2013 (5) TMI 575 - HC - Companies Law

Appeal u/s 483 Modification of scheme of arrangement Non - Compliance of Section 2(19AA) of IT, Act - Company Petition was preferred by IRTL/respondent for sanctioning of a Scheme and which was sanctioned. Simultaneously, the respondent had also approached the Madhya Pradesh High Court and which also sanctioned the Scheme qua the respondent. Under the said Schemes, the spinning business of the respondent was demerged as a going concern and transferred to IRTL, with the respondent retaining the polymer business. IRTL subsequently was amalgamated with the appellant. Company Application was filed by the appellant u/s 392(1)(b) for modification of the Scheme qua IRTL sanctioned by the Court and for a direction to the respondent to transfer certain assets including a part of the housing colony occupied for use by the workers/employees of the erstwhile IRTL to the appellant or in the alternative to pay to the appellant the value of the said assets. As per appellant under the Scheme sanctioned by the Court the Undertaking of the spinning business, as a going concern within the meaning of Section 2(19AA) of the Income Tax Act, 1961, was to be transferred to IRTL and for this reason only the respondent had not paid any capital gains tax on the said transfer; that under the said transfer, the properties of the Undertaking being transferred as a going concern, would also stand transferred; that the assets including the housing colony occupied by the workers of IRTL, qua which the application was filed were the assets of the Undertaking of the spinning business; however the Scheme did not mention or refer to the said assets and thus the Scheme was liable to be modified to make it Section 2(19AA) compliant. Held that - The filing of the application u/s 392(1)(b) by the appellant after nearly three years of acquiring the said spinning business by purchase of shareholding of IRTL is nothing but an act of greed and arm twisting the respondent to continue allowing the appellant to use the said assets. A change of shareholding of a Company which has in law been conferred the status of a juristic person, does not entitle the company to wriggle out of past commitments/representations. Thus, modification sought by the appellant is against the fabric of the Scheme and in the domain of modifications of the Scheme and not of modification for working of the Scheme. For the Court to sanction a Scheme of demerger, compliance of Section 2(19AA) is not essential. The reference to Section 2(19AA) in the Scheme is only for the purpose of making the transaction tax neutral. The same cannot be said to be a pivot around which the Scheme revolved or essential to its workability. Thus, non-compliance of Section 2(19AA), would not render the Scheme unworkable. Appeal is dismissed accordingly.

Summary

Issues Involved:
1. Modification of the Scheme sanctioned under Section 392(1)(b) of the Companies Act, 1956.
2. Compliance with Section 2(19AA) of the Income Tax Act, 1961.
3. Transfer of assets, including housing colony and common utilities.
4. Amendment of the arbitration clause.

Detailed Analysis:

1. Modification of the Scheme sanctioned under Section 392(1)(b) of the Companies Act, 1956:
The appellant sought modification of the Scheme sanctioned on 27th February 2003, arguing that certain assets, including a housing colony used by workers, were essential for the spinning business and should have been transferred to IRTL. The Company Judge held that the Scheme specifically retained these assets with the respondent, and the shareholders and creditors were aware of this arrangement. The Court emphasized that the Scheme could not be re-written under Section 392(1)(b) and that the appellant's request amounted to a re-writing of the Scheme, which is impermissible. The Court further noted that the spinning business had continued to operate for ten years without ownership of these assets, indicating that they were not essential for its operation.

2. Compliance with Section 2(19AA) of the Income Tax Act, 1961:
The appellant contended that the Scheme was not compliant with Section 2(19AA), which requires all properties of the Undertaking being transferred as a going concern. The Company Judge held that Section 2(19AA) does not mandate the transfer of all properties and that the essential and integral assets necessary for the business to run independently had been transferred. The Court also stated that compliance with Section 2(19AA) is for the Tax Authorities to determine and is not a mandatory requirement for Schemes under Sections 392, 393, and 394 of the Companies Act. The Court concluded that the non-compliance, if any, with Section 2(19AA) would not render the Scheme unworkable.

3. Transfer of assets, including housing colony and common utilities:
The appellant argued that the housing colony and common utilities were essential for the spinning business and should have been transferred. The Company Judge found that the Scheme explicitly retained these assets with the respondent and that the shareholders and creditors were aware of this arrangement. The Court noted that the spinning business had continued to operate for ten years without ownership of these assets, indicating that they were not essential for its operation. The Court also emphasized that the appellant's request for either the transfer of these assets or their monetary value was not justified and amounted to an act of greed and arm-twisting.

4. Amendment of the arbitration clause:
The appellant contended that the arbitration clause in the Scheme should be amended to reflect the change in management. The Company Judge modified the arbitration clause to provide for arbitration by an Arbitrator appointed with the consent of the parties. However, the appellant argued that the arbitration clause in the MoU should also be amended. The Court held that it could not change the agreement in the form of the MoU between the parties, which was subsequent to the Scheme.

Conclusion:
The Court dismissed the appeal, agreeing with the reasoning of the Company Judge and emphasizing that the appellant's request for modification of the Scheme was not justified. The Court also noted that the spinning business had continued to operate for ten years without ownership of the disputed assets, indicating that they were not essential for its operation. The Court dismissed the appeal with costs of Rs.50,000/- payable by the appellant to the respondent.