TaxTMI 
TaxTMI 
2016 (5) TMI 880
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....from transfer of an undertaking by the Assessee to a new company, M/s Matsushita Television & Audio India Ltd., in terms of a scheme of arrangement sanctioned by this Court, under Section 391-394 of the Companies Act, 1956. Whilst the Assessee claims that it has incurred a short term capital loss of Rs. 11,14,31,696/- on the sale of the said undertaking, the Assessing Officer (hereafter "the AO") has assessed the said transaction as resulting in a short term capital gain of Rs. 25,34,72,144/-. The principal dispute revolves around the quantum of consideration for the sale of the said undertaking; according to the Assessee, the consideration is Rs. 32,48,00,000/- but according to the AO, it is Rs. 50,12,00,000/-. Further, the Assessee has computed the capital loss by taking the cost of the assets as Rs. 59,94,36,171/- which according to the AO should have been Rs. 41,09,32,331/- being the Written Down Value (hereafter "WDV") of the assets. The Revenue has not pressed its challenge as to the cost of the assets for the purposes of calculation of capital gains. Therefore, the only issue surviving in this appeal is the dispute as to the quantum of consideration for the purposes of co....
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....on, the Assessee was allotted 48,60,000 fully paid equity shares of Rs. 10 each of MTAIC and was also entitled to receive the balance consideration of Rs. 27,62,00,000/- within the period of 90 days from the date of the Scheme becoming effective. 5.4 An application under Section 391-394 of the Companies Act, 1956 for, inter alia, convening of meetings of members and creditors of the Assessee for approving the Scheme was filed in this Court, pursuant to which the necessary meetings were convened under the directions of this Court. The requisite majority voted in favour of approving the Scheme and, thereafter a petition under Section 391-394 of the Companies Act, 1956 for sanctioning the Scheme was moved in this Court. After giving due notice to all concerned, this Court approved the Scheme by an order dated 20th September, 1996. 5.5 The Assessee filed its return of income for AY 1997-98 on 28th November 1997, disclosing a total income of 1,07,47,720/-. In its return, the Assessee declared that it had received a consideration of Rs. 32,48,00,000/- being the sum of Rs. 4,86,00,000/- ( the paid-up value of 48,60,000 fully paid equity shares of MTAIC) and Rs. 27,62,00,000/-. The A....
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.... for the purposes of computation of capital gains would be the WDV of the fixed assets, which as per the depreciation schedule submitted by the Assessee was Rs. 41,09,32,331/-. He accordingly, computed the short term capital gains on transfer of the Panasonic Division at Rs. 25,34,72,144/-. 5.8 Aggrieved by the aforesaid assessment order dated 29th March, 2000, the Assessee preferred an appeal before the CIT(A). The CIT(A) concurred with the AO and rejected the appeal by an order dated 22nd February, 2001. The Assessee appealed against the CIT(A)"s order dated 22nd February, 2001 before the Tribunal which was allowed by an order dated 02nd August, 2002 (hereafter the „impugned order"). Impugned Order 6. The Tribunal observed that the Scheme had been approved by this Court pursuant to a petition filed under Section 391-394 of the Companies Act, 1956. The said approval was granted after the requisite meetings of the shareholders as well as secured and unsecured creditors had been convened and all necessary parties had been heard. The Tribunal further observed that notice under Section 394A of the Companies Act, 1956 had also been issued to the Central Governm....
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....Tribunal noted the Assessee's contention that the sale consideration received for transfer of the Panasonic Division was not identifiable with individual assets and, therefore, Section 50 of the Act was inapplicable. The Tribunal also observed that the transfer of Panasonic Division was a case of slump sale where the division was transferred as a going concern, including the related intangible assets. And, concluded that, the transfer of Panasonic Division could not be considered as "a case of transfer of any depreciable asset only". The Tribunal referred to the decision of the Supreme Court in CIT v. Mugneeram Bangur & Co. (Land Department): (1965) 57 ITR 299 (SC) and held that Section 50(1) of the Act was inapplicable. The Tribunal also noticed the provisions of Section 50B of the Act - which were introduced in the Act with effect from 1st April, 2000 by virtue of the Finance Act, 1999 - and held that since Section 50B of the Act was introduced after AY 1997-98, the said provision could not be applied for computing the capital gains in the present case. The Tribunal referred to the provision of Section 48 of the Act and accepting the Assessee's contention that considerati....
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....cash and partly by issue of shares. He referred to the decision of the Supreme Court in Sadanand S. Varde (supra) and drew the attention of this Court to the following paragraph:- "Even if the scheme is approved by all concerned parties by consensus, merely because it is so agreed upon, the court is not obliged to put its imprimatur on it. The court has the discretion and power to reject a scheme even if all the shareholders and creditors have agreed to it. But, once the scheme is scrutinised by the company court and sanctioned by an order made by it under section 391 of the Companies Act, it ceases to retain the character of contract and operates by force of the statute." 14. On the strength of the aforesaid observations, Mr Kapoor contended that the terms of the Scheme were binding and it could not be considered that Assessee had voluntarily diverted its income in favour of its shareholders. He argued that but for the consent of shareholders, the Scheme would not be sanctioned and since the shareholders had consented to the Scheme entailing issue of shares of paid-up value of Rs. 17.64 crores to them, the same could not form part of the consideration, as either received or ....
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....nic Division as Rs. 59,94,36,171/-, which now stands accepted by the Revenue. 17. In the circumstances, the only question that needs to be addressed is whether the consideration for the transfer of Panasonic Division is Rs. 50.12 crores or Rs. 32.48 crores. 18. An order passed by the Company Court sanctioning a scheme of arrangement under Section 391-394 of the Companies Act, 1956 is an order in rem. It is not in dispute that the Scheme is binding on all the persons including the Assessee. However, we are unable to appreciate any material difference, in so far as the incidence of tax is concerned, between a scheme of arrangement which has been approved by a Company Court under the provisions of the Companies Act, 1956 (or the Companies Act 2013) or any other binding arrangement/agreement. Mere sanctioning or approval under Section 391-394 of the Companies Act, 1956 would not alter the character of the scheme or the nature of transaction embodied therein for the purposes of levy of income tax under the Act. To illustrate the aforesaid, let us take an instance of a company which enters into an agreement for sale of one of its undertakings (substantial) and in terms of th....
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....n of SIL" under the Scheme which is defined as under:- "a) All assets, movable or immovable including plant, machinery, earnest money and security deposit paid by SIL in connection with or relating to Panasonic Division, the particulars of which are specified in Schedule A hereto as also the liabilities and debts pertaining to that division particulars of which are specified in Schedule B hereto. b) All privileges and benefits of contracts, agreements, deeds, bonds, insurance policies and other rights, licenses, powers and facilities of every kind, nature and description relating to the Panasonic Division as specified in Schedule C hereto. c) All legal or other proceedings by or against SIL and relating to the Panasonic Division of SIL specified in Schedule D hereto. d) All permanent employees of SIL primarily engaged in or in relation to PANASONIC DIVISION of SIL. e) Lease rights, tenancy rights, industrial licenses, trademarks and all other licenses, powers, facilities etc. of every kind, nature and description whatsoever pertaining to that Division." 21. Part II of the Scheme expressly provides for the transfer to and vesting of the Panasonic Division in....
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....7,62,00,000 (Rupees twenty seven crores sixty two lakhs only) within a period of 90 days from the effective date or on such date or dates as may be mutually agreed between the Board of Directors of SIL and MTAIC and in the meanwhile the said amount of Rs. 27,62,00,000 (Rupees twenty seven crores sixty two lakhs only) will stand credited to the account of SIL in the books of accounts of MTAIC." 24. It is also relevant to note, at this stage, that the identity of shareholders of a company is different from that of the company. The consideration as reflected under the Scheme is clearly for the transfer of title to the assets as well as assumption of obligations of the Panasonic Division. Undisputedly, the title to the assets of the Panasonic Division belonged to the Assessee, so as the obligation to discharge the liabilities of the said division. The Panasonic Division was an undertaking owned by the Assessee and not by its shareholders. Whilst shareholders own shares issued by a company, they have no interest in the assets held by the company. In Bacha F. Guzdar v. CIT, Bombay: (1955) 27 ITR 1 (SC) a Constitution Bench of the Supreme Court explained the above principle in the foll....
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....vision should accrue to the shareholders of this Company by allotment to them of shares of the said MTAIC, the transferee Company, in the ratio of two shares of MTAIC for each share held in this Company. Accordingly, MTAIC has issued and allotted in the aggregate 17,62,500 Equity shares of Rs. 10/- each at par to the shareholders of this Company. The share certificates of the shares allotted were sent by the said MTAIC in January this year, and it is hoped that all of you have received your respective entitled share certificates." 26. In Vodafone International Holdings B.V. v. Union of India: [2012] 341 ITR 1 (SC), the Supreme Court held - albeit in a different context - that a transaction must be viewed holistically in its proper context. In that case the court applied the "look at" principle to consider whether the transaction in question was a device to evade taxes. Although the subject matter of the controversy in that case was different, the following extract from the said decision is relevant: "In this connection, we may reiterate the "look at" principle enunciated in Ramsay (supra) in which it was held that the Revenue or the Court must look at a document or a transact....
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....clared as a charge on the properties in the hands of the assessee. The Court held that the decree of the Court had created a charge on the entire resources of the assessee for the specific payment to his stepmother and to that extent had diverted a portion of the income from the estate to his stepmother. The Court held that such income was diverted prior to it forming a part of the assessee's income and was an allocation of revenue before it became income in the hands of the assessee. However, in Sitaldas Tirathdas (supra), the Supreme Court allowed the appeal of the Revenue and did not accept the assessee's contention that he was entitled to claim the amount of maintenance as a deduction from his income. The Supreme Court explained the legal principle in the following words:- "In our opinion, the true test is whether the amount sought to be deducted, in truth, never reaches the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be sai....