TaxTMI 
TaxTMI 
2015 (9) TMI 1125
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....resaid equity shares of TAAL to its Shareholders, the Petitioner proposes to reduce the balance lying in its Securities Premium Account ("SPA") by the book value of the Petitioner's investment in the shares of TAAL as appearing in the books of accounts of the Petitioner on the record date. The reduction of the SPA is sought in terms of the provisions of Sections 100 to 104 of the 1956 Act read with Section 52 of the Companies Act 2013 ("the 2013 Act"). The Board of Directors of the Petitioner Company approved the Scheme at its Meeting held on 26th June 2014. 2. By an Order dated 8th August 2014 passed by this Court in Company Summons for Directions No.632 of 2014, this Court convened Meetings of the Equity Shareholders and Unsecured Creditors of the Petitioner Company on 15th September 2014 for the purpose of considering the Scheme. Since there were no secured creditors of the Petitioner Company, no meeting of secured creditors was convened. At the Meetings of the Shareholders and Unsecured Creditors the Scheme was unanimously approved. Thereafter the Petitioner filed the present Company Scheme Petition and served copies thereof on the Regional Director as well as the Registrar ....
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....y has incurred a loss of Rs. 8,98,81,844/as on 31st March 2013. From the unaudited/provisional financial statements as on 28th February 2014 annexed to the Petition, it appears that the Petitioner Company has made a profit of Rs. 4,88,20,709/as on 28th February 2014 after adjusting certain exceptional items. Without this adjustment the Petitioner Company has incurred a loss of Rs. 3,76,81,881/as on 28th February 2014. 6. The concerned Income Tax Department has, after being served with a copy of the Petition, examined the Scheme and furnished its comments and observations thereon to the Regional Director. These comments and observations are contained in the letter dated 27th October 2014 of the Dy. Commissioner of Income Tax, Central Circle 2(1), Pune, addressed to the Regional Director. The Income Tax Department has informed the Regional Director that the following proceedings are pending against the Petitioner under the Income Tax Act : i) Assessment proceedings in respect of AY 201314 i.e. FY 201213; ii) Outstanding demands of Rs. 1,16,57,000/and Rs. 1,09,57,772/in respect of AY 200607 and AY 200708 respectively. iii) Penalty proceedings in respect of AYs 200607 to 20....
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.... to comply with all laws including the Companies Act and that consequently if the Scheme violates Section 123 of the 2013 Act the same is illegal and ought not to be sanctioned. 8. On the other hand Mr. Tulzapurkar, learned Senior Counsel appearing on behalf of the Petitioner urged that Sections 391 to 394 of the 1956 Act are a complete code and that under these sections a company is conferred with wide powers to undertake any kind of scheme of compromise or arrangement with its shareholders, creditors etc. including a scheme involving the distribution of shares to its shareholders. He submitted that these powers cannot be taken away by the other Sections of the 1956 Act or the 2013 Act including Sections 105 and 123. He further submitted that Sections 205 and 123 have no application in the present case. According to him where a company has more than one mode available for corporate action, the choice lies with the company. In the present case the Petitioner Company has opted for the procedure under Sections 391 to 394 read with Sections 100 to 104 of the 1956 Act which is a legally permissible procedure for the Petitioner Company to follow. He further submits that once the Peti....
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....said decisions of the Hon'ble Apex Court had no relevance in the present case. He further submitted that it was not permissible for the Regional Director to import the meaning of "dividend" as contained in the Income Tax Act into the 1956 Act or the 2013 Act and that the said meaning could not be relied upon in the context of the Companies Acts. He further submitted that the decisions of the Hon'ble Apex Court in Kantilal Manilal (supra) and Central India Industries Limited(supra) related to the taxability of dividend in the hands of shareholders and not the company and that as far as the Companies Act is concerned, the distribution of dividend should be considered from the company's perspective and not the shareholders' perspective. In support of his submissions Mr. Tulzapurkar relied on the decisions of the Hon'ble Apex Court in CIT v/s Nalin Behari Lal Singha (1969) 2 SCC 310, Bangalore Turf Club Limited v/s Regional Director Employees State Insurance Corporation (2009) 15 SCC 33, Whirlpool Corporation v/s Registrar of Trade Marks, Mumbai (1998) 8 SCC 1, Union of India v/s R.C. Jain (1981) 2 SCC 308, State of Punjab V/s S.S. Singh AIR 1961 SC 493, Ranjit Singh v/s State of Harya....
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...., in that the Petitioner Company was issuing dividend in kind by gifting the shares of TAAL to its Shareholders, but he was relying on the ordinary meaning of the word "dividend". He submitted that the ordinary meaning of "dividend" was not excluded from the definition of "dividend" contained in either the 1956 Act or the 2013 Act, or for that matter the Income Tax Act. According to him, in the decisions of the Hon'ble Apex Court in Kantilal Manilal (supra) and Central India Industries Limited (supra), the Hon'ble Apex Court had considered the ordinary meaning of the word "dividend" and held that the distribution of assets by a company in kind will also amount to payment of dividend. He therefore submitted that the aforesaid decisions of the Hon'ble Apex Court were squarely applicable in the facts of the present case. He further submitted that if any distribution of cash or other property by a company amongst its shareholders amounts to dividend in the hands of the shareholders, it will also constitute distribution of dividend by the company and what is dividend received by a shareholder is equally dividend issued by a company. In the light of these submissions he submitted that th....
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....e the definition of "dividend" as contained in the Income Tax Act, 1922 and the Income Tax Act, 1961. The definition of "dividend" contained in the Income Tax Act, 1922 is as follows :" 2. In this Act, unless there is anything repugnant in the subject or context 6(a) "dividend" includes ...................................." The definition of "dividend" contained in the Income Tax Act, 1961 is as follows: 2. Definitions: .... ..... ..... (22) "dividend" includes ............................................." Except for the opening words in the above definitions of dividend, the rest of the definition is not relevant for the present purposes as it is nobody's case that gifting of the shares of TAAL by the Petitioner Company to its Shareholders constitutes dividend as specifically defined in the various subclauses of Section 2(22) of the Income Tax Act, 1961. 13. I will first consider the argument of Mr. Tulzapurkar that the Petitioner Company is conferred with the widest powers to formulate any kind of scheme of compromise and/or arrangement with its shareholders under Sections 391 to 394 of the 1956 Act. According to him, where a company has more than one mod....
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....me with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously xray the same." 15. Mr. Tulzapurkar placed heavy reliance on the decision of the Division Bench of this Court in the case of Sterlite Industries (India) Limited to support his argument that the Court has the widest powers under Sections 391 to 394 to approve or sanction any scheme of compromise or arrangement and that a company is at liberty to select one of the several modalities available for any corporate action. In support of his contention, Mr. Tulzapurkar also relied upon the unreported decisions of this Court in the case of Tatanet Services Limited (supra), Balkrishna Industries Ltd. (supra), Balkrishna Paper Mills Ltd. (supra), Balkrishna Synthetics Limited (supra) and Zicom Electronic Security Systems Limited (supra). However, none of the decisions relied on by Mr. Tulzapurkar state that a scheme of compromise and arrangement under Sections 391 to 394 is required to be sanctioned even though it is found that the scheme violates some provision of the Companies Act. These decisions at best show that a company c....
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....hat the Petitioner Company ought to have followed another procedure for the purpose of gifting the shares of TAAL to its Shareholders. The contention of the Regional Director is that such a gift of shares is violative of the provisions of Section 123 of the 2013 Act. None of the decisions cited by Mr. Tulzapurkar deal with a case where the contention of the Regional Director was that the scheme in question was contrary to any provision of the 1956 Act. This is the material difference between the case in hand and the decisions cited by Mr. Tulzapurkar. Consequently none of the above decisions cited by Mr. Tulzapurkar are applicable in the facts of the present case and do not take the case of the Petitioner Company any further. On the other hand the decision of the Hon'ble Apex Court in Miheer Mafatlal's case categorically holds that a scheme of compromise and/or arrangement must not violate any provision of law. Consequently the decisions of this Court cited by Mr. Tulzapurkar are irrelevant in the context of the objections of the Regional Director that the Scheme is violative of Section 123 of the 2013 Act. 18. Further if one looks at Section 123 of the 2013 Act, it is clear tha....
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.... meaning of a particular word or expression. While an inclusive definition may specify the acts or things that will be covered by the definition, it does not exclude the ordinary meaning of the expression or word. Accordingly, in my view, the inclusive definition of the expression "dividend" in the 2013 Act will not exclude from its purview the meaning of "dividend" in its ordinary sense. In other words, the expression "dividend" used in the 2013 Act will have to be understood in its ordinary sense and be given its ordinary meaning. The only consequence of the definition of "dividend" in Section 2(35) of the 2013 Act is that "dividend" will also include interim dividend. 21. The view I have taken with respect to the meaning of "dividend" in the 2013 Act is supported by two decisions of the Hon'ble Apex Court relied upon by Mr. Mehta and referred to above viz. the decisions in the case of Kantilal Manilal (supra) and Central India Industries (supra). Although both these decisions were rendered in the context of the provisions of the Income Tax Act, 1922, the ratios of these decisions will be applicable and relevant in the context of the Companies Act also in view of the fact that....
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.... it in the light of its ordinary meaning. There is no substance in this contention. "dividend" is defined in Section 2(6A) as inclusive of various items and exclusive of certain others which it is not necessary to set out for the purpose of this appeal. "dividend" in its ordinary meaning is a distributive share of the profits or income of a company given to its shareholders. When the Legislature by Section 2(6A) sought to define the expression "dividend" it added to the normal meaning of the expression several other categories of receipts which may not otherwise be included herein. By the definition in Section 2(6A), "dividend" means dividend as normally understood and includes in its connotation several other receipts set out in the definition. The Tribunal had referred the question whether the distribution of the right to apply for the Bank of India shares amounted to distribution of dividend within the meaning of Section 2(6A) and in answering that question, the High Court had to take into account both the normal and the extended meaning of that expression. In the question framed by the Tribunal, there is nothing to indicate that the High Court was called upon to advise on the q....
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....d in money; it may be distributed by delivery of property or right having monetary value. The resolution, it is true, did not purport to distribute the right amongst the shareholders as dividend. It did not also take the form of a resolution for distribution of dividend; it took the form of distribution of a right which had a monetary value. But by the form of the resolution sanctioning the distribution, the true character of the resolution could not be altered. We are therefore of the view that the High Court was right in holding that the distribution of the right to apply for and obtain two shares of the Bank of India (at half their market value) for each share held by the shareholders of the Mills amounted to distribution of dividend." (Emphasis supplied) 22. From the above decision of the Hon'ble Apex Court it is apparent that the Hon'ble Apex Court considered the inclusive definition of the expression "dividend" as contained in Section 2(6a) of the Income Tax Act, 1922 and its meaning, and clearly held that the expression "dividend" means dividend as ordinarily understood and includes in its connotation the other items set out in the definition. The Hon'ble Apex Court furth....
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....lude dividend in its ordinary sense. As held by the Hon'ble Apex Court in Kantilal Manilal (supra) even the distribution of properties or rights having monetary value by a company amongst its shareholders will constitute dividend. The form of resolution passed by the company is not relevant, but its substance is relevant. In Kantilal Manilal (supra) the Hon'ble Apex Court held that the distribution of the right to acquire shares constituted distribution of dividend. In the present case it is not just the right to acquire shares that is being gifted by the Petitioner Company to its Shareholders, but it is the shares themselves that are being gifted. The Petitioner Company is distributing its shares in TAAL to its Shareholders by way of a gift. In my view this is clearly distribution of dividend by the Petitioner Company. The Company could very well have sold the shares of TAAL in the market and distributed the proceeds amongst its Shareholders. Instead the Company is directly gifting the said shares to its Shareholders. Such a gift in the hands of the Shareholders would clearly be dividend. Mr. Tulzapurkar submitted that in the case of Kantilal Manilal, the Hon'ble Apex Court was co....
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....value, amongst its shareholders. In the present case the Petitioner Company is seeking to distribute its shares in TAAL to its Shareholders under the Scheme. This is nothing but payment of dividend in kind. 25. The next question that arises for consideration is whether the gifting of the shares of TAAL by the Petitioner Company to its Shareholders is violative of Section 123 of the 2013 Act. Subsection 5 of Section 123 categorically prohibits the payment of dividend by a company in any manner otherwise than by cash. I have already held that the gift of the shares of TAAL by the Petitioner Company to its Shareholders amounts to payment of dividend. It is clear that this payment of dividend is in kind and not by way of cash. Payment of dividend in kind is expressly prohibited by Section 123(5). In my view therefore the gifting of the shares of TAAL by the Petitioner Company to its Shareholders will be in violation of Section 123(5) of the 2013 Act. 26. It is submitted by Mr. Tulzapurkar that a company can distribute its assets under the provisions of Sections 100104 of the 1956 Act and that accordingly no fault can be found with the Scheme. I am unable to accept this submission....
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.... case of the Petitioner Company any further. 28. The next objection of the Regional Director is based on the letter of the Dy. Commissioner of Income Tax, Central Circle2(1), Pune dated 27th October 2014. By this letter the Income Tax Department has informed the Regional Director that the following proceedings are pending against the Petitioner Company under the Income Tax Act : i) Assessment proceedings in respect of AY 201314 i.e. FY 201213. ii) Outstanding demands of Rs. 1,16,57,000/and Rs. 1,09,57,772/in respect of AY 200607 and AY 200708 respectively. iii) Penalty proceedings in respect of AYs 200607 to 201213. 29. Relying upon Section 281 of the Income Tax Act, 1961, the Income Tax Department has contended that the gift of the shares of TAAL by the Petitioner to its Shareholders as proposed under the Scheme is void. It is pointed out that the Petitioner has not made any application to the Income Tax Department for permission to make this gift. In view of the aforesaid, the Income Tax Department has requested that the Scheme not be approved. The Regional Director has placed the aforesaid objection of the Income Tax Department before the Court in support of the s....
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....e same crystallizes upon the Petitioner, inasmuch as according to the Petitioner, it has a net worth of Rs. 52 crores as per the book value method and a net worth of Rs. 57 crores as per the market value method post distribution of the shares of TAAL to its Shareholders. In my view, even if this be true, the same does not alter the position with regard to the applicability of Section 281(1). Section 281(1) does not carve out any exception on the basis of sufficiency or otherwise of the assets of the assessee. The Petitioner therefore cannot avoid the applicability of the provisions of Section 281(1) on the ground that it may have sufficient assets to discharge the tax liability as and when the same accrues. This contention of the Petitioner is also therefore liable to be rejected. 33. As noticed above, there are assessment proceedings, outstanding demands and penalty proceedings under the Income Tax Act pending against the Petitioner Company. These proceedings may very well result in taxes or other sums being payable by the Petitioner Company to the Income Tax Department. The gift of the shares of TAAL by the Petitioner Company to its Shareholders will be void as against the cla....