TMI Blog2020 (11) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... on for maintaining a writ petition without availing the alternate remedy and hence, the petitioner can maintain the writ petitions without availing the statutory appeal remedy. 'Demerger' under Section 2(19AA) of the Income Tax Act - Whether transaction is not a demerger and that the income tax implications referred to in the statement under Section 393 of the Companies Act will not form a part of the Scheme of Arrangement ? - whether the statement under Section 393 of the Companies Act, 1956 would form a part of the Scheme of Arrangement and if so, whether the proceedings for sanctioning of the Scheme under Sections 391 to 394 would be a proceeding in rem? - AO disallowed the depreciation claim made by the petitioner and treated the Scheme as one of 'demerger' under Section 2(19AA), thereby restricting the claim for depreciation, only on the Written Down Value (WDV) of the assets being transferred from PSCL to PEL - HELD THAT:- Scheme of Arrangement between PSCL and PEL, which expressly states that the Scheme is not a Demerger, within the meaning of Income Tax Act, has attained finality and statutory force not only inter se PSCL or PEL but also in rem . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r demerging Erode Unit by spinning it off to Ponni Sugars (Erode) Limited (PEL) was conceived in order to restructure the operations and revive the prospects of PEL. Accordingly, a Scheme of Arrangement was arrived and in accordance with the provisions of Sections 391 to 394 of the Companies Act, 1956, Company Petition Nos.118 and 119 of 2000 was filed before this Court and on 10.09.2001, the Scheme was sanctioned by the Company Court. Some of the salient features of the scheme sanctioned by the Company Court are as follows:- i. The Erode Undertaking of PSCL was transferred to PEL with effect from 01.04.1999; ii. The consideration for transfer shall be for the aggregate value of ₹ 7500 lakhs; iii. All contingent liabilities shall vest only with PSCL; iv. Term debts and bank borrowings are transferred that include transfer of debts specifically contracted for Bolangir unit to the Erode Undertaking of Transferee Company; v. A part of debit balance (₹ 923 lakhs) in P L A/c was transferred to PEL; vi. A part of General Reserve (₹ 1004 lakhs) was transferred to PEL; vii. Sugar stocks were recorded in PSCL Books at net selling price. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TRANSFEROR COMPANY and continue to enure for its set-off in future as permissible. (e) The TRANSFEREE COMPANY, upon transfer of EU to it at fair value will be entitled to claim depreciation in its Tax Returns on the basis of fair market value of fixed assets as of EFFECTIVE DATE arrived at on the basis of independent valuation to be undertaken by the TRANSFEREE COMPANY at the appropriate time for this purpose. 4. When PEL filed its returns of income for the assessment year 2000-01, the transfer of Erode undertaking was for an aggregate consideration of ₹ 7500 lakhs and the itemised value of fixed assets comprising land, building and plant machinery was determined based on the Chartered Engineer's Certificate. Accordingly, it claimed depreciation on buildings, plant machinery, based on the value of assets so acquired/transferred in terms of the Scheme. The Assessing Officer had disallowed the depreciation claim by treating the Scheme as one of 'demerger' under Section 2(19AA) of the Income Tax Act, thereby restricting the claim for depreciation only on the Written Down Value (WDL) of assets being transferred from PSCL to PEL. 5. The same stand w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Vs Deputy Commissioner (CT)-IV reported in (2015) 79 VST 137 (Mad), has made a consolidated reference to some of the decisions of the Hon'ble Supreme Court and held that the nonavailment of the statutory appeal remedy will not be a bar for filing a writ petition. The relevant portion of the order reads as follows:- 26. In the light of the above facts and the contentions raised by both sides, this Court is of the view that the petitioner need not be relegated to avail the alternate remedy as it has been held in all cases that necessity to avail the alternative remedy may not arise and it is not a bar to exercise the jurisdiction under Article 226 of the Constitution of India. As regards the objection of the Revenue that alternative remedy is available to the petitioner, it is no doubt true that the Act provides for an alternative remedy of filing an appeal. In a recent decision reported in [ 2011] 5 SCC 697 (Union of India (UOI vs. Tantia Construction Private Limited), on the issue of maintainability of a writ petition in the face of an alternative remedy provided under the Act, the apex court held that the presence of an alternative remedy is not an absolute bar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sanction of a Scheme under the provisions of the Companies Act is binding on all concerned. This ratio decidendi came to be followed by this Court in Pentamedia Graphics Ltd. Vs Income Tax Officer reported in (2011) 236 CTR 204 (Mad) in the following manner:- In this connection, the principle laid down by the Supreme Court in the decision reported in Marshall Sons Co. (India) Ltd. v. ITO (supra) needs reference. Dealing with the question of relevancy of effective date in a scheme sanctioned by the Court, the apex Court held that once the scheme had been sanctioned with effect from a particular date, it is binding on everyone including the statutory authorities. Having regard to the law declared by the apex Court as to the effect of the scheme sanctioned by the Court, the only course open to the Revenue would be to act as per the scheme sanctioned effective from 1st Jan., 2004, which means that the tax authorities are bound to take note of the state of affairs of the applicant as on 1st Jan., 2004 and a return filed reflecting the same cannot be ignored on the strength of s. 139(5) of the IT Act. The merits or otherwise on the returns filed, however, is a matter of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on raised either by the statutory authorities, the Department, or other regulators or authorities, likely to be affected by the Schemes. 18. On a comprehensive enumeration of the aforesaid judicial precedents, it can be summarised and held that the order sanctioning a Scheme of Arrangement pursuant to Sections 391 to 394 of the Companies Act will have a statutory force, binding on all concerned and the sanction of the Court would operate as a judgment in rem. 19. Above all, the Company Court, while sanctioning the Scheme of arrangement through its order dated 10.09.2001 in C.P.Nos.118 119 of 2000, had held in paragraph 5 that the Scheme of Arrangement between the transferor and transferee companies, shall form part of the order. 20. The core objection of the respondent is to the effect that the statement under Section 393 of the Companies Act, 1956 will not form a part of the Scheme of Arrangement sanctioned by the Court and the Scheme would be one of 'demerger', as defined under Section 2(19AA) of the Income Tax Act. 21. The Assessing Officer had disallowed the depreciation claim made by the petitioner and treated the Scheme as one of 'demerger' under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t giving reasons would not amount to a precedent. Thus, the decision of the Karnataka High Court may not have a persuasive effect, for the purpose of this proposition and hence its imperative to analyse the scope and object of the proposition. Barring the reliance placed on the Karnataka High Court's decision in Tulunadu F D Ltd., (supra), no other decisions were relied upon by either side on this proposition. 25. In the Scheme of Arrangement between PSCL and PEL, the transfer and vesting of Erode Undertaking (EU) in PEL, was for the aggregated value of ₹ 7,500 lakhs. In the statement under Section 393 of the Companies Act, 1956, the Income Tax implications were explained, whereby, the scheme involving transfer of EU was construed to be not one of Demerger , within the meaning of Section 2(19AA). The statement also explained that the PEL, upon transfer of EU to it at fair value, will be entitled to claim depreciation in its tax returns on the basis of fair market value or fixed assets as of effective dates arrived at on the basis of independent valuation undertaken by the PEL, at the appropriate time for this purpose. The Company Court, had taken note of this aspect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a notice given by advertisement includes a notification that copies of a statement setting forth the terms of the compromise or arrangement proposed and explaining its effect can be obtained by creditors or members entitled to attend the meeting, every creditor or member so entitled shall, on making an application in the manner indicated by the notice, be furnished by the company, free of charge, with a copy of the statement. 4) Where default is made in complying with any of the requirements of this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees; and for the purpose of this sub- section any liquidator of the company and any trustee of a deed for securing the issue of debentures of the company shall be deemed to be an officer of the company: Provided that a person shall not be punishable under this sub- section if he shows that the default was due to the refusal of any other person, being a director, managing director, managing agent, secretaries and treasurers, manager or trustee for debenture holders, to supply the necessary particulars as to his material interests. 5) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditors or members in the statement under Section 393, to the effect that the scheme involving the transfer of EU is not one of a Demerger. Upon transfer of EU to PEL at a fair value, PEL will be entitled to claim depreciation on the basis of fair market value of the fixed assets. In view of the legal principles unequivocally settled by the Hon'ble Supreme Court in Dalmia's case (supra), as well as, various other decisions dealt with in the earlier portion of this order, the Scheme of Arrangement between PSCL and PEL, which expressly states that the Scheme is not a Demerger, within the meaning of Income Tax Act, has attained finality and statutory force not only inter se PSCL or PEL but also in rem . Accordingly, the Scheme, that includes the Income Tax implications given in the statement and which explanatory statements are in conformity with the scope of the terms of arrangement, would be binding on the Tax Department. 31. On a conjecture that the Scheme is one of Demerger under Section 2(19AA), the Assessing Officer had disallowed the depreciation claim made by the petitioner and thereby restricted the claim for depreciation only on the WDV of the assets transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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