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Issues: Whether the composite scheme of arrangement in the nature of demerger and transfer of undertakings should be sanctioned despite objections that it did not satisfy the definition of demerger under the Income-tax Act, 1961 and that it was designed to avoid stamp duty.
Analysis: The scheme was proposed under Sections 391 and 394 of the Companies Act, 1956 and had already been approved unanimously by the concerned shareholders and creditors. The objection based on Section 2(19AA) of the Income-tax Act, 1961 was held not to be a bar to sanction under the Companies Act, because that provision governs tax neutrality and eligibility for tax benefits, while the Court dealing with a scheme of arrangement is concerned with whether the undertaking can be transferred as a going concern and whether the arrangement is lawful and fair. The objection regarding stamp duty was also addressed by the petitioners' undertaking that duty would be paid in accordance with law, and the Court noted that issues relating to assessment and recovery under the stamp law could be examined by the competent authorities at the appropriate stage.
Conclusion: The objections raised by the Regional Director were rejected and the scheme of arrangement was sanctioned.
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