Appeal Details
Counselvise Citation
[2013] 120 COUNSELVISE.COM (IT) 0632 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
1 year(s) 11 month(s) 19 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
08-02-2013
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
A
Next Hearing Date
02-01-2013
Assessment Year
2007-2008
Appeal Filed On
18-02-2011
Judgement Text
IN THE INCOME TAX APPELLATE TRI BNAL BANGALORE BENCH A, BANGALORE BEFORE SHRI N.V.VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NOS.149 & 150(BNG.)/2011 (ASSESSMENT YEAR : 2007-08) SHRI V MADHUSUDHAN REDDY(HUF) & THE DY. COMMISS IONER OF INCOME-TAX, & SMT.V.SOUMINI REDDY, CIRCLE -7(2), NO.502, CMH ROAD, VS. BANGA LORE BANGALORE. PAN NO.AABHV7947N (HUF) PAN NO.AAQPV 2901B (INDL.) APPELLANTS RESPONDENTS AND ITA NOS. 158 & 159(BNG)/2011 (ASSESSMENT YEAR : 2007-08) SHRI V VIKRAM REDDY (INDIVIDUAL) V.VIKRAM REDDY (HUF) THE ASST. CIT, CIRCLE 1(1)/ 6A REGENCY HEIGHTS,, VS. ITO , WARD 1(2), 3/2-1, CLEAVELAND ROAD, FRAZER TOWN, BANGALORE BANGALORE-560 005 PAN NO.ABIPV 7709G(INDIVIDUAL) PAN NO.AABHV 068ID(HUF) APPELLANTS RESPONDENTS ASSESSEE BY : SHRI ASHOK KULKARNI, ADVOCATE REVENUE BY : SHRI E.B. INDRA KUMAR, SR. STANDING CO UNSEL DATE OF HEARING : 02-01-2013 DATE OF PRONOUNCEMENT : 08-02-2013 ITA NOS.149 & 150 & 158 & 159(B)/2011 2 O R D E R PER BENCH ITA NO.148 & 149/BANG/2011: THESE ARE APPEALS BY THE ASSESSEE AGAINST THE COMMON ORDER DATED 31-01-2011 OF CIT(A) -IIII, BANGALORE RELATING TO ASSESSMENT YEARS 2007-08. THE APPEALS A RE IN RELATION TO TWO ASSESSEES NAMELY SHRI V.MADHUSUDHAN REDDY(HUF) AND SMT.V.SOUMINI REDDY( INDIVIDUAL). 2. ITA NOS.158 & 159(B)/2011 ARE APPEALS BY THE AS SESSEES AGAINST THE COMMON ORDER DATED 28-01-2011 OF CIT(A)-I, BANGALOR E RELATING TO ASSESSMENT YEARS 2007-08. THESE APPEALS ARE IN RE LATION TO TWO ASSESSEES BY NAME SHRI V.VIKRAM REDDY (INDIVIDUAL) AND SHRI V . VIKRAM (HUF). A COMMON ISSUE ARISING OUT OF SAME FACTS AND CIRCUMST ANCES ARISES FOR CONSIDERATION IN ALL THESE APPEALS. APART FROM THE COMMON ISSUE THERE ARE CERTAIN ISSUES IN THE ASSESSMENT OF EACH OF THE ASS ESSEES. ALL THESE APPEALS WERE HEARD TOGETHER AND WE DEEM IT CONVENIENT TO PA SS A CONSOLIDATED ORDER. 3. FIRST WE SHALL TAKE UP THE COMMON ISSUE THAT AR ISES FOR CONSIDERATION IN ALL THESE APPEALS. THE ASSESSEES ARE MEMBERS OF RE DDY FAMILY OF CHITTOOR, ANDHRA PRADESH. THERE WAS A FIRM BY NAME M/S B.V.R EDDY ENTERPRISES (BVRE) . BVRE WAS FORMED FOR THE PURPOSE OF CARRYING ON BUSINESS IN ITA NOS.149 & 150 & 158 & 159(B)/2011 3 PARTNERSHIP VIZ., THE BUSINESS OF PURCHASE AND SALE OF MILK, MILK PRODUCTS, CONDENSED MILK, OTHER FOOD PRODUCTS, MILK PROCESSIN G, RICE HULLING AND SHELLING ON OWN ACCOUNT OR BY TAKING ON LEASE AND/O R SUCH OTHER BUSINESS OR BUSINESSES AS MAY BE AGREED UPON BY THE PARTNERS . SOME OF THE MEMBERS OF THE REDDY FAMILY WERE PARTNERS OF THE FI RM WHEN IT WAS STARTED. THE FIRM OF BVRE CAME INTO EXISTENCE ON 14-07-1971. ON THIS DATE THE PARTNERSHIP FIRM OF BVRE WAS FORMED. THE FOLLOWING WERE THE PARTNERS UNDER THE PARTNERSHIP DEED. 1. SHRI V. MADHUSUDHAN REDDY 2. SHRI V.VIKRAM REDDY 3. SMT. SHOBHA REDDY BESIDES THE ABOVE, THE SMT. V. ANITHA REDDY, V.SAND HYA REDDY AND V. DINESH WERE ALSO PARTNERS BUT WERE MINORS. THEY WE RE ADMITTED AS PARTNERS ENTITLED TO THE BENEFITS OF THE PARTNERSHI P. 5. ON 10-02-1977 SHRI V.MADHUSUDHAN REDDY GOT MARR IED. FOR THE AY: 1978-79 SHRI V.MADHUSUDHAN REDDY FILED RETURN O F INCOME IN WHICH HE DECLARED HIS STATUS AS THAT OF HUF CONSISTING OF HIMSELF AND HIS WIFE. IN THE STATEMENT OF INCOME THE SHARE OF PROFIT FROM B VRE WAS ALSO DECLARED AS THE INCOME OF THE HUF. THUS, SHRI V MADHUSUDHAN REDDY, WHO BECAME A PARTNER OF BVRE IN HIS INDIVIDUAL CAPACITY CONTINUED TO BE A PARTNER VIS--VIS THE FIRM BVRE IN HIS INDIVIDUAL C APACITY BUT VIS--VIS THE HUF HE WAS REPRESENTING THE HUF CONSISTING OF HIMSE LF AND HIS WIFE. ITA NOS.149 & 150 & 158 & 159(B)/2011 4 6. ON 22-03-1978 SHRI V.VIKRAM REDDY GOT MARRIED. IT IS THE CLAIM OF THE SHRI V.VIKRAM REDDY THAT ON MARRIAGE HIS STATUS BECAME THAT OF HUF CONSISTING OF HIMSELF AND HIS WIFE AND THAT THE INT EREST IN THE PARTNERSHIP WHICH WAS HELD BY HIM IN HIS INDIVIDUAL CAPACITY CO NTINUED TO BE SO HELD BY HIM VIS--VIS THE FIRM IN HIS INDIVIDUAL CAPACIT Y. VIS--VIS THE HUF HE WAS A PARTNER OF THE FIRM BVRE IN HIS REPRESENTATIV E CAPACITY ON BEHALF OF HUF CONSISTING OF HIMSELF AND HIS WIFE. A COPY OF THE ORDER OF AY: 1994-95 OF SHRI V.VIKRAM REDDY(HUF) HAS BEEN FILED BEFORE U S, WHICH SHOWS THAT INCOME FROM THE PARTNERSHIP FIRM BVRE HAS BEEN DECL ARED IN THE RETURN FILED IN THE CAPACITY OF HUF. 7. ON 25-06-1979 THE FIRM BVRE WAS RE-CONSTITUTED BY DEED OF PARTNERSHIP. THIS BECAME NECESSARY BECAUSE SMT. V. ANITHA REDDY AND V.SANDHYA REDDY ATTAINED MAJORITY AND THEREFORE, TH EY BECAME FULL FLEDGED PARTNERS WITH EFFECT FROM 01-07-1978. 8. ON 30-12-1982 ANOTHER DEED OF PARTNERSHIP WAS E NTERED INTO BETWEEN THE PARTNERS. THIS DEED BECAME NECESSARY BECAUSE S HRI V.DINESH REDDY BECAME A MAJOR AND HE BECAME A FULL FLEDGED PARTNER OF THE BVRE. 9. ON 10-02-1989 SHRI V.DINESH REDDY, GOT MARRIED. IT IS THE CLAIM OF THE SHRI V.DINESH REDDY THAT ON MARRIAGE HIS INTEREST I N THE PARTNERSHIP FIRM ITA NOS.149 & 150 & 158 & 159(B)/2011 5 I.E. BVRE WHICH WAS HELD BY HIM CONTINUED TO BE HEL D IN VIS--VIS THE FIRM IN HIS INDIVIDUAL CAPACITY AND VIS--VIS THE HUF IN REPRESENTATIVE CAPACITY REPRESENTING THE HUF CONSISTING OF HIMSELF AND HIS WIFE. A COPY OF THE ORDER OF ASSESSMENT FOR THE AY: 1995-96 HAS BEEN FI LED WHICH SHOWS THAT INCOME FROM THE FIRM BVRE HAS BEEN DECLARED BY SHRI V. DINESH REDDY(HUF). 10. ON 08-02-1988 A DEED OF RE-CONSTITUTION OF PA RTNERSHIP FIRM WAS ENTERED INTO. THIS DEED OF RE-CONSTITUTION WAS ONLY FOR THE PURPOSE OF CHANGE OF ACCOUNTING YEAR AND THE SIX PARTNERS CONT INUED TO BE THE PARTNERS OF THE FIRM. 11. IT IS ALSO WORTHWHILE MENTIONING THAT FOR THE AY: 1980-81 THE PARTNERSHIP FIRM BVRE WAS GRANTED THE REGISTRATION BY AN ORDER PASSED U/S 185 OF THE ACT, FOR AY: 1980-81. THIS ORDER BEC AME NECESSARY BECAUSE OF THE DEED OF RE-CONSTITUTION DATED 25-06-1979. SIMILARLY, THERE WAS A DEED OF RE-CONSTITUTION ON 30-12-1982 AND AN ORDER U/S 185 WAS PASSED GRANTING REGISTRATION TO THE PARTNERSHIP FIRM AS RE CONSTITUTED FOR THE AY: 1984-85. 12. THUS THE PARTNERSHIP CONSISTED OF THE FOLLOWIN G 6 PARTNERS AS ON 24.3.2006. 1. V.MADHUSUDHAN REDDY (HUF) 2. V.VIKRAM REDDY (HUF) ITA NOS.149 & 150 & 158 & 159(B)/2011 6 4. V.SHOBHA REDDY (ON HER MARRIAGE TO T.N.VIJAYANA RAYANA REDDY SHE IS REFERRED TO AS T.N.SHOBHA REDDY IN SOME OF THE DOCUMENTS). 4. V.ANITHA REDDY 5. V.SANDHYA REDDY 6. V.DINESH REDDY (HUF). 13. ON 24.03.2006, SEVEN OTHER MEMBERS OF THE REDD Y BECAME PARTNERS OF THE FIRM BVRE. A DEED OF RECONSTITUTION DATED 2 4-03-2006 WAS ENTERED INTO BETWEEN THE PARTIES. AS PER THIS DEED OF RECO NSTITUTION, THE FOLLOWING SEVEN PERSONS WERE ADMITTED AS INCOMING PARTNERS: I. V DWARAKANATH REDDY (INDL.) II. V INDIRA REDDY -DO- III. V. NITHYA REDDY -DO- IV. V. SAUMINI REDDY -DO- V. V DWARAKANATH REDDY (HUF) VI. V VIKRAM REDDY (INDL.) VII. V MADHUSUDHAN REDDY -DO- 14. AS PER THE DEED OF RECONSTITUTION DATED 24-03- 2006, THE CAPITAL OF THE PARTNERSHIP WAS DETERMINED AT A SUM OF RS.1,30,000/ - I.E. RS.10,000/- WAS THE SHARE OF EACH PARTNER TO THE CAPITAL OF THE FIRM. CLALUSE-4 OF THE DEED OF RECONSTITUTION DATED 24-03-2006, IT WAS PRO VIDED AS FOLLOWS; THE CAPITAL OF THE PARTNERSHIP IS RS.1,30,000/- ( RS. ONE LAKH THIRTY THOUSAND ONLY) WHICH SHALL BE CONTRIBUTED BY THE PA RTNERS HERETO IN EQUAL SHARES. WHILE NEW PARTNERS BRING IN THEIR S HARE OF CAPITAL, CONTINUING PARTNERS WILL MAKE GOOD THE SHORT FALL I N THEIR HARE OF CAPITAL. THE CAPITAL CONTRIBUTION OF EACH PARTNER IS GIVEN IN ANNEXURE-I. THE ABOVE CAPITAL SHALL NOT CARRY ANY INTEREST. IF AT ANY TIME ADDITIONAL FUNDS ARE REQUIRED FOR PURPOSES OF BUSINESS, THE PA RTIES HERETO MAY RISE FUNDS BY WAY OF BORROWALS FROM OUTSIDERS AT TH E PREVAILING MARKET ITA NOS.149 & 150 & 158 & 159(B)/2011 7 RATE OF INTEREST OR FROM AMONG THEMSELVES OR THEIR RELATIVES ON SUCH TERMS AND CONDITIONS AS MAY BE AGREED UPON BY THEM . THE EXISTING PARTNERS CAPITAL CONTRIBUTION FELL SH ORT OF RS.10,000/- BY RS.8,884/- AND THE SAME WAS CONTRIBUTED BY THEM AS CAPITAL OF THE FIRM. THE SEVEN NEW PARTNERS BROUGHT IN A SUM OF RS.10,00 0/- EACH, AS THEIR SHARE OF CAPITAL CONTRIBUTION TO THE FIRM. THE ENT IRE NARRATION OF FACTS REGARDING THE NUMBER OF PARTNERS, THE CAPACITY IN W HICH THEY WERE PARTNERS AND THE MANNER IN WHICH THEY BECAME PARTNERS AS GIV EN IN PARAGRAPHS 3 TO 14 CAN BE UNDERSTOOD BY LOOKING AT THE CHART GIVEN AS ANNEXURE-I TO THIS ORDER. 15. THE 13 PARTNERS HELD ALMOST THE ENTIRE SHARE C APITAL OF A COMPANY BY NAME M/S. NUTRINE CONFECTIONERY COMPANY PRIVATE LIM ITED (NCCPL). NCCPL WAS INCORPORATED ON 14.2.1952. IT WAS IN THE BUSINESS OF MANUFACTURE AND SALE OF CONFECTIONERY PRODUCT UNDER THE BRAND NAME NUTRINE. THE ISSUED, SUBSCRIBED AND PAID UP CAPI TAL OF NCCPL WAS 6,71,823 EQUITY SHARES OF RS.100/- EACH. THE SHARE HOLDERS AND THE NUMBER OF SHARES HELD BY THEM WERE AS FOLLOWS: EXISTING PARTNERS: 1. V.MADHUSUDHAN REDDY(HUF) 1,22,089 2. V.VIKRAM REDDY (HUF) 42,394 3. V.SHOBHA REDDY(INDL.) 2,950 (ON HER MARRIAGE TO T.N.VIJAYANARAYANA REDDY SHE IS REFERRED TO AS T.N.SHOBHA REDDY IN SOME OF THE DOCUMENTS). 4. V.ANITHA REDDY(INDL.) 21,589 5. V.SANDHYA REDDY(INDL.) 13,480 ITA NOS.149 & 150 & 158 & 159(B)/2011 8 6. V.DINESH REDDY (HUF). 1,67,599 NEW PARTNERS: 7. V .DWARAKANATH REDDY(INDL.) 1,02,948 8. V. INDIRA REDDY (INDL.) 6,891 9. V. NITHYA REDDY (INDL.) 43,578 10.V. SAUMINI REDDY(INDL.) 31,388 11.V DWARAKANATH REDDY (HUF) 29,920 12.V. VIKRAM REDDY(INDL.) 36,181 13.V.MADHUSUDHAN REDDY(INDL.) 44,318 6,65,325 OTHERS: 14. MR.V.DINESH REDDY (INDL.) 375 15. MS.BINDUVASINI 5,760 16. S.VASUDEVAN 363 _________ TOTAL 6,71,823 16. THE EXISTING PARTNERS AND THE NEW PARTNERS ALS O BROUGHT IN THE SHARES HELD BY THEM IN NCCPL AS THEIR SHARE OF CAPITAL CON TRIBUTION TO THE FIRM BVRE. THE SHARES SO BROUGHT IN WERE VALUED AT A SUM OF RS.35.27 CRORES AS ON 24-03-2006. NECESSARY ENTRIES WERE PA SSED IN THE BOOKS OF ACCOUNTS ON 24.3.06, RECORDING THE SHARES AS PROPER TY OF THE FIRM AND CREDITING THE CAPITAL ACCOUNT OF THE RESPECTIVE PAR TNERS WITH THE RESPECTIVE VALUE OF THE SHARES BROUGHT IN BY THEM AS THEIR SHA RE OF CAPITAL. THE FOLLOWING AMOUNTS WERE CREDITED TO THE CAPITAL ACCO UNT OF THE PARTNERS OF BVRE. NAME NO. OF VALUE CREDITED SHARES TO CAPITAL A/C. RS. 1. V.MADHUSUDHAN REDDY(HUF) 1,22,089 6,47,07,000 2. V.VIKRAM REDDY (HUF) 42,394 2,24,69,000 3. V.SHOBHA REDDY(INDL.) 2,950 15,63,0 00 4. V.ANITHA REDDY(INDL.) 21,589 1,14,42,000 ITA NOS.149 & 150 & 158 & 159(B)/2011 9 5. V.SANDHYA REDDY(INDL.) 13,480 71,44, 000 6. V.DINESH REDDY (HUF). 1,67,599 8,88,27,000 7. V .DWARAKANATH REDDY(INDL.) 1,02,948 5,42,62,0 00 8. V. INDIRA REDDY (INDL.) 6,891 36,5 2,000 9. V. NITHYA REDDY (INDL.) 43,578 2,30,96,000 10.V. SAUMINI REDDY(INDL.) 31,388 1,66,35,000 11.V DWARAKANATH REDDY (HUF) 29,920 1,58,58,000 12.V. VIKRAM REDDY(INDL.) 36,181 1,91,75,000 13.V.MADHUSUDHAN REDDY(INDL.) 44,318 2,34,88,00 0 TOTAL 6,65,325 35,27,48,000 17. WHEN THE 13 PARTNERS OF BVRE BROUGHT IN THE SH ARES OF NCCPL HELD BY THEM AS THEIR CAPITAL CONTRIBUTION TO THE FIRM B VRE THERE WERE CERTAIN LEGAL STEPS THAT WERE REQUIRED TO BE COMPLIED WITH TO VEST OWNERSHIP IN SHARES OF NCCPL FROM THE 13 PARTNERS TO THE FIRM BV RE. AS FAR AS THE PARTNERSHIP ACT, 1932 IS CONCERNED; SEC.16 OF THE S AID ACT CONTEMPLATES MERE BOOK ENTRIES RECOGNIZING THE FACT THAT THE FIR M IS THE OWNER OF THE SHARES AND WAS BROUGHT IN AS CAPITAL CONTRIBUTION O F THE FIRM BY THE PARTNERS. THIS FORMALITY HAS DULY BEEN COMPLIED WI TH BY BVRE. AS FAR AS THE PROVISIONS OF THE COMPANIES ACT, 1956 IS CONCER NED, A FIRM IS NOT A LEGAL ENTITY AND THEREFORE CANNOT BE RECOGNIZED AS A SHAREHOLDER IN THE REGISTER OF MEMBERS OF A COMPANY. SEC.25(4) OF THE COMPANIES ACT., 1956 BY IMPLICATION PROHIBITS A FIRM FROM BEING RECOGNIZ ED AS REGISTERED OWNER OF SHARES. SEC.187C OF THE COMPANIES ACT, 1956 HOWEVE R PROVIDES THAT WHEN A REGISTERED OWNER OF SHARES IS NOT THE BENEFICIAL OWNER OF THE SHARES THEN THE REGISTERED OWNER AS WELL AS THE BENEFICIAL OWNE R OF THE SHARES CAN GIVE A DECLARATION TO THE CONCERNED COMPANY MENTIONING THE PARTICULARS OF THE ITA NOS.149 & 150 & 158 & 159(B)/2011 10 BENEFICIAL INTEREST. ONCE SUCH A DECLARATION IS FI LED, THE CONCERNED COMPANY HAS TO FILE THE SAME WITH THE REGISTRAR OF COMPANIES CONCERNED. 18. ON 22.3.2006, THE 13 PARTNERS OF THE FIRM BVRE IN A MEETING HELD AT THE OFFICE OF THE FIRM AT CHITTOOR, ANDHRA PRADESH, RESOLVED THAT ONE OF THE PARTNER VIZ., MR.V.MADHUSUDAN REDDY, BE RECOGNIZED AS REGISTERED OWNER OF THE SHARES OF NCCPL HELD BY THEM (WHICH WERE BRO UGHT IN BY THEM AS THEIR CAPITAL CONTRIBUTION TO THE FIRM BVRE) IN THE REGISTER OF MEMBERS OF NCCPL. IT WAS ALSO RESOLVED THAT V.MADHUSUDAN REDD Y WILL HOLD THOSE SHARES FOR AND ON BEHALF OF THE FIRM. 19. ON 24.3.2006, THE SHARES OF NCCPL BROUGHT IN A S CAPITAL CONTRIBUTION BY THE PARTNERS WERE RECOGNIZED AS THE PROPERTY OF THE FIRM. ON THE VERY SAME DATE THE 13 PARTNERS SIGNED AND DELIVERED SHAR E TRANSFER FORMS TRANSFERRING THE SHARES SO BROUGHT IN AS CAPITAL IN FAVOUR OF V.MADHUSUDAN REDDY. MR.V.MADHUSUDAN REDDYS NAME WAS ENTERED AS REGISTERED SHAREHOLDER OF THE SHARES OF NCCPL IN THE REGISTER OF MEMBERS OF NCCPL. 20. ON 27.3.2006, V.MADHUSUDAN REDDY FILED A DECLA RATION U/S.187-C OF THE COMPANIES ACT, 1956 WITH NCCPL DECLARING THAT T HE BENEFICIAL OWNER OF THE 6,65,325 SHARES OF NCCPL HELD BY HIM WERE THE 1 3 PARTNERS OF THE FIRM BVRE. IN THE SAID DECLARATION IT HAS FURTHER MENTI ONED THE NATURE OF THE BENEFICIAL INTEREST AS PARTNER IN PARTNERSHIP FIRM. THE REASON FOR THE ITA NOS.149 & 150 & 158 & 159(B)/2011 11 SHARES NOT HAVING BEEN REGISTERED IN THE NAME OF TH E BENEFICIAL OWNER HAS BEEN DECLARED BY HIM AS OWING TO THE FACT THAT ALL PARTNERS NAME COULD NOT BE ENTERED IN THE REGISTER OF MEMBERS. 21. SIMILARLY THE 13 PARTNERS ON 29.3.2006 GAVE SI MILAR DECLARATION U/S.187-C OF THE COMPANIES ACT, 19556, THAT THEY AR E THE BENEFICIAL OWNERS OF THE 6,65,325 SHARES OF NCCPL. THEY ALSO DECLARED THAT THE SHARES WERE BROUGHT IN BY THEM AS CAPITAL CONTRIBUT ION OF THE FIRM BVRE AND THAT ALL PARTNERS NAME CANNOT BE ENTERED IN THE REGISTER OF MEMBERS OF NCCPL AND HENCE THE SHARES WERE REGISTERED IN THE N AME OF V.MADHUSUDAN REDDY WHO WAS TO HOLD THEM FOR AND BEH ALF OF THE FIRM. 22. ON 29.3.2006, NCCPL ALSO FILED THE DECLARATION U/S.187-C OF THE COMPANIES ACT, 1956 WITH THE REGISTRAR OF COMPANIES . 23. SECTION 45(3) OF THE ACT, PROVIDES THAT PROFIT S OR GAINS ARISING FROM TRANSFER OF A CAPITAL ASSET BY A PERSON TO A FIRM I N WHICH HE BECOMES A PARTNERS, BY WAY OF CAPITAL CONTRIBUTION, SHALL BE CHARGEABLE TO TAX AS HIS INCOME OF THE PREVIOUS YEAR IN WHICH SUCH TRANSFER TAKES PLACE. THE COMPUTATION OF CAPITAL GAIN WILL BE DONE BY ADOPTIN G THE AMOUNT RECORDED IN THE BOOKS OF ACCOUNTS OF THE FIRM AS THE VALUE O F THE CAPITAL ASSET, AS FULL VALUE OF CONSIDERATION RECEIVED AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET. IT IS NOT IN DISPUTE THAT ALL THE FOUR ASSE SSES DECLARED LONG TERM ITA NOS.149 & 150 & 158 & 159(B)/2011 12 CAPITAL GAIN (LTCG) ARISING AS A RESULT OF THE TRAN SFER OF THE SHARES OF NCCPL AS CAPITAL CONTRIBUTION OF THE FIRM BVRE AND PAID TAX ON SUCH LTCG. IN FACT IN THE CASE OF V.VIKRAM REDDY (INDIV IDUAL) ROI FILED FOR AY 06-07 DECLARING LTCG ON TRANSFER OF SHARES OF NCCPL AS CAPITAL CONTRIBUTION OF THE FIRM BVRE, IN WHICH HE WAS A PA RTNER WAS ACCEPTED IN PROCEEDINGS U/S.143(3) OF THE ACT BY ORDER DATED 31 .12.2006. 24. M/S GODREJ BEVERAGE AND FOODS LTD.,(GBFL) WANT ED TO TAKEOVER ENTIRE BUSINESS OF NCCPL BY ACQUIRING ALL THE SHARES OF NC CPL. THERE WAS A MEMORANDUM OF UNDERSTANDING DATED 29-03-2006 BETWEE N GBFL AND THE REDDY FAMILY. AS PER THE AFORESAID MEMORANDUM OF U NDERSTANDING, M/S.GBFL AS PURCHASER AND PARTY OF THE FIRST PART A GREED TO PURCHASE FROM THE REDDY FAMILY COMPRISING OF THE 16 PERSONS SET O UT IN PARA-15 OF THIS ORDER, THE 16 PERSONS BEING REPRESENTED IN THE AGRE EMENT BY SHRI V.VIKRAM REDDY, FOR AND ON BEHALF OF THE REDDY FAMILY, AS SE LLERS AND PARTY OF THE SECOND PART, AGREED WITH GBFL TO SELL ALL THE SHARE S HELD BY THE REDDY FAMILY IN NCCPL. NCCPL REPRESENTED BY MR.VIKRAM RED DY WAS ALSO A CONFIRMING PARTY TO THIS AGREEMENT AND DESCRIBED AS PARTY OF THE THIRD PART. ANNEXURE-I TO THIS MEMORANDUM OF UNDERSTANDING GIVE S THE NAMES OF 16 PERSONS REFERRED TO IN PARA-15 OF THIS ORDER AS SHA RE-HOLDERS OF NCCPL AS ON 01-03-2006. THE CONSIDERATION FOR TRANSFER OF T HE ENTIRE OWNERSHIP AND CONTROL OF THE NCCPL TOGETHER WITH BUSINESS OF THE COMPANY WAS AGREED AT A SUM OF RS.270 CRORES. ITA NOS.149 & 150 & 158 & 159(B)/2011 13 25. AS PER THE AFORESAID MOU IT WAS AGREED THAT TH E ENTIRE OWNERSHIP OF THE NCCPL WILL BE TRANSFERRED TO GBFL FOR A CONSIDE RATION OF RS.270/- CRORES, SUBJECT TO DUE DILIGENCE AND OBTAINING OF R EQUISITE APPROVALS. IT WAS ALSO AGREED THAT THE PARTIES WILL STRUCTURE THE TRANSACTION IN SUCH A MANNER AS TO BE MUTUALLY BENEFICIAL. IT WAS ALSO A GREED THAT THE TRANSACTION WOULD BE COMPLETED BEFORE 15.06.2006. 26. THERE WAS A COMPANY BY NAME M/S. NUTRINE CONFE CTIONERY & SWEETS PVT.LTD. (NCSPL). NCSPL, UNDER A BUSINESS TRANSFER AGREEMENT DATED 5.5.2006 SUCCEEDED TO THE BUSINESS CARRIED ON BY T HE FIRM BVRE AND THEREBY BECAME OWNER OF CAPITAL ASSETS/INTANGIBLE A SSETS OWNED BY THE FIRM, INCLUDING 6,65,325 EQUITY SHARES OF NCCPL THA T WERE BROUGHT IN AS CAPITAL CONTRIBUTION BY THE 13 PARTNERS OF BVRE. T HE CONSIDERATION FOR SUCH TRANSFER WAS A SUM OF RS.270 CRORES. THE SAME WAS ARRIVED AT AS FOLLOWS: SUNDRY DEBTORS RS. 40,03,424.49 ANDHRA BANK BALANCE RS. 13,710.04 CASH ON HAND RS. 633.44 NUTRINE SHARES RS.270,07,53,000.00 RS.270,47,70,767.97 LESS: SUNDRY CREDITORS RS. 47,70,767.97 NET VALUE RS.270,00,00,000.00 IT CAN BE SEEN FROM THE ABOVE VALUATION THAT THE VA LUE OF THE SHARES OF NCCPL BROUGHT IN BY THE 13 PARTNERS AS THEIR SHARE OF CAPITAL CONTRIBUTION TO THE FIRM BVRE WHICH VALUE WAS RECORDED IN THE BO OKS OF THE FIRM BVRE ITA NOS.149 & 150 & 158 & 159(B)/2011 14 AT RS.35,27,48,000 HAS BEEN ENHANCED TO RS.270,07,5 3,000. THIS IS CLAIMED TO BE FOR THE REASON THAT PRIOR TO SALE OF FIRM BVRE AS A GOING CONCERN TO NCSPL, THE SHARES OF NCCPL HELD BY THE F IRM WERE VALUED BY ADOPTING THEIR INTRINSIC VALUE WHICH WAS ARRIVED AT BY ADDING THE SHARE CAPITAL, RESERVES AND SURPLUS OF NCCPL AND DIVIDING THE SAME BY THE PAID UP CAPITAL OF NCCPL WHICH WAS 6,71,823 SHARES. PRIO R TO 5.5.2006 THE DATE ON WHICH NCSPL SUCCEEDED TO THE BUSINESS OF THE FIR M BVRE, THE CAPITAL ACCOUNT OF THE PARTNERS HAD BEEN CREDITED WITH THE VALUE OF THE SHARES AS ARRIVED AT BY ADOPTING THEIR INTRINSIC VALUE AT RS. 270,07,53,000/-. AFTER SUCCESSION, SHARES OF NCSPL WERE ALLOTTED TO THE 13 PARTNERS IN THE SAME PROPORTION IN WHICH THEIR CAPITAL ACCOUNTS STOOD IN THE BOOKS OF THE FIRM. THIS TRANSFER BY WAY OF SUCCESSION OF THE FIRM BVRE BY NCSPL WAS CLAIMED TO BE NOT A TRANSFER OF A CAPITAL ASSET GIVING RAIS E TO INCIDENCE OF CAPITAL GAIN CHARGEABLE TO TAX UNDER THE ACT BECAUSE OF THE PROVISIONS OF SEC.47(XIII) OF THE ACT. SEC.47(XIII) PROVIDES AS F OLLOWS: 'WHERE A FIRM IS SUCCEEDED BY A COMPANY IN THE BUSI NESS CARRIED ON BY IT AS A RESULT OF WHICH THE FIRM SELLS OR OTHERW ISE TRANSFERS ANY CAPITAL ASSET OR INTANGIBLE ASSET TO THE COMPANY : PROVIDED THAT (A) ALL THE ASSETS AND LIABILITIES OF THE FIRM OR O F THE AOP OR BOI RELATING TO THE BUSINESS IMMEDIATELY BEFORE THE SUC CESSION BECOME THE ASSETS AND LIABILITIES OF THE COMPANY; (B) ALL THE PARTNERS OF THE FIRM IMMEDIATELY BEFORE 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 SUCCESSION; ITA NOS.149 & 150 & 158 & 159(B)/2011 15 (C) THE PARTNERS OF THE FIRM DO NOT RECEIVE ANY CON SIDERATION OR BENEFIT DIRECTLY OR INDIRECTLY, IN ANY FORM OR MANNER, OTHE R THAN BY WAY OF ALLOTMENT OF SHARES IN THE COMPANY; AND (D) THE AGGREGATE OF THE SHAREHOLDING IN THE COMPAN Y OF THE PARTNERS OF THE FIRM IS NOT LESS THAN FIFTY PER CENT OF THE TOTAL VOTING POWER IN THE COMPANY AND THEIR SHAREHOLDING CONTINUES TO BE AS SUCH FOR A PERIOD OF FIVE YEARS FROM THE DATE OF THE SUCCESSIO N;........... 27. UNDER A SHARE PURCHASE AGREEMENT DATED 1 0.6.2006, GBFL PURCHASED 6,71,823 SHARES OF NCCPL, OUT OF WHIC H 6,62,325 SHARES WERE HELD BY NCSPL AND 375 SHARES HELD BY MR.V .DINESH REDDY (INDL.), 5,760 SHARES HELD BY MS.BINDUVASINI AND 36 3 SHARES HELD BY S.VASUDEVAN FOR A CONSIDERATION OF RS.265,00,00 ,000/-. WE HAVE ALREADY SEEN THAT THE ENTIRE PAID UP CAPITAL OF NCCPL WERE HELD BY THE FIRM AND CONSEQUENT TO SUCCESSION OF THE F IRM BY NCSPL THE ENTIRE PAID UP CAPITAL WAS HELD BY NCSPL AND THREE OTHERS. UNDER THE SHARE PURCHASE AGREEMENT DATED 10.6.2006, THE THREE OTHERS WHO SOLD THE SHARES OF NCCPL HELD BY THEM TO GBFL WERE DESCRIBED AS OTHER SELLERS AND NCSPL WAS DESCRIBED AS SELLER NO.1. GBFL AND O THER SELLERS WERE TOGETHER DESCRIBED AS SELLERS. THE 13 PARTNERS OF THE FIRM BVRE WERE DESCRIBED AS CONFIRMING PARTIES IN THIS SHARE PURCH ASE AGREEMENT. NCCPL WAS ALSO MADE A PARTY TO THIS AGREEMENT THOUGH THE SUBJECT MATTER OF THE TRANSFER UNDER THIS AGREEMENT IS THE ENTIRE SHARE C APITAL OF NCCPL, PROBABLY BY WAY OF ABUNDANT CAUTION. NCSPL RECEIVE D A CONSIDERATION OF RS.257,52,32,953 FOR SALE OF 6,65,325 SHARES OF NCC PL HELD BY IT TO GBFL. ITA NOS.149 & 150 & 158 & 159(B)/2011 16 NCSPL IN THE RETURN OF INCOME FILED FOR AY 07-08 DE CLARED A CAPITAL LOSS ON SALE OF SHARES OF NCCPL AS FOLLOWS: FULL VALUE OF CONSIDERATION RECEIVED ON TRANSFER RS.257,52,32,953 LESS: COST OF ACQUISITION RS.270,07,53,000 EXPENDITURE IN THE FORM OF STAMP DUTY RS. 67,50,000 RS.270,75, 03,000 CAPITAL LOSS RS. 13,22,79,047 NCSPL LATER CHANGED ITS NAME TO B.V.REDDY ENTERPRIS ES PRIVATE LIMITED (BVREPL). WE WILL THEREFORE REFER TO NCSPL AS NCSP L/BVREPL. 28. IN THE PREVIOUS YEAR RELEVANT TO AY 07-08, V.M ADHUSUDHAN REDDY (HUF) AND SMT.V.SOUMINI REDDY, HAD ON 31.5.2006 S HOWN A SUM OF RS.43,04,63,000 AND RS.11,07,95,000 RESPECTIVELY, I N THEIR CAPITAL ACCOUNT, BEING THE VALUE RECEIVED FROM BVREPL BY W AY OF SHARES ON SALE OF THE FIRM BVRE AS A GOING CONCERN TO NCSPL/BVREPL. ACCORDING TO THE AO, THIS AMOUNT OUGHT TO HAVE BEEN OFFERED TO TAX B Y THE ASSESSEE. HE HELD THAT THE ENTIRE EXERCISE OF TRANSFERRING SHARE S HELD BY THE ASSESSEE IN NCCPL TO A FIRM AS CAPITAL CONTRIBUTION AND THE SUB SEQUENT TAKE-OVER OF THE FIRM BY NCSPL AND THE FINAL SALE OF SHARES OF N CCPL BY NCSPL TO GODREJ WERE ALL COLOURABLE DEVICES ADOPTED AND WERE SHAM TRANSACTIONS FOR EVADING TAX LIABILITY. ACCORDINGLY THE AO HELD THA T THE INCOME EARNED ON SALE OF SHARES OF NCCPL TO GODREJ IS LIABLE TO ASSE SSED IN THE HANDS OF BOTH THE AFORESAID ASSESSEE AS FOLLOWS: ITA NOS.149 & 150 & 158 & 159(B)/2011 17 V.MADHUSUDAN SMT.V.SOUMINI REDDY (HUF) REDDY NO. OF SHARES HELD 1,22,089 31,388 TOTAL SALE CONSIDERATION( RS.3944.50 PER SHARE) RS.48,15,80,060 RS.12,38,09 ,966 LESS: COST OF ACQUISITION OF THE SHARES AS PER THE WORKING GIVEN ALONGWITH THE RETURN OF INCOME FOR AY 06-07. RS.16,33,840 RS.30,48,482 LONG TERM CAPITAL GAIN RS.47,99,46,220 RS.12,07,6 1,484 LESS: LONG TERM CAPITAL GAIN ALREADY OFFERED TAX IN AY 06-07BY THE ASSESSEE RS.6,30,73,160 RS.1,35,86,5 18 LONG TERM CAPITAL GAIN ASSESSED IN AY 07-08 RS.41,68,73,060 RS.10,71,74, 966 29. IN THE ASSESSMENT OF V.VIKRAM REDDY (INDIVIDUA L) AND V.VIKRAM REDDY (HUF), FOR AY 07-08, THE AO HELD THAT DIRECT SALE O F SHARES BY THE SHAREHOLDERS TO GODREJ WOULD HAVE RESULTED IN HUGE LONG TERM CAPITAL GAINS IN THEIR HANDS. HE HELD THAT VARIOUS TRANSACTIONS WERE ARTIFICIALLY CREATED TO CIRCUMVENT THE LAW AND AVOID PAYING TAXES TO THE GOVERNMENT. THE AO HELD THAT WHEN A MOU DATED 29.3.06 WAS SIGNED BY TH E MEMBERS OF THE REDDY FAMILY THEY KNEW THE TAX IMPLICATIONS AND THE REFORE THEY RESORTED TO VARIOUS COLOURABLE DEVICES TO AVOID PAYING TAX. ACC ORDING TO THE AO THE MOU DATED 29.3.2006 WAS THE STARTING POINT OF THE T RANSACTION AND THE SAME HAS BEEN RECOGNISED EVEN IN THE SHARE PURCHASE AGREEMENT DATED 10.6.2006 WHEREBY NCSPL SOLD SHARES OF NCCPL TO GOD REJ GROUP. THE AO ALSO MADE A REFERENCE TO THE STATEMENT OF V.VIKRAM REDDY RECORDED U/S.131 OF THE ACT WHICH WAS TO THE EFFECT THAT THE GODREJ GROUP CONTACTED ITA NOS.149 & 150 & 158 & 159(B)/2011 18 THE FAMILY MEMBERS AND THE FAMILY MEMBERS DECIDED T O SELL THE SHARES DIRECTLY TO GODREJ GROUP. ACCORDING TO THE AO IF T HE SHARES OF NCCPL WERE HELD BY NCSPL/BREVPL, THEN THERE WAS NO REQUIREMENT OF THE REDDY FAMILY SIGNING MOU DATED 29.3.2006. THIS ACCORDING TO THE AO PROVED THAT THE CORPORATE VEIL REQUIRED TO BE IGNORED. THE FIR M BVRE, COMPANIES NCCPL AND NCSPL WERE ALL REQUIRED TO BE SEEN ONLY A S FAMILY MEMBERS OF REDDY FAMILY. THE BOOK ENTRIES AND THE SERIES OF T RANSACTIONS WERE ALL ARTIFICIALLY CREATED TO CIRCUMVENT THE LAW AND AVOI D PAYING TAXES TO THE GOVERNMENT. HE MADE REFERENCE TO THE DECISION OF T HE HONBLE SUPREME COURT IN THE CASE OF MC.DOWELL & CO. LTD. 154 ITR 1 48 (SC) AND HELD THAT THE REAL TRANSACTION IS THE SALE OF SHARES BY THE V ARIOUS SHAREHOLDERS (REDDY FAMILY) TO GODREJ. THE AO COMPUTED LONG TER M CAPITAL GAIN IN THE CASE OF V.VIKRAM REDDY (INDIVIDUAL) AND V.VIKRAM RE DDY (HUF) AS FOLLOWS: V.VIKRAM V.VIKRAM REDDY (INDI) REDDY (HUF) NO. OF SHARES HELD 36,181 42394 TOTAL SALE CONSIDERATION (RS.3944.50 PER SHARE) RS.14,27,15,945.50 RS.17,79 ,27,618 LESS: COST OF ACQUISITION OF THE SHARES AS PER THE WORKING GIVEN ALONGWITH THE RETURN OF INCOME FOR AY 06-07. RS. 20,57,822 RS. 4,57,83 2 LONG TERM CAPITAL GAIN RS.14,06,58,132.00 RS.17,74 ,69,786 LESS: LONG TERM CAPITAL GAIN ALREADY OFFERED TAX IN AY 06-07 BY THE ASSESSEE RS.1,70,46,507.00 RS.2,16 ,34,068 LONG TERM CAPITAL GAIN ASSESSED IN AY 07-08 RS.12,36,11,625 RS.15,58,35,718 ITA NOS.149 & 150 & 158 & 159(B)/2011 19 30. AGGRIEVED BY THE ORDERS OF THE AO, THE ASSESSE ES PREFERRED APPEAL BEFORE CIT(A). BEFORE CIT(A) THE ASSESSEES CONTEND ED THAT THEY HAD EFFECTED TRANSFER OF THE SHARES OF NCCPL HELD BY THEM TO THE FIRM BVRE DURING THE PREVIOUS YEAR RELEVANT TO AY 06-07. THE CAPITAL GA IN ON SUCH TRANSFER WAS ALSO OFFERED TO TAX AS PER THE PROVISIONS OF SEC.45 (3) OF THE ACT AND TAXED BY THE REVENUE. THUS THE ASSESSEES RIGHT TO THE SHARE S GOT DIVESTED ON 24.3.2006 WHEN THE SHARES WERE INTRODUCED AS CAPITA L CONTRIBUTION TO THE FIRM BVRE. THEREFORE IT IS NOT PROPER ON THE PART OF THE AO IN AY 07-08 TO HOLD THAT THE ASSESSEES TRANSFERRED SHARES OF NCCPL TO GODREJ GROUP DURING THE PREVIOUS YEAR RELEVANT TO AY 07-08. 31. ON THE ABOVE SUBMISSION, THE CIT(A) HELD THAT THE FIRM BVRE WAS NOT GENUINE BECAUSE IN THE COURSE OF ASSESSMENT, THE AS SESSEES WERE NOT ABLE TO SHOW THE DETAILS OF TRANSPORT RECEIPTS OR INTERE ST RECEIPTS OF THE FIRM BVRE WHICH WAS CLAIMED TO BE ITS SOURCE OF INCOME. HE ALSO HELD THAT AS PER THE DEED OF PARTNERSHIP DATED 24.3.2006 THERE W AS NO CLAUSE WHICH REQUIRED THAT THE PARTNERS SHOULD CONTRIBUTE THE SH ARES HELD BY THEM IN NCCPL AS THEIR CAPITAL CONTRIBUTION TO THE FIRM BVR E. HE ALSO HELD THAT THE RECONSTITUTED FIRM BVRE WAS ILLEGAL AND NON-EST FOR THE FOLLOWING REASONS: 1. ACCORDING TO THE CIT(A), THE HUF OF V.VIKRAM RE DDY WAS A PARTNER IN THE FIRM BVRE AS ON 24.3.2006. IN THIS R EGARD HE REFERRED TO THE FACT THAT IN THE PARTNERSHIP DEED DATED 24.3 .2006, IN SL.NO.2 OF THE LIST OF PARTNERS V.VIKRAM REDDY WAS SHOWN AS AN EXISTING ITA NOS.149 & 150 & 158 & 159(B)/2011 20 PARTNER AND HAS BEEN DESCRIBED AS CONTINUING PARTN ER IN HIS HUF CAPACITY. IN SL.NO. 12 OF THE LIST OF PARTNERS, V.VIKRAM REDDY HAS AGAIN BEEN REFERRED TO AS NEW PARTNER IN HIS INDIV IDUAL CAPACITY. ACCORDING TO THE CIT(A), THE ABOVE DESCRIPTION IN T HE PARTNERSHIP DEED SHOWED THAT V.VIKRAM REDDY HUF WAS PARTNER IN THE FIRM. HE HELD THAT A HUF CANNOT BE ENTER INTO A PARTNERSHIP AND IN THIS REGARD REFERRED TO THE DECISION OF THE HONBLE SUPR EME COURT IN THE CASE OF CIT VS. KALU BABU LAL CHAND 37 ITR 123 (SC) . HE ALSO HELD THAT THE PRINCIPLE AS LAID DOWN ABOVE BY THE HONBL E SUPREME COURT HAS BEEN REITERATED IN THE DECISION OF AGRAWAL & CO . VS. CIT 77 ITR 10 (SC). IN THE LATER DECISION THE HONBLE SUPREME COURT REITERATED THE PRINCIPLE LAID DOWN BY THE HONBLE SUPREME COUR T IN KALU BABU LAL CHANDS CASE (SUPRA) THAT A HUF CANNOT AS SUCH ENTER INTO A CONTRACT OF PARTNERSHIP WITH ANOTHER PERSON OR PERS ONS, WENT ON TO HOLD THAT THE QUESTION AS TO WHETHER A PARTNER JOIN ED THE FIRM AS A BENEFICIAL OWNER OR THE BENEFICIAL OWNERSHIP IN HIS SHARE VESTS WITH OTHERS, WAS NOT RELEVANT AND THAT THERE WAS NO PROH IBITION IN LAW TO ENTER INTO CONTRACT OF PARTNERSHIP IN ONES INDIVID UAL CAPACITY EVEN THOUGH THE BENEFICIAL INTEREST COULD VEST IN SOME O THERS. ACCORDING TO THE CIT(A) THERE WAS NOTHING TO SHOW THAT V.VIKRAM REDDY BECAME PARTNER IN HIS INDIVIDUAL CAPACITY AND THE HUF WAS ONLY THE BENEFICIAL OWNER OF THE SHARE. HE HELD THAT THE V. VIKRAM REDDY HUF WAS THE PARTNER OF THE FIRM ON A STRICT INTERPRETAT ION OF THE PARTNERSHIP DEED AND THEREFORE THE PARTNERSHIP IN T ERMS OF THE DEED DATED 24.3.2006 WAS NON-EST IN THE EYE OF LAW. THE CIT(A) FINALLY CONCLUDED THAT 4 HUFS WERE PARTNERS UNDER THE DEED DATED 24.3.2006 AND THEREFORE THE PARTNERSHIP IS ILLEGAL AND NON-EST IN LAW. 2. HE ALSO HELD THAT THE NUMBER OF PARTNERS IN THE FIRM BVRE AS PER THE RECONSTITUTION DEED DATED 24.3.2006 EXCEEDED 20 . HE HELD THAT AS PER SEC.11(2)& (3) OF THE COMPANIES ACT, 1956, I F THE NUMBER OF ITA NOS.149 & 150 & 158 & 159(B)/2011 21 PARTNERS EXCEED 20 IN THE CASE OF NON-BANKING BUSIN ESS THEN THE PARTNERSHIP IS ILLEGAL. THE CIT(A) COMPUTED THE NU MBER OF PARTNERS AS PER THE DEED OF RECONSTITUTION OF PARTNERSHIP DA TED 24.3.2006 AS FOLLOWS: 1. SRI. V.DWARAKANATH REDDY (HUF) A) SRI.V.DWARAKANATH REDDY B) SRI.V. DINESH REDDY (SON) C) SMT.V.ANITA REDDY (DAUGHTER) D) SMT.V.SANDHYA REDDY (DAUGHTER) 2. SRI.V.VIKRAM REDDY (HUF) A) SRIV.VIKRAM REDDY B) SMT.NITHYA REDDY (WIFE) C) BINDUVASINI(DAUGHTER) D) BHANYATINI(DAUGHTER) 3. SRI.V.MADHUSUDAN REDDY (HUF) A)SRI.V.MADHUSUDAN REDDY B)SMT.SOUMINI REDDY (WIFE) C)NACHIKETA(SON) 4. SRI.V.DINESH REDDY (HUF) A)SRI.V.DINESH REDDY B)SMT.SRUTHI REDDY (WIFE) C) KIRTANA(SON) D)TANNA(DAUGHTER) ACCORDING TO THE CIT(A), THE NUMBER OF MEMBERS OF T HE 4 HUFS WERE 15 AND THE TOTAL NUMBER OF PARTNERS WOULD THEREFORE EX CEED 20 AND HENCE THERE WOULD BE VIOLATION OF THE PROVISIONS OF SEC.1 1(2) OF THE COMPANIES ACT, 1956. 32. THE CIT(A) ALSO ENDORSED THE VIEW OF THE AO TH AT THE MOU DATED 29.3.2006 REVEALS THE REAL NATURE OF THE TRANSACTIO N VIZ., SALE OF SHARES HELD BY THE VARIOUS MEMBERS OF THE REDDY FAMILY TO GBFL. ALL OTHER ITA NOS.149 & 150 & 158 & 159(B)/2011 22 INTERMEDIATE TRANSACTIONS WERE ALL COLORABLE DEVICE TO EVADE PAYMENT OF PROPER CAPITAL GAINS TAX ON SALE OF SHARES. 33. WE HAVE ALREADY SEEN THAT ULTIMATELY ON 10.6.2 006 I.E., IN THE PREVIOUS YEAR RELEVANT TO AY 07-08, 6,65,325 SHARES OF NCCPL WERE SOLD BY NCSPL/BVREPL TO GBFL. WE HAVE ALSO SEEN THAT NCSPL /BVREPL DECLARED CAPITAL LOSS ON SALE OF SUCH SHARES IN THE IR RETURNS OF INCOME FOR AY 07-08. THE AO IN THE ASSESSMENT OF NCSPL/BVREPL FOR AY 07-08 HELD THAT THE SHARES WERE VALUED ONLY AT RS.35,26,18,000 WHEN THEY WERE BROUGHT IN AS CAPITAL OF THE FIRM BVRE BY THE 13 PA RTNERS AND JUST BEFORE TAKE-OVER OF THE FIRM BY NCSPL THE SHARES WERE REVA LUED AT RS.270,07,53,000/-. ACCORDING TO THE AO OF NCSPL IN AY 07-08, THE REVALUATION SO DONE WAS ONLY NOTIONAL AND NOT ACTUA L AND THEREFORE THE COST OF ACQUISITION OF THE SHARES WERE TO BE TAKEN ONLY AT RS.35,26,18,000. THE AO ACCORDINGLY COMPUTED CAPITAL GAIN OF RS.222,26,1 4,953 IN THE HANDS OF NCSPL/BVREPL. THE ASSESSEE POINTED OUT THE ABOVE C IRCUMSTANCE BEFORE THE AO AND SUBMITTED THAT NCSPL/BVREPL HAD ALREADY BEEN ASSESSED TO TAX ON THE CAPITAL GAIN AND THEREFORE THE SAME INCO ME CANNOT BE TAXED AGAIN IN THE HANDS OF THE ASSESSEE. THIS WAS REJE CTED BY THE AO IN THE ASSESSMENT OF NCSPL/BVREPL FOR AY 07-08. ITA NOS.149 & 150 & 158 & 159(B)/2011 23 34. ON THE ABOVE ISSUE THE ASSESSEE NCSPL/BVREPL H AD GONE IN APPEAL BEFORE CIT(A)-III, CHENNAI WHO BY HIS ORDER DATED 2 6.11.2010 FOR AY 07-08 HELD: (I) THERE WAS A VALID TRANSFER BY THE 13 PARTNERS O F THE PARTNERSHIP FIRM BVRE OF THE SHARES OF NCCPL HELD BY THEM AS TH EIR CAPITAL CONTRIBUTION TO THE FIRM DURING THE PREVIOUS YEAR R ELEVANT TO AY 06- 07 AND THAT THE SAID TRANSFER ATTRACTED CAPITAL GAI NS TAX U/S.45(3). HE ALSO HELD THAT THE FULL VALUE OF CONSIDERATION R ECEIVED ON TRANSFER SHOULD BE TAKEN AS THE AMOUNT REFLECTED IN THE FIRM S BOOK PRIOR TO THE SUCCESSION OF THE FIRM BY THE COMPANY NCSPL/BVR EPL, I.E., A SUM OF RS. 270,07,53,000/- AND NOT RS.35,26,18,000/ -. HE HELD THAT THE PROPORTIONATE SHARE OF THE 13 PARTNERS IN THE SUM OF RS.270,07,53,000/- SHOULD BE RECKONED AS THE FULL V ALUE OF CONSIDERATION RECEIVED ON TRANSFER IN THE ASSESSMEN T OF THE RESPECTIVE PARTNERS FOR AY 06-07. (II) THE TRANSACTION OF TAKE-OVER OF THE BUSINESS OF THE FIRM BVRE BY THE COMPANY NCSPL WAS HELD TO NOT CHARGEABLE TO CAP ITAL GAINS TAX AS ALL CONDITIONS PRESCRIBED U/S.47(XIII) OF THE AC T HAD BEEN SATISFIED. (III) IT WAS ALSO HELD THAT FOR AY 07-08 CAPITAL G AIN OR LOSS ON SALE OF SHARES OF NCCPL TO GBFL, HAD TO BE COMPUTED IN THE ASSESSMENT OF NCSPL/BVREPL BY ADOPTING THE COST OF ACQUISITION AT RS.270,07,53,000/-. ITA NOS.149 & 150 & 158 & 159(B)/2011 24 THE ASSESSEE THUS ARGUED THAT FOR AY 07-08, THERE C OULD BE NO ASSESSMENT OF ANY CAPITAL GAIN IN THE HANDS OF THE ASSESSEES A S HAS BEEN HELD BY THE CIT(A)-III, CHENNAI IN THE ASSESSMENT OF NCSPL/BVRE PL FOR AY 07-08. 35. ON THE ABOVE SUBMISSION, THE CIT(A) IN THE IMP UGNED ORDER HELD AS FOLLOWS: 9.4 I FIND IT IS BETTER TO PERUSE THE ORDER OF CI T(APPEALS),- III, CHENNAI, ON THE ISSUE TO DISCOVER WHETHER HE HAS DI FFERED FROM THE VIEW OF AOS EITHER AT CHENNAI OR BANGALORE. IN FAC T, I FIND THE VIEWS OF AOS AT BANGALORE HAD NOT BEEN PUT BEFORE HIM FOR CONSIDERATION AND THEREFORE HE GOT NO OCCASION TO FORM AN OPINION THEREON. THEREFORE, ON FACTS PRESENTED TO HIM, HE HAS HELD T HAT THE COMPANY BVREPL OR ERSTWHILE COMPANY NCSPL HAD FULFILLED ALL CONDITIONS ENVISAGED IN SECTION 47(XIII) WHILE SUCCEEDING THE FIRM BVRE AND THEREFORE BVRE, NSCPL, BVREPL, IS NOT LIABLE TO PAY TAX ON SUCH TRANSACTION. THUS, THERE IS NO OCCASION FOR ANY DI FFERENCE OF OPINION BETWEEN THE AOS OF BANGALORE AND THE OFFICERS AT CH ENNAI BECAUSE BOTH ARE DEALING WITH APPARENTLY DIFFERENT TIMINGS OF THE DIFFERENT TRANSACTIONS IN THE SAME CONTINUUM BUT ACTUALLY ONE TRANSACTION MADE TO LOOK LIKE A SERIES OF TRANSACTIONS BY THE T AX PLANNING OF THE APPELLANTS. IN VIEW OF THIS, THE GROUND OF APPEAL IS DISMISSED. 36. IT WAS ALSO SUBMITTED ON BEHALF OF THE ASSESSE E THAT THE AO WAS NOT JUSTIFIED IN APPLYING THE RATIO OF THE HONBLE SUPR EME COURT IN THE CASE OF MC.DOWELL(SUPRA). IT WAS SUBMITTED THAT THE HONBL E SUPREME COURT IN THE CASE OF UNION OF INDIA VS. AZADI BACHAO ANDOLAN 263 ITR 706 (SC) AND COMMISSIONER OF INCOME TAX VS. WALFORT SHARE & STOC K BROKERS (P) LTD.326 ITR 1 (SC) HAS EXPLAINED THE EA RLIER RULING IN MC.DOWELLS CASE (SUPRA) AND HELD THAT EVERY MAN IS ENTITLED TO ARRANGE HIS AFFAIRS IN SUCH A MANNER THAT HE PAYS LESS TAX THAN WHAT HE WOULD HAVE OTHERWISE PAID. ON THE ABOVE SUBMISSION THE CIT(A ) HELD THAT THE REAL TEST ITA NOS.149 & 150 & 158 & 159(B)/2011 25 THAT WOULD EMANATE FROM ALL THE DECISIONS REFERRED TO ABOVE WOULD BE THAT THE TRANSACTIONS OR SERIES OF TRANSACTIONS SHOULD N OT ONLY BE LEGAL AND GENUINE. HE HELD THAT THE FIRM BVRE WAS NOT REAL O R GENUINE AND THEREFORE THE CONTRIBUTION OF SHARES OF NCCPL AS CAPITAL BY I TS PARTNERS WAS ALSO ILLEGAL. HE ALSO HELD THAT THE TRANSFER OF SHARES OF NCCPL BY THE 13 PARTNERS OF BVRE TO THE FIRM BVRE WAS ILLEGAL BECAU SE THE SAME WAS NOT IN CONFORMITY WITH THE PARTNERSHIP DEED DATED 24.3.200 6. 37. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSE SSEES HAVE PREFERRED APPEALS BEFORE THE TRIBUNAL. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEES, IN SO FAR AS IT RELATES TO BRINGING TO T AX CAPITAL GAIN ON SALE OF SHARES OF NCCPL IS CONCERNED, ARE COMMON IN ALL THE APPEALS. THEY READ AS FOLLOWS: 1) THE ORDER OF THE LEARNED COMMISSIONER IS OPPOS ED TO LAW AND FACTS OF THE CASE. 2) THE CIT HAD NO JURISDICTION ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE TO GO INTO THE VALIDITY A ND GENUINENESS OF THE FIRM M/S. BVRE OR THE TRANSFER OF SHARES IN NCC PL TO IT DURING THE YEAR ENDING 31.03.2006. 3) FROM THE IMPUGNED ORDER IT IS EVIDENT THAT THE L EARNED COMMISSIONER DID NOT APPLY HIS MIND INDEPENDENTLY, BUT MERELY FOLLOWED THE DECISION OF THE LEARNED COMMISSIONER O F INCOME TAX (APPEALS)-I DATED 28.01.2011 IN THE CASE OF SHRI VI KRAM REDDY. ITA NOS.149 & 150 & 158 & 159(B)/2011 26 4) WHEN THE FIRM HAD BEEN TREATED AS VALID AND GEN UINE IN THE EARLIER YEARS, ON THE SAME FACTS SITUATION THE PRIN CIPLE OF RES JUDICATA IN A LIMITED SENSE WILL APPLY. 5) WITHOUT PREJUDICE, THE FIRM BVRE WAS GENUINE AN D VALID IN ALL RESPECTS DURING THE YEAR ENDING 31ST MARCH 2006. 6) THE FIRM HAD BEEN TREATED AS GENUINE AND VALID BY THE ASSESSING OFFICER AT TIRUPATHI FOR ALL THE EARLIER ASSESSMENT YEARS AND THERE WAS NO CHANGE IN THE FACTS SITUATION AND HENCE IT CANNOT BE SAID THAT THE FIRM WAS REVIVED FOR THE PURPOSE O F TAX PLANNING. 7) IT SHOULD HAVE BEEN APPRECIATED THAT FOR THIS A SSESSMENT YEAR 2007-08 THE FIRM HAD BEEN TREATED AS GENUINE AND VA LID BY THE CIT (A) AT CHENNAI IN ITS APPELLATE ORDER FOR 2007-08 A ND THE SAME DOES NOT APPEAR TO HAVE BEEN CHALLENGED BY THE DEPARTMEN T. 8) THE RECORDS OF THE DEPARTMENT THEMSELVES SHOW T HAT THE FIRM OF BVRE FILED ITS RETURNS BEFORE THE JURISDICTIONAL OFFICER AT THIRUPATHI FOR THE A.Y. 2003-04, 2004-05, 2005-06 A ND 2006-07 IN THE CALENDAR YEARS 2003, 2004, 2005, 2006 AND WERE OBVIOUSLY ACCEPTED AND THIS EFFECTIVELY REBUTS THE ALLEGATION THAT THE FIRM OF BVRE WHICH WAS DEAD WAS REVIVED ONLY FOR THE PURPOS E OF INTRODUCTION OF SHARES AS CAPITAL ON 25/03/2006 WHI CH IS THE CORRECT DATE OF SUCH INTRODUCTION. 9) THE APPELLANT AFFIRMS THAT IDENTICAL DOCUMENTS AND INFORMATION WAS FURNISHED TO ALL THE AUTHORITIES IN CLUDING THE ITA NOS.149 & 150 & 158 & 159(B)/2011 27 COMMISSIONERS AND THE ASSESSING OFFICERS AT BANGALO RE AND ALSO TO THE COMMISSIONER AT CHENNAI AND IF IT WAS THE CASE OF THE COMMISSIONER THAT DIFFERENT DOCUMENTS WERE FURNISHE D, INSTEAD OF MAKING A WILD ALLEGATION HE OUGHT TO HAVE OBTAINED THE DOCUMENTS FROM HIS COLLEAGUES AND SHOWN WHICH OF THOSE WERE A T VARIANCE WITH WHAT WAS PRODUCED BEFORE HIM. 10) NO HINDU UNDIVIDED FAMILY WAS EVER PARTNER IN THE SAID FIRM AND THE DESCRIPTION IN THE DEED WAS ONLY TO SHOW TH E DESTINATION OF PROFITS AND THE HUF CANNOT BE TREATED AS A PARTNER. 11) IT SHOULD BE APPRECIATED THAT WHEN THE KARTHA BECAME A PARTNER REPRESENTING THE HUF UNDER THE RELEVANT PRO VISIONS OF THE COMPANIES ACT, THE MEMBERS OF THE HUF DO NOT BECOME AND CANNOT BE RECKONED AS PARTNERS. EVEN OTHERWISE, THE TOTAL NUMBER OF PARTNERS DOES NOT EXCEED THE STATUTORY LIMIT OF 20. 12) VARIATION IN THE CAPITAL CONTRIBUTED OR TO BE CONTRIBUTED BY A PARTNER VIS--VIS DEED DOES NOT IMPACT THE VALIDITY OF THE PARTNERSHIP. 13) THERE WAS NO CONFLICT OR CONTRADICTION BETWEEN THE DOCUMENTS AND OPINION FURNISHED BEFORE THE AUTHORITIES IN REL ATION TO THE SHARE TRANSFER AND THE EXISTENCE OF THE FIRM AND THE ALLE GATION IS BASELESS. 14) THE FINDING OF THE CIT (A) THAT THE SHARE TRAN SFERS MADE TO THE FIRM DURING THE YEAR ENDING 31.03.2006 BY THE APPEL LANT AND OTHERS SIMILARLY SITUATE WAS INVALID AND NOT GENUINE IS ER RONEOUS, UNSUBSTANTIATED AND UNSUSTAINABLE. ITA NOS.149 & 150 & 158 & 159(B)/2011 28 15) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE TRANSFER OF SHARES IN NCCPL TO BVRE TOOK PLACE ONLY ON 25.03.20 06 AND THIS POSITION IN LAW AND IN FACT IS NOT DISPLACED BY THE RESOLUTION DATED 22.03.2006 RELATING TO THE SHARE TRANSFERS BY THE A PPELLANT AND MEMBERS OF THE GROUP TO THE FIRM. THE DATE OF THE R ESOLUTION AROSE FROM AN INNOCENT ERROR AND DOES NOT AFFECT THE VALI DITY OF TRANSFER TO THE FIRM IN ANY WAY. 16) IT SHOULD HAVE BEEN APPRECIATED THAT THE MEMOR ANDUM BETWEEN THE MEMBERS OF THE REDDY GROUP AND GODREJ O NLY REFLECTS THE POSITION AS PER THE DESIRE OF THE MEMBERS TO TR ANSFER THE SHARES IN NCCPL TO GODREJ AS ON 01.03.2006 AND NOTHING MOR E AND DID NOT AFFECT THE MANNER IN WHICH THE TRANSACTION WAS ULTI MATELY PUT THROUGH. 38. WE HAVE HEARD THE ELABORATE SUBMISSIONS OF MR. ASHOK KULKARNI, ADVOCATE FOR THE APPELLANTS/ASSESSEES AND MR.INDRA KUMAR, SENIOR ADVOCATE FOR THE REVENUE. 39. BEFORE WE SET OUT THEIR RIVAL CONTENTIONS, WE MUST MAKE A REFERENCE TO AN IMPORTANT STATUTORY AMENDMENT TO THE ACT WITH RE TROSPECTIVE EFFECT, WHICH HAS A BEARING ON THE TRANSACTION OF SALE OF S HARES OF NCCPL BY NCSPL/BVREPL. UNDER THE ACT, CAPITAL GAIN IS COMPU TED IN THE MANNER ITA NOS.149 & 150 & 158 & 159(B)/2011 29 LAID DOWN IN SEC.48 OF THE ACT. SEC.48 OF THE ACT, IN SO FAR AS IT IS RELEVANT FOR THE PRESENT CASE, IS AS FOLLOWS: SEC.48: MODE OF COMPUTATION: THE INCOME CHARGEAB LE UNDER THE HEAD 'CAPITAL GAINS' SHALL BE COMPUTED, BY DEDUCTIN G FROM THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET THE FOLLOWING AMOUNTS , NAMELY : (I) EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER; (II) THE COST OF ACQUISITION OF THE ASSET AND THE C OST OF ANY IMPROVEMENT THERETO:.. SEC.49 OF THE ACT LAYS DOWN THE MANNER IN WHICH COS T WITH REFERENCE TO CERTAIN MODES OF ACQUISITION HAVE TO BE RECKONED FO R THE PURPOSE OF COMPUTING CAPITAL GAIN U/S.48 OF THE ACT. IT READS THUS: SEC.49: COST WITH REFERENCE TO CERTAIN MODES OF A CQUISITION. (1)] WHERE THE CAPITAL ASSET BECAME THE PROPERTY OF THE ASSESSEE (I) ON ANY DISTRIBUTION OF ASSETS ON THE TOTAL OR P ARTIAL PARTITION OF A HINDU UNDIVIDED FAMILY; (II) UNDER A GIFT OR WILL; (III) (A) BY SUCCESSION, INHERITANCE OR DEVOLUTION , OR (B) ON ANY DISTRIBUTION OF ASSETS ON THE DISSOLUTIO N OF A FIRM, BODY OF INDIVIDUALS, OR OTHER ASSOCIATION OF PERSONS, WHERE SUCH DISSOLUTION HAD TAKEN PLACE AT ANY TIME BEFORE THE 1ST DAY OF APRIL, 1987, OR (C) ON ANY DISTRIBUTION OF ASSETS ON THE LIQUIDATIO N OF A COMPANY, OR (D) UNDER A TRANSFER TO A REVOCABLE OR AN IRREVOCAB LE TRUST, OR (E) UNDER ANY SUCH TRANSFER AS IS REFERRED TO IN CLAUSE (IV) OR CLAUSE (V) OR CLAUSE (VI)] OR CLAUSE (VIA) OR CLAUSE ITA NOS.149 & 150 & 158 & 159(B)/2011 30 (VIAA) OR CLAUSE (VICA) OR (VICB) CLAUSE (XIII) OR CLAUSE (XIIIB) OR CLAUSE (XIV) OF SECTION 47 , (IV) SUCH ASSESSEE BEING A HINDU UNDIVIDED FAMILY, BY THE MODE REFERRED TO IN SUB-SECTION (2) OF SECTION 64 AT ANY TIME AFTER THE 31ST DAY OF DECEMBER, 1969,] THE COST OF THE ACQUISITION OF THE ASSETS SHALL BE DEEMED TO BE THE COST FOR WHICH THE PREVIOUS OWNER OF THE PROPERTY A CQUIRED IT, AS INCREASED BY THE COST OF ANY IMPROVEMENT OF THE ASS ETS INCURRED OR BORNE BY THE PREVIOUS OWNER OR THE ASSESSEE, AS THE CASE MAY BE. EXPLANATION : IN THIS SUB-SECTION THE EXPRESSION 'P REVIOUS OWNER OF THE PROPERTY' IN RELATION TO ANY CAPITAL ASSET OWNE D BY AN ASSESSEE MEANS THE LAST PREVIOUS OWNER OF THE CAPITAL ASSET WHO ACQUIRED IT BY A MODE OF ACQUISITION OTHER THAN THAT REFERRED TO I N CLAUSE (I) OR CLAUSE (II) OR CLAUSE (III) OR CLAUSE (IV)] OF THIS SUB-SECTION. THE PROVISIONS OF SEC.49(1)(III)(E) MAKES A REFEREN CE CAPITAL GAIN ARISING UNDER ANY SUCH TRANSFER AS IS REFERRED TO IN CLAUSE (XIII) OF SEC.47 OF THE ACT AND IT LAYS DOWN THAT WHEN A TRANSFER TAKES PLACE I N THE ABOVE MANNER THEN THE COST OF ACQUISITION OF THE ASSETS SHALL BE DEEMED TO BE THE COST FOR WHICH THE PREVIOUS OWNER OF THE PROPERTY ACQUIRED I T. THIS AMENDMENT BY WHICH THE COST OF ACQUISITION OF CAPITAL ASSETS HAV E TO BE RECKONED FOR COMPUTING CAPITAL GAIN WHEN A TRANSFER OF CAPITAL A SSET TAKES PLACE IN THE MANNER REFERRED TO IN CLAUSE (XIII) OF SEC.47 OF TH E ACT, WAS MADE BY THE FINANCE ACT, 2012 (W.R.E.F. 1-4-1999). PRIOR TO TH E ABOVE RETROSPECTIVE AMENDMENT, THE COST OF ACQUISITION WAS TO BE RECKON ED AS THE COST FOR WHICH THE CAPITAL ASSETS WERE ACQUIRED BY THE TRANS FEROR OF THE CAPITAL ASSET AND NOT THE COST FOR WHICH THE PREVIOUS OWNER I.E., THE PERSON FROM WHOM THE TRANSFEROR ACQUIRED THE CAPITAL ASSET. THE CHA NGE IN LAW WITH ITA NOS.149 & 150 & 158 & 159(B)/2011 31 RETROSPECTIVE EFFECT HAS FAR REACHING CONSEQUENCES AS FAR AS THE PRESENT CASE IS CONCERNED, WHICH WE WILL EXPLAIN THE SUBSEQ UENT PARAGRAPHS. 40. WE SHALL NOW RECAPITULATE THE ENTIRE SEQUENCE OF TRANSACTIONS BY WHICH THE SHARES OF NCCPL WERE TRANSFERRED TO GBFL. WE W ILL CLASSIFY THE SEQUENCE OF EVENTS INTO THREE CATEGORIES, VIZ., I. TRANSACTION BY WHICH THE SHARES OF NCCPL, HELD BY 13 INDIVIDUALS, WERE BROUGHT INTO THE FIRM OF BVRE AS CAPITAL CONTRIBUTION OF THE 13 PARTNERS OF BVRE; II. TRANSACTION BY WHICH NCSPL/BVREPL SUCCEEDED TO THE BUSINESS OF BVRE U/S.47(XIII) OF THE ACT. III. TRANSACTION BY WHICH NCSPL/BVREPL SOLD THE SH ARES OF NCCPL TO GBFL. I. TRANSACTION BY WHICH THE SHARES OF NCCPL, HELD BY 13 INDIVIDUALS, WERE BROUGHT INTO THE FIRM OF BVRE AS CAPITAL CONTR IBUTION OF THE 13 PARTNERS OF BVRE; 41. WE HAVE ALREADY SEEN THAT THE ENTIRE PAID UP SHARE CAPITAL OF NCCPL OF 6,71,823 EQUITY SHARES OF RS.100/- EACH WAS HELD BY 16 PERSONS LISTED IN PARA -15 OF THIS ORDER. OUT OF THIS 13 PERSONS HOLDING 6,65,325 EQUITY SHARES OF NCCPL BROUGHT IN THOSE SHARES AS CAPITAL CONTRIBUTION OF THE FIRM BVRE IN WHICH THEY WERE PARTNERS ON 24.3.2006 I.E., DURING THE PREVIOUS YEAR RELEVANT TO AY 06-07. THE EQUITY SHARES SO BR OUGHT IN AS CAPITAL OF THE FIRM BVRE BECAME THE PROPERTY OF THE FIRM AND W ERE VALUED AT A SUM OF ITA NOS.149 & 150 & 158 & 159(B)/2011 32 RS.35,27,48,000 BY THE FIRM. THE TRANSACTION BY WH ICH THE 13 PARTNERS BROUGHT IN THEIR INDIVIDUAL ASSETS AS THE ASSETS OF THE FIRM ATTRACTED CHARGE TO CAPITAL GAIN TAX U/S.45(3) OF THE ACT IN AY 06-0 7. THE 13 PARTNERS HAD IN THEIR RETURNS FILED FOR AY 06-07 DULY DECLARED C APITAL GAIN ON SUCH TRANSFER ADOPTING THE VALUE OF FULL CONSIDERATION R ECEIVED ON TRANSFER PROPORTIONATE TO THE SHARES HELD BY THEM IN THE TOT AL VALUE OF RS.35,27,48,000 AND THE SAME WAS ACCEPTED BY THE RE VENUE. AS FAR AS BVRE IS CONCERNED, THE COST OF ACQUISITION OF THE 6 ,65,325 EQUITY SHARES OF RS.100/- WAS RS.35,27,48,000/-. II. TRANSACTION BY WHICH NCSPL/BVREPL SUCCEEDED TO THE BUSINESS OF BVRE U/S.47(XIII) OF THE ACT. 42. NCSPL/BVREPL, UNDER A BUSINESS TRANSFER AGREEME NT DATED 5.5.2006 SUCCEEDED TO THE BUSINESS CARRIED ON BY T HE FIRM BVRE AND THEREBY BECAME OWNER OF CAPITAL ASSETS/INTANGIBLE A SSETS OWNED BY THE FIRM, INCLUDING 6,65,325 EQUITY SHARES OF NCCPL THA T WERE BROUGHT IN AS CAPITAL CONTRIBUTION BY THE 13 PARTNERS OF BVRE. P RIOR TO SUCH TRANSFER, THE VALUE OF THE SHARES OF NCCPL BROUGHT IN BY THE 13 PARTNERS AS THEIR SHARE OF CAPITAL CONTRIBUTION TO THE FIRM BVRE WHIC H VALUE WAS RECORDED IN THE BOOKS OF THE FIRM BVRE AT RS.35,27,48,000 WAS E NHANCED TO RS.270,07,53,000. THIS WAS CLAIMED TO BE FOR THE R EASON THAT PRIOR TO SALE OF FIRM BVRE AS A GOING CONCERN TO NCSPL, THE SHARE S OF NCCPL HELD BY THE FIRM WERE VALUED BY ADOPTING THEIR INTRINSIC VA LUE WHICH WAS ARRIVED AT ITA NOS.149 & 150 & 158 & 159(B)/2011 33 BY ADDING THE SHARE CAPITAL, RESERVES AND SURPLUS O F NCCPL AND DIVIDING THE SAME BY THE PAID UP CAPITAL OF NCCPL WHICH WAS 6,71,823 SHARES. PRIOR TO 5.5.2006 THE DATE ON WHICH NCSPL SUCCEEDED TO THE BUSINESS OF THE FIRM BVRE, THE CAPITAL ACCOUNT OF THE PARTNERS HAD BEEN CREDITED WITH THE VALUE OF THE SHARES AS ARRIVED AT BY ADOPTING T HEIR INTRINSIC VALUE AT RS.270,07,53,000/-. AFTER SUCCESSION, SHARES OF NC SPL WERE ALLOTTED TO THE 13 PARTNERS IN THE SAME PROPORTION IN WHICH THE IR CAPITAL ACCOUNTS STOOD IN THE BOOKS OF THE FIRM. THIS TRANSFER BY WA Y OF SUCCESSION OF THE FIRM BVRE BY NCSPL/BVREPL WAS NOT A TRANSFER OF A C APITAL ASSET GIVING RAISE TO INCIDENCE OF CAPITAL GAIN CHARGEABLE TO TA X UNDER THE ACT BECAUSE OF THE PROVISIONS OF SEC.47(XIII) OF THE ACT. III. TRANSACTION BY WHICH NCSPL/BVREPL SOLD THE SH ARES OF NCCPL TO GBFL. 43. UNDER A SHARE PURCHASE AGREEMENT DATED 10.6.20 06, GBFL PURCHASED 6,71,823 SHARES OF NCCPL, OUT OF WHICH 6, 62,325 SHARES WERE HELD BY NCSPL/BVREPL AND 375 SHARES HELD BY MR.V.DI NESH REDDY (INDL.), 5,760 SHARES HELD BY MS.BINDUVASINI AND 36 3 SHARES HELD BY S.VASUDEVAN FOR A CONSIDERATION OF RS.265,00,00,000 /-. NCSPL RECEIVED A CONSIDERATION OF RS.257,52,32,953 FOR SALE OF 6,65, 325 SHARES OF NCCPL HELD BY IT TO GBFL. THIS TRANSACTION OF SALE OF SH ARES OF NCCPL TOOK PLACE DURING THE PREVIOUS YEAR RELEVANT TO AY 07-08. NCS PL/BVREPL IN THE RETURN OF INCOME FILED FOR AY 07-08 DECLARED A CAPI TAL LOSS ON SALE OF SHARES OF NCCPL AS FOLLOWS: ITA NOS.149 & 150 & 158 & 159(B)/2011 34 FULL VALUE OF CONSIDERATION RECEIVED ON TRANSFER RS.257,52,32,953 LESS: COST OF ACQUISITION RS.270,07,53,000 EXPENDITURE IN THE FORM OF STAMP DUTY RS. 67,50,000 RS.270,75 ,03,000 CAPITAL LOSS RS. 13,22,79,047 44. FROM THE ABOVE COMPUTATION OF CAPITAL GAIN IT CAN BE SEEN THAT NCSPL/BVREPL HAS ADOPTED THE COST OF ACQUISITION OF THE SHARES AT RS.270,07,53,000 I.E., THE COST AT WHICH IT PURCHAS ED THE SHARES OF NCCPL FROM THE FIRM BVRE. THIS CLAIM WOULD BE IN TUNE W ITH THE ACT AS IT STOOD PRIOR TO THE RETROSPECTIVE AMENDMENT TO WHICH WE HA VE ALREADY MADE A REFERENCE IN PARA-39 OF THIS ORDER. IN TERMS OF SE C.55(2)(B)(I) THE COST OF ACQUISITION WOULD BE THE COST FOR WHICH THE TRANSFE ROR ACQUIRED THE CAPITAL ASSET I.E., THE VALUE AT WHICH NCSPL/BVREPL ACQUIRE D THE SHARES. HOWEVER IN TERMS OF THE RETROSPECTIVE STATUTORY AME NDMENT TO THE PROVISIONS REFERRED TO IN PARA-39 OF THIS ORDER, TH E COST OF ACQUISITION FOR COMPUTING CAPITAL GAINS IN THE HANDS OF NCSPL/BVREP L WOULD BE RS.35,27,48,000/-. IF THE SUM OF RS.35,27,48,000 IS SUBSTITUTED WITH THE FIGURE OF 270,07,53,000 IN THE COMPUTATION OF CAPIT AL GAIN ON SALE OF SHARES OF NCCPL BY NCSPL/BVREPL, THEN THE RESULTANT FIGURE WILL BE AS FOLLOWS: FULL VALUE OF CONSIDERATION RECEIVED ON TRANSFER RS.257,52,32,953 LESS: COST OF ACQUISITION RS. 35,27,48,000 EXPENDITURE IN THE FORM OF STAMP DUTY RS. 67,50,000 RS. 35, 94,98,000 CAPITAL GAIN RS.221,57,34,953 ITA NOS.149 & 150 & 158 & 159(B)/2011 35 THEREFORE WITH THE RETROSPECTIVE CHANGE IN LAW, WHA TEVER IS THE REAL GAIN ON SALE OF SHARES OF NCCPL BY NCSPL/BVREPL, WOULD GET TAXED IN THE HANDS OF NCSPL/BVREPL. THE SERIES OF STEPS TAKEN FOR TRA NSFER OF SHARES OF NCCPL TO GBFL, ASSUMING TO BE LEGAL, WILL NOT CONFE R ANY BENEFITS IN TERMS OF PAYING TAXES ON A LESSER SUM OF CAPITAL GAIN, BE CAUSE OF THE AFORESAID STATUTORY AMENDMENT. IN THE ASSESSMENT OF THE ASSE SSEES IN THESE APPEALS, THE ENTIRE APPROACH OF THE REVENUE HAS BEE N ONLY ON THE ASPECT OF THE VARIOUS STEPS TAKEN BEFORE THE SHARES HELD BY I NDIVIDUALS ULTIMATELY GOT TRANSFERRED TO GBFL BEING COLORABLE DEVICE, HAVING BEEN ADOPTED TO AVOID PAYMENT OF TAX ON THE CORRECT QUANTUM OF CAPITAL GA IN. THAT CONCERN OF THE REVENUE HAS NOW BEEN ADDRESSED BY A STATUTORY AMEND MENT. WE ALSO NOTICE THAT THE REVENUE HAS BROUGHT TO TAX THE SAME CAPITAL GAIN IN THE HANDS OF THE ASSESSEES AS WELL AS IN THE HANDS OF N CSPL/BVREPL. THE ASSESSMENTS IN THE CASE OF THE ASSESSEES AS WELL NC SPL/BVREPL IS ON A SUBSTANTIVE BASIS. THE EFFECT OF THE ABOVE STATUTO RY AMENDMENT WAS BROUGHT TO THE NOTICE OF THE LEARNED COUNSEL FOR TH E ASSESSEE IN THE COURSE OF HEARING OF THE APPEALS. HIS SUBMISSION ON THE A BOVE ASPECT WAS THAT THE ISSUE HAS TO BE ADDRESSED ONLY IN THE ASSESSMENT OF NCSPL/BVREPL AND NOT IN THESE APPEALS. 45. IT WAS THE PLEA OF THE REVENUE IN THE PRESENT APPELLATE PROCEEDINGS THAT IT WOULD BE IDEAL THAT THE APPEAL IN THE CASE OF NCSPL/BVREPL FOR AY 07-08 WHICH ARE STATED BE PENDING BEFORE THE ITAT, CHENNAI BENCHES AND ITA NOS.149 & 150 & 158 & 159(B)/2011 36 THE APPEALS OF THE ASSESSEES IN THESE APPEALS SHOUL D BE HEARD TOGETHER. THE ASSESSEES HAVE BEEN OBJECTING TO SUCH CLUBBING OF APPEALS ON THE GROUND THAT THE ISSUES INVOLVED IN THESE APPEALS AN D THE APPEAL PENDING BEFORE ITAT CHENNAI BENCHES ARE DIFFERENT IN THEIR MEMO FILED BEFORE TRIBUNAL ON 31.7.2012. THE STAY OF RECOVERY OF OUT STANDING DEMAND AGAINST THE ASSESSEES IN THESE APPEALS COULD NOT BE STAYED BY THE TRIBUNAL BEYOND A PERIOD OF 365 DAYS BECAUSE AS PER THE DECI SION OF HONBLE KARNATAKA HIGH COURT ON INTERPRETATION OF PROVISION S OF SEC.254 OF THE ACT, THE TRIBUNAL DOES NOT HAVE POWER TO EXTEND STAY OF RECOVERY OF OUTSTANDING DEMAND BEYOND A PERIOD OF 365 DAYS. IN THOSE CIRCU MSTANCES, THE ASSESSEES PREFERRED A WRIT PETITION BEFORE THE HON BLE KARNATAKA HIGH COURT IN W.P. 38440/2012. THE HONBLE KARNATAKA H IGH COURT ACCORDINGLY HAS BY ITS ORDER DATED 12.10.2012 DIREC TED THE TRIBUNAL TO DISPOSE OF THE APPEAL WITHIN A PERIOD OF 60 DAYS FR OM THE DATE OF PRODUCTION OF THE ORDER BEFORE THE TRIBUNAL. ACCOR DINGLY THESE APPEALS WERE TAKEN UP FOR HEARING WITHOUT WAITING FOR CLUBB ING OF THESE APPEALS WITH THE APPEALS OF NCSPL/BVREPL PENDING BEFORE THE ITAT, CHENNAI BENCHES. 46. THE FOLLOWING ISSUES WOULD ARISE FOR CONSI DERATION BY US IN RESPECT OF TRANSFER OF SHARES OF NCCPL TO GBFL:- ITA NOS.149 & 150 & 158 & 159(B)/2011 37 (1) WHETHER THE CONCLUSIONS OF THE REVENUE AUTHORIT IES THAT THE FIRM BVRE WAS NOT GENUINE, LEGAL, VALID FIRM IS CORRECT? (2) CAN IT BE SAID THAT THE HUFS WERE PARTNERS IN BVRE AND THEREFORE, THE FIRM BVRE CANNOT BE SAID TO BE VALID LY CONSTITUTED? (3) CAN IT BE SAID THAT SINCE THERE ARE MORE THAN 20 PARTNERS IN THE FIRM BVRE, THE SAME IS NOT LEGAL? (4) WAS THERE A VALID TRANSFER OF SHARES OF NCCPL HELD BY THE ASSESSEES IN FAVOUR OF THE FIRM BVRE DURING THE PRE VIOUS YEAR RELEVANT TO AY 06-07? (5) WAS THERE A TRANSFER OF SHARES OF NCCPL BY T HE ASSESSEES IN FAVOUR OF GBFL DURING THE PREVIOUS YEAR RELEVANT TO A.Y. 2007-08, SO AS TO BRING TO TAX CAPITAL GAIN ON TRAN SFER OF SUCH SHARES U/S. 45 OF THE ACT IN THE HANDS OF THE ASSESSEE? (6) CAN IT BE SAID THAT THE ENTIRE SERIES OF TRANS ACTIONS BY WHICH THE SHARES OF NCCPL WERE ULTIMATELY TRANSFERR ED TO GBFL WERE ALL NOT VALID AND IN ANY EVENT WERE ARRAN GED IN SUCH A MANNER SO AS TO AVOID PAYMENT OF TAX ON THE CORRECT QUANTUM OF CAPITAL GAIN THAT WOULD RESULT O N TRANSFER OF SHARES OF NCCPL TO GBFL? ITA NOS.149 & 150 & 158 & 159(B)/2011 38 (7) IF THE SERIES OF TRANSACTIONS BY WHICH THE SHA RES OF NCCPL WERE ULTIMATELY TRANSFERRED TO GBFL WERE NOT COLOUR ABLE TRANSACTIONS AND ARE CONSIDERED TO BE LEGAL AND VAL ID, CAN IT BE SAID THAT THE ENTIRE SERIES OF TRANSACTIONS W ERE PLANNED CONSCIOUSLY AND DELIBERATELY BY THE ASSESSE ES TO MITIGATE ITS TAX BURDEN AND THEREFORE CAN THE SERIE S OF TRANSACTIONS BE IGNORED AND CAN THE REVENUE BRING T O TAX THE QUANTUM OF CAPITAL GAIN WHICH WOULD HAVE RESULT ED, 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? 47. AS FAR AS ISSUE NO.(1) IS CONCERNED, THE LD. C OUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE VARIOUS DOCUMENTS UNDER W HICH THE PARTNERSHIP FIRM BVRE CAME INTO EXISTENCE AND HOW THE 13 PARTNE RS OF THE BVRE HOLDING SHARES OF NCCPL BROUGHT IN THOSE SHARES AS CAPITAL CONTRIBUTION OF THE FIRM BVRE. THESE DETAILS ARE NOT BEING REPEAT ED HERE AND THEY CAN BE FOUND FROM THE DESCRIPTION OF FACTS, WHICH WE HAVE NARRATED FROM PARAGRAPHS 2 TO 14 OF THIS ORDER. IN PARTICULAR, O UR ATTENTION WAS DRAWN TO THE FACT THAT THE DEPARTMENT HAS PASSED ORDERS U/S. 185 OF THE ACT FOR AYS 1980-81 & 1984-85 GRANTING REGISTRATION TO THE FIRM . OUR ATTENTION WAS DRAWN TO THE FACT THAT THE FIRM BVRE HAD FILED RETU RNS OF INCOME FOR THE AYS 2004-05, 2005-06 & 2006-07 BEFORE THE ACIT-I (1 ), TIRUPATHI, WHERE ITA NOS.149 & 150 & 158 & 159(B)/2011 39 THE FIRM IS REGULARLY ASSESSED TO TAX. IT WAS SUBM ITTED THAT IT IS NOT CORRECT ON THE PART OF THE REVENUE AUTHORITIES TO SAY THAT THIS FIRM HAS BECOME DEFUNCT. THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THE FACT THAT THE PARTNERSHIP FIRM HAD SHOWN RECEIPTS FROM H IRING OUT TRUCKS. IN THE COURSE OF ASSESSMENT OF THE ASSESSEES, THE AO A SKED FOR EVIDENCE IN SUPPORT OF THE HIGHER RECEIPTS SHOWN IN THE PROFIT & LOSS ACCOUNT. SINCE THE DETAILS WERE AVAILABLE ONLY AT CHITTOOR (ANDHRA PRADESH), THE SAME COULD NOT BE PRODUCED BEFORE THE AO. THE SAME WERE HOWEVER PRODUCED BEFORE THE CIT(A). THE CIT(A), HOWEVER, HAS NOT FO UND THE EVIDENCE TO BE NOT CREDIBLE. IT CAN THUS BE SAID THAT THE CIT(A) WAS SATISFIED WITH THE RECEIPTS SHOWN BY THE FIRM BVRE. IT WAS THEREFORE SUBMITTED THAT THE FIRM BVRE WAS NOT DEFUNCT AND WAS VALID, SUBSISTING AND DERIVING INCOME FROM THE BUSINESS OF PLYING TRUCKS ON HIRE. IT WAS ALS O SUBMITTED THAT IN THE ASSESSMENT OF THE FIRM, NO SUCH FINDING HAS BEEN GI VEN AND THEREFORE IT IS NOT OPEN TO THE REVENUE AUTHORITIES WHILE MAKING AS SESSMENT ON THE PARTNERS OF THE FIRM VIZ., THE ASSESSEES IN THESE A PPEALS, TO HOLD THAT THE FIRM BVRE WAS NOT GENUINE AND NOT IN EXISTENCE. 48. THE LD. DR PLACED RELIANCE ON THE ORDERS OF TH E REVENUE AUTHORITIES ON ISSUE NO.(1) AND NO SPECIFIC ARGUMENTS WERE ADVA NCED ON THE ABOVE ASPECT. ITA NOS.149 & 150 & 158 & 159(B)/2011 40 49. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RI VAL SUBMISSIONS. AT OUR INSTANCE, CERTAIN ADDITIONAL DOCUMENTS WERE FIL ED BY THE ASSESSEE BEFORE THE TRIBUNAL. WE HAVE ALREADY MADE A REFERE NCE TO THESE IN PARAGRAPHS 2 TO 16 OF THIS ORDER. WE ARE OF THE VI EW THAT THESE DOCUMENTS ARE ALL DOCUMENTS WHICH ARE ALREADY AVAILABLE ON TH E FILE OF THE AO. THE ORDERS PASSED U/S. 185 OF THE ACT FOR THE AY 1980-8 1 & 1984-85 ARE SIMILARLY ORDERS PASSED BY THE AO ASSESSING THE FIR M. THE AUTHENTICITY, VERACITY AND THE CONTEMPORANEOUS NATURE OF THE DOCU MENTS FILED BEFORE US CANNOT BE DISPUTED OR DOUBTED. WE THEREFORE CONSID ER IT APPROPRIATE TO TAKE COGNIZANCE OF THESE DOCUMENTS FILED BY THE ASS ESSEE AT OUR INSTANCE AND DIRECTIONS. 50. IT IS CLEAR FROM THE DOCUMENTS AVAILABLE BEFOR E US THAT THE FIRM BVRE HAS BEEN ACCEPTED TO BE GENUINE BY THE REVENUE IN T HE ORDERS PASSED U/S. 185 OF THE ACT FOR THE AYS 1980-81 & 1984-85. IN F ACT, FOR AY 2006-07, THE FIRM BVRE HAS FILED RETURN OF INCOME BEFORE THE ACI T-I(1), TIRUPATHI ON 30.10.2006. THE SAID RETURN HAS BEEN ACCEPTED BY T HE REVENUE. THUS, PRIMA FACIE, THE REVENUE HAS ACCEPTED THE GENUINENE SS AND EXISTENCE OF THE FIRM BVRE. THE REVENUE CANNOT NOW SAY THAT THE FI RM BVRE IS NOT GENUINE OR THAT IT WAS DEFUNCT FIRM. IN ANY EVENT, THE AO WHILE ASSESSING THE ASSESSEES FOR AY 2007-08 HAS NO JURISDICTION TO RENDER A FINDING THAT THE FIRM BVRE WAS NOT IN EXISTENCE OR THAT THE SAME WAS DEFUNCT, WITHOUT PUTTING THE FIRM BVRE ON NOTICE ON THE GROUNDS ON W HICH THE AO WANTS TO ITA NOS.149 & 150 & 158 & 159(B)/2011 41 COME TO SUCH CONCLUSIONS. IN THE LIGHT OF THE EVID ENCE AVAILABLE ON THE RECORD, WE HOLD THAT THE FIRM BVRE WAS GENUINE, LEG AL AND VALID, WAS NOT DEFUNCT AND WAS LEGALLY AN EXISTING PARTNERSHIP FIR M. WE HOLD ACCORDINGLY ON ISSUE NO.(1). 51. AS FAR AS THE SECOND ISSUE WITH REGARD TO WH ETHER THE HUF WAS THE PARTNER OF THE FIRM BVRE, IT WAS SUBMITTED BY THE L D. COUNSEL FOR THE ASSESSEE THAT IN THE PARTNERSHIP DEED DATED 24.03.2 006, PARTNERS 1, 2, 6 & 11 (I.E., V.MADHUSUDHAN REDDY, V.VIKRAM REDDY, V.DI NESH REDDY AND V.DWARAKANATH REDDY (HUF) ) ARE RESPECTIVELY DESCRI BED AS CONTINUING PARTNERS IN HIS HUF CAPACITY. IT WAS SUBMITTED T HAT SUCH DESCRIPTION WAS ONLY TO HIGHLIGHT THE FACT THAT THESE PERSONS W ERE ALSO PARTNERS IN THEIR INDIVIDUAL CAPACITY AND TO MAKE IT CLEAR THAT THEY WERE ALSO PARTNERS IN THEIR CAPACITY AS KARTHA OF THE HUF. PARTNERS IN S L.NO.7, 12 & 13 (I.E., V.DWARAKANATH REDDY, V.VIKRAM REDDY AND V.MADHUSUDA N REDDY) WERE PARTNERS IN THEIR INDIVIDUAL CAPACITY ALSO. IT WAS SUBMITTED THAT IT IS OPEN FOR A PARTNER TO BE A PARTNER OF A PARTNERSHIP FIRM IN MORE THAN ONE CAPACITY AND IN THIS REGARD REFERENCE WAS MADE TO T HE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF ARUNA & COMPANY VS. CIT 196 ITR 831 (KARN) AND THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT V. KANDATH MOTORS 224 ITR 663 (SC) AND INSTRUCTION IN F.NO.278 DATED 12.7.1978 OF THE CBDT ACCEPTING THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF CIT V. RAGHAVJI ITA NOS.149 & 150 & 158 & 159(B)/2011 42 ANANDJI & CO., 100 ITR 246 (BOM) WHEREIN IT WAS ACCEPTED AND THE OFFICERS WERE INSTRUCTED TO ACCEPT THE VIEW THAT WH ERE PARTNERSHIP IS CONSTITUTED BY TWO OR MORE PERSONS, ONE OR MORE OF SUCH PERSONS MAY SIGN THE DEED IN DUAL CAPACITY WITHOUT MAKING THE PARTNE RSHIP INVALID AND THAT THE ITO CAN GRANT REGISTRATION TO SUCH A FIRM BUT F OR THE PURPOSE OF COMPUTING THE NUMBER OF PARTNERS, THE PERSON WHO BE COMES PARTNER IN TWO CAPACITIES WILL BE COUNTED AS TWO. IT WAS SUBMITTE D THAT BY SHOWING SAME PERSONS AS PARTNERS IN TWO CAPACITIES, THERE WAS NO INTENTION TO TREAT THE HUF AS A PARTNER AND THAT THE SAME WAS ONLY DONE TO SHOW THE ULTIMATE DESTINATION OF THE SHARE OF PROFIT OR LOSSES, WHICH WOULD BE THE HUF WHEREVER THE DESCRIPTION IS IN HIS HUF CAPACITY A ND IN THE HANDS OF THE INDIVIDUAL CONCERNED, WHEREVER THE DESCRIPTION IS IN HIS INDIVIDUAL CAPACITY. IT WAS ARGUED THAT IT IS PERFECTLY PE RMISSIBLE FOR A PERSON TO BECOME A PARTNER IN TWO CAPACITIES IN THE SAME PART NERSHIP FIRM. IF THE PARTNERSHIP DEED IS READ REASONABLY, IT WOULD BE CL EAR THAT AT NO TIME IT WAS INTENDED THAT ANY OF THE FOUR HUFS WAS TO BECOM E A PARTNER AS SUCH IN THE FIRM. IT WAS ARGUED THAT THE CONCLUSIONS OF THE REVENUE AUTHORITIES THAT SINCE HUF WAS A PARTNER, THE EXISTENCE OF THE PARTNERSHIP FIRM IS NOT VALID, CANNOT BE ACCEPTED. OUR ATTENTION WAS DRAWN TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF RAM LAXMAN SUGAR MILLS VS. COMMISSIONER OF INCOME TAX & ANR. 66 ITR 613 (SC) WHEREIN THE HONBLE SUPREME COURT HAD AN OCCASION TO EXAMINE TH E QUESTION AS TO HOW ONE HAS TO ASCERTAIN THE INTENTION OF A PERSON WHO IS SHOWN AS A PARTNER IN ITA NOS.149 & 150 & 158 & 159(B)/2011 43 THE PARTNERSHIP DEED, THAT HE REPRESENTS A HUF. TH E HONBLE SUPREME COURT HELD AS FOLLOWS:- AN HUF IS UNDOUBTEDLY A 'PERSON' WITHIN THE MEANIN G OF THE INDIAN IT ACT: IT IS, HOWEVER, NOT A JURISTIC PERSO N FOR ALL PURPOSES, AND CANNOT ENTER INTO AN AGREEMENT OF PAR TNERSHIP WITH EITHER ANOTHER UNDIVIDED FAMILY OR INDIVIDUAL. IT IS OPEN TO THE MANAGER OF A JOINT HINDU FAMILY AS REPRESENT ING THE FAMILY TO AGREE TO BECOME A PARTNER WITH ANOTHER PE RSON. THE PARTNERSHIP AGREEMENT IN THAT CASE IS BETWEEN THE M ANAGER AND THE OTHER PERSON, AND BY THE PARTNERSHIP AGREEM ENT NO MEMBERS OF THE FAMILY EXCEPT THE MANAGER ACQUIRES A RIGHT OR INTEREST IN THE PARTNERSHIP. THE JUNIOR MEMBER OF T HE FAMILY MAY MAKE A CLAIM AGAINST THE MANAGER FOR TREATING T HE INCOME OR PROFITS RECEIVED FROM THE PARTNERSHIP AS A JOINT FAMILY ASSET, BUT THEY CANNOT CLAIM TO EXERCISE THE RIGHTS OF PARTNERS NOR BE LIABLE AS PARTNERS. FROM THE MERE F ACT THAT THE MANAGER OF AN HUF DESCRIBING HIMSELF AS REPRESENTIN G THE FAMILY ENTERED INTO AN AGREEMENT OF PARTNERSHIP WIT H OTHER PERSONS, IT CANNOT BE INFERRED THAT AN AGREEMENT OF PARTNERSHIP WAS INTENDED CONTRARY TO LAW BETWEEN AN HUF CONSISTING OF ALL ADULT MEMBERS, FEMALES, MINORS AN D EVEN UNBORN PERSONS AND STRANGERS TO THE FAMILY. THE INT ENTION DISCLOSED BY THE DEED WAS THAT L WAS TO BE A PARTNE R, AND HE WAS DESCRIBED AS MANAGER AND HE SIGNED THE DOCUMENT IN THAT CAPACITY; IT DID NOT THEREBY SEEK TO BRING INT O EXISTENCE A RELATIONSHIP OF PARTNERS BETWEEN THE HUF AND THE OT HER MEMBERS DESCRIBED AS THE SECOND PARTY. NOR CAN IT S AID THAT BY THIS AGREEMENT IT WAS INTENDED TO MAKE ALL THE A DULT MEMBERS OF THE JOINT FAMILY PARTNERS OF THE ASSESSE E-FIRM. NONE OF THE CLAUSES OF THE DEED OF PARTNERSHIP EVID ENCES AN INTENTION THAT THE MEMBERS OF THE FAMILY WERE TO BE AGENTS INTER SE OR AGENTS OF THE MEMBERS OF THE SECOND PAR TY FOR THE PURPOSE OF CARRYING ON THE BUSINESS OF THE ASSESSEE -FIRM. THE TRUE INTERPRETATION OF THIS CLAUSE IS THAT L WAS TH E FIRST PARTY UNDER THE DEED. HE WAS MERELY DESCRIBED AS THE MANA GER OF THE JOINT HINDU TRADING FIRM KNOWN AND STYLED AS M/ S DINA NATH NANAK CHAND, BUT THEREBY THERE WAS NO ATTEMPT TO MAKE THE FAMILY A PARTNER OF THE FIRM. CLAUSE 6 DOE S NOT INDICATE THAT THE MEMBERS OF THE JOINT FAMILY, OF W HICH L WAS THE MANAGER, BECOME ON THAT ACCOUNT PARTNERS. THE S IGNATURE OF L WHO SIGNED THE DOCUMENT ONLY INDICATES THAT HE WAS ACTING AS A MANAGER OF THE FAMILY IN ENTERING INTO THE PARTNERSHIP AGREEMENT. THEREBY HE WAS NOT SEEKING T O MAKE ITA NOS.149 & 150 & 158 & 159(B)/2011 44 THE MEMBERS OF THE JOINT FAMILY, PARTNERS OF THE AS SESSEE- FIRM. 52. THE FOLLOWING OBSERVATIONS OF THE COURT WERE B ROUGHT TO OUR NOTICE:- IN ASCERTAINING THE LEGAL EFFECT OF A TRANSACTION THE COURT SEEKS IN THE FIRST INSTANCE TO DETERMINE THE INTENT ION OF THE PARTIES, AND WHEN AMBIGUOUS EXPRESSIONS ARE USED TH E COURT MAY NORMALLY ADOPT THAT INTERPRETATION WHICH UPHOLD S THE DEED, IF THE PARTIES THERETO HAVE ACTED ON THE ASSU MPTION OF ITS VALIDITY. FROM THE MERE FACT THAT THE MANAGER OF AN HUF DESCRIBING HIMSELF AS REPRESENTING THE FAMILY ENTER ED INTO AN AGREEMENT OF PARTNERSHIP WITH OTHER PERSONS, IT CAN NOT BE INFERRED THAT AN AGREEMENT OF PARTNERSHIP WAS INTEN DED CONTRARY TO LAW BETWEEN AN HUF CONSISTING OF ALL AD ULT MEMBERS, FEMALES, MINORS AND EVEN UNBORN PERSONS AN D STRANGERS TO THE FAMILY. 53. IT WAS SUBMITTED THAT THE ABOVE PARTNERS AS AN D WHEN THEY WERE ACTING IN THEIR CAPACITY AS MEMBER/KARTHA OF HUF, H AD FILED RETURNS OF INCOME, IN WHICH THE SHARE INCOME FROM THE FIRM HAS BEEN SHOWN AS THE INCOME OF THE HUF. THUS VIS--VIS THE FIRM THEY AC TED IN THEIR INDIVIDUAL CAPACITY AND VIS--VIS THE HUF THEY WERE ACTING IN THEIR REPRESENTATIVE CAPACITY ON BEHALF OF THE HUF. IT WAS POINTED OUT THAT THE REVENUE HAS ACCEPTED SUCH RETURNS SO FILED BY THE HUF. IT WAS SUBMITTED THAT THE REVENUE CANNOT NOW TURN AROUND AND SAY THAT HUF WAS PARTNER IN THE FIRM. IT WAS THEREFORE SUBMITTED THAT THE INTENTIO N OF THE PARTIES WAS THAT HUF WAS NEVER SOUGHT TO BE MADE AS A PARTNER OF THE FIRM. IT WAS SUBMITTED THAT THE FIRM BVRE CANNOT BE HELD TO BE N OT LEGAL, VALID BECAUSE HUFS WERE PARTNERS IN THE SAID FIRM. ITA NOS.149 & 150 & 158 & 159(B)/2011 45 54. THE LD. DR RELIED ON THE ORDER OF THE CIT(A) ON THIS ISSUE. 55. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE CIT(A) HAS ACCEPTED THE LEGAL POSITION THAT WHEN A PERSON IS SHOWN IN T HE PARTNERSHIP DEED AS PARTNER REPRESENTING THE HUF, THE HUF DOES NOT BECO ME THE PARTNER. THE CIT(A) HAS HOWEVER PROCEEDED ON THE BASIS THAT THE DESCRIPTION IN THE PARTNERSHIP DEED IN THE PRESENT CASE SHOWED THAT HU F WAS THE PARTNER. THEREAFTER, THE CIT(A) APPLIED THE PROPOSITION THAT HUF CANNOT ENTER THE PARTNERSHIP AND CARRY ON BUSINESS AND FINALLY CONCL UDED THAT THE PARTNERSHIP ITSELF IS ILLEGAL AS HUF WAS A PARTNER OF THE FIRM. IN OUR VIEW, THE CIT(A) HAS NOT PROPERLY APPRECIATED THE TRUE EF FECT OF THE DESCRIPTION IN THE PARTNERSHIP DEED. AS FAR AS V.MADHUSUDAN REDDY , V.VIKRAM REDDY AND V.DINESH REDDY ARE CONCERNED, THEY WERE SHOWN A S PARTNERS IN THEIR INDIVIDUAL CAPACITY IN ALL THE PARTNERSHIP DEEDS PR IOR TO 24.3.2006. THE FACT THAT THEIR NAMES APPEARING IN INDIVIDUAL CAPAC ITY IN ALL THE DEEDS PRIOR TO 24.3.2006 WAS IN FACT IN THEIR CAPACITY VIZ., RE PRESENTING THE HUF HAS BEEN BROUGHT OUT IN THE PARTNERSHIP DEED DATED 24.3 .2006. THIS BECAME NECESSARY BECAUSE, THESE 3 PERSONS ALSO BECAME PART NERS OF THE FIRM BVRE IN THEIR INDIVIDUAL CAPACITY UNDER THE DEED OF PART NERSHIP DATED 24.3.2006. AS FAR AS DWARKANATH REDDY IS CONCERNED, HE BECAME PARTNER IN TWO CAPACITIES UNDER THE DEED OF PARTNERSHIP DATED 24.3 .2006 VIZ., IN HIS CAPACITY ON BEHALF OF THE HUF AND IN HIS INDIVIDUAL CAPACITY. HERE AGAIN TO DISTINGUISH THE TWO CAPACITIES IN WHICH HE WAS A PA RTNER, THE DESCRIPTION ITA NOS.149 & 150 & 158 & 159(B)/2011 46 IN HIS HUF CAPACITY AND IN HIS INDIVIDUAL CAPACI TY HAD BEEN USED IN THE PARTNERSHIP DEED DATED 24.3.2006. AS RIGHTLY CONTE NDED ON BEHALF OF THE ASSESSEE, THE FACT THAT THE NAME OF AN INDIVIDUAL I S WRITTEN IN THE PARTNERSHIP DEED FOLLOWED BY THE DESCRIPTION PARTN ER IN HIS HUF CAPACITY CANNOT CONSTITUTE THE HUF AS A PARTNER. THE INTENT ION OF THE PARTIES IS VERY CLEAR THAT THE INDIVIDUAL IS A PARTNER OF THE FIRM AS FAR AS THE FIRM IS CONCERNED. AS FAR AS THE MEMBERS OF THE HUF ARE CO NCERNED, HE IS ACTING ON THEIR BEHALF IN A REPRESENTATIVE CAPACITY. THI S FACT IS ALSO CORROBORATED BY THE FACT THAT THE SHARE INCOME OF V.MADHUSUDAN R EDDY, V.VIKRAM REDDY AND V.DINESH REDDY, WHO WERE SHOWN AS INDIVID UALS IN THE PARTNERSHIP DEEDS PRIOR TO 24.3.2006, THE CONCER NED INDIVIDUAL OFFERED TO TAX IN THE HANDS OF THE HUF AND TAXED IN THE HAN DS OF THE RESPECTIVE HUFS. THE DETAILS IN THIS REGARD HAVE ALREADY BEEN GIVEN IN PARA-3 TO 15 OF THIS ORDER. A PARTNER MAY BE THE KARTA OF A JOINT HINDU FAMILY, HE MAY BE A TRUSTEE, HE MAY BE A REPRESENTATIVE OF A GROUP OF PERSONS, HE MAY BE A BENAMIDAR FOR ANOTHER. IN ALL SUCH CASES HE OCCUPI ES A DUAL POSITION; QUA THE PARTNERSHIP, HE FUNCTIONS IN HIS PERSONAL CAPAC ITY; QUA THE THIRD PARTIES, IN HIS REPRESENTATIVE CAPACITY; THIRD PART IES, WHOM ONE OF THE PARTNERS REPRESENTS, CANNOT ENFORCE THEIR RIGHTS AG AINST THE OTHER PARTNERS, NOR CAN THE OTHER PARTNERS DO SO AGAINST THE SAID T HIRD PARTIES. THEIR RIGHT IS ONLY TO A SHARE IN THE PROFITS OF THEIR PARTNERS WHO (QUA THEM) WAS REPRESENTATIVE. IT IS THUS CLEAR THAT HUF WAS NEVE R PARTNER IN THE FIRM BVRE AND THE CONCLUSIONS TO THE CONTRARY BY THE CIT (A) CANNOT BE ITA NOS.149 & 150 & 158 & 159(B)/2011 47 SUSTAINED. THUS IT IS HELD ON ISSUE NO.(2) THAT HU F WAS NOT PARTNER OF THE FIRM BVRE AND THEREFORE THE FIRM BVRE CANNOT BE SAI D TO BE NOT VALID. 56. THE THIRD ISSUE THAT ARISES FOR CONSIDERATION IS AS WHETHER THERE WERE MORE THAN 20 PERSONS AS PARTNERS IN THE FIRM B VRE, AND CONSEQUENTLY THE FIRM IS NOT VALID? SEC.11 OF THE COMPANIES ACT, 1956 PROVIDES THAT NO PARTNERSHIP SHALL CONSIST OF MORE THAN 10 PERSONS IF IT CARRIES ON BUSINESS OF BANKING AND 20 PERSONS IN TH E CASE OF ANY OTHER BUSINESS. THE FIRM BVRE WAS NOT CARRYING ON BANKIN G BUSINESS AND THEREFORE COULD HAVE 20 PARTNERS AND ON THIS THERE IS NO DISPUTE. A PARTNERSHIP FIRM IF IT VIOLATES THE ABOVE PROVISION S WILL BE CONSIDERED ILLEGAL. THE CIT(A) IN HIS ORDER FOUND THAT THERE FOUR OF THE PARTNERS WHO WERE DESCRIBED AS REPRESENTING THEIR HUFS VIZ., V.MADHUSUDHAN REDDY, V.VIKRAM REDDY, V.DINESH REDDY AND V.DWARAKA NATH REDDY. HE ALSO LISTED MEMBERS OF EACH OF THE HUFS AS FOLLO WS: I. V.DWARAKANATH REDDY (HUF) (A) SRI.V.DWARAKANATH REDDY (B) SRIV.DINESH REDDY (SON) (C ) SMT.V.ANITA REDDY (DAUGHTER) (D) SMT.V.SANDHYA REDDY (DAUGHTER) II. V.VIKRAM REDDY (HUF) (A) SRI.V.VIKRAM REDDY (B) SRIV.NITYA REDDY (WIFE) (C ) SMT.BINDUVASINI (DAUGHTER) (D) SMT.BHANYATINI (DAUGHTER) III. V.MADHUSUDAN REDDY (HUF) (A) SRI.V.MADHUSUDAN REDDY (B) SMT.SOUMINI REDDY (WIFE) (C ) NACHIKETA (SON) ITA NOS.149 & 150 & 158 & 159(B)/2011 48 IV. V.DINESH REDDY (HUF) (A) SRI.V.DINESH REDDY (B) SMT.SRUTHI REDDY (DAUGHTER) (C ) KIRTANA (SON) (D) TANNA (SON). ACTUAL NAME IS TARUN NOT TANNA AS RECORDED IN THE ORDER OF CIT(A) THE CIT(A) THEREAFTER CONCLUDED THAT THE NUMBER OF MEMBERS OF THE HUF WAS 15. THERE WERE 13 PARTNERS INCLUDING THE 4 HUF S UNDER THE DEED OF PARTNERSHIP DATED 24.3.2006. ACCORDING TO THE CIT( A), IF THE OTHER 9 PARTNERS (OTHER THAN THE 4 HUFS) WERE TAKEN INTO CO NSIDERATION THEN THE PARTNERSHIP WOULD CONSIST OF MORE THAN 20 PERSONS A ND HENCE ILLEGAL. 57. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT UNDER THE DEED OF PARTNERSHIP DATED 24.3.2006 THERE WERE THIRTEEN PAR TNERS OF WHICH FOUR PARTNERS (I.E., V.MADHUSUDHAN REDDY, V.VIKRAM REDDY , V.DINESH REDDY AND V.DWARAKANATH REDDY) WERE PARTNERS IN THEIR IND IVIDUAL CAPACITY AS FAR AS THE FIRM IS CONCERNED BUT AS BETWEEN THEM AN D THE MEMBERS OF THE HUF OF WHICH THEY WERE REPRESENTING, THEY WERE ACTI NG AS PARTNERS IN THEIR REPRESENTATIVE CAPACITY ON BEHALF OF THE HUF. OUT OF THE AFORESAID FOUR PERSONS, THREE PARTNERS VIZ., V.DWARAKANATH REDDY, V.VIKRAM REDDY AND V.MADHUSUDAN REDDY WERE REPRESENTING IN THEIR INDIV IDUAL CAPACITY ALSO. THE THREE PERSONS HAVE THUS SIGNED THE DEED OF PART NERSHIP IN DUAL CAPACITY. THUS THEY WERE TO BE RECKONED AS 7 PARTN ERS (4 HUFS AND 3 INDIVIDUALS) FOR THE PURPOSE OF APPLYING THE PROVIS IONS OF SEC.11 OF THE COMPANIES ACT, 1956. IT WAS ARGUED THAT SEC.11(2) OF THE COMPANIES ACT, ITA NOS.149 & 150 & 158 & 159(B)/2011 49 1956 USES THE EXPRESSION PERSON AND NOT PARTNERS AND THEREFORE WHEN V.DWARAKANATH REDDY, V.VIKRAM REDDY AND V.MADHUSUDA N REDDY SIGN THE PARTNERSHIP DEED IN THEIR CAPACITY AS REPRESENT ING HUF AND WHEN THEY SIGN THE PARTNERSHIP DEED IN THEIR INDIVIDUAL CAPAC ITY, THEY HAVE TO BE COUNTED TOGETHER ONLY AS 3 PERSONS AND NOT AS 6 PARTNERS. IT WAS SUBMITTED THAT EVEN IF IT THEY WERE TO BE CONSIDERE D AS PARTNERS, THEN THE NUMBER OF PARTNERS WILL ONLY BE 7 PARTNERS (4 HUFS + 3 INDIVIDUALS). IN THIS REGARD REFERENCE WAS MADE TO INSTRUCTION IN F. NO.278 DATED 12.7.1978 OF THE CBDT ACCEPTING THE DECISION OF THE HONBLE B OMBAY HIGH COURT IN THE CASE OF RAGHAVJI ANANDJI & CO., 100 ITR 246(BOM ) WHEREIN IT WAS ACCEPTED AND THE OFFICERS WERE INSTRUCTED TO ACCEPT THE VIEW THAT WHERE PARTNERSHIP IS CONSTITUTED BY TWO OR MORE PERSONS, ONE OR MORE OF SUCH PERSONS MAY SIGN THE DEED IN DUAL CAPACITY WITHOUT MAKING THE PARTNERSHIP INVALID AND THAT THE ITO CAN GRANT REGI STRATION TO SUCH A FIRM BUT FOR THE PURPOSE OF COMPUTING THE NUMBER OF PART NERS, THE PERSON WHO BECOMES PARTNER IN TWO CAPACITIES WILL BE COUNTED A S TWO. RELIANCE WAS PLACED BY THE LEARNED COUNSEL FOR THE ASSESSEE ON T HE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF AGARWAL & CO. VS. CIT 77 ITR 10 (SC). IN THE AFORESAID DECISION THE ITO, THE AAC A S WELL AS THE TRIBUNAL WERE OF THE OPINION THAT SOME PARTNERS OF THE ASSES SEE-FIRM HAVING ENTERED INTO THE PARTNERSHIP AS REPRESENTATIVES OF THEIR RE SPECTIVE HUFS, THE ADULT MEMBERS OF THOSE FAMILIES SHOULD BE TAKEN INTO CONS IDERATION FOR DETERMINING WHETHER OR NOT THE TOTAL NUMBER OF PART NERS EXCEEDED TWENTY. ITA NOS.149 & 150 & 158 & 159(B)/2011 50 ON THAT BASIS THEY HAVE ARRIVED AT THE CONCLUSION T HAT THE FIRM HAS MORE THAN TWENTY PARTNERS AND THE SAME HAVING NOT BEEN R EGISTERED AS A COMPANY UNDER THE COMPANIES ACT, NOR HAVING BEEN FO RMED IN PURSUANCE OF AN ACT OF PARLIAMENT OF THE UNITED KINGDOM OR SO ME OTHER INDIAN LAW OR OF ROYAL CHARTER OR LETTERS PATENT, IT MUST BE HELD TO BE AN UNLAWFUL PARTNERSHIP. THE HONBLE SUPREME COURT FOUND THAT THE PERSONS WHO ARE SHOWN IN THE PARTNERSHIP DEED AS PARTNERS, APPEARED TO HAVE JOINED THE SAME IN THEIR INDIVIDUAL CAPACITY. THERE WAS NOTHIN G IN THE PARTNERSHIP DEED TO INDICATE THAT THEY HAVE JOINED THE PARTNERS HIP AS KARTHAS OF THEIR RESPECTIVE FAMILIES. THE HONBLE COURT THEREFORE HE LD THAT IT WAS NOT OPEN TO THE ITO TO GO BEHIND THE DEED AND FIND OUT, FOR THE PURPOSES OF REGISTRATION UNDER S. 26A, WHETHER THE PARTNERS MENTIONED IN THE DEED HAVE JOINED THE PARTNERSHIP IN THEIR OWN RIGHT OR AS REPRESENTING O THERS. HENCE, THE PARTNERSHIP MUST BE HELD TO HAVE BEEN VALIDLY FORME D AS THE LAW DID NOT AT THE RELEVANT TIME PROHIBIT ANYONE, OTHERWISE COMPET ENT TO CONTRACT, FROM ENTERING INTO A CONTRACT OF PARTNERSHIP, EVEN THOUG H THE BENEFICIAL INTEREST IN HIS SHARE MAY VEST IN OTHERS. WHERE THE PARTNERS HIP DEED DOES NOT SPECIFY THAT CERTAIN PARTNERS WHO ARE KARTA'S OF HU FS ARE REPRESENTING THEIR RESPECTIVE FAMILIES, THE FIRM CANNOT BE DENIED REGI STRATION ON THE GROUND THAT THERE ARE MORE THAN 20 PARTNERS IF THE MEMBERS OF THE FAMILIES ARE INCLUDED. 58. ALTERNATIVELY, IT WAS SUBMITTED THAT OUT OF TH E NAMES OF MEMBERS GIVEN BY THE CIT(A) IN HIS ORDER, MINORS HAVE TO BE EXCLU DED FOR THE PURPOSE OF ITA NOS.149 & 150 & 158 & 159(B)/2011 51 COMPUTING NUMBER OF PERSONS U/S.11(2) OF THE COMPAN IES ACT, 1956. THE EXPRESSION USED IN SEC.11(3) OF THE COMPANIES ACT, 1956 IS MEMBER OF A JOINT FAMILY AND NOT CO-PARCENERS OF JOINT FAMILY AND THEREFORE ALL THE MEMBERS- MALE AND FEMALE, OTHER THAN MINORS HAVE AL ONE TO BE RECKONED. IT WAS POINTED OUT THAT KEERTHANA, NACHIKETHA AND T ARUN WERE MINORS AND THEY ARE TO BE EXCLUDED. IF DONE SO, THE NUMBER OF PERSONS VIS--VIS THE 4 HUFS WOULD BE 12 (15 3). SINCE SEC.11(2) OF THE COMPANIES ACT, 1956 USES THE EXPRESSION PERSON, THE NUMBER OF PERSONS WHO HAVE SIGNED THE PARTNERSHIP DEED IN TWO CAPACITIES HAVE TO BE RECKO NED AS ONE PERSON. IF SO DONE, THE V.MADHUSUDAN REDDY, V.VIKRAM REDDY AND V.DWARAKANATH REDDY WHO SIGNED IN THEIR INDIVIDUAL CAPACITY APART FROM THEIR CAPACITY ON BEHALF OF THE HUF HAVE TO BE EXCLUDED. THEN THE NU MBER WOULD BECOME 9. (12-3). THE OTHER PARTNERS ARE 6 (13-7 ( 7 = 4 HUFS + 3 INDIVIDUAL CAPACITY). THUS THE NUMBER OF PERSONS WOULD ONLY BE 15 (9 + 6) AND THEREFORE THERE IS NO VIOLATION OF THE PROVISIONS OF SEC.11(2) OF THE COMPANIES ACT, 1956. 59. THE LEARNED DR RELIED ON THE ORDER OF THE CIT( A) ON THE ISSUE. 60. WE HAVE CONSIDERED THE RIVAL CONTENTIONS. WHI LE DECIDING ISSUE NO.2 WE HAVE ALREADY HELD THAT THE 4 HUFS WERE NOT PARTN ERS IN THE FIRM BVRE AND THAT V.MADHUSUDHAN REDDY, V.VIKRAM REDDY, V.DIN ESH REDDY AND V.DWARAKANATH REDDY SIGNED THEIR DEED IN THEIR INDI VIDUAL CAPACITY VIS-- VIS THE FIRM AND VIS--VIS THE HUF THEY WERE ACCOUN TABLE TO THE SHARE OF PROFITS WHICH THEY RECEIVE FROM THE FIRM BVRE. IT THEREFORE FOLLOWS THAT THE ITA NOS.149 & 150 & 158 & 159(B)/2011 52 NUMBER OF PARTNERS WOULD ONLY BE 13. EVEN ASSUMING THE REVENUE IS RIGHT IN ITS CONCLUSION THAT FOR THE PURPOSE OF COMPUTING THE NUMBER OF PARTNERS, THE ADULT FEMALE AND MALE MEMBERS OF THE HUF HAVE T O BE RECKONED, THEN THE NUMBER OF PERSONS IN THE PARTNERSHIP AS DISTI NCT FROM THE NUMBER OF PARTNERS, WOULD ONLY BE 15. THE EXPRESSION USED IN SEC.11(3) OF THE COMPANIES ACT, 1956 IS MEMBER OF A JOINT FAMILY A ND NOT CO-PARCENERS OF JOINT FAMILY AND THEREFORE ALL THE MEMBERS- MALE A ND FEMALE, OTHER THAN MINORS HAVE ALONE TO BE RECKONED. SEC.11(3) OF THE COMPANIES ACT, 1956 SPECIFICALLY EXCLUDES MINORS WHILE DETERMINING THE NUMBER OF MEMBERS OF A HUF. KEERTHANA, NACHIKETHA AND TARUN WERE MINORS A ND THEY ARE TO BE EXCLUDED. IF DONE SO, THE NUMBER OF PERSONS VIS-- VIS THE 4 HUFS WOULD BE 12 (15 3). SINCE SEC.11(2) OF THE COMPANIES ACT, 1956 USES THE EXPRESSION PERSON, THE NUMBER OF PERSONS WHO HAVE SIGNED THE PARTNERSHIP DEED IN TWO CAPACITIES HAVE TO BE RECKO NED AS ONE PERSON. IF SO DONE, THE V.MADHUSUDAN REDDY, V.VIKRAM REDDY AND V.DWARAKANATH REDDY WHO SIGNED IN THEIR INDIVIDUAL CAPACITY APART FROM THEIR CAPACITY ON BEHALF OF THE HUF HAVE TO BE EXCLUDED. THEN THE NU MBER OF PERSONS IN THE PARTNERSHIP, WOULD BECOME 9. (12-3). THE OTHER PAR TNERS ARE 6 (13-7 ( 7 = 4 HUFS + 3 INDIVIDUAL CAPACITY). THUS THE NUMBER OF PERSONS WOULD ONLY BE 15 (9 + 6) AND THEREFORE THERE IS NO VIOLATION OF T HE PROVISIONS OF SEC.11(2) OF THE COMPANIES ACT, 1956. WE THEREFORE HOLD ON ISSUE NO.3 THAT THE FIRM BVRE IS NOT INVALID BECAUSE IT HAD MORE THAN 20 PER SONS AS PARTNERS. ITA NOS.149 & 150 & 158 & 159(B)/2011 53 61. THE FOURTH ISSUE WHICH ARISES FOR CONSIDE RATION IS AS TO WHETHER THERE WAS A VALID TRANSFER OF SHARES OF NCCPL HELD BY THE ASSESSEES IN FAVOUR OF THE FIRM BVRE DURING THE PREVIOUS YEAR RE LEVANT TO AY 06-07? THE FACTUAL DETAILS IN THIS REGARD AS NARRATED IN P ARA-15 TO 23 OF THIS ORDER ARE NOT DISPUTED BY THE REVENUE. ON THOSE ADMITTED FACTS IT HAS TO BE HELD THAT THERE WAS A VALID TRANSFER OF SHARES OF NCCPL HELD BY THE ASSESSEES IN FAVOUR OF THE FIRM BVRE DURING THE PREVIOUS YEAR RE LEVANT TO AY 06-07. WE SHOULD ALSO ADD THAT THE SHARES ARE REGISTERED IN T HE NAME OF MADHUSUDAN REDDY IN THE SHARE REGISTER OF THE COMPANY NCCPL TH OUGH THE SHARES BELONG TO THE FIRM BVRE. THIS IS BECAUSE A FIRM CA NNOT HOLD SHARES IN A COMPANY AND CANNOT BE SHOWN AS A REGISTERED SHARE H OLDER BECAUSE FIRM HAS NO LEGAL EXISTENCE AND IS A MERE COMPENDIOUS NA ME TO DESCRIBE ITS PARTNERS. THE DECLARATION U/S.187-C OF THE COMPANI ES ACT, 1956 CLEARLY SHOWS THAT THE BENEFICIAL OWNER OF THE SHARES STAND ING IN THE NAME OF MADHUSUDAN REDDY IS THE FIRM BVRE. APART FROM THE ABOVE, THE FACTUM OF TRANSFER BY THE ASSESSEES IN FAVOUR OF THE FIRM HAS BEEN ACCEPTED BY THE REVENUE AND THE CAPITAL GAIN DECLARED IN AY 06-07 H AS BEEN TAXED IN THE HANDS OF THE ASSESSEES BY THE REVENUE IN THOSE YEAR S. THIS FACT HAS ALSO BEEN REITERATED IN THE ASSESSMENT ORDERS OF THE ASS ESSEES FOR AY 07- 08(WHICH IS THE SUBJECT OF THE PRESENT APPEALS) WHE REIN THE REVENUE HAS TAXED ONLY THE DIFFERENCE BETWEEN THE ACTUAL CAPITA L GAIN (ACCORDING TO THE REVENUE THAT ACCRUES IN AY 07-08) AND THE CAPITAL G AIN ALREADY TAXED IN THE HANDS OF THE ASSESSEES FOR AY 06-07. WE THEREFORE HOLD ON ISSUE NO.4, THAT ITA NOS.149 & 150 & 158 & 159(B)/2011 54 THERE WAS A VALID TRANSFER OF SHARES BY THE ASSESSE ES IN FAVOUR OF THE FIRM BVRE IN THE PREVIOUS YEAR RELEVANT TO AY 06-07. 62. THE FIFTH ISSUE THAT ARISES FOR CONSIDERATION IS THE ISSUE AS TO WHETHER THERE WAS A TRANSFER OF SHARES OF NCCPL BY THE ASSE SSEES IN FAVOUR OF GBFL DURING THE PREVIOUS YEAR RELEVANT TO A.Y. 2007-08, SO AS TO BRING TO TAX CAPITAL GAIN ON TRANSFER OF SUCH SHARES U/S. 45 OF THE ACT IN THE HANDS OF THE ASSESSEE? THIS ISSUE MIGHT OVERLAP WITH ISSUE 6 AND 7 WHICH WE HAVE FRAMED FOR CONSIDERATION. TO THE EXTENT THAT THE I SSUE RELATES TO TAX AVOIDANCE/EVASION BY TAX PLANNING AS CONTENDED BY T HE REVENUE, WE WILL DEAL WITH THEM WHILE DEALING WITH THOSE GROUNDS. T HE DISCUSSION ON ISSUE NO.5 WILL THEREFORE BE LIMITED ONLY ON THE BASIS OF THE DOCUMENTS AVAILABLE ON RECORD. TO DECIDE THE ISSUE NO.5, WE HAVE TO LO OK AT THE DOCUMENT BY WHICH SHARES WERE TRANSFERRED TO GBFL BY NCSPL/BVRE PL VIZ., SHARE PURCHASE AGREEMENT DATED 10.6.2006. THE ISSUED, SUBSCRIBED AND PAID UP CAPITAL OF NCCPL WAS 6,71,823 EQUITY SHARES OF R S.100/- EACH. THE SHAREHOLDERS AND THE NUMBER OF SHARES HELD BY THEM WERE AS FOLLOWS: 1. V.MADHUSUDHAN REDDY(HUF) 1,22,089 2. V.VIKRAM REDDY (HUF) 42,394 3. V.SHOBHA REDDY(INDL.) 2,950 (ON HER MARRIAGE TO T.N.VIJAYANARAYANA REDDY SHE IS REFERRED TO AS T.N.SHOBHA REDDY IN SOME OF THE DOCUMENTS). 4. V.ANITHA REDDY(INDL.) 21,589 5. V.SANDHYA REDDY(INDL.) 13,480 6. V.DINESH REDDY (HUF). 1,67,599 7. V .DWARAKANATH REDDY(INDL.) 1,02,948 8. V. INDIRA REDDY (INDL.) 6,891 9. V. NITHYA REDDY (INDL.) 43,578 10.V. SAUMINI REDDY(INDL.) 31,388 ITA NOS.149 & 150 & 158 & 159(B)/2011 55 11.V DWARAKANATH REDDY (HUF) 29,920 12.V. VIKRAM REDDY(INDL.) 36,181 13.V.MADHUSUDHAN REDDY(INDL.) 44,318 TOTAL 6,65,325 14. MR.V.DINESH REDDY (INDL.) 375 15. MS.BINDUVASINI 5,760 16. S.VASUDEVAN 363 _________ TOTAL 6,71,823 THE SUBJECT MATTER OF THE SHARE PURCHASE AGREEMENT IS THE ENTIRE SHARE CAPITAL OF NCCPL VIZ., 6,71,823 EQUITY SHARES. THE 13 PARTNERS OF THE FIRM HOLDING 6,65,325 EQUITY SHARES HAD ALREADY TRANSFER RED THEIR SHARE HOLDING TO THE FIRM BVRE. BVRE WAS TAKEN OVER AS A GOING C ONCERN BY NCSPL AND THUS NCSPL WAS THE SELLER OF SHARES OF 6,625,325 IN THE SHARE PURCHASE AGREEMENT DATED 10.6.2006 AND HAS BEEN DESCRIBED AS SELLER NO.1 IN THE SAID AGREEMENT. THE THREE OTHER PERSONS LISTED AT SL.NO.14 TO 16 ARE DESCRIBED IN PAR-A OF ANNEXURE-I TO THE SHARE PURCH ASE AGREEMENT DATED 10.6.2006. THEY ARE DESCRIBED AS OTHER SELLERS. S ELLER NO.1 AND OTHER SELLERS ARE TOGETHER DESCRIBED AS SELLERS UNDER T HE SHARE PURCHASE AGREEMENT DATED 10.6.2006. THE 13 PARTNERS OF THE FIRM BVRE ARE DESCRIBED IN THE SHARE PURCHASE AGREEMENT DATED 10. 6.2006 AS CONFIRMING PARTY AND ARE SHOWN IN PART-B OF ANNEXURE-I TO THE SHARE PURCHASE AGREEMENT DATED 10.6.2006. CLAUSE-3 OF THE AGREEME NT WHICH REFERS TO THE TRANSFER OF SHARES, MAKES A REFERENCE TO SALE OF SH ARES BY THE SELLERS TO THE PURCHASERS (GBFL) AND THERE IS NO REFERENCE TO THE CONFIRMING PARTIES TO THE AGREEMENT SELLING SHARES TO GBFL. THE CONFIRMI NG PARTIES ONLY CONFIRM THE FACT THAT THEY HAVE TRANSFERRED THE SHARES OF N CCPL HELD BY THEM TO ITA NOS.149 & 150 & 158 & 159(B)/2011 56 THE FIRM BVRE AND THAT THEY HAVE NO RIGHT, TITLE OR INTEREST WHATSOEVER OVER THE SHARES SO TRANSFERRED. THUS IT CANNOT BE SAID THAT THERE WAS ANY TRANSFER OF SHARES OF NCCPL BY THE ASSESSEES TO GBF L DURING THE PREVIOUS YEAR RELEVANT TO AY 07-08. THIS ISSUE IS DECIDED A CCORDINGLY. 63. ISSUE NO.6 AND 7 CAN BE TAKEN UP TOGETHER. TH ESE ISSUES ARE: (6) CAN IT BE SAID THAT THE ENTIRE SERIES OF TRAN SACTIONS BY WHICH THE SHARES OF NCCPL WERE ULTIMATELY TRANSFERRED TO GBFL WERE ALL NOT VALID AND IN ANY EVENT WERE ARRANGED IN SUCH A MANN ER SO AS TO AVOID PAYMENT OF TAX ON THE CORRECT QUANTUM OF CAPI TAL GAIN THAT WOULD RESULT ON TRANSFER OF SHARES OF NCCPL TO GBFL ? (7) IF THE SERIES OF TRANSACTIONS BY WHICH THE SHA RES OF NCCPL WERE ULTIMATELY TRANSFERRED TO GBFL WERE NOT COLOURABLE TRANSACTIONS AND ARE CONSIDERED TO BE LEGAL AND VALID, CAN IT BE SAI D THAT THE ENTIRE SERIES OF TRANSACTIONS WERE PLANNED CONSCIOUSLY AND DELIBERATELY BY THE ASSESSEES TO MITIGATE ITS TAX BURDEN AND THEREF ORE CAN THE SERIES OF TRANSACTIONS BE IGNORED AND CAN THE REVENUE BRIN G TO TAX THE QUANTUM OF CAPITAL GAIN WHICH WOULD HAVE RESULTED, HAD THE TRANSACTIONS OF SALE OF SHARES OF NCCPL TO GBFL BEI NG CARRIED OUT BY THE ASSESSEES DIRECTLY TO GBFL INSTEAD OF THROUGH N CSPL/BVREPL? 64. THE LEARNED SENIOR ADVOCATE AND STANDING COUNS EL FOR THE REVENUE HAS FOCUSED HIS ATTENTION MORE ON THE ABOVE TWO ISS UES AND HAS MADE ELABORATE SUBMISSIONS ON THE ABOVE ISSUES. THE LEA RNED COUNSEL FOR THE ASSESSEES HAS ALSO MADE ELABORATE SUBMISSIONS ON TH E ABOVE ISSUES. WE SHALL SET OUT THE RIVAL CONTENTIONS ON THE ABOVE IS SUES. 64. THE LEARNED COUNSEL FOR THE ASSESSEES SUBMIT TED THAT IT IS OPEN TO AN ASSESSEE TO MITIGATE ITS TAX BURDEN WHEREBY INSTEAD OF ADOPTING A ITA NOS.149 & 150 & 158 & 159(B)/2011 57 PARTICULAR MODE OF CARRYING OUT A TRANSACTION, HE A DOPTS ANOTHER MODE WHEREBY THE TRANSACTION IS CARRIED OUT AS DESIRED B UT WITH A LESSER TAX BURDEN. IN THIS REGARD IT WAS HIS SUBMISSION THAT THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. WALFORT SHARE & STOCK BROKERS (P) LTD. 326 ITR 1 (SC) AS WELL AS AZADI BACHAO ANDOLAN 263 ITR 706 (SC ) DEPARTED FROM ITS EARLIER RULING IN THE CASE OF MC.DOWELL (SUPRA). IN PARTICULAR RELIANCE WAS PLACED ON THE DECISIONS OF THE PUNJAB & HARYANA HIGH COURT IN THE CASE OF PORRITS & SPENCER (ASIA) LTD. VS. COMMISSIONER OF INCOME TAX 329 ITR 222 (P&H) AND THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF STATE OF KARNATAKA VS. M/S.VIDEOCON INTERNATIONAL LTD. STRP NO.4 OF 2000 DA TED 14.7.2010 . IT WAS HIS SUBMISSION THAT THE HONBLE HIGH COUR TS HAVE EXPLAINED THE DECISIONS OF THE HONBLE SUPREME COUR T ON THE ASPECT OF TAX AVOIDANCE/TAX PLANNING IN THE AFORESAID DECISIONS. OUR ATTENTION WAS DRAWN TO THE FOLLOWING PASSAGE FROM THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF M/S. VIDEOCON INTERNATIONAL LTD. (SUPRA). IT IS NOW WELL SETTLED THAT A CITIZEN IS ENTITLED TO ARRANGE HIS AFFAIRS AS NOT TO ATTRACT TAXES IMPOSED BY THE STAT E, SO FAR HE CAN DO SO WITHIN THE LAW. EVERY MAN IS ENTITLED TO ORDER HIS AFFAIRS IN SUCH A MANNER THAT THE TAX ATTACHING UND ER THE APPROPRIATE ACTS IS LESS THAN IT OTHERWISE WOULD BE . IF HE SUCCEEDS IN ORDERING THEM SO AS TO SECURE THE SAID RESULT, HIS ITA NOS.149 & 150 & 158 & 159(B)/2011 58 INGENUITY IS TO BE RESPECTED AND HE CANNOT BE COMPE LLED TO PAY AN INCREASED TAX. HE MAY LEGITIMATELY CLAIM THE ADV ANTAGE OF ANY EXPRESS TERMS OR OF ANY OMISSION THAT HE CAN FI ND IN HIS FAVOUR IN TAXING STATUTES. HIS LEGAL RIGHT SO TO DI SPOSE OFF HIS CAPITAL AND INCOME AS TO ATTRACT UPON HIMSELF THE L EAST AMOUNT OF TAX IS FULLY RECOGNIZED. THE LAW DOES NOT OBLIGE A TRADER TO MAKE THE MAXIMUM PROFIT THAT HE CAN OUT OF HIS TRAD ING TRANSACTIONS. THE LEGAL RIGHT OF A TAX PAYER TO DEC REASE THE AMOUNT OF WHAT OTHERWISE WOULD BE HIS TAXES, OR ALT OGETHER TO AVOID THEM, BY MEANS WHICH THE LAW PERMITS, CANNOT BE DOUBTED. THE BASIC PROPOSITION UNDERLINING THIS TAX ATION LAW IS THAT ANY TAX PAYER IS ENTITLED SO AS TO ORDER HIS A FFAIRS IN SUCH A MANNER AS TO SEE THAT HIS LIABILITY TO TAX IS AS LO W AS POSSIBLE. IF THE TAX PAYER IS IN A POSITION TO CARRY THROUGH A T RANSACTION IN TWO ALTERNATIVE WAYS, ONE OF WHICH WILL RESULT IN A LIABILITY TO TAX AND THE OTHER OF WHICH WILL NOT, IS AT LIBERTY TO C HOOSE THE LATTER AND TO DO SO EFFECTIVELY IN THE ABSENCE OF ANY SPEC IFIC TAX AVOIDANCE PROVISION. THE FACT THAT THE MOTIVE FOR A TRANSACTION MAY BE TO AVOID TAX DOES NOT INVALIDATE IT UNLESS A PARTICULAR ENACTMENT SO PROVIDES. EVERY PERSON IS ENTITLED TO SO ARRANGE HIS AFFAIRS AS TO AVOID TAXATION. BUT THE ARRANGEME NT SHOULD BE REAL AND GENUINE AND NOT A SHAM OR MAKE BELIEVE . ITA NOS.149 & 150 & 158 & 159(B)/2011 59 IN THE LIGHT OF THE AFORESAID DECISIONS AND THE OBSERVATIONS OF THE APEX COURT EMPHATICALLY IN AZAD I BACHAO ANDOLANS CASE AS LONG AS THE ARRANGEMENT OF THE AS SESSEE TO AVOID PAYMENT OF TAX DO NOT CONTRAVENE ANY STATUTO RY PROVISION AND IS WITHIN THE FOUR CORNERS OF LAW, IT CANNOT BE FOUND FAULT WITH. THE TRANSACTIONS REFERRED TO ARE NEITHER SHAM NOR UNREAL. THOUGH WE COULD SEE THAT THE THREE COMPANIES ARE FL OATED WITH INTENTION OF AVOIDING PAYMENT OF TAX, AS LONG AS TH E SAID ACT IS WITHIN THE FRAME WORK OF LAW AND IS NOT A SHAM TRAN SACTION, THE BENEFIT OF THE LAW OR THE LOOPHOLES IN THE LAW WOUL D ENSUE TO THE BENEFIT OF THE ASSESSEE. AFTER SEEING HOW THIS LOOP HOLE HAS BEEN EXPLOITED WITHIN THE FOUR CORNERS OF LAW, THE PARLI AMENT HAS PROMPTLY NOW AMENDED THE LAW PLUGGING THE LOOPHOLE. THEREFORE BY ANY JUDICIAL INTERPRETATION WE CANNOT READ INTO THE SECTION WHICH WAS NOT INTENDED BY THE PARLIAMENT AT THE TIM E OF ENACTING THIS PROVISION. THEREFORE, THE ORDER PASSE D BY THE TRIBUNAL IS IN CONSONANCE WITH THE LAW OF THE LAND. THE SUBSTANTIAL QUESTION OF LAW RAISED IN THIS APPEAL I S ANSWERED AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE. 65. OUR ATTENTION WAS ALSO DRAWN TO THE DECISION O F THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF PORRITS & SPENCER (ASIA) LTD (SUPRA) WHEREIN THE HONBLE PUNJAB & HARYANA HIGH COURT HAS HELD THAT EVEN ITA NOS.149 & 150 & 158 & 159(B)/2011 60 THOUGH THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MC.DOWELL (SUPRA) WAS OF A LARGER, YET THE DECISION OF SMALL ER BENCH OF THE HONBLE SUPREME COURT IN THE CASE OF AZADI BACHAO ANDOLAN (SUPRA) EXPLAINING THE DECISION IN THE CASE OF MC.DOWELL (SUPRA) IS BINDING. THE FOLLOWING RELEVANT OBSERVATIONS OF THE HONBLE PUNJ AB & HARYANA HIGH COURT IN THIS REGARD, WERE BROUGHT TO OUR NOTICE: 20. THE ARGUMENT OF THE LEARNED COUNSEL FOR THE RE VENUE RESPONDENT BASED ON THE JUDGMENT RENDERED IN THE CA SE OF MCDOWELL & CO. LTD. (SUPRA) CANNOT BE ACCEPTED BECAUSE THE J UDGMENT RENDERED BY HONBLE MR. JUSTICE O. CHINNAPPA REDDY IN MCDOWELLS CASE (SUPRA) HAS BEEN EXPLAINED IN DETAIL BY THE LA TER JUDGMENT OF HONBLE THE SUPREME COURT IN THE CASE OF AZADI BACH AO ANDOLAN (SUPRA). IT IS WELL-SETTLED THAT IF A SMALLER BENCH OF HONBLE THE SUPREME COURT HAS LATER ON EXPLAINED ITS EARLIER LA RGER BENCH THEN THE LATER JUDGMENT IS BINDING ON THE HIGH COURT. IN THAT REGARD RELIANCE MAY BE PLACED ON A FULL BENCH JUDGMENT OF THIS COURT RENDERED IN THE CASE OF STATE OF PUNJAB VS. TEJA SI NGH (1971) 78 PLR 433 (P&H)(FB). SPEAKING FOR THE BENCH, HONBLE MR. JUSTICE S.S. SANDHAWALIA OBSERVED AS UNDER : 'NOW IT IS TRITE LEARNING TO SAY THAT WHEN AN EARLI ER JUDGMENT OF THE SUPREME COURT IS ANALYSED AND CONSIDERED BY A L ATTER BENCH OF THAT COURT THEN THE VIEW TAKEN BY THE LATT ER AS TO THE TRUE RATIO OF THE EARLIER CASE IS AUTHORITATIVE. IN ANY CASE LATTER VIEW IS BINDING ON THE HIGH COURTS. ' LIKEWISE, RELIANCE MAY BE PLACED ON ANOTHER FULL BE NCH JUDGMENT OF THIS COURT IN DAULAT RAM TRILOK NATH VS. STATE OF P UNJAB AIR 1976 P&H 304. IN PARA 16, SPEAKING FOR THE FULL BENCH, H ONBLE MR. JUSTICE S.S. SANDHAWALIA HELD THAT 'THE CONSTRUCTIO N WHICH THE SUPREME COURT ITSELF PLACES ON AN EARLIER PRECEDENT IS OBVIOUSLY BINDING AND AUTHORITATIVE .'. THE AFORESAID VIEW HAS ALSO BEEN FOLLOWED BY ANOTHER FULL BENCH OF THIS COURT IN THE CASE OF SUBHASH CHANDER KAMLESH KUMAR VS. STATE OF PUNJAB (1990-2) 98 PLR 666 (P&H)(FB). IN THAT CASE THE FULL BENCH WAS CONSIDER ING THE RATIO OF THE JUDGMENT RENDERED BY A CONSTITUTION BENCH OF HO NBLE THE SUPREME COURT IN THE CASE OF K.K. PURI VS. STATE OF PUNJAB AIR 1980 ITA NOS.149 & 150 & 158 & 159(B)/2011 61 SC 1008. THE AFORESAID JUDGMENT WAS ANALYSED AND EX PLAINED BY THE LATER SMALLER BENCHES OF HONBLE THE SUPREME COURT IN THE CASES OF SREENIVASA GENERAL TRADERS VS. STATE OF ANDHRA PRAD ESH AIR 1983 SC 1246 AND AMAR NATH OM PARKASH VS. STATE OF PUNJA B AIR 1985 SC 218. ACCORDINGLY, THE FULL BENCH HELD THAT THE L ATER JUDGMENTS ALTHOUGH BY SMALLER BENCHES, WHICH HAVE ANALYSED AN D EXPLAINED THE CONSTITUTION BENCH WERE BINDING. ACCORDINGLY, W E TAKE IT AS WELL- SETTLED THAT IF A SMALLER BENCH HAS LATER ON EXPLAI NED THE JUDGMENT OF A LARGER BENCH OF HONBLE THE SUPREME COURT THEN TH E LATER IS BINDING. EXAMINED IN THE AFORESAID PERSPECTIVE, THE VIEW EXPRESSED BY HONBLE THE SUPREME COURT IN THE CASE OF AZADI B ACHAO ANDOLAN (SUPRA), HAS TO BE ACCEPTED AS BINDING. THEREFORE, IT CANNOT BE SAID THAT THE PRINCIPLE OF LAW LAID DOWN BY THE HOUSE OF LORDS IN DUKE OF WESTMINSTERS CASE (SUPRA), AS FOLLOWED, EXPLAINED AND APPLIED IN THE CASE OF AZADI BACHAO ANDOLAN (SUPRA), IS NO LONGER APPLICABLE. THE PRINCIPLE IS FOUND APPLICABLE IN ITS NATIVE COUNTRY AND CANNOT BE DEEMED TO HAVE BEEN ABANDONED. MOREOVER, NO SUCH PR INCIPLES HAVING BEEN LAID DOWN IN THE CASE OF MCDOWELL & CO. LTD. (SUPRA) BY THE MAJORITY JUDGMENT, IT IS NOT POSSIBLE TO ACCEPT THE ARGUMENT ADVANCED BY THE REVENUE RESPONDENT. ACCORDINGLY, TH E SECOND QUESTION IS ALSO ANSWERED AGAINST THE REVENUE RESPO NDENT AND IN FAVOUR OF THE ASSESSEE-APPELLANT. 66. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE FOLLOWING PASSAGE FROM THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF WALFORT SHARE & STOCK BROKERS (P) LTD. (SUPRA): 20. THE REAL OBJECTION OF THE DEPARTMENT APPEARS T O BE THAT THE ASSESSEE IS GETTING TAX-FREE DIVIDEND; THAT AT THE SAME TIME IT IS CLAIMING LOSS ON THE SALE OF THE UNITS; THAT THE AS SESSEE HAD PURPOSELY AND IN A PLANNED MANNER ENTERED INTO A PR E-MEDITATED TRANSACTION OF BUYING AND SELLING UNITS YIELDING EX EMPTED DIVIDENDS WITH FULL KNOWLEDGE ABOUT THE FALL IN THE NAV AFTER THE RECORD DATE AND THE PAYMENT OF TAX-FREE DIVIDEND AND, THEREFORE , LOSS ON SALE WAS NOT GENUINE. WE FIND NO MERIT IN THE ABOVE ARGUMENT OF THE DEPARTMENT. AT THE OUTSET, WE MAY STATE THAT WE HAV E TWO SETS OF CASES BEFORE US. THE LEAD MATTER COVERS ASSESSMENT YEARS BEFORE INSERTION OF S. 94(7) VIDE FINANCE ACT, 2001 W.E.F. 1ST APRIL, 2002. WITH REGARD TO SUCH CASES WE MAY STATE THAT ON FACT S IT IS ESTABLISHED THAT THERE WAS A 'SALE'. THE SALE-PRICE WAS RECEIVE D BY THE ASSESSEE. THAT, THE ASSESSEE DID RECEIVE DIVIDEND. THE FACT T HAT THE DIVIDEND RECEIVED WAS TAX-FREE IS THE POSITION RECOGNIZED UN DER S. 10(33) OF THE ACT. THE ASSESSEE HAD MADE USE OF THE SAID PROVISIO N OF THE ACT. THAT ITA NOS.149 & 150 & 158 & 159(B)/2011 62 SUCH USE CANNOT BE CALLED 'ABUSE OF LAW'. EVEN ASSU MING THAT THE TRANSACTION WAS PRE-PLANNED THERE IS NOTHING TO IMP EACH THE GENUINENESS OF THE TRANSACTION. WITH REGARD TO THE RULING IN MCDOWELL & CO. LTD. VS. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC), IT MAY BE STATED THAT IN THE LATER DE CISION OF THIS COURT IN UNION OF INDIA VS. AZADI BACHAO ANDOLAN & ANR. ( 2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) IT HAS BEEN HELD THAT A CITIZEN IS FREE TO CARRY ON ITS BUSINESS WITHIN THE FOUR CORNE RS OF THE LAW. THAT, MERE TAX PLANNING, WITHOUT ANY MOTIVE TO EVADE TAXE S THROUGH COLOURABLE DEVICES IS NOT FROWNED UPON EVEN BY THE JUDGMENT OF THIS COURT IN MCDOWELL & CO. LTD.S CASE (SUPRA) IT WAS SUBMITTED THAT IN THE LIGHT OF THE LATER DEC ISIONS ON THE ISSUE, IT IS NO LONGER OPEN TO THE REVENUE TO CONTEND THAT A TAX PA YER IS NOT ENTITLED TO ARRANGE HIS AFFAIRS AS NOT TO ATTRACT TAXES IMPOSED BY THE STATE, SO FAR HE DOES SO WITHIN THE LAW. IT WAS ARGUED THAT THE RE VENUE CANNOT REWRITE CONTRACT BETWEEN TWO CONTRACTING PARTIES. THE DOCU MENTS EVIDENCING THE FORMATION OF PARTNERSHIP, BRINGING SHARES OF NCCPL AS CAPITAL CONTRIBUTION BY PARTNERS, TAKE-OVER OF THE FIRM BVRE AS A GOING CONCERN BY NCSPL AND THE ULTIMATE SALE OF SHARES OF NCCPL BY NCSPL ARE A LL VALID IN LAW AND IT IS NOT OPEN TO THE REVENUE TO DISREGARD THE LEGAL EFFE CT OF THOSE DOCUMENTS. BY THE VARIOUS DOCUMENTS THE PARTIES HAD ALTERED TH EIR LEGAL RIGHTS AND COULD NOT WRIGGLE OUT OF IT. THE LEGAL RIGHTS CREA TED BY SUCH DOCUMENTS RESULTS IN A LESS TAX BURDEN TO THE ASSESSEES BUT T HAT IS NO REASON TO DISREGARD THE DOCUMENTS OR THE LEGAL RIGHTS CREATED BY THOSE DOCUMENTS. WHERE THE MEANS ADOPTED ARE BONA FIDE AND NOT A SUB TERFUGE AND THE SERIES OF TRANSACTIONS WHICH ARE FOLLOWED AS THE ME ANS ARE NOT COLORABLE DEVICES OR DUBIOUS METHODS, THE MERE FACT THAT THER E IS TAX MITIGATION DOES NOT ATTRACT THE APPROACH IN MCDOWELL . ITA NOS.149 & 150 & 158 & 159(B)/2011 63 67. THE LEARNED SENIOR ADVOCATE FOR THE REVENUE SU BMITTED THAT IN REALITY SHARES OF NCCPL WERE SOLD BY THE 13 PARTNERS OF THE FIRM BVRE TO GBFL DURING THE PREVIOUS YEAR RELEVANT TO AY 07-08 AND T HEREFORE THE CONCLUSIONS OF THE REVENUE AUTHORITIES THAT CAPITAL GAIN IS CHARGEABLE TO TAX IN THE HANDS OF THE ASSESSEES PROPORTIONATE TO THEI R SHARE-HOLDING IN NCCPL, IS CORRECT. IN THIS REGARD HE DREW OUR ATTE NTION TO THE SEQUENCE OF EVENTS BY WHICH THE SHARES WHICH STOOD IN THE NAME OF 13 PARTNERS OF THE FIRM BVRE WERE ULTIMATELY TRANSFERRED TO GBFL. THE SEQUENCE OF EVENTS HAS BEEN NARRATED IN EARLIER PART OF THIS ORDER AND IS NOT BEING REPEATED. BY WAY OF RECAPITULATION, WE GIVE BRIEFLY THE BROAD ER SEQUENCE OF EVENTS. (A) 13 PERSONS HELD COLLECTIVELY HELD 6,65,325 EQU ITY SHARES OF A COMPANY BY NAME NCCPL, OUT OF THE TOTAL PAID UP CAP ITAL WAS 6,71,823 EQUITY SHARES. THE REMAINING SHARES OF NC CPL WERE HELD BY MR.V.DINESH REDDY (INDL.) 375 SHARES, MS .BINDUVASINI 5,760 SHARES, S.VASUDEVAN 363 SHARES. OUT OF THE 13 PERS ONS 6 PERSONS WERE ALREADY PARTNERS IN A FIRM BVRE WHICH CAME INT O EXISTENCE AS EARLY AS IN THE YEAR 1971. THE REMAINING 7 PERSONS WERE ADMITTED AS PARTNERS OF THE FIRM BVRE ON 24.3.2006. (B) ON THE VERY SAME DAY THEY BROUGHT IN THE SHARE S HELD BY THEM IN NCCPL AS CAPITAL CONTRIBUTION OF THE FIRM BVRE. ( C) ON 29.3.2006 A MOU WAS SIGNED BETWEEN GBFL (W HICH WANTED TO BUY THE ENTIRE PAID UP CAPITAL OF NCCPL) AND V.V IKRAM REDDY WHO REPRESENTED THE 16 SHAREHOLDERS OF NCCPL AND WHO BE LONGED TO THE REDDY FAMILY, WHEREBY IT WAS AGREED THAT THE ENTIRE PAID UP SHARE CAPITAL OF NCCPL WOULD BE SOLD TO GBFL FOR A CONSID ERATION OF RS.270 CRORES. THE MOU (CLAUSE-2.2) SPECIFICALLY PROVIDES THAT THE PARTIES SHALL ENDEAVOR TO STRUCTURE THE TRANSACTION IN SUCH A MANNER AS TO BE MUTUALLY BENEFICIAL. (D) ON 5.5.2006 THE NCSPL BY WAY OF SUCCESSION TOO K OVER THE BUSINESS AND FIRM BVRE LOCK, STOCK AND BARREL. THU S THEY BECAME ITA NOS.149 & 150 & 158 & 159(B)/2011 64 OWNERS OF THE SHARES OF NCCPL HELD BY THE 13 PARTNE RS OF BVRE WHICH HAD BECOME THE PROPERTY OF THE FIRM ON BEING BROUGHT IN BY THE PARTNERS AS THEIR CAPITAL CONTRIBUTION TO THE F IRM BVRE. (E) ON 10.6.2006 NCSPL SOLD THE SHARES TO GBFL. ACCORDING TO HIM THE MOU DATED 29.3.2006 REFLECTS T HE REAL INTENTION OF THE PARTIES. HE POINTED OUT THAT THE MOU WAS SIGNE D BY VIKRAM REDDY AS REPRESENTING THE 16 PERSONS WHO HELD THE ENTIRE PAI D UP CAPITAL OF NCCPL. THE NAMES OF THE 16 PERSONS HAVE BEEN GIVEN IN ANNE XURE-I TO THE MOU WITH THE DESCRIPTION THAT THEY WERE THE SHAREHOLDER S OF NCCPL AS ON 1-3- 2006. THE MOU DETAILS THE CONSIDERATION TO BE PAI D FOR THE TRANSFER OF SHARES AND IS BASED ON DETAILS CONTAINED IN ANNEXUR E-II TO THE AGREEMENT. THE MOU IMPOSES RESTRICTIONS ON THE PART OF THE SEL LERS NOT TO ENGAGE IN SIMILAR BUSINESS. IT ALSO PROVIDES THE TIME LIMIT FOR COMPLETION OF THE TRANSFER OF SHARES. HE DREW OUR ATTENTION TO CLAUS E-8.1 OF THE MOU AND SUBMITTED THAT THOUGH THE MOU IS STATED TO BE NOT B INDING UNTIL DULY AUTHORIZED BY DEFINITIVE AGREEMENTS TO BE EXECUTED BY BOTH THE PARTIES, THE FACT IS THAT ULTIMATELY THE TRANSFER OF SHARES TOOK PLACE ON THE SAME TERMS AS CONTAINED IN THE MOU DATED 29.3.2006. IT WAS HI S SUBMISSION THAT IF ON 29.3.2006, THE 16 PERSONS WHO OWNED THE ENTIRE PAID UP SHARE CAPITAL OF NCCPL ENTERED INTO AN MOU THEN HOW COULD THERE BE T RANSFER OF SHARES BY THE 13 PARTNERS OF THE FIRM BVRE ON 24.3.2006 TO TH E FIRM BVRE. HIS SUBMISSION WAS THAT THE TRANSFER OF SHARES BY THE 1 3 PARTNERS OF THE FIRM BVRE TO THE FIRM BVRE AS CAPITAL CONTRIBUTION ON 24 .3.2006 WAS AN AFTERTHOUGHT. IN THIS REGARD IT WAS SUBMITTED BY H IM THAT THE DEED OF ITA NOS.149 & 150 & 158 & 159(B)/2011 65 PARTNERSHIP DATED 24.3.2006 DOES NOT CONTAIN ANY CL AUSE BY WHICH THE 13 PARTNERS WERE TO BRING IN THEIR SHARE-HOLDING IN NC CPL AS CAPITAL CONTRIBUTION OF THE FIRM. HE DREW OUR ATTENTION TO THE STATEMENT OF MR.V.VIKRAM REDDY RECORDED ON 31.10.2008 BY THE DCI T, C-1(1), BANGALORE, THE AO OF V.VIKRAM REDDY AND V.VIKRAM RE DDY(HUF) IN THE COURSE OF ASSESSMENT PROCEEDINGS WHEREIN HE HAS IN ANSWER TO Q.NO.5 WHETHER THERE WAS TRANSACTION IN RESPECT OF SHARES IN NCCPL PRIOR TO THE TRANSACTION WITH GODREJ GROUP, HE HAD STATED WHATE VER THE SHARES WE ARE HOLDING IN NCCPL WERE DIRECTLY TRANSFERRED TO GODRE J GROUP DURING THE YEAR 2006-07. ACCORDING TO HIM THESE CIRCUMSTANCES CLE ARLY GO TO SHOW THAT IT WAS THE INDIVIDUALS WHO WANTED TO SELL THE SHARES H ELD BY THEM IN NCCPL TO GBFL. THE INTERMEDIARY TRANSACTIONS OF THE SHAR ES BECOMING PROPERTY OF THE FIRM BVRE, BVRE BEING TAKEN OVER AS A GOING CONCERN BY NCSPL AND THEREAFTER SELLING THE SHARES TO GBFL ARE ALL TRANS ACTIONS WITH NO LEGAL SANCTITY AND DONE PURELY AS AN AFTERTHOUGHT TO AVOI D PAYMENT OF LEGITIMATE TAXES DUE ON SALE OF SHARES OF NCCPL. 68. THE LEARNED SENIOR ADVOCATE FOR THE REVENUE DR EW OUR ATTENTION TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F SUNIL SIDDHARTHBHAI VS. CIT 156 ITR 509 (SC) . THE QUESTION IN THE AFORESAID CASE WHICH RELATED TO AY 73-74, WAS AS TO WHETHER WHEN A PARTNER INTRODUCES CAPITAL ASSET BELONGING TO HIM A S HIS CAPITAL CONTRIBUTION TO A FIRM IS THERE A TRANSFER GIVING R AISE TO INCIDENCE OF TAX ON ITA NOS.149 & 150 & 158 & 159(B)/2011 66 CAPITAL GAIN ON TRANSFER OF A CAPITAL ASSET. THE H ONBLE SUPREME COURT HELD THAT THERE WAS A TRANSFER IN SUCH AN EVENT BUT THE VALUE RECORDED IN THE BOOKS AS VALUE OF CAPITAL BROUGHT IN BY THE PARTNER WAS ONLY NOTIONAL AND THEREFORE NOT FULL VALUE OF CONSIDERATION RECEIVED ON TRANSFER U/S.48. SINCE THE FULL VALUE OF CONSIDERATION COULD NOT BE DETERM INED IT WAS HELD THAT THE COMPUTATION PROVISION VIZ., SEC.48 FAILS AND THEREF ORE THE CHARGE TO TAX ALSO FAILS. THE LEARNED SENIOR ADVOCATE FOR THE REVENUE DREW OUR ATTENTION TO THE FOLLOWING OBSERVATIONS OF THE HONBLE SUPREME C OURT IN THE PENULTIMATE PARAGRAPHS: 20. WE HAVE DECIDED THESE APPEALS ON THE ASSUMPTIO N THAT THE PARTNERSHIP FIRM IN QUESTION IS A GENUINE FIRM AND NOT THE RESULT OF A SHAM OR UNREAL TRANSACTION, AND THAT THE TRANSFER B Y THE PARTNER OF HIS PERSONAL ASSET TO THE PARTNERSHIP FIRM REPRESEN TS A GENUINE INTENTION TO CONTRIBUTE TO THE SHARE CAPITAL OF THE FIRM FOR THE PURPOSE OF CARRYING ON THE PARTNERSHIP BUSINESS. IF THE TRANSFER OF THE PERSONAL ASSET BY THE ASSESSEE TO A PARTNERSHIP IN WHICH HE IS OR BECOMES A PARTNER IS MERELY A DEVICE OR RUSE FOR CONVERTING THE ASSET INTO M ONEY WHICH WOULD SUBSTANTIALLY REMAIN AVAILABLE FOR HIS BENEFIT WITHOUT LIABILITY TO INCOME-TAX ON A CAPITAL GAIN, IT WILL BE OPEN TO THE IT AUTHORITIES TO GO BEHIND THE TRANSACTION AND EXAMINE WHETHER THE TRANSACTION OF CREATING THE PARTNERSHIP IS A GENUINE OR A SHAM TRANSACTION AND, EVEN WHERE THE PARTNERSHIP IS GENUINE, THE TRANSACTION OF TRANSFER RING THE PERSONAL ASSET TO THE PARTNERSHIP FIRM REPRESENTS A REAL ATTEMPT TO CONTRIBUTE TO THE SHARE CAPITAL OF THE PARTNERSH IP FIRM FOR THE PURPOSE OF CARRYING ON THE PARTNERSHIP BUSINESS OR IS NOTHING BUT A DEVICE OR RUSE TO CONVERT THE PERSONAL ASSET INTO MONEY SUBSTANTIALLY FOR THE BENEFIT OF THE ASSESSEE WHILE EVADING TAX ON A CAPITAL GAIN. THE ITO WILL BE ENTITLED TO CONSIDER ALL THE RELEV ANT INDICIA IN THIS REGARD, WHETHER THE PARTNERSHIP IS FORMED BETWEEN THE ASSESSEE AND HIS WIFE AND CHILDREN OR SUBSTANTIALLY LIMITED TO THEM, WHETHER THE PERSONAL ASSET IS SOLD BY THE PARTNERSH IP FIRM SOON AFTER IT IS TRANSFERRED BY THE ASSESSEE TO IT, WHETHER THE PARTNERSHIP FIRM HAS NO SUBSTANTIAL OR REAL BUSINESS OR THE RECORD S HOWS THAT THERE WAS NO REAL NEED FOR THE PARTNERSHIP FIRM FOR SUCH CAPITAL CONTRIBUTION FROM THE ASSESSEE. ALL THESE AND OTHER PERTINENT CONSIDERATIONS MAY BE TAKEN INTO REGARD WHEN THE IT O ENTERS ITA NOS.149 & 150 & 158 & 159(B)/2011 67 UPON A SCRUTINY OF THE TRANSACTION, FOR, IN THE TAS K OF DETERMINING WHETHER A TRANSACTION IS A SHAM OR ILLU SORY TRANSACTION OR A DEVICE OR RUSE HE IS ENTITLED TO P ENETRATE THE VEIL COVERING IT AND ASCERTAIN THE TRUTH. (EMPHASIS LAID) IT WAS HIS SUBMISSION THAT IN THE PRESENT CASE THER E WAS NO NECESSITY TO BRING IN THE SHARES OF NCCPL AS CAPITAL OF THE FIRM BVRE. THE TRANSFER OF THE PERSONAL ASSET OF THE 13 INDIVIDUALS VIZ., SHAR ES WHICH THEY HELD IN NCCPL WAS NOTHING BUT A DEVICE OR RUSE TO CONVERT T HE PERSONAL ASSET INTO MONEY SUBSTANTIALLY FOR THE BENEFIT OF THE ASSESSEE WHILE EVADING TAX ON CAPITAL GAIN. IN THIS REGARD, HE POINTED OUT THAT THE CAPITAL OF THE PARTNERSHIP UNDER THE DEED DATED 24.3.2006 WAS RS.1 0,000/- BY EACH PARTNER AND THERE WAS NO CLAUSE IN THE PARTNERSHIP DEED WHICH STATES THAT THE SHARES OF NCCPL HELD BY THE PARTNERS SHOULD BE BROUGHT IN AS CAPITAL OF THE FIRM. THERE WAS NO BUSINESS EXIGENCY ESTABL ISHED/SHOWN WHICH NECESSITATED BRINING IN SHARES OF NCCPL AS CAPITAL CONTRIBUTION BY THE PARTNERS. IT WAS ALSO POINTED OUT THAT ON 5.5.2006 (WITHIN A PERIOD OF JUST 42 DAYS) THE FIRM WAS TAKEN OVER BY NCSPL AND THERE AFTER ON 10.6.2006 THE SHARES OF NCCPL WERE SOLD BY NCSPL TO GBFL. AC CORDING TO HIM ALL THE CIRCUMSTANCES REFERRED TO ABOVE WOULD ONLY GO T O SHOW THAT THE REVENUE AUTHORITIES WERE RIGHT IN COMING TO THE CON CLUSION THAT IN REALITY DURING THE PREVIOUS YEAR RELEVANT TO AY 07-08, SHAR ES WERE IN FACT SOLD BY THE 13 PARTNERS OF THE FIRM BVRE TO GBFL AND THAT A LL THE INTERMEDIARY STEPS ARE NOTHING BUT A DEVICE OR RUSE TO AVOID PAY MENT OF LEGITIMATE TAX ON CAPITAL GAIN ON TRANSFER OF SHARES OF NCCPL. ITA NOS.149 & 150 & 158 & 159(B)/2011 68 69. IT WAS NEXT SUBMITTED BY THE LEARNED SENIOR AD VOCATE FOR THE REVENUE THAT THE DECISION OF THE HONBLE SUPREME COURT IN T HE CASE OF AZADI BACHAO ANDOLAN (SUPRA) WILL NOT BE OF ANY ASSISTANCE TO THE PLEA OF THE REVENUE. IN THIS REGARD HE DREW OUR ATTENTION TO P AGE 759 PARA 3 LAST 6 LINES OF ITR VOLUME 263 WHEREIN THE HONBLE SUPREME COURT EXPLAINED ITS CONCLUSIONS ON MC.DOWELLS CASE (SUPRA) AS FOLLOWS: ..THE FACTS AND CIRCUMSTANCES WHICH LEAD TO MC.DO WELLS DECISION LEAVE US IN NO DOUBT THAT THE PRINCIPLE ENUNCIATED IN THE ABOVE CASE HAS NOT AFFECTED THE FREEDOM OF THE CITIZEN TO ACT IN A MANNER ACCORDING TO HIS REQUIREMENTS, HIS WISHES IN THE MA NNER OF DOING ANY TRADE, ACTIVITY OR PLANNING HIS AFFAIRS HIS WISHES IN THE MANNER OF DOING ANY TRADE, ACTIVITY OR PLANNING HIS AFFAIRS W ITH CIRCUMSPECTION, WITHIN THE FRAMEWORK OF LAW, UNLESS THE SAME FALL IN THE CATEGORY OF COLOURABLE DEVICE WHICH MAY PROPERLY BE CALLED A DEVICE OR A DUBIOUS METHOD OR A SUBTERFUGE CLOTHED WITH APPAREN T DIGNITY HIS SUBMISSION WAS THAT THE PORTION OF THE DECISION IN AZADI BACHAO ANDOLAN (SUPRA) UNDERLINED ABOVE, ONLY SHOWS THAT COLOURAB LE DEVICE, DUBIOUS METHODS OR A SUBTERFUGE CLOTHED WITH APPARE NT DIGNITY ARE STILL SUSCEPTIBLE TO THE RATIO LAID DOWN IN THE CASE OF MC.DOWELL (SUPRA). 70. HE NEXT DREW OUR ATTENTION TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF WORKMEN OF ASSOCIATED RUBBER INDUSTRY LTD. VS. ASSOCIATED RUBBER INDUSTRY LTD. AND ANOTHER 157 ITR 77 (SC) WHEREIN THE HONBLE SUPREME COURT IN THE CONTEXT OF COMPUTATION OF AVAILABLE SURPLUS FOR PAYMENT OF BONUS TO WORKMEN F OUND THAT BY CREATING ITA NOS.149 & 150 & 158 & 159(B)/2011 69 A SUBSIDIARY COMPANY AND DIVERTING INCOME TO THE SU BSIDIARY COMPANY, AVAILABLE PROFITS FOR PAYMENT OF BONUS STOOD REDUCE D. THE HONBLE COURT AFTER REFERRING TO THE DECISION IN THE CASE MC.DOWELL (SUPRA) HELD THAT IT WAS THE DUTY OF COURTS IN EVERY CASE WHERE INGENUIT Y IS EXPENDED TO AVOID TAXING AND WELFARE LEGISLATIONS, TO GET BEHIND THE SMOKE-SCREEN AND DISCOVER THE TRUE STATE OF AFFAIRS. ON THE QUESTIO N OF EVIDENCE NECESSARY TO CONCLUDE THAT A PARTICULAR COURSE OF ACTION WAS A D EVICE TO AVOID TAX OR WELFARE LEGISLATION THE HONBLE COURT, MADE THE FOL LOWING OBSERVATIONS: IF WE NOW LOOK AT THE FACTS OF THE CASE, WHAT DO W E FIND? A NEW COMPANY IS CREATED WHOLLY OWNED BY THE PRINCIPAL CO MPANY, WITH NO ASSETS OF ITS OWN EXCEPT THOSE TRANSFERRED TO IT BY THE PRINCIPAL COMPANY, WITH NO BUSINESS OR INCOME OF ITS OWN EXCE PT RECEIVING DIVIDENDS FROM SHARES TRANSFERRED TO IT BY THE PRIN CIPAL COMPANY AND SERVING NO PURPOSE WHATSOEVER EXCEPT TO REDUCE THE GROSS PROFITS OF THE PRINCIPAL COMPANY. THESE FACTS SPEAK FOR THEMSE LVES. THERE CANNOT BE DIRECT EVIDENCE THAT THE SECOND COMPANY W AS FORMED AS A DEVICE TO REDUCE THE GROSS PROFITS OF THE PRINCIPAL COMPANY FOR WHATEVER PURPOSE. AN OBVIOUS PURPOSE THAT IS SERVED AND WHICH STARES ONE IN THE FACE IS TO REDUCE THE AMOUNT TO B E PAID BY WAY OF BONUS TO WORKMEN. IT IS SUCH AN OBVIOUS DEVICE THAT NO FURTHER EVIDENCE, DIRECT OR CIRCUMSTANTIAL, IS NECESSARY IT WAS THUS CONTENDED THAT IN THE PRESENT CASE, THE FACTS SPEAK FOR THEMSELVES AND THE DEVICE EMPLOYED BY THE ASSESSEES SHOULD BE HELD TO BE A SMOKE-SCREEN AND THE REAL TRANSACTION WAS SALE OF SHARES BY THE 13 PARTNERS OF BVRE TO GBFL. 71. THE LEARNED SENIOR ADVOCATE FOR THE REVENUE PL ACED RELIANCE ON THE DECISION OF THE HOUSE OF LORDS IN THE CASE OF REVENUE AND CUSTOMS COMMISSIONERS VS. TOTAL NETWORK SL (2008) 2 ALL ER 4 13 . IT WAS A ITA NOS.149 & 150 & 158 & 159(B)/2011 70 CASE WHERE BY A TAX AVOIDANCE SCHEME TAXES LAWFULLY PAYABLE TO THE STATE WERE AVOIDED BY EMPLOYING MISSING TRADERS AS INTERM EDIARIES. THE REVENUE AND CUSTOMS COMMISSIONERS PROCEEDED TO INSTITUTE CI VIL SUIT FOR DAMAGES AGAINST ONE OF THE AVAILABLE CONSPIRATOR LIABLE FOR THE VALUE ADDED TAX WHICH WAS AVOIDED, ALLEGING THAT HE WAS LIABLE TO BE PROC EEDED AGAINST THE TORT OF CONSPIRACY WHERE THE UNLAWFUL MEANS ALLEGED WAS THE COMMON LAW OFFENCE OF CHEATING THE PUBLIC REVENUE. THE QUESTION BEFOR E THE HOUSE OF LORDS WAS WHETHER SUCH A SUIT WAS MAINTAINABLE. THE HOUS E OF LORDS HELD THAT SUCH AN ACTION WAS MAINTAINABLE. 72. THE LEARNED SENIOR ADVOCATE NEXT DREW OUR ATTE NTION TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF COMMISSIONER OF CENTRAL EXCISE VS. M/S. MODI ALKALIES AND CHEMICALS LTD. & OTHERS AIR 2005 SC 1468 , WHEREIN THE QUESTION BEFORE THE HONBLE COURT WAS LEVY OF DUTY AND PENALTY U/S.9, 11A OF THE CENTRAL EXCISE A CT, (1 OF 1944). THE COURT FOUND THAT THE ASSESSEE IN THAT CASE CREATED THREE FRONT COMPANIES TO AVAIL BENEFIT OF EXEMPTION GRANTED TO SMALL SCAL E INDUSTRIES. THE RECORDS SHOWED THAT FINANCIAL AND MANAGEMENT ASPECT OF FRON T COMPANIES WAS CONTROLLED BY THE ASSESSEE, THE MAIN COMPANY. THE COURT HELD THAT THAT WAS SUFFICIENT TO SHOW INTER-DEPENDENCE OF COMPANIE S AND THEREFORE THE MAIN COMPANY WAS FOUND GUILTY OF EVADING DUTY BY RE SORTING TO UNDER VALUATION AND THE ORDER IMPOSING DUTY AND PENALTY W AS HELD TO BE PROPER. ITA NOS.149 & 150 & 158 & 159(B)/2011 71 73. OUR ATTENTION WAS ALSO DRAWN TO THE DECISION O F THE HONBLE SUPREME COURT IN THE CASE OF STATE OF MADHYA PRADESH VS. HOME DECORATORS AND FINANCE (P) LTD. 1990 AIR 1322 (SC) . IT WAS A CASE UNDER THE MADHYA PRADESH ENTERTAINMENT DUTY AND ADVERTISEMENT TAX ACT, 1936 WHERE SALE OF TICKETS FOR ENTERTAINMENT PROGRAMME W AS LIABLE TO TAX. THE ASSESSEES INSTEAD OF ISSUING TICKETS, ISSUED INVITA TION CARDS BASED ON WHICH ENTRY FOR THE PROGRAMME WAS PERMITTED. THE H ONBLE SUPREME COURT UPHELD THE LEVY OF TAX HOLDING THAT THE ASSESSEE US ED A DEVICE TO EVADE PAYMENT OF ENTERTAINMENT DUTY. 74. REFERENCE WAS MADE TO THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF VODAFONE INTERNATIONAL HOLDINGS B.V. VS. UOI 341 IT R 1 (SC) WHEREIN THE HONBLE SUPREME COURT HAS REITERATED T HE POSITION THAT ARTIFICIAL AND COLOURABLE DEVICES FOR AVOIDING TAX CANNOT BE RESORTED TO. OUR ATTENTION WAS DRAWN TO PAGE-36 OF 341 ITR LAST PARAGRAPH WHERE THE HONBLE COURT HAS EXPLAINED THAT IF THE REVENUE EST ABLISHES THAT A TRANSACTION IS A SHAM OR TAX AVOIDANT THEN IT CAN I GNORE THE TRANSACTION. 75. THE LEARNED SENIOR ADVOCATE FOR THE REVENUE D REW OUR ATTENTION TO THE FOLLOWING OBSERVATIONS FROM THE DECISION OF THE COU RT OF APPEALS IN THE CASE OF HOWARD DE WALDEN (LORD) VS. INLAND REVENUE COMMISSIO NERS ITA NOS.149 & 150 & 158 & 159(B)/2011 72 (1942) ALL ELR ANNOTATED VOL-I PAGE 287 WHEREIN THE COURT OF APPEALS IN A CASE INVOLVING TAX PLANNING (AT PAGE 2 89 THIRD PARAGRAPH): . FOR YEARS A BATTLE OF MANEUVER HAS BEEN WAGED B ETWEEN THE LEGISLATURE AND THOSE WHO ARE MINDED TO THROW THE B URDEN OF TAXATION OFF THEIR OWN SHOULDERS ON TO THOSE OF THE IR FELLOW SUBJECTS. IN THAT BATTLE THE LEGISLATURE HAS OFTEN BEEN WORST ED BY THE SKILL, DETERMINATION AND RESOURCEFULNESS OF ITS OPPONENTS, OF WHOM THE PRESENT APPELLANT HAS NOT BEEN THE LEAST SUCCESSFUL . IT WOULD NOT SHOCK US IN THE LEAST TO FIND THAT THE LEGISLATURE HAS DETERMINED TO PUT AN END TO THE STRUGGLE BY IMPOSING THE SEVEREST OF PENALTIES. IT SCARCELY LIES IN THE MOUTH OF THE TAXPAYER WHO PLAY S WITH FIRE TO COMPLAIN OF BURNT FINGERS. 76. OUR ATTENTION WAS ALSO DRAWN TO THE FOLLOWING OBSERVATIONS IN THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F KESHAVJI RAVJI AND CO. VS. CIT 183 ITR 1 (SC) : ARTIFICIAL AND UNDULY LATITUDINARIAN RULES OF CONS TRUCTION, WHICH WITH THEIR GENERAL TENDENCY TO 'GIVE THE TAXPAYER T HE BREAKS', ARE OUT OF PLACE WHERE THE LEGISLATION HAS A FISCAL MISSION . INDEED, TAXATION HAS CEASED TO BE REGARDED AS AN 'IMPERTINENT INTRUS ION INTO THE SACRED RIGHTS OF PRIVATE PROPERTY' AND IT IS NOW IN CREASINGLY REGARDED AS A POTENT FISCAL TOOL OF STATE POLICY TO STRIKE T HE REQUIRED BALANCE REQUIRED IN THE CONTEXT OF THE FELT NEEDS OF THE TI MESBETWEEN THE CITIZENS' CLAIM TO ENJOYMENT OF HIS PROPERTY ON THE ONE HAND AND THE NEED FOR AN EQUITABLE DISTRIBUTION OF THE BURDENS O F THE COMMUNITY TO SUSTAIN SPECIAL SERVICES AND PURPOSES ON THE OTH ER. THESE WORDS OF THOMAS M. COOLEY IN LAW OF TAXATION', VOLUME 2, AR E WORTH MENTIONING : 'ARTIFICIAL RULES OF CONSTRUCTION HAVE PROBABLY FOU ND MORE FAVOUR WITH COURTS THAN THEY HAVE EVER DESERVED. TH EIR APPLICATION IN LEGAL CONTROVERSIES HAS OFTEN TIMES BEEN PUSHED TO AN EXTREME WHICH HAS DEFEATED THE PLAIN AND MANI FEST PURPOSE IN ENACTING THE LAWS. PENAL LAWS HAVE SOMET IMES HAD ALL THEIR- MEANING CONSTRUED AWAY AND IN REMEDIAL L AWS, REMEDIES HAVE BEEN FOUND WHICH THE LEGISLATURE NEVE R INTENDED TO GIVE. SOMETHING AKIN TO THIS HAS BEFALLEN THE RE VENUE LAWS.' ITA NOS.149 & 150 & 158 & 159(B)/2011 73 77. FINALLY REFERENCE WAS MADE TO THE COMMENTS OF RICHARD A.POSNER IN HIS BOOK OVERCOMING LAW FIRST INDIAN REPRINT, 200 7 WHEREIN THE LEARNED AUTHOR AT PAGE 53 (LAST PARA) HAS OPINED AS FOLLOWS ON TAX PLANNING: ANOTHER SOURCE OF UPWARD PRESSURE ON QUALITY IN TH E LEGAL PROFESSION IS THE ADVERSARY CHARACTER OF LEGAL SERVICES. THE BETTER THE LAWYER ON ONE SIDE OF A CASE (OR A NEGOTIATION) IS, THE GREAT ER WILL BE THE VALUE TO THE OPPOSING PARTY OF HAVING A GOOD LAWYER ON HIS S IDE. SINCE BETTER QUALITY OF LAWYERS MAY CONDUCE TO BETTER QUALITY OF DECISIONS, QUALITY COMPLETION AMONG LAWYERS IS NOT A ZERO-SUM GAME. I F CARTELIZATION RESULTS IN HIGHER-QUALITY LAWYERS WHO PRODUCE HIGHE R-QUALITY BRIEFS, JUDGES DECISIONS WILL TEND TO BE OF HIGHER QUALITY AND THIS WILL CONFER BENEFITS ON THE COMMUNITY AS A WHOLE-MAYBE. QUALI TY IS AN ELUSIVE CONCEPT WHEN ONE IS SPEAKING OF LEGAL SERVICES. HI GHLY INTELLIGENT LAWYERS MAY CREATE INTRICATE DOCTRINAL STRUCTURES T HAT, WHILE INGENIOUS, EVEN IN A SENSE RIGOROUS, HAVE NO SOCIAL UTILITY. FOR EXAMPLE, BRILLIANT LAWYERS CREATE, DISCOVER, AND EN LARGE TAX LOOPHOLES. THIS ACTIVITY IS PURELY REDISTRIBUTIVE; THERE IS NO SOCIAL GAIN. IN FACT THERE IS A NET SOCIAL LOSS, NOT ONLY BECAUSE LAWYER S TIME HAS AN OPPORTUNITY COST BUT ALSO BECAUSE THEIR BEAYER-LIKE ACTIVITIES REQUIRE MORE CAREFULLY DRAFTED AND COMPLEX TAX CODES. SOCI AL WELFARE MIGHT INCREASE IF THE IQS OF ALL TAX LAWYERS COULD BE RED UCED BY 10 PER CENT. 78. IN HIS REJOINDER THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF SUNIL SIDDHARTHBAI (SUPRA) HAS NOW BEEN SUPERSEDED BY A STATUTORY AMENDMENT AND THEREFORE THOSE OBSERVATIONS ARE NO L ONGER RELEVANT. IT WAS POINTED OUT THAT THE ASSESSEES HAVE OFFERED TO TAX CAPITAL GAIN U/S.45(3) OF THE ACT, ON INTRODUCTION OF THE SHARES OF NCCPL AS CAPITAL CONTRIBUTION TO THE FIRM BVRE IN AY 06-07 AND THE REVENUE HAS ACCEP TED THE SAME. IT WAS THEREFORE SUBMITTED THAT THOSE OBSERVATIONS ARE NOT OF ANY HELP TO THE REVENUE IN THE PRESENT CASE. IT WAS REITERATED THA T ALL STEPS TAKEN BY THE ITA NOS.149 & 150 & 158 & 159(B)/2011 74 ASSESSEE WERE LEGAL, REAL AND GENUINE, MAY BE WITH THE ULTIMATE RESULT OF A LESSER TAX BURDEN, BUT THAT CANNOT BE A GROUND TO R EGARD THE TRANSACTIONS AS EITHER COLOURABLE, DUBIOUS DEVICE TO AVOID TAX O R SUBTERFUGE. THE SERIES OF TRANSACTIONS CANNOT ALSO BE SAID TO BE SHAM. F INALLY IT WAS SUBMITTED THAT THE REVENUES APPREHENSION OF TAX AVOIDANCE ARE ALL WITHOUT ANY BASIS IN VIEW OF THE AMENDMENT TO THE LAW BY THE FINANCE ACT. 2012. THE AMENDMENT TO THE LAW AND ITS EFFECT ON THE TAX LIAB ILITY IN THE HANDS OF NCSPL/BVREPL HAS BEEN SET OUT IN PARAGRAPH-39 TO 44 OF THIS ORDER. AS A CONSEQUENCE THE REAL CAPITAL GAIN ON SALE OF SHARES OF NCCPL TO GBFL MAY GET ULTIMATELY TAXED IN THE HANDS OF NCSPL/BVREPL. 79. WE HAVE VERY CAREFULLY CONSIDERED THE RIVAL C ONTENTIONS. FOR COMING TO A CONCLUSION ON ISSUE 6 AND 7, WE MUST FIRST UND ERSTAND THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF MC .DOWELL (SUPRA) AND HOW THE SAME HAS BEEN EXPLAINED BY THE HONBLE SUPR EME COURT IN SUBSEQUENT DECISIONS IN THE CASE OF AZADI BACHAO ANDOLAN (SUPRA), WALFORT STOCK AND SHARE BROKERS (SUPRA) AND VODAFONE CASE (SUPRA). ON THIS ASPECT THE HONBLE SUPREME COURT HAS EXPLAI NED IN THE CASE OF VODAFONE (SUPRA) AT PAGE-32 AND 34 OF ITR VOL.341 (IN THE J UDGMENT OF S.H.KAPADIA CJI AS FOLLOWS: CORRECTNESS OF AZADI BACHAO CASERE : TAX AVOIDAN CE/EVASION 57. BEFORE US, IT WAS CONTENDED ON BEHALF OF THE RE VENUE THAT UNION OF INDIA VS. AZADI BACHAO ANDOLAN (2003) 184 CTR (S C) 450 : (2004) 10 SCC 1 NEEDS TO BE OVERRULED INSOFAR AS IT DEPART S FROM MCDOWELL ITA NOS.149 & 150 & 158 & 159(B)/2011 75 & CO. LTD. VS. CTO (1985) 47 CTR (SC) 126 : (1985) 3 SCC 230 PRINCIPLE FOR THE FOLLOWING : (I) PARA 46 OF MCDOWE LL JUDGMENT HAS BEEN MISSED WHICH READS AS UNDER: 'ON THIS ASPECT C HINNAPPA REDDY, J. HAS PROPOSED A SEPARATE OPINION WITH WHIC H WE AGREE'. [I.E. WESTMINSTER PRINCIPLE IS DEAD]. (II) THAT, AZADI BA CHAO FAILED TO READ PARAS 41-45 AND 46 OF MCDOWELL IN ENTIRETY. IF SO R EAD, THE ONLY CONCLUSION ONE COULD DRAW IS THAT FOUR LEARNED JUDG ES SPEAKING THROUGH MISRA, J. AGREED WITH THE OBSERVATIONS OF C HINNAPPA REDDY, J. AS TO HOW IN CERTAIN CIRCUMSTANCES TAX AVOIDANCE SHOULD BE BROUGHT WITHIN THE TAX NET. (III) THAT, SUBSEQUENT TO MCDOWELL, ANOTHER MATTER CAME BEFORE THE CONSTITUTION BENCH O F FIVE JUDGES IN MATHURAM AGRAWAL VS. STATE OF MADHYA PRADESH (1999) 8 SCC 667, IN WHICH WESTMINSTER PRINCIPLE WAS QUOTED WHICH HAS NOT BEEN NOTICED BY AZADI BACHAO. OUR ANALYSIS 58. . TO 63 64. THE MAJORITY JUDGMENT IN MCDOWELL (SUPRA) HELD THAT 'TAX PLANNING MAY BE LEGITIMATE PROVIDED IT IS WITHIN TH E FRAMEWORK OF LAW' (PARA 45). IN THE LATTER PART OF PARA 45, IT H ELD THAT 'COLOURABLE DEVICE CANNOT BE A PART OF TAX PLANNING AND IT IS W RONG TO ENCOURAGE THE BELIEF THAT IT IS HONOURABLE TO AVOID PAYMENT O F TAX BY RESORTING TO DUBIOUS METHODS'. IT IS THE OBLIGATION OF EVERY CIT IZEN TO PAY THE TAXES WITHOUT RESORTING TO SUBTERFUGES. THE ABOVE OBSERVA TIONS SHOULD BE READ WITH PARA 46 WHERE THE MAJORITY HOLDS 'ON THIS ASPECT ONE OF US, CHINNAPPA REDDY, J. HAS PROPOSED A SEPARATE OPINION WITH WHICH WE AGREE'. THE WORDS 'THIS ASPECT' EXPRESS THE MAJORIT Y'S AGREEMENT WITH THE JUDGMENT OF REDDY, J. ONLY IN RELATION TO TAX E VASION THROUGH THE USE OF COLOURABLE DEVICES AND BY RESORTING TO DUBIO US METHODS AND SUBTERFUGES. THUS, IT CANNOT BE SAID THAT ALL TAX P LANNING IS ILLEGAL/ILLEGITIMATE/IMPERMISSIBLE. MOREOVER, REDDY , J. HIMSELF SAYS THAT HE AGREES WITH THE MAJORITY. IN THE JUDGMENT O F REDDY, J. THERE ARE REPEATED REFERENCES TO SCHEMES AND DEVICES IN C ONTRADISTINCTION TO 'LEGITIMATE AVOIDANCE OF TAX LIABILITY' (PARAS 7 -10, 17 AND 18). IN OUR VIEW, ALTHOUGH CHINNAPPA REDDY, J. MAKES A NUMB ER OF OBSERVATIONS REGARDING THE NEED TO DEPART FROM THE 'WESTMINSTER' AND TAX AVOIDANCE THESE ARE CLEARLY ONLY IN THE CON TEXT OF ARTIFICIAL AND COLOURABLE DEVICES. READING MCDOWELL (SUPRA), I N THE MANNER INDICATED HEREINABOVE, IN CASES OF TREATY SHOPPING AND/OR TAX AVOIDANCE, THERE IS NO CONFLICT BETWEEN MCDOWELL (S UPRA) AND AZADI ITA NOS.149 & 150 & 158 & 159(B)/2011 76 BACHAO (SUPRA) OR BETWEEN MCDOWELL (SUPRA) AND MATH URAM AGRAWAL (SUPRA). HIS LORDSHIP MR.JUSTICE K.S.RADHAKRISHNAN IN HIS CO NCURRING BUT SEPARATE JUDGMENT HAD THE FOLLOWING TO SAY THE PRINCIPLE LAI D DOWN BY THE HONBLE SUPREME COURT IN MC.DOWELL S CASE (SUPRA) AT PAGE-105 TO 108 OF ITR VOL.341: MCDOWELLWHETHER CALLS FOR RECONSIDERATION 107 TO 109.. 110. JUSTICE CHINNAPPA REDDY STARTS HIS CONCURRING JUDGMENT IN MCDOWELL (SUPRA) AS FOLLOWS : 'WHILE I ENTIRELY AGREE WITH MY BROTHER RANGANATH M ISHRA, J. IN THE JUDGMENT PROPOSED TO BE DELIVERED BY ME, I W ISH TO ADD A FEW PARAS, PARTICULARLY TO SUPPLEMENT WHAT HE HAS SAID ON THE FASHIONABLE TOPIC OF TAX AVOIDANCE.' (EMPHASI S, ITALICIZED IN PRINT, SUPPLIED) JUSTICE REDDY HAS, THE ABOVE QUOTED PORTION SHOWS, ENTIRELY AGREED WITH JUSTICE MISHRA AND HAS STATED THAT HE IS ONLY SUPPLEMENTING WHAT JUSTICE MISHRA HAS SPOKEN ON TAX AVOIDANCE. JU STICE REDDY, WHILE AGREEING WITH JUSTICE MISHRA AND THE OTHER TH REE JUDGES, HAS OPINED THAT IN THE VERY COUNTRY OF ITS BIRTH, THE P RINCIPLE OF WESTMINSTER HAS BEEN GIVEN A DECENT BURIAL AND IN T HAT COUNTRY WHERE THE PHRASE 'TAX AVOIDANCE' ORIGINATED THE JUD ICIAL ATTITUDE TOWARDS TAX AVOIDANCE HAS CHANGED AND THE COURTS AR E NOW CONCERNING THEMSELVES NOT MERELY WITH THE GENUINENE SS OF A TRANSACTION, BUT WITH THE INTENDED EFFECT OF IT FOR FISCAL PURPOSES. JUSTICE REDDY ALSO OPINED THAT NO ONE CAN GET AWAY WITH THE TAX AVOIDANCE PROJECT WITH THE MERE STATEMENT THAT THER E IS NOTHING ILLEGAL ABOUT IT. JUSTICE REDDY HAS ALSO OPINED THA T THE GHOST OF WESTMINSTER (IN THE WORDS OF LORD ROSKILL) HAS BEEN EXORCISED IN ENGLAND. IN OUR VIEW, WHAT TRANSPIRED IN ENGLAND IS NOT THE RATIO OF MCDOWELL AND CANNOT BE AND REMAINS MERELY AN OPINIO N OR VIEW. ITA NOS.149 & 150 & 158 & 159(B)/2011 77 111. CONFUSION AROSE (SEE PARA 46 OF THE JUDGMENT) WHEN JUSTICE MISHRA HAS STATED AFTER REFERRING TO THE CONCEPT OF TAX PLANNING AS FOLLOWS : 'ON THIS ASPECT, ONE OF US CHINNAPPA REDDY, J. HAS PROPOSED A SEPARATE AND DETAILED OPINION WITH WHICH WE AGREE.' 112. JUSTICE REDDY, WE HAVE ALREADY INDICATED, HIMS ELF HAS STATED THAT HE IS ENTIRELY AGREEING WITH JUSTICE MISHRA AN D HAS ONLY SUPPLEMENTED WHAT JUSTICE MISHRA HAS STATED ON TAX AVOIDANCE, THEREFORE, WE HAVE TO GO BY WHAT JUSTICE MISHRA HAS SPOKEN ON TAX AVOIDANCE. 113. JUSTICE REDDY HAS DEPRECIATED THE PRACTICE OF SETTING UP OF TAX AVOIDANCE PROJECTS, IN OUR VIEW, RIGHTLY BECAUSE TH E SAME IS/WAS THE SITUATION IN ENGLAND AND RAMSAY AND OTHER JUDGMENTS HAD DEPRECIATED THE TAX AVOIDANCE SCHEMES. 114. IN OUR VIEW, THE RATIO OF THE JUDGMENT IS WHAT IS SPOKEN BY JUSTICE MISHRA FOR HIMSELF AND ON BEHALF OF THREE O THER JUDGES, ON WHICH JUSTICE REDDY HAS AGREED. JUSTICE REDDY HAS C LEARLY STATED THAT HE IS ONLY SUPPLEMENTING WHAT JUSTICE MISHRA H AS SAID ON TAX AVOIDANCE. 115. JUSTICE REDDY HAS ENDORSED THE VIEW OF LORD RO SKILL THAT THE GHOST OF WESTMINSTER HAD BEEN EXORCISED IN ENGLAND AND THAT ONE SHOULD NOT ALLOW ITS HEAD REAR OVER INDIA. IF ONE S CANS THROUGH THE VARIOUS JUDGMENTS OF THE HOUSE OF LORDS IN ENGLAND, WHICH WE HAVE ALREADY DONE, ONE THING IS CLEAR THAT IT HAS BEEN A CORNERSTONE OF LAW, THAT A TAX PAYER IS ENABLED TO ARRANGE HIS AFFAIRS SO AS TO REDUCE THE LIABILITY OF TAX AND THE FACT THAT THE MOTIVE FOR A TRANSACTION IS TO AVOID TAX DOES NOT INVALIDATE IT UNLESS A PARTICULA R ENACTMENT SO PROVIDES (WESTMINSTER PRINCIPLE). NEEDLESS TO SAY I F THE ARRANGEMENT IS TO BE EFFECTIVE, IT IS ESSENTIAL THAT THE TRANSA CTION HAS SOME ECONOMIC OR COMMERCIAL SUBSTANCE. LORD ROSKILLS VI EW IS NOT SEEN AS THE CORRECT VIEW SO ALSO JUSTICE REDDYS, FOR THE R EASONS WE HAVE ALREADY EXPLAINED IN EARLIER PART OF THIS JUDGMENT. 116. A FIVE JUDGES BENCH JUDGMENT OF THIS COURT IN MATHURAM AGRAWAL VS. STATE OF MADHYA PRADESH (1999) 8 SCC 66 7, AFTER REFERRING TO THE JUDGMENT IN B.M. KHARWAR (SUPRA) A S WELL AS THE OPINION EXPRESSED BY LORD ROSKILL ON DUKE OF WESTMI NSTER STATED THAT THE SUBJECT IS NOT TO BE TAXED BY INFERENCE OR ANALOGY, BUT ONLY BY THE PLAIN WORDS OF A STATUTE APPLICABLE TO THE F ACTS AND CIRCUMSTANCES OF EACH CASE. ITA NOS.149 & 150 & 158 & 159(B)/2011 78 117. REVENUE CANNOT TAX A SUBJECT WITHOUT A STATUTE TO SUPPORT AND IN THE COURSE WE ALSO ACKNOWLEDGE THAT EVERY TAXPAY ER IS ENTITLED TO ARRANGE HIS AFFAIRS SO THAT HIS TAXES SHALL BE AS L OW AS POSSIBLE AND THAT HE IS NOT BOUND TO CHOOSE THAT PATTERN WHICH W ILL REPLENISH THE TREASURY. REVENUES STAND THAT THE RATIO LAID DOWN IN MCDOWELL IS CONTRARY TO WHAT HAS BEEN LAID DOWN IN AZADI BACHAO ANDOLAN, IN OUR VIEW, IS UNSUSTAINABLE AND, THEREFORE, CALLS FO R NO RECONSIDERATION BY A LARGER BRANCH (BENCH). 80. FROM THE ABOVE OBSERVATIONS OF THE HONBLE SUP REME COURT IN THE CASE OF VODAFONE (SUPRA) IT IS CLEAR THAT ALL TAX PLANNING IS NOT ILLEGAL/ILLEGITIMATE/IMPERMISSIBLE. IT IS ONLY WHE N COLOURABLE OR DUBIOUS DEVICES ARE EMPLOYED OR TRANSACTIONS ARE SHAM OR WH EN ARRANGEMENTS ARE A MERE SUBTERFUGE, AS PART OF TAX PLANNING CAN IT B E SAID THAT THEY ARE ILLEGAL, ILLEGITIMATE, AND IMPERMISSIBLE. FOR ASCE RTAINING WHAT THE REAL INTENTION OF THE PARTIES WAS, IT IS PERMISSIBLE TO GO BEHIND THE DOCUMENTS. GENERALLY ONE MUST PROCEED ON THE BASIS OF THE INTE NTION AS EXPRESSED IN THE TRANSACTION OR DOCUMENT. IF THAT IS CHALLENGED AS NOT TRUE ON GOOD GROUNDS THEN THE REAL INTENTION CAN BE LOOKED INTO. IF IT IS FOUND THAT THE ARRANGEMENT IS A MAKE-BELIEVE AFFAIR, OR A DUBIOUS DEVICE AND THE REAL INTENTION WAS TAX EVASION THEN THE ARRANGEMENT NEED NOT BE GIVEN EFFECT TO. IN CASES WHERE TRANSACTIONS OR ARRANGEMENT ARE EVID ENCED BY WRITTEN AGREEMENT/ARRANGEMENT IT IS NOT POSSIBLE TO REWRITE THE AGREEMENT/ARRANGEMENT. THE RIGHT OF THE PARTIES TO ENTER INTO TRANSACTIONS ACCORDING TO THEIR FREE WILL AND CHOICE HAS ALWAYS BEEN PROTECTED, THE ONLY RIDER BEING THAT BOTH THE PROFESSED INTENTION AND T HE REAL INTENTION SHOULD BE THE SAME. ANY TRANSACTION IN WHICH THE PROFESSED INTENTION AND THE ITA NOS.149 & 150 & 158 & 159(B)/2011 79 INTENTION GATHERED FROM THE DOCUMENTATION ARE THE S AME MUST BE CONSIDERED TO BE GENUINE. 81. WE SHALL NOW TURN TO THE FACTS OF THE PRESENT CASE TO SEE IF THE PROPOSED INTENTION AND THE INTENTION GATHERED FROM THE DOCUMENTATION ARE THE SAME. FOR THIS PURPOSE, WE NEED TO CONFINE OUR SELVES ONLY TO THE FIRST SET OF TRANSACTIONS BY WHICH THE SHARES OF NCCPL HE LD BY THE 13 PARTNERS OF THE FIRM BVRE IN THEIR NAMES WERE TRANSFERRED TO THE FIRM BVRE. ON THIS ASPECT WE HAVE ALREADY NARRATED THE FACTS IN P ARAGRAPHS 16 TO 23 OF THIS ORDER AND ARE NOT BEING REPEATED AGAIN. SUFFI CE IT TO SAY THAT THERE WAS A VALID TRANSFER OF SHARES OF NCCPL BY THE 13 I NDIVIDUALS TO THE FIRM BVRE. THE LAW IS WELL SETTLED WHATEVER IS BROUGHT IN BY THE PARTNERS AS CAPITAL CONTRIBUTION OR TREATED AS PROPERTY OF THE FIRM BECOMES THE PROPERTY OF THE FIRM. THE EVIDENCE ON RECORD CLEARLY INDICA TE THAT THERE WAS A TRANSFER OF OWNERSHIP IN SHARES FROM THE 13 INDIVID UALS IN FAVOUR OF THE FIRM BVRE AS ON 24.3.2006 WHEN THE FIRM MADE THE NE CESSARY BOOK ENTRIES AND WHEN THE PARTNERS MADE THEIR INTENTIONS CLEAR T HAT THE SHARES WERE TO BE TREATED AS THE PROPERTY OF THE FIRM IN THE FORM OF RESOLUTION, DECLARATION U/S.187-C OF THE COMPANIES ACT, 1956. THUS THE ASS ESSEES COULD NO LONGER BE CONSIDERED AS OWNERS OF SHARES OF NCCPL B ROUGHT IN AS CAPITAL OF THE FIRM, ON AND FROM 24.3.2006. THERE IS NOTHING ON RECORD TO SUGGEST REAL INTENTION OF THE PARTIES WAS TO TREAT THE ASSE SSEE AS OWNER OF THE SHARES EVEN AFTER THE TRANSFER OF SHARES TO THE FIR M. ITA NOS.149 & 150 & 158 & 159(B)/2011 80 82. EVEN IN THE SHARE PURCHASE AGREEMENT DATED 10. 6.2006, THE 13 PARTNERS WERE NOT THE SELLERS AND WERE ONLY CONFIRM ING PARTIES. THE SELLERS WERE THE THREE OTHER PERSONS (OTHER THAN THE 13 PAR TNERS OF BVRE) AND THE COMPANY NCSPL AS IS EVIDENT FROM CLAUSE 3.1 OF THE SHARE PURCHASE AGREEMENT DATED 10.6.2006. THE 13 PARTNERS SIGNED THE AGREEMENT ONLY TO CONFIRM THE FACT THAT THEY HAD ALREADY TRANSFERRED THE SHARES HELD BY THEM TO THE FIRM BVRE AS CAPITAL CONTRIBUTION AND THEY H AVE NO OTHER RIGHTS OVER THE BUSINESS OF NCCPL OR AS SHAREHOLDERS OF NCCPL. ON THE OTHER HAND IT IS ONLY NCSPL THAT TRANSFERRED THE SHARES TOGETHER WITH THE 3 OTHER SHAREHOLDERS OF THE ENTIRE PAID UP SHARE CAPITAL OF NCCPL. IT IS NO DOUBT TRUE THAT IF THE CORPORATE VEIL OF NCSPL IS REMOVED , WE WILL FIND ONLY THE 13 SHAREHOLDERS OF BVRE AS THE PERSONS BEHIND THE CORP ORATE VEIL. IT IS NOT POSSIBLE TO LIFT THE CORPORATE VEIL JUST FOR THE AS KING. A CASE OF DEFRAUDING THE REVENUE HAS TO BE MADE OUT. THE QUESTION IS AS TO WHETHER THE COURSE OF ACTION ADOPTED BY THE ASSESSEE WAS PERMISSIBLE O R NOT. THE ANSWER TO THE QUESTION WOULD BE THAT THERE WERE TWO WAYS IN W HICH THE SHARES OF NCCPL HELD BY THE 13 PARTNERS OF BVRE COULD HAVE BE EN TRANSFERRED TO GBFL. ONE WAY WAS THAT THE 13 PARTNERS IN THEIR IN DIVIDUAL CAPACITY COULD HAVE TRANSFERRED THE SHARES OF NCCPL HELD BY THEM T O GBFL AT A PRICE AT WHICH THEY WERE ULTIMATELY SOLD TO GBFL THROUGH NCS PL. THE OTHER WAY WAS THE MANNER IN WHICH THE ASSESSEES HAVE TRANSFER RED THE SHARES THROUGH THE MEDIUM OF THE FIRM BVRE. THE LATTER CO URSE WOULD CERTAINLY ITA NOS.149 & 150 & 158 & 159(B)/2011 81 RESULT IN LESSER TAX BURDEN TO THE ASSESSEES BUT TH AT IS A COURSE WHICH THE LAW PERMITS. THE ASSESSEES HAVE ALTERED THEIR LEGA L RIGHTS UNDER THE VARIOUS DOCUMENTS. IT IS NOT POSSIBLE TO IGNORE TH E LEGAL EFFECTS OF ALL THE ACTIONS CARRIED OUT BY THE ASSESSEES AND PROCEED ON THE BASIS THAT IT IS THE ASSESSEES WHO SOLD THEIR SHARE-HOLDING IN NCCPL TO GBFL DURING THE PREVIOUS YEAR RELEVANT TO AY 07-08. 83. MUCH EMPHASIS HAS BEEN LAID BY THE LEARNED SEN IOR ADVOCATE FOR THE REVENUE ON THE FACT THAT THE MOU DATED 29.3.2006 DE PICTS THE TRUE INTENTION OF THE PARTIES AND THAT ULTIMATELY IT WAS THAT INTENTION WHICH IN A DIFFERENT FORM WAS PUT THROUGH IN THE FORM OF A SHA RE PURCHASE AGREEMENT DATED 10.6.2006. IT WAS HIS SUBMISSION THAT ALL OT HER STEPS TAKEN, BEFORE THE SHARES OF NCCPL WERE ULTIMATELY TRANSFERRED TO GBFL, ARE ALL STEPS TAKEN WITH A VIEW TO AVOID PAYMENT OF LEGITIMATE TA X ON THE CORRECT QUANTUM OF CAPITAL GAIN AND THEREFORE DESERVE TO BE IGNORED. HE ALSO HIGHLIGHTED THE QUICK SPAN OF TIME WITHIN WHICH THE VARIOUS TRANSACTIONS HAD BEEN CARRIED OUT AND ARGUED THAT THE INTENTION WAS TO AVOID PAYMENT OF TAX ON THE CORRECT QUANTUM OF CAPITAL GAIN ON SA LE OF SHARES OF NCCPL TO GBFL. AS FAR AS THE MOU DATED 29.3.2006 IS CONCERN ED IT MAY BE TRUE THAT IT HAS ALL INGREDIENTS OF A VALID AGREEMENT AN D THE BARGAIN BETWEEN THE PARTIES AS CONTAINED IN THIS AGREEMENT WAS ULTIMATE LY REFLECTED IN THE SHARE PURCHASE AGREEMENT DATED 10.6.2006. THE MOU GIVES THE PARTICULARS OF THE SHAREHOLDERS AS ON 1.3.2006. AS EARLY AS 24.3. 2006 THE SHARES OF ITA NOS.149 & 150 & 158 & 159(B)/2011 82 NCCPL HELD BY THE 13 PARTNERS WERE ALREADY TRANSFER RED TO THE FIRM BVRE AS CAPITAL CONTRIBUTION OF THE PARTNERS. IT IS NOT POSSIBLE TO HOLD THAT THE TRANSACTION OF TRANSFER BY THE PARTNERS OF THE SHAR ES OF NCCPL AS CAPITAL CONTRIBUTION ON 24.3.2006 WAS NOT CONTEMPORANEOUS A ND THAT IT WAS AN AFTER-THOUGHT. THERE IS NO EVIDENCE ON RECORD TO T HAT EFFECT. FURTHER THE MOU DATED 29.3.2006 STANDS SUPERSEDED BY THE SHARE PURCHASE AGREEMENT DATED 10.6.2006 AS PER THE RECITALS IN THE SHARE PU RCHASE AGREEMENT DATED 10.6.2006 (CLAUSE-B OF PREAMBLE TO THE AGREEMENT). UNDER SEC.45 OF THE ACT, CAPITAL GAIN ARISING ON TRANSFER OF CAPITAL AS SET DURING THE PREVIOUS YEAR IS CHARGED TO CAPITAL GAIN TAX. THE TRANSFER WHICH TRIGGERED THE CHARGE TO TAX ON CAPITAL GAIN IN AY 07-08 WAS THE TRANSFER OF SHARES UNDER THE AGREEMENT DATED 10.6.2006. IT IS THEREFORE NO LON GER POSSIBLE TO RELY ON THE MOU DATED 29.3.2006 TO SAY THAT IT IS ONLY THE ASSESSEES WHO TRANSFERRED THE SHARES OF NCCPL TO GBFL DURING THE PREVIOUS YEAR RELEVANT TO AY 07-08. 84. AS ALREADY STATED THE SERIES OF TRANSACTIONS B Y WHICH THE SHARES OF NCCPL HELD BY THE ASSESSEE ULTIMATELY WAS TRANSFERR ED TO GBFL WERE INTENDED TO LESSEN THE TAX BURDEN ON CAPITAL GAIN O N 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 ASSE SSEES WAS LEGALLY ITA NOS.149 & 150 & 158 & 159(B)/2011 83 VALID. EVEN THE ASSESSEE IN THE WRITTEN SUBMISSION S DATED 2.1.2013 HAS ACCEPTED THE POSITION THAT IN VIEW OF THE RETROSPEC TIVE 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 E NTIRE SERIES OF TRANSACTIONS BY WHICH THE SHARES OF NCCPL WERE ULTI MATELY TRANSFERRED TO GBFL WERE ALL VALID. EVEN IF IT WERE TO BE CONSIDE RED 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 TRANSF ER 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 T RANSACTIONS 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 T AX THE QUANTUM OF CAPITAL GAIN WHICH WOULD HAVE RESULTED, HAD THE TRA NSACTIONS OF SALE OF SHARES OF NCCPL TO GBFL BEING CARRIED OUT BY THE AS SESSEES DIRECTLY TO GBFL INSTEAD OF THROUGH NCSPL/BVREPL. WE HOLD ACCO RDINGLY 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 DE CISION OF THE HONBLE SUPREME COURT IN THE CASE OF VODAFONE (SUPRA) IS TH E LAW ON THE SUBJECT, WHICH HAS BEEN THE BASIS FOR OUR CONCLUSIONS AS ABO VE. THE CONCLUSION ON THE COMMON ISSUE THAT ARISES FOR CONSIDERATION I N THESE APPEALS BY THE ASSESSEES IS THAT THE ORDER OF THE REVENUE AUTHORIT IES BRINGING TO TAX ITA NOS.149 & 150 & 158 & 159(B)/2011 84 CAPITAL GAIN ON SALE OF SHARES OF NCCPL TO GODREJ B Y 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 DIRECTE D TO BE DELETED. THE RELEVANT GROUNDS OF APPEAL OF THE ASSESSEES IN THEI R APPEALS ARE ALLOWED. 85. NOW WE WILL TAKE UP FOR CONSIDERATION THE OT HER ISSUES IN THE RESPECTIVE APPEALS OF THE ASSESSEE. ITA NO.149/BANG/2011 B. MADHUSUDAN REDDY (HUF) AY 2007-08 86. THE ASSESSEE HAS FILED CONCISE GROUNDS OF APP EAL. GROUND NOS. 1 TO 19 RAISED BY THE ASSESSEE IS WITH REGARD TO THE COM MON ISSUE I.E., CAPITAL GAINS ON SALE OF SHARES OF NCCPL BY NCSPL TO GBFL. THIS ISSUE HAS ALREADY BEEN DECIDED IN THE EARLIER PARAGRAPHS. FO R THE REASONS STATED THEREIN, THESE GROUNDS ARE ALLOWED. 87. CONCISE GROUND NO.20 READS AS FOLLOWS:- THE ADDITION OF RS. 10,44,155/- BEING THE AGGREGAT E OF THE BALANCES IN VARIOUS ACCOUNTS COULD NOT BE TREATED A S THE INCOME OF THE APPELLANT UNDER ANY OF THE PROVISIONS OF THE ACT MERELY BECAUSE THEY WERE LONG OUTSTANDING AND ON NO OTHER EVIDENCE. THE CONTENTION OF THE APPELLANT AS REGARD S ITS NON LIABILITY SHOULD HAVE BEEN ACCEPTED. ITA NOS.149 & 150 & 158 & 159(B)/2011 85 88. IN THE BALANCE SHEET IN ITS PROPRIETARY CONCERN , THE ASSESSEE HAD SHOWN VARIOUS DEBTORS TOTALING RS.10,44,155. THE AO CALLED UPON THE ASSESSEE TO ESTABLISH THAT THESE LIABILITIES EXISTE D ON THE BALANCE SHEET DATE I.E., 31.3.2007. ACCORDING TO THE AO, THE ASSESSEE DID NOT FURNISH ANY EVIDENCE AS CALLED FOR BY HIM AND HE THEREFORE ADDE D A SUM OF RS.10,44,155. 89. BEFORE CIT(A), THE ASSESSEE POINTED OUT THAT AL L THE BALANCES SHOWN IN THE BALANCE SHEET WERE GENUINE BALANCES OUTSTAND ING AND PAYABLE BY THE ASSESSEE AND THE ACTION OF THE AO IN TREATING T HE SAME AS INCOME OF THE ASSESSEE CANNOT BE SUSTAINED. IN PARTICULAR, THE A SSESSEE POINTED OUT THAT OUT OF THE BALANCES SHOWN AS OUTSTANDING IN THE BAL ANCE SHEET, A SUM OF RS.7,37,101 WAS AN ADVANCE RECEIVED BY THE ASSESSEE FOR SALE OF SHARES OF NCCPL TO M/S. NESTLE INDIA LTD. AND SINCE THE SHARE S WERE ULTIMATELY SOLD TO GBFL, THIS SUM WAS AN OUTSTANDING LIABILITY PAYA BLE TO M/S. NESTLE INDIA LTD. THE CIT(A) HOWEVER HELD THAT SINCE NO E VIDENCE WAS FURNISHED, IT WAS REASONABLE TO PRESUME THAT THE LIABILITY OF THE ASSESSEE FOR REPAYMENT OF ALL THE OUTSTANDING DEBTS HAS CEASED AND HE THER EFORE SUSTAINED THE ADDITION MADE BY THE AO. 90. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE SUB MITTED THAT THE ADDITION CANNOT BE SUSTAINED BECAUSE U/S. 41(1) OF THE ACT, BECAUSE THERE WAS NO EVIDENCE TO SHOW THAT THE ASSESSEE HAS RECEI VED ANY BENEFIT BY WAY ITA NOS.149 & 150 & 158 & 159(B)/2011 86 OF REMISSION OF LIABILITY. IN PARTICULAR, IT WAS S UBMITTED THAT AS FAR AS THE OUTSTANDING PAYABLE TO NESTLE INDIA LTD. IS CONCERN ED, THE SAME WAS NOT CLAIMED AS DEDUCTION IN THE PAST AND THEREFORE, SEC TION 41(1) CANNOT APPLY. 91. THE LD. DR RELIED ON THE ORDER OF THE CIT(A). 92. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. FROM A PERUSAL OF THE ORDER OF THE AO, IT TRANSPIRES THAT HE HAS NOT INVO KED ANY SPECIFIC PROVISION OF LAW FOR MAKING THE IMPUGNED ADDITION. THE CIT(A ) HAS, HOWEVER, SUSTAINED THE ADDITION BY RESORTING TO THE PROVISIO NS OF SECTION 41(1) OF THE ACT. FOR INVOKING THE AFORESAID PROVISIONS, THERE SHOULD BE A BENEFIT TO THE ASSESSEE BY WAY OF REMISSION OR CESSATION OF LIABIL ITY. THERE IS NO EVIDENCE ON RECORD TO SHOW THAT THE ASSESSEE HAD RECEIVED AN Y SUCH BENEFIT BY WAY OF REMISSION OR CESSATION OF LIABILITY. AN ADDITIO N U/S. 41(1) CANNOT BE MADE ON PRESUMPTIONS AND ASSUMPTIONS. THE FACT REM AINS THAT THE ASSESSEE CONTINUES TO RECOGNIZE THE OUTSTANDING BAL ANCES AS ITS LIABILITY. UNLESS THERE IS EVIDENCE TO SHOW THAT THE PROVISION S OF SECTION 41(1) ARE ATTRACTED, THE ADDITION MADE CANNOT BE SUSTAINED. WE ACCORDINGLY DIRECT THAT THE ADDITION SUSTAINED BY THE CIT(A) DESERVES TO BE DELETED AND ACCORDINGLY THE SAME IS HEREBY DELETED. GROUND NO. 21 IS ACCORDINGLY ALLOWED. 93. CONCISE GROUND NO.21 RAISED BY THE ASSESSEE REA DS AS FOLLOWS:- ITA NOS.149 & 150 & 158 & 159(B)/2011 87 THE ADDITION IN A SUM OF RS.4,25,577/- WITH RESPEC T TO THE APPELLANTS DEALING WITH M/S. ADANI EXPORTS WHO HAD RAISED A DEBIT NOTE ON THE APPELLANT THAT WAS DULY REFLECTED IN THE ACCOUNTS ON ACCOUNT OF SHORTAGE OF IRON ORE IS NOT JUSTIFIED. 94. THE ASSESSEE HUF CARRIES ON THE BUSINESS OF DEA LING IN GRANITES AND MONEY LENDING. IN THE COURSE OF ASSESSMENT PROCEED INGS, THE AO NOTICED THAT THE ASSESSEE WAS RUNNING THE BUSINESS OF DEALI NG IN GRANITES AS PROPRIETOR UNDER THE NAME AND STYLE, M/S. MADHU GRA NITES, CHITTOOR. IN THE PROFIT & LOSS ACCOUNT OF THE SAID BUSINESS, A S UM OF RS.9,92,695 WAS DEBITED AS EXPENSES RELATING TO EARLIER PERIOD. TH E AO CALLED FOR THE DETAILS AND FOUND THAT A SUM OF RS.4,25,577 WAS INCURRED AS EXPENSES, CONSEQUENT TO A DEBIT ADVICE GIVEN BY M/S. ADANI EX PORTS DURING THE YEAR FOR RATE DIFFERENCES IN SUPPLIES MADE DURING THE YE AR. THE ASSESSEE COULD NOT FURNISH COPY OF DEBIT OR ANY OTHER EVIDENCE TO SUBSTANTIATE THE INCURRING OF EXPENSES PERTAINING TO THE PREVIOUS YE AR RELEVANT TO ASSESSMENT YEAR 2007-08. THE AO THEREFORE DISALLOW ED A SUM OF RS.4,25,577 AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. EVEN BEFORE THE CIT(A), THE ASSESSEE COULD NOT PRODUCE A NY EVIDENCE AND THEREFORE THE GRIEVANCE BY THE ASSESSEE AGAINST THE ADDITION MADE BY THE AO WAS NOT ACCEPTED BY THE CIT(A). ITA NOS.149 & 150 & 158 & 159(B)/2011 88 95. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE SUB MITTED THAT IT WAS IN THE BUSINESS OF SUPPLY OF IRON ORE. DURING THE EAR LIER PERIOD, IT HAD SUPPLIED IRON ORE TO M/S. ADANI EXPORTS. THE SALE TO ADANI EXPORTS WAS DULY REFLECTED IN THE BOOKS OF ACCOUNT AS PER THE M ERCANTILE SYSTEM OF ACCOUNTING. DURING THE PREVIOUS YEAR, ADANI EXPORT S CLAIMED THAT THERE WAS SHORTAGE OF SUPPLY OF IRON ORE SUPPLIED BY THE ASSESSEE IN THE EARLIER PERIOD AND THEREFORE THEY WERE DEBITING THE ACCOUNT OF THE ASSESSEE IN THEIR BOOKS OF ACCOUNTS BY A SUM OF RS.4,25,577. THE ASS ESSEE SUBMITTED THAT THERE WAS NO DEBIT NOTE ISSUED BY ADANI EXPORTS AS SUCH AND THAT THE COPY OF THE ACCOUNTS OF THE ASSESSEE AS APPEARING IN THE BOOKS OF ADANI EXPORTS IS THE ONLY EVIDENCE AVAILABLE. THE ASSESSEE SUBM ITTED THAT THE COPY OF ACCOUNTS WAS RECEIVED BY THE ASSESSEE DURING THE PR EVIOUS YEAR AND THEREFORE THE CLAIM OF THE ASSESSEE OUGHT TO BE ALL OWED. 96. WE HAVE CONSIDERED THE SUBMISSIONS OF THE ASSES SEE. THE CLAIM OF THE ASSESSEE BEFORE US IS NOT SUBSTANTIATED BY ANY EVIDENCE. EVEN THE COPY OF THE ACCOUNT OF THE ASSESSEE AS APPEARING IN THE BOOKS OF ADANI EXPORTS HAS NOT BEEN FILED, NOR THE EVIDENCE TO SHOW THAT T HE COPY OF THE SAID BOOKS OF ACCOUNTS WAS RECEIVED BY THE ASSESSEE ONLY DURIN G THE PREVIOUS YEAR. IN SUCH CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE CON CLUSIONS DRAWN BY THE REVENUE AUTHORITIES DO NOT CALL FOR ANY INTERFERENC E. CONSEQUENTLY, GROUND NO. 21 IS DISMISSED. ITA NOS.149 & 150 & 158 & 159(B)/2011 89 97. IN THE RESULT, ITA 149/BANG/2011 IS PARTLY ALLO WED. ITA NO.150/BANG/2012 - SMT. V. SOUMINI REDDY AY 200 7-08 98. THE ASSESSEE IN THIS APPEAL IS AN INDIVIDUAL. SHE CARRIES ON THE BUSINESS OF MONEY LENDING, BESIDES INCOME FROM OTHE R SOURCES. THE ASSESSEE HAS FILED CONCISE GROUNDS OF APPEAL. GROUN D NOS. 1 TO 19 RAISED BY THE ASSESSEE IS WITH REGARD TO THE COMMON ISSUE I.E., CAPITAL GAINS ON SALE OF SHARES OF NCCPL BY NCSPL TO GBFL. THIS ISS UE HAS ALREADY BEEN DECIDED IN THE EARLIER PARAGRAPHS. FOR THE REASONS STATED THEREIN, THESE GROUNDS ARE ALLOWED. 99. CONCISE GROUND NO.20 RAISED BY THE ASSESSEE RE ADS AS FOLLOWS:- THERE WAS NO GROUND FOR DISALLOWANCE OF LOSS OF RS.1,81,235/- IN MONEY-LENDING BUSINESS ON THE GROU ND THAT NO EVIDENCE WAS PRODUCED AS THERE WAS NO ENQUIRY MA DE EVEN DURING THE MAKING OF THE REMAND REPORT. 100. THE ASSESSEE CLAIMED THAT SHE HAD INCURRED A LOSS OF RS.1,81,235 FROM MONEY LENDING BUSINESS. ON VERIFICATION OF TH E DETAILS, THE AO NOTICED THAT THE ASSESSEE HAD RECEIVED INTEREST FROM TWO PE RSONS AMOUNTING TO RS.1,20,000. SHE CLAIMED THAT SHE HAD BORROWED TH OSE FUNDS AND HAD PAID INTEREST ON SUCH BORROWING OF RS.1,81,106. T HE AO WAS OF THE VIEW THAT THE ASSESSEE WAS NOT CARRYING ON THE BUSINESS OF MONEY LENDING, ITA NOS.149 & 150 & 158 & 159(B)/2011 90 THEREFORE THE INTEREST EXPENSES CANNOT BE SAID TO B E EXPENSES INCURRED IN EARNING INTEREST INCOME. IN THIS REGARD, THE AO OB SERVED THAT THE ASSESSEE HAS RECEIVED INTEREST ONLY FROM TWO PERSONS. THE A O THEREFORE DID NOT ALLOW THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON AC COUNT OF LOSS FROM BUSINESS OF MONEY LENDING. 101. BEFORE CIT(A), THE ASSESSEE SUBMITTED THAT THE MONEY LENDING BUSINESS WAS BEING DONE ON A REDUCED SCALE, BUT THE LOANS BORROWED IN THE PAST FOR THE PURPOSE OF MONEY LENDING BUSINESS CONT INUED. ACCORDING TO THE CIT(A), THE ASSESSEE COULD NOT FURNISH REQUIRED EVIDENCE TO SUBSTANTIATE HER CASE IN THE REMAND PROCEEDINGS BEF ORE THE AO. THE CIT(A) THEREFORE CONFIRMED THE ORDER OF THE AO. 102. BEFORE US, LD. COUNSEL FOR THE ASSESSEE SUBM ITTED THAT THE INTEREST EXPENDITURE CLAIMED AS A DEDUCTION OUGHT TO HAVE BE EN ALLOWED. IT WAS SUBMITTED THAT BECAUSE THE INTEREST RECEIPTS WERE L ESS DURING THE PREVIOUS YEAR, INTEREST EXPENSES CANNOT BE DISALLOWED. IT W AS ALSO ARGUED THAT THE AO HAS NOT DISPUTED THAT THE BORROWING ON WHICH INT EREST WAS PAID WAS NOT FOR THE PURPOSE OF BUSINESS OF MONEY LENDING. 103. THE LD. DR RELIED ON THE ORDER OF THE CIT(A). ITA NOS.149 & 150 & 158 & 159(B)/2011 91 104. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. PE RUSAL OF THE ORDER OF THE AO SHOWS THAT THE AO DID NOT DISPUTE THE INCURR ING OF THE INTEREST EXPENSES IN CONNECTION WITH FUNDS THAT WAS BORROWED FOR MONEY LENDING BUSINESS. HE WAS OF THE VIEW THAT BECAUSE INTEREST RECEIPTS WERE ONLY FROM TWO PERSONS, THE ASSESSEE CANNOT BE SAID TO BE ENGA GED IN THE BUSINESS OF MONEY LENDING AND THEREFORE THE AO SOUGHT TO BRING TO TAX INTEREST INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. THE C IT(A) HAD CALLED FOR A REMAND REPORT FROM THE AO ON THE SUBMISSION OF THE ASSESSEE THAT THE INTEREST INCOME FROM MONEY LENDING BUSINESS WAS LES S BECAUSE OF THE REDUCED SCALE OF BUSINESS, WHEREAS THE OLD BORROWIN GS FOR THE PURPOSE OF MONEY LENDING BUSINESS CONTINUED AND THEREFORE THE INTEREST EXPENSES WERE INCURRED FOR THE PURPOSE OF BUSINESS OF THE AS SESSEE. THE AO SEEMS TO HAVE ASKED FOR EVIDENCE REGARDING THE CLAIM OF T HE ASSESSEE. WE FIND THAT THIS WAS NOT THE CASE OF THE AO IN THE ORDER O F ASSESSMENT. HOWEVER, WE ALSO DO NOT FIND ANY EVIDENCE FILED BY THE ASSES SEE TO SHOW THAT THE INTEREST INCOME WAS FROM THE BUSINESS OF MONEY LEND ING, WHICH BUSINESS, ACCORDING TO THE ASSESSEE, WAS CARRIED ON BY THE AS SESSEE IN THE PAST AND ALSO IN THE SUBSEQUENT ASSESSMENT YEARS. WE THERE FORE SET ASIDE THE ORDER OF THE CIT(A) AND REMAND THE ISSUE TO THE AO FOR FR ESH CONSIDERATION WITH LIBERTY TO THE ASSESSEE TO SUBSTANTIATE HER CASE TH AT INTEREST INCOME IN QUESTION WAS FROM THE BUSINESS OF MONEY LENDING. 105. CONCISE GROUND NO.21 RAISED BY THE ASSESSEE R EADS AS FOLLOWS:- ITA NOS.149 & 150 & 158 & 159(B)/2011 92 21) THE SUM OF RS. 1,77,778/- WAS MERELY ADVANCE TOWARDS SHARE PURCHASE WHICH NEVER MATERALISED AND MERELY BECAUSE IT WAS OUTSTANDING FOR A LONG TIME, UNDER NO PROVISION OF LAW COULD IT HAVE BEEN TREATE D AS INCOME FOR THE CURRENT ASSESSMENT YEAR. 106. THIS GROUND IS IDENTICAL TO GROUND NO.21 IN IT A NO.149/BANG/2011, THE ONLY DIFFERENCE BEING THAT THE OUTSTANDING AMOU NT SHOWN IN THE BALANCE SHEET OF THE ASSESSEE WAS SUM DUE AND PAYAB LE TO M/S. NESTLE INDIA PVT. LTD. AS ADVANCE FOR PURCHASE OF SHARES OF NCCPL HELD BY THE ASSESSEE. THE REVENUE INVOKED THE PROVISIONS OF S ECTION 41(1) OF THE ACT AND BROUGHT A SUM OF RS.1,77,778 TO TAX ON THE GROU ND THAT THE LIABILITY SHOWN IN THE BALANCE SHEET NO LONGER EXISTS. THE ORDER OF THE AO WAS CONFIRMED BY THE CIT(A). WE HAVE ALREADY HELD WHI LE DECIDING SIMILAR GROUND IN ITA NO.149/BANG/2011 THAT THE ADDITION MA DE BY THE REVENUE CANNOT BE SUSTAINED. FOR THE REASONS GIVEN EARLIE R, WE HOLD THAT THE ADDITION MADE BY THE AO AND SUSTAINED BY THE CIT(A) SHOULD BE DELETED. ACCORDINGLY GROUND NO.21 RAISED BY THE ASSESSEE IS ALLOWED. 107. IN THE RESULT, THE APPEAL BEING ITA NO.150/BAN G/2011 IS PARTLY ALLOWED. ITA NOS.149 & 150 & 158 & 159(B)/2011 93 ITA NO.158/BANGA/2011 V. VIKRAM REDDY (INDL.) AY 2007-08 108. THE ASSESSEE IS AN INDIVIDUAL. THE ASSESS EE HAS FILED CONCISE GROUNDS OF APPEAL. GROUND NOS. 1 TO 16 RAISED BY TH E ASSESSEE IS WITH REGARD TO THE COMMON ISSUE I.E., CAPITAL GAINS ON S ALE OF SHARES OF NCCPL BY NCSPL TO GBFL. THIS ISSUE HAS ALREADY BEEN DECI DED IN THE EARLIER PARAGRAPHS. FOR THE REASONS STATED THEREIN, THESE GROUNDS ARE ALLOWED. 109. GROUND NO.17 RAISED BY THE ASSESSEE READS AS F OLLOWS:- THE SUM OF RS. 1,70,029/- HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE COULD NOT HAVE BEEN TREATED AS DEEMED DIVIDEND U/S. 2(22)(E). 110. THE ASSESSEE WAS A DIRECTOR OF A COMPANY BY NA ME HAMSA MINERALS PVT. LTD. DURING THE PREVIOUS YEAR RELEVANT TO A.Y. 2007-08. AS PER THE ACCOUNT COPY OF THE ASSESSEE IN THE BOOKS OF THE SA ID COMPANY, A SUM OF RS.1,70,029 HAD BEEN AVAILED OF AS A LOAN BY THE AS SESSEE FROM THE AFORESAID COMPANY. THE ASSESSEE WAS HOLDING 43.6% VOTING POWER IN THE COMPANY AND THE COMPANY HAD RESERVED SOME SURPLUS A S ON 31.3.2007 OF RS.5.72 CRORES. IN THOSE CIRCUMSTANCES, THE AO INV OKING THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT, TREATED THE LOAN AS A PAYMENT OF DIVIDEND AND BROUGHT THE SAME TO TAX AS INCOME OF THE ASSESSEE. THE ASSESSEES STAND BEFORE THE AO WAS THAT HE HAD ADVANCED LOANS TO THI RD PARTIES ON BEHALF OF ITA NOS.149 & 150 & 158 & 159(B)/2011 94 THE COMPANY AND LATER THE COMPANY REIMBURSED THE SA ME TO THE ASSESSEE AND THEREFORE THERE WAS NO LOAN GIVEN BY THE COMPAN Y TO THE ASSESSEE. ON THE ABOVE PLEA BY THE ASSESSEE, THE AO FOUND THAT T HE TWO PERSONS TO WHOM THE ASSESSEE CLAIMED TO HAVE GIVEN LOAN ON BEHALF O F THE COMPANY VIZ., SHRI HANUMAN SINGHJI RANA AND SHRI N. CHANDRASHEKARA RED DY WERE ALREADY REFLECTED AS LOAN DEBTORS IN THE BOOKS OF THE COMPA NY. THE AO THEREFORE DID NOT ACCEPT THE PLEA OF THE ASSESSEE. THE CIT( A) CONFIRMED THE ORDER OF THE AO. 111. BEFORE US, THE SAME PLEA AS WAS PUT FORTH BEF ORE THE REVENUE AUTHORITIES WAS REITERATED. 112. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE A DMITTED POSITION THAT THE ASSESSEE COULD NOT SUBSTANTIATE HIS PLEA THAT THE A MOUNT SHOWN AS LOAN IN HIS ACCOUNT IN THE BOOKS OF THE COMPANY WAS REIMBUR SEMENT OF THE LOAN GIVEN ON BEHALF OF THE COMPANY TO TWO PERSONS, THE ADDITION DESERVED TO BE SUSTAINED. ACCORDINGLY GROUND NO.17 RAISED BY THE A SSESSEE IS DISMISSED. 113. GROUND NO.18 RAISED BY THE READS AS FOLLOWS:- THE DISALLOWANCE OF RS.1,48,78,299/- IS UNWARRANTE D BY LAW AS THE ASSESSEE WAS CARRYING ON MONEY LENDIN G BUSINESS AND IT IS NOT SHOWN THAT ANY PART OF THE BORROWED AMOUNT INTEREST ON WHICH IS THE SUBJECT ITA NOS.149 & 150 & 158 & 159(B)/2011 95 MATTER OF DISALLOWANCE WAS LENT FOR NON-BUSINESS PURPOSES OR DIVERTED AS SUCH. 114. DURING THE PREVIOUS YEAR, THE ASSESSEE HAD SH OWN RECEIPT OF INTEREST OF RS.1,97,969 UNDER THE HEAD INCOME FROM OTHER SO URCES. THE INTEREST HAD BEEN RECEIVED FROM TWO DEBTORS VIZ., SHRI VASUD EVAN AND HAMSA MINERAL EXPORTS. AGAINST THE AFORESAID INCOME, THE ASSESSEE CLAIMED EXPENSES TO THE TUNE OF RS.1,50,70,266 AS INTEREST PAID ON BORROWINGS AND DECLARED A LOSS OF RS.1,49,27,013. ACCORDING TO T HE ASSESSEE, THE BORROWINGS ON WHICH INTEREST WAS PAID, WAS USED TO GIVE LOANS TO PERSONS FROM WHOM INTEREST INCOME WAS RECEIVED. 115. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE A O CALLED FOR THE DETAILS OF LOANS OUTSTANDING AND RECOVERED BY THE ASSESSEE. THE ASSESSEE GAVE DETAILS WHICH SHOWED THAT THE ASSESSEE HAD ADVANCED A SUM OF RS.2,13,03,784 TO 40 PARTIES, WHICH WERE OUTSTANDIN G FOR THREE YEARS. THE ASSESSEE SUBMITTED THAT HE DID NOT RECEIVE ANY INTE REST FROM THESE PARTIES. THE AO WAS OF THE VIEW THAT FUNDS BORROWED ON WHICH INTEREST WAS PAID, WAS NOT USED FOR THE PURPOSE OF EARNING THE INTERES T INCOME AND THEREFORE THE LOSS CLAIMED BY THE ASSESSEE WAS DISALLOWED. I N THIS REGARD, THE AO OBSERVED THAT THE ASSESSEE CLAIMED THAT IT HAD TAKE N A LOAN OF RS.77,24,419 FROM B.V. REDDY & SONS AND PAID INTERE ST OF RS.1,18,35,566 ON SUCH BORROWING. THE ASSESSEE RECEIVED ONLY INTE REST OF RS.1,47,375 ITA NOS.149 & 150 & 158 & 159(B)/2011 96 FROM OTHER PARTIES. THE AO ALSO HELD THAT THERE WA S NO NEXUS BETWEEN THE AMOUNT BORROWED FROM B.V. REDDY & SONS AND AMOUNT A DVANCED AS LOANS. THE ASSESSEE CLAIMED THAT HE HAD GIVEN A SUM OF RS. 7.22 CRORES AND RS.2,35,02,550 TO HAMSA MINERALS & EXPORTS IN WHICH HE WAS A PARTNER AND THAT THIS LOAN WAS GIVEN OWING TO COMMERCIAL EX PEDIENCY. THE AO ON THE ABOVE PLEA FOUND THAT THE ASSESSEE HAS RECEIVED INTEREST OF ONLY RS.56,594 FROM HAMSA MINERAL AND EXPORTS. THE AO A LSO FOUND THAT THE ASSESSEE ON THE ONE HAND HAD ADVANCED A SUM OF RS.9 ,57,02,550 (7.22 CRORES + 2,35,02,550) AND ON THE OTHER HAND TOOK A LOAN FROM THE VERY SAME FIRM TO THE EXTENT OF RS.16,61,44,269 ON WHICH INTEREST OF RS.29,85,296 WAS PAID. ON THE ABOVE STATE OF AFFAI RS, THE AO CAME TO THE CONCLUSION THAT THE PLEA OF INTEREST PAYMENT HAVING BEEN MADE OWING TO COMMERCIAL EXPEDIENCY HAD NOT BEEN ESTABLISHED BY T HE ASSESSEE. FOR THE ABOVE REASONS, THE AO WAS OF THE VIEW THAT INTEREST EXPENSES CLAIMED SHOULD BE DISALLOWED. THE AO FOUND THAT THE ASSESSE E WAS PAYING 12% INTEREST ON FUNDS BORROWED. HE HAD LENT THOSE FUND S BUT COLLECTED INTEREST ON SUCH LENDING ONLY A SUM OF RS.1,97,969. THE INT EREST EXPENSES CLAIMED BY THE ASSESSEE WAS RS.1,50,70,266. AFTER DEDUCTIN G THE INTEREST RECEIVED, THE AO DISALLOWED A SUM OF RS.1,48,72,287 AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 116. BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THA T HE HAD INVESTED A SUM OF RS.59,74,31,660 AND THE BORROWED FUNDS HAD BEEN USED FOR THE SAID ITA NOS.149 & 150 & 158 & 159(B)/2011 97 PURPOSE. SINCE THE LOANS WERE USED FOR THE PURPOSE OF EARNING INCOME, NO DISALLOWANCE OF INTEREST COULD BE MADE. THE ASSESS EE ALSO PLACED RELIANCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT V. S.A. BUILDERS 288 ITR 1 (SC) . 117. THE CIT(A) DID NOT AGREE WITH THE SUBMISSIONS OF THE ASSESSEE AND HE HELD AS FOLLOWS:- 12.2 I HAVE GONE THROUGH THE ABOVE. M/S. S.A . BUILDERS CASE HAD IN FACT BEEN SET ASIDE TO THE HIGH COURT T O VERIFY THE VERACITY OF THE NEW EVIDENCE PROVIDED BY THE RESPON DENT M/S. S.A. BUILDERS TO JUSTIFY THAT THE AMOUNT GIVEN AS I NTEREST FREE LOAN TO ITS SISTER CONCERN M/S. SAB WAS ENTIRELY FR OM ITS OWN FUNDS AND NOT A PIE FROM ANY BORROWED FUNDS ON WHIC H INTEREST HAD BEEN PAID. THIS IS NOT THE CASE HERE AT ALL. AD MITTEDLY LOAN HAD BEEN BORROWED FROM BANK ON WHICH INTEREST HAD B EEN PAID AND SUCH BORROWED FUNDS HAD BEEN DIVERTED TO SOME P ERSONS AS LOAN ON WHICH INTEREST HAS NOT BEEN CHARGED. HENCE FACTS DIFFER. HOWEVER, OBITER DICTA OF THE APEX COURT IS ALSO BIN DING. IN THE OBITER DICTA OF THE S.A. BUILDERS CASE, THE HONORAB LE COURT HAS ENUNCIATED THE PRINCIPLES OF COMMERCIAL EXPEDIENCY. IT IS STATED THEREIN THAT THE REVENUE AUTHORITIES IS NOT ALLOWED TO SIT IN THE CHAIR OF THE BUSINESSMAN TO DECIDE WHICH EXPENDITUR E IS TO BE INCURRED FOR THE PURPOSE OF BUSINESS. IN OTHER WORD S, IF SOME ITA NOS.149 & 150 & 158 & 159(B)/2011 98 NEXUS BETWEEN THE EXPENDITURE AND THE BUSINESS CARR IED ON BY THE ASSESSEE IS ESTABLISHED THE SAME HAS TO BE ALLO WED BY THE A.O. HERE THIS IS ALSO LACKING. ADMITTEDLY THE APPE LLANT HAS BORROWED FUNDS FROM BANK FOR THE PURPOSE OF CARRYIN G ON ITS BUSINESS OF CONFECTIONERIES. BUT THE DIVERSION OF F UND IS NOT FOR SUCH BUSINESS. IT IS STATED THAT SUCH DIVERSION IS FOR MONEY LENDING TO DIFFERENT PERSONS. HERE I FIND PARADOX A ND ALSO ABSURDITY. FIRSTLY THE ASSESSEE HAS NEVER SHOWN ANY INCOME FROM MONEY LENDING IN THE EARLIER YEARS. SECONDLY H E IS NOT IN POSSESSION OF THE REQUISITE CERTIFICATE TO DO SUCH BUSINESS AND THEREFORE THE EQUIPMENT HAS TO BE HELD AS ABSURD AN D WHITE LIE. THIRDLY A MONEYLENDER WOULD NEVER GIVE TO ANY ONE I NTEREST FREE LOANS. EVEN THE MONEYLENDERS ARE SEEN TO HAVE GIVEN LOANS TO THEIR WIVES OR PARENTS ONLY WITH INTEREST. THEREFOR E THE PROPOSITION THAT THE SO CALLED/CLAIMED MONEY LENDER ASSESSEE HAS GIVEN LOAN OF SUCH HIGH AMOUNT WITHOUT ANY INTE REST IS CONTRADICTION IN TERMS OR A PARADOX. HENCE THE ARGU MENTS ARE NOT ACCEPTED. THE ASSESSEE HAS ADMITTEDLY INCURRED EXPENDITURE FROM THE BORROWED FUNDS. THIS EXPENDITURE IS ESTABL ISHED TO BE NOT FOR THE PURPOSE OF BUSINESS. THEREFORE THE AO H AS RIGHTLY DISALLOWED AND ADDED THE SAME UNDER THE HEAD NOT R ELATED TO BUSINESS. THE ADDITION IS UPHELD. GROUND OF APPEAL DISMISSED. ITA NOS.149 & 150 & 158 & 159(B)/2011 99 118. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE R EITERATED THE SUBMISSIONS AS WERE MADE BEFORE THE CIT(A). 119. WE ARE OF THE VIEW THAT THE STAND TAKEN BY THE ASSESSEE HAS BEEN INCONSISTENT. WHILE BEFORE THE AO, THE ASSESSEE PL EADED THAT BORROWED FUNDS ON WHICH INTEREST WAS PAID HAD BEEN GIVEN TO SISTER CONCERNS OWING TO COMMERCIAL EXPEDIENCY AND THEREFORE THE SAME SHO ULD BE ALLOWED AS DEDUCTION. BEFORE CIT(A), THE ASSESSEE TOOK A STAN D THAT THE BORROWED FUNDS WERE INVESTED AND THAT ALL INVESTMENTS WERE F OR THE PURPOSE OF EARNING INCOME UNDER THE PROVISIONS OF THE ACT. T HE CLAIM OF THE ASSESSEE IN THE RETURN OF INCOME WAS FOR DEDUCTION OF INTERE ST EXPENSES AGAINST INTEREST INCOME WHICH WAS DECLARED UNDER THE HEAD I NCOME FROM OTHER SOURCES. IN TERMS OF SECTION 57(III) OF THE ACT, I T IS ONLY EXPENSES LAID OUT OR EXPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF E ARNING OR MAKING INCOME DECLARED UNDER THE HEAD INCOME FROM OTHER SO URCES, THAT CAN BE ALLOWED AS A DEDUCTION. WE ARE THEREFORE OF THE V IEW THAT THE DISALLOWANCE MADE BY REVENUE AUTHORITIES WAS JUSTIFIED AND CALLS FOR NO INTERFERENCE. CONSEQUENTLY GROUND NO.18 RAISED BY THE ASSESSEE IS DISMISSED. 120. GROUND NO.19 RAISED BY THE ASSESSEE IS WITH REGARD TO CHARGING OF INTEREST U/S. 234A OF THE ACT. THE CHARGING OF IN TEREST IS CONSEQUENTIAL AND THE AO IS DIRECTED TO GIVE CONSEQUENTIAL RELIEF . ITA NOS.149 & 150 & 158 & 159(B)/2011 100 121. IN THE RESULT, ITA NO.158 IS PARTLY ALLOWED. ITA NO.159/BANG/2011 V. VIKRAM REDDY (HUF) 122. THE ASSESSEE IS A HUF. THE ASSESSEE HAS FILE D CONCISE GROUNDS OF APPEAL. GROUND NOS. 1 TO 16 RAISED BY THE ASSESSEE IS WITH REGARD TO THE COMMON ISSUE I.E., CAPITAL GAINS ON SALE OF SHARES OF NCCPL BY NCSPL TO GBFL. THIS ISSUE HAS ALREADY BEEN DECIDED IN THE E ARLIER PARAGRAPHS. FOR THE REASONS STATED THEREIN, THESE GROUNDS ARE ALLOW ED. 123. GROUND NO.17 RAISED BY THE ASSESSEE IS WITH RE GARD TO CHARGING OF INTEREST U/S. 234A OF THE ACT. THE CHARGING OF IN TEREST IS CONSEQUENTIAL AND THE AO IS DIRECTED TO GIVE CONSEQUENTIAL RELIEF . 124. IN THE RESULT, ITA NO.159/BANG/2011 IS PARTLY ALLOWED. 125. IN THE RESULT, ALL THE APPEALS ARE PARTLY ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 8 TH FEBRUARY, 2013. SD/- SD/- (JASON P.BOAZ) (N.V.V ASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE: D A T E D : 08/02/2013. AM*/DS ITA NOS.149 & 150 & 158 & 159(B)/2011 101 COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A), BANGALORE 4 CIT 5 DR, ITAT, BANGALORE. BY ORDER SR. PRIVATE SECRETARY ITAT, BANGALORE ITA NOS.149 & 150 & 158 & 159(B)/2011 102 ANNEXURE-I TO ORDER ITA NOS.149 & 150 & 158 & 159(B)/2011 103 (ANNEXURE-I TO ORDER)
Other Referred Cases
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Laws Referred To
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1:1 Consultation on Tax Litigation
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1:1 Consultation on FEMA Compliance
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Guide to Charitable Trusts: Formation, Benefits, and Compliance
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Sales Forecasting Sheet
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Non-Compete Agreement
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