2015 (9) TMI 1125 - HC - Income Tax

Validity of Scheme of arrangement between the Petitioner and its Shareholders - Proceedings under Income Tax were pending - Petitioner seeks to make a gift of the shares held by the Petitioner in a Company to its Shareholders - the Petitioner proposes to reduce the balance lying in its Securities Premium Account ( SPA ) by the book value of the Petitioner s investment in the shares of TAAL as appearing in the books of accounts of the Petitioner on the record date. It is clear from Section 281 of the Income Tax Act that the gift of any asset by an assessee to any person during the pendency of any proceedings under the Income Tax Act will be void as against any claim in respect of any tax or any other sum payable by the assessee as a result of the completion of such proceedings or otherwise. In the present case it is an undisputed position that the above mentioned proceedings under the Income Tax Act are pending against the Petitioner Company. Despite the pendency of these proceedings, by the Scheme the Petitioner proposes to gift its shares in TAAL to its Shareholders. Such a gift would therefore clearly be hit by the provisions of Section 281(1) and would be void as against the claims of the Income Tax Department resulting from the proceedings mentioned above. It is pertinent to note that it is not the case of the Petitioner that the gift of the shares of TAAL would not be void on account of the proviso to Section 281(1). In the circumstances there can be no doubt that the proposed gift of the shares of TAAL by the Petitioner to its Shareholders will defeat the provisions of Section 281(1) of the Income Tax Act. The Petitioner however contends that it has more than sufficient assets to discharge the tax liability in the event that the same crystallizes upon the Petitioner, inasmuch as according to the Petitioner, it has a net worth of ₹ 52 crores as per the book value method and a net worth of ₹ 57 crores as per the market value method post distribution of the shares of TAAL to its Shareholders. In my view, even if this be true, the same does not alter the position with regard to the applicability of Section 281(1). Section 281(1) does not carve out any exception on the basis of sufficiency or otherwise of the assets of the assessee. It will not be proper to permit the Petitioner Company to gift its shares in TAAL to its Shareholders as envisaged under the Scheme. The Court will not put its imprimatur on such a Scheme. - it is clear that the Scheme is illegal and contrary to law and hence cannot be sanctioned by this Court. - Decided against the company.

Summary

Issues Involved:
1. Violation of Section 205 of the Companies Act, 1956 and Section 123 of the Companies Act, 2013.
2. Violation of Section 281 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Violation of Section 205 of the Companies Act, 1956 and Section 123 of the Companies Act, 2013:

The Petitioner sought the Court's sanction for a scheme of arrangement involving the gifting of shares of Taneja Aerospace and Aviation Limited (TAAL) to its shareholders. The Regional Director objected, arguing that this scheme constituted payment of dividend in kind, which is prohibited under Section 123 of the Companies Act, 2013. The Petitioner contended that Sections 391 to 394 of the Companies Act, 1956 provided a complete code for such schemes, allowing for wide-ranging arrangements including the distribution of shares. The Court, however, held that any scheme under Sections 391 to 394 must comply with all laws, including Section 123 of the Companies Act, 2013, which mandates that dividends must be paid in cash and not in kind. The Court referenced the Supreme Court's rulings in Kantilal Manilal and Central India Industries, which established that dividends could include distributions of property or rights with monetary value. Consequently, the Court concluded that the gifting of TAAL shares amounted to payment of dividend and violated Section 123 of the Companies Act, 2013.

2. Violation of Section 281 of the Income Tax Act, 1961:

The Income Tax Department objected to the scheme, citing pending assessment and penalty proceedings against the Petitioner and outstanding tax demands. Under Section 281 of the Income Tax Act, any transfer of assets during the pendency of tax proceedings is void against any tax claims unless made for adequate consideration or with prior permission from the Assessing Officer. The Petitioner argued that it had sufficient assets to cover any potential tax liabilities. However, the Court held that Section 281(1) does not provide exceptions based on the sufficiency of assets. The Court noted that allowing the transfer of TAAL shares could result in these shares being unavailable to satisfy future tax claims, thereby defeating the purpose of Section 281(1). The Court emphasized that an assessee's right to arrange its affairs to avoid tax does not extend to defeating statutory provisions like Section 281.

Conclusion:

The Court found the scheme to be in violation of both Section 123 of the Companies Act, 2013, and Section 281 of the Income Tax Act, 1961. Consequently, the scheme was deemed illegal and contrary to law, leading to the dismissal of the Company Scheme Petition. The Court's order emphasized the necessity for schemes of arrangement to comply with all relevant legal provisions and not contravene statutory requirements.