TaxTMI 
TaxTMI 
2007 (10) TMI 403
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....r business units were opened and controlled by the Doshi family. Harilal Doshi died on 22-11-1980 leaving behind his five sons. It appears that after the death of Harilal, there were disputes in the family essentially about control and management of the business. Therefore, a family arrangement was formulated and it was decided to spin off Kanjur Division from the Echjay Industries and to give control of Kanjur Division to Mansukhlal, who was eldest among the brothers. A new company known as Echjay Forgings Private Limited came into existence as a result of this arrangement. This newly formed company may be referred to as 'Forgings' and the original company may be referred to as the 'Industries' for the sake of convenience. A scheme was prepared to spin off Kanjur Division and the Company Petition No. 271 of 1985 and the Company Petition No. 272 of 1985 were filed for sanction of the scheme. The scheme was sanctioned by this Court by the order dated 3-9-1986. The shares, rights and liabilities of the parties were described in the said scheme and as a result, Forgings came into existence as a new company, which was totally controlled by Mansukhlal and after his death by his sons. 3....
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....s, machinery as well as the current assets was made. As per the valuation, Mansukhlal had taken over complete 69 per cent shares, which were previously controlled by Doshi family and he also took over some other properties and business units. He surrendered his rights and shares in the Industries and other units of the Industries, which were taken over by the remaining four brothers. It is contended that General Reserve No. II were never assets or liabilities of the Forgings. It was general reserve in the Balance Sheet of the main company and it was appropriated from the profit of that company. The whole of that company was never transferred to Mansukhlal and, therefore, transfer of General Reserve No. II was not provided as per the scheme. Forgings had no right over the same. It was contended that even though the amount of Rs. 23,47,000 was paid to the workers from the Kanjur Division account, that amount was adjusted while evaluating the differential to be paid by Mansukhlal to his brothers. Amount of Rs. 8.68 lakhs which is net of tax was adjusted in the differential because the Forgings had taken tax benefit of remaining amount as income-tax rebate and, therefore, nothing more ....
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....void any complications though the then Managing Director had disclosed this fact in the report to the Board of Directors. It is contended that as whole of the undertaking of the Kanjur Division belonging to the Industries was transferred to the Forgings, Industries could not retain the said General Reserve No. II, which would become the property of Forgings on transfer. It is contended that when the liability of making payment to the workers was fulfilled by the Forgings, naturally it was also entitled to the General Reserve No. II, which was created as a provision to meet that liability. It is also contended that the learned Single Judge committed error in rejecting claim of the Forgings to die-blocks and machinery, which were transferred from Kanjur Division to Rajkot Division. 7. On the other hand, it is contended by the Industries that the learned Singel Judge committed error in holding that the Industries is liable to pay an amount of Rs. 23.47 lakhs to the Forgings on account of payment of the compensation to the workers, whose services were terminated. It is contended that Mr. Dastur had, after minutely going through the record, come to conclusion that the said amount of Rs....
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....s had shares to the extent of 30.75 per cent. There was provision for computation of differential to be paid to Manshukhlal group in case the property taken over by them would be more than their 20 per cent shares and vice versa if the property, to be allotted to Mansukhlal group would be less than its 20 per cent shares. Valuation of fixed assets of the Kanjur Division including flat of Echjay house, which was to be given to Mansukhlal group, was Rs. 86,01,141.69.25 per cent of the same would be Rs. 59,56,290. Value of the remaining family property excluding Kanjur Division and the flat was Rs. 5,05,14,107.69.25 per cent of the same would be Rs. 3,49,81,019. 10. Before the scheme was sanctioned by this Court, the family had made a reference to H.P. Kumbhani & Co., Chartered Accountants to assess the value of Kanjur Division and to suggest the ratio of allotment of shares in the Forgings in consideration of the shares held in Industries. As per the annexure A in the report of H.P. Kumbhani and Co., valuation of the Kanjur Division was made thus : "Echjay Industries Pvt. Ltd. Kanjur Division (Rs. in lakhs) Fixed Assets (At W.D.V.) 86.01 Current assets: &....
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....the liabilities of workers in view of two cases pending before the Industrial Court and as the said liability was met from the account of Forgings, the General Reserve No. II is liable to be transferred to the Forgings. It is material to note that while General Reserve No. II for an amount of Rs. 2,20,00,000 was created by resolution passed by the Board of Directors on 3-7-1981, additional amount of Rs. 39,00,000 was put in the said reserve on 20-7-1982. Third addition of Rs. 68,54,732 was made in the said reserve by a resolution dated 28-6-1983 taking the total of General Reserve No. II to the tune of Rs. 3,25,54,732. Admittedly, on 10-1-1983, the settlement had taken place with the said workers and as per that settlement, total amount to be paid to the workers was Rs. 23,47,000 and the payment of the said amount was actually made from 14-1-1983 to August, 1983. If the total liability towards the workers was finally settled at Rs. 23,47,000 on 10-1-1983, there could be no reason or justification to make additional reserve of Rs. 68,54,732 on 28-6-1983 particularly when a huge amount of Rs. 2,57,00,000 was already in General Reserve No. II. This clearly reveals that the General Res....
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....out of profits exclusively of the Kanjur Division. As the reserves are appropriations of profits to be placed along with the capital in the balance sheet, it is not a provision for any anticipated liability. Therefore, this amount is also liable to payment of tax. Tax payable on the General Reserve No. II was borne and paid by the Industries. Admittedly, tax liability amounted to Rs. 2.06 crores. The question whether the Industries were liable to pay the tax on the accumulated reserves was taken to Income-tax Appellate Tribunal and after referring to the judgment of Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 4 SCC 435, the Income-tax Appellate Tribunal by its judgment dated 25-11-1987 rejected the claim of Industries that the tax was not payable. The Tribunal held that all the facts would indicate that the amount was in fact appropriation out of the profits and it was never intended as provision for liability and was never utilised as such in subsequent years. The learned Single Judge rightly noted that Mr. Dastur, Senior Advocate, had in his report noted that even by the test propounded in the case of Vazir Sultan Tobacco Co. Ltd. (supra) the excess of Rs. 3.25 c....
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....assets of Rs. 86.01 lakhs. As he had received 69.25 per cent share of Doshi family, he had actually received interest of the family worth Rs. 59.56 lakhs in the form of fixed assets of the Kanjur Division. He also received net current assets of Rs. 45 lakhs being the share of Doshi family in the company. He had also received certain other business concerns like Echjay Electronics Kanjurmarg, Kanjur Bleaching, Hem Suru Corporation, Investment Companies and personal wealth. The total valuation of assets received or retained by Mansukhlal Group worked out to Rs. 183.92 lakhs. In view of the fact that Mansukhlal Group was entitled to assets worth Rs. 121.53 lakhs, he was required to pay amount of Rs. 62.39 lakhs as differential to the remaining group. This calculation made by M/s. Bachubhai fully tallies with the calculation made by H.P. Kumbhani & Co. Chartered Accountants. The learned Single Judge noted that this statement of M/s. Bachubhai Munim & Co. was accepted as per the admitted Minutes of Meeting dated 29-8-1984. Here also there was no reference to the claim over the amount of Rs. 3.25 crores being General Reserve No. II of the Industries. 16. Mr. Dastur as well as the learne....
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....fic provisions in respect of pending legal proceedings and the liability in respect thereof in the sanctioned scheme, the liability to make payment of compensation to erstwhile workmen was assumed by Forgings and not by the Industries. However, as in the settlement, no provision was made for that amount and as the claim of Forgings over the General Reserve No. II is not acceptable, the Industries are liable to compensate Forgings in that respect. It may be noted that in his report, Mr. Dastur, Senior Advocate had come to conclusion that as per the terms of the scheme as sanctioned by the Court, the Forgings had taken over the responsibility only in respect of workmen, who were in service immediately before 31-12-1982 and also the workers, who were in service after that day and in view of the fact that workmen, about whom two cases were pending before the Industrial Court, were not in service on or immediately before 31-12-1982, the Forgings had not taken responsibility of the same. Mr. Dastur came to conclusion that it was the responsibility of Industries to pay compensation to the workmen but as the payment was made from the account of the Kanjur Division, the Industries was liabl....
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....date, which was 31-12-1982. Not only this, the second part of this clause provided a protection to such employees of continuation of service without any interruption and the guarantee that terms of their service shall not be less favourable to them than the terms, which were applicable to them on the day immediately preceding the effective date. Sub-clause b(ii ) provides that responsibility of payment of gratuity and all terminal liabilities up to the effective date and thereafter will be of Forgings with respect to the said employees. If these two clauses are read together, the words "the said employees" used in sub-clause b( ii) clearly refer to the employees covered under clause b( i) and they were only those employees, who were in actual service on the day immediately preceding the effective date, i.e., 31-12-1982. Taking into consideration the second part of sub-clause b( i), there remains no doubt that this responsibility was only in respect of employees, who were in actual service because there could not be any protection of uninterrupted service and the guarantee against any terms of service less favourable than those which were applicable prior to the effective date in re....
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....equired to be paid by Mansukhlal Group to the remaining group. Taking into consideration the rights and shares of Mansukhlal Group in the whole property and the property actually received by the said group, Mansukhlal Group was found liable to pay amount of Rs. 62.79 lakhs towards the differential as calculated by Bansi Mehta and the same was also the calculation made by M/s. Bachubhai Munim and Company, the attorneys of Echjay Electronics, which was taken over by Mansukhlal group. There is no dispute that a meeting had taken place on 29-8-1984 and the minutes of that meeting are not in dispute. As per the said minutes' Mansukhlal group was to pay total amount of Rs. 119.20 lakhs, which included payment of Rs. 67 lakhs towards the outsiders towards their share in the fixed assets and the current assets. As far as payment of differential to the group of remaining brothers, it shows that from the total amount of Rs. 62.39 lakhs, amount of Rs.13.07 lakhs was agreed to be deducted and on two different counts, there was addition of Rs. 4.50 lakhs and Rs. 0.30 lakhs and, thus, he was finally required to pay Rs. 54.20 lakhs to the remaining brothers. In the minutes dated 29-8-1984, there ....
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....i was not reliable, Bansi Mehta was not examined, original minutes of the meeting dated 6-8-1984 were not placed on record and, therefore, these minutes could not be taken into consideration. With these observations, the learned Single Judge came to conclusion that the Industries had failed to prove that the amount of Rs. 23.47 lakhs was adjusted against the differential. 23. After careful scrutiny of the record, which is discussed at length in the report of Mr. Dastur as well as in the impugned judgment of the learned Single Judge, we find it difficult to uphold the view taken by the learned Single Judge. Admittedly, there was deduction of Rs. 13.07 lakhs from the differential of Rs. 62.39 lakhs which was required to be paid by Mansukhlal Group to the remaining brothers. Maganlal Doshi explained what this deduction was but there is no acceptable or plausible explanation from Mansukhlal group about this deduction. Report of Mr. Dastur reveals that Mansukhlal group tried to contend that this differential was towards the depreciation of machinery. This could not be accepted for the reason that valuation of the fixed assets, machinery, etc. was already made by H.P. Kumbhani & Company....