Delhi High Court
Commissioner Of Income Tax vs Sunaero Limited on 1 June, 2012
Author: Sanjiv Khanna
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA No. 562 of 2008
Reserved on: 24th May,2012
% Date of Decision: 1st June, 2012
Commissioner of Income Tax ....Petitioner
Through Mr. N.P. Sahni, Sr. Standing Counsel with
Mr. Ruchesh Sinha, Advocate.
Versus
Sunaero Limited ....Respondent
Through Dr. Rakesh Gupta with Ms. Rani Kiyala, Advs.
CORAM:
HON'BLEMR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE R.V. EASWAR
SANJIV KHANNA, J.
Revenue in this appeal under Section 260A of the Income Tax
Act, 1961 (Act, for short) impugns order dated 26th October, 2007,
passed by the Income Tax Appellate Tribunal (tribunal, for short) in the
case of Sunaero Limited, the respondent assessee. The appeal arises
from the block assessment order for the period 1st April, 1990 to 21st
November, 2000, as the respondent assessee was subject to search and
seizure operation on 21st November, 2000.
2. We are required to decide the following substantial questions of
law, which were framed vide order dated 11th November, 2011:-
"(i) Whether the Income Tax Appellate Tribunal was
right in deleting the addition of Rs.21 crores made by
the Assessing Officer under Section 45 read with
Section 47(v) of the Income Tax Act, 1961?
(ii) Whether the impugned order passed by the Income
Tax Appellate Tribunal is perverse?"
3. Sunair Hotels Ltd. was granted the rights to develop a hotel at
Bangla Sahib Road by the New Delhi Municipal Corporation (NDMC)
in 1970. However, due to some differences that developed between the
two, the development rights were cancelled. Sunair Hotels Ltd.
incorporated another group company, the respondent assessee herein,
and vide letter dated 16th September 1993, wrote to the NDMC to
substitute its name with that of the respondent assessee. During the
pendency of this request, in the year 1993- 94, Sunair Hotels Ltd.
transferred its development rights to the respondent assessee for NIL
consideration. However, the NDMC refused to transfer the licensee
rights in the name of the respondent assessee. During the year 1994-
95, the respondent assessee transferred the hotel development rights
back to Sunair Hotels Ltd. for a consideration of 21 crores.
4. The respondent assessee in the return filed for the assessment year
1995-96, had shown capital gain of Rs.21 crores on transfer of hotel
development rights to Sunair Hotels Ltd., but the same was claimed to
be exempt from capital gains tax under Section 47(v) of the Act.
4A. Section 47(v) of the Act reads as under:-
"47. Transactions not regarded as transfer.--Nothing
contained in Section 45 shall apply to the following
transfers:--
xxxx
(v) any transfer of a capital asset by a subsidiary
company to the holding company, if--
(a) the whole of the share capital of the subsidiary
company is held by the holding company, and
(b) the holding company is an Indian company:
Provided that nothing contained in clause (iv) or
clause (v) shall apply to the transfer of a capital asset
made after the 29th day of February, 1988, as stock-in-
trade;"
5. A reading of the said provision shows that it applies when a
wholly owned subsidiary transfers its capital assets for consideration to
the holding company. Consideration received by the wholly owned
subsidiary company in such cases is not liable to capital gains tax. A
subsidiary company has been defined in Section 4 of the Companies Act,
1956 (Companies Act, for short) as:-
"4. Meaning of "holding company" and
"subsidiary".--
(1) For the purposes of this Act, a company shall"
subject to the provisions of sub-section (3), be deemed
to be a subsidiary of another if, but only if,--
(a) that other controls the composition of its Board of
directors; or
(b) that other--
(i) where the first-mentioned company is an existing
company in respect of which the holders of preference
shares issued before the commencement of this Act
have the same voting rights in all respects as the
holders of equity shares, exercises or controls more
than half of the total voting power of such company;
(ii) where the first-mentioned company, is any other
company, holds more than half in nominal value of its
equity share capital; or]
(c) the first mentioned company is a subsidiary of any
company which is that other's subsidiary.
Illustration
Company B is a subsidiary of Company A, and
Company C is a subsidiary of Company B. Company C
is a subsidiary of Company A, by virtue of clause (c)
above. If Company D is a subsidiary of Company C,
Company D will be a subsidiary of Company B and
consequently also of Company A, by virtue of clause
(c) above; and so on.
(2) For the purposes of sub-section (1), the
composition of a company's Board of directors shall be
deemed to be controlled by another company if, but
only if, that other company by the exercise of some
power exercisable by it at its discretion without the
consent or concurrence of any other person, can
appoint or remove the holders of all or a majority of
the directorships; but for the purposes of this provision
that other company shall be deemed to have power to
appoint to a directorship with respect to which any of
the following conditions is satisfied, that is to say--
(a) that a person cannot be appointed thereto without
the exercise in his favour by that other company of
such a power as aforesaid;
(b) that a person's appointment thereto follows
necessarily from his appointment as director2 [* * *]
or manager of, or to any other office or employment in,
that other company; or
(c) that the directorship is held by an individual
nominated by that other company or a subsidiary
thereof.
(3) In determining whether one company, is a
subsidiary of another--
(a) any shares held or power exercisable by that other
company in a fiduciary capacity shall be treated as not
held or exercisable by it;
(b) subject to the provisions of clauses (c) and (d), any
shares held or power exercisable--
(i) by any person as a nominee for that other company
(except where that other is concerned only in a
fiduciary capacity); or
(ii) by, or by a nominee for, a subsidiary of that other
company, not being a subsidiary which is concerned
only in a fiduciary capacity;
shall be treated as held or exercisable by that other
company;
(c) any shares held or power exercisable by any person
by virtue of the provisions of any debentures of the
first-mentioned company or of a trust deed for securing
any issue of such debentures shall be disregarded;
(d) any shares held or power exercisable by, or by a
nominee for, that other or its subsidiary [not being
held or exercisable as mentioned in clause (c)] shall be
treated as not held or exercisable by that other, if the
ordinary business of that other or its subsidiary, as the
case may be, includes the lending of money and the
shares are held or the power is exercisable as
aforesaid by way of security only for the purposes of a
transaction entered into in the ordinary course of that
business.
(4) For the purposes of this Act, a company shall be
deemed to be the holding company of another if, but
only if, that other is its subsidiary.
(5) In this section, the expression "company" includes
any body-corporate, and the expression "equity share
capital" has the same meaning as in sub-section (2) of
Section 85.
(6) In the case of a body corporate which is
incorporated in a country outside India, a subsidiary
or holding company of the body corporate under the
law of such country shall be deemed to be a subsidiary
or holding company of the body corporate within the
meaning and for the purposes of this Act also, whether
the requirements of this section are fulfilled or not.
(7) A private company, being a subsidiary of a body
corporate incorporated outside India, which, if
incorporated in India, would be a public company
within the meaning of this Act, shall be deemed for the
purposes of this Act to be a subsidiary of a public
company if the entire share capital in that private
company is not held by that body corporate whether
alone or together with one or more other bodies
corporate incorporated outside India."
6. The Assessing Officer in the block assessment order dated 29 th
November, 2002, held that the assessee was not a wholly owned
subsidiary of Sunair Hotels Ltd. He observed that during the course of
search operations, material/documents seized contradicted the claim of
the respondent assessee, that it was a wholly owned subsidiary of Sunair
Hotels Ltd. It was in fact a wrong claim. The respondent assessee had
seven registered individuals as shareholders and Sunair Hotels Ltd. was
not a holder of even a single share.
7. During the course of block assessment proceedings, the
respondent assessee claimed that it was wholly owned subsidiary of
Sunair Hotels Limited and that the seven shareholders were nominees of
Sunair Hotels Limited and not shareholders in their individual right. The
entire expenditure for incorporation of the company, as well as
investment in the subscribed share capital of Rs.7,000/-, was made by
the holding company in the names of the seven shareholders. The
Assessing Officer rejected the said contention observing that material
unearthed during the search operation under Section 132 of the Act, and
during the post search investigation, elucidated that the respondent
asssessee was not a wholly owned subsidiary of Sunair Hotels Limited
as claimed. He specifically examined and rejected the two contentions
of the respondent being (i) that the shareholders were nominees of
Sunair Hotels Limited and were not shareholders in their individual
capacity and (ii) that the entire investment in the share capital of Rs.
7,000/- was made by Sunair Hotels Limited, i.e. the holding company,
recording the following reasons:-
(i) Share Certificate of 100 shares of Rs.10/- each, allotted on 23rd
October, 1993, were in the names of the individual shareholders. The
share certificates do not show that the shareholders were nominees of
Sunair Hotels Limited.
(ii) The Memorandum and Articles of Association submitted by the
respondent assessee, along with the reply dated 29th August, 2002 did
not state that the respondent assessee was a wholly owned subsidiary of
Sunair Hotels Ltd. and that the shares were subscribed by Sunair Hotels
Limited.
(iii) No declaration was made under Section 187C of the Companies
Act, that the seven shareholders were nominees of Sunair Hotels
Limited. It is obligatory to file a declaration in the prescribed form
under Section 187C of the Companies Act.
(iv) Prescribed forms under Section 187C of the Companies Act were
filed with the Registrar of Companies in January 2000 i.e. six and half
years after incorporation of the respondent assessee. These forms
purportedly signed and dated on 25th October, 1993, were forged and
fabricated as per the Assessing Officer. The said forms were purchased
from Jain Book Agency (Sales), Connaught Place, New Delhi and as per
the statement of Nabhi Kumar Jain and Meenakshi Mathur of Jain Book
Agency, dated 28th February, 2001 these forms were printed and sold
after May-June, 1998. The statement made by Nabhi Kumar Jain and
Meenakshi Mathur have been quoted in the assessment order.
(v) Two shareholders, i.e Robin Gupta and Radhika Prasad Dubey, in
their statements had clearly stated that they had not signed the forms
under Section 187C of the Companies Act. The statements of Robin
Gupta and Radhika Prasad Dubey have been quoted in the assessment
order.
(vi) The Government Examiner of Questioned Documents had
affirmed that the forms submitted under Section 187C were not signed
by Robin Gupta and Radhika Prasad Dubey.
(vii) Robin Gupta had denied that he was a nominee of Sunair Hotels
Limited and stated that he was a shareholder in his individual capacity.
(viii) Radhika Prasad Dubey in his statement stated that he had worked
with V.K. Bindal & Company, Chartered Accountant and had signed the
Memorandum and Articles of Association but had no association with
Sunair Hotels Limited. He had ascribed his signature on the
Memorandum etc. on the asking of Vinod Bindal.
(ix) The inspection report of Mr. J.N. Tikku, Deputy Director
(Inspection) dated 22nd November, 2000 under Section 209A of the
Companies Act states that there were several irregularities/violations
with regard to the issue of shares etc.
(x) The minutes of Board of Directors of the respondent assessee
seized at the time of search show extensive use of fluid to change the
dates of the meetings. Robin Gupta had categorically denied his
attending the Board meeting on 23rd October, 1993 in which it was
recorded that the individual shareholders were nominees of Sunair
Hotels Limited. Minutes of the meeting of Board of Directors, seized as
Annexure A-31 show that they have been written on the same date using
the same pen and in the same writing. Annexure 31 was a false and
forged document created by the respondent assessee to support the claim
that it was a wholly owned subsidiary of Sunair Hotels Limited.
(xi) Sunair Hotels Limited had made a request to NDMC on 16th
September, 1993 to substitute and transfer the license to the respondent
assessee but the respondent assessee was incorporated subsequently on
22nd October, 1993.
(xii) Incurring of expenditure at the time of incorporation does not
make the company, which incurs the expenditure, the holding company
and the company incorporated a subsidiary. It certainly does not make
the incorporated company, a wholly owned subsidiary.
8. Accordingly, it was held by the Assessing Officer that the
respondent assessee was not a wholly owned subsidiary of Sunair Hotels
Limited. Consequently, the entire amount of Rs.21 crores received by
the respondent assessee was taxable and the benefit under Section 47(v)
was not available.
9. The aforesaid findings made by the Assessing Officer and the
denial of benefit under Section 47(v) of the Act was reversed by the first
appellate authority. The Commissioner of Income Tax (Appeals) held
that the statement of Robin Gupta was not reliable. Statement of
Radhika Prasad Dubey was to the effect that he was acting as a dummy
Director and was not a de facto Director. This was not sufficient and the
Assessing Officer should have had made further enquiries. In these
circumstances, it was necessary to find out and ascertain who had
actually made investment in the share capital of the respondent assessee.
This would determine the real ownership of the respondent assessee.
The payment of share capital was made by cheque and the copy of the
receipt issued by the Registrar of Companies had been filed. This
aspect was not controverted and denied by the Assessing Officer, while
denying benefit under Section 47(v) of the Act. Section 187C of the
Companies Act is a procedural provision and the requirement of the
Companies Act cannot be imported and considered for examining
whether conditions under Section 47(v) of the Act were fulfilled or not.
As far as forgery of signatures and discrepancy in the minutes books was
concerned, it was for the authorities under the Companies Act to take
notice and action. However, having regard to the provisions of Section
47(v), this aspect was immaterial. Investment in the shares was made by
the holding company, Sunair Hotels Ltd., and this position was reflected
in the books of both the respondent assessee and Sunair Hotels Limited.
Robin Gupta had not stated that he had made payment for 100 shares out
of his own funds and had not shown or claimed ownership of shares in
his balance-sheet. Addition of Rs.21 crores was treated as unwarranted
and the same was deleted.
10. Appeal filed by the Revenue, has been dismissed by the impugned
order dated 26th October, 2007. We deem it appropriate to reproduce the
entire reasoning given by the tribunal, as a question of perversity has
been raised. Paragraphs 8 to 14 of the order passed by the tribunal read
as under:-
"8. We have considered the rival submissions of
both the parties, perused the record and carefully
gone through the impugned order of the tax
authorities below.
9. In the instant case the ld. DR for the
Revenue except placing reliance on the reasoning
given in the order of AO was not able to controvert
the factual observations made in the order of
CIT(A) and the findings recorded on the basis of
the conclusions drawn on the factual observations
made by the CIT(A).
10. On the other hand the ld. AR for the
assessee first reiterated submissions made before
the CIT(A) and thereafter relying on the reasoning
given in the order of CIT(A) submitted that the
CIT(A) rightly deleted the impugned addition of
Rs.21 crores made by the AO.
11. The first point required to be resolved by us
is whether on the basis of statement of Shri Robin
Gupta recorded on 8-3-2001 the AO was justified
in concluding that Shri Robin Gupta held the
shares in his own name and not as a nominee
because except bald oral statement, he has not
been able to substantiate the claim of investment in
the shares in his personal capacity by providing
any document/evidence when the case of the
assessee is that the source of the investment in the
share capital of Sunaero Ltd. is from the funds
given by the Sunair Hotels Ltd. The payment
towards the share capial was made through
cheque and copy of the receipts issued by registrar
of companies supports the claim of the assessee.
The AO has not controverted this aspect of the
assessee u/s 47(v) of the Act it is necessary that the
holding company should hold the whole of the
share capital of the subsidiary company and
should also be an India Company. The assessee,
in view of the payment towards share capital
having been made by Sunair Hotels Ltd., has been
able to show that these conditions have been met
in the case of the assessee and therefore the
assessee is entitled to the benefit allowed u/s 47(v)
of the Act.
12. The undisputed facts in this case are that the
assessee company M/s Sunaero Ltd. was
incorporated on 22-10-93 with 7 subscribers to its
share capital. During the year 1994-95 M/s
Sunaero Ltd. transferred the hotel development
rights back to M/s Sunair Hotels Ltd. for a
consideration of Rs.21 crores. This amount was
declared to be the profits in the annual financial
statement of M/s Sunaero Ltd. for the year ending
31.3.95. However, this amount was claimed to be
exempt from Capital Gains Tax u/s 47(v) of the I.T.
Act in the return of its income filed for A.Y. 1995-
96. Whereas, under the section any capital gains
arising out of transfer of capital assets from a
wholly subsidiary company to its holding company
is not liable to gain tax. As discussed hereinabove,
the assessee from the above mentioned evidence
was able to show that the holding company was
holding the whole of the share capital of the
subsidiary company and the payments towards the
share capital of the assessee too was made by M/s
Sunair Hotels Ltd. The AO without examining
other six subscribers to the share capital, simply
on the basis of the statement of Shri Robin Gupta
has tried to establish that the shars of the company
were held in the name of the 7 subscribers and not
as nominee. On analyzing the statement of Shri
Robin Gupta we find firstly that Shri Robin Gupta
states that the signatures appearing on form no. 1
prescribed under Rule3(1) of sec. 187C were not
his. It is however to be noticed that in his
statement Shri Robin Gupta has further stated that
he was unable to recall the mode of payment of the
share capital. Further, that the day to day affairs
of the company were being looked by Shri S.P.
Gupta, an another subscriber. We have already
mentioned hereinabove that the AO has not made
any enquiries from the other remaining
sharesholders of the assessee company, so, in
these facts the only satisfactory basis for arriving
at a decision regarding capital gain u/s 47(v)
could not be the examination of the other
subscribers who could actually disclose as to
whether they had made the investment in the share
capital of the assessee company. Only on this
basis the real ownership of the shares in question
could have been ascertained by the AO, but, in the
instant case the AO has failed to do so by bringing
on record any cogent evidence.
13. Now coming to the other point whether the
assessee company has fulfilled the condition laid
down in sec. 187C of the Companies Act and the
effect thereof. In this regard we find that Income
Tax Act, 1961 does not contain any reference to
sec. 187C of the purpose of considering the
taxability of capital gains u/s 74(v) (sic.) of the Act
otherwise too it is simply a procedural section for
the purpose of disclosure of benami holding of
shares. So far as the alleged violation of
Companies Act in terms of late submission of
declaration u/s 187, forgery or mismatch or
signatures and discrepancies in recording in
minute books are concerned, it is for the
concerned authorities under the relevant
enactments to take note of and to take such
punitive action as may be deemed fit. However, as
regards the provisions of sec. 47(v) of I.T. Act it is
clear from the facts of the instant case that
investment in the shars of the assessee company
has been made by M/s Sunair Hotels Ltd. which is
reflected in the balance sheets of both the
companies. Regarding the statement of Shri Robin
Gupta we have already analyzed hereinabove that
his statement is not worth placing any reliance as
he failed to establish from cogent evidence that in
the fact he made the payment of 100 shares out of
his own funds because he neither furnished any
detailed of such payment nor the same was shown
by him in his balance sheet indicating the
ownership of the same.
14. For the reasons stated above we are of the
opinion that in the existing facts and
circumstances, the assessee has been able to
establish that the capital gains of Rs.21
croresarising out of transfer of the capital assets
from a wholly-owned subsidiary company to its
holding company was not liable to capital gains
tax as per the provisions of sec. 47(v) of Income
Tax Act, 1961. Accordingly, the order of CIT(A) in
this regard is upheld and grounds of appeals taken
by the Revenue are rejected."
11. Before us, the Revenue has filed three paper books, Paper Book -
I, Paper Book - II and Paper Book - III. The respondent assessee has
also filed a paper book. We are only entitled to refer and have
examined the documents filed and available to the tribunal, when we
examine the question of perversity. Of course, the orders passed by the
Assessing Officer and the CIT(A) can be referred to.
12. In order to decide the issue in question, we would like to point out
the contentions raised on behalf of the Revenue, which are as under:-
(i) Sunair Hotels Limited was not a shareholder of the respondent
assessee. It does not hold even a single share. The seven shareholders
were individuals.
(ii) As per Section 49 of the Companies Act, all investments made by
a company should be held in its own name. Sub-section (3) stipulates
that a company may hold shares in the subsidiary company in its own
name or in the name of its nominee, in so far as it is necessary to do so to
ensure that the number of members of the subsidiary is not reduced to
less than 7 (seven), in the case of public limited company, and in the
case of private company the number should not fall below 2 (two).
(iii) There is a difference between a subsidiary company and a wholly
owned subsidiary company. In the case of wholly owned subsidiary
company, the entire shareholding must be held by the holding company
or its nominees. This is not necessary in the case of a subsidiary
company. (See Sections 4 and 49 of the Companies Act)
(iv) Respondent assessee was not set up or incorporated as a wholly
owned subsidiary company of Sunair Hotels Limited. In the
Memorandum of Understanding dated 17th June, 1993 or in subsequent
correspondence with NDMC, it was not alleged or stated that the
respondent assessee was a wholly owned subsidiary company. The letter
indicated that the formation of separate company was for the purpose of
a joint venture or as a subsidiary but it cannot be said that the respondent
assessee was incorporated as a wholly owned subsidiary.
(v) The letter/correspondence exchange with the Secretariat for
Industrial Approvals, Ministry of Industry of Foreign Investment and
Technologies dated 30.9.1994 were self-serving documents and do not
establish the claim and do not constitute an admission or a proof that the
respondent assessee was a wholly owned subsidiary.
(vi) There is no contemporaneous record to show that the seven
shareholders were nominees of Sunair Hotels Limited or that the
investment towards share capital was made exclusively or only by
Sunair Hotels Limited.
(vii) Members and Directors of the respondent assessee and Sunair
Hotels Limited were not the same.
(viii) Share certificates were issued in the various individuals' names
and do not mention that the shareholders/ members were nominees of
Sunair Hotels Ltd.
(ix) Statements of Robin Gupta, Radhika Prasad Dubey and the
Director and Manager of Jain Book Depot and the forgery and the report
of the Government Examiner of Questioned Documents, have been
ignored and not given due credence.
(x) The declaration under Section 187C was not filed in time, and in
at least two cases, signatures were forged on the form filed with the
Registrar of Companies.
The reports and findings made by the Department of Company
Affairs have been ignored.
(xi) On the date when the shares were issued, the respondent assessee
did not have a bank account and the payments were made in cash. There
is nothing to show that the payments towards share application money
were made by Sunair Hotels Limited. The ledger account of the
respondent assessee in the books of Sunair Hotels Limited, relied upon,
does not support the contention that the Sunair Hotels Ltd. had made
payment for the shares.
13. Learned counsel for the respondent assessee has submitted and
raised the following contentions:-
(i) Appeal under Section 260A is maintainable only on substantial
questions of law. Findings of facts cannot be re-appreciated. In the
present case, there are concurrent findings of both, CIT(Appeal) and the
tribunal in favour of the assessee. Reliance is placed on Janardhana
Rao (M) vs. Joint CIT, (2005) 273 ITR 50 (SC), CIT vs. P. Mohankala,
(2007) 291 ITR 278 (SC) and other decisions on similar lines of the
Delhi High Court.
(ii) No evidence relating to undisclosed income was found during
search and, therefore, block assessment proceedings are void. Block
assessment proceedings are not a substitute for regular assessment
proceedings. [See Commission of Income Tax vs. Ravi Kant Jain,
(2001) 250 ITR 141 (Del); CIT vs. V.B. Aggarwal, (2008) 296 ITR 750
(Del), CIT vs. Pramod Kumar Gupta, (2010) 320 ITR 408 (Del); CIT
vs. Balaji Wire Private Limited, (2008) 304 ITR 393 (Delhi); N.R.
Paper and Board Limited & ors. vs. DCIT, (1998) 234 ITR 733 (Guj.);
Caltradeco Steel Sales (P) Ltd. vs. DCIT (2000) 243 ITR 643 (Cal.);
CIT vs. Md. Rizwan (2009) 316 ITR 317 (Patna).]
(iii) In the regular assessment order under Section 143(3) in the case of
assessee relating to the assessment year 1995-96, the Assessing Officer
had held that factually no transaction had taken place between Sunair
Hotels Limited to transfer the hotel development rights in favour of the
respondent assessee and then by the respondent assessee in favour of
Sunair Hotels Limited. He had held that these transactions were
infructuous and had to be ignored. He had accordingly recast the
balance-sheet. The said assessment order has become final and binding
and, therefore, there is no question of capital gain on transfer of the hotel
development rights by the respondent assessee in favour of Sunair
Hotels Limited. Applicability of Section 47(v) is of academic interest
and inconsequential.
(iv) The findings recorded by the Assessing Officer in the assessment
order under Section 143(3) for the assessment year 1995-96 dated 9th
February, 1998, could not have been examined in the block assessment
proceedings. This aspect was specifically raised by the respondent
assessee in the appeal before the CIT (Appeals) and accepted by the
Assessing Officer in the remand report.
(v) The respondent assessee is entitled to raise this issue and question
before the High Court as one of the facets of the issue or a part of the
subject matter of the appeal. (See CIT vs. Indian Molasses Co. (P) Ltd.
(1970) 78 ITR 474 (SC), Sundarama and Co. (P) Ltd. vs. CIT (1967) 66
ITR 604 (SC), Raja Sharda Narain Singh vs. CIT (1968) 68 ITR 209
(SC).
(vi) Correspondence of Sunair Hotels Limited with NDMC in the
letters dated 12th August, 1993 and 16th September, 1993, shows that
Sunair Hotels Ltd. wanted to incorporate its subsidiary. The agreement
dated 17th June, 1993, between Sunair Hotels Ltd. and Aeroflot also
discloses the intention to create a subsidiary. Letters dated 2nd May,
1995 and 31st May, 1995 written by Sunair Hotels Ltd. and the assessee
to Ministry of Industries affirms and admits that the respondent assessee
was a wholly owned subsidiary of Sunair Hotels Ltd.
(vii) Ministry of Industry's letter dated 27th June, 1995, acknowledges
that Sunair Hotels Ltd. was the holding company of the respondent
assessee. This was also acknowledged in the Ministry of Industry's
letter dated 24th May, 1995. Internal note of Law Department of NDMC
also records that the respondent assessee was to be established as a
subsidiary of Sunair Hotels Ltd.
(viii) The entire fund for establishment and incorporation of the
respondent assessee was provided/incurred by Sunair Hotels Ltd. Share
application money of Rs.7,000/- was also recorded and shown in the
balance sheet and books of accounts of Sunair Hotels Ltd.
(ix) In the balance sheet of Sunair Hotels Ltd. as on 31st March, 1995
and 31st March, 1994, the assessee was shown as a wholly owned
subsidiary. These balance-sheets were filed with the Registrar of
Companies in 1995.
(x) The register of members records that the seven shareholders were
nominees of the holding company i.e. Sunair Hotels Ltd.
(xi) The respondent assessee and the holding company were operating
from the same premises. The transaction of Rs.21 crores was duly
disclosed in the balance sheet/ computation of assessable income for the
assessment year 1995-96.
(xii) Statement of Robin Gupta was not credible and an afterthought.
There were differences between Robin Gupta and other shareholders.
Robin Gupta is related to S.P. Gupta and because of differences, their
relationship had taken an ugly turn. He had wrongly answered and
claimed that he was not a nominee of Sunair Hotels Ltd. Robin Gupta
had executed a power of attorney in favour of V.K. Bindal. Being a well
educated person holding degree in MBA (Finance), he was aware of the
papers signed by him. Robin Gupta had not disclosed and declared the
shares, held by him in the respondent assessee, in the balance-sheet and
documents filed with his income tax returns. He was not the de facto
shareholder and Sunair Hotels Ltd. was the beneficial and the de facto
shareholder.
(xiii) Even otherwise, there were gaps between statements of Robin
Gupta on different aspects and his claims/assertions are not substantiated
by facts.
(xiv) Robin Gupta did not recall and explain the source of payment of
Rs.1000/- for subscribing to the shares of the respondent assessee.
(xv) Sunaero Ltd. had furnished and given replies to the Department of
Company Affairs, Economic Offences Wing, Crime Cell, Delhi and they
were satisfied and no further action has been taken.
(xvi) Law does not require that the Articles and Memorandum of
Association of the subsidiary or holding company should mention/record
beneficial ownership or whether the company in question is a wholly
owned subsidiary.
(xvii) Opinion of Government Examiner of Questioned Document,
Simla is debatable and not a fair and clear opinion. The opinion
rendered by them relate to signature of Radhika Prasad Dubey and as
regards Robin Gupta, they had asked for more specimen signatures.
(xviii) Section 187C of the Companies Act requires filing of forms
but this is for the purpose of reporting. This is a formality and does not
affect the rights of the beneficial shareholder.
(xix) The delay in filing the forms has been condoned. The forms
purchased from Jain Book Agency were filled up on the basis of earlier
declarations taken on plain paper dated 23rd October, 1993. Thus, the
aforesaid date was mentioned on the forms. This aspect, therefore, does
not negate the respondent assessee's claim that it was a wholly owned
subsidiary.
(xx) Statement of Radhika Prasad Dubey does not support the
department's case.
14. At the very outset, we may record that several issues and
contentions raised by the appellant/Revenue and the respondent/assessee
have not been recorded or dealt with by the CIT(Appeals) or the tribunal.
These remain unnoticed and have not been adverted to, considered and
evaluated. The tribunal has also not dealt with various legal issues and
contentions raised by both sides. A reading of the order passed by the
tribunal shows that same is cryptic as also factually wrong and incorrect
on factual conclusions/findings recorded.
15. We have quoted Section 47(v) of the Act. To claim benefit under
the said Section respondent assessee must be a wholly owned subsidiary
of the holding company. Merely because the respondent assessee was a
subsidiary of Sunair Hotels Ltd., benefit under Section 47(v) cannot be
claimed. The requirement is more stringent.
16. In paragraph 11 of the order, it is stated that the Assessing Officer
was not justified in concluding that Robin Gupta was holding shares in
his own name and not as a nominee because of the bald oral statement,
as there was no other material/evidence. He has not been able to
substantiate the claim that investment in the shares was in his personal
capacity. He did not prove and establish the said fact from any
document/ evidence, when the case of the respondent assessee was that
the source and payment in fact was made by Sunair Hotels Ltd. For the
sake of convenience, we are reproducing paragraph 11 once again:-
"11. The first point required to be resolved by us
is whether on the basis of statement of Shri Robin
Gupta recorded on 8-3-2001 the AO was justified
in concluding that Shri Robin Gupta held the
shares in his own name and not as a nominee
because except bald oral statement, he has not
been able to substantiate the claim of investment in
the shares in his personal capacity by providing
any document/evidence when the case of the
assessee is that the source of the investment in the
share capital of Sunaero Ltd. is from the funds
given by the Sunair Hotels Ltd. The payment
towards the share capial was made through
cheque and copy of the receipts issued by registrar
of companies supports the claim of the assessee.
The AO has not controverted this aspect of the
assessee u/s 47(v) of the Act it is necessary that the
holding company should hold the whole of the
share capital of the subsidiary company and
should also be an India Company. The assessee,
in view of the payment towards share capital
having been made by Sunair Hotels Ltd., has been
able to show that these conditions have been met
in the case of the assessee and therefore the
assessee is entitled to the benefit allowed u/s 47(v)
of the Act."
17. We have examined the said reasoning but find that it is
substantially, and for a large part, factually incorrect and wrong. The
respondent assessee has placed on record a copy of the ledger account of
respondent assessee in the books of Sunair Hotels Limited. The same, as
per the date mentioned thereon, was printed on 23 rd December, 1994 and
the ledger account reads:-
"---------------------------------------------------------------------------------------------------------------------------------------
L E D G E R AS ON .......... 23/12/94 TIME 14.54.49 Pg. No. 29
Voucher Date Narration Bill Bill Cheque Cheque
No. No. Dt. No. Date Debit Credit Balance
65 15/10/93 DD FVR ROC P&H FOR SUN AERO LTD. 38020.00 38020.00
66 17/10/93 PRDF CGHS TO VKB & CO. FR REGIN OF SUNAERO LTD. 19480.00 57500.00
83 30/11/93 CHQ PD FR MOA PTG FR SUN AERO
THRU TRANSASTA 832037 30/11/93 17500.00 75000.00
149 31/03/94 RECT FR ALLOT. OF 700 SH @ 10/- SUN AERO LTD. 7000.00 68000.00"
18. The said ledger account would reveal that on 15th & 17th October,
1993, two debit entries of Rs.38,020/- and Rs.19480/- were made as
payments forwarded to the Registrar of Company for registration of the
respondent assessee. The next entry of Rs.17,500/- is made on 30th
November, 1993, as Cheque paid on behalf of the respondent assessee.
The aforesaid payments would only show that the respondent assessee
was liable to pay Rs. 75,000/- to Sunair Hotels Ltd. who had made the
said payments or had provided funds or was a creditor. The last entry on
31.3.1994 relates to Rs.7,000/- and is on the credit side. As per the said
entry, the same was made for allotment of 700 shares @ Rs.10/- each in
the respondent assessee to Sunair Hotels Ltd. The said entry is an
adjustment entry and no payment either by cheque or cash has been
made. The respondent assessee was admittedly incorporated on 22 nd
October, 1993. The Articles and Memorandum of Association record
the initial shareholding in the name of 7 persons. These shareholdings
were issued on or before the date of incorporation. For issue of shares,
payment for the shares has to be made. It is not the case of the
respondent assessee that these were partly paid up shares. Sequitor is
that the payments for the issue of share capital should have been made
on or before the date of incorporation i.e. 22nd October, 1993. Obviously
the entry dated 31st March, 1994, that too an adjustment entry made in
the books of Sunair Hotels Ltd. would not show and establish that the
payment of the shares was made by Sunair Hotels Limited. It is
accepted and admitted that other than this document i.e. the ledger
account of Sunair Hotels Ltd., no other paper or document was produced
or filed before the tribunal and in fact there is no other paper or
document produced or filed before us to justify and state that payment
for shares in question was made by Sunair Hotels Ltd. The payment was
certainly not by cheque as recorded and held by both CIT (Appeals) and
the tribunal.
19. It is an accepted position that shares were issued and held in the
name of Robin Gupta. The amount of Rs.1,000/-, is not a big or
princely sum. It is not understood and stated what document or evidence
was required to be given/ furnished by Robin Gupta, when the two
appellate forums recorded that Robin Gupta had failed to substantiate the
claim of investment in the shares and that the source was his own
personal fund. Apparently what had weighed and mattered was the
finding that the source of payment for purchase of the shares was the
cheque issued by Sunair Hotels Limited. It is apparent from the ledger
account that it was never the claim of the respondent assessee that Sunair
Hotels Ltd. had paid for the share capital by cheque.
20. Revenue has submitted that the respondent assessee has not
denied but has accepted that Robin Gupta was the recorded shareholder.
In his returns, Robin Gupta has not claimed or stated that he was a
nominee of Sunair Hotels Ltd. Failure to mention the shares recorded/
standing in his name was a lapse and an error on the part of Robin
Gupta. The Revenue submits that at best this is a neutral factor. But
from the said factum, no inference or legal conclusion can be drawn that
Sunair Hotels Ltd. was the beneficial shareholder. This was and would
be an erroneous conclusion.
21. Normal presumption in law is that the registered shareholder holds
the share in his own right and in his individual/ personal capacity. He
does not hold shares as a nominee of a third person. It is the contrary
which has to be proved by the party who claims or asserts that the
recorded shareholder is a nominee. The onus is, therefore, on the party
who claims to the contrary. The said party has to lead evidence sufficient
in law to enable the authorities/tribunal to come to the conclusion that
it/she/he has discharged the onus. The evidence should be such that it
can be held that the shares were not held by the shareholder in his
individual/ personal capacity but as a nominee of the third person. [See
In Re: Dinshaw Maneckjee Petit Bart, AIR 1927 Bom 371]
22. It was recorded that the receipts were issued by Registrar of
Companies. This is again factually incorrect. It is not case of the
respondent assessee that the Registrar of Companies had issued any
receipts for issue of share capital in the name of the respondent assessee.
The further finding recorded is that the Assessing Officer had not
controverted these facts. This is wrong and incorrect as per the findings
recorded in the assessment order. The last finding in the said paragraph
that the payment towards share capital by Sunair Hotels Ltd. has been
established beyond doubt, is a presumptuous statement without reference
to any other material/evidence which forms the basis/foundation.
23. Thereafter, the tribunal has stated that the statement of Robin
Gupta, that he had not signed form I prescribed under Rule 3 relating to
declaration under Section 187C, should be ignored for the reason that he
was unable to recall the mode of payment of share capital and it was
stated that day to day affairs of respondent assessee was looked after by
S.P. Gupta - another subscriber. It is not necessary for the shareholder
to be involved in day to day working. Neither does the shareholder
become a nominee shareholder if he is not involved in day to day
working. Further, the shares were issued in the name of Robin Gupta.
The amount involved was only Rs.1,000/- which was not big or
substantial amount. We have already referred to the findings recorded
by the tribunal that the payment of share capital was made by Sunair
Hotels Ltd. by cheque is factually incorrect.
24. Paragraph 12 of the order of the tribunal, states that the respondent
assessee was incorporated on 22nd October, 1993 with seven subscribers
to the share capital. Hotel development rights were transferred back to
Sunair Hotels Ltd. for consideration of Rs.21 crores in the year 1994-95.
This amount was claimed as exempt from capital gain under Section
47(v). The respondent assessee in view of the evidence discussed in
paragraph 11 above, was able to show that the respondent assessee was
wholly owned subsidiary and the payments towards share capital were
made by Sunair Hotels Ltd. The aforesaid findings as recorded by the
tribunal are contrary to the contention and plea raised by the respondent
assessee before us relying upon the assessment order dated 2nd
September, 1998, under Section 143(3). In view of the said factual
finding, the respondent assessee cannot urge and argue that the
transaction relating to transfer of hotel development right should be
ignored and treated as non-existent/void. The finding of the tribunal is
to the contrary. The tribunal has further recorded that the Assessing
Officer did not examine the six other subscribers to the share capital.
This is factually incorrect. The Assessing Officer had examined and
even quoted, the statement made by one more subscriber namely
Radhika Prasad Dubey. The tribunal has probably not examined and not
gone through the statement of Radhika Prasad Dubey, which has been
quoted in the assessment order itself. For benefit under Section 47(v),
the subsidiary must be wholly owned subsidiary. Being a subsidiary is
not sufficient. Thus even if one of the shareholders was not a nominee
of the holding company, benefit under Section 47(v) has to be denied.
25. Thereafter, the tribunal has recorded that the question of real
ownership of shares should have been ascertained by the Assessing
Officer but he has failed to do so. As noticed and held above, there is
no presumption that the registered shareholder is a nominee of a third
person. In case of a dispute, the person who claims to the contrary has to
establish and show that the person mentioned in the register of
shareholders was his nominee. The onus is on the person who states and
claims that what is apparent is not real. It was not for the Assessing
Officer to establish to the contrary but for the assessee to show and
establish that it was a wholly owned subsidiary of the holding company
and the shareholders were merely the nominees of the holding company.
There is no presumption that the shareholders were nominees.
26. In paragraph 13, the tribunal has referred to requirement of
Section 187C of the Companies Act and effect thereof. It is stated that
the violation of Companies Act, mismatch of signature, discrepancies in
recording of the minutes books were aspects which the authorities under
the Companies Act could take note of and also take punitive action. As
far as provisions of Section 47(v) are concerned, the investment in the
shares was made by Sunair Hotels Ltd. and the same was reflected in
balance-sheet of both companies i.e. Sunair Hotels Ltd. and the
respondent assessee.
27. With regard to the aforesaid observations, we may note that
Section 187C or Section 49 of the Companies Act and violation thereof
and penalty prescribed is one aspect. But, the effect of the said violation
has to be examined and considered. It has to be also examined and
considered whether violation of the said provisions would prevent and
bar the respondent assessee from claiming that it was wholly owned
subsidiary and the recorded shareholders were mere nominees. We
would have examined the said aspect but refrain from doing so as we are
passing an order of remit. Therefore, it may not be appropriate and
proper for us to decide the said aspect and it may cause prejudice to the
parties. This aspect/question is not examined and elucidated in the
impugned order. However, another contention of the Revenue may be
noted that de hors provisions of Section 49 and 187 of the Companies
Act, the Benami Prohibition Act, 1988, may have to be also examined.
We are not stating anything in this regard as there are exceptions carved
out in the Benami Act itself. Examination of exceptions may require
factual elucidation and findings. This legal aspect may be raised by the
Revenue on remand.
28. However, we do not agree with the observations of the tribunal
that the question whether or not the respondent is a 100% subsidiary of
Sunair Hotels Ltd., can be examined without reference to the provisions of
the Companies Act or other enactments. The Act, i.e. Income Tax Act,
1961, deals with and relates to taxation of income. For the purpose of
determining taxable income, provisions and parameters/stipulations have
been made/prescribed in the Act. In a given case, however, the authorities
under the Act (i.e. Income Tax Act) may have to examine provisions of
other enactments, when required and necessary. The term "subsidiary" or
"wholly owned subsidiary" have not been be defined in the Act i.e. the
Income Tax Act. Therefore, reference is to be made to the other Acts
and in this case, the Companies Act. Effect of the violation of
Section 49 and 187C of the Companies Act is one aspect but the
other issue, which has to be examined, is the evidentiary value and the
effect when no such declaration was initially made and the
subsequent filing of the declaration is disputed and contested. It is
claimed that the signatures on the forms/declarations made were forged
and fabricated. The tribunal is required to examine and consider whether
the said conduct, reflects and is of relevance.
29. The last part of paragraph 13 refers to the statement of Robin
Gupta and states that the tribunal had analyzed the statement and it
cannot be relied upon as he has failed to establish that he had made
payment of Rs.1000/- from his own funds as this amount was not shown
in his balance sheet. We have already commented about this aspect
above.
30. At this stage, we may notice two contentions of the respondent.
The first contention is that block assessment proceeding are bad as no
material or evidence was found in the search. This aspect has not been
examined and dealt with by the tribunal. A reading of the order passed
by the Assessing Officer would show that he has referred to the evidence
and material which was found during the search and thereafter, he has
referred to the post search investigation and verification. As per the
assessment order, the evidence/material found during the search and post
search investigation had revealed that the respondent assessee was not
100% subsidiary of Sunair Hotels Ltd. As we are passing order or
remit, this question, if raised, will be examined and considered by the
tribunal. The second contention of the respondent relying upon the
assessment order dated 9th February, 1998, does not help or assist the
respondent for the said order has proceeded on the assumption that the
respondent assessee was 100% subsidiary of Sunair Hotels Ltd.
However, as per the case of the appellant, material and evidence found
during the search and subsequent enquiries had revealed that the
respondent assessee was not a 100% subsidiary of Sunair Hotels Ltd. It is,
therefore, the contention of the appellant that the assessment order dated 9 th
February, 1998 does not help or protect the respondent assessee as the said
order had proceeded on the basis of premise and assumption that the
respondent assessee was not a 100% subsidiary of Sunair Hotels Ltd. This
aspect will be examined by the tribunal. We refrain from deciding this
aspect/question. Order of the tribunal we record is silent on this question.
31. In Sree Meenakshi Mills Limited versus CIT, (1957) 31 ITR 28
(SC), the Supreme Court had propounded the following principles:
"25. We have discussed the authorities at great length,
as some of the observations contained therein appear,
at first sight, to render plausible the contention of the
appellant, and it seems desirable that the true
meaning of those observations should be clarified, lest
error and misconception should embarrass and fog
the administration of law. The position that emerges
on the authorities may thus be summed up:
(1) When the point for determination is a pure
question of law such as construction of a statute or
document of title, the decision of the Tribunal is open
to reference to the court under Section 66(1).
(2) When the point for determination is a mixed
question of law and fact; while the finding of the
Tribunal on the facts found is final its decision as to
the legal effect of those finding is a question of law
which can be reviewed by the court.
(3) A finding on a question of fact is open to attack,
under Section 66(1) as erroneous in law when there is
no evidence to support it or if it is perverse.
(4) When the finding is one of fact, the fact that it is
itself in inference from other basic facts will not alter
its character as one of fact."
32. In case of pure question of facts, inference from proved facts is a
question of fact. However, as observed in Bomford versus Osborne,
(1942) 10 ITR [E.C.] 27 there can be cases where inferences drawn from
proved or admitted facts, can give rise to question of law when facts proved
or admitted, do not provide and do not support, the conclusions of fact. A
finding of fact can be challenged on the ground that it is perverse. Way
back in 1954, the Supreme Court in Dhirajlal Girdharilal versus CIT,
(1954) 26 ITR 736 (SC) had observed:
"....if the court of fact, whose decision on a question
of fact is final, arrives at this decision by considering
material which is irrelevant to the enquiry, or by
considering material which is partly relevant and
partly irrelevant, or bases its decision partly on
conjectures, surmises and suspicions, and partly on
evidence, then in such a situation clearly an issue of
law arise....
.....It is well established that when a court of fact acts
on material, partly relevant and partly irrelevant, it is
impossible to say to what extent the mind of the court
was affected by the irrelevant material used by it in
arriving at its finding. Such a finding is vitiated
because of the use of inadmissible material and
thereby an issue of law arises."
33. In CIT versus Daulat Ram Rawat Mull, (1973) 87 ITR 349, the
Supreme Court held that onus of proving what was apparent is not real is
on the party who claims it to be so. There should be some direct nexus
between the conclusions of fact arrived at by the authorities concerned and
the primary facts upon which the conclusion is based. Use of extraneous or
irrelevant material in arriving at the conclusion would vitiate the conclusion
of fact, because it is difficult to predicate to what extent, the extraneous and
irrelevant material has influenced the authority in arriving at the conclusion
of fact.
34. Therefore, if a decision excludes or ignores admissible or relevant
evidence, takes into account inadmissible evidence, irrelevant consideration
or extraneous materials, a substantial question of law arises. Similarly,
when an authority has proceeded on an assumption, which is erroneous in
law, a question of law can arise.
35. A factual decision is perverse if the authority has acted without any
evidence or on view of facts, which cannot be reasonably entertained. A
perverse finding is one, if it is arrived at without any material or if it is
arrived at or inference is made on material, which would not have been
accepted or relied upon by a reasonable person conversant with the law. If
the finding is based upon surmises, conjectures or suspicion and is not
rationally possible. A factual conclusion is regarded as perverse when no
person duly instructed or acting judicially could act upon the record before
him, have reached the conclusion arrived at by the tribunal/authority [see
CIT versus S.P. Jain, (1973) 87 ITR 370 (SC)].
36. We are conscious that it has been observed that the order must be
read as a whole to see whether the test of perversity is satisfied but in the
present case when we apply the test expounded in Dhirajlal Girdharilal
(supra) and Daulat Ram Rawat Mull (supra) and also read the order as a
whole, we reach the affirmative opinion in favour of the appellant-
Revenue. It is the aforesaid test, which has been applied by us in our
conclusion recorded above.
37. In view of the aforesaid discussion, we answer the second question
of law in affirmative, i.e., in favour of the appellant-Revenue and against
the respondent-assessee. The first question is answered with the order of
remit as it would be better and appropriate if the entire issue is examined
threadbare by the tribunal. It would not be proper for us to decide the said
question without elucidation and finding of facts being firmly recorded by
the tribunal. We refrain from carrying out the said exercise as the tribunal
is the final fact finding authority. They should record findings of facts and
then apply the law.
38. To cut short the delay, the parties are directed to appear before the
Assistant Registrar of Tribunal on 6th July, 2012, when a date of hearing
will be fixed.
The appeal is accordingly disposed of. No costs.
-sd-
(SANJIV KHANNA)
JUDGE
-sd-
(R.V. EASWAR )
JUDGE
June 1, 2012
Kkb/VKR
