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Anu Trading Private Limited Versus Shinano Retail Private Ltd.

2013 (2) TMI 830 - MADHYA PRADESH HIGH COURT

Company Petition No. 16/2012 - Dated:- 27-2-2013 - Prakash Shrivastava, C.J. For Appellant: Mr. Vivek Tankha, Sr. Advocate, Mr. Rishab Sancheti and Mr. Akshay Sapre, Advocates For Respondents: Mr. Girish Dave Mr. R.L. Jain, Ms. Veena Mandlik, Mr. G.P. Singh, Mr. Vivek Sharan, Mr. H.Y. Mehta, Advocate, and Mr. Vijyesh Atre, for Devaki Commercial P. Ltd. ORDER Prakash Shrivastava, 1. This petition under Sections 391 and 394 of the Companies Act 1956 has been filed to sanction the Scheme of Amalgam .....

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been filed as Annexure H to this petition. 2. In the first stage proceedings, this Court vide order dated 16th May, 2012 in Co. P. No. 14/2012 had dispensed with the meeting of the equity shareholders and unsecured creditors of the transferor Company for the reasons stated therein and it was also noted that there was no preferential share-holder and secured creditor of the transferor Company. 3. In the present petition, this Court vide order dated 4-7-2012 had issued notice to Registrar of Compa .....

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Limited has filed the affidavit, dated 20th September, 2012 confirming and consenting to the approval of the DCPL to the Scheme of Amalgamation. Letters of consent and approval to the Scheme are enclosed as Annexures A-1 and A-2 and the Resolution as Annexure B to the affidavit. 5. The affidavit of the RD, dated 10th September, 2012 also indicates that Registrar of the Companies, Gwalior had submitted his report, dated 30th July, 2012 and as per that report, no complaint/representations were re .....

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hareholders and debenture-holders, the affairs of the transferor Company have not been conducted in a manner prejudicial to the interest of its members, creditors or to public interest. Counsel for the petitioner has agreed to take appropriate steps in the light of Paras 13 and 14 of the report. It has also been pointed out in the report that present Scheme of Amalgamation is a part of group restructuring and that under the larger Scheme, 8 companies are to merge in the transferee Company. 7. At .....

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has submitted that the Scheme has been framed to evade the tax liability and that the survey of the transferor. Company was done on 30-8-2012, i.e., after the appointed date and therefore, the proceedings against the transferor Company would be affected if the merger is allowed. He has further submitted that this Court can lift the veil and look into the true nature of the Scheme. 9. Shri Vivek Tankha, learned Counsel appearing for the petitioner opposing the objection of Income Tax Department .....

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mpany Ltd. (JISCO) v. A CIT, Company Application No. 123/2004 connected with Company Petition No. 76/2004, and in the matter of AVM Capital Services P. Ltd. v. In Company Scheme, Petition No. 670/11, dated 12th July, 2012 has submitted that in the proceedings under Sections 391 to 394 of the Companies Act, the Income Tax Department has no locus standi to intervene. Considering the nature of objection, which the Income Tax Department has raised, I do not find it to be a fit case to summarily reje .....

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ed by Section 39(1)(a) have been held. (2) That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by Section 391 Sub-section (2). (3) That the meetings concerned of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters just and fair to the class as a whole so as to legitimately .....

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and arrangement is not found to be violative of any provision of law and is not unconscionable, nor contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously X-ray the same. (7) That the Company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may b .....

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cheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class, of persons, whom with their open eyes have given their approval to the scheme even if in the view of the Court there would be a better scheme for the company and its members or creditors from whom the scheme is framed. The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount t .....

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atified the scheme by the requisite majority. Consequently, the Company Court's jurisdiction to that extent is peripheral and supervisory and not appellate. The Court acts like an umpire in a game of cricket, who has to see that both the teams play their game according to the rules and do not overstep the limits. But, subject to that how best the game is to be played is left to the players and not to the umpire. The supervisory jurisdiction of the Company Court can also be culled out from th .....

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ment and agree to be bound by such compromise or arrangement. 12. The objection raised by the Income Tax Department needs to be considered in the light of the nature of jurisdiction this Court is exercising under Sections 391 to 394 of the Companies Act, 1956 and the broad contours of the jurisdiction, which have been laid down by the Supreme Court in the matter of Miheer H. Mafatlal (supra). 13. This Court vide order dated 10-10-2012 had directed the Income Tax Department to submit the objectio .....

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e Income Tax Department stating that the income of 190 crores has been accounted in the draft balance sheet of the petitioner-Company and that paper books contain bank statement of the petitioner-Company reflecting that the transactions have been done only through bank account of the petitioner-Company and in terms of Clause 7.1(c) of the Scheme, the transferee Company is answerable and accountable for tax including Income Tax paid or payable, if any, by the transferor Company for any income or .....

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subject to the approval of the scheme. It has further been stated that the transferee Company-M/s. Shinano Retail P. Ltd. will remain in existence even after the present Scheme is approved by the Court, therefore, any enquiry can be conducted by the concerned Jurisdictional Authority as they deem fit and that no provision of the Companies Act, 1956 has been violated either in issuing zero coupon compulsory convertible debentures or acquiring shares in other Private Limited Companies. The RD has .....

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Tax Department have been examined by the Registrar of Companies, Gwalior with the help of an expert, i.e.. Chartered Accountant and on the basis of the expert opinion, there is no objection on approval of the Scheme. The reports of the Registrar of the Companies as well as the Chartered Accountant have been filed along with the supplementary affidavit of RD. It has been stated that the reports do not point out anything which is against the interest of the revenue to the Government or against the .....

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t prejudicial to the interest of public. He has further stated that in terms of Section 396A of the Companies Act, the transferee Company and the Directors of the transferor Company be directed not to dispose of the books and papers of the transferor Company without prior permission of the Central Government. Accordingly, suitable directions have been issued in the operative part of this order. 16. Thus, in the supplementary affidavits/reports also, the RD and OL have not found the Scheme of mer .....

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furnish a ground for rejecting the Scheme. 18. It is the settled position in law that avoidance of tax liability by so arranging commercial affairs that the charge of tax is distributed is not prohibited. A tax payer may resort to a device to divert the income before it accrues or arises to him. The tax planning and arranging the affairs by the assessee in such a manner so that the tax burden is minimised is permissible, if the same do not contravene the provisions of the taxing statute. [See: .....

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cDowell 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 disfavour. Though the Madras High Court had occasion to refer to the judgment, of the Privy Council in IRC v. Challenge Corpn. Ltd. and did not have the benefit of the House of Lord's pronouncement in Craven, the .....

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f legitimacy or genuineness of the act; and 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 us in no doubt that the principle enunciated in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in .....

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) : (109 ITR 177 Guj) and has submitted that the Scheme may not be sanctioned since it has been framed to avoid tax liability whereas Bombay High Court in the matter of AVM Capital Services Private Limited in Company Scheme Petition No. 670/2011 vide judgment dated 12th July, 2012 has held that the decision of the Gujarat High Court in the case of Wood Polymer Ltd. (supra), is no longer a good law in view of the decision of the Supreme Court in the case of Azadi Bachao (supra), and Vodafone Inte .....

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ility and it should not be-a-colourable device to evade the tax. 21. The Division Bench of the Gujarat High Court in the matter of Vodafone Essar Gujarat Ltd. v. Department of Income Tax in OJ Appeal No. 81/2010 in Company Petition No. 183/2009 by judgment dated 31-8-2012 has held that if the Scheme has been framed and is approved by the share-holders in their wisdom, it cannot be said that the Scheme itself is plotted with the sole criteria of tax avoidance simply because it may have effect and .....

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inental Hotel, reported in (1990) 185 ITR 38 Raj. has held that expression (public interest) must take its colour and content from the context in which it is used and that whether the amalgamation Scheme is for the purpose of avoiding capital gains tax will depend upon fact of each case. The Rajasthan High Court further in the matter of In Re : Indo Continental Hotel and Resort Limited, reported in (1998) 93 Comp.Cases 194 Raj., considering the similar objection of the Income Tax Department has .....

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d not alleged violation of any provisions of the Companies Act and that avoidance by the Company of its tax liabilities will attract the provisions of the Income Tax Act and the companies cannot escape from their respective liabilities. The Scheme of arrangement between shareholders of the transferor and transferee Companies to conduct the management and the affairs of the company in a particular way must be honoured and if the Scheme of arrangement is just, fair, reasonable and commercial, it s .....

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thorities consider the amalgamation itself to be a device designed to evade the tax legitimately payable by the transferor Company they can do so, if permissible in law, in a separate proceedings under the IT Act. [See : Marshal Sons & Co. (India) Ltd. v. Income Tax Officer, (1997) 2 SCC 302]. The Bombay High Court in the matter of Reliance Communication Ltd. in Company Petition No. 487/2009, vide judgment dated 18th July, 2009, considering the objection about the breach of accounting standa .....

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rdance with law uninfluenced by the approval of the Scheme. 24. Learned Counsel for Income Tax Department has placed reliance upon the judgment of the Bombay High Court in the matter of A.V.M. Capital Services P. Ltd. in Company Scheme Petition No. 670/2011, dated 12th July, 2012, but, in that case also, the objection that the Scheme is a tax evading device, was rejected finding that the Scheme was not illegal, unlawful, dubious or colourful or a tax avoidance device. He has further placed relia .....

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oper perspective together with its various manifestations and ramifications with a view to find out whether the Scheme is fair, just and reasonable to the members concerned and is not contrary to any law of public policy. 25. Counsel for Income Tax Department has also placed reliance upon the judgment of High Court of Karnataka in the matter of Sasken Communication Technologies Ltd., In Re, reported in (2010) 155 Comp.Cases 463 (Kar), but, in that case also, the objection of the Registrar that t .....

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year, therefore, it was held that the appointed date provided in the Scheme beyond the date of beginning of such accounting year should not be accepted. 26. Learned Counsel for Objector has also relied upon the judgment of the Supreme Court in the matter of Hindustan Lever and another v. State of Maharashtra and another, dated 18th November, 2003 in Civil Appeal No. 8232 of 1996, but, in that case also the Supreme Court has held that while exercising the power in sanctioning the Scheme of Arrang .....

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pending proceedings by or against the transferor Company will continue by or against the transferee Company. A reliance has also been placed on the judgment of this Court in the matter of Nilnita Chemicals Ltd., In Re: 1997 (CC2) GJX 004 MP, wherein this Court while sanctioning the Scheme had imposed the condition that if, as a result of transfer, any liability of capital gains arise against any company, or its share-holders or payment of tax which may be leviable under the existing laws, then t .....

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f merger normally need no interference. Scheme may not be sanctioned if it has been framed with the sole object or is a colourable device to evade the tax but, if as a result of the merger the tax liability is reduced, which is the consequence of the Scheme of merger, then on such a ground the sanction of the Scheme cannot be refused. However, in a given case, suitable condition can be imposed granting liberty to the Tax Authorities to proceed against the concerned company under the provisions o .....

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Scheme, on and from the appointed date, all suits, actions and legal proceedings, pending by or against the transferor Company are to continue till the effective date as desired by the transferee Company and on and from the effective date against the transferee Company in the same manner and to the same extent as if the same had been instituted and/or pending against the transferee Company. In terms of Clause 7.1(c) of the Scheme all taxes paid or payable by the transferor Company in respect of .....

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Tax Department. 29. It is also worth noting that the Regional Director as well as the Official Liquidator have in detail examined the objection of the Income Tax Department and they have not found that the proposed Scheme has been framed with the sole object to evade the tax. The RD had observed that an undertaking be obtained from the transferee Company to own the liability of tax of the transferor Company irrespective of the appointed date. Accordingly an undertaking has been filed. The suppl .....

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6 and submitted that in the event transferee Company fails to pay the tax liability, if any, of the transferor Company after amalgamation, the remedy is available to the Income Tax Department under the said provision. According to the OL also the Scheme is not prejudicial to the interest of the public. 30. In the present matter on the perusal of the Scheme, it is found that the Scheme has not been framed with the sole object to evade the tax but, the present Scheme of merger is a part of the lar .....

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ansferee Company in respect of the Scheme of merger before the Bombay High Court, which was allowed by the Bombay High Court vide order dated 18th September, 2012 by modifying the Clause 11.3 of the Scheme to the extent that "Securities premium account" in the said clause be read as "Capital Reserve" and the Scheme has been allowed to be amended accordingly. The Scheme has been sanctioned by the Bombay High Court subject to the order of this Court on the petition filed by the .....

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d not in violation of any provision of law or prejudicial to the interest of public, accordingly, the Scheme of Amalgamation as contained in Exh. H of the Company Petition is approved with the following conditions:- a) The Scheme is approved with the modification to the extent that in Clause 11.3 of the Scheme the word "securities premium account" be read as "capital reserve" and the scheme is allowed to be amended accordingly. (b) The transferee and the transferor Companies .....

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