IN THE HIGH COURT OF GUJARAT AT AHMEDABAD · IN THE HIGH COURT OF GUJARAT AT AHMEDABAD O.J.APPEAL...

OJA/81/2010 1/91 JUDGMENT

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

O.J.APPEAL No. 81 of 2010In

COMPANY PETITION No. 183 of 2009In COMPANY APPLICATION No. 254 of 2009

For Approval and Signature:

HONOURABLE MR.JUSTICE P.B.MAJMUDAR

HONOURABLE MR.JUSTICE MOHINDER PAL

================================================

1Whether Reporters of Local Papers may be allowed to see the judgment ?

2To be referred to the Reporter or not ?

3Whether their Lordships wish to see the fair copy of the judgment ?

4

Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ?

5Whether it is to be circulated to the civil judge ?

================================================ VODAFONE ESSAR GUJARAT LIMITED Appellant(s)

VersusDEPARTMENT OF INCOME TAX Opponent(s)

================================================

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Appearance :MR MIHIR H JOSHI, SR ADVOCATE WITH MR SAURABH N SOPARKAR, SR ADVOCATE WITH MR AMIT M PANCHAL, ADVOCATE for the Appellant with Ms Niti Dixit, Advocate with Mr Sandeep Singhi, Advocate with Ms Shivani S Rajpurohit, Advocate MR MIHIR J THAKORE, SR ADVOCATE with MR NITIN K MEHTA for the Respondent No.1 – Income Tax Department

MR PANKAJ S CHAMPANERI, ASST. SOLICITOR GENERAL OF INDIA for REGIONAL DIRECTOR================================================

CORAM : HONOURABLE MR.JUSTICE P.B.MAJMUDARandHONOURABLE MR.JUSTICE MOHINDER PAL

Date : /08/2012

CAV JUDGMENT

(Per : HONOURABLE MR.JUSTICE P.B.MAJMUDAR)

1 This appeal is directed against the judgment

and order dated 9th December 2010 passed in

Company Petition No.183 of 2009 whereby the

learned Company Judge did not accord

sanction to the Scheme of Arrangement under

Sections 391 to 394 and other applicable

provisions of the Companies Act, 1956

whereby Passive Infrastructure Assets of the

appellant Company together with the Passive

Infrastructure Assets of other Companies,

transferor companies, shall vest in and

become the right, property and assets of

Vodafone Essar Infrastructure Limited, the

transferee Company.

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2 The transferee company was originally

incorporated under the Companies Act, 1956

on 19th January, 2007 with the Registrar of

Companies, Maharashtra, Mumbai under the

name and style of Perfect Tribute Impex

Private Limited. The company changed its

name to Vodafone Essar Infrastructure

Private Limited after passing the necessary

resolution to this effect and obtained fresh

certificate of incorporation on 18th

October, 2007. The company again changed its

name to Vodafone Essar Infrastructure

Limited and obtained fresh certificate of

incorporation on 17th January, 2008.

Thereafter, the company shifted its

registered office from the State of

Maharashtra to NCT of Delhi and obtained a

certificate in this regard from the

Registrar of Companies, NCT of Delhi &

Haryana at New Delhi on 28th June, 2008.

3. The authorized share capital of the

transferee company, as on 31st March, 2009,

is Rs.5,00,000/ divided into 50,000 equity

shares of Rs.10/ each. The issued,

subscribed and paid up capital of the

company is Rs.5,00,000/ divided into 50,000

equity shares of Rs.10/ each.

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4 It is the case of the appellant Company

that the Board of Directors of the appellant

Company has approved the Scheme by

Resolution passed in the meeting held on 21st

September 2007 and further modified by a

Resolution dated 30.4.2008. The Board of

Directors of the transferee Company has also

approved the Scheme by a Resolution dated

21.9.2007.

5 The Scheme envisages the demerger of the

Passive Infrastructure Assets of each of the

transferor Companies. Upon sanction of the

Scheme, the Passive Infrastructure Assets of

the transferor Companies will be transferred

from each of the transferor Companies and

shall vest in the transferee Company. By

an order dated 8th July 2009 passed in

Company Application No.254 of 2009 this

Court has dispensed with the requirement of

holding meetings of the shareholders,

Secured Creditors and the Unsecured

Creditors of the petitioner Company, for the

purpose of considering and approving the

Scheme. The registered office of the

appellant company is situated at Ahmedabad.

Along with the Company Petition a copy of

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the Scheme of Arrangement has been filed on

the record and salient features of the

Scheme have been incorporated and detailed

in the Company Petition. Under the said

Scheme it is proposed to demerge passive

infrastructure assets of eight transferor

companies and transfer them to the

transferee company. The transferee company

is the wholly owned subsidiary of the

transferee company. The said scheme has

already been sanctioned by the High Courts

of Bombay, Calcutta, Madras and Delhi. The

Scheme envisages that on the appointed day,

inter alia, the passive infrastructure

assets of all the transferor companies shall

stand transferred to it and vested in the

transferee company. As per the Scheme, the

segregation of the passive infrastructure

assets, business and the telecommunications

services business is to enable further

growth and maximise value in each of the

businesses. It is also claimed that it will

improve the quality of services to customers

by establishing a high service standard and

delivering services in an environment

friendly manner and will also increase the

speed of rollout and efficiency through the

sharing of infrastructure. This initiative

of the petitioners is stated to be in line

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with global trends, as well as the policy of

the Government of India, as reflected in the

Report of the Working Group on the Telecom

Sector for the Eleventh Five Year Plan

(20072012) issued by the Department of

Tele Communications, Ministry of

Communications and Information Technology,

Government of India. The Department of

Telecommunications has recommended, inter

alia, to promote sharing of infrastructure

so that costs can be kept down, which is

essential for rural penetration, and to

incentivize such sharing.

6 So far as share exchange ratio is concerned,

the Scheme provides that the Scheme is

intended to restructure, within the Vodafone

Essar Limited Group, the holding of the

assets constituting the Passive

Infrastructure Assets in a more efficient

manner consistent with the diverse needs of

business, and does not involve any movement

of assets or liabilities to any company

outside the Vodafone Essar Limited Group.

The said transfer is without consideration

as the transfer of the Passive

Infrastructure Assets is within the Vodafone

Essar Limited Group and according to the

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appellant company, the transferee company

shall not be required to issue any shares or

pay any consideration to any of the

transferor companies or their shareholders

for acquiring the Passive Infrastructure

Assets. As pointed out earlier, the Board

of Directors of the transferor and

transferee companies, in their respective

meetings, have unanimously approved and

proposed the scheme of arrangements. The

Scheme was accordingly placed before the

learned Company Judge for according his

sanction.

7 The learned Company Judge admitted the

petition on 11th August 2009 and notice was

issued to the Central Government to be

served through the Regional Director,

Ministry of Corporate Affairs, Mumbai.

Notice was also issued to the Official

Liquidator for examination of the affairs of

the petitioning Company. The Official

Liquidator was given liberty to engage

Chartered Accountant for such purpose at the

cost of the appellant Company. The learned

Company Judge also directed to issue public

advertisement in Times of India, English

daily, Ahmedabad edition and Gujarat

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Samachar, Gujarati daily, Ahmedabad edition,

in terms of the Companies (Court) Rules,

1959. Pursuant to the notice, public

advertisements were issued and affidavit to

this effect was filed before the learned

Company Judge.

8 In response to the notice served on the

Regional Director an affidavit was filed by

Shri Rakesh Chandra, Regional Director,

Western Region, Ministry of Corporate

Affairs, Mumbai on 27th November 2009

stating that the appellant Company may be

directed to furnish the latest financial

statement before this Court at the time of

hearing and that the petitioner Company may

also be directed to obtain necessary

approval of the concerned regulatory

authorities of the Ministry of the

Telecommunications in respect of the present

scheme of arrangement if applicable and that

the Regional Director had received letter

dated 7.9.2009 from Assistant Commissioner

of Income Tax, Ahmedabad on tax aspects in

respect of the appellant Company wherein it

is stated that they are going to represent

the same before the learned Company Judge.

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9 In response to these objections and

observations, an affidavit was filed on

behalf of the petitioner Company and it was

submitted that the latest audited financial

statement of the petitioner Company for the

financial year ended on 31.3.2009 were filed

along with the Company Petition. The latest

unaudited financial statements of the

petitioner Company as on 31.9.2009 were

placed on record along with this affidavit.

With regard to the second issue raised by

the Regional Director, it was submitted that

the petitioner Company is a mobile

telecommunication service provider and holds

a Unified Access Services License for the

Gujarat Service Area, with effect from

20.10.2008 issued by the Department of

Telecommunications. The appellant Company is

not transferring the license to the

transferee Company pursuant to the Scheme

and hence condition No.6.3 of the license is

not applicable. It was further stated that

the appellant Company shall continue to hold

its license and to provide the licensed

telecommunications services even after the

completion of the demerger and therefore

there was no requirement for the appellant

Company to seek approval of the Department

of Telecommunications for the Scheme. It

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was also submitted that the transferee

Company is registered as an Infrastructure

Provider Category–1 by the Department of

Telecommunications which permits the

transferee Company to establish and maintain

Passive Infrastructure Assets to lease, rent

or sell such assets to licensees of Telecom

Services licensed under Section4 of the

Indian Telegraph Act, 1885.

10 The learned Company Judge having considered

the objections raised on behalf of the

Income Tax Department and having heard

learned counsel for the parties came to the

conclusion that the sole object of the

Scheme is to avoid tax. The learned Company

Judge observed that the transaction is void

under Section 281 of Income Tax Act and

therefore the court will not exercise its

jurisdiction to sanction a transaction which

is pointed out to be void. The learned

Company Judge observed that the Scheme

appeared to be a camouflage to circumvent

the mandatory provisions of Income Tax Act.

The learned Company Judge has also observed

that since no liabilities are transferred

including the employees relating to the

Passive Infrastructure assets, the expenses

will continue to be borne by the Transferor

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companies which would artificially deplete

the taxable profit and will not give a true

and fair view of the accounts, thus

adversely affecting the taxable profits.

He has further observed that the entire tax

payable on the market value of assets to be

transferred to Indus is sought to be evaded

by present scheme and had the transaction

been done directly with Indus, the same

would not have been exempted, and it would

have been at market value for exchange of

consideration. He further observed that

since the liabilities are not taken over, it

would not tantamount to a demerger u/s

2(19AA) nor gift u/s 47(iii). He further

observed that since the liabilities are not

to be taken over nor any shares are supposed

to be issued, it could not satisfy the

condition of demerger and therefore the only

option was to transfer it as a gift as a tax

planning devise. The learned Company Judge

was of the opinion that by doing so it is

creating a conduit avoiding the capital gain

tax at this stage and further in the next

stage the transferee is sought to be merged

with Indus which transaction will again be

exempt u/s 47 and thus would be avoiding

capital gain tax at that stage as well. The

learned Company Judge therefore came to the

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conclusion that income tax amounting to the

tune in excess of Rs.3,500 crore as alleged

by the Incometax Department is sought to be

evaded if the present scheme is sanctioned

by the Company Court.

11 As regards stamp duty and VAT, the learned

Company Judge observed that stamp duty is

sought to be evaded to the tune to Rs.600

crores and if the sale is directly made to

Indus, the stamp duty payable would have

been @ 6%. If the court sanctions the

present scheme in the guise of demerger u/s

391, the stamp duty shall be paid @ 1% and

thus avoiding legitimate payment of stamp

duty to the extent of 5% (6%1%) on the

amount of Rs.15,000 crores being the

conservative estimate of the market value of

Passive Infrastructure assets being

transferred. He further observed that no

VAT shall be payable on the movable assets

transferred under the scheme if the same is

sanctioned under Section 391 which otherwise

would have been payable.

12 The learned Company Judge thus observed that

it is a foregone conclusion that if the

present scheme is sanctioned by him, it

would result into avoidance of tax and that

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the transferee company is nothing but a

paper company was being used only as an

intermediary for transferring Passive

Infrastructure assets from transferor

companies to Indus for the purpose of tax

evasion. The learned Company Judge has

relied on the decision of Wood Polymer Ltd.:

(1977) 47 Co. Cases 597 (Guj) for coming to

the conclusion that the scheme is nothing

but a device and a conduit having the sole

purpose of avoiding and evading taxes

including income tax, stamp duty,

registration charges and VAT. The purpose

being tax avoidance is explicit from the

facts that different accounting treatments

are accorded to transferor companies having

a positive net worth in comparison to ones

which have negative net worth with an

intention to maximize tax avoidance and

therefore the Scheme is unreasonable, unfair

and unjust.

13 The aforesaid order passed by the learned

Company Judge in not granting sanction to

the Scheme in question has given rise to

this appeal at the instance of the appellant

– Vodafone Essar Gujarat Limited.

14 Mr Mihir Joshi, learned Senior Counsel,

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assisted by Mr Amit Panchal, learned counsel

for the appellant, has vehemently argued

that the learned Company Judge has merely

recorded the submissions of both the sides,

but has not considered the submissions made

on behalf of the appellantcompany and by

merely recording the arguments of the

incometax Department passed the impugned

order without giving his own independent

reasoning in this behalf. Mr Joshi has

argued that the learned Company Judge should

have given his own independent reasons

instead of merely recording the arguments of

both the sides and ultimately in dismissing

the company petition on the basis of the

submissions of the incometax Department.

It is argued by Mr Joshi that the incometax

Department has no locus standi to raise

objections to the Scheme especially when no

objections have been raised by anyone else.

It is argued by Mr Joshi that the learned

Company Judge has committed a grave error in

coming to the conclusion that the sole

object in formulating the Scheme is tax

avoidance. He has submitted that without

there being any basis in this behalf the

learned Company Judge has come to the said

conclusion.

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15 Mr Mihir Joshi next contended that it is a

case of reconstruction of business in line

with the Government policy and even other

telecom companies have also formulated such

policy. It is submitted that in the matter

of reconstruction of business, Section 25 of

the Contract Act has no role to play and the

said provisions are not attracted. It is

submitted that by the instant scheme the

passive assets will become revenue

generating assets. It is further submitted

by him that no rights of the incometax

Department are being affected by the present

Scheme and the appellant would continue to

be profitable after the demerger of Passive

Infrastructure (PI) assets and that its net

worth after giving effect to the Scheme

would be Rs.3592 crores as on March 31,

2012. On the other hand the outstanding

demand of the Income Tax Department as on

July 1, 2012 is Rs.29.3 crores

approximately. In the circumstances, the

rights of the Income Tax Department to

recover the alleged demand would in no

manner be affected by the sanctioning of the

present Scheme. It is further submitted

that sanctioning the scheme ipso facto would

not grant any immunity to the Appellant qua

any liability that may be imposed on it

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under the relevant provisions of the Income

Tax Act, in accordance with law. Similar

statement has also been made before the

Delhi High Court in the case of Vodafone

Essar Limited & ors. v/s. Vodafone Essar

Infrastructure Limited, reported in (2011) 2

Comp LJ 317. It is submitted that once

the dues of Income Tax Department are taken

care of, it has no further locus standi to

challenge the Scheme. It is further

submitted that under Sections 391394 of the

Companies Act, 1956 only the Central

Government, through the Regional Director

has the powers to study the Scheme and raise

such objections as it thinks fit. Thus,

besides the shareholders and creditors of

the company to whom an arrangement and/or

compromise is offered by the company, only

the Regional Director has locus standi in

respect of the proceedings under sections

391394 of the Companies Act. The Income Tax

Department, which is a revenue collecting

arm of the Central Government, cannot object

to the proposed Scheme. He submitted that

it is only the Central Government through

Regional Director which is vested with the

powers to raise the objections qua the

Scheme but, when the Regional Director has

not raised any objection to the Scheme,

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which is sought to be raised by the Income

Tax Department the Incometax Department has

no locus to raise such objections. It is

further submitted that when the Central

Government through the Regional Director

has not raised any objection to the Scheme,

it is surprising as to how the Incometax

Department is fighting tooth and nail in

opposing the Scheme as if it is an adverse

litigation between the appellant and the

Incometax Department.

16 Mr Joshi has further submitted that the

objection taken by the Incometax Department

to the effect that the sole object of the

Scheme of Arrangement is tax evasion is not

sustainable at all. It is submitted that

the ratio of the judgment of the learned

Single Judge in the case of Wood Polymer

Ltd. (supra) has no application to the facts

of the present case as the Scheme seeks to

achieve a commercial purpose and object

inter alia being segregating the PI business

and the telecommunications service business

to enable further growth and maximize value

in each of the business; improved quality of

services to customers by establishing high

service standards and delivering services in

an environment friendly manner; increase in

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the speed of role out and efficiency through

sharing of infrastructure, converting the PI

assets from nonrevenue generating assets;

improved network quality and greater

coverage etc. He further submitted that the

segregation of telecommunications services

and telecommunications infrastructure

business reflects the global trend and has

been adopted by telecommunication companies

in India without objection. In fact the

Working Group under the Planning Commission

has recommended sharing of infrastructure,

which is presently under contemplation by

Vodafone and the present Scheme reserves

flexibility to it for easing such process

when required. The Central Government has

not raised any objection to the Scheme and

even the Department has not contended that

the aforesaid objectives are imaginary.

Therefore it cannot be said that the Scheme

has no purpose or object and that it is a

mere device/subterfuge with the sole

intention to evade taxes, particularly when

even the incidence of tax purportedly sought

to be evaded is not established on facts.

He has next contended that similar scheme

of arrangement proposed by other

telecommunication companies to achieve the

aforesaid objectives has been sanctioned by

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different High Courts.

17 Mr Joshi has further contended that the

Scheme of Arrangement was necessitated for

reasons set out in clause 1.4 thereof. Mr

Joshi has relied upon various clauses in the

Scheme. It is further argued that under the

Income Tax Act, there is no liability for

payment of tax on capital gains since there

would be a transfer of capital assets under

a gift as envisaged under section 47(iii),

which excludes application of section 45.

It is also submitted that there is a clear

rationale for nil monetary consideration

since the Appellant and the transferee com

pany are both wholly owned subsidiaries of

Vodafone Essar Limited as per Clause 3.1 of

the scheme and even a transfer at book value

would not have resulted in capital gains.

Therefore the scheme in any case is not for

the purpose of avoiding capital gains.

18 Mr Joshi has further contended that the plea

of the Income Tax Department that had there

been a direct transfer of PI assets to Indus

Towers Limited, there would have been a li

ability for capital gains is misconceived.

He submitted that the Income Tax Department

is purposefully seeking to overlook the fact

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that Indus Towers Limited is already a joint

venture company of Vodafone, Bharti and

Idea. Further, Vodafone, Bharti and Idea are

already holding equity shares in Indus in

the ratio of 42:42:16 and therefore even if

there would have been a direct transfer

either at nil monetary consideration or at

book value, there would have been no liabil

ity for payment of tax on capital gains.

It is submitted that even if the Scheme in

question had not been proposed and if Voda

fone transferor companies had transferred

the PI assets by way of gift to one of its

group companies, still there would have been

no liability of tax on capital gains in view

of section 47(iii) of the Incometax Act.

It is submitted that the entire plea of the

Income Tax Department is hypothetical and

without any basis and no evidence is placed

to such hypothetical claim made by the In

come Tax Department. According to him,

such a contention in respect of proposed

transfer to Indus cannot be said to be part

of the same transaction since it is a separ

ate and independent proposed scheme subject

to sanction of jurisdictional court and in

any case beyond the scope of the present

proceedings.

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19 It is further submitted that it can never be

said that the Scheme is nothing but a

camouflage and in substance it is a transfer

by the transferor companies in favour of

Indus with a view to avoid tax liability and

with the sole object of avoidance of tax

liability arising from the capital gains

that the present scheme has been formulated.

It is further submitted so far as aspect

about transfer to Indus Towers Limited is

concerned, it cannot be said it is a part of

same transaction since it is a separate and

independent proposed scheme subject to

sanction of jurisdictional court and in any

case beyond the scope of the present

proceedings and therefore that aspect cannot

be considered while considering the present

scheme. It is submitted that in any case

when the appellant was not required to

follow a particular pattern and every tax

payer is entitled to arrange its affairs

legitimately so that its taxes shall be as

low as possible and that it is not bound to

choose that pattern which will replenish the

treasury. Further, where there are several

legitimate alternatives, means and procedure

for attaining the same object there is no

bar in choosing any one of them. It is

respectfully submitted that while

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sanctioning the scheme the Court does not

sit in appeal over the decision taken by the

shareholders who have, in their commercial

wisdom, given their approval to the scheme.

Even if there are various ways to carry out

a particular transaction, if one of the

modes is chosen by the Vodafone group

entities, the complexity of direct transfer

by seven separate Vodafone group entities to

Indus; the number of Vodafone group entities

as shareholders in Indus compared to one

Vodafone entity as shareholder in Indus; the

issues pertaining to the success of Bharti

and Idea to transfer their respective PI

assets to Indus; the successful completion

of transfer of PI assets by all the three

joint venture partners into Indus; the

option for Vodafone to accomplish the object

of the Working Group in case the joint

venture partners are not successful in

transferring the PI assets to Indus. It is

submitted by Mr Joshi that on the basis of

the relevant consideration as pointed above

if the Scheme is floated, it cannot be said

that the same is floated with the sole

object of avoiding tax. Even incidentally

in a given case it may result into tax

saving or evading of tax, then also, it can

never be said that the sole object of the

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Scheme is avoidance of tax. It is further

submitted that the reliance placed by the

Incometax Department in the case of Wood

Polymer Limited (1977) 47 CC 597 and

comparing the present Scheme with the said

Scheme is misconceived and not justified as,

in that case, the parties were seeking the

assistance of the court to reduce the tax

liability and this Court has held that the

court should be the last instrument to grant

such assistance of judicial process to

defeat a tax liability. It is submitted

that even if there is a consideration of one

rupee, then also it can be held that it is

valid consideration and in support of his

submission he has relied upon the

observations of the Delhi High Court in

sanctioning scheme.

20 It is submitted that the Scheme is an

arrangement between the Company and its

shareholders since it involves bifurcation

of the business carried out by the company

and arrangement of its assets and the way

the business is carried in the future. The

term of arrangement is wide enough in view

of definition of Section 390(b) of the

Companies Act. There is an element of give

and take since a substantial business is

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being taken out by the company but

substantially the same persons would be

carrying it on in the future. The

shareholders of the Appellant are giving up

the PI assets of the Appellant so as to

take/reap the benefits of the income/benefit

to be derived inter alia by putting the idle

PI assets to use. It is further submitted

that in the present case the right of the

Incometax Department in assessing, levying

and collecting the tax of the appellant are

not confiscated or expropriated so as to

extinguish such rights. It is further

submitted that the Scheme is for

reconstruction of the Company and it

contemplates the carrying on of the business

in an altered form, by dividing the

telecommunications services business and the

telecommunications infrastructure business

being carried on by the Appellant, in a

manner that the telecommunications

infrastructure business would be carried on

by the transferee company. The said business

will be continued and carried on by

substantially the same persons who are

presently carrying on the consolidated

business since both the transferor and the

transferee companies are wholly owned

subsidiaries of Vodafone Essar Limited which

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will continue to carry on the businesses.

It is submitted that both reconstruction and

amalgamation are statutorily recognized as

an arrangement and/or compromise under

Section 391. It necessarily implies that

once a scheme is in the nature of

reconstruction, which in the facts of the

present case it is, the same is bound to be

recognized as an arrangement and/or

compromise under section 391 of the

Companies Act. He submitted that once there

is a Scheme of reconstruction, the same is

bound to be recognized as a

compromise/agreement under Section 391 of

the Companies Act. It is further argued

that it can never be said that in the

present Scheme there is only transfer of

assets and not transfer of undertaking and

that it cannot be said that unless there is

a transfer of undertaking, it cannot be said

that it is a demerger. It is submitted

that it is nobody’s case that the present

Scheme is a demerger under the Incometax

Act and simply because it is not under

section 2(19AA), it does not mean that the

present scheme is not a reconstruction under

sections 391394 of the Companies Act, 1956.

Even if no liabilities are transferred, the

same would still be a reconstruction under

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the Companies Act, 1956. It is also

submitted that in the present case the

Scheme has been approved by the members in

requisite majority.

21 It is submitted that the Scheme of

Arrangement cannot be equated with an

agreement between the parties. The Scheme

does not result into an agreement between

the parties as contemplated under the

Contract Act, 1872 and it remains to be a

Scheme, which is to be approved by the

statutory majority and it is required to be

sanctioned by the Court. Therefore, it

cannot be said that the Scheme is in the

nature of agreement and the same is void

under Section 25 of the Contract Act. On

the aforesaid premises it has been argued by

Mr Joshi that the impugned order of the

learned Company Judge is required to be set

aside especially when the learned Company

Judge has not given reasons while refusing

to sanction the Scheme of the Arrangement

proposed by the appellant.

22 Mr Joshi, in support of his submissions has

relied upon the following judgments:

i. Vodafone Essar Limited & ors. v/s. Vodafone

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Essar Infrastructure Limited, reported in

(2011) 2 Comp LJ 317, para 29, 49 & 69 on

the point of locus of the Income Tax

Department to raise objection against

sanctioning of the Scheme.

ii. J indal Iron & Steel Co. Ltd. v/s. Asst.

Commissioner of Income Tax on the point of

locus of the Income Tax Department to raise

objection against sanctioning of the Scheme.

iii SREI Infrastructure Finance Ltd. Calcutta

High Court, (2008) 4 Comp LJ 196, for the

proposition that consideration per se cannot

invalidate the Scheme as avoidance by the

Appellant Company of its tax liabilities

will attract the provisions of the Income

Tax Act and the Company cannot escape from

its liability.

iv Nirmay Properties Private Limited, (2009)

150 CC 538 for the observation that simply

because the Court has granted the sanction

to the Scheme it does not absolve the

Company from any future liability qua

violation of any statutory provisions.

v Vodafone International Holdings vs. Union of

India (2012) 1 Comp LJ 225, for the

proposition that every tax payer is entitled

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to arrange his affairs so that his taxes

shall be as low as possible and that he is

not bound to choose that pattern which will

replenish the treasury.

vi Banyan & Berry v Commissioner of Income Tax,

Gujarat High Court, 222 ITR 831 for the

proposition that every act which results in

tax reduction or exemption of tax cannot be

treated as a device of tax avoidance and the

real question to be asked is whether the act

of the assessee falls in the category of

colourable device.

vii Azadi Bachao Andolan, (2004) 10 SCC 1, for

the proposition that McDowell cannot be read

as laying down that every transaction or

arrangement perfectly permissible under law,

which has the effect of reducing the tax

burden of the assessee must be looked upon

with disfavour.

viiiUnited Bank of India Ltd. vs. United India

Credit & Development Co. Ltd. Of Calcutta

High Court, (1977) 47 CC 689 for the

proposition that where there are several

legitimate alternatives, means and procedure

for attaining the same object, there is no

bar in choosing any one of them.

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ix Larsen & Toubro Ltd. (2004) 121 CC 523, for

the proposition that though the word

'amalgamation' is not defined specifically,

it has a wide range and ambit and is a term

of wider connotation.

x Re T&N Ltd. – Chancery Division , (2007) 1

All ER 851 for the proposition that it is

not a necessary element of an arrangement

for the purposes of Section 425 or that it

should alter the rights existing between the

company and the Creditors or the members.

xi Judgment of Gujarat High Court in the case

of Idea Cellular Ltd. (Company Petition No.167 of 2009 dated 31.8.2009) sanctioning

similar Scheme of Arrangement.

xii Judgment of Delhi High Court in the case of Bharti Airtel Ltd. (Company Petition No.233

of 2007 dated 26.11.2007) sanctioning similar Scheme of Arrangement.

xiiiJudgment of Bombay High Court in the case of

Reliance Telecom Infrastructure Ltd. (Company Petition No.68 of 2007 dated 16.3.2007)

sanctioning similar Scheme of Arrangement.

xiv Judgment of Calcutta High Court in the case of Vodafone Essar East Ltd. (Company Peti

tion No.273 of 2009 dated 5.4.2010) sanctioning the present Scheme of Arrangement.

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xv Judgment of Bombay High Court in the case of

Vodafone Essar Ltd. (Company Petition No.712 of 2009 dated 17.12.2009) sanctioning the

present Scheme of Arrangement.

xvi Judgment of Madras High Court in the case of Vodafone Essar Cellular Ltd. (Company Peti

tion No.203 of 2009 dated 17.11.2009) sanctioning the present Scheme of Arrangement.

xviiJudgment of Delhi High Court in the case of Vodafone Essar Ltd., reported in (2011) 2

Comp LJ 317, sanctioning the present Scheme of Arrangement.

xviiMysore Minerals Ltd. vs. Commissioners of

Income Tax, Karnataka, reported in (1999) 7

SCC 106(para 14) for the proposition that

there is no bar which restrains a transac

tion falling differently or being dealt with

separately under different Acts.

xviii Chidambara Iyer & Ors. v. P.S. Renga Iyer, AIR 1966 SC 193 for the proposition

that the present Scheme of Arrangement is not without consideration.

xix His Holiness Kesavananda Bharti v. State of

Kerala, (1973) 4 SCC 225 for the proposition that even most trifle benefit can be con

sidered as consideration so as to avoid the impact of Section 25.

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xx Ledhingham & Ors. v. Bermejo Estancia Co. Ltd., All ER 749 for the proposition that

there is no requirement of monetary consideration and even a promise to induce the

company to carry on its business has been treated as sufficient consideration.

23 Mr Mihir Thakor, learned Senior Advocate ap

pearing for the Incometax Department, on

the other hand, argued that the Incometax

Department has locus standi to object the

Scheme and, for that reason, anyone can ob

ject to the Scheme if the same is floated

with the ulterior purpose. It is submitted

by Mr Thakor that the learned Company Judge

has considered the arguments of both the

sides and simply because the judgment might

not have been happily worded this Court can

examine the aspect involved in the matter on

its own. It is submitted that it is

ultimately for the Court to consider as to

whether the Scheme is required to be sanc

tioned and the Court is required to be sat

isfied itself, even if there is no objection

by anyone, to find out whether the Scheme is

required to be sanctioned or whether it vi

olates any law or whether it is contrary to

the public policy. It is submitted by Mr

Thakor that in view of the decision of this

Court in the case of Wood Polymer Private

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Limited (supra) the present Scheme is

floated with the sole purpose of avoiding

the tax as the transaction in the present

case and Wood Polymer Private Limited

(supra) can be said to be of a similar

nature. It is submitted that the Scheme is

nothing but camouflage and the object of the

Scheme is nothing but avoidance of capital

gains tax. It is submitted by Mr Thakor

that looking to the Scheme it is evident

that it is not a Scheme for reconstruction

nor it is a Scheme of Arrangement. It is

submitted that the Scheme in question is an

agreement and the same is without considera

tion and therefore the same is violative of

Section 25 of the Contract Act. It is sub

mitted by Mr Thakor that motive or purpose

or reason of a transaction is different from

its consideration and for any transaction

there will be a reason or motive or purpose

or an object. It is submitted that there

may be any motive or object for transferring

the assets, but the same cannot be said to

be a consideration for transfer in the eye

of law. In order to substantiate his say,

he has relied upon Clause 1.4.6, which uses

the word reasons and not consideration. It

is further submitted that Clause 1.4 which

relates to ‘Rationale for the Scheme’, but

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the same can be said to be reason or modi

fication or justification prohibiting the

scheme, but the same cannot be treated as a

consideration.

24 It is submitted that consideration being

different from the object of the

transaction, if there is no consideration,

then, the transaction is void. He has

submitted that there is no consideration as

defined under Section 2(d) of the Contract

Act. It is submitted that consideration has

to be valuable consideration in the eye of

law and since there is no consideration,

much less valuable consideration, the Scheme

ought not to have been sanctioned by the

learned Company Judge. It is submitted that

the Scheme represents a contract sanctified

by the Court’s approval between the company

and the creditors and/or members of the

company. It is submitted that the word

‘gift’ is not defined under the Income Tax

Act and with the Gift Tax Act being

repealed, the only definition which could

possibly be resorted to is under Section 122

of the Transfer of Property Act.

According to him, the meaning of the word

‘gift’ as understood under the Companies Act

and the Income Tax Act is the same, which is

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defined under Section 122 of the Transfer of

Property Act. He further submitted that the

fact that the appellant was required to

amend Memorandum of Association under the

Companies Act to align the same with the

meaning of Gift under the Income Tax

confirms and supports this interpretation.

25 It is further submitted by Mr Thakor that in

the present case statutory majority was not

achieved. He submitted that the assets are

sought to be transferred free from any

charges and encumbrances and that too

without consideration and therefore meeting

of Secured Creditors was necessary and not

that of the shareholders, who retain their

control over the assets and are not the

class of person with whom any arrangement or

compromise is entered into, as sought to be

claimed.

26 It is also submitted by Mr Thakor that the

Scheme is ultra vires Companies Act as

admittedly, there was no power to gift under

the Memorandum of Association of the

petitioner company and it was by in an

Extraordinary General Meeting of

Shareholders that a Resolution was passed on

21st September 2007 wherein Memorandum of

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Association is amended to incorporate the

power of gift. He further submitted that

the proposed scheme being based on an ultra

vires resolution of Board of Directors is

void and it cannot be ratified even if all

the shareholders have given their consent.

He has also contended that jurisdiction

under Section 391 of the Companies Act is

not available for want of authority to the

Company to gift and thus the Scheme is void.

Mr Thakor, therefore, submitted that if

Scheme before the Court is void, abinitio

it cannot be ratified even if all the

shareholders agree and the Court cannot

sanction such a Scheme. Mr Thakor has also

tried to elaborate his argument as to how

the sole object of the Scheme is avoidance

of tax. He has next contended that the he

Appellant has failed to show even a single

clause or provision from the working

committee recommendations requiring or

mandating the Appellant to transfer its

assets in the manner and mode in which it is

sought to be done i.e. gifting it at stage 1

and merging it at stage 2 and that also

under the guise of a scheme u/s 391. He

has also submitted that no authority or

committee has or can recommend/ mandated

divesting/ sale of assets, much less in the

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manner it is sought to be done. The mode and

manner adopted is solely for avoiding taxes.

27 Mr Thakor submitted that the three groups

providing mobile telephony services,

Vodafone, Bharti and Idea formed a company

called Indus Towers Ltd with an equity

structure of 42:42:16 respectively, around

2007. It was agreed between the shareholders

of Indus as to the terms on which the

existing infrastructure of towers (called

"Passive Infrastructure Assets") in

different circles/ states (including state

of Gujarat) shall be contributed to Indus.

In order to comply with their agreement to

contribute assets to Indus, the simplest and

the legally correct way to transfer the

assets were to execute a deed of conveyance

and transfer the PIA from the respective

owners to Indus. However to avoid and evade

the taxes payable to both Central and State

Government like Income Tax, stamp duty, VAT

etc. an entire tax avoidance subterfuge was

created and dubious method was adopted by

the aforesaid three groups based on their

individual structures of the ownership of

PIA viz. Stage 1: Introducing a pre

ordained devise/ conduit in the form of a

new Company (the present Transferee Company)

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and transferring by way of Gift to this new

Company and Stage 2: Amalgamating this new

Company into Indus. According to him, both

the stages are done under the guise of

scheme u/s 391 to legitimise the same by

obtaining the seal of the Hon'ble Court and

evade payment of Income Tax, stamp duty and

VAT.

28 Mr Thakor next contended that it is clear

that the only purpose of the Scheme is to

acquire the assets of the Appellant (the

original owner) through the intermediary of

the Vodafone Infrastructure Ltd. (present

Transferee) which was created for that very

purpose to meet the requirement of law, and

in the process to defeat tax liability that

would otherwise arise. It is submitted that

the Supreme Court in case of Miheer Mafatlal

vs. Mafatlal Industries Ltd. 1997 (1) SCC

579, has held that for ascertaining the real

purpose underlying; the Scheme with a view

to be satisfied on this aspect, the Court,

if necessary, can pierce the veil of

apparent corporate purpose underlying the

scheme and can judiciously Xray the same.

He submitted that applying this mandate of

Miheer Mafatlal (supra) this Court can

pierce the veil of apparent corporate

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purpose underlying the scheme and look at

the schemes of both the Stage 1 & 2, which

would reveal the real purpose that is the

transfer of assets to Indus without payment

of taxes. Once the Court ascertains the real

purpose, after piercing the veil by

considering the composite transaction, it

would not lend any assistance by permitting

the completion of even Stage 1, even

assuming if the same is found to be meeting

the requirements of law, as this would

perpetuate and lend a helping hand in the

process to achieve the ultimate purpose of

defeating the tax, which, as held is

contrary, to public policy and public

interest. It is the cardinal principle of

law and judicial discipline and part of the

public policy that the court shall not

become party to any part of the process

whose ultimate object is to achieve fraud or

illegality or anything contrary to public

policy. It is also submitted that the

claim of the Appellant that no capital gain

tax is payable if the transfer was on book

value is legally untenable. If the exemption

u/s 47 is not available then the capital

gain is payable on sale of assets. It is

submitted that the ultimate objective of

transferring the assets to Indus without

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payment of capital gain tax cannot be

achieved except by using the present modus

operandi, as already demonstrated above read

with para 58 of the impugned judgment, which

the Appellant has failed to dislodge.

29 Mr Thakor further submitted that if it is

found that the Scheme is opposed to public

policy or defeating the tax and contrary to

the public interest, the Court may not

sanction the Scheme by way of approving the

same. It is submitted that the argument of

revenue neutrality is exfacie untenable and

runs contrary to the very purpose of

introduction of the provisions MAT u/s

115JB, which was to remove the effect of

such entries made in Books of Accounts, on

the tax liability for that year as it would

give a distorted tax effect. MAT provision

is not evoked or introduced to create a

fresh charge over a new source of Income but

perse are concerned to prepone the tax

payment which otherwise was postponed due to

accounting entries in the books of accounts.

Thus revenue neutral argument is untenable.

This attempt of the Appellant to affect MAT

liability by way of differential accounting

treatment further highlights the purpose of

the scheme, which is to use it as a conduit

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to avoid and evade tax.

30 Mr Thakore has also submitted that the

Incometax Department has huge demand of

revenue pending against the appellant

Company. The Incometax Department had

raised a demand of Rs.70,11,06,474/ for

assessment years 200506 out of which

Rs.28,65,92,370/ is pending recovery. The

part of the said demand to the extent it was

confirmed by the first appellate authority

being Commissioner of Income Tax (Appeals)

has been confirmed by the Incometax

Appellate Tribunal vide its order of January

2009 which has been challenged by the

petitioner before this Court. For the part

of the demand deleted by CIT(A) the objector

had preferred the appeal before ITAT which

has been dismissed by its common order dated

9.1.2009. Against the said common order of

ITAT, to the extent of dismissal of its

Appeal, the objector has challenged the same

before this Court. Similarly a demand of

Rs.118,99,33,185/ was raised for assessment

years 200607 out of which Rs.87,99,42,566/

is pending recovery. To the extent of the

said demand raised and confirmed by CIT(A),

the appellant has preferred an appeal before

ITAT, in which stay has been granted against

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recovery on the condition of the petitioner

depositing Rs.30 crores. Further the

Department has raised a penalty demand of

Rs.210,33,19,341/ for the year 200506

which entirely is pending recovery.

Accordingly, sum of around

Rs.326,98,54,277/ is pending recovery from

the petitioner. The aforesaid claim shall

further be increased on addition of interest

recoverable on the aforesaid amount.

Mr.Thakore further submitted that for

assessment years 200708 and 200809 the

assessments are pending finalization and the

objector apprehends demand amounting to

hundred of crores, pursuant to issues

similar to previous assessment year.

31 Mr Thakore further submitted that under

Section 391 of the Act, the jurisdiction of

this Court can be invoked only for sanction

of the Scheme of Compromise or Arrangement.

The present Scheme is neither arrangement

nor a compromise as contemplated under

Section 391. He has further submitted that

under the present Scheme the Passive

Infrastructure Assets are sought to be

transferred without any corresponding

liabilities and free from all encumbrances

to the transferee Company without any

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consideration. There is also no provision

under the Scheme of any allotment of shares

to the members of the petitioner Company.

Post the demerger, the transferee Company

is sought to be amalgamated/merged to Indus

Towers Ltd. However, it is further

contemplated that the transferee Company

before the proposed merger shall be made a

substantially owned company of a new company

to be formed by all or some of the

shareholders of transferee Company. He has

further submitted that underlined

transaction in the Scheme is the transfer of

the said assets without any consideration to

the transferee Company. Since no

consideration is involved, the same is

ultravires the Company and Companies Act and

is not a valid contract. Even otherwise, the

same cannot be approved by this Court under

Section 391 of the Act. He has further

submitted that even if it is assumed that

the transaction embodied in the scheme is a

arrangement or a compromise, the same is not

between the Company and its shareholders or

between the Company and its creditors or

between any of their class. The onus to

prove that the scheme is such which the

Court has the jurisdiction to sanction under

Section 391 of the said Act, is on the

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petitioner and the same is not discharged by

it. He has further submitted that the scheme

is nothing but a garb to legitimize a simple

transaction of transfer between two separate

commercial legal entities in order to evade

the legitimate taxes which would be payable,

if the transaction would have been effected

by way of simplicitor transfer. It would

have attracted Central Sales Tax or Gujarat

Value Added Tax, capital gains tax, other

provision of Income Tax Act, 1961 and stamp

duty if the same were by way of transfer.

Thus, by way of the said scheme these taxes

are sought to be evaded, which is clearly

against public interest.

32 Mr Thakore further submitted that there

exists substantial liabilities in the books

of the petitioner Company, part of which are

relatable to the assets under transfer.

Since liabilities of the said assets would

remain with the petitioner Company there

would be a continuous charge of interest and

other liabilities with respect to the said

assets in its hands. This would reduce the

taxable profit in the hands of the

petitioner Company in the succeeding years.

On the other hand, the books of the

transferee Company would show exorbitant and

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inflated income and since the same is

infrastructure Company, it may ultimately

claim deductions under various provisions of

Chapter VIA of the Income Tax Act on its

inflated profits, leading to great loss of

revenue to the exchequer. Moreover, pursuant

to the scheme the petitioner Company will be

required to pay access charges or some other

charges to the transferee Company for using

the said assets, which it is not paying

before the scheme. This would further reduce

the taxable profit of the petitioner

Company. By transferring the said assets at

the book value the petitioner Company is

trying to evade capital gain which otherwise

would be payable at the market value. He has

further submitted that the sanction of the

scheme is sought to be taken by

misrepresenting the same to be a scheme of

demerger with the ulterior motive to foist

the same on the Income tax Department and

claim the benefit under the Income Tax Act.

For the purpose of Income Tax Act, the

present scheme is not a scheme of demerger.

Mr Thakor has relied upon the following

judgments:

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(i) South African Supply and Cold Storage

Co., (1904) 2 Ch 268, in support of his

contention that the Scheme is not

covered under Section 391 of the

Companies Act.

(ii) Re NFU Development Trust Ltd., 1972 1 WLR

1548 (Ch.D) in support of his contention

in the present case there is no element

of give and take in the Scheme and if

there is no taking but only giving,

there cannot be arrangement and further

it becomes unreasonable on that affected

class and therefore the Scheme cannot be

sanctioned.

(iii) Indian Flour Mills Ltd., AIR 1934 Sind 54

in support of his contention that since

the transfer being without

consideration, it is not an arrangement

under Section 391 of the Companies Act

and thus is not a reconstruction capable

of being sanctioned under Section 391 of

the Act.

(iv) A Lakshmanaswami Mudaliar (Dr) v. LIC of

India, (1963) Supp 2 SCR in support of

his contention that the consideration

contemplated under Section 122 of the

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Transfer of Property Act and under

Section 25 of the Contract Act must be

valuable to be a valid consideration in

the eyes of law.

(v) Mcdowell and Company Ltd. V. CTO (1985) 3

SCC 230 (para 45)to contend that tax

planning has to be within the framework

of law and colourable devices cannot be

part of tax planning.

(vi) Miheer Mafatlal v Mafatlal Industries

Ltd., (1997) 1 SCC 579, in support of

his contention that this Court is

required to pierce the veil of apparent

corporate purpose underlying the scheme

which is the transfer of assets to Indus

without payment of taxes.

33 We have heard both the learned advocates at

great length and have gone through the

relevant documents forming part of this

appeal proceedings. We have gone through

the order of the learned Single Judge and we

have also gone through the case law cited by

the respective counsel. We have also gone

through the written submissions filed by

both the sides.

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34 The question which requires consideration is

whether the Scheme in question is floated

with the sole object of avoiding the tax

liability and to avoid taxes liable to be

paid under various statutes like Incometax,

Stamp Act, etc. The Court is also required

to consider whether the Scheme in question

is in violation of public policy and whether

the Incometax Department has locus standi

to raise the objections in connections with

sanctioning the scheme in question. This

Court is also required to consider whether

the learned Company Judge has committed an

error in refusing to accord sanction to the

Scheme in question.

LOCUS STANDI

35 So far as the preliminary contention raised

by the learned counsel for the appellant

about the locus standi is concerned, except

the Incometax Department, no one else has

raised any objection before the learned

Company Judge in response to the public

advertisement. It is required to be noted

that the proceedings between the appellant –

transferor company and the Incometax

Department are going on before the Tribunal

regarding the liability of payment of tax by

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the transferor company in past transactions.

Some interim orders are also passed in the

said proceedings.

It is the case of the Income Tax Department

that they being the Creditors of the

appellant, they have locus to raise

objections. It is submitted by Mr Joshi

that the powers to raise objections is only

vested on a shareholder and/or creditor

provided a shareholder and/or creditor are

able to show that any arrangement and/or

compromise is offered to them by which their

rights are being affected and in the present

Scheme no compromise and/or arrangement is

being offered to the Income Tax Department

and therefore the Income Tax Department has

no locus.

It is also argued that as per Sections

391394 of the Companies Act, 1956 it is

only the Central Government, through the

Regional Director, which has been vested

with the powers to study the Scheme and

raise such objections as it thinks fit.

Therefore, beside the shareholders and

creditors of the company to whom an

arrangement and/or compromise is offered by

the company, only the Regional Director has

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locus standi in respect of the proceedings

under sections 391 to 394. Further, the

Appellant has clearly outlined its stand at

the beginning of the present proceedings, to

the effect that the sanctioning of the

Scheme would not ipso facto grant any

immunity to the Appellant qua any liability

that may be imposed on it under the relevant

provisions of the Income Tax Act, in

accordance with law. Similar statement has

also been made before the Hon'ble Delhi High

Court [Vodafone Essar Limited & ors. v/s.

Vodafone Essar Infrastructure Limited,

reported in (2011) 2 Comp LJ 317.

36. In the case of SREI Infrastructure Finance

Limited, (2008) 4 Comp LJ 196 (Cal) the

Scheme of Arrangement was placed for sanc

tion before the High Court by the transferor

and transferee company wherein it is ob

served by the Calcutta High Court that the

consideration per se cannot invalidate the

scheme as avoidance by the company of its

tax liabilities will attract the provisions

of the Income Tax Act and the companies can

not escape from their respective liabilit

ies.

In our view, if any amount is required to be

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payable to the Incometax Department by the

transferor company, the Incometax

Department can be said to be a creditor so

far as its claim against the transferor

company is concerned. Considering the same,

it cannot be said that the Incometax

Department has no locus to put forward its

objections in this behalf. In other words,

even if there are no objections, which are

received against the Scheme pursuant to the

public advertisement, yet the Court is

required to examine the Scheme while giving

its approval. In our view, the learned

Company Judge has rightly allowed the

Incometax Department to have its say by

raising objections in connection with the

Scheme in question. Even a similar

objection had been raised by the Incometax

Department before Delhi High Court and the

Delhi High Court has considered the

objections raised by the Incometax

Department on its own merits. Considering

the same, in our view, in cannot be said

that the Incometax Department has no right

to lodge its objections as the Incometax

Department raised a substantial demand

towards tax from the transferor company.

The aforesaid point raised by Mr Joshi is

therefore negative by holding that the

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Incometax Department has the right to place

its objections against sanctioning of the

Scheme in question. The Income Tax

Department will be free to examine the

aspect of any tax payable as a result of the

Scheme.

IS OBJECT OF THE SCHEME AVOIDANCE OF TAX

LIABILITY?

37. The next crucial question, which is required

to be considered is whether the Scheme in

question is floated with the sole object of

avoiding the tax liability such as Income

tax, Stamp Duty, VAT, etc. and that the sole

object is only to avoid capital gains tax,

which otherwise, was required to be payable

by the appellantcompany if there is simple

transfer of assets by the transferor company

to Indus Towers Limited. It is also

required to be considered as to whether in

case if it is found that the sole object of

the Scheme is not to evade tax liability,

then also, whether the Scheme in question is

a Scheme for reconstruction and the Scheme

of Arrangement or that the Scheme being an

agreement is void as it is without

consideration and that whether it is ultra

vires the provisions of the Companies Act,

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1956.

38 It is required to be noted that the

appellantcompany has moved this Court under

Sections 391 to 394 of the Companies Act,

1956 seeking sanction of the Scheme of

Arrangement between M/s. Vodafone Essar

Limited; M/s. Vodafone Essar Mobile Services

Limited; M/s. Vodafone Essar East Limited;

M/s. Vodafone Essar Gujarat Limited; M/s.

Vodafone Essar South Limited; M/s. Vodafone

Essar Digilink Limited; M/s. Vodafone Essar

Cellular Limited and M/s. Vodafone Essar

Infrastructure Limited (hereinafter referred

to as the transferee company). In all

there are seven transferor companies and the

transferee company being M/s Vodafone Essar

Infrastructure Limited and its respective

shareholders. As per Clause 5.4 of the

Scheme, in the even this Scheme is not

sanctioned by all the Company Courts or

other competent authorities referred to in

Clause 5.3.1 before which this Scheme is

presented for approval, the Scheme shall

stand implemented without the demerged of

the Passive Infrastructure Assets of the

relevant Transfer Company/ies. The

provisions in the Scheme relate to such

transferor companies in respect of which the

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Scheme has not been sanctioned shall stand

invalidated and such invalidity shall attach

only to such part dealing with such

Transferor Companies. The remaining portion

of the Scheme shall continue in full force

and effect. In such an event, the relevant

transferor company in respect of which the

Scheme has not been sanctioned shall bear

and pay its costs, charges and expenses for

and/or in connection with the Scheme.

39 The objection is raised only by the Income

Tax Department. On behalf of the Regional

Director a stand is taken that the Regional

Director has no objection to the Scheme

except by pointing out that the Assistant

Commissioner of Income Tax, Ahmedabad has

raised objections in connection with the tax

liability of the appellant Company. On

behalf of the Regional Director, a stand was

taken before various High Courts before

which the company petitions were filed for

giving sanction to the Scheme by various

other transferor companies to the effect

that it has no objection if the Scheme is

sanctioned because the Scheme does not

appear to be prejudicial to the interests

of the shareholders and the public. It is

required to be noted that except before this

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Court and the Delhi High Court, the Income

Tax Department has not raised similar such

type of objections before any other Court.

The Regional Director had not raised any

objections qua sanctioning the Scheme on the

ground that there is no consideration

involved in the transfer or that it is not a

Scheme of Arrangement and that Section 391

and 394 of the Companies Act are not

attracted, etc. Such objections were not

taken by the Income Tax Department before

various High Courts for sanctioning the

Scheme. It is no doubt true that while

giving approval to the Scheme the Court is

required to consider as to whether the

Scheme is question is against the public

policy or is floated with an object to

defeat provisions of law. In a given case,

even though there may not be any objection,

the Court may, on its own, try to find out

the same. It is not in dispute that the

Transferee Company is fully owned subsidiary

of the petitionercompany, the shareholders

are also common. It cannot be disputed that

the Scheme does not contemplate either a

change in the Transferor Companies or the

Transferee Company. The petitioner company

is a mobile telecommunication service

provider and holds a Unified Access Services

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License for the Gujarat Service Area, with

effect from 20.10.2008 issued by the

Department of Telecommunications. As per the

conditions of the licence, the appellant –

transferor company may transfer or assign

with the prior written agreement of the

licensor subject to various conditions

provided therein. It also provides that

whenever amalgamation or reconstruction,

merger or demerger takes place, the same has

to be approved by the High Court or Tribunal

as per law in force in accordance with the

provisions Sections 391 and 394 of the

Companies Act.

40 It is pointed out to the Court that the

appellant is not transferring the licence to

the transferee company pursuant to the

Scheme and the appellant transferor company

shall continue to hold the license even

after completion of the demerger. It is

pointed out to the Court that the transferee

company is registered as an infrastructure

provider category by the Department of

Telecommunication which permits the company

to establish and maintain Passive

Infrastructure Assets to lease, rent or sell

such assets to licensees of Telecom Services

licensed under Section 4 of the Indian

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Telegraph Act, 1885. As per the Scheme of

Arrangement, the Scheme of Arrangement is

arrived at between M/s. Vodafone Essar

Limited; M/s. Vodafone Essar Mobile Services

Limited; M/s. Vodafone Essar East Limited;

M/s. Vodafone Essar Gujarat Limited; M/s.

Vodafone Essar South Limited; M/s. Vodafone

Essar Digilink Limited; M/s. Vodafone Essar

Cellular Limited and M/s. Vodafone Essar

Infrastructure Limited. PartI of the

Scheme provides definitions of share capital

and the purpose of the Scheme. Part II

deals with demerger of the Passive

Infrastructure Assets of the Transferor

Companies into the Transferee Company.

PartIII of the Scheme deals with Accounting

Treatment in the Books of the Transferor

Companies. PartIV provides General

Clauses and Terms and Conditions. PartV

deals with other terms and conditions. We

have also gone through various clauses of

the Scheme of Arrangement. The Passive

Infrastructure Assets are defined as all

present and future wireless and broadcast

towers that host or assist in the operation

of the plant and equipment used for

transmitting telecommunication signals,

being towers owned and operated by the

Transferor Companies situated in India and

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include any and all towers under

construction; all rights, title, deposits

and interests in, or over, the land or

property on which such towers have been

constructed or erected or installed; and all

plants and equipments customarily treated by

telecommunications operators worldwide as

forming part of the Passive Infrastructure

Assets.

41 As pointed out earlier, the appellant and

all other transferee company is wholly owned

subsidiary of the transferor company, that

is, Vodafone Essar Gujarat Limited. As per

Clause 5.4 of the Scheme, in case the Scheme

is not sanctioned by the concerned High

Court wherein an application is moved for

sanctioning by such transferor company, the

Scheme shall stand implemented with demerger

of the passive infrastructure of the

relevant transferor company in respect of

which the Scheme has been sanctioned. At

this stage, it is required to be

mentioned that out of seven transferor

companies, sanction has been given

to various transferor companies except the

present transferor company.

42 The main contention of the Income Tax

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Department is that the Scheme is floated

with the sole object to avoid tax liability.

Except the Income Tax Department no

objections were raised by anyone against

sanctioning the Scheme. In this connection,

it is submitted by Mr Mihir Thakor, learned

Counsel for the Department that the

transaction in question is nothing, but a

transaction of assets of passive

infrastructure of the transferor company

into Indus, but the said transaction is

given colour by an artificial device and

with a view to save incometax liability two

stages are created by the appellant group

i.e. Vodafone i.e. introducing a pre

ordained devise/ conduit in the form of a

new Company (the present Transferee Company)

and transferring by way of Gift to this new

Company and thereafter amalgamating this new

Company into Indus. Both the stages are done

under the guise of scheme u/s 391 to

legitimise the same by obtaining the seal of

the Hon'ble Court and evade payment of

Income Tax, stamp duty and VAT and other

taxes. In this connection, it is required

to be noted that as per the Scheme the

Passive Infrastructure business and the

telecommunication service business was

sought to be segregated in order to achieve

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a commercial purpose and object inter alia

being segregating the PI business and the

telecommunications service business to

enable further growth and maximize value in

each of the business; improved quality of

services to customers by establishing high

service standards and delivering services in

an environment friendly manner; increase in

the speed of role out and efficiency through

sharing of infrastructure, converting the PI

assets from nonrevenue generating assets;

improved network quality and greater

coverage etc. It is required to be noted

that various telecommunication companies in

this country have adopted the business

policy of segregation of telecommunication

services and telecommunication

infrastructure business as per the global

trends prevailing as on today. During the

course of hearing it has been pointed out

that the working group under the Planning

Commission has recommended sharing of

infrastructure. Keeping the said object in

mind if the Scheme has been framed and is

approved by the shareholders in their

wisdom, in our view, it cannot be said that

the Scheme itself is floated with the sole

criteria of tax avoidance simply because it

may have effect and result into avoidance

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tax. If the Scheme is evolved by way of an

arrangement and with an object of converting

the PI assets from nonrevenue generating

assets; improved network quality and greater

coverage etc. Moreover the segregation of

telecommunications services and


reflects the global trend and has been

adopted by telecommunication companies in

India without objection. In fact, the

Working Group under the Planning Commission

has recommended sharing of infrastructure,

and the present Scheme reserves flexibility

to it for easing such process when required.

It may be relevant to note that even the

Central Government has not raised any

objection to the Scheme and even the

Department has not contended that the

aforesaid objectives are imaginary.

Therefore it cannot be said that the Scheme

has no purpose or object and that it is a

mere device/subterfuge with the sole

intention to evade taxes, particularly when

even the incidence of tax purportedly sought

to be evaded is not established on facts.

Further, similar scheme of arrangement

proposed by other telecommunication

companies to achieve the aforesaid

objectives have been sanctioned by different

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High Courts. In our considered view, this

Court cannot refuse the sanction on the

aforesaid ground by coming to the conclusion

that the only object of the Scheme is to

avoid taxes.

43 It is, no doubt, true as argued by Mr Thakor

that in case the Scheme is sanctioned, it

may result into tax avoidance on the part of

the appellant, but it is required to be

noted that even if the ultimate effect of

the Scheme may result into some tax benefit

or even if it is framed with an object of

saving tax or it may result into tax

avoidance, it cannot be said that the only

object of the Scheme is tax avoidance.

Considering the various clauses of the

Scheme it is not possible for us to come to

a conclusion that the Scheme is floated with

the sole object of tax avoidance. In its

commercial wisdom if the Company has decided

to have a particular arrangement by which

there may be even benefit of saving income

tax or other taxes, that itself cannot be a

ground for coming to the conclusion that the

sole object of framing the Scheme is to

defraud the Income Tax Department or other

taxing authorities. It is also required to

be noted that identical Schemes have been

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approved by various High Courts as pointed

out earlier. As per the Scheme, it proposed

to demerge the passive infrastructure assets

of seven transferor companies and transfer

them to the transferee company. The

transferor companies and the transferee

company are wholly owned and subsidiary of

transferee company viz. Vodafone Essar

Mobile Services Limited. One of the

objects for framing of the Scheme is

segregation of passive infrastructure

business and telecommunication services

business is to enable further growth and

maximize value in each of the businesses.

It is required to be noted that in the case

of Nirmay Properties P. Ltd. reported in

(2009) 150 Comp Cases 538 (Gujarat), this

Court was dealing with the Scheme for

amalgamation of five subsidiary companies

with the holding company. In the said case

also there were no secured creditors. No

objection was raised to the petitions even

after the publication. The Official

Liquidator in his report has stated that the

auditors appointed for the purpose of

scrutiny and investigation of the books of

account and affairs of the company had in

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their report pointed out violation of the

provisions of the Companies Act, 1956 and

Accounting Standards and evasion of stamp

duty and incometax. The learned Company

Judge held that the objections raised by the

auditors would not affect the scheme and

that sanction to the scheme would not

absolve the companies from any liability

that may arise in future on violation of any

statutory provisions or that the Scheme

would not affect proceedings pending either

before the civil or criminal courts and the

liability that may be inflicted upon the

petitioners or their Directors, would not be

affected simply by virtue of the Scheme of

Amalgamation.

In the case of Vodafone International

Holdings B.V. v. Union of India and Another,

(2012) 1 Comp LJ 225 (SC), the Honourable

Supreme Court has considered the provisions

of Section 195 of the Income Tax Act. The

aforesaid matter concerned a tax dispute

involving the Vodafone group with the Indian

tax authorities in relation to the

acquisition by Vodafone International

Holdings BV (VIH), a company resident for

tax purposes in the Netherlands, of the

entire share capital of CGP Investments

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(Holdings) Ltd. (CGP), a company resident

for tax purposes in the Cayman Islands (CI,

for short), vide transaction dated

11.02.2007, whose stated aim, according to

the Revenue, was acquisition of 67%

controlling interest in HEL being a company

resident for tax purposes in India which is

disputed by the appellant saying that VIH

agreed to acquire companies which in turn

controlled a 67% interest, but not

controlling interest, in Hutchison Essar

Limited (HEL). According to the appellant,

CGP held indirectly through other companies,

52% shareholding interest in HEL as well as

options to acquire a further 15%

shareholding interest in HEL, subject to

relaxation of FDI norms. The Revenue sought

to tax the capital gains arising from the

sale of the share capital of CGP on the

basis that CGP, whilst not a tax resident in

India, holds the underlying Indian assets.

The High Court upheld the jurisdiction of

the Indian tax authority to impose capital

gains tax on VIH as a representative assesse

after holding that the transaction between

the parties attracted capital gains in

India. Applying the ‘natural character of

the transaction’ test, the High Court came

to the conclusion that the transfer of CGP

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share was not adequate in itself to achieve

the object of consummating the transaction

between HTIL (a group holding overseas

company of which HEL was a subsidiary) and

VIH. That, intrinsic to the transaction was

a transfer of other ‘rights and

entitlements’ which rights and entitlements

constituted in themselves ‘capital assets’

within the meaning of Section 2(14) of the

Income Tax Act, 1961. According to the High

Court, VIH acquired the CGP share with other

rights and entitlements whereas, according

to the appellant, whatever VIH obtained was

through the CGP share. The decision of the

High Court was called in question in SLP

before the Honourable Supreme Court. The

Honourable Supreme Court held that the

capital gains arising from the sale of the

share capital of CGP on the basis that CGP,

whilst not a tax resident in India, holds

the underlying Indian assets. The Revenue

cannot start with the question as to whether

the impugned transaction is a tax

deferment/saving device but that it should

apply the look at test to ascertain its true

legal nature. The corporate business

purpose of a transaction is evidence of the

fact that the impugned transaction is not

undertaken as a colourable or artificial

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device. The stronger the evidence of a

device, the stronger the corporate business

purpose must exist to overcome the evidence

of a device. In para 45 it has been held

that the tax planning may be legitimate

provided it is within the framework of law.

In the latter part of para 45, it held that

colourable device cannot be a part of tax

planning and it is wrong to encourage the

belief that it is honourable to avoid

payment of tax by resorting to dubious

methods. It is the obligation of every

citizen to pay the taxes without resorting

to subterfuges. Thus, it cannot be said that

all tax planning is

illegal/illegitimate/impermissible.

The following observations of the Honourable

Supreme Court in the aforesaid case are

relevant for our purpose:

“64.Shareholders can enter into any agreement in the best interest of the company, but the only thing is that the provisions in Association. The essential purpose of the SHA is to make provisions for proper and effective internal management of the company. It can visualize the best interest of the company on diverse issues and can also find different ways not only for the

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best interest of the shareholders, but also for the company as a whole. In S.P. Jain v. Kalinga Cables Ltd. : (1965) 2 SCR 720, this Court held that agreements between nonmembers and members of the Company will not bind the company, but there is nothing unlawful in entering into agreement for transferring of shares. of course, the manner in which such agreements are to be enforced in the case of breach is given in the general law between the company and the shareholders. A breach of SHA which does not breach the Articles of Association is a valid corporate action but, as we have already indicated, the parties aggrieved can get remedies under the general law of the land for any breach of that agreement.”

In the case of Union of India & Another v.

Azadi Bachao Andolan And Another, (2004) 10

SCC 1 the Supreme Court was considering the

question as to whether offshore companies

incorporated and operating from Mauritius

and liable to tax in that country were

entitled to benefits of IndoMauritius

Double Taxation Avoidance Convention, 1983

or not. The Honourable Supreme Court has

held as under:

114.The decision of the Chancery Division in Re F.G. Films Ltd. 53 (1) WLR 483 was pressed into service as an example of the mask of corporate entity being lifted and account be taken of what lies behind in order to prevent

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fraud. This decision only emphasises the doctrine of piercing the veil of incorporation. There is no doubt that, where necessary, the courts are empowered to lift the veil of incorporation while applying the domestic law. In the situation where the terms of the DTAC have been made applicable by reason of section 90 of the Income Tax Act, 1961, even if they derogate from the provisions of the Income Tax Act, it is not possible to say that this principle of lifting the veil of incorporation should be applied by the court. As we have already emphasised, the whole purpose of the DTAC is to ensure that the benefits thereunder are available even if they are inconsistent with the provisions of the Indian Income Tax Act. In our view, therefore, the principle of piercing the veil of incorporation can hardly apply to a situation as the one before us.

164. If the court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it would not be permissible for the court to treat the intervening legal steps as nonest based upon some hypothetical assessment of the real motive of the assessee. In our view, the court must deal with what is tangible in an objective manner and cannot afford to chase a willothewisp.

166. We are unable to agree with the submission that an act which is otherwise valid in law can be treated as nonest merely on the basis of some

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underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents.

167.In the result, we are of the view that Delhi High Court erred on all counts in quashing the impugned circular. The judgment under appeal is set aside and it is held and declared that the Circular No.789 dated 1342000 is valid and efficacious.

In the case of United Bank of India Limited

v. United India Credit and Development

Company Limited, 1977 Company Cases 689

(Cal.), the Calcutta High Court has observed

that fairness or unfairness of the scheme is

not for the court's discretion in a

technical sense but is a matter to be

decided on evidence Test being whether it

is for the interest of future commercial

interest of the company, court cannot

substitute its own views for the directors

and experts. Unanimous opinion of directors

is a relevant factor. He rightly submitted

that predominant combined holdings of shares

by directors are irrelevant consideration

for the court. In paragraph 54 of the

said decision, it has been held as under:

“54.Regarding the question of the scheme

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being unfair on merits, hypothetical, conditional, etc., I do not find any substance in the same save and except such contentions as have been raised relying on various decisions which are entirely on different background and different facts having no relevancy whatsoever in the facts and circumstances of the case. All of the said decisions relate to taking over or amalgamation of a company with an existing company, whereas, here, a new company has been incorporated for the purpose of the said amalgamation. As such, the principles relied on by the opposing group of shareholders cannot have any application whatsoever in the facts of the case, as, admittedly, the new company has not commenced its business but has only been incorporated for the purpose of taking over the petitionerbank. Further, the court cannot speculate at this stage as to the possibility, potentiality of the amalgamatedcompany in future and its working. It is true that the court is not a mere rubberstamp but, in sound exercise of its discretionary power to sanction a scheme, must consider the scheme as a whole having regard to the general conditions, background, and object of the scheme and the present day conditions, and atmosphere in the State where the companies are going to function. Court cannot take a pedantic and strict view of each and every clause in the scheme and speculate as to its future, feasibility and possibility at this stage. It is for the collective wisdom of the shareholders who are primarily businessmen and investors guided by the directors of a company to determine the course of business they

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choose. The principles are so wellknown and even repeated by all the counsels appearing for both the parties that I need not discuss the same threadbare and it will be sufficient for me to hold that I accept the arguments and contentions of Mr. S. C. Sen, Mr. R. C. Nag and Mr. S. B. Mukherjee on this question which I have set out before. It is premature for the court to judge now whether the business envisaged by the scheme of amalgamation to be carried on in future would become profitable and a success. The court is only to see whether it is feasible having potentiality in the facts and circumstances of this case. In my view, prima facie, I am satisfied that in the present set up and conditions, particularly as it appears from the Report of the Banking Commission, the relevant articles of which I have quoted before, that there is nothing wrong or objectionable in the scheme of amalgamation being put through. In fact, the State of West Bengal appearing before me through Mr. D. P. Gupta is supporting the said scheme so also the Life Insurance Corporation of India and other statutory bodies. I have no hesitation in holding that the business of the amalgamated company is highly potential and conducive to the economy and development of the State of West Bengal in the present set up, when funds are urgently needed for the growth and development of existing and new enterprises. Further, the shareholders of the petitionerbank never complained of the management of their company by its directors so far and suddenly they cannot have any reasonable and bona fide grievances against the said management

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and the scheme. It is true that names of eminent, wellknown industrialists and respectable persons of integrity and honesty have been referred as prospective directors of the amalgamated company and they have not yet signified their consent of acceptance of such office but that in my view is not required at this stage, being premature. But the suggestion and intention as shown by the petitioners to appoint respectable, reliable and honest persons of high reputation as directors is enough for me at this stage to take into consideration the bona fide intention and object of the petitionercompanies.”

(emphasis supplied)

45. It is also required to be noted that a

similar Scheme of arrangement involving

demerger of passive infrastructure assets of

the Company has been sanctioned by the Delhi

High Court in Re: Bharti Airtel Limited [CP

No. 233/2007, decided on 26th November,

2007] wherein a similar Scheme of

Arrangement involving demerger of Passive

Infrastructure Assets into a group company,

where no consideration was to be paid nor

were any shares to be issued by the

transferee company to the transferor

company, was sanctioned. In the aforesaid

case no consideration was to be paid nor

were any shares to be issued by the

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transferor company to the transferee

company.

46. It is vehemently argued by Mr Thakor that

this can never be said to be an arrangement

since the transferor companies proposed to

transfer only assets of the transferor

company without transferring the liabilities

and the liabilities would remain with the

transferor companies after demerger. It is

also vehemently argued that the expression

“arrangement with members used in S. 391,‟

did not contemplate a gift from one party to

the Scheme to the other party for the reason

that the aforesaid expression contemplated

an arrangement in the nature of a contract

with a consideration involved, which is

missing in this case. The second submission

was that the Scheme is against public

interest. It is no doubt true that as

provided in the Scheme certain assets are to

be transferred without consideration and

without transfer of liability in respect

thereof. At this stage, it is required to

be noted that the proposition that so far as

expression of arrangement with members is

concerned, it is not defined in the

Companies Act. However, in the instant

case it cannot be said that the majority of

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the shareholders wanted confiscate the

rights of the objecting minority

shareholders. In the instant case no

shareholder has raised any objection

regarding such an arrangement. There is no

question, therefore, of forcing the Scheme

on a class of members against their wish.

47. Mr Thakor has placed strong reliance upon

the decision of this Court in the case of

Wood Polymer (Supra). In the said case,

Company Petitions Nos. 10 and 12 of 1975 are

filed by Wood Polymer Limited and Bengal

Hotels Private Limited, respectively, under

sections 391(2) of the Companies Act,

praying for according sanction to a scheme

of amalgamation of the aforementioned two

companies. Wood Polymer Limited is public

limited company and it is the transferee

company. Bengal Hotels Private Limited is a

private limited company and is the

transferorcompany. The scheme submitted to

the court for sanction involves amalgamation

of the transferorcompany with the

transfereecompany and amongst others it

envisages dissolution of the transferor

company without winding up. The learned

Company Judge of this Court has while

rejecting the aforesaid company petitions

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has observed that merely it is shown to the

Court that the requisite formalities in

relation to proposed scheme of amalgamation

having been carried out, the Court is not

bound to sanction the Scheme. The learned

Company Court has observed that the

transferorcompany appears to have been

merely created to facilitate transfer of a

building called 'Avenue House' once

belonging to DOC Pvt. Ltd. to the

transfereecompany so as not to be liable

for capital gains tax, which, if a

subterfuge of the transferorcompany 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 transfereecompany

without any liability to pay capital gains

tax. Considering the nature of the

transaction, the Court found that the sole

object of the Scheme is to avoid capital

gains tax and there was no other purpose

worth the name.

48. Reference is also made to the case of

Navjivan Mills Co. Ltd., Kalol v. Kohinoor

Mills Co. Ltd., Bombay, (1972) 42 CompCas 265

(Gujarat High Court) wherein similar view is

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taken by the learned Company Judge that

Scheme of Compromise must satisfy that the

provisions of the statute are complied with.

In the aforesaid case, the learned Judge of

this Court has sanctioned the Scheme with

modifications.

49. Both the learned counsel have relied upon

the decision of the Supreme Court in the

case of Miheer H Mafatlal v. Mafatlal

Industries Limited (1996) 87 CompCas 792

(SC). In the said case it has been held by

the Honourable Supreme Court that the

sanctioning court has to see to it that all

the requisite statutory procedure for

supporting such a scheme has been complied

with and that the requisite meetings as

contemplated by Section 391(1)(a) have been

held, whether the Scheme of compromise or

Arrangement is not found to be violative of

any law and not contrary to the public

policy. The Supreme Court has laid down

the following broad contours of such

jurisdiction:

“1. The sanctioning court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by Section 391(1)(a)have been held.

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2. That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by Section 391 SubSection (2).

3. That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class.

4. That all necessary material indicated by Section 393(1)(a) is placed before the voters at the concerned meetings as contemplated by Section 391 Subsection (1).

5. That all the requisite material contemplated by the proviso of Subsection (2) of Section 391 of the Act is placed before the Court by the concerned applicant seeking sanction for such a scheme and the Court gets satisfied about the same.

6. That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the Scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously Xray the same.

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7. That the Company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising of the same class whom they purported to represent.

8. That the scheme as a whole is also found to be just, fair and reasonable from the 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.

9. Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there would be a better scheme for the company and its members or creditors for whom the scheme is framed. The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction.

The aforesaid parameters of the scope and ambit of the jurisdiction of the Company Court which is called upon to sanction a Scheme of Compromise and Arrangement are not exhaustive but only broadly illustrative of the contours of

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the courts jurisdiction.”

49 So far as the submission of Mr Thakor that

the Scheme of arrangement is not an

arrangement and therefore the petition under

Sections 391 to 394 of the Companies Act is

not maintainable is concerned, the word

‘arrangement’ cannot be interpreted in a

narrow manner and the definition. As held

by the Bombay High Court in the case of

Larsen & Toubro Ltd. (2004) 121 CC 523 the

word ‘arrangement’, though not defined

specifically, has a wide range and ambit and

is a term of wider connotation (at pages

562564). There is nothing wrong if the

Company wants to reconstruct its business in

an alternative form by dividing

telecommunication business and

telecommunication infrastructure business in

the manner business being carried on by the

Appellant, in a manner that the


would be carried on by the transferee

company. The said business will be continued

and carried on by substantially the same

persons who are presently carrying on the

consolidated business since both the

transferor and the transferee companies are

wholly owned subsidiaries of Vodafone Essar

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Limited which will continue to carry on the

businesses.

50 On perusal of section 394(1) and 394(1)(a)

it is evident that both reconstruction and

amalgamation are statutorily recognized as

an arrangement and/or compromise under

section 391. It necessarily implies that

once a scheme is a reconstruction, which in

the facts of the present case it is, the

same is bound to be recognized as an

arrangement and/or compromise under section

391. The Income Tax Department, by raising

such a contention, is unnecessarily putting

restrictions on the language of section

394(1) and section 394(1)(a) which the

legislature has not deemed it fit to impose.

In Larsen & Toubro Ltd, 2004 121 Company

Cases 523 (Bombay) wherein the learned

Company Judge of the Bombay High Court has

held that the word ‘arrangement’ though not

defined specifically has a wide range and

ambit and is a term of wider connotation.

It is held that the expression ‘arrange

ment’ includes a reorganization of the share

capital of the company by the consolidation

of shares of different classes.

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In Re T & N Ltd., (2007) 1 All ER 851 (Chan

cery Division) it has been held that it is

not a necessary element of an arrangement

for the purposes of section 425 that it

should alter the rights existing between the

company and the creditors or members with

whom it is made provided that the context

and the content of the scheme are such as

properly to constitute an arrangement. It

is further held that it is neither necessary

nor desirable to attempt a definition of ar

rangement. The legislature has not done so.

To insist on an alteration of a right or a

termination of rights as in the case of

schemes to effect takeovers or mergers, is

to impose a restriction which is neither

warranted neither by the statutory language

nor justified by the courts’ approach over

the years to give the term its widest mean

ing.

In the case of Re NFU Development Trust

Limited 1 WLR 1548 (CD) a Scheme of Arrange

ment was proposed for reducing the adminis

trative expenses. The Chancery Division

Court has after considering the provisions

of the Companies Act and after considering

the Scheme. It has been observed by the

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Court that the word ‘compromise’ implies

some element of accommodation on each side

and it is not an apt to describe total sur

render. The objection of the Income Tax De

partment that the scheme confiscates the

rights of the Income Tax Department and

therefore is not an arrangement, relying on

NFU Development Trust Ltd., overlooks the

fact that there is neither any arrangement

with the Income Tax Department nor confisca

tion of its rights. In the case referred to,

there was complete extinguishment of the

rights of the members, which was not accep

ted as being an arrangement. In the present

case the rights of the Income Tax Department

of assessing, levying and collecting tax

from the Appellant are not confiscated or

expropriated so as to extinguish such

rights. A contention that the recovery of

the outstanding tax may be affected by

transfer of PI assets, apart from being in

correct as it would be clear from the earli

er paragraph cannot be equated with expro

priation/confiscation/ extinguishment of

rights of the Income Tax Department.

51 So far as argument of the Revenue that the

transfer is void for want of consideration

is concerned, it is required to be noted

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that the Income Tax Department is not a

party to the transaction. We agree with the

view taken by the Delhi High Court that even

if the consideration of one rupee can be

said to be a valid consideration. In our

view, while examining the Scheme each and

every objection of a third party cannot be

considered by carrying out microscopic exam

ination. It is also required to be noted

that it is not necessary that consideration

is always a monetary consideration. In such

type of cases wherein the reconstruction in

volves give and take and mutual/reciprocal

promises and obligations, which can be said

to be consideration for each other and it

cannot be said that there is absolutely no

consideration so far as Scheme of Arrange

ment is concerned. The Court is required to

see whether the Scheme in question is for

the benefit of shareholders and whether it

is framed with the sole object of avoidance

of the Scheme is avoidance of tax or it is

against the public policy. Even otherwise,

when various High Courts have sanctioned the

identical Schemes, even on the principles of

parity and judicial comity, in our view,

consent is required to be given to the

Scheme in question. It is also required

to be noted that identical points were

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raised before the Delhi High Court and the

learned Judge of the Delhi High Court has

already sanctioned the Scheme and it is not

in dispute that till date that order of the

Delhi High Court holds the field. It is

pointed out by Mr Joshi that the Income Tax

Department has not even taken care to chal

lenge the said order within the period of

limitation and according to him the Scheme

has already been implemented pursuant to the

order of the Delhi High Court. Nonetheless,

during the course of hearing, it was pointed

out by Mr Thakor that against the order of

the Delhi High Court appeal has been filed

with a delay condonation application. He,

however, admits that the order of the

learned Single Judge of the Delhi High Court

is still holding the field and there is no

stay. He has also conceded that so far as

orders of other High Courts are concerned,

not only such objections, which are raised

herein, were not raised therein, but even no

further appeals have been filed against the

orders of different High Courts. Therefore,

on the basis of judicial comity and prin

ciples of parity, this Court would not like

to take a contrary view of the matter by re

jecting the Scheme of the arrangement.

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52. Even otherwise, the word ‘Consideration’ is

defined under section 2(d) of the Contract

Act, as under:

"When, at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing something such act or abstinence or promise is called a consideration for the promise."

In Chidambara Iyer & ors vs. P. S. Renga

Iyer & ors., reported in AIR 1966 SC 193 at

page 197 the Supreme Court was considering a

case wherein on August 22, 1934, a Trust was

created by the family in respect of a sum of

Rs.36,98898 for charitable purposes; on

September 3, 1939, the usufructuary mortgage

right of the family in Ex.A1, was given to

the charity in discharge of the obligation

undertaken under Ex.B1; and the dedication

of the said property was affirmed in the

regular partition deed. In short, under the

said documents the family transferred to the

charity their interest in the usufructuary

mortgage, Ex. A1, in discharge of their

obligation to pay the trust a sum of Rs.

36,98898. The High Court, on a

consideration of the said documents, arrived

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at exactly the same finding. The learned

Judges of the High Court clearly held that

the mortgage interest in Ex. A1 was

transferred in discharge of the liability

undertaken under Ex. B1. When the matter

carried in appeal, while dismissing the

appeal the Honourable Supreme Court held as

under:

“So far as is relevant to the present enquiry, the content of the two definitions is practically the same, though the expression "valuable" is implied under S. 2(d) of the Contract Act, for consideration shall be "something which not only parties regard but the law can regard as having some value". From the definitions it is apparent that consideration may be negative or positive. In the present case the mortgage interest was transferred in trust to the charity. What was the consideration that passed from the charity to the family? The family was under an obligation to pay to the charity the amount set apart to it under Ex. B1. The mortgage interest was transferred in discharge of that obligation. That is to say, the charity agreed as a consideration for the transfer of the mortgage interest not to enforce its right to recover that amount from the family. The charity gave up that right in consideration of the mortgage interest acquired by it. We therefore, hold that the family transferred the mortgage interest in trust to the charity for valuable consideration within the meaning of S. 9A (10) (ii) (b) of the Act. It follows

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that the mortgage, Ex. A1, was rightly held by the High Court not liable to be scaled down under the provisions of the Act.”

53. Even the most trifle benefit can be

consideration so as to avoid the impact of

section 25 in view of the decision in His

Holiness Kesavananda Bharati vs. State of

Kerala, reported in (1973) 4 SCC 225, at

para 1971). There is no requirement of

monetary consideration and even a promise to

induce the company to carry on its business

has been treated as sufficient consideration

as held in the case of Ledingham & ors. Vs.

Bermejo Estancia Co. Ltd., reported in 1947

(1) All ER 749). Even a letter for bringing

about peace for the family was a good

consideration and the letter brought about

an enforceable agreement between the parties

as held in The Commissioner of Wealth Tax,

Mysore vs. Vijayaba, Dowger Maharani Saheb,

Bhavnagar & ors., reported in AIR 1979 SCC

982. In the present case the reconstruction

involves give and take and mutual/reciprocal

promises and obligations which are

consideration for each other and it cannot

be said that the scheme of arrangement is

without consideration.

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54. The objection raised by the Income Tax

Department that the Appellant should not be

permitted to argue that for the purpose of

Income Tax Act, the transfer is by way of a

gift and that for the purpose of the

Companies Act, the same is with

consideration is completely misplaced. There

is no bar which restrains a transaction

falling differently or being dealt with

separately under different Acts. Reliance is

placed on the judgment of Mysore Minerals

Ltd. vs. Commissioners of Income Tax,

Karnataka, reported in (1999) 7 SCC 106(para

14), for the aforesaid proposition.

55. In view of the approval accorded by the

equity shareholders, secured and unsecured

Creditors of the petitioner and the Regional

Director, Western Region to the proposed

Scheme of Arrangement, as well as the

submissions of the Income Tax Department,

there appear 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 while protecting the

right of the Income Tax Department to

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recover the dues in accordance with law

irrespective of the sanction of the Scheme.

However, while sanctioning the Scheme it is

observed that said sanction shall not defeat

the right of the Income Tax Department to

take appropriate recourse for recovering the

existing or previous liability of the

transferor company and the transferor

company is directed not to raise any issue

regarding maintainability of such

proceedings in respect of assets sought to

be transferred under the proposed Scheme and

the same shall bind to transferor and

transferee company. The pending

proceedings against the transferor company

shall not be affected in view of the

sanction given to the Scheme by this Court.

In short, the right of the Income Tax

Department is kept intact to take out

appropriate proceedings regarding recovery

of any tax from the transferor or transferee

company as the case may be and pending cases

before the Tribunal shall not be affected in

view of the sanction of the Scheme.

56. In the result, the appeal is allowed by

substituting the order of the learned

Company Judge and Scheme is sanctioned

subject to what is stated hereinabove.

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(P.B.Majmudar, J.)

(Mohinder Pal, J.)

FURTHER ORDER

57. At this stage, Mr Nitin K Mehta, learned

counsel for the Income Tax Department

requested that the operation and

implementation of this judgment be stayed as

the respondent would like to approach the

Honourable Apex Court against this judgment.

The request is vehemently opposed by the

learned counsel for the appellantcompany

and it is submitted that so far as the

Schemes approved by the other High Courts

are concerned, as on today, no stay is

granted in any of those matters. It is also

pointed out that insofar as the matter

before the Delhi High Court is concerned,

though the appeal is filed, even delay in

filing the appeal is not condoned as yet.

It is, therefore, submitted that this is not

a case in which the Scheme is required to be

stayed. At this juncture, the learned

counsel for the appellantcompany, invited

the attention of the Court to Section 395(3)

of the Companies Act, 1956 which provides

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that an order of the Company Court shall not

come into effect until certified copy of the

order of the Company Court is produced

before the Registrar of Companies. The

learned counsel for the appellantcompany

assured this Court that they shall not

produce the certified copy of this judgment

before the Registrar of Companies until 5th

September 2012.

In that view of the matter, the

appellantcompany is directed not to produce

the certified copy of this judgment before

the Registrar of Companies until 5th

September 2012. The request made by the

learned counsel for the Income Tax

Department is not required to be entertained

in view of the aforesaid statement made by

the learned counsel for the appellant

company.

(P.B.Majmudar, J.)

(Mohinder Pal, J.)

*mohd

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