2002 (10) TMI 48 - HC - Income Tax

By this writ petition under article 226 of the Constitution, the petitioner seeks to challenge, inter alia, notices 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). In conclusion, we may refer to the judgment of the Supreme Court in the case of McDowell and Co. Ltd. v. CTO, in which it has been held that even if the transaction is genuine and even if it is actually acted upon, but if the transaction is entered into with the intention of tax avoidance, then the transaction would constitute a colourable device. That the courts are now concerned, not merely with the genuineness of a transaction, but with the intended effect of the transaction on the fiscal purpose. That, the true principle in the 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

Issues Involved:
1. Validity of the notices issued under Section 226(5) read with the Third Schedule of the Income-tax Act, 1961.
2. Applicability of Section 281 of the Income-tax Act, 1961.
3. Adequacy of consideration for the transfer of shares.
4. Authority and jurisdiction of the Assessing Officers.
5. Compliance with procedural requirements under the Income-tax Act and the Third Schedule.
6. Alleged non-cooperation by the petitioner during block assessment proceedings.
7. The legality of attachment orders and the necessity of prior notice.

Detailed Analysis:

1. Validity of Notices Issued Under Section 226(5):
The petitioner challenged the notices dated July 14, 2002, and July 15, 2002, issued under Section 226(5) read with the Third Schedule of the Income-tax Act, 1961. These notices prohibited the petitioner from receiving shares and restrained the depository participant from delivering the shares to any person. The court found that the impugned orders were beyond the jurisdiction as Section 226(5) empowers recovery of arrears of tax due from an assessee by distraint and sale of his movable property. The property in question (shares) belonged to the petitioner, who was not an assessee from whom arrears of tax were due.

2. Applicability of Section 281:
The petitioner argued that Section 281 did not apply as the transfer of shares took place before the pendency of block assessment proceedings. The Department contended that the transfer was during the pendency of proceedings or after completion thereof but before the service of notice under rule 2 of the Second Schedule. The court held that Section 281 was declaratory and not procedural, and the impugned transfer fell within its ambit as it was made to avoid tax liability. The court also noted that the petitioner had full notice of the pendency of the proceedings, and the transfer was not for adequate consideration.

3. Adequacy of Consideration for the Transfer of Shares:
The petitioner argued that the transfer of shares was for adequate consideration as it was made pursuant to the liquidation of the three investment companies. The court found no merit in this argument, stating that the entire voluntary liquidation proceedings were initiated to transfer the shares at cost and not at market value, with the object of tax evasion. The court held that the transfer was not for adequate consideration, and the proviso (i) to Section 281(1) did not apply.

4. Authority and Jurisdiction of the Assessing Officers:
The petitioner contended that the Assessing Officers had no authority to declare the transfer void under Section 281 and that the Department should have moved the civil court for a declaration. The court held that Section 281 did not contemplate making any order by any authority and was declaratory in nature. The court found that the Assessing Officers were duly authorized by the Commissioner of Income-tax-III to take action under Section 226(5).

5. Compliance with Procedural Requirements:
The petitioner argued that the Assessing Officers failed to comply with procedural requirements, such as issuing notice under rule 2 of the Second Schedule. The court held that the Department would proceed to issue notice under rule 2 and follow the provisions of Schedule II before effecting the sale. The court found that the provisions of Section 226(5) read with the Third Schedule were duly complied with.

6. Alleged Non-Cooperation by the Petitioner:
The court noted the total non-cooperation by the three assessees in the block assessment proceedings. The Assessing Officer repeatedly requested documents and information, which were not provided by the petitioner. The court found that the petitioner's actions indicated an intention to avoid tax liability.

7. Legality of Attachment Orders and Necessity of Prior Notice:
The petitioner argued that the attachment orders were illegal as they were issued without prior notice. The court held that giving notice would have defeated the rights of the Department to recover tax dues, as the petitioner could have sold its holdings. The court found that the attachment orders were legal and within jurisdiction.

Conclusion:
The court dismissed the writ petition, holding that the impugned attachment was in consonance with the provisions of Section 226(5) read with the Third Schedule to the Income-tax Act, 1961. The court found that Section 281 was applicable, the transfer was not for adequate consideration, and the Assessing Officers had the authority and jurisdiction to issue the impugned notices. The court also held that the procedural requirements were complied with, and the petitioner's non-cooperation indicated an intention to avoid tax liability. The interim orders were vacated, and no costs were awarded.

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