TaxTMI 
TaxTMI 
2012 (8) TMI 79
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....ur, Madhya Pradesh. 3. In 1993-1994, respondent-IRSL set up a second unit in Butibori near Nagpur for expansion of spinning business as well as for commencing polymer production. 4. It is the Applicant's case that the second unit at Butibori, Nagpur, including the housing colony had been constructed out of the funds of the spinning business. 5. In 2002, respondent-IRSL decided to vertically split its business by way of a Scheme of Arrangement. Under the said Scheme, spinning business was to be demerged as a going concern and transferred to IRTL, while the polymer business was to be retained by respondent-IRSL. 6. On 27th February, 2003, the Scheme qua IRTL was sanctioned by this Court, whereas Madhya Pradesh High Court on 24th March, 2003 sanctioned the Scheme qua respondent-IRSL. The relevant portion of the Scheme is reproduced hereinbelow:- "AND WHEREAS Indo Rama Synthetics (India) Limited ("IRSL") is a public limited company engaged in the manufacture and marketing of Polyester Staple Fibre ("PSF"), Partially Oriented Yarn ("POY"), Fully Drawn Yarn ("FDY"), Textile grade polyester Chip, Draw Texturised Yarn ("DTY") and Spun Yarn. IRSL today is the largest Integrat....
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....r-viscose yarns presently, located at the factory units of the Transferor Company at Pithampur and Butibori and means and includes the following: (a) All properties and assets, movable and immovable, tangible and intangible, real and personal, corporeal and incorporeal, in possession or in reversion, present and future contingent or of whatsoever nature where-so-ever situated, as on the Appointed Date along with land (as mentioned in Schedule-1) and buildings plant and machinery, capital work in progress, vehicles, equipments, furniture and fittings, sundry debtors, investments inventories, cash and bank balances, bills of exchange, deposits, loans and advances etc. of Spinning Business of the Transferor Company at Pithampur and Butibori as mentioned in Schedule-II. (b) All leases or parts thereof, tenancy, rights and agency of the Transferor Company, pertaining to the Spinning Business and all other interests or rights in or arising out of or relating to such properties together with all rights, powers, interests, charges, privileges, benefits, entitlements, industrial and other licences (and/or conditions attached thereto), registrations, quotas, trademarks, pat....
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....ee Company was incorporated under the name Indo Rama Projects and Services Limited on August 2, 1989. Subsequently, the name was changed to Indo Rama Projects & Investments Limited and a fresh Certificate of Incorporation in the changed name was issued on November 29, 1994. The Company has once again changed its name to its present name and a fresh Certificate of Incorporation consequent upon change of name was issued on July 16, 2002. The Transferee Company is having its Registered Office at Mohan Dev, 13, Tolstoy Marg, New Delhi-110001. ** ** ** PART-II THE SCHEME Transferred/Demerged Undertaking: 3. With effect from the Appointed Date, all the properties, estates and interests of the Transferor Company in the Spinning Business in its entirety (including but not restricted to its assets, liabilities, rights, licences, benefits, obligations etc.) shall, pursuant to Section 394(2) of the Act and without any further act or deed be transferred to and vested in or be deemed to have been transferred to and vested in the Transferee Company on a "going concern" basis, subject to all existing charges, mortgages, liens, encumbrances, if any created/existing i....
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....the Equity Capital of the Transferor Company into Secured Debentures, conversion of 20% Equity Capital into preference shares of the Transferee Company. 36. If any dispute, doubt or difference or issue shall arise between the parties hereto or any of their shareholders, creditors, employees and/or any other person, as to the construction hereof or as to any account, valuation or apportionment to be taken or made of any asset or liability transferred under this Scheme or as to the construction hereof or as to any account, valuation or apportionment to be taken or made of any asset or liability transferred under the Scheme or as to the accounting treatment thereof or as to anything else contained in or relating to or arising out of this Scheme, the same shall be referred to the sole arbitration of Shri O.P. Lohia, resident of R-69, Greater Kailash-I, New Delhi-110048 or any person nominated by him whose decision shall be final and binding. The Courts in New Delhi shall have exclusive jurisdiction in respect of any disputes arising out of or relating to this Scheme. ** ** ** SCHEDULE-I DETAILS OF THE IMMOVABLE PROPERTY OF SPINNING BUSINESS 1. Plot No.51-....
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....5. Plot No.A-31 Out of the below mentioned property, an area of 1,10,843.00 sq. mtrs. will remain with Spinning Business as indicated in the attached plan. All that piece or parcel of land known as Plot No.A-31 in the Butibori Industrial Area within the village limits of Umri & Khape and outside the limits of Nagpur Municipal Corporation, in rural area, Taluka and Registration Sub-District & Registration District Nagpur containing by admeasurement 404607 sq. mtrs or thereabouts. The land is held by way of Lease for 95 years dated July 29, 1994 executed with the Maharashtra Industrial Development Corporation. The Plot is surrounded by: On or towards the North by: MIDC Road On or towards the South by: MIDC Land Plot No.A-31/P On or towards the East by : MIDC Land Plot No. A-31/P and A-31/2 On or towards the West by: MIDC Boundary and Plot A-31/P-1 SCHEDULE-II Details of Assets and liabilities of Spinning Business as on April 1, 2002 Total Assets (Rs. Lacs) 1. Gross Fixed Assets 33,940.87 Accumulated Depreciation ....
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....in the ratio of 2:3 between IRSL and IRTL respectively as provided in Annexure A & B. ** ** ** 2. Validity of contract period This contract is valid for the period 1.4.2005 to 31.3.2010 and will automatically expire on 31.3.2010 and maybe renewed for subsequent period on mutually accepted terms & conditions. ** ** ** Allocation Ratio of Cost Sharing between IRSL & IRTL for the period 1.4.2005 to 31.3.2010 Annexure 'A' ** ** ** S. No. Nature of Services Service Provident Deptt. Basis of Allocation Proposed 15. Housing Colony (Club, Cable TV and Recreation and Security for Colony maintenance etc.) Admin and HR Deptt. Employee Ratio 8. On 17th February, 2006, present Applicant executed a Share Purchase Agreement with Mr. O.P. Lohia. According to the said agreement, the Applicant and respondent-IRSL were to negotiate mutually acceptable terms for sharing common resources. The relevant portion of the Share Purchase Agreement is reproduced hereinbelow:- "Article 5A Covenants of the Parties (a) The Parties shall negotiate in good faith, t....
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....demerger, all the property of the undertaking (as a going concern) being transferred had to become the property of the resulting company. He, in fact, submitted that in accordance with Section 394(2) of the Act, 1956, the entire undertaking as a whole stood transferred and became the property of the resulting company. He submitted that by operation of law, the title of the properties of the undertaking that vested in the Transferor Company prior to the demerger, upon sanction of the Scheme, stood transferred to the resulting company. He also submitted that the condition precedent of the Act, 1961 was to transfer the property in such a manner that the property transferred became the property of the resulting company. 17. According to him, retaining an undertaking's property and then making it available to the resulting company as a resource under a contract was not in accordance with the statutory requirement. 18. Mr. Kapur stated that if immense costs were to be incurred by the Transferee Company, the transferred undertaking could not be regarded as a going concern apart from the fact that such incomplete transfer would not satisfy the requirement of sub-Section (i) of Sectio....
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....n in the ordinary sense;..." 24. The expression ''business activity'', thus, according to him meant operations or combination of operations carried on by the Undertaking and constituting a business. 25. Mr. Nigam submitted that the expression ''taken as a whole'' as explained in the definition of ''Undertaking'', reproduced supra, was used in the context of ''business activity'' and not ''Undertaking''. Therefore, according to him to qualify the pre-requisites of demerger under Section 2(19AA) of the Act, 1961, what was essential was that the unit/division/Undertaking/part of the Undertaking or the business activity as a whole being transferred should constitute a running business, which should be capable of carrying on uninterruptedly with such assets and liabilities alone. 26. Mr. Arvind Nigam further submitted that term "Going Concern'' was an accounting concept that implied that the business would continue to exist and operate for an indefinite period in the future. Accounting Standard (AS)-1, issued by the Institute of Chartered Accountants' of India, which dealt with Disclosure of Accounting Policies, considered ''Going Concern'' to be one of the generally accepted f....
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....one has to read the terms and conditions of the arrangement ........ one has to construe the entire arrangement in order to ascertain the true intention of the parties and merely because there is a schedule of assets on record, it cannot be said that there is a sale of itemized assets." (B) CIT v. Max India Ltd. 319 ITR 68 (P&H), wherein the Punjab and Haryana High Court held as under:- ' '3. We have heard learned counsel for the parties and perused the record. 4. In para 20 of its order, the Tribunal held that the sale was slump sale if it was a sale of Going Concern, even if some of the assets were retained by the transferor ........... Para -29 of the order is reproduced below: 29. From the above, it is evident that for a sale to be termed as a 'slump sale', it is not essential that all the assets and liabilities must be transferred. Even if some assets and liabilities are retained by the transferor, the sale would not lose the character of being a slump sale, if the transfer is of a Going Concern, on that basis and the transferee is in a position to carry on the business without any interruption. In the present case, the right to use the technical know-how developed....
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.... the demerged Undertaking should be transferred in the Scheme of Demerger. Accordingly, he submitted that if the Undertaking or any part thereof, being transferred independently constituted a running business, which was capable of carrying on as a Going Concern, the same would be regarded as tax compliant demerger. 32. Mr. Arvind Nigam lastly contended that under the Scheme of Demerger agreed upon between the parties, certain flats in the housing colony occupied by the employees of the demerged Undertaking were not transferred as transfer of the said flats was not crucial/critical affecting the ability of the demerged undertaking to continue its business as a Going Concern. Mr. Nigam pointed out that even at the time of demerger, only around 20% of the employees of demerged Spinning business were actually residing in those flats and rest were staying in either rented or own accommodation outside the housing colony. According to him, the Applicant had carried on business of the demerged Undertaking uninterruptedly for nearly a decade without transfer of the housing colony and consequently, he stated that the present application was devoid of merits. 33. In rejoinder, Mr. P.V. ....
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....of Understanding dated 28th July, 2005, which specifically stated that housing colony was being offered by respondent-IRSL as a resource to IRTL for five years upon payment of actual cost. In the opinion of this Court, if respondent-IRSL was not the owner of the common resources and infrastructure, there was no question of it offering the common assets for use to IRTL on payment of cost. 40. Since considerable emphasis was laid by the Applicant's senior counsel on Section 2(19AA) of the Act, 1961, the same is reproduced hereinbelow for ready reference:- "2. Definitions.-In this Act, unless the context otherwise requires, - ** ** ** (19AA) "demerger", in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that-- (i) all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger; (ii) all the liabilities relatable to the undert....
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....ny. This Court is of the view that non-transfer of some of the pervious common assets being used by the transferee undertaking will not affect IRTL status as a going concern. 43. In fact, it is settled legal position that there is no requirement under the provisions of the Act, 1961 or Act, 1956 for transfer of all common assets and/or liabilities relatable to the Undertaking being demerged. The Applicant's submission that all common assets that cannot be divided must be transferred to the transferee namely, IRTL overlooks the explicit language of Section 2(19AA)(i) of the Act, 1961, which states that ''all the properties of the undertaking being transferred by the demerged company, immediately before the demerger becomes the property of resulting company by virtue of the demerger''. The expression ''being transferred'' is relatable to such assets as are being transferred to make it a going concern. Moreover, if the applicant's submission is accepted it would put all the schemes of demerger in a 'straightjacket' format and it would also infringe upon the two company's freedom to negotiate with regard to the transfer of common assets. This Court is of the view that while framing ....
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....ich is meant for availing tax concession cannot be read as a mandatory requirement for all schemes of amalgamation/arrangement/de-merger under Sections 391/392/394 of the Act, 1956. The said provision cannot be read and interpreted to include assets/units/undertakings/business belonging to the respondent-IRSL which were never transferred or intended to be transferred to IRTL and which are not mentioned in the Scheme of Arrangement. In the opinion of this Court, the Applicant is in error in contending that the common infrastructure is liable to be made over to them by virtue of reasoning of Section 2(19AA) of the Act, 1961 as the division of assets was indicated in the Scheme. 50. This Court is also of the view if the Applicant's interpretation of Clause 17 of this Scheme of Arrangement which refers to Section 2(19AA) of the Act, 1961 is accepted then it would amount to re-writing the Scheme of Arrangement, which this Court cannot do in the present proceedings. In fact, the Supreme Court in S.K. Gupta and Another v. K.P. Jain and Another [1979] 3 SCC 54 has held as under:- "13. When a scheme is being considered by the Court, in all its ramifications, for according its sanction....
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.... Court to give directions and, if necessary, to modify the scheme for the proper working of the compromise or arrangement. The only limitation on the power of the Court, as already mentioned, is that all such directions that the Court may consider appropriate to give or make such modifications in the scheme, must be for the proper working of the compromise and/or arrangement." (Emphasis supplied) 51. From the aforesaid, it is apparent that in the proceedings under Section 392(1)(b) of the Act, 1956, the Court cannot rewrite the scheme approved in the meeting called under Section 391(2) of the Act, 1956; but, it can only make such modification as it may consider necessary for proper working of the compromise or arrangement. 52. It is pertinent to mention that when the scheme was sanctioned in the year 2003, both the Transferor and Transferee Companies were owned and managed by O.P. Lohia group but now both the entities are owned and managed by different business groups. Consequently, to ensure that the scheme sanctioned by this Court is properly implemented, this Court modifies only the dispute redressal mechanism in Clause 36 of the Scheme by directing that in the event of an....