2018 (3) TMI 201 - HC - Companies Law

Changes in scheme sanctioned - Held that - Once a scheme is sanctioned and made effective, the changes allowed therein should be minor ones and not wholesale changes which would tamper with the essence of the scheme and if a company desires to modify a sanctioned scheme, though not necessary to do so for the proper working thereof, it is required to follow the procedure prescribed under Section 391 of the Act It should be noted that when an order sanctioning a scheme under Section 391 of the Act is passed, it operates in rem. It affects the rights of several persons including creditors, investors, etc. and also creates liabilities in favour of persons like the Income Tax Authorities. These rights and liabilities became vested once the scheme becomes effective. The windmill business was transferred to Transferee and the Scheme was made effective by Transferee by filing Form 21 with the Registrar of Companies, Transferee having started earning revenue and having filed income tax returns, undoubtedly created rights and liabilities in favour of the Income Tax Authorities. It should be noted that Transferee has filed returns for 3 years before this applications were filed. Therefore, these applications are not just for a simple or minor modification of the scheme. If the Court grants the prayers as sought, the net effect would be of recalling the order sanctioning the Scheme to the extent of windmill business. Just because certain tax benefits have been lost does not mean that the Scheme is not workable. Hence no modifications are required. If the reliefs as sought are granted, would effectively amount to tampering with the essence of the scheme which is impermissible. The basic fabric of the Scheme would change and will go beyond the confines of what the Court while sanctioning the Scheme understood in the provisions of the Scheme.

Summary

Issues Involved:
1. Amendment of Scheme Clauses
2. Tax Benefits under Section 80IA
3. Modification of Sanctioned Scheme
4. Legal Precedents and Court Powers

Issue-wise Detailed Analysis:

1. Amendment of Scheme Clauses:
The applicants sought to amend clauses 2(e) and 2(f) of the Scheme of Arrangement by deleting specific sub-clauses and references to the Windmill Business and Windmill Business Undertaking. The amendments aimed to retain the Windmill Business with the Transferor while transferring other undertakings to the Transferee.

2. Tax Benefits under Section 80IA:
The Transferor enjoyed tax benefits under Section 80IA for its Windmill Business. However, post-demerger, the Transferee realized it was ineligible for these benefits as per Section 80IA(12A), which states that no deduction shall be available to the amalgamated company when the enterprise is transferred in a demerger scheme after 01-04-2007. The Income Tax Department disallowed the deduction claimed by the Transferee, adding ?54,02,673 to its total income and initiating penalty proceedings for furnishing inaccurate particulars of income.

3. Modification of Sanctioned Scheme:
The applicants approached the Court to amend the Scheme, arguing that the modification would not recall the order but merely adjust it. Section 392 of the Companies Act, 1956, empowers the Court to supervise and modify the Scheme for its proper working but does not permit recalling the order sanctioning the Scheme. The Supreme Court in Meghal House P. Limited vs. Shree Niwas Girni K.K. Samiti and S.K. Gupta vs. K.P. Jain held that modifications should not alter the "basic fabric" of the Scheme and should be minimal to ensure functionality.

4. Legal Precedents and Court Powers:
The Court considered judgments like Unique Delta Force Security P. Ltd. vs. Sumeet Facilities P. Ltd., S.K. Gupta vs. K.P. Jain, and Idea Cellular Limited vs. Union of India. These cases emphasized that modifications should not change the essence of the Scheme and should be limited to making it workable. The Court noted that the applicants' request was not a minor modification but a significant change that would affect the Scheme's essence, which is impermissible.

Conclusion:
The Court dismissed the applications, stating that the requested amendments would effectively recall the order sanctioning the Scheme concerning the Windmill Business, which is not allowed. The Scheme's basic fabric would be altered, and the rights and liabilities vested with the Income Tax Authorities would be affected. The Court emphasized that the loss of tax benefits does not render the Scheme unworkable, and no modifications were required.