1990 (4) TMI 25 - HC - Income Tax

Summary

Issues Involved:
1. Scheme of Amalgamation under Sections 391 and 394 of the Companies Act, 1956.
2. Approval of the Scheme by shareholders and creditors.
3. Compliance with statutory requirements.
4. Fairness and reasonableness of the Scheme.
5. Public interest and tax implications.

Detailed Analysis:

1. Scheme of Amalgamation under Sections 391 and 394 of the Companies Act, 1956
The petitions were filed by Indo Continental Hotels and Resorts Ltd. (transferee-company) and Hotel Pink City Pvt. Ltd. (transferor-company) under Sections 391 and 394 of the Companies Act, 1956, seeking the court's sanction for a scheme of amalgamation. The transferee-company was incorporated on May 2, 1970, and the transferor-company on April 26, 1973. The amalgamation aimed to consolidate resources, reduce costs, and improve financial stability and operational efficiency.

2. Approval of the Scheme by Shareholders and Creditors
Separate meetings of the creditors and members of both companies were convened to consider the proposed scheme. The meetings were held on July 10, 1988, and the scheme was approved with a modification in the share exchange ratio. Instead of five equity shares of Rs. 10 each for one equity share of Rs. 100 of the transferor-company, four equity shares of Rs. 10 each were to be allotted. The resolutions were passed by the statutory majority.

3. Compliance with Statutory Requirements
The court ensured compliance with statutory requirements by appointing chairmen for the meetings and scrutinizing the reports submitted. Notices were served to the Official Liquidator and the Regional Director, Company Law Board. A Chartered Accountant was appointed to assist the Official Liquidator, who confirmed that the scheme was not prejudicial to the interests of the members, shareholders, creditors, and employees of the transferor-company.

4. Fairness and Reasonableness of the Scheme
The court examined whether the scheme was fair and reasonable. The principles laid down by the Madras High Court in In re Coimbatore Cotton Mills Ltd. and Lakshmi Mills Co. Ltd. were considered. The court found that the scheme was approved by a statutory majority, was fair and reasonable, and was in the interest of both the members and creditors of the companies. The value of shares post-amalgamation was found to be favorable for the shareholders of the transferor-company.

5. Public Interest and Tax Implications
The Income-tax Department raised concerns about potential tax avoidance. However, the court noted that the amalgamation was aimed at business consolidation and operational efficiency, not tax avoidance. The court referred to the Supreme Court's decision in McDowell and Co. Ltd. v. CTO, emphasizing that legitimate tax planning within the law is permissible. The court concluded that the amalgamation was in public interest, providing better facilities for tourists and generating employment.

Conclusion:
The court sanctioned the scheme of amalgamation with the modification in clause 4 regarding the share exchange ratio. The scheme was found to be fair, reasonable, and in the interest of the members, creditors, and public. The amalgamation was to take effect from April 1, 1987. The judgment emphasized that the scheme met all statutory requirements and was not aimed at tax avoidance.