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Income Tax Appellate Tribunal - Mumbai

Dy. Cit, Range 3(1) vs Dwarkaprasad Anil Kumar Investment ... on 30 April, 2007

Equivalent citations: [2008]110ITD247(MUM), [2008]304ITR182(MUM), (2008)113TTJ(MUM)524

ORDER

S.C. Tiwari, Accountant Member

1. This appeal has been filed by the revenue on 20-1-2004 against the order of the learned Commissioner (Appeals)-III, Mumbai dated 4-11 -2003 in the case of the assessee in relation to block assessment order under Section 158BC for the block period 1-4-1989 to 8-12-1999.

2. In this appeal, the revenue has taken as many as 15 grounds of appeal that are as follows:

1. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred holding that the shares of M/s. Sterlite Industries (India) Ltd. and M/s. Madras Aluminium Co. Ltd. held by the assessee were not t; in the nature of stock-in-trade and that the shares were held as 'investments' for the purpose of acquiring controlling stake.

2. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in placing undue reliance on the return of income filed by the assessee before the search action under Section 132 for the assessment year 1998-99 wherein the conversion of shares from stock-in-trade into investments had been disclosed in the balance sheet and in holding that the conversion had been accepted by the assessing officer in the assessment for the said assessment year.

3. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in placing undue reliance on the findings of the assessment orders under Section 143(3) for the assessment year 1998-99, while deciding on the Block Assessment order under Section 158BC in this case, thereby, applying the principles of res judicata to Income-tax Proceedings.

4. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in not appreciating that the special procedure for assessment of search cases under Chapter XIV-B has an overriding effect over the regular assessment governed by Chapter XIV of the Income Tax Act.

5. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in not appreciating that the Block Assessment order had taken into account the seized material and documentary evidences found during the search in its entirety and accordingly, a conclusive finding had been given for the block period consisting of ten years on a holistic approach to the state of affairs of the business and the undisclosed income of the assessee-company and hence the findings given in the regular assessment orders cannot have any bearing on the block assessment order.

6. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in not appreciating that there was a fraudulent scheme of tax planning by the assessee-company to defraud the revenue in existence which was unearthed during the course of search action under Section 132.

7. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in completely ignoring the fact that the tax planning schemeby the assessee-company was devised to avoid charge of capital gainunder Section 46(2) of the Income Tax Act, in the hands of the assessee-company and thereby, taking advantage of article 13 of the Double Taxation Avoidance Agreement Treaty between India and Mauritius.

8. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in not taking cognizance of the enormous quantum of facts and documentary evidences which have been marshalled in the block assessment order.

9. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in not arriving at the logical conclusion to his own findings in the appellate order wherein, he has observed that the assessee-company has not been able to rebut various facts and documentary evidences mentioned in the Block Assessment order.

10. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in not considering all the facts, the documentary evidences, the point of law and the conclusive finding which is based on the facts and point of law.

11. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in not appreciating the findings of the fact as well as the provision of law which have been enumerated in the block assessment order and which has been further upheld by the Division Bench of the Hon'ble Bombay High Court in the case of Twinstar Holdings Ltd v. Anand Kedia 260 ITR 6.

12. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in constructing the remarks of the Division Bench of the Hon'ble Bombay High Court that the ruling of the Bench is confined only to the issue of applicability of Section 281 of the Income-tax thereby, completely overlooking "findings of the fact" enumerated by the Hon'ble Bombay High Court in the case of Twinstar Holdings Ltd v. Anand Kedia 260 ITR 25 which in fact is the finding of the Hon'ble Division Bench.

13A. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in not taking cognizance of facts as well as point of law which had been determined by the Hon'ble Division Bench in the aforesaid order wherein, the Hon'ble Bench has held that the ratio of the judgment of the Supreme Court in the case of McDowell& Co. Ltd v. CTO (1984) 154 ITR 148 would apply to the facts and circumstances of the case.

13B. On the facts and circumstances of the case and in. law, the learned Commissioner (Appeals) erred in not considering the observations of the Hon'ble High Court which were material facts, and should have been taken into account while deciding the issue.

14. The appellant prays that the order of Commissioner (Appeals) on the above grounds be set aside and that of the assessing officer be restored.

15. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.

3. These grounds relate to assessment of a sum of Rs. 44.52 crores as the assessee's undisclosed income during the block assessment period. The facts; of the case leading to this dispute briefly are that a search under Section 132 of the Act was carried out on 8-12-1999 at the various offices and factories of the: Sterlite Group of companies as also the residences of the Directors and key individuals of the group. Various persons searched included the assessee before us also. Thereafter a notice under Section 158BC was issued on 20-6-2000, in response the assessee filed Return of undisclosed income of the block period on 28-7-2000 wherein undisclosed income offered was declared Nil. According to the assessing officer, there were only two directors of the assessee-company viz. Smt. Vedvati Agarwal and Suman Agarwal. The liquidation proceedings had already commenced in April 1999 and one Shri K.L. Damani an employee with Sterlite Foundation had been appointed as the Liquidator.

4. The learned assessing officer found that the assessee-company was one of the three investments companies which were holding shares in Sterlite Industries Ltd. (SIIL) and Madras Aluminium Company Ltd. (MALCO). Almost the entire shareholding of these three investment companies was in turn held lay M/s. Twinstar Holdings Ltd. (TSHL), a Mauritius registered company. The other two companies were Sterlite Copper Rolling Mills Company (P.) Ltd. (SCRM) and Pravin Navin Investments and Trading Company (P.) Limited (PNIT). TSHL was in turn a family controlled company. According to the assessing officer the search yielded a number of loose papers seized from the office premises at Dhanraj Mahal and Tulisiani Chambers. The papers found at Dhanraj Mahal included a document bearing the heading "Sterlite-Time frame-discussion draft-steps for Sterlite restructuring". It was a fax sent to Shri Tarun Jain of the Sterlite Group from RSM & Co. Shri Tarun Jain was Director of Finance of SIIL. The fax mentioned that the gift of shares of SIIL by the promoter family should be completed by 31-3-1999 and the three investment companies had to be liquidated. For liquidation the three companies were to file FNC-7 with Reserve Bank of India for transfer of shares of the companies, by 10-4-1999, hold a board meeting of the company for giving intention of the winding of the business of the company on 17-4-1999, hold annual general meeting to pass special resolution for voluntary winding on 29-4-1999, Liquidator to file a notice of office appointment to the Income Tax Officer of the company within 30 days of the appointment and obtain clearance under Section 170 of Income Tax Act, by 3-5-1999, to obtain RBI approval for liquidation by 30-6-1999. These documents comprised of pages 15 to 22 of the loose papers file Marked A-l, pages 1 to 40 of the same loose papers filed were a copy of presentation made by RSM and Co. on March 23,1999 on the same issue.

5. According to the assessing officer pages 28 to 30 of loose-paper file Marked A-2 seized from Tulsiani Chambers was a fax dated 10-11-1998 sent by RSM and Co. to Shri Rajnish of Sterlite Group in relation to liquidation process of the three investment companies. The fax stated that TSHL had invested 99 per cent of the share capital of the three investment companies under the 24 per cent investment scheme. The balance investment in the investment companies was held by TSHL on non-repatriable basis. The three investment companies in turn made investment in shares of SIIL and MALCO. It was contemplated that the investment companies be liquidated under the voluntary dissolution provisions of the Companies Act, 1956. On liquidation, the assets and the liabilities of the investments companies will be distributed in specie to the shareholder namely TSHL and thereafter the shares in SIIL and MALCO would be held directly by TSHL. The learned assessing officer then refers to pages 36 to 40 of the loose paper file A-2 and he has reproduced extracts therefrom in Para 4.3 of the assessment order. According to him it showed that there was planned and deliberate process of liquidation of the investments companies and the objective of the correspondence between the assessee and the experts was to devise cost effective manner of transferring the shares held by the three investment companies to TSHL. It was suggested that by converting stock-in-trade held by the investments companies into investment there would be no tax liability. More so because by virtue of Double Taxation Avoidance Agreement Treaty between India and Mauritius there was no capital gain tax liability leviable in Mauritius. The learned Assessing Officer then refers to pages 28 to 37 of the loose paper file A-1. Page 37 contained the opinion of Shri S.E. Dastur that dissolving three investment companies without converting stock-in-trade in investment was risky because Income-tax department was likely to apply Supreme Court Judgment in the case of ALA Firm v. CIT . There was similar risk on conversion of stock-in-trade into investment. According to Mr. Dastur it was better to merge the three investment companies first into another company (with 100 per cent OCB holding) and then dissolving the new investment company. Before dissolving the stock-in-trade acquired on merger, would be shown as investment. It was better to get determination of the Income Tax Officer and then dissolve it. He also opined that exemption to the OCB under DTAT may not be under article 13 rather article 22 applied. Similar opinions were given by Shri Nishith Desai, Shri B. N. Chaturvedi, Gautam Doshi, Shri R. N. Bajoria and Sandeep Junnarkar, Shri Sandeep Junnarkar opined that Section 46(1) of the Act would not apply if the shares were held by investment company as stock-in-trade. q Because the shares were not capital assets within the meaning of Section 2(14) of the Act. Therefore, conversion into capital assets was required. However, in some of the opinions the assessees were cautioned that the judgment in the case of McDowell & Co. Ltd. v. CTO could apply and the transaction may be disregarded as being part of tax evasion.

6. Page 30 of the file was letter dated 29-9-1988 from Shri Patodia, CA and auditor of one of the investment company SCRM to Shri Gautam Doshi of RSM & Co. It was discussed that if dividend income was taken as exempt under Section 10 of the Income Tax Act, there would be huge loss in the investment company and that may attract attention of Income-tax Authorities. Therefore it would be advisable to artificially bring the loss figure in thousands to escape attention. The assessing officer has reproduced the entire letter in paragraph 4.4-2 of the block assessment order.

Page 28 of the file once again comprised the note on merger/dissolution.

7. We have thus briefly enumerated the seized material that has been relied upon in the block assessment order. The same has been discussed at greater length in para 4 of the block assessment order. Based on the seized material the assessing officer issued a show-cause notice on 27-12-2001. The learned assessing officer has reproduced the entire shows cause notice in paragraph 5 of the block assessment order. In short, according to the assessing officer, the seized material revealed that there was a plan to transfer the shares of the investment companies who held shares, in SIIL and MALCO to TSHL but not to pay any Income-tax or capital gains tax in the process. The course of action suggested was to convert the shares of SIIL and MALCO held by the investment company as stock-in-trade into investment. Thereafter, to liquidate the three investment companies and transfer the net assets of these companies in specie to the shareholder. It was advised that by converting stock-in-trade into investment no tax liability may arise and on subsequent liquidation only capital gains tax would arise but by virtue of Double Taxation Avoidance Agreement Treaty between India and Mauritius no tax liability would arise either in India or in Mauritius. In the light of various seized papers, it was clear that it was calculated and premeditated process of converting the stock-in-trade held by Investment Company into investment and thereafter going in for voluntary liquidation to enable TSHL acquire shares of SIIL & MALCO. True enough, the stock-in- trade was shown as converted into investment as on 31-3-1998 and voluntary liquidation proceedings were initiated in April 1999. The learned assessing officer referred to the fact also that the three investment companies had utilised entire capital and borrowings for purchase of shares of SIIL and MALCO and its only source of income was earning of dividend from SIIL and MALCO. Dividend income was exempt under Section 10 of the Act with effect from 1-4-1998. Therefore the assessee had filed return of income for assessment year 1998-99 declaring loss of Rs. 1,04,54,482 treating the dividend exempt from tax and at the same time claimed deduction of interest and other expenditure. The assessee was asked as to why interest and other expenditure amounting to Rs. 4,22,04,432 should not be treated as income evaded by the assessee for the assessment year 1998-99.

Similarly, the interest and other expenditure amounting to Rs. 4,39,95,271 of assessment year 1999-2000 was income evaded by the assessee.

8. The assessee did not reply to the show-cause notice of the Assessing Officer nor did it file certain details asked for by the assessing officer. In the block assessment order the learned assessing officer had alleged that the assessee did not avail of the opportunity of being heard granted by the show-cause notice. In the light of overwhelming evidence of the dubious method of tax avoidance adopted by the assessee-company it was a fit case of lifting of corporate veil. The courts had time and again held that tax avoidance devices should be rejected while applying the provisions of taxation. For that purpose the learned assessing officer strongly relied upon the following judgments:

Union of India v. Playworld Electronics (P.) Ltd. , Juggilal Kamlapat v. CIT , CIT v. Durga Prasad More .

9. The assessing officer contended that voluntary liquidation proceedings initiated in the case of the assessee was only with a purpose to transfer the shares to TSHL at cost and with a view to evade tax. The Hon'ble Supreme Court in the case of A.L.A. Finn (supra) had held that valuation of stock-in-trade in the case of dissolution of the firm has to be done at market price. While the valuation of assets; during the subsistence of partnership was immaterial and could even be notional, the situation was totally different when the firm was dissolved or when a partner retired. The statement of account then must not be on a notional basis but on a real basis, i.e., every asset should be converted into money and the account of each partner settled on that basis. This equally applied to assets which were stock-in-trade. There could be no manner of doubt that for any purpose of dissolution the partner would value the assets only on a real basis and not at cost or any other value appearing in the books. The assessing officer held that in view of the judgment of the Hon'ble Supreme Court in the case of A.L.A. Firm (supra) the market value of shares held by the assessee in SIIL and MALCO was to be treated as revenue receipt on trading account on the date of liquidation. The assessee had not furnished any details how and at what price the shares held in SIIL and MALCO were acquired. The assessee did not furnish details and evidence of market price of shares of SIIL and MALCO nor other papers relating to liquidation proceedings. The assessee did not reply to show-cause notice. The learned assessing officer therefore assessed business profit on dissolution in the following manner:

1.

Market value of quoted shares held as per balance sheet as on 31-3-1999 Rs. 102.58 Cr.

2. Book value as per bcdance sheet as on 31-3-1999 Rs. 58.06 Cr.

3. Income evaded Rs. 44.52 Cr.

The assessing officer held the sum of Rs. 44.52 crores as undisclosed income of the assessee of the block period. He added thereto the disallowance of interest claimed for assessment years 1998-99 and 1999-2000 at Rs. 4,22,04,432 and Rs. 4,39,95,271 respectively as the undisclosed income of the block period. In this manner the learned assessing officer assessed the total undisclosed income of the block period at Rs. 53,13,99,700.

9A. The assessee preferred appeal before the learned Commissioner (Appeals). The assessing officer made a remand report to the learned Commissioner (Appeals) wherein reference was made to Hon'ble Bombay High Court dismissal of the writ petition filed by TSHL. The assessing officer made reference to Accounting standards also. It was stated that the computation of the undisclosed income at Rs. 32.67 crores was erroneous since that amount was the difference between the market value and the book value of the shares and warrants as on 31-3-1999. The liquidation proceedings commenced only on 29-4-1999. The assessing officer argued that the transfer of the shares held by the assessee-company to TSHL took place within the block period ended on 8-12-1999. For that purpose he relied on the fact that the dividend declared by SIIL on 30-10-1999 was paid to TSHL and not to the assessee-company. That was because shares had actually been transferred to the folio of TSHL and not held in the folio of the assessee company. We shall advert to the judgment of the Hon'ble Jurisdictional High Court at more length subsequently in this order.

10. The assessee argued before the learned Commissioner (Appeals), that the in come assessed by the learned assessing officer could not be a subject-matter of block assessment inasmuch as the same could not be construed "undis-closed" within the meaning of the Section 158B. The assessee argued that the two elements were required to be established before invoking the provisions of Chapter XIV-B viz.;

(i) There should be non-disclosure on the part of the assessee and

(ii) Non-disclosure should have been unearthed as a result of search.

In the block assessment order the assessing officer had not relied upon any money, bullion, jewellery or other valuable article or thing found during the course of search. The assessing officer placed reliance on certain documents which according to him showed that conversion of shareholding of the assessee-company from stock-in-trade into investment and liquidation of the assessee-company thereafter gave rise to undisclosed income. Both these facts were known and had been disclosed to the Income-tax Authorities before the date of search. The conversion/ reclassification of shares from stock-in-trade into investments was refleeted in the balance sheet for 31-3-1998 filed along with the return of income for the assessment year 1998-99 on 14-1-1999. The mention of date as September 1998 in the letter of Shri Patodia was a mistake. As regard liquidation, the liquidator of the assessee-company had already informed the assessing officer as required under Section 178 vide his letter dated 29-4-1999. The assessing officer had by his letter dated 26-5-1999 intimated No Objection for liquidation of the company. As a result of search there was no material/evidence that had not been or would not have been disclosed for the purposes of the Act. The assessee submitted that there was no back dating and that was based upon misunderstanding of the facts on the part of the assessing officer. The misunderstanding arose because of fax dated 25-5-1999 sent to Mr. Tarun Jain by RSM. The fax referred to various events should take place before the date of fax and that led the assessing officer to hold that the assessee had travelled backward in time and backdated events. The assessee submitted that fax sent a note that had been prepared earlier and was once again faxed on 29-5-1999 as it was perhaps required for immediate reference. The dates mentioned in the fax were not actual dates but a deadline by which the specified action was expected to be completed. The assessee argued that conversion of shares and liquidation of the company was no hidden fact. Thus there was no material/evidence found as a result of search.

11. The learned Commissioner (Appeals) held that the evidence found as a result of search clearly indicated to the assessing officer that the primary purpose of the conversion of shares held by the assessee from stock-in-trade into investment was not to reflect the correct position of shares but to save tax. That, the assessing officer would not have come to know but for the search. The nature of the material found in the course of search could not be said to have been disclosed by the assessee to the department. Had there been no search the same could not have come to the notice of the department as that material was not meant to be disclosed. Some of the seized material showed that there was planning devised on certain issues to avoid detection by the department. Documents found during the course of search did require the assessing officer to probe into the affairs of the assessee. The learned Commissioner (Appeals), therefore, rejected the contention of the assessee that the provisions of Chapter XIV-B did not apply.

12. Secondly, the assessee argued before the learned Commissioner (Appeals) that the relevant shares in relation to which disclosed income was assessed were indeed held as investment and consequently assessment as business income was incorrect. The assessee submitted that it had acquired the shares of SIIL and MALCO over a period of time by participating in the C public issue or otherwise allotment made by SIIL and MALCO. The shares held by the assessee-company were part of the Promoters' holdings in SIIL and MALCO collectively. The assessee along with other two investments companies held 28.44 per cent in SIIL and 70.49 per cent in MALCO. That shareholding had been disclosed as investment till 31-3-1991 and on 1-4-1991 it was classified into stock-in-trade and continued as such till 31-3-1998. The shareholding was once again converted into the investments as n on 31-3-1998. The fact of the matter was that the shares had all along been held as investment only and as on 31-3-1998 there was no conversion but only correction of incorrect classification that had continued from 31-3-1991 to 31-3-1998. The assessee submitted that the above correction was not only seen and examined by the assessing officer who made the assessment order for assessment year 1998-99 under Section 143(3) on 9-2-2001, i.e., long after the search but the learned assessing officer in that assessment order confirmed the correction thus made. For the purpose, the assessee relied upon the extracts from that assessment order. The assessee argued that the shares were a part of the Promoters' holding for controlling interest in the SIIL & MALCO. In the eyes of law where shares were purchased with a view of obtaining control, the profit from the sale of such assets would be a capital gain. The assessee placed reliance on the decision of ITAT, Hyderabad in the case of KNB Investments (P.) Ltd. v. Asstt. CIT (2001) 79 LTD 238 (Hyd.) and on the following judgments also:

• Bengal & Assam Investors Ltd. v. CIT , • RameshwarPrasadBagla v. CIT , • CIT v. H. Holek Larsen (1966) 160 ITR 67 (SC), • Ramnarain Sons (P.) Ltd. v. CIT .

The assessee argued that the mode of disclosure in the books of account or the return of income did not determine inherent nature of holding. It was the intention of the assessee and the conduct that determined the nature of holding. The conversion of shares as investment as on 31-3-1998 merely reflected true nature of the holdings. The assessee argued that as the shares had been held by the assessee not as stock-in-trade but as investment, the transfer of those shares was governed by the provisions of Section 46(1) of the Act. As per Section 46(1), the transfer of a capital asset by a company to its shareholders on its liquidation would not be regarded as transfer by the company in liquidation. Thus, there was no tax liability on the assessee on distribution of the shares in specie to its shareholders on liquidation. The assessee argued that this contention was also supported by the judgment of the Hon'ble Bombay High Court oh the writ petition filed by TSHL. The Hon'ble Bombay High Court upheld attachment of the shareholding of the assessee in recovery proceedings. If the shares had constituted stock-in-trade the provisions of Section 281 could not be applied and the attachment could not be made. In the writ petition filed by TSHL this question was squarely before the Hon'ble Bombay High Court and the Hon'ble High Court gave a categorical finding "the assessee has transferred the assets as assets and not as stock-in-trade". The assessee argued that this finding was a finding necessary for the disposal of the writ petition filed by TSHL and therefore it formulated the ratio of the judgment of the Hon'ble Bombay High Court and was binding on the department. In that view of the matter the block assessment made only on the basis that the assessee had held stock-in-trade was required to be quashed. The assessee argued that in the block assessment the learned assessing officer had not independently examined this issue. He did not do so in the remand report also. In the remand report the assessing officer did not rebut the finding of the assessing officer in the assessment order for the assessment year 1998-99. He merely held that the assessee himself had disclosed the shares stock-in-trade and the assessee proceeded to disclose the same as investment from 31-3-1998 motivated by the objective of saving tax. Even in the remand report, no facts in support of stock-in-trade were relied upon. In the block assessment order, the assessing officer had tried to make out the case that the counsels had apprehended the applicability of the decision in the case of A.L.A. Firm (supra). The fact of the matter was that the counsels' advice for conversion was only because that would reflect the true nature of the holding. Similar view had been taken in the case of PNIT also. In that case for assessment years 1996-97 and 1997-98 the assessment order was set aside by the CIT under Section 263 directing the assessing officer to re-examine the assessee's claim for deduction of interest because the facts showed that the shares in SIIL and MALCO had been acquired with a view to have controlling interests. In other words, the shares were held to be investment. As against this vital fact no material was brought on record to show that the shares were indeed stock-in-trade and not investment.

13. The learned Commissioner (Appeals) noted that in the assessment order made under Section 143(3) on 15-2-2001 for assessment year 1998-99, the Assessing Officer had examined the factual situation of the assessees holding for the accounting years ended on31-3-1995,31-3-1996,31-3-1997 and31-3-1998. The learned assessing officer had recorded the finding that even though the assessee had shown the investment in shares in question as stock-in-trade, the very intention of the assessee was not to treat them as stock-in-trade retain them as long-term investments. The intention was finally translated into action by converting the stock-in-trade into investment on the last day of the accounting year for the assessment year 1998-99. After considering the observations and findings of the assessing officer in the assessment order for assessment year 1998-99 the learned Commissioner (Appeals) observed as under:

The sum and substance of the findings recorded by the assessing officer in the body of the assessment order for assessment year 1998-99 is that despite the nomenclature of 'trading assets' or stock-in-trade given, these shares have never been held as trading stock and the block of Sterlite Industries (India) Ltd. shares and Madras Aluminium shares were never intended for the purposes of trading, but the real intention of the appellant was to hold the shares of the flagship companies of the group for acquiring control over management.

The learned Commissioner (Appeals) noted that in the case of the assessee search under Section 132 was conducted on 8-12-1999. The aforesaid assessment order for the assessment year 1998-99 was made on 9-2-2001 and the block assessment order was made on 31-12-2001. When the copious findings recorded in the assessment order were matched against the findings of the assessing officer in the block assessment order, it was found that the findings in the block assessment were in palpably opposite directions while the basic facts in the assessee's case remained the same. Had the assessment order been made prior to the date of search, one could perhaps infer that different finding was possible in the block assessment on the g basis of the material or information gathered after the search was carried out. But in the case of the assessee, the parallel assessment under Section 143(3) had been made after the lapse of considerable period of time from the date of the search. Therefore it did not stand to reason that the assessing officer was not aware of the material found during the course of the search while: framing the assessment order under Section 143(3) for assessment year 1998-99. Hence findings of the facts recorded by the assessing officer in the assessment order under Section 143(3) were relevant to the block assessment proceedings. In the block assessment order the vital facts as recorded in the assessment order had not been considered at all in the context of the nature of the stock holding of the assessee. In the block assessment year the assessing officer's entire focus was on the correspondence and legal opinion. The assessing officer held that by providing colour of the investment to the shareholding as stock-in-trade the assessee aimed at evasion of tax revenue in fraudulent manner. hereafter remand report was submitted by the assessing officer. In the remand report also no reason was given apart from repetition of the allegations as made in the block assessment order. The assessing officer in the block assessment order had not given any reasons to spell out as to why in the face of the same facts he was not in agreement with the findings recorded in the assessment order for assessment year 1998-99. There was no defence available of non-applicability of res judicata when the order had been made on the basis of the same set of facts. The learned Commissioner (Appeals) held that unless there were compelling reasons adequately supported by cogent material to justify a different view, the findings recorded in the order under Section 143(3) did not deserve to be ignored more specifically because such findings were based on actual facts borne out in the assessee's record. The learned Commissioner (Appeals) referred to the judgments in CIT v. Dalmia Dadri Cement Ltd. , Rusell Properties (P.) Ltd v. A. Chowdhury, Addl CIT , CIT v. Hindustan Motors Ltd. , M.A. Namazie Endowment v. CIT (1988) 174 ITR 582 (Mad.), Taraben Ramanbhai Patel v. ITO ( and Tax LR 258 (Ker.) and held that the treatment given by the assessee in the books of account for assessment years 1993-94 to 1998-99 was not the crux of the matter. Classification of the shareholdings as stock-in-trade was unreal and the assessee's record evidenced that the holdings were on investment account to acquire a controlling stake as spelt out vividly at page 10 of the assessment order.

The learned Commissioner (Appeals) thereafter recorded his finding in the following words:

In my considered opinion, in the light of the facts available on record as also the findings recorded in the assessment order under Section 143(3) for assessment year 1998-99 passed before the impugned block assessment as also in view of what has been held in my appellate order in the case of PNIT and after carefully considering the submissions of the learned AR at different stages of hearing of this appeal as also the remand report submitted by the assessing officer, I have but to hold that there are over-whelming reasons to come to the conclusion that nomenclature of the shares classified as stock-in-trade is indeed a mis-classification all along. The findings recorded in the assessment order for assessment year 1998-99 are quite cogent and lucid based on a correct appraisal and appreciation of facts attaching to the shareholdings in question. Those findings based on actual facts obtaining in the appellant's case are quite comprehensively and intimately relevant to the appellant's case before me for, be it for the purpose of regular assessment or an assessment for a block period, the basic facts of the case remain the same.

In this context the controversy raked up in the impugned order for the block period that the conversion of stock-in-trade into investment on 31-3-1998 is back dated loses its relevance. The basic fact is that the shares in question are inherently and intrinsically in the nature of holdings on investment account for the one pointed purpose of acquiring controlling stake. That also goes to show that the classification of the shares as stock-in-trade during the intervening period from assessment years 1992-93 to 1998-99 was a mis-classification and a misnomer as has been successfully made out by the assessing officer inter alia in the assessment order for assessment year 1998-99 inasmuch as the holdings kept on accumulating, that they were never intended to be traded and B that the classification as stock-in-trade was misleading. These findings being findings of fact which are corroborated by the appellant's record, I have but to hold that the shareholdings are not in the nature of stock-in-trade and the same are on investment account for the purpose of acquiring controlling stake. Accordingly the addition made by the assessing officer by treating the shares as stock-in-trade deserves to be deleted and the same is deleted.

14. Thus the learned Commissioner (Appeals) deleted the addition made in the block assessment order as a question of fact that the shares in question held by the assessee were intended to be traded and therefore the conversion of the same as stock-in-trade was misleading. However, having deleted the addition on this account the learned Commissioner (Appeals) has nonetheless considered other contentions of the assessee. The next contention of the assessee was that the transfer of shares did not happen in the block period. The assessee contended before him that the shares were transferred to the Demat account of TSHL on 25/26-9-2000 and 20-2-2001. That being so the transfer of the shares to TSHL took place subsequent to the block assessment period ended on 3-12-1999. The assessee argued that this fact was supported by the judgment of the Hon'ble High Court on the writ Petition filed by the TSHL. At page 39 of the order, the Hon'ble High Court held that the shares were transferred on 16-2-2001 (the correct date being 20-2-2001). This finding of the Hon'ble High Court was binding on revenue. The assessee submitted that winding up of the company involved three stages; the first stage being Commencement of liquidation proceedings. At that stage, the directors ceased to have control and the assets of the company vest in the liquidator. The second stage was Process involving realisation etc. That process was simple if the distribution could be made "in specie", then realisation of assets and distribution of excess over payment of liabilities was not; required. The third stage was Dissolution. A company stood dissolved and ceased to exist when the High Court passed an order to that effect. In the case of the assessee actual dissolution of the company was pending. As in the case of the assessee assets were distributed by the liquidator "in specie" that distribution could not and did not relate back to commencement of liquidation. In the case of the assessee, the distribution to TSHL required RBI approval. The liquidator made distribution "in specie" subject to approval. In a case where approval was required, the transfer took place only on approval and the approval granted could not be related back to any past event. The assessee relied upon the judgment of the Hon'ble Supreme Court in the case of Nonsuch Tea Estate Ltd. v. CIT . He placed reliance on the judgment in the case of Pfizer Corpn. v. CIT and CIT v. Kirloskar Tractors Ltd. also.

15. The learned assessing officer in his remand report submitted that during the block period dividend was declared by SIIL in the Annual General Meeting held on 30-10-1999 and that dividend was received by TSHL signifying that the transfer of the share had occurred during the block period. Relying on the judgment in the case of CIT v. Ghaziabad Engg. Co. (P.) Ltd. , the assessing officer argued that the approval granted by RBI related back to the distribution made by SIIL on 30-10-1999. The assessee, however, argued that the judgment in the case of Ghaziabad Engg. Co. (P.) Ltd. (supra) was distinguishable on facts because that judgment had been given in the context of registration under Section 47 of Indian Registration Act.

16. The learned Commissioner (Appeals) considered these submissions. He did not agreewith the reasoning of the assessee that the date of transfer was when final approval of RBI as also approval of FIPB/SIA was received. The distinction drawn by the assessee between transfer of shares "in principal" and "on final approval" was not justified. The effective date of transfer was the date the shares were actually transferred and that happened, admittedly, prior to the date of search. The final approval only formalised the effective transfer that had taken place before the date of search. Even if the effective transfer before the date of the search was procedurally not sound, nothing turned on that. The fact of the matter was that the shares were factually transferred prior to the search and for income-tax proceedings if there was a transaction, in substance, that had to be acted upon. The learned Commissioner (Appeals) held that the judgment of the Hon'ble Bombay High Court in the writ petition filed by TSHL was concerned only and exclusively with the question of the stay, for lifting the attachment of the shares under Section 281 of the Act. The court had clarified in the body of their judgment on a number of occasions such as paragraph 7 and paragraph 17 of the judgment. It was more than clear that none of the issues involved in the block assessment order could be taken to have been pre-judged by the Hon'ble High Court on merits. The judgment was exclusively confined to the applicability of Section 281 of the Act to the attachment of the shares.

Hence neither the assessing officer nor the assessee was justified in drawing strength from the observations made in that judgment. The learned Commissioner (Appeals) therefore held that the contention of the assessee that the transfer of shares had taken place after search was not acceptable.

17. During the course of hearing before us the learned CIT (DR) argued that on 8-12-1999 the assessee-company was under liquidation. After search proceedings the assessing officer carried out block assessment proceedings and the salient feature of the block assessment proceedings was that the assessee did not co-operate with the assessing officer. The assessing officer had clearly recorded in paragraph 3 that after having filed part details on 7/10-12-2001, the assessee did not furnish any further details and many details that had been asked for remained not furnished. There were three investment companies having huge shareholdings of SIIL and MALCO. The assessee was one of those three investment companies and all of them were entirely held by TSHL, a Mauritius based company. For their own reasons it was considered necessary that shares of SIIL and MALCO held by the three investment companies should be transferred to TSHL. The question was how to attain that objective without having pay any taxes and for that purpose the services of lawyers, were requisitioned. The learned assessing officer had discussed that aspect in considerable details in the block assessment order. The facts narrated in the block assessment order indicated that the purpose was to create a facade of facts behind which the transfer of shares from the investment companies to TSHL could be claimed as tax free. The consultants appointed by the assessee prescribed an elaborate exercise that the shares that were hitherto held as stock-in-trade be first converted into investment and thereafter on dissolution of the investment companies including the assessee-company distribution of shares "in specie" to TSHL. For that purpose step by step date-wise plan was chalked out. The learned DR took us closely through the block assessment order and the opinions given by the Lawyers and Tax Consultants reproduced in the block assessment order. The opinions warned the assessee of very high risk of the income-tax department applying the Supreme Court judgment in the case of A.L.A. Firm (supra) and levying Income-tax on the difference between market value as on the date of distribution of shares to TSHL and p the cost of acquisition of the shares to the assessee and other investment companies. Hence in order to avoid the imminent tax liability it was decided to give a different colour to the facts of the case and to disguise what was transfer of trading assets as transfer of capital assets. The learned DR in particular emphasised the letter dated 29-9-1998 addressed by Shri R. K. Patodia, Auditor of Sterlite Group to Shri Gautam Doshi of RSM and Co. He argued that this letter revealed that there was ever willingness to falsify the facts. The learned DR then took us through the F show-cause notice issued by the learned assessing officer and pointed out that the various queries raised by the assessing officer were not replied to by the assessee-company. The learned DR argued that there was no force in the argument of the assessee that there was no transfer of shares during the block assessment period. Large amount of dividend declared by SIIL and MALCO during the block period were directly paid to TSHL and not to the three investment companies, that showed that transfer of shareholdings from the assessee-company and other investment companies in favour of TSHL had already taken place prior to the date of search. The deemed profit made by the assessee-company on the date of such transfer within the ratio of Supreme Court judgment in the case of A.L.A. Firm (supra) came to the notice of the revenue during the course of search proceedings under Section 132. The search revealed that the assessee was holding these shares as stock-in-trade and the declaration of the same as capital asset in the return of income was an attempt to suppress and conceal the true facts of the case. There was thus direct nexus between the profit of the firm and evidence found as a result of search. This aspect had been elaborately brought out in the show-cause notice issued by the assessing officer.

18. During the course of hearing before us, the learned DR strongly relied upon the judgment of Hon'ble Bombay High Court in the case of Twinstar Holdings Ltd. v. Anand Kedia, Dy. CIT , the Hon'ble High Court referred to the statement of Shri Navin Agarwal son of Shri Dwarka Prasad Agarwal and full-time Director of SIIL recorded on 9-12-1999 under Section 132(4) of the Act. Shri Navin admitted that the Directors of PNIT were controlling the affairs of the investment companies as also of TSHL. The court noticed that incriminating papers had been seized during the course of search from which it was gathered that the entire device was to transfer the shareholding of the three investment companies in SIIL and MALCO to TSHL, without paying any taxes. It was to avoid the payment of tax that the shares held as stock-in-trade in the books of three investment companies were sought to be converted as investment. The CIT (DR) took us through the observations of Hon'ble High Court under the heading "Conduct of the Petitioner" at pages 27-28 of the judgment. He pointed out that the court had noted total non-cooperation by the assessee in the block assessment proceedings. From the material that was available the assessing officer had found that the assets were distributed during the financial year ended 31-3-2000. The assessee was asked to give the effective date of distribution as also the market value on the date of distribution. The assessee only gave vague replies. The court noted that up to 31 -3-1991 the three investment companies Tiad shown their shareholdings as investment, in the financial year 1991-92 shareholdings were converted from investment into stock-in-trade and thereafter the shareholdings were held as stock-in-trade up to 31-3-1999 when these were converted again into investment. The assessee was asked to furnish various documents so as to ascertain the exact date of dissolution and distribution of assets, but to no avail. The Hon'ble High Court noted that according to the assessing officer the distribution of assets had taken place before the commencement of search. The assessee's argument was that the transfer took place on 20-2-2001 and it was for that reason that the Hon'ble Court with a view to decide the assessee's writ petition acted on the assumption that the transfer was dated 20-2-2001 and accordingly the transfer came within the first limb of Section 281 of A the Act. The Hon'ble High Court had made very clear that 20-2-2001 was not binding on the departmental assessment proceedings. The date was being accepted for the purpose of Section 281 of the Act because that was on the assessee's own showing. The learned CIT (DR) took us through the observations of the Hon'ble High Court under the head "Findings on Section 281 at Para 9 onwards; of the judgment". The learned DR emphasized that the Hon'ble High Court noted the provisions of Section 2(47) of the Act as also of Section 45(2) of the Act. Under those provisions conversion of capital assets into stock-in-trade gave rise to liability to tax though the liabilities were brought to tax not in the year in which conversion took place but in the year in which the asset was sold or otherwise transferred. The Hon'ble High Court took note of the fact that according to the assessing officer the entire exercise wais undertaken in order to avoid business being created with market value of the shares in the profit and loss a ccount. Therefore, the liabilities accrued on 31-3-1999, in the case of the assessee. In order to avoid that liability the assessee transferred the assets after 8-2-1999 on 16-2-2001 when they got the final approval from RBI. The assessment order shows that the assessee knew that a huge tax liability would arise and therefore they first converted stock-in-trade into investment on March 1999, followed by initiation of dissolution of the three companies in April 1999, followed by the petitioner becoming a holding company, followed by application for transmission of shares on 17-6-1999, made to RBI, followed by conditional approval of RBI on 30-11-1999, then came the search on 8-12-1999, after the search the assessee obtained approval from FIPB on 16-5-2000, followed by Final approval from RBI dated 16-2-2001. Thereafter the learned DR brought our attention to the Hon'ble Court judgment page 31 the it there could be no adequate sale consideration as the assessee valued the assets at cost. He pointed out that at page 32 there was clear finding of the Hon'ble Court that the entire device was implemented by the TSHL and the investment companies to evade tax. The learned DR thereafter emphasised that during the course of writ petition TSHL sought to rely on the findings of the assessing officer in the block assessment order. At page 33 again the Hon'ble Court noted that the assessee had transferred the shares under a sham dissolution as an asset. The assessee had transferred the asset as asset and not stock-in-trade. Lastly, the learned DR strongly emphasised the concluding remarks of the Hon'ble High Court at Para 16 of the judgment wherein the court referred to the Apex Court judgment in the case of McDowell& Co. Ltd. (supra) and held that judgment to be squarely applicable to the case of the assessee before us.

19. The learned DR argued that it was settled legal position that there could be no premium on dishonesty. In support of the contention he referred to the judgments in Sivagaminatha Moopanar & Sons v. CIT , K.P. Arthanariswamy Chettiar v. ITO , CIT v. Suleman Abdul Sattar (1983) 139 ITR 8 (Guj.), CIT v. Smt. V. Sikka (1984) l49 lTR 73 (DeM), Snehlata Chandrakant Chalishqzar v. Thanvi (2000) 108 Taxman 171 (Guj.) and Income Tax Officerv. Hemesh Family Trust (1994) 51 ITD 88 (Ahd.). The learned DR then argued that when untruthfulness is exposed court are bound to reject the pleas taken by an untruthful party. During the course of hearing before the learned Commissioner (Appeals) the assessee had harped upon the fact that entire material facts had been disclosed in the return of income filed prior to commencement of search proceedings and the statements filed during the course of assessment proceedings. The learned DR argued that a person who made untrue disclose of material facts cannot take the plea that there was full disclosure of facts. The assessee cannot be heard to argue that truthfulness or falsity of statement of facts can be examined only in the original proceedings and not in the subsequent proceedings. In support of such contentions the learned DR relied upon the judgments in S.P. Mohan Singh v. ITO (1983) 141 ITR 4403 (Punj.& Har.),Phool Chand Bajrang Lal v. ITO , CIT v. Jamnadas Dwarkadas & Co. (1994) 209 ITR 15 (Bom.), Sri Krishna (P) Ltd. v. ITO , Manilal Gafoorbhai Shah v. CIT and G. Sukeshv. Dy. CIT .

20.The learned DR argued that there was no force in the argument of the assessee that as a result of search no evidence relating to undisclosed income was found. Various legal opinions received by the assessee were of such nature that the same would never have been disclosed to the assessing officer in the normal course of assessment proceedings. The evidence found thus satisfied the requirement of Section 158B(&). Those legal opinions suggested that the assessee had embarked upon systematic device to evade tax. Hence those formed "evidence" for the purpose of block assessment proceedings. In support of this the learned DR relied upon the judgments in Paras Dass Munna Lai v. CIT (1937) 5 ITR 523 (Lahore), Addl. CIT v. Jay Engg. Works Ltd. , Vimal Chandra Golecha v. ITO and Mangalchand Gobardhan Das v. CIT .

21. The learned DR argued that in the present case the assessee had taken contradictory stand at different stages of assessments, the assessee had first disclosed and declared the shareholding to be investment thereafter it was converted into stock-in-trade and once again the assessee was seeking to re-convert it into investment. In law, the assessee was not entitled to both approbate and reprobate, that was not permissible. In support of this contention the learned DR relied upon the judgments in Naraindas v. CIT , Lal Singh Estate (P) Ltd. v. CIT (1995) 216 ITR 644 (Gauhati), CGT v. S. Lakshmana Sarma , N. Mangathayaramm v. ITO , Reliance Industries Ltd. v. Union of India (2002) 258 ITR 143 (Delhi), Seshasayee Paper & Boards Ltd. v. CIT , CIT v. Bimal Kumar Damani (2003) 261 ITR 876(Cal.), V.P. Patil v. ITO and UOI v. British India Corpn. Ltd. (2004) 268 ITR 4818 (SC). The learned CIT (DR) argued that the act of conversion of a capital asset into stock-in-trade or of stock-in-trade into a capital asset/investment was a matter of bona fide conduct of the assessee and not of the exigencies of the tax liability of the assessee. The declaration of conversion of the nature of a holding on the part of the assessee must emanate from legitimate business action and needs or actual transactions of the assessee. The. Assessee could not use them as instrument of tax planning. In support the learned DR relied upon the judgment of the Hon'ble Rajasthan High Court in the case of Manna Lal Nirmal Kumar Surana v. CIT .

22. The learned DR argued that the assessee's argument that the shareholding had all along been as investment could not be accepted. The assessee had filed several returns of income and several orders of assessment had been made on the basis that the assessee had already converted what he held as investment into stock-in-trade. Hence it was 'fait accompli' that the assessee had held these: asserts for several years as stock-in-trade. The assessee could not turn the clock back for the reason only that he was cautioned of huge liability imminent in the event of transfer of the shareholding to TSHL. The learned DR argued that this issue in the block assessments proceedings was independent of whatever had been held by the assessing officer in the assessment order under Section 143(3) for assessment year 1998-99, even if that assessment order had been made after search proceedings. He pointed out that in any case there was no mention of any search in the assessment order. Hence the fact that the E assessment order had been made after search was not of much consequence. Even otherwise there was vast difference between the nature of assessment proceeding under Section 143(3) and block assessment proceeding under Section 158BC. These were different proceedings and therefore the findings made in the course of one proceeding were not binding in another. In support of this contention the learned DR relied on the decision of ITAT in Dy. CIT v. Sanmukhdas Wadhwani (2003) 85 ITD 734 (Nag.).

23. The learned DR argued that at any rate in law there was no bar on double assessment. A wrong assessment could never come in the way of correct assessment being made and therefore in the proceeding against block assessment it was necessary to ascertain the correct legal position and that could not be summarily decided on the basis of assessment order for assessment year 1998-99. In support of this contention the learned CIT (DR) relied upon the judgments in Jamnaprasad Kanhaiyalal v. CIT ; ITO v. Ch. Atchaiah ; CIT v. Abdul Rasheed , CIT/CWT v. A. Savudappan (2000) 244 ITR 6203 (Mad.).

24. Before parting the learned DR made an alternative submission without prejudice to the main arguments that the shareholdings of the assessee of SIIL and MALCO were stock-in-trade on the eve of the dissolution of the assessee-company or distribution of the shareholding to TSHL. The learned DR argued that even if the shareholding was held to be investment and not stock-in-trade still the assessee was liable to capital gains tax in the block assessment proceeding. In support of this the learned DR relied upon the judgment of the Hon'ble Rajasthan High Court in Manna Lal Nirmal Kumar Surana v. CIT (2003) 763 ITR 328.

25. Shri S.K. Tulsiyan, the learned Counsel for the assessee stated that the Sterlite Group was a well-known Industrial Group of India engaged in the business of manufacturing aluminium, copper telephone cables and optical fibre cables. The said group was controlled by three brothers Shri Anil Agarwal, Navin Agarwal, Pravin Agarwal and their father Shri Dwarkaprasad Agarwal. Two main companies of the Group were Sterlite Industries (India) Ltd. (SIIL) and the Madras Aluminium Company Ltd. (MALCO)'. The assessee-company was formed sometimes in mid-1980s and had been holding the promoters' holding in SIIL and MALCO. Those shares were acquired by the assessee at different times mostly by way of original application/right shares and/or preferential offer. There were some purchases of shares of SIIL & MALCO from open market also. The intention of holding such shares was to have controlling interest in SIIL and MALCO. The assessee was initially held by the family members of Agarwal Group and later on in between the year 1993 to 1999, M/s. Twinstar Holdings Ltd. (TSHL) an OCB based in Mauritius invested into the equity of the assessee-company with the approval of the relevant authorities and later on in the month of June, 1999 TSHL acquired almost 100 per cent of the equity of the assessee by buying the shares which were A held by the members of Agarwal family from them. The learned Counsel emphasised that TSHL at the time of acquisition of shares in the assessee was indirectly held by the family members of Agarwal Group. Finally in the month of April, 1999 the respondent-assessee was put tinder members' voluntary winding up and the shares of SIIL/MALCO held by the assessee were ultimately transmitted to TSHL. The learned Counsel informed that the shares of SLIL and MALCO were held by the assessee as Investments till 31-3-1991. With effect from 1-4-1991 the holdings in the B two companies was converted into stock-in-trade and remained so till 31-3-1998. Again on 31-3-1998 the said shares were converted into Investments. The above aspects were duly disclosed in the returns of income filed and accepted by the department in the assessment orders under Section 143(3). A search action under Section 132 was carried out on 8-12-1999 at various offices and factories of the Sterlite group of companies and also at the residences of the directors and key individuals of the group q including the assessee. The assessee, was searched on 15-12-1999. Subsequent to the said search notices under Section 158BC was issued on 22-5-2000 in response to which block return was filed on 18-7-2000 declaring Rs. 11,30,130 as undisclosed income. The unaccounted income was assessed at Rs. 53,13,99,700. The learned Commissioner (Appeals) allowed full relief against which the department had come in the instant appeal. The relief of Rs. 44.52 crores only was being contested by the department. The learned Counsel argued that the conversion of shares of SIIL and MALCO held by the assessee as investment into stock-in-trade was a mistake on the part of the assessee inasmuch as the status of the shares was always that of investments and the same were treated as investments. The said mistake was rectified by converting the said stock-in-trade again into investment. In other words the second conversion was acceptance of a situation that always existed and could best be explained as a correction of mistake so as to reflect the true picture. The position as explained above was duly reflected in the returns of income and assessment of the said years made. In other words the above conversions were in the knowledge of the department and were accepted in the course of regular assessment. Nonetheless during the course of block assessment proceedings on the basis of documents seized, the assessing officer concluded that the conversion of stock-in-trade into investment was a well-planned and a calculated move to avoid payment of tax which the assessee would otherwise had to pay on liquidation. Hence the assessment was completed by treating the difference between the market price of the said shares and cost as business profit amounting to Rs. 44.52 crores. The learned Counsel argued that the entire addition was legally incorrect inasmuch as the same was beyond the scope of block assessment. The matter of conversion of stock-in-trade into investment was a part of regular assessment proceedings. Block assessment had to be restricted to assessment of undisclosed income not hitherto disclosed before departmental authorities. It could not be used to disturb matters pertaining to regular assessment until and unless evidence to indicate unaccounted income pertaining to the said year was unearthed. On the other hand the documents seized and relied upon by the assessing officer did not point to any such thing. The above fact was agreed to by the learned Commissioner (Appeals) who stated that the said shares were truly investment and not stock-in-trade and hence assessee was not required to pay any tax under Section 46(1) of the Income Tax Act, 1961 thereby deleting the said addition. Further another thing which needed to be noted was that the course of regular assessment proceedings the assessing officer had himself accepted the conversion. His change of stand in the block assessment proceedings could not be accepted as there was no new fact. The learned Counsel relied upon the judgment of the Hon'ble Gujarat High Court in the case of N.R. Paper & Board Ltd. v. Dy. CIT wherein it was held that what the assessee had already disclosed or would have disclosed was not to be treated as undisclosed income. Further Finance (No. 2) Act, 1998 inserted an Explanation to Section 158BA(2). Clause (b) to Explanation enacted that 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. The learned Counsel relied upon Sunder Agencies v. Dy. CIT (1997) 63 ITD 245 (Mum.); CIT v. Dr. M.K.E. Memon , Bhagwati Prasad Kedia v. CIT ; Parekh Foods Ltd. v. Dy. CIT (1998) 64 ITD 396 (Pune); CIT v. Vikram A. Doshi , CIT v. GOM Industries Ltd , H.B. Stock holding Ltd. v. Jt. CIT (2004) 87 TTJ 127 (Delhi) and Essam Intra-Port Services (P) Ltd. v. Asstt. CIT (2000) 72 ITD 228 (Hyd.). The learned Counsel argued that the sum and substance of all the judicial pronouncements cited was that block assessment was restricted to assessment of "undisclosed income" only. Under-payment of tax was a matter of regular assessment and the same could not be taken up in block assessment proceedings. Matters which were reflected in the returns of income filed or books of account maintained in the regular course of business could not be considered in block assessment. The learned Counsel argued that the documents seized in the course of search on the basis of which the assessing officer assumed tax evasion were a fax sent by M/s. RSM & Co to Shri Tarun Jain, Director, Finance of SIIL. The said fax was sent on 25-5-1999 and was a checklist of work done or to be done in the process of liquidation. The assessing officer interpreted this to mean that since the fax was sent on 25-5-1999 but some of the items listed ought to have been completed by April, 1999 it meant that actions of the company were being backdated. However, during the course of appellate proceedings it was explained that the contents of the seized pages had been prepared much before 25-5-1999 and it was faxed A once again on the said date as it was required for some immediate reference. Furthermore the dates mentioned were not the actual dates but a deadline by which the specified action was expected to be completed. In reality, the contemplated actions were completed by the deadline or a few days later. The assessing officer overlooked the fact that most of the tasks listed in the said documents involved outside Government agency like RBI. The assessee obviously could not connive with them to backdate documents. Secondly even otherwise how did that show that the assessee had earned unaccounted income or income not offered for the purpose of taxation ? The document or the fax message did not prove any such thing. The learned Counsel further argued that the fax dated 10-11-1998 sent to Shri Rajnish of Sterliite Group from RSM & Co. containing a brief note on the liquidation process of the investment companies contained nothing in relation to "undisclosed income". Pages 36-40 of the loose: paper file A-2 seized from the office of Tulsiani Chambers were a note on process of liquidation. The said note highlighted the most cost effective method of transferring the shares from the assessee to the OCB-Twinstar Holdings Ltd. was to convert the shares held as stock-in-trade into investments and then to transfer the net assets of the assessee and other companies in specie to the shareholder. The possibility of application of Supreme Court judgment in the case of ALA Firm v. CIT and consequent taxation of difference between the cost and market value of the stock-in-trade was also discussed. Hence conversion of stock-in-trade to investment would, save incidence of such taxation also. It was further stated that on liquidation only capital gains would arise but by virtue of DTAA between India and Mauritius, no tax liability would arise, as there was no capital gains tax leviable in Mauritius. There was nothing in the note which was hidden from the department. The fact that shares v/ere converted from stock-in-trade to investment was known to the department. Hence the above papers could not be held against the respondent- assessee. The learned Counsel argued that Pages 28-37 of file A-l seized from the office of Tulsiani Chambers. Page 28 was a note on merger/ dissolution. Page 30 was a letter from Shri Patodia dated 29-9-1998 to Ghri Gautam Doshi of RSM & Co. where the profit and loss account position of the assessee was discussed. It was mentioned that if dividend income was exempt under Section 10 of the Income Tax Act, the loss of the assessee would further increase to the extent of dividend. The huge figure might attract attention and hence the possibility of artificially bringing the loss figure was suggested. The above letter did not have much significance inasmuch as pointed out by Shri Ramesh Patodia in the course of assessment proceedings for assessment year 2000-01 of M/ section Pravin Navin Investment Pvt. Ltd., there was a mistyping of date. Furthermore the said letter was never issued by him. Page 36 set out the process proposed for voluntary winding up of the assessee-company. The queries posed to the various advocates were with regard to Income-tax, Company Law and FERA. Page 37 contained the opinion of Shri S.E. Dastur, Sr. Advocate giving the same advice that the shareholding should be converted into investment. Those papers also contained opinions of other leading tax consultants. The learned Counsel argued that those documents merely proves that before taking any step the assessee had done one proper research and sought opinions of luminaries of the field because the amount involved was huge. That did not show earning of any undisclosed income which was the essence of block assessment proceedings. Those documents did not bring anything new to light. It merely showed that the decision to convert stock-in-trade was taken after much deliberation and after a prolonged thought process. That could not be held against the assessee. By using the seized papers to assume that the assessee had defrauded the department was far-fetched. Application of McDowell& Co. Ltd.'s case (supra) (as done by assessing officer) was erroneous as there was no colourable device. Even other - if at all application of McDowell & Co. Ltd.'s case (supra) was a matter of regular assessment and it could not be brought in a block assessment. Further, a perusal of the order of the assessing officer showed that there was nothing in it that could not have occurred to the assessing officer at the time of regular assessment proceedings. Irrespective of the expert opinion sought by the respondent-assessee and the research done by him the fact of conversion of shares into investments was before the assessing officer. The legalities and the correctness from the taxation point of view were open to the assessing officer to consider. The case laws applied by him in the block assessment order could have been applied in the course of regular assessment proceedings as well. Hence there was no fresh discovery of material that could justify the block assessment made. Seeking opinions of legal experts was something that any big company would do. It did not mean at all that the assessee-company intended to defraud revenue. It was merely tax planning perfectly legitimate being within the framework of the law as held by the Hon'ble Supreme Court in the case of Union of India v. Playworld Electronics (P.) Ltd. . The learned Counsel relied upon the judgments of Banyan & Berry v. CIT ; CIT v. Sri Abhayananda Rath Family Benefit Trust , Union of lndia v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC) also. He argued that in the case of Azadi Bachao Andolan (supra) referring to the judgment of the Madras High Court in M. V. Valliappanv. ITO the Hon'ble Apex Court held that the decision in McDowell & Co. Ltd.'s case (supra) cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing tax burden of the assessee, must be looked upon with disfavour. Referring to the judgment of the Hon'ble Gujarat High Court in the case of Banyan & Berry v. CIT , the Hon'ble Apex Court further held that an act which was otherwise valid in law cannot be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests. In a nutshell all the above judgments laid down that it was open to assessee to arrange their affairs in such a manner that it would not attract the tax liabilities, if it was within the permissible limit of law. In short, tax planning is legitimate and allowable and the same could not be held against the assessee. The learned Counsel argued that in the case of the assessee during the course of search no such evidence or document was found that would justify the existence of unaccounted money or undisclosed income. The documents discussed were only opinions sought in the normal course of business. Subsequently, on the basis of such opinions a decision of conversion of stock-in-trade into investments was q taken and such decision was duly reflected in the balance sheet filed with the return of income for assessment year 1998-99. The said return of income was subjected to scrutiny assessment wherein the conversion of stock-in-trade to investment was accepted. Hence there was nothing that was hidden from the department. Further as far as decision regarding liquidating the assessee-company was concerned the fact was intimated to the department under Section 178 vide letter dated 29-4-1999 (much before the search date). The assessing officer acknowledged the receipt of the said letter and granted his consent vide letter dated 26-5-1999. Hence: the department was aware of conversion of stock-in-trade into investments much before the search date and had accepted the same long after the search in order dated 9-2-2001 for assessment year 1998-99. The decision regarding liquidation was intimated to the department and the department accepted the same much before the search date. Hence the matter having been disclosed the alleged tax evaded by virtue of the conversion of stock-in-trade to investment became a subject-matter of regular assessment. The same was beyond the definition of block assessment and hence the addition made is bad in the eyes of law.

26. The learned Counsel argued that there was no support to the block assessment made by the assessing officer from the case law relied upon by the assessing officer. As to the judgment in the case of McDowell & Co. v. CTO the same had been analysed in detail by the Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra), McDowell & Co. Ltd.'s case (supra), ratio did not apply to the assessee because no colourable devise was detected by the department. The judgment in the case of Union of India v. Play world Electronics was distinguishable on facts. In that case it was discovered that there was wilful suppression of facts with the intention to evade payment of central excise duty. In the case of the assessee there was no suppression of information and the conversion of stock-in-trade into investment was duly disclosed in its books of account and balance sheet filed With the return of income. Similarly in the case of Juggilal Kamlapat v. CIT it was held by the Tribunal that the termination of the managing agency was a collusive device practiced for the purpose of evading income-tax, that the partners of the firm continued to enjoy the benefit of the managing agency as shareholders and directors of the new managing agency company. In short, that was the case of colourable device. In the case of CIT v. Durga Prasad More the Tribunal found itself unable to accept the correctness of the recitals in the trust deeds that were held to be merely self-serving recitals. Thus none of the various Supreme Court judgments cited by the learned assessing officer applied on the assessee's case.

27. During the course of hearing before us the learned Counsel strongly relied upon the doctrine of res judicata. In the case of the assessee, on the same facts for the same assessment year the learned assessing officer had after detailed discussion in the regular assessment under Section 143(3) held that the nature of the shareholding of the assessee was throughout investment i.e. capital asset held by the assessee. In the block assessment the learned assessing officer took the contrary stand and held that the sharehoding was stock-in-trade and its conversion into investment was sham and merely a device of tax evasion employed by the assessee. In Income Tax Act normally the principles of res judicata did not apply. However, the mere fact that estoppel and res judicata did not apply, did not by itself justify the revenue authorities to change their stand year after year and on the same set of facts to take different views in different years. In Income-tax proceedings though the principles of res judicata did not apply, yet rule of consistency did apply i.e., if no fresh facts came to light on investigation the assessing officer was not entitled to reopen the same question on mere ground of suspicion or change of opinion. This was based on principle of natural justice or expediency. In this regard, attention was invited to the judgments in the cases of Hon'ble Supreme Court in the case of Radhasoami Satsang v. CIT ; Trustees, Nagore Durgah v. CIT , CIT v. Shree Nirmal Commercial Ltd. ; Sardar Kehar Singh v. CIT ; Burmah Shell Refineries Ltd v. G.B. Chand, ITO ; CWT v. N.R. Sirkar ; Hon'ble Gauhati High Court in the case of Dhansiram Agarwalla v. CIT (1996) 217 ITR 44 (Gauhati); Lalludas Children Trust v. CIT (2001 ) 251 ITR 505 (Guj.); Hon'ble M.P. High Court in the case of Asstt. CIT v. Gendalal Hazarital & Co. and Union of India v. Kaumudini A Narayan Dalai .

28. The learned Counsel argued that in the regular assessment framed 14 months after the search the learned assessing officer h ad after detailed discussion already adjudicated in favour of the assessee. The relevant findings were hugely emphasized by the learned Counsel.

29. The learned Counsel argued that similarly in the case of M/s. Pravin Navin Investment & Trading Co. Pvt. Ltd., a sister concern facing similar B allegations, assessment orders for assessment year 1996-97 and assessment year 1997-98 were passed under Section 143(3) on 16-5-1998 and 24-3-2000 respectively. However, after the date of search on 8-12-1999, these orders were set aside by the CIT under Section 263 vide consolidated order dated 29-3-2001 to be made afresh. The orders under Section 143(3) read with Section 263 were passed on 26-3-2002 for assessment years 1996-97 and 1997-98 by disallowing the interest and finance charges r incurred for investment in shares on protective basis on the basis of search materials available with the department for assessment year 1997-98. In a nutshell in the regular assessment proceedings for assessment year 1996-97, 1997-98, 1998-99 and 1999-2000 in case of M/s. Pravin Navin Investments Pvt. Ltd., on similar facts the said shares of SIIL and MALCO held by the respondent-assessee were treated as investments ie., the position in the balance sheet that of conversion of shares from stock-in-trade to investments was accepted. The learned Counsel pointed out that this view was accepted by the learned Commissioner (Appeals) also who stated at page 26 of the order that "Diametrically opposite findings have been recorded in the parallel assessment-one assessment order being order under Section 143(3) and the other for the block period passed contemporaneously on the same set of f acts". He further stated at page 27 of the order that "In my considered opinion the findings of facts recorded by the assessing officer for assessment year 1998-99 under Section 143(3) are equally relevant for the block assessment proceedings." The order of the assessing officer was E illegal and bad in the eyes of law.

30. On merits, the learned Counsel argued that the main question was the true status of the shareholding in SIIL and MALCO. He argued that the effective date of transfer of shares was beyond block period. Hence the transfer of shares could not be considered in the block assessment order. In this regard, the learned Counsel relied upon the facts that the shares were transferred to TSHL's demat account on September 25/26,2000 and 20-2-2001. Further, the learned Counsel argued that this position was also borne out from the decision of the Hon'ble Bombay High Court in the case of Twinstar Holdings Ltd. (supra). That judgment was delivered in the context of attachment by the department under Section 281 of the shares to recover the taxes of the assessee and PNIT & SCRM. Though the findings were not relevant yet some of the facts highlighted therein were relevant. The learned Counsel pointed out that the Hon'ble Court had noted that Reserve Bank of India had made the clearance from FIPB necessary for their final approval and thus the final approval was given on 16-2-2001 only and it was thereafter that TSHL was registered as a beneficiary of the said shares held by Deustche Bank, Mumbai Branch, as depository participant. However the assessing officer ignored those facts and held the transfer to be in block period for the reasons that the Dividend, in respect of the subject shares, declared by SIIL in the AGM held on 30-10-1999 was received by TSHL; Balance Sheet as on 31-3-2000 did not reflect the shares as the assets of the assessee; in the statement on oath of Shri K.L. Damani (the liquidator) recorded by the assessing officer Shri Damani had stated categorically that on 16-6-1999 the Jeep, shares and tradeable warrants had been distributed in specie to the sole shareholder i.e. TSHL; in the books of account the journal entries for the abovestated transfer were made on 16-6-1999 (in the case of PNIT); motor car was also transferred on 16-6-1999 and the invoice and bill of lading for transporting the same to UK was dated 19-7-1999 (in case of PNIT), as far as the decision of the Bombay High Court was concerned the same was only and exclusively in respect of the stay for lifting the attachment of the shares under Section 281 of the Income Tax Act, 1961. The court had clarified more than once in the body of the judgment that the observations made are confined to the issue relating to attachment of shares. The learned Counsel argued that on close scrutiny these arguments of the assessing officer/Commissioner (Appeals) were not tenable. The In-Principle approval of the RBI attached as pages 27-29 of the paper book, on page 29 of clearly stated that "we advise that this is an 'in-principle' approval only and the Indian Company should register the transfer in its books only after the final permission to that effect is granted by the Reserve Bank for which the applicant should submit to this office SIA/FIPB approval as also the documentary evidence in regard to 2(a) above." Hence the assessee was specifically asked not to register transfer till the final approval was received from the RBI. The SIA/FIPB approval was received on 16-5-2000 ie., after the date of search. On receipt of the evidence of SIA/FIPB approval the RBI granted final approval on 15-7-2000, amended on 5-10-2000 and again amended on 16-2-2001. Thus the final approval was received only on 16-2-2001. Relying upon the judgment of Hon'ble Bombay High Court in the case of CIT v. Kirloskar Tractors Ltd. the learned Counsel argued that even an assessee following the mercantile system of accounting was not entitled to claim a deduction until the RBI granted approval under Section 9 of the Foreign Exchange Regulation Act, 1973. The learned Counsel further relied upon the judgments of Hon'ble Bombay High Court in the case of Dorr-Oliver (India) Ltd. v. CIT and in the case of CIT v. John Fowler (India) Ltd. . Hence it was clear that where approval of specific authority was required to perform any act the act could not be termed to have been performed prior to the said approval. Further it was held by the Hon'ble Bombay High Court in the case of CIT v. Phalton Sugar Works Ltd. that the requirement of obtaining approval of the Central Government or the Board was not a matter merely of procedure or a formality. Hence approval had to be very specific and it could not be general. Thus it was clear that the specific approval of the RBI was received on 16-2-2001 which then became the date of transfer. Hence transfer before that date could not be regarded as effective transfer in this view of the date of transfer being beyond the block period the addition could not be made and hence the addition deserved to be deleted.

31. The learned Counsel argued that the assessee's transactions pertaining to the shares in SIIL and MALCO were investment and not stock-in-trade.

He referred to pages 41 and 203 to 217 of the paper book and made a categorical statement that apart from possibly some sales/transfer to group) entities the assessee never sold/transferred the shares of SIIL and MALCO and thus the assessee only acquired the shares and did not deal in those shares. This fact had been recognized by the learned Commissioner (Appeals) that the shareholding was inherently and intrinsically in the nature of holding son investment account for the one pointed purpose of acquiring controlling stake. He therefore correctly held that the shareholdings were not in the nature of stock-in-trade and were on investment account. The learned Counsel stated that in the block assessment proceedings the Assessing Officer had not investigated the case from this angle at all He had not tried to find out independently whether the said shares were stock-in-trade or investments. He had merely held that the assessee himself disclosed the shares as stock-in-trade and the assessee's attempt to disclose the same as investment from 31 -3-1998 was a motivated one with the object of saving taxes. Hence the learned Commissioner (Appeals) was constrained to remark, "vital facts have not been considered at all in the context of the nature of stock held by the appellant." However the above matter was considered in the assessment order for assessment year 1998-99 and the assessing officer had concluded that facts clearly showed that the assessee was more interested in acquiring the controlling stake of the said companies i.e., SIIL and MALCO. This was also buttressed by the fact that the assessee was holding the promoters' stake in SIIL and MALCO and the said shares had been disclosed to SEBI as a part of promoters' holding.

32.The learned Counsel argued that even otherwise the judgment of Hon'ble Supreme Court in the case of A.L.A. Firm v. CIT (1991) 189 ITR 285 could not be imported in the case of the assessee for the reasons that the said case pertained to partnership firm and the method to be adopted for valuation of stock upon its dissolution. However, the assessee was not a partnership firm but a limited company. Even otherwise the applicability or not of that judgment could come in play only in regular assessment proceedings and not the block assessment proceedings. At any rate, the shares transferred by the assessee were investments and not stock-in-trade.

33. We have carefully considered the rival submissions. We find that there are the following major issues arising in this appeal:

1. Whether the provisions of Chapter XIV-B of the Act are applicable in the sense that evidence was found as a result of search ?

2. Whether the transfer of the shareholdings in SIIL and MALCO took place during the block period ?

3. Whether the nature of shareholdings in the hands of the assessee as on the date of transfer is stock-in-trade ?

4. If the answer to question 3 above is in affirmative whether the learned assessing officer is entitled to assess the difference between the market value of the shareholdings as on the date of transfer and the cost of acquisition of the shareholdings to the assessee?

If the answer to all the four questions above is in the affirmative then the revenue's appeal must succeed. But, if the answer to any of the four questions abovementioned is in the negative the revenue's appeal fails.

According to the learned Counsel for the assessee the answer to all the four questions abovementioned is in the negative. According to the impugned order of the learned Commissioner (Appeals) the answer to the first two questions is in the affirmative and because the answer to question No. 3 is in the negative, the question No. 4 abovementioned does not arise. In other words, the learned Commissioner (Appeals) has decided the appeal in favour of the assessee and against the revenue because according to him the answer to all the questions abovementioned is not in the affirmative. During the course of hearing before us the learned Counsel for the assessee has addressed us at length against the findings of the learned Commissioner (Appeals) in relation to questions 1 and 2 above and he has argued that the answer to question Nos. 1 and 2 above should also be in the negative. The assessee is not in appeal before us, nor has the assessee filed any cross objections. However Rule 27 of Appellate Tribunal Rules, 1963 permits the respondent, though he may not have appealed, to support the order appealed against on any of the grounds decided against him. In view of this Rule 27 of Appellate Tribunal Rules the assessee is entitled to support the impugned order on the ground that answer to questions 1 and/or 2 above is in the negative. More so, as we have already stated, if the answer to any of the four questions mentioned above is in the negative the assessee succeeds. Since the learned Counsel for the assessee has addressed us in length in relation to question Nos. 1 and 2 above also, we shall address to all the four questions mentioned above.

34. Before we proceed further we have to most respectfully ascertain whether there is and if so in what manner bearing on the appeal before us from the judgment of Hon'ble jurisdictional High Court on the writ petition filed by TSHL (supra). During the course of hearing before us both the learned CIT (DR.) and the learned Counsel for the assessee have strongly argued that the judgment of Hon'ble High Court bears out their case. The learned CIT (DR.) has argued that the Hon'ble High Court had already held that the assessee; had resorted to a device for tax avoidance and that the ratio of the judgment of Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) applied and the so-called conversion of stock-in-trade into investment was sham and a colourable device and was accordingly required to be rejected. The learned Counsel for the assessee, on the other hand, has vehemently argued that in the aforesaid judgment Hon'ble jurisdictional High Court have held that the transfer of the shareholdings in question to TSHL took place on 16-2-2001 i.e., much after the block period and what the assess transferred was not stock-in-trade. In view of either finding of the Hon'ble jurisdictional High Court the assessment of the alleged undisclosed income in the block assessment was required to be quashed.

35. To recapitulate the facts of the case, as told by the parties before us, the assessee is an investment company, who along with other two investment companies, viz., PNIT and SCRM were family controlled companies of Agarwals through TSHL, a company incorporated under the Mauritius Companies' Act, 1984. The shares of TSHL were held by Shri Dwarkaprasad Agarwal and Shri Agnivesh Agarwal in the ratio of 50 per cent each. These three investment companies acquired large shareholding in SHL and MALCO. Originally they had shown the shareholdings as investment. From 1-4-1991 the shareholdings were converted from investment into stock-in-trade. This position continued for assessment years 1992-93 to 1997-98. With a view to borrow funds from the international market on security of the SIIL and MALCO shares, it was decided to liquidate the E three investment companies and to consolidate the shareholding in SI1L and MALCO in TSHL. As huge stakes were involved the family consulted an array of tax experts so as; to ascertain the possible tax implications of transfer of shareholdings in the three investment companies to TSHL. The tax experts cautioned the assessee that there was a strong possibility of the department applying the ratio of Hon'ble Supreme Court judgment in the case of ALA Firm (supra) and assess the difference between the market value of the shareholdings as on the date of transfer and the cost of acquisition of shareholdings to the three investment companies as the profits from business arisen to the investment companies in the year of transfer. The family was advised that the incidence of tax would be Nil the shareholdings of the investment companies including the assessee in SIIL and MALCO were made investments and not stock-in-trade and then shareholdings were transferred to TSHL as a holding company on liquidation of the investment companies because according to provisions of Section 46(1) and (2) of the Act where the assets of a company are distributed to its shareholders on its liquidation it is the shareholder and not the company that is chargeable to tax under the head "Capital gains". Because under Double Taxation Avoidance Treaty between India and Mauritius there was no levy of capital gains on a Mauritian company, the resultant was that there would be no tax payable at all if the investment companies including the assessee company were to be liquidated and the shareholdings were to be acquired by TSHL by way of distribution of the assets of the liquidated companies. In pursuance to the legal advice thus received the shareholdings in SIIL and MALCO that had hitherto been shown as stock-in-trade in the books of account of the assessee-company were shown as investment for the year ended 31-3-1998, corresponding to assessment year 1998-99. At about the same time TSHL who was already holder of the most of the shares of investment companies proceeded to acquire the shares of remaining shareholders of the investment companies and thus became hundred per cent holder of the assessee-company. On 17-4-1999 a board meeting of the three investment companies was held. It was proposed to wind up the investment companies and appoint liquidators. On 29-4-1999 the proposal of the boards of the three investment companies received the assent of the shareholders in the extraordinary general meetings. A liquidator was appointed. On appointment the liquidator made applications to the assessing officers of the investment companies and obtained No Objection Certificates under D Section 178 from the assessing officers on 15-6-1999,26-5-1999 and 14-6-1999 in the case of PNIT, the assessee-company and SCRM, respectively. On 17-6-1999 an application was made to Reserve Bank of India by TSHL for approval of transmission of shares of SIIL and MALCO on fully repatriable basis upon liquidation of the investment companies. On 30-12-1999 RBI granted conditional approval for transmission of shares on fully repatriable basis in favour of TSHL. However, RBI had advised TSHL that P the extent of repatriability of the shares had to be ultimately decided by FIPB and therefore RBI should be approached only after obtaining approval from FIPB. On 16-5-2000 the petitioner received the approval from FIPB approving transmission of shares of SIIL and MALCO, hitherto held by the three investment companies on fully repatriable basis to TSHL. Thereafter, RBI gave its final approval on 16-2-2001. Pursuant to the above, TSHL was registered as a beneficiary of the shares earlier held by the three investment companies in SIIL and MALCO by Deustche Bank, Mumbai Branch as Depository Participant. In the meantime on 8-12-1999, a search was carried out at offices/factories of SIIL including the offices of the three investment companies and residences of its directors and other important persons. Pursuant to the search block assessment orders were made in the case of the investment companies including the assessee company and huge tax liability was raised on the basis that conversion of stock-in-trade into investment was sham and merely a device adopted for tax avoidance. As huge tax demand was raised pursuant, to the block assessment orders, as a measure of tax recovery, notices of attachment under Section 226(5) were served on the investment companies and the Depository Participant prohibiting receiving/delivering shares to any person whomsoever. Under the above circumstances TSHL filed writ petition before Hon'ble High Court seeking to challenge notices under Section 226(5) read with the Third Schedule to the Income Tax Act served upon the three investment companies as also Depository Participant.

36. During the course of hearing before Hon'ble High Court the petitioner (TSHL) submitted that notices of attachment under Section 226(5) were g ex facie beyond the jurisdiction because the property against which the action had been taken i.e., shares in SIIL and MALCO was the property of TSHL who was not an assessee from whom arrears of tax were due. It was submitted that if the case of the revenue was that the corporate veil should be lifted so as to treat TSHL and the three investment companies as one entity, then there was no transfer that could give rise to a tax liability. If the case of the revenue was that the three investment companies continued to own the shareholdings because there was no valid transfer in favour of C TSHL still there could be no tax liability in the absence of taxable profit arising on the transfer of the shares. It was argued that the stand of the revenue in recovery proceedings was not in conformity with the stand taken by the assessing officer in the block assessment order. The petitioner (TSHL) contended that Section 281 of the Act did not apply because that provision applied to transfers during pendency of proceedings under Income Tax Act, 1961. In the case of the assessee the transfer of shares by virtue of which the demand was raised had been taxed in block assessment orders, which, by definition, covered the period up to the date of the search, ie., 8-12-1999. According to the revenue the transfer of shares took place during the block period (31-3-1999 in the case of the assessee). Block assessment proceedings could be started only after the date of search, ie., 8-12-1999. In other words at the time of the transfer of shares, the block assessment proceedings were not pending and consequently Section 281 did not apply. The petitioner argued that the provisions of Section 281 applied only when there was a pre-existing tax liability whereas according to the department the tax liability arose out of the very transfer which the department sought to treat as void under Section 281. It was pointed out that the provisions of Section 281 applied only in two situations, viz. transfer during the pendency of proceedings or in a case where the assessment was completed and the transfer took place after such completion. It was argued that the Section 281 had two limbs. The first limb of Section 281 was not attracted because the transfer was not made during F the pendency of any proceedings but the impugned transfer itself gave rise to the impugned tax liability. As to the second limb of Section 281 which referred to the transfer after completion of the assessment, the petitioner argued that according to the department's stand the transfer took place on 30-11-1999; 31-3-1999 and 31-3-1999 respectively in the cases of PNIT, the assessee-company and SCRM whereas the block assessment orders in their cases were completed on 30-1-2002; 31 -12-2001 and 31-12-2001 respectively. Hence the second limb of Section 281 also did not apply. The petitioner next contended that provisions of Section 281 were not applicable to stock-in-trade, in view of Explanation appended to Section 281. In the case of the investment companies the tax demand arose on account of the assessing officer coming to the conclusion that the shares held by them constituted their stock-in-trade. The department acting in recovery proceedings contended that the impugned shares were held by the investment companies as investments.

37. The petitioner next contended before the Hon'ble High Court that bona fide transfers for adequate consideration could not be declared void. For that purpose reliance was placed upon Proviso (i) to Section 281(1).TSHL argued that the shares had been transferred pursuant to liquidation of the three investment companies and in the balance-sheet of the three liquidated companies, the equity holding of the petitioner was proposed to be cancelled and in consideration thereof, the shares in SIIL and MALCO were proposed to be transferred to the petitioner. It was therefore contended that the transfer of the shares/warrants was a bona fide transfer for adequate consideration. Therefore Proviso (i) to Section 281 applied and therefore the transfer of shares to the petitioners was not void.

38. TSHL next contended that under Proviso (ii) to Section 281 of the Act, a transfer shall not be void if it was made with the prior permission of the assessing officer. It was pointed out that No Objection Certificate under Section 178 of the Income Tax Act was obtained in the case of each of the three investment companies. For that reason Proviso (ii) of Section 281 also applied and the transfer could not be held void. TSHL challenged the notices of attachment on some other technical grounds also with which we are not presently concerned in this appeal.

39. Revenue contended, among other things, that the impugned shares had been transferred during the pendency of block assessment proceedings. Further the impugned transfers had been made without adequate, consideration. The action taken by the assessing officer was therefore in consonance with Section 281 of the Act. In the judgment Hon'ble High Court have, however noted that at one stage the learned Counsel for the department had contended that the correct date of transfer was 31-3-2000 when assets were distributed. However, releasing that the date 31-3-2000 would bring the transfer outside the block period, learned Counsel for the department after taking instructions from the officers reverted to the original date 30-11-1999. In the circumstances, learned Counsel for the department was not able to give a clear-cut date. He conceded that he had no clear-cut instructions in that regard. The learned Counsel for the revenue however contended that the second limb of Section 281 would apply because transfer was effected after completion of the proceedings and before notice under Rule 2 was given. There also, learned Counsel for the revenue found himself in difficulty because the department wanted to rely upon the date of transfer as 31-3-2000 but the block assessment orders were passed on 31-12-2001 and 30-1-2002. Therefore the second limb also could not apply if 31-3-2000 was taken as the date of transfer. The Hon'ble High Court recorded, "Ultimately, the department was totally confused. Learned Counsel was not in a position to explain the contradiction. At one stage, the department instructed learned Counsel to state that, in any event, regular assessment proceedings were pending against PNIT and D AIL for the assessment year 1997-98 and the assessment year 1998-99 and, therefore, Section 281 was applicable. We asked the department to file an affidavit stating why this fact was not brought to the notice of the court earlier. At that stage the officers stated that they did not wish to press this point because they realised that there was no pending demand for those years under regular assessment and further they also realised that the authorisation given by the Commissioner on 15-7-2002 was not based on those facts".

40. In the rejoinder learned Counsel for TSHL argued that on liquidation of the three investment companies, there was distribution of assets. That C such distribution did not amount to transfer. That the shareholder bought the assets by way of operation of law. That, it was a case of transmission in law. That, in the alternative, even if it was held to be transfer, the second limb of Section 281 would not apply because the second limb applied to transfers after completion of the assessment which was on 31 -12-2001 and 30-1-2002 and therefore the department's submission that the impugned transfer was on 31-3-2000 would not attract the second limb of Section 281 n because on 31-3-2000 assessments were pending. Moreover such transfer dated 31-3-2000 would fall outside the block period. It was contended that the impugned transaction itself gave rise to tax liability and therefore it could not be related to a pending proceeding of assessment nor could it be related to a completed assessment. In the instant case the department had sought to declare the very transfer, which gave rise to tax liability, as void and therefore Section 281 could not apply.

41. After hearing both sides the Hon'ble High Court formulated the following point for determination in the Writ Petition filed by TSHL:

Whether the impugned attachment was in consonance with the provisions of Section 226(5) read with the Third Schedule to the Income Tax Act, 1961, is the issue, which arises for determination in this case. For that purpose, one also has to examine the applicability of Section 281 to the facts of this case.

42. After formulating the aforesaid point for determination the Hon'ble High Court proceeded to give its findings. The part of the judgment captioned "Findings" is divided into three sub-parts, viz, "Preface", "Conduct of the petitioner" and "Findings on Section 281". The Hon'ble High Court began pronouncement of its findings with the following preface:

At the very outset, we wish to point out that in this case, we are not concerned with the assessment proceedings. Basically, we are concerned with the procedure followed by the department in the matter of attachment of shares transferred by three investment companies to the petitioner. However, in order to judge the applicability of Section 281, the date of transfer of the impugned shares is material and for that purpose, we are required to state a few facts emanating from the block assessment orders. We are conscious of the fact that the matter is pending in appeal before the Commissioner of Income-tax. However, some of these facts are required to be stated in order to decide the question of applicability of Section 281 of the Act, particularly in view of the argument advanced by the petitioner that the impugned transfer was not during the pendency of the block assessment proceedings.

43. Under the sub-part "Conduct of the petitioner" the Hon'ble High Court, as pointed out by the learned departmental representative took note of total non-cooperation by the three investment companies in their block assessment proceedings. Thereafter the Hon'ble High Court has taken note of the fact that irrespective of the findings of the assessing officers in the cases of three investment companies, as far as those investment companies were concerned, the transfer of shares to TSHL did not take place during the course of pendency of block assessment proceedings. The Hon'ble High Court at the same time made it clear that such date was not binding on the department in the assessment proceedings. The Hon'ble High Court have in this behalf observed as under:

The assessing officer, in the case of DAIL, has calculated the difference between the market value and the book value of the shares as on 31-3-1999, as undisclosed business income. Being aggrieved, DAIL has gone in appeal to the Commissioner (Appeals). The memo of appeal is annexed to the paper book {see page 112). In the appeal memo, DAIL has averred that the impugned shares and warrants were transferred on 20-2-2001. This is not the finding of the assessing officer. However, it is the case of the assessee in the said appeal that the shares were transferred on 20-2-2001. If so, the impugned transfer has taken place after the date of search on 8-12-1999, and during the pendency of the block assessment proceedings, which terminated by the block assessment order passed against DAIL on 31-12-2001. Even in the additional grounds of appeal filed before the Commissioner of Income-tax-III, the said assessee-DAIL has stated that there was no transfer of shares on or before the date of search, i.e., 8-12-1999. Even in the appeal filed by PNIT, the assessee has averred that the shares were transferred after the date of search. However, they have not given the date of transfer {see para 10 of the grounds of appeal filed by PNIT). At this stage, we may mention that in this writ petition, we are concerned with the validity of attachment and not with computation of income under Section 28/45. Suffice it to state that according to DAIL, the transfer is dated 20-2-2001, and if so, on their own showing, the transfer would come within the first limb of Section 281 of the Act. We make it clear that this date is not binding on the department in the assessment proceedings. The above discussion is only to show that on their own showing, the date of transfer falls within the pendency of the assessment proceedings.

44. Under the sub-part "Findings on Section 281" the Hon'ble High Court have considered the arguments of the assessee that neither the first limb nor the second limb of Section 281 applied on the facts of the case. As to the first limb the Hon'ble High Court observed as quoted above. The learned High Court re-informed that finding in the following words :

In this case, we are concerned with collection and recovery of tax. In this case we are not concerned with the computation of total income under Chapter IV. In this case, we are concerned with collection and recovery of tax and not with assessment of income. In this case, we are concerned with law of attachment. It is for the assessing authority to decide the date of transfer for the purposes of assessment proceedings. We are not concerned with the validity of the assessment order. We are concerned with a limited question as to whether the assessee has transferred the assets, pending assessment proceedings, in order to avoid the liability which accrued during the block period. Secondly, under the Income Tax Act, conversion of a capital asset to stock-in-trade gives rise to liability {see Section 2(47)), though such liability is brought to tax in the year in which the asset is sold or otherwise transferred (see Section 45(2)). It is not therefore, necessary that a liability arises only when the asset is sold. In the case of DAIL, the assessing officer' has found that in order to avoid the tax liability, stock-in-trade is converted into investment as on 31-3-1999, followed by dissolution. That the entire exercise was undertaken in order to avoid the business being credited with the market value of the shares in the profit and loss account. Therefore, the liability accrued on 31-3-1999, in the case of DAIL. Therefore, it was a pre-existing liability. It accrued before 8-12-1999, and in order to avoid that liability, the assessee transferred the asset after 8-12-1999, ie., on 16-2-2001, when they got the final approval from the Reserve Bank of India for transmission of shares from the three investment companies/assessees to the petitioner. Thirdly, we have taken the case of DAIL as the other two cases are identical. The assessment order shows that the assessee knew that a huge tax liability would arise on the difference between the market value and the book value, much prior to 8-12-1999. They first converted the stock-in-trade into investment on 31-3-1999, followed by initiation of dissolution of the three companies in April, 1999, followed by the petitioner becoming a holding company, followed by application for transmission of shares on 17-6-1999, made to the Reserve Bank of India, followed by conditional approval of the Reserve Bank of India on November 30, 1999. Then came p the search on 8-12-1999. After the search, the assessees obtained the approval from the Foreign Investment Promotion Board on 16-5-2000, followed by the final approval from the Reserve Bank of India dated February 16, 2001. Therefore, the transfer of shares took place on 16-2-2001, which is during the pendency of block assessment proceedings. Therefore, in our view, the case falls within the first limb of Section 281 of the Act.

45. Thereafter the Hon'ble High Court proceeded to consider the contention of the assessee that the transfer of shares to TSHL was not without adequate consideration. The Hon'ble High Court have decided this point in the following words :

It is argued on behalf of the petitioner that in this case, transfer has been made for adequate consideration. In this connection, it has been urged, as stated above, that the transfer of the shares has been pursuant to liquidation of the three investment companies. That, in the balance-sheet of the liquidated company, the equity holding of the petitioner would be written off and in consideration thereof, the shares/warrants in SIIL/ MALCO will be transferred to the petitioner and, therefore, the transfer was for adequate consideration. We do not find any merit in this argument. Firstly, as stated hereinabove, we are not concerned in this case with the question of validity of assessment. However, we are required to state the following facts in order to meet this argument. According to the department, the entire voluntary liquidation proceedings came to be initiated only for the purposes of transferring the shares to the petitioners at cost and not at market value with the object of tax evasion. As stated above, the petitioner became a holding company only after liquidation of the investment companies. Now, if in the balance-sheet of the liquidated company, the equity holding of the petitioner would be written off/ cancelled and in consideration thereof, the shares/warrants in SIIL and MALCO would be transferred to the petitioner as argued by learned Counsel for the petitioner, even then, the question remains as to on what basis the gain/loss would be calculated - whether the asset would be valued at cost or market value ? If gain takes place then, in the balance-sheet, it has to be reflected in the reserves. According to the assessing officer, the asset has to be valued at market value. If so, there cannot be sale for adequate consideration as the assessee has valued the asset at cost. We do not have the balance-sheet before us. In any event, that aspect needs to be examined by the assessing authorities. The fundamental issue in this case is whether the transferred shares should be valued at market value and if so, as on what date? The block assessment order is still in force. It has not been set aside. Under the block assessment order, the shares were held, as stock-in-trade and, therefore, the assessing officer has treated the difference between the market value of the shares as on 31-3-1999, and the book value as undisclosed business income (see page 116 of the paper book). The order of block assessment is not set aside, under that order, the shares have to be valued at market value and not at cost. In the circumstances, it is not open to the petitioner to contend that the transfer was for adequate consideration. Moreover, proviso (i) to Section 281(1) refers to a bona fide transfer for value, without notice of the pendency of proceedings. Both the conditions are required to be satisfied to attract proviso (i). We have already held that the entire device was implemented by the petitioner and the investment companies to evade tax. That, they had full notice of the pendency of the proceedings as indicated by the various steps taken by the petitioner commencing from 31-3-1998, in the case of DAIL. Therefore, proviso (i) has no application to the present case.

46. Thereafter the Hon'ble Court considered the contention of the assessee that the three investment companies had obtained No Objection Certificate from the assessing officer under Section 178 and therefore Proviso(ii) to Section 281(1) was satisfied. The Hon'ble High Court did not accept this argument because No Objection Certificate was issued by the Assessing Officer under Section 178(2) on 15-6-1999. On that date there was no tax demand pending. The demand was raised under Section 156 only pursuant to the block assessment order, which was passed pursuant to the search on 8-12-1999 when incriminating documents were seized.

47. Thereafter the Hon'ble High Court have considered the contention of the assessee that the department had treated the shares as stock-in-trade and not as investments and therefore the Explanation to Section 281 would apply. This issue has been decided by Hon'ble High Court, in the following words:

In the present case, we are not concerned with the assessment proceedings. At this point, we once again wish to make it clear that computation of business income by the department under Chapter TV is quite different from the recovery proceedings under Chapter XVII. That, Section 281 finds place in Chapter XXIII, which assists recovery. Section J) 281(1) is a prelude to Schedule II and Schedule III read with Section 226(5). In this case, the assessing officers have proceeded to attach the shares transferred as such to the petitioner. As held hereinabove by the assessing officer, the assessee has transferred the shares under a sham dissolution as an asset. That, if the dissolution is sham, one cannot call such transfer by operation of law. In such a case, one has to judge the intention of the assessee. The assessee has transferred the asset as asset and not as stock-in-trade, Hence, there is no merit in the argument of the petitioner.

48. Finally in conclusion the Hon'ble High Court have observed as under:

In conclusion, we may refer to the judgment of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148, in which it has been held that even if the transaction is genuine and even if it is actually acted upon, but if the transaction is entered into with the intention of tax avoidance, then the transaction would constitute a colourable device. That the courts are now concerned, not merely with the genuineness of a transaction, but with the intended effect of the transaction on the fiscal purpose. That, the true principle in the case of W. TRamsay (1981) 2 WLR 449 (HL) was that one must consider fiscal consequences of a preplanned series of transactions and one has not to dissect the scheme and consider individual stages separately. This judgment squarely applies to our case.

On a careful perusal of the judgment of Hon'ble High Court on the writ petition filed by TSHL we find that the Hon'ble High Court have not provided an answer to question Nos. 2 and 3 viz., whether the transfer of the assessee's shareholdings in SIIL and MALCO to TSHL took place during the block period and what was the nature of the shareholding in the hands of the assessee as on the date of such transfer. The reliance placed on the judgment of Hon'ble High Court in this behalf by both the assessee as well as the revenue is not justified when the Hon'ble Court have stated in no uncertain terms that their judgment has not to affect the view to be taken in relation to block assessments. As regards the date of transfer the Hon'ble High Court have adopted the date 16-2-2001 only because that was on the assessee's own showing. In the same breath the Hon'ble High Court qualified, "We make it clear that this date is not binding on the department in the assessment proceedings". Similarly on the question as to whether the nature of the shareholdings in the hands of the assessee as on the date of transfer was stock-in-trade, the Hon'ble High Court held that the provisions of Explanation appended to Section 281 prohibiting attachment of stock-in-trade were not attracted because as far as the assessee was concerned the assessee had transferred the asset as asset and not as stock-in-trade. On both issues the Hon'ble High Court have held that in the writ petition the petitioner could not take a plea opposed to his own stand in the block assessments. According to the Hon'ble High Court the fundamental issue in the case was whether the transferred shares should be valued at market value and if so, as on what date. The Hon'ble High Court, for the purpose of the issue of collection and recovery of tax before them, proceeded on the footing that the block assessment order was still in force. It had not been set aside. We are therefore unable to accept the contentions of both the revenue as well as the assessee that on merit the aforesaid judgment of Hon'ble High Court supports their respective stands. But, there is one aspect on which the judgment of Hon'ble High Court is in favour of the revenue and against the assessee. The Hon'ble High Court have in the aforesaid judgment expressly held that the judgment of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148', squarely applies on the facts of the case of the assessee before us. Hon'ble High Court have held also at page 32 in Twinstar Holdings Ltd. 's case (supra) "The demand was raised under Section 156 only pursuant to the block assessment order, which was passed pursuant to the search on 8-12-1999, when incriminating documents were seized". Respectfully following these findings of the Hon'ble High Court that are binding on us we answer question No. 1 posed by us whether the provisions of Chapter XIV-B of the Act are applicable in the sense that evidence was found as a result of search in the affirmative, i.e. in favour of the revenue and against the assessee.

49. Question No. 2 before us is whether the transfer of the shareholding in SIIL and MALCO took place during the block period ended 8-12-1999? The facts of the case relating to this issue, in brief, are that the voluntary liquidation proceedings were initiated in the case of the assessee-company in April, 1999. On and about the same time TSHL became the holding company after buying out the other shareholders. That was followed by B an application on 17-6-1999, made to the Reserve Bank of India, for transmission of the entire shareholdings to TSHL followed by conditional approval of the Reserve Bank of India on 30-11-1999. Then came the search on 8-12-1999. In the meantime the Official Liquidator sent notice of liquidation to the Assessing Officer under Section 178 of the Income Tax Act and obtained No Objection Certificate from the assessing officer on 15-6-1999. While granting 'in-principle' approval on 30-11-1999 Reserve Bank of India advised the assessee-company that it should register the transfer in its books only after final permission to that effect was granted by Reserve Bank of India for which the assessee should submit SL\/FIPB approval as also the evidence regarding the transfer expenses being remitted by the transferor OCB through normal banking channel from abroad, etc. The assessee obtained the approval from the Foreign Investment Permission Board on 16-5-2000 and the final approval of the Reserve Bank of India was made on 16-2-2001. The shares were transferred to TSHLs demat account on 25/26-9-2000 and 20-2-2001. According to the revenue the transfer of shareholdings took place during the block period ended on 8-12-1999. This contention of the revenue is based on the fact the liquidation proceedings had already commenced during the block period. Thereafter dividend was declared by SIIL in the Annual General Body Meeting held on 30-10-1999 and that dividend was received by TSHL g signifying that the transfer of shares had occurred during the block period. RBI too had given 'in-principle' approval to the transfer of the shareholdings to TSHL. The assessee, on the contrary argues that while granting 'in-principle' approval on 30-11 -1999 Reserve Bank of India had advised the assessee not to register the transfer in its books until final permission to that effect was granted by Reserve Bank of India. Further the shares were transferred to the demat account of TSHL on 25/26-2- p 2000 and 20-2-2001. The assessee has thus argued before us that all material events took place after the search on 8-12-1999 and 'in-principle' approval granted by Reserve Bank of India just a few days before the date of search did not result into any transfer. During the course of hearing before the learned Commissioner (Appeals) the revenue strongly relied upon the judgment of Hon'ble Delhi High Court in the case of CIT v. Ghaziabad Engg. Co. (P.) Ltd. (2001) 249 ITR 2441. The assessee has supported its contentions relying upon the judgments in Nonsuch Tea Estate Ltd. v. CIT (1975) 98 ITR 189 (SC); CIT v. Phalton Sugar Works Ltd. (1991) 191 ITR 403 (Bom.); CIT v. Kirloskar Tractors Ltd. (1998) 231 ITR 8492 (Bom.); Dorr-Oliver (India) Ltd. v. CIT(1998) 234 ITR 723 (Bom.); CIT v. John Fowler (India) Ltd. (1999) 239 ITR 3123 (Bom.) and Pfizer Corporation v. CIT(2003) 259 ITR 3914 (Bom.). In the case of Ghaziabad Engg. Co. (P.) Ltd. (supra), the UPSIDC allotted the assessee company a plot in the industrial area near Ghaziabad. Thereafter the assessee obtained from two allottees of adjacent plots their rights in respect of three plots. In respect of those three plots the assessee-company relinquished its right, title and interest in favour of Harsha Tractors Ltd. and in the process made certain profit. The dispute arose as to the date of transfer. The department took the view that the transfer of allottees' rights of that assessee-company in favour of Harsha Tractors became complete only when the lease was executed by UPSIDC in favour of Harsha Tractors Ltd. The Tribunal held that as the possession of the plots had been handed over to Harsha Tractors much before, the material date was when the possession was given and not the lease executed by UPSIDC in favour of Harsha Tractors. Hon'ble Delhi High Court held it was well-established that a document relating to immovable property so long as it is not registered is not valid, yet once it is registered, it takes effect from the date of its execution. On this basis Hon'ble Delhi High Court held that the effective date was 5-1-1971 when the agreement between Ghaziabad Engg. Co. and Harsha Tractors was executed and not 13-4-1971 when the lease deed between UPSIDC and the assessee was registered. The learned Counsel for the assessee has relied upon the judgment of Hon'ble Supreme Court in the case of Nonsuch Tea Estate Ltd. (supra). In that case the question arose as to when the managing agency remuneration paid by the assessee was deductible. The remuneration pertained to the period 1 -4-1956 to 30-6-1957 but it was paid on 30-6-1958. The dispute in that case arose as to whether the assessee was entitled to claim deduction of the prior period in computation of its income chargeable to tax for assessment year 1959-60. The Hon'ble Supreme Court held that Section 326 of the Companies Act had prohibited the appointment or reappointment of a managing agent without the approval of Central Government. In the case of that assessee Central Government approved the appointment of managing agents by its letter dated 2-9-1957. The liability to pay managing agents' remuneration therefore could not be said to have arisen on any date prior to 2-9-1957. Next case relied upon by the assessee is the judgment of Hon'ble Bombay High Court in the case of CIT A v. Phalton Sugar Works Ltd. (1991) 191ITR 403. In that case Hon'ble High Court held special deduction for technical fees received from a foreign company could not be claimed until the mandatory approval of the agreement by the Central Government was received. Next case relied upon by the assessee is Dorr Oliver (India) Ltd. v. CIT (1998) 234 ITR 723 (Bom.). In that case collaboration agreement was required to be approved by RBI. Hon'ble High Court held that business expenditure liability B accrued only on such approval. Next authority relied upon is the judgment of Hon'ble Bombay High Court in the case of CIT v. Kirloskar Tractors Ltd. (1998) 231 ITR 849'. In that case the promoters of the assessee-company were in correspondence with a foreign collaborator for a technical collaboration agreement in relation to manufacture of tractors. The controversy arose in regard to the assessment year in which the fee for technical know-how paid by the assessee could be claimed as deduction. q The assessee was following the mercantile system of accounting. According to the assessee it became entitled to deduction in the year in which the liability accrued for the first time. However it was contended that the liability would arise only on receipt of the approval of the Reserve Bank of India. Following the judgment of Hon'ble Supreme Court in the case of Nonsuch Tea Estate Ltd. (supra) the Hon'ble Bombay High held that the year of deductibility was when the Reserve Bank of India approval was rj received. Next case relied upon by the assessee is CIT v. John Fowler India Ltd. (1999) 239 ITR 3122 (Bom.). Following the judgment of the Apex Court in Nonsuch Tea Estate Ltd. 's case (supra) and the earlier judgment in the case of Kirloskar Tractors Ltd. (supra) Hon'ble High Court similarly held that the liability under a collaboration agreement required to be approved by RBI accrued only when the approval was received. In the case of Pfizer Corpn. v. CIT(2003) 259 ITR 3913 (Bom.) the dispute arose as to when the E final dividend income accrued to the assessee - whether on the date of declaration or on the date when Reserve Bank of India granted permission under FERA, 1973. Hon'ble Bombay High Court held that the right to receive dividend crystallised only in the year in which approval was granted by the Reserve Bank of India to pay the amount to the nonresident assessee. The reasoning of the learned Commissioner (Appeals) is strongly based on the amount of dividend paid by SIIL to TSHL during the block period. He has sought to draw a distinction between the final date of transfer and effective date of transfer. According to him the final approval of Reserve Bank of India when granted related back to the date of the assessee's application for grant of approval. Having regard to the fact that the assessee had already acted upon that request inasmuch as the amount of dividend was directly paid to TSHL the learned Commissioner (Appeals) has held that effective date of transfer took place during the block period. The learned CIT, DR also vigorously argued before us that as far as the assessee as a transferor was concerned the assessee had done all that was required of him to do. Reserve Bank of India permission was required by TSHL. As respects the assessee-company the act of transfer was complete once the company had gone into liquidation and TSHL had become 100 per cent holding company. On consideration we are of the view that these arguments are not in line with the judgment of Hon'ble Supreme Court in the case of Nonsuch Tea Estate Ltd. (supra) and the judgments of Hon'ble Bombay High Court briefly enumerated by us. Reliance placed by the revenue on the judgment of Hon'ble Delhi High Court in the case of Ghaziabad Engg. Co. (P.) Ltd. (supra) is not justified, in the case of transfer of immovable property it is now axiomatic that deed of transfer once registered relates back to the date of execution of the agreement. There is no such legal principle in relation to various kinds of approval laid down, by the orders of the Government or Acts of Parliament, as a condition precedent for various things. The judgment of Hon'ble Supreme Court in the case of Nonsuch Tea Estate Ltd. (supra) lays down that in cases where there is a condition precedent, the action can be said to be complete only when the condition precedent is satisfied. Respectfully following the judgment of Hon'ble Supreme Court in the case of Nonsuch Tea Estate Ltd. (supra) and of Hon'ble Bombay High Court enumerated above we hold that in the case of the assessee the transfer of its shareholdings in SIIL, MALCO and any other company did not take place until the final approval of Reserve Bank of India on 16-2-2001. We may point out that the stand of revenue in this regard was found to be inconsistent during the course of TSHL's writ petition as enumerated at pp. 23 & 24 in Twins tar Holdings Ltd. 5 case (supra). In view of this discussion we answer question No. 2 in the negative, ie., in favour of the assessee and against the revenue.

50. As we have decided the issue of the date of transfer of the shareholdings to TSHL in favour of the assessee the impugned order of the learned p Commissioner (Appeals) needs to be upheld for that reason alone. However for the sake of completeness we now address ourselves to Question No. 3 as to whether the nature of the shareholdings in SIIL and MALCO in the hands of the assessee as on the date of transfer is stock-in-trade? At the cost of repetition we may enumerate the history of events in this behalf. The assessee is part of the trilogy of investment companies, viz., PNIT, the assessee and SCRM that were incorporated some times in mid 1980s. These three investment companies mainly acquired the shareholdings in SIIL and MALCO, These shares were acquired by the assessee by way of A original application/right shares and/or preferential allotment. There were some purchases of shares of SIIL and MALCO from the open market also. The assessee-company was initially held by the family members of Agarwal group and later on in between the years 1993 to 1999 TSHL, an OCB based in Mauritius made investment into the equity of the assessee-company with the: approval of the relevant authorities. The assessee held its shareholdings in SIIL and MALCO as investments till 31-3-1991. With g effect from 1-4-1991 the holdings in the two companies were converted into stock-in-trade and remained so till 31-3-1998. On 31-3-1998 the said shares were again converted into investments. At or about the time of commencement of liquidation proceedings TSHL became the 100 per cent holding company of the assessee-company after having purchased whatever shares were then being held by other entities from them. Of course, the entire shareholdings in TSHL at that point of time were held p by the members of Agarwal family only. The entire case of the learned assessing officer in the impugned block assessment order under Section 158BC is built upon the premises that conversion of stock-in-trade into investments on March 31, 1999 was not a natural act of the assessee-company and that the same was done entirely guided by the intention to transfer the entire shareholdings of the assessee in SHL and MALCO to TSHL without having to peiy any taxes therefor. As huge stakes were involved the assessee consulted renowned tax experts, who advised the ^ assessee that its shareholdings in SIIL and MALCO should be converted from stock-in-trade into investments and thereafter the assessee company should go in liquidation and the shares should be transmitted to TSHL, who should by then became 100 per cent holding company of the assessee-company, by way of distribution on liquidation of the assessee company. According to the learned assessing officer these steps were taken not in the ordinary course of the conduct of the business of the E assessee-company but as a scheme of tax avoidance with a view to transfer the assessee's shareholdings to TSHL without attracting any tax liability that was bound to arise had the shareholdings of the assessee in SIIL and MALCO continued to be stock-in-trade that it was from 1-4-1991 to 31-3-1998. Relying on the Mcdowell principle the learned assessing officer ignored/rejected the assessee's claim of conversion of shareholdings from stock-in-trade into investments on 31-3-1998 and he has pro- f ceeded on the basis that what the assessee transferred to TSHL was its stock-in-trade and not investment. Taking this finding to its logical conclusion the learned assessing officer has ass essed the difference between the market value of the assessee's shareholdings in SIIL and MALCO as on the date of transfer and the cost of acquisition of those shares to the assessee as the assessee's undisclosed income of the block period.

51. On a careful perusal of the block assessment order, remand report furnished by the assessing officer during the course of hearing before the learned Commissioner (Appeals) and the arguments of the learned CIT, DR we find that the revenue relies heavily on the fact that conversion of the shares that were hitherto claimed to be stock-in-trade into investment by the assessee was entirely motivated and guided as a device of tax avoidance on transfer of those shares to TSHL. There is otherwise no examination as to the facts of the case and surrounding circumstances so as to determine the real nature of the shareholding of the assessee in SIIL and MALCO on the material dates. As against this the learned assessing officer who made the assessment order for assessment year 1998-99 has not taken into consideration the seized documents relating to the alleged device and he has gone by the examination of the transactions of the assessee year after year. At this juncture it is vital to remember that it is not the case of the revenue that the assessee has entered into any particular transactions as a part of tax avoidance device. The case of the revenue is that at the end of the day when transfer of the assessee's shareholdings to the holding company became imminent the assessee claimed to be an investor whereas hitherto the assessee had been claiming himself to be a trader in those shares. The shortcoming in the argument of the learned assessing officer in the impugned block assessment order is that he assumes that the question whether an assessee is a trader in shares or investor in shares is the question of what that assessee describes himself to be. The learned assessing officer assumes that in past the assessee claimed to be a trader in normal course and for the purpose of transfer of the shares to the holding company TSHL the assessee did not claim to be an investor in normal course but as a matter of colourable device. In the eyes of law, whether an assessee is a trader or an investor is a question to be determined on the basis of the legal effect of the totality of facts and circumstances of the case and not what an assessee says he is or even believes he is. We begin with a very instructive passage appearing in the judgment of court of Appeal in the case of Weiner v. Harris (1910) 1 KB 285, 290 (CA):

By the mere use of a well-known legal phrase, one cannot constitute a transaction that which it is not. Perhaps, the commonest instance of all which has come before the Courts in many cases is this: Two parties enterpinto a transaction and say: 'It is hereby declared that there is no partnership between us'. The court pays no regard to that. The court looks at the transaction and says: 'Is this, in law, really a partnership?' It is not in the least conclusive that the parties have used a term or language intended to indicate that the transaction is not that which in law it is. Thus, the mere fact that goods are said to be taken on sale or return is not in any way conclusive of the real nature of the contract. One must look at the thing as a whole and see whether that is the real meaning and effect of it.

In the case of Rolls Royce Ltd. v. Jeffrey (1962) 1 All ER 801, 806 (HL); A 40 TC 443, 494 (HL.) the question was in regard to the nature of a receipt, whether it was a capital or a revenue receipt and the parties had described it as a capital receipt. Lord Radcliff remarked:

I do not think it possible to attach any significance to the qualifying adjective. If we did, revenue appeals on this particular issue would soon settle themselves. Presumably it did not matter to the Commission how the sum was described: on the other hand, it certainly did bind the company when it had received the money, to apply it in any particular way in their accounts or otherwise. I think that one has to be on one's guard in cases of this kind, against supposing that such adjectives as 'capital' or 'lump' contribute anything to the solution of the issue.

52. In the case of National Steel Works Ltd. v. CIT , the assessee-company entered into partnership with one Mr. Irani and it was agreed that a sum of Rs. 50 per tonne of steel shall be paid to the company by the partnership. After some lime this agreement was modified and it was agreed by Mr. Irani to pay a lump sum of Rs. 60,000 as goodwill in consideration of waiving the royalty from the partnership account. The Hon'ble Supreme Court held that the description of the amount as goodwill in consideration of waiving royalty did not convey the real nature of that amount and the payment was in fact received on the revenue account.

53. It is also important to mention that the entries made in the books of account though relevant are not decisive of the nature of transactions entered into by the parties. Reference in this respect is invited to the judgments of Hon'ble Supreme Court in the cases Delhi Stock Exchange Association Ltd. v. CIT (1961) 141 ITR 495, 498; Kedarnath Jute Mfg. Co. Ltd. v. CIT and Sutlej Cotton Mills Ltd. v. CIT . The quality of a receipt (or expenditure) is one that attaches to it at the moment of receipt (or expenditure). Such quality cannot be altered or E affected by any subsequent act or conduct of the assessee in relation to the item of receipt (or expenditure). The treatment or the entry in the books of account is no more than a subsequent act of the assessee which may have no effect upon the character attached to the receipt (or expenditure) at its conception.

54. It, therefore, follows that it is required to be seen what is the quality and the nature of the assessee's shareholdings in SIIL and MALCO and that issue cannot be decisively concluded on the basis of the treatment given by the assessee in its books of account at different points of time. Thus if the assessee has held and dealt with the shareholdings as a trader or as an investor, the factual position cannot be altered by the entries in the books of account. The learned assessing officer himself admits that the entries made by the assessee in its accounts for the year ended 31-3-1998 were motivated by a tax avoidance device. We are of the view that the true character of the shareholding cannot be decided on the basis of the motivation of the assessee for the time being. Thus if the assessee's entries in the books of account have been made without any motive of tax evasion or avoidance the entries cannot be treated to be reflective of the true nature of the transactions or shareholdings of the assessee for that reason alone. Similarly, if it is found that the entries in the books of account have been made with an eye on the tax benefit arising therefrom, the entries as made in the books of account cannot be considered to be not reflective of the true nature of transactions and true character of holdings of an assessee for that reason alone. This aspect of the matter has been very aptly described by Meggary, J. in the Finsbury Securities Ltd. v. Bishap (Inspector of Taxes) (1966) 1 WLR 1402 in the following words:

If upon analysis it is found that the greater part of the transaction consists of elements for which there is some trading purpose or explanation (whether ordinary or extraordinary), then the presence of what I may call 'fiscal elements'; inserted solely or mainly for the purpose of producing a fiscal benefit, may not suffice to deprive the transaction of its trading status. The question is whether viewed as a whole, the transaction is one which can fairly be regarded as a trading transaction. If it is, then it will not be denatured merely because it was entered into with motives of reaping a fiscal advantage. Neither fiscal elements nor fiscal motives will prevent what in substance is a trading transaction from ranking as such.

On the other hand, if the greater part of the transaction is explicable only on fiscal grounds, the mere presence of elements of trading will not suffice to translate the transaction into the realms of trading. In particular, if what is erected is predominantly an artificial structure, remote from trading and fashioned so as to secure a tax advantage, the mere presence in that structure of certain elements which by themselves could fairly be described as trading will not cast the cloak of trade over the whole structure.

It therefore follows that even though the assessee purported to convert its shareholdings in SIIL and MALCO that was hitherto being described as stock-in-trade into investment driven by the motive to avoid that tax liability that may have arisen if what the assessee transferred to TSHL constituted stock-in-trade in the hands of the assessee, nonetheless the intention of the assessee whatever it could be no ground for the learned assessing officer not examining the real character of the shareholding in the hands of the assessee on the material date. The learned assessing officer has in the block assessment order simplified the matter by assuming that since the assessee had gone through the motion of conversion of stock-in-trade into investment with a view to implement the tax avoidance scheme, the real nature of the assets on the material date had to be stock-in-trade and not investment. In the impugned order the learned Commissioner (Appeals) has stressed this point at considerable length. He has held that even though the doctrine of res judicata did not apply to income-tax proceedings, the principle of consistency did. The learned assessing officer, who made the block assessment order, therefore, was not entitled to disregard the findings of his predecessor in the regular assessment, order under Section 143(3). The learned Counsel for the assessee has also vigorously pursued this line during the course of his arguments before us. As a matter of theory, we may add something more to these arguments. One of the main reasons for the doctrine of res judicata not applying to the income-tax matters is that in the scheme of income-tax Act each assessment year is a separate and independent unit of charge of Income-tax. Here we are concerned with the same assessment year only the proceedings are different. It would therefore appear that the rule of consistency should apply in such a situation with greater force. But, there is one important reason persuading us not to accept the reasoning of the learned Commissioner (Appeals) and the arguments of the learned Counsel of the assessee in this behalf. It is not correct to say that the Assessing Officer who did block assessment order did so on the same set of facts and considered the same material. Various seized documents that have formulated the basis of block assessment order have not been considered by the assessing officer while completing regular assessment under Section 143(3) even though that assessment order has also been made 14 months after the date of search. The learned Commissioner (Appeals) has held that it did not stand to reason that the assessing officer was not aware of the material found during the course of the search while framing the assessment order under Section 143(3) for assessment year 1998-99. We are not impressed by this argument. Fact of the matter is that in the assessment order under Section 143(3) the learned assessing officer has not referred to the documents seized during the course of the search. Be that as it may, we find that in the assessment order under Section 143(3) for assessment year 1998-99 made on 9-2-2001 the learned assessing officer has arrived at his conclusions on cogent material. There is detailed discussion in this behalf in paras 7 to 14 of the assessment order, in paras 7 and 8 of that assessment order the learned assessing officer has observed as under:

7. The submissions of the assessee have been considered. As mentioned above, even though, the assessee has shown the investments in shares of Sterlite Industries (India) Ltd. and Madras Aluminium Co. Ltd. as stock-in-trade, the very intention of the assessee was not to treat them as stock-in-trade but retain them as long-term investments. The intention of the p assessee was finally translated into action by converting the stock-in-trade into investments on the last day of the accounting year, i.e., 31-3-1998. The major investment made by the assessee was; in the shares of Sterlite Industries (India) Ltd. As mentioned above, the Etssessee has been holding these s;hares from financial year 1994-95 onwards and the portf olio has increased over a period of time. It appears from the records that no sales were affected out of the above purchases. This clearly shows that the assessee's intention was to hold them as investments even though they were categorised as trading assets. It is noteworthy to mention here that the assessee-company is a group concern of Sterlite Industries (India) Ltd., and the intention of the assessee was to hold the shares of the flagship company of the group for control over management etc.

8. Similarly, the assessee acquired 50,00,000 shares of Madras Aluminium Co. Ltd. during financial year 1996-97 and the same number of shareswere held in the portfolio as on 31-3-1998. These shares were also converted into investments on 31-3-1998. Hence, the intention of the assessee is very clear to hold the above shares as investments rather than stock-in-trade. Similarly, the assessee invested in the shares of Morgan Stanley Growth Fund during financial year 1994-95 and held them continuously without any sales till 31-3-1998. Even though, the assessee is still treating the above stock as stock-in-trade, the intention is to hold them as investments.

Not only not in the block assessment order the assessing officer in his remand report before the learned Commissioner (Appeals) and the learned CIT, DR during the course of his argument before us has controverted any of the facts recorded by the learned assessing officer in the extracts from that order above quoted. As against this the learned Counsel for the assessee has during the course of his submissions before us categorically affirmed the facts as recorded by the learned assessing officer in the above quoted extract. The learned Counsel has categorically stated that from beginning the assessee company never, except in a few instances of intra-group transfers transferred or sold its shareholdings in SIIL and MALCO. The situation before us is that on the one hand there is finding of fact based on relevant material in the regular assessment order under Section 143(3). As against the same, we have the block assessment order heavily relying upon the treatment given by the assessee in the books of account in past as also upon the fact that the assessee's reconversion of the share holding into investment was solely guided by a burning desire to avoid taxes. On consideration of the matter we are of the view that if we have to be solely guided by the character of the assessee's shareholdings in SIIL and MALCO it should be held on the basis of facts presented before us that those shares were always held by the assessee on investment/capital account and the assessee's claim of stock-in-trade for the assessment years 1992-93 to 1997-98 was a misrepresentation of facts. In other words the shareholdings as on the date of transfer were capital asset even without conversion. On these peculiar facts and circumstances a number of significant issues arise. The learned CIT, DR has in the course of his elaborate arguments painstakingly contended that an assessee should not be allowed after having reaped the harvest of his wrongful claims to seek later on the advantages arising from the correct claim by merely saying that the earlier claim was wrongful. He has argued that doing so would amount to allowing premium on dishonesty. He has argued that an assessee should not be allowed to approbate and reprobate at the expense of revenue. He has relied upon a plethora of case law in support of his arguments. After consideration we are of the view that these aspects relate to regular assessment proceedings. In a block assessment order under Chapter XIV-B the assessing officer does not have the same jurisdiction that he has while completing the regular assessment under the general provisions of the Act. For the purpose of block assessment there should be prima facie undisclosed income and not what may be considered to be undisclosed income on the basis of a long drawn reasoning. The authorities for this proposition appear to be plenty. To name a few: N.R. Paper & Board Ltd v. Dy. CIT CIT v. Shambhulal C. Bachkaniwah , CIT v. Vinod Danchand Ghodawal (2001) 247 ITR 4483 (Bom.), CIT v. Rajendra Prasad Gupta (2001) 248 ITR 3504 (Raj.), Bhagwati Prasad Kedia v. CIT , CIT v. Smt. Usha Tripathi (2001) 249 ITR 46 (All.), CIT v. Dr. M.K.E. Memon (2001) 248 ITR 3107 (Bom.), CIT v. Shamlal Balram Gurbani (2001) 249 ITR 5018 (Bom.), CIT v. Vikram A. Doshi (2002) 256 ITR 1299 (Bom.) etc. We therefore, c answer question No. 3 in the negative, i.e., in favour of the assessee and against the revenue. We make it clear here that in this appeal we are concerned only with the block assessment order. We do not intend this order to have any bearing upon the regular assessment orders in the case of the assessee-company and the tax liabilities of TSHL or the tax liabilities of the assessee-company itself arising from liquidation of the assessee-company and the alleged transfers/transmission of the shareholding to TSHL. In this appeal against the block assessment order we have dealt with the limited question of undisclosed income arising to the assessee on the alleged conversion by the assessee of the shareholding from stock-in-trade to investment.

55. As to the Question No. 4, that strictly does not arise because we have answered Question No. 3 in t he negative. However as that issue also was raised by the parties during the course of hearing before us we may as well adjudicate upon the same so as to make our decision on this appeal complete. As pointed out earlier the learned Assessing Officer has assessed undisclosed income of Rs. 44.52 crores on the basis of the difference between the market value of the shareholding of the assessee-company in SIIL and MALCO as on the material date and cost of acquisition of the same to the assessee. The argument of the assessee against that approach.