TaxTMI 
TaxTMI 
2007 (4) TMI 282
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....rned CIT(A) erred in placing undue reliance on the return of income filed by the assessee before the search action under section 132 for the assessment year 1998-99 wherein the conversion of shares from stock-in-trade into investments had been disclosed in the balance sheet and in holding that the conversion had been accepted by the Assessing Officer in the assessment for the said assessment year. 3. On the facts and circumstances of the case and in law, the learned CIT(A) erred in placing undue reliance on the findings of the assessment orders under section 143(3) for the assessment year 1998-99, while deciding on the Block Assessment order under section 158BC in this case, thereby, applying the principles of res judicata to Income-tax Proceedings. 4. On the facts and circumstances of the case and in law, the learned CIT(A) erred in not appreciating that the special procedure for assessment of search cases under Chapter XIV-B has an overriding effect over the regular assessment governed by Chapter XIV of the Income-tax Act. 5. On the facts and circumstances of the case and in law, the learned CIT(A) erred in not appreciating that the Block Assessment order had taken into ....
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....ucting the remarks of the Division Bench of the Hon'ble Bombay High Court that the ruling of the Bench is confined only to the issue of applicability of section 281 of the Income-tax Act thereby, completely overlooking "findings of the fact" enumerated by the Hon'ble Bombay High Court in the case of Twinstar Holdings Ltd. v. Anand Kedia 260 ITR 25 which in fact is the finding of the Hon'ble Division Bench. 13A. On the facts and circumstances of the case and in law, the learned CIT(A) erred in not taking cognizance of facts as well as point of law which had been determined by the Hon'ble Division Bench in the aforesaid order wherein, the Hon'ble Bench has held that the ratio of the judgment of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1984] 154 ITR 148 would apply to the facts and circumstances of the case. 13B. On the facts and circumstances of the case and in law, the learned CIT(A) erred in not considering the observations of the Hon'ble High Court which were material facts, and should have been taken into account while deciding the issue. 14. The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the Assessing Offic....
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....4-1999, hold a board meeting of the company for giving intention of the winding of the business of the company on 17-4-1999, hold annual general meeting to pass special resolution for voluntary winding on 29-4-1999, Liquidator to file a notice of office appointment to the Income-tax Officer of the company within 30 days of the appointment and obtain clearance under section 170 of Income-tax Act, by 3-5-1999, to obtain RBI approval for liquidation by 30-6-1999. These documents comprised of pages 15 to 22 of the loose papers file Marked A-1, pages 1 to 40 of the same loose papers filed were a copy of presentation made by RSM and Co. on March 23, 1999 on the same issue. 5. According to the Assessing Officer pages 28 to 30 of loose-paper file Marked A-2 seized from Tulsiani Chambers was a fax dated 10-11-1998 sent by RSM and Co. to Shri Rajnish of Sterlite Group in relation to liquidation process of the three investment companies. The fax stated that TSHL had invested 99 per cent of the share capital of the three investment companies under the 24 per cent investment scheme. The balance investment in the investment companies was held by TSHL on non-repatriable basis. The three invest....
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.... the meaning of section 2(14) of the Act. Therefore, conversion into capital assets was required. However, in some of the opinions the assessees were cautioned that the judgment in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) could apply and the transaction may be disregarded as being part of tax evasion. 6. Page 30 of the file was letter dated 29-9-1988 from Shri Patodia, CA and auditor of One of the investment company SCRM to Shri Gautam Doshi of RSM & Co. It was discussed that if dividend income was taken as exempt under section 10 of the Income-tax Act, there would be huge loss in the investment company and that may attract attention of Income-tax Authorities. Therefore it would be advisable to artificially bring the loss figure in thousands to escape attention. The Assessing Officer has reproduced the entire letter in paragraph 4.4-2 of the block assessment order. Page 28 of the file once again comprised the note on merger/dissolution. 7. We have thus briefly enumerated the seized material that has been relied upon in the block assessment order. The same has been discussed at greater length in para 4 of the block assessment order. Based on the seized ma....
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....ssessing Officer nor did it file certain details asked for by the Assessing Officer. In the block assessment order the learned Assessing Officer had alleged that the assessee did not avail of the opportunity of being heard granted by the show-cause notice. In the light of overwhelming evidence of the dubious method of tax avoidance adopted by the assessee-company it was a fit case for lifting of corporate veil. The courts had time and again held that tax avoidance devices should be rejected while applying the provisions of taxation. For that purpose the learned Assessing Officer strongly relied upon the following judgments: (a) McDowell & Co. Ltd v. CTO [1985] 154 ITR 148 (SC), (b) Union of India v. Playworld Electronics (P.) Ltd. [1990] 184 ITR 308 (SC), (c) Juggilal Kamlapat v. CIT [1969] 73 ITR 702 (SC), (d) CIT v. Durga Prasad More [1971] 82 ITR 540 (SC). 9. The Assessing Officer contended that voluntary liquidation proceedings initiated in the case of the assessee was only with a purpose to transfer the shares to TSHL at cost and with a view to evade tax. The Hon'ble Supreme Court in the case of A.L.A. Firm had held that valuation of stock-in-trade in the case o....
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....undisclosed income of the block period at Rs. 53,13,99,700. 9A. The assessee preferred appeal before the learned CIT(A). The Assessing Officer made a remand report to the learned CIT(A) wherein reference was made to Hon'ble Bombay High Court dismissal of the writ petition filed by TSHL. The Assessing Officer made reference to Accounting standards also. It was stated that the computation of the undisclosed income at Rs. 32.67 crores was erroneous since that amount was the difference between the market value and the book value of the shares and warrants as on 31-3-1999. The liquidation proceedings commenced only on 29-4-1999. The Assessing Officer argued that the transfer of the shares held by the assessee-company to TSHL took place within the block period ended on 8-12-1999. For that purpose he relied on the fact that the dividend declared by SIIL on 30-10-1999 was paid to TSHL and not to the assessee-company. That was because shares had actually been transferred to the folio of TSHL and not held in the folio of the assessee-company. We shall advert to the judgment of the Hon'ble Jurisdictional High Court at more length subsequently in this order. 10. The assessee argued befor....
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....ates but a deadline by which the specified action was expected to be completed. The assessee argued that conversion of shares and liquidation of the company was no hidden fact. Thus there was no material/evidence found as a result of search. 11. The learned CIT(A) held that the evidence found as a result of search clearly indicated to the Assessing Officer that the primary purpose of the conversion of shares held by the assessee from stock-in-trade into investment was not to reflect the correct position of shares but to save tax. That, the Assessing Officer would not have come to know but for the search. The nature of the material found in the course of search could not be said to have been disclosed by the assessee to the department. Had there been no search the same could not have come to the notice of the department as that material was not meant to be disclosed. Some of the seized material showed that there was planning devised on certain issues to avoid detection by the department. Documents found during the course of search did require the Assessing Officer to probe into the affairs of the assessee. The learned CIT(A), therefore, rejected the contention of the assessee tha....
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....f the assessee and the conduct that determined the nature of holding. The conversion of shares as investment as on 31-3-1998 merely reflected true nature of the holdings. The assessee argued that as the shares had been held by the assessee not as stock-in-trade but as investment, the transfer of those shares was governed by the provisions of section 46(1) of the Act. As per section 46(1), the transfer of a capital asset by a company to its shareholders on its liquidation would not be regarded as transfer by the company in liquidation. Thus, there was no tax liability on the assessee on distribution of the shares in specie to its shareholders on liquidation. The assessee argued that this contention was also supported by the judgment of the Hon'ble Bombay High Court on the writ petition filed by TSHL. The Hon'ble Bombay High Court upheld attachment of the shareholding of the assessee in recovery proceedings. If the shares had constituted stock-in-trade the provisions of section 281 could not be applied and the attachment could not be made. In the writ petition filed by TSHL this question was squarely before the Hon'ble Bombay High Court and the Hon'ble High Court gave a categorical f....
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....ry intention of the assessee was not to treat them as stock-in-trade retain them as long-term investments. The intention was finally translated into action by converting the stock-in-trade into investment on the last day of the accounting year for the assessment year 1998-99. After considering the observations and findings of the Assessing Officer in the assessment order for assessment year 1998-99 the learned CIT(A) observed as under: "The sum and substance of the findings recorded by the Assessing Officer in the body of the assessment order for assessment year 1998-99 is that despite the nomenclature of 'trading assets' or stock-in-trade given, these shares have never been held as trading stock and the block of Sterlite Industries (India) Ltd. shares and Madras Aluminium shares were never intended for the purposes of trading, but the real intention of the appellant was to hold the shares of the flagship companies of the group for acquiring control over management." The learned CIT(A) noted that in the case of the assessee search under section 132.was conducted on 8-12-1999. The aforesaid assessment order for the assessment year 1998-99 was made on 9-2-2001 and the block ass....
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.... findings were based on actual facts borne out in the assessee's record. The learned CIT(A) referred to the judgments in CIT v. Dalmia Dadri Cement Ltd. [1970] 77 ITR 410 (Punj. & Har.), Rusell Properties (P.) Ltd. v. A. Chowdhury, Addl. CIT[1977] 109 ITR 229 (Ca1.), CIT v. Hindustan Motors Ltd. [1991] 192 ITR 619 (Cal.), M.A. Namazie Endowment v. CIT [1988] 174 ITR 58 (Mad.), Taraben Ramanbhai Patel v. ITO [1995] 215 ITR 323 (Guj.) and Tax LR 258 (Ker.) and held that the treatment given by the assessee in the books of account for assessment years 1993-94 to 1998-99 was not the crux of the matter. Classification of the shareholdings as stock-in-trade was unreal and the assessee's record evidenced that the holdings were on investment account to acquire a controlling stake as spelt out vividly at page 10 of the assessment order. The learned CIT(A) thereafter recorded his finding in the following words: "In my considered opinion, in the light of the facts available on record as also the findings recorded in the assessment order under section 143(3) for assessment year 1998-99 passed before the impugned block assessment as also in view of what has been held in my appellate order in ....
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....this account the learned CIT(A) has nonetheless considered other contentions of the assessee. The next contention of the assessee was that the transfer of shares did not happen in the block period. The assessee contended before him that the shares were transferred to the Demat account of TSHL on 25/26-9-2000 and 20-2-2001. That being so the transfer of the shares to TSHL took place subsequent to the block assessment period ended on 8-12-1999. The assessee argued that this fact was supported by the judgment of the Hon'ble High Court on the writ Petition filed by the TSHL. At page 39 of the order, the Hon'ble High Court held that the shares were transferred on 16-2-2001 (the correct date being 20-2-2001). This finding of the Hon'ble High Court was binding on revenue. The assessee submitted that winding up of the company involved three stages; the first stage being Commencement of liquidation proceedings. At that stage, the directors ceased to have control and the assets of the company vest in the liquidator. The second stage was Process involving realisation etc. That process was simple if the distribution could be made "in specie", then realisation of assets and distribution of exce....
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....search was procedurally not sound, nothing turned on that. The fact of the matter was that the shares were factually transferred prior to the search and for income-tax proceedings if there was a transaction, in substance, that had to be acted upon. The learned CIT(A) held that the judgment of the Hon'ble Bombay High Court in the writ petition filed by TSHL was concerned only and exclusively with the question of the stay, for lifting the attachment of the shares under section 281 of the Act. The court had clarified in the body of their judgment on a number of occasions such as paragraph 7 and paragraph 17 of the judgment. It was more than clear that none of the issues involved in the block assessment order could be taken to have been pre-judged by the Hon'ble High Court on merits. The judgment was exclusively confined to the applicability of section 281 of the Act to the attachment of the shares. Hence neither the Assessing Officer nor the assessee was justified in drawing strength from the observations made in that judgment. The learned CIT(A) therefore held that the contention of the assessee that the transfer of shares had taken place after search was not acceptable. 17. Durin....
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....hat was transfer of trading assets as transfer of capital assets. The learned DR in particular emphasised the letter dated 29-9-1998 addressed by Shri R.K. Patodia, Auditor of Sterlite Group to Shri Gautam Doshi of RSM and Co. He argued that this letter revealed that there was ever willingness to falsify the facts. The learned DR then took us through the show-cause notice issued by the learned Assessing Officer and pointed out that the various queries raised by the Assessing Officer were not replied to by the assessee-company. The learned DR argued that there was no force in the argument of the assessee that there was no transfer of shares during the block assessment period. Large amount of dividend declared by SIIL and MALCO during the block period were directly paid to TSHL and not to the three investment companies, that showed that transfer of shareholdings from the assessee-company and other investment companies in favour of TSHL had already taken place prior to the date of search. The deemed profit made by the assessee-company on the date of such transfer within the ratio of Supreme Court judgment in the case of A.L.A. Firm came to the notice of the revenue during the course o....
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....ssolution and distribution of assets, but to no avail. The Hon'ble High Court noted that according to the Assessing Officer the distribution of assets had taken place before the commencement of search. The assessee's argument was that the transfer took place on 20-2-2001 and it was for that reason that the Hon'ble Court with a view to decide the assessee's writ petition acted on the assumption that the transfer was dated 20-2-2001 and accordingly the transfer came within the first limb of section 281 of the Act. The Hon'ble High Court had made very clear that 20-22001 was not binding on the departmental assessment proceedings. The date was being accepted for the purpose of section 281 of the Act because that was on the assessee's own showing. The learned CIT (DR) took us through the observations of the Hon'ble High Court under the head "Findings on section 281 at Para 9 onwards of the judgment". The learned DR emphasized that the Hon'ble High Court noted the provisions of section 2(47) of the Act as also of section 45(2) of the Act. Under those provisions conversion of capital assets into stock-in-trade gave rise to liability to tax though the liabilities were brought to tax not in....
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....hanariswamy Chettiar v. ITO [1972] 84 ITR 51 (Mad.), CIT v. Suleman Abdul Sattar [1983] 139 ITR 8 (Guj.), CIT v. Smt. V. Sikka [1984] 149 ITR 73 (Delhi), Snehlata Chandrakant Chalishqzar v. Thanvi [2000] 108 Taxman 171 (Guj.) and ITO v. Hemesh Family Trust [1994] 51 ITD 88 (Ahd.). The learned DR then argued that when untruthfulness is exposed court are bound to reject the pleas taken by an untruthful party. During the course of hearing before the learned CIT(A) the assessee had harped upon the fact that entire material facts had been disclosed in the return of income filed prior to commencement of search proceedings and the statements filed during the course of assessment proceedings. The learned DR argued that a person who made untrue disclose of material facts cannot take the plea that there was full disclosure of facts. The assessee cannot be heard to argue that truthfulness or falsity of statement of facts can be examined only in the original proceedings and not in the subsequent proceedings. In support of such contentions the learned DR relied upon the judgments in S.P. Mohan Singh v. ITO [1983] 141 ITR 440 (Punj. & Har.), Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456 (SC)....
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....ration of conversion of the nature of a holding on the part of the assessee must emanate from legitimate business action and needs or actual transactions of the assessee. The assessee could not use them as instrument of tax planning. In support the learned DR relied upon the judgment of the Hon'ble Rajasthan High Court in the case of Manna Lal Nirmal Kumar Surana v. CIT [2003] 263 ITR 328 (Raj.). 22. The learned DR argued that the assessee's argument that the shareholding had all along been as investment could not be accepted. The assessee had filed several returns of income and several orders of assessment had been made on the basis that the assessee had already converted what he held as investment into stock-in-trade. Hence it was 'fait accompli' that the assessee had held these asserts for several years as stock-in-trade. The assessee could not turn the clock back for the reason only that he was cautioned of huge liability imminent in the event of transfer of the shareholding to TSHL. The learned DR argued that this issue in the block assessments proceedings was independent of whatever had been held by the Assessing Officer in the assessment order under section 143(3) for ass....
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....the Group were Sterlite Industries (India) Ltd. (SIIL) and the Madras Aluminium Company Ltd. (MALCO). The assessee-company was formed sometimes in mid-1980s and had been holding the promoters' holding in SIIL and MALCO. Those shares were acquired by the assessee at different times mostly by way of original application/right shares and/or preferential offer. There were some purchases of shares of SIIL & MALCO from open market also. The intention of holding such shares was to have controlling interest in SIIL and MALCO. The assessee was initially held by the family members of Agarwal Group and later on in between the year 1993 to 1999, M/s. Twinstar Holdings Ltd. (TSHL) an OCB based in Mauritius invested into the equity of the assessee-company with the approval of the relevant authorities and later on in the month of June, 1999 TSHL acquired almost 100 per cent of the equity of the assessee by buying the shares which were held by the members of Agarwal family from them. The learned counsel emphasised that TSHL at the time of acquisition of shares in the assessee was indirectly held by the family members of Agarwal Group. Finally in the month of April, 1999 the respondent-assessee was....
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....ment was completed by treating the difference between the market price of the said shares and cost as business profit amounting to Rs. 44.52 crores. The learned counsel argued that the entire addition was legally incorrect inasmuch as the same was beyond the scope of block assessment. The matter of conversion of stock-in-trade into investment was a part of regular assessment proceedings. Block assessment had to be restricted to assessment of undisclosed income not hitherto disclosed before departmental authorities. It could not be used to disturb matters pertaining to regular assessment until and unless evidence to indicate unaccounted income pertaining to the said year was unearthed. On the other hand the documents seized and relied upon by the Assessing Officer did not point to any such thing. The above fact was agreed to by the Ld. CIT(A) who stated that the said shares were truly investment and not stock-in-trade and hence assessee was not required to pay any tax under section 46(1) of the Income-tax Act, 1961 thereby deleting the said addition. Further another thing which needed to be noted was that the course of regular assessment proceedings the Assessing Officer had himself....
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....required for some immediate reference. Furthermore the dates mentioned were not the actual dates but a deadline by which the specified action was expected to be completed. In reality, the contemplated actions were completed by the deadline or a few days later. The Assessing Officer overlooked the fact that most of the tasks listed in the said documents involved outside Government agency like RBI. The assessee obviously could not connive with them to backdate documents. Secondly even otherwise how did that show that the assessee had earned unaccounted income or income not offered for the purpose of taxation? The document or the fax message did not prove any such thing. The learned counsel further argued that the fax dated 10-11-1998 sent to Shri Rajnish of Sterlite Group from RSM & Co. containing a brief note on the liquidation process of the investment companies contained nothing in relation to "undisclosed income". Pages 36-40 of the loose paper file A-2 seized from the office of Tulsiani Chambers were a note on process of liquidation. The said note highlighted the most cost effective method of transferring the shares from the assessee to the OCB-Twinstar Holdings Ltd. was to conv....
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....nt involved was huge. That did not show earning of any undisclosed income which was the essence of block assessment proceedings. Those documents did not bring anything new to light. It merely showed that the decision to convert stock-in-trade was taken after much deliberation and after a prolonged thought process. That could not be held against the assessee. By using the seized papers to assume that the assessee had defrauded the department was far-fetched. Application of McDowell & Co. Ltd.'s case (as done by AO) was erroneous as there was no colour able device. Even other - if at all application of McDowell & Co. Ltd.'s case was a matter of regular assessment and it could not be brought in a block assessment. Further, a perusal of the order of the Assessing Officer showed that there was nothing in it that could not have occurred to the Assessing Officer at the time of regular assessment proceedings. Irrespective of the expert opinion sought by the respondent-assessee and the research done by him the fact of conversion of shares into investments was before the Assessing Officer. The legalities and the correctness from the taxation point of view were open to the Assessing Officer t....
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....k-in-trade into investments was taken and such decision was duly reflected in the balance sheet filed with the return of income for assessment year 1998-99. The said return of income was subjected to scrutiny assessment wherein the conversion of stock-in-trade to investment was accepted. Hence there was nothing that was hidden from the department. Further as far as decision regarding liquidating the assessee-company was concerned the fact was intimated to the department under section 178 vide letter dated 29-4-1999 (much before the search date). The Assessing Officer acknowledged the receipt of the said letter and granted his consent vide letter dated 26-5-1999. Hence the department was aware of conversion of stock-in-trade into investments much before the search date and had accepted the same long after the search in order dated 9-2-2001 for assessment year 1998-99. The decision regarding liquidation was intimated to the department and the department accepted the same much before the search date. Hence the matter having been disclosed the alleged tax evaded by virtue of the conversion of stock-in-trade to investment became a subject-matter of regular assessment. The same was beyon....
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....e of tax evasion employed by the assessee. In Income-tax Act normally the principles of res judicata did not apply. However, the mere fact that estoppel and res judicata did not apply, did not by itself justify the Revenue authorities to change their stand year after year and on the same set of facts to take different views in different years. In Income-tax proceedings though the principles of res judicata did not apply, yet rule of consistency did apply i.e., if no fresh facts came to light on investigation the Assessing Officer was not entitled to reopen the same question on mere ground of suspicion or change of opinion. This was based on principle of natural justice or expediency. In this regard, attention was invited to the judgments in the cases of Hon'ble Supreme Court in the case of Radhasoami Satsang v. CIT [1992] 193 ITR 321; Trustees, Nagore Durgah v. CIT [1954] 26 ITR 805 (Mad.), CIT v. Shree Nirmal Commercial Ltd. [1995] 213 ITR 361 (Bom.); Sardar Kehar Singh v. CIT [1992] 195 ITR 769 (Raj.); Burmah Shell Refineries Ltd. v. G.B. Chand, ITO [1966] 61 ITR 493 (Bom.); CWT v. N.R. Sirkar [1989] 178 ITR 311 (Gauhati); Hon'ble Gauhati High Court in the case of Dhansiram Agarw....
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....learned counsel argued that the main question was the true status of the shareholding in SIIL and MALCO. He argued that the effective date of transfer of shares was beyond block period. Hence the transfer of shares could not be considered in the block assessment order. In this regard, the learned counsel relied upon the facts that the shares were transferred to TSHL's demat account on September 25/26,2000 and 20-2-2001. Further, the learned counsel argued that this position was also borne out from the decision of the Hon'ble Bombay High Court in the case of Twinstar Holdings Ltd. That judgment was delivered in the context of attachment by the department under section 281 of the shares to recover the taxes of the assessee and PNIT & SCRM. Though the findings were not relevant yet some of the facts highlighted therein were relevant. The learned counsel pointed out that the Hon'ble Court had noted that Reserve Bank of India had made the clearance from FIPB necessary for their final approval and thus the final approval was given on 16-2-2001 only and it was thereafter that TSHL was registered as a beneficiary of the said shares held by Deustche Bank, Mumbai Branch, as depository partic....
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....led to claim a deduction until the RBI granted approval under section 9 of the Foreign Exchange Regulation Act, 1973. The learned counsel further relied upon the judgments of Hon'ble Bombay High Court in the case of Dorr-Oliver (India) Ltd v. CIT [1998] 234 ITR 723 and in the case of CIT v. John Fowler (India) Ltd. [1999] 239 ITR 312. Hence it was clear that where approval of specific authority was required to perform any act the act could not be termed to have been performed prior to the said approval. Further it was held by the Hon'ble Bombay High Court in the case of CIT v. Phalton Sugar Works Ltd. [1991] 191 ITR 403 that the requirement of obtaining approval of the Central Government or the Board was not a matter merely of procedure or a formality. Hence approval had to be very specific and it could not be general. Thus it was clear that the specific approval of the RBI was received on 16-2-2001 which then became the date of transfer. Hence transfer before that date could not be regarded as effective transfer in this view of the date of transfer being beyond the block period the addition could not be made and hence the addition deserved to be deleted. 31. The learned counsel....
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....ings. At any rate, the shares transferred by the assessee were investments and not stock-in-trade. 33. We have carefully considered the rival submissions. We find that there are the following major issues arising in this appeal:- "1. Whether the provisions of Chapter XIV-B of the Act are applicable in the sense that evidence was found as a result of search? 2. Whether the transfer of the shareholdings in SIIL and MALCO took place during the block period? 3. Whether the nature of shareholdings in the hands of the assessee as on the date of transfer is stock-in-trade? 4. If the answer to question 3 above is in affirmative whether the learned Assessing Officer is entitled to assess the difference between the market value of the shareholdings as on the date of transfer and the cost of acquisition of the shareholdings to the assessee?" If the answer to all the four questions above is in the affirmative then the Revenue's appeal must succeed. But, if the answer to any of the four questions abovementioned is in the negative the revenue's appeal fails. According to the learned counsel for the assessee the answer to all the four questions abovementioned is in the negative.....
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.... judgment Hon'ble jurisdictional High Court have held that the transfer of the shareholdings in question to TSHL took place on 16-2-2001 i.e., much after the block period and what was transferred, was not stock-in-trade. In view of either finding of the Hon'ble jurisdictional High Court the assessment of the alleged undisclosed income in the block assessment was required to be quashed. 35. To recapitulate the facts of the case, as told by the parties before us, the assessee is an investment company, who along with other two investment companies, viz., PNIT and SCRM were family controlled companies of Agarwals through TSHL, a company incorporated under the Mauritius Companies Act, 1984. The shares of TSHL were held by Shri Dwarkaprasad Agarwal and Shri Agnivesh Agarwal in the ratio of 50 per cent each. These three investment companies acquired large shareholding in SIIL and MALCO. Originally they had shown the shareholdings as investment. From 1-4-1991 the shareholdings were converted from investment into stock-in-trade. This position continued for assessment years 1992-93 to 1997-98. With a view to borrow funds from the international market on security of the SIIL and MALCO shar....
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.... the proposal of the boards of the three investment companies received the assent of the shareholders in the extraordinary general meetings. A liquidator was appointed. On appointment the liquidator made applications to the Assessing Officers of the investment companies and obtained No Objection Certificates under section 178 from the Assessing Officers on 15-6-1999, 26-5-1999 and 14-6-1999 in the case of PNIT, the assessee-company and SCRM, respectively. On 17-6-1999 an application was made to Reserve Bank of India by TSHL for approval of transmission of shares of SIIL and MALCO on fully repatriable basis upon liquidation of the investment companies. On 30-12-1999 RBI granted conditional approval for transmission of shares on fully repatriable basis in favour of TSHL. However, RBI had advised TSHL that the extent of repatriability of the shares had to be ultimately decided by FIPB and therefore RBI should be approached only after obtaining approval from PIPE. On 16-5-2000 the petitioner received the approval from FIPB approving transmission of shares of SIIL and MALCO, hitherto held by the three investment companies on fully repatriable basis to TSHL. Thereafter, RBI gave its fina....
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....f proceedings under Income-tax Act, 1961. In the case of the assessee the transfer of shares by virtue of which the demand was raised had been taxed in block assessment orders, which, by definition, covered the period up to the date of the search, i.e., 8-12-1999. According to the revenue the transfer of shares took place during the block period (31-3-1999 in the case of the assessee). Block assessment proceedings could be started only after the date of search, i.e., 8-12-1999. In other words at the time of the transfer of shares, the block assessment proceedings were not pending and consequently section 281 did not apply. The petitioner argued that the provisions of section 281 applied only when there was a pre-existing tax liability whereas according to the department the tax liability arose out of the very transfer which the department sought to treat as void under section 281. It was pointed out that the provisions of section 281 applied only in two situations, viz. transfer during the pendency of proceedings or in a case where the assessment was completed and the transfer took place after such completion. It was argued that the section 281 had two limbs. The first limb of sect....
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....hnical grounds also with which we are not presently concerned in this appeal. 39. Revenue contended, among other things, that the impugned shares had been transferred during the pendency of block assessment proceedings. Further the impugned transfers had been made without adequate, consideration. The action taken by the Assessing Officer was therefore in consonance with section 281 of the Act. In the judgment Hon'ble High Court have, however noted that at one stage the learned counsel for the Department had contended that the correct date of transfer was 31-3-2000 when assets were distributed. However, releasing that the date 31-3-2000 would bring the transfer outside the block period, learned counsel for the Department after taking instructions from the officers reverted to the original date 30-11-1999. In the circumstances, learned counsel for the Department was not able to give a clear-cut date. He conceded that he had no clear-cut instructions in that regard. The learned counsel for the revenue however contended that the second limb of section 281 would apply because transfer was effected after completion of the proceedings and before notice under rule 2 was given. There als....
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....ermination in the Writ Petition filed by TSHL:- "Whether the impugned attachment was in consonance with the provisions of section 226(5) read with the Third Schedule to the Income-tax Act, 1961, is the issue, which arises for determination in this case. For that purpose, one also has to examine the applicability of section 281 to the facts of this case." 42. After formulating the aforesaid point for determination the Hon'ble High Court proceeded to give its findings. The part of the judgment captioned "Findings" is divided into three sub-parts, viz. "Preface", "Conduct of the petitioner" and "Findings on section 281". The Hon'ble High Court began pronouncement of its findings with the following preface: "At the very outset, we wish to point out that in this case, we are not concerned with the assessment proceedings. Basically, we are concerned with the procedure followed by the Department in the matter of attachment of shares transferred by three investment companies to the petitioner. However, in order to judge the applicability of section 281, the date of transfer of the impugned shares is material and for that purpose, we are required to state a few facts emanating from....
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....stage, we may mention that in this writ petition, we are concerned with the validity of attachment and not with computation of income under section 28/45. Suffice it to state that according to DAIL, the transfer is dated 20-2-2001, and if so, on their own showing, the transfer would come within the first limb of section 281 of the Act. We make it clear that this date is not binding on the Department in the assessment proceedings. The above discussion is only to show that on their own showing, the date of transfer falls within the pendency of the assessment proceedings." 44. Under the sub-part "Findings on section 281" the Hon'ble High Court have considered the arguments of the assessee that neither the first limb nor the second limb of section 281 applied on the facts of the case. As to the first limb the Hon'ble High Court observed as quoted above. The learned High Court re-informed that finding in the following words:- "In this case, we are concerned with collection and recovery of tax. In this case we are not concerned with the computation of total income under Chapter IV. In this case, we are concerned with collection and recovery of tax and not with assessment of income.....
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....ich is during the pendency of block assessment proceedings. Therefore, in our view, the case falls within the first limb of section 281 of the Act." 45. Thereafter the Hon'ble High Court proceeded to consider the contention of the assessee that the transfer of shares to TSHL was not without adequate consideration. The Hon'ble High Court have decided this point in the following words:- "It is argued on behalf of the petitioner that in this case, transfer has been made for adequate consideration. In this connection, it has been urged, as stated above, that the transfer of the shares has been pursuant to liquidation of the three investment companies. That, in the balance-sheet of the liquidated company, the equity holding of the petitioner would be written off and in consideration thereof, the shares/warrants in SIIL/MALCO will be transferred to the petitioner and, therefore, the transfer was for adequate consideration. We do not find any merit in this argument. Firstly, as stated hereinabove, we are not concerned in this case with the question of validity of assessment. However, we are required to state the following facts in order to meet this argument. According to the Depart....
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....on'ble Court considered the contention of the assessee that the three investment companies had obtained No Objection Certificate from the Assessing Officer under section 178 and therefore Proviso (ii) to section 281 (1) was satisfied. The Hon'ble High Court did not accept this argument because No Objection Certificate was issued by the Assessing Officer under section 178(2) on 15-6-1999. On that date there was no tax demand pending. The demand was raised under section 156 only pursuant to the block assessment order, which was passed pursuant to the search on 8-12-1999 when incriminating documents were seized. 47. Thereafter the Hon'ble High Court have considered the contention of the assessee that the department had treated the shares as stock-in-trade and not as investments and therefore the Explanation to section 281 would apply. This issue has been decided by Hon'ble High Court in the following words: "In the present case, we are not concerned with the assessment proceedings. At this point, we once again wish to make it clear that computation of business income by the Department under Chapter IV is quite different from the recovery proceedings under Chapter XVII That, sect....
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....e same breath the Hon'ble High Court qualified, "We make it clear that this date is not binding on the department in the assessment proceedings". Similarly on the question as to whether the nature of the shareholdings in the hands of the assessee as on the date of transfer was stock-in-trade, the Hon'ble High Court held that the provisions of Explanation appended to section 281 prohibiting attachment of stock-in-trade were not attracted because as far as the assessee was concerned the assessee had transferred the asset as asset and not as stock-in-trade. On both issues the Hon'ble High Court have held that in the writ petition the petitioner could not take a plea opposed to his own stand in the block assessments. According to the Hon'ble High Court the fundamental issue in the case was whether the transferred shares should be valued at market value and if so, as on what date. The Hon'ble High Court, for the purpose of the issue of collection and recovery of tax before them, proceeded on the footing that the block assessment order was still in force. It had not been set aside. We are therefore unable to accept the contentions of both the revenue as well as the assessee that on merit....
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....mission Board on 16-5-2000 and the final approval of the Reserve Bank of India was made on 16-2-2001. The shares were transferred to TSHLs demat account on 25/26-9-2000 and 20-2-2001. According to the revenue the transfer of shareholdings took place during the block period ended on 8-12-1999. This contention of the revenue is based on the fact the liquidation proceedings had already commenced during the block period. Thereafter dividend was declared by SIIL in the Annual General Body Meeting held on 30-10-1999 and that dividend was received by TSHL signifying that the transfer of shares had occurred during the block period. RBI too had given 'in-principle' approval to the transfer of the shareholdings to TSHL. The assessee, on the contrary argues that while granting 'in-principle' approval on 30-11-1999 Reserve Bank of India had advised the assessee not to register the transfer in its books until final permission to that effect was granted by Reserve Bank of India. Further the shares were transferred to the demat account of TSHL on 25/26-2-2000 and 20-2-2001. The assessee has thus argued before us that all material events took place after the search on 8-12-1999 and 'in-principle' ....
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....to 30-6-1957 but it was paid on 30-6-1958. The dispute in that case arose as to whether the assessee was entitled to claim deduction of the prior period in computation of its income chargeable to tax for assessment year 1959-60. The Hon'ble Supreme Court held that section 326 of the Companies Act had prohibited the appointment or reappointment of a managing agent without the approval of Central Government. In the case of that assessee Central Government approved the appointment of managing agents by its letter dated 2-9-1957. The liability to pay managing agents' remuneration therefore could not be said to have arisen on any date prior to 2-9-1957. Next case relied upon by the assessee is the judgment of Hon'ble Bombay High Court in the case of CIT v. Phalton Sugar Works Ltd. [1991] 191 ITR 403. In that case Hon'ble High Court held special deduction for technical fees received from a foreign company could not be claimed until the mandatory approval of the agreement by the Central Government was received. Next case relied upon by the assessee is Dorr-Oliver (India) Ltd. v. CIT [1998] 234 ITR 723 (Bom.). In that case collaboration agreement was required to be approved by RBI. Hon'ble....
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....f dividend was directly paid to TSHL the learned CIT(A) has held that effective date of transfer took place during the block period. The learned CIT, DR also vigorously argued before us that as far as the assessee as a transferor was concerned the assessee had done all that was required of him to do. Reserve Bank of India permission was required by TSHL. As respects the assessee-company the act of transfer was complete once the company had gone into liquidation and TSHL had become 100 per cent holding company. On consideration we are of the view that these arguments are not in line with the judgment of Hon'ble Supreme Court in the case of Nonsuch Tea Estate Ltd. and the judgments of Hon'ble Bombay High Court briefly enumerated by us. Reliance placed by the revenue on the judgment of Hon'ble Delhi High Court in the case of Ghaziabad Engg. Co. (P.) Ltd. is not justified, in the case of transfer of immovable property it is now axiomatic that deed of transfer once registered relates back to the date of execution of the agreement. There is no such legal principle in relation to various kinds of approval laid down, by the orders of the Government or Acts of Parliament, as a condition pre....
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....me of commencement of liquidation proceedings TSHL became the 100 per cent holding company of the assessee-company after having purchased whatever shares were then being held by other entities from them. Of course, the entire shareholdings in TSHL at that point of time were held by the members of Agarwal family only. The entire case of the learned Assessing Officer in the impugned block assessment order under section 158BC is built upon the premises that conversion of stock-in-trade into investments on March 31, 1999 was not a natural act of the assessee-company and that the same was done entirely guided by the intention to transfer the entire shareholdings of the assessee in SIIL and MALCO to TSHL without having to pay any taxes therefor. As huge stakes were involved the assessee consulted renowned tax experts, who advised the assessee that its shareholdings in SIIL and MALCO should be converted from stock-in-trade into investments and thereafter the assessee company should go in liquidation and the shares should be transmitted to TSHL, who should by then became 100 per cent holding company of the assessee-company, by way of distribution on liquidation of the assessee company. Acc....
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....ming himself to be a trader in those shares. The shortcoming in the argument of the learned Assessing Officer in the impugned block assessment order is that he assumes that the question whether an assessee is a trader in shares or investor in shares is the question of what that assessee describes himself to be. The learned Assessing Officer assumes that in past the assessee claimed to be a trader in normal course and for the purpose of transfer of the shares to the holding company TSHL the assessee did not claim to be an investor in normal course but as a matter of colourable device. In the eyes of law, whether an assessee is a trader or an investor is a question to be determined on the basis of the legal effect of the totality of facts and circumstances of the case and not what an assessee says he is or even believes he is. We begin with a very instructive passage appearing in the judgment of Court of Appeal in the case of Weiner v. Harris [1910] 1 KB 285, 290 (CA): "By the mere use of a well-known legal phrase, one cannot constitute a transaction that which it is not. Perhaps, the commonest instance of all which has come before the Courts in many cases is this: Two parties ent....
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....hange Association Ltd. v. CIT [1961] 141 ITR 495, 498; Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 and Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1. The quality of a receipt (or expenditure) is one that attaches to it at the moment of receipt (or expenditure). Such quality cannot be altered or affected by any subsequent act or conduct of the assessee in relation to the item of receipt (or expenditure). The treatment or the entry in the books of account is no more than a subsequent act of the assessee which may have no effect upon the character attached to the receipt (or expenditure) at its conception. 54. It, therefore, follows that it is required to be seen what is the quality and the nature of the assessee's shareholdings in SIIL and MALCO and that issue cannot be decisively concluded on the basis of the treatment given by the assessee in its books of account at different points of time. Thus if the assessee has held and dealt with the shareholdings as a trader or as an investor, the factual position cannot be altered by the entries in the books of account. The learned Assessing Officer himself admits that the entries made by the assessee in its accounts for the....
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....e into investment driven by the motive to avoid that tax liability that may have arisen if what the assessee transferred to TSHL constituted stock-in-trade in the hands of the assessee, nonetheless the intention of the assessee whatever it could be no ground for the learned Assessing Officer not examining the real character of the shareholding in the hands of the assessee on the material date. The learned Assessing Officer has in the block assessment order simplified the matter by assuming that since the assessee had gone through the motion of conversion of stock-in-trade into investment with a view to implement the tax avoidance scheme, the real nature of the assets on the material date had to be stock-in-trade and not investment. In the impugned order the learned Commissioner (Appeals) has stressed this point at considerable length. He has held that even though the doctrine of res judicata did not apply to income-tax proceedings, the principle of consistency did. The learned Assessing Officer, who made the block assessment order, therefore, was not entitled to disregard the findings of his predecessor in the regular assessment order under section 143(3). The learned counsel for t....
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....ally translated into action by converting the stock-in-trade into investments on the last day of the accounting year, i.e., 31-3-1998. The major investment made by the assessee was in the shares of Sterlite Industries (India) Ltd. As mentioned above, the assessee has been holding these shares from financial year 199495 onwards and the portfolio has increased over a period of time. It appears from the records that no sales were affected out of the above purchases. This clearly shows that the assessee's intention was to hold them as investments even though they were categorised as trading assets. It is noteworthy to mention here that the assessee-company is a group concern of Sterlite Industries (India) Ltd., and the intention of the assessee was to hold the shares of the flagship company of the group for control over management etc. 8. Similarly, the assessee acquired 50,00,000 shares of Madras Aluminium Co. Ltd. during financial year 1996-97 and the same number of shares were held in the portfolio as on 31-3-1998. These shares were also converted into investments on 31-3-1998. Hence, the intention of the assessee is very clear to hold the above shares as investments rather than ....
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....uld amount to allowing premium on dishonesty. He has argued that an assessee should not be allowed to approbate and reprobate at the expense of revenue. He has relied upon a plethora of case law in support of his arguments. After consideration we are of the view that these aspects relate to regular assessment proceedings. In a block assessment order under Chapter XIV-B the Assessing Officer does not have the same jurisdiction that he has while completing the regular assessment under the general provisions of the Act. For the purpose of block assessment there should be prima facie undisclosed income and not what may be considered to be undisclosed income on the basis of a long drawn reasoning. The authorities for this proposition appear to be plenty. To name a few : N.R. Paper & Board Ltd. v. Dy. CIT [1998] 234 ITR 733 (Guj.), CIT v. Shambhulal C. Bachkaniwala [2000] 245 ITR 488 (Guj.), CIT v. Vinod Danchand Ghodawal [2001] 247 ITR 448 (Bom.), CIT v. Rajendra Prasad Gupta [2001] 248 ITR 350 (Raj.), Bhagwati Prasad Kedia v. CIT [2001] 248 ITR 562 (Cal.), CIT v. Smt. Usha Tripathi [2001] 249 ITR 4 (All.), CIT v. Dr. M.K.E. Memon [2001] 248 ITR 310 (Bom.), CIT v. Shamlal Balram Gurbani....
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....urn of income in this behalf was accepted. Thereafter a notice under section 148 was issued on the ground that, the difference in the value of assets arisen on account of revaluation of assets as on the date of dissolution of the firm should have been brought to tax. The assessee contended that no profit or loss could be assessed on revaluation of assets. The matter travelled up to the Supreme Court and the Hon'ble Supreme Court gave the following verdict:- "The decision in Muhammad Ussain Sahib v. S.N. Abdul Gaffoor Sahib AIR 1950 Mad. 758; [1950] 1 MLJ 81 correctly sets out the mode of taking accounts regarding the assets of a firm. While the valuation of assets during the subsistence of the partnership would be immaterial and could even be notional, the position at the point of dissolution is totally different: 'But the situation is totally different when the firm is dissolved or when a partner retires. The settlement of his account must be not on notional basis but on a real basis, that is every asset of the partnership should be converted into money and the account of each partner settled on that basis.... The assets have to be valued, of course, on the basis of the mark....