WHETHER OBTAINING NO OBJECTION CERTIFICATE UNDER XX-C OF INCOME TAX ACT IS A CONDITION PRECEDENT TO SANCTIONING THE AMALGAMATION SCHEME?

[Mr. M. GOVINDARAJAN]

Chapter XX-C of the Income Tax deals with the purchase by the Central Government of immoveable properties in certain cases of transfer. Section 269 UC places restriction on transfer of immoveable property. No transfer of any immoveable property in such area and such value exceeding five lakh rupees, as may be prescribed, shall be effect except after an agreement for transfer is entered into between the person who intends transferring the immoveable property and the person to whom it is proposed to be transferred at least four months before the date of transfer. The agreement shall be in writing and in the prescribed form. The agreement shall set forth such particulars as may be prescribed and shall be verified in the prescribed manner and shall be furnished to the appropriate authority of Income Tax Department in such manner and within such time as may be prescribed by each of the parties to such transaction or by any of the parties to such transaction acting on behalf of himself and on behalf of the other parties. The appropriate authority may make an order for purchase by the Central Government of such immoveable property at an amount equal to the amount of apparent consideration and specifying the grounds on which it is made.

Sec. 390 to Sec. 396A of the Companies Act, 1956 deals with the arbitration, compromises, arrangement and reconstructions. Sec. 391 of the Companies Act deals with the power to compromise or make arrangements with creditors and members. It provides that where a compromise or arrangement is proposed-

§         Between a company and its creditors or any class of them; or

§         Between a company and its members or any class of them

The Court may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Court directs.  If a majority in number representing three-fourths in value of the creditors, or class of creditors, or members, or class of members, as the case may be, present and voting either in person, or, where proxies are allowed under the rule made under Sec. 643, by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or in the case of a company which is being wound up, on the liquidator and contributories of the company.  Thus except the creditors and shareholders of the company the consent of other person is not required in the case of compromise or arrangement or reconstruction.  In 'ICICI Ltd., V. Financial & Management Service Ltd.,' - (1998) 29 CLA 372 (Bom) held that it is clear under the provisions of the Companies Act, as they stand, the persons who are interveners who are neither shareholders members nor creditors of the company which is before the court, have no locus to be heard in relation to the scheme under Section 391 of the Act.

In amalgamation process the properties of the transferor company are transferred to the transferee company.   If the value of such properties exceed the limit as prescribed under Chapter XX-C of Income Tax Act whether permission from the appropriate authority is required under amalgamation process. 

In 'Sadanand S. Varde V. State of Maharastra' - (2001) 247 ITR 609 the issue taken is whether it was imperative to seek prior permission as was required in terms of provisions of Chapter XX-C of the Income Tax Act, 1961.   In that, on account within the meaning of Sec. 269UA clause (f) of the Income Tax Act, 1961 which would require prior permission of the appropriate authority. In the absence of such permission, the transfer effected by the scheme of amalgamation would be invalid.  The Division Court analyzed the provisions of Chapter XX-C of the Income Tax Act.  A scrutiny of the definitions of 'apparent consideration' given by clause (b) of Sec. 269UA and 'transfer given in clause (f) would unmistakably indicate that the transfers to which the provisions of Chapter XX-C are intended to apply, are only transfers under agreements or contractual transfers and not statutory transfers or transfers effected by orders of the court or by operation of law.   In a situation of amalgamation, the transfer is not by way of sale, exchange, else or rent so as to fall within Section 269 UA.   Further the process by which the land in question stood vested in the transferee-company by virtue of amalgamation order, would not answer the description of 'immoveable property' within the meaning of clause (d) (ii), nor does it answer the description of 'transfer' as defined in clause (f) (ii) of section 269UA of the Income tax Act.

It was urged by the petitioners as well as the fifth respondent, that a no objection certificate under Chapter XX-C is a condition precedent to the company court considering the scheme for amalgamation.   The court held that this contention does not appear to be tenable for several reasons:

§         Whenever the Legislature wanted a sanction order subject to some condition precedent, the Legislature has so provided expressly;

§         While interpreting a statute, the court has to consider the legislative habit which indicates that where the Legislature intended a sanction to the amalgamation scheme was subject to consent by another authority, it expressly provided so;

§         There is no such provision either in Chapter XX-C or in any other provision of the Income Tax Act, 1961 which is a clear indicator of the negative intention;

The Court rejected the other contention on the ground that whether the scheme of amalgamation in fact and in law results in an unlawful assignment, is a question which can only be determined after amalgamation before the appropriate forum in proper proceedings and does not arise for consideration by the company court at the stage of giving sanction to the scheme of amalgamation.

In a situation of amalgamation even if it can be said that there was a transfer of asset, the transfer was not by way of an assignment but by the order of the court backed up by the force of a statutory provision and by operation of law.  The amalgamation has its origin in a statute and is statutory in character, the transfer and vesting is by operation of law and not an act of the transferor-company, or an assignment by it, but is the result of a statutory instrument. Once the scheme is scrutinized by the company court and sanctioned by an order made by it under Section 391 of the Companies Act, it ceases to retain the character of contract and operates by force of the statute. Such a scheme sanctioned by the Court is statutorily binding on the company, the creditors and the shareholders and has statutory operation by virtue of the provisions of section 391 of the Act. Such a scheme sanctioned by the Court is statutorily binding even on the creditors and shareholders who might have dissented from it or who might have opposed its being sanctioned. It, therefore, has the statutory sanction in that sense. Therefore the contention that Chapter XX-C is not attracted to such a transfer by operation of law has substance and needs to be upheld. 

The Supreme Court in 'General Radio & Appliances Co. Ltd., V. M.A. Khader' - (1986) 60 Comp Cas 1013 held that a no objection certificate by the appropriate authority under Chapter XX-C is not a prescribed condition precedent under section 291 of the Act and, therefore, is a factory wholly irrelevant, immaterial and non-germane for consideration at the time of sanctioning of the amalgamation scheme.