TaxTMI 
TaxTMI 
1977 (1) TMI 160
X X X X Extracts X X X X
X X X X Extracts X X X X
.... was offered. In the case of the transferee-company, J. B. Mehta, J. by his order dated 23rd October, 1974, directed separate meetings of equity and preference shareholders and Unsecured creditors having a claim over Rs. 5,000 to be convened separately for approving with or without modification the scheme of compromise and/or arrangement. In the case of the transferor-company, direction given was that a meeting of the members of the company be convened for approving with or without modification the compromise and/or arrangement offered to them. Mr. V. H. Thakore, then attached to this High Court as special officer, was appointed as chairman to preside over the meetings. After the meetings were held, the chairman submitted his report. Thereafter, both the transferor-company and the transferee-company filed separate petitions under section 391(2) of the Companies Act, praying for according sanction to the compromise and/or arrangement, which involves a scheme of amalgamation of the transferor-company with the transferee-company. On the petitions being presented they were admitted and directions were given for usual advertisements. 3. The official liquidator was directed to submit ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to this amalgamation, all the assets and liabilities of the transferor-company are being taken over by the transferee-company with effect from the appointed day, which was specified to be close of the business hours on 31st day of March, 1973. The issued, subscribed and paid up capital of the transferor-company is Rs. 2 lakhs consisting of 2,000 shares of Rs. 100 each of which 1,800 shares were issued as fully paid for consideration other than cash. The entire issued capital of the transferor-company was held by DOC Pvt. Ltd. In other words, the transferor-company was a wholly-owned subsidiary company of DOC Pvt. Ltd. The scheme of amalgamation envisage extinguishment of the capital of the transferor-company on its dissolution to be brought about by exchange of its equity shares in the ratio of 20 equity shares of Rs. 100 each fully paid of the transferor-company for 900 equity shares of Rs. 10 each credited as fully paid of the transferee-company, as well as 170 convertible debentures bearing 8% interest each of Rs. 100 credited as fully paid to be issued by the transferee-company. The convertible debentures were to carry interest at the rate of 8 per cent. per annum and were red....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stion that the majority has coerced the minority into submission or is trying to take unfair advantage of the minority. The last question is whether the compromise and/or arrangement is such is one guided by instinct of preservation of one's own interest, who brings to bear upon the subject his commercial judgment would accept it as fair and reasonable one. The only point in this behalf to be examined is the ratio in respect of which the shares of the transferor-company were to be exchanged for the shares of the transferee-company. Exchange ratio has already been set out above. M/s. Talbot & Co. had valued the assets of the transferor-company as on 2nd January, 1973, at Rs. 2 lakhs. Accepting the report as the basis for exchange of shares, the transferee-company agreed to allot 90,000 equity shares of Rs. 10 fully paid and 17,000 convertible debentures bearing 8 per cent. interest of Rs. 100 each fully paid in exchange for 2,000 equity shares of Rs. 100 fully paid of the transferor-company. There is an option to receive Rs. 800 per cent share in each. Let us see how it works out in reality. Avenue House is the only capital asset of the transferor-company and is valued at Rs. 26....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... petition under section 391(2) is presented for according sanction to the scheme of amalgamation, that the requisite statutory formalities have been duly carried out, has the court no option or jurisdiction to reject the scheme or has it merely to rubber-stamp the scheme ? The court has discretion in this and it is not merely a rubber-stamp. This question is no more res integra and can be said to have been fairly concluded by a decision of this High Court in Bank of Baroda Ltd. v. Mahindra Ugine Steel Co. Ltd. [1976] 46 Comp Cas 227, 244 (Guj),) P. D. Desai, J.) wherein it is observed as under : "In view of the foregoing discussion it appears to me that the court cannot abdicate its duty to scrutinise the scheme with vigilance and act as a mere rubber stamp simply because the statutory majority has approved it and there is no opposition to the scheme in the court. So much weight cannot be attached to the view of the statutory majority as to require the court to mechanically put its imprimatur on the scheme. The court is not bound to treat the scheme as a fait accompli and to accord sanctions out whether it is a reasonable arrangement which can by reasonable people conversant wit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....willing or dissenting members of the class. That being the position in law, the court obviously would have a discretion either to sanction or to refuse to sanction the scheme. It cannot, therefore, be said that merely because statutory formalities are duly carried out, the court has no option but to sanction the scheme. In other words, the court at that stage is not merely reduced to a rubber stamp. 9. Once it is held that the occur that a discretion in the matter even after it is satisfactory established that statutory formalities have been duly would immediately arise as to what is the ambit of the discretion of the court. It is well-established and calls for no discussion that the discretionary power has to be exercised in a reasonable manner. Whenever a statue confers power, it is indisputable that power is conferred to achieve some object. And the power has to be exercised towards achieving the object. While exercising power, the authority on whom the power is conferred must be guided by the consideration whether by exercise of the power, the objection sought to be achieved while conferring power would achieved or not. Exercise of discretionary power stands on the same foot....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rs and/or members to whim it was offered. And this discretion of the court to accept or reject the scheme would be guided by the consideration that power is exercised to achieve the object or purpose for which it was conferred. 11. Reverting to the case on hand, the court is called upon the sanction the scheme of amalgamation of two companies, namely, the transferor-company and the transferee-company. The scheme of compromise and/or arrangement envisaged by section 391 takes with its sweep amalgamation of companies. Section 394(1)(a) makes a provision for amalgamation of companies by resorting to the provisions of section 391. In fact, section 396 confers powers on the Central Government to direct amalgamation of two or more companies into a single company, if it is satisfied that it is essential in the public interest to do so. Power under section 396 can be exercised only if amalgamation is in public interest. This will have to be kept in view while considering the habit of discretionary power under section 391(2) read with section 394 and the purpose for which it can be exercised. If a compromise or arrangement envisages amalgamation of any two or more companies, the court wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s tax, which, if a subterfuge of the transferor-company was not resorted to, would have become payable in the amount of Rs. 10,88,776. If the court sanctions the scheme, the property 'Avenue House' once belonging to DOC Pvt. Ltd. would stand transferred to the transferee-company without any liability to pay capital gains tax. 14. On the discussion and points canvassed the following further questions arise for re-examination : (i) What was the legislative intent in introducing the second proviso to section 394 and what is its relevance while examining a scheme of amalgamation submitted to court for sanction ? (ii) What is the ambit, scope and outer periphery of the concept of 'public interest' as envisaged in the second proviso ? (iii) Is the disclosed purpose per forth by the companies who have moved the court for sanction of the scheme or merger/amalgamation, relevant consideration or could the court probe and go behind the apparent purpose and ascertain the real purpose and take into consideration that purpose, so as to reach a conclusion that for such a purpose the court would not permit its process to be utilised if the purpose shown to be one which ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n Company. Section 47(iv) was clearly attracted because all the shares of Bengal Hotels Pvt. Ltd. were then held by DOC Pvt. Ltd. and Bengal Hotels Pvt. Ltd. was an Indian company transfer was of capital asset by the holding company to its subsidiary company. After this transfer was effected on 30th November, 1971, at the book value, Bengal Hotels Pvt. Ltd. the transferor-company, got it valued by one Messrs. Talbot & Co. on 2nd January, 1973, and Avenue House property was valued at Rs. 26 lakhs. It would appear that within a span of 1 1/2 years only, the valuation rose form Rs. 1,88,717.79 to Rs. 26 lakhs. Scheme of compromise and/or arrangement between the transferor-company and the transferee-company was first mooted by the end of 1972, when the transferor-company received a proposal from the transferee-company that it, Wood Polymer Limited, for a scheme of amalgamation with the latter to which the entity undertaking, property, rights and powers and all assets, duties, obligations, and liabilities of the transferor-company were to be transferred without further act or deed to the transferee-company. Probably valuation by Messrs. Talbot & Co. is undertaken after the proposal for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r payment of capital gains tax on the transfer in a scheme of amalgamation of capital asset by the amalgamation company to the amalgamated is an Indian company. The scheme envisages transfer of all assets including the capital asset of he transferee-company and capital asset is Avenue House and it is to be transferred to the transferee-company and the transfer-company is amalgamating company and it is an Indian company. As the transfer of capital asset is being brought about as an integral part of the scheme of amalgamation of amalgamating company with the amalgamated company is an Indian, company, transfer of the capital asset, namely, Avenue House, would again be exempt from the liability to pay capital gains tax. 18. DOC Pvt. Ltd. floated the transferor-company as its subsidiary company. The principal object for which the subsidiary company was floated was to set up a hotel at the premises of Avenue House, Chowringhee Square, Calcutta. In other words, the holding company floated a subsidiary company for starting business hotelier. The business was to be started in the property known as Avenue House then belonging to the holding company. The subsidiary company was incorporated....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ough a via the transferor-company and in the process the original owner company receiving Rs. 26 Lakhs worth of securities in respect of the property valued in its book at Rs. 1,80,717.79 without the slightest liability to pay the capital gains tax. That would be the point to ponder over. 19. Before we proceed further, it is necessary to lift the veil in respect of transferor-company and to see the realities behind the facade of corporate personality. The transferor-company, that is, Bengal Hotels Pvt. Ltd., was floated by Pranlal Bhogilal, Baldevdas K. Petal and Ambalal C. Patel. They are subscribers to the memorandum of association in which the first mentioned two persons, namely, Pranlal and Baldevdas, are shown as nominees of Dost Mohammad and Company Private Limited having its registered office at Calcutta. The registered office of the transferor-company was initially to be set up in the State of Maharashtra, but subsequently, by a special resolution confirmed by the High Court of Maharashtra, it was transferred to the State of Gujarat. As state earlier, the company was floated in the latter half of 1971. In the year 1972-73, Pranlal Bhogilal was the chairman of the board o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Bengal Hotels Pvt. Ltd., i.e., from himself to itself and, then, in turn, has suggested a scheme of amalgamation of Bengal Hotels P. Ltd. with Wood Polymer Ltd. from his left had to his right hand. In other words, DOC P. Ltd. i.e., Pranlal and his friends and relatives, could sell Avenue House to Wood Polyer Ltd., wherein they have substantial interest through the transferor-company, solely created as paper company, a fiction of law or a fictituous personality to bring about this transfer which if undertaken directly would straightway invite application of section 45 of the Income-tax Act. It would, in this connection, be advantageous to recall the words of Denning M.R. in Wallersteiner v. Moir [1974] 3 All ER 217 at 237, examining the contention that the various concern set up and controlled by Dr. Wallersteiner were his alter ego or himself wearing another had and it was a fit case to pierce the corporate veil. It was observed that these different concerns were the puppets of Dr. Wallersteiner. He controlled their movements. Each danced to his bidding. He pulled the strings. No one else got within their reach. This is equally true of Pranlal, his friends and relatives and the co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dinarily corporate personality is to be respected, but when a benefit is misused, the court is not powerless and it can lift the veil of corporate personality to see the realities behind the veil because is so doing, the court subserves the important public interest, namely, to arrest misuse or abuse of benefit conferred by law. One such filed in which the court lifts the veil and looks behind the realities is the field of taxation. Professor Gower in his treatise, Modern Company Law, 3rd edition, says that only trusted creditor in whose favour Slomon rule has been substantially mitigated is the revenue. In Bank Voor Handel en Scheepvaart N. V. v. Slatford [1951] 2 All ER 779,799, (KBD), Devlin, J. has observed : "No doubt, the legislature can forge a sledgehammer capable of cracking open the corporate shell, had it can, if it chooses, demand that the courts ignore all the conceptions and principles which are at the root of company law." 23. In the field of taxation, the legislature has done precisely the same thing. 24. If the veil is lifted in this case, the realities are startling. Pranlal and his friends and associates first established control over DOC Pvt. Ltd. by ta....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of acquiring Avenue House property without incurring any liability to pay capital gains tax. The liquidator was called upon to inquire whether the affairs of the transferor-company have been carried on in a manner prejudicial to the members of the company or public interest. Now, the report clearly recites that the affairs are not shown to have been carried on in a manner prejudicial to the members of the company. But, if it is shown that the transferor-company was a paper company, created for the purpose herein mentioned, could it be said that its affairs were carried on in a manner not prejudicial to public interest ? An attempt was made to urge that inquiry under the second proviso is limited to carrying on affairs of the company, meaning thereby, carrying on of the business or the management of the company, in other words, its internal affairs and it has nothing to do with the broader perspective of creation of company for a purpose and achieving that purpose by mere creation of the company, purpose being to defeat the payment of capital gains tax. The language of the second proviso does not admit of such narrow construction. What is meant by the expression "carrying on the af....
X X X X Extracts X X X X
X X X X Extracts X X X X
....de and industry. As far as our Companies Act is concerned, it has received statutory recognition in sections 89(4), 205(1), 211(3), 221, 244(1), 250, 303,326,352 and 396 in the Companies Act. "Public interest" is a positive check on unhindered exercise of private right whether by management or stock-holders. Our company law has recognised the fact that there are several areas in this field where even the joint will of the management and the stock-holders must give way to the requirements of public policy. In the field in which public interest is recognised as a relevant consideration, freedom of management and stock-holders to carry on the business of the company in regard to these matters, in such manner as they like, has been specifically subjected to the condition that autonomous decision making in these areas must not override the concept of the public interest (vide D. L. Mazumdar I.C.S. supra). 27. The expression "public interest": is sometimes used as an expression inter-changeable for the national interest. This is a term very often used in contradistinction to "private interest" or "personal interest". It is something in which the public, the community at large, has som....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d with the aid of the court, a subject seeks to defeat tax, such action could even be in public interest ? 28. It was incidentally said that in the context of the Monopolies and Restrictive Trade Practices Act, the test for determining "public interest" : would be properly covered in the second limb of the dictum of Lord Macnaghten in Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. [1894] AC 535 (HL). Before I examine the test, I should like to make it clear that passage relied upon opens with words "the true view in the present time, I think, is this" and the present time has relation to the role of the State in England in 1894, economic doctrine of laissez faire, then prevalent, and apart from anything else. I have my grave doubt whether that test is valid in the context of the welfare State and egalitarian society sought to be set up under our Constitution. With this limitation, the second limb of the test formulated in that case may be examined. It says that all interference with individual liberty in action in trading, and all restraints in themselves, if there is nothing more, are contrary to public policy, and therefore, void. That is said to be the general rule an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e-tax Act, those transactions enumerated in section 47 would be exempt from the operation of section 45. That would include transfer of capital asset by the holding company to the subsidiary company or vice versa, or transfer as part of the scheme of amalgamation of the capital asset of the amalgamating company to the amalgamated company. In the latter case, however, the scheme of amalgamation can only be operative and binding if it is sanctioned by the court. The power to sanction a scheme is converted on the court. Scheme of amalgamation may have to be framed for achieving some object or purpose. Companies do not amalgamate for the fun of it. They must amalgamated or would like to amalgamate or may be amalgamated to achieve some purpose or object. By section 396 power is conferred on the Central Government to amalgamate two companies if it is in public interest. Section 396 is in the same part in which sections 391 onwards find their place. Section 396 is the legislative exposition of the purpose behind the provision conferring power on the court or the Central Government to sanction amalgamation in one case or to direct amalgamation, namely, it must be exercised in public intere....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r device enabling the assessee to avoid payment of tax on what is really and in truth his income. If the assessee parts with his income producing asset, so that the right to receive income arising from the asset which therefore belonged to the assessee is transferred to and vested in some other person, there is no avoidance of tax liability : no part of the income from the asset goes into the hands of the assessee in the share of income or under any guise." 32. This view of the Gujarat High Court, I was informed, has been subsequently confirmed by the Supreme Court. My attention was also drawn to the Law and Practice of Income Tax by Palkhivala, 7th edition, in which it is stated that the subject has the legal right so to dispose of his capital and income as to attract upon himself the least amount of tax. Avoidance of tax is not tax evasion and it carries no ignominy with it, for it is sound law and, certainly, not bad morality for anybody to so arrange his affair as to brunt of taxation to a minimum. In Lilly v. Commissioners of Internal Revenue, 27 American LR 492, the question arose whether the deduction from the income-tax returns of the proprietor of the retail optical sto....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stion arose whether certain instrument were exempt from payment of stamp duty as they would fall under section 42 of the Finance Act, 1930. Rejecting the claim for exemption from stamp duty it was held that the object of section 50 was to put a stop to that device; and it succeeded. If that meaning is not given all that would be necessary would be to incorporate two puppet companies, make the contract in the name of one and take the conveyance in the name of the other, and no stamp duty would be payable. In such a situation, the House of Lords referred to Heydon's case [1584] 3 Co. Rep 7a, 7b and observed that such construction should be put on the provisions of a status shall suppress the mischief, and advance the remedy and the words of Lord Selborne L.C. in Caledonian Railway Co. v. North British Railway Co. [1881] 6 App Cas 114, 122, (HL), that the more literal construction ought not to prevail if it is opposed to the intention of the legislature as apparent by the statue, were recalled. It was further observed that the case is not one of literal construction versus liberal construction, it is rather a case of remembering that every statute must be read in the light of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ore, in order to ascertain the true meaning of "public interest" used in a given statute, it is to be construed in the context of the legislation in which it is used, provision in which it is used, and the purpose sought to be achieved by the use of the expression. Where alternative constructions are equally open that alternative is to be chosen which will be consistent with the smooth working of the system which statue purports to be regulating and that alternative is to be rejected, which will introduce uncertainty, friction, or confusion into the working of the system : vide Shannon Realities v. St. Michel [1924] AC 185 (PC). At any rate, such as expression capable of more than one meaning must draw is colour and content from the context in which it is used. It such should be the constriction of the expression "public interest", it would be necessary to see the setting in which it is placed. To recall earlier controversy "public interest" in company law is a new and recent entrant. The second proviso to section 394(1) was added by Amending Act of 1965, pursuant to the recommendations of Vivian Bose Commission of Dalmia and Jain concerns. The Vivian Bose Commission was appointed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... transferor-company before it gets virtually extinct. The court is, therefore, charged with a duty before it finally the confirms burial-cum-cremation of the transferor-company, to peep into its affairs to ascertain whether they have been carried on not only in a manner not prejudicial to its members but in even public interest. The expression "public interest" must take its colour and content from the context in which it is used. The context in which the expression "public interest" is used should permit the court to find out why the transferor-company came into existence, for what purpose it was set up, who were its promoters, who were controlling it, what object was sought to be achieved through creation of the transferor-company and why it is now being dissolved by merging it with another company. All these aspects will have to be examined in the context of the satisfaction of the court whether its affairs have not been carried on in a manner prejudicial to public interest. That is the colour and content of the expression "public interest" as used in section 394(1), second proviso, and the facts of this case will have to be examined keeping in view the colour and content of the....