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Over-riding objections raised by the income-tax authorities, the Delhi High Court has cleared the demerger of Vodafone Essar's tower assets into another group company.
The scheme was sanctioned under Sections 391 to 394 of the Companies Act and involved demerger of passive infrastructure assets (the towers) of eight Vodafone Essar entities.
It may be recalled that Vodafone Essar Mobile Services and its seven subsidiaries had proposed to demerge and transfer the passive infrastructure assets to another subsidiary, Vodafone Essar Infrastructure (VEI) in 2009.
Segregation of assets
The demerger was proposed for the segregation of passive infrastructure assets from the business and telecommunication services to enable future growth and maximise the value of each business. Under the scheme, the assets were proposed to be transferred within Vodafone Essar group for ‘nil' consideration and the transferee company (VEI) was not required to issue shares or pay any consideration following the transfer.
The Delhi High Court, however, rejected the Income-Tax Department's view that giving the asset without taking something in return amounted to confiscation. It could not be held confiscatory in nature since the scheme of demerger was unanimously approved by all shareholders, the Court added.
“It is not open to this Court, in the exercise of company jurisdiction, to sit over the views of the shareholders and board of directors of the petitioner companies, unless their views were against the framework of law and public policy, which, as discussed above, is not the conclusion reached here. It is purely a business decision based on commercial considerations,” Mr Justice Sudershan Misra said in the ruling.
Capital gains
The Income-Tax Department's contention was that by proposing to transfer the assets at book value, the petitioners were trying to evade payment of capital gains tax that would have been payable if the assets were to be transferred at market value.
However, the Court added the avoidance of capital gains can be no reason for not sanctioning a scheme which is otherwise lawful or valid.
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