2019 (9) TMI 1140 - AT - Companies Law

Whether the Tribunal could direct the Transferor Company to make payment of alleged tax despite an express undertaking by the Transferee Company to make such payment on behalf of Transferor Company if found due and payable after adjudication? HELD THAT - It is well settled by a catena of Rulings that while sanctioning a scheme of arrangement the right of Tax Authorities remains intact to initiate appropriate proceedings regarding recovery of any tax. The Tax Authorities concern is in regard to recovery of the outstanding tax dues and in the event of a scheme of arrangement/merger/amalgamation the Tax Authorities right to recover the outstanding tax dues must remain intact. Once a scheme has been sanctioned by a Tribunal in accordance with law, as admittedly in the instant case it is and the same goes unassailed, nothing precludes the Tax Authorities from recovering its legitimate and recoverable outstanding tax dues from the Transferor or the Transferee Company, as provided in the scheme. Where in a given case the liability has arisen or would arise or the demand would be raised against the Transferor Company for the relevant period after due scrutiny, assessment, review or determination through a due judicial process and the Transferee Company undertakes to make payment of all outstanding tax dues as determined in the aforesaid manner, the scheme cannot be refused and has to be allowed. The Scheme having been approved and sanctioned and the same being in consonance with law, no fault can be found with the Transferee s undertaking to satisfy all demands raised by the tax authorities as finally determined by due process. The Appellants are justified in maintaining that the tax liabilities would be satisfied by the Transferee as determined by the competent forum seised of the matter in accordance with the approved Scheme which admittedly does not come in conflict with any express provision of the Companies Act, 2013. The legitimate interests of the concerned Tax Authorities have been lawfully protected and their right to recover the tax dues as determined by ITAT or any other competent forum as the case may be, remains intact. While the Scheme of Arrangement approved by the Tribunal remains intact, condition 10(b) cannot be sustained and the same requires modification - Appeal allowed subject to modifications.

Issues Involved:
1. Whether the Tribunal could impose a condition to make payment of alleged tax liabilities when the same are disputed by the Company before the concerned authorities.
2. Whether the Tribunal could direct the Transferor Company to make payment of alleged tax despite an express undertaking by the Transferee Company to make such payment on behalf of Transferor Company if found due and payable after adjudication.

Issue-wise Detailed Analysis:

1. Imposition of Condition to Pay Disputed Tax Liabilities:
The Tribunal approved the scheme of arrangement between the Transferor Company and the Transferee Company, subject to the condition that the Transferor Company must pay the entire tax liability allegedly outstanding to the Income Tax Department and Service Tax Authorities. The Appellants contended that the demand raised by the tax authorities had not crystallized and was being challenged before competent appellate tribunals. They argued that the Tribunal should not have made the payment of these disputed liabilities a precondition for sanctioning the scheme, especially when no such demand had been made by the relevant authorities and no objection was raised before the Tribunal. The Appellants also highlighted that the Transferee Company had provided an undertaking to make such payments if found due after adjudication.

2. Direction to Transferor Company Despite Undertaking by Transferee Company:
The Appellants pointed out that the Transferee Company had undertaken to pay any tax liabilities determined after adjudication. Clause 12.7 of the Scheme of Arrangement specified that post-amalgamation, all tax assessment proceedings and appeals would continue with the Transferee Company, which would be responsible for any dues payable. Despite this, the Tribunal directed the Transferor Company to pay the outstanding dues. The Appellants argued that this condition was unnecessary given the Transferee Company's undertaking and the provisions of the Scheme.

Tribunal's Findings:
The Tribunal acknowledged that the right of tax authorities to recover outstanding dues remains intact even after sanctioning a scheme of arrangement. The Tribunal noted that the Transferee Company had undertaken to satisfy all demands raised by the tax authorities as determined through due judicial process. The Tribunal referred to a judgment by the Hon’ble High Court of Delhi, which upheld a similar undertaking by a transferee company to pay legally assessed and payable tax liabilities of the transferor companies.

Modification of Condition:
The Tribunal found that the condition requiring the Transferor Company to pay the entire outstanding dues before the scheme could be implemented was not sustainable. The Tribunal modified the condition as follows:
- The Transferee Company shall pay the Income Tax dues of ?8,03,10,074/- lying outstanding against the Transferor Company or such amount as determined by the ITAT, Bengaluru.
- The Transferee Company shall also pay any additional amount found due upon scrutiny of the return for AY 2017-18, together with any interest.
- The Transferee Company shall pay the Service Tax outstanding amount of ?86,81,439/- to the competent authorities.
- Compliance regarding the outstanding Income Tax liability shall not be treated as a condition precedent for implementing the approved Scheme of Arrangement. The scheme shall be implemented without insisting on compliance with the demands for the specified period, subject to interim directions by the ITAT.

Conclusion:
The appeals were allowed, and the Tribunal directed that the approved Scheme of Arrangement be modified to reflect the changes. The Tribunal also directed that a copy of the judgment be sent to the Tribunal for incorporating the modifications and taking appropriate follow-up action. The Appellants were granted liberty to seek necessary modifications in the approved scheme to render it workable. There was no order as to costs.

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