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TMI Blog1986 (5) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... products which were previously imported. Accordingly, the existing company, ACCI, was substantially expanded and two other new companies named Indian Explosives Ltd. (hereafter referred to as " IEL ") and Atic Industries Ltd. (hereafter referred to as " ATIC ") were promoted. The expansion of ACCI contemplated a project for the setting up of a plant for production of polythene granules; IEL was promoted for the manufacture of commercial blasting high explosives and ATIC was promoted for the manufacture of dye stuffs. (iii) The Government of India had also requested ICI to consider manufacture of commercial blasting high explosives in India some time in 1949. (iv) To finance the aforesaid projects, ICI made available sterling loans to the respondent to enable the respondent to advance loans to ACCI, IEL and ATIC. The respondent advanced the loans to the said three companies on condition, inter alia, that the respondent would take up equity shares in the said three companies initially in its own name with an understanding to transfer the same to ICI as and when ICI would call upon the respondent to do so at par or at the issue price in satisfaction of the said loans from ICI t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which were issued in the name, of the respondent. Between 1956 and 1958, ICI advanced loans each year to the respondent aggregating to Rs. 1 crore which were utilised by the respondent for subscribing to the shares of ATIC. In 1957, ICI advanced loans to the respondent aggregating to Rs. 1,75,30,720 which was in turn advanced to ACCI in three instalments in May, July and November. The entire amount of the loans is aforesaid was utilised by the respondent for subscribing for equity capital in the said manufacturing companies. On the completion of the new issues, the respondent held 80% shares in TEL, 50% shares in ATIC and 76% shares in ACCI. The provisions for taxing dividends were altered by the Finance Act, 1959. As a result of the change, double taxation came to be imposed on dividends passing from the manufacturing companies to ICI through the shareholdings set up under the above arrangement. This resulted in a liability of an additional dividend tax of over Rs. 12 lakhs in India for the accounting year 1960 for which no relief would be available to ICI under the taxation laws of the U.K. In view of the changed legal position, ICI, by a cable dated February 15, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent would be the real beneficial owner of the said shares. (d) The said scheme of financing had been recorded in the minutes of the meeting held with the officers of the Central Government and had been reduced to writing in clear terms. The respondent was obliged and bound under the aforesaid arrangements to transfer to ICI at issue price and there was no case for the application of section 52 of the Income-tax Act, 1961. The Revenue did not accept the decision of the Tribunal and applied to the Tribunal for reference of certain questions of law for the opinion of this court. One of the questions which the Tribunal was called upon to refer was whether, on the facts and circumstances and on a proper construction of the relevant documents, the Tribunal was right in finding that the transfer of the shares to ICI at issue price was throughout the basis of the advance of loans to the respondent. By its order dated July 28, 1969, the Tribunal dismissed the reference application. On an application of the Revenue, this court by its order dated September 8, 1970, directed the Tribunal to refer the said questions to this court for its opinion. The respondent preferred an appeal to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (liability) to gift-tax had to be considered. The respondent was directed to co-operate with the Gift-tax Officer in finalising the gift-tax assessment. By a letter dated July 22, 1969, the Income-tax Officer, " B " Ward, Companies, Dist. IV, called for further information in respect of the proposed gift-tax assessment. By a letter dated August 18, 1969, the respondent furnished the information called for to the Income-tax Officer concerned and reiterated that no gift-tax was leviable in respect of the transactions in the relevant assessment year. The matter rested there, till 1973. On March 14, 1973, the Gift-tax Officer issued a notice under section 15(2) of the Gift-tax Act, 1958, on the respondent asking the latter to attend his office on March 22, 1973, for furnishing further information in connection with the return submitted for the assessment year 1962-63. The respondent replied to the said notice by a letter dated March 19, 1973, challenging the validity of the notice issued under section 16 of the Gift-tax Act, 1958, as also the subsequent notice issued under section 15(2) of the said Act. It was contended that the said notice had been issued mala fide and in pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended that the Income-tax Appellate Tribunal also was concerned with the question whether section 52 of the Income-tax Act, 1961, was applicable in the facts and that was the only question involved in the appeal before the Tribunal. It was alleged that the proceedings under the Gift-tax Act, 1958, were validly and lawfully initiated as the respondent had transferred shares valued at Rs. 19,55,93,621 to ICI at Rs. 5,25,30,720. It was contended that as a result of the aforesaid transfer, a gift valued at Rs. 14,40,62,901 had been made by the respondent to ICI as the transaction was without adequate consideration and was in settlement of loans of only Rs. 5,25,30,720. It was denied that there was any contractual or legal obligation at any point of time on the respondent to transfer the said shares at par to ICI. There was no contract or agreement in writing in respect of the transfer of the said shares and there was no firm offer or acceptance between the parties. It was contended that the action of the Gift-tax authorities was neither mala fide nor perverse and that the said proceedings were initiated lawfully and validly on a proper and bona fide application of mind by the autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res of the three new companies. Subject to certain terms, the respondent could enjoy the dividends declared on the said shares so long as the respondent retained the same. The respondent would hold the shares beneficially but as and when called upon the respondent would transfer the said shares to ICI at par value. The learned judge noted that it was the contention of the respondent that the transfer of the said shares took place by virtue of the above scheme or arrangement. The learned judge rejected the contention of the Revenue that there was no legal or contractual obligation on the respondent to transfer the said shares on such terms and held that in the facts of the instant case, it was indisputable that there was an agreement. It was found that there was mutual consideration between the respondent and ICI and that the said agreement had not been shown to be contrary to any provision of law or illegal. It was noted that neither the existence nor the bona fide nature of the agreement had been doubted or called into question. The learned judge held that though the said agreement was not embodied in any formal document or recorded, it would not detract from the enforceabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material facts necessary for assessment of the gifts made by him or such other person for that year, any taxable gift has escaped assessment for that year, whether by reason of underassessment or assessment at too low a rate or otherwise ; ...... he may, in cases falling under clause (a) at any time within eight years...... serve on the assessee a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 13, and may proceed to assess or reassess any taxable gift which has escaped assessment; ...... .. Construing the said section, the learned advocate contended that in the instant case, the escapement alleged was on account of non-filing of the return and, therefore, it was not a case of reopening but a case of opening. The learned advocate submitted that the preconditions in cases of opening of assessments differed from those in case of reopening, where an already completed assessment was reopened on examination of primary facts. The learned advocate for the appellant next submitted that before the issue of a notice under section 16 of the Act, it was necessary for the Gift-tax Officer to have some material before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax Act, 1961, should not have been applied. The learned advocate submitted that the decision of the Supreme Court in the case of the respondent which was strongly relied on by the respondent and on which the judgment under appeal was based did not record any finding which could be final and binding so far as the gift-tax proceedings in the instant case was concerned. The finding in the case before the Supreme Court was in the background and context of section 52 of the Income-tax Act, 1961, and the same would not have any binding effect in determining whether a notice under section 16 of the Gift-tax Act was valid and binding. The learned advocate for the appellant next submitted that there was no question of res judicata in taxation and findings in income-tax proceedings will not constitute res judicata in gift-tax proceedings. The learned advocate for the appellant next submitted that the fact that some officers of the Central Government had taken part in the deliberations and negotiations leading up to the transactions involved would not stand in the way of the Gift-tax Officer in initiating proceedings under the Gift-tax Act. There could be no estoppel against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Chinubhai v. CIT [1967] 63 ITR 416 (SC): This decision of the Supreme Court was cited for the following observations (at page 423): " It is true that an assessment year under the Income-tax Act is self contained assessment period and a decision in the assessment year does not ordinarily operate as res judicata in respect of the matter decided in any subsequent year .......... A decision reached in one year would be cogent factor in the determination of a similar question in a following year .... .." (e) M. M. Ipoh v. CIT [1968] 67 ITR 106 (SC) This decision was cited for the following observation of the Supreme Court (at page 118): " The assessment and the facts found are conclusive only in the year of assessment : the findings on questions of fact may be good and cogent evidence in subsequent years, when the same question falls to be determined in another year, but they are not binding and conclusive. (f) CIT v. Manick Sons [1969] 74 ITR 1 (SC): In this case, in an appeal from an order of assessment for the assessment year 1953-54, the Tribunal aggregated the income of the assessee for the assessment years 1952-53 and 1953-54, rounded it off and apportioned it in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 and 148 of the Income-tax Act, 1961, in a writ petition before the Delhi High Court. The High Court held that the impugned notice was not one without jurisdiction and upheld the contention of the Revenue. The High Court observed as follows (at page 222): " We would only add that we do not express any opinion regarding the merits of the reassessment .......... These are all matters which can be agitated by the assessee in the course of the reassessment proceedings. We have addressed ourselves only to a very short question as to whether, on the material placed on record, the Income-tax Officer bad the jurisdiction to initiate proceedings under section 147. " (i) K. P Varghese v. ITO [1981] 137 ITR 597 (SC): In this case, the Supreme Court construed section 52(2) of the Incometax Act, 1961, and observed as follows (at page 617) : " The construction which we are placing on sub-section (2) also marches in step with the Gift-tax Act, 1958. If a capital asset is transferred for a consideration below its market value, the difference between the market value and the full value of the consideration received in respect of the transfer would amount to a gift liable to tax under the G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceeding to determine independently whether or not such primary fact had been correctly established. The learned advocate for the respondent next submitted that though this court was not called upon to investigate into the adequacy or sufficiency of the reasons weighing with the Gift-tax Officer in arriving at his belief, the court would certainly examine whether the reasons, were relevant and had a bearing on the matters on which the Gift-tax Officer was required to entertain the belief before he issued a notice under section 16. If there was no rational or intelligible nexus between the reasons and the belief and if the reasons recorded were such that no person could reasonably come to hold the belief on the same as held by the Gift-tax Officer, it must be held that the Officer did not have the reason to believe that any gift chargeable to tax had escaped assessment. The belief required to be arrived at by the Gift-tax Officer should not be arbitrary or irrational or mere pretence. The reasons disclosed by the Gift-tax Officer were certainly justiciable. In the instant case, the Income-tax Officer who had dealt with the transaction in the relevant assessment year 1962-63 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sought to question the finding of the Tribunal. The question was not allowed to be raised by the Tribunal. The decision of the Tribunal was upheld by the Supreme Court. In the proceedings initiated against ICI under section 147 of the Income-tax Act, 1961, the same facts and transaction as in the instant case were considered by a Division Bench of this court. It was found that the transaction between the parties was under the arrangement or the agreement arrived at between ICI, the respondent and the Government of India as recorded in the declaration of intention. The Division Bench noted that the nature of the transaction had been determined prima facie by the Tribunal and was confirmed by the Supreme Court. The Division Bench held that the transfer of shares was under such agreement or arrangement. This decision of the Division Bench in Imperial Chemical Industries Ltd. v. ITO [1978] 111 ITR 614 (Cal) is considered hereafter. In still another proceeding against the respondent, a Division Bench of this court again had interpreted the same documents and transactions in the same manner. This decision is CIT v. Imperial Chemical Industries Ltd. [1984] 145 ITR 447 (Cal). The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1970] 75 ITR 367 (SC): In this case, the Supreme Court reiterated the proposition laid down by it in Calcutta Discount Co. Ltd. [1961]41 ITR 191, viz., that, two conditions have to be satisfied before the Income-tax Officer can have jurisdiction under section 34 of the Indian Income-tax Act, 1922, to issue a notice for reassessment. It was held that the said conditions were cumulative and precedent to the exercise of such jurisdiction. (c) Malegaon Electricity Co. P. Ltd. v. CIT [1970] 78 ITR 466 (SC): In this case, the assessee sold some of its assets at a price higher than their written down value during the relevant assessment year. In the proceedings for assessment to income-tax, the assessee disclosed the fact of the sale but did not disclose that any profits had resulted from such sale nor was it stated in the return that any excess had resulted from the price having been received over the written down value. The particulars of the price and that of depreciation accrued, allowed and unabsorbed were disclosed. After completion of the original assessment where the income was determined at nil, the Income-tax Officer reopened the assessment and reassessed the income. An a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in question or to disclose fully and truly the material facts necessary for the said assessment. The Supreme Court also considered the question of sufficiency or adequacy of the reasons which would lead to the formation of the belief by the Income-tax Officer and held ,is follows (at pages 445 and 446): "Once there exists reasonable grounds for the Income-tax Officer to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the court to investigate. The sufficiency of the grounds which induce the Income-tax Officer to act is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. The expression ' reason to believe' does not mean a purely subjective satisfaction on the part of the Incometax Officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 61, to reopen an earlier assessment of the assessee was challenged in a proceeding under article 226 of the Constitution. The proceedings were successful in the final appeal before the Supreme Court. This decision was cited for the following proposition laid down by the Supreme Court, viz., that the existence of reason to believe on the part of the Income-tax Officer was a justiciable issue and it was for the court to satisfy whether in fact the Income-tax Officer had reason to believe that income had escaped assessment by reason of the failure of the respondent to make full and true disclosure. (i) GTO v. Venesta Foils Ltd. [1980] 124 ITR 660 (Cal): In this case, by an agreement dated November 30, 1961, Venesta Foils Ltd., a U.K. company, sold its Indian business to its 100% subsidiary India Foils Ltd. In consideration of the transfer, India Foils transferred 998 shares of I each to Venesta Foils Ltd. It was contended that the consideration was not adequate and the Gift-tax Officer issued a notice to Venesta Foils Ltd. that a gift made by it and chargeable to tax had escaped assessment. The said proceedings were challenged in all application under article 226 of the Constituti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch the conditions precedent for assumption of jurisdiction under Section 16(1) of the Gift-tax Act, 1958, have not been satisfied. In answer, it is stated by the gift-tax authorities that the impugned proceedings were initiated on the ground that the respondent bad transferred shares valued at over Rs. 19 crores to ICI for a consideration of approximately Rs. 5 crores and that as a result of such transfer, a gift valued at over Rs. 14 crores had been made by the respondent to ICI. It is alleged that the aforesaid transfer was prima face without adequate consideration and in settlement of a loan of approximately Rs. 5 lakhs standing to the credit of ICI in the books of the, respondent. It is further stated that there was no contractual or legal obligation on the respondent to transfer the said shares at par to ICI. There was no contract or agreement in writing between the parties and there was no firm offer or acceptance between the parties. As can be noted from the decisions cited considered earlier, law stands settled that the existence of the belief of the Gift-tax Officer can be challenged and on such challenge, it would be open to the court to examine whether the reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to a genuine belief. It also cannot be held that such reason to believe was arrived at in good faith. As noted in the judgment dated March 9, 1976, under appeal, there was an agreement for consideration in the instant case and the arrangement between the parties was enforceable. The fact that the agreement was not embodied in any formal document nor recorded in formal manner was of no consequence, if otherwise the arrangement was enforceable. From the aforesaid, the learned judge came to the conclusion that there was no material for holding that the transaction involved amounted to a gift assessable to tax and that such a gift had escaped assessment. We also note that apart from the proceedings in the Income-tax Act taken in respect of capital gains, the same transaction was sought to be made the basis of reopening of the assessment of ICI. The reassessment was challenged and considered by a Division Bench of this court. The Division Bench noted that the transaction had been duly disclosed with supporting records and that the primary nature of the transaction had been examined by the Tribunal. The same transaction came up again for consideration before a Division Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X
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