TMI Blog2002 (10) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... case of W.T. Ramsay was that one must consider fiscal consequences of a pre-planned series of transactions and one has not to dissect the scheme and consider individual stages separately. This judgment squarely applies to our case - petition fails - - - - - Dated:- 30-10-2002 - Judge(s) : S. H. KAPADIA., J. P. DEVADHAR. JUDGMENT The judgment of the court was delivered by S.H. KAPADIA J.-By this writ petition under article 226 of the Constitution, the petitioner seeks to challenge, inter alia, notices dated July 14, 2002, July 15, 2002 and July 15, 2002, being exhibit J. 1 to exhibit J. 3 issued under section 226(5) read with the Third Schedule to the Income-tax Act, 1961, under which the Deputy Commissioner of Income-tax-respondent No. 1, has prohibited Twinstar Holdings Limited-petitioners from receiving shares mentioned in the impugned notices. By the said notices, the depository participant is also restrained from delivering the impugned shares to any person(s). Facts: The petitioner-Twinstar Holdings Limited, is a Mauritius based company, being an overseas corporate body, registered under the Mauritius Companies Act, 1994. The petitioner was the holder of 100 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdingly appointed. On appointment, the liquidator made applications to respondents Nos. 1, 2 and 3 herein, being the Deputy Commissioner of Income-tax, Range-III(1), Range-III(2) and Range III(3), Mumbai. Accordingly, NOC was obtained under section 178 from the said three respondents on June 15, 1999, May 26, 1999 and June 14, 1999 in the case of PNIT, DAIL and SCRM, respectively. On June 17, 1999, an application was made to the Reserve Bank of India (RBI) by the petitioner-company for approval of transmission of shares of SIIL and MALCO on fully repatriable basis upon liquidation of the investment companies. On November 30, 1999, the Reserve Bank of India granted conditional approval for transmission of shares on fully repatriable basis in favour of the petitioners. However, on January 29, 2000, and March 13, 2000, the Reserve Bank of India advised the petitioner that the extent of repatriability of the shares had to be ultimately decided by the Foreign Investment Promotion Board and, therefore, the Reserve Bank of India should be approached only after obtaining approval from the Foreign Investment Promotion Board. On May 16, 2000, the petitioner received the approval from the For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies, stay was sought from respondents Nos. 1 to 3 under section 220(6) of the Income-tax Act pending hearing and final disposal of the appeal by the Commissioner of Income-tax (Appeals). The applications remained undisposed of. Therefore, the liquidators moved, on the administrative side, Commissioner of Income-tax-III, being respondent No. 4 to the petition, for stay in March, 2002. According to the petitioners, without any prior intimation, hearing or correspondence, respondents Nos. 1 to 3 issued impugned notices on July 14, 2002, for PNIT, July 15, 2002, for DAIL and July 15, 2002, for SCRM to DP stating that the three investment companies have failed to pay the tax arrears due from them and prohibiting the petitioner-company and the DP from receiving/delivering shares to any person whomsoever. To complete the chronology of events on July 15, 2002, respondent No. 1 passed orders under section 179 of the Income-tax Act against two ex-directors of PNIT holding them liable for payment of tax arrears of PNIT, inter alia, on the ground that the assets of PNIT have been transmitted to the petitioner and that PNIT had no assets so as to enable the Department to recover the tax arrears ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the petitioner-company was not liable to pay capital gains tax under article 13 and article 22 of the Double Tax Avoidance Agreement (DTAA) between India and Mauritius. That, the entire process of conversion of stock-in-trade to investment and liquidation of the three investment companies was a device formulated with the sole motive of avoiding tax liability. That, Dwarkaprasad Agarwal and Agnivesh Agarwal were the only two shareholders of the petitioner-company and that they were occupying key positions in all the three investment companies. In para. 6 of the petition, the shareholders of the three investment companies are mentioned. They all belong to the families of Dwarkaprasad Agarwal and Agnivesh Agarwal. That, the promoters of the petitioner-company were the directors and promoters of the three investment companies. That, the Agarwal family were the promoters of the petitioner-company. They were also the promoters of the three investment companies. They were also the promoters of the Sterilite group of companies. That, in the circumstances, the court should lift the corporate veil as the decision to liquidate the three investment companies and transfer their shares at book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -99 and, therefore, for the limited purposes of section 281 and to protect the interests of the Revenue, the holding in the above shares has been treated as investments. That, section 281 did not contemplate making of any order by any authority. It was declaratory in nature. That, there was no question of adjudication of validity of the impugned transfer and, therefore, there was no question of the authority concerned to go to a civil court for a declaration. That, the Department had not treated the transfer of shares from the investment companies to the petitioner-company as void, ab initio. That section 281 does not declare the transfer to be void, ab initio. That, it only declares the transfer to be void to the extent of the tax liability that might be finally decided by the authorities. That, no prior notice was given to the petitioner at the time of invoking section 281 or section 226(5) since for recovery proceedings, the transfer of shares from investment companies to the petitioner-company has been treated as void. That, before the Department could recover the tax dues of the three investment companies, SIIL came out with an offer to buy back its shares and, therefore, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock in-trade, but that nomenclature was misleading. That, in the circumstances, the order dated February 15, 2001, was binding on respondents Nos. 1 to 3. That, in the alternative, assuming for the sake of arguments, that the said shares were held as stock-in-trade in the hands of the investment companies, even then no business profits could be assessed on liquidation of the three investment companies and on consequent transmission of shares to the petitioner. That, since, in any event, the shares were fully and accurately disclosed in the books of account of the investment company, they can never form a subject matter of block assessment. It may be mentioned that the additional affidavit in rejoinder was filed on October 16, 2002, in view of the additional affidavit filed by the Assessing Officer on October 9, 2002, by which additional affidavit, it was clarified that there was no order passed by the Assessing Officer under section 281 and what was made was merely a noting in the order sheet. Under the circumstances, it was submitted on behalf of the petitioners by way of rejoinder that the entire action was arbitrary, illegal and without jurisdiction and that, consequently, the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 281 applies to transfers during pendency of proceedings under the Act. That, in the present case, the transfer of shares by virtue of which the demand arises has been taxed in block assessment orders, which, by definition, covers the period upto the date of the search, i.e., December 8, 1999, in the present case. Learned counsel for the petitioner further pointed out in this connection that in the three block assessment orders, the date of transfer has been taken to be November 30, 1999 (for PNIT), March 31, 1999 (for DAIL), and March 31, 1999, (for SCRM). That, however, the block assessment proceedings can be pending only after the date of search, i.e., December 8, 1999. Therefore, at the time of the transfer of shares, the block assessment proceedings were not pending and consequently section 281 cannot apply. That, according to the Department, the impugned tax liability arose out of the very transfer, which the Department seeks to treat as void under section 281. That, section 281 applies only when there is a pre-existing tax-liability as section 281 applies only in two situations, viz., transfer during the pendency of proceedings or in a case where the assessment is completed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o section 281(1). He submitted that in the present case, shares were transferred pursuant to liquidation of the three investment companies and in the balance-sheet of the three liquidated companies, the equity holding of the petitioner is proposed to be cancelled and in consideration thereof, the shares in SIIL and MALCO were proposed to be transferred to the petitioner. It was, therefore, contended that the transfer of the shares/warrants was a bona fide transfer for adequate consideration. Therefore, proviso (i) to section 281 stood attracted. Therefore, section 281 was not applicable to the facts of the case. Learned counsel for the petitioner next contended that under proviso (ii) to section 281 of the Act, a transfer shall not be void if it is made with the prior permission of the Assessing Officer. It was pointed out that in this case, NOC under section 178 of the Income-tax Act was obtained by the assessee on June 15, 1999, for PNIT and others. Therefore, proviso (i) to section 281 stood attracted and, consequently, the transfer must be deemed to be with the prior permission of the Assessing Officer. Learned counsel for the petitioner next contended that the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further out of the Second Schedule, the Third Schedule has been carved out as applicable to a limited class of cases, viz., movables attach able by actual seizure. Therefore, the impugned orders/notices (exhibit J.1 to exhibit J.3) were bad in law and without jurisdiction as they are prohibitory orders under rule 26(1)(iii) of the Second Schedule. Learned counsel for the petitioner contended that by the impugned orders, the Assessing Officers have attached the impugned shares by actual seizure which was bad in law and without jurisdiction as the impugned orders are prohibitory orders under rule 26. In this connection, learned counsel for the petitioner contended that rule 23 of Schedule II states that where the property to be attached is movable in the possession of the defaulter, the attachment shall be made by actual seizure, whereas rule 26(1) states that in the case of shares attachment shall be made by a written order, prohibiting the person in whose name the shares stand from transferring the same. Learned counsel for the petitioner, therefore, submitted that the impugned orders (exhibit J.1 to exhibit J.3) are illegal and without jurisdiction because in this case, what appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were bad in law, ultra vires and without jurisdiction. At this stage it may be pointed out that in the affidavit-in-reply filed by the Department they have accepted the position that rule 2 of Schedule 11 has not been complied with, but they claim to issue such notice prior to sale. The Department has contended that such notice under rule 2 can be given after attachment and before sale. The Department has contended that if notice was to be given before attachment and sale, then the property could be transferred on the receipt of such notice by the defaulting party. Learned counsel for the petitioner, in reply to this point, submitted that the argument of the Department that notice under rule 2 can be given before sale and after attachment was contrary to the plain language of rule 2, rule 20, rule 21 and rule 22 of the Second Schedule. He urged that rule 2 was a starting point of any action taken under the Schedule and there was no authority in law which permits respondents Nos. 1, 2 and 3 to rewrite the statute. It was contended that hearing was essential before passing an order adverse to a person such as the petitioner, particularly when the petitioner's property is being atta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oners to the attachment of the shares under rule 11 of Schedule II, it would not be fair for respondents Nos. 1, 2 and 3 to hear and decide the objections of the petitioners under rule 11 because the impugned orders are passed by the same Assessing Officers, viz., respondents Nos. 1, 2 and 3 and, therefore, the plea of the Department that rule 11 offers alternate remedy has no merit. That, rule 11 applies to cases of attachment and sale in execution of a certificate by the Tax Recovery Officer which is not the case here. Therefore, rule 11 has no application to the facts of this case. That, in any event, in the present case we are concerned with the plea of lack of jurisdiction and, therefore, the Department cannot raise the plea of alternate remedy. Arguments on behalf of the Department: Mr. R.V. Desai, learned senior counsel for the Department, contended that section 281 of the Act was a prelude to the Assessing Officer proceeding to attach the property under section 226(5) read with the Third Schedule. He contended that section 281 constituted foundation for initiation of proceedings under section 226(5) read with the Third Schedule. That, section 281 was declaratory in natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e body having no registered office in India and it would have been impossible to trace the funds which would have been realised from sale of shares of Sterilite group held by the petitioner. Therefore, no prior notice on the facts was given before attaching the impugned shares. Learned counsel for the Department, however, submitted that in the present case, the Department would certainly give notice of hearing before effecting sale, pursuant to attachment. He also contended that having attached the impugned shares, the Department would proceed to issue notice under rule 2 of Schedule II and thereafter follow the provisions of Schedule II. In this connection, he further contended that if one reads the provisions of Schedule III, it is clear that where any distraint and sale of movables is to be effected by the Assessing Officer/Tax Recovery Officer, authorised for that purpose, the distraint and sale shall be made, as far as may be, in the same manner as attachment and sale of movables attachable by actual seizure, and the provisions of the Second Schedule relating to attachment and sale shall, so far as may be, apply in respect of such distraint and sale. He, therefore, contended t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in support of his contention that in this case, the transfer had taken place after completion of the block assessment and before issuance of rule 2 notice. Here also, learned counsel for the Department found himself in difficulty because the Department wanted to rely upon the date of transfer as March 31, 2000, but the block assessment orders were passed on December 31, 2001, and January 30, 2002, whereas the transfer, on which the Department wanted to rely, while invoking the second limb, was on March 31, 2000. Therefore, the second limb also cannot apply and if March 31, 2000, was taken as the date of transfer then, it was argued on behalf of the petitioner that, the tax liability accruing to the petitioner would be falling outside the block period which ended on December 8, 1999. Ultimately, the Department was totally confused. Learned counsel was not in a position to explain the contradiction. At one stage, the Department instructed learned counsel to state that, in any event, regular assessment proceedings were pending against PNIT and DAIL for the assessment year 199798 and the assessment year 1998-99 and, therefore, section 281 was applicable. We asked the Department to fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 226(5). It is not so mentioned. It was very simple for the Legislature to say in section 226(5) that Schedule 11 would operate, but it does not say so. In fact, it refers to the Third Schedule, which deals with attachment and sale of a specific specie of properties, viz., the movables attachable by seizure. That, the Third Schedule does not refer to movables attachable by prohibitory orders as contemplated by rule 26(1) of the Second Schedule. Therefore, while the Tax Recovery Officer has all the powers vested in him, the Assessing Officer is directed only to go in accordance with the Third Schedule because all powers of the Tax Recovery Officer are not given to the Assessing Officer. He contended that rule 23 of Schedule II deals with attachment of movables by seizure, whereas rule 26 of Schedule II deals with prohibitory orders attaching the movables. He contended that only rule 23 and rule 30 of Schedule II deal with attachment by seizure. He further pointed out that rule 32 deals with attachment of partnership property. He contended that Schedule III excludes immovable properties, arrest, detention and appointment of receiver. There fore, only distraint and sale of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the block assessment order, the material seized indicated that the shares held by the three investment companies in SIIL and MALCO were planned to be transferred to the petitioners as early as March, 1999. That, the petitioner had invested in 99 per cent. of the share capital of the three investment companies. That, a plan was devised under which the three investment companies were to be voluntarily liquidated and on liquidation, the assets and liabilities of the three investment companies were to be distributed in specie to the shareholder, viz., the petitioner. That, before initiation of liquidation, the shares held by the investment companies in SIIL and MALCO were converted from stock-in-trade to investment. That, this exercise was undertaken in order to value the said shares at cost and not at market price. That, the conversion as on March 31, 1999, was not genuine. That, the voluntary liquidation, which was initiated in April, 1999, was only to transfer the shares to the petitioner at cost. This course of action was adopted because, on liquidation, only capital gains liability would arise, which, by virtue of the Double Tax Avoidance Agreement between India and Mauritius, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven. It may be mentioned that up to March 31, 1991, the three investment companies showed their holding in MALCO and SIIL as investments, but in the next financial year ending March 31, 1992, the assessees had converted the said investment into stock-in-trade and thereafter they continued to show the same as stock-in-trade upto March 31, 1999, when they were advised to convert to investment. The petitioner became the 100 per cent. holding company after June, 1999, i.e., after initiation of the liquidation proceedings in April, 1999. The Assessing Officer repeatedly requested the assessee to produce the minutes of the board resolution in order to ascertain the exact date of dissolution and distribution of assets, but to no avail. The assessee was also asked to produce evidence of filing of Form No. 23 of the Companies Act with the Registrar of Companies. However, none of these documents have been produced. Further, in this case, we are concerned with three block assessments for three different investment companies, viz., PNIT, DAIL and SCRM. It is important to note that on January 29, 2002, DAIL has gone in appeal to the Commissioner of Income-tax-III against the order of block asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs. Findings on section 281: According to the petitioner, if the Department adopts the date, viz., March 31, 1999, as the date of transfer giving rise to liability, then the transaction cannot fall within the first limb of section 281, which states that the transfer should take place during the pendency of the assessment proceedings. That, in this case, the search took place on December 8, 1999, and, therefore, if the date of transfer is taken as March 31, 1999, then such transfer cannot be during the pendency of the proceedings. Therefore, section 281 will not apply. If, on the other hand, the Department takes the date of transfer as February 20, 2001, then the transfer falls outside the block period. It was submitted that generally, a transfer giving rise to liability takes place during the block period. That such transfer is detected when search is carried out. Therefore, such liability is treated as undisclosed income. However, it is contended that in this case the very transfer, which gives rise to liability and which the Department seeks to declare as void, is sought to be brought into the first limb of section 281, which can never be done. That, generally, the assessee t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng liability. It accrued before December 8, 1999, and in order to avoid that liability, the assessee transferred the asset after December 8, 1999, i.e., on February 16, 2001, when they got the final approval from the Reserve Bank of India for transmission of shares from the three investment companies/assessees to the petitioner. Thirdly, we have taken the case of DAIL as the other two cases are identical. The assessment order shows that the assessee knew that a huge tax liability would arise on the difference between the market value and the book value, much prior to December 8, 1999. They first converted the stock-in-trade into investment on March 31, 1999, followed by initiation of dissolution of the three companies in April, 1999, followed by the petitioner becoming a holding company, followed by application for trans mission of shares on June 17, 1999, made to the Reserve Bank of India, followed by conditional approval of the Reserve Bank of India on November 30, 1999. Then came the search on December 8, 1999. After the search, the assessees obtained the approval from the Foreign Investment Promotion Board on May 16, 2000, followed by the final approval from the Reserve Bank of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the transfer affected by section 281 as void and, therefore, not standing in the way of recovery proceedings. The case law further indicates that expression of opinion or intention by the Assessing Officer under section 281 does not take away the jurisdiction of the competent authority under rule 11 of the Second Schedule to the Act. That, in a given case, the department may, instead of resorting to the provisions of Schedule II, resort to the civil court to obtain a declaration. That, for the purposes of proceeding against a property, which has been transferred or on which a charge is created, for an intention of the Assessing Officer to proceed against the said property, one may pass an order under section 281. That, even if the order is not passed, a transfer, contrary to section 281, would be void against the Revenue and even if the order is passed, it will be considered to be only a declaration of the intention of the Revenue authority to proceed against the said property. Therefore, section 281 does not contemplate making of any order by any authority. Section 281(1) has a proviso under which transfers are saved if they are made for adequate consideration and if such transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arket value of the shares as on March 31, 1999, and the book value as undisclosed business income. The order of block assessment is not set aside, under that order, the shares have to be valued at market value and not at cost. In the circumstances, it is not open to the petitioner to contend that the transfer was for adequate consideration. Moreover, proviso (i) to section 281(1) refers to a bona fide transfer for value, without notice of the pendency of proceedings. Both the conditions are required to be satisfied to attract proviso (i). We have already held that the entire device was implemented by the petitioner and the investment companies to evade tax. That, they had full notice of the pendency of the proceedings as indicated by the various steps taken by the petitioner commencing from March 31, 1998, in the case of DAIL. Therefore, proviso (i) has no application to the present case. It was next urged that the assessee--investment companies had obtained NOC from the Assessing Officer under section 178 before the transfer and, therefore, proviso (ii) to section 281(1) was satisfied. It was contended that in this case, the Assessing Officer had issued NOC under section 178 ena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by treating the said shares as stock-in-trade, section 281 has no application. We do not find any merit in this argument. Section 281(1), declares transfer of assets as void vis-a-vis the Department's claim where such transfers are effected during the pendency of proceedings under the Act or after the completion thereof, but before the service of notice under rule 2 of the Second Schedule. It refers to an assessee parting with the possession of his assets to defeat the Department's claim. In the present case, we are not concerned with the assessment proceedings. At this point, we once again wish to make it clear that computation of business income by the Department under Chapter IV is quite different from the recovery proceedings under Chapter XVII. That, section 281 finds place in Chapter XXIII, which assists recovery. Section 281(1) is a prelude to Schedule II and Schedule III read with section 226(5). In this case, the Assessing Officers have proceeded to attach the shares transferred as such to the petitioner. As held hereinabove by the Assessing Officer, the assessee has transferred the shares under a sham dissolution as an asset. That, if the dissolution is sham, one cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Assessing Officer had no authority to issue prohibitory orders. That he could issue only orders of attachment by actual seizure. That, in the present case, we are concerned with shares. That shares could be attached only by prohibitory orders as contemplated by rule 26, but rule 26 was not available to the Assessing Officer and, therefore, the impugned prohibitory orders are illegal. We do not find any merit in this contention. To answer this controversy, we must be clear about the meaning of the word "seizure". In the case of Champarun Sugar Co. Ltd. v. Haridas Mundhra, AIR 1966 Cal 134, a similar argument was raised. One of the questions which arose for determination in that case was whether the right of repurchase/option given to Haridas Mundhra under the suit agreement was capable of actual seizure. In that case also the prohibitory order, as in our case, restrained the judgment-debtor from exercising his rights in respect of the shares and simultaneously the prohibitory orders restrained the person in possession of the shares from transferring the same by purchase, gift, sale or otherwise. In our case, the impugned shares are in demat form. They are transferable elect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt found that the petitioner had obtained prior permission of the Assessing Officer under the proviso (ii) to section 281(1). On the facts, the court found that the petitioner, who had purchased the property, sought an appointment with the Assessing Officer to explain the position under which the petitioner had bought the property. However, the Assessing Officer, without considering the case of the petitioner, declared the same as void. Therefore, the action of the Assessing Officer was struck down. The said judgment was given on the facts of that case. It does not lay down a general rule of giving notice under section 281(1). In fact, if the argument is accepted, it would defeat the object of the law relating to attachment under section 226(5) read with the Third Schedule. Therefore, reliance on the judgment of the Bombay High Court in the case of Palanpur Traders Ltd. [1991] 187 ITR 132, is not correct. Lastly, it was contended that in the present matter, the petitioner had sought for stay from the Assessing Officer under section 220(6). That the Assessing Officer kept the application for stay pending and, therefore, the matter had to be moved on the administrative side before ..... X X X X Extracts X X X X X X X X Extracts X X X X
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