2010 (12) TMI 1056 - HC - Income Tax

Court dismisses scheme of arrangement petition under Companies Act due to tax evasion concerns and lack of creditor approval.

Vodafone Essar Gujarat Ltd., In re

The court dismissed the petition seeking sanction for a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956, due to lack of ... Scheme of arrangement under sections 391 to 394 - scheme is nothing but a composite agreement between concerned parties to transfer the passive infrastructure assets without consideration by the transferor company to the transferee company – Held that:- Transaction may be held to be void under section 281 of the Income-tax Act and if it is so, the court will not exercise its jurisdiction, if any, to sanction a transaction which is pointed out to be void under law – entire tax payable on the market value of the assets to be transferred to Indus is sought to be evaded by the present scheme - stamp duty is sought to be evaded - 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 – Scheme cannot be sanctioned Issues Involved:1. Sanction of the scheme of arrangement under sections 391 to 394 of the Companies Act, 1956.2. Objections by the Income-tax Department.3. Validity of the scheme as a demerger.4. Compliance with statutory requirements and creditors' rights.5. Alleged tax evasion and public interest.Detailed Analysis:1. Sanction of the Scheme of Arrangement:The petitioner-company sought the court's sanction for a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956, which involved the transfer of passive infrastructure assets to Vodafone Essar Infrastructure Ltd., the transferee company. The board of directors of both the petitioner and transferee companies approved the scheme in 2007, with modifications in 2008.2. Objections by the Income-tax Department:The Income-tax Department raised significant objections, arguing that the scheme was designed to evade taxes and was against public interest. They highlighted pending tax demands totaling approximately Rs. 327 crores and argued that the scheme aimed to dilute the assets available for tax recovery. They contended that the scheme was not a legitimate arrangement or compromise under section 391, as it involved the transfer of assets without consideration, which they claimed was ultra vires and not a valid contract.3. Validity of the Scheme as a Demerger:The court examined whether the scheme qualified as a demerger under section 391. The petitioner argued that the scheme was a restructuring of assets within the Vodafone Essar group, involving no external entities. The court, however, found that the scheme did not meet the criteria for a demerger, as it did not involve the same persons carrying on the same business. The passive infrastructure assets were to be transferred to a different entity, Indus Towers Ltd., which was not a continuation of the petitioner's business.4. Compliance with Statutory Requirements and Creditors' Rights:The court noted that the scheme did not involve any consideration for the transfer of assets, which contradicted the requirements for an arrangement under section 391. Furthermore, the scheme was not approved by the statutory majority of creditors, whose rights were significantly affected by the transfer of substantial assets without consideration. The court emphasized that the scheme failed to meet the jurisdictional requirements of section 391 due to the lack of creditors' approval.5. Alleged Tax Evasion and Public Interest:The court found merit in the objections raised by the Income-tax Department, concluding that the scheme was designed to evade taxes, including income tax, stamp duty, and VAT. The court highlighted that the petitioner-company's argument of the scheme being a gift for tax purposes was inconsistent with its claim of consideration for company law purposes. The court also noted that the scheme would result in double deductions and artificially reduced taxable profits, which would adversely affect the revenue.Conclusion:The court dismissed the petition, refusing to sanction the scheme of arrangement on the grounds that it was not a legitimate arrangement under section 391, failed to secure the requisite approval from creditors, and was primarily designed to evade taxes. The court also suspended the order for two weeks to allow the petitioner to approach a higher forum.