2019 (12) TMI 1043 - AT - Companies Law

Tribunal Upholds Scheme, Protects Tax Department Rights

The Tribunal dismissed the appeals, upholding the sanction of the scheme while safeguarding the Income Tax Department's rights to investigate and act on ... Sanction of scheme of arrangement under the Companies Act - liberty of the Income Tax Department to examine tax consequences and initiate proceedings - conversion of preference shares into loans and its tax implications - tax planning versus tax avoidance - competence of Company Bench/Regional Director/Registrar of Companies to consider corporate law complianceSanction of scheme of arrangement under the Companies Act - role of the Tribunal in considering objections of revenue - Validity of the Tribunal's sanction of the Composite Scheme despite representations of the Income Tax Department - HELD THAT: - The Tribunal recorded the Income Tax Department's representations, considered the petitioners' affidavits and Chairpersons' reports of meetings, and expressly preserved the Department's right to examine tax consequences and to initiate proceedings if it found tax avoidance. The Court held that the Tribunal did not err in granting sanction as the statutory procedure, meetings and requisite approvals were complied with and the Tribunal granted the specific directions and liberty sought by the Department. The Court applied established principles that a sanctioning court must ensure compliance with statutory procedure and ensure scheme is not violative of law, but it need not substitute its commercial judgment for that of the shareholders or creditors where the statutory requirements are satisfied. (See findings recorded by Tribunal and Court at paras 15 and 21 and conclusions at paras 40-41.) [Paras 15, 21, 40, 41]Tribunal's sanction of the Composite Scheme is upheld and the appeals challenging sanction are dismissed.Conversion of preference shares into loans and its tax implications - competence of Regional Director and Registrar of Companies to examine corporate law compliance - Whether the question of conversion/cancellation of preference shares contrary to company law (including Section 55-related concerns) was a matter for the Income Tax Department to determine at the threshold - HELD THAT: - The Court held that objections concerning compliance with company law (including matters touching issue/redemption/cancellation of preference shares) are primarily for the competent corporate authorities such as the Regional Director and Registrar of Companies to notice and consider. The Income Tax Department may make representations and seek liberty to examine tax consequences, but it is not the forum to decide at the threshold whether Clause B(iv) contravenes company law; such corporate-law compliance issues fall within the remit of the corporate regulators and the Tribunal's supervisory role. (The Tribunal took note of Regional Director's observations and the petitioners' responses; see paras 27-29, 13.6 and related findings.) [Paras 13, 27, 29]Issues of corporate-law compliance regarding cancellation/conversion of preference shares are not matters the Income Tax Department could preclude the Tribunal from sanctioning; the competent corporate authorities must be allowed to examine those aspects.Liberty of the Income Tax Department to examine tax consequences and initiate proceedings - tax planning versus tax avoidance - Whether sanctioning the Scheme would bar the Income Tax Department from examining tax consequences or initiating proceedings for alleged tax avoidance - HELD THAT: - The Tribunal expressly recorded and the petitioners affirmed that sanctioning the Scheme would not affect the Income Tax Department's rights. The Court reiterated that mere reduction in tax liability or legitimate tax planning does not invalidate a scheme and that, where the revenue suspects tax avoidance, it is entitled to examine and, if appropriate, initiate proceedings. Reliance was placed on precedent holding that the revenue's right to recover tax remains intact notwithstanding court sanction of corporate rearrangements. The Court therefore preserved the Department's liberty to investigate and proceed under tax law if it concludes the Scheme effects tax avoidance. (See Tribunal's direction at para 21 and Court's adoption at paras 15 and 40.) [Paras 15, 21, 40]Sanction of the Scheme does not prejudice the Income Tax Department's right to examine tax consequences or to initiate appropriate proceedings for recovery if tax avoidance or violation of tax law is found.Tax planning versus tax avoidance - standards for refusing sanction on grounds of tax avoidance - Whether alleged tax-avoidance motive or the possibility of reduced tax liability is a sufficient ground to refuse sanction of the Scheme - HELD THAT: - The Court applied established authority that a scheme is not to be refused merely because it may have the effect of reducing tax liability; tax planning within law is permissible. The Court observed that the Income Tax Department's statements sought a liberty to examine and proceed rather than a categorical demonstration that the Scheme was a colourable device; absent evidence or substantiation before the Tribunal that the Scheme was a sham or contravened law, mere apprehensions of tax loss do not justify withholding sanction. Precedents were relied upon for the proposition that sanctioning courts should not substitute their view for commercial wisdom where statutory formalities and requisite approvals are met. (See reasoning drawing on paras discussing Vodafone authorities and paras 34-40.) [Paras 34, 36, 38, 39]Allegations that the Scheme results in tax avoidance or merely reduces tax liability do not, without substantiation, warrant denial of sanction.Final Conclusion: The National Company Law Tribunal's sanction of the Composite Scheme is sustained; corporate-law compliance issues remain for the appropriate corporate regulators and the Income Tax Department retains liberty to examine tax consequences and initiate proceedings if it finds tax avoidance, and therefore the appeals are dismissed. Issues Involved:1. Dispensation of Shareholder Meetings2. Objections by Income Tax Department3. Conversion of Preference Shares to Loans4. Tax Avoidance Allegations5. Compliance with Section 2(19AA) of the Income Tax Act6. Rights of Income Tax Department Post-Scheme SanctionDetailed Analysis:1. Dispensation of Shareholder Meetings:The Petitioner Companies sought the dispensation of meetings for Equity Shareholders of Petitioner Company No.2 and Petitioner Company No.3, while directing meetings for Secured Creditors, Unsecured Creditors, Preference Shareholders, and Equity Shareholders of Petitioner Company No.1. The Tribunal, by order dated 11th January 2019, approved this request.2. Objections by Income Tax Department:The Income Tax Department raised objections, stating that the Tribunal did not adjudicate on their objections before sanctioning the composite scheme. The primary concern was the conversion of preference shares into loans, which they argued would reduce the profitability of the Demerged Company and act as a tool for tax avoidance.3. Conversion of Preference Shares to Loans:The scheme proposed the cancellation of preference shares and conversion into loans, which the Income Tax Department argued would reduce the profitability and evade taxes. They contended that this conversion is contrary to the principles of company law and Section 55 of the Companies Act, 2013. The Tribunal noted that the objections related to Section 55 were not for the Income Tax Department to determine but for the Competent Authorities like the Regional Director and Registrar of Companies.4. Tax Avoidance Allegations:The Department alleged that the scheme would reduce the payment of dividend distribution tax and was a method of tax planning to avoid taxes. They argued that converting equity into debt would reduce the company’s taxable income, leading to a loss of revenue. The Tribunal observed that the Income Tax Department could examine any tax payable as a result of the scheme and initiate appropriate action if it resulted in tax avoidance.5. Compliance with Section 2(19AA) of the Income Tax Act:The Department argued that the scheme did not fulfill the requirements of Section 2(19AA), which defines ‘demerger.’ They contended that the transfer of the undertaking on a going concern basis was not evident from the balance sheet and profit and loss account of 'Reliance Jio Infocomm Limited.' The Tribunal noted that the Petitioner Companies affirmed compliance with Section 2(19AA) and that the scheme was a composite one.6. Rights of Income Tax Department Post-Scheme Sanction:The Tribunal clarified that the Income Tax Department would be free to examine any tax payable as a result of the scheme and take appropriate action if it resulted in tax avoidance. The Tribunal emphasized that the mere fact that a scheme may result in a reduction of tax liability does not furnish a basis for challenging its validity. The Tribunal granted liberty to the Income Tax Department to initiate appropriate proceedings if the scheme resulted in tax avoidance or violated Income Tax provisions.Conclusion:The Tribunal dismissed the appeals, affirming that the scheme was sanctioned while protecting the rights of the Income Tax Department to examine and take action on any tax implications. The Tribunal relied on precedents, including the Hon’ble Supreme Court’s decision in 'Department of Income Tax v. Vodafone Essar Gujarat Limited,' which upheld the validity of schemes even if they resulted in tax benefits, provided they complied with the law. The Tribunal concluded that the scheme was not solely for tax avoidance and was in the commercial interest of the companies involved.