The Commissiner of Income Tax-VI vs. M/s. M.A. Basith Khan

IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA

CWP No.598 of 2016

Decided on: 24.03.2023 Monal Potteries & Ceramics (Pvt.) Ltd. Mehatpur Industrial Area, District Una, H.P. .…Petitioner. Versus State of Himachal Pradesh & others ….Respondents.

Coram Hon’ble Mr. Justice Ajay Mohan Goel, Judge. Whether approved for reporting?

1    Yes

For  the petitioner : M/s Y.P. Sood and Praveen Chauhan, Advocate. For the respondents : M/s Jitender Sharma, Baldev Negi, Pushpender Jaswal, Additional Advocate Generals, with Mr. Gautam   Sood,   Deputy

Advocate General. Ajay Mohan Goel, Judge

(Oral)

By way of this petition, the petitioner has prayed for the following relief:­ “It   is,   therefore,   respectfully   prayed   that   this   writ petition may kindly be allowed and Annexure P­10 and P­15 may kindly be ordered to be quashed  and set aside and further respondents may be restrained from taking any penal action like cancellation/taking over of the industrial plot of the company under the garb of payment of unearned increase.” 1 Whether reporters of the local papers may be allowed to see the judgment?

2 2. The case of the petitioner is that it is a private limited company, duly incorporated under  the provisions of Companies Act,   having   its   registered   office   at   Industrial   Area,   Mehatpur, District Una, H.P. As the petitioner was interested in setting up an industry   in   the   State   of   Himachal   Pradesh,   it   approached   the respondents for the allotment of land in Mehatpur industrial area in District Una, H.P. Respondents allotted plots, bearing No.6, 6A and 7, measuring 17000 square metre, in favour of the petitioner­ Company   on   03.12.1976   in   the   industrial   area,   Mehatpur   in District Una, H.P. for setting up an industry. This was followed by execution of the Lease Deed which was duly executed between the parties on 15.03.1977, copy whereof is appended with the petition as Annexure P­3. It is further the case of the petitioner that the petitioner   had   intended   to   set   up   the   unit   for   manufacturing potteries on the plots which remained in operation till about 1997. In   the   said   year,   it   was   decided   by   the   petitioner­Company   to diversify by starting new activity. This new activity was likely to take time for its implementation on account of financial reason and taking advantage of the said fact, the respondents  cancelled  the allotment of land in favour of the petitioner in the year 2001 on the pretext   that   the   petitioner   had   not   started   production   within stipulated time. This order of the respondents was assailed by the petitioner   by   way   of   Civil   Writ   Petition   No.789   of  2002,   which

3 petition   was   decided   by   the   Court   on   20.08.2002   in   terms   of Annexure P­4. In terms of the order  passed  by  the Court, the petitioner was permitted to make a representation to respondent No.2, seeking permission to diversify the project. The petitioner, in compliance   to   the   orders   passed   by   the   Court   applied   to respondent No.2 for diversifying the project and also paid all the dues payable to the respondents. The petitioner sought permission to   diversify   the   project   in   order   to   set   up   an   Integrated   Bio Technology  Project  for  commercial  production of  tissue culture, derive   planting   material   and   Bio   Pesticides.     Respondent   No.2, pursuant to representation of the petitioner granted permission to the   petitioner   to   diversify   the   project   in   terms   of   letter,   dated 10.01.2013,   copy   whereof   is   appended   with   the   petition   as Annexure P­5. No Dues Certificate was issued by respondent No.3, copy   whereof   is   appended   with   the   petition   as   Annexure   P­6. Thereafter, respondent No.3 provisionally registered the unit of the petitioner  on  28.02.2003   (wrongly  mentioned  in the petition as 2004). 3. It   started   commercial   production   w.e.f.   04.05.2004 and   applied   for   permanent   registration   to   the   respondents complete with all documents on 21.06.2004, but the respondents did not grant permanent registration to the unit despite the fact that   the   petitioner   had   completed   all   the   codal   formalities.

4 According to the petitioner, the permanent registration to the unit stands   denied   by   the   respondents,   on   the   ground   that   the petitioner is liable to pay unearned increase/premium on the plot, as there has been 100% change of Directors and shareholding of the   Company.   On   these   basis,   demand   for   payment   of   50% unearned increase was being made. Though, initially the demand was to the tune of       Rs.62,47,500/­, but subsequently, the same stood reduced to Rs.15,72,500/­ in terms of Annexure P­10. 4. Learned counsel for the petitioner has argued that the demand which is being raised by the respondents with regard to the 50% unearned increase on the ground that there has been 100% change of Directors and shareholding of the Company is totally   uncalled­for,   for   the   reason   that   the   Company   which entered into the Lease Deed with the respondents is still the same and   simply   because   there   is   change   of   Directors   or   the Shareholders of the Company, the same ifso facto does not confers any  right  upon the respondents  to demand unearned increase. Learned counsel for the petitioner has relied upon the judgment of Hon’ble Division Bench of this Court, reported in 2010 (1) Shim. LC 47,   titled   as  Commissioner   of   Income   Tax,   Shimla  Versus  M/s Panchrattan Hotels Pvt. Ltd., Manali,  in Para­10 thereof, Hon’ble Division Bench was pleased to hold as under:­

5 “8. The company is a juristic person having its distinct legal entity separate from that of the shareholders. The change in the shareholders of the company does not change   the   legal   identity   of   the   company.   Therefore, section 170 had no application to the facts of the case. Reliance in this behalf may be placed on the judgment of the Allahabad High Court in CIT v. Mass Products (Ind.) Ltd.[1996] 221 ITR wherein it was held as follows: — "... In our opinion, the first question referred to us has to be   answered   in   the   negative   and   against   the department   because   it   is   settled   law   that   a   limited liability company is a distinct legal entity separate from its   shareholder.   Change   in   the   shareholders   of   the company   does   not   change   the   legal   identity   of   the company. A limited liability company is thus different from a partner­ ship­firm because while a company is distinct   from   its   shareholders   and   directors,   a partnership firm is not different from its partners and it is not a distinct legal entity. Since the assessee is a limited liability company, change in the ownership of its shares will have no effect on the legal identity of the company." 5. Learned Counsel for the petitioner has also relied upon the judgment of Hon’ble Coordinate Bench of this Court in  CWP No.1788 of 2010, titled as  M/s Fresenius Kabi Oncology Limited Versus   H.P.   State   Industrial   Development   Corporation   Limited, decided on  02.08.2018,  in which Hon’ble Coordinate Bench has

6 been pleased to observe that a Share Purchase Agreement, as was the case in that case, did not amount to change in the Company per se and on purchase of capital share by the petitioner­Company therein, only its Board stood reconstituted with the nominee of the petitioner­Company   and   the   same   was   not   construed   by   the Hon’ble Bench to be a case of transfer of the plot in question in the facts of the said case. Hon’ble Coordinate Bench was pleased to observe that mere acquiring of equity share capital of Dabur Farma Limited  by  the petitioner­Company  did not amount  to transfer, assigning or parting with the possession or any other rights of the allottee   Company,   neither   plot   in   question   nor   structure   in existence thereupon. Hon’ble Coordinate Bench also held that the acquiring of the equity share capital of the allottee Company by the petitioner   also   did   not   contravene   the   conditions   contained   in Clause   2   (ix)   of   the   Conveyance   Deed   and   in   the   said circumstances, the government was not entitled to claim unearned increase/ transfer charges. 6. By placing reliance on said judgments, a prayer has been made that as the impugned act of the respondents­State is per se  bad in law and in­conflict with the law laid down by this Court, the present petition be allowed. 7. The petition is resisted by the State, inter alia, on the ground   that   the   terms   and   conditions   of   the   lease   agreement

7 entered into between the petitioner­Company and the Industries Department   have   been   violated   by   the   petitioner­Company   by permitting its shares to be assigned to someone else and further by altering the constitution of the Board of Directors. According to the State, as the industrial plot, which was allotted in favour of the petitioner­Company was not utilized by it for the purpose for which the   same   stood   allotted,   therefore,   action   was   taken   for cancellation of the lease. However, on the request so made by the petitioner­Company and by taking a lenient view, the respondents granted   six   months   more   time   to   the   petitioner­Company   to implement   the  diversified   project   with  which  it   approached   the respondents   subsequently.   It   is   further   the   stand   of   the respondents that after going through the matter with respect to the diversified project, the respondents initially decided to cancel the earlier   provisional   registration   but   granted   fresh   provisional registration   in   favour   of   the   petitioner­Company   in   view   of   the change in the constitution of  the  Company  and  the  petitioner­ Company   having   constituted   a   new   Board   of   Director,   as   is depicted   by   the   respondent   in   their   reply.   According   to   the respondents, the petitioner had defeated the purpose of allotment of plot at subsidized  grade by not utilizing the same and in fact, the petitioner­Company also failed to deposit 50% of the unearned increase  in   terms   of   Rule   5.11   of   Rules  regarding   grant   of

8 incentives,   concessions   and   facilities   to   industrial   units   in Himachal Pradesh, 1996 and  Clause­2 (v) (a)  of the Lease Deed executed by the Company. 8. Leaned   Deputy   Advocate   General   has   vehemently argued that there is no illegality or infirmity in the demand that has been raised by the respondents, for the reason that as the constitution of the Company  per se  has changed including the Board   of   Directors   as   also   the   shareholders,   therefore,   the respondents are liable to pay the unearned increase, because there in fact has been a violation of Clause­2 (v) (a) of the Lease Deed. Learned Deputy Advocate General has submitted that as there has been   a   complete   change  in  the  Board  of   Directors  as  also  the shareholders of the Company, the same has to be construed as sale and transfer of the industrial unit in favour of the subsequent shareholders/   Board   of   Directors   and   therefore,   there   is   no illegality or irregularity in the act of the respondents in calling upon   the   petitioner   to   deposit   the   unearned   increase.   Learned Deputy   Advocate   General   has   also   argued   that   the   petitioner­ Company, taking advantage of industrial policy of the  Government of Himachal Pradesh got hold of the industrial plots on subsidized rates and then failed to utilize the same for the purpose for which the unit was allotted to the Company. He has further submitted that simply because the petitioner­Company has been permitted to

9 diversify the project for which the land was allotted, the same does not exonerates them from payment of unearned increase which the petitioner­Company   is   liable   to   pay   as   per   law.   As   far   as   the judgments relied upon by learned counsel for the petitioner are concerned, learned Deputy Advocate General submitted that in the factual matrix involved in the present petition, said judgments are not attracted. 9. I have heard learned counsel for the parties and have also gone through the pleadings as well as documents on record. 10. The   prayer   made   in   the   writ   petition   is   for   the quashing of Annexures P­10 and P­15. 11. Annexure P­10, which is a communication addressed by the General Manage of the District Industrial Centre, Una, to the petitioner­Company, reads as under:­ “Kindly   refer   to   your   letter   No.HPFC/6085   dated 31.3.2006 regarding above mentioned subject. In this context it is submitted that the permission to mortgage lease hold right of above plot in favour of Corporation was   accorded   by   Director   of   Industries,   Himachal Pradesh on 20.6.1977, so this matter may be taken up with the Director of Industries. In reference to Para­2 of your letter it is stated that this office has intimated to the party to deposit an amount of Rs.62,47,500/­ as un­ earned premium because all the Directors of Company have changed. The unit had then represented to this

10 office   against   the   demand   raised   by   this   office.   The matter has been referred to Director of Industries in light of the issues raised by party for advise that whether to charge   un­earned   premium   or   not   in   view   of   the representation of the party. In context of Para­3 of letter it is submitted that once the issue of payment of un­ earned premium is decided by the Director of Industries only then permission to mortgage leasehold rights can be considered. It is therefore requested that the HPFC may also take up the case with Director of Industries regarding these pending issue.” 12. Feeling   aggrieved   by   the   act   of   the   respondents   of calling upon them to deposit the unearned increase, the petitioner initially filed CWP No.2391 of 2015, titled as Monal Potteries & Ceramics (Pvt.) Ltd. Versus State of H.P. and others which was disposed of by Hon’ble Division Bench of this Court in terms of order dated 06.10.2015 and in compliance thereto, Annexure P­15 stood   passed   by   the   competent   authority. In   terms   of Annexure P­15, the representation of the Petitioner that unearned increase be not sought from it, stands rejected by respondent No.2 by assigning the following reasons:­ “Whereas the Petitioner Company was required to bring the   unit   into   commercial   production   on   or   before 09/07.2003 but the unit came into production only on 04/05/2004 i.e. after 11 months which is in violation of the   time   lines   specified   in   the   Order   passed   by   the

11 Hon’ble   High   Court   of   Himachal   Pradesh   on 20/08/2002.   Moreover,   the   Petitioner   Company   has concealed the facts from Hon’ble High Court as well as from reply Respondents as regards 100% change in the Directors/Promoters   of   Company   in   December   2002 without   the   permission/consent   of   the   lessor   i.e. Director of Industries which is again a violation of the provision   of   clause   2(v)   (a)   of   Lease   Deed   executed between   the   Petitioner   Company   &   replying Respondents. This fact came into notice of Respondent No.3   i.e.   General   Manager,   District   Industries   Centre Una,   when   the   Petitioner   Company   applied   for permanent registration in the eyar 2004. Whereas Petitioner Company breached the clause 2(v) (a)   of   lease   deed   by   transfer   of   100%   shareholding without provisions/consent of lessor, the Company was liable to pay 50% unearned increase to the extent of Rs.15,72,500/­   (Rupees   fifteen   lacs   seventy   two thousand five hundred) which the Company failed to deposit till date. It is crystal clear that Company has not cleared departmental dues till date which is the sole reason to keep the case of permanent registration in abeyance till date. In case, the Company adhered to the instructions of replying Respondents, the case would have been disposed off much earlier i.e. at the time of initial   request   of   Company   for   grant   of   permanent registration in the year 2004. In compliance to the Orders of Hon’ble High Court of Himachal   Pradesh   in   CWP   2391/2015   dated

12 6/10/2015,   the   representation   of   the   Petitioner Company dated 22.3.2012 has been examined again and considered by the respondent Department. No new material facts have been brought to the notice of this office after filing of the said CWP 2391/2015 by the Petitioner   Company   which   merits   consideration.   The representation of the said Company dated 22.3.2012 is hereby rejected based on material facts for violation of clause   2(v)   (a)   of   lease   deed   executed   between   the Petitioner Company and the replying respondents and due   to   non­payment   of   Government   dues   i.e.   50% unearned increase amounting to Rs.15,72,500/­.” 13. A perusal of Annexure P­10 thus demonstrates that the demand by the government to charge 50% unearned premium was on account of change of shareholding of the Company and similarly, the rejection of representation of the petitioner in terms of Annexure P­15 is also on the ground that there has been 100% change in the Directors/Promotors of the Company in December, 2002 without the permission/consent of the  lesser, which is in violation of the provisions of Clause­2 (v) (a) of the Lease Deed. 14. Clause­2 (v) (a) of the Lease Deed entered into between the petitioner and the respondents reads as under:­ “The Lessee shall not sell, transfer, assign or otherwise part with th possession of the whole or any part of the industrial   plot   except   with   the   previous   consent   in

13 writing of the Lessor which he shall be entitled to refuse in his absolute discretion.” 15. In terms of this particular Clause, there is an embargo on the lessee, i.e. the petitioner­Company that it shall not sell, transfer, assign or otherwise part with the possession of whole or any part of the industrial plot except with the previous consent in writing of the lessor which he shall be entitled to refuse in his absolute discretion. 16. During the course of arguments, the respondents have not been able to demonstrate that the petitioner­Company either sold,   or   transferred,   or   assigned,   or   otherwise   parted   with   the possession of whole or  any part of the industrial plot which stands allotted to it by the respondents. The contention of the respondents is that because there is a change in the Board of Directors and because there is a change in the shareholding, therefore, there is change in the shareholders, there is a violation of Clause 2 (v) (a) of the Lease Deed. Least to say, this is not only a misreading and misinterpretation of the Clauses of the Lease Deed, apparently the impugned act of the State is nothing, but an arm twisting tactic being   adopted   by   the   respondent­Department   to   extract   money from the petitioner­Company. The petitioner herein is a Company duly registered under the Companies Act. It is a juristic person. There is no embargo in the Lease Deed that for the purpose of

14 changing the Directors of the Company or for the purpose of sale of the   shares   of   the   Company,   any   permission   of   the   lessor   was required. 17. This Court is of the considered view that had it been a case   that   the   petitioner­Company   had   sold   or   transfered   or assigned or otherwise parted with the possession  of the leased industrial pot in favour of any other entity, be it a Company, or any other individual, then the same would have had amounted to the violation of Clause 2 (v) (a) of the Lease Deed. That not being the case here, the present case is squarely covered by the judgment passed   by   this   Court   in  Commissioner   of   Income   Tax,   Shimla Versus  M/s Panchrattan Hotels Pvt. Ltd., Manali (supra)  and  M/s Fresenius   Kabi   Oncology   Limited  Versus   H.P.   State   Industrial Development Corporation Limited (supra), in which this Court has clearly   held   that   the   Company   is   a   juristic   person   having   its distinct legal entity separate from that of shareholders and change in shareholders of the Company does not changes the legal identity of the Company. Similarly, this Court has also held that simply because  there is a change in the Board of Directors  or in the composition of Board of Directors, the same  ifso facto  does not means that the Company looses its juristic identity. 18. Accordingly,   in   light   of   the   observations   made hereinabove, this petition is allowed. The act of the respondents of

15 calling upon the petitioner to deposit with it unearned increase on the ground of there being a change in the pattern of shareholders and change in the Board of Directors, is held to be bad in law. Annexures P­10 and P­15 are therefore, quashed and set aside. No order as to costs. 19. The petition stands disposed of, so also the pending miscellaneous applications, if any.

(Ajay Mohan Goel)

Judge March 24, 2023 (Rishi)