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TMI Blog2010 (1) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... device or subterfuge to avoid the tax liability on account of capital gains and there is no other business purpose or expediency behind the purported amalgamation, is not, in our view, sound and acceptable. - . A design to avoid the tax within the meaning of clause (iii) of the proviso to Section 245 R(2) apparently covers such of the transactions which are sham or nominal or which would lead to the inescapable inference of a contrived device solely with a view to avoid the tax - that no tax liability arises under the Income Tax Act in respect of the transfer of assets/shares pursuant to and as a part of the terms of amalgamation. - 805-810/2009 - - - Dated:- 21-1-2010 - Mr. Justice P.V. Reddi and MR. J. Khosla,JJ. Present for the Applicant: Mr. S.E. Dastur, Mr.Porus F. Kaka, Mr. Sunil Agarwal, Mr. Abhinav Ashwin, Mr. Frank D'souza, Mr. Jaideep S. Kulkarni. Present for the Department: Mr. T.N. Chopra, Mr. Shivendra Kumar Singh, Mr. I.C.S. Kaushik. RULING : These six Applications are filed under Section 245 Q (1) of the Income Tax Act, 1961 (hereafter referred to as the "I.T. Act"). Three Applications viz., Appn. Nos.805, 807 and 809 of 2009 have been filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the transferee company (SIPL) and all the properties, assets, outstandings, liabilities, duties and obligations concerning the transferor companies shall stand transferred to and vested in the transferee company. The transfer and vesting of the properties and assets of the transferor companies shall be subject to the existing charges and encumbrances, if any. Para 13 of the scheme deals with issuance of shares by the transferee company. In para 13.5, it is specifically mentioned that the shares of the transferor companies held by their equity share holders shall without any further application, act or instrument, be deemed to have been automatically cancelled without any requirement to surrender the share certificates. According to para 13.7, the new shares in the transferee company to be issued to the members of the transferor companies shall be subject to the Articles of Association of the transferee company and such shares shall rank pari passu with the existing equity shares in the transferee-company. 4. The question which has been formulated in Application Nos.805, 807 and 809 for seeking advance ruling of this Authority is "Whether the amalgamation, as defined under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of amalgamation. 9. Section 2(1B) reads thus: 2(1B) "amalgamation", in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that - (i) all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation; (ii) all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation; (iii) shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation, otherwise than as a result of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the stand of the Revenue is that the entire scheme of amalgamation and the transaction as a whole has to be disregarded as it has been devised only to defeat the payment of capital gains taxes and the recovery of outstanding taxes from the transferor companies. The learned counsel appearing for the Revenue has gone to the extent of characterizing the scheme as a make-believe one having no legitimate purpose apart from tax evasion and avoidance. It is contended that the scheme which is opposed to public interest cannot receive due legal recognition. The D.I.T. (Intl. Taxation), Mumbai has commented that the applicants "have taken resort to the scheme of amalgamation for the mere purpose of availing the benefit of exemption under Section 47 by putting on the mantle of amalgamation on transfer of shares of channel companies to the Indian companies". It is also urged by the learned counsel for the Revenue that it is desirable to keep the applications on hold till the scheme is sanctioned by the High Court as the I.T.--Department proposes to intervene and present its case of adverse financial repercussions to the Revenue in the event of approval of scheme. In order to substantiate its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to request the Hon'ble Court to give appropriate directions regarding the payment of income tax arrears presently due or as per the determination of the Settlement Commission. Further, it is always open to the Court to consider whether the amalgamation, if sanctioned, would have an irretrievable impact on the recovery of the statutory dues and the Court has undoubted power to safeguard the interests of Revenue by imposing appropriate conditions. With these various possibilities wide open, it is not permissible for this Authority to draw an inference at this stage that the amalgamation is only a ruse or a deliberate plan to evade the payment of income tax arrears. 17. The next question is whether the amalgamation is a pure and simple design to avoid the capital gains tax, as contended by Revenue. Clause (iii) of the Proviso to Section 245 R (2) ordains that the Authority shall not allow the Application where the question raised in the Application relates to a transaction or issue which is designed prima facie for the avoidance of income tax. Normally, the stage at which a finding in terms of clause (iii) of the proviso to Section 245 R (2) has to be given is at the stage of consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate 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 payers may be of his ingenuity, he cannot be compelled to pay an increased tax." This passage was quoted with approval by the Supreme Court of India in the case of CIT vs. A. Raman Co2 and Madhuram Aggarwal vs. State of MP3 (decided by a Constitution bench). To the similar effect is the view taken by the privy council in the case of Bank of Chettinad Ltd. vs. CIT4. 20. In Raman Co, JC Shah, J speaking for the Supreme Court stated the same proposition in the following words : "Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the Income-tax Act. Legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented." 21. Such a view expressed in Duke of Westminister, Raman Co. e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 186), a Division Bench of Gujarat High Court aptly observed: "Tax avoidance postulates that the assessee is in receipt of amount which is really and in truth his income liable to tax but on which he avoids payment of tax by some artifice or device. Such artifice or device may apparently show the income as accruing to another person, 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 theretofore 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 shape of income or under any guise." This passage shall of course be read in conjunction with the observations made in Azadi Bachao ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars to have not done any business except acquiring capital asset from its parent company of which it was a subsidiary company and got it revalued so that by the process of revaluation, the equity shareholders of the transferor-company can get large number of shares of the transferee-company by the exchange ratio prescribed in the scheme of amalgamation. No apparent understandable purpose or object behind the scheme is discernible. The purpose and the only purpose appears to be to acquire capital asset of the DOC Pvt. Ltd. through the intermediary of the transferor-company which was created for that very purpose to meet the requirement of law, and in the process to defeat tax liability that would otherwise arise. If such be the scheme of amalgamation and if such is the use made of the transferor-company by those controlling it, it can never be said that the affairs of the transferor-company sought to be amalgamated, created for the sole purpose of facilitating transfer of capital asset, through its medium, have not been carried on in a manner prejudicial to public interest. Public interest looms large in this background, and the machinery of judicial process is sought to be utilized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 and 4.1.4 as well. The "background and rationale for the Scheme" has been explained in detail at para 4 of the Amalgamation Scheme submitted to the High Court. Thus, the stated business purpose being to concentrate the Indian language channels into SIPL - the amalgamated company, it has to be taken due note of especially when it seems to be rational and plausible and there are no strong and substantial reasons to discredit the said version of the applicants. The amalgamation cannot therefore be brushed aside by characterizing the same as a mere device with the sole objective of avoiding the capital gains tax. At any rate, we have no material before us to reach such conclusion. None of the points which have been highlighted by the Department in its comments would militate against the avowed business purpose. In fact, most of the points raised by the Revenue in the comments at paragraph 11 etc., have some bearing on the share exchange ratio/ swap ratio which is not really relevant for the purpose of examining whether the scheme of amalgamation should be treated as a manipulated colourable device with the sole objective of avoiding the tax. 27. Before we conclude the discussion on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at discounting cash flow method is irrelevant or obsolete method of valuation. The discounted cash flow method is a recognized method of valuation, vide the decision of Supreme Court in Renuka vs. Salve Pharmaceuticals8. Moreover, we are not concerned here with the correctness of computation of share value and the exchange ratio. The swap ratio is really not relevant to consider whether the amalgamation as such, has any business purpose or a mere sham/colourable device. 30. The bald assertion of the DIT that the realizable value of the entire gross assets of the amalgamating companies would be lower than book value, lacks factual basis. Moreover, it is not demonstrated as to how the method of share valuation has an inextricable bearing on the point under consideration i.e. whether the amalgamation should be ignored and treated as non-est in the eye of law. 31. It is then pointed out that the net result of amalgamation is that post-merger, the two Mauritius companies presently holding 100% of the shares in the Indian company SIPL would be left with only 51.09% of the shareholding and the balance would stand transferred to the foreign companies holding the shares of the amalgamat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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