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2016 (5) TMI 880 - DELHI HIGH COURT

2016 (5) TMI 880 - DELHI HIGH COURT - [2016] 386 ITR 580 - Computation of capital gains arising from transfer of an undertaking by the Assessee to a new company in terms of a scheme of arrangement - Assessee had received only ₹ 32.48 crores in terms of the Scheme and the balance amount of ₹ 17.64 crores was discharged by MTAIC by directly issuing fully paid shares to the shareholders of the Assessee - Held that:- If we look at the Scheme in the context in which it belongs, it wou .....

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ideration. We are unable to accept Mr Kapoor's contention that merely because part of the consideration for the transfer of the Panasonic Division had been paid to the shareholders of the Assessee by issue of fully paid-up shares, the same could not be stated to have been “received or accruing” in favour of the Assessee. The expression “accruing” as used in Section 48 of the Act is synonymous to entitlement. If the Assessee is entitled to the consideration, then the same must be taken into accou .....

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- S.MURALIDHAR & JUSTICE VIBHU BAKHRU JJ. For the Appellant : Mr Ashok K. Manchanda, Senior Standing counsel with Ms Vibhooti Malhotra, Junior Standing counsel. For the Respondent : Mr Salil Kapoor, Mr Sanat Kapoor, Ms Ananya Kapoor and Mr Sumit Lal Chandani. JUDGMENT VIBHU BAKHRU, J 1. The Revenue has preferred the present appeal under Section 260A of the Income Tax Act, 1961 (hereafter the Act ) assailing an order dated 2nd August, 20 .....

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ransfer of an undertaking by the Assessee to a new company, M/s Matsushita Television & Audio India Ltd., in terms of a scheme of arrangement sanctioned by this Court, under Section 391-394 of the Companies Act, 1956. Whilst the Assessee claims that it has incurred a short term capital loss of ₹ 11,14,31,696/- on the sale of the said undertaking, the Assessing Officer (hereafter the AO ) has assessed the said transaction as resulting in a short term capital gain of ₹ 25,34,72,144 .....

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its challenge as to the cost of the assets for the purposes of calculation of capital gains. Therefore, the only issue surviving in this appeal is the dispute as to the quantum of consideration for the purposes of computation of capital gains on transfer of the undertaking in question. 3. The present appeal was admitted on 10th July, 2003 and the following questions of law were framed: (i) Whether on a correct interpretation of clauses 9 and 12 of the .....

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ce the second question was not pressed by the Revenue, we are called upon to consider only the first question as quoted herein above. 5. Briefly stated the facts necessary to address the aforesaid question are as under: 5.1 The Assessee is a Public Limited company and at the material time was, inter alia, engaged in manufacturing television sets, components, office automation equipment, etc. The Assessee states that it had five undertakings including one referred to as the .....

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ich MEI agreed to subscribe and hold 55% of the issued and paid-up equity capital. 5.3 In order to hive off the Panasonic Division as aforesaid, the Assessee proposed a scheme of arrangement entailing transfer of the Panasonic Division to MTAIC (hereafter referred to as the Scheme ) as on 1st April 1996. The Scheme indicates that the total consideration for the transfer of the Panasonic Division was agreed at ₹ 50,12,00,000/- . In consideration of the transfer of the Panasonic D .....

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391-394 of the Companies Act, 1956 for, inter alia, convening of meetings of members and creditors of the Assessee for approving the Scheme was filed in this Court, pursuant to which the necessary meetings were convened under the directions of this Court. The requisite majority voted in favour of approving the Scheme and, thereafter a petition under Section 391-394 of the Companies Act, 1956 for sanctioning the Scheme was moved in this Court. After giving due notice to all concerned, this Court .....

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the transferred division as ₹ 59,94,36,171/- and computed the short term capital loss on the transfer of the Panasonic Division as under: Short-term capital loss Consideration received on spin off of Panasonic Division a. Cash received ₹ 27,62,00,000/- b. 48,60,000 shares @ 10 each recd. ₹ 4,86,00,000/- 32,48,00,000/- Less: Cost of acquisition of Panasonic Division Cost of fixed assets ₹ 59,94,36,171/-< .....

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cordingly, computed the short term capital gains on transfer of Panasonic Division as under: Total consideration as per para 12 of scheme of arrangement ₹ 50,12,00,000/- Less: WDV of fixed assets belonging to Panasonic Division as per dep. chart filed as per IT Rules 41,09,32,331/- Add: Current assets, loans and advances 42,29,63,886/- 83,38,96,217/- Less: liabilities taken over 58,61,68,361/- 24,77,27,856/- Short .....

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; 17.64 crores could not be taken into account for calculation of capital gains. This contention was rejected by the AO and he held that the sum of ₹ 17.64 crores was Assessee s income which was diverted to its shareholders by allotment of shares by MTAIC to them. He held that such allotment of shares to the Assessee s shareholders was application of the Assessee s income and thus was a part of the consideration for transfer of the Panasonic Division. The AO further held that the cost of a .....

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d rejected the appeal by an order dated 22nd February, 2001. The Assessee appealed against the CIT(A) s order dated 22nd February, 2001 before the Tribunal which was allowed by an order dated 02nd August, 2002 (hereafter the impugned order ). Impugned Order 6. The Tribunal observed that the Scheme had been approved by this Court pursuant to a petition filed under Section 391-394 of the Companies Act, 1956. The said approval was granted after the requisite meetin .....

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rs.: (2001) 247 ITR 609 (Bom.) and observed that after approval by a Company Court, a scheme of arrangement acquires statutory recognition. 7. The Tribunal noted that only ₹ 32.64 Crores had been received by the Assessee in terms of paragraph 12 of the Scheme and the amount of ₹ 17.64 crores was given to the Assessee s shareholders by MTAIC by allotment of its shares. The Tribunal noted that it was the Assessee s case that the same amounted to diversion of receipt at the .....

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ies (India) P. Ltd.: (1969) 74 ITR 17 (SC) and held that under the Scheme, the amount given to shareholders was diversion at the very source and could not be considered to be application of income because sum of ₹ 17.64 crores was not received by the Assessee at all. 8. The Tribunal rejected the Revenue's contention that the shareholders had no right to get any shares or any amount and were only entitled to dividends, if distributed, and a share in the assets of the company .....

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ncidence of tax. 9. The Tribunal accepted the contention that the WDV of the fixed assets could not be taken as the cost of acquisition for computing the shortterm capital gains. The Tribunal noted the Assessee's contention that the sale consideration received for transfer of the Panasonic Division was not identifiable with individual assets and, therefore, Section 50 of the Act was inapplicable. The Tribunal also observed that the transfer of Panasonic Division was a case of slum .....

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which were introduced in the Act with effect from 1st April, 2000 by virtue of the Finance Act, 1999 - and held that since Section 50B of the Act was introduced after AY 1997-98, the said provision could not be applied for computing the capital gains in the present case. The Tribunal referred to the provision of Section 48 of the Act and accepting the Assessee's contention that consideration diverted to its shareholders was neither received by nor accrued to the Assessee, concluded that the .....

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on the basis of the said consideration. 11. Next, she referred to the decision of the Supreme Court in the case of Miheer H. Mafatlal v. Mafatlal Industries Ltd.: (1997) 1 SCC 579 and on the strength of the said decision contended that the Court was not required to examine the merits of the Scheme or the commercial wisdom exercised by creditors and the members of the company. She earnestly contended that sanction of the Scheme by this Court was merely an approval of the arrangement a .....

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Tirathdas (supra) and on the basis of the said decision contended that in the present case, the undertaking of Panasonic Division was held by the Assessee and the Assessee was entitled to receive the entire consideration for the same. However, the Board of Directors of the Assessee proposed to divert part of the consideration to its shareholders. In the circumstances, the consideration received by the shareholders could not be excluded from the income of the Assessee. 13. Countering .....

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lowing paragraph:- Even if the scheme is approved by all concerned parties by consensus, merely because it is so agreed upon, the court is not obliged to put its imprimatur on it. The court has the discretion and power to reject a scheme even if all the shareholders and creditors have agreed to it. But, once the scheme is scrutinised by the company court and sanctioned by an order made by it under section 391 of the Companies Act, it ceases to retain the character of contract and oper .....

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not form part of the consideration, as either received or accruing in favour of the Assessee. 15. Mr Salil Kapoor referred to Section 48 of the Act and submitted that for the purposes of computing capital gains, the value of consideration should be either received or accruing . He contended that in the present case, the Assessee had neither received the consideration of ₹ 17.64 crores nor the same had accrued in favour of the Assessee in terms of the Scheme. He also r .....

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notice that this Court is not called upon to consider the question whether any income chargeable under the head 'Capital Gains' could be computed under Section 48 of the Act (given that no separate asset had been transferred but the entire Panasonic Division has been transferred as a going concern by the Assessee to MTAIC). Although the Tribunal had noted that Section 50B of the Act was not applicable for AY 1997-98, as it was enacted subsequently, it did not hold that in the present cas .....

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f acquisition of the assets sold and, accordingly, has not pressed question no.2 framed by this Court. In the circumstances, we are not examining the question whether in a slump sale, income chargeable under the head Capital Gains could be computed under Section 48 of the Act. We are also not called upon to determine any other controversy relating to the cost of acquisition of the Panasonic Division. The Assessee had itself claimed the cost of acquisition of the fixed assets of the Panasonic Div .....

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ncluding the Assessee. However, we are unable to appreciate any material difference, in so far as the incidence of tax is concerned, between a scheme of arrangement which has been approved by a Company Court under the provisions of the Companies Act, 1956 (or the Companies Act 2013) or any other binding arrangement/agreement. Mere sanctioning or approval under Section 391-394 of the Companies Act, 1956 would not alter the character of the scheme or the nature of transaction embodied therein for .....

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1956. Another company which is identically situated enters into a similar arrangement, however, follows a different route and instead of directly approaching its shareholders, files a scheme of arrangement before the Company Court and makes an application for the requisite meetings to be convened. The Court gives directions for holding of the meetings and the entire transaction (the scheme) is placed before the members and creditors for obtaining their approval. After following the p .....

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o:p> 19. During the course of the arguments, we had also put this illustration to Mr Kapoor and enquired whether the Assessee claimed that incidence of taxation in the two cases would be any different. Mr Kapoor had responded contended that in either case, the part of the consideration paid directly to the shareholders would not be taxable for computation of income chargeable under the head 'Capital Gains' as the same would not be received or accruing to the company selling its und .....

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the Assessee to MTAIC for the consideration as specified in Clause 9 of the Scheme. Panasonic Division is referred to as Panasonic Division of SIL under the Scheme which is defined as under:- a) All assets, movable or immovable including plant, machinery, earnest money and security deposit paid by SIL in connection with or relating to Panasonic Division, the particulars of which are specified in Schedule A hereto as also the liabilities and debts pertaining to that division particula .....

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ily engaged in or in relation to PANASONIC DIVISION of SIL. e) Lease rights, tenancy rights, industrial licenses, trademarks and all other licenses, powers, facilities etc. of every kind, nature and description whatsoever pertaining to that Division. 21. Part II of the Scheme expressly provides for the transfer to and vesting of the Panasonic Division in MTAIC. 22. Paragraph 9 of the Scheme provides for the total consideration for transfer of the Panasonic Divis .....

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above consideration is to be discharged by MTAIC and reads as under:- 12. In consideration of the transfer and vestment of the running business of Panasonic Division to MTAIC and upon this Scheme being effective: a) Every member of SIL holding Equity Shares in SIL on the Effective Date or such other date as may be decided by the Board of Directors of SIL and MTAIC respectively (on the scheme becoming final and effective) shall in respect of every fully paid equity share of .....

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ess that on half share of MTAIC, such member shall be entitled as of right to claim and receive from MTAIC an allotment of one equity share of MTAIC of ₹ 10/- each credited as fully paid up. And if the shareholding of any member in SIL is such that he would consequent upon the aforesaid exchange ratio be entitled to a fraction of a share of MTAIC of a value of less than one half share of MTAIC then such fraction shall be ignored and such member shall not be entitled to receive any fraction .....

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be mutually agreed between the Board of Directors of SIL and MTAIC and in the meanwhile the said amount of ₹ 27,62,00,000 (Rupees twenty seven crores sixty two lakhs only) will stand credited to the account of SIL in the books of accounts of MTAIC. 24. It is also relevant to note, at this stage, that the identity of shareholders of a company is different from that of the company. The consideration as reflected under the Scheme is clearly for the transfer of title to the assets .....

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ench of the Supreme Court explained the above principle in the following words: That a shareholder acquires a right to participate in the profits of the company may be readily conceded but it is not possible to accept the contention that the shareholder acquires any interest in the assets of the company. The use of the word assets in the passage quoted above cannot be exploited to warrant the inference that a shareholder, on investing money in the purchase of shares, becomes entitled .....

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areholder has got a right in the property of the company. It is true that the shareholders of the company have the sole determining voice in administering the affairs of the company and are entitled, as provided by the Articles of Association, to declare that dividends should be distributed out of the profits of the company to the shareholders but the interest of the shareholder either individually or collectively does not amount to more than a right to participate in the profits of the company. .....

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of the Scheme which entailed issue of shares to its shareholders. The above position is also reflected in the Director's report of the Assessee. The AO had taken note of the same and referred to the following passage from the Director's report in the assessment order:- In framing the said scheme, your Board had decided that in order to improve shareholders value and to benefit them directly, a portion of the consideration for the transfer of the said Panasonic Division should .....

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titled share certificates. 26. In Vodafone International Holdings B.V. v. Union of India: [2012] 341 ITR 1 (SC), the Supreme Court held - albeit in a different context - that a transaction must be viewed holistically in its proper context. In that case the court applied the look at principle to consider whether the transaction in question was a device to evade taxes. Although the subject matter of the controversy in that case was different, the following extract from the said decisio .....

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ther the impugned transaction is a tax deferment/saving device but that it should apply the look at test to ascertain its true legal nature. 27. In our view, if we look at the Scheme in the context in which it belongs, it would be plainly evident that it is an instrument for effecting sale of the Assessee s assets (the Panasonic Division) where the owner selling its assets (the Assessee) has called upon the buyer to pay a part of the consideration to a third party (its shareholders). .....

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to have been received or accruing in favour of the Assessee. The expression accruing as used in Section 48 of the Act is synonymous to entitlement. If the Assessee is entitled to the consideration, then the same must be taken into account for the purposes of computation of capital gains in terms of Section 48 of the Act. 28. Both the learned counsels, Ms. Malhotra as well as Mr. Salil Kapoor, strongly relied on the decision of the Supreme Court in Sitaldas Tirathdas (supra). In that .....

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in a compromise decree under which the stepmother was to be paid a sum of ₹ 1,100 per month which was declared as a charge on the properties in the hands of the assessee. The Court held that the decree of the Court had created a charge on the entire resources of the assessee for the specific payment to his stepmother and to that extent had diverted a portion of the income from the estate to his stepmother. The Court held that such income was diverted prior to it forming a part of the asses .....

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, never reaches the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be appli .....

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he person to whom it is payable. 29. The Supreme Court distinguished the case of Bejoy Singh Dudhuria (supra), by noticing that in that case, the claim of stepmother had been made a charge on the resources and, thus, she had become entitled to the specified income, prior to it becoming an income in the hands of the assessee in that case. 30. As explained by the Supreme Court in Sitaldas Tirathdas (supra), it is the nature of the obligation which is the decisive fact. And .....

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