IN THE MATTER OF vs. M/S VODAFONE ESSAR LIMITED

IN THE HIGH COURT OF DELHI

COMPANY PETITION NO. 334/2009

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

In the matter of
The Companies Act, 1956:

And

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

Scheme of Arrangement between:

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

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

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


CP No. 334/2009 Page 1 of 43


SUDERSHAN KUMAR MISRA, J.

1. Four companies have moved this Court under Sections 391
to 394 of the Companies Act, 1956 seeking sanction of the Scheme of
Arrangement between M/s. Vodafone Essar Limited (hereinafter
referred to as the transferor company no. 1); M/s. Vodafone Essar
Mobile Services Limited (hereinafter referred to as the petitioner/
transferor company no. 2); M/s. Vodafone Essar East Limited
(hereinafter referred to as the transferor company no. 3); M/s.
Vodafone Essar Gujarat Limited (hereinafter referred to as the
transferor company no.4); M/s. Vodafone Essar South Limited
(hereinafter referred to as the petitioner/transferor company no. 5);
M/s. Vodafone Essar Digilink Limited (hereinafter referred to as the
petitioner/transferor company no. 6); M/s. Vodafone Essar Cellular
Limited (hereinafter referred to as the transferor company no. 7) and
M/s. Vodafone Essar Infrastructure Limited (hereinafter referred to as
the transferee company).
2. The registered offices of the petitioner/transferor
companies no. 2, 5 & 6 and the transferee company, all of whom have
approached this Court, are situated at New Delhi, within the
jurisdiction of this court.
3. The registered offices of the transferor company Nos.1, 3,
4 and 7 are situated at Mumbai, Kolkata, Ahmedabad and Coimbatore,
respectively.
4. The petitioner/transferor company no. 2 was originally
th
incorporated under the Companies Act, 1956 on 27 March, 1992 with
the Registrar of Companies, Tamil Nadu under the name and style of
CP No. 334/2009 Page 2 of 43


Sterling Cellular Limited. The company changed its name to Hutchison
Essar Telecom Limited after passing the necessary resolution to this
th
effect and obtained the fresh certificate of incorporation on 12
August, 2002. The company again changed its name to Hutchison
Essar Mobile Services Limited and obtained the fresh certificate of
st
incorporation on 1 March, 2005. Thereafter, the company shifted its
registered office from the State of Tamil Nadu to NCT of Delhi and
obtained a certificate in this regard from the Registrar of Companies,
th
NCT of Delhi & Haryana at New Delhi On 20 June, 1997. The
company finally changed its name to Vodafone Essar Mobile Services
rd
Limited and obtained the fresh certificate of incorporation on 3 July,
2007.
5. The petitioner/transferor company no. 5 was originally
th
incorporated under the Companies Act, 1956 on 7 December, 1995
with the Registrar of Companies, NCT of Delhi & Haryana at New Delhi
under the name and style of Barakhamba Sales & Services Private
Limited. The company changed its name to Barakhamba Sales &
Services Limited after passing the necessary resolution to this effect
nd
and obtained the fresh certificate of incorporation on 22 June, 2001.
The company again changed its name to Hutchison Essar South
th
Limited and obtained the fresh certificate of incorporation on 12
February, 2002. The company finally changed its name to Vodafone
Essar South Limited and obtained the fresh certificate of incorporation
th
on 4 July, 2007.
6. The petitioner/transferor company no. 6 was originally
st
incorporated under the Companies Act, 1956 on 21 March, 1995 with
the Registrar of Companies, Tamil Nadu under the name and style of
CP No. 334/2009 Page 3 of 43


Aircel Digilink India Limited. Thereafter, the company had shifted its
registered office from the State of Tamil Nadu to NCT of Delhi and
obtained a certificate in this regard from the Registrar of Companies,
th
NCT of Delhi & Haryana at New Delhi On 20 June, 1997. The
company changed its name to Vodafone Essar Digilink Limited and
th
obtained the fresh certificate of incorporation on 4 July, 2007.
7. The petitioner/transferee company was originally
th
incorporated under the Companies Act, 1956 on 19 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
th
obtained the fresh certificate of incorporation on 18 October, 2007.
The company again changed its name to Vodafone Essar Infrastructure
th
Limited and obtained the fresh certificate of incorporation on 17
January, 2008. Thereafter, the company had shifted its registered
office from the State of Maharashtra to NCT of Delhi and obtained a
certificate in this regard from the Registrar of Companies, NCT of Delhi
th
& Haryana at New Delhi on 28 June, 2008.
8. The authorized share capital of the petitioner/ transferor
st
company no. 2, as on 31 March, 2009, is Rs.2,00,00,00,000/- divided
into 20,00,00,000 equity shares of Rs.10/- each. The issued,
subscribed and paid up capital of the company is Rs.1,99,71,64,690/-
divided into 19,97,16,469 equity shares of Rs.10/- each.
9. The authorized share capital of the petitioner/ transferor
st
company no. 5, as on 31 March, 2009, is Rs.10,42,00,00,000/-
divided into 54,00,00,000 equity shares of Rs.10/- each aggregating
CP No. 334/2009 Page 4 of 43


Rs.5,40,00,00,000/-; 2,00,000 preference shares of Rs.100/- each
aggregating Rs.2,00,00,000/- and 5,000 preference shares of
Rs.10,00,000/- each aggregating Rs.5,00,00,00,000/-. The issued,
subscribed and paid up capital of the company is Rs.7,01,60,75,000/-
divided into 53,96,07,500 equity shares of Rs.10/- each aggregating
Rs.5,39,60,75,000/-; 2,00,000 preference shares of Rs.100/- each
aggregating Rs.2,00,00,000/- and 1,600 preference shares of
Rs.10,00,000/- each aggregating Rs.1,60,00,00,000/-.
10. The authorized share capital of the petitioner/ transferor
st
company no. 6, as on 31 March, 2009, is Rs.1,01,20,00,000/- divided
into 10,12,00,000 equity shares of Rs.10/- each. The issued,
subscribed and paid up capital of the company is Rs.1,01,10,00,000/-
divided into 10,11,00,000 equity shares of Rs.10/- each.
11. The authorized share capital of the petitioner/ transferee
st
company, as on 31 March, 2009, is Rs.5,00,000/- divided into 50,000
equity shares of Rs.10/- each. The issued, subscribed and paid up
capital of the company is Rs.5,00,000/- divided into 50,000 equity
shares of Rs.10/- each
12. Copies of Memorandum and Articles of Association of the
petitioner/transferor companies no. 2, 5 & 6 and the transferee
company have been filed on record. The audited balance sheets as on
st
31 March, 2008 of the petitioner/ transferor companies no. 2, 5 & 6
and the transferee company along with the report of the auditors have
also been placed on record.
13. A copy of the Scheme of Arrangement has been filed on
record and the salient features of the Scheme have been incorporated
CP No. 334/2009 Page 5 of 43


and detailed in the petition and the accompanying affidavits. Under
that scheme, it is proposed to demerge the passive infrastructure
assets of eight transferor companies and transfer them to the
transferee company. The transferor companies No. 2 to 7, and the
transferee company are the wholly owned subsidiaries of transferor
company No.1, i.e. Vodafone Essar Mobile Services Ltd. Out of these,
three transferor companies, being Nos. 2, 5 and 6, and the transferee
company, lie within the jurisdiction of this Court. The four remaining
transferor companies, being Nos. 1, 3, 4 and 7, are within the
jurisdiction of the High Courts of Bombay, Calcutta, Gujarat and
Madras, respectively, as mentioned above. The Scheme has already
been sanctioned by the High Courts of Bombay, Calcutta and Madras,
and is pending before the High Court of Gujarat and this Court. It is
further submitted that the Scheme envisages that on the appointed
date, inter alia, the Passive Infrastructure Assets of all the transferor
companies shall stand transferred to and vested in the transferee
company. It is claimed that the segregation of the Passive
Infrastructure Assets business and the telecommunications services
business is to enable further growth and maximise value in each of the
businesses. It is also claimed that it will improve the quality of
services to customers by establishing a high service standard and
delivering services in an environment friendly manner and will also
increase the speed of roll-out and efficiency through the sharing of
infrastructure. This initiative of the petitioners is stated to be in line
with global trends, as well as the policy of the Government of India, as
reflected in the Report of the Working Group on the Telecom Sector for
the Eleventh Five Year Plan (2007-2012) issued by the Department of
CP No. 334/2009 Page 6 of 43


Telecommunications, Ministry of Communications and Information
Technology, Government of India, wherein it is recommended, inter
alia, in Chapter 5.5. thereof, that the parties concerned;
“Promote sharing of infrastructure so that costs
can be kept down – this is essential for rural
penetration. Incentivize such sharing.”

14. So far as the share exchange ratio is concerned, the
Scheme provides that the Scheme is intended to restructure, within
the VEL Group, the holding of the assets constituting the Passive
Infrastructure Assets in a more efficient manner consistent with the
diverse needs of business, and does not involve any movement of
assets or liabilities to any company outside the VEL Group. Since the
transfer of the Passive Infrastructure Assets is within the VEL Group,
such transfer shall be without any consideration. Accordingly, the
transferee company shall not be required to issue any shares or pay
any consideration to any of the transferor companies or their
shareholders for acquiring the Passive Infrastructure Assets.
15. It is claimed by the petitioners that no proceedings under
Sections 235 to 250A of the Companies Act, 1956 are pending against
the petitioner/transferor companies no. 2, 5 & 6 and the transferee
company
16. The Board of Directors of the petitioner/transferor
companies no. 2, 5 & 6 and the transferee company in their separate
st th
meetings held on 21 September, 2007 & 30 April, 2008 have
unanimously approved the proposed Scheme of Arrangement. Copies
of the Resolutions passed at the meetings of the Board of Directors of
CP No. 334/2009 Page 7 of 43


the petitioner/transferor companies no. 2, 5 & 6 and the transferee
company have been placed on record.
17. The petitioner companies had earlier filed CA (M) No.
113/2010 seeking directions of this court to dispense with the
requirement of convening the meetings of their shareholders, secured
and unsecured creditors, which are statutorily required for sanction of
th
the Scheme of Arrangement. By order dated 29 May, 2010, this
court allowed the application and dispensed with the requirement of
convening and holding the meetings of the shareholders and creditors
of the petitioner companies to consider and, if thought fit, approve,
with or without modification, the proposed Scheme of Arrangement.
18. The petitioner companies have thereafter filed the present
st
petition seeking sanction of the Scheme of Arrangement. On 31 July,
2009, notice in the petition was issued to the Regional Director,
Northern Region. Citations were also directed to be published in the
Delhi, Mumbai, Kolkata, Chennai and Ahmedabad editions of 'Times of
India' (English), and 'Nav Bharat Times' (Hindi); 'Ananda Bazar
Patrika' (Bengali); 'Dina Malar' (Tamil) and 'Sandesh' (Gujarati)
respectively, in terms of the Companies (Court) Rules, 1959. Affidavit
of service has been filed by the petitioners showing compliance
regarding service on the Regional Director, Northern Region and also
th
regarding publication of citations in the aforesaid newspapers on 24
th
to 27 August, 2009 respectively. Copies of the newspaper clippings
containing the publications have been filed along with the affidavit of
service.
19. In response to the notices issued in the petition, Dr.
Navrang Saini, Regional Director, Northern Region, Ministry of
CP No. 334/2009 Page 8 of 43


th
Corporate Affairs has filed his report dated 16 September, 2009.
Relying on Clause 4.4.1 of Part-III of the Scheme, he has stated that,
upon sanction of the Scheme of Arrangement, all the employees of the
transferor companies engaged in or in relation to the Passive
Infrastructure Assets of the Transferor companies who are in such
employment as on the appointed date shall continue to remain
employees of the respective transferor companies, without any break
or interruption in their services.
20. The Regional Director has further submitted that the
details of individual assets and liabilities and values thereof pertaining
to, “Passive Infrastructure Assets”, of all the transferor companies
proposed to be transferred to the transferee company are not
mentioned in the Scheme, and that such details of individual assets
and liabilities thereof should have been part of the Scheme so that the
same are known to the shareholders and creditors of all the
companies.
21. In response to the above objection, the petitioner
companies in their rejoinder stated that assets have been defined in
the Scheme of Arrangement and that, as such, the assets being
transferred are identifiable and a list of assets of each of the petitioner
companies is not required to be a part of the Scheme. The petitioner
companies have also placed on record a provisional list of assets to be
st
transferred by each of the petitioner companies, as at 31 March,
2009. The petitioner companies further undertake to file a final list of
assets for the transferor companies Nos. 2, 5 and 6 after receiving the
approval of this Court, to form a part of the sanctioned Scheme. The
CP No. 334/2009 Page 9 of 43


undertaking is accepted, and in view of the same, this objection does
not survive.
22. The Regional Director, while referring to Para 3.1.1 of Part-
III of the Scheme regarding accounting treatment in the books of the
transferee company, has further submitted that the transferor
companies Nos. 2, 5 and 6 have failed to submit a valuation report and
that all the transferor and transferee companies may be directed to
obtain a valuation report from a recognized firm of Chartered
Accountants.
23. In response to the above objection, the petitioner
companies in their rejoinder have submitted that the petitioner
companies, including the transferee company, are 100% subsidiaries
of transferor company no. 1 and that since the restructuring involves
movement of assets within the Vodafone Essar Limited group of
companies, such transfer of assets shall be without consideration, and
therefore, no shares are required to be issued by the transferee
company to any of the petitioner companies or to any of their
shareholders, and accordingly, no valuation report is required to be
prepared with respect to the Scheme. In support of the above
submission, the petitioner companies relied on the judgment of this
th
court in Re: Bharti Airtel Limited [CP No. 233/2007, decided on 26
November, 2007] wherein a similar Scheme of Arrangement involving
demerger of Passive Infrastructure Assets into a group company,
where no consideration was to be paid nor were any shares to be
issued by the transferee company to the transferor company, was
sanctioned. In view of the above, the objection raised by the Regional
Director does not survive.
CP No. 334/2009 Page 10 of 43


24. The Regional Director, while referring to Para 2.4 of Part-II
of the Scheme, has further submitted that the transferee company
may be directed to obtain the necessary approvals from the
Department of Telecommunications for transfer of licenses after
sanction of the Scheme by this court, pursuant to the Department of
th
Telecommunications' letter No. 820-I/2003-LR dated 9 June, 2003, in
which the Department of Telecommunications has clarified that the
licensee may transfer the licenses with prior written approval of the
licensor even in cases of amalgamation under Sections 391/394 of the
Companies Act, 1956.
25. In response to the above objection, the petitioner
companies have submitted that none of the transferor companies are
transferring any telecommunication licenses issued by the Department
of Telecommunications to the transferee company pursuant to this
Scheme and that the aforesaid letter issued by the Department of
Telecommunications has no application to this Scheme. Consequently,
the transferor companies before this court will continue to operate as
telecommunication service providers even after the demerger is
effected. It is further submitted that the transferee company has been
registered as an Infrastructure Provider Category- I by the Department
of Telecommunications, which permits the transferee company to
establish and maintain Passive Infrastructure Assets to lease, rent or
sell such assets to licensees of the telecom services under Section 4 of
the Indian Telegraph Act, 1885. A true copy of this registration
th
certificate dated 17 June, 2008 has also been placed on record by the
petitioners. In view thereof, this objection raised by the Regional
Director does not survive.
CP No. 334/2009 Page 11 of 43


26. After the citations were published in the newspapers on
th
27 August, 2009, counsel for the Income Tax Department appeared
th
on 18 September, 2009 and stated at the bar that certain queries
had been raised by the income tax authorities in respect of the
Scheme. The Income Tax Department‟s formal objections to the
th
Scheme were filed in this Court on 10 November, 2009.
27. The rationale behind the objections of the income tax
authorities is that since the transferor companies propose to transfer
only the assets of the transferor companies to the transferee company,
without transferring the liabilities in respect thereof as well, including
any contingent liabilities, the liabilities would remain with the
transferor companies after the demerger. Consequently, a continuous
charge of interest and other liabilities would remain in the hands of the
transferor companies in respect of the transferred assets, thus
reducing the taxable profits in their hands, which would in turn lower
the tax burden on the transferors, thereby adversely affecting the
revenue‟s interest. It was further pointed out that the proposed
Scheme contemplated transfers for „nil‟ consideration. It was also
claimed that if the proposed Scheme was sanctioned by this Court, the
accounts of the transferee company would reflect an exorbitant and
inflated income, but as the transferee company was an infrastructure
company, being an Infrastructure Provider Category I, it could claim
deductions under the various provisions of Chapter VI-A of the Income
Tax Act, 1961 on its profits, thereby also leading to a loss of revenue
for the income tax authorities. The Income Tax Department also
apprehended that once the assets were transferred, and their value
consequently removed from the account books of the transferor
CP No. 334/2009 Page 12 of 43


companies, the net worth of some of the transferor companies might
be rendered negative, and that, therefore, there was a real likelihood
that those companies would be unable to pay their existing and
contingent tax liabilities, since there was allegedly insufficient material
to demonstrate that those companies would be able to generate
enough income to meet the same. It was further claimed that the
Scheme, as it stood, was against public interest for these reasons.
These are, broadly, the issues raised by the Income Tax Department,
which are, in my view, to be considered keeping the tax authorities‟
interest in mind, i.e. that nothing in the Scheme should come in the
way of applicability of the relevant taxing statutes to the transactions
flowing therefrom. Although it is disputed by the petitioners, the
Income Tax Department has claimed an outstanding tax liability of
approximately Rs. 19 crore against the petitioners before this Court,
from assessment year 1999-2000 onwards.
28. In this context, two broad submissions were made by the
Income tax Department. The first was that the expression
„arrangement with members‟ used in S. 391, did not contemplate a gift
from one party to the Scheme to the other party for the reason that
the aforesaid expression contemplated an arrangement in the nature
of a contract with a consideration involved, which is missing in this
case. The second submission was that the Scheme is against public
interest.
29. At the outset, it is necessary to record that Dr. Singhvi,
counsel for the petitioners, submitted, on instructions, that
notwithstanding any sanction or approval that may be granted by this
Court to the proposed Scheme, his clients would be bound by all
CP No. 334/2009 Page 13 of 43


obligations that may be imposed on them under the applicable
provisions of the Income Tax Act, 1961. By stating this, the petitioners
clearly outlined their stand at the beginning of these proceedings, to
the effect that the sanctioning of the Scheme would not ipso facto
grant any immunity to the petitioners qua any liability that may be
imposed on them under the relevant provisions of the Income Tax Act,
in accordance with law.
30. The first issue to be decided is whether an arrangement,
as understood in S.391, does not contemplate a transfer by way of gift
from one party to the Scheme to another. Undisputably, a company
may transfer property to another company. [See, Hindustan Lever v
State of Maharashtra, (2004) 9 SCC 438]. Under the Gift Tax Act,
1958, any person may make a gift, and „person‟ is defined in S.2(xviii)
thereof to include, inter alia, a company, whether incorporated or not.
A Division Bench of the Karnataka High Court in Sanjiv V. Kudva v
Commissioner of Income Tax, Karnataka , (1981) 127 ITR 354
(Kar) has held that the meaning of „gift‟ in the Income Tax Act, 1961
must be given the same meaning as that in S.2(xii) of Gift Tax Act,
1958, i.e. a gift is the transfer by one person to another of any
existing movable or immovable property made voluntarily and without
consideration. Therefore, it seems that there is no legal impediment to
a company transferring property by gift.
31. Admittedly, in the Scheme, certain assets are to be
transferred without consideration, and without transfer of liabilities in
respect thereof. According to the petitioners, these are, “transfers by
way of gift”, and the relevant clauses in the Memorandum of
Association of the petitioner companies give them the power to do so.
CP No. 334/2009 Page 14 of 43


The petitioners also referred to S.5 of the Transfer of Property Act,
1882, read with S.122 thereof, to contend that a transfer between
companies would constitute a gift, provided it was of existing property,
transferred voluntarily, made without consideration, and was accepted
by or on behalf of the donee. Further, according to the petitioners,
the logical consequence of such a transfer by way of gift, is that such a
transfer is exempt from the payment of capital gains tax under
S.47(iii) read with S.45 of the Income Tax Act, 1961.
32. However, according to the Tax Department, the transfer of
assets by way of „gift‟ is impermissible, because a scheme of
arrangement under S.391-394, does not and cannot include a gift, as
understood in law, and that the, “arrangement”, contemplated by
Section 391 can only be a transaction in the nature of a contractual
arrangement for consideration. In respect of the effect of this
transaction on the non-leviability of capital gains tax, the income tax
authorities submitted that this rendered the Scheme contrary to public
interest, which issue will be taken up subsequently. But first, the issue
whether a transfer by gift is within the scope of a Scheme of
arrangement, shall be dealt with.
33. S.391 contemplates a scheme which is a compromise or
arrangement with a company and its creditors or any class of them, or
between a company and its members or any class of them. According
to counsel for the Income Tax Department, the present Scheme falls
into neither of the above categories, and therefore, cannot be
sanctioned by this Court in exercise of its jurisdiction under S.391
because it contemplates neither a compromise nor an arrangement.
According to counsel, the scope of the expression, “arrangement”,
CP No. 334/2009 Page 15 of 43


contemplated under S.391, is limited only to a contract which involves
the transfer of consideration from each party to the other, and
therefore cannot include a “gift”. He relied mainly on In re: NFU
Development Trust Ltd. , (1972) 1 WLR 1548, and State of Punjab
& Ors. v Ganpat Rai , (2006) 8 SCC 364 in support of this
proposition.
34. NFU Development Trust Ltd.’s case (supra) dealt with a
Scheme of arrangement that had been propounded which would have
had the effect of forfeiting the rights of some of its members. At the
meeting, although some members opposed the Scheme, it was,
however, approved by a three-quarter majority vote. Later, when the
petition for sanction of the Scheme was presented to the Court, it was
opposed by some directors and members of the company. An
objection was raised to the effect that the terms of the proposed
Scheme did not qualify as an „arrangement‟ under the English statute,
i.e. the Companies Act, 1948, for the reason that the members were
being stripped of all their rights and were receiving no compensating
benefit of any description in lieu thereof, except for the extinction of
their nominal contingent liability to contribute in the event of winding
up. Counsel for the Income Tax Department relied on the following
portion of that judgment;
“Mr. Rice’s second submission was that the terms of
the scheme were such that it did not qualify as an
arrangement within the meaning of Section 206 of
the Act. The effect of the scheme would be that all
the members of the company except the NFU
Development Co. and such of the so-called new
members as were not already members of the
CP No. 334/2009 Page 16 of 43


company, would be stripped of all their rights and
receive in exchange no compensating benefit of any
description, except the theoretical extinction of their
contingent liability to contribute five new pence in
case of a winding up; theoretical, because it is de
minimis and has no significance in the context of a
non-trading company with assets of £3,000,000 and
liabilities which do not exceed £25,000. A member
loses his right to attend the annual general meetings
and other meetings of the company; his right to
make his voice heard at meetings; his right to
receive the board’s annual report and the company’s
accounts; his right to question the use which the
board makes or omits to make of the company’s
considerable financial resources; the right to vote on
the remuneration of directors; the right to put
himself forward for appointment to an area electoral
college and thus acquire a say in the election of a
director. Admittedly the rights of a member are very
limited, and so it may be said that a member does
not lose much under the scheme because he has not
much to lose. Nor did he pay much for his
membership rights in the first place - merely an
entrance fee of five shillings. Be that as it may, the
company has become prosperous, no doubt as a
result of the support which members gave to the
company’s marketing undertaking during the period
that it traded, and the profit thereby made by the
company. However little a member originally paid
for his membership, and however small his effective
stake in the company and his opportunity to control
its operations, nevertheless he has rights and under
the scheme he loses all.”
He also relied on the following;
CP No. 334/2009 Page 17 of 43


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

35. Relying on these observations, counsel contended that
even if all members and shareholders of a company had given their
consent to a Scheme, which would have the effect of forfeiting their
rights in the company, this Court must still refuse to sanction this
Scheme. In effect, his submission is that whilst it is always open to
any member of a company, either of the majority or of the minority, to
agree to any Scheme which would not give him any compensating
benefit, and while such an act would be valid in law, the Company
CP No. 334/2009 Page 18 of 43


Court cannot sanction a Scheme of such a nature. He submitted that
this would be the outcome even if all members, without exception,
voted in favour of the scheme proposed, and no member raised any
objection before the Court. According to him, the Scheme proposed in
the present case is confiscatory.
36. To my mind, such a proposition cannot be countenanced.
The expression „arrangement‟ has not been defined in the Companies
Act, 1956. The ordinary meaning of the word is as follows;
“ “ arrangement n. – 1. The act or process of
arranging or being arranged, 2. The condition of
being arranged; the manner in which a thing is
arranged. 3. Something arranged. 4. Plans,
measures (make your own arrangements) 5. A
composition arranged for performance by different
instruments or voices. 6. Settlement of a dispute etc.
th
See, Concise Oxford English Dictionary, 10 Edition.
37. In NFU Development Trust Ltd.’s case (supra), the
Court was satisfied on facts that the Scheme, which had been passed
by the majority, intended to confiscate the rights of the objecting
minority shareholders. It was of the view that confiscation of the
rights of an objecting minority member by virtue of a majority-
approved Scheme, cannot amount to either a „compromise‟ or an
„arrangement‟ by that company with its members and therefore any
sanction granted to such a Scheme would amount to sanctioning a
scheme of confiscation. It also took the view that it would be
improper for the Court to allow such an arrangement to be forced on
any class of members, since it could not reasonably be supposed by
any sensible commercial standard to be for the benefit of that class.
CP No. 334/2009 Page 19 of 43


The relevant distinguishing factor was that, in that case, the objectors
were the members who were subject to the proposed confiscation.
However, in the present case, as also clarified by Dr. Singhvi at the
Bar, in view of the nature of the shareholding between the transferors
and transferee company, there is clearly no question of any
confiscation of the rights of any party to the Scheme. Furthermore, all
the concerned shareholders have given their consent and there is no
objecting shareholder.
38. Mr. Mehta, who addressed the Court for the Income Tax
Department on this aspect, further sought to interpret the meaning of
the words, “compromise or arrangement”, as used in NFU
Development Trust Ltd.’s case (supra), to necessarily include some
element of, „give and take‟. He submitted that if the petitioners had
been able to demonstrate that there was an element of give and take
in the proposed Scheme under the consideration of this Court, i.e. that
the members or shareholders of the transferor companies received
anything after the demerger, only then would it amount to an
arrangement. According to him, giving the assets without receiving
anything in return from the transferee, in effect, automatically
amounts to a confiscation of the aforesaid assets by the transferee
company. Mr. Mehta was invited to place any authority before this
Court in support of this proposition, to which he responded that he had
not come across any judgment on this point.
39. To my mind, the expression, „give and take‟ used in NFU
Development Trust Ltd.’s case (supra) must be read in the context
of the finding that the arrangement proposed therein was found to be
confiscatory in nature. Furthermore, there is a significant difference
CP No. 334/2009 Page 20 of 43


between an arrangement which is confiscatory in nature and an
arrangement which contemplates a gift. In the case of a gift, the donor
may have no expectation of a return, but this does not mean that the
subject matter of the gift has been confiscated from the donor by the
donee. Expressions such as, “confiscation” and “forfeiture” normally
contemplate the taking and seizing of property, or the deprivation
thereof, as a penalty. It can be said that these expressions have,
within them, elements of involuntariness with regard to the persons
who suffer confiscation or forfeiture, and, in that sense, since the very
foundation of a gift is voluntariness, they are the very antithesis of a
gift. It follows, therefore, that it would be absurd to suggest that a
gift has either resulted in, or is a consequence of, any confiscation or
forfeiture. Furthermore, the expressions used in Section 391 is,
“arrangement”; but nothing prevented the Legislature, in its wisdom,
from specifically mentioning the requirement of a, “contract for
consideration”, also in that Section. Although NFU Development
Trust Ltd.’s case (supra) interpreted the expression “arrangement” to
mean an implied give and take, the Court did not specify that “give
and take” was to mean reciprocal promises by way of consideration.
To my mind, the expression “give and take” used in that judgment
implies a degree of voluntariness in the transactions contemplated by
the Scheme between all parties thereto, and no more. Even the offer
of a gift by the donee and its required acceptance by the done, are
sufficient to satisfy this test. In that case (supra), the Court did not
venture further since that decision was rendered in the light of a
scheme passed by the majority which operated to confiscate the rights
of the objecting minority. The scheme was held to be a confiscatory
CP No. 334/2009 Page 21 of 43


transaction because there was no element of voluntary, „give and
take‟, in the sense explained above, since it could not be said that
what was given, was given willingly, or that it was taken with the
consent of the giver. In the light of the foregoing, it becomes clear
that in a confiscatory Scheme, since there is no element of
voluntariness, there can be no give and take, as understood above.
To put it differently in that case (supra), there was no „giving‟ by the
members whose rights were being forfeited, rather, there was only a
„taking‟ sanctioned by the majority of the members as per the
Scheme, which made the Scheme confiscatory qua the objecting
minority. Therefore, the Court refused to sanction such a Scheme. It
is in that sense that the Court in NFU Development Trust Ltd.’s
case (supra) used the expression „give and take‟. To my mind, the
present factual matrix is different from that of the abovementioned
case, as is the nature of the Scheme propounded.
40. Further, as already pointed out, the decision in the NFU
Development Trust Ltd’s case (supra) was rendered in the context
of the fact that the objections of the minority shareholders were
overruled by the majority at the AGM, who then approached the court
with their objections, contending that the scheme passed by the
majority extinguished all their rights without any compensation. It
was in that context that the court held that for the arrangement or
compromise to be considered reasonable, it must be of a sort
considered as such by reasonable persons conversant with the subject.
Also, whether the arrangement in that matter was reasonable or not
was examined from the standpoint of the objecting shareholders who,
it was held, are losing everything and getting nothing. It was in these
CP No. 334/2009 Page 22 of 43


circumstances that the Scheme propounded was held to be
confiscatory, and not that every transfer without consideration or
recompense passing to the transferor as, for example, in a gift, must
automatically be declared confiscatory, and therefore unacceptable
under Section 391 of the Act. Here, the context is quite different. Not
a single shareholder has objected. The Income Tax Department
cannot conceivably have the same interest in the company proposing
the scheme as the shareholders of that company. And, to my mind,
the Income Tax Department is also not in any sort of loco parentis to
the shareholders of the transferor companies who have unanimously
agreed to transfer their assts without recompense, nor are they the
guardians of their interests, and therefore, the Income Tax
Department cannot be heard to plead that the scheme must be thrown
out because, in its opinion, the Scheme operates as a confiscation of
the transferor shareholder‟s rights. The essence of the idea of
confiscation is the taking away or abstraction of something from
someone without his consent. Once there is consent, there can be no
confiscation.
41. I might add that, on a question being put to counsel for
the Income Tax Department as to whether a nominal consideration of
Re.1/- would be considered sufficient consideration, he admitted that it
would be sufficient and that, in that case, all objections to the issue of
transfer by way of a gift would no longer stand and the Scheme would
be squarely covered under S.391 of the Companies Act, 1956.
42. Counsel for the Income Tax Department then tried to rely
on State of Punjab & Ors. v Ganpat Rai , (2006) 8 SCC 364,
wherein the expression “compromise” in S.20(3) and (5) of the Legal
CP No. 334/2009 Page 23 of 43


Services Authorities Act, 1987, was examined by the Supreme Court to
mean that a compromise is always bilateral and implies mutual
adjustment , that some element of accommodation on each side is
implied in the word itself, and that “it is not apt to describe total
surrender”. Relying on this judgment, counsel submits that the act by
which a donor gifts any property to a donee would be an act of
surrender and therefore cannot be construed as an arrangement of the
type contemplated under Section 391 of the Companies Act. That
decision does not hold that, a “gift” amounts to, “total surrender”; nor
does the dictionary meaning of the word, “gift” and “surrender” lead us
to any such conclusion. The question whether a “gift” also amounts to
a, “total surrender”, was not before the Supreme Court in that case.
There, the Court was concerned with the issue whether the necessary
requirements enabling the Lok Adalat to dispose off the matter were
satisfied in that case since, admittedly, there was no settlement or
compromise between the parties after reference by the Punjab &
Haryana High Court. For this, the Supreme Court examined Section
20 of the Legal Services Authorities Act, 1987 to hold that if no
settlement or compromise is arrived at, the Lok Adalat has no power
to dispose off the matter. Consequently, the order of the Lok Adalat
allowing the writ petition was held to be bad. For counsel to take this
to mean that since in lay terms, a gift could also be said to amount to
a “total surrender” of the donee‟s rights, and because a „total
surrender‟ has been held as not amounting to a settlement or
compromise of the type contemplated by the Legal Service Authority
Act, therefore, even a gift contemplated under a scheme under Section
391 of the Companies Act has to be construed as something that
CP No. 334/2009 Page 24 of 43


cannot be countenanced as a part of a permissible „arrangement or
compromise‟ envisaged therein, amounts to a comparison that is too
farfetched. To my mind, relinquishment of a right by a donor, by way
of a gift or otherwise, does not amount to a “total surrender” of what
is being gifted. The words “surrender” and “gift” are not synonymous,
and cannot be used interchangeably. The concise Oxford Dictionary
th
(6 Edition) defines the word, “gift”, to mean, “a thing given willingly
to someone without payment; a present”; whilst the word, “surrender”
is a verb, defined by that Dictionary to mean, “(i) cease resistance to
an opponent and submit to their authority, (ii) give up (a person,
right, or possession) on compulsion or demand.” Although the
Supreme Court referred to NFU Development Trust Ltd.’s case
(supra) while making the aforesaid observation to the effect that a
compromise does not mean total surrender, for the reasons I have set
out, it has no application in this case. I, therefore, do not agree with
the proposition enunciated by the counsel for the Income Tax
Department in this behalf and, in my view, this judgment relied on by
the objector does not advance his case.
43. At this juncture, the petitioners‟ response to this issue may
also be noted, which was, that the shareholders of the transferor
companies and the transferee company have given their unanimous
consent to the Scheme for transfer of the passive infrastructure assets
for nil consideration, and that there was no dissent expressed by any
one of them, nor is there any element of expropriation or surrender in
the proposed Scheme. It was also averred by the petitioners that there
is indeed a „compensating advantage‟ conferred on the transferor
companies, i.e. that after the demerger, an asset which previously did
CP No. 334/2009 Page 25 of 43


not generate any revenue will become a revenue generating asset, and
that the enormous maintenance and installation expenditure required
to keep such an asset in working condition will be reduced for the
transferor companies. Furthermore, this arrangement is in line with
the policy of the Government of India.
44. The petitioners relied on In re: Larson and Toubro Ltd. ,
(2004) 121 Comp Cas 523 (Bom), paragraph 58 thereof, to show that
although the expression „arrangement‟ has not been defined in the
Companies Act, 1956, yet it has been held to be of wide scope,
including the reorganization of shares and share capital of a company,
among other things. Further reliance was placed by the petitioners on
Guardian Assurance Co, Re , (1917) 1 Ch. 431, at page 441 thereof,
to support the argument that an arrangement extends to and includes,
“every transaction between a company and its members which directly
affected their proprietary rights in their shares”. To meet the
objector‟s contention that S.391 does not contemplate a Scheme of
arrangement whereby transfer of assets is made without
consideration, the petitioner‟s counsel has also referred to In re:
Highway Cycle Industries and Sunbeam Auto Ltd , (1999) 97
Comp Cas 846 (P&H), where no cash consideration was given for
transfer of a business undertaking. There it was held as follows;
“6. …The proposed scheme need not satisfy the
basic ingredients of a contract...”

This decision was also followed in In re: SREI Infrastructure
Finance Ltd. (2008) 4 Company Law Journal 196 (Cal), which dealt,
inter alia, with the objection by the Central Government that the
CP No. 334/2009 Page 26 of 43


Scheme propounded may assist the parties in avoiding payment of
capital gains and further that rights, privileges and benefits accruing to
the transferee company have not been spelt out under the Scheme
and, therefore, it is unfair to the shareholders and ought not to be
sanctioned. The Court while noting that “….no shareholder has come
forward to challenge the Scheme of Arrangement or to raise any
objection in respect thereof”, held that “….avoidance of capital gains
can be no reason for not sanctioning the Scheme of Arrangement as
avoidance of capital gains is a matter of revenue and will attract the
provisions of the Income Tax Act” and that, “….the companies cannot
escape from their respective liabilities.” It was further held that, “it
must not be forgotten that a Scheme of Arrangement is between
shareholders and the transferor and transferee companies. The
Scheme of Arrangement is an arrangement to conduct the business of
a company by its shareholders. The shareholders having agreed to
conduct the management and the affairs of the company in a
particular way must be honoured.”
45. For all of the above reasons, and since the objector has
not been able to place any direct authority, precedent or Rule before
this Court to support his contention, and in view of the authorities
relied on by the petitioners, counsel for the Income Tax Department
has failed to persuade this Court that a transfer by way of gift was not
permissible under Section 391 of the Companies Act, 1956, or that the
Scheme in question was confiscatory, this objection does not survive.
46. The second objection raised by the Income Tax
Department was regarding the accounting treatment prescribed in the
Scheme. Admittedly, the accounting treatment of the transactions in
CP No. 334/2009 Page 27 of 43


relation to the demerger is vital for determining the tax treatment of
the same. According to the Income Tax Department, by proposing to
transfer assets at book value, the petitioners were trying to evade
payment of capital gains tax, which would otherwise have been
payable if the assets were to be transferred at market value. Further,
according to the Department, it was for this reason that the petitioners
had not provided any valuation in respect of the passive infrastructure
assets that are proposed to be demerged in terms of the Scheme.
Admittedly the transfer of assets by the transferor companies to the
transferee company for no apparent or real consideration is in the
nature of a gift. The permissibility of such a transfer has been
established in the discussion above. However, counsel for the
objectors submitted that in view of the faulty accounting treatment
prescribed in the Scheme, the petitioners would succeed in evading
payment of tax liabilities if this Court were to sanction this Scheme
and the accounting treatment proposed therein.
47. Mr. Tripathi, Learned Additional Solicitor General, further
contended that any consent that may have been obtained from
shareholders of the transferor companies, in respect of a Scheme
proposing to transfer valuable assets of those companies to another
company, without disclosing the value of those assets to the
shareholders, would be a nullity in law, as the substance of the
transaction would not be known to the shareholders. According to him,
the book value methodology was only available to the petitioners so
long as the assets remained with the respective transferor companies,
but when a transfer is intended, a „true and fair‟ value of the assets is
to be disclosed before the assets are actually transferred, in terms of
CP No. 334/2009 Page 28 of 43


Accounting Standards 9, 10 and 11, which were prescribed with a view
to ensuring transparent transactions. However, Mr. Tripathi conceded
that the „true and fair‟ value may be higher, equal to, or lower than
the book value. Therefore, to my mind, the only pertinent question
here is whether there is any onus or obligation on the petitioners to
furnish or disclose any such value to its shareholders or to this Court.
48. According to Dr. Singhvi, Senior Counsel for the
petitioners, there is no such obligation cast on the petitioners, and no
requirement that the value or details of assets in a Scheme have to be
listed by the parties to the Scheme. Further, according to him, the
circumstances of this particular case show that in any case, the
disclosure of the value of the assets proposed to be transferred was
immaterial, since the transferor companies largely have only one
majority shareholder, which is the transferor company No. 1 itself,
who is also part of the Scheme. With regard to the petitioners before
this Court, i.e. transferor companies No. 2, 5 and 6 and transferee
company; transferor company Nos.2, 6 and the transferee company,
are wholly owned by transferor company No.1, while transferor
company No.1 has a 49% shareholding in transferor company No.5.
According to Dr. Singhvi, the description of the assets given in the
Scheme is sufficient and is all that is required. He further urged that
there was no requirement in the statute that a transfer of any asset
needed to be carried out at „fair value‟, and that parties could agree on
what constituted a fair price among themselves. However,
notwithstanding that there was no requirement in law to provide a
valuation of assets proposed to be transferred pursuant to sanction of
a Scheme by a Company Court, with a view to establishing the
CP No. 334/2009 Page 29 of 43


petitioners‟ bona fide, the net book value of the passive infrastructure
st
assets proposed to be transferred, as on 31 March, 2009, have been
disclosed to this Court by the petitioners and placed on record vide
written submissions which were handed over in Court in response to
the objections of the Income Tax Department.
49. Counsel for the petitioners also categorically stated that if
the Income Tax Department had any objection with regard to the
accounting methodology, it would remain open to the tax authorities to
proceed against the transferor companies and/or the transferee
company after the demerger is effected. It was also stated on behalf
of the petitioners that before the tax authorities, they would not take
the stand that the issue of taxability cannot be gone into by reason of
the order sanctioning the Scheme. The Bombay High Court in re:
Reliance Communications Infrastructure Ltd , (2009) 151 Comp
Cas 538, sanctioned a proposed Scheme with similar directions. The
Income Tax Department will consequently be free to examine all
aspects of the demerger being effected from the taxation point of
view.
50. In this context, the petitioners also relied on In re:
Ajmera Realty and Infra India Ltd , (2009) 151 Comp Cas 442
(Bom), wherein the Bombay High Court dismissed the Regional
Director‟s objection that neither the petition nor the Scheme provided
details of the assets and liabilities proposed to be transferred by way
of the demerger, by holding that there was no provision in law which
required the balance sheet and profit and loss account or the scheme
proposed to enumerate and set out each and every asset which is the
subject matter of the scheme. Further, while the Court did not
CP No. 334/2009 Page 30 of 43


expressly hold that there was a bar on any creditor, shareholder or
any other concerned party in filing an application for those details in
the Company Court, any such application would have to be decided by
the Court on the facts of a particular case. I am in agreement with this
view. The petitioners‟ response is based on the essential difference
between a company, which is a legal entity, and its constituent
shareholders. For certain acts, the company is obliged to find support
from its constituents, and for that purpose, it is required to disclose all
the relevant details to those constituents to enable them to arrive at a
decision. However, in case the constituent shareholder happens to be
a company whose shares are held by the propounder itself, then, to
enable an informed decision to be taken, it is not necessary for the
propounder to disclose the relevant details to such a constituent
shareholder because it would amount to disclosing something to itself.

51. Further reliance was placed by the petitioners on In re:
Hindalco Industries Ltd., (2009) 151 Comp Cas 446 (Bom), in
support of their proposition that a dispute regarding accounting
standards is not sufficient ground to refuse grant of sanction to a
Scheme, is well-founded, although that case dealt with the
restructuring of a company and not a demerger. In that case, an
objection that sanction of the Scheme would result in violation of
Accounting Standards by the petitioner company in the course of
effecting the proposed restructuring, which would also result in an
inaccurate representation of the petitioner company‟s financial
position, was rejected. It was held by the Court that deviation from
CP No. 334/2009 Page 31 of 43


accounting standards, per se, cannot be a ground for rejection of the
Scheme.
52. Moreover, since the question of tax treatment of the
transactions arising out of the Scheme, which are obviously based on
the financial statements and accounts of the petitioners, is being left
open, I see no reason why sanction to the Scheme should be withheld
only on this ground.
53. Another ancillary issue raised with respect to the issue of
the accounting treatment was that the petitioners would then have the
benefit of „double depreciation‟, to which the petitioners‟ response was
that the Scheme envisages depreciation being claimed by the
transferor companies only on the assets that remain with them after
the demerger takes effect, while the transferee company shall claim
depreciation on the assets it receives after the demerger, and
therefore, by this method, there was no question of the petitioners‟
claiming double depreciation. However, since the objection regarding
valuation of those assets, which is necessary to determine the
depreciation claimed, has already been discussed above and since it
has been made clear that the income tax authorities will have full
freedom to question the accounting treatment and the resulting tax
liabilities found payable by the petitioners, this ancillary issue is also
being left open for determination by the appropriate authority.
54. The third objection put forth by the objector was that,
since it was for nil consideration, the proposed demerger might result
in the net worth of some transferor companies decreasing significantly,
almost to the extent of being rendered negative, which would affect
their solvency and, consequently, any outstanding tax liabilities that
CP No. 334/2009 Page 32 of 43


may be payable by them. Admittedly, the petitioner companies
propose to transfer valuable assets which have a potential to generate
income, and as per the Scheme, will receive no consideration for the
transfer. The net worth of a company is relevant for assessing its
solvency. The Department contended that the petitioners had been
unable to demonstrate that, after the proposed demerger, the
transferor companies and transferee company would have sufficient
assets to meet any tax liability that may arise, meaning thereby that
the transferors would be rendered insolvent after the demerger, and
therefore, for this Court to sanction a Scheme that may result in the
coming into existence of a palpably insolvent company would be
against public interest. It was also contended that, in addition, since
the Scheme contemplated a change in the ownership of the passive
infrastructure assets with their transfer to the transferee company, the
transferor companies may well be obliged thereafter to pay the
transferee company for the use of those assets. If that were to
happen, naturally, there would be an increase in the revenue of the
transferee company, since the charges paid by the transferor
companies would be income in the hands of the transferee company,
on which it would be liable to pay tax. Yet, at the same time, the
amount paid to the transferee company by the transferor companies
would be a sort of revenue expenditure, thereby distorting the tax
liability of the transferor companies. However, if the passive
infrastructure assets were to remain in the hands of the transferor
companies themselves, liability to pay tax would be only on the
incomes generated for the transferor companies by the use of those
assets and nothing further.
CP No. 334/2009 Page 33 of 43


55. In response, the petitioners disputed that there was any
outstanding tax liability payable by the companies at present, and that
if any tax liabilities were found payable after the demerger, the
transferor companies and the transferee company would continue to
generate revenue from their operations and meet the same.
Admittedly, the ability of the petitioners to meet tax demands can only
be assessed by the revenue stream that they are able to generate.
Counsel for the petitioners argued that, even if it were assumed for
the sake of argument that the post-demerger net worth of the
transferor companies would become negative, even in that situation,
each transferor company would be generating sufficient revenue from
its telecom operations to meet its tax demands. According to the
petitioners, the transferor companies will be more than able to meet
all alleged tax claims that were mentioned in the objections filed by
the Income tax Department, if found ultimately payable by the
petitioners. According to the petitioners themselves, the estimated net
st
worth of the transferor companies, as at 31 March, 2009, was
Rs.14,058 crores, and after demerger, the net worth of all the
transferor companies, would be approximately Rs.10,078 crores.
Details of incomes from operations, mobile telecommunications
services and license fees, which show that the transferor companies
before this Court are generating more than enough revenue to meet
any tax liability, were placed on record by the petitioners in the
petition as well as in the written response to the objections. They are
as follows:
st
a) Transferor company No. 2 - Rs. 2038.73 crores, as at 31
March, 2009
CP No. 334/2009 Page 34 of 43


st
b) Transferor company No. 5 - Rs. 6963 crores, as at 31 March,
2009
st
c) Transferor company No. 6 - Rs 3130.15 crores, as at 31
March, 2009.

56. The Income Tax Department‟s fourth objection was that
the proposed Scheme was contrary to law and should be dismissed
irrespective of the legality of the transaction from the income tax point
of view, in the public interest. Counsel for the petitioner raised the
question of how the Income Tax Department, being a department of
the Central Government, was objecting to the Scheme, when the
Central Government, vide the Regional Director‟s report, had not
objected to the same on this ground.
57. Mr. Tripathi relied on In re: Wood Polymer , (1977) 109
ITR 177 (Guj), to contend that restrictions that may apply to the
exercise of the Income Tax Department‟s jurisdiction over a return
that is being assessed by it confining its jurisdiction to the question of
revenue alone, need not automatically apply to this Court in its
exercise of company jurisdiction under S.391 to 394 which enable this
Court to examine whether the Scheme was in public interest or not.
In In re: Wood Polymer (supra), while the Central Government had
not objected to the Scheme, the Official Liquidator himself raised an
objection to the Scheme, to the effect that the transferee company
was being created purely to facilitate the evasion of capital gains tax,
whereas the Central Government had not objected to the Scheme.
Reliance was placed on the following observations made therein, at
page 624 thereof;
“…If the party seeks assistance of the court only to
reduce tax liability, the court should be the last
instrument to grant such assistance or judicial
CP No. 334/2009 Page 35 of 43


process to defeat such a tax liability, or even to
avoid tax liability…”

58. In the aforesaid judgment, at page 623 thereof, the Court
has also made certain observations about the scope of the term „public
interest‟ used in S.394, which are reproduced as follows;
“The expression "public interest" must take its
colour and content from the context in which it is
used. The context in which the expression "public
interest" is used should permit the court to find out
why the transferor-company came into existence, for
what purpose it was set up, who were its promoters,
who were controlling it, what object was sought to
be achieved through creation of the transferor-
company and why it is now being dissolved by
merging it with another company. All these aspects
will have to be examined in the context of the
satisfaction of the court whether its affairs have not
been carried on in a manner prejudicial to public
interest. That is the colour and content of the
expression "public interest" as used in section
394(1), second proviso, and the facts of this case
will have to be examined keeping in view the colour
and content of the expression "public interest".”

59. In reply, the petitioner‟s counsel referred to Union of
India & Ors. v Ambalal Sarabhai Enterprises Ltd. , (1983) 55
Comp Cas 623 (Guj), where Wood Polymers case (supra) was also
considered by a Division Bench of the Gujarat High Court which
distinguished it on facts and further explained it as follows;
“ In the case of Wood Polymer [1977] 47 Comp Cas
597 (Guj), the only purpose discernible behind the
amalgamation was to defeat capital gains tax and
prior to the amalgamation, a situation was brought
about by creating a paper company and transferring
an asset to such company which can, without further
consequence, be amalgamated with another
company to whom the capital asset was to be
transferred so that, on amalgamation, it could pass
on to the amalgamated company, it would distinctly
appear that the provision for such a scheme of
amalgamation was utilised for the avowed object of
defeating tax. Such is not the situation here. The
CP No. 334/2009 Page 36 of 43


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

60. Therefore, it was the petitioners‟ submission that, in the
present case, the present Scheme, being an internal arrangement
between companies who have commonality of ownership, is consistent
with the policy of the Government of India, and will also allow the
transferor companies to operate independently, therefore, it cannot be
said that the avowed object of the Scheme is merely to defeat tax.
Moreover, reliance was placed on In re: SREI Infrastructure
Finance Ltd., (2008) 4 Com LJ 196 (Cal) and In re: Tata Tea Ltd. ,
(2008) 144 Comp Cas 236 (Cal), which followed the former, and held
that;
“ With regard to the first objection it has been
submitted that avoidance of capital gains can be no
reason for not sanctioning a scheme which is
otherwise lawful or valid as held in A.W. Figgis & Co.
(P.) Ltd. In re (supra) and the unreported decision in
C.P. No. 288 of 2007 - since reported as SREI
Infrastructure Finance Ltd.”

61. SREI Infrastructure ‟s case (supra) pertains to a scheme
of arrangement under Sections 391 to 394 of the Companies Act,
1956, wherein transfer of the benefits of the license held by the
transferor company to the transferee company, was objected to on the
ground that the transferor company was, in fact, effecting the outright
sale of the license to the transferee company, and since no time limit
was fixed for payment of the consideration for the sale by the
transferee company to the transferor company, therefore, by this
arrangement, the transferor company was avoiding the burden of
capital gains tax. It was further contended that the benefits of the
license, to be transferred by the transferor company to the transferee
CP No. 334/2009 Page 37 of 43


company, were not specified, and therefore, the shareholders of both
the companies were not in a position to make an informed decision
with regard to the fairness and adequacy of the consideration which
was to ultimately pass from the transferee company to the transferor
company. It was in these circumstances that the Calcutta High Court
held that so long as there is no allegation of violation of any provisions
of the Companies Act, 1956, and so long as there was compliance with
Sections 391, 392 and 394 of that Act, the objection raised by the
Central Government regarding avoidance of capital gains was not
material and that these were commercial matters best left to
shareholders, and that this objection could not per se invalidate the
scheme for the alleged reason of avoidance of tax liability since it
would, in any case, attract the provisions of the Income Tax Act, as a
company cannot escape from its tax liabilities. [See also, Jindal Iron
and Steel Co. Ltd. v Assistant Commissioner of Income Tax
5(2) , 2003 (154) ELT 380 (Bom)]
62. Simply because the tax payable under the business
structure adopted by the assessee, which he is otherwise entitled to
adopt in law, is reduced, does not, in my view, ipso facto, make such
adoption illegal or impermissible on the ground that it is opposed to
the public interest.
63. Not only does the policy of the government, which is, in a
sense, the custodian of the public interest, contemplate the sort of
structure proposed, it actively seeks to promote it by suggesting that
incentives should be given for its adoption. The policy specifically
states that by this method, “costs can be kept down..” and that, “this
is essential for rural penetration”. Such an approach is also stated to
CP No. 334/2009 Page 38 of 43


be in line with global trends. I fail to see how then, a scheme aimed
at achieving just that must be held to be opposed to the public interest
merely because, by its adoption, revenue payable by the transferor
company might decrease with no corresponding increase in the
revenue payable by the transferee company since the latter would be
entitled to exemption under an incentive scheme of the government.
It is strange that while on the one hand the government in its wisdom
seeks to promote the sharing of infrastructure by the setting up of
infrastructure companies and also decides to give such companies the
incentive of tax exemption, the income tax department wants that in
this case, no such thing should be permitted by the court because its
overall revenue collection will go down.
64. Finally, the petitioners contended that similar schemes of
arrangement for the demerger of passive infrastructure into a
subsidiary for „nil‟ consideration, pertaining to the petitioners‟
competitors, namely, Reliance, Bharti, Airtel and Idea, have been duly
sanctioned without any objection to the same from the Income Tax
Department. These are In re: Reliance Telecom Infrastructure
Ltd. , CP Nos. 68, 69 and 70 of 2007, Bombay High Court, decided on
th
16 March 2007; In re: Bharti Airtel Ltd. , CP No.233 of 2007, Delhi
th
High Court, decided on 26 November, 2007; and In re: Idea
st
Cellular Ltd ., CP No. 167 of 2009, Gujarat High Court, decided on 31
August, 2009. However, counsel for the Income Tax Department
claimed that the Schemes sanctioned in the abovementioned matters
were, in fact, not identical to the one under consideration in the
present petition and, therefore, this justified the differential treatment
being accorded to the petitioners herein. Be that as it may, the fact
CP No. 334/2009 Page 39 of 43


remains that the Scheme under consideration, when placed before the
High Courts of Madras, Karnataka and Bombay for their approval, was
not objected to by the income tax authorities. It is an admitted
position that the objections have only been raised by the Income Tax
Department to the Schemes filed in this Court and in the Gujarat High
Court.
65. Certain additional submissions were also made on behalf of
the tax authorities. The first was that the Income Tax Department
must be permitted to retain its recourse for recovery in respect of any
existing or future tax liabilities of the transferor companies or the
transferee company, in respect of the assets sought to be transferred
under the proposed Scheme, and that this protection must be made
explicit by this Court in its final order and has to bind all the parties to
the Scheme, particularly the transferor and transferee companies. I
am in agreement with this. As already noted in the preceding
paragraphs, there can be no limitation on the powers of the Income
Tax Department for recovery, including imposition of penalties etc.
66. The second submission was as regards the tax treatment
accorded to the various transactions referred to in the Scheme. The
Department‟s stand was that the approval of the Scheme should in no
manner affect the tax treatments of the transactions under the Income
Tax Act, 1961 or any other applicable taxing statute, nor would
sanction of the Scheme or the effect thereof serve as a defence for the
companies concerned against tax treatment under the aforementioned
statutes.
67. The Court has a discretion in the matter of granting
sanction, and the scope of its inquiry is not limited by any rigid
CP No. 334/2009 Page 40 of 43


principles, except insofar that, in addition to examining the statutory
compliances, it must be seen whether the proposed Scheme is
reasonable, and can be viewed as beneficial to those likely to be
affected by it. The burden to prove this lies on the petitioner.
Arrangements similar to those proposed by the scheme are being
followed not only by the petitioner‟s competitors in India, it also
conforms to the global standards being adopted by various companies
overseas. It bears repetition that in addition, the policy of the
Government of India has also recommended that sharing of
infrastructure be promoted and that incentives be given for this. The
scheme also has this object in view. All this goes to show that the
object of the Scheme is not merely aimed at avoidance of tax. The
high earnings of the transferee company‟s assets would naturally be
subjected to tax in the hands of the transferee company, and the
liabilities that remain behind with the transferor companies would not
be available to the transferee company for adjustment against profit
before tax. However, if the transferee company is further entitled to
other benefits or deductions notified by the Government in its wisdom,
the Income Tax authorities cannot complain.
68. As regards the accounting principles used and the validity
of their adoption by the petitioners, the question is left open to the
Income Tax Department to inquire into the correctness or otherwise of
the same, independently of the sanction of the Scheme.
69. Further, the petitioners have fairly admitted that any
question of tax liability is within the purview of the Income Tax
Department and that it is free to pursue either the transferor
companies or of the transferee company, as it may be advised,
CP No. 334/2009 Page 41 of 43


notwithstanding the sanction of the Scheme by this Court. Neither
counsel seeks a finding by this Court with regard to the tax
implications of the proposed Scheme. It is agreed that the Scheme
may be sanctioned whilst relegating the parties to the appropriate fora
to determine the tax liability, if any, that may arise. No action which
may be violative of a statute is being legitimized by approval of the
Scheme, and the income tax authorities are free to move against any
of the parties concerned, in case they are of the belief that there has
been any impermissible evasion of payment of tax by the petitioners.
70. In my view, if the Court is indeed to sanction the Scheme,
the powers of the Income Tax Department must remain intact. The
authorities relied on by the petitioners also support this proposition,
with the only exception being a situation where the Scheme itself has
only one purpose, which is to create a vehicle to evade the payment of
tax, rather than mere avoidance of tax. It is also true that the scope of
objection that may be raised by the Central Government and the
Regional Director is larger, and that of the tax authorities is confined
to the question of revenue. It is not open to this Court, in the exercise
of company jurisdiction, to sit over the views of the shareholders and
Board of Directors of the petitioner companies, unless their views were
against the framework of law and public policy, which, as discussed
above, is not the conclusion reached here. It is purely a business
decision based on commercial considerations.
71. No objection has been received to the Scheme of
Arrangement from any other party.
72. In view of the approval accorded by the equity
shareholders, secured and unsecured creditors of the petitioner
CP No. 334/2009 Page 42 of 43


companies, and the Regional Director, Northern Region, to the
proposed Scheme of Arrangement, as well as the submissions of the
Income Tax Department, there appear to be no further impediments to
the grant of sanction to the Scheme of Arrangement. Consequently,
sanction is hereby granted to the Scheme of Arrangement under
Sections 391 and 394 of the Companies Act, 1956 on the aforesaid
terms while reserving the right of the Income Tax Authorities to the
extent stated above. The petitioner companies will comply with the
statutory requirements in accordance with law. Certified copy of this
order be filed with the Registrar of Companies within five weeks. It is
also clarified that this order will not be construed as an order granting
exemption from payment of stamp duty as payable in accordance with
law. Upon the sanction becoming effective from the appointed date of
Arrangement, that is Ist April, 2009, the passive infrastructure assets
of the transferor companies No. 2, 5 and 6 shall stand merged in the
transferee company.
73. The petition is allowed in the above terms.
74. Dasti.

SUDERSHAN KUMAR MISRA, J.
March 29, 2011.
CP No. 334/2009 Page 43 of 43