1978 (7) TMI 221 - HC - Companies Law

Summary

Issues Involved:
1. Bona fides of the scheme of arrangement.
2. Compliance with statutory requirements.
3. Allegations of tax evasion and avoidance of fiscal provisions.
4. Legality and fairness of the scheme.

Issue-wise Detailed Analysis:

1. Bona fides of the scheme of arrangement:
The court examined whether the scheme of arrangement proposed by the transferor-company and the transferee-company was bona fide. The transferor-company aimed to separate its property business from its tea broking and auctioneering business for administrative convenience and efficiency. The Company Law Board opposed the scheme, alleging it was not bona fide and was merely a means to transfer valuable property to a newly formed subsidiary. However, the court found that the scheme was propounded for legitimate business reasons, such as improving administrative efficiency and better management of distinct business activities.

2. Compliance with statutory requirements:
The court scrutinized the compliance with sections 391, 392, 393, and 394 of the Companies Act, 1956. The transferor and transferee companies convened separate meetings of their shareholders as directed by the court, and the scheme was unanimously approved. The court noted that all statutory requirements were met, including the holding of statutory meetings and the approval of the scheme by the statutory majority. The court emphasized that it should not interfere with the shareholders' decision unless there was evidence of fraud or illegality.

3. Allegations of tax evasion and avoidance of fiscal provisions:
The Company Law Board contended that the scheme was designed to evade capital gains tax, stamp duty, and court fees. They argued that the transfer of property at a nominal value was intended to avoid taxes and circumvent the need for sanction from the urban land ceiling authority. The court, however, found no specific legal provisions barring such a scheme of arrangement. It cited precedents to support the view that lawful arrangements to minimize tax liability are permissible. The court concluded that mere suspicion or allegations of tax avoidance without concrete evidence could not justify rejecting the scheme.

4. Legality and fairness of the scheme:
The court carefully scrutinized the scheme to determine if it violated any legal provisions or was ultra vires. It found no illegality or fraud in the scheme, which was approved by the shareholders. The court reiterated that it should not act as a "rubber stamp" but also should not interfere with the business decisions of shareholders unless there was a strong reason. The court referred to several precedents, including CIT v. A. Raman & Co. and CIT v. Calcutta Discount Co. Ltd., to assert that lawful arrangements to minimize tax liability are acceptable. The court concluded that the scheme was fair, reasonable, and honest, and thus, should be sanctioned.

Conclusion:
The court sanctioned the scheme of arrangement, finding it bona fide, compliant with statutory requirements, and free from illegality or fraud. The petitioner was ordered to pay the costs of the Company Law Board assessed at 60 G.Ms.