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In Re. : AVM Capital Services Private Limited, Chevy Capital Services Private Limited, PM Capital Services Private Limited, Pranit Trading Private Limited, Viramrut Trading Private Limited And Unichem Laboratories Limited.

2012 (7) TMI 513 - BOMBAY HIGH COURT

Challenging the scheme of Arrangement by Objector holding 0.001% of the total share capital of the Transferee Company - scheme is propounded to avoid capital gains tax that would have arisen if the Transferor Companies would have directly transferred their shares to the Promoters & colourable device to evade tax - Held that:- Scheme involves merger of Transferor Companies with Transferee Company with consequent cancellation of the shares held by the Transferor Companies in the Transferee Company .....

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r than indirectly. The object of the Scheme is not to avoid any tax - Under the Scheme the only difference is that the Promoter will now hold shares directly in the Transferee Company. It is correctly submitted by the Transferee Company that there is nothing illegal or unlawful or dubious or colourful in the Scheme and the same is a perfectly legitimate scheme and permissible by law. Therefore, the objection of the Objector that the Scheme is a tax avoidance device and ought not to be approved, .....

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2 till the time the Scheme is sanctioned by appropriate Court and filing the Court order with the Registrar of Companies for the Scheme to become otherwise effective. Therefore, the submission of the Objector that the Scheme has become null and void, cannot be accepted. - Company Secretary of the Transferee Company was not authorized to file the Affidavit in Rejoinder - Held that:- Considering certified true copy of the resolutions passed at the Board Meeting of the Transferee Company held o .....

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ompany Secretary, explaining why some of the proceedings were not mentioned in the Affidavit filed before the Regional Director. The explanation is accepted. In view thereof, the said objection is rejected. - Challenging the Valuation report - Held that:- Valuation Report has been obtained to comply with the provisions of the Listing Agreement and there is no change in the shareholding pattern of the Transferee Company, as it will issue equivalent number of shares to the Promoters as already .....

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t case. Again, the only assets (apart from cash and bank balance) of the Transferor Companies were the shares held by them in the Transferee Company. As such, it was reasonable and proper to value the Transferor Companies on the basis of the value of their shareholdings in the Transferee Company. - No pending cases for infringement of Trademark or Patent filed against the Transferee Company and as such there is no question of providing any contingent liability. - Transferee Company that .....

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SUMMONS FOR DIRECTION NOs. 598 to 603 OF 2011 - Dated:- 12-7-2012 - S.J. KATHAWALLA, J. JUDGMENT 1. By the above Company Scheme Petitions, sanction of this Court is sought under Sections 391 to 394 read with Sections 80, 100 to 103 of the Companies Act, 1956, to the scheme of arrangement whereunder the five Companies AVM Capital Services Private Limited (ACPL); Chevy Capital Services Private Limited (CCSPL); PM Capital Services Private Limited (PCSPL); Pranit Trading Private Limited (PTPL); and .....

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olders present at the meeting, voted in favour of the Scheme, except Mr. Shailesh Mehta - the Objector, who holds 750 shares of the Transferee Company, constituting 0.001% of the total share capital of the Transferee Company. Out of the total 158 ballots received, one ballot was invalid. Out of the 157 valid ballots, 156 share holders representing 98.74% in number and 99.99% in value, voted in favour of the Scheme and only the Objector, representing 0.63% in number and 0.001% in value, voted aga .....

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is that the Scheme is propounded to avoid capital gains tax that would have arisen if the Transferor Companies would have directly transferred their shares to the Promoters. It is alleged that the object of the Scheme is not to help the Transferee Company, but to transfer these shares to the Promoter Dr. Prakash Modi. According to the Objector, it is not shown how long term stability would be achieved if the shares are transferred in the name of Dr. Mody. According to the Objector, the Scheme i .....

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pa Reddy, J., delivered in the aforesaid case, in which it is held that avoidance of tax was unethical and if a transaction is a device to avoid tax, it should not be permitted . The Objector has pointed out that the learned Judge in this context, also referred to the decision of the Gujarat High Court in the case of Wood Polymer Limited [1977] 47 Comp. cases 597 (Guj) in which case, the learned Single Judge of the Gujarat High Court refused to sanction a scheme which was found to be a device to .....

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ince it correctly lays down the law on tax avoidance. The AAR appears to have held that the decision of the Supreme Court in the case of Azadi Bachao Andolan (supra) is not good law and the correct law is as laid down in McDowell s case (supra). 5. On the issue of Tax avoidance, the Objector has also submitted that this Court should direct the Transferee Company to implead the income tax authority as a necessary party. He has further submitted that the shares of the Transferee Company held by th .....

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rt in the case of Azadi Bachao Andolan (supra) and more recently in the case of Vodaphone International Holdings v. Union of India and Ors. [2012] 341 ITR 1 (SC). He submitted that in the case of Azadi Bachao Andolan (Supra), the Hon ble Supreme Court has in paragraphs 137 to 166 explained the rule in McDowell s case with particular reference to the Judgment of Chinnappa Reddy, J. It is submitted that the Objector has relied upon a sentence in the Judgment of Justice Ranganath Mishra in McDowell .....

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(supra) and categorically came to the conclusion that Azadi Bachao Andolan (Supra) was correctly decided and that the majority in McDowell s case had not approved the observations of Justice Chinnappa Reddy, J. It is submitted that the decision of the Gujarat High Court in Wood Polymer Limited (Supra) is no longer good law, in view of the decisions of the Hon ble Supreme Court in Aazadi Bachao Andolan and Vodaphone International Holdings (Supra). It is submitted that as far as the decision of th .....

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sary to implead the Income Tax Authority in the present proceedings and infact, it is held by this Court in Jindal Iron & Steel Company Limited (JISCO) v. ACIT (Company Application No. 123 of 2004 connected with Company Petition No. 76 of 2004) that the income tax department has no locus to intervene in the proceedings under Section 391-394 of the Companies Act, 1956. The learned Senior Advocate appearing for the Petitioner has submitted that the primary assets of the Transferor Companies, c .....

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ansferee Company to merge the five Transferor Companies with the Transferee Company to enable the Promoter thereof to hold shares directly in the Transferee Company rather than indirectly. The object of the Scheme is not to avoid any tax. It is submitted that there is nothing illegal, unlawful or dubious or colourful in the Scheme and the same is a perfectly legitimate scheme, permissible by law. 8. It is submitted on behalf of the Petitioners that the real motive of the Objector in opposing the .....

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eree Company. This would mean that Dr. Prakash Modi, who presently owns and controls the shares of the Transferee Company through the Transferor Companies should be divested of his share holding. It is submitted that it is well settled that in an amalgamation scheme, share holders of the Transferor Companies are always entitled to the shares of the Transferee Company. Any scheme to the contrary would be unfair and illegal. Consequently, it is clear that the objection of the Objector is clearly c .....

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rangement between Tata Services Limited and Tatanet services Limited (Company Petition No. 758 of 2005 connected with Company Application No. 540 of 2005) (Bom.) and in the Scheme of Arrangement between Balkrishna Industries Limited and Balkrishna Paper Mills Limited and Balkrishna Synthetics Limited (Company Petition No. 713 of 2007 connected with Company Application No. 771 of 2007) (Bom). It is therefore, submitted on behalf of the Petitioners that the submissions advanced by the Objector, th .....

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r : - 147. We may in this connection usefully refer to the judgment of the Madras High Court in M.V. Valliappan v. ITO which has rightly concluded that the decision in McDowell cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavor. Though, the Madras High Court had occa .....

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ich results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the Act; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell case. The ratio of any decision has to be understood in the context it has been made. The facts and circumstances which lead to McDowell decision leave .....

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1. It is clear from the aforesaid paragraphs that according to the Hon ble Supreme Court, the decision in McDowell s case cannot be read as laying down that every attempt at tax planning is illegitimate, or that every transaction or arrangement which is perfectly permissible under the law, but has the effect of reducing the tax burden of the assessee must be looked upon with disfavour. 12. In the case of Commissioners of Inland Revenue v. His Grace the Duke of Westminster [1935] ALL E.R. 259, on .....

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rts have done and to dissociate ourselves from the observations of Shah, J. and similar observations made elsewhere . 14. In paragraph 46 of the decision in McDowell s case, Ranganath Mishra, J., speaking for the majority has observed on this aspect, one of us, Chinnappa Reddy, J., has proposed a separate and detailed opinion with which we agree . In the case of Azadi Bachao Andolan (supra), the respondents therein, therefore strenuously argued that the decision in McDowell has changed the conce .....

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clear from Paragraphs 141 and 142 of its Judgment, which are reproduced hereunder : - 141. As we shall show presently, far from being exorcised in its country of origin, Duke of Westminster 1936 AC 1 : 19 TC 490 continues to be alive and kicking in England. Interestingly, even in McDowell, though Chinnappa Reddy, J., dismissed the observations of J.C. Shah, J., in CIT v. A. Raman and Co. [1968] 67 ITR 11: AIR 1968 SC 49 based on Westminster and Fisher s Executors 1926 AC 395 at p.412 by saying ( .....

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itimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. 142. This opinion of the majority is a far cry from the view of Chinnappa Reddy, J. : (SCC p. 243, para 17) In our view, the proper way to construe a tax statute, w .....

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in our considered opinion, actually militates against the observations of the majority of the Judges which we have just extracted from the leading judgment of Ranganath Mishra, J. (as he then was) . 15. Further, in Azadi Bachao the Supreme Court also referred to the decision of the Constitution Bench of the Supreme Court in the case of Mathuram Agarwal v. the State of Madhya Pradesh [1999] (8 SCC 667) wherein the Constitution Bench reiterated the observations in Bank of Chettinad Ltd. v. CIT [1 .....

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in the wake of McDowell . 16. The Hon ble Supreme Court in paragraph 166 of its decision in Azadi Bachao Andolan, therefore, held as follows: - 166. We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents . 17. In the case of Vodaphone International Holdings (supra), the Advoc .....

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case (supra) failed to read paras 41-45 and 46 of McDowell & Co. Ltd. (supra) in entirety. If so read, the only conclusion one could draw is that four learned judges speaking through Misra, J. agreed with the observations of Chinnappa Reddy, J. as to how in certain circumstances tax avoidance should be brought within the tax net. (iii) That, subsequent to McDowell & Co. Ltd. (supra), another matter came before the Constitution Bench of five Judges in Mathuram Agarwal v. State of Madhya .....

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may be legitimate provided it is within the framework of law (para 45). In the latter part of para 45, it held that colourable device cannot be a part of tax planning and it is wrong to encourage the belief that it is honourable to avoid payment of tax by resorting to dubious methods . It is the obligation of every citizen to pay the taxes without resorting to subterfuges. The above observations should be read with para 46 where the majority holds on this aspect one of us, Chinnappa Reddy, J. h .....

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ontradistinction to legitimate avoidance of tax liability (paras 7-10, 17 and 18). In our view, although Chinnappa Reddy, J. makes a number of observations regarding the need to depart from the Westminster and tax avoidance - these are clearly only in the context of artificial and colourable devices. Reading McDowell, in the manner indicated hereinabove, in cases of treaty shopping and/or tax avoidance, there is no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agraw .....

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ndolan and Vodaphone International Holdings (supra). In any event, as submitted on behalf of the Petitioners, that was a case where the Transferor Company was specially incorporated for the purpose of effecting transfer of immovable property to the Transferee Company without payment of tax. This transfer was part of the scheme. The Court thus concluded that this was a clear device to avoid tax and consequently rejected the scheme. The Wood Polymer Limited (supra) case is therefore clearly distin .....

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suggested that the law laid down in Azadi Bachao Andolan is not good law, and the correct law is laid down in McDowell s case, is of no assistance to the Objector, since the decision in the case of Vodaphone International Holdings (supra) has now settled the controversy once and for all. 21. As regards the submission of the Objector that this Court should direct the Transferee Company to implead the income tax authority as a necessary party, in my view, the income tax authority is not required .....

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under Section 391-394 of the Companies Act, 1956, only the Regional Director and Official Liquidator (in case company is being wound-up) apart from the shareholders and creditors, have locus standi to support or oppose the scheme. Hence, I am of the firm view that the income tax Department has no locus standi to intervene in the proceedings under Section 391-394 of the Companies Act, 1956 (emphasis supplied) . 22. The Objector has also raised a grievance that the shares of the Transferee Compan .....

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division of Tata Services Limited was proposed to be transferred, the Regional Director had objected that the transfer could be achieved through compliance of the provisions of Section 293(1)(a) of the Companies Act, 1956. This Court dealing with the said objection has held that if the Petitioners have adopted an elaborate route to achieve the objective, they cannot be faulted for the same. A similar view was taken by this Court in the Scheme of Arrangement between Balkrishna Industries Limited .....

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y and transparency in the Transferee Company. The Transferor Companies are in existence since 1975. It was felt that it would be in the interest of the Transferee Company to merge the five Transferor Companies with the Transferee Company, and to enable the Promoter thereof to hold shares directly in the Transferee Company rather than indirectly. The object of the Scheme is not to avoid any tax. Even today the shares are owned/controlled by the same Promoter albeit through the Transferor Companie .....

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e the Scheme was not sanctioned on or before 31st March, 2012 and since there is no announcement by the Transferee Company that the time has been extended, the Scheme has become null and void. 25. It is true that Clause 21.1 interalia provides that the Scheme shall become null and void and be of no effect if the same is not sanctioned by this Court by March 31, 2012 or within such further period or periods as may be agreed between the Boards of the Transferor Companies and the Transferee Company .....

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the Scheme is sanctioned by appropriate Court and filing the Court order with the Registrar of Companies for the Scheme to become otherwise effective. Therefore, the submission of the Objector that the Scheme has become null and void, cannot be accepted. 26. The Objector has further contended that the Company Secretary of the Transferee Company Mr. K. Subharaman, was not authorized to file the Affidavit in Rejoinder. In response, my attention is drawn to Exhibit N, page 535 of the Company Scheme .....

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as failed to disclose certain proceeding where prosecution was launched against the Transferee Company and its Chairman and Managing Director. In this regard, the Transferee Company has filed an Affidavit dated 26th March 2012 of its abovenamed Company Secretary, explaining in paragraphs 4 to 9 therein, why some of the proceedings were not mentioned in the Affidavit filed before the Regional Director. The explanation is accepted. In view thereof, the said objection is rejected. 28. The Objector .....

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ependent one. Further, Mr. Jayendra Shah is the second holder of the said shares and as such did not have any pecuniary interest in the Transferor Companies. Again Valuation Report has been obtained to comply with the provisions of the Listing Agreement and there is no change in the shareholding pattern of the Transferee Company, as it will issue equivalent number of shares to the Promoters as already held by the Transferor Companies. The pre and post shareholding pattern of the Transferee Compa .....

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e Transferee Company, the provisions of the Wealth Tax Act, does not apply in the instant case. Again, the only assets (apart from cash and bank balance) of the Transferor Companies were the shares held by them in the Transferee Company. As such, it was reasonable and proper to value the Transferor Companies on the basis of the value of their shareholdings in the Transferee Company. Moreover, the Transferee Company has secured a Fairness Opinion of Fedex Securities Ltd, a Category I Merchant Ban .....

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e Transferee Company that there are no pending cases for infringement of Trademark or Patent filed against the Transferee Company and as such there is no question of providing any contingent liability. 31. It is lastly contended by the Objector that since there is reduction in the capital of the Transferee Company to an extent of over 15%, the Securities and Exchange Board of India (Substantial Acquisitions and Takeover) Regulations, 1997 ( SEBI Takeover Regulations 1997 ) is triggered. It is co .....

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he Company Scheme Petition as Exhibit S1 and S2 at page 595 and 596. This objection raised by the Objector is therefore, also rejected. 32. As stated hereinabove, the shareholders of the Transferor Companies and the Transferee Company have approved the Scheme and the Objector who is holding 0.001% of the total share capital of the Transferee Company is the only shareholder who has opposed the Scheme. The Official Liquidator has filed his Report dated January 18, 2012 stating that the affairs of .....

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