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2020 (6) TMI 770 - HC - Income TaxCapital gain computation - Transfer of capital asset within the meaning of section 2(47)(ii) - Scheme of amalgamation - renunciation of rights to the ultimate transfer of shares by SWFSL in RRITCPL to MBL - Settlement Commission order - HELD THAT - When SWCL was relinquishing its shares, the allotting and subscribing companies were subsidiaries or step down subsidiaries of SWCL. The transactions being limited to that extent, possibly, the Department would not have had a case to argue. The transactions did not stop with SWCL relinquishing its shares in its subsidiary and step down subsidiaries. In fact, these relinquished shares were ultimately sold of to MBL for a valuable consideration. The relinquishment of rights by SWCL and allowing a merger to take place are mechanisms to create an entity which but for such steps and measures would not have come about. The newly created entity was thereafter sold to MBL. This mechanism is improper, results in avoidance of taxation and impermissible at the end of SWCL. The Settlement Commission has not considered this aspect of the contentions of the Department in the impugned order. It has not assigned any reason as to why, when the subsidiary and step down subsidiary of SWCL is transferring the shares to MBL, the same will not be taxed on SWCL as capital gains as SWCL was instrumental in bringing about the ultimate entity. The Settlement Commission has failed to take into consideration the fact that the entity created and sold to MBL come about by the active steps taken by SWCL and that SWCL therefore may not enjoy the benefits of section 47(iv) of the Act of 1961. The applicability of sections 45 and 47 of the Act of 1961 have to be considered in the context of the transactions had by the assessee. If on consideration of the entirety of the transactions, the Department can substantiate the fact that the assessee that is respondent No. 2 had entered into such transactions in order to avoid taxes payable, then, respondent No. 2 is not entitled to claim that the transactions in question were covered under sections 45 and 47 of the Act of 1961 and therefore not taxable. The contention of respondent No. 2 on the interpretations of sections 47 and 45 and the authorities cited on such subject are to be considered in the context of the actual contours of the transactions of the assessee, that is respondent No. 2, had in this regard. In George Henderson and Co. Ltd. (supra) a reference to the Supreme Court was answered by finding that the actual contract price paid was obscure and its import could not be determined. The Supreme Court directed the Appellate Tribunal to rehear the appeal and record a clear finding as to what was the actual price received. Again the contention of respondent No. 2 relying upon Vodafone International Holdings BV 2012 (1) TMI 52 - SUPREME COURT that control is an interest arising from holding a particular number of shares and that the same cannot be separately acquired or transferred is required to be considered in the given facts and circumstances of the present case. S. R. Chockalingam Chettiar 1967 (4) TMI 39 - MADRAS HIGH COURT has held that the right to obtain a specified number of rights shares under section 81 of the Companies Act, 1956 in a fresh issue of capital is a tangible right and is not interest in future property but is existing property as defined in the Gift-tax Act, 1958. The fact that SWFSL offered capital gains arising out of the transactions of shares of RRITCPL to MBL for the assessment year 2004-05, ipso facto, does not absolve SWCL from its tax liability in the event, it is found that SWCL brought about an entity to be transferred to a third party by the mechanism employed to defraud the Revenue. By the impugned order the Settlement Commission has overlooked the evidence produced before it so far as transactions relating to M/s. Amrit Engineering, commission sales promotion through Super Distributors, and payments made to Tirupati Enterprises are concerned. S. Ajith Kumar (supra) and Smt. C Sabira (supra) have held that reliance can be placed on evidence discovered during the search and seizure as also evidence which is relatable to the evidence unearthed during the search and seizure. The Settlement Commission ought to have considered the evidence placed by the Department with regard to such transactions of the assessee as they relate to the block assessment period before the Settlement Commission on the strength of the ratio laid down in the authorities noted in this paragraph. The Department has sought to bring on record evidence relating to the transactions that the assessee had on such accounts. Such evidence relates to the block assessment period under consideration by the Settlement Commission. Such evidence have a material bearing on the issue as to the quantum of tax that the assessee is liable to pay during the assessment period under consideration before the Settlement Commission. Such evidence cannot be said to be not relevant for the purpose of assessing the tax liability of respondent No. 2. Specified portions of the impugned order of the Settlement Commission are therefore non-speaking. One of the grounds for a successful challenge to an order of the Settlement Commission is that the impugned order suffers from the vice of breach of principles of natural justice. Since some portions of the impugned order of the Settlement Commission are non-speaking, it can be said that the present writ petition is maintainable. Having answered the issue of maintainability in favour of the writ petitioner and having found that specific portions of the impugned order of the Settlement Commission to be uninformed with reasons, such specific portions of the impugned order are set aside. The Settlement Commission is directed to consider the issue of tax liability of SWCL on different stages commencing from the initial renunciation of rights to the ultimate transfer of shares by SWFSL in RRITCPL to MBL. The Settlement Commission will also consider the tax liability of respondent No. 2 with regard to purchases of gift items from Amrit Engineering, commission sales promotion through Super Distributors, and payments made to Tirupati Enterprises, in accordance with law
Issues Involved:
1. Challenge to the Settlement Commission's order by the Income-tax Department. 2. Valuation and taxability of rights and shares transactions involving Shaw Wallace and Co. Ltd. (SWCL) and its subsidiaries. 3. Allegations of bogus transactions and unaccounted income. 4. Applicability of sections 47(iv) and 2(47)(ii) of the Income-tax Act, 1961. 5. Maintainability of the writ petition. Detailed Analysis: 1. Challenge to the Settlement Commission's Order: The Income-tax Department challenged the order dated March 6, 2007, of the Settlement Commission. The Department argued that parts of the order were perverse, lacked reasoning, and did not address specific contentions raised by the Department, rendering it non-speaking. The Department sought a remand for fresh consideration. 2. Valuation and Taxability of Rights and Shares Transactions: The Department contended that the Settlement Commission failed to address the valuation of SWCL's rights in its subsidiaries. The Department argued that SWCL and its subsidiaries engaged in sham transactions that should not benefit from section 2(47)(ii) of the Income-tax Act, 1961. The transactions involved multiple subsidiaries, including PDPL, PEPL, SWFSL, and RRITCPL, and resulted in the relinquishment of rights and capital gains for SWCL. The Department argued that these transactions amounted to a transfer of capital assets and were taxable under section 2(47)(ii) and not exempt under section 47(iv) of the Act. 3. Allegations of Bogus Transactions and Unaccounted Income: The Department highlighted several transactions involving SWCL, including purchases from Amrit Engineering, commission sales promotion through Super Distributors, and payments to Tirupati Enterprises. The Department argued that these transactions were bogus and resulted in unaccounted income for SWCL. The Settlement Commission's reasoning that certain documents could not be used in the block assessment was deemed erroneous by the Department, which argued that section 158BB of the Act allowed consideration of such evidence. 4. Applicability of Sections 47(iv) and 2(47)(ii) of the Income-tax Act, 1961: The Department contended that SWCL's relinquishment of rights and subsequent transactions were taxable and not exempt under section 47(iv). The Department argued that the concept of a subsidiary under the Companies Act, 1956, could not be imported into the Income-tax Act. The Department cited various cases to support its contention that the transactions resulted in taxable capital gains for SWCL. 5. Maintainability of the Writ Petition: The respondent (assessee) argued that the Settlement Commission's order was well-reasoned and did not require interference. The respondent contended that the writ petition was not maintainable as the order was not contrary to the Act, violated principles of natural justice, or was prejudicial to the petitioner. The respondent also argued that there was an unexplained delay in filing the writ petition. Court's Findings: The court found that the Settlement Commission's order was non-speaking and lacked reasoning on specific contentions raised by the Department. The court held that the writ petition was maintainable and set aside specific portions of the Settlement Commission's order. The court directed the Settlement Commission to reconsider the tax liability of SWCL, including the valuation of rights and shares transactions and allegations of bogus transactions, in accordance with law. Conclusion: The court disposed of the writ petition with directions to the Settlement Commission to reassess the tax liability of SWCL, considering the Department's contentions and the evidence presented. The court emphasized the need for a reasoned order addressing all issues raised by the parties.
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