Companies Act Case Law Hindustan Lever & amp Anr Vs State Of Maharashtra & amp Anr

CASE NO.:
Appeal (civil) 8232 of 1996
Appeal (civil) 8231 of 1996
Appeal (civil) 9237 of 1996
Appeal (civil) 10208 of 1996

PETITIONER:
Hindustan Lever & Anr.

RESPONDENT:
State of Maharashtra & Anr.

DATE OF JUDGMENT: 18/11/2003

BENCH:
R.C. Lahoti & Ashok Bhan.

JUDGMENT:
J U D G M E N T
BHAN, J.

 

Civil Appeal Nos. 8232 of 1996, 8231 of 1996, 9237 and 10208 of 1996
arising from a common judgment of the High Court involving the same
question of law are taken up for disposal together. Illustrative facts are taken
from Civil Appeal No. 8232 of 1996.
Tata Oil Mills Co. Ltd. (Transferor Company) was incorporated on
10.12.1917 under the Companies Act, 1913. Hindustan Lever Ltd. (Transferee
Company) was incorporated under the same Act on 17.10.1933. The scheme of
amalgamation of transferor company with the transferee company was
formulated and approved by the Board of Directors of respective companies on
19.3.1993. On 3.3.1994 the scheme of amalgamation of the transferor
company with the transferee company was sanctioned with certain
modifications by a Single Judge of the High Court. Appeal filed against the
judgment and order of the Single Judge was rejected by the Division Bench on
18.5.1994. Special leave petition against the above judgment of the Division
Bench was dismissed by this Court on 24.10.1994. This judgment is reported
in Hindustan Lever Employees’ Union Vs. Hindustan Lever Ltd. & Ors.,
1995 Suppl. (1) SCC 499.

The drawn up order of amalgamation of transferor company with
transferee company was approved by the High Court on 24.11.1994. On
presentation of the certified copy of the Court’s order the Registrar of
Companies, Maharashtra issued a certificate amalgamating the two companies.

In view of the stamp duty sought to be levied on the order of
amalgamation passed under Section 394 of the Companies Act, 1956
(hereinafter referred to as “the Act”) the appellant filed writ petition in the
Bombay High Court challenging the constitutional validity of the provisions of
Section 2(g)(iv) of the Bombay Stamp Act, 1958 (hereinafter referred to as
“the Stamp Act”). By the impugned order the Division Bench of the High
Court has dismissed the writ petition. The validity of Section 2(g)(iv) of the
Stamp Act has been upheld. Section 2(g) of the Stamp Act which defines
“Conveyance” reads:

“2. In this Act, unless there is anything repugnant in
the subject or context.-

xxx xxx
(g) “Conveyance” includes,.-

(i) a conveyance on sale,
(ii) every instrument,
(iii) every decree or final order of any Civil Court,
(iv) every order made by the High Court under
Section 394 of the Companies Act, 1956 in
respect of amalgamation or reconstruction of
companies; and every order made by the
Reserve Bank of India under Section 44A of
the Banking Regulation Act, 1949 in respect of
amalgamation or reconstruction of Banking
companies
by which property, whether movable or immovable,
or any estate or interest in any property is transferred
to, or vested in, any other person, inter vivos, and
which is not otherwise specifically provided for by
Schedule I;

Explanation.- An instrument whereby a co-owner of
any property transfers his interest to another co-
owner of the property and which is not an instrument
of partition, shall, for the purposes of this clause, be
deemed to be an instrument by which property is
transferred inter vivos; ”
It would be seen that conveyance includes a conveyance on sale as well
as every instrument. Clause (g)(iii) was added by the Maharashtra Act No. 27
of 1985 which came into operation w.e.f. 10.12.1985. It provides that
conveyance includes every decree or final order of any civil court. Clause (g)
(iv) was added by the Maharashtra Act No. 17 of 1993 which came into
operation w.e.f. 1.4.1993.
Section 2(g)(iii) came up for interpretation before this Court in the case
of Ruby Sales and Services (P) Ltd. & Anr. Vs. State of Maharashtra & Ors.,
1994 (1) SCC 531. It was held that the definition of “conveyance” and
“instrument” starts with the expression “includes” which shows that the
definition is very wide which would include a consent decree as well. That the
sub-clause (iii) of Section 2(g) was introduced out of abundant caution and it
does not mean that the consent decree was not otherwise covered by the
definition in Section 2 (g) or 2(l) of the Stamp Act. That there was no
particular pleasure in merely going by the label but what is decisive is the
terms of the document. It was clear from the terms of the consent decree that it
is also an instrument under which the property has been transferred by one
person to another. It was observed:

“There is no particular pleasure in merely going by
the label but what is decisive is by the terms of the
document. It is clear from the terms of the consent
decree that it is also an “instrument” under which
title has been passed over to the appellants/plaintiffs.
It is a live document transferring the property in
dispute from the defendants to the plaintiffs.
Thus the position becomes clear that the
consent decree falls under the definitions of
“conveyance” as well as “instrument”.”

By Act No. 17 of 1993, the Legislature has added Section 2(g)(iv) to
include every order passed by the High Court under Section 394 of the
Companies Act in respect of amalgamation of the companies. Section 394 of
the Companies Act reads:

“394. Provisions for facilitating reconstruction
and amalgamation of companies.  (1) Where an
application is made to the Court under section 391
for the sanctioning of a compromise or arrangement
proposed between a company and any such persons
as are mentioned in that section, and it is shown to
the Court 

(a) that the compromise or arrangement has been
proposed for the purposes of, or in connection
with, a scheme for the reconstruction of any
company or companies, or the amalgamation of
any two or more companies; and
(b) that under the scheme the whole or any part of the
undertaking, property or liabilities of any
company concerned in the scheme (in this section
referred to as a “transferor company”) is to be
transferred to another company (in this section
referred to as “the transferee company”);
the court may, either by the order sanctioning the
compromise or arrangement or by a subsequent
order, make provision for all or any of the following
matters:-

(i) the transfer to the transferee company of the
whole or any part of the undertaking, property
or liabilities of any transferor company;
(ii) the allotment or appropriation by the transferee
company of any shares, debentures, policies or
other like interests in that company which,
under the compromise or arrangement, are to
be allotted or appropriated by that company to
or for any person;
(iii) the continuation by or against the transferee
company of any legal proceedings pending by
or against any transferor company;
(iv) the dissolution, without windingup, of any
transferor company;
(v) the provision to be made for any persons, who
within such time and in such manner as the
Court directs, dissent from the compromise or
arrangement; and
(vi) such incidental, consequential and
supplemental matters as are necessary to
secure that the reconstruction or amalgamation
shall be fully and effectively carried out:

(Provided that no compromise or arrangement
proposed for the purposes of, or in connection with, a
scheme for the amalgamation of a company, which is
being woundup, with any other company or
companies, shall be sanctioned by the Court unless
the Court has received a report from the Company
Law Board or the Registrar that the affairs of the
company have not been conducted in a manner
prejudicial to the interests of its members or to public
interest:

Provided further that no order for the dissolution of
any transferor company under clause (iv) shall be
made by the Court unless the Official Liquidator has,
on scrutiny of the books and papers of the company,
made a report to the Court that the affairs of the
company have not been conducted in a manner
prejudicial to the interests of its members or to public
interest.)

(2) Where an order under this Section provides for
the transfer of any property or liabilities, then, by
virtue of the order, that property shall be transferred
to and vest in, and those liabilities shall be
transferred to and become the liabilities of, the
transferee company; and in the case of any property,
if the order so directs, freed from any charge which
is, by virtue of the compromise or arrangement, to
cease to have effect.

(3) Within {thirty} days after the making of an order
under this section, every company in relation to
which the order is made shall cause a certified copy
thereof to be filed with the Registrar for registration.

If default is made in complying with this sub-
section, the company, and every officer of the
company who is in default, shall be punishable with
fine which may extend to {five hundred rupees}.

(4) In this section
(a) “property” includes property, rights and
powers of every description; and “liabilities”
includes duties of every description; and

(b) “transferee company” does not include any
company, other than a company within the
meaning of this Act; but “transferor company”
includes any body corporate, whether a
company within the meaning of this Act or
not.”
[Emphasis supplied]
The issue which is debated before us is: (1) whether the State
Legislature had the legislative competence to impose stamp duty on the order
of amalgamation passed by a court? and (2) whether an order sanctioning a
scheme of amalgamation under Section 394 read with Section 391 of the
Companies Act, 1956, is liable to be stamped in accordance with the
provisions of the Bombay Stamp Act in its application in the State of
Maharashtra?
Section 394 provides that application and order of amalgamation
under Section 394 is based on compromise or arrangement which has been
proposed for the purpose of amalgamation of two or more companies. The
amalgamation scheme, which is an agreement between the companies is
presented before the Court and the Court passes an appropriate order
sanctioning the compromise or arrangement. The foundation or the basis for
passing an order of amalgamation is agreement between two or more
companies. Under the Scheme of amalgamation, the whole or any part of the
undertaking, properties or liability of any company concerned in the scheme is
to be transferred to the other company. The company whose property is
transferred would be the transferor company and the company to whom
property is transferred would be considered as the transferee company. The
scheme of amalgamation has its genesis in an agreement between the
prescribed majority of shareholders and creditors of the transferor company
with the prescribed majority of shareholders and creditors of the transferee
company. The intended transfer is a voluntary act of the contracting parties.
The transfer has all the trappings of a sale. The transfer is effected by an order
of the Court. The proposed compromise or arrangement is subject to
verification by the Court as provided therein. First is that the scheme of
compromise or arrangement proposed for the purposes of amalgamation or in
connection therewith, shall not be sanctioned unless the Court has received a
report from the Company Law Board or the Registrar that the affairs of the
company have not been conducted in a manner prejudicial to the interest of its
Members or to public interest and; secondly that the order of resolution of
transfer of company shall not be made unless official liquidator on scrutiny of
the books and papers of the Company makes a report to the Court that the
affairs of the company had not been conducted in a manner prejudicial to the
interest of its members or to public interest.
By virtue of provisions of section 391 of the Companies Act a scheme
sanctioned by the Court is statutorily binding on all its shareholders and
creditors including those who dissented from or were opposed to the scheme
being sanctioned. Since by law a procedure has been prescribed by which
every shareholder and creditor in the absence of individual agreement, gets
bound by the scheme, which would otherwise be necessary to give its validity,
the two provisos have been introduced casting a duty on the Court to satisfy
itself that the affairs of the company were/are not being conducted in a manner
prejudicial to the interest of its members or to the public interest. The basic
principle underlying these provisos is none other than the broad and general
principle inherent in any compromise or settlement entered into between the
parties, the same being that it should not be unfair, contrary to the public
policy, unconscionable or against the law. There is no adjudication as such.
Any modification proposed by the Court in the scheme is also subject to its
being accepted by the transferor and the transferee company. If any one of
them objects to the modifications suggested by the Court then the scheme
would not be sanctioned. The scheme would be sanctioned only if there is an
acceptance to the modification proposed by the Court to the scheme by the
transferor as well as transferee company. On acceptance of the same it gets
incorporated in the compromise or arrangement arrived at between the two
companies. Modification in the scheme becomes a part of the compromise or
arrangement arrived at between the parties.

While exercising its power in sanctioning a scheme of agreement, the
Court has to examine as to whether the provisions of the statute have been
complied with. Once the Court finds that the parameters set out in Section 394
of the Companies Act have been met then the Court would have no further
jurisdiction to sit in appeal over the commercial wisdom of the class of persons
who with their eyes open give their approval, even if, in the view of the Court
better scheme could have been framed. This aspect was examined in detail by
this Court in Miheer H. Mafatlal Vs. Mafatlal Industries Ltd., 1997 (1)
SCC 579. The Court laid down the following broad contours of the
jurisdiction of the company court in granting sanction to the scheme as
follows:-

1. The sanctioning court has to see to it that all the
requisite statutory procedure for supporting such a
scheme has been complied with and that the
requisite meetings as contemplated by Section
391(1)(a) have been held.

2. That the scheme put up for sanction of the Court
is backed up by the requisite majority vote as
required by Section 391 sub-section (2).

3. That the meetings concerned of the creditors or
members or any class of them had the relevant
material to enable the voters to arrive at an
informed decision for approving the scheme in
question. That the majority decision of the
concerned class of voters is just and fair to the
class as a whole so as to legitimately bind even
the dissenting members of that class.

4. That all necessary material indicated by Section
393(1)(a) is placed before the voters at the
meetings concerned as contemplated by Section
391 sub-section (1).

5. That all the requisite material contemplated by the
proviso of sub-section (2) of Section 391 of the
Act is placed before the Court by the applicant
concerned seeking sanction for such a scheme and
the Court gets satisfied about the same.

6. That the proposed scheme of compromise and
arrangement is not found to be violative of any
provision of law and is not unconscionable, nor
contrary 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.

7. That the Company Court has also to satisfy itself
that members or class of members or creditors or
class of creditors, as the case may be, were acting
bona fide and in good faith and were not coercing
the minority in order to promote any interest
adverse to that of the latter comprising the same
class whom they purported to represent.

8. That the scheme as a whole is also found to be
just, fair and reasonable from the point of view of
prudent men of business taking a commercial
decision beneficial to the class represented by
them for whom the scheme is meant.

9. Once the aforesaid broad parameters about the
requirements of a scheme for getting sanction of
the Court are found to have been met, the Court
will have no further jurisdiction to sit in appeal
over the commercial wisdom of the majority of
the class of persons who with their open eyes have
given their approval to the scheme even if in the
view of the Court there would be a better scheme
for the company and its members or creditors for
whom the scheme is framed. The Court cannot
refuse to sanction such a scheme on that ground as
it would otherwise amount to the Court exercising
appellate jurisdiction over the scheme rather than
its supervisory jurisdiction. It is the commercial
wisdom of the parties to the scheme who have
taken an informed decision about the usefulness
and propriety of the scheme by supporting it by
the requisite majority vote that has to be kept in
view by the Court. The Court has neither the
expertise nor the jurisdiction to delve deep into
the commercial wisdom exercised by the creditors
and members of the company who have ratified
the scheme by the requisite majority.
Consequently the Company Court’s jurisdiction
to that extent is peripheral and supervisory and
not appellate. The Court acts like an umpire in a
game of cricket who has to see that both the teams
play their game according to the rules and do not
overstep the limits. But subject to that how best
the game is to be played is left to the players and
not to the umpire. The supervisory jurisdiction of
the Company Court can also be culled out from
the provisions of Section 392. Of course this
section deals with post-sanction supervision. But
the said provision itself clearly earmarks the field
in which the sanction of the Court operates. The
supervisor cannot ever be treated as the author or
a policy-maker. Consequently the propriety and
the merits of the compromise or arrangement have
to be judged by the parties who as sui juris with
their open eyes and fully informed about the pros
and cons of the scheme arrive at their own
reasoned judgment and agree to be bound by such
compromise or arrangement.
Two broad principles underlying a scheme of amalgamation which have
been brought out in this judgment are:
1. That the order passed by the Court amalgamating the company is
based on a compromise or arrangement arrived at between the
parties; and
2. That the jurisdiction of the company court while sanctioning the
scheme is supervisory only, i.e., to observe that the procedure set
out in the Act is met and complied with and that the proposed
scheme of compromise or arrangement is not violative of any
provision of law, unconscionable or contrary to public policy.
The Court is not to exercise the appellate jurisdiction and examine
the commercial wisdom of the compromise or arrangement
arrived at between the parties. The role of the court is that of an
umpire in a game to see that the teams play their role as per rules
and do not overstep the limits. Subject to that how best the game
is to be played is left to the players and not to the umpire.

Both these principles indicate that there is no adjudication by the court on the
merits as such.

In Hindustan Lever Employees Union case (supra) it has been held by
this Court that Section 394 casts an obligation on the Court to be satisfied that
the scheme of amalgamation or merger was not contrary to the public interest;
the basic principle of such satisfaction is none other than the broad and general
principle inherent in any compromise or settlement entered between the parties
that it should not be unfair or contrary to public policy or unconscionable or
that the scheme should not be a device to evade the law.
The term “instrument” has been defined in Section 2(l) of the Bombay
Stamp Act 1958 which is as under:-

” “instrument” includes every document by which
any right or liability is, or purports to be, created,
transferred, limited, extended, extinguished or
recorded, but does not include a bill of exchange,
cheque, promissory note, bill of lading, letter of
credit, policy of insurance, transfer of share,
debenture, proxy and receipt;”

This definition of instrument is not amended by the Maharashtra Act of
17 of 1993. The word “Instrument” is defined to mean, every document by
which any right or liability is, or purports to be created, transferred, limited,
extended, extinguished or recorded, but does not include bill of exchange,
cheque, promissory note, bill of lading, letter of credit, policy of insurance,
transfer of shares, debenture proxy and receipt. The recital in the scheme of
amalgamation as well as the order of the High Court under Section 394 of the
Companies Act, declares, that, upon such order of High Court the undertaking
of the transferor company shall stand transferred to the transferee company
with all its movable, immovable and tangible assets to the transferee company
without any further act or deed. Sub-section 3 of Section 394 provides that the
certified copy of the Order of the Court has to be presented before the Registrar
of companies within 30 days for registration. And in default any officer of the
company, who is in default, becomes liable to be punished and fined, which
may extend up to Rs.500/-. Section 391 (3) provides that an order made by the
court under sub-section (2) of Section 391 shall not have effect till a certified
copy of the order has been filed with the Registrar. On presentation of the
certified copy of order, the Registrar of the Company certifies that the
transferor company stands amalgamated with the transferee company along
with all its assets and liabilities. Thus the amalgamation scheme sanctioned by
the Court would be an “instrument” within the meaning of Section 2(i). By
the said “instrument” the properties are transferred from the transferor
company to the transferee company, the basis of which is the compromise or
arrangement arrived at between the two companies.

Mr. Anil B. Diwan and. Mr. Andhyarajuna, learned senior counsels have
appeared for the appellants in these appeals. The submissions made by them
are on the similar lines.
It was contended by the learned counsels appearing for the appellants
that an order of amalgamation under Section 394 is not an order simplicitor of
transfer of property by an act of parties with imprimatur of the Court. It is an
order made by the Court after judicial scrutiny and transfer of the property
under such an order would not be an act of parties to which the Court puts its
seal of approval. Stamp duty can be levied on “documents” or “instruments”.
The Order of the Court in exercise of its judicial functions is not “a document”
or an “instrument”. Once the Court passes an order or a decree, it is required to
be implemented or executed as such. The same cannot be subjected to stamp
duty otherwise the orders passed by the Courts would become subject to
interference by the revenue authorities and would not be admissible in
evidence unless the stamp duty is paid.

It is difficult to subscribe the view propounded by the learned counsels
for the appellants. As stated earlier, the order of amalgamation is based on a
compromise or an arrangement arrived at between the two companies. No
individual living being owns the company. Each shareholder is the owner of
the company to the extent of his share holding. By enacting Sections 391 to
394 a method has been devised to give effect to the will of the prescribed
majority of shareholders/ creditors. Even in the absence of individual
agreement by all the shareholders and creditors the decision of the majority
prescribed in Section 391 (2) binds all the creditors and the shareholders. The
Scheme after being sanctioned by the Court binds all its creditors, members
and shareholders including even those who were opposed to the scheme being
sanctioned. It binds the company as well. While exercising its power in
sanctioning the scheme of amalgamation, the Court is to satisfy itself that the
provisions of statute have been complied with. That the class was fairly
represented by those who attended the meeting and that the statutory majority
was acting bona-fide and not in an oppressive manner. That the arrangement is
such as which a prudent, intelligent or honest man or a member of class
concerned and acting in respect of the interest might reasonably would take.
While examining as to whether the majority was acting bona-fide the Court
would satisfy itself to the effect that the affairs of the company were not being
conducted in the manner prejudicial to the interest of its members or to public
interest. The basic principle underlying such a situation is none other than the
broad and general principle inherent in any compromise or settlement entered
into between the parties the same being that it should not be unfair, contrary to
public policy and unconscionable or against the law.

Orders passed by the Court resulting in transferring the rights in property
have been subjected to levy of stamp duty in several situations. It is there from
the date of the inception of the Indian Stamp Act 1899. Section 2 (m) of the
Indian Stamp Act 1899 defines “instrument of partition” to mean any
instrument whereby co-owners of any property divide or agree to divide such
property in severalty, and includes also a final order for effecting a partition
passed by any revenue authority or any Civil Court and an award by an
arbitrator directing a partition. This provision specifically provide that any
final order effecting partition by any Court, Revenue Authority or award made
by the Arbitrator directing partition would be an instrument of partition.

This Court in Purshottam H. Jadve and Ors. Vs. V.B. Potdar, 1966 (2)
SCR 353, considered as to whether an award made by the Industrial Tribunal
could be considered as an instrument. After considering the relevant
provisions of the law it was held that the word “instrument” would include
awards made by the Industrial Tribunal.

In the case of The Commissioner of Inland Revenue Vs. G. Anous &
Co. & Anr. (1891)  Vol. XXIII Queen’s Bench Division 579, considered as
to what interpretation has to be placed upon the expression “conveyance on
sale” with regard to Section 70 of the stamp Act, 1899 and held:-

“The term conveyance on sale includes every
instrument and every decree or order of any Court or
of any commissioners, whereby any property upon
the sale thereof is legally or equitably transferred to
or vested in the purchaser or any other person on his
behalf or by his direction.”

The Court held that the thing, which is made liable to stamp duty is the
“instrument”. It is not a transaction of purchase and sale, which is struck at, it
is the “instrument” whereby the purchase and sale are affected which is struck
at. It is the “instrument” whereby any property upon the sale thereof is legally
or equitably transferred and the taxation is confined only to the instrument
whereby the property is transferred. If a contract of purchase or sale or a
conveyance by way of purchase and sale, can be, or is, carried out without an
instrument, the case would not fall within the Section and no tax can be
imposed. Taxation is confined to the instrument by which the property is
transferred legally and equitably transferred.

Point as to whether the stamp duty was leviable on the Court order
sanctioning the scheme of amalgamation was considered at length in Sun
Alliance Insurance Ltd. Vs. Inland Revenue Commissioners 1971 (1) All
England Law Reports 135. The point which arose for determination as to
whether the stamp duty was payable on the order of the Judge sanctioning the
scheme of arrangement under Section 206 of the Companies Act, it was held:-

” It follows that it is the court order that effects the
transfer; and this is nonetheless so because the scheme
is not operative until an office copy has been
delivered to the Registrar of Companies for
registration, for the court order itself ordered that to
be done and the Act so provides; nor because London
has still to cause the name of Sun Alliance to be
entered on to the register as the holder of the shares.
The registration of the transferee occurs in every case
where a transfer is executed, and merely perfects the
title of the transferee. The same thing occurs in the
case of registered land, where one finds a transfer and
subsequent registration. I have therefore come to the
conclusion that by the court order the shares were
transferred to Sun Alliance, or, to use the words of s.
54, by that order property was transferred to a
purchaser.”

Expression “conveyance on sale” as provided in Section 54 of the Stamp
Act, 1891 is similar to Section 2 (g) of the Bombay Stamp Act. The
expression “conveyance on sale” as defined in the said Section includes every
instrument, and every decree or order of any Court or any Commissioner,
whereby any property, or a estate or interest in any property, upon the sale
thereof was transferred or vested in the purchaser, or any other persons on his
behalf and on his direction.

The Court further considered as to whether the order of the judge is an
‘instrument’ executed in any part of the United Kingdom for the purposes of
Section 14(4) of the Stamp Act, 1891; it was held that it was an instrument
executed in the United Kingdom within the meaning of Section 14(4) of the
Stamp Act 1891. It was further held that order of the Court was liable to stamp
duty as it resulted in transferring the property and that the order passed by any
Court which results in transfer of property would be an instrument as it
includes every document.

Section 391 (2) of the Companies Act, 1956 provides as follows:
“391(2). If a majority in number representing three-
fourths in value of the creditors, or class of creditors,
or members, or class of members, as the case may be,
present and voting either in person or, where proxies
are allowed, under the rules made under Section 643,
by proxy, at the meeting, agree to any compromise or
arrangement, the compromise or arrangement shall, if
sanctioned by the court, be binding on all the
creditors, all the creditors of the class, all the
members, or all the members of the class, as the case
may be, and also on the company, or in the case of a
company which is being wound up, on the liquidator
and contributories of the company:

Provided that no order sanctioning any compromise
or arrangement shall be made by the Court unless the
Court is satisfied that the company or any other
person by whom an application has been made under
sub-section (1) has disclosed to the court, by affidavit
or otherwise, all material facts relating to the
company, such as the latest financial position of the
company, the latest auditor’s report on the accounts
of the company, the pendency of any investigation
proceedings in relation to the company under
sections 235 to 251, and the like.”

 

Section 394 (2) of the Companies Act, 1956 provides that the properties
and liabilities of the transferor company stand transferred to the transferee
company by virtue of an order of court. The statutory form of an order under
Section 394 (2) of the Companies Act provides for three different Schedules in
order to incorporate therein the properties transferred. It would be useful to
take notice of the statutory form of an order under Section 394 (2) of the
Companies Act.
“THE COMPANAIES (COURT) RULES, 1959
FORM NO. 42
(See rule 84)

Upon the above petition and application coming on for further
hearing on upon reading etc, and upon hearing, etc.

THIS COURT DOTH ORDER

(1) That all the property, rights and powers of the
Transferor company specified in the first, second and third parts
of the Schedule hereto and all other property, rights and powers of
the transferor company be transferred without further act or deed
to the transferee company and accordingly the same shall pursuant
to section 394(2) of the Companies Act, 1956, be transferred to
and vest in the transferee company for all the estate and interest of
the transferor company therein but subject nevertheless to all
charges now affecting the same other than (here set out any
charges which by virtue of the compromise or arrangement are
cease to have effect); and

(2) That all the liabilities and duties of the transferor
company be transferred without further act or deed to the
transferee company and accordingly the same shall, pursuant to
section 394(2) of the Companies Act, 1956, be transferred to and
become the liabilities and duties of the transferee company ;and

(3) That all proceeding now pending by or against the
transferor company be continued by or against the transferee
company; and

(4) That the transferee company do without further
application allot to such members of the transferor company as
have not given such notice of dissent as is required by clause.of
the compromise or arrangement herein the shares in the transferee
company to which they are entitled under the said compromise or
arrangement; and

(5) That the transferor company do within 14 days after the
date of this order cause a certified copy of this order to be
delivered to the Registrar of Companies for registration and on
such certified copy being so delivered the transferor company
shall be dissolved and the Registrar of Companies shall place all
documents relating to the transferor company , and registered with
him on the file kept by him in relation to the transferee company
and the files relating to the said two companies shall be
consolidated accordingly; and

(6) That any person interested shall be at liberty to apply to
the court in the above matter for any directions that may be
necessary.
SCHEDULE
Part I
(Insert a short description of the freehold property of the
transferor company )

Part II
(Insert a short description of the leasehold property of the
transferor company)
Part III
(Insert a short description of all stocks, shares, debentures and
other charges in action of the transferor company )”

(Emphasis supplied)
The transfer of assets and liabilities takes effect by an order of the Court.
The order also provides for passing of consideration from the transferee
company to the shareholders of the transferor company. The consideration for
sale in a transaction like this is the shares. The share exchange ratio is decided
on the basis of number of factors including the value of net assets of the
transferor and transferee company. To arrive at this figure of net assets the
liabilities have to be set off against the gross value of the assets. The share
value is fixed. The properties belong to the company and the company belongs
to the shareholders. Once the shareholders of the transferee company receive
the consideration it would be deemed as if the owner has received the
consideration.
Strong reliance was placed by the counsel for the appellants on the
judgment of this Court in M/s. General Radio and Appliances Co. Ltd. and
Ors Vs. M.A. Khader (Dead) By Lrs., 1986 (2) SCC 656. Transferor-
company had taken a premises on rent with the stipulation that the tenant
would not sublet the premises without the written consent of the landlord.
After sanctioning of the scheme for amalgamation by the Court, the tenanted
premises came to be transferred to the transferee company. Landlord filed the
eviction suit. The question before the Court was whether the amalgamation
amounted to transfer of tenant company’s right under the lease by way of
subletting and as such violative of the provisions of Section 10(ii)(a) of the
A.P. Buildings (Lease, Rent and Eviction) control Act as also the terms of the
rent agreement. It was observed that the A.P. Act prohibited in specific terms
both subletting as well as transfer or assignment of the interest of the tenant.
By the order of amalgamation, the interest, rights of the transferor company in
all its properties including leasehold interest tenancy rights and possession
were transferred and vested in the transferee company voluntarily and the
transferor company was dissolved and ceased to be exist for all practical
purposes in the eye of law. This amounted to contravention of Section 10
(ii)(a) of the A.P. Rent Act as well as of the terms of the said rent agreement
thereby making the transferee company liable to be evicted from the tenanted
premises. Though, the court held that the transfer was voluntary but still to test
the argument and treating it to be involuntary it was observed that there was no
express provision in the A.P. Rent Act that in case of involuntary transfer or
transfer of rights by virtue of a scheme of amalgamation sanctioned by the
court under Section 394 of the Companies Act will not come within the
purview of Section 10(ii) (a) of the A.P. Rent Act, and, therefore, the
transferee company is required to be evicted. Even in the case of involuntary
transfer or transfer of tenancy rights by virtue of scheme of amalgamation
sanctioned by the court by its order under Sections 391 and 394 of the
Companies Act the transfer will come within the purview of Section 10(ii) (a)
of the A.P. Rent Act. It was observed that since the order of amalgamation had
been made on the basis of a petition filed by the transferor company it could
not be said that it was an involuntary transfer effected by the order of the
Court. Instead of supporting the contention of the appellant this decision
indicates to the contrary as the Court held that order of transfer of property by
a scheme of amalgamation was not “involuntary” meaning thereby it was a
voluntary act by agreement between the parties. In any case, the Court decided
the dispute between the parties in the context of specific provisions of the A.P.
Rent Act and would have no applicability to the point which is being examined
by the present case.

A document creating or transferring a right is an instrument. Can it be
said that an order effectuating the transfer is a document? The answer has
been given in the affirmative by this in Court in Haji Sk. Subhan Vs.
Madhorao, AIR 1962 SC 1230, wherein it was held that the question is
whether the word “document” includes a decree of the Court. It was held that
there was no good reason why a decree of the court, when it affects the
proprietary rights and is in relation to them should not be included in this
expression. This question more pointedly arose before this Court in Ruby
Sales and services (P) Ltd., (supra). In that case in a suit for specific
performance the property was conveyed to the vendee by a consent decree.
The question arose whether the consent decree is an instrument and liable to be
stamped. The consent decree contained a recital to the effect that “this decree
does operate as the conveyance from the defendants in favour of the plaintiffs
in respect of the said property more particularly described in exhibit A to the
plaint.” The Court held that “there is no particular pleasure in merely going by
the label but which is decisive is by the terms of the document. It is clear from
the terms of the consent decree that it is also an “instrument” under which title
has been passed over to the appellant/plaintiffs. It is a live document
transferring the property in dispute from the defendants to the plaintiffs.” The
aforesaid decree was based on an agreement between the parties. So is the
case with an order under Section 394 of the Companies Act which is also
based on an agreement between the transferor company and the transferee
company.

Learned counsel for the appellants argued that the Ruby Sales and
services (P) Ltd., (supra) was a case of consent decree where the term of the
settlement was admittedly a conveyance, transferring property alone. That the
order passed by the High Court under Section 394 of the Companies Act
cannot be equated with a consent order. This submission cannot be accepted.
The Court held that consent decree was an instrument. It was not held to be an
instrument because it was a consent decree. It was held to be an instrument
because it conveyed the title in the property in dispute from the defendant to
the plaintiff. It was held to be an instrument because it had the effect of
conveying the title and not because it was a consent decree. Once this
definition is kept in view it would be clear that consent or no consent when the
decree or order of the Court purports to transfer title in the property, it becomes
an instrument. Court negatived the submission made, that, prior to
introduction of Section 2 (g)(iii) the consent decree was not included in the
definition of “conveyance” and “instrument” was negatived by observing “it
appears to us that the amendment was made out of abundant caution and it
does not mean that the consent decree was not otherwise covered.” It clearly
shows that the Court was of the opinion that consent decree which purports to
convey the title in the property was in an instrument liable for stamp duty at all
times and it was only by way of abundant caution that the Legislature had
included the consent decree in the definition of the word “conveyance”.

In view of the aforesaid discussion, we hold that the order passed by the
Court under Section 394 of the Companies Act is based upon the compromise
between two or more companies. Function of the Court while sanctioning the
compromise or arrangement is limited to oversee that the compromise or
arrangement arrived at is lawful and that the affairs of the company were not
conducted in a manner prejudicial to the interest of its members or to public
interest that is to say it should not be unfair or contrary to public policy or
unconscionable. Once these things are satisfied the scheme has to be
sanctioned as per the compromise arrived at between the parties. It is an
instrument which transfers the properties and would fall within the definition
of Section 2 (1) of the Bombay Stamp Act which includes every document by
which any right or liability is transferred. The State Legislature would have
the jurisdiction to levy stamp duty under Entry 44, List III of the seventh
Schedule of the Constitution of India and prescribe rates of stamp duty under
Entry 63, List II.

It was next contended that the impugned duty is not a duty upon
instrument but it is in reality a duty on transfer of property which the State
Legislature is not competent to impose.

In Welfare Association, A.R.P., Maharahstra & Anr. Vs. Ranjit P.
Gohil & Ors., 2003 (2) Scale 288, it was held that there is a presumption that
the Legislature does not exceed its jurisdiction. A statute should be construed
so as to make it effective and operative on the principle expressed in the
maxim “ut res megis valeat quam pereat”. (It is better to validate a thing than
to invalidate it). The burden of establishing that the Act is within the
competence of the Legislature, or that it has transgressed other constitutional
mandates is always on the person who challenges its vires. That the fountain
source of legislative power exercised by the Parliament or the State Legislature
is not Schedule Seven; the fountain source is Article 246 and other provisions
of the Constitution. The function of the three Lists in Seventh Schedule is
merely to demarcate legislative fields between Parliament and State
Legislatures and not to confer any legislative power. The several entries
mentioned in the three Lists are fields of legislation. While exercising the
legislative competence of a Legislature in regard to a particular enactment with
reference to the entries in the various lists it is necessary to examine the pith
and substance of the Act and to find out if the matter comes substantially
within the item in the list. The express words employed in an entry would
necessarily include incidental and ancillary matters so as to make the
legislation effective. The scheme of the Act under scrutiny, its object and
purpose, its true nature and character and the pith and substance of the
legislation are to be focused at.
If the matter is within the exclusive competence of State Legislature, i.e.,
List II then the Union Legislature is prohibited to make any law with regard to
the same. Similarly, if any matter is within the exclusive competence of the
Union, it becomes a prohibited field for the State Legislatures. The concept of
occupied filed is relevant in the case of laws made with reference to entries in
List III. The doctrine of covered field has to be applied only to the Entries in
List III. This proposition of law is well settled in a number of decisions of this
Court including State of A.P. & Ors. Vs. Mcdowell & Co. & Ors., 1996 (3)
SCC 709; State of Rajasthan & Ors. Vs. Vatan Medical & General Store &
Ors., 2001 (4) SCC 642 and Shri Krishsna Gyanoday Sugar Ltd. & Anr. Vs.
State of Bihar, 2003 (2) Scale 226.

The relevant entries of the Constitution Schedule VII are as follows:

List II Entry 63:

” Rates of Stamp duty in respect of documents other
than those specified in provisions of List I with
regard to the rates of stamp duty.”
List III Entry 44:

“Stamp duties other than duties or fees collected by
means of judicial stamps but not including rates of
stamp duty”
List I Entry 91:
“Rates of stamp duty in respect of Bill of Exchange,
cheques, promissory notes, Bill of landing, letter of
credit, policies of insurance, transfer of shares,
debentures, proxies and receipts.”

List I Entry 43:

“Incorporation, regulation winding up of trading
corporation including banks insurances and finance
corporations but not including corporative societies.”

List I Entry 44:

” Incorporation, Regulation and winding up of
corporations, whether trading or not with object not
confined to one state but not including universities.”
List I Entry 97:

“Any other matter not enumerated in List II and List
III, including any tax not mentioned in either of any
those lists.”
Union under Entry 91 of List I can prescribe rates of stamp duty in
respect of Bill of Exchange, cheques, promissory notes, Bill of landing, letter
of credit, policies of insurance, transfer of shares, debentures, proxies and
receipts. In exercise of power conferred by Entry 63 List II it is open for the
State Legislature to make amendment in the Act in regard to the rates of Stamp
duty in respect of documents other than those specified in provisions of List I.
As discussed above, the order passed under Section 394 is founded on
consent and this order is an instrument as defined under Section 2 (1) of the
Bombay Stamp Act. The State Legislature would have the jurisdiction to levy
stamp duty under Entry 44 List III of the Seventh Schedule of the Constitution
and prescribes rate of stamp duty under Entry 63 List II. It does not in any
way impinge upon any entry in List I. Entry 44 of List III empowers the State
Legislature to provide for stamp duties other than duties or fees collected by
means of judicial stamps. Along with this, Entry 63 of List II empowers the
State Legislature to prescribe rates of stamp duty in respect of documents other
than those specified in the provisions of List I, that is to say, rates of stamp
duty in respect of Bill of Exchange, cheques, promissory notes, Bill of landing,
letter of credit, policies of insurance, transfer of shares, debentures, proxies and
receipts. By sanctioning of amalgamation scheme, the property including the
liabilities are transferred as provided in Section 394 of the Companies Act and
on that transfer instrument, stamp duty is levied. It, therefore, cannot be said
that the State Legislature has no jurisdiction to levy such duty.

Charging Section, i.e., Section 3 of the Bombay stamp Act reads:
“3. Instrument chargeable with duty.
Subject to the provisions of this Act and the
exemptions contained in Schedule I, the following
instruments shall be chargeable with duty of the
amount indicated in Schedule I as the property duty
therefor respectively, that is to say 

(a) every instrument mentioned in Schedule I, which not
having been previously executed by any person, is
executed in the State on or after the date of
commencement of this Act;
(b) every instrument mentioned in Schedule I, which not
having been previously executed by any person, is
execute out of the State on or after the said date,
relates to any property situate, or to any matter or
thing done or to be done in this State and is received
in this State:

xxx xxx xxx”

 

The duty charged by the State Legislature is on the instrument and is on
the execution of the instrument. The measure of charging stamp duty may be
fixed or ad-valoram which is to be determined by the Legislature. The basis for
computation of stamp duty can be determined by the State Legislature and it
may be on the basis of the market value of the property transferred or at a fixed
amount.
In Himalaya House Co. Ltd. Vs. The Chief Controlling Revenue
Authority, & Anr. AIR 1972 SC 899, it was observed:

“On a conspectus of these authorities it is, therefore,
apparent that in the exercise of powers conferred on
it by Entry 63 of List II and Entry 44 of List III, it
was open to the State Legislature not only to make an
amendment in the Act in regard to the rates of stamp
duty but also in regard to the mode of computation of
stamp duty. In other words, it was open to the State
Legislature to lay down that the basis for computing
stamp duty shall not be the amount or value of the
consideration of the conveyance as set forth therein
but it shall be the market value of the property which
is the subject matter of conveyance.”

{Emphasis supplied}

Maharashtra Tax Laws (Levy, Amendment and Validation) Act, 1997
was enacted whereby in Article 25 of the Schedule I of the Bombay Stamp
Act, 1958 Clause (da) and Explanation III were added with retrospective
effect prescribing the rates at which the duty was to be calculated and levied.
Vires of this provision of this Act were not challenged in the writ petition.

It was next contended that provisions of Section 2(g)(iv) read with
Section 34 of the Bombay Stamp Act which provides that the instrument not
duly stamped would be inadmissible in evidence are repugnant to Section 394
of the Companies Act and that the State Legislation cannot be prevail over the
provisions of the Companies Act. It was also contended that in the guise of the
stamp duty the State Legislature is in reality imposing a tax on the
amalgamation of the companies and has therefore encroached on the field of
the Parliament under Entry 43, List I of the Constitution. We do not find any
substance in this submission as well. Stamp duty is levied on the instrument
and the measure is the valuation of the property transferred. There is no
question of encroachment on the field of Parliament under Entry 43, List I of
the Constitution which empowers the Union to make laws re: incorporation,
regulation winding up of trading corporation including banks insurances and
finance corporations but not including corporative societies. The follow up
legislation under Entry 43 List I is totally different from the levy of stamp duty
and of prescribing rate of stamp duty on such documents. The Bombay Stamp
Act does not provide for any Legislation with regard to incorporation,
regulation and winding up of corporations. It only levies the stamp duty and
prescribes the rate of stamp duty in respect of documents by compromise or
arrangement.

Section 2 (g)(iv) of the Act does not in any way describe any alternate
procedure as compared to the one appearing in Section 394 of the Companies
Act, 1956. The question of repugnancy of Section 2(g)(iv) of the Act visa-a-
vis Section 394 of the Companies Act, 1956 is therefore irrelevant. Section
2(g)(iv) does not impinge or negate the judicial power because it merely
defines the word “conveyance” in regard to the order passed by the High Court
under Section 394 of the Companies Act, the basis of which is consent and
voluntary act which ultimately result in transfer of property for consideration.
Under the Bombay Stamp Act conveyance includes any instrument by
which property, whether movable or immovable, or any estate or interest in
any property is transferred to, or vested in, any other person, inter vivos. The
word “inter vivos” has not been defined in the Act or in the General Clauses
Act. The meaning assigned to the word “inter vivos” in the Black’s Law
Dictionary, 6th Edn., is:
“Between the living; from one living person to
another. Where property passes by conveyance, the
transaction is said to be inter vivos, to distinguish it
from a case of succession or devise. So an ordinary
gift from one person to another is called a “gift inter
vivos”
It was contended that since the transaction was not between the ‘living
beings’ the same was not “inter vivos” as the transfer of property had not taken
place between the living beings. We do not agree. “Transfer of Property” has
been defined in Section 5 of the Transfer of Property Act, 1882 to mean an act
by which a living person conveys property, in present or in future to one more
other living persons. Company or association or body of individual, whether
incorporated or not, have been included amongst the “living person” in this
Section. It clearly brings out that a company can effect transfer of property.
The word “inter vivos” in the context of Section 394 of the Companies Act
would include within its meaning also a transfer between two “juristic persons”
or a transfer to which a ‘juristic person’ is one of the parties. The transaction
between a minor or a person of unsound mind with the other person would not
be recognised in law, though the same is between two living beings, as they are
not juristic persons in the eyes of law who can by mutual consent enter in a
contract or transfer the property. The company would be juristic person
created artificially in the eyes of law capable of owning and transferring the
property. Method of transfer is provided in law. One of the methods
prescribed is dissolution of the transferor company by merger in the transferee
company along with all its assets and liabilities. Where any property passes by
conveyance, the transaction would be said to be inter vivos as distinguished
from a case of succession or devise.

No other point was urged.
For the reasons stated above, we do not find any merit in these appeals
and dismiss the same with no order as to costs.

 

 

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