S. 391-394 scheme of arrangement is not a “tax avoidance scheme”

Vodafone Essar Gujarat Ltd vs. Dept of Income-tax (Gujarat High Court)

Vodafone Essar Gujarat Ltd (“transferor”) filed a Petition u/s 391 to 394 of the Companies Act, 1956 to transfer its ‘Passive Infrastructure Assets’ to Vodafone Essar Infrastructure Ltd (“transferee”) free of liabilities and encumbrances. The corresponding liabilities were not to be transferred. No consideration was payable by the transferee nor were any shares to be allotted to the members of the transferor. Post de-merger, the transferee was to be made a substantially owned company of a new company to be formed by all or some of the shareholders of the transferee. Thereafter, the transferee was to be amalgamated/ merged into Indus Towers Ltd. The application was opposed by the income-tax
department on the ground that since no consideration was involved, the transaction was ultra vires. It was also claimed that the transaction did not fall within the anbit of ss. 391 to 394 but was a simple transfer between two separate entities to evade legitimate taxes which would be payable if the transaction was effected as a simplicitor transfer. It was also claimed that the Scheme was solely for purposes of avoiding tax. The Company Judge came to the conclusion that the transferee was a paper company and that the sole object of the Scheme was to avoid tax on income in excess of Rs. 3,500 crore and also stamp duty and VAT to the tune to Rs.600 crores. He accordingly refused to sanction the arrangement. On appeal by the Company, HELD reversing the Company Judge: