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Rockland Hotels Ltd., Mona Infotech Pvt Ltd, Avee Medi Surgical Pvt. Ltd, Akhil Meditech Pvt. Ltd, Hitesh Constructions Pvt. Ltd, Radhika Surgical Pvt. Ltd., Kunal Medicare Pvt. Ltd., Glory Lifescience Pvt. Ltd, Umesh Pharmaceuticals Pvt. Ltd., Lipi Finstock Ltd., Himanshu Medicare Pvt. Ltd., Aesthetica Enterprises Pvt. Ltd., Aditya Medicos Pvt. Ltd. Versus Income Tax Settlement Commission Principal Bench, & Others

2015 (10) TMI 1904 - DELHI HIGH COURT

Settlement application - whether the petitioner in each of these petitions is a related party of the respective specified person under section 245C(1)(ia)? - Held that:- Admittedly, neither M/s. Rockland Hospitals Ltd. nor any of its directors individually or their relatives individually hold any substantial interest in the applicant companies. The finding of the Settlement Commission is that there is no shareholder having substantial interest in this company i.e. there is no shareholder having .....

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d so. Since the legislature has not provided for clubbing of the shareholding of different persons to determine substantial interest, the same cannot be considered. The fact that the legislature has catered for a situation of beneficial ownership of shares shows that the omission of clubbing of shareholding is not unintentional.

The alleged fact that four directors of the specified person (M/s Rockland Hospitals Ltd.) hold 50% shares of the petitioner companies does not satisfy the co .....

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clause (a)(v), only if a director of the Petitioner companies had a substantial interest in the specified person (M/s Rockland Hospitals Ltd.), then, the petitioner companies, their directors and relatives of their directors qualify as related parties. Under clause (a)(vi), the petitioner companies would qualify as related parties, if the specified person (M/s Rockland Hospitals Ltd.) or any of its directors or any relative of any of its directors had a substantial interest in the petitioner co .....

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ta Jha, Advocates For the Respondents : Mr Rohit Madan, Mr Akash Vajpai and Mr Zoheb Hussain, Advocates JUDGMENT Sanjeev Sachdeva, J 1. These 13 Writ Petitions arise out of a common Judgment dated 23.04.2014 passed by the Income Tax Settlement Commission (hereinafter referred to as the Settlement Commission), in a batch of 25 settlement applications filed under section 245C (1) of the Income Tax Act, 1961 (hereinafter referred to as the said Act ). Out of the 25 applications, 12 applications wer .....

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s a related party of the respective specified person under section 245C(1)(ia) of the Act ? 3. Before adverting to the facts of each of the cases, it would be expedient to examine the provisions of section 245C of the Act to ascertain as to who qualifies as a related party in terms of clauses (a)(v) and (a)(vi)(B) of the Explanation to sub-section (1) to section 245C. Since the petitioners in these petitions claim themselves to be related parties in terms of the above referred clauses only, so t .....

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such other particulars as may be prescribed, to the Settlement Commission to have the case settled and any such application shall be disposed of in the manner hereinafter provided : Provided that no such application shall be made unless,- (i) in a case where proceedings for assessment or reassessment for any of the assessment years referred to in clause (b) of sub-section (1) of section 153A or clause (b) of sub-section (1) of section 153B in case of a person referred to in section 153A or sect .....

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(b) of sub-section (1) of section 153B in case of the applicant, being a person referred to in section 153A or section 153C, have been initiated, the additional amount of income-tax payable on the income disclosed in the application exceeds ten lakh rupees, (ii) in any other case, the additional amount of income-tax payable on the income disclosed in the application exceeds ten lakh rupees, and such tax and the interest thereon, which would have been paid under the provisions of this Act had th .....

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pecified person is a company, firm, association of persons or Hindu undivided family, any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member; (iii) any individual who has a substantial interest in the business or profession of the specified person, or any relative of such individual; (iv) a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or professi .....

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mber; (vi) any person who carries on a business or profession,- (A) where the specified person being an individual, or any relative of such specified person, has a substantial interest in the business or profession of that person; or (B) where the specified person being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substanti .....

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ch person is, on the date of search, beneficially entitled to not less than twenty per cent of the profits of such business or profession. (1A) For the purposes of sub-section (1) of this section , the additional amount of income-tax payable in respect of the income disclosed in an application made under sub-section (1) of this section shall be the amount calculated in accordance with the provisions of sub-sections (1B) to (1D). (1B) Where the income disclosed in the application relates to only .....

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t of income-tax payable in respect of the income disclosed in the application relating to the previous year referred to in sub-section (1B) shall be,- (a) in a case referred to in clause (i) of that sub-section, the amount of tax calculated under that clause; (b) in a case referred to in clause (ii) of that sub-section, the amount of tax calculated under that clause as reduced by the amount of tax calculated on the total income returned for that year; (1D) Where the income disclosed in the appli .....

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ication made under sub-section (1) shall be accompanied by such fees as may be prescribed. (3) An application made under sub-section (1) shall not be allowed to be withdrawn by the applicant. (4) An assessee shall, on the date on which he makes an application under sub-section (1) to the Settlement Commission, also intimate the Assessing Officer in the prescribed manner of having made such application to the said Commission. (highlight & underlining supplied) 5. From a reading of clause (a) .....

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cified person; or (iii) an association of persons, a member of which, has a substantial interest in the business or profession of the specified person; or (iv) a Hindu undivided family, a member of which, has a substantial interest in the business or profession of the specified person; or (v) any director, of such a company or (vi) any partner, of such a firm or (vii) any member, of such an association of persons; or (viii) any member, of such a Hindu undivided family; or (ix) any relative of su .....

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he specified person (being an association of persons), that association; or (iv) the specified person (being a Hindu undivided family), that family; or (v) any director of such specified person (company); or (vi) any partner of such specified person (firm); or (vii) any member of such specified person (association of persons); or (viii) any member of such specified person (Hindu undivided family); or (ix) any relative of such director of such a specified person (company); or (x) any relative of .....

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sub-section 1 to section 245C of the Act. 7. So, under clause (a)(v), only if a director of the applicant company has a substantial interest in the specified person (company), then, the applicant company, its directors and relatives of its directors qualify as related parties. A company would not qualify as a related party merely because any relative of one of its directors has a substantial interest in the specified person. However, under clause (a)(vi), the applicant would qualify as a relate .....

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ative of Director of SP Relative of Director of RP - (where signifies having a substantial interest) 9. We may also note that the Explanation uses the word means . It is trite to say that when in the definition clause given in any statute the word means is used, what follows is intended to speak exhaustively. When the word means is used in the definition, to borrow the words of Lord Esher, M.R. in Gough v. Gough [(1891) 2 QB 665 : 60 LJQB 726 : 65 LT 110] it is a hard-and-fast definition and no .....

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h in its ordinary meaning may or may not comprise. Bharat Coop. Bank (Mumbai) Ltd. v. Employees Union, (2007) 4 SCC 685 at page 695 The words means and includes , on the other hand, indicate an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably be attached to these words or expressions . (See : Dilworth v. Commissioner of Stamps [1899 AC 99, 105-106 : (1895-9) All ER Rep Ext 1576] (Lord Watson); Mahalakshmi Oil Mills v. State of A.P. [(1989) 1 SCC 164, 169 .....

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l interest in a business or profession, where if, the business or profession is carried on by a company, then on the date of search, such person is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend, whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting power and in any other case, such person is, on the date of search, beneficially entitled to not less than twenty per cent of the profits of such busines .....

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ground that both the companies are substantially controlled by the Srivastava and the Bhandari families and has common shareholding and directorship. It is also contended that more than 20% of the equity share capital of the specified person M/s Somya Constructions Pvt. Ltd. was held by Mrs. Mala Srivastava wife of Mr. Rajesh Srivastava a director of the petitioner. It claims to be covered by clause (a)(v) of the explanation. 14. The Settlement Commission, qua the petitioner, by the impugned ju .....

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interest in the business of specified person. Holding of shares by the relatives of such Director either singly or jointly is of no significance. Accordingly, holding of more than 20% shares of M/s. Somya Constructions Pvt. Ltd. by Smt. Mata Srivastava and Smt. Sushmita Srivastava is of no significance. As no Director of the applicant, company holds any substantial interest in the business of M/s. Somya Constructions Pvt. Ltd., it cannot be said that the conditions of explanation (a)(v) are sat .....

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Hospitals Ltd. Accordingly, it is held that M/s. Rockland Hotels Ltd. is not a related person either to Somya Constructions Pvt. Ltd. or to M/s. Rockland Hospitals Ltd. (underlining supplied) 15. Holding a substantial interest in the specified person, by a director of the applicant, is a necessary qualifying condition. If the legislature had intended to enlarge the ambit of the qualifying condition by including a relative of the director it would have specifically provided so. Wherever the relat .....

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ns Pvt. Ltd.. Admittedly that is not the case and the said condition is not satisfied. None of the directors of M/s Rockland Hotels Ltd. hold substantial interest in M/s Somya Constructions Pvt. Ltd. Merely because a relative of one of the directors of the applicant/petitioner is stated to be holding a substantial interest in the specified person would be of no avail. We do not find any infirmity with the reasoning of the Settlement Commission. Since the conditions of Explanation (a)(v) are not .....

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Pvt Ltd.) 17. The Settlement Commission qua the petitioners hereinabove has held as under: The AR claims that clause (vi) of the Explanation is attracted in respect of these 9 companies. Examination of the explanation (a)(vi)(B) reveals that it is applicable to a person where the specified person being a company itself holds or any Director of such company holds or any relative of such Director holds a substantial interest in the business or profession of that person. In other words, first it is .....

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eir relative hold any substantial interest in the applicant company. Examination of the application of M/s. Radhika Surgical Pvt. Ltd. reveals that its total shareholding is of 18,72,500 shares, with M/s. Rockland Pvt. Ltd. holding 18,62,500 shares which comes to 99% of shares. Thus, M/s. Rockland Pvt. Ltd. is the only shareholder having substantial interest in this company. Neither M/s. Rockland Hospitals Ltd. nor any of its directors or their relative hold any substantial interest in the appli .....

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sh Construction Pvt. Ltd. reveals that its total shareholding is of 4,44.847 shares, with M/s. Rockland Pvt. Ltd. holding 4,34,847 shares which comes to 97% of shares. Thus, M/s. Rockland Pvt. Ltd. is the only shareholder having substantial interest in this company. Neither M/s. Rockland Hospitals Ltd. nor any of its Directors or their relative hold any substantial interest in the applicant company. Examination of the application of M/s. Himanshu Medicare Pvt. Ltd. reveals that its total shareho .....

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Pvt. Ltd. holding 15,47.500 shares which comes to 99% of shares. Thus. M/s. Rockland Pvt. Ltd. is the only shareholder having substantial interest in this company. Neither M/s. Rockland Hospitals Ltd. nor any of its Directors or their relative hold any substantial interest in the applicant company. Examination of the application of M/s. Kunal Medicare Pvt. Ltd. reveals that its total shareholding is of 20,04,250 shares, with M/s. Rockland Pvt. Ltd. holding 19,94,250 shares which comes to 99%,of .....

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reholder having substantial interest in this company. Neither M/s. Rockland Hospitals Ltd. nor any of its directors or their relative hold any substantial interest in the applicant company. Examination of the application of M/s. Lipi Finstock Pvt. Ltd. reveals that its total shareholding is of 15,58,200 shares, with M/s. Rockland Pvt. Ltd. holding 15,57,400 shares which comes to 99% of shares. Thus, M/s. Rockland Pvt. Ltd. is the only shareholder having substantial interest in this company. Neit .....

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he applicant company. The examination made above reveals that M/s. Rockland Hospitals Ltd. does not hold any shares in these 9 companies. None of the Directors of M/S. Rockland Hospitals Ltd. hold any substantial interest in these 9 companies. None of the relatives of the directors of Rockland Hospitals Ltd. hold any substantial interest in these 9 companies. M/s. Rockland Pvt. Ltd. is neither a Director in M/s. Rockland Hospitals Ltd. nor a relative of Directors. Thus, conditions mentioned in e .....

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rticipate in the profits), carrying not less than 20% of voting power, is deemed to have substantial interest. So the section envisages a situation where a shareholder has a right to participate in the profits and has voting power. It is only the equity shareholders who are normally entitled to voting power and participate in the profits. Such an equity shareholder may hold shares in his own name or in the name of his relatives or associates, but be the beneficial owner of such shares. In such a .....

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tors either do not have shareholdings in these 9 companies or their shareholding in less than 9%. Consequently, voting power of these Directors in 9 applicant companies is either zero or of a percentage less than 20%. Rockland Pvt. Ltd. is an independent company and exists on its own as a legal entity. The company is a legal person entirely, different from its shareholders even if there is only one shareholder. Rights and liabilities of a company are different from the rights and liabilities of .....

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in profits of the companies in which Rockland Pvt. Ltd. has a substantial interest. Thus, the Directors of Rockland Hospitals neither participate in the profits of the above 9 applicant companies nor have any voting power in these companies. We are accordingly of the view that the definition of beneficial owner of the share in explanation (b) applies only to shares held in a company by a person either in his own name or in the name of other, persons. But this does not apply to the situation in t .....

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e capital of M/s. Rockland Pvt. Ltd. and therefore these 9 companies are related to Rockland Hospitals Ltd. is to be rejected as it is without any substance. The definition of related person has been provided in the Explanation (a) to proviso below section 245C(1). The words used are the applicant, in relation to specified person referred to in clause (ia), means". Thus, the definition provided in Explanation is a complete definition and does not provide for any inclusive definition. Thus, .....

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are not satisfied. None of the Directors of these 9 companies holds substantial interest in M/s. Rockland Hospitals Ltd., a specified person. Accordingly, conditions of clause (v) of the Explanation are also not satisfied. Clause (i) and (iii) of Explanation are not applicable. Similarly, clauses (ii) and (iv) are also not applicable. Thus, under the facts and circumstances of the case, there is no relationship of these 9 companies with M/s Rockland Hospitals Ltd. within the meaning of Explanat .....

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e any relative of one of its directors has a substantial interest in the specified person. Further, the petitioner companies would qualify as a related party, if a specified person (company) or any of its directors or any relative of any of its directors have a substantial interest in the petitioner companies. 19. In the case of the abovementioned 9 petitioners clause (a)(vi) is stated to be applicable and they are stated to be related parties to M/s Rockland Hospitals Ltd. Therefore the specifi .....

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tors of the specified person (M/s Rockland Hospitals Ltd.) claim to have substantial interest in Rockland Pvt. Ltd. Individually, however, these 3 Directors either do not have shareholdings in the 9 petitioners or their shareholding is less than 9%. Consequently, these Directors do not have a substantial interest in either of the 9 petitioners. The plea that the directors of the specified person (M/s Rockland Hospitals Ltd.) hold an indirect share in the Petitioner company, i.e. through M/s Rock .....

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referred to in Explanation (b)(A) refers to shares held in a company by a person either in his own name or in the name of other, persons. A corporate entity is a separate legal entity. Merely because a director of the specified person holds shares in a company which in turn holds shares in the Petitioner would not make the director the beneficial holder of the shares of the Petitioner and thus qualify the petitioner as a related party. We do not find any infirmity with the reasoning of the Sett .....

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ion (a)(vi)(B) reveals that it is applicable to a person where the specified person being a company itself holds or any Director of such company holds or any relative of such Director holds a substantial interest in the business or profession of that person. In other words, first it is necessary to find out who are the persons who hold a substantial interest in the business of applicants. Examination of the application of M/s. Mona Infotech Pvt. Ltd. reveals that its total shareholding is of 6,7 .....

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ination of the shareholding details reveals that there is no shareholder having substantial interest in this company. Examination of the application of M/s. Umesh Pharmaceuticals Pvt. Ltd. reveals that the total shareholding of the company is of 7,40,625 shares 20% of shareholding comes to 1,48,125 shares. Examination of the shareholding details provided in the settlement application reveals that there is no shareholder having substantial shareholding in this company. Accordingly, it is clear th .....

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it cannot be held that the above 3 applicant companies are related to M/s. Rockland, Hospitals Ltd. The argument of AR that cumulative holding of the Directors of M/s. Rockland Hospitals in the above companies exceeds 20% and therefore they have substantial interest, cannot be accepted. The provisions of Explanation (a) very clearly define the relationship based on any Director or his relative having substantial interest. The provisions of the Explanation do not provide that cumulative holding o .....

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inition of substantial interest and also the definition of related person as provided in Explanation (a) and (b) would have suitably provided for it. The present definition is very clearly applicable only in respect of a person having a substantial interest. Two or more persons cumulatively having substantial interest cannot be read into the present definition. We accordingly find no merit in the argument that cumulative holding of Directors should be taken into account to determine whether they .....

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to be applicable and they are stated to be related parties to M/s Rockland Hospitals Ltd. Therefore the specified person (i.e. M/s Rockland Hospitals Ltd.) or any of its directors or any relative of any of its directors should have a substantial interest in the petitioner companies. Admittedly, neither M/s. Rockland Hospitals Ltd. nor any of its directors individually or their relatives individually hold any substantial interest in the applicant companies. 23. The finding of the Settlement Commi .....

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