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TMI Blog2012 (8) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... on 2(19AA) of the Act, 1961, all the properties of the undertaking become the property of the resulting company. This Court is of the view that non-transfer of some of the pervious common assets being used by the transferee undertaking will not affect IRTL status as a going concern - infact it is settled legal position that there is no requirement under the provisions of the Act, 1961 or Act, 1956 for transfer of all common assets and/or liabilities relatable to the Undertaking being demerged. Applicant's submission that all common assets that cannot be divided must be transferred to the transferee namely, IRTL overlooks the explicit language of Section 2(19AA)(i) of the Act, 1961, which states that ''all the properties of the undertaking being transferred by the demerged company, immediately before the demerger becomes the property of resulting company by virtue of the demerger." Whether or not Section 2(19AA) of the Act, 1961 has been complied with, is not to be determined pre-merger, but post merger and that too by the tax authorities. Thus if the Scheme of Arrangement is not tax complaint, then the tax authorities will levy capital gains tax, if any, on the transferor, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the present application are that in 1989 respondent-IRSL was incorporated and it set up a spinning mill in Pithampur, Madhya Pradesh. 3. In 1993-1994, respondent-IRSL set up a second unit in Butibori near Nagpur for expansion of spinning business as well as for commencing polymer production. 4. It is the Applicant's case that the second unit at Butibori, Nagpur, including the housing colony had been constructed out of the funds of the spinning business. 5. In 2002, respondent-IRSL decided to vertically split its business by way of a Scheme of Arrangement. Under the said Scheme, spinning business was to be demerged as a going concern and transferred to IRTL, while the polymer business was to be retained by respondent-IRSL. 6. On 27th February, 2003, the Scheme qua IRTL was sanctioned by this Court, whereas Madhya Pradesh High Court on 24th March, 2003 sanctioned the Scheme qua respondent-IRSL. The relevant portion of the Scheme is reproduced hereinbelow:- "AND WHEREAS Indo Rama Synthetics (India) Limited ("IRSL") is a public limited company engaged in the manufacture and marketing of Polyester Staple Fibre ("PSF"), Partially Oriented Yarn ("POY"), Fully Drawn Ya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' means April 1, 2002. ** ** ** ( vii ) "spinning Business" means the entire business of manufacture and sale of cotton yarn, polyester yarn, polyester-cotton and polyester-viscose yarns presently, located at the factory units of the Transferor Company at Pithampur and Butibori and means and includes the following: ( a ) All properties and assets, movable and immovable, tangible and intangible, real and personal, corporeal and incorporeal, in possession or in reversion, present and future contingent or of whatsoever nature where-so-ever situated, as on the Appointed Date along with land (as mentioned in Schedule-1) and buildings plant and machinery, capital work in progress, vehicles, equipments, furniture and fittings, sundry debtors, investments inventories, cash and bank balances, bills of exchange, deposits, loans and advances etc. of Spinning Business of the Transferor Company at Pithampur and Butibori as mentioned in Schedule-II. ( b ) All leases or parts thereof, tenancy, rights and agency of the Transferor Company, pertaining to the Spinning Business and all other interests or rights in or arising out of or relating to such properti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany" means Indo Rama Textiles Limited ("IRTL") a Company duly incorporated under the Companies Act,1956 as public limited company with the Registrar of Companies, Delhi Haryana. The Transferee Company was incorporated under the name Indo Rama Projects and Services Limited on August 2, 1989. Subsequently, the name was changed to Indo Rama Projects Investments Limited and a fresh Certificate of Incorporation in the changed name was issued on November 29, 1994. The Company has once again changed its name to its present name and a fresh Certificate of Incorporation consequent upon change of name was issued on July 16, 2002. The Transferee Company is having its Registered Office at Mohan Dev, 13, Tolstoy Marg, New Delhi-110001. ** ** ** PART-II THE SCHEME Transferred/Demerged Undertaking: 3. With effect from the Appointed Date, all the properties, estates and interests of the Transferor Company in the Spinning Business in its entirety (including but not restricted to its assets, liabilities, rights, licences, benefits, obligations etc.) shall, pursuant to Section 394(2) of the Act and without any further act or deed be transferred to and ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the accumulated losses against share premium account of the Transferor Company; ( ii ) The demerger of the Spinning Business as going concern basis as required under Section 2(19AA) of the Income Tax Act, 1961. ( iii ) And conversion of 20% of the Equity Capital of the Transferor Company into Secured Debentures, conversion of 20% Equity Capital into preference shares of the Transferee Company. 36. If any dispute, doubt or difference or issue shall arise between the parties hereto or any of their shareholders, creditors, employees and/or any other person, as to the construction hereof or as to any account, valuation or apportionment to be taken or made of any asset or liability transferred under this Scheme or as to the construction hereof or as to any account, valuation or apportionment to be taken or made of any asset or liability transferred under the Scheme or as to the accounting treatment thereof or as to anything else contained in or relating to or arising out of this Scheme, the same shall be referred to the sole arbitration of Shri O.P. Lohia, resident of R-69, Greater Kailash-I, New Delhi-110048 or any person nominated by him whose decision shall be final and b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Madhya Pradesh through the Managing Director of Madhya Pradesh Audyogik Kendra Vikas Nigam (MPAKVN), Indore. The Plot is surrounded by: On North : MPAKVN Plot On south : MPAKVN Plot On East : 80' wide Road On West : MPAKVN Plot 5. Plot No.A-31 Out of the below mentioned property, an area of 1,10,843.00 sq. mtrs. will remain with Spinning Business as indicated in the attached plan. All that piece or parcel of land known as Plot No.A-31 in the Butibori Industrial Area within the village limits of Umri Khape and outside the limits of Nagpur Municipal Corporation, in rural area, Taluka and Registration Sub-District Registration District Nagpur containing by admeasurement 404607 sq. mtrs or thereabouts. The land is held by way of Lease for 95 years dated July 29, 1994 executed with the Maharashtra Industrial Development Corporation. The Plot is surrounded by: On or towards the North by: MIDC Road On or towards the South by: MIDC Land Plot No.A-31/P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .3.2010 1. The "actual cost" is the basic principle for sharing common expenses between IRSL IRTL. The Allocation Ratio of cost sharing between IRSL IRTL during the period 1.4.2005 to 31.3.2010 under different heads are as per the details mentioned in the enclosed Annexure 'A' 'B' respectively. 1( a ) The cost of alteration and interiors including paintings, money plants and minor fixing shall form part of the Annual Maintenance Budget as provided in Annexure A B. 1( b ) Separate estimates have been agreed to sharing the cost of relocation of PSF and POY in the ratio of 2:3 between IRSL and IRTL respectively as provided in Annexure A B. ** ** ** 2. Validity of contract period This contract is valid for the period 1.4.2005 to 31.3.2010 and will automatically expire on 31.3.2010 and maybe renewed for subsequent period on mutually accepted terms conditions. ** ** ** Allocation Ratio of Cost Sharing between IRSL IRTL for the period 1.4.2005 to 31.3.2010 Annexure 'A' ** ** ** S. No. Nature of Services Service Provident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e published or pronounced. 15. Mr. P.V. Kapur, learned senior counsel for Applicant submitted that the intention of the Scheme of Arrangement was to transfer to IRTL the undertaking of the spinning business as a going concern within the meaning of Section 2(19AA) of the Income Tax Act, 1961 (hereinafter referred to as ''the Act, 1961''). In this connection, he relied upon Clauses 1.1(vii), 3, 17 and 35(ii). He repeatedly emphasised that the respondent-IRSL Company had not paid any capital gains tax on the said transfer. 16. According to Mr. P.V. Kapur, Section 2(19AA)(i) and (vi) of the Act, 1961, stipulated that as a result of the demerger, all the property of the undertaking (as a going concern) being transferred had to become the property of the resulting company. He, in fact, submitted that in accordance with Section 394(2) of the Act, 1956, the entire undertaking as a whole stood transferred and became the property of the resulting company. He submitted that by operation of law, the title of the properties of the undertaking that vested in the Transferor Company prior to the demerger, upon sanction of the Scheme, stood transferred to the resulting company. He also subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or liabilities or any combination thereof not constituting a business activity. 23. Mr. Nigam pointed out that the term ''business'' has been defined in Section 2(14) of the Act, 1961, to include '' ....... any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture''. He drew attention of this Court to Judicial Dictionary by K.J. Aiyar, 13th Edition defining the term "activity'' as under:- "Activity Read in the context of business, trade or profession, it means the combination of operations undertaken by the corporate body, whether or not they amount to a business, trade or profession in the ordinary sense;..." 24. The expression ''business activity'', thus, according to him meant operations or combination of operations carried on by the Undertaking and constituting a business. 25. Mr. Nigam submitted that the expression ''taken as a whole'' as explained in the definition of ''Undertaking'', reproduced supra, was used in the context of ''business activity'' and not ''Undertaking''. Therefore, according to him to qualify the pre-requisites of demerger under Section 2(19AA) of the Act, 1961, what was essential was th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss activity, being a separate line of business of the assessee, was transferred as a Going Concern and therefore, the transaction was that of a slump sale. The Bombay High Court observed that '' ....under the said law, the basic test which one must apply to ascertain whether there existed a slump sale is continuity of business. The question to be asked is whether there is a transfer of business as a whole?........... The question therefore to be asked is: whether there was a transfer of land, building, plant and machinery as a whole or whether there was a transfer of land, building or plant and machinery separately and individually. For that purpose, one has to read the terms and conditions of the arrangement ........ one has to construe the entire arrangement in order to ascertain the true intention of the parties and merely because there is a schedule of assets on record, it cannot be said that there is a sale of itemized assets." (B) CIT v. Max India Ltd. 319 ITR 68 (P H), wherein the Punjab and Haryana High Court held as under:- ' '3. We have heard learned counsel for the parties and perused the record. 4. In para 20 of its order, the Tribunal held that the sale was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... values being assigned to any assets and liabilities. Although this definition has been brought in Section 2(42C) by the amendment introduced with effect from 1-4-2000 but the concept behind slump sale has been the same even before the amendments has been held by various courts." (D) Rohan Software (P) Ltd. v. ITO , 115 ITD 203 (Mum.), wherein the Tribunal held "the sale of software business including intellectual properties, etc; but excluding building and motor car did not militate the concept of slump sale." 31. Consequently, Mr. Arvind Nigam submitted that there was no requirement in law that each and every asset and liability directly or indirectly relatable to the demerged Undertaking should be transferred in the Scheme of Demerger. Accordingly, he submitted that if the Undertaking or any part thereof, being transferred independently constituted a running business, which was capable of carrying on as a Going Concern, the same would be regarded as tax compliant demerger. 32. Mr. Arvind Nigam lastly contended that under the Scheme of Demerger agreed upon between the parties, certain flats in the housing colony occupied by the employees of the demerged Undertaking we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Court has no hesitation in concluding that the Housing colony as well as common utilities were specifically agreed to be retained and owned by respondent-IRSL. The properties, buildings and assets that were transferred to IRTL under the Scheme of Arrangement were specifically mentioned in its Schedule 1 and 2. 38. This Court is of the view that shareholders and creditors of respondent-IRSL and IRTL gave their consents to the Scheme of Arrangement knowing fully well that common utilities and housing colony would continue to be retained and owned by the respondent-IRSL. 39. Even the Applicant before entering into the share purchase agreement was aware of the Memorandum of Understanding dated 28th July, 2005, which specifically stated that housing colony was being offered by respondent-IRSL as a resource to IRTL for five years upon payment of actual cost. In the opinion of this Court, if respondent-IRSL was not the owner of the common resources and infrastructure, there was no question of it offering the common assets for use to IRTL on payment of cost. 40. Since considerable emphasis was laid by the Applicant's senior counsel on Section 2(19AA) of the Act, 1961, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing demerged is hived off as a going concern, that means, if it constitutes a business activity capable of being run independently for a foreseeable future. To ensure that it is a going concern, the Court while sanctioning a Scheme can certainly examine whether essential and integral assets like plant, machinery and manpower without which it would not be able to run as an independent unit have been transferred to the demerged company. 42. However, this Court is not in agreement with the Applicant's submissions that in a Scheme of Demerger by virtue of Section 2(19AA) of the Act, 1961, all the properties of the undertaking become the property of the resulting company. This Court is of the view that non-transfer of some of the pervious common assets being used by the transferee undertaking will not affect IRTL status as a going concern. 43. In fact, it is settled legal position that there is no requirement under the provisions of the Act, 1961 or Act, 1956 for transfer of all common assets and/or liabilities relatable to the Undertaking being demerged. The Applicant's submission that all common assets that cannot be divided must be transferred to the transferee namely, IRTL o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... complied with, is not to be determined pre-merger, but post merger and that too by the tax authorities. In the opinion of this Court, if the Scheme of Arrangement is not tax complaint, then the tax authorities will levy capital gains tax, if any, on the transferor, namely, respondent-IRSL. 48. Accordingly, compliance with Section 2(19AA) of the Act, 1961, is relevant only for the purposes for determining whether the Scheme is tax neutral or not and it has consequences for respondent-IRSL only. 49. Consequently, the contention urged by the Applicant that in view of Section 2(19AA) of the Act, 1961, the Scheme of Demerger must necessarily comply with Section 2(19AA) which is meant for availing tax concession cannot be read as a mandatory requirement for all schemes of amalgamation/arrangement/de-merger under Sections 391/392/394 of the Act, 1956. The said provision cannot be read and interpreted to include assets/units/undertakings/business belonging to the respondent-IRSL which were never transferred or intended to be transferred to IRTL and which are not mentioned in the Scheme of Arrangement. In the opinion of this Court, the Applicant is in error in contending that the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the compromise and/or arrangement. To effectuate this purpose the power of widest amplitude has been conferred on the High Court and this is a basic departure from the scheme of the U.K. Act in which provision analogous to Section 392 is absent. The sponsors of the scheme under Section 206 of the U.K. Act have tried to get over the difficulty by taking power in the scheme of compromise or arrangement to make alterations and modifications as proposed by the Court. But the legislature, foreseeing that a complex or complicated scheme of compromise or arrangement spread over a long period may face unforeseen and unanticipated obstacles, has conferred power of widest amplitude on the Court to give directions and, if necessary, to modify the scheme for the proper working of the compromise or arrangement. The only limitation on the power of the Court, as already mentioned, is that all such directions that the Court may consider appropriate to give or make such modifications in the scheme, must be for the proper working of the compromise and/or arrangement." (Emphasis supplied) 51. From the aforesaid, it is apparent that in the proceedings under Section 392(1)(b) of the Act, 1956, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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