Income Tax Appellate Tribunal - Delhi
Slocum Investment (P) Ltd. vs Deputy Commissioner Of Income Tax on 24 March, 2006
Equivalent citations: (2006)101TTJ(DELHI)558
ORDER
1. IT(SS)A No. 411/Del/2004 is an appeal by the assessee and IT(SS)A No. 45/Del/2005 is an appeal by the Revenue. Both these appeals arise out of the order of learned CIT(A)-III, New Delhi dt. 30th Nov., 2004. They are being disposed of by this consolidated order.
2. First we shall take up the assessee's appeal, i.e., IT(SS)A No. 411/Del/2004 for consideration. The facts and circumstances giving rise to the appeal by the assessee are as follows. The assessee is a company. M/s HCL Corporation Ltd., (hereinafter referred to as 'M/s HCLCL'), M/s Shiv Nadar Investment (P) Ltd. (hereinafter referred to as 'M/s SNIPL') and the assessee-company were promoters of a company by name, M/s HCL Consulting Ltd. The main objects of these three companies were making investments in various companies. The investments are in the form of contribution to share capital of various companies. They promote companies and hold shares of companies promoted. The shares are held by these companies in order to have power to control and manage the companies, which they promote. The assessee, M/s HCLCL and M/s SNIPL sold 41,00,000, 14,50,000 and 14,50,000 shares respectively of M/s HCL Consulting Ltd. to one overseas corporate body (OCB), i.e., M/s Wintech Investment (P) Ltd., Mauritius (hereinafter referred to as 'M/s WIPL') at Rs. 50 per share. All the three transactions took place in June, 1999. The three companies passed a Board Resolution all dt. 3rd June, 1999 offering shares held by them in the capital of M/s HCL Consulting Ltd., to M/s WIPL. M/s WIPL by Board resolution dt. 4th June, 1999 agreed to buy the shares in question subject to the required Governmental approvals. The RBI granted in principle approval on 23rd Sept., 1999 and final approval on 23rd Oct., 1999. The assessee, M/s SNIPL and M/s HCLCL received the sale proceeds on 13th Oct., 1999, 14th Oct., 1999 and 12th Oct., 1999 respectively in the form of remittances in foreign exchange duly evidenced by the Foreign Exchange Remittance Certificates. Therefore, there was a completed sale of the shares in the previous year relevant to asst. yr. 2000-01, i.e., financial year 1999-2000, by the assessee, M/s SNIPL and M/s HCLCL respectively. Prior to this sale, M/s WIPL was holding 20,00,000 shares of M/s HCL Consulting Ltd. and after acquiring 70,00,000 shares from the aforesaid three companies, it sold 4,15,000 shares leaving with it 85,85,000 shares of M/s HCL Consulting Ltd. of the face value of Rs. 10 per share. Subsequently, M/s HCL Consulting Ltd. capitalized part of its free reserves/profit by issuing bonus shares. Each shareholder was issued one equity share of Rs. 10 as bonus for every two shares held in M/s HCL Consulting Ltd. Thus M/s WIPL held 1,28,77,500. shares of M/s HCL Consulting Ltd. after such issue of bonus shares. The share capital of M/s HCL Consulting Ltd. was consolidated and shares of the face value of Rs. 10 each were sub-divided into shares of face value of Rs. 4 each in November, 1999. Accordingly, 1,28,77,500 shares of the face value of Rs. 10 each held by M/s WIPL became 3,21,93,750 shares of the face value of Rs. 4 each. Such consolidation and sub-division happened in the month of November, 1999. This holding by M/s WIPL in M/s HCL Consulting Ltd. represented a controlling interest in the said company. Meanwhile, the name of M/s HCL Consulting Ltd. was changed to M/s HCL Technologies Ltd. on 6th Oct., 1999 and in this new name, the said company came up with an Initial Public Offer (IPO) of shares in the month of November, 1999.
3. The assessee filed its return of income for the asst. yr. 2000-01 on 30th Nov., 2000, A copy of the acknowledgement of filing return of income for the asst. yr. 2000-01 on 30th Nov., 2000 is placed at p. 358 of the assessee's paper book. A copy of computation of total income is at p. 359 of assessee's paper book. In the. computation of income under the head long-term capital gain the assessee has shown to have made a gain as per Annex. 1 attached to the statement of taxable income. In Annex. 1, the assessee has reflected sale of 14,50,000 shares of M/s HCL Consulting Ltd. A capital loss (long-term) on sale of these shares has been reflected in Annex. 1. This long-term capital loss has however been set off against the capital gain on sale of certain other shares and the net capital gain has been shown in the statement of taxable income under the head "long-term capital gains". The return of income so filed by the assessee was subjected to an assessment by the AO and an order dt. 27th March, 2003 was passed by the AO under Section 143(3) of the Act. A copy of order of assessment is at pp. 362 to 372 of assessee's paper book (Vol. 1).
4. Similarly, M/s HCLCL had also disclosed the transaction of sale of shares of M/s HCL Consulting Ltd. to M/s WIPL in their returns filed for asst. yr. 2000-01. This company filed its return of income for the asst. yr. 2000-01 on 27th Nov., 2000. In the computation of income (copy at p. 384) under the head "Capital gain", a long-term capital loss has been returned as per details in Annex. A to the said return. In Annex. A, sale of 41,00,000 equity shares of M/s HCL Consulting Ltd. has been declared.
5. Similarly, M/s SNIPL had also disclosed the transaction of sale of shares of M/s HCL Consulting Ltd. to M/s WIPL in their returns filed for asst. yr. 2000-01. This company filed its return of income for asst. yr. 2000-01 on 30th Nov., 2000. A copy of the return of income for asst. yr. 2000-01 filed by this company is at p. 400 of assessee's paper book. Under the head "Capital gain", long-term capital gain has been declared by the assessee as per Annex. 1 to the said computation. In Annex. 1, 14,50,000 shares of M/s HCL Consulting Ltd. has been shown to have been sold by the assessee. On such sale long-term capital loss has been declared by the assessee. An intimation under Section 143(1) of the Act has been issued by the AO in February, 2002.
6. M/s SNIPL and M/s HCLCL proposed to amalgamate with the assessee w.e.f. 1st April, 2000. The scheme of amalgamation insofar as the same is relevant for the present case, provides as follows :
"Appointed date" for the purposes of the scheme means the 1st day of April, 2000 or such other date(s) as the Hon'ble High Court of Delhi may direct.
"Effective date" shall be the last of the following dates or such other dates as the Hon'ble High Court of Delhi may direct, namely.:
(i) the date on which the last of all the consents, approvals, permissions, resolutions, sanctions and/or orders as are necessary have been obtained or passed; and
(ii) the date on which certified copies of the orders of the Court under Sections 391, 392 and 394 of the said Act are filed with the Registrar of Companies, National Capital Territory of Delhi and Haryana.
Transfer of assets and liabilities Transfer of assets, rights, title, etc. : with effect from the appointed date and subject to the provisions of the Scheme including in relation to the mode of vesting, the undertaking and the entire business of the transferor companies including all the movable and immovable properties, tangible and intangible properties, assets, buildings, offices, investments of all kinds, lease and hire purchase contracts, lending contracts, benefit of any security arrangements, reversions, powers, authorities, allotments, approvals, consents, licenses, registrations, contracts, agreements, engagements, arrangements of all kind, rights, titles, interests, benefits, easements, and privileges of whatsoever nature and wherever situate belonging to or in the ownership, power or possession and in the control of or vested in or granted in favour of or enjoyed by the transferor companies, including but without being limited to trade names and other intellectual property rights of any nature whatsoever, permits, approvals, authorizations, rights to use telephones, telexes, facsimile connections and installations, utilities, electricity and other services, reserves, provisions, funds, benefits of all agreements and all other interests or benefits whatsoever shall be and stand vested in and/or be deemed to be and stand vested in the transferee company under the provisions of Section 394 of the said Act so as to amend from the appointed date, the estate, assets, rights, interests of the transferee company.
In respect of such of the said assets of the respective transferor companies on and from the appointed date, as are movable in nature are otherwise capable of transfer by mutual delivery or by endorsement and delivery, the same may be so transferred by the respective transferor companies and shall, with effect from the effective date become the property of the transferee company in pursuance of the provisions of Section 394 of the said Act.
In respect of such of the said Assets of the respective transferor companies on and from the appointed date other than those referred to in 4.2 above, the same, shall, without any further act, instrument of deed, with effect from the effective date be transferred to and vested in the transferee company oh the appointed date pursuant to the provisions of Section 394 of the said Act.
Upon the scheme becoming effective, the accounts of the transferor companies with the National Securities Depository Limited and Central Depository Services Limited through which they hold securities in other companies shall be consolidated and transferred in favour of the transferee company.
Transfer of debts, liabilities, etc.:
Upon the coming into effect of the scheme and with effect from the appointed date :
(a) All secured and unsecured debts, liabilities including contingent liabilities, whether disclosed or undisclosed, duties, taxes and obligations of the transferor companies along with any charge, encumbrance, lien or. security thereon (hereinafter referred to as the 'said liabilities') shall also be vested or be deemed to be and stand vested, without any further act, instrument or deed, to the transferee company, pursuant to the provisions of Section 394 of the said Act so as to become the debts, liabilities, duties and obligations of the transferee company, and further that it shall not be necessary to obtain the consent of any third party or other person who is a party to any contract or arrangement by virtue of which such debts, liabilities, duties , litigations have arisen in order to give effect to the provisions of this clause.
Activities pending approval:
With effect from the appointed date up to and including the effective date :
(a) the transferor companies shall carry on and shall be deemed to have carried on all their business and activities and shall hold and stand possessed of and shall be deemed to have held and stood possessed of all their assets for and on account of, and in trust for, the transferee company.
7. The Hon'ble High Court of Delhi by order dt. 27th Aug., 2001 sanctioned the scheme. The operative portion of the order reads as follows:
This Court doth hereby sanction the scheme of amalgamation set forth in Schedule I hereto and doth hereby declare the same to be binding on all the shareholders and creditors of the transferor companies and transferee company and all concerned and doth approve the said scheme of amalgamation from the appointed date, i.e., 1st April, 2000.
A further direction in the said order is as follows :
that the said transferor companies do within 30 days after the dale of this order cause a certified copy of this order to be delivered to the Registrar of Companies for registration and on such certified copy being so delivered, the transferor companies shall be dissolved without the process of winding up and the Registrar of Companies shall place all documents related to the transferor companies and registered with him on the file kept by him in relation to the transferee company and the files relating to the said transferor companies and transferee company shall be consolidated accordingly.
(Underlining by us, italicised in print, for emphasis)
8. A certified copy of the order of the Hon'ble Delhi High Court was filed with the Registrar of Companies (RoC) on 8th Nov., 2001. Thus on 8th Nov., 2001 M/s SNIPL and M/s HCLCL ceased to exist. On registration of this fact with the Registrar of Companies (RoC), it would be notice to one and all that these two companies cease to exist.
9. A search under Section 132(1) was conducted on 24th Jan., 2002 at the business premises of the assessee and residential premises of some of its employees, Directors, etc. Each of the warrant of search was in the joint names of 4 entities. They are :
(i) M/s HCL Corporation Ltd.
(ii) M/s Shiv Nadar Investment (P) Ltd.
(iii) M/s Slocum Investment (P) Ltd.
(iv) M/s HCL Technologies (P) Ltd.
10. As on the date of search, M/s HCLCL and M/s SNIPL as entities did not exist. After conclusion of search, a notice under Section 158BC was issued to the assessee, M/s SNIPL and M/s HCLCL calling upon them to file return of income for the 'Block period'. By letter dt. 2nd Dec., 2002, the counsel for the assessee, informed the AO that M/s HCLCL has already been amalgamated with the assessee w.e.f. 1st April, 2000 and ceased to exist and called upon the AO to examine the validity of proceeding against M/s HCLCL. Similarly in the case of M/s SNIPL by letter dt. 16th Jan., 2004, the counsel for the assessee informed the AO about the non-existence of M/s SNIPL.
11. The AO however proceeded to make assessment of alleged undisclosed income of the two other companies (hereinafter called the amalgamating company) also in the hands of the assessee. The AO referred to the decisions of Hon'ble Madras High Court in the case of Union Services (P) Ltd. (1975) Comp. Cas. 146 as well as the case of CIT v. T.V. Sundaram lyengar & Sons (P) Ltd. , wherein the proceedings against amalgamated company for tax liability of amalgamating company for the period prior to amalgamation was held to be valid. The AO also made a reference to the relevant portion of the scheme of amalgamation of M/s HCLCL and M/s SNIPL with the assessee-company as approved by the Hon'ble Delhi High Court regarding transfer of debt liabilities, etc., as well as the relevant provisions of the Companies Act, 1956, and held that the undisclosed income of the amalgamating companies, i.e., M/s HCLCL and M/s SNIPL for the part of block period when they were in existence, is liable to be assessed in the hands of the assessee being the amalgamated company.
12. After concluding as above, the AO proceeded to determine the undisclosed income of assessee, M/s SNIPL and M/s HCLCL, in the assessment framed in the case of assessee. During the course of search conducted in the case of the assessee as well as in the case of M/s HCLCL and M/s SNIPL, certain books of account and documents were found and seized. According to the AO, the said seized material revealed certain facts which led to an inescapable conclusion that the transfer of 70 lakhs shares of M/s HCL Consulting Ltd. by the assessee, M/s HCLCL and M/s SNIPL to M/s WIPL was not made at arms length price resulting into evasion of tax as envisaged in Section 92. Section 92 of the IT Act, as it stood at the relevant point of time when the shares of M/s HCL Consulting Ltd. were sold by the assessee, M/s HCLCL and M/s SNIPL to M/s WIPL, provides as follows :
Section 92 : Income from transactions with non-residents, how computed in certain cases,-Where a business is carried on between a resident and a non-resident and it appears to the AO that, owing to the close connection between them, the course of business is so arranged that the business transacted between them produces to the resident either no profits or less than the ordinary profits which might be expected to arise in that business, the AO shall determine the amount of profits which may reasonably be deemed to have been derived therefrom and include such amount in the total income of the resident.
13. (a) One of such seized documents identified as page No. 155 of Annex. A-5 of Party P-2 was a communication received by Mr. A.S.T. Rajan from Mr. Anil Chanana, a senior executive in the HCL group. In this communication dt. 20th Jan., 1997, it was stated inter alia by Shri Anil Chanana that share of M/s HCL Consulting Ltd. even today could be valued between Rs. 200 to Rs. 400 assuming that the share price is taken at multiples of 2.5 times to 5 times the sales revenue.
(b) A seized document identified as page Nos. 52, 53 and 54 of Annex. A-2 of Party P-2 also was a communication sent by Shri Anil Chanana to Shri A.S.T. Rajan on 25th Feb., 1997 stating that the evaluation of IPO in the case of M/s HCL Consulting Ltd. was being done by Alex Brown and Sons, a leading Investment bankers for technology stocks. A table was also given by Shri Anil Chanana in the said letter containing data about the share value of different group companies stated to be worked out on the average of the low and high possible based on Imputed Market Rates (IMR) stock performance. In the value so given, market imputed rate of M/s HCL Consulting Ltd. was indicated as Rs. 300 per share.
(c) Page No. 13 of Annex. A-1 of Party P-6 was a fax message sent by Shri Neelesh Agarwal, the senior executive in the HCL group to Ms. Priscille Koeing in reply to a fax dt. 19th June, 1998 referring to one Board resolution passed for purchase of 20 lakhs shares of M/s HCL Consulting Ltd. by Vamasundari Investment (P) Ltd. from Slocum Investment (P) Ltd. for a total consideration of INR 500 million, (i.e., Rs. 250 per share) and informing that the same transaction could not happen as the idea to purchase was dropped at the moment.
14. Having regard to all the aforesaid documents found and seized during the course of search indicating higher market rates of the shares of M/s HCL Consulting Ltd., the AO formed an opinion that the assessee-company M/s HCLCL and M/s SNIPL were well aware on 10th June, 1999, i.e., the date on which they transferred the shares of M/s HCL Consulting Ltd. to M/s WIPL that the value of the said shares was much more than Rs. 50 each. According to him, the relevant seized documents also clearly indicated that all the affairs of the entire HCL group were being managed by Shri Shiv Nadar, the chief promoter and major shareholder in several companies belonging to the HCL group of companies of which the assessee, M/s HCLCL and M/s SNIPL also belonged. The AO also found that the valuation of M/s HCL Consulting Ltd.'s shares adopted by the assessee-company M/s HCLCL and M/s SNIPL at Rs. 50 each as sale price was supported by the valuation report of M/s Purushothaman Bhutani & Co. who did not have any expertise in valuing the technology stocks. He also found that for getting the similar valuation done in respect of other transactions such as transactions with Arjun Malhotra group, the assessee-company had availed the services of expert valuers whereas when it came to transfer of shares to a foreign company controlled by the brother of Shri Shiv Nadar, i.e., M/s WIPL, M/s Purushothaman Bhutani & Co. was chosen in order to manage the lower valuation of shares to suit their requirements. In this regard, it may be relevant to point out that the HCL Group was controlled by two groups namely Malhotra group and Shiv Nadar Group. There was a proposal in January, 1998 that Malhotra group would exit from the HCL group by selling all the shares to Shiv Nadar group. An agreement had been signed between Malhotra Group and Shiv Nadar group dt. 27th Jan., 1998, This agreement apart from the shares of other group companies of HCL also included shares of M/s HCL Consulting Ltd. In this agreement the shares of M/s HCL Consulting Ltd. had not been specifically valued and lump sum consideration had been agreed between the parties. The valuation of shares which were subject-matter of transfer under this agreement had been done by internationally acclaimed valuers. This agreement dt. 27th Jan., 1998 was however superseded by an agreement dt. 3rd April, 1999, a copy of which is placed at pp. 1302-1309 of the assessee's paper book. In this agreement, the shares of M/s HCL Consulting Ltd., held by Malhotra group were agreed to be transferred to Shiv Nadar group at a price of Rs. 50 per share. According to the assessee, this price of Rs. 50 per share for M/s HCL Consulting Ltd.'s shares at or about the time when the shares were sold to M/s WIPL, was an evidence of arm's length price. This was an instance of evidence of sale between willing buyer and willing seller at or about the time when the assessee and the two other companies wanted to sell shares of M/s HCL Consulting Ltd. to M/s WIPL. The plea of the assessee in this regard was not accepted by the AO. He was of the view that the entire exercise carried out by the assessee-company was a well planned one in order to evade the capital gain tax in India by following the modus operandi as given below :
(i) To manage the valuation of shares of M/s HCL Consulting Ltd. done at a lower value to ensure that no capital gams is attracted at time of transfer of shares to Mauritius-based associated company.
(ii) Since the incidence of capital gains tax is absent in Mauritius, no capital gains tax would be attracted whenever the shares are further transferred or sold at the higher market value in future.
(iii) In effect to transfer its holdings to an associated company at a low value without incidence of tax in India and without losing control over M/s HCL Consulting Ltd. thereby taking advantage of Direct Tax Avoidance Agreement between India and Mauritius.
15. In view of the above, the AO was of the opinion that the provisions of Section 92 are apparently applicable to the facts of the present case and the actual gain arising from the transaction of transfer of shares can be brought to tax in India taking into consideration the arm's length price. Accordingly, he confronted his various findings/observations based on the relevant seized material to the assessee-company requiring it to offer explanation in the matter. In particular, the AO wanted to know as to how the issue price of shares of M/s HCL Consulting Ltd. when these shares were offered for Public Subscription in November, 1999 were valued at Rs. 580 per share of a face value of Rs. 4 per share when the same shares were sold at Rs. 50 per share of face value of Rs. 10 in the month of June, 99 to M/s WIPL. Secondly, the AO referred to page No. 22 of Annex. 4 Party P4 a document seized in the course of search which is an e-mail from one Anil Channana, employee in HCL Group to Mr. Shiv Nadar dt. 23rd Sept., 1999 in which Mr. Anil Channana had opined that shares of face value of Rs. 10 of M/s HCL Consulting Ltd., would be at Rs. 1,807 per share. Thirdly, p. 155 of Annex-1A Party-2 according to the AO suggested that Anil Channana referred to a price of Rs. 200 to Rs. 400 each to Mr. A.S.T. Raj an as the price of M/s HCL Consulting Ltd. as on 20th Jan., 1997. Fourthly, AO referred to pp. 52, 53 and 54 of Annex. A-2 Party-2 dt. 26th Feb., 1997 wherein in a letter by Anil Channana to Mr. A.S.T. Rajan M/s HCL Consulting Ltd.'s shares were valued at Rs. 300 per share by valuers M/s Alex Brown & Sons.
16. In reply, detailed submissions were made on behalf of the assessee-company raising mainly the following contentions :
(i) The income proposed to be added by invoking the provisions of Section 92 cannot be considered as its undisclosed income under Chapter XIV-B.
(ii) The sale consideration received by it from M/s WIPL was only to the extent of Rs. 50 per share of M/s HCL Consulting Ltd. and no amount over and above the said consideration was received by it, which could be treated as its undisclosed income liable to tax under Chapter XTV-B.
(iii) Reliance was placed on the decision of Hon'ble Supreme Court in the case of K.P. Vaighese v. ITO , wherein it was held that the AO cannot substitute the market value of the assets sold for the consideration declared by the assessee unless it is proved by him that there was any understatement or concealment by the assessee.
17. In addition to the aforesaid contentions, the contents of various seized documents were also explained by the assessee-company stating mainly that the indications of share price given therein were based on assumptions and presumptions worked out in connection with the possibility of a public issue that was contemplated by some of the group companies and not essentially M/s HCL Consulting Ltd. The relevance of such indications for this limited purpose was also explained on behalf of the assessee-company and it was also pointed out that such higher indications given by the employees of the group were not accepted by the expert in the field. Some of the seized documents relied upon by the AO were also stated to be not found from the premises of the assessee-company. It was also submitted that most of the other documents found and seized were undated and unsigned which could not be relied upon to draw any definite or concrete inference against the assessee. As regards the security purchase agreement dt. 27th Jan., 1998 found and seized during the course of search, it was submitted that the same was drawn to facilitate acquisition of the entire shareholdings of Mr. Arjun Malhotra for various operating and non-operating companies by Shiv Nadar, but having regard to unrealistic prices of such shares indicated therein, the same was never given effect to. Documents evidencing contemporaneous transactions of purchase and sale of shares of M/s HCL Consulting Ltd. at Rs. 50 per share between various companies including those owned by Mr. Arjun Malhotra including agreement dt. 3rd April, 1999 were also placed on record by the assessee-company to point out that the value of Rs. 50 shown therein was accepted by the Department in the regular assessments of Mr. Arjun Malhotra. It was contended on behalf of the assessee-company that Shri Arjun Malhotra or his company would not have sold these shares carrying substantial voting rights at Rs. 50 per share while he was completely dis-investing from M/s HCL Consulting Ltd.
18. The aforesaid submissions made on behalf of the assessee-company, however, were not found to be acceptable by the AO for the following reasons given in para Nos. 7.4.5 of his assessment order:
(a) At point No. (iii), Mr. A.S.T. Rajan has not replied to the letter of Mr. Anil Chanana in which he has suggested the market price of each share of M/s HCL Consulting (P) Ltd. should be Rs. 1,807. (Reference is to p. 22 of A-4, P-4 seized at the time of search)
(b) At point No. (iv), the contention of the assessee is again not correct. Though this paper was seized from the residence of Ms. Rita Gupta, but
- Ms. Rita Gupta is or has been a director in M/s HCL Holdings (P) Ltd., M/s HCL Investment (P) Ltd., M/s IT Con Investment (P) Ltd., M/s Vamasundari Investment (P) Ltd., M/s Orient Cartons Ltd., M/s Net Investment (P) Ltd., M/s HCL Networking Software Ltd., M/s Balfour Holdings Ltd., M/s Bees Holdings Ltd. and M/s Benley Investment Ltd., apart from being a director in some of the Indian companies related with HCL group.
- She has been the authorized signatory for banking purposes or for giving instructions for the purchase/sale of shares in India by these OCBs.
- Some of the papers related with the financial transactions of some OCBs have been found in her possession during search and seizure operation.
- The transactions of sale and purchase of shares, for these OCBs, have been carried out by M/s Front Line Capital Services Ltd. and the instructions for the same has been given to them by Ms. Rita Gupta and not by the OCBs directly.
- Some of the minutes of proceedings of the board meeting of the OCBs, as furnished by the assessee during the assessment proceedings, indicate that it was the assessee Ms. Rita Gupta who was to take necessary action for disposal of the shares held by the OCBs and was to keep the board informed and updated. As per the same resolution, she was to keep Sh. Shiv Nadar updated.
Hence, finding of these papers at the residence of Ms. Rita Gupta is not out of context and definitely relate to the transactions and activities of the assessee-company (The AO here wants to highlight that the overseas corporate bodies were under the control and supervision of HCL group from India)
(c) The contention of the assessee that mere bald allegation would not serve to discharge the onus/burden placed on him, especially in view of the Supreme Court decision in the case of K.P. Varghese v. ITO wherein their Lordships held in the context of Section 52(2) of the Act, that the AO cannot substitute the market value of the assets sold for the consideration declared by the assessee and that the aforesaid section can be invoked only where full value of the consideration in respect of the transfer is shown at a lesser figure than that actually received by the assessee. There is no dispute on this issue as this decision is valid when transaction takes place between the residents as defined in IT Act, 1961. But, when transaction takes place between resident and non-resident, then Section 92 of the IT Act, 1961 is invoked, where AO has to determine whether transaction was at arm's length or not.
(d) The contention of the assessee that Department is having shifting stand on valuation of shares is again not correct. The assessee was specifically asked vide order sheet entry dt. 17th Feb., 2004 why valuation of shares of M/s HCL Consulting (P) Ltd. should not be done at Rs. 1,807 per share based on seized material.
19. The AO once again referred to the various documents found and seized during the course of search giving higher indications of the market value of the shares of M/s HCL Consulting Ltd. at the relevant time and came to a conclusion based thereon that the management of HCL group was aware of the fact that the market value of the shares of M/s HCL Consulting Ltd. was much higher than Rs. 50 per share and transfer of these shares at such a higher value would have given rise to a substantial capital gain chargeable to tax in India. According to him, the management was also aware of the fact that the said shares are going to be listed in the stock exchange following the IPO at a higher value and it is only before such IPO that the shares could have been transferred at a suitable value and parked in a tax heaven without losing control over the . M/s HCL Consulting Ltd. In order to serve this purpose, not only prices of shares but also date of transfer were managed and arranged in such a manner so as to avoid paying any capital gain tax and the shares were parked with a Mauritius company so that the control can be retained on the one hand and shares also could be sold in the open market at a higher value without incidence of any capital gain tax in India. In this regard, the AO pointed out from the relevant seized documents the extraordinary urgency in which the entire process of transfer of shares, of M/s HCL Consulting Ltd. from the assessee-company to M/s WIPL, Mauritius was completed. He also relied on the relevant seized documents identified as page Nos. 15, 16 and 17 of Annex. A-4 of Party P-4 wherein the price of Rs. 50 per share was stated to be taken to "complete the transaction tax neutral. He concluded that the price of Rs. 50 thus was taken to be a tax neutral price and the valuation was arranged or managed just to substantiate the same. The AO also relied on a letter found and seized during the course of search as page Nos. 156 and 157 of Annex. A-1 of Party P-2 which was written by Mr. Anil Chanana to Mr. Shiv Nadar on 5th June, 1998 indicating clearly that once HCLT goes public, it would become almost impossible to do the externalization of M/s HCL Consulting shares as discussed and decided earlier. As regards the transfer of shares of M/s HCL Consulting Ltd. by Shri Arjun Malhotra and his companies at the same price of Rs. 50 each during the relevant period, the AO held that such a price, in any case, was suitable to the said transferors in order to avoid the payment of capital gains tax.
20. To sum up, the AO held that the main idea behind the entire exercise of transfer of shares of M/s HCL Consulting Ltd. by the assessee M/s HCLCL and M/s SNIPL to M/s WIPL, Mauritius was to avoid payment of capital gains tax and it was a well-planned, discussed, consulted, understood and executed exercise with the clear picture in mind that in the atmosphere of strong sentiments towards the technology shares, the IPO of M/s HCL Consulting Ltd. will fetch a very good price and after IPO, it will be literally impossible to transfer the shares of M/s HCL Consulting Ltd. at a price lower than the market price. He found support for this inference from the fact that M/s HCL Holdings (P) Ltd., Mauritius [formerly M/s WIPL, Mauritius] had subsequently sold 15,82,430 shares of M/s HCL Technologies Ltd. [formerly M/s HCL Consulting (P) Ltd.] in the Indian capital market at a very high price of about Rs. 104 crores as against the effective cost price of Rs. 1.34 crores paid to the assessee, M/s HCLCL and M/s SNIPL resulting in the long-term capital gain of Rs. 102.66 crores without any incidence of tax in India. Accordingly, the AO held that the transaction of transfer of shares of M/s HCL Consulting Ltd. by the assessee M/s HCLCL and M/s SNIPL to the Mauritius company was not done at arm's length price and thus the said transaction attracted the provisions of Section 92 empowering him to compute the income from the said transactions between a resident and a non-resident company having regard to arm's length price. He then proceeded to ascertain the arm's length price of shares of M/s HCL Consulting Ltd. at the relevant time and recorded the following findings/observations based on the relevant seized documents in this regard:
(i) In the letter dt. 25th Feb., 1997 (page Nos. 52, 53 and 54 of Annex. A-2 of Party P-2) addressed to Mr. A.S.T. Rajan, Mr. Anil Chanana, the senior executive in the. HCL group had worked out the market imputed rate of the shares of M/s HCL Consulting Ltd. at Rs. 300 whereas such rate of the shares of NIIT was worked out by him at Rs. 320 based on the discussion with Alex Brown & Sons, the leading investment bankers for technology stocks. Subsequently, the shares of NIIT were listed on the stock exchange and the same were quoted at Rs. 2,709 on NSC as on 23rd Sept., 1999 as against the valuation of Rs. 320 done by Shri Anil Chanana. Since such valuation of M/s HCL Consulting shares made by Shri Anil Chanana simultaneously was Rs. 300, the corresponding price of M/s HCL Consulting Ltd. as on 23rd Sept., 1999 should normally be Rs. 2,540 per share (2,709 x 300/320)
(ii) The valuation of shares of M/s HCL Consulting Ltd. at Rs. 300 was apparently done by Shri Anil Chanana on the basis of discussions with Alex Brown & Sons and as per the latest balance sheet as on 30th June, 1996 available then, the profit after tax of M/s HCL Consulting Ltd. was Rs. 1,067.38 lakhs. Such profit, after tax, for the year ending 30th June, 1999, however, stood at Rs. 10,096.80 lakhs which gives the effective value of each share of M/s HCL Consulting Ltd. at Rs. 2,838 (300 x 10,096.80/1,067.38).
(iii) As per the fax message sent by Shri Neelesh Agarwal, the senior executive in the HCL group to Ms. Priscille Koeing of M/s Vamasundari Investment (P) Ltd. (page No. 13 of Annex. A-1 of Party P-6), the shares of M/s HCL Consulting Ltd. had been agreed to be sold by the assessee-company to M/s Vamasundari Investment (P) Ltd. at Rs. 250 per share as on 19th June, 1998 and if the rise in profits after tax at Rs. 10,096.80 lakhs in the year ending 30th June, 1999 from Rs. 1,039.28 lakhs in the year ending 30th June, 1997 is to be considered, it gives the effective value of each share of M/s HCL Consulting Ltd. at Rs. 2,429 (250 x 10,096.80/1,039.28).
(iv) In the fax message sent by Shri Anil Chanana to Shri Shiv Nadar on 23rd Sept., 1999 (page No. 22 of Annex. A-4 of Party P-4), the price of each share of Rs. 10 each of M/s HCL Technologies Ltd. was indicated at Rs. 1,807 assuming a market cap of Rs. 6,000 crores. It was also stated in the said message that in order to keep the share price of IPO between Rs. 450 and Rs. 500 each, bonus shares in the ratio of one share for every two shares held would be required to be declared and after such bonus, the stock will have to be split in the ratio of 2.5 : 1 by reducing the face value of each share from Rs. 10 to Rs. 4. Subsequently, bonus was declared and even the shares were split in the ratio of 2.5 : 1 and the shares of the face value of Rs. 4 per share, after bonus and split, were issued to the public and such issue was closed at Rs. 580 per share as per the understanding and conviction expressed by Mr. Anil Chanana in the fax message sent to Mr. Shiv Nadar dt. 23rd Sept., 1999 wherein the value of share of the face value of Rs. 10 before bonus and split was estimated at Rs. 1,807 each.
21. Keeping in view the aforesaid observations, the AO adopted the price of Rs. 1,807 being the lowest of the above as the arm's length price of the shares of M/s HCL Consulting Ltd. at the relevant time and computed the income of the assessee from capital gain on sale of the said shares to a Mauritius company at Rs. 254,76,50,000 (14,50,000 x 1,757). This income was treated by him as the undisclosed income of the assessee and addition was made to that extent in the assessment completed under Section 158BC. Similarly, capital gain arising from the transfer of shares by M/s HCLCL and by M/s SNIPL to a Mauritius company was determined by him as per Section 92 at Rs. 720,37,00,000 and Rs. 254,76,50,000 respectively and the same was assessed in the hands of the assessee-company as its undisclosed income in the block assessment since both these companies had already merged in the assessee-company as per the scheme of amalgamation approved by the High Court. Accordingly, a total addition of Rs. 1229,90,00,000 was made by the AO to the undisclosed income of the assessee-company in the block assessment by invoking the provisions of Section 92 and relying on the decision of Calcutta Bench of Tribunal in the case of ITO v. Kusum Products Ltd. (1984) 18 TTJ (Cal) 494 : (1984) 7 ITD 557 (Cal).
22. Aggrieved by the aforesaid assessment made by the AO under Section 158BC, appeal was preferred by the assessee before the learned CIT(A) challenging inter alia the additions of Rs. 1,229 crores made by applying the provisions of Section 92. During the course of appellate proceedings before the learned CIT(A), the validity of the block assessment made by the AO under Section 158BC was also challenged by the assessee on various grounds. The first contention raised on behalf of the assessee before the learned CIT(A) in this regard was that the search action undertaken against it under Section 132 was invalid. However, having regard to the evidence found as a result of search, the learned CIT(A) found no merits in this contention raised on behalf of the assessee. Further, relying on the decision of Delhi Bench of Tribunal in the case of Virinder Bhatia v. Dy. CIT (2002) 74 TTJ (Del) 60 : (2001) 79 ITD 340 (Del) and that of Cochin Bench of Tribunal in the case of S. Gopakumai v. Asstt. CIT (2002) 76 TTJ (Coch) 709, he held that adjudicating question regarding validity of search is beyond the powers of the AO and the same, therefore, could not be challenged even before him.
23. It was also contended on behalf of the assessee before the learned CIT(A) that the capital gains/loss on sale of shares of M/s HCL Consulting Ltd. to M/s WIPL, Mauritius was duly disclosed in its return of income for asst. yr. 2000-01 filed prior to the date of search and the same having been accepted by the AO in the assessment completed under Section 143(3), any addition on account of the said transactions was beyond the scope of block assessment under Chapter XIV-B especially when no evidence was found as a result of search to prove that the assessee had received any sum over and above the agreed consideration of Rs. 50 per share. This contention of the assessee, however, was rejected by the learned CIT(A) observing that on the basis of evidence gathered as a result of search, even the declared transaction may partake the character of yielding "undisclosed income" on account of their falsity. He held that the regular assessment in the present case was completed on the basis of entries disclosed in the books of account whereas the block assessment was framed on the basis of evidence found as a result of search. According to him, the position emanating from the seized documents revealing the planning of the assessee to transfer the shares of M/s HCL Consulting Ltd. to Mauritius company at a price which is tax neutral was further fortified from the fact that all these 70 lakhs shares of M/s HCL Consulting Ltd. held by the assessee and the merged companies were sold to Mauritius company at a price equivalent to the cost of acquisition. He accordingly concluded that the transactions of M/s HCL Consulting Ltd. to M/s WIPL, Mauritius at Rs. 50 per share (effectively Rs. 13.33 per share after bonus and split) as against the fair market value of about Rs. 576 per share known to the assessee-company, as evidenced by the seized material, were clandestinely and surreptitiously undertaken to evade capital gains tax and there was no legal infirmity in the block assessment completed by the AO under Section 158BC bringing to tax the same as undisclosed income of the assessee by invoking the provisions of Section 92. The various objections raised by the assessee challenging the validity of notice issued by the AO under Section 158BC were also held to be unsustainable by the learned CIT(A) for the reasons given in his impugned order. Even the contention of the assessee about the inadequate opportunity afforded by the AO to it of being heard was also found to be unacceptable by the learned CIT(A). Accordingly, he concluded that the search undertaken against the assessee under Section 132 as well as the block assessment framed under Section 158BC consequent to the said search was valid in the eye of law having regard to the factual and legal position and there was no infirmity as alleged by the assessee.
24. As regards the addition of Rs. 1,229.90 crores made by the AO by applying the provisions of Section 92 on account of income from sale of shares of M/s HCL Consulting Ltd. to M/s WIPL, Mauritius, the following contentions were mainly raised by the assessee before the learned CIT(A):
(1) M/s WIPL has not sold any of the 70,00,000 shares acquired from the appellant and the erstwhile companies. Even the shares sold by that company, out of shares acquired by it from other sources, as shown in the assessment order, constitute a minuscule percentage of that company's total holding of M/s HCL Consulting Ltd. As such, the allegation of the AO regarding evasion of capital gains tax in India under the India-Mauritius Tax Treaty is baseless and factually incorrect. Had there been any intention to evade capital gains tax, as alleged by the AO, then M/s WIPL would have immediately sold the shares in the Indian market.
(2) This seems to be an attempt to create a fictitious income and tax the same. The facts relating to sale of shares to M/s WIPL, Mauritius, listing of shares of M/s HCL Technologies Ltd. and movement of prices of the shares in the secondary market after listing, were also narrated by the appellant.
(3) No share of M/s HCL Technologies Ltd. was issued to M/s WIPL, Mauritius by the appellant or the other companies out of promoter's quota and the sale price was determined according to the valuation of shares of M/s HCL Consulting Ltd. (a closely held unlisted company) carried out by M/s Purushothaman Bhutani & Co., chartered accountants vide their certificate dt. 21st May, 1999. The fair value of shares of M/s HCL Consulting Ltd. was determined at Rs. 50 per share as the average of Net Asset Value and Profit Earning Capacity Value. This valuation was done in accordance with the CCI's Guidelines because the RBI required the price of shares proposed to be sold to a foreign company to be determined as per the said CCI's guidelines.
(4) The valuation as per Rule 10-D of the WT Rules provides lower value based on the last financial results available as undertaken in the case of unlisted companies. If the shares were to be valued on 4th June, 1999, viz., the date of the transaction, as per Rule 10-D of the WT Rules, the basis of the last available balance sheet was at 30th June, 1998, then the fair market value of these shares would be much lower than Rs. 50 per share.
(5) The appellant and the erstwhile companies had applied vide letter dt. 4th June, 1999 to the Secretariat for Industrial Approvals (SIA) seeking permission for sale of shares of M/s HCL Consulting Ltd. of Rs. 10 face value, to M/s WIPL, Mauritius at the rate of Rs. 50 per share. The valuation report was also submitted to the SIA. Pursuant to the said application, separate sale deeds were executed by the appellant and the other companies with M/s WIPL, Mauritius on 26th July, 1999. In the meanwhile, the Mauritius company was permitted by the SIA vide approval letter dt. 2nd July, 1999, as modified by their letter dt. 21st Sept., 1999, to invest in India by acquiring an aggregate of 70,00,000 shares of M/s HCL Consulting Ltd. from the appellant and the other companies.
25. On the basis of the aforesaid contentions, the case of the assessee before the learned CIT(A) was that the transfer of shares of M/s HCL Consulting Ltd. to M/s WIPL, Mauritius was at a fair value determined in accordance with the erstwhile CCI Guidelines which was duly informed to and approved by the Government of India. The attention of the learned CIT(A) was also invited to the evidence found during the course of search itself showing independent contemporaneous transactions to point out that the same was sufficient to show that the sale of shares to M/s WIPL, Mauritius was at arm's length price. It was on behalf of the assessee that such arm's length price could not be linked to the speculative prices prevailing in the stock market for shares of an altogether different company at a subsequent date and under different circumstances. It was also contended that the onus to prove to the contrary was on the AO who had alleged that the apparent was not real.
26. The aforesaid submissions made on behalf of the assessee, however, did not find favour with the learned CIT(A). According to him, it was something unbelievable that a share which was quoted in the market at Rs. 2,200 each in January, 2000 was sold by the assessee at Rs. 50 each in June, 1999, i.e., just six months earlier and such price was the arm's length price. He also found substance in the observations of the AO that the assessee having agreed to sell the shares of M/s HCL Consulting Ltd. to M/s Vamasundari Investment (P) Ltd. Mauritius on 19th June, 1999 at Rs. 250 per share as indicated in the relevant seized document based on the audited accounts as on 30th June, 1997, would have sold the same shares at Rs. 50 each in June, 1999 when the profit as per the latest balance sheet as on 30th June, 1998 was on the higher side than that of 30th June, 1997. He also found the objection raised by the AO regarding the valuation of shares got done by the assessee-company from Purushothaman Bhutani & Co., chartered accountants to be sustainable and having regard to the observations recorded by the AO in this regard, the learned CIT(A) concurred with the AO's conclusion that the same was got done by the assessee-company as per its wish and convenience to ensure that the transaction of transfer of shares to M/s WIPL, Mauritius is without any tax incidence/burden. Accordingly, the learned CIT(A) held that the said transfer was not done at arm's length price and since this understatement of selling price was detected as a result of evidence found during the course of search, the addition made by the AO on account of income adopting the arm's length price in the block assessment under Chapter XIV-B was fully justified.
27. Before the learned CIT(A), the following arguments were also advanced on behalf of the assessee challenging the addition of Rs. 1,229.90 crores made to its total income on merits :
(1) As per the valuation report, the fair value of shares of M/s HCL Consulting Ltd. was determined at Rs. 50 per share after taking the average of net asset value and profit earning capacity value. This valuation was in accordance with the guidelines of CCI, which was also submitted to SIA. Accordingly, the appellant and other companies executed separate sale deeds with M/s WIPL, Mauritius on 26th July, 1999.
Permission of SIA was received vide letter dt. 2nd July, 1999, as modified by their letter dt. 21st Sept., 1999 giving approval to invest in India by acquiring 70,00,000 shares of M/s HCL Consulting Ltd.
(2) At the time of transfer of shares to M/s WIPL, there was no such plan for M/s HCL Consulting Ltd. to go public in India.
(3) M/s HCL Technologies (P) Ltd. was merged with M/s HCL Consulting Ltd. vide Delhi High Court's order dt. 30th Aug., 1999 and, thereafter, its name was changed to M/s HCL Technologies Ltd. w.e.f. 6th Oct., 1999. With a view to make M/s HCL Technologies a global technology and software services company, vide Board's meeting of M/s HCL Consulting Ltd. dt. 13th Sept., 1999, it was decided to make it a widely held limited company. Accordingly, an offer document was issued inviting bids for the IPO, which opened on 16th Nov., 1999. For determining the price for its IPO, M/s HCL Technologies Ltd. adopted a book building process, i.e., the company estimated the prices that its shares are likely to fetch in the market, based upon its financial position and market performance as well as the prevalent market conditions and perceptions about the company among the investors. Since there was no guideline or restriction for valuation of shares for the purpose of determining the premium, the company informed the investor and advised them to make their own judgment about investment prior to making a bid or application in the issue.
(4) There was tremendous surge in the valuation of listed shares of Information Technology companies in the last quarter of 1999. Encouraged by the market movement, which kept on climbing from August, 1999 onwards, bidding prices of M/s HCL Technologies Ltd. was estimated at Rs. 450 to Rs. 580, which was also submitted to the regulatory authorities in November, 1999.
(5) The shares of M/s HCL Technologies Ltd., on the first day at NSE was quoted at Rs. 1,550, climbed upto Rs. 1,725 and fell to a low of Rs. 1,492. Later on, the price of this share declined upto Rs. 105 per share.
(6) The appellant is a promoter company and not a speculator. After sale of shares of M/s HCL Consulting Ltd., the appellant has not sold even a single share of M/s HCL Technologies Ltd. from its listing. The document relied upon by the AO (p. 22 of Annex. A-4 of Party P-4), which is e-mail by an employee of M/s HCL Technologies Ltd. to its Chairman dt. 23rd Sept., 1999, contemplating the public issue refers to an assumption of prices that could be resulted in a market capitalization of Rs. 6,000 crores, looking at the number of shares of the company. Subsequent portion of the same e-mail clearly indicates that it was stated that price of Rs. 1,807 was not achievable and suggested lower prices with enhancement of number of shares. Therefore, sum of Rs. 1,807 cannot be adopted to the value of a transaction that was settled on 4th June, 1999.
(7) In response to the above communication, Mr. A.S.T. Rajan has faxed letter to Mr. Anil Chanana on 21st Jan., 1997 (p. 156 of Annex. A-5 of Party P-2) wherein he has categorically, on the basis of audited account of M/s HCL Consulting Ltd., stated that the said share should have a market price of Rs. 23.76.
(8) Page 52 of Annex. A-2 of Party P-2 is not a valuation report of shares of M/s HCL Consulting Ltd. by Alex Brown & Sons or any other party but appears to be a table showing the total number of issued shares of various companies and the imputed rate thereof.
(9) The Security purchase agreement dt. 27th Jan., 1998 between Mr. Shiv Nadar and Arjun Malhotra group was never given effect to. This agreement was drawn to facilitate acquisition of the entire shareholdings of Mr. Arjun Malhotra for various operating and non-operating companies by Mr. Shiv Nadar. Mr. Arjun Malhotra had accepted a certain level of prices to be paid in respect of the shares of different companies to be acquired by Mr. Nadar. These prices were however, not realistic and the transactions could not be completed as per this agreement.
(10) The transaction of purchase and sale of shares of M/s HCL Consulting Ltd. @ Rs. 50 per share between various companies have already been accepted in regular assessments of purchasers/sellers of these shares. Had the prices of shares of M/s HCL Consulting Ltd. been either Rs. 102 or 255 or 200-400 or 250 or 300 or 450-580 or 1500 or 1807 or 2500, as arbitrarily suggested in the various notices/letters sent to the appellant during block assessment then Mr. Arjun Malhotra/his companies would not have sold these shares carrying substantial voting rights @ Rs. 50 per share while he was completely disinvesting from this company.
(11) The date of contract for transfer of shares if 4th June, 1999 on which date, M/s WIPL irrevocably committed to purchase the shares of M/s HCL Consulting Ltd. @ Rs. 50 per share. It is on this date that an enforceable agreement came into existence between the parties. However, later on vide its letter dt. 27th Aug., 2004, on the basis of opinions of some eminent persons, the appellant submitted the date of transfer of shares was 26th July, 1999, i.e., the date on which a sale deed was executed to record the understanding of the parties.
(12) The price comparison methodology involving NIIT, as adopted by the AO is merely a simplistic projection and is completely invalid, especially since, share prices depend upon innumerable other factors and cannot be in direct proportion of the profits of the company. As such, the formula adopted by the AO is totally incorrect and contrary to the rudiments of stock market and price behaviour.
28. In addition to the aforesaid contentions, it was also pleaded on behalf of the assessee before the learned CIT(A) that the transaction of sale of shares of M/s HCL Consulting Ltd. to M/s WIPL was duly disclosed by it in the audited accounts for the year ended 31st March, 2000 and the capital gains/loss on the said sale offered in the return of income for asst. yr. 2000-01 was accepted by the AO in the regular assessment completed on 27th March. 2003 under Section 143(3). It was pointed out that before relying on the communication stated to be sent by Shri Anil Chanana to Shri Shiv Nadar to draw an inference about the possible market price of M/s HCL Technologies Ltd. at Rs. 1,807, the AO neither chose to examine Shri Anil Chanana nor any specific question was asked to Shri Shiv Nadar in this regard in his statement recorded on oath. The action of the AO in invoking the provisions of Section 92 was also challenged by the assessee before the learned CIT(A) submitting that the said provisions, as applicable to the year under consideration, sought to cover only the business transactions between a resident and a non-resident and did not cover any transaction on capital account. A reference in this regard was made to Rule 11 of the IT Rules, 1962 providing for the method of determination of income for the purpose of Section 92 wherein emphasis was given on profits and gains derived from business without any machinery provisions for the computation of income arising through transfer of a capital asset. It was also contended on behalf of the assessee before the learned CIT(A) that the price of M/s HCL Consulting Ltd. shares was determined by the events prior to the date of sale, i.e., 4th June, 1999 and the events subsequent to that date could not be said to have any bearing on the said price. Specific instances/incidences were pointed out by the assessee in this regard to justify that the price of Rs. 50 was the arm's length price. An attempt was also made on behalf of the assessee-company to point out the errors/fallacies in the price comparisons and computations made by the AO while adopting the price of Rs. 1,807 as arm's length price in place of Rs. 50 shown by the assessee. It was contended that the sale to Mauritius company, having been made after obtaining the necessary approval of Government/Regulatory Authorities, could not be found fault with merely on the basis of the possibility of any exemption from capital gains arising in the future to the buyers of the shares. The assessee also tried to rebut various allegations made by the AO by filing elaborate written submissions before finally praying that the impugned addition of Rs. 1,229.90 crores made by the AO to its income alleging the suppression of capital gains was not sustainable either in law or on facts and the same being outside the purview of Chapter XIV-B, deserves to be deleted. The written submissions filed by the assessee were forwarded by the learned CIT(A) to the AO and the remand report obtained thereon from him was also confronted by him to the assessee with an opportunity to file a rejoinder which the assessee availed.
29. After taking into consideration all the material available before him including the submissions made by the assessee, remand report submitted by the AO as well as the assessee's rejoinder, the learned CIT(A) proceeded to confirm the addition of Rs. 1,229.90 crores for the various reasons/observations recorded elaborately in his impugned order, which are summarized below in brief:
(i) The valuation of M/s HCL Consulting Ltd. shares made by Purushothaman Bhutani & Co. at Rs. 50 each was incorrectly made without fully applying the CCI Guidelines to suit the assessee's convenience and in order to arrive at the desired price which was tax neutral.
(ii) There was sufficient evidence available on record to show that the IPO was proposed much earlier and despite the fact that the same was known well before the transfer of shares to M/s WIPL, it was not taken into consideration in calculating the net asset value as required by Clause 6.2(b) of the CCI Guidelines.
(iii) Many points emphasized by the assessee-company to justify the valuation of Rs. 50 per share made by Purushothaman Bhutani & Co. during the appellate proceedings were contradictory with the justification of amalgamation adopted by the assessee before the Hon'ble High Court of Delhi. Even the amalgamation of M/s HCL Technologies Ltd. into M/s HCL Consulting Ltd. initiated at the beginning of May, 1999 was done with the public issue in mind.
(iv) Even though the so-called sale deeds of shares were executed on 26th July, 1999, the financial results for the year ending 30th June, 1999 showing higher profits were purposely ignored especially as per the CCI Guidelines, if the profits are rising consistently from year to year at a steady ratio and there are reasons to believe that the rising trend will be maintained, the average profit was expected to be calculated on a weighted basis giving a weightage of 3 for the latest year, 2 for the middle year and 1 for this year for applying price (sac-profit) earning capacity value method. Accordingly, if the net asset value is recalculated on the basis of the latest financial results as well as the widened capital base, the value per share comes to Rs. 75 as per the net value asset method according to CCI Guidelines.
(v) Similarly, the correct value of share as per the profit earning capacity value method according to CCI Guidelines works out to Rs. 254 on the basis of improved financial results available for the latest years upto 30th June, 1999. This price of Rs. 254 per share of Rs. 10 face value comes to Rs. 1,430 per share of Rs. 4 face value after the bonus issue and split.
(vi) The valuation of the shares of M/s HCL Consulting Ltd. as done by M/s Purushothaman Bhutani & Co. thus was not the real value and the same was not the arm's length price. Such valuation claimed to be made as per the guidelines of CCI, in any case, could not be misdirected or misinterpreted to justify a wrong doing. Even in the letter dt. 2nd July, 1998 issued by the RBI and found during the course of search as page No. 58 of Annex. A-14 of Party A-6, it was clarified by the RBI that the question of valuation of shares proposed to be transferred for tax purposes such as income-tax, capital gains tax, etc. is liable to be considered by the IT authorities independently.
30. As regards the contemporaneous transactions cited by the assessee involving transfer of shares of M/s HCL Consulting Ltd. at Rs. 50 during the relevant period, the learned CIT(A) observed that all such transactions had taken place only among the HCL group of companies and with Arjun Malhotra group of companies and such transfers having been effected with a specific purpose among the related parties as is evident from the amalgamation scheme, the price of Rs. 50 per share shown therein could not be said to be the arm's length price. As regards the transactions of transfer of shares involving Arjun Malhotra group of companies, the learned CIT(A) held that the sequence of events was sufficient to suggest that it was mandatory for the assessee-company to first oust the Arjun Malhotra group for which the share price was intentionally kept tax neutral for mutual benefit. In this regard, he relied on the relevant noting found to be made on page No. 15 of Annex. A-4 of Party P-4 after giving the shareholding pattern of M/s HCL Consulting Ltd. as on 13th Sept., 1999 specifying alternative actions to be taken either to transfer the shares to the company A, B and C directly from AM (Arjun Malhotra) and if not, such transfer to take place at any price which is tax neutral by putting the consideration at Rs. 50 per share. According to the learned CIT(A), this noting found recorded in the relevant seized document was conclusive to establish that the price per share was intentionally adopted at Rs. 50 to ward off the burden of capital gains tax. He also noted that all these transactions amongst the group companies and with Arjun Malhotra group were made at Rs. 50 per share without obtaining any valuation report either from Purushothaman Bhutani & Co. or any other consulting firm. He held that the report of Purushothaman Bhutani & Co. showing the valuation of the shares of M/s HCL Consulting Ltd. at Rs. 50 obtained subsequently was only a managed report just to give genuineness to the transactions. He, therefore, rejected the contention of the assessee that the transaction of 1.08 crores shares of M/s HCL Consulting Ltd., being at arm's length price, was backed by any corroboratory evidence.
31. The learned CIT(A) also discussed the various documents found during the course of search and relied upon by the AO to come to a conclusion that the price of the shares of M/s HCL Consulting Ltd. was much more than Rs. 50 as shown by the assessee while transferring the shares to M/s WIPL, Mauritius. He held that the conclusion drawn by the AO as regards the said price being not at arm's length thus was based on evidence/information found as a result of search from the relevant seized documents and the confrontation of the same to the assessee could not be termed as in the nature of roving and fishing enquiries as sought to be argued by the assessee. He also referred to the substantial increase in the stock prices of some of the information technology shares during the period from June, 1999 to January, 2000 and based on the unprecedented hike noted therein, he held that the price taken by the AO of the shares of M/s HCL Consulting Ltd. as on 4th June, 1999 was the actual arm's length price. He, therefore, held that the transfer of shares of M/s HCL Consulting Ltd. by the assessee and other two merged companies to M/s WIPL, Mauritius at the understated price of Rs. 50 per share was a colorable device to park the said shares with the overseas group company situated in Mauritius to avoid payment of any capital gains tax in India. For this conclusion, he relied on the decision of Calcutta Bench of Tribunal in the case of Classic Finance Ltd. v. Dy. CIT (2000) 112 Taxman 155 (Cal)(Mag) and in the case of Unique Invin Ltd. v. Asstt. CIT (2000) 68 TTJ (Cal) 465 : (2000) 74 ITD 43 (Cal). He also held that the decision of Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO is applicable to the facts of the assessee's case.
32. As regards the contention of the assessee that the impugned transactions of sale of shares being related to sale of investment and not the business transactions, the provisions of Section 92 are not applicable, the learned CIT(A) relied on the provisions of Rule 10 to hold that the scope of Section 92 is not restricted only to the transactions related to the business undertaken. He held that the relevance is of the transaction generating income and not the character of income and if income is arising from any business connection, property or from whatever source, the powers under Sub-clause (3) of Rule 10 are wide enough to compute such income on which tax is sought to be evaded or avoided as contemplated in Section 92. He observed that the assessee-company as well as other two companies were undisputedly . engaged in the business of trading, investing and underwriting shares and securities and there being no business other than that of the investment company undertaken by them, the transactions in question involving transfer of shares to M/s WIPL, Mauritius were in the nature of business transactions undertaken by them. Relying on the various judicial pronouncements discussed in his impugned order, the learned CIT(A) held that even a single transaction of purchase and sale may constitute an adventure in the nature of trade and accordingly, he rejected the contention of the assessee that the relevant transactions could not be termed as business transactions. He, therefore, held that the provisions of Section 92 were clearly applicable to the impugned transaction of sale of shares and since such application, according to him, was based on the evidence found as a result of search, he held that the addition of Rs. 1,229.90 crores made by the AO to the undisclosed income of the assessee on this issue was within the scope and ambit of the block assessment under Chapter XIV-B. Aggrieved by the order of CIT(A), the assessee has preferred the present appeal before the Tribunal.
33. The learned Counsel for the assessee and the learned special counsel for the Department were heard at length. The following propositions, as put forth by the learned Counsel for the assessee, arise for our consideration out of the grounds raised in the grounds of appeal filed by the assessee before the Tribunal.
(A) General proposition (1) Can a search be conducted on a non-existent company and can a Section 158BC notice, be issued to non-existent companies ?
(2) Can an assessment of alleged undisclosed income or income generally of M/s HCLCL and M/s Shiv Nadar Investment (P) Ltd. be made in the hands of the assessee ?
(3) Are the conditions necessary for invoking Section 92 of the Act satisfied in the present case ?
(B) Particular proposition referable to block assessment.
(1) Can a disclosed transaction give rise to undisclosed income especially when it is not alleged that any amount over and above what has been disclosed has in fact passed ? As a corollary to the question, the following question will arise for consideration :
(1) Can a disclosed transaction assessed in regular assessment be at all assessed in the block period ?
(2) Can invocation of Section 92 which gives rise to notional income be classified as undisclosed income ?
(3) Can the successor be at all assessed for a block period referable to the predecessor ? When a regular assessment cannot be made in such a situation, can a block assessment be so made ? Can there be block period at all for the companies, which ceased to exist ?
(4) Is the search at all valid because conditions under Section 132(1)(c) are not satisfied ?
(5) If notice under Section 158BC is defective can a valid assessment be made ?
33A. The following arguments were advanced by Mr. Dastur, learned Counsel for the assessee, with reference to General Proposition 1 and 2 which reads as follows :
(1) Can a search be conducted on a non-existent company and can a Section 158BC notice, be issued to non-existent companies ?
(2) Can an assessment of alleged undisclosed income or income generally of M/s HCLCL and M/s Shiv Nadar Investment (P) Ltd. be made in the hands of the assessee ?
The arguments are also valid for Proposition 3 referable to block assessment, which reads as follows :
(3) Can the successor be at all assessed for a block period referable to the predecessor ? When a regular assessment cannot be made in such a situation can a block assessment be so made ? Can there be block period at all for the companies, which ceased to exist ?
34. The learned Counsel for the assessee Shri S.E. Dastur firstly submitted that the block period in the present case is from 1st April, 1995 to 24th Jan., 2002. He drew our attention to the fact that 70 lakhs shares in the company called M/s HCL Consulting Ltd. were sold to company called Wintech Investment (P) Ltd. (i.e., M/s WIPL). The sale was in June, 1999. He brought our attention, that prior to the sale of the shares by the aforesaid three companies, the shares were got valued by one Purushottam Bhutani & Co., chartered accountants. The valuation was done by the chartered accountants on the basis of the guidelines issued by the Controller of Capital Issues (CCI). He also brought to our notice that the RBI had accorded its approval to the sale of these shares by the aforesaid three persons in favour of M/s WIPL who is a OCB. Our attention was drawn to the approval of the RBI, copy of which is placed at page No. 1294 of the assessee's paper book (Vol. 4). The approval of RBI is dt. 23rd Sept., 1999 and has been granted pursuant to the provisions of Section 29(1)(b) of the Foreign Exchange Regulation Act, 1973. The said permission was a provisional permission and later on by another letter, dt. 23rd Oct., 1999, the RBI had granted final approval for the proposed sale of shares.
35. The learned Counsel drew our attention to the fact that these shares, which were sold by the three companies to M/s WIPL were shown as "investments non-trading in their books of account. It was also submitted by him that a company such as the assessee, M/s HCLCL and M/s SNIPL, which hold shares of other companies to control and manage other companies, can hold some of the shares as stock-in-trade or as a capital asset. He highlighted the fact that the shares which were sold were held by all the three companies as investments, i.e., as a capital asset and not as stock-in-trade. He also emphasized the accounting treatment given by the three companies in its books of account and the conclusiveness of such accounting treatment of the intention of these three companies in holding the shares which were sold as capital asset. Our attention was drawn to the various documents to highlight the fact that even prior to the search, the assessee and M/s HCLCL and M/s SNIPL had duly filed their returns of income for asst. yr. 2000-01 duly disclosing the transaction of sale of shares of M/s HCL Consulting Ltd. by them to M/s WIPL. These details and documents have already been referred to by us at paras 3 to 5 of this order and are not being repeated here.
36. On the first general proposition, the learned Counsel for the assessee highlighted the sequence of events and submitted that the assessee in its return of income filed had duly highlighted the fact that M/s HCLCL and M/s SNIPL ceased to exist on amalgamation with the assessee for the asst. yr. 2001-02. Our attention was drawn to Schedule XX to the balance sheet for the year ended 31st March, 2001, a copy of the same is at p. 973 of the assessee's paper book, wherein the fact that by the order dt. 27th Aug., 2001 of the Hon'ble High Court, sanctioning the scheme of amalgamation of M/s HCLCL and M/s SNIPL with the assessee, M/s HCLCL and M/s SNIPL have been merged with the assessee-company has been highlighted in the return of income for the asst. yr. 2001-02. The return of income for asst. yr. 2001-02 along with the audited accounts in which the above fact has been highlighted has been filed by the assessee on 29th Nov., 2001. The learned Counsel for the assessee submitted that the Revenue could be presumed to have knowledge about the fact regarding the non-existence of M/s HCLCL and M/s SNIPL. It was also pointed out that with the filing of the certified copies of the Court's order with the Registrar of Companies on 8th Nov., 2001 read with the order of the Court sanctioning the scheme of amalgamation, the two companies, in law, would cease to exist w.e.f. 8th Nov., 2001.
37. The learned Counsel drew our attention to p. 59 of assessee's paper book, which contains a copy of Panchnama drawn by the authorized officers. The Panchnama makes a reference to the warrant in the case of M/s HCLCL, M/s SNIPL besides the assessee and another company by name M/s HCL Technologies Ltd. The Panchnama refers to the warrant of authorization dt. 23rd Jan., 2002 issued under Section 132 of the IT Act. It was queried by the learned Counsel for the assessee that when the person sought to be searched was nonexistent on 23rd Jan., 2002 and when such fact is within the knowledge of the Revenue, can a warrant of authorization be issued in their names and a Panchnama be drawn showing the name of two non-existent companies as having been subjected to a search ? He drew our attention to the decision of the Hon'ble Delhi High Court in the case of R.C. Jain Through LR v. CIT . The facts in the aforesaid case were that the residential premise of one Romesh Chand Jain was searched pursuant to warrant of authorization issued on 12th June, 2001. Shri R.C. Jain died on 27th Nov., 2001. A show-cause notice; dt. 6th Feb., 2002 was issued by the CIT, Delhi for transfer of files of the assessee from Delhi to Kolkata. The legal heir of R.C. Jain namely R.K. Jain informed the CIT, that R.C. Jain had died on 27th Nov., 2001. Thereafter, the CIT took no action. After period of one year, i.e., on 10th Feb., 2003 a notice under Section 158BC was sent in the name of the deceased R.C. Jain calling upon him to file return of income for block period. Later on, an order of assessment for the block period came to be passed on 28th Feb., 2003, under Section 158BC of the Act. in the name of the deceased. The legal heir of R.C. Jain, filed writ petition for quashing the order of assessment. On such writ petition, the Hon'ble Delhi High Court held that the Revenue having had knowledge about the death of R.C. Jain, proceeded to make an assessment against a dead person. The order of block assessment was held to be not valid in law having been passed in the name of a dead person (assessee), after having knowledge about the death of the assessee. Our attention was also drawn to the Commentary by Kanga and Palkhivala on the Law and Practice of Income-tax 8th Edn. p, 1260 wherein the learned authors had expressed the view that under Section 159(2) of the Act, in respect of proceedings taken after the death of an assessee, it was incumbent on the AO to take proceedings only against the legal representative of a deceased person.
38. Our attention was also drawn to the decision of the Hon'ble Supreme Court in the case of CIT v. Amarchaud N. Shroff wherein the Hon'ble Supreme Court has held that an assessee under the Act has ordinarily to be a living person and could not be a dead person because his legal personality ceases on his death. The Court, therefore, concluded that no assessment can be made on a dead person.
39. It was submitted by him that in the present case the Revenue has full knowledge about dissolution without winding up of M/s HCLCL and M/s SNIPL, yet it has chosen to issue warrant of authorization in the name of a non-existent person. According to him, a search cannot take place in the case of a nonexistent company. Even if it is contended by the Revenue that the warrant of authorization is a joint warrant or individually different warrants on the three companies, yet in law the same would not make any difference and the warrant of authorization deserves to be held to be not valid in law. It was pointed out by him that it is not the case of the Revenue that the warrants are in the name of the assessee as successor of the two other companies. According to him, the search is a condition precedent for making an order of assessment for the block period. Section 158BB refers to a search in the case of a person, which contemplates that the person searched should be existing as on the date of search not a non-existent company. According to him, as will be highlighted later, even making assessment on the assessee as successor of the two companies was also not possible.
40. Reliance was placed on the decision of the Delhi Bench of Tribunal in the case of Impsat (P) Ltd. v. ITO (2005) 92 TTJ (Del) 552 : (2004) 91 ITD 354 (Del). The facts of the said case were that an assessee, a limited company was incorporated to implement a project in the country, in collaboration with the foreign company. The assessee received some money from a foreign collaborator in asst. yr. 1995-96 and 1996-97. The assessee due to heavy losses abandoned the project. The collaborators thought it fit to waive refund of the share application money and wrote a letter dt. 24th Oct., 2000 waiving their claims. The assessee-company's name was struck off the Register by the RoC on 18th Sept., 2001 pursuant to an application by the assessee under Section 560 of the Companies Act, 1956. The assessee however, later in point of time, filed a return of income for asst. yr. 2001-02 declaring loss. The Revenue treated the waiver of share application money by the foreign collaborator as giving rise to a casual and non-recurring income in the hands of the assessee. In the appeal before the Tribunal, one of the questions that arose for consideration was as to whether a company whose name was struck off the Register by RoC under Section 560 of Companies Act, 1956 and therefore, stood dissolved, could be assessed to tax after dissolution ? The Tribunal held that existence of the person sought to be taxed at the point of making the assessment is a condition for the validity of the assessment. The Tribunal referred to the decision of the Hon'ble Bombay High Court in the case of Patiala State Bank, In re (1941) 9 ITR 95 (Bom) wherein it was held that tax is not imposed on income generally. It is imposed on the income of a person, natural or artificial, as defined in Section 3. The Tribunal thereafter, referred to the various provisions in the IT Act, 1961, for initiating proceedings for assessment of income in the case of death of different assessees. In the case of a company which is in liquidation the provisions of Section 178 of the Act providing for assessment in the hands of a liquidator, was referred to. The Tribunal then referred to the distinction in law between liquidation and winding up and ultimately concluded that there was no provision under the IT Act to assess a company which is dissolved and that there was a lacunae in the Act in this regard. The Tribunal ultimately held that the order of assessment passed on the assessee-company was a nullity.
41. The learned Counsel also referred to the provisions of Section 170 of the Act and submitted that in the case of succession to business, the predecessor was to be assessed in respect of income up to the date of succession and the successor has to be assessed in respect of income after the date of succession. Sub-section (2) of Section 170 contemplates a situation where predecessor cannot be found and even in such a case, only in respect of income of the previous year in which succession took place up to the date of succession and the previous year preceding that year can an assessment be made on the successor. He further submitted even in such a case a separate assessment for the period referred to in Sub-section (2) of Section 170 has to be made showing assessee as successor in business of the predecessor and an assessment on the successor individually, cannot be made. According to him the above procedure is to be adopted since the expression used in Sub-section (2) of Section 170 is "in the like manner and to the same extent as it would be made on the predecessor". In any event an assessment cannot be made in the name of the successor individually as has been done in the present case. The reason for this rule according to him is that while allowing set off and carry forward of loss or unabsorbed depreciation in the hands of the successor assessee, such set off cannot be allowed against the income of the predecessor assessee and vice versa. Therefore, the assessment can only be as "successor of a predecessor" and not on the successor individually.
42. His alternative submission was that in any event, the provisions of Section 170 would not apply to a block assessment proceeding under Chapter XIV-B of the Act. In this regard, he drew our attention to the fact that Section 158BA(1) provides that a block assessment order on a person who is subjected to a search after 30th June, 1995 has to be made fin accordance with the provisions of Chapter XIV-B of the Act. The block period has been defined in Section 158B(a) as a period comprising of previous years relevant to 6 assessment years preceding the previous year in which a search is conducted under Section 132 and a period up to the date of commencement of search. The block period cannot be split and if Section 170 were to be invoked, the same would mean splitting the block period. Therefore, according to him. it was not possible to apply Section 170 to a block assessment proceeding. There is no other provision specifically making the provisions of Section 170 applicable to block assessment proceedings in Chapter XIV-B of the Act.
43. According to him even the provisions of Section 158BH, which provides that all other provisions of the Act shall apply to assessment made under this chapter (Chapter XTV-B), will not enable the AO to invoke the provisions of Section 170(1) and (2) of the Act. It was submitted by him that the provisions of Section 158BH are only intended to enable recovery proceedings in respect of tax assessed on an assessment already made, determining undisclosed income. The expression "Assessment made under this chapter" used in Section 158BH clearly implies that the said provisions will come into play only after block assessment order is passed.
44. Reference was also made by him to the provisions of Section 246A(1)(k) of the Act which provides for a specific right of appeal before the CIT(A) against the order of assessment made for the block period. This according to him clearly shows the intention of the legislature to treat the block assessment proceedings as a distinct class by itself not falling within the ambit of regular assessment made under the other provisions of the Act.
45. He also drew our attention to p. 20 of paper book-I of assessee and submitted that no doubt the scheme of amalgamation provides that the liabilities of the two other companies will stand vested in the assessee, the transferee company, but these liabilities can relate only to liabilities which in law can so stand vested and not in respect of liabilities which law does not envisage as capable being vested on a transferee company. Since, there are no such provision in the IT Act, it was argued by him that the liability cannot stand vested with the assessee.
46. The learned Counsel for the assessee drew our attention to pp. 38 and 39 of the order of AO wherein the AO has determined income of M/s HCLCL, M/s SNIPL and the assessee separately but concluded by assessing the three different incomes in the hands of the assessee giving the following reasons :
As concluded in para 6.4, the UDI in the hands of M/s HCLCL and M/s SNIPL has to be assessed in the hands of M/s Slocum Investments (P) Ltd on substantive basis.
47. It was submitted by the learned Counsel that the expression "Substantive Assessment" is always used in contradistinction to "Protective Assessment" and when there is no protective assessment the assessment on a substantive basis is without any purpose and not valid in law. It was thus submitted by him that the order of assessment deserves to be quashed in the present case.
48. Mr. S.D. Kapila, the learned Counsel for the Revenue at the outset submitted that M/s SNIPL and M/s HCLCL ceased to exist on 1st April, 2000. In this regard the learned Counsel brought to our notice the scheme of amalgamation,. (which was approved by the Hon'ble Delhi High Court by its order dt. 27th Aug., 2001) wherein it has been provided that the appointed date for the purpose of the scheme means 1st April, 2000 or such other date as the Hon'ble Delhi High Court may direct. He pointed out that in the order dt. 27th Aug., 2001 the Hon'ble High Court has approved the scheme as such and has not given any other appointed date for the purpose of the scheme. His submission was that the two companies viz., M/s HCLCL and M/s SNIPL would cease to exist on the appointed date i.e. 1st April, 2000. His submissions was that though the order of the Court (certificate copy) was filed with the RoC on 8th Nov., 2001 that cannot be deemed to be the date on which the companies will cease to exist. In this regard the learned Counsel drew our attention to the decision of the Hon'ble Supreme Court in the case of Marshal Sons & Co. (India) Ltd. v. ITO (1997) 138 CTR (SC) 1 : (1996) 223 ITR 809 (SC) wherein it has been held that every scheme of amalgamation of companies has necessarily to provide a date with effect from which the amalgamation/shall take place and that it is open to the Court sanctioning the scheme to modify the said date and prescribe a different date of amalgamation as the Court thinks appropriate. If the Court does not prescribe any specific date but merely sanctions the scheme presented to it, the date of amalgamation is the date specified in the scheme as the transfer date and not any other date.
49. The further submissions of the learned Counsel for the Revenue on the search and assessment having been made on a non-existent company was that the name of M/s Slocum Investments (P) Ltd. (SIPL) was found in the warrant of search and since this company continued to exist at all material point of time, it is enough to uphold the validity of search. According to him the fact that the names of two other companies find place in the warrant of search can be ignored as irrelevant. According to him the notice under Section 158BC on the assesses, was therefore a valid notice and is deemed to have been issued on the amalgamating companies also. According to him the real question that should be taken up for consideration is as to whether the notice issued under Section 158BC can embrace the two amalgamating companies also. According to him the provisions of Section 170 are relevant and can be pressed into service.
50. With regard to the applicability of the provisions of Section 170 of the Act, the learned Departmental Representative drew our attention to the provisions of Section 159(5), Section 161 and Section 168 and submitted that the liability of a legal representative, a representative-assessee and executors have been laid down in those sections. Drawing our attention to the provisions of Section 170, the learned Departmental Representative submits that on an amalgamation the amalgamating company loses its identity and gets merged with the amalgamated company, and, therefore, an assessment in respect of all the companies could be made in the hands of the assessee. According to him, the provisions of Section 170(2) are clearly applicable in the present case. Reliance was also placed by the learned Departmental Representative in this regard on the decision of the Hon'ble Madras High Court in the case of CIT v. Express Newspapers Ltd. (1960) 40 ITR 38 (Mad) and the decision of the Madras High Court in the case of CIT v. T.V. Sundaram Iyengar & Sons (P) Ltd. . In the case of Express News Papers Ltd. (supra), it has been held by the Madras High Court that a successor in business can be assessed in respect of the profits earned by the predecessor. In the case of T.V. Sundaram lyengai & Sons (supra), the Hon'ble Madras High Court has held that it is not open to an amalgamated company which has taken over all assets and liabilities of the amalgamating company to claim that it is not in any way liable for the tax payable by the amalgamating company even though the order under Section 104 of the IT Act 1961 came to be made after the order of amalgamation and after dissolution of the amalgamating company but on account of acts of omission and commission committed by the amalgamating company and its failure to carry out the obligations which were required to be carried out. The Court further held that the fact that the liability had not crystallized and the charge had not been created would not entitle the amalgamated company to avoid the payment of the tax under Section 104 that would have been payable if the amalgamating company had continued to exist. The learned Departmental Representative also brought to our notice that the Hon'ble Madras High Court has distinguished the decision of the Hon'ble Delhi High Court in the case of Birla Cotton Spinning & Weaving Mills Ltd. v. CIT . The Madras High Court has pointed out that in the said judgment the Court held that it was not competent to hear the reference application and that jurisdiction lay only with the Hon'ble Rajasthan High Court. One of the Judges however expressed opinion on the validity of proceedings against a dissolved company. The opinion was not necessary to decide the controversy involved in the reference and for this reason the same should not be considered as good in law. In conclusion on this issue the learned Departmental Representative submitted that an assessment in the hands of the assessee in respect of the undisclosed income of M/s HCLCL and M/s SNIPL was valid and no three separate assessments need to be framed as contended by the learned Counsel for the assessee. Drawing attention to the decision of the Delhi High Court in the case of R.C. Jain (supra) the learned Counsel for the assessee submitted that the said decision supports the case of the Revenue rather than that of the assessee. He pointed out that the notice in the said case was issued in the name of the deceased and that was the reason why the Court held that the proceedings were not valid. It was submitted that in the present case, the name of the assessee is found in the notice issued under Section 158BC, and, therefore, the objection of the learned Counsel for the assessee cannot be sustained. Referring to the decision of the Bombay High Court in the case Amarchand Shroff (supra) the learned Departmental Representative submitted that it was a case where income was received by the legal representative after the death of the assessee and, therefore, distinguishable on facts. It was thus submitted by the learned Departmental Representative that on and from 1st April, 2000 order of assessment could be made in the name of the assessee in respect of undisclosed income of M/s HCLCL and M/s SNIPL.
51. With regard to the contention of the learned Counsel for the assessee that a block period cannot be split, the learned Departmental Representative referred to the provisions of Section 158B(a) defining block period and submitted that the section starts with the words "unless the context otherwise requires". According to him the present case was a case which requires the word "block period" to be restricted to the year of sale of shares as there was no other undisclosed income of the two other companies.
52. With regard to the contention of the learned Counsel for the assessee that by reason of the provisions of Section 158BH, the other provisions of this Act will apply only in respect of an assessment already made and not while making a block assessment, the learned Departmental Representative submitted that the expression "assessment made" has to be read in the context of the opening words of Section 158BH which uses the expression "save, otherwise provided in this Chapter". According to the learned Departmental Representative the aforesaid expression only means that all other provisions which are excluded specifically alone do not apply while making block assessment and all other provisions not so specifically excluded will apply while making computation of undisclosed income under Chapter XIV-B. The learned Departmental Representative drew attention to the fact that the provisions of Section 131 have not been specifically referred to in Chapter XIV-B and this should not be taken to mean that an AO cannot issue summons for examination of persons while making a block assessment. According to the learned Departmental Representative the expression "made" used in Section 158BH does not refer to only an assessment already made. Reference was made to the decision of the Kolkata Bench of Tribunal in the case of W.C. Shaw (P) Ltd. v. Asstt. CIT (2005) 94 TTJ (Kol) 169 wherein it has been held that provisions of Section 158BH make the other provisions of the Act applicable while making a block assessment. Drawing our attention to the arguments of the learned Counsel for the assessee that the other provisions of the Act are made applicable only after the completion of an assessment under Chapter XIV-B of the Act for the purpose of recovery of tax due on the undisclosed income, the learned Departmental Representative submitted that such a provision is not required for recovery. In this regard the learned Departmental Representative drew our attention to provisions of Section 156 where a notice of demand could be issued pursuant to any order passed under the Act. Reference was also made to the provisions of Section 220 of the Act where pursuant to a notice of demand not being complied with, within 30 days of service, provision for levying penalty and interest have been prescribed. According to him after completion of a block assessment proceedings there are provisions to enable recovery of tax due on an undisclosed income and such recovery is not dependent only on the provisions of Section 158BH as contended by the learned Counsel for the assessee. In this regard our attention was also drawn to the decision of the Hon'ble Madras High Court in the case of M.G. Pictures (Madras) Ltd. v. Asstt. CIT wherein it has been held by the Hon'ble Madras High Court that except provisions which are specifically made inapplicable, all other provisions of the Act are applicable to block assessment by virtue of provisions of Section 158BH of the Act.
53. In rejoinder, Shri Dastur submitted that the proper course for the AO to have adopted, was to have made three separate assessments (a) on Slocurn (I) (P) Ltd., i.e., the assessee separately; (b) The assessee as successor of M/s SNIPL; (c) The assessee as successor of M/s HCLCL : for the period after 1st April, 2000 and 3 separate assessments on the assessee, M/s SNIPL and M/s HCLCL for periods upto 1st April, 2000. This procedure was in conformity with the provisions of Section 170. He highlighted the need for making separate assessment for reasons like applicability of rates of taxes could be different for amalgamating and amalgamated companies or one of the companies could be an industrial company warranting a different treatment of its income. He then pointed out that even assuming that the provisions of Section 170(2) are applicable in the present case, the same cannot be pressed into service for the reasons that the 'block period' cannot be split. In this regard our attention was drawn to the provisions of Section 158BB(2) of the Act which provides that when computing undisclosed income for the Block period, the provisions of Sections 68 to 69C shall, so far as may be, apply and reference to financial year in those sections shall be construed as reference to the relevant previous year falling within the block period including the previous year ending with the date of search. According to him but for this deeming provision, the provisions of Section 68 to 69-C, cannot be invoked in block assessment proceedings. He pointed out that there is no such deeming provision making provisions of Section 170 applicable to block assessment proceedings and restricting the period referred to in Section 170(2) in lieu of the block period as defined in Section 158B(a). He submitted that even provisions of Section 158BH will not come to the rescue of the Revenue because, the provisions of Section 170(2) and the 'block period' as defined in Section 158B(a) are contradictory and to the extent the provisions in Chapter XIV-B of the Act provide otherwise, the other provisions of the Act, will not apply to block assessment proceedings. Further reliance was placed on the decision of the Mumbai Bench of the Tribunal in the case of Western India Bakers (P) Ltd. v. Dy. CIT (2004) 84 TTJ (Mumbai) 223 : (2003) 87 ITD 607 (Mumbai) wherein the Mumbai Bench had held that provisions of Section 147 of the Act cannot be invoked to make a reassessment of for block period.
54. We have considered the rival submissions. We shall for the purpose of clarity recapitulate the sequence of events leading to the present assessment in the hands of the assessee. The assessment in the hands of the assessee relates to a transaction of sale of shares of M/s HCL Consulting Ltd., by the assessee and the other companies by name M/s SNIPL and M/s HCLCL to an OCB M/s WIPL of Mauritius. All the 3 transactions had taken place in June, 1999. The three companies passed a Board Resolution all dt. 3rd June, 1999 offering for sale of shares of M/s HCL Consulting Ltd. held by them to M/s WIPL, M/s WIPL by Board resolution dt. 4th June, 1999 agreed to buy the shares in question subject to the required Governmental approvals. The RBI granted in principle approval on 23rd Sept., 1999 and final approval on 23rd Oct., 1999. The sale proceeds were received by the assessee, M/s SNIPL and M/s HCLCL on 13th Oct., 1999, 14th Oct., 1999 and 12th Oct., 1999 respectively in the form of remittances in foreign exchange duly evidenced by the Foreign Exchange Remittance Certificates. Therefore, there was a completed sale of the shares in the previous year relevant to asst. yr. 2000-01, i.e., financial year 1999-2000, by M/s SNIPL, [Slocum Investment (P) Ltd.] M/s SNIPL and M/s HCLCL respectively.
55. The assessee as well as M/s HCLCL and M/s SNIPL had filed their returns of income for asst. yr. 2000-01 prior to the search. The details of the filing of returns have already been narrated in paras 3 to 5 of this order.
56. M/s SNIPL and M/s HCLCL proposed to amalgamate with the assessee. The provisions of the scheme of amalgamation insofar as the same is relevant for the present case have already been set out in para 6 of this order. In short, the assets of the amalgamating companies stood vested with the amalgamated company on and from the appointed date, i.e. ,1st April, 2000 and so were the liabilities.
57. The Hon'ble High Court of Delhi by order dt. 27th Aug., 2001 sanctioned the scheme. A certified copy of the order of the Hon'ble Delhi High Court was filed with the 'Registrar of Companies on 8th Nov., 2001. Thus on 8th Nov., 2001 M/s SNIPL and M/s HCLCL ceased to exist. On registration of this fact with the RoC, it would be noticed to one and all that these two companies ceased to exist.
58. A search under Section 132(1) was conducted on 24th Jan., 2002 at the business premises of the assessee SIPL and residential premises of some of its employees, directors, etc. Each of the warrant of search was in the joint names of 4 entities. They are:
(i) HCL Corporation Ltd.
(ii) Shiv Nadar Investment (P) Ltd.
(iii) Slocum Investment (P) Ltd.
(iv) M/s HCL Technologies (P) Ltd.
59. Thus, as on the date of search, M/s HCLCL and M/s SNIPL as entities did not exist. After conclusion of search, notice under Section 158BC was issued to the assessee. M/s SNIPL and M/s HCLCL. By letter dt. 2nd Dec., 2002, the counsel for the assessee, informed the AO that M/s HCLCL had amalgamated with the assessee w.e.f. 1st April, 2000 and ceased to exist and called upon the AO to examine the validity of proceeding against M/s HCLCL. Similarly in the case of M/s SNIPL by letter dt. 16th Jan., 2004, the counsel for the assessee informed the AO about the non-existence of M/s SNIPL.
60. The AO however proceeded to make assessment of income of the two other companies (hereinafter called the amalgamating company) also in the hands of the assessee (hereinafter called the amalgamated company). The AO placed reliance on the decision of the Hon'ble Madras High Court in the case of CIT v. T.V. Sundaram Iyengai and Sons (P) Ltd. (supra). The question before the Hon'ble Madras High Court was as to whether for the failure of the amalgamating company to distribute the statutorily prescribed portion of undistributed profits under Section 104 of the Act, the proceedings could be initiated against the amalgamated company. The plea of the amalgamated company was that since the liability did not accrue to the amalgamating company, prior to amalgamation, the same could not be fastened on the amalgamated company. Another plea of the amalgamated company was that since the amalgamating company was not in existence when the order under Section 104 was passed proceeding cannot be initiated against the amalgamated company. The Hon'ble Madras High Court did not agree with the submission on behalf of the amalgamated company and it held as follows :
It is not open to the amalgamated company which has taken over all the assets and liabilities of the amalgamating company to claim that it is not in any way liable for the tax payable by the amalgamating company, even though the order under Section 104 came to be made after the order of amalgamation and after the dissolution of the amalgamating company, but on account of acts of omission and commission committed by the amalgamating company, and its failure to carry out the obligation which were required to be carried out. The fact that the liability had not crystallised and the charge had not been created would not entitle the amalgamated company to avoid the payment of the tax under Section 104 that would have been payable if the amalgamating company had continued to exist.
Notice in this case was given by the ITO rightly to the amalgamated company as the amalgamating company had been dissolved by the time the notice was issued and the liability, after amalgamation, was that of the amalgamated company. Under the terms of amalgamation, the amalgamated company had taken over the obligation to pay and discharge "all liabilities, debts and obligations of whatsoever nature" of the amalgamating company. The liability of the amalgamating company to pay tax under Section 104 of the Act, became the liability or obligation of the amalgamated company which had taken over all liabilities duties and obligations of the amalgamating company in terms of the order of amalgamation.
61. The Hon'ble Madras High Court also dissented from the view expressed by the Hon'ble Delhi High Court in the case of Birla Cotton Spinning & Weaving Mills Ltd. v. CIT (supra). The Hon'ble Delhi High Court in the aforesaid decision was dealing with a case of proceedings against amalgamating companies, which ceased to exist. The facts in the said case were as follows. There were two companies carrying on business in Jaipur known as M/s Merchandise and Stores Ltd., and M/s Rajputana General Dealers Ltd. By an order dt. 22nd April, 1960, the Rajasthan High Court sanctioned a scheme of arrangement bringing about the amalgamation of the above two companies with the Birla Cotton Spinning and Weaving Mills Ltd., Delhi (hereinafter referred to as "the Birla company"). As a result with effect from some date in June, I960, when the order of Court dissolving the two companies were filed with the Registrar of Companies, the two amalgamating companies stood dissolved without a winding up. For the asst. yr. 1960-61, M/s Merchandise and Stores Ltd., had been assessed to income-tax on a total income of Rs. 1,45,143 and the Rajputana General Dealers Ltd., had been assessed to income-tax on a total income of Rs. 1,14,417. Later on, the ITO found that the two companies had not declared any dividends and he was of opinion that proceedings had to be initiated against these companies under Section 23A of the Indian IT Act, 1922, for the asst. yr. 1960-61. He, therefore, proceeded to issue notices in the names of the two companies and in reply thereto a chartered accountant appeared and objected to the proceedings on merits. However, after hearing the representative who appeared, the ITC passed an order dt. 2nd March, 1965, in the case of M/s Merchandise and Stores Ltd., demanding an additional supertax of Rs. 40,135 under Section 23A. On the same date, he similarly determined the additional super-tax payable by the other company, i.e., M/s Rajputana General Dealers Ltd., at Rs. 31,465. In both the orders, the names of the assessee were given as M/s Merchandise and Stores Ltd., and M/s Rajputana General Dealers Ltd., respectively. One of the questions for consideration before the Court was as to whether Delhi High Court was competent to hear the reference. The two Hon'ble Judges held that Delhi High Court had no territorial jurisdiction to hear the reference. One of the Hon'ble Judges expressed the following opinion :
Therefore, the position would be that the orders passed under Section 23A(1) by the ITO purportedly against these companies were invalid orders of assessment. However, the validity of the orders would have no effect on these companies since they did not exist at the time of the orders. In a case, where an assessee exists and the order of assessment is null and void for some reason, the assessee would be aggrieved and would and should file an appeal to get rid of the invalid order. But where the assessee is non-existent and consequently can have no grievance against the assessment order there is no question of its preferring any appeals against the said order. The appeals preferred before the AAC in the first instance and thereafter before the Tribunal purportedly on behalf of these companies were manifestly incompetent appeals. It does not need much argument to say that an appeal preferred by a non-existing person must be treated as non est. In other words, there were no appeals at all, in the eye of law, before the AAC or before the Tribunal. Consequently, there could be no competent reference to this Court out of the orders passed by the Tribunal on such appeals.
The other Judge, however, expressed opinion that in view of lack of territorial jurisdiction it was not necessary to express any opinion on merits.
62. As can be seen from the facts of the said case, the assessment was made in the name of two non-existing companies. In the present case, the assessment was made in the case of amalgamated company, as was made in the case of T.V. Sundaram lyengar & Sons (supra). The ratio laid down therein is, therefore, squarely applicable to the facts of the present case. Apart from the above, the decision of the Hon'ble Delhi High Court is divided on this issue, one Judge not expressing any opinion on the issue. The issue was not argued at all and has to be regarded as a precedent sub silentio and without any argument on this issue. The said decision is therefore of no help to plea of the assessee on this issue. In the case of Marshall Sons & Co. (India) Ltd. (supra), the Hon'ble Supreme Court has held that proceedings against amalgamating company cannot be initiated after the effective date mentioned in a scheme of amalgamation where the Court approves such scheme without modifying the effective date of amalgamation. In the said decision, question was raised on behalf of the Revenue as to a situation where the Court refuses to sanction a scheme of amalgamation. The Court answered the same as follows :
Counsel for the Revenue contended that if the aforesaid view is adopted then several complications will ensue in case the Court refuses to sanction the scheme of amalgamation. We do not see any basis for this apprehension. Firstly, an assessment can always be made and is supposed to be made on the transferee company taking into account the income of both the transferor and transferee companies. Secondly, and probably the more advisable course from the point of view of the Revenue would be to make one assessment on the transferee company taking into account the income of both of transferor or transferee companies and also to make separate protective assessments on both the transferor and transferee companies separately. There may be a certain practical difficulty in adopting this course inasmuch as separate balance sheets may not be available for the transferor and transferee companies. But that may not be an insuperable problem inasmuch as assessment can always be made, on the available material, even without a balance sheet. In certain cases, best judgment assessment may also be resorted to. Be that as it may, we need not pursue this line of enquiry because it does not arise for consideration in these cases directly.
(underlining by us, italicised in print, for emphasis)
63. The above observations of the Hon'ble Supreme Court suggest that the course adopted by the AO in the present case was proper. In the present case, we have already noticed that while sanctioning the scheme of amalgamation of M/s HCLCL and M/s SNIPL with the assessee, the Hon'ble Delhi High Court did not specify any other date as the 'transfer date'. Consequently, the transfer date would be 1st April, 2000 as mentioned in the scheme of amalgamation. In the present case, notices were issued under Section 158BC to M/s SNIPL and M/s HCLCL sometime in December, 2002. There were replies received from the counsel who represented the assessee, to the effect that M/s SNIPL and M/s HCLCL ceased to exist on their amalgamation with the assessee. In the circumstances, the AO proceeded to make assessment in the hands of the assessee in respect of income of both M/s SNIPL and M/s HCLCL, the amalgamating companies, even prior to the transfer date.
64. We may clarify here that the income in question arising as a result of transfer of shares, is in respect of asst. yr. 2000-01, since the transfer of shares had taken place during the previous year relevant to asst. yr. 2000-01. The contention by the learned Counsel for the assessee has been that in a case of amalgamation where one entity takes over the business of two other entities, the same would be a case of succession to business otherwise on death and therefore the provisions of Section 170 of the Act would apply. The provisions of Section 170 reads as follows :
170. Succession to business otherwise than on death.-(1) Where a person carrying on any business or profession (such person hereinafter in this section being referred to as the predecessor) has been succeeded therein by any other person (hereinafter in this section referred to as the successor) who continues to carry on that business or profession,-
(a) the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession;
(b) the successor shall be assessed in respect of the income of the previous year after the date of succession.
(2) Notwithstanding anything contained in Sub-section (1), when the predecessor cannot be found, the assessment of the income of the previous year in which the succession took place up to the date of succession and of the previous year preceding that year shall be made on the successor in like manner and to the same extent as it would have been made on the predecessor, and all the provisions of this Act shall, so far as may be, apply accordingly. .
(3) When any sum payable under this section in respect of the income of such business or profession for the previous year in which the succession took place upto the date of succession or for the previous year preceding that year, assessed on the predecessor, cannot be recovered from him, the AO shall record a finding to that effect and the sum payable by the predecessor shall thereafter be payable by and recoverable from the successor, and the successor shall be entitled to recover from the predecessor any sum so paid.
(4) Where any business or profession carried on by an HUF is succeeded to, and simultaneously with the succession or after the succession there has been a partition of the joint family property between the members or groups of members, the tax due in respect of the income of the business or profession succeeded to, up to the date of succession, shall be assessed and recovered in the manner provided in Section 171, but without prejudice to the provisions of this section.
Explanation : For the purposes of this section, "income" includes any gain accruing from the transfer, in any manner whatsoever, of the business or profession as a result of the succession.
According to him applying the provisions, i.e., Section 170(1)(a) the predecessor, (i.e., the amalgamating company) has to be assessed in respect of income up to the date of succession. His submission was that there is no other provision in the Act by which the AO can proceed to assess the income of a predecessor in business, (i.e., the amalgamating company) in the hands of a successor in business, (i.e., the amalgamated company). He admits of one exception provided by Section 170(2) where a predecessor is not found, successor can be assessed for a period comprising of previous year in which succession took place up to the date of succession and the previous year preceding such previous year. The above argument of the learned Counsel for the assessee was without prejudice to the argument that provisions of Chapter XV of the Act dealing with "Liability in special cases" do not apply while making a block assessment. We shall first deal with the argument regarding applicability of Chapter XV of the Act while making block assessments.
65. To resolve this controversy, a reference may be made to provisions of Chapter XIV-B of the Act. Section 158BA provides that on or after 30th June, 1995 if a search is initiated under Section 132 of the Act, the AO shall proceed to assess the undisclosed income in accordance with the provisions of Chapter XIV-B of the Act dealing with "Special procedure for assessment of search cases". The said section starts with a non obstante clause "Notwithstanding anything contained in any other provisions of the Act". Thus applicability of other provisions of the Act is excluded. Section 158BB(1) however provides that undisclosed income of the block period shall be aggregate of the total income of the previous year falling within the block period "computed in accordance with the provisions of this Act", on the basis of evidence found as a result of search. Thus other provisions of the Act in relation to computation of total income are made applicable while making assessment under Chapter XIV-B of the Act. These are contained in Chapter IV to Chapter XII-G of the Act. Prior to Finance Act, 2002, amending Section 158BB(1), w.r.e.f. 1st July, 1995, only provisions of Chapter IV were applicable while computing undisclosed income. That is why Section 158BB(2) provided for applicability of Sections 68 to 69C while computing undisclosed income. The reasons for introduction of the amendment have been explained as follows in the circular issued by the CBDT:
Circular No. 8 of 2002 dt. 27th Aug., 2002 [reported at (2002) 178 CTR (St) 9] of CBDT explained the reasons for this amendment as follows :
61.7 The existing provision of Explanation to Section 158BB provides that the total income of the block period for the purpose of aggregation is to be computed without giving effect to set off of brought forward losses under Chapter VI or unabsorbed depreciation under Section 32(2). In many cases it is being claimed by the assessees that the deduction allowable under Chapter VI-A for any previous year should also be computed on the total income before giving effect to set off of brought forward losses and depreciation. In such cases the amount of deduction under Chapter VI-A admissible in computing aggregate total income comes out to be more than the deduction actually allowed in regular assessments resulting in underassessment of undisclosed income for the block period. It has also been noted that the computation of aggregate total income under Section 158BB is required to be made in accordance with the provisions of Chapter IV of the Act. This has given rise to doubts as to whether deductions under Chapter VI-A are to be allowed in computing the aggregate total income.
61.7.1 The Finance Act, 2002 has carried out amendments to clarify that the aggregate total income is to be computed in accordance with the provisions of the Act including the provisions of Chapter VI-A, and that for the purpose of computing deductions under Chapter VI-A, effect shall be given to set off of brought forward losses or unabsorbed depreciation.
66. Thus the manner of computation of undisclosed income is set out in Section 158BB. Now we have to see the procedure for making block assessment. These are contained in Section 158BC of the Act. The procedure prescribed therein is to call upon assessee to furnish return of income. Provisions of Section 142, Sections 143(2) and 142(3), 144 and 145 of the Act applicable to the usual assessment procedure under the Act are made applicable to block assessment proceedings also. Section 158BC provides for time limit to pass a block assessment order. Sections 158BF and 158BFA provide for levy of interest and penalty. Section 158BH provides that save as otherwise provided in Chapter XIV-B of the Act, the other provisions of the Act shall apply to assessment made under this Chapter. Section 158BH of the Act reads as follows :
Section 158BH : Save as otherwise provided in this Chapter, all other provisions of this Act shall apply to assessments made under this chapter.
From the above, it is clear that other provisions of the Act are applicable only to the extent indicated above. One of the arguments of the learned Counsel for the assessee has been that other provisions of the Act like Section 170 are not applicable while making block assessment because Section 158BH makes other provisions of the Act applicable only to assessments already made and not while making on assessment under Chapter XIV. This is because of the past tense "assessment made", used in Section 158BH of the Act. The argument of the learned Counsel for the assessee was that the procedure for making block assessment is set out in Section 158BC. The provisions akin to Section 158BH if it were to be made applicable while making block assessment, then they ought to have been incorporated in Section 158BC itself. The fact that the provisions of Section 158BC are set after the prescription of limitation for making block assessment, levy of penalty, interest, etc. also suggests that they are to be applied post block assessment order. He agues that the chronological setting of the provisions also suggests that the provisions of Section 158BH apply only to post-assessment order for the block period. These provisions are meant to ensure recovery of tax determined on undisclosed income and that the other provisions of Section 158BA(1) excludes all other provisions of the Act while making block assessment. The provisions of Section 156 empowering AO to issue notice of demand and thereafter enforce recovery of tax cannot be invoked by the AO but for Section 158BH and the purpose of Section 158BH is only to enable such recovery meaning thereby that they come into effect after an order of block assessment is made and not when a block assessment is sought to be made. The learned Departmental Representative however has relied on the decision of the Hon'ble Madras High Court in the case of M.G. Pictures (supra). The said case was a case regarding applicability of Section 40A(3) to block assessment proceedings. The contention of the assessee was that if as a result of search some genuine expenses are found to have been incurred by an assessee, which is not disclosed in the books, then they cannot be considered as undisclosed income. The Court rejected this argument and also made a reference to the provisions of Section 158BH and held that other provisions of the Act were applicable. Let us assume a case where the person searched dies after search and during assessment proceedings, can it be said that the AO cannot proceed to make a block assessment because provisions of Chapter XV dealing with liability of legal representative is not applicable to block assessment proceedings. Similarly, can it be said that Chapter XII-B dealing with jurisdiction of officers empowered to make an assessment do not apply to block assessment proceedings. Similarly, can it be said that Chapter XIII-C dealing with powers of AO regarding discovery, production of evidence, etc., do not apply to block assessment proceedings. Therefore, the argument of the learned Counsel for the assessee that "other provisions of the Act" are not applicable while making a block assessment except the computation provisions contained in Chapter IV to Chapter XII-G and the Provisions of Sections 142 to 145 of the Act, being procedure for making assessment, cannot be accepted. By virtue of the provisions of Section 158BH all other provisions of the Act, including Chapter XV dealing with liability in special cases are applicable while making block assessment proceedings and not after a block assessment order is made.
67. We may mention here that if we apply Section 170(2), then the income from transfer of shares by M/s SNIPL and M/s HCLCL (amalgamating companies/predecessor companies) can be assessed in the hands of the assessee (the successor company/amalgamated company) because the transfer had taken place in the previous year preceding the year in which succession took place, i.e., asst. yr. 2000-01. The learned Counsel for the assessee contends that an assessment made on a successor in respect of income of a predecessor has to be made in the same manner in which an assessment would be made on predecessor. This is because of the expression used in Section 170(2) "in like manner and to the same extent as it would have been made on the predecessor". This is the reason he contends that three assessments ought to have been made, the first assessment in the name of the assessee, the second assessment in the name of the assessee as successor of M/s SNIPL, the third assessment in the name of the assessee as successor of M/s HCLCL. He contends that in the present case the assessment is being made under Chapter XIV-B of the Act and therefore the concept of block period will come in the way of making an assessment even by invoking Section 170(2) in the hands of the assessee (amalgamated company). He points out that the search in the present case had taken place on 24th Jan., 2002. Section 158BC provides that where a search has been conducted under Section 132, the AO has to determine income for the block period. Section 158B defines block period as period comprising of previous years relevant to 6 assessment years preceding the previous year in which the search was conducted under Section 132 and ending up to the date of commencement of search. The learned Counsel for the assessee contends that applicability of other provisions of the Act to block assessment under Chapter XIV-B is specifically excluded by the provisions of Section 158BA of the Act and, therefore, one cannot apply the provisions of Section 170(2) also as they are contrary to the provisions of Section 158B defining 'block period'. In this case the previous years relevant to 6 assessment year preceding the previous year in which search took place would be from asst. yrs. 1995-96 to 2000-01 and further upto 24th Jan., 2002, i.e., the date of commencement of search. The learned Counsel for the assessee submits that even applying Section 170(2) one can make assessment of income of M/s SNIPL and M/s HCLCL in the hands of assessee only for asst. yr. 1999-2000 and not any assessment year prior to that. To this extent he contends that Sections 170(2) and 158B r/w Section 158BB and Section 158BC of the Act are contrary.
68. Having held that other provisions of the Act including Chapter XV dealing with "Liability in special cases", are applicable while making a block assessment, let us now examine as to whether provisions of Section 170 contained in Chapter XV of the Act, have been properly applied in this case. Firstly, it is noticed that one assessment has been made in which undisclosed income of the assessee and the two other amalgamating companies have also been included. We have already referred to the provisions of Section 170(2), which mandate that an assessment made on a successor in respect of income of a predecessor has to be made in the same manner in which an assessment would be made on predecessor. This is because of the expression used in Section 170(2) "in like manner and to the same extent as it would have been made on the predecessor". Therefore three separate assessments have to be made, the first assessment in the name of the assessee, the second assessment in the name of the assessee as successor of M/s SNIPL and the third assessment in the name of the assessee as successor of M/s HCLCL. The reasons for doing so could be because of difference in rates of taxes. The nature of business might warrant a special treatment of income like the predecessor being an Industrial company or a company the profits of which are to be considered as speculative, warranting special treatment. Secondly, Section 158BH excludes applicability of other provisions of the Act to the extent they are inconsistent with the provisions of Chapter XIV-B. Section 158BA provides that on or after 30th June, 1995 if a search is initiated under Section 132 of the Act, the AO shall proceed to assess the undisclosed income for the block period in accordance with the provisions of Chapter XIV-B of the Act dealing with "Special procedure for assessment of search cases". Section 158B defines block period as follows :
158B Definitions.-In this Chapter, unless the context otherwise requires,-
(a) "block period" means the period comprising previous years relevant to six assessment years preceding, the previous year in which the search was conducted under Section 132 or any requisition was made under Section 132A and also includes the period up to the date of the commencement of such search or date of such requisition in the previous year in which the said search was conducted or requisition was made.
69. The period of assessment to be made in a block assessment under Chapter XIV-B and the period for which an assessment can be made on successor of business in respect of predecessor's income prior to the succession as provided in Section 170(2) are contrary and therefore to that extent the provisions of Section 170(2) are not applicable in the present case. The expression "unless the context otherwise requires" found in Section 158B is not intended to cover cases as the present one. It can be properly applied only in cases where a company/a firm, which is subjected to a search was incorporated/formed just two years prior to search. In such cases block period can be only from the date of incorporation of the company and a period of 6 previous years prior to the previous year in which search was conducted cannot apply. In fact, the very purpose of introduction of special procedure for assessment of search cases has been explained for the reason that searches conducted by the IT Department are important means for unearthing black money. However, under the present scheme, valuable time is lost in trying to relate the undisclosed incomes to the different years. Tax-evaders generally manage to divert the focus to procedural and legal issues and often invent new evidence to explain undisclosed income. By the time search-related assessments are completed, the effect of the search is considerably diluted. Legal battles continue for many years to decide which income is assessable in which assessment year. No finality is reached and the seized assets remain with the Department for a long time. In order to make the procedure of assessment of search cases cost-effective, efficient and meaningful, a new scheme has been introduced for the assessment of undisclosed income determined as a result of search under Section 132 or requisition under Section 132A. Under this scheme, the undisclosed income detected as a result of any search initiated, or requisition made, after 30th June, 1995, shall be assessed separately as income of a block of years. Even the purpose of the special procedure in search cases prescribed in Chapter XIV-B does not contemplate splitting of the block period.
70. The block period in the present case would be a period of 6 previous years preceding the previous year in which search took place, i.e., from 1st April, 1995 to 31st March, 2001 and includes the period from 1st April, 2001 till the date of search viz., 24th Jan., 2002. Upto 31st March, 2000 M/s SNIPL and M/s HCLCL existed and, therefore, the block period cannot be restricted in their case only from 1st April, 2000 to 24th Jan., 2002. There being no other provision in the Act to make an assessment on the successor in business in respect of predecessor's income prior to succession, the assessment of undisclosed income of M/s SNIPL and M/s HCLCL in the hands of the assessee cannot be sustained.
71. Now reverting to the issue whether a search can be conducted on a nonexistent company and can a Section 158BC notice, be issued to non-existent companies, we find that the provisions of Chapter XV deal with liability in special cases. The charge to tax on undisclosed income is provided under Section 158BA. It is in the hands of the person who was subjected to a search under Section 132 or in respect of whom a requisition is made under Section 132A of the Act. Section 158BD however provides for exceptions and even in the case of a person not searched under Section 132, assessment can be made and liability to tax enforced. For applicability of Section 158BC, it is necessary that the person searched must be in existence on the date of search. In the case of Section 158BD, if the documents or material found in the course of search relate to some other person, then the AO can proceed against that other person. In the first case, the existence of the person on the date of search is necessary. In the second case, existence of the person proceeded against under Section 158BD, on the date of the search or issue of notice under Section 158BD is not necessary. In the present case both M/s SNIPL and M/s HCLCL ceased to exist w.e.f. 8th Nov., 2001 on the certified copy of Court's order dissolving these two companies without the process of winding up, being filed with the Registrar of Companies. The search was conducted on 24th Jan., 2002. Therefore no search could have been conducted on these two companies nor could a notice under Section 158BC be issued in their case on or after 8th Nov., 2001. But in the present case each of the warrant of search was in the name of 4 different entities jointly. The plea of the Departmental Representative has been that the names of M/s SNIPL and M/s HCLCL appearing in the warrant of search can be ignored. His further plea was that the notice issued under Section 158BC to the assessee could be considered as having been issued to include the two amalgamating companies also. In our opinion, separate notices ought to be issued in respect of assessment on a successor in respect of income of the predecessor prior to succession. In the case of CIT v. Express Newspapers Ltd. (supra) the Hon'ble Madras High Court has held that there can be no assessment on companies which ceased to exist after being struck off the Register of Companies with the RoC. Even in that case notice to the successor was issued as "Express Newspapers Ltd." successor to the Free Press of India (Madras) Ltd." (See at p. 44 para 12 of the Report). In the present case the AO does not rely on the notice issued under Section 158BC to M/s SNIPL and M/s HCLCL to sustain assessment of the undisclosed income of the two entities in the hands of the assessee. Nor has the AO relied on the search conducted in the case of M/s SNIPL and M/s HCLCL to make assessment of their incomes in the hands of the assessee.
72. We are of the view that even the provisions of Section 292B of the Act cannot cure the illegality that has crept in the procedure adopted in the present case. The procedure prescribed under Section 170(2) is intended to ensure proper determination of tax liability of a predecessor. By not following such procedure the AO violates the intent and purpose of the Act. If the AO seeks to split the block period, that would tantamount to adopting a convenient course rather than the correct course open to him in law. It cannot be said that there was only a mistake, defect or omission in the notice or assessment. If the Revenue is allowed to plead validity of proceedings on the basis of Section 292B in a case like this then that would render the procedure and the purpose behind procedure contemplated by the Act redundant.
73. In the light of the above discussion, the following are the conclusions on the issues set out in para 33A :
(a) A search cannot be conducted on a non-existent company nor can a Section 158BC notice be issued to a non-existing company.
(b) An assessment of undisclosed income for a block period under Chapter XIV-B in respect of a predecessor of a business cannot be made in the hands of the successor in such business because a successor's liability to tax in respect of a predecessor's income cannot be beyond the period specified in Section 170(2) viz., the previous year in which the succession took place up to the date of succession and the previous year immediately preceding such previous year, provided the predecessor cannot be found. Whereas in the case of a search conducted under Section 132 after 30th June, 1995, an assessment has to be made in respect of undisclosed income of a block period as contemplated by Section 158BA of the Act and such assessment has to be in accordance with provisions of Chapter XIV-B of the Act. The block period has been defined as a period comprising of six assessment years immediately preceding the previous year in which the search was conducted and up to the date of search. In view of the clear contradiction between the provisions of Section 170(2) and Section 158BA r/w Section 158B(a), the provisions of Section 170(2) also cannot be applied to bring to tax income of a predecessor in the hands of a successor for a block period. Though Section 158BH makes other provisions of the Act applicable to a block assessment made under Chapter XIV-B of the Act, to the extent the other provisions of the Act are contrary to the provisions of Chapter XIV-B of the Act, these provisions will not apply while making a block assessment. There is no other provision in the Act by which a predecessor's income for a block period can be brought to tax in the hands of the successor in business. There is a lacuna in the Act in this regard.
(c) There cannot be a block period for companies which cease to exist. Therefore, a successor in business cannot be assessed for a block period in respect of undisclosed income of a predecessor.
(d) That assessment of alleged undisclosed income of M/s HCLCL and M/s SNIPL cannot be made in the hands of the assessee.
(e) That even in the case of making an assessment of income of a predecessor in business in the hands of a successor under Section 170(2) of the Act, separate assessment has to be made in the hands of the successor. The process of assessment including issue of notices and the order of assessment has to be framed in the hands of the successor captioned "Successor of Predecessor". This is because of the provisions of Section 170(2) which provide that such assessment has to be made "in the same manner and to the same extent as it would have been made on the predecessor".
(f) In the present case, the question whether a non-existent company can be subjected to a search and as to whether notice under Section 158BC can be issued is purely academic for the reason that the AO does not rely on the notice issued to M/s SNIPL and M/s HCLCL to sustain assessment of the undisclosed income of the two entities in the hands of the assessee. Nor has the AO relied on the search conducted in the case of M/s SNIPL and M/s HCLCL to make assessment of their incomes in the hands of the assessee.
74. The next issue to be considered is the third general proposition viz., are the conditions necessary for invoking Section 92 of the Act satisfied in the present case ?
75. The learned Counsel for the assessee contended that the conditions necessary for invoking Section 92 did not exist in the present case. In this regard, it was submitted by him that there is no dispute that the assessee received only a sum of Rs. 50 per share on sale of shares of M/s HCL Consulting Ltd. It was also submitted by him that this amount was offered to tax under the head capital gain and was also accepted by the Revenue. He brought to our notice the fact these shares were held as investments and were therefore, capital asset in the hands of the assessee. He drew our attention to the provisions of Section 92 as it existed prior to 1st April, 2002 which reads as follows :
92. Income from transactions with non-residents, how computed in certain cases-Where a business is carried on between a resident and a non-resident and it appears to the AO that, owing to the close connection between them, the course of business is so arranged that the business transacted between them produces to the resident either no profits or loss than the ordinary profits which might be expected to arise in that business, the AO shall determine the amount of profits which may reasonably be deemed to have been derived therefrom and include such amount in the total income of the resident.
76. First, he submitted that these provisions, contemplate a business being carried on between the resident and non-resident. In the light of the fact that the transaction of sale of shares of M/s HCL Consulting Ltd. was not a business transaction there was no question applying Section 92 to the case of the assessee. Secondly, even assuming without admitting that the transaction of sale of shares was a business transaction, he submitted that since the provisions contemplate business transaction, a single or isolated transaction of sale between the assessee, M/s HCLCL and M/s SNIPL on the one hand and M/s WIPL on the other hand cannot be said to be a business transaction. Thirdly, it was pointed out that provisions contemplate that there should be a close connection between the resident and the non-resident. It was submitted that neither the assessee nor the two other companies owned any shares in M/s WIPL and vice-versa, except the fact that Mr. Shiv Nadar, the promoter of the three companies and who owns major shares in these companies and the person holding the major shares in M/s WIPL, the non-resident company, were brothers. According to him the fact that the promoters of Indian company and the major shareholder controlling the OCB are related as brothers, will not result in a close connection. Fourthly, it was submitted that a singular instance of sale cannot be said to be a course of business. Drawing attention to the provision of Section 92, it was submitted by him that the provisions of the said section talks about "arrangement of course of business" which element is absent in the present case. Fifthly, it was submitted while applying the provision of Section 92 it is always the duty of the AO to consider the transaction and thereafter determine the profit, which a resident could have earned in the transaction with a non-resident, and such income has to be included in the total income. It was submitted by him that these were deeming provisions and the assessee is not expected to make any disclosure in this regard. A reading of the provisions of the Section 92 by its very nature would show that it was only the duty of the assessee to disclose the income from transaction with non-resident and it was up to the AO to estimate such income subject to the fulfillment of conditions laid down in Section 92 and there was no duty on the part of the assessee to disclose anything in this regard. As a corollary to the above submission it was submitted that, an assessee can never disclose the income, which the AO has to determine by applying the provision of Section 92 and consequently such income cannot be said to be undisclosed income. He also drew attention to the new provisions of Section 92 as they exist from 1st April, 2002, whereby the assessee was obliged to make certain disclosure regarding the arm's length price in an international transaction. It was pointed out by him under the new provisions, there is also a duty to file a report of auditor.
77. It was submitted by him that in the case of determination of income from transaction with non-residents, as per provisions of Rule 11, the provisions of Rule 10 had to be applied. Rule 10 refers to a case where income cannot definitely be ascertained and in such an event it talks of applying a percentage of turnover, which the AO himself considers reasonable, or a proportion of the total of profit and gain of business. He submitted that going by the provisions of Rule 10 it cannot be applied to transaction of sale of shares, since adopting a percentage of turnover or proportion of total profits cannot be done, in the matter of ascertaining capital gains on sale of shares. The residuary rule under Rule 10(iii) also refers only to determination of income in respect of transactions mentioned in Rule 10, viz., from (i) any business connection in India or through or from any property in India or (ii) through or from any asset or source of income in India or (iii) through or from any money lent at interest and brought into India in cash or in kind which cannot be definitely ascertained. According to him, the provisions of Rule 10(iii) also cannot be applied in the present case, as the transaction in question does not fall within any of the categories mentioned in the first part of Rule 10.
78. He also drew our attention to p. 36 of the AO's order where the AO has made a reference to diversion of income without overriding title. He also referred to the fact that the AO has concluded that the purpose of sale of shares by the assessee to other companies was to avoid tax which would be payable on further sale of shares. It was submitted that the purpose behind enactment of Section 92 was not to cover such cases. Similar reasons have been given by the CIT(A) also.
79. He drew attention to the decision of the Hon'ble Calcutta High Court in the case of CIT v. Kusum Products Ltd. (1993) 71 Taxman 611 (Cal), the Hon'ble Calcutta High Court wherein the provisions of Section 92 of the Act as it existed prior to 1st April, 2002 explained in the following words :
On analysis of Section 92 it will appear that there are five ingredients of this section which are as follows :
(i) The transaction may be between a resident and a non-resident
(ii) It should be a business transaction.
(iii) The business may be with the motive of profit.
(iv) The profit earned by the assessee may not be fair due to the close relation.
(v) The ITO in such a situation may estimate the fair profit.
80. The learned Counsel also emphasized the need for the existence of a close relationship between the resident and the non-resident. He submitted that the assessee and M/s WIPL were distinct entities in the eye of law and the mere fact that a close relationship exist between the promoters of the two companies will not give rise to a close connection between the assessee and M/s WIPL. He also submitted that provisions of Section 92 do not lay down any criteria for determining the existence of relationship between two persons. He drew our attention to provisions of Section 40A(2) of the Act where the legislature has provided guidelines for determination of the existence of a close relation in the context of disallowance of expenditure incurred by an assessee, where payment for such expenditure is made to a persons standing in certain relationship with the assessee. In the absence of any such guidelines laid down in Section 92 as it existed prior to 1st April, 2002, according to him, it was not possible to say that there was existence of close relationship between promoters of the assessee and M/s WIPL and that close connection would result in a close connection between the assessee and M/s WIPL. Doing so would amount to ignoring corporate personality of the assessee and the two other companies and M/s WIPL.
81. He further highlighted the fact that Section 192 talks of a situation where the course of business is arranged in such a way that the business transaction produces to the resident no profit. He drew our attention to paras 1 and 2 of p. 38 of the order of the AO wherein the AO has given the following finding :
Now, in the light of the above discussion, one can observe all the ingredients as listed by the Hon'ble Tribunal is completely met in the present case. It has been established from analysis of seized document that the assessee has with wilful intent to avoid capital gains tax that may arise in future, transferred its shares to associate foreign company at a tax neutral price. Section 92 of the IT Act, 1961 governing this transactions is, therefore, clearly attracted in this case. This entire gamut of facts would never have been known but for the incriminating papers seized during the search and therefore clearly falls within the meaning of 'undisclosed income' defined in Chapter XIV of the IT Act, 1961.
82. The learned Counsel submitted even as per the AO the transfer of shares by the assessee to the non-resident was with the view to avoid capital gain tax that may arise in future. If this was the conclusion of the AO, it can then safely be said that Section 92 could not be applicable to such transaction since these provisions are intended to cover a different type of transaction. The learned Counsel further brought to our notice that ultimately the AO substituted the sale price of shares from Rs. 50 to Rs. 1,807 per share. Section 92 does not contemplate substitution of sale price. The provisions only empowers the AO to determine the amount of profit which in his opinion the assessee has reasonably derived from a business transaction carried on with the non-resident. Mere substitution of sale price of shares is not determining profits which the assessee had reasonably derived from a business transaction carried on with a non-resident. In this connection he also drew our attention to the Explanatory Notes while introducing the new provisions of Section 92 w.e.f. 1st April, 2002. These Explanatory Notes are placed at page No. 1621 of the assessee's paper book. Circular No. 14 of 2001 [reported at (2002) 172 CTR (St) 13] explaining the new provisions of Section 92 w.e.f. 1st April, 2002 also says that the old provisions were very vague and indefinite and hence the new provisions were being introduced. The following have been mentioned in the aforesaid circular:
New legislation to curb tax avoidance by abuse of transfer pricing.
55.1 The increasing participation of multi-national groups in economic activities in the country has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same multi-national group. The profits derived by such enterprises carrying on business in India can be controlled by the multi-national group, by manipulating the prices charged and paid in such intra-group transactions, thereby, leading to erosion of tax revenues.
55.2 Under the existing Section 92 of the IT Act, which was the only section dealing specifically with cross-border transactions, an adjustment could be made to the profits of a resident arising from a business carried on between the resident and a non-resident, if it appeared to the AO that owing to the close connection between them, the course of business was so arranged so as to produce less than expected profits to the resident. Rule 11 prescribed under the section provided a method of estimation of reasonable profits in such cases. However, this provision was of a general nature and limited in scope. It did not allow adjustment of income in the case of non-residents. It referred to a "close connection" which was undefined and vague. It provided for adjustment of profits rather than adjustment of prices, and the rule prescribed for estimating profits was not scientific. It also did not apply to individual transactions such as payment of royalty, etc., which are not part of a regular business carried on between a resident and a non-resident. There were also no detailed rules prescribing the documentation required to be maintained.
83. Our attention was drawn to the explanation given in the aforesaid portion of the circular whereby it is mentioned that the old provisions provided for adjustment of profits rather than adjustment of prices and the rules for estimating profits were not scientific. The further reference in the aforesaid circular is to the fact that the old provisions did not apply to individual transactions such as payment of royalty, etc., which are not part of regular business carried on between resident and non-resident. The learned Counsel emphasized the fact that even the circular of the Board recognized the fact that the old provisions apply only to a business transaction carried on between the resident and non-resident. His further submission was that, this circular of the CBDT was binding on the Revenue authorities and in this regard he relied on the decision of the Hon'ble Supreme Court in the case of UCO Bank v. CIT . He drew our attention to the submission of the assessee before the Revenue authorities. In the submissions made before the CIT(A), dt. 31st May, 2004 in p. 83 of the said submission the assessee had specifically highlighted the fact that the transaction and sale of shares of M/s HCL Consulting Ltd., to M/s WIPL, were held as investment by the assessee and the two other companies and that the transaction in question was an isolated transaction. Our attention was also invited to the additional submissions dt. 27th Aug., 2004 filed before the CIT(A) wherein a reference was made by the assessee to Circular No. 14 of 2001. Despite the aforesaid submissions, the CIT(A) while deciding the appeal of the assessee, did not make any reference to the aforesaid submissions. On the other hand, the CIT(A) at p. 180 of his order referred to the new provisions of Section 92, which were not applicable to the case at all. The CIT(A) has presumed that there was a duty on the part of the assessee to furnish details and documentary evidence to justify the transaction between itself and the non-resident and that the assessee had deliberately avoided furnishing of such details. Thereafter, the CIT(A) has referred to the power of the Revenue to compute the current arms length price in accordance with the rules r/w Section 92C of the IT Act. He thus submitted that the action of the Revenue authorities in invoking the provisions of Section 92 was highly unjustified.
84. Shri Kapila, the learned special counsel for the Revenue, submitted that all the conditions required for application of Section 92 were duly satisfied in the present case since all the required ingredients were present in the transaction of transfer/sale of shares in question. He submitted that evidence found during the course of search was sufficient to bring out the close connection between the assessee-company and M/s WIPL inasmuch as names of both these companies were appearing in the document found during the course of search showing dollar-cash flow of the HCL group (copy at p. 23 of the Revenue's paper book No. I) as well as in the document showing shareholding of promoter group companies (copy at p. 16 of the Revenue's paper book No. 1). He also invited our attention to page Nos. 8 to 12 of the Revenue's paper book No. IV giving details of shareholding and directorships of Shri Shiv Nadar and his wife and various group companies to point out that they both were directors in the assessee-company as well as M/s Vamasundari Investments (P) Ltd. He also invited our attention to the offer document issued by M/s HCL Technologies Ltd. placed at page Nos. 9 to 14 of the Revenue's paper book to point out that M/s WIPL was shown as an entity belonging to the promoter group. Our attention was also drawn to the copy of proforma of chartered accountant's certificate found and seized during the course of search placed at page No. 61 of the Revenue's paper book No. I to show that M/s Vamasundari Investments (P) Ltd., a company belonging to the assessee's group was holding substantial interest in M/s WIPL through another company, i.e., M/s I.T. CON Investments (P) Ltd. Mr. Kapila contended that this documentary evidence as well as the specific replies given by Shiva Prasad Shiva Subrahmanya Nadar, brother of Shri Shiv Nadar in his statement recorded on oath was sufficient to show that the assessee-company and M/s WIPL were closely connected. He also contended that even the e-mail and fax messages found and seized during the course of search further established that these two companies belonged to one group and they were being controlled and managed by Shri Shiv Nadar.
85. As regards the nature of the transaction involving the sale of shares in question being a business transaction of the assessee-company, Shri Kapila placed heavy reliance on the decision of Hon'ble Supreme Court in the case of Mazagaon Dock Ltd. v. CIT wherein it was held that the word "business" must be construed in a broad manner rather than in a restricted sense in fiscal statutes. He submitted that the exact nature of assessee's business is required to be appreciated to ascertain whether the transaction of shares in question was a business transaction or not In this regard, he invited our attention to the statement of Shri Shiv Nadar recorded during the course of search (copy placed at pp. 23 to 32 of the Revenue's paper book No. II) and pointed out that the business of the assessee-company was explained by Shri Shiv Nadar himself as that of investment planning and investment monitoring. He also took us through the written submissions filed by the assessee-company during the course of regular proceedings for asst. yr. 1998-99 before the AO as well as before the learned CIT(A) placed in Revenue's paper book No. III to show that the business of the assessee-company was explained therein as making of investments including investment being made in the equity shares of various companies. He also pointed out that the main object of the assessee-company as per its memorandum of association is to carry on the business of the investment company and to buy, invest, underwrite, acquire shares/other securities. He contended that even the shares held as investment by the assessee-company in various group companies were with the intention of retaining the controlling stake of the said companies and one of the business activities of the assessee-company being that of retaining such controlling stakes, the investment in shares of M/s HCL Technologies Ltd. was made by the assessee-company for the purpose of its business and sale thereof to M/s WIPL represented its business transaction as contemplated in Section 92. He also contended that even if the profit/loss arising from the said sale was chargeable under the head "capital gains", the character of transaction of sale of shares was purely a business transaction in the hands of the assessee-company. Shri Kapila also invited our attention to the findings recorded by the learned CIT(A) in his appellate order for asst. yr. 2000-01 placed at page Nos. 67 to 96 of his paper book No. III and pointed out that as per the finding so recorded by the learned CIT(A) accepting the submissions made on behalf of the assessee-company before him, the investment made in shares of the group companies was for the purpose of assessee's normal business. He contended that the sale of the said shares thus was nothing but the transaction entered into by the assessee-company in the normal course of his business and, therefore, the provisions of Section 92 were clearly attracted to the said transaction. He also contended that the stand now being taken by the assessee is clearly contradictory to the stand taken in the regular assessment proceedings and urged that the same, therefore, should not be accepted. He also contended that even a single transaction can constitute the business and since the transaction of sale of shares in question was effected between the assessee-company and M/s WIPL during the course of its normal business, all the conditions required to invoke the provisions of Section 92 were duly satisfied.
86. In the rejoinder, Shri S.E. Dastur pointed out that neither the AO nor the learned CIT(A) has recorded any finding in their orders to the effect that the transaction of sale/transfer of shares in question was adventure in the nature of trade. He submitted that the Department having accepted the said shares as investment made by the assessee on capital account as shown in the regular assessment, it cannot treat the same differently in the block assessments. Referring to p. 234 of Vol. 1 of Commentary by Kanga & Palkhivala, he contended that if income is held to be taxable under the head "capital gains", Section 92 cannot have an application to the corresponding transactions giving rise to such capital gain. Relying on the decision of Hon'ble Bombay High Court in the case of Mazagaon Dock Ltd. (supra), he contended that even for establishing a business connection, continuity of the business transactions between the concerned parties is must. His contention, therefore, was that a single transaction of sale of shares as involved in the present case was not sufficient to establish such business connection as contemplated in Section 92.
87. We have considered the rival submissions in the light of material available on record and the case laws cited at the bar. In order to ascertain the conditions required to be satisfied for application of Section 92, it would be relevant to consider the provisions of the said section which, as applicable to the year under consideration, are reproduced below.
92. Where a business is carried on between a resident and a non-resident and it appears to the AO that, owing to the close connection between them, the course of business is so arranged that the business transacted between them produces to the resident either no profits or loss than the ordinary profits which might be expected to arise in that business, the AO shall determine the amount of profits which may reasonably be deemed to have been derived therefrom and include such amount in the total income of the resident.
88. In the case of CIT v. Kusum Products Ltd. (supra) cited by the learned Counsel for the assessee, Hon'ble Calcutta High Court has characterized the following ingredients which are necessary for applying the provisions of Section 92 :
(i) The transaction may be between a resident and a non-resident.
(ii) It should be a business transaction.
(iii) The business may be with the motive of profit.
(iv) The profit earned by the assessee may not be fair due to the close relation.
(v) The ITO in such a situation may estimate the fair profit.
89. Keeping in view the aforesaid ingredients characterized by Hon'ble Calcutta High Court and having regard to the express language used in, the provisions of Section 92, we feel that the conditions to be satisfied for application of Section 92 can also be outlined in the following manner:
(i) There should be a business carried on between a resident and a non-resident.
(ii) There should be a close connection between the resident and a non-resident.
(iii) Owing to such close connection between them, the course of business is so arranged that the business transactions between them produces to the resident either no profits or less than the ordinary profits which might be expected to arise in that business.
If all the aforesaid conditions are satisfied in a given case, the AO shall be entitled to determine the amount of profits which may reasonably be deemed to have been derived from the relevant transactions between a resident and a nonresident and include such amount in the total income of the resident-assessee.
90. In the light of the aforesaid ingredients as characterized by the Hon'ble Calcutta High Court in the case Kusum Products Ltd. (supra) and the conditions outlined by us on the basis of relevant provisions of law, it would be necessary to consider and appreciate as to whether all the ingredients were present in the transactions in question involved in the present case and whether the conditions precedent were satisfied so as to empower the AO to invoke the said provisions and make the additions as have been made by him.
91. There is no dispute about the fact that the transaction involving sale/transfer of shares of M/s HCL Consulting Ltd. was between the assessee-company and the other two companies which subsequently merged with the assessee-company on the one hand and M/s WIPL, Mauritius on the other hand and their residential status was resident and non-resident respectively. It was thus a transaction of sale of shares between a resident and a non-resident and this condition was duly satisfied.
92. As regards the issue as to whether there was any close connection between the said two entities, it is observed that the term "close connection" used in Section 92 has not been defined expressly in the statute as rightly pointed out by the learned Counsel for the assessee. Since the term "close connection" has not been defined or explained in the relevant provisions, it should be understood in the popular sense having regard to the meaning assigned to the said term in common parlance as well as the meaning/definition given in the statute elsewhere of the similar term or in the similar context. It is, therefore, necessary to appreciate the facts of the case on hand in the light of material available on record to ascertain as to whether these two entities, i.e., the assessee-company and M/s WIPL were closely connected at the relevant time going by the expression "close connection" as commonly understood.
93. During the course of search, a proforma of chartered accountant's certificate found and seized and a perusal of copy thereof placed at p. 61 of the Revenue's paper book No. 1 shows that the paid up value of shares of M/s WIPL as on 1st April, 1999 was US $ 3 (million) and the same was fully held by M/s I.T. CON Investments (P) Ltd. It was also shown in the said certificate that the paid up share capital of US $ 2 (million) of M/s I.T. CON Investments (P) Ltd. as on 1st April, 1999 was fully held by M/s Vamasundari Investments (P) Ltd. M/s Vamasundari Investments (P) Ltd. was shown as the group concern in the dollar-cash flow found and seized during the course of search (copy placed at p. 23 of the Revenue's paper book No. I). The said company was also shown as promoter company along with other companies belonging to HCL group in the details of shareholding of promoter group found to be given in the relevant seized document placed at page No. 16 of Revenue's paper book No. I. As per the list of shareholding of Shri Shiv Nadar, a key person of the assessee-company given at page Nos. 10 and 11 of the Revenue's paper book, the contents of which have remained unrebutted, Shri Shiv Nadar and his wife were shown to be the shareholders as well as directors of M/s Vamasundari Investments (P) Ltd. but they were also directors of the said company. In both these documents found and seized during the course of search which are placed at page No. 16 of the Revenue's paper book, M/s WIPL was also shown as an OCB belonging to promoter group, i.e., HCL group along with the other companies including the assessee-company. In the offer document issued by M/s HCL Technologies Ltd. in connection with public issue of new equity shares (copy placed at page Nos. 9 to 14 of the Revenue's paper book No. II), M/s WIPL was shown as an entity belonging to promoter group and the transactions involving purchase of shares by it from the assessee-company as well as two other companies were shown therein, as required, A statement of Shri Shiva Prasad Shiva Subrahmanyam Nadar, brother of Shri Shiv Nadar was recorded under Section 131 on 5th Jan., 2004 and in the said statement, he accepted that he himself as well as his brother Shri Balakrishna Nadar are the directors in M/s Vamasundari Investments (P) Ltd., Mauritius. Further, details of companies belonging to HCL group and their directors are given on page No. 8 of the Revenue's paper book No. 4 which show that Shri Shiv Nadar, Mrs. Kiran Nadar and Shri Subroto Bhattacharya, directors of the assessee-company were also the directors of M/s Vamasundari Investments (P) Ltd. which was having controlling interest in M/s WIPL. All these facts arising from the material available on record clearly show that the assessee-company and M/s WIPL both were belonging to the HCL group, one being the resident company and the other being an OCB and having regard to their respective shareholding as well as common directorships through M/s Vamasundari Investments (P) Ltd., they were closely associated with each other. In these circumstances, we are of the view that it can reasonably be concluded that there was a close connection between the assessee-company and M/s WIPL as commonly understood and this condition stipulated in Section 92 was also satisfied in the present case. The meaning of "associated enterprises" given in Section 92A, although inserted in the statute w.e.f. 1st April, 2002, to elaborate/explain such close connection also supports our conclusion since the assessee-company and M/s WIPL would clearly be the "associated enterprises" within the meaning so given.
94. Having held that the transaction of transfer/sale of shares involved in the present case was between a resident and a non-resident who were closely connected, the next aspect which is required to be seen is whether the said transaction represented the business transaction as envisaged in Section 92 which contemplates, having regard to the express language used, a business carried on between a resident and a non-resident and the arrangement of the course of such business that the business transacted between them produces to the resident either no profits or less than ordinary profits which might be expected to arise in that business. The transaction covered by Section 92 thus is not a business transaction simplicitor but it envisages a business carried on between the two parties as well as the arrangement of the course of business in a particular manner with a particular purpose.
95. It is no doubt true that the word "business" is one of wide import and as held by Hon'ble Supreme Court in the case of Mazagaon Dock Ltd. v. CIT (supra) relied upon by the learned Departmental Representative, it must be construed in a broad manner rather than a restricted sense in fiscal statutes. However, when it comes to the facts of the present case, the transactions are basically in the shares and the provisions sought to be invoked are the deeming provisions of Section 92 which apply only to the specific business transactions as contemplated therein. The question which is, therefore, always relevant in this context is whether the sale of shares which produces the surplus was so connected with the carrying on the assessee's business that it could fairly be said that the surplus so produced is the profits and gains of such business. As held by Hon'ble Supreme Court in the case of Calcutta Discount Co. Ltd. v. ITO , the question whether sales of certain shares by way of changing the investments or by way of trading in shares has to be decided on the consideration of different circumstances including the frequency of the sales, the nature of shares sold, the price received as compared to the past price and other several facts. However, whether the assessee had the intention to make a business profit as distinguished from the intention to change the form of the investments is really an inference to be drawn by the assessing authorities from the material facts taken in conjunction with the surrounding circumstances. In the case of CIT v. Guest Keen & Nettlefold Ltd. , Hon'ble Calcutta High Court has held that in determining whether a transaction was an investment or an adventure in the nature of trade, no universal rule or principle can be applied. Each case has to be judged on its own merits and the Court has to come to a conclusion taking into account the totality of facts and circumstances. Therefore, the purchase and sale of shares would invariably involve consideration of the question whether such purchase and sale of shares is a mere investment or adventure in the nature of trade. If it is found that purchase and sale of shares is a solitary transaction, the presumption would be that it is not in the nature of trade and presumption can be rebutted by the Revenue only by establishing that the transaction is in the nature of trade as held by Hon'ble Allahabad High Court in the case of Seth Banarsi Das Gupta v. CIT .
96. In the present case, heavy reliance has been placed by the learned Departmental Representative on the nature of assessee's business in support of the Revenue's case that the transfer of shares in question was business transaction which was covered by the provisions of Section 92. In this regard, he has relied on the statement of Shri Shiv Nadar recorded during the course of search on 24th Jan., 2002 (copy placed at page Nos. 23 to 32 of Revenue's paper book No. II) wherein the activities of the assessee-company were explained by him as-(a) investment planning, (b) investment monitoring and (c) governance monitoring such as audit and overall strategic planning. The learned Departmental Representative has also invited our attention to the copy of written submission made on behalf of the assessee-company during the course of regular assessment proceedings for asst. yr. 1998-99 placed at page Nos. 1 and 2 of the Revenue's paper book No. III wherein the business activities of the assessee-company were stated to be as follows :
The company is in the business of investment which includes investing in equity shares of various companies. The company also takes a large block of shares in upcoming new companies for which the company has to incur expenditure in identifying and evaluation of these investment decisions. The company, in order to purchase shares at par and get a preferential and firm allotment in such upcoming companies, has to participate along with other companies in the promotional stage and pay and contribute expenses...
97. He has also drawn our attention to the various submissions made on behalf of the assessee-company during the course of assessment proceedings for the different years in the regular course wherein the nature of its business was explained on behalf of the assessee-company. In one of such submissions made during the course of assessment proceedings for asst. yr. 1998-99, a copy of which is placed at page Nos. 3 to 13 of 'assessee's paper book, it was submitted that the assessee is a closely held domestic company incorporated in India with the primary objective of carrying on the business of investment company and to, inter alia, buy, invest, underwrite, acquire shares/other securities. It was also submitted that the assessee has acquired shares of various companies since its inception, some of which are held as stock-in-trade whereas the balance are held in investment portfolio with the primary intention of acquiring and retaining controlling stake of the companies within the fold of HCL group.
98. The learned Departmental Representative has also referred to the extensive submissions made on behalf of the assessee-company during the course of assessment proceedings before the AO for asst. yr. 2000-01 (copy at pp. 46 to 58 of Revenue's paper book No. III) as well as before the learned CIT(A) during the course of appellate proceedings for the same year (copy at pp. 59 to 66 of Revenue's paper book No. III) explaining the nature of its business. In the said submissions, it was submitted that investment in shares has always been in the shares of specific companies wherein the assessee seeks to retain the controlling stake and the said investment thus is made for a specific business purpose. It was also submitted that the investment decisions of the assessee were taken by its directors more on the basis of enhancing strategic shareholding in particular companies and while holding such shares as investment, the company had an underlying business objective too. Heavy reliance was also placed on behalf of the assessee-company on the various judicial pronouncements propounding that income falling under a specific head should be chargeable under that head even if it is earned for business purposes and even though an item of income falls under a specific head, the commercial character of that income can be taken into account. In one of such decisions in the case of CIT v. Chugandas & Co. relied upon by the assessee, Hon'ble Supreme Court held that the different heads of income described for the purpose of computation of income are merely to indicate the classes of income and even if the business income is broken up under different heads only for the purpose of the computation of total income, the nature of such income does not cease to be the income of the business. It is pertinent to note here that these submissions were made on behalf of the assessee in support of its claim that the acquisition of shares held as investment was the part of its business activity and therefore, interest paid on the borrowed funds utilized for such acquisition was for the purpose of its business which is deductible under Section 36(1)(iii).
99. The aforesaid stand taken by the assessee in the regular assessment proceedings for asst. yr. 2000-01 was accepted by the learned CIT(A) and a perusal of his appellate order dt. 22nd Sept., 2004 (copy placed at pp. 67 to 96 of Revenue's paper book No. III shows that he has recorded the following observations/findings on this issue :
(i) The appellant-company's main object is to invest in shares, stock and debentures, etc., of the specified group companies with controlling motive and then hold the same for a long period.
(ii) As per the balance sheets, at the time of purchase of shares/debentures etc., the scrip has been quantified as "investment" or "stock-in-trade".
(iii) Most of the shares held as "Investment" have been acquired and held by the appellant for a long period.
(iv) The appellant has not converted any of its investment into stock-in-trade during the accounting period.
(v) The appellant has shuffled his portfolio for a better investment.
(vi) The appellant has not valued the investment at cost/market price whichever is lower, which is applicable for "stock-in-trade" but has followed the cost method, which is applicable for "investments" as prescribed by the Institute of Chartered Accounts of India vide AS-13.
(vii) The appellant's claim for assessing the profits under the head 'Capital gain' from the sale of shares held as "Investment" by the appellant has been accepted by the Department for last so many assessment years. Further, there is no change in the facts or circumstances of the case during the accounting period as compared to the past years.
(viii) The appellant has not purchased any shares of NIIT from the market except the shares allotted to it as promoter. Only 2,500 shares were allotted much before the public issue, which clearly indicates the appellant's intention that the shares of NIIT were acquired as an "investment" and not as "stock-in-trade".
(ix) Merely that the sale of capital asset results into realization of a substantial profit would not change the nature of the asset from capital assets to stock-in-trade.
(x) The CIT(A)-XVII vide his Order No. 12/2003-04 dt. 31st Dec., 2003 in asst. yr. 2000-01 in the case of M/s Pace Industries Ltd. and the CIT(A)-XXV vide his order No. 8/1999-2000 dt. 4th Oct., 2000 in asst. yr. 1996-97 in the case of Sh. V.K. Thadani, another co-promoter of NIIT. held that the profit on sale of shares of NIIT was assessed as "capital gains" as against the AO's assertion of "business income".
100. On the basis of the aforesaid findings/observations, the learned CIT(A) held that the intention of the assessee-company while holding investment in shares and securities of specific companies was to retain the controlling stake and therefore, the main object of this investment was not to earn dividend and the borrowings were required to enable the assessee-company to purchase these shares. He, therefore, held that the capital was borrowed for the purpose of business and the acquisition of assets being in the nature of business assets, the expenses incurred in relation to such investments are deductible as business expenditure under Section 36(1)(iii).
101. According to the learned Departmental Representative, the aforesaid submissions made on behalf of the assessee-company itself and the findings recorded by the learned CIT(A) are sufficient to establish that the shares in question were held for the purpose of assessee's own business to retain the controlling stake and, therefore, the transfer of the same constituted business transactions of the assessee to which the provisions of Section 92 were clearly attracted. He has contended that this conclusion is inevitable on the basis of stand taken by the assessee-company itself during the course of regular assessment proceedings and the evidence found during the course of search further fortifies the same.
102. It is no doubt true that the main object of the assessee-company as per its memorandum of association was to carry on the business of an investment company and to buy underwrite, invest in, acquire, hold shares, stocks, debentures, securities, etc. The main object of the assessee-company was also to hold by way of investment shares, stocks, debentures, securities and other investments. Further, as explained on behalf of the assessee-company itself in the various submissions made before the authorities below during the course of regular proceedings, the various and substantial activities of the assessee-company were in the nature of trading in shares, lending/advancing moneys on interest and maintaining controlling stake over specific companies. It was also explained that the assessee-company has acquired shares of various companies (quoted as well as unquoted) since its inception some of which were held by it as stock-in-trade and balance are held in investment portfolio with the primary intention of acquiring and retaining controlling stake of certain companies. The shares of M/s HCL Technologies Ltd., sale of which is in question in the present case, were held as such in investment portfolio with the primary intention of retaining controlling stake. The said shares were shown by the assessee-company in its books of account separately as investments and not stock-in-trade and the profit/loss on the same thereof was declared under the head "capital gain" in the year under consideration as well as in the earlier years which was accepted by the Department. At the same time, the stand taken by the assessee-company relying on the various judicial pronouncements that the said investment have been made during the course of its business of retaining the controlling stake in the concerned company was accepted by the learned CIT(A) in asst. yr. 2000-01 while allowing the interest paid on the borrowed funds utilized for making the said investment as business expenditure deductible under Section 36(1)(iii).
103. In the present context the question, however, is whether the sale of the aforesaid shares held as investment could be treated as a business transacted between the assessee-company and the buyer, i.e., M/s WIPL as contemplated in the provisions of Section 92 as applicable to the year under consideration, the requirements of which are very specific. Before we consider the applicability of these specific requirements to the transactions in question, let us see the nature of this transaction involving sale of shares as per the general position under the law without a particular reference to Section 92. The test often applied, to ascertain the nature of such transaction and the treatment given to the profit/loss arising out of such transaction, as laid down by Hon'ble Supreme Court in the case of Raja Bahadur Kamakhaya Narain Singh v. CIT , is the intention of the assessee as reflected from the treatment given in his accounts in holding the shares/securities as stock-in-trade of a business or as an investment. As held by Hon'ble Supreme Court in the case of Bengal Assam Investors Ltd. v. CIT , the mere fact that a company is incorporated to carry on investment business does not automatically lead to the inference that it is carrying on business by purchase and sale of their shares held as investments and the question always is whether such sale which produced the surplus was connected with the carrying on of the assessee's business that it could fairly be said that the surplus is the profits and gains of such business. As laid down by Hon'ble Supreme Court in the case of Calcutta Discount Co. Ltd. (supra), one cannot generalize that in every case of investment company, all transactions involving investments are nothing but dealings in the course of business. Further, as held by Hon'ble Supreme Court in the case of Ramnarain Sons (P) Ltd. v. CIT , where the shares were purchased for acquisition of managing agency, sale of some of the shares could not be treated as an adventure in the nature of trade. Explaining further, Hon'ble Supreme Court observed that the managing agency is manifestly the source of profits of the appellants but the shares purchased and managing agency acquired were both assets of a capital nature and did not constitute stock-in-trade of a trading venture. The subsequent disposal of some of the shares could not also convert what was a capital acquisition into an adventure in the nature of trade.
104. In the present case, the investment in shares of M/s HCL Consulting Ltd. was made by the assessee-company to acquire and retain the controlling stake in the said company and even though acquiring and maintaining the controlling stake was the business of the assessee-company, the shares purchased as well as controlling stake acquired were both its business assets of a capital nature and did not constitute a stock-in-trade. The controlling interest/stake so acquired by purchase of shares was a capital asset in the hands of the assessee-company and even though the same was a business asset of the assessee-company going by its nature of business activities as set out in the object clause of memorandum of association and as further explained in the submissions made before the authorities below in the regular assessment, the same could not be said to be a stock-in-trade by any stretch of imagination.
105. As held by the Hon'ble Supreme Court in the case of CIT v. Associated Industrial Development Co. (P) Ltd. , the determination of the question whether particular holding of shares by the assessee is by way of an investment or whether it forms part of stock-in-trade of the assessee is a matter generally within the knowledge of the assessee holding the shares and normally the assessee should be in a position to produce evidence from his own records as to whether he had maintained any distinction between those shares which are held as stock-in-trade and those which are held by way of investments. In the present case, the learned Counsel for the assessee has sufficiently and satisfactorily demonstrated before us on the basis of relevant and material evidence in the form of relevant balance sheets of the assessee-company that the shares held by it as stock-in-trade and as investments were separately and distinctly treated in the books of account and the shares of M/s HCL Consulting Ltd. in question held by it were shown as investment right from the date of acquisition. The purchase of the said shares thus was a mere investment made by the assessee-company and although the said investment was a business asset going by the nature of assessee's business, the sale thereof was on capital account and not an adventure in the nature of trade. This position gets fortified from the fact that the profit arising from such sale was declared by the assessee under the head "capital gain" and not "profits and gams of business" and this treatment given by the assessee-company in the returns of income filed regularly in the year under consideration as well as for the earlier years was accepted by the Department. In the case of Raja Bahadur Kamakhaya Narain Singh v. CIT (supra), the assessee had purchased and sold shares as well as gold in bulk and the profit realized from such sale was held by the Hon'ble Supreme Court to be not arising from an adventure in the nature of trade. Their Lordships of Hon'ble Supreme Court, however, observed that if the investments in shares and securities have been held as stock-in-trade, the loss resulting on sale thereof would be a business loss being of a revenue nature.
106. In the case of CIT v. Express Newspaper Limited , Hon'ble Supreme Court has held that the profits and gains of business and capital gains are two distinct concepts in the IT Act, the former arises from the activity which is called business and the latter accrues because capital assets are disposed of at value higher than what they cost the assessee. Explaining further, Hon'ble Supreme Court observed that the fact that capital gains are connected with the capital assets of the business cannot make them the profit of the business. They are only deemed to be income of the previous year and not the profits or gains arising from the business during that year.
107. Reverting to the applicability of Section 92, a perusal of the relevant provisions as applicable in the present case which are reproduced above, clearly shows that the conditions stipulated therein are specific and only the transactions having all the ingredients/attributes in existence could only attract the said provisions. The expressions used "Income from transactions", "where a business is carried on", "the course of business" and "produces to the resident either no profits or less than ordinary profits which might be expected to arise in that business" clearly define the limited scope of the applicability of the said provisions and the specific transactions covered therein. First of all, it contemplates a regular business being carried on between a resident and a non-resident going by the expressions "income from transactions" and "the course of business" which indicate explicitly the multiplicity of transactions. In the 1922 Act, analogous provisions were contained in Sub-section (2) of Section 42 corresponding to Section 92 of 1961 Act and the Hon'ble Bombay High Court had an occasion to consider the issue relating to applicability of the provisions of Section 42(2) of the 1922 Act in the case of CIT v. Mazagaon Dock Ltd. . It was observed in this context by the Hon'ble Bombay High Court that business is brought about by a transaction between two or more persons and if there is an activity which is a business activity and the activity is carried on between two persons, then each is carrying on business with the other. Explaining further, Hon'ble Bombay High Court observed that if such activity is sufficiently continuous and the same is in relation to the business of the concerned parties, then there is no reason to suggest that there was no business carried on between the said parties. In the present case, the shares of M/s HCL Consulting Ltd. were held by the assessee-company as investment whereas the shares being dealt in as trading activity were held separately as stock-in-trade. In these circumstances, it is difficult to say that the sale of shares of M/s HCL Consulting Ltd. to M/s WIPL in a solitary transaction was an activity in relation to the business of the assessee-company and such activity was sufficiently continuous to suggest that there was a business carried on between the said two parties. It was not the business of the assessee-company to deal in those shares which are held as investment and, therefore, the profits resulting from the sale of such shares cannot be said to be the profits of the business of the assessee. As a matter of fact, the assessee-company had consistently declared such profit under the head "Capital gains" and not "Profits and gains of business" in its returns of income filed regularly and the same was accepted by the Department. The profits arising to the assessee from the transaction of sale of M/s HCL Consulting Ltd.'s shares, therefore, cannot be regarded as profits from the business and consequently, the situation contemplated in Section 92 of the said transaction producing to the resident either no profits or less than ordinary profits which might be expected to arise in that business cannot be said to have been obtained in the present case. It clearly shows that both the conditions stipulated in Section 92, viz., a business carried on between a resident and a non-resident and the profit arising from that business were not satisfied in relation to the transaction of sale of shares by the assessee-company to M/s WIPL and in the absence of the same, the AO was not justified in applying the said provisions to such transaction.
108. Our aforesaid conclusion about the inapplicability of the provisions of Section 92 on the basis of limited scope of the said provisions gets support from the relevant Rules, i.e., Rules 10 and 11 of the IT Rules, 1962. The said Rules as applicable to the year under consideration, i.e., asst. yr. 2000-01 are reproduced below :
10. Determination of income in the case of non-residents.-In any case in which the AO is of opinion that the actual amount of the income accruing or arising to any non-resident person whether directly or indirectly, through or from any business connection in India or through or from any property in India or through or from any asset or source of income in India or through or from any money lent at interest and brought into India in cash or in kind cannot be definitely ascertained, the amount of such income for the purposes of assessment to income-tax may be calculated :
(i) at such percentage of the turnover so accruing or arising as the AO may consider to be reasonable, or
(ii) on any amount which bears the same proportion to the total profits and gains of the business of such person (such profits and gains being computed in accordance with the provisions of the Act), as the receipts so accruing or arising bear to the total receipts of the business; or
(iii) in such other manner as the AO may deem suitable.
"11. Determination of income from transactions with non-residents.-The profits and gains derived from any business carried on in the manner referred to in Section 92 may be determined for the purposes of assessment to income-tax according to Rule 10."
109. As is evident from the aforesaid Rules, Rule 11 lays down that the profits and gains derived from any business carried on in the manner referred to in Section 92 may be determined for the purposes of assessment to income-tax according to Rule 10. The manner and method of determining the quantum of income to be added in the hands of the assessee are stipulated in Rule 10 and the method so stipulated generally requires application of certain percentage of profit to the total turnover or certain proportion to the total receipts of the business. This method of computation/determination of income to be added in the hands of the assessee under Section 92 as well as the expression used in Rule 11 "profits and gains derived from any business carried on in the manner referred to in Section 92" further goes to show that the nature of transactions sought to be covered by the legislature was very specific inasmuch as such transactions should have been in the course of business carried on by the assessee with non-resident and the same should have resulted in the profits and gains derived from such business.
110. It is also pertinent to note that the original Section 92 was substituted by a new section by the Finance Act, 2001 w.e.f. 1st April, 2002 and before this new section becomes operative from that date, the same again came to be substituted by the Finance Act, 2002 with effect from the same date, i.e., 1st April, 2002. These amendments made in the provisions of Section 92 were mainly to overcome the limitation of the earlier provisions in terms of scope covering only the specific type of transactions as discussed above which is quite evident from the Circular No. 14 of 2001 explaining the legislative intention behind introducing the new provisions of Section 92. A copy of the said Circular is placed at page No. 1621 of the assessee's paper book and the paragraphs of the said Circular bearing Nos. 55.1 and 55.2 being relevant in this context are reproduced below :
55.1 The increasing participation of multi-national groups in economic activities in the country has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same multi-national group. The profits derived by such enterprises carrying on business in India can be controlled by the multi-national group, by manipulating the prices charged and paid in such infra-group transactions, thereby, leading to erosion of tax revenues.
55.2 Under the existing Section 92 of the IT Act, which was the only section dealing specifically with cross-border transactions, an adjustment could be made to the profits of a resident arising from a business carried on between the resident and a non-resident, if it appeared to the AO that owing to the close connection between them, the course of business was so arranged so as to produce less than expected profits to the resident. Rule 11 prescribed under the section provided a method of estimation of reasonable profits in such cases. However, this provision was of a general nature and limited in scope. It did not allow adjustment of income in the case of non-residents. It referred to a "close connection" which was undefined and vague. It provided for adjustment of profits rather than adjustment of prices, and the rule prescribed for estimating profits was not scientific. It also did not apply to individual transactions such as payment of royalty, etc., which are not part of a regular business carried on between a resident and a non-resident. There were also no detailed rules prescribing the documentation required to be maintained.
111. As is evident from the aforesaid Circular, it has been accepted by the lawmakers themselves that the provision of Section 92 as applicable up to asst. yr. 2001-02 was of a general nature and limited in scope. It was also accepted in the said circular that the said provision did not apply to individual transactions which are not part of a regular business carried on between a resident and a non-resident. In the present case, the transaction for sale of shares between the assessee-company and the non-resident company, i.e., M/s WIPL was an individual transaction and as already discussed in detail, the same did not form part of a regular business carried on between the said two parties. The said transaction of sale of shares held as investment by the assessee-company thus did not form part of the business of the assessee-company in general and that of the business carried on between the assessee and the non-resident company, i.e., M/s WIPL in particular. Therefore, there was no question or even possibility of adjustments to the profits arising from such business as were permissible by Rules 10 and 11 for determining the income to be assessed in the hands of the assessee under Section 92 and accordingly, the said rules containing computation provisions were clearly unworkable in determining such income as accepted in the aforesaid circular.
112. It is worthwhile to note here that Section 92 was applied by the AO to the transaction of sale of shares in the present case relying on the new provisions of the said section substituted in the statute w.e.f. 1st April, 2002. He, however, overlooked the relevant and material aspect of the matter that the provisions so substituted widening the scope thereof as explained in the aforesaid Circular No. 14 of 2001 were not applicable to the previous year relevant to the asst. yr. 2000-01 when the transaction in question for sale of shares was effected. The AO thus clearly fell in error in applying the wrong provisions of law for holding that the transaction was covered by Section 92 and he, therefore, had no occasion to consider and appreciate as to whether the conditions precedent to invoke/apply the said provisions indeed had been satisfied in the present case. The learned CIT(A) no doubt realized this patent and glaring mistake in the order of the AO, but still he appears to have not appreciated the limited scope of the provisions of Section 92 as applicable to the asst. yr. 2000-01 involved in the present case in the right perspective and proceeded to uphold the applicability of Section 92 without considering that the transaction in question was not covered within the scope and ambit of the said section as already discussed by us.
113. As such, considering all the facts of the case and keeping in view the legal position as emanating from the interpretation of the relevant provisions of Section 92 in the light of various judicial pronouncements as discussed above, we are of the considered opinion that although the transaction of sale of shares in question was between a resident, i.e., the assessee-company and M/s WIPL, a nonresident who were closely connected, the said transaction did not represent the business transacted between the said two parties in ordinary course and since the said shares held as investment by the assessee-company were the capital assets of its business, the income arising from the sale thereof was a capital gain and not the profits arising from the business. The conditions precedent for applying the provisions of Section 92 thus were not fully satisfied in the present case and since all the attributes required to invoke the said provisions were not in existence in respect of the said transaction of sale, we hold that the addition made by the AO and confirmed by the learned CIT(A) by invoking the said provisions was not sustainable in law. Similar is the position as regards the transactions involving transfer of shares by other two companies, i.e., M/s HCLCL and M/s SNIPL to M/s WIPL.
114. The learned Counsel for the assessee thereafter addressed arguments on the first proposition referable to the block assessment proceedings, which reads as follows :
(1) Can a disclosed transaction give rise to undisclosed income especially when it is not alleged that any amount over and above what has been disclosed has in fact passed ? As a corollary to the question the following question also arises for consideration : (i) Can a disclosed transaction assessed in regular assessment be at all assessed in the block period ?
The above issue can be conveniently decided along with the second proposition referable to block assessments viz., (2) Can invocation of Section 92 which gives rise to notional income be classified as undisclosed income ?
115. We shall first narrate the arguments of the learned Counsel for the assessee on the question whether Section 92 can at all be invoked when one makes a block assessment. According to him the provisions of Section 92 can be invoked only in a case where the assessment is made under Section 143(3) or under Section 148 and not when assessment is made under Chapter XIV-B of the Act. In this regard, his first submission was that Section 92 brings to tax a notional income. Such deeming provisions have to be construed strictly. Reference was made to the decision of the Hon'ble Madras High Court in the case of Balachander v. CIT wherein it was held that deeming provisions have to be strictly construed. He then referred to the definition of undisclosed income under Section 158B(b) which reads as follows :
158B. In this Chapter, unless the context otherwise requires,-
(b) "Undisclosed income" includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act or any expense, deduction or allowance claimed under this Act which is found to be false.
116. Referring to the various clauses in this definition the learned Counsel submitted that there was no bullion jewellery or other valuable article or thing found in the course of search. There was also no entry in the books of account or other documents or transactions, which represented income, which has not been or would not have been disclosed for the purpose of this Act. He laid emphasis on the fact that the entries in the books of account or other documents or transactions should first of all give rise to an income. Only if it gives rise to income can there be a disclosure or non-disclosure of such income. He then drew our attention to the definition of income as given in Section 2(24) of the Act and submitted that by the very nature of definition of income it contemplates something which should come in. Referring to the decision of the Hon'ble Supreme Court in the case of Raghuvanshi Mills Ltd. v. CIT it was submitted by him that the decision lays down that the word income was very wide and would include anything that is received and which swells the credit side of assessee's account. It was submitted that in the absence of anything coming in. it cannot be considered as income. He then drew our attention to provisions of Section 92 and submitted that the said provisions do not contemplate an assessee receiving an income, in the sense of something coming in to the hands of the assessee. The provisions apply whether or not an assessee actually receives something. In other words, these provisions deem something to be income in the hands of the assessee, even though the assessee has not received the same. It was submitted by him that the provisions of Section 92 by its very nature is something which the AO has to determine by using his discretion, whether or not the assessee has in reality earned any income. Therefore, according to him, it was not possible for an assessee to anticipate whether an AO would invoke his discretion and estimate an income under the provisions of the Section 92 of the Act. In these circumstances the assessee cannot be expected to disclose for the purposes of this Act an income, which could be brought to tax by invoking the provisions of Section 92 of the Act. It was thus submitted by him that in the absence of existence of an income under Section 92, the question of its disclosure will not arise for consideration at all. It was thus submitted by him that there cannot be disclosure of income falling within the ambit of Section 92.
117. He also drew our attention to the provisions of Section 158BA where the legislature has provided that in the case of search initiated after 30th June, 1995 the AO shall assess the undisclosed income in accordance with the provisions of Chapter XTV-B of the Act, notwithstanding anything contained in any other provisions of the Act. According to the learned Counsel for the assessee this non obstante clause in Section 158BA, by itself would rule out the applicability of the provisions of Section 92 of the Act in a block assessment proceedings. Section 158BH provides that other provisions of the Act will apply to an assessment made under Chapter XIV-B. This provision according to the learned Counsel is meant only for recovery of tax on undisclosed income determined under Chapter XIV-B of the Act. The other provisions of the Act only apply to assessment made and not assessment to be made under Chapter XIV-B.
118. The learned Counsel also referred to the provisions of Section 158BA(2) r/w Section 113 of the Act whereby undisclosed income is charged at the rate of 60 per cent apart from surcharge and penalty under Section 158BFA of the Act. According to him, it could never have been the intention of the legislature to tax an artificial income determined by applying the provisions of Section 92 of the Act, at such a high rate of tax. In this regard he also referred to the decision of the Hon'ble Supreme Court in the case of K.P. Varghese v. ITO wherein the Hon'ble Supreme Court has made an observation that even in the context of the provisions of Section 52(2) of the Act there was a necessity for availability of evidence to show that real income has been earned by the assessee. The aforesaid decision of the Hon'ble Supreme Court was rendered in the context of capital gain on transfer of capital asset. Under Section 52(2) of the Act if a capital asset being immovable property, is sold for a price which is less by 30 per cent of its value as per the guidelines, values fixed for registration of such property by the Registrar of Assurances, then the value fixed by the Registrar of Assurances will be deemed to be the price at which the property was sold by the assessee. Even in the context of such deeming provisions the Supreme Court had emphasized the need for evidence to be available on record to show that the assessee received something more than what has been stated in the instrument of transfer. The Supreme Court had opined that only real income can be taxed and not notional income.
119. He submitted that Section 92, which talks about fictional or notional income is antithesis of Chapter XIV-B of the Act, which only refers to income, which is earned but not offered to tax. It was submitted by the learned Counsel that the law does not oblige a trader to make maximum profit and in this regard referred to the decision of Hon'ble Supreme Court in the case of CIT v. A. Raman . The Supreme Court however, in the case of McDowell & Co. Ltd. v. CTO (supra) did cast shadow on this principle but in the case of Union of India and Anr. v. Azadi Bachao Andolan and Anr. (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC), the Supreme Court had observed that the law laid down in the case of A. Raman (supra) was very much relevant even today.
120. Reference was made to the decision of the Hon'ble Supreme Court in the case of CIT v. Gillanders Arbuthnot & Co. where the question before the Court arose in the context of the proviso to Section 12B(2) of the 1922 Act, whereby a person acquiring a capital asset from another person directly or indirectly connected at a particular price, the AO was empowered to substitute the full value of consideration received by the transferee, with the fair market value of the capital asset on the date of transfer. The Supreme Court had held that in the case of sale, the price bargained between the parties was to be adopted and no substitution of the fair market value can be made. It was submitted that even the provisions of Section 52(2) now stand deleted from asst. yr. 1988-89. Reference was made to the provisions of Section 158BB(3) which presupposes income already earned and not the income which is fictionally to be determined. It was thus submitted by him that the provisions of Section 92 by its very nature is such that it can never be applied while making block assessment under XIV-B of the Act.
121. The learned Counsel for the assessee then advanced arguments, with regard to question as to whether in a case where the assessee has already made disclosure regarding a particular transaction, can it be said that there was any undisclosed income. On this question learned Counsel first submitted that the form in which return of income is to be field by a corporate assessee, with reference to the regular assessment provisions of the Act, does not contemplate any disclosure of income earned by the assessee which could be subject to scrutiny under Section 92. He drew our attention to the provisions of Section 64 of the Act where there was an obligation on the part of the parents of minor children to club the income of minors in their hands. No such provision was available vis-avis the provisions of Section 92 of the Act. Even assuming Section 92 can be applied in a given case since the assessee and the two other companies in the present case, disclosed the capital gain on transfer of shares of M/s WIPL, there was no other disclosure contemplated. The provisions of Section 92 only apply to business transaction and not to capital gain. With regard to the disclosure contemplated under the Act, the learned Counsel drew our attention to the decision of the Hon'ble Supreme Court in the case of V.D.M. RM. M. RM. Muthaiah Chettiar v. CIT wherein the Hon'ble Supreme Court while dealing with the question as to when an assessee could be said to have failed to disclose material facts in the context of reassessment proceeding under the 1922 Act had held that where in the form of return prescribed under the IT Rules, there was no clause which required a particular disclosure of income, then it cannot be said that an assessee by not showing that income failed or omitted to disclose fully and truly all material facts necessary for his assessment.
122. The facts with regard to the disclosure made by the assessee in the regular return of income had already been set out and are not being repeated here.
123. The learned Counsel drew our attention to the provisions of Section 158BA(2) and the Explanation thereunder, wherein the legislature had clarified that the assessment under Chapter XIV-B is in addition to the regular assessment in respect of each previous year included in the block period and that undisclosed income of a block period should not include income assessed in any regular assessment. He also drew our attention to the provisions of Section 158BB(1) of the Act and submitted computation of undisclosed income has to be on the basis of evidence found as a result of search. He stressed on the use of the word 'evidence' and submitted that suspicion, conjectures, estimates, surmises and imagination is not evidence found in the course of search. The assessee submitted that in the light of the fact that this transaction of sale of shares was already disclosed as income under the head capital gain, could only mean that there was a proper disclosure by the assessee. The learned Counsel also drew our attention to the provisions of Sections 92E and 92C(3) of the Act as it applies from the assessment year 1st April, 2002 and submitted that under the present provision there was an obligation on the part of the assessee to make a specific disclosure, whereas under the old provisions which was applicable to the present case, there was no such obligation to make any disclosure. He referred to the fact that even in the block assessment proceedings, the AO treated the transaction as giving raise to a capital gain and not as a commercial transaction, giving rise to business income. The CIT(A) however came to a different conclusion that the income was from business. Both the Revenue authorities have acted de hors the material found in the course of search. Learned Counsel thereafter drew our attention to several judicial pronouncements of the various High Courts on the question as to whether in respect of a transaction, which is already disclosed can be subjected to tax as undisclosed income, in a block assessment proceedings.
(a) CIT v. Ravikant Jain (2001) 167 CTR (Del) 566 : (2001) 250 ITR 141 (Del)-the Hon'ble Delhi High Court in the aforesaid decision has emphasized the need that in a block assessment the scope and ambit is limited to the material unearthed during search and that assessment for the block period can only be made on the basis of evidence found as a result of search. The Hon'ble High Court found that the block assessment was framed not on the basis of material found as a result of search but on the basis of the report of a special auditor who had given a different colour to the existing facts which stood assessed by the AO in the earlier assessment orders and was not relatable to any seized material.
(b) Reference was made to the decision of the Hon'ble Bombay High Court in the case of CIT v. Vikram A. Doshi and Anr. . In this case the Hon'ble Bombay High Court had taken the view that transactions disclosed in return which was subject-matter of regular assessment ought not to be assessed in the block assessment.
(c) CIT v. Vinod Danchand Ghodawat -In this case the assessee in the wealth-tax returns, which was accepted by the Revenue, had disclosed value of gold and silver articles and jewellery. In the block assessment the source of investment in these articles found in the course of search was held to be not explained and the value of the articles was treated as unexplained investment giving rise to undisclosed income. The Bombay High Court held that since there was a disclosure of these articles in the wealth-tax return, the Revenue was not entitled to treat the same as undisclosed and make an addition in a block assessment.
(d) CIT v. Shyam Lal Balram Gurbani -In this case the assessee who was a partner in a partnership firm receiving income in the form of interest, salary and rent, did not file his return for three assessment years. The firm however had filed its return in which in the audited balance sheet for the three assessment years, these payments had been disclosed. The Court held that this disclosure in the firm's return was enough disclosure and, therefore, the income in question cannot be construed as undisclosed income.
(e) Bhagwati Piasad Kedia v. CIT -There was a search and seizure resulting in an order of block assessment of undisclosed income. During the block assessment the assessee was called upon to explain the advance taken from a company. The assessee had filed the confirmation letter of loan from the company including income-tax file numbers of the creditor. The IT authority held that the said loan was a fictitious one and was to be considered as undisclosed income of the assessee during the block period under consideration. On the question whether the AO was entitled to question the loan amount which was the subject-matter of a regular assessment, while making block assessment, the Court held as follows:
The Explanation to Section 158BA of the IT Act, 1961 makes it clear that the legislature thought it fit to make a distinction between the block assessment and the regular assessment. In the case of regular assessment, the AO is free to examine the veracity of the return as well as the claims made by the assessee, whereas the undisclosed income is taxed by way of block assessment as a result of search and seizure. The logic behind the two different modes of assessment is that concealment of income and claiming deduction or exemption in respect of a disclosed income cannot be treated at par. The former is an offence, which goes to the root of the matter and the other is on the basis of the causes shown by the assessee where the AO is free to accept the justification shown or reject the same. The Court therefore held, that the AO was not entitled to question in block assessment the loan which was a subject-matter of the regular assessment. That the AO was wrong in holding that the said sum could be taxed in block assessment although the same featured in the regular books of account. When the loan creditor was an assessee and in whose assessment the loan advanced had been accepted by the Revenue, the AO was wrong in holding that the assessee was liable to pay tax on that loan money taken from that assessee.
124. Besides the aforesaid decisions, reference was made to several other decisions laying down similar propositions. In conclusion on this issue, the learned Counsel brought to our notice the manner in which the CIT(A) has dealt with this issue. In para 5.8 of his order the CIT has held that the mere fact that the assessee filed a return prior to the search, in which the transactions stood disclosed was not enough to hold that the same cannot be subject-matter of a block assessment proceeding. This conclusion, it was submitted, was contrary to the several decisions relied upon by the learned Counsel for the assessee.
125. He drew our attention to para 10.85 of the CIT(A)'s order wherein the submissions of the assessee with regard to non-applicability of the Section 92 to the transactions in question was referred to but not considered by the CIT(A). The CIT(A) also brushed aside the fact that the assessee had already disclosed this transaction in the regular return of income and the fact that the same stood assessed by the AO under the head capital gains in the regular assessment. The learned Counsel also submitted that the CIT(A) placed the onus on the assessee to prove that the consideration paid was just and proper, when in law, it was for the Revenue to establish that the assessee had earned income which had not been disclosed.
126. The submissions of the learned Counsel for the Revenue on the issue as to whether a disclosed transaction can give rise to an undisclosed income was that the seized material did reveal that the shares of M/s HCL Consulting Ltd. were held by the assessee not as an investment but as a stock-in-trade in the business of promoting and controlling other companies. The learned Departmental Representative referred to the statement of Mr. Shiv Nadar, President, Chairman, CEO of M/s HCL Technologies Ltd. as well as Director in several companies belonging to the HCL group. The learned Departmental Representative referred to the fact that in his statement he had admitted that the activity of the assessee was investment planning, investment monitoring, governance monitoring such as audit and overall strategic planning. He also referred to the various evidence found during the course of search which clearly go to prove that the shares were held as stock-in-trade. The learned Departmental Representative submitted that the Assessee was in the business of managing various companies belonging to HCL Group. It is a primary business of assessee for planning investments, monitoring and governing. According to the learned Departmental Representative it was only consequent to search and the material found in the course of such a search that it came to light that the shares of M/s HCL Consulting Ltd. which were sold to M/s WIPL were held as stock-in-trade and that its sale was a business transaction attracting the applicability of the provisions of Section 92.
(a) Our attention was drawn to seized documents exhibit P. 2/AS/155. This is a letter from one Mr. Anil Channana an employee of M/s HCLCL. This letter is dt. 20th Jan., 1997 and addressed to one Mr. A.S.T. Rajan. Reference is made to a fax message dt. 20th Jan., 1997 and the fact that the said letter was in reply to the said fax message is also referred to in this letter. There is a reference to the shares of M/s HCL Consulting Ltd. being capable of valued at Rs. 200 to Rs. 400 as on 20th Jan., 1997 on the basis of a multiplying factor of 2.5 or 5 being applied to the sales revenue. There is also a comparison of the value at which a similarly placed company which is half the size of M/s HCL Consulting Ltd. having been quoted at 4.6 times its project revenue for 1997. Besides the above, there is a reference about the shareholding pattern of M/s HCL Consulting Ltd. (HCLCL)
(b) The next document referred to by the learned Departmental Representative ext.-P2/AS/54 which is first a letter dt. 25th Feb., 1997 from Anil Channana of M/s HCLCL to one A.S.T. Rajan. This letter refers to the discussion which the parties had on 25th Feb., 1997 regarding TEMASEK proposal. In this letter there is a reference regarding IPO (initial public offer) of M/s HCLCL. There is also an alternative suggestion to issue convertible bonds. There is a third proposal of Slocum (SIPL) (i.e., the assessee) forming a joint venture with TEMASEK in Mauritius in which Slocum (i.e., the assessee) will make its equity contribution in the form of its holding of equity shares in M/s HCL Consulting Ltd. and other entities. The valuation of the equity contribution being done at a particular figure is also mentioned in this letter. The letter further highlights that this will be a mode of transferring shares to a special purpose vehicle (SPV). TEMASEK was to contribute to the equity and debt in such joint venture company to be found. There is a suggestion that the contribution of debt by TEMASEK could be convertible or exchanged for the equity stock held by the SPV/M/s Slocum (i.e. the assessee) would get back some consideration against shares transferred to SPV in the form of cash which could be brought in by TEMASEK. There is also a reference in this letter that once the shares are offshore there is a possibility of putting structure around the same.
127. Pointing out to the aforesaid two letters found in the course of a search, the learned Departmental Representative submitted that even in, February, 1997, the date of the second letter, there was a public issue of shares, of HCL in contemplation. In fact an investment by the Mauritius-based company was also thought of. It was also pointed out by the Departmental Representative that the assessee is in the business of promoting companies and joint ventures and the above letters are a clear indication of a desire to offer shares of M/s HCL Consulting Ltd. to the public and the mode in which promoters were to retain control of M/s HCL Consulting Ltd.
128. The learned Departmental Representative next drew our attention to seized documents P. 2/A.2/157. This is a letter dt. 5th June, 1998 by Anil Chanana to Mr. Shiv Nadar. This letter contains various subjects. Our attention was drawn to para 4 of this letter in which there is a discussion about loan to FEC from M/s HCL Consulting Ltd. There is also a reference to investments in HCL (HCLT) Technologies, Bermuda. The learned Departmental Representative thus submitted that M/s HCL Consulting Ltd. and HCLT, Bermuda existed even as early as 5th June, 98 and that the initial public offer of HCLT, Bermuda was connected with the IPO of M/s HCLCL.
129. Our attention was drawn to seized documents P.2/A.2/105 which is a letter dt. 13th June, 1998 by Anil Chanana to one Parwiz. This letter contains certain directions by Mr. Anil Chanan to Mr. Parwiz. It is submitted by the learned Departmental Representative that Mr. Perwiz was a person engaged in promoting paper companies in Mauritius. This letter according to the Departmental Representative shows that the Mauritius companies were acting under instructions and under control and management by HCL group, India. A reference was made to Ext. P.2/A.2/113 which is a letter dt. 20th Jan., 1998 by Vamasundari Investments (P) Ltd. to Magnus Capital Corporation Ltd. This letter makes a reference to M/s Magnus acquiring shares on behalf of and for the benefit of Vamasundari Investments (P) Ltd. (VSIPL). Similarly our attention was drawn to ext. P.4/A4/17 which is a shareholding as on 13th Sept., 1999 in the capital of M/s HCL Consulting Ltd. Similarly a reference was made to P.6/A1/13 which is a letter from Nilesh Agarwal to Pricille Koeing of Mauritius. Mr. Nilesh Agarwal is DGM Finance of M/s HCL group. In this letter, Mr. Nilesh Agarwal instructs Precille of Mauritius to incorporate minutes of board whereby VSIPL would give up the idea ,of purchasing shares of M/s HCL Consulting Ltd. from the assessee. A reference was made to Ext P.6/A1/23 a letter dt. 25th Sept., 1998 from Nilesh Agarwal to Precile of Mauritius whereby funds are arranged from India by HCL Corporation for use by VSIPL. Our attention was also drawn to a letter dt. 8th Oct., 1998 being P.6/A1/29 which is a similar letter from Nilesh Agarwal to Precile following up the arrangement of funds to VSIPL for purchase of shares of HCL/HDMauritius (P) Ltd. Similar letters being P6/A1/30, P6/A1/104 dt. 10th Oct., 1998 and 2nd Feb., 2000 in connection with remittance of funds to. VSIPL are also documents found in the course of search. Ext. P6/A14/89 is a C.A's Certificate regarding the shareholding pattern in M/s WIPL, Mauritius, The total shares of this company are US 3 dollars and these shares are held by I.T. CON Investments (P) Ltd. and VSIPL.
130. The learned Departmental Representative submitted that though the aforesaid seized documents have not been referred to by the AO in his order, since these documents are material for arriving at a conclusion on the issues involved in the present appeal, he was competent to place reliance on the same. In this regard reliance was placed by the learned Departmental Representative on the decision reiterated in the case of Uttam Construction Co. v. CIT .
131. The learned Departmental Representative submitted that the provisions of Section 92 would not apply in the context of a capital gain but if it is established from the seized material that there was a business connection, then the provisions of Section 92 would stand attracted. The learned Counsel for the assessee drew our attention to the provisions of Section 92 of the Act and submitted that when the business of the assessee was investment planning, monitoring and governance the holding of the shares of M/s HCL Consulting Ltd. cannot be said to be an investment. It was submitted that the evidence found in the course of search clearly points out that the shares were held as a stock-in-trade. It was submitted that under the provisions of Section 92 income is deemed to accrue or arise to an assessee by a legal fiction and therefore it has to be considered as a real income. It was further contended that in the light of evidence found in the course of search, it was clear that the domain and control of M/s WIPL was with the assessee. In this regard reference was made to the decision of the Hon'ble Supreme Court in the case of CIT v. Best & Co. (P) Ltd. wherein it has been held that in the context of deciding whether compensation given for loss of agency was a taxable income or not. Adverse inference could be drawn against the assessee if he had suppressed documents and evidence which were exclusively in his possession.
132. With regard to the contention of the learned Counsel for the assessee that no specific form of disclosure is contemplated by Section 92 of the Act. The learned Departmental Representative submitted that the definition of undisclosed income as laid down in Section 158B(b) is an inclusive definition and the expression used therein "would not have been disclosed for the purposes of this Act". According to Departmental Representative there is no requirement in the definition that a disclosure has to be made in pursuance of any requirement to disclose under any provisions of the Act. He submitted that the facts with regard to the connection of the assessee with M/s WIPL was not disclosed and secondly the fact that the sale of shares was in the course of business was not disclosed. The learned Departmental Representative also drew our attention to the provisions of Section 158BB(1) and submitted that while making a block assessment, the AO is empowered not only to use the material or evidence found as a result of search but also was entitled to fall back upon other materials and available with the AO and relatable to such evidence, i.e., the evidence found in the course of search. According to him the evidence found as a result of search revealing applicability of Section 92 in respect of transaction of sale of shares of M/s HCL Consulting Ltd. to M/s WIPL and the material already available with the AO viz., the disclosure of the transaction by the assessee would be sufficient to make the impugned addition in the block assessment. The learned Departmental Representative submitted that there has to be a harmonious construction of the definition of undisclosed income as contained in Section 158B(b) and Section 158BB(1) of the Act, prescribing the mode of computing undisclosed income.
133. We have considered the rival submissions. "Undisclosed Income" has been defined in the Act as follows:
158B. In this Chapter, unless the context otherwise requires,-
(b) 'Undisclosed income' includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act, or any expense, deduction or allowance claimed under this Act which is found to be false.
134. The underlined portion (in italics) in the definition above was inserted by the Finance Act of 2002, w.e.f. 1st July, 1995. In the memo explaining the above amendment, it has been stated as follows:
Rationalisation of the provisions of Chapter XIV-B relating to block assessments in cases of search and requisition The existing provisions contained in Chapter XIV-B of the IT Act provide for a single assessment of undisclosed income of a block period of six years, in cases of search under Section 132 or requisition under Section 132A, and lay down the manner in which such income is to be computed, and the interest or penalty which may be levied in certain circumstances. In order to remove inconsistencies in some of the provisions of block assessment and to rationalise the provisions it is proposed to.
(i) amend the definition of undisclosed income in Clause (b) of Section 158B to specifically include therein income based on entries in books of account or other documents which represent a false claim of any expense, deduction, or allowance under the IT Act;
135. In Circular No. 8 of 2002, dt. 27th Aug., 2002 of CBDT, these provisions have been explained to have been introduced for the following purposes:
61.1 The existing provisions contained in Chapter XIV-B of the IT Act provide for a single assessment of undisclosed income of a block period of six years, in cases of search under Section 132 or requisition under Section 132A and lay down the manner in which such income is to be computed, and the interest or penalty which may be levied in certain circumstances.
61.2 The existing provisions of Clause (b) of Section 158B defines undisclosed income to include income or property which has not been or would not have been disclosed for the purposes of the Act, and which is represented by any money, bullion, jewellery or other valuable article or thing, or by any entry in the books of account or other document or any other transaction. It has been noticed that in some cases the appellate authorities have taken a view that this definition covers only property or receipts which have not been disclosed and does not cover income represented by entries in respect of false claims of expenses or deductions. Such view is contrary to the intention underlying the provision of bringing to tax the entire undisclosed income, including income which has been suppressed by making false claims of expenses or deduction, which have been discovered as a result of search or requisition.
61.2.1 The Finance Act, 2002 has amended the definition of undisclosed income in Section 158B to specifically include therein income based on entries in books of account or other documents which represent a false claim of any expense, deduction, or allowance under the IT Act.
(Underlining by us, italicised in print, for emphasis)
136. The facts with regard to the filing of the return of income for the asst. yr. 2000-01 by the assessee, M/s HCLCL and M/s SNIPL have already been narrated by us in paras 3 to 5 of this order. It is not in dispute that the assessee and the two other companies duly disclosed the fact that they had sold the shares held by them in M/s HCL Consulting Ltd. to M/s WIPL of Mauritius. The AO has also accepted the return of income filed by the assessee in proceedings under Section 143(3) of the Act. As far as M/s SNIPL is concerned, an intimation has been issued accepting the return of income filed by the said company. As far as M/s HCLCL is concerned, a return of income had been filed disclosing the transaction in question. The submission of the learned Counsel for the assessee was that there had been a disclosure of the above transactions. In. this connection we have perused the paper, book and we find that there was a proper disclosure of these transaction in the returns filed by the assessee and two other companies in their return of income.
137. Even assuming that the transactions in question are a business transaction, the learned Counsel for the assessee submitted that under Section 92 there is no such form in which disclosure has to be made by the assessee. From a reading of the provisions of Section 92 of the Act, it is clear that while applying the provisions of Section 92 it is always the duty of the AO, to consider the transaction between a resident and non-resident and thereafter determine the profit, which a resident could have earned in the transaction with a non-resident, and such income has to be included in the total income. These are deeming provisions and the assessee is not expected to make any disclosure in this regard. A reading of the provisions of the Section 92 by its very nature would show that it was only the duty of the assessee to disclose the income from transaction with non-resident and it was up to the AO to estimate such income subject to the fulfillment of conditions laid down in Section 92 and there was no duty on the part of the assessee to disclose anything in this regard. Under the new provisions of Section 92 as they exist from 1st April, 2002, an assessee is obliged to make certain disclosure regarding the arms length price in an international transaction. Under the new provisions, there is also a duty to file a report of Auditor. As per the old provisions prevalent prior to 1st April, 2002 which are applicable in the present case, there was no such obligation. Rules 10 & 11 of IT Rules, 1962 as applicable to asst. yr. 2000-01, when the transaction in question had taken place, read as follows :
10. Determination of income in the case of non-residents.-In any case in which the AO is of opinion that the actual amount of the income accruing or arising to any non-resident person whether directly or indirectly, through or from any business connection in India or through or from any property in India or through or from any asset or source of income in India or through or from any money lent at interest and brought into India in cash or in kind cannot be definitely ascertained, the amount of such income for the purposes of assessment to income-tax may be calculated:
(i) at such percentage of the turnover so accruing or arising as the AO may consider to be reasonable, or
(ii) on any amount which bears the same proportion to the total profits and gains of the business of such person (such profits and gains being computed in accordance with the provisions of the Act), as the receipts so accruing or arising bear to the total receipts of the business: or
(iii) in such other manner as the AO may deem suitable.
11. Determination of income from transactions with non-residents.-The profits and gains derived from any business carried on in the manner referred to in Section 92 may be determined for the purposes of assessment to income-tax according to Rule 10.
The above rules do not also call for any specific disclosure regarding transaction with a non-resident by a resident. Under the provisions of Sections 92E and 92C(3) of the Act as it applies from 1st April, 2002 there is an obligation on the part of the assessee to make a specific disclosure, whereas under the old provisions which was applicable to the present case, there was no such obligation to make any disclosure.
138. The Hon'ble Supreme Court in the case of V.D.M. RM. M. RM. Muthiah Chettiai v. CIT (supra) was dealing with a question as to when an assessee could be said to have failed to disclose material facts in the context of reassessment proceeding under the 1922 Act. It held that where in the form of return prescribed under the IT Rules, there was no clause which required a particular disclosure of income, then it cannot be said that an assessee by not showing that income failed or omitted to disclose fully and truly all material facts necessary for his assessment. The learned Departmental Representative however submitted that this decision was no longer good law in view of the decision in the case of CIT v. P.K. Kochammu Amma Peioke . We have perused the. said judgment and do not agree with the contention of the learned Departmental Representative The Hon'ble Court in the case of Kochammu (supra) has pointed out that there was no column in the form of return about disclosure of income of others includible in the total income of the assessee but there was a note in the form to that effect and that such note should be enough to hold that there was a duty on the part of the assessee to disclose income of others which is includible in his income. Thus the principle laid down in the case of Muthiah Chettiar (supra) has-been only reiterated but distinguished on the ground that the note in the form of return of income has been overlooked. We therefore hold that the principle regarding duty to disclose pursuant to any provision of law still holds good and would be a condition precedent in the context of undisclosed income. Even this principle is recognized under the provisions of Section 158BC(1)(c) where if income is below taxable limit, non-furnishing of return of income has been considered as not giving raise to undisclosed income.
139. Since no specific form of disclosure is contemplated by the Act as well as the Rules and the form of return prescribed, an assessee can never be held to be guilty of non-disclosure of income which is determined by applying the provisions of Section 92. We therefore hold the disclosure of the transaction in question as done by the assessee was sufficient in law. A question might arise as to whether the fact that the sale of shares was to a non-resident at least ought to have been disclosed by the assessee. We have already noticed the lacunae in the provisions of Section 92 and the Act and Rules in this regard and as to how the law w.e.f. 1st April, 2002 prescribes sufficient safeguards. As the law stood at the relevant point of time which is the previous year relevant to asst. yr. 2000-01, there was no specific form of disclosure contemplated.
140. The next question is as to whether a disclosed transaction can give rise to undisclosed income. In this regard, we deem it appropriate to set out the scope of block assessment proceedings as explained by the Hyderabad Bench of Tribunal in the case of Essem Intra-port Services (P) Ltd. v. Asstt. CIT (2000) 68 TTJ (Hyd) 103 : (2000) 72 ITD 228 (Hyd):
Chapter XIV-B lays down special procedure for assessment in search cases. The special procedure set out in Chapter XIV-B is a separate set of rules by itself. For the purposes of this chapter, the term 'undisclosed income' is defined. The definition of the term 'undisclosed income' is given in an 'inclusive' manner, but it is again made clear under Section 158B(b) that 'undisclosed income' includes money, bullion, jewellery, etc. only if they represent income or property which has not been or would not have been disclosed for the purposes of this Act. Therefore, we find that even though 'undisclosed income' is defined in an 'inclusive' manner, the scope and extent of the term 'undisclosed income' for the purposes of this Chapter XIV-B is contingent upon the fact that the undisclosed income should be borne out of materials representing income or property which has not been or would not have been disclosed by the assessee for the purposes of this Act. When certain information and details are already furnished in the returns of income or statements accompanying thereto, filed before the 'Department, or when certain information and details are already recorded in the books of account maintained in the regular course of business, based on which returns of income would be filed in normal course, that very same information and details cannot be re-examined in the course of block assessment proceedings to arrive at any fresh conclusions, so as to result in determination of undisclosed income based on those materials. The true nature of undisclosed income, as it is construed in Chapter XIV-B is that the assessee has not or would not have disclosed that income to the Department in the normal course, and such income should be found out by the Department as a result of search or requisition of books and details as provided under Section 132 of the IT Act. Thus, there are two elements to be satisfied so as to be treated as undisclosed income for purposes of this Chapter, i.e., the factum of nondisclosure on the part of the assessee should be existing, and the said nondisclosure should have been blown out as a result of search or requisition of books, etc. under Section 132 of the Act. It naturally follows, therefore, that whenever, the assessee has disclosed necessary information and details regarding income or expenses or credit or property in the returns of income or in the statements accompanying the returns, or even if the books of account based on which returns would be filed contain those details, assessee gets away from the clutches of non-disclosure in respect of that income or property, etc. because those materials are already available, even in the absence of any recourse to search operations under Section 132.
141. A perusal of the aforesaid decision of the Tribunal clearly shows that two elements have to be satisfied before the income can be said to be undisclosed income:
(a) there should be a factum of non-disclosure on the part of the assessee
(b) such non-disclosure should have been detected as a result of search.
142. We have already noticed that there was a proper disclosure of this transaction in the regular returns of income filed by the assessee and the two other companies even prior to the search. Even this fact is not disputed by the AO. But the only reason assigned by the AO is that from an analysis of the seized document it transpired that the assessee with wilful intent to avoid capital gain tax that may arise in future transferred shares to associate foreign company at a tax neutral price and that Section 92 of the Act was clearly attracted. That these facts came to the knowledge of the Revenue only on the basis of incriminating documents found in the course of search. It has been held in a series of cases by the various High Courts that if there has been a disclosure by the assessee in the regular returns of income, then no assessment could be made in respect of such transactions in a block assessment as undisclosed income. In the case of N.R. Paper & Board Ltd. v. Dy. CIT (1998) 146 CTR (Guj) 612 the Hon'ble Gujarat High Court have at p. 742, pointed out that the process under Chapter XIV-B did not disturb the assessments already made, of the previous years, and was only intended to "sniff out what had remained hidden and would not have been disclosed by the assessee". In the case of Shamlal Balram Gurbani (supra), the Hon'ble Bombay High Court held that income disclosed by firm in its audited balance sheet could not be treated as undisclosed income for purpose of block assessment. In the case of Ravi Kant Jain (supra), the Hon'ble Delhi High Court has held that the scope and ambit of Chapter XIV-B is limited to "material unearthed during search". In the case of Vikram A. Doshi (supra), the Hon'ble Bombay High Court held that the transactions disclosed in returns "by no stretch of imagination can be said to be undisclosed transactions falling under Section 158B" and "ought to have been assessed in the regular assessment and not in the block assessment".
143. The other argument of the learned Departmental Representative was that incriminating documents found as a result of search and the disclosure already made by the assessee did reveal existence of undisclosed income. Even in such a case, we are of the view that proceedings under Chapter XIV-B is not the appropriate remedy as has been laid down in the various decisions referred to above.
144. Explanation to Section 158BA(2) reads as follows :
Explanation-For the removal of doubts, it is hereby declared that-
(a) the Assessment made under this Chapter shall be in addition to the regular assessment in respect of each previous year included in the block period;
(b) the total undisclosed income relating to the block period shall not include the income assessed in any regular assessment as income of such block period.
(c) The income assessed in this Chapter shall not be included in the regular assessment of any previous year included in the block period.
We have already noticed that the assessee filed return of income for asst. yr. 2000-01 disclosing the income (loss) on sale of shares of M/s HCL Consulting Ltd. to M/s WIPL, Mauritius. An order of assessment dt. 27th March, 2003 under Section 143(3) has also been passed by the AO. The present order by the AO in the block assessment proceedings has been passed on 27th Feb., 2004. Thus the income in question as far as M/s Slocum Investment (P) Ltd. (i.e. the assessee) has already been assessed in regular assessment and therefore assessing the same income under Chapter XIV-B would be against the provisions of Section 158BA(2) Expln. (b). Even on this ground the assessment under Chapter XIV-B is liable to be set aside. As far as M/s SNIPL and M/s HCLCL are concerned, we have already held that the assessment of their alleged undisclosed income in the hands of the assessee was not valid.
145. The provisions of Section 158B(b) inserting the words "or any expense, deduction or allowance claimed under this Act which is found to be false" in the definition of undisclosed income might give an impression that even disclosed transactions, if found to result in undisclosed income as a result of material found in the course of search, is covered by the said definition. We are of the view that the present case is not a case where any expense, deduction or allowance was claimed by the assessee. Moreover it is not the case of the Revenue that the assessee received some consideration over and above Rs. 50 per share. In such circumstances it cannot be said that "any claim of assessee has been found to be false". Therefore even the amended provisions of law do not help the case of the Revenue.
146. The undisclosed income assessed in the present ease does not fall within the domain of Chapter XIV-B as there had already been a disclosure of the transaction in the regular books of account maintained by the assessee, M/s HCLCL and M/s SNIPL and since such disclosure was already made in the returns filed prior to the search, the impugned addition is liable to be deleted being beyond the scope and ambit of Chapter XIV-B :
147. As a result of our decision rendered hereinabove in paragraph Nos. 113 and 146 holding that the additions made by the AO and confirmed by the learned CIT(A) by invoking Section 92 were not sustainable in the facts of the present case and in any case, the said additions were beyond the scope of block assessment proceedings under Chapter XIV-B, the issue relating to the ascertainment of exact arm's length price (fair market value) of the shares of M/s HCL Consulting Ltd. at the relevant time has become only academic. We. therefore, do not deem it necessary or expedient to decide the same although elaborate arguments have been advanced by the learned representatives of both the sides on this issue at the time of hearing before us. Similarly, the alternative contentions raised by the learned Departmental Representative to support the Revenue's case by placing reliance on the provisions of Section 93 as well as on the decision of Hon'ble Supreme Court in the McDowell's case have also been rendered only academic as a result of conclusion drawn by us that the relevant transactions of purchase/sale of shares having been already disclosed by the assessee, the addition in respect of the same, if any, could be made in the regular assessment and not in the block assessment.
148. The fourth issue referable to block assessment viz., whether the search itself is valid because of absence of satisfaction or conditions under Section 132(1)(c) does not require any detailed analysis in view of the decision of the Special Bench of the Tribunal, Delhi in the case of Promain Ltd. v. Dy. CIT (2005) 95 TTJ (Del) 825 : (2005) 95 ITD 489 (Del) and the Hon'ble High Court in the case of M.B. Lal v. CIT , wherein it has been held that the Tribunal does not have power to adjudicate upon the validity of search on the ground of non-satisfaction of the conditions prior to issue of a warrant of search. The fifth issue referable to block assessment viz., whether the block assessment is invalid in view of defective notice Under Section 158BC of the Act is again an issue which has already been decided by the Special Bench of the Tribunal, Amritsar Bench in the case of Smt. Mahesh Kuman Batta v. Jt. CIT (2005) 95 TTJ (Asr) 461 : (2005) 95 ITD 152 (Asr) wherein it has been held that any defect in notice under Section 158BC of the Act will not vitiate the order of assessment. In view of the above, these issues are decided against the assessee.
149. In the result, the appeal of the assessee is partly allowed.
150. Now we shall take up the Revenue's appeal for consideration which is IT(SS) A. No. 45/Del/2005.
151. The first ground of appeal of the Revenue reads as follows:
On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the addition of Rs. 89,47,59,623 made on account of sale of shares of M/s HCL-HDX Holdings (Mauritius) (P) Ltd. to M/s Vamasundari (P) Ltd., Mauritius at less than the market price by manipulation.
The assessee (Revenue) has sought leave to raise the following additional ground for adjudication:
On the facts and circumstances of the case, CIT(A) has erred in deleting the addition of Rs. 89,47,59,623 made on account of sale of shares of M/s HCL Deluxe NV by M/s HCL-HDX Holdings (Mauritius) (P) Ltd. to Deluxe Corporation USA.
152. Leave to raise the additional ground is granted. The original ground and the additional ground permitted to be raised as above are taken up for consideration together. The facts and circumstances which are relevant for adjudication of the aforesaid ground of appeal are as follows. The three important HCL investment companies of HCL group namely M/s HCLCL, M/s SNIPL and Slocum Investment (P) Ltd. incorporated a 100 per cent Subsidiary Company Wholly Owned Subsidiary (WOS) in Mauritius namely M/s HCL-HDX Holdings (Mauritius) (P) Ltd. in the month of June, 1997. Subsequently, in September. 1997 a joint venture between HCL-HDX Holdings (Mauritius) (P) Ltd. and Deluxe Corporation USA was formed on the basis of 50 per cent equity holding by each party in the name of HCL Deluxe NV. This joint-venture company that is HCL Deluxe NV had two 100 per cent Subsidiary companies namely HCL Deluxe USA and HCL Deluxe India (P) Ltd. The joint venture company along with its two subsidiaries commenced operation in 1997 and the nature of business was to provide income-tax consulting and business process management. The following chart will explain the position of shareholding :
HCL Corporation Ltd. Slocum Investment (P) Ltd. Shiv Nadar Investment (P) Ltd.
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|
HCL-HDC Holdings (Mauritius) Deluxe Corporation USA
(P) Ltd. (50%) (50%)
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|
HCL Deluxe NA (Joint Venture)
HCL Deluxe India (P) Ltd. HCL Deluxe USA
The three Indian investment companies namely M/s HCLCL, M/s SNIPL and Slocum Investment (P) Ltd. sold their 100 per cent shareholdings in HCL-HDX Holdings (Mauritius) (P) Ltd. to M/s Vamasundari Investment (Mauritius) (P) Ltd. hereinafter called VSIPL(M) for a consideration of US $ 2.11 million (approx.) in September, 1998. HCL-HDX Holdings (P) Ltd. Mauritius, which became Wholly Owned Subsidiary (WOS) of VSIPL(M) Investments (P) Ltd. (Mauritius), in turn, sold the shares of HCL Deluxe to Deluxe Corporation of the USA, for US $ 23.4 million in April, 1999.
153. It may be relevant at this stage to point out that for establishing of joint venture company, the assessee and the two other companies were granted permission/approval by the RBI vide its letter dt. 31st March, 1997. Later on this approval was modified by letter dt. 24th May, 1997. Initially the joint venture company was to be at Austria. As per modified certificate, the joint venture company was to be located at Mauritius. It is consequent to such approval that the company M/s HCL-HDX Holdings (Mauritius) (P) Ltd. was formed. It was incorporated according to the Laws of Mauritius and was a tax resident of the Republic of Mauritius.
154. When the shares of HCL-HDX Holdings (Mauritius) (P) Ltd. were sold by the assessee and the two other companies to VSIPL(M), the shares were valued by M/s Purushottaman Bhutani & Co. Chartered Accountants. The consideration for sale of the shares had been paid by VSIPL(M) to the assessee and the two other companies and the foreign inward remittance certificate dt. 28th Sept., 1998, 6th Oct., 1998, 14th Oct., 1998 and 5th Dec., 1998 evidencing such payment to the assessee and the two other companies are placed at page Nos. 1719 to 1723 of the assessee's paper book. The sale of the shares by the assessee and the two other companies had been duly approved by the RBI vide its letter dt. 3rd Nov., 2001, a copy of which is placed at page No. 1724 of the assessee's paper book.
155. The AO was however of the view that based on the seized documents found in the course of search it was clear that the shares were sold by the assessee to VSIPL(M) at a lower value and this had been done with a view to avoid the incidence of capital gains tax which the assessee and the two other companies would have incurred had the shares been sold at a proper price. In this connection the AO also found fault with the assessee having obtained the valuation of shares from M/s Purushottaman Bhutani & Co. According to the AO the valuation of shares at the time of sale ought to have been done by experts in valuing of technology stocks like Merrill Lynch, Alex Ground, JP Morgan, Morgan Stanley, etc.
156. The AO thereupon called upon the assessee to give the following particulars along with supporting evidence:
(a) the details of the funds available with VSIPL(M) during the period 1st April, 1998 to 31st Dec., 1999 with datewise in-flow and outflow of funds and copy of bank statement;
(b) copy of agreement between VSIPL(M) and Deluxe Corporation of USA for sale of 50 per cent ownership interest in M/s HCL-HDX (Mauritius) (P) Ltd.
(c) The circumstance under which VSIPL(M) had to sell the ownership interest to Deluxe Corporation of USA.
157. In reply the assessee submitted that with reference to point (a) above it neither is in possession nor is expected to be in possession of the aforesaid details which AO may obtain directly from the said company. With reference to points (b) and (c) the assessee pleaded inability to comply with the same as the assessee was not a party to the agreement.
158. The AO took up for consideration the following issues:
A. Has the assessee-company sold their 100 per cent shareholding in HCL-HDX Holdings (Mauritius) (P) Ltd. to a company namely "M/s VISPL(M)" in normal course of business after applying due business acumen.
B. Whether the whole transaction was designed in such a manner that resulted into the diversion of income and evasion of income-tax in India.
C. If it is designed, then who are the real beneficiaries and how they did it.
D. What is the evidence available which supports the argument that the whole transaction was designed with some ulterior motive.
E. Whether the assessee-company is really not in a position to provide the information asked for on 17th Feb., 2004.
F. Whether the assessee-company and M/s VISPL(M) are totally independent of each other.
G. What were the circumstances which led M/s VISPL(M) to sell its 50 per cent ownership interest in the "HCL Deluxe NV" to the Deluxe Corporation of the USA.
H. Did M/s VISPL(M) have sufficient funds to purchase the shares of HCL-HDX Holdings (Mauritius) (P) Ltd. from the assessee-company?
159. The AO answered each of the questions with reference to the seized documents.
A. On the question that VSIPL(M) having sufficient funds to purchase the shares of HCL-HDX Holdings (Mauritius) (P) Ltd., the AO concluded that they did not have any funds. In this connection the AO referred to p. 30 of Annex. A-1 of Party P-6 which is a letter dt. 10th Oct., 1998 by Nilesh Agarwal, a key person in HCL Group from India addressed to one Priscille Koeing of Mauritius. In this letter there is a reference to remittance of certain funds into the account of VSIPL(M) and a further instruction to transfer funds to the assessee and the two other companies. There is also a further direction in the said letter that in future further funds would be deposited and such funds should be utilized in the manner directed. Further reference was also made to P-23 of Annex. A-1 Party P-6 which is a letter dt. 25th Sept., 1998 by Nilesh Agarwal to Prescille Koeing. Here again there is a reference to a deposit of funds to M/s VSIPL(M) and further instruction to transfer the same to M/s SNIPL towards consideration for purchase of shares in HCL-HDX Consulting (Mauritius) (P) Ltd. These letters which are copies of e-mail were in a paper with the heading "HCL Corporation Ltd.". From the above, the AO concluded that funds for purchase of shares were provided to VSIPL(M) from the assessee-company.
B. On the question whether the assessee-company and VSIPL(M) are totally independent of each other, the AO observed that apart from the letters referred to in (A) above the document page No. 105 of Annex. A-2 Party P-2 threw light on the degree of control exercised by the assessee on M/s VSIPL(M), In this letter which is on a plain paper in the form of an e-mail dt. 13th June, 1998 there is some instruction regarding singing of agreement on behalf of VSIPL(M). This is authored by Mr. Anil Chanana, a key person in HCL Group. These are addressed to Mr. Parwez and Mr. A.S.T. Rajan respectively. Another reference was made to p. 8 of Annex. A-23 seized from party P-4. This is a dollar-cash flow for the period 1st April, 1999 to 31st May, 1999. There is a scribbling on top of this chart "Mr. Nadar 31st May, 1999". In this dollar-cash flow the receipt in US dollars of 2,44,34,225 has been shown against-HDX sale as an in-flow of dollars. From this the AO concluded that VSIPL(M) and the assessee were closely connected. Another reason given by the AO was that Shiv Nadar was the chairman who had major shareholdings in other companies belonging to the HCL group of companies. He was also a director in M/s VSIPL(M) and a signatory in some of the bank accounts standing in the name of the said company. He was also receiving salary from HCL-HDX Holdings (Mauritius) (P) Ltd. The AO therefore concluded that VSIPL (M) was controlled by the assessee and its group companies through Mr. Shiv Nadar.
C. On the question of the circumstances leading to the sale of 50 per cent of the ownership interest in HCL Deluxe NV to Deluxe Corporation of USA, the AO held that the Deluxe Corporation of USA who was the 50 per cent joint venture partner in HCL Deluxe NV was not comfortable with the joint venture with HCL-HDX Holdings (Mauritius) (P) Ltd. In this regard the AO had referred to a seized document which is letter dt. 29th Nov., 2001 from Turchan Markp. According to the AO the stand taken in the letter clearly showed that a split in the joint venture was contemplated long before the actual sale of shares to Deluxe Corporation (USA). The AO referred to the agreement between VSIPL(M) and M/s Magnus Capital Corporation Ltd., a company incorporated in Mauritius dt. 15th June, 1998 whereby Magnus financed VSIPL(M) for purchase of shares in Indian companies. The AO has observed that the Agreement was signed on 15th June, 1998 but was to be effective from 17th Jan., 1997 and this evidenced the fact that backdating agreements were a common thing in this group. The AO ultimately concluded that the joint venture of HCL-DLX NV was likely to split and this fact was known in advance to the assessee and the two other companies. With this knowledge they sold the shares first to a Mauritius-based company so that the gains likely to arise on sale can be transferred to Mauritius a tax heaven so far as tax on capital gains are concerned.
D. The AO held that the real beneficiary was Shiv Nadar Group which was effectively running and controlling from India M/s VSIPL(M).
E. The AO concluded that the transaction was designed in such a manner that it resulted into diversion of income and evasion of income-tax in India.
F. The AO concluded that the assessee and the two other companies selling shares of HCL-HDX Holdings (Mauritius) (P) Ltd. to VSIPL(M) was not a sale in the normal course of business after applying due business acumen.
160. After concluding as above, the AO had referred to the fact that RBI granting permission for sale of shares has nothing to do when it comes to bringing to tax income arising out of a transaction. The final conclusions of the AO on this issue were as follows:
Thus owing to the close connection between HCL group and VSIPL(M), as discussed above, the shares have actually been sold at US $ 23,043,727 instead of US $ 2,110,000. The actual consideration was US $ 23,043,727 has been established on the basis of page No. 8 and 11 of Annex. 23 seized from party P4.
A. Dollar-cash inflow for the period 1st April, 1999 to 31st May, 1999 towards the sale of shares of HDX US $ 24,434,225.
B. Dollar-cash outflow for the period 1st June, 1999 to 30th June, 1999 mentioned against Deluxe US $ 1,390,498 C. Net receipt US $ 23,043,727 Thus additional tax on income of US $ 20,933,727 (23,043,727-2,110,000) has escaped assessment due to the colourable device used by the group.
161. The AO has thereafter referred to tax evasion and employing colourable device to avoid tax. Reference was made to the decision of the Supreme Court in the case of CIT v. Sithal Das Tirath Das and decision in the case of Mcdowell Co. Ltd. v. CTO (supra) and several other decisions. The AO ultimately assessed the difference between the sale consideration received by the assessee and the two other companies from VSIPL(M) and the Sale Consideration received by M/s HCL-HDX (Mauritius) (P) Ltd. from Deluxe Corporation USA on sale of shares held in HCL Deluxe NV, as undisclosed income of the assessee.
162. Before the CIT(A), the assessee pointed out that the AO proceeded on an erroneous assumption that the shares of HCL-HDX Holdings (Mauritius) (P) Ltd., which were sold by the assessee and the two other companies to VSIPL(M), were later sold by VSIPL(M) to Deluxe Corporation at a substantially higher price. The fact that the shares sold by the assessee and those sold by HCL-HDX Holdings (Mauritius) (P) Ltd. were entirely different and distinct from each other, was claimed as not having been appreciated or deliberately overlooked by the AO. The assessee referred to finding by the AO that in order to avoid payment of capital gains tax in India the assessee 'parked' the shares with associate foreign company which in turn sold the same at much higher price subsequently and the further finding that this action, resulted in the diversion of income in the form of capital gains and the same is brought to tax as the 'undisclosed income' and submitted that there is no reference to any provisions of the Act which authorizes the action of the AO, treating the income of a foreign company, i.e., VISPL (M) or HCL-HDX Mauritius (P) Ltd. arising entirely outside India, as income of the assessee, an Indian company. It was submitted that the AO has displayed scant regard to the facts and twisted the same at will. It was pointed out that the block of shares held, and later sold by the assessee were entirely different from the block of shares held in a Dutch Company by a Mauritius Company. It was argued that the gains arising to HCL-HDX Holdings (Mauritius) (P) Ltd. from the sale of shares in the Dutch Company, HCL Deluxe NV could not be said to accrue to the assessee from the sale of its shareholding in HCL-HDX Holdings (Mauritius) (P) Ltd. It was submitted that the sum of US $ 23.4 million, was the income of HCL-HDX Holdings (Mauritius) (P) Ltd. obtained by sale of its holding in the Dutch Company M/s HCL Deluxe NV in favour of the US company. It was pointed out that the said consideration was credited to the account of HCL-HDX in Mauritius and no part of the consideration of US dollars 23.4 million was receivable or actually received in India. Therefore, such income, can, by no stretch of argument, be considered as the income of the assesses. Secondly, the assessee and the two other companies ceased to be the owner of HCL-HDX Holdings (Mauritius) (P) Ltd. in September, 1998, and. after that date, it was VSIPL(M) which was the owner of HCL-HDX Holdings (Mauritius) (P) Ltd. It was again clarified that had the assessee and the two other companies not sold their shares in HCL-HDX Holdings (Mauritius) (P) Ltd. and continued to hold the same and if HCL-HDX Holdings (Mauritius) (P) Ltd. transfers its holding in HCL Deluxe NV to Deluxe Corporation, the resultant consideration or the gains arising therefrom could still not have been taxed in India in the hands of the assessee. That the assessee and the other two companies could not have taken any cognizance of the transaction at all. It. was thus argued that, by no stretch of imagination, can it be contended that US $ 23.4 million received by a non-resident company is the "undisclosed income" of the assessee.
163. Apart from the above, the various inferences drawn by the AO from the seized documents were also explained by the assessee and it was submitted that the assessment made in the hands of the assessee was unsustainable.
The CIT(A) held as follows:
Thus, the appellant company has raised a valid plea that the shares of both the Dutch Joint Venture Company (M/s HCL Deluxe NV) as well as the Mauritius company (M/s HCL-HDX Holdings (Mauritius) (P) Ltd.) were altogether different. No holding or equity participation in any manner of M/s Deluxe Corporation USA existed in M/s HCL-HDX Holdings (Mauritius) (P) Ltd. (the WOS of the appellant and the erstwhile companies, which became wholly owned subsidiary of M/s VSIPL(M) in October, 1998). The sale of shares in the joint venture company was made by M/s HCL-HDX Holdings (Mauritius) (P) Ltd. and not by the appellant company or any other companies. Hence, the finding of the AO that the shares of the joint venture company were sold by M/s VSIPL(M) is grossly incorrect as the shares in joint venture company were never held by M/s VSIPL(M). Another finding that no time would be left for the appellant and other companies to sell their holding in M/s HCL-HDX Holdings (Mauritius) (P) Ltd. to M/s VSIPL(M) in the event of sale of joint venture company is also incorrect since M/s Deluxe Corporation USA was not affected at all by such transfer since it held stake in joint venture company and not in M/s HCL-HDX Holdings (Mauritius) (P) Ltd.
Here, it is pertinent to note that M/s VSIPL(M) is an OCB incorporated in Mauritius with tax residence in that country. It has an independent board having non-resident directions in addition to Mr. Shiv Nadar as director. Further, as per Clause (ii) of Section 6(3) of the IT Act, 1961, M/s VSIPL(M) is not a company resident in India as the control and management of its affairs is situated wholly outside India and all decisions are taken by the majority opinion of the Board of Directors outside India.
From the above discussion, it is absolutely clear that instead of one, actually there were two transactions that had taken place. The first transaction was between M/s Slocum Investments (P) Ltd., M/s SNIPL and M/s HCLCL with M/s VSIPL(M) to sell their 100 per cent wholly owned subsidiary namely M/s HCL-HDX Deluxe Holdings (Mauritius) (P) Ltd. for US $ 2.11 million. The second transaction was between M/s HCL Delxue NV, Dutch joint venture company and M/s Deluxe Corporation USA for acquisition of 50 per cent of shares of M/s HCL Deluxe NV by M/s Deluxe Corporation USA. Thus, the first transaction was between a resident (Indian companies) and non-resident (Mauritius company) whereas the second transaction, on the basis of which the addition was made by the AO was between two non-resident companies (a Dutch joint venture company and a USA company). Since the second transaction was involving two non-resident companies, therefore, there was absolutely no need on the part of these non-resident companies to inform this transaction to the Indian tax authorities or it can be said that the same has taken place outside the taxable territory of India, therefore, cannot be brought to tax under Indian IT law. Further, I agree with the appellant's contention that even if it is assumed that no off-loading of investment in M/s HCL-HDX Holding (Mauritius) (P) Ltd. would have occurred, then also the seller of shares of the joint venture company would have been M/s HCL-HDX Holdings (Mauritius) (P) Ltd. and not the appellant and the two erstwhile companies. In that case also, out of such sale, no capital gain would have arisen in India and only corpus fund of M/s HCL-HDX Holdings (Mauritius) (P) Ltd. would have been appreciated whereby only the value of investment of the appellant and the other companies in such wholly owned subsidiary would have increased.
The fact is that the block of shares held and later on sold by the appellant and other companies was entirely different from the block of shares held in a Dutch company (HCL Deluxe NV) by a Mauritius company (HCL-HDX Holdings (Mauritius) (P) Ltd.). The gains arising to M/s HCL-HDX Holdings (Mauritius) (P) Ltd. from the sale of shares of M/s HCL Deluxe NV could not, therefore, said to be accruing to the appellant. Therefore, the sum of US $ 23.4 million is the income of M/s HCL-HDX Holdings (Mauritius) (P) Ltd. obtained by sale of its holding in the Dutch Joint Venture Company in favour of M/s Deluxe Corporation USA. The said consideration was credited to the account of. M/s HCL-HDX Holdings (P) Ltd. in Mauritius and not in India. Since the fact of existence of seller company at Mauritius has not been challenged at any stage by either party, therefore, such income can under no circumstances be considered as the income of the appellant and the other two erstwhile companies. The fact that the appellant ceased to be the owner of M/s HCL-HDX Holdings (Mauritius) (P) Ltd. in September, 1998, and after that date, it was M/s VSIPL(M), which was the owner of M/s HCL-HDX Holdings (Mauritius) (P) Ltd. remained unchallenged. Therefore, the appellant's contention that had the appellant and the two erstwhile companies not sold their shares in M/s HCL-HDX Holdings (Mauritius) (P) Ltd. and continued to hold the same when that company transferred its holding in M/s HCL Deluxe NV to M/s Deluxe Corporation USA, the resultant consideration or the gains arising therefrom could still not have been taxed in India is legally as well as factually correct.
The CIT(A) thus deleted the addition made by the AO.
164. Aggrieved by the order of learned CIT(A) deleting the addition made by the AO, the Revenue has preferred the present appeal before the Tribunal. We have heard the submissions of the learned Departmental Representative and the learned Counsel for the assessee. The learned Departmental Representative at the outset pointed out that the assessee and the two other companies sold their 100 per cent shareholding in M/s HCL-HDX Holdings (Mauritius) (P) Ltd. in September, 1998 for 2.11 million US $ to M/s VSIPL(M). M/s HCL-HDX Holdings (Mauritius) (P) Ltd. sold the shares, i.e., 50 per cent of the share capital of the company HCL Deluxe NV of Netherlands, held by them for 23.4 million US $ in April, 1999 to M/s Deluxe Corporation, USA. He pointed out to seized document P.23 Al P6 and P-30 A1 P6 which clearly showed that funds for purchase of shares of HCL-HDX Holdings (Mauritius) (P) Ltd. by M/s VSIPL(M) were provided from the HCL group in India. He submitted that a comparison of the above seized document with the FIRC evidencing in-flow of consideration to the assessee and the two companies being the consideration paid by VSIPL(M) for purchase of shares of M/s HCL-HDX Holdings (Mauritius) (P) Ltd. clearly showed that the funds which went out of India came back to India. He also brought to our notice the documents seized in the course of search viz., the dollar-cash flow statement for the period 1st April, 1999 to 31st May, 1999 which is P4/A23/8 and dollar-cash flow for the period 31st Aug., 1998 to 30th Sept., 2000 which is P4/A53/S4. His submission was that these documents found in the course of search clearly indicated that the ownership, control and decision-making power in respect of all the OCB lay with the assessee and the two companies and therefore, the two companies were to be treated as dummy companies and the profit on sale of shares of HCL Deluxe NV have to be taxed in the hands of the assessee and the two other companies. His submission was that the overall control and decision-making power was with Shiv Nadar, the promoter and major shareholder in all the group companies of HCL group. He pointed out that at every stage of all transactions, there was presence of the HCL group India, either in the form of remitting funds from India or arranging for loans from India. The learned Departmental Representative further submitted that the assessee at every stage of the proceedings before AO did not furnish any information about VSIPL(M) or about the basis of valuation of shares of HCL-HDX Holdings (Mauritius) (P) Ltd. which were sold to Deluxe Corporation (U.S.A). In the circumstances, according to him. the Revenue was entitled to draw an adverse inference against the assessee. He therefore submitted that the action of the AO in taxing the profits that HCL-HDX (Mauritius) (P) Ltd. earned on sale of shares of M/s HCL Deluxe (NV) Netherlands to Deluxe Corporation (USA) was right.
165. He further submitted that provisions of Section 93 could be invoked in the present case and the addition made could be sustained on that basis. It is at this stage appropriate for us to narrate the provisions of Section 93 insofar as the same is relevant for adjudicating the dispute in the present case.
Section 93 : Avoidance of income-tax by transactions resulting in transfer of income to non-residents-(1) Where there is a transfer of assets by virtue or in consequence whereof, either alone or in conjunction with associated operations, any income becomes payable to a non-resident, the following provisions shall apply-
(a) Where any person has, by means of any such transfer, either alone or in conjunction with associated operations, acquired any rights by virtue of which he has, within the meaning of this section, power to enjoy, whether forthwith or in the future, any income of a non-resident person which, if it were income of the first-mentioned person, would be chargeable to income-tax, that income shall, whether it would or would not have been chargeable to income-tax apart from the provisions of this section be deemed to be income of the first-mentioned person for all the purposes of this Act.
(b) Where, whether before or after any such transfer, any such first-mentioned person receives or is entitled to receive any capital sum the payment whereof is in any way connected with the transfer or any associated operations, then any income which, by virtue or in consequence of the transfer, either alone or in conjunction with associated operations, has become the income of a nonresident shall, whether it would or would not have been chargeable to income-tax apart from the provisions of this section, be deemed to be the income of the first-mentioned person for all the purposes of this Act.
Explanation-The provisions of this sub-section shall apply also in relation to transfers of assets and associated operations carried out before the commencement of this Act.
166. The following are the purpose and intent behind the above provision and the ingredients to be satisfied for application of these provisions. Under the Act, a resident is chargeable on world income basis. It is immaterial where his income accrued or arose whether within India or outside India, or where it was received, whether within India or outside India. On the other hand, a nonresident is chargeable to Indian taxation in respect of his income received or deemed to be received in India and any income which accrued or arose or is deemed to have accrued or arisen in India. Consequently, in the case of a nonresident, if his income-bearing asset is one situate outside India, the income arising therefrom would not be includible in his total income. Therefore, a resident who is desirous of reducing his tax liability may transfer the ownership in his foreign asset to a non-resident while at the same time contriving to secure benefits to himself or for his own men, relations or dependants. The transferee may be a trustee, or body of trustees under a settlement or a limited company. To take a simple case of a settlement in trust, the resident transferor would be liable to income-tax only to the extent to which any benefits are payable to him under the settlement. The rest of the income remaining in the hands of the non-resident trustee would go free of tax. Again, if there be several beneficiaries under the settlement and even if all of them were residents in India, the income would be split amongst them in various parcels carrying a nil or lower rate of tax. To take another instance: should the resident transfer his foreign income-bearing asset to a foreign company formed for the purpose, in return for shares in the company, the resident would render himself liable to tax only to the extent of the dividends, if any, declared and paid by the company. But for the transfer to the incorporated company, the resident would have been exigible to tax in respect of the entire income from the foreign asset. To strike at such transfers, Section 93 enacts that the income arising to the non-resident transferee should be deemed to be the income of the transferor. The section is designedly couched in the widest phraseology to prevent evasion of tax by such devices, at the same time protecting bona fide transactions. The above is the view expressed by the Hon'ble Supreme Court in the case of M.C.T.M. Chidambaram Chettiar and Ors. v. CIT
167. The learned Departmental Representative submitted that the term 'rights' mentioned in Section 93(1)(a) is of wide amplitude. Referring to the Explanation below Sub-section (3) of Section 93, the learned Departmental Representative submitted that Shiv Nadar had a right to sit on the board of VSIPL(M) and was also authorized signatory of the bank accounts of VSIPL(M). The fact that Shiv Nadar provided funds of US $ 9,500 is also evident from document P.4-A53-S4. He drew our attention to exhibit P2-A2/156 & 157 and submitted that this seized document clearly evidenced control of the various group companies of HCL based at Mauritius. These notings found in the seized document according to the learned Departmental Representative were that of Shiv Nadar. His submission was that the transfer of HCL-HDX (Mauritius) (P) Ltd. shares by the assessee and the two other companies in favour of VSIPL(M) is a transfer of asset which generated the income in question and which attracts the applicability of the provisions of Section 93 of the Act. His further submission was that once the primary conditions applicable under Section 93 are satisfied it is then for the assessee to prove that the transaction in question was a bona tide commercial transaction and was not for the purpose of avoiding liability to taxation. He drew our attention to the provisions of Section 93(3) of the Act in this regard. The learned Departmental Representative thus submitted that the action of the AO in bringing to tax the income in question can be sustained on this basis. On the applicability of the provisions of Section 93 reference was also made by the learned Departmental Representative to the decisions of the Supreme Court in the case of Chidambaram Chettiar (supra).
168. His further plea was that notwithstanding the decision of the Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra), still the principle laid down in the case of McDowell & Co. Ltd. v. CTO (supra) would be applicable. The nomenclature given by the parties to a transaction can be ignored if it is a colourable device or a dubious method or a subterfuge. The learned Departmental Representative relied on the decision of the Special Bench of Tribunal in the case of Wallfort Shares & Stock Brokers Ltd. v. ITO (2005) 96 TTJ (Mumbai) 673 : (2005) 96 ITD 1 (Mumbai) wherein the above principle has been laid down after making a reference to the later decision of the Hon'ble Supreme Court in the case of CCE v. Modi Alkalies & Chemicals Ltd. . Reliance was also placed on the decision of the Delhi High Court in the case of Bhagat Construction Co. (P) Ltd. v. CIT wherein the Hon'ble Delhi High Court has upheld bringing to tax income ignoring a colourable device employed by an assessee. The submission of the learned Departmental Representative in conclusion was that even on the basis of the theory of colourable device as propounded by the AO the addition made can be sustained.
169. For sustaining the order of the AO on the new plea of invoking the provisions of Section 93, the learned Departmental Representative submitted that the same is permissible even without a specific ground of appeal in this regard. Reliance was placed on the following decisions:
(a) Hukumchand Mills v. CIT .
(b) NTPC v. CIT .
(c) Ahmedabad Electricity Co. v. CIT .
170. The learned Counsel for the assessee at the outset submitted that the learned Departmental Representative was not in a position to dispute the error in the approach of the AO in presuming that the shares which were sold in April, 1999 were that of HCL-HDX Holding (Mauritius) (P) Ltd. Referring to the original grounds of appeal of the Revenue, he submitted that the grounds read in the context of the findings of the CIT(A) are erroneous and reflects lack of application of mind by the CIT in drafting and approving the grounds of appeal filed before the Tribunal. On the question of application of Section 93, he submitted that the same would completely change the very basis of assessment made by the AO. While the AO wanted to tax the profit made on alleged sale of shares by VSIPL(M) to Deluxe Corporation, USA, the Departmental Representative now wants to bring to tax the profit made by M/s HCL-HDX (Mauritius) (P) Ltd. in the hands of the assessee. He submitted that as an appellant, the Revenue cannot seek to put forth such plea. It may be relevant at this stage to mention that the learned Departmental Representative in support of his plea of invoking the provisions of Section 93 in the present case has placed reliance on the decision of the Hon'ble Supreme Court in the case of Hukum Chand Mills Ltd. (supra). The learned Counsel for the assessee submitted that the course suggested by the learned Departmental Representative cannot be adopted and in this connection relied on the decision of the Bombay High Court in the case of CIT v. T.M. Bhumaddi and Anr. . His submission was that on the plea raised by the Departmental Representative before the Tribunal, it has to be assumed that the transaction by the assessee and the two other companies, i.e., sale of shares of HCL-HDX (Mauritius) (P) Ltd. to VSIPL(M) was a sham transaction. Whether the plea of sham can be allowed to be raised at this stage as it would negate the very case sought to be made out by the AO. Referring to the decision in the case of Hukum Chand (supra) he submitted that in the said case there was no change of the character of assessment as in the present case. His submission was that the applicability of Section 93 does not arise out of the order of the CIT(A) and cannot be the subject-matter of the appeal. It was submitted that entertaining the plea will involve investigation of new facts and, therefore, cannot be permitted to be raised at this stage. It was also submitted that for application of Section 93 the primary conditions as mentioned in Section 93(1) have to be prima facie established by the Revenue and only then the onus shifts to the assessee under Section 93(3). In any case it was submitted that the facts of the present case do not warrant application of the provisions of Section 93. According to him in the worst situation it can only be said that Shiv Nadar was behind all these companies. Even assuming the corporal veil is lifted/pierced, one can only find Mr. Shiv Nadar as the person behind all these companies and assessment in the hands of the assessee and the two other companies can never be made. It was submitted that in the present case which is a block assessment proceeding Section 93 could not be invoked, as there was already a disclosure of these transactions by the assessee and the two other companies in their returns of income. He points out that under Section 93 there is intrinsic evidence available to show that it cannot be applied at this second appeal stage. The reason, according to him, is that under Sub-section (3) of Section 93, the assessee was entitled to show to the satisfaction of the AO that there was no tax evasion and that the transaction was a genuine commercial transaction. If the plea is raised at the second appeal stage, the assessee would loose the right to rebut the inference regarding bona fides of a commercial transaction.
171. On the question of raising a new plea before the Tribunal for the first time the learned Counsel for the assessee submitted that without facts necessary for adjudication of the new plea the. Revenue should not be permitted to raise the same before the Tribunal. He points out that the Revenue has no right of appeal against the order of the AO and therefore CIT(A) could not have invoked Section 93. When first appeal cannot be filed the Revenue should not be allowed to raise the plea in the second appeal. He points out that when an assessee seeks to raise a new plea before the Tribunal, the same stands on a different footing because he has no other avenue to redress his grievance whereas the Revenue can have recourse to the provisions of Section 147 for bringing to tax income escaping-assessment and Section 263 where the order of the AO is erroneous and prejudicial to the interest of the Revenue.
172. We have considered the rival submissions. At the outset, we have to point out that the transaction in question namely sale of shares of HCL-HDX (Mauritius) (P) Ltd. by the assessee and the two other companies to VSIPL(M) took place in the month of September, 1998 i.e. the previous year relevant to asst. yr. 1999-2000. The assessee as well as the two other companies had filed the returns of income for these assessment years wherein the sale of these shares duly reflected in their returns of income and the documents filed therewith. A copy of the return of income of the assessee for the asst. yr. 1999-2000 is placed at page Nos. 291 to 295 and that of M/s HCLCL is placed at page Nos. 310 to 312 and that of M/s SNIPL is placed at page Nos. 335 to 339. It is therefore seen that there has been a disclosure of these facts in the return of income filed prior to the date of search. We have already noticed while discussing the assessee's appeal that in respect of a disclosed transaction no addition could be made in a block assessment. This is not a case where as a result of material found in the course of search any expenditure, deduction or allowance is found to be false, it is not the Revenue's case that the assessee received something more on sale of the shares in creation over and above what has already been disclosed.
173. Secondly it is noticed that the AO under a wrong assumption that the shares sold by VSIPL(M) were that of HCL-HDX Holdings (Mauritius) (P) Ltd. proceeded to assess the undisclosed income. This was obviously on a wrong basis. It is on this mistake that the CIT(A) had deleted the addition made by the AO. When this basic mistake subsists in the order of the AO, we do not see how the Revenue can seek to argue that the profits made by HCL-HDX Holdings (Mauritius) (P) Ltd. on sale of shares of HCL Deluxe NV (Netherlands) should be assessed in the hands of the assessee. As rightly contended by the learned Counsel for the assessee, this would change the very basis of the assessment as made by the AO.
174. We have also considered the question whether the Revenue should be allowed to raise a new plea regarding applicability of Section 93 for the first time before the Tribunal. For the following reasons, we are of the view that the Revenue cannot be allowed to raise such a plea. The powers of the Tribunal in dealing with appeals are expressed in Section 254(1) of the Act in the widest possible terms.
The Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit.
The word "thereon", of course, restricts the jurisdiction of the Tribunal to the subject-matter of the appeal. The words "pass such orders as the Tribunal thinks fit" include all the powers (except possibly the power of enhancement) which are conferred upon the CIT(A) by Section 251 of the Act. Rule 11 of the ITAT Rules, 1963. provides as follows :
The appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal; but the Tribunal, in deciding the appeal, shall not be confined to the grounds set for in the memorandum of appeal or taken by leave of the Tribunal under this rule :
Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground.
Rule 27 provides that:
The respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him.
175. The Revenue has not chosen to raise an additional ground of appeal praying for sustaining the order of the Revenue authorities on the basis of this new plea. It has been held in the case of Hukumchand Mills (supra) that the Tribunal has sufficient power under Section 33(4) of the Act 1922 (Section 254(1) of the Act of 1961) to entertain a new argument by the Revenue and that Rule 12 (present Rule 11 of ITAT Rules) and 27 are not exhaustive of the powers of the Tribunal. That the rules are merely procedural in character and do not, in any way, circumscribe or control the power of the Tribunal under Section 33(4) of the Act. (Section 254(1) of Act of 1961).
176. The Hon'ble Supreme Court in the case of National Thermal Power Corporation (supra) has laid down that (a) it is the discretion of the Tribunal to admit or not to admit a new ground to be raised before it, (b) if the Tribunal is required to only consider a question of law arising from the facts which are on record in the assessment proceedings such question should be allowed to be raised and (c) that the proceedings before the tax authorities are for correctly assessing the tax liability of an assessee in accordance with law.
177. The next question would be where facts which are necessary for adjudication of a new ground are not already on record, can the Tribunal exercise its discretion to allow a new ground to be raised ? In this regard should there be any difference in its approach when permitting the Assessee to raise a new ground to be raised and in permitting the Revenue to raise a new ground ?
178. In the case of Hukumchand Mills (supra) relied by the learned Departmental Representative, it has been held as follows :
In the present case, the subject-matter of the appeal before the Tribunal was the question as to what should be the proper written down value of the buildings, machinery, etc., of the assessee for calculating the depreciation allowance under Section 10(2)(vi) of the Act. It was certainly open to the Department, in the appeal filed by the assessee before the Tribunal, to support the finding of the AAC with regard to the written down value on any of the grounds decided against it. It was argued on behalf of the appellant that the action of the Tribunal in remanding the case is not strictly justified by the language of Rule 27 or Rule 12. Even assuming that Rules 12 and 27 are not strictly applicable, we are of opinion that the Tribunal has got sufficient power under Section 33(4) of the Act to entertain the argument of the Department with regard to the application of para. 2 of the Taxation Laws Order and remand the case to the ITO in the manner it has done. It is necessary to state that Rules 12 and 27 are not exhaustive of the powers of the Tribunal. The rules are merely procedural in character and do not, in any way, circumscribe or control the power of the Tribunal under Section 33(4) of the Act. We are accordingly of the opinion that the Tribunal had jurisdiction to entertain the argument of the Department in this case and to direct the ITO to find whether any depreciation was actually allowed under the Industrial Tax Rules and whether such depreciation should be taken into consideration for the purpose of computing the written down value.
179. The Hon'ble Gauhati High Court in the case of Assam Company (India) Ltd. v. CIT (supra) dealt with the decision of the Hon'ble Supreme Court in the case of Hukumchand Mills case (supra) and Mahalakshmi Mills case (supra) relied upon by the learned Counsel for the Revenue in the context of admission of new plea for adjudication by the Tribunal for the first time. The Court also considered the decision of the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. (supra). The question before the Court was as to whether the Tribunal ought to have considered the plea of the applicant-company that it was entitled to the benefit of weighted deduction under Section 35B(1)(b)(iv) of the Act in the absence of any appeal or any cross-objection filed by it against the order of the CIT(A). The Court after considering several judicial pronouncements on the subject held as follows:
We are therefore of the view that it is permissible on the part of the Tribunal to entertain a ground beyond those incorporated in the memorandum of appeal though the party urging the said ground had neither appealed before it nor had filed a cross-objection in the appeal filed by the other party. We must however hasten to add that in order to enable either the assessee or the Department to urge a ground in the appeal filed by the other side, the relevant facts on which such ground is to be founded should be available on record. In the absence of such primary facts, in our opinion, neither the assessee nor the Department can be permitted to urge any ground other than those which are incorporated in the memorandum of appeal filed by the other party. In other words, if the assessee or the Department, without filing any appeal or a cross-objection seeks to urge a ground other than the grounds incorporated in the memorandum of appeal filed by the other side, the evidentiary facts in support of new ground must be available on record.
180. The uniform view of Courts on this issue has been that facts necessary for adjudication of a new plea should already be available on record. The only other decision relied upon by the learned Counsel for the Revenue is the decision of the Full Bench of the Hon'ble Bombay High Court in the case of Ahmedabad Electricity Co. (supra). The Court after referring to several judicial pronouncements on the subject held that the Tribunal has jurisdiction to permit additional grounds to be raised before it even though these may not arise from the order of the AAC, so long as these grounds are in respect of the subject-matter of the entire tax proceedings. The Court has not said anything about the existence of the facts necessary for adjudication of the additional or a new ground. The preponderance of judicial opinion is that the facts necessary for adjudication of a new ground should already be available on record. In the present case facts with regard to applicability of Section 93 are not available on record. An order of remand for finding facts with regard to applicability of the provisions of Section 93 cannot also be permitted as the same would be a mere fishing inquiry hoping to sustain the action of the Revenue authorities for bringing to tax income in the hands of the assessee. The same cannot be permitted, as adopting such a course would cause considerable harassment, hardship and expenditure to the assessee and the same cannot be permitted on the mere possibility or hope that some facts may emerge by which the action of the Revenue authorities can be sustained. Moreover, we should not forget the fact that we are dealing with an assessment under Chapter XTV-B of the Act. under which determination of undisclosed income should be made on the basis of material found in the course of search.
181. We are also of the view where an assessee seeks to put forth a new plea before Tribunal without facts necessary for adjudication of appeal being available on record in allowing such plea, the approach of the Tribunal should be different for the following reasons:
(a) An assessee has no other avenue and if on the facts and in law if ultimately it is found that the assessee is not liable to tax, the Revenue cannot have grievance. After all, Article 265 of the Constitution of India provides that no tax shall be levied and collected except by authority of law. If ultimately the assessee is found to be liable to tax. he compensates the Revenue in the form of interest. Therefore the Tribunal can even think of a remand of the case for a finding on facts or can adjudicate on facts itself.
(b) On the other hand the Revenue has other options open to it under the Act. If the order of an AO is erroneous and prejudicial to the interests of the Revenue the same can be revised by the CIT under Section 263 of the Act. If income chargeable to tax escapes assessment, proceedings under Section 147 can be initiated to bring to tax such escaped income. In an appeal by an assessee against the order of the AO the CIT(A) has power of. enhancement under Section 251(1) of the Act.
(c) The Revenue does not have a right of appeal against the order of the AO. Therefore if AO does not invoke Section 93, and if the same was erroneous and prejudicial to the interest of the Revenue, the same could be revised by the CIT under Section 263.
(d) The AO cannot plead before CIT(A) in an appeal by the assessee to invoke Section 93. In a case in which Section 93 is not invoked by CIT(A) also, the Revenue cannot seek to sustain the order of the AO by invoking Section 93. The Revenue's right of appeal before the Tribunal should therefore be held to be limited only to restoring the assessment as done by the AO and on the same basis.
(e) An assessee aggrieved by an assessment of income in his hands, has the right to appeal to CIT(A) and thereafter to the Tribunal. By seeking to raise an issue before the Tribunal for the first time, the right of appeal before CIT(A) provided to an assessee becomes redundant and deprives the assessee the benefit of adjudication by one of the appellate authority.
182. In the light of the view, which we have taken above, we do not think it appropriate to deal with the applicability of Section 93 to the transactions in question. But we are of the view that the very basis of the arguments put forth by the learned Departmental Representative on the basis of the seized documents cannot also be sustained. Admittedly all the seized documents with reference to the transaction of sale of shares to VSIPL(M) do not speak for themselves. The complaint of the AO was that the assessee did not co-operate in furnishing the required information called for by him. The AO thereafter drew inferences from these seized documents without any basis. The learned Departmental Representative submitted before us that in view of the non-co-operation of the assessee adverse inference can be drawn against the assessee. We are of the view that such an argument cannot be accepted. The AO is empowered under the various provisions of the Act to issue summons for examination of a person. He has the powers of a Civil Court as are vested under the CPC when trying a suit regarding discovery and inspection, compelling production of books, issuing commissions and enforcing attendance of any person. These powers are meant to ensure investigation regarding existence or non-existence of a fact. Without exhausting those remedies the Revenue cannot be heard to say that there was a lack of co-operation on the part of the assessee. In this connection, we also wish to add that the documents found at the time of search itself did not throw any light on the conclusions arrived at by the AO. Apart from the above, the basic premise of the AO was that funds for shares by VSIPL(M) had been arranged from India and in this connection the AO had placed reliance on documents A 1 p. 6 p. 23 and A1 P6 p. 30. The first document is dt. 25th Sept., 1998 and the second document is dt. 10th Oct., 1998. The transaction of sale of shares had however taken place in the month of September, 1998. In the seized document dt. 25th Sept., 1998, there is nothing to indicate the involvement of the assessee or the two other companies in arranging for funds to M/s VSIPL(M). The second document also refers to disbursement of funds by and not to any flow of funds to VSIPL(M). Therefore, the basic assumption of the learned Departmental Representative that there was an outflow of funds from India from the assessee and the two other companies to VSIPL(M) which was. used for purchasing of shares is found to be not correct. In the circumstances, we are doubtful as to how the provisions of Section 93 could be invoked by the Revenue. We do not wish to delve further on this issue for the reason that we have already held that this new plea should not be permitted to be raised by the Revenue for the first time before the Tribunal. For the reasons stated above, we are of the view that the CIT(A) was fully justified in deleting the addition made by the AO and consequently his order is confirmed and this ground of appeal by the Revenue is dismissed.
183. The second ground of appeal by the Revenue does not call for any adjudication as the additions made by the AO have been deleted. Consequently the question of levy of surcharge is academic calling no adjudication. In the result the appeal by the Revenue is dismissed.
184. In the result, the appeal of the assessee is partly allowed whereas that of the Revenue is dismissed.