Amalgamation of companies
Amalgamation of companies legal meaning, translation and judicial precedents.
Meaning & Judicial Interpretation: (اردو مفہوم اور قانونی تشریح)
Assessment order (Income Tax Return) filed by the Taxpayer/company (deriving income from manufacturing and sale of juices, pickles, jams, ketchups etc.) was amended by putting in additions on account of capital gains thereby disallowing the expense on repair and maintenance of the vehicles
Appellate Tribunal Inland Revenue ('Tribunal'), on appeal preferred by the company, deleted the addition, made under S.37 of Income Tax Ordinance, 2001 ('the Ordinance, 2001'), by the Additional Commissioner Inland Revenue which was confirmed by the Commissioner (Appeals)
Department filed reference before the High Court against the order passed by the Tribunal
Contention of the applicant/Department was that the Appellate Tribunal was not justified in deleting the addition made on account of capital gains under S. 37 of the Ordinance, 2001 without making any comparison or without having any material before it for the purpose of cross-checking in order to satisfy the parameters provided in S.97 of the Ordinance 2001
Plea of the respondent(company/taxpayer) was that merger of wholly owned subsidiary was fully covered under the provisions of S. 97 of the Ordinance of 2001, thus, no gain or loss shall be taken to arise on disposal of its assets
Validity
Record revealed that respondent/company had a subsidiary company with a different name and style ('the subsidiary'), which was merged into respondent/company pursuant to a Court's order, and the subsidiary merged into respondent/company under the scheme of arrangement for merger / amalgamation
Merger of two or more companies is essentially a process of corporate reconstruction whereby assets of merging companies are either clubbed or brought together in the surviving or new company, however, proprietary rights of assets remained intact
No financial transaction could be said to have taken place between the merging companies
As such in the scheme of merger arrangement, there does not take place any sale, disposition, exchange or relinquishment or extinguishment of any right on the part of the amalgamating companies that gives rise to any income or gain resulting in a taxable event
If upon merger, the net assets of the merging companies remain unaltered and also the proprietary interest of the shareholders in the amalgamated company remains the same, a corporate merger does not give rise to any taxable event
A merger does not give rise to any financial transaction to create a taxable event and no cash payment is involved in any manner
Amalgamation does not involve any sale or purchase and any surplus of value of shares issued by the amalgamated company over the value of one asset transferred does not result in any taxable gain
Amalgamation of the wholly-owned subsidiary company with its parent company does not result in transfer for consideration and, therefore, does not give rise to any capital gains
Liability to capital gains tax (if any) can only be on the transferor company (subsidiary), which in the present case had lost its identity and ceased to exist
Subsidiary (company), which got amalgamated with the respondent/company, was a hundred percent subsidiary of the respondent/company
By virtue of the amalgamation, all the assets and liabilities of the subsidiary became the assets and liabilities of the respondent/company
Where the amalgamating company, which is a hundred percent subsidiary, merges with the holding company (amalgamated company), no question of any profit or gain would arise because the amalgamating company (wholly owned subsidiary), on amalgamation, ceases to exist and its identity merges completely with the amalgamated company; however, in case the amalgamating company receives nothing but the shareholders receive shares of the amalgamated company, there is no question of capital gains in the hands of the amalgamating company since it is the shareholders who receive consideration (if any)
In an amalgamation where no shares are issued by the amalgamated company, because the amalgamating company was a wholly owned subsidiary, no question of capital gains can arise because the amalgamating company does not receive any consideration
Applicant/department had failed to point out any illegality or legal infirmity in the order passed by the Appellate Tribunal, which even otherwise was unexceptionable, thus, needed no interference
High Court answered to the purposed questions in affirmative, i.e. against applicant/department and in favour of respondent/company
Reference Application filed by the Department was dismissed accordingly.
All indispensable statutory benchmarks and formalities were accomplished and adhered to by petitioners as envisaged under Companies Ordinance, 1984 and enabling rules
Schemes set up for sanction were reinforced and fortified by requisite majority which decision was just and fair
Reports/minutes of meeting unequivocally conveyed that all essential and fundamental characteristics and attributes of schemes were placed before voters in separate meetings to live up to statutory obligations including
Swap ratio was determined by Chartered Accountants and their reports were placed on record
Effect
Proposed scheme as a whole looked like even handed and serviceable from the point of view of prudent men of business taking a commercial decision
Once requirements of a scheme for getting sanction of the Court were found to have been met, Court had no jurisdiction to sit in appeal over commercial wisdom of majority of the class of persons who with their open eyes had given their approval to the scheme
Scheme of arrangement was sanctioned in circumstances.
Where scheme is found to be reasonable and fair, at that moment in time it is not the sense of duty or province of High Court to supplement or substitute its judgment against collective wisdom and intellect of shareholders of companies involved.
Respondents/shareholders of the petitioners' companies had unanimously endorsed the resolution in their general meeting held in supervision of the chairperson appointed by the High Court, whereby the shareholders had approved the "Scheme of Arrangement" for the amalgamation by way of merger
No one appeared to object to the proposed amalgamation in response to publications in the daily newspapers
Revenue Authority had no objection for grant of sanction in favour of the petitioners regarding their amalgamation subject to their undertaking that they would deposit the requisite stamp duty in accordance with the law
High Court sanctioned the proposed scheme of amalgamation
Application was allowed.
Inclusion of the schedule of properties of the transferor Company in the "Scheme of Arrangement" is sine qua non to evaluate the assets of that Company.
At the time of approval of scheme of amalgamation of petitioner companies, authorities raised an objection with regard to payment of stamp duty on the properties which were to be transferred as a result of such amalgamation
Validity
Decree of court which resulted in transfer of property or had created or transferred a right in property should be included in the definition of 'document'
In consequence of an order sanctioning scheme of arrangement/amalgamation, transfer of assets had taken place from transferor company to transferee company in terms of S.287 of Companies Ordinance, 1984
Such order was an instrument as it conveyed and had the effect of conveying title in property from transferor company to transferee company
Incident of transfer of assets from transferor company to transferee company in order sanctioning scheme of arrangement/amalgamation made it liable to stamp duty in terms of Art.27-A of First Schedule to Stamp Act, 1899
Such order was, without any question, an 'instrument' as defined in S.2(14) of Stamp Act, 1899
High Court directed parties to petition to supply to office of High Court, requisite stamp paper, before the order sanctioning a scheme under S.284 of Companies Ordinance, 1984, was passed, where after the order would be placed for final signatures
High Court restrained Registrar of Companies from receiving and taking on its record an order sanctioning a scheme of arrangement/amalgamation until the same was duly stamped in terms of applicable provisions of Stamp Act, 1899
Petition was allowed accordingly.
At the time of approval of scheme of amalgamation of petitioner companies, authorities raised an objection with regard to payment of stamp duty on the properties which were to be transferred as a result of such amalgamation
Validity
Decree of Court which resulted in transfer of property or had created or transferred a right in property should be included in the definition of 'document'
In consequence of an order sanctioning scheme of arrangement/amalgamation, transfer of assets had taken place from transferor company to transferee company in terms of S. 287 of Companies Ordinance, 1984
Such order was an instrument as it conveyed and had the effect of conveying title in property from transferor company to transferee company
Incident of transfer of assets from transferor company to transferee company in the order sanctioning scheme of arrangement/amalgamation made it liable to stamp duty in terms of Art. 27-A of First Schedule to Stamp Act, 1899
Such order was, without any question, an 'instrument' as defined in S. 2(14) of Stamp Act, 1899
High Court directed parties to petition to supply to office of High Court, requisite stamp paper, before the order sanctioning a scheme under S. 284 of Companies Ordinance, 1984, was passed, whereafter the order would be placed for final signatures
High Court restrained Registrar of Companies from receiving and taking on its record an order sanctioning a scheme of arrangement/amalgamation until the same was duly stamped in terms of applicable provisions of Stamp Act, 1899
Petition was allowed accordingly.
Plea raised by Security and Exchange Commission of Pakistan was that authorized share capital of surviving company could not increase without compliance of provisions of S.92 or 94 of Companies Ordinance, 1984
Validity
As a result of grant of scheme of amalgamation of petitioner companies by High Court, their authorized share capitals stood automatically merged resulting into automatic increase in authorized share capital of surviving company without recourse to S.92 or 94 of Companies Ordinance, 1984
Surviving company was not obliged to take any step for enhancement of its authorized capital or to do any further act or deed
Provisions of S.92 or 94 of Companies Ordinance, 1984, were inapplicable to cases of merger or amalgamation of companies and or their authorized paid-up share capital in such cases would be governed on under Part IX "Arbitration , Arrangements and Reconstruction" of Companies Ordinance, 1984
Respective authorized share capitals of both the companies were subjected to payment of fee at the time of registration and were covered by definition of property of every description under S.287(4) of Companies Ordinance, 1984
Company could not again subjected to pay fee on same authorized share capital on which it had already paid requisite fee
Amalgamation of petitioner companies was allowed as per terms prayed by them
Petition was allowed in circumstances.
"Amalgamation of companies", Pakistan Law Portal, available at: https://paklawportal.com/words-terms-maxims/124945629
Precedents & Case Laws citing "Amalgamation of companies"
2016 C L D 2185
MASOOD SPINNING MILLS through Representative and another — Petitioners Versus PUBLIC AT LARGE and others — Respondents
Court: Lahore (Multan Bench)2003 C L D 1713
CAPITAL ASSETS LEASING CORPORATION LTD.‑‑ Petitioner Versus INTERNATIONAL MULTI LEASING CORPORATION LTD.‑‑‑Respondent
Court: Lahore1998 P T D 856
COMMISSIONER OF INCOME-TAX Versus LEENA SARABHAI (N. CH).
Court: 221 I T R 5201989 M L D 1861
Court: Karachi
2002 C L D 1338
Court: Karachi
2000 P T D 3489
COMMISSIONER OF INCOME-TAX Versus T.V. SUNDARAM IYENGAR & SONS (PVT.) LTD,
Court: 238 I T R 328