ITO, Ward - 8(3), Kolkata, Kolkata V. M/s. Purbanchal Power Co. Ltd., Kolkata

ITA 201/KOL/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 78426 (ITAT-KOLKATA)
• Duration Of Justice: 4 year(s) 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-07-2014
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 05-09-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 01-02-2010
• Court: TRIBUNAL
• Department Lawyers: VARINDER MEHTA
• Assessee Lawyers: MANOJ KA; R P AGGARWAL
• Keywords: Unexplained cash credit; Capital asset; Income from undisclosed sources; Deemed to accrue or arise in india; Avoidance of tax; Scheme of amalgamation; Capital receipt; Benefit of exemption
• Section: 143(3); 68

Judgement Text

, B , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: KOLKATA ( ) , , ) [BEFORE SHRI MAHAVIR SINGH, JM & SHRI SHAMIM YAHYA, AM] / I.T.A NO.201/KOL/2010 !' / ASSESSMENT YEAR: 2006-07 ITO, WARD-8(3) V P URBANCHAL POWER CO. LTD. KOLKATA 5, RUSSEL STREET, 1 ST FLOOR KOLKATA 700 071 (PAN: AABCP 7523R) ( #$ /APPELLANT ) ( %&#$ / RESPONDENT ) DATE OF HEARING: 03.07.2014 DATE OF PRONOUNCEMENT: 17.07.2014 FOR THE APPELLANT: SHRI VARINDER MEHTA , CIT- DR FOR THE RESPONDENT: SHRI R.P.AGGARWAL, SR-ADVOCATE & MANOJ KATARUKA, ADVOCATE / ORDER PER SHRI MAHAVIR SINGH, JM : THIS APPEAL BY REVENUE IS EMANATING FROM THE ORDER OF CIT(APPEALS)-VIII, KOLKATA (CIT(A) FOR SHORT), IN APPEAL NO.442/CIT( A)-VIII/KOL/08-09 DATED 19-11- 2009. ASSESSMENT WAS FRAMED BY ITO, WARD-8(3), KOLK ATA FOR THE ASSESSMENT YEAR 2006-07 VIDE ORDER DATED 31-12-2008 U/S. 143(3) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT). 2. OUT OF THESE FOLLOWING SIX GROUNDS OF REVENUES APPEAL, THE FOLLOWING THREE ISSUES ARE FRAMED, WHICH READ AS UNDER:- WHETHER, IN THE GIVEN FACTS AND CIRCUMSTANCES OF T HE CASE, ONCE THIS SCHEME OF AMALGAMATION APPROVED BY HONBLE JURISDICTIONAL HI GH COURT, IT IS OPEN FOR REVENUE TO GO INTO THE CREDITWORTHINESS OF THE AMAL GAMATING COMPANIES AS ATTESTED BY THEIR BALANCE-SHEETS DESPITE THE FACT T HAT THE SAME WERE BEFORE HONBLE JURISDICTIONAL HIGH COURT BEFORE APPROVAL O F THIS SCHEME. ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 2 WHETHER, IN THE GIVEN FACTS AND CIRCUMSTANCES OF TH E CASE, THE AMALGAMATION IN THE PRESENT CASE ITSELF IS A COLOURABLE DEVICE TO E VADE THE TAX BY AMALGAMATING COMPANIES OR NOT. WHETHER, IN THE GIVEN FACTS AND CIRCUMSTANCES OF T HE CASE, SINCE DUE TO CROSS HOLDINGS INTER SE THE SHARE HOLDINGS GOT NEUTRALIZE D AND CANCELLED, NO SHARES WERE REQUIRED TO BE ISSUED BY THE TRANSFEREE COMPAN Y I.E. THE ASSESSEE COMPANY FOR THIS ISSUE, REVENUE HAS RAISED FOLLOWING 1 TO 6 GROUNDS:- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(APPEALS)-VIII, KOLKATA, HAS ERRED IN DELETING T HE ADDITION OF RS.69,64,34,089/- ON THE GROUND THAT THE JURISDICTI ONAL HIGH COURT HAS APPROVED THE SCHEME OF AMALGAMATION WHEN THE HONBLE APEX CO URT IN THE CASE OF M/S. MARSHAL & SONS AND CO.(I) LTD. VS- ITO, 223 809 (S C) HAS DECIDED THAT IT IS OPEN EVEN IF THERE MAY BE AN AMALGAMATION AS PER TH E COMPANYS ACT 1956, THERE MAY BE SEPARATE PROCEEDINGS AS PER THE I.T. A CT, 1961 AND THE ASSESSEE HAS VIOLATED SECTION 2(1B) OF THE I.T. ACT, 1961. 2, THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(APPEALS) VIII, KOLKATA, HAS ERRED IN DELETING THE ADDITION OF RS.69,64,34,089/- ON THE GROUND THAT THE CREDITWORT HINESS OF THE AMALGAMATING COMPANIES ARE ATTESTED BY THEIR BALANCE SHEET WHEN IN ALL THE FOUR LAST BALANCE SHEETS OF THE AMALGAMATING COMPANIES THERE WAS NO R EFLECTION OF THE SHARES OF INTER SE HOLDING AND THE ASSESSEE HAS ADMITTED IT A LSO AS APPEARED IN PARA-3 OF PAGE-37 OF THE APPEAL ORDER. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(APPEALS) VIII, KOLKATA, HAS ERRED IN DELETING T HE ADDITION OF RS.69,64,34,089/- ON THE GROUND THAT THE SHARES WER E ACQUIRED BY THE AMALGAMATING COMPANIES AND NOT BY THE ASSESSEE COMP ANY WHEN THE ASSESSEE CLAIMED THAT THE SHARES WERE ACQUIRED DURING THE PR EVIOUS YEAR 2005-06 CORRESPONDING TO THIS ASSESSMENT YEAR 2006-07 AND F OR WHICH NO RETURN WAS FILED BY THE AMALGAMATING COMPANIES AND AS SUCH THE PRESENT ASSESSING OFFICER BECOMES THE ASSESSING OFFICER OF THE AMALGAMATING C OMPANIES ALSO FOR THIS ASSESSMENT YEAR. 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(APPEALS) VIII, KOLKATA, HAS ERRED IN DELETING THE ADDITION OF RS.69,64,34,089/-, WHEN THE ASSESSEE COULD OFFER NO EXPLANATION HOW THE AMALGAMATING COMPANIES HAVE ACQUIRED SHARES @ RS.2/ PER SHARE WHEN THE BOOK VALUE OF THE SHARES WERE RANGING FROM RS.122/- TO RS.2,212/- AND THE ASSESSEES FIRST EXPLANATION THAT THE SHARES WERE A CQUIRED THROUGH BANK AND THE BANK ACCOUNT WILL BE PRODUCED HAS LATER BEING WITHD RAWN BY THE ASSESSEE AS CORRESPONDING BANK ACCOUNT COULD NOT BE PRODUCED AN D THE ASSESSEES LATER SUBMISSION THAT IT WAS ACQUIRED BY ADJUSTMENT AT TH E FLAT RATE OF RS.2/- PER SHARE WAS NOT SUPPORTED BY ANY EVIDENCE. 5. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(APPEALS)-VIII, KOLKATA, AHS ERRED IN DELETING T HE ADDITION OF ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 3 RS.69,64,34,089/- WHEN THE ASSESSEE COULD NOT SUBM IT ANY EXPLANATION WHO ARE THE SHAREHOLDERS OF THE AMALGAMATING COMPANIES WHO CALLED THE MEETING AND WHO ARE THE SHAREHOLDERS OF THE AMALGAMATING COMPAN IES WHO APPROVED THE AMALGAMATION AS IN BETWEEN AS PER THE ASSESSEES VE RSION, THERE WAS COMPLETE CHANGE OF SHAREHOLDERS HAS TAKEN PLACE AND THE ASSE SSEE COULD NOT PRODUCE THE BOOKS OF ACCOUNTS OF THE AMALGAMATING COMPANIES, EV EN FOR THE PREVIOUS YEAR 2005-06 CORRESPONDING TO THIS ASSESSMENT YEAR FOR W HICH THE ASSESSMENT HAS MADE. 6. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(APPEALS) VIII, KOLKATA, HAS ERRED IN DELETING THE ADDITION OF RS.69,64,34,089/- ON THE GROUND THAT THE SECTION 68 IS NOT APPLICABLE WHEN THE ASSESSEE COULD OFFER NO EXPLANATION HOW THE SHARE C APITAL IN THE AMALGAMATING COMPANIES HAS INCREASED FOR A SUM MORE THAN RS.69 C RORES DURING THE PREVIOUS YEAR BY ADJUSTMENT ACQUISITION OF SHARES AT THE FLA T RATE OF RS.2/- AND THE ASSESSEE ITSELF HAS RETREATED FROM ITS EARLIER EXPL ANATION THAT THE SHARES WERE ACQUIRED THROUGH BANK AND NO BANK ACCOUNT COULD BE PRODUCED AND THE ASSESSEE LATER SUBMITTED THAT IT WAS ACQUIRED THROUGH ADJUST MENT WITHOUT ANY EVIDENCE. 3. FACTS RELATING TO THE ABOVE ISSUE ARE THAT THE F OLLOWING FOUR COMPANIES AMALGAMATED WITH THE ASSESSEE-COMPANY DURING THE YE AR:- (A) PREETAM MARKETING PVT. LTD. W.E.F. 31.03.2004 (B) XENIX EXPORTS PVT. LTD. W.E.F. 31.03.2004 (C) BURMAN TREXIM PVT. LTD. W.E.F 31-03-2005 (D) VARSHA FABRICS PVT. LTD. W.E.F. 31.03.2005 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO NOT ICED FROM ACCOUNTS OF THE ASSESSEE THAT A SUM OF RS.69,64,39,089/- WAS CREDITED AS AMA LGAMATION RESERVE IN THE ACCOUNTS. THE TOTAL SHARE CAPITAL OF THE ASSESSEE-COMPANY AS ON 31-03-2005 AND 31-03-2006 WAS AT RS.5,04,600/-. ACCORDING TO AO NO SHARES WERE AL LOTTED TO THE SHAREHOLDERS OF AMALGAMATING COMPANIES IN LIEU OF THE TRANSFER OF S UBSTANTIAL UNDERTAKING IN THE AMALGAMATED COMPANY. ACCORDING TO HIM, NONISSUE OF THE SHARES TO THE SHAREHOLDERS OF THE AMALGAMATING COMPANIES WAS ABNORMAL AND HE REQU IRED THE ASSESSEE TO EXPLAIN. THE ASSESSEE EXPLAINED THAT ON AMALGAMATION NO SHARES W ERE ALLOTTED TO THE SHAREHOLDERS OF THE AMALGAMATING COMPANIES DUE TO CROSS HOLDINGS, A ND THE SHARES OF THE FOUR COMPANIES INTER SE GOT CANCELLED FOR WHICH DETAILS WERE ALSO FILED BEFORE THE AO AND THESE DETAILS ARE VERIFIED BY THE AO IN HIS ORDER B UT THE SAME WAS NOT PROPERLY APPRECIATED, WHICH IS AS UNDER:- ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 4 NAME OF THE AMALGAMATING COMPANY NUMBER OF SHARES SUBSCRIBED PAID UP SHARE CAPITAL (RS) SECURITIES PREMIUM (RS) TOTAL (RS) SURPLUS OF PROFIT & LOSS ACCOUNT (RS) BOOK VALUE PER SHE (RS) PREETAM 31.3.04 1290020 1,29,00,200/- 21,61,00000/- 22,90,00,200/- 8,14,69,079/- 240.58 BURMAN 31.3.05 100000 10,00,000/- 89,82,000/- 99,82,000/- 2,53,56,065/- 353.37 XENIX 31.3.04 100000 10,00,000/- 89,82,000/- 99,82,000/- 3,17,88,478/- + GENERAL RESERVE 17,93,94,905/- 2211.63 VARSHA 31.03.05 600000 60,00,000/- 5,39,82,000/- 5,99,82,000/- 1, 32,73,043/- 121.99 THE AO REFERRED TO SECTION 2(1B) OF THE ACT AND HAV E OPINED THAT 3/4 TH OF THE SHAREHOLDERS IN TERM OF VALUE HAS TO BECOME SHAREHO LDERS OF THE AMALGAMATED COMPANY VIRTUE OF AMALGAMATION. THE AO WITH REFEREN CE TO THE BALANCE SHEETS OF THESE COMPANIES HELD THAT NO INVESTMENT IN SHARES OF OTHE R AMALGAMATING COMPANIES APPEARED IN THE AUDITED BALANCE SHEET AS ON 31.3.2004 IN CAS E OF PREETAM MARKETING (P) LD. AND XENIX EXPORTS (P) LTD AND 31.3.2005 IN CASE OF VARS HA FABRICS (P) LTD AND BURMAN TREXIM (P) LTD. ON THIS ISSUE IT WAS EXPLAINED TO T HE AO THAT THE SAID HOLDINGS DID NOT APPEAR IN THE AUDITED ACCOUNTS OF THESE FOUR COMPAN IES AS ON 31.3.2004 AND 31.03.2005 RESPECTIVELY, AS THE INTER SE HOLDINGS EXISTED BETW EEN 06.10.2005 TO 2.11.2005 THAT IS AFTER THE ACCOUNTING PERIOD MENTIONED ABOVE. BUT TH E AO HELD THAT AMALGAMATION RESERVE WAS CREATED AFTER AMALGAMATION AND SHARE CA PITAL OF THE ASSESSEE-COMPANY WAS SALE AS WAS BEFORE AMALGAMATION. THE AO TRIED TO TR EAT THE AMALGAMATION RESERVE, AS DONE IN VIEW OF AMALGAMATION SCHEME APPROVED BY HON BLE CALCUTTA HIGH COURT, AS COLOURABLE DEVICE TO EVADE TAX AND HE BROUGHT THE A MALGAMATION RESERVE AT RS.69,64,34,089/- AS UNEXPLAINED CASH CREDIT U/S 68 OF THE ACT AND ADDED TO THE RETURN INCOME OF THE ASSESSEE BY OBSERVING AS UNDER:- HENCE, THE ENTIRE AMALGAMATION RESERVE OF RS.69,64, 34,089/- IS TREATED AS UNEXPLAINED CREDIT TO THE BOOKS OF THE ASSESSEE COMPANY AND IT IS TREATED AS DEEMED INCOME OF THE ASSESSEE COMPANY U/S 68 OF THE INCOME TAX ACT, 1961 AND PENALTY PROCEEDINGS U/S. 271(1)(C) IS INITIATED FOR CONCEALMENT & FURNISHING OF INACCURATE PARTICULARS OF INCOME. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE CIT(A). ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 5 4. THE CIT(A) AFTER CONSIDERING THE SUBMISSION OF T HE ASSESSEE AND LEGAL POSITION AS ARGUED BEFORE HIM, DELETED THE ADDITION BY OBSERVIN G AS UNDER:- THESE GROUNDS BEING INTERRELATED ARE TAKEN UP TOGE THER. IN THESE GROUNDS THE APPELLANT IS DISPUTING THE ASS ESSING OFFICERS (AO) ACTION IN ADDING THE AMALGAMATION RESERVE CREDITED IN THE BOO KS UNDER SEC. 68 OF THE INCOME TAX ACT, 1961. IT APPEARS FROM THE ASSESSMENT ORDER THAT THE AMALGAMATION OF FOUR COMPANIES WITH THE APPELLANT IS A CONSEQUENCE OF AN ORDER OF THE JURISDICTIONAL HIGH COURT. IN MY OPINION, THE ORDER OF THE JURISDICTION AL HIGH COURT IN THIS MATTER IS FINAL AND ALL OTHER CONSIDERATIONS, WHICH HAVE BEEN RAISE D BY THE AO IN HIS ORDER, ARE SECONDARY. THESE CANNOT, IN ANY WAY DETRACT FROM TH E LEGAL POSITION, AS DETERMINED BY THE ORDER OF THE JURISDICTIONAL HIGH COURT. THE AO HAS RAISED THE ISSUE OF INTER SE HOLDINGS AND PURPOSE OF SHARES AND THE PURPORTED DA TE OF THE SHAREHOLDERS MEETING. HOWEVER, ONCE THE HONBLE JURISDICTIONAL HIGH COURT APPROVES THE SCHEME OF AMALGAMATION, IT IS A NATURAL COROLLARY TO PRESUME THAT THESE ISSUES WERE IN THE KNOWLEDGE OF THE HONBLE HIGH COURT AND, ALSO, THAT SUCH AN ORDER HAS BEEN PASSED AFTER DUE DELIBERATIONS OF ALL CONCERNED ISSUES. TH E AO HAS RELIED ON A FEW CASE LAWS IN SUPPORT OF HIS STAND. THESE HAVE BEEN PERUSED. I DO NOT DISCERN ANY LATITUDE IN THESE DECISIONS WHICH CAN EMPOWER ANY AO TO CHALLENGE THE JURISDICTIONAL HIGH COURTS ORDER IN THIS REGARD. MOREOVER, ONCE THE JURISDICTI ONAL HIGH COURT APPROVES OF A SCHEME OF AMALGAMATION, THE SUSPICION OF A COLOURAB LE DEVICE THEREIN IS PRECLUDE. THE AO HAS MENTIONED IN HIS ORDER THAT A HUGE AMOUNT O F MONEY HAS BEEN TRANSFERRED TO THE RESERVE BY WAY OF SOME TRANSACTION WHICH IS NOT HING BUT A COLOURABLE DEVISE TO PUT INTO UNDISCLOSED AND UNACCOUNTED INCOME OF THE ASSE SSEE COMPANY THROUGH THE TRANSFEROR COMPANIES. THE ASSESSMENT ORDER ITSELF IS SILENT ABOUT THE PROCESS OF GENERATION OF SUCH UNDISCLOSED AND UNACCOUNTED INC OME. THERE IS NO MATERIAL THEREIN TO INDICATE THAT THE APPELLANT HAS EARNED ANY SUCH INCOME AS MENTIONED BY THE AO. FURTHERMORE, AS HAS BEEN REPEATEDLY STRESSED IN VAR IOUS JUDICIAL DECISIONS, THE TESTS FOR AN ADDITION UNDER SEC. 68 OF THE INCOME TAX ACT TO BE SUSTAINED ARE THOSE OF IDENTITY OF THE CREDITOR, ITS CREDITWORTHINESS AND GENUINITY OF THE TRANSACTIONS. IF THE AOS ADDITION IS MEASURED AGAINST THESE, THEN IT IS SEEN THAT, TH ERE IS NO DISPUTE AS TO THE IDENTITY OF THESE AMALGAMATING COMPANIES, THEIR CREDITWORTHINES S IS ATTESTED BY THEIR BALANCE- SHEET WHICH, HAVE BEEN ACCEPTED BY THE AO AND THERE IS NO IMPUTATION IN THE ORDER THAT THESE MONIES HAVE BEEN ACTUALLY PAID TO THE APPELLA NT, IN WHATEVER MANNER. THUS THE QUESTION OF GENUINITY ALSO BECOMES REDUNDANT. ACCOR DINGLY, I DIRECT THAT THE ADDITION MADE UNDER SEC. 68 OF THE INCOME TAX ACT, 1961 ON A CCOUNT OF AMALGAMATION RESERVE CREDIT IN THE BOOKS BE DELETED. THESE GROUNDS OF AP PEAL ARE ALLOWED. AGGRIEVED, AGAINST THE APPELLATE ORDER OF CIT(A), R EVENUE CAME IN APPEAL BEFORE US. 5. BEFORE US LD. CIT-DR, SHRI VARINDER MEHTA HEAVIL Y RELIED ON THE ASSESSMENT ORDER. ON THE OTHER HAND, LD. COUNSEL FOR THE ASSES SEE, SHRI R.P. AGGARWAL, SR. ADVOCATE, FIRST OF ALL, TAKEN US TO THE FACTS OF TH E CASE AND ARGUED THAT THE FINDINGS AND OBSERVATION OF THE AO ARE NOT CONTEMPORANEOUS TO TH E EVIDENCES ON RECORDS, THE BALANCE ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 6 SHEET OF THE AMALGAMATING COMPANIES, WHEREIN THE RE SERVE AND SURPLUS ARE FULLY REFLECTED AND FOR WHICH RECONCILIATION WAS SUBMITTE D BEFORE THE AO. HE TAKEN US TO PAGE 215 OF THE ASSESSEES PAPER BOOK, WHEREIN THE DETAI LS OF SHARES OF AMALGAMATING COMPANIES ARE FILED AND WHICH IS AS UNDER:- SL . N O NO OF ISSUED SHARES OF TRANSFEROR COMPANIES & THEIR NAMES NAME NO OF SHARES INTER SE HO LDING SHARES HELD BY BTPL OF N O OF DATE OF COST SHARE ACQUISITION RS SHARES HELD BY VFPL OF NO OF DATE COST SHARES HELD BY XEPL OF NO OF DATE COST SHARES HELD BY PMPL OF NO OF DATE OF COST 1 BURMAN TREXIM PVT LTD (BTPL) 100000 20000 21.10.05 40000 32000 21.10.05 64000 48000 21.10.05 9600 2 VARSHA FABRICS PVT.LTD (VFPL) 600000 225000 02.11.05 450000 100000 02.11.05 200000 275000 20.10.05 550000 3 XENIX EXPORTS PVT LTD (XEPL) 100000 22000 02.11.05 44000 48000 21.10.05 96000 - - 30000 21.10.05 60000 4 PREETQAM MARKETING PVT LTD (PMPL) 129020 394520 08.10.05 789040 470000 08.10.05 940000 280000 08.10.05 560000 - - 2090020 641520 1283040 683500 1367000 412000 824000 353000 706000 LD. COUNSEL FOR THE ASSESSEE FURTHER TAKEN US TO PA GE-216 OF THE ASSESSEES PAPER BOOK WHEREIN DETAILS OF AMALGAMATION RESERVE AND INTER S E DEBIT BALANCE OF TRANSFEROR COMPANY WITH TRANSFEREE COMPANY IS PROVIDED BY ASSE SSEE AND THE SAME WAS FILED BEFORE AO ALSO. THE RELEVANT RECONCILIATION IS AS U NDER:- PURBACHAL POWER COMPANY LTD. A Y 2006-07 DETAILS OF AMALGAMATION RESERVE ( AMOUNT RS) PARTICULARS BURMAN VARSHA PREETAM XENIX TOTAL A) AS PER LAST AUDITED BALANCE SHEET SHARE CAPITAL 1000000 6000000 12900200 1000000 20900200 RESERVE & SURPLUS 34338065 67255043 297569079 220165383 819327570 ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 7 SURPLUS OUT OF SHARES TO BE ALLOTTED (AS PER LAST AUDITED BALANCE SHEET) OF TRANSFER COMPANY:- M/S. XENIX EXPORTS PVT. LTD:- RS.7906,000(-) RS.11,60,290 BEING COST OF INTER SE SHAREHOLDING OF TRANSFER COS OF XENIX EXPORTS PVT. LTD. 6745710 6745710 TOTAL 35338065 3255043 310469279 227911093 646973480 LESS: MISCELLANEOUS EXPENDITURE PRELIMINARY EXPENSES 1020 59100 24000 2040 86160 BALANCE 35337045 73195943 310356839 227909053 846798880 LESS: CHANGES AFTER LAST AUDITED BALANCE SHEET COST OF CANCELLATION OF INTER COMPANY 200000 1200000 2580040 20000 4180040 SHAREHOLDING 35137045 71995943 307776799 227709053 642618840 ADD: INTER SE DEBIT BALANCE OF TRANSFEROR CO. WITH TRANSFEREE CO. 53815250 69643490 THE LD COUNSEL FOR THE ASSESSEE STATED THAT IT IS T RUE THAT ON AMALGAMATION NO SHARES WERE ALLOTTED TO THE SHAREHOLDERS OF THE AMALGAMATI NG COMPANIES DUE TO CROSS-HOLDING AS THE SHARES OF FOUR AMALGAMATING COMPANIES INTER SE GOT CANCELLED. HE EXPLAINED THAT THIS WAS BECAUSE DUE TO CROSS-HOLDING BETWEEN THE F OUR COMPANIES, THE HOLDING OF EACH COMPANY WITH OTHER, GOT NEUTRALIZED. AS REGARDS TO APPLICATION OF SEC. 2(1B) OF THE ACT BY THE AO, THE LD. COUNSEL FOR THE ASSESSEE STATED THAT 100% SHARES BEING HELD BY THE TRANSFEROR COMPANIES BETWEEN THEMSELVES AND IT IS M ORE THAN AND FURTHER IT IS BEING HELD BY THE TRANSFEROR COMPANY AFTER THE DATE OF AM ALGAMATION AND DUE TO CROSS-HOLDING INTER SE THE SHAREHOLDING GOT NEUTRALIZED AND CANCE LLED, NO SHARES WERE REQUIRED TO BE ISSUED. IT WAS CLARIFIED BY HIM THAT AS PER CLAUSE- 6(A) OF PART IV OF AMALGAMATION SCHEME THERE IS NO BAR TO HOLD / ACQUIRE THE SHARES AFTER EFFECTIVE OF MERGER BUT BEFORE THE MERGER ORDER WAS PASSED. HE ARGUED THAT THE ASSESS EE-COMPANY HAS FILED COMPLETE EXPLANATION AND SUBMISSIONS THAT HONBLE CALCUTTA H IGH COURT HAS SEEN ALL THE RECORDS ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 8 BEFORE PASSING AMALGAMATION ORDER AND THAT THE DATE OF AMALGAMATION IS THE DATE OF SCHEME AND IS BINDING OF ALL AUTHORITIES CONCERN. 6. LD. COUNSEL FOR THE ASSESSEE ALSO ARGUED THAT TH E SHARE CAPITAL OF AMALGAMATING COMPANIES WAS MUCH PRIOR TO THIS ASSESSMENT YEAR AN D IN ALL EARLIER ASSESSMENT YEARS THESE AMALGAMATING COMPANIES WERE ASSESSED TO TAX I N THEIR RESPECTIVE JURISDICTION. ACCORDING TO LD. COUNSEL, THE AMALGAMATION RESERVE IN ANY CASE, CANNOT BE SUBJECT- MATTER OF ADDITION U/S. 68 OF THE ACT BEING AN OLD CREDIT IN THE BOOKS OF AMALGAMATING COMPANIES. HE ARGUED THAT THE ACTION OF THE AO IS A RBITRARY AND UNJUSTIFIED FOR THE REASON THAT HE HAS REFERRED TO BOOK VALUE AND PURCH ASE OF SHARES OF THE AMALGAMATING COMPANIES JUST TO JUSTIFY THIS ADDITION ON ACCOUNT OF AMALGAMATION RESERVE AT ABOUT RS.69 CRORES. IN RESPECT TO THE EXPRESSION USED BY THE ASSESSING OFFICER COLOURABLE DEVICE AND SHAM TRANSACTION . LD. COUNSEL FOR THE ASSESSEE REFERRED TO THE DEC ISION OF HONBLE SUPREME COURT IN THE CASE OF UNION OF INDIA V. AZADI BACHAO ANDALON & ANR. (2003) 263 ITR 706 (SC). AS REGARD TO THE ISSUE OF AMALGAMATION, LD. COUNSEL FOR THE ASSESSEE REFERRED TO PROVISIONS SEC. 394A OF THE CO MPANIES ACT AND ALSO DISTINGUISH THE CASE LAW CITED BY THE AO IN HIS ASSESSMENT ORDER OF HONBLE SUPREME COURT IN THE CASE OF MARSHALL SONS AND COMPANY INDIA LTD. V. ITO (1997) 223 ITR 809 (SC). LD. COUNSEL FOR THE ASSESSEE ALSO ARGUED ON THE CONCEPT OF PUBLIC INTEREST BY REFERRING THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF WOOD POLYMER LTD., IN RE AND BENGAL HOTELS PVT. LTD. IN RE (1977) 109 ITR 177 ( GUJ). 7. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE OBSERVATIONS OF THE AO THAT NO INVESTMENT IN SHARES OF THE OTHER AMALGAMATING COMPANIES AS ON 31.3.2004 AND 31.3.200 5 EXISTED AMONGST THE AMALGAMATING COMPANIES ARE WITHOUT CONSIDERING THE ENTIRETY OF THE FACTS OF THE CASE. IT IS A FACT THAT IN BETWEEN 6.10.2005 TO 2.11.2005 TH E SHARE HOLDERS PURCHASED THE SHARES OF INTER SE HOLDINGS AND DUE TO THE CROSS HOLDINGS BETWEEN THE FOUR COMPANIES ULTIMATELY THE SHAREHOLDING BETWEEN THEM GOT NEUTRALIZED FOR W HICH NO FURTHER SHARES WERE REQUIRED TO BE ISSUED TO THE SHARE HOLDERS OF THESE COMPANIES. THE FOUR AMALGAMATING COMPANIES HELD THEIR BOARD RESOLUTION ON 07-11-2005 AFTER CREATING THESE CROSS HOLDINGS AND APPROVED THE SCHEME OF AMALGAMATION IN THEIR BO ARD MEETING. THEREAFTER THE ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 9 AMALGAMATION APPLICATION WAS FILED BEFORE THE HONB LE HIGH COURT ON 21-11-2005, WHICH, AFTER DETAILED APPRAISAL OF THE ACCOUNTS, VE RIFICATION ETC., WAS APPROVED BY THE HONBLE CALCUTTA HIGH COURT ON 22-03-2006. COPY OF THE AMALGAMATION ORDER OF THE HONBLE CALCUTTA HIGH COURT IS PART OF ASSESSEES P APER BOOK. ACCORDING TO AO, AMALGAMATION RESERVE WAS CREATED AFTER AMALGAMATION AND THE SHARE CAPITAL OF THE AMALGAMATED COMPANY WAS SAME AS BEFORE, BUT ACCORDI NG TO US FINDINGS AND OBSERVATIONS OF AO ARE NOT CONTEMPORANEOUS TO THE EVIDENCES ON RECORDS, AND IT IS CLEAR FROM BALANCE SHEETS OF THE AMALGAMATING COMPANIES T HE SHAREHOLDINGS BETWEEN THEM GOT NEUTRALIZED FOR WHICH NO FURTHER SHARES WERE RE QUIRED TO BE ISSUED, WHEREIN THE RESERVE AND SURPLUS ARE FULLY REFLECTED FOR WHICH R ECONCILIATION WAS ALSO SUBMITTED BEFORE THE AO, AND EVEN NOW BEFORE US, WHICH HAS BE EN REPRODUCED IN THE ORDER, AND IS ALSO PART OF ASSESSEES PAPER BOOK . WE FIND THAT P ARTICULARS OF THE AMALGAMATION RESERVES CREDITED TO THE ACCOUNTS TO THE EXTENT OF RS.64,69,73,480/- APPEARED IN THE AUDITED ACCOUNTS OF THE FOUR COMPANIES TILL 31-03-2 004 AND 31-03-2005 RESPECTIVELY AND THE BALANCE AMOUNT IS ON ACCOUNT OF INTER SE DEBIT BALANCE OF THE TRANSFEROR COMPANY. ON THE QUERY OF THE AO AS TO THE REQUIREMENT U/S. 2(1B ) OF 3/4 TH HOLDING OF SHARES BY THE SHARE HOLDERS OF THE AMALGAMATING COMPANIES IN THE AMALGAMATED COMPANY, THE ASSESSEE EXPLAINED THAT SHARES BEING HELD BY THE TR ANSFEROR COMPANIES BETWEEN THEMSELVES INTER SE, IT WAS MORE THAN 3/4 TH AND THEREFORE THE PROVISIONS OF SECTION 2(1B) HAVE NOT BEEN VIOLATED. IT WAS ALSO CLARIFIED IN RE SPECT TO CLAUSE 6(A) OF PART IV OF THE AMALGAMATION SCHEME THAT THERE IS NO BAR TO HOLD / ACQUIRE THE SHARES AFTER EFFECTIVE DATE OF MERGER AND BEFORE MERGER ORDERS ARE PASSED, BY AMALGAMATING COMPANIES WHICH IN EFFECT NEUTRALIZED THE CROSS HOLDINGS AND CANCELLED THE HOLDINGS INTER SE OF THE FOUR COMPANIES. THE RELEVANT FACT WERE ALSO PLACED BEFORE THE HONBLE CALCUTTA HIGH COURT, WHICH WAS DULY APPROVED AND IT HAS BEEN MENT IONED IN THE ORDER OF THE HIGH COURT THAT DUE TO INTER SE HOLDINGS NO SHARES WERE REQUIRED TO BE ISSUED TO THE SHAREHOLDERS OF THE AMALGAMATING COMPANIES BY THE A MALGAMATED COMPANY. 8. THE AO HAS REFERRED TO THE PURCHASE PRICE OF RS. 2 PER SHARE BY THE AMALGAMATING COMPANIES TO NEUTRALIZE THE CROSS HOLDINGS. THE ASS ESSEE LAID THE SCHEME OF AMALGAMATION BEFORE HONBLE CALCUTTA HIGH COURT ON 21-11-2005 AFTER RECEIPT OF THE ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 10 BOARD RESOLUTION OF THE FOUR AMALGAMATING COMPANIES APPROVING THE AMALGAMATION ON 07-11-2005, ALL THE DEALINGS OF THE FOUR AMALGAMATI NG COMPANIES UPTO THAT DAY IS WITHIN THE KNOWLEDGE OF THOSE COMPANIES. AO HAS OBSERVED I N THE ASSESSMENT ORDER ON THE AMALGAMATION SCHEME APPROVED BY HONBLE CALCUTTA HI GH COURT AND NOTED AS UNDER:- 5.8 ON GOING THROUGH THE HONBLE CALCUTTA HIGH COU RTS ORDER SANCTIONING SCHEME OF AMALGAMATION, THE SALIENT FEATURES CAN BE SUMMARIZED AS BELOW: PART-II 1- RATIONAL AND PURPOSE OF THE SCHEME A) THE TRANSFEROR COMPANIES ARE ENGAGED IN THE BUSINES S OF THE TRADING, BUYING, SELLING AND DISTRIBUTING OF TEXTILE PRODUCT S AND GENERAL COMMODITIES. THE TRANSFEREE COMPANY IS PROPOSES TO ENGAGED IN POWER PRODUCTION. 5.9. AS PER PARA 4.6 THE ASSESSEES REPLY REGARDING THE ACQUISITION OF INTER SE HOLDING IS THE SHARES WERE ACQUIRED BY THE TRANSFE ROR COMPANIES FROM PARTIES WITH WHOM TRANSACTIONS HAD BEEN CARRIED OUT IN THE NORMAL COURSE OF BUSINESS AND THE AMOUNT PAYABLE TO THEM HAVE BEEN ADJUSTED / SQU ARED OFF WITH THE AMOUNT RECEIVABLE FROM -/ PAYABLE TO THEM. HENCE NO BANK S TATEMENT IS REQUIRED TO BE SUBMITTED. SO THE ASSESSEE WANTED TO SAY THAT THE AMALGAMATING COMPANIES HAVE TRANSACTIONS WITH THE SHARE HOLDERS OF EACH IN THE NORMAL COURSE OF BUSINESS. THE TRANSACTIONS ARE CLAIMED TO HAVE DONE IN THE FY 200 5-06 FOR WHICH THE SCRUTINY IS BEING DONE. NO REFLECTION OF ANY SUCH TRANSACTION IS THERE IN THE TAR OF THIS YEAR IN THE PART OF DISCLOSURE U/S 40A(2)(B). THE TAX AU DITOR HAS AUDITED THE ENTIRE SALE AND PURCHASE FOR THE YEAR INCLUDING THAT OF THE AMA LGAMATED COMPANIES. HENCE, IT SHOULD HAVE BEEN NOTICED BY HIM AS AFTER 01.04.2005 , THE ADJUSTMENTS WERE CLAIMED TO HAVE DONE. THE CLAIM OF ACQUISITION OF T HE SHARERS AT A FLAT RATE OF RS.2/- PER SHARE AS DISCUSSED ABOVE AS ARE LIKE IT HAS BEE N ACQUIRED FROM AIR OF IMPOSSIBILITY AND THUS TOTALLY COVERED BY THE DICTU M AS EXPRESSED BY THE HONBLE APEX COURT IN THE CASE OF SMT. SUMATI DAYAL V. CIT 214 ITR 301 (SC) . IT IS TOTALLY IMPROBABLE AND UNNATURAL AND CAN HAPPEN ONLY IF IT IS PREPLANNED AND WITH A COMMON INTENSION OF ALL THE FIVE COMPANIES AS BOOK VALU9E PER SHARE WAS DIFFERENT FOR DIFFERENT COMPANIES. WE ARE OF THE VIEW THAT ONCE THE ACQUISITION OF SHA RES IS INTER SE HOLDING AND SHARES WERE ACQUIRED BY THE TRANSFEROR COMPANIES FROM PART IES WITH WHOM TRANSACTIONS HAD BEEN CARRIED OUT IN THE NORMAL COURSE OF BUSINESS A ND THE AMOUNT PAYABLE TO THEM HAVE BEEN ADJUSTED OR SQUARED OFF WITH THE AMOUNT RECEIV ABLE FROM OR PAYABLE TO THEM. THE AO, AS APPEARS FROM THE FACTS OF THE PRESENT CASE, IS TRYING TO FIND FAULT WITH THE ORDER OF AMALGAMATION OF HONBLE CALCUTTA HIGH COURT, WHICH WAS PASSED AFTER DUE APPLICATION OF MIND, APPRAISAL OF FACTS AND ACCOUNTS OF THE COM PANIES UNDER AMALGAMATION. THE AMALGAMATION OF THE AFORESAID FOUR COMPANIES WITH T HE ASSESSEE COMPANY HAD BEEN ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 11 CLOSELY AND MINUTELY EXAMINED BY HONBLE CALCUTTA H IGH COURT OR ITS APPOINTED OFFICERS. 9. THE RELEVANT PORTIONS OF THE ORDER OF THE HIGH C OURT APPROVING THE SCHEME OF AMALGAMATION ARE QUOTED HEREIN UNDER TO SUBSTANTIAT E THAT THE ORDER OF THE HONBLE CALCUTTA HIGH COURT, WHICH COVERS ALL THE ISSUES ON WHICH DOUBTS HAVE BEEN RAISED BY THE AO:- PAGE 8 PART-I PARA (H) OF THE ORDER OF HONBLE CALC UTTA HIGH COURT READS AS UNDER: TRANSFER DATE MEANS THE COMMENCEMENT OF BUSINESS ON THE 1 ST DAY OF APRIL 2004 IN RESPECT OF PREETAM AND XENIX AND THE COMMENCEMENT OF BUSINESS ON THE 1 ST DAY OF APRIL 2005 IN RESPECT OF VARSHA AND BURMAN RESPECTIVELY OR SUCH OTHER DATE AS THE HIGH COURT A T CALCUTTA MAY DIRECT FROM WHICH RESPECTIVE DATES THE RESPECTIVE UNDERTAKINGS OF THE TRANSFEROR COMPANIES AS HEREINAFTER DEFINED SHALL BE TRANSFERR ED OR DEEMED TO BE TRANSFERRED WITHOUT ANY FURTHER ACT OR DEED TO THE TRANSFEREE COMPANY. PAGE 8 AND 9 PARA-I PARA OF HONBLE CALCUTTA HIGH C OURT READS AS UNDER: (I) THE DATE ON WHICH THE LAST OF ALL THE CONSENTS, APP ROVALS, PERMISSIONS, RESOLUTIONS, SANCTIONS AND ORDERS AS ARE HEREINAFTE R REFERRED TO HAVE BEEN OBTAINED OR PASSED; (II) THE DATE ON WHICH CERTIFIED COPY OF THE ORDERS OF T HE HIGH COURT AT CALCUTTA UNDER SECTIONS 391, 392 AND 394 OF THE ACT ARE FILE D WITH THE REGISTRAR OF COMPANIES, WEST BENGAL PAGE 13 PARA IV, PARA 6(A) SINCE ALL THE SHARES IN THE TRANSFEROR COMPANIES AR E HELD INTER SE BY THE TRANSFEROR COMPANIES NO SHARES SHALL BE ISSUED BY T HE TRANSFEREE COMPANY TO THE SHAREHOLDERS OF THE TRANSFEROR COMPANIES. BY NO STRETCH OF IMAGINATION, IN VIEW OF THE ABOVE DISCUSSION, THE AMALGAMATION RESERVE WHICH IS A CAPITAL RECEIPT COULD BE TREATED AS A RE VENUE RECEIPT IN THE HANDS OF THE AMALGAMATED COMPANY, AND AS SUCH RESERVES AND SURPL US ARE APPEARING AS A CAPITAL IN THE BALANCE SHEETS OF THE AMALGAMATING COMPANIES AN D ALSO ADMITTED BY THE AO IN PARTS OF THE ASSESSMENT ORDER. 10. IN VIEW OF THE ABOVE FACTUAL POSITION NOW WE HA VE TO DISCUSS THE PROVISIONS OF SECTION 394A OF THE COMPANIES ACT, WHEREIN NOTICE H AS TO BE GIVEN TO THE CENTRAL ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 12 GOVERNMENT FOR APPLICATIONS MADE U/S. 391 AND 394 O F THE ACT. THE PROVISION OF SECTION 394A OF THE COMPANIES ACT, 1956 READS AS UNDER: S. 394-A NOTICE TO BE GIVEN TO CENTRAL GOVERNMENT FOR APPLICATIONS UNDER SECTIONS 391 AND 394 THE COURT SHALL GIVE NOTICE OF EVERY APPLICATION MADE TO IT UNDER SECTION 391 OR 394 TO THE CENTRAL GOVERNMENT, AND SHALL TAKE INTO CONSIDERATION THE REPRESENTATIONS, IF ANY, MADE TO IT BY THAT GOVERNMENT BEFORE PASSING ANY ORDER UNDER ANY OF THESE SECTIONS. THE CASE LAW CITED BY REVENUE OF HONBLE SUPREME CO URT IN THE CASE OF MARSHALL SONS & COMPANY INDIA LTD., SUPRA WHEREIN THEIR LORDSHIPS OF THE SUPREME COURT HAD MADE IT CLEAR THAT THEY HAVE NOT EXPRESSED ANY OPINION O N THE PLEA THAT THE AMALGAMATION ITSELF IS A DEVICE DESIGNED TO EVADE THE TAXES LEGITIMATEL Y PAYABLE BY THE SUBSIDIARY COMPANY. IF THE REVENUE THINKS THAT THEY ARE ENTITLED TO RAI SE SUCH A PLEA IN A PROCEEDING UNDER THE ACT, IT IS OPEN TO THEM TO DO SO BY WAY OF SEPARATE PROCEEDINGS ACCORDING TO LAW. THE SPIRIT OF SECTION 394 OF THE COMPANIES ACT, 1956 PR OVIDES THAT ON EVERY APPLICATION UNDER SECTION 391 OR SECTION 394, THE COURT SHALL G IVE NOTICE OF SUCH APPLICATION TO THE CENTRAL GOVERNMENT AND SHALL TAKE INTO CONSIDERATIO N THE REPRESENTATIONS, IF ANY, MADE TO IT BY THAT GOVERNMENT BEFORE PASSING ANY ORDER U NDER ANY OF THE SAID SECTIONS. IN THE PRESENT CASE BEFORE US, IN THIS VIEW OF THE MATTER, WE FEEL THAT THE COMPANY LAW HAS RECOGNISED THE FACT THAT THERE ARE SEVERAL AREAS IN THIS FIELD WHERE EVEN THE JOINT WILL OF MANAGEMENT AND THE STAKE HOLDERS MUST GIVE WAY TO T HE PUBLIC POLICY. THE FUNCTIONS, POWERS AND DISCRETIONS OF THE COURT HAVE BEEN NOTED BY A. RAMAIYA IN THE COMPANIES ACT, PART 2 AT PAGES 2499 AND 2500 IN POINT NO. 6 I NCORPORATED HEREUNDER: THAT THE PROPOSED SCHEME OF COMPROMISE AND ARRANGE MENT IS NOT FOUND TO BE VIOLATIVE OF ANY PROVISION OF LAW AND IS NOT CONTRA RY TO PUBLIC POLICY. FOR ASCERTAINING THE REAL PURPOSE UNDERLYING THE SCHEME WITH A VIEW TO BE SATISFIED ON THIS ASPECT, THE COURT, IF NECESSARY, CAN PIERCE THE VEIL OF APPARENT CORPORATE PURPOSE UNDERLYING THE SCHEME AND CAN JUDICIOUSLY X -RAY THE SAME. IN OUR VIEW, IT IS ONE OF THE FUNCTIONS OF THE COUR T TO ASCERTAIN WHETHER THE PROPOSED SCHEME OF MERGER OR AMALGAMATION IS NOT VIOLATIVE O F ANY PROVISIONS OF LAW OR IS NOT CONTRARY TO PUBLIC POLICY. THE PUBLIC POLICY OR PU BLIC INTEREST HAS BEEN DISCUSSED BY HONBLE GUJARAT HIGH COURT IN THE CASE OF WOOD POLY MER LTD., IN RE AND BENGAL HOTELS PVT. LTD. IN RE, SUPRA HONBLE GUJARAT HIGH COURT H AS CONSIDERED THAT THE SCHEME OF AMALGAMATION IS FRAMED FOR ACHIEVING SOME OBJECT BU T COMPANIES DO NOT AMALGAMATE ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 13 FOR FUN. THE COURT WILL SANCTION A SCHEME ONLY WHE RE ALL THE CONCERNED STAKE HOLDERS HAVE BEEN HEARD AND IT IS OPEN TO THE REVENUE I.E. THE INCOME TAX DEPARTMENT, AS ONE OF THE CLASS OF CREDITORS, TO PUT FORWARD ANY OBJECTIO N IT MAY HAVE AGAINST THE AMALGAMATION THE COURT WILL REFUSE SANCTION OF AMAL GAMATION SCHEME, WHERE THE SCHEME PROPOSED IS NOT BONA FIDE OR WORKABLE OR WHERE IT I S SHOWN THAT THERE IS SOMETHING WRONG WITH THE SCHEME. IN CASE THE PURPOSE DISCERN ABLE BEHIND THE AMALGAMATION SCHEME IS TO DEFEAT THE LIABILITIES OF REVENUE THE COURT CAN REFUSE SANCTIONING THE SCHEME. HONBLE GUJARAT HIGH COURT IN WOOD POLYMER LTD., IN RE AND BENGAL HOTELS PVT. LTD. IN RE SUPRA HAS LAID DOWN CERTAIN PRINCIP LES REGARDING THE EXPRESSION PUBLIC INTEREST AND THE SCHEME OF AMALGAMATION AND THE RELEVANT PARAS OF THE JUDGMENT READ AS UNDER: SIMILAR IS THE POSITION IN RODWELL SECURITIES V. I NLAND REVENUE COMMISSIONERS [1968] 1 ALL ER 257. THE BENEFIT OF EXEMPTION FROM THE STAMP DUTY WAS DENIED ON THE CONSTRUCTION OF STATUTE GRANTING EXEMPTION BUT THE FOLLOWING OBSERVATION WAS RELIED UPON IN SUPPORT OF THE SUBMISSION THAT A MER E SETTING UP OF A CHAIN OF COMPANIES IS NOT OPEN TO LURKING SUSPICION, THAT IT HAS BEEN DONE WITH AN AVOWED OBJECT OF DEFEATING TAXING STATUTE. THE OBSERVATION RELIED UPON READS AS UNDER: 'IT IS WORTHWHILE OBSERVING THAT WHERE YOU HAVE A C HAIN OF COMPANIES IT IS ALWAYS POSSIBLE BY ARRANGING THE TR ANSFER IN A CERTAIN WAY, TO OBTAIN THE BENEFIT OF EXEMPTION UND ER THE SECTION. ' IT CANNOT BE SAID THAT THIS OBSERVATION HAD LAID DOWN A BROAD PROPOSITION OF LAW. THE OBSERVATION CANNOT BE TORN OUT OF CONTEXT AND WHEN READ IN THE CONTEXT, IT ONLY MEANS THAT AN ARRANGEMENT CAN BE MADE BY THE ASSESSEE SO AS TO INCUR THE LEAST LI ABILITY FOR THE TAX AND TO SUCH A PROPOSITION, I DO NOT TAKE ANY EXCEPT ION. THE EXPRESSION 'PUBLIC INTEREST' STANDING BY ITSEL F IS LIKELY TO APPEAR TO BE VAGUE WITHOUT ANY SPECIFIC CONNOTATION. IT IS CAPAB LE OF MORE THAN ONE MEANING. THEREFORE, IN ORDER TO ASCERTAIN THE TRUE MEANING O F ' PUBLIC INTEREST ' USED IN A GIVEN STATUTE, IT IS TO BE CONSTRUED IN THE CONTEXT OF THE LEGISLATION IN WHICH IT IS USED, PROVISION IN WHICH IT IS USED, AND THE PURPOS E SOUGHT TO BE ACHIEVED BY THE USE OF THE EXPRESSION. WHERE ALTERNATIVE CONSTRUCTI ONS ARE EQUALLY OPEN THAT ALTERNATIVE IS TO BE CHOSEN WHICH WILL BE CONSISTEN T WITH THE SMOOTH WORKING OF THE SYSTEM WHICH STATUTE PURPORTS TO BE REGULATING AND THAT ALTERNATIVE IS TO BE REJECTED, WHICH WILL INTRODUCE UNCERTAINTY, FRICTIO N, OR CONFUSION INTO THE WORKING OF THE SYSTEM : VIDE SHANNON REALTIES V. ST. MICHEL [1924] AC 185 (PC). AT ANY RATE, SUCH AN EXPRESSION CAPABLE OF MORE THAN ONE M EANING MUST DRAW ITS COLOUR AND CONTENT FROM THE CONTEXT IN WHICH IT IS USED. I F SUCH SHOULD BE THE CONSTRUCTION OF THE EXPRESSION 'PUBLIC INTEREST', IT WOULD BE NE CESSARY TO SEE THE SETTING IN WHICH IT IS PLACED. TO RECALL EARLIER CONTROVERSY ' PUBLIC INTEREST' IN COMPANY LAW IS A NEW AND RECENT ENTRANT. THE SECOND PROVISO TO SECTION 394(1) WAS ADDED BY AMENDING ACT OF 1965, PURSUANT TO THE RECOMMENDATIO NS OF VIVIAN BOSE ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 14 COMMISSION OF DALMIA AND JAIN CONCERNS. THE VIVIAN BOSE COMMISSION WAS APPOINTED TO INQUIRE INTO AND REPORT ON THE ADMINIS TRATION OF CERTAIN COMPANIES CONTROLLED BY SHRI RAMKRISHNA DALMIA AND SHANTI PRA SAD JAIN AND TWO OTHERS AND ESPECIALLY ABOUT THE IRREGULARITIES, FRAUD OR B REACHES OF TRUST OR ACTION IN DISREGARD OF HONEST COMMERCIAL PRACTICES, CONTRAVEN TION OF ANY LAW (EXCEPT CONTRAVENTION IN RESPECT OF WHICH CRIMINAL PROCEEDI NGS WERE PENDING IN A COURT OF LAW) IN RESPECT OF THE COMPANIES AND FIRMS COVERED BY THE TERMS OF REFERENCE. COMMISSION WAS ALSO DIRECTED TO SUGGEST THE ACTION WHICH IN THE OPINION OF THE COMMISSION SHOULD BE TAKEN TO ACT AS A PREVENTIVE I N FUTURE CASES AND ALSO TO SUGGEST MEASURES WHICH IN THE OPINION OF THE COMMIS SION ARE NECESSARY IN ORDER TO ENSURE IN THE FUTURE THAT DUE AND PROPER ADMINIS TRATION OF THE FUNDS AND ASSETS OF THE COMPANIES AND FIRMS IN THE INTEREST OF INVES TING PUBLIC. INTEREST OF THE INVESTING PUBLIC IS INTEREST OF GENERAL PUBLIC WHIC H EXPRESSION WOULD BE COVERED BY 'PUBLIC INTEREST'. PURSUANT TO THIS DIRECTIVE AN D AS A CONSEQUENCE OF ITS FINDING, THE COMMISSION RECOMMENDED INTRODUCTION OF A PROVIS ION BY WHICH THE COURT WHILE EXAMINING THE SCHEME OF AMALGAMATION, WOULD H AVE AN OPPORTUNITY TO ASCERTAIN WHETHER THE AFFAIRS OF THE TRANSFEROR-COM PANY WHICH WILL BE DISSOLVED WITHOUT WINDING UP WERE CARRIED ON IN A MANNER PREJ UDICIAL TO ITS MEMBERS OR PUBLIC INTEREST. THIS RECOMMENDATION FOUND ITS ECHO IN THE SECOND PROVISO TO SECTION 394(1). APART FROM THE RECOMMENDATION, THE VOLUMINOUS REPORT OF THE COMMISSION THROWS A LURID LIGHT ON HOW THE MACHINER Y OF COMPANY FORMATION AND COMPANY MANAGEMENT WERE USED TO SUBSERVE THE INTERE ST OF THOSE CONTROLLING THE AFFAIRS OF THE COMPANY WITH SCANT REGARD FOR THE IN TEREST OF THE SOCIETY OR EVENT OF THE INVESTING PUBLIC. THE EXPRESSION 'PUBLIC INTEREST' IS TO BE FOUND IN THE SECOND PROVISO AND IN THE CONTEXT OF A COMPANY WHICH, IF, SCHEME OF AM ALGAMATION IS SANCTIONED, IS LIKELY TO LOSE ITS IDENTITY BY GETTING MERGED WITH THE TRANSFEREE-COMPANY. IT IS TO BE DISSOLVED WITHOUT WINDING UP. IN WINDING UP THE MAN NER IN WHICH AFFAIRS OF A COMPANY ARE CONDUCTED CAN BE PROBED IN DEPTH; BUT A SCHEME OF AMALGAMATION WHICH PROVIDES FOR MERGER OF THE TRANSFEROR COMPANY WITH THE TRANSFEREE- COMPANY, WOULD DESTROY ANY OPPORTUNITY FOR EXAMINAT ION OF THE AFFAIRS OF THE TRANSFEROR-COMPANY. THE SECOND PROVISO WOULD PROVID E THE LAST OPPORTUNITY TO PEEP INTO THE AFFAIRS OF THE TRANSFEROR COMPANY BEF ORE IT GETS VIRTUALLY EXTINCT. THE COURT IS, THEREFORE, CHARGED WITH A DUTY BEFORE IT FINALLY CONFIRMS BURIAL-CUM- CREMATION OF THE TRANSFEROR-COMPANY, TO PEEP INTO I TS AFFAIRS TO ASCERTAIN WHETHER THEY HAVE BEEN CARRIED ON NOT ONLY IN A MANNER NOT PREJUDICIAL TO ITS MEMBERS BUT IN EVEN PUBLIC INTEREST. THE EXPRESSION 'PUBLIC INT EREST' MUST TAKE ITS COLOUR AND CONTENT FROM THE CONTEXT IN WHICH IT IS USED. THE C ONTEXT IN WHICH THE EXPRESSION ' PUBLIC INTEREST ' IS USED SHOULD PERMIT THE COURT T O FIND OUT WHY THE TRANSFEROR- COMPANY CAME INTO EXISTENCE, FOR WHAT PURPOSE IT WA S 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 WHETHE R ITS AFFAIRS HAVE NOT BEEN CARRIED ON IN A MANNER PREJUDICIAL TO PUBLIC INTERE ST. THAT IS THE COLOUR AND CONTENT OF THE EXPRESSION ' PUBLIC INTEREST ' AS U SED 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 INTER EST '. ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 15 THE SCHEME OF AMALGAMATION MUST HAVE SOME PURPOSE OR OBJECT TO ACHIEVE. IT WAS REPEATEDLY INQUIRED WHAT PURPOSE OR OBJECT WAS TO BE ACHIEVED BY A SCHEME OF AMALGAMATION OFFERED FOR COURT'S SANCTI ON. IT WAS SAID THAT THE PROPERTY BELONGING TO THE TRANSFEROR-COMPANY WILL B E AVAILABLE TO THE TRANSFEREE- COMPANY. NOW, THE PROPERTY BELONGING TO THE TRANSFE ROR COMPANY IS SITUATE IN CALCUTTA. THE TRANSFEROR-COMPANY IS HAVING ITS FACT ORY AT BILLIMORA. THE TRANSFEROR-COMPANY APPEARS TO HAVE NOT DONE ANY BUS INESS EXCEPT ACQUIRING CAPITAL ASSET FROM ITS PARENT COMPANY OF WHICH IT W AS A SUBSIDIARY COMPANY AND GOT IT REVALUED SO THAT BY THE PROCESS OF REVALUATI ON, THE EQUITY SHAREHOLDERS OF THE TRANSFEROR-COMPANY CAN GET LARGE NUMBER OF SHAR ES OF THE TRANSFEREE-COMPANY BY THE EXCHANGE RATIO PRESCRIBED IN THE SCHEME OF A MALGAMATION. NO APPARENT UNDERSTANDABLE PURPOSE OR OBJECT BEHIND THE SCHEME IS DISCERNIBLE. THE PURPOSE AND THE ONLY PURPOSE APPEARS TO BE TO ACQUIRE CAPIT AL ASSET OF THE DOC PVT. LTD. THROUGH THE INTERMEDIARY OF THE TRANSFEROR-COMPANY WHICH WAS CREATED FOR THAT VERY PURPOSE TO MEET THE REQUIREMENT OF LAW, AND IN THE PROCESS TO DEFEAT TAX LIABILITY THAT WOULD OTHERWISE ARISE. IF SUCH BE TH E SCHEME OF AMALGAMATION AND IF SUCH IS THE USE MADE OF THE TRANSFEROR-COMPANY BY T HOSE CONTROLLING IT, IT CAN NEVER BE SAID THAT THE AFFAIRS OF THE TRANSFEROR CO MPANY SOUGHT TO BE AMALGAMATED, CREATED FOR THE SOLE PURPOSE OF FACILI TATING TRANSFER OF CAPITAL ASSET, THROUGH ITS MEDIUM, HAVE NOT BEEN CARRIED ON IN A M ANNER PREJUDICIAL TO PUBLIC INTEREST. PUBLIC INTEREST LOOMS LARGE IN THIS BACKG ROUND, AND THE MACHINERY OF JUDICIAL PROCESS IS SOUGHT TO BE UTILISED FOR DEFEA TING PUBLIC INTEREST AND THE COURT WOULD NOT LEND ITS ASSISTANCE TO DEFEAT PUBLIC INTE REST, NAMELY, TAX PROVISION. IT MUST BE CONFESSED THAT IT IS OPEN TO A PARTY TO SO ARRANGE ITS AFFAIRS SO AS TO REDUCE ITS TAX LIABILITY. THE ASSESSEE OR PARTY CAN ARRANGE ITS AFFAIRS SO THAT HE OR IT MAY NOT INCUR ANY TAX LIABILITY. BUT IT MUST BE WITHIN THE POWER OF THE PARTY TO ARRANGE ITS AFFAIRS. 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 PROCESS TO DEFEAT A TAX LIABILITY, OR EVEN TO AVOID TAX LIABILITY. IF THE PARTY HAS SO ARRANGED ITS AFFAIRS, AS TO REDUCE OR EVEN A VOID TAX LIABILITY AND THE TAXING AUTHORITY DISPUTES IT, AND THE MATTER IS BROUGHT BE FORE THE COURT, THE COURT WOULD ADJUDICATE UPON THE DISPUTE BETWEEN THE REVENUE AND THE ASSESSEE ON THE RIVAL CONTENTIONS. THAT IS NOT THE SITUATION HERE. IN SUC H A SITUATION, THE COURT WOULD NOT BE CONCERNED AS TO THE MODALITY OF AVOIDANCE OF TAX BUT HERE THE TAX CANNOT BE AVOIDED UNLESS THE COURT LENDS ITS ASSISTANCE, NAME LY, BY SANCTIONING THE SCHEME OF AMALGAMATION. IN OTHER WORDS, THE JUDICIAL PROCE SS IS USED OR POLLUTED TO DEFEAT THE TAX BY FORMING AN APPROPRIATE DEVICE OR SUBTERF UGE. SUCH A SITUATION CAN NEVER BE SAID TO BE IN PUBLIC INTEREST. IT IS CLEAR LY OPPOSED TO PUBLIC INTEREST AND ON THIS GROUND THE COURT WOULD NOT SANCTION THE SCH EME OF AMALGAMATION. 11. IN VIEW OF THE JUDGMENT OF HONBLE GUJARAT HIGH COURT IN THE CASE OF WOOD POLYMER LTD., IN RE AND BENGAL HOTELS PVT. LTD. IN RE SUPRA, WE ARE OF THE VIEW THAT COURT HAS POWER TO ENSURE THAT AMALGAMATION IS NOT AT THE EXPENSE OF PUBLIC INTEREST AND THAT IT IS QUITE FAIR, REASONABLE, WORKABLE AND IS SUCH THA T A REASONABLE MAN WOULD APPROVE THE SAME. THE COURT MUST BE SATISFIED THAT THE CHARGE OF EVASION OF TAX ALLEGED BY ANY OF THE ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 16 PARTIES IS NOT TRUE BEFORE SANCTIONING A SCHEME OF AMALGAMATION AND IT WOULD NOT APPROVE THE SCHEME OF AMALGAMATION, WHICH IS INTEND ED TO AVOID A TAX OTHERWISE PAYABLE. EVEN THE COURT HAS POWER TO ISSUE APPROPR IATE DIRECTIONS WHILE APPROVING THE SCHEME WHERE IT CANNOT BE POSITIVELY INFERRED THAT THE SCHEME IS SOLELY INTENDED TO AVOID A TAX. HONBLE GUJARAT HIGH COURT IN THE CASE OF V ODAFONE ESSAR GUJARAT LTD. VS. DEPARTMENT OF INCOME TAX (2013) 353 ITR 222 (GUJ) H AS CONSIDERED A SCHEME OF ARRANGEMENT PROPOSED BY ASSESSEE FOR TRANSFER OF PA SSIVE INFRASTRUCTURE ASSETS. THE SCHEME WAS OBJECTED TO BY THE REVENUE AND HONBLE S INGLE JUDGE OF THE VERY HIGH COURT CONSIDERING THIS OBJECTION, INTER ALIA, HELD THAT THE TRANSACTION WAS VOID IN VIEW OF THE PROVISIONS OF SECTION 281OF THE ACT AND REFUSED TO SANCTION THE SCHEME. HONBLE HIGH COURT ON APPEAL, DIVISION BENCH LAID DOWN CERT AIN PRINCIPLES AS UNDER (AS REPRODUCED FROM HEAD NOTES): HELD, ALLOWING THE APPEAL, (I) THAT IF ANY AMOUNT WAS REQUIRED TO BE PAID TO THE INCOME-TAX DEPARTMENT BY THE TRANSFEROR COMPANY, TH E INCOME-TAX DEPARTMENT COULD BE SAID TO BE A CREDITOR SO FAR AS ITS CLAIM AGAINST THE TRANSFEROR COMPANY WAS CONCERNED. CONSIDERING THE FACT, IT COULD NOT B E SAID THAT THE INCOME-TAX DEPARTMENT HAD NO LOCUS STANDI TO PUT FORWARD ITS O BJECTIONS IN THIS BEHALF. EVEN IF NO OBJECTIONS WERE RECEIVED AGAINST THE SCHEME P URSUANT TO THE PUBLIC ADVERTISEMENT, YET THE COURT WAS REQUIRED TO EXAMIN E THE SCHEME WHILE GIVING ITS APPROVAL. THE SINGLE JUDGE HAD RIGHTLY ALLOWED THE INCOME-TAX DEPARTMENT TO HAVE ITS SAY BY RAISING OBJECTIONS IN CONNECTION WI TH THE SCHEME IN QUESTION. A SIMILAR OBJECTION HAD BEEN RAISED BY THE INCOME-TAX DEPARTMENT BEFORE THE DELHI HIGH COURT WHICH HAD CONSIDERED THE OBJECTIONS RAIS ED BY THE INCOME-TAX DEPARTMENT ON ITS OWN MERITS. THE INCOME-TAX DEPART MENT HAD THE RIGHT TO PLACE ITS OBJECTIONS AGAINST SANCTIONING OF THE SCHEME IN QUESTION. THE INCOME-TAX DEPARTMENT WOULD BE FREE TO EXAMINE THE ASPECT OF A NY TAX PAYABLE AS A RESULT OF THE SCHEME. (II) THAT THERE WAS NOTHING WRONG IF THE COMPANY WA NTED TO RECONSTRUCT ITS BUSINESS IN AN ALTERNATIVE FORM BY DIVIDING TELECOM MUNICATION BUSINESS AND TELECOMMUNICATION INFRASTRUCTURE BUSINESS IN THE MA NNER CARRIED ON BY THE APPELLANT, IN A MANNER THAT THE TELECOMMUNICATIONS INFRASTRUCTURE BUSINESS WOULD BE CARRIED ON BY THE TRANSFEREE COMPANY. THE BUSINE SS WOULD BE CONTINUED AND CARRIED ON BY SUBSTANTIALLY THE SAME PERSONS WHO WE RE PRESENTLY CARRYING ON THE CONSOLIDATED BUSINESS SINCE BOTH THE TRANSFEROR AND THE TRANSFEREE COMPANIES WERE WHOLLY OWNED SUBSIDIARIES OF ONE COMPANY WHICH WOULD CONTINUE TO CARRY ON THE BUSINESSES. IT NECESSARILY IMPLIED THAT ONCE A SCHEME WAS A RECONSTRUCTION IT WAS BOUND TO BE RECOGNISED AS AN ARRANGEMENT AND /OR COMPROMISE UNDER SECTION 391. THE INCOME-TAX DEPARTMENT, BY RAISING SUCH A CONTENTION WAS UNNECESSARILY PUTTING RESTRICTIONS ON THE LANGUAGE OF SECTION 394(1) AND (1)(A) WHICH THE LEGISLATURE HAD NOT DEEMED FIT TO IMPOSE. (III) THAT THE RIGHTS OF THE INCOME-TAX DEPARTMENT OF ASSESSING, LEVYING AND COLLECTING TAX FROM THE APPELLANT WERE NOT CONFISCA TED OR EXPROPRIATED SO AS TO EXTINGUISH SUCH RIGHTS. A CONTENTION THAT THE RECOV ERY OF THE OUTSTANDING TAX MAY ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 17 BE AFFECTED BY TRANSFER OF PASSIVE INFRASTRUCTURE A SSETS, APART FROM BEING INCORRECT, COULD NOT BE EQUATED WITH EXPROPRIATION OR CONFISCATION OR EXTINGUISHMENT OF RIGHTS OF THE INCOME-TAX DEPARTME NT. (IV) THAT THE EQUITY SHAREHOLDERS, SECURED AND UNSE CURED CREDITORS OF THE APPELLANT AND THE REGIONAL DIRECTOR HAD APPROVED TH E SCHEME OF ARRANGEMENT. THE SANCTION WAS TO BE GRANTED TO THE SCHEME OF ARR ANGEMENT UNDER SECTIONS 391 AND 394 OF THE 1956 ACT WHILE THE RIGHT OF THE INCO ME-TAX DEPARTMENT TO RECOVER THE DUES IN ACCORDANCE WITH LAW IRRESPECTIVE OF THE SANCTION OF THE SCHEME WAS TO BE PROTECTED. [THE COURT OBSERVED THAT THE RIGHT OF THE INCOME-TAX DEPARTMENT TO TAKE OUT APPROPRIATE PROCEEDINGS REGARDING RECOVERY OF ANY TAX FROM THE TRANSFEROR OR TRANSFEREE COMPANY AS THE CASE MAY BE WAS TO BE KEPT INTACT AND PENDING CASES BEFORE THE TRIBUNAL WERE NOT BE AFFEC TED IN VIEW OF THE SANCTION OF THE SCHEME.] ORDER OF THE SINGLE JUDGE IN VODAFONE ESSAR GUJARAT LTD., IN RE [2012] 342 ITR 135 (GUJ) REVERSED. FROM THE ABOVE PROVISIONS OF SECTION 394A OF THE CO MPANIES ACT, 1956, LEGAL POSITION ENUNCIATED IN THE DECISIONS OF HONBLE GUJARAT HIGH COURT IN THE CASE OF WOOD POLYMER LTD., IN RE AND BENGAL HOTELS PVT. LTD. IN RE, SUPRA AND VODAFONE ESSAR GUJARAT LTD., SUPRA, EVIDENTLY MAKES THE PURPOSE CLEAR THAT IF THE REVENUE WANTS TO OBJECT TO THE PROPOSED SCHEME OF AMALGAMATION, IT HAS TO DO SO IN THE COURSE OF PROCEEDINGS BEFORE THE HIGH COURT BUT BEFORE THE FINAL ORDER IS PASSED . WHENEVER SUCH OBJECTIONS HAVE BEEN RAISED, THESE HAVE BEEN CONSIDERED ON MERITS B Y THE CONCERNED HIGH COURT AND ALSO INCORPORATED THE CONDITION FOR SAFEGUARDING TH E INTEREST OF REVENUE IN THE VERY SCHEME. AS A MATTER OF PUBLIC POLICY, ONCE A SCHEME OF AMALGAMATION IS APPROVED BY HONBLE HIGH COURT NO AUTHORITY SHOULD BE ALLOWED T O TINKER WITH THE SCHEME. IN THE PRESENT CASE OF THE ASSESSEE, NEITHER THE OFFICIAL LIQUIDATOR NOR THE REGIONAL DIRECTOR NOR CENTRAL GOVERNMENT RAISED ANY OBJECTION TO THE SCHE ME OF AMALGAMATION. IN SUCH CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE REVENUE HAS NOTHING TO SAY AT THE TIME OF APPROVAL OF SCHEME BY HONBLE HIGH COURT IN THE PRE SENT CASE. 12. IN VIEW OF THE ABOVE FACTS AND LEGAL POSITION DISCUSSED ABOVE, IT IS NOT OPEN TO THE REVENUE TO GO INTO THE AMALGAMATION RESERVE AS PER AMALGAMATION SCHEME APPROVED BY HONBLE CALCUTTA HIGH COURT. WE ANSWER THE FIRST I SSUE FRAMED BY US IN NEGATIVE I.E. AGAINST REVENUE AND IN FAVOUR OF ASSESSEE FOR THE R EASONS STATED ABOVE. 13. IN REGARD TO THE ASPECT OF COLOURABLE DEVICE AL LEGED BY THE REVENUE, WE HAVE GONE THROUGH THE JUDGMENT CITED BY THE LD. COUNSEL FOR T HE ASSESSEE IN THE CASE OF AZADI ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 18 BACHAO ANDOLAN & ANR., SUPRA WHEREIN THE EXPRESSION COLOURABLE DEVICE HAS BEEN DISCUSSED ELABORATELY AND HOW TO MAKE THE USAGES OF THE SAME IS ALSO DESCRIBED. HONBLE SUPREME COURT IN THE ABOVE CASE HAS HELD AS UNDER: WE MAY ALSO REFER TO THE JUDGMENT OF THE GUJARAT H IGH COURT IN BANYAN AND BERRY V. COMMISSIONER OF INCOME-TAX[1996] 222 ITR 831 AT 850 WHERE REFERRING TO MCDOWELLS CASE [1985] 154 ITR 148 (SC), THE COU RT OBSERVED : THE COURT NOWHERE SAID THAT EVERY ACTION OR INACTI ON ON THE PART OF THE TAXPAYER WHICH RESULTS IN REDUCTION OF TAX LIABILIT Y TO WHICH HE MAY BE SUBJECTED IN FUTURE, IS TO BE VIEWED WITH SUSPICION AND BE TREATED AS A DEVICE FOR AVOIDANCE OF TAX IRRESPECTIVE OF LEGITIM ACY OR GENUINENESS OF THE ACT; AN INFERENCE WHICH UNFORTUNATELY, IN OUR OPINI ON THE TRIBUNAL APPARENTLY APPEARS TO HAVE DRAWN FROM THE ENUNCIATI ON MADE IN MCDOWELLS CASE [1958] 154 ITR 148 (SC). THE RATIO OF ANY DECISION HAS TO BE UNDERSTOOD IN THE CONTEXT IT HAS BEEN MADE. T HE FACTS AND CIRCUMSTANCES WHICH LEAD TO MCDOWELLS DECISION LEA VE US IN NO DOUBT THAT THE PRINCIPLE ENUNCIATED IN THE ABOVE CASE HAS NOT AFFECTED THE FREEDOM OF THE CITIZEN TO ACT IN A MANNER ACCORDING TO HIS REQ UIREMENTS, HIS WISHES IN THE MANNER OF DOING ANY TRADE, ACTIVITY OR PLANNING HIS AFFAIRS WITH CIRCUMSPECTION, WITHIN THE FRAMEWORK OF LAW, UNLESS THE SAME FALL IN THE CATEGORY OF COLOURABLE DEVICE WHICH MAY PROPERLY BE CALLED A DEVICE OR A DUBIOUS METHOD OR A SUBTERFUGE CLOTHED WITH APPAREN T DIGNITY. FURTHER, HONBLE SUPREME COURT IN THIS VERY JUDGMEN T DISCUSSED THE WORDS SHAM AND DEVICE AND CLARIFIED MEANINGS OF THE SAME AS UNDE R: THOUGH THE WORDS SHAM AND DEVICE WERE LOOSELY USED IN CONNECTION WITH THE INCORPORATION UNDER THE MAURITIOUS LAW, WERE DEEM I T FIT TO ENTER A CAVEAT HERE. THESE WORDS ARE NOT INTENDED TO BE USED AS MAGIC MA NTRAS OR CATCH-ALL PHRASES TO DEFEAT OR NULLIFY THE EFFECT OF A LEGAL SITUATION. AS LORD ATKIN POINTED OUT IN DUKE OF WESTMINSTERS CASE [1936] AC 1 (HL); [1935] 19 T C 490, 511): I DO NOT USE THE WORD DEVICE IN ANY SINISTER SENSE : FOR IT HAS TO BE RECOGNISED THAT THE SUBJECT, WHETHER POOR AND HUMBL E OR WEALTHY AND NOBLE, HAS THE LEGAL RIGHT SO TO DISPOSE OF HIS CAP ITAL AND INCOME AS TO ATTRACT UPON HIMSELF THE LEAST AMOUNT OF TAX. THE O NLY FUNCTION OF A COURT OF LAW IS TO DETERMINE THE LEGAL RESULT OF HIS DISP OSITIONS SO FAR AS THEY AFFECT TAX. LORD TOMLIN SAID (PAGE 521) : THERE MAY, OF COURSE, BE CASES WHERE DOCUMENTS ARE NOT BONA FIDE NOR INTENDED TO BE ACTED UPON, BUT ARE ONLY USED AS A C LOAK TO CONCEAL A DIFFERENT TRANSACTION. IN SNOOK V. LONDON AND WEST RIDING INVESTMENTS LTD. [1971] 1 ALL ER 518 AT 528 (CA) LORD DIPLOCK L. J., EXPLAINED THE USE OF THE WORD SHAM AS A LEGAL CONCEPT IN THE FOLLOWING WORDS : ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 19 IT IS, I THINK, NECESSARY TO CONSIDER WHAT, IF A NY, LEGAL CONCEPT IS INVOLVED IN THE USE OF THIS POPULAR AND PEJORATI VE WORD. I APPREHEND THAT, IF IT HAS ANY MEANING IN LAW, IT ME ANS ACTS DONE OR DOCUMENTS EXECUTED BY THE PARTIES TO THE SHAM WHI CH ARE INTENDED BY THEM TO GIVE TO THIRD PARTIES OR TO THE COURT THE APPEARANCE OF CRATING BETWEEN THE PARTIES LEGAL RIG HTS AND OBLIGATIONS DIFFERENT FROM THE ACTUAL LEGAL RIGHTS AND OBLIGATIONS (IF ANY) WHICH THE PARTIES INTEND TO CREATE. ONE THING I THINK, HOWEVER, IS CLEAR IN LEGAL PRINCIPLE, MORALITY AND THE AUTHO RITIES (SEE YORKSHIRE RAILWAY WAGON CO. V. MACLURE [1882] 21 C H. D. 309 ; STONELEIGH FINANCE, LTD. V. PHILLIPS [1965] 1 ALL E R 513 (CA); [1965] 2 QB 537 (CA)) THAT FOR ACTS OR DOCUMENTS TO BE A SHAM, WITH WHATEVER LEGAL CONSEQUENCES FOLLOW FROM THIS, ALL THE PARTIES THERETO MUST HAVE A COMMON INTENTION THAT THE ACTS OR DOCUMENTS ARE NOT TO CREATE THE LEGAL RIGHTS AND OBLIGATIONS WHICH THEY GIVE THE APPEARANCE OF CREATING. NO UNEXPRESSED INTENTIO NS OF A SHAMMER AFFECT THE RIGHTS OF A PARTY WHOM HE DECE IVED. IN WAMAN RAO V. UNION OF INDIA [1981] 2 SCC 362 AT PARA. 45 AND MINERVA MILLS LTD. V. UNION OF INDIA [1980] 3 SCC 6 25 AT PARA 91 THIS COURT CONSIDERED THE IMPORT OF THE WORD DEVICE WI TH REFERENCE TO ARTICLE 31B WHICH PROVIDED THAT THE ACTS AND REGULATIONS SP ECIFIED IN THE NINTH SCHEDULE SHALL NOT BE DEEMED TO BE VOID OR EVEN TO HAVE BECOME VOID ON THE GROUND THAT THEY ARE INCONSISTENT WITH THE FUND AMENTAL RIGHTS. THE USE OF THE WORD DEVICE HERE WAS NOT PEJORATIVE, BUT T O DESCRIBE A PROVISION OF LAW INTENDED TO PRODUCE A CERTAIN LEGAL RESULT. IF THE COURT FINDS THAT NOTWITHSTANDING A SERIES OF LEGAL STEPS TAKEN BY AN ASSESSEE, THE INTENDED LEGAL RESULT HAS NOT BEEN AC HIEVED, THE COURT MIGHT BE JUSTIFIED IN OVERLOOKING THE INTERMEDIATE STEPS, BUT IT WOULD NOT BE PERMISSIBLE FOR THE COURT TO TREAT THE INTERVENING LEGAL STEPS AS NON EST BASED UPON SOME HYPOTHETICAL ASSESSMENT OF THE REA L MOTIVE OF THE ASSESSEE. IN OUR VIEW, THE COURT MUST DEAL WITH WHA T IS TANGIBLE IN AN OBJECTIVE MANNER AND CANNOT AFFORD TO CHASE A WILL- O-THE-WISP. THE JUDGMENT OF THE PRIVY COUNCIL IN BANK OF CHETTI NADS CASE [1940] 8 ITR 522, WHOLEHEARTEDLY APPROVING THE DICTA IN THE PASSAGE FROM THE OPINION OF LORD RUSSEL IN WESTMINSTERS CASE [1936] AC 1 (HL); [1935] 19 TC 490, WAS THE LAW IN THIS COUNTRY WHEN THE CON STITUTION CAME INTO FORCE. THIS WAS THE LAW IN FORCE THEN, WHICH CONTIN UED BY REASON OF ARTICLE 372. UNLESS ABROGATED BY AN ACT OF PARLIAMENT, OR B Y A CLEAR PRONOUNCEMENT OF THIS COURT, WE THINK THAT THIS LEG AL PRINCIPLE WOULD CONTINUE TO HOLD GOOD. HAVING ANXIOUSLY SCANNED MCD OWELLS CASE [1985] 154 ITR 148 (SC), WE FIND NO REFERENCE THEREIN TO HAVING DISSE NTED FROM OR OVERRULED THE DECISION OF THE PRIVY COUNCIL IN B ANK OF CHETTINADS CASE [1940] 8 ITR 522 (PC). IF ANY, THE PRINCIPLE APPEAR S TO HAVE BEEN REITERATED WITH APPROVAL BY THE CONSTITUTIONAL BENC H OF THIS COURT IN MATHURAMS CASE [1999] 8 SCC 667 AT PAGE 12 . WE ARE, THEREFORE, UNABLE TO ACCEPT THE CONTENTION OF THE RESPONDENTS THAT TH ERE HAS BEEN A VERY DRASTIC CHANGE IN THE FISCAL JURISPRUDENCE, IN INDI A, AS WOULD ENTAIL A ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 20 DEPARTURE. IN OUR JUDGMENT, FROM WESTMINSTERS CASE [1936] AC 1 (HL); 19 TC 490 TO BANK OF CHETTINADS CASE [1940] 8 ITR 522 (PC) TO MATHURAMS CASE [1999] 8 SCC 667, DESPITE THE HICCU PS OF MCDOWELLS CASE [1985] 154 ITR 148 (SC), THE LAW HAS REMAINED THE SAME. WE ARE UNABLE TO AGREE WITH THE SUBMISSION THAT AN ACT WHICH IS OTHERWISE VALID IN LAW CAN BE TREATED AS NON EST ME RELY ON THE BASIS OF SOME UNDERLYING MOTIVE SUPPOSEDLY RESULTIN G IN SOME ECONOMIC DETRIMENT OR PREJUDICE TO THE NATIONAL INT ERESTS, AS PERCEIVED BY THE RESPONDENTS. IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE PRESE NT CASE AND PRINCIPLES LAID DOWN BY HONBLE SUPREME COURT IN THE CASE OF AZADI BACHAO A NDOLAN & ANR., SUPRA, WE FIND NO COLOURABLE DEVICE WHICH THE ASSESSEE HAS ADOPTED IN THE SCHEME OF AMALGAMATION AS SANCTIONED BY HONBLE CALCUTTA HIGH COURT IN THE PR ESENT CASE. THE AMALGAMATION RESERVE HAS PROPERLY BEEN EXPLAINED BY THE ASSESSEE BY FILING DETAILS OF ASSETS AND LIABILITIES IN CONSEQUENCE TO AMALGAMATION. THE BA LANCE SHEET OF TRANSFEROR COMPANIES, WHEREIN THE ASSETS AND LIABILITIES HAVE BEEN TRANSF ERRED TO THE TRANSFEREE COMPANY I.E. THE AMALGAMATED COMPANY ARE ON THE RECORD OF THE REVENU E AND EVERYTHING IS EXPLAINED BEFORE THE AO. THE AO COULD NOT PIN POINT ANY DEFE CT IN THE ISSUE OF NON-ALLOTMENT OF SHARES ON AMALGAMATION TO THE SHAREHOLDERS OF AMALG AMATING COMPANIES DUE TO CROSS HOLDING AND DUE TO THAT SHARES OF THE FOUR COMPANIE S INTER SE GOT CANCELLED. COMPLETE DETAILS WERE FILED BEFORE AO AS WELL AS BEFORE CIT( A) AND EVEN NOW BEFORE US. HERE REFERENCE CAN BE MADE TO THE ACCOUNTING STANDARDS I SSUED BY ICAI WHICH HAS DEFINED THE TREATMENT OF RESERVES IN AMALGAMATION, WHICH READS AS UNDER: 16. IF THE AMALGAMATION IS AN AMALGAMATION IN THE NATURE OF MERGER, THE IDENTITY OF THE RESERVES IS PRESERVED AND THEY APPEAR IN THE FI NANCIAL STATEMENTS OF THE TRANSFEREE COMPANY IN THE SAME FORM IN WHICH THEY APPEARED IN THE FINANCIAL STATEMENTS OF THE TRANSFEROR COMPANY. THUS, FOR EXAMPLE, THE GENERAL RESERVE OF THE TRANSFEROR COMPANY BECOMES THE GENERAL RESERVE OF THE TRANSFEREE COMPA NY, THE CAPITAL RESERVE OF THE TRANSFEROR COMPANY BECOMES THE CAPITAL RESERVE OF T HE TRANSFEREE COMPANY AND THE REVALUATION RESERVE OF THE TRANSFEROR COMPANY BECOM ES THE REVALUATION RESERVE OF THE TRANSFEREE COMPANY. AS A RESULT OF PRESERVING THE I DENTITY, RESERVES WHICH ARE AVAILABLE FOR DISTRIBUTION AS DIVIDEND BEFORE THE AMALGAMATIO N WOULD ALSO BE AVAILABLE FOR DISTRIBUTIO0N AS DIVIDEND AFTER THE AMALGAMATION. THE DIFFERENCE BETWEEN THE AMOUNT RECORDED AS SHARE CAPITAL ISSUED (PLUS ANY ADDITION AL CONSIDERATION IN THE FORM OF CASH OR OTHER ASSETS) AND THE AMOUNT OF SHARE CAPITAL OF THE TRANSFEROR COMPANY IS ADJUSTED IN RESERVES IN THE FINANCIAL STATEMENTS OF THE TRANSFE REE COMPANY. 14. IN VIEW OF THE JUDGMENT OF HONBLE SUPREME COUR T IN THE CASE OF AZADI BACHAO ANDOLAN, SUPRA, THE REVENUE MUST HAVE FOUND OUT WHA T IS TANGIBLE IN AN OBJECTIVE ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 21 MANNER BUT THEY FAILED TO DO SO. THE PRINCIPLES EN UNCIATED IN THE ABOVE CASE BY HONBLE SUPREME COURT IN RESPECT TO COLOURABLE DEVICE HAS TO BE FOLLOWED AND APPLIED. IN THE PRESENT CASE BEFORE US, THE ASSESSEE HAS COMPLETELY DISCLOSED THE TRANSACTION IN THE AMALGAMATION SCHEME PRESENTED BEFORE HONBLE CALCUT TA HIGH COURT, WHICH WAS DULY APPROVED. HENCE, OUR ANSWER TO SECOND ISSUE FRAMED BY US IS IN NEGATIVE I.E. AGAINST REVENUE AND IN FAVOUR OF ASSESSEE. 15. FURTHER, ON THE ISSUE OF BALANCING OF CHARGE ON THE VALUATION OF SHARES OF THE AMALGAMATING COMPANY VIS--VIS THAT OF AMALGAMATED COMPANY WHICH IS, WHETHER CAPITAL OR REVENUE RECEIPT, HONBLE DELHI HIGH COUR T IN THE CASE OF CIT VS. BHARAT DEVELOPMENT PVT, LTD. (1982) 135 ITR 456 HAS HELD A S UNDER: THIS IS THE ONLY FORM IN WHICH THE AMALGAMATED COM PANIES PAY FOR THE ASSETS OF THE AMALGAMATING COMPANIES. THESE SHARES MAY BE IS SUED AT ANY CONVENIENT VALUE. THE SHAREHOLDERS OF THE PREVIOUS COMPANY, I. E., THE TRANSFERRING- COMPANY, MAY BE GIVEN MORE SHARES THAN THEY PREVIOU SLY HAD OR THEY MAY BE GIVEN LESS SHARES. THIS DEPENDS ON THE SCHEME OF AM ALGAMATION ENTERED INTO BETWEEN THE TWO SETS OF SHAREHOLDERS WHICH IS AGAIN SUBJECT TO THE APPROVAL OF THE COURT. IF LESS SHARES ARE ISSUED, I.E., FOR LES SER THAN PAR VALUE, THEN A SURPLUS APPEARS IN THE ACCOUNT. IF MORE SHARES OF GREATER T HAN PAR VALUE ARE ISSUED, THEN A DEFICIT WILL APPEAR IN THE AMALGAMATED ACCOUNT. I N NO EVENT WILL THIS SURPLUS OR DEFICIT BE A CAPITAL OR REVENUE RECEIPT OR PAYMENT. THEY ARE MERELY BOOK ENTRIES INTRODUCED FOR THE PURPOSE OF ACCOUNTANCY, I.E., FO R BALANCING THE BALANCE- SHEET. WE FIND THAT PARTICULARS OF THE AMALGAMATION RESERV ES CREDITED TO THE ACCOUNTS TO THE EXTENT OF RS.64,69,73,480/- APPEARED IN THE AUDITED ACCOUNTS OF THE FOUR COMPANIES TILL 31-03-2004 AND 31-03-2005 RESPECTIVELY AND THE BALA NCE AMOUNT IS ON ACCOUNT OF INTER SE DEBIT BALANCE OF THE TRANSFEROR COMPANY. WE FIND THAT SHARES BEING HELD BY THE TRANSFEROR COMPANIES BETWEEN THEMSELVES INTER SE, I T WAS MORE THAN 3/4 TH AND THEREFORE THE PROVISIONS OF SECTION 2(1B) HAVE NOT BEEN VIOLA TED. IN RESPECT TO CLAUSE 6(A) OF PART IV OF THE AMALGAMATION SCHEME, IT IS A FACT THAT TH ERE IS NO BAR TO HOLD / ACQUIRE THE SHARES AFTER EFFECTIVE DATE OF MERGER AND BEFORE T HE MERGER ORDERS ARE PASSED, BY THE AMALGAMATING COMPANIES WHICH IN EFFECT NEUTRALIZED THE CROSS HOLDINGS AND CANCELLED THE HOLDINGS INTER SE OF THE FOUR COMPANIES. THE RE LEVANT FACT WERE ALSO PLACED BEFORE THE HONBLE CALCUTTA HIGH COURT, WHICH WAS DULY AP PROVED AND IT HAS BEEN MENTIONED ITA NO.201/KOL/2010 A.Y. 2006-07 ITO, WD-8(3) KOL. V. PURBANCHAL POWER CO. LTD. PAGE 22 IN ITS ORDER THAT DUE TO INTER SE HOLDINGS NO SHARE S WERE REQUIRED TO BE ISSUED TO THE SHAREHOLDERS OF THE AMALGAMATING COMPANIES BY THE A MALGAMATED COMPANY. IN SUCH CIRCUMSTANCES, OUR ANSWER TO THIRD ISSUE FRAMED BY US IS AGAIN NEGATIVE I.E. AGAINST THE REVENUE AND IN FAVOUR OF ASSESSEE. 16. IN VIEW OF THESE THREE ISSUES DECIDED, IN PARA 12, 14 & 15 OF THIS ORDER, IN FAVOUR OF ASSESSEE, THE APPEAL OF REVENUE IS DISMISSED. 17. IN THE RESULT, REVENUES APPEAL IS DISMISSED. 18. ORDER PRONOUNCED IN THE OPEN COURT ON 17.0 7.2014 SD/- SD/- (SHAMIM YAHYA) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER KOLKATA, ' ( - 17-07-2014 *DKP ) )) ) %* %* %* %* +*! +*! +*! +*! / COPY OF ORDER FORWARDED TO:- 1. #$ / APPELLANT ITO, WARD-8(3), AAYAKAR BHAWAN, P-7, C HOWRINGHEE SQ., 5 TH FLOOR, ROOM NO.5/17, KOLKATA 700 069 2. %&#$ / RESPONDENT PURBANCHAL POWER CO. LTD., 5, RUSSEL ST. 1 ST FLOOR, KOLKATA 7 00 071 3. , -. / CONCERNED CIT 4. -. - / CIT (A) 5. */ 0 % , / DR, ITAT, KOLKATA 6. 0 12 3 4 / GUARD FILE. BY ORD ER/ , /TRUE COPY/ 5/ 8 ,