REPRESENTATION OF INCOME TAX DEPARTMENT AND OTHER SECTORAL REGULATORS IN CASES OF SCHEME OF ARRANGEMENT UNDER SECTION 391 OR 394 OF COMPANIES ACT, 1956

Ministry of Corporate Affairs (MCA) is of view that while the Regional Director provided their representations u/s 394A to the High Court in respect to the scheme of arrangement under section 391 – 394 of the Companies, Act, 1956, they do not project the observation/objection of the Income Tax Department or the other Sectoral Regulatories, had on the particular scheme of arrangement.

In order to ensure the representation of the Income Tax, MCA vide its general circular no. 1/2014 dated 15^th January, 2014, has introduced a mechanism wherein the Regional Directors (RD’s) are required to invite a specific comments from Income Tax Department within 15 days of receipt of notice before filling his response to the Court. The circular also provides that, in case, no response from the Income Tax Department is forthcoming, it may be presumed that the Income Tax Department has no observation /objection to the action proposed under section 391 or 394 of the companies Act, 1956 as the case may be. The Regional Directors must also see if in a particular case feedback from any other Sectoral Regulator is to be obtained and if it appears necessary for him to obtain such feedback, it will also be dealt with in a like manner.

This circular has also emphasized that it is not for the Regional Director to decide or otherwise of the objection / views of the Income Tax Department or other Sectoral Regulators, however, if the Regional Director has any compelling reason for doubting the correctness of such views, the Regional Director must take a reference of this to MCA for taking up the matter before filing the representation under section 394A.

This circular is effective from date of issue i.e.15^th January, 2014.

The process of the Scheme of Arrangement, already involves the approval of number of statutory authorities and this circular has added certain authorities, thereby making the whole process of arrangement as cumbersome. The circular would eventually escalate the process and increase the timeline for completion of Scheme. On the other hand this could be also considered as a welcome step as herein the Income Tax and the Sectoral Regulatory Authorities, would have closer look on each such schemes, where in numerous benefits are being taken, which would have not been available in the normal course.

Similar provisions have been provided in Chapter XV i.e. Compromise, Arrangement and Amalgamation under Companies Act, 2013. Hence effectively, the requirement in the Companies Act, 2013 has been implemented in advance.