Hansa Industries Pvt. Ltd. And Others vs Kidarsons Industries Pvt. Ltd

To appreciate the background in which the two aforesaid issues arise, it is necessary to refer to the factual background of the case. The relevant facts are really not in dispute. The Respondent No.1 Company, namely Kidarsons Industries Pvt. Ltd. is a Private Limited Company closely held by the Nanda family. Except for a few shares held by their relatives and friends the entire shareholding of the Company is that of the members of the Nanda family. Appellant No.2 before us is Shri Narendra Nath Nanda. His three brothers namely, Mohinder Nath, Varinder Nath and Rajinder Nath were the respondents in the High Court alongwith their mother, who is no more.

The main source of income of Respondent No.1 Company was the commission earned from the agency business of M/s. Thyssen Sthal Union of Germany (hereinafter referred to as 'Thyssen'). Disputes arose between the brothers, and it appears that appellant No.2 succeeded in getting the agency exclusively in his name. M/s. Thyssen served a notice on Respondent No.1 Company terminating their agency w.e.f. June 30, 1988 and thereafter the agency was given to appellant No.1, namely Hansa Industries Private Limited, a company controlled by appellant No.2.

After the termination of the agency of Respondent No.1 Company, the appellants herein filed a petition for winding up of Respondent No.1 Company alleging that the agency having been terminated, the main source of income of the Company had vanished and, therefore, it was just and equitable to wind up the Company. On the other hand, the Respondents filed a suit for declaration and for injunction restraining the appellants from carrying on the agency business by holding themselves out as the agent of M/s. Thyssen.

During the pendency of the proceedings the parties arrived at a compromise whereby appellant No.2 Narendra Nath Nanda and his group agreed to transfer their equity shares in Kidarsons Industries (P) Ltd. Respondent No.1 Company, constituting 30.14% of the share capital of Respondent No.1 Company, in favour of the respondents. The price of the shares was to be paid in specie by transferring to the appellants 30.14% of the assets of the Company. The agency of Thyssen was to be retained by Narendra Nath Nanda, appellant No.2 and his group. The relevant terms of the settlement are the following:-

Justice P.N. Khanna acting as the Commissioner allotted the Golf Links property to the group of appellant No.2 even though he found that appellant No.2 and his group were entitled to get assets worth Rs.1.10 crores whereas the value of the property was Rs.1.82 crores. However, since further disputes arose between the parties the matter came up before the Court and it was agreed by the parties that the valuation of the shares of Respondent No.1 Company namely, Kidarsons Industries Private Ltd. and the immovable properties owned by the Company shall be done, and for this purpose the Court by its order of August 30, 1990 appointed M/s. V. Shankar Aiyer and Company as the Chartered Accountants for valuing the assets of the Respondent No.1 Company. They were required to work out the value of each share after valuing the assets as well as the liabilities of the Company. The Court passed an order to this effect on September 4, 1990.

We have made the above observations only because it has some relevance to the second issue which arises for our consideration in this appeal.

The next question is whether the judgment of the High Court could be suitably modified to provide for challenge by respondent -Company to any order that may be passed in future by the tax authority imposing capital gains tax on the hypothetical transfers made under the settlement. We find from the judgment of the High Court that the matter was discussed at length and the Court was of the view, prima facie, that the transfers may attract capital gains tax. There was, therefore, justification for deduction of the anticipated capital gains tax liability from the total value of assets.

We are of the view that since no demand of capital gains tax has been made so far, if any such demand is made in future in respect of the transfer of assets under the settlement for which 20% has been deducted by the Chartered Accountants, the respondent Company shall challenge the demand provided the appellants shall place at its disposal necessary funds for the purpose. In any event the liability under the head "capital gains", if any, shall be that of the appellants who shall furnish an undertaking to this effect accepting their liability, and create a charge over the aforesaid assets to secure payment of capital gains tax, if any, imposed in future. Subject to this being done, there shall be no deduction from the value of the assets of the company of the anticipated liability of capital gains.

We, therefore, allow this appeal to the extent indicated below:-

The matter is remitted to the High Court for giving effect to the aforesaid modifications which may involve directing the Chartered Accountants to make a re-calculation on the basis of the directions contained in this judgment, and apportion the assets accordingly.

This appeal is allowed to the extent indicated above. Parties to bear their own costs.

In view of the judgment passed by us today in Civil Appeal No. 1682 of 1999 it is not necessary to pass any order in this appeal. The appeal stands disposed of.