In Re AVM Capital Services Private Limited (Bombay High Court)

Tax planning is legitimate if it is within the framework of the law

A scheme of arrangement u/s 391 to 394 of the Companies Act was entered into which provided that five private limited companies would be merged with Unichem Laboratories. Pursuant to the Scheme, (a) the entire undertaking of the transferor companies would stand vested with the transferee, (b) The shares held by the transferor companies in the transferee company would be cancelled & (c) shares of the transferee company would be issued to the shareholders of the transferor companies. The scheme was challenged by a shareholder on the ground that it was propounded to avoid capital gains tax that would have arisen if the transferor companies would have directly transferred their shares to the promoters and that it was a “colourable device to evade tax”. Reliance was placed on McDowell 154 ITR 148 (SC), Wood Polymer 47 CC 597 (Guj) & Groupe Industrial Marcel Dassault (AAR). HELD by the High Court rejecting the objection:

In Azadi Bachao Andolan 263 ITR 706 (SC), it was held that McDowell cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavor. A citizen is free to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity. This was considered again in Vodafone International 341 ITR 1 (SC) and it was held that there is no conflict between McDowell and Azadi Bachao Andolan and reiterated that tax planning may be legitimate provided it is within the framework of law. On facts, the object of the scheme is to enable the Promoter to hold shares directly in the transferee company rather than indirectly and not to avoid any tax. There is nothing illegal or unlawful or dubious or colourful in the Scheme and the same is a perfectly legitimate scheme and permissible by law. Therefore, the objection that the scheme is a tax avoidance device stands rejected.