Nelakuditi Hari Krishan vs Vijaya Gayathri Cold Storage Pvt. Ltd. & ...

[Arising out of Order dated 3rd July, 2018 passed by the National Company Law Tribunal, Hyderabad Bench, Hyderabad in CP No. 188/241/HDB/2017]

IN THE MATTER OF:

Nelakuditi Hari Krishna, S/o Late Nageshwara Rao, R/o D. No. 6-61, Rythupeta, Nandigama Village and Mandal, Krishna District.

...Appellant

Vs

1. Sri Vijaya Gayathri Cold Storage Pvt. Ltd., R/o D. No. 6-62, Rythupeta, Nandigama Village and Mandal, Krishna District, Pin-521185, Andhra Pradesh. Rep. By its Director Nelakuditi Tirupataiah.

2. Nelakuditi Tirupataiah S/o Kasaiah, R/o D. No. 6-62, Rythupeta, Nandigama Village and Mandal, Krishna District, Andhra Pradesh. -2-

3. Nelakuditi Kasi Visivisweswara Rao, S/o Nelakuditi Tirupataiah, R/o D. No. 6-62, Rythupeta, Nandigama Village and Mandal, Krishna District, Andhra Pradesh.

4. Nelakuditi Subhadra, W/o Nelakuditi Tirupataiah, R/o D. No. 6-62, Rythupeta, Nandigama Village and Mandal, Krishna District, Andhra Pradesh.

5. Nelakuditi Rajyalakshmi, W/o Kasi Visivisweswara Rao, R/o D. No. 6-62, Rythupeta, Nandigama Village and Mandal, Krishna District, Andhra Pradesh.

....Respondents

Present:

For Appellant: Mr. Mithun Shashank and Mr. M. V. Mukunda, Advocates.

For Respondents: Mr. P. Nagesh and Mr. Dhruv Gupta, Advocates

Company Appeal (AT) No. 331 of 2018 -3-

BANSI LAL BHAT, J.

Appellant - 'Nelakuditi Hari Krishna' - a shareholder of 'Sri Vijaya

Gayathri Cold Storage Pvt. Ltd.' (Respondent No.1) filed petition under

Section 241-242 of the Companies Act, 2013 (hereinafter referred to as the

'Act') before National Company Law Tribunal, Hyderabad Bench, Hyderabad

(hereinafter referred to as the 'Tribunal') alleging fraud at the hands of

Respondents 2 to 5 in reducing the share capital of Appellant to deprive him

from claiming Directorship in Respondent No. 1 Company, seeking

proportionate shareholdings, directorship and proportionate profits in the

Respondent No. 1 Company and directing the Registrar of Companies to

conduct enquiry into the affairs of Respondent No. 1. After considering the

pleadings of the parties and arguments advanced on their behalf the

Tribunal found that the Appellant had agreed for the transfer of firm to

Respondent No. 1 and since he was only entitled to 100 shares based upon

the value of the assets and liabilities of the transferor firm, allotment of 100

shares in his favour did not constitute an act of oppression or

mismanagement. The Tribunal was of the further view that there was no act

of oppression or mismanagement that led to the diminishing of shares of the

Appellant in the Respondent No. 1. It also held that the Appellant was not

single handedly eligible to file the petition under Section 241 of the Act when

the number of members was twelve and the shareholding of Appellant was

Company Appeal (AT) No. 331 of 2018 -4-

less than 10 percent. The petition filed by Appellant came to be dismissed

at the hands of the Tribunal in terms of order dated 3rd July, 2018 which

has been impugned in this appeal on various grounds to which we shall

advert to in the forthcoming paras.

2. A brief resume of the factual matrix is inevitable. The genesis of

business relationship between the father (since deceased) of Appellant

namely 'Nageshwara Rao' and the Respondent No. 2 namely 'Nelakuditi

Tirupataiah' can be traced back to year 2007 when a firm in the name and

style of 'Sri Gayathri Cold Storages' came to be registered wherein the

Appellant was a partner with a holding of 23%. 'Nageshwara Rao' died in

the year 2008. Allegedly Respondent No. 2 assumed complete control of the

firm when the Appellant was a teenager. It was alleged that in year 2014,

Respondent No. 2 alongwith his wife and other family members incorporated

a company in the name of 'Sri Vijaya Gayathri Cold Storage Pvt. Ltd.', whose

objects were similar and identical with the objects of 'Sri Gayathri Cold

Storages'. The assets of the firm were taken over by the Respondent No. 1

Company in terms of resolution dated 24th November, 2014 allegedly passed

by Respondent No. 2 to 5 with fraudulent intention. The Appellant claims to

have no knowledge about the resolution, nor was a party to the meeting and

did not sign the resolution. He further alleged that at the time of takeover

the firm was valued at Rs.1.10 Crore. FIR No.353 of 2017 alleging

commission of offence under Section 420 and 465 of IPC came to be

registered at Nandigama Police Station, Krishna District in Andhra Pradesh

Company Appeal (AT) No. 331 of 2018 -5-

at the instance of Appellant. A takeover agreement dated 26th December,

2014 was entered into between the firm and Respondent No.1 in terms

whereof the firm was dissolved and merged into Respondent No.1.

Respondent No. 1 allotted 11,00,000 shares to all partners of the erstwhile

firm. According to Appellant the allotment of shares was not proportionate

to the holding of shares in the partnership firm which is demonstrated as

under:-

Holding in Shares allotted Partner in the firm the firm in the company

N. Subadhra 27% 5,86,686 P. Jaganmohan Rao 23% 100 N. Rajya Lakshmi 27% 5,13,114 N. Hari Krishna 23% 100

Total 11,00,000

According to Appellant, Respondents 2 to 5 purposely allotted bare

minimum shares to Appellant so as to reduce him to the status of a minority

shareholder so as to deprive him of any role in the management of the

Company. This was assailed by the Appellant through a petition filed under

Section 241-242 before the Tribunal at Hyderabad which came to be

dismissed in terms of order impugned in this appeal.

3. Heard learned counsel for the parties and perused the record.

Resolution dated 24th November, 2014 passed in regard to takeover of the

Company Appeal (AT) No. 331 of 2018 -6-

firm by the Respondent No. 1 Company, though claimed by the Appellant at

his back and not bearing his signatures was admittedly followed by a

'Takeover Agreement' dated 26th December, 2014 between the firm and

Respondent No. 1 Company by virtue whereof the firm was dissolved.

Though the Appellant termed the resolution dated 24th November, 2014 as

being fraudulent in respect whereof an FIR was lodged alleging cheating and

forgery, the 'Takeover Agreement' following the resolution has not been

assailed. The Tribunal, after thorough examination of all relevant

considerations arrived at the conclusion that the Appellant had agreed for

the transfer of business of the firm to Respondent No. 1 Company. This

finding is not shown to be erroneous, much less perverse. During the

course of hearing learned counsel for Appellant frankly conceded that he

was not assailing the 'Takeover Agreement'. In view of this development, we

do not propose to pronounce upon the factum and validity of the 'Takeover

Agreement', which led to dissolution of the firm and incorporation of

Respondent No. 1 Company. Thus the sole grievance of the Appellant

requiring consideration is whether the Appellant is entitled to allotment of

23% shareholding in Respondent No. 1 Company as admittedly in the

Partnership Deed dated 25th July, 2007 profit sharing ratio of Appellant in

the dissolved firm was 23%. The issue for consideration is whether profit

sharing ratio can be the basis for allotment of shares in the transferee

company viz. Respondent No. 1.

Company Appeal (AT) No. 331 of 2018 -7-

4. The 'Takeover Agreement' dated 26th December, 2014 admittedly

executed inter-se the firm and Respondent No. 1 Company reflects the

names of the partners of the erstwhile firm with their profit/ loss sharing

ratio as well as capital balance as under:-

Profit/loss Capital Balance Sl.

Partner Address Sharing as on 10.12.2014 No. Ratio (Amt. in Rs.) 6-29, 1. N Subadhra Raithupeta, 0.27 58,66.860 Nandigama 59a-8/12-3/1, P Jaganmohana Vasavi Nagar, 2. 0.23 1,000 Rao Patamata, Vijayawada 6-29, 3. N Rajaya Lakshmi Raithupeta, 0.27 51,31,140 Nandigama 6-61, 4. N Hari Krishna Raithupeta, 0.23 1,000 Nandigama Total 1.00 1,10,00,000

Consideration for the takeover has been stated as Rs.1,10,00,000/-.

The Takeover Agreement mentioned that the Respondent No. 1 Company

shall allot 11 Lakh equity shares of Rs.10 each to the partners of the

erstwhile firm i.e. the transferor firm in the same proportion in which their

capital accounts stood in the books of the firm on the cut of date. The

resolution dated 24th November, 2014 preceding the Takeover Agreement is

said to have approved the Draft Takeover Agreement but such Draft

Takeover Agreement is not forthcoming from record. Valuation of the

business of the firm is said to have been carried out by the Chartered

Company Appeal (AT) No. 331 of 2018 -8-

Accountant, based whereon the value of the business of the firm was fixed

on Rs.1,10,00,000/-. It is not denied that the Takeover Agreement, not

called in question by the Appellant, is signed by the Managing Partner of the

firm. The shares in Respondent No. 1 Company are stated to have been

allotted on the basis of valuation fixed by the Chartered Accountant as on

16th December, 2014. Appellant has not assailed the certificate of the

Chartered Accountant. In absence of any challenge to such valuation

assessment, the valuation of the assets and liabilities of the firm as assessed

by the Chartered Accountant has to be accepted. The question arising for

consideration in regard to allotment of shares in Respondent No. 1 Company

would be whether the book value of the assets and liabilities of the firm or

the sharing of profit/ loss ratio as per the Partnership Deed would be the

relevant consideration.

5. It is not in controversy that the Takeover Agreement stipulated its

main object behind takeover for developing the business of the transferor

firm drawing the business of transferor firm under the umbrella of a private

limited company. As per Terms of Agreement book value of Rs.10 each i.e.

11,00,000 equity shares were to be allotted to the partners of the firm in

proportion to their capital balance in the firm. Since, the Appellant held

only 0.01% of the capital ratio he was allotted only 100 shares in

Respondent No. 1 Company. Ex-facie this allocation of shares is based on

the capital balance ratio as stipulated in the Takeover Agreement. It is

indisputable that the capital ratio is the basis for the allocation of the equity

Company Appeal (AT) No. 331 of 2018 -9-

shares in the Respondent No. 1 Company. According to Appellant there is

nothing on record to show the Appellant had contributed only 0.01% of the

capital to the firm. This is countered by the Respondents, who bank upon

the admission of Appellant in this regard. It has already been noticed that

the Appellant has not assailed the Takeover Agreement. Therefore, he

cannot be heard to say that he is relying upon the Takeover Agreement only

to the extent of it being a proof of agreement inter-se the parties for takeover

of business of the firm by a private limited company. The Appellant cannot

be permitted to aprobate and reprobate. The Takeover Agreement forming

part of the record is the primary evidence of its recitations, stipulations and

terms. No stand or evidence supporting such stand contrary to the

stipulations of the Takeover Agreement is admissible or of any value.

6. It is submitted on behalf of Respondents that the Respondent No. 1

Company took over the firm as a going concern in the interest of the

Company to save it from the liability of capital gains after complying with

the conditions laid down in Section 47(xiii) of the Income Tax Act, 1961, one

of which postulated that the partners of the firm immediately before the

succession become the shareholders of the Company in the same proportion

in which their capital accounts stood in the books of the firm on the date of

succession and their shareholding continues to be as such for a period of

five years from the date of succession. To appreciate this argument it is

necessary to refer to the relevant provisions of Income Tax Act, 1961 to the

extent same are relevant for our purposes.

Company Appeal (AT) No. 331 of 2018 -10-

"Capital Gains

45. (1) Any profits or gains arising from the transfer of a

capital asset effected in the previous year shall, save as

otherwise provided in sections 54, 54B, 54D, 54E, 54EA,

54EB, 54F, 54G and 54H, be chargeable to income-tax

under the head "Capital gains", and shall be deemed to be

the income of the previous year in which the transfer took

place."

However, all transactions falling within the ambit of Section 45 are not

regarded as transfers. Section 47 carves out exceptions to such

transactions which are not regarded as transfers. It provides as under:-

"Transactions not regarded as transfer:-

47. Nothing contained in section 45 shall apply to the

following transfers:--

x....x....x....x

(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 Appeal (AT) No. 331 of 2018 -11-

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 :

Provided that--

(a) all the assets and liabilities of the firm or of the

association of persons or body of individuals

relating to the business immediately before the

succession become the assets and liabilities of

the company;

(b) all the partners of the firm immediately before

the succession become the shareholders of the

company in the same proportion in which their

capital accounts stood in the books of the firm on

the date of the succession;

(c) the partners of the firm do not receive any

consideration or benefit, directly or indirectly, in

any form or manner, other than by way of

allotment of shares in the company; and

Company Appeal (AT) No. 331 of 2018 -12-

(d) the aggregate of the shareholding in the

company of the partners of the firm is not less

than fifty per cent of the total voting power in the

company and their shareholding continues to be

as such for a period of five years from the date of

the succession;

(e) the demutualisation or corporatisation of a

recognised stock exchange in India is carried out

in accordance with a scheme for demutualisation

or corporatisation which is approved by the

Securities and Exchange Board of India

established under section 3 of the Securities and

Exchange Board of India Act, 1992 (15 of 1992);"

From the aforesaid provisions it is clear that the gains arising from the

transfer of a capital asset effected in the previous year, subject to exceptions,

are deemed to be the income of the previous year and chargeable to income

tax under the head 'Capital Gains'. However, transfer of capital assets

falling within the clauses enumerated under Section 47 including 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 carrying on the same business as the

firm would be exempted from being chargeable to income tax under the head

'Capital Gains' as such transactions are not regarded as transfer of a capital

Company Appeal (AT) No. 331 of 2018 -13-

asset within the meaning of Section 45. Clause (xiii) of Section 47 clearly

provides that the exemption clause will come into play provided all the

assets and liabilities of the firm relating to business immediately before its

succession become the assets and liabilities of the Company and all partners

of the firm immediately before the succession become the shareholders of the

Company in the same proportion in which their capital accounts stood in the

books of the firm on the date of the succession. This is apart from the fact

that the partners of the firm do not receive any consideration or benefit other

than by way of allotment of shares. In the instant case since the Takeover

Agreement is not the subject of challenge, therefore for purposes of deriving

advantage under Section 47(xiii) of the Income Tax Act, 1961, if the partners

of the firm have agreed to allotment of shares in proportion to the capital

account, same cannot be regarded as causing prejudice to the Appellant as a

member of the successor company viz. Respondent No. 1 when it is not

denied that the Respondent No. 1 Company has succeeded the erstwhile firm

in the business carried on by the firm with all partners of the firm becoming

shareholders in the company proportionate to their capital account as per

books of the firm on the date of succession. Appellant has not been able to

demonstrate that his capital holding in the firm was different than the one

reflected in the books and that there was a basis for allotment of share in

Respondent No.1 proportionate to the profit sharing ratio of the partner in

the firm. Appellant does not appear to have questioned the allotment of 100

shares to him for about two and a half years. This is apart from the fact that

the Appellant holding only 0.009% shareholding and being the only

Company Appeal (AT) No. 331 of 2018 -14-

aggrieved member out of 12 was ineligible to file petition under Section 241

of the Companies Act, 2013. Admittedly, no waiver has been sought and

obtained from the Tribunal for filing the petition. In these circumstances,

the Appellant cannot be heard to say that the acts complained of constituted

oppression and any prejudice was caused to him.

7. Having considered the matter from all perspectives, we are of the

considered opinion that the impugned order is a reasoned one and does not

suffer from any legal infirmity. There being no merit in this appeal, the same

is dismissed. However, there shall be no orders as to costs.

[Justice Bansi Lal Bhat] Member (Judicial)

[Balvinder Singh] Member (Technical)

NEW DELHI

3rd July, 2019

AM

Company Appeal (AT) No. 331 of 2018