JUDGMENT 1. - Company Petitions Nos. 4 of 1988 and 5 of 1988 have been filed by Indo Continental Hotels and Resorts Ltd. (for short, "the transferee-company") and Hotel Pink City Pvt. Ltd. (for short, "transferor-company") under Section 391 of the Companies Act, 1956 (for short, "the Act"), read with Rule 57 of the Companies (Court) Rules, 1959 (for short, "the Rules"), and Company Petition No. 14 of 1988 has been filed jointly by both the transferee and transferor-companies under Sections 391 and 394 of the Act and it has been prayed that a scheme of amalgamation of the two companies, namely, the transferee and transferor-companies be sanctioned. 2. The transferee-company was incorporated under the provisions of the Act on May 2, 1970, in the name of S. B. Properties and Enterprises Ltd. However, with effect from December 11, 1982, the name of the transferee-company has been changed to Indo Continental Hotels and Resorts Ltd. The registered office of the transferee-company is situated at Sansar Chandra Marg, Jaipur. The authorised share capital of the transferee-company is Rs. 1,00,00,000 (rupees one crore only) divided into 10,00,000 (ten lakhs) equity shares of Rs. 10 each. The issued, subscribed and paid-up capital of the transferee-company is Rs. 65,00,000 (rupees sixty-five lakhs) divided into 6,50,000 (six lakhs and fifty thousand) equity shares of Rs. 10 each. The objects of the transferee-company are set out in the memorandum of association annexed with Company Petition No. 4 of 1988. Besides those objects, the object is also to construct, reconstruct, alter, improve, decorate and furnish hotels, restaurants, cinema houses, theatres, shops, factories, warehouses, wharves, buildings, etc. The object is also to carry on the business of hotel, restaurant, cafeteria, bar-house, lodging house, keepers, licensed victuallers, wine, beer and spirit merchants, malters, dealers of aerated minerals and artificial waters and other drinks purveyors, caterers for public amusement, etc. The object is also to carry on business as industrialists, concessionaires, guarantors, financiers, merchants, underwriters, promoters and other agents and to undertake and carry on and execute all kinds of financial, commercial, trading and other operations. The transferee-company commenced the business of running a four star hotel, namely, "Mansingh" at Jaipur and another five star hotel is under completion at Ajmer and has been carrying on the same since January, 1979. 3. The transferee-company commenced the business of running a four star hotel, namely, "Mansingh" at Jaipur and another five star hotel is under completion at Ajmer and has been carrying on the same since January, 1979. 3. The transferor-company was incorporated on April 26, 1973, as a private limited company and its registered office is situated at Sansar Chandra Road, Jaipur. The authorised, issued, subscribed and paid-up capital of the transferor-company is Rs. 25,00,000 (rupees twenty-five lakhs only), divided into 25,000 (twenty-five thousand) shares of Rs. 100 each. All the shares are fully paid-up and are of the same class. The objects of the transferor-company are set out in the memorandum of association annexed to the company petition. The main object of the transferor-company is to construct, manufacture and to provide for sale all forms, types of lodging, foods and beverages, entertainment and all products available for sale, shops, super markets and stores. The object is also to carry on the business of hoteliers, hotel manager and operations, refreshment contractors, boarding and lodging, house-keepers, inn-keepers, restaurateurs, publications, caterers, jewellers, hairdressers and stylists, both for men and women, florists, cashiers and money-changers, travel agents, charter and tour operators and of shop-keepers for trade in all services, materials and products. The object is also to run hotels, hostels, boarding and lodging houses, services and other apartments and flats and to fit up and furnish such properties, buildings, houses, flats, out-houses, courtyards and quarters for the purpose of letting or otherwise giving the same to visitors or guests or others in cottages, rooms, suites or other space arrangements as it may determine to be in the interest of the company. The object of the transferor-company is also to operate and manage stalls, cafes, coffee-shops, automats, snack bars and ice-shops and to produce and manufacture animal-synthetic and associated milk-products inclusive of ice cream, sweetmeats, bread, biscuits and confectionery, non-alcoholic beverages, juices, squashes and preserves, and to organise, operate and present all forms of entertainment, educational and cultural shows, son-et-lumieres and other promotional presentations, fashion shows, spectacles, festivals, Indian and Western, including ball room dances, etc. The transferor-company commenced the business of running a three-star hotel, namely, "Mumtaj" at Agra and has been carrying on the same since December 1, 1976. The transferor-company commenced the business of running a three-star hotel, namely, "Mumtaj" at Agra and has been carrying on the same since December 1, 1976. According to the averments made in the company petitions, the circumstances that have necessitated the arrangement or compromise or merger and/or amalgamation of the transferor-company with the transferee-company and the benefits sought to be achieved by the said scheme of merger or amalgamation are - (a) By amalgamation, the transferor-company shall be able to avail of the infrastructural facilities developed by the transferee-company, which will result in reduction in cost of both the companies and their hotels. The cost benefits would be the maximum in the areas of management, marketing, purchase, contracting out the various jobs, recruitment, advertisement publicity, secretarial and personnel. (b) About 75% to 90% of foreign tourists visiting India visit Agra and/or Rajasthan. By amalgamation, all the three hotels, Mumtaj at Agra, Mansingh at Jaipur and Mansingh Palace at Ajmer, will come under a common banner and a tourist visiting any of the aforesaid three places, which would mean more assured business for all the three hotels. Thus, by amalgamation, apart from providing better facilities to the tourists, the profits of all the three hotels would go up. (c) The transferee-company has already established an efficient team of managers and other staff. This strength of personnel can be effectively used, if all the aforesaid hotels are owned by one company. Amalgamation would not only provide easy transfer ability of employees, but would also mean utilising the services of expert employees in a particular hotel for the other hotels as well. (d) The transferor-company, since the beginning of its operation, has not been able to do well, especially because of low business and heavy overheads. The need for the hotel is wide advertisement publicity and a reputed association for securing more business and renovation and expansion of the existing hotel. However, these things are not possible as the transferor-company has serious financial problems and as per its latest balance-sheet, it' is not in a position to obtain financial assistance from the Government agencies or from the public. On the other side, the transferee-company is in a very sound financial position and can provide the necessary financial assistance for publicity, creation of an image and for its renovation and expansion. On the other side, the transferee-company is in a very sound financial position and can provide the necessary financial assistance for publicity, creation of an image and for its renovation and expansion. By amalgamation, the transferor-company would be able to avail of the financial facilities of the transferee company for its expansion and modernisation plans which would result in more business and better profits for the hotel at Agra. (e) Though the operations of the transferor-company are improving over the last 2-3 years, however, the same require rationalisation. Amalgamation would enable consolidation of certain operations of both the companies with a view to achieve economies of scale which will be in the interest of both the companies. (f) Amalgamation of the aforesaid companies would mean expansion, modernisation and diversification, which would generate further employment in the country and this amalgamation is in the public and national interest as well. (g) Amalgamation will provide a healthier financial base, especially from the view-point of the transferor-company, which will enable availing of better financial assistance from the banks and /or financial institutions for its working capital requirements and expansion projects. (h) Increase in business and thereby profits at the hotels would lead to better services to the tourists and other guests at the hotels. Apart from earning goodwill for the company, the amalgamation would, therefore, also be in the interest of the tourist industry as a whole. (i) It is seen from the above that, by amalgamation, all the aforesaid three hotels would generate more profits and, therefore, the amalgamation is in the interest of both the companies, their shareholders and creditors. 4. Because of the aforesaid advantages, the board of directors of both the companies were of the opinion that it is expedient and in the best interest of all concerned that the transferor-company be amalgamated and merged with the transferee-company and they have accordingly formulated arid approved the said scheme of merger or amalgamation, subject to the approval of the said scheme of merger or amalgamation by the requisite majority of shareholders and creditors, if required, of both the transferor and the transferee-companies and also subject to sanction by this court. 5. The terms of the scheme of merger as aforesaid and approved by the board of directors shall be dealt with at a later stage of this order. 6. 5. The terms of the scheme of merger as aforesaid and approved by the board of directors shall be dealt with at a later stage of this order. 6. This court, under its separate orders dated April 22, 1988, in Company Petitions Nos. 4 of 1988 and 5 of 1988, made orders for the holding of two separate meetings, one of the creditors and the other of the members of both the companies to consider the proposed scheme of amalgamation/ merger or arrangement. So far as the company petition by the transferee-company is concerned, this court fixed July 10, 1988, as the date on which the two meetings, one of the creditors and the other of the members were to be held for considering the proposed scheme of amalgamation and Mr. Gopal Garg, advocate, was appointed as chairman of the meeting of the creditors and Mr. V.L. Mathur, advocate, was appointed as chairman of the meeting of the members of the company. In Company Petition No. 5 of 1988 also, July 10, 1988, was fixed for holding the two meetings, one of the creditors and the other of the members of the company and Mr. M.R. Singhvi was appointed as chairman of the meeting of the creditors and Mr. Manoj Sharma was appointed as chairman of the meeting of the members of the company. The said meetings were held and the chairmen have submitted their reports to this court. A perusal of the reports submitted by the chairmen appointed by this court will show that so far as the meeting of the members of the company is concerned, of which Mr. V.L. Mathur was the chairman, it was attended either personally or by proxy by 21 members of the said company entitled together to 4,30,268 equity shares valued at Rs. 43,02,680. The question which was submitted to the said meeting was whether the members of the transferee-company will approve of the amalgamation/merger/compromise/arrangement of the meeting submitted to the meeting and agreed thereto. Shri H.P. Dani, company secretary, informed that as per the terms of an agreement, entered into by the transferee-company with the Industrial Finance Corporation of India (IFCI), the approval of the Industrial Finance Corporation of India was required to be obtained by the transferee-company for implementing the aforesaid scheme of amalgamation/merger/compromise/arrangement. Shri H.P. Dani, company secretary, informed that as per the terms of an agreement, entered into by the transferee-company with the Industrial Finance Corporation of India (IFCI), the approval of the Industrial Finance Corporation of India was required to be obtained by the transferee-company for implementing the aforesaid scheme of amalgamation/merger/compromise/arrangement. The transferee-company has received the consent of the Industrial Finance Corporation of India for the said scheme with a modification that the shareholders of Hotel Pink City Pvt. Ltd. be allotted and issued 4 (four) equity shares instead of 5 (five) equity shares of Rs. 10 each in lieu of their 1 (one) equity share of Rs. 100 each. All the members present in person or by proxy were of the opinion that the scheme of amalgamation/merger/compromise/arrangement should be approved with the modification and agreed to the same. A resolution to that effect was passed in the meeting by the members either present or by proxy. Shri Gopal Garg, another chairman appointed by this court to preside over the meeting of the creditors, also submitted his report The meeting of the creditors was attended either personally or by proxy by seven creditors of the said company entitled together to Rs. 1,02,71,799.98. The meeting resolved that Clause 4 of the aforesaid scheme of amalgamation regarding the share exchange ratio shall be modified and substituted and for every 1 (one) equity share of Rs. 100 each of the transferor-company, 4 (four) equity shares of Rs. 10 each of the transferee-company as fully paid-up, that is, to say the transferee-company shall allot for each of 25,000 (twenty-five thousand) equity shares of Rs. 100 (rupees one hundred only) each of the transferor-company, 1,00,000 (one lakh) equity shares of R. 10 each of the transferee-company as fully paid-up. In similar meetings of the members and creditors of the transferor-company, similar decisions were taken, and the chairmen submitted their reports to this court. It will, therefore, be clear that, in the meetings held of the members as well as creditors of the transferee and transferor-companies, the scheme of merger/amalgamation/compromise/arrangement was approved with the modification as aforesaid, i.e., instead of five equity shares of Rs. 10 each which the transferee-company had proposed to be allotted for one equity share of Rs. 100 of the transferor-company, four equity shares of Rs. 10 each of the transferee-company were to be allotted for every one equity share of Rs. 10 each which the transferee-company had proposed to be allotted for one equity share of Rs. 100 of the transferor-company, four equity shares of Rs. 10 each of the transferee-company were to be allotted for every one equity share of Rs. 100 of the transferor-company. 7. After the aforesaid reports of the chairmen in the above two company petitions, Company Petition No. 14 of 1988 was filed under Sections 391 and 394 of the Act read with Rule 29 of the Rules, and it was prayed that the scheme of amalgamation/merger/compromise/arrangement may be sanctioned by this court so as to be binding on all the members and the creditors of the two companies, i.e., transferee-company and transferor-company. Notice of the aforesaid petition was ordered to be advertised in the newspaper The Times of India. Notice was also given to the Official Liquidator and Regional Director, Company Law Board (Northern Region), Department of Company Affairs, Ministry of Industries, Kanpur. All of them were sewed. On the request of the official liquidator to appoint a chartered accountant to assist him to scrutinise the books and relevant papers, Mr. N. C. Jain, chartered accountant, was appointed, who, after scrutiny, gave his report on December 17, 1988. In his detailed report, N. C. Jain, chartered accountant, except for minor observations on perusing the profit and loss account of the transferor-company, had found that the balance-sheet gives a true and fair view of the state of affairs of the transferor-company. The chartered accountant said that the book value of four shares of Rs. 10 each in the transferee-company after merger would be Rs. 235.80 which is still more than Rs. 188 being the book value of one equity share of Rs. 100 each of the transferor-company. Therefore, the shareholders of the transferor-company will not lose so far as their investment is concerned. The chartered accountant has concluded that the proposed scheme does not appear to be prejudicial to the interest of the members, shareholders and creditors and employees of the transfer or-company and the public at large. The Regional Director (Northern Region), Company Law Board, Kanpur, who too was given a notice, has filed an affidavit that he has examined the relevant records in his office and stated that there is no material on record on the basis of which the petition may be supported or opposed. The Regional Director (Northern Region), Company Law Board, Kanpur, who too was given a notice, has filed an affidavit that he has examined the relevant records in his office and stated that there is no material on record on the basis of which the petition may be supported or opposed. He, therefore, decided that no representation need be made in the present case and this court may, therefore, decide the petition on its merits. 8. An application was filed on behalf of the Income-tax Department, Jaipur, that any order of amalgamation is likely to affect the Income-tax Department and, therefore, it should be made a party to the proceedings. The aforesaid application dated April 26, 1989, was considered and Mr. V. K. Singhal was allowed to address his arguments. 9. The principles which govern the cases of amalgamation/compromise/ merger/arrangement of the transferee and transferor-companies are settled. The amalgamation should not only be beneficial to the companies, but it should also be in the interest of the creditors', members of both transferee and transferor-companies and should be in public interest. The Madras High Court in In re Coimbatore Cotton Mills Ltd. and Lakshmi Mills Co. Ltd., [1980]50 Comp Cas 623, laid down the following principles for sanctioning the scheme (at p. 630) : "(1) The court should be satisfied that the resolutions are passed by the statutory majority in value and in number in accordance with Section 391(2) of the Companies Act at a meeting or meetings duly convened and held. This factor is jurisdictional in the matter of confirmation of the scheme. The court should not usurp the right of the members or creditors to decide whether they approved the scheme or not, Therefore, if a class whose interests are affected by a scheme does not assent to the scheme or approve it at a meeting convened in accordance with the provisions of Section 391, the court will have no jurisdiction to confirm the scheme, even if it considers that the class concerned is being fairly dealt with or that it would approve the scheme. (2) The court should satisfy itself that those who took part in the meeting are fairly representative of the class and that the statutory meeting did not coerce the minority in order to promote the adverse interest of those of the class whom they purport to represent. (2) The court should satisfy itself that those who took part in the meeting are fairly representative of the class and that the statutory meeting did not coerce the minority in order to promote the adverse interest of those of the class whom they purport to represent. (3) Lastly, in exercising its discretion under Sections 391 and 394, the court is not merely acting as a rubber stamp. It is the function of the court to see that the scheme as a whole, having regard to the general conditions and background and object of the scheme, is a reasonable one and if the court so finds, it is not for the court to interfere with the collective wisdom of the shareholders of the company. When once the court finds that the scheme is a fair one, then it is for the objector to convincingly show that the scheme is unfair and that, therefore, the court should exercise its discretion to reject the scheme, notwithstanding the views of a very large majority of the shareholders that the scheme is a fair one. If the court is of the opinion that there is such an objection to it as any reasonable man would say that he would not approve of it, then the court may refuse to confirm the scheme. However, if the scheme as a whole is fair and reasonable, it is the duty of the court not to launch on an investigation upon the commercial merits or demerits of the scheme which is the function of those who are interested in the arrangement. (4) There should not be any lack of good faith on the part of the majority." 10. While giving the facts of this case in the earlier part of this order, the result of the meetings of members as well as creditors of both transferee and transferor-companies under the chairmanship of the advocates appointed by this court has already been stated and even at the cost of repetition, it may be stated that the meetings of the creditors and members of both the transferee and transferor-companies by a majority of the persons being either present personally or by proxy, have approved the scheme of amalgamation. The scheme of amalgamation proposed that, for every one equity share of Rs. 100 each of the transferor-company, five equity shares of Rs. The scheme of amalgamation proposed that, for every one equity share of Rs. 100 each of the transferor-company, five equity shares of Rs. 10 each of the transferee-company fully paid-up shall be allotted. In the meetings as aforesaid of both the transferee and transferor-companies so far as the members and creditors ate concerned, the scheme was accepted with the modification that, in place of five fully paid-up equity shares of Rs. 10 each of the transferee-company to be allotted for one equity share of Rs. 100 of the transferor-company, four equity shares of Rs. 10 were to be allotted. It can, therefore, be said that the resolution has been passed by a statutory majority of the creditors and members of both the transferee and transferor-companies in accordance with Section 391 of the Act. It has also been said earlier that so far as the Company Law Board is concerned, it has neither opposed nor supported the amalgamation scheme and has said that it should be decided by the court on its merits. So far as the official liquidator is concerned, it has already been said earlier that a chartered accountant was appointed to assist him and after going through the account books of both the companies, he has submitted his detailed report. Not only this, the value of the shares of both the companies were taken by approved valuers. After going through the scheme and taking into consideration the fact that in the meetings of the members and creditors of both the transferee and transferor companies, the amalgamation scheme was approved with the modification in Clause 4 thereof in respect of allotment of equity shares, i.e., instead of five equity shares of Rs. 10 each for one equity share of Rs. 100 of the transferor-company, four equity shares of the transferee-company are to be allotted, I am of the opinion that the scheme as modified as aforesaid is both fair and reasonable and it is in the interest of both members and creditors. 11. Mr. Singhal, learned counsel for the Income-tax Department, argued that the object of the amalgamation scheme is to avoid the liability to payment of capital gains tax on transfer of assets of the transferor-company to the transferee-company and thereby to avoid payment of income-tax. 11. Mr. Singhal, learned counsel for the Income-tax Department, argued that the object of the amalgamation scheme is to avoid the liability to payment of capital gains tax on transfer of assets of the transferor-company to the transferee-company and thereby to avoid payment of income-tax. It was also contended that the transferee-company is a sick company and as such no tax shall be payable by the transferee-company (sic). He, therefore, contends that the scheme should not be approved or sanctioned and that the interest of the Income-tax Department should be safeguarded. In In re Wood Polymer Ltd., [1977]109 ITR 177, the Gujarat High Court said that notwithstanding that the formalities had been complied with, sanction to the scheme ought to be refused, if the only purpose behind the amalgamation is to defeat the tax liability. D.A. Desai J. as he then was, said that the court is charged with a duty, before it finally permits dissolution of the transferor-company by dissolving it without winding up, to ascertain whether its affairs have been carried on, not only in a manner not prejudicial to its members but even in public interest. The expression "public interest" must take its colour and content from the context in which it is used. The context in which the expression "public interest" is used enables the court to find out why the transferor-company came into existence, for what purpose it was set up, who were its promoters, who were controlling it, what object was sought to be achieved through creation of the transferor company and why it was being dissolved by merging it with another company. The court also said that if the only purpose appears to be to acquire a certain capital asset through the intermediary of the transferor company created for that very purpose to meet the requirement of law, and in the process to defeat tax liability which would otherwise arise, it could not be said that the affairs of the transferor-company sought to be amalgamated, created for the sole purpose of facilitating transfer of a capital asset through its medium, have not been carried on in a manner prejudicial to public interest. The court also said that "public interest" looms large in this background and the machinery of the judicial process is sought to be utilised for defeating public interest and the court would not lend its assistance to defeat public interest. The court also said that "public interest" looms large in this background and the machinery of the judicial process is sought to be utilised for defeating public interest and the court would not lend its assistance to defeat public interest. The court would, therefore, not sanction the scheme of amalgamation. The Supreme Court, in the case of McDowell and Co. Ltd. v. CTO, [1985]154 ITR 148, said that tax planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. The court said that the evil consequences of tax avoidance are manifold. First, there is substantial loss of much needed public revenue, particularly in a welfare State like ours. Next, there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is "the large hidden loss" to the community by some of the best brains in the country being involved in the perpetual war waged between the tax avoider and his expert team of advisers, lawyers and accountants on one side and the tax gatherer and his, perhaps not so skillful, advisers, on the other side. Then again there is the "sense of injustice and inequality which tax avoidance arouses in those who are unwilling or unable to profit by it". Last, but not the least, is the ethics of transferring the burden of tax liability to the shoulders of the guileless, good citizens from those of the "artful dodgers". Referring to the aforesaid authorities, Mr. Singhal, learned counsel for the Income-tax Department, contends that if the amalgamation scheme is sanctioned, it will permit the transferor-company to get capital gain. In my opinion, there can be no dispute that in the case of an amalgamation scheme, it cannot be said that it is for the purpose of avoiding capital gains tax or for that matter any other tax liability. It will depend on the facts of each case whether it is so or not. In my opinion, there can be no dispute that in the case of an amalgamation scheme, it cannot be said that it is for the purpose of avoiding capital gains tax or for that matter any other tax liability. It will depend on the facts of each case whether it is so or not. In the instant case, both the transferor-company and the transferee-company are carrying on the business of running hotels and the transferor-company has only one hotel, "Mumtaj", whereas the transferee-company has two hotels, one at Jaipur and the other at Ajmer. The transferee-company is financially sound. It has no hotel at Agra which is also a place where tourists are attracted because of one of the seven wonders of the world, i.e., Taj Mahal. It is well-known that hotel business having a chain of hotels at different places which the tourists visit may provide better facilities and it cannot be said that the amalgamation scheme in this case is for the purpose of avoiding capital gains tax liability or, for that matter, any other tax liability. In the earlier part of this order, while dealing with the amalgamation scheme, it has already been said that it is not unfair or unreasonable, but also it is in the interest of the creditors and members of both the transferor and transferee-companies as well as in public interest. If the only purpose of the amalgamation scheme would have been avoiding capital gains tax liability, the matter would have been different, but, in the instant case, such a conclusion cannot be arrived at. The Act vests power in the court to sanction amalgamation schemes in case the conditions mentioned in Section 391 of the Act are satisfied and the court is further satisfied that it is in public interest. In my opinion, the amalgamation scheme with the modification in Clause 4 thereof as aforesaid appears to be fair, reasonable, in the interest of members and creditors of both the transferor and transferee-companies and it is also in the interest of the staff and also in public interest. 12. Consequently, I allow these petitions, and sanction the scheme of amalgamation/merger/compromise/arrangement with the modification in Clause 4 thereof which shall be modified and substituted by the following clause. "4. 12. Consequently, I allow these petitions, and sanction the scheme of amalgamation/merger/compromise/arrangement with the modification in Clause 4 thereof which shall be modified and substituted by the following clause. "4. As part of the consideration for the transfer, the transferee-company shall allot to the shareholders of the transferor-company (whose names stand in the register of members of the transferor-company as on the day on which this scheme is sanctioned) for every 1 (one) equity share of Rs. 100 (rupees one hundred only) each of the transferor-company, 4 (four) equity shares of Rs. 10 (rupees ten only) each of the transferee-company as fully paid-up, i.e., to say, the transferee-company shall allot for each of 25,000 (twenty-five thousand) equity shares of Rs. 100 (rupees one hundred only) each of the transferor-company, 1,00,000 (one lakh) equity shares of Rs. 10 (rupees ten only) each of the transferee-company as fully paid-up. Equity shares so allotted by the transferee-company will in all respects rank pari pasu with the existing equity shares of the transferee-company for dividends and voting rights." 13. The aforesaid scheme shall take effect from April 1, 1987. *******