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HC plugs tax evasion leak in M&A formula
October, 16th 2006

Amalgamation of companies as a tax avoidance/evasion device is going to be difficult from now on, thanks to a recent order by the company court of the Bombay High Court. The order directs the regional director of the department of company affairs to inform the court of taxes payable by merging companies, namely income tax, sales tax, excise and customs duties.

Legal experts point out that this order will go a long way in putting an end to the practice employed by certain businessmen who avoid taxes by merging a profit-making company with the entities that made huge losses in their books.

Justice RS Mohite, presiding over the company court of the high court, directed that the regional director should ascertain that the statutory dues to the government are cleared by the company in question, before certifying that the amalgamation scheme is not prejudicial to the shareholders, creditors and the public at large.

The order was passed during the hearing of an amalgamation scheme filed by Pratibha Fabrics with Kamdar Fab. The court said the regional director should investigate and apply his mind before writing his report, as liability of a company may cease to exist along with its identity.

The court further observed that the regional director had been filing reports that looked exactly like computer printouts of earlier ones, mostly approving the amalgamation proposal after stating that he had vetted the report of registrar of companies (ROC), replies of the amalgamating firms and the relevant provisions of the Companies Act.

However, the companies proposing the merger scheme sought a review of the court order.During the hearing of the review petition, Beni Chatterji, the counsel for the central government, cited a Supreme Court order in the Mihir Mafatlal case.

The apex court had held earlier that amalgamation can be rejected on the ground of a tax fraud. Being informed of the tax dues is the only way for the court to verify whether the proposal for amalgamation is a genuine corporate exercise or a device to evade taxes due to the government.

The counsel for amalgamating companies, Virag Tulzapurkar argued that all schemes of amalgamation provide for shifting liabilities and there is no basis for the apprehension that government may lose taxes therefrom. The company court subsequently disposed of the review application.

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