Delhi High Court
In The Matter Of M/S. Indo Rama ... vs --- on 23 July, 2012
Author: Manmohan
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* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ CO.PET. 4/2003
IN THE MATTER OF
M/S. INDO RAMA TEXTILE LTD. ..... Petitioner
Through Mr. P.V. Kapur, Senior Advocate
with Mr. Deepak Diwan and Mr.
Aman Anand, Mr. V.K. Naoijrath
and Mr. Krishna Singhal, Advocates
for M/s. Spentex Industries Ltd.
Mr. Arvind K. Nigam and
Mr. Anoop Bagai, Senior
Advocates with Mr. Arunabh
Chaudhary, Mr. Surender Kr.
Gupta, Mr. G. Panmei and
Mr. Sumit Anand, Advocates for
M/s. Indo Rama Textile Ltd.
Reserved on : 31st May, 2012.
% Date of Decision: 23rd July, 2012
CORAM:
HON'BLE MR. JUSTICE MANMOHAN
JUDGMENT
MANMOHAN, J :
CO. APPL. 762/2009
1. Present application being Co. Appl.762/2009 has been filed
under Section 392(1)(b) of the Companies Act, 1956, (hereinafter
referred to as "Act, 1956") on behalf of the Spentex Industries
Limited (hereinafter referred to as ''Applicant'') for modification of a
Scheme sanctioned by this Court on 27th February, 2003 as well as
for an order directing the respondent-Indo Rama Synthetics Limited
(for short ''respondent-IRSL'') to transfer the assets mentioned in
chart in para 13 of the application including the part of the housing
colony occupied/used by the workers/employees of Indo Rama
Textile Limited (for short ''IRTL'') to the Applicant or in the
alternative to pay to the applicant the value of the aforesaid assets
amounting to Rs. 61,30,56,983/-.
2. The relevant facts of the present application are that in 1989
respondent-IRSL was incorporated and it set up a spinning mill in
Pithampur, Madhya Pradesh.
3. In 1993-1994, respondent-IRSL set up a second unit in
Butibori near Nagpur for expansion of spinning business as well as
for commencing polymer production.
4. It is the Applicant's case that the second unit at Butibori,
Nagpur, including the housing colony had been constructed out of
the funds of the spinning business.
5. In 2002, respondent-IRSL decided to vertically split its
business by way of a Scheme of Arrangement. Under the said
Scheme, spinning business was to be demerged as a going concern
and transferred to IRTL, while the polymer business was to be
retained by respondent-IRSL.
6. On 27th February, 2003, the Scheme qua IRTL was sanctioned
by this Court, whereas Madhya Pradesh High Court on 24 th March,
2003 sanctioned the Scheme qua respondent-IRSL. The relevant
portion of the Scheme is reproduced hereinbelow:-
"AND WHEREAS Indo Rama Synthetics (India) Limited
("IRSL") is a public limited company engaged in the
manufacture and marketing of Polyester Staple Fibre
("PSF"), Partially Oriented Yarn ("POY"), Fully Drawn
Yarn ("FDY"), Textile grade polyester Chip, Draw
Texturised Yarn ("DTY") and Spun Yarn. IRSL today is the
largest Integrated Polyster Company in India. Its businesses
can broadly be classified as Polyster business and Spun Yarn
business. IRSL has manufacturing facilities in Pithampur
near Indore in Madhya Pradesh and in Butibori near Nagpur
in Maharashtra.
xxxx xxxx xxxx xxxx
AND WHEREAS the Polyester Business having a faster
growth potential in India, IRSL has gradually changed its
focus from being a Spun yarn manufacturer to becoming an
Integrated Polyester producer. As the domestic demand for
polyester yarn increased in the 1990s, it expanded its
polyester capacity in stages. IRSL also ensured that it keeps
improving its operating rates to capitalize on the rising
domestic demand by judiciously investing in balancing
equipment and making process improvements. As a result,
the Polyester business of IRSL has witnessed a healthy growth
since 1995, when IRSL entered this industry. Currently, IRSL
has three production lines for manufacturing PSF, POY &
FDY and Polyester Chips.
xxxx xxxx xxxx xxxx
AND WHEREAS the two businesses require different
management and growth focus. The Polyester business is
capital intensive with low manpower requirements. The
demand growth is high and IRSL will have to invest in
expanding capacity and keeping its capital cost low. On the
other hand, yarn business requires more management focus
on the mix of products to manufacturers. In terms of the
different blends and different counts. Further, the spun yarn
division will require a different growth path as compared to
the capacity expansion led growth of polyester business.
IRSL expects both businesses to achieve substantially higher
growth in future through greater focus, induction of suitable
technology in existing areas as well as in newer applications
and product diversification.
xxxx xxxx xxxx xxxx
AND WHEREAS IRSL intends to transfer its business by way
of a demerger, to IRTL with the ultimate intent of
restructuring and reorganizing the equity capital base under
this Scheme of Arrangement with both companies having the
same shareholders, in the manner provided herein.
xxxx xxxx xxxx xxxx
PART I
1. Definitions:
xxxx xxxx xxxx xxxx
(iii) „Appointed Date‟ means April 1, 2002.
xxxx xxxx xxxx xxxx
(vii) "spinning Business" means the entire business of
manufacture and sale of cotton yarn, polyester yarn,
polyester-cotton and polyester-viscose yarns presently,
located at the factory units of the Transferor Company at
Pithampur and Butibori and means and includes the
following:
(a) All properties and assets, movable and immovable,
tangible and intangible, real and personal, corporeal and
incorporeal, in possession or in reversion, present and
future contingent or of whatsoever nature where-so-ever
situated, as on the Appointed Date along with land (as
mentioned in Schedule-1) and buildings plant and
machinery, capital work in progress, vehicles, equipments,
furniture and fittings, sundry debtors, investments
inventories, cash and bank balances, bills of exchange,
deposits, loans and advances etc. of Spinning Business of
the Transferor Company at Pithampur and Butibori as
mentioned in Schedule-II.
(b) All leases or parts thereof, tenancy, rights and agency of
the Transferor Company, pertaining to the Spinning
Business and all other interests or rights in or arising out
of or relating to such properties together with all rights,
powers, interests, charges, privileges, benefits,
entitlements, industrial and other licences (and/or
conditions attached thereto), registrations, quotas,
trademarks, patents, copyrights, brand names, Import
quotas, liberties, easements, advantages pertaining to the
Spinning Business, telephones, telexes, facsimile, other
communication facilities and equipment, electricity and
other such connections, rights and benefits of all
agreements and allotments held by or applied for by the
Transferor Company after the Appointed Date and
pertaining to the Spinning Business and/or to which the
Transferor Company is entitled to in respect of the said
Spinning Business of whatsoever kind, nature or
description held, applied for or may be obtained thereafter
or to which the Transferor Company is entitled to in
respect of the Spinning Business together with the benefit
of all contracts and engagements and all books, papers,
documents and records, related to the said Spinning
Business and all rights, obligations, benefits available
under any rules, regulations, statutes including direct and
indirect taxes and particularly sales tax
benefits/exemptions, electricity duty benefits, modvat
benefits, import and export benefits and custom duty
benefits.
(c) All debts, liabilities, loans and obligations, provisions,
deposits present and future, contingent or whatsoever
nature, relating to Spinning Business of the Transferor
Company as mentioned in Schedule II.
(d) All permanent employees of the Transferor Company
engaged in or in relation to and required in the opinion of
the Transfer Company‟s management for the Spinning
Business‟ at the works, factories, branches and other
offices etc.
(viii) "The Transferor Company" means Indo Rama
Synthetics (India) Limited ("IRSL"), a Company duly
incorporated under the Companies Act, 1956 as a public
limited company with the Registrar of Companies, Delhi &
Haryana on April 28, 1986 having its registered office in New
Delhi. The registered office was subsequently shifted to
Pithampur, Madhya Pradesh and a fresh Certificate of
Incorporation consequent upon change of the registered
office of the Company was issued on January 4, 1993. The
Transferor Company is having its Registered Office at 51-A,
Industrial Area, Sector-III, Pithampur-453001, District Dhar,
Madhya Pradesh.
(ix) "The Transferee Company" means Indo Rama Textiles
Limited ("IRTL") a Company duly incorporated under the
Companies Act,1956 as public limited company with the
Registrar of Companies, Delhi & Haryana. The Transferee
Company was incorporated under the name Indo Rama
Projects and Services Limited on August 2, 1989.
Subsequently, the name was changed to Indo Rama Projects
& Investments Limited and a fresh Certificate of
Incorporation in the changed name was issued on November
29, 1994. The Company has once again changed its name to
its present name and a fresh Certificate of Incorporation
consequent upon change of name was issued on July 16,
2002. The Transferee Company is having its Registered
Office at Mohan Dev, 13, Tolstoy Marg, New Delhi-110001.
xxxx xxxx xxxx xxxx
PART-II
THE SCHEME
Transferred/Demerged Undertaking:
3. With effect from the Appointed Date, all the properties,
estates and interests of the Transferor Company in the
Spinning Business in its entirety (including but not restricted
to its assets, liabilities, rights, licences, benefits, obligations
etc.) shall, pursuant to Section 394(2) of the Act and without
any further act or deed be transferred to and vested in or be
deemed to have been transferred to and vested in the
Transferee Company on a "going concern" basis, subject to
all existing charges, mortgages, liens, encumbrances, if any
created/existing in favour of banks and/or financial
institutions and/or other lenders.
xxxx xxxx xxxx xxxx
6. The Transferor Company currently generates its own
electricity at Butibori for captive consumption for a total of
52,62 MW for the Polyester and Spinning Businesses.
Similarly, the Transferor Company provides common utilities
to the Spinning Business. Under the Scheme, it is proposed
that the Transferor will ensure continuous and uninterrupted
supply of electricity and common utilities to the Transferee
Company on agreed terms and conditions. Such approvals as
may be necessary, shall be obtained from the appropriate
authorities by the parties.
xxxx xxxx xxxx xxxx
17. The demerger of the Spinning Business as a going
concern to the Transferee Company is in accordance with
Section 2(19AA) of the Income Tax Act, 1961.
xxxx xxxx xxxx xxxx
19. (a) The Transferee Company undertakes to engage
on and from the Appointed Date, all permanent employees of
the Transferor Company engaged in the Spinning Business on
the same terms and conditions at which these employees are
engaged as on the appointed Date by the Transferor
Company without any interruption of service as a result of the
transfer. The Transferee Company also undertakes to accept
and abide by any change in terms and conditions that may be
agreed/effected by the Transferor Company with all
permanent employees between the Appointed Date and
Effective Date.
xxxx xxxx xxxx xxxx
24. Save and except the Spinning Business of the
Transferor Company and as expressly provided in this
Scheme of Arrangement nothing contained in this Scheme of
Arrangement shall effect the rest of the assets, liabilities and
business of the Transferor Company being the Polyester
Business which shall continue to belong to and be vested in
and be managed by the Transferor Company.
xxxx xxxx xxxx xxxx
35. Upon the sanction of the Scheme and after the Scheme
has become effective with effect from the Appointed Date the
following shall be deemed to have occurred in the sequence
and in the order provided:-
(i) The write-off of the accumulated losses against share
premium account of the Transferor Company;
(ii) The demerger of the Spinning Business as going concern
basis as required under Section 2(19AA) of the Income
Tax Act, 1961.
(iii) And conversion of 20% of the Equity Capital of the
Transferor Company into Secured Debentures,
conversion of 20% Equity Capital into preference shares
of the Transferee Company.
36. If any dispute, doubt or difference or issue shall arise
between the parties hereto or any of their shareholders,
creditors, employees and/or any other person, as to the
construction hereof or as to any account, valuation or
apportionment to be taken or made of any asset or liability
transferred under this Scheme or as to the construction
hereof or as to any account, valuation or apportionment to be
taken or made of any asset or liability transferred under the
Scheme or as to the accounting treatment thereof or as to
anything else contained in or relating to or arising out of this
Scheme, the same shall be referred to the sole arbitration of
Shri O.P. Lohia, resident of R-69, Greater Kailash-I, New
Delhi-110048 or any person nominated by him whose
decision shall be final and binding. The Courts in New Delhi
shall have exclusive jurisdiction in respect of any disputes
arising out of or relating to this Scheme.
xxxx xxxx xxxx xxxx
SCHEDULE-I
DETAILS OF THE IMMOVABLE PROPERTY OF
SPINNING BUSINESS
1. Plot No.51-A
The Plot of land in the Industrial Area No.3,Pithampur, Tehsil
Dhar, District Dhar comprising of an area measuring
1,25,000 sq. mts. or there about, held by way of Lease Deed
dated July 23, 1988 for a period of 99 years, executed with
the Governor of Madhya Pradesh through the Managing
Director of Madhya Pradesh Audyogik Kendra Vikas Nigam
(MPAKVN), Indore,
The Plot is surrounded by:
On North : Plot No.51-B, Plot No.51-C
On South : 30 mtrs wide Road
On East : 30 mtrs wide Road
On West : 50 mtrs wide Road
2. Plot No.51-B
The Plot of land in the Industrial Area No.3, Pithampur,
Tehsil Dhar, District Dhar comprising of an area measuring
40,254 sq. mts. or thereabout, held by way of Lease Deed
dated May 25, 1990 for a period of 99 years, executed with
the Governor of Madhya Pradesh through the Managing
Director of Madhya Pradesh Audyogik Kendra Vikas Nigam
(MPAKVN), Indore.
The Plot is surrounded by:
On North : Mhow Neemuch Road
On South : Plot No.51-A
On East : 30 mtrs wide Road
On West : Plot No.51-C
3. Plot No.51-C
The Plot of land in the Industrial Area No.3, Pithampur,
Tehsil Dhar, District Dhar comprising of an area measuring
45,000 sq. mts or thereabout, held by way of Lease Deed
dated September 1, 1990 for a period of 99 years, executed
with the Governor of Madhya Pradesh through the Managing
Director of Madhya Pradesh Audyogik Kendra Vikas Nigam
(MPAKVN), Indore.
The Plot is surrounded by:
On North : Existing PWD Road
On south : Plot No.51-A
On East : Plot No.51-B
On West : MPEB Plot.
4. Plot No.M-17
The Plot of land in the Industrial Area No.3, Pithampur,
Tehsil Dhar, District Dhar comprising of an area measuring
12,500 sq. mts or thereabout, held by way of Lease Deed
dated February 17, 1993 for a period of 99 years, executed
with the Governor of Madhya Pradesh through the Managing
Director of Madhya Pradesh Audyogik Kendra Vikas Nigam
(MPAKVN), Indore.
The Plot is surrounded by:
On North : MPAKVN Plot
On south : MPAKVN Plot
On East : 80‟ wide Road
On West : MPAKVN Plot
5. Plot No.A-31
Out of the below mentioned property, an area of 1,10,843.00
sq. mtrs. will remain with Spinning Business as indicated in
the attached plan.
All that piece or parcel of land known as Plot No.A-31 in the
Butibori Industrial Area within the village limits of Umri &
Khape and outside the limits of Nagpur Municipal
Corporation, in rural area, Taluka and Registration Sub-
District & Registration District Nagpur containing by
admeasurement 404607 sq. mtrs or thereabouts. The land is
held by way of Lease for 95 years dated July 29, 1994
executed with the Maharashtra Industrial Development
Corporation.
The Plot is surrounded by:
On or towards the North by: MIDC Road
On or towards the South by: MIDC Land Plot No.A-31/P
On or towards the East by : MIDC Land Plot No. A-31/P
and A-31/2
On or towards the West by: MIDC Boundary and Plot
A-31/P-1
SCHEDULE-II
Details of Assets and liabilities of Spinning Business as on April 1,
Total Assets (Rs. Lacs)
1. Gross Fixed Assets 33,940.87
Accumulated Depreciation (13,247.04)
Net Fixed Assets Including
revaluating reserves 20,693.83
Less: Revaluation Reserves 5,798.46
Net Fixed Assets 14,895.37
2. Capital WIP 12.82
3. Deferred Tax Assets 1,422.70
4. Inventory 2,152.94
5. Debtors 1,554.77
6. Cash & Bank 47.38
7. Other Current Assets 247.45
8. Loans & Advances 426.12
Total Current Assets 4,428.66
9. Miscellaneous Expenditure 96.49
Total Assets (A) 20,856.04
Total Liabilities
10. Current Liabilities & Provisions 3,533.19
11. Loan Funds 5,938.19
Total Liabilities (B) 9,471.38
Net Worth (A-B) 11,384.66"
7. On 28th July, 2005, a Memorandum of Understanding was
executed between respondent-IRSL and IRTL for sharing of the
common facilities for five years. It only provided for payment of
expenses on actual basis by IRTL with no provision for enhancement
of fee/rent. In case of dispute, it was agreed that the same would be
referred to sole Arbitrator Mr. O.P. Lohia or his nominee. The
relevant portion of the Memorandum of Understanding is reproduced
hereinbelow:-
"IRSL has agreed to share electricity, common utilities,
common infrastructure, common fire fighting facilities &
uninterrupted water supply for fire fighting from
common storage with IRTL for its Spinning Business
located at Butibori as per the Scheme of Arrangement &
as per the last MOU dated 31.3.2003 & 18.3.2004.
xxxx xxxx xxxx xxxx
Sharing of Expenses between 1.4.2005 to 31.3.2010
1. The "actual cost" is the basic principle for sharing
common expenses between IRSL & IRTL. The
Allocation & Ratio of cost sharing between IRSL &
IRTL during the period 1.4.2005 to 31.3.2010 under
different heads are as per the details mentioned in the
enclosed Annexure „A‟ & „B‟ respectively.
1(a) The cost of alteration and interiors including
paintings, money plants and minor fixing shall form
part of the Annual Maintenance Budget as provided
in Annexure A & B.
1(b) Separate estimates have been agreed to
sharing the cost of relocation of PSF and POY in
the ratio of 2:3 between IRSL and IRTL
respectively as provided in Annexure A & B.
xxxx xxxx xxxx xxxx
2. Validity of contract period
This contract is valid for the period 1.4.2005 to
31.3.2010 and will automatically expire on 31.3.2010
and maybe renewed for subsequent period on mutually
accepted terms & conditions.
xxxx xxxx xxxx xxxx
Allocation Ratio of Cost Sharing between IRSL & IRTL for the
period 1.4.2005 to 31.3.2010
Annexure „A‟
xxxx xxxx xxxx xxxx
S. Nature of ServicesService Provident Basis of
No. Deptt. Allocation
Proposed
15. Housing Colony Admin and HR Employee Ratio
(Club, Cable TV Deptt.
and Recreation
and Security for
Colony
maintenance etc.)
8. On 17th February, 2006, present Applicant executed a Share
Purchase Agreement with Mr. O.P. Lohia. According to the said
agreement, the Applicant and respondent-IRSL were to negotiate
mutually acceptable terms for sharing common resources. The
relevant portion of the Share Purchase Agreement is reproduced
hereinbelow:-
"Article 5A
Covenants of the Parties
(a) The Parties shall negotiate in good faith, to
draw up mutually acceptable terms of sharing, between
the Company and IRSL, of the common resources that
are currently being shared between them. The terms of
sharing shall be such that it ensures that the resources
would be available to the Company on such commercial
terms as would suffice to be arms length transactions
under Indian income tax law and so that the business of
the Company is not disrupted."
9. On 20th December, 2006, a Scheme of Amalgamation of
Applicant with IRTL was approved by this Court under Section 391
of the Act, 1956.
10. It is the Applicant's case that in 2007 when respondent-IRSL
demanded more money for use of common facilities contrary to the
Memorandum of Understanding, the Applicant refused to pay the
same. Consequently, the respondent-IRSL withdrew the said
facilities.
11. In 2009, respondent-IRSL invoked the arbitration clause in the
Memorandum of Understanding dated 28th July, 2005 and appointed
its own nomine as the sole Arbitrator.
12. Thereafter, the Applicant applied under Section 14 of the
Arbitration and Conciliation Act, 1996 for termination of the
arbitrator's mandate. However, on 25th May, 2009, the said
application was rejected by a learned Single Judge of this Court. On
20th July, 2009, Applicant's appeal against the said order was also
dismissed.
13. On 27th May, 2009, Applicant applied under Section 392(1)(b)
of Act, 1956, to this Court seeking a restraint order against
respondent-IRSL from disturbing the Applicant's possession or
withdrawal of facilities. An ex parte order in favour of the Applicant
was passed by this Court.
14. On 10th August, 2009, this Court was pleased to direct that the
Arbitrator shall proceed with the matter, but no final award shall be
published or pronounced.
15. Mr. P.V. Kapur, learned senior counsel for Applicant
submitted that the intention of the Scheme of Arrangement was to
transfer to IRTL the undertaking of the spinning business as a going
concern within the meaning of Section 2(19AA) of the Income Tax
Act, 1961 (hereinafter referred to as ''the Act, 1961''). In this
connection, he relied upon Clauses 1.1(vii), 3, 17 and 35(ii). He
repeatedly emphasised that the respondent-IRSL Company had not
paid any capital gains tax on the said transfer.
16. According to Mr. P.V. Kapur, Section 2(19AA)(i) and (vi) of
the Act, 1961, stipulated that as a result of the demerger, all the
property of the undertaking (as a going concern) being transferred
had to become the property of the resulting company. He, in fact,
submitted that in accordance with Section 394(2) of the Act, 1956,
the entire undertaking as a whole stood transferred and became the
property of the resulting company. He submitted that by operation
of law, the title of the properties of the undertaking that vested in the
Transferor Company prior to the demerger, upon sanction of the
Scheme, stood transferred to the resulting company. He also
submitted that the condition precedent of the Act, 1961 was to
transfer the property in such a manner that the property transferred
became the property of the resulting company.
17. According to him, retaining an undertaking's property and
then making it available to the resulting company as a resource
under a contract was not in accordance with the statutory
requirement.
18. Mr. Kapur stated that if immense costs were to be incurred by
the Transferee Company, the transferred undertaking could not be
regarded as a going concern apart from the fact that such incomplete
transfer would not satisfy the requirement of sub-Section (i) of
Section 2(19AA) of the Act, 1961.
19. Mr. Kapur submitted that the law postulated that the
undertaking being hived off should be a going concern and it was
irrelevant whether the residual undertaking was a going concern or
not. According to him, a common asset which could not be divided
into two, would have to be transferred to the demerged/hived off
undertaking in order to satisfy the requirement of Section 2(19AA)
of the Act, 1961.
20. Mr. Kapur pointed out that the Scheme did not refer to the
workers/Housing colony or to any infrastructure. Thus, according to
him, the workers/Housing colony stood transferred by operation of
law to the resulting company (IRTL) as an intrinsic part of the textile
undertaking.
21. On the contrary, Mr. Arvind Nigam, learned senior counsel
for respondent-IRSL submitted that by virtue of the Amendment of
1999 to the Act, 1961, restructuring of a company involving, inter
alia, "demerger" of any Undertaking was treated as tax neutral in
terms of Section 2(19AA) of the Act, 1961, subject, inter alia, to
fulfillment of the following essential conditions:-
(a) Demerger should have involved transfer of an
Undertaking (as stated in Expl.1) of Section 2(19AA) i.e. (i)
transfer of such assets; (ii) such liabilities; (iii) on book values;
(iv) the company issued proportionate shares to its
shareholders; (v) 3/4th shareholders were shareholders of the
resulting company and (b) Transfer of the Undertaking was on
a Going Concern basis.
22. According to him, ''Undertaking'' has been defined in
Explanation 1 to Section 2(19AA) of the Act,1961, as any part of the
Undertaking, or Unit or Division of the Undertaking; or a business
activity taken as a whole; but did not include individual assets or
liabilities or any combination thereof not constituting a business
activity.
23. Mr. Nigam pointed out that the term ''business'' has been
defined in Section 2(14) of the Act, 1961, to include ''.....any trade,
commerce or manufacture or any adventure or concern in the nature
of trade, commerce or manufacture''. He drew attention of this Court
to Judicial Dictionary by K.J. Aiyar, 13th Edition defining the term
"activity'' as under:-
"Activity. Read in the context of business, trade or
profession, it means the combination of operations
undertaken by the corporate body, whether or not they
amount to a business, trade or profession in the ordinary
sense;..."
24. The expression ''business activity'', thus, according to him
meant operations or combination of operations carried on by the
Undertaking and constituting a business.
25. Mr. Nigam submitted that the expression ''taken as a whole'' as
explained in the definition of ''Undertaking'', reproduced supra, was
used in the context of ''business activity'' and not ''Undertaking''.
Therefore, according to him to qualify the pre-requisites of demerger
under Section 2(19AA) of the Act, 1961, what was essential was that
the unit/division/Undertaking/part of the Undertaking or the business
activity as a whole being transferred should constitute a running
business, which should be capable of carrying on uninterruptedly
with such assets and liabilities alone.
26. Mr. Arvind Nigam further submitted that term "Going
Concern'' was an accounting concept that implied that the business
would continue to exist and operate for an indefinite period in the
future. Accounting Standard (AS)-1, issued by the Institute of
Chartered Accountants' of India, which dealt with Disclosure of
Accounting Policies, considered ''Going Concern'' to be one of the
generally accepted fundamental accounting assumption underlying
the preparation and presentation of financial statements and is:
''a. Going Concern The enterprise is normally viewed
as a Going Concern, that is, as continuing in operation
for the foreseeable future. It is assumed that the
enterprise has neither the intention nor the necessity of
liquidation or of curtailing materially the scale of the
operations.''
27. Statement on Standard Auditing Practices (SAP) 16, "Going
Concern'', issued by the Council of the Institute of Chartered
Accountants of India, provides that -- ''When a question arises
regarding the appropriateness of the Going Concern assumption, the
auditor should gather sufficient appropriate audit evidence to attempt
to resolve, to the auditor's satisfaction, the question regarding the
entity's ability to continue in operation for the foreseeable future.''
28. Mr. Nigam submitted that the fundamental requirement of tax
neutral ''demerger'' was that the Undertaking or any part thereof,
being transferred, should be capable of being run independently for a
foreseeable future as a Going Concern.
29. It was, therefore, according to him, open to the transferor and
the transferee companies to enter into a Scheme of Arrangement
under Sections 391 to 394 of the Act, 1956, wherein the parties may
mutually agree to retain any particular asset/liability, even though
the same was directly or indirectly, relatable to the Undertaking
being demerged.
30. In support of his submissions, Mr. Arvind Nigam relied upon
the following decisions:-
A) Premier Automobiles Ltd. vs. ITO & Anr. 264 ITR
193 (Bom) wherein Bombay High Court held that though
certain land was retained, but on analysis, it was clear that the
business activity, being a separate line of business of the
assessee, was transferred as a Going Concern and therefore, the
transaction was that of a slump sale. The Bombay High Court
observed that '' ....under the said law, the basic test which one
must apply to ascertain whether there existed a slump sale is
continuity of business. The question to be asked is whether
there is a transfer of business as a whole?........The question
therefore to be asked is: whether there was a transfer of land,
building, plant and machinery as a whole or whether there was
a transfer of land, building or plant and machinery separately
and individually. For that purpose, one has to read the terms
and conditions of the arrangement.......one has to construe the
entire arrangement in order to ascertain the true intention of
the parties and merely because there is a schedule of assets on
record, it cannot be said that there is a sale of itemized
assets."
B) CIT v. Max India Ltd. 319 ITR 68 (P&H), wherein the
Punjab and Haryana High Court held as under:-
''3. We have heard learned counsel for the parties and
perused the record.
4. In para 20 of its order, the Tribunal held that the
sale was slump sale if it was a sale of Going Concern,
even if some of the assets were retained by the
transferor..... Para -29 of the order is reproduced below:
29. From the above, it is evident that for a sale to be
termed as a 'slump sale', it is not essential that all the
assets and liabilities must be transferred. Even if some
assets and liabilities are retained by the transferor, the
sale would not lose the character of being a slump sale, if
the transfer is of a Going Concern, on that basis and the
transferee is in a position to carry on the business
without any interruption. In the present case, the right to
use the technical know-how developed by the assessee
was granted by the assessee to the transferee against the
payment of a separate consideration. The proprietary
rights therein were retained till 30-6-2000. On facts, in
view of the above numerous judicial pronouncements, it
cannot be said that what the transferee acquired was not
a Going Concern. Rather, after the transfer, the
transferee carried on the business without any disruption
therein. In West Coast Chemicals & Industries Ltd.'s
case (In Liquidation), F.X. Periera & Sons (Travancore)
(P) Ltd.'s case, Premier Automobiles Ltd.'s case and
Raka Food Products' case, amongst others, it has been
held that in the case of a sale of an Undertaking as a
whole, on a Going Concern basis, if some assets are
retained by the transferor or some liabilities are not
taken over by the transferee, this fact does not render the
slump sale as not a slump sale.
xxx xxx xxx xxx
13. The view of the Tribunal is, thus, consistent with
the settled law.''
C) CIT vs. ECE Industries Limited in ITA No. 417 of
2007, this Court affirmed the following reason given by the
Tribunal while holding that the transaction in question was a
slump sale.
''35...........
(viii) The approach adopted by the ld. CIT(A) for
rejecting the version of the assessee regarding the slump
sale on the reasoning that for slump sale there should be
sale of entire or whole business of the assessee including
all the undertakings even though they may be self
sufficient and independent units, is not correct because
the word 'slump sale' as interpreted by various
authorities and as defined in Section 2(42C) means
'transfer of one or more undertakings' as a result of the
sale for a lump sum consideration without values being
assigned to any assets and liabilities. Although this
definition has been brought in Section 2(42C) by the
amendment introduced with effect from 1-4-2000 but the
concept behind slump sale has been the same even before
the amendments has been held by various courts."
D) Rohan Software (P) Ltd. v. ITO, 115 ITD 203
(Mum.), wherein the Tribunal held "the sale of software
business including intellectual properties, etc; but excluding
building and motor car did not militate the concept of slump
sale."
31. Consequently, Mr. Arvind Nigam submitted that there was no
requirement in law that each and every asset and liability directly or
indirectly relatable to the demerged Undertaking should be
transferred in the Scheme of Demerger. Accordingly, he submitted
that if the Undertaking or any part thereof, being transferred
independently constituted a running business, which was capable of
carrying on as a Going Concern, the same would be regarded as tax
compliant demerger.
32. Mr. Arvind Nigam lastly contended that under the Scheme of
Demerger agreed upon between the parties, certain flats in the
housing colony occupied by the employees of the demerged
Undertaking were not transferred as transfer of the said flats was not
crucial/critical affecting the ability of the demerged undertaking to
continue its business as a Going Concern. Mr. Nigam pointed out
that even at the time of demerger, only around 20% of the employees
of demerged Spinning business were actually residing in those flats
and rest were staying in either rented or own accommodation outside
the housing colony. According to him, the Applicant had carried on
business of the demerged Undertaking uninterruptedly for nearly a
decade without transfer of the housing colony and consequently, he
stated that the present application was devoid of merits.
33. In rejoinder, Mr. P.V. Kapur, learned senior counsel for
Applicant submitted that for the purposes of ascertaining the true
intent of the parties, Section 2(19AA) of the Act, 1961 had a
bearing. According to him, it was represented to the shareholders of
the company as also to this Court in 2003 that all the assets of the
undertaking within the meaning of Section 2(19AA) of the Act, 1961
were being transferred in such a manner that their title would stand
transferred to and vested in IRTL and it was on this representation
and understanding that the then Company Court sanctioned the
Scheme of Arrangement.
34. Mr. P.V. Kapur further submitted that the judgments relied
upon by Mr. Arvind Nigam, learned senior counsel for respondent-
IRSL were inapplicable to the facts of the present case as they dealt
with issues relating to 'slump sale' and not 'demerger'. He pointed
out that the ingredients of 'slump sale' and 'demerger' were different.
He also contended that most of the judgments cited by Mr. Nigam
belonged to a period when neither 'demerger' nor 'slump sale'
definitions existed in the statute.
35. Having heard the parties at length, this Court is of the view
that the Scheme of Arrangement sanctioned by this Court in 2003
has to be read as a whole and not in a piecemeal manner. The
Applicant is reading the Scheme of Arrangement as if it comprises
only one clause, namely, Clause 17.
36. With respect to the Applicant, the Scheme of Arrangement
does not revolve around Section 2(19AA) of the Act, 1961 and the
rest of its Clauses are not otiose.
37. In fact, upon reading the Scheme of Arrangement in its
entirety, in particular Clauses 1.1(vii), 3, 6, 24 along with the
Schedules and map annexed to it, this Court has no hesitation in
concluding that the Housing colony as well as common utilities were
specifically agreed to be retained and owned by respondent-IRSL.
The properties, buildings and assets that were transferred to IRTL
under the Scheme of Arrangement were specifically mentioned in its
Schedule 1 and 2.
38. This Court is of the view that shareholders and creditors of
respondent-IRSL and IRTL gave their consents to the Scheme of
Arrangement knowing fully well that common utilities and housing
colony would continue to be retained and owned by the respondent-
IRSL.
39. Even the Applicant before entering into the share purchase
agreement was aware of the Memorandum of Understanding dated
28th July, 2005, which specifically stated that housing colony was
being offered by respondent-IRSL as a resource to IRTL for five
years upon payment of actual cost. In the opinion of this Court, if
respondent-IRSL was not the owner of the common resources and
infrastructure, there was no question of it offering the common
assets for use to IRTL on payment of cost.
40. Since considerable emphasis was laid by the Applicant's
senior counsel on Section 2(19AA) of the Act, 1961, the same is
reproduced hereinbelow for ready reference:-
"2.Definitions.-In this Act, unless the context otherwise
requires, -
xxx xxx xxx xxx
(19AA) "demerger", in relation to companies, means the
transfer, pursuant to a scheme of arrangement under
sections 391 to 394 of the Companies Act, 1956 (1 of
1956), by a demerged company of its one or more
undertakings to any resulting company in such a manner
that--
(i) all the property of the undertaking, being transferred
by the demerged company, immediately before the
demerger, becomes the property of the resulting company
by virtue of the demerger;
(ii) all the liabilities relatable to the undertaking, being
transferred by the demerged company, immediately
before the demerger, become the liabilities of the
resulting company by virtue of the demerger;
(iii) the property and the liabilities of the undertaking or
undertakings being transferred by the demerged
company are transferred at values appearing in its books
of account immediately before the demerger;
(iv) the resulting company issues, in consideration of the
demerger, its shares to the shareholders of the demerged
company on a proportionate basis;
(v) the shareholders holding not less than three-fourths
in value of the shares in the demerged company (other
than shares already held therein immediately before the
demerger, or by a nominee for, the resulting company or,
its subsidiary) become shareholders of the resulting
company or companies by virtue of the demerger,
otherwise than as a result of the acquisition of the
property or assets of the demerged company or any
undertaking thereof by the resulting company;
(vi) the transfer of the undertaking is on a going concern
basis;
(vii) the demerger is in accordance with the conditions, if
any, notified under sub-section (5) of section 72A by the
Central Government in this behalf. ''
Explanation 1.--For the purposes of this clause,
''undertaking'' shall include any part of an undertaking,
or a unit or division of an undertaking or a business
activity taken as a whole, but does not include individual
assets or liabilities or any combination thereof not
constituting a business activity.''
41. Upon reading of the aforesaid Section, it is apparent that the
definition of Demerger in Act, 1961, would be satisfied if the
undertaking that is being demerged is hived off as a going concern,
that means, if it constitutes a business activity capable of being run
independently for a foreseeable future. To ensure that it is a going
concern, the Court while sanctioning a Scheme can certainly
examine whether essential and integral assets like plant, machinery
and manpower without which it would not be able to run as an
independent unit have been transferred to the demerged company.
42. However, this Court is not in agreement with the Applicant's
submissions that in a Scheme of Demerger by virtue of Section
2(19AA) of the Act, 1961, all the properties of the undertaking
become the property of the resulting company. This Court is of the
view that non-transfer of some of the pervious common assets being
used by the transferee undertaking will not affect IRTL status as a
going concern.
43. In fact, it is settled legal position that there is no requirement
under the provisions of the Act, 1961 or Act, 1956 for transfer of all
common assets and/or liabilities relatable to the Undertaking being
demerged. The Applicant's submission that all common assets that
cannot be divided must be transferred to the transferee namely, IRTL
overlooks the explicit language of Section 2(19AA)(i) of the Act,
1961, which states that ''all the properties of the undertaking being
transferred by the demerged company, immediately before the
demerger becomes the property of resulting company by virtue of the
demerger''. The expression ''being transferred'' is relatable to such
assets as are being transferred to make it a going concern.
Moreover, if the applicant's submission is accepted it would put all
the schemes of demerger in a 'straightjacket' format and it would also
infringe upon the two company's freedom to negotiate with regard to
the transfer of common assets. This Court is of the view that while
framing a scheme of demerger, the existing and the resulting
companies after ensuring that both of them are a going concern, are
free to negotiate which common asset/liability would be transferred
to which undertaking. After all, it is on this asset/liability transfer
basis that share swap ratio are assessed, determined and allotted.
44. The Applicant's submission also overlooks the primary
function of the Company Court, namely, to ensure that the Scheme
serves larger public interest, that means, to ensure both the existing
and resulting unit are economically and technically viable.
Consequently, merely because certain common assets and liabilities
have not been transferred, the transaction would not cease to be
demerger of an Undertaking, provided the assets and liabilities
transferred, by themselves, constitutes a running business and the
business can be carried on uninterruptedly with such assets and
liabilities alone.
45. Moreover, the Applicant's contention that Clause 6 of the
Arrangement must be struck down as it is contrary to Clauses 17 and
35, is beyond the pleadings of the case. It is also pertinent to
mention that no direction has been sought by the Applicant for
continued sharing of common resources and common infrastructure.
46. In 'The Law and Practice of Income Tax' by Kanga,
Palkhivala and Vyas, it has been observed that ''the provisions
relating to taxation of the companies involved in the demerger and
their shareholders are applicable only if the demerge fulfils the
Section 2(19AA) of the Act, 1961. Mere sanction of the High Court
for demerger under the Act, 1956, is, by itself, not sufficient''.
47. Therefore, whether or not Section 2(19AA) of the Act, 1961
has been complied with, is not to be determined pre-merger, but post
merger and that too by the tax authorities. In the opinion of this
Court, if the Scheme of Arrangement is not tax complaint, then the
tax authorities will levy capital gains tax, if any, on the transferor,
namely, respondent-IRSL.
48. Accordingly, compliance with Section 2(19AA) of the Act,
1961, is relevant only for the purposes for determining whether the
Scheme is tax neutral or not and it has consequences for respondent-
IRSL only.
49. Consequently, the contention urged by the Applicant that in
view of Section 2(19AA) of the Act, 1961, the Scheme of Demerger
must necessarily comply with Section 2(19AA) which is meant for
availing tax concession cannot be read as a mandatory requirement
for all schemes of amalgamation/arrangement/de-merger under
Sections 391/392/394 of the Act, 1956. The said provision cannot
be read and interpreted to include assets/units/undertakings/business
belonging to the respondent-IRSL which were never transferred or
intended to be transferred to IRTL and which are not mentioned in
the Scheme of Arrangement. In the opinion of this Court, the
Applicant is in error in contending that the common infrastructure is
liable to be made over to them by virtue of reasoning of Section
2(19AA) of the Act, 1961 as the division of assets was indicated in
the Scheme.
50. This Court is also of the view if the Applicant's interpretation
of Clause 17 of this Scheme of Arrangement which refers to Section
2(19AA) of the Act, 1961 is accepted then it would amount to re-
writing the Scheme of Arrangement, which this Court cannot do in
the present proceedings. In fact, the Supreme Court in S.K. Gupta
and Another vs. K.P. Jain and Another (1979) 3 SCC 54 has held
as under:-
"13. When a scheme is being considered by the Court,
in all its ramifications, for according its sanction, it
would not be possible to comprehend all situations,
eventualities and exigencies that may arise while
implementing the scheme. When a detailed compromise
and/or arrangement is worked out, hitches and
impediments may arise and if there was no provision like
the one in Section 392, the only obvious alternative
would be to follow the cumbersome procedure as
provided in Section 391(1), viz., again by approaching
the class of creditors or members to whom the
compromise and/or arrangement was offered to accord
their sanction to the steps to be taken for removing such
hitches and impediments. This would be unduly
cumbersome and time-consuming and, therefore, the
legislature in its wisdom conferred power of widest
amplitude on the High Court under Section 392 not only
to give directions but to make such modification in the
compromise and/or arrangement as the Court may
consider necessary, the only limit on the power of the
Court being that such directions can be given and
modifications can be made for the proper working of the
compromise and/or arrangement. The purpose
underlying Section 392 is to provide for effective working
of the compromise and/or arrangement once sanctioned
and over which the Court must exercise continuous
supervision [see Section 392(1)], and if over a period
there may arise obstacles, difficulties or impediments, to
remove them, again, not for any other purpose but for the
proper working of the compromise and/or arrangement.
This power either to give directions to overcome the
difficulties or if the provisions of the scheme themselves
create an impediment, to modify the provision to the
extent necessary, can only be exercise so as to provide
for smooth working of the compromise and/or
arrangement. To effectuate this purpose the power of
widest amplitude has been conferred on the High Court
and this is a basic departure from the scheme of the U.K.
Act in which provision analogous to Section 392 is
absent. The sponsors of the scheme under Section 206 of
the U.K. Act have tried to get over the difficulty by taking
power in the scheme of compromise or arrangement to
make alterations and modifications as proposed by the
Court. But the legislature, foreseeing that a complex or
complicated scheme of compromise or arrangement
spread over a long period may face unforeseen and
unanticipated obstacles, has conferred power of widest
amplitude on the Court to give directions and, if
necessary, to modify the scheme for the proper working
of the compromise or arrangement. The only limitation
on the power of the Court, as already mentioned, is that
all such directions that the Court may consider
appropriate to give or make such modifications in the
scheme, must be for the proper working of the
compromise and/or arrangement."
(emphasis supplied)
51. From the aforesaid, it is apparent that in the proceedings under
Section 392(1)(b) of the Act, 1956, the Court cannot rewrite the
scheme approved in the meeting called under Section 391(2) of the
Act, 1956; but, it can only make such modification as it may
consider necessary for proper working of the compromise or
arrangement.
52. It is pertinent to mention that when the scheme was sanctioned
in the year 2003, both the Transferor and Transferee Companies
were owned and managed by O.P. Lohia group but now both the
entities are owned and managed by different business groups.
Consequently, to ensure that the scheme sanctioned by this Court is
properly implemented, this Court modifies only the dispute redressal
mechanism in Clause 36 of the Scheme by directing that in the event
of any dispute, doubt or issue arising between the parties, the same
shall be referred to a sole arbitrator to be appointed with the consent
of the parties. If, however, no consensus is reached between the
parties, then the sole arbitrator shall be appointed by the concerned
Court. Accordingly, Clause 36 of the Scheme shall now read as
under:-
"36. If any dispute, doubt or difference or issue shall arise
between the parties hereto or any of their shareholders,
creditors, employees and/or any other person, as to the
construction hereof or as to any account, valuation or
apportionment to be taken or made of any asset or liability
transferred under this Scheme or as to the construction
hereof or as to any account, valuation or apportionment to be
taken or made of any asset or liability transferred under the
Scheme or as to the accounting treatment thereof or as to
anything else contained in or relating to or arising out of this
Scheme, the same shall be referred to the sole arbitrator to be
nominated jointly by both the parties. The Arbitrator‟s
decision shall be final and binding. If, however, there is no
consensus upon the name of the sole arbitrator, the sole
arbitrator shall be appointed by the concerned court. The
Courts in New Delhi shall have exclusive jurisdiction in
respect of any disputes arising out of or relating to this
Scheme."
53. With the aforesaid modification, the present application stands
disposed of.
MANMOHAN,
JULY 23, 2012
js/rn
