COMMISSIONER OF INCOME TAX vs. SHRI. VIKRAM REDDY

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 24TH DAY OF FEBRUARY 2021 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE NATARAJ RANGASWAMY I.T.A. NO.291 OF 2013 BETWEEN: 1. COMMISSIONER OF INCOME TAX

C.R. BUILDINGS-III

QUEENS ROAD

BANGALORE-560001. 2. ASSISTANT COMMISSIONER OF

INCOME TAX, CIRCLE-1(1)

ITO WARD 1(2), BANGALORE. ... APPELLANTS (BY SRI. E.R. INDRAKUMAR, SR. COUNSEL A/W SRI. E.I. SANMATHI, ADV.,) AND: SHRI. VIKRAM REDDY (INDIVIDUAL) NO.6A, REGENCY HEIGHTS 3/2-1, CLEAVELAND ROAD FRAZER TOWN, BANGALORE-560005. ... RESPONDENT (BY SRI. ASHOK A. KULKARNI, ADV.) - - - THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 08.02.2013 PASSED IN ITA NO.158/BANG/2011, PRAYING TO: (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN.

2 (ii) SET ASIDE THE APPELLATE ORDER OF THE ITAT, 'A' BENCH, BANGALORE IN APPEAL PROCEEDINGS ITA NO.158/BANG/2011 DATED 8.2.2013, AS SOUGHT FOR IN THIS APPEAL. THIS I.T.A. COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment year 2007-08. The appeal was admitted by a bench of this Court vide order dated 13.08.2013 on the following substantial questions of law: "(i) Whether on the facts and circumstances of the case, the Tribunal is correct in law in not recognizing the colourable device employed by the assessee as envisaged by the Hon'ble Apex Court in case of McDowell & Co Ltd (reported in 158 ITR page 148) which resulted in massive tax evasion in the guise of tax planning laced with multi layered transactions?".

3 "(ii) Whether on the facts and circumstances of the case, the Tribunal is correct in law in not considering the fact that the shares belonging to the assessee were ultimately transferred to Godrej Group as part of sale of business of the Nutrine Group to Godgrej Group, routed through a series of transactions including the reconstitution of the defunt firm M/s. B.V. Reddy enterprises to accommodate the shareholders of M/s. Nutrine confectionery Co. P. Ltd and guising the numerous transactions as genuine in quick span of time, with a sheer motive of avoidance of payment of actual capital gain?". "(iii) Whether on the facts and circumstances of the case, the Tribunal is correct in law in holding that the entire series of transactions by which the shares of NCCPL were ultimately transferred to GBFL were all valid and such an arrangement to avoid payment of taxes on account of correct quantum of capital gain that would result on transfer of shares of NCCPL to GBFL was permitted and within the framework of law?".

4 "(iv) Whether in the given facts and circumstances of the case, the Tribunal is correct in law in holding that the entire series of transactions by which the shares of Nutrine Confectionary Co. P Ltd were ultimately transferred to GBFL were all valid and such a course was permitted and within the frame work of law and that the transaction was not colourable or dubious device or subterfuge and were legal and valid without completely appreciating the complete though process and motive behind the series of transactions entered in to by the assessee and family members?". "(v) Whether in the given facts and circumstances of the case, the Tribunal is correct in law in allowing the appeal of the assessee with reference to addition on account of non existent liability amount to Rs.1,77,778/- without appreciating that the assessee had not been able to prove the same beyond doubt?". 2. Facts leading to filing of this appeal briefly stated are that M/s Neuprine Confectionary Company P. Ltd. (Hereinafter referred to as 'the NCCPL' for short)

5 was incorporated on 14.02.1952. The said company was engaged in the business of manufacture and sale of confectionary products under the brand name 'Neutrine'. Thereafter on 14.07.1971, M/s B.V.Reddy Enerprises (Firm) was formed at Chittoor in the State of Andhra Pradesh (hereinafter referred to as 'the BVRE' for short). The aforesaid partnership firm comprised of Sri.Madhusudhan Reddy, Sri.Vikram Reddy, Smt.Shobha Reddy, Smt.Sandhya Reddy, Smt.Anitha Reddy and Sri.Dinesh Reddy. Out of the aforesaid three partners viz., Smt.Sandhya Reddy, Smt.Anitha Reddy and Sri.Dinesh Reddy were minors. On 25.06.1979, Smt.Anitha Reddy and Smt.Sandhya Reddy attained the date of majority and a fresh deed of partnership was executed with the same partners. Again on 30.12.1982 a new deed of partnership was drawn with same six partners, as Sri.Dinesh Reddy attained the age of majority. On 28.12.2005, a company M/s Neutrine Confectionary and Sweets Pvt. Ltd., (hereinafter

6 referred to as 'the NCSPL' for short) was incorporated. On 22.03.2013, 10 separate persons but 13 in number as out of 10 partners 3 were shown to be in dual capacity executed a Memorandum of Understanding (MoU). Thereafter, on 24.03.2006 the partners brought in the shares held by them in NCCPL as their share of capital contribution to firm BVRE and their value recorded at the agreed figure on which capital gains have been returned and tax for Assessment Year 2006- 07 under Section45(3) of the Act and accepted in a proceeding under Section 143(3) of the Act. The resolution was forwarded on the same date i.e., 24.03.2006 to the company secretary of NCCPL with signature of the partners showing different status in which they were partners including their dual capacity. All the 13 partners delivered share transfer forms transferring the shares so brought in as capital in favour of Sri.Madhusudhan Reddy on 24.03.2006 and name of Sri.Madhusudhan Reddy was entered as registered

7 shareholder of NCCPL in pursuance of the resolution passed by the firm. 3. Sri.Madhusudhan Reddy filed a declaration under Section 187C of the Companies Act, 1956 on 27.03.2006 stating that beneficial owners of the shares NCCPL held by him were 13 partners of the firm viz., BVRE. Similar declaration under Section 187C of the Companies Act was given by 13 partners. The NCCPL on 29.03.2006 entered in the books the name of Sri.Madhusudhan Reddy as shareholder on behalf of various partners of BVRE as per provision of the Companies Act. On 29.03.2006, a non binding MoU between the members of the Reddy family and Godrej Beverages and Foods Ltd. was executed with reference to the position prevailing on 01.03.2006 contemplating transfer of shares to Godrej Beverages and Foods Ltd. for a sum of Rs.270 Crores. NCCPL also filed a similar declaration under Section 187C of the Companies Act, 1956 on 29.03.2006. With effect from 05.05.2006, the

8 firm viz., BVRE was succeeded by NCSPL taking over the entire business lock stock and barrel including all its assets and liabilities for a consideration of Rs.270 Crores in accordance with provisions of Chapter IX of the Companies Act, 1956. Thereafter, under a share purchase agreement dated 10.06.2006, the shares in NCCPL were transferred by NCSPL to Godrej Beverages and Foods Ltd. for a consideration of Rs.265 Crores and the transfer of shares was effective with effect from 29.06.2006. On 18.08.2006, M/s NCSPL changed its name to M/s B.V.R.E.P.L. 4. The aforesaid NCSPL / B.V.R.E.P.L filed the return of income for the Assessment Year 2007-08 declaring the capital loss on sale of shares of NCCPL of Rs.33,22,70,041/-. The Assessing Officer by an order dated 30.12.2009 inter alia held that entire exercise of transfer of shares held by the assessee in NCCPL to firm viz., BVRE as capital contribution and subsequent take over of the firm by NCSPL and the final sale of shares by

9 NCSPL to Godrej Beverages and Foods Ltd. were colorable devices adopted and were sham transactions for evading tax liability. The short term capital gains of Rs.222,26,14,953/- was taxed under Section 45 read with Section 49(1) of the Act and Short Term Capital Gains was computed taking the actual cost for acquisition of sales at Rs.35.27 Crores instead of Rs.270,07,53,000/- as claimed by the B.V.R.E.P.L. 5. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 28.01.2011 inter alia held that the firm viz., BVRE is not a genuine firm and dismissed the appeal. The assessee thereupon filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The tribunal vide order dated 08.02.2013 inter alia held that the firm BVRE was genuine and was not defunct but was a legally existing partnership firm. It was further held that a person shown in the partnership deed as a partner representing

10 the HUF, does not become the partner and therefore, HUF was not the partner of BVRE and therefore, the firm BVRE cannot be said to be invalid. It was further held that there was a valid transfer of shares by NCCPL held by the assessee in favour of the firm BVRE during the previous year relevant to Assessment Year 2006-07 and declaration under Section 187C of the Companies Act, 1956 clearly shows that the beneficial owner of the shares was Sri.Madhusudhan Reddy in the firm BVRE. It was further held that the course adopted by the assessee was within the framework of law and was permissible. Accordingly, the appeal preferred by the assessee was allowed. In the aforesaid factual background, the revenue has filed this appeal. 6. Learned counsel for the revenue submitted that in reality shares of NCCPL were sold by 13 partners of firm viz., BVRE to Godrej Beverages and Foods Ltd. during previous year relevant to Assessment Year 2007- 08 and therefore, the conclusion of the authorities that

11 capital gains is chargeable to tax in the hands of the assessee proportionate of their share holding in NCCPL is correct. It is pointed out that MoU dated 29.03.2006 reflects the real intention of the parties and MoU was signed by Vikram Reddy representing 16 persons who held the entire paid up capital of NCCPL. It is also pointed out that from perusal of Annexure-1 to MoU, it is evident that aforesaid 16 persons were shareholders of NCCPL. The finding recorded by the tribunal that MoU has been superseded with share purchase agreement is perverse and in the MoU details have been given about the consideration to be paid for transfer of shares and the same is based on the details contained in Annexure- 2 to the agreement. It is also submitted that MoU contains a non compete clause and provides time limit for transfer of shares. Our attention has also been invited to clause 8.1. of the MoU and it has beenurged that the MoU is not binding until duly authorized by definitive agreements to be executed by both the parties

12 and the fact that ultimately the transfer of shares took place on the same terms which are contained in MoU. It has also been pointed out that the deed of partnership does not contain any clause by which 13 partners were to bring in their shareholding in NCCPL as capital contribution of the firm. 7. It is further submitted that Mr.V.Vikram Reddy and Mr.V.Vikram Reddy (HUF) in the course of assessment proceedings in answer to question No.5 has submitted that there was transaction in respect of shares in NCCPL prior to transaction with Godrej Beverages and Foods Ltd. and has further stated that whatever shares they were holding in NCCPL were directly transferred to Godrej Beverages and Foods Ltd. In the year 2006-07. Therefore, the individuals have sold the shares held by them in NCCPL to Godrej Beverages and Foods Ltd. It is further contended that against the order passed by the Income Tax Appellate Tribunal, Chennai dated 31.04.2004 the revenue has

13 preferred an appeal before High Court of Madras, which is pending. It is contended that there were no transactions in books of accounts of BVRE except book entries with a view to give transaction the colour that NCAPL has taken over BVRE. Even in NCSPL there were no financial transactions except the book entries and the assessee and his family members were allotted the shares in NCSPL in proportion to their capital. It is also urged that entire series of transaction is only a colorable device to evade the tax, which is evident from the fact that assessee and his family members had entered into MoU with Godrej Beverages and Foods Ltd. on 29.03.2006 as mentioned in share purchase agreement between NCCPL and Godrej Beverages and Foods Ltd. Dated 10.06.2006. The family members signed the share purchase agreement as confirming parties but para 11.11 contains non compete clause. It is also urged that the tribunal without appreciating the facts of the case has deleted addition of a sum of Rs.1,77,778/- and

14 the Assessing Authority and the Commissioner of Income Tax (Appeals) have rightly held that the assessee had failed to appreciate the advance received from Nestle was returned and as such, it was income of the assessee. In support of aforesaid submissions, reliance has been placed on decisions in SUNIL SIDDHARTHBHAI VS. CIT, 156 ITR 509 (SC), WORKMEN OF ASSOCIATED RUBBER INDSUTRY LTD. VS. ASSOCIATED RUBBER INDSUTRY LTD AND ANOTHER, 157 ITR 77 (SC) AND KILLICK NIXON LTD VS. DCIT, (2012) 81 CCH 0066 MUM HC. 8. On the other hand, learned counsel for the assessee submitted that transfer of shares by the assessee in favour of the firm viz., BVRE during the previous year relevant to Assessment Year 2006-07 is accepted by the revenue and is assessed to tax which is not disputed by the revenue. It is also submitted that revenue has brought to tax gains arising out of sale of

15 shares of NCCPL to Godrej Beverages and Foods Ltd. Both in the hands of assessee (individual / HUF) as well as in the hands of B.V.R.E.P.L. and the revenue has not disputed the existence of B.V.R.E.P.L or its genuineness. Therefore, the aforesaid issue has reached finality. It is also submitted that it is open to the assessee to mitigate its tax burden instead of adopting a particular mode of carrying out a transaction, he adopts another mode whereby transaction is carried out as desired but with a lesser tax burden. It is also contended that the assessee has not contravened any statutory provision and has adopted tax planning which is within four corners of law and the transaction is neither sham nor unreal. It is pointed out that after noticing the loophole that by Finance Act, 2012, Clause (xiii) in Sub Clause (3) of Section 49(1) with effect from 01.04.1999 has been inserted and as per the aforesaid clause, the cost of acquisition of capital asset has to be reckoned from the date of computing capital gains when a transfer of

16 capital gains take place in the manner referred to in Clause (xiii) of Section 47 of the Act. It is also pointed out that during the previous year relevant to Assessment Year 2007-08, there is no transfer of shares by the assessee (individual / HUF) in favour of Godrej Beverages and Foods Ltd. It is also submitted that the matter stands concluded against the revenue by finding of fact and no substantial question of law arises for consideration in this appeal. In support of aforesaid submissions, reliance has been placed on decisions in COMMISSIONER OF INCOME-TAX VS. WALFORT SHARE AND STOCK BROKERS P. LTD., (2010) 326 ITR 1 (SC), UNION OF INDIA AND ANOTHER VS. AZADI BACHAO ANDOLAN AND ANOTHER, 263 ITR 706 (SC), STATE OF KARNATAKA VS. VIDEOCON INTERNATIONAL LTD., STRP NO.4/2000 DATED 14.07.2010. 9. We have considered the submissions made by learned counsel for the parties and have perused the

17 record. Before proceeding further, it is apt to take note of statutory provisions viz., relevant extract of Section 2(47), 45(3), and relevant extracts of 47(xiii) Section 48 and 49(1)(e) read as under: (47) "transfer", in relation to a capital asset, includes,— (i) the sale, exchange or relinquishment of the asset ; or (ii) the extinguishment of any rights therein ; or 45 Capital Gains. (3) The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co- operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be

18 deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. 47. Nothing contained in section 45 shall apply to the following transfers :— (xiii) any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, or any transfer of a capital asset to a company in the course of demutualisation or corporatisation of a recognised stock exchange in India as a result of which an association of persons or body of individuals is succeeded by such company : 48. The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :— (i) expenditure incurred wholly and exclusively in connection with such transfer;

19 (ii) the cost of acquisition of the asset and the cost of any improvement thereto: 49. (1) Where the capital asset became the property of the assessee— (e) under any such transfer as is referred to in clause (iv) or clause (v) or clause (vi) or clause (via) or clause (viaa) or clause (viab) or clause (vib) or clause (vic) or clause (vica) or clause (vicb) or clause (vicc) or clause (xiii) or clause (xiiib) or clause (xiv) of section 47 ….. The cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. 10. After having noticed relevant statutory provisions, we may advert to the legal principles. The Supreme Court in AZADI BACHAO ANDOLAN supra held that an act which is otherwise valid in law cannot be treated as non est merely on the basis of some

20 underlying motive supposedly resulting in some economic detriment or prejudice to the national interest. The aforesaid view has quoted with approval in WALFORT SHARE AND STOCK BROKERS P. LTD supra. Thereafter, a division bench of this court in M/s Videocon Iternational Ltd. Supra by taking into account the law laid down by the Supreme Court in AZADI BACHAO ANDOLAN supra held that as long as arrangement of the assessee to avoid payment of tax do not contravene any statutory provision and the same is within four corners of law it cannot be found fault with.

21 had filed the return for the Assessment Year 2006-07, which has been accepted on 30.10.2006 and the Assessing Officer while assessing the assessee for Assessment Year 2007-08 has no jurisdiction to record a finding that the firm was not in existence or the same was defunct. It is pertinent to note that the aforesaid finding cannot be sustained in the eye of law without putting the firm BVRE to notice before recording such conclusion against the firm. Thus, the existence of the firm BVRE has been accepted as genuine, legal and valid. From the material on record as well as para 81 of the order passed by the tribunal, it is evident that there was transfer of ownership in shares from 13 individuals in favour of firm BVRE as on 24.03.2006 when the firm made necessary book entries and when the partners made their intentions clear that shares were to be treated as property of the firm in the form of resolution. There is nothing on record to suggest that real intention of the parties was to treat the assessee as owner of the

22 shares even after transfer of the shares to the firm. The course adopted by the assessee for transfer of shares does not disclose any violation of the provision of law. There were two ways in which the shares of NCCPL held by 13 partners of BVRE to be transferred to Godrej Beverages and Foods Ltd., firstly, that 13 partners in their individual capacity could transfer the shares to NCCPL held by them to Godrej Beverages and Foods Ltd. at a price the shares were ultimately sold to Godrej Beverages and Foods Ltd. through NCSPL and secondly, the manner in which the assesses have transferred the shares through medium of the firm BVRE. The later course would definitely result in lesser tax burden to the assessee but the aforesaid course is permissible in law. It is pertinent to note that there was a lacuna in law which has been addressed by Finance Act, 2012 by introducing clause (xiii) to sub clause(e) of Section 49(1) with effect from 01.04.1999. Before the aforesaid amendment, the assessment was complete. It is also

23 pertinent to mention that during the previous year relevant to Assessment Year 2007-08, there is no transfer of shares by the assessee (individual /HUF) in favour of Godrej Beverages and Foods Ltd. The tribunal on the basis of meticulous appreciation of evidence on record has recorded a conclusion in favour of the assessee in para 84 of the order. In our considered view, the aforesaid finding which is a finding of fact can be termed as perverse. It is the cardinal principle of law that tribunal is fact finding authority and a decision on facts on the tribunal can be gone into by the High Court only if a question has been referred to it, which says the finding of the tribunal is perverse.[SEE: ‘SUDARSHAN SILKS & SAREES VS. CIT’, 300 ITR 205 SCC @ 211 and ‘MANGALORE GANESH BEEDI WORKS VS. CIT’, 378 ITR 640 (SC) @ 648]. Therefore, the substantial questions of law 1 to 4 are answered against the revenue and in favour of the assessee.

24 12. Now we may advert to the fifth substantial question of law. The tribunal para 92 of its order has held that the Assessing Officer has not invoked any specific provision of law for making the addition of Rs.1,77,778/-. The Commissioner of Income Tax (Appeals) has sustained the addition by resorting tyo Section 41(1) of the Act. It has been held by the tribunal that for invoking the aforesaid provision there should be benefit to the assessee by way of remission or cessation of liability and there is no evidence on record to show that assessee has received any benefit by way of remission or cessation of liability and therefore, addition under Section 41(1) of the Act cannot be made on assumptions and presumptions. Therefore, in the fact situation of the case the provision of Section 41(1) of the Act are not attracted. Therefore, the addition of Rs.1,77,778/- has been deleted. The aforesaid finding is based on proper appreciation of the material available on record. The aforesaid finding cannot be termed to be

25 perverse. In the result, the fifth substantial question of law is also answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE ss