* IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA No. 562 of 2008 Reserved on: 24th May,2012 % Date of Decision: 1st June, 2012 Commissioner of Income Tax ....Petitioner Through Mr. <NAME>, Sr. Standing Counsel with Mr. <NAME>, Advocate. Versus <ORG> ....Respondent Through Dr. <NAME> with Ms. <NAME>, Advs. <NAME>: HON'BLEMR. JUSTICE <NAME> HON'BLE MR. JUSTICE R.V. EASWAR <NAME>, J.

Revenue in this appeal under Section 260A of the Income Tax Act, 1961 (Act, for short) impugns order dated 26th October, 2007, passed by <ORG> (tribunal, for short) in the case of <ORG>, the respondent assessee. The appeal arises from the block assessment order for the period 1st April, 1990 to 21st November, 2000, as the respondent assessee was subject to search and seizure operation on 21st November, 2000.

2. We are required to decide the following substantial questions of law, which were framed vide order dated 11th November, 2011:-

"(i) Whether <ORG> was right in deleting the addition of Rs.21 crores made by the Assessing Officer under Section 45 read with Section 47(v) of the Income Tax Act, 1961?

(ii) Whether the impugned order passed by <ORG> is perverse?"

3. <ORG> was granted the rights to develop a hotel at Bangla Sahib Road by <ORG> (<ORG>) in 1970. However, due to some differences that developed between the two, the development rights were cancelled. <ORG> incorporated another group company, the respondent assessee herein, and vide letter dated 16th September 1993, wrote to the <ORG> to substitute its name with that of the respondent assessee. During the pendency of this request, in the year 1993- 94, <ORG> transferred its development rights to the respondent assessee for <ORG> consideration. However, the <ORG> refused to transfer the licensee rights in the name of the respondent assessee. During the year 1994- 95, the respondent assessee transferred the hotel development rights back to <ORG> for a consideration of 21 crores.

4. The respondent assessee in the return filed for the assessment year 1995-96, had shown capital gain of Rs.21 crores on transfer of hotel development rights to <ORG>, but the same was claimed to be exempt from capital gains tax under Section 47(v) of the Act.

4A. Section 47(v) of the Act reads as under:-

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"47. Transactions not regarded as transfer.--Nothing contained in Section 45 shall apply to the following transfers:--

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(v) any transfer of a capital asset by a subsidiary company to the holding company, if--

(a) the whole of the share capital of the subsidiary company is held by the holding company, and

(b) the holding company is an Indian company:

Provided that nothing contained in clause (iv) or clause (v) shall apply to the transfer of a capital asset made after the 29th day of February, 1988, as stock-in- trade;"

5. A reading of the said provision shows that it applies when a wholly owned subsidiary transfers its capital assets for consideration to the holding company. Consideration received by the wholly owned subsidiary company in such cases is not liable to capital gains tax. A subsidiary company has been defined in Section 4 of the Companies Act, 1956 (Companies Act , for short) as:-

"4. Meaning of "holding company" and "subsidiary".--

(1) For the purposes of this Act, a company shall" subject to the provisions of sub-section (3), be deemed to be a subsidiary of another if, but only if,--

(a) that other controls the composition of its Board of directors; or

(b) that other--

(i) where the first-mentioned company is an existing company in respect of which the holders of preference shares issued before the commencement of this Act have the same voting rights in all respects as the holders of equity shares, exercises or controls more than half of the total voting power of such company;

(ii) where the first-mentioned company, is any other company, holds more than half in nominal value of its equity share capital; or]

(c) the first mentioned company is a subsidiary of any company which is that other's subsidiary.

Illustration Company B is a subsidiary of Company A, and <ORG> is a subsidiary of Company B. <ORG> is a subsidiary of Company A, by virtue of clause (c) above. If <ORG> is a subsidiary of <ORG>, <ORG> will be a subsidiary of Company B and consequently also of Company A, by virtue of clause

(c) above; and so on.

(2) For the purposes of sub-section (1), the composition of a company's Board of directors shall be deemed to be controlled by another company if, but only if, that other company by the exercise of some power exercisable by it at its discretion without the consent or concurrence of any other person, can appoint or remove the holders of all or a majority of the directorships; but for the purposes of this provision that other company shall be deemed to have power to appoint to a directorship with respect to which any of the following conditions is satisfied, that is to say--

(a) that a person cannot be appointed thereto without the exercise in his favour by that other company of such a power as aforesaid;

(b) that a person's appointment thereto follows necessarily from his appointment as director2 [* * *] or manager of, or to any other office or employment in, that other company; or

(c) that the directorship is held by an individual nominated by that other company or a subsidiary thereof.

(3) In determining whether one company, is a subsidiary of another--

(a) any shares held or power exercisable by that other company in a fiduciary capacity shall be treated as not held or exercisable by it;

(b) subject to the provisions of clauses (c) and (d), any shares held or power exercisable--

(i) by any person as a nominee for that other company (except where that other is concerned only in a fiduciary capacity); or

(ii) by, or by a nominee for, a subsidiary of that other company, not being a subsidiary which is concerned only in a fiduciary capacity;

shall be treated as held or exercisable by that other company;

(c) any shares held or power exercisable by any person by virtue of the provisions of any debentures of the first-mentioned company or of a trust deed for securing any issue of such debentures shall be disregarded;

(d) any shares held or power exercisable by, or by a nominee for, that other or its subsidiary [not being held or exercisable as mentioned in clause (c)] shall be treated as not held or exercisable by that other, if the ordinary business of that other or its subsidiary, as the case may be, includes the lending of money and the shares are held or the power is exercisable as aforesaid by way of security only for the purposes of a transaction entered into in the ordinary course of that business.

(4) For the purposes of this Act, a company shall be deemed to be the holding company of another if, but only if, that other is its subsidiary.

(5) In this section, the expression "company" includes any body-corporate, and the expression "equity share capital" has the same meaning as in sub-section (2) of Section 85 .

(6) In the case of a body corporate which is incorporated in a country outside India, a subsidiary or holding company of the body corporate under the law of such country shall be deemed to be a subsidiary or holding company of the body corporate within the meaning and for the purposes of this Act also, whether the requirements of this section are fulfilled or not. (7) A private company, being a subsidiary of a body corporate incorporated outside India, which, if incorporated in India, would be a public company within the meaning of this Act, shall be deemed for the purposes of this Act to be a subsidiary of a public company if the entire share capital in that private company is not held by that body corporate whether alone or together with one or more other bodies corporate incorporated outside India."

6. The Assessing Officer in the block assessment order dated 29 th November, 2002, held that the assessee was not a wholly owned subsidiary of <ORG> He observed that during the course of search operations, material/documents seized contradicted the claim of the respondent assessee, that it was a wholly owned subsidiary of <ORG> It was in fact a wrong claim. The respondent assessee had seven registered individuals as shareholders and <ORG> was not a holder of even a single share.

7. During the course of block assessment proceedings, the respondent assessee claimed that it was wholly owned subsidiary of <ORG> and that the seven shareholders were nominees of <ORG> and not shareholders in their individual right. The entire expenditure for incorporation of the company, as well as investment in the subscribed share capital of Rs.7,000/-, was made by the holding company in the names of the seven shareholders. The Assessing Officer rejected the said contention observing that material unearthed during the search operation under Section 132 of the Act, and during the post search investigation, elucidated that the respondent asssessee was not a wholly owned subsidiary of <ORG> as claimed. He specifically examined and rejected the two contentions of the respondent being (i) that the shareholders were nominees of <ORG> and were not shareholders in their individual capacity and (ii) that the entire investment in the share capital of Rs. 7,000/- was made by <ORG>, i.e. the holding company, recording the following reasons:-

(i) Share Certificate of 100 shares of Rs.10/- each, allotted on 23rd October, 1993, were in the names of the individual shareholders. The share certificates do not show that the shareholders were nominees of <ORG>.

(ii) The Memorandum and Articles of Association submitted by the respondent assessee, along with the reply dated 29th August, 2002 did not state that the respondent assessee was a wholly owned subsidiary of <ORG> and that the shares were subscribed by <ORG>.

(iii) No declaration was made under Section 187C of the Companies Act, that the seven shareholders were nominees of <ORG>. It is obligatory to file a declaration in the prescribed form under Section 187C of the Companies Act.

(iv) Prescribed forms under Section 187C of the Companies Act were filed with the Registrar of Companies in January 2000 i.e. six and half years after incorporation of the respondent assessee. These forms purportedly signed and dated on 25th October, 1993, were forged and fabricated as per the Assessing Officer. The said forms were purchased from <ORG>), Connaught Place, New Delhi and as per the statement of <NAME> and <NAME> of <ORG>, dated 28th February, 2001 these forms were printed and sold after May-June, 1998. The statement made by <NAME> and <NAME> have been quoted in the assessment order.

(v) Two shareholders, i.e <NAME> and <NAME>, in their statements had clearly stated that they had not signed the forms under Section 187C of the Companies Act. The statements of <NAME> and <NAME> have been quoted in the assessment order.

(vi) The Government Examiner of Questioned Documents had affirmed that the forms submitted under Section 187C were not signed by <NAME> and <NAME>.

(vii) <NAME> had denied that he was a nominee of <ORG> and stated that he was a shareholder in his individual capacity.

(viii) <NAME> in his statement stated that he had worked with <NAME>, Chartered Accountant and had signed the Memorandum and Articles of Association but had no association with <ORG>. He had ascribed his signature on the Memorandum etc. on the asking of <NAME>.

(ix) The inspection report of Mr. <NAME>, Deputy Director (Inspection) dated 22nd November, 2000 under Section 209A of the Companies Act states that there were several irregularities/violations with regard to the issue of shares etc.

(x) The minutes of <ORG> of the respondent assessee seized at the time of search show extensive use of fluid to change the dates of the meetings. <NAME> had categorically denied his attending the Board meeting on 23rd October, 1993 in which it was recorded that the individual shareholders were nominees of <ORG>. Minutes of the meeting of <ORG>, seized as Annexure A-31 show that they have been written on the same date using the same pen and in the same writing. Annexure 31 was a false and forged document created by the respondent assessee to support the claim that it was a wholly owned subsidiary of <ORG>.

(xi) <ORG> had made a request to <ORG> on 16th September, 1993 to substitute and transfer the license to the respondent assessee but the respondent assessee was incorporated subsequently on 22nd October, 1993.

(xii) Incurring of expenditure at the time of incorporation does not make the company, which incurs the expenditure, the holding company and the company incorporated a subsidiary. It certainly does not make the incorporated company, a wholly owned subsidiary.

8. Accordingly, it was held by the Assessing Officer that the respondent assessee was not a wholly owned subsidiary of <ORG>. Consequently, the entire amount of Rs.21 crores received by the respondent assessee was taxable and the benefit under Section 47(v) was not available.

9. The aforesaid findings made by the Assessing Officer and the denial of benefit under Section 47(v) of the Act was reversed by the first appellate authority. The Commissioner of Income Tax (Appeals) held that the statement of <NAME> was not reliable. Statement of <NAME> was to the effect that he was acting as a dummy Director and was not a de facto Director. This was not sufficient and the Assessing Officer should have had made further enquiries. In these circumstances, it was necessary to find out and ascertain who had actually made investment in the share capital of the respondent assessee. This would determine the real ownership of the respondent assessee. The payment of share capital was made by cheque and the copy of the receipt issued by the Registrar of Companies had been filed. This aspect was not controverted and denied by the Assessing Officer, while denying benefit under Section 47(v) of the Act. Section 187C of the Companies Act is a procedural provision and the requirement of the Companies Act cannot be imported and considered for examining whether conditions under Section 47(v) of the Act were fulfilled or not. As far as forgery of signatures and discrepancy in the minutes books was concerned, it was for the authorities under the Companies Act to take notice and action. However, having regard to the provisions of Section 47(v) , this aspect was immaterial. Investment in the shares was made by the holding company, <ORG>, and this position was reflected in the books of both the respondent assessee and <ORG>. <NAME> had not stated that he had made payment for 100 shares out of his own funds and had not shown or claimed ownership of shares in his balance-sheet. Addition of Rs.21 crores was treated as unwarranted and the same was deleted.

10. Appeal filed by the <ORG>, has been dismissed by the impugned order dated 26th October, 2007. We deem it appropriate to reproduce the entire reasoning given by the tribunal, as a question of perversity has been raised. Paragraphs 8 to 14 of the order passed by the tribunal read as under:-

"8. We have considered the rival submissions of both the parties, perused the record and carefully gone through the impugned order of the tax authorities below.

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9. In the instant case the ld. DR for the <ORG> except placing reliance on the reasoning given in the order of AO was not able to controvert the factual observations made in the order of CIT(A) and the findings recorded on the basis of the conclusions drawn on the factual observations made by the CIT(A).

10. On the other hand the ld. AR for the assessee first reiterated submissions made before the CIT(A) and thereafter relying on the reasoning given in the order of CIT(A) submitted that the CIT(A) rightly deleted the impugned addition of Rs.21 crores made by the AO.

ITA 562/2008 Page 12 of 38

12. The undisputed facts in this case are that the assessee company <ORG> was incorporated on 22-10-93 with 7 subscribers to its share capital. During the year 1994-95 <ORG> transferred the hotel development rights back to <ORG> for a consideration of Rs.21 crores. This amount was declared to be the profits in the annual financial statement of <ORG> for the year ending 31.3.95. However, this amount was claimed to be exempt from Capital Gains Tax u/s 47(v) of the I.T. Act in the return of its income filed for A.Y. 1995-

96. Whereas, under the section any capital gains arising out of transfer of capital assets from a wholly subsidiary company to its holding company is not liable to gain tax. As discussed hereinabove, the assessee from the above mentioned evidence was able to show that the holding company was holding the whole of the share capital of the subsidiary company and the payments towards the share capital of the assessee too was made by M/s Sunair Hotels Ltd. The AO without examining other six subscribers to the share capital, simply on the basis of the statement of <NAME> has tried to establish that the shars of the company were held in the name of the 7 subscribers and not as nominee. On analyzing the statement of <NAME> we find firstly that <NAME> states that the signatures appearing on form no. 1 prescribed under Rule3(1) of sec. 187C were not his. It is however to be noticed that in his statement <NAME> has further stated that he was unable to recall the mode of payment of the share capital. Further, that the day to day affairs of the company were being looked by <NAME>, an another subscriber. We have already mentioned hereinabove that the AO has not made any enquiries from the other remaining sharesholders of the assessee company, so, in these facts the only satisfactory basis for arriving at a decision regarding capital gain u/s 47(v) could not be the examination of the other subscribers who could actually disclose as to whether they had made the investment in the share capital of the assessee company. Only on this basis the real ownership of the shares in question could have been ascertained by the AO, but, in the instant case the AO has failed to do so by bringing on record any cogent evidence.

13. Now coming to the other point whether the assessee company has fulfilled the condition laid down in sec. 187C of the Companies Act and the effect thereof. In this regard we find that Income Tax Act , 1961 does not contain any reference to sec. 187C of the purpose of considering the taxability of capital gains u/s 74(v) (sic.) of the Act otherwise too it is simply a procedural section for the purpose of disclosure of benami holding of shares. So far as the alleged violation of Companies Act in terms of late submission of declaration u/s 187, forgery or mismatch or signatures and discrepancies in recording in minute books are concerned, it is for the concerned authorities under the relevant enactments to take note of and to take such punitive action as may be deemed fit. However, as regards the provisions of sec. 47(v) of I.T. Act it is clear from the facts of the instant case that investment in the shars of the assessee company has been made by <ORG> <ORG> which is reflected in the balance sheets of both the companies. Regarding the statement of <NAME> we have already analyzed hereinabove that his statement is not worth placing any reliance as he failed to establish from cogent evidence that in the fact he made the payment of 100 shares out of his own funds because he neither furnished any detailed of such payment nor the same was shown by him in his balance sheet indicating the ownership of the same.

14. For the reasons stated above we are of the opinion that in the existing facts and circumstances, the assessee has been able to establish that the capital gains of Rs.21 croresarising out of transfer of the capital assets from a wholly-owned subsidiary company to its holding company was not liable to capital gains tax as per the provisions of sec. 47(v) of Income Tax Act , 1961. Accordingly, the order of CIT(A) in this regard is upheld and grounds of appeals taken by the <ORG> are rejected."

11. Before us, the <ORG> has filed three paper books, Paper Book - I, Paper Book - II and Paper Book - III. The respondent assessee has also filed a paper book. We are only entitled to refer and have examined the documents filed and available to the tribunal, when we examine the question of perversity. Of course, the orders passed by the Assessing Officer and the CIT(A) can be referred to.

12. In order to decide the issue in question, we would like to point out the contentions raised on behalf of the <ORG>, which are as under:-

(i) <ORG> was not a shareholder of the respondent assessee. It does not hold even a single share. The seven shareholders were individuals.

(ii) As per Section 49 of the Companies Act, all investments made by a company should be held in its own name. Sub-section (3) stipulates that a company may hold shares in the subsidiary company in its own name or in the name of its nominee, in so far as it is necessary to do so to ensure that the number of members of the subsidiary is not reduced to less than 7 (seven), in the case of public limited company, and in the case of private company the number should not fall below 2 (two).

(iii) There is a difference between a subsidiary company and a wholly owned subsidiary company. In the case of wholly owned subsidiary company, the entire shareholding must be held by the holding company or its nominees. This is not necessary in the case of a subsidiary company. (See Sections 4 and 49 of the Companies Act)

(iv) Respondent assessee was not set up or incorporated as a wholly owned subsidiary company of <ORG>. In the Memorandum of Understanding dated 17th June, 1993 or in subsequent correspondence with <ORG>, it was not alleged or stated that the respondent assessee was a wholly owned subsidiary company. The letter indicated that the formation of separate company was for the purpose of a joint venture or as a subsidiary but it cannot be said that the respondent assessee was incorporated as a wholly owned subsidiary.

(v) The letter/correspondence exchange with <ORG>, <ORG> dated 30.9.1994 were self-serving documents and do not establish the claim and do not constitute an admission or a proof that the respondent assessee was a wholly owned subsidiary.

(vi) There is no contemporaneous record to show that the seven shareholders were nominees of <ORG> or that the investment towards share capital was made exclusively or only by <ORG>.

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(vii) Members and Directors of the respondent assessee and <ORG> were not the same.

(viii) Share certificates were issued in the various individuals' names and do not mention that the shareholders/ members were nominees of <ORG>

(ix) Statements of <NAME>, <NAME> and the Director and Manager of <ORG> and the forgery and the report of the Government Examiner of Questioned Documents, have been ignored and not given due credence.

(x) The declaration under Section 187C was not filed in time, and in at least two cases, signatures were forged on the form filed with the Registrar of Companies.

The reports and findings made by <ORG> have been ignored.

(xi) On the date when the shares were issued, the respondent assessee did not have a bank account and the payments were made in cash. There is nothing to show that the payments towards share application money were made by <ORG>. The ledger account of the respondent assessee in the books of <ORG>, relied upon, does not support the contention that <ORG> had made payment for the shares.

13. Learned counsel for the respondent assessee has submitted and raised the following contentions:-

(i) Appeal under Section 260A is maintainable only on substantial questions of law. Findings of facts cannot be re-appreciated. In the present case, there are concurrent findings of both, CIT(Appeal) and the tribunal in favour of the assessee. Reliance is placed on <CITATION> , (2005) 273 ITR 50 ( <CITATION> , (2007) 291 ITR 278 (SC) and other decisions on similar lines of <ORG>.

(ii) No evidence relating to undisclosed income was found during search and, therefore, block assessment proceedings are void. Block assessment proceedings are not a substitute for regular assessment proceedings. [ <CITATION> , (2001) 250 ITR 141 (Del); <CITATION> , (2008) 296 ITR 750 ( <CITATION> , (2010) 320 ITR 408 (Del); <CITATION> , (2008) 304 ITR 393 (Delhi); <ORG> vs. <ORG>, (1998) 234 ITR 733 (Guj.); <ORG> vs. <ORG> (2000) 243 ITR 643 (<ORG>.); <CITATION> (2009) 316 ITR 317 (<ORG>).]

(iii) In the regular assessment order under Section 143(3) in the case of assessee relating to the assessment year 1995-96, the Assessing Officer had held that factually no transaction had taken place between <ORG> to transfer the hotel development rights in favour of the respondent assessee and then by the respondent assessee in favour of <ORG>. He had held that these transactions were infructuous and had to be ignored. He had accordingly recast the balance-sheet. The said assessment order has become final and binding and, therefore, there is no question of capital gain on transfer of the hotel development rights by the respondent assessee in favour of <ORG>. Applicability of Section 47(v) is of academic interest and inconsequential.

(iv) The findings recorded by the Assessing Officer in the assessment order under Section 143(3) for the assessment year 1995-96 dated 9th February, 1998, could not have been examined in the block assessment proceedings. This aspect was specifically raised by the respondent assessee in the appeal before the CIT (Appeals) and accepted by the Assessing Officer in the remand report.

(v) The respondent assessee is entitled to raise this issue and question before <ORG> as one of the facets of the issue or a part of the subject matter of the appeal. ( <CITATION> . (1970) 78 ITR 474 ( <CITATION> (1967) 66 ITR 604 ( <CITATION> (1968) 68 ITR 209 (SC).

(vi) Correspondence of <ORG> with <ORG> in the letters dated 12th August, 1993 and 16th September, 1993, shows that <ORG> wanted to incorporate its subsidiary. The agreement dated 17th June, 1993, between <ORG> and <ORG> also discloses the intention to create a subsidiary. Letters dated 2nd May, 1995 and 31st May, 1995 written by <ORG> and the assessee to <ORG> affirms and admits that the respondent assessee was a wholly owned subsidiary of <ORG>

(vii) <ORG>'s letter dated 27th June, 1995, acknowledges that <ORG> was the holding company of the respondent assessee. This was also acknowledged in the <ORG>'s letter dated 24th May, 1995. Internal note of <ORG> also records that the respondent assessee was to be established as a subsidiary of <ORG>

(viii) The entire fund for establishment and incorporation of the respondent assessee was provided/incurred by <ORG> Share application money of Rs.7,000/- was also recorded and shown in the balance sheet and books of accounts of <ORG>

(ix) In the balance sheet of <ORG> as on 31st March, 1995 and 31st March, 1994, the assessee was shown as a wholly owned subsidiary. These balance-sheets were filed with the Registrar of Companies in 1995.

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(x) The register of members records that the seven shareholders were nominees of the holding company i.e. <ORG>

(xi) The respondent assessee and the holding company were operating from the same premises. The transaction of Rs.21 crores was duly disclosed in the balance sheet/ computation of assessable income for the assessment year 1995-96.

(xii) Statement of <NAME> was not credible and an afterthought. There were differences between <NAME> and other shareholders. <NAME> is related to <NAME> and because of differences, their relationship had taken an ugly turn. He had wrongly answered and claimed that he was not a nominee of <ORG> <NAME> had executed a power of attorney in favour of <NAME>. Being a well educated person holding degree in MBA (Finance), he was aware of the papers signed by him. <NAME> had not disclosed and declared the shares, held by him in the respondent assessee, in the balance-sheet and documents filed with his income tax returns. He was not the de facto shareholder and <ORG> was the beneficial and the de facto shareholder.

(xiii) Even otherwise, there were gaps between statements of <NAME> on different aspects and his claims/assertions are not substantiated by facts.

(xiv) <NAME> did not recall and explain the source of payment of Rs.1000/- for subscribing to the shares of the respondent assessee.

(xv) <ORG> had furnished and given replies to <ORG>, Economic Offences Wing, Crime Cell, Delhi and they were satisfied and no further action has been taken. (xvi) Law does not require that the Articles and Memorandum of Association of the subsidiary or holding company should mention/record beneficial ownership or whether the company in question is a wholly owned subsidiary.

(xvii) Opinion of Government Examiner of Questioned Document, <NAME> is debatable and not a fair and clear opinion. The opinion rendered by them relate to signature of <NAME> and as regards <NAME>, they had asked for more specimen signatures. (xviii) Section 187C of the Companies Act requires filing of forms but this is for the purpose of reporting. This is a formality and does not affect the rights of the beneficial shareholder. (xix) The delay in filing the forms has been condoned. The forms purchased from <ORG> were filled up on the basis of earlier declarations taken on plain paper dated 23rd October, 1993. Thus, the aforesaid date was mentioned on the forms. This aspect, therefore, does not negate the respondent assessee's claim that it was a wholly owned subsidiary.

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(xx) Statement of <NAME> does not support the department's case.

14. At the very outset, we may record that several issues and contentions raised by the appellant/Revenue and the respondent/assessee have not been recorded or dealt with by the CIT(Appeals) or the tribunal. These remain unnoticed and have not been adverted to, considered and evaluated. The tribunal has also not dealt with various legal issues and contentions raised by both sides. A reading of the order passed by the tribunal shows that same is cryptic as also factually wrong and incorrect on factual conclusions/findings recorded.

15. We have quoted Section 47(v) of the Act. To claim benefit under the said Section respondent assessee must be a wholly owned subsidiary of the holding company. Merely because the respondent assessee was a subsidiary of <ORG>, benefit under Section 47(v) cannot be claimed. The requirement is more stringent.

16. In paragraph 11 of the order, it is stated that the Assessing Officer was not justified in concluding that <NAME> was holding shares in his own name and not as a nominee because of the bald oral statement, as there was no other material/evidence. He has not been able to substantiate the claim that investment in the shares was in his personal capacity. He did not prove and establish the said fact from any document/ evidence, when the case of the respondent assessee was that the source and payment in fact was made by <ORG> For the sake of convenience, we are reproducing paragraph 11 once again:-

"11. The first point required to be resolved by us is whether on the basis of statement of <NAME> recorded on 8-3-2001 the AO was justified in concluding that <NAME> held the shares in his own name and not as a nominee because except bald oral statement, he has not been able to substantiate the claim of investment in the shares in his personal capacity by providing any document/evidence when the case of the assessee is that the source of the investment in the share capital of <ORG> is from the funds given by <ORG> The payment towards the share capial was made through cheque and copy of the receipts issued by registrar of companies supports the claim of the assessee. The AO has not controverted this aspect of the assessee u/s 47(v) of the Act it is necessary that the holding company should hold the whole of the share capital of the subsidiary company and should also be an India Company. The assessee, in view of the payment towards share capital having been made by <ORG>, has been able to show that these conditions have been met in the case of the assessee and therefore the assessee is entitled to the benefit allowed u/s 47(v) of the Act."

17. We have examined the said reasoning but find that it is substantially, and for a large part, factually incorrect and wrong. The respondent assessee has placed on record a copy of the ledger account of respondent assessee in the books of <ORG>. The same, as per the date mentioned thereon, was printed on 23 rd December, 1994 and the ledger account reads:-

L E D G E R AS ON .......... 23/12/94 TIME 14.54.49 Pg. No. 29 Voucher Date Narration Bill Bill Cheque Cheque No. No. Dt. No. Date Debit Credit Balance 65 15/10/93 DD FVR ROC P&H FOR SUN AERO LTD. 38020.00 38020.00 66 17/10/93 PRDF CGHS TO <ORG>. FR REGIN OF SUNAERO LTD. 19480.00 57500.00 83 30/11/93 CHQ PD FR MOA PTG FR SUN AERO THRU TRANSASTA 832037 30/11/93 17500.00 75000.00 149 31/03/94 RECT FR ALLOT. OF 700 SH @ 10/- SUN AERO LTD. 7000.00 68000.00"

18. The said ledger account would reveal that on 15th & 17th October, 1993, two debit entries of Rs.38,020/- and Rs.19480/- were made as payments forwarded to the Registrar of Company for registration of the respondent assessee. The next entry of Rs.17,500/- is made on 30th November, 1993, as Cheque paid on behalf of the respondent assessee. The aforesaid payments would only show that the respondent assessee was liable to pay Rs. 75,000/- to <ORG> who had made the said payments or had provided funds or was a creditor. The last entry on 31.3.1994 relates to Rs.7,000/- and is on the credit side. As per the said entry, the same was made for allotment of 700 shares @ Rs.10/- each in the respondent assessee to <ORG> The said entry is an adjustment entry and no payment either by cheque or cash has been made. The respondent assessee was admittedly incorporated on 22 nd October, 1993. The Articles and Memorandum of Association record the initial shareholding in the name of 7 persons. These shareholdings were issued on or before the date of incorporation. For issue of shares, payment for the shares has to be made. It is not the case of the respondent assessee that these were partly paid up shares. Sequitor is that the payments for the issue of share capital should have been made on or before the date of incorporation i.e. 22nd October, 1993. Obviously the entry dated 31st March, 1994, that too an adjustment entry made in the books of <ORG> would not show and establish that the payment of the shares was made by <ORG>. It is accepted and admitted that other than this document i.e. the ledger account of <ORG>, no other paper or document was produced or filed before the tribunal and in fact there is no other paper or document produced or filed before us to justify and state that payment for shares in question was made by <ORG> The payment was certainly not by cheque as recorded and held by both <ORG> (Appeals) and the tribunal.

19. It is an accepted position that shares were issued and held in the name of <NAME>. The amount of Rs.1,000/-, is not a big or princely sum. It is not understood and stated what document or evidence was required to be given/ furnished by <NAME>, when the two appellate forums recorded that <NAME> had failed to substantiate the claim of investment in the shares and that the source was his own personal fund. Apparently what had weighed and mattered was the finding that the source of payment for purchase of the shares was the cheque issued by <ORG>. It is apparent from the ledger account that it was never the claim of the respondent assessee that <ORG> had paid for the share capital by cheque.

20. <ORG> has submitted that the respondent assessee has not denied but has accepted that <NAME> was the recorded shareholder. In his returns, <NAME> has not claimed or stated that he was a nominee of <ORG> Failure to mention the shares recorded/ standing in his name was a lapse and an error on the part of <NAME>. The <ORG> submits that at best this is a neutral factor. But from the said factum, no inference or legal conclusion can be drawn that <ORG> was the beneficial shareholder. This was and would be an erroneous conclusion.

21. Normal presumption in law is that the registered shareholder holds the share in his own right and in his individual/ personal capacity. He does not hold shares as a nominee of a third person. It is the contrary which has to be proved by the party who claims or asserts that the recorded shareholder is a nominee. The onus is, therefore, on the party who claims to the contrary. The said party has to lead evidence sufficient in law to enable the authorities/tribunal to come to the conclusion that it/she/he has discharged the onus. The evidence should be such that it can be held that the shares were not held by the shareholder in his individual/ personal capacity but as a nominee of the third person. [See In Re: <NAME>, AIR 1927 Bom 371]

22. It was recorded that the receipts were issued by Registrar of Companies. This is again factually incorrect. It is not case of the respondent assessee that the Registrar of Companies had issued any receipts for issue of share capital in the name of the respondent assessee. The further finding recorded is that the Assessing Officer had not controverted these facts. This is wrong and incorrect as per the findings recorded in the assessment order. The last finding in the said paragraph that the payment towards share capital by <ORG> has been established beyond doubt, is a presumptuous statement without reference to any other material/evidence which forms the basis/foundation.

23. Thereafter, the tribunal has stated that the statement of <NAME>, that he had not signed form I prescribed under Rule 3 relating to declaration under Section 187C , should be ignored for the reason that he was unable to recall the mode of payment of share capital and it was stated that day to day affairs of respondent assessee was looked after by <NAME> - another subscriber. It is not necessary for the shareholder to be involved in day to day working. Neither does the shareholder become a nominee shareholder if he is not involved in day to day working. Further, the shares were issued in the name of <NAME>. The amount involved was only Rs.1,000/- which was not big or substantial amount. We have already referred to the findings recorded by the tribunal that the payment of share capital was made by <ORG> by cheque is factually incorrect.

24. Paragraph 12 of the order of the tribunal, states that the respondent assessee was incorporated on 22nd October, 1993 with seven subscribers to the share capital. Hotel development rights were transferred back to <ORG> for consideration of Rs.21 crores in the year 1994-95. This amount was claimed as exempt from capital gain under Section 47(v) . The respondent assessee in view of the evidence discussed in paragraph 11 above, was able to show that the respondent assessee was wholly owned subsidiary and the payments towards share capital were made by <ORG> The aforesaid findings as recorded by the tribunal are contrary to the contention and plea raised by the respondent assessee before us relying upon the assessment order dated 2nd September, 1998, under Section 143(3) . In view of the said factual finding, the respondent assessee cannot urge and argue that the transaction relating to transfer of hotel development right should be ignored and treated as non-existent/void. The finding of the tribunal is to the contrary. The tribunal has further recorded that the Assessing Officer did not examine the six other subscribers to the share capital. This is factually incorrect. The Assessing Officer had examined and even quoted, the statement made by one more subscriber namely <NAME>. The tribunal has probably not examined and not gone through the statement of <NAME>, which has been quoted in the assessment order itself. For benefit under Section 47(v) , the subsidiary must be wholly owned subsidiary. Being a subsidiary is not sufficient. Thus even if one of the shareholders was not a nominee of the holding company, benefit under Section 47(v) has to be denied.

25. Thereafter, the tribunal has recorded that the question of real ownership of shares should have been ascertained by the Assessing Officer but he has failed to do so. As noticed and held above, there is no presumption that the registered shareholder is a nominee of a third person. In case of a dispute, the person who claims to the contrary has to establish and show that the person mentioned in the register of shareholders was his nominee. The onus is on the person who states and claims that what is apparent is not real. It was not for the Assessing Officer to establish to the contrary but for the assessee to show and establish that it was a wholly owned subsidiary of the holding company and the shareholders were merely the nominees of the holding company. There is no presumption that the shareholders were nominees.

26. In paragraph 13, the tribunal has referred to requirement of Section 187C of the Companies Act and effect thereof. It is stated that the violation of Companies Act , mismatch of signature, discrepancies in recording of the minutes books were aspects which the authorities under the Companies Act could take note of and also take punitive action. As far as provisions of Section 47(v) are concerned, the investment in the shares was made by <ORG> and the same was reflected in balance-sheet of both companies i.e. <ORG> and the respondent assessee.

27. With regard to the aforesaid observations, we may note that Section 187C or Section 49 of the Companies Act and violation thereof and penalty prescribed is one aspect. But, the effect of the said violation has to be examined and considered. It has to be also examined and considered whether violation of the said provisions would prevent and bar the respondent assessee from claiming that it was wholly owned subsidiary and the recorded shareholders were mere nominees. We would have examined the said aspect but refrain from doing so as we are passing an order of remit. Therefore, it may not be appropriate and proper for us to decide the said aspect and it may cause prejudice to the parties. This aspect/question is not examined and elucidated in the impugned order. However, another contention of the <ORG> may be noted that de hors provisions of Section 49 and 187 of the Companies Act, the Benami Prohibition Act , 1988, may have to be also examined. We are not stating anything in this regard as there are exceptions carved out in the Benami Act itself. Examination of exceptions may require factual elucidation and findings. This legal aspect may be raised by the <ORG> on remand.

28. However, we do not agree with the observations of the tribunal that the question whether or not the respondent is a 100% subsidiary of <ORG>, can be examined without reference to the provisions of the Companies Act or other enactments. The Act , i.e. Income Tax Act , 1961, deals with and relates to taxation of income. For the purpose of determining taxable income, provisions and parameters/stipulations have been made/prescribed in the Act. In a given case, however, the authorities under the Act (i.e. Income Tax Act ) may have to examine provisions of other enactments, when required and necessary. The term "subsidiary" or "wholly owned subsidiary" have not been be defined in the Act i.e. the Income Tax Act . Therefore, reference is to be made to the other Acts and in this case, the Companies Act . Effect of the violation of Section 49 and 187C of the Companies Act is one aspect but the other issue, which has to be examined, is the evidentiary value and the effect when no such declaration was initially made and the subsequent filing of the declaration is disputed and contested. It is claimed that the signatures on the forms/declarations made were forged and fabricated. The tribunal is required to examine and consider whether the said conduct, reflects and is of relevance.

29. The last part of paragraph 13 refers to the statement of <NAME> and states that the tribunal had analyzed the statement and it cannot be relied upon as he has failed to establish that he had made payment of Rs.1000/- from his own funds as this amount was not shown in his balance sheet. We have already commented about this aspect above.

30. At this stage, we may notice two contentions of the respondent. The first contention is that block assessment proceeding are bad as no material or evidence was found in the search. This aspect has not been examined and dealt with by the tribunal. A reading of the order passed by the Assessing Officer would show that he has referred to the evidence and material which was found during the search and thereafter, he has referred to the post search investigation and verification. As per the assessment order, the evidence/material found during the search and post search investigation had revealed that the respondent assessee was not 100% subsidiary of <ORG> As we are passing order or remit, this question, if raised, will be examined and considered by the tribunal. The second contention of the respondent relying upon the assessment order dated 9th February, 1998, does not help or assist the respondent for the said order has proceeded on the assumption that the respondent assessee was 100% subsidiary of <ORG> However, as per the case of the appellant, material and evidence found during the search and subsequent enquiries had revealed that the respondent assessee was not a 100% subsidiary of <ORG> It is, therefore, the contention of the appellant that the assessment order dated 9 th February, 1998 does not help or protect the respondent assessee as the said order had proceeded on the basis of premise and assumption that the respondent assessee was not a 100% subsidiary of <ORG> This aspect will be examined by the tribunal. We refrain from deciding this aspect/question. Order of the tribunal we record is silent on this question.

31. In <ORG> versus <ORG>, (1957) 31 ITR 28 (<ORG>), <ORG> had propounded the following principles:

"25. We have discussed the authorities at great length, as some of the observations contained therein appear, at first sight, to render plausible the contention of the appellant, and it seems desirable that the true meaning of those observations should be clarified, lest error and misconception should embarrass and fog the administration of law. The position that emerges on the authorities may thus be summed up:

(1) When the point for determination is a pure question of law such as construction of a statute or document of title, the decision of the <ORG> is open to reference to the court under Section 66(1) .

ITA 562/2008 Page 34 of 38

(2) When the point for determination is a mixed question of law and fact; while the finding of the <ORG> on the facts found is final its decision as to the legal effect of those finding is a question of law which can be reviewed by the court.

(3) A finding on a question of fact is open to attack, under Section 66(1) as erroneous in law when there is no evidence to support it or if it is perverse.

(4) When the finding is one of fact, the fact that it is itself in inference from other basic facts will not alter its character as one of fact."

32. In case of pure question of facts, inference from proved facts is a question of fact. However, as observed in <NAME> versus <NAME>, (1942) 10 ITR [E.C.] 27 there can be cases where inferences drawn from proved or admitted facts, can give rise to question of law when facts proved or admitted, do not provide and do not support, the conclusions of fact. A finding of fact can be challenged on the ground that it is perverse. Way back in 1954, <ORG> in <NAME> versus CIT, (1954) 26 ITR 736 (SC) had observed:

"....if the court of fact, whose decision on a question of fact is final, arrives at this decision by considering material which is irrelevant to the enquiry, or by considering material which is partly relevant and partly irrelevant, or bases its decision partly on conjectures, surmises and suspicions, and partly on evidence, then in such a situation clearly an issue of law arise....

.....It is well established that when a court of fact acts on material, partly relevant and partly irrelevant, it is impossible to say to what extent the mind of the court was affected by the irrelevant material used by it in arriving at its finding. Such a finding is vitiated because of the use of inadmissible material and thereby an issue of law arises."

33. In CIT versus <NAME>, (1973) 87 ITR 349, <ORG> held that onus of proving what was apparent is not real is on the party who claims it to be so. There should be some direct nexus between the conclusions of fact arrived at by the authorities concerned and the primary facts upon which the conclusion is based. Use of extraneous or irrelevant material in arriving at the conclusion would vitiate the conclusion of fact, because it is difficult to predicate to what extent, the extraneous and irrelevant material has influenced the authority in arriving at the conclusion of fact.

34. Therefore, if a decision excludes or ignores admissible or relevant evidence, takes into account inadmissible evidence, irrelevant consideration or extraneous materials, a substantial question of law arises. Similarly, when an authority has proceeded on an assumption, which is erroneous in law, a question of law can arise.

35. A factual decision is perverse if the authority has acted without any evidence or on view of facts, which cannot be reasonably entertained. A perverse finding is one, if it is arrived at without any material or if it is arrived at or inference is made on material, which would not have been accepted or relied upon by a reasonable person conversant with the law. If the finding is based upon surmises, conjectures or suspicion and is not rationally possible. A factual conclusion is regarded as perverse when no person duly instructed or acting judicially could act upon the record before him, have reached the conclusion arrived at by the tribunal/authority [see CIT versus S.P. Jain, (1973) 87 ITR 370 (SC)].

36. We are conscious that it has been observed that the order must be read as a whole to see whether the test of perversity is satisfied but in the present case when we apply the test expounded in <NAME> (supra) and <NAME> (supra) and also read the order as a whole, we reach the affirmative opinion in favour of the appellant- Revenue. It is the aforesaid test, which has been applied by us in our conclusion recorded above.

37. In view of the aforesaid discussion, we answer the second question of law in affirmative, i.e., in favour of the appellant-Revenue and against the respondent-assessee. The first question is answered with the order of remit as it would be better and appropriate if the entire issue is examined threadbare by the tribunal. It would not be proper for us to decide the said question without elucidation and finding of facts being firmly recorded by the tribunal. We refrain from carrying out the said exercise as the tribunal is the final fact finding authority. They should record findings of facts and then apply the law.

38. To cut short the delay, the parties are directed to appear before the Assistant Registrar of <ORG> on 6th July, 2012, when a date of hearing will be fixed.

The appeal is accordingly disposed of. No costs.

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(<NAME>) JUDGE

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(<NAME> ) JUDGE June 1, 2012 Kkb/VKR


PETITIONER: <NAME> & <NAME>. Vs. RESPONDENT: UNION OF INDIA & ORS. DATE OF JUDGMENT: 25/04/2000 BENCH: <NAME>, S.R.Babu, <NAME> JUDGMENT:

<NAME> J. :

Civil Appeal No. 5086 of 1994 This appeal is directed against the order made by <ORG>, <ORG> [hereinafter referred to as `the <ORG>'] on November 5, 1993 in O.A. No. 286/92. Respondents Nos. 3 and 4 filed an application O.A. No. 286/92 before the <ORG>. The pleadings raised in the application, briefly stated, are as under.

The respondents were directly recruited through <ORG> as Assistant Executive Engineers (Electrical) Class I in <ORG>, while respondents Nos. 3 to 5 before the <ORG> were recruited as Assistant Engineers (Electrical) Class II and both the applicants and the other respondents were subsequently promoted on ad hoc basis and thereafter they were regularised as Executive Engineers (Electrical). The two respondents were aggrieved by the letter sent on February 6, 1992 which was accompanied by a seniority list of <ORG> whereby the ad hoc services rendered by respondents 3 to 5 before the <ORG> as Executive Engineers from May 25, 1977, February 21, 1982 and April 16, 1982 respectively being treated as regular services and counted for the purpose of seniority in that grade and proposed to re-fix that position in the final seniority list of Executive Engineers as on April 1, 1985 and thus the applicants before the <ORG> being pushed down in the seniority list.

There are two channels of recruitment under the relevant recruitment rules and promotions to the post of Executive Engineer are to be made from two categories, namely, Assistant Executive Engineer Class I with five years regular service on seniority-cum-fitness basis (non-selection) in the 2/3rd quota and the other being Assistant Engineer Class II with eight years regular service on seniority-cum-merit basis (selection method) in the 1/3rd quota selection being made by <ORG> with a member of the <ORG> as Chairman.

The stand taken by the applicants before the <ORG> is that while regular promotions to the grade of Executive Engineers from the Assistant Executive Engineers cadre was made regularly from 1976. However, the seniority in respect of Assistant Engineers Class II was not finalised till November 1987 in view of certain disputes inter se the promotees in the cadre. The <ORG> thereafter selected from the category of Assistant Engineers Class II in a meeting held only in May 1988 when the <ORG> selected the appellants for the vacancies belonging to their quota for the years 1977 to 1982. The appellants had thus worked for long period varying from 6 to 11 years in the post of Executive Engineer on ad hoc before the <ORG> could meet for finalising regular promotion. The revision of the seniority list which was challenged before the <ORG>, it was submitted, was only a corrective action though belated to render justice to the affected persons and is in compliance of the judgment of the Madras Bench of the <ORG> dated October 12, 1990 in O.A. No. 113/89 directing disposal of the representation regarding the seniority of one of the appellants. It was further made clear in the said direction that it has to be decided after taking into account the decision of the Principal Bench of the <ORG> in <NAME> case in O.A. No. 978/87 and of this <ORG> in <CITATION> ., 1990 (2) SCC 715. After noticing several decisions of this <ORG> and of the <ORG>, it was held that under the statutory recruitment rules promotions to the post of Executive Engineer were to be made from among the Assistant Engineers Class II with eight years regular service on seniority-cum-merit by selection method in the 1/3rd quota and admittedly the appellants were promoted on ad hoc basis as Executive Engineers on different dates mentioned earlier. The relevant appointments were purely temporary and on ad hoc basis and were for a limited duration and it was also made clear that services on ad hoc basis will not confer any claim in the matter of seniority, confirmation, etc. Thus it was noticed that the ad hoc promotions were made in administrative exigencies since seniority lists of Assistant Engineers could not be finalised in view of pending litigation and, therefore, the <ORG> meeting for regular selection could not be arranged. Non- selection for a selection post can hardly be considered to be a minor procedural deficiency and, therefore, the <ORG> concluded that selection was not by a competent <ORG> and the ad hoc promotion was itself for a limited time and, therefore, does not fulfil the conditions mentioned in the decision in <CITATION> .., 1993 (3) SCC 371. The <ORG> is of the view that ad hoc service to count for seniority must be rendered continuously till the date of regularisation for 15 years or more and, therefore, it held that the appellants could not take advantage of the ad hoc promotions made purely as a stop gap arrangement and it is only in special circumstances such ad hoc service could be counted for purpose of seniority as noticed in some of the decisions of this <ORG>. Consequently, the application filed by the contesting respondents was allowed and it was declared that the appellants were not entitled to count their ad hoc service in the post of Executive Engineers (Electrical) for seniority, confirmation, promotion, etc. It is contended before us that regular promotions from Executive Engineers, which is a feeder cadre, to the grade of Superintending Engineer could not take place immediately and four vacancies of Superintending Engineers had arisen by the time the meeting of <ORG> was held on October 17, 1984. Strong reliance was placed on the counter affidavit filed before the <ORG> which is to the following effect :- "The first two points after Point No. 7 of seniority list dated 10-4- 85 thus, go to the officers promoted from the rank of AEE(E) and SL No. 10 goes to the officer promoted from the rank of AE(E). A point was left blank in seniority list to accommodate an officer promoted from Group B. This was erroneously shown as Sl No. 9 instead of SL No. 10. This mistake has later on been rectified. The applicant cannot presume that in the selection process, he will find the top most position on the panel. The <ORG> chaired by a Member of <ORG> will draw a select panel according to statutory Recruitment Rules."

Appellant No. 1 claimed that he was assigned top most position by the <ORG> held on May 13, 1988 but the provisional seniority list dated January 12, 1989 did not reflect his position and in those circumstances he sought permission to withdraw the pending application with liberty to file a fresh application. So far as appellant No. 2 is concerned, he filed an O.A. before the Madras Bench of the <ORG> claiming seniority from the year 1982 when he was promoted on ad hoc basis to the grade of Executive Engineer (Electrical). The <ORG> rejected the contention raised by the <ORG> that he is deemed to be on regular basis only with effect from May 13, 1988 when the <ORG> met. Since the seniority list dated January 12, 1989 was only provisional the <ORG> directed appellant No. 2 to make another representation to the <ORG> which the <ORG> was directed to dispose of in accordance with law. Pursuant to this direction given by the Madras Bench of the <ORG> it is stated that the seniority had to be re-fixed and, therefore, it is contended that inasmuch as they had rendered service for a long period at any rate in higher cadre and their promotions having been subsequently regularised ought to be treated as giving them seniority in the matter.

The stand taken by the contesting respondents is that under the relevant rules the <ORG> should be headed by a member of <ORG> which was not done in the case of the appellants at the time of their ad hoc appointment and appellant No. 1 was duly considered in 1978 and was not found suitable and for that reason his name did not figure in the selection list and there was no additional quota vacancy in the grade of Executive Engineer (Electrical) meant for group B cadre officers upto 1985. As a matter of fact, <NAME>, who is admittedly senior to both the appellants, was only regularised on June 28, 1985 with effect from April 1, 1975 as he came under the purview of clause 4C of amended rules published on September 22, 1984. Since the appellants herein were not covered under clause 4C of amended rules 1984 and also additional quota was not available as such, they could not be regularised prior to 1985. The <ORG> has taken note of the fact that the ad hoc promotions given to the appellants were not de hors the rules. It was contended that there were four vacancies against Assistant Engineers' quota but <ORG> had informed the <ORG> to fill two vacancies from direct recruitment and the <ORG> accordingly selected <NAME> and <NAME> though <NAME> and the first appellant were also eligible and vacancies were existing they were not regularly promoted by wrong interpretation of rules and separately reserving two vacancies for promotee cadre. Such provision is not existing in recruitment rules and the petitioners are the initial constituents in Assistant Engineer (Electrical) grade and are much above promotees in the Assistant Engineer (Electrical) seniority list. There was considerable delay in the introduction of initial constitution clause and the same was published only in 1984 after a gap of 9 years and came into force with effect from April 5, 1975. <ORG> was thereafter convened by the <ORG> on August 16, 1985 and appellants and officers, including <NAME> and several other officers, were promoted on the dates indicating against their names. Appellant No. 1 and <NAME> were not included as initial constituents since they neither completed eight years of service nor on ad hoc before April 5, 1975. Their promotions fall under maintenance clause 4A and 4B of amended rules 1984. They, however, formed the initial constituents in Assistant Engineer (Electrical) or Assistant Executive Engineer (Electrical) cadre separately. On that basis it was contended that the seniority list published is in order.

<ORG> has also filed two appeals - one (Civil Appeal No. 3018 of 1997) arising out of judgment dated June 27, 1996 in O.A. No. 108/96 passed by the Madras Bench of <ORG> and other (Civil Appeal No. 5081 of 1994) against judgment and order dated November 5, 1993 passed by the <ORG> in O.A. No. 286/92. In O.A. No. 108/96 the Madras Bench of <ORG> merely followed the judgment of the <ORG> which is under appeal before us in Civil Appeal No. 3018 of 1997.

There is another dimension to the case by reason of the introduction of the Rules called "The Posts & Telegraphs Civil Engineering (Electrical Gazetted Officers) Recruitment (Amendment) Rules, 1984", which were given retrospective effect from April 5, 1975. It is explained that the reason for introduction of these Rules is that for recruitment to the various posts in the Electrical Branch of the Civil Wing of <ORG>, the rules of recruitment were published on the April 5, 1975. Prior to commencement of the said Rules, there were officers who had joined directly as Assistant Executive Engineer (Electrical) through the Combined Engineering Services Examination held by <ORG>. Those who had come on deputation from C.P.W.D. were also deemed to have been regularly appointed in <ORG> pursuant to a decision of <ORG>. Some of the officers were promoted to the higher grades on ad hoc basis. In order to ensure that these officers are not deprived of the service rendered by them before commencement of the rules, it was proposed to incorporate retrospectively a provision for initial constitution of these posts. Therefore, though the rules were amended by a notification issued on April 22, 1984 published in <ORG> and it was given retrospective effect but the purpose of giving retrospective effect to the provision relating to the initial constitution of these posts would not prejudicially affect the interests of any person already in service. It is in this background, it is contended before us, that the cases of the appellants could not be considered to the post of Superintendent Engineers although they were functioning as the Executive Engineers without determining their position in the initially constituted cadre and that could be done with reference to the rules, as amended in 1984 which came into effect from April 5, 1975. Though there may have been some delay and complications arising thereto there is another factor which needs to be considered in these cases. The case of the 1st appellant was considered by <ORG> in which Air Marshal <NAME> was present on behalf of the <ORG> and who presided over that meeting for selection of officers for officiating promotion to the grade of Executive Engineer (Electrical) and it was noticed that out of four vacancies, two vacancies are to be filled by promotion of direct recruit Assistant Engineer (Electrical) and the remaining two vacancies were kept reserved for the promotion of Assistant Engineer (Electrical). As no officer was available for consideration at present and the Committee accordingly considered the 4 eligible officers and assessed them. While <NAME>, <NAME> and <NAME> were found to be `very good', the 1st appellant was assessed to be only `good'. This was recorded in the minutes of the meeting of <ORG> held on June 2, 1978 in the office of the <ORG>. Thereafter, in the minutes of the meeting of the meeting of <ORG> held on May 13, 1988, the 1st appellant was found to be `very good' for the year 1977 as an Executive Engineer (Electrical) Group A. It is in these circumstances, it is to be considered whether the case of the 1st appellant could have been considered earlier to the date he was found fit to be promoted. The initially constituted cadre is of the date April 5, 1975 and on that date the 1st appellant had not been considered for promotion to the post of Executive Engineer and he was found fit to be promoted as Executive Engineer only with effect from 1977, i.e., much later to the promulgation of these rules. Reliance has been placed on the decision of this Court in <ORG> [supra]. That is a case where the quota rule between the direct recruits and the promotees had broken down and the appointments were made from one source in excess of the quota, but were made after following the procedure prescribed by the rules for the appointment; therefore, it was held that the appointees should not be pushed down below the appointees from the other source inducted in the service at a later date. In that case the direct recruits were not available in adequate number for appointment and appropriate candidates in the subordinate rank capable of efficiently discharging the duties of Deputy Engineers were waiting in their queue. The development work of the <ORG> pre-emptorily required experienced and efficient hands and in that situation the <ORG> Government took a decision to fill up the vacancies by promotion in excess of the quota, but only after subjecting the officers to the test prescribed by the rules. Therefore, in those peculiar conditions certain directions had been given by this Court inasmuch as the rigours of the quota rule having been neutralised and the seniority being dependent on continuous officiation, the seniority so fixed would not be defeated by the ratio fixed by the rules. It is difficult to appreciate as to how the principle stated in that case could be extended to the case of 1st appellant in the present case as the quota rule had not broken down in any manner nor is there any material before the court to show that he has not been duly considered by <ORG> before appointment to the higher grade. Again in the case of <CITATION> [supra] the same question arose. In that case it was noticed that when reckoning seniority the length of the service may be a relevant factor. If the ad hoc selection is followed by regular selection, then the benefit of ad hoc service is not admissible if ad hoc appointment is in violation of the rules. If the ad hoc appointment has been made as the stop gap arrangement and where there was a procedural irregularity in making appointments according to rules and that irregularity was subsequently rectified, the principle to be applied in that case was stated once again. There is difficulty in the way of the appellants to fight out their case for seniority should be reckoned by reason of the length of the service whether ad hoc or otherwise inasmuch as they had not been recruited regularly. As stated earlier, the appellants were regularly found fit for promotion only in the year 1977 and if that period is reckoned their cases could not be considered as found by the <ORG>. The view expressed by this Court in these cases have been again considered in the decisions in <CITATION> ., 1998 (5) SCC 293; <CITATION> ., 1999 (1) SCC 280; <CITATION> ., 1997 (2) SCC 150; <CITATION> ., 1997 (6) SCC 406; <CITATION> , 1995 Supp. (1) SCC 16, but all these decisions do not point out that in case the promotions had been made ad hoc and they are subsequently regularised in the service in all the cases, ad hoc service should be reckoned for the purpose of seniority. It is only in those cases where initially they had been recruited even though they have been appointed ad hoc the recruitment was subject to the same process as it had been done in the case of regular appointment and that the same was not a stop gap arrangement. That is not the position in the present cases at all. Therefore, we are of the view that conclusions reached by the <ORG> appear to us to be correct and call for no interference. However, we make it clear, as noticed earlier, that while amending the rules of recruitment in the 1984 all those who are already in service will be borne in mind in adjusting the seniority amongst the promotees inter se and suitable adjustments could be made and so far as the direct recruits are concerned, their cases will go by their quota rule and the view taken by the <ORG> in this regard cannot be taken exception of.

Appeals stand dismissed accordingly.