In a recent judgement, the Hon’ble National Company Law Appellate Tribunal (“Appellate Tribunal”) has upheld the order of the Hon’ble National Company Law Tribunal, Ahmedabad Bench (“Tribunal”) and dismissed the appeal preferred by the Income Tax Department against the order of NCLT approving Composite Scheme of Arrangement of Reliance Jio Infocomm Limited & Others (“Respondents”).
The Composite Scheme of Arrangement among Reliance Jio Infocomm Limited (Demerged Company/ Transferor Company), Jio Digital Fibre Private Limited (Resulting Company) and Reliance Jio Infratel Private Limited (Transferee Company) (“Scheme”) provides for the following:
- Cancellation of preference shares and reduction of preference share capital and Securities Premium such that there will be constructive payment to the holders of the Preference shares and a constructive receipt of an identical amount as loan from the holders of the Preference Shares to the Demerged/ Transferor Company.
- Demerger of the Optic Fibre Cable undertaking from the Demerged Company and its transfer and vesting into the Resulting Company.
- Transfer of Tower Infrastructure undertaking of the Transferor Company to Transferee Company as a going concern i.e. as a slump sale at book value.
The Scheme was approved by the shareholders and creditors of all the companies. Also, the Regional Director (North Western Region) and the Registrar of Companies have given their No-objection to the Scheme. Since, Income Tax Department was not present at final date of hearing, the order sanctioning the Scheme was reserved on 18th March, 2019 and scheme was approved vide order dated 20th March, 2019.
Aggrieved by the order of NCLT, Income Tax Department (“Appellant”) approached Appellate Tribunal Challenging the order of NCLT on following grounds –
- The main thrust of the argument was that by the Scheme, the Transferor Company has sought to convert the redeemable preference shares into loans i.e. conversion of equity into debt which is not only contrary to the well settled principles of company law as well as Section 55 of the Companies Act, 2013 but also would reduce the profitability or net total income of the Transferor Company causing a huge loss of revenue to the Income Tax Department.
- It was contended that there are two consequences of such conversion of preference shares into loan. Firstly, the shareholders who are now creditors can seek payment of the loan irrespective of whether there are accumulated profits or not and secondly, the company would be liable to pay interest on the loans to its creditors, which it otherwise would not have had to do to its shareholders.
- It was submitted that the proposed composite scheme of arrangement amounts to reduction in profitability would also bring down the payment of dividend distribution tax which is again a way to avoid payment of taxes. The structure of proposed composite scheme adopted by the Respondents was a permissible method of tax planning or is a tool to avoid and evade payment of taxes.
- Further, the payment of interest on such huge amounts of loan would lead to reducing the total income of the company in an artificial manner which is not permissible in law.
- It was also alleged that the proposed scheme does not identify the interest payable on the loan which will be a charge on the profits of the Company. The reduction in the profitability is clearly resulting into tax evasion.
NCLAT held that the ultimate effect of the Scheme may result into some tax benefit or even if it is framed with an object of saving tax or it may result into tax avoidance, it cannot be said that the only object of the Scheme is tax avoidance. If the Company have decided to have a particular arrangement by which there may be even benefit of saving Income Tax, that itself cannot be a ground for coming to the conclusion that the sole object of framing the Scheme is to defraud the Income Tax Department or other tax authorities. NCLAT, while referring to the landmark cases of Apex Court held, mere fact that a Scheme may result in reduction of tax liability does not furnish a basis for challenging the validity of the same. Hence, nod to Scheme was granted by NCLAT.