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In Re :Woodcraft Products Limited, Wood Polymer Limited and Bengal Hotels Private Limited,

1977 (1) TMI 103 - HIGH COURT OF GUJARAT

Compromise and arrangement, Amalgamation - 10 AND 12 OF 1975 AND 40 AND 41 OF 1974 - Dated:- 31-1-1977 - D.A. DESAI, J. J.M. Thakore, G.N. Shah and V.B. Patel for the Appearing Parties. JUDGMENT D.A. Desai, J. - Company Petitions Nos. 10 and 12 of 1975 are filed by Wood Polymer Limited and Bengal Hotels Private Limited, respectively, under section 391(2) of the Companies Act, praying for according sanction to a scheme of amalgamation of the afore-mentioned two companies. Wood Polymer Limited is .....

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g the court to give directions for convening meetings of the creditors and members to whom compromise and/or arrangement was offered. In the case of the transferee-company, J.B. Metha J. by his order dated 23rd October, 1974, directed separate meetings of equity and preference shareholders and unsecured creditors having a claim over Rs. 5,000 to be convened separately for approving with or without modification the scheme of compromise and/ or arrangement. In the case of the transferor-company, d .....

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ing for according sanction to the compromise and/or arrangement, which involves a scheme of amalgamation of the transferor-company with the transferee-company. On the petitions being presented they were admitted and directions were given for usual advertisements. The official liquidator was directed to submit his report as contemplated by the second proviso to section 394(1)(vi)in respect of the transferor-company. The official liquidator has submitted his report dated 11th March, 1975. The offi .....

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port dated 10th March, 1973, to the official liquidator, a copy of which is annexed to the report of the official liquidator. While stating that the affairs of the transferor-company have not been conducted in a manner prejudicial to the interest of its members or public interest, it was pointed out by the auditors, and reiterated by the official liquidator, that the transferor-company was merely created to facilitate the transfer of Avenue House which was once of the ownership of Dar Organo Che .....

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76. It is in terms stated that in order to avoid this capital gains tax, the transferor-company was floated and the transferor-company has already availed of the benefit enacted in section 47 of the Income-tax Act. It is this part of the report of the official liquidator that has added an entirely new dimension to this otherwise routine run-of-the-mill application which would have been disposed of without much ado. Salient features of the scheme of amalgamation of the transferor-company with the .....

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-company is Rs. 2 lakhs consisting of 2,000 shares of Rs. 100 each of which 1,800 shares were issued as fully paid for consideration other than cash. The entire issued capital of the transferor-company was held by DOC Pvt. Ltd. In other words, the transferor-company was a wholly-owned subsidiary company of DOC Pvt. Ltd. The scheme of amalgamation envisages extinguishment of the capital of the transferor-company on its dissolution to be brought about by exchange of its equity shares in the ratio .....

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y belonging to the transferor-company and shall not carry any charge on any other assets of the transferee-company. The holders of the debentures were given an option to convert the said debentures into equity shares of the transferee-company of Rs. 10 each at par fully paid, the option to be exercised from time to time and at any time for such portion or portions of the holdings of the said debentures as holder thereof may think fit during the accounting years 1976-77 and/or 1977-78 of the tran .....

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was served upon the Central Government as envisaged by section 394A of the Companies Act and a letter was received from the Joint Director (Accounts) on behalf of the Regional Director, Company Law Board, dated 19th April, 1975, whereby it was intimated to the court that the Central Government has decided not to file any representation with regard to the petitions for amalgamation. When a scheme of compromise and/or arrangement is submitted to the court for its sanction, the court would ordinari .....

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pany have approved the scheme of compromise and/or arrangement offered to them. The classes, looking to the report of the chairman, appear to have been adequately represented. There is not the slightest suggestion that the majority has coerced the minority into submission or is trying to take unfair advantage of the minority. The last question is whether the compromise and/or arrangement is such as one guided by instinct of preservation of one s own interest, who brings to bear upon the subject .....

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ot 90,000 equity shares of Rs. 10 fully paid and 17,000 convertible debentures bearing 8 per cent. interest of Rs. 100 each fully paid in exchange for 2,000 equity shares of Rs. 100 fully paid of the transferor-Company. There is an option to receive Rs. 800 per share in each. Let us see how it works out in reality. Avenue House is the only capital asset of the transferor-company and is valued at Rs 26,00,000 at the relevant time. If it is sold and the purchase price is distributed amongst 2,000 .....

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idea as to how the debenture would fare when put on stock exchange list. However, as neither the equity shareholders of the transferor-company nor the equity and preference shareholders of the transferee-company have objected to the exchange ratio on the ground of it being unfair or unjust though it gives such prima facie impression, nor has any one appeared at the hearing of these petitions in response to a public advertisement to put forth any controversy in this behalf, therefore, even though .....

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ct. There is a serious and keen recent controversy on the fair shares in corporate mergers and takeovers ably analysed by Victor Brudeney and Marvin A. Chivelstein in their article in Harvard Law Review, December, 1974, wherein they suggest the legal standards the courts should apply in testing fairness of a merger more particularly between a parent corporation and a subsidiary. It is obvious that in such a situation, the terms are unilaterally imposed. One standard suggested is that the parent .....

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diction to reject the scheme or has it merely to rubber-stamp the scheme?. The court has discretion in this and it is not merely a rubber-stamp. This question is no more res integra and can be said to have been fairly concluded by a decision of this High Court in Bank of Baroda Ltd. v. Mahindra Ugine Steel Co. Ltd. [1976] 46 Comp. Cas. 227 , 244 (Guj.) (P.D. Desai J.), wherein it is observed as under: In view of the foregoing discussion it appears to me that the court cannot abdicate its duty to .....

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t is a reasonable arrangement which can by reasonable people conversant with the subject be regarded as beneficial to those who are likely to be affected by it. In the pursuit of such inquiry, the court is not tied down by any rigid principles or strait-jacket formulas and no enumeration contained in judicial decisions of the factors which can be taken into account, howsoever precise, can be treated as exhaustive so as to limit the scope of the inquiry which, having regard to varying circumstanc .....

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angle, it would appear that power of such amplitude as is discernible from the provisions contained in section 391(2) is conferred on the court to achieve some definite purpose or object. It is more often said that sections 391 to 396 constitute a complete code and the provisions are in a way derogatory to the law of contract. To illustrate, when compromise or arrangement is offered to a class of creditors and/or a class of members of the company, and if the offer is accepted by a statutory maj .....

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, when sanctioned by the court, it would be binding on the dissenting minority. Now, when the court exercises the power conferred upon it by section 391(2) for sanctioning the scheme of compromise or arrangement the court by its act is imposing the scheme on dissenting members of that class. Before taking such an action, it would be open to the court to examine the scheme in proper perspective in its various manifestations and ramifications before imposing it on unwilling or dissenting members o .....

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ties have been duly carried out either to sanction or refuse to sanction the scheme, the question would immediately arise as to what is the ambit of discretion of the court. It is well-established and calls for no discussion that the discretionary power has to be exercised in a reasonable manner. Whenever a statute confers power, it is indisputable that power is conferred to achieve some object. And the power has to be exercised towards achieving the object. While exercising power, the authority .....

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lebrated passage of Maxwell on Interpretation of Statutes, 12th edition, at page 148, there is the following observation : When, said Lord Halsbury L.C., it is said that something is to be done within the discretion of the authorities......... that something is to be done according to the rules of reason and justice, not according to private opinion.... according to law and not humour. It is to be, not arbitrary, vague, and fanciful, but legal and regular. And it must be exercised within the lim .....

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y consider necessary for the proper working of the compromise or arrangement. This power when properly exercised would enable the court to rectify or modify or add to a compromise or arrangement. To bring out the width and amplitude of the power by contrast, it may be pointed out that while our company law follows almost to a word corresponding provisions of the English Companies Act, the latter Act does not contain the provision in pari materia with section 392(1)(b) and, therefore, in order to .....

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have been duly complied with, and the scheme of compromise and/or arrangement has been approved by a statutory majority of the class of members and/or members to whom it was offered. And this discretion of the court to accept or reject the scheme would be guided by the consideration that power is exercised to achieve the object or purpose for which it was conferred. Reverting to the case on hand, the court is called upon to sanction the scheme of amalgamation of two companies, namely, the transf .....

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6 can be exercised only if amalgamation is in public interest. This will have to be kept in view while considering the ambit of discretionary power under section 391(2) read with section 394 and the purpose for which it can be exercised. If a compromise or arrangement envisages amalgamation of any two or more companies, the court while sanctioning the compromise or arrangement can make provision for all or any of the matters set out in various sub-clauses of clause (b) of sub-section (1) of sect .....

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scheme of amalgamation, of which sanction is sought, contemplates dissolution of the transferor-company without winding-up. Consequent upon that prayer being made, the second proviso would come into play. The court is precluded from making an order for dissolution of the transferor-company unless the official liquidator has on scrutiny of the books and papers of the company made a report to the court that the affairs of the company have not been conducted in a manner prejudicial to the interest .....

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ts and other papers of the transferor-company and on the basis of the report of the auditors, has submitted a report to which reference has been made earlier. In short, the report does say that except for one noticeable feature of the scheme of amalgamation, and subject to it, in his opinion, the affairs of the company are not shown to have been conducted in a manner prejudicial to the interests of its members or to public interest. The noticeable feature referred to in his report is that the tr .....

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bility to pay capital gains tax. On the discussion and points canvassed the following further questions arise for examination: (i)What was the legislative intent in introducing the second proviso to section 394 and what is its relevance while examining a scheme of amalgamation submitted to court for sanction ? (ii)What is the ambit, scope and outer periphery of the concept of public interest as envisaged in the second proviso ? (iii)Is the disclosed purpose put forth by the companies who have mo .....

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oidance appears to be the major and only purpose for the scheme, could it not be said that the purpose is such that the court should not sanction the scheme on the ground that it is opposed to public interest ? (v)Should the court by its process facilitate avoidance of the tax, even if it can be said that avoidance is legal and cannot be styled as evasion ? A mere reference to the events leading to the formation of the scheme of amalgamation would bring out in bold relief the purpose behind the .....

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Private Limited, the transferor-company, was incorporated on 23rd August, 1971. Its issued, subscribed and paid up capital is Rs. 2 lakhs consisting of 2,000 equity shares of Rs. 100 each. These 2,000 equity shares of Rs. 100 each were held by Dost Mohmad & Co. Pvt. Ltd. whose name was subsequently changed to DOC Pvt. Ltd. At the relevant time the Avenue House which was the property of DOC Pvt. Ltd. was valued in its books at Rs. 1,80,71779. This property was transferred to its wholly-owned .....

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ained in section 47(iv) of the Income-tax Act, 1961, which provides that nothing contained in section 45 shall apply to.................(iv) any transfer of capital asset by a company to its subsidiary company, and (b) the subsidiary company is an Indian company. Section 47(iv) was clearly attracted because all the shares of Bengal Hotels Pvt. Ltd. were then held by DOC Pvt. Ltd. and Bengal Hotels Pvt. Ltd. was an Indian company and transfer was of capital asset by the holding company to its sub .....

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end of 1972, when the transferor-company received a proposal from the transferee-company that is, Wood Polymer Limited, for a scheme of amalgamation with the latter to which the entire undertaking, property, rights and powers and all assets, duties, obligations, and liabilities of the transferor-company were to be transferred without further act or deed to the transferee-company. Probably valuation by Messrs. Talbot & Co. is undertaken after the proposal for amalgamation was received from t .....

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on the valuation report. The official liquidator in his report under the second proviso clearly points out that on the valuation report made by Messrs. Talbot & Co. the transferee, company has agreed to allot 90,000 equity shares of Rs. 100 each and 17,000 convertible debentures bearing 8 per cent. interest of Rs. 100 each in consideration of 2,000 equity shares of Rs. 100 each of the transferor-company. Shorn of all embellishments, the Avenue House property which was of DOC Pvt. Ltd. and w .....

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s twice in a span of 1½ years. Section 45 of the Income-tax Act, 1961, provides for levy of capital gains tax on any profits or gains arising from the transfer of a capital asset. Section 47 carves out an exception to section 45 meaning thereby that certain transactions specifically set out in section 47 are not to be treated as transfer for the purpose of section 45. Section 47(iv) provides for exemption from payment of capital gains tax on any transfer of capital asset by a holding comp .....

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o the amalgamated company if the amalgamated company is an Indian company. The scheme envisages transfer of all assets including the capital asset of the transferee-company and capital asset is Avenue House and it is to be transferred to the transferee-company and the transferee-company is amalgamating company and it is an Indian company. As the transfer of capital asset is being brought about as an integral part of the scheme of amalgamation of amalgamating company with the amalgamated company .....

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usiness was to be started in the property known as Avenue House then belonging to the holding company. The subsidiary company was incorporated in August, 1971, and the property, Avenue House, was transferred to the subsidiary company in November, 1971. No hotel business appears to have been ever started in the property known as Avenue House or anywhere else. For that matter, the subsidiary company appears not to have commenced any business. In passing it was mentioned that the transferor-company .....

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usual, because in the world of commerce, transfer at book value is a normal phenomenon. Reference in this connection was made to the Capital Issues (Exemption) Order, 1969. Clause 5 of this Order provides for exemption for issue of securities other than debentures by certain public limited companies from the provisions contained in sections 3, 4 and 5 of the Capital Issues (Control) Act, 1947. There is a long proviso to this clause and sub-para. 4 of the proviso provides for the issue of securit .....

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existing business or asset and take over is effected at the book value of such business. It is not for a moment suggested that that take-over of asset at book value is unknown in the world of commerce. The question really is whether that was a normal transfer of asset in the ordinary course of business or the transfer to a subsidiary company was a subterfuge or device to defeat the payment of capital gains tax, which could be payable, had the capital asset been transferred directly by DOC Pvt. .....

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any and to see the realities behind the facade of corporate personality. The transferor-company, that is, Bengal Hotels Pvt. Ltd., was floated by Pranlal Bhogilal, Baldevdas K. Patel and Ambalal C. Patel. They are subscribers to the memorandum of association in which the first mentioned two persons, namely, Pranlal and Baldevdas, are shown as nominees of Dost Mohmad and Company Private Limited having its registered office at Calcutta. The registered office of the transferor-company was initially .....

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transferee-company including Pranlal Bhogilal and his friends and relations, and thereafter the name of Dost Mohmad & Co. Pvt. Ltd. was changed to DOC Pvt. Ltd. The authorised capital of DOC Pvt. Ltd. was Rs. 50 lakhs, out of which, issued, subscribed and paid up capital was of Rs. 28 lakhs consisting of 28,000 equity shares of Rs. 10 each fully paid, 1,50,480 A preference shares of Rs. 10 each fully paid and 1,26,720 B preference shares of Rs. 10 each fully paid. The total issued and subsc .....

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the owner as the majority shares of them are held by his friends and relations. These companies and Dost Mohmad & Co. Pvt. Ltd. are appropriately described as companies belonging to Bhogilal group. On a proper analysis, at the relevant time, Ambalal Patel and Pranlal Patel with their friends and relations held all the issued, subscribed and paid up capital of DOC Pvt. Ltd. DOC Pvt. Ltd. held all the shares of Bengal Hotels Pvt. Ltd., the transferor-company. Pranlal has a large shareholding .....

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has a large interest in Wood Polymer Limited, the transferee-company, and is the chairman of the transferee-company. Virtually it comes to this that Pranlal and his associates first acquired DOC Pvt. Ltd. and then floated Bengal Hotels Pvt. Ltd. so as to transfer the Avenue House from Dost Mohmad & Co. Pvt. Ltd. to its subsidiary, Bengal Hotels Pvt. Ltd., i.e., from himself to itself and, then, in turn, has suggested a scheme of amalgamation of Bengal Hotels P. Ltd. with Wood Polymer Ltd. f .....

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words of Denning M.R. in Wallersteiner v. Moir [1974] 3 All ER 217 at 237, examining the contention that the various concerns set up and controlled by Dr. Wallersteiner were his alter ego or himself wearing another hat and it was a fit case to pierce the corporate veil. It was observed that these different concerns were the puppets of Dr. Wallersteiner. He controlled their movements. Each danced to his bidding. He pulled the strings. No one else got within their reach. This is equally true of P .....

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estionably established that the corporation is a legal entity distinct from its members. More often the words of Lord Halsbury in Salomon v. Salomon & Co. Ltd. [1897] AC 22, 51 (HL) were referred to assert that a limited company was a legal entity independent of those who formed it. In his celebrated passage Lord Macnaghten observed that : The company is at law a different person altogether from the subscribers......and, though it may be that after incorporation the business is precisely the .....

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spects of a human being, it can sue and be sued, it has a perpetual succession, it can own and dispose of property and so on. But over a period the abuses of this corporate personality became apparent. The courts have lifted the veil in order to see that corporate personality is not blatantly used as a cloak for fraud or improper conduct. In United States v. Milwaukee Refrigerator Transit Co. [1905] 142 Fed 247, the law on the point was summed up as under : A corporation will be looked upon as a .....

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e court is not powerless and it can lift the veil of corporate personality to see the realities behind the veil because in so doing, the court sub-serves the important public interest, namely, to arrest misuse or abuse of benefit conferred by law. One such field in which the court lifts the veil and looks behind the realities is the field of taxation. Professor Gower in his treatise. Modern Company Law, 3rd edition, says that only trusted creditor in whose favour Solomon rule has been substantia .....

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artling. Pranlal and his friends and associates first established control over DOC Pvt. Ltd. by taking over all its shares and with the use of its asset, namely, Avenue House, created a subsidiary company, transferred its capital assets to its wholly owned subsidiary company, namely, the transferor-company, and after transfer of the assets got it revalued and then this subsidiary company did not do any business and in fact I am more than certain that it was not expected to do any business ; and, .....

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h is theoretically a separate entity but in reality part of the concern represented by the group as a whole. If the transferor-company was a paper creation of those who were in charge of the company, who created a transferor-company, as a wholly owned subsidiary company and used it as a medium to transfer its capital assets to the transferee-company and in the process enriched itself by defeating capital gains tax to the tune of Rs. 10 lakhs and more and if that is the only purpose to be achieve .....

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feror-company when it proceeds to state that the affairs of the transferor-company are not conducted in a manner prejudicial to the members or public interest. It was said that on that averment, it can be said that the requirement of the proviso has been complied with and the court should not further probe into the matter. The report of the official liquidator is subject to an important factual statement, namely, that the transferor-company was a paper company only created for the purpose of acq .....

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pose herein mentioned, could it be said that its affairs were carried on in a manner not prejudicial to public interest ? An attempt was made to urge that inquiry under the second proviso is limited to carrying on affairs of the company, meaning thereby, carrying on of the business or the management of the company, in other words, its internal affairs and it has nothing to do with the broader perspective of creation of company for a purpose and achieving that purpose by mere creation of the comp .....

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ression affairs of the company . The expression affairs of the company need not be given a restricted meaning, namely, the internal working of the company The expression affairs of the company must take colour from the expression of public interest used in the proviso. The query which the court must address itself is : whether the affairs of the company have been in a manner prejudicial to the public interest ? The expression affairs of the company must receive wider construction in view of the .....

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the heydays of laissez faire, it was quite well-known for the leaders of trade and industry not only to ignore but disavow public interest involved in carrying on business. Their sole attention was confined to the interest of creditors and members. But other important consumers of industry-cum commercial service were wholly ignored, namely, employees and consumers of the goods produced by the industry, I mean, the society. It would be interesting to recall the remarks of Correlius Venderbilt, th .....

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s practice of the more enlightened sections of the leaders in the trade and industry. As far as our Companies Act is concerned, it has received statutory recognition in sections 89(4), 205(1), 211(3), 221, 244(1), 250,303,326,352 and 396 in the Companies Act Public interest is a positive check on unhindered exercise of private right whether by management or stock-holders. Our company law has recognised the fact that there are several areas in this field where even the joint will of the managemen .....

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ic interest is sometimes used as an expression inter-changeable for the national interest. This is a term very often used in contradistinction to private interest or personal interest . It is something in which the public, the community at large, has some pecuniary interest, or some interest by which their legal rights or liabilities are affected (vide. Black s Dictionary, 4th edition, p. 1393). The word public has a very wide connotation, and though the word public has a very wide connotation, .....

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e verdict in deciding what constitutes public interest in the context of the legislation in which it is used. In the very nature of the case, modern conditions and the increasing inter-dependence of the different human factors in the progressive complexity of a community make it necessary for the Government to touch upon and limit individual activities at more points than formerly. (Vide State of Bihar v. Maharajadhiraj Sir Kameshwar Singh of Darbhanga [1952] SCR 889 at 994; AIR 1952 SC 252). In .....

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he private use of some private individual. The State represents the common will and is devoted to common good and all powers are conferred on the State for achieving common good. That is equally true of police powers of the State. For carrying out all the activities expected of a welfare State, the State must have funds and to get them, it has to levy taxes. It would, therefore, be indisputable that taxes are levied for the common good and that would indisputably be in public interest. If such b .....

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ns and Ammunition Co. [1894] AC 535 (HL). Before I examine the test, I should like to make it clear that the passage relied upon opens with words the true view in the present time, I think, is this and the present time has relation to the role of the State in England in 1894, economic doctrine of laissez faire, then prevalent, and apart from anything else, I have my grave doubt whether that test is valid in the context of the welfare State and egalitarian society sought to be set up under our Co .....

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ase. It is sufficient justification and, indeed, it is the only justification, if the restriction is reasonable-reasonable, that is, in the interest of the parties concerned and reasonable in the interest of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public. In Restrictive Trade Practices and Monopolies, second edition, by Lord Wilberforce and others, page 272, it is obs .....

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comes to the court to decide whether certain agreement is in public interest or opposed to public interest, a broader test was formulated of specific and substantial benefit to achieve, enjoy or likely to be enjoyed by the public. It is not necessary to probe this argument further because the concept of public interest takes its own colour in providing its own inherent yardstick by reference to the context in which the expression is used, the statute in which it is used and purpose sought to be .....

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g of which is permitted by law, the same could never be said to be against public interest, and, therefore, the court should not look upon it with an eye of suspicion. Undoubtedly, for the purpose of section 45 of the Income-tax Act, those transactions enumerated in section 47 would be exempt from the operation of section 45. That would include transfer of capital asset by the holding company to the subsidiary company or vice versa, or transfer as part of the scheme of amalgamation of the capita .....

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er is conferred on the Central Government to amalgamate two companies if it is in public interest. Section 396 is in the same part in which sections 391 onwards find their place. Section 396 is the legislative exposition of the purpose behind the provision conferring power on the court or the Central Government to sanction amalgamation in one case or to direct amalgamation, namely, it must be exercised in public interest. Amalgamation must accordingly fulfil some felt need, some purpose, some ob .....

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ion for such a scheme of amalgamation was utilised for the avowed object of defeating tax. It was, however, urged that if the parties so arranged their affairs as would result in diminution of the tax liability, that may amount to avoidance of tax and not evasion of tax and law frowns upon the tax evasion and not on tax avoidance. Number of paragraphs were read over to me from Adopt Avoidance and Avoid Evasion by S.R. Loonekar, 1972 edition. It was said that in a tax law, morality has no place a .....

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junction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented . In Commissioner of Income-tax v. Sakarlal Balabhai [1968] 69 ITR 186, 200, 201 (Guj.), it was observed as under: Tax avoidance postulates that the assessee is in receipt of amount which is really and in truth his income liable to tax but on which he avoids payment of tax by some artifice or device. Such artifice or device may apparently show the income as accruing to another person .....

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rising from the asset which theretofore belonged to the assessee is transferred to and vested in some other person, there is no avoidance of tax liability t no part of the income from the asset goes into the hands of the assessee in the shape of income or under any guise . This view of the Gujarat High Court, I was informed, has been subsequently confirmed by the Supreme Court. My attention was also drawn to the law and Practice of Income Tax by Palkhivala, 7th edition, in which it is stated tha .....

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il optical store of payment to physicians of the one-third of the sales price of glasses sold to their patients was claimed as an ordinary and necessary payment within the meaning of the relevant section of the Internal Revenue Code. The tax court did not uphold such deduction and the matter was brought to the Supreme Court wherein it was observed that deductibility of such payments, although they are not to be approved as a matter of business ethics, cannot be denied on grounds of public policy .....

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ublic interest was examined in the context of the statute under which the problem was brought before the court and I was specifically asked to note that the problem arose under the taxing statute. It was urged that even if a certain payment may appear to the court to be improper, if not immoral, yet that should not be the guiding consideration for examining them in the context of public interest. It was further contended that the provisions of the Companies Act are not enacted for the purpose of .....

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another such company ; and one of the companies is beneficial owner of not less than 90 per cent. of the issued share capital of the other company. By section 50(1) of the Finance Act, 1938, it was provided that section 42 of the Finance Act, 1930, shall not apply unless it is shown to the satisfaction of the Commissioners of Inland Revenue that the instrument was not executed in pursuance of or in connection with an arrangement whereunder certain things were provided for. A question arose wheth .....

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uch a situation, the House of Lords referred to Heydon s case [1584] 3 Co Rep 7a, 7b and observed that such construction should be put on the provisions of a statute as shall suppress the mischief, and advance the remedy and the words of Lord Selborne L.C. in Caledonian Railway Co. v. North British Railway Co. [1881] 6 App Cas 114, 122 (HL), that the more literal construction ought not to prevail if it is opposed to the intentions of the legislature as apparent by the statute, were recalled. It .....

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iture had been incurred in part for the purpose of facilitating tax avoidance, and the same was considered fatal to the claim since that purpose was not a trading purpose and accordingly the expenditure had not been incurred wholly and exclusively for the purpose of trade. However, this decision was read also to point out that apart from admissible deductions, the view has been taken in this case that if the numerous companies were formed so as to create certain tax benefit, that in itself was n .....

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e benefit of exemption from the stamp duty was denied on the construction of statute granting exemption but the following observation was relied upon in support of the submission that a mere setting up of a chain of companies is not open to lurking suspicion, that it has been done with an avowed object of defeating taxing statute. The observation relied upon reads as under : It is worthwhile observing that where you have a chain of companies it is always possible by arranging the transfer in a c .....

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tion. It is capable of more than one meaning. Therefore, in order to ascertain the true meaning of public interest used in a given statute, it is to be construed in the context of the legislation in which it is used provision in which it is used, and the purpose sought to be achieved by the use of the expression. Where alternative constructions are equally open that alternative is to be chosen which will be consistent with the smooth working of the system which statute purports to be regulating .....

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st in company law is a new and recent entrant. The second proviso to section 394(1) was added by Amending Act of 1965, pursuant to the recommendations of Vivian Bose Commission of Dalmia and Jain concerns. The Vivian Bose Commission was appointed to inquire into and report on the administration of certain companies controlled by Shri Ramkrishna Dalmia and Shantiprasad Jain and two others and especially about the irregularities, fraud or breaches of trust or action in disregard of honest commerci .....

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n of the funds and assets of the companies and firms in the interest of investing public. Interest of the investing public is interest of general public which expression would be covered by public interest . Pursuant to this directive and as a consequence of its finding, the Commission recommended introduction of a provision by which the court while examining the scheme of amalgamation, would have an opportunity to ascertain whether the affairs of the transferor-company which will be dissolved w .....

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ression public interest is to be found in the second proviso and in the context of a company which, if, scheme of amalgamation is sanctioned, is likely to lose its identity by getting merged with the transferee-company. It is to be dissolved without winding up. In winding up the manner in which affairs of a company are conducted can be probed in depth ; but a scheme of amalgamation which provides for merger of the transferor-company with the transferee-company, would destroy any opportunity for .....

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t take its colour and content from the context in which it is used. The context in which the expression public interest is used should permit the court to find out why the transferor-company came into existence, for what purpose it was set up, who were its promoters, who were controlling it, what object was sought to be achieved through creation of the transferor-company and why it is now being dissolved by merging it with another company. All these aspects will have to be examined in the contex .....

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by a scheme of amalgamation offered for court s sanction. It was said that the property belonging to the transferor-company will be available to the transferee-company. Now, the property belonging to the transferor-company is situate in Calcutta. The transferor-company is having its factory at Billimora. The transferor-company appears to have not done any business except acquiring capital asset from its parent company of which it was a subsidiary company and got it revalued so that by the proces .....

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ss to defeat tax liability that would otherwise arise. If such be the scheme of amalgamation and if such is the use made of the transferor-company by those controlling it, it can never be said that the affairs of the transferor-company sought to be amalgamated, created for the sole purpose of facilitating transfer of capital asset, through its medium, have not been carried on in a manner prejudicial to public interest. Public interest looms large in this background, and the machinery of judicial .....

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