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TMI Blog2012 (7) TMI 513X X X X Extracts X X X X X X X X Extracts X X X X ..... th the Transferee Company. 2. The shareholders of the Transferor Companies and the Transferee Company have approved the Scheme. A meeting of the share holders of the Transferee Company was held on November 3, 2011. At this meeting, all the share holders present at the meeting, voted in favour of the Scheme, except Mr. Shailesh Mehta - the Objector, who holds 750 shares of the Transferee Company, constituting 0.001% of the total share capital of the Transferee Company. Out of the total 158 ballots received, one ballot was invalid. Out of the 157 valid ballots, 156 share holders representing 98.74% in number and 99.99% in value, voted in favour of the Scheme and only the Objector, representing 0.63% in number and 0.001% in value, voted against the Scheme. Further, the share holders voting in favour of the Scheme, comprised of 46 individual share holders, 31 financial institutional investors ('FII's') and 3 Insurance Companies. Thus, the Scheme was approved by an overwhelming majority of 99.99% in value of the shareholders present and voted. The Objector was the only share holder who opposed the Scheme. The objections raised by the Objector are set out and dealt with hereunder : 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransferee Company to implead the income tax authority as a necessary party. He has further submitted that the shares of the Transferee Company held by the Transferor Companies which are freely tradable and transferrable without any restriction cannot be transferred through a scheme of arrangement as is sought to be done in this case. 6. The learned Senior Advocate appearing for the Petitioners has submitted that the aforestated submissions/allegations/contentions of the Objector are untenable and baseless. It is submitted that the correct legal position with regard to tax avoidance/evasion is laid down in the decisions of the Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra) and more recently in the case of Vodaphone International Holdings v. Union of India and Ors. [2012] 341 ITR 1 (SC). He submitted that in the case of Azadi Bachao Andolan (Supra), the Hon'ble Supreme Court has in paragraphs 137 to 166 explained the rule in McDowell's case with particular reference to the Judgment of Chinnappa Reddy, J. It is submitted that the Objector has relied upon a sentence in the Judgment of Justice Ranganath Mishra in McDowell's case to the effect that "on this aspect one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was felt that it would be in the interest of the Transferee Company to merge the five Transferor Companies with the Transferee Company to enable the Promoter thereof to hold shares directly in the Transferee Company rather than indirectly. The object of the Scheme is not to avoid any tax. It is submitted that there is nothing illegal, unlawful or dubious or colourful in the Scheme and the same is a perfectly legitimate scheme, permissible by law. 8. It is submitted on behalf of the Petitioners that the real motive of the Objector in opposing the Scheme is to prevent the Promoter Dr. Prakash Modi from holding or controlling any shares in the Transferee Company. According to the Petitioners, this is clear from para 12 of the written submissions handed over by the Objector, in which the Objector has contended that once the shares held by the Transferor Companies in the Transferee Company are cancelled and the capital of the Transferee Company is reduced, no new shares should be issued to Dr. Prakash Modi, who is the Promoter of the Transferee Company. This would mean that Dr. Prakash Modi, who presently owns and controls the shares of the Transferee Company through the Transferor Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Council in IRC v. Challenge Corpn. Ltd. and did not have the benefit of the House of Lord's pronouncement in Craven the view taken by the Madras High Court appears to be correct and we are inclined to agree with it. 148. WE may also refer to the judgment of the Gujarat High Court in Banyan and Berry v. CIT where referring to McDowell, the Court observed : (ITR p.850 E-H) "The Court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the Act; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell case. The ratio of any decision has to be understood in the context it has been made. The facts and circumstances which lead to McDowell decision leave us in no doubt that the principle enunciated in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exorcised in its country of origin, Duke of Westminster 1936 AC 1 : 19 TC 490 continues to be alive and kicking in England. Interestingly, even in McDowell, though Chinnappa Reddy, J., dismissed the observations of J.C. Shah, J., in CIT v. A. Raman and Co. [1968] 67 ITR 11: AIR 1968 SC 49 based on Westminster and Fisher's Executors 1926 AC 395 at p.412 by saying (SCC p.242 para 17) "We think that time has come for us to depart from the Westminster principle as emphatically as the British Courts have done and to dissociate ourselves from the observations of Shah, J. and similar observations made elsewhere." it does not appear that the rest of the learned Judges of the Constitutional Bench contributed to this radical thinking. Speaking, for the majority Ranganath Mishra, J. (as he then was) says in McDowell (SCC PP 254-55 para 45) "45. Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Paragraph 57 of the Judgment : "(i) Para 46 of McDowell and Co. Ltd. (supra) judgment has been missed which reads as under "on this aspect Chinnappa Reddy, J., has proposed a separate opinion with which we agree". [i.e. Westminster principle is dead]. (ii) That, Azadi Bachao Andolan case (supra) failed to read paras 41-45 and 46 of McDowell & Co. Ltd. (supra) in entirety. If so read, the only conclusion one could draw is that four learned judges speaking through Misra, J. agreed with the observations of Chinnappa Reddy, J. as to how in certain circumstances tax avoidance should be brought within the tax net. (iii) That, subsequent to McDowell & Co. Ltd. (supra), another matter came before the Constitution Bench of five Judges in Mathuram Agarwal v. State of Madhya Pradesh [1999] 8 SCC 667 in which Westminster principle was quoted which has not been noticed by Azadi Bachao Andolan case (supra)". 18. The Hon'ble Supreme Court in its analysis, held in paragraph 64 of its decision that there is no conflict between McDowell & Co. Ltd. and Azadi Bachao Andolan or between McDowell & Co. Ltd. and Mathuram Agarwal. Paragraph 64 of the said decision is reproduced her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer was part of the scheme. The Court thus concluded that this was a clear device to avoid tax and consequently rejected the scheme. The Wood Polymer Limited (supra) case is therefore clearly distinguishable on facts. Infact, in a later case in Ambalal Sarabhai Enterprises [1984] 147 ITR 294 (Guj) the Division Bench of the Gujarat High Court approved the scheme despite the fact that tax was avoided by the scheme and held that the Wood Polymer Limited (supra) was decided on the basis of the peculiar facts of the case. The Gujarat High Court reiterated the principle that a tax payer can always arrange his affairs to avoid tax. 20. The decision of AAR, wherein according to the Objector, it is suggested that the law laid down in Azadi Bachao Andolan is not good law, and the correct law is laid down in McDowell's case, is of no assistance to the Objector, since the decision in the case of Vodaphone International Holdings (supra) has now settled the controversy once and for all. 21. As regards the submission of the Objector that this Court should direct the Transferee Company to implead the income tax authority as a necessary party, in my view, the income tax authority is not requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares of the Transferee Company to the shareholders of the Transferor Companies. The purpose of the Scheme is to provide long term stability and transparency in the Transferee Company. The Transferor Companies are in existence since 1975. It was felt that it would be in the interest of the Transferee Company to merge the five Transferor Companies with the Transferee Company, and to enable the Promoter thereof to hold shares directly in the Transferee Company rather than indirectly. The object of the Scheme is not to avoid any tax. Even today the shares are owned/controlled by the same Promoter albeit through the Transferor Companies. Under the Scheme the only difference is that the Promoter will now hold shares directly in the Transferee Company. It is correctly submitted by the Transferee Company that there is nothing illegal or unlawful or dubious or colourful in the Scheme and the same is a perfectly legitimate scheme and permissible by law. Therefore, the objection of the Objector that the Scheme is a tax avoidance device and ought not to be approved, stands rejected. 24. It is next contended by the Objector that since the Scheme was not sanctioned on or before 31st March, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said objection is rejected. 28. The Objector has further submitted that Mr. Jayendra Natwarlal Shah who is a joint shareholder with Dr. Prakash Modi, holding one share in four of the five Transferor Companies is a Partner of the Valuer - N.A. Shah Associates, which fact was not disclosed to the shareholders. In response, it is pointed out on behalf of the Transferee Company that the Valuation Report was prepared and signed by Mr. Milan Modi, Partner of N.A. Shah Associates and not by Mr. Jayendra Shah. As such, the Report is clearly an independent one. Further, Mr. Jayendra Shah is the second holder of the said shares and as such did not have any pecuniary interest in the Transferor Companies. Again Valuation Report has been obtained to comply with the provisions of the Listing Agreement and there is no change in the shareholding pattern of the Transferee Company, as it will issue equivalent number of shares to the Promoters as already held by the Transferor Companies. The pre and post shareholding pattern of the Transferee Company, including Promoters and Mr. Shailesh Mehta will remain unchanged as disclosed in the Notice and Explanatory Statement. In view thereof, I see no subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page 595 and 596. This objection raised by the Objector is therefore, also rejected. 32. As stated hereinabove, the shareholders of the Transferor Companies and the Transferee Company have approved the Scheme and the Objector who is holding 0.001% of the total share capital of the Transferee Company is the only shareholder who has opposed the Scheme. The Official Liquidator has filed his Report dated January 18, 2012 stating that the affairs of the Transferor Companies have been conducted in an appropriate manner and the Transferor Companies may be ordered to be dissolved. Neither the Official Liquidator, nor the Auditors appointed by him, have made any adverse remarks with regard to the Scheme, nor have they objected to the same. The Regional Director has also filed an Affidavit dated 17th February 2012 stating that the Scheme is not prejudicial to the interest of the shareholders and public. Even the Regional Director has not made any adverse remark with regard to the scheme nor objected to the scheme being sanctioned. 33. As already held hereinabove, there is nothing illegal, unlawful, dubious or colourful in the Scheme and the same is a perfectly legitimate Scheme, which is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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