TMI Blog2007 (4) TMI 282X X X X Extracts X X X X X X X X Extracts X X X X ..... iled 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 account the seized material and documentary evidences found during the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Officer be restored. 15. The appellant craves leave to amend or alter any ground or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 investment companies in turn made investment in shares of SIIL and MALCO. It was contemplate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 material the Assessing Officer issued a show-cause notice on 27-12-2001. The learned Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 of dissolution of the firm has to be done at market price. While the valuation of assets during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 before the learned CIT(A), that the income assessed by the learned Assessing Officer could not be a subject-matter of block assessment inasmuch as the same could not be construed "undisclosed" within the meaning of the section 158B. The assessee argued that the two elements were required to be established before invoking the provisions of Chapter XIV-B viz.; (i) There should be non-disclosure on the part of the assessee, and (ii) Non-disclosure should have been unearthed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 that the provisions of Chapter XIV-B did not apply. 12. Secondly, the assessee argued before the learned CIT(A) that the relevant shares in relation to which disclosed income was assessed were indeed held as investment and consequently assessment as business income was incorrect. The assessee submitted that it had acquired the shares of SIIL and MALCO over a period of time by participating in the public issue or otherwise allotment made by SIIL and MALCO. The shares held by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 finding "the assessee has transferred the assets as assets and not as stock-in-trade". The assessee argued that this finding was a finding necessary for the disposal of the writ petition filed by TSHL and therefore it formulated the ratio of the judgment of the Hon'ble Bombay High Court and was binding on the department. In that view of the matter the block assessment made only on the basis that the assessee had held stock-in-trade was required to be quashed. The assessee argued that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 assessment order was made on 31-12-2001. When the copious findings recorded in the assessment order were matched against the findings of the Assessing Officer in the block assessment order, it was found that the findings in the block assessment were in palpably opposite directions while the basic facts in the assessee's case remained the same. Had the assessment order been made prior to the date of search, one could perhaps infer that different finding was possible in the block assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 the case of PNIT and after carefully considering the submissions of the learned AR at different stages of hearing of this appeal as also the remand report submitted by the Assessing Officer, I have but to hold that there are overwhelming reasons to come to the conclusion that nomenclature of the shares classified as stock-in-trade is indeed a mis-classification all along. The findings recorded in the assessment order for assessment year 1998-99 are quite cogent and lucid based on a corr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 excess overpayment of liabilities was not required. The third stage was Dissolution. A company stood dissolved and ceased to exist when the High Court passed an order to that effect. In the case of the assessee actual dissolution of the company was pending. As in the case of the assessee assets were distributed by the liquidator "in specie" that distribution could not and did not relate back to commencement of liquidation. In the case of the assessee, the distribution to TSHL required RBI ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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. During the course of hearing before us the learned CIT (DR) argued that on 8-12-1999 the assessee-company was under liquidation. After search proceedings the Assessing Officer carried out block assessment proceedings and the salient feature of the block assessment proceedings was that the assessee did not co-operate with the Assessing Officer. The Assessing Officer had clearly recorded in paragraph 3 that after having filed part details on 7/10-12-2001, the assessee did not furnish any further d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 of search proceedings under section 132. The search revealed that the assessee was holding these shares as stock-in-trade and the declaration of the same as capital asset in the return of income was an attempt to suppress and conceal the true facts of the case. There was thus direct nexus between the profit of the firm and evidence found as a result of search. This aspect had been elaborately brought out in the show-cause notice issued by the Assessing Officer. 18. During the course of hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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 the year in which conversion took place but in the year in which the asset was sold or otherwise transferred. The Hon'ble High Court took note of the fact that according to the Assessing Officer the entire exercise was undertaken in order to avoid business being created with market value of the shares in the profit and loss account. Therefore, the liabilities accrued on 31-3-1999, in the case of the assessee. In order to avoid that liability the assessee transferred the assets after 8-12-19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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), CIT v. Jamnadas Dwarkadas Co. [1994] 209 ITR 1 (Bom.), Sri Krishna (P.) Ltd v. ITO [1996] 221 ITR 538 (SC), Manilal Gafoorbhai Shah v. CIT [1974] 95 ITR 624 (Guj.) and G. Sukesh v. Dy. CIT [2001] 252 ITR 230 (Ker.). 20. The learned DR argued that there was no force in the argument of the assessee that as a result of search no evidence relating to undisclosed income was found. Various legal opinions received by the assessee were of such nature that the same would never have been disclose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 assessment year 1998-99, even if that assessment order had been made after search proceedings. He pointed out that in any case there was no mention of any search in the assessment order. Hence the fact that the assessment order had been made after search was not of much consequence. Even otherwise there was vast difference between the nature of assessment proceeding under section 143(3) and block assessment proceeding under section 158BC. These were different proceedings and therefore the findings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 put under members' voluntary winding up and the shares of SIIL/MALCO held by the assessee were ultimately transmitted to TSHL. The learned counsel informed that the shares of SIIL and MALCO were held by the assessee as Investments till 31-3-1991. With effect from 1-4-1991 the holdings in the two companies was converted into stock-in-trade and remained so till 31-3-1998. Again on 31-3-1998 the said shares were converted into Investments. The above aspects were duly disclosed in the returns of incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal 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 accepted the conversion. His change of stand in the block assessment proceedings could not be accepted as there was no new fact. The learned Counsel relied upon the judgment of the Hon'ble Gujarat High Court in the case of N.R. Paper Board Ltd. v. Dy. CIT [1998] 234 ITR 733 wherein it was held that what the assessee had already disclosed or would have disclosed was not to be treated as undisclosed income. Further Finance (No. 2) Act, 1998 inserted an Explanation to section 158BA(2). Clause (b) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id 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 convert the shares held as stock-in-trade into investments and then to transfer the net assets of the assessee and other companies in specie to the shareholder. The possibility of application of Supreme Court judgment in the case of ALA Firm v. CIT [1991] 189 ITR 285 and consequent taxation of difference between the cost and market value of the stock-in-trade was also discussed. Hence conversion of stock-in-trade to investment would save incidence of such taxation also. It was further stated that on li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 to consider. The case laws applied by him in the block assessment order could have been applied in the course of regular assessment proceedings as well. Hence there was no fresh discovery of material that could justify the block assessment made. Seeking opinions of legal experts was something that any big company would do. It did not mean at all that the assessee-company intended to defraud Revenue. It was merely tax planning perfectly legitimate being within the framework of the law as held by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 beyond the definition of block assessment and hence the addition made is bad in the eyes of law. 26. The learned counsel argued that there was no support to the block assessment made by the Assessing Officer from the case law relied upon by the Assessing Officer. As to the judgment in the case of McDowell Co. v. CTO [1985] 154 ITR 148 (SC) the same had been analysed in detail by the Hon'ble Supreme Court in the case of Azadi Bachao Andolan, McDowell Co. Ltd.'s case, ratio did not apply to the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tigation 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 Agarwalla v. CIT [1996] 217 ITR 4 (Gauhati); Lalludas Children Trust v. CIT [2001] 251 ITR 50 (Guj.); Hon'ble M.P. High Court in the case of Asstt. CIT v. Gendalal Hazarilal Co. [2003] 263 ITR 679 and Union of India v. Kaumudini Narayan Dalal [2001] 249 ITR 219 (SC). 28. The learned counsel argued that in the regular assessment framed 14 months after the search the learned Assessing Officer had after detailed discussion already adjudicated in favour of the assessee. The relevant findings were hugely e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision 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 participant. However the Assessing Officer ignored those facts and held the transfer to be in block period for the reasons that the Dividend, in respect of the subject shares, declared by SIIL in the AGM held on 30-10-1999 was received by TSHL; Balance Sheet as on 31-3-2000 did not reflect the shares as the assets of the assessee; in the statement on oath of Shri K.L. Damani (the liquidator) recorded by the Assessing Officer Shri Damani had stated categorically that on 16-6-1999 the Jeep, shares and tradeable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 argued that the assessee's transactions pertaining to the shares in SIIL and MALCO were investment and not stock-in-trade. He referred to pages 41 and 203 to 217 of the paper book and made a categorical statement that apart from possibly some sales/transfer to group entities the assessee never sold/transferred the shares of SIIL and MALCO and thus the assessee only acquired the shares and did not deal in those shares. This fact had been recognized by the learned CIT(A) that the shareholding was inherent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. According to the impugned order of the learned CIT(A) the answer to the first two questions is in the affirmative and because the answer to question No. 3 is in the negative, the question No. 4 abovementioned does not arise. In other words, the learned CIT(A) has decided the appeal in favour of the assessee and against the Revenue because according to him the answer to all the questions abovementioned is not in the affirmative. During the course of hearing before us the learned counsel for the assessee has add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 shares; it was decided to liquidate the three investment companies and to consolidate the shareholding in SIIL and MALCO in TSHL. As huge stakes were involved the family consulted an array of tax experts so as to ascertain the possible tax implications of transfer of shareholdings in the three investment companies to TSHL. The tax experts cautioned the assessee that there was a strong possibility of the department applying the ratio of Hon'ble Supreme Court judgment in the case of ALA Firm and assess the difference b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia 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 final approval on 16-2-2001. Pursuant to the above, TSHL was registered as a beneficiary of the shares earlier held by the three investment companies in SIIL and MALCO by Deustche Bank, Mumbai Branch as Depository Participant. In the meantime on 8-12-1999, a search. was carried out at offices/factories of SIIL including the offices of the three investment companies and residences of its directors and other important persons. Pursuant to the search block assessment orders were made in the case of the investment compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer 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 section 281 was not attracted because the transfer was not made during the pendency of any proceedings but the impugned transfer itself gave rise to the impugned tax liability. As to the second limb of section 281 which referred to the transfer after completion of the assessment, the petitioner argued that according to the department's stand the transfer took place on 30-11-1999; 31-3-1999 and 31-3-1999 respectively in the cases of PNIT, the assessee-company and SCRM whereas the block assessment orders in their cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded 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 also, learned counsel for the revenue found himself in difficulty because the department wanted to rely upon the date of transfer as March 31, 2000 but the block assessment orders were passed on December 31, 2001 and 30-1-2002. Therefore the second limb also could not apply if 31-3-2000 was taken as the date of transfer. The Hon'ble High Court recorded, "Ultimately, the Department was totally confused. Learned counsel was not in a position to explain the contradiction. At one stage, the Department instructed learned cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the block assessment orders. We are conscious of the fact that the matter is pending in appeal before the Commissioner of Income-tax. However, some of these facts are required to be stated in order to decide the question of applicability of section 281 of the Act, particularly in view of the argument advanced by the petitioner that the impugned transfer was not during the pendency of the block assessment proceedings." 43. Under the sub-part "Conduct of the petitioner" the Hon'ble High Court, as pointed out by the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in 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. In this case, we are concerned with law of attachment. It is for the assessing authority to decide the date of transfer for the purposes of assessment proceedings. We are not concerned with the validity of the assessment order. We are concerned with a limited question as to whether the assessee has transferred the assets, pending assessment proceedings, in order to avoid the liability which accrued during the block period. Secondly, under the Income-tax Act, conversion of a capital asset to stock-in-trade gives rise to liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Department, the entire voluntary liquidation proceedings came to be initiated only for the purposes of transferring the shares to the petitioners at cost and not at market value with the object of tax evasion. As stated above, the petitioner became a holding company only after liquidation of the investment companies. Now, if in the balance-sheet of the liquidated company, the equity holding of the petitioner would be written off/cancelled and in consideration thereof, the shares/warrants in SIIL and MALCO would be transferred to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed 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, section 281 finds place in Chapter XXIII, which assists recovery. Section 281(1) is a prelude to Schedule II and Schedule III read with section 226(5). In this case, the Assessing Officers have proceeded to attach the "shares transferred as such to the petitioner. As held hereinabove by the Assessing Officer, the assessee has transferred the shares under a sham dissolution as an asset. That, if the dissolution is sham, one cannot call such transfer by operation of law. In such a case, one has to judge the intention of the assessee. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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 the aforesaid judgment of Hon'ble High Court supports their respective stands. But, there is one aspect on which the judgment of Hon'ble High Court is in favour of the revenue and against the assessee. The Hon'ble High Court have in the aforesaid judgment expressly held that the judgment of the Supreme Court in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148, squarely applies on the facts of the case of the assessee before us. Hon'ble High Court have held also at page 32 in Twinstar Holdings Ltd.'s case "The demand was rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived 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' approval granted by Reserve Bank of India just a few days before the date of search did not result into any transfer. During the course of hearing before the learned CIT(A) the revenue strongly relied upon the judgment of Hon'ble Delhi High Court in the case of CIT v. Ghaziabad Engg. Co. (P.) Ltd. [2001] 249 ITR 244. The assessee has supported its contentions relying upon the judgments in Nonsuch Tea Estate Ltd. v. CIT [1975] 98 ITR 189 (SC); CIT v. Phalton Sugar Works Ltd. [1991] 191 ITR 403 (Bom.); CIT v. Kirloskar Tractors Ltd. [19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility 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 High Court held that business expenditure liability accrued only on such approval. Next authority relied upon is the judgment of Hon'ble Bombay High Court in the case of CIT v. Kirloskar Tractors Ltd. [1998] 231 ITR 849. In that case the promoters of the assessee-company were in correspondence with a foreign collaborator for a technical collaboration agreement in relation to manufacture of tractors. The controversy arose in regard to the assessment year in which the fee for technical know-how paid by the assessee could be claimed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 precedent for various things. The judgment of Hon'ble Supreme Court in the case of Nonsuch Tea Estate Ltd. lays down that in cases where there is a condition precedent, the action can be said to be complete only when the condition precedent is satisfied. Respectfully following the judgment bf Hon'ble Supreme Court in the case of Nonsuch Tea Estate Ltd. and of Hon'ble Bombay High Court enumerated above we hold that in the case of the assessee the transfer of its shareholdings in SIIL, MALCO and any other company did not take place until t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. According to the learned Assessing Officer these steps were taken not in the ordinary course of the conduct of the business of the assessee-company but as a scheme of tax avoidance with a view to transfer the assessee's shareholdings to TSHL without attracting any tax liability that was bound to arise had the shareholdings of the assessee in SIIL and MALCO continued to be stock-in-trade that it was from 1-4-1991 to 31-3-1998. Relying on the Mcdowell principle the learned Assessing Officer ignored/rejected the assessee's claim of conversio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mal 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 enter into a transaction and say: 'It is hereby declared that there is no partnership between us'. The Court pays no regard to that. The Court looks at the transaction and says: 'Is this, in law, really a partnership?' It is not in the least conclusive that the parties have used a term or language intended to indicate that the transaction is not that which in law it is. Thus, the mere fact that goods are said to be taken on sale or return is not in any way conclusive of the real nature of the contract. One must look at the thing as a whole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 year ended 31-3-1998 were motivated by a tax avoidance device. We are of the view that the true character of the shareholding cannot be decided on the basis of the motivation of the assessee for the time being. Thus if the assessee's entries in the books of account have been made without any motive of tax evasion or avoidance the entries cannot be treated to be reflective of the true nature of the transactions or shareholdings of the assessee for that reason alone. Similarly, if it is found that the entries in the books of account have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the assessee has also vigorously pursued this line during the course of his arguments before us. As a matter of theory, we may add something more to these arguments. One of the main reasons for the doctrine of res judicata not applying to the income-tax matters is that in the scheme of Income-tax Act each assessment year is a separate and independent unit of charge of Income-tax. Here we are concerned with the same assessment year - only the proceedings are different. It would therefore appear that the rule of consistency should apply in such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 stock-in-trade. Similarly, the assessee invested in the shares of Morgan Stanley Growth Fund during financial year 1994-95 and held them continuously without any sales till 31-3-1998. Even though, the assessee is still treating the above stock as stock-in-trade, the intention is to hold them as investments." Not only not in the block assessment order the Assessing Officer in his remand report before the learned CIT(A) and the learned CIT, DR during the course of his argument before us has controverted any of the facts recorded by the learned As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment 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 [2001] 249 ITR 501 (Bom.), CIT v. Vikram A. Doshi [2002] 256 ITR 129 (Bom.) etc. We therefore, answer question No. 3 in the negative, i.e., in favour of the assessee and against the Revenue. We make it clear here that in this appeal we are concerned only with the block assessment order. We do not intend this order to have any bearing upon the regular assessment orders in the case of the assessee-company and the tax liabilities of TSHL or the tax liabilities of the assessee-company itself arising from liquidation of the assessee-company and the al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0] 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 market value on the date of the dissolution....' This applies equally well to assets which constitute stock-in-trade. There can be no manner of doubt that, in taking accounts for purposes of dissolution, the firm and the partners, being commercial men, would value the assets only on a real basis and not at cost or at their other value appearing in the books. A short passage from Pickles on Accountancy (Third Edn.), p. 650, will make this clear: 'In the event of the accounts being drawn up to the date of death or retirement, no departure from the norm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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