTION ON 17/ 04/2014 WHICH IS ENCLOSED IN PAGE 24 OF THE ASSESSEES PAPER BOOK AP PROVING ACQUISITION OF EQUITY INTEREST OF SCL BY INVESTING IN SFS, A PARTN ERSHIP FIRM HOLDING AN EQUITY INTEREST IN SCL. 8.3. THE LD. AR ACCORDINGLY ARGUED THAT SHARES OF S CL WERE NEVER TRANSFERRED NOR ALLOTTED TO PEL BY ANY ENTITY. THE NAME OF PEL NEVER ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 34 FIGURED IN THE SHAREHOLDERS REGISTER OF SCL. SIMILA RLY, NAME OF SCL NEVER FIGURED IN THE BOOKS OF PEL. THE BOOKS OF PEL REFLE CT INVESTMENT MADE IN SFS (ASSESSEE FIRM ALONE). IT IS ALSO A FACT THAT P EL CANNOT DEAL WITH THE SHARES OF SCL HELD BY ASSESSEE AND IT CAN DO ONLY T HAT 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% SHA REHOLDING IN NOVUS. HE EXPLAINED THAT EVERY TRANSACTION INVOLVING ACQUI SITION OF SHARES WOULD NOT RESULT IN TAXABLE INCOME. FOR EXAMPLE, IN THE C ASE OF ACQUISITION OF SHARES THROUGH INITIAL PUBLIC OFFER (IPO), RIGHTS I SSUE, PRIVATE PLACEMENT ETC, THERE IS NO TAXABLE INCOME IN THE HANDS OF THE RECIPIENT OF CONSIDERATION AS SUCH RECEIPT WAS ONLY IN THE CAPIT AL FIELD. HE ALSO ARGUED THAT ALLOTMENT OF SHARES THROUGH IPO, RIGHTS ISSUE, PRIVATE PLACEMENT ETC., ARE LEGALLY PERMISSIBLE METHODS AVAILABLE FOR ANY C OMPANY. IN THE PRESENT CASE, NO ENTITY TRANSFERRED SHARES OF SCL TO PEL. SCL ALLOTTED ITS SHARES TO NOVUS THROUGH PRIVATE PLACEMENT BASIS BY DULY EN HANCING ITS AUTHORISED AND PAID UP CAPITAL. THE LD. AR REFERRED TO PAGES 25-27 OF HIS PAPER BOOK CONTAINING THE RELEVANT PAGES OF THE FIN ANCIAL STATEMENTS TO PROVE THE FACT THAT AUTHORISED CAPITAL AND PAID UP CAPITAL OF SCL WAS DULY INCREASED. THE LD. AR FURTHER SUBMITTED THAT ON AMA LGAMATION OF NOVUS WITH SCL, SHARES ALLOTTED EARLIER TO NOVUS WERE ALL OTTED TO SFS (ASSESSEE FIRM). ON THE AMOUNT RECEIVED BY SCL FROM NOVUS FOR THE ALLOTMENT OF SHARES, NO INCOME ARISES IN ITS HANDS LEAVE ALONE I TS TAXABILITY. 8.5. THE LD. AR ALSO ARGUED THAT EVEN IF SCL ALLOTT ED SHARES TO PEL DIRECTLY ON PRIVATE PLACEMENT BASIS, STILL NO TAX L IABILITY WOULD ARISE IN THE HANDS OF ANY ENTITY. HE ALSO STATED ON RECORD WHICH COULD BE CONSTRUED AS A STATEMENT MADE FROM THE BAR THAT THIS WAS NOT THE FIRST TIME SCL HAD ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 35 MADE ALLOTMENT OF SHARES IN AN EFFECTIVE WAY. HE SUBMITTED THAT IN THE CASE OF SANLAM EMERGING MARKETS (MAURITIUS) LTD., F OREIGN INSTITUTIONAL INVESTOR (FII) EQUITY OF SCL WAS HELD THROUGH SHRIR AM FINANCIAL VENTURES CHENNAI PVT. LTD. THIS WAS DUE TO THE UNDERSTANDING SCL HAD WITH TPG INDIA INVESTMENTS II INC, FII WHICH HAD INVESTED IN THE SHARES OF SCL FOR THE FIRST TIME. HE ALSO SUBMITTED THAT THE PRIVATE EQUITY PARTNERS WHO ALREADY HELD SHARES IN SCL HAD IMPOSED A CONDITION THAT SCL SHALL NOT ALLOT ANY SHARES TO ANY OUTSIDE PLAYER OTHER THAN I TS OWN GROUP COMPANIES / GROUP ENTITIES (I.E SHRIRAM GROUP ENTITIES). HE A RGUED THAT THIS IS A CRUCIAL POINT WHICH HAD APPARENTLY AND ADMITTEDLY M ISSED THE ATTENTION OF THE LD. AO THAT SCL COULD NOT HAVE ALLOTTED SHARES TO PEL DIRECTLY ON PRIVATE PLACEMENT BASIS. THIS WAS THE REASON THAT T HE ASSESSEE FIRM HAD TO COME INTO PICTURE AS AN INTERMEDIATE ENTITY. HEN CE, HE ARGUED THAT THE TRANSACTIONS OF RECEIPT OF MONIES FROM PEL CANNOT B E TAXED AS INCOME IN THE HANDS OF THE ASSESSEE FIRM. 8.6. THE LD. DR HAD ARGUED THAT THE RECEIPT OF CAPI TAL RESERVE BY ASSESSEE FIRM FROM PEL IS A SCHEME DEVISED AND ADOP TED BY SHRIRAM GROUP TO AVOID ITS TAX LIABILITY ON TRANSFER OF 20% EQUITY OF SCL. THE LD. DR HAD ALSO ARGUED THAT THE CAPITAL RESERVE BELONGS TO THE FIRM AND THE PARTNER DOES NOT GET ITS SHARE OUT OF SUCH RESERVE AT THE TIME OF RETIREMENT. IN THIS REGARD, THE LD. AR DEFENDED THE PURPOSE OF CREATING CAPITAL RESERVE, RIGHTS OF THE PARTNERS ETC., IN TH E FOLLOWING MANNER:- (I) IT WAS EXPLAINED THAT IN AY 2014-15, A PARTNER SOT WHICH HAD 99.97% SHARE IN PROFITS AND ASSETS OF THE FIRM, BRO UGHT IN CAPITAL CONTRIBUTION IN THE FORM OF EQUITY SHARES VALUED BY AO AS PER FMV AT RS. 413.80 CRORES AND ADOPTED ITS VALUE AT RS. 7 ,49,001/- U/S 45(3) OF THE ACT IN THE BOOKS AND CREDITED THE SUM OF RS 7,49,001/- TO ITS CAPITAL ACCOUNT. AFTER PEL JOINING THE FIRM WITH 75% SHARE, ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 36 SOT HAS A SHARE OF 25% WITH OTHERS HAVING NEGLIGIBL E SHARE. PEL BROUGHT IN CAPITAL OF RS. 2117.45 CRORES TOWARDS IT S 75% SHARE. IN THE BOOKS OF THE FIRM, PARTNERS CAPITAL OF SOT WIT H 25% SHARE WOULD REFLECT A VERY NOMINAL AMOUNT OF RS. 7,49,001 /- WHEREAS THE PARTNERS CAPITAL OF PEL WITH 75% SHARE WOULD SHOW CAPITAL OF RS. 2,117.45 CRORES. THIS WOULD GIVE A VERY LOPSIDED PI CTURE OF THE FINANCIAL STATEMENTS OF THE FIRM WHEN THE SAME ARE PRESENTED BEFORE ANY AGENCY. TO AVOID SUCH AN IMBALANCE IN T HE BALANCE SHEET, CAPITAL RESERVE WAS CREATED AS AGREED UPON I N THE PARTNERSHIP DEED. THE ALLOCATION OF CAPITAL CONTRIBUTION OF PEL BETWEEN PARTNERS CAPITAL ACCOUNT AND CAPITAL RESER VE WAS AGREED AMONG THE PARTNERS VIDE PARA 6.2 OF PARTNERSHIP DEE D DATED 17.04.2014 (COPY OF PARTNERSHIP DEED IS ENCLOSED IN PAGE 152 O F REVENUES PAPER BOOK). (II) CAPITAL RESERVE & REVALUATION RESERVE IN F IRMS AND CAPITAL RESERVE, SHARE PREMIUM, RESERVES AND SURPLUS E TC., UNDER COMPANIES ACT ARE ANALOGOUS ACCOUNTING CONCEPTS. TH E ONLY DIFFERENCE BEING, IT IS CODIFIED UNDER COMPANIES AC T WHEREAS IT IS NOT DONE UNDER INDIAN PARTNERSHIP ACT (IPA). IPA D OES NOT PROVIDE FOR ANY PARTICULAR METHOD(S) TO MAINTAIN ACCOUNTS B Y A FIRM UNLIKE THE COMPANIES ACT. CAPITAL RESERVE IS VERY MUCH IN VOGUE IN THE ACCOUNTANCY NORMS BEING FOLLOWED BY THE COMPANIES. ACCOUNTANCY NORMS OF COMPANIES ARE FORMALISED IN THE FORM OF AC COUNTING STANDARDS RECOGNISED UNDER THE COMPANIES ACT AND AR E ALWAYS CONSIDERED AS THAT OF HIGHER STANDARDS. THERE IS N OTHING WRONG IN FOLLOWING ACCOUNTANCY NORMS OF HIGHER STANDARDS AND THE SAME CANNOT BE VIEWED ADVERSELY. ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 37 (III) THE IPA PROVIDES THAT ALL ACTIVITIES VIZ: CON DUCT OF BUSINESS, MUTUAL RIGHTS AND LIABILITIES, MANNER OF DEALING WI TH PROPERTIES OF THE FIRM ETC., ARE SUBJECT TO CONTRACT BETWEEN THE PARTNERS . (IV) AS PER PARA 18 OF THE PARTNERSHIP DEED (PAGE 158 OF REVENUES PAPER BOOK), SFS WAS TO BE CONVERTED INTO A COMPANY OR LLP. WHEN CONVERTED INTO COMPANY, CAPITA L RESERVE SHALL BE CREDITED AS SHARE PREMIUM/CAPITA L RESERVE IN THE BOOKS OF THE COMPANY (PARA 18.3 OF THE DEED AT PAGE 158 OF REVENUES PAPER BOOK). ACCORDINGLY, CAPITAL RESERVE WAS CREATED AS A PRECURSOR TO FOLLOWING THE ACCOUNT ANCY NORMS OF THE COMPANY IN ADVANCE. THE CAPITAL RESERVE WAS DUL Y REFLECTED IN THE FINANCIAL STATEMENTS OF THE SUCCESSOR COMPANY I .E SHRILEKHA BUSINESS CONSULTANCY PVT LTD (PAGE 28A TO 28C OF AS SESSEES PAPER BOOK) AND HENCE THE UNDERSTANDING OF THE LD. AO AND LD. CIT DR THAT THE CAPITAL RESERVE SHALL REMAIN WITH THE FIRM IS TOTALLY BASELESS AND INCORRECT. (V) THE LD. AR INVITED OUR ATTENTION TO PARA 19 OF THE PARTNERSHIP DEED (PAGE 158 OF REVENUES PAPER BOOK) CONTAINING THE CLAUSE REGARDING DISSOLUTION OF THE FIRM. AS PER THE SAID PARA, IT WAS STATED THAT THE NET ASSETS OF THE FIRM SHALL BE DIVIDED BE TWEEN THE PARTNERS IN THE RATIO OF THEIR RESPECTIVE INTEREST. (VI) IT WAS EXPLAINED THAT BOTH PIRAMAL AND SHRIRAM GROUPS ARE HIGHLY SUCCESSFUL UNRELATED BIG BUSINESS HOUSES AND BOTH ARE AWARE OF THEIR RIGHTS AND LIABILITIES. IT IS A BUSINESS D ECISION TO MAKE STRATEGIC INVESTMENTS IN THE MANNER AGREED UPON AND NO GROUP ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 38 WOULD LIKE TO LOSE ITS MONEY TO THE OTHER GROUP. IF PUTTING THE MONEY IN THE CAPITAL RESERVE ACCOUNT WOULD CAUSE AN Y LOSS TO PEL EVEN AS A REMOTE POSSIBILITY, IT WOULD NEVER AGREE FOR SUCH AN ARRANGEMENT. (VII) THE LD. AR ARGUED THAT AS SUCH, THERE IS NO B ASIS TO APPREHEND THAT CAPITAL RESERVE WAS CREATED AS PART OF A SCHEM E TO AVOID TAX LIABILITY. THE VIEW OF THE LD. AO AS MENTIONED IN T HE ORDER AND THE ARGUMENTS MADE BY THE LD. CIT DR DO NOT STAND THE S CRUTINY OF LAW AND MAY BE REJECTED. 8.7. THE LD. AR ALSO POINTED OUT YET ANOTHER MISCON CEPTION 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 HAVIN G 75% STAKE IN ASSESSEE FIRM IN THE FORM OF PARTNERS CAPITAL. TH E REMAINING 25% SHARE IS HELD BY SHRIRAM OWNERSHIP TRUST (SOT), A CONCERN OF SHRIRAM GROUP. HENCE, SFS (ASSESSEE FIRM HEREIN) IS ONLY A CONCER N CONTROLLED, MANAGED BY PIRAMAL GROUP AND NOT SHRIRAM GROUP. THE LD. AO WANTED TO TAX SOME ENTITY IN SHRIRAM GROUP SOMEHOW BUT FINALLY ENDED U P 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 G ROUP ON THE AGGREGATE CONSIDERATION OF RS.2111.23 CRORES RECEIVED FROM PE L. THE LD. AR ALSO DREW OUR ATTENTION TO PARA 3.4 OF THE ASSESSMENT OR DER WHEREIN THE LD. AO HAD STATED THAT IT IS AN UNDISPUTED FACT THAT S HRIRAM GROUP IS LIABLE TO PAY TAX OF RS.2100/- CRORES OF THE CONSIDERATION RE CEIVED. FURTHER IN PARA ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 39 3.37 OF THE ASSESSMENT ORDER, THE LD. AO HAD ALSO M ENTIONED THAT IT IS AN UNDISPUTED FACT THAT THE CONSIDERATION SO RECEIVED FROM PEL FOR GETTING SHARES OF SCL IS TO BE TAXED SOMEWHERE DOWN THE LI NE. THE LD. AR SUBMITTED THAT THE AFORESAID OBSERVATIONS OF THE LD . AO ARE CASUAL, VAGUE, BASELESS, UNLAWFUL AND DO NOT DESERVE TO BE TAKEN I NTO COGNIZANCE AND IS PURELY BASED ON SURMISE AND CONJUNCTURE. THE LD. AR STATED THAT THE LD. AO COULD NOT ESTABLISH THE TAXABILITY OF THE RECEIP T WITH SPECIFIC REFERENCE TO ANY PROVISION OF LAW. INFACT, HE ALSO DREW OUR A TTENTION TO PAGE-6 OF ASSESSEES PAPER BOOK CONTAINING THE LETTER ADDRESS ED BY THE LD. AO TO THE ASSESSEE DATED 08/12/2017 WHEREIN THE LD. AO PR OPOSED TO TAX SHRIRAM OWNERSHIP TRUST (SOT) FOR RELINQUISHING ITS RIGHTS IN ASSESSEES FIRM TO THE EXTENT OF 528.88 CRORES U/S.2(47) R.W.S . 45(4) OF THE ACT. THE ASSESSEE GAVE A DETAILED REPLY DATED 15/12/2017 BEF ORE THE LD. AO AS TO HOW THE SAID PROVISIONS ARE NOT APPLICABLE AND LATE R THE LD. AO DROPPED HIS PROPOSAL TO TAX SOT U/S.2(47) R.W.S.45(4) OF TH E ACT. FURTHER, YET ANOTHER SHOW-CAUSE NOTICE WAS ISSUED BY THE LD. AO VIDE LETTER DATED 14/12/2017 SEEKING TO TAX THE AMOUNT LYING IN THE C APITAL RESERVE AMOUNTING TO RS.2111.23 CRORES AS BENEFIT DERIVED B Y THE ASSESSEE WARRANTING TAXABILITY U/S.28(IV) OF THE ACT. THE AS SESSEE GAVE A DETAILED REPLY DATED 18/12/2017 MAKING LOT OF FACTUAL AND LE GAL SUBMISSIONS AS TO HOW THE PROVISIONS OF SECTION 28(IV) OF THE ACT CAN NOT BE MADE APPLICABLE. THE LD. AO ON GOING THROUGH THIS REPLY DROPPED HIS PROPOSAL OF TAXING THE AMOUNTS LYING IN THE CAPITAL RESERVE AND U/S.28(IV) OF THE ACT. LATER, THE SAME SUM WAS ULTIMATELY TAXED BY THE LD. AO U/S.56(1) OF THE ACT BEING THE RESIDUAL HEAD. NOT BEING SATISFIED WI TH THE SAID ADDITION, THE LD. AO MADE THE SAME ADDITION ALTERNATIVELY U/S.56( 2)(VIIA) OF THE ACT WITHOUT EVEN GIVING A FINDING AS TO HOW THE SAID PR OVISIONS ARE INDEED APPLICABLE TO THE FACTS OF THE INSTANT CASE. THE L D. AR ARGUED VEHEMENTLY THAT THIS ACTION OF THE LD. AO CLEARLY REFLECTS HER DESPERATENESS TO ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 40 SOMEHOW TAX THE SAID RECEIPT OF RS.2111.23 CRORES U NDER SOME PROVISIONS OF THE ACT WITHOUT UNDERSTANDING THE FACTS OF THE C ASE AND WITHOUT GIVING A CATEGORICAL FINDING AS TO WHETHER THE SAID RECEIP T 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 ABSOLUTE LY NO INCIDENCE OF TAX LIABILITY AT ALL IN THIS ENTIRE GAMUT OF TRANSACTIO NS, 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 RS.211 1.23 CRORES WAS MADE BY THE LD. AO U/S.56(1) OF THE ACT BY ADDUCING THE FOLLOWING REASONS:- (A) TREATMENT OF RS.2111.23 CRORES AS RESERVES OF THE P ARTNERSHIP SHOWS THAT THE PARTNER HAD GIFTED THE SAID AMOUNT T O THE FIRM. (B) THE ASSESSEE WAS A CONDUIT OF PEL FOR INDIRECT TRAN SFER OF MONEY TO SCL AND TO ACQUIRE ITS 20% STAKE. (C) CONFIRMATION GIVEN BY PEL THAT ITS INVESTMENT IN TH E ASSESSEE FIRM WAS RECORDED IN ITS BOOKS AS INVESTMENT AS FACTUALL Y INCORRECT. (D) MONEY WAS PAID AS CONSIDERATION FOR ACQUIRING 20% S TAKE IN SCL AS PER BOARD RESOLUTION OF PEL AND CONSIDERATION RECEI VED DIRECTLY OR INDIRECTLY FOR TRANSFER OF SHARES IS LIABLE FOR TAX UNDER THE INCOME TAX ACT. (E) AS THE SUM RECEIVED BY ASSESSEE FIRM INTURN HELPED TO FULFIL THE OBJECTIVE OF PEL, THE SAME WILL FORM PART OF ASSESS EES INCOME. (F) PEL USED ASSESSEE AND NOVUS AS VEHICLES TO ACQUIRE STAKE IN SCL TO DO AWAY WITH INCIDENCE OF TAXATION. ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 41 (G) DEFINITION OF INCOME U/S.2(24) IS INCLUSIVE AND I T TAKES CARE OF RECEIPTS WHICH DOES NOT CONTAIN ANY ELEMENT OF PROF IT OR GAIN. 8.11. THE LD. AR MET EACH OF THE AFORESAID REASONIN G IN THE FOLLOWING MANNER:- (I) THERE CANNOT BE A GIFT OF CAPITAL CONTRIBUTION BY A PARTNER TO THE FIRM. IF IT WAS GIFT, IT REPRESENTS CAPITAL RECEIPT AND CANNOT BECOME INCOME. (II) IF ASSESSEE WAS A CONDUIT TO PEL AS HELD BY THE LD. AO, THEN IT IS NOT LIABLE TO TAX. IT IS MANDATORY THAT TAX HAS TO BE COLLECTED FROM RIGHT HANDS ONLY. RELIANCE IN THI S REGARD WAS PLACED ON THE DECISION OF HONBLE SUPREM E COURT IN THE CASE OF ITO VS. CH. ATCHAIAH REPORTED IN 218 ITR 239 (SC). (III) IF THE CAPITAL CONTRIBUTION WAS FOR NO OR INADEQUAT E CONSIDERATION, SECTION 56(1) OF THE ACT DOES NOT AP PLY. (IV) IN ANY CASE, ACCOUNTING ENTRIES AND NOMENCLATURE OF THE ACCOUNT IN THE BOOKS OF THE ASSESSEE WOULD NOT DETERMINE THE TAXABILITY OF ANY RECEIPT. RELIANCE I N THIS REGARD WAS PLACED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF THE PEERLESS GENERAL FINANCE & INVESTMENT COMPANY LTD., VS. CIT REPORTED IN 107 TAXMANN.COM 228 (SC). (V) THE LD. AO CANNOT HOLD THE ENTRY REGARDING THE INVESTMENT RECORDED IN THE BOOKS OF PEL AS FACTUALL Y ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 42 INCORRECT AS HE IS NOT THE AO ASSESSING PEL AND THE SAID ALLEGATION LEVELLED BY THE LD. AO IS ABSOLUTELY WIT HOUT BASIS. (VI) THE LD. AO DID NOT REALISE THAT EVERY RECEIPT OF CONSIDERATION FOR TRANSFER OF SHARES IS NOT LIABLE TO TAX AS A GENERAL RULE. TAXABILITY DEPENDS ON FACTS IN OTHE R CASE WHETHER THE SHARES WERE ALLOTTED BY THE COMPANY OR PURCHASED FROM THIRD PARTIES. MOREOVER, IN THE INS TANT CASE, PEL HAD JUST MADE CAPITAL CONTRIBUTION IN ASS ESSEE FIRM WHICH EVENTUALLY HELD THE SHARES OF SCL (PURSU ANT TO MERGER OF NOVUS WITH SCL) THEREBY GIVING 20% EFFECTIVE STAKE TO PEL IN SCL. (VII) BY ANY STRETCH OF IMAGINATION, THE SUM RECEIVED BY AN ENTITY WHICH INTURN HELPED TO FULFIL THE OBJECTIVE OF ANOTHER ENTITY CANNOT FORM PART OF INCOME OF THE FI RST ENTITY. INCIDENCE OF TAXATION CANNOT BE AVOIDED BY ANY ENTITY JUST BY INTRODUCING CERTAIN VEHICLES IN BETW EEN. IF THAT WAS LEGALLY POSSIBLE THEN, EVERY ASSESSEE WOUL D ATTEMPT THE SAME. (VIII) CAPITAL CONTRIBUTION MADE BY A PARTNER INTO THE FIR M IS DEFINITELY ON THE CAPITAL FIELD AND DOES NOT FALL W ITHIN 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 CLEA R ABOUT THE FACTS OF THE CASE AS REGARDS WHETHER SHAR ES OF SCL WERE TRANSFERRED, HOW AND WHO TRANSFERRED AND TO ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 43 WHOM IT WAS TRANSFERRED ? IF SO, WHETHER THE TRANSACTION ATTRACTS TAX LIABILITY AND IN WHOSE HAN DS? 8.12. THE LD. AR WITHOUT PREJUDICE TO AFORESAID ARG UMENTS 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 SOUR CES EVEN WITHOUT MAKING ANY DEDUCTION TOWARDS COST OF SHARES / COST OF INVESTMENT WHICH WAS ELIGIBLE FOR DEDUCTION IN TERMS OF 57(III) OF T HE ACT. HE ARGUED THAT IF THE SAID DEDUCTION TOWARDS COST IS GIVEN THEN IT WO ULD 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 UTILISED ON T HE SAME DAY BY INVESTING IN NOVUS. THE LD. AR ARGUED THAT THE PROV ISIONS OF SECTION 56(2)(VIIA) OF THE ACT DOES NOT COVER THESE TYPE OF TRANSACTIONS. 9. IN DEFENCE, THE LD. DR ARGUED THAT PURSUANT TO R ECEIPT OF MONIES FROM PEL, THERE WAS SACRIFICING OF INTEREST BY THE EXIST ING PARTNERS IN FAVOUR OF PEL. THE CONSIDERATION ATTRIBUTABLE TO THIS SACRIFI CE OF INTEREST IS RETAINED IN CAPITAL RESERVE. HENCE, THE SAME IS LIABLE TO BE TAXED U/S.56(1) OF THE ACT. HE FAIRLY AGREED THAT DEDUCTION HOWEVER, SHOUL D BE GIVEN FOR COST OF SHARES IN TERMS OF 57(III). 9.1. THE LD. DR ALSO PLACED RELIANCE ON THE DECISIO N OF THE HONBLE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. CARLTON HOTEL PVT. LTD., REPORTED IN 399 ITR 611 AND ALSO ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. WIPRO L IMITED REPORTED IN 227 TAXMAN 244 ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 44 10. 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 PRESEN TATION OF THE LD AR SUBMITTED AT THE TIME OF HEARING BEFORE US AND LATE R FILED IN EMAIL BY HIM. THE SOLE ISSUE TO BE DECIDED IN THIS APPEAL OF THE REVENUE FOR A.Y.2015-16 IS AS TO WHETHER THE CAPITAL CONTRIBUTION MADE BY P EL IN ASSESSEE FIRM WHICH WAS KEPT PARTLY IN CAPITAL ACCOUNT AND PARTLY IN CAPITAL RESERVE ACCOUNT IN THE BOOKS OF THE ASSESSEE FIRM IS CORREC T 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.5 6(2)(VIIA) OF THE ACT IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 10.1. THE TRANSACTIONS CARRIED OUT BY THE ASSESSEE AND PEL ARE AS UNDER:- A) ASSESSEE FIRM COMPRISED OF FOUR PARTNERS VIZ SOT HO LDING 99.97% AND THREE INDIVIDUALS HOLDING 0.01% EACH B) ASSESSEE WAS HOLDING 100% SHARES IN NOVUS C) PEL INVESTED ITS CAPITAL CONTRIBUTION IN ASSESSEE F IRM. D) ASSESSEE FIRM UTILISED THAT MONEY BY MAKING PAYMENT TO NOVUS. E) NOVUS IN TURN UTILISED THAT MONEY FOR MAKING INVEST MENT IN SHARES OF SCL ON PRIVATE PLACEMENT BASIS. F) NOVUS IS A GROUP CONCERN OF SCL. G) NOVUS GOT MERGED WITH SCL W.E.F. 01/04/2014 PURSUAN T TO THE ORDER OF AMALGAMATION DULY APPROVED BY THE HONBLE MADRAS HIGH COURT. H) PURSUANT TO THIS AMALGAMATION, THE SCL ALLOTTED SHA RES TO ASSESSEE FIRM IN LIEU OF SHARES ALREADY HELD BY NOVUS IN SCL . ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 45 I) PURSUANT TO THIS ALLOTMENT OF SHARES, PEL WAS EFFEC TIVELY ABLE TO HAVE 20% STAKE IN SCL AS IT WAS HOLDING 75% PARTNER SHIP STAKE IN ASSESSEE FIRM. THE ABOVE PRIMARY FACTS ARE NOT IN DISPUTE. 10.2. ON PERUSAL OF THE BOARD RESOLUTION OF PEL DAT ED 01/04/2014 WHICH IS REPRODUCED SUPRA, WE FIND THAT PEL ACTUALLY DECI DED TO ACQUIRE EFFECTIVE EQUITY STAKE OF 20% IN SCL. IN FACT IT WAS NEVER TH E INTENTION OF PEL TO HOLD SHARES OF SCL IN ITS OWN NAME DIRECTLY AS IS V ERY MUCH EVIDENT FROM ITS BOARD RESOLUTION DATED 01/04/2014. INFACT, WE A LSO 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, IDE NTIFYING THE INTERMEDIATE ENTITY (IES) THROUGH WHICH SUCH INVEST MENTS SHOULD BE MADE, MODE AND EXTENT OF OWNERSHIP INTEREST OF THE INTERM EDIATE ENTITY (IES) TO BE ACQUIRED ETC., THIS CLEARLY SHOWS THE INTENTION OF PEL TO HAVE ONLY EFFECTIVE STAKE IN SCL THROUGH INTERMEDIATE ENTITIE S AND NOT DIRECTLY. HENCE, THE PRIMARY CONTENTION OF THE REVENUE IS THA T PEL HAD PAID MONIES TO ASSESSEE FOR ULTIMATELY HOLDING STAKE IN SCL NEE D TO BE APPRECIATED IN THE CONTEXT OF THE AFORESAID RESOLUTION WHICH SPECI FIES THE INTENTION OF PEL. 10.3. WE FIND THAT SHARES OF SCL WERE NEVER TRANSFE RRED NOR ALLOTTED TO PEL BY ANY ENTITY. THE LD. AR ALSO SUBMITTED THAT T HE NAME OF PEL NEVER FIGURED IN THE SHAREHOLDERS REGISTER OF SCL AND SIM ILARLY, THE NAME OF SCL NEVER FIGURED IN THE BOOKS OF PEL. THE BOOKS OF PEL REFLECT INVESTMENT MADE IN SFS ASSESSEE FIRM ALONE. THIS FACT STATED B Y THE LD. AR WAS NOT CONTROVERTED BY THE LD. DR BEFORE US. WE ALSO FIND LOT OF FORCE IN THE ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 46 ARGUMENT ADVANCED BY THE LD. AR THAT PEL CANNOT MAK E DIRECT INVESTMENT IN EQUITY CAPITAL OF SCL IN VIEW OF THE FACT THAT S CL, BEING AN UNLISTED ENTITY, COULD ISSUE SHARES ONLY ON PRIVATE PLACEMEN T BASIS. MOREOVER, SINCE THERE IS ALREADY A PRIVATE EQUITY INVESTOR PR EVAILING IN SCL WHO HAD IMPOSED A CONDITION THAT NO SHARES SHALL BE ALLOTTE D BY SCL TO ANY OUTSIDE PLAYERS OTHER THAN TO THEIR OWN GROUP COMPANIES OR GROUP ENTITIES, THAT IS WHY PEL CHOSE TO INVEST IN ASSESSEE FIRM WHICH EVEN TUALLY HELD SHARES OF SCL THROUGH NOVUS. PURSUANT TO THIS PRECONDITION IM POSED BY THE PRIVATE EQUITY INVESTORS, PRACTICALLY SCL CANNOT ALLOT SHAR ES TO PEL DIRECTLY. HENCE, THE OBSERVATION MADE BY THE LD. AO THAT SHAR ES COULD HAVE BEEN ALLOTTED DIRECTLY TO PEL BY SCL IS INCORRECT AND WO ULD ONLY RESULT IN IMPOSSIBILITY OF PERFORMANCE. WE ARE ONLY REMINDED OF A FAMOUS LEGAL MAXIM IN THIS REGARD LEX NON COGIT AD IMPOSSIBILIA , MEANING THEREBY - THAT THE LAW CANNOT COMPEL A PERSON TO DO AN ACT W HICH HE CANNOT POSSIBLY PERFORM. HENCE, EFFECTIVELY IT COULD BE S EEN THAT PEL HAD MERELY MADE CAPITAL CONTRIBUTION IN ASSESSEE FIRM IN THE C APACITY OF PARTNER. THIS TRANSACTION, IN OUR CONSIDERED OPINION, CANNOT GIVE RAISE TO ANY TAXABLE INCOME IN ANY MANNER WHATSOEVER UNDER ANY PROVISION S OF THE INCOME TAX ACT, AS THE TRANSACTION IS ONLY IN THE CAPITAL FIELD. 10.4. FROM THE AFORESAID OBSERVATION, IT COULD BE S EEN THAT ASSESSEE FIRM EVEN THOUGH HAD ACTED AS AN INTERMEDIATE ENTITY, IT COULD NOT BE CONSTRUED AS A CONDUIT BETWEEN PEL AND SCL AND THE WHOLE TRANSACTIONS ARE TO BE UNDERSTOOD IN A HOLISTIC MANNER AND CANNO T BE CONSTRUED AS A COLOURABLE DEVICE OR A SHAM TRANSACTION AS ADMITTED LY THERE IS NO ELEMENT OF ANY INCOME WITHIN THE MEANING OF SECTION 2(24) O F THE ACT IN THIS ENTIRE GAMUT OF TRANSACTION AND ONCE THERE IS NO ES CAPEMENT OF ANY REVENUE TO THE EXCHEQUER, WHERE IS THE QUESTION OF COLOURABLE DEVICE COMING INTO PLAY IN ORDER TO ESCAPE TAX LIABILITY. HENCE, WE HOLD THAT THE ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 47 ENTIRE TRANSACTIONS BETWEEN PEL, ASSESSEE AND SCL T HROUGH NOVUS WAS ALL DONE BY DULY COMPLYING WITH ALL LEGAL PROCEDURES AN D FORMALITIES AND THERE IS ABSOLUTELY NO ESCAPEMENT OF TAX IN THIS EN TIRE GAMUT OF TRANSACTIONS. THE LD. AR ALSO VEHEMENTLY SUBMITTED THAT IT IS NOT THE FIRST TIME SHARES WERE ALLOTTED BY SCL IN THIS FASHION. I N FACT THE PRESENCE OF PRIVATE EQUITY PLAYER I.E. TPG INDIA INVESTMENTS (I I) INC (FII INVESTOR) HAD CAUSED SOME DIFFICULTY TO SCL AS THEY ARE PREVE NTED FROM MAKING ANY ALLOTMENT OF SHARES EVEN ON PRIVATE PLACEMENT BASIS OTHER THAN TO ITS GROUP CONCERNS. WE FIND THAT THIS FACT HAD MISSED A TTENTION OF THE LD. AO WHILE CONSIDERING ENTIRE GAMUT OF TRANSACTIONS. HEN CE, THE ALLEGATIONS LEVELLED BY THE LD. AO WHICH WAS STRONGLY SUPPORTED BY THE LD. DR THAT THE ENTIRE TRANSACTION IS A COLOURABLE DEVICE ARE HEREB Y 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 RESERV E IN THE BOOKS OF ASSESSEE FIRM AND SUBSTANTIAL AMOUNT RECEIVED FROM PEL TOWARDS CAPITAL CONTRIBUTION GETTING CREDITED TO SUCH RESERVE ACCOU NT IN THE BOOKS OF ASSESSEE FIRM, WE FIND THAT THE LD. AR HAD DULY EXP LAINED ITS PURPOSE OF CREATING SUCH CAPITAL RESERVE AND HAD MET EACH AND EVERY ALLEGATION LEVELLED BY THE LD. AO IN HIS ASSESSMENT ORDER AND SUBSEQUENTLY IN HIS REMAND REPORT. WE FIND THAT THE EXISTING PARTNER IN ASSESSEE FIRM SOT HOLDING 25% PARTNERSHIP SHARE HAD CONTRIBUTED ONLY RS.7,49,001/-, WHEREAS PEL HAD CONTRIBUTED RS.2117.45 CRORES FOR I TS 75% SHARE IN THE ASSESSEE FIRM. THIS APPARENTLY GIVES A LOPSIDED PIC TURE OF THE FINANCIAL STATEMENTS OF THE ASSESSEE FIRM, THEREBY APPARENTLY CREATING IMBALANCE AMONG THE PARTNERS AND THEIR RESPECTIVE PROFIT SHAR ING RATIO. IN ORDER TO AVOID SUCH IMBALANCE, THE ASSESSEE FIRM CONSCIOUSLY TOOK A DECISION TO RETAIN ONLY RS.6.22 CRORES IN CAPITAL ACCOUNT AND R EMAINING AMOUNT OF ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 48 RS.2111.23 CRORES IN CAPITAL RESERVE ACCOUNT. WE AL SO FIND THAT THE CREATION OF CAPITAL RESERVE HAVE BEEN DULY MENTIONE D IN THE RECONSTITUTED PARTNERSHIP DEED ITSELF AS AGREED AMONG THE EXISTIN G PARTNERS AND PEL AT THE TIME OF ITS CAPITAL CONTRIBUTION IN THE ASSESSE E FIRM. WITH REGARD TO THE OBSERVATION MADE BY THE LD. AO AND THE LD. DR THAT CAPITAL RESERVE BELONGS TO THE FIRM AND WOULD REMAIN WITH THE FIRM AT THE TIME OF DISSOLUTION AND THAT THE SAME WOULD NOT GET DISTRIB UTED TO THE ACCOUNT OF THE PARTNERS, WE ARE AFRAID THAT WE ARE UNABLE TO A CCEPT TO THIS PROPOSITION MADE BY THE REVENUE BEFORE US. ON PERUS AL OF THE ENTIRE RECONSTITUTED PARTNERSHIP DEED WHICH IS PART OF THE REVENUE PAPER BOOK FILED BEFORE US, WE FIND THAT PARA 19 THEREON SPEA K ABOUT DISSOLUTION OF THE FIRM, WHEREIN IT IS CATEGORICALLY STATED THAT O N DISSOLUTION, THE NET ASSETS OF THE FIRM SHALL BE DIVIDED BETWEEN THE PAR TNERS IN THE RATIO OF THEIR RESPECTIVE INTEREST. MOREOVER, THE INDIAN PA RTNERSHIP ACT PROVIDES THAT ALL THE ACTIVITIES OF THE FIRM I.E. THE CONDUC T OF BUSINESS, MUTUAL RIGHTS AND LIABILITIES, MANNER OF DEALING WITH PROPERTIES OF THE PARTNERSHIP FIRM ETC., ARE ALWAYS SUBJECT TO CONTRACT BETWEEN THE PA RTNERS. WHILE THIS IS SO, WE ARE UNABLE TO UNDERSTAND HOW THE MONIES LYING IN CAPITAL RESERVE WHICH IS ALSO REFLECTED IN THE FORM OF CORRESPONDIN G ASSETS ON THE ASSET SIDE OF THE BALANCE SHEET OF THE FIRM, WOULD NOT GE T DISTRIBUTED TO THE PARTNERS AT THE TIME OF DISSOLUTION. THE VIEW POINT OF THE LD AO THAT THE CAPITAL RESERVE BELONGS TO FIRM MAY BE TO SOME EXTE NT 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 NAM E OF PARTNERSHIP AND ALL THE ASSETS AND LIABILITIES OF THE PARTNERSHIP B ELONGS TO PARTNERS ONLY AND NO DISTINCTION COULD BE DRAWN BETWEEN PARTNERSH IP FIRM AND PARTNERS IN THIS REGARD. HENCE, THE APPREHENSIONS OF THE REV ENUE 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. ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 49 SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., AND THE C APITAL RESERVE LYING IN THE BOOKS OF THE ASSESSEE FIRM HAD BEEN DULY CREDIT ED 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 PRIVAT E LIMITED COMPANY OR LIMITED LIABILITY PARTNERSHIP (LLP). HENCE, WE SUMM ARILY DISMISS THE ARGUMENTS ADVANCED BY THE REVENUE BEFORE US THAT CA PITAL 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. 10.6. WE ALSO AGREE WITH THE ARGUMENTS ADVANCED BEF ORE US THAT PURSUANT TO ASSESSEE FIRM RECEIVING CAPITAL CONTRIB UTION FROM PEL TO THE TUNE OF RS.2117.45 CRORES, PEL HAD BECOME 75% PARTN ER IN THE ASSESSEE FIRM. HENCE, FOR ALL PRACTICAL PURPOSES, THE ASSESS EE FIRM BELONGS TO PIRAMAL GROUP AND NOT TO SHRIRAM GROUP AS UNDERSTOO D BY THE LD. AO IN HER ASSESSMENT ORDER. 10.7. WE FIND THAT THE TRANSACTIONS CARRIED OUT BY THE ASSESSEE WERE SOUGHT TO BE ORIGINALLY TAXED BY THE LD. AO IN THE HANDS OF SHRIRAM OWNERSHIP TRUST (SOT) U/S.2(47) R.W.S. 45(4) OF THE ACT WHICH WAS LATER DROPPED BY HIM. SUBSEQUENTLY, THE LD. AO ALSO HAD S OUGHT TO TAX THE AMOUNTS CREDITED IN THE CAPITAL RESERVE ACCOUNT OF THE ASSESSEE FIRM AS THE BENEFIT DERIVED U/S.28(IV) OF THE ACT WHICH WAS ALSO DROPPED BY THE LD. AO AND AS A LAST RESORT, THE LD. AO HAD CHOSEN TO TAX THE SAID AMOUNTS ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 50 UNDER THE RESIDUARY HEAD INCOME FROM OTHER SOURCES U/S.56(1) OF THE ACT. WE FIND THAT THE LD. AO HAD STRANGELY ARRIVED AT A CONCLUSION THAT SINCE THE SUM OF RS.2111.23 CRORES WAS CREDITED IN CAPITAL RESERVE ACCOUNT OF THE PARTNERSHIP FIRM, THE SAME WOULD TAN TAMOUNT TO GIFT GIVEN BY A PARTNER TO THE FIRM. THIS IS BASICALLY ON THE PREMISE OF THE LD. AO THAT THE CAPITAL RESERVE BELONGS TO THE FIRM AND NOT TO THE PARTNERS. WE HAVE ALREADY ADDRESSED THIS ASPECT HEREINABOVE THAT CAPI TAL RESERVE IS REFLECTED CORRESPONDINGLY IN THE FORM OF SOME ASSETS OF THE F IRM ON WHICH PARTNERS HAVE GOT RIGHTS AND INTEREST IN PROPORTION TO THEIR PROFIT SHARING RATIO. 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% STA KE. IN THIS REGARD, WE HAVE ALREADY HELD HEREINABOVE THE CLEAR PURPOSE BEHIND ASSESSEE COMING INTO PICTURE FOR ROUTING THIS TRANSACTION FO R THE SIMPLE REASON THAT SCL IS PREVENTED BY ITS PRIVATE EQUITY INVESTORS FR OM 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 SUBSEQUEN T ALLOTMENT OF SHARES OF SCL TO ASSESSEE THROUGH NOVUS CANNOT BE C ONSTRUED 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 TH E ACT DOES NOT HOLD ANY WATER. IN THESE CIRCUMSTANCES, THE SAID TRANSACTIO N 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 H AD DULY FILED ITS CONFIRMATION BEFORE THE LD. AO STATING THAT THE MON IES INVESTED BY THEM IN ASSESSEE FIRM WAS SHOWN AS CAPITAL CONTRIBUTION MADE IN ASSESSEE FIRM ONLY. THE SAID CONFIRMATION NOWHERE TALKED ABOUT PE L HAVING ANY DIRECT ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 51 STAKE IN EQUITY OF SCL. THIS ALSO GOES IN CONSONANC E WITH THE ACTUAL INTENTION OF PEL WHICH IS APPROVED IN THE BOARD RES OLUTION DATED 01/04/2014 AS PEL ALWAYS INTENDED TO HAVE ONLY EFFE CTIVE STAKE OF 20% IN SCL AND NOT DIRECT STAKE THEREON. WE FIND THAT T HE LD. AO HAD SUMMARILY DISREGARDED THIS CONFIRMATION GIVEN FROM PEL WITHOUT ANY BASIS. 10.9. IN ANY CASE, WE FIND THAT THE ENTIRE TRANSACT IONS CARRIED OUT BY THE ASSESSEE, PEL AND SCL DOES NOT FALL WITHIN THE AMBI T OF DEFINITION OF INCOME U/S.2(24) OF THE ACT IN ANY MANNER WHATSOEVE R, AS THE ENTIRE TRANSACTIONS ARE ONLY IN THE CAPITAL FIELD. THESE T RANSACTIONS DO NOT HAVE ANY INCIDENCE OF TAXATION AT ALL. IT IS NOT IN DISP UTE THAT PEL HAD ACTUALLY MADE CAPITAL CONTRIBUTION OF RS.2117.45 CRORES IN A SSESSEE FIRM, WHICH IS PARTLY KEPT IN CAPITAL ACCOUNT AND PARTLY KEPT IN C APITAL RESERVE ACCOUNT. HENCE THERE CANNOT BE ANY GIFT OF CAPITAL BY A PART NER TO THE PARTNERSHIP FIRM AS PEL WOULD NOT LIKE TO LOSE ITS RIGHTS AND I NTEREST IN PARTNERSHIP FIRM FOR THE CAPITAL CONTRIBUTED BY THEM. HENCE IT WOUL D BE TOTALLY UNFAIR AND BASELESS TO STATE THAT PEL HAD ACTUALLY GIFTED OR P ARTED WITH ITS CAPITAL LYING IN CAPITAL RESERVE TO THE FIRM. 10.10. THE ONE FACT WHICH IS STARING ON US IS THAT PEL IN THE INSTANT CASE HAD JUST MADE CAPITAL CONTRIBUTION IN ASSESSEE FIRM WHICH EVENTUALLY HELD THE SHARES OF SCL (PURSUANT TO MERGER OF NOVUS WITH SCL) THEREBY GIVING 20% EFFECTIVE STAKE TO PEL IN SCL. WE FIND THAT THE LD. AO HAD NOT MADE OUT ANY CASE TO DRIVE HOME THE POINT VIS--VIS THE FACTS OF THE CASE AS TO WHETHER THE SHARES OF SCL WERE TRANSFERRED, H OW AND WHO TRANSFERRED AND TO WHOM IT WAS TRANSFERRED? EVEN IF SO, WHETHER THE ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 52 TRANSACTION ATTRACTS TAX LIABILITY AND IN WHOSE HAN DS. WE FIND THAT THERE IS ABSOLUTELY NO FINDING REGARDING THESE QUESTIONS. 10.11. WE ALSO FIND THAT THE ENTIRE RECEIPT OF CAPI TAL CONTRIBUTION LYING IN CAPITAL RESERVE ACCOUNT WAS SOUGHT TO BE T AXED BY THE LD. AO U/S.56(1) OF THE ACT ON THE GROUND THAT THE SAME ON LY REPRESENTS SHARE SALE CONSIDERATION FOR ISSUE OF SHARES IN SCL. 10.12. WE FIND THAT THE LD. DR HAS ALSO FAIRLY AGRE ED BEFORE US THAT ASSESSEE WOULD BE ENTITLED FOR DEDUCTION TOWARDS CO ST OF SHARES / COST OF INVESTMENT IN TERMS OF SECTION 57(III) OF THE ACT. WE FIND THAT EVEN THIS DEDUCTION WAS NOT GRANTED BY THE LD. AO IN THE INST ANT CASE. 10.13. 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 UTIL ISED THE SAME BY MAKING PAYMENTS TO NOVUS ON THE SAME DAY. WE FIND T HAT THESE TYPE OF TRANSACTIONS ARE NOT AT ALL COVERED IN THE PROVISIO NS 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 INADEQU ATE CONSIDERATION, HENCE, THE PROVISIONS OF SECTION 56(2)(VIIA) OF THE ACT CANNOT BE MADE APPLICABLE TO THE FACTS OF THE ASSESSEES CASE AND THE CONTENTIONS OF THE LD. AO DESERVES TO BE DISMISSED AT THE THRESHOLD LE VEL ITSELF. ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 53 10.14. IN DEFENCE TO VARIOUS ARGUMENTS OF THE LD. A R, THE LD. DR ARGUED THAT PURSUANT TO RECEIPT OF MONIES FROM PEL, THERE WAS SACRIFICING OF INTEREST BY THE EXISTING PARTNERS IN FAVOUR OF P EL AND THAT THE CONSIDERATION ATTRIBUTABLE TO THIS SACRIFICE OF INT EREST 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 S UCH ACTION. 10.15. WITH REGARD TO TWO CASE LAWS RELIED UPON BY THE LD. DR BEFORE US, VIZ, DECISION OF THE HONBLE ALLAHABAD H IGH COURT IN THE CASE OF CIT VS. CARLTON HOTEL PVT. LTD., REPORTED IN 399 IT R 611(ALL) AND THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CAS E OF CIT VS. WIPRO LTD., 227 TAXMAN 244(KAR) ARE CONCERNED, THE SAID D ECISIONS ARE FACTUALLY DISTINGUISHABLE IN AS MUCH AS THEY WERE CONCERNED W ITH 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 AS SESSEE IS NOT ENGAGED IN THE BUSINESS ACTIVITY OF PURCHASE AND SALE OF SHARE S AND HENCE, THERE CANNOT BE ANY BUSINESS INCOME OR CAPITAL GAINS. KIN D REFERENCE IS DRAWN TO ARGUMENTS ADVANCED BY THE LD. DR IN THIS REGARD WHICH IS CONSIDERED IN PARA 7.1. SUPRA. HENCE, THE DECISIONS RELIED UPON B Y THE LD. DR HEREINABOVE, DOES NOT ADVANCE THE CASE OF THE REVEN UE. 10.16. IN VIEW OF THE AFORESAID OBSERVATIONS, WE CA TEGORICALLY HOLD THAT 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. WE FIND THAT THE LD. CIT(A) HAD DULY APPRECIATED THE FACTS OF THE ASSESSEE IN RIGHT PERSPECTIVE WHICH IN OUR CONSIDERED OPINION DO NOT WARRANT ANY INTERFERE NCE. HENCE, THE GROUNDS RAISED BY THE REVENUE ON MERITS OF THE ADDI TION FOR THE A.Y.2015- 16 ARE HEREBY DISMISSED. ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 54 11. WE FIND THAT THE LD. AR HAD FILED HIS WRITTEN S UBMISSIONS ON THE GROUND THAT THE LD. AO WHO FRAMED THE ASSESSMENT DO ES NOT HAVE ANY JURISDICTION AND THAT THE ASSESSMENT WAS FRAMED IN THE HANDS OF NON- EXISTENT ENTITY IN AS MUCH AS THE ASSESSEE FIRM WAS CONVERTED INTO PRIVATE LIMITED COMPANY BEFORE THE COMPLETION OF ASSESSMENT . WE FIND THAT ONLY REVENUE HAS PREFERRED APPEAL BEFORE US AND THERE IS NO APPEAL OR CROSS OBJECTIONS PREFERRED BY THE ASSESSEE BEFORE US. INF ACT, THERE IS NO PETITION UNDER RULE 27 OF THE ITAT RULES ALSO PREFERRED BY T HE ASSESSEE BEFORE US. HENCE, WE DEEM IT FIT NOT TO ADJUDICATE THIS ASPECT OF THE WRITTEN SUBMISSIONS PREFERRED BY THE LD. AR FOR WANT OF PRO PER GROUNDS FOR ADJUDICATION BEFORE US IN THAT REGARD. 12. IN THE RESULT, APPEAL OF THE REVENUE FOR A.Y.2 015-16 IS DISMISSED. 13. NOW LET US TAKE THE APPEAL OF THE REVENUE FOR A .Y.2014-15. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS:- 1. THE CIT(A) ERRED IN FACTS AND CIRCUMSTAN CES OF THE CASE AND IN LAW IN DELETING THE ADDITION OF MADE U/S. 56(2)(VIIA) OF RS.413,80,30,734/- 2. THE CIT(A) ERRED IN HOLDING THAT THE APPLICABLE PROVISIONS TO THE FACTS OF THE CASE ARE SEC.45(3) AND NOT SEC. 56(2) (VIIA) WHEREAS BOTH THE SECTIONS ARE ALTOGETHER DIFFERENT. SEC. 45(3) DEALS WITH CAPITAL GAINS IN THE HANDS OF THE TRANSFEROR, WHEREAS IN T HE PRESENT CASE ADDITION WAS MADE IN THE HANDS OF THE ASSESSEE WH O IS TRANSFEREE OF SHARES. 3. THE CIT(A) ERRED IN HOLDING THAT THE CONSOLATION RECEIVED ON TRANSFER OF SHARES FROM THE PARTNER BY THE ASSESSEE IS ' CAPITAL CONTRIBUTION ' AND CANNOT BE CONSIDERED AS 'CONSIDERAT ION' FOR THE PURPOSE OF SEC. 56(2) (VIIA) WHEREAS THE PURPOSE FOR WHICH SHARES WERE RECEIVED BY TRANSFEREE IS IMMATERIAL FOR TAXING DEEMED INCO ME AS PER PROVISION S OF SEC.56(2) (VIIA). ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 55 4. THE CIT(A) ERRED IN EQUATING THE PROVISIONS OF S EC,56(2) (VIIA) AND 56(2) (VIIB) WHICH ARE APPLICABLE FOR DIFFERENT CONTEXTS. 5. ANY OTHER GROUND THAT MAY BE URGED AT THE TIM E OF HEARING. 14. THE BRIEF FACTS OF THIS APPEAL ARE THAT THE ASS ESSEE WAS A FIRM AND AS ON 01/04/2013 CONSISTED OF THREE INDIVIDUAL PART NERS NAMELY SHRI D.V.RAVI, SHRI S MURALI AND SHRI K JAGDEESH WITH TO TAL CAPITAL OF RS.225/- @75/- EACH HAVING EQUAL PROFIT SHARING RATIO. DURIN G THE ASSESSMENT YEAR UNDER CONSIDERATION, SHRIRAM OWNERSHIP TRUST (SOT) JOINED THE FIRM AS FOURTH PARTNER WITH 99.97% SHARE AND ABOVE THREE IN DIVIDUALS CONTINUED AS PARTNERS WITH 0.01% SHARE EACH. THE RE-CONSTITUT ED PARTNERSHIP DEED WAS DULY PREPARED IN THIS REGARD AND AS PER THE SAI D DEED, SOTS CONTRIBUTION TOWARDS CAPITAL WAS AS UNDER:- I. 74,970 SHARES OF SHRIRAM FINANCIAL VENTURE C APITAL PVT LTD (SFVCPL) - VALUE WAS TAKEN AT RS. 7,49,700/- @ RS.10/- U/S 4 5(3) OF THE ACT AND CREDITED TO CAPITAL ACCOUNT OF SOT. II. 9,57,47,200 SHARES OF SHRIRAM CAPITAL LTD (S CL) - VALUE WAS ADOPTED AT RS. 1/- U/S 45(3) OF THE ACT AND CREDITED TO CAP ITAL ACCOUNT OF SOT. 14.1. PURSUANT TO THE ABOVE, TOTAL PARTNERS CAPITA L AS ON 31/03/2014 WAS RS.7,49,926/-. THE BREAK-UP OF THE SUM ARE AS UNDER :- SOT CAPITAL CONTRIBUTION - RS.74,9701/- OTHER THREE PARTNERS CAPITAL CONTRIBUTION - RS. 225/- ------------------------ TOTAL RS.7,49,926 =========== ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 56 14.2. THE RETURN OF INCOME FOR THE A.Y.2014-15 WAS FILED IN THE STATUS OF FIRM ON 30/09/2014 DECLARING TOTAL INCOME OF RS.27, 630/-. THE ASSESSMENT FOR THE A.Y.2015-16 WAS COMPLETED U/S.14 3(3) OF THE ACT ON 30/12/2017, WHEREIN THE LD. AO OBSERVED THAT THE TR ANSACTION CARRIED OUT BY THE ASSESSEE IN THE A.Y.2014-15 ALSO HAS A BEARI NG ON THE PROCEEDINGS FOR A.Y.2015-16. THE LD. AO EXAMINED PROFIT AND LOS S ACCOUNT, BALANCE SHEET ALONGWITH ALL SCHEDULES, THE LIST OF VARIOUS SHAREHOLDERS OF SHRIRAM CAPITAL LTD. (SCL) AS ON 31/03/2013 AND 31/03/2014. THE SHAREHOLDING PATTERN OF SHAREHOLDERS OF SCL HOLDING MORE THAN 5% STAKE AS ON 31/03/2013 AND 31/03/2014 ARE AS UNDER:- NAME OF THE SHAREHOLDER NO OF SHARES AS ON 31/03/2013 NO OF SHARES AS ON 31/03/2014 SHRIRAM OWNERSHIP TRUST 9,57,47,300 100 M/S. TPG INDIA INV. (MAURITIUS) 10,13,80,344 10,13,80,344 M/S. SHRIRAM FINANCIAL VENTURES 71,62,07,367 71,62,07,367 M/S. SHRILEKHA FINANCIAL SERVICES NIL 9,57,47,200 OTHERS 1,200 1,200 TOTAL 91,33,36,411 91,33,36,411 14.3. FROM THE ABOVE TABLE, IT COULD BE SEEN THAT S OT HAD TRANSFERRED 9,57,47,200/- SHARES OF SCL TO THE ASSESSEE FIRM DU RING A.Y.2014-15 ON 26/03/2014. THE ASSESSEE SUBMITTED THAT THE SHARES HELD BY SOT IN SCL ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 57 AND SFVCPL WERE REFLECTED AT RS.1/- AND RS.749700/- RESPECTIVELY IN THE BOOKS OF THE ASSESSEE FIRM AS CAPITAL CONTRIBUTION OF SOT IN ACCORDANCE WITH THE PROVISIONS OF SECTION 45(3) OF THE ACT. TH E LD. AO HOWEVER, IGNORED THE SUBMISSION OF THE ASSESSEE AND ON THE B ASIS OF INFORMATION GATHERED/ COLLECTED FROM VARIOUS AVAILABLE SOURCES, HE FOUND THAT THE BOOK VALUE OF EACH SHARE OF M/S. SHRIRAM CAPITAL LT D., WAS RS.25.69 AND ACCORDINGLY, ARRIVED AT THE TOTAL BOOK VALUE OF THE SHARES OF SCL RECEIVED FROM SOT BY THE ASSESSEE FIRM AT RS.245,97,45,568/- (95747200 X 25.69). SIMILARLY, INFORMATION WAS GATHERED BY HIM FROM VARIOUS SOURCES REGARDING THE BOOK VALUE OF EACH SHARE OF M/S. SHRI RAM FINANCIAL VENTURES CHENNAI PVT. LTD., (SFVCPL) AT RS.22396.09 AND ACCO RDINGLY, ARRIVED AT THE TOTAL BOOK VALUE OF SFVCPL RECEIVED FROM SOT AT RS.167,90,34,867/- (RS.74,970 X RS.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 RS.245,97,45,567/- (RS. 245,97,45,568/- RS.1) AND RS.167,82,85,167/- (RS.167,90,34,867/- RS.7,49,700/-) RESPECTIVELY AND SOUGHT TO INVOKE THE PROVISIONS OF SECTION 56(2)(VIIA) OF THE ACT FOR MAKING TOTAL ADDITION OF RS.413,80,30,7 34/- (RS.245,97,45,567/- + 167,82,85,167/-) AND ACCORDIN GLY CONCLUDED THAT INCOME OF THE ASSESSEE HAD ESCAPED ASSESSMENT. ACCO RDINGLY, THE LD. AO AFTER OBTAINING PRIOR APPROVAL FROM ADDITIONAL COMM ISSIONER 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 F OR A.Y.2014-15. IN RESPONSE TO THE SAID NOTICE, THE ASSESSEE FIRM FILE D ITS RETURN OF INCOME ON 04/04/2018 ADMITTING THE SAME TOTAL INCOME ORIGINAL LY DECLARED AT RS.27,630/-. THE ASSESSEE ALSO FILED A LETTER DATED 09/04/2018 ALONGWITH COPY OF ACKNOWLEDGEMENT OF RETURN, BALANCE SHEET, P ROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING 31/03/2014. CONSEQUENTL Y, A NOTICE U/S.143(2) AND 142(1) OF THE ACT WERE ISSUED TO THE ASSESSEE ON ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 58 10/04/2018 CALLING FOR CERTAIN INFORMATION WHICH WE RE DULY RESPONDED BY ASSESSEE ON 23/04/2018. 14.4. FURTHER THE ASSESSEE FILED ITS REPLY ON 25/06 /2018 REPLIED WITH REGARD TO NON-APPLICABILITY OF THE PROVISIONS OF SE CTION 56(2)(VIIA) OF THE ACT AS UNDER:- 7.1 SECTION 56(2)(VIIA) OF THE ACT, INTER-ALIA, PR OVIDES THAT WHERE A FIRM RECEIVES, IN ANY PREVIOUS YEAR, FROM ANY PERSO N, ANY PROPERTY, BEING SHARES OF A COMPANY, NOT BEING A COMPANY IN W HICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED: WITHOUT CONSIDERATION, THE AGGREGATE FAIR MARKET VA LUE OF WHICH EXCEEDS FIFTY THOUSAND RUPEES, THE WHOLE OF T HE AGGREGATE FAIR MARKET VALUE (FMV) OF SUCH PROPERTY SHALL BE C HARGEABLE TO TAX UNDER THE HEAD 'INCOME FROM OTHER SOURCES'; OR FOR A CONSIDERATION WHICH IS LESS THAN THE AGGREGAT E FAIR MARKET VALUE OF THE PROPERTY BY AN AMOUNT EXCEEDING FIFTY THOUSAND RUPEES, THE AGGREGATE FAIR MARKET VALUE OF SUCH PRO PERTY AS EXCEEDS SUCH CONSIDERATION SHALL BE CHARGEABLE TO T AX UNDER THE HEAD 'INCOME FROM OTHER SOURCES;. 7.2 WHEN A PERSON BECOMES A PARTNER IN A FIRM CONTR IBUTION HIS CAPITAL, HE ACQUIRES VARIOUS RIGHTS IN THE FIRM. 7.3 HE HAS INTEREST IN EACH AND EVERY ASSET OF THE FIRM INCLUDING GOODWILL EVEN DURING THE SUBSISTENCE OF THE FIRM, T HOUGH DURING SUBSISTENCE HE CANNOT CLAIM SPECIFIC SHARE IN ANY P ARTICULAR ASSET. SUCH RIGHTS, INTER ALIA, INCLUDE RIGHT TO TAKE PART IN THE CONDUCT OF THE BUSINESS, RIGHT TO SHARE IN THE PROFITS, RIGHT TO S ETTLEMENT OF ACCOUNTS AT THE TIME OF RETIREMENT AND IF NOT SHARE IN THE SUBS EQUENT PROFITS AND INTEREST ETC. 7.4 AS PER SECTION 14 OF THE PARTNERSHIP ACT, THE PROPERTY OF THE FIRM INCLUDES ALL PROPERTY AND RIGHTS AND INTERESTS IN P ROPERTY ORIGINALLY BROUGHT INTO THE STOCK OF THE FIRM OR ACQUIRED BY P URCHASE OR OTHERWISE BY OR FOR THE FIRM OR FOR THE PURPOSES AN D IN THE COURSE OF THE BUSINESS OF THE FIRM AND INCLUDES ALSO THE GOOD WILL OF THE BUSINESS. 7.5 SUPREME COURT IN ADDANKI NARAYANAPPA V BHARKARA KRISHNAPPA AIR 1966 SC 1300 AFTER REFERRING TO SECTIONS 14, 29, 30, ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 59 36, 37 AND ALSO 39 TO 55 OF THE PARTNERSHIP ACT HAS OBSERVED AS FOLLOWS. 'FROM A PERUSAL OF THESE PROVISIONS IT WOULD BE ABU NDANTLY CLEAR THAT WHATEVER MAY BE THE CHARACTER OF THE PROPERTY WHICH IS BROUGHT IN BY THE PARTNERS WHEN THE PARTNERSHIP IS FORMED OR WHIC H MAY BE ACQUIRED IN THE COURSE OF THE BUSINESS 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 T O A SHARE IN THE MONEY REPRESENTING THE VALUE OF THE PROPERTY. NO DOUBT, SINCE A FIRM HAS NO LEGAL EXISTENCE, THE PARTNERSHIP PROPERTY WI LL VEST IN ALL THE PARTNERS AND IN THAT SENSE EVERY PARTNER HAS AN INT EREST 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. N OR 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 FAL L TO HIS SHARE FROM TIME TO TIME AND UPON THE DISSOLUTION OF THE FIRM TO A S HARE IN THE ASSETS OF THE FIRM WHICH REMAIN AFTER SATISFYING THE LIABILIT IES 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 PARTNER IN THE FIRM TO THE SURVIVORS. PLEA SE SEE CONTROLLER OF ESTATE DUTY V. MRUDULA NARESHCHANDRA (198B AIR 1821 ). 7.7 THE FACT THAT A PARTNER'S INTEREST IN THE FIRM IS A VALUABLE ASSET IS ALSO BORNE OUT BY ITS INCLUSION AS AN ASSET WHILE COMPUT ING NET WEALTH UNDER THE WEALTH TAX ACT. 7.8 WHEN THE PARTNERSHIP INTEREST IS SOLD FOR A PRI CE IT IS LIABLE TO TAX AS HELD BY THE SUPREME COURT IN VATSALA SHENOY V. JT. COMMISSIONER OF INCOME TAX (ASSESSMENT), MYSORE (2016 389 ITR 519) 7.9 THE PARTNER'S INTEREST IN A FIRM IS A VALUABLE ASSET WHICH CONSTITUTES ADEQUATE CONSIDERATION AND IT CANNOT BE RESTRICTED TO THE CREDIT ENTRY IN THE BOOKS EXCEPT FOR THE PURPOSE OF SECTION 45(3) W HERE THE PARTICULAR STATUTORY PROVISION RESTRICTS IT ARTIFICIALLY. 7.10 FROM THE ABOVE, IT IS ABUNDANTLY CLEAR THAT TH E CONSIDERATION AT THE TIME OF CONTRIBUTION OF ASSETS INTO THE FIRM BY A P ARTNER IS NOT DETERMINABLE TO INVITE SECTION 56(2)(VIIA). 8 PARTNERSHIP INTEREST IS A VALUABLE AND ADEQUATE C ONSIDERATION ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 60 8.1 WE WISH TO SUBMIT THAT THE RIGHT IN THE PARTNER SHIP TO WHICH A PARTNER BECOMES ON CONTRIBUTION OF CAPITAL ALWAYS CONSTITUT ES 'VALUABLE CONSIDERATION FOR THE PURPOSE OF SECTION 56(2)(VIIA ) OF THE ACT AND WILL NOT FAIL TO BE CONSIDERED AS A CASE WITHOUT CONSIDE RATION OR AS A CASE WHERE THE CONSIDERATION IS LESS THAN THE FAIR MARKE T VALUE. 8.2 IN SUM, THEREFORE, IN THE CASE OF A PARTNERSHIP FIRM, THE 'CONSIDERATION' FOR THE SUBSISTENCE OF THE PARTNERS HIP TO GET HIS SHARE OF PROFITS FROM TO TIME AND AFTER THE DISSOLUTION OF T HE PARTNERSHIP OR WITH HIS RETIREMENT FROM THE PARTNERSHIP TO GET HIS ACCO UNTS SETTLED. 8.3 THUS, IN THE INSTANT CASE, THE PARTNERSHIP INTE REST TO WHICH SOT (I.E 99.97%) IS ENTITLED PURSUANT TO CONTRIBUTION OF SHA RES IN THE FIRM DOES NOT FALL SHORT OF CONSIDERATION ENVISAGED. SOT'S 9 9.97% INTEREST EXTENDS OVER THE VERY SAME SHARES WHICH SOT CONTRIBUTED AS CAPITAL. 8.4 IN SUMMARY, THE CONTRIBUTION OF SHARES BY SOT T O THE FIRM BY WAY OF CAPITAL CONTRIBUTION DOES NOT ATTRACT THE PROVIS IONS OF SECTION 56(2)(VIIA) ON ACCOUNT OF THE FOLLOWING: THE PARTNERSHIP INTEREST WHICH GIVES THE PARTNER A RIGHT TO SHARE IN THE PROFITS AND LOSSES OF THE FIRM AND RIGHT IN THE ASS ETS OF THE FIRM IS A VALUABLE AND ADEQUATE CONSIDERATION. SUCH CONSIDERATION DOES NOT ADMIT OF FULL EVALUATIO N. THE PARTNERSHIP INTEREST OF 99.97% OBTAINED BY SOT PURSUANT TO THE CAPITAL CONTRIBUTION SHOULD BY ITSELF CONSTITUTE 'A DEQUATE CONSIDERATION' FOR THE PURPOSE OF SECTION 56(2)(VII A) OF THE ACT. 9. FOR THE ABOVE REASONS, WE SUBMIT THAT SECTION 5 6(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 H ELD BY IT IN SCL AND SFVCPL AT THE PRICE MUTUALLY AGREED UPON BETWEEN TH E 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:- ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 61 1. HERE THE ISSUE IS NOT ABOUT WHAT IS THE VALUE OF THE ASSET BROUGHT IN BY THE PARTNER TO BE RECORDED IN THE BOO KS OF THE FIRM. THIS ISSUE OF RECORDING VALUE OF ASSET IN THE BOOKS OF ACCOUNTS COMES INTO PICTURE IN THE CASE OF CALCULATION OF CA PITAL GAINS LIABLE TO BE PAID TO THE TRANSFEROR AS GOVERNED UNDER SECT ION 45(3) OF THE ACT WHEREAS THE ISSUE INVOLVED IN THE PRESENT CASE IS DEEMED INCOME ACCRUED TO THE TRANSFEREE AS GOVERNED U/S.56 (2)(VIIA) OF THE ACT. 2. AS PER SECTION 56(2)(VIIA) OF THE ACT, THE FOLL OWING CONDITIONS ARE TO BE SATISFIED:- A. THE TRANSFEREE HAS TO BE A FIRM OR A COMPANY NOT BE ING A COMPANY IN WHICH PUBLIC ARE SUBSTANTIALLY INTERESTE D. B. THE ASSET TO BE TRANSFERRED IS IN PROPERTY BEING SH ARES OF A COMPANY NOT BEING A COMPANY IN WHICH PUBLIC ARE SUB STANTIALLY INTERESTED. C. THE TRANSFEROR CAN BE ANY PERSON. D. THE DATE OF TRANSFER HAS TO BE ON OR AFTER 01/06/20 10. IN THIS CASE, THE TRANSFEREE IS A FIRM, THE ASSET T RANSFERRED IS SHARES OF A COMPANY IN WHICH PUBLIC ARE NOT SUBSTANTIALLY INTERESTED; THE DATE OF TRANSFER IS 26/03/2014 AND 27/03/2014 W HICH IS AFTER 01/06/2010 AND MORE IMPORTANTLY, THE TRANSFEROR CAN BE ANY PERSON AS DEFINED U/S.2(31) OF THE ACT. THUS, IN T HIS CASE, ALL THE ABOVE CONDITIONS LAID DOWN FOR THE PURPOSE OF INVOK ING PROVISIONS OF SECTION 56(2)(VIIA) OF THE ACT ARE FULFILLED. 3. THE ASSESSEES SUBMISSION THAT THE PARTNERS IN TEREST IN THE FIRM IS A VALUABLE ASSET, WHICH CONSTITUTE ADEQUATE CONS IDERATION AND IT ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 62 CANNOT BE RESTRICTED TO THE CREDIT ENTRIES IN THE B OOKS OF ACCOUNTS EXCEPT FOR THE PURPOSE OF SECTION 45(3) OF THE ACT, IS ALSO NOT APPLICABLE. THE PROVISIONS OF SECTION 45(3) ARE PAR T AND PARCEL OF COMPUTATION OF INCOME UNDER THE HEAD CAPITAL GAINS WHEREAS THE INSTANT CASE DEALS WITH THE COMPUTATION OF INCOME U /S.56(2)(VIIA) OF THE ACT WHICH IS A DEEMING PROVISION FOR COMPUTATIO N OF INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. 4. THE EXPLANATORY NOTES TO FINANCE ACT 2010 WITH R EGARD TO INSERTION OF SECTION 56(2)(VIIA) OF THE ACT WERE RE PRODUCED BY THE LD. AO IN THE ASSESSMENT ORDER WHICH WAS INTRODUCED AS A COUNTER EVASION MECHANISM TO PREVENT LAUNDERING OF UNACCOU NTED INCOME. 5. WITH REGARD TO THE SUBMISSION OF THE ASSESSEE TH AT SHARES TRANSFERRED BY SOT TO THE FIRM IS PART OF CAPITAL C ONTRIBUTION BY THE PARTNER AND ACCORDINGLY, THE PROVISIONS OF SECTION 56(2)(VIIA) OF THE ACT DOES NOT APPLY, IS CONCERNED, THE LD. AO OBSERV ED THAT THE PROVISO TO SECTION 56(2)(VIIA) OF THE ACT EXPLICITL Y PROVIDED THE TRANSACTIONS WHICH DOES NOT COME U/S. 56(2)(VIIA) O F THE ACT AND HE REPRODUCED THE SAID PROVISO AS UNDER:- 'PROVIDED THAT THIS CLAUSE SHALL NOT APPLY TO ANY S UCH PROPERTY RECEIVED BY WAY OF A IIANSACTION NOT REGARDED AS TRANSFER UN DER CLAUSE (VIA) OR CLAUSE (VIC) OR CLAUSE (VICB) OR CLAUSE (VID) OR CL AUSE (VII) OF SECTION 47.' 14.6. ACCORDINGLY, HE OBSERVED THAT WHAT IS INCLUDE D 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 W HEN A PARTNER ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 63 TRANSFERS SHARES TO THE FIRM FOR INADEQUATE CONSIDE RATION, DOES NOT FALL UNDER ANY OF THOSE EXCLUSIONS. 14.7. WITH THE ABOVE OBSERVATIONS, THE LD. AO MADE AN ADDITION OF RS.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 PAR TNER IN THE FIRM. THE SOT AS A PARTNER INTRODUCED SHARES OF TWO COMPA NIES NAMELY, M/S.SHRIRAM CAPITAL LTD AND M/S.SHRIRAM FINANCIAL V ENTURE (CHENNAI) PVT LTD, DURING THIS ASSESSMENT YEAR 2014-15 AS A C APITAL CONTRIBUTION IN THE APPELLANT FIRM. THE APPELLANT FIRM NOT RECEIVED CONSIDERATION FOR S HARES BUT ONLY RECEIVED CAPITAL CONTRIBUTION IN THE FORM OF SHARES OF TWO C OMPANIES FROM THE PARTNER SOT. THE PARTNER'S CAPITAL IS NOT A CONSIDERATION TO BE CONSIDERED AS PER SECTION 56(2)(VIIA). SINCE THERE IS NO CONSIDERATION, THEN THERE IS NO B ENEFIT OR LOSS TO THE APPELLANT FIRM. SINCE THERE IS NO BENEFIT TO THE APPELLANT, THERE I S NO QUESTION OF GIFT. HENCE, PROVISIONS OF SECTION 56(2)(VIIA) DOES NOT C OME INTO PICTURE. SINCE THERE IS NO CONSIDERATION RECEIVED BY THE APP ELLANT FIRM, THEREFORE THERE IS NO ISSUE OF LESSER CONSIDERATION THEREFORE, AS PER ABOVE DISCUSSIONS IN DETAIL, I A M OF THE OPINION THAT PROVISIONS OF SECTION 56(2)(VIIA) DOES NOT APPLY IN THIS CASE. WHEN ONCE THE PROVISIONS OF SECTION 56(2)(VIIA) DOE S NOT APPLY, THEN THERE IS NO QUESTION OF VALUING THE SHARES AT FAIR MARKET VALUE. 12. THEREFORE, THE ADDITIONS MADE BY THE ASSES SING OFFICER BY REWORKING SHARES AT FAIR MARKET VALUE BY APPLYING PROVISIONS OF SECTION 56(2)(VIIA) IS NOT CORRECT. HENCE, ADDITIONS MADE BY THE AO DELE TED. 15.1. THE LD. CIT(A) FURTHER OBSERVED THAT SECTION 45(3) OF THE ACT DEALS WITH CAPITAL CONTRIBUTION BY A PARTNER AND ITS CAPI TAL GAINS LIABILITY IN THE ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 64 HANDS OF THE TRANSFEROR (I.E PARTNER IN THE INSTANT CASE). THE LEGISLATURE NEVER INTENDED TO ADOPT A DIFFERENT CONSIDERATION I N THE HANDS OF THE TRANSFEREE (I.E. FIRM IN THE INSTANT CASE). MOREOVE R, THE PROVISIONS OF SECTION 56(2)(VIIA) OF THE ACT WERE INTRODUCED AS A COUNTER MECHANISM TO PREVENT / COUNTER MONEY LAUNDERING. NO FINDING WAS GIVEN BY THE LD. AO THAT THE ASSESSEE HEREIN WAS INVOLVED IN ANY MONEY LAUNDERING. 15.2. THE LD. CIT(A) FURTHER OBSERVED THAT IT IS A RULE OF INTERPRETATION THAT SPECIAL PROVISION PREVAILS OVER GENERAL PROVIS IONS OF THE LAW. SECTION 56(2)(VIIA)OF THE ACT IS A GENERAL PROVISION AND SE CTION 45(3) OF THE ACT IS A SPECIAL PROVISION OF THE ACT. THERE IS NO NON-OBS TANTE CLAUSE U/S.56(2) (VIIA) PROVIDING TO OVERRULE PROVISIONS OF SECTION 45(3) OF THE ACT. 16. AGGRIEVED BY THESE OBSERVATIONS, THE REVENUE IS IN APPEAL BEFORE US ON THE GROUNDS REPRODUCED SUPRA. 17. THE LD. CIT DR APART FROM REITERATING THE OBSER VATIONS MADE BY THE LD. AO BY DRAWING SPECIFIC ATTENTION TO THE RELEVAN T PORTION OF HIS WRITTEN SUBMISSIONS FORMING PART OF HIS PAPER BOOK DATED 24 /06/2019, SPECIFICALLY ARGUED THAT THE SUBMISSIONS OF THE ASSESSEE WITH RE SPECT TO PROVISIONS OF SECTION 56(2)(VIIA) OF THE ACT WILL NOT APPLY IN TH E CASE WHERE THE PARTNER INTRODUCED AN ASSET IN THE FIRM AS CAPITAL CONTRIBU TION, HOLDS NO WATER. HE ARGUED THAT THE ISSUE UNDER CONSIDERATION HERE IS N OT THE PARTNER CONTRIBUTING THE ASSET INTO A FIRM, BUT THE ISSUE W HETHER THE FAIR MARKET VALUE OF THE ASSET CONTRIBUTED BY THE PARTNER IS SA ME 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 ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 65 FOR INADEQUATE CONSIDERATION THAN ITS FAIR MARKET V ALUE, THE PROVISIONS OF SECTION 56(2)(VIIA) OF THE ACT WILL AUTOMATICALLY A PPLY. 17.1. THE LD. CIT DR ALSO ARGUED THAT APART FROM TH E 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 HONBLE SUPREME COURTS DECISION WAS RENDE RED IN THE CONTEXT OF APPLICABILITY OF SECTION 2(47) R.W.S.45 & 48 OF THE ACT AND NOT WITH SECTION 56(2)(VIIA) OF THE ACT AND HENCE IT IS FACTUALLY DI STINGUISHABLE. HE ALSO ARGUED THAT THE PROVISIONS OF SECTION 45(3) OF THE ACT ITSELF WAS AMENDED BY THE FINANCE ACT, 1987 W.E.F. 01/04/1988 ONLY TO OVERRULE THE HONBLE SUPREME COURT JUDGEMENT REFERRED TO SUPRA. MOREOVER , HE ARGUED THAT THE LD. CIT(A) FAILED TO APPRECIATE THAT THE SAID D ECISION WAS RENDERED IN THE CONTEXT OF TAXABILITY OF THE PARTNER U/S.45(3) OF THE ACT WHEREAS THE INSTANT CASE BEFORE US SPEAKS ABOUT THE TAXABILITY OF THE RECIPIENT FIRM U/S.56(2)(VIIA) OF THE ACT. HE ARGUED THAT PROVISI ONS OF SECTION 45(3) AND 56(2)(VIIA) OF THE ACT ARE INDEPENDENT SECTIONS AS THE FORMER DEALS WITH THE TRANSFEROR (I.E PARTNER) UNDER THE HEAD CAPITA L GAINS AND THE LATTER DEALS WITH THE TRANSFEREE (I.E FIRM) UNDER THE HEAD INCOME FROM OTHER SOURCES. ACCORDINGLY, THE ISSUE OF TAXABILITY IN T HE HANDS OF TWO DISTINCT PERSONS DOES NOT ENVISAGE EXISTENCE OF ANY NON-OBST ANTE CLAUSE. 17.2. WITH REGARD TO YET ANOTHER IMPORTANT OBSERVAT ION MADE BY THE LD. CIT(A) IN HIS ORDER THAT SOT AS A PARTNER HAD INTRO DUCED SHARES OF SCL AND SFVCPL AS ITS CAPITAL CONTRIBUTION IN THE ASSES SEE FIRM; THAT THE FIRM HAD NOT RECEIVED ANY CONSIDERATION FOR SHARES WHICH HAD ONLY RECEIVED CAPITAL CONTRIBUTION IN THE FORM OF SHARES OF TWO C OMPANIES FROM ITS PARTNER; THAT THE PARTNERS CAPITAL IS NOT A CONSID ERATION TO BE CONSIDERED ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 66 AS PER SECTION 56(2)(VIIA) OF THE ACT; SINCE THERE IS NO CONSIDERATION, THERE IS NO BENEFIT OR LOSS TO THE ASSESSEE FIRM; SINCE T HERE IS NO BENEFIT TO THE ASSESSEE, THERE IS NO QUESTION OF ANY GIFT AND HENC E, PROVISIONS OF SECTION 56(2)(VIIA) OF THE ACT DOES NOT COME INTO PICTURE; THERE IS NO CONSIDERATION RECEIVED BY THE ASSESSEE FIRM, THEREF ORE, THERE IS NO ISSUE OF LESSER CONSIDERATION AND ACCORDINGLY, THE PROVIS IONS OF SECTION 56(2)(VIIA) DOES NOT APPLY; THAT WHEN ONCE THE PROV ISIONS OF SECTION 56(2)(VIIA) OF THE ACT DOES NOT APPLY, THEN THERE I S NO QUESTION OF CONTRIBUTING THE SHARES AT FAIR MARKET VALUE, IS CO NCERNED, THE LD. CIT DR VEHEMENTLY ARGUED THAT THE PARTNER I.E. SOT INTRODU CED SHARES AS ITS CAPITAL CONTRIBUTION IN THE ASSESSEE FIRM AND WHAT MATTERS IS WHETHER THE FAIR MARKET VALUE OF THE SHARES BROUGHT IN BY THE P ARTNER IS SAME AS WHAT IS RECORDED IN THE BOOKS OF ACCOUNTS OF THE ASSESSE E FIRM TOWARDS PARTNERS CAPITAL CONTRIBUTION. HE ARGUED THAT TRAN SFEROR AND TRANSFEREE ARE TWO DISTINCT ENTITIES AND ONCE, THE TRANSACTION S BETWEEN TWO DIFFERENT ENTITIES TAKES PLACE, THE RECIPIENT WILL BE OWNER O F THE ASSET. IN THIS CASE, THE ASSESSEE FIRM BEING THE RECIPIENT HAD BECOME TH E OWNER OF THE SHARES WHOSE FAIR MARKET VALUE IS RS.413,87,80,435/- AS AG AINST THE CONSIDERATION RECORDED IN THE BOOKS OF THE ASSESSEE FIRM AT RS.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 PRESEN TATION OF THE LD AR SUBMITTED AT THE TIME OF HEARING BEFORE US AND LATE R 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 C APITAL CONTRIBUTION. THE ASSESSEE HAD PLEADED THAT PURSUANT TO THIS CAPI TAL CONTRIBUTION IN THE ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 67 FORM OF SHARES IN THE ASSESSEE FIRM, THE ASSESSEE F IRM HAD BECOME THE OWNER OF THE SHARES OF SCL AND SFVCPL IN TERMS OF S ECTION 14 OF THE INDIAN PARTNERSHIP ACT. AT THE OUTSET, WE FIND THAT PROVISIONS OF SECTION 56(2)(VIIA) OF THE ACT HAD BEEN INVOKED BY THE LD. AO ON THE PRESUMPTION THAT THERE IS A TRANSACTION BETWEEN THE FIRM AND TH E PARTNER WHEREIN THE PARTNER BROUGHT IN CAPITAL CONTRIBUTION IN THE FORM OF SHARES AND FIRM RECEIVED SUCH SHARES AND CREDITED THE ENTIRE CONSID ERATION TO ITS CAPITAL ACCOUNT FOR INADEQUATE CONSIDERATION. FOR THE SAKE OF CONVENIENCE, THE PROVISIONS OF SECTION 56(2)(VIIA) ARE REPRODUCED HE REUNDER:- (VIIA) WHERE A FIRM OR A COMPANY NOT BEING A COMPA NY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, RECEIVES, IN A NY PREVIOUS YEAR, FROM ANY PERSON OR PERSONS, ON OR AFTER THE 1ST DAY OF J UNE, 2010 BUT BEFORE THE 1ST DAY OF APRIL, 2017, ANY PROPERTY, BEING SHA RES OF A COMPANY NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIAL LY INTERESTED, (I) WITHOUT CONSIDERATION, THE AGGREGATE FAIR MAR KET VALUE OF WHICH EXCEEDS FIFTY THOUSAND RUPEES, THE WHOLE OF T HE AGGREGATE FAIR MARKET VALUE OF SUCH PROPERTY; (II) FOR A CONSIDERATION WHICH IS LESS THAN THE A GGREGATE FAIR MARKET VALUE OF THE PROPERTY BY AN AMOUNT EXCEEDING FIFTY THOUSAND RUPEES, THE AGGREGATE FAIR MARKET VALUE OF SUCH PRO PERTY AS EXCEEDS SUCH CONSIDERATION : PROVIDED THAT THIS CLAUSE SHALL NOT APPLY TO ANY SUCH PROPER TY RECEIVED BY WAY OF A TRANSACTION NOT REGARDED AS TRANSFER UNDER CLAUSE (VIA) OR CLAUSE (VIC) OR CLAUSE (VICB) OR CLAUSE (VID) OR CLAUSE (V II) OF SECTION 47 . EXPLANATION.FOR THE PURPOSES OF THIS CLAUSE, 'FAIR MARKET VALUE' OF A PROPERTY, BEING SHARES OF A COMPANY NOT BEING A COM PANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, SHALL HAVE THE MEANING ASSIGNED TO IT IN THE EXPLANATION TO CLAUSE (VII); 18.1. THE CRUCIAL WORD MENTIONED IN THE AFORESAID S ECTION IS CONSIDERATION. IN THE INSTANT CASE, WE FIND THAT SOT HAD MERELY BROUGHT ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 68 IN CAPITAL CONTRIBUTION IN THE FORM OF SHARES AT A PARTICULAR VALUE IN TERMS OF SECTION 45(3) OF THE ACT. THE SAID VALUE HAD BEE N DULY CREDITED IN THE BOOKS OF THE ASSESSEE FIRM AS PARTNERS CAPITAL CON TRIBUTION. THE TERM CONSIDERATION REPRESENTS AMOUNT LYING AT THE DISP OSAL OF THE ASSESSEE FIRM TO DO WHATEVER IT WANTS AND IS NOT REPAYABLE T O ANY PERSON IN ANY MANNER WHATSOEVER. WHEREAS THE AMOUNT LYING TO THE CREDIT OF CAPITAL ACCOUNT OF PARTNER IS REPAYABLE BY THE FIRM TO THE SAID PARTNER AS AND WHEN THE PARTNER RETIRES, RESIGNS OR AT THE TIME OF DISSOLUTION OF THE FIRM. ON THIS ASPECT ITSELF, IT COULD BE SAFELY CONCLUDED THAT WHAT HAS BEEN RECEIVED BY THE PARTNER IN THE FORM OF CAPITAL CONT RIBUTION CANNOT BE EQUATED WITH THE TERM CONSIDERATION WITHIN THE ME ANING 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 TRANS ACTION IN THE CAPITAL FIELD AND NOT IN THE REVENUE FIELD AT ALL, FOR THE SIMPL E REASON THAT THE SAID CAPITAL IS ALWAYS REPAYABLE AT THE TIME OF RETIREME NT / RESIGNATION OF THE PARTNERS OR AT THE TIME OF DISSOLUTION OF THE FIRM. 18.2. WE FIND THAT THE OTHER KEY WORDS IN THE SECT ION 56(2)(VIIA) ARE FIRM , RECEIVES AND ANY PERSON. IT CONTEMPLA TES A CONTRACT / TRANSACTION BETWEEN THE FIRM AND ANY PERSON WHO TRANSFERRED SHARES FOR CONSIDERATION. IN ANY CONTRACT, CONSIDERATION P RE-SUPPOSES AN ENFORCEABLE RIGHT TO RECOVER MONEY DUE FROM ONE PAR TY BY THE OTHER. AS THERE IS NO CONTRACT / TRANSACTION BETWEEN THE PART NER AND THE FIRM IN RESPECT OF CAPITAL CONTRIBUTION, THE PARTNER CANNOT SUE THE FIRM FOR RECOVERY OF THE SAME. IN CASE OF CAPITAL CONTRIBUTI ON, THE PARTNER CANNOT CLAIM / RECOVER THE CAPITAL BALANCE FROM THE FIRM A S LONG AS HE CONTINUES AS A PARTNER. IN THE CASE OF CAPITAL CONTRIBUTION M ADE BY A PARTNER, THERE IS NO CONSIDERATION INVOLVED FROM THE FIRM UNTIL RE TIREMENT OF PARTNER FROM THE FIRM OR DISSOLUTION OF THE FIRM AND AS SUCH, TH ERE CANNOT BE ANY ISSUE ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 69 OF RECOVERY MUCH LESS ENFORCEABLE RIGHT TO RECOVER THE CREDIT BALANCE IN ITS CAPITAL ACCOUNT. 18.3. THE MOST EXCRUCIATING FACT WHICH NEEDS TO BE UNDERSTOOD IS WHEN A PARTNER RETIRES FROM THE FIRM, HE DOES NOT WALK AWA Y WITH THE CREDIT BALANCE IN HIS CAPITAL ACCOUNT ALONE, INSTEAD HE WO ULD BE ENTITLED TO THE SHARE OF THE PROFITS / LOSSES BESIDES ASSETS OF THE FIRM. THE PROVISIONS OF THE SECTION 56(2)(VIIA) DEALS WITH TRANSACTION / CO NTRACT BETWEEN THE EXISTING FIRM AND ANY PERSON WHICH ARE NOT IN T HE NATURE OF CAPITAL CONTRIBUTION. HENCE, ANY PERSON MENTIONED IN SECT ION 56(2)(VIIA) OF THE ACT, IN OUR CONSIDERED OPINION, DOES NOT COVER THE PARTNER IN RESPECT OF HIS CAPITAL CONTRIBUTION. YET ANOTHER CRUCIAL POINT WHICH NEEDS TO BE UNDERSTOOD IS WHETHER ANY CONTRACT EXISTS BETWEEN F IRM AND PARTNER IN THE CASE OF CAPITAL CONTRIBUTION. WE FIND THAT THER E IS NO CONTRACT BETWEEN THE FIRM AND THE PARTNER IN THE CASE OF CAPITAL CON TRIBUTION. FIRM IS A CONCERN CREATED CONSEQUENT TO A CONTRACT OF PARTNER SHIP DEED AMONG PARTNERS TO CONTRIBUTE CAPITAL, TO CARRY ON BUSINES S AND SHARE PROFITS AND ASSETS IN PRE-DETERMINED RATIO. PURSUANT TO THE CAP ITAL CONTRIBUTION MADE BY THE PARTNERS ONLY, THE PARTNERSHIP FIRM COMES IN TO EXISTENCE AND BECOMES CAPABLE OF ENTERING INTO ALL THE TRANSACTIO NS / CONTRACTS THEREAFTER. THE PROVISIONS OF SECTION 56(2)(VIIA) C OVERS BOTH FIRMS AS WELL AS COMPANIES. A COMPANY CANNOT ENTER INTO ANY TRANS ACTION / CONTRACT BEFORE ITS INCORPORATION EVEN WITH ITS PROMOTER/PRO SPECTIVE SHAREHOLDER. HOWEVER, THE PROMOTERS OF THE PROSPECTIVE COMPANY N EED TO MAKE PAYMENTS OF VARIOUS KINDS VIZ: ROC FEES, PREPARATIO N OF ARTICLES AND MEMORANDUM OF ASSOCIATION, PROFESSIONAL CHARGES, TR AVELLING ETC., BEFORE ITS INCORPORATION. ACCOUNTING ENTRIES REGARDING ALL SUCH CONTRIBUTIONS ARE MADE IN THE BOOKS OF THE COMPANY AFTER INCORPORATIO N. SIMILARLY, FIRM ALSO CANNOT ENTER INTO ANY TRANSACTION WITH ITS PROSPECT IVE PARTNER BEFORE ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 70 COMING INTO EXISTENCE. PARTNERS CAPITAL CONTRIBUTI ON IS AN EVENT THAT HAPPENS BEFORE THE FIRM COMES INTO EXISTENCE RATHER FIRM COMES INTO EXISTENCE WITH THE HELP OF CAPITAL CONTRIBUTION. TH ERE CANNOT BE ANY CONSIDERATION FROM THE FIRM TO THE PARTNER IN RESPE CT 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 RESIGNATIO N OF PARTNER. HENCE, IT COULD BE SAFELY CONCLUDED THAT THE TERM PERSON ME NTIONED IN SECTION 56(2)(VIIA) OF THE ACT DOES NOT COVER PARTNER IN RESPECT OF CAPITAL CONTRIBUTION AND ACCORDINGLY, SECTION 56(2)(VIIA) O F 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 ADVAN CED BY THE LD. AR BY PLACING RELIANCE ON THE DECISION OF THE HONBLE SUP REME 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), WH EREIN THE HONBLE SUPREME COURT HAD HELD THAT PART OF THE OWNERSHIP R IGHTS IN THE PROPERTY GETS TRANSFERRED TO OTHER PARTNERS AND HENCE, SUCH CONTRIBUTION AMOUNTS TO TRANSFER OF CAPITAL ASSET U/S.45 OF THE ACT ; C ONSIDERATION FOR CAPITAL CONTRIBUTION IS SHARE IN THE PROFITS OF THE FIRM DU RING ITS SUBSISTENCE AND SHARE IN ASSETS AFTER ITS DISSOLUTION ; CONSIDERA TION IS INDETERMINATE AND AS SUCH THE COMPUTATION PROVISIONS OF SECTION 48 OF THE ACT WOULD FAIL AND HENCE, NO CAPITAL GAIN WOULD ARISE THEREON. THE REL EVANT OBSERVATIONS OF THE HONBLE SUPREME COURT IN PARA 15 OF THE SAID OR DER WOULD ALSO BE CRUCIAL FOR UNDERSTANDING AND RELATING TO THE FACTS OF THE INSTANT CASE BEFORE US, WHEREIN IT WAS OBSERVED THAT THE CREDIT ENTRY MADE IN THE PARTNERS CAPITAL ACCOUNT DOES NOT REPRESENT THE TRU E VALUE OF THE CONSIDERATION AND THAT IT IS ONLY A NOTIONAL ENTRY INTENDED TO BE TAKEN INTO ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 71 ACCOUNT AT THE TIME OF DETERMINING VALUE OF PARTNER S SHARE IN NET ASSETS OF THE FIRM AT THE TIME OF DISSOLUTION OF THE FIRM. HENCE, IN THESE CIRCUMSTANCES, THE HONBLE SUPREME COURT HELD THAT CONSIDERATION WHICH A PARTNER ACQUIRES ON MAKING OVER HIS PERSONAL ASSE T TO THE PARTNERSHIP FIRM AS HIS CONTRIBUTION TO ITS CAPITAL ACCOUNT DOE S NOT FALL WITHIN THE TERMS OF SECTION 48 OF THE ACT. THE AFORESAID REASONING A ND OBSERVATIONS OF THE HONBLE SUPREME COURT COULD BE MADE APPLICABLE TO T HE FACTS OF THE INSTANT CASE IN AS MUCH AS CONSIDERATION IN RESPE CT OF CAPITAL CONTRIBUTION MADE BY A PARTNER IS INDETERMINATE F OR THE PURPOSE OF SECTION 56(2)(VIIA) OF THE ACT ALSO. WHEN CONSIDERA TION IS INDETERMINATE, COMPUTATION PROVISIONS OF SECTION 56(2)(VIIA) OF TH E ACT TO DETERMINE INADEQUACY OR OTHERWISE OF SUCH CONSIDERATION ALS O FAIL. HENCE, ON THIS COUNT ALSO, PROVISIONS OF SECTION 56(2)(VIIA) OF TH E ACT CANNOT BE MADE APPLICABLE TO CAPITAL CONTRIBUTION OF A PARTNER MAD E IN THE FIRM. 18.5. THE CBDT VIDE ITS CIRCULAR NO.495 DATED 22/09 /1987 HAD EXPLAINED RATIONALE BEHIND INTRODUCTION OF SECTION 45(3) OF T HE ACT BY SPECIFICALLY STATING THAT CONSIDERATION WAS MADE DEEMED TO BE D ETERMINATE AT THE DISCRETION OF THE PARTIES FOR THE PURPOSE OF SECTIO N 48 OF THE ACT. HENCE, UNLESS THE CONSIDERATION WAS MADE DETERMINATE SPE CIFICALLY U/S.56(2)(VIIA) OF THE ACT LIKE IT WAS DONE U/S.45( 3) OF THE ACT FOR THE PURPOSE OF SECTION 48, IT CANNOT BE EXTENDED TO ANY OTHER PROVISION. NEEDLESS TO MENTION THAT WHEN SECTION 56(2)(VIIA) O F THE ACT WAS INTRODUCED IN THE STATUTE IN THE YEAR 2010, THE PAR LIAMENT WAS WELL AWARE OF THE EXISTING DECISION OF THE HONBLE SUPREME COU RT IN THE CASE OF SUNIL SIDHARTHBAI REFERRED TO SUPRA HOLDING THE CONSIDERA TION AS INDETERMINATE AND ALSO EXISTENCE OF SECTION 45(3) OF THE ACT IN T HE STATUTE. STILL THE LEGISLATURE IN ITS WISDOM DID NOT DEEM IT FIT TO MA KE IT DETERMINATE FOR ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 72 THE PURPOSE OF SECTION 56(2)(VIIA) OF THE ACT CONSC IOUSLY UNLIKE IT WAS DONE FOR SECTION 45(3) OF THE ACT. 18.6. WE FIND THAT THE VALUE OF THE SHARES WERE REC ORDED BY WAY OF CREDIT TO THE PARTNERS CAPITAL ACCOUNT IN THE FORM OF CAPI TAL 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 ASSES SEE FIRM AS THE SAME IS EMANATING FROM THE SAME TRANSACTION. WE FIND THAT T HE PROVISIONS OF SECTION 45(3) IS A SPECIAL PROVISION AND A SPECIFIC PROVISION, WHEREAS, THE PROVISIONS OF SECTION 56(2)(VIIA) IS A GENERAL PROV ISION. 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 O F THE HONBLE SUPREME COURT IN THE CASE OF DR YADHAV VS. R K SING H REPORTED IN (2003) 7 SCC 110 WHEREIN IT WAS HELD THAT WHEN TWO CONFLIC TING PROVISIONS OF LAW OPERATE IN THE SAME FIELD, THE PROVISION THAT SPECI FICALLY OPERATES IN THAT FIELD WOULD APPLY OVER THE GENERAL RULE. MOREOVER, IF THE CONTENTION OF THE LD. CIT DR THAT PROVISIONS OF SECTION 56(2)(VIIA) O F THE ACT WOULD COME INTO OPERATION FOR EVERY CAPITAL CONTRIBUTION MADE IN KIND BY A PARTNER INTO THE PARTNERSHIP FIRM, IS TO BE ACCEPTED, THEN THE PROVISIONS OF SECTION 45(3) WOULD BECOME REDUNDANT AND OPERATION OF THAT SECTION WOULD BE RENDERED OTIOSE. SUCH INTERPRETATION OF LA W SHOULD ALWAYS BE AVOIDED. WE FIND THE TRANSFER OF ASSET BY A PARTNER TO THE FIRM AS THE CAPITAL CONTRIBUTION, NO DOUBT CONSTITUTES A TRANSF ER 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 TRANSF ER OF CAPITAL ASSET. ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 73 RELIANCE IN THIS REGARD IS PLACED ON THE DECISION O F THE HONBLE MADRAS HIGH COURT IN THE CASE OF ACIT VS. DR. D. RAMAMURTH Y REPORTED IN 410 ITR 236. IN VIEW OF THE AFORESAID OBSERVATIONS, WE HAVE NO HESITATION TO HOLD THAT THE PROVISION OF SECTION 56(2)(VIIA) OF T HE ACT COULD NOT BE MADE APPLICABLE AT ALL IN THE CASE OF CAPITAL CONTRIBUTI ON MADE BY A PARTNER IN THE FORM IN KIND. ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A) GRANTING RELIEF TO THE ASSESSEE AND THE GROUNDS RAISED BY THE REVENUE IN THIS REGARD ARE DISMISSED. 19. WE FIND THAT THE LD. AR HAD FILED HIS WRITTEN S UBMISSIONS ON THE GROUND THAT THE LD. AO WHO FRAMED THE ASSESSMENT DO ES NOT HAVE ANY JURISDICTION AND THAT THE ASSESSMENT WAS FRAMED IN THE HANDS OF NON- EXISTENT ENTITY IN AS MUCH AS THE ASSESSEE FIRM WAS CONVERTED INTO PRIVATE LIMITED COMPANY BEFORE THE COMPLETION OF ASSESSMENT . WE FIND THAT ONLY REVENUE HAS PREFERRED APPEAL BEFORE US AND THERE IS NO APPEAL OR CROSS OBJECTIONS PREFERRED BY THE ASSESSEE BEFORE US. INF ACT, THERE IS NO PETITION UNDER RULE 27 OF THE ITAT RULES ALSO PREFERRED BY T HE ASSESSEE BEFORE US. HENCE, WE DEEM IT FIT NOT TO ADJUDICATE THIS ASPECT OF THE WRITTEN SUBMISSIONS PREFERRED BY THE LD. AR FOR WANT OF ANY GROUNDS BEFORE US IN THAT REGARD. 20. BEFORE WE PART, WE WOULD LIKE TO PLACE ON RECOR D OUR GENUINE APPRECIATION FOR THE ENORMOUS EFFORTS TAKEN BY THE LD. COUNSELS FROM BOTH THE SIDES BY FILING DETAILED PAPER BOOKS AND BRINGI NG ON RECORD ALL THE FACTS THAT ARE NECESSARY FOR ADJUDICATION OF ALL TH ESE APPEALS AND ALSO PLAYING THEIR RESPECTIVE ROLES IN A MOST EFFECTIVE WAY AS AN OFFICER OF THE COURT BY PROVIDING ABLE ASSISTANCE TO THE BENCH TO ARRIVE AT THE PROPER CONCLUSION. ITA NOS.1371/HYD/2018 & 1041/HYD/2019 M/S. SHRILEKHA BUSINESS CONSULTANCY PVT. LTD., 74 21. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE DISMISSED. ORDER PRONOUNCED ON 04/11/2020 BY WAY OF PROPER MEN TIONING IN THE NOTICE BOARD. SD/ - (C.N.PRASAD) SD/ - (M.BALAGANESH) JUDICIAL MEMBER A CCOUNTANT MEMBER MUMBAI ; DATED 04/11/2020 KARUNA , SR.PS COPY OF THE ORDER FORWARDED TO : BY ORDER, ( ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), HYDERABAD. 4. CIT 5. DR, ITAT, HYDERABAD 6. GUARD FILE. //TRUE COPY//