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TMI Blog1977 (1) TMI 171X X X X Extracts X X X X X X X X Extracts X X X X ..... nvening meetings of the creditors and members to whom compromise and/or arrangement was offered. In the case of the transferee-company, J. B. Mehta, J. by his order dated 23rd October, 1974, directed separate meetings of equity and preference shareholders and Unsecured creditors having a claim over ₹ 5,000 to be convened separately for approving with or without modification the scheme of compromise and/or arrangement. In the case of the transferor-company, direction given was that a meeting of the members of the company be convened for approving with or without modification the compromise and/or arrangement offered to them. Mr. V. H. Thakore, then attached to this High Court as special officer, was appointed as chairman to preside over the meetings. After the meetings were held, the chairman submitted his report. Thereafter, both the transferor-company and the transferee-company filed separate petitions under section 391(2) of the Companies Act, praying for according sanction to the compromise and/or arrangement, which involves a scheme of amalgamation of the transferor-company with the transferee-company. On the petitions being presented they were admitted and directions wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferee-company and dissolution of the transferor-company without winding up. Incidental to this amalgamation, all the assets and liabilities of the transferor-company are being taken over by the transferee-company with effect from the appointed day, which was specified to be close of the business hours on 31st day of March, 1973. The issued, subscribed and paid up capital of the transferor-company is ₹ 2 lakhs consisting of 2,000 shares of ₹ 100 each of which 1,800 shares were issued as fully paid for consideration other than cash. The entire issued capital of the transferor-company was held by DOC Pvt. Ltd. In other words, the transferor-company was a wholly-owned subsidiary company of DOC Pvt. Ltd. The scheme of amalgamation envisage extinguishment of the capital of the transferor-company on its dissolution to be brought about by exchange of its equity shares in the ratio of 20 equity shares of ₹ 100 each fully paid of the transferor-company for 900 equity shares of ₹ 10 each credited as fully paid of the transferee-company, as well as 170 convertible debentures bearing 8% interest each of ₹ 100 credited as fully paid to be issued by the transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e classes, looking to the report of the chairman, appear to have been adequately represented. There is not the slightest suggestion that the majority has coerced the minority into submission or is trying to take unfair advantage of the minority. The last question is whether the compromise and/or arrangement is such is one guided by instinct of preservation of one's own interest, who brings to bear upon the subject his commercial judgment would accept it as fair and reasonable one. The only point in this behalf to be examined is the ratio in respect of which the shares of the transferor-company were to be exchanged for the shares of the transferee-company. Exchange ratio has already been set out above. M/s. Talbot Co. had valued the assets of the transferor-company as on 2nd January, 1973, at ₹ 2 lakhs. Accepting the report as the basis for exchange of shares, the transferee-company agreed to allot 90,000 equity shares of ₹ 10 fully paid and 17,000 convertible debentures bearing 8 per cent interest of ₹ 100 each fully paid in exchange for 2,000 equity shares of ₹ 100 fully paid of the transferor-company. There is an option to receive ₹ 800 per cen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... criticism on the ground of the unfairness but I would not reject the scheme of amalgamation on that account. The question then is whether once it is shown to the court, to whom petition under section 391(2) is presented for according sanction to the scheme of amalgamation, that the requisite statutory formalities have been duly carried out, has the court no option or jurisdiction to reject the scheme or has it merely to rubber-stamp the scheme ? The court has discretion in this and it is not merely a rubber-stamp. This question is no more res integra and can be said to have been fairly concluded by a decision of this High Court in Bank of Baroda Ltd. v. Mahindra Ugine Steel Co. Ltd. MANU/GJ/0003/1975,) P. D. Desai, J.) wherein it is observed as under : In view of the foregoing discussion it appears to me that the court cannot abdicate its duty to scrutinise the scheme with vigilance and act as a mere rubber stamp simply because the statutory majority has approved it and there is no opposition to the scheme in the court. So much weight cannot be attached to the view of the statutory majority as to require the court to mechanically put its imprimatur on the scheme. The court is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such an action, it would be open to the court to be examine the scheme in proper perspective in its various manifestations and ramifications before imposing it on unwilling or dissenting members of the class. That being the position in law, the court obviously would have a discretion either to sanction or to refuse to sanction the scheme. It cannot, therefore, be said that merely because statutory formalities are duly carried out, the court has no option but to sanction the scheme. In other words, the court at that stage is not merely reduced to a rubber stamp. 9. Once it is held that the occur that a discretion in the matter even after it is satisfactory established that statutory formalities have been duly would immediately arise as to what is the ambit of the discretion of the court. It is well-established and calls for no discussion that the discretionary power has to be exercised in a reasonable manner. Whenever a statue confers power, it is indisputable that power is conferred to achieve some object. And the power has to be exercised towards achieving the object. While exercising power, the authority on whom the power is conferred must be guided by the consideration whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed that statutory formalities have been duly complied with, and the scheme of compromise and/or arrangement has been approved by statutory majority of class of members and/or members to whim it was offered. And this discretion of the court to accept or reject the scheme would be guided by the consideration that power is exercised to achieve the object or purpose for which it was conferred. 11. Reverting to the case on hand, the court is called upon the sanction the scheme of amalgamation of two companies, namely, the transferor-company and the transferee-company. The scheme of compromise and/or arrangement envisaged by section 391 takes with its sweep amalgamation of companies. Section 394(1)(a) makes a provision for amalgamation of companies by resorting to the provisions of section 391. In fact, section 396 confers powers on the Central Government to direct amalgamation of two or more companies into a single company, if it is satisfied that it is essential in the public interest to do so. Power under section 396 can be exercised only if amalgamation is in public interest. This will have to be kept in view while considering the habit of discretionary power under section 391(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated to facilitate transfer of a building called 'Avenue House' once belonging to DOC Pvt. Ltd. to the transferee-company so as not to be liable for capital gains tax, which, if a subterfuge of the transferor-company was not resorted to, would have become payable in the amount of ₹ 10,88,776. If the court sanctions the scheme, the property 'Avenue House' once belonging to DOC Pvt. Ltd. would stand transferred to the transferee-company without any liability to pay capital gains tax. 14. On the discussion and points canvassed the following further questions arise for re-examination : (i) What was the legislative intent in introducing the second proviso to section 394 and what is its relevance while examining a scheme of amalgamation submitted to court for sanction ? (ii) What is the ambit, scope and outer periphery of the concept of 'public interest' as envisaged in the second proviso ? (iii) Is the disclosed purpose per forth by the companies who have moved the court for sanction of the scheme or merger/amalgamation, relevant consideration or could the court probe and go behind the apparent purpose and ascertain the real purpose and take int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which provides that nothing contained in section 45 shall apply to .......... (iv) any transfer of capital asset by a company to its subsidiary company, and (b) the subsidiary company is an Indian Company. Section 47(iv) was clearly attracted because all the shares of Bengal Hotels Pvt. Ltd. were then held by DOC Pvt. Ltd. and Bengal Hotels Pvt. Ltd. was an Indian company transfer was of capital asset by the holding company to its subsidiary company. After this transfer was effected on 30th November, 1971, at the book value, Bengal Hotels Pvt. Ltd. the transferor-company, got it valued by one Messrs. Talbot Co. on 2nd January, 1973, and Avenue House property was valued at ₹ 26 lakhs. It would appear that within a span of 1 1/2 years only, the valuation rose form ₹ 1,88,717.79 to ₹ 26 lakhs. Scheme of compromise and/or arrangement between the transferor-company and the transferee-company was first mooted by the end of 1972, when the transferor-company received a proposal from the transferee-company that it, Wood Polymer Limited, for a scheme of amalgamation with the latter to which the entity undertaking, property, rights and powers and all assets, duties, obli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e House Property belonging to DOC Pvt. Ltd., the holding company, was transferred to Bengal Hotels Pvt. Ltd., transferor-company being a subsidiary company and the transfer was of capital asset. Sub-clause (vi) of section 47 grants exemption for payment of capital gains tax on the transfer in a scheme of amalgamation of capital asset by the amalgamation company to the amalgamated is an Indian company. The scheme envisages transfer of all assets including the capital asset of he transferee-company and capital asset is Avenue House and it is to be transferred to the transferee-company and the transfer-company is amalgamating company and it is an Indian company. As the transfer of capital asset is being brought about as an integral part of the scheme of amalgamation of amalgamating company with the amalgamated company is an Indian, company, transfer of the capital asset, namely, Avenue House, would again be exempt from the liability to pay capital gains tax. 18. DOC Pvt. Ltd. floated the transferor-company as its subsidiary company. The principal object for which the subsidiary company was floated was to set up a hotel at the premises of Avenue House, Chowringhee Square, Calcutta. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efeat the payment of capital gains tax, which could be payable, had the capital asset been transferred directly by DOC Pvt. Ltd. to which it belonged, to the Wood Polymer Ltd., the transferee-company, to whom it is sought to be transferred through a via the transferor-company and in the process the original owner company receiving ₹ 26 Lakhs worth of securities in respect of the property valued in its book at ₹ 1,80,717.79 without the slightest liability to pay the capital gains tax. That would be the point to ponder over. 19. Before we proceed further, it is necessary to lift the veil in respect of transferor-company and to see the realities behind the facade of corporate personality. The transferor-company, that is, Bengal Hotels Pvt. Ltd., was floated by Pranlal Bhogilal, Baldevdas K. Petal and Ambalal C. Patel. They are subscribers to the memorandum of association in which the first mentioned two persons, namely, Pranlal and Baldevdas, are shown as nominees of Dost Mohammad and Company Private Limited having its registered office at Calcutta. The registered office of the transferor-company was initially to be set up in the State of Maharashtra, but subsequently, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransferee-company, and is the chairman of the transferee-company. Virtually it comes to this that Pranlal and his associates first acquired DOC Pvt. Ltd. and then floated Bengal Hotels Pvt. Ltd. so as to transfer the Avenue House from Dost Mohammad Co. Pvt. Ltd. to its subsidiary, Bengal Hotels Pvt. Ltd., i.e., from himself to itself and, then, in turn, has suggested a scheme of amalgamation of Bengal Hotels P. Ltd. with Wood Polymer Ltd. from his left had to his right hand. In other words, DOC P. Ltd. i.e., Pranlal and his friends and relatives, could sell Avenue House to Wood Polyer Ltd., wherein they have substantial interest through the transferor-company, solely created as paper company, a fiction of law or a fictitious personality to bring about this transfer which if undertaken directly would straightway invite application of section 45 of the Income Tax Act. It would, in this connection, be advantageous to recall the words of Denning M.R. in Wallersteiner v. Moir [1974] 3 All ER 217, examining the contention that the various concern set up and controlled by Dr. Wallersteiner were his alter ego or himself wearing another had and it was a fit case to pierce the corporate ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defend crime, the law will regard the corporation as an association of persons. 22. The court should disregard separate legal personality of a company and ascertain who are in control of the company because in doing so there was an overriding public interest to be served. Ordinarily corporate personality is to be respected, but when a benefit is misused, the court is not powerless and it can lift the veil of corporate personality to see the realities behind the veil because is so doing, the court subserves the important public interest, namely, to arrest misuse or abuse of benefit conferred by law. One such filed in which the court lifts the veil and looks behind the realities is the field of taxation. Professor Gower in his treatise, Modern Company Law, 3rd edition, says that only trusted creditor in whose favour Slomon rule has been substantially mitigated is the revenue. In Bank Voor Handel en Scheepvaart N. V. v. Slatford [1951] 2 All ER 779,799, (KBD), Devlin, J. has observed : No doubt, the legislature can forge a sledgehammer capable of cracking open the corporate shell, had it can, if it chooses, demand that the courts ignore all the conceptions and principles whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said that the requirement of the proviso has been complied with and the court should not further prove into the matter. The report of the official liquidator is subject to an important factual statement, namely, that the transferor-company was a paper company only created for the purpose of acquiring Avenue House property without incurring any liability to pay capital gains tax. The liquidator was called upon to inquire whether the affairs of the transferor-company have been carried on in a manner prejudicial to the members of the company or public interest. Now, the report clearly recites that the affairs are not shown to have been carried on in a manner prejudicial to the members of the company. But, if it is shown that the transferor-company was a paper company, created for the purpose herein mentioned, could it be said that its affairs were carried on in a manner not prejudicial to public interest ? An attempt was made to urge that inquiry under the second proviso is limited to carrying on affairs of the company, meaning thereby, carrying on of the business or the management of the company, in other words, its internal affairs and it has nothing to do with the broader perspec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Public Interest in the Indian Company Law by D. L. Mazumdar I.C.S., quoted in The chartered Accountant, vol. XII part I, 1963-64, p. 406.) the concept of public interest has recently received recognition in the business practice of the more enlightened sections of the leaders in the trade and industry. As far as our Companies Act is concerned, it has received statutory recognition in sections 89(4) 205(1) 211(3) 221 244(1), 250, 303,326,352 and 396 in the Companies Act. Public interest is a positive check on unhindered exercise of private right whether by management or stock-holders. Our company law has recognised the fact that there are several areas in this field where even the joint will of the management and the stock-holders must give way to the requirements of public policy. In the field in which public interest is recognised as a relevant consideration, freedom of management and stock-holders to carry on the business of the company in regard to these matters, in such manner as they like, has been specifically subjected to the condition that autonomous decision making in these areas must not override the concept of the public interest (vide D. L. Mazumdar I.C.S. supra). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxes. It would, therefore, be indisputable that taxes are levied for the common good and that would indisputably be in public interest. If such be the philosophy behind the taxing power of the State, could it be said that when by a device resorted to, in which success can be achieved with the aid of the court, a subject seeks to defeat tax, such action could even be in public interest ? 28. It was incidentally said that in the context of the Monopolies and Restrictive Trade Practices Act, the test for determining public interest : would be properly covered in the second limb of the dictum of Lord Macnaghten in Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. [1894] AC 535 (HL). Before I examine the test, I should like to make it clear that passage relied upon opens with words the true view in the present time, I think, is this and the present time has relation to the role of the State in England in 1894, economic doctrine of laissez faire, then prevalent, and apart from anything else. I have my grave doubt whether that test is valid in the context of the welfare State and egalitarian society sought to be set up under our Constitution. With this limitation, the second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... malgamation is exempt from the levy of capital gains tax, doing of which is permitted by law, the same could never be said to be against public interest, and, therefore, the court should not look upon it with an eye of suspicion. Undoubtedly, for the purpose of section 45 of the Income Tax Act, those transactions enumerated in section 47 would be exempt from the operation of section 45. That would include transfer of capital asset by the holding company to the subsidiary company or vice versa, or transfer as part of the scheme of amalgamation of the capital asset of the amalgamating company to the amalgamated company. In the latter case, however, the scheme of amalgamation can only be operative and binding if it is sanctioned by the court. The power to sanction a scheme is converted on the court. Scheme of amalgamation may have to be framed for achieving some object or purpose. Companies do not amalgamate for the fun of it. They must amalgamated or would like to amalgamate or may be amalgamated to achieve some purpose or object. By section 396 power is conferred on the Central Government to amalgamate two companies if it is in public interest. Section 396 is in the same part in whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son, at the same time making it available for use and enjoyment to the assessee as in a case falling within section 44D or mask the true character of the income by disguising it as a capital receipt as in a case falling within section 44E or assume diverse other forms ... But there must be some artifice or device enabling the assessee to avoid payment of tax on what is really and in truth his income. If the assessee parts with his income producing asset, so that the right to receive income arising from the asset which therefore belonged to the assessee is transferred to and vested in some other person, there is no avoidance of tax liability : no part of the income from the asset goes into the hands of the assessee in the share of income or under any guise. 32. This view of the Gujarat High Court, I was informed, has been subsequently confirmed by the Supreme Court. My attention was also drawn to the Law and Practice of Income Tax by Palkhivala, 7th edition, in which it is stated that the subject has the legal right so to dispose of his capital and income as to attract upon himself the least amount of tax. Avoidance of tax is not tax evasion and it carries no ignominy with it, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 938, it was provided that section 42 of the Finance Act, 1930, shall not apply unless it is whom to the satisfaction of the Commissioners of Inland Revenue that the instrument was not executed in pursuance of or in connection with an arrangement where under certain things were provided for. A question arose whether certain instrument were exempt from payment of stamp duty as they would fall under section 42 of the Finance Act, 1930. Rejecting the claim for exemption from stamp duty it was held that the object of section 50 was to put a stop to that device; and it succeeded. If that meaning is not given all that would be necessary would be to incorporate two puppet companies, make the contract in the name of one and take the conveyance in the name of the other, and no stamp duty would be payable. In such a situation, the House of Lords referred to Heydon's case [1584] 3 Co. Rep 7a, 7b and observed that such construction should be put on the provisions of a status shall suppress the mischief, and advance the remedy and the words of Lord Selborne L.C. in Caledonian Railway Co. v. North British Railway Co. [1881] 6 App Cas 114, 122, (HL), that the more literal construction ought no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee is as it incur the least liability for the tax and to such proposition, I do not take any exception. 35. The expression public interest standing by itself is likely to appear to be vague without any specific connotation. It is capable of more than one meaning. Therefore, in order to ascertain the true meaning of public interest used in a given statute, it is to be construed in the context of the legislation in which it is used, provision in which it is used, and the purpose sought to be achieved by the use of the expression. Where alternative constructions are equally open that alternative is to be chosen which will be consistent with the smooth working of the system which statue purports to be regulating and that alternative is to be rejected, which will introduce uncertainty, friction, or confusion into the working of the system : vide Shannon Realities v. St. Michel [1924] AC 185 (PC). At any rate, such as expression capable of more than one meaning must draw is colour and content from the context in which it is used. It such should be the constriction of the expression public interest , it would be necessary to see the setting in which it is placed. To ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epth; but a scheme of amalgamation which provides for merger of the transferor-company with the transferee-company, would destroy any opportunity for examination of the affairs of the transferor-company. The second proviso would provide the last opportunity to peep into the affairs of the transferor-company before it gets virtually extinct. The court is, therefore, charged with a duty before it finally the confirms burial-cum-cremation of the transferor-company, to peep into its affairs to ascertain whether they have been carried on not only in a manner not prejudicial to its members but in even public interest. The expression public interest must take its colour and content from the context in which it is used. The context in which the expression public interest is used should permit the court to find out why the transferor-company came into existence, for what purpose it was set up, who were its promoters, who were controlling it, what object was sought to be achieved through creation of the transferor-company and why it is now being dissolved by merging it with another company. All these aspects will have to be examined in the context of the satisfaction of the court whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s affairs. If the party seeks assistance of the court only to reduce tax liability, the court should be the last instrument to grant such assistance or judicial process to defeat a tax liability, or even to avoid tax liability. If the party has so arranged its affairs, as to reduce or even avoid tax liability and the taxing authority disputes it, and the matter is brought before the court, the court would adjudicate upon the dispute between the revenue and the assessee on the rival contentions. That is not the situation here. In such a situation, the court would not be concerned as to the modality of avoidance of tax but there the tax cannot scheme of amalgamation. In other words, the judicial process is used or polluted to defeat the tax by forming an appropriate device or subterfuge. Such a situation can never be said to be in public interest. It is clearly opposed to public interest and on this ground the court would not sanctions the scheme of amalgamation. 39. Accordingly, Petition Nos. 10 of 1975 and 12 of 1975 are rejected. As the Central Government after notice did not appear, Mr. V. B. Patel was appointed by the court to assist it in unraveling the implications of law i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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