Case Law Details

Case Name : Rockland Hotels Ltd Vs IT Settlement Commission (Delhi High Court)
Appeal Number : Writ Petition (c) No. 3557- 3559 of 2014 and 3752–3759 & 3761-3762 of 2014
Date of Judgement/Order : 20/10/2015
Related Assessment Year :
Courts : All High Courts (4166) Delhi High Court (1288)
Brief of the Case

Delhi High Court held In the case of Rockland Hotels Ltd. vs. IT Settlement Commission that as per clauses (a)(v) and (a)(vi) of section 245C , only if a director of the petitioner companies has a substantial interest in the specified person (company), then, the petitioner companies, their directors and relatives of their directors qualify as related parties. The Petitioner companies would not qualify as a related party merely because any relative of one of its directors has a substantial interest in the specified person. Further, the petitioner companies would qualify as a related party, if a specified person (company) or any of its directors or any relative of any of its directors have a substantial interest in the petitioner companies.

The fact that four directors of the specified person hold 50% shares of the petitioner companies does not satisfy the condition. The requirement is that an individual director must hold more than 20% shares, which apparently is not the case.

Facts of the Case

The following two applicants fall in the category of specified persons: (i) M/s Somya Constructions Pvt. Ltd. (ii) M/s Rockland Hospitals Ltd.

 WP(C) 3557of 2014(M/s Rockland Hotels Ltd.)

 In this petition, the assessee claims itself to be a related party to M/s Somya Constructions Pvt. Ltd. on the ground that both the companies are substantially controlled by the Srivastava and the Bhandari families and has common shareholding and directorship. It is also contended that more than 20% of the equity share capital of the specified person M/s Somya Constructions Pvt. Ltd. was held by Mrs. Mala Srivastava wife of Mr. Rajesh Srivastava a director of the petitioner.

WP(C) 3559/2014 (M/s. Avee Medi Surgical Pvt. Ltd.), 3752/2014 (M/s. Akhil Meditech Pvt. Ltd.) , 3753/2014 (M/s. Hitesh Construction Pvt. Ltd.) , 3754/2014 (M/s. Radhika Surgical Pvt. Ltd.), 3755/2014 (M/s. Kunal Medicare Pvt Ltd.), 3756/2014 (M/s. Glory Lifescience Pvt. Ltd.) , 3758/2014 (M/s. Lipi Finstock Ltd.) , 3759/2014 (M/s. Himanshu Medicare Pvt. Ltd.) , 3761/2014 (M/s. Aesthetica Enterprises Pvt Ltd.

These assessee claims that clause (vi) of the Explanation is attracted in their case. So, they are related parties and entitled to file application for settlement u/s 245C.

WP(C) 3558 of 2014 (M/s Mona Infotech Pvt. Ltd.), 3757 of 2014 (M/s. Umesh Pharmaceuticals Pvt. Ltd.) and 3762 of 2014 (M/s. Aditya Medicos Pvt Ltd.)

These assessee claims that clause (vi) of the Explanation is attracted in their case. So, they are related parties and entitled to file application for settlement u/s 245C.

Held by Settlement Commission

WP(C) 3557of 2014 (M/s Rockland Hotels Ltd.)

The settlement commission held that for purposes of explanation (a) (v), it is necessary that any Director of the applicant company should have substantial interest in the business of specified person. Holding of shares by the relatives of such Director either singly or jointly is of no significance. Accordingly, holding of more than 20% shares of M/s. Somya Constructions Pvt. Ltd. by Smt. Mata Srivastava and Smt. Sushmita Srivastava is of no significance. As no Director of the applicant, company holds any substantial interest in the business of M/s. Somya Constructions Pvt. Ltd., it cannot be said that the conditions of explanation (a) (v) are satisfied. We are of the opinion that M/s. Rockland Hotels Ltd. is not related to M/s. Somya Constructions Pvt. Ltd. Also As no Director of the applicant company holds substantial interest in the business of M/s. Rockland Hospitals Ltd. applicant is also not related to M/s. Rockland Hospitals Ltd.

WP(C) 3559/2014 (M/s. Avee Medi Surgical Pvt. Ltd.), 3752/2014 (M/s. Akhil Meditech Pvt. Ltd.) , 3753/2014 (M/s. Hitesh Construction Pvt. Ltd.) , 3754/2014 (M/s. Radhika Surgical Pvt. Ltd.), 3755/2014 (M/s. Kunal Medicare Pvt Ltd.), 3756/2014 (M/s. Glory Lifescience Pvt. Ltd.) , 3758/2014 (M/s. Lipi Finstock Ltd.) , 3759/2014 (M/s. Himanshu Medicare Pvt. Ltd.) , 3761/2014 (M/s. Aesthetica Enterprises Pvt Ltd.

Examination of the application of M/s. Avee Medi Surgical Pvt. Ltd. reveals that its total shareholding is of 4,63,922 shares, with M/s. Rockland Pvt. Ltd. holding 4,41,422 shares which comes to 95% of shares. Thus, M/s. Rockland Pvt Ltd. is the only shareholder having substantial interest in M/s. Avee Medi Surgical Pvt. Ltd. Neither M/s. Rockland Hospitals Ltd. nor any of its Directors or their relative hold any substantial interest in the applicant company.

Examination of the application of M/s. Radhika Surgical Pvt. Ltd. reveals that its total shareholding is of 18,72,500 shares, with M/s. Rockland Pvt. Ltd. holding 18,62,500 shares which comes to 99% of shares. Thus, M/s. Rockland Pvt. Ltd. is the only shareholder having substantial interest in this company. Neither M/s. Rockland Hospitals Ltd. nor any of its directors or their relative hold any substantial interest in the applicant company.

Examination of the application of M/s. Akhil Meditech Pvt. Ltd. reveals that its total shareholding is of 17,73,750 shares, with M/s. Rockland Pvt. Ltd. holding 17,61,250 shares which comes to 99% of shares. Thus, M/s. Rockland Pvt. Ltd. is the only shareholder having substantial interest in this company. Neither M/s. Rockland Hospitals Ltd. nor any of its Directors or their relative hold any substantial interest in the applicant company.

Examination of the application of M/s. Hitesh Construction Pvt. Ltd. reveals that its total shareholding is of 4,44.847 shares, with M/s. Rockland Pvt. Ltd. holding 4,34,847 shares which comes to 97% of shares. Thus, M/s. Rockland Pvt. Ltd. is the only shareholder having substantial interest in this company. Neither M/s. Rockland Hospitals Ltd. nor any of its Directors or their relative hold any substantial interest in the applicant company.

Examination of the application of M/s. Himanshu Medicare Pvt. Ltd. reveals that its total shareholding is of 18,72,500 shares, with M/s. Rockland Pvt. Ltd. holding 18,62,500 shares which comes to 99% of shares. Thus, M/s. Rockland Pvt. Ltd. is the only shareholder having substantial interest in this company. Neither M/s. Rockland Hospitals Ltd. nor any of its Directors or their relative hold any substantial interest in the applicant company.

Examination of the application of M/s. Aesthetica Enterprises Pvt. Ltd. reveals that its total shareholding is of 15,57,500 shares, with M/s. Rockland Pvt. Ltd. holding 15,47.500 shares which comes to 99% of shares. Thus. M/s. Rockland Pvt. Ltd. is the only shareholder having substantial interest in this company. Neither M/s. Rockland Hospitals Ltd. nor any of its Directors or their relative hold any substantial interest in the applicant company.

Examination of the application of M/s. Kunal Medicare Pvt. Ltd. reveals that its total shareholding is of 20,04,250 shares, with M/s. Rockland Pvt. Ltd. holding 19,94,250 shares which comes to 99%,of shores. Thus, M/s. Rockland Pvt. Ltd. is the only shareholder having substantial interest in this company. Neither M/s. Rockland Hospitals Ltd. nor any of its Directors or their relative hold any substantial interest in the applicant company.

Examination of the application of M/s. Glory Lifescience Pvt. Ltd. reveals that its total shareholding is of 16,74,750 shares, with M/s. Rockland Pvt. Ltd. holding 16,64,750 shares which comes to 99% of shares. .Thus, M/s. Rockland Pvt. Ltd. is the only shareholder having substantial interest in this company. Neither M/s. Rockland Hospitals Ltd. nor any of its directors or their relative hold any substantial interest in the applicant company.

Examination of the application of M/s. Lipi Finstock Pvt. Ltd. reveals that its total shareholding is of 15,58,200 shares, with M/s. Rockland Pvt. Ltd. holding 15,57,400 shares which comes to 99% of shares. Thus, M/s. Rockland Pvt. Ltd. is the only shareholder having substantial interest in this company. Neither M/s. Rockland Hospitals Ltd. nor any of its Directors or their relative hold any substantial interest in the applicant company.

Accordingly, it is clear that in all 9 companies, M/s. Rockland Pvt. Ltd. is the only shareholder-having substantial interest. The examination made above reveals that M/s. Rockland Hospitals Ltd. does not hold any shares in these 9 companies. None of the Directors of M/S. Rockland Hospitals Ltd. hold any substantial interest in these 9 companies. None of the relatives of the directors of Rockland Hospitals Ltd. hold any substantial interest in these 9 companies. M/s. Rockland Pvt. Ltd. is neither a Director in M/s. Rockland Hospitals Ltd. nor a relative of Directors. Thus, conditions mentioned in explanation (a)(vi)(B) are not satisfied.

WP(C) 3558 of 2014 (M/s Mona Infotech Pvt. Ltd.), 3757 of 2014 (M/s. Umesh Pharmaceuticals Pvt. Ltd.) and 3762 of 2014 (M/s. Aditya Medicos Pvt Ltd.)

 Examination of the application of M/s. Mona Infotech Pvt. Ltd. reveals that its total shareholding is of 6,74,875 shares. 20% of holding comes to 1,34,975 shares. The details of shareholding filed with the application reveals that there is no shareholder holding 20% of shares. Thus there is no person having substantial holding in M/s. Mona Infotech Pvt. Ltd.

Examination of application of M/s. Aditya Medicos Pvt. Ltd. reveals that total shareholding of this company is of 7,62,375 shares. 20% of shareholding comes to 1,52,475. Details of shareholding have been filed with the settlement application. Examination of the shareholding details reveals that there is no shareholder having substantial interest in this company.

Examination of the application of M/s. Umesh Pharmaceuticals Pvt. Ltd. reveals that the total shareholding of the company is of 7,40,625 shares 20% of shareholding comes to 1,48,125 shares. Examination of the shareholding details provided in the settlement application reveals that there is no shareholder having substantial shareholding in this company.

Also the argument of AR that cumulative holding of the Directors of M/s. Rockland Hospitals in the above companies exceeds 20% and therefore they have substantial interest, cannot be accepted. The provisions of Explanation (a) very clearly define the relationship based on any Director or his relative having substantial interest. The provisions of the Explanation do not provide that cumulative holding of 2 or more Directors can be taken into account for purpose of establishing the substantial interest.

 Held by High Court

 From a reading of clause (a) (v) of the Explanation to sub-section (1) to section 245C , it is clear that only if a director of the applicant company has a substantial interest in the specified person (company), then, the applicant company, its directors and relatives of its directors qualify as related parties. A company would not qualify as a related party merely because any relative of one of its directors has a substantial interest in the specified person. However, under clause (a)(vi), the applicant would qualify as a related party, if a specified person (company) or any of its directors or any relative of any of its directors have a substantial interest in the applicant. Also it is important to note that the use of only the word “means” without the word “includes” is clearly indicative of the legislative intent that it is a hard and fast definition and no meaning other than which is put in the definition can be assigned to the same.

Further from a reading of clause (b) of the Explanation to sub-section (1) to section 245C it emerges that a person shall be deemed to have a substantial interest in a business or profession, where if, the business or profession is carried on by a company, then on the date of search, such person is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend, whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting power and in any other case, such person is, on the date of search, beneficially entitled to not less than twenty per cent of the profits of such business or profession.

WP(C) 3557of 2014 (M/s Rockland Hotels Ltd.)

Holding a substantial interest in the specified person, by a director of the applicant, is a necessary qualifying condition. If the legislature had intended to enlarge the ambit of the qualifying condition by including a relative of the director it would have specifically provided so. Wherever the relative of a director is intended to be included, the legislature has specifically provided so. As held in Bharat Coop. Bank Ltd. (2007) 4 SCC 685, use of word ‘means’ implies that it is a ‘hard and fast’ definition. The court cannot enlarge the ambit of the qualifying condition and read into it what is not so specifically provided by the legislature.

For M/s Rockland Hotels Ltd. to qualify as a related party, one of its directors must hold a substantial interest in the specified person M/s Somya Constructions Pvt. Ltd. Admittedly that is not the case and the said condition is not satisfied. None of the directors of M/s Rockland Hotels Ltd. hold substantial interest in M/s Somya Constructions Pvt. Ltd. Merely because a relative of one of the directors of the applicant/petitioner is stated to be holding a substantial interest in the specified person would be of no avail.

WP(C) 3559/2014 (M/s. Avee Medi Surgical Pvt. Ltd.), 3752/2014 (M/s. Akhil Meditech Pvt. Ltd.) , 3753/2014 (M/s. Hitesh Construction Pvt. Ltd.) , 3754/2014 (M/s. Radhika Surgical Pvt. Ltd.), 3755/2014 (M/s. Kunal Medicare Pvt Ltd.), 3756/2014 (M/s. Glory Lifescience Pvt. Ltd.) , 3758/2014 (M/s. Lipi Finstock Ltd.) , 3759/2014 (M/s. Himanshu Medicare Pvt. Ltd.) , 3761/2014 (M/s. Aesthetica Enterprises Pvt Ltd.

Applying the parameters of clauses (a)(v) and (a)(vi), only if a director of the petitioner companies has a substantial interest in the specified person (company), then, the petitioner companies, their directors and relatives of their directors qualify as related parties. The Petitioner companies would not qualify as a related party merely because any relative of one of its directors has a substantial interest in the specified person. Further, the petitioner companies would qualify as a related party, if a specified person (company) or any of its directors or any relative of any of its directors have a substantial interest in the petitioner companies.

In the case of the abovementioned 9 petitioners clause (a)(vi) is stated to be applicable and they are stated to be related parties to M/s Rockland Hospitals Ltd. Therefore the specified person (i.e. M/s Rockland Hospitals Ltd.) or any of its directors or any relative of any of its directors should have a substantial interest in the petitioner companies. Admittedly, neither M/s. Rockland Hospitals Ltd. nor any of its directors or their relatives hold any substantial interest in the applicant companies. In all the 9 petitioners, M/s. Rockland Pvt. Ltd and not the specified person (M/s Rockland Hospitals Ltd.) is the only shareholder having substantial interest. Though, 3 directors of the specified person (M/s Rockland Hospitals Ltd.) claim to have substantial interest in Rockland Pvt. Ltd. Individually, however, these 3 Directors either do not have shareholdings in the 9 petitioners or their shareholding is less than 9%. Consequently, these Directors do not have a substantial interest in either of the 9 petitioners. The plea that the directors of the specified person (M/s Rockland Hospitals Ltd.) hold an indirect share in the Petitioner company, i.e. through M/s Rockland Pvt. Ltd. and is thus qualified, in our view, is not sustainable in as much as we have held that the use of the word “means” signifies the intention of the legislature to make the definition “hard and fast”. If the intention of the legislature had been to permit scope of the same to be enlarged to include having substantial interest indirectly through another entity, the legislature would have specified so as has been done in the case of Explanation (b)(A).

Beneficial owner of the share as referred to in Explanation (b)(A) refers to shares held in a company by a person either in his own name or in the name of other, persons. A corporate entity is a separate legal entity. Merely because a director of the specified person holds shares in a company which in turn holds shares in the Petitioner would not make the director the beneficial holder of the shares of the Petitioner and thus qualify the petitioner as a related party. We do not find any infirmity with the reasoning of the Settlement Commission. Since the conditions of Explanation (a)(vi)(B) are not satisfied, these writ petitions are thus liable to be dismissed.

WP(C) 3558 of 2014 (M/s Mona Infotech Pvt. Ltd.), 3757 of 2014 (M/s. Umesh Pharmaceuticals Pvt. Ltd.) and 3762 of 2014 (M/s. Aditya Medicos Pvt Ltd.)

In the case of the abovementioned 3 petitioners also clause (a)(vi) is stated to be applicable and they are stated to be related parties to M/s Rockland Hospitals Ltd. Therefore the specified person (i.e. M/s Rockland Hospitals Ltd.) or any of its directors or any relative of any of its directors should have a substantial interest in the petitioner companies. Admittedly, neither M/s. Rockland Hospitals Ltd. nor any of its directors individually or their relatives individually hold any substantial interest in the applicant companies.

The finding of the Settlement Commission is that there is no shareholder having substantial interest in this company i.e. there is no shareholder having more than 20% shares in the Petitioner companies. As there is no person holding substantial interest in these 3 companies, conditions mentioned in Explanation (a)(vi)(B) are not satisfied. The words used are “any director of such company” and “any relative of such director”. If the intention of the legislature of had been to cumulatively consider the shareholding of more than one directors or more than one relative of such directors to constitute substantial interest, then it would have specified so. Since the legislature has not provided for clubbing of the shareholding of different persons to determine substantial interest, the same cannot be considered. The fact that the legislature has catered for a situation of beneficial ownership of shares shows that the omission of clubbing of shareholding is not unintentional.

The alleged fact that four directors of the specified person (M/s Rockland Hospitals Ltd.) hold 50% shares of the petitioner companies does not satisfy the condition. The requirement is that an individual director must hold more than 20% shares, which apparently is not the case. The further plea that the family members of Srivastava family and the Bhandari Family hold more than 20% of the shares of the specified person (M/s Rockland Hospitals Ltd.) and the petitioner companies and further that the petitioner companies have invested 100% share capital in the specified person (M/s Rockland Hospitals Ltd.)is of no avail. As elucidated hereinabove, under clause (a)(v), only if a director of the Petitioner companies had a substantial interest in the specified person (M/s Rockland Hospitals Ltd.), then, the petitioner companies, their directors and relatives of their directors qualify as related parties. Under clause (a)(vi), the petitioner companies would qualify as related parties, if the specified person (M/s Rockland Hospitals Ltd.) or any of its directors or any relative of any of its directors had a substantial interest in the petitioner companies. This is clearly not the case. Thus, we do not find any infirmity with the reasoning of the Settlement Commission. These writ petitions are also liable to be dismissed.

Accordingly, all appeal of the all assessee dismissed.

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