TaxTMI 
TaxTMI 
2016 (3) TMI 696
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.... thought for approving with or without modifications the demerger of the company as proposed. Vide order dated 31-5-2012 it was directed by the court that meeting of shareholders and unsecured creditors of applicant company be convened and held at its registered office on 30-6- 2012 under the chairmanship of Ms.Pallavi Mehta and Mr. Rachit Sharma respectively. In the consequent meetings as directed by this court, the scheme of demerger was approved and adopted at the meetings of 30-6-2012 and reports of Chairpersons of the meetings as appointed by the court submitted to the court. Hence this application on the second motion seeking sanction of the approved scheme of de-merger. Notices were issued by this court on 26-7-2012 to the Regional Director, Ministry of Corporate Affairs. Publication of notices in two newspapers, one English, the other vernacular, as directed was done on 2-9-2012. Copies of notices published in the newspapers have been filed before this court. The company Uma Enterprises Private Limited was incorporated under the Companies Act, 1956 on 23-10-1973. It engaged in the business of production, processing and sale of edible oils and other related activities.....
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....oved by the various stakeholders as required under the Companies Act and set up before this court. Mr. R.D.Rastogi, Additional Solicitor General appearing for the Regional Director has submitted that the de-merger scheme of which sanction is sought is evidently a sham and a mere ruse to convey the company's land to third parties circumventing liability towards capital gains under the Income Tax Act, 1961 (hereinafter `the Act of 1961') and stamp duty under the Rajasthan Stamp Act, 1998 (hereinafter `the Act of 1998'). It is in a clear attempt to evade taxation and is against public interest, submitted counsel, and if it is sanctioned would cause huge loss to the public exchequer amounting to crores of rupees on account of stamp duty and capital gains tax. It was pointed out that 26023 sq. meters of valuable land with market price of over Rs. 1 lac per meter is worth Rs. 260 crores odd but is being transferred on face value of Rs. 1.61 lacs under the colour of the demerger scheme. It was submitted that the purpose and intent of the de-merger scheme is not so much efficacy of existing businesses or enhancement of shareholder value by transferring an ongoing concern/ under....
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....t in respect thereof to be reflected in the books of the company. It was submitted that this nebulous suspect entry as a capital expenditure on the company's land on account of its alleged levelling cannot be taken as a commencement of the company's real estate business or creation of real estate division/s. It was submitted that the process of this court is sought to be misutilised as are the salutary provisions of Section 392(2) read with 394 of the Act of 1956 by camouflaging the conveyance of the company's land as a demerger solely to avoid the taxation events which would otherwise follow in the ordinary course of law in respect of a conveyance. It was further submitted that the scheme of de-merger of which sanction is sought being a sham is also buttressed by the fact that the proposed de-merger does not fall within the ambit of Section 2 (19AA) of the Income Tax Act, 1961 and Explanation I thereto. According to the Additional Solicitor General the explanation aforesaid provides that a de-merger can be brought about only by way of transfer of an undertaking or any part thereof or a unit of an undertaking or a business as a whole, and when the holder of equity share....
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....he applicant company has a real estate business as would be evident from the fact that it expanded Rs. 75,000/- as recorded in its books of account as capital expenditure towards levelling the company's land. Counsel submitted that where expenditure is revenue or capital is a matter of identification by the statutory auditor of the company who is fully competent and authorised to comment and qualify the expenditure. It has been submitted that Rs. 75,000/- having been described by the statutory auditor of the company as capital expenditure, and so accepted by the Income Tax Department, it does not lie in the mouth of the Regional Director to argue to the contrary that the company is not engaged in any real estate activity of which it is seeking demerger. It has been further submitted that for the commencement of a business mere intention to do so suffices and no rule, regulation or law applicable to a private limited company has been cited by the Regional Director to show it is as the company's obligation to disclose the factum of commencement of a business in its financial statements. It has been submitted that in the year 2010 a resolution was passed at the extraordinary m....
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....d faith and foundation of scheme under consideration, ascertaining the purpose of scheme, ensuring that it is not prejudicial to the public interest, that it does not violate any provision of law rendering it contrary to public policy and is not a mere device to evade tax. The scheme should be bonafide to advance business efficacies and shareholders interest without compromising public interest. It should not be a ruse to indirectly achieve what is prohibited in law. It is within these parameters that the objections to the sanction of scheme by the Regional Director have to be considered. It is quite apparent from the facts on record that ever since its inception in 1973, the company has been only engaged in the business of manufacturing and sale of vanaspati and edible oil. It is indeed true that in the year 2010 the object clause of the company as disclosed in its Memorandum of Association was amended to include among the company's "other objects" real estate business. However, as submitted by the Additional Solicitor General it is manifest that the company did not carry out any real estate activity as neither was such activity reflected in its books of accounts by way of ....
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....lsorily redeemable preference shares have no rights in the business or its management but only right to dividends. Even though it is correct to contend that mere suspicion of alleged avoidance of tax and stamp duty cannot entail holding the scheme under Sections 391(2)-394 as unlawful/ invalid, yet the fact remains that where a scheme under sections 391-394 appears to have been formulated, approved and adopted by the shareholders solely with the intent to avoid tax and is without any evident fundamental purpose for the benefit of the shareholders and efficacies of a restructured business, it would tantamount to a sanction being sought contrary to public interest owing to which it cannot and ought not to be sanctioned. The Apex Court in the case of M/s. Macdowell and Company Limited Vs. Commercial Tax Officer [(1985)3 SCC 230] has held that though tax planning may be legitimate within the frame work of law, yet colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It was further held that it is the obligation of every citizen to pay taxes honestly without resorting ....