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Dwarkaprasad Agarwal 50% Agnivesh Agarwal 50% The Company was designated as Overseas Corporate Body (hereinafter referred to as the "OCB"). Petitioner acquired shares of above said Investment Companies between 1993 to 1999. On 30-6-1999 the petitioner was the holder of 100 per cent stake in the three Investment Companies. These three Investment Companies, in turn, were holding shares in two Indian Companies viz., Sterilite Industries (India) Limited (hereinafter referred to as the "SIIL') and Madras Aluminium Company Limited (hereinafter referred to as the "MALCO"). The shareholding of the three Investment Companies in SIIL and MALCO is chartered out in para 4 of the Petition. According to the petitioner, the shares of SIIL and MALCO were held by the three Investment Companies, not as stock-in-trade, but as investment. The shares of SIIL and MALCO were shown as investment in the accounts for the year ending 31-3-1998 corresponding to assessment year 1998-99. The Agarwal brothers, being Promoters of various companies, held a substantial part of shareholding in SIIL and MALCO through the said three Investment Companies. With a view to borrow funds from International Market on security of shares of SIIL and MALCO, it was decided to liquidate the three Investment Companies and to consolidate the shareholding in SIIL and MALCO in the petitioner-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 accordingly appointed. On appointment, the Liquidator made applications to respondent Nos. 1, 2 and 3 herein, being Deputy Commissioner of Income Tax, Range-III(1), Range-III(2) and Range-III(3), Mumbai. Accordingly, NOC was obtained under section 178 from the said three respondents on 15-6-1999, 26-5-1999 and 14-6-1999 in case of PNIT, DAIL and SCRM respectively. On 17-6-1999, an application was made to the Reserve Bank of India (RBI) by the petitioner-company for approval of transmission of shares of SIIL and MALCO on fully repatriable basis upon liquidation of the Investment Companies. On 30-11-1999, RBI granted conditional approval for transmission of shares on fully repatriable basis in favour of the petitioners. However, on 29-1-2000 and 13-3-2000, RBI advised the petitioner that extent of repatriability of the shares had to be ultimately decided by Foreign Investment Promotion Board and, therefore, RBI should be approached only after obtaining approval from Foreign Investment Promotion Board. On 16-5-2000, petitioner received the approval from Foreign Investment Promotion Board, approving transmission of shares of SIIL and MALCO, hitherto held by the Investment Cordpanies on fully repatriable basis. Accordingly, RBI gave its final approval on 16-2-2001. Pursuant to the above, the petitioner-company was registered as a beneficiary of the said shares held by Deutsche Bank, Mumbai Branch as Depository Participant (hereinafter referred to as the "DP").

Findings on section 281

9. According to the petitioner, if the department adopts the date, viz., 31-3-1999 as the date of transfer giving rise to liability, then the transaction cannot fall within the first limb of section 281, which states that the transfer should take place during the pendency of the assessment proceedings. That, in this case, the search took place on 8-12-1999 and, therefore, if the date of transfer is taken as 31-3-1999 then such transfer cannot be during the pendency of the proceedings. Therefore, section 281 will not apply. If, on the other hand, the department takes the date of transfer as 20-2-2001, then the transfer falls outside the block period. It was submitted that generally, a transfer giving rise to liability takes place during the block period. That, such transfer is detected when search is carried out. Therefore, such liability is treated as undisclosed income. However, it is contended that in this case the very transfer, which gives rise to liability and which the department seeks to declare as void, is sought to be brought into the first limb of section 281, which can never be done. That, 'generally, the assessee transfers his assets in order to defeat the claim of the department arising on a pre-existing liability, i.e., on a transfer which takes place before the date of search. However, in this case, the transfer dated 20-2-2001 in case of DAIL can never be said to give rise to undisclosed income as it takes place after the search. That, if the liability to pay tax arises after the date of search then the first limb of section 281 cannot apply. Similarly, the second limb of section 281 also does not apply because the block assessment was completed on 31-12-2001 and there is no transfer after that date for DAIL. Although these arguments appear to be attractive, on deeper consideration, they have no merit. Firstly, section 281 of the Income Tax Act falls in Chapter XXIII. Section 281 is a prelude to section 226(5) read with the Third Schedule which comes under Chapter XVII - Collection and Recovery of Tax. In this case we are concerned with collection and recovery of tax. In this case we are not concerned with 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 profit and loss account. Therefore, the liability accrued on 31-3-1999 in 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, i.e., on 16-2-2001, when they got the final Approval from RBI 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 market value and book value, much prior to 8-12-1999. They first converted the stock-in-trade into investment on 31-12-1999, 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 assessees obtained approval from Foreign Investment Promotion Board on 16-5-2000, followed by final approval from RBI dated 16-2-2001. 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.