JUDGEMENT :-
V.RAMASUBRAMANIAN, J.
1 This is a petition filed by a Private Limited company, seeking sanction of a Scheme of arrangement under Sections 391 and 394 of the companies Act, 1956.
2 Heard Mr. V. Venkadasalam, learned counsel for the petitioner, Mr. M. Jayakumar, learned Deputy Official Liquidator and Mr. V. Parivallal, learned senior Central Government standing counsel.
3 The petitioner is a Private Limited Company, having an authorised share capital of Rs.1 crore divided into 1 lakh shares of Rs.100/-each and a paid up capital of Rs.84 lakhs divided into 84,000 equity shares of Rs.100/-each. There are only 4 shareholders and the company has no secured creditors. There has been no activity in the company for the past 7 years. Therefore, they proposed a scheme of arrangement, by which it was decided to dissolve the company without winding up and to have the only immovable property owned by the company divided among the 4 shareholders.
4 The Memorandum and Articles of Association of the Company, the balance sheet as on 31.3.2008, the proposed scheme of arrangement, the Board Resolution, the list of shareholders as certified by the Auditors, Certificate of the Auditor confirming that there are no secured creditors and the consent affidavits of the shareholders, are filed as Annexures A, b, C, D, E, F and G.
5 On 30.1.2009, notices were ordered by this Court and a Chartered Accountant was appointed to scrutinise the books and to file a report. Accordingly, notices were issued and published and the Chartered Accountant carried out the scrutiny. Thereafter, the Official liquidator filed a report, enclosing the report of the Auditor, certifying that they did not come across any act of misfeasance on the part of the Directors and that the affairs of the Company were not conducted in a manner prejudicial to the interest of its members or to public interest. Based upon the said report, the Official Liquidator has stated that there is no other material to come to any adverse conclusion.
6 However, the Regional Director, Ministry of Corporate Affairs, filed a report to the effect that the proposal contained in the scheme to have the immovable property of the Company divided among the shareholders, would virtually amount to return of capital and that such return of capital is not possible except when a voluntary liquidation procedure is followed. The Regional Director has also expressed a view that the sanction to the scheme would result in the shareholders avoiding capital gains tax, which the company would have otherwise become obliged to pay, on account of appreciation in the value of the assets. Such division, according to the Regional Director, would also result in the reduction of share capital. The Regional Director has further stated that the object of the scheme between the company and its shareholders is to transfer the immovable property to the respective shareholders in proportion to their shareholding and to dissolve the company under the orders of the court without winding up and that since it is not a case of Amalgamation, the dissolution is not possible under Sec.391/394 of the companies Act.
7 I have carefully considered the remarks made by the Regional Director. The first remark, relates to the avoidance of the incidence of capital gains tax. But the learned counsel for the petitioner relied upon a decision, in which an identical objection was overruled by the calcutta High Court in A. W. Figgis and Co. Pvt. Ltd In re and Queens Park Property Co. Pvt. Ltd. In re, (1980) 50 Comp. Cases 95. It was contended on behalf of the Regional Director in that case that the scheme was propounded solely for the purpose of evading capital gains tax and stamp duty, by circumventing the process of execution of a regular deed of conveyance. Citing the decisions of the Supreme court in CIT V/s. A. Raman and Co. AIR 1968 SC 49 and CIT V/s. Calcutta Discount Co. Ltd AIR 1974 SC 13 58: (1974) 3 SCC 260, the Calcutta high Court observed that a person is entitled to so arrange his affairs as to minimise his tax burden and that legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented. The decision in A. W. Figgis and Co. Pvt. Ltd In re and Queens Park Property Co. Pvt. Ltd. In re (supra) was followed in W. H. Targett and Co. Ltd V/s. Wall Street Investment P. Ltd (1986) 59 comp. Cases 335 (Cal ).
8 However, in Wood Polymer Ltd. , Re (1977) 47 Comp. Cases 597, D. A. Desai, J. of the Gujarat High Court noticed that when a scheme of Amalgamation, whose sole object was to facilitate the transfer of an immovable property without any liability to pay capital gains tax, is presented, the Court may have to examine whether it would be against public interest, as envisaged in the Second Proviso to section 394 (1 ). In the said judgment, the gujarat High Court held as follows:
"it must be confessed that it is open to a party to so arrange its affairs so as to reduce its tax liability. The assessee or party can arrange its affairs so that he or it may not incur any tax liability. But it must be within the power of the party to arrange its affairs. If the party seeks assistance of the Court only to reduce tax liability, the Court should be the last instrument to grant such assistance or judicial process to defeat a tax liability, or even to avoid tax liability. If the party has so arranged its affairs, as to reduce or even avoid tax liability and the taxing authority disputes it, and the matter is brought before the Court, the Court would adjudicate upon the dispute between the revenue and the assessee on the rival contentions. That is not the situation here. In such a situation, the court would not be concerned as to the modality of avoidance of tax but here the tax cannot be avoided unless the Court lends its assistance, namely, by sanctioning the scheme of Amalgamation. In other words, the judicial process is used or polluted to defeat the tax by forming an appropriate device or subterfuge. Such a situation can never be said to be in public interest. It is clearly opposed to public interest and on this ground the Court would not sanction the Scheme of Amalgamation."
so holding, D. A. Desai, J. , rejected the scheme of amalgamation in that case. The said view was quoted with approval by a Division bench of the Gujarat High Court in
Union of india V/s. Ambalal Sarabhai Enterprises
Ltd.1984 (55) Comp. Cases 623, though the Division Bench held in that case on facts that the object of the scheme before them was not to defeat tax.
9 In Kriti Plastics Pvt. Ltd. , Re (1993) 78 comp. Cases 138, Qureshi, J. , of the Madhya pradesh High Court, after referring to a decision of D. A. Desai, J. , in Wood Polymer Ltd. , re (supra), held as follows:
"if the Court finds that the amalgamation scheme has been made solely to facilitate the transfer of a building to the transferee company of a transferor company without attracting the liability to pay capital gains tax, the Court can refuse to sanction the scheme, because if such a scheme is approved, the scheme of amalgamation would result in the avoidance of payment of capital gains tax. If the Court arrives at a conclusion that the purpose of amalgamation is defeating tax by creating a paper company and transferring on asset to such company which can without consequence be amalgamated with another company to whom the capital asset was to be transferred so that on amalgamation, it may pass on to the amalgamating company, it would distinctly appear that the provision for such a scheme of amalgamation was utilised for the avowed object of defeating tax. The Court has emphasised that a company may arrange its affairs in such a way that under the law, it may be exempt from a tax, but that is permissible only if it is done without the aid of the Court. However, if the indulgence of the Court is sought, then the Court cannot allow the avoidance of tax by approving the amalgamation scheme and the public interest enjoins upon the Court to find out why the transferee company came into existence and can go into the details of the affairs of the transferor and transferee companies. The machinery of judicial process cannot be pressed into service for defeating the public interest and the Court would not lend its assistance for that purpose."
ultimately, the Madhya Pradesh High court approved the Scheme of Amalgamation, in Kriti Plastics Pvt. Ltd. , (supra) case, subject to the following conditions: (a) that the approval of the Scheme would not in any way dispense with the formality of execution of any instrument of conveyance for effectively vesting the property; (b) that if as a result of the transfer of any assets, a liability to pay capital gains tax arises, the order sanctioning the Scheme would not absolve any person from payment of such taxes. The above decision was followed in nilnita Chemicals Ltd. , Re, (
1997)3 Comp. LJ 101 (MP), where also a scheme of amalgamation was sanctioned subject to the very same conditions laid down in Kriti Plastics Pvt. Ltd (supra) case.
10 Therefore, it is not necessary to withhold sanction for a scheme of arrangement, on the sole ground that it may lead to avoidance of capital gains tax. The order sanctioning the scheme itself, if necessary, can provide for any contingency. It is needless to point out that the liability to pay capital gains tax, even if there is any, would arise, only after the scheme is sanctioned. No liability to pay capital gains tax would arise, even before any transfer takes place. Therefore, after the scheme is sanctioned, it would be a matter for the Income Tax department to see if it was a case attracting capital gains tax. I cannot presume at this stage, what would happen after the scheme is sanctioned, while considering the question whether it is within the parameters laid down.
11 In Trackparts of India Ltd V/s. K. N. Bhargava and Others (2000) 4 Comp. L. J.310, a Division Bench of the Allahabad High court, pointed out in paragraph-45 that the concept of division of assets is not unknown to corporate jurisprudence. By referring to Sec.293, which provides for sale, lease or disposal otherwise, of the undertaking of a Company, the Allahabad High Court held that the division of assets may also be ordered under section 391 while sanctioning a scheme of compromise or arrangement. Therefore, the objection that an arrangement resulting in the division of assets, is not permissible under section 391, does not appear to be valid.
12 The next objection that the division of assets would amount to return of capital, resulting in reduction of capital, is answered by a division Bench of this Court in T. Durairajan v. Waterfall Estates Ltd. (1972) 42 Comp. Cases 563. The Division Bench held in that case that it is not every extinguishment of shares that would lead to reduction in capital, unless the company continued to exist. It was pointed out that where, by the process of arrangement, the company itself is dissolved without winding up, it is hardly a case of reduction in capital.
13 The next objection namely that the sanction to the scheme would result in transfer of immovable property and that therefore necessary stamp duty is to be paid, is not actually an objection to the very sanctioning of the scheme. It is a point which the Regional Director wants this Court to take note of. Let me now see, how this aspect could be taken care of.
14 It appears that the Bombay stamp Act, 1958, was amended by act no.17 of 1993, to include every order of the Company Court passed under Sec.394 of the Companies act, 1956, in respect of Amalgamation of companies, within the meaning of the word "conveyance" under Sec.2 (g ). The amendment came under challenge before the apex Court in Hindustan Lever V/s. State of maharashtra (2004) 1 Comp. LJ 148. Two issues arose for the consideration of the Supreme Court, as seen from paragraph-8 of the judgment. They were (i) whether the State legislature had the Legislative competence to impose stamp duty on the order of Amalgamation passed by a Court? and (ii) whether an order sanctioning a scheme under Sec.394 read with Sec.391 is liable to be stamped in accordance with the provisions of the Bombay stamp Act, in its application in the State of maharashtra?.
15 While dealing with the above issues, the Supreme Court held in paragraph-9 that "the transfer has all the trappings of a sale" and that "the transfer is effected by an order of the court. " After holding so and after referring to the broad contours of the jurisdiction of the company Court in granting sanction to a scheme, laid down by the Apex Court in miheer H. Mafatlal V/s. Mafatlal Industries Ltd air 1997 SC 506 : (1997) 1 SCC 579, the apex Court held in paragraph-15 that by virtue of the provisions of Sections 391 (3) and 394 (3) of the Companies Act, the scheme of amalgamation sanctioned by the Court would be an "instrument" within the meaning of Sec.2 (1) of the Bombay Stamp Act, 1958. The court also held that by the said instrument, the properties are transferred from the transferor company to the transferee company, the basis of which is the compromise or arrangement arrived at between two companies (or between the company and its shareholders/creditors ). The Supreme Court further pointed out in paragraph-19 that by virtue of Sec.2 (m) of the Indian stamp Act, 1899, even a final order effecting partition by any Court, Revenue Authority or award made by the Arbitrator, directing partition, would be an instrument of partition. Citing with approval, the decision of the Chancery Division in Sun Alliance Industries Ltd V/s. I. R. C. (1971) 1 All ER 135 and also referring to the clauses contained in Form No.42 under Rule 84 of the Companies (Court)Rules 1959, the Supreme Court held that a transfer of assets and liabilities takes place by an order of the Court and that it is an instrument which transfers the properties, which would fall within the definition of Sec.2 (1) of the Bombay Stamp Act, 1958.
16 Though there is no parallel legislation in Tamil Nadu, to compare with the Bombay stamp Act, 1958, the State of Tamil Nadu has effected amendments from time to time, in the Indian stamp Act, 1899, in its application to the State of Tamil Nadu. Sec.2 (10) of the Indian stamp Act, 1899, defines "conveyance"-"to include a conveyance on sale and every instrument by which property, whether movable or immovable is transferred inter vivos and which is not otherwise specifically provided for by Schedule I. " similarly, Sec.2 (14) defines "instrument"-"to include every document by which any right or liability is or purports to be created, transferred, limited, extended, extinguished or recorded" section 2 (15) defines "instrument of partition" to mean-"any instrument whereby co-owners of any property divide or agree to divide such property in severalty and includes also a final order for effecting a partition passed by any revenue authority or any Civil Court and an award by an Arbitrator directing partition. " article 45 of Schedule I to the Indian stamp Act, 1899, deals with the stamp duty payable on instruments of partition. By virtue of Tamil nadu Amendment Act 31 of 2004, an instrument of partition among family members, covered by Article 45 (a) is chargeable to duty at re.1/- for every Rs.100/- or part thereof, on the market value of the property, subject to a maximum of Rs.10,000/- per share. But, the instruments of partition among persons other than family members, are chargeable under article 45 (b) to the same duty as that of bottomry Bonds. Clause (c) in the second column as against Article 45 (b), makes a reference to a partition effected by a final order passed by a Revenue Authority or any Civil court or an award by an Arbitrator directing partition. Article 46-B deals with an instrument of dissolution of partnership, which involves partition of immovable properties of the firm, among the partners, who are not family members and who are family members under Clauses (i) and (ii) respectively.
17 Therefore, the decision of the Supreme court in Hindustan Lever V/s. State of maharashtra (supra), though made with specific reference to Sec.2 (g) (iv) of the Bombay stamp Act, 1958, was rendered after taking note of two things viz. ,
(i) the definition of the words "instrument" and "instrument of partition" under the Indian stamp Act, 1899 and (ii) the fact that by virtue of Sec.394 (2)of the Companies Act, 1956 read with Form 42 under Rule 84 of the Companies (Courts)Rules 1959, a transfer of assets and liabilities takes effect by an order sanctioning a scheme of arrangement.
18 Therefore, prima facie , it appears that the above decision of the Apex Court may apply to the present case. But, on a closer scrutiny of the decision of the Supreme Court in hindustan Lever, it will be clear that we have not yet reached the stage where the question of payment of stamp duty would arise. We are at the threshold in this case, at the stage of deciding whether the scheme of arrangement can be sanctioned or not. In Hindustan Lever, a scheme of amalgamation of Tata Oil Mills Co. Ltd. , (transferor) with Hindustan Lever Ltd. V. State of Maharashtra (transferee) was sanctioned by a single Judge of the Bombay High court, with certain modifications. The same was confirmed by the Division Bench and later by the Supreme Court. The certified copy of the Court's order of amalgamation was presented to the Registrar of Companies, maharashtra, who issued a Certificate amalgamating both companies. Later, stamp duty was sought to be levied on the order of amalgamation, in view of the amended definition of the word "conveyance" under Sec.2 (g) of the Bombay Stamp Act, 1958. Hence, hindustan Lever challenged the validity of the amendment to the bombay stamp act and such challenge landed up in the Supreme court in the aforesaid decision. Therefore, it was not a case which arose, even at the stage of consideration of the scheme of amalgamation. Hence, I am of the view that the question of stamp duty need not deter this Court from considering the scheme of arrangement, in the light of the 9 principles laid down in Miheer H. Mafatlal V/s. Mafatlal Industries Ltd. (supra ).
19 On a consideration of the scheme of arrangement proposed, I find that all the requisite statutory procedure has been complied with and the requisite meetings have been held. The scheme has the support of all the 4 shareholders. There are no secured creditors. The scheme is not found to be violative of any law or contrary to public policy. It also appears to be just, fair and reasonable. Therefore, there is no impediment for sanctioning the scheme, subject to the same kind of observations made by the Madhya Pradesh High Court in Nilnita chemicals Ltd. (supra)
20 Accordingly, the petition is ordered and the scheme of arrangement as proposed, is sanctioned, subject to the following observations:
(i) This order shall not be construed as a decision on the question of liability or otherwise of the company or of its Directors/members, under the Income Tax Act, for payment of any tax, including capital gains tax. (ii) This order shall not also be construed as exempting the petitioner or its members, from liability to pay stamp duty, if any. (iii) Subject to the above, the petitioner-Company shall stand dissolved without being wound up. The Additional Central Government Standing counsel's fee of Rs.2,500/-shall be paid by the petitioner. Ordered accordingly.