Illegal gifting of company shares as dividends violates Companies Act & Income Tax Act

The Court held that the scheme involving the gifting of shares of a company to its shareholders violated Section 123 of the Companies Act, 2013, as it amounted to payment of dividend in kind, which is prohibited. Additionally, the scheme was found to contravene Section 281 of the Income Tax Act, 1961, as it could hinder tax claims against the petitioner. Consequently, the Court deemed the scheme illegal and dismissed the Company Scheme Petition, emphasizing the importance of compliance with all legal provisions in schemes of arrangement.

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Issues Involved:
1. Violation of Section 205 of the Companies Act, 1956 and Section 123 of the Companies Act, 2013.
2. Violation of Section 281 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Violation of Section 205 of the Companies Act, 1956 and Section 123 of the Companies Act, 2013:

The Petitioner sought the Court's sanction for a scheme of arrangement involving the gifting of shares of Taneja Aerospace and Aviation Limited (TAAL) to its shareholders. The Regional Director objected, arguing that this scheme constituted payment of dividend in kind, which is prohibited under Section 123 of the Companies Act, 2013. The Petitioner contended that Sections 391 to 394 of the Companies Act, 1956 provided a complete code for such schemes, allowing for wide-ranging arrangements including the distribution of shares. The Court, however, held that any scheme under Sections 391 to 394 must comply with all laws, including Section 123 of the Companies Act, 2013, which mandates that dividends must be paid in cash and not in kind. The Court referenced the Supreme Court's rulings in Kantilal Manilal and Central India Industries, which established that dividends could include distributions of property or rights with monetary value. Consequently, the Court concluded that the gifting of TAAL shares amounted to payment of dividend and violated Section 123 of the Companies Act, 2013.

2. Violation of Section 281 of the Income Tax Act, 1961:

The Income Tax Department objected to the scheme, citing pending assessment and penalty proceedings against the Petitioner and outstanding tax demands. Under Section 281 of the Income Tax Act, any transfer of assets during the pendency of tax proceedings is void against any tax claims unless made for adequate consideration or with prior permission from the Assessing Officer. The Petitioner argued that it had sufficient assets to cover any potential tax liabilities. However, the Court held that Section 281(1) does not provide exceptions based on the sufficiency of assets. The Court noted that allowing the transfer of TAAL shares could result in these shares being unavailable to satisfy future tax claims, thereby defeating the purpose of Section 281(1). The Court emphasized that an assessee's right to arrange its affairs to avoid tax does not extend to defeating statutory provisions like Section 281.

Conclusion:

The Court found the scheme to be in violation of both Section 123 of the Companies Act, 2013, and Section 281 of the Income Tax Act, 1961. Consequently, the scheme was deemed illegal and contrary to law, leading to the dismissal of the Company Scheme Petition. The Court's order emphasized the necessity for schemes of arrangement to comply with all relevant legal provisions and not contravene statutory requirements.

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