Madras High Court
M/S.Empee Distilleries Limited Having vs Unknown on 24 October, 2013
Author: V.Ramasubramanian
Bench: V.Ramasubramanian
In the High Court of Judicature at Madras Dated : 24-10-2013 Coram : The Honourable Mr.Justice V.RAMASUBRAMANIAN Company Petition Nos.196 and 197 of 2012 M/s.Empee Distilleries Limited having its regd.office at Empee Tower, No.59, Harris Road, Pudupet, Chennai-2 Petitioner in rep.by Ms.Nisha Purushothaman, CP.No.196/2012/ Joint Managing Director ... Transferor company M/s.Appollo Wind Energy Private Limited having its regd.office at 2D, Petitioner in Elcanso, Halls Road, Egmore, Chennai-8 CP.No.197/2012/ rep.by Mr.Sheeju Purushothaman, Director ... Resulting Company ----- PETITIONS under Sections 391(2) and 394 of the Companies Act,1956 seeking to sanction the composite scheme of arrangement of M/s.Empee Distilleries Limited (transferor company), M/s.Empee Sugars and Chemicals Limited (transferee company) and M/s.Appollo Wind Energy Private Limited (resulting company) and their respective shareholders with effect from 1st April 2011, being the appointed date for amalgamation of the transferor company with transferee company and with effect from 1st April 2012, being the appointed date for demerger of sugar undertaking of the transferee company to the resulting company so as to be binding on all the shareholders of the petitioning companies as well as the transferee company and to dissolve the transferor company without winding up. ----- For Petitioners : Mr.Arvind P.Datar S.C. For Mr.K.Ramasamy For Regional Director : Mr.M.Gopikrishnan, ACGSC For Income Tax Department : Mr.N.V.Balaji, Senior Standing Counsel For Objector : Mr.Rahul Balaji Official Liquidator : Mr.Arvind Shukla ----- COMMON ORDER
Praying for sanctioning a Composite Scheme of Arrangement of M/s. Empee Distilleries Limited, the transferor company, M/s.Empee Sugars and Chemicals Limited, the transferee company and M/s.Appollo Wind Energy Private Limited, the resulting company and their respective shareholders with effect from 1.4.2011 as the appointed date for the amalgamation of the transferor with the transferee company and with effect from 1.4.2012 as the appointed date for the demerger of the sugar undertaking of the transferee company to the resulting company, the transferor has come up with the first petition C.P.No.196 of 2012 and the resulting company has come up with the second petition in C.P.No.197 of 2012.
2. I have heard Mr.Arvind P.Datar, learned Senior Counsel appearing for the petitioners, Mr.M.Gopikrishnan, learned Additional Central Government Standing Counsel appearing for the Regional Director, Mr.N.V.Balaji, learned Senior Standing Counsel for the Income Tax Department and Mr.Rahul Balaji, learned counsel appearing for a creditor of the transferee company, objecting to the present scheme and Mr.Arvind Shukla, learned Official Liquidator.
3. The petitioner in C.P.No.196 of 2012 is M/s.Empee Distilleries Limited, having its registered office at No.59, Harris Road, Pudupet, Chennai-2. This company, which is the transferor, has an authorised share capital of Rs.30 crores divided into 3 crores equity shares of Rs.10/- each. The issued, subscribed and paid up capital of the company is Rs.19,00,88,930/- divided into 1,90,08,893 equity shares of Rs.10/- each. The financial year of the company ends on 31st March every year. The company is engaged mainly in the business of manufacturing and selling Indian made foreign liquor.
4. There is another company by name Empee Sugars and Chemicals Limited having its registered office at Naidupet, Nellore District, Andhra Pradesh. This is the transferee company and it has an authorised share capital of Rs.70 crores divided into 7 crores equity shares of Rs.10/- each and preference share capital of Rs.10 crores divided into 1 crore preference shares of Rs.10/- each. The issued, subscribed and paid up capital of the said company is Rs.41,97,29,000/- divided into 4,19,72,900 equity shares of Rs.10/- each. The said company is engaged in the business of processing sugar production and manufacture of industrial alcohol.
5. The petitioner in C.P.No.197 of 2012, is the resulting company and it was incorporated only in December 2004 and its registered office is situate at Halls Road, Egmore, Chennai-8. The main objects of the company is to generate electric power by using wind, solar energy, water, coal, etc. The company is yet to commence operations. The authorised share capital of the company is Rs.1 lakh divided into 10,000 equity shares of Rs.10/- each. The issued, subscribed and paid up capital of the company is the same.
6. According to the petitioners, the Board of Directors of all the above three companies proposed a Composite Scheme of Arrangement in terms of Sections 391 to 394 read with 100 to 104 of the Companies Act. The Scheme is to the following effect:
(i) reorganisation of the share capital of the transferee company Empee Sugars and Chemicals Limited by way of reduction of equity share capital;
(ii) merger of the transferor Empee Distilleries Limited with the transferee Empee Sugars and Chemicals Limited and rechristening the merged entity; and
(iii) demerger of the sugar units of Empee Sugars and Chemicals Limited functioning at Naidupet and Ambasamudram, so as to merge them with the resulting company namely Appollo Wind Energy Private Limited.
7. It appears that by virtue of the orders passed by this Court, a meeting of the equity shareholders was held and by a majority, the equity shareholders have approved the Scheme. The meeting of the secured and unsecured creditors was dispensed with, however, with a direction to serve individual notices to those who have outstanding dues of more than Rs.1 lakh. The petitioners have complied with the conditions.
8. Since the registered offices of the transferor company and the resultant company alone are situate within the jurisdiction of this Court, both of them have come up with the above petitions. The transferee company has its registered office in the State of Andhra Pradesh and hence, they have undertaken to file a petition before the Andhra Pradesh High Court.
9. Before proceeding to consider the reports of the Official Liquidator and the Regional Director, apart from the objections filed by the Income Tax Department and an unsecured creditor, it is necessary to note two special features of the Composite Scheme proposed. They are :-
(i) As stated earlier, the transferor namely Empee Distilleries Limited is proposed to get merged with Empee Sugars and Chemicals Limited. While the transferor is a profit making company, the transferee is running into losses. Therefore, the peculiar feature of the Scheme is that a profit making entity is merging with a loss making entity; and
(ii) After the merger of the profit making entity into a loss making entity, the sugar undertaking of the transferee company alone will be hived off and taken to the resulting company, namely Appollo Wind Energy Private Limited. Since this demerger could take place only after the merger of the transferor and transferee companies, two effective dates are proposed. One effective date is for the merger and that is fixed on 1.4.2011. Another effective date is for demerger and it is proposed as 1.4.2012.
10. The Official Liquidator, after engaging the services of the Chartered Accountants and investigating into the affairs of the transferor company, has filed a report. On the basis of the report of the Chartered Accountants, the Official Liquidator has come to the conclusion that the affairs of the transferor company were not conducted in a manner prejudicial to the interests of the members, creditors or to public interest and that there were no transactions, which would attract the provisions of Section 542 of the Companies Act. The transferor company has also filed their returns for the last five assessment years and obtained acknowledgement. The transferor is also said to be complying with the statutory obligations such as provident fund, employees' state insurance, customs duty, excise duty, etc.
11. However, the Assistant Commissioner of Income Tax, Company Circle II(1), has filed an affidavit of objections to C.P.No.196 of 2012. Similarly, the Income Tax Officer, Company Ward I (1), has filed an affidavit of objections to C.P.No.197 of 2012. The objections of the Department, in brief, are as follows :
(i) Though for the assessment year relevant to the previous year ending 31.3.2012, the transferor company filed a return of income on 29.9.2012 showing a profit of Rs.23.99 crores, the transferor company failed to pay tax thereon as advance tax or even as a self assessment tax;
(ii) The transferor did not also pay advance tax for the assessment year 2012-13 relevant to previous year ending 31.3.2013;
(iii) A survey conducted by the Department under Section 133A showed that the transferor company had not paid taxes on distribution of dividend. After such detection, the transferor paid the same in February 2013;
(iv) The transferee company has filed a return showing a loss of Rs.105.97 crores. Therefore, in anticipation of the merger, the transferor filed a revised return on 20.2.2013 showing "NIL" income, since, if the Scheme gets sanctioned, the profits of the transferor would get dissolved into the losses of the transferee. This would result in avoidance of tax to the extent of Rs.7.53 crores for the transferor. Therefore, the primary object of the scheme is evasion of tax.
12. The learned Senior Standing Counsel for the Department also relies upon Section 72A(4) of the Act in support of their objections to the Scheme.
13. Similarly, a company by name ISGEC Heavy Engineering Limited has also filed its objections to the Scheme. This company appears to have entered into six contracts with the transferee company and the transferee company defaulted in the discharge of its obligations under those contracts. Therefore, this objector company filed a petition for winding up in C.P.No.232 of 2011 against the transferee company on the file of the High Court of Andhra Pradesh. The said petition is still pending. Though the objector is actually obliged to file these objections in the petition for sanction filed by the transferee company on the file of the Andhra Pradesh High Court, the objector has filed all these objections even here. Their main objection is to Clause 23.1 of the Scheme. The said clause reads as follows :
"23.1 : All legal proceedings of whatsoever nature by or against the demerged company and/or arising at the demerger appointed date and resulting to the sugar undertaking of the demerged company, as and from the effective date, shall be continued and enforced by or against resulting company in the manner and to the same extent as would or might have been continued and enforced by or against the demerged company. In the event of any difference or difficulty in determining as to whether any specific legal or other proceeding relates to sugar understanding or not, a certificate jointly issued by the Board of Directors of the demerged company and the resulting company as to whether such proceeding relates to sugar undertaking or not, shall be conclusive evidence on the matter."
14. I have carefully considered the objections of the Income Tax Department and the creditor of the transferee company. Since the disposal of the objections of the creditor of the transferee company is much easier, let me take it up first.
15. The primary objection of the creditor of the transferee company is that as per the second half of Clause 23.1 of the Scheme, an absolute discretion is conferred upon the Board of Directors of the demerged company and the resulting company to determine whether any specific legal or other proceeding related to the sugar undertaking or not. In other words, Clause 23.1 of the Scheme vests an absolute discretion upon the Board of Directors of both companies to determine the company, which is liable to answer the creditors of the demerged company. This, in the contention of the objector, would throw the creditors at the mercy of the demerged entities.
16. However, as rightly contended by Mr.Arvind P.Datar, learned Senior Counsel appearing for the petitioners, the objector is a creditor of the transferee company. The transferee company, even according to the affidavit filed by the Income Tax Department, has returned a loss of Rs.105.97 crores in respect of the year ending 31.3.2012. But, the transferor company returned an income of Rs.23.99 crores for the same period. Therefore, upon merger, the total loss of the merged entity, would only come down. Hence, except for the latter part of Clause 23.1 of the Scheme, the objector should not have any serious objection.
17. In so far as the latter part of Clause 23.1 of the Scheme is concerned, the learned Senior Counsel appearing for the petitioners submitted that it was intended only as an internal arrangement and that the petitioners have no objection to the said clause being read down.
18. Therefore, I am of the view that if at all the Scheme is sanctioned by this Court, the objections of the objector can be taken care of by recording two things namely
(a) that this order will not prejudice their rights in the company petition for winding up pending on the file of the Andhra Pradesh High Court; and
(b) that the rights of the objector cannot be defeated by the merged entities by taking cover under Clause 23.1.
19. Now, coming to the objections of the Income Tax Department, it is seen that their objections are two fold namely
(a) that the entire scheme is motivated by a desire to avoid tax; and
(b) that the Scheme is in contravention of the provisions of Section 72A of the Act.
20. In so far as the first objection is concerned, it is true that for the year ending 31.3.2012, the transferor returned a profit of Rs.23.99 crores. But, after filing the petitions for sanctioning the Scheme, the transferor filed a revised return on 20.2.2013 showing 'NIL' return in the hope that this profit would be swallowed by the losses of the transferee company for the same period.
21. It is also true that if the merger does not take place, the transferor would be obliged to pay tax of Rs.7.53 crores. But, if the Scheme is sanctioned, the merged entity will be entitled to carry forward the losses for a period of eight years, thereby postponing the payment. There can be no dispute about the fact that if, the only purpose for which a Scheme of Arrangement is proposed, is to avoid tax, the same cannot be sanctioned. But, if the avoidance of tax happens as a result or incidental to the Scheme, the Court cannot reject the Scheme merely because of such consequences.
22. In Indo Continental Hotel and Resorts Limited., In Re [1998 (Vol.93) Company Cases 194 (Rajasthan)], a Division Bench of the Rajasthan High Court rejected a similar objection raised by the Income Tax Department and held that if there was any tax liability, it could always be recovered by the Department in accordance with law. Similarly, the Calcutta High Court held in A.W.Figgis & Co.(P) Ltd., In Re [1980 (Vol.50) Company Cases 95 (Calcutta)] that if an assessee arranged its affairs in such a manner so as to reduce tax liability, the same cannot be held to be illegal. But, these two decisions, do not deal with a specific objection that the Department has taken in this case and hence, these two decisions can be relied only for the broad and general propositions laid down therein.
22. The Supreme Court in Miheer H. Mafatlal v. Mafatlal Industries Ltd. (AIR 1997 SC 506), has laid down broad parameters on which the petitions for sanctioning of schemes are to be considered. One of the touchstones on which the schemes are to be tested is public interest. The avoidance of income tax to the tune of Rs.7.53 crores is certainly against public interest. But, if this is a natural result of a scheme, which has several other objectives, the Court cannot refuse sanction. Therefore, what is crucial is to see if the Scheme has other objectives.
23. According to the petitioners, the transferee company returned a loss of Rs.105.97 crores as on 31.3.2012. The net worth of the transferee is likely to be eroded, making the company a sick industrial undertaking within the meaning of the provisions of Sick Industrial Companies (Special Provisions) Act, 1984. Saving a company from the danger of becoming a sick industrial company also has an element of public interest. If the Scheme is sanctioned, the transferee will be saved from becoming a sick industrial company at least as of now. Therefore, this is a case where two elements of public interest are in conflict with each other. One element of public interest is to prevent the postponement of payment of income tax and another element of public interest is that of saving a company from becoming a sick industrial undertaking.
24. The saving of a company from becoming a sick industrial undertaking is of greater importance than the prevention of postponement of payment of income tax dues. As a matter of fact, the Income Tax Department does not have any objection to the Scheme being sanctioned, if a common effective date is adopted by all the three companies. If the transferor, transferee and resultant companies are prepared to adopt 1.4.2011 or 1.4.2012 as an effective date, the Income Tax Department has no objection to a sanction being accorded.
25. But unfortunately, the merger of the transferor with the transferee and the demerger of the sugar undertaking from the transferee to the resulting company, cannot take place on the same date. The only hope for the transferee company to escape from being referred to the Board for Industrial and Financial Reconstruction, is to have the merger sanctioned from a date anterior to the date of demerger of the sugar undertaking. Therefore, it is not possible to reject the Scheme on the ground that the transferor would avoid payment of tax. A reference to the Board for Industrial and Financial Reconstruction would result in the creditors, employees and contributories getting doomed, unless a rehabilitation and revival takes place. On the contrary, postponement of payment of income tax will save the company, its creditors, its contributories, though it would result in the immediate denial of tax dues to the Department.
26. In so far as the second objection of the Income Tax Department is concerned, it revolves around Section 72A. While Sub-Section (1) of Section 72A deals with amalgamation, Sub-Section (4) deals with demerger. This section in entirety may have to be reproduced for a better understanding. It reads as follows :
"72A.Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger, etc. -
(1) Where there has been an amalgamation of -
(a) a company owning an industrial undertaking or a ship or a hotel with another company; or
(b) a banking company referred to in clause (c) of Section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a specified bank; or
(c) one or more public sector company or companies engaged in the business of operation of aircraft with one or more public sector company or companies engaged in similar business, then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.
(2) Notwithstanding anything contained in Sub-Section (1), the accumulated loss shall not be set off or carried forward and the unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company unless -
(a) the amalgamating company
(i) has been engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for three or more years;
(ii) has held continuously as on the date of the amalgamation at least three-fourths of the book value of fixed assets held by it two years prior to the date of amalgamation;
(b) the amalgamated company-
(i) holds continuously for a minimum period of five years from the date of amalgamation at least three-fourths of the book value of fixed assets of the amalgamating company acquired in a scheme of amalgamation;
(ii) continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation;
(iii) fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose.
(3) In a case where any of the conditions laid down in Sub-Section (2) are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be the income of the amalgamated company chargeable to tax for the year in which such conditions are not complied with.
(4) Notwithstanding anything contained in any other provisions of this Act, in the case of a demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall-
(a) where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company, be allowed to be carried forward and set off in the hands of the resulting company;
(b) where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting company, be apportioned between the demerged company and the resulting company in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company, and be allowed to be carried forward and set off in the hands of the demerged company or the resulting company, as the case may be.
(5) The Central Government may, for the purposes of this Act, by notification in the Official Gazette, specify such conditions as it considers necessary to ensure that the demerger is for genuine business purposes.
(6) Where there has been reorganisation of business, whereby a firm is succeeded by a company fulfilling the conditions laid down in clause (xiii) of Section 47 or a proprietary concern is succeeded by a company fulfilling the conditions laid down in Clause(xiv) of Section 47, then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the predecessor firm or the proprietary concern, as the case may be, shall be deemed to be the loss or allowance for depreciation of the successor company for the purpose of previous year in which business reorganisation was effected and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.
Provided that if any of the conditions laid down in the proviso to clause (xiii) or the proviso to clause (xiv) to Section 47 are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the successor company, shall be deemed to be the income of the company chargeable to tax in the year in which such conditions are not complied with.
6A. Where there has been reorganisation of business whereby a private company or unlisted public company is succeeded by a limited liability partnership fulfilling the conditions laid down in the proviso to clause (xiiib) of Section 47, then notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the predecessor company, shall be deemed to be the loss or allowance for depreciation of the successor limited liability partnership for the purpose of previous year in which business reorganisation was effected and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.
Provided that if any of the conditions laid down in the proviso to clause (xiiib) of Section 47 are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the successor limited liability partnership, shall be deemed to be the income of the limited liability partnership chargeable to tax in the year in which such conditions are not complied with.
(7) For the purposes of this Section-
(a) 'Accumulated Loss' means so much of the loss of the predecessor firm or the proprietary concern or the private company or unlisted public company before conversion into limited liability partnership or the amalgamating company or the demerged company, as the case may be, under the head 'Profits and gains of business or profession" (not being a loss sustained in a speculation business) which such predecessor firm or the proprietary concern or the company or amalgamating company or demerged company, would have been entitled to carry forward and set off under the provisions of Section 72 if the reorganisation of business or conversion or amalgamation or demerger had not taken place;
(aa) "Industrial Undertaking" means any undertaking which is engaged in-
(i) the manufacture or processing of goods; or
(ii) the manufacture of computer software; or
(iii) the business of generation or distribution of electricity or any other form of power; or (iiia) the business of providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services; or
(iv) mining; or
(v) the construction of ships, aircrafts or rail systems;
(b) "Unabsorbed Depreciation" means so much of the allowance for depreciation of the predecessor firm or the proprietary concern or the private company or unlisted public company before conversion into limited liability partnership or the amalgamating company or the demerged company, as the case may be, which remains to be allowed and which would have been allowed to the predecessor firm or the proprietary concern or the company or amalgamating company or demerged company, as the case may be, under the provisions of this Act, if the reorganisation of business or conversion or amalgamation or demerger had not taken place;
(c) "Specified Bank" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), or a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959) or a corresponding new bank constituted under Section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under Section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980)."
27. A careful reading of Section 72A would show the following:
(i) Sub-sections (1), (2) and (3) of Section 72A apply in respect of an amalgamation;
(ii) Sub-sections (4) and (5) apply to cases of demerger;
(iii) For the application of Sub-sections (1), (2) and (3), the amalgamating company should either be an industrial undertaking or a shipping or a hotel, though the amalgamated company could be any other company. Alternatively, the amalgamating company should be a banking company within the meaning of Section 5(c) of the Banking Regulation Act, 1949 and the amalgamated company could be a specific bank. Yet another alternative is that the amalgamating company is a public sector company engaged in the business of operation of air craft and the amalgamated company is also a public sector company engaged in similar business;
(iv) To be an industrial undertaking within the meaning of Section 72A(1)(a), the undertaking should be engaged in the manufacture or process of goods, or the manufacture of computer software or the business of generation and distribution of electricity or any other form of power or the business of providing telecom and other allied services or mining or construction of ships, air crafts or rail systems;
(v) In view of the definition of the word "amalgamation" contained in Section 2(1B) of the Act, the company which merges with another is referred to as the amalgamating company and the company with which it merges or which is formed as the result of the merger is referred as the amalgamated company.
28. Under Sub-section (1) of Section 72A, the accumulated loss and the unabsorbed depreciation of the amalgamating company will be deemed to be the loss or the allowance for unabsorbed depreciation of the amalgamated company. In other words, Sub-section (1) applies to a case of a loss making company amalgamating into a profit making company. In the case on hand, the transferor is a profit making company. It is the amalgamating company. It amalgamates into a loss making company. Therefore, the case on hand is just the converse of something that is provided under Sub-section (1) of Section 72A.
29. Sub-section (2) of Section 72A merely contains the conditions subject to which set off or carried forward could be allowed when the conditions prescribed in Sub-section (1) are satisfied. Therefore, Sub-section (2) will not apply to a case not covered by Sub-section (1). Similarly, Sub-section (3) is also consequential to Sub-section (2) and hence, will not apply to the case on hand.
30. As pointed out earlier, Sub-sections (4) and (5) of Section 72A deal with demerger. The expression "demerger" is defined in Section 2(19AA). It reads as follows:
" '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;
Explanation 2 :- For the purposes of this clause, the liabilities referred to in sub-clause (ii), shall include -
(a) the liabilities which arise out of the activities or operations of the undertaking;
(b) the specific loans or borrowings (including debentures) raised, incurred and utilised solely for the activities or operations of the undertaking; and
(c) in cases, other than those referred to in clause (a) or clause (b), so much of the amounts of general or multipurpose borrowings, if any, of the demerged company as stated in the same proportion which the value of the assets transferred in a demerger bears to the total value of the assets of such demerged company immediately before the demerger;
Explanation 3 :- For determining the value of the property referred to in sub-clause (iii), any change in the value of the assets consequent to their revaluation shall be ignored;
Explanation 4 :- For the purposes of this clause, the splitting up or the reconstruction of any authority or a body constituted or established under a Central, State or Provincial Act, or a local authority or a public sector company, into separate authorities or bodies or local authorities or companies, as the case may be, shall be deemed to be a demerger if such split up or reconstruction fulfils such conditions as may be notified in the Official Gazette, by the Central Government."
31. Section 2(19AAA) defines the expression "demerged company" to mean the company whose undertaking is transferred pursuant to a demerger, to a resulting company. The expression "resulting company" is defined in Section 2(41A) to mean one or more companies, to which the undertaking of a demerged company is transferred in a demerger and the resulting company, in consideration of such transfer of undertaking issues shares to the shareholders of the demerged company.
32. Keeping in mind the above definitions, if we get back to Sub-sections (4) and (5) of Section 72A, it can be seen that they talk about carry forward and set off in the hands of the resulting company, the accumulated loss and the allowances for unabsorbed depreciation of the demerged company. In the case on hand, the demerged company will be the company that is formed after the amalgamation of the transferor and the transferee. This is, in view of the fact that the demerger is planned to take effect from a date later than the date of amalgamation. Pre-amalgamation, the accumulated loss of the transferee company is Rs.105.97 Crores. Post-amalgamation, the accumulated loss is going to come down, since the transferor is a profit making company. The demerger is going to take effect only after this event, namely, the reduction of the accumulated losses. Therefore, what is sought to be carried forward and set off in the hands of the resulting company is only far less than the accumulated losses of the transferee as on date.
33. As I have pointed out earlier, the Income Tax Department does not have an objection per se to the Scheme of Demerger. Suppose the transferee and the resulting company alone had come up with a proposal for demerger, the Income Tax Department would not have had any objection. But, the scenario in such an event would be that the accumulated losses to be carried forward and set off would be much higher than what is now going to be carried forward and set off, if the conditions laid down in Sub-sections (4) and (5) are satisfied.
34. As a matter of fact, but for Section 72A(4) and (5), the entitlement of the resulting company to carry forward and set off the accumulated loss and allowance for the unabsorbed depreciation would have been automatic. With the introduction of Section 72A, the entitlement to carry forward and set off is made subject to the conditions prescribed in Sub-sections (4) and (5). Therefore, de hors the sanction granted by me, it is always open to the Income Tax Department to disallow the claim for carry forward and set off, if the conditions prescribed in Sub-sections (4) and (5) are not satisfied. To object to the Scheme itself, on the basis of Section 72A, would be to put the cart before the horse.
35. Therefore, the objection of the Income Tax Department with reference to Section 72A is overruled. Hence, the company petitions are allowed and the composite Scheme of Arrangement proposed by the petitioners is approved as prayed for, subject however to the following conditions:
(i) that the transferee company obtains similar sanction from the High Court of Andhra Pradesh;
(ii) that this order will not prejudice the rights of the creditor of the transferee company to pursue their petition for winding up pending on the file of the High Court of Andhra Pradesh;
(iii) that the rights of the creditors of the companies cannot be defeated by the merged entities by taking cover under clause 23.1 of the Scheme; and
(iv) that as and when a claim is made by the demerged and the resultant companies for the benefit of carry forward and setting off the accumulated loss and the allowances for unabsorbed depreciation, it is open to the Income Tax Department to see if the conditions for allowing such a claim are satisfied or not, in terms of Sub-sections (4) and (5) of Section 72A.
Index : Yes 24.10.2013. Internet : Yes RS/kpl V.RAMASUBRAMANIAN,J. RS/kpl Order in C.P.Nos.196 & 197 of 2012. 24.10.2013.