I. C. I. (INDIA) PRIVATE LTD.

C. I. T., WEST BENGAL

January 20, 1972

[A. N. GROVER AND M. H. BEG, JI.]

Income-tax Act, (1961) ss. 52 and 256--Dlrectlons by High Court to Tribunal to refer questions-Scope of High Court's ; urisdiction

After negotiations in 1953 with the concerned Department of the Government of India and the Reserve Bank, a Company, incorporated in U.K. advanced large sums by way of loans to its subsidiary in India, namely the assessee, for subscribing for shares in 80llle Indian Companies. The cormpondence showed that the U.K. Company had the right to acquire at any time the shares at par, in satisfaction of the loans. ln 1961, the asseisee transferred the ahares when called upon by the U.K. Company to do ao.

The Income-tax Officer applied s. 52 of the Income-tax Act, 1961, and

use&Sed the usessee to capital gains tax, which was not in existence in 1953 but was re-introduced in the Finance Bill of 1959. The Income-tax Officer held that the object Of the transfer was to avoid or reduce the assessee's liability to capital gains tax. The Appellate Aaistant Commissioner however, held that the assessee was not liable to capital gains tax, and the Appellate Tribunal, after an elaborate discussion of the cornspondence, confirmed the order, holding that the transfer was not effected with that object.

The Department applied to the Tribunal to refer the questions, (i) E whether certain documents were not properly construed, (ii) whether the Tribunal ignored evidence on essential matten, (iii) whether the finding of the Tribunal was perverse, and (iv) whether s. 52 was not applicable, u arising out the Tribunal's order.

The Tribunal rejected the application.

The Department then moved the Higb Court and the High Court direct. ed Tribunal to state a case in relation to the four questions, but the F High Court did not give any reasons for doini so.

Allowing the appeal to this Court,

HELD : The Higb Court can exercise its jurisdiction in the matter or reference, (a) when the point for determination is a pure question of law, such as, the construction of a statute or a document of title; (b) when the point for determination is a mixed question of law and fact-(Wbile the findings of the Tribunal on the facts are final, its decision as to the leJnll effect of the findings is a question of law. Where, however, the findin1 is one of fact, the fact that it is an inference from other basic facts will not alter its character as one of fact); and (c) when a finding on a que•tion of fact is pervene. rl47C-EJ

The necessary ingredients of s. 52 are : (i) there should be a direct or indirect connection between the person who acquires a capital asset and the u9essee; (ii) the income-tax officer should have reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee to capital gains; and (iii) if the ftnt two conditions

are satisfied then the full value of consideration for the transfer may be tal<en to be the fair market value of the capital asset on the date of the transfer. The intention with which a particular transfer is made and the

object which is to be achieved . by such transfer are essentially questions of fact, the conclusion relating to which, are to be arrived at_ on a conside ration of relevant material; that is1 before the incometax .officer can have

B any reason to believe that a transfer was effected with the object mentioned in the section facts, must exist showing that the object .was to avoid or reduce the liability to capital gains. [141 H; 142 AD]

In the present case, the orders of the Tribunal show that there was no dispute as to the construction of any expression in any letter or document, that no relevant evidence was overlooked, that the inference was drawn from other facts and, that no question was raised on the construction of s. 52. When the Tribunal found, as a fact, that before there was any C proposal to re-impose the capital gains tax which had remained abolished for some time, the scheme between the assessee and the U.K. Company had been fully evolved, the applicability of s. 52 could not be attracted.

The findings of the Tribunal that the object mentioned in the section could not be held to be established from the mere absence of a formal agreement between the assessee and the U.K. Company, is not perverse, but is supported by evidence and is eminently reasonable.

In view of the clear, cogent and precise findings and conclusions of the Tribunal, the Himt D Court should at least have recorded a speaking order showing how tlie questions of law of the nature sought to be referred arose from the order of the Tribunal. [146 BD; 141 A~. F; 148 C.D] Shree Meenakshi Mills Ltd, v. C.1.T., Madras.

31 I.T.R. 28, followed.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1308 of E 1970.

Appeal by special leave from the order dated September 8 .. 1970 of the Calcutta High Court in Income Tn Reference No. 50 of

1971.

N. A. Palkhivala, Veda Vyasa, T. A. Ramachandran and F. D. N. Gupta, for the appellant.

V. S. Desai, S. K. Aiyar and H. D. Sharma, for the respondent.

The Judgment of the Court was delivered by

Grover, J. This is an appeal by special leave from an order G of the Calcutta High Court directing the Income-tax Appellate

Tribunal, 'B' Br11<nch, Calcutta, to draw a statement of case relating to four questions of law which, it was stated, arose out of the order of the Trib/unal in the matter of assessment of the appellant which was the assessee in respect of the assessment year 1962-63.

The Appellate Tribunal had rejected the application of the Com- H missioner of Income-tax requiring it to refer those questions to the High Court. The High Court, on being moved, issued a rule nisi and then made it absolute after full arguments without giving any reasons, whatsoever.

The assessee is a 100% subsidiary of Imperial Chemical Jn.

A dustries Ltd., iincorporated in the United Kingdom (hereinafter referred to as I.C.l. for convenience).

I.C.I. advanced large amounts by way of loans to the assessee from time to time. This, it was claimed, was done for subscribing to shares in three Indian Companies called Indian Explosives Ltd., Alkalai & Chemical Corporation of India and Atic Industries Private Ltd., (herein- .B after called as I.E.L., A.C.C.I and A TIC respectively).

Subsequently the assessee transferred the shares in the aforesaid companies at par to I.C.I. in satisfactiQ!l of the loans advanced by that company. The Income-tax Officer applied s. 52 of the Income-tax Act, 1961 (hereinafter called the 'Act') and assessed .. the assessee to capital gains.

The Appellate Assistant Commisc sioner took the contrary view and held that on the facts which had been established, the assessee was not liable to capital gains under the aforesaid section.

The Tribunal upheld the decision of the Appellate Assistant Commissioner by a detailed and well reasoned order.

Broadly, the case of the assessee was that I.CJ. wanted to D make investments in India in sterling currency.

The assessee was already in. existeaiee but the other three companies which have been mentioned, were incorporated later.

I.C.I. devised a scheme by which it .could make the investment as desired by it and by which it could also take advantage of the tax relief which could be availed of by the new enterprises under s. 15(CJ and 56(A) of the Income-tax Act, 1922. The scheme in short was that I.C.I. \\'Ould arrange to let the assessee hold shares in the three companies by investing the money which was to be given by I.C.I. to

the assessee. 'The modus operandi was that I.C.I. would give that money by way of loans to the assessee who agreed that the shares in the three companies would be transferred to I. C.I. in satisfaction of the loans at par or issue price as and when desired F by I.C.I. All this Was done after negol!ations with the concerned Department of the Government of India at the highest level and with the approval of the Reserve Bank of India.

The entire scheme was conceived and was put into operation prior to 30th November 1956 when the Finance BilJ was introduced re-imposing capital gains tax which had remained abolished for certain .years.

There was a provision for charging ijnterest by the I.C.I. from the assessee at a rate not exceeding l /2% above the Indian Bank rate which came to 5 t % per annum hut the interest was not to exceed in any case the divideinds received by the assessee from those shares. It was claimed on behalf of the assessee tl1at

this arrangement was advantageous both to I.C.I. and the ff assessec.

I.C.I. having taken the risk (of depreciation in shares or otherwise) attached to the new busiiness pioneering adventures, cnsiJred that capital appreciation of the shares, if any, also went

.A to itself.

The assessee did not suffer any disadvantage because it had to pay no interest if no dividend was received and it could keep aind get the benefit of any dividend in excess of 5!%. As a result of I.C.I. investments being held through the assessee instead of directly, LC.I, achieved an advantage of saving tax in U.K. amounting to £ 68,000 in the relevant years.

In 1959 the structure of Lndian taxation regarding the grossing up of dividends was radically changed and by the Finance Act 1959, the system of grossing up of dividends (under s. 16(2) and 18 ( 5) of 1922 Act) was abolished and intercorporate dividends became liable to income tax at each stage.

Thus, the dividends passing from the three companies through the assessee C to I.C.L became liable to tax stages. This affected the net return of I.C.I. on its investments in the three companies substantially. In these circumstances, it was decided by LC.I. that the investments in the three companies should ]le held by it directly.

For that reason it called upon the assessee in February 1961 to transfer to it the aforesaid shares in the three companies at the D issue price in satisfaction of the sterling loans in accordance with the .previous agreements.

The approval of. the Reserve Baali:: to these transfers was received in February 1961 and the transfers were made in March/ April 1961. According to the assessee there was no question of the transfer of shares having been affected with the object of avoidance or reductiqn of the liability of the 'E assessee to capital gains which alone could attract the applicability of s. 52 of the Act. ·· ·

Section 52 is in the following terms :-

"Consideration for transfer in cases of under-statement : Where th~ person who acquires a capital asset from an assessee is directly or indirectly connected with the assessee and the Income-tax Officer has n to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under s. 45, the full value of the consideration for the :transfer shall, with the previous approval of the Inspecting Asstt. Commissioner, be taken to be the fair market value of the capital asset on the date of the 1ransfer".

The necessary ingredients of the section are : '

(i) there should be a direct or indirect connection between the pe!Son who acquires a capital asset and the assessee; (ii) the H Income tax Officer should have reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee to capital gains; (iii) if the first two conditions are satisfied then the full value of consideration for the

transfer can be taken to be the fair market value of the capital 4 asset on the date of the transfer.

s regards the first requirement, that was admittedly satisfied m the present case. The second requirement could be satisfied only if there was any cogent material on which the Income tax Officer could have reason to believe that the transfers were B effected with the object of avoidance and reduction of liability to capital gains. It is abundantly clear that the intention with which a particular transfer is made and the object whiCh is to be achieved by such transfer is essentially a question of fact the conclusion relating to which is to be arrived at on a consideration of the relevant material. In other words, before the Income c tax Officer can have any reason to believe that a transfer was effected with the object mentioned in the section facts must exist showing that the object was to avoid or reduce the liability to capital gains.

The Tribunal examined folly the correspondence and the other material with regard to each of "the three :(ndian companies D in which the investment had been made of the money advanced by I.C.L to the assessee.

We may briefly notice the discussion relating to each company. It was .in or. about 1949 that LC.I. was asked _by the Government of India to consider the manufacture of commercial Lasting High Explosives in India.

Negotiations advanced more towards October 1953 when the E representatives of LC.I. met the officials of the Government of India. The Tribunal referred to the minutes of the meeting held on October 1, 1953 as also on the 6th October 1953. In the final draft of the Declaration of Intention dated November 5, 1953, it was mentioned that the Gove111llil.ent had agreed that if I. C.I. made a loan to the assessee the Iaiter would hold the shares in I.E.L. and that the loan "may be repaid by a transfer of the F shares to I.C.I. at any time".

On 21st December 1954, the assessee applied to the Reserve Bank of India for formal sanction for borrowing Rs. 160 lakhs from I.C.I. for the purchase of shares in I.E.L. in terms of the agreement dated November 5 1953. It was stated in the letter that I.CJ. would charge no

iterest until such time as the shares began to yield dividends.

G The loans were advanced from 30th September 1954 to 30th June 1957 by the I.CJ. to the assessee of the equivalent. of Rs. 160 lakhs in Sterling.

The other correspondence relatmg to the aforesaid amount was also noticed by the Tribunal. In 1958 there was a Rights Issue by I.E.L. I.C.I. agreed to give a loan of Rs. 80 lakhs to the assessee to cover the Sterling require- 8 ment of I.E.L. The assessee was to take up shares of that amount. The terms of the loan were that I.C.I. had the right to acquire at any time the shares held bv the assessee in I.E.L.

A at par in satisfaction of the loan and the rate of interest payable on the loan was to be 1 % above the Indian Bank rate. This was followed by other correspondence and a re.solution which was recorded on 30-9-1958 containing terms of the second loan of Rs. 80,00,000/-. It is not necessary to refer to the other correspondence looked into by the Tribunal with regard to that B loan. On 15-2-1961 the assessee was called upon by I.C.I. to transfer the investments in satisfaction of the loans. After the sanction was obtained from the Reserve Bank of India, the shares were transferred at par. The Tribunal referred to the undisputed facts relating to the Circumstances in which the scheme for advancing the loan to the assessee for investment in C I.E.L. came to be mooted and was ulti!llately approved by the Government. This is what the Tribunal said :

"The above background would show tllat the idea was not to make the assessee the real beaeficial owner of the shares. The fact that the shares should be held only for a time beneficially by the assessee is clear from the "Declaration of Intention" dated S-11-1953"

Before the Tribunal the counsel for the Department had accepted the position that if there was an arm1F11ent or agreement before the reintroduction of capital gains tax he would have no case.

According to him, until the transfers were actually made of the shares, there was no agreement on which the parties E could have gone to court in order to obtain the share transfers at par in favour of I.C.I. The Tribunal proceeded first to examine whether there was any kind of understanding between the assessee and I.C.I. regarding the transfer of shar.is at par.

After recapitulating the correspondence and the relevant facts, the Tribunal came to the following conclusion: F "Taking this along with the minutes of the meeting with the officials of the Government of India, in October 1953, it is clear that the whole idea of I.C.I. throughout was to make some funds available to the assessee so that the shares could be acquired in its name and that the shares could be transferred to I.C.I.

G as and when it demanded".

It 'was however stated by the Tribunal that taking into account the co;,.espondece and the documents referred to earlier it was satisfied with the assessee's case that the transfer of shares to London at issue price or at par was throughout the basis of the advances of loans to the assessee. It is necessary to reproduce H paragraph 31 of the order of the Tribunal :-

"In October 1953 the.re was no mention of any capital gains tax being' revived. At that time the assessee could not have had any idea of avoiding or reducing any liability to capital gains tax.

The learned counsel for the department laid some emphasis on the fact that there was no enforceable arrangement. The question as to whether there was an enforceable arrangement or not is not really material. What we have to find out is whether the object in putting through these transactions of taking over the shares at par or at issue price was one of avoidance or reduction of liability to capital gains tax. That object does not get established by the mere absence of an enforceable arrangement.

Having regard to the assessee being the subsidiary of I.C.I., there is nothing surprising about the arrangement not being so formal or not being put through after complying with all the necessary legal formalities.

The absence of formal agreement is thus understandable in this context and cannot by itself suggest anything in favour of the department.

Businessmen are not always motivated by legalistic considerations. Even taking that the arrangement was only binding morally and not legally, still so long as the assessee wanted to fulfil a moral obligation and had not the capital gains tax in mind, it cannot be said that the transaction was entered into with the object of avoidance or reduction of liability to capital gains tax".

The Tribunal proceeded to say :

"We have to find out the object of the transaction.

It is removed in point of time from the result. In such a case one cannot try to infer the object from the results .. We really have to put ourselves at a point of time when the transaction was conceived ....... .

Taking the materials before us, we consider that there is nothing to suggest that the parties had the capital gains tax in their mjnd in 1953 and later when they put through the aforesaid transactions. We have, therefore, to hold that the factual requisities of section 52 have not been established here".

In dealing with the second Company, namely, A.C.C.I it was pointed out by the Tribunal that ·!he scheme for manufactur

ing Polythene was placed before the Government of India by a letter of the assessee dated 13-12-1955 addressed to Mr. H. V. R.

Iengar, Secretary, Minister of Commerce & Industry, in which it was specifically stated that to enable the assess.ee to subscribe for H the new shares I.C.I. would lend the subscription monies to the assessee on the understanding that at a later date I.C.I. could acquire at the issue price these new shares in satisfaction of its

A Joan.

The Tribunal dealt with all the relevant facts relating to the loan advanced to A.C.C.I. including ithose stated in the affidavits of P. T. Manzies dated 17-8-1966 and U. R. Newbery dated 10-1-1967 and considered that the transaction relating to this Company was not in any way different from those relating to the I.E.L. ATIC, the third Company was incorporated jiri- B maray for the manufacture of certain Dye-stuffs. On 29-12-1955 I.C.I. agreed to advance Rs. 25 lakhs as Joan to the assessee The shares acquired under 1the loan could be transferred to I.C, t on request by the latter at the issue price. l.C.l. waived its right to interest on the loan until the commencement of the period in respect of which ATIC paid the dividend.

There was a funher C Joan of Rs. 35,00,000 on the same terms. These shares were al'o subsequently required to be transferred to I.C.I. in February

1961. The Appellate Assistant Commissioner had referred to the affidavits which had been filed on behalf of the assessee and had mentioned that the Department had not cross-examined the deponents.

Before the Tribunal the counsel for the Department stated that he accepted the affidavits as correct in so far as facts D were concerned but he only disputed the inferences therefrom.

The Tribunal in this connection observed:-

"In our opinion, once the facts mentioned therein are taken as correct, the inference that the transaction was not for 11e purpose of avoiding or reducing liability to capital gains tax has to follow".

Finally the Tribunal, as stated before, confirmed the decision of the Appellate Assistant Commissioner that the material on record did no! justify the conclusion of the Income tax Officer that the object of the transfer of the shares of all the three Companies by the .assessee to I.CJ. was the avoidance of liability to capital gains which would attract the applicability of s. 52 of the Act.

The Commissioner of Income tax asked for a reference on six questions.

The Tribunal again examined the further contentions of the Department in its order dated 28-7-1969 by which it declined to make the reference on the ground that no question of G Jaw arose oll't of the order of the Appellate Tribunal. Only four questions appear to have been pressed for being referred.

As regards question No. 1 (which was No. 3 before the Tribunal) it was pointed out that it proceeded on the basis tha! there was some dispu~ about the construction of the correspondence or documents.

The Tribunal ob!erved that '.here was no such dis- H pute and it had not been suggested that a particular expression in any letter or document had been wrongly construed.

Regarding question No. 2 (which was No. 4 before the Tribunal), the Departmental representative was asked to particularise the documents or evidence omitted from consideration. He referred to A certain documents and evidence which according to him had not been conidered by the Tribunal. The Tribunal made it clear that all the relevant materials which had been referred to had been considered by i!.

These materials were distributed over four bulky vol1111les of typed records and, therefore, ead! document could not have been mentioned in the order.

Nothing relevant B was actually over-looked. At any rate the documents on which particular reliance was placed on behalf of the Department were considered and !he Tribunal observed that the grievance of omission of materials from consideration related to irrelevant matters.

As regards the other two questions, the Tribunal observed that the charge of perversity was only a desparate attempt at ex!racting C a question of law where none existed and that the object or intention of an assessee was always a question of fact. It was a factual inference to .be drawn from other facts.

It was pointed out that on the construction of s. 52, the par'ies had not joined any issue.

We may now mention the four questions which the High Court D directed to be referred :-

1. "whether on the facts and in the circumstances of the case and on a proper construction of the documents referred to and/or considered by it the Tribunal was right in arriving at the finding that the transfer of the shares to Imperial CMmical Industries Ltd., Loadon at the issue price or par was throughout the basis of the advance of loans to the assessee ?

2. Whether, in arriving at the said finding the Tribunal misdirected itself in la)V in basing the said fiuding on evidence covering some matters only and ignoring evidence on other essential matters ?

3. Whether, on the facts and in the circumstances of the case and particularly in view of the finding that there was. no enforceable 'agreement making it obligatory upon the assessee to transfer the shares to Imperial Chemical Industries Ltd., London, at par or issue price the oonclusion of the Tribunal that the transfer of the shares by the assessee to the latter company at par was not effected with the object of avoidance or reduction of the liability of the assessee to capital gains tax was unreasonable or perverse ?

4. Whether, on the facts and in the circumstances

of the case, the Tribunal was right in holding that

s. 52 of the Income tax Act, 1961, was not applicable to the facts of the case ?

On the analysis o.f s. 52 of '!he Act made by us at a previous stage and the clear, cogent and precise findings and conclusions of B the Appellate Tribiunal, we are wholly unable to comprehend, how any question of law of the nature sought to be referred arose

or arises from the order of the Appellate Tribunal.

It is unfortunate that in a case of this naure and magnitude, the High Court did hotichoose to record a speaking order to enable us to appreciate the reasons which prevailed with it for directing c the four questions o be referred.

The jurisdiction in the matter of reference can be exercised (i) when the point for determination is a pure question of law such 'as construction of a statute or document of title; (ii) when the point for derermination is a mixed question of law and fact. While the finding of the Tribu nal on the facts is final its decision as to the legal effect of those findings is a question of law, (iii) a finding on a question of fact D is . open to attack as erroneous in law when there is no evideince

to support it or if it is perverse.

Where, however, the finding is one of fact, the fact that it is an inference from other sic facts will not alter its character as one of fact (See Sree Meenakashi

Mills Ltd. v. Commissioner of Income tax, Madras(1). In that

case it was held that there was no question of construction of any statutory provision or document of title.

The issues which arose for derermination, whether the sales entered in books of the appellant in the names of the intermediaries were nuine, and if not, to whom the goods were sold 'and for what price, were all questions of fact.

Their determination did not involve the application of any Jegal principles to facts esblished by the evidence.

The findings of the Tribunal were amply supported by evidence .and were eminently reasonable.

It, therefore, followed that there was no question which could be referred to the Court under s. 66 (1) of the Income tax Act 1922. The same principles will apply when a reference is sought under s. 256 of the Act. We are altoirether unable to see how findings of the Appellate Tribu"' nal that the transfer of shares in the present case was not made wi!h the intention or object of avoidance or reduction of liability to capital gains were not questions of fact and did not depend on inference of facts from the. evidence or the material before the Tribunal.

It can well be said that the determination of !he question whether the object of the assessee was to avoid or reduce its liability to' capital gains by niakin.R; the transfers in question did not involve tile applicadon of any le2al principles to the facts established by the evidence.

The findings of the Tribunal were amply supported by evidence and were eminently reasonable. It

(I 31 I.T.R. 28.

is true that the amount involved is very large but that cannot A justify a reference as under s. 256 of the Act neither the Appellate Tribunal could make a reference nor could the High Court direct the reference to be made to it by the Tribunal on pure questions .of fact.

The learned counsel for the Commissioner has sought to invite our attention <to certain parts of the order of the Tribunal and, B in particular, to the statement extracted by us at an earlier stage about the question whether 1he .assessee had held the shares benefically and the pc>int which was debated before the Tribunal

whether there was any binding legal agreement between 'the assessee and I.C.I. for transfer of the shares at par. We are unable to see how these matters were relevant for the purpose of determining the inteotion or object under-lying the transfer of the C shares to r.c.r. by the assessee. Once the Tribunal came to the conclusion which was purely one of fact that before there was any proposal to reimpose capitiil gains tax which came to be embodied in the Fin.ance Bill towards the end of November 1956, the scheme had been fully evolved between !he assessee and I.C.I. of making the loans by the latter to the former for being D invested in the three companies and that the shares would be

transferr~ at par by !he assessee to I.C.I. whenever desired, the applicability of s. 52 could not be attracted as the same depend- . ed on certain facts which must exist or must be found and which had not been s0 found by the Tribunal.

In the result the appeal is allowed and ithe order of the High E Court is hereby set aside.

The assessee shall be entitled to its costs in this Court.

v.P.S.

Appeal allowed.