TaxTMI 
TaxTMI 
2025 (1) TMI 555
X X X X Extracts X X X X
X X X X Extracts X X X X
....s : Mr. Gaurav Gupta, Sr. SC with Mr. Shivendra Singh, Mr. Yojit Pareek, Advocates for Income Tax. Mr. Sajjan Poovayya Sr. Advocate with Mr. K.V. Girish Chowdary, Mr. Palash Maheshwari, Mr. D. Satya Sai Sumanth, Advocates for Intervention Applicant For Appellant : Mr. Sajjan Poovayya Sr. Advocate with Mr. K.V. Girish Chowdary, Mr. Palash Maheshwari, Mr. D. Satya Sai Sumanth, Advocates For the Respondents : Ms. Munisha Gandhi, Sr. Advocate with Mr. Vaibhav Sharma, Ms. Salina Chalana, Advocates for R- 1. Mr. Vaibhav Sharma, Advocate for R- 2 & 3 JUDGMENT ( Hybrid Mode ) [ Per : Ajai Das Mehrotra , Member ( Technical ) ] Company Appeal (AT) No. 120 of 2023 is filed by Indiabulls Real Estate Ltd. (hereinafter called the 'IBREL' or the 'Transferee Company'), NAM Estates Private Limited (hereinafter called the 'NAMEPL' or the 'Transferor Company No. 1') and Embassy One Commercial Property Developments Private Limited (hereinafter called 'EOCPDPL' or the 'Transferor Company No. 2') against the order dated 09.05.2023 in CA No. 9/2023 & CA No. 29/2023 and CP (CAA) No. 14/Chd/Hry/2022 passed by Ld. NCLT Chandigarh Bench, Chandigarh, wherein the Second Motion Company Petitio....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... his Report confirmed that the resolution for Amalgamation was passed by equity shareholders by 99.9987% out of the total shareholders present and voting in the meeting. iii) All the directions issued by Ld. NCLT were complied with by the Transferee Company including publication of notice of hearing in English and Vernacular newspapers and notices to various Government/Statutory Regulatory Authorities. iv) The Petitioner Company submitted that no objection to the scheme was received by the Petitioner Company or any of its representatives till date. v) The Competition Commission of India, in letter dated 24.02.2021 gave their no objection stating that "the proposed combination is not likely to have any appreciable adverse effect on competition in India in any relevant market(s) and the proposed combination is approved under Section 31(1) of the Competition Commission Act, 2002". vi) The Statutory Auditors confirmed that the Scheme is in compliance with the applicable Indian Accounting Standards as specified in Section 133 of Companies Act, 2013. vii) The Registrar of Companies and the Regional Director initially raised some observations w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ired by way of amalgamation of NAM Estates Pvt. Ltd. and EOCDPL with IBREL by way of share swapping. xv) In a more detailed report dated 17.09.2022, the Income Tax Department informed that incriminating material was seized, indicating over valuation of the assets of the Embassy group while transferring the same to M/s NAMEPL. It was pointed out that there are inconsistencies and incorrect assumptions made while valuing the assets. The Income Tax Department pointed out that one of the joint development project, namely Embassy Cornerstone Tech Valley, was undertaken by the Embassy group where the land doesn't belong to it. The value of this asset has been estimated at Rs. 581 crores and the land for development was 100 acres, and it was decided by parties that 67% built-up area was for the Embassy group and 33% belonged to Cornerstone group. Cornerstone had failed to acquire 20 acres and the total land available for development is only 80 acres. The reduction of the measurements of assets (land) has not been conveyed to IBREL and its shareholders. As per the Embassy group approximately 8 acres of land still needs to be acquired by the Cornerstone group out of the 80 acres. T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....etitioner that 99% of the secured creditors, which included leading banks and financial institution, had given their consent to the scheme of amalgamation. The public shareholders have also approved the scheme with overwhelming majority. The scheme has been additionally vetted and cleared by the SEBI and Stock Exchanges. xvii) The Valuer, Mr. Mander Vikas Gadkari, filed an affidavit dated 14.03.2023 supporting his valuation report. The Second Valuer, Mr. Niranjan Kumar also filed an affidavit dated 14.03.2023 supporting his valuation report. xviii) Valuation reports submitted by Mr. Niranjan Kumar/NS Kumar and Company and Mr. Mander Vikas Gadkari/BDO* (wrongly stated as IBDO in the order of NCLT) have stated number of limitations, qualifications, exclusions and disclaimers in the report. It was noted that the Valuer had not done any independent evaluation or appraisal of the assets of the company and no analysis of any potential or actual litigation or possible unasserted claims has been made. xix) The main issue for discussion is "whether a Fair equity swap ratio determined solely on the basis of information furnished by the management without the valuer making a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....do not represent faithfully that which it either purports to represent or could reasonably be expected to represent. 32. As a sequel to the above discussion and reasons recorded herein before, this Tribunal is of the considered opinion that it is not a fit case to sanction the scheme of amalgamation. Hence, the CP(CAA) No. 14/Chd/Hry/2022 stands dismissed. As discussed above, CA No. 9/2023 & CA No. 29/2023 are also dismissed." 5. Surprisingly, the report dated 11.04.2023 of Amicus Curiae appointed by Ld. NCLT, Chandigarh is not reproduced/discussed in the impugned order. At the end of his report, the Amicus Curiae, CA (Dr) Debashis Mitra, gave his opinion, which is reproduced below: "D. Opinion In view of the above, in my considered view :- 1. It is recognized that a Registered Valuer (RV), shall prepare the valuation report of the company based on information and records concerned as provided by the management. The management remains liable for the correctness and veracity thereof. However, significant inputs provided to the RV by the management/owners should be considered, investigated and /or corroborated by the Valuer. The various....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ently, if the material assumptions are found to be incorrect or not based on facts then the DC Method would be adversely affected. 3. I have been made to understand that the original scheme of merger related to100 acres of land for Embassy Comerstone Tech Valley Project at Bangalore & the swap ratios* of 67:33 was decided between Nam Estates Private Limited, Embassy One Commercial Property Development Private Limited and India bulls Real Estate Limited. Subsequently, the swap ratio* was revised to 74:26 based on 80 acres of land which could be acquired at Embassy Cornerstone Tech Valley Project at Bangalore. The Joint Development Agreement ("JDA") for 80 acres with the revised sharing ratio (74:26) was executed between the parties on 15 Nov 2021 (which is after the date of valuation report being August 18, 2020), with the provision for reverting to the original ratio of 67:33 upon completion of acquisition of the balance lands by the Landowner. Further clarity is required as to how the swap ratio could be revised post the valuation date of 18th August,2020 & whether the revision adequately compensates Embassy Group for loss in value due to reduct....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... fair. The SEBI had specifically examined the valuation reports and have found them to be in order. (d) The scheme has been extensively examined by various Government and Statutory Authorities and no objection has been raised by Securities and Exchange Board of India, Bombay Stock Exchange, National Stock Exchange, Registrar of Companies, Regional Director, Ministry of Corporate Affairs and Competition Commission of India and their replies were placed on record. (e) The scheme was approved by an overwhelming 99.998% shareholders, much higher than the threshold of 75% required under Section 230 of the Companies Act, 2013. (f) All the pre-requisites prescribed under Section 230 of Companies Act, have been complied with. (g) The report of BDO has been made on the basis of the International Valuation Standards. Only the report of NS Kumar & Co. is made as per ICAI valuation standards. The ICAI Standards 201 (2018), in point 18 itself states that "The valuation shall not be constituted as an audit or review in accordance with the auditing standards applicable in India, accounting/ financial/ commercial/ legal/ tax/ environmental due diligence or foren....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... valuation reports which were prepared prior to the issue of these guidelines. 8. It was further submitted that the Amicus Curiae had correctly pointed out that Valuer is not required to conduct any audit or to express any assurance on the information provided by the management. It was further stated that change in profit sharing ratio consequent to later knowledge of acquisition of only 80 acres of land, instead of 100 acres of land by the joint development partner, were events subsequent to the valuation report. However, due to changed profit sharing ratio, the cashflow from the JDA will hardly be affected and this aspect has been confirmed by the Valuer in affidavit dated 01.03.2023, which is as under: "10.2. Assuming all other factors considered in the valuation report remain same, if the area to be developed is reduced from 100 acres to 80 acres (and the said reduction is reflected in the last phase of development), then the revision in JDA ratio from 67% to 74% adequately compensates Embassy Group for loss in value due to such reduction in the area of the land to be developed." Reliance was placed on the following judgments: (i) Mihir H. Mafatlal Vs. M....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ll tax liabilities arising due to pre-merger and merger stage issues of the concerned entities. 2.3. In view of the above, since the petitioner company has undertaken to pay any and all tax dues as may be applicable with respect to it or the Amalgamating companies which was the stand of the department, the interest of the Income Tax Department is protected on this aspect. 2.4. Vide email dated 01/03/2023, it was submitted before the Hon'ble NCLT that O/o DDIT (Inv.) Unit 3(3), Bengaluru submitted a factual report on valuation based on the prima facie evidences found during search, and since the department is not expert in valuation and the said office didn't have any further comments to offer on same." 11. In Rejoinder to the counter affidavit dated 07.12.2023, the Appellants submitted that the Scheme of Amalgamation, in Clause 3.2(xiv) of Part III read with Clause 15.2(xiv) of Part IV, provides that all tax liabilities including any tax proceedings (whether direct or indirect) payable by NAM Estates Private Limited or Embassy One Commercial Property Developments Private Limited, respectively, shall be treated as the tax liability/proceedings of the Amalgam....
X X X X Extracts X X X X
X X X X Extracts X X X X
....point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. The Tribunal also has to see that the scheme of amalgamation if the same is prejudicial to the interest of a particular class who may not be able to meet the threshold limit to see the scheme but it may be a pointer enough for the Tribunal to see that the scheme may be loaded against the interest of the objectors." 13. It was submitted that besides the issue of Cornerstone Project, there was another issue regarding Concord Land which was land leased by KIADB in favour of Concord India Pvt. Ltd. It is alleged by the objector that resumption proceedings were initiated by KIADB as of 31.08.2023 and in this case interim orders were passed by Karnataka High Court on 29.10.2021 in Writ Petition No. 18952 of 2021 which ought to have been duly disclosed. It was also submitted that the impact of internal restructuring of NAMEPL was not considered by the valuers while working out the swap ratio. 14. In its response, the Learned Counsel for Respondent No. 1 (IBREL) submitted as follows: i) Mr. Tejo Ratna Kongara acquired shares through ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s by previous owner, had purchased the said shares, and since his shareholding is much less than the threshold of 10% specified under Section 230(4) of the Companies Act, 2013, the Company Application No. 9 of 2023 and Company Application No. 92 of 2022 are not maintainable. Recently, this Tribunal has held similar view in Jatinder Singh Ahuja & Ors. vs. Tata Steel Ltd. & Ors. (MANU/NL/0867/2023). However, in view of the spirit of decision of this Tribunal in the case of Ankit Mittal (Supra) the objections raised by the Objector are being considered while arriving at the decision in this case. We also agree with Ld. NCLT that the reports submitted by the Income Tax Department are not to be shared with a minority shareholder who has no locus to intervene, as his shareholding is less than the minimum prescribed in Section 230 (4) of the Companies Act, 2013. Company Appeal (AT) No.215-216 of 2023 are accordingly dismissed. 17. The issue in the main appeal Company Appeal (AT) No.120 of 2023 is (a) whether any material information was suppressed which had a substantial impact on valuation of the shares, and the consequential share swap ratio, or whether the valuation done by the valu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....el because it is based upon expected future cash flows that will determine an investor's actual return; (b) It is based on expectations of performance specific to the business, and is not influenced by short-term market conditions or non-economic indicators; (c) It is not as vulnerable to accounting conventions like depreciation, inventory valuation in comparison with the other techniques/approaches since it is based on cash flows rather than accounting profits; (d) It is appropriate for valuing green-field or start-up projects, as these projects have little or no asset base or earnings which render the Cost Approach (net asset value) or the Market Approach (application of market multiples) inappropriate. However, it is important that valuation must recognise the additional risks in such a case (e.g. project execution risk, lack of past track record, etc.) by using an appropriate discount rate." ( Emphasis supplied ) 21. The said DCF method is also recognised in Rule 11(UA) of Income Tax Rules 1962, the relevant part of which is under: "11UA. [(1)] For the purposes of section 56 of the Act, the fair market value of a property, oth....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s sometime referred to as an income capitalisation method. 23. The Foreign Exchange Management Act (FEMA) earlier recognised DCF as the only method for valuing shares, though it has been replaced with any internationally accepted pricing methodology. The DCF was specified as sole method in RBI FEMA Notification No. 205/2010-RB dated 07.04.2010 and the relevant portion is as under: "5. Issue Price Price of shares issued to persons resident outside India under this Schedule, shall not be less than - (a) the price worked out in accordance with SEBI guidelines, as applicable, where the shares of the company is listed on any recognised stock exchange in India; (b) the fair valuation of shares done by a SEBI registered Category-I Merchant Banker or a Chartered Accountant as per the discounted free cash flow method, where the shares of the company are not listed on any recognised stock exchange in India; and (c) the price as applicable to transfer of shares from resident to nonresident as per the pricing guidelines laid down by the Reserve Bank from time to time, where the issue of shares is on preferential allotment." The said rul....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 01.09.2020 are applicable prospectively and para 1(b) states that : "These guidelines shall come into force in respect of valuation reports in respect of valuations completed by Registered Valuers (RVs) on or after 1st October, 2020". The Ld. NCLT has grossly erred in applying these guidelines retrospectively. 27. From perusal of the records of this case, we find that no objection to the Scheme was raised by any of the statutory or regulatory authority, except the Income Tax Department. The Competition Commission of India has stated that the Scheme does not cause any appreciable adverse impact on competition and they have no objection to its approval. The Competition Commission of India, The Registrar of Companies and The Regional Director, Ministry of Corporate Affairs have not raised any objections viz. a viz. compliance of various provisions of the Companies Act, 2013 and Competition Act. SEBI and Stock Exchanges have not raised any compliance issue regarding the listed entities involved in the Scheme. 28. The Ld. NCLT, Bangaluru, which had jurisdiction over both the Transferor Companies had accepted and approved the Scheme. As recorded in the previous paragra....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is a symbol of the soundness of the scheme. The court would not interfere. It cannot substitute with its wisdom the collective wisdom of the shareholders. 32. It was held in Aradhana Beverages & Foods Company Ltd. V Regional Director of Companies, 1998 (46) DRJ 228 where share exchange ratio is determined by experts, and shareholders are satisfied, no interference at the instance of Regional Director is called for. The relevant portion of the said judgment is reproduced below: "Since as a matter of fact and undisputedly the loan has been subsequently converted into shares, the grievance of the Regional Director in my view does not survive. The shareholders and creditors are better equipped to gauge the value of their shares with reference to market trends & if they have approved the amalgamation, the Regional Director cannot be heard to say that the merger would not be in interest of the shareholders and creditors & consequently in the public interest. To my mind in a given case, the interest of the shareholders may or may not be synonymous with the public interest. But in the instant case determination of the share exchange ratio does not affect public interest. There....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... if some other method would have been adopted probably the determination of valuation could have been a bit more in favour of the shareholders. But since admittedly more than 95% of the shareholders who are the best judges of their interest and are better conversant with market trend agreed to the valuation determined it could not be interfered by courts as, "[certainly, it is not part of the judicial process to examine entrepreneurial activities to ferret out flaws. The court is least equipped for such oversights. Nor, indeed, is it a function of the judges in our constitutional scheme. We do not think that the internal management, business activity or institutional operation of public bodies can be subjected to inspection by the court. To do so, is incompetent and improper and, therefore, out of bounds. Nevertheless, the broad parameters of fairness in administration, bona fides in action, and the fundamental rules of reasonable management of public business, if breached, will become justiciable." (Emphasis supplied) 34. It has been held by Hon'ble Supreme Court in the case of Miheer H. Mafatlal v Mafatlal Industries Ltd. (1997) 1 SCC 579, it is for the equit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....valuation cannot be assailed unless it is shown that the valuation was made on a fundamentally erroneous basis, or that a patent mistake had been committed, or the valuer adopted a demonstrably wrong approach or a fundamental error going to the root of the matter. Where a method of valuation is prescribed the valuation must be made by adopting scrupulously the method prescribed, taking into account all relevant factors which may be enumerated as relevant for arriving at the valuation". ( Emphasis supplied ) 37. Hon'ble Bombay High Court in the case of Alstom Power Boilers Ltd. vs. State Bank of India & IDBI 2002 SCC Online Bom 1084 has held the Company Court has supervisory jurisdiction, and where Scheme is approved by overwhelming majority, the dissenting minority shareholders cannot tyrannise the majority. The relevant part of judgement is as under: "........ 28. The parameters of the jurisdiction of the Company Court under Sections 391 to 394 are well established. The limitations put on this jurisdiction can be equated with the jurisdiction of the judicial review under Articles 226 and 227 of the Constitution of India. It is not an appellate jurisdi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t, it is not for the court to substitute its exchange ratio especially when the same has been accepted without demur by the overwhelming majority of the shareholders of the two companies, or the say of that the shareholders in their collective wisdom should not have accepted the exchange ratio on the ground that it will be detrimental to their interest. The Supreme Court precisely says so, In the petitions on hand there is absolutely no demur by any of the shareholders against the exchange ratio. On the contrary the shareholders of the transferor-companies and transferee-company also have accepted the exchange ratio proposed in the scheme of amalgamation. Therefore, it appears that, it would not be open to me to say that the exchange ratio accepted by the shareholders of the transferor-companies and the transfereecompany would be prejudicial or detrimental to their interest. Therefore, the above said communication should not come in the way of the petitioning companies. 14. Independently all of these, as a company court, I have been satisfied with the scheme proposed as a whole is just, fair and reasonable from the point of view of all concerned". ( Emphasis supplied ) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... would not correctly reflect the revaluation reserve. In this connection, a reference is made to the Kerala High Court decision, in the case of Malayalam Plantation (India) Ltd. v. Mathew Philip. [1986] TLR 1753, in which the learned single Judge has taken a view that, when there was no evidence of fraud or mala fides on the part of the persons making the valuation and when the standard method of valuation is adopted, the objection to the valuation should be overruled. Here also, in the instant case before me, there is not only no evidence of fraud or mala fides on the part of the valuer, but even there is no such whisper in the affidavit-in-reply, filed on behalf of the Central Government. In view of this factual and legal position, the contention does not appear to be open to the Central Government. The exchange ratio, therefore, cannot be said to be unreasonable or unfair. This requires to be said and emphasised regard being had to the revaluation reserve of the assets of the transferor-company. 15. Thus, it appears that, the petitions require to be allowed and the scheme of amalgamation, as presented along with the same require to be sanctioned. The same is hereby acco....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ppear to be no further impediments to the grant of sanction to the Scheme of Arrangement. Consequently, sanction is hereby granted to the Scheme of Arrangement under Sections 391 and 394 of the Companies Act, 1956 on the aforesaid terms while reserving the right of the Income Tax Authorities to the extent stated above". ( Emphasis supplied ) 43. The Hon'ble Bombay High Court in Parke Davis (India) Ltd, In re [Company Petition No. 894 of 2002] while deciding the legality of swap share ratio discussed the judgement of Hindustan Lever (Supra) and held that: "It is clear from the observations that if any objection is raised before the company court to the swap ratio of shares, the enquiry that the court has to make is whether it is contrary to any law, whether the valuation is carried out by an independent body and to find out whether it can be said that the ratio is unfair. The court has to see how the members who are the best judges of their own interest have voted on the resolution. So far as the present case is concerned, it is nobody's case that the swap ratio is contrary to any law. It is also nobody's case that the experts who submitted the valua....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (KIADB) to conduct enquiry into alleged violation of lease terms by Concord India Pvt. Ltd., which is subsidiary of NAMEPL. It was submitted that KIADB concluded the enquiry and passed the order dated 03.09.2024 under Section 34(B) of KIADB Act 1966 which is entirely in favour of Concord India Pvt. Ltd. (now known as Embassy East Business Pvt. Ltd., for short 'EEBPL'). This order of KIADB has been challenged before the Hon'ble High Court of Karnataka and it is still pending. Since this land and the land holding company are not part of the present scheme of amalgamation, it is not likely to effect the approval of the scheme. Interestingly, this issue was also raised before Ld. NCLT Bangaluru, wherein it was held as under: "It is to be seen that even according to the KIADB, the original Allottee M/s. Steyr India Ltd.*, now known as M/s. Embassy East Business Park Pvt. Ltd. is neither the Petitioner in the instant C.P. nor the Petitioners in the C.P. sought for any reliefs with regard to the properties or claims of the said Allottee. Even otherwise as ordered hereinunder, upon approving, the scheme does not confer any additional right, authority or power to the amalgamated c....