Transfer of shares could not be tantamount to transfer of assets of company: HC
CL : Shares of a company are a separate asset wholly distinct from assets held by company. Thus where there was dilution of share capital of parent company TGC as well as transfer of shares held by TGC in petitioner company, transfer of shares of petitioner company could not be construed as transfer of assets of petitioner company. Thus, fundamental premise that there had been a transfer of subject property is erroneous and consequently, demand of unearned increase founded on same was liable to be set aside
 105 taxmann.com 194 (Delhi)
HIGH COURT OF DELHI
Gillette India Ltd.
Delhi Development Authority
VIBHU BAKHRU, J.
- (C) NO. 7456 OF 2013
MAY 9, 2019
Abhinav Vashisht, Sr. Adv., Amitabh Chaturvedi, Satvik Verma, Tanveer Oberoi, Ms. Priya Singh and Ms. Hamneet Kaur, Advs. for the Petitioner. Ajay Verma, Sumit Mishra and Ishaan Verma, Advs. for the Respondent.
- The petitioner has filed the present petition, inter alia, impugning the demand of unearned increase for a sum of Rs. 34,24,27,979/-, made by the respondent (hereafter ‘DDA’) in terms of its letter dated 15.04.2013 read with letters dated 14.05.2013 and 13.01.2015. The petitioner also seeks a refund for an amount of Rs.3,94,57,027/-, which was paid by the petitioner to DDA in terms of the order dated 19.01.2011 passed in W.P.(C) 344/2011. In addition, the petitioner has also sought refund for certain other sums paid to DDA, in connection with the property bearing the address Plot No. E-31, admeasuring 9715.75 square yards, Okhla Industrial Area, Phase II, New Delhi (hereafter “the subject property”).
- The principal controversy in the present case relates to the levy of unearned increase in respect of the subject property. DDA claims that the subject property was transferred in the year 2005-06, as there was a material change in the shareholding of the petitioner. According to DDA, the said change in shareholding brought about the change in the effective control in the subject property, which is construed as a transfer, thereby entitling DDA to levy unearned increase. The petitioner disputes the above and contends that change in the shareholding cannot be construed as a transfer of the subject property.
- M/s Sharpedge Limited (hereafter ‘Sharpedge’), a Company incorporated in India, acquired the subject property on 11.06.1974 in an auction conducted by DDA.
- Sharpedge constructed an industrial building on the subject property after obtaining the necessary approvals of the building plans. Subsequently on 05.07.1978, a perpetual lease deed in respect of the subject property was registered in favour of Sharpedge.
- On 09.02.1984, the petitioner – then known as Indian Shaving Products Limited (ISPL) – acquired the entire shareholding of Sharpedge. Consequently, Sharped gebecamea wholly owned subsidiary of ISPL.
- On 09.08.1989, the Board of Industrial and Financial Reconstruction (BIFR) declared Sharpedgeas a sick company within the meaning of Section 3(o) of the Sick Industrial Companies (Special Provisions) Act, 1985.
- During the course of the proceedings before the BIFR, the operating agency prepared a scheme for rehabilitation of Sharpedge, which entailed its amalgamation with ISPL (the petitioner company). The aforesaid scheme (entailing amalgamation of Sharpedge with the petitioner) was sanctioned by the BIFR on 23.04.1992. As a consequence of the said Scheme, the assets of Sharpedge, including the subject property and the building constructed thereon, vested with the petitioner. Accordingly on 15.05.1992, the petitioner requested DDA to effect the change in its records.
- In view of the transfer of the subject property from Sharpedge to the petitioner, DDA issued a demand notice dated 29.08.1995, calling upon the petitioner to pay a sum of Rs. 5,37,95,788/- as unearned increase alongwith interest thereon.
- The petitioner contested the aforesaid demand as according to it, unearned increase was not payable on account of transfer of any property pursuant to the rehabilitation scheme approved by BIFR under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985. Consequently, Indian Shaving Products Limited, as the petitioner was then known, filed a writ petition being C.W.P. 3489/1995, impugning the said demand notice.
- In terms of the order dated 06.02.1996 passed in the said petition, the petitioner deposited an amount of Rs. 3,50,00,000/- with DDA on 13.02.1996.
- The petitioner did not prevail in its challenge to the demand of the unearned increase as raised by DDA and the aforementioned writ petition was dismissed by this Court by an order dated 05.10.2001. The petitioner sought to challenge the order dated 05.10.2001 passed by this Court, before the Supreme Court. However, the Special Leave Petition (SLP(C) No. 19185/2001) was also dismissed by the Supreme Court by an order dated 23.11.2001.
- In the meantime, the petitioner changed its name from Indian Shaving Products Limited (ISPL) to its current name – Gillette India Limited. In December, 2001 the petitioner filed an application (CM No. 700 of 2001) before this Court, praying that directions be issued to DDA to provide the basis for arriving at the figure of unearned increase and the interest demanded from the petitioner, vide DDA’s notice dated 29.08.1995. On 19.04.2002, the aforementioned application was disposed of by this Court by directing DDA to consider and dispose the representation made by the petitioner.
- On 29.10.2002, DDA issued a letter (bearing No. F.5(52)73-LSB (Indl) PT) demanding a sum of Rs. 28,00,096/- from the petitioner as interest.
- On 01.10.2005, the petitioner issued letters to various stock exchanges, informing them about the merger of Aquarium Acquisition Corp.(AAC) a wholly owned subsidiary of Procter & Gamble, USA with the Gillette Company, USA (TGC). It is relevant to note that at the material time, TGC had substantial shareholding in the petitioner.
- On 10.06.2006, TGC transferred its rights, title and interest in the petitioner company (a total of 41.02% shareholding) to Procter& Gamble, Netherlands, without consideration. The petitioner submits that the same did not trigger an open offer under the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997, since the transfer was within the ‘group’.
- On 04.05.2007, DDA issued another demand letter to the petitioner, calling upon the petitioner to deposit Rs. 2,22,13,177/- as interest on unearned increase, ground rent up to 14.07.2007 and interest thereon. It is material to note that this was in relation to transfer of the subject property from Sharpedge to the petitioner. The petitioner thereafter deposited a sum of Rs. 2,15,75,884/- with DDA.
- On 29.06.2007, the petitioner filed a conversion application to convert the subject property from leasehold to freehold and deposited an amount of Rs. 1,38,97,257/- as conversion fee.
- On 05.09.2007, DDA advised the petitioner to deposit a sum of Rs. 6,37,293/- towards ground rent. Thereafter, on 17/18.01.2008, DDA raised a full and final demand of Rs. 3,94,57,027/- towards interest on unearned increase. This demand was reiterated on 07.04.2008.
- On 29.05.2008, the DDA rejected the petitioner’s conversion application on account of non-payment of interest on unearned increase. On 10.05.2010, DDA informed the petitioner that its application for restoration of the conversion application dated 11.02.2010 could only be acted upon by DDA after payment of the demanded dues.
- Aggrieved by the same, on 10.01.2011, the petitioner filed a writ petition (W.P. (C) 344 of 2011) before this Court challenging the demand of interest on unearned increase and seeking restoration of its conversion application. During the course of proceedings before this court on 19.01..2011, the petitioner stated that it would pay an amount of Rs. 3,94,57,027/- towards interest on unearned increase within a period of two weeks, under protest. This was noted by this court in the order passed on that date and DDA was directed to consider and decide the conversion application and reconcile its accounts, keeping in mind the petitioner’s challenge within a period of four weeks.
- The petitioner deposited the aforementioned amount on 27.01.2011. And, on 23.03.2011, DDA informed the petitioner that its conversion application has been restored subject to deposit of processing fee, payment of difference in conversion charges and payment of interest.
- On 26.05.2011, the petitioner’s counsel found that as per DDA’s records, DDA had issued a letter dated 30.03.2011 demanding Rs. 45,99,596/- as difference in conversion charges calculated on the basis of conversion rates of 2010-2011 and not the conversion rate prevailing in 2007-2008. Further, by the said letter, the DDA had also demanded interest at Rs. 13,876/-. However, the petitioner submits that this communication was never sent to the petitioner.
23.. On 23.06.2011, the petitioner paid an amount of Rs. 46,13,472/-, as demanded in terms of the letter dated 30.03.2011, under protest.
- In August 2011, the petitioner submitted more documents, composition fee of Rs. 81,233/- under protest, additional interest (for the period between 01.04.2011 to 23.06.2011) amounting to Rs. 2,07,235/-under protest, and requested DDA to issue a ‘No-Dues Certificate’ to the petitioner. On 13.04.2012, DDA called upon the petitioner to submit a board resolution authorizing Mr Amit Vyas to represent the petitioner in the conversion process.
- On 21.05.2012, the petitioner filed a contempt petition (C.C.P. No. 331 of 2012) alleging willful non-compliance of the orders passed by this court. During the course of the hearing of the said contempt petition, the learned counsel appearing for DDA submitted that as soon as the petitioner submits necessary documents as requisitioned in DDA’s letter dated 18.05.2012, the conveyance deed would be executed and registered by DDA.
- The petitioner states that on 21.06.2012, the petitioner paid stamp duty amounting to Rs. 11,09,815/- and submitted three copies of the duly filled and stamped conveyance deed alongwith attested copies of the Memorandum and Articles of Association of the petitioner company.
- The petitioner filed an application before this Court (CM. No. 12895 of 2012 in C.C.P. No. 331 of 2012)alleging non-compliance of the aforesaid order passed by this Court on 21.05.2012, whereby the DDA was directed to decide the petitioner’s representation regarding the charges within a period of four weeks.
- On 26.07.2012, DDA decided the petitioner’s representation and decided to drop the demand of Rs. 3,94,57,027/- towards interest on unearned increase.
- On 06.09.2012, in response to the order dated 26.07.2012, the petitioner sent two letters stating that the conversion of the subject property had been allowed by DDA vide its letter dated 18.05.2012, and that DDA had accepted in its own order dated 26.07.2012 that the amount of Rs. 3,94,57,027/- towards interest on the balance amount of unearned increase had been illegally charged by DDA.
- In the aforesaid contempt petition, DDA filed an affidavit contending that since the petitioner had been acquired by Procter & Gamble Ltd., the same amounted to change of ownership and attracted levy of unearned increase. In its reply, the petitioner contended that the merger did not amount to a change of ownership of the subject property.
- On 15.04.2013, the petitioner received a demand letter calling upon the petitioner to pay a sum of Rs. 34,24,27,979/- for the “merger of Gillette India Limited with P&G, since Oct., 2005”.
- The petitioner requested DDA to provide the basis for such a demand, which was provided by DDA by its letter dated 14.05.2013..
- Aggrieved by the aforesaid demand, the petitioner has filed the present petition. The petitioner also claims refund of certain amount paid by the petitioner which includes a sum of Rs. 3,94,57,027/-, which was decided by DDA to be withdrawn in its order dated 26.07.2012.
Reasons and Conclusion
- The first and foremost question to be addressed is whether any unearned increase is payable on account of the merger of Aquarium Acquisition Corp. (AAC) with Gillette Company, USA (TGC) or the transfer of TGCs shareholding in the petitioner to Procter & Gamble, Netherlands.
- It is contended on behalf of DDA that unearned increase is payable on the said transaction in terms of the lease deed. Reliance in this regard is placed on Clause 4 of the lease deed which proscribes the lessee to sell, transfer, assign or otherwise part with the possession of the subject property except with the previous approval of the lessor. Clauses 4 and 5 of the perpetual lease deed dated 05.07.1978, read as under:-
“(4) (a) The Lease shall not sell, transfer, assign or otherwise part with the possession of the whole or any part of the industrial plot except with the previous in writing of the Lessor which he shall be entitled to refuse in his absolute discretion.
Provided that such consent shall not be given for a period of ten years after the commencement of this Lease unless, in the opinion of the Lessor, exceptional circumstances exist for the grant of such consent.
Provided Furtherthat in the event of the consent being, the Lessee may impose such terms and conditions as he thinks fit and the Lessor shall be entitled to claim and recover a portion of the unearned increase in the value i.e. the difference between the premium paid and the market value) of the industrial plot at the time of sale, transfer, assignment, or parting with the possession, the amount to be recovered being fifty per cent of the un-earned increase and the decision of the Lessor in respect of the market value shall be final and binding.
Provided Furtherthat the Lessor shall have the pre-emptive right to purchase the property after deducting fifty % of the unearned increase as aforesaid.
(b) Notwithstanding anything contained in sub-clause (a) above, the Lease may, with the previous consent in writing of the Lieutenant Governor of Delhi (hereinafter called “the Lieutenant Governor), mortgage or charge the industrial plot to such person as may be approved by the Lieutenant Governor in his absolute discretion.
Provided that, in the event of the sale or fore-clause of the mortgage or charged property, the Lessor shall be entitled to claim arid recover the fifty per cent of the unearned increase in the value of the plot as aforesaid, and the amount of the Lessor’s share of the said mortgage or charge. The decision of the Lessor in respect of the market value of the said industrial plot shall be final and binding on all parties concerned.
PROVIDED Further that the Lessor shall have the pre-emptive right to purchase the mortgage or charged property after deducting fifty per cent of the unearned increase as aforesaid.
(5) The Lessor’s right to the recovery of fifty per cent of the unearned increase and the pre-emptive right to purchase the property as mentioned herein-before shall apply equally to an involuntary sale or transfer whether it be by or through an executing or insolvency court.”
- It is apparent from the above that unearned increase can be demanded only in cases where subject property is sold, transferred, assigned or its possession is parted with by the lessor. In this case, the lease was in favour of Sharpedge, which merged with the petitioner. The question whether the said merger involved transfer of the subject property is no longer res integra. Indisputably, with the merger of Sharpedge with the petitioner (then known as Indian Shaving Products Ltd.) on 23.04.1992, the subject property also vested with the petitioner along with other assets of Sharpedge. This clearly amounted to transfer of the subject property and, therefore, unearned increase was payable on such transfer, which was occasioned in terms of the scheme of amalgamation as approved by BIFR..
- Concededly, the petitioner has paid the amount of unearned increase due of such transfer. The controversy involved in the present petition does not relate to levy of unearned increase on such transfer but on account of dilution of the share capital of TGC by issue of shares to Procter & Gamble, USA and transfer of certain shares held by TGC in the petitioner company to Procter & Gamble, Netherlands.
- Pursuant to the Scheme of merger of ACC (which is a group company of a Procter & Gamble) with Gillette, TGC became a subsidiary of Procter & Gamble Company, with effect from 01.10.2005. It is relevant to note that even at that stage, there was no change in the shareholding of the petitioner, since 75.89% of shares of the petitioner continued to be held by TGC (the Gillette Company, USA). It is stated that on 10.06.2006, TGC transferred 41.02% of its shareholding of the petitioner company to Procter & Gamble, Netherlands. It is the DDA’s case that with the acquisition of Gillette Company, USA by the Procter & Gamble Company, USA, the subject property stood transferred from the Gillette Group to Procter & Gamble Group. DDA’s claim for unearned increases is confined on this ground.
- It is trite law that an incorporated company is an entity separate from its shareholders. In Bacha F. Guzdar v.Commissioner of Income Tax: AIR 1955 SC 74, the Constitution Bench of the Supreme Court had held that the nature of income in the hands of a company was not the nature of income in the hands of its shareholders. It held that dividends in the hands of the shareholders of a company declared from agricultural income received by that company could not be considered as agricultural income. The said decision rested on the fundamental principle that a company is a separate juristic entity distinct from its shareholders.
- In the aforementioned case, the Supreme Court referred to the Halsbury’s Laws of England, Vol. 6 (3rdEdn.), p. 234 and set forth the following passage regarding the attributes of shares:-
“A share is a right to a specified amount of the share capital of a company carrying with it certain rights and liabilities while the company is a going concern and in its winding up. The shares or other interest of any member in a company are personal estate transferable in the manner provided by its articles, and are not of the nature of real estate.”
- It is well settled that shares of a company are a separate asset wholly distinct from the assets held by the company.
- In the present case, there was dilution of the share capital of TGC as well as transfer of shares held by the TGC in the petitioner company. The transfer of shares of the petitioner company cannot be construed as transfer of the assets of the petitioner company.
- In Rustom Cavasjee Cooper v. Union of India: 1 SCC 248, the constitution bench of the Supreme Court reiterated the above settled principle in the following words:
“11. A company registered under the Companies Act is a legal person, separate, and distinct from its individual members. Property of the Company is not the property of the shareholders. A shareholder has merely an interest in the Company arising under its Articles of Association, measured by a sum of money for the purpose of liability, and by a share in the distributed profit. Again a director of a Company is merely its agent for the purpose of management. The holder of a deposit account in a Company is its creditor: he is not the owner of any specific fund lying with the Company. A shareholder, a depositor or a director may not therefore be entitled to move a petition for infringement of the rights of the Company, unless by the action impugned by him, his rights are also infringed.”
- In a recent decision of the Supreme Court in Vodafone International Holdings B.V. v. Union of India and Anr.:  6 SCC 613, the Supreme Court rejected the contention that a transfer of shares of an overseas holding company would amount to transfer of assets held by the subsidiary in India. In the said case, the Supreme Court applied the “look at” test to view the transaction relating to transfer of shares by overseas holding companies. The transaction must be viewed as it looks and a dissecting approach is not warranted.
- Essentially, DDA seeks to lift the corporate veil of the petitioner in order to establish transfer of assets of the petitioner to the Procter & Gamble Group. Clearly, no grounds for lifting of the corporate veil are established in this case. It is nobody’s case that the transaction relating to dilution of equity of TGC in favour of Procter & Gamble, USA by virtue of the merger of AAC with TGC or the transfer of shares held by TGC in the petitioner company to Procter & Gamble, Netherlands is a subterfuge to transfer the subject property to another entity. The takeover of the Gillette Group by Procter & Gamble, USA was obviously for commercial reasons and the said transaction was not crafted for transferring of the subject property. Clearly, there is no occasion for this Court to overlook the legal form of the transaction which, as simply stated, is the dilution of shares of the parent company of the petitioner, namely, the Gillette Company, USA (TGC) and the transfer of 41.02% shareholding of the petitioner company held by TGC to Procter & Gamble, Netherlands.
- In view of the above, the fundamental premise that there has been a transfer of the subject property is erroneous and consequently, the demand of unearned increase founded on the same is liable to be set aside.
- Insofar as the refund for a sum of Rs. 3,94,57,027/- is concerned, there is no dispute that the DDA is liable to refund the said amount to the petitioner. The order dated 26.07.2012 passed by the DDA in compliance with the orders dated 21.05.2012 passed by this Court in Contempt Case (C) 331/2012, unequivocally records the DDA’s decision to refund the said amount. The relevant extract of the said decision is set out below:-
“As regards the demand of DDA amounting to Rs. 3,94,57,027/- towards interest on balance amount of UEI (interest for the period 14.02.1996 to 31.05.2007), the issue has now been reviewed and it has been decided with the approval of the Competent Authority that as per the then existing policy and rule position, this demand is not logical and thus may be dropped. Action will be taken by DDA to refund this amount subject to adjustment/recovery of dues of DDA, if any. However, the Competent Authority has also approved that the Hon’ble High Court may be requested to direct the petitioner to pay interest at reasonable rate as decided by it on the outstanding amount of Rs. 2,15,95,884/- which the petitioner ought to have paid alongwith payment of UEI on 13.02.1996 as DDA has lost opportunity cost on this amount while on the other hand the petitioner continued to hold this amount for his benefit.”
- As noticed above, the petitioner also claims further sums as noted in the order dated 26.07.2012 passed by DDA including Rs. 46,13,472/-on account of the difference in conversion charges and Rs. 2,07,235/- as interest on the said differential amount of conversion charges. In terms of the said order, DDA had directed that the Management Wing would review the petitioner’s claim for the said amounts, keeping in view that the demand of Rs. 3,94,57,027/- has been dropped and taking into account that a sum of Rs. 20,000/- was payable as balance interest on the unearned increase as on 01.06..2007.
- The DDA also claims that interest is payable on the amount of Rs. 2,26,55,314/-, being the interest on unearned increase paid by the petitioner. The said amount includes an amount of Rs. 1,98,55,228/- as the interest payable on the unearned increase upto 31.08.1995 and further interest of Rs. 28,00,096/- on the aforesaid amount of interest for the period from 01.09.1995 to 13.02.1996. As against the aforesaid amount, the petitioner has paid a sum of Rs. 10,59,440/- on 13.02.1996, leaving a balance amount of Rs. 2,15,95,884/- which, according to DDA, was payable on 15.02.1996. Out of the aforesaid amount, the petitioner paid a sum of Rs.. 2,15,75,884/- on 01.06.2007, leaving a balance of Rs. 20,000/-. Thus, admittedly, the petitioner has not only paid interest on the unearned increase as demanded but the said amount also includes an element of interest on the interest so computed till 13.02.1996. It is also relevant to note that the interest has been computed at a high rate of 18% per annum. In the aforesaid view, this Court does not consider it apposite to direct payment of any interest. It is also relevant to note that the petitioner has also claimed interest on the sum of Rs. 3,94,57,027/-, which is indisputably refundable to the petitioner, in terms of the order dated 26.07.2012. The petitioner’s claim for interest is also rejected.
- In view of the above, this Court considers it apposite to direct the concerned Wing of DDA to compute the amount refundable to the petitioner having regard to the decision of the DDA, as recorded in its order dated 26.07.2012, and the observations made hereinabove.
- In view of the above, the impugned letters dated 15.04.2013, 14.05.2013 and 13.01.2015 are set aside.
- The DDA is also directed to forthwith execute the conveyance deed of the subject property in favour of the petitioner within a period of six weeks, without awaiting determination of the amount refundable to the petitioner.
- The petition is disposed of with the aforesaid observations.