REGIONAL DIRECTOR IS PROJECT THE OBJECTIONS OF INCOME TAX DEPARTMENT IN MERGER & AMALGAMATIONS.

[Mr. M. GOVINDARAJAN]

Section 391 of Companies Act, 1956 (‘Act’ for short) gives powers to the Company court to compromise and make arrangements with creditors and members.  Section 392 gives powers to the Company court to enforce compromise and arrangements.  Section 393 provides that the information is to be furnished as to compromises or arrangements with creditors and members.  Section 394 provides for facilitating reconstruction and amalgamation of companies.

Section 394A provides that the Court  shall give notice of every application made to it under section 391 or 394 to the Central Government, and shall take into consideration the representations, if any, made to it by that Government before passing any order under any of these sections.   First proviso to Section 394(1) provides that no compromise or arrangement proposed for the purposes of, or in connection with, a scheme for the amalgamation of a company, which is being wound up, with any other company or companies, shall be sanctioned by the Court unless the Court has received a report from the Registrar that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest.   The second proviso to Section 394 (1) provides that no order for the dissolution of any transferor company under clause (iv) shall be made by the Court unless the Official Liquidator has, on scrutiny of the books and papers of the company, made a report to the Court that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest.

The powers of the Central Government have been delegated to the Regional Directors.  The Regional Directors file representations on behalf of the Government wherever necessary.

In a recant case of proposed amalgamation, it was noted that the scheme of amalgamation was designed seeking amalgamation with retrospective dates so as to claim set off of losses of loss-making Companies against the profits of profit making Companies of the group and thus impacting adversely the much needed public revenue. This fact of proposed amalgamation was not brought to the notice of Income Tax Department either by the Ministry of Corporate Affairs (MCA) or Registrar of Companies (ROC). The Department had to file an intervention application opposing such amalgamation before the High Court which was rejected on the ground that the Department had no locus standi in the matter and that Regional Director, MCA has been delegated power in this regard.  Not only income tax department but also other regulators are not able to file their objections before the High Court in such cases.

To redress the grievances of the income tax department and other regulators in this regard the Ministry of Corporate Affairs issued a circular No. 1/2014, dated 15.01.2014.   According to this circular a joint reading of Sections 394 and Section 394A of the Companies Act makes it clear that the duties to be performed by the Registrar and Official Liquidator under Sections 394 and of the Regional Director concerned acting on behalf of the Central Government under Section 394A  are quite different.

The Ministry of Corporate Affairs considered a recent instance wherein Regional Director did not project the objections of the Income Tax Department in a case under Section 394.  This matter has been examined by the Ministry.  The Ministry decided that while responding to the notices on behalf of the Central Government under Section 394A, the Regional Director concerned shall invite comments from Income Tax Department within 15 days of receipt of notice before filing his response to the Court.   If no response is received from the Income Tax Department has no objection to the action proposed under Section 391 or Section 394 as the case may be.  The Regional Director must also see if in a particular case feedback from other sectoral regulator is to be obtained and if it appears necessary for him to obtain such feed back, it will also be dealt with in a like manner.

The Ministry further emphasized that it is not for the Regional Director to decide correctness or otherwise of the objections/views of the Income Tax Department or other regulators.  While ordinarily such views should be projected by the Regional Director in his representation, if there are compelling reasons for doubting the correctness of such views, the Regional Director must make a reference to the Ministry of Corporate Affairs for taking up the matter with the Ministry concerned before filing the representation under Section 394A of the Act.

On issue of this circular by the Ministry of Corporate Affairs, the Income Tax Department also issued circular on 11.04.2014 and gave instructions to the Commissioners of Income Tax as this is the only opportunity with the Department to object to the scheme of amalgamation if the some is found prejudicial to the interest of Revenue to send  the comments/objections of the Department  to Regional Director, MCA for incorporating them in its response to the Court, immediately after receiving information about any scheme of amalgamation or reconstruction etc.

By these circulars the Companies who are to go in for mergers or amalgamations are to face the objections to be raised by the Income Tax Department and other sectoral regulators.