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2015 (9) TMI 1125 - BOMBAY HIGH COURT

2015 (9) TMI 1125 - BOMBAY HIGH COURT - TMI - Validity of Scheme of arrangement between the Petitioner and its Shareholders - Proceedings under Income Tax were pending - Petitioner seeks to make a gift of the shares held by the Petitioner in a Company to its Shareholders - the Petitioner proposes to reduce the balance lying in its Securities Premium Account (“SPA”) by the book value of the Petitioner’s investment in the shares of TAAL as appearing in the books of accounts of the Petitioner on th .....

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ner Company. Despite the pendency of these proceedings, by the Scheme the Petitioner proposes to gift its shares in TAAL to its Shareholders. Such a gift would therefore clearly be hit by the provisions of Section 281(1) and would be void as against the claims of the Income Tax Department resulting from the proceedings mentioned above.

It is pertinent to note that it is not the case of the Petitioner that the gift of the shares of TAAL would not be void on account of the proviso to S .....

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net worth of ₹ 57 crores as per the market value method post distribution of the shares of TAAL to its Shareholders. In my view, even if this be true, the same does not alter the position with regard to the applicability of Section 281(1). Section 281(1) does not carve out any exception on the basis of sufficiency or otherwise of the assets of the assessee.

It will not be proper to permit the Petitioner Company to gift its shares in TAAL to its Shareholders as envisaged under th .....

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hyam Mehta, Senior Advocate, along with Mr. C.J. Joy, JUDGMENT: 1. By this Petition filed under Sections 391 to 394 of the Companies Act, 1956 ( the 1956 Act ) the Petitioner seeks sanction of this Court to a scheme of arrangement between the Petitioner and its Shareholders ( the Scheme ). By the Scheme, the Petitioner seeks to make a gift of the shares held by the Petitioner in a Company known as Taneja Aerospace and Aviation Limited ( TAAL ) to its Shareholders in the ratio of one fully paid u .....

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e. The reduction of the SPA is sought in terms of the provisions of Sections 100 to 104 of the 1956 Act read with Section 52 of the Companies Act 2013 ( the 2013 Act ). The Board of Directors of the Petitioner Company approved the Scheme at its Meeting held on 26th June 2014. 2. By an Order dated 8th August 2014 passed by this Court in Company Summons for Directions No.632 of 2014, this Court convened Meetings of the Equity Shareholders and Unsecured Creditors of the Petitioner Company on 15th S .....

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his Affidavit dated 6th January, 2015, placing on record his observations and comments with regard to the Scheme. The Regional Director has objected to the Scheme being sanctioned by this Court. The Petitioner Company has filed an Affidavit dated 12th February 2015 in response to the Affidavit of the Regional Director seeking to answer the objections of the Regional Director. 3. I have heard Mr. Virag Tulzapurkar, the learned Senior Counsel appearing for the Petitioner and Mr. Shyam Mehta, the .....

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er Company is in effect giving dividend to its Shareholders in kind, which is prohibited by the aforesaid provisions. b) The Scheme also violates Section 281 of the Income Tax Act, 1961 inasmuch as in view of the pendency of certain demands and proceedings under the Income Tax Act against the Petitioner Company, the proposed gift of the Petitioner s shares in TAAL to its Shareholders would be void as against any claim in respect of any tax or any other sum payable by the Petitioner on account of .....

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Exchange ( BSE ). From the information available on the BSE portal the shares of TAAL were quoted at ₹ 50/on 9th October 2014, ₹ 82.55 on 11th December 2014 and ₹ 86.40 on 26th June 2015. The market value of the shares of TAAL is therefore much higher than their book value. The Petitioner Company has incurred a loss of ₹ 8,98,81,844/as on 31st March 2013. From the unaudited/provisional financial statements as on 28th February 2014 annexed to the Petition, it appears that .....

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ted 27th October 2014 of the Dy. Commissioner of Income Tax, Central Circle 2(1), Pune, addressed to the Regional Director. The Income Tax Department has informed the Regional Director that the following proceedings are pending against the Petitioner under the Income Tax Act : i) Assessment proceedings in respect of AY 201314 i.e. FY 201213; ii) Outstanding demands of ₹ 1,16,57,000/and ₹ 1,09,57,772/in respect of AY 200607 and AY 200708 respectively. iii) Penalty proceedings in respe .....

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henceforth refer only to Section 123. Mr. Mehta, the learned Senior Counsel appearing for the Regional Director submits that the gift of the shares of TAAL by the Petitioner Company to its Shareholders constitutes payment of dividend by the Petitioner to its Shareholders. According to him Section 123 of the 2013 Act prohibits the payment of dividend by a company to its shareholders otherwise than in cash. He submits that by the Scheme the Petitioner is issuing dividend to its Shareholders in the .....

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Mehta, the ordinary meaning of dividend will include the distribution of any property of a company in kind amongst its shareholders. In support of his contention Mr. Mehta relies upon the decisions of the Hon ble Apex Court in the case of Kantilal Manilal v/s CIT(1961) 41 ITR 275 and in the case of CIT v/s Central India Industries Ltd. (1972) 3 SCC 311. He further submits that the market value of the shares of TAAL is much higher than their book value and therefore there is no doubt at all that .....

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lates Section 123 of the 2013 Act the same is illegal and ought not to be sanctioned. 8. On the other hand Mr. Tulzapurkar, learned Senior Counsel appearing on behalf of the Petitioner urged that Sections 391 to 394 of the 1956 Act are a complete code and that under these sections a company is conferred with wide powers to undertake any kind of scheme of compromise or arrangement with its shareholders, creditors etc. including a scheme involving the distribution of shares to its shareholders. He .....

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legally permissible procedure for the Petitioner Company to follow. He further submits that once the Petitioner Company has adopted a legally permissible procedure, there can be no violation of Sections 205 and 123. Hence it is the submission of Mr. Tulzapurkar that the Petitioner Company had the option of distributing its assets viz. the shares of TAAL amongst its Shareholders by following the procedure under Sections 391 to 394 read with Sections 100 to 104 of the 1956 Act, which is a legally .....

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ision of this Court (Vazifdar, J.) dated 3rd March, 2006 in Company Petition Nos. 758 and 759 of 2005, Zicom Electronic Security Systems Limited Unreported decision of this Court (Khanwilkar, J.) dated 23rd November, 2007 in Company Petition No. 813 of 2007, Balkrishna Industries Limited Unreported decision of this Court (Bhosale, J.) dated 10th October, 2007 in Company Petition Nos. 713 of 2007 , Balkrishna Paper Mills Ltd. Unreported decision of this Court (Bhosale, J.) dated 10th October, 200 .....

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kar submitted that the Regional Director s reliance on the decisions of the Hon ble Apex Court in the case of Kantilal Manilal (supra) and in the case of Central India Industries Limited (supra) is misconceived. He submitted that both these decisions relate to proceedings under the Income Tax Act, and are based on a special definition of dividend as provided in the Income Tax Act which was different from the definition of dividend under the 1956 Act as well as the 2013 Act and accordingly the sa .....

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ability of dividend in the hands of shareholders and not the company and that as far as the Companies Act is concerned, the distribution of dividend should be considered from the company s perspective and not the shareholders perspective. In support of his submissions Mr. Tulzapurkar relied on the decisions of the Hon ble Apex Court in CIT v/s Nalin Behari Lal Singha (1969) 2 SCC 310, Bangalore Turf Club Limited v/s Regional Director Employees State Insurance Corporation (2009) 15 SCC 33, Whirlp .....

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005, sanctioning a Scheme involving the distribution of shares by KEC International Limited in KEC Infrastructure Limited to the shareholders of KEC International Limited and submitted that the case was similar to the present one and that this Court had already sanctioned a similar scheme in the past. Mr. Tulzapurkar further relied upon an Order dated 22nd September 1995 passed by the Hon ble Calcutta High Court in the case of Bata Properties Limited Unreported decision of Calcutta High Court (B .....

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laws and that the Companies Act was no exception. In other words, according to him the Scheme, even though framed under Sections 391 to 394 read with Sections 100 to 104 of 1956 Act, was also required to comply with the other provisions of the 1956 Act as well as the provisions of the 2013 Act. Merely because the Scheme was formulated under Sections 391 to 394 read with Sections 100 to 104 of the 1956 Act, it does not mean that the Scheme could violate the other provisions of the 1956 Act or the .....

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x Act to support his argument that the Scheme was violative of Section 123 of the 2013 Act, in that the Petitioner Company was issuing dividend in kind by gifting the shares of TAAL to its Shareholders, but he was relying on the ordinary meaning of the word dividend . He submitted that the ordinary meaning of dividend was not excluded from the definition of dividend contained in either the 1956 Act or the 2013 Act, or for that matter the Income Tax Act. According to him, in the decisions of the .....

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ongst its shareholders amounts to dividend in the hands of the shareholders, it will also constitute distribution of dividend by the company and what is dividend received by a shareholder is equally dividend issued by a company. In the light of these submissions he submitted that the decisions relied upon by Mr. Tulzapurkar in relation to importing a meaning from one Act to another, has no relevance at all. As regards the order passed by this Court in the case of KEC Infrastructure Limited, Mr. .....

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n though a similar scheme was sanctioned in the past. 11. I have considered the above submissions of the Petitioner as well as the Regional Director. The question that arises for consideration is whether the Scheme violates Section 123 of the 2013 Act. The answer to this question depends on whether the gifting of the shares of TAAL by the Petitioner Company to its Shareholders amounts to the Petitioner giving dividend to its Shareholders. To determine this question one will have to examine the r .....

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lip;… …… ……. (4) … … ……… …… ………. (5) No dividend shall be paid by a company in respect of any share therein except to the registered shareholder of such share or to his order or to his banker and shall not be payable except in cash; Provided that nothing in this subsection shall be deemed to prohibit the capitalization of profits or reserves of a company for the purpose of issuing fully paidu .....

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is as follows : 2. In this Act, unless there is anything repugnant in the subject or context 6(a) dividend includes ……………………………… The definition of dividend contained in the Income Tax Act, 1961 is as follows: 2. Definitions: .... ..... ..... (22) dividend includes ……………………………………… Except for the opening words .....

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r arrangement with its shareholders under Sections 391 to 394 of the 1956 Act. According to him, where a company has more than one modality available for any corporate action, the choice lies with the company to select the one which it deems appropriate. In this case the Petitioner Company has opted for and followed the procedure prescribed under Sections 391 to 394 read with Sections 100 to 104 of the 1956 Act for the purpose of gifting its shares in TAAL to its Shareholders. He submitted that .....

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th the provisions of Sections 391 to 394, the Scheme must also comply with the other provisions of the Companies Act and must not be contrary to any of those provisions. In my view therefore it cannot be said that merely because the Scheme is propounded under Sections 391 to 394 read with Sections 100 to 104 of the 1956 Act, the Scheme need not comply with the other provisions of the 2013 Act as applicable including the provisions of Section 123 of the 2013 Act. In my opinion the Scheme must not .....

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the following extract taken from the aforesaid decision : In view of the aforesaid settled legal position, therefore, the scope and ambit of the jurisdiction of the company court has clearly got earmarked. The following broad contours of such jurisdiction have emerged :- .... ..... ....... .... .... ... ..... .... (6) That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose .....

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t a company is at liberty to select one of the several modalities available for any corporate action. In support of his contention, Mr. Tulzapurkar also relied upon the unreported decisions of this Court in the case of Tatanet Services Limited (supra), Balkrishna Industries Ltd. (supra), Balkrishna Paper Mills Ltd. (supra), Balkrishna Synthetics Limited (supra) and Zicom Electronic Security Systems Limited (supra). However, none of the decisions relied on by Mr. Tulzapurkar state that a scheme o .....

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the case of Sterlite Industries (India) Limited this Court held that even though Section 77A of the 1956 Act prescribed the procedure for a company to buy back its own shares, the company had the option of buying back its own shares by following the procedure under Sections 391 to 394 subject to compliance with Sections 100 to 104 of the 1956 Act. Significantly, Section 77A did not prohibit the buy back of shares by a company but only prescribed a method for doing so. As such that was not a case .....

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a contention that the Petitioner therein could have transferred the undertaking of the company by availing of the provisions of Section 393(1)(a) of the 1956 Act and that it was not necessary for the Petitioners to file a Petition under Sections 391 and 394. In that context this Court held that if the Petitioners have chosen a more elaborate route which has the same object, they could not be faulted for the same. The decision in Tatanet Services was followed by this Court in the later unreported .....

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e of any aid to the Petitioner herein. 17. In the present case the argument of the Regional Director is not that the Petitioner Company ought to have followed another procedure for the purpose of gifting the shares of TAAL to its Shareholders. The contention of the Regional Director is that such a gift of shares is violative of the provisions of Section 123 of the 2013 Act. None of the decisions cited by Mr. Tulzapurkar deal with a case where the contention of the Regional Director was that the .....

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not violate any provision of law. Consequently the decisions of this Court cited by Mr. Tulzapurkar are irrelevant in the context of the objections of the Regional Director that the Scheme is violative of Section 123 of the 2013 Act. 18. Further if one looks at Section 123 of the 2013 Act, it is clear that it does not prescribe any modality or method for declaration of dividend. It prescribes conditions to be complied with by a company before declaring dividend. Hence Section 123 is not a modali .....

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e need not comply with the conditions prescribed by Section 123. If such a contention is accepted, it will mean that companies can declare dividends in violation of Section 123 merely by following the procedure prescribed by Sections 391 to 394. For this reason also I am of the view that even if a company distributes its assets amongst its shareholders by means of a scheme of compromise or arrangement under Sections 391 to 394, such a company will be required to comply with the provisions of Sec .....

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t the gift of the shares of TAAL by the Petitioner Company to its Shareholders is a violation of Section 123 of the 2013 Act inasmuch as the same constitutes and amounts to payment of dividend by the Petitioner Company to its Shareholders. The question that therefore arises for consideration is whether gift of shares of TAAL by the Petitioner Company to its Shareholders constitutes and amounts to payment of dividend by the Petitioner Company to its Shareholders. 20. From the definition of divide .....

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Act will not exclude from its purview the meaning of dividend in its ordinary sense. In other words, the expression dividend used in the 2013 Act will have to be understood in its ordinary sense and be given its ordinary meaning. The only consequence of the definition of dividend in Section 2(35) of the 2013 Act is that dividend will also include interim dividend. 21. The view I have taken with respect to the meaning of dividend in the 2013 Act is supported by two decisions of the Hon ble Apex .....

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6a) of the Income Tax Act, 1922 reproduced hereinabove. In Kantilal Manilal, the Appellants before the Hon ble Apex Court held 570 shares of Navjivan Mills Limited. It seems that Navjivan Mills held 5000 shares of the Bank of India Limited. On 6th May 1948 the Bank of India passed a resolution increasing its share capital and approving the allotment of new shares to its existing shareholders. Navjivan Mills, as a holder of 5000 shares of the Bank of India, became entitled to receive 1666.6 share .....

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Court became entitled to 1440 shares of the Bank of India which they acquired and ultimately transferred to a Private Company by the name of Jesinghbai Investment Company Limited. Sometime later the assessment of the Appellants before the Hon ble Apex Court and of other shareholders of Navjivan Mills was reopened by the Income Tax Department on the footing that the release of the shares of the Bank of India by Navjivan Mills to its shareholders amounted to distribution of dividend and the value .....

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ed, having regard to the form of the question which expressly related to the distribution of the right to the Bank of India shares being divided within the meaning of the definition in Section 2(6A) of the Income Tax Act, in enlarging the scope of the question and in answering it in the light of its ordinary meaning. There is no substance in this contention. dividend is defined in Section 2(6A) as inclusive of various items and exclusive of certain others which it is not necessary to set out for .....

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t out in the definition. The Tribunal had referred the question whether the distribution of the right to apply for the Bank of India shares amounted to distribution of dividend within the meaning of Section 2(6A) and in answering that question, the High Court had to take into account both the normal and the extended meaning of that expression. In the question framed by the Tribunal, there is nothing to indicate that the High Court was called upon to advise on the question whether the receipts by .....

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had three options, (1) to accept the shares, (2) to decline to accept the shares, or (3) to surrender them in favour of its nominee. It is undisputed that when the shares were offered by the Bank of India to its shareholders, the right to apply for the shares had a market value of ₹ 100 per share. The face value of the new share was ₹ 50 but the shareholders had to pay a premium of ₹ 50, thus making a total payment of ₹ 100 for acquiring the new share. The new shares were .....

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y nominating the persons who were to take over the shares and that is what the Mills did. The Mills requested the Bank of India to allot the shares to its nominees, and the request for allotment to its nominees amounted to transfer of the right. By its resolution, the Mills in truth transferred a right of the value of ₹ 200 for each share held by its shareholders. This was manifestly not distribution of the capital of the Mills. It was open to the Mills to sell the right to the shares of t .....

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, did not purport to distribute the right amongst the shareholders as dividend. It did not also take the form of a resolution for distribution of dividend; it took the form of distribution of a right which had a monetary value. But by the form of the resolution sanctioning the distribution, the true character of the resolution could not be altered. We are therefore of the view that the High Court was right in holding that the distribution of the right to apply for and obtain two shares of the Ba .....

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tion the other items set out in the definition. The Hon ble Apex Court further held that when the Legislature defined the expression dividend in Section 2(6A) it added to the normal meaning of the expression several other categories of receipts which may not otherwise be included therein. In other words, the Hon ble Apex Court held that the ordinary meaning of the expression dividend would be applicable and was not excluded by virtue of the inclusive definition of the the said expression. The Ho .....

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shareholders was still dividend. According to the Hon ble Apex Court dividend need not be distributed only in money but may be distributed by delivery of property or a right having monetary value. The Hon ble Apex Court further held that even though the resolution passed by the Navjivan Mills did not purport to distribute the right amongst the shareholders as dividend, it did not make any difference inasmuch as it was not the form of the resolution that mattered but the true character thereof. I .....

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nd payment of dividend. As held by the Hon ble Apex Court the inclusive definition of dividend in the Income Tax Act did not exclude from its purview the ordinary meaning of dividend. In my view the same is the situation in the context of the 2013 Act. The definition of dividend in Section 2(35) of the 2013 Act will not exclude from its purview the meaning of dividend as ordinarily understood. The expression dividend as used in the 2013 Act will therefore include dividend in its ordinary sense. .....

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t is being gifted by the Petitioner Company to its Shareholders, but it is the shares themselves that are being gifted. The Petitioner Company is distributing its shares in TAAL to its Shareholders by way of a gift. In my view this is clearly distribution of dividend by the Petitioner Company. The Company could very well have sold the shares of TAAL in the market and distributed the proceeds amongst its Shareholders. Instead the Company is directly gifting the said shares to its Shareholders. Su .....

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rence that the Hon ble Apex Court was considering the matter from the angle of taxability of dividend whether in the hands of the shareholders or the company. In my view the expression dividend in its ordinary sense must mean the same thing whether considered in the context of the Income Tax Act or the Companies Act. What constitutes dividend when declared or issued by the company will equally be dividend when received by its shareholders. In the light of the aforesaid discussion, in my view, th .....

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pex Court followed its earlier decision in Kantilal Manilal and came to the conclusion that since the distribution of property or right having monetary value also constitutes distribution of dividend, and dividend need not be distributed in money only, the dividend by way of handing over of shares also constituted dividend and was taxable. The Hon ble Apex Court further held that if it were otherwise, companies may distribute dividend in kind and facilitate evasion of tax by shareholders and thi .....

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or assets of a company or any rights having monetary value, amongst its shareholders. In the present case the Petitioner Company is seeking to distribute its shares in TAAL to its Shareholders under the Scheme. This is nothing but payment of dividend in kind. 25. The next question that arises for consideration is whether the gifting of the shares of TAAL by the Petitioner Company to its Shareholders is violative of Section 123 of the 2013 Act. Subsection 5 of Section 123 categorically prohibits .....

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the 2013 Act. 26. It is submitted by Mr. Tulzapurkar that a company can distribute its assets under the provisions of Sections 100104 of the 1956 Act and that accordingly no fault can be found with the Scheme. I am unable to accept this submission. First and foremost, as is clear from the Clause 5 of the Scheme itself, the reduction of the SPA is merely an accounting treatment in the books of the Petitioner Company. Further this reduction is a consequence of the gifting of the shares of TAAL by .....

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areholders. Moreover, even a reduction of capital under the Companies Act must not be in violation of the other provisions of the Companies Act. The gift of the shares of TAAL by the Petitioner Company to its Shareholders will therefore necessarily have to comply with the provisions of Section 123 of the 2013 Act, particularly in view of my finding that the said gift amounts to distribution of dividend. In the circumstances the provisions of Sections 100 to 104 of the 1956 Act and Section 52 of .....

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scheme in the past. In this regard Mr. Mehta has rightly pointed out that in the case of KEC Infrastructure Limited there was no objection raised by the Regional Director or any other party with regard to the violation of Section 205 of the 1956 Act. Hence this issue was not considered by this Court in that case. Consequently, the order of this Court in KEC Infrastructure Limited is not relevant in the present case and is of no assistance to the Petitioner Company. The same is the situation with .....

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ainst the Petitioner Company under the Income Tax Act : i) Assessment proceedings in respect of AY 201314 i.e. FY 201213. ii) Outstanding demands of ₹ 1,16,57,000/and ₹ 1,09,57,772/in respect of AY 200607 and AY 200708 respectively. iii) Penalty proceedings in respect of AYs 200607 to 201213. 29. Relying upon Section 281 of the Income Tax Act, 1961, the Income Tax Department has contended that the gift of the shares of TAAL by the Petitioner to its Shareholders as proposed under the .....

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come Tax Act. The relevant portion of Section 281 is reproduced below : 281 (1) Where, during the pendency of any proceedings under this Act or after the completion thereof, but before the service of notice under rule 2 of the Second Schedule, any assessee creates a charge on, or parts with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever) of, any of his assets in favour of any other person, such charge or transfer shall be void as against any cla .....

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t the gift of any asset by an assessee to any person during the pendency of any proceedings under the Income Tax Act will be void as against any claim in respect of any tax or any other sum payable by the assessee as a result of the completion of such proceedings or otherwise. In the present case it is an undisputed position that the above mentioned proceedings under the Income Tax Act are pending against the Petitioner Company. Despite the pendency of these proceedings, by the Scheme the Petiti .....

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es of TAAL by the Petitioner to its Shareholders will defeat the provisions of Section 281(1) of the Income Tax Act. 32. The Petitioner however contends that it has more than sufficient assets to discharge the tax liability in the event that the same crystallizes upon the Petitioner, inasmuch as according to the Petitioner, it has a net worth of ₹ 52 crores as per the book value method and a net worth of ₹ 57 crores as per the market value method post distribution of the shares of TA .....

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er is also therefore liable to be rejected. 33. As noticed above, there are assessment proceedings, outstanding demands and penalty proceedings under the Income Tax Act pending against the Petitioner Company. These proceedings may very well result in taxes or other sums being payable by the Petitioner Company to the Income Tax Department. The gift of the shares of TAAL by the Petitioner Company to its Shareholders will be void as against the claim or claims of the Income Tax Department in respec .....

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be kept in mind that TAAL is a Public Limited Listed Company whose shares can be traded on the Stock Exchange. In this manner this asset of the Petitioner Company will be lost to the Income Tax Department. In my view this will defeat the purpose and object of Section 281(1) of the Income Tax Act. Accordingly it will not be proper to permit the Petitioner Company to gift its shares in TAAL to its Shareholders as envisaged under the Scheme. The Court will not put its imprimatur on such a Scheme. 3 .....

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