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   Dwarkaprasad Agarwal             50 per cent.
Agnivesh Agarwal                 50 per cent.  
 

3. The company was designated as an overseas corporate body (hereinafter referred to as "OCB"). The petitioner acquired shares of the above said investment companies between 1993 to 1999. On June 30, 1999, the petitioner was the holder of 100 per cent. stake in the three investment companies. These three investment companies, in turn, were holding shares in two Indian companies, viz., Sterilite Industries (India) Limited (briefly known as "SIIL") and Madras Aluminium Company Limited (briefly known as "MALCO"). The shareholding of the three investment companies in SIIL and MALCO is charted 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 March 31, 1998, corresponding to the assessment year 1998-99. The Agarwal brothers, being promoters of various companies, held a substantial part of the shareholding in SIIL and MALCO through the said three investment companies. With a view to borrow funds from the international market on the 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 April 17, 1999, a board meeting of the three investment companies was held. It was proposed to wind up the investment companies and appoint liquidators. On April 29, 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 respondents Nos. 1, 2 and 3 herein, being the 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 June 15, 1999, May 26, 1999 and June 14, 1999 in the case of PNIT, DAIL and SCRM, respectively. On June 17, 1999, an application was made to the Reserve Bank of India (R5I) 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 November 30, 1999, the Reserve Bank of India granted conditional approval for transmission of shares on fully repatriable basis in favour of the petitioners. However, on January 29, 2000, and March 13, 2000, the Reserve Bank of India advised the petitioner that the extent of repatriability of the shares had to be ultimately decided by the Foreign Investment Promotion Board and, therefore, the Reserve Bank of India should be approached only after obtaining approval from the Foreign Investment Promotion Board. On May 16, 2000, the petitioner received the approval from the Foreign Investment Promotion Board, approving transmission of shares of SIIL and MALCO, hitherto held by the investment companies on fully repatriable basis. Accordingly, the Reserve Bank of India gave its final approval on February 16, 2001. Pursuant to the above, the petitioner-company was registered as a beneficiary of the said shares held by Deutsche Bank, Mumbai Branch, as depository participant (hereinafter referred to, for the sake of brevity, as "DP").

5. By affidavit-in-reply dated October 3, 2002, respondents Nos. 1 to 3, on the facts, have alleged that on December 8, 1999, search and seizure action under Section 132 of the Act was carried out on various business and office premises of the Sterilite group of industries. That, during the search, it was found that the petitioner was an overseas corporate body, holding substantial shares in SIIL and MALCO through the above three investment companies. That, the petitioner-company was controlled by the promoters of Sterilite group of industries. That, during the search, a statement of Navin Agarwal, the son of Dwarkaprasad Agarwal, and a full-time director of SIIL came to be recorded under Section 132(4) of the Act. This was on December 9, 1999. That, in the statement, Navin admitted that the directors of PNIT were controlling the affairs of the investment companies and also of the petitioner-company. That, various incriminating papers have been seized from which it was gathered that the entire device was to transfer the shares held by the three investment companies in SIIL and MALCO to the petitioner, without paying tax. That, to avoid payment of tax, the shares of Sterilite group held as stock-in-trade in the books of three investment companies were sought to be converted as investment. That, it was a deliberate device to escape from payment of tax on distribution of shares from the investment companies to the petitioner-company. That the three investment companies were advised to convert the shares, held as stock-in-trade, into investment because if the shares are so transferred from the three investment companies to the petitioners as stock-in-trade, then there was an apprehension that the department would bring to tax, the difference between the market value and the book value of the shares as business income under Section 28 of the Income-tax Act. That, under the circumstances, the petitioner-company was advised to convert the stock-in-trade into investment and thereafter the investment companies could conveniently escape capital gains on transfer as the transferee-company viz., the petitioner-company was not liable to pay capital gains tax under Article 13 and Article 22 of the Double Tax Avoidance Agreement (DTAA) between India and Mauritius. That, the entire process of conversion of stock-in-trade to investment and liquidation of the three investment companies was a device formulated with the sole motive of avoiding tax liability. That, Dwarkaprasad Agarwal and Agnivesh Agarwal were the only two shareholders of the petitioner-company and that they were occupying key positions in all the three investment companies. In para. 6 of the petition, the shareholders of the three investment companies are mentioned. They all belong to the families of Dwarkaprasad Agarwal and Agnivesh Agarwal. That, the promoters of the petitioner-company were the directors and promoters of the three investment companies. That, the Agarwal family were the promoters of the petitioner-company. They were also the promoters of the three investment companies. They were also the promoters of the Sterilite group of companies. That, in the circumstances, the court should lift the corporate veil as the decision to liquidate the three investment companies and transfer their shares at book value was taken by the promoters of the petitioner-company on behalf of the three investment companies. That, in anticipation, and with a view to avoid tax liability arising in the aforestated transaction and to defeat recovery of tax by the Department, the promoters transferred the assets of the investment companies to its holding company and have proceeded to liquidate the investment companies, without making arrangement for liquidation of the tax liability and, therefore, the entire device was to defraud the Revenue because there would be no asset available with the investment companies to meet the tax liability of Rs. 222.70 crores. That, after issuing notices under Section 158BC of the Income-tax Act on all the three companies and after enquiry, block assessment orders have been passed as stated above. That, vide order dated March 21, 2002, passed by respondent No. 1, the stay application has been rejected in the case of PNIT under Section 220(6). That, although the Department made attempts to recover the outstandings of the investment companies from the directors on account of objection raised by the directors, no recovery could be effected. In the circumstances on July 15, 2002, notings were made in the order sheet under Section 281 of the Act treating transfer of shares from the three investment companies to the petitioner-company as void, only for the purposes of recovery. That, such transfer was treated as void because Section 281 was invoked with the sole intention of protecting the Revenue and also on the ground that the impugned transfer of snares from the three investment companies to the petitioner-company came to be effected during the pendency of block assessment proceedings after December 8, 1999. That, under Circular No. 179, dated September 30, 1975 (see [1976] 102 ITR (St.) 9), issued by the Central Board of Direct Taxes, even transfers made after completion of the proceedings, but before the service of notice under Rule 2 of the Second Schedule, can also be treated as void. That, the impugned transfer of shares to the petitioners has been made without adequate consideration. That, the tax payable exceeded Rs. 5,000 and that the assets transferred exceeded Rs. 10,000. Therefore, according to the Department all three conditions to Section 281 stood complied with. That, the impugned shares were shown as investments in the return of income for the assessment year 1998-99 and, therefore, for the limited purposes of Section 281 and to protect the interests of the Revenue, the holding in the above shares has been treated as investments. That, Section 281 did not contemplate making of any order by any authority. It was declaratory in nature. That, there was no question of adjudication of validity of the impugned transfer and, therefore, there was no question of the authority concerned to go to a civil court for a declaration. That, the Department had not treated the transfer of shares from the investment companies to the petitioner-company as void, ab initio. That Section 281 does not declare the transfer to be void, ab initio. That, it only declares the transfer to be void to the extent of the tax liability that might be finally decided by the authorities. That, no prior notice was given to the petitioner at the time of invoking Section 281 or Section 226(5) since for recovery proceedings, the transfer of shares from investment companies to the petitioner-company has been treated as void. That, before the Department could recover the tax dues of the three investment companies, SIIL came out with an offer to buy back its shares and, therefore, there was every possibility that the petitioner-company could have sold its holdings in SIIL and on the happening of such an event, it was impossible to recover the tax as the liquidator had no assets left with him. That, moreover Twinstar Holdings is an OCB, having no registered office in India. Consequently, it would be impossible to trace the funds realised from sale of shares held by the petitioners in Sterilite group. Therefore, a restraint order was also passed under Section 226(5) prohibiting the petitioner from transferring the shares from Demat Account with the DP. That, before passing orders under Section 226(5), respondents Nos. 1 to 3 obtained authorisation from the Commissioner of Income-tax-Ill, vide general order dated July 15, 2002, authorising respondents Nos. 1 to 3 to take action under Section 226(5) read with the Third Schedule. That, under Section 281 the impugned shares have been treated as a property of the investment companies.

6. In rejoinder dated October 16, 2002, the allegations made by the Department in the reply have been denied. In the rejoinder it has been pointed out that an identical order has been passed by the three Assessing Officers under Section 281 on July 15, 2002, which indicates non-application of mind by the three Assessing Officers. That, the order passed by the Commissioner of Income-tax-III, authorising the three Assessing Officers, came to be passed on July 15, 2002, whereas in case of PNIT, the prohibitory order under Section 226(5) is dated July 14, 2002, as issued by the Assessing Officer, which indicates clear non-application of mind and lack of jurisdiction as the Assessing Officer had no authority on July 14, 2002, to issue prohibitory orders and, on that ground itself, the prohibitory order needs to be set aside. That, the holding pattern of the three investment companies shows that there were substantial acquisitions of shares by them from 1983 onwards. That the promoters held approximately 28.44 per cent. in SIIL and 70.49 per cent. in MALCO through the three investment companies. That, in the regular assessment order, the Assessing Officer had, after extensive review of the facts, held that the shares of SIIL and MALCO should be treated as investments. This was vide assessment order dated February 15, 2001. He has given a categorical finding that up to the assessment year 1996-97, the shares were held as stock-in-trade, but that nomenclature was misleading. That, in the circumstances, the order dated February 15, 2001, was binding on respondents Nos. 1 to 3. That, in the alternative, assuming for the sake of arguments, that the said shares were held as stock-in-trade in the hands of the investment companies, even then no business profits could be assessed on liquidation of the three investment companies and on consequent transmission of shares to the petitioner. That, since, in any event, the shares were fully and accurately disclosed in the books of account of the investment company, they can never form a subject matter of block assessment. It may be mentioned that the additional affidavit in rejoinder was filed on October 16, 2002, in view of the additional affidavit filed by the Assessing Officer on October 9, 2002, by which additional affidavit, it was clarified that there was no order passed by the Assessing Officer under Section 281 and what was made was merely a noting in the order sheet. Under the circumstances, it was submitted on behalf of the petitioners by way of rejoinder that the entire action was arbitrary, illegal and without jurisdiction and that, consequently, the impugned attachment should be lifted vis-a-vis the petitioners.

Point for determination;

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

Findings :

Preface :

22. 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. As stated above, there were three investment companies, PNIT, DAIL and SCRM. They were holding shares in SIIL and MALCO. The entire shareholding of the three investment companies was, in turn, held by Twinstar Holding Ltd. (petitioner), a Mauritius registered company. Therefore, the petitioner was a holding company. On December 8, 1999, there was a search. As per the block assessment order, the material seized indicated that the shares held by the three investment companies in SIIL and MALCO were planned to be transferred to the petitioners as early as March, 1999. That, the petitioner had invested in 99 per cent. of the share capital of the three investment companies. That, a plan was devised under which the three investment companies were to be voluntarily liquidated and on liquidation, the assets and liabilities of the three investment companies were to be distributed in specie to the shareholder, viz., the petitioner. That, before initiation of liquidation, the shares held by the investment companies in SIIL and MALCO were converted from stock-in-trade to investment. That, this exercise was undertaken in order to value the said shares at cost and not at market price. That, the conversion as on March 31, 1999, was not genuine. That, the voluntary liquidation, which was initiated in April, 1999, was only to transfer the shares to the petitioner at cost. This course of action was adopted because, on liquidation, only capital gains liability would arise, which, by virtue of the Double Tax Avoidance Agreement between India and Mauritius, was exempt. Therefore, the entire device was to evade tax liability. That, after initiation of liquidation proceedings, the petitioner, which was an overseas corporate body incorporated in Mauritius, became the holding company qua the three investment companies. That, liquidation was initiated in April, 1999, followed by the permission from the Reserve Bank of India, on conditional basis for transmission of shares to the petitioner on November 30, 1999, and the final approval on February 16, 2001. That, in the meantime, the official liquidator obtained NOC on June 15, 1999, from the Assessing Officer under Section 178 of the Income-tax Act. As stated above, on December 8, 1999, there was a search, which ultimately resulted in block assessment orders to be passed on December 31, 2001, and January 30, 2002, followed by notice of demand for Rs. 222.70 crores and followed by three prohibitory orders issued under Section 226(5) on July 14, 2002, and July 15, 2002. It is well settled that if an assessee holds the shares as stock-in-trade, the money received by him represents income/revenue receipt, but if the assessee holds the shares as investment, then monies received would be in the nature of capital receipt. Accordingly, the nature of receipt of shares by the petitioner depends on whether the shares held by the petitioners in the three investment companies were held by it as investment or stock-in-trade. According to the Assessing Officer, the entire device was to avoid the business being credited with the market value of the said shares in its profit and loss account and, therefore, it was a tax evasion.