9911796707
TMI Blog2002 (10) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies, viz., Pravin Navin Investment and Trading Company (hereinafter referred to as "PNIT"); Dwarkaprasad Anilkumar Investment Private Limited (hereinafter referred to as "DAIL") and Sterilite Copper Rolling Mills Private Limited (hereinafter referred to as "SCRM"). All the three investment companies were Indian companies. They have come under voluntary winding-up. The petitioner-company was incorporated on January 12, 1993, under the Mauritius Companies Act, 1984, in Mauritius with the object of holding shares. The shares of the petitioner-company were held by non-resident Indians in the following ratio: Dwarkaprasad Agarwal 50 per cent. Agnivesh Agarwal 50 per cent. The company was designated as an overseas corporate body (hereinafter referred to as "OCB"). The petitioner acquired shares of the above said investment companies between 1993 to 1999. On June 30, 1999, the petitioner was the holder of 100 per cent. stake in the three investment companies. These three investment companies, in turn, were holding shares in two Indian companies, viz., Sterilite Industries (India) Limited (briefly known as "SIIL") and Madra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the Foreign Investment Promotion Board, approving transmission of shares of SIIL and MALCO, hitherto held by the investment companies on fully repatriable basis. Accordingly, the Reserve Bank of India gave its final approval on February 16, 2001. Pursuant to the above, the petitioner-company was registered as a beneficiary of the said shares held by Deutsche Bank, Mumbai Branch, as depository participant (hereinafter referred to, for the sake of brevity, as "DP"). On December 8, 1999, a search was carried out at offices/factories of SIIL, including the three investment companies. Pursuant to the search, respondents Nos. 1 to 3 herein passed three separate block assessment orders of the said investment companies, viz., order dated January 30, 2002, in respect of PNIT, order dated December 31, 2001, for DAIL and order dated December 31, 2001, in respect of SCRM. The block period for which assessment was made was for the financial years 1989-90 up to 1998-99 and for the period April 1, 1989, up to December 8, 1999. For PNIT, the assessed income has been found to be Rs. 238 crores; for DAIL, the assessed income has been found to be Rs. 53 crores and for SCRM, the assessed income i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax arrears. Under the above circumstances, this petition has been filed, seeking to challenge the impugned notices dated July 14, 2002, July 15, 2002, and July 15, 2002, in respect of PNIT, DAIL and SCRM, respectively, under section 226(5) read with the Third Schedule to the Income-tax Act. By affidavit-in-reply dated October 3, 2002, respondents Nos. 1 to 3, on the facts, have alleged that on December 8, 1999, search and seizure action under section 132 of the Act was carried out on various business and office premises of the Sterilite group of industries. That, during the search, it was found that the petitioner was an overseas corporate body, holding substantial shares in SIIL and MALCO through the above three investment companies. That, the petitioner-company was controlled by the promoters of Sterilite group of industries. That, during the search, a statement of Navin Agarwal, the son of Dwarkaprasad Agarwal, and a full-time director of SIIL came to be recorded under section 132(4) of the Act. This was on December 9, 1999. That, in the statement, Navin admitted that the directors of PNIT were controlling the affairs of the investment companies and also of the petitioner-compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s at book value was taken by the promoters Of the petitioner-company on behalf of the three investment companies. That, in anticipation, and with a view to avoid tax liability arising in the aforestated transaction and to defeat recovery of tax by the Department, the promoters transferred the assets of the investment companies to its holding company and have proceeded to liquidate the investment companies, without making arrangement for liquidation of the tax liability and, therefore, the entire device was to defraud the Revenue because there would be no asset available with the investment companies to meet the tax liability of Rs. 222.70 crores. That, after issuing notices under section 158BC of the Income-tax Act on all the three companies and after enquiry, block assessment orders have been passed as stated above. That, vide order dated March 21, 2002, passed by respondent No. 1, the stay application has been rejected in the case of PNIT under section 220(6). That, although the Department made attempts to recover the outstandings of the investment companies from the directors on account of objection raised by the directors, no recovery could be effected. In the circumstances on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, there was every possibility that the petitioner-company could have sold its holdings in SIIL and on the happening of such an event, it was impossible to recover the tax as the liquidator had no assets left with him. That, moreover Twinstar Holdings is an OCB, having no registered office in India. Consequently, it would be impossible to trace the funds realised from sale of shares held by the petitioners in Sterilite group. Therefore, a restraint order was also passed under section 226(5) prohibiting the petitioner from transferring the shares from Demat Account with the DP. That, before passing orders under section 226(5), respondents Nos. 1 to 3 obtained authorisation from the Commissioner of Income-tax-III, vide general order dated July 15, 2002, authorising respondents Nos. 1 to 3 to take action under section 226(5) read with the Third Schedule. That, under section 281 the impugned shares have been treated as a property of the investment companies. In rejoinder dated October 16, 2002, the allegations made by the Department in the reply have been denied. In the rejoinder it has been pointed out that an identical order has been passed by the three Assessing Officers under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, the impugned attachment should be lifted vis-a-vis the petitioners. Arguments on behalf of the petitioners: Mr. Chidambaram, learned senior counsel appearing on behalf of the petitioner-company, submitted that the impugned notices/orders dated July 14, 2002, and July 15, 2002, passed against the three investment companies (assessees) are purportedly issued under section 226(5) of the Act. That, the impugned orders were ex facie 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. That, in the instant case, it cannot be disputed that the property against which the impugned action is taken (shares) is the property of the petitioner who is not an assessee from whom arrears of tax are due. Learned counsel for the petitioner next contended that in this case, respondents Nos. 1 to 3 (hereinafter referred to as "the Assessing Officer") have claimed that the transfer of shares to the petitioners by the three investment companies should be ignored and that the corporate veil should be lifted so as to treat the petitioner and the investment companies as one entity. He contended that if one accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eted and the transfer takes place after such completion. It was contended that if the impugned transfer itself gives rise to the impugned tax liability, then the proceedings for assessment of income arising from such transfer will commence after the impugned transfer. Therefore, section 281 can never be attracted to the present case. That, even the second limb of section 281, which refers to impugned transfer after completion of the assessment and before the service of notice under rule 2 of Schedule II, has no application because the assessments were completed on January 30, 2002, for PNIT, December 31, 2001, for DAIL and December 31, 2001, for SCRM, respectively. Therefore, there was no transfer after the said three dates because, according to the Department, the transfer took place on November 30, 1999, March 31, 1999, and March 31, 1999, respectively. Therefore, the second limb of section 281 also did not apply. At this stage we may point out that in the course of the argument learned senior counsel for the Department submitted orally at one point of time that the date of transfer was March 31, 2000. Therefore, Mr. Chidambaram, learned senior counsel for the petitioner, submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer had no authority to declare the transfer void under section 281 of the Act. In this connection, he invited our attention to the judgment of the Supreme Court in Tax Recovery Officer v. Gangadhar Viswanath Ranade [1998] 234 ITR 188 and also Sancheti Leasing Co. Ltd. v. ITO [2000] 246 ITR 814 (Mad). He submitted that if the Department seeks to declare the transfer void then the Department should move the civil court and seek a declaration to that effect. He further contended that assuming for the sake of argument that section 281 of the Act was applicable, even then respondents Nos. 1 to 3 have not set out their stand as to when the order under section 281 has been passed. That, the affidavit-in-reply on this point is ambiguous. It merely states that there was no order passed on July 15, 2002, and mere notings were made in the order sheet on July 15, 2002. It was further submitted that in view of the judgment of the Bombay High Court in Palanpur Traders Ltd. v. Union of India [1991] 187 ITR 132, an opportunity of being heard was a necessary precondition which has not been complied with and, therefore, invocation of section 281 is of no effect. Learned counsel for the petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lies is the Third Schedule and not the Second Schedule and since the Third Schedule refers to movable property attachable by actual seizure and since the Third Schedule does not contemplate issuance of prohibitory orders as contemplated by rule 26(1), the impugned orders were illegal and bad in law. In this connection, he pointed out that the impugned orders are prohibitory orders under rule 26(1). That, the Assessing Officer had no jurisdiction to issue such prohibitory orders. That, the Assessing Officer had only the authority to seize movables under rule 23 of Schedule II in view of the provisions of the Third Schedule. He contended that the Third Schedule expressly refers to distraint and sale of movables to be effected as far as may be in the same manner as attachment and sale of movables attachable by actual seizure. Learned counsel for the petitioner con tended that under the Third Schedule, where any distraint and sale of movable is to be effected by any Assessing Officer authorised for such purpose, then such 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tached for recovery of alleged tax dues of the three investment companies. That, in the present case, rules of natural justice have been violated and, therefore, the impugned orders were bad in law. Learned counsel for the petitioner next contended that in the present case, once a liquidator took charge of a company, he was responsible for all liabilities of the investment company. That, the liquidator obtained consent of the Assessing Officers under section 178(1) on June 15, 1999, and having obtained such consent, the action of the Assessing Officer in seeking to recover tax dues of the investment company from persons, other than the liquidators, cannot be sustained. It was urged that in the present case, the liquidator, having informed the Assessing Officer and having obtained the consent of the Assessing Officer to the liquidation, without holding any assets of the investment companies under section 178(2), the impugned action of the Assessing Officer in seeking to recover alleged tax dues of the investment companies from persons, other than the liquidator, cannot be sustained. Learned counsel for the petitioner next contended that in the present case, the impugned action of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That, no written order was required to be passed by the Assessing Officer under section 281 of the Act. That, on July 15, 2002, notings were made in the order sheet by the three Assessing Officers under section 281 treating the transfer of shares from the three investment companies to the petitioner as void for the limited purpose of recovery proceedings. That, before initiating proceedings under section 281, the Assessing Officers complied with the preconditions. That, in this case, the impugned shares have been transferred during the pendency of block assessment proceedings. That, in this case, the impugned transfers have been made without adequate consideration. That, in this case, the tax payable exceeded Rs. 5,000 and that the assets transferred exceeded Rs. 10,000 in value. Therefore, it was argued that the notings dated July 15, 2002, were made in consonance with section 281 of the Act. Learned counsel for the Department further contended that section 281 does not contemplate passing of any order by any authority. That, the effect of section 281 was that if a transfer was effected during the pendency of the proceedings under the Act or after completion thereof, but before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this case, having invoked section 226(5) read with Schedule III, the Department was entitled to follow the procedure of attachment and sale as laid down in the Second Schedule. He contended that in this case, before the Department could invoke rule 2, the petition has been filed and, therefore, the Department has not been able to proceed further in the matter. He further contended that the Assessing Officers were duly authorised by the Commissioner of Income-tax-III to take action under section 226(5). He orally submitted that in the case of PNIT, the authorisation is dated July 14, 2002. However, July 14, 2002, was a Sunday. That the authorisation was made on July 15, 2002, which was a Monday, but through oversight, the date of authorisation has been wrongly shown as July 14, 2002. He, therefore, contended that the authorisation was, in fact, on July 15, 2002, on which date the Assessing Officer passed the prohibitory order under section 226(5) (exhibit J.1). At this stage, one point needs to be mentioned. As stated above, it has been argued on behalf of the petitioner that according to the Department, the impugned transfer took place on November 30, 1999. In this connection, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... affidavit stating why this fact was not brought to the notice of the court earlier. At that stage the officers stated that they do not wish to press this point because they realised that there was no pending demand for those years under regular assessment and further they also realised that the authorisation given by the Commissioner on July 15, 2002, was not based on those facts. In rejoinder, learned counsel for the petitioner submitted that on liquidation of the three investment companies, there was distribution of assets. That, such distribution did not amount to transfer. That, the shareholder brought the assets by way of operation of law. That, it was a case of transmission in law. That, in the alternative, even if it was held to be a transfer, the second limb of section 281 would not apply because the second limb applies to transfers after completion of the assessment which, in this case, was on December 31, 2001, and January 30, 2002, and, therefore, the Department's submission that the impugned transfer was on March 31, 2000, would not attract the second limb of section 281 because on March 31, 2000, assessments were pending. Moreover, such transfer dated March 31, 2000, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attachable by seizure is contemplated by Schedule III. Therefore, Schedule III operates in a smaller area as compared to Schedule II. Consequently, only rule 23 and rule 30 were available for the assessing Officer, i.e., attachment of movables attachable by seizure. It was further contended that in this case, the Assessing Officer has invoked rule 26(1) which was impermissible. Further, if the Assessing Officer wanted to resort to rule 23 and rule 30, he could have done that only after invoking rule 2. That, till today, rule 2 has not been invoked. Therefore, the Assessing Officer cannot invoke rule 23 of Schedule II. Section 226 was not available to him. Therefore, the prohibitory order was bad in law. Therefore, the attachment was without authority of law. Point for determination: Whether the impugned attachment was in consonance with the provisions of section 226(5) read with the Third Schedule to the Income-tax Act, 1961, is the issue, which arises for determination in this case. For that purpose, one also has to examine the applicability of section 281 to the facts of this case. Findings: Preface: At the very outset, we wish to point out that in this case, we are not con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, the entire device was to evade tax liability. That, after initiation of liquidation proceedings, the petitioner, which was an overseas corporate body incorporated in Mauritius, became the holding company qua the three investment companies. That, liquidation was initiated in April, 1999, followed by the permission from the Reserve Bank of India, on conditional basis for transmission of shares to the petitioner on November 30, 1999, and the final approval on February 16, 2001. That, in the meantime, the official liquidator obtained NOC on June 15, 1999, from the Assessing Officer under section 178 of the Income-tax Act. As stated above, on December 8, 1999, there was a search, which ultimately resulted in block assessment orders to be passed on December 31, 2001, and January 30, 2002, followed by notice of demand for Rs. 222.70 crores and followed by three prohibitory orders issued under section 226(5) on July 14, 2002, and July 15, 2002. It is well settled that if an assessee holds the shares as stock-in-trade, the money received by him represents income/revenue receipt, but if the assessee holds the shares as investment, then monies received would be in the nature of cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecember 31, 2001. The said block assessment order has been passed in the case of DAIL for the block period financial year 1989-90 up to 1998-99 and the period April 1, 1999, up to December 8, 1999 (when the search was carried out). In the case of DAIL, under the block assessment order, an amount of Rs. 44.52 crores is found by the Assessing Officer as undisclosed income/business profits arising on valuation of shares at market rate. This amount forms part of the total profit on distribution of stock-in-trade for the three companies, amounting to Rs. 221.71 crores. The Assessing Officer, in the case of DAIL, has calculated the difference between the market value and the book value of the shares as on March 31, 1999, as undisclosed business income. Being aggrieved, DAIL has gone in appeal to the Commissioner of Income-tax (Appeals). The memo of appeal is annexed to the paper book. In the appeal memo, DAIL has averred that the impugned shares and warrants were transferred on February 20, 2001. This is not the finding of the Assessing Officer. However, it is the case of the assessee in the said appeal that the shares were transferred on February 20, 2001. If so, the impugned transfer h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets in order to defeat the claim of the Department arising on a pre-existing liability, i.e., on a transfer which takes place before the date of search. However, in this case, the transfer dated February 20, 2001, in the case of DAIL can never be said to give rise to undisclosed income as it takes place after the search. That, if the liability to pay tax arises after the date of search then the first limb of section 281 cannot apply. Similarly, the second limb of section 281 also does not apply because the block assessment was completed on December 31, 2001, and there is no transfer after that date for DAIL. Although these arguments appear to be attractive, on deeper consideration, they have no merit. Firstly, section 281 of the Income-tax Act falls in Chapter XXIII. Section 281 is a prelude to section 226(5) read with the Third Schedule which comes under Chapter XVII--Collection and recovery of tax. In this case, we are concerned with collection and recovery of tax. In this case we are not concerned with the computation of total income under Chapter IV. In this case, we are concerned with collection and recovery of tax and not with assessment of income. In this case, we are conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uary 16, 2001. Therefore, the transfer of shares took place on February 16, 2001, which is during the pendency of block assessment proceedings. Therefore, in our view, the case falls within the first limb of sec tion 281 of the Act. The next legal contention which we have to answer is--whether the impugned transfer of shares to the petitioner was without adequate consideration? Under section 281 of the Income-tax Act, it is, inter alia, laid down that where, the during pendency of proceedings under the Act or after the completion thereof, but before the service of notice under rule 2 of the Second Schedule, an assessee creates a charge or parts with the possession of any assets in favour of any other person, then such charge or transfer shall be void as against any claim in respect of tax due from the assessee as a result of the completion of the proceedings or otherwise. We do not wish to examine the entire case law on the scope of section 281(1). The position is well settled in law. We are concerned with the application of that law to the facts of this case. Suffice it to state that section 281(1) is declaratory in nature. It is not procedural in the sense that there is no enfor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut notice of pendency of proceedings or if made without notice of tax payable by the assessee. It is argued on behalf of the petitioner that in this case, transfer has been made for adequate consideration. In this connection, it has been urged, as stated above, that the transfer of the shares has been pursuant to liquidation of the three investment companies. That, in the balance-sheet of the liquidated company, the equity holding of the petitioner would be written off and in consideration thereof, the shares/warrants in SIIL/MALCO will be transferred to the petitioner and, therefore, the transfer was for adequate consideration. We do not find any merit in this argument. Firstly, as stated hereinabove, we are not concerned in this case with the question of validity of assessment; However, we are required to state the following facts in order to meet this argument. According to the Department, the entire voluntary liquidation proceedings came to be initiated only for the purposes of transferring the shares to the petitioners at cost and not at market value with the object of tax evasion. As stated above, the petitioner became a holding company only after liquidation of the investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to transfer the shares to the petitioner and, therefore, the transfer must be deemed to be with the prior permission of the Assessing Officer, as contemplated by the proviso (ii) to section 281(1). We do not find any merit in this argument. Under section 178 of the Income-tax Act, every person, who is the liquidator of a company which is being wound up or who has been appointed the receiver of any assets of a company, shall, within thirty days after he becomes such liquidator, give notice of his appointment to the Assessing Officer who is entitled to assess the income of the company. Under section 178(2), the Assessing Officer shall, after making enquiries, notify to the liquidator within three months from the date on which he receives notice of the appointment of the liquidator, the amount, which, in the opinion of the Assessing Officer, would be sufficient to provide for any tax liability/amount payable by the company. In this case, it may be pointed out that NOC was issued by the Assessing Officer under section 178(2) on June 15, 1999. On that day, there was no tax demand pending. In fact, as stated hereinabove, in the regular assessment of DAIL, there was no demand. The deman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by operation of law. In such a case, one has to judge the intentionof the assessee. The assessee has transferred the asset as asset and not as stock-in-trade, Hence, there is no merit in the argument of the petitioner. Now coming to the next contention advanced on behalf of the petitioner, viz., that there was no proper authorisation in favour of the Assessing Officer and, therefore, one out of the three prohibitory orders (exhibit J.1) passed by the Assessing Officer on July 14, 2002, was without jurisdiction. In this connection, we may mention that the prohibitory orders are identically worded. They are preceded by an order of authorisation passed by the Commissioner on July 15, 2002. However, it has been submitted that in one case of PNIT, the prohibitory order is dated July 14, 2002. It was urged that if the Commissioner's authorisation is dated July 15, 2002, the prohibitory order for PNIT dated July 14, 2002 (exhibit J.1) was without jurisdiction because under section 226(5), the Assessing Officer has to be authorised by general or special order passed by the Commissioner, to recover arrears of tax due from an assessee by distraint and sale of his movable property in the man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held by the Division Bench of the Calcutta High Court, after considering dictionary meanings, that if a right cannot be actually seized, then taking hold of such right in any possible manner would also come within the expression "seizure". In view of the said judgment we hold that the prohibitory orders issued in this case come within the expression "actual seizure" in the Third Schedule to the Act. Even in Law Lexicon, the word "distrain" has been defined to mean "to keep the property in custody until the person performs his obligation or until the property is sold by the Sherif". It is important to note that the Third Schedule uses the word "distraint" and not "attachment". In the circumstances, there is no merit in the contention advanced on behalf of the petitioner. To complete this point, we may also add that the Third Schedule is a door to the Second Schedule. The Second Schedule deals with attachment and sale of movables under Part II. Part II commences with rule 20. Section 226(5) confers concurrent powers on the Tax Recovery Officer and the Assessing Officer. In the case of Smt. Moni Senan v. CIT [2001] 248 ITR 452, it has been laid down by the Kerala High Court that atta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his connection reliance was placed on the judgment of this court in the case of KEC International Ltd. v. B.R. Balakrishnan [2001] 251 ITR 158. The said judgment has no application to the facts of the present case. In a large number of matters, this court has found that the Assessing Officers keep such applications in abeyance. They do not decide the matter. Ultimately, the parties are required to move the Commissioner on the administrative side. It is in these circumstances that the Division Bench has given certain guidelines in the said judgment for the Commissioner to redress the grievance of the assessees whose stay applications are kept pending so that the stay applications could be disposed of promptly and that the grievance of the assessees could be redressed promptly. Therefore, the judgment has no application to the facts of this case. In conclusion, we may refer to the judgment of the Supreme Court in the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148, 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 const ..... X X X X Extracts X X X X X X X X Extracts X X X X
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