TMI Blog2020 (6) TMI 770X X X X Extracts X X X X X X X X Extracts X X X X ..... The Settlement Commission has not considered this aspect of the contentions of the Department in the impugned order. It has not assigned any reason as to why, when the subsidiary and step down subsidiary of SWCL is transferring the shares to MBL, the same will not be taxed on SWCL as capital gains as SWCL was instrumental in bringing about the ultimate entity. The Settlement Commission has failed to take into consideration the fact that the entity created and sold to MBL come about by the active steps taken by SWCL and that SWCL therefore may not enjoy the benefits of section 47(iv) of the Act of 1961. The applicability of sections 45 and 47 of the Act of 1961 have to be considered in the context of the transactions had by the assessee. If on consideration of the entirety of the transactions, the Department can substantiate the fact that the assessee that is respondent No. 2 had entered into such transactions in order to avoid taxes payable, then, respondent No. 2 is not entitled to claim that the transactions in question were covered under sections 45 and 47 of the Act of 1961 and therefore not taxable. The contention of respondent No. 2 on the interpretations of sections 47 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dence relating to the transactions that the assessee had on such accounts. Such evidence relates to the block assessment period under consideration by the Settlement Commission. Such evidence have a material bearing on the issue as to the quantum of tax that the assessee is liable to pay during the assessment period under consideration before the Settlement Commission. Such evidence cannot be said to be not relevant for the purpose of assessing the tax liability of respondent No. 2. Specified portions of the impugned order of the Settlement Commission are therefore non-speaking. One of the grounds for a successful challenge to an order of the Settlement Commission is that the impugned order suffers from the vice of breach of principles of natural justice. Since some portions of the impugned order of the Settlement Commission are non-speaking, it can be said that the present writ petition is maintainable. Having answered the issue of maintainability in favour of the writ petitioner and having found that specific portions of the impugned order of the Settlement Commission to be uninformed with reasons, such specific portions of the impugned order are set aside. The Settlemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that Shaw Wallace Breweries Limited (SWBL) was also one of the subsidiary company of SWCL. SWBL offered, issued and allotted 12,34,122 preferential shares to PDPL. At the time of issue and allotment of such preferential shares, SWCL had the right to subscribe to the same. At the time of issue and allotment of such preferential shares, SWBL and PDPL were subsidiaries of SWCL. This, according to the learned Additional Solicitor General, amounted to extinguishment of rights vested in a capital asset within the meaning of section 2(47)(ii) of the Act of 1961. 4. The learned Additional Solicitor General has submitted that SWBL offered shares on rights basis to PDPL on May 13, 2002. PDPL accepted and subscribed 5,92,383 rights shares of SWBL. PDPL merged with PEPL by virtue of a scheme of amalgamation sanctioned by the hon'ble Bombay High Court on May 1, 2002. Consequent upon such merger, shares of PDPL held by SWBL were transferred in favour of PEPL. SWCL also relinquished its rights in SWBL in favour of Raman Reti Investment and Trading Company Private Limited (RRITCPL) which is a subsidiary of SWFSL. RRITCPL therefore has to be considered as a step down subsidiary of SWCL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued in favour of PDPL. 7. The learned Additional Solicitor General has relied upon S. R. Chockalingam Chettiar v. CGT [1968] 70 ITR 397 (Mad) and submitted that the right of subscribing in the further issue of share capital of a company, upon further issue of capital being made by such company is a tangible right of the person holding the shares. Such rights can be conveyed by renunciation and that such rights can be sold. A money value can be ascribed to such rights. Renunciation of rights which have a money value encompasses the concept of capital gains. Consequently, the transactions had, between the parties, as pointed out by him, gives rise to capital gains at the hands of SWCL. 8. The learned Additional Solicitor General has relied upon Kalindi Investment (P.) Ltd. v. CIT [2002] 256 ITR 713 (Guj) and submitted that section 47(iv) of the Act of 1961 would have no manner of application in the case of a transfer of shares in a 100 per cent step down subsidiary. 9. He has contended that SWCL having relinquished its rights in favour of PDPL and RRITCPL, the same tantamounts to transfer of capital asset within the meaning of section 2(47)(ii) of the Act of 1961. Accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... search operations at the office premises of SWCL, the Department came across evidence in respect of payments by way of commission to sale promoters. Subsequent investigation, surveys and statements of such connected persons established that the payments were bogus. The Settlement Commission ignored such aspect. 13. On the aspect of payments impugned to Tirupati Enterprises, the learned Additional Solicitor General has submitted that search operations at the office premises of SWCL at Mumbai resulted in evidence coming into possession of the Department in respect of payments by way of commission to sale promoters. Subsequent investigations revealed that the payments were bogus. Similarly, transactions with Mahavir group and cash generations were also found to be bogus. The Settlement Commission did not consider such aspects. Therefore, the learned Additional Solicitor General has submitted that such portions of the impugned order of the Settlement Commission should be remanded to the Settlement Commission to consider and decide the same, in accordance with law. 14. Respondent No. 2 is the assessee. The learned senior advocate appearing for respondent No. 2 has submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that renunciation of rights in favour of RRITCPL is exempted under section 47(iii) of the Act of 1961 as a transfer without consideration is a gift covered under section 47(iii). According to him, admittedly, no consideration was received by respondent No. 2 for renunciation of the rights in favour of RRITCPL. 18. In the alternative and without prejudice to the previous two contentions, the learned senior advocate appearing for respondent No. 2 has contended that even if it is held that the exemptions under section 47(iv) and section 47(iii) do not apply and therefore, the transfer is covered under section 45 of the Act of 1961, then also, no taxable capital gain has arisen in the hands of SWCL for various reasons. Elaborating thereon, the learned senior advocate appearing for respondent No. 2 has submitted that even if the renunciation of the rights is treated as a transfer of rights covered under section 45 of the Act of 1961, there will be no chargeable capital gains as no consideration was received for such transfer. He has referred to section 48 of the Act of 1961 and submitted that no capital gains arose from the renunciation of rights. He has relied upon CIT v. George ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SWCL. According to him, the Department is seeking to tax two different entities for the same transactions twice. The learned senior advocate appearing for respondent No. 2 has drawn the attention of the court to the fact that the writ petitioner did not challenge the transfer of shares by PEPL to MBL. 21. Referring to section 158BB of the Act of 1961, the learned senior advocate appearing for respondent No. 2 has submitted that the Department accepted the finding that additions proposed by the Assessing Officer are not based on material found during the course of the search of respondent No. 2 and are not relatable to such search. According to him, therefore, such material cannot be the basis of making additions in the block assessment proceedings. Referring to section 158BB of the Act of 1961, he has submitted that such section defines undisclosed income for the block period as aggregate of the total income falling within the block period computed on the basis of evidence found as a result of search and other material or information available with the Assessing Officer and relatable to such evidence. According to him, an Assessing Officer, while making a block assessment, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain any ground justifying the delay in filing the writ petition. Therefore according to him, the writ petition should be dismissed. 23. On March 11, 2004, respondent No. 2 as the assessee filed a petition before the Settlement Commission for the block assessment years 1987 to 1997 and for the broken period from April 1, 1996 to August 27, 1996, as also for regular assessment in respect of the assessment year 1996-97 and the assessment years 1998 to 2004. Such petition was admitted by the Settlement Commission on December 2, 2004. In the proceedings before the Settlement Commission, respondent No. 2 offered an additional income of ₹ 58.12 crores in the aggregate. The parties were heard by the Settlement Commission. By the impugned order, the Settlement Commission decided the issues raised before it, assessment year wise and claimed that it was on the basis of the broad ground of contentions between the parties, the Department is aggrieved by specific portions of the impugned order. According to the Department, such specific portions of the impugned order are also unreasoned. 24. According to the Department, dilution of 50 per cent. step of SWCL held in SWBL and extingui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tely transferring the shares to MBL so as to avoid the tax incidence on SWCL illegally. The Department has contended that notwithstanding the relinquishment of the rights happening in favour of the subsidiaries or the step down subsidiaries of SWCL the transactions attract tax at the instance of SWCL as the net result of the transactions is sale of shares not to a subsidiary or a subsidiary of SWCL. 29. In the context of such contentions, the issue of maintainability as raised by respondent No. 2 has to be considered. Jyotendrasinhji (supra) has held that an order passed by a Settlement Commission is amenable to judicial review under article 226 of the Constitution of India as well as under article 136 of the Constitution of India if the order of the Settlement Commission is contrary to any provisions of the Income-tax Act, 1961 and if so, apart from all ground of bias, fraud and malice such order has prejudiced the petitioner. Jyotendrasinhji (supra) has been followed in Swamina International Pvt. Ltd. (supra) and DIT (International Taxation) v. ITSC [2017] 398 ITR 23 (Cal). An order of the Settlement Commission is justiciable. A writ petition under article 226 of the Constitut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtment would not have had a case to argue. The transactions did not stop with SWCL relinquishing its shares in its subsidiary and step down subsidiaries. In fact, these relinquished shares were ultimately sold of to MBL for a valuable consideration. The relinquishment of rights by SWCL and allowing a merger to take place are mechanisms to create an entity which but for such steps and measures would not have come about. The newly created entity was thereafter sold to MBL. This mechanism is improper, results in avoidance of taxation and impermissible at the end of SWCL. The Settlement Commission has not considered this aspect of the contentions of the Department in the impugned order. It has not assigned any reason as to why, when the subsidiary and step down subsidiary of SWCL is transferring the shares to MBL, the same will not be taxed on SWCL as capital gains as SWCL was instrumental in bringing about the ultimate entity. The Settlement Commission has failed to take into consideration the fact that the entity created and sold to MBL come about by the active steps taken by SWCL and that SWCL therefore may not enjoy the benefits of section 47(iv) of the Act of 1961. 33. The appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existing property as defined in the Gift-tax Act, 1958. 36. The fact that SWFSL offered capital gains arising out of the transactions of shares of RRITCPL to MBL for the assessment year 2004-05, ipso facto, does not absolve SWCL from its tax liability in the event, it is found that SWCL brought about an entity to be transferred to a third party by the mechanism employed to defraud the Revenue. 37. In short, all the contentions of respondent No. 2 are to be adjudged on the anvil of the actual nature of transactions that took place rather than the ostensible one which respondent No. 2 claims. The Settlement Commission has to arrive at a finding as to whether the transactions as claimed by respondent No. 2 are correct or the version of the Department has to be accepted. In the event the Settlement Commission accepts the version of the transactions of the Department then, there will be implications for respondent No. 2. The impugned order of the Settlement Commission is non-speaking to such an extent. 38. So far as section 158BB of the Act of 1961 and the ratio of Smt. C. Sabira (supra) are concerned, it has to be noted that Smt. C. Sabira (supra) has held that Chapter XIV-B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in this paragraph. The Department has sought to bring on record evidence relating to the transactions that the assessee had on such accounts. Such evidence relates to the block assessment period under consideration by the Settlement Commission. Such evidence have a material bearing on the issue as to the quantum of tax that the assessee is liable to pay during the assessment period under consideration before the Settlement Commission. Such evidence cannot be said to be not relevant for the purpose of assessing the tax liability of respondent No. 2. 41. In light of the discussions above, specified portions of the impugned order of the Settlement Commission are therefore non-speaking. One of the grounds for a successful challenge to an order of the Settlement Commission is that the impugned order suffers from the vice of breach of principles of natural justice. Since some portions of the impugned order of the Settlement Commission are non-speaking, it can be said that the present writ petition is maintainable. 42. Having answered the issue of maintainability in favour of the writ petitioner and having found that specific portions of the impugned order of the Settlement Commis ..... 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