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TMI Blog2004 (1) TMI 375X X X X Extracts X X X X X X X X Extracts X X X X ..... y from a particular date and for the purposes of the BST Act the said company loses its corporate personality from another date. Once the court declares that a company stands destroyed from a particular date then the corporate personality of that company is destroyed completely from that date. Prospectively for the purposes of sales tax, it may be open to the State Legislature to artificially preserve the separate identity of the companies up to the date on which the court approves the scheme of amalgamation. However, in respect of amalgamation orders passed by the court prior to the insertion of section 33C are concerned, the effective date of amalgamation declared by the court cannot be altered by the State Legislature as it amounts to overruling the orders of the court or declaring that the judicial decisions are not binding. It is well-established in law that the Legislature cannot declare that the judicial decisions of the court are not binding, as it amounts to reversing the decisions rendered in exercise of judicial power. The court s decision always binds unless the conditions on which the decision is based, are fundamentally altered. The State cannot declare as to when a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vy a tax. The contention of the State that in the instant case retrospective operation of section 33C does not cause any hardship to the petitoners, because at the relevant time when the transactions took place, two companies were distinct and separate entities is also without any merit. As stated hereinafter from April 1, 1993, business was carried on by PIL as agent or trustee of NOCIL and not as a separate and distinct entity. The rights and liabilities of the companies in amalgamation as well as the taxable income of NOCIL and PIL have been determined on the footing that PIL ceases to exist from April 1, 1993. If section 33C is to operate retrospectively then the entire scenario relating to profit sharing ratio, bargains by the shareholders and the assessed income of the two companies will be severely affected. It must be remembered that in the present case it is not the infirmity or deficiency pointed out by the court which is sought to be remedied. On the contrary it is the order of the court which is sought to be nullified by the impugned legislation. In other words, in the present case the basis of amalgamation which has been approved and acknowledged by the High Court is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders passed by the court or the Central Government as the case may be. In other words, the submission is that section 33C may be valid prospectively from the date of its insertion on May 4, 2002, but it is invalid for the period prior to May 4, 2002, because it amounts to by- passing or overruling the judicial orders already passed under the Companies Act, 1956. In a nutshell, the second submission is that section 33C is invalid to the extent it applies for the period from July 1, 1981 to May 3, 2002. 2. The facts in brief relevant for the purpose of this petition, are as follows: National Organic Chemical Industries Limited ("NOCIL" for short) and Polyolefins Industries Limited ("PIL" for short) were two companies duly registered under the Companies Act, 1956. NOCIL is engaged in the business of manufacture of rubber and plastic products. Up to 2002, NOCIL was also manufacturing petrochemicals and polymers. PIL was also engaged in the manufacture of polymers, rubber chemicals and plastic products. These two companies decided to amalgamate and the terms and conditions of the scheme of amalgamation were finalised and approved by the board of directors of NOCIL on March 8, 1994. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NOCIL provisionally was refunded by the Sales Tax Department to NOCIL on April 2, 1997. 4. NOCIL had filed an appeal against the aforesaid assessment order on certain other issues, such as set off, turnover tax, purchase tax, etc. In the said appeal, the Deputy Commissioner of Sales Tax (Appeals) issued a show-cause notice on November 19, 1997 calling upon NOCIL to show cause as to why supply of goods worth Rs. 64.57 crores by NOCIL to PIL from April 1, 1993, should not be treated as sales liable to tax under the BST Act. The petitioners in their reply letter submitted that from April 1, 1993 PIL stood merged with NOCIL as per the High Court's order dated November 10, 1994 and, therefore, there being no two separate legal entities from April 1, 1993, the transactions between NOCIL and PIL cannot be considered as sale transactions and consequently there was no liability to pay sales tax. The appellate authority, however, by an order dated March 31, 1998, passed under section 55(6) of the BST Act, rejected the contention of the petitioners and held that the amalgamation of one company into another can always be prospective and not retrospective, and that the High Court could not app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of sale and purchase shall be included in the turnover of sales or, as the case may be, purchases of the respective companies and shall be assessed to tax accordingly, and for the purposes of this Act, the said two or more companies shall be treated as distinct companies and shall be treated as such for the entire period up to the date of the said order, and the registration certificates of the said companies shall be cancelled, or amended, where necessary, with effect from the date of the said amalgamation order. (2) Words and expressions used in this section, but not defined, shall have the respective meanings assigned to them in the Companies Act, 1956." 7. Thus, by inserting section 33C in the BST Act, it is declared by the State Legislature that where two or more companies are to be amalgamated by an order of the court or the Central Government and the order is to take effect from a date anterior to the date of the order, then, for the purposes of sales tax the said companies shall be deemed to be distinct and separate companies till the date on which the scheme of amalgamation is approved by the court or the Central Government. By giving retrospective effect to section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when a judicial order is passed directing that the amalgamation of two companies shall be from a particular date, it is not open to the State Legislature to interfere with the court order and declare that for the purpose of sales tax the amalgamation of the two companies shall not be from the anterior date specified by the High Court, but from the date on which the High Court approved the scheme of amalgamation. He submitted that such a legislation which directly interferes with the judicial order must be held to be unconstitutional. 11. Mr. Dada further submitted that the High Court order sanctioning the scheme of amalgamation from the appointed day is an order in rem binding on all the authorities including the sales tax authorities. He submitted that the State Legislature cannot override the order of amalgamation passed by the High Court. He submitted that if at all the State was aggrieved by the date of amalgamation of companies passed by the High Court under section 391 of the Companies Act, it was open to the State to approach the High Court and seek modification under section 392 of the Companies Act, 1956. Instead of approaching the High Court and seeking modification of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with effect from July 1, 1971. On a question coming up for consideration as to what was the effective date of amalgamation, it was held that even for assessing income under the Income-tax Act the effective date of amalgamation will be July 1, 1971, as ordered by the court under the Companies Act. In the present case, it was submitted that from April 1, 1993, all transactions between NOCIL and PIL have to be considered as transactions with one entity, i.e., NOCIL and where the transactions are from one to oneself, the concept of sale does not apply to such transactions. It is well established in law that to constitute sale there must be two separate parties/entities to the transaction. It was submitted that if the Legislature wanted to treat the supply of goods, from one to oneself as "sale", then unless the Constitution is amended, the State cannot bring to tax such transactions. In any event, it was submitted, that in respect of the cases where the court has already ruled that the amalgamation of the companies shall be from a particular date, then, the State does not have legislative power to alter the date of amalgamation even under the sales tax law. 13. Counsel for the petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion arrive at the share exchange ratio on the basis of the net worth after eliminating the effect of transactions between those companies. The profit and loss account and the balance-sheet of all the companies have been drawn up as per the order of amalgamation passed after July 1, 1981, and the tax liability of all the companies has been assessed and the said assessments have attained finality. He submitted that the retrospective amendment would result in changing the said commercial bargain because of recasting of the balance-sheet to give effect to section 33C and consequently giving effect to the increase in liability on account of sales tax. The impugned amendment would also result in revising the income-tax returns of both the companies which cannot be done due to time-limit of one year provided under section 139(5) of the Income-tax Act, 1961. By the retrospective amendment rights and liabilities of all the companies amalgamated after July 1, 1981, have been sought to be disturbed without any justification. He submitted that the only reason given by the respondents for retrospective insertion of section 33C from July 1, 1981, is that there were substantial changes effected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferor and transferee company have merged from the appointed date. In this regard counsel for the petitioners relied upon the judgment of the Andhra Pradesh High Court in the case of KCP Ltd. v. State of Andhra Pradesh [1993] 88 STC 374, wherein it was held that branch transfers between two units though registered separately under the Sales Tax Act would not constitute sale. 17. It was further submitted on behalf of the petitioners that as the respondents have not given any explanation to justify the retrospective insertion of section 33C, the section does not stand to the test of reasonableness. It was submitted that the respondents have also failed to explain the underlying purpose of the enactment, the extent and the urgency of the evil sought to be remedied thereby, the disproportion of the imposition and the prevailing conditions which led to the passing of such a harsh enactment. In the absence of any such explanation, it was submitted, that the enactment with retrospective effect is bad in law. 18. Counsel for the petitioners relied upon the judgment of the Apex Court in the case of D. Cawasji & Co. v. State of Mysore [1984] 150 ITR 648, wherein it was held that instea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, as per the Companies (Court) Rules, public notice is required to be given calling for objections for amalgamation of the two companies from the appointed date. The creditors are therefore put to notice and their objections are taken into account. The courts do not sanction schemes which are against public interest. It was submitted that the order of the court under section 391 of the Companies Act has a statutory force. It was submitted that the order of the High Court under section 391 of the Companies Act is in the nature of insolvency jurisdiction as contemplated under section 41 of the Indian Evidence Act. Accordingly, it was submitted that the order passed under section 391 of the Companies Act is an order in rem and binding on all the authorities including the sales tax authorities. Accordingly, it was submitted that in any view of the matter, application of section 33C for the period prior to its insertion on May 4, 2002, is illegal and unconstitutional and, therefore, to the extent section 33C applies for the period from July 1, 1981, to May 3, 2002, must be held to be unconstitutional. 21. Mr. Naphade, learned senior advocate appearing on behalf of the State, on the ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Companies Act does not empower the company court to issue any direction to the sales tax authorities directing them to treat the sales between the transferor and the transferee companies during the relevant period as cancelled. It is not the duty of the Court either to enlarge or cut down the scope of the legislation. It was submitted that the court cannot rewrite, or recast law as it has no power to legislate. The power to legislate is not conferred on the Court. The question of giving retrospective effect to the legislation is a question of legislative policy and being a question of legislative policy the same cannot be closely canvassed under article 226 of the Constitution of India. 24. Counsel for the respondents submitted that the argument of the petitioners is that since the parties by their voluntary act have agreed to merge with retrospective effect the sales tax must recognise it. He submitted that the argument of the petitioners relates to what law ought to be and not what the law is. He submitted that the petitioners are indirectly inviting the court to lay down what the law ought to be and not what the law is. He submitted that this is for beyond the judicial functi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any prejudice or hardship to the petitioners as at the time when the sale took place the two companies were distinct and separate entities and, therefore, sales tax was attracted. The impugned enactment does no impose any new liability or any additional liability. In any event the legislation is not confiscatory in nature. The impugned enactment is only clarificatory in nature and explains only the law as it existed at all material times and the impugned enactment only removes the doubt on the true legal position. 27. It was submitted that assuming without admitting that the impugned enactment creates a new rule even then it cannot be considered as unreasonable. It was submitted that giving a retrospective effect is essentially a question of legislative policy. The fact that a dealer is not in a position to pass on the tax on others does not affect the competence of the Legislature to enact a law imposing tax retrospectively because that is a matter of legislative policy. It was submitted that it is axiomatic that the Government needs revenue to discharge its obligations towards its citizens. It was submitted that in the instant case the petitioners have not shown any real prejud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the same parameters as applied to the validating law. 30. It was submitted that the legislative power conferred on the appropriate Legislatures to enact laws in respect of topics covered by several entries in the three Lists can be exercised both prospectively and retrospectively. The legislative power, in addition, includes the subsidiary or auxiliary power to validate laws which have been found to be invalid. Similarly, the Legislatures have power to validate fiscal levy with retrospective effect even by making necessary changes in the law and by removing deficiencies or defects pointed out by the Courts. It was submitted that this power to validate fiscal levy is on the footing that the courts have found that there is no authority of law to levy the tax as there is no provision in the enactment in that behalf. Such a defect can be cured by making necessary changes in the law with retrospective effect and giving the levy the authority of law. This is purely a legislative function. 31. It was submitted that it was competent to the appropriate Legislature to cure the infirmity and pass a validating law so as to make the provisions of the said earlier law (law which was found to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, therefore, it cannot be said that the new impost interfers with the judicial power. 33. In rejoinder Mr. Dada submitted that once the company court passes an order under section 391 of the Companies Act declaring that two companies stand amalgamated from a particular date then the State cannot alter that effective date in exercise of its legislative power. He submitted that the State is duty-bound to disclose the reasons for retrospective insertion of section 33C to the BST Act. He submitted that to constitute sale, there must be two parties to the transaction and if by operation of law the two parties stood merged from a particular date, then, the transactions from that date cannot be said to be transactions between two entites so as to constitute sale and consequently there is no question of levy sales tax on such transactions. He relied upon the judgment of the Apex Court in the case of People's Union for Civil Liberties v. Union of India [2003] 2 JT 530. In that case, the Apex Court has held that the Legislature can remove the basis of a decision rendered by a competent court thereby rendering that decision ineffective, but the Legislature has no power to ask the instrum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order of amalgamation is based or does it override the order of amalgamation itself ? 35. A company gets corporate personality or becomes a legal entity as per the provisions contained in the Companies Act, 1956. Similarly, a company loses its corporate personality or is deemed to be destroyed on amalgamation from a date declared by the competent authority under the Companies Act. There can be no dispute that the High Court is one of the competent authorities under the Companies Act to approve the scheme of amalgamation from any specified day as it deems fit. Therefore, once the court order under the Companies Act declares that the amalgamation of the companies shall be effective from a particular date, then, from that date the corporate personality of the amalgamated companies ceases to exist for all purposes. From that day the corporate personality of the amalgamated company is destroyed completely. Before the court approves the scheme of amalgamation, it may be open to the Legislature to declare that for the purposes of sales tax, the transferor company carrying on business as a trustee or agent of the transferee company is a separate identity distinct from the transferee com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not binding, as it amounts to reversing the decisions rendered in exercise of judicial power. The court's decision always binds unless the conditions on which the decision is based, are fundamentally altered. In all cases, where the court, from July 1, 1981, has declared that the effective date of amalgamation shall be from a date anterior to the date on which the scheme of amalgamation is sanctioned, by retrospectively inserting section 33C, the State is not altering the basis on which the court order is founded, but in fact, the State is nullifying the court order itself. The origin and destruction of a corporate personality flows from the provisions under the Companies Act. The State cannot declare as to when a corporate entity shall come into existence or cease to exist. Even assuming that by inserting section 33C the State is trying to preserve the identity of the amalgamated company up to the date on which the scheme of amalgamation is approved, such provision can take effect only prospectively and not retrospectively because there will be nothing to preserve after the corporate personality of a company is destroyed from the effective date as per the order of the court. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is accepted and approved by the court by its order dated November 10, 1994. The declaration of the court to the above effect cannot be set at naught by the State even in exercise of its legislative powers. As stated hereinabove, whether, prospectively, the State is competent to preserve the corporate personality of the company in amalgamation up to the date on which the scheme of amalgamation is approved by the court is not the issue considered at this stage. Suffice it to state that wherever the court has already declared that the corporate entity of a company is destroyed from the effective date, then there is complete destruction of that company from that date and it will not be open to the State to legislate that even after the effective date of amalgamation declared by the court, the amalgamated company shall be deemed to be in existence for sales tax purposes. 41. The Apex Court in the case of Bhopal Sugar Industries Ltd. (supra) has held that consumption by the owner of goods in which he deals is not a sale within the meaning of the Sale of Goods Act and, therefore, it is not "sale of goods" within the meaning of entry 54 List II, Schedule VII to the Constitution. A Di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spectively that for the purposes of sales tax the amalgamated and amalgamating companies are two separate and distinct entities up to the date on which the scheme of amalgamation is approved by the court, so that the company court while passing the order under section 391 of the Companies Act would take note of the said provisions while sanctioning the scheme of amalgmation. We expressly keep this issue open and to not express any opinion as to the prospective validity of section 33C of this BST Act. However, to the extent section 33C seeks to alter the effective date of amalgamation of companies determined by the court from July 1, 1981, till May 3, 2002, must be held to be unconstitutional. 45. The contention of the State that by retrospective insertion the State has merely reiterated the law as existed cannot be accepted. As stated hereinabove, in law, the transferor company carrying on business as agent or trustees of a transferee cannot be said to be carrying on business as a separate entity. The State, by a fiction has sought to declare that the transferor company carrying on business as trustee or agent of a transferee company is a separate entity for the purposes of the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eparate and distinct entity. The rights and liabilities of the companies in amalgamation as well as the taxable income of NOCIL and PIL have been determined on the footing that PIL ceases to exist from April 1, 1993. If section 33C is to operate retrospectively then the entire scenario relating to profit sharing ratio, bargains by the shareholders and the assessed income of the two companies will be severely affected. 50. The contention of the State that section 33C must be judged on the parameters as applicbale to validating law cannot be accepted because by the retrospective insertion of section 33C the order of the court itself is nullified which is not permissible in law. 51. It must be remembered that in the present case it is not the infirmity or deficiency pointed out by the court which is sought to be remedied. On the contrary it is the order of the court which is sought to be nullified by the impugned legislation. In other words, in the present case the basis of amalgamation which has been approved and acknowledged by the High Court is sought to be nullified by the impugned legislation. In none of the decisions cited on behalf of the State it is held that the State rende ..... X X X X Extracts X X X X X X X X Extracts X X X X
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