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TMI Blog1987 (9) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... bstance the assessee was a company in which the public were substantially interested. The Commissioner (Appeals) has accepted this contention and hence these appeals by the department. 4. The following narration of facts will bring out the controversy. The assessee was formed on 1st November, 1977 with 7 shareholders each having 10 shares, with a view to take over the Indian business of a foreign company. The accounting year of the assessee ends in December. For this purpose a scheme was formulated and the order approving the scheme was passed by the Hon'ble High Court on 18th December, 1977 subject to certain conditions. By that order, the scheme was to be effective from the close of business on 31st October, 1977 and the Indian undertak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the Indian business of the foreign company to the assessee from 1st November, 1977 for the total consideration of Rs. 95,00,000 and further laid down, inter alia, that there should not be any depletion in the assets existing on 1st November, 1977. The second letter permitted the assessee, inter alia, to issue equity shares of Rs. 10 each worth Rs. 10 lakhs to be allotted to the foreign company. It also provided that the assessee was to obtain the permission of the Reserve Bank of India for the said allotment. The Reserve Bank of India granted the said permission to the assessee vide its letter dated 20th February, 1980. In that letter, there was one important condition that till the formalities regarding the acquisition of business an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arch, 1980 and since the income has arisen to the assessee only because of the deeming provision of the High Court's order, the principle of relation back should be applied. The Income-tax Officer rejected this contention because in his view what was relevant was the status of the assessee-company in the previous year in question. The Commissioner (Appeals) allowed the assessee's appeals on the ground that if the assets are deemed to have been taken over from 1-11-1977 this composition of the company after the allotment to the foreign company and the general public should also be deemed to have come into effect form that date. He has noted that the shares issued in November 1977 and June\July 1978 on the one hand were to rank pari passu in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment years in question. He also pointed out that there was no provision at all in the High Court's order for any retrospective effect whatsoever to the allotment of shares and it was the allotment of shares alone with which we are concerned. 9. On the other hand, the assessee's representative argued that from the very beginning the assessee-company was formed with a view to take over the Indian business of the foreign company and that in the scheme itself the allotment of shares to the foreign company was provided for. He pointed out that when the shares were latter on allotted by the assessee to the foreign company, the foreign company did not have to pay for the shares because, consideration in the form of transfer of undertaki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orthiness of the transferee. This kind of provision is made in the articles of most companies and it does not affect the general free transfer ability of its shares. It also does not deprive the assessee of the status claimed by it. What is material for our purpose is the second condition in sub-clause (iii) of section 2(18)(b) which is as follows : "The affairs of the company or the shares carrying more than fifty per cent of its total voting power were at no time, during the relevant previous year, controlled or held by five or less persons." It was not denied, indeed it could not be denied that in the period relevant to the assessment years in question, five persons did hold 50 per cent of the voting power in the assessee-company. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n company. Thus the assessee-company was expected to do nothing in the periods relevant to the assessment years in question except to serve as a holder of the undertaking which could be transferred to it. Moreover, as indicated above, it could not declare any dividend. 12. When the above quoted clause is considered in the light of this reality a different picture emerges. The provisions regarding the control of the affairs of the company or the holding of 50 per cent or more of its shares are all intended to serve a purpose. In this case, the purpose of those provisions and those regarding the restriction of transfer or shares is simply group of people tax at a higher rate would be payable. As can be seen from the above, there were hardly ..... X X X X Extracts X X X X X X X X Extracts X X X X
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