M/s. BV Reddy Enterprises Pvt. Ltd., CHENNAI V. ITO (OSD), CHENNAI

ITA 152/CHNY/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 73755 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 1 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-03-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 23-01-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 31-01-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SHAJI P JACOB IRS
• Assessee Lawyers: S SRIDHAR
• Keywords: Capital asset; Share purchase agreement; Retrospective amendment; Cost of acquisition
• Section: 143(3); 15

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . . . , !' , # $! % BEFORE DR. O.K.NARAYANAN, VICE-PRESIDENTAND SHRI VIKAS AWASTHY, JUDICIAL MEMBER ./ ITA NO.152(MDS)/2011 # & '& / ASSESSMENT YEAR : 2007-08 M/S BV REDDY ENTERPRISES PVT. LTD., 232, KILPAUK GARDEN ROAD, CHENNAI - 600 010. PAN : AAACN 2252 L V. THE INCOME TAX OFFICER (OSD), COMPANY CIRCLE I(2), CHENNAI - 600 034. ( ') ) (APPELLANT) ( +,') ) (RESPONDENT) ./ ITA NO.250(MDS)/2011 # & '& / ASSESSMENT YEAR : 2007-08 THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE I(2), CHENNAI - 600 034. V. M/S BV REDDY ENTERPRISES PVT. LTD., 232, KILPAUK GARDEN ROAD, CHENNAI - 600 010. ( ') ) (APPELLANT) ( +,') ) (RESPONDENT) 2 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 # &-. / / ASSESSEE BY : SHRI S. SRIDHAR, ADVOCATE 0! / / REVENUE BY : SHRI SHAJI P. JACOB, IRS, ADDL. CIT 1 / .2 / DATE OF HEARING : 23 RD JANUARY, 2014 34' / .2 / DATE OF PRONOUNCEMENT : 3 RD MARCH, 2014 / O R D E R PER DR.O.K.NARAYANAN, VICE-PRESIDENT THESE TWO APPEALS ARE FILED BY THE ASSESSEE AND T HE REVENUE. THE RELEVANT PREVIOUS YEAR IS 2007-08. T HESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER OF COMMISSIO NER OF INCOME TAX (APPEALS)-III AT CHENNAI, PASSED ON 26.11.2010. THE APPEALS ARISE OUT OF THE ASSESSMENT COMPLETED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961. 2. IN ITS APPEAL FILED BY THE ASSESSEE, IT HAS RAIS ED THREE ISSUES FOR CONSIDERATION OF THE TRIBUNAL. BESIDES THE GEN ERAL OBJECTIONS RAISED AGAINST THE ORDER OF THE COMMISSIONER OF INC OME TAX (APPEALS), THE ASSESSEE HAS SPECIFICALLY OBJECTED T O THE OBSERVATIONS MADE BY THE COMMISSIONER OF INCOME TAX (APPEALS) THAT THE ASSESSEE WAS RESORTING TO AVOIDANCE/EVASIO N OF TAX BY SUCCESSIVELY TRANSFERRING SHARES FROM INDIVIDUALS T O A COMPANY THROUGH THE MEDIA OF PARTNERSHIP FIRM AND COMPANY. THE SECOND 3 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 ISSUE RAISED BY THE ASSESSEE IS THAT THE COMMISSION ER OF INCOME TAX (APPEALS) HAS ERRED IN NOT DELETING THE NOTIONA L ADDITION MADE BY THE ASSESSING OFFICER UNDER SECTION 14A. THE TH IRD ISSUE IS THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN CONFIRMING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDE R SECTION 35D OF THE INCOME-TAX ACT, 1961. 3. THE GROUNDS RAISED IN THE APPEAL FILED BY THE RE VENUE RELATE TO TWO ISSUES. THE FIRST ISSUE IS THAT THE COMMISS IONER OF INCOME TAX (APPEALS) HAS ERRED IN ADOPTING THE REVALUED CO ST OF ACQUISITION OF SHARES AS AGAINST THE ACTUAL COST OF ACQUISITION INCURRED BY THE FIRM WHICH HAS TRANSFERRED THE SHARES TO THE ASSESS EE-COMPANY. THE SECOND ISSUE IS THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN HOLDING THAT RULE 8D IS NOT APPLICABLE FOR THE IMPUGNED ASSESSMENT YEAR 2007-08. 4. IN THE FACTS AND CIRCUMSTANCES LEADING TO THESE APPEALS, THE MOST IMPORTANT ISSUE TO BE CONSIDERED IS THE ISSUE OF DETERMINING THE COST OF ACQUISITION OF SHARES FOR THE PURPOSE O F COMPUTING CAPITAL GAINS TAXABLE IN THE HANDS OF THE ASSESSEE-COMPANY. THEREFORE, AT THE FIRST INSTANCE, WE PROCEED TO CONSIDER THE APPE AL FILED BY THE REVENUE IN I.T.A. NO. 250/MDS/2011. 4 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 5. ONE B.V. REDDY FAMILY HAD FORMED A COMPANY BY NA ME NUTRINE CONFECTIONARY CO. PVT. LTD. (NCCPL), IN 195 2. THIS COMPANY WAS THE BIGGEST PLAYER IN INDIAN CONFECTION ARY INDUSTRY. THIS DOMINANT POSITION ENJOYED BY NCCPL CONTINUED T ILL ITS BUSINESS WAS SOLD TO M/S GODREJ BEVERAGES AND FOODS LIMITED (GBFL) ON 10 TH JUNE, 2006. THIRTEEN MEMBERS OF B.V. REDDY FAMILY HELD ALMOST THE ENTIRE SHAREHOLDING OF NCCPL; MORE THAN 99%. 6. A FEW MEMBERS OF B.V. REDDY FAMILY WERE PARTNERS OF A FIRM BY NAME B.V. REDDY ENTERPRISES (BVRE). THE MEMBERS WHO HELD THE SHARE OF NCCPL TOGETHER DECIDED TO JOIN THE FIR M BVRE FOR WHICH PURPOSE, THE FIRM BVRE WAS RECONSTITUTED ON 2 4.3.2006. THE RECONSTITUTED FIRM BVRE WITH 13 MEMBERS OF B.V. RED DY FAMILY CAME INTO EXISTENCE ON 24.3.2006. IMMEDIATELY THER EAFTER, ON 29.3.2006, ALL THE 13 PARTNERS, WHO JOINED THE BVRE FIRM, TRANSFERRED THEIR INDIVIDUAL SHAREHOLDING IN M/S NC CPL TO THE FIRM BVRE. THE SHARES WERE TRANSFERRED BY THE PARTNERS AS THE SHARE OF THEIR CAPITAL CONTRIBUTION IN JOINING THE FIRM BVRE . THE PARTNERS, WHEN JOINED THE FIRM, CONTRIBUTED THEIR CAPITAL IN THE FORM OF SHARES HELD BY THEM IN M/S NCCPL. THE PARTNERS WERE, IN T URN, ALLOTTED THEIR CAPITAL ACCOUNTS IN THE FIRM BVRE IN PROPORTI ON TO THE VALUE OF THE SHARES BROUGHT IN BY THEM. THE TOTAL VALUE OF THE NCCPL 5 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 SHARES BROUGHT IN BY THE PARTNERS WAS ` 35,27,48,000/-. THIS VALUE REPRESENTED 6,65,325 SHARES HELD BY THE PARTNERS IN M/S NCCPL. ACCORDINGLY, THE POSITION IN THE BOOKS OF ACCOUNTS OF THE FIRM BVRE STOOD AS ON 29.3.2006, AS SHARES IN M/S NCCPL AT ` 35,27,48,000/- IN THE ASSET SIDE AND PARTNERS CAPITAL ACCOUNT ` 35,27,48,000/- IN THE LIABILITY SIDE. 7. ANOTHER COMPANY WAS INCORPORATED BY REDDY FAMILY ON 21.12.2005 UNDER THE NAME AND STYLE OF NUTRINE CONF ECTIONARY AND SWEETS PVT. LTD. (NCSPL). THIS COMPANY M/S NCSPL S UCCEEDED THE FIRM BVRE ON 5.5.2006 BY TAKING OVER ALL THE AS SETS AND LIABILITIES OF THE FIRM BVRE. WHEN THE FIRM BVRE W AS TAKEN OVER AND SUCCEEDED BY THE COMPANY M/S NCSPL ON 5.5.2006, THE SHAREHOLDINGS HELD BY THE FIRM BVRE IN NCCPL CAME I NTO THE POSSESSION OF THE COMPANY NCSPL. THEREAFTER THE NA ME OF THE COMPANY M/S NCSPL WAS CHANGED TO B.V. REDDY ENTERPR ISES PVT. LTD. (BVREPL). THE CHANGE OF NAME WAS MADE EFFECTI VE FROM 18.8.2006. THIS COMPANY M/S BVREPL, FORMERLY KNOWN BY THE NAME M/S NCSPL, IS THE ASSESSEE IN THE PRESENT CASE . 8. WHILE DEALING WITH THESE CASES, IT IS TO BE SEEN THAT M/S NCCPL AND M/S NCSPL ARE DIFFERENT COMPANIES. LIKEW ISE, THE FIRM 6 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 BVRE AND THE COMPANY BVREPL ARE DIFFERENT ENTITIES. ALL ARE RELATING TO B.V. REDDY FAMILY. 9. THIS CASE INVOLVES A SERIES OF SHARE TRANSFERS. WE HAVE ALREADY SEEN THE TRANSFER OF SHARES BY THE PARTNERS TO THE FIRM BVRE WHEN THEY JOINED THE RECONSTITUTED FIRM ON 24.3.200 6. THIS TRANSACTION OF TRANSFERRING SHARES FROM PERSONAL AC COUNT TO THE ACCOUNT OF THE FIRM BVRE WAS THE FIRST SUCH TRANSFE R OF SHARES. AS THE PARTNERS HAVE SHOWN THE VALUE OF SHARES TRANSFE RRED TO THE FIRM BVRE AT ` 35,27,48,000/-, THEY WERE LIABLE FOR CAPITAL GAIN T AXATION UNDER SECTION 45(3) OF THE INCOME-TAX ACT, 1961. A CCORDINGLY, THE PARTNERS PAID THE CAPITAL GAIN TAX FOR THE ASSESSME NT YEAR 2006-07. 10. THE FIRM BVRE, WHICH WAS RECONSTITUTED ON 24.3. 2006 WAS TAKEN OVER AND SUCCEEDED BY M/S NCSPL (THE NAME OF THE COMPANY CHANGED TO BVREPL WITH EFFECT FROM 18.8.200 6), ACQUIRING OF ALL ASSETS AND LIABILITIES, INCLUDING THE SHARES OF NCCPL. THE TAKEOVER WAS MADE ON THE BASIS OF BUSINESS TRAN SFER AGREEMENT ON 5.5.2006. 11. THE ABOVE TAKEOVER OF THE FIRM BVRE BY NCSPL MA DE ON 5.5.2006 FELL IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 7 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 2007-08. THE TAKEOVER CONSIDERATION DUE FROM NCSPL TO THE FIRM BVRE WAS ` 270 CRORES, AS FOLLOWS:- (I) SUNDRY DEBTORS ` 40,03,424 (II) BANK BALANCES ` 13,710 (III) CASH IN HAND ` 633 (IV) SHARES IN NCCPL ` 270,07,53,000 TOTAL ` 270,47,70,767 LESS: SUNDRY CREDITORS ` 47,70,767 TAKEOVER VALUE ` `` ` 270,00,00,000 12. THE CONSIDERATION OF TAKEOVER OF ` 270 CRORES WAS SATISFIED BY ALLOTTING SHARES TO THE PARTNERS OF THE FIRM BVR E IN THE ASSESSEE- COMPANY, NAMELY, NCSPL / BVREPL. THE SHARES WERE A LLOTTED TO THE PARTNERS IN THE SAME PROPORTION IN WHICH THEIR CAPITAL ACCOUNTS STOOD IN THE BOOKS OF THE FIRM BVRE. 13. IT IS TO BE SEEN THAT THE FIRM BVRE ACQUIRED TH E SHARES OF NCCPL ON 5.5.2006, WHEN THE PARTNERS ASSIGNED THEIR SHARES TO THE FIRM BVRE AS THEIR CAPITAL CONTRIBUTION. AS ALREAD Y STATED, THAT WAS THE FIRST TRANSFER IN WHICH THE PARTNERS WERE LIABL E FOR CAPITAL GAINS TAXATION. THAT TAX WAS PAID. THE FIRM BVRE ACQUIR ED THE SHARES FROM ITS PARTNERS FOR ` 35,27,48,000/- (FOR 6,65,325 SHARES). THIS WAS ON 29.3.2006. THE VALUE ASSIGNED BY NCSPL / BV REPL FOR THE NCCPL SHARES WAS ` 270,07,53,000/-. THIS WAS THE VALUE AS ON 5.5.2006, WHEN THE FIRM BVRE WAS SUCCEEDED BY NC SPL / BVREPL, BY WAY OF SUCCESSION. THE VALUE OF SHARES OF NCCPL 8 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 WAS SATISFIED BY ALLOTTING SHARES TO THE PARTNERS I N NCSPL / BVREPL FOR ` 270,07,53,000/-. THE VALUE OF NCCPL SHARES AT THE TIME OF TRANSFER BY THE PARTNERS TO THE FIRM BVRE W AS, AS ALREADY STATED, ` 35,27,48,000/-. THE VALUE OF SAME NCCPL SHARES PA ID BY NCSPL TO THE FIRM BVRE WAS ` 270,07,53,000/-. THUS THERE IS AN INCREASE IN THE VALUE OF NCCPL SHARES AT ` 234,80,05,000/-. THIS INCREASE IN THE VALUE OF NCCPL SHARES WAS ON ACCOUN T OF THE REVALUATION OF NCCPL SHARES MADE BY THE FIRM BVRE. 14. THE PARTNERS WERE ALLOTTED SHARES IN NCSPL / BV REPL AS THE TAKEOVER CONSIDERATION OF ` 270 CRORES, PROPORTIONATE TO THEIR CAPITAL ACCOUNTS IN THE FIRM BVRE, I.E. SHARES IN N CSPL / BVREPL WERE ALLOTTED TO THE PARTNERS OF THE FIRM BVRE ON T HE REVALUATION AMOUNT OF NCCPL SHARES IN THE SAME PROPORTION IN WH ICH THE CAPITAL ACCOUNTS OF THE PARTNERS WERE HELD IN THE F IRM BVRE. 15. THE TAKEOVER OF SHARES OF NCCPL FROM THE FIRM B VRE BY NCSPL / BVREPL, BY WAY OF SUCCESSION, IS THE SECOND INSTANCE OF TRANSFER IN A SERIES OF TRANSFERS MADE IN THE CASE OF NCCPL SHARES. THE FIRM BVRE HAS TRANSFERRED THE NCCPL SHARES TO M /S NCSPL / BVREPL AND THEREFORE, THE TRANSACTION WAS BETWEEN T HE FIRM BVRE AND THE COMPANY NCSPL / BVREPL. 9 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 16. AS TRANSFER OF SHARES WAS MADE AS A RESULT OF S UCCESSION OF THE BUSINESS OF THE FIRMS TAKEN OVER BY THE COMPANY M/S NCSPL / BVREPL, THE FIRM BVRE CLAIMED EXEMPTION FROM LEVY O F CAPITAL GAIN TAX UNDER SECTION 47(XIII). THUS, THE SECOND INSTANCE OF TRANSFER OF NCCPL SHARES WAS SOUGHT TAX-FREE. 17. SECTION 47 EXCLUDES CERTAIN TRANSACTIONS FROM T HE AMBIT OF TRANSFER AND EXCLUDED SUCH TRANSACTIONS FROM SECT ION 45, WHICH CHARGES THE CAPITAL GAINS TAX. SECTION 47 DEALS WI TH DIFFERENT SUCH TRANSACTIONS NOT REGARDED AS TRANSFER. CLAUSE (X III) OF SECTION 47 DEALS WITH TAKING OVER OF A FIRM BY A COMPANY, AS H APPENED IN THE PRESENT CASE. CLAUSE (XIII) PROVIDES THAT SECTION 45 SHALL NOT APPLY TO ANY TRANSFER OF A CAPITAL ASSET BY A FIRM TO A C OMPANY AS RESULT OF THE SUCCESSION OF THE FIRM BY THE COMPANY IN THE BU SINESS CARRIED ON BY THE FIRM. CERTAIN CONDITIONS HAVE TO BE SATI SFIED FOR CLAIMING THE ABOVE EXEMPTION. THEY ARE:- (I) ALL THE ASSETS AND LIABILITIES OF THE FIRM RELA TING TO THE BUSINESS IMMEDIATELY BEFORE THE SUCCESSION BECOME THE ASSETS AND LIABILITIES OF THE COMPANY. (II) ALL THE PARTNERS OF THE FIRM IMMEDIATELY BEFOR E THE SUCCESSION BECOME THE SHAREHOLDERS OF THE COMPANY IN THE SAME PROPORTION IN WHICH THEIR CAPITAL ACCOUNTS STOOD IN THE BOOKS OF THE FIRM ON THE DATE OF THE SUCCESSION. (III) THE PARTNERS OF THE FIRM DO NOT RECEIVE ANY CONSIDERATION OR BENEFIT, DIRECTLY OR INDIRECTLY, 10 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 IN ANY FORM OR IN ANY MANNER OTHER THAN BY WAY OF ALLOTMENT OF SHARES IN THE COMPANY. 18. AS ALREADY STATED, THE FIRM BVRE CLAIMED EXEMPT ION FROM THE CAPITAL GAINS TAXATION ATTRIBUTABLE TO THE ABOV E TAKEOVER TRANSACTION, I.E. SUCCESSION OF THE FIRM BVRE BY TH E COMPANY NCSPL / BVREPL. THE EXEMPTION WAS CLAIMED UNDER SE CTION 47(XIII). 19. THEREAFTER, THE ASSESSEE-COMPANY M/S NCSPL / BV REPL ENTERED INTO AN AGREEMENT ON 10.6.2006 WITH M/S GOD REJ BEVERAGES AND FOODS LIMITED (GBFL) FOR THE SALE OF ITS SHAREH OLDINGS IN THE COMPANY M/S NCCPL. THE ASSESSEE-COMPANY M/S NCSPL / BVREPL HAS ACQUIRED MORE THAN 99% OF THE SHARES OF M/S NCCPL THROUGH TAKEOVER OF THE FIRM BVRE ON 5.5.2006. CER TAIN OTHER INDIVIDUALS ALSO HELD SOME SHARES IN THE COMPANY M/ S NCCPL, TOTALLING TO LESS THAN 1% OF TOTAL PAID UP CAPITAL OF M/S NCCPL. THE ASSESSEE-COMPANY M/S NCSPL / BVREPL ALONGWITH THOSE INDIVIDUALS, JOINTLY ENTERED INTO A SHARE PURCHASE AGREEMENT ON 10.6.2006 WITH M/S GBFL ON THE BASIS OF WHICH, THE ENTIRE NCCPL SHARES WERE SOLD TO GBFL FOR A TOTAL CONSIDERATION OF ` 265 CRORES. THE SALE TOOK PLACE ON 29.6.2006, WHICH FELL IN THE IMPUGNED ASSESSMENT YEAR 2007-08. 11 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 20. THIS THIRD TRANSACTION OF SALE OF NCCPL SHARES BY THE ASSESSEE-COMPANY TO M/S GBFL IS A TRANSFER LIABLE F OR CAPITAL GAINS TAXATION UNDER SECTION 45. THE ASSESSEE-COMPANY AC QUIRED THE NCCPL SHARES ON 5.5.2006 BY TAKING OVER THE FIRM BV RE. THOSE SHARES WERE SOLD TO GBFL ON 29.6.2006. BOTH HAPPEN ED IN THE PREVIOUS YEAR RELEVANT TO THE IMPUGNED ASSESSMENT Y EAR 2007-08. THEREFORE, CAPITAL GAINS, IF ANY, ARISING IN THE TH IRD INSTANCE OF TRANSACTION, WOULD BE SHORT TERM CAPITAL GAINS. 21. ACCORDINGLY, THE ASSESSEE-COMPANY COMPUTED THE SHORT TERM CAPITAL GAINS FOR THE IMPUGNED ASSESSMENT YEAR 2007-08 PERTAINING TO SALE OF NCCPL SHARES TO M/S GBFL. TH E ASSESSEE- COMPANY HAS ADOPTED THE ACQUISITION COST OF NCCPL S HARES AT ` 270,07,53,000/- FOR WHICH VALUE, AMONG OTHER THINGS , THE ASSESSEE- COMPANY HAS TAKEN OVER THE NCCPL SHARES FROM THE FI RM BVRE ON 5.5.2006. THE ASSESSEE-COMPANY ALSO WORKED OUT THE STAMP COST OF ` 67,50,000/- FOR THE TRANSFER OF SHARES TO M/S GBFL . OUT OF THE TOTAL CONSIDERATION PAID BY GBFL AT ` 265 CRORES, THE CONSIDERATION DUE TO NCCPL SHARES WAS ` 257,52,32,953/-. THUS THE ASSESSEE- COMPANY WORKED OUT THE CAPITAL GAINS IN THE FOLLOWI NG MANNER:- 12 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 ACQUISITION COST OF NCCPL SHARES : ` 270,07,53,000 ADD: STAMP COST : ` ___67,50,000 270,75,03,000 LESS: CONSIDERATION RECEIVED FROM M/S GBFL : ` 257,52,32,953 SHORT TERM CAPITAL LOSS : ` 13,22,70,047 22. THE ABOVE COMPUTATION OF THE ASSESSEE-COMPANY R ESULTING IN A LOSS WAS NOT ACCEPTABLE TO THE ASSESSING AUTHO RITY. SHE OBSERVED THAT THE VALUE OF NCCPL SHARES WAS SHOWN O N 31.3.2006 AT ` 35,26,18,000/- IN THE BOOKS OF THE FIRM M/S BVRE. WHEN THE FIRM BVRE WAS SUCCEEDED BY THE ASSESSEE-COMPANY NCS PL / BVREPL ON 5.5.2006, THE VALUE OF NCCPL SHARES HAS B EEN ENHANCED BY REVALUATION. THE REVALUATION HAS FIXED THE SHARE VALUE AT ` 270,07,53,000/-. IT IS ON THE BASIS OF THIS INCRE ASED SHARE VALUE, SHARES HAVE BEEN ALLOTTED TO THE PARTNERS OF THE FIRM BVRE IN THE ASSESSEE-COMPANY NCSPL / BVREPL. THERE IS NO B ASIS FOR THIS UPWARD REVALUATION OF SHARE VALUE. THE ASSESS EE HAS EXPLAINED THAT THE REVALUATION WAS MADE TO BRING IN TO ACCOUNT, THE INTRINSIC VALUE OF NCCPL SHARES. 23. THE ASSESSING OFFICER OBSERVED THAT IN THE ABOV E SCENARIO, THE ASSESSEE-COMPANY HAS VIOLATED THE PROVISIONS OF SECTION 47(XIII)(B) & (C). THE FIRM BVRE HAS CLAIMED EXEMP TION FROM CAPITAL GAIN TAXATION ON THE GROUND OF SUCCESSION UNDER SEC TION 47(XIII). 13 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 THE EXEMPTION NO LONGER HELD GOOD AS THE ASSESSEE-C OMPANY HAS VIOLATED PROVISIONS OF CLAUSES (B) AND (C) OF SECTI ON 47(XIII). THE PARTNERS WERE NOT ALLOTTED SHARES IN THE COMPANY IN THE SAME PROPORTION AS OF THE BALANCE IN THEIR CAPITAL ACCOU NTS IN THE FIRM BVRE. BUT, THE PARTNERS WERE ALLOTTED MORE SHARES OVER AND ABOVE THE ACTUAL BALANCE OF THEIR CAPITAL ACCOUNTS. THIS WAS ON THE BASIS OF A BOOSTED NOTIONAL REVALUATION OF NCCPL SHARES. THIS IS A VIOLATION OF CONDITION LAID DOWN IN SECTION 47(XIII )(B). THE PARTNERS HAVE RECEIVED BENEFIT TO THE EXTENT OF ` 234.80 CRORES [270.07 CRORES (-) 35.20 CRORES] INDIRECTLY ON ACCOUNT OF T HE REVALUATION. THIS IS A VIOLATION OF SECTION 47(XIII)(C). 24. AS THE CONDITIONS LAID DOWN IN SECTION 47(XIII) HAVE NOT BEEN FULFILLED, THE ASSESSING OFFICER HELD THAT THE CAPI TAL GAINS IS TAXABLE IN THE HANDS OF THE ASSESSEE-COMPANY BY VIRTUE OF S ECTION 47A(3) OF INCOME-TAX ACT, 1961. SECTION 47A(3) PROVIDES F OR TAXING OF THE SUCCESSOR COMPANY ON THE CAPITAL GAINS DUE ON SUCCE SSION, IF THE CONDITIONS LAID DOWN IN SECTION 47(XIII) ARE VIOLAT ED. 25. THE ASSESSING OFFICER HAS RAISED ANOTHER ALTE RNATE OBJECTION TO THE COMPUTATION OF CAPITAL GAINS MADE BY THE ASSESSEE- COMPANY. AS PER SECTION 49(1), THE COST OF ACQUISI TION IN THE HANDS OF THE ASSESSEE-COMPANY IS THE COST IN THE HANDS OF THE PREVIOUS 14 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 OWNER. THE FIRM BVRE IS THE PREVIOUS OWNER. THE S AID FIRM HAS ACQUIRED THE SHARES FROM ITS PARTNERS FOR ` 35,27,48,000/-. SECTION 49(1) PROVIDES THAT THE COST OF ACQUISITION OF CAPI TAL ASSET IN THE CASE OF SUCCESSION SHALL BE DEEMED TO BE THE COST O F ACQUISITION FOR WHICH THE PREVIOUS OWNER ACQUIRED IT, AS INCREASED BY THE COST OF ANY IMPROVEMENT OF THE ASSETS INCURRED OR BORNE BY THE PREVIOUS OWNER OR THE ASSESSEE, AS THE CASE MAY BE. IN THE PRESENT CASE, EITHER THE FIRM BVRE OR ITS PARTNERS HAVE NOT INCUR RED OR BORNE COST OF ANY IMPROVEMENT TO INCREASE THE VALUE OF SHARES OF NCCPL FROM ` 35,27,48,000/- TO ` 257,00,52,353/-. THE VALUE OF NCCPL SHARES ACQUIRED BY THE FIRM BVRE HAS BEEN BOOSTED TO ` 250,52,32,953/- BY A NOTIONAL REVALUATION. NO BASIS HAS BEEN EXPLA INED TO JUSTIFY THE UPWARD REVALUATION OF SHARES. THEREFORE, INFLATED VALUE OF ` 250,52,32,953/- CANNOT BE THE ACTUAL COST OF ACQUIS ITION IN THE HANDS OF THE FIRM BVRE, WHICH IS THE PREVIOUS OWNER IN THIS CASE, FOR THE PURPOSE OF SECTION 49(1). ACTUAL COST, THE REFORE, TO BE ADOPTED IS ` 35,27,48,000/-. THE ASSESSING OFFICER HAS THEREFO RE HELD THAT THE COST OF ACQUISITION COULD BE ALLOWED ONLY AS STATED ABOVE AND THE CAPITAL GAINS CAN BE COMPUTED UNDER S ECTION 45 READ WITH SECTION 49(1), EVEN WITHOUT TAKING RECOUR SE TO SECTION 47A(3). 15 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 26. ACCORDINGLY, COMBINING BOTH SECTION 47A(3) AND SECTION 45 READ WITH SECTION 49(1), THOUGH ALTERNATIVELY, THE ASSESSING AUTHORITY COMPUTED THE SHORT TERM CAPITAL GAINS TAX ABLE IN THE HANDS OF THE ASSESSEE-COMPANY. THE ASSESSING OFFICER HAS ADOPTED THE COST OF ACQUISITION AT ` 35,26,18,000/- AS AGAINST ` 35,27,48,000/- STATED ELSEWHERE. THE COMPUTATION STOOD AS FOLLOWS :- SALE OF NCCPL SHARES TO GBFL : ` 257,52,32,953 (-) PURCHASE VALUE : ` _35,26,18,000 PROFIT ON SALE OF SHARES BEING SHORT TERM CAPITAL GAINS : ` 222,26,14,953 27. ACCORDINGLY, THE ASSESSING OFFICER DISALLOWED T HE SHORT TERM CAPITAL LOSS OF ` 13,22,17,047/- AS CLAIMED BY THE ASSESSEE- COMPANY AND INSTEAD ADDED THE PROFIT OF ` 222,26,14,953/- IN THE NATURE OF SHORT TERM CAPITAL GAINS. 28. AMONG OTHER THINGS, THE COMPUTATION OF SHORT TE RM CAPITAL GAINS ARISING OUT OF TRANSFER OF NCCPL SHARES WAS A LSO CHALLENGED IN FIRST APPEAL BEFORE THE COMMISSIONER OF INCOME T AX (APPEALS). 29. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS CO NSIDERED THE ISSUE IN AN EXTENSIVE MANNER, AFTER GOING THROU GH THE FACTS OF THE CASE AND AFTER EXAMINING THE PROVISIONS OF LAW GOVERNING THE ISSUE. THE WHOLE ORDER OF THE COMMISSIONER OF INCO ME TAX (APPEALS) COMES TO 38 PAGES; OUT OF WHICH THIS ISSU E ALONE HAS 16 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 TAKEN 30 PAGES FROM PP.07 TO PP. 36. THE COMMISSION ER OF INCOME TAX (APPEALS) HAS FOUND THAT A VERY SIMILAR ISSUE W AS ADJUDICATED BY ITAT, AHMEDABAD BENCH IN THE CASE OF DHARMSHI BH AI B. SHAH V. ITO (2009) 126 TTJ (AHD) 721. IN THE SAID DECIS ION, THE TRIBUNAL HAS HELD THAT THE REVALUATION OF THE SHARES WOULD A LSO BE TREATED AS CONSIDERATION FOR THE PURPOSE OF COMPUTATION OF CAP ITAL GAINS IN THE HANDS OF THE PARTNERS UNDER SECTION 45(3) OF THE IN COME-TAX ACT, 1961. IN THAT CASE, THE ASSESSEE HAD CONVERTED ITS PROPRIETARY CONCERN INTO PARTNERSHIP WITH EFFECT FROM 1.4.1994. ON 31.3.1995, THE ASSETS OF THE FIRM WERE REVALUED AND CAPITAL AC COUNTS OF THE PARTNERS WERE CREDITED BY THE REVALUATION SURPLUS. THE TRIBUNAL HELD THAT SECTION 45(3) DOES NOT STATE THAT THE AMO UNT RECORDED IN THE BOOKS OF THE FIRM ON THE DATE OR AT THE TIME WH EN THE PERSON BROUGHT CAPITAL ASSET MAY BE DEEMED TO BE THE FULL VALUE OF CONSIDERATION. THE TRIBUNAL CONCLUDED THAT SINCE T HE FIRM HAD RECORDED THE CAPITAL ASSETS AT THE REVALUED FIGURE ON 31 ST MARCH, 1995, THE SAID VALUE HAS TO BE TAKEN TO BE THE FULL VALUE OF CONSIDERATION. 30. IN VIEW OF THE ABOVE CASE, THE COMMISSIONER OF INCOME TAX (APPEALS) HELD THAT NOT ONLY THE INITIAL VALUE OF T HE SHARES IN THE BOOKS OF THE FIRM BUT ALSO THE SUBSEQUENT ENHANCED VALUE, DUE TO 17 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 REVALUATION, NEEDS TO BE CONSIDERED AS THE FULL VAL UE OF THE CONSIDERATION FOR THE PURPOSE OF COMPUTATION OF CAP ITAL GAINS. AS THE SUBSEQUENT REVALUATION OF SHARES CANNOT BE IGNO RED, THE ENHANCED VALUE SHOULD BE CONSIDERED AS VALUE OF THE ASSETS WHICH WERE BROUGHT IN BY THE PARTNERS AS CAPITAL CONTRIBU TION FOR THE PURPOSE OF COMPUTATION OF CAPITAL GAINS UNDER SECTI ON 45(3). THE FULL VALUE OF CONSIDERATION DOES NOT MEAN THE INITI AL VALUE CREDITED IN THE BOOKS. HE ACCORDINGLY HELD THAT THE COST OF AC QUISITION OF SHARES IN THE HANDS OF THE FIRM BVRE SHALL BE TAKEN AT REV ALUED AMOUNT OF ` 270,07,53,000/-. 31. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS EX AMINED THE SCOPE OF INVOKING SECTION 47A(3) AGAINST THE AS SESSEE. THE EXEMPTION OF CAPITAL GAINS TAXATION IN A CASE OF SU CCESSION OF A FIRM BY A COMPANY IS SUBJECT TO CERTAIN CONDITIONS. THE FIRST CONDITION AS PROVIDED IN PROVISO (A) TO CLAUSE (XIII) OF SECTION 47 IS THAT ALL THE ASSETS AND LIABILITIES OF THE FIRM RELATING TO THE BUSINESS IMMEDIATELY BEFORE THE SUCCESSION BECOME THE ASSETS AND LIABILI TIES OF THE COMPANY. THE COMMISSIONER OF INCOME TAX (APPEALS) HELD THAT THE ASSETS AND LIABILITIES OF THE FIRM BVRE WERE TA KEN OVER BY NCSPL / BVREPL AND AS SUCH, THERE IS NO VIOLATION O F PROVISO (A) TO CLAUSE (XIII) OF SECTION 47. 18 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 32. THE SECOND CONDITION PROVIDED IN PROVISO (B) IS THAT ALL THE PARTNERS OF THE FIRM IMMEDIATELY BEFORE THE SUCCESS ION BECOME THE SHAREHOLDERS OF THE COMPANY IN THE SAME PROPORTION IN WHICH THEIR CAPITAL ACCOUNTS STOOD IN THE BOOKS OF THE FIRM ON THE DATE OF THE SUCCESSION. THE COMMISSIONER OF INCOME TAX (APPEA LS) FOUND THAT ALL THE PARTNERS OF THE FIRM BVRE HAVE BECOME THE SHAREHOLDERS OF NCSPL / BVREPL. HE ALSO FOUND THAT SHARES HAVE BEEN ALLOTTED TO THE PARTNERS IN THE ASSESSEE-COMPA NY IN THE SAME PROPORTION OF THEIR CAPITAL ACCOUNTS STOOD IN THE B OOKS ON THE DATE OF SUCCESSION. HE HELD THAT THE ASSESSING AUTHORITY W ENT WRONG IN GOING BY THE AMOUNTS CREDITED IN THE CAPITAL ACCOUN TS BEFORE AND AFTER THE REVALUATION OF NCCPL SHARES. THE CASE OF THE ASSESSING AUTHORITY IS THAT THE PARTNERS CAPITAL ACCOUNTS HA VE BEEN INFLATED BY THE REVALUATION OF SHARES AND SHARES HAVE BEEN ALLO TTED ON THAT INFLATED AMOUNTS, WHICH IS MUCH HIGHER THAN THE AMO UNT IN THEIR CAPITAL ACCOUNTS. WHEN THEY JOINED THE FIRM, THE V ALUE OF SHARES WAS ` 35,27,48,000/-; WHEREAS SHARES IN THE COMPANY WERE ALLOTTED TO THE PARTNERS ON A HIGHER AMOUNT OF ` 270,07,53,000/-. THE COMMISSIONER OF INCOME TAX (APPEALS) HELD THAT THE CONDITION STIPULATED IN THE ALLOTMENT OF SHARES IS IN THE SA ME PROPORTION AND NOT THE SAME AMOUNT. WHEN THE PARTNERS CONTRIBUT ED THE NCCPL 19 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 SHARES HELD BY THEM TO THE BVRE FIRM AS THEIR CAPIT AL, THEIR CAPITAL ACCOUNTS WERE CREDITED PROPORTIONATE TO THE VALUE O F SHARES BROUGHT IN BY THEM. THE PROPORTIONATE ALLOTMENT WAS MADE A T THAT STAGE ITSELF. WHEN THE SHARES WERE REVALUED AT ` 270,07,53,000/-, THE SURPLUS WAS ALLOCATED IN THE SAME PROPORTION IN THE IR CAPITAL ACCOUNTS. WHEN THE FIRM BVRE WAS TAKEN OVER BY THE ASSESSEE- COMPANY, SHARES WERE ALLOTTED TO THE PARTNERS IN TH E SAME PROPORTION IN WHICH THEIR CAPITAL ACCOUNTS STOOD IN THE BOOKS OF THE FIRM ON THE DATE OF SUCCESSION. EVEN THE ASSESSING OFFICER HAS NOT DISPUTED REGARDING THE PROPORTION OF ALLOTMENT. HE R ONLY CASE WAS THAT HIGHER AMOUNT WAS CREDITED IN THE CAPITAL ACCO UNTS OF THE PARTNERS. ACCORDINGLY, THE COMMISSIONER OF INCOME TAX (APPEALS) HELD THAT THERE IS NO VIOLATION OF PROVISO (B) TO S ECTION 47(XIII). 33. PROVISO (C) PROVIDES THAT THE PARTNERS OF THE FIRM DO NOT RECEIVE ANY CONSIDERATION OR BENEFIT, DIRECTLY OR I NDIRECTLY, IN ANY FORM OR MANNER, OTHER THAN BY WAY OF ALLOTMENT OF S HARES IN THE NEW COMPANY. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS FOUND THAT CONSIDERATION FOR TAKING OVER WAS SATISFIED ON LY BY WAY OF ALLOTMENT OF SHARES TO THE PARTNERS IN THE COMPANY AND PARTNERS HAVE NOT RECEIVED ANY BENEFIT OR CONSIDERATION DIRE CTLY OR INDIRECTLY. 20 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 ACCORDINGLY, HE HELD THAT THERE IS NO VIOLATION OF PROVISO (C) TO SECTION 47(XIII). 34. THUS THE COMMISSIONER OF INCOME TAX (APPEALS) H AS HELD THAT ASSESSEE HAS NOT VIOLATED THE PROVISO (A), (B) AND (C) OF SECTION 47(XIII) AND AS SUCH, INVOKING OF SECTION 47A(3) IS NOT JUSTIFIED. 35. IN SHORT, THE COMMISSIONER OF INCOME TAX (APPEA LS) HAS ULTIMATELY CONCLUDED AS UNDER (P.35 / PARA 11.8):- (A) THE ASSESSEE-COMPANY HAS FULFILLED THE CONDITIONS OF PROVISO (A), (B) AND (C) OF SECTION 47(XIII) AND HENCE INVOKING OF PROVISIONS OF SECTION 47A(3) IS NOT CORRECT. (B) SECTION 49(1)(III)(A) IS APPLICABLE TO THE ASSESSEE-COMPANY IN RESPECT OF TRANSFER OF ASSETS BY THE FIRM BVRE. (C) THE REVALUATION OF ASSETS (SHARE OF NCCPL) WITHOUT ANY NEW FACTORS CONTRIBUTING TOWARDS ENHANCED VALUE AFTER ITS INTRODUCTION IN THEIR BOOKS OF BVRE SHALL BE A COMPONENT OF THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING FOR THE PURPOSE OF TAXATION UNDER SECTION 45(3). 36. ACCORDINGLY, THE COMMISSIONER OF INCOME TAX (AP PEALS) HELD THAT THE COST OF ACQUISITION FOR COMPUTING CAP ITAL GAINS IS THE REVALUED COST OF ` 270,07,53,000/- AND NOT THE INITIAL AMOUNT OF ` 35,27,48,000/-. AS SUCH THE ADDITION OF ` 222,26,14,953/- MADE ON 21 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 ACCOUNT OF SHORT TERM CAPITAL GAINS, ON SALE OF SHA RES OF NCCPL WAS DELETED. THE LOSS OF ` 13,22,70,047/- HAS BEEN ACCEPTED. 37. THE REVENUE IS AGGRIEVED ON THE ORDER OF COMMIS SIONER OF INCOME TAX (APPEALS) ON THE ISSUE OF COST OF ACQUIS ITION OF NCCPL SHARES, FOR THE PURPOSE OF SECTION 47(XIII) AND THE REFORE, THIS APPEAL BEFORE US. 38. SHRI SHAJI P. JACOB, THE LEARNED ADDITIONAL COM MISSIONER OF INCOME TAX, APPEARING FOR THE REVENUE, ARGUED THE C ASE AT LENGTH. RELYING ON THE PROVISIONS OF LAW STATED IN SECTION 49, THE LEARNED ADDITIONAL COMMISSIONER OF INCOME TAX ARGUED THAT T HE COST OF ACQUISITION OF THE ASSET SHALL BE DEEMED TO BE COST FOR WHICH THE PREVIOUS OWNER OF THE PROPERTY ACQUIRED IT IN A CAS E WHERE THE CAPITAL ASSET BECAME THE PROPERTY OF THE ASSESSEE B Y SUCCESSION. HE EXPLAINED THAT IN THE PRESENT CASE, THE FIRM BVR E HAD ACQUIRED THE SHARES OF NCCPL FROM B.V. REDDY FAMILY MEMBERS FOR A CONSIDERATION OF ` 35,27,48,000/- AND THEREAFTER, THE FIRM HAS SOLD THE SHARES TO M/S GBFL FOR AN AMOUNT OF ` 257,52,32,953/-. INSTEAD OF SELLING THE NCCPL SHARES DIRECTLY BY THE MEMBERS OF B.V. REDDY FAMILY, THEY FIRST FORMED A PARTNERSHIP AND TRANSFERRED THE SHARES TO THE FIRM AS THEIR CAPITAL AND THEREAF TER THE FIRM WAS SUCCEEDED BY M/S NCSPL / BVREPL (ASSESSEE-COMPANY) WITH AN 22 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 INFLATED VALUE OF SHARES AT ` 270,07,53,000/- AND THEREAFTER, THEY CLAIMED A LOSS ON SALE OF SHARES ON THE BASIS OF TH E INFLATED VALUE BOOKED IN THE ACCOUNTS OF THE ASSESSEE. THE LEARNE D ADDITIONAL COMMISSIONER OF INCOME TAX EXPLAINED THAT THERE IS NO BASIS FOR SUCH A VALUATION OF SHARES. THE ASSESSEE HAS NOT E XPLAINED THE BASIS ON WHICH THE VALUE OF SHARES HAS BEEN INCREAS ED FROM ` 35,27,48,000/- TO ` 270,07,53,000/- WITHIN A MATTER OF DAYS OR WEEKS. THIS IS A SCHEME MADE OUT BY THE CONCERNED P ARTIES TO BRING DOWN THE INSTANCE OF CAPITAL GAINS TAXATION. 39. THE LEARNED ADDITIONAL COMMISSIONER OF INCOME T AX EXPLAINED THAT IT IS IN THESE CIRCUMSTANCES, WE HAV E TO EXAMINE WHAT IS THE COST OF ACQUISITION OF THE ASSET IN THE HANDS OF THE PREVIOUS OWNER OF THE PROPERTY. PREVIOUS OWNER OF THE PROPERTY IS THE FIRM BVRE. THE COST OF ACQUISITION ALWAYS REMA INED AT ` 35,27,48,000/- BUT FOR THE EMPTY FORMALITY OF VALUA TION OF SHARES AT ` 270,07,53,000/-. SECTION 49 PROVIDES FOR COMPUTING THE COST OF ACQUISITION IN A VERY CLEAR MANNER. AS PER THE LAW , THE COST OF ACQUISITION OF THE PREVIOUS OWNER COULD BE INCREASE D ONLY BY TWO ITEMS; BY THE COST OF ANY IMPROVEMENT OF THE ASSET INCURRED BY THE PREVIOUS OWNER OR INCURRED BY THE ASSESSEE AND ANY COST OF IMPROVEMENT OF THE ASSETS BORNE BY THE PREVIOUS OWN ER OR THE 23 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 ASSESSEE. THE COST MUST BE INCURRED OR BORNE FOR I MPROVEMENT OF THE ASSETS ACQUIRED BY THE PREVIOUS OWNER. IN THE PRESENT CASE, THE FIRM BVRE HAS NOT INCURRED OR BORNE ANY AMOUNT SO A S TO RESULT IN THE IMPROVEMENT OF THE ASSET. IN THAT WAY, AS THE ASSETS ARE IN THE NATURE OF SHARES, THE PREVIOUS OWNER, THE FIRM BVRE COULD NOT HAVE BROUGHT ANY IMPROVEMENT EITHER. NEITHER THE ASSESS EE-COMPANY HAS INCURRED OR BORNE ANY SUCH COST OF IMPROVEMENT. THEREFORE, INSPITE OF THE TECHNICAL FORMALITY OF REVALUATION O F SHARES, THE ACQUISITION COST OF SHARES ALWAYS REMAINED AT ` 35,27,48,000/- FOR WHICH VALUE THE SHARES WERE ACQUIRED BY THE FIRM BV RE FROM THE MEMBERS OF B.V. REDDY FAMILY. HE, THEREFORE, SUBMI TTED THAT SECTION 49 IS VERY CLEAR AND INFLEXIBLE TO CONFIRM THAT IN THE PRESENT CASE, THE COST OF THE PREVIOUS OWNER MEANS THE COST FOR WHICH THE FIRM BVRE ACQUIRED THE SHARES OF NCCPL FROM THE MEM BERS OF B.V. REDDY FAMILY. 40. THE LEARNED ADDITIONAL COMMISSIONER OF INCOME T AX FURTHER REFERRED TO THE AMENDMENT BROUGHT IN BY FINANCE ACT , 2010 WHEREBY CLAUSE (XIII) OF SECTION 47 HAS ALSO BEEN B ROUGHT UNDER THE JURISDICTION OF SECTION 49. SECTION 47(XIII) DEALS WITH THE SUCCESSION OF BUSINESS OF A FIRM BY A COMPANY. THE FINANCE AC T, 2010 HAS SPECIFICALLY CLARIFIED THROUGH AMENDMENT THAT CLAUS E (XIII) OF SECTION 24 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 47 DEALING WITH SUCCESSION OF A BUSINESS OF A FIRM IS ALSO BROUGHT UNDER SECTION 49, WHEREBY IN A CASE OF SUCCESSION A S WELL, THE COST OF ACQUISITION OF THE ASSET SHALL BE DEEMED TO BE C OST AT WHICH THE PREVIOUS OWNERS OF THE PROPERTY ACQUIRED IT. THE L EARNED ADDITIONAL COMMISSIONER OF INCOME TAX EXPLAINED THAT AS THE AM ENDMENT IS IN THE NATURE OF CLARIFICATION, ITS EFFECT IS RETROSPE CTIVE AND THEREFORE, THE SAID AMENDMENT BROUGHT IN BY FINANCE ACT, 2010 APPLIES TO IMPUGNED ASSESSMENT YEAR 2007-08 AS WELL. 41. THE LEARNED ADDITIONAL COMMISSIONER OF INCOME T AX SUPPORTED HIS ARGUMENTS IN THE LIGHT OF THE FOLLOWI NG JUDICIAL PRONOUNCEMENTS:- 1. CIT V. K.H. CHAMBERS 55 ITR 674 (SC) 2. CIT V. B.C. SRINIVASA SETTY 128 ITR 294 (SC) PP 300 3. CIT V. S. KRISHNAMURTHY 152 ITR 669 (MAD) 4. CIT V. JAIDEO OIL MILLS 194 ITR 495 (BOM.) 5. ITO V. CH. ATCHAIAH 218 ITR 239 (SC) 6. PRAKASH ELECTRIC CO. V. ITO 22 SOT 382 (BANG) 42. ADVOCATE S.SRIDHAR, THE LEARNED COUNSEL APPEARI NG FOR THE ASSESSEE CONTENDED THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS RIGHTLY ADOPTED THE AMOUNT OF ` 270,07,53,000/- AS THE ACQUISITION COST OF THE SHARES IN THE HANDS OF THE FIRM BVRE VIS-- 25 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 VIS IN THE HANDS OF THE ASSESSEE-COMPANY NCSPL / BV REPL. THE LEARNED COUNSEL EXPLAINED THAT THE AMENDMENT BROUGH T IN BY FINANCE ACT, 2010 IN SECTION 49, HIGHLIGHTED BY THE REVENUE, DOES NOT IMPAIR THE CASE OF THE ASSESSEE-COMPANY. THE A MENDMENT POINTED OUT BY THE LEARNED ADDITIONAL COMMISSIONER OF INCOME TAX STATES THAT THE COST OF ACQUISITION OF ASSET IN THE CASE OF A SUCCESSION ALSO HAS TO BE CONSIDERED AS THE COST OF ACQUISITION IN THE HANDS OF THE PREVIOUS OWNER SUBJECT TO ADJUSTME NT OF COST OF IMPROVEMENT. THIS POSITION BROUGHT IN BY FINANCE A CT, 2010 DOES NOT PREJUDICE THE CASE OF THE ASSESSEE FOR THE REAS ON THAT THE ASSESSEE HAS NO QUARREL IN ADOPTING THE COST OF ACQ UISITION IN THE HANDS OF THE PREVIOUS OWNER. IN THE PRESENT CASE, THE PREVIOUS OWNER OF THE SHARES IS THE FIRM BVRE. THE ONLY DIS PUTE IS REGARDING THE CORRECT AMOUNT OF COST OF ACQUISITION OF THE NC CPL SHARES IN THE HANDS OF THE FIRM BVRE. THERE IS NO DISPUTE ON THE PRINCIPLE OF ADOPTING THE COST OF ACQUISITION IN THE HANDS OF TH E PREVIOUS OWNER; THE DISPUTE IS ONLY ON THE VALUE. 43. THE LEARNED COUNSEL EXPLAINED THAT THE MEMBERS OF B.V. REDDY FAMILY, WHO HELD SHARES IN NCCPL, JOINED THE FIRM BVRE ON THE BASIS OF THE SHARES ASSIGNED BY THEM IN FAVOUR OF THE FIRM AS THEIR CAPITAL CONTRIBUTION. WHEN THE FAMILY MEMBER S JOINED THE FIRM 26 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 BVRE, THEIR SHARES WERE ASSIGNED A VALUE OF ` 35,27,48,000/-, WHICH WAS CORRESPONDINGLY REFLECTED IN THE CAPITAL ACCOUNTS OF THE PARTNERS. THEREAFTER, THE FIRM BVRE HAS REVALUED T HE SHARES AT PAR WITH THE INTRINSIC WORTH OF THE SHARES OF M/S NCCPL . SHARES MUST ACTUALLY REPRESENT THE INTRINSIC WORTH OF THE COMPA NY. THERE IS A CLEAR NEXUS BETWEEN THE SHARE VALUE AND THE INTRINS IC BUSINESS VALUE OF THE COMPANY. THIS IS AN UNIVERSALLY ACCEP TED PRINCIPLE OF SHARE VALUATION. THEREFORE, IF THE FIRM BVRE HAD R EVALUED ITS SHARES SO AS TO REFLECT THE INTRINSIC WORTH OF M/S NCCPL, THERE IS NOTHING WRONG IN THAT EITHER IN FACT OR IN LAW. IN FACT, A MULTINATIONAL COMPANY, BY NAME M/S ACTIS, HAD CARRIED OUT NEGOTIA TIONS WITH THE SHAREHOLDERS DURING FINANCIAL YEAR 2005-06, FOR THE PURCHASE OF SHARES HELD BY THEM IN M/S NCCPL. THIS FACT IS ACK NOWLEDGED IN THE ORDER PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS) EVEN THOUGH THE COMMISSIONER OF INCOME TAX (APPEALS ) HAS REFERRED TO THAT POINT TO FIND FAULT WITH THE ASSES SEE. BUT, THE FACT REMAINS ON RECORD. THE INITIAL OFFER MADE BY M/S A CTIS WAS USD 62.5 MILLION. THIS OFFER MADE BY M/S ACTIS ITSELF SHOWED THAT THE INTRINSIC VALUE OF NCCPL SHARES HELD BY THE MEMBERS OF B.V. REDDY FAMILY ALWAYS HAD MUCH HIGHER VALUE THAN THE AMOUNT OF ` 35,27,48,000/- FOR WHICH THE SHARES WERE CONTRIBUTE D BY THE PARTNERS AS THEIR CAPITAL IN THE FIRM BVRE. THEREA FTER, THE SALE OF 27 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 SHARES WAS FINALIZED BY THE ASSESSEE-COMPANY WITH M /S GBFL AND THERE ALSO M/S GBFL HAS PAID A SUM OF ` 257,52,32,953/- AS CONSIDERATION FOR THE ACQUISITION OF SHARES. THESE TWO INSTANCES CLEARLY SHOW THAT THE VALUATION MADE BY THE FIRM BV RE IS FULLY JUSTIFIED AND THE VALUATION WAS NOT A NOTIONAL EXER CISE AS ALLEGED BY THE REVENUE. BY REVALUING THE SHARES, THE FIRM BVR E HAS FAIRLY STATED THE ACTUAL VALUE OF THE SHARES AT PAR WITH T HE INTRINSIC VALUE OF THE BUSINESS OF M/S NCCPL. 44. ON THE BASIS OF THE WORTHWHILE VALUATION, THE F IRM BVRE HAS REVISED THE CAPITAL ACCOUNTS OF THE PARTNERS BY CRE DITING THE DIFFERENTIAL AMOUNT TO THEIR CAPITAL ACCOUNTS. THI S IS NOT AN EMPTY FORMALITY. WHEN THE VALUE OF THE SHARES HAS INCREA SED FROM ` 35,27,48,000/- TO ` 270,07,53,000/-, THE CAPITAL ACCOUNTS OF THE PARTNERS ALSO HAVE INCREASED. THE FIRM BVRE HAS TH US INCURRED THE COST OF DIFFERENTIAL CAPITAL CREDITED TO THE PARTNE RS ACCOUNT. THE DIFFERENTIAL AMOUNT AROSE OUT OF THE SHARE VALUATIO N. IT AMOUNTS TO THE COST OF IMPROVEMENT BORNE BY THE FIRM BVRE, WIT HIN THE MEANING OF SECTION 49 OF THE INCOME-TAX ACT, 1961. IT IS ON THE BASIS OF THIS INCREASED COST OF ACQUISITION THAT SH ARES WERE ALLOTTED TO THE PARTNERS OF THE FIRM BVRE, IN THE SHARE CAPI TAL OF THE ASSESSEE-COMPANY NCSPL / BVREPL. WHEN THE ASSESSE E- 28 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 COMPANY HAS TAKEN OVER THE FIRM BVRE, THE SHARES WE RE ACQUIRED AT THE VALUE REFLECTED IN THE BOOKS OF THE FIRM BVR E. THAT VALUE OF SHARES REFLECTED IN THE BOOKS OF THE FIRM BVRE IS T HE COST OF ACQUISITION OF THOSE SHARES IN THE HANDS OF THE FIR M. THEREFORE, THE COMMISSIONER OF INCOME TAX (APPEALS) HAS RIGHTLY AD OPTED THE COST OF ACQUISITION IN THE HANDS OF THE FIRM AT ` 270,07,53,000/-. 45. THE LEARNED COUNSEL CONCLUDED THAT THERE IS NOT HING WRONG IN THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEAL S) IN HOLDING THAT THE COST HAS BEEN CORRECTLY ADOPTED BY THE ASS ESSEE-COMPANY FOR THE PURPOSE OF SECTION 49. 46. REGARDING THE ALTERNATE CONTENTION OF THE ASSES SING OFFICER UNDER SECTION 47A(3) READ WITH SECTION 47(XIII), TH E LEARNED COUNSEL EXPLAINED THAT ALL THE CONDITIONS OF SUCCESSION WER E COMPLETED IN THE PRESENT CASE, AS PROVIDED IN CLAUSE (XIII) OF S ECTION 47. THE FIRST CONDITION OF SUCCESSION FOR AVAILING EXEMPTION OF C APITAL GAINS TAXATION IS THAT ALL THE ASSETS AND LIABILITIES OF THE FIRM RELATING TO THE BUSINESS IMMEDIATELY BEFORE THE SUCCESSION BECOME T HE ASSETS AND LIABILITIES OF THE COMPANY. IN THE PRESENT CASE, T HE ASSESSEE- COMPANY HAS ACQUIRED THE BUSINESS OF THE FIRM BVRE IN LOCK, STOCK, AND BARREL AND HAS COMPLIED WITH THE FIRST CONDITIO N. THE SECOND CONDITION IS THAT ALL THE PARTNERS OF THE FIRM IMME DIATELY BEFORE THE 29 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 SUCCESSION BECOME THE SHAREHOLDERS OF THE COMPANY I N THE SAME PROPORTION IN WHICH THEIR CAPITAL ACCOUNTS STOOD IN THE BOOKS OF THE FIRM ON THE DATE OF SUCCESSION. IN THE PRESENT CAS E, ALL THE PARTNERS OF THE FIRM HAVE BECOME THE SHAREHOLDERS OF THE ASS ESSEE- COMPANY. SHARES HAVE BEEN ALLOTTED TO THE PARTNERS IN THE SAME PROPORTION TO THEIR CAPITAL ACCOUNTS REFLECTED IN T HE BOOKS OF THE FIRM. THE REVENUE IS TARGETING ON THE HIGHER AMOUNT REFLE CTED IN THE CAPITAL ACCOUNT BY VIRTUE OF THE SHARE VALUE INCREA SED AS A RESULT OF REVALUATION. THE TOTAL AMOUNT FOR WHICH THE SHARES ARE ALLOTTED TO A PARTNER IS NOT THE ISSUE TO BE CONSIDERED FOR THE P URPOSE OF THE SECOND CONDITION. IT IS NOT THE VALUE BUT IT IS TH E PROPORTION. SHARES HAVE TO BE ALLOTTED IN THE NEW COMPANY IN THE SAME PROPORTION IN WHICH THE CAPITAL ACCOUNTS STOOD IN THE BOOKS OF TH E FIRM. IN THE PRESENT CASE ALSO, SHARES WERE ALLOTTED IN THE ASSE SSEE-COMPANY EXACTLY IN THE SAME PROPORTION IN WHICH THE CAPITAL ACCOUNTS OF THE PARTNERS STOOD IN THE BOOKS OF THE FIRM BVRE. SECO ND CONDITION IS ALSO SATISFIED. THE THIRD CONDITION IS THAT THE PA RTNERS OF THE FIRM DO NOT RECEIVE ANY CONSIDERATION OR BENEFIT, DIRECTLY OR INDIRECTLY, IN ANY FORM OR MANNER, OTHER THAN BY WAY OF ALLOTMENT OF S HARES IN THE COMPANY. IN THE PRESENT CASE ALSO THE PARTNERS WER E ALLOTTED SHARES IN THE ASSESSEE-COMPANY AND THEY RECEIVED NO OTHER BENEFIT OR CONSIDERATION EITHER DIRECTLY OR INDIRECTLY. TH IS CONDITION IS ALSO 30 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 SATISFIED. AS ALL THE NECESSARY CONDITIONS APPLICA BLE TO THE PRESENT CASE HAVE BEEN COMPLIED WITH, SECTION 47A DOES NOT APPLY TO THE ASSESSEE, AS RIGHTLY HELD BY THE COMMISSIONER OF IN COME TAX (APPEALS). 47. THEREFORE, THE LEARNED COUNSEL APPEARING FOR TH E ASSESSEE SUBMITTED THAT THE ORDER OF THE COMMISSIONER OF INC OME TAX (APPEALS) ON THIS GROUND OF COST OF ACQUISITION OF SHARES BE UPHELD. 48. WE HEARD BOTH SIDES IN DETAIL AND EXAMINED THE ISSUE CAREFULLY. WE NEED NOT REPEAT THE PROVISIONS OF LA W STATED IN SECTION 49, AS THE SAME HAS ALREADY BEEN SUFFICIENT LY DISCUSSED IN EARLIER PARAGRAPHS OF THIS ORDER. SO, WE STRAIGHTA WAY GO INTO THE ISSUE TO DECIDE WHETHER THE COST OF ACQUISITION ARR IVED BY THE ASSESSEE IN COMPUTING THE CAPITAL GAINS IS ACCEPTAB LE OR NOT. THE HISTORY OF THE TRANSFERS OF SHARES IS ALREADY BEFOR E US. THE MEMBERS OF B.V. REDDY FAMILY JOINED THE FIRM BVRE B Y CONTRIBUTING THEIR SHAREHOLDING IN M/S NCCPL AS THEIR CAPITAL CO NTRIBUTION. AT THE TIME OF ENTERING THE PARTNERSHIP, THE VALUE OF THE SHARES WAS ASSIGNED AT ` 35,27,48,000/-. THEREAFTER, THE SHARES WERE REVAL UED AT HIGHER AMOUNT OF ` 270,07,53,000/-. THE FIRST QUESTION IS WHETHER THE REVALUATION IS JUSTIFIED OR NOT. IT CANNOT BE DISPUTED THAT THE VALUE OF THE SHARE OF A COMPANY SHOULD REASONABLY R EPRESENT THE 31 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 INTRINSIC BUSINESS WORTH OF THE COMPANY. THERE MUS T BE PARITY BETWEEN THE SHARE VALUE AND THE COMPANYS BUSINESS WORTH. IF THE REVALUATION OF THE SHARE IN THE PRESENT CASE IS EXA MINED IN THE LIGHT OF THE ABOVE PRINCIPLE, WE FIND THAT THE FIRM BVRE WAS JUSTIFIED IN REVALUING THE SHARES OF NCCPL, HELD BY IT. AS POIN TED OUT BY THE COMMISSIONER OF INCOME TAX (APPEALS) IN HIS ORDER A ND ALSO ARGUED BY THE LEARNED COUNSEL APPEARING FOR THE ASS ESSEE AT THE TIME OF HEARING, EARLIER, THERE WAS AN OFFER MADE B Y M/S ACTIS TO BUY THE SHARES OF M/S NCCPL FROM THE MEMBERS OF B.V. RE DDY FAMILY. THE OFFER MADE AT THAT TIME WAS USD 62.5 MILLION. T HIS OFFER WAS FAR HIGHER THAN THE AMOUNT OF ` 35,27,48,000/- FOR WHICH THE SHARES WERE INITIALLY ASSIGNED BY THE REDDY FAMILY MEMBERS TO THE FIRM BVRE. IT CLEARLY SHOWS THAT THE AMOUNT OF ` 35,27,48,000/- DID NOT REFLECT THE CORRECT VALUE ASSIGNABLE TO THE SHARES ON THE BASIS OF THE NET WORTH OF THE BUSINESS OWNED BY M/S NCCPL. AS A RGUED BY THE LEARNED COUNSEL, M/S GBFL PURCHASED SHARES OF M/S N CCPL FROM THE ASSESSEE-COMPANY FOR A SUM OF ` 257,52,32,953/-. THIS PURCHASE CONSIDERATION IS VERY NEAR TO THE REVALUAT ION PRICE OF ` 270,07,53,000/- WORKED OUT BY THE FIRM BVRE. FROM THESE TWO INSTANCES, IT IS REASONABLY PROVED THAT THE VALUE O F THE SHARES OF NCCPL HELD BY THE FIRM BVRE WAS REVOLVING AROUND TH E REVALUED AMOUNT OF ` 270,07,53,000/-. THE EARLIER PURCHASE OFFER MADE B Y 32 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 M/S ACTIS WAS FOR AN AMOUNT VERY NEAR TO THIS REVAL UATION FIGURE; SO ALSO THE PURCHASE PRICE PAID BY GBFL. 49. IN THE LIGHT OF THE ABOVE FACTS, IT IS TO BE RE ASONABLY UNDERSTOOD THAT THE FIRM BVRE WAS JUSTIFIED IN REVA LUING THE SHARES OF NCCPL HELD BY IT. IT IS ALSO TO BE SEEN THAT TH E VALUATION HAS BEEN PROPERLY MADE BY THE FIRM BVRE BRINGING THE RE VALUATION FIGURE TO ` 270,07,53,000/-. 50. IN SHORT, IT IS APPARENT ON RECORD THAT THERE W ERE SUFFICIENT REASONS FOR THE FIRM BVRE TO REVALUE THE SHARES OF NCCPL AND THE FIRM HAS RIGHTLY REVALUED THE SHARES AT ` 270,07,53,000/-. 51. NEXT IS THE QUESTION WHETHER THIS REVALUED FIGU RE SHOULD BE ACCEPTED AS THE COST OF ACQUISITION OF NCCPL SHARES IN THE HANDS OF BVRE. THE ANSWER IS YES. THIS IS BECAUSE THE CA PITAL ACCOUNTS OF THE PARTNERS OF THE FIRM BVRE HAVE BEEN REVISED WITH THEIR PROPORTIONATE SHARE IN THE INCREASED AMOUNT OF SHAR E VALUE RESULTED BY THE REVALUATION OF SHARES. THE FIRM BVRE HAS CR EDITED THE CAPITAL ACCOUNTS OF ITS PARTNERS WITH ADDITIONAL AM OUNTS CORRESPONDING TO THE SHARE VALUE INCREASED BY REVAL UATION. IN THAT WAY, THE FIRM BVRE HAS BORNE THE COST OF ADDITIONS CREDITED IN THE CAPITAL ACCOUNTS OF THE PARTNERS OF THE FIRM. THER EFORE, IT IS TO BE 33 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 SEEN THAT THE REVALUATION HAS NOT BEEN MADE BY THE FIRM BVRE GRATUITOUSLY. THE REVALUATION HAS BEEN MADE FOR A COST. THE COST OF REVALUATION IS THE ADDITIONAL AMOUNT OF CAPITAL CRE DITED IN THE CAPITAL ACCOUNTS OF THE PARTNERS OF THE FIRM. THE FIRM BVR E HAS SUFFERED THAT INCREMENTAL LIABILITY AGAINST THE ENHANCED VAL UE REFLECTED IN THE CAPITAL ACCOUNTS OF THE PARTNERS OF THE FIRM. THER EFORE, IT IS TO BE SEEN THAT THE FIRM BVRE HAS BORNE THE LIABILITY OF REVALUATION WHICH SHOULD BE ADDED TO THE COST OF ACQUISITION OF SHARE S MADE FROM B.V. REDDY FAMILY MEMBERS. THEREFORE, AS FAR AS THE FIR M BVRE, THE PREVIOUS OWNER OF THE SHARES, IS CONCERNED, THE COS T OF ACQUISITION OF SHARES IS ` 270,07,53,000/-. 52. MOREOVER, WHEN THE FIRM BVRE WAS TAKEN OVER AND SUCCEEDED BY THE ASSESSEE-COMPANY M/S NCSPL / BVREP L, THE VALUE OF NCCPL SHARES IN THE BOOKS OF THE FIRM BVRE WAS ` 270,07,53,000/-. IT IS FOR THAT AMOUNT, THE SHARES WERE TAKEN OVER BY THE ASSESSEE-COMPANY. THE PARTNERS OF THE FIRM BVRE ABSORBED THIS HIGHER AMOUNT OF REVALUATION IN PROPO RTION TO THE CAPITAL ACCOUNTS STOOD IN THE BOOKS OF THE FIRM. T HEREFORE, THE COST OF THE SHARES IN THE HANDS OF THE FIRM BVRE AS WELL AS THE COST OF ACQUISITION INCURRED BY THE ASSESSEE-COMPANY, IS ` 270,07,53,000/-. THEREFORE, IT IS TO BE SEEN THAT THE COST OF SHARES IN THE HANDS OF THE 34 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 FIRM BVRE, BEING THE PREVIOUS OWNER, IS CORRECTLY C OMPUTED BY THE ASSESSEE WHICH IS UPHELD BY THE COMMISSIONER OF INC OME TAX (APPEALS) AT ` 270,07,53,000/-. 53. REGARDING INVOKING SECTION 47A, WE AGREE WITH T HE FINDINGS OF THE COMMISSIONER OF INCOME TAX (APPEALS). THE C ONDITIONS SPECIFIED IN SECTION 47(XIII) HAVE BEEN COMPLIED IN THE PRESENT CASE. ALL THE ASSETS AND LIABILITIES OF THE FIRM RELATING TO THE BUSINESS IMMEDIATELY BEFORE THE SUCCESSION HAD BECOME THE AS SETS AND LIABILITIES OF THE COMPANY. THERE IS NO DISPUTE ON THIS FACT. THE FIRST CONDITION IS SATISFIED. ALL THE PARTNERS OF THE FI RM BVRE BECAME THE SHAREHOLDERS OF THE ASSESSEE-COMPANY IN THE SAME PR OPORTION IN WHICH THEIR CAPITAL ACCOUNTS STOOD IN THE BOOKS OF THE FIRM ON THE DATE OF SUCCESSION. REGARDING PROPORTIONATE ALLOCA TION OF SHARES, THERE IS NO DISPUTE AT ALL. THE ONLY OBJECTION POI NTED OUT BY THE ASSESSING OFFICER IS THAT THE CAPITAL ACCOUNTS OF T HE PARTNERS WERE CREDITED WITH HIGHER AMOUNTS RESULTING FROM SHARE R EVALUATION. THE OBJECTION OF THE ASSESSING OFFICER IS ON THE QUANTU M OF THE AMOUNT AND NOT ON THE PROPORTION IN WHICH SHARES WERE ALLO TTED. THE PRINCIPLE LAID DOWN IN PROVISO (B) TO SECTION 47(XI II) IS THAT THE PARTNERS BECOME THE SHAREHOLDERS OF THE COMPANY IN THE SAME PROPORTION IN WHICH THEIR CAPITAL ACCOUNTS STOOD IN THE BOOKS OF THE 35 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 FIRM ON THE DATE OF SUCCESSION. THE REQUIREMENT IS THE SATISFACTION OF THE PROPORTION. IT IS NOT THE QUANTUM OF THE AM OUNT. IN THE PRESENT CASE, THE PROPORTION HAS BEEN COMPLIED WITH . THEREFORE, THIS CONDITION IS ALSO SATISFIED. REGARDING THE TH IRD CONDITION, IT IS A MATTER ON RECORD THAT THE PARTNERS OF THE FIRM BVRE DID NOT RECEIVE ANY CONSIDERATION OR BENEFIT, DIRECTLY OR INDIRECTL Y, IN ANY FORM OR MANNER, OTHER THAN BY WAY OF ALLOTMENT OF SHARES IN ASSESSEE- COMPANY. 54. AS SUCH, WE HAVE TO HOLD THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS CORRECTLY HELD THAT THERE WAS NO VIOLATION OF THE CONDITIONS LAID DOWN IN SECTION 47(XIII) AND AS SUC H, THERE IS NO JUSTIFICATION IN INVOKING SECTION 47A(3) AGAINST TH E ASSESSEE. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ALSO RIGHT LY HELD THAT FOR THE PURPOSE OF SECTION 49, THE COST OF ACQUISITION IN THE HANDS OF THE PREVIOUS OWNER IS ` 270,07,53,000/-. 55. THE PARTNERS OF THE FIRM BVRE HAD FILED APPEALS BEFORE THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE, IN CONNEC TION WITH THEIR INDIVIDUAL ASSESSMENTS, WHEREIN THIS ISSUE OF TRANS FER OF SHARES HAD ALSO COME UP FOR CONSIDERATION. THE APPELLATE TRIB UNAL, INTER ALIA, HELD AS FOLLOWS:- 36 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 84. AS ALREADY STATED THE SERIES OF TRANSACTIONS BY WHICH THE SHARES OF NCCPL HELD BY THE ASSESSEE ULTIMATELY WAS TRANSFERRED TO GBFL WERE INTENDED TO LESSEN THE TAX BURDEN ON CAPITAL GAIN ON TRANSFER OF SHARES. THE COURSE ADOPTED BY THE ASSESSEES WAS WITHIN THE FRAMEWORK OF LAW AND WAS PERMISSIBLE. IN FACT THERE WAS A LACUNA IN THE LAW WHICH HAS NOW BEEN FILLED UP BY A RETROSPECTIVE STATUTORY AMENDMENT TO THE PROVISIONS OF LAW. THAT ONLY SHOWS THAT THE COURSE ADOPTED BY THE ASSESSEES WAS LEGALLY VALID. EVEN THE ASSESSEE IN THE WRITTEN SUBMISSIONS DATED 2.1.2013 HAS ACCEPTED THE POSITION THAT IN VIEW OF THE RETROSPECTIVE STATUTORY AMENDMENT, THERE IS NO TAX ADVANTAGE AT ALL. IN THAT VIEW OF THE MATTER, WE ARE OF THE VIEW THAT ON ISSUE NO.6, WE HAVE TO HOLD THAT THE ENTIRE SERIES OF TRANSACTIONS BY WHICH THE SHARES OF NCCPL WERE ULTIMATELY TRANSFERRED TO GBFL WERE ALL VALID. EVEN IF IT WERE TO BE CONSIDERED THAT THEY WERE ARRANGED IN SUCH A MANNER SO AS TO AVOID PAYMENT OF TAX ON THE CORRECT QUANTUM OF CAPITAL GAIN THAT WOULD RESULT ON TRANSFER OF SHARES OF NCCPL TO GBFL, SUCH A COURSE WAS PERMITTED AND WITHIN THE FRAMEWORK OF LAW. ON ISSUE NO.7, WE HAVE TO HOLD THAT THE SERIES OF TRANSACTIONS BY WHICH THE SHARES OF NCCPL WERE ULTIMATELY TRANSFERRED TO GBFL WERE NOT COLOURABLE OR DUBIOUS DEVICE OR SUBTERFUGE AND WERE LEGAL AND VALID. THE CONSEQUENCE OF THE SAME, EVEN IF IT RESULTS IN REDUCTION OF TAX BURDEN, IS THAT THEY CANNOT BE IGNORED AND THE REVENUE CANNOT BRING TO TAX THE QUANTUM OF CAPITAL GAIN WHICH WOULD HAVE RESULTED, HAD THE TRANSACTIONS OF SALE OF SHARES OF NCCPL TO GBFL BEING CARRIED OUT BY THE ASSESSEES DIRECTLY TO GBFL INSTEAD OF THROUGH NCSPL/BVREPL. WE HOLD ACCORDINGLY ON ISSUE NO.6 AND 7. THE OTHER DECISIONS REFERRED TO BY THE LEARNED SENIOR ADVOCATE FOR THE REVENUE ARE NOT BEING ADVERTED TO AS THE 37 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF VODAFONE (SUPRA) IS THE LAW ON THE SUBJECT, WHICH HAS BEEN THE BASIS FOR OUR CONCLUSIONS AS ABOVE. THE CONCLUSION ON THE COMMON ISSUE THAT ARISES FOR CONSIDERATION IN THESE APPEALS BY THE ASSESSEES IS THAT THE ORDER OF THE REVENUE AUTHORITIES BRINGING TO TAX CAPITAL GAIN ON SALE OF SHARES OF NCCPL TO GODREJ BY NCSPL IN THE HANDS OF THE ASSESSEES CANNOT BE SUSTAINED AND THE ADDITION MADE BY THE REVENUE AUTHORITIES IN THE CASE OF THE ASSESSEES IS DIRECTED TO BE DELETED. THE RELEVANT GROUNDS OF APPEAL OF THE ASSESSEES IN THEIR APPEALS ARE ALLOWED. 56. WHEN THERE IS A FINDING BY THE INCOME TAX APPEL LATE TRIBUNAL, BANGALORE, IN THE CASE OF THE PARTNERS, T HAT ALL THESE TRANSACTIONS ARE WITHIN THE FOUR WALLS OF THE LAW, WE HAVE TO FOLLOW THE SAID FINDING OF THE TRIBUNAL. THE RESULT IS TH AT WE HAVE TO ACCEPT THE CONTENTIONS OF THE ASSESSEE IN THESE APPEALS TH AT ALL THE FACTORS LEADING TO THE SUCCESSIVE TRANSACTIONS ARE VALID AN D THEY ARE LEGITIMATE AND THEREFORE ACCEPTABLE IN LAW. THEREF ORE, WE CANNOT GO BEYOND THE FACTS APPARENT ON RECORDS AND EXAMINE TH E QUESTION OF COLOURABLE DEVICE, AS ARGUED BY THE REVENUE. 57. ACCORDINGLY, THE FIRST ISSUE RAISED BY THE REVE NUE REGARDING THE COST OF ACQUISITION OF SHARES IS HELD AGAINST I T. 58. THE NEXT ISSUE RAISED BY THE REVENUE IS REGARDI NG THE RETROSPECTIVE EFFECT OF RULE 8D OF INCOME-TAX RULES , 1962. THE 38 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 COMMISSIONER OF INCOME TAX (APPEALS) HAS HELD THAT RULE 8D IS NOT RETROSPECTIVE AND IS APPLICABLE ONLY FROM THE ASSES SMENT YEAR 2008- 09 BY RELYING ON THE JUDGMENT OF HONBLE BOMBAY HIG H COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD VS. DY. CIT ( 328 ITR 81) (BOM.). THEREFORE, THERE IS NO INFIRMITY IN THE OR DER OF THE COMMISSIONER OF INCOME TAX (APPEALS) ON THIS POINT. THIS ISSUE IS ALSO DECIDED AGAINST THE REVENUE. 59. REVENUE FAILS IN ITS APPEAL. 60. NEXT, WE WILL CONSIDER THE APPEAL FILED BY THE ASSESSEE. THE FIRST ISSUE RAISED BY THE ASSESSEE IS THAT THE COMM ISSIONER OF INCOME TAX (APPEALS) HAS MADE CERTAIN OBSERVATIONS IN HIS ORDER ALLEGING THAT THE ASSESSEE WAS RESORTING TO TAX AVO IDANCE/EVASION OF TAX BY SUCCESSIVELY TRANSFERRING SHARES FROM INDIVI DUALS TO A COMPANY, THROUGH THE MEDIA OF PARTNERSHIP FIRM AND COMPANY. IN FACT, THE COMMISSIONER OF INCOME TAX (APPEALS) HAS MADE THESE OBSERVATIONS QUITE SUBSTANTIALLY IN HIS ORDER. THE ITAT BANGALORE A BENCH, WHILE CONSIDERING THE APPEALS FILED BY THE PARTNERS OF THE B.V. REDDY FAMILY IN I.T.A. NOS.149 & 150(BNG.) /2011 AND OTHERS, HAS HELD IN THEIR COMMON ORDER DATED 8 TH FEBRUARY, 2013, AS UNDER IN PARAGRAPH 84:- 39 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 84. AS ALREADY STATED, THE SERIES OF TRANSACTIONS BY WHICH THE SHARES OF NCCPL HELD BY THE ASSESSEE ULTIMATELY WAS TRANSFERRED TO GBFL WERE INTENDED TO LESSEN THE TAX BURDEN ON CAPITAL GAINS ON TRANSFER OF SHARES. THE COURSE ADOPTED BY THE ASSESSEES WAS WITHIN THE FRAMEWORK OF LAW AND WAS PERMISSIBLE. ... 61. IN THE LIGHT OF THE ABOVE OBSERVATION MADE BY T HE TRIBUNAL, IT IS SUFFICIENT FOR US TO SAY THAT THE OBSERVATIONS M ADE BY THE COMMISSIONER OF INCOME TAX (APPEALS) IN HIS ORDER W ERE UNCALLED FOR. 62. THE SECOND ISSUE RAISED BY THE ASSESSEE IS AGAI NST THE DISALLOWANCE OF 2% MADE BY THE COMMISSIONER OF INCO ME TAX (APPEALS) UNDER SECTION 14A. THE ASSESSING OFFICER HAS IN FACT APPLIED RULE 8D. THE COMMISSIONER OF INCOME TAX (A PPEALS) HAS RIGHTLY HELD THAT RULE 8D IS NOT APPLICABLE FOR THE IMPUGNED ASSESSMENT YEAR. ACCORDINGLY, AS CONSISTENTLY DONE IN MANY CASES, THE COMMISSIONER OF INCOME TAX (APPEALS) HAS MADE A REASONABLE DISALLOWANCE TOWARDS CORRESPONDING EXPENDITURE. TH E COMMISSIONER OF INCOME TAX (APPEALS) HAS MADE A DIS ALLOWANCE OF 2%. WE FIND IT IS VERY REASONABLE. THIS CONTENTIO N OF THE ASSESSEE IS, THEREFORE, REJECTED. 40 I.T.A. NO. 152/MDS/2011 I.T.A. NO. 250/MDS/2011 63. THE THIRD ISSUE RAISED BY THE ASSESSEE IS REGAR DING THE DISALLOWANCE OF THE CLAIM MADE BY IT UNDER SECTION 35D. THIS ISSUE WAS NOT SERIOUSLY PURSUED AT THE TIME OF HEARING. THIS GROUND IS ACCORDINGLY REJECTED. 64. ASSESSEE ALSO FAILS IN ITS APPEAL. 65. IN THE RESULT, THE APPEAL FILED BY THE REVENUE AND THE APPEAL FILED BY THE ASSESSEE, BOTH ARE DISMISSED. ORDERS PRONOUNCED ON MONDAY, THE 3 RD OF MARCH, 2014 AT CHENNAI. SD/- SD/- (VIKAS AWASTHY) (DR. O.K. NARAYANAN) JUDICIAL MEMBER VICE-PRESIDENT CHENNAI, DATED, THE 3 RD MARCH, 2014. KRI. COPY TO: 1. ASSESSEE 2. ASSESSING OFFICER 3. CIT, CHENN AI-I, CHENNAI 4. CIT(A)-III , CHENNAI 5. DR 6. GF.