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TMI Blog2012 (10) TMI 1279X X X X Extracts X X X X X X X X Extracts X X X X ..... tition No.144 of 2012). 2. The objects for which the petitioner Demerged Company was incorporated are set out in the Memorandum and Articles of Association annexed at Annexure-A to the petition. It is stated in the petition filed by the Demerged Company, that it is engaged in the business of manufacture and marketing of Diamond Core/ Waterwell Drilling Equipments and accessories for Mineral Exploration Geotechnical uses. It has diversified in manufacturing of electronic items through another Unit and further intends to diversify into medical services. It is stated that it has been realized by the management of the petitioner Demerged Company that two of its operating divisions are quite different, involve distinct business dynamics, manufacturing methods and processes and third intended activity, namely medical sciences, which also requires altogether different focus. That, as the strategies for the development and growth of these unrelated businesses require different focus and may find different strategic/ financial investors in the long run, it is proposed to segregate the three activities and bifurcate its undertakings into three different Companies. It is, therefore, envisaged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29.06.2012. Notices of the hearing of the petitions were duly advertised in the newspapers, being the English daily newspaper Indian Express and the Gujarati daily newspaper Sandesh , both Ahmedabad editions, on 21.07.2012. Publication in the Government Gazette was dispensed with, as directed by the orders of the Court. Pursuant to the said publication in the newspapers, no objections have been received by the petitioner or its advocate. 8. Notices of the petitions have been served upon the Central Government and Shri M. Iqbal A. Shaikh, learned Central Government Counsel, appears for the Central Government. An affidavit dated 14.09.2012 has been filed by Mr. Kashmir Lal Kamboj, the Regional Director, North-Western Region, Ministry of Corporate Affairs, wherein two observations have been made to the effect that (i) the proposed Scheme does not fall under the purview of the definition of Demerger as per Section 2(19AA) of the Income Tax Act, 1961, and (ii) the purported avoidance of stamp duty. It has been stated by the Regional Director in the said affidavit that the Demerger and transfer of one of the Undertakings as envisaged under the Scheme results into noncompliance of the af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 012] 173 Company Cases 373 (Delhi), whereby, the Delhi High Court has confirmed the Scheme, rejecting the issues raised on the same ground. Reliance has also been placed upon a judgment of the Division Bench of this Court in Vodafone Essar Gujarat Limited v. Department of Income-tax [2012] 24 taxmann.com 333 (Guj.) (O.J. Appeal No. 81 of 2010 in Company Petition No. 183 of 2009 in Company Application No. 254 of 2009) in support of the submission that it is not necessary that liabilities also be transferred along with assets. In the case of Vodafone Essar Gujarat Limited v. Department of Income-tax (supra), this Court sanctioned the grant to the Scheme of Arrangement under Sections 391 to 394 of the Companies Act while protecting the right of the Income-tax Department to recover the dues in accordance with law irrespective of the sanction of the Scheme. 15. With regard to the observation made by the Regional Director on the issue of purported avoidance of Stamp Duty, it is submitted by learned Senior Counsel on behalf of the petitioners that the same is not at all relevant as the petitioners would pay Stamp Duty in accordance with law. Referring to Article 20(d) to ScheduleI of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger; (iii) the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger; (iv) the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis; (v) the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, Co. Pet. 4/2003 Page 30 of 38 its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger, otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company; (vi) the transfer of the undertaking is on a going concern basis; (vii) the demerger is in accordance with the conditions, if any, notified under subsection (5) of section 72A by the Central Government in this be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies after ensuring that both of them are a going concern, are free to negotiate which common asset/liability would be transferred to which undertaking. After all, it is on this asset/liability transfer basis that share swap ratio are assessed, determined and allotted. ... ... ... 46. In 'The Law and Practice of Income Tax' by Kanga, Palkhivala and Vyas, it has been observed that ''the provisions relating to taxation of the companies involved in the demerger and their shareholders are applicable only if the demerge fulfils the Section 2(19AA) of the Act, 1961. Mere sanction of the High Court for demerger under the Act, 1956, is, by itself, not sufficient . 47. Therefore, whether or not Section 2(19AA) of the Act, 1961 has been complied with, is not to be determined premerger, 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 . 18. In the case of Vodafone Essar Gujarat Limited v. Department of Income-tax (supra) , this Court Court sanctioned the Scheme of Arrangement under Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nction of the Scheme. However, while sanctioning the Scheme it is observed that said sanction shall not defeat the right of the Income Tax Department to take appropriate recourse for recovering the existing or previous liability of the transferor company and the transferor company is directed not to raise any issue regarding maintainability of such proceedings in respect of assets sought to be transferred under the proposed Scheme and the same shall bind to transferor and transferee company. The pending proceedings against the transferor company shall not be affected in view of the sanction given to the Scheme by this Court. In short, the right of the Income Tax Department is kept intact to take out appropriate proceedings regarding recovery of any tax from the transferor or transferee company as the case may be and pending cases before the Tribunal shall not be affected in view of the sanction of the Scheme. 19. In the present case, the observation of the Regional Director that the Demerger and transfer of UndertakingIII of the Demerged Company to the Resulting Company No.2 would result in non compliance of Section 2(19AA) of the Income Tax Act, 1961, does not appear to be valid a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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