Demerger without transfer of liabilities is valid unless

sole motive for the same is tax avoidance

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TG Team

HIGH COURT OF GUJARAT

Vodafone Essar Gujarat Ltd.

v/s.

Department of Income-tax

O.J. APPEAL NO. 81 OF 2010

CO. PETITION NO. 183 OF 2009

AND CO. APPLICATION NO. 254 OF 2009

AUGUST 31, 2012

JUDGMENT

P.B. Majmudar, J.

This appeal is directed against the judgment and order dated 9th December 2010 passed
in Company Petition No. 183 of 2009 whereby the learned Company Judge did not
accord sanction to the. Scheme of Arrangement under Sections 391 to 394 and other
applicable provisions of the Companies Act, 1956 whereby Passive Infrastructure Assets
of the appellant Company together with the Passive Infrastructure Assets of other
Companies, transferor companies, shall vest in and become the right, property and
assets of Vodafone Essar Infrastructure Limited, the transferee Company.

2. The transferee company was originally incorporated under the Companies Act, 1956
on 19th January, 2007 with the Registrar of Companies, Maharashtra, Mumbai under the
name and style of Perfect Tribute Impex Private Limited. The company changed its name
to Vodafone Essar Infrastructure Private Limited after passing the necessary resolution to
this effect and obtained fresh certificate of incorporation on 18th October, 2007. The
company again changed its name to Vodafone Essar Infrastructure Limited and obtained
fresh certificate of incorporation on 17th January, 2008. Thereafter, the company shifted
its registered office from the State of Maharashtra to NCT of Delhi and obtained a
certificate in this regard from the Registrar of Companies, NCT of Delhi & Haryana at
New Delhi on 28th June, 2008.

3. The authorized share capital of the transferee company, as on 31st March, 2009, is
Rs. 5,00,000/- divided into 50,000 equity shares of Rs. 10/- each. The issued, subscribed
and paid up capital of the company is Rs. 5,00,000/- divided into 50,000 equity shares of
Rs. 10/- each.

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4. It is the case of the appellant Company that the Board of Directors of the appellant
Company has approved the Scheme by Resolution passed in the meeting held on 21st
September 2007 and further modified by a Resolution dated 30.4.2008. The Board of
Directors of the transferee Company has also approved the Scheme by a Resolution
dated 21.9.2007.

5. The Scheme envisages the demerger of the Passive Infrastructure Assets of each of
the transferor Companies. Upon sanction of the Scheme, the Passive Infrastructure
Assets of the transferor Companies will be transferred from each of the transferor
Companies and shall vest in the transferee Company. By an order dated 8th July 2009
passed in Company Application No. 254 of 2009 this Court has dispensed with the
requirement of holding meetings of the shareholders, Secured Creditors and the
Unsecured Creditors of the petitioner Company, for the purpose of considering and
approving the Scheme. The registered office of the appellant company is situated at
Ahmedabad. Along with the Company Petition a copy of the Scheme of Arrangement has
been filed on the record and salient features of the Scheme have been incorporated and
detailed in the Company Petition. Under the said Scheme it is proposed to demerge
passive infrastructure assets of eight transferor companies and transfer them to the
transferee company. The transferee company is the wholly owned subsidiary of the
transferee company. The said scheme has already been sanctioned by the High Courts
of Bombay, Calcutta, Madras and Delhi. The Scheme envisages that on the appointed
day, inter alia, the passive infrastructure assets of all the transferor companies shall stand
transferred to it and vested in the transferee company. As per the Scheme, the
segregation of the passive infrastructure assets, business and the telecommunications
services business is to enable further growth and maximise value in each of the
businesses. It is also claimed that it will improve the quality of services to customers by
establishing a high service standard and delivering services in an environment friendly
manner and will also increase the speed of 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 Tele Communications, Ministry of Communications and Information
Technology, Government of India. The Department of Telecommunications has
recommended, inter alia, to promote sharing of infrastructure so that costs can be kept
down, which is essential for rural penetration, and to incentivize such sharing.

6. So far as share exchange ratio is concerned, the Scheme provides that the Scheme is
intended to restructure, within the Vodafone Essar Limited Group, the holding of the
assets constituting the Passive Infrastructure Assets in a more efficient manner
consistent with the diverse needs of business, and does not involve any movement of
assets or liabilities to any company outside the Vodafone Essar Limited Group. The said
transfer is without consideration as the transfer of the Passive Infrastructure Assets is
within the Vodafone Essar Limited Group and according to the appellant company, the
transferee company shall not be required to issue any shares or pay any consideration to
any of the transferor companies or their shareholders for acquiring the Passive

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Infrastructure Assets. As pointed out earlier, the Board of Directors of the transferor and
transferee companies, in their respective meetings, have unanimously approved and
proposed the scheme of arrangements. The Scheme was accordingly placed before the
learned Company Judge for according his sanction.

7. The learned Company Judge admitted the petition on 11th August 2009 and notice was
issued to the Central Government to be served through the Regional Director, Ministry of
Corporate Affairs, Mumbai. Notice was also issued to the Official Liquidator for
examination of the affairs of the petitioning Company. The Official Liquidator was given
liberty to engage Chartered Accountant for such purpose at the cost of the appellant
Company. The learned Company Judge also directed to issue public advertisement in
Times of India, English daily, Ahmedabad edition and Gujarat Samachar, Gujarati daily,
Ahmedabad edition, in terms of the Companies (Court) Rules, 1959. Pursuant to the
notice, public advertisements were issued and affidavit to this effect was filed before the
learned Company Judge.

8. In response to the notice served on the Regional Director an affidavit was filed by Shri
Rakesh Chandra, Regional Director, Western Region, Ministry of Corporate Affairs,
Mumbai on 27th November 2009 stating that the appellant Company may be directed to
furnish the latest financial statement before this Court at the time of hearing and that the
petitioner Company may also be directed to obtain necessary approval of the concerned
regulatory authorities of the Ministry of the Telecommunications in respect of the present
scheme of arrangement if applicable and that the Regional Director had received letter
dated 7.9.2009 from Assistant Commissioner of Income Tax, Ahmedabad on tax aspects
in respect of the appellant Company wherein it is stated that they are going to represent
the same before the learned Company Judge.

9. In response to these objections and observations, an affidavit was filed on behalf of the
petitioner Company and it was submitted that the latest audited financial statement of the
petitioner Company for the financial year ended on 31.3.2009 were filed along with the
Company Petition. The latest unaudited financial statements of the petitioner Company as
on 31.9.2 009 were placed on record along with this affidavit. With regard to the second
issue raised by the Regional Director, it was submitted that the petitioner Company is a
mobile telecommunication service provider and holds a Unified Access Services License
for the Gujarat Service Area, with effect from 20.10.2008 issued by the Department of
Telecommunications. The appellant Company is not transferring the license to the
transferee Company pursuant to the Scheme and hence condition No.6.3 of the license is
not applicable. It was further stated that the appellant Company shall continue to hold its
license and to provide the licensed telecommunications services even after the
completion of the demerger and therefore there was no requirement for the appellant
Company to seek approval of the Department of Telecommunications for the Scheme. It
was also submitted that the transferee Company is registered as an Infrastructure
Provider Category-1 by the Department of Telecommunications which permits the
transferee Company to establish and maintain Passive Infrastructure Assets to lease, rent
or sell such assets to licensees of Telecom Services licensed under Section-4 of the
Indian Telegraph Act, 1885.
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10. The learned Company Judge having considered the objections raised on behalf of the
Income Tax Department and having heard learned counsel for the parties came to the
conclusion that the sole object of the Scheme is to avoid tax. The learned Company
Judge observed that the transaction is void under Section 281 of Income Tax Act and
therefore the court will not exercise its jurisdiction to sanction a transaction which is
pointed out to be void. The learned Company Judge observed that the Scheme appeared
to be a camouflage to circumvent the mandatory provisions of Income Tax Act. The
learned Company Judge has also observed that since no liabilities are transferred
including the employees relating to the Passive Infrastructure assets, the expenses will
continue to be borne by the Transferor companies which would artificially deplete the
taxable profit and will not give a true and fair view of the accounts, thus adversely
affecting the taxable profits. He has further observed that the entire tax payable on the
market value of assets to be transferred to Indus is sought to be evaded by present
scheme and had the transaction been done directly with Indus, the same would not have
been exempted, and it would have been at market value for exchange of consideration.
He further observed that since the liabilities are not taken over, it would not tantamount to
a demerger u/s 2(19AA) nor gift u/s 47(iii). He further observed that since the liabilities are
not to be taken over nor any shares are supposed to be issued, it could not satisfy the
condition of demerger and therefore the only option was to transfer it as a gift as a tax
planning devise. The learned Company Judge was of the opinion that by doing so it is
creating a conduit avoiding the capital gain tax at this stage and further in the next stage
the transferee is sought to be merged with Indus which transaction will again be exempt
u/s 47 and thus would be avoiding capital gain tax at that stage as well. The learned
Company Judge therefore came to the conclusion that income tax amounting to the tune
in excess of Rs. 3,500 crore as alleged by the Income-tax Department is sought to be
evaded if the present scheme is sanctioned by the Company Court.

11. As regards stamp duty and VAT, the learned Company Judge observed that stamp
duty is sought to be evaded to the tune to Rs.600 crores and if the sale is directly made
to Indus, the stamp duty payable would have been @ 6%. If the court sanctions the
present scheme in the guise of demerger u/s 391, the stamp duty shall be paid @ 1% and
thus avoiding legitimate payment of stamp duty to the extent of 5% (6%-1%) on the
amount of Rs. 15,000 crores being the conservative estimate of the market value of
Passive Infrastructure assets being transferred. He further observed that no VAT shall be
payable on the movable assets transferred under the scheme if the same is sanctioned
under Section 391 which otherwise would have been payable.

12. The learned Company Judge thus observed that it is a foregone conclusion that if the
present scheme is sanctioned by him, it would result into avoidance of tax and that the
transferee company is nothing but a paper company was being used only as an
intermediary for transferring Passive Infrastructure assets from transferor companies to
Indus for the purpose of tax evasion. The learned Company Judge has relied on the
decision of Wood Polymer Ltd. [1977] 47 Co. Cases 597 (Guj) for coming to the
conclusion that the scheme is nothing but a device and a conduit having the sole purpose
of avoiding and evading taxes including income tax, stamp duty, registration charges and

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VAT. The purpose being tax avoidance is explicit from the facts that different accounting
treatments are accorded to transferor companies having a positive net worth in
comparison to ones which have negative net worth with an intention to maximize tax
avoidance and therefore the Scheme is unreasonable, unfair and unjust.

13. The aforesaid order passed by the learned Company Judge in not granting sanction
to the Scheme in question has given rise to this appeal at the instance of the appellant
Vodafone Essar Gujarat Limited.

14. Mr Mihir Joshi, learned Senior Counsel, assisted by Mr Amit Panchal, learned counsel
for the appellant, has vehemently argued that the learned Company Judge has merely
recorded the submissions of both the sides, but has not considered the submissions
made on behalf of the appellant-company and by merely recording the arguments of the
income-tax Department passed the impugned order without giving his own independent
reasoning in this behalf. Mr Joshi has argued that the learned Company Judge should
have given his own independent reasons instead of merely recording the arguments of
both the sides and ultimately in dismissing the company petition on the basis of the
submissions of the income-tax Department. It is argued by Mr Joshi that the income-tax
Department has no locus standi to raise objections to the Scheme especially when no
objections have been raised by anyone else. It is argued by Mr Joshi that the learned
Company Judge has committed a grave error in coming to the conclusion that the sole
object in formulating the Scheme is tax avoidance. He has submitted that without there
being any basis in this behalf the learned Company Judge has come to the said
conclusion.

15. Mr Mihir Joshi next contended that it is a case of reconstruction of business in line
with the Government policy and even other telecom companies have also formulated
such policy. It is submitted that in the matter of reconstruction of business, Section 25 of
the Contract Act has no role to play and the said provisions are not attracted. It is
submitted that by the instant scheme the passive assets will become revenue generating
assets. It is further submitted by him that no rights of the income-tax Department are
being affected by the present Scheme and the appellant would continue to be profitable
after the demerger of Passive Infrastructure (PI) assets and that its net worth after giving
effect to the Scheme would be Rs. 3592 crores as on March 31, 2012. On the other hand
the outstanding demand of the Income Tax Department as on July 1, 2012 is Rs. 29.3
crores approximately. In the circumstances, the rights of the Income Tax Department to
recover the alleged demand would in no manner be affected by the sanctioning of the
present Scheme. It is further submitted that sanctioning the scheme ipso facto would not
grant any immunity to the Appellant qua any liability that may be imposed on it under the
relevant provisions of the Income Tax Act, in accordance with law. Similar statement has
also been made before the Delhi High Court in the case of Vodafone Essar Limited & ors.
v. Vodafone Essar Infrastructure Limited, reported in [2011] 2 Comp LJ 317. It is
submitted that once the dues of Income Tax Department are taken care of, it has no
further locus standi to challenge the Scheme. It is further submitted that under Sections
391-394 of the Companies Act, 1956 only the Central Government, through the Regional
Director has the powers to study the Scheme and raise such objections as it thinks fit.
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Thus, besides the shareholders and creditors of the company to whom an arrangement
and/or compromise is offered by the company, only the Regional Director has locus
standi in respect of the proceedings under sections 391-394 of the Companies Act. The
Income Tax Department, which is a revenue collecting arm of the Central Government,
cannot object to the proposed Scheme. He submitted that it is only the Central
Government through Regional Director which is vested with the powers to raise the
objections qua the Scheme but, when the Regional Director has not raised any objection
to the Scheme, which is sought to be raised by the Income Tax Department the Income-
tax Department has no locus to raise such objections. It is further submitted that when the
Central Government through the Regional Director has not raised any objection to the
Scheme, it is surprising as to how the Income-tax Department is fighting tooth and nail in
opposing the Scheme as if it is an adverse litigation between the appellant and the
Income-tax Department.

16. Mr Joshi has further submitted that the objection taken by the Income-tax Department
to the effect that the sole object of the Scheme of Arrangement is tax evasion is not
sustainable at all. It is submitted that the ratio of the judgment of the learned Single Judge
in the case of Wood Polymer Ltd. (supra) has no application to the facts of the present
case as the Scheme seeks to achieve a commercial purpose and object inter alia being
segregating the PI business and the telecommunications service business to enable
further growth and maximize value in each of the business; improved quality of services
to customers by establishing high service standards and delivering services in an
environment friendly manner; increase in the speed of role out and efficiency through
sharing of infrastructure, converting the PI assets from non-revenue generating assets;
improved network quality and greater coverage etc. He further submitted that the
segregation of telecommunications services and telecommunications infrastructure
business reflects the global trend and has been adopted by telecommunication
companies in India without objection. In fact the Working Group under the Planning
Commission has recommended sharing of infrastructure, which is presently under
contemplation by Vodafone and the present Scheme reserves flexibility to it for easing
such process when required. The Central Government has not raised any objection to the
Scheme and even the Department has not contended that the aforesaid objectives are
imaginary. Therefore it cannot be said that the Scheme has no purpose or object and that
it is a mere device/subterfuge with the sole intention to evade taxes, particularly when
even the incidence of tax purportedly sought to be evaded is not established on facts. He
has next contended that similar scheme of arrangement proposed by other
telecommunication companies to achieve the aforesaid objectives has been sanctioned
by different High Courts.

17. Mr Joshi has further contended that the Scheme of Arrangement was necessitated for
reasons set out in clause 1.4 thereof. Mr Joshi has relied upon various clauses in the
Scheme. It is further argued that under the Income Tax Act, there is no liability for
payment of tax on capital gains since there would be a transfer of capital assets under a
gift as envisaged under section 47(iii), which excludes application of section 45. It is also
submitted that there is a clear rationale for nil monetary consideration since the Appellant
and the transferee company are both wholly owned subsidiaries of Vodafone Essar
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Limited as per Clause 3.1 of the scheme and even a transfer at book value would not
have resulted in capital gains. Therefore the scheme in any case is not for the purpose of
avoiding capital gains.

18. Mr Joshi has further contended that the plea of the Income Tax Department that had
there been a direct transfer of PI assets to Indus Towers Limited, there would have been
a liability for capital gains is misconceived. He submitted that the Income Tax Department
is purposefully seeking to overlook the fact that Indus Towers Limited is already a joint
venture company of Vodafone, Bharti and Idea. Further, Vodafone, Bharti and Idea are
already holding equity shares in Indus in the ratio of 42:42:16 and therefore even if there
would have been a direct transfer either at nil monetary consideration or at book value,
there would have been no liability for payment of tax on capital gains. It is submitted that
even if the Scheme in question had not been proposed and if Vodafone transferor
companies had transferred the PI assets by way of gift to one of its group companies, still
there would have been no liability of tax on capital gains in view of section 47(iii) of the
Income-tax Act. It is submitted that the entire plea of the Income Tax Department is
hypothetical and without any basis and no evidence is placed to such hypothetical claim
made by the Income Tax Department. According to him, such a contention in respect of
proposed transfer to Indus cannot be said to be part of the same transaction since it is a
separate and independent proposed scheme subject to sanction of jurisdictional court
and in any case beyond the scope of the present proceedings.

19. It is further submitted that it can never be said that the Scheme is nothing but a
camouflage and in substance it is a transfer by the transferor companies in favour of
Indus with a view to avoid tax liability and with the sole object of avoidance of tax liability
arising from the capital gains that the present scheme has been formulated. It is further
submitted so far as aspect about transfer to Indus Towers Limited is concerned, it cannot
be said it is a part of same transaction since it is a separate and independent proposed
scheme subject to sanction of jurisdictional court and in any case beyond the scope of
the present proceedings and therefore that aspect cannot be considered while
considering the present scheme. It is submitted that in any case when the appellant was
not required to follow a particular pattern and every tax payer is entitled to arrange its
affairs legitimately so that its taxes shall be as low as possible and that it is not bound to
choose that pattern which will replenish the treasury. Further, where there are several
legitimate alternatives, means and procedure for attaining the same object there is no bar
in choosing any one of them. It is respectfully submitted that while sanctioning the
scheme the Court does not sit in appeal over the decision taken by the shareholders who
have, in their commercial wisdom, given their approval to the scheme. Even if there are
various ways to carry out a particular transaction, if one of the modes is chosen by the
Vodafone group entities, the complexity of direct transfer by seven separate Vodafone
group entities to Indus; the number of Vodafone group entities as shareholders in Indus
compared to one Vodafone entity as shareholder in Indus; the issues pertaining to the
success of Bharti and Idea to transfer their respective PI assets to Indus; the successful
completion of transfer of PI assets by all the three joint venture partners into Indus; the
option for Vodafone to accomplish the object of the Working Group in case the joint

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venture partners are not successful in transferring the PI assets to Indus. It is submitted
by Mr Joshi that on the basis of the relevant consideration as pointed above if the
Scheme is floated, it cannot be said that the same is floated with the sole object of
avoiding tax. Even incidentally in a given case it may result into tax saving or evading of
tax, then also, it can never be said that the sole object of the Scheme is avoidance of tax.
It is further submitted that the reliance placed by the Income-tax Department in the case
of Wood Polymer Limited (1977) 47 CC 597 and comparing the present Scheme with the
said Scheme is misconceived and not justified as, in that case, the parties were seeking
the assistance of the court to reduce the tax liability and this Court has held that the court
should be the last instrument to grant such assistance of judicial process to defeat a tax
liability. It is submitted that even if there is a consideration of one rupee, then also it can
be held that it is valid consideration and in support of his submission he has relied upon
the observations of the Delhi High Court in sanctioning scheme.

20. It is submitted that the Scheme is an arrangement between the Company and its
shareholders since it involves bifurcation of the business carried out by the company and
arrangement of its assets and the way the business is carried in the future. The term of
arrangement is wide enough in view of definition of Section 390(b) of the Companies Act.
There is an element of give and take since a substantial business is being taken out by
the company but substantially the same persons would be carrying it on in the future. The
shareholders of the Appellant are giving up the PI assets of the Appellant so as to
take/reap the benefits of the income/benefit to be derived inter alia by putting the idle PI
assets to use. It is further submitted that in the present case the right of the Income-tax
Department in assessing, levying and collecting the tax of the appellant are not
confiscated or expropriated so as to extinguish such rights. It is further submitted that the
Scheme is for reconstruction of the Company and it contemplates the carrying on of the
business in an altered form, by dividing the telecommunications services business and
the telecommunications infrastructure business being carried on by the Appellant, in a
manner that the telecommunications infrastructure business would be carried on by the
transferee company. The said business will be continued and carried on by substantially
the same persons who are presently carrying on the consolidated business since both the
transferor and the transferee companies are wholly owned subsidiaries of Vodafone
Essar Limited which will continue to carry on the businesses. It is submitted that both
reconstruction and amalgamation are statutorily recognized as an arrangement and/or
compromise under Section 391. It necessarily implies that once a scheme is in the nature
of reconstruction, which in the facts of the present case it is, the same is bound to be
recognized as an arrangement and/or compromise under section 391 of the Companies
Act. He submitted that once there is a Scheme of reconstruction, the same is bound to be
recognized as a compromise/agreement under Section 391 of the Companies Act. It is
further argued that it can never be said that in the present Scheme there is only transfer
of assets and not transfer of undertaking and that it cannot be said that unless there is a
transfer of undertaking, it cannot be said that it is a demerger. It is submitted that it is
nobodys case that the present Scheme is a demerger under the Income-tax Act and
simply because it is not under section 2(19AA), it does not mean that the present scheme
is not a reconstruction under sections 391-394 of the Companies Act, 1956. Even if no

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liabilities are transferred, the same would still be a reconstruction under the Companies
Act, 1956. It is also submitted that in the present case the Scheme has been approved by
the members in requisite majority.

21. It is submitted that the Scheme of Arrangement cannot be equated with an agreement
between the parties. The Scheme does not result into an agreement between the parties
as contemplated under the Contract Act, 1872 and it remains to be a Scheme, which is to
be approved by the statutory majority and it is required to be sanctioned by the Court.
Therefore, it cannot be said that the Scheme is in the nature of agreement and the same
is void under Section 25 of the Contract Act. On the aforesaid premises it has been
argued by Mr Joshi that the impugned order of the learned Company Judge is required to
be set aside especially when the learned Company Judge has not given reasons while
refusing to sanction the Scheme of the Arrangement proposed by the appellant.

22. Mr Joshi, in support of his submissions has relied upon the following judgments:

i. Vodafone Essar Limited & ors. v. Vodafone Essar Infrastructure Limited, reported in
[2011] 2 Comp LJ 317, para 29, 49 & 69 on the point of locus of the Income Tax
Department to raise objection against sanctioning of the Scheme.

ii. Jindal Iron & Steel Co. Ltd. v. Asst. Commissioner of Income Tax on the point of locus
of the Income Tax Department to raise objection against sanctioning of the Scheme.

iii. SREI Infrastructure Finance Ltd. Calcutta High Court, [2008] 4 Comp LJ 196, for the
proposition that consideration per se cannot invalidate the Scheme as avoidance by the
Appellant Company of its tax liabilities will attract the provisions of the Income Tax Act
and the Company cannot escape from its liability.

iv. Nirmay Properties Private Limited, [2009] 150 CC 538 for the observation that simply
because the Court has granted the sanction to the Scheme it does not absolve the
Company from any future liability qua violation of any statutory provisions.

v. Vodafone International Holdings v. Union of India [2012] 1 Comp LJ 225, for the
proposition that every tax payer is entitled to arrange his affairs so that his taxes shall be
as low as possible and that he is not bound to choose that pattern which will replenish the
treasury.

vi. Banyan & Berry v. Commissioner of Income Tax, Gujarat High Court, 222 ITR 831 for
the proposition that every act which results in tax reduction or exemption of tax cannot be
treated as a device of tax avoidance and the real question to be asked is whether the act
of the assessee falls in the category of colourable device.

vii. Azadi Bachao Andolan, [2004] 10 SCC 1, for the proposition that McDowell cannot be
read as laying down that every transaction or arrangement perfectly permissible under
law, which has the effect of reducing the tax burden of the assessee must be looked upon
with disfavour.

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viii. United Bank of India Ltd. v. United India Credit & Development Co. Ltd. Of Calcutta
High Court, [1977] 47 CC 689 for the proposition that where there are several legitimate
alternatives, means and procedure for attaining the same object, there is no bar in
choosing any one of them.

ix. Larsen & Toubro Ltd. [2004] 121 CC 523, for the proposition that though the word
amalgamation is not defined specifically, it has a wide range and ambit and is a term of
wider connotation.

x. Re T&N Ltd. Chancery Division , [2007] 1 All ER 851 for the proposition that it is not
a necessary element of an arrangement for the purposes of Section 425 or that it should
alter the rights existing between the company and the Creditors or the members.

xi. Judgment of Gujarat High Court in the case of Idea Cellular Ltd. (Company Petition
No.167 of 2009 dated 31.8.2009) sanctioning similar Scheme of Arrangement.

xii. Judgment of Delhi High Court in the case of Bharti Airtel Ltd. (Company Petition
No.233 of 2007 dated 26.11.2007) sanctioning similar Scheme of Arrangement.

xiii. Judgment of Bombay High Court in the case of Reliance Telecom Infrastructure Ltd.
(Company Petition No.68 of 2007 dated 16.3.2007) sanctioning similar Scheme of
Arrangement.

xiv. Judgment of Calcutta High Court in the case of Vodafone Essar East Ltd. (Company
Petition No.273 of 2009 dated 5.4.2010) sanctioning the present Scheme of
Arrangement.

xv. Judgment of Bombay High Court in the case of Vodafone Essar Ltd. (Company
Petition No.712 of 2009 dated 17.12.2009) sanctioning the present Scheme of
Arrangement.

xvi. Judgment of Madras High Court in the case of Vodafone Essar Cellular Ltd.
(Company Petition No.203 of 2009 dated 17.11.2009) sanctioning the present Scheme of
Arrangement.

xvii. Judgment of Delhi High Court in the case of Vodafone Essar Ltd., reported in [2011]
2 Comp LJ 317, sanctioning the present Scheme of Arrangement.

xviii. Mysore Minerals Ltd. v. Commissioners of Income Tax, Karnataka, reported in

[1999] 7 SCC 106 (para 14) for the proposition that there is no bar which restrains a
transaction falling differently or being dealt with separately under different Acts.

xix. Chidambara Iyer & Ors. v. P.S. Renga Iyer AIR 1966 SC 193 for the proposition
that the present Scheme of Arrangement is not without consideration.

xx. His Holiness Kesavananda Bharti v. State of Kerala [1973] 4 SCC 225 for the
proposition that even most trifle benefit can be considered as consideration so as to avoid
the impact of Section 25.

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xxi. Ledhingham & Ors. v. Bermejo Estancia Co. Ltd. All ER 749 for the proposition that
there is no requirement of monetary consideration and even a promise to induce the
company to carry on its business has been treated as sufficient consideration.

23. Mr Mihir Thakor, learned Senior Advocate appearing for the Income-tax Department,
on the other hand, argued that the Income-tax Department has locus standi to object the
Scheme and, for that reason, anyone can object to the Scheme if the same is floated with
the ulterior purpose. It is submitted by Mr Thakor that the learned Company Judge has
considered the arguments of both the sides and simply because the judgment might not
have been happily worded this Court can examine the aspect involved in the matter on its
own. It is submitted that it is ultimately for the Court to consider as to whether the
Scheme is required to be sanctioned and the Court is required to be satisfied itself, even
if there is no objection by anyone, to find out whether the Scheme is required to be
sanctioned or whether it violates any law or whether it is contrary to the public policy. It is
submitted by Mr Thakor that in view of the decision of this Court in the case of Wood
Polymer Private Limited (supra) the present Scheme is floated with the sole purpose of
avoiding the tax as the transaction in the present case and Wood Polymer Private Limited
(supra) can be said to be of a similar nature. It is submitted that the Scheme is nothing
but camouflage and the object of the Scheme is nothing but avoidance of capital gains
tax. It is submitted by Mr Thakor that looking to the Scheme it is evident that it is not a
Scheme for reconstruction nor it is a Scheme of Arrangement. It is submitted that the
Scheme in question is an agreement and the same is without consideration and therefore
the same is violative of Section 25 of the Contract Act. It is submitted by Mr Thakor that
motive or purpose or reason of a transaction is different from its consideration and for any
transaction there will be a reason or motive or purpose or an object. It is submitted that
there may be any motive or object for transferring the assets, but the same cannot be
said to be a consideration for transfer in the eye of law. In order to substantiate his say,
he has relied upon Clause 1.4.6, which uses the word reasons and not consideration. It is
further submitted that Clause 1.4 which relates to Rationale for the Scheme, but the
same can be said to be reason or modification or justification prohibiting the scheme, but
the same cannot be treated as a consideration.

24. It is submitted that consideration being different from the object of the transaction, if
there is no consideration, then, the transaction is void. He has submitted that there is no
consideration as defined under Section 2(d) of the Contract Act. It is submitted that
consideration has to be valuable consideration in the eye of law and since there is no
consideration, much less valuable consideration, the Scheme ought not to have been
sanctioned by the learned Company Judge. It is submitted that the Scheme represents a
contract sanctified by the Courts approval between the company and the creditors and/or
members of the company. It is submitted that the word gift is not defined under the
Income Tax Act and with the Gift Tax Act being repealed, the only definition which could
possibly be resorted to is under Section 122 of the Transfer of Property Act. According to
him, the meaning of the word gift as understood under the Companies Act and the
Income Tax Act is the same, which is defined under Section 122 of the Transfer of

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Property Act. He further submitted that the fact that the appellant was required to amend
Memorandum of Association under the Companies Act to align the same with the
meaning of Gift under the Income Tax confirms and supports this interpretation.

25. It is further submitted by Mr Thakor that in the present case statutory majority was not
achieved. He submitted that the assets are sought to be transferred free from any
charges and encumbrances and that too without consideration and therefore meeting of
Secured Creditors was necessary and not that of the shareholders, who retain their
control over the assets and are not the class of person with whom any arrangement or
compromise is entered into, as sought to be claimed.

26. It is also submitted by Mr Thakor that the Scheme is ultra vires Companies Act as
admittedly, there was no power to gift under the Memorandum of Association of the
petitioner company and it was by in an Extraordinary General Meeting of Shareholders
that a Resolution was passed on 21st September 2007 wherein Memorandum of
Association is amended to incorporate the power of gift. He further submitted that the
proposed scheme being based on an ultra vires resolution of Board of Directors is void
and it cannot be ratified even if all the shareholders have given their consent. He has also
contended that jurisdiction under Section 391 of the Companies Act is not available for
want of authority to the Company to gift and thus the Scheme is void. Mr Thakor,
therefore, submitted that if Scheme before the Court is void, ab-initio it cannot be ratified
even if all the shareholders agree and the Court cannot sanction such a Scheme. Mr
Thakor has also tried to elaborate his argument as to how the sole object of the Scheme
is avoidance of tax. He has next contended that the he Appellant has failed to show even
a single clause or provision from the working committee recommendations requiring or
mandating the Appellant to transfer its assets in the manner and mode in which it is
sought to be done i.e. gifting it at stage 1 and merging it at stage 2 and that also under
the guise of a scheme u/s 391. He has also submitted that no authority or committee has
or can recommend/ mandated divesting/ sale of assets, much less in the manner it is
sought to be done. The mode and manner adopted is solely for avoiding taxes.

27. Mr Thakor submitted that the three groups providing mobile telephony services,
Vodafone, Bharti and Idea formed a company called Indus Towers Ltd with an equity
structure of 42:42:16 respectively, around 2007. It was agreed between the shareholders
of Indus as to the terms on which the existing infrastructure of towers (called Passive
Infrastructure Assets) in different circles/ states (including state of Gujarat) shall be
contributed to Indus. In order to comply with their agreement to contribute assets to
Indus, the simplest and the legally correct way to transfer the assets were to execute a
deed of conveyance and transfer the PIA from the respective owners to Indus. However
to avoid and evade the taxes payable to both Central and State Government like Income
Tax, stamp duty, VAT etc. an entire tax avoidance subterfuge was created and dubious
method was adopted by the aforesaid three groups based on their individual structures of
the ownership of PIA viz. Stage 1: Introducing a pre-ordained devise/ conduit in the form
of a new Company (the present Transferee Company) and transferring by way of Gift to
this new Company and Stage 2: Amalgamating this new Company into Indus. According

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to him, both the stages are done under the guise of scheme u/s 391 to legitimise the
same by obtaining the seal of the Honble Court and evade payment of Income Tax,
stamp duty and VAT.

28. Mr Thakor next contended that it is clear that the only purpose of the Scheme is to
acquire the assets of the Appellant (the original owner) through the intermediary of the
Vodafone Infrastructure Ltd. (present Transferee) which was created for that very purpose
to meet the requirement of law, and in the process to defeat tax liability that would
otherwise arise. It is submitted that the Supreme Court in case of Miheer Mafatlal v.
Mafatlal Industries Ltd. 1997 (1) SCC 579, has held that for ascertaining the real purpose
underlying; the Scheme with a view to be satisfied on this aspect, the Court, if necessary,
can pierce the veil of apparent corporate purpose underlying the scheme and can
judiciously X-ray the same. He submitted that applying this mandate of Miheer Mafatlal
(supra) this Court can pierce the veil of apparent corporate purpose underlying the
scheme and look at the schemes of both the Stage 1 & 2, which would reveal the real
purpose that is the transfer of assets to Indus without payment of taxes. Once the Court
ascertains the real purpose, after piercing the veil by considering the composite
transaction, it would not lend any assistance by permitting the completion of even Stage
1, even assuming if the same is found to be meeting the requirements of law, as this
would perpetuate and lend a helping hand in the process to achieve the ultimate purpose
of defeating the tax, which, as held is contrary, to public policy and public interest. It is the
cardinal principle of law and judicial discipline and part of the public policy that the court
shall not become party to any part of the process whose ultimate object is to achieve
fraud or illegality or anything contrary to public policy. It is also submitted that the claim of
the Appellant that no capital gain tax is payable if the transfer was on book value is
legally untenable. If the exemption u/s 47 is not available then the capital gain is payable
on sale of assets. It is submitted that the ultimate objective of transferring the assets to
Indus without payment of capital gain tax cannot be achieved except by using the present
modus operandi, as already demonstrated above read with para 58 of the impugned
judgment, which the Appellant has failed to dislodge.

29. Mr Thakor further submitted that if it is found that the Scheme is opposed to public
policy or defeating the tax and contrary to the public interest, the Court may not sanction
the Scheme by way of approving the same. It is submitted that the argument of revenue
neutrality is exfacie untenable and runs contrary to the very purpose of introduction of the
provisions MAT u/s 115JB, which was to remove the effect of such entries made in Books
of Accounts, on the tax liability for that year as it would give a distorted tax effect. MAT
provision is not evoked or introduced to create a fresh charge over a new source of
Income but per-se are concerned to pre-pone the tax payment which otherwise was
postponed due to accounting entries in the books of accounts. Thus revenue neutral
argument is untenable. This attempt of the Appellant to affect MAT liability by way of
differential accounting treatment further highlights the purpose of the scheme, which is to
use it as a conduit to avoid and evade tax.

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30. Mr Thakore has also submitted that the Income-tax Department has huge demand of
revenue pending against the appellant-Company. The Income-tax Department had raised
a demand of Rs. 70,11,06,474/- for assessment years 2005-06 out of which Rs.
28,65,92,370/- is pending recovery. The part of the said demand to the extent it was
confirmed by the first appellate authority being Commissioner of Income Tax (Appeals)
has been confirmed by the Income-tax Appellate Tribunal vide its order of January 2009
which has been challenged by the petitioner before this Court. For the part of the demand
deleted by CIT(A) the objector had preferred the appeal before ITAT which has been
dismissed by its common order dated 9.1.2009. Against the said common order of ITAT,
to the extent of dismissal of its Appeal, the objector has challenged the same before this
Court. Similarly a demand of Rs. 118,99,33,185/- was raised for assessment years 2006-
07 out of which Rs. 87,99,42,566/-is pending recovery. To the extent of the said demand
raised and confirmed by CIT(A), the appellant has preferred an appeal before ITAT, in
which stay has been granted against recovery on the condition of the petitioner depositing
Rs. 30 crores. Further the Department has raised a penalty demand of Rs.
210,33,19,341/- for the year 2005-06 which entirely is pending recovery. Accordingly, sum
of around Rs. 326,98,54,277/- is pending recovery from the petitioner. The aforesaid
claim shall further be increased on addition of interest recoverable on the aforesaid
amount. Mr.Thakore further submitted that for assessment years 2007-08 and 2008-09
the assessments are pending finalization and the objector apprehends demand
amounting to hundred of crores, pursuant to issues similar to previous assessment year.

31. Mr Thakore further submitted that under Section 391 of the Act, the jurisdiction of this
Court can be invoked only for sanction of the Scheme of Compromise or Arrangement.
The present Scheme is neither arrangement nor a compromise as contemplated under
Section 391. He has further submitted that under the present Scheme the Passive
Infrastructure Assets are sought to be transferred without any corresponding liabilities
and free from all encumbrances to the transferee Company without any consideration.
There is also no provision under the Scheme of any allotment of shares to the members
of the petitioner Company. Post the de-merger, the transferee Company is sought to be
amalgamated/merged to Indus Towers Ltd. However, it is further contemplated that the
transferee Company before the proposed merger shall be made a substantially owned
company of a new company to be formed by all or some of the shareholders of
transferee Company. He has further submitted that underlined transaction in the Scheme
is the transfer of the said assets without any consideration to the transferee Company.
Since no consideration is involved, the same is ultravires the Company and Companies
Act and is not a valid contract. Even otherwise, the same cannot be approved by this
Court under Section 391 of the Act. He has further submitted that even if it is assumed
that the transaction embodied in the scheme is a arrangement or a compromise, the
same is not between the Company and its shareholders or between the Company and its
creditors or between any of their class. The onus to prove that the scheme is such which
the Court has the jurisdiction to sanction under Section 391 of the said Act, is on the
petitioner and the same is not discharged by it. He has further submitted that the scheme
is nothing but a garb to legitimize a simple transaction of transfer between two separate
commercial legal entities in order to evade the legitimate taxes which would be payable, if
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the transaction would have been effected by way of simplicitor transfer. It would have
attracted Central Sales Tax or Gujarat Value Added Tax, capital gains tax, other provision
of Income Tax Act, 1961 and stamp duty if the same were by way of transfer. Thus, by
way of the said scheme these taxes are sought to be evaded, which is clearly against
public interest.

32. Mr Thakore further submitted that there exists substantial liabilities in the books of the
petitioner Company, part of which are relatable to the assets under transfer. Since
liabilities of the said assets would remain with the petitioner Company there would be a
continuous charge of interest and other liabilities with respect to the said assets in its
hands. This would reduce the taxable profit in the hands of the petitioner Company in the
succeeding years. On the other hand, the books of the transferee Company would show
exorbitant and inflated income and since the same is infrastructure Company, it may
ultimately claim deductions under various provisions of Chapter VIA of the Income Tax
Act on its inflated profits, leading to great loss of revenue to the exchequer. Moreover,
pursuant to the scheme the petitioner Company will be required to pay access charges or
some other charges to the transferee Company for using the said assets, which it is not
paying before the scheme. This would further reduce the taxable profit of the petitioner
Company. By transferring the said assets at the book value the petitioner Company is
trying to evade capital gain which otherwise would be payable at the market value. He
has further submitted that the sanction of the scheme is sought to be taken by
misrepresenting the same to be a scheme of demerger with the ulterior motive to foist the
same on the Income tax Department and claim the benefit under the Income Tax Act. For
the purpose of Income Tax Act, the present scheme is not a scheme of demerger.

Mr Thakor has relied upon the following judgments:

(i) South African Supply and Cold Storage Co., [1904] 2 Ch 268, in support of his
contention that the Scheme is not covered under Section 391 of the Companies Act.

(ii) Re NFU Development Trust Ltd., 1972 1 WLR 1548 (Ch.D) in support of his
contention in the present case there is no element of give and take in the Scheme and if
there is no taking but only giving, there cannot be arrangement and further it becomes
unreasonable on that affected class and therefore the Scheme cannot be sanctioned.

(iii) Indian Flour Mills Ltd., AIR 1934 Sind 54 in support of his contention that since the
transfer being without consideration, it is not an arrangement under Section 391 of the
Companies Act and thus is not a reconstruction capable of being sanctioned under
Section 391 of the Act.

(iv) A Lakshmanaswami Mudaliar (Dr) v. LIC of India, [1963] Supp 2 SCR in support of
his contention that the consideration contemplated under Section 122 of the Transfer of
Property Act and under Section 25 of the Contract Act must be valuable to be a valid
consideration in the eyes of law.

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(v) Mcdowell and Company Ltd. v. CTO [1985] 3 SCC 230 (para 45)to contend that tax
planning has to be within the framework of law and colourable devices cannot be part of
tax planning.

(vi) Miheer Mafatlal v Mafatlal Industries Ltd. [1997] 1 SCC 579, in support of his
contention that this Court is required to pierce the veil of apparent corporate purpose
underlying the scheme which is the transfer of assets to Indus without payment of taxes.

33. We have heard both the learned advocates at great length and have gone through the
relevant documents forming part of this appeal proceedings. We have gone through the
order of the learned Single Judge and we have also gone through the case law cited by
the respective counsel. We have also gone through the written submissions filed by both
the sides.

34. The question which requires consideration is whether the Scheme in question is
floated with the sole object of avoiding the tax liability and to avoid taxes liable to be paid
under various statutes like Income-tax, Stamp Act, etc. The Court is also required to
consider whether the Scheme in question is in violation of public policy and whether the
Income-tax Department has locus standi to raise the objections in connections with
sanctioning the scheme in question. This Court is also required to consider whether the
learned Company Judge has committed an error in refusing to accord sanction to the
Scheme in question. This Court is also required to consider whether the learned
Company Judge has committed an error in refusing to accord sanction to the Scheme in
question.

Locus Standi

35. So far as the preliminary contention raised by the learned counsel for the appellant
about the locus standi is concerned, except the Income-tax Department, no one else has
raised any objection before the learned Company Judge in response to the public
advertisement. It is required to be noted that the proceedings between the appellant
transferor company and the Income-tax Department are going on before the Tribunal
regarding the liability of payment of tax by the transferor company in past transactions.
Some interim orders are also passed in the said proceedings.

It is the case of the Income Tax Department that they being the Creditors of the appellant,
they have locus to raise objections. It is submitted by Mr Joshi that the powers to raise
objections is only vested on a shareholder and/or creditor provided a shareholder and/or
creditor are able to show that any arrangement and/or compromise is offered to them by
which their rights are being affected and in the present Scheme no compromise and/or
arrangement is being offered to the Income Tax Department and therefore the Income
Tax Department has no locus.

It is also argued that as per Sections 391-394 of the Companies Act, 1956 it is only the
Central Government, through the Regional Director, which has been vested with the
powers to study the Scheme and raise such objections as it thinks fit. Therefore, beside
the shareholders and creditors of the company to whom an arrangement and/or

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compromise is offered by the company, only the Regional Director has locus standi in
respect of the proceedings under sections 391 to 394. Further, the Appellant has clearly
outlined its stand at the beginning of the present proceedings, to the effect that the
sanctioning of the Scheme would not ipso facto grant any immunity to the Appellant qua
any liability that may be imposed on it under the relevant provisions of the Income Tax
Act, in accordance with law. Similar statement has also been made before the Honble
Delhi High Court [Vodafone Essar Limited & ors. v. Vodafone Essar Infrastructure Limited,
reported in [2011] 2 Comp LJ 317.

36. In the case of SREI Infrastructure Finance Limited, [2008] 4 Comp LJ 196 (Cal) the
Scheme of Arrangement was placed for sanction before the High Court by the transferor
and transferee company wherein it is observed by the Calcutta High Court that the
consideration per se cannot invalidate the scheme as avoidance by the company of its
tax liabilities will attract the provisions of the Income Tax Act and the companies cannot
escape from their respective liabilities.

In our view, if any amount is required to be payable to the Income-tax Department by the
transferor company, the Income-tax Department can be said to be a creditor so far as its
claim against the transferor company is concerned. Considering the same, it cannot be
said that the Income-tax Department has no locus to put forward its objections in this
behalf. In other words, even if there are no objections, which are received against the
Scheme pursuant to the public advertisement, yet the Court is required to examine the
Scheme while giving its approval. In our view, the learned Company Judge has rightly
allowed the Income-tax Department to have its say by raising objections in connection
with the Scheme in question. Even a similar objection had been raised by the Income-tax
Department before Delhi High Court and the Delhi High Court has considered the
objections raised by the Income-tax Department on its own merits. Considering the same,
in our view, in cannot be said that the Income-tax Department has no right to lodge its
objections as the Income-tax Department raised a substantial demand towards tax from
the transferor company. The aforesaid point raised by Mr Joshi is therefore negative by
holding that the Income-tax Department has the right to place its objections against
sanctioning of the Scheme in question. The Income Tax Department will be free to
examine the aspect of any tax payable as a result of the Scheme.

Is object of the Scheme Avoidance of Tax Liability?

37. The next crucial question, which is required to be considered is whether the Scheme
in question is floated with the sole object of avoiding the tax liability such as Income-tax,
Stamp Duty, VAT, etc. and that the sole object is only to avoid capital gains tax, which
otherwise, was required to be payable by the appellant-company if there is simple
transfer of assets by the transferor company to Indus Towers Limited. It is also required
to be considered as to whether in case if it is found that the sole object of the Scheme is
not to evade tax liability, then also, whether the Scheme in question is a Scheme for
reconstruction and the Scheme of Arrangement or that the Scheme being an agreement
is void as it is without consideration and that whether it is ultra vires the provisions of the
Companies Act, 1956.

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38. It is required to be noted that the appellant-company has moved this Court under
Sections 391 to 394 of the Companies Act, 1956 seeking sanction of the Scheme of
Arrangement between M/s. Vodafone Essar Limited; M/s. Vodafone Essar Mobile
Services Limited; M/s. Vodafone Essar East Limited; M/s. Vodafone Essar Gujarat
Limited; M/s. Vodafone Essar South Limited; M/s. Vodafone Essar Digilink Limited; M/s.
Vodafone Essar Cellular Limited and M/s. Vodafone Essar Infrastructure Limited
(hereinafter referred to as the transferee company). In all there are seven transferor
companies and the transferee company being M/s Vodafone Essar Infrastructure Limited
and its respective shareholders. As per Clause 5.4 of the Scheme, in the even this
Scheme is not sanctioned by all the Company Courts or other competent authorities
referred to in Clause 5.3.1 before which this Scheme is presented for approval, the
Scheme shall stand implemented without the demerged of the Passive Infrastructure
Assets of the relevant Transfer Company/ies. The provisions in the Scheme relate to
such transferor companies in respect of which the Scheme has not been sanctioned shall
stand invalidated and such invalidity shall attach only to such part dealing with such
Transferor Companies. The remaining portion of the Scheme shall continue in full force
and effect. In such an event, the relevant transferor company in respect of which the
Scheme has not been sanctioned shall bear and pay its costs, charges and expenses for
and/or in connection with the Scheme.

39. The objection is raised only by the Income Tax Department. On behalf of the
Regional Director a stand is taken that the Regional Director has no objection to the
Scheme except by pointing out that the Assistant Commissioner of Income Tax,
Ahmedabad has raised objections in connection with the tax liability of the appellant
Company. On behalf of the Regional Director, a stand was taken before various High
Courts before which the company petitions were filed for giving sanction to the Scheme
by various other transferor companies to the effect that it has no objection if the Scheme
is sanctioned because the Scheme does not appear to be prejudicial to the interests of
the shareholders and the public. It is required to be noted that except before this Court
and the Delhi High Court, the Income Tax Department has not raised similar such type of
objections before any other Court. The Regional Director had not raised any objections
qua sanctioning the Scheme on the ground that there is no consideration involved in the
transfer or that it is not a Scheme of Arrangement and that Section 391 and 394 of the
Companies Act are not attracted, etc. Such objections were not taken by the Income Tax
Department before various High Courts for sanctioning the Scheme. It is no doubt true
that while giving approval to the Scheme the Court is required to consider as to whether
the Scheme is question is against the public policy or is floated with an object to defeat
provisions of law. In a given case, even though there may not be any objection, the Court
may, on its own, try to find out the same. It is not in dispute that the Transferee Company
is fully owned subsidiary of the petitioner-company, the shareholders are also common. It
cannot be disputed that the Scheme does not contemplate either a change in the
Transferor Companies or the Transferee Company. The petitioner company is a mobile
telecommunication service provider and holds a Unified Access Services License for the
Gujarat Service Area, with effect from 20.10.2008 issued by the Department of
Telecommunications. As per the conditions of the licence, the appellant transferor
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company may transfer or assign with the prior written agreement of the licensor subject to
various conditions provided therein. It also provides that whenever amalgamation or
reconstruction, merger or demerger takes place, the same has to be approved by the
High Court or Tribunal as per law in force in accordance with the provisions Sections 391
and 394 of the Companies Act.

40. It is pointed out to the Court that the appellant is not transferring the licence to the
transferee company pursuant to the Scheme and the appellant transferor company shall
continue to hold the license even after completion of the demerger. It is pointed out to the
Court that the transferee company is registered as an infrastructure provider category by
the Department of Telecommunication which permits the company to establish and
maintain Passive Infrastructure Assets to lease, rent or sell such assets to licensees of
Telecom Services licensed under Section 4 of the Indian Telegraph Act, 1885. As per the
Scheme of Arrangement, the Scheme of Arrangement is arrived at between M/s.
Vodafone Essar Limited; M/s. Vodafone Essar Mobile Services Limited; M/s. Vodafone
Essar East Limited; M/s. Vodafone Essar Gujarat Limited; M/s. Vodafone Essar South
Limited; M/s. Vodafone Essar Digilink Limited; M/s. Vodafone Essar Cellular Limited and
M/s. Vodafone Essar Infrastructure Limited. Part-I of the Scheme provides definitions of
share capital and the purpose of the Scheme. Part II deals with demerger of the Passive
Infrastructure Assets of the Transferor Companies into the Transferee Company. Part-III
of the Scheme deals with Accounting Treatment in the Books of the Transferor
Companies. Part-IV provides General Clauses and Terms and Conditions. Part-V deals
with other terms and conditions. We have also gone through various clauses of the
Scheme of Arrangement. The Passive Infrastructure Assets are defined as all present
and future wireless and broadcast towers that host or assist in the operation of the plant
and equipment used for transmitting telecommunication signals, being towers owned and
operated by the Transferor Companies situated in India and include any and all towers
under construction; all rights, title, deposits and interests in, or over, the land or property
on which such towers have been constructed or erected or installed; and all plants and
equipments customarily treated by telecommunications operators worldwide as forming
part of the Passive Infrastructure Assets.

41. As pointed out earlier, the appellant and all other transferee company is wholly owned
subsidiary of the transferor company, that is, Vodafone Essar Gujarat Limited. As per
Clause 5.4 of the Scheme, in case the Scheme is not sanctioned by the concerned High
Court wherein an application is moved for sanctioning by such transferor company, the
Scheme shall stand implemented with demerger of the passive infrastructure of the
relevant transferor company in respect of which the Scheme has been sanctioned. At this
stage, it is required to be mentioned that out of seven transferor companies, sanction has
been given to various transferor companies except the present transferor company.

42. The main contention of the Income Tax Department is that the Scheme is floated with
the sole object to avoid tax liability. Except the Income Tax Department no objections
were raised by anyone against sanctioning the Scheme. In this connection, it is submitted
by Mr Mihir Thakor, learned Counsel for the Department that the transaction in question
is nothing, but a transaction of assets of passive infrastructure of the transferor company
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into Indus, but the said transaction is given colour by an artificial device and with a view to
save income-tax liability two stages are created by the appellant group i.e. Vodafone i.e.
introducing a pre-ordained devise/conduit in the form of a new Company (the present
Transferee Company) and transferring by way of Gift to this new Company and thereafter
amalgamating this new Company into Indus. Both the stages are done under the guise of
scheme u/s 391 to legitimise the same by obtaining the seal of the Honble Court and
evade payment of Income Tax, stamp duty and VAT and other taxes. In this connection, it
is required to be noted that as per the Scheme the Passive Infrastructure business and
the telecommunication service business was sought to be segregated in order to achieve
a commercial purpose and object inter alia being segregating the PI business and the
telecommunications service business to enable further growth and maximize value in
each of the business; improved quality of services to customers by establishing high
service standards and delivering services in an environment friendly manner; increase in
the speed of role out and efficiency through sharing of infrastructure, converting the PI
assets from non-revenue generating assets; improved network quality and greater
coverage etc. It is required to be noted that various telecommunication companies in this
country have adopted the business policy of segregation of telecommunication services
and telecommunication infrastructure business as per the global trends prevailing as on
today. During the course of hearing it has been pointed out that the working group under
the Planning Commission has recommended sharing of infrastructure. Keeping the said
object in mind if the Scheme has been framed and is approved by the shareholders in
their wisdom, in our view, it cannot be said that the Scheme itself is floated with the sole
criteria of tax avoidance simply because it may have effect and result into avoidance tax.
If the Scheme is evolved by way of an arrangement and with an object of converting the
PI assets from non-revenue generating assets; improved network quality and greater
coverage etc. Moreover the segregation of telecommunications services and
telecommunications infrastructure business reflects the global trend and has been
adopted by telecommunication companies in India without objection. In fact, the Working
Group under the Planning Commission has recommended sharing of infrastructure, and
the present Scheme reserves flexibility to it for easing such process when required. It
may be relevant to note that even the Central Government has not raised any objection to
the Scheme and even the Department has not contended that the aforesaid objectives
are imaginary. Therefore it cannot be said that the Scheme has no purpose or object and
that it is a mere device/subterfuge with the sole intention to evade taxes, particularly
when even the incidence of tax purportedly sought to be evaded is not established on
facts. Further, similar scheme of arrangement proposed by other telecommunication
companies to achieve the aforesaid objectives have been sanctioned by different High
Courts. In our considered view, this Court cannot refuse the sanction on the aforesaid
ground by coming to the conclusion that the only object of the Scheme is to avoid taxes.

43. It is, no doubt, true as argued by Mr Thakor that in case the Scheme is sanctioned, it
may result into tax avoidance on the part of the appellant, but it is required to be noted
that even if the ultimate effect of the Scheme may result into some tax benefit or even if it
is framed with an object of saving tax or it may result into tax avoidance, it cannot be said
that the only object of the Scheme is tax avoidance. Considering the various clauses of

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the Scheme it is not possible for us to come to a conclusion that the Scheme is floated
with the sole object of tax avoidance. In its commercial wisdom if the Company has
decided to have a particular arrangement by which there may be even benefit of saving
income-tax or other taxes, that itself cannot be a ground for coming to the conclusion that
the sole object of framing the Scheme is to defraud the Income Tax Department or other
taxing authorities. It is also required to be noted that identical Schemes have been
approved by various High Courts as pointed out earlier. As per the Scheme, it proposed
to demerge the passive infrastructure assets of seven transferor companies and transfer
them to the transferee company. The transferor companies and the transferee company
are wholly owned and subsidiary of transferee company viz. Vodafone Essar Mobile
Services Limited. One of the objects for framing of the Scheme is segregation of passive
infrastructure business and telecommunication services business is to enable further
growth and maximize value in each of the businesses.

44. It is required to be noted that in the case of Nirmay Properties P. Ltd. reported in
[2009] 150 Comp Cases 538 (Gujarat), this Court was dealing with the Scheme for
amalgamation of five subsidiary companies with the holding company. In the said case
also there were no secured creditors. No objection was raised to the petitions even after
the publication. The Official Liquidator in his report has stated that the auditors appointed
for the purpose of scrutiny and investigation of the books of account and affairs of the
company had in their report pointed out violation of the provisions of the Companies Act,
1956 and Accounting Standards and evasion of stamp duty and income-tax. The learned
Company Judge held that the objections raised by the auditors would not affect the
scheme and that sanction to the scheme would not absolve the companies from any
liability that may arise in future on violation of any statutory provisions or that the Scheme
would not affect proceedings pending either before the civil or criminal courts and the
liability that may be inflicted upon the petitioners or their Directors, would not be affected
simply by virtue of the Scheme of Amalgamation.

In the case of Vodafone International Holdings B.V. v. Union of India and Another, [2012]
1 Comp LJ 225 (SC), the Honourable Supreme Court has considered the provisions of
Section 195 of the Income Tax Act. The aforesaid matter concerned a tax dispute
involving the Vodafone group with the Indian tax authorities in relation to the acquisition
by Vodafone International Holdings BV (VIH), a company resident for tax purposes in the
Netherlands, of the entire share capital of CGP Investments (Holdings) Ltd. (CGP), a
company resident for tax purposes in the Cayman Islands (CI, for short), vide transaction
dated 11.02.2007, whose stated aim, according to the Revenue, was acquisition of 67%
controlling interest in HEL being a company resident for tax purposes in India which is
disputed by the appellant saying that VIH agreed to acquire companies which in turn
controlled a 67% interest, but not controlling interest, in Hutchison Essar Limited (HEL).
According to the appellant, CGP held indirectly through other companies, 52%
shareholding interest in HEL as well as options to acquire a further 15% shareholding
interest in HEL, subject to relaxation of FDI norms. The Revenue sought to tax the capital
gains arising from the sale of the share capital of CGP on the basis that CGP, whilst not a
tax resident in India, holds the underlying Indian assets. The High Court upheld the
jurisdiction of the Indian tax authority to impose capital gains tax on VIH as a
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representative assessee after holding that the transaction between the parties attracted
capital gains in India. Applying the natural character of the transaction test, the High
Court came to the conclusion that the transfer of CGP share was not adequate in itself to
achieve the object of consummating the transaction between HTIL (a group holding
overseas company of which HEL was a subsidiary) and VIH. That, intrinsic to the
transaction was a transfer of other rights and entitlements which rights and entitlements
constituted in themselves capital assets within the meaning of Section 2(14) of the
Income Tax Act, 1961. According to the High Court, VIH acquired the CGP share with
other rights and entitlements whereas, according to the appellant, whatever VIH obtained
was through the CGP share. The decision of the High Court was called in question in
SLP before the Honourable Supreme Court. The Honourable Supreme Court held that
the capital gains arising from the sale of the share capital of CGP on the basis that CGP,
whilst not a tax resident in India, holds the underlying Indian assets. The Revenue cannot
start with the question as to whether the impugned transaction is a tax deferment/saving
device but that it should apply the look at test to ascertain its true legal nature. The
corporate business purpose of a transaction is evidence of the fact that the impugned
transaction is not undertaken as a colourable or artificial device. The stronger the
evidence of a device, the stronger the corporate business purpose must exist to
overcome the evidence of a device. In para 45 it has been held that the tax planning may
be legitimate provided it is within the framework of law. In the latter part of para 45, it held
that colourable device cannot be a part of tax planning and it is wrong to encourage the
belief that it is honourable to avoid payment of tax by resorting to dubious methods. It is
the obligation of every citizen to pay the taxes without resorting to subterfuges. Thus, it
cannot be said that all tax planning is illegal/illegitimate/impermissible.

The following observations of the Honourable Supreme Court in the aforesaid case are
relevant for our purpose:

64. Shareholders can enter into any agreement in the best interest of the company, but
the only thing is that the provisions in Association. The essential purpose of the SHA is to
make provisions for proper and effective internal management of the company. It can
visualize the best interest of the company on diverse issues and can also find different
ways not only for the best interest of the shareholders, but also for the company as a
whole. In S.P. Jain v. Kalinga Cables Ltd. : [1965] 2 SCR 720, this Court held that
agreements between non-members and members of the Company will not bind the
company, but there is nothing unlawful in entering into agreement for transferring of
shares. of course, the manner in which such agreements are to be enforced in the case
of breach is given in the general law between the company and the shareholders. A
breach of SHA which does not breach the Articles of Association is a valid corporate
action but, as we have already indicated, the parties aggrieved can get remedies under
the general law of the land for any breach of that agreement.

In the case of Union of India & Another v. Azadi Bachao Andolan And Another [2004] 10
SCC 1 the Supreme Court was considering the question as to whether offshore
companies incorporated and operating from Mauritius and liable to tax in that country
were entitled to benefits of Indo-Mauritius Double Taxation Avoidance Convention, 1983
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or not. The Honourable Supreme Court has held as under:

114. The decision of the Chancery Division in Re F.G. Films Ltd. 53 (1) WLR 483 was
pressed into service as an example of the mask of corporate entity being lifted and
account be taken of what lies behind in order to prevent fraud. This decision only
emphasises the doctrine of piercing the veil of incorporation. There is no doubt that,
where necessary, the courts are empowered to lift the veil of incorporation while applying
the domestic law. In the situation where the terms of the DTAC have been made
applicable by reason of section 90 of the Income Tax Act, 1961, even if they derogate
from the provisions of the Income Tax Act, it is not possible to say that this principle of
lifting the veil of incorporation should be applied by the court. As we have already
emphasised, the whole purpose of the DTAC is to ensure that the benefits thereunder are
available even if they are inconsistent with the provisions of the Indian Income Tax Act. In
our view, therefore, the principle of piercing the veil of incorporation can hardly apply to a
situation as the one before us.

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

166. We are unable to agree with the submission that an act which is otherwise valid in
law can be treated as non-est merely on the basis of some underlying motive supposedly
resulting in some economic detriment or prejudice to the national interests, as perceived
by the respondents.

167. In the result, we are of the view that Delhi High Court erred on all counts in quashing
the impugned circular. The judgment under appeal is set aside and it is held and declared
that the Circular No.789 dated 13-4-2000 is valid and efficacious.

In the case of United Bank of India Limited v. United India Credit and Development
Company Limited, 1977 Company Cases 689 (Cal.), the Calcutta High Court has
observed that fairness or unfairness of the scheme is not for the courts discretion in a
technical sense but is a matter to be decided on evidence Test being whether it is for
the interest of future commercial interest of the company, court cannot substitute its own
views for the directors and experts. Unanimous opinion of directors is a relevant factor.
He rightly submitted that predominant combined holdings of shares by directors are
irrelevant consideration for the court. In paragraph 54 of the said decision, it has been
held as under:

54. Regarding the question of the scheme being unfair on merits, hypothetical,
conditional, etc., I do not find any substance in the same save and except such
contentions as have been raised relying on various decisions which are entirely on
different background and different facts having no relevancy whatsoever in the facts and
circumstances of the case. All of the said decisions relate to taking over or amalgamation
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of a company with an existing company, whereas, here, a new company has been
incorporated for the purpose of the said amalgamation. As such, the principles relied on
by the opposing group of shareholders cannot have any application whatsoever in the
facts of the case, as, admittedly, the new company has not commenced its business but
has only been incorporated for the purpose of taking over the petitioner-bank. Further, the
court cannot speculate at this stage as to the possibility, potentiality of the amalgamated-
company in future and its working. It is true that the court is not a mere rubber-stamp but,
in sound exercise of its discretionary power to sanction a scheme, must consider the
scheme as a whole having regard to the general conditions, background, and object of
the scheme and the present day conditions, and atmosphere in the State where the
companies are going to function. Court cannot take a pedantic and strict view of each and
every clause in the scheme and speculate as to its future, feasibility and possibility at this
stage. It is for the collective wisdom of the shareholders who are primarily businessmen
and investors guided by the directors of a company to determine the course of business
they choose. The principles are so well-known and even repeated by all the counsels
appearing for both the parties that I need not discuss the same threadbare and it will be
sufficient for me to hold that I accept the arguments and contentions of Mr. S. C. Sen, Mr.
R. C. Nag and Mr. S. B. Mukherjee on this question which I have set out before. It is
premature for the court to judge now whether the business envisaged by the scheme of
amalgamation to be carried on in future would become profitable and a success. The
court is only to see whether it is feasible having potentiality in the facts and
circumstances of this case. In my view, prima facie, I am satisfied that in the present set
up and conditions, particularly as it appears from the Report of the Banking Commission,
the relevant articles of which I have quoted before, that there is nothing wrong or
objectionable in the scheme of amalgamation being put through. In fact, the State of West
Bengal appearing before me through Mr. D. P. Gupta is supporting the said scheme so
also the Life Insurance Corporation of India and other statutory bodies. I have no
hesitation in holding that the business of the amalgamated company is highly potential
and conducive to the economy and development of the State of West Bengal in the
present set up, when funds are urgently needed for the growth and development of
existing and new enterprises. Further, the shareholders of the petitioner-bank never
complained of the management of their company by its directors so far and suddenly they
cannot have any reasonable and bona fide grievances against the said management and
the scheme. It is true that names of eminent, well-known industrialists and respectable
persons of integrity and honesty have been referred as prospective directors of the
amalgamated company and they have not yet signified their consent of acceptance of
such office but that in my view is not required at this stage, being premature. But the
suggestion and intention as shown by the petitioners to appoint respectable, reliable and
honest persons of high reputation as directors is enough for me at this stage to take into
consideration the bona fide intention and object of the petitioner-companies. (emphasis
supplied)

45. It is also required to be noted that a similar Scheme of arrangement involving

demerger of passive infrastructure assets of the Company has been sanctioned by the
Delhi High Court in Re: Bharti Airtel Limited [CP No. 233/2007, decided on 26th

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November, 2007] wherein a similar Scheme of Arrangement involving demerger of
Passive Infrastructure Assets into a group company, where no consideration was to be
paid nor were any shares to be issued by the transferee company to the transferor
company, was sanctioned. In the aforesaid case no consideration was to be paid nor
were any shares to be issued by the transferor company to the transferee company.

46. It is vehemently argued by Mr Thakor that this can never be said to be an

arrangement since the transferor companies proposed to transfer only assets of the
transferor company without transferring the liabilities and the liabilities would remain with
the transferor companies after demerger. It is also vehemently argued that the expression
arrangement with members used in S. 391, did not contemplate a gift from one party to
the Scheme to the other party for the reason that the aforesaid expression contemplated
an arrangement in the nature of a contract with a consideration involved, which is missing
in this case. The second submission was that the Scheme is against public interest. It is
no doubt true that as provided in the Scheme certain assets are to be transferred without
consideration and without transfer of liability in respect thereof. At this stage, it is required
to be noted that the proposition that so far as expression of arrangement with members is
concerned, it is not defined in the Companies Act. However, in the instant case it cannot
be said that the majority of the shareholders wanted confiscate the rights of the objecting
minority shareholders. In the instant case no shareholder has raised any objection
regarding such an arrangement. There is no question, therefore, of forcing the Scheme
on a class of members against their wish.

47. Mr Thakor has placed strong reliance upon the decision of this Court in the case of
Wood Polymer (Supra). In the said case, Company Petitions Nos. 10 and 12 of 1975 are
filed by Wood Polymer Limited and Bengal Hotels Private Limited, respectively, under
sections 391(2) of the Companies Act, praying for according sanction to a scheme of
amalgamation of the afore-mentioned two companies. Wood Polymer Limited is public
limited company and it is the transferee-company. Bengal Hotels Private Limited is a
private limited company and is the transferor-company. The scheme submitted to the
court for sanction involves amalgamation of the transferor-company with the transferee-
company and amongst others it envisages dissolution of the transferor-company without
winding up. The learned Company Judge of this Court has while rejecting the aforesaid
company petitions has observed that merely it is shown to the Court that the requisite
formalities in relation to proposed scheme of amalgamation having been carried out, the
Court is not bound to sanction the Scheme. The learned Company Court has observed
that the transferor-company appears to have been merely created to facilitate transfer of
a building called Avenue House once belonging to DOC Pvt. Ltd. to the transferee-
company so as not to be liable for capital gains tax, which, if a subterfuge of the
transferor-company was not resorted to, would have become payable in the amount of
Rs. 10,88,776. If the court sanctions the scheme, the property Avenue House once
belonging to DOC Pvt. Ltd. would stand transferred to the transferee-company without
any liability to pay capital gains tax. Considering the nature of the transaction, the Court
found that the sole object of the Scheme is to avoid capital gains tax and there was no
other purpose worth the name.

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48. Reference is also made to the case of Navjivan Mills Co. Ltd., Kalol v. Kohinoor Mills
Co. Ltd., Bombay, [1972] 42 Comp. Cas. 265 (Gujarat High Court) wherein similar view is
taken by the learned Company Judge that Scheme of Compromise must satisfy that the
provisions of the statute are complied with. In the aforesaid case, the learned Judge of
this Court has sanctioned the Scheme with modifications.

49. Both the learned counsel have relied upon the decision of the Supreme Court in the
case of Miheer H Mafatlal v. Mafatlal Industries Limited [1996] 87 Comp Cas 792 (SC). In
the said case it has been held by the Honourable Supreme Court that the sanctioning
court has to see to it that all the requisite statutory procedure for supporting such a
scheme has been complied with and that the requisite meetings as contemplated by
Section 391(1)(a) have been held, whether the Scheme of compromise or Arrangement is
not found to be violative of any law and not contrary to the public policy. The Supreme
Court has laid down the following broad contours of such jurisdiction:

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

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

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

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

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

6. That the proposed scheme of compromise and arrangement is not found to be

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

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

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 8. That the scheme as a whole is also found to be just, fair and reasonable from the
point of view of prudent men of business taking a commercial decision beneficial to the
class represented by them for whom the scheme is meant.

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

50. So far as the submission of Mr Thakor that the Scheme of arrangement is not an
arrangement and therefore the petition under Sections 391 to 394 of the Companies Act
is not maintainable is concerned, the word arrangement cannot be interpreted in a
narrow manner and the definition. As held by the Bombay High Court in the case of
Larsen & Toubro Ltd. [2004] 121 CC 523 the word arrangement, though not defined
specifically, has a wide range and ambit and is a term of wider connotation (at pages 562-
564). There is nothing wrong if the Company wants to reconstruct its business in an
alternative form by dividing telecommunication business and telecommunication
infrastructure business in the manner business being carried on by the Appellant, in a
manner that the telecommunications infrastructure business would be carried on by the
transferee company. The said business will be continued and carried on by substantially
the same persons who are presently carrying on the consolidated business since both the
transferor and the transferee companies are wholly owned subsidiaries of Vodafone
Essar Limited which will continue to carry on the businesses.

51. On perusal of section 394(1) and 394(1)(a) it is evident that both reconstruction
and amalgamation are statutorily recognized as an arrangement and/or
compromise under section 391. It necessarily implies that once a scheme is a
reconstruction, which in the facts of the present case it is, the same is bound to be
recognized as an arrangement and/or compromise under section 391. The Income
Tax Department, by raising such a contention, is unnecessarily putting restrictions
on the language of section 394(1) and section 394(1)(a) which the legislature has
not deemed it fit to impose.

In Larsen & Toubro Ltd, 2004 121 Company Cases 523 (Bombay) wherein the
learned Company Judge of the Bombay High Court has held that the word
arrangement though not defined specifically has a wide range and ambit and is a
term of wider connotation. It is held that the expression arrangement includes a
reorganization of the share capital of the company by the consolidation of shares
of different classes.

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In Re T & N Ltd., [2007] 1 All ER 851 (Chancery Division) it has been held that it is not a
necessary element of an arrangement for the purposes of section 425 that it should alter
the rights existing between the company and the creditors or members with whom it is
made provided that the context and the content of the scheme are such as properly to
constitute an arrangement. It is further held that it is neither necessary nor desirable to
attempt a definition of arrangement. The legislature has not done so. To insist on an
alteration of a right or a termination of rights as in the case of schemes to effect takeovers
or mergers, is to impose a restriction which is neither warranted neither by the statutory
language nor justified by the courts approach over the years to give the term its widest
meaning.

In the case of Re NFU Development Trust Limited 1 WLR 1548 (CD) a Scheme of
Arrangement was proposed for reducing the administrative expenses. The Chancery
Division Court has after considering the provisions of the Companies Act and after
considering the Scheme. It has been observed by the Court that the word compromise
implies some element of accommodation on each side and it is not an apt to describe
total surrender. The objection of the Income Tax Department that the scheme confiscates
the rights of the Income Tax Department and therefore is not an arrangement, relying on
NFU Development Trust Ltd., overlooks the fact that there is neither any arrangement
with the Income Tax Department nor confiscation of its rights. In the case referred to,
there was complete extinguishment of the rights of the members, which was not accepted
as being an arrangement. In the present case the rights of the Income Tax Department of
assessing, levying and collecting tax from the Appellant are not confiscated or
expropriated so as to extinguish such rights. A contention that the recovery of the
outstanding tax may be affected by transfer of PI assets, apart from being incorrect as it
would be clear from the earlier paragraph cannot be equated with
expropriation/confiscation/extinguishment of rights of the Income Tax Department.

52. So far as argument of the Revenue that the transfer is void for want of consideration
is concerned, it is required to be noted that the Income Tax Department is not a party to
the transaction. We agree with the view taken by the Delhi High Court that even if the
consideration of one rupee can be said to be a valid consideration. In our view, while
examining the Scheme each and every objection of a third party cannot be considered by
carrying out microscopic examination. It is also required to be noted that it is not
necessary that consideration is always a monetary consideration. In such type of cases
wherein the reconstruction involves give and take and mutual/reciprocal promises and
obligations, which can be said to be consideration for each other and it cannot be said
that there is absolutely no consideration so far as Scheme of Arrangement is concerned.
The Court is required to see whether the Scheme in question is for the benefit of
shareholders and whether it is framed with the sole object of avoidance of the Scheme is
avoidance of tax or it is against the public policy. Even otherwise, when various High
Courts have sanctioned the identical Schemes, even on the principles of parity and
judicial comity, in our view, consent is required to be given to the Scheme in question. It
is also required to be noted that identical points were raised before the Delhi High Court
and the learned Judge of the Delhi High Court has already sanctioned the Scheme and it

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is not in dispute that till date that order of the Delhi High Court holds the field. It is pointed
out by Mr Joshi that the Income Tax Department has not even taken care to challenge the
said order within the period of limitation and according to him the Scheme has already
been implemented pursuant to the order of the Delhi High Court. Nonetheless, during the
course of hearing, it was pointed out by Mr Thakor that against the order of the Delhi High
Court appeal has been filed with a delay condonation application. He, however, admits
that the order of the learned Single Judge of the Delhi High Court is still holding the field
and there is no stay. He has also conceded that so far as orders of other High Courts are
concerned, not only such objections, which are raised herein, were not raised therein, but
even no further appeals have been filed against the orders of different High Courts.
Therefore, on the basis of judicial comity and principles of parity, this Court would not like
to take a contrary view of the matter by rejecting the Scheme of the arrangement.

53. Even otherwise, the word Consideration is defined under section 2(d) of the Contract
Act, as under:

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

In Chidambara Iyer & ors v. P. S. Renga Iyer & ors., reported in AIR 1966 SC 193 at page
197 the Supreme Court was considering a case wherein on August 22, 1934, a Trust was
created by the family in respect of a sum of Rs. 36,988-9-8 for charitable purposes; on
September 3, 1939, the usufructuary mortgage right of the family in Ex.A-1, was given to
the charity in discharge of the obligation undertaken under Ex.B-1; and the dedication of
the said property was affirmed in the regular partition deed. In short, under the said
documents the family transferred to the charity their interest in the usufructuary mortgage,
Ex. A-1, in discharge of their obligation to pay the trust a sum of Rs. 36,988-9-8. The High
Court, on a consideration of the said documents, arrived at exactly the same finding. The
learned Judges of the High Court clearly held that the mortgage interest in Ex. A-1 was
transferred in discharge of the liability undertaken under Ex. B-1. When the matter carried
in appeal, while dismissing the appeal the Honourable Supreme Court held as under:-

So far as is relevant to the present enquiry, the content of the two definitions is
practically the same, though the expression valuable is implied under S. 2(d) of the
Contract Act, for consideration shall be something which not only parties regard but the
law can regard as having some value. From the definitions it is apparent that
consideration may be negative or positive. In the present case the mortgage interest was
transferred in trust to the charity. What was the consideration that passed from the charity
to the family? The family was under an obligation to pay to the charity the amount set
apart to it under Ex. B-1. The mortgage interest was transferred in discharge of that
obligation. That is to say, the charity agreed as a consideration for the transfer of the
mortgage interest not to enforce its right to recover that amount from the family. The
charity gave up that right in consideration of the mortgage interest acquired by it. We
therefore, hold that the family transferred the mortgage interest in trust to the charity for

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valuable consideration within the meaning of S. 9-A (10) (ii) (b) of the Act. It follows that
the mortgage, Ex. A-1, was rightly held by the High Court not liable to be scaled down
under the provisions of the Act.

54. Even the most trifle benefit can be consideration so as to avoid the impact of section
25 in view of the decision in His Holiness Kesavananda Bharati v. State of Kerala,
reported in [1973] 4 SCC 225, at para 1971). There is no requirement of monetary
consideration and even a promise to induce the company to carry on its business has
been treated as sufficient consideration as held in the case of Ledingham & ors. v.
Bermejo Estancia Co. Ltd., reported in 1947 (1) All ER 749). Even a letter for bringing
about peace for the family was a good consideration and the letter brought about an
enforceable agreement between the parties as held in The Commissioner of Wealth Tax,
Mysore v. Vijayaba, Dowger Maharani Saheb, Bhavnagar & ors., reported in AIR 1979
SCC 982. In the present case the reconstruction involves give and take and
mutual/reciprocal promises and obligations which are consideration for each other and it
cannot be said that the scheme of arrangement is without consideration.

55. The objection raised by the Income Tax Department that the Appellant should not be
permitted to argue that for the purpose of Income Tax Act, the transfer is by way of a gift
and that for the purpose of the Companies Act, the same is with consideration is
completely misplaced. There is no bar which restrains a transaction falling differently or
being dealt with separately under different Acts. Reliance is placed on the judgment of
Mysore Minerals Ltd. v. Commissioners of Income Tax, Karnataka, reported in [1999] 7
SCC 106 (para 14), for the aforesaid proposition.

56. In view of the approval accorded by the equity shareholders, secured and unsecured
Creditors of the petitioner and the Regional Director, Western Region to the proposed
Scheme of Arrangement, as well as the submissions of the Income Tax Department,
there appear to be no further impediments to the grant of sanction to the Scheme of
Arrangement. Consequently, sanction is hereby granted to the Scheme of Arrangement
under Sections 391 and 394 of the Companies Act, 1956 while protecting the right of the
Income Tax Department to recover the dues in accordance with law irrespective of the
sanction of the Scheme. However, while sanctioning the Scheme it is observed that said
sanction shall not defeat the right of the Income Tax Department to take appropriate
recourse for recovering the existing or previous liability of the transferor company and the
transferor company is directed not to raise any issue regarding maintainability of such
proceedings in respect of assets sought to be transferred under the proposed Scheme
and the same shall bind to transferor and transferee company. The pending proceedings
against the transferor company shall not be affected in view of the sanction given to the
Scheme by this Court. In short, the right of the Income Tax Department is kept intact to
take out appropriate proceedings regarding recovery of any tax from the transferor or
transferee company as the case may be and pending cases before the Tribunal shall not
be affected in view of the sanction of the Scheme.

57. In the result, the appeal is allowed by substituting the order of the learned Company
Judge and Scheme is sanctioned subject to what is stated hereinabove.

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FURTHER ORDER

58. At this stage, Mr Nitin K Mehta, learned counsel for the Income Tax Department
requested that the operation and implementation of this judgment be stayed as the
respondent would like to approach the Honourable Apex Court against this judgment. The
request is vehemently opposed by the learned counsel for the appellant-company and it
is submitted that so far as the Schemes approved by the other High Courts are
concerned, as on today, no stay is granted in any of those matters. It is also pointed out
that insofar as the matter before the Delhi High Court is concerned, though the appeal is
filed, even delay in filing the appeal is not condoned as yet. It is, therefore, submitted that
this is not a case in which the Scheme is required to be stayed. At this juncture, the
learned counsel for the appellant-company, invited the attention of the Court to Section
395(3) of the Companies Act, 1956 which provides that an order of the Company Court
shall not come into effect until certified copy of the order of the Company Court is
produced before the Registrar of Companies. The learned counsel for the appellant-
company assured this Court that they shall not produce the certified copy of this judgment
before the Registrar of Companies until 5th September 2012.

In that view of the matter, the appellant-company is directed not to produce the certified
copy of this judgment before the Registrar of Companies until 5th September 2012. The
request made by the learned counsel for the Income Tax Department is not required to
be entertained in view of the aforesaid statement made by the learned counsel for the
appellant-company.

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