Demerger scheme interpretation: common assets need not all transfer if the resulting undertaking can function independently.

A sanctioned demerger scheme must be read as a whole, and Section 2(19AA) of the Income-tax Act does not require transfer of every common asset or liability to the resulting company. The relevant enquiry is whether the transferred assets are sufficient for the undertaking to function independently as a going concern. Section 392(1)(b) of the Companies Act permits modification only to secure proper working of the scheme, not to rewrite the substantive allocation of assets or import a broader transfer obligation than the scheme itself provides. The commentary also notes that where common assets are retained under the scheme and acted upon by the parties, that allocation remains effective, subject only to limited procedural modification where necessary.

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Issues: Whether, in an application for modification of a sanctioned scheme under Section 392(1)(b) of the Companies Act, 1956, the Court could treat Section 2(19AA) of the Income-tax Act, 1961 as requiring transfer of all common assets, including the housing colony and utilities, to the resulting company, and whether the scheme could be modified to the extent necessary for its proper working.

Analysis: The scheme had to be construed as a whole and not by isolating the clause referring to Section 2(19AA) of the Income-tax Act, 1961. The definition of demerger requires transfer of the undertaking on a going-concern basis, but it does not compel transfer of every common asset or liability. The essential enquiry is whether the assets transferred are sufficient to enable the resulting undertaking to function independently as a business. The Court found that the housing colony and common utilities had been specifically retained by the transferor company under the sanctioned scheme, and that the parties had acted on that basis. It further held that Section 392(1)(b) permits modification only for the proper working of the scheme and does not authorise rewriting the arrangement or importing a broader transfer requirement than what the scheme itself provided.

Conclusion: The applicant's contention that all common assets and the housing colony must stand transferred to the resulting company was rejected. The scheme remained valid as sanctioned, and only the dispute-resolution clause was modified by requiring appointment of a sole arbitrator by consent or, failing consensus, by the concerned court.

Final Conclusion: The application was disposed of after a limited modification to the arbitration mechanism, while the substantive challenge to the scheme of demerger and the claim for transfer of the disputed assets was not accepted.

Ratio Decidendi: A sanctioned scheme of demerger must be read as a whole, and Section 2(19AA) of the Income-tax Act, 1961 does not require transfer of every asset or liability; under Section 392(1)(b) of the Companies Act, 1956, the Court may modify a scheme only to secure its proper working and cannot rewrite its substantive allocation of assets.

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