TMI Blog2006 (3) TMI 217X X X X Extracts X X X X X X X X Extracts X X X X ..... s are in the form of contribution to share capital of various companies. They promote companies and hold shares of companies promoted. The shares are held by these companies in order to have power to control and manage the companies, which they promote. The assessee, M/s. HCLCL and M/s. SNIPL sold 41,00,000, 14,50,000 and 14,50,000 shares respectively of M/s. HCL Consulting Ltd. to one Overseas Corporate Body (OCB) i.e., M/s. Wintech Investment Pvt. Ltd., Mauritius (hereinafter referred to as 'M/s. WIPL') as Rs. 50 per share. All the three transactions took place in June, 1999. The three companies passed a Board Resolution all dated3-6-1999offering shares held by them in the capital of M/s. HCL Consulting Ltd., to M/s. WIPL. M/s. WIPL by Board resolution dated 4-6-1999 agreed to buy the shares in question subject to the required Governmental approvals. The RBI granted in principle approval on23-9-1999and final approval on23-10-1999. The assessee, M/s. SNIPL and HCLCL received the sale proceeds on 13-10-1999,14-10-1999 and 12-10-1999 respectively in the form of remittances in foreign exchange duly evidenced by the Foreign Exchange Remittance Certificates. Therefore, there was a comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d "Long-term capital gains". The return of income so filed by the assessee was subjected to an assessment by the Assessing Officer and an order dated27-3-2003was passed by the Assessing Officer under section 143(3) of the Act. A copy of order of assessment is at pages 362 to 372 of assessee's paper book (volume 1). 4. Similarly, M/s. HCLCL had also disclosed the transaction of sale of shares of M/s. HCL Consulting Ltd. to M/s. WIPL in their returns filed for assessment year 2000-01. This company filed its return of income for the assessment year 2000-01 on27-11-2000. In the computation of income under the head "Capital gain", a long-term capital loss has been returned as per details in Annexure A to the said return. In Annexure A, sale of 41,00,000 equity shares of HCL Consulting Ltd. has been declared. 5. Similarly, M/s. SNIPL had also disclosed the transaction of sale of shares of M/s. HCL Consulting Ltd. to M/s. WIPL in their returns filed for assessment year 2000-01. This company has filed its return of income for assessment year 2000-01 on30-11-2000. A copy of the return of income for assessment year 2000-01 filed by this company is at page 400 of assessee's paper book. Un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions and installations, utilities, electricity and other services, reserves, provisions, funds, benefits of all agreements and all other interests or benefits whatsoever shall be and stand vested in and/or be deemed to be and stand vested in the transferee-company under the provisions of section 394 of the said Act so as to amend from the appointed date, the estate, assets, rights, interests of the transferee-company. In respect of such of the said assets of the respective, transferor-companies on and from the appointed date, as are movable in nature are otherwise capable of transfer by mutual delivery or by endorsement and delivery, the same may be so transferred by the respective transferor-companies and shall, with effect from the effective date become the property of the transferee-company in pursuance of the provisions of section 394 of the said Act. In respect of such of the said assets of the respective transferor-companies on and from the appointed date other than those referred to in 4.2 above, the same, shall, without any further act, instrument of deed, with effect from the effective date be transferred to and vested in the transferee-company on the Appointed Date pursua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies for registration and on such certified copy being so delivered, the transferor-companies shall be dissolved without the process of winding up and the Registrar of Companies shall place all documents related to the transferor-companies and registered with him on the file kept by him in relation to the transferee-company and the files relating to the said transferor-companies and transferee-company shall be consolidated accordingly.' 8. A certified copy of the order of the Hon'ble Delhi High Court was filed with the Registrar of Companies (RoC) on8-11-2001. Thus on8-11-2001M/s. SNIPL and M/s. HCLCL ceased to exist. On registration of this fact with the Registrar of Companies (RoC), it would be notice to one and all that these two companies cease to exist. 9. A search under section 132(1) was conducted on24-1-2002at the business premises of the assessee and residential premises of some of its employees, Directors etc. Each of the warrant of search was in the joint names of 4 entities. They are: (i) HCL Corporation Ltd. (ii) Shiv Nadar Investment (P.) Ltd. (iii) Slocum Investment (P.) Ltd. (iv) HCL Technologies (P.) Ltd. 10. As on the date of search, M/s. HCLCL a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HCLCL and M/s. SNIPL to M/s. WIPL was not made at arm's length price resulting into evasion of tax as envisaged in section 92. Section 92 of the Income-tax Act, as it stood at the relevant point of time when the shares of M/s. HCL Consulting Ltd. were sold by the assessee, M/s. HCLCL and M/s. SNIPL to M/s. WIPL, provides as follows: "92. Income from transactions with non-residents, how computed in certain cases. Where a business is carried on between a resident and a nonresident and it appears to the Assessing Officer that, owing to the close connection between them, the course of business is so arranged that the business transacted between them produces to the resident either no profits or less than the ordinary profits which might be expected to arise in that business, the Assessing Officer shall determine the amount of profits which may reasonably be deemed to have been derived therefrom and include such amount in the total income of the resident." 13. (a) One of such seized document identified at page No. 155 of Annexure A-5 of Party P-2 was communication received by Mr. A.S.T. Rajan from Mr. Anil Chanana, a senior executive in the HCL group. In this communication dated 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e price was supported by the valuation report of M/s. Purushothaman Bhutani Co. who did not have any expertise in valuing the technology stocks. He also found that for getting the similar valuation done in respect of other transactions such as transactions with Arjun Malhotra group, the assessee-company had availed the services of expert valuers whereas when it came to transfer of shares to a foreign company controlled by the brother of Shri Shiv Nadar i.e., M/s. WIPL, M/s. Purushothaman Bhutani Co. was chosen in order to manage the lower valuation of shares to suit their requirements. In this regard, it may be relevant to point out that the HCL Group was controlled by two groups namely Malhotra group and Shiv Nadar group. There was a proposal in January 1998 that Malhotra group would exit from the HCL group by selling all the shares of Shiv Nadar group. An agreement had been signed between Malhotra Group and Shiv Nadar group dated27-1-1998. This agreement apart from the shares of other group companies of HCL also included shares of HCL Consulting Ltd. In this agreement the shares of HCL Consulting Ltd. had not been specifically valued and lump sum consideration had been agreed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CL Consulting Ltd. when these shares were offered for Public Subscription in November 1999 were valued at Rs. 580 per share of a face value of Rs. 4 per share when the same shares were sold at Rs. 50 per share of face value of Rs. 10 in the month of June, 1999 to M/s. WIPL. Secondly, the Assessing Officer referred to page No. 22 of Annexure-4 Party P-4 a document seized in the course of search which is an E-mail from one Anil Chanana, employee in HCL group to Mr. Shiv Nadar dated 23-9-1999 in which Mr. Anil Chanana had opined that shares of face value of Rs. 10 of HCL Consulting Ltd., would be at Rs. 1,807 per share. Thirdly, page 155 of Annex. 1-A Party-2 according to the Assessing Officer suggested that Anil Chanana referred to a price of Rs. 200 to Rs. 400 each to Mr. AST Rajan as the price of HCL Consulting Ltd. as on 20-1-1997. Fourthly, Assessing Officer referred to pages 52, 53 and 54 of Annex. A-2 Party-2 dated26-2-1997wherein in a letter by Anil Chanana to Mr. AST Rajan HCL Consulting Ltd.'s shares were valued at Rs. 300 per share by valuers M/s. Alex Brown Sons. 16. In reply, detailed submissions were made on behalf of the assessee-company raising mainly the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rjun Malhotra including Agreement dated 3-4-1999 were also placed on record by the assessee-company to point out that the value of Rs. 50 shown therein was accepted by the Department in the regular assessments of Mr. Arjun Malhotra. It was contended on behalf of the assessee-company that Shri Arjun Malhotra or his company would not have sold these shares carrying substantial voting rights at Rs. 50 per share while he was completely disinvesting from HCL Consulting Ltd. 18. The aforesaid submissions made on behalf of the assessee-company, however, were not found to be acceptable by the Assessing Officer for the following reasons given in paragraph No. 7.4.5 of his assessment order: "a. At point No. iii, Mr. A.S.T. Rajan has not replied to the letter of Mr. Anil Chanana in which he has suggested the market price of each share of HCL Consulting (P.) Ltd. should be Rs. 1,807. [Reference is to page 22 of A4 P4 seized at the time of search] b. At point No. iv, the contention of the assessee is again not correct. Though this paper was seized from the residence of Ms. Rita Gupta, but -Ms. Rita Gupta is or has been a director in M/s. HCL Holdings Pvt. Ltd., M/s. HCL Investment Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1961 is invoked, where Assessing Officer has to determine whether transaction was at arm's length or not. d. The contention of the assessee that department is having shifting stand on valuation of shares is again not correct. The assessee was specifically asked vide order sheet entry dated17-2-2004why valuation of shares of HCL Consulting Pvt. Ltd. should not be done at Rs. 1,807 per share based on seized material." 19. The Assessing Officer once again referred to the various documents found and seized during the course of search giving higher indications of the market value of the shares of HCL Consulting Ltd. at the relevant time and came to a conclusion based thereon that the management of HCL group was aware of the fact that the market value of the shares of HCL Consulting Ltd. was much higher than Rs. 50 per share and transfer of these shares at such a higher value would have given rise to a substantial capital gain chargeable to tax in India. According to him, the management was also aware of the fact that the said shares are going to be listed in the stock exchange following the IPO at a higher value and it is only before such IPO that the shares could have been tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer the shares of HCL Consulting Ltd. at a price lower than the market price. He found support for this inference from the fact that M/s. HCL Holdings Pvt. Ltd., Mauritius (formerly M/s. Wintech Investment Pvt. Ltd., Mauritius) had subsequently sold 15,82,430 shares of M/s. HCL Technologies Ltd. (formerly HCL Consulting Pvt. Ltd.) in the Indian capital market at a very high price of about Rs. 104 crores as against the effective cost price of Rs. 1.34 crores paid to the assessee M/s. HCLCL and M/s. SNIPL resulting in the long-term capital gain of Rs. 102.66 crores without any incidence of tax in India. Accordingly, the Assessing Officer held that the transaction of transfer of shares of HCL Consulting Ltd., by the assessee M/s. HCLCL and M/s. SNIPL to the Mauritius company was not done at arm's length price and thus the said transaction attracted the provisions of section 92 empowering him to compute the income from the said transactions between a resident and a non-resident company having regard to arm's length price. He then proceeded to ascertain the arm's length price of shares of HCL Consulting Ltd. at the relevant time and recorded the following findings/observations based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have to be split in the ratio of 2.5 : 1 by reducing the face value of each share from Rs. 10 to Rs. 4. Subsequently, bonus was declared and even the shares were split in the ratio of 2.5 : 1 and the shares of the face value of Rs. 4 per share, after bonus and split, were issued to the public and such issue was closed at Rs. 580 per share as per the understanding and conviction expressed by Mr. Anil Chanana in the fax message sent to Mr. Shiv Nadar dated 23-9-1999 wherein the value of share of the face value of Rs. 10 before bonus and split was estimated at Rs. 1,807 each. 21. Keeping in view the aforesaid observations, the Assessing Officer adopted the price of Rs. 1,807 being the lowest of the above as the arm's length price of the shares of HCL Consulting Ltd. at the relevant time and computed the income of the assessee from capital gain on sale of the said shares to a Mauritius company at Rs. 254,76,50,000 (14,50,000 X 1757). This income was treated by him as the undisclosed income of the assessee and addition was made to that extent in the assessment completed under section 158BC. Similarly, capital gain arising from the transfer of shares of by M/s. HCLCL and by M/s. SNIPL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... V - B especially when no evidence was found as a result of search to prove that the assessee had received any sum over and above the agreed consideration of Rs. 50 per share. This contention of the assessee, however, was rejected by the learned CIT(A) observing that on the basis of evidence gathered as a result of search, even the declared transaction may partake the character of yielding "undisclosed income" on account of their falsity. He held that the regular assessment in the present case was completed on the basis of entries disclosed in the books of account whereas the block assessment was framed on the basis of evidence found as a result of search. According to him, the position emanating from the relevant seized documents revealing the planning of the assessee to transfer the shares of HCL Consulting Ltd. to Mauritius company at a price which is tax neutral was further fortified from the fact that all these 70 lakhs shares of HCL Consulting Ltd. held by the assessee and the merged companies were sold to Mauritius company at a price equivalent to the cost of acquisition. He accordingly concluded that the transactions to transfer the shares of M/s. HCL Consulting Ltd. to M/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s relating to sale of shares to M/s. Wintech Investment P. Ltd.,Mauritius, listing of shares of M/s. HCL Technologies Ltd. and movement of prices of the shares in the secondary market after listing, were also narrated by the appellant. (3) No share of M/s. HCL Technologies Ltd. was issued to M/s. Wintech Investment P. Ltd., Mauritius by the appellant or the other companies out of promoter's quota and the sale price was determined according to the valuation of shares of M/s. HCL Consulting Ltd. (a closely held unlisted company) carried out by M/s. Purushothaman Bhutani Co., Chartered Accountants vide their certificate dated 21-5-1999. The fair value of shares of M/s. HCL Consulting Ltd. was determined at Rs. 50 per share as the average of Net Asset Value and Profit Earning Capacity Value. This valuation was done in accordance with the CCI's Guidelines because the RBI required the price of shares proposed to be sold to a foreign company to be determined as per the said CCI's guidelines. (4) The valuation as per Rule 10-D of the Wealth-tax Rules provides lower value based on the last financial results available as, undertaken in the case of unlisted companies. If the shares were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 50 each in June, 1999 i.e. just six months earlier and such price was the arm's length price. He also found substance in the observations of the Assessing Officer that the assessee having agreed to sell the shares of M/s. HCL Consulting Ltd. to M/s. Vama Sundari Investment Pvt. Ltd., Mauritius on 19-6-1999 at Rs. 250 per share as indicated in the relevant seized document based on the audited accounts as on 30-6-1997, would have sold the same shares at Rs. 50 each in June, 1999 when the profit as per the latest balance sheet as on 30-6-1998 was on the higher side than that of 30-6-1997. He also found the objection raised by the Assessing Officer regarding the valuation of shares got done by the assessee-company from Purushothaman Bhutani Co., Chartered Accountants to be sustainable and having regard to the observations recorded by the Assessing Officer in this regard, the learned CIT(A) concurred with the Assessing Officer's conclusion that the same was got done by the assessee-company as per its wish and convenience to ensure that the transaction of transfer of shares to M/s. Wintech Investment Pvt. Ltd., Mauritius is without any tax incidence/burden. Accordingly, the learned C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r own judgment about investment prior to making a bid or application in the issue. (4) There was tremendous surge in the valuation of listed shares of Information Technology companies in the last quarter of 1999. Encouraged by the market movement, which kept on climbing from August, 1999 onwards, bidding prices of M/s. HCL Technologies Ltd. was estimated at Rs. 450 to Rs. 580, which was also submitted to the regulatory authorities in November, 1999. (5) The shares of M/s. HCL Technologies Ltd., on the first day at NSE was quoted at Rs. 1,550, climbed up to Rs. 1,725 and fell to a low of Rs. 1,492. Later on, the price of this share declined up to Rs. 105 per share. (6) The appellant is a promoter company and not a speculator. After sale of shares of M/s. HCL Consulting Ltd., the appellant has not sold even a single share of M/s. HCL Technologies Ltd. from its listing. The document relied upon by the Assessing Officer, which is e-mail by an employee of M/s. HCL Technologies Ltd. to its Chairman dated 23-9-1999, contemplating the public issue refers to an assumption of prices that could be resulted in a market capitalization of Rs. 6,000 crores, looking at the number of shares o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed27-8-2004, on the basis of opinions of some eminent persons, the appellant submitted the date of transfer of shares was26-7-1999i.e., the date on which a sale deed was executed to record the understanding of the parties. (12) The price comparison methodology involving NIIT, as adopted by the Assessing Officer is merely a simplistic projection and is completely invalid, especially since, share prices depend upon innumerable other factors and cannot be a direct proportion of the profits of the company. As such, the formula adopted by the Assessing Officer is totally incorrect and contrary to the rudiments of stock market and price behaviour." 28. In addition to the aforesaid contentions, it was also pleaded on behalf of the assessee before the learned CIT(A) that the transaction of sale of shares of M/s. HCL Consulting Ltd. to M/s. Wintech Investment Pvt. Ltd. was duly disclosed by it in the audited accounts for the year ended 31-3-2000 and the capital gains/loss on the said sale offered in the return of income for assessment year 2000-01 was accepted by the Assessing Officer in the regular assessment completed on 27-3-2003 under section 143(3). It was pointed out that before r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outside the purview of Chapter XIV-B, deserves to be deleted. The written submissions filed by the assessee were forwarded by the learned CIT(A) to the Assessing Officer and the remand report obtained thereon from him was also confronted by him to the assessee with an opportunity to file a rejoinder which the assessee availed. 29. After taking into consideration all the material available before him including the submissions made by the assessee, remand report submitted by the Assessing Officer as well as the assessee's rejoinder, the learned CIT(A) proceeded to confirm the addition of Rs. 1,229.90 crores for the various reasons/observations recorded elaborately in his impugned order, which are summarized below in brief:- (i) The valuation of M/s. HCL Consulting Ltd. shares made by Purushothaman Bhutani Co. at Rs. 50 each was incorrectly made without fully applying the CCI Guidelines to suit the assessee's convenience and in order to arrive at the desired price which was tax neutral. (ii) There was sufficient evidence available on record to show that the IPO was proposed much earlier and despite the fact that the same was known well before the transfer of shares to M/s. Wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is liable to be considered by the Income-tax Authorities independently. 30. As regards the contemporaneous transactions cited by the assessee involving transfer of shares of M/s. HCL Consulting Ltd. at Rs. 50 during the relevant period, the learned CIT(A) observed that all such transactions had taken place only among the HCL group of companies and with Arjun Malhotra group of companies and such transfers having been effected with a specific purpose among the related parties as is evident from the amalgamation scheme, the price of Rs. 50 per share shown therein could not be said to be the arm's length price. As regards the transactions of transfer of shares involving Arjun Malhotra group of companies, the learned CIT(A) held that the sequence of events was sufficient to suggest that it was mandatory for the assessee-company to first oust the Arjun Malhotra group for which the share price was intentionally kept tax neutral for mutual benefit. In this regard, he relied on the relevant noting found to be made on page No. 15 of Annexure A-4 of Party P-4 after giving the shareholding pattern of M/s. HCL Consulting Ltd. as on 13-9-1999 specifying alternative actions to be taken either t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... device to park the said shares with the overseas group company situated in Mauritius to avoid payment of any capital gain tax in India. For this conclusion, he relied on the decision of Calcutta Bench of ITAT in the case of Classic Finance Ltd. v. Dy. CIT [2000] 112 Taxman 155 (Mag.) and in the case of Unique India Limited v. Asstt. CIT [2000] 74 ITD 43. He also held that the decision of Hon'ble Supreme Court in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148 is applicable to the facts of the assessee's case. 32. As regards the contention of the assessee that the impugned transactions of sale of shares being related to sale of investment and not the business transactions, the provisions of section 92 are not applicable, the learned CIT(A) relied on the provisions of rule 10 to hold that the scope of section 92 is not restricted only to the transactions related to the business undertaken. He held that the relevance is of the transaction generating income and not the character of income and if income is arising from any business connection, property or from whatever source, the powers under sub-clause (3) of rule 10 are wide enough to compute such income on which tax is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g question will arise for consideration:- (i) Can a disclosed transaction assessed in regular assessment be at all assessed in the block period? (2) Can invocation of section 92 which gives rise to notional income be classified as undisclosed income? (3) Can the successor be at all assessed for a block period referable to the predecessor? When a regular assessment cannot be made in such a situation can a block assessment be so made? Can there be block period at all for the companies, which ceased to exist? (4) Is the search at all valid because conditions under section 132(1)(c) are not satisfied? (5) If notice under section 158BC is defective can a valid assessment be made? 33A. The following arguments were advanced by Mr. Dastur, learned counsel for the assessee with reference to General Propositions 1 and 2 which reads as follows: (1) Can a search be conducted on a non-existent company and can a section 158BC notice, be issued to non-existent companies? (2) Can an assessment of alleged undisclosed income or income generally of HCL Corporation Ltd. and Shiv Nadar Investment Private Ltd. be made in the hands of the assessee? The arguments are also valid for Proposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention of these three companies in holding the shares which were sold as capital asset. Our attention was drawn to the various documents to highlight the fact that even prior to the search, the assessee and M/s. HCLCL and M/s. SNIPL had duly filed their returns of income for assessment year 2000-01 duly disclosing the transaction of sale of shares of M/s. HCL Consulting Ltd. by them to M/s. WIPL. These details and documents have already been referred to by us at paragraphs 3 to 5 of this order and are not being repeated here. 36. On the first general proposition, the learned counsel for the assessee highlighted the sequence of events and submitted that the assessee in its return of income filed had duly highlighted the fact that M/s. HCLCL and M/s. SNIPL ceased to exist on amalgamation with the assessee for the assessment year 2001-02. Our attention was drawn to Schedule XX to the balance sheet for the year ended 31-3-2001 a copy of the same is at page 973 of the assessee's paper book, wherein the fact that by the order dated 27-8-2001 of the Honourable High Court, sanctioning the scheme of amalgamation of M/s. HCLCL and M/s. SNIPL with the assessee, M/s. HCLCL and M/s. SNIPL ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 158BC of the Act, in the name of the deceased. The legal heir of R.C. Jain, filed writ petition for quashing the order of assessment. On such writ petition, the Hon'ble Delhi High Court held that the Revenue having had knowledge about the death of R.C. Jain, proceeded to make an assessment against a dead person. The order of block assessment was held to be not valid in law having been passed in the name of a dead person (assessee), after having knowledge about the death of the assessee. Our attention was also drawn to the commentary by Kanga and Palkhivala on the Law and Practice of Income-tax, 8th edition, page 1260 wherein the learned authors had expressed the view that under section 159(2) of the Act, in respect of proceedings taken after the death of an assessee, it was incumbent on the Assessing Officer to take proceedings only against the legal representative of a deceased person. 38. Our attention was also drawn to the decision of the Hon'ble Supreme Court in the case of CIT v. Amarchand N. Shroff [1963] 48 ITR 59 wherein the Hon'ble Supreme Court has held that an assessee under the Act has ordinarily to be a living person and could not be a dead person because his lega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration was as to whether a company whose name was struck off the Register by ROC under section 560 of Companies Act, 1956 and therefore, stood dissolved, could be assessed to tax after dissolution? The Tribunal held that existence of the person sought to be taxed at the point of making the assessment is a condition for the validity of the assessment. The Tribunal referred to the decision of the Hon'ble Bombay High Court in the case of Patiala State Bank, In re [1941] 9 ITR 95 wherein it was held that tax is not imposed on income generally. It is imposed on the income of a person, natural or artificial, as defined in section 3. The Tribunal thereafter, referred to the various provisions in the Income- tax Act, 1961, for initiating proceedings for assessment of income in the case of death of different assessees. In the case of a company which is in liquidation the provisions of section 178 of the Act providing for assessment in the hands of a liquidator, was referred to. The Tribunal then referred to the distinction in law between liquidation and winding up and ultimately concluded that there was no provision under the Income-tax Act to assess a company which is dissolved and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be split and if section 170 were to be invoked, the same would mean splitting the block period. Therefore, according to him, it was not possible to apply section 170 to a block assessment proceeding. There is no other provision specifically making the provisions of section 170 applicable to block assessment proceedings in Chapter XIV-B of the Act. 43. According to him even the provisions of section 158BH, which provides that all other provisions of the Act shall apply to assessment made under this chapter (Chapter XIV-B), will not enable the Assessing Officer to invoke the provisions of section 170(1) and (2) of the Act. It was submitted by him that the provisions of section 158BH are only intended to enable recovery proceedings in respect of tax assessed on an assessment already made, determining undisclosed income. The expression "Assessment made under this chapter" used in section 158BH clearly implies that the said provisions will come into play only after block assessment order is passed. 44. Reference was also made by him to the provisions of section 246A(1)(k) of the Act which provides for a specific right of appeal before the CIT(A) against the order of assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the purpose of the scheme. His submission was that the two companies viz., M/s. HCLCL and M/s. SNIPL would cease to exist on the appointed date i.e.,1-4-2000. His submissions was that though the order of the Court (certificate copy) was filed with the ROC on8-11-2001that cannot be deemed to be the date on which the companies will cease to exist. In this regard the ld. counsel drew our attention to the decision of the Hon'ble Supreme Court in the case of Marshall Sons Co. (India) Ltd. v. ITO [1997] 223 ITR 809 wherein it has been held that every scheme of amalgamation of companies has necessarily to provide a date with effect from which the amalgamation shall take place and that it is open to the Court sanctioning the scheme to modify the said date and prescribe a different date of amalgamation as the Court thinks appropriate. If the Court does not prescribe any specific date but merely sanctions the scheme presented to it, the date of amalgamation is the date specified in the scheme as the transfer date and not any other date. 49. The further submissions of the ld. counsel for the Revenue on the search and assessment having been made on a non-existent company was that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission and commission committed by the amalgamating company and its failure to carry out the obligations which were required to be carried out. The Court further held that the fact - that the liability had not crystallized and the charge had not been created would not entitle the amalgamated company to avoid the payment of the tax under section 104 that would have been payable if the amalgamating company had continued to exist. The ld. DR also brought to our notice that the Hon'ble Madras High Court has distinguished the decision of the Hon'ble Delhi High Court in the case of Birla Cotton Spg. Wvg. Mills Ltd. v. CIT [1984] 123 ITR 354. The Madras High Court has pointed out that in the said judgment the Court held that it was not competent to hear the reference application and that jurisdiction lay only with the Hon'ble Rajasthan High Court. One of the Judges however expressed opinion on the validity of proceedings against a dissolved company. The opinion was not necessary to decide the controversy involved in the reference and for this reason the same should not be considered as good in law. In conclusion on this issue the ld. DR submitted that an assessment in the hands of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed Income under Chapter XIV-B. The ld. DR drew attention to the fact that the provisions of section 131 have not been specifically referred to in Chapter XIV-B and this should not be taken to mean that an Assessing Officer cannot issue summons for examination of persons while making a block assessment. According to the ld. DR the expression "made" used in section 158BH does not refer to only an assessment already made. Reference was made to the decision of the Kolkata Bench of ITAT in the case of W.C. Shaw (P.) Ltd v. Asstt. CIT [2005] 93 ITD 169 wherein it has been held that provisions of section 158BH make the other provisions of the Act applicable while making a Block Assessment. Drawing our attention to the arguments of the ld. counsel for the assessee that the other provisions of the Act are made applicable only after the completion of an assessment under Chapter XIV-B of the Act for the purpose of recovery tax due on the undisclosed income, the ld. DR submitted that such a provision is not required for recovery. In this regard the ld. DR drew our attention to provisions of section 156 where a notice of demand could be issued pursuant to any order passed under the Act. Refere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... block assessment proceedings. He pointed out that there is no such deeming provision making provisions of section 170 applicable to block assessment proceedings and restricting the period referred to in section 170(2) in lieu of the block period as defined in section 158B(a). He submitted that even provisions of section 158BH will not come to the rescue of the Revenue because, the provisions of section 170(2) and the 'Block period' as defined in section 158B(a) are contradictory and to the extent the provisions in Chapter XIV-B of the Act provide otherwise, the other provisions of the Act, will not apply to Block Assessment proceedings. Further reliance was placed on the decision of the Mumbai Bench of the Tribunal in the case of Western India Bakers (P.) Ltd v. Dy. CIT [2003] 87 ITD 607 wherein the Mumbai Bench had held that provisions of section 147 of the Act cannot be invoked to make a reassessment of undisclosed income for Block period. 54. We have considered the rival submissions. We shall for the purpose of clarity recapitulate the sequence of events leading to the present assessment in the hands of the assessee. The assessment in the hands of the assessee relates to a tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he date of search, M/s. HCLCL and M/s. SNIPL as entities did not exist. After conclusion of search, notice under section 158BC was issued to the assessee, M/s. SNIPL and M/s. HCLCL. By letter dated2-12-2002, the counsel for the assessee, informed the Assessing Officer that M/s. HCLCL had amalgamated with the assessee with effect from1-4-2000and ceased to exist and called upon the Assessing Officer to examine the validity of proceeding against HCLCL. Similarly in the case of M/s. SNIPL by letter dated16-1-2004, the Counsel for the assessee informed the Assessing Officer about the nonexistence of M/s. SNIPL. 60. The Assessing Officer, however, proceeded to make assessment of income of the two other companies (hereinafter called the 'Amalgamating Company') also in the hands of the assessee (hereinafter called the 'Amalgamated Company'). The Assessing Officer placed reliance on the decision of the Hon'ble Madras High Court in the case of T.V. Sundaram Iyengar Sons (P.) Ltd. The question before the Hon'ble Madras High Court was as to whether for the failure of the Amalgamating Company to distribute the statutorily prescribed portion of undistributed profits under section 104 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to exist. The facts in the said case were as follows: There were two companies carrying on business in Jaipur known as M/s. Merchandise and Stores Ltd., and M/s. Rajputana General Dealers Ltd. By an order datedApril 22, 1960, the Rajasthan High Court sanctioned a scheme of arrangement bringing about the amalgamation of the above two companies with the Birla Cotton Spinning and Weaving Mills Ltd.,Delhi(hereinafter referred to as "the Birla company"). As a result with effect from some date in June, 1960, when the order of court dissolving the two companies were filed with the Registrar of Companies, the two amalgamating companies stood dissolved without a winding up. For the assessment year 1960-61, M/s. Merchandise and Stores Ltd., had been assessed to income-tax on a total income of Rs. 1,45,143 and the Rajputana General Dealers Ltd., had been assessed to income-tax on a total income of Rs. 1,14,417. Later on, the ITO found that the two companies had not declared any dividends and he was of opinion that proceedings had to be initiated against these companies under section 23A of the Indian Income-tax Act, 1922, for the assessment year 1960-61. He, therefore, proceeded to issue not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f two non-existing companies. In the present case, the assessment was made in the case of amalgamated company, as was made in the case of T.V. Sundaram Iyengar Sons (P.) Ltd. The ratio laid down therein is therefore squarely applicable to the facts of the present case. Apart from the above, the decision of the Hon'ble Delhi High Court is divided on this issue, one Judge not expressing any opinion on the issue. The issue was not argued at all and has to be regarded as a precedent sub-silentio and without any argument on this issue. The said decision is, therefore, of no help to plea of the assessee on this issue. In the case of Marshall Sons Co. (India) Ltd., the Hon'ble Supreme Court has held that proceedings against amalgamating company cannot be initiated after the effective date mentioned in a Scheme of Amalgamation where the Court approves such scheme without modifying the effective date of Amalgamation. In the said decision, question was raised on behalf of the Revenue as to a situation where the Court refuses to sanction a scheme of amalgamation. The Court answered the same as follows: "Counsel for the Revenue contended that if the aforesaid view is adopted then several ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. counsel for the assessee has been that in a case of amalgamation where one entity takes over the business of two other entities, the same would be a case of succession to business otherwise on death and, therefore, the provisions of section 170 of the Act would apply. The provisions of section 170 reads as follows: "170. Succession to business otherwise than on death.- (1) Where a person carrying on any business or profession (such person hereinafter in this section being referred to as the 'predecessor') has been succeeded therein by any other person (hereinafter in this section referred to as the 'successor') who continues to carry on that business or profession,- (a) the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession; (b) the successor shall be assessed in respect of the income of the previous year after the date of succession. (2) Notwithstanding anything contained in sub-section (1), when the predecessor cannot be found, the assessment of the income of the previous year in which the succession took place up to the date of succession and of the previous year preceding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st deal with the argument regarding applicability of Chapter XV of the Act while making block assessments. 65. To resolve this controversy, a reference may be made to provisions of Chapter XIV-B of the Act. Section 158BA provides that on or after30-6-1995if a search is initiated under section 132 of the Act, the Assessing Officer shall proceed to assess the undisclosed income in accordance with the provisions of Chapter XIV-B of the Act dealing with "Special procedure for assessment of search cases". The said section starts with anon obstante clause "Notwithstanding anything contained in any other provisions of the Act". Thus applicability of other provisions of the Act is excluded. Section 158BB(1) however provides that undisclosed income of the block period shall be aggregate of the total income of the previous year falling within the block period "computed in accordance with the provisions of this Act", on the basis of evidence found as a result of search. Thus other provisions of the Act in relation to computation of Total Income are made applicable while making assessment under Chapter XIV-B of the Act. These are contained in Chapter IV to Chapter XII-G of the Act. Prior to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock assessment proceedings also. Section 158BC provides for time-limit to pass a block assessment order section 158BF and BFA provides for levy of interest and penalty. Section 158BH provides that save or otherwise provided in Chapter XIV-B of the Act, the other provisions of the Act shall apply to assessment made under this Chapter. Section 158BH of the Act reads as follows:- "158BH. Save as otherwise provided in this Chapter, all other provisions of this Act shall apply to assessments made under this chapter." From the above, it is clear that other provisions of the Act are applicable only to the extent indicated above. One of the arguments of the learned counsel for the assessee has been that other provisions of the Act like section 170 are not applicable while making Block Assessment because section 158BH makes other provisions of the Act applicable only to assessments already made and not while making on assessment under Chapter XIV. This is because of the past tense "Assessment made", used in section 158BH of the Act. The argument of the learned counsel for the assessee was that the procedure for making block assessment is set out in section 158BC. The provisions akin to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the argument of the learned Counsel for the assessee that "other provisions of the Act" are not applicable while making a block assessment except the computation provisions contained in Chapter IV to Chapter XII-G and the provisions of sections 142 to 145 of the Act, being procedure for making assessment, cannot be accepted. By virtue of the provisions of section 158BH all other provisions of the Act, including Chapter XV dealing with liability in special cases are applicable while making Block Assessment proceedings and not after a block assessment order is made. 67. We may mention here that if we apply section 170(2), then the income from transfer of shares by M/s. SNIPL and M/s. HCLCL (Amalgamating Companies/Predecessor Companies) can be assessed in the hands of the assessee (the successor company/Amalgamated company) because the transfer had taken place in the previous year preceding the year in which succession took place i.e., assessment year 2000-01. The learned counsel for the assessee contends that an assessment made on a successor in respect of income of a predecessor has to be made in the same manner in which an assessment would be made on predecessor. This is becaus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case. Firstly, it is noticed that one assessment has been made in which undisclosed income of the assessee and the two other amalgamating companies have also been included. We have already referred to the provisions of section 170(2), which mandate that an assessment made on a successor in respect of income of a predecessor has to be made in the same manner in which an assessment would be made on predecessor. This is because of the expression used in section 170(2) "in like manner and to the same extent as it would have been made on the predecessor". Therefore three separate assessments have to be made, the first assessment in the name of the assessee, the second assessment in the name of the assessee as successor of M/s. SNIPL and the third assessment in the name of the assessee as successor of M/s. HCLCL. The reasons for doing so could be because of difference in rates of taxes. The nature of business might warrant a special treatment of income like the predecessor being an industrial company or a company the profits of which are to be considered as speculative, warranting special treatment. Secondly, section 158BH excludes applicability of other provisions of the Act to the ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decide which income is assessable in which assessment year. No finality is reached and the seized assets remain with the Department for a long time. In order to make the procedure of assessment of search cases cost-effective, efficient and meaningful, a new scheme has been introduced for the assessment of undisclosed income determined as a result of search under section 132 or requisition under section 132A. Under this scheme, the undisclosed income detected as result of any search initiated, or requisition made, after30th June, 1995, shall be assessed separately as income of a block of years. Even the purpose of the special procedure in search cases prescribed in Chapter XIV-B does not contemplate splitting of the block period. 70. The Block Period in the present case would be a period of 6 previous years preceding the previous year in which search took place i.e., from1-4-1995to31-3-2001and includes the period from1-4-2001till the date of search viz.,24-1-2002. Up to 31-32000 M/s. SNIPL and M/s. HCLCL existed and therefore, the Block period cannot be restricted in their case only from1-4-2000to24-1-2002. There being no other provision in the Act to make an assessment on the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble Madras High Court has held that there can be no assessment on companies which ceased to exist after being struck off the Register of Companies with the ROC. Even in that case notice to the successor was issued as "Express Newspapers Ltd." Successor to the Free Press ofIndia(Madras) Ltd." In the present case the Assessing Officer does not rely on the Notice issued under section 158BC to M/s. SNIPL and M/s. HCLCL to sustain assessment of the Undisclosed Income of the two entities in the hands of the assessee. Nor has the Assessing Officer relied on the search conducted in the case of M/s. SNIPL and M/s. HCLCL to make assessment of their incomes in the hands of the assessee. 72. We are of the view that even the provisions of section 292B of the Act cannot cure the illegality that has crept in the procedure adopted in the present case. The procedure prescribed under section 170(2) is intended to ensure proper determination of tax liability of a predecessor. By not following such procedure the Assessing Officer violates the intent and purpose of the Act. If the Assessing Officer seeks to split the block period, that would tantamount to adopting a convenient course rather than th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xist. Therefore, a successor in business cannot be assessed for a block period in respect of undisclosed income of a predecessor. (d) That assessment of alleged undisclosed income of M/s. HCLCL and M/s. SNIPL cannot be made in the hands of the assessee. (e) That even in the case of making an assessment of income of a predecessor in business in the hands of a successor under section 170(2) of the Act, separate assessment has to be made in the hands of the successor. The process of assessment including issue of notices and the order of assessment has to be framed in the hands of the successor captioned "Successor of predecessor". This is because of the provisions of section 170(2) which provide that such assessment has to be made "in the same manner and to the same extent as it would have been made on the predecessor". (f) In the present case, the question whether a non-existent company can be subjected to a search and as to whether notice under section 158BC can be issued is purely academic for the reason that the Assessing Officer does not rely on the notice issued to M/s. SNIPL and M/s. HCLCL to sustain assessment of the Undisclosed Income of the two entities in the hands of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction. Thirdly, it was pointed out that provisions contemplate that there should be a close connection between the resident and the non-resident. It was submitted that neither the assessee nor the two other companies owned any shares in M/s. WIPL and vice versa. Except the fact that Mr. Shiv Nadar, the promoters of the three companies and who owns major shares in these companies and the person holding the major shares in WIPL, the non-resident company, were brothers. According to him the fact that the promoters of Indian company and the major shareholder controlling the overseas corporate body are related as brothers, will not result in a close connection. Fourthly, it was submitted that a singular instance of sale cannot be said to be a course of business. Drawing attention to the provision of section 92, it was submitted by him that the provisions of the said section talks about "arrangement of course of business" which element is absent in the present case. Fifthly, it was submitted while applying the provision of section 92 it is always the duty of the Assessing Officer, to consider the transaction and thereafter determine the profit, which a resident could have earned in the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transaction in question does not fall within any of the categories mentioned in the first part of rule 10. 78. He also drew our attention to page 36 of the Assessing Officer's order where the Assessing Officer has made a reference to diversion of income without overriding title. He also referred to the fact that the Assessing Officer has concluded that the purpose of sale of shares by the assessee to other companies was to avoid tax which would be payable on further sale of shares. It was submitted that the purpose behind enactment of section 92 was not to cover such cases. Similar reasons have been given by the CIT(A) also. 79. He drew attention to the decision of the Hon'ble Calcutta High Court in the case of CIT v. Kusum Products Ltd. [1993] 71 Taxman 611, the Hon'ble Calcutta High Court wherein the provisions of section 92 of the Act as it existed prior to 1-4-2002 were explained in the following words:- "On analysis of section 92 it will appear that there are five ingredients of this section which are as follows: (i) The transaction may be between a resident and a nonresident. (ii) It should be a business transaction. (iii) The business may be with the motive o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed during the search and therefore clearly falls within the meaning of "undisclosed income" defined in Chapter XIV of the Income-tax Act, 1961." 82. The learned counsel submitted even as per the Assessing Officer the transfer of shares by the assessee to the non-resident was with the view to avoid capital gain tax that may arise in future. If this was the conclusion of the Assessing Officer, it can than safely be said that section 92 could not be applicable to such transaction since these provisions are intended to cover a different type of transaction. The learned counsel further brought to our notice that ultimately the Assessing Officer substituted the sale price of shares from Rs. 50 to Rs. 1,807 per share. Section 92 does not contemplate substitution of sale price. The provisions only empowers the Assessing Officer to determine the amount of profit which in his opinion the assessee has reasonably derived from a business transaction carried on with a non-resident. Mere substitution of sale price of shares is not determining profits which the assessee had reasonably derived from a business transaction carried on with a non-resident. In this connection he also drew our attentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment of prices and the rules for estimating profits were not scientific. The further reference in the aforesaid circular is to the fact that the old provisions did not apply to individual transactions such as payment of royalty etc., which are not part of regular business carried on between resident and non-resident. The learned counsel emphasized the fact that even the circular of the Board recognized the fact that the old provisions apply only to a business transaction carried on between the resident and non-resident. His further submission was that, this circular of the CBDT was binding on the revenue authorities and in this regard he relied on the decision of the Hon'ble Supreme Court in the case of UCO Bank v. CIT [1999] 237 ITR 889. He drew our attention to the submission of the assessee before the revenue authorities. In the submissions made before the CIT(A) dated 31-5-2004 in page 83 of the said submission the assessee had specifically highlighted the fact that the transaction and sale of shares of M/s. HCL Consulting Ltd., to WIPL, were held as investment by the assessee and the two other companies and that the transaction in question was an isolated transaction. Our att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show that M/s. Vama Sundari Investments Pvt. Ltd., a company belonging to the assessee's group was holding substantial interest in M/s. WIPL through another company i.e., M/s. I.T. CON Investment Pvt. Ltd. Mr. Kapila contended that this documentary evidence as well as the specific replies given by Shiva Prasad Shiva Subrahmanya Nadar, brother of Shri Shiv Nadar in his statement recorded on oath was sufficient to show that the assessee-company and M/s. WIPL were closely connected. He also contended that even the e-mail and fax message found and seized during the course of search further established that these two companies belonged to one group and they were being controlled and managed by Shri Shiv Nadar. 85. As regards the nature of the transaction involving the sale of shares in question being a business transaction of the assessee-company, Shri Kapila placed heavy reliance on the decision of Hon'ble Supreme Court in the case of the Mazagaon Dock Ltd v. CIT [1958] 34 ITR 368 wherein it was held that the word "business" must be construed in a broad manner rather than in a restricted sense in fiscal statute. He submitted that the exact nature of the assessee's business is requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of section 92 were clearly attracted to the said transaction. He also contended that the stand now being taken by the assessee is clearly contradictory to the stand taken in the regular assessment proceedings and urged that the same, therefore, should not be accepted. He also contended that even a single transaction can constitute the business and since the transaction of sale of shares in question was effected between the assessee-company and M/s. WIPL during the course of its normal business, all the conditions required to invoke the provisions of section 92 were duly satisfied. 86. In the rejoinder, Shri S.E. Dastur pointed out that neither the Assessing Officer nor the learned CIT(A) has recorded any finding in their orders to the effect that the transaction of sale/transfer of shares in question was adventure in the nature of trade. He submitted that the Department having accepted the said shares as investment made by the assessee on capital account as shown in the regular assessment, it cannot treat the same differently in the block assessments. Referring to page 234 of Volume 1 of Commentary by Kanga Palkhivala, he contended that if income is held to be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-resident, (ii) There should be a close connection between the resident and a non-resident, (iii) Owning to such close connection between theI11, the course of baseness is so arranged that the business transactions between them produces to the resident either no profits or less than the ordinary profits which might be expected to arise in that business. If all the aforesaid conditions are satisfied in a given case, the Assessing Officer shall be entitled to determine the amount of profits which may reasonably be deemed to have been derived from the relevant transactions between a resident and a nonresident and include such amount in the total income of the resident-assessee. 90. In the light of the aforesaid ingredients as characterized by the Hon'ble Calcutta High Court in the case of Kusum Products Ltd and the conditions outlined by us on the basis of relevant provisions of law, it would be necessary to consider and appreciate as to whether all the ingredients were present in the transactions in question involved in the present case and whether the conditions precedent were satisfied so as to empower the Assessing Officer to invoke the said provisions and make the addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. I. As per the list of shareholding of Shri Shiv Nadar, a key person of the assessee-company given at page Nos. 10 and 11 of the revenue's paper book, the contents of which have remained unrebutted, Shri Shiv Nadar and his wife were shown to be the shareholders as well as directors of M/s. Vama Sundari Investments Pvt. Ltd. but they were also directors of the said company. In both these documents found and seized during the course of search which are placed at page No. 16 of the revenue's paper book, M/s. Wintech Investments Pvt. Ltd. was also shown as an OCB belonging to promoter group i.e., HCL group along with the other companies including the assessee-company. In the offer document issued by M/s. HCL Technologies Ltd. in connection with public issue of new equity shares, M/s. Wintech Investments Pvt. Ltd. was shown as an entity belonging to promoter group and the transactions involving purchase of shares by it from the assessee-company as well as two other companies were shown therein, as required. A statement of Shri Shiva Prasad Shiva Subrahmanyam Nadar, brother of Shri Shiv Nadar was recorded under section 131 on5-1-2004and in the said statement, he accepted that he hims ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is no doubt true that the word "business" is one of wide import and as held by Hon'ble Supreme Court in the case of Mazagaon Dock Ltd. relied upon by the learned DR, it must be construed in a broad manner rather than a restricted sense in fiscal statutes. However, when it comes to the facts of the' present case, the transactions are basically in the shares and the provisions sought to be invoked are the deeming provisions of section 92 which apply only to the specific business transactions as contemplated therein. The question which is, therefore, always relevant in this context is whether the sale of shares which produces the surplus was so connected with the carrying on the assessee's business that it could fairly be said that the surplus so produced is the profits and gains of such business. As held by Hon'ble Supreme Court in the case of Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191, the question whether sales of certain shares by way of changing the investments or by way of trading in shares has to be decided on the consideration of different circumstances including the frequency of the sales, the nature of shares sold, the price received as compared to the past pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the company has to incur expenditure in identifying and evaluation of these investment decisions. The company, in order to purchase shares at par and get a preferential and firm allotment in such upcoming companies, has to participate along with other companies in the promotional stage and pay and contribute expenses....." 97. He has also drawn our attention to the various submissions made on behalf of the assessee-company during the course of assessment proceedings for the different years in the regular course wherein the nature of its business was explained on behalf of the assessee-company. In one of such submissions made during the course of assessment proceedings for assessment year 1998-99, a copy of which is placed at page Nos. 3 to 13 of assessee's paper book, it was submitted that the assessee is a closely held domestic company incorporated in India with the primary objective of carrying on the business of investment company and to, inter alia, buy, invest, underwrite, acquire shares/other securities. It was also submitted that the assessee has acquired shares of various companies since its inception, some of which are held as stock-in-trade whereas the balance are he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 22-9-2004 shows that he has recorded the following observations/findings on this issue:- "(i) The appellant company's main object is to invest in shares, stock and debentures etc. of the specified group companies with controlling motive and then hold the same for a long period. (ii) As per the balance sheets, at the time of purchase of shares/debentures etc., the scrip has been quantified as "investment" or "stock-in-trade". (iii) Most of the shares held as "Investment" have been acquired and held by the appellant for a long period. (iv) The appellant has not converted any of its investment into stock-in-trade during the accounting period. (v) The appellant has shuffled his portfolio for a better investment. (vi) The appellant has not valued the investment at cost/market price whichever is lower, which is applicable for "stock-in-trade" but has followed the cost method, which is applicable for "investments" as prescribed by the Institute of Chartered Accountants of India vide Accounting Standard-B. (vii) The appellant's claim for assessing the profits under the head 'Capital Gain' from the sale of shares held as "Investment" by the appellant has been accepted by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce found during the course of search further fortifies the same. 102. It is no doubt true that the main object of the assessee-company as per its memorandum of association was to carryon the business of an investment company and to buy, underwrite, invest in, acquire, hold shares, stocks, debentures, securities etc. The main object of the assessee-company was also to hold by way of investment shares, stocks, debentures, securities and other investments. Further, as explained on behalf of the assessee-company itself in the various submissions made before the authorities below during the course of regular proceedings, the various and substantial activities of the assessee-company were in the nature of trading in shares, lending/advancing moneys on interest and maintaining controlling stake over specific companies. It was also explained that the assessee-company has acquired shares of various companies (quoted as well as unquoted) since its inception some of which were held by it as stock-in-trade and balance are held in investment portfolio with the primary intention of acquiring and retaining controlling stake of certain companies. The shares of M/s. HCL Technologies Ltd., sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing on of the assessee's business that it could fairly be said that the surplus is the profits and gains of such business. As laid down by Hon'ble Supreme Court in the case of Calcutta Discount Co. Ltd., one cannot generalize that in every case of investment company, all transactions involving investments are nothing but dealings in the course of business. Further, as held by Hon'ble Supreme Court in the case of Ram Narain Sons (P.) Ltd. v. CIT [1961] 41 ITR 534, where the shares were purchased for acquisition of managing agency, sale of some of the shares could not be treated as an adventure in the nature of trade. Explaining further, Hon'ble Supreme Court observed that the managing agency is manifestly the source of profits of the appellants but the shares purchased and managing agency acquired were both assets of a capital nature and did not constitute stock-in-trade of a trading venture. The subsequent disposal of some of the shares could not also convert what was a capital acquisition into an adventure in the nature of trade. 104. In the present case, the investment in shares of M/s. HCL Consulting Ltd. was made by the assessee-company to acquire and retain the controlling s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regularly for the year under consideration as well as for the earlier years was accepted by the Department. In the case of Raja Bahadur Kamakhaya Narain Singh, the assessee had purchased and sold shares as well as gold in bulk and the profit realized from such sale was held by the Hon'ble Supreme Court to be not arising from an adventure in the nature of trade. Their Lordships of Hon'ble Supreme Court, however, observed that if the investments in shares and securities have been held as stock-in-trade, the loss resulting on sale thereof would be a business loss being of a revenue nature. 106. In the case of CIT v. Express Newspapers Ltd. [1964] 53 ITR 250, Hon'ble Supreme Court has held that the profits and gains of business and capital gains are two distinct concepts in the Income-tax Act, the former arises from the activity which is called business and the latter accrues because capital assets are disposed of at value higher than what they cost the assessee. Explaining further, the Hon'ble Supreme Court observed that the fact that capital gains are connected with the capital assets of the business cannot make them the profit of the business. They are only deemed to be income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntly continuous to suggest that there was a business carried on between the said two parties. It was not the business of the assessee-company to deal in those shares which are held as investment and therefore, the profits resulting from the sale of such shares cannot be said to be the profits of the business of the assessee. As a matter of fact, the assessee-company had consistently declared such profit under the head "Capital gains" and not "Profits and gains of business" in its returns of income filed regularly and the same was accepted by the Department. The profits arising to the assessee from the transaction of sale of M/s. HCL Consulting Ltd.'s shares, therefore, cannot be regarded as profits from the business and consequently, the situation contemplated in section 92 of the said transaction producing to the resident either no profits or less than ordinary profits which might be expected to arise in that business cannot be said to have been obtained in the present case. It clearly shows that both the conditions stipulated in section 92 viz., a business carried on between a resident and anon-resident and the profit arising from that business were not satisfied in relation to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in proportion to the total receipts of the business. This method of computation/determination of income to be added in the hands of the assessee under section 92 as well as the expression used in rule 11 "profits and gains derived from any business carried on in the manner referred to in section 92" further goes to show that the nature of transactions sought to be covered by the Legislature was very specific inasmuch as such transactions should have been in the course of business carried on by the assessee with non-resident and the same should have resulted in the profits and gains derived from such business. 110. It is also pertinent to note that the original section 92 was substituted by a new section by the Finance Act, 2001 with effect from1st April, 2002and before this new section becomes operative from that date, the same again came to be substituted by the Finance Act, 2002 with effect from the same date i.e.,1-4-2002. These amendments made in the provisions of section 92 were mainly to overcome the limitation of the earlier provisions in terms of scope covering only the specific type of transactions as discussed above which is quite evident from the Circular No. 14 of 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t case, the transaction for sale of shares between the assessee-company and the non-resident company i.e., M/s. Wintech Investments Pvt. Ltd. was an individual transaction and as already discussed in detail, the same did not form part of a regular business carried on between the said two parties. The said transaction of sale of shares held as investment by the assessee-company thus did not form part of the business of the assessee-company in general and that of the business carried on between the assessee and the nonresident company i.e., M/s. Wintech Investments Pvt. Ltd. in particular. Therefore, there was no question or even possibility of adjustments to the profits arising from such business as were permissible by rules 10 and 11 for determining the income to be assessed in the hands of the assessee under section 92 and accordingly, the said Rules containing computation provisions were clearly unworkable in determining such income as accepted in the aforesaid Circular. 112. It is worthwhile to note here that section 92 was applied by the Assessing Officer to the transaction of sale of shares in the present case relying on the new provisions of the said section substituted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Similar is the position as regards the transactions involving transfer of shares by other two companies i.e., M/s. HCLCL and M/s. SNIPL to M/s. WIPL. 114. The learned counsel for the assessee thereafter addressed arguments on the 1st proposition referable to the block assessment proceedings, which reads as follows: (1) Can a disclosed transaction give rise to undisclosed income especially when it is not alleged that any amount over and above what has been disclosed has in fact passed? As a corollary to the question the following question also arises for consideration: (i) Can a disclosed transaction assessed in regular assessment be at all assessed in the block period? The above issue can be conveniently decided along with the second proposition referable to Block Assessments viz., (2) Can invocation of section 92 which gives rise to notional income be classified as undisclosed income? 115. We shall first narrate the arguments of the learned counsel for the assessee on the question whether section 92 can at all be invoked when one makes a block assessment. According to him the provisions of section 92 can be invoked only in a case where the assessment is made under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to provisions of section 92 and submitted that the said provisions do not contemplate an assessee receiving an income, in the sense of something coming into the hands of the assessee. The provisions apply whether or not an assessee actually receives something. In other words, these provisions deem something to be income in the hands of the assessee, even though the assessee has not received the same. It was submitted by him that the provisions of section 92 by its very nature is something which the Assessing Officer has to determine by using his discretion, whether or not the assessee has in reality earned any income. Therefore, according to him, it was not possible for an assessee to anticipate whether an Assessing Officer would invoke his discretion and estimate an income under the provisions of section 92 of the Act. In these circumstances the assessee cannot be expected to disclose for the purposes of this Act an income, which could be brought to tax by invoking the provisions of section 92 of the Act. It was thus submitted by him that in the absence of existence of an income under section 92, the question of its disclosure, will not arise for consideration at all. It was thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt had emphasized the need for evidence to be available on record to show that the assessee received something more than what has been stated in the instrument of transfer. The Supreme Court had opined that only real income can be taxed and not notional income. 119. He submitted that section 92, which talks about fictional or notional income is anti-thesis of Chapter XIV-B of the Act, which only refers to income, which is earned but not offered to tax. It was submitted by the learned counsel that the law does not oblige a trader to make maximum profit and in this regard referred to the decision of Hon'ble Supreme Court in the case of CIT v. A. Raman Co. [1968] 67 ITR 11. The Supreme Court however, in the case of McDowell Co. did cast shadow on this principle but in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 7061 the Supreme Court had observed that the law laid down in the case of A. Raman Co. was very much relevant even today. 120. Reference was made to the decision of the Hon'ble Supreme Court in the case of CIT v. Gillanders Arbuthnot Co. [1973] 87 ITR 407 where the question before the Court arose in the context of the proviso to section 12B(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to have failed to disclose material facts in the context of reassessment proceeding under the 1922 Act had held that where in the form of return prescribed under the IT Rules, there was no clause which required a particular disclosure of income, then it cannot be said that an assessee by not showing that income failed or omitted to disclose fully and truly all material facts necessary for his assessment. 122. The facts with regard to the disclosure made by the assessee in the regular return of income had already been set out and are not being repeated here. 123. The learned counsel drew our attention to the provisions of section 158BA(2) and the Explanation thereunder, wherein the Legislature had clarified that the assessment under Chapter XIV-B is in additional to the regular assessment in respect of each previous year included in the block period and that undisclosed income of a block period should not include income assessed in any regular assessment. He also drew our attention to the provisions of section 158BB(1) of the Act and submitted computation of undisclosed income has to be on the basis of evidence found as a result of search. He stressed on the use of the word 'evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt ought not to be assessed in the block assessment. (c) CIT v. Vinod Danchand Ghodawat [2001] 247 ITR 448 (Bom.)- In this case the assessee in the Wealth Tax returns, which was accepted by the revenue, had disclosed value of gold and silver articles and jewellery. In the block assessment the source of investment in these articles found in the course of search was held to be not explained and the value of the articles was treated as unexplained investment giving rise to undisclosed income. The Bombay High Court held that since there was a disclosure of these articles in the Wealth Tax return the revenue was not entitled to treat the same as undisclosed and make an addition in a block assessment. (d) CIT v. Shamlal Balram Gurbani [2001] 249 ITR 501 (Bom.)- In this case the assessee who was a partner in a partnership firm receiving income in the form of interest, salary and rent, did not file his return for three assessment years. The firm however had filed its return in which in the audited balance sheet for the three assessment years, these payments had been disclosed. The Court held that this disclosure in the firms return was enough disclosure and therefore the income in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght to our notice the manner in which the CIT(A) has dealt with this issue. In paragraph 5.8 of his order the Commissioner has held that the mere fact that the assessee filed a return prior to the search, in which the transactions stood disclosed was not enough to hold that the same cannot be subject-matter of a block assessment proceeding. This conclusion, it was submitted, was contrary to the several decisions relied upon by the learned counsel for the assessee. 125. He drew our attention to paragraph 10.85 of the CIT(A) order wherein the submissions of the assessee with regard to non-applicability of the section 92 to the transactions in question was referred to but not considered by the CIT(A). The CIT(A) also brushed aside the fact that the assessee had already disclosed this transaction in the regular return of income and the fact that the same stood assessed by the Assessing Officer under the head 'Capital gains' in the regular assessment. The learned counsel also submitted that the CIT(A) placed the onus on the assessee to prove that the consideration paid was just and proper, when in law, it was for the revenue to establish that the assessee had earned income which had n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r dated25-2-1997from Anil Chanana of HCLCL to one AST Rajan. This letter refers to the discussion which the parties had on25-2-1997regarding TEMASEK proposal. In this letter there is a reference regarding IPO (initial public offer) of HCLCL. There is also an alternative suggestion to issue convertible bonds. There is a third proposal of Slocum (SIPL) (i.e., the assessee) forming a joint venture with TEMASEK in Mauritius in which Slocum (i.e., the assessee) will make its equity contribution in the form of its holding of equity shares in M/s. HCL Consulting Ltd. and other entities. The valuation of the equity contribution being done at a particular figure is also mentioned in this letter. The letter further highlights that this will be a mode of transferring shares to a special purpose vehicle (SPV). TEMASEK was to contribute to the equity and date in such joint venture company to be found. There is a suggestion that the contribution of debt by TEMASEK could be convertible or exchanged for the equity stock held by the SPV/M/s. Slocum (i.e., the assessee) would get back some consideration against shares transferred to SPV in the form of cash which could be brought in by TEMASEK There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Mauritius to incorporate minutes of board whereby VSIPL would give up the idea of purchasing shares of HCL Consulting Ltd. from the assessee. A reference was made to Ex. P.6/A1/123 a letter dated25-9-1998from Nilesh Agarwal to Precille of Mauritius whereby funds are arranged fromIndiaby HCL Corporation for use by VSIPL. Our attention was also drawn to a letter dated 8-10-1998 being P.6/A1/29 which is a similar letter from Nilesh Agarwal to Precille following up the arrangement of funds to VSIPL for purchase of shares of HCL/HD Mauritius Pvt. Ltd. Similar letters being P6/A1/30, P6/A1/104 dated 10-10-1998 and 2-2-2000 in connection with remittance of funds to VSIPL are also documents found in the course of search. Exh. P6/ A14/89 is a C.A's Certificate regarding the shareholding patter in M/s. WSIPL,Mauritius. The total shares of this company are US 3 Dollars and these shares are held by I.T. CON Investments Pvt. Ltd. and BSIPL. 130. The ld. DR submitted that though the aforesaid seized documents have not been referred to by the Assessing Officer in his order, since these documents are material for arriving at a conclusion on the issues involved in the present appeal, he was com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of section 158BB(1) and submitted that while making a block assessment, the Assessing Officer is empowered not only to use the material or evidence found as a result of search but also was entitled to fall back upon other materials and available with the Assessing Officer and relatable to such evidence i.e., the evidence found in the course of search. According to him the evidence found as a result of search revealing applicability of section 92 in respect of transaction of sale of shares of HCL Consulting Ltd. to M/s. WIPL and the material already available with the Assessing Officer viz., the disclosure of the transaction by the assessee would be sufficient to make the impugned addition in the block assessment. The ld. DR submitted that there has to be a harmonious construction of the definition of undisclosed income as contained in section 158BB(b) and section 158BB(1) of the Act, prescribing the mode of computing undisclosed income. 133. We have considered the rival submissions. "Undisclosed income" has been defined in the Act as follows: "158B. In this Chapter, unless the context otherwise requires,- (b) "Undisclosed income" includes any money, bullion, jewellery or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count or other document or any other transaction. It has been noticed that in some cases the appellate authorities have taken a view that this definition covers only property or receipts which have not been disclosed and does not cover income represented by entries in respect of false claims of expenses or deductions. Such view is contrary to the intention underlying the provision of bringing to tax the entire undisclosed income, including income which has been suppressed by making false claims of expenses or deduction, which have been discovered as a result of search or requisition. 61.2-1 The Finance Act, 2002 has amended the definition of undisclosed income in section 158B to specifically include therein income based on entries in books of account or other documents which represent a false claim of any expense, deduction, or allowance under the Income-tax Act." 136. The facts with regard to the filing of the return of income for the assessment year 2000-01 by the assessee, M/s. HCLCL and M/s. SNIPL have already been narrated by us in paragraphs 3 to 5 of this order. It is not in dispute that the assessee and the two other companies duly disclosed the fact that they had sold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows:- "10. Determination of income in the case of non-residents.- In any case in which the Assessing Officer is of the opinion that the actual amount of the income accruing or arising to any non-resident person whether directly or indirectly, through or from any business connection in India or through or from any property in India or through or from any asset or source of income in India or through or from any money lent at interest and brought into India in cash or in kind cannot be definitely ascertained, the amount of such income for the purposes of assessment to income-tax may be calculated:- (i) at such percentage of the turnover so accruing or arising as the Assessing Officer may consider to be reasonable, or (ii) on any amount which bears the same proportion to the total profits and gains of the business of such person (such profits and gains being computed in accordance with the provisions of the Act), as the receipts so accruing or arising bear to the total receipts of the business, or (iii) in such other manner as the Assessing Officer may deem suitable. 11. Determination of income from transactions with non-residents.- The profits and gains derived from an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ince no specific form of disclosure is contemplated by the Act as well as the Rules and the form of return prescribed, an assessee can never be held to be guilty of non-disclosure of income which is determined by applying the provisions of section 92. We therefore hold the disclosure of the transaction in question as done by the assessee was sufficient in law. A question might arise as to whether the fact that the sale of shares was to a Non-Resident at least ought to have been disclosed by the assessee. We have already noticed the lacunae in the provisions of section 92 and the Act and Rules in this regard and as to how the law with effect from1-4-2002prescribes sufficient safeguards. As the law stood at the relevant point of time which is the P.Y. relevant to assessment year 2000-01, there was no specific form of disclosure contemplated. 140. The next question is as to whether a disclosed transaction can give rise to undisclosed income. In this regard, we deem it appropriate to set out the scope of Block Assessment proceedings as explained by the Hyderabad Bench of ITAT in the case of Essem Intra-port Services (P.) Ltd. v. Assistant CIT [2000] 72 ITD 228 (Hyd.):- "Chapter XIV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments accompanying the returns, or even if the books of account based on which returns would be filed contain those details, assessee gets away-from the clutches of non-disclosure in respect of that income or property, etc. because those materials are already available, even in the absence of any recourse to search operations under section 132." 141. A perusal of the aforesaid decision of the Tribunal clearly shows that two elements have to be satisfied before the income can be said to be undisclosed income: (a) there should be a factum of non-disclosure on the part of the assessee. (b) such non-disclosure should have been detected as a result of search. 142. We have already noticed that there was a proper disclosure of this transaction in the regular terms of income filed by the assessee and the two other companies even prior to the search. Even this fact is not disputed by the Assessing Officer. But the only reason assigned by the Assessing Officer is that from an analysis of the seized document it transpired that the assessee with wilful intent to avoid capital gain tax that may arise in future transferred shares to associate foreign company at a tax neutral price and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noticed that the assessee filed ROI for assessment year 2000-01 disclosing the income (loss) on sale of shares of HCL Consulting Ltd. to M/s. WIPL,Mauritius. An order of assessment dated27-3-2003under section 143(3) has also been passed by the Assessing Officer. The present order by the Assessing Officer in the block assessment proceedings has been passed on27-2-2004. Thus, the income in question as far as M/s. Slocum Investment (P.) Ltd. (i.e., the assessee) has already been assessed in regular assessment and therefore, assessing the same income under Chapter XIV-B would be against the provisions of section 158BA(2) Explanation (b). Even on this ground the assessment under Chapter XIV-B is liable to be set aside. As far as M/s. SNIPL and M/s. HCLCL are concerned, we have already held that the assessment of their alleged undisclosed income in the hands of the assessee was not valid. 145. The provisions of section 158B(b) inserting the words "or any expense, deduction or allowance claimed under this Act which is found to be false" in the definition of undisclosed income might give an impression that even disclosed transactions, if found to result in undisclosed income as a result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... require any detailed analysis in view of the decision of the Special Bench of the ITAT, Delhi in the case of Promain Ltd. v. Dy. CIT [2005] 95 ITD 489 and the Hon'ble High Court in the case of M.B. Lal v. CIT [2005] 279 ITR 298 (Delhi), wherein it has been held that the Tribunal does not have power to adjudicate upon the validity of search on the ground of non-satisfaction of the conditions prior to issue of a warrant of search. The fifth issue referable to block assessment viz., whether the block assessment is invalid in view of defective notice under section 158BC of the Act is again an issue which has already been decided by the Special Bench of the ITAT, Amritsar Bench in the case of Smt. Mahesh Kumari Batra v. Jt. CIT [2005] 95 ITD 152 (SB) wherein it has been held that any defect in notice under section 158BC of the Act will not vitiate the order of the assessment. In view of the above, these issues are decided against the assessee. 149. In the result, the appeal of the assessee is partly allowed. 150. Now we shall take up the Revenue's appeal for consideration which is IT (SS) A. No. 45/Delhi/2005. 151. The first ground of appeal of the Revenue reads as follows:- "On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... | | | | | |_____________________________________| | | HCL Deluxe NA (Joint Venture) HCL Deluxe India Pvt. Ltd. HCL Deluxe, USA The three Indian investment companies namely HCL Corporation Ltd., Shiv Nadar Investment (P.) Ltd. and Slocum Investment (P.) Ltd. sold their 100 per cent shareholdings in HCL-HDX Holdings (Mauritius) (P.) Ltd. to M/s. Vama Sundari Investment (Mauritius) (P.) Ltd. hereinafter called [VSIPL(M)] for a consideration of US$ 2.11 Million (Approx.) in September, 1998. HCLHDX Holdings Pvt. Ltd.,Mauritius, which became Wholly Owned Subsidiary (WOS) of Vama Sundari Investments Pvt. Ltd. (Mauritius), in turn, sold the shares of HCL Deluxe to Deluxe Corporation of theUSA, for US$ 23.4 Million in April, 1999. 153. It may be relevant at this stage to point out that for establishing of joint venture company the assessee and the two other companies were granted permission/approval by the RBI vide its letter dated 31-3-1997. Later on this approval was modified by letter dated24-5-19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ip interest to Deluxe Corporation ofUSA. 157. In reply the assessee submitted that with reference to point (a) above it neither is in possession nor is expected to be in possession of the aforesaid details which the Assessing Officer may obtain directly from the said company. With reference to points (b) and (c) the assessee pleaded inability to comply with the same as the assessee was not a party to the agreement. 158. The Assessing Officer took up for consideration the following issues:- A. Has the assessee-company sold their 100 per cent shareholding in HCL-HDX Holdings (Mauritius) Private Limited to a company namely, "M/s. Vama Sundari Investment Pvt. Ltd.,Mauritius" in normal course of business after applying due business acumen. B. Whether the whole transaction was designed in such a manner that resulted into the diversion of income and evasion of Income Tax inIndia. C. If it is designed, then who are the real beneficiaries and how they did it. D. What is the evidence available which supports the argument that the whole transaction was designed with some ulterior motive. E. Whether the assessee-company is really not in a position to provide the information asked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his is authored by Mr. Anil Chanana, a key person in HCL Group. These are addressed to Mr. Parwez and Mr. AST Rajan respectively. Another reference was made to page 8 of Annexure A-23 seized from party P-4. This is a Dollar cash-flow for the period1-4-1999to31-5-1999. There is a scribbling on top of this chart "Mr. Nadar31-5-1999". In this Dollar cash-flow the receipt in US Dollars of 2,44,34,255 has been shows against - HDX Sale as an inflow of Dollars. From this the Assessing Officer concluded that VSIPL(M) and the assessee were closely connected. Another reason given by the Assessing Officer was that Shiv Nadar was the Chairman who had major shareholdings in other companies belonging to the HCL group of companies. He was also a Director in M/s. VSIPL(M) and a signatory in some of the bank accounts standing in the name of the said company. He was also receiving salary from HCL-HDX Holdings Pvt. Ltd. (M). The Assessing Officer therefore, concluded that VSIPL(M) was controlled by the assessee and its group companies through Mr. Shiv Nadar. C. On the question of the circumstances leading to the sale of 50 per cent of the ownership interest in HCL Deluxe NV to Deluxe Corporation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... $ 23,043,727 has been established on the basis of page Nos. 8 and 11 of Annexure 23 seized by party P4. A. Dollar cash inflow for the period of1-4-1999to31-5-1999towards the sale of shares of HDX - US $ 24,434,225. B. Dollar cash outflow for the period1-6-1999to30-6-1999mentioned against Deluxe - US $ 1,390,498. C. Net receipt - US $ 23,043,727 Thus additional tax on income of US $ 20,933,727 (23,043,727 - 2,110,000) has escaped assessment due to the colourable device used by the group." 161. The Assessing Officer has thereafter referred to tax evasion and employing colourable device to avoid tax. Reference was made to the decision of the Supreme Court in the case of CIT v. Sithal Das Tirath Das [1961] 41 ITR 367 and decision in the case of McDowell Co. Ltd. and several other decisions. The Assessing Officer ultimately assessed the difference between the sale consideration received by the assessee and the two other companies from VSIPL(M) and the Sale Consideration received by M/s. HCL-HDX Mauritius (P.) Ltd. from Deluxe Corporation,USAon sale of shares held in HCL Deluxe N.V. as undisclosed income of the assessee. 162. Before the CIT(A), the assessee pointed out that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owner of HCL-HDX Holdings (Mauritius) (P.) Ltd. in September, 1998, and, after that date, it was VSIPL (Mauritius) which was the owner of HCL-HDX Holdings (Mauritius) Pvt. Ltd. It was again clarified that had the assessee and the two other companies not sold their shares in HCL-HDX Holdings (Mauritius) (P.) Ltd. and continued to hold the same and if HCL-HDX Holdings(M)(P.) Ltd. transfers its holding in HCL Deluxe NV to Deluxe Corporation, the resultant consideration or the gains arising therefrom could still not have been taxed inIndiain the hands of the assessee. That the assessee and the other two companies could not have taken any cognizance of the transaction at all. It was thus argued that, by no stretch of imagination, can it be contended that US $ 23.4 million received by a non-resident company is the "undisclosed income" of the assessee. 163. Apart from the above, the various inferences drawn by the Assessing Officer from the seized documents were also explained by the assessee and it was submitted that the assessment made in the hands of the assessee was unsustainable. The CIT(A) held as fol1ows:- "Thus, the appellant company has raised a valid plea that the shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis of which the addition was made by the Assessing Officer was between two Non-resident companies (a Dutch JV company and aUSAcompany). Since the second transaction was involving two Nonresident companies, therefore, there was absolutely no need on the part of these Non-resident companies to inform this transaction to the Indian Tax Authorities or it can be said that the same has taken place outside the taxable territory of India, therefore, cannot be brought to tax under Indian Income-tax Law. Further, I agree with the appellant's contention that even if it is assumed that no off loading of investment in M/s. HCL-HDX Holding (Mauritius) (P.) Ltd. would have occurred, then also the seller of shares of the JV company would have been M/s. HCL-HDX Holdings (Mauritius) (P.) Ltd. and not the appellant and the two erstwhile companies. In that case also, out of such sale, no capital gain would have arisen inIndiaand only corpus fund of M/s. HCL-HDX Holdings (Mauritius) (P.) Ltd. would have been appreciated whereby only the value of investment of the appellant and the other companies in such wholly owned subsidiary would have increased. The fact is that the block of shares held and la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, U.S.A. He pointed out to seized document P.23 A1 P6 and P-30 A1 P6 which clearly showed that funds for purchase of shares of HCL-HDX Holdings (M) (P.) Ltd. by M/s. VSIPL(M) were provided from the HCL group inIndia. He submitted that a comparison of the above seized document with the FIRC evidencing in flow of consideration to the assessee and the two companies being the consideration paid by VSIPL (M) for purchase of shares of M/s. HCL-HDX-Holdings (M) (P.) Ltd. clearly showed that the funds which went out ofIndiacame back toIndia. He also brought to our notice the documents seized in the course of search viz., the Dollar Cash-flow Statement for the period1-4-1999to31-5-1999which is P4/A23/8 and Dollar Cash Flow for the period31-8-1998to30-9-2000which is P4/A53/S4. His submission was that these documents found in the course of search clearly indicated that the ownership, control and decision-making power in respect of all the Overseas Corporate Body lay with the assessee and the two companies and therefore, the two companies were to be treated as dummy companies and the profit on sale of shares of HCL Deluxe N.V. have to be taxed in the hands of the assessee and the two other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated operations, then any income which, by virtue or in consequence of the transfer, either alone or in conjunction with associated operations, has become the income of a non-resident shall, whether it would or would not have been chargeable to income-tax apart from the provisions of this section, be deemed to be the income of the first mentioned person for all the purposes of this Act. Explanation: The provisions of this sub-section shall apply also in relation to transfers of assets and associated operations carried out before the commencement of this Act." 166. The following are the purpose and intent behind the above provision and the ingredients to be satisfied for application of these provisions. Under the Act, a resident is chargeable on world income basis. It is immaterial where his income accrued or arose whether withinIndiaor outsideIndia, or where it was received, whether withinIndiaor outsideIndia. On the other hand, a non-resident is chargeable to Indian taxation in respect of his income received or deemed to be received inIndiaand any income which accrued or arose or is deemed to have accrued or arisen inIndia. Consequently, in the case of a non-resident, if his i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed atMauritius. These notings found in the seized document according to the ld. DR were that of Shiv Nadar. His submission was that the trainer of HCL-HDX (M) (P.) Ltd. shares by the assessee and the two other companies in favour of VSIPL(M) is transfer of asset which generated the income in question and which attracts the applicability of the provisions of section 93 of the Act. His further submission was that once the primary conditions applicable under section 93 are satisfied it is then for the assessee to prove that the transaction in question was a bona fide commercial transaction and was not for the purpose of avoiding liability to taxation. He drew our attention to the provisions of section 93(3) of the Act in this regard. The ld. DR thus submitted that the action of the Assessing Officer in bringing to tax the income in question can be sustained on this basis. On the applicability of the provisions of section 93 reference was also made by the ld. DR to the decisions of the Supreme Court in the case of M.CT.M. Chidambaram Chettiar. 168. His further plea was that notwithstanding the decision of the Hon'ble Supreme Court in the case of Azadi Bachao Andolan, still the princi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. He submitted that as an appellant, the revenue cannot seek to put forth such plea. It may be relevant at this stage to mention that the ld. DR in support of his plea of invoking the provisions of section 93 in the present case has placed reliance on the decision of the Hon'ble Supreme Court in the case of Hukumchand Mills Ltd. The ld. counsel for the assessee submitted that the course suggested by the ld. DR cannot be adopted and in this connection relied on the decision of the Bombay High Court in the case of CIT v. T.M. Bhumraddi [1958] 33 ITR 82. His submission was that on the plea raised by the DR before the Tribunal, it has to be assumed that the transaction by the assessee and the two other companies i.e., sale of shares of HCL-HDX (M) (P.) Ltd. to VSIPL (M) was a sham transaction. Whether the plea of sham can be allowed to be raised at this stage as it would negate the very case sought to be made out by the Assessing Officer. Referring to the decision in the case of Hukumchand Mills Ltd. he submitted that in the said case there was no change of the character assessment as in the present case. His submission was that the applicability of section 93 does not arise out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss his grievance whereas the Revenue can have recourse to the provisions of section 147 for bringing to tax income escaping assessment and section 263 where the order of the Assessing Officer is erroneous and prejudicial to the interest of the revenue. 172. We have considered the rival submissions. At the outset, we have to point out that the transaction in question namely sale of shares of HCL-HDX (M) (P.) Ltd. by the assessee and the two other companies to VSIPL(M) took place in the month of September, 1998 i.e., the previous year relevant to assessment year 1999-2000. The assessee as well as the two other companies had filed the returns of income for these assessment years wherein the sale of these shares duly reflected in their returns of income and the documents filed therewith. A copy of the return of income of the assessee for the assessment year 1999-2000 is placed at page Nos. 291 to 295 and that of HCLCL is placed at page Nos. 310 to 312 and that of SNIPL is placed at page Nos. 335 to 339. It is, therefore, seen that there has been a disclosure of these facts in the return of income filed prior to the date of search. We have already noticed while discussing the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is rule: Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground." Rule 27 provides that: "The respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him." 175. The revenue has not chosen to raise an additional ground of appeal praying for sustaining the order of the revenue authorities on the basis of this new plea. It bas been held in the case of Hukumchand Mills that the Tribunal has sufficient power under section 33(4) of the Act, 1922 [section 254(1) of the Act of 1961] to entertain a new argument by the revenue and that rules 12 (present rule 11 of ITAT Rules) and 27 are not exhaustive of the powers of the Appellate Tribunal. That the rules are merely procedural in character and do not, in any way, circumscribe or control the power of the Tribunal under section 33(4) of the Act. [Section 254(1) of the Act of 1961]. 176. The Hon'ble Supreme Court in the case of National Thermal Power Corpn. Ltd has laid down that (a) it is the discretion of the Tribunal to admit or not to ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion should be taken into consideration for the purpose of computing the written down value." 179. The Hon'ble Gauhati High Court in the case of Assam Co. (India) Ltd dealt with the decision of the Hon'ble Supreme Court in the case of Hukumchand Mills and Mahalakshmi Mills case relied upon by the learned counsel for the revenue in the context of admission of new plea for adjudication by the Tribunal for the first time. The Court also considered the decision of the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. The question before the Court was as to whether the Tribunal ought to have considered the plea of the applicant-company that it was entitled to the benefit of weighted deduction under section 35B(1)(b)(iv) of the Act in the absence of any appeal or any cross-objection filed by it against the order of the Commissioner of Income-tax (Appeals). The Court after considering several judicial pronouncements on the subject held as follows: "We are, therefore, of the view that it is permissible on the part of the Tribunal to entertain aground beyond those incorporated in the memorandum of appeal though the party urging the said ground had neither appealed befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of the revenue authorities can be sustained. Moreover, we should not forget the fact that we are dealing with an assessment under Chapter XIV-B of the Act, under which determination of undisclosed income should be made on the basis of material found in the course of search. 181. We are also of the view where an assessee seeks to put forth a new plea before Tribunal without facts necessary for adjudication of Appeal being available on record in allowing such plea, the approach of the Tribunal should be different for the following reasons:- (a) An assessee has no other avenue and if on the facts and in law if ultimately it is found that the assessee is not liable to tax the Revenue cannot have grievance. After all, Article 265 of the Constitution of India provides that no tax shall be levied and collected except by authority of law. If ultimately the assessee is found to be liable to tax, he compensates the Revenue in the form of interest. Therefore, the Tribunal can even think of a remand of the case for a finding on facts or can adjudicate on facts itself. (b) On the other hand the Revenue has other options open to it under the Act. If the order of an Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer is empowered under the various provisions of the Act to issue summons for examination of a person. He has the powers of aCivil Courtas are vested under the Code of Civil Procedure when trying a suit regarding discovery and inspection, compelling production of books, issuing commissions and enforcing attendance of any person. These powers are meant to ensure investigation regarding existence or non-existence of a fact. Without exhausting those remedies the Revenue cannot be heard to say that there was a lack of co-operation on the part of the assessee. In this connection, we also wish to add that the documents found at the time of search itself did not throw any light on the conclusions arrived at by the Assessing Officer. Apart from the above, the basic premise of the Assessing Officer was that funds for purchase of shares by VSIPL(M) had been arranged fromIndiaand in this connection the Assessing Officer had placed reliance on documents A1 P.6 page 23 and A1 P6 p.30. The first document is dated25-9-1998and the second document is dated10-10-1998. The transaction of sale of shares have however taken place in the month of September, 1998. In the seized document da ..... X X X X Extracts X X X X X X X X Extracts X X X X
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