in the high court of gujarat at ahmedabad...

http://www.itatonline.org 1

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

O.J.APPEAL No. 81 of 2010 In

COMPANY PETITION No. 183 of 2009 In COMPANY APPLICATION No. 254 of 2009

For Approval and Signature: HONOURABLE MR.JUSTICE P.B.MAJMUDAR HONOURABLE MR.JUSTICE MOHINDER PAL ================================================

1 Whether Reporters of Local Papers may be allowed to see the judgment ?

2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ?

4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ?

5 Whether it is to be circulated to the civil judge ? ================================================

VODAFONE ESSAR GUJARAT LIMITED - Appellant(s) Versus

DEPARTMENT OF INCOME TAX - Opponent(s) ================================================ Appearance : MR MIHIR H JOSHI, SR ADVOCATE WITH MR SAURABH N SOPARKAR, SR ADVOCATE WITH MR AMIT M PANCHAL, ADVOCATE for the Appellant with Ms Niti Dixit, Advocate with Mr Sandeep Singhi, Advocate with Ms Shivani S Rajpurohit, Advocate MR MIHIR J THAKORE, SR ADVOCATE with MR NITIN K MEHTA for the Respondent No.1 – Income Tax Department MR PANKAJ S CHAMPANERI, ASST. SOLICITOR GENERAL OF INDIA for REGIONAL DIRECTOR ================================================

CORAM : HONOURABLE MR.JUSTICE P.B.MAJMUDAR and HONOURABLE MR.JUSTICE MOHINDER PAL

Date : /08/2012 CAV JUDGMENT

(Per : HONOURABLE MR.JUSTICE P.B.MAJMUDAR) 1 This appeal is directed against the judgment and order dated 9th December 2010 passed in

Company Petition No.183 of 2009 whereby the learned Company Judge did not accord sanction to the Scheme of Arrangement under Sections 391 to 394 and other applicable provisions of the Companies Act, 1956 whereby Passive Infrastructure Assets of the


appellant Company together with the Passive Infrastructure Assets of other Companies, transferor companies, shall vest in and become the right, property and assets of Vodafone Essar Infrastructure Limited, the transferee Company.

2 The transferee company was originally incorporated under the Companies Act, 1956 on 19th

January, 2007 with the Registrar of Companies, Maharashtra, Mumbai under the name and style of Perfect Tribute Impex Private Limited. The company changed its name to Vodafone Essar Infrastructure Private Limited after passing the necessary resolution to this effect and obtained fresh certificate of incorporation on 18th October, 2007. The company again changed its name to Vodafone Essar Infrastructure Limited and obtained fresh certificate of incorporation on 17th January, 2008. Thereafter, the company shifted its registered office from the State of Maharashtra to NCT of Delhi and obtained a certificate in this regard from the Registrar of Companies, NCT of Delhi & Haryana at New Delhi on 28th June, 2008.

3. The authorized share capital of the transferee company, as on 31st March, 2009, is

Rs.5,00,000/- divided into 50,000 equity shares of Rs.10/- each. The issued, subscribed and paid up capital of the company is Rs.5,00,000/- divided into 50,000 equity shares of Rs.10/- each.

4 It is the case of the appellant Company that the Board of Directors of the appellant Company

has approved the Scheme by Resolution passed in the meeting held on 21st September 2007 and further modified by a Resolution dated 30.4.2008. The Board of Directors of the transferee Company has also approved the Scheme by a Resolution dated 21.9.2007.

5 The Scheme envisages the demerger of the Passive Infrastructure Assets of each of the transferor Companies. Upon sanction of the Scheme, the Passive Infrastructure Assets of the transferor Companies will be transferred from each of the transferor Companies and shall vest in the transferee Company. By an order dated 8th July 2009 passed in Company Application No.254 of 2009 this Court has dispensed with the requirement of holding meetings of the shareholders, Secured Creditors and the Unsecured Creditors of the petitioner Company, for the purpose of considering and approving the Scheme. The registered office of the appellant company is situated at Ahmedabad. Along with the Company Petition a copy of the Scheme of Arrangement has been filed on the record and salient features of the Scheme have been incorporated and detailed in the Company Petition. Under the said Scheme it is proposed to demerge passive infrastructure assets of eight transferor companies and transfer them to the transferee company. The transferee company is the wholly owned subsidiary of the transferee company. The said scheme has already been sanctioned by the High Courts of Bombay, Calcutta, Madras and Delhi. The Scheme envisages that on the appointed day, inter alia, the passive infrastructure assets of all the transferor companies shall stand transferred to it and vested in the transferee company. As per the Scheme, the segregation of the passive infrastructure assets, business and the telecommunications services business is to enable further growth and maximise value in each of the businesses. It is also claimed that it will improve the quality of services to customers by establishing a high service standard and delivering services in an environment friendly manner and will also increase the speed of roll-out and efficiency through the sharing of infrastructure. This initiative of the petitioners is stated to be in line with global trends, as well as the policy of the Government of India, as reflected in the Report of the Working Group on the Telecom Sector for the Eleventh Five Year Plan (2007-2012) issued by the Department of Tele Communications, Ministry of Communications and Information Technology, Government of India. The Department of Telecommunications has recommended, inter alia, to promote sharing of infrastructure


so that costs can be kept down, which is essential for rural penetration, and to incentivize such sharing.

6 So far as share exchange ratio is concerned, the Scheme provides that the Scheme is intended to

restructure, within the Vodafone Essar Limited Group, the holding of the assets constituting the Passive Infrastructure Assets in a more efficient manner consistent with the diverse needs of business, and does not involve any movement of assets or liabilities to any company outside the Vodafone Essar Limited Group. The said transfer is without consideration as the transfer of the Passive Infrastructure Assets is within the Vodafone Essar Limited Group and according to the appellant company, the transferee company shall not be required to issue any shares or pay any consideration to any of the transferor companies or their shareholders for acquiring the Passive Infrastructure Assets. As pointed out earlier, the Board of Directors of the transferor and transferee companies, in their respective meetings, have unanimously approved and proposed the scheme of arrangements. The Scheme was accordingly placed before the learned Company Judge for according his sanction.

7 The learned Company Judge admitted the petition on 11th August 2009 and notice was issued to

the Central Government to be served through the Regional Director, Ministry of Corporate Affairs, Mumbai. Notice was also issued to the Official Liquidator for examination of the affairs of the petitioning Company. The Official Liquidator was given liberty to engage Chartered Accountant for such purpose at the cost of the appellant Company. The learned Company Judge also directed to issue public advertisement in Times of India, English daily, Ahmedabad edition and Gujarat Samachar, Gujarati daily, Ahmedabad edition, in terms of the Companies (Court) Rules, 1959. Pursuant to the notice, public advertisements were issued and affidavit to this effect was filed before the learned Company Judge.

8 In response to the notice served on the Regional Director an affidavit was filed by Shri Rakesh

Chandra, Regional Director, Western Region, Ministry of Corporate Affairs, Mumbai on 27th November 2009 stating that the appellant Company may be directed to furnish the latest financial statement before this Court at the time of hearing and that the petitioner Company may also be directed to obtain necessary approval of the concerned regulatory authorities of the Ministry of the Telecommunications in respect of the present scheme of arrangement if applicable and that the Regional Director had received letter dated 7.9.2009 from Assistant Commissioner of Income Tax, Ahmedabad on tax aspects in respect of the appellant Company wherein it is stated that they are going to represent the same before the learned Company Judge.

9 In response to these objections and observations, an affidavit was filed on behalf of the

petitioner Company and it was submitted that the latest audited financial statement of the petitioner Company for the financial year ended on 31.3.2009 were filed along with the Company Petition. The latest unaudited financial statements of the petitioner Company as on 31.9.2009 were placed on record along with this affidavit. With regard to the second issue raised by the Regional Director, it was submitted that the petitioner Company is a mobile telecommunication service provider and holds a Unified Access Services License for the Gujarat Service Area, with effect from 20.10.2008 issued by the Department of Telecommunications. The appellant Company is not transferring the license to the transferee Company pursuant to the Scheme and hence condition No.6.3 of the license is not applicable. It was further stated that the appellant Company shall continue to hold its license and to provide the licensed telecommunications services even after the completion


of the demerger and therefore there was no requirement for the appellant Company to seek approval of the Department of Telecommunications for the Scheme. It was also submitted that the transferee Company is registered as an Infrastructure Provider Category–1 by the Department of Telecommunications which permits the transferee Company to establish and maintain Passive Infrastructure Assets to lease, rent or sell such assets to licensees of Telecom Services licensed under Section-4 of the Indian Telegraph Act, 1885.

10 The learned Company Judge having considered the objections raised on behalf of the Income

Tax Department and having heard learned counsel for the parties came to the conclusion that the sole object of the Scheme is to avoid tax. The learned Company Judge observed that the transaction is void under Section 281 of Income Tax Act and therefore the court will not exercise its jurisdiction to sanction a transaction which is pointed out to be void. The learned Company Judge observed that the Scheme appeared to be a camouflage to circumvent the mandatory provisions of Income Tax Act. The learned Company Judge has also observed that since no liabilities are transferred including the employees relating to the Passive Infrastructure assets, the expenses will continue to be borne by the Transferor companies which would artificially deplete the taxable profit and will not give a true and fair view of the accounts, thus adversely affecting the taxable profits. He has further observed that the entire tax payable on the market value of assets to be transferred to Indus is sought to be evaded by present scheme and had the transaction been done directly with Indus, the same would not have been exempted, and it would have been at market value for exchange of consideration. He further observed that since the liabilities are not taken over, it would not tantamount to a demerger u/s 2(19AA) nor gift u/s 47(iii). He further observed that since the liabilities are not to be taken over nor any shares are supposed to be issued, it could not satisfy the condition of demerger and therefore the only option was to transfer it as a gift as a tax planning devise. The learned Company Judge was of the opinion that by doing so it is creating a conduit avoiding the capital gain tax at this stage and further in the next stage the transferee is sought to be merged with Indus which transaction will again be exempt u/s 47 and thus would be avoiding capital gain tax at that stage as well. The learned Company Judge therefore came to the conclusion that income tax amounting to the tune in excess of Rs.3,500 crore as alleged by the Income-tax Department is sought to be evaded if the present scheme is sanctioned by the Company Court.

11 As regards stamp duty and VAT, the learned Company Judge observed that stamp duty is

sought to be evaded to the tune to Rs.600 crores and if the sale is directly made to Indus, the stamp duty payable would have been @ 6%. If the court sanctions the present scheme in the guise of demerger u/s 391, the stamp duty shall be paid @ 1% and thus avoiding legitimate payment of stamp duty to the extent of 5% (6%-1%) on the amount of Rs.15,000 crores being the conservative estimate of the market value of Passive Infrastructure assets being transferred. He further observed that no VAT shall be payable on the movable assets transferred under the scheme if the same is sanctioned under Section 391 which otherwise would have been payable.

12 The learned Company Judge thus observed that it is a foregone conclusion that if the present scheme is sanctioned by him, it would result into avoidance of tax and that the transferee company is nothing but a paper company was being used only as an intermediary for transferring Passive Infrastructure assets from transferor companies to Indus for the purpose of tax evasion. The learned Company Judge has relied on the decision of Wood Polymer Ltd.: (1977) 47 Co. Cases 597 (Guj) for coming to the conclusion that the


scheme is nothing but a device and a conduit having the sole purpose of avoiding and evading taxes including income tax, stamp duty, registration charges and VAT. The purpose being tax avoidance is explicit from the facts that different accounting treatments are accorded to transferor companies having a positive net worth in comparison to ones which have negative net worth with an intention to maximize tax avoidance and therefore the Scheme is unreasonable, unfair and unjust.

13 The aforesaid order passed by the learned Company Judge in not granting sanction to the

Scheme in question has given rise to this appeal at the instance of the appellant – Vodafone Essar Gujarat Limited.

14 Mr Mihir Joshi, learned Senior Counsel, assisted by Mr Amit Panchal, learned counsel for the

appellant, has vehemently argued that the learned Company Judge has merely recorded the submissions of both the sides, but has not considered the submissions made on behalf of the appellant-company and by merely recording the arguments of the income-tax Department passed the impugned order without giving his own independent reasoning in this behalf. Mr Joshi has argued that the learned Company Judge should have given his own independent reasons instead of merely recording the arguments of both the sides and ultimately in dismissing the company petition on the basis of the submissions of the income-tax Department. It is argued by Mr Joshi that the income-tax Department has no locus standi to raise objections to the Scheme especially when no objections have been raised by anyone else. It is argued by Mr Joshi that the learned Company Judge has committed a grave error in coming to the conclusion that the sole object in formulating the Scheme is tax avoidance. He has submitted that without there being any basis in this behalf the learned Company Judge has come to the said conclusion.

15 Mr Mihir Joshi next contended that it is a case of reconstruction of business in line with the

Government policy and even other telecom companies have also formulated such policy. It is submitted that in the matter of reconstruction of business, Section 25 of the Contract Act has no role to play and the said provisions are not attracted. It is submitted that by the instant scheme the passive assets will become revenue generating assets. It is further submitted by him that no rights of the income-tax Department are being affected by the present Scheme and the appellant would continue to be profitable after the demerger of Passive Infrastructure (PI) assets and that its net worth after giving effect to the Scheme would be Rs.3592 crores as on March 31, 2012. On the other hand the outstanding demand of the Income Tax Department as on July 1, 2012 is Rs.29.3 crores approximately. In the circumstances, the rights of the Income Tax Department to recover the alleged demand would in no manner be affected by the sanctioning of the present Scheme. It is further submitted that sanctioning the scheme ipso facto would not grant any immunity to the Appellant qua any liability that may be imposed on it under the relevant provisions of the Income Tax Act, in accordance with law. Similar statement has also been made before the Delhi High Court in the case of Vodafone Essar Limited & ors. v/s. Vodafone Essar Infrastructure Limited, reported in (2011) 2 Comp LJ 317. It is submitted that once the dues of Income Tax Department are taken care of, it has no further locus standi to challenge the Scheme. It is further submitted that under Sections 391-394 of the Companies Act, 1956 only the Central Government, through the Regional Director has the powers to study the Scheme and raise such objections as it thinks fit. Thus, besides the shareholders and creditors of the company to whom an arrangement and/or compromise is offered by the company, only the Regional Director has locus standi in respect of the proceedings under sections 391-394 of the Companies Act. The Income Tax Department, which is a revenue collecting arm of the Central Government,


cannot object to the proposed Scheme. He submitted that it is only the Central Government through Regional Director which is vested with the powers to raise the objections qua the Scheme but, when the Regional Director has not raised any objection to the Scheme, which is sought to be raised by the Income Tax Department the Income-tax Department has no locus to raise such objections. It is further submitted that when the Central Government through the Regional Director has not raised any objection to the Scheme, it is surprising as to how the Income-tax Department is fighting tooth and nail in opposing the Scheme as if it is an adverse litigation between the appellant and the Income-tax Department.

16 Mr Joshi has further submitted that the objection taken by the Income-tax Department to the

effect that the sole object of the Scheme of Arrangement is tax evasion is not sustainable at all. It is submitted that the ratio of the judgment of the learned Single Judge in the case of Wood Polymer Ltd. (supra) has no application to the facts of the present case as the Scheme seeks to achieve a commercial purpose and object inter alia being segregating the PI business and the telecommunications service business to enable further growth and maximize value in each of the business; improved quality of services to customers by establishing high service standards and delivering services in an environment friendly manner; increase in the speed of role out and efficiency through sharing of infrastructure, converting the PI assets from non-revenue generating assets; improved network quality and greater coverage etc. He further submitted that the segregation of telecommunications services and telecommunications infrastructure business reflects the global trend and has been adopted by telecommunication companies in India without objection. In fact the Working Group under the Planning Commission has recommended sharing of infrastructure, which is presently under contemplation by Vodafone and the present Scheme reserves flexibility to it for easing such process when required. The Central Government has not raised any objection to the Scheme and even the Department has not contended that the aforesaid objectives are imaginary. Therefore it cannot be said that the Scheme has no purpose or object and that it is a mere device/subterfuge with the sole intention to evade taxes, particularly when even the incidence of tax purportedly sought to be evaded is not established on facts. He has next contended that similar scheme of arrangement proposed by other telecommunication companies to achieve the aforesaid objectives has been sanctioned by different High Courts.

17 Mr Joshi has further contended that the Scheme of Arrangement was necessitated for reasons

set out in clause 1.4 thereof. Mr Joshi has relied upon various clauses in the Scheme. It is further argued that under the Income Tax Act, there is no liability for payment of tax on capital gains since there would be a transfer of capital assets under a gift as envisaged under section 47(iii), which excludes application of section 45. It is also submitted that there is a clear rationale for nil monetary consideration since the Appellant and the transferee company are both wholly owned subsidiaries of Vodafone Essar Limited as per Clause 3.1 of the scheme and even a transfer at book value would not have resulted in capital gains. Therefore the scheme in any case is not for the purpose of avoiding capital gains.

18 Mr Joshi has further contended that the plea of the Income Tax Department that had there been

a direct transfer of PI assets to Indus Towers Limited, there would have been a liability for capital gains is misconceived. He submitted that the Income Tax Department is purposefully seeking to overlook the fact that Indus Towers Limited is already a joint venture company of Vodafone, Bharti and Idea. Further, Vodafone, Bharti and Idea are already holding equity shares in Indus in the ratio of 42:42:16 and therefore even if there


would have been a direct transfer either at nil monetary consideration or at book value, there would have been no liability for payment of tax on capital gains. It is submitted that even if the Scheme in question had not been proposed and if Vodafone transferor companies had transferred the PI assets by way of gift to one of its group companies, still there would have been no liability of tax on capital gains in view of section 47(iii) of the Income-tax Act. It is submitted that the entire plea of the Income Tax Department is hypothetical and without any basis and no evidence is placed to such hypothetical claim made by the Income Tax Department. According to him, such a contention in respect of proposed transfer to Indus cannot be said to be part of the same transaction since it is a separate and independent proposed scheme subject to sanction of jurisdictional court and in any case beyond the scope of the present proceedings.

19 It is further submitted that it can never be said that the Scheme is nothing but a camouflage

and in substance it is a transfer by the transferor companies in favour of Indus with a view to avoid tax liability and with the sole object of avoidance of tax liability arising from the capital gains that the present scheme has been formulated. It is further submitted so far as aspect about transfer to Indus Towers Limited is concerned, it cannot be said it is a part of same transaction since it is a separate and independent proposed scheme subject to sanction of jurisdictional court and in any case beyond the scope of the present proceedings and therefore that aspect cannot be considered while considering the present scheme. It is submitted that in any case when the appellant was not required to follow a particular pattern and every tax payer is entitled to arrange its affairs legitimately so that its taxes shall be as low as possible and that it is not bound to choose that pattern which will replenish the treasury. Further, where there are several legitimate alternatives, means and procedure for attaining the same object there is no bar in choosing any one of them. It is respectfully submitted that while sanctioning the scheme the Court does not sit in appeal over the decision taken by the shareholders who have, in their commercial wisdom, given their approval to the scheme. Even if there are various ways to carry out a particular transaction, if one of the modes is chosen by the Vodafone group entities, the complexity of direct transfer by seven separate Vodafone group entities to Indus; the number of Vodafone group entities as shareholders in Indus compared to one Vodafone entity as shareholder in Indus; the issues pertaining to the success of Bharti and Idea to transfer their respective PI assets to Indus; the successful completion of transfer of PI assets by all the three joint venture partners into Indus; the option for Vodafone to accomplish the object of the Working Group in case the joint venture partners are not successful in transferring the PI assets to Indus. It is submitted by Mr Joshi that on the basis of the relevant consideration as pointed above if the Scheme is floated, it cannot be said that the same is floated with the sole object of avoiding tax. Even incidentally in a given case it may result into tax saving or evading of tax, then also, it can never be said that the sole object of the Scheme is avoidance of tax. It is further submitted that the reliance placed by the Income-tax Department in the case of Wood Polymer Limited (1977) 47 CC 597 and comparing the present Scheme with the said Scheme is misconceived and not justified as, in that case, the parties were seeking the assistance of the court to reduce the tax liability and this Court has held that the court should be the last instrument to grant such assistance of judicial process to defeat a tax liability. It is submitted that even if there is a consideration of one rupee, then also it can be held that it is valid consideration and in support of his submission he has relied upon the observations of the Delhi High Court in sanctioning scheme.

20 It is submitted that the Scheme is an arrangement between the Company and its shareholders

since it involves bifurcation of the business carried out by the company and arrangement


of its assets and the way the business is carried in the future. The term of arrangement is wide enough in view of definition of Section 390(b) of the Companies Act. There is an element of give and take since a substantial business is being taken out by the company but substantially the same persons would be carrying it on in the future. The shareholders of the Appellant are giving up the PI assets of the Appellant so as to take/reap the benefits of the income/benefit to be derived inter alia by putting the idle PI assets to use. It is further submitted that in the present case the right of the Income-tax Department in assessing, levying and collecting the tax of the appellant are not confiscated or expropriated so as to extinguish such rights. It is further submitted that the Scheme is for reconstruction of the Company and it contemplates the carrying on of the business in an altered form, by dividing the telecommunications services business and the telecommunications infrastructure business being carried on by the Appellant, in a manner that the telecommunications infrastructure business would be carried on by the transferee company. The said business will be continued and carried on by substantially the same persons who are presently carrying on the consolidated business since both the transferor and the transferee companies are wholly owned subsidiaries of Vodafone Essar Limited which will continue to carry on the businesses. It is submitted that both reconstruction and amalgamation are statutorily recognized as an arrangement and/or compromise under Section 391. It necessarily implies that once a scheme is in the nature of reconstruction, which in the facts of the present case it is, the same is bound to be recognized as an arrangement and/or compromise under section 391 of the Companies Act. He submitted that once there is a Scheme of reconstruction, the same is bound to be recognized as a compromise/agreement under Section 391 of the Companies Act. It is further argued that it can never be said that in the present Scheme there is only transfer of assets and not transfer of undertaking and that it cannot be said that unless there is a transfer of undertaking, it cannot be said that it is a demerger. It is submitted that it is nobody’s case that the present Scheme is a demerger under the Income-tax Act and simply because it is not under section 2(19AA), it does not mean that the present scheme is not a reconstruction under sections 391-394 of the Companies Act, 1956. Even if no liabilities are transferred, the same would still be a reconstruction under the Companies Act, 1956. It is also submitted that in the present case the Scheme has been approved by the members in requisite majority.

21 It is submitted that the Scheme of Arrangement cannot be equated with an agreement between

the parties. The Scheme does not result into an agreement between the parties as contemplated under the Contract Act, 1872 and it remains to be a Scheme, which is to be approved by the statutory majority and it is required to be sanctioned by the Court. Therefore, it cannot be said that the Scheme is in the nature of agreement and the same is void under Section 25 of the Contract Act. On the aforesaid premises it has been argued by Mr Joshi that the impugned order of the learned Company Judge is required to be set aside especially when the learned Company Judge has not given reasons while refusing to sanction the Scheme of the Arrangement proposed by the appellant.

22 Mr Joshi, in support of his submissions has relied upon the following judgments: i. Vodafone Essar Limited & ors. v/s. Vodafone Essar Infrastructure Limited, reported in (2011) 2

Comp LJ 317, para 29, 49 & 69 on the point of locus of the Income Tax Department to raise objection against sanctioning of the Scheme.

ii. Jindal Iron & Steel Co. Ltd. v/s. Asst. Commissioner of Income Tax on the point of locus of the

Income Tax Department to raise objection against sanctioning of the Scheme.


iii SREI Infrastructure Finance Ltd.- Calcutta High Court, (2008) 4 Comp LJ 196, for the

proposition that consideration per se cannot invalidate the Scheme as avoidance by the Appellant Company of its tax liabilities will attract the provisions of the Income Tax Act and the Company cannot escape from its liability.

iv Nirmay Properties Private Limited, (2009) 150 CC 538 for the observation that simply because

the Court has granted the sanction to the Scheme it does not absolve the Company from any future liability qua violation of any statutory provisions.

v Vodafone International Holdings vs. Union of India- (2012) 1 Comp LJ 225, for the proposition

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.

vi Banyan & Berry v Commissioner of Income Tax, Gujarat High Court, 222 ITR 831 for the

proposition that every act which results in tax reduction or exemption of tax cannot be treated as a device of tax avoidance and the real question to be asked is whether the act of the assessee falls in the category of colourable device.

vii Azadi Bachao Andolan, (2004) 10 SCC 1, for the proposition that McDowell cannot be read as

laying down that every transaction or arrangement perfectly permissible under law, which has the effect of reducing the tax burden of the assessee must be looked upon with disfavour.

viii United Bank of India Ltd. vs. United India Credit & Development Co. Ltd. Of Calcutta High

Court, (1977) 47 CC 689 for the proposition that where there are several legitimate alternatives, means and procedure for attaining the same object, there is no bar in choosing any one of them.

ix Larsen & Toubro Ltd. (2004) 121 CC 523, for the proposition that though the word

'amalgamation' is not defined specifically, it has a wide range and ambit and is a term of wider connotation.

x Re T&N Ltd. – Chancery Division, (2007) 1 All ER 851 for the proposition that it is not a

necessary element of an arrangement for the purposes of Section 425 or that it should alter the rights existing between the company and the Creditors or the members.

xi Judgment of Gujarat High Court in the case of Idea Cellular Ltd. (Company Petition No.167 of 2009 dated 31.8.2009) sanctioning similar Scheme of Arrangement.

xii Judgment of Delhi High Court in the case of Bharti Airtel Ltd. (Company Petition No.233 of

2007 dated 26.11.2007) sanctioning similar Scheme of Arrangement.

xiii Judgment of Bombay High Court in the case of Reliance Telecom Infrastructure Ltd. (Company Petition No.68 of 2007 dated 16.3.2007) sanctioning similar Scheme of Arrangement.

xiv Judgment of Calcutta High Court in the case of Vodafone Essar East Ltd. (Company Petition

No.273 of 2009 dated 5.4.2010) sanctioning the present Scheme of Arrangement. xv Judgment of Bombay High Court in the case of Vodafone Essar Ltd. (Company Petition

No.712 of 2009 dated 17.12.2009) sanctioning the present Scheme of Arrangement.


xvi Judgment of Madras High Court in the case of Vodafone Essar Cellular Ltd. (Company

Petition No.203 of 2009 dated 17.11.2009) sanctioning the present Scheme of Arrangement.

xvii Judgment of Delhi High Court in the case of Vodafone Essar Ltd., reported in (2011) 2 Comp

LJ 317, sanctioning the present Scheme of Arrangement. xvii Mysore Minerals Ltd. vs. Commissioners of Income Tax, Karnataka, reported in (1999) 7

SCC 106(para 14) for the proposition that there is no bar which restrains a transaction falling differently or being dealt with separately under different Acts.

xviii Chidambara Iyer & Ors. v. P.S. Renga Iyer, AIR 1966 SC 193 for the proposition that the

present Scheme of Arrangement is not without consideration. xix His Holiness Kesavananda Bharti v. State of Kerala, (1973) 4 SCC 225 for the proposition

that even most trifle benefit can be considered as consideration so as to avoid the impact of Section 25.

xx Ledhingham & Ors. v. Bermejo Estancia Co. Ltd., All ER 749 for the proposition that there is

no requirement of monetary consideration and even a promise to induce the company to carry on its business has been treated as sufficient consideration.

23 Mr Mihir Thakor, learned Senior Advocate appearing for the Income-tax Department, on the

other hand, argued that the Income-tax Department has locus standi to object the Scheme and, for that reason, anyone can object to the Scheme if the same is floated with the ulterior purpose. It is submitted by Mr Thakor that the learned Company Judge has considered the arguments of both the sides and simply because the judgment might not have been happily worded this Court can examine the aspect involved in the matter on its own. It is submitted that it is ultimately for the Court to consider as to whether the Scheme is required to be sanctioned and the Court is required to be satisfied itself, even if there is no objection by anyone, to find out whether the Scheme is required to be sanctioned or whether it violates any law or whether it is contrary to the public policy. It is submitted by Mr Thakor that in view of the decision of this Court in the case of Wood Polymer Private Limited (supra) the present Scheme is floated with the sole purpose of avoiding the tax as the transaction in the present case and Wood Polymer Private Limited (supra) can be said to be of a similar nature. It is submitted that the Scheme is nothing but camouflage and the object of the Scheme is nothing but avoidance of capital gains tax. It is submitted by Mr Thakor that looking to the Scheme it is evident that it is not a Scheme for reconstruction nor it is a Scheme of Arrangement. It is submitted that the Scheme in question is an agreement and the same is without consideration and therefore the same is violative of Section 25 of the Contract Act. It is submitted by Mr Thakor that motive or purpose or reason of a transaction is different from its consideration and for any transaction there will be a reason or motive or purpose or an object. It is submitted that there may be any motive or object for transferring the assets, but the same cannot be said to be a consideration for transfer in the eye of law. In order to substantiate his say, he has relied upon Clause 1.4.6, which uses the word reasons and not consideration. It is further submitted that Clause 1.4 which relates to ‘Rationale for the Scheme’, but the same can be said to be reason or modification or justification prohibiting the scheme, but the same cannot be treated as a consideration.


24 It is submitted that consideration being different from the object of the transaction, if there is no consideration, then, the transaction is void. He has submitted that there is no consideration as defined under Section 2(d) of the Contract Act. It is submitted that consideration has to be valuable consideration in the eye of law and since there is no consideration, much less valuable consideration, the Scheme ought not to have been sanctioned by the learned Company Judge. It is submitted that the Scheme represents a contract sanctified by the Court’s approval between the company and the creditors and/or members of the company. It is submitted that the word ‘gift’ is not defined under the Income Tax Act and with the Gift Tax Act being repealed, the only definition which could possibly be resorted to is under Section 122 of the Transfer of Property Act. According to him, the meaning of the word ‘gift’ as understood under the Companies Act and the Income Tax Act is the same, which is defined under Section 122 of the Transfer of Property Act. He further submitted that the fact that the appellant was required to amend Memorandum of Association under the Companies Act to align the same with the meaning of Gift under the Income Tax confirms and supports this interpretation.

25 It is further submitted by Mr Thakor that in the present case statutory majority was not

achieved. He submitted that the assets are sought to be transferred free from any charges and encumbrances and that too without consideration and therefore meeting of Secured Creditors was necessary and not that of the shareholders, who retain their control over the assets and are not the class of person with whom any arrangement or compromise is entered into, as sought to be claimed.

26 It is also submitted by Mr Thakor that the Scheme is ultra vires Companies Act as admittedly,

there was no power to gift under the Memorandum of Association of the petitioner company and it was by in an Extraordinary General Meeting of Shareholders that a Resolution was passed on 21st September 2007 wherein Memorandum of Association is amended to incorporate the power of gift. He further submitted that the proposed scheme being based on an ultra vires resolution of Board of Directors is void and it cannot be ratified even if all the shareholders have given their consent. He has also contended that jurisdiction under Section 391 of the Companies Act is not available for want of authority to the Company to gift and thus the Scheme is void. Mr Thakor, therefore, submitted that if Scheme before the Court is void, ab-initio it cannot be ratified even if all the shareholders agree and the Court cannot sanction such a Scheme. Mr Thakor has also tried to elaborate his argument as to how the sole object of the Scheme is avoidance of tax. He has next contended that the he Appellant has failed to show even a single clause or provision from the working committee recommendations requiring or mandating the Appellant to transfer its assets in the manner and mode in which it is sought to be done i.e. gifting it at stage 1 and merging it at stage 2 and that also under the guise of a scheme u/s 391. He has also submitted that no authority or committee has or can recommend/ mandated divesting/ sale of assets, much less in the manner it is sought to be done. The mode and manner adopted is solely for avoiding taxes.

27 Mr Thakor submitted that the three groups providing mobile telephony services, Vodafone,

Bharti and Idea formed a company called Indus Towers Ltd with an equity structure of 42:42:16 respectively, around 2007. It was agreed between the shareholders of Indus as to the terms on which the existing infrastructure of towers (called "Passive Infrastructure Assets") in different circles/ states (including state of Gujarat) shall be contributed to Indus. In order to comply with their agreement to contribute assets to Indus, the simplest and the legally correct way to transfer the assets were to execute a deed of conveyance and transfer the PIA from the respective owners to Indus. However to avoid and evade


the taxes payable to both Central and State Government like Income Tax, stamp duty, VAT etc. an entire tax avoidance subterfuge was created and dubious method was adopted by the aforesaid three groups based on their individual structures of the ownership of PIA viz. Stage 1: Introducing a pre-ordained devise/ conduit in the form of a new Company (the present Transferee Company) and transferring by way of Gift to this new Company and Stage 2: Amalgamating this new Company into Indus. According to him, both the stages are done under the guise of scheme u/s 391 to legitimise the same by obtaining the seal of the Hon'ble Court and evade payment of Income Tax, stamp duty and VAT.

28 Mr Thakor next contended that it is clear that the only purpose of the Scheme is to acquire the

assets of the Appellant (the original owner) through the intermediary of the Vodafone Infrastructure Ltd. (present Transferee) 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. It is submitted that the Supreme Court in case of Miheer Mafatlal vs. Mafatlal Industries Ltd. 1997 (1) SCC 579, has held that for ascertaining the real purpose underlying; the Scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously X-ray the same. He submitted that applying this mandate of Miheer Mafatlal (supra) this Court can pierce the veil of apparent corporatepurpose underlying the scheme and look at the schemes of both the Stage 1 & 2, which would reveal the real purpose that is the transfer of assets to Indus without payment of taxes. Once the Court ascertains the real purpose, after piercing the veil by considering the composite transaction, it would not lend any assistance by permitting the completion of even Stage 1, even assuming if the same is found to be meeting the requirements of law, as this would perpetuate and lend a helping hand in the process to achieve the ultimate purpose of defeating the tax, which, as held is contrary, to public policy and public interest. It is the cardinal principle of law and judicial discipline and part of the public policy that the court shall not become party to any part of the process whose ultimate object is to achieve fraud or illegality or anything contrary to public policy. It is also submitted that the claim of the Appellant that no capital gain tax is payable if the transfer was on book value is legally untenable. If the exemption u/s 47 is not available then the capital gain is payable on sale of assets. It is submitted that the ultimate objective of transferring the assets to Indus without payment of capital gain tax cannot be achieved except by using the present modus operandi, as already demonstrated above read with para 58 of the impugned judgment, which the Appellant has failed to dislodge.

29 Mr Thakor further submitted that if it is found that the Scheme is opposed to public policy or

defeating the tax and contrary to the public interest, the Court may not sanction the Scheme by way of approving the same. It is submitted that the argument of revenue neutrality is exfacie untenable and runs contrary to the very purpose of introduction of the provisions MAT u/s 115JB, which was to remove the effect of such entries made in Books of Accounts, on the tax liability for that year as it would give a distorted tax effect. MAT provision is not evoked or introduced to create a fresh charge over a new source of Income but per-se are concerned to pre-pone the tax payment which otherwise was postponed due to accounting entries in the books of accounts. Thus revenue neutral argument is untenable. This attempt of the Appellant to affect MAT liability by way of differential accounting treatment further highlights the purpose of the scheme, which is to use it as a conduit to avoid and evade tax.


30 Mr Thakore has also submitted that the Income-tax Department has huge demand of revenue pending against the appellant-Company. The Income-tax Department had raised a demand of Rs.70,11,06,474/- for assessment years 2005-06 out of which Rs.28,65,92,370/- is pending recovery. The part of the said demand to the extent it was confirmed by the first appellate authority being Commissioner of Income Tax (Appeals) has been confirmed by the Income-tax Appellate Tribunal vide its order of January 2009 which has been challenged by the petitioner before this Court. For the part of the demand deleted by CIT(A) the objector had preferred the appeal before ITAT which has been dismissed by its common order dated 9.1.2009. Against the said common order of ITAT, to the extent of dismissal of its Appeal, the objector has challenged the same before this Court. Similarly a demand of Rs.118,99,33,185/- was raised for assessment years 2006-07 out of which Rs.87,99,42,566/- is pending recovery. To the extent of the said demand raised and confirmed by CIT(A), the appellant has preferred an appeal before ITAT, in which stay has been granted against recovery on the condition of the petitioner depositing Rs.30 crores. Further the Department has raised a penalty demand of Rs.210,33,19,341/- for the year 2005-06 which entirely is pending recovery. Accordingly, sum of around Rs.326,98,54,277/- is pending recovery from the petitioner. The aforesaid claim shall further be increased on addition of interest recoverable on the aforesaid amount. Mr.Thakore further submitted that for assessment years 2007-08 and 2008-09 the assessments are pending finalization and the objector apprehends demand amounting to hundred of crores, pursuant to issues similar to previous assessment year.

31 Mr Thakore further submitted that under Section 391 of the Act, the jurisdiction of this Court

can be invoked only for sanction of the Scheme of Compromise or Arrangement. The present Scheme is neither arrangement nor a compromise as contemplated under Section 391. He has further submitted that under the present Scheme the Passive Infrastructure Assets are sought to be transferred without any corresponding liabilities and free from all encumbrances to the transferee Company without any consideration. There is also no provision under the Scheme of any allotment of shares to the members of the petitioner Company. Post the de-merger, the transferee Company is sought to be amalgamated/merged to Indus Towers Ltd. However, it is further contemplated that the transferee Company before the proposed merger shall be made a substantially owned company of a new company to be formed by all or some of the shareholders of transferee Company. He has further submitted that underlined transaction in the Scheme is the transfer of the said assets without any consideration to the transferee Company. Since no consideration is involved, the same is ultravires the Company and Companies Act and is not a valid contract. Even otherwise, the same cannot be approved by this Court under Section 391 of the Act. He has further submitted that even if it is assumed that the transaction embodied in the scheme is a arrangement or a compromise, the same is not between the Company and its shareholders or between the Company and its creditors or between any of their class. The onus to prove that the scheme is such which the Court has the jurisdiction to sanction under Section 391 of the said Act, is on the petitioner and the same is not discharged by it. He has further submitted that the scheme is nothing but a garb to legitimize a simple transaction of transfer between two separate commercial legal entities in order to evade the legitimate taxes which would be payable, if the transaction would have been effected by way of simplicitor transfer. It would have attracted Central Sales Tax or Gujarat Value Added Tax, capital gains tax, other provision of Income Tax Act, 1961 and stamp duty if the same were by way of transfer. Thus, by way of the said scheme these taxes are sought to be evaded, which is clearly against public interest.


32 Mr Thakore further submitted that there exists substantial liabilities in the books of the petitioner Company, part of which are relatable to the assets under transfer. Since liabilities of the said assets would remain with the petitioner Company there would be a continuous charge of interest and other liabilities with respect to the said assets in its hands. This would reduce the taxable profit in the hands of the petitioner Company in the succeeding years. On the other hand, the books of the transferee Company would show exorbitant and inflated income and since the same is infrastructure Company, it may ultimately claim deductions under various provisions of Chapter VIA of the Income Tax Act on its inflated profits, leading to great loss of revenue to the exchequer. Moreover, pursuant to the scheme the petitioner Company will be required to pay access charges or some other charges to the transferee Company for using the said assets, which it is not paying before the scheme. This would further reduce the taxable profit of the petitioner Company. By transferring the said assets at the book value the petitioner Company is trying to evade capital gain which otherwise would be payable at the market value. He has further submitted that the sanction of the scheme is sought to be taken by misrepresenting the same to be a scheme of demerger with the ulterior motive to foist the same on the Income tax Department and claim the benefit under the Income Tax Act. For the purpose of Income Tax Act, the present scheme is not a scheme of demerger.

Mr Thakor has relied upon the following judgments:

i. South African Supply and Cold Storage Co., (1904) 2 Ch 268, in support of his contention that the Scheme is not covered under Section 391 of the Companies Act.

ii. Re NFU Development Trust Ltd., 1972 1 WLR 1548 (Ch.D) in support of his

contention in the present case there is no element of give and take in the Scheme and if there is no taking but only giving, there cannot be arrangement and further it becomes unreasonable on that affected class and therefore the Scheme cannot be sanctioned.

iii. Indian Flour Mills Ltd., AIR 1934 Sind 54 in support of his contention that since the transfer being without consideration, it is not an arrangement under Section 391 of the Companies Act and thus is not a reconstruction capable of being sanctioned under Section 391 of the Act.

iv. A Lakshmanaswami Mudaliar (Dr) v. LIC of India, (1963) Supp 2 SCR in support of his contention that the consideration contemplated under Section 122 of the Transfer of Property Act and under Section 25 of the Contract Act must be valuable to be a valid consideration in the eyes of law.

v. Mcdowell and Company Ltd. V. CTO (1985) 3 SCC 230 (para 45)to contend that tax planning has to be within the framework of law and colourable devices cannot be part of tax planning.

vi. Miheer Mafatlal v Mafatlal Industries Ltd., (1997) 1 SCC 579, in support of his contention that this Court is required to pierce the veil of apparent corporate purpose underlying the scheme which is the transfer of assets to Indus without payment of taxes.

33 We have heard both the learned advocates at great length and have gone through the relevant

documents forming part of this appeal proceedings. We have gone through the order of the learned Single Judge and we have also gone through the case law cited by the


respective counsel. We have also gone through the written submissions filed by both the sides.

34 The question which requires consideration is whether the Scheme in question is floated with the sole object of avoiding the tax liability and to avoid taxes liable to be paid under various statutes like Income-tax, Stamp Act, etc. The Court is also required to consider whether the Scheme in question is in violation of public policy and whether the Income-tax Department has locus standi to raise the objections in connections with sanctioning the scheme in question. This Court is also required to consider whether the learned Company Judge has committed an error in refusing to accord sanction to the Scheme in question.

LOCUS STANDI 35 So far as the preliminary contention raised by the learned counsel for the appellant about

the locus standi is concerned, except the Income-tax Department, no one else has raised any objection before the learned Company Judge in response to the public advertisement. It is required to be noted that the proceedings between the appellant – transferor company and the Income-tax Department are going on before the Tribunal regarding the liability of payment of tax by the transferor company in past transactions. Some interim orders are also passed in the said proceedings.

It is the case of the Income Tax Department that they being the Creditors of the appellant, they

have locus to raise objections. It is submitted by Mr Joshi that the powers to raise objections is only vested on a shareholder and/or creditor provided a shareholder and/or creditor are able to show that any arrangement and/or compromise is offered to them by which their rights are being affected and in the present Scheme no compromise and/or arrangement is being offered to the Income Tax Department and therefore the Income Tax Department has no locus.

It is also argued that as per Sections 391-394 of the Companies Act, 1956 it is

only the Central Government, through the Regional Director, which has been vested with the powers to study the Scheme and raise such objections as it thinks fit. Therefore, beside the shareholders and creditors of the company to whom an arrangement and/or compromise is offered by the company, only the Regional Director has locus standi in respect of the proceedings under sections 391 to 394. Further, the Appellant has clearly outlined its stand at the beginning of the present proceedings, to the effect that the sanctioning of the Scheme would notipso facto grant any immunity to the Appellant qua any liability that may be imposed on it under the relevant provisions of the Income Tax Act, in accordance with law. Similar statement has also been made before the Hon'ble Delhi High Court [Vodafone Essar Limited & ors. v/s. Vodafone Essar Infrastructure Limited, reported in (2011) 2 Comp LJ 317.

36. In the case of SREI Infrastructure Finance Limited, (2008) 4 Comp LJ 196 (Cal) the

Scheme of Arrangement was placed for sanction before the High Court by the transferor and transferee company wherein it is observed by the Calcutta High Court that the consideration per se cannot invalidate the scheme as avoidance by the company of its tax liabilities will attract the provisions of the Income Tax Act and the companies cannot escape from their respective liabilities. In our view, if any amount is required to be payable to the Income-tax Department by the transferor company, the Income-tax Department can be said to be a creditor so far as its


claim against the transferor company is concerned. Considering the same, it cannot be said that the Income-tax Department has no locus to put forward its objections in this behalf. In other words, even if there are no objections, which are received against the Scheme pursuant to the public advertisement, yet the Court is required to examine the Scheme while giving its approval. In our view, the learned Company Judge has rightly allowed the Income-tax Department to have its say by raising objections in connection with the Scheme in question. Even a similar objection had been raised by the Income-tax Department before Delhi High Court and the Delhi High Court has considered the objections raised by the Income-tax Department on its own merits. Considering the same, in our view, in cannot be said that the Income-tax Department has no right to lodge its objections as the Income-tax Department raised a substantial demand towards tax from the transferor company. The aforesaid point raised by Mr Joshi is therefore negative by holding that the Income-tax Department has the right to place its objections against sanctioning of the Scheme in question. The Income Tax Department will be free to examine the aspect of any tax payable as a result of the Scheme.

IS OBJECT OF THE SCHEME AVOIDANCE OF TAX LIABILITY? 37. The next crucial question, which is required to be considered is whether the Scheme in

question is floated with the sole object of avoiding the tax liability such as Income-tax, Stamp Duty, VAT, etc. and that the sole object is only to avoid capital gains tax, which otherwise, was required to be payable by the appellant-company if there is simple transfer of assets by the transferor company to Indus Towers Limited. It is also required to be considered as to whether in case if it is found that the sole object of the Scheme is not to evade tax liability, then also, whether the Scheme in question is a Scheme for reconstruction and the Scheme of Arrangement or that the Scheme being an agreement is void as it is without consideration and that whether it is ultra vires the provisions of the Companies Act, 1956.

38 It is required to be noted that the appellant-company has moved this Court under Sections 391

to 394 of the Companies Act, 1956 seeking sanction of the Scheme of Arrangement between M/s. Vodafone Essar Limited; M/s. Vodafone Essar Mobile Services Limited; M/s. Vodafone Essar East Limited; M/s. Vodafone Essar Gujarat Limited; M/s. Vodafone Essar South Limited; M/s. Vodafone Essar Digilink Limited; M/s. Vodafone Essar Cellular Limited and M/s. Vodafone Essar Infrastructure Limited (hereinafter referred to as the transferee company). In all there are seven transferor companies and the transferee company being M/s Vodafone Essar Infrastructure Limited and its respective shareholders. As per Clause 5.4 of the Scheme, in the even this Scheme is not sanctioned by all the Company Courts or other competent authorities referred to in Clause 5.3.1 before which this Scheme is presented for approval, the Scheme shall stand implemented without the demerged of the Passive Infrastructure Assets of the relevant Transfer Company/ies. The provisions in the Scheme relate to such transferor companies in respect of which the Scheme has not been sanctioned shall stand invalidated and such invalidity shall attach only to such part dealing with such Transferor Companies. The remaining portion of the Scheme shall continue in full force and effect. In such an event, the relevant transferor company in respect of which the Scheme has not been sanctioned shall bear and pay its costs, charges and expenses for and/or in connection with the Scheme.

39 The objection is raised only by the Income Tax Department. On behalf of the Regional

Director a stand is taken that the Regional Director has no objection to the Scheme except


by pointing out that the Assistant Commissioner of Income Tax, Ahmedabad has raised objections in connection with the tax liability of the appellant Company. On behalf of the Regional Director, a stand was taken before various High Courts before which the company petitions were filed for giving sanction to the Scheme by various other transferor companies to the effect that it has no objection if the Scheme is sanctioned because the Scheme does not appear to be prejudicial to the interests of the shareholders and the public. It is required to be noted that except before this Court and the Delhi High Court, the Income Tax Department has not raised similar such type of objections before any other Court. The Regional Director had not raised any objections qua sanctioning the Scheme on the ground that there is no consideration involved in the transfer or that it is not a Scheme of Arrangement and that Section 391 and 394 of the Companies Act are not attracted, etc. Such objections were not taken by the Income Tax Department before various High Courts for sanctioning the Scheme. It is no doubt true that while giving approval to the Scheme the Court is required to consider as to whether the Scheme is question is against the public policy or is floated with an object to defeat provisions of law. In a given case, even though there may not be any objection, the Court may, on its own, try to find out the same. It is not in dispute that the Transferee Company is fully owned subsidiary of the petitioner-company, the shareholders are also common. It cannot be disputed that the Scheme does not contemplate either a change in the Transferor Companies or the Transferee Company. The petitioner company is a mobile telecommunication service provider and holds a Unified Access Services License for the Gujarat Service Area, with effect from 20.10.2008 issued by the Department of Telecommunications. As per the conditions of the licence, the appellant – transferor company may transfer or assign with the prior written agreement of the licensor subject to various conditions provided therein. It also provides that whenever amalgamation or reconstruction, merger or demerger takes place, the same has to be approved by the High Court or Tribunal as per law in force in accordance with the provisions Sections 391 and 394 of the Companies Act.

40 It is pointed out to the Court that the appellant is not transferring the licence to the transferee

company pursuant to the Scheme and the appellant transferor company shall continue to hold the license even after completion of the demerger. It is pointed out to the Court that the transferee company is registered as an infrastructure provider category by the Department of Telecommunication which permits the company to establish and maintain Passive Infrastructure Assets to lease, rent or sell such assets to licensees of Telecom Services licensed under Section 4 of the Indian Telegraph Act, 1885. As per the Scheme of Arrangement, the Scheme of Arrangement is arrived at between M/s. Vodafone Essar Limited; M/s. Vodafone Essar Mobile Services Limited; M/s. Vodafone Essar East Limited; M/s. Vodafone Essar Gujarat Limited; M/s. Vodafone Essar South Limited; M/s. Vodafone Essar Digilink Limited; M/s. Vodafone Essar Cellular Limited and M/s. Vodafone Essar Infrastructure Limited. Part-I of the Scheme provides definitions of share capital and the purpose of the Scheme. Part II deals with demerger of the Passive Infrastructure Assets of the Transferor Companies into the Transferee Company. Part-III of the Scheme deals with Accounting Treatment in the Books of the Transferor Companies. Part-IV provides General Clauses and Terms and Conditions. Part-V deals with other terms and conditions. We have also gone through various clauses of the Scheme of Arrangement. The Passive Infrastructure Assets are defined as all present and future wireless and broadcast towers that host or assist in the operation of the plant and equipment used for transmitting telecommunication signals, being towers owned and operated by the Transferor Companies situated in India and include any and all towers under construction; all rights, title, deposits and interests in, or over, the land or property


on which such towers have been constructed or erected or installed; and all plants and equipments customarily treated by telecommunications operators worldwide as forming part of the Passive Infrastructure Assets.

41 As pointed out earlier, the appellant and all other transferee company is wholly owned

subsidiary of the transferor company, that is, Vodafone Essar Gujarat Limited. As per Clause 5.4 of the Scheme, in case the Scheme is not sanctioned by the concerned High Court wherein an application is moved for sanctioning by such transferor company, the Scheme shall stand implemented with demerger of the passive infrastructure of the relevant transferor company in respect of which the Scheme has been sanctioned. At this stage, it is required to be mentioned that out of seven transferor companies, sanction has been given to various transferor companies except the present transferor company.

42 The main contention of the Income Tax Department is that the Scheme is floated with the sole

object to avoid tax liability. Except the Income Tax Department no objections were raised by anyone against sanctioning the Scheme. In this connection, it is submitted by Mr Mihir Thakor, learned Counsel for the Department that the transaction in question is nothing, but a transaction of assets of passive infrastructure of the transferor company into Indus, but the said transaction is given colour by an artificial device and with a view to save income-tax liability two stages are created by the appellant group i.e. Vodafone i.e. introducing a pre-ordained devise/ conduit in the form of a new Company (the present Transferee Company) and transferring by way of Gift to this new Company and thereafter amalgamating this new Company into Indus. Both the stages are done under the guise of scheme u/s 391 to legitimise the same by obtaining the seal of the Hon'ble Court and evade payment of Income Tax, stamp duty and VAT and other taxes. In this connection, it is required to be noted that as per the Scheme the Passive Infrastructure business and the telecommunication service business was sought to be segregated in order to achieve a commercial purpose and object inter alia being segregating the PI business and the telecommunications service business to enable further growth and maximize value in each of the business; improved quality of services to customers by establishing high service standards and delivering services in an environment friendly manner; increase in the speed of role out and efficiency through sharing of infrastructure, converting the PI assets from non-revenue generating assets; improved network quality and greater coverage etc. It is required to be noted that various telecommunication companies in this country have adopted the business policy of segregation of telecommunication services and telecommunication infrastructure business as per the global trends prevailing as on today. During the course of hearing it has been pointed out that the working group under the Planning Commission has recommended sharing of infrastructure. Keeping the said object in mind if the Scheme has been framed and is approved by the shareholders in their wisdom, in our view, it cannot be said that the Scheme itself is floated with the sole criteria of tax avoidance simply because it may have effect and result into avoidance tax. If the Scheme is evolved by way of an arrangement and with an object of converting the PI assets from non-revenue generating assets; improved network quality and greater coverage etc. Moreover the segregation of telecommunications services and telecommunications infrastructure business reflects the global trend and has been adopted by telecommunication companies in India without objection. In fact, the Working Group under the Planning Commission has recommended sharing of infrastructure, and the present Scheme reserves flexibility to it for easing such process when required. It may be relevant to note that even the Central Government has not raised any objection to the Scheme and even the Department has not contended that the aforesaid objectives are imaginary. Therefore it cannot be said that the Scheme has no


purpose or object and that it is a mere device/subterfuge with the sole intention to evade taxes, particularly when even the incidence of tax purportedly sought to be evaded is not established on facts. Further, similar scheme of arrangement proposed by other telecommunication companies to achieve the aforesaid objectives have been sanctioned by different High Courts. In our considered view, this Court cannot refuse the sanction on the aforesaid ground by coming to the conclusion that the only object of the Scheme is to avoid taxes.

43 It is, no doubt, true as argued by Mr Thakor that in case the Scheme is sanctioned, it may

result into tax avoidance on the part of the appellant, but it is required to be noted that even if the ultimate effect of the Scheme may result into some tax benefit or even if it is framed with an object of saving tax or it may result into tax avoidance, it cannot be said that the only object of the Scheme is tax avoidance. Considering the various clauses of the Scheme it is not possible for us to come to a conclusion that the Scheme is floated with the sole object of tax avoidance. In its commercial wisdom if the Company has decided to have a particular arrangement by which there may be even benefit of saving income-tax or other taxes, that itself cannot be a ground for coming to the conclusion that the sole object of framing the Scheme is to defraud the Income Tax Department or other taxing authorities. It is also required to be noted that identical Schemes have been approved by various High Courts as pointed out earlier. As per the Scheme, it proposed to demerge the passive infrastructure assets of seven transferor companies and transfer them to the transferee company. The transferor companies and the transferee company are wholly owned and subsidiary of transferee company viz. Vodafone Essar Mobile Services Limited. One of the objects for framing of the Scheme is segregation of passive infrastructure business and telecommunication services business is to enable further growth and maximize value in each of the businesses. It is required to be noted that in the case of Nirmay Properties P. Ltd. reported in (2009) 150 Comp Cases 538 (Gujarat), this Court was dealing with the Scheme for amalgamation of five subsidiary companies with the holding company. In the said case also there were no secured creditors. No objection was raised to the petitions even after the publication. The Official Liquidator in his report has stated that the auditors appointed for the purpose of scrutiny and investigation of the books of account and affairs of the company had in their report pointed out violation of the provisions of the Companies Act, 1956 and Accounting Standards and evasion of stamp duty and income-tax. The learned Company Judge held that the objections raised by the auditors would not affect the scheme and that sanction to the scheme would not absolve the companies from any liability that may arise in future on violation of any statutory provisions or that the Scheme would not affect proceedings pending either before the civil or criminal courts and the liability that may be inflicted upon the petitioners or their Directors, would not be affected simply by virtue of the Scheme of Amalgamation. In the case of Vodafone International Holdings B.V. v. Union of India and Another, (2012) 1 Comp LJ 225 (SC), the Honourable Supreme Court has considered the provisions of Section 195 of the Income Tax Act. The aforesaid matter concerned a tax dispute involving the Vodafone group with the Indian tax authorities in relation to the acquisition by Vodafone International Holdings BV (VIH), a company resident for tax purposes in the Netherlands, of the entire share capital of CGP Investments (Holdings) Ltd. (CGP), a company resident for tax purposes in the Cayman Islands (CI, for short), vide transaction dated 11.02.2007, whose stated aim, according to the Revenue, was acquisition of 67% controlling interest in HEL being a company resident for tax purposes


in India which is disputed by the appellant saying that VIH agreed to acquire companies which in turn controlled a 67% interest, but not controlling interest, in Hutchison Essar Limited (HEL). According to the appellant, CGP held indirectly through other companies, 52% shareholding interest in HEL as well as options to acquire a further 15% shareholding interest in HEL, subject to relaxation of FDI norms. The Revenue sought to tax the capital gains arising from the sale of the share capital of CGP on the basis that CGP, whilst not a tax resident in India, holds the underlying Indian assets. The High Court upheld the jurisdiction of the Indian tax authority to impose capital gains tax on VIH as a representative assesse after holding that the transaction between the parties attracted capital gains in India. Applying the ‘natural character of the transaction’ test, the High Court came to the conclusion that the transfer of CGPshare was not adequate in itself to achieve the object of consummating the transaction between HTIL (a group holding overseas company of which HEL was a subsidiary) and VIH. That, intrinsic to the transaction was a transfer of other ‘rights and entitlements’ which rights and entitlements constituted in themselves ‘capital assets’ within the meaning of Section 2(14) of the Income Tax Act, 1961. According to the High Court, VIH acquired the CGP share with other rights and entitlements whereas, according to the appellant, whatever VIH obtained was through the CGP share. The decision of the High Court was called in question in SLP before the Honourable Supreme Court. The Honourable Supreme Court held that the capital gains arising from the sale of the share capital of CGP on the basis that CGP, whilst not a tax resident in India, holds the underlying Indian assets. The Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/saving device but that it should apply the look at test to ascertain its true legal nature. The corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not undertaken as a colourable or artificial device. The stronger the evidence of a device, the stronger the corporate business purpose must exist to overcome the evidence of a device. In para 45 it has been held that the tax planning may be legitimate provided it is within the framework of law. In the latter part of para 45, it held that colourable device cannot be a part of tax planning and it is wrong to encourage the belief that it is honourable to avoid payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes without resorting to subterfuges. Thus, it cannot be said that all tax planning is illegal/illegitimate/impermissible. The following observations of the Honourable Supreme Court in the aforesaid case are relevant for our purpose: “64. Shareholders can enter into any agreement in the best interest of the company, but

the only thing is that the provisions in Association. The essential purpose of the SHA is to make provisions for proper and effective internal management of the company. It can visualize the best interest of the company on diverse issues and can also find different ways not only for the best interest of the shareholders, but also for the company as a whole. In S.P. Jain v. Kalinga Cables Ltd. : (1965) 2 SCR 720, this Court held that agreements between non-members and members of the Company will not bind the company, but there is nothing unlawful in entering into agreement for transferring of shares. of course, the manner in which such agreements are to be enforced in the case of breach is given in the general law between the company and the shareholders. A breach of SHA which does not breach the Articles of Association is a valid corporate action but, as we have already indicated, the parties aggrieved can get remedies under the general law of the land for any breach of that agreement.”


In the case of Union of India & Another v. Azadi Bachao Andolan And Another, (2004) 10 SCC 1 the Supreme Court was considering the question as to whether offshore companies incorporated and operating from Mauritius and liable to tax in that country were entitled to benefits of Indo-Mauritius Double Taxation Avoidance Convention, 1983 or not. The Honourable Supreme Court has held as under:

114. The decision of the Chancery Division in Re F.G. Films Ltd. 53 (1) WLR 483 was pressed into service as an example of the mask of corporate entity being lifted and account be taken of what lies behind in order to prevent fraud. This decision only emphasises the doctrine of piercing the veil of incorporation. There is no doubt that, where necessary, the courts are empowered to lift the veil of incorporation while applying the domestic law. In the situation where the terms of the DTAC have been made applicable by reason of section 90 of the Income Tax Act, 1961, even if they derogate from the provisions of the Income Tax Act, it is not possible to say that this principle of lifting the veil of incorporation should be applied by the court. As we have already emphasised, the whole purpose of the DTAC is to ensure that the benefits thereunder are available even if they are inconsistent with the provisions of the Indian Income Tax Act. In our view, therefore, the principle of piercing the veil of incorporation can hardly apply to a situation as the one before us. 164. If the court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it would not be permissible for the court to treat the intervening legal steps as non-est based upon some hypothetical assessment of the real motive of the assessee. In our view, the court must deal with what is tangible in an objective manner and cannot afford to chase a will-o-the-wisp. 166. We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non-est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents. 167. In the result, we are of the view that Delhi High Court erred on all counts in quashing the impugned circular. The judgment under appeal is set aside and it is held and declared that the Circular No.789 dated 13-4-2000 is valid and efficacious.

In the case of United Bank of India Limited v. United India Credit and Development Company Limited, 1977 Company Cases 689 (Cal.), the Calcutta High Court has observed that fairness or unfairness of the scheme is not for the court's discretion in a technical sense but is a matter to be decided on evidence -- Test being whether it is for the interest of future commercial interest of the company, court cannot substitute its own views for the directors and experts. Unanimous opinion of directors is a relevant factor. He rightly submitted that predominant combined holdings of shares by directors are irrelevant consideration for the court. In paragraph 54 of the said decision, it has been held as under:


“54. Regarding the question of the scheme being unfair on merits, hypothetical, conditional, etc., I do not find any substance in the same save and except such contentions as have been raised relying on various decisions which are entirely on different background and different facts having no relevancy whatsoever in the facts and circumstances of the case. All of the said decisions relate to taking over or amalgamation of a company with an existing company, whereas, here, a new company has been incorporated for the purpose of the said amalgamation. As such, the principles relied on by the opposing group of shareholders cannot have any application whatsoever in the facts of the case, as, admittedly, the new company has not commenced its business but has only been incorporated for the purpose of taking over the petitioner-bank. Further, the court cannot speculate at this stage as to the possibility, potentiality of the amalgamated-company in future and its working. It is true that the court is not a mere rubber-stamp but, in sound exercise of its discretionary power to sanction a scheme, must consider the scheme as a whole having regard to the general conditions, background, and object of the scheme and the present day conditions, and atmosphere in the State where the companies are going to function. Court cannot take a pedantic and strict view of each and every clause in the scheme and speculate as to its future, feasibility and possibility at this stage. It is for the collective wisdom of the shareholders who are primarily businessmen and investors guided by the directors of a company to determine the course of business they choose. The principles are so well-known and even repeated by all the counsels appearing for both the parties that I need not discuss the same threadbare and it will be sufficient for me to hold that I accept the arguments and contentions of Mr. S. C. Sen, Mr. R. C. Nag and Mr. S. B. Mukherjee on this question which I have set out before. It is premature for the court to judge now whether the business envisaged by the scheme of amalgamation to be carried on in future would become profitable and a success. The court is only to see whether it is feasible having potentiality in the facts and circumstances of this case. In my view, prima facie, I am satisfied that in the present set up and conditions, particularly as it appears from the Report of the Banking Commission, the relevant articles of which I have quoted before, that there is nothing wrong or objectionable in the scheme of amalgamation being put through. In fact, the State of West Bengal appearing before me through Mr. D. P. Gupta is supporting the said scheme so also the Life Insurance Corporation of India and other statutory bodies. I have no hesitation in holding that the business of the amalgamated company is highly potential and conducive to the economy and development of the State of West Bengal in the present set up, when funds are urgently needed for the growth and development of existing and new enterprises. Further, the shareholders of the petitioner-bank never complained of the management of their company by its directors so far and suddenly they cannot have any reasonable and bona fide grievances against the said management and the scheme. It is true that names of eminent, well-known industrialists and respectable persons of integrity and honesty have been referred as prospective directors of the amalgamated company and they have not yet signified their consent of acceptance of such office but that in my view is not required at this stage, being premature. But the suggestion and intention as shown by the petitioners to appoint respectable, reliable and honest persons of high reputation as directors is enough for me at this stage to take into consideration the bona fide intention and object of the petitioner-companies.”

(emphasis supplied)


45. It is also required to be noted that a similar Scheme of arrangement involving demerger of

passive infrastructure assets of the Company has been sanctioned by the Delhi High Court in Re: Bharti Airtel Limited [CP No. 233/2007, decided on 26th November, 2007] wherein a similar Scheme of Arrangement involving demerger of Passive Infrastructure Assets into a group company, where no consideration was to be paid nor were any shares to be issued by the transferee company to the transferor company, was sanctioned. In the aforesaid case no consideration was to be paid nor were any shares to be issued by the transferor company to the transferee company.

46. It is vehemently argued by Mr Thakor that this can never be said to be an arrangement since

the transferor companies proposed to transfer only assets of the transferor company without transferring the liabilities and the liabilities would remain with the transferor companies after demerger. It is also vehemently argued that the expression “arrangement with members‟ used in S. 391, did not contemplate a gift from one party to the Scheme to the other party for the reason that the aforesaid expression contemplated an arrangement in the nature of a contract with a consideration involved, which is missing in this case. The second submission was that the Scheme is against public interest. It is no doubt true that as provided in the Scheme certain assets are to be transferred without consideration and without transfer of liability in respect thereof. At this stage, it is required to be noted that the proposition that so far as expression of arrangement with members is concerned, it is not defined in the Companies Act. However, in the instant case it cannot be said that the majority of the shareholders wanted confiscate the rights of the objecting minority shareholders. In the instant case no shareholder has raised any objection regarding such an arrangement. There is no question, therefore, of forcing the Scheme on a class of members against their wish.

47. Mr Thakor has placed strong reliance upon the decision of this Court in the case of Wood

Polymer (Supra). In the said case, Company Petitions Nos. 10 and 12 of 1975 are filed by Wood Polymer Limited and Bengal Hotels Private Limited, respectively, under sections 391(2) of the Companies Act, praying for according sanction to a scheme of amalgamation of the afore-mentioned two companies. Wood Polymer Limited is public limited company and it is the transferee-company. Bengal Hotels Private Limited is a private limited company and is the transferor-company. The scheme submitted to the court for sanction involves amalgamation of the transferor-company with the transferee-company and amongst others it envisages dissolution of the transferor-company without winding up. The learned Company Judge of this Court has while rejecting the aforesaid company petitions has observed that merely it is shown to the Court that the requisite formalities in relation to proposed scheme of amalgamation having been carried out, the Court is not bound to sanction the Scheme. The learned Company Court has observed that the transferor-company appears to have been merely created 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 Rs.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. Considering the nature of the transaction, the Court found that the sole object of the Scheme is to avoid capital gains tax and there was no other purpose worth the name.


48. Reference is also made to the case of Navjivan Mills Co. Ltd., Kalol v. Kohinoor Mills Co. Ltd., Bombay,(1972) 42 CompCas 265 (Gujarat High Court) wherein similar view is taken by the learned Company Judge that Scheme of Compromise must satisfy that the provisions of the statute are complied with. In the aforesaid case, the learned Judge of this Court has sanctioned the Scheme with modifications.

49. Both the learned counsel have relied upon the decision of the Supreme Court in the case

of Miheer H Mafatlal v. Mafatlal Industries Limited (1996) 87 CompCas 792 (SC). In the said case it has been held by the Honourable Supreme Court that the sanctioning court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by Section 391(1)(a) have been held, whether the Scheme of compromise or Arrangement is not found to be violative of any law and not contrary to the public policy. The Supreme Court has laid down the following broad contours of such jurisdiction: “1. The sanctioning court has to see to it that all the requisite statutory procedure for

supporting such a scheme has been complied with and that the requisite meetings as contemplated by Section 391(1)(a)have been held.

2. That the scheme put up for sanction of the Court is backed up by the requisite majority

vote as required by Section 391 Sub-Section (2). 3. That the concerned meetings of the creditors or members or any class of them had the

relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class.

4. That all necessary material indicated by Section 393(1)(a) is placed before the voters at

the concerned meetings as contemplated by Section 391 Sub-section (1). 5. That all the requisite material contemplated by the proviso of Sub-section (2) of

Section 391 of the Act is placed before the Court by the concerned applicant seeking sanction for such a scheme and the Court gets satisfied about the same.

6. That the proposed scheme of compromise and arrangement is not found to be violative

of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the Scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously X-ray the same.

7. That the Company Court has also to satisfy itself that members or class of members or

creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising of the same class whom they purported to represent.

8. That the scheme as a whole is also found to be just, fair and reasonable from the point

of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant.


9. Once the aforesaid broad parameters about the requirements of a scheme for getting

sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there would be a better scheme for the company and its members or creditors for whom the scheme is framed. The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction.

The aforesaid parameters of the scope and ambit of the jurisdiction of the Company Court which is called upon to sanction a Scheme of Compromise and Arrangement are not exhaustive but only broadly illustrative of the contours of the courts jurisdiction.”

49 So far as the submission of Mr Thakor that the Scheme of arrangement is not an arrangement and therefore the petition under Sections 391 to 394 of the Companies Act is not maintainable is concerned, the word ‘arrangement’ cannot be interpreted in a narrow manner and the definition. As held by the Bombay High Court in the case of Larsen & Toubro Ltd. (2004) 121 CC 523 the word ‘arrangement’, though not defined specifically, has a wide range and ambit and is a term of wider connotation (at pages 562-564). There is nothing wrong if the Company wants to reconstruct its business in an alternative form by dividing telecommunication business and telecommunication infrastructure business in the manner business being carried on by the Appellant, in a manner that the telecommunications infrastructure business would be carried on by the transferee company. The said business will be continued and carried on by substantially the same persons who are presently carrying on the consolidated business since both the transferor and the transferee companies are wholly owned subsidiaries of Vodafone Essar Limited which will continue to carry on the businesses.

50 On perusal of section 394(1) and 394(1)(a) it is evident that both reconstruction and

amalgamation are statutorily recognized as an arrangement and/or compromise under section 391. It necessarily implies that once a scheme is a reconstruction, which in the facts of the present case it is, the same is bound to be recognized as an arrangement and/or compromise under section 391. The Income Tax Department, by raising such a contention, is unnecessarily putting restrictions on the language of section 394(1) and section 394(1)(a) which the legislature has not deemed it fit to impose. In Larsen & Toubro Ltd, 2004 121 Company Cases 523 (Bombay) wherein the learned Company Judge of the Bombay High Court has held that the word ‘arrangement’ though not defined specifically has a wide range and ambit and is a term of wider connotation. It is held that the expression ‘arrangement’ includes a reorganization of the share capital of the company by the consolidation of shares of different classes. In Re T & N Ltd., (2007) 1 All ER 851 (Chancery Division) it has been held that it is not a necessary element of an arrangement for the purposes of section 425 that it should alter the rights existing between the company and the creditors or members with whom it is made provided that the context and the content of the scheme are such as properly to constitute an arrangement. It is further held that it is neither necessary nor desirable to


attempt a definition of arrangement. The legislature has not done so. To insist on an alteration of a right or a termination of rights as in the case of schemes to effect takeovers or mergers, is to impose a restriction which is neither warranted neither by the statutory language nor justified by the courts’ approach over the years to give the term its widest meaning. In the case of Re NFU Development Trust Limited 1 WLR 1548 (CD) a Scheme of Arrangement was proposed for reducing the administrative expenses. The Chancery Division Court has after considering the provisions of the Companies Act and after considering the Scheme. It has been observed by the Court that the word ‘compromise’ implies some element of accommodation on each side and it is not an apt to describe total surrender. The objection of the Income Tax Department that the scheme confiscates the rights of the Income Tax Department and therefore is not an arrangement, relying on NFU Development Trust Ltd., overlooks the fact that there is neither any arrangement with the Income Tax Department nor confiscation of its rights. In the case referred to, there was complete extinguishment of the rights of the members, which was not accepted as being an arrangement. In the present case the rights of the Income Tax Department of assessing, levying and collecting tax from the Appellant are not confiscated or expropriated so as to extinguish such rights. A contention that the recovery of the outstanding tax may be affected by transfer of PI assets, apart from being incorrect as it would be clear from the earlier paragraph cannot be equated with expropriation/confiscation/ extinguishment of rights of the Income Tax Department.

51 So far as argument of the Revenue that the transfer is void for want of consideration is

concerned, it is required to be noted that the Income Tax Department is not a party to the transaction. We agree with the view taken by the Delhi High Court that even if the consideration of one rupee can be said to be a valid consideration. In our view, while examining the Scheme each and every objection of a third party cannot be considered by carrying out microscopic examination. It is also required to be noted that it is not necessary that consideration is always a monetary consideration. In such type of cases wherein the reconstruction involves give and take and mutual/reciprocal promises and obligations, which can be said to be consideration for each other and it cannot be said that there is absolutely no consideration so far as Scheme of Arrangement is concerned. The Court is required to see whether the Scheme in question is for the benefit of shareholders and whether it is framed with the sole object of avoidance of the Scheme is avoidance of tax or it is against the public policy. Even otherwise, when various High Courts have sanctioned the identical Schemes, even on the principles of parity and judicial comity, in our view, consent is required to be given to the Scheme in question. It is also required to be noted that identical points were raised before the Delhi High Court and the learned Judge of the Delhi High Court has already sanctioned the Scheme and it is not in dispute that till date that order of the Delhi High Court holds the field. It is pointed out by Mr Joshi that the Income Tax Department has not even taken care to challenge the said order within the period of limitation and according to him the Scheme has already been implemented pursuant to the order of the Delhi High Court. Nonetheless, during the course of hearing, it was pointed out by Mr Thakor that against the order of the Delhi High Court appeal has been filed with a delay condonation application. He, however, admits that the order of the learned Single Judge of the Delhi High Court is still holding the field and there is no stay. He has also conceded that so far as orders of other High Courts are concerned, not only such objections, which are raised herein, were not raised therein, but even no further appeals have been filed against the orders of different High Courts. Therefore, on the basis of judicial comity and principles of parity, this Court


would not like to take a contrary view of the matter by rejecting the Scheme of the arrangement.

52. Even otherwise, the word ‘Consideration’ is defined under section 2(d) of the Contract Act, as

under:

"When, at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing something such act or abstinence or promise is called a consideration for the promise."

In Chidambara Iyer & ors vs. P. S. Renga Iyer & ors., reported in AIR 1966 SC 193 at page 197 the Supreme Court was considering a case wherein on August 22, 1934, a Trust was created by the family in respect of a sum of Rs.36,988-9-8 for charitable purposes; on September 3, 1939, the usufructuary mortgage right of the family in Ex.A-1, was given to the charity in discharge of the obligation undertaken under Ex.B-1; and the dedication of the said property was affirmed in the regular partition deed. In short, under the said documents the family transferred to the charity their interest in the usufructuary mortgage, Ex. A-1, in discharge of their obligation to pay the trust a sum of Rs. 36,988-9-8. The High Court, on a consideration of the said documents, arrived at exactly the same finding. The learned Judges of the High Court clearly held that the mortgage interest in Ex. A-1 was transferred in discharge of the liability undertaken under Ex. B-1. When the matter carried in appeal, while dismissing the appeal the Honourable Supreme Court held as under:-

“So far as is relevant to the present enquiry, the content of the two definitions is practically the same, though the expression "valuable" is implied under S. 2(d) of the Contract Act, for consideration shall be "something which not only parties regard but the law can regard as having some value". From the definitions it is apparent that consideration may be negative or positive. In the present case the mortgage interest was transferred in trust to the charity. What was the consideration that passed from the charity to the family? The family was under an obligation to pay to the charity the amount set apart to it under Ex. B-1. The mortgage interest was transferred in discharge of that obligation. That is to say, the charity agreed as a consideration for the transfer of the mortgage interest not to enforce its right to recover that amount from the family. The charity gave up that right in consideration of the mortgage interest acquired by it. We therefore, hold that the family transferred the mortgage interest in trust to the charity for valuable consideration within the meaning of S. 9-A (10) (ii) (b) of the Act. It follows that the mortgage, Ex. A-1, was rightly held by the High Court not liable to be scaled down under the provisions of the Act.”

53. Even the most trifle benefit can be consideration so as to avoid the impact of section 25 in

view of the decision in His Holiness Kesavananda Bharati vs. State of Kerala, reported in (1973) 4 SCC 225, at para 1971). There is no requirement of monetary consideration and even a promise to induce the company to carry on its business has been treated as sufficient consideration as held in the case of Ledingham & ors. Vs. Bermejo Estancia Co. Ltd., reported in 1947 (1) All ER 749). Even a letter for bringing about peace for the family was a good consideration and the letter brought about an enforceable agreement between the parties as held in The Commissioner of Wealth Tax, Mysore vs. Vijayaba,


Dowger Maharani Saheb, Bhavnagar & ors., reported in AIR 1979 SCC 982. In the present case the reconstruction involves give and take and mutual/reciprocal promises and obligations which are consideration for each other and it cannot be said that the scheme of arrangement is without consideration.

54. The objection raised by the Income Tax Department that the Appellant should not be

permitted to argue that for the purpose of Income Tax Act, the transfer is by way of a gift and that for the purpose of the Companies Act, the same is with consideration is completely misplaced. There is no bar which restrains a transaction falling differently or being dealt with separately under different Acts. Reliance is placed on the judgment ofMysore Minerals Ltd. vs. Commissioners of Income Tax, Karnataka, reported in (1999) 7 SCC 106(para 14), for the aforesaid proposition.

55. In view of the approval accorded by the equity shareholders, secured and unsecured Creditors

of the petitioner and the Regional Director, Western Region to the proposed Scheme of Arrangement, as well as the submissions of the Income Tax Department, there appear to be no further impediments to the grant of sanction to the Scheme of Arrangement. Consequently, sanction is hereby granted to the Scheme of Arrangement under Sections 391 and 394 of the Companies Act, 1956 while protecting the right of the Income Tax Department to recover the dues in accordance with law irrespective of the sanction 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.

56. In the result, the appeal is allowed by substituting the order of the learned Company Judge

and Scheme is sanctioned subject to what is stated hereinabove.

(P.B.Majmudar, J.) (Mohinder Pal, J.)

FURTHER ORDER

57. At this stage, Mr Nitin K Mehta, learned counsel for the Income Tax Department requested

that the operation and implementation of this judgment be stayed as the respondent would like to approach the Honourable Apex Court against this judgment. The request is vehemently opposed by the learned counsel for the appellant-company and it is submitted that so far as the Schemes approved by the other High Courts are concerned, as on today, no stay is granted in any of those matters. It is also pointed out that insofar as the matter before the Delhi High Court is concerned, though the appeal is filed, even delay in filing the appeal is not condoned as yet. It is, therefore, submitted that this is not a case in which the Scheme is required to be stayed. At this juncture, the learned counsel for the


appellant-company, invited the attention of the Court to Section 395(3) of the Companies Act, 1956 which provides that an order of the Company Court shall not come into effect until certified copy of the order of the Company Court is produced before the Registrar of Companies. The learned counsel for the appellant-company assured this Court that they shall not produce the certified copy of this judgment before the Registrar of Companies until 5th September 2012.

In that view of the matter, the appellant-company is directed not to produce the certified copy of this judgment before the Registrar of Companies until 5th September 2012. The request made by the learned counsel for the Income Tax Department is not required to be entertained in view of the aforesaid statement made by the learned counsel for the appellant-company.

(P.B.Majmudar, J.) (Mohinder Pal, J.)

*mohd

in the high court of gujarat at ahmedabad...

Documents