The Assessee was a partnership firm belonging to Shriram Group and held 100% shares in a group company Novus. Piramal Enterprises Ltd decided to acquire 20% stake in group company Shriram Capital Ltd (‘SCL’). However, since SCL could not allot shares to outsider directly due to restrictions from private equity investors, it decided to do so by joining assessee as a partner and infusing capital which was partly kept in capital reserve. The said money was utilized to make investment in the shares of Novus who inturn invested in shares of SCL and later got merged with SCL. As a result, SCL allotted shares to assessee.

The AO held that Shriram group as a whole should have paid tax on the consideration received and the entire transaction was devised in order to avoid the tax liability and the same should be taxable under section 56(1) or section 56(2)(viia) of the Act.

On assesses appeal the Ld. CIT(A) deleted the addition by holding that the capital reserves are created from capital receipts meant for capital investments and/or large anticipated expenses. As there was no income, section 56(1) is not applicable. The process adopted in assesses case was strategic and systematic investment by one industrial group in another group to synergise their mutual strengths and no colourable devise/tax planning was done.

The Hon’ble Tribunal held that assessee firm even though had acted as an intermediate entity, it could not be construed as a conduit between the group companies and the whole transactions were to be understood in a holistic manner and could not be construed as a colorable device or a sham transaction. Accordingly, Hon’ble Tribunal held that the transaction was capital in nature and no addition under section 56(1) can be made. Further, since it is not the case of the AO that the money received is without any consideration or inadequate consideration, addition under section 56(2)(viia) could not be made.  (AY. 2014-15, 2015-16)