Joint Commissioner Of Income Tax (Osd) vs Reliance Jio Infocomm Ltd. & Ors

Joint Commissioner of Income Tax (OSD), Circle (3)(3)-1, Mumbai ...Appellant

Vs.

Reliance Jio Infocomm Ltd. & Ors. ...Respondents

Company Appeal (AT) No. 114 of 2019

IN THE MATTER OF:

Income Tax Officer, Ward 3(3)-1, Mumbai ...Appellant

Vs.

M/s. Reliance Jio Infratel Pvt. Ltd. & Ors. ...Respondents

Present: For Appellant: - Mr. Zoheb Hossain, Sr. Standing Counsel for Revenue and Mr. Piyush Goyal, Advocate for Income Tax Department. Mr. Sagar Suri, Ms. Lakshmi Gurung, Advocates.

For Respondents: - Dr. A.M. Singhvi, Mr. Ramji Srinivasan, Mr. Jehangir N. Mistry, Mr. Ritin Rai, Senior Advocates with Mr. K.R. Sasiprabhu, Mr. Biju P. Raman, Mr. Raghav Shankar, Mr. Tushar Bhardwaj, Mr. Aabhas Kshetrapal, Mr. Avishkar Singhvi and Ms. Sylona Mohapatra, Advocates.

J U D G M E N T

SUDHANSU JYOTI MUKHOPADHAYA, J.

'Reliance Jio Infocomm Limited'- Demerged/ Transferor Company

(Petitioner Company No.1), 'Jio Digital Fibre Private Limited'- Resulting 2

Company (Petitioner Company No.2) and 'Reliance Jio Infratel Private

Limited'- Transferee Company (Petitioner Company No. 3) moved joint

petition under Sections 230-232 of the Companies Act, 2013, seeking

sanction of the Composite Scheme of Arrangement amongst 'Reliance Jio

Infocomm Limited' and 'Jio Digital Fibre Private Limited' and 'Reliance

Jio Infratel Private Limited' and their respective shareholders and

Creditors ("Composite Scheme of Arrangement").

2. The Petitioner Companies (Respondents herein) filed Company

Application seeking dispensation of the meeting of Equity Shareholders

of the Petitioner Company No.2 and the Petitioner Company No.3 by

seeking directions to convene and hold meetings of Secured Creditors

(including Secured Debenture Holders), Unsecured Creditors (including

Unsecured Debenture Holders), Preference Shareholders and Equity

Shareholders of the Petitioner Company No.1.

3. By order dated 11th January, 2019, passed in Company

Application, the National Company Law Tribunal ("Tribunal" for short),

Ahmedabad Bench, ordered dispensation of the meeting of the Equity

Shareholders of the Petitioner Company No.2 and the Petitioner Company

No.3, directing for holding and convening the meetings of the Secured

Creditors (including Secured Debenture holders), Unsecured Creditors

(including Unsecured Debenture holders), Preference Shareholders and

Equity Shareholders of the Petitioner Company No.1.

Company Appeal (AT) Nos. 113 & 114 of 2019 3

4. Notices were directed to be issued on Regional Director, North

Western Region, Registrar of Companies, concerned Income Tax

Authority (in case of Petitioner Company No.1), 'Securities and Exchange

Board of India', 'BSE Limited' and 'National Stock Exchange of India

Limited' (in case of Petitioner Company No.1) stating that the

representation, if any, to be made by them, within a period of 30 days

from the date of receipt. Publication was also directed to be made and

published in the Newspaper "Indian Express" in English language having

all India circulation and "Divya Bhaskar" in Gujarati language having

circulation in Ahmedabad. Statutory notice was issued and Affidavits

were also filed.

5. The National Company Law Tribunal, Ahmedabad Bench, taking

into consideration the Chairperson's Report of the meeting of the Secured

Creditors; Chairperson's Report of the meeting of the Unsecured

Creditors; Chairperson's Report of the meeting of the Preference

Shareholders; Chairperson's Report of the meeting of the Equity

Shareholders of the Petitioner Company No.1, by order dated 11th

January, 2019, directed the Regional Director, North Western Region to

make a representation under Section 230(5) of the Companies Act, 2013

and the Income Tax Department to file representation.

6. The Joint Commissioner of Income Tax (OSD), Circle (3)(3)-1,

Mumbai and the income Tax Officer, Ward 3(3)-1, Mumbai have preferred

these appeals.

Company Appeal (AT) Nos. 113 & 114 of 2019 4

7. According to the Appellants, the Tribunal has not adjudicated upon

the objections raised by the Appellant- Income Tax Department at the

threshold before granting any sanction to the proposed composite scheme

of arrangement.

8. It was submitted that the Tribunal has not dealt with specific

objection that conversion of preference shares by cancelling them and

converting them into loan, it would substantially reduce the profitability

of Demerged Company/ 'Reliance Jio Infocomm Limited' which would act

as a tool to avoid and evade taxes.

9. It was submitted that the proposed composite scheme of

arrangement amounts to reduction in profitability would also bring down

the payment of dividend distribution tax which is again a way to avoid

payment of taxes. The structure of proposed composite scheme adopted

by the Respondents was a permissible method of tax planning or is a tool

to avoid and evade payment of taxes.

10. The main thrust of the argument was that by scheme of

arrangement, the transferor company has sought to convert the

redeemable preference shares into loans i.e. conversion of equity into

debt which is not only contrary to the well settled principles of company

law as well as Section 55 of the Companies Act, 2013 but also would

reduce the profitability or the net total income of the transferor company

causing a huge loss of revenue to the Income Tax Department.

Company Appeal (AT) Nos. 113 & 114 of 2019 5

11. According to the Appellants, the scheme seeks to do indirectly what

it cannot do directly under the law. By way of the composite scheme,

there is an indirect release of assets by the demerged company to its

shareholders which is used to avoid dividend distribution tax which

would have otherwise been attracted in light of Section 2(22) (a) of the

Income Tax Act.

12. It was further submitted that the composite scheme also does not

fulfil the requirements of Section 2(19AA) which defines the meaning of

'demerger' under the Companies Act, 2013 and it could only be referred

to as a purported demerger which does not fulfil the requirements of law.

13. According to counsel for the Appellant, Section 2(19AA) requires

the transfer of the undertaking on a going concern basis which is not

evident from the balance sheet and profit and loss account of 'M/s.

Reliance Jio Infocomm Limited'.

14. Further, as per the law, dividend arising out of preference shares

can only be paid by the company out of its accumulated profits. However,

when preference shares are converted into loan, the shareholders turn

into creditors of the company. There are two consequences of such

conversion of preference shares into loan. Firstly, the shareholders who

are now creditors can seek payment of the loan irrespective of whether

there are accumulated profits or not and secondly, the company would

be liable to pay interest on the loans to its creditors, which it otherwise

Company Appeal (AT) Nos. 113 & 114 of 2019 6

would not have had to do to its shareholders. Payment of interest on such

huge amounts of loan would lead to reducing the total income of the

company in an artificial manner which is not permissible in law.

15. It was also alleged that the proposed scheme does not identify the

interest rate payable on the loan which will be a charge on the profits of

the company i.e. 'Reliance Jio Infratel Private Limited'. Even if 10%

interest rate is considered as per Section 186 of the Companies Act, 2013,

this would amount to interest of Rs.782.2 Crores per annum which would

reduce profitability of company as this interest would reduce

Respondent's tax by Rs.258.16 Crores (approx.) each year. The reduction

in the profitability is clearly resulting into tax evasion.

16. Learned counsel for the Appellant relied on the decision of the

Hon'ble Supreme Court in "Vodafone International Holdings BV v.

Union of India and Another─ (2012) 6 SCC 613" wherein the Hon'ble

Supreme Court has frowned upon such artifice which leads to tax

avoidance.

17. Referring to the Scheme, learned counsel for the Appellant

submitted that the Scheme envisages cancellation of preference shares

and discharge by constructive payment to the holders of preference

shares and a constructive receipt of an equivalent amount as loan from

the holders of preference shares to the demerged company, which is not

permissible under the law.

Company Appeal (AT) Nos. 113 & 114 of 2019 7

18. Overview of the Scheme has been highlighted by 1st Respondent-

'Reliance Jio Infocomm Limited', as follows:

(i) Reliance Jio Infocomm Limited and Ors. previously had separate

units/divisions housing its optic fiber and tower infrastructure

undertakings. Each of these units had distinct assets and liabilities

and were involved in separate business.

(ii) The Composite Scheme of Arrangement was entered into between

'Reliance Jio Infocomm Limited', 'Jio Digital Fibre Private Limited'

and 'Reliance Jio Infratel Private Limited'. The rationale of the

Scheme was that since the businesses and markets in which they

operated were distinct, segregation and unbundling of these

undertakings would enable enhanced focus on exploiting

opportunities, attracting different sets of investors, de-leveraging

RJIL's balance sheet and unlocking the value of the undertakings

for the shareholders.

(iii)The scheme provided for:

a) demerger of the optic fiber undertakings of 'Reliance Jio

Infocomm Limited' to 'Jio Digital Fibre Private Limited', i.e.,

all assets, properties and liabilities of the undertaking were

demerged to the resulting company at the values appearing

in the books of 'Reliance Jio Infocomm Limited'

Company Appeal (AT) Nos. 113 & 114 of 2019 8

b) Transfer of the tower infrastructure undertaking to 'Reliance

Jio Infratel Private Limited' as a going concern, i.e., as a

slump sale at book value.

c) As consideration for the demerger of the optic fiber

undertaking, equity and/or preference shares of 'Jio Digital

Fibre Private Limited' would be issued to the shareholders of

'Reliance Jio Infocomm Limited' on a proportionate basis;

similarly, 'Reliance Jio Infocomm Limited' would receive

equity and/or preference shares of 'Reliance Jio Infratel

Private Limited' as consideration for the slump sale of the

tower infrastructure undertaking

d) 'Reliance Jio Infocomm Limited' had issued 1,300 preference

shares of Rs. 10 each at a premium of Rs. 40 each to its

holding company, 'Reliance Industries Ltd.' (RIL),

aggregating to Rs. 65,000 crore of subscribed share capital.

These funds were inter alia utilized by the Answering

Respondent for investment in the optic fiber and tower

infrastructure undertakings.

e) Under Clause 4 of the Scheme w.e.f 31.03.2019, the

preference share capital and corresponding share premium

would be cancelled and converted into an equivalent amount

of loans from 'Reliance Industries Ltd.' to 'Reliance Jio

Infocomm Limited' (7,822 crore), 'Jio Digital Fibre Private

Company Appeal (AT) Nos. 113 & 114 of 2019 9

Limited' (45,342 crore) and 'Reliance Jio Infratel Private

Limited' (11,836 crore).

19. It was submitted that the opportunities of hearing granted to the

Appellants, as detailed below:

(i) Notice dated 17th November, 2019 was issued by 'Reliance Jio

Infocomm Limited' to the Appellant pursuant to the NCLT's order

dated 11th January, 2019. Pursuant to this, letters dated 14th

February, 2019 and 6th March, 2019 were written by the Appellant

to NCLT setting out their comments/ observations on the proposed

Scheme.

(ii) Further Notice dated 7th March, 2019 was issued by 'Reliance Jio

Infocomm Limited' to the Appellant notifying that the final hearing

in the matter was fixed for 18th March, 2019. Appellant vide letter

dated 15th March, 2019 informed NCLT that it was a "very busy

period" for the Department, so the matter may be adjourned to

some date in April 2019 (i.e., after the appointed dated under the

Scheme, which was 31st March, 2019)

(iii)Final hearing was conducted on 18th March, 2019, on which date

Appellant chose to remain unrepresented. The order was reserved

on this date and pronounced on 20th March, 2019. The impugned

order notes in detail the submissions of the IT Department and

issues the directions sought in the same.

Company Appeal (AT) Nos. 113 & 114 of 2019 10

(iv) Appellant is now effectively suggesting that the matter should have

been adjourned and the scheme recast solely on the basis that the

NCLT should have unquestioningly acceded to its request for an

adjournment, which request it did not even see fit to advance

through counsel on the date of hearing. This is ex facie an absurd

suggestion. The plea that that Appellant was not heard prior to

passing of the impugned order is therefore contrary to the record

of the case unsustainable.

20. It was submitted that in its letters dated 14th February, 2019 and

6th March, 2019 written to the Tribunal, the Appellant did not seek

adjudication of the issues raised by it, but only sought issuance of

appropriate directions protecting the interests of revenue, i.e., by

reserving the right of the Appellant to initiate proceedings under the

Income Tax Act in regard to past, present or future liability arising out of

or in relation to the Scheme. The Appellant nowhere sought denial of

sanction to the Scheme.

21. It was further submitted that the Tribunal in the impugned order

noted the submissions of the Appellant and observed that even as per the

Department, only two residual issues- valuation of assets and

cancellation of preference shares. Even in respect of these issues,

Appellant itself had only sought directions protecting the Revenue's right

to initiate appropriate proceedings, if it ultimately found that the Scheme

had resulted in tax avoidance. The directions prayed for by the Appellant

Company Appeal (AT) Nos. 113 & 114 of 2019 11

were noted by the Tribunal and granted in the very terms in which they

were sought.

22. According to Respondents, 'Reliance Jio Infocomm Limited' has

affirmed on Affidavit that it has no objection to being subjected to tax on

the transactions under the Scheme as per law and that the sanctioning

of the Scheme would not adversely impact the rights of the Appellant in

this regard.

23. Further, it was submitted that no prejudice has, therefore, been

occasioned to the interests of Revenue on account of the sanctioning of

the Scheme. It remains open to the Department to initiate appropriate

proceedings under the Income Tax Act in regard to each of the aspects

mentioned in its letters dated 14th February, 2019 and 6th March, 2019.

24. It was also contended that the Appellant is approbating and

reprobating in submitting before the Tribunal that it would take

necessary steps to examine under the Income Tax Act the specific issues

identified by it in appropriate proceedings, while it now contends that

these were the threshold issues that the Tribunal should have

determined as precursor to according sanction to the Scheme.

25. The main grievance of the Appellant is against clause B of the

Composite Scheme of Arrangement and part of Clause C, which relates

to 'preference shares' and 'cancellation of the preference shares and

reduction of the Preference Share Capital', as shown below:

Company Appeal (AT) Nos. 113 & 114 of 2019 12

26. Section 55 of the Companies Act, 2013 relates to 'issue and

redemption of preference shares', as follows:

"55. Issue and redemption of preference

shares─ (1) No company limited by shares shall,

after the commencement of this Act, issue any

preference shares which are irredeemable.

Company Appeal (AT) Nos. 113 & 114 of 2019 13

(2) A company limited by shares may, if so

authorised by its articles, issue preference shares

which are liable to be redeemed within a period not

exceeding twenty years from the date of their issue

subject to such conditions as may be prescribed:

Provided that a company may issue

preference shares for a period exceeding twenty

years for infrastructure projects, subject to the

redemption of such percentage of shares as may be

prescribed on an annual basis at the option of such

preferential shareholders:

Provided further that--

(a) no such shares shall be redeemed

except out of the profits of the company

which would otherwise be available for

dividend or out of the proceeds of a fresh

issue of shares made for the purposes of

such redemption;

(b) no such shares shall be redeemed

unless they are fully paid;

(c) where such shares are proposed to be

redeemed out of the profits of the

company, there shall, out of such profits,

be transferred, a sum equal to the

Company Appeal (AT) Nos. 113 & 114 of 2019 14

nominal amount of the shares to be

redeemed, to a reserve, to be called the

Capital Redemption Reserve Account,

and the provisions of this Act relating to

reduction of share capital of a company

shall, except as provided in this section,

apply as if the Capital Redemption

Reserve Account were paid-up share

capital of the company; and

(d) (i) in case of such class of

companies, as may be prescribed and

whose financial statement comply with

the accounting standards prescribed for

such class of companies under section

133, the premium, if any, payable on

redemption shall be provided for out of

the profits of the company, before the

shares are redeemed:

Provided also that premium, if

any, payable on redemption of any

preference shares issued on or before

the commencement of this Act by any

such company shall be provided for out

of the profits of the company or out of

Company Appeal (AT) Nos. 113 & 114 of 2019 15

the company's securities premium

account, before such shares are

redeemed.

(ii) in a case not falling under sub-clause

(i) above, the premium, if any, payable

on redemption shall be provided for out

of the profits of the company or out of the

company's securities premium account,

before such shares are redeemed.

(3) Where a company is not in a position to redeem

any preference shares or to pay dividend, if any,

on such shares in accordance with the terms of

issue (such shares hereinafter referred to as

unredeemed preference shares), it may, with the

consent of the holders of three-fourths in value of

such preference shares and with the approval of

the Tribunal on a petition made by it in this behalf,

issue further redeemable preference shares equal

to the amount due, including the dividend thereon,

in respect of the unredeemed preference shares,

and on the issue of such further redeemable

preference shares, the unredeemed preference

shares shall be deemed to have been redeemed:

Company Appeal (AT) Nos. 113 & 114 of 2019 16

Provided that the Tribunal shall, while giving

approval under this sub-section, order the

redemption forthwith of preference shares held by

such persons who have not consented to the issue

of further redeemable preference shares.

Explanation.--For the removal of doubts, it is

hereby declared that the issue of further

redeemable preference shares or the redemption of

preference shares under this section shall not be

deemed to be an increase or, as the case may be,

a reduction, in the share capital of the company.

(4) The capital redemption reserve account may,

notwithstanding anything in this section, be

applied by the company, in paying up unissued

shares of the company to be issued to members of

the company as fully paid bonus shares.

Explanation.--For the purposes of sub-section

(2), the term ''infrastructure projects'' means the

infrastructure projects specified in Schedule VI."

27. Whether clause B (iv) is against Section 55, is not a subject matter

for determination by the Income Tax Department. It can be noticed and

Company Appeal (AT) Nos. 113 & 114 of 2019 17

objected by the Competent Authorities i.e., Regional Director, North

Western Region and the Registrar of Companies.

28. Pursuant to order dated 11th January, 2019, the Regional Director,

North Western Region, made a representation vide letter dated 13th

March, 2019 making certain observations.

(i) The first observation relates to non-convertible debentures of

the Applicant Company No.1.

(ii) The second observation relates to placing on record the

relevant facts regarding clause 4.2 of the Composite Scheme

of Arrangement.

(iii) The third observation relates to modification of the

Composite Scheme of Arrangement.

(iv) The fourth observation relates to approvals to be taken from

the concerned Regulatory Authorities.

(v) The fifth observation is regarding sufficiency of authorised

share capital to issue and allot new equity shares of the

Transferee Company to the shareholders of the Demerged/

Transferor Company upon sanction of the Composite

Scheme of Arrangement.

(vi) The sixth observation relates to compliance with the

provisions of Section 2(19AA) of the Income Tax Act, 1961.

(vii) The seventh observation relates to disclosure of list of assets

and liabilities which are proposed to be demerged and

Company Appeal (AT) Nos. 113 & 114 of 2019 18

transferred pursuant to the Composite Scheme of

Arrangement.

(viii) The eight observation relates to legal expenses to be paid to

the Regional Director.

(ix) The ninth observation relates to representation received by

Regional Director from the office of Registrar of Companies,

Ahmedabad which contain three observations.

29. The Tribunal has noticed the stand taken by the Regional Director,

North Western Region as well as taken into consideration the stand taken

by the Petitioner Companies and the Composite Scheme filed by them,

relevant of which reads as follows:

"13.1 With regard to first observation, it is

submitted that the non-convertible debentures of the

Petitioner Company No.1 are listed on BSE Limited

and the National Stock Exchange of India Limited.

Regulation 59 of the SEBI (Listing Obligations and

Disclosure Requirements) Regulations, 2015

prescribe prior approval of the stock exchanges

where the non-convertible debentures are listed for

any material modification in the structure of the

aforesaid debentures in terms of coupon,

conversion, redemption, or otherwise. It is further

submitted that as there is no change in the structure

Company Appeal (AT) Nos. 113 & 114 of 2019 19

of non-convertible debentures in terms of coupon,

conversion, redemption, or otherwise pursuant to the

Composite Scheme of Arrangement, no prior

approval is necessary.

13.2 With regard to second observation, it is submitted

that the amount of Preference Share Capital and the

corresponding securities premium apportioned to

Loan 1, Loan 2 and Loan 3 (as defined in the

Composite Scheme of Arrangement) are based on

expenditure incurred in respect of the optic fibre

cable undertaking, tower infrastructure undertaking

and other businesses of the Petitioner Company

No.1.

13.3 With regard to third observation, it is submitted that

the Petitioner Companies modified the composite

scheme of arrangement to the effect that the

Resulting Company and the Transferee Company

shall provide an option to the shareholders of the

Demerged Company and to the Transferor

Company, at their discretion, to receive a part of the

consideration in the form of preference shares, for

the demerger of Demerged Undertaking and transfer

of the Transferred Undertaking respectively. It is

further submitted that the aggregate consideration

Company Appeal (AT) Nos. 113 & 114 of 2019 20

envisaged under the Composite Scheme of

Arrangement does not undergo any change

pursuant to the aforesaid amendment. It is further

submitted that a notice of this modification was

published in Indian Express, all editions in English

and a Gujarati translation thereof in Divya Bhaskar

on 13.02.2019. The modifications were also

explained by the Chairperson of the respective

meetings of the Secured Creditors (including

Secured Debenture holders), Unsecured Creditors

(including Unsecured Debenture holders), Preference

Shareholders and Equity Shareholders of the

Petitioner Company No. 1 at their meetings convened

and held for approving the Composite Scheme of

Arrangement. In the said meetings, the Composite

Scheme of Arrangement, as amended, was

approved by the requisite majority of the Secured

Creditors (including Secured Debenture holders),

Unsecured Creditors (including Secured Debenture

holders), Preference Shareholders and Equity

Shareholders of the Petitioner Company No. 1.

13.4 With regard to fourth observation, it is submitted

that the approvals and permissions, as may be

necessary for carrying on the activities of the

Company Appeal (AT) Nos. 113 & 114 of 2019 21

Petitioner Companies shall be applied for and

obtained by following necessary procedures in

accordance with applicable law.

13.5 With regard to fifth observation, it is submitted that

Petitioner Company No. 2 and Petitioner Company

No.3, shall reclassify/ increase the authorized share

capital to the extent required and also undertake to

make due compliances for the said purpose.

13.6 With regard to sixth observation, it is submitted that

Composite Scheme of Arrangement is a composite

Scheme and that the Petitioner Companies shall

comply with the provisions of Section 2 (19AA) of the

Income-tax Act, 1961, to the extent applicable.

13.7 With regard to seventh observation, it is submitted

that the Petitioner Company No.1 shall submit the

list of assets pertaining to the Demerged

Undertaking and the Transferred Undertaking with

the registry to be annexed as part of the order

sanctioning this Composite Scheme of Arrangement.

Since the Appointed Date is a prospective date, the

Petitioner Company No.1 shall identify all the

liabilities of the Demerged Undertaking and the

Transferred Undertaking as on the Appointed Date

Company Appeal (AT) Nos. 113 & 114 of 2019 22

and the same shall also be duly transferred along

with the respective undertakings.

13.8 With regard to eighth observation, it is submitted

that the Petitioner Companies shall pay the requisite

legal fees/cost to the Central Government as may be

directed by this Tribunal.

13.9 With regard to the ninth observation which is in

relation to representation of Registrar of Companies,

it is submitted that the Petitioner Company No. 1 has

submitted letter dated 08.02.2019 with the office of

the Regional Director and the Registrar of

Companies, for reply to letter dated 17.12.2018 of

Birbhum Highway Division-II, stating that the

Composite Scheme of Arrangement will not impact

the dues, if any, of the Birbhum Highway Division-

II. A copy of the letter dated 08.02.2019 of the

Petitioner Company No.1 is placed on record. As

regards the second observation is concerned, the

Petitioner Company No. 1 has submitted letter dated

05.03.2019 with the office of the Regional Director

and the Registrar of Companies, for reply to letter

dated 29.11.2018 of Municipal Commissioner,

Thane Municipal Corporation, clarifying that there is

no proposal of merger between the Petitioner

Company Appeal (AT) Nos. 113 & 114 of 2019 23

Company No.1 and Reliance Communications

Limited. So far as the third observation is concerned,

it is stated that the Petitioner Company No.1 has

submitted a letter dated 07.02.2019 with the office

of the Registrar of Companies clarifying the issues

and that there is no further observation received

from the office of Registrar of Companies.

There are no other observations made by the

Regional Director and the Registrar of Companies."

30. Though no specific argument was advanced on behalf of the Income

Tax Department (Appellant), however, the Tribunal dealt with the

representations of the concerned Income Tax Department and observed:

"15. In response to the representations of

concerned Income Tax Department, the Petitioner

Companies have filed affidavit dated 15.3.2019 with

this Tribunal. This Tribunal perused the

representations of the Income Tax Department and the

affidavit filed by the Petitioner Companies in response

thereto. This Tribunal notes that though in its initial

report, the IT Department had some reservations in the

Scheme, later on, after receipt of clarifications from the

Petitioner Companies, the IT Department, in its last

Company Appeal (AT) Nos. 113 & 114 of 2019 24

report, has raised only two issues viz. valuation of the

assets under slump sale/ demerger and cancellation

of preference shares. In so far as the first issue is

concerned, it is understood by the Petitioner

Companies that "the IT Department reserves the right

to examine any aspect of any tax payable in respect of

proposed slump sale and issue of shares, etc." On the

second issue, IT Department has merely referred to tax

implication on conversion of preference shares into

loan. However, having said that, ultimately the report

makes the following submissions:-

"9. The Income Tax Department will be free to examine the aspect of any tax payable as a result of the Scheme and in case it is found that the Scheme of Arrangement ultimately results in tax avoidance or is not in accordance to the demerger provisions of the Income Tax Act, then the Department will be at liberty to initiate appropriate course of action as per law.

10. It is further requested that the right of the Income Tax Department should remain intact to take out appropriate proceedings regarding rising of any tax demand against the demerged company at any future date and these rights should not

Company Appeal (AT) Nos. 113 & 114 of 2019 25

be adversely affected in view of sanction of the Scheme.

11. It is reiterated that any sanction to the Scheme of Arrangement under Sections 230 to 232 of the Companies Act, 2013 should not adversely impact the rights of the Income Tax Department for any past, present or future proceedings. The department should be at liberty to take appropriate action as per law in case of an event of any tax-avoidance or violation of Income Tax Law or any other similar issue."

In response to this, the Petitioner Companies have

affirmed that the sanctioning of the Composite Scheme

of Arrangement will not adversely impact the rights of

the Income Tax Department for any past, present or

future proceedings as per law in relation to the

Petitioner Companies.

No representations have been received from any

other statutory authorities.

xxx xxx xxx

21. In so far as the observations of Income Tax

Department made in Para 15 are concerned,

considering the response of the Petitioner companies,

it is hereby made it clear that the Income Tax

Department will be free to examine the aspect of any

Company Appeal (AT) Nos. 113 & 114 of 2019 26

tax payable as a result of the sanction of the Scheme

and in case it is found that the Scheme of

Arrangement ultimately results in tax avoidance or is

not in accordance with the demerger provisions of the

Income Tax Act, then the IT Department will be a

liberty to initiate appropriate course of action as per

law. It is further clarified that any sanction to the

Scheme of Arrangement under Sections 230 to 232 of

the Companies Act, 2013 shall not adversely impact

the rights of the Income Tax Department for any past,

present or future proceedings. The department shall

be at liberty to take appropriate action as per law in

case of an event of any tax-avoidance or violation of

Income Tax Law or any other similar issue."

31. We have noticed the representations made by the Income Tax

Department dated 14th February, 2019 wherein following comments were

made in respect to issues relating to cancellation of preference shares:

"iv) Issue related to Cancellation of

Preference Share:-

 As per the scheme the preference shares having

face value of 13000 crores along with securities

premium of 52,000 crores are cancelled and

Company Appeal (AT) Nos. 113 & 114 of 2019 27

converted into loan as mentioned in page 8 para

7b of the scheme.

Generally, share premium cannot be

cancelled or returned back. The security

premium once received does not belong to the

person who has paid the premium but to all

the shareholders of the company irrespective

of quantum of shareholding and period of

shareholding. It cannot be paid to the

subscriber or preference shareholders only.

 Converting preference shares along with

securities premium into loans is detrimental to

the interest of shareholders and income tax

department because payment to preference

shareholders is made only when there is profit

in the hands of company and the same is

application of profit. Whereas, payment of

interest on loan is charged on profit therefore the

conversion will result in lesser taxable profit in

the hands of company which pays interest and

would be against the interests of Income Tax

Department.

 The security premium amount can only be used

for the following purpose.

Company Appeal (AT) Nos. 113 & 114 of 2019 28

a. When money is lying and is not used.

b. For issuing bonus.

c. For payment of dividends

The cancellation of preference share is not

related/ connected with demerger/ transfer

of an undertaking. The conditions laid down

in section 66(1) of Companies Act, 2013 are

not satisfied while making cancellation of

preference shares.

 The conversion of securities premium into loan

results into release of assets and may be taxable

u/s 2(22a) of Income Tax Act, 1961. The reasons

being,

a. In the case of securities premium there is no

liability on the company to pay to anyone

whereas conversion of the same into loan

creates liability on the company and

ultimately company has to pay these loans

along with interest. This results into release

of the assets.

 The complete details of treatment given to

preference share capital and security premium

are not provided. In this circumstance, no further

Company Appeal (AT) Nos. 113 & 114 of 2019 29

comment can be offered in respect of this at this

stage.

 In Para 4.2 of page 16 of copy of notice give, it is

mentioned that the terms and conditions of

document shall be mutually agreed between

demerged and transferor company and holders

of preference shares which is a future event

whereas the details of the same should have

been given in the scheme itself. Even in the case

of M/s. Reliance Jio Infocomm Ltd. these

details are missing. It is also mentioned that

there will be no reduction in authorized share

capital of demerged/ transferor company

whereas what is relevant is reduction/ change

in the paid up capital and securities premium.

 The names of preference shareholders are not

made available. However, since M/s. Reliance

Jio Infocomm Ltd. is closely held company and

from plain reading of the scheme, it may be

assumed that the preference shareholders

would be closely related to the management or

the equity shareholders.

This assumption can be made from the

information that huge amount of securities

Company Appeal (AT) Nos. 113 & 114 of 2019 30

premium (Rs. 52,000 Cr.) is being converted

into loan in favour of these shareholders. In

this background, this part of scheme is

apparently designed to unduly favour the

preference shareholders. Further, the

decision to convert Preference Share to Loans

is detrimental to the Transferor Company (i.e.

M/s. Reliance Jio Infocomm Limited)

This would adversely affect the Income

Tax Department also because interest on

these converted loans would be claimed as

expenditure by the concerned companies and

the same would result in lesser taxable

profit."

32. In the said comments, the Income Tax Department also noticed the

note on the page 9 of the Scheme and made following comments:

"(vii) It is clear that all pending proceedings against

the Demerged Company shall be continued against

the Resulting Company. Therefore, the Scheme

should be without prejudice to the rights of the

Income Tax Department and the Income-tax

Company Appeal (AT) Nos. 113 & 114 of 2019 31

Department is free to proceed against the Resulting

Company for all its proceedings.

(viii) Apart from the above tax aspects of the

scheme, if it is discovered that this scheme or similar

such schemes are in any way acting further as a

device for tax-avoidance then the Department will be

at liberty to initiate the appropriate course of action

as per law.

(ix) The Income Tax Department will be free to

examine the aspect of any tax payable as a result of

the Scheme and in case it is found that the scheme

of Arrangement ultimately results in tax avoidance

or is not in accordance to the demerger provisions of

the Income Tax Act, then the Department will be at

liberty to initiate the appropriate course of action as

per law.

(x) It is further requested that the rights of the

Income Tax Department should remain intact to take

out appropriate proceedings regarding raising of any

tax demand against the demerged company at any

future date and these rights should not be adversely

affected in view of the sanction of the Scheme.

(xi) It is further being mentioned that, as per the

scheme of demerger the valuation of the assets and

Company Appeal (AT) Nos. 113 & 114 of 2019 32

liabilities in the case of M/s. Reliance Jio

Infocomm Limited shall be done on 31/03/2019.

Hence, it would be not possible to comment on the

valuation of the assets and liabilities at this point of

time."

33. Comments show that liberty was sought for to allow the Income

Tax Department to examine the aspect of any tax payable as a result of

the Scheme and in case it is found that the scheme of arrangement

ultimately results in tax avoidance or is not in accordance to the

demerger provisions of the Income Tax Act, then the Department will be

at liberty to initiate the appropriate course of action as per law.

34. However, in the end of comments, asking for such liberty, it was

observed that the Composite Scheme of arrangement amongst 'M/s.

Reliance Jio Infocomm Limited', 'M/s. Digital Fibre Pvt. Ltd.' and 'M/s.

Reliance Jio Infratel Pvt. Ltd.' and their respective shareholders and

creditors is giving undue favour to the shareholders of the company and

also the overall scheme of arrangement results into tax avoidance.

35. The Income Tax Department in one hand asked that it is entitled

to examine the aspect of any tax payable as a result of the Scheme and

the Scheme of Arrangement ultimately results in tax avoidance or not, on

the other hand, without any basis, it comes to a conclusion that the

Composite Scheme of Arrangement amongst the Petitioner Companies

Company Appeal (AT) Nos. 113 & 114 of 2019 33

and their shareholders and creditors is giving undue favour to the

shareholders of the company and also the overall scheme of arrangement

results into tax avoidance.

36. Without going to the record and without placing any evidence or

substantiate the allegation by appearing before the Tribunal, it was not

open to the Income Tax Department to hold that the Composite Scheme

of Arrangement amongst the Petitioner Companies and their respective

shareholders and creditors is giving undue favour to the shareholders of

the company and also the overall scheme of arrangement results into tax

avoidance.

37. The Income Tax Department, which sought for liberty, while

accepted by the Petitioner Companies (Respondents herein) and the

Tribunal while approving the Composite Scheme of Arrangement has

granted liberty. Such liberty to the Income Tax Department to enquire

into the matter, if any part of the Composite Scheme of Arrangement

amounts to tax avoidance or is against the provisions of the Income Tax

and is to let it take appropriate steps if so required.

38. Mere fact that a Scheme may result in reduction of tax liability does

not furnish a basis for challenging the validity of the same. In the Division

Bench of the Hon'ble Gujarat High Court in "Vodafone Essar Gujarat

Ltd. v. Department of Income Tax (2013) 176 Com Cas 7 (Guj)" while

rejecting the similar objection of the Income Tax Department held:

Company Appeal (AT) Nos. 113 & 114 of 2019 34

"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

Company Appeal (AT) Nos. 113 & 114 of 2019 35

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

Company Appeal (AT) Nos. 113 & 114 of 2019 36

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

Company Appeal (AT) Nos. 113 & 114 of 2019 37

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

Company Appeal (AT) Nos. 113 & 114 of 2019 38

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

Company Appeal (AT) Nos. 113 & 114 of 2019 39

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,

Company Appeal (AT) Nos. 113 & 114 of 2019 40

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

CGP share was not adequate in itself to achieve the

object of consummating the transaction between

HTIL (a group holding overseas company of which

Company Appeal (AT) Nos. 113 & 114 of 2019 41

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

Company Appeal (AT) Nos. 113 & 114 of 2019 42

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

Company Appeal (AT) Nos. 113 & 114 of 2019 43

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

Company Appeal (AT) Nos. 113 & 114 of 2019 44

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,

Company Appeal (AT) Nos. 113 & 114 of 2019 45

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

Company Appeal (AT) Nos. 113 & 114 of 2019 46

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

Company Appeal (AT) Nos. 113 & 114 of 2019 47

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

Company Appeal (AT) Nos. 113 & 114 of 2019 48

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

Company Appeal (AT) Nos. 113 & 114 of 2019 49

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

Company Appeal (AT) Nos. 113 & 114 of 2019 50

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)

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,

Company Appeal (AT) Nos. 113 & 114 of 2019 51

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.

Company Appeal (AT) Nos. 113 & 114 of 2019 52

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

Company Appeal (AT) Nos. 113 & 114 of 2019 53

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

Company Appeal (AT) Nos. 113 & 114 of 2019 54

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."

xxx xxx xxx

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

Company Appeal (AT) Nos. 113 & 114 of 2019 55

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."

39. The aforesaid decision of the Hon'ble Gujarat High Court in

"Vodafone Essar Gujarat Ltd." (Supra) was affirmed by the Hon'ble

Supreme Court in "Department of Income Tax v. Vodafone Essar

Gujarat Limited ─ (2015) 16 SCC 629" wherein the Hon'ble Supreme

Court observed:

"2. We are not inclined to entertain the special

leave petitions. The special leave petitions are,

accordingly, dismissed. We only state that the

Company Appeal (AT) Nos. 113 & 114 of 2019 56

Income Tax Department is entitled to take out

appropriate proceedings for recovery of any tax

statutorily due from the transferor or transferee

company or any other person who is liable for

payment of such tax due."

40. The case of the Appellant(s) is covered by the decision of the Hon'ble

Supreme Court in "Department of Income Tax v. Vodafone Essar

Gujarat Limited and Another" (Supra) and in view of the liberty given

to the Income Tax Department, we are not inclined to interfere with the

Scheme of Arrangement as approved by the Tribunal.

Both the appeals are dismissed. No costs.

(Justice S.J. Mukhopadhaya) Chairperson

(Justice A.I.S. Cheema) Member(Judicial)

(Kanthi Narahari) Member(Technical) NEW DELHI 20th December, 2019

AR

Company Appeal (AT) Nos. 113 & 114 of 2019