TaxTMI 
TaxTMI 
2007 (4) TMI 781
X X X X Extracts X X X X
X X X X Extracts X X X X
....udhiana. The unit at Ludhiana is manufacturing moped up to 72cc. The unit at Ghaziabad is manufacturing moped beyond 72cc. Hero Motors Limited (the transferee company) is another public limited company manufacturing mopeds and scooters. The board of directors of these two companies proposed a scheme of arrangement by which Ghaziabad unit of the transferor company was to be de-merged and merged with the transferee company. This proposed scheme was sanctioned by the Punjab and Haryana High Court on 29.5.2004. It was also sanctioned by the Delhi High Court on 22.7.2004. It appears that there was some mistake in the order of the Delhi High Court and it was corrected on 30.7.2004. 4. In substance the scheme of arrangement provides that the assets of Ghaziabad unit alongwith its liabilities and employees stood de-merged with the transferor company and merged with the transferee company. Under the scheme of arrangement, the shareholders of the transferor company got shares of the transferee company, in the ratio of 100 is to 10.39 shares of the face value of Rs. 10. 5. The immoveable property is situated in this State. The transferee company filed an application before the Tehsildar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wn up by which the first two companies, namely, Gobind Vanijya Ltd., Kanpur, and, Ujala Mercantile Ltd., Kanpur, (the transferor companies) (alongwith their asset, liabilities and employees) were amalgamated with Telesia Trading and Finance Ltd., Kanpur (the transferee company). This scheme was sanctioned by the Allahabad High Court on 4.8.2003. 11. Under the scheme, the shareholders of the transferor company got shares of the transferee company in the ratio of 2 is to 1 of face values of Rs. 10. A show cause notice was issued to the transferee company on 25.11.2006 to show cause is to why deficiency in the stamp duty and penalty be not imposed upon it. Hence the writ petition No. 8114 of 2007. WP No. 8119 of 2007 (Pre Dental Merchant case) 12. Ved Mercantiles Ltd., Kanpur, and Parag Mercantiles Ltd., Kanpur, are the transferor companies and Prudential Merchants and Traders Ltd. is the transferee company. A scheme of amalgamation was drawn up by which the first two companies alongwith assets, liabilities, and employees merged with the third company. This scheme was approved on 22.4.2003. The entire assets of the transferor companies consist of investment in equity shares o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... point is in the affirmative then, whether such scheme is covered by article 23 of Schedule 1-B of the UP Stamp Act? Point 1: No Dismissal - On alternative remedy WP No. 4811 of 2006-Order dated 8.6.2006-No Reasonable Opportunity 17. In pursuance of the show-cause notice dated 5.2.2005 the petitioner had filed its reply on 18.4.2005. Thereafter, no evidence was produced and the arguments were heard on 13.5.2005 and 6.6.2005. However, before any decision could be taken, the presiding officer was transferred and a new officer took over. Thereafter some dates were fixed but the case could not be taken for one reason or the other. 18. The case was adjourned on 21.9.2005 as the staff was on strike on that date. It was listed on 28.9.2005 and 4.10.2005 but was adjourned as the advocates were on strike. Thereafter some dates were fixed in which it was mentioned that the counsel for the Hero Motors was not present. It was again listed on 12.5.2006. It is mentioned in the order-sheet that: The case is taken up today. The respondent is not present; Written arguments have been received; and the case be put up on 8.6.2006 for order. 19. The original file of this case was produce....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er can be completed by an agreement between the parties without intervention of the court and the fact that the court has approved, it does not change its nature. However, here, the transfer cannot take place merely by the agreement of the parties; it can take place only if it is sanctioned by the court. The order regarding scheme of arrangement is different than the order/decree in any other case. In other cases, the transfer can take place without intervention of the court; here it is not so. (iv) Before any document can be treated as an instrument or a conveyance, it has to be executed. The word 'execution' is defined under the Stamp Act. The scheme is not signed by any of the parties and it cannot be said that it is executed. (v) Hindustan Lever and another v. State of Maharashtra (2004) 1 Comp LJ 148 (SC) : (2004) 9 SCC 438 (the Hindustan Lever case) arose from State of Maharashtra where the definition of word 'conveyance' has been amended. It specifically includes such schemes of arrangement. The observation made in the Hindustan Lever case should be seen in that light only. (vi) The Supreme Court decision in Ruby Sales Services (P) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on a compromise or arrangement arrived at between the parties and; (ii) The jurisdiction of the Company Court while sanctioning the scheme is supervisory only, i.e., To observe that the procedure set out in the Act is met and complied with and that proposed scheme of compromise or arrangement is not violative of any provision of law, unconscionable or contrary to public policy. (Paragraph 12)... Thus the amalgamation scheme sanctioned by the court would be an 'instrument' within the meaning of section 2(1). By the said 'instrument' the properties are transferred from the transferor company to the transferee company, the basis of which is the compromise or arrangement. arrived at between the two companies." (Paragraph 15). 25. The question whether the amendments in the definitions of the conveyance in the Maharashtra Stamp Act are merely clarificatory and out of abundant caution or not has been answered in the Rubey Sales case as well as by the division bench decision of the Bombay High Court in Li Taka Pharmaceuticals Ltd. v. State of Maharashtra (1996) 4 Comp LJ 385 (Bom) : AIR 1997 Bom 7 (the Li Taka case). The Supreme Court in the Ruby Sales case held,- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....harging stamp duty on transfer of assets only and it is not charging any duty on transfer of liability. This can always be done. The fact that our State has not separately provided for scheme of arrangement, as has been done by some other States, does not mean that scheme of arrangement is not covered by article 23 of Schedule 1-B. The transfer of assets of immovable property can be charged under article 23(a) and of movable property under article 23(b) of Schedule 1-B. The question is whether scheme of arrangement can be so split. 30. Section 3 of the UP Stamp Act is the charging section. It provides that all instruments shall be charged with duty of the amount as indicated in the schedules. In these cases, notices have been issued or order has been passed treating the case to be covered by article 23 of schedule-1(B). This article conceives of two kinds of conveyances: Conveyances relating to immovable property [sub-article (a)]; and Conveyances relating to movable property [sub-article (b)]. The question is whether the scheme of arrangement is covered by it; what is the nature of scheme of arrangement? But before that, some words about the company, shareholders, and debenture....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng convened by the court to consider such schemes. Nature of the scheme of Arrangement 35. There are two kinds of schemes. In one, transferor-company amalgamates/merges completely with the transferee company. In this case, all assets, liabilities become those of the transferee companies. In the second case, transferor-company demerges a part of the business (including assets, liabilities and employees relating to that business) and merges it with the transferee company. In lieu of these transactions, normally, shareholders of the transferor company are allotted shares of the transferee company and become its members/shareholders. In all cases before us it has so happened. 36. Irrespective of kind of scheme, it is re-arrangement of business for both the companies. It is not only immovable property or the movable property (as it is normally understood) that is transferred but also the intangible rights, privileges alongwith the liabilities are also transferred. There is no way by which the assets and liabilities can be separately judged. The transfer of assets and liabilities are to be seen as one transaction. The consideration of this transaction is: allotment of shares of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the transaction.. 39. In my opinion, the scheme of arrangement cannot be split up as suggested by the standing counsel: the cases involving scheme of arrangement are different than the cases where only movable and immovable property, simplicitor is transferred. These transactions cannot be split up and treated merely as the conveyance of transfer of immovable or movable property. They are a class apart. These cases do not fall under article 23 of Schedule 1-B of the UP Stamp Act... 40. The scheme of arrangement was never stamped in this State yet no notice requiring affixing of stamp on scheme of arrangement was ever issued prior to the Hindustan Lever case (2004) 1 Comp LJ 148 (SC). We had requested the standing counsel to find out the following information: (i) Whether the schemes of arrangement were ever stamped in this State or not; and (ii) Whether any notice for charging stamp duty was ever issued prior to the Hindustan Lever case (2004) 1 Comp LJ 148 (SC). 40.1. The standing counsel, after obtaining instruction, had made the statement in the negative. This shows the stand of the State; it never treated scheme of arrangement to be covered by the UP....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lue of the net assets transferred or by the stamp duty charged thereupon but I have merely indicated to show whether this could ever be the intention of the legislature. If this is to be the intention of the legislature then, it should come by means of clear and unambiguous language as has been done by the six other States. It is relevant to point out that even in those six States the method of calculating rate of stamp duty for scheme of arrangement is different than the rate for calculating stamp duty on the transfer of immoveable or moveable property under the UP Stamp Act: stamp duty in such cases is much less. Clarification 45. I wish to clarify here that I have only gone into question whether scheme of arrangement is covered under article 23 of Schedule 1-B of the UP Stamp Act or not. I have not decided whether scheme of arrangement can fall under any other article or not. In case it is so covered then stamp duty can always be charged. A notice cannot be invalidated merely for mentioning wrong article. This question may be considered after giving reasonable opportunity to the petitioner. Conclusions 46. My conclusions are as follows: (a) It is not a fit c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t Tax v. Smt. Kusumben D Mahadevia (1980) 2 SCC 238 (paragraph 4). APPENDIX-1 Indian Stamp Act, 1899 (as applicable in UP) "2. Definitions.-.... (10) 'Conveyance'-'Conveyance' includes a conveyance on sale and every instrument by which property, whether movable or immovable, is transferred inter vivos, and which is not otherwise specifically provided for by Schedule I, Schedule I-A or Schedule I-B, as the case may be. Explanation.-An instrument whereby a co-owner of a property having defined share therein, transfers such share or part thereof to another co-owner of the property, is, for the purposes of this clause an instrument by which property is transferred. 3. Instruments chargeable with duty.- Subject to the provisions of this Act and the exemptions contained in Schedule I, the following instruments shall be chargeable with duty of the amount indicated in that Schedule as the proper duty therefor, respectively, that is to say-... Schedule 1-B Article 23 Description of instrument Proper stamp duty 23. Conveyance - as defined by Section 2(10) not being a Transfer charged or exempted under No. 62 - (a) If relat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....' used in the definition means between living persons. The word living persons has been explained in section 5 of the Transfer of Property Act. "5. 'Transfer of property' defined. -In the following sections 'transfer of property' means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself, [or to himself] and one or more other living persons; and "to transfer property" is to perform such act. [In this section 'living person' includes a company or association or body of individuals, whether incorporated or not, but nothing herein contained shall affect any law for the time being in force relating to transfer of property to or by companies, associations or bodies of individuals.]" 50. From the bare perusal of the section it is apparent that company is living person within the meaning of section 5 of Transfer of Property Act. Instrument 50.1. Instrument has been defined under section 2(14) of the Stamp Act which is quoted below: 'Instrument'. - 'Instrument' includes every document and record created or maintained in or by an electronic storage ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....demand, or promissory note drawn, or made out of India, on, or after that day, and, accepted or paid or presented for acceptance or payment, or endorsed, transferred, or otherwise negotiated in India; and (c) every instrument (other than a bill of exchange, or promissory note) mentioned in that Schedule, which, not having been previously executed by any person, is executed out of India on or after that day, relates to any property situate, or to any matter or thing done or to be done, in India and is received in India: Provided that, except as otherwise expressly provided in this Act, and notwithstanding anything contained in clauses (a), (b) and (c) of this section, or in Schedule I or I-A the following instruments shall, subject to the exemptions contained in Schedule I-A or I-B, be chargeable with duty of the amount indicated in Schedule I-A or I-B or as the proper duty therefore, respectively, that is to say- (aa) every instrument mentioned in Schedule I-A or I- B, which not having been previously executed by any person, was executed in Uttar Pradesh: (i) in the case of instruments mentioned in Schedule I-A, on or after the date on which the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es, and assets of whatsoever nature such as licences/registrations and quota rights, lease and tenancy rights or power of whatever kind, nature or description (all undertakings properties, assets, rights and powers are hereinafter collectively referred to as the "said undertaking"), shall without any further act or deed be and the same shall stand transferred to and vested as a going concern in Prudential Merchanties and Traders Ltd. (hereinafter called the Transferee Company) pursuant to the provisions of section 394 of the Companies Act, 1956, (hereinafter referred to as the 'said Act') subject to the charges, if any then affecting the undertaking of the Transferor Companies transferred to and vested in the Transferee Company as aforesaid, without such charges in any way extending to other undertakings of transferee company. (2)................ This Court Doth Order (1) That all the property, rights and powers of the above-named two transferor companies specified in the first, second and third parts of the schedule hereto and all other property, rights and powers of the above named two Transferor companies be transferred without...........or dee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) of the Companies Act, 1956, be transferred to and vest in the Transferee company for all the estate and interest of the Transferor companies, therein but subject nevertheless to all charges now affecting the same. Annexure Sanctioned Scheme of Amalgamation. Schedule (Part-I) Description of freehold properties of Transferor-None. Schedule (Part-II) Description of leasehold properties of the Transferor Companies-None. Schedule (Part-III) Short description of all stocks, shares, debentures and other chose-in-action of the transferor companies-Annexed. (3) Writ Petition No. 8114 of 2007 - Telesia Trading and Finance Limited v. State of U.P. through Collector, Kanpur Nagar and others (scheme of amalgamation): (1) With effect from 1 February, 2003, (hereinafter called the 'appointed date), the entire undertaking of Gobind Vanijya Limited and Ujala Merchanties Ltd. (hereinafter called the 'Transferor Companies') including all its properties, movable and immovable, and assets of whatsoever nature such as licences, registrations and quota rights, lease and tenancy rights or power of whatever kind nature or description (All undertakings properties, as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y rights, titles, interests, benefits and advantages of whatsoever nature belonging to or in the ownership, power possession, control of or vested in or granted in favour of or enjoyed by the transferor company, including but without being limited to, all licenses, liabilities, easements, advantages, benefits, privileges, lease, tenancy rights, ownership, trade marks brand copy rights, quota rights, subsidies, concessions, exemptions, sales tax exemptions, concessions/obligations, approvals, clearances, environmental clearances, authorizations, certification, quality, certification, utilities electricity connections, electronics and computer link ups, services of all types reserves, provisions, funds benefits of all agreements and all other interests arising to the Transferor company (herein collectively referred to as "the said assets") shall, without any further act or deed or without payment of any duty or other charges, be transferred to and vested in the Transferee Company pursuant to the provisions of section 394 of the Act, for all the estate, right, title and interest of the Transferor Company therein so as to become the property of the Transferee Company but, subject to mo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ership rights, quota rights, permits, approvals, reauthorizations and availment of telephones, telexes, facsimiles, connections and installations, utilities, electricity and other services, reserves provisions, funds, benefits and all arrangements and all other interest arising to the transferor company including the equities (rights and also the obligations) in respect of its existing or proposed joint ventures (hereinafter collectively referred to as the said undertaking) shall, without any further act or deal, be transferred to and vested in and/or deemed to be transferred and vested in the Transferee company i.e. DSML pursuant to the provisions of sections 391 to 394 of the Act for all the estate, rights, titles, and interest of the Transferor company i.e. MSML therein. (2).................... This Court Doth Order- (1) The confirmation petition is accordingly allowed. The scheme of amalgamation is approved without any modification with 01.04.2005 as appointed date and the date of this order as effective date. The Transferor Company shall stand dissolved without any order of winding up to be made by the Court. (1) That all the property, rights and pow....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ransferee company. Under the scheme of arrangement, the share holders of the transferor company got shares of the transferee company in the ratio of 100 is to 10.39 shares of the face value of Rs. 10. (3) The immoveable property is situate in our State. The transferee company filed an application before the Tehsildar for recording its name over the same under the Land Revenues Act. thereafter a notice dated 5.4.2005 was issued to the petitioner to show cause as to why deficiency in the stamp duty and penalty be not imposed on it. The transferee company filed their reply on 18.4.2005 against the same. Thereafter the order was passed on 8.6.2006 imposing the deficiency of stamp duty of Rs. 9,44,47,000 under Article 23 (a) of Schedule I-B of the U.P. Stamp Act and penalty of Rs. 5,00,00,000. Hence the Writ Petition No. 41811 of 2006. 54. From the bare reading of the scheme of arrangement/amalgamation/merger, de-merger/reconstruction of company, almost in all the writ petitions the word transferor companies and transferee companies have been used and the transferor companies including all its properties movable, immoveable and assets of whatever nature such as licences, reg....
X X X X Extracts X X X X
X X X X Extracts X X X X
....made following submissions: (a) Scheme of arrangement/amalgamation/merger, de-merger/reconstruction of companies of a going concern is not conveyance relating to immoveable property or movable property. For the purposes of payment of stamp duty as required under Articles 23 (1) a and 23 (1) b of Schedule I-B of the Act. (b) Since there is no method of computation of stamp duty prescribed under the rules framed under Stamp Act in respect to such scheme of arrangements, therefore, no stamp duty can be charged. (c) While transferring the assets, liabilities have also been transferred and that has not been taken into consideration while issuing the impugned notice. (d) Almost in six states there are amendment under the Stamp Act with regard to the chargeability of stamp duty in respect to the scheme of amalgamation of companies/reconstruction of companies. Since in the State of U.P. there is no such amendment, therefore, the stamp duty cannot be charged. (e) The another reason for not charging stamp duty is that before the Hindustan Lever Ltd. case (2004) 1 Comp LJ 148 (SC) the State of U.P. has not been charging stamp duty on such type of s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....red and started without permission of the State Government. Considering the submissions of the learned counsel for the parties, the material thing which is required to be looked into is the requirement of law under the various provisions of the Stamp Act with regard to the chargeability of Stamp duty on such type of scheme of arrangements/merger/de-merger or reconstruction of company. Since it has already been held that such type of scheme of amalgamation/merger, demerger/reconstruction of companies falls under the definition of conveyance, therefore, only questions requires to be examined is the applicability of articles 23-(1) a, 23-(1) b of the Schedule I-B of the Stamp Act. From the perusal of entire scheme, the definition, of instruments/conveyance/chargeability and relevant chargeable articles of the Schedule I-B of the Stamp Act, it is apparent that different kind of stamp duty is chargeable on different kind of transfer of property. For example, some instruments relating to the transfer of property enumerated in the Indian Stamp Act, 1899, and its schedule are instrument of conveyance, gift, instrument of partition, lease, mortgage deed, settlement trust, transfer of lease,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reafter unchargeable articles are amended under the Stamp Act. In those States where amendment have been made, it may have been made with a view to give certain kind of relaxations with respect to such type of schemes but it appears that the state legislature of U.P. has not intended so and it has broadly divided the properties in two classes movable and immoveable with a view to charge stamp duty under the Stamp Act. It cannot be said that this kind of transaction neither falls under the category of movable nor immoveable property. The counsel for the petitioners have invited attention of the court towards the strict construction of the taxing statutes and submitted that unless language is clear with respect to chargeability on such type of arrangement no stamp duty can be charged. The ruling relied upon by the counsel for the petitioners with regard to the interpretation of fiscal statute as understood by me are fully applicable in reverse in the case of petitioners looking into the nature of the instrument and chargeable section and charging articles. There is no place of equity in interpreting the fiscal statutes since in State of U.P., the properties chargeable under the artic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rue from perusal of record that there is heavy liability along with the assets has also gone of the going concern merged in the other concern but looking into the fiscal nature of the statute, I am of the view that the liability of payment of stamp duty cannot be relaxed. The Court finds itself helpless to help the petitioner. So far as splitting of the scheme of arrangement/merger, de-merger/reconstruction of company with a view to charge stamp duty is concerned, I beg to defer in this regard for the simple reason that the stamp duty is demanded only with regard to the transfer of assets not on liability and under the provisions of Stamp Act to my little knowledge there is no provision to charge the stamp duty after excluding the liabilities. Learned counsels for the petitioners have also not shown any provision under the provision of the Stamp Act in this regard. Since Stamp Act is a fiscal statute, therefore, the stamp duty has to be charged under the chargeable articles over an instrument. Therefore, the stamp duty in my opinion can be charged even without splitting the liability as no duty is demanded on the liability. So far as the different kind of instrument in one deed is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....justice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it'. Last but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guidelines good citizens from those of the 'artful dodgers'. It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr. Justice Holmes, who said, 'Taxes are what we pay for civilized society. I like to pay taxes. With them I buy civilization'. But, surely, it is hight time for the judiciary in India too to part its ways from the principle of Westminster and the alluring logic of tax avoidance, we now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognise that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is to ask whether the provisions ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in different fields. Both have got their independent status. The things done under the provisions of Companies Act or not done, keeping in view the provisions of Indian Stamp Acts otherwise also, while framing such scheme and getting approval of the Court under the Companies Act, the court dealing with approval of scheme under the provisions of Companies Act is not supposed to look into the correctness of the statements with regard to the valuation of properties and the liabilities: Whereas the Stamp Acts is only concerned with the nature of the instruments and its chargeability under the various sections and schedules of the Indian Stamp Act. Therefore, to my mind, the court's order approving the scheme of amalgamation/merger, de-merger/reconstruction of companies can be looked into by the authorities under the Stamp Act with a view to charge the stamp duty. Except in the case of Hero Motors all the writ petitions have been filed challenging the show cause notice. However, in the case of Hero Motors, the notices have been issued only after the report of Tehsildar. When such scheme of amalgamation was brought before the Tehsildar for the purpose of mutation of the name of the c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er [or creating such right or relationship] unless it has been registered: [Provided that an unregistered document affecting immovable property and required by this Act, or the Transfer of Property Act, 1882, to be registered may be received or as evidence of any collateral transaction not required to be effected by registered instrument.]" 61. From the bare perusal of section 17 and 49 it is apparent that such type of scheme of arrangement/amalgamation/merger, de-merger/reconstruction of companies are required to be registered before the registering authority and at the time of execution it has to be stamped with proper stamp duties. Since the entire schedules as contained in the scheme of arrangement/amalgamation/merger, de-merger/reconstruction of companies has not been brought on record, therefore, broadly it can be inferred that it is chargeable only under articles 23 (1) a and 23 (1) b of Schedule I-B of the Stamp Acts as the properties are either immovable or movable have been transferred but from the language used in the scheme it appears that different type of instruments are clubbed together in one deed and apart from the movable and immovable properties, leas....