TMI Blog2016 (3) TMI 696X X X X Extracts X X X X X X X X Extracts X X X X ..... e business of the company as sought would also be in the cross hair of a statutory provision i.e. explanation to Section 2(19AA) of the Act of 1961. Thus the scheme of demerger of which sanction is sought appears to be only a device for avoidance of obligation towards capital gains tax and stamp duty and also falls foul of Explanation to Section 2(19AA) of the Income Tax Act of 1961. The scheme of de-merger cannot therefore be sanctioned - Decided against petitioner company - S.B. Company Petition No.14, 19, 20, 21, 22, 23, 24, 25, 26, 27/2012 - - - Dated:- 12-2-2016 - MR. ALOK SHARMA, J. Mr. Gunjan Pathak, for the petitioner company Mr. R.D. Rastogi, Addl.SG with Mr. Ashish Tiwari, for the Union of India. Mr. Mukesh Meena, for Regional Director. Mr. Amol Vyas, for respondents BY THE COURT: These petitions came up on second motion under Section 391-394 of the Companies Act, 1956 (hereinafter `the Act of 1956') read with Rule 57 of the Company Court Rules, 1959 (hereinafter `the Rules of 1959') seeking sanction of the scheme of de-merger of Uma Enterprises Private Limited (hereinafter `the company') into nine resultant companies aside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness operations relating thereto with their own vision and determination. The arrangement envisaged eschews potential defences and dispute in the future between the extended members of the family, all shareholders in different measure in the applicant company. It has been submitted that the scheme of demerger will also facilitate proper management, focus on core businesses to advance the interest of the shareholders by each of the resultant demerged and resultant companies. It has been submitted that total value of land in the ownership and possession of the company as per its books is ₹ 2,43,051 of which a sum of ₹ 75,000/- is constituted of capital expenditure towards development work on the company land by levelling it and redying it for real estate business. Subsequent to the de-merger/ hiving out of 26023 sq. meters under the real estate division into the nine resultant companies, land value of de-merged company will be ₹ 73,727/-. It has been contended that the scheme of de-merger is in compliance of all laws and this court on a second motion moved under Sections 391-394 of the Act of 1956 having only supervisory jurisdiction confined to ensuring that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f public interest. Collection of due tax is the highest public interest. The Addl. Solicitor General has also submitted that the scheme of de-merger is also malafide founded as it is upon incorrect statement of facts as to the existence of real estate division in the company as an ongoing concern/ undertaking/ division. It has been submitted that no real estate business at any point of time has been carried by the company as evident from the fact that no turnover, income or expenditure from the said business from the very inception of the company in 1973 is reflected in its annual financial statements as apparent from the balance-sheet as of 31-3-2012. It has been submitted that the Tax Audit Report dated 11-9-2013 and 19-9-2014 also shows the applicant company only engaged in the manufacturing activity and sale of vanaspati and edible oils. The Addl. Solicitor General then pointed out that no land has been shown in the inventory of the company in its books under the head of current assets as required if the purported real estate business of company was operational as a going concern. Even in the return of 2014-15 the applicant company's land has been shown as Fixed Assets . I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholders of the demerged company are allotted shares in the resultant company, oddly in the instant case contrary to general practice, the shareholders of the demerged company are to be allotted under the scheme only non-cumulative compulsorily redeemable preference shares and not equity shares, thus clearly separating them from ownership/ interest in the resultant companies. This clearly establishes that the demerger is not a bonafide restructuring but a sale of assets under a device to circumvent tax liability. Per contra, Mr. Gunjan Pathak, counsel for the petitioner company has submitted that the scheme of de-merger is in compliance with all operative laws and fully within the legal frame work of the Companies Act, 1956. If any taxation event under the Act of 1961 or the Act of 1998 attracts to the demerger sanctioned by this court, law will take its own course. It was then submitted that if the de-merger scheme entails saving of capital gains, tax or stamp duty, it is of no consequence. Counsel submitted that the Apex Court has constantly held that where a scheme of arrangement under the Act of 1956 does not violate any provision of law, the mere suspicion of alleged a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f preference shares in lieu of equity shares in a case of de-merger of a company is a matter of practice and does not in any way render the proposed scheme of de-merger illegal or fraudulent. I have perused the scheme of de-merger approved and adopted by the shareholders and unsecured creditors of the applicant company and heard counsel for the petitioner company as also the Additional Solicitor General for the Regional Director. The jurisdiction of a company court in sanctioning a scheme of arrangement by way of amalgamation or de-merger is well delineated under Sections 391 to 394 of the Act of 1956 and profusely expounded in a catena of judgments of the Apex Court and this Court. It is well settled that the scheme of arrangement under Sections 391-394 of the Act of 1956 is fundamentally a commercial document based on the commercial wisdom of the shareholders and creditors of the company. The company court cannot sit in judgment thereof on merits as if in appeal and seek to evaluate the scheme meticulously prior to grant of sanction. That however is not the end of the matter or the complete statement of law. For it is equally well settled that the sanction of the court under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel for the petitioner that the mere intent to commence the business of real estate and the purported expenditure of ₹ 75,000/- debited to the capital account towards levelling of land constituted commencement of business to bring it within the scope of Section 2 (19AA) of the Income Tax Act, 1961 and allow for a demerger. I am of the considered view that in the facts obtaining it cannot be held that the company had an operative real estate business or undertaking, which is a prereqisite for a de-merger under the law of the land. It cannot be disputed that while sanctioning a scheme the court in the exercise of its jurisdiction under Section 391(2) read with 394 of the Act of 1956 cannot negate other laws as it would be plainly contrary to public policy to do so. In the circumstances the sanction of the scheme of de-merger as sought, as rightly argued by the Addl. Solicitor General appears to be a mere device to avoid tax capital gains and stamp duty which would be otherwise leviable in the event of the land of company otherwise being transferred to a third party. The compulsorily redeemable preference shares in lieu of equity shares being allotted by the resultant companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w holding that rampant laissez faire was not countenanced under the Act of 1956. Instead the Act of 1956 also very consciously provided for regulation of companies in public interest, inasmuch as in several fields even the joint will of the management and the stake-holders has to reckon with public policy. It was held that all taxes are levied by the State in public interest and where a citizen/ corporate seeks to circumvent its obligation to pay taxes by subterfuges and even misuse and abuse of salutary provisions dehors their context and purpose, the enterprise should not be promoted by the court. In the context of amalgamation and public interest considerations for sanction thereof it was held by the Gujarat High Court in its opinion that the scheme of amalgamation must accordingly fulfill some felt needs, some objects and it must have some correlation to public interest. If the only purpose behind the scheme is defeating tax obligations and prior to the arrangement a phoney situation is created wholly unreal for milking the enabling provisions of law it would distinctly establish appear that the provisions of such a scheme were sought to be utilised for the avowed object of def ..... X X X X Extracts X X X X X X X X Extracts X X X X
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