2012 (10) TMI 1279 - HC - Income Tax

Summary

Issues Involved:

1. Compliance with the definition of "Demerger" under Section 2(19AA) of the Income Tax Act, 1961.
2. Alleged avoidance of Stamp Duty under the Bombay Stamp Act, 1958.

Issue-wise Detailed Analysis:

1. Compliance with the Definition of "Demerger" under Section 2(19AA) of the Income Tax Act, 1961:

The primary issue raised by the Regional Director was that the proposed Scheme does not fall under the purview of the definition of "Demerger" as per Section 2(19AA) of the Income Tax Act, 1961. The petitioners argued that the transfer of property along with liabilities and Undertaking falls within the purview of Section 2(19AA) of the Income Tax Act, 1961, making it a valid Scheme of Demerger as per the Companies Act. The petitioners further contended that the definition of "Demerger" under the Income Tax Act is specific to that Act and should not be read into Sections 391 to 394 of the Companies Act, which allow for arrangements in the form of Demerger of an "Undertaking" as well as property. The Court referred to judgments from the Delhi High Court and its own Division Bench, which supported the view that compliance with Section 2(19AA) is not a pre-requisite for sanctioning a Scheme of Arrangement under the Companies Act. The Court concluded that the observation regarding non-compliance with Section 2(19AA) is not valid, as the definition under the Income Tax Act is relevant only for determining tax neutrality and not as a mandatory requirement for all Schemes under the Companies Act.

2. Alleged Avoidance of Stamp Duty under the Bombay Stamp Act, 1958:

The second observation made by the Regional Director was regarding the purported avoidance of Stamp Duty. The Regional Director suggested that the transfer of Undertaking III to the Resulting Company No.2 was an attempt to avoid Stamp Duty by transferring immovable property under the Court's order. The petitioners countered this by stating that the Scheme did not intend to avoid Stamp Duty and that they would pay the duty in accordance with the law. The Court noted that the petitioners had committed to paying Stamp Duty as required under the Bombay Stamp Act, 1958, which sufficiently addressed the Regional Director's concerns. The Court found no justifiable reason to reject the Scheme based on this observation.

Conclusion:

After considering the entirety of the facts, submissions, and relevant judgments, the Court determined that the observations made by the Regional Director did not provide a valid basis to reject the Scheme. The Court found no evidence that the Scheme was non-compliant with the Companies Act, 1956, or against the interests of the Shareholders, Creditors, or the public. The Court sanctioned the Scheme, allowing the prayers made in the respective petitions, and directed the payment of costs to the Central Government Counsel.