In The Matter Of vs M/S Vodafone Essar Limited
2011 Latest Caselaw 1808 Del

                  IN THE HIGH COURT OF DELHI

                  COMPANY PETITION NO. 334/2009

                                         Reserved on :   22-09-2010
                                  Date of pronouncement: 29-03-2011

In the matter of
The Companies Act, 1956:

And

Petition under Sections 391 to
394 of the Companies Act, 1956

Scheme of Arrangement between:

M/s. Vodafone Essar Limited
                                    ..    Non-petitioner/Transferor
                                          Company No. 1
M/s. Vodafone Essar   Mobile Services Limited
                                     ..   petitioner/Transferor
                                          Company No. 2
M/s. Vodafone Essar   East Limited
                                      ..  Non-petitioner/Transferor
                                          Company No. 3
M/s. Vodafone Essar   Gujarat Limited
                                      ..  Non-petitioner/Transferor
                                          Company No. 4
M/s. Vodafone Essar   South Limited
                                      ..  petitioner/Transferor
                                          Company No. 5
M/s. Vodafone Essar   Digilink Limited
                                     ..   petitioner/Transferor
                                          Company No. 6
M/s. Vodafone Essar   Cellular Limited
                                      ..  Non-petitioner/Transferor
                                          Company No. 7
      AND

M/s. Vodafone Essar Infrastructure Limited
                                    ..   petitioner/Transferee
                                         Company

                        Through Dr. Abhishek Manu Singhvi,
                        Sr. Adv. with Ms. Niti Dixit and
                        Mr. Shankh Sengupta, Advocates
                        for the petitioners
                        Mr. Parag P. Tripathi, ASG with
                        Mr. Nitin Mehta and Mr. Anuj Bhandari,
                        Advocates for the Income Tax Deptt.
                        Dy. Registrar of Companies in person



CP No. 334/2009                                            Page 1 of 43
 SUDERSHAN KUMAR MISRA, J.

1. Four companies have 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 (hereinafter

referred to as the transferor company no. 1); M/s. Vodafone Essar

Mobile Services Limited (hereinafter referred to as the petitioner/

transferor company no. 2); M/s. Vodafone Essar East Limited

(hereinafter referred to as the transferor company no. 3); M/s.

Vodafone Essar Gujarat Limited (hereinafter referred to as the

transferor company no.4); M/s. Vodafone Essar South Limited

(hereinafter referred to as the petitioner/transferor company no. 5);

M/s. Vodafone Essar Digilink Limited (hereinafter referred to as the

petitioner/transferor company no. 6); M/s. Vodafone Essar Cellular

Limited (hereinafter referred to as the transferor company no. 7) and

M/s. Vodafone Essar Infrastructure Limited (hereinafter referred to as

the transferee company).

2. The registered offices of the petitioner/transferor

companies no. 2, 5 & 6 and the transferee company, all of whom have

approached this Court, are situated at New Delhi, within the

jurisdiction of this court.

3. The registered offices of the transferor company Nos.1, 3,

4 and 7 are situated at Mumbai, Kolkata, Ahmedabad and Coimbatore,

respectively.

4. The petitioner/transferor company no. 2 was originally

incorporated under the Companies Act, 1956 on 27 th March, 1992 with

the Registrar of Companies, Tamil Nadu under the name and style of

Sterling Cellular Limited. The company changed its name to Hutchison

Essar Telecom Limited after passing the necessary resolution to this

effect and obtained the fresh certificate of incorporation on 12 th

August, 2002. The company again changed its name to Hutchison

Essar Mobile Services Limited and obtained the fresh certificate of

incorporation on 1st March, 2005. Thereafter, the company shifted its

registered office from the State of Tamil Nadu to NCT of Delhi and

obtained a certificate in this regard from the Registrar of Companies,

NCT of Delhi & Haryana at New Delhi On 20 th June, 1997. The

company finally changed its name to Vodafone Essar Mobile Services

Limited and obtained the fresh certificate of incorporation on 3rd July,

2007.

5. The petitioner/transferor company no. 5 was originally

incorporated under the Companies Act, 1956 on 7 th December, 1995

with the Registrar of Companies, NCT of Delhi & Haryana at New Delhi

under the name and style of Barakhamba Sales & Services Private

Limited. The company changed its name to Barakhamba Sales &

Services Limited after passing the necessary resolution to this effect

and obtained the fresh certificate of incorporation on 22 nd June, 2001.

The company again changed its name to Hutchison Essar South

Limited and obtained the fresh certificate of incorporation on 12 th

February, 2002. The company finally changed its name to Vodafone

Essar South Limited and obtained the fresh certificate of incorporation

on 4th July, 2007.

6. The petitioner/transferor company no. 6 was originally

incorporated under the Companies Act, 1956 on 21st March, 1995 with

the Registrar of Companies, Tamil Nadu under the name and style of

Aircel Digilink India Limited. Thereafter, the company had shifted its

registered office from the State of Tamil Nadu to NCT of Delhi and

obtained a certificate in this regard from the Registrar of Companies,

NCT of Delhi & Haryana at New Delhi On 20 th June, 1997. The

company changed its name to Vodafone Essar Digilink Limited and

obtained the fresh certificate of incorporation on 4 th July, 2007.

7. The petitioner/transferee company was originally

incorporated under the Companies Act, 1956 on 19 th 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 the fresh certificate of incorporation on 18th October, 2007.

The company again changed its name to Vodafone Essar Infrastructure

Limited and obtained the fresh certificate of incorporation on 17 th

January, 2008. Thereafter, the company had 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.

8. The authorized share capital of the petitioner/ transferor

company no. 2, as on 31st March, 2009, is Rs.2,00,00,00,000/- divided

into 20,00,00,000 equity shares of Rs.10/- each. The issued,

subscribed and paid up capital of the company is Rs.1,99,71,64,690/-

divided into 19,97,16,469 equity shares of Rs.10/- each.

9. The authorized share capital of the petitioner/ transferor

company no. 5, as on 31st March, 2009, is Rs.10,42,00,00,000/-

divided into 54,00,00,000 equity shares of Rs.10/- each aggregating

Rs.5,40,00,00,000/-; 2,00,000 preference shares of Rs.100/- each

aggregating Rs.2,00,00,000/- and 5,000 preference shares of

Rs.10,00,000/- each aggregating Rs.5,00,00,00,000/-. The issued,

subscribed and paid up capital of the company is Rs.7,01,60,75,000/-

divided into 53,96,07,500 equity shares of Rs.10/- each aggregating

Rs.5,39,60,75,000/-; 2,00,000 preference shares of Rs.100/- each

aggregating Rs.2,00,00,000/- and 1,600 preference shares of

Rs.10,00,000/- each aggregating Rs.1,60,00,00,000/-.

10. The authorized share capital of the petitioner/ transferor

company no. 6, as on 31st March, 2009, is Rs.1,01,20,00,000/- divided

into 10,12,00,000 equity shares of Rs.10/- each. The issued,

subscribed and paid up capital of the company is Rs.1,01,10,00,000/-

divided into 10,11,00,000 equity shares of Rs.10/- each.

11. The authorized share capital of the petitioner/ 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

12. Copies of Memorandum and Articles of Association of the

petitioner/transferor companies no. 2, 5 & 6 and the transferee

company have been filed on record. The audited balance sheets as on

31st March, 2008 of the petitioner/ transferor companies no. 2, 5 & 6

and the transferee company along with the report of the auditors have

also been placed on record.

13. A copy of the Scheme of Arrangement has been filed on

record and the salient features of the Scheme have been incorporated

and detailed in the petition and the accompanying affidavits. Under

that scheme, it is proposed to demerge the passive infrastructure

assets of eight transferor companies and transfer them to the

transferee company. The transferor companies No. 2 to 7, and the

transferee company are the wholly owned subsidiaries of transferor

company No.1, i.e. Vodafone Essar Mobile Services Ltd. Out of these,

three transferor companies, being Nos. 2, 5 and 6, and the transferee

company, lie within the jurisdiction of this Court. The four remaining

transferor companies, being Nos. 1, 3, 4 and 7, are within the

jurisdiction of the High Courts of Bombay, Calcutta, Gujarat and

Madras, respectively, as mentioned above. The Scheme has already

been sanctioned by the High Courts of Bombay, Calcutta and Madras,

and is pending before the High Court of Gujarat and this Court. It is

further submitted that the Scheme envisages that on the appointed

date, inter alia, the Passive Infrastructure Assets of all the transferor

companies shall stand transferred to and vested in the transferee

company. It is claimed that 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 roll-out and efficiency through the sharing of

infrastructure. This initiative of the petitioners is stated to be in line

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 (2007-2012) issued by the Department of

Telecommunications, Ministry of Communications and Information

Technology, Government of India, wherein it is recommended, inter

alia, in Chapter 5.5. thereof, that the parties concerned;

"Promote sharing of infrastructure so that costs can be kept down - this is essential for rural penetration. Incentivize such sharing."

14. So far as the share exchange ratio is concerned, the

Scheme provides that the Scheme is intended to restructure, within

the VEL 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 VEL Group. Since the

transfer of the Passive Infrastructure Assets is within the VEL Group,

such transfer shall be without any consideration. Accordingly, 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.

15. It is claimed by the petitioners that no proceedings under

Sections 235 to 250A of the Companies Act, 1956 are pending against

the petitioner/transferor companies no. 2, 5 & 6 and the transferee

company

16. The Board of Directors of the petitioner/transferor

companies no. 2, 5 & 6 and the transferee company in their separate

meetings held on 21st September, 2007 & 30th April, 2008 have

unanimously approved the proposed Scheme of Arrangement. Copies

of the Resolutions passed at the meetings of the Board of Directors of

the petitioner/transferor companies no. 2, 5 & 6 and the transferee

company have been placed on record.

17. The petitioner companies had earlier filed CA (M) No.

113/2010 seeking directions of this court to dispense with the

requirement of convening the meetings of their shareholders, secured

and unsecured creditors, which are statutorily required for sanction of

the Scheme of Arrangement. By order dated 29th May, 2010, this

court allowed the application and dispensed with the requirement of

convening and holding the meetings of the shareholders and creditors

of the petitioner companies to consider and, if thought fit, approve,

with or without modification, the proposed Scheme of Arrangement.

18. The petitioner companies have thereafter filed the present

petition seeking sanction of the Scheme of Arrangement. On 31st July,

2009, notice in the petition was issued to the Regional Director,

Northern Region. Citations were also directed to be published in the

Delhi, Mumbai, Kolkata, Chennai and Ahmedabad editions of 'Times of

India' (English), and 'Nav Bharat Times' (Hindi); 'Ananda Bazar

Patrika' (Bengali); 'Dina Malar' (Tamil) and 'Sandesh' (Gujarati)

respectively, in terms of the Companies (Court) Rules, 1959. Affidavit

of service has been filed by the petitioners showing compliance

regarding service on the Regional Director, Northern Region and also

regarding publication of citations in the aforesaid newspapers on 24 th

to 27th August, 2009 respectively. Copies of the newspaper clippings

containing the publications have been filed along with the affidavit of

service.

19. In response to the notices issued in the petition, Dr.

Navrang Saini, Regional Director, Northern Region, Ministry of

Corporate Affairs has filed his report dated 16 th September, 2009.

Relying on Clause 4.4.1 of Part-III of the Scheme, he has stated that,

upon sanction of the Scheme of Arrangement, all the employees of the

transferor companies engaged in or in relation to the Passive

Infrastructure Assets of the Transferor companies who are in such

employment as on the appointed date shall continue to remain

employees of the respective transferor companies, without any break

or interruption in their services.

20. The Regional Director has further submitted that the

details of individual assets and liabilities and values thereof pertaining

to, "Passive Infrastructure Assets", of all the transferor companies

proposed to be transferred to the transferee company are not

mentioned in the Scheme, and that such details of individual assets

and liabilities thereof should have been part of the Scheme so that the

same are known to the shareholders and creditors of all the

companies.

21. In response to the above objection, the petitioner

companies in their rejoinder stated that assets have been defined in

the Scheme of Arrangement and that, as such, the assets being

transferred are identifiable and a list of assets of each of the petitioner

companies is not required to be a part of the Scheme. The petitioner

companies have also placed on record a provisional list of assets to be

transferred by each of the petitioner companies, as at 31st March,

2009. The petitioner companies further undertake to file a final list of

assets for the transferor companies Nos. 2, 5 and 6 after receiving the

approval of this Court, to form a part of the sanctioned Scheme. The

undertaking is accepted, and in view of the same, this objection does

not survive.

22. The Regional Director, while referring to Para 3.1.1 of Part-

III of the Scheme regarding accounting treatment in the books of the

transferee company, has further submitted that the transferor

companies Nos. 2, 5 and 6 have failed to submit a valuation report and

that all the transferor and transferee companies may be directed to

obtain a valuation report from a recognized firm of Chartered

Accountants.

23. In response to the above objection, the petitioner

companies in their rejoinder have submitted that the petitioner

companies, including the transferee company, are 100% subsidiaries

of transferor company no. 1 and that since the restructuring involves

movement of assets within the Vodafone Essar Limited group of

companies, such transfer of assets shall be without consideration, and

therefore, no shares are required to be issued by the transferee

company to any of the petitioner companies or to any of their

shareholders, and accordingly, no valuation report is required to be

prepared with respect to the Scheme. In support of the above

submission, the petitioner companies relied on the judgment of this

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 view of the above, the objection raised by the Regional

Director does not survive.

24. The Regional Director, while referring to Para 2.4 of Part-II

of the Scheme, has further submitted that the transferee company

may be directed to obtain the necessary approvals from the

Department of Telecommunications for transfer of licenses after

sanction of the Scheme by this court, pursuant to the Department of

Telecommunications' letter No. 820-I/2003-LR dated 9th June, 2003, in

which the Department of Telecommunications has clarified that the

licensee may transfer the licenses with prior written approval of the

licensor even in cases of amalgamation under Sections 391/394 of the

Companies Act, 1956.

25. In response to the above objection, the petitioner

companies have submitted that none of the transferor companies are

transferring any telecommunication licenses issued by the Department

of Telecommunications to the transferee company pursuant to this

Scheme and that the aforesaid letter issued by the Department of

Telecommunications has no application to this Scheme. Consequently,

the transferor companies before this court will continue to operate as

telecommunication service providers even after the demerger is

effected. It is further submitted that the transferee company has been

registered as an Infrastructure Provider Category- I 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 the telecom services under Section 4 of

the Indian Telegraph Act, 1885. A true copy of this registration

certificate dated 17th June, 2008 has also been placed on record by the

petitioners. In view thereof, this objection raised by the Regional

Director does not survive.

26. After the citations were published in the newspapers on

27th August, 2009, counsel for the Income Tax Department appeared

on 18th September, 2009 and stated at the bar that certain queries

had been raised by the income tax authorities in respect of the

Scheme. The Income Tax Department‟s formal objections to the

Scheme were filed in this Court on 10th November, 2009.

27. The rationale behind the objections of the income tax

authorities is that since the transferor companies propose to transfer

only the assets of the transferor companies to the transferee company,

without transferring the liabilities in respect thereof as well, including

any contingent liabilities, the liabilities would remain with the

transferor companies after the demerger. Consequently, a continuous

charge of interest and other liabilities would remain in the hands of the

transferor companies in respect of the transferred assets, thus

reducing the taxable profits in their hands, which would in turn lower

the tax burden on the transferors, thereby adversely affecting the

revenue‟s interest. It was further pointed out that the proposed

Scheme contemplated transfers for „nil‟ consideration. It was also

claimed that if the proposed Scheme was sanctioned by this Court, the

accounts of the transferee company would reflect an exorbitant and

inflated income, but as the transferee company was an infrastructure

company, being an Infrastructure Provider Category I, it could claim

deductions under the various provisions of Chapter VI-A of the Income

Tax Act, 1961 on its profits, thereby also leading to a loss of revenue

for the income tax authorities. The Income Tax Department also

apprehended that once the assets were transferred, and their value

consequently removed from the account books of the transferor

companies, the net worth of some of the transferor companies might

be rendered negative, and that, therefore, there was a real likelihood

that those companies would be unable to pay their existing and

contingent tax liabilities, since there was allegedly insufficient material

to demonstrate that those companies would be able to generate

enough income to meet the same. It was further claimed that the

Scheme, as it stood, was against public interest for these reasons.

These are, broadly, the issues raised by the Income Tax Department,

which are, in my view, to be considered keeping the tax authorities‟

interest in mind, i.e. that nothing in the Scheme should come in the

way of applicability of the relevant taxing statutes to the transactions

flowing therefrom. Although it is disputed by the petitioners, the

Income Tax Department has claimed an outstanding tax liability of

approximately Rs. 19 crore against the petitioners before this Court,

from assessment year 1999-2000 onwards.

28. In this context, two broad submissions were made by the

Income tax Department. The first was 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.

29. At the outset, it is necessary to record that Dr. Singhvi,

counsel for the petitioners, submitted, on instructions, that

notwithstanding any sanction or approval that may be granted by this

Court to the proposed Scheme, his clients would be bound by all

obligations that may be imposed on them under the applicable

provisions of the Income Tax Act, 1961. By stating this, the petitioners

clearly outlined their stand at the beginning of these proceedings, to

the effect that the sanctioning of the Scheme would not ipso facto

grant any immunity to the petitioners qua any liability that may be

imposed on them under the relevant provisions of the Income Tax Act,

in accordance with law.

30. The first issue to be decided is whether an arrangement,

as understood in S.391, does not contemplate a transfer by way of gift

from one party to the Scheme to another. Undisputably, a company

may transfer property to another company. [See, Hindustan Lever v

State of Maharashtra, (2004) 9 SCC 438]. Under the Gift Tax Act,

1958, any person may make a gift, and „person‟ is defined in S.2(xviii)

thereof to include, inter alia, a company, whether incorporated or not.

A Division Bench of the Karnataka High Court in Sanjiv V. Kudva v

Commissioner of Income Tax, Karnataka, (1981) 127 ITR 354

(Kar) has held that the meaning of „gift‟ in the Income Tax Act, 1961

must be given the same meaning as that in S.2(xii) of Gift Tax Act,

1958, i.e. a gift is the transfer by one person to another of any

existing movable or immovable property made voluntarily and without

consideration. Therefore, it seems that there is no legal impediment to

a company transferring property by gift.

31. Admittedly, in the Scheme, certain assets are to be

transferred without consideration, and without transfer of liabilities in

respect thereof. According to the petitioners, these are, "transfers by

way of gift", and the relevant clauses in the Memorandum of

Association of the petitioner companies give them the power to do so.

The petitioners also referred to S.5 of the Transfer of Property Act,

1882, read with S.122 thereof, to contend that a transfer between

companies would constitute a gift, provided it was of existing property,

transferred voluntarily, made without consideration, and was accepted

by or on behalf of the donee. Further, according to the petitioners,

the logical consequence of such a transfer by way of gift, is that such a

transfer is exempt from the payment of capital gains tax under

S.47(iii) read with S.45 of the Income Tax Act, 1961.

32. However, according to the Tax Department, the transfer of

assets by way of „gift‟ is impermissible, because a scheme of

arrangement under S.391-394, does not and cannot include a gift, as

understood in law, and that the, "arrangement", contemplated by

Section 391 can only be a transaction in the nature of a contractual

arrangement for consideration. In respect of the effect of this

transaction on the non-leviability of capital gains tax, the income tax

authorities submitted that this rendered the Scheme contrary to public

interest, which issue will be taken up subsequently. But first, the issue

whether a transfer by gift is within the scope of a Scheme of

arrangement, shall be dealt with.

33. S.391 contemplates a scheme which is a compromise or

arrangement with a company and its creditors or any class of them, or

between a company and its members or any class of them. According

to counsel for the Income Tax Department, the present Scheme falls

into neither of the above categories, and therefore, cannot be

sanctioned by this Court in exercise of its jurisdiction under S.391

because it contemplates neither a compromise nor an arrangement.

According to counsel, the scope of the expression, "arrangement",

contemplated under S.391, is limited only to a contract which involves

the transfer of consideration from each party to the other, and

therefore cannot include a "gift". He relied mainly on In re: NFU

Development Trust Ltd., (1972) 1 WLR 1548, and State of Punjab

& Ors. v Ganpat Rai, (2006) 8 SCC 364 in support of this

proposition.

34. NFU Development Trust Ltd.'s case (supra) dealt with a

Scheme of arrangement that had been propounded which would have

had the effect of forfeiting the rights of some of its members. At the

meeting, although some members opposed the Scheme, it was,

however, approved by a three-quarter majority vote. Later, when the

petition for sanction of the Scheme was presented to the Court, it was

opposed by some directors and members of the company. An

objection was raised to the effect that the terms of the proposed

Scheme did not qualify as an „arrangement‟ under the English statute,

i.e. the Companies Act, 1948, for the reason that the members were

being stripped of all their rights and were receiving no compensating

benefit of any description in lieu thereof, except for the extinction of

their nominal contingent liability to contribute in the event of winding

up. Counsel for the Income Tax Department relied on the following

portion of that judgment;

"Mr. Rice's second submission was that the terms of the scheme were such that it did not qualify as an arrangement within the meaning of Section 206 of the Act. The effect of the scheme would be that all the members of the company except the NFU Development Co. and such of the so-called new members as were not already members of the

company, would be stripped of all their rights and receive in exchange no compensating benefit of any description, except the theoretical extinction of their contingent liability to contribute five new pence in case of a winding up; theoretical, because it is de minimis and has no significance in the context of a non-trading company with assets of £3,000,000 and liabilities which do not exceed £25,000. A member loses his right to attend the annual general meetings and other meetings of the company; his right to make his voice heard at meetings; his right to receive the board's annual report and the company's accounts; his right to question the use which the board makes or omits to make of the company's considerable financial resources; the right to vote on the remuneration of directors; the right to put himself forward for appointment to an area electoral college and thus acquire a say in the election of a director. Admittedly the rights of a member are very limited, and so it may be said that a member does not lose much under the scheme because he has not much to lose. Nor did he pay much for his membership rights in the first place - merely an entrance fee of five shillings. Be that as it may, the company has become prosperous, no doubt as a result of the support which members gave to the company's marketing undertaking during the period that it traded, and the profit thereby made by the company. However little a member originally paid for his membership, and however small his effective stake in the company and his opportunity to control its operations, nevertheless he has rights and under the scheme he loses all."

He also relied on the following;

"Then comes the more serious point, whether this is a compromise or arrangement which is within either the words of the section or within the true spirit of the legislation; that is to say, whether the court has either jurisdiction to sanction it, or ought to sanction it. I do not think myself that the point of jurisdiction is worth discussing at much length, because everybody will agree that a compromise or agreement which has to be sanctioned by the court must be reasonable, and that no arrangement or compromise can be said to be reasonable in which you can get nothing and give up everything. A reasonable compromise must be a compromise which can, by reasonable people conversant with the subject, be regarded as beneficial to those on both sides who are making it. Now I have no doubt at all that it would be improper for the court to allow an arrangement to be forced on any class of creditors, if the arrangement cannot reasonably be supposed by sensible business people to be for the benefit of that class as such, otherwise the sanction of the court would be a sanction to what would be a scheme of confiscation. The object of this section is not confiscation."

35. Relying on these observations, counsel contended that

even if all members and shareholders of a company had given their

consent to a Scheme, which would have the effect of forfeiting their

rights in the company, this Court must still refuse to sanction this

Scheme. In effect, his submission is that whilst it is always open to

any member of a company, either of the majority or of the minority, to

agree to any Scheme which would not give him any compensating

benefit, and while such an act would be valid in law, the Company

Court cannot sanction a Scheme of such a nature. He submitted that

this would be the outcome even if all members, without exception,

voted in favour of the scheme proposed, and no member raised any

objection before the Court. According to him, the Scheme proposed in

the present case is confiscatory.

36. To my mind, such a proposition cannot be countenanced.

The expression „arrangement‟ has not been defined in the Companies

Act, 1956. The ordinary meaning of the word is as follows;

""arrangement n. - 1. The act or process of arranging or being arranged, 2. The condition of being arranged; the manner in which a thing is arranged. 3. Something arranged. 4. Plans, measures (make your own arrangements) 5. A composition arranged for performance by different instruments or voices. 6. Settlement of a dispute etc.

See, Concise Oxford English Dictionary, 10th Edition.

37. In NFU Development Trust Ltd.'s case (supra), the

Court was satisfied on facts that the Scheme, which had been passed

by the majority, intended to confiscate the rights of the objecting

minority shareholders. It was of the view that confiscation of the

rights of an objecting minority member by virtue of a majority-

approved Scheme, cannot amount to either a „compromise‟ or an

„arrangement‟ by that company with its members and therefore any

sanction granted to such a Scheme would amount to sanctioning a

scheme of confiscation. It also took the view that it would be

improper for the Court to allow such an arrangement to be forced on

any class of members, since it could not reasonably be supposed by

any sensible commercial standard to be for the benefit of that class.

The relevant distinguishing factor was that, in that case, the objectors

were the members who were subject to the proposed confiscation.

However, in the present case, as also clarified by Dr. Singhvi at the

Bar, in view of the nature of the shareholding between the transferors

and transferee company, there is clearly no question of any

confiscation of the rights of any party to the Scheme. Furthermore, all

the concerned shareholders have given their consent and there is no

objecting shareholder.

38. Mr. Mehta, who addressed the Court for the Income Tax

Department on this aspect, further sought to interpret the meaning of

the words, "compromise or arrangement", as used in NFU

Development Trust Ltd.'s case (supra), to necessarily include some

element of, „give and take‟. He submitted that if the petitioners had

been able to demonstrate that there was an element of give and take

in the proposed Scheme under the consideration of this Court, i.e. that

the members or shareholders of the transferor companies received

anything after the demerger, only then would it amount to an

arrangement. According to him, giving the assets without receiving

anything in return from the transferee, in effect, automatically

amounts to a confiscation of the aforesaid assets by the transferee

company. Mr. Mehta was invited to place any authority before this

Court in support of this proposition, to which he responded that he had

not come across any judgment on this point.

39. To my mind, the expression, „give and take‟ used in NFU

Development Trust Ltd.'s case (supra) must be read in the context

of the finding that the arrangement proposed therein was found to be

confiscatory in nature. Furthermore, there is a significant difference

between an arrangement which is confiscatory in nature and an

arrangement which contemplates a gift. In the case of a gift, the donor

may have no expectation of a return, but this does not mean that the

subject matter of the gift has been confiscated from the donor by the

donee. Expressions such as, "confiscation" and "forfeiture" normally

contemplate the taking and seizing of property, or the deprivation

thereof, as a penalty. It can be said that these expressions have,

within them, elements of involuntariness with regard to the persons

who suffer confiscation or forfeiture, and, in that sense, since the very

foundation of a gift is voluntariness, they are the very antithesis of a

gift. It follows, therefore, that it would be absurd to suggest that a

gift has either resulted in, or is a consequence of, any confiscation or

forfeiture. Furthermore, the expressions used in Section 391 is,

"arrangement"; but nothing prevented the Legislature, in its wisdom,

from specifically mentioning the requirement of a, "contract for

consideration", also in that Section. Although NFU Development

Trust Ltd.'s case (supra) interpreted the expression "arrangement" to

mean an implied give and take, the Court did not specify that "give

and take" was to mean reciprocal promises by way of consideration.

To my mind, the expression "give and take" used in that judgment

implies a degree of voluntariness in the transactions contemplated by

the Scheme between all parties thereto, and no more. Even the offer

of a gift by the donee and its required acceptance by the done, are

sufficient to satisfy this test. In that case (supra), the Court did not

venture further since that decision was rendered in the light of a

scheme passed by the majority which operated to confiscate the rights

of the objecting minority. The scheme was held to be a confiscatory

transaction because there was no element of voluntary, „give and

take‟, in the sense explained above, since it could not be said that

what was given, was given willingly, or that it was taken with the

consent of the giver. In the light of the foregoing, it becomes clear

that in a confiscatory Scheme, since there is no element of

voluntariness, there can be no give and take, as understood above.

To put it differently in that case (supra), there was no „giving‟ by the

members whose rights were being forfeited, rather, there was only a

„taking‟ sanctioned by the majority of the members as per the

Scheme, which made the Scheme confiscatory qua the objecting

minority. Therefore, the Court refused to sanction such a Scheme. It

is in that sense that the Court in NFU Development Trust Ltd.'s

case (supra) used the expression „give and take‟. To my mind, the

present factual matrix is different from that of the abovementioned

case, as is the nature of the Scheme propounded.

40. Further, as already pointed out, the decision in the NFU

Development Trust Ltd's case (supra) was rendered in the context

of the fact that the objections of the minority shareholders were

overruled by the majority at the AGM, who then approached the court

with their objections, contending that the scheme passed by the

majority extinguished all their rights without any compensation. It

was in that context that the court held that for the arrangement or

compromise to be considered reasonable, it must be of a sort

considered as such by reasonable persons conversant with the subject.

Also, whether the arrangement in that matter was reasonable or not

was examined from the standpoint of the objecting shareholders who,

it was held, are losing everything and getting nothing. It was in these

circumstances that the Scheme propounded was held to be

confiscatory, and not that every transfer without consideration or

recompense passing to the transferor as, for example, in a gift, must

automatically be declared confiscatory, and therefore unacceptable

under Section 391 of the Act. Here, the context is quite different. Not

a single shareholder has objected. The Income Tax Department

cannot conceivably have the same interest in the company proposing

the scheme as the shareholders of that company. And, to my mind,

the Income Tax Department is also not in any sort of loco parentis to

the shareholders of the transferor companies who have unanimously

agreed to transfer their assts without recompense, nor are they the

guardians of their interests, and therefore, the Income Tax

Department cannot be heard to plead that the scheme must be thrown

out because, in its opinion, the Scheme operates as a confiscation of

the transferor shareholder‟s rights. The essence of the idea of

confiscation is the taking away or abstraction of something from

someone without his consent. Once there is consent, there can be no

confiscation.

41. I might add that, on a question being put to counsel for

the Income Tax Department as to whether a nominal consideration of

Re.1/- would be considered sufficient consideration, he admitted that it

would be sufficient and that, in that case, all objections to the issue of

transfer by way of a gift would no longer stand and the Scheme would

be squarely covered under S.391 of the Companies Act, 1956.

42. Counsel for the Income Tax Department then tried to rely

on State of Punjab & Ors. v Ganpat Rai, (2006) 8 SCC 364,

wherein the expression "compromise" in S.20(3) and (5) of the Legal

Services Authorities Act, 1987, was examined by the Supreme Court to

mean that a compromise is always bilateral and implies mutual

adjustment, that some element of accommodation on each side is

implied in the word itself, and that "it is not apt to describe total

surrender". Relying on this judgment, counsel submits that the act by

which a donor gifts any property to a donee would be an act of

surrender and therefore cannot be construed as an arrangement of the

type contemplated under Section 391 of the Companies Act. That

decision does not hold that, a "gift" amounts to, "total surrender"; nor

does the dictionary meaning of the word, "gift" and "surrender" lead us

to any such conclusion. The question whether a "gift" also amounts to

a, "total surrender", was not before the Supreme Court in that case.

There, the Court was concerned with the issue whether the necessary

requirements enabling the Lok Adalat to dispose off the matter were

satisfied in that case since, admittedly, there was no settlement or

compromise between the parties after reference by the Punjab &

Haryana High Court. For this, the Supreme Court examined Section

20 of the Legal Services Authorities Act, 1987 to hold that if no

settlement or compromise is arrived at, the Lok Adalat has no power

to dispose off the matter. Consequently, the order of the Lok Adalat

allowing the writ petition was held to be bad. For counsel to take this

to mean that since in lay terms, a gift could also be said to amount to

a "total surrender" of the donee‟s rights, and because a „total

surrender‟ has been held as not amounting to a settlement or

compromise of the type contemplated by the Legal Service Authority

Act, therefore, even a gift contemplated under a scheme under Section

391 of the Companies Act has to be construed as something that

cannot be countenanced as a part of a permissible „arrangement or

compromise‟ envisaged therein, amounts to a comparison that is too

farfetched. To my mind, relinquishment of a right by a donor, by way

of a gift or otherwise, does not amount to a "total surrender" of what

is being gifted. The words "surrender" and "gift" are not synonymous,

and cannot be used interchangeably. The concise Oxford Dictionary

(6th Edition) defines the word, "gift", to mean, "a thing given willingly

to someone without payment; a present"; whilst the word, "surrender"

is a verb, defined by that Dictionary to mean, "(i) cease resistance to

an opponent and submit to their authority, (ii) give up (a person,

right, or possession) on compulsion or demand." Although the

Supreme Court referred to NFU Development Trust Ltd.'s case

(supra) while making the aforesaid observation to the effect that a

compromise does not mean total surrender, for the reasons I have set

out, it has no application in this case. I, therefore, do not agree with

the proposition enunciated by the counsel for the Income Tax

Department in this behalf and, in my view, this judgment relied on by

the objector does not advance his case.

43. At this juncture, the petitioners‟ response to this issue may

also be noted, which was, that the shareholders of the transferor

companies and the transferee company have given their unanimous

consent to the Scheme for transfer of the passive infrastructure assets

for nil consideration, and that there was no dissent expressed by any

one of them, nor is there any element of expropriation or surrender in

the proposed Scheme. It was also averred by the petitioners that there

is indeed a „compensating advantage‟ conferred on the transferor

companies, i.e. that after the demerger, an asset which previously did

not generate any revenue will become a revenue generating asset, and

that the enormous maintenance and installation expenditure required

to keep such an asset in working condition will be reduced for the

transferor companies. Furthermore, this arrangement is in line with

the policy of the Government of India.

44. The petitioners relied on In re: Larson and Toubro Ltd.,

(2004) 121 Comp Cas 523 (Bom), paragraph 58 thereof, to show that

although the expression „arrangement‟ has not been defined in the

Companies Act, 1956, yet it has been held to be of wide scope,

including the reorganization of shares and share capital of a company,

among other things. Further reliance was placed by the petitioners on

Guardian Assurance Co, Re, (1917) 1 Ch. 431, at page 441 thereof,

to support the argument that an arrangement extends to and includes,

"every transaction between a company and its members which directly

affected their proprietary rights in their shares". To meet the

objector‟s contention that S.391 does not contemplate a Scheme of

arrangement whereby transfer of assets is made without

consideration, the petitioner‟s counsel has also referred to In re:

Highway Cycle Industries and Sunbeam Auto Ltd, (1999) 97

Comp Cas 846 (P&H), where no cash consideration was given for

transfer of a business undertaking. There it was held as follows;

"6. ...The proposed scheme need not satisfy the basic ingredients of a contract..."

This decision was also followed in In re: SREI Infrastructure

Finance Ltd. (2008) 4 Company Law Journal 196 (Cal), which dealt,

inter alia, with the objection by the Central Government that the

Scheme propounded may assist the parties in avoiding payment of

capital gains and further that rights, privileges and benefits accruing to

the transferee company have not been spelt out under the Scheme

and, therefore, it is unfair to the shareholders and ought not to be

sanctioned. The Court while noting that "....no shareholder has come

forward to challenge the Scheme of Arrangement or to raise any

objection in respect thereof", held that "....avoidance of capital gains

can be no reason for not sanctioning the Scheme of Arrangement as

avoidance of capital gains is a matter of revenue and will attract the

provisions of the Income Tax Act" and that, "....the companies cannot

escape from their respective liabilities." It was further held that, "it

must not be forgotten that a Scheme of Arrangement is between

shareholders and the transferor and transferee companies. The

Scheme of Arrangement is an arrangement to conduct the business of

a company by its shareholders. The shareholders having agreed to

conduct the management and the affairs of the company in a

particular way must be honoured."

45. For all of the above reasons, and since the objector has

not been able to place any direct authority, precedent or Rule before

this Court to support his contention, and in view of the authorities

relied on by the petitioners, counsel for the Income Tax Department

has failed to persuade this Court that a transfer by way of gift was not

permissible under Section 391 of the Companies Act, 1956, or that the

Scheme in question was confiscatory, this objection does not survive.

46. The second objection raised by the Income Tax

Department was regarding the accounting treatment prescribed in the

Scheme. Admittedly, the accounting treatment of the transactions in

relation to the demerger is vital for determining the tax treatment of

the same. According to the Income Tax Department, by proposing to

transfer assets at book value, the petitioners were trying to evade

payment of capital gains tax, which would otherwise have been

payable if the assets were to be transferred at market value. Further,

according to the Department, it was for this reason that the petitioners

had not provided any valuation in respect of the passive infrastructure

assets that are proposed to be demerged in terms of the Scheme.

Admittedly the transfer of assets by the transferor companies to the

transferee company for no apparent or real consideration is in the

nature of a gift. The permissibility of such a transfer has been

established in the discussion above. However, counsel for the

objectors submitted that in view of the faulty accounting treatment

prescribed in the Scheme, the petitioners would succeed in evading

payment of tax liabilities if this Court were to sanction this Scheme

and the accounting treatment proposed therein.

47. Mr. Tripathi, Learned Additional Solicitor General, further

contended that any consent that may have been obtained from

shareholders of the transferor companies, in respect of a Scheme

proposing to transfer valuable assets of those companies to another

company, without disclosing the value of those assets to the

shareholders, would be a nullity in law, as the substance of the

transaction would not be known to the shareholders. According to him,

the book value methodology was only available to the petitioners so

long as the assets remained with the respective transferor companies,

but when a transfer is intended, a „true and fair‟ value of the assets is

to be disclosed before the assets are actually transferred, in terms of

Accounting Standards 9, 10 and 11, which were prescribed with a view

to ensuring transparent transactions. However, Mr. Tripathi conceded

that the „true and fair‟ value may be higher, equal to, or lower than

the book value. Therefore, to my mind, the only pertinent question

here is whether there is any onus or obligation on the petitioners to

furnish or disclose any such value to its shareholders or to this Court.

48. According to Dr. Singhvi, Senior Counsel for the

petitioners, there is no such obligation cast on the petitioners, and no

requirement that the value or details of assets in a Scheme have to be

listed by the parties to the Scheme. Further, according to him, the

circumstances of this particular case show that in any case, the

disclosure of the value of the assets proposed to be transferred was

immaterial, since the transferor companies largely have only one

majority shareholder, which is the transferor company No. 1 itself,

who is also part of the Scheme. With regard to the petitioners before

this Court, i.e. transferor companies No. 2, 5 and 6 and transferee

company; transferor company Nos.2, 6 and the transferee company,

are wholly owned by transferor company No.1, while transferor

company No.1 has a 49% shareholding in transferor company No.5.

According to Dr. Singhvi, the description of the assets given in the

Scheme is sufficient and is all that is required. He further urged that

there was no requirement in the statute that a transfer of any asset

needed to be carried out at „fair value‟, and that parties could agree on

what constituted a fair price among themselves. However,

notwithstanding that there was no requirement in law to provide a

valuation of assets proposed to be transferred pursuant to sanction of

a Scheme by a Company Court, with a view to establishing the

petitioners‟ bona fide, the net book value of the passive infrastructure

assets proposed to be transferred, as on 31st March, 2009, have been

disclosed to this Court by the petitioners and placed on record vide

written submissions which were handed over in Court in response to

the objections of the Income Tax Department.

49. Counsel for the petitioners also categorically stated that if

the Income Tax Department had any objection with regard to the

accounting methodology, it would remain open to the tax authorities to

proceed against the transferor companies and/or the transferee

company after the demerger is effected. It was also stated on behalf

of the petitioners that before the tax authorities, they would not take

the stand that the issue of taxability cannot be gone into by reason of

the order sanctioning the Scheme. The Bombay High Court in re:

Reliance Communications Infrastructure Ltd, (2009) 151 Comp

Cas 538, sanctioned a proposed Scheme with similar directions. The

Income Tax Department will consequently be free to examine all

aspects of the demerger being effected from the taxation point of

view.

50. In this context, the petitioners also relied on In re:

Ajmera Realty and Infra India Ltd, (2009) 151 Comp Cas 442

(Bom), wherein the Bombay High Court dismissed the Regional

Director‟s objection that neither the petition nor the Scheme provided

details of the assets and liabilities proposed to be transferred by way

of the demerger, by holding that there was no provision in law which

required the balance sheet and profit and loss account or the scheme

proposed to enumerate and set out each and every asset which is the

subject matter of the scheme. Further, while the Court did not

expressly hold that there was a bar on any creditor, shareholder or

any other concerned party in filing an application for those details in

the Company Court, any such application would have to be decided by

the Court on the facts of a particular case. I am in agreement with this

view. The petitioners‟ response is based on the essential difference

between a company, which is a legal entity, and its constituent

shareholders. For certain acts, the company is obliged to find support

from its constituents, and for that purpose, it is required to disclose all

the relevant details to those constituents to enable them to arrive at a

decision. However, in case the constituent shareholder happens to be

a company whose shares are held by the propounder itself, then, to

enable an informed decision to be taken, it is not necessary for the

propounder to disclose the relevant details to such a constituent

shareholder because it would amount to disclosing something to itself.

51. Further reliance was placed by the petitioners on In re:

Hindalco Industries Ltd., (2009) 151 Comp Cas 446 (Bom), in

support of their proposition that a dispute regarding accounting

standards is not sufficient ground to refuse grant of sanction to a

Scheme, is well-founded, although that case dealt with the

restructuring of a company and not a demerger. In that case, an

objection that sanction of the Scheme would result in violation of

Accounting Standards by the petitioner company in the course of

effecting the proposed restructuring, which would also result in an

inaccurate representation of the petitioner company‟s financial

position, was rejected. It was held by the Court that deviation from

accounting standards, per se, cannot be a ground for rejection of the

Scheme.

52. Moreover, since the question of tax treatment of the

transactions arising out of the Scheme, which are obviously based on

the financial statements and accounts of the petitioners, is being left

open, I see no reason why sanction to the Scheme should be withheld

only on this ground.

53. Another ancillary issue raised with respect to the issue of

the accounting treatment was that the petitioners would then have the

benefit of „double depreciation‟, to which the petitioners‟ response was

that the Scheme envisages depreciation being claimed by the

transferor companies only on the assets that remain with them after

the demerger takes effect, while the transferee company shall claim

depreciation on the assets it receives after the demerger, and

therefore, by this method, there was no question of the petitioners‟

claiming double depreciation. However, since the objection regarding

valuation of those assets, which is necessary to determine the

depreciation claimed, has already been discussed above and since it

has been made clear that the income tax authorities will have full

freedom to question the accounting treatment and the resulting tax

liabilities found payable by the petitioners, this ancillary issue is also

being left open for determination by the appropriate authority.

54. The third objection put forth by the objector was that,

since it was for nil consideration, the proposed demerger might result

in the net worth of some transferor companies decreasing significantly,

almost to the extent of being rendered negative, which would affect

their solvency and, consequently, any outstanding tax liabilities that

may be payable by them. Admittedly, the petitioner companies

propose to transfer valuable assets which have a potential to generate

income, and as per the Scheme, will receive no consideration for the

transfer. The net worth of a company is relevant for assessing its

solvency. The Department contended that the petitioners had been

unable to demonstrate that, after the proposed demerger, the

transferor companies and transferee company would have sufficient

assets to meet any tax liability that may arise, meaning thereby that

the transferors would be rendered insolvent after the demerger, and

therefore, for this Court to sanction a Scheme that may result in the

coming into existence of a palpably insolvent company would be

against public interest. It was also contended that, in addition, since

the Scheme contemplated a change in the ownership of the passive

infrastructure assets with their transfer to the transferee company, the

transferor companies may well be obliged thereafter to pay the

transferee company for the use of those assets. If that were to

happen, naturally, there would be an increase in the revenue of the

transferee company, since the charges paid by the transferor

companies would be income in the hands of the transferee company,

on which it would be liable to pay tax. Yet, at the same time, the

amount paid to the transferee company by the transferor companies

would be a sort of revenue expenditure, thereby distorting the tax

liability of the transferor companies. However, if the passive

infrastructure assets were to remain in the hands of the transferor

companies themselves, liability to pay tax would be only on the

incomes generated for the transferor companies by the use of those

assets and nothing further.

55. In response, the petitioners disputed that there was any

outstanding tax liability payable by the companies at present, and that

if any tax liabilities were found payable after the demerger, the

transferor companies and the transferee company would continue to

generate revenue from their operations and meet the same.

Admittedly, the ability of the petitioners to meet tax demands can only

be assessed by the revenue stream that they are able to generate.

Counsel for the petitioners argued that, even if it were assumed for

the sake of argument that the post-demerger net worth of the

transferor companies would become negative, even in that situation,

each transferor company would be generating sufficient revenue from

its telecom operations to meet its tax demands. According to the

petitioners, the transferor companies will be more than able to meet

all alleged tax claims that were mentioned in the objections filed by

the Income tax Department, if found ultimately payable by the

petitioners. According to the petitioners themselves, the estimated net

worth of the transferor companies, as at 31st March, 2009, was

Rs.14,058 crores, and after demerger, the net worth of all the

transferor companies, would be approximately Rs.10,078 crores.

Details of incomes from operations, mobile telecommunications

services and license fees, which show that the transferor companies

before this Court are generating more than enough revenue to meet

any tax liability, were placed on record by the petitioners in the

petition as well as in the written response to the objections. They are

as follows:

a) Transferor company No. 2 - Rs. 2038.73 crores, as at 31st March, 2009

b) Transferor company No. 5 - Rs. 6963 crores, as at 31st March,

c) Transferor company No. 6 - Rs 3130.15 crores, as at 31st March, 2009.

56. The Income Tax Department‟s fourth objection was that

the proposed Scheme was contrary to law and should be dismissed

irrespective of the legality of the transaction from the income tax point

of view, in the public interest. Counsel for the petitioner raised the

question of how the Income Tax Department, being a department of

the Central Government, was objecting to the Scheme, when the

Central Government, vide the Regional Director‟s report, had not

objected to the same on this ground.

57. Mr. Tripathi relied on In re: Wood Polymer, (1977) 109

ITR 177 (Guj), to contend that restrictions that may apply to the

exercise of the Income Tax Department‟s jurisdiction over a return

that is being assessed by it confining its jurisdiction to the question of

revenue alone, need not automatically apply to this Court in its

exercise of company jurisdiction under S.391 to 394 which enable this

Court to examine whether the Scheme was in public interest or not.

In In re: Wood Polymer (supra), while the Central Government had

not objected to the Scheme, the Official Liquidator himself raised an

objection to the Scheme, to the effect that the transferee company

was being created purely to facilitate the evasion of capital gains tax,

whereas the Central Government had not objected to the Scheme.

Reliance was placed on the following observations made therein, at

page 624 thereof;

"...If the party seeks assistance of the court only to reduce tax liability, the court should be the last instrument to grant such assistance or judicial

process to defeat such a tax liability, or even to avoid tax liability..."

58. In the aforesaid judgment, at page 623 thereof, the Court

has also made certain observations about the scope of the term „public

interest‟ used in S.394, which are reproduced as follows;

"The expression "public interest" must take its colour and content from the context in which it is used. The context in which the expression "public interest" is used should permit the court to find out why the transferor-company came into existence, for what purpose it was set up, who were its promoters, who were controlling it, what object was sought to be achieved through creation of the transferor- company and why it is now being dissolved by merging it with another company. All these aspects will have to be examined in the context of the satisfaction of the court whether its affairs have not been carried on in a manner prejudicial to public interest. That is the colour and content of the expression "public interest" as used in section 394(1), second proviso, and the facts of this case will have to be examined keeping in view the colour and content of the expression "public interest"."

59. In reply, the petitioner‟s counsel referred to Union of

India & Ors. v Ambalal Sarabhai Enterprises Ltd., (1983) 55

Comp Cas 623 (Guj), where Wood Polymers case (supra) was also

considered by a Division Bench of the Gujarat High Court which

distinguished it on facts and further explained it as follows;

"In the case of Wood Polymer [1977] 47 Comp Cas 597 (Guj), the only purpose discernible behind the amalgamation was to defeat capital gains tax and prior to the amalgamation, a situation was brought about by creating a paper company and transferring an asset to such company which can, without further consequence, be amalgamated with another company to whom the capital asset was to be transferred so that, on amalgamation, it could pass on to the amalgamated company, it would distinctly appear that the provision for such a scheme of amalgamation was utilised for the avowed object of defeating tax. Such is not the situation here. The

purpose for which amalgamation is proposed, is not to defeat tax."

60. Therefore, it was the petitioners‟ submission that, in the

present case, the present Scheme, being an internal arrangement

between companies who have commonality of ownership, is consistent

with the policy of the Government of India, and will also allow the

transferor companies to operate independently, therefore, it cannot be

said that the avowed object of the Scheme is merely to defeat tax.

Moreover, reliance was placed on In re: SREI Infrastructure

Finance Ltd., (2008) 4 Com LJ 196 (Cal) and In re: Tata Tea Ltd.,

(2008) 144 Comp Cas 236 (Cal), which followed the former, and held

that;

"With regard to the first objection it has been submitted that avoidance of capital gains can be no reason for not sanctioning a scheme which is otherwise lawful or valid as held in A.W. Figgis & Co. (P.) Ltd. In re (supra) and the unreported decision in C.P. No. 288 of 2007 - since reported as SREI Infrastructure Finance Ltd."

61. SREI Infrastructure‟s case (supra) pertains to a scheme

of arrangement under Sections 391 to 394 of the Companies Act,

1956, wherein transfer of the benefits of the license held by the

transferor company to the transferee company, was objected to on the

ground that the transferor company was, in fact, effecting the outright

sale of the license to the transferee company, and since no time limit

was fixed for payment of the consideration for the sale by the

transferee company to the transferor company, therefore, by this

arrangement, the transferor company was avoiding the burden of

capital gains tax. It was further contended that the benefits of the

license, to be transferred by the transferor company to the transferee

company, were not specified, and therefore, the shareholders of both

the companies were not in a position to make an informed decision

with regard to the fairness and adequacy of the consideration which

was to ultimately pass from the transferee company to the transferor

company. It was in these circumstances that the Calcutta High Court

held that so long as there is no allegation of violation of any provisions

of the Companies Act, 1956, and so long as there was compliance with

Sections 391, 392 and 394 of that Act, the objection raised by the

Central Government regarding avoidance of capital gains was not

material and that these were commercial matters best left to

shareholders, and that this objection could not per se invalidate the

scheme for the alleged reason of avoidance of tax liability since it

would, in any case, attract the provisions of the Income Tax Act, as a

company cannot escape from its tax liabilities. [See also, Jindal Iron

and Steel Co. Ltd. v Assistant Commissioner of Income Tax

5(2), 2003 (154) ELT 380 (Bom)]

62. Simply because the tax payable under the business

structure adopted by the assessee, which he is otherwise entitled to

adopt in law, is reduced, does not, in my view, ipso facto, make such

adoption illegal or impermissible on the ground that it is opposed to

the public interest.

63. Not only does the policy of the government, which is, in a

sense, the custodian of the public interest, contemplate the sort of

structure proposed, it actively seeks to promote it by suggesting that

incentives should be given for its adoption. The policy specifically

states that by this method, "costs can be kept down.." and that, "this

is essential for rural penetration". Such an approach is also stated to

be in line with global trends. I fail to see how then, a scheme aimed

at achieving just that must be held to be opposed to the public interest

merely because, by its adoption, revenue payable by the transferor

company might decrease with no corresponding increase in the

revenue payable by the transferee company since the latter would be

entitled to exemption under an incentive scheme of the government.

It is strange that while on the one hand the government in its wisdom

seeks to promote the sharing of infrastructure by the setting up of

infrastructure companies and also decides to give such companies the

incentive of tax exemption, the income tax department wants that in

this case, no such thing should be permitted by the court because its

overall revenue collection will go down.

64. Finally, the petitioners contended that similar schemes of

arrangement for the demerger of passive infrastructure into a

subsidiary for „nil‟ consideration, pertaining to the petitioners‟

competitors, namely, Reliance, Bharti, Airtel and Idea, have been duly

sanctioned without any objection to the same from the Income Tax

Department. These are In re: Reliance Telecom Infrastructure

Ltd., CP Nos. 68, 69 and 70 of 2007, Bombay High Court, decided on

16th March 2007; In re: Bharti Airtel Ltd., CP No.233 of 2007, Delhi

High Court, decided on 26th November, 2007; and In re: Idea

Cellular Ltd., CP No. 167 of 2009, Gujarat High Court, decided on 31 st

August, 2009. However, counsel for the Income Tax Department

claimed that the Schemes sanctioned in the abovementioned matters

were, in fact, not identical to the one under consideration in the

present petition and, therefore, this justified the differential treatment

being accorded to the petitioners herein. Be that as it may, the fact

remains that the Scheme under consideration, when placed before the

High Courts of Madras, Karnataka and Bombay for their approval, was

not objected to by the income tax authorities. It is an admitted

position that the objections have only been raised by the Income Tax

Department to the Schemes filed in this Court and in the Gujarat High

Court.

65. Certain additional submissions were also made on behalf of

the tax authorities. The first was that the Income Tax Department

must be permitted to retain its recourse for recovery in respect of any

existing or future tax liabilities of the transferor companies or the

transferee company, in respect of the assets sought to be transferred

under the proposed Scheme, and that this protection must be made

explicit by this Court in its final order and has to bind all the parties to

the Scheme, particularly the transferor and transferee companies. I

am in agreement with this. As already noted in the preceding

paragraphs, there can be no limitation on the powers of the Income

Tax Department for recovery, including imposition of penalties etc.

66. The second submission was as regards the tax treatment

accorded to the various transactions referred to in the Scheme. The

Department‟s stand was that the approval of the Scheme should in no

manner affect the tax treatments of the transactions under the Income

Tax Act, 1961 or any other applicable taxing statute, nor would

sanction of the Scheme or the effect thereof serve as a defence for the

companies concerned against tax treatment under the aforementioned

statutes.

67. The Court has a discretion in the matter of granting

sanction, and the scope of its inquiry is not limited by any rigid

principles, except insofar that, in addition to examining the statutory

compliances, it must be seen whether the proposed Scheme is

reasonable, and can be viewed as beneficial to those likely to be

affected by it. The burden to prove this lies on the petitioner.

Arrangements similar to those proposed by the scheme are being

followed not only by the petitioner‟s competitors in India, it also

conforms to the global standards being adopted by various companies

overseas. It bears repetition that in addition, the policy of the

Government of India has also recommended that sharing of

infrastructure be promoted and that incentives be given for this. The

scheme also has this object in view. All this goes to show that the

object of the Scheme is not merely aimed at avoidance of tax. The

high earnings of the transferee company‟s assets would naturally be

subjected to tax in the hands of the transferee company, and the

liabilities that remain behind with the transferor companies would not

be available to the transferee company for adjustment against profit

before tax. However, if the transferee company is further entitled to

other benefits or deductions notified by the Government in its wisdom,

the Income Tax authorities cannot complain.

68. As regards the accounting principles used and the validity

of their adoption by the petitioners, the question is left open to the

Income Tax Department to inquire into the correctness or otherwise of

the same, independently of the sanction of the Scheme.

69. Further, the petitioners have fairly admitted that any

question of tax liability is within the purview of the Income Tax

Department and that it is free to pursue either the transferor

companies or of the transferee company, as it may be advised,

notwithstanding the sanction of the Scheme by this Court. Neither

counsel seeks a finding by this Court with regard to the tax

implications of the proposed Scheme. It is agreed that the Scheme

may be sanctioned whilst relegating the parties to the appropriate fora

to determine the tax liability, if any, that may arise. No action which

may be violative of a statute is being legitimized by approval of the

Scheme, and the income tax authorities are free to move against any

of the parties concerned, in case they are of the belief that there has

been any impermissible evasion of payment of tax by the petitioners.

70. In my view, if the Court is indeed to sanction the Scheme,

the powers of the Income Tax Department must remain intact. The

authorities relied on by the petitioners also support this proposition,

with the only exception being a situation where the Scheme itself has

only one purpose, which is to create a vehicle to evade the payment of

tax, rather than mere avoidance of tax. It is also true that the scope of

objection that may be raised by the Central Government and the

Regional Director is larger, and that of the tax authorities is confined

to the question of revenue. It is not open to this Court, in the exercise

of company jurisdiction, to sit over the views of the shareholders and

Board of Directors of the petitioner companies, unless their views were

against the framework of law and public policy, which, as discussed

above, is not the conclusion reached here. It is purely a business

decision based on commercial considerations.

71. No objection has been received to the Scheme of

Arrangement from any other party.

72. In view of the approval accorded by the equity

shareholders, secured and unsecured creditors of the petitioner

companies, and the Regional Director, Northern 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 on the aforesaid

terms while reserving the right of the Income Tax Authorities to the

extent stated above. The petitioner companies will comply with the

statutory requirements in accordance with law. Certified copy of this

order be filed with the Registrar of Companies within five weeks. It is

also clarified that this order will not be construed as an order granting

exemption from payment of stamp duty as payable in accordance with

law. Upon the sanction becoming effective from the appointed date of

Arrangement, that is Ist April, 2009, the passive infrastructure assets

of the transferor companies No. 2, 5 and 6 shall stand merged in the

transferee company.

73. The petition is allowed in the above terms.

74. Dasti.

SUDERSHAN KUMAR MISRA, J.

March 29, 2011.