Tax dodge no reason for barring demerger

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Recently Delhi High Court approved a scheme of arrangement for the demerger of the passive infrastructure assets of Vodafone Essar Mobile Services and six of its subsidiaries and for the transfer of the assets to Vodafone Essar Infrastructure. The scheme was sanctioned under sections 391 to 394 of the Companies Act, 1956, despite objections from the income tax authorities.

Telecom_towerIn making its case Vodafone Essar said that the board of directors of the companies involved had unanimously approved the scheme of arrangement. As such, Delhi High Court held that a company court cannot judge the views of the shareholders and board of directors of a company, unless their views were against the law and public policy.

In addition, the court noted that similar schemes had been sanctioned, without objections from the tax authorities, in the case of Reliance Telecom Infrastructure and two other companies. Further, as the proposed scheme is in line with the policy objectives of the government of India, which recommends the promotion of sharing of infrastructure, the court held that it is not merely aimed at avoidance of tax.

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The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@bhasinco.in or lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.

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