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 the Composite Scheme of Arrangement - dispensation of the meeting of Equity Shareholders of the Petitioner Company No.2 and the Petitioner Company No.3 - main thrust of the argument was that by scheme of arrangement, the transferor company has sought to convert the redeemable preference shares into loans i.e. conversion of equity into debt which is not only contrary to the well settled principles of company law as well as Section 55 of the Companies Act, 2013 but also would reduce the profitability or the net total income of the transferor company causing a huge loss of revenue to the Income Tax Department. HELD THAT:- The case of the Appellant(s) is covered by the decision of the Hon'ble Supreme Court in 'Department of Income Tax v. Vodafone Essar Gujarat Limited and Another' [2012 (9) TMI 100 - GUJARAT HIGH COURT] where it was held that Appeal 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.