2015 (10) TMI 1904 - HC - Income Tax

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 more than 20% shares in the Petitioner companies. As there is no person holding substantial interest in these 3 companies, conditions mentioned in Explanation (a)(vi)(B) are not satisfied. The words used are any director of such company and any relative of such director . If the intention of the legislature of had been to cumulatively consider the shareholding of more than one directors or more than one relative of such directors to constitute substantial interest, then it would have specified 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 condition. The requirement is that an individual director must hold more than 20% shares, which apparently is not the case. The further plea that the family members of Srivastava family and the Bhandari Family hold more than 20% of the shares of the specified person (M/s Rockland Hospitals Ltd.) and the petitioner companies and further that the petitioner companies have invested 100% share capital in the specified person (M/s Rockland Hospitals Ltd.)is of no avail. As elucidated hereinabove, under 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 companies. This is clearly not the case. Thus, we do not find any infirmity with the reasoning of the Settlement Commission. These writ petitions are also liable to be dismissed.

Issues Involved:
1. Definition of "related party" under Section 245C(1)(ia) of the Income Tax Act.
2. Interpretation of clauses (a)(v) and (a)(vi)(B) of the Explanation to Section 245C(1).
3. Determination of substantial interest for qualifying as a related party.
4. Applicability of the Settlement Commission's decision on the petitioners.

Analysis:

1. Definition of "related party" under Section 245C(1)(ia):
The primary issue in these petitions is whether the petitioners qualify as related parties to the specified person under Section 245C(1)(ia) of the Income Tax Act. The court examines the provisions of Section 245C to ascertain who qualifies as a related party, focusing on clauses (a)(v) and (a)(vi)(B) of the Explanation to sub-section (1) of Section 245C.

2. Interpretation of clauses (a)(v) and (a)(vi)(B) of the Explanation to Section 245C(1):
Clause (a)(v) specifies that a company qualifies as a related party if any of its directors has a substantial interest in the specified person. Clause (a)(vi) extends this to situations where the specified person or any of its directors or their relatives have a substantial interest in the petitioner's business.

3. Determination of substantial interest for qualifying as a related party:
The court emphasizes that holding a substantial interest by a director of the applicant is a necessary qualifying condition. Substantial interest is defined as owning shares carrying not less than twenty percent of the voting power or being entitled to not less than twenty percent of the profits in a business or profession.

4. Applicability of the Settlement Commission's decision on the petitioners:

WP(C) 3557 of 2014 (M/s Rockland Hotels Ltd.):
The petitioner claimed to be a related party to M/s Somya Constructions Pvt. Ltd. based on common shareholding and directorship. The Settlement Commission found that none of the directors of the petitioner held shares in M/s Somya Constructions Pvt. Ltd., thus not satisfying the conditions of clause (a)(v). The court upheld this reasoning, stating that the legislature did not intend to include relatives of directors unless explicitly specified.

WP(C) 3559/2014 and related petitions:
For the nine petitioners, the Settlement Commission found that M/s Rockland Pvt. Ltd. held substantial interest in these companies, not M/s Rockland Hospitals Ltd. or its directors. The court agreed, noting that the definition of related parties does not include indirect shareholding through another entity.

WP(C) 3558 of 2014 and related petitions:
The Settlement Commission found no shareholder holding substantial interest in the three petitioners. The court upheld this finding, rejecting the argument that cumulative shareholding of multiple directors should be considered for determining substantial interest.

Conclusion:
The court dismissed all 13 writ petitions, agreeing with the Settlement Commission's interpretation and application of the provisions under Section 245C(1) of the Income Tax Act. The petitioners did not qualify as related parties to the specified persons, as they failed to meet the necessary conditions of substantial interest as defined in the statute.

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