INCOME TAX OFFICER, WARD-4(5), HYDERABAD vs. SHRILEKHA BUSINESS CONSULTANCY PVT LTD(FORMERLY KNOWN AS SHRILEKHA FINANCIAL SERVICES INITIALLY AND SUBSEQUEBTLY M/S SHRILEKHA BUSINESS CONSULTANCY ), HYDERABAD

3.2 Simultaneously, PEL formed a Committee of Directors with a mandate to finalise and approve the structure, mode, manner and tranches in which such acquisition was to be made, including the intermediate entity(ies) through which such investment should be made. It was decided by the Committee of Directors on 17.04.2014 to have an effective 20% equity stake in SCL by joining SFS as a partner with 75% share and making investment through it.

3.3 Consequently, on 17.04.2014 i.e during FY 2014-15, PEL joined SFS as a 5th partner. After PEL joined SFS, capital contribution of the partners stood as under: i. Piramal Enterprises Ltd (PEL) joined as a new partner with 74% share by bringing in capital contribution of Rs. 2,014.20 crores. ii. Out of the capital contribution, as per partnership deed, an amount of Rs. 5.92 crores was allocated to partner’s capital account and the remaining amount of Rs. 2008.28 crores was credited to the ‘capital reserve’ account. iii. SOT brought in fresh capital of Rs. 2,00,50,299/- taking its total capital contribution to Rs. 2.08 crores with share of 25.9997%. iv. Capital of other 3 partners remained the same @ Rs. 75/- with share of 0.0001% each.

3.4 On 27.08.2014, there was infusion of further capital and readjustment of profit sharing ratio among partners as mentioned below: i. PEL made a further capital contribution of Rs. 103.25 crores increasing its share in SFS to 74.95%. ii. Out of Rs. 103.25 crores, Rs. 0.30 cr was allocated to PEL’s capital account and the remaining amount of Rs. 102.95 cr was allocated to capital reserve of the firm. iii. After fresh infusion of capital contribution by PEL, balance in it’s capital account stood at Rs. 6.22 cr and balance in capital reserve account stood at Rs. 2111.23 cr. iv. Shares of partners got readjusted to PEL with 74.95%, SOT with 25.0497 and the remaining 3 partners with 0.0001% each.

3.5 Out of the capital contribution brought into the firm by the partners, an amount of Rs. 2118.96 crores was utilised to make investment in the shares of Novus Cloud Solutions Pvt Ltd (Novus). Novus allotted its shares of Rs. 10/- each at par to the assessee firm i.e SFS against the payment received from SFS.

3.6 In turn, Novus invested the fund in 11,91,64,806 shares of Shriram Capital Ltd (SCL) through private placement. SCL increased its authorised and paid up equity share capital to enable it to issue shares to Novus through private placement.

3.7 Novus merged/amalgamated with SCL w.e.f 1.4.2014 vide order of Hon’ble High Court of Madras dated 31.3.2015. In lieu of merger/amalgamation of Novus with it, SCL allotted its shares to SFS which were earlier held by Novus. Post amalgamation of Novus with SCL, shares of SCL stood allotted to SFS on private placement basis.

3.8. The aforesaid narration of facts together with its sequence of events remain undisputed before us.

PIRAMAL ENTERPRISES LIMITED (“PIRAMAL”) AGREES TO ACQUIRE 20% EQUITY STAKE IN SHRIRAM CAPITAL LIMITED (“SHRIRAM CAPITAL”) Mumbai, 17 April 2014: Piramal Enterprises Ltd. (“Piramal, NSE; PEL, BSE:500302) today announced that it has agreed to acquire an effective 20% equity stake in Shriram Capital Limited (“Shriram Capital” or “Company”) a financial services company, for an aggregate consideration of Rs.2,014 Cr.

4.1. The ld. AO observed that the information gathered from available source show that M/s. PEL was contemplating to acquire 20% stake in SCL for an aggregate consideration of Rs.2014 Crores is contrary to the submissions of the assessee who had stated that PEL was acquiring 74% stake in the assessee firm. Accordingly, the assessee was requested to submit a copy of Board Resolution of M/s. PEL on the basis of which PEL had invested in SCL. In reply, the assessee submitted two Board Resolutions dated 01/04/2014 and 06/08/2014. The extracts of first Board Resolution dated 01/04/2014 are as under:-

Certified Copy of the Resolution passed by the Board of Directors of Piramal Enterprises Limited on April 1, 2014. Shriram Capital Limited – Acquisition of Equity Interest.

RESOLVED THAT in accordance with the provisions of Section 186 of the Companies Act,2013 and subject to compliance with other applicable statutory and regulatory requirements, the Board hereby approves, in principle, acquisition of an effective 20% equity stake in Shriram Capital Limited ('Shriram'} for an aggregate consideration not exceeding Rs. 2100 Crores (Rupees two thousand one hundred crores) ('the Transaction');

RESOLVED FURTHER THAT the Committee of Directors (Authorisations) be and is hereby empowered to do the following acts, deeds, matters and things; a) To further deliberate and take final decision with regard to the Transaction; b) To finalise and approve the terms and conditions relating to the Transaction, including the amount of consideration to be paid and the mode and manner of payment thereof; c) To finalize and approve: i) the structure, mode, manner and tranches in which such acquisition of an effective 20% equity stake in Shriram is to be made, including where applicable, the intermediate entity(ies) through which such investment, should be made; ii) the number of shares and/or the quantum of equity or ownership interests of any intermediate entity(ies) through which such investment may be made; that would provide the Company an effective 20% equity stake in Shriram, and till matters incidental, related or consequential thereto; d) To finalize and approve the mode and manner in which such 20% equity stake in Shriram is to be held by the Company, whether directly by the Company and/or through any of its existing or new subsidiaries and for this purpose, if thought fit, to approve the incorporation of such new subsidiaries as may be deemed necessary and to approve all matters connected therewith or consequential thereto; e) To approve and authorize the execution of all agreements and documents required to be executed for or in connection with the Transaction; f) To consider and approve modifications, if any, in the terms and conditions of the Transaction and in this regard, to authorize the execution of necessary agreements and documents to give effect to the same; 4.2. The extract of second Board Resolution dated 06/08/2014 asked by PEL is as under:-

CERTIFIED TRUE COPY OF THE RESOLUTION PASSED AT THE MEETING OF THE BOARD OF DIRECTORS OF PIRAMAL ENTERPRISES LIMITED HELD ON 6TH AUGUST, 2014 ______________________________________________________________ "WHEREAS: A. Pursuant to the resolution passed by the Board at its meeting on 1st April, 2014, the Company had acquired an effective 20% equity interest in Shriram Capital Limited ('Shriram Capital'), consequent to which, the equity interest of one of the existing shareholders of Shriram Capital i.e. Sanlam Limited ('Sanlam') that then held an effective equity interest of 26% in Shriram Capital prior to the Company's investment, got diluted; and B. In view of Sanlam. expressing its desire to restore its effective equity interest in Shriram Capital to 26% by infusing additional funds for this purpose; and C. In order to maintain the Company's effective equity interest in Shriram Capital at 20%; and D. In accordance with the applicable provisions of Section 186 of the Companies Act, 2013 and subject to compliance with other applicable statutory and regulatory requirements; IT IS RESOLVED THAT the Board hereby approves, in principle, investment of an additional sum not exceeding Rs. 105 crores (Rupees One Hundred and Five Crores) for the purpose maintaining the Company's effective equity interest in Shriram Capital at 20% ('the Transaction").

RESOLVED FURTHER THAT the Committee of Directors (Authorisations) be and is hereby empowered to do the following acts, deeds, matters and things: a) To further deliberate and take final decision with regard to the Transaction; b) To finalise and approve the terms and conditions relating to the Transaction, including the quantum of amount to be invested and the mode and manner in which such investment is to be made; c) To finalize and approve: 1. the structure, mode, manner and tranches in which the Transaction is to be implemented, including where applicable, the intermediate entity(ies) through which such investment should be made; 2. the number of shares and/or the quantum of equity or ownership interests of any intermediate entity(ies) through which such investment may be made; and matters incidental or consequential thereto;”

4.3. The ld. AO from the aforesaid two Board Resolutions observed that M/s. PEL decided itself on 01/04/2014 to acquire 20% stake in SCL for an aggregate consideration of Rs.2100/- Crores. Accordingly, the AO concluded that submission of the assessee firm that PEL infused Rs.2014.20 Crores as capital into the firm to acquire 74% stake in assessee firm is factually incorrect. The ld. AO also observed that the submission of the assessee was also not correct on the basis of total partner’s capital of the firm. He observed that the total capital of the firm of Rs.8.30 Crores, out of which, Rs.2.08 Crores is invested by one of the partners M/s. Shriram Ownership Trust. He observed that to acquire 74% of Rs.8.30 Crores what is required to be contributed by M/s. PEL is only Rs.6.22 Crores. This fact is also proved from the balance sheet of the assessee firm. Hence, whatever, the additional amount of Rs.2111.23 Crores received by the assessee firm was over and above the required capital of Rs.6.22 Crores. Accordingly, he concluded that the submission of the assessee that PEL infused capital of Rs.2014.20 Crores into the firm to acquire 74% stake in the firm as factually incorrect statement. The ld. AO understood the basis of amount of Rs.2014 Crores as mentioned in the press release issued by SCL by placing reliance on the valuation report of SCL which valued the total worth of SCL to be Rs.10071 Crores (comprising of 1022023239 shares). The 20% of the same would work out to Rs.2014.20 Crores. The amounts received in the bank account of the assessee on 17/04/2014 and 21/04/2014 was Rs.2015 Crores which was same as the cost for 20% of the shares of SCL and which was also the aggregate consideration payable by M/s. PEL. Accordingly, the ld. AO concluded that what was shown as reserve in the balance sheet amounting to Rs.2111.23 Crores was not at all reserves but instead consideration received by the assessee on behalf of the SCL from PEL.

4.4. The ld. AO observed that Shriram Group as a whole is supposed to pay tax on the aggregate consideration received of Rs.2100 Crores from M/s. PEL and that in order to avoid tax liability on the same, Shriram Capital Ltd., (SCL) and assessee firm had devised new method to avoid tax liability by applying the following modus operandi:-

(1) In the first step, M/s. Piramal Enterprises Ltd. had invested Rs. 6.22Cr. as partner's capital and Rs. 2111.23 Cr. as capital reserve in the assessee firm M/s. Shrilekha Financial Services on 17/04/2014 (Rs.1000 Cr.), 21/04/2014 (Rs.1016 Cr.) and 27/08/2014 (Rs,103.83 Cr.); (2) In the second step, M/s. Shrilekha Financial Services, the assessee firm had transferred these monies so received to M/s. Novus Cloud Solutions Pvt. Ltd. on 17/04/2014 (Rs. 1000 Cr.), 21/04/2014 (Rs. 1015.70 Cr.) and 27/08/2014 (Rs.103.25Cr.); (3) In the third step, M/s. Novus Cloud Solutions Pvt. Ltd. which is a group company of Shriram whose net worth is only Rs. 69,073/- as on 31/03/2014 allots 2118959995 shares to assessee firm at face value of Rs.10/- for total consideration received of Rs. 2118,95,99,950/- (out of the same, the contribution of one of the partner Shriram Ownership Trust is Rs. 2,08,00,000/- only and the balance contribution of Rs. 2116,87,99,950/- from M/s. Piramal Enterprises Ltd.); (4) Finally, M/s. Novus Cloud Solutions Pvt. Ltd. got merged with M/s.Shriram Capital Ltd w.e.f. 01/04/2014.

4.5. The dates on which the assessee firm received money from M/s. PEL and the dates on which the assessee firm transferred the money to M/s. Novus Cloud Solutions Pvt. Ltd. are reproduced as under: Date on which the Amount received Date on which the Amount transfer took place from by the assessee transfer took place transferred by PEL to the assessee i.e., firm (Rs. in Cr.) from assessee i.e., the assessee Srilekha Financial Srilekha Financial firm (Rs. in Cr.) Services Services to Novus Cloud Solutions 17/04/2014 1000.00 17/04/2014 1000.00 21/04/2014 1016.20 21/04/2014 1015.70 27/08/2014 103.83 27/08/2014 103.25 TOTAL 2120.03 2118.95 4.6. The date of allotment of shares with other details by M/s. Novus Cloud Solutions Pvt. Ltd. to the assessee firm is as under:

Date Particulars No. of Shares Total No. of Value in Cr. Share Remarks Shares Certificate details 31/03/2014 Total No. 10,000 (100%) 10,000 (100%) 0.01 No.1, 4, 9 Held by of shares and 10 Srilekha as at Financial 31/03/2014 Servces (Opening Balance)

17/04/2014 Shares 1,00,00,00,000 1,00,00,10,000 1000 No. 5 and 6 Allotted to allotment SFS in the name of its partners 21/04/2014 Shares 1,01,57,00,000 2,01,57,10,000 1015.71 No. 7 and 8 Allotted to allotment (1,00,00,00,000 + SFS in the 1,01,57,00,000) name of its partners 28/08/2014 Shares 10,32,49,995 2,11,89,59,995 103.25 No. 11 and Allotted to (2,01,57,10,000 + allotment 12 SFS in the 10,32,49,995) name of its partners Total No. of Shares as at 2,11,89,59,995 31/03/2015 4.7. The ld. AO observed that by avoiding tax liability on the aggregate consideration received from M/s. PEL by Shriram Group for diluting the stake to the extent of 20% in SCL, the group had first received money in the assessee firm to the tune of Rs.6.22 Crores as capital and balance Rs.2111.23 as reserves and thereafter, the money was transferred to M/s. Novus Cloud Solutions Pvt.Ltd. (Novus) and finally M/s. Novus got merged with M/s.SCL. The ld. AO further observed that this entire gamut of operations to M/s. PEL had acquired an effective 20% equity interest in SCL by virtue of Board Resolution dated 01/04/2014 which was further reconfirmed vide another Board Resolution dated 06/08/2014.

4.8. The ld. AO further observed that bringing huge amount of money by PEL into the assessee firm for getting the shares of M/s.Novus whose net worth was only Rs.69,073/- as on 31/03/2014 to finally acquire 20% of the shareholding of SCL, by virtue of merger was convoluted tax planning and colourable device to avoid tax liability on the aggregate consideration received from PEL.

4.9. The entire crux of the various observations made by the ld. AO for taxing the amount credited in the capital reserve could be summarised as under:-

(i) There is no concept of ‘capital reserve’ (other than accumulated profits) in the partnership firm (para 2.5. of assessment order). If a partner contributes capital, it has to be paid back to the partner in the event of dissolution, whereas there is no such obligation for capital reserves. The capital reserve belongs to the firm.

(ii) The intention of PEL in investing Rs. 6.22 cr as capital and Rs. 2111.23 cr as capital reserve was to acquire 75% stake in SFS. (para 3.3 of assessment order). The real intention of PEL was to acquire 20% stake in Shriram Capital Ltd (SCL) for an aggregate consideration of Rs. 2114 cr through SFS.

(iii) What is shown as reserve of Rs. 2111.23 cr in the balance sheet of SFS( assessee herein) is not at all the reserves but it is aggregate consideration received on behalf of SCL for acquisition of shares by PEL (Para 3.13 and 3.14 of assessment order).

(iv) To avoid tax liability on transfer of shares of SCL indirectly to PEL, SFS devised a new method (Para 3.15 and 3.16 of assessment order) as under:-

 SFS received money from PEL as capital reserve.  SFS invested the entire fund in the shares of Novus.  Novus in turn invested the fund in the shares of SCL.  Subsequently, Novus got merged with SCL.  SCL allotted its shares to SFS consequent to merger of Novus.

(v) PEL achieved its objective of acquiring 20 % stake in SCL. But, what escaped is the liability to pay tax by the Shriram group on the aggregate consideration of Rs. 2111.23 cr received from PEL (para 3.21 of the assessment order). The treatment of Rs. 2111.23 cr as reserves of the partnership clearly shows that the partners have gifted the said amount to the firm (Para 3.22. v of the assessment order).

(vi) The amount of Rs. 2111.23 cr was received as capital reserve from PEL without any obligation to pay back:

 It is liable to be taxed.

 It is nothing but a gift to the assessee firm as it was received without adequate consideration (Para 3.33 of the assessment order).

(vii) The modus operandi adopted by the assessee is a convoluted tax planning and a colourable device to avoid tax liability. Relied upon the SC decision in the case of Mc Dowell and Co Ltd (154 ITR 148) (Para 3.23 of the assessment order) .

(viii) Even though PEL confirmed their contribution to the firm as investment as recorded in their books of account along with a copy of their investment account, AO held it as factually incorrect referring to their Board resolution dated 1.4.2014 (Para 3.35 & 3.36 of the assessment order).

(ix) The consideration received by a person directly or through another person for transfer of shares is liable for taxation under the provisions of the Income Tax Act (Para 3.37 of the assessment order). It is an undisputed fact that the consideration so received from PEL for getting shares of SCL is to be taxed somewhere down the line (para 3.37 of the assessment order). It is also an undisputed fact that Shriram group is liable to pay tax on Rs. 2100 cr of the consideration received (Para 3.24 of the assessment order).

(x) As the sum was received by SFS which in turn helped to fulfil the objective of PEL, the said sum will form part of the assessee’s income (Para 3.37 of the assessment order). PEL used the assessee firm and Novus as vehicles to acquire the intended stake in SCL to overcome the rigours of law and to do away with the incidence of taxation (Para 3.41 of the assessment order) . What is to be taxed in the hands of SCL for diluting its stake was introduced as capital reserve and reached SCL through a series of steps (Para 3.31 of the assessment order).

(xi) The amount of Rs. 2111.23 cr received from PEL represents aggregate consideration for indirect transfer of 20% stake in SCL by using SFS as a conduit, has to be treated as income from other sources u/s 56(1) of the Act (Para 3.34 of the assessment order). The submissions of the assessee are rejected and the amount of Rs. 2111.23 cr is treated as income from other sources (Para 3.43 of the assessment order).

(xii) Alternatively, the same is liable to be taxed u/s 56(2)(viia) as the money received from PEL was utilised on the same day for acquisition of shares of Novus (Para 3.44 of the assessment order).

5. The assessee had submitted that SCL could increase its share capital by way of allotment of shares on private placement basis only to its existing shareholders or to any other Shriram group companies and could not allot any shares to any outsiders directly. This was due to the fact that SCL already had certain other investors who had imposed such a condition that no shares could be allotted to any party other than Shriram group concerns.

5.1. The assessee submitted that the money brought in by PEL into assessee firm constitute capital contribution by a partner in the firm irrespective of its allocation to capital account and capital reserve account. It submitted that the amount received towards capital contribution from a partner cannot at any stretch of imagination be construed as income as defined in Section 2(24) of the Act. It vehemently argued that unless a particular receipt falls within the definition of income u/s.2(24) of the Act, it cannot be brought to tax under the head of income specified in Section 14 of the Act. In other words, what is not income under the Income Tax Act cannot be taxed u/s.56(1) too. It is a residual head for charging to tax ‘income’ as per the provisions of Income Tax Act and not falling under the head capital A to capital E specified in Section 14 of the Act. It is not a residual head for charging to tax ‘any receipt’ `which does not constitute ‘income’ as per the provisions of the Act. The sum of money brought in by the partner is a capital receipt in the case of the firm and certainly not a receipt in the revenue field. To support this contention, the assessee had also filed a confirmation from Piramal Enterprises Ltd., (PEL) confirming their contribution to the assessee firm as investments which has also duly recorded in their financial statements. The assessee also pleaded that the burden to show a particular receipt as income is always on the revenue, which burden remain undischarged by the ld. AO in the entire assessment order.

5.2. The assessee also submitted before the ld. CIT(A) that the transactions between PEL and SCL was not a clandestine transaction as it was a simple transaction of PEL investing in SCL through the assessee firm in order to get rid of the difficulties that would otherwise arise due to the presence of other investors in the firm of private equity partners in SCL as referred supra. The assessee further submitted that money brought in by a partner as capital cannot be taxed as income of the firm in as much as the capital contributed by a partner is always for valuable consideration in the firm of partner’s rights in the firm; the right to share in the profits; right to settlement at the time of retirement / exit and right to share assets at the time of dissolution of the firm. Accordingly, it pleaded that the receipt of capital contribution from a partner by the assessee firm cannot be taxed either u/s.56(1) or u/s.56(2)(viia) of the Act.

5.3. The assessee also submitted the following documents:- a) Annual accounts of M/s. Shrilekha Financial Service for the AY 2015-16 b) Axis Bank account of M/s. Shrilekha Financial Service for the period from 01.04.2014 to 31.03.2015 c) City Union Bank account of M/s. Shrilekha Financial Service for the period from 01,04.2014 to 02.04.2015 d) Partnership deed dated 17.04.2014 between Shriram Ownership Trust (SOT), Mr.D.V.Ravi, Mr.S.Murali, Mr. KJagadish and M/s.Piramal Enterprises Limited (New partner) e) Deed of Amendment in Partnership deed dated 26.11.2014 between Shriram Ownership Trust (SOT), Mr.D.V.Ravi, Mr.S.Murali, Mr. KJagadish and M/s.Piramal Enterprises Limited (New partner). f) Details of investment in M/s. Shrilekha Financial Services (Partnership Firm) issued by M/s. Piramal Enterprises limited g) Ledger accounts of Capital reserves, investments, partner's capital accounts, cash book and bank books of M/s. Shrilekha Financial Service was submitted h) Petition filed by M/s. Novus cloud Solutions Pvt Ltd for amalgamation before the Hon'ble High Court of Madras i) Amalgamation order issued by Hon'ble High Court of Madras for the amalgamation of M/s. Novus cloud Solutions Pvt Ltd with Shriram Capital ltd j) Annual Accounts of M/s.Shriram Capital ltd as on 31.03.2015 k) Shareholding pattern of M/s. Piramal Enterprises limited as on 31.03.2014 and 30.06.2014 l) Form MGIT filed by M/s.Shriram Capital ltd with ROC for the FY 2014- 15 m) Axis Bank account statement of M/s. Shrilekha Financial Services for the period from 01.04.2014 to 31.03.2015

6. The ld. CIT(A) sought for a remand report on 02/03/2018 from the ld. AO. The ld. AO submitted a remand report dated 17/04/2018 before the ld. CIT(A) with regard to each of the grounds raised by the assessee before the ld. CIT(A) and the various factual and legal submissions made by the assessee before the ld. CIT(A) as summarised hereinabove. The copy of the said remand report dated 17/04/2018 of the ld. AO is placed on record by the ld. DR in his paper book submitted dated 06/05/2019 vide pages 40-62 thereon .

6.1. The assessee filed a rejoinder to the remand report submitted by the ld. AO and further made the following submissions:

(i) The assessee further submitted that the relation of partnership arises from contract. All rights and liabilities between or among the partners vis a vis the partnership are subject to contract between the partners. That is the reason for many sections dealing with partners mutual rights and liabilities, conduct of business, property of the firm, application of the property of the firm, introduction of a partner, dissolution of a firm etc., in the Indian Partnership Act to open with the phrase "Subject to contract between the partners".

(ii) In this particular case, PEL became a partner in the firm Shrilekha with a view to acquire 20% stake in Shriram Capital Ltd. At the time when PEL was inducted into the firm as a partner, the firm Shrilekha did not have as its property adequate extent of share-holding in SCL either directly or indirectly through another company or even in combination thereof to enable PEL to have 20% stake in SCL. So there was imperative need for the firm Shrilekha to invest in SCL shares directly or indirectly and for that purpose necessary funds had to be earmarked. iii) Such earmarking was done for funds to be used for investment out of monies brought in by PEL into the firm Shrilekha and the label "capital reserve" was affixed to that. That is all. It is an understanding between the partners for convenience. There is no other significance to it. There is nothing special about it from income tax perspective. Whatever name is assigned, whatever label is affixed, the amounts brought in by a partner constitute property of the firm under section 14 of the Partnership Act. Thus it was deployed by Shrilekha for eventually getting adequate stake in SCL to enable PEL to have 20% interest in SCL while remaining as a partner in Shrilekha.

6.2. The ld. CIT(A) deleted the addition by meeting all the allegations levelled by the ld. AO in his assessment order, by considering the submissions of the assessee and by considering the remand report of the ld. AO together for its rejoinder from the assessee. The crux and the basis of ld. CIT(A) deleting the addition could be summarised as under:-

I. Capital reserves are created from capital receipts meant for capital investments and/or large anticipated expenses.

II. AO’s contention that funds cannot be brought under the head ‘capital reserve’ is against the principles of accountancy of firms.

III. SFS is not a conduit. The AO’s contention that income has to be taxed in the hands of ‘conduit’ and not in the hands of the recipient is incorrect and it has no basis.

IV. The question of income from other sources arises only if there was ‘income’. As there was no income, sec 56(1) is not applicable.

V. The process adopted was in the nature of strategic and systematic investment by one industrial group in another group to synergise their mutual strengths.

6.3. The ld. CIT(A) also observed that no colourable devise / tax planning had been adopted by the assessee firm in as much as the assessee firm had taken a systematic approach to the acquisition through all the legal procedures and the investment / merger / take over between two industrial houses i.e M/s. Piramal Group and M/s. Shriram Group had been through systematic investments. He also observed that in any case assessee was ultimately allotted shares from SCL (pursuant to merger of Novus with SCL) out of the capital contribution received by the assessee from PEL which was inturn invested in Novus and since Novus was already holding shares of SCL, pursuant to its merger of Novus with SCL, the assessee was allotted shares from SCL. There is absolutely no dispute that SCL had originally allotted shares to Novus on private placement basis which enabled Novus to have stake in the form of shareholding in SCL.

7. The ld. DR filed detailed written submissions which are enclosed in pages 1-12 of the paper book dated 06/05/2019 filed before us. The ld. DR at the time of arguments before us took us to each and every aspect mentioned in the written submissions referred to supra hence, the entire essence of his arguments could be captured from his written submissions itself which are reproduced herein below for the sake of convenience:-

“1. In the present case, assessment u/s.143(3) was completed on 30.12.2017 determining the total income at Rs.2111,22,94,30/- and the demand payable was determined at Rs.961,59,31,800/-. In the said assessment proceedings, it was noticed that the assessee has shown an amount of Rs.2111,22,65,347/- under the head "capital reserve'. During the course of assessment proceedings/remand proceedings, the relevant details were called for and the same were examined. On examination, it was found that the said amount of Rs.2111,22,65,347/- which was shown as "capital reserve" was infact received by the assessee firm from one of the partners M/s.Piramal Enterprises Private Limited (for short "M/s.PEL") towards fulfilling its intention to become 20% beneficial owner in M/s.Shriram

Capital Limited (SCL), a group company of the assessee firm this was also evident from the resolution dated 01-04-2014 or the Board of Directors of M/s. PEL. Since the money was received by the assessee firm for specific purpose of making M/s.PEL a beneficial owner, the said amount of Rs.2111,22,65,347/- received by the assessee firm was treated as income of the assessee and the same was taxed as "Income from Other Sources' of the assessee firm.

2. Being aggrieved, the assessee preferred appeal before the Id. Commissioner of Income Tax(Appeals)-1, Hyderabad. The Ld. CIT(A)- 1,Hyderabad has called for remand report in the matter in letter in F.No.CIT(A)-l/Hyd//RR/2017-18 dt.12.03.2018 followed by reminder dated 06.04.2018. In pursuance of the same, a detailed remand report was submitted on 17.04.2018.

3. After receipt of the remand report, the Ld. CIT(A) disposed off the appeal vide order in Appeal No.0131/CIT(AH/Hyd/2017-18/2018-19 dated 27.04.2018 deleting the entire addition of Rs.2111,22,65,347/-made by the Assessing Officer.

4. In the appellate order, the Ld. CIT(A) has observed in para No.10.3 of page Nos.55 and 56 of the appellate order dated 27.04.2018 that the money received from M/s.PEL by the assessee firm was for future investments and accordingly the same can be treated as "capital reserve". The Ld. CIT(A) further held that there is no bar on the quantum of monies that can be brought in by the partners of the firm. On the basis of the same, the Id. CIT(A) gave a finding that the funds received by the firm for future investments cannot be termed as tax evasion and the same cannot be taxed as income in the hands of the assessee firm. Accordingly, the entire addition of Rs2111,22,65,347/-was deleted.

5. The observations of the Id. CIT(A) as contained in page nos. 55 and 56 of appellate order are reproduced as under :

"To conclude, the contention of the Assessing Officer that this investment of Rs.2111.23 crores is an income in the hands of appellant's firm being a conduit of the transaction, has no stand. Investment between business houses were made through different investing companies. In the present case, appellant's firm is a just an Intermediary between the actual transfer of funds. It is pertinent to note that the funds which were received from M/s. Piramal Enterprise Limited were kept as Capital Reserve. As per Accounting Principles, Capital Reserve is meant for specified investment and it cannot be distributed or used by the business unit for any other purpose than what it has been created for. This clarifies the stand of the appellant that the funds were meant for investment and appellant did not use for the business purpose for its own. Being a partnership firm, the partners can bring in funds for specified purposes and future investments. There is no bar in the quantum of monies that can be brought in by the partners of the partnership firm. In the present case also, the appellant firm received funds for future investment and this cannot be termed as tax evasion. Hence, I agree with the appellant that the funds received cannot be taxed as Income in the hands of the appellant's firm."

8. The discussion in the preceeding paragraph with regard to, the number of shares required for making M/s. PEL 20% effective stake holder, the amount required for each share as decided by valuation report of Shri Saptharishi, CA and the exact amount paid by M/s.PEL to the assessee firm on the same day as on the date of reconstituted partnership deed dated 17- 4-2014 is exactly in conformity with the fact that whatever money was received by the assessee firm, is for the intended acquisition of shares of M/s.Shriram Capital Limited, but not for future investment, as held by the Id. CIT(A)-1, Hyderabad. The clause 3.4 and clause 5.2 of the reconstituted

partnership deed dated 17-4-2014 also confirms the fact that the assessee firm has to make new partner the beneficial owner within 3 working days of the "EFFECTIVE DATE " i.e. within 3 working days of the new partner makes its payment/contribution to the assessee firm.

9. The chronology of events which led to receipt of consideration by the assessee firm from M/s.PEL to finally M/s. PEL becoming a beneficial owner of 20% stake in M/s.Shriram Capital Limited, a group company of the assessee firm is as discussed in detail herein below:

a) M/s.Shriram Ownership Trust [SOT] which is an existing partner of the assessee firm is also a shareholder in M/s. SCL by holding 9,57,37,300 shares of M/s. SCL. One week prior to the intention of M/s.PEL through its Board's Resolution dated 1-4-2014 for acquiring 20% effective stake in M/s. SCL, the existing partner of the assessee firm M/s. SOT had transferred 9,57,37,200 out of its total shares of 9,57,37,3000 held in the company M/s. SCL on 26.03.2013. b) Apart from the above, M/s. SOT is also holding 5,00,000 shares of M/s.Shriram Financial Ventures Chennai Private Limited [for short "M/s.SFVCPL"]. The total share - base of M/s.SFVCPL as on 31.03.2013 is 7,47,943 shares of Rs.10/- face value. In the same way One week prior to the intention of M/s.PEL through its Board's Resolution dated 1-4-2014 for acquiring 20% effective stake in M/s. SCL, the existing partner M/s. SOT who is the owner of 5,00,000 shares of M/s. SFVCPL had transferred 74,970 shares of M/s. SFVCPL to the assessee firm on 27-3-2014. c) M/s. SFVCPL is a private Limited Company is in turn a shareholder in M/s. SCL by holding 71,62,07,367 shares. By way of this SOT who is the owner of 5,00,000 shares out of total share base of 7,47,943 shares in M/s. SFVCPL had become the owner of 47,87,84,725 shares of M/s. SCL (5,00,000 ÷ 7,47,943 x 71,62,07,367) c(i) By way of receiving 74,970 shares of M/s. SFVCPL from SOT, the assessee firm had in turn become the owner of 7,17,88,982 shares Of M/s. SCL. [74,970 ÷ 5,00,000 x 47,87,84,725] . d) By way of the above two transactions between M/s.SOT and the assessee firm, the assessee firm had become the owner of 16,75,36,182 (9,57,47,200 + 7,17,88,982) shares of M/s.Shriram Capital Limited as on 27.03.2014. e) Having ensured that the assessee firm is already the owner of 16,75,86,192 shares of M/s. SCL, M/s.PEL passed a Board's Resolution on 01.04.2014 ( just 4 days after 27-3-2014 ) approving in principle for acquisition of effective 20% equity stake in M/s.SCL for an aggregate consideration not exceeding Rs.2100 crores (copy of Board's Resolution is enclosed herewith this Paper Book). f) As discussed in the preceding paragraphs, the basis for arriving at the consideration not exceeding Rs.2100 crores, is that M/s.PEL wanted to acquire 20% stake in M/s.Shriram Capital Limited. It was also mentioned that the total share base of M/s.SCL as on 31-3-2014 is 102,20,23,239. The number of shares required for intended acquisition is 20,44,04,648 (20% of 102,20,23,239 shares). It was further mentioned that the price per share of M/s.SCL as per the Valuation Report of Shri V.S.Saptharishi, CA vide his report dated 09.04.2014 was fixed at Rs.98.54 per share, (copy of valuation report is enclosed herewith this Paper Book). g) M/s.PEL now worked out the consideration to be paid for acquisition of 20% equity in M/s. SCL or 20,44,04,648 shares of M/s. SCL at Rs.2014,20,34,014/- i.e. [20,44,04,648 shares x Rs.98.54 per share]. h) Having known about the availability of 16,75,26,182 shares of M/s.SCL with assessee firm as discussed, M/s. PEL chooses to become a partner in the assessee firm and through the assessee firm M/s. PEL want to become 20% beneficial owner of the SCL shares. i) Accordingly, M/s.PEL has entered as a new partner in the assessee firm through reconstituted partnership deed dt.17.04.2014. Till 31.03.2014 the partners of the firm is M/s.SOT 99.97%, Shri S.Murali 0.01%, Shri Jagadish 0.01% and Shri D.V.Ravi 0.01%. Consequent to the entry of M/s.PEL as a new partner in the assessee firm on 17.04.2014, the shareholding of the firm now changed to M/s.SOT 25.997%, M/s.PEL 74%, D.V. Ravi 0.0001%, S. Murali 0.0001%, K Jagadish 0.0001%. The partners also decided to have their registered office at D.No. 3-6-478, 4th floor, Anand Estates, Liberty Road, Himayatnagar, Hyderabad (clause 4.4 of reconstituted partnership deed dated 17-4-2014). j) Having arrived at the consideration to be paid for acquisition of 20% equity stake in M/s.SCL which is Rs.2014,20,34,014/- ( i.e. 20,44,04,648 shares x Rs. 98.54 per share), the new partner M/s.PEL has said the consideration in two instalments viz. Rs.1000,00,00,000/- on 17.04.2014 and Rs.1014,20,00,000/- on 24.04.2014 totalling to Rs.2014,20,00,000 into the bank account of the assessee firm maintained with Axis Bank, T-Nagar, Chennai. k) On receipt of the money by the firm from M/s. PEL, the assessee firm immediately acted and the partners were made the beneficial owner of 9,57,47,200 SCL shares in their profit sharing ratio of 25.997% : 74 % between SOT and PEL. Accordingly, 9,57,47,200 shares were now rearranged in the ratio of 2,48,94,272 : 7,08,52,928 in favour of M/s. SOT and M/s. PEL respectively as required under clause 5.2 of Reconstituted partnership deed dated 17-4-2014. k(i) It may please be noted that the ratios of partners in the assessee firm between SOT and PEL latter through deed of amendment dated 27-11-2014 as changed to 25.049% : 74.95%. Accordingly, the shares of SCL were also rearranged in the ratio of 2,39,84,674 : 7,17,62,526. l) In the same way the assessee firm also rearranged 74,970 shares of SFVCPL in the profit sharing ratio of 25.997% : 74% between SOT and PEL. Accordingly, 74,970 shares were now rearranged in the ratio of 19,472 : 55,478 in favour of M/s. SOT and M/s. PEL respectively as required under clause 5.2 of Reconstituted partnership deed dated 17-4- 2014. l(i)The rearrangement of shares of SFVCPL in turn resulted rearrangement of shares of 7,17,88,982 shares of SCL held by the assessee firm through M/s. SFVCPL in the ratio of 25.999% : 74%. Accordingly, the shares of M/s. SCL held by the assessee firm through M/s. SFVCPL was now rearranged in the ratio of 1,86,64,417 ; 5,31,24,565 l(ii) It may please be noted that the ratios of partners in the assessee firm between SOT and PEL latter through deed of amendment dated 27-11-2014 as changed to 25.049% : 74.95%. Accordingly, the shares of SCL were also rearranged in the ratio of 1,79,83,050 : 5,38,05,842 m)It was mentioned in the preceding paragraphs that the firm was already the owner of 16,75,36,182 shares of M/s.SCL which were received from M/s. SOT on 26-3-2014 (9,57,47,200 shares directly and 7,17,88,982 shares of M/s.SCL through M/s. SFVCPL indirectly. It was also mentioned that the total number of shares of M/s. SCL required by M/s. PEL to become 20% stake holder as on 31-3-2014 is 20,44,04,648. It was also mentioned that M/s. PEL is 74% shareholder of the assessee firm (prior to the deed of amendment dated 27-11-2014). n) To make M/s. PEL a beneficial owner of 20,44,04,648, the firm requires 27,62,22,497 shares of M/s. SCL (i.e. 100 / 74 x 20,44,04,648). In the event of firm becoming the owner of 27,62,22,497 shares of SCL only, the firm can make PEL the beneficial owner to the extent of 20,44,04,628. n(i) As brought out in the preceding paragraphs the total number of shares of M/s. SCL held by the firm before the entry of PEL is 16,75,36,182. However, the firm requires 27,62,22,497 shares of SCL to fulfil the obligation of making PEL the beneficial owner to the extent of 20,44,04,628. Accordingly, the shortage in the hands of the assessee firm is arrived at 10,86,86,315 ( 27,62,22,497 -20,44,04,648 ). o) Having received the consideration of Rs.2014,20,00,000/- in its bank account, the assessee firm was under obligation to acquire the balance shares to make good of the shortfall and make M/s.PEL the beneficial owner to the extent of 20% in M/s.SCL. p) It appears the assessee firm instead of acquiring the balance 10,88,86,315 shares of M/s.SCL either from the existing shareholders of SCL or by way of applying for fresh allotment from M/s. SCL wishes to acquire the same through its insignificant subsidiary M/s, NCSPL. p(i) M/s. Novus Cloud Solutions Private Limited [M/s.NCSPL] is an hundred percent subsidiary of the assessee firm. The total authorised share capital of the company is Rs.1,00,000/-. The total net worth of M/s. NCSPL as on 31-3-2014 is only Rs.69,100/. q) Having taken a decision by the assessee firm to acquire the balance shares through M/s. NCSPL, the assessee firm resorted to number of steps to acquire the balance shares to fulfil its obligation towards M/s. PEL a partner who paid the assessee an amount of Rs. 2014.20 crores. q(i) As a first step the authorised share capital of M/s. NCSPL which is Rs. 1,00,000/- only was increased to Rs. 2200,00,00,000. After increasing the authorised share capital of its insignificant subsidiary of the assessee firm M/s.NCSPL, the entire consideration received by the assessee firm from M/s. PEL was utilised for subscribing shares of M/s. NCSPL. Accordingly, an amount of Rs. 2015.70 crores ( Rs. 1000 crores on 17-4-2014 and Rs. 1015.70 crores on 21-4-2014) was transferred by the assessee firm into the bank account of M/s. NCSPL. On receipt of this amount M/s. NCSPL had allotted 100,00,00,000 shares on 17-4-2014 and 101,57,00,000 shares on 21-4-2014 of NCSPL @ Rs. 10/- per share. r) M/s.NCSPL who had received an amount of Rs. 2015.70 crores from the assessee firm in turn used part of the money to acquire the balance 10,86,86,315 shares of SCL to make shortfall in the process of making PEL the beneficial owner of 20% equity stake holder in SCL. Accordingly, M/ s. NCSPL had applied for fresh allotment of 10,86,86,828 shares (through the exact shortfall is 10,86,86,315) of SCL. The assessee firm is aware about the price per share on the basis valuer report of Sri V.S. Saptharishi, CA dated 9-4-2014 who fixed the same at Rs. 98.54 per share. The price to be paid to SCL is arrived at Rs. 1071 crores ( 10,86,86,828 x Rs. 98.54 ) r(i) Accordingly, M/s. NCSPL out of Rs. 2015.70 crores received from the assessee firm had paid an amount of Rs.1071 crores to M/s. SCL. On receipt of the same M/s.SCL has made allotment of 10,86,86,828 shares @ Rs.98.54 per share on 21.04.2014. [copy of share allotment letter dt.21.04.2014 is made part of the Paper Book]. s) Thus, the assessee firm had become the owner of required 27,62,23,010 snares of SCL to enable to fulfil its obligation towards PEL after receipt of consideration of Rs. 2014.20 crores on 17-4-2014 and 21-4-2014.

The breakup of SCL shares held by the assessee as on 21-4-2014 are as under : i)Received from SOT 9,57,47,200 ii)Received from SOT 7,17,88,982 (indirectly through SFVCPL) iii) Acquired through NCSPL 10,86,86,828

Total shares 27,62,23,010 t)In the assessment year under consideration the reconstituted partnership firm dated 17-4-2014 which envisages 25.999%: 74% in favour of M/s. SOT and M/s. PEL got amended through deed of amendment dated 26-11- 2014. Consequent to the same the partnership ratio has now been changed to 25.049% : 74.95% in favour of SOT and PEL as against existing ratios of 25.999 : 74%.

U) Further, in the Assessment Year under consideration the total share capital rase of M/s. Shriram Capital Limited had also changed. The share capital case of M/s. SCL which is 102,20,23,239 as on 31-3-2014 got increased ;o 107,44,11,829 as on 31-3-2015.

Ui)Consequent to the change of capital base M/s. SCL, the requirement of the firm to make M/s. PEL a beneficial owner to the extent of 20% of SCL was also changed. The required number of shares for PEL to become 20% share holder has now gone upto 21,48,82,366 ( 20% of 107,44,11,829 ) from the existing requirement of 20,44,04,648(20% of 102,20,23,239).

V) To fulfil the new obligation casted on the assessee firm to make M/s. PEL 20% equity stakeholder and the increased share capital base of M/s. SCL, the assessee firm received further sum of Rs. 103,24,99,952 in its rank account on 27-8-2014. On the same day the assessee firm utilised this money for subscribing shares of NCSPL @ Rs. 10/- per share. On receipt of the money, in its bank account, M/s. NCSPL had allotted 10,32,49,995 shares to the assessee firm.

V(i)M/s.NCSPL who had received the money amounting to Rs. 103,24,99,952 from the assessee firm had in turn made application for allotment of scares of M/s. SCL. On the receipt of request by SCL from NCSPL, M/s. SCL had made allotment of additional 1,04,77,798 shares of SCL @ Rs. 98.54 per share to NCSPL on 27-8-2014 itself. These additional shares were acquired by the assessee firm through its insignificant subsidiary M/s. NCSPL to fill the shortfall for PEL consequent to increase of share capital of SCL from 102,20,23,239 as on 31-3-2014 to 107,44,11,829.

W) Thus, the assessee firm is the owner of shares of SCL as per the details given below : i) Received from SOT on 26-3-2014 9,57,47,200 ii) Received from SOT on 27-3-2014 7,17,88,982 (indirectly through SFVCPL) iii) Acquired through NCSPL on 21-4-2014) 10,86,86,828 iv) Acquired through NCSPL on 27-8-2014 1,04,77,798

Total shares 28,67,00,828

X) As brought out in the preceding paragraphs the share holding pattern between SOT and PEL in the assessee firm had changed to 25.049% : 74.95% through deed of amendment dated 27-11-2014 from the existing ratios of 25.999% ; 74% as envisaged earlier in the partnership deed dated 17-4-2014. Accordingly, the assessee firm made the new partner M/s. PEL the beneficial owner of shares of SCL as per amended partnership deed. The details of the same are as under :

S. Source of Total shares PEL SOT No the shares 74.95% 25. 049%

1 Received 9,57,47,200 7,17,62,526 2,39,84,675 from SOT on 26-3- 2014

2. Received 7,17,88,982 5,38,05,842 1,79,83,140 from SOT on 27-3- 2014 (indirectly through SFVCPL)

3. Acquired 10,86,86,828 8,14,60,778 2,71,93,445 through NCSPL on 21-4-2014

Acquired 1,04,77,978 78,53,244 26,24,734 4. through NCSPL on 27-8-2014

Total 28,67,00,828 21,48,82,390 7,18,18,438

Y)In the manner described above, the assessee firm had acquired 28,67,00,828 shares of M/s SCL and made PEL the beneficial owner to the extent of 21,48,82,390. This constitutes 20% effective stake '20% of 107,44,11,829 ) as required by M/s. PEL in its Board's Resolution dated 1- 4-2014 and 16-8-2014. The consideration required -or acquiring the same is Rs. 2117,45,10,710 (21,48,82,390 shares x Rs. 98.54 per share ).

10. PEL paid the said consideration to the assessee firm to enable the assessee firm to make 20% stake holder in M/s SCL in the following manner :

SI. Date Amount [Rs] No.

1. 17.04.2014 1000,00,00,000/-

2. 21.04.2014 1014,20,00,000/-

3. 27.08.2014 103,24,99,952/-

2117,44,99,952/-

10.1. Out of the above aggregate amount received, the assessee firm has shown an amount of Rs.6,22,34,605/- towards capital contribution by M/s.PEL and the remaining amount of Rs.2111,22,65,347/- was shown as "capital reserve". The assessee firm claimed that the capital reserve is meant for future investment. But, the facts discussed above clearly show that M/s.PEL paid the said amount for acquiring 20% stake in M/s.SCL.

10.2. In the light of the facts discussed above, the assessee's claim that the amount of Rs.2111,22,65,347/- represented capital reserve intended for future investment cannot be accepted and is devoid of merit. In sum and substance, the amount of Rs.2111,22,65,347/- was towards consideration received for acquiring 20% shareholding in M/s.Shriram Capital Limited by M/s.PEL. With this object only, M/s.PEL has paid consideration of Rs.2117,44,99,952/- to the assessee firm for acquiring 21,48,82,256 shares @ Rs.98.54 per share [equivalent to 20% stake in M/s.SCL] and the assessee firm on its part, discharged the obligation of making M/s.PEL the beneficial owner to the aforesaid extent.

10.3. It is pertinent to note that M/s. NCSPL which is an insignificant subsidiary of the assessee firm and through which the assessee firm had acquired 11,91,54,806 shares (10,86,86,828 on 21-4-2014 + 1.04,77,798 on 27-8-2014 ) of M/s. SCL through allotment @ 98.54 per share from M/s. SCL was latter amalgamated in M/s. SCL through a court order dated 31- 3-2015. In the process whatever the aggregate consideration paid by M/s. PEL to the assessee firm amounting to Rs. 2117,44,99,952/-was also transferred to M/s. SCL.

10.4 Shriram Capita! Limited is the flagship company of M/s. Shriram group of companies wherein the assessee is one of the many entities controlled by M/s. Shriram Capital Limited.

10.5. Thus, the aggregate consideration paid by M/s. PEL amounting to Rs. 2117,44,99,952/- for acquiring 21,48,82,256 shares ( @ 98.54) of M/s. SCL to the assessee firm to make M/s. PEL the beneficial owner of 20% effective equity in M/s. SCL by the assessee firm had finally transferred to M/s. SCL by using an insignificant subsidiary of the assessee firm M/s. Novus Clouds Solutions Private Limited without even suffering a rupee of tax. The whole issue raised during the remand proceedings whether the said receipt is taxable receipt or non taxable receipt was not addressed by the Ld. CIT(A).

11. Therefore, the order of the learned Commissioner of Incometax(Appeals) accepting the claim of the assessee, that the said receipt represents capital reserve and the same brought in by the partner for future investment is erroneous on the facts and in the circumstances of the case. The said amount so received from M/s.PEL was rightly brought to tax in the hands of the assessee firm in the assessment order passed for the assessment year 2015-16.

12. It is also pertinent to bring to the notice of the Hon'ble Tribunal that in recent newspaper reports published in Economic Times on 23.04.2019, Business Standard on 23.04.2019 and Eenadu Telugu Newspaper on 24.04.2019, it was mentioned that the new partner M/s.

Piramal Enterprises Limited intends to sell its 20% stake in M/s.SCL to prospective buyer. It can therefore be said that M/s.PEL can express its intention only when it is the owner of the shares. This fact also proves that M/s. PEL had become owner of 21,48,82,256 shares of SCL or 20% of effective stake holder in SCL ( 20% of 107,44,11,829 shares ) only after making the requisite aggregate consideration of Rs. 2117,44,99,950/- to the assessee firm. The word to word mention i the Board's Resolutions of M/s. PEL date 1-4-2014 and 6-8-2014 also says the payment is an aggregate consideration and the same is paid for acquiring 20% state in SCL. [copy of the Board's Resolutions were made part of the assessment order as Attachment - II].

13. It is also conclusively established that the entire gamut of transaction was aimed at doing away with taxation by the assessee firm in the guise of showing the said consideration as 'Capital Reserve' in Balance Sheet of the assessee firm. Thus, the submission of the assessee firm at the stage of assessment as well as during appellate proceedings that the said monies represented capital reserve is devoid of merit and the same is factually incorrect. The assessee's submissions apart, the findings of the learned CIT(A) in not giving any finding whether the said receipt is taxable or not taxable. Further, the Id, CIT(A)'s order holding the same as a capital reserve, is also erroneous and factually incorrect.

14. In view of the submissions made above, it is humbly prayed that the decision of the Ld. CIT(A) holding the aggregate consideration received by the assessee firm as capital reserve intended for future investment, shall not be accepted and the action of the Assessing Officer in bringing the same to tax, may please be upheld.

7.1. With regard to treating the receipt of capital contribution from PEL by the assessee as income u/s.56 of the Act, the ld. DR also submitted that the assessee firm is not in the business of purchase and sale of shares and hence, it cannot be business income or capital gains. Accordingly, the said receipt gets taxable under the residuary head u/s.56 of the Act being the income from other sources.

(i) How did the aggregate consideration (as held by the ld. AO) become income of the firm ? (ii) Whether the ld. AO presumed that there was no cost of acquisition of shares and the assessee firm got it for free? In the same assessment order, the ld. AO had repeatedly stated that the entire money received from PEL has landed with SCL through Novus for the purpose of allotment of its shares by diluting its equity. Having given such a finding, there is absolutely no basis for making a presumption. He argued that if the ld. AO is of the view that there is no cost of acquisition to the shares, the ld. AO should have stated so giving proper reasoning for reaching such conclusion. If entire consideration (as held by the ld. AO) was held income, what would happen to the cost and when and how would the cost of such shares would get set off in the hands of the assessee? (iii) How was the receipt taxed under the head ‘income from other sources’ when shares were part of the firm’s investments?

8.1. At the outset, the ld. AR submitted that during the course of arguments made by the ld. DR, a reference was made to the Board Resolution of PEL dated 01/04/2014 based on which, the ld. DR emphatically argued that PEL decided to acquire 20% equity in SCL and paid an amount of Rs.2217.45 Crores to assessee only to acquire such stake. As the amount was paid to acquire shares of SCL, the ld. DR argued that it represented consideration and becomes taxable in the hands of the recipient. In this regard, the ld. AR clarified the various apprehensions raised by the ld. CIT DR in his arguments which are also reflected in the written submissions reproduced supra.

8.2. The ld. AR referred to the Board Resolution of PEL dated 01/04/2014 which is also reproduced supra, wherein it was explained that from the beginning, the understanding between two groups were clear and categorical that, PEL would get “only an effective stake” and not shares of SCL in its name directly. Specific attention was drawn by the ld. AR to Clause C and Clause B of the said resolution which also included setting up of sub-committee of Directors to finalise and approve the mode of investment, intermediate entity(ies) through which such investments should be made, mode and extent of ownership interest of the intermediate entity(ies) to be acquired etc., to show that PEL plan to acquire equity of SCL “effectively” and not directly. As per the mandate given, the sub-committee passed a resolution on 17/04/2014 which is enclosed in page 24 of the assessee’s paper book approving acquisition of equity interest of SCL by investing in SFS, a partnership firm holding an equity interest in SCL.

8.3. The ld. AR accordingly argued that shares of SCL were never transferred nor allotted to PEL by any entity. The name of PEL never figured in the shareholders register of SCL. Similarly, name of SCL never figured in the books of PEL. The books of PEL reflect investment made in SFS (assessee firm alone). It is also a fact that PEL cannot deal with the shares of SCL held by assessee and it can do only that much which could be done by a partner.

8.4. The ld. AR vehemently argued that SCL allotted shares to Novus on private placement basis. The assessee held 100% shareholding in Novus. He explained that every transaction involving acquisition of shares would not result in taxable income. For example, in the case of acquisition of shares through Initial Public Offer (IPO), rights issue, private placement etc, there is no taxable income in the hands of the recipient of consideration as such receipt was only in the capital field. He also argued that allotment of shares through IPO, rights issue, private placement etc., are legally permissible methods available for any company. In the present case, no entity transferred shares of SCL to PEL. SCL allotted its shares to Novus through private placement basis by duly enhancing its authorised and paid up capital. The ld. AR referred to pages 25-27 of his paper book containing the relevant pages of the financial statements to prove the fact that authorised capital and paid up capital of SCL was duly increased. The ld. AR further submitted that on amalgamation of Novus with SCL, shares allotted earlier to Novus were allotted to SFS (assessee firm). On the amount received by SCL from Novus for the allotment of shares, no income arises in its hands leave alone its taxability.

8.5. The ld. AR also argued that even if SCL allotted shares to PEL directly on private placement basis, still no tax liability would arise in the hands of any entity. He also stated on record which could be construed as a statement made from the bar that this was not the first time SCL had made allotment of shares in an ‘effective’ way. He submitted that in the case of Sanlam Emerging Markets (Mauritius) Ltd., Foreign Institutional Investor (FII) equity of SCL was held through Shriram Financial Ventures Chennai Pvt. Ltd. This was due to the understanding SCL had with TPG India Investments II INC, FII which had invested in the shares of SCL for the first time. He also submitted that the private equity partners who already held shares in SCL had imposed a condition that SCL shall not allot any shares to any outside player other than its own group companies / group entities (i.e Shriram group entities). He argued that this is a crucial point which had apparently and admittedly missed the attention of the ld. AO that SCL could not have allotted shares to PEL directly on private placement basis. This was the reason that the assessee firm had to come into picture as an intermediate entity. Hence, he argued that the transactions of receipt of monies from PEL cannot be taxed as income in the hands of the assessee firm.

8.6. The ld. DR had argued that the receipt of capital reserve by assessee firm from PEL is a scheme devised and adopted by Shriram group to avoid its tax liability on transfer of 20% equity of SCL. The ld. DR had also argued that the capital reserve belongs to the firm and the partner does not get its share out of such reserve at the time of retirement. In this regard, the ld. AR defended the purpose of creating capital reserve, rights of the partners etc., in the following manner:- (i) It was explained that in AY 2014-15, a partner SOT which had 99.97% share in profits and assets of the firm, brought in capital contribution in the form of equity shares valued by AO as per FMV at Rs. 413.80 crores and adopted its value at Rs. 7,49,001/- u/s 45(3) of the Act in the books and credited the sum of Rs 7,49,001/- to its capital account. After PEL joining the firm with 75% share,

SOT has a share of 25% with others having negligible share. PEL brought in capital of Rs. 2117.45 crores towards its 75% share. In the books of the firm, partner’s capital of SOT with 25% share would reflect a very nominal amount of Rs. 7,49,001/- whereas the partner’s capital of PEL with 75% share would show capital of Rs. 2,117.45 crores. This would give a very lopsided picture of the financial statements of the firm when the same are presented before any agency. To avoid such an imbalance in the balance sheet, capital reserve was created as agreed upon in the partnership deed. The allocation of capital contribution of PEL between partner’s capital account and capital reserve was agreed among the partners vide para 6.2 of partnership deed dated 17.04.2014 (copy of partnership deed is enclosed in page 152 of revenue’s paper book).

(ii) ‘Capital reserve’ & ‘revaluation reserve’ in firms and ‘Capital reserve’, ‘share premium’, ‘reserves and surplus’ etc., under Companies Act are analogous accounting concepts. The only difference being, it is codified under Companies Act whereas it is not done under Indian Partnership Act (IPA). IPA does not provide for any particular method(s) to maintain accounts by a firm unlike the Companies Act. Capital reserve is very much in vogue in the accountancy norms being followed by the companies. Accountancy norms of companies are formalised in the form of accounting standards recognised under the Companies Act and are always considered as that of higher standards. There is nothing wrong in following accountancy norms of higher standards and the same cannot be viewed adversely.

(iii) The IPA provides that all activities viz: conduct of business, mutual rights and liabilities, manner of dealing with properties of the firm etc., are “subject to contract between the partners”.

(iv) As per para 18 of the partnership deed (page 158 of revenue’s paper book), SFS was to be converted into a company or LLP. When converted into company, ‘capital reserve’ shall be credited as ‘share premium/capital reserve’ in the books of the company (para 18.3 of the deed at page 158 of revenue’s paper book). Accordingly, capital reserve was created as a precursor to following the accountancy norms of the company in advance. The capital reserve was duly reflected in the financial statements of the successor company i.e Shrilekha Business Consultancy Pvt Ltd (Page 28A to 28C of assessee’s paper book) and hence the understanding of the ld. AO and ld. CIT DR that the capital reserve shall remain with the firm is totally baseless and incorrect.

(v) The Ld. AR invited our attention to para 19 of the partnership deed (Page 158 of revenue’s paper book) containing the clause regarding dissolution of the firm. As per the said para, it was stated that the net assets of the firm shall be divided between the partners in the ratio of their respective interest.

(vi) It was explained that both Piramal and Shriram groups are highly successful unrelated big business houses and both are aware of their rights and liabilities. It is a business decision to make strategic investments in the manner agreed upon and no group would like to lose its money to the other group. If putting the money in the capital reserve account would cause any loss to PEL even as a remote possibility, it would never agree for such an arrangement.

(vii) The ld. AR argued that as such, there is no basis to apprehend that capital reserve was created as part of a scheme to avoid tax liability. The view of the Ld. AO as mentioned in the order and the arguments made by the Ld. CIT DR do not stand the scrutiny of law and may be rejected.

8.7. The ld. AR also pointed out yet another misconception of the ld. AO wherein the ld. AO had stated that assessee firm is a concern of Shriram group. In this regard, the ld. AR pointed out that PEL is a company of Mumbai based Piramal group, which has control having 75% stake in assessee firm in the form of partner’s capital. The remaining 25% share is held by Shriram Ownership Trust (SOT), a concern of Shriram group. Hence, SFS (assessee firm herein) is only a concern controlled, managed by Piramal group and not Shriram group. The ld. AO wanted to tax some entity in Shriram group somehow but finally ended up taxing Piramal group on its capital contribution.

8.8. The ld. AR addressed yet another misconception of the ld. AO that the entire transaction was devised in such a manner that there is absolutely no liability to pay tax by the Shriram group on the aggregate consideration of Rs.2111.23 Crores received from PEL. The ld. AR also drew our attention to para 3.4 of the assessment order wherein the ld. AO had stated that “it is an undisputed fact that Shriram group is liable to pay tax of Rs.2100/- crores of the consideration received”. Further in para 3.37 of the assessment order, the ld. AO had also mentioned that “it is an undisputed fact” that the consideration so received from PEL for getting shares of SCL is to be taxed “somewhere down the line”. The ld. AR submitted that the aforesaid observations of the ld. AO are casual, vague, baseless, unlawful and do not deserve to be taken into cognizance and is purely based on surmise and conjuncture. The ld. AR stated that the ld. AO could not establish the taxability of the receipt with specific reference to any provision of law. Infact, he also drew our attention to page-6 of assessee’s paper book containing the letter addressed by the ld. AO to the assessee dated 08/12/2017 wherein the ld. AO proposed to tax Shriram Ownership Trust (SOT) for relinquishing its rights in assessee’s firm to the extent of 528.88 Crores u/s.2(47) r.w.s. 45(4) of the Act. The assessee gave a detailed reply dated 15/12/2017 before the ld. AO as to how the said provisions are not applicable and later the ld. AO dropped his proposal to tax SOT u/s.2(47) r.w.s.45(4) of the Act. Further, yet another show-cause notice was issued by the ld. AO vide letter dated 14/12/2017 seeking to tax the amount lying in the capital reserve amounting to Rs.2111.23 Crores as benefit derived by the assessee warranting taxability u/s.28(iv) of the Act. The assessee gave a detailed reply dated 18/12/2017 making lot of factual and legal submissions as to how the provisions of Section 28(iv) of the Act cannot be made applicable. The ld. AO on going through this reply dropped his proposal of taxing the amounts lying in the capital reserve and u/s.28(iv) of the Act. Later, the same sum was ultimately taxed by the ld. AO u/s.56(1) of the Act being the residual head. Not being satisfied with the said addition, the ld. AO made the same addition alternatively u/s.56(2)(viia) of the Act without even giving a finding as to how the said provisions are indeed applicable to the facts of the instant case. The ld. AR argued vehemently that this action of the ld. AO clearly reflects her desperateness to somehow tax the said receipt of Rs.2111.23 Crores under some provisions of the Act without understanding the facts of the case and without giving a categorical finding as to whether the said receipt falls within the ambit of “income” u/s.2(24) of the Act.

8.9. The ld. AR vehemently argued that the assessee had complied with due legal provisions of the Act and the transaction carried out by the assessee cannot be construed as a colourable device to avoid tax liability. He also argued that at the outset there is absolutely no incidence of tax liability at all in this entire gamut of transactions, as ultimately PEL had only made its capital contribution in the assessee firm as a partner.

8.10. The ld. AR stated that the addition of Rs.2111.23 Crores was made by the ld. AO u/s.56(1) of the Act by adducing the following reasons:-

(a) Treatment of Rs.2111.23 Crores as reserves of the partnership shows that the partner had gifted the said amount to the firm. (b) The assessee was a conduit of PEL for indirect transfer of money to SCL and to acquire its 20% stake. (c) Confirmation given by PEL that its investment in the assessee firm was recorded in its books as investment as factually incorrect. (d) Money was paid as consideration for acquiring 20% stake in SCL as per Board Resolution of PEL and consideration received directly or indirectly for transfer of shares is liable for tax under the Income Tax Act. (e) As the sum received by assessee firm inturn helped to fulfil the objective of PEL, the same will form part of assessee’s income. (f) PEL used assessee and Novus as vehicles to acquire stake in SCL to do away with incidence of taxation.

(g) Definition of ‘income’ u/s.2(24) is inclusive and it takes care of receipts which does not contain any element of profit or gain.

8.11. The ld. AR met each of the aforesaid reasoning in the following manner:- (i) There cannot be a gift of capital contribution by a partner to the firm. If it was gift, it represents capital receipt and cannot become income.

(ii) If assessee was a conduit to PEL as held by the ld. AO, then it is not liable to tax. It is mandatory that tax has to be collected from right hands only. Reliance in this regard was placed on the decision of Hon’ble Supreme Court in the case of ITO vs. Ch. Atchaiah reported in 218 ITR 239 (SC).

(iii) If the capital contribution was for no or inadequate consideration, Section 56(1) of the Act does not apply.

(iv) In any case, accounting entries and nomenclature of the account in the books of the assessee would not determine the taxability of any receipt. Reliance in this regard was placed on the decision of the Hon’ble Supreme Court in the case of The Peerless General Finance & Investment Company Ltd., vs. CIT reported in 107 Taxmann.com 228 (SC).

(v) The ld. AO cannot hold the entry regarding the investment recorded in the books of PEL as factually incorrect as he is not the AO assessing PEL and the said allegation levelled by the ld. AO is absolutely without basis.

(vi) The ld. AO did not realise that every receipt of consideration for transfer of shares is not liable to tax as a general rule. Taxability depends on facts in other case whether the shares were allotted by the company or purchased from third parties. Moreover, in the instant case, PEL had just made capital contribution in assessee firm which eventually held the shares of SCL (pursuant to merger of Novus with SCL) thereby giving 20% effective stake to PEL in SCL.

(vii) By any stretch of imagination, the sum received by an entity which inturn helped to fulfil the objective of another entity cannot form part of income of the first entity. Incidence of taxation cannot be avoided by any entity just by introducing certain vehicles in between. If that was legally possible then, every assessee would attempt the same.

(viii) Capital contribution made by a partner into the firm is definitely on the capital field and does not fall within the scope of definition of income u/s.2(24) of the Act.

(ix) The ld. AR also argued that the ld. AO was not clear about the facts of the case as regards whether shares of SCL were transferred, how and who transferred and to whom it was transferred ? If so, whether the transaction attracts tax liability and in whose hands?

8.12. The ld. AR without prejudice to aforesaid arguments also submitted that in any case, the ld. AO had made addition u/s.56(1) of the Act taxing the entire receipt as income from other sources even without making any deduction towards cost of shares / cost of investment which was eligible for deduction in terms of 57(iii) of the Act. He argued that if the said deduction towards cost is given then it would set off the entire addition and nothing would remain. With regard to addition made by the ld. AO alternatively u/s.56(2)(viia) of the Act, he argued that the monies received by the assessee from PEL and utilised on the same day by investing in Novus. The ld. AR argued that the provisions of Section 56(2)(viia) of the Act does not cover these type of transactions.

9.1. The ld. DR also placed reliance on the decision of the Hon’ble Allahabad High Court in the case of CIT vs. Carlton Hotel Pvt. Ltd., reported in 399 ITR 611 and also on the decision of the Hon’ble Karnataka High Court in the case of CIT vs. Wipro Limited reported in 227 Taxman 244

10.1. The transactions carried out by the assessee and PEL are as under:- a) Assessee firm comprised of four partners viz SOT holding 99.97% and three individuals holding 0.01% each b) Assessee was holding 100% shares in Novus c) PEL invested its capital contribution in assessee firm. d) Assessee firm utilised that money by making payment to Novus. e) Novus in turn utilised that money for making investment in shares of SCL on private placement basis. f) Novus is a group concern of SCL. g) Novus got merged with SCL w.e.f. 01/04/2014 pursuant to the order of amalgamation duly approved by the Hon’ble Madras High Court. h) Pursuant to this amalgamation, the SCL allotted shares to assessee firm in lieu of shares already held by Novus in SCL. i) Pursuant to this allotment of shares, PEL was effectively able to have 20% stake in SCL as it was holding 75% partnership stake in assessee firm.

The above primary facts are not in dispute.

10.2. On perusal of the Board Resolution of PEL dated 01/04/2014 which is reproduced supra, we find that PEL actually decided to acquire effective equity stake of 20% in SCL. In fact it was never the intention of PEL to hold shares of SCL in its own name directly as is very much evident from its Board Resolution dated 01/04/2014. Infact, we also find that Clause C and Clause B of Resolution dated 01/04/2014 of PEL contemplated setting up of sub-committee of Directors who had been given the task of finalising of approving the mode of investment, identifying the intermediate entity (ies) through which such investments should be made, mode and extent of ownership interest of the intermediate entity (ies) to be acquired etc., This clearly shows the intention of PEL to have only effective stake in SCL through intermediate entities and not directly. Hence, the primary contention of the revenue is that PEL had paid monies to assessee for ultimately holding stake in SCL need to be appreciated in the context of the aforesaid resolution which specifies the intention of PEL.

10.3. We find that shares of SCL were never transferred nor allotted to PEL by any entity. The ld. AR also submitted that the name of PEL never figured in the shareholders register of SCL and similarly, the name of SCL never figured in the books of PEL. The books of PEL reflect investment made in SFS assessee firm alone. This fact stated by the ld. AR was not controverted by the ld. DR before us. We also find lot of force in the argument advanced by the ld. AR that PEL cannot make direct investment in equity capital of SCL in view of the fact that SCL, being an unlisted entity, could issue shares only on private placement basis. Moreover, since there is already a private equity investor prevailing in SCL who had imposed a condition that no shares shall be allotted by SCL to any outside players other than to their own group companies or group entities, that is why PEL chose to invest in assessee firm which eventually held shares of SCL through Novus. Pursuant to this precondition imposed by the private equity investors, practically SCL cannot allot shares to PEL directly. Hence, the observation made by the ld. AO that shares could have been allotted directly to PEL by SCL is incorrect and would only result in impossibility of performance. We are only reminded of a famous legal maxim in this regard “Lex Non Cogit Ad Impossibilia” , meaning thereby - ‘that the law cannot compel a person to do an act which he cannot possibly perform’. Hence, effectively it could be seen that PEL had merely made capital contribution in assessee firm in the capacity of partner. This transaction, in our considered opinion, cannot give raise to any taxable income in any manner whatsoever under any provisions of the Income Tax Act, as the transaction is only in the capital field.

10.4. From the aforesaid observation, it could be seen that assessee firm even though had acted as an intermediate entity, it could not be construed as a conduit between PEL and SCL and the whole transactions are to be understood in a holistic manner and cannot be construed as a colourable device or a sham transaction as admittedly there is no element of any income within the meaning of Section 2(24) of the Act in this entire gamut of transaction and once there is no escapement of any revenue to the exchequer, where is the question of colourable device coming into play in order to escape tax liability. Hence, we hold that the entire transactions between PEL, assessee and SCL through Novus was all done by duly complying with all legal procedures and formalities and there is absolutely no escapement of tax in this entire gamut of transactions. The ld. AR also vehemently submitted that it is not the first time shares were allotted by SCL in this fashion. In fact the presence of private equity player i.e. TPG India Investments (II) INC (FII Investor) had caused some difficulty to SCL as they are prevented from making any allotment of shares even on private placement basis other than to its group concerns. We find that this fact had missed attention of the ld. AO while considering entire gamut of transactions. Hence, the allegations levelled by the ld. AO which was strongly supported by the ld. DR that the entire transaction is a colourable device are hereby rejected. Accordingly, the case law relied upon by the ld. AR need not be gone into by us.

10.5. With regard to the creation of capital reserve in the books of assessee firm and substantial amount received from PEL towards capital contribution getting credited to such reserve account in the books of assessee firm, we find that the ld. AR had duly explained its purpose of creating such capital reserve and had met each and every allegation levelled by the ld. AO in his assessment order and subsequently in his remand report. We find that the existing partner in assessee firm SOT holding 25% partnership share had contributed only Rs.7,49,001/-, whereas PEL had contributed Rs.2117.45 Crores for its 75% share in the assessee firm. This apparently gives a lopsided picture of the financial statements of the assessee firm, thereby apparently creating imbalance among the partners and their respective profit sharing ratio. In order to avoid such imbalance, the assessee firm consciously took a decision to retain only Rs.6.22 Crores in capital account and remaining amount of Rs.2111.23 Crores in capital reserve account. We also find that the creation of capital reserve have been duly mentioned in the reconstituted partnership deed itself as agreed among the existing partners and PEL at the time of its capital contribution in the assessee firm. With regard to the observation made by the ld. AO and the ld. DR that capital reserve belongs to the firm and would remain with the firm at the time of dissolution and that the same would not get distributed to the account of the partners, we are afraid that we are unable to accept to this proposition made by the revenue before us. On perusal of the entire reconstituted partnership deed which is part of the revenue paper book filed before us, we find that para 19 thereon speak about dissolution of the firm, wherein it is categorically stated that on dissolution, the net assets of the firm shall be divided between the partners in the ratio of their respective interest. Moreover, the Indian Partnership Act provides that all the activities of the firm i.e. the conduct of business, mutual rights and liabilities, manner of dealing with properties of the partnership firm etc., are always subject to contract between the partners. While this is so, we are unable to understand how the monies lying in capital reserve which is also reflected in the form of corresponding assets on the asset side of the balance sheet of the firm, would not get distributed to the partners at the time of dissolution. The view point of the ld AO that the capital reserve belongs to firm may be to some extent true in the case of limited companies, but not in the case of a ‘firm’, where a group of persons come together for doing business in the name of partnership and all the assets and liabilities of the partnership belongs to partners only and no distinction could be drawn between partnership firm and partners in this regard. Hence, the apprehensions of the revenue in this regard deserve to be squarely dismissed. We also find that assessee partnership firm had been subsequently converted into a private limited company i.e. Shrilekha Business Consultancy Pvt. Ltd., and the capital reserve lying in the books of the assessee firm had been duly credited as such in the financial statements of the successor company under the head reserves and surplus. Infact reconstituted partnership deed also provides this clause about the subsequent event which may happen regarding the fact of conversion of the partnership firm into a private limited company or limited liability partnership (LLP). Hence, we summarily dismiss the arguments advanced by the revenue before us that capital reserve belongs to the firm and not to the partners. Hence, there cannot be any allegation that can be levelled on the assessee in the instant case that the capital reserve was created as part of a scheme to avoid tax liability and is part of any colourable device.

10.6. We also agree with the arguments advanced before us that pursuant to assessee firm receiving capital contribution from PEL to the tune of Rs.2117.45 Crores, PEL had become 75% partner in the assessee firm. Hence, for all practical purposes, the assessee firm belongs to Piramal group and not to Shriram group as understood by the ld. AO in her assessment order.

10.7. We find that the transactions carried out by the assessee were sought to be originally taxed by the ld. AO in the hands of Shriram Ownership Trust (SOT) u/s.2(47) r.w.s. 45(4) of the Act which was later dropped by him. Subsequently, the ld. AO also had sought to tax the amounts credited in the capital reserve account of the assessee firm as the benefit derived u/s.28(iv) of the Act which was also dropped by the ld. AO and as a last resort, the ld. AO had chosen to tax the said amounts under the residuary head ‘income from other sources’ u/s.56(1) of the Act. We find that the ld. AO had strangely arrived at a conclusion that since the sum of Rs.2111.23 Crores was credited in capital reserve account of the partnership firm, the same would tantamount to gift given by a partner to the firm. This is basically on the premise of the ld. AO that the capital reserve belongs to the firm and not to the partners. We have already addressed this aspect hereinabove that capital reserve is reflected correspondingly in the form of some assets of the firm on which partners have got rights and interest in proportion to their profit sharing ratio. One more reason canvassed by the ld. AO for taxing the said sum u/s.56(1) of the Act is that the assessee had acted as a conduit of PEL for indirect transfer of money to SCL and to acquire its 20% stake. In this regard, we have already held hereinabove the clear purpose behind assessee coming into picture for routing this transaction for the simple reason that SCL is prevented by its private equity investors from not making any allotment of shares to any outsiders other than to its group companies. We have also held hereinabove that the said receipt of capital contribution by the assessee from PEL and subsequent allotment of shares of SCL to assessee through Novus cannot be construed as a colourable device. Hence all the reasons canvassed by the ld. AO and by the ld .CIT DR for framing addition u/s 56(1) of the Act does not hold any water. In these circumstances, the said transaction cannot be brought to tax in terms of Section 56(1) of the Act.

10.8. One of the most clinching fact is that PEL had duly filed its confirmation before the ld. AO stating that the monies invested by them in assessee firm was shown as capital contribution made in assessee firm only. The said confirmation nowhere talked about PEL having any direct stake in equity of SCL. This also goes in consonance with the actual intention of PEL which is approved in the Board Resolution dated 01/04/2014 as PEL always intended to have only effective stake of 20% in SCL and not direct stake thereon. We find that the ld. AO had summarily disregarded this confirmation given from PEL without any basis.

10.9. In any case, we find that the entire transactions carried out by the assessee, PEL and SCL does not fall within the ambit of definition of income u/s.2(24) of the Act in any manner whatsoever, as the entire transactions are only in the capital field. These transactions do not have any incidence of taxation at all. It is not in dispute that PEL had actually made capital contribution of Rs.2117.45 Crores in assessee firm, which is partly kept in capital account and partly kept in capital reserve account. Hence there cannot be any gift of capital by a partner to the partnership firm as PEL would not like to lose its rights and interest in partnership firm for the capital contributed by them. Hence it would be totally unfair and baseless to state that PEL had actually gifted or parted with its capital lying in capital reserve to the firm.

10.10. The one fact which is staring on us is that PEL in the instant case had just made capital contribution in assessee firm which eventually held the shares of SCL (pursuant to merger of Novus with SCL) thereby giving 20% effective stake to PEL in SCL. We find that the ld. AO had not made out any case to drive home the point vis-à-vis the facts of the case as to whether the shares of SCL were transferred, how and who transferred and to whom it was transferred? Even if so, whether the transaction attracts tax liability and in whose hands. We find that there is absolutely no finding regarding these questions.

10.11. We also find that the entire receipt of capital contribution lying in capital reserve account was sought to be taxed by the ld. AO u/s.56(1) of the Act on the ground that the same only represents share sale consideration for issue of shares in SCL.

10.12. We find that the ld. DR has also fairly agreed before us that assessee would be entitled for deduction towards cost of shares / cost of investment in terms of Section 57(iii) of the Act. We find that even this deduction was not granted by the ld. AO in the instant case.

10.13. With regard to alternative addition made by the ld. AO u/s.56(2)(viia) of the Act, the only observation of the ld. AO is that the assessee firm had received monies from PEL and utilised the same by making payments to Novus on the same day. We find that these type of transactions are not at all covered in the provisions of Section 56(2)(viia) of the Act. Certainly, it is not the case of the AO that money received thereon is without any consideration or for inadequate consideration, hence, the provisions of Section 56(2)(viia) of the Act cannot be made applicable to the facts of the assessee’s case and the contentions of the ld. AO deserves to be dismissed at the threshold level itself.

10.14. In defence to various arguments of the ld. AR, the ld. DR argued that pursuant to receipt of monies from PEL, there was sacrificing of interest by the existing partners in favour of PEL and that the consideration attributable to this sacrifice of interest is retained in the capital reserve. This has got absolutely nothing to do with the assessee firm as apparently the sacrifice of interest, even if any, had happened between partners and the firm cannot be taxed for such action.

10.15. With regard to two case laws relied upon by the ld. DR before us, viz, decision of the Hon’ble Allahabad High Court in the case of CIT vs. Carlton Hotel Pvt. Ltd., reported in 399 ITR 611(All) and the decision of Hon’ble Karnataka High Court in the case of CIT vs. Wipro Ltd., 227 Taxman 244(Kar) are concerned, the said decisions are factually distinguishable in as much as they were concerned with the taxability of capital gains. The ld. DR had also argued before us that there cannot be any levy of capital gains in the instant case as assessee is not engaged in the business activity of purchase and sale of shares and hence, there cannot be any business income or capital gains. Kind reference is drawn to arguments advanced by the ld. DR in this regard which is considered in para 7.1. supra. Hence, the decisions relied upon by the ld. DR hereinabove, does not advance the case of the revenue.

10.16. In view of the aforesaid observations, we categorically hold that there cannot be any taxability either u/s.56(1) or u/s.56(2)(viia) of the Act in the hands of the assessee firm. We find that the ld. CIT(A) had duly appreciated the facts of the assessee in right perspective which in our considered opinion do not warrant any interference. Hence, the grounds raised by the revenue on merits of the addition for the A.Y.2015- 16 are hereby dismissed.

1. “The CIT(A) erred in facts and circumstances of the case and in law in deleting the addition of made u/s. 56(2)(viia) of Rs.413,80,30,734/- 2. The CIT(A) erred in holding that the applicable provisions to the facts of the case are sec.45(3) and not Sec. 56(2) (viia) whereas both the sections are altogether different. Sec. 45(3) deals with capital gains in the hands of the transferor, whereas in the present case addition was made in the hands of the assessee who is transferee of shares.

3. The CIT(A) erred in holding that the consolation received on transfer of shares from the partner by the assessee is ' capital contribution ' and cannot be considered as 'consideration' for the purpose of Sec. 56(2) (viia) whereas the purpose for which shares were received by transferee is immaterial for taxing deemed income as per provision s of Sec.56(2) (viia).

4. The CIT(A) erred in equating the provisions of Sec,56(2) (viia) and 56(2) (viib) which are applicable for different contexts.

5. Any other ground that may be urged at the time of hearing.”

14.1. Pursuant to the above, total partner’s capital as on 31/03/2014 was Rs.7,49,926/-. The break-up of the sum are as under:-

SOT capital contribution - Rs.74,9701/- Other three partners capital contribution - Rs. 225/- ------------------------ Total Rs.7,49,926 =========== 14.2. The return of income for the A.Y.2014-15 was filed in the status of firm on 30/09/2014 declaring total income of Rs.27,630/-. The assessment for the A.Y.2015-16 was completed u/s.143(3) of the Act on 30/12/2017, wherein the ld. AO observed that the transaction carried out by the assessee in the A.Y.2014-15 also has a bearing on the proceedings for A.Y.2015-16. The ld. AO examined profit and loss account, balance sheet alongwith all schedules, the list of various shareholders of Shriram Capital Ltd. (SCL) as on 31/03/2013 and 31/03/2014. The shareholding pattern of shareholders of SCL holding more than 5% stake as on 31/03/2013 and 31/03/2014 are as under:-

Name of the shareholder No of shares as on No of shares as on 31/03/2013 31/03/2014 Shriram Ownership Trust 9,57,47,300 100 M/s. TPG India Inv. 10,13,80,344 10,13,80,344 (Mauritius)

M/s. Shriram Financial 71,62,07,367 71,62,07,367 Ventures M/s. Shrilekha Financial NIL 9,57,47,200 Services Others 1,200 1,200 Total 91,33,36,411 91,33,36,411 14.3. From the above table, it could be seen that SOT had transferred 9,57,47,200/- shares of SCL to the assessee firm during A.Y.2014-15 on 26/03/2014. The assessee submitted that the shares held by SOT in SCL and SFVCPL were reflected at Rs.1/- and Rs.749700/- respectively in the books of the assessee firm as capital contribution of SOT in accordance with the provisions of Section 45(3) of the Act. The ld. AO however, ignored the submission of the assessee and on the basis of information gathered/ collected from various available sources, he found that the book value of each share of M/s. Shriram Capital Ltd., was Rs.25.69 and accordingly, arrived at the total book value of the shares of SCL received from SOT by the assessee firm at Rs.245,97,45,568/- (95747200 x 25.69). Similarly, information was gathered by him from various sources regarding the book value of each share of M/s. Shriram Financial Ventures Chennai Pvt. Ltd., (SFVCPL) at Rs.22396.09 and accordingly, arrived at the total book value of SFVCPL received from SOT at Rs.167,90,34,867/- (Rs.74,970 x Rs.22,396.09). Accordingly, the ld. AO concluded that the assessee firm received the shares of SCL and SFVCPL from SOT for an inadequate consideration of Rs.245,97,45,567/- (Rs.245,97,45,568/- – Rs.1) and Rs.167,82,85,167/- (Rs.167,90,34,867/- – Rs.7,49,700/-) respectively and sought to invoke the provisions of Section 56(2)(viia) of the Act for making total addition of Rs.413,80,30,734/- (Rs.245,97,45,567/- + 167,82,85,167/-) and accordingly concluded that income of the assessee had escaped assessment. Accordingly, the ld. AO after obtaining prior approval from Additional Commissioner of Income Tax-Range 4, Hyderabad on 22/03/2018 for escapement of income, issued notice u/s.148 of the Act dated 22/03/2018 for A.Y.2014-15. In response to the said notice, the assessee firm filed its return of income on 04/04/2018 admitting the same total income originally declared at Rs.27,630/-. The assessee also filed a letter dated 09/04/2018 alongwith copy of acknowledgement of return, balance sheet, profit and loss account for the year ending 31/03/2014. Consequently, a notice u/s.143(2) and 142(1) of the Act were issued to the assessee on 10/04/2018 calling for certain information which were duly responded by assessee on 23/04/2018.

14.4. Further the assessee filed its reply on 25/06/2018 replied with regard to non-applicability of the provisions of Section 56(2)(viia) of the Act as under:-

“7.1 Section 56(2)(viia) of the Act, inter-alia, provides that where a firm receives, in any previous year, from any person, any property, being shares of a company, not being a company in which the public are substantially interested: • Without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value (FMV) of such property shall be chargeable to tax under the head 'Income from other sources'; or • for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration shall be chargeable to tax under the head 'Income from other sources;. 7.2 When a person becomes a partner in a firm contribution his capital, he acquires various rights in the firm. 7.3 He has interest in each and every asset of the firm including goodwill even during the subsistence of the firm, though during subsistence he cannot claim specific share in any particular asset. Such rights, inter alia, include right to take part in the conduct of the business, right to share in the profits, right to settlement of accounts at the time of retirement and if not share in the subsequent profits and interest etc. 7.4 As per section 14 of the Partnership Act, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm or acquired by purchase or otherwise by or for the firm or for the purposes and in the course of the business of the firm and includes also the goodwill of the business. 7.5 Supreme Court in Addanki Narayanappa V Bharkara Krishnappa AIR 1966 SC 1300 after referring to Sections 14, 29, 30,

36, 37 and also 39 to 55 of the Partnership Act has observed as follows. "From a perusal of these provisions it would be abundantly clear that whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing to the partnership form the realization of this property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in clause (a) and sub-clauses (i),(ii), and (iii) of clause (b) of section 48." 7.6 A partner's interest in the firm is a valuable property. The Estate Duty Act when it was in force provided for passing of such interest of the deceased partner in the firm to the survivors. Please see controller of Estate Duty V. Mrudula Nareshchandra (198b AIR 1821). 7.7 The fact that a partner's interest in the firm is a valuable asset is also borne out by its inclusion as an asset while computing net wealth under the Wealth Tax Act. 7.8 When the partnership interest is sold for a price it is liable to tax as held by the Supreme Court in Vatsala Shenoy V. Jt. Commissioner of Income Tax (assessment), Mysore (2016 389 ITR 519) 7.9 The partner's interest in a firm is a valuable asset which constitutes adequate consideration and it cannot be restricted to the credit entry in the books except for the purpose of Section 45(3) where the particular statutory provision restricts it artificially. 7.10 From the above, it is abundantly clear that the consideration at the time of contribution of assets into the firm by a partner is not determinable to invite section 56(2)(viia). 8 Partnership interest is a valuable and adequate consideration 8.1 We wish to submit that the right in the partnership to which a partner becomes on contribution of capital always constitutes 'valuable consideration for the purpose of section 56(2)(viia) of the Act and will not fail to be considered as a case without consideration or as a case where the consideration is less than the Fair Market Value. 8.2 In sum, therefore, in the case of a partnership firm, the 'consideration' for the subsistence of the partnership to get his share of profits from to time and after the dissolution of the partnership or with his retirement from the partnership to get his accounts settled. 8.3 Thus, in the instant case, the partnership interest to which SOT (i.e 99.97%) is entitled pursuant to contribution of shares in the Firm does not fall short of consideration envisaged. SOT's 99.97% interest extends over the very same shares which SOT contributed as capital. 8.4 In summary, the contribution of shares by SOT to the Firm by way of capital contribution does not attract the provisions of section 56(2)(viia) on account of the following: • The partnership interest which gives the partner a right to share in the profits and losses of the firm and right in the assets of the firm is a valuable and adequate consideration. • Such consideration does not admit of full evaluation. • The partnership interest of 99.97% obtained by SOT pursuant to the capital contribution should by itself constitute 'adequate consideration' for the purpose of section 56(2)(viia) of the Act.

9. For the above reasons, we submit that section 56(2)(viia) is not applicable in our case and request you to drop the Section 147 proceedings initiated by you."

14.5. The assessee also submitted that the capital contribution was brought in by SOT (partner) in the form of shares held by it in SCL and SFVCPL at the price mutually agreed upon between the partners and the assessee firm in terms of Section 45(3) of the Act. The crux of the entire observations of the ld. AO for framing the addition u/s.56(2)(viia) of the Act after meeting these submissions of the assessee could be summarised in the following manner:-

a. The transferee has to be a firm or a company not being a company in which public are substantially interested. b. The asset to be transferred is in property being shares of a company not being a company in which public are substantially interested. c. The transferor can be any person. d. The date of transfer has to be on or after 01/06/2010.

In this case, the transferee is a firm, the asset transferred is shares of a company in which public are not substantially interested; the date of transfer is 26/03/2014 and 27/03/2014 which is after 01/06/2010 and more importantly, the transferor can be ‘any person’ as defined u/s.2(31) of the Act. Thus, in this case, all the above conditions laid down for the purpose of invoking provisions of Section 56(2)(viia) of the Act are fulfilled.

3. The assessee’s submission that the partner’s interest in the firm is a valuable asset, which constitute adequate consideration and it

cannot be restricted to the credit entries in the books of accounts except for the purpose of Section 45(3) of the Act, is also not applicable. The provisions of Section 45(3) are part and parcel of computation of income under the head ‘capital gains’ whereas the instant case deals with the computation of income u/s.56(2)(viia) of the Act which is a deeming provision for computation of income under the head ‘income from other sources’.

4. The explanatory notes to Finance Act 2010 with regard to insertion of Section 56(2)(viia) of the Act were reproduced by the ld. AO in the assessment order which was introduced as a counter evasion mechanism to prevent laundering of unaccounted income.

"Provided that this clause shall not apply to any such property received by way of a iiansaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47."

14.6. Accordingly, he observed that what is included is the transactions pertaining to a situation where transfer of shares in a demerged foreign company, transfer of shares in a co-operative bank, transfer of shares in a demerged Indian company and transfer of shares in a scheme of amalgamation. The submission of the assessee that when a partner transfers shares to the firm for inadequate consideration, does not fall under any of those exclusions.

14.7. With the above observations, the ld. AO made an addition of Rs.413,80,30,734/- towards shares received from SOT for an inadequate consideration u/s.56(2)(viia) of the Act under the head ‘income from other sources.

15. The ld. CIT(A) deleted the addition made u/s.56(2)(viia)of the Act by observing as under:-

• “The appellant is a partnership firm and SOT is partner in the firm. • The SOT as a partner introduced shares of two companies namely, M/s.Shriram Capital Ltd and M/s.Shriram Financial Venture (Chennai) Pvt Ltd, during this assessment year 2014-15 as a capital contribution in the appellant firm. • The appellant firm not received consideration for shares but only received capital contribution in the form of shares of two companies from the partner SOT. • The partner's capital is not a consideration to be considered as per Section 56(2)(viia). • Since there is no consideration, then there is no benefit or loss to the appellant firm. • Since there is no benefit to the appellant, there is no question of gift. Hence, provisions of Section 56(2)(viia) does not come into picture. • Since there is no consideration received by the appellant firm, therefore there is no issue of lesser consideration • Therefore, as per above discussions in detail, I am of the opinion that provisions of Section 56(2)(viia) does not apply in this case. • When once the provisions of Section 56(2)(viia) does not apply, then there is no question of valuing the shares at Fair Market Value.

12. Therefore, the additions made by the Assessing Officer by reworking shares at Fair Market Value by applying provisions of Section 56(2)(viia) is not correct. Hence, additions made by the AO deleted.”

15.1. The ld. CIT(A) further observed that Section 45(3) of the Act deals with capital contribution by a partner and its capital gains liability in the hands of the transferor (i.e partner in the instant case). The legislature never intended to adopt a different consideration in the hands of the transferee (i.e. firm in the instant case). Moreover, the provisions of Section 56(2)(viia) of the Act were introduced as a counter mechanism to prevent / counter money laundering. No finding was given by the ld. AO that the assessee herein was involved in any money laundering.

15.2. The ld. CIT(A) further observed that it is a rule of interpretation that special provision prevails over general provisions of the law. Section 56(2)(viia)of the Act is a general provision and Section 45(3) of the Act is a special provision of the Act. There is no non-obstante clause u/s.56(2) (viia) providing to overrule provisions of Section 45(3) of the Act.

17.1. The ld. CIT DR also argued that apart from the facts, the ld. CIT(A) had also placed reliance on the decision of the Hon’ble Supreme Court in the case of Sunil Siddharthbhai vs.CIT reported in 156 ITR 509 to delete the addition made u/s.56(2) (viia) of the Act. The ld. CIT DR argued that the said Hon’ble Supreme Court’s decision was rendered in the context of applicability of Section 2(47) r.w.s.45 & 48 of the Act and not with Section 56(2)(viia) of the Act and hence it is factually distinguishable. He also argued that the provisions of Section 45(3) of the Act itself was amended by the Finance Act, 1987 w.e.f. 01/04/1988 only to overrule the Hon’ble Supreme Court judgement referred to supra. Moreover, he argued that the ld. CIT(A) failed to appreciate that the said decision was rendered in the context of taxability of the partner u/s.45(3) of the Act whereas the instant case before us speaks about the taxability of the recipient firm u/s.56(2)(viia) of the Act. He argued that provisions of section 45(3) and 56(2)(viia) of the Act are independent sections as the former deals with the transferor (i.e partner) under the head ‘capital gains’ and the latter deals with the transferee (i.e firm) under the head ‘income from other sources’. Accordingly, the issue of taxability in the hands of two distinct persons does not envisage existence of any non-obstante clause.

17.2. With regard to yet another important observation made by the ld. CIT(A) in his order that SOT as a partner had introduced shares of SCL and SFVCPL as its capital contribution in the assessee firm; that the firm had not received any consideration for shares which had only received capital contribution in the form of shares of two companies from its partner; that the partner’s capital is not a consideration to be considered as per Section 56(2)(viia) of the Act; since there is no consideration, there is no benefit or loss to the assessee firm; since there is no benefit to the assessee, there is no question of any gift and hence, provisions of Section 56(2)(viia) of the Act does not come into picture; there is no consideration received by the assessee firm, therefore, there is no issue of lesser consideration and accordingly, the provisions of Section 56(2)(viia) does not apply; that when once the provisions of Section 56(2)(viia) of the Act does not apply, then there is no question of contributing the shares at fair market value, is concerned, the ld. CIT DR vehemently argued that the partner i.e. SOT introduced shares as its capital contribution in the assessee firm and what matters is whether the fair market value of the shares brought in by the partner is same as what is recorded in the books of accounts of the assessee firm towards partner’s capital contribution. He argued that transferor and transferee are two distinct entities and once, the transactions between two different entities takes place, the recipient will be owner of the asset. In this case, the assessee firm being the recipient had become the owner of the shares whose fair market value is Rs.413,87,80,435/- as against the consideration recorded in the books of the assessee firm at Rs.7,49,701/- only thereby resulting in inadequate consideration warranting taxing u/s.56(2)(viia) of the Act for the differential sum.

“(viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010 but before the 1st day of April, 2017, any property, being shares of a company not being a company in which the public are substantially interested,—

(i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;

(ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration :

Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47.

Explanation.—For the purposes of this clause, "fair market value" of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii); 18.1. The crucial word mentioned in the aforesaid Section is “consideration”. In the instant case, we find that SOT had merely brought in capital contribution in the form of shares at a particular value in terms of Section 45(3) of the Act. The said value had been duly credited in the books of the assessee firm as partner’s capital contribution. The term “consideration” represents amount lying at the disposal of the assessee firm to do whatever it wants and is not repayable to any person in any manner whatsoever. Whereas the amount lying to the credit of capital account of partner is repayable by the firm to the said partner as and when the partner retires, resigns or at the time of dissolution of the firm. On this aspect itself, it could be safely concluded that what has been received by the partner in the form of capital contribution cannot be equated with the term “consideration” within the meaning of Section 56(2)(viia) of the Act. Admittedly, the receipt of capital contribution from a partner either in cash or in kind would be “transaction in the capital field and not in the revenue field” at all, for the simple reason that the said capital is always repayable at the time of retirement / resignation of the partners or at the time of dissolution of the firm.

18.2. We find that the other key words in the Section 56(2)(viia) are “firm” , “receives” and “any person”. It contemplates a contract / transaction between the “firm” and “any person” who transferred shares for consideration. In any contract, consideration pre-supposes an enforceable right to recover money due from one party by the other. As there is no contract / transaction between the partner and the firm in respect of capital contribution, the partner cannot sue the firm for recovery of the same. In case of capital contribution, the partner cannot claim / recover the capital balance from the firm as long as he continues as a partner. In the case of capital contribution made by a partner, there is no consideration involved from the firm until retirement of partner from the firm or dissolution of the firm and as such, there cannot be any issue of recovery much less enforceable right to recover the credit balance in its capital account.

18.3. The most excruciating fact which needs to be understood is when a partner retires from the firm, he does not walk away with the credit balance in his capital account alone, instead he would be entitled to the share of the profits / losses besides assets of the firm. The provisions of the Section 56(2)(viia) deals with transaction / contract between the existing ‘firm’ and ‘any person’ which are not in the nature of capital contribution. Hence, “any person” mentioned in section 56(2)(viia) of the Act, in our considered opinion, does not cover the partner in respect of his capital contribution. Yet another crucial point which needs to be understood is whether any contract exists between firm and partner in the case of capital contribution. We find that there is no contract between the firm and the partner in the case of capital contribution. “Firm” is a concern created consequent to a contract of partnership deed among partners to contribute capital, to carry on business and share profits and assets in pre-determined ratio. Pursuant to the capital contribution made by the partners only, the partnership firm comes into existence and becomes capable of entering into all the transactions / contracts thereafter. The provisions of Section 56(2)(viia) covers both firms as well as companies. A company cannot enter into any transaction / contract before its incorporation even with its promoter/prospective shareholder. However, the promoters of the prospective company need to make payments of various kinds viz: ROC fees, preparation of articles and memorandum of association, professional charges, travelling etc., before its incorporation. Accounting entries regarding all such contributions are made in the books of the company after incorporation. Similarly, firm also cannot enter into any transaction with its prospective partner before coming into existence. Partner’s capital contribution is an event that happens before the firm comes into existence rather firm comes into existence with the help of capital contribution. There cannot be any consideration from the firm to the partner in respect of capital contribution as long as the firm subsists. Capital contribution happens before firm comes into existence and consideration for partner arises after dissolution of the firm or retirement or resignation of partner. Hence, it could be safely concluded that the term “person” mentioned in Section 56(2)(viia) of the Act does not cover “partner” in respect of capital contribution and accordingly, Section 56(2)(viia) of the Act cannot be made applicable in the case of capital contribution made by a partner to the firm.

18.4. We are inclined to accept the arguments advanced by the ld. AR by placing reliance on the decision of the Hon’ble Supreme Court in the case of Kartikeya V Sarabhai vs. CIT reported in 228 ITR 163 (SC) and Sunil Sidharthbai vs.CIT reported in 156 ITR 509 (SC), wherein the Hon’ble Supreme Court had held that part of the ownership rights in the property gets transferred to other partners and hence, such contribution amounts to transfer of capital asset u/s.45 of the Act ; Consideration for capital contribution is share in the profits of the firm during its subsistence and share in assets after its dissolution ; ‘Consideration’ is ‘indeterminate’ and as such the computation provisions of Section 48 of the Act would fail and hence, no capital gain would arise thereon. The relevant observations of the Hon’ble Supreme Court in para 15 of the said order would also be crucial for understanding and relating to the facts of the instant case before us, wherein it was observed that the credit entry made in the partners capital account does not represent the true value of the consideration and that it is only a notional entry intended to be taken into account at the time of determining value of partners share in net assets of the firm at the time of dissolution of the firm. Hence, in these circumstances, the Hon’ble Supreme Court held that consideration which a partner acquires on making over his personal asset to the partnership firm as his contribution to its capital account does not fall within the terms of Section 48 of the Act. The aforesaid reasoning and observations of the Hon’ble Supreme Court could be made applicable to the facts of the instant case in as much as “consideration” in respect of capital contribution made by a partner is “indeterminate” for the purpose of Section 56(2)(viia) of the Act also. When consideration is indeterminate, computation provisions of Section 56(2)(viia) of the Act to determine inadequacy or otherwise of ‘such consideration’ also fail. Hence, on this count also, provisions of Section 56(2)(viia) of the Act cannot be made applicable to capital contribution of a partner made in the firm.

18.5. The CBDT vide its circular No.495 dated 22/09/1987 had explained rationale behind introduction of Section 45(3) of the Act by specifically stating that consideration was made deemed to be “determinate” at the discretion of the parties for the purpose of Section 48 of the Act. Hence, unless the consideration was made ‘determinate’ specifically u/s.56(2)(viia) of the Act like it was done u/s.45(3) of the Act for the purpose of Section 48, it cannot be extended to any other provision. Needless to mention that when Section 56(2)(viia) of the Act was introduced in the statute in the year 2010, the Parliament was well aware of the existing decision of the Hon’ble Supreme Court in the case of Sunil Sidharthbai referred to supra holding the consideration as “indeterminate” and also existence of Section 45(3) of the Act in the statute. Still the legislature in its wisdom did not deem it fit to make it “determinate” for the purpose of Section 56(2)(viia) of the Act consciously unlike it was done for Section 45(3) of the Act.

18.6. We find that the value of the shares were recorded by way of credit to the partners capital account in the form of capital contribution in terms of Section 45(3) of the Act. Though the provisions of Section 45(3) of the Act are applicable for levy of capital gains in the hands of the transferor i.e. partner in the instant case, the consideration fixed thereon cannot be different in the hands of transferee i.e. the assessee firm as the same is emanating from the same transaction. We find that the provisions of Section 45(3) is a special provision and a specific provision, whereas, the provisions of Section 56(2)(viia) is a general provision. It is the accepted rule of construction that special provisions would prevail over general provisions as per the famous latin maxim “Generalia Specialibus Non Derogant”. The ld. AR also placed reliance on the decision of the Hon’ble Supreme Court in the case of DR Yadhav vs. R K Singh reported in (2003) 7 SCC 110 wherein it was held that when two conflicting provisions of law operate in the same field, the provision that specifically operates in that field would apply over the general rule. Moreover, if the contention of the ld. CIT DR that provisions of Section 56(2)(viia) of the Act would come into operation for every capital contribution made in kind by a partner into the partnership firm, is to be accepted, then the provisions of Section 45(3) would become redundant and operation of that section would be rendered otiose. Such interpretation of law should always be avoided. We find the transfer of asset by a partner to the firm as the capital contribution, no doubt constitutes a transfer in the hands of the partner, but the value recorded in the books of the firm by way of credit to the partners capital account would be conclusive proof of consideration received in the hands of the partner towards transfer of capital asset.

Reliance in this regard is placed on the decision of the Hon’ble Madras High Court in the case of ACIT vs. Dr. D. Ramamurthy reported in 410 ITR 236. In view of the aforesaid observations, we have no hesitation to hold that the provision of Section 56(2)(viia) of the Act could not be made applicable at all in the case of capital contribution made by a partner in the form in kind. Accordingly, we do not find any infirmity in the order of the ld. CIT(A) granting relief to the assessee and the grounds raised by the revenue in this regard are dismissed.

Order pronounced on 04/11/2020 by way of proper mentioning in the notice board.