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TMI Blog2015 (11) TMI 1144X X X X Extracts X X X X X X X X Extracts X X X X ..... ine the affairs of the companies by ensuring that all the 14 transferor companies which have stopped their activities are wound up. Therefore, ex facie this Court has no reason to doubt the bona fide nature of the scheme. If one of the reasons for the proposed amalgamation is tax planning, applying the settled legal position emanating from the above mentioned legal authorities, the scheme cannot be invalidated only on that ground. The intention of a party to reduce tax liability cannot be said to be contrary to public interest or against public policy. On the contrary, such planning by a tax payer is permissible in law. As regards the investigation stated to be pending against the transferee company, as the transferee company will continue to exist after amalgamation, the pendency of investigation would not affect public interest as it will continue to be liable for all legal actions that may be taken against it. In the light of the above, and as no objections/claims have been received in pursuance of the advertisement got published by the petitioners in the newspapers, this Court is of the opinion that the proposed scheme of amalgamation is in conformity with the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 2015 is filed by M/s. Yamuna Agro-Farms Private Limited (transferor company No.14). Company Petition No.193 of 2015 is filed by M/s. Hill County Properties Limited (transferee company). These company petitions have been filed under Sections 391 and 394 of the Companies Act, 1956 (for short, the Act) for sanction of the proposed scheme of amalgamation of transferor Company Nos.1 to 14 with the transferee Company. 2. In company petition Nos.179 to 192 of 2015 filed by the petitioners - transferor companies it is averred that they were incorporated under the Act, on 05.06.2000, 08.05.2002, 07.05.2002, 07.07.2000, 13.06.2000, 08.05.2000, 07.05.2002, 07.05.2002, 07.05.2002, 21.07.1999, 24.05.2002, 24.05.2002, 23.05.2002 and 29.06.2002 respectively; that their respective authorized share capital is ₹ 25,00,000/- each divided into 25,000 equity shares of ₹ 100/- each; and that their respective issued, subscribed and paid-up share capital is ₹ 25,00,000/- each divided into 25,000 equity shares of ₹ 100/- each. 3. It is further averred that main objects of the petitioners in Company Petition Nos.179, 182, 183 and 192 are to raise, farm, cultivate, multiply, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a ports, air ports, bridges, flyovers, subways alleys, pavements, and to do other similar constructions and to carry on the business of builders, constructors, developers, contractors, or otherwise deal in houses, land buildings, sheds or any other property etc. 5. The transferor companies and the transferee company pleaded that they are engaged inter alia in the business of development of lands; that majority equity shareholding of the transferor companies is held by the transferee company; that the transferor companies possess lands and they have given the same to the transferee company for development in consideration for a share in the development; that the proposed amalgamation will (i) enable appropriate consolidation of the activities of the transferor companies and the transferee company with pooling and more utilization of their resources; (ii) achieve synergistic integration and consolidation of the businesses of the transferor companies and the transferee company; (iii) achieve consolidation, greater integration and financial strength and flexibility, greater efficiency in cash management and unfettered access to cash flows generated by the combined business, reductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ); (ii) Chandrabhaga Agro Farms Private Limited (Rs.41,945/-); (iii) Nallamala Agro Farms (Rs.8,953/-) and (iv) Vindhya Bio-tech Private Limited (Rs.20,18,670/-). That it has three shareholders out of whom the transferee company is holding 24,959 shares (99.83% shareholding), that one Mr. B. Nandini Raju is holding 40 shares (0.16% shareholding) and that one Mr. G. Venkateswar Reddy (Nominee of the transferee company) is holding 1 share (0.004% shareholding). (v) In Company Petition No.183 of 2015, the petitioner averred that it has no secured creditors, but it has four unsecured creditors for a total amount of ₹ 17,61,523/-, i.e., (i) Audit Fee Payable (Potnuru Associates) (Rs.11,236)]; (ii) Chandrabhaga Agro Farms Private Limited (Rs.65,957/-); (iii) Nallamala Agro Farms (Rs.8,751/-) and (iv) Vindhya Bio-tech Private Limited (Rs.16,75,569/-). That it has three shareholders out of whom the transferee company is holding 24,049 shares (96.196% shareholding), that one Mr. B. Nandini Raju is holding 950 shares (3.80% shareholding) and that one Mr. G. Venkateswar Reddy (Nominee of the transferee company) is holding 1 share (0.004% shareholding). (vi) In Company Petition No.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,449 shares (99.79% shareholding), that one Mr. B. Rama Raju is holding 50 shares (0.20% shareholding) and that one Mr. Neerav Kapasi (Nominee of the transferee company) is holding 1 share (0.01% shareholding). (xi) In Company Petition No.189 of 2015, the petitioner averred that it has no secured creditors, but it has three unsecured creditors for a total amount of ₹ 21,83,672/-, i.e., (i) Nallamala Agro Farms Private Limited (Rs.9,592/-); (ii) Vindhya Bio-tech Private Limited (Rs.21,62,844/-) and (iii) Audit Fee Payable (Potnuru Associates) (Rs.11,236/-). That it has three share holders out of whom the transferee company is holding 24,499 shares (99.79% shareholding), that one Mr. B. Teja Raju is holding 500 shares (2.00% shareholding) and that one Mr. Neerav Kapasi (Nominee of the transferee company) is holding 1 share (0.01% shareholding). (xii) In Company Petition No.190 of 2015, the petitioner averred that it has no secured creditors, but it has four unsecured creditors for a total amount of ₹ 5,07,700/-, i.e., (i) Chandrabhaga Agro Farms Private Limited (Rs.13,982/-); (ii) Nallamala Agro Farms (Rs.9,592/-); (iii) Vindhya Bio-tech. Private Limited (Rs.4,72, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eholder) such number of redeemable preference shares of ₹ 100/- each in lieu of the equivalent number of equity shares held by such a shareholder, that the said preference shares shall be redeemable after ten years or with an option to redeem earlier than the redemption period by providing two months notice to the concerned shareholders and that pursuant to the vesting of the undertaking in the transferee company, the investment in the shares of the transferor companies appearing in the books of account of the transferee company will stand cancelled. 8. The petitioners transferor companies have filed company applications (C.A. Nos.574, 577, 580, 585 586, 591 592, 595, 598, 603 604, 607, 610 611, 618 619, 625 624, 628, and 633 634 respectively) before this Court for appointment of Chairpersons for convening the meeting of their unsecured creditors and/or shareholders. This Court by orders dt.15.4.2015 appointed separate Chairpersons for convening the meetings of their un-secured creditors and/or shareholders for consideration of the proposed scheme of arrangement. That the Chairpersons have filed their reports dt.21/22.5.2015 inter alia stating that pursuant t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of IL FS Engineering and Construction Company Limited) 1 share (0.004%); (xv) Mr. Mohan Krishna Vemuri (Nominee of IL FS Engineering and Construction Company Limited) 1 share (0.004%); and (xvi) Ms. Suguna Mudundi (Nominee of IL FS Engineering and Construction Company Limited) is holding 1 share (0.004% shareholding). That upon this scheme being effective, the transferee company shall without any further application, act, instrument or deed, issue and allot to the shareholders of the transferor company (except to the transferee company and its nominee shareholder) a total of 4,900 redeemable preference shares of ₹ 100/- each in lieu of the equivalent number of equity shares held by such a shareholder, that the said preference shares shall be redeemable after ten years or with an option to redeem earlier than the redemption period by providing two months notice to the concerned shareholders. That the details of the shareholders of the transferor companies who will be issued redeemable preference shares equivalent to the number of equity shares held by them are as under: Sl.No. Name of the company Shareholder Ms./Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explained to them, and that they have voted in favour of the proposed scheme of arrangement. (iv) In the report relating to the meeting of the unsecured creditors of the transferee company, the Chairperson has stated that pursuant to the order of this Court, after issuing individual notices to the unsecured creditors of the transferee company and causing publication of the advertisement in two daily newspapers, he has conducted the meeting of the unsecured creditors on 21.5.2015 at 11.30 a.m., that as the said meeting was attended by 33 unsecured creditors, the quorum of 15 members was fulfilled, that the scheme of arrangement was read out and explained to them, and that they have voted in favour of the proposed scheme of arrangement. (v) In the report relating to the meeting of the shareholders of the transferee company, the Chairperson has stated that pursuant to the order of this Court, after issuing individual notice to the shareholders of the transferee company and causing publication of the advertisement in two daily newspapers, he has conducted the meeting of the shareholders on 21.5.2015 at 10.00 a.m., that as the said meeting was attended by 13 shareholders, the quor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeds would be given to each these entities (transferor companies) in the respective proportion of their contribution of land. In the petition filed by the assessee-company before the Honble High Court it was mentioned that all these transferor companies are 96% subsidiary companies of M/s.HCPL. In other words the flagship company M/s.HCPL entered into development agreements with its own subsidiary companies. Since these transferor companies acquired the lands at very low cost and there being no cost of construction being incurred by these companies, these transferor companies would end up with huge profits as and when their share of constructed property is sold. It may not be out of place to mention here that the real estate sector has witnessed a down fall in the past few years and the developers i.e, M/s.HCPL ended up with losses owing to increase in cost of construction, increase in interest burden on the loans raised, coupled with fall in sale realizations. Such loss incurred by M/s. HCPL would be allowed to be carried forwarded as business loss for a period of 8 years which can be set off only against any profits that may arise from construction activity in the subseque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies, Hyderabad, has reported that the transferor companies and the transferee company involved in the scheme of amalgamation are regular in filing the statutory returns and that no complaints, no investigations and no inspection are pending against the transferor companies and that inspection against the transferee company is pending. 14. In substance, the main objection raised by the Regional Director is based on the letter addressed by the Income Tax Department, wherein a view has been expressed that the scheme is intended only to offset the losses being suffered by the transferee company against profits that are being made by the transferor companies which acquired agricultural land at cheaper cost and are receiving huge profits from out of the development of the lands provided by the transferee company with a view to evade payment of income tax. 15. In order to meet the objections raised in the report of the Regional Director, a detailed common reply affidavit has been filed by the Authorised Signatory of the petitioners companies, wherein it is inter alia stated that the transferee company was established for the purpose of development of real estate, that the promoter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king over the management of the transferee company, IL FS Group has infused about ₹ 850 crores into the transferee company for the due completion of the Hill County project in public interest to fulfil the contractual obligation of the company and delivered residential units to 800 families in the city of Hyderabad, that the funds were also used for the purpose of completion of Hill County project, part repayment to project lenders, trade creditors, settlement with commercial banks and financial institutions, that new promoters paid around ₹ 57 crores towards pending income tax dues, which became liable during the erstwhile management regime, and that this payment towards pending income tax was also from public money. That in spite of the said investment of ₹ 850 crores, the transferee company continues to be in losses even as on the effective date, that due to Satyam episode and the political disturbances arising out of bifurcation of the erstwhile united State of Andhra Pradesh, the completion of the Hill County project was delayed by almost seven years and that the transferee company is in negative net-worth as of today. That at the time of change of management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te control over the affairs of the transferee company and that in that process even if there is resultant avoidance of tax it amounts to tax planning, but not tax evasion, and therefore the same cannot constitute a ground for declining to approve the scheme. In support of his submissions, the learned Senior Counsel has referred to the following judgments. (i) In Re: Indo Continental Hotels Resorts Ltd. (1990) 69 Comp. Cases 93 (Raj.) (ii) In Re: Indo Continental Hotel and Resorts Ltd. (1998) 93 Comp. Cases 194 (Raj.) (iii) In Re: AVM Capital Services Private Limited (2012) 173 Comp. Cases 355 (Bom.) : 2012 (114) Bom.LR 2533 (iv) Anu Trading Private Limited v. Shinano Retail Private Limited 2014 (1) MPHT 521 (v) Union of India v. Azadi Bachao Andolan (2004) 10 SCC 1 (vi) Vodaphone International Holdings B.V. v. Union of India (2012) 6 SCC 613 (vii) Miheer H. Mafatlal v. Mafatlal Industries Limited (1997) 1 SCC 579 18. In Miheer H. Mafatlal (7 supra), the Supreme Court has dealt in detail with the scope of interference by the Company Court in sanction proceedings. After referring to the provisions of Sections 391 and 393 of the Act, the Supreme Court held: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ros and cons of the scheme with a view to finding out whether the scheme is fair, just and reasonable and is not contrary to any provisions of law and it does not violate any public policy. This is implicit in the very concept of compromise or arrangement which is required to receive the imprimatur of a court of law. No court of law would ever countenance any scheme of compromise or arrangement arrived at between the parties and which might be supported by the requisite majority if the Court finds that it is an unconscionable or an illegal scheme or is otherwise unfair or unjust to the class of shareholders or creditors for whom it is meant. Consequently it cannot be said that a Company Court before whom an application is moved for sanctioning such a scheme which might have got the requisite majority support of the creditors or members or any class of them for whom the scheme is mooted by the company concerned has to act merely as a rubber stamp and must almost automatically put its seal of approval on such a scheme. It is trite to say that once the scheme gets sanctioned by the Court it would bind even the dissenting minority shareholders or creditors. Therefore, the fairness of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the transferee company setting off its losses against profits that are being made by the transferor companies in future. In other words, there is an implicit plea that the scheme is affecting public interest or violating public policy. 21. There was indeed a big debate as to whether a transaction by which the parties achieve avoidance of tax, is illegal or not? In Commissioners of Inland Revenue v. Duke of Westminster (1936 AC 1), Lord Tomlin, it was held as under: Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however, unappreciative the Commissioners of Inland Revenue or his fellow tax gatherers may be of his ingenuity, he cannot be compelled to pay an increased tax. J.C. Shah, J, in C.I.T. v. Raman Co. (AIR 1968 SC 49) , has referred to and relied upon the above mentioned legal proposition in Duke of West Minister (8 supra). However, Chinnappa Reddy, J, in Mc.Dowell and Company Limited v. Commercial Tax Officer (1985) 3 SCC 230), while concurring with the majority judgment of Justice Ranganath Mishra ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxpayer was entitled to manage his or her affairs so as to reduce tax; (3) Even if the purpose or object of a transaction was to avoid tax this did not invalidate a transaction unless an anti- avoidance provision applied; and (4) If a document or transaction was genuine and not a sham in the traditional sense, the Court had to adhere to the form of the transaction following the Duke Westminster (8 supra) concept. In conclusion, the Supreme Court in paragraph 332 in Vodaphone International Holdings B.V. (6 supra), inter alia held as under: Needless to say if the arrangement is to be effective, it is essential that the transaction has some economic or commercial substance. The Supreme Court further held in paragraph 334 as under: Revenue cannot tax a subject without a statute to support and in the course we also acknowledge that every tax payer is entitled to arrange his affairs so that his taxes shall be as low as possible and that he is not bound to choose that pattern which will replenish the treasury. The Revenue s stand that the ratio laid down in McDowell (10 supra) is contrary to what has been laid down in Azadi Bachao Andolan (5 supra), in our view, is uns ..... X X X X Extracts X X X X X X X X Extracts X X X X
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