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The Tax Publishers ITO v. V. Indira [I.T.A. Nos. 786 & 787/Hyd/2015, dt. 13-5-2016] : 2016 TaxPub(DT) 2452 (Hyd-Trib) Capital gains on imputing shareholding into an existing firm and then revaluation of firm and then conversion into a company and subsequent sale to a third party--Whether colorable transaction *Facts:* Assessee was one of the family members of the BV Reddy group the owners of the then Nutrine confectionary. There was a company called Nutrine Confectionery Company Pvt. Ltd. (NCCPL) in which the assessee was a shareholder. A family firm was also existent called BV Reddy Enterprises. The shareholders of NCCPL imputed/sold their shares as their capital contribution to the firm and offered the surplus to capital gains. Subsequently the firm revalued the said capital contributions to 270 crores. Subsequently the firm got converted into a company called Nutrine Confectionery Sweets Pvt. Ltd. (NCSPL). This NCSPL then sold their holding to Godrej Food and Beverages (GBFL) for 265 crores. Thus there was a capital loss. Subsequently NCSPL changed its name to BV Reddy Enterprises Pvt. Ltd. (BVREPL). It was noticed by the assessing officer in the process of the above transaction the assessee also a family member had offered only a small portion of the actual capital gain i.e the transfer of shares to the firm by way of share capital (the rest of the amounts arose by way of revaluation) thus held the whole transaction to be a colourable one thus computed the fair market value of the shares and then taxed (the revalued part) the notional capital gain as well. On further appeal - the Commissioner (Appeals) following similar ITAT decisions of Bangalore/Chennai ITAT on other family members cases and of that of the firm held it to be not of a colourable transaction as what was done was actually permitted by law and fell in the scope of section 47(xiii) of conversion of firm into a company as well with its conditions being met. It was also found that the revaluation was done based on the actual market offers from Actis capital (a PE investor) to bring the value of the firms capital in line with market value prior to sale. One of the ITAT orders also made reference that the firm itself was a wrong constitution comprising of more than 20 partners with HUF being partners in the same. Thus the HUF members were double counted in the process. This was also clarified in the ITAT order of Chennai. On further appeal by the department against the order of the Commissioner (Appeals): Held in favour of the assessee that there was no capital gain further to be taxed and the transaction was not colourable and additions made by the assessing officer was not sustainable.

The Tax Publishers

ITO v. V. Indira [I.T.A. Nos. 786 & 787/Hyd/2015, dt. 13-5-2016] : 2016 TaxPub(DT) 2452 (Hyd-Trib)

Capital gains on imputing shareholding into an existing firm and then revaluation of firm and then conversion into a company and subsequent sale to a third party--Whether colorable transaction

Facts:

Assessee was one of the family members of the BV Reddy group the owners of the then Nutrine confectionary. There was a company called Nutrine Confectionery Company Pvt. Ltd. (NCCPL) in which the assessee was a shareholder. A family firm was also existent called BV Reddy Enterprises. The shareholders of NCCPL imputed/sold their shares as their capital contribution to the firm and offered the surplus to capital gains. Subsequently the firm revalued the said capital contributions to 270 crores. Subsequently the firm got converted into a company called Nutrine Confectionery Sweets Pvt. Ltd. (NCSPL). This NCSPL then sold their holding to Godrej Food and Beverages (GBFL) for 265 crores. Thus there was a capital loss. Subsequently NCSPL changed its name to BV Reddy Enterprises Pvt. Ltd. (BVREPL). It was noticed by the assessing officer in the process of the above transaction the assessee also a family member had offered only a small portion of the actual capital gain i.e the transfer of shares to the firm by way of share capital (the rest of the amounts arose by way of revaluation) thus held the whole transaction to be a colourable one thus computed the fair market value of the shares and then taxed (the revalued part) the notional capital gain as well. On further appeal - the Commissioner (Appeals) following similar ITAT decisions of Bangalore/Chennai ITAT on other family members cases and of that of the firm held it to be not of a colourable transaction as what was done was actually permitted by law and fell in the scope of section 47(xiii) of conversion of firm into a company as well with its conditions being met. It was also found that the revaluation was done based on the actual market offers from Actis capital (a PE investor) to bring the value of the firms capital in line with market value prior to sale. One of the ITAT orders also made reference that the firm itself was a wrong constitution comprising of more than 20 partners with HUF being partners in the same. Thus the HUF members were double counted in the process. This was also clarified in the ITAT order of Chennai. On further appeal by the department against the order of the Commissioner (Appeals):

Held in favour of the assessee that there was no capital gain further to be taxed and the transaction was not colourable and additions made by the assessing officer was not sustainable.