2012 (9) TMI 100 - HC - Income Tax

Scheme of demerger - objection of Income-tax Department that the Scheme in question is floated with the sole object of avoiding the tax liability such as Income-tax, Stamp Duty, VAT, etc. and that the sole object is only to avoid capital gains tax - assessee contested that it is only the Central Government through Regional Director which is vested with the powers to raise the objections qua the Scheme and the Income-tax Department has no locus to raise such objections - Held that - If any amount is required to be payable to the Income-tax Department by the transferor company, the Income-tax Department can be said to be a creditor so far as its claim against the transferor company is concerned. Considering the same, it cannot be said that the Income-tax Department has no locus to put forward its objections in this behalf. The segregation of telecommunications services and telecommunications infrastructure business reflects the global trend and has been adopted by telecommunication companies in India without objection. In fact, the Working Group under the Planning Commission has recommended sharing of infrastructure, and the present Scheme reserves flexibility to it for easing such process when required. It may be relevant to note that even the Central Government has not raised any objection to the Scheme and even the Department has not contended that the aforesaid objectives are imaginary. Therefore it cannot be said that the Scheme has no purpose or object and that it is a mere device/subterfuge with the sole intention to evade taxes, particularly when even the incidence of tax purportedly sought to be evaded is not established on facts. Transfer is void for want of consideration - Held that - On agreeing with the view taken by the Delhi High Court that even if the consideration of one rupee can be said to be a valid consideration and it is not necessary that consideration is always a monetary consideration. In such type of cases wherein the reconstruction involves give and take and mutual/reciprocal promises and obligations, which can be said to be consideration for each other and it cannot be said that there is absolutely no consideration so far as Scheme of Arrangement is concerned. As approval accorded by the equity shareholders, secured and unsecured Creditors of the petitioner and the Regional Director, Western Region to the proposed Scheme of Arrangement, as well as the submissions of the Income Tax Department, sanction is hereby granted to the Scheme of Arrangement under Sections 391 and 394 of the Companies Act, 1956 while protecting the right of the Income Tax Department to recover the dues in accordance with law irrespective of the sanction of the Scheme. However, while sanctioning the Scheme it is observed that said sanction shall not defeat the right of the Income Tax Department to take appropriate recourse for recovering the existing or previous liability of the transferor company and the transferor company is directed not to raise any issue regarding maintainability of such proceedings in respect of assets sought to be transferred under the proposed Scheme and the same shall bind to transferor and transferee company. The pending proceedings against the transferor company shall not be affected in view of the sanction given to the Scheme by this Court as the rights of the Income Tax Department of assessing, levying and collecting tax from the Appellant are not confiscated or expropriated so as to extinguish such rights.

Issues Involved:
1. Locus Standi of the Income Tax Department to object to the Scheme.
2. Whether the Scheme is floated with the sole object of avoiding tax liability.
3. Whether the Scheme constitutes a valid arrangement under Sections 391-394 of the Companies Act, 1956.
4. Validity of the Scheme in light of consideration and public policy.
5. Whether the Scheme is void for lack of consideration and ultra vires the Companies Act.
6. Whether the Scheme is against public interest.

Issue-wise Detailed Analysis:

Locus Standi:
The Income Tax Department has the locus standi to object to the Scheme. Despite arguments that only the Central Government through the Regional Director has the power to object, the court held that the Income Tax Department, being a creditor due to pending tax liabilities, has the right to raise objections. This aligns with the precedent set in the Calcutta High Court case, SREI Infrastructure Finance Limited, where it was determined that tax liabilities attract the provisions of the Income Tax Act, and thus the Department can object.

Avoidance of Tax Liability:
The court examined whether the Scheme was floated solely to avoid tax liabilities, such as income tax, stamp duty, and VAT. The Scheme proposed the segregation of passive infrastructure assets to enable further growth and maximize value in each business. The court noted that similar Schemes had been sanctioned by other High Courts without objections from the Income Tax Department. The court concluded that the Scheme was not solely for tax avoidance, as it had legitimate business purposes, including improved quality of services and increased efficiency.

Validity of the Scheme under Sections 391-394:
The court determined that the Scheme constituted a valid arrangement under Sections 391-394 of the Companies Act, 1956. The Scheme involved the demerger of passive infrastructure assets to a wholly-owned subsidiary, which is a recognized form of business reorganization. The court referenced the broad interpretation of "arrangement" in cases like Larsen & Toubro Ltd. and Re T & N Ltd., which support the legitimacy of such Schemes.

Consideration and Public Policy:
The court addressed the argument that the Scheme was void for lack of consideration. It held that consideration does not always need to be monetary and can include mutual promises and obligations. The court cited cases like Chidambara Iyer & Ors v. P.S. Renga Iyer & Ors., where non-monetary considerations were deemed valid. The court also referenced the Supreme Court's decision in Vodafone International Holdings B.V. v. Union of India, which emphasized that legitimate tax planning within the framework of law is permissible.

Void for Lack of Consideration and Ultra Vires:
The court rejected the argument that the Scheme was void for lack of consideration and ultra vires the Companies Act. It held that even a nominal consideration, such as one rupee, could be sufficient. The court emphasized that the Scheme involved mutual obligations and benefits, which constitute valid consideration. The court also noted that similar Schemes had been sanctioned by other High Courts, reinforcing the validity of the Scheme.

Public Interest:
The court examined whether the Scheme was against public interest. It concluded that the Scheme was not against public interest, as it aimed to improve business efficiency and service quality. The court referenced the decision in Miheer H. Mafatlal v. Mafatlal Industries Limited, which laid down the parameters for sanctioning Schemes, including ensuring they are not contrary to public policy. The court found that the Scheme met these parameters.

Conclusion:
The court allowed the appeal and sanctioned the Scheme, subject to the condition that the Income Tax Department's right to recover dues in accordance with law is protected. The court directed that the pending proceedings against the transferor company would not be affected by the sanction of the Scheme. The court also noted that the appellant-company should not produce the certified copy of the judgment before the Registrar of Companies until 5th September 2012, allowing the Income Tax Department time to approach the Supreme Court if desired.

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