I. C. I. (India) Private Ltd. Vs. C.
I. T., West Bengal  INSC 21 (20 January 1972)
BEG, M. HAMEEDULLAH
CITATION: 1972 AIR 1524 1972 SCR (3) 138 1972
SCC (3) 370
RF 1986 SC1428 (16)
Income-tax Act, (1961) ss. 52 and
256-Directions by High Court to Tribunal to refer questions-Scope of High
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 some Indian
Companies. The correspondence showed that the U.K. Company had the right to
acquire at any time the shares at par, in satisfaction of the loans. In 1961,
the assessee transferred the shares when called upon by the U.K. Company to do
so. The Incometax Officer applied s. 52 of the Income-tax Act, 1961, and
assessed the assessee to capital gains tax, which was not in existence in 1953
but was Reintroduced 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 Assistant Commissioner however, held that
the assessee was not liable to capital gains tax, and the Appellate Tribunal,
after an elaborate discussion of the correspondence, confirmed the order,
holding that the transfer was not effected with that object.
The Department applied to the Tribunal to
refer the questions, (i) whether certain documents were not properly construed,
(ii) whether the Tribunal ignored evidence on essential matters, (iii) whether
the finding of the Tribunal was perverse, and (iv) whether s. 52 was not
applicable, as arising out the Tribunal's order. The Tribunal rejected the
The Department then moved the High Court and
the High Court directed the Tribunal to state a case in relation to the four
questions, but the High Court did not give any reasons for doing so.
Allowing the appeal to this Court,
HELD : The High Court can exercise its
jurisdiction in the matter of 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-(While the findings of the Tribunal on the facts are final, its decision
as to the legal effect of the findings is a question of law. Where, however,
the finding 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
question of fact is perverse. [147C-E] 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 assesee; (ii) the incometax 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 first two conditions 139 are satisfied then the full value of
consideration for the transfer may be taken 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 consideration of relevant material; that is, before
the income-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. [141 H;
142 A-D] In the present ease, 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 proposal to reimpose
the capital gains tax which had remained abolished for some time, the scheme
between the assessee and the U.K. Company bad 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 High Court, should at least have recorded a speaking order
showing how the questions of law of the nature sought to be referred arose from
the order of the Tribunal. [146 B-D; 141 A-C, F; 148 C.D] Shree Meenakshi Mills
Ltd. v. C.I.T., Madras, 31 I.T.R. 28, followed.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1308 of 1970.
Appeal by special leave from the order dated
1970 of the Calcutta High Court in Income Tax
Reference No. 50 of 1971.
N. A. Palkhivala, Veda Vyasa, T. A.
Ramachandran and D. N. Gupta, for the appellant.
Y. S. Desai, S. K. A iyar 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 of the Calcutta
High Court directing the Income-tax Appellate Tribunal, 'B' Branch, Calcutta,
to draw a statement of case relating to four questions of law which, it was
stated, arose out of the order of the-Tribunal 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 Commissioner 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.
140 The assessee is a 100% subsidiary of
Imperial Chemical Industries Ltd., incorporated in the United Kingdom
(hereinafter referred to as I.C.I. 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., (hereinafter
called as I.E.L., A.C.C.I and ATIC respectively). Subsequently the assessee
transferred the shares in the aforesaid companies at par to I.C.I. in
satisfaction 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 Commissioner
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.C.I. wanted to make investments in India in sterling currency. The assessee
was already in existence 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(C) and 56.(A) of the Income-tax Act, 1922. The scheme in short was that
I.C.I. would 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.T.
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 by I.C.I. All this was done after negotiations 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 Bill was
introduced reimposing capital gains tax which had remained abolished for
certain years. There was a provision for charging interest by the I.C.I. from
the assessee at a rate not exceeding 1/2% above the Indian Bank rate which came
to 51% per annum but the interest was not to exceed in any case the dividends
received by the assessee from those shares. It was claimed on behalf of the
assessee that this arrangement was advantageous both to I.C.I. and the assessee,
having taken the risk (of depreciation in
shares or otherwise) attached to the new business pioneering adventures,
ensured that capital appreciation of the shares, if 'any, also went 141 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 and get the benefit of
any dividend in excess of 5 1/2%. As a result of I.C.I.
investments being held through the assessee
instead of directly, I.C.I. achieved an advantage of saving tax in U.K.
amounting to pound 68,000 in the relevant
In 1959 the structure of Indian 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 to I.C.I. 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 I.C.I. that the investments in the three companies should 'he
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 issue
price in satisfaction of the sterling loans in accordance with the previous
agreements. The approval of the Reserve Bank 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 reduction of the liability of the 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 understatement: Where the person
who acquires a capital asset from an assessee is directly or indirectly
connected with the assessee and the Income-tax Officer has reason 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 transfer".
The necessary ingredients of the section are
(i)there should be a direct or indirect connection between the person who
acquires a capital asset and the assessee;
(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; (iii) if the
first two conditions are satisfied then the full value of consideration for the
142 transfer can be taken to be the fair market value of the capital asset on
the date of the transfer.
As regards the first requirement, that was
admittedly satisfied in 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 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 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 fully the correspondence
and the other material with regard to each of the three Indian companies in
which the investment had been made of the money advanced by I.C.I. to the
assessee. We may briefly notice the discussion relating to each company. It was
in or about 1949 that I.C.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 representatives of I.C.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 Government had agreed that if T.C.I. made a loan to the
assessee the latter would hold the shares in I.E.L. and that the loan "may
be repaid by a transfer of the 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.C.I.
would charge no interest until such time as
the shares began to yield dividends. The loans were advanced from 30th
September 1954 to 30th June 1957 by the I.C.I. to the assessee of the
equivalent of Rs. 160 lakhs in Sterling.
The other correspondence relating 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 requirement of I.E.L. The assessee was to take up shares of that
The terms of the loan were that I.C.I. had
the right to acquire at any time the shares held by the assessee in I.E.L.
143 at par in satisfaction of the loan and
the rate of interest payable on the loan was to be I% above the Indian Bank
This was followed by other correspondence and
a resolution 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 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 I.E.L. came to be mooted
and was ultimately approved by the Government. This is what the Tribunal said :
"The above background would show that
the idea was not to make the assessee the real beneficial 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
Before the Tribunal the counsel for the
Department had accepted the position that if there was an arrangement 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 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 shares at par.
After recapitulating the correspondence and the relevant facts, the Tribunal
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 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. as and when it demanded".
It was, however, stated by the Tribunal that
taking into account the correspondence 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 paragraph 31 of the order of the
Tribunal :"In October 1953, there was no mention of any capital gains tax
being revived. At that time the asses144 see 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 mind in 1953 and
later when they put through the aforesaid transactions. We have, therefore, to
hold that the factual requisites of section 52 have not been established
In dealing with the second Company, namely,
A.C.C.I it was pointed out by the Tribunal that the scheme for manufacturing
Polythene was placed before the Government of India by a letter of the assessee
dated 13-12-1955 addressed to Mr. H.
V. R. lengar, Secretary, Minister of Commerce
& Industry, in which it was specifically stated that to enable the assessee
to subscribe for 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 145 loan. The Tribunal
dealt with all the relevant facts relating to the loan advanced to A.C.C.I.
including those 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.P..L. ATIC,
the third Company was incorporated primarily for the manufacture of certain
Dye-stuffs. On 29-12-1955 I.C.I. agreed to advance Rs. 25 lakhs as loan to the
assessee. The shares acquired under the loan could be transferred to I.C.I. on
request by the latter at the issue price. I.C.I. 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 further loan of Rs. 35,00,000 on the same terms.
These shares were age 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 were concerned but he only disputed the inferences
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 *he 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 not 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.C.I.
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 law arose out 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 that there was some dispute
about the construction of the correspondence or documents.
The Tribunal observed that there was no such
dispute 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 certain documents and evidence which according to him had not been
considered by the Tribunal. The Tribunal made it cleat that all the relevant
materials which had been referred to had been considered by it. These materials
were distributed over four bulky volumes of typed records and, therefore, each
document could not have been mentioned in the order. Nothing relevant was
actually over-looked. At any rate the documents on which particular reliance
was placed on behalf of the Department were considered and the 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 disparate attempt at
extracting 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 parties had not joined, any issue.
We may now mention the four questions which
the High Court directed to be referred :
1. "whether on the facts and in +he
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 Chemical Industries Ltd.,
London 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 law in basing the said finding on evidence
covering some matters only and ignoring, evidence on other essential matters ?
3. Whether, on the facts and in +,he
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 conclusion 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 147 s. 52 of
the Income tax Act, 1961, was not applicable to the facts of the case ? On the
analysis of s. 52 of the Act made by us at a previous stage and the clear,
cogent and precise findings and conclusions of the Appellate Tribunal, 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 nature and magnitude, the High Court did not
choose to record a speaking order to enable us to appreciate the reasons which
prevailed with it for directing the four questions to 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 determination is a mixed question of
law and fact. While the finding of the Tribunal 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 is open to attack as erroneous in law when there
is no evidence 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 basic 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 determination, whether the sales entered in books of
the appellant in the names of the intermediaries were genuine, 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 legal principles to facts
established 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 altogether unable to see how findings of the
Appellate Tribunal that the transfer of shares in the present case was not made
with 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 the question whether the object of the assessee was to avoid
or reduce its liability to capital gains by making the transfers in question
did not involve the application of any legal principles to the facts
established by the evidence. The findings of the Tribunal were amply supported
by evidence and were eminently reasonable. It (1) 31 I.T.R. 28.
148 is true that the amount involved is very
large but that cannot 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, in particular, to the statement extracted by us at an earlier stage about
the question whether the assessee had held the shares beneficially and the
point 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 intention or object under-lying the transfer of the shares to
I.C.I. by the assessee. Once the Tribunal came to the conclusion which was
purely one of fact that before there was any proposal to reimpose capital gains
tax which came to be embodied in the Finance Bill towards the end of November
1956, the scheme had been fully evolved between the assessee and I.C.I. of
making the loans by the latter to the former for being invested in the three
companies and that the shares would be transferred at par by the assessee to
I.C.I. whenever desired, the applicability of s. 52 could not be attracted as
the same depended on certain facts which must exist or must be found and which
had not been so found by the Tribunal.
In the result the appeal is allowed and the
order of the High Court is hereby set aside. The assessee shall be entitled to
its costs in this Court.
V.P.S. Appeal allowed.