Twinstar Holdings Ltd. vs Anand Kedia on 30 October, 2002

JUDGMENT

S.H. Kapadia, J.

By this writ petition under article 226 of the Constitution, the petitioner seeks to challenge, inter alia, Notices dated 14-7-2002, 15-7-2002 and 15-7-2002 being Exhibit-J. 1 to Exhibit-J. 3 issued under section 226(5) read with the Third Schedule to the Income Tax Act, 1961 under which the Deputy Commissioner of Income Tax – respondent No. 1, has prohibited M/s. Twinstar Holdings Limited-petitioners from receiving shares mentioned in the impugned Notices. By the said Notices, the Depository Participant is also restrained from delivering the impugned shares to any person(s).

Facts

2. Petitioner-Twinstar Holdings Limited is a Mauritius based Company, being Overseas Corporate Body, registered under the Mauritius Companies Act, 1984. Petitioner was the holder of 100 per cent shares of three Investment Companies viz., Pravin Navin Investment & Trading Company (hereinafter referred to as the “PNIT”); Dwarkaprasad Anilkumar Investment Private Limited (hereinafter referred to as the “DAIL”) and Sterilite Copper Rolling Mills Private Limited (hereinafter referred to as the “SCRM”). All the three Investment Companies were Indian Companies. They have come under voluntary winding-up. The petitioner-company was incorporated on 12-1-1993 under Mauritius Companies Act, 1984 in Mauritius with the object of holding shares. The shares of the petitioner-company were held by Non-Resident Indians in the following ratio :

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”).

3. On 8-12-1999, a search was carried out at Offices/Factories of SIIL, including the three Investment Companies. Pursuant to the search, respondent Nos. 1 to 3 herein passed three separate Block Assessment Orders of the said Investment Companies viz., Order dated 30-1-2002 in respect of PNIT, order dated 31-12-2001 for DAIL and order dated 31-12-2001 in respect of SCRM. The block period for which assessment was made was for the financial year 1989-90 upto 1998-99 and for the period 1-4-1989 upto 8-12-1999. For PNIT, the assessed income has been found to be Rs. 238 crores; 1 or DAIL, the assessed income has been found to be Rs. 53 crores and for SCRM, the assessed income is found to be Rs. 37 crores. In all, the total assessed income of the three Investment Companies during the block period is found to be Rs. 328 crores for which a total tax demand outstanding is Rs. 222.70 crores. In the assessment orders, additions were made by the assessing officer on the ground that conversion of stock-in-trade into investments by the three Investment Companies was sham and consequently, transmission of shares of SIIL and MALCO to the petitioners has been charged to tax in the hands of the three Investment Companies at the market value of the shares. Pursuant to the Block Assessment Orders, referred to above, Notice under section 156 in respect of total demand of Rs. 222.70 crores has been raised on the three Investment Companies. These Notices of demand are dated 30-1-2002 for PNIT, 31-12-2001 for DAIL and 31-12-2001 for SCRM. The Liquidators of the three Investment Companies have filed Appeals against the Block Assessment Orders before the Commissioner (Appeals). They are pending even today. By Stay Applications dated 5-3-2002, 7-2-2002 and 7-2-2002 addressed by the Liquidators of the three Investment Companies, stay was sought from respondent Nos. 1 to 3 under section 220(6) of the Income Tax Act pending hearing and final disposal of the Appeal by Commissioner (Appeals). The applications remained undisposed. Therefore, the Liquidators moved, on the Administrative Side, Commissioner-III, being respondent No. 4 to the Petition, for stay in March 2002. According to the petitioners, without any prior intimation, hearing or correspondence, respondent Nos. 1 to 3 issued impugned Notices on 14-7-2002 for PNIT, 15-7-2002 for DAIL and 15-7-2002 for SCRM to DP stating that the three Investment Companies have failed to pay the tax arrears due from them and prohibiting the petitioner-company and the DP from receiving/delivering shares to any person whomsoever. To complete the chronology of events on 15-7-2002, respondent No. 1 passed orders under section 179 of the Income Tax Act against two ex-Directors of PNIT holding them liable for payment of tax arrears of PNIT, inter alia, on the ground that the assets of PNIT have been transmitted to the petitioner and that PNIT had no assets so as to enable the department to recover the tax arrears. Under the above circumstances, this Petition has been filed, seeking to challenge the impugned Notices dated 14-7-2002, 15-7-2002 and 15-7-2002 in respect of PNIT, DAIL and SCRM respectively under section 226(5) read with the Third Schedule to the Income Tax Act.

4. By Affidavit-in-Reply dated 3-10-2002, respondent Nos. 1 to 3. on facts, have alleged that on 8-12-1999, search and seizure action under section 132 of the Act was carried out on various business and office premises of Sterilite Group of Industries. That, during the search, it was found that the petitioner was 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, 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 9-12-1999, That, in the statement, Navin admitted that Directors of PNIT were controlling affairs of 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 shares held by the three Investment Companies in SIIL and MALCO to the petitioner, without paying tax. That, to avoid payment of tax, 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 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 (DTA) 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 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 21-3-2002 passed by respondent No. 1, the stay application has been rejected in 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 15-7-2002, 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 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 shares from the three Investment Companies to the petitioner-company came to be effected during the pendency of block assessment proceedings after 8-12-1999. That, under Circular No. 179 dated 30-9-1975 issued by CBDT, even transfers made after completion of the proceedings, but before service of Notice under rule 2 of 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 transfer 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 assessment year 1998-99 and, therefore, for the limited purposes of section 281 and to protect the interest 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 restrain order was also passed under section 226(5) prohibiting the petitioner from transferring the shares from Demat Account with DP. That, before passing Orders under section 226(5), respondent Nos. 1 to 3 obtained authorization from the Commissioner-III vide General order dated 15-7-2002 authorizing respondent 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.

In Rejoinder dated 16-10-2002, 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 15-7-2002, which indicates non-application of mind by the three assessing officers. That, the order passed by Commissioner-III, authorizing the three assessing officers, came to be passed on 15-7-2002, whereas in case of PNIT, the Prohibitory order under section 226(5) is dated 14-7-2002, 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 14-7-2002 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 show that there were substantial acquisition of shares by them from 1983 onwards. That the Promoters held approximately 28.44 per cent in Sill 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 shares of SIIL and MALCO should be treated as investments. This was vide assessment order dated 15-2-2001. He has given a categorical finding that upto assessment year 1996-97, shares were held as stock-in-trade, but that nomenclature was misleading. That, in the circumstances, the order dated 15-2-2001 was binding on respondent 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 additional Affidavit in Rejoinder was filed on 16-10-2002 in view of the Additional Affidavit filed by the assessing officer on 9-10-2002, 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.

Arguments on behalf of the petitioners

5. Mr. Chidambaram, learned senior counsel appearing on behalf of the petitioner-company submitted that the impugned Notices/Orders dated 14-7-2002 and 15-7-2002 passed against the three Investment Companies (assessees) are purportedly issued under section 226(5) of the Act. That, the impugned Orders were ex facie beyond jurisdiction as section 226(5) empowers recovery of arrears of tax due from an assessee by distraint and sale of his movable property. That, in the instant case, it cannot be disputed that the property against which the impugned action is taken (shares) is the property of the petitioner who is not an assessee from whom arrears of tax are due. Learned counsel for the petitioner next contended that in this case, respondent Nos. 1 to 3 (hereinafter referred to as “assessing officer”) have claimed that the transfer of shares to the petitioners by the three Investment Companies should be ignored and that the corporate veil should be lifted so as to treat the petitioner and the Investment Companies as one entity. He contended that if one accepts this contention of the assessing officer then the entire substratum of the demand collapses as there is no transfer and if there is no transfer from the Investment Companies to the petitioner then business profits cannot accrue and the purported transfer cannot give rise to a tax liability. He further contended that in the present proceedings, the stand of the assessing officer is that shares/warrants still belong to the Investment Companies as there was no valid transfer in favour of the petitioner which contention is directly opposite to the decision in the Block Assessment Orders of the Investment Companies passed by the very same respondent Nos. 1 to 3 viz., that in fact, there was a transfer of shares by the three Investment Companies to the petitioner consequent upon the liquidation of the three Investment Companies giving rise to a taxable profit. It was, therefore, contended that the stand taken by the assessing officer in this Petition is contrary to the stand taken by the assessing officer in the block assessment order. Learned counsel for the petitioner next contended that section 281 of the Income Tax Act did not apply in the instant case. He contended that section 281 applies to transfers during pendency proceedings under the Act. That, in the present case, the transfer of shares by virtue of which the demand arises has been taxed in block assessment orders, which, by definition, covers the period upto the date of the search, i.e., 8-12-1999 in the present case. Learned counsel for the petitioner further pointed out in this connection that in the three block assessment orders, the date of transfer has been taken to be 30-11-1999 (for PNIT), 31-3-1999 (for DAIL) and 31-3-1999 (for SCRM). That, however, the block assessment proceedings can be pending only after the date of search, i.e., 8-12-1999. Therefore, at the time of the transfer of shares, the block assessment proceedings were not pending and consequently, section 281 cannot apply. That, according to the department, the impugned tax liability arose out of the very transfer, which the department seeks to treat as void under section 281. That, section 281 applies only when there is a preexisting tax liability as section 281 applies only in two situations viz., transfer during pendency of the proceedings or in a case where the assessment is completed and the transfer takes place after such completion. It was contended that if the impugned transfer itself gives rise to the impugned tax liability, then the proceedings for assessment of income arising from such transfer will commence after the impugned transfer. Therefore, section 281 can never be attracted to the present case. That, even the second limb of section 281, which refers to impugned transfer after completion of assessment and before service of Notice under rule 2 of Schedule II, has no application because the assessments were completed on 30-1-2002 for PNIT, 31-12-2001 for DAIL and 31-12-2001 for SCRM respectively. Therefore, there was no transfer after the said three dates because, according to the department, the transfer took place on 30-11-1999, 31-3-1999 and 31-3-1999 respectively. Therefore, the second limb of section 281 also did not apply. At this stage we may point out that in the course of the argument learned senior counsel for the department submitted orally at one point of time that the date of transfer was 31-3-2000. Therefore, Mr. Chidambaram, learned senior counsel for the petitioner submitted that if one takes the date of transfer as 31-3-2000 then such transfer would fall outside the block period and the entire block assessment proceedings for the period ending 8-12-1999 will fall to the ground in which event, there would be no assessment, no liability and no demand.

Learned counsel for the petitioner next submitted that section 281 was not applicable to stock-in-trade. In this connection, he invited our attention to the explanation which defines the word “assets” in section 281 of the Act and which rules out stock-in-trade from the definition of the word “assets”. He contended that in this case, the tax demand arose on account of the assessing officer coming to the conclusion that the shares held by the three Investment Companies constituted stock-in-trade of the assessee. In the circumstances, it was contended that it is not open to the department now to contend that the impugned shares were held as investments (See para 11(4) of the Affidavit-in-Reply filed by the department).

Learned counsel for the petitioner next contended that bona fide transfers for adequate consideration cannot be declared void. In this connection, he relies upon the proviso (ii) to section 281(1). He submitted that in the present case, shares were 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 is proposed to be cancelled and in consideration thereof, 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 (1) to section 281 stood attracted, Therefore, section 281 was not applicable to the facts of the case.

Learned counsel for the petitioner next contended that under proviso (ii) to section 281 of the Act, a transfer shall not be void if it is made with prior permission of the assessing officer. It was pointed out that in this case, NOC under section 178 of the Income-tax was obtained by the assessee on 15-6-1999 for PNIT and others. Therefore, proviso (1) to section 281 stood attracted and consequently, the transfer must be deemed to be with prior permission of the assessing officer,

Learned counsel for the petitioner next contended that the assessing officer had no authority to declare the transfer void under section 281 of the Act, In this connection he invited our attention to the judgment of the Supreme Court in TRO v. Gangadhar Vishwanath Ranade (1998) 234 ITR 188 (SC) and also in Sancheti Leasing Co. Ltd. v. ITO (2002) 246 ITR 814 (Mad). He submitted that if the department seeks to declare the transfer void then the department should move the civil court and seek a declaration to that effect. He further contended that assuming for the sake of argument that section 281 of the Act was applicable, even then respondent Nos. 1 to 3 have not set out their stand as to when the order under section 281 has been passed. That, the Affidavit-in-Reply on this point is ambiguous. It merely states that there was no order passed on 15-7-2002 and mere notings were made in the order Sheet on 15-7-2002. It was further submitted that in view of the judgment of the Bombay High Court in Palanpur Traders Lid. v. Union of India (1991) 187 ITR 132 (Bom), an opportunity of being heard was a necessary pre-condition which has not been complied with and, therefore, invocation of section 281 is of no effect.

Learned counsel for the petitioner next con tended that the Commissioner’s authorization, empowering the assessing officers to proceed under section 226(5) read with Schedule III, was made on 15-7-2002, whereas the Prohibitory order under section 226(5) is dated 14-7-2002. He submitted that under section 226(5), the assessing officer could not attach properties without authorization by the Commissioner. Therefore, in the present case, Exhibit-II has been issued by the assessing officer without authorization from the Commissioner because Exhibit-J.1 is dated 14-7-2002, whereas the Commissioner’s authorization is dated 15-7-2002. At this point, we may mention that 14-7-2002 was a Sunday. In this connection, learned counsel for the petitioner further submitted that section 226(5) of the Act requires recovery to be made in the manner laid down in the Third Schedule which empowers recovery by attachment and sale of movables attachable by actual seizure. That, the said Schedule provides, inter alia, that the provisions of the Second Schedule shall, as far as may be, apply. Learned counsel, therefore, contended that the Second Schedule had a wider ambit and scope as compared to the Third Schedule and further out of Second Schedule, Third Schedule has been carved out as applicable to a limited class of cases viz., movable attachable by actual seizure. Therefore, the impugned Orders/Notices (Exhibit-J.1 to Exhibit-J.3) were bad in law and without jurisdiction as they are Prohibitory Orders under rule 26(1)(iii) of the second Schedule. Learned counsel for the petitioner contended that by the impugned orders, the assessing officers have attached the impugned shares by actual seizure which was bad in law and without jurisdiction as the impugned orders are Prohibitory Orders under rule 26. In this connection, learned counsel for the petitioner contended that rule 23 of Schedule II states that where the property to be attached is movable in possession of the defaulter, the attachment shall be made by actual seizure, whereas rule 26(1) states that in case of shares attachment shall be made by a written Order, prohibiting the person in whose name the shares stand from transferring the same. Learned counsel for the petitioner, therefore, submitted that the impugned Orders (Exhibit J.1 to Exhibit J.3) are illegal and without jurisdiction because in this case, what applies is Third Schedule and not the Second Schedule and since the Third Schedule refers to movable property attachable by actual seizure and since the Third Schedule does not contemplate issuance of Prohibitory Orders as contemplated by rule 26(1), the impugned Orders were illegal and bad in law. In this connection, he pointed out that the impugned Orders are Prohibitory Orders under rule 26(1). That, the assessing officer had no jurisdiction to issue such Prohibitory Orders. That, the assessing officer had only the authority to seize movables under rule 23 of Schedule II in view of the provisions of the Third Schedule. He contended that the Third Schedule expressly refers to distraint and sale of movables to be effected as far as may be in the same manner as attachment and sale of movables attachable by actual seizure. Learned counsel for the petitioner contended that under the Third Schedule, where any distraint and sale of movable is to be effected by any assessing officer authorized for such purpose, then such distraint and sale shall be made as far as may be in the same manner as attachment and sale of movable attachable by actual seizure and provisions of the Second Schedule relating to attachment and sale shall, so far as may be, apply for such distraint and sale. Therefore, it was contended that rule 26(1) was not applicable because rule 26(1) refers to attachment of movables by Prohibitory Orders, whereas rule 23 of the Second Schedule refers to attachment of movables by actual seizure. Learned counsel for the petitioner submitted that in this case the impugned Orders have been issued wrongly under rule 26(1), which cannot be invoked by the assessing officer under section 226(5) read with the Third Schedule. He, therefore, contended that the said orders were bad in law and without jurisdiction. Learned counsel for the petitioner further contended that section 226(5) requires recovery to be made in the manner laid down in the Third Schedule which provides that Second Schedule shall apply so far as may be possible. That the impugned Orders Exhibit-J.1, Exhibit-J.2 and Exhibit-J.3 are Prohibitory Orders under rule 26(1)(iii) of the Second Schedule. That these impugned Orders have been passed ignoring the mandatory provisions of the Second Schedule such as rule 2, rule 3, rule 20, rule 21 and rule 22. In the circumstances, the impugned Orders were bad in law, ultra vires and without jurisdiction. At this stage it may be pointed out that in the Affidavit-in-Reply filed by the department they have accepted the position that rule 2 of Schedule II has not been complied, but they claim to issue such Notice prior to sale. The department has contended that such Notice under rule 2 can be given after attachment and before sale. The department has contended that if Notice was to be given before attachment and sale, then the property could be transferred on the receipt of such Notice by the defaulting party.

Learned counsel for the petitioner, in reply to this point, submitted that the argument of the department that Notice under rule 2 can be given before sale and after attachment was contrary to the plain language of rule 2, rule 20, rule 21 and rule 22 of the second Schedule. He urged that rule 2 was a starting point of any action taken under the Schedule and there was no authority in law which permits respondent Nos. 1, 2 and 3 to rewrite the statute. It was contended that hearing was essential before passing an Order, adverse to a person such as the petitioner, particularly when the petitioner’s property is being attached for recovery of alleged tax dues of the three Investment Companies. That, in the present case, rules of natural justice have been violated and, therefore, the impugned Orders were bad in law.

Learned counsel for the petitioner next contended that in the present case, once a Liquidator took charge of a company, he was responsible for all liabilities of the Investment Company. That, the Liquidator obtained consent of the assessing officers under section 178(1) on 15-6-1999 and having obtained such consent, the action of the assessing officer in seeking to recover tax dues of the Investment Company from persons, other than the Liquidators, cannot be sustained. It was urged that in the present case the Liquidator, having informed the assessing officer and having obtained the consent of the assessing officer to the liquidation, without holding any assets of the Investment Companies under section 178(2), the impugned action of the assessing officer in seeking to recover alleged tax dues of the Investment Companies from persons, other than the Liquidator, cannot be sustained.

Learned counsel for the petitioner next contended that in the present case, the impugned action of the assessing officers was arbitrary as they have purported to enforce the alleged tax demands, pending their applications for stay of recovery under section 226(3). That, even in the case of PNIT, the stay application has been rejected contrary to the judgment of the Bombay High Court reported in the case of KEC International v. B.R. Balakrishnan (2002) 251 ITR 158 (Bom). In this connection it is submitted that the petitioner does not claim that Commissioner should issue directions to the assessing officer. Their only submission is that all assessing officers should dispose of stay applications before them promptly and failure to dispose of such applications by the assessing officers should be corrected by the Commissioner.

Lastly, it was urged by the learned counsel for the petitioner that in the present case, the assessing officers are fully aware that the shares are not in possession of the Investment Companies – assessees, who alone can be the defaulters. That the shares were in possession of the petitioners and yet, impugned action has been taken against the said shares. Therefore, in the event of objection being raised by the petitioners to the attachment of the shares under rule 11 of Schedule II, it would not be fair for respondent Nos. 1, 2 and 3 to hear and decide the objections of the petitioners under rule 11 because the impugned Orders are passed by the same assessing officers viz., respondent Nos. 1, 2 and 3 and, therefore, the plea of the department that rule 11 offers alternate remedy has no merit. That, rule 11 applies to cases of attachment and sale in execution of a certificate by TRO which is not the case here. Therefore, rule 11 has no application to the facts of this case. That, in any event, in the present case we are concerned with the plea of lack of jurisdiction and, therefore, the department cannot raise the plea of alternate remedy.

Arguments on behalf of the department

6. Mr. R.V. Desai, learned Senior Counsel for the department contended that section 281 of the Act was a prelude to the assessing officer proceeding to attach the property under section 226(5) read with the Third Schedule. He contended that section 281 constituted foundation for initiation of proceedings under section 226(5) read with the Third Schedule. That, section 281 was declaratory in nature. That, no written order was required to be passed by the assessing officer under section 281 of the Act. That, on 15-7-2002 notings were made in the order sheet by the three assessing officer’s under section 281 treating the transfer of shares from the three Investment Companies to the petitioner as void for the limited purpose of recovery proceedings. That, before initiating proceedings under section 281, the assessing officers complied with the pre-conditions. That, in this case, impugned shares have been transferred during the pendency of block assessment proceedings. That, in this case, the impugned transfers have been made without adequate consideration. That, in this case, the tax payable exceeded Rs. 5,000.00 and that the assets transferred exceeded Rs 10,000.00 in value. ‘Therefore, it was argued that the notings dated 15-7-2002 were made in consonance with section 281 of the Act. Learned counsel for the department further contended that section 281 does not contemplate passing of any order by any authority. That, the effect of section 281 was that if a transfer was effected during pendency of proceedings under the Act or after completion thereof, but before service of notice under rule 2 of the Second Schedule, then tax can be recovered by proceeding against the property, notwithstanding such transfer. Therefore, there was no question of adjudication on the validity of the transfer, prior to actual transfer.

Learned counsel for the department next contended that no notice was given to the petitioner at the time of invoking section 281 or section 226(5). It was contended that there was no such requirement in law. In the alternative it was argued that giving of notice in this case would have defeated the rights of the department to recover the tax dues as the entire attempt was to siphon off the assets to defeat the claim of the department. That the department has not treated the transfer as void ab initio. That in this case, M/s. Sterilite Industries Ltd. came out with a buy-back offer and there was every possibility that the petitioner could have sold its holding of M/s. Sterilite Industries in which event, it was impossible for the department to recover the tax dues because the liquidator, in that event, would have no assets left with him. This is particularly important in view of the fact that the petitioner was an Overseas Corporate Body having no registered office in India and it would have been impossible to trace the funds which would have been realised from sale of shares of M/s. Sterilite Group held by the petitioner. Therefore, no prior notice on facts was given before attaching the impugned shares. Learned counsel for the department, however, submitted that in the present case, the department would certainly give notice of hearing before effecting sale, pursuant to attachment. He also contended that having attached the impugned shares, the department would proceed to issue notice under rule 2 of Schedule II and thereafter follow the provisions of Schedule II. In this connection, he further contended that if one reads provisions of Schedule III, it is clear that where any distraint and sale of movable is to be effected by assessing officer/TRO, authorized for that purpose, the distraint and sale shall be made, as far as may be, in the same manner as attachment and sale of movables attachable by actual seizure, and the provisions of the Second Schedule relating to attachment and sale shall, so far as may be, apply in respect of such distraint and sale. He, therefore, contended that in this case, having invoked section 226(5) read with Schedule III, the department was entitled to follow the procedure of attachment and sale as laid down in the Second Schedule. He contended that in this case, before the department could invoke rule 2, the petition has been filed and, therefore, the department has not been able to proceed further in the matter. He further contended that the assessing officers were duly authorized by the Commissioner of Income Tax-III to take action under section 226(5). He orally submitted that in the case of PNIT, the authorization is dated 14-7-2002. However, 14-7-2002 was a Sunday. That the authorization was made on 15-7-2002 which was a Monday, but through oversight, the date of authorization has been wrongly shown as 14-7-2002. He, therefore, contended that the authorization was, in fact, on 15-7-2002, on which date the assessing officer passed the prohibitory order under section 226(5) (Exhibit-J.1).

At this stage one point needs to be mentioned. As stated above, it has been argued on behalf of the petitioner that according to the department, the impugned transfer took place on 30-11-1999. In this connection, reliance was placed by the petitioner on the finding in the Block Assessment order in case of PNIT (See Page 91.60). It was urged that in the said Block Assessment Order, the date of transfer has been taken as 30-11-1999. Therefore, the transfer was not during the pendency of proceedings. The proceedings, according to the petitioner, commenced on and from 8-12-1999. To meet this argument, learned counsel for the department at one stage contended that the correct date of transfer was 31-3-2000, when assets were distributed. However, realising that the date 21-3-2000 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 this regard. He, however, contended that in this case, the second limb of section 281 would apply because under the second limb, transfers effected after completion of proceedings and before notice under rule 2 is given, were covered. He, therefore, relied upon the second limb in support of his contention that in this case, the transfer had taken place after completion of Block Assessment and before issuance of rule 2 notice. Here also, learned counsel for the department 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, whereas the transfer, on which the department wanted to rely upon, while invoking the second limb, was 31-3-2000. Therefore, the second limb also cannot apply and if 31-3-2000 was taken as the date of transfer then, it was argued on behalf of the petitioner that, the tax liability accruing to the petitioner would be falling outside the block period which ended on 8-12-1999. Ultimately, the department was totally confused. The learned counsel was not in a position to explain the contradiction. At one stage the department instructed the learned counsel to state, that, in any event, regular assessment proceedings were pending against PNIT and DAIL for assessment year 1997-98 and 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 do 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 authorization given by the Commissioner on 15-7-2002 was not based on those facts.

In rejoinder, learned counsel for the petitioner submitted that on liquidation of the three Investment Companies, there was distribution of assets. That, such distribution did not amount to transfer. That, the shareholder brought 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 a transfer, the second limb of section 281 would not apply because the second limb applies to transfers after completion of assessment which, in this case, 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 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 gives rise to tax liability in this case and, therefore, it cannot be related to a pending proceeding of assessment and nor can it be related to a completed assessment. It was urged that section 281 would apply to a case where pending proceedings, the assessee seeks to transfer the assets in order to defeat the claim of the revenue or in cases where the assessee seeks to transfer the assets, after, completion of assessment proceedings and before issuance of rule 2 notice, which presupposes that the transfer is effected in order to obviate pre-existing liability. However, in this case, the department seeks to declare the very transfer, which gives rise to tax liability, as void and, therefore, section 281 cannot apply.

It was next contended that if one reads section 226(5) with the Third Schedule, it is clear that the Third Schedule is carved out from the larger Schedule, viz., the Second Schedule. That, the entire Second Schedule was not available to the assessing officer. That, if the entire Second Schedule was available to the assessing officer, then it would have been so stated in section 226(5). It is not so mentioned. It was very simple for the legislature to say in section 226(5) that Schedule II would operate, but it does not say so. In fact, it refers to the Third Schedule, which deals with attachment and sale of a specific specie of properties, viz., the movables attachable by seizure. That, the Third Schedule does not refer to movables attachable by prohibitory orders as contemplated by rule 26(1) of the Second Schedule. Therefore, while the TRO has all the powers vested in him, the assessing officer is directed only to go in accordance with the Third Schedule because all powers of TRO are not given to the assessing officer. He contended that rule 23 of Schedule II deals with attachment of movables by seizure, whereas rule 26 of Schedule II deals with prohibitory orders attaching the movables. He contended that only rule 23 and rule 30 of Schedule II deal with attachment by seizure. He further pointed out that rule 32 deals with attachment of partnership property. He contended that Schedule III excludes immovable properties, arrest, detention and appointment of receiver. Therefore, only distraint and sale of movables attachable by seizure is contemplated by Schedule III. Therefore, Schedule III operates in a smaller area as compared to Schedule II. Consequently, only rule 23 and rule 30 were available for the assessing officer, i.e., attachment of movables attachable by seizure. It was further contended that in this case the assessing officer has invoked rule 26(1) which was impermissible. Further, if the assessing officer wanted to resort to rule 23 and rule 30, he could have done that only after invoking rule 2. That, till today, rule 2 has not been invoked. Therefore, the assessing officer cannot invoke rule 23 of Schedule II. Section 226 was not available to him. Therefore, the prohibitory order was bad in law. Therefore, the attachment was without authority of law.

Point for determination

Whether the impugned attachment was in consonance with 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 applicability of section 281 to the facts of this case.

Findings

Preface

7. At the very outset, we wish to point out that in this case, we are not concerned with 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 block assessment orders. We are conscious of the fact that the matter is pending in appeal before the Commissioner. 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 Limited (petitioner), a Mauritius registered company. Therefore, the petitioner was a holding company. On 8-121999, 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, 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 31-3-1999 was riot 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 against liability would arise, which, by virtue of 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 permission from Reserve Bank of India, on conditional basis for transmission of shares to the petitioner on 30-11-1999, and the final approval on 16-2-2001. That, in the meantime, the Official Liquidator obtained No Objection Certificate on 15-6-1999 from the assessing officer under section 178 of the Income Tax Act. As stated above, on 8-12-1999, there was a search, which ultimately resulted in Block Assessment Orders to be passed on 31-12-2001 and 30-1-2002 followed by notice of demand for Rs. 222.70 crores and followed by three prohibitory orders issued under section 226(5) on 14-7-2002 and 15-7-2002. 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.

Conduct of the petitioner

8. Before coming to the arguments on section 281, the following facts are required to be stated, viz., total non-cooperation by the three assessees in the block assessment proceedings. The assessing officer wrote repeated reminders to ascertain the effective date of dissolution and effective date of transfer of shares by the assessee. However, no reply was given on this point (See page 91.36). The assessing officer found from the available material that assets were distributed during financial year ending 31-3-2000. Therefore, the assessee was called upon to give effective date of distribution supported by documents. They were also called upon to give market value of the shares on the date of distribution. A vague reply was given. It may be mentioned that upto 31-3-1991, the three Investment Companies showed its holding in MALCO and SIIL as investments, but in the next financial year ending 31-3-1992, the assessee had converted the said investment into stock-in-trade and thereafter it continued to show the same as stock-in-trade upto 31-3-1999 when they were advised to convert to investment. The petitioner became 100 per cent holding company after June 1999, i.e., after initiation of the liquidation proceedings in April 1999. The assessing officer repeatedly requested the assessee to produce Minutes of the Board Resolution in order to ascertain the exact date of dissolution and distribution of assets, but to no avail. The assessee was also asked to produce evidence of filing of Form No. 23 of the Companies Act with the Registrar of Companies. However, none of these documents have been produced. Further, in this case, we are concerned with three block assessments for three different Investment Companies, viz., PNIT, DAIL and SCRM. It is important to note that on 29-1-2002, DAIL has gone in appeal to the Commissioner of Income Tax-III against the order of block assessment dated 31-12-2001. The said block assessment order has been passed in the case of DAIL for the block period financial year 1989-90 upto 1998-99 and the period 1-4-1999 upto 8-12-1999 (when the search was carried out). In the case of DAIL, under the block assessment year order, an amount of Rs. 44.52 crores is found by the assessing officer as undisclosed income/business profits arising on valuation of shares at market rate. This amount forms part of the total profit on distribution of stock-in-trade for three companies, amounting to Rs. 221.71 crores. 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 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-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 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 pendency of assessment proceedings.

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.

10. The next legal contention which we have to answer is – whether the impugned transfer of shares to the petitioner was without adequate consideration. Under section 281 of the Income Tax Act, it is inter alia laid down that where, during pendency of proceedings under the Act or after completion thereof, but before the service of notice under rule 2 of Second Schedule, an assessee creates a charge or parts with possession of any assets in favour of any other person, then such charge or transfer shall be void as against any claim in respect of tax due from the assessee as a result of completion of the proceedings or otherwise. We do not wish to examine the entire case law on scope of section 281(1). The position is well-settled in law. We are concerned with application of that law to facts of this case. Suffice it to state that section 281(1) is declaratory in nature. It is not procedural in the sense that there is no enforceability provided therein. The case law indicates that such transfers are not ab initio void. That notwithstanding the transfer of the assets by the assessee in favour of third party, the department can proceed to recover the tax if such transfer has taken place during the pendency of proceedings under the Act or completion thereof, but before service of notice under rule 2 of the Second Schedule. The case law further indicates that section 281 is a prelude to section 226(5) read with the Third Schedule. The case law indicates that an adjudication by the assessing officer on validity of the transfer is not provided for under section 281(1). As stated above, section 281 is declaratory and not procedural in the sense that it does not provide for mode of enforcement of the rights created under the section (1995) 214 ITR 594 (Cal). The case law further indicates that section 281(1) only provides for an expression of intention on the part of the assessing officer to act or proceed under section 281 and such exercise does not take the character of adjudication. It merely has the character of an expression of intention or opinion on the part of the assessing officer who intends to treat the transfer affected by section 281 as void and, therefore, not standing in the way of recovery proceedings. The case law further indicates that expression of opinion or intention by the assessing officer under section 281 does not take away the jurisdiction of the competent authority under rule 11 of Second Schedule to the Act. That, in a given case, the department may, instead of resorting to provisions of Schedule II, resort to civil court to obtain a declaration in Gangadhar Vishwanath Ranade v. ITO (1989) 177 ITR 163 (Born). That, for the purposes of proceeding against a property, which has been transferred or on which a charge is created, for an intention of the assessing officer to proceed against the said property, one may pass an order under section 281. That, even if the order is not passed, a transfer, contrary to section 281, would be void against the revenue and even if the order is passed, it will be considered to be only a declaration of the intention of the revenue authority to proceed against the said property. Therefore, section 281 does not contemplate making of any order by any authority. Section 281(1) has a proviso under which transfers are saved if they are made for adequate consideration and if such transfers are made without notice of pendency of proceedings or if made without notice of tax payable by the assessee, 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 the 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, what 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 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 1 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 1. 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 case of DAIL. Therefore, proviso (1) has no application to the present case.

11. It was next urged that the assessee – Investment Companies had obtained No Objection Certificate from the assessing officer under section 178 before the transfer and, therefore, proviso (ii) to section 281 (1) was satisfied. It was contended that in this case, the assessing officer had issued NOC under section 178 enabling the liquidator to transfer the shares to the petitioner and, therefore, the transfer must be deemed to be with the prior permission of the assessing officer, as contemplated by proviso (ii) to section 281(1). We do not find any merit in this argument, under section 178 of the Income Tax Act, every person, who is the liquidator of a company which is being wound-up or who has been appointed receiver of any assets of a company, shall, within thirty days after he becomes such lsiquidator, give notice of his appointment to the assessing officer who is entitled to assess the income of the company. Under section 178(2), the assessing officer shall, after making enquiries, notify to the liquidator within three months from the date on which he receives notice of appointment of the liquidator, the amount, which, in the opinion of assessing officer, would be sufficient to provide for any tax liability/ amount payable by the company. In this case, it may be pointed out that No Objection Certificate was issued by the assessing officer under section 178(2) on 15-6-1999. On that day, there was no tax demand pending. In fact, as stated hereinabove, in the regular assessment of DAIL, there was no demand. 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. Therefore, it is not open to the petitioner to rely upon No Objection Certificate dated 15-6-1999 issued under section 178 when proceedings have been initiated under Chapter XIV-B after search on 8-12-1999. Further, proviso (ii) would apply if section 281(1) applies. According to the petitioner, section 281 is not applicable. That, no application was made under section 281 proviso (ii). Therefore, in this case, proviso (ii) has riot been fulfilled.

12. It was next contended on behalf of the petitioner that in the present case, the department has treated the said shares as stock-in-trade and not as investments and, therefore, the Explanation to section 281 would apply. Explanation to section 281 states that for the purposes of section 281(1), asset shall mean land, building, machinery, plant, shares, securities and fixed deposits in banks to the extent to which they do not form part of stock-in-trade of the business. It has been, therefore, argued that since block assessment has been done by treating the said shares as stock-in-trade, section 281 has no application. We do not find any merit in this argument. Section 281(1), declares transfer of assets as void vis-a-vis department’s claim where such transfers are effected during pendeny of proceedings under the Act or after the completion thereof, but before, service of notice under rule 2 of Second Schedule. It refers to an assessee parting with possession of his assets to defeat the department’s claim. 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 IV is quite different front the recovery proceedings under Chapter XVII. That, section 281 finds place in Chapter XXIII, which assists recovery. Section 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 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.

13. Now coming to the next contention advanced on behalf of the petitioner, viz., that there., was no proper authorization in favour of the assessing officer and, therefore, one out of the three prohibitory orders (Exhibit-J.1) passed by the assessing officer on 14-7-2002 was without jurisdiction. In this connection, we may mention that the prohibitory orders are, identically worded. They are preceded by an order of authorization passed by the Commissioner on 15-7-2002. However, it has been submitted that in one case of PNIT, the prohibitory order is dated 14-7-2002. It was urged that if the Commissioner’s authorization is dated 15-7-2002, the prohibitory order for PNIT dated 14-7-2002 (Exhibit-J.1) was without jurisdiction because under section 226(5), the assessing officer has to be authorized by, general or special order passed by the Commissioner, to recover arrears of tax due from an assessee-company by distraint and sale of his movable property in the manner laid down in the Third Schedule. As stated above, three different prohibitory orders were passed. They are Exhibit-J.1, Exhibit-J.2 and Exhibit-J.3. However, we are satisfied with the explanation given by the department that through oversight, the date in Exhibit-J.1 is mentioned as 14-7-2002. That, 14-7-2002 was a Sunday. In the circumstances, we have read Exhibit-J.1 to be dated 15-7-2002 on which date the authorization was made in favour of all three Investment Companies. To complete the chronology, we may mention that the remaining two prohibitory orders in respect of DAIL and SCRM, there is no such mistake. They are both dated 15-7-2002. Hence, there is no merit in this contention of the petitioner.

14. It was next contended that section 226(5), has to be read with the Third Schedule. That the Third Schedule operated within a very limited sphere, unlike the Second Schedule. That the Third Schedule was carved out of the Second Schedule. That as can be seen from the Second Schedule, there is a difference between attachment of movable by seizure under rule 23 and attachment by issuing prohibitory orders under rule 26. It was contended that the assessing officer had no authority to issue prohibitory orders. That he could issue only orders of attachment by actual seizure. That, in the present case, we are concerned with the shares. That shares could be attached only be prohibitory orders as contemplated by rule 26, but rule 26 was not available to the assessing officer and, therefore, the impugned prohibitory orders are illegal. We do not find any merit in this contention. To answer this controversy, we must be clear about the meaning of the word “Seizure”. In the case of Champaran Sugar Co. Ltd. v. Haridas Mundhra AIR 1966 Cal 134 a similar argument was raised. One of the questions which arose for determination in that case was whether the right of repurchase/option given to Haridas Mundhra under the suit agreement was capable to actual seizure. In that case also the prohibitory order, as in our case, restrained the judgment-debtor from exercising his rights in respect of the shares and simultaneously the prohibitory orders restrained the person in possession of the shares from transferring the same by purchase, gift, sale or otherwise. In our case, the impugned shares are in the demat form. They are transferable electronically. It has been held by the Division Bench of the Calcutta High Court, after considering dictionary meanings, that if a right cannot be actually seized then taking hold of such right in any possible manner would also come within the expression “Seizure”. In view of the said judgment we hold that the prohibitory orders issued in this case comes within the expression “Actual Seizure” in the Third Schedule to the Act. Even in the Law Lexicon, the word “distrain” has been defined to mean to keep the property in custody until the person performs his obligation or until the property is sold by the sheriff. It is important to note that the Third Schedule uses the word “distrain” and not “attachment”. In the circumstances, there is no merit in the contention advanced on behalf of the petitioner. To complete this point, we may also add that the Third Schedule is a door to the Second Schedule. The Second Schedule deals with attachment and sale of movables under Part II. Part II commences with rule 20. Section 226(5) confers concurrent powers on TRO and assessing officer. In the case of Smt. Moni Senan v. CIT (2001) 248 ITR 452 (Ker) it has been laid down by the Kerala High Court that attachment and sale are two separate and distinct concepts. Rule 2 of Schedule II refers to issuance of notice before realization of the amount under the Second Schedule. Part II of Second Schedule cannot be invoked without rule 2 notice. In this case, before the department could resort to rule 2 of the Second Schedule, the petition came to be filed. Therefore, the department will now have to proceed as a next step under rule 2 of the Second Schedule before invoking provisions relating to sale. Once rule 2 is resorted to, rule 11 will also come into force. Therefore, in the present case, we are satisfied that provisions of section 226(5) read with the Third Schedule are duly complied with. At one point of time, it was contended that before invoking section 281 of the Income Tax Act, notice ought to have been issued to the petitioner, For this purpose reliance was placed on the judgment of the learned Single Judge of this court in the case of Palanpur Traders Ltd. (supra). In that matter, the petitioners were found to be bona fide purchasers for value without notice of the pending assessment proceedings. On facts, the court found that the petitioner had obtained prior permission of the assessing officer under proviso (ii) to section 281(1). On facts, the court found that the petitioner, who had purchased the property, sought an appointment with the assessing officer to explain the position under which the petitioner had bought the property. However, the assessing officer, without considering the case of the petitioner, declared the same as void. Therefore, the action of the assessing officer was struck down. The said judgment was given on the facts of that case. It does not lay down a general rule of giving notice under section 281(1). In fact, if the argument is accepted, it would defeat the object of the law relating to attachment under section 226(5) read with the Third Schedule. Therefore, reliance on the judgment of the Bombay High Court in the case of Palanpur Traders Ltd. (supra) is not correct.

15. Lastly, it was contended that in the present matter, the petitioner had sought for stay from the assessing officer under section 220(6). That the assessing officer kept the application for stay pending and, therefore, the matter had to be moved on the administrative side before the Commissioner. In this connection reliance was placed on the judgment of this court in the case of KEC International Ltd. (supra). The said judgment has application to the facts of the present case. In large number of matters, this court has found that the assessing officer’s keep such applications in abeyance. They do not decide the matter. Ultimately, the parties are required to move the Commissioner on the administrative side. It is in these circumstances that the Division Bench has given certain guidelines in the said judgment for the Commissioner to redress the grievance of the assessees whose stay applications are kept pending so that stay applications could be disposed of promptly and that the grievance of the assessees could be redressed promptly. Therefore, the judgment has no application to the facts of this case.

16. 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 (SC) 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 the transaction, but with the intended effect of the transaction on the fiscal purpose. That, the true principle in case of Ramsay was that one must consider fiscal consequences of a pre-planned series of transaction and one has not to dissect the scheme and consider individual stages separately. This judgment squarely applies to our case.

17. We may add that our observations in this case on the merits of the matter are tentative and they are not binding on the appellate authority/recovery authority. They have been given only to explain the legal position on section 281.

ORDER

For the aforestated reasons Writ Petition fails. Rule is discharged. No order as to costs. Interim orders to stand vacated.