The assessee was incorporated under the Companies Act, 1956 and is engaged in the business of designing, manufacturing and marketing various auto components. The company is on the stock exchange. In 2012-13, 75% of the shares of the Appellant were held by Clayton Dewandre (“CD”) and the balance 25% were held by public. In 2013-14, there was a share transfer agreement between CD and WABCO, Singapore. As per agreement, CD transferred its shareholding to WABCO, Singapore. The sale consideration was discharged by issuance of own by WABCO Singapore. The AO passed the assessment order u/s. 143(3) read with section 144C of the Act, wherein capital gains was assessed in the hands of CD.
On 09/01/2018, the Department issued a show-cause notice u/s. 163(1)(c) of the Act, to the Appellant assessee, whereby it was alleged that the capital gains had arisen directly as a result of consideration received by CD from the Appellant and the Appellant was proposed to be held as agent u/s. 163(1)(c) of the Act for tax liability that might arise against CD.
The Appellant challenged the aforesaid notice by filing a writ petition to HC. The petition was dismissed by the Single Judge on the sole ground that the appellant had a right to give a reply to the impugned show-cause notice and as such, there was no merit in the petition.
The Division Bench of the Madras HC allowed the appeal. Referring to the decisions in the case of State of U.P. v. Mohd. Nooh AIR 1958 SC 86, A.V.Venkateswaran, Collector of Customs v. Ramchand Sobhraj Wadhwani AIR 1961 SC 1506, Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) and Whirlpool Corporation v. Registrar of Trade Marks [1998] 8 SCC 1, the SC observed that it has the discretion to entertain or not to entertain a writ petition. However, the High Court has imposed upon itself certain restrictions one of which is that if an effective and efficacious remedy is available, the High Court would not normally exercise its jurisdiction. But, the alternative remedy has been consistently held by the Supreme Court not to operate as a bar in at least three contingencies, namely, where the writ petition has been filed for the enforcement of a fundamental right; where there has been a violation of principle of natural justice; and where an order or alternatively proceedings are without jurisdiction or the constitutional vires of an Act is under challenge.
The HC held that no case was made out by the Department that in respect of transfer of shares to a third party, that too outside India, the Indian company could be taxed when the Indian company had no role in the transfer. Merely because those shares related to the Indian company, that would not make the Indian company an agent qua deemed capital gains purportedly earned by the foreign company. The HC held that notice was not valid and is set aside.