Oja/81/2010 Of Vodafone Essar Gujarat Limited v. Department Of Income Tax

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD O.J.APPEAL No. 81 of 2010 In COMPANY PETITION No. 183 of 2009 In COMPANY APPLICATION No. 254 of 2009 For Approval and Signature: HONOURABLE MR.JUSTICE P.B.MAJMUDAR HONOURABLE MR.JUSTICE MOHINDER PAL ================================================ Whether Reporters of Local Papers 1may be allowed to see the judgment ?2 [To be referred to the Reporter or ]not ?Whether their Lordships wish to 3see the fair copy of the judgment ?Whether this case involves a substantial question of law as to 4the interpretation of the constitution of India, 1950 or any order made thereunder ?5 [Whether it is to be circulated to ]the civil judge ? ================================================ VODAFONE ESSAR GUJARAT LIMITED - Appellant(s) VersusDEPARTMENT OF INCOME TAX - Opponent(s)================================================ Appearance : MR MIHIR H JOSHI, SR ADVOCATE WITH MR SAURABH N SOPARKAR, SR ADVOCATE WITH MR AMIT M PANCHAL, ADVOCATE for the Appellant with Ms Niti Dixit, Advocate with Mr Sandeep Singhi, Advocate with Ms Shivani S Rajpurohit, Advocate MR MIHIR J THAKORE, SR ADVOCATE with MR NITIN K MEHTA for the Respondent No.1 – Income Tax Department MR PANKAJ S CHAMPANERI, ASST. SOLICITOR GENERAL OF INDIA for REGIONAL DIRECTOR ================================================ CORAM :HONOURABLE MR.JUSTICE P.B.MAJMUDAR and HONOURABLE MR.JUSTICE MOHINDER PALDate : /08/2012 CAV JUDGMENT (Per : HONOURABLE MR.JUSTICE P.B.MAJMUDAR) 1 This appeal is directed against the judgment and order dated 9[th] 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. 5 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 21[st ] 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. 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 5 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 21[st ] 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. 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 8[th]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 OJA/81/2010 5/91 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 6/91 with global trends, as well as the policy of the Government of India, as reflected in the Report of the Working Group on the Telecom Sector for the Eleventh Five Year Plan (2007-2012) issued by the Department of TeleCommunications,Ministryof 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. 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 assetsconstitutingthePassive 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 asthetransferofthePassive Infrastructure Assets is within the Vodafone Essar Limited Group and according to the OJA/81/2010 7/91 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 Infrastructure Assets. As pointed out earlier, the Board OJA/81/2010 7/91 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 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 11[th] 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 advertisement in Times of India, English 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. 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 27[th]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. OJA/81/20109/91JUDGMENT9In 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 31.9.2009 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 10 was also submitted that the transferee Company is registered as an Infrastructure Provider Category–1 by the Department of Telecommunicationswhichpermitsthe 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. 10 was also submitted that the transferee Company is registered as an Infrastructure Provider Category–1 by the Department of Telecommunicationswhichpermitsthe 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. 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 11 12 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. 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 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 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 PassiveInfrastructureassetsbeing PassiveInfrastructureassetsbeing 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. 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 OJA/81/201013/91 JUDGMENT the transferee company is nothing but a paper company was being used only as an intermediary for transferring Passive 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 PassiveInfrastructureassetsbeing PassiveInfrastructureassetsbeing 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. 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 OJA/81/201013/91 JUDGMENT 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 includingincometax,stampduty, registration charges and 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. 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. there being any basis in this behalf the learned Company Judge has come to the said conclusion. OJA/81/201015/91JUDGMENT15Mr 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 July1,2012isRs.29.3crores 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 statement has also been made before the Essar Limited & ors. v/s. Vodafone EssarInfrastructure 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. 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, OJA/81/2010 17/91 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 PolymerLtd.(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 OJA/81/2010 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 PolymerLtd.(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 OJA/81/2010 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 andtelecommunicationsinfrastructure 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 ofarrangementproposedbyother telecommunication companies to achieve the aforesaid objectives has been sanctioned by 17 18 different High Courts. 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 com- pany are both wholly owned subsidiaries of Vodafone Essar 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. 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 li-ability for capital gains is misconceived. been a direct transfer of PI assets to Indus Towers Limited, there would have been a li-ability for capital gains is misconceived. He submitted that the Income Tax Department is purposefully seeking to overlook the fact OJA/81/2010 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 would not have resulted in capital gains. Therefore the scheme in any case is not for the purpose of avoiding capital gains. 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 li-ability for capital gains is misconceived. been a direct transfer of PI assets to Indus Towers Limited, there would have been a li-ability for capital gains is misconceived. He submitted that the Income Tax Department is purposefully seeking to overlook the fact OJA/81/2010 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 liabil-ity for payment of tax on capital gains. It is submitted that even if the Scheme in question had not been proposed and if Voda-fone 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 In-come 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 separ-ate and independent proposed scheme subject to sanction of jurisdictional court and in any case beyond the scope of the present proceedings. OJA/81/2010 21/91 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 OJA/81/2010 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 OJA/81/2010 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 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 20 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. 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 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 mannerthat 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 OJA/81/2010 25/91 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 boundtoberecognizedasa 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 nobody’s 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 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. 21It 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. proposed by the appellant. 22Mr Joshi, in support of his submissions has relied upon the following judgments: i.Vodafone Essar Limited & ors. v/s. 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. to sanction the Scheme of the Arrangement proposed by the appellant. proposed by the appellant. 22Mr Joshi, in support of his submissions has relied upon the following judgments: i.Vodafone Essar Limited & ors. v/s. 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. J indal Iron & Steel Co. Ltd. v/s. Asst.Commissioner of Income Taxon the point of locus of the Income Tax Department to raise objection against sanctioning of the Scheme.Commissioner of Income Taxon the point of locus of the Income Tax Department to raise objection against sanctioning of the Scheme. iii SREI Infrastructure Finance Ltd.- CalcuttaHigh 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.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. ivNirmay Properties Private Limited, (2009) 150 CC 538 for the observation that simply because the Court has granted the sanction 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.Company from any future liability qua violation of any statutory provisions. v Vodafone International Holdings vs. Union of India- (2012) 1 Comp LJ 225, for the proposition that every tax payer is entitled India- (2012) 1 Comp LJ 225, for the proposition that every tax payer is entitled OJA/81/201028/91JUDGMENT 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.not bound to choose that pattern which will replenish the treasury. viBanyan & 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.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.which has the effect of reducing the tax burden of the assessee must be looked upon with disfavour. viiiUnited Bank of India Ltd. vs. 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.bar in choosing any one of them. ixLarsen & 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.'amalgamation' is not defined specifically, it has a wide range and ambit and is a term of wider connotation. xRe T&N Ltd.– Chancery Division, (2007) 1 viiiUnited Bank of India Ltd. vs. 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.bar in choosing any one of them. ixLarsen & 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.'amalgamation' is not defined specifically, it has a wide range and ambit and is a term of wider connotation. xRe 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.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. xiJudgment 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.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 simil-ar Scheme of Arrangement.Bharti Airtel Ltd. (Company Petition No.233 of 2007 dated 26.11.2007) sanctioning simil-ar Scheme of Arrangement. xiiiJudgment of Bombay High Court in the case of Reliance Telecom Infrastructure Ltd. (Com-pany Petition No.68 of 2007 dated 16.3.2007) sanctioning similar Scheme of Arrangement.Reliance Telecom Infrastructure Ltd. (Com-pany 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 Peti-tion No.273 of 2009 dated 5.4.2010) sanc-tioning the present Scheme of Arrangement.of Vodafone Essar East Ltd. (Company Peti-tion No.273 of 2009 dated 5.4.2010) sanc-tioning the present Scheme of Arrangement. xvJudgment 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.present Scheme of Arrangement. xvi Judgment of Madras High Court in the case of Vodafone Essar Cellular Ltd. (Company Peti-tion No.203 of 2009 dated 17.11.2009) sanc-tioning the present Scheme of Arrangement.Vodafone Essar Cellular Ltd. (Company Peti-tion No.203 of 2009 dated 17.11.2009) sanc-tioning the present Scheme of Arrangement. xviiJudgment of Delhi High Court in the case of Vodafone Essar Ltd., reported in (2011) 2 Comp LJ 317, sanctioning the present Scheme of Arrangement.Vodafone Essar Ltd., reported in (2011) 2 Comp LJ 317, sanctioning the present Scheme of Arrangement. xviiMysore Minerals Ltd. vs. Commissioners of Income Tax, Karnataka, reported in (1999) 7 SCC 106(para 14) for the proposition that there is no bar which restrains a transac-tion falling differently or being dealt with separately under different Acts.SCC 106(para 14) for the proposition that there is no bar which restrains a transac-tion falling differently or being dealt with separately under different Acts. xviiiChidambara Iyer & Ors. v. P.S. Renga Iyer, AIR 1966 SC 193 for the proposition that the present Scheme of Arrangement is not without consideration.that the present Scheme of Arrangement is not without consideration. xix His Holiness Kesavananda Bharti v. State ofKerala, (1973) 4 SCC 225 for the proposition that even most trifle benefit can be con-sidered as consideration so as to avoid the impact of Section 25.Kerala, (1973) 4 SCC 225 for the proposition that even most trifle benefit can be con-sidered as consideration so as to avoid the impact of Section 25. OJA/81/2010 xx xviiiChidambara Iyer & Ors. v. P.S. Renga Iyer, AIR 1