TMI Blog2015 (9) TMI 1125X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Section 281(1). In the circumstances there can be no doubt that the proposed gift of the shares of TAAL by the Petitioner to its Shareholders will defeat the provisions of Section 281(1) of the Income Tax Act. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roved. Thereafter the Petitioner filed the present Company Scheme Petition and served copies thereof on the Regional Director as well as the Registrar of Companies, Pune and the concerned Income Tax Department. The Regional Director has filed 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 learned Senior Counsel appearing for the Regional Director at some length. The Petitioner Company as well as the Regional Director thereafter filed their Written Submissions in the matter dated 29th April, 2015 and 30th June, 2015 respectively. 4. Broadly speaking the Regional Director is objecting to the Scheme on the following grounds : a) The Scheme violates Section 205 of the 1956 Act and Section 123 of the 2013 Act, inasmuch as by gifting t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01213; 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. The Company has not disputed the fact that the aforesaid proceedings are pending against it. The Income Tax Department has also objected to the Scheme and prayed that the same ought not to be approved by the Court. 7. Coming to the objections of the Regional Director, his first and primary objection is that the Scheme is violative of Section 205 of the 1956 Act corresponding to Section 123 of the 2013 Act. Since Section 123 of the 2013 Act has come into force, I will 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 form of the shares of TA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re under Sections 391 to 394 read with Sections 100 to 104 of the 1956 Act which is a 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 permissible procedure under the 1956 Act and hence the Scheme is in accordance with the law and cannot be said to be violative of Sections 205 or 123, and in fact the latter Sections have no applicability at all. In support of his contentions, Mr. Tulzapurkar relied upon the decisions of this Court in SEBI v/s Sterlite (India) Industries Limited (2003) 45 SCL 475 (Bom.) and PMP Auto Limited (1995) 5 Comp LJ 598 and the unreported decisions of this Court in Tatanet Services Limited Unreported decision of this Court (Vazifdar, J.) dated 3rd March, 2006 in Company Petition Nos. 758 and 759 of 2005, Zicom Elect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Corporation v/s Registrar of Trade Marks, Mumbai (1998) 8 SCC 1, Union of India v/s R.C. Jain (1981) 2 SCC 308, State of Punjab V/s S.S. Singh AIR 1961 SC 493, Ranjit Singh v/s State of Haryana and Pankaj Mehra v/s State of Maharashtra (2000) 2 SCC 756. Mr. Tulzapurkar also relied on an order passed by this Court in the case of KEC Infrastructures Limited Unreported decision of this Court (A.M. Khanwilkar, J.) dated 27th September, 2005 in Company Petition No. 416 of 2005 on 27th September 2005, 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 (Baboo Lall Jain, J.) dated 18th September, 1995 in Company Petition No. 300 of 1995.. For all these reasons Mr. Tulzapurkar submitted that the objections of the Regional Director on this count are untenabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitute 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. Mehta submitted that there was no objection raised by the Regional Director or any other party in that case as has been raised in the present case and hence that order cannot be relied upon for the purpose of sanctioning the present Scheme. The same was the case with the Order passed by the Calcutta High Court in the case of Bata Properties Limited (supra). He further submitted that in any event once it was shown that the present Scheme was illegal, the Court ought not to sanction the Scheme even 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 once the Petitioner Company has followed a legally prescribed procedure for entering into an arrangement with its shareholders, Section 123 of the 2013 Act will have no application and will not come in the way of such a Scheme. It is not possible to accept the aforesaid submissions of Mr. Tulzapurkar. It is trite law that every Scheme under Sections 391 to 394 of the Companies Act must comply with all laws and must not be violative of any provision of law. It follows that apart from complying with 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 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies Act. These decisions at best show that a company can follow the procedure under Sections 391 to 394 and enter into a scheme of compromise and/or arrangement with its shareholders and/or creditors and that by such a scheme a company may do something for which another method may also be prescribed by the Companies Act. For example, in 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 where the Scheme in question was found to be violative of any other provision of the Companies Act. In fact this Court held that a company could buy back its shares either by following the procedure under Section 77A or the procedure under Sections 391 to 394 subject to compliance with Sections 100 to 104 of the 1956 Act. 16. As regards the unreported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 modality to be followed for the purpose of issuing dividend as suggested by Mr. Tulzapurkar. It is clear that if a company wishes to issue or declare dividend it is mandatorily required to comply with the provisions of Section 123. It is therefore not possible to accept the submission of Mr. Tulzapurkar that if a company wishes to distribute its properties among its shareholders by following the procedure prescribed under Sections 391 to 394, Section 123 will not be applicable and the company therefore 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 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontext of the Companies Act also in view of the fact that even the definition of dividend in the Income Tax Act, 1922 was an inclusive definition, as is clear from Section 2(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 shares of the Bank of India. It appears that the management of Navjivan Mills was not inclined to acquire these 1666.6 shares offered by the Bank of India. Accordingly the Board of Directors of Navjivan Mills passed a resolution to the effect that Navjivan Mills would acquire only 66 shares out of 1666.6 shares offered by the Bank of India and the right to the remaining 1600 shares shall be distributed amongst the shareholders of Navjivan Mills proportionately. The Appellants before the Hon ble Apex Court became entitled to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te that the High Court was called upon to advise on the question whether the receipts by the appellants amounted to dividend only within the extended definition of that expression in Section 2(6A). 7. It was also urged that in nominating its shareholders to exercise the option to purchase the new issue of the Bank of India, the Mills did not distribute any dividend. The Mills were, it is true, not obliged to accept the offer made by the Bank of India, however advantageous it might have been to the Mills to accept the offer: it was open to the Mills to renounce the offer. The Mills 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 quoted in the market at more than ₹ 200: and the difference between the amount payable for acquiring t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnotation 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 Hon ble Apex Court thereafter went on to hold that it was open to Navjivan Mills to sell the right to the shares of the Bank of India in the market and distribute the sale proceeds among its shareholders, which distribution would undoubtedly have been distribution of dividend. The Hon ble Apex Court held that if, instead of selling the right in the market and then distributing the sale proceeds, the Navjivan Mills directly transferred the right to its shareholders, the benefit in the hands of the 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 v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kar submitted that in the case of Kantilal Manilal, the Hon ble Apex Court was considering whether the distribution of the right to acquire shares was taxable in the hands of the shareholders and not the company, and that for the purposes of the Companies Act the distribution of dividend should be considered from the company s perspective and not the perspective of the shareholders. In my view it makes little difference 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, there can be no doubt that by gifting the shares of TAAL the Petitioner Company is in fact distributing dividend amongst its Shareholders. 24. The decision in Kantilal Manilal (supra) was subsequently followed by the Hon ble Apex Court in the case of Central India Industries (su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly 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 the Petitioner Company to its Shareholders and this is clear from the opening words of Clause 5 viz., Pursuant to the gifting of equity shares in TAAL by ISEL to its shareholders, the balance lying in the Securities Premium Account shall, be reduced by the book value of investments in TAAL so gifted, .. .. . Even otherwise it is clear that the main purpose and object of the Scheme is the gifting of shares of TAAL by the Petitioner Company to its Shareholders. 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d objection of the Income Tax Department before the Court in support of the same. 30. To appreciate the objection of the Income Tax Department it is necessary to consider the provisions of Section 281 of the Income 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 claim in respect of any tax or any other sum payable by the assessee as a result of the completion of the said proceeding or otherwise : Provided that such charge or transfer shall not be void if it is made- (i) For adequate consideration and without notice of the pendency of such proceeding or, as the case may be, without notice of such tax or other sum payable by the assessee; or (ii) With the previous permission of the Assessing Officer. 31. It is clear from Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of TAAL by the Petitioner Company to its Shareholders will be void as against the claim or claims of the Income Tax Department in respect of the aforesaid taxes and sums, in view of Section 281(1). The Income Tax Department would therefore be entitled to recover its dues by attachment and sale of the said shares of TAAL. If these shares are today permitted to be gifted under the Scheme to the Shareholders of the Petitioner Company, the same may not be available at the time when the claim of the Income Tax Department is crystallized, since there may be further sales of these shares by the Shareholders receiving the same. It must 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. 34. Mr. Tulzapurkar submitted that it is well settled by the d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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