Sabyasachi Mukharji, J. -
(1.)On the 29th March, 1967, a notice was issued to the petitioner I.C.I. (India) Private Ltd. by the Gift-tax Officer, 'B' Ward, Companies Dist. IV, Calcutta, intimating that he had reason to believe that the gift made by the petitioner assessable to gift-tax for the assessment year 1962-63 had escaped assessment. The assessee was, therefore, required to file a return of the gift made by the assessee for the aforesaid assessment period. The petitioner replied on the 15th May, 1967, intimating to the Gift-tax Officer that it was unaware of any gift having escaped assessment to gift-tax and accordingly it submitted a nil return in the prescribed form. It is the validity of the said notice, which was issued under Section 16(1), of the Gift-tax Act, 1958, which is under challenge in this application under Article 226 of the Constitution. In order to appreciate this challenge it is necessary to refer to certain facts. The petitioner is a subsidiary of the Imperial Chemical Industries Ltd. incorporated in the United Kingdom. The said Imperial Chemical Industries Ltd. is shortly referred to as ICI. It is the case of the petitioner that after the last world war, ICI had decided to make substantial investments in India for manufacture of extended range of products which were previously imported ; as a result Alkali & Chemical Corporation of India Ltd., hereinafter referred to as ACCI, was substantially expanded and two new companies were promoted, namely, Indian Explosives Ltd., hereinafter referred to as IEL and Atic Industries Ltd., hereinafter referred to as Atic. In or about 1949, the Government of India asked ICI to consider manufacture of commercial blasting high explosives in India. ICI decided to finance foreign exchange requirements for the aforesaid projects by making sterling loans available to the petitioner, namely, ICI (India) Pvt. Ltd., to enable the petitioner to take up equity shares in the aforesaid three manufacturing companies initially in the name of the petitioner with a view to get tax advantage under sections 15C and 56A of the Indian Income-tax Act, 1922, with an understanding to transfer the said shares to ICI as and when ICI would call back the loans. On the 1st of October, 1953, method of financing in the case of IEL was specially outlined, discussed and accepted at the meetings between the representatives of the Government of India, of ICI and of the petitioner-company. The meetings were held in or about October, 1953, and the decisions of the meetings relating to financing in the case of IEL were recorded in the minutes. The terms and conditions of the loan arrangement were subsequently set out in an agreement dated the 5th November, 1953, called "The Declaration of Intention" between the Government of India, ICI and the petitioner. The said "Declaration of Intention" was relating to the shares of Indian Explosives Ltd. It recorded as follows :
"It is Id's present intention to subscribe for so much of this later issue as will ensure that it retains control of the new company. It may be convenient that ICI (India) should for a time hold beneficially the shares which under this agreement are to be allotted to ICI. If this is done, ICI (India) will pay the amount due on allotment and subsequent calls with money borrowed from ICI. Subsequently ICI (India) may repay the loan by transfer to ICI of the shares so held. Government have no objection to this course of action."
(2.)On the 4th August, 1955, the terms and conditions in respect of the loan arrangement regarding Atic shares covered by an agreement called "Declaration of Intention" were entered into. It contained identical terms. On the 13th December, 1955, there was a letter from the chairman of the petitioner to Mr. Iyengar, of the Ministry of Commerce & Industry, setting out the terms and conditions for advancing loans to the petitioner by ICI regarding ACCI. Then there was a letter from the ACCI to the Controller of Capital Issues on the 24th March, 1956, and on the 4th July, 1956, there was a letter from the ACCI to the Secretary, Central Board of Revenue, asking for confirmation that the benefit of Section 56A of the Indian Income-tax Act, 1922, would be available to the subscribers to the fresh capital. The petitioner on the 7th March, 1957, wrote to the Assistant Controller, Reserve Bank of India, regarding the shares of ACCI. The Finance Act, 1959, however, altered the system of taxing dividends as a result whereof the dividends passing from manufacturing companies to ICI suffered, according to the petitioner, double taxation. The assessee-company was already in existence but the other three companies mentioned hereinbefore were incorporated later. ICI, therefore, devised a scheme by which it could make the investments 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 sections 15C and 56A of the Indian Income-tax Act, 1922. The scheme in short was that the ICI would arrange to let the assessee hold the shares in the three companies by investing the money which was to be given by ICI to the assessee. The modus operandi was that the ICI would give that money by way of loan to the assessee who agreed that the shares in the three companies mentioned hereinbefore would be transferred to ICI in satisfaction of the loan at par or issue price as and when desired by ICI. All this was done after negotiations with the concerned department of the Government of India at the highest level with the approval of the Reserve Bank of India. The entire scheme was conceived and put into operation prior to the 30th of November, 1956. There was a provision for charging interest by the ICI from the assessee at the rate which came to 5 1/2 per cent. per annum but the interest was not to exceed the dividends received by the assessee from those shares. It was the assessee's claim that this arrangement was advantageous both to ICI and the assessee. ICI took the risk of depreciation in shares or otherwise attached to the new business ensuring that the capital appreciation from the shares, if any, also went to itself. The assessee did not suffer any disadvantage because it had to pay no interest if no dividend was received and it could get the benefit of any dividend in excess of 5 1/2%. As a result of ICI investment being held through the assessee indirectly, ICI had achieved an advantage of saving tax in the United Kingdom amounting to 68,000 during the relevant years. Thereafter, as mentioned hereinbefore, the structure of taxation under the scheme of the Indian Income-tax Act underwent a change in 1959, and as a result of the Finance Act, 1959, the system of grossing up of dividend under Sections 16(2) and 18(5) of the Indian Income-tax Act, 1922, was abolished and intercorporate dividends became liable to income-tax at each stage. Thus, the dividends passing from the three companies through the assessee to ICI became liable to tax at two stages. This affected the net return of the three companies substantially. In these circumstances, it was decided by the ICI that the investments in the three companies should be held by it directly. For that reason it called upon the assessee in February, 1961, to transfer to it those shares in the three companies at the issue price in satisfaction of the sterling loans in accordance with the previous arrangement. The approval of the Reserve Bank to this transfer was received in February, 1961, and the transfer was made in March and April, 1961. The facts as narrated hereinbefore were found by the Tribunal in the case of assessment of the assessee under Section 52 of the Indian Income-tax Act, 1922, and these findings were recorded by the Supreme Court in the decision reported in the case of /. C. I. (India) Private Ltd. v. Commissioner of Income-tax.
(3.)Thereafter, on the 29th March, 1967, as mentioned hereinbefore, the impugned notice was issued. On the 30th March, 1967, the Income-tax Officer assessing the petitioner for the assessment year 1962-63, who is also by virtue of Section 7 of the Gift-tax Act, 1958, the Gift-tax Officer in this case, added a sum of Rs. 14,40,62,901 to the total income as notional capital gains on the ground that the market value of the aforesaid shares was higher than the face value at which these were transferred. On appeal the Appellate Assistant Commissioner deleted the said addition. On the 18th/ 25th April, 1967, the petitioner wrote to the Central Board of Direct Taxes pointing out that the transfer of shares was made by the petitioner to ICI in accordance with the contractual obligation and there was no question of gift. On the 30th June, 1967, the Central Board of Direct Taxes replied that the department had not accepted the position that there was any contractual obligation under which the transfer was made and, therefore, the question of gift-tax liability had to be considered. On the 18th October, 1967, an order was passed by the Appellate Assistant Commissioner in the appeal for the assessment under the Income-tax Act referred to hereinbefore. On the 23rd September, 1968, the Income-tax Officer issued a notice under Section 147 of the Income-tax Act, 1961, with a view to include the sum of Rs. 14,40,62,901 as income escaping assessment. There was an appeal preferred by the revenue against the order of the Appellate Assistant Commissioner referred to hereinbefore relating to the income-tax for the assessment year 1962-63 and the said appeal was disposed of by the Appellate Tribunal on the 19th February, 1969, dismissing the appeal of the revenue and upholding the contention of the petitioner that there was no occasion of capital gains. The Tribunal, after recapitulating the correspondence and the relevant facts, came to the following conclusion :
"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 ICI 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 ICI as and when it demanded. In October, 1953, there 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 or taking over the shares at par or at issue price was one of avoidance or reduction of liability to capital gains tax. That object docs not get established by the mere absence of an enforceable arrangement. Having regard to the assessee being the subsidiary of ICI 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. In our opinion, once the facts mentioned therein are taken as correct, the inference that the transaction was not for the purpose of avoiding or reducing liability to capital gains tax has to follow."