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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

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(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

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the Companies Act reads:

"394. Provisions for facilitating reconstruction

and amalgamation of companies. \026 (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 \026

(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,

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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\026

(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.

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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

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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

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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

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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

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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) \026 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,

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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\005 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

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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\005.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.

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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.

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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.

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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.

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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 \026

(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."

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{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

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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.