The Commissioner Of Income Tax v. Mis Slocum Investment P Ltdrespondentthrough: Mr Ajay Vohra, Senior Advocate Withmr Rahul Jam, Mr Vaibhav Kulkarni And Mraashish Gupta, Advocates

$* IN THE HIGH COURT OF DELHI AT NEW DELHI 7. + ITA 1655/2006 THE COMMISSIONER OF INCOME TAX.....AppellantThrough: Mr Rahul Chaudhary, Senior StandingCounsel with Mr Ruchir Bhatia, Junior StandingCounsel.Through: Mr Rahul Chaudhary, Senior StandingCounsel with Mr Ruchir Bhatia, Junior StandingCounsel. versus • MIS SLOCUM INVESTMENT P LTDRespondentThrough: Mr Ajay Vohra, Senior Advocate withMr Rahul Jam, Mr Vaibhav Kulkarni and MrAashish Gupta, Advocates. WITH ITA 434/2010 + COMMISSIONER OF INCOME TAX DELHIAppellantThrough: Mr Rahul Chaudhary, Senior StandingCounsel with Mr Ruchir Bhatia, Junior StandingCounsel. • versus HCL CORPORATION LTD. .....Respondent Through: Mr Ajay Vohra, Senior Advocate withMr Rahul Jam, Mr Vaibhav Kulkarni and MrAashish Gupta, Advocates. WITH + ITA 1656/2006 THE COMMISSIONER OF INCOME TAX Appellant Signature Not Verified . Through: Mr Rahul Chaudhary, Senior StandingCounsel with Mr Ruchir Bhatia, Junior StandingCounsel. versus WITH H.C.L. CORPORATION LTD.. RespondentThrough: Mr Ajay Vohra, Senior Advocate withMr Rahul Jam, Mr Vaibhav Kulkarni and MrAashish Gupta, Advocates. CORAM:HON'BLE DR. JUSTICE S. MURALIDHARHON'BLE MR. JUSTICE VIBHU BAKHRUORDER%30.07.2015 1. These appeals have been preferred by the Revenue under Section 260A ofthe Income Tax Act, 1961 (hereafter the 'Act') against separate orderspassed by the Income Tax Appellate Tribunals (hereafter 'Tribunal') inrespect of block assessments made by the Assessing Officer (hereafter'AO') for the period [1st ]April, 1995 to [24th ]January, 2002. 2. In ITA 1655/2006 and ITA 1656/2006, the Revenue impugns a commonorder dated [24th ]March, 2006 passed by the Tribunal in IT(SS)A No.41 1/Del/2004 and IT(SS)A No. 45/Del/2005. These appeals were preferredagainst an order of Commissioner Income Tax (Appeals)-III [hereafterCIT(A)] dated [30th ]November, 2004; whilst the former was preferred by theAssessee -Slocum Investment Pvt. Ltd. (now known as HCL CorporationLtd and hereafter referred to as SIPL), the latter was preferred by theRevenue. I In ITA Nos. 427/2010 and 434/2010, the Revenue impugns a commonorder dated [7th ]August, 2008 passed by the Tribunal in IT(SS)A No.40/Del/07 and IT(SS)A No. 41/Del/07. These appeals emanate fromprotective assessments made by the AO in respect of Shiv Nadar InvestmentPvt. Ltd. (hereafter 'SNIPL') & HCL Corporation Ltd. (hereafter 'HCLC'),as these companies had amalgamated with SIPL. •[4. ITA 1105/2008 pertains to the penalty imposed on the Assessee under] Section 158BFA(2) of the Act. 5. The principal controversy in these appeals arises from two sets oftransactions; the first involving sale of shares of HCL Consulting Ltd— anunlisted company - by SIPL, HCLC and SNIPL (hereafter collectivelyreferred to as the 'Assessee Companies') to Wintex Pvt. Ltd. (Mauritius) - acompany incorporated under the laws of Mauritius - in June 1999 (hereafterreferred to as 'WIPL'). According to the AO, the shares in question weresold by the Assessee companies at a value lower than their correct worth asa devise to evade tax and this constituted undisclosed income of theAssessee Companies. 6. The second set of transactions involved sale of shares of HCL HDX Holdings (Mauritius) Pvt. Ltd. (hereafter 'HCL HDX, Mauritius') - acompany incorporated under the laws of Mauritius - by the AssesseeCompanies to another Mauritian company- Varna Sundari Investment (P)Ltd. (hereafter 'VSI'). 7. Briefly stated the relevant facts necessary to consider the controversy areas under:- 7.1 SIPL, SNIPL and HCLC - the Assessee Companies were threecompanies belonging to the HCL Group and each of the said companies heldsubstantial shares in HCL Consulting Limited which was at the materialtime an unlisted company. 6. The second set of transactions involved sale of shares of HCL HDX Holdings (Mauritius) Pvt. Ltd. (hereafter 'HCL HDX, Mauritius') - acompany incorporated under the laws of Mauritius - by the AssesseeCompanies to another Mauritian company- Varna Sundari Investment (P)Ltd. (hereafter 'VSI'). 7. Briefly stated the relevant facts necessary to consider the controversy areas under:- 7.1 SIPL, SNIPL and HCLC - the Assessee Companies were threecompanies belonging to the HCL Group and each of the said companies heldsubstantial shares in HCL Consulting Limited which was at the materialtime an unlisted company. 7.2 In June 1999, SIPL, SNIPL and HCLC sold 41,00,000, 14,50,000 and14,50,000 shares of HCL Consulting Limited respectively, to WIPL at aprice of Rs. 50 per share. HCL Consulting Limited issued bonus shares andthereafter the shares were split. Resultantly, by November 1999, WIPL held3,21,93,750 shares of HCL Consulting Limited. HCL Consulting Limitedchanged its name to HCL Technologies Ltd. in October 1999 and came outwith a public offer in November 1999. The shares of HCL TechnologiesLimited were quoted at a price which was significantly higher than the value at which the Assessee companies had sold the shares to WIPL. 7.3 The Assessee Companies had invested in a Mauritian Company namely HCL HDX, Mauritius in the year 1997. Investments were made withapproval of the Reserve Bank of India. In September 1998, the Assesseecompanies divested their shares held by them in HCL HDX, Mauritius toVSI a Company incorporated under the laws of Mauritius. 7.4 HCL HDX, Mauritius held 50% shares in HCL Deluxe N.V. a DutchCompany. This company was in effect a Joint Venture between HCL HDX,Mauritius and Deluxe Corp. USA, which held the balance 50% equity inHCL Deluxe N.V. In April 1999 HCL HDX, Mauritius sold its stake in HCLDeluxe N.V. to Deluxe Corp. USA. 7.5 By an order dated [27th ]August 2001, this Court approved a scheme ofamalgamation whereby SNIPL and HCLC amalgamated with SIPL w.e.f.appointed date - 1st April, 2000. 7.6 On [24th ]January, 2002 the premises of the SIPL and premises of certain directors and employees of HCL group of companies were searchedunder Section 132 of the Act. The warrants of search were issued in thename of the three Assessee Companies as well as HCL Technologies S Limited. Thereafter, notices under Section 158BC were issued to the threeAssessee Companies even though SNIPL and HCLC had been dissolvedearlier. 8. The Assessee companies had disclosed the transactions in question,namely the sale of shares of HCL Consulting Limited and HCL HDX,Mauritius to WIPL and VSI in their respective returns. It is not disputed thatthe shares were valued as per the prevalent CCI guidelines and the transferwas with due permission of the Reserve Bank of India. 9. The AO was of the view that both the transactions i.e. the sale of theshares held by the Assessee companies in HCL HDX, Mauritius to VSI aswell as shares held by the Assessee companies in HCL Consulting Limitedto WIPL were at a price significantly lower than their worth and this was adevice to avoid taxation. The AO was of the view that the transaction ofsale of shares of HCL consulting to WIPL was not made at Arms Lengthprice. The AO held that the management of the Assessee Companies wasaware that the shares of HCL Consulting Limited would be listed at asignificantly higher price pursuant to the Initial Public Offer (IPO) that wason the anvil. Thus, the management entered into a device to avoid tax byselling the shares to an associated Mauritian entity at a significantly lower 9. The AO was of the view that both the transactions i.e. the sale of theshares held by the Assessee companies in HCL HDX, Mauritius to VSI aswell as shares held by the Assessee companies in HCL Consulting Limitedto WIPL were at a price significantly lower than their worth and this was adevice to avoid taxation. The AO was of the view that the transaction ofsale of shares of HCL consulting to WIPL was not made at Arms Lengthprice. The AO held that the management of the Assessee Companies wasaware that the shares of HCL Consulting Limited would be listed at asignificantly higher price pursuant to the Initial Public Offer (IPO) that wason the anvil. Thus, the management entered into a device to avoid tax byselling the shares to an associated Mauritian entity at a significantly lower price. The AU also found that WIPL had, after the IPO, sold the shares ofHCL Technologies Ltd. (earlier known as HCL Consulting Limited) at asignificantly higher price and in view of the Indo-Mauritian Treaty, hadeffectively avoided payment of capital gain tax. The AU further found thatWIPL was substantially controlled by the brother of Shiv Nadar and thus,WIPL was an associate enterprise. According to the AU, the provisions ofSection 92 of the Act would be applicable and would entitle the AU tonotionally enhance the value of the shares sold in the. hands of the AssesseeCompanies and levy tax accordingly. - 10. Insofar as the second transaction is concerned, the AU held that theAssessee Companies had sold their shares to VSI as they were aware of theimminent transaction with Deluxe Corp. USA. The AU held that theunderstanding with Deluxe Corp. prompted the Assessee's company tosell "their shares first to a Mauritius based company, whose control is withShiv Nadar group and then part the ways by selling their shares in JointVenture to M/s Deluxe Corporation of USA, thus avoiding the capital gaintax in India as further transaction will be between Mauritius based companyand US based company" 11. Aggrieved by the block assessment order passed by the AU, the Assessee -SIPL preferred an appeal before CIT(A). The Assessee, interalia, contended that there was no jurisdiction for the AO to make an additionunder the block assessment as the transactions were duly disclosed in thebooks of accounts and there was no question of any undisclosed incomehaving been unearthed in the search operations. The Assessee furthercontended that after the search operations, the assessment for theAssessment Year 2000-2001 was completed under Section 143(3) of the Actand the capital gains as declared by the Assessee Companies was dulyaccepted. 12. The appeal preferred by the Assessee was disposed of by CIT(A) by anorder dated 30th November, 2004. Insofar as the addition with regard toundisclosed income relating to the first transaction i.e. sale of shares by theAssessee companies to WIPL is concerned, the CIT (A) upheld the decisionof the AO. However, insofar as the second transaction is concerned, the CIT(A) held that the AO had erroneously proceeded to treat the shares of HCLDeluxe N.V. as that of HCL HDX, Mauritius. The CIT (A) noted that thetransaction relating to the sale of shares of HCL Deluxe N.V. to DeluxeCorp. USA were between two non-resident companies and thus, could notbe brought to tax under the Act. 13. Aggrieved by the decision of the CIT (A) in upholding the AO'saddition in respect of undisclosed income pertaining to the first transaction -sale of shares of HCL Consulting Ltd. to WIPL, SIPL preferred an appealbefore the Tribunal (being IT(SS)A No. 41 1/Del/2004). The Revenue alsoimpugned the order of CIT (A) insofar as the CIT(A) had deleted theaddition made by the AO in respect of the second transaction - sale ofshares held by the Assessee companies in HCL HDX Holdings, Mauritius tovSI. 14. The questions before the Tribunal were: (i)Can a search be conducted and a Section 158BC notice beserved on a non-existent company?served on a non-existent company? 13. Aggrieved by the decision of the CIT (A) in upholding the AO'saddition in respect of undisclosed income pertaining to the first transaction -sale of shares of HCL Consulting Ltd. to WIPL, SIPL preferred an appealbefore the Tribunal (being IT(SS)A No. 41 1/Del/2004). The Revenue alsoimpugned the order of CIT (A) insofar as the CIT(A) had deleted theaddition made by the AO in respect of the second transaction - sale ofshares held by the Assessee companies in HCL HDX Holdings, Mauritius tovSI. 14. The questions before the Tribunal were: (i)Can a search be conducted and a Section 158BC notice beserved on a non-existent company?served on a non-existent company? (ii)Can the assessment of undisclosed or regular income ofHCLCL or SNIPL be done in the hands of the assessee?HCLCL or SNIPL be done in the hands of the assessee? (iii)Can the successor be at all assessed for a block period referableto the predecessor? When a regular assessment cannot be madein such a situation, can a block assessment be so made? Canthere be block period at all for the companies which ceased toexist?to the predecessor? When a regular assessment cannot be madein such a situation, can a block assessment be so made? Canthere be block period at all for the companies which ceased toexist? (iv)Are the conditions necessary for invoking Section 92 satisfiedin the present case? Can the invocation of Section 92 whichgives rise to notional income be classified as undisclosedincome?in the present case? Can the invocation of Section 92 whichgives rise to notional income be classified as undisclosedincome? (v) Can a disclosed transaction give rise to undisclosed income?Can a disclosed transaction be re-assessed in a block period? 15. By the impugned order dated [24th ]March, 2006, the Tribunal dismissedthe appeal preferred by the Revenue and allowed the appeal preferred by theAssessee. The Tribunal held that the income of the amalgamating companiesnamely, SNIPL& HCLC could not be brought to tax in the hands of SIPL,by applying provisions of Section 170(2) of the Act, as there was a clearcontradiction between the provisions that Section 170(2) and Section 1 58BAread with Section 15813(a) of the Act. The Tribunal further held that therewas no provision under the Act by which the Predecessor's income for ablock period could be taxed in the hands of the Successor and held that therewas a lacuna in the Act in this regard. The Tribunal also held that theprovisions of Section 92 of the Act (as on the statute book at the materialtime) was not applicable as the transaction was one relating to a capital assetand the same could not be termed as a business transaction to attract theprovisions of Section 92 of the Act. 16. The Tribunal also held that prior to the sale, valuation was done byPurushottam Bhutan and Co. CA on the basis of the guidelines issued by theController of Capital Issues (CCI). Provisional RBI approval dated 23i'd September was also obtained. Final approval was granted vide letter dated2311 October, 1999. The shares were shown as "investments non-trading" inbooks of accounts of the Assessee Companies. The sales were disclosed inthe returns of income filed by the assessee for the AY 2000-01. Thus theTribunal held that the undisclosed income assessed in the present case doesnot fall within the domain of Chapter XIV-B as there had already been adisclosure of the transaction in the regular books of account maintained bythe assessee, HCLCL and SNIPL and since such disclosure was alreadymade in the returns filed prior to the search, the impugned addition is liableto be deleted being beyond the scope and ambit of Chapter XIV —B. September was also obtained. Final approval was granted vide letter dated2311 October, 1999. The shares were shown as "investments non-trading" inbooks of accounts of the Assessee Companies. The sales were disclosed inthe returns of income filed by the assessee for the AY 2000-01. Thus theTribunal held that the undisclosed income assessed in the present case doesnot fall within the domain of Chapter XIV-B as there had already been adisclosure of the transaction in the regular books of account maintained bythe assessee, HCLCL and SNIPL and since such disclosure was alreadymade in the returns filed prior to the search, the impugned addition is liableto be deleted being beyond the scope and ambit of Chapter XIV —B. 17. The Revenue has challenged the order dated [24th ]March, 2006 passed bythe Tribunal on several grounds and according to the Revenue, severalquestions of law arise from the order of Tribunal.18. We have heard the learned counsel for the parties. We propose to firstexamine one of the questions projected by the Revenue in these appeals viz.,whether the 1 TAT erred in law in holding that if there is a disclosure by theassessee in the regular return of income, then no assessment can be made inrespect of such transactions in a block assessment as undisclosed income asa result of a search undertaken? We feel that this is the central issue in these S 18. We have heard the learned counsel for the parties. We propose to first . appeals. The answer to the said question will determine whether the otherissues projected require to be examined. 19. In the regular assessments framed under section 143(3) of the Act, theAO accepted the transactions as disclosed by the Assessee Companies. It isalso relevant to mention that the regular assessments were made subsequentto the search under Section 132 of the Act. 20. It is now well established that the provisions of block assessment are inaddition to the provisions of regular assessment and are not intended tosubstitute the same. This Court in CIT v. Ravi Kant Jam: (2001) 250 ITR141 (Del) stated the above principle as under:- "The special procedure of Chapter XIV-B is intended toprovide a mode of assessment of undisclosed income, whichhas been detected as a result of search. As the statutoryprovisions go to show, it is not intended to be a substitute for• regular assessment. Its scope and ambit is limited in thatsense to materials unearthed during search. It is in addition tothe regular assessment already done or to be done. Theassessment for the block period can only be done on the basisof evidence found as a result of search or requisition of booksof account or documents and such other materials orinformation as are available with the Assessing Officer.Evidence found as a result of search is clearly relatable tosections 132 and 132A." 21. The Supreme Court in the case of Assistant Commissioner of Income- Tax and Anr. V. Hotel Blue Moon: (2010) [321 ITR 362 ][(SC)explained the] scope of Chapter XIV-B of the Act as under:- 21. The Supreme Court in the case of Assistant Commissioner of Income- Tax and Anr. V. Hotel Blue Moon: (2010) [321 ITR 362 ][(SC)explained the] scope of Chapter XIV-B of the Act as under:- "Chapter XIV-B provides for an assessment of theundisclosed income unearthed as a result of search withoutaffecting the regular assessment made or to be made. Searchis the sine qua non for the block assessment. The specialprovisions are devised to operate in the distinct field ofundisclosed income and are clearly in addition to the regularassessments covering the previous years falling in the blockperiod. The special procedure of Chapter XIV-B is intended• to provide a mode of assessment of undisclosed income,which has been detected as a result of search. It is notintended to be substituted for regular assessment. Its scopeand ambit is limited in that sense to materials unearthedduring search. It is in addition to the regular assessmentalready done or to be done. The assessment for the blockperiod can only be done on the basis of evidence found as aresult of search or requisition of books of account ordocuments and such other materials or information as areavailable with the Assessing Officer. Therefore, the incomeassessable in block assessment under Chapter XIV-B is theincome not disclosed but found and determined as the resultof search under Section 132 or requisition under section132A of the Act." . 22. It is not disputed that both the sets of transactions - the sale of shares of HCL Consulting in favour of WIPL and the sale of shares of HCL HDX,Mauritius to VSI - were duly disclosed by the Assessee Companies in theirbooks of accounts. 23. It is also not the Revenue's case that the Assessee Companies had received any consideration in excess of what had been duly disclosed bythem. In other words, the transactions had been disclosed in the returns atthe values at which they were effected.Thus, undisputedly, the AssesseeCompanies had not made any undisclosed gains. Clearly, the AssesseeCompanies could not be taxed on any notional income under Chapter XIV-Bof the Act. The Tribunal held that as the Assessee Companies had dulydisclosed the transaction in their regular returns of income prior to thesearch, no assessment could be made in respect of such transactions in ablock assessment under Chapter XIV B of the Act. In these facts, we do notfind any infirmity in the aforesaid view of the Tribunal and find no reason tointerfere with the impugned order. 24. In view of the above, it is not necessary to decide other questions of lawraised by the Revenue in ITA Nos. 1655/2006 and 1656/2006.The saidappeals are, accordingly, dismissed. We clarify that all the questions of lawraised in the said appeals are left open. 25. ITA 1105/200 relates to the penalty imposed by the AO which arises onaccount of additions made by the AO in block assessment. In view of ourdecision in ITA 1655/2006 and 1656/2006 above, this appeal is alsodismissed. 26. ITA 427/2010 & 434/2010 arise out of the block assessments made inrespect of SNIPL & HCLC on protective basis. As the impugned orderdated [24th ]March, 2006 passed by the Tribunal in ITA 45/De112004 and411/Del/2000 holding that the transaction in question were disclosedtransactions and, therefore, could not have been subject matter of blockassessment has been upheld, these appeals must fail and are, accordingly,dismissed. 27. No order as to costs. S. MURALIDHAR, J JULY 309 2015RK SRK VIBHU BAKHRU, J