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DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY VISAKHAPATNAM, A.P., INDIA Kwality Ice Creams v. SEBI & Ors: Case Analysis CORPORATE LAW II SUBMITTED TO: Dr. Dayananda Murthy C. P. SUBMITTED BY: PIYUSH KUMAR MISHRA 2014078 CASE ANALYSIS 1. IDENTIFICATION Case Name: Kwality Ice Creams (India) Ltd v. Securities
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    DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY VISAKHAPATNAM, A.P., INDIA Kwality Ice Creams v. SEBI & Ors: Case Analysis CORPORATE LAW II SUBMITTED TO: Dr. Dayananda Murthy C. P. SUBMITTED BY: PIYUSH KUMAR MISHRA 2014078   CASE ANALYSIS 1.   IDENTIFICATION Case Name: Kwality Ice Creams (India) Ltd v. Securities & Exchange Board of India   Citation:  2001 Indlaw SAT 25 Year: February 15, 2001.  Jurisdiction : SECURITIES APPELLATE TRIBUNAL, MUMBAI Bench:   C. ACHUTHAN (Presiding Officer) 2.   FACTS IN ISSUE  A public limited company named Kwality Ice Creams (India) Ltd., ( hereinafter to be referred as “ KIC ”) , had invested Rs.2 crores in three open ended mutual fund schemes  providing tax benefits on capital gains. Out of the said investment, one crore rupees was invested in Templeton India Growth Fund of Templeton Mutual Funds and fifty lakhs rupees each in Alliance Fund Growth of Alliance Capital Mutual Fund and Prudential ICICI Growth Plan of Prudential ICICI Mutual Funds. These investments were made during June-July, 1998 Investments in all the three mutual fund schemes provided exemption from capital gains tax, in terms of section 54EB of the Income Tax Act, 1961. Exemption was available subject to the condition that the units in which investment has  been made will be re-purchasable after a period of 7 years from the date of issue. The KIC, after about 2 years of the date of purchase of the units decided to forego the  benefits of exemption provided under section 54EB ( Income Tax Act, 1961)  and approached ICICI mutual funds seeking redemption of the units purchased by it. Formal request for this purpose was made on 7.3.2000. But ICICI mutual funds declined to redeem the units on the ground that the units were not re-purchasable during the stipulated lock in period of 7 years as agreed to by the KIC at the time of purchasing the same.  3.   PROCEDURAL HISTORY When the ICICI mutual funds declined to redeem the units on the ground that the units were not re-purchasable during the stipulated lock in period of 7 years as agreed to by the KICs at the time of purchasing the same. Aggrieved by the said decision, the KIC filed a Civil Writ Petition before the Delhi High Court.   CIVIL WRIT PETITION (W.P.No.1794/2000) IN DELHI HIGH COURT The Delhi high court held that the usual course which was to be adopted by the KICs was to first file the case before ICICI in the form of writ and the ICICI was obliged to dispose the same within three weeks with reasons. This was supported from paragraph 15 filed  by the ICICI in the form of affidavit. This course shall be adopted by the parties without  prejudice to the averments involved in the writ petition. For the said reason the KIC filed a representation before the ICICI, but the ICICI rejected the representation holding that it has no merit. Subsequently the KIC filed appeal before Delhi high court for rejecting the same. But before that the KIC withdrew the application with liberty to pursue the alternative remedy of appeal before the Tribunal. The present appeal is the result. The KIC has prayed therein for a direction to ICICI mutual funds to release the money due upon redemption of the units, calculated as per the Net Asset Value (NAV) prevailing on the date on which the redemption was sought, i.e. 7.3.2000, and interest thereon calculated at 15%, till the date of actual payment. Now the present appeal is before securities appellate tribunal, Mumbai. 4.   ISSUE(S)    Whether the KIC who has invested in the mutual funds is entitled to prematurely redeem the units carrying 7 years lock in period in the schemes? OR    Whether the denial of premature withdrawal of funds would be contrary to public policy?    HOLDING KIC is not entitled to redeem before the stipulated period, the units attached with 7 years lock in  period issued by ICICI mutual funds. Premature redemption would adversely affect the interests of other investors as the NAV of the fund will suffer as a result of such premature redemption Also, denial of premature withdrawal of funds is not contrary to public policy.   REASONING The tribunal before reaching to the conclusion that the KIC is not entitled to redeem  before the stipulated period, the units attached with 7 years lock in period issued by the ICICI mutual funds observed various things like, respective clauses of the ICICIs company. The offer documents of the ICICIs company which prescribed the restrictive clauses are: 1.   ICICI 1- “Under section 54EB of the Act ( Income Tax Act, 1961) , where a long term capital asset is transferred by the unit holder and whole or any part of the net consideration is invested in units of the scheme, or bonds and debentures specified by CBDT, the unit holder can claim exemption from capital gains tax. The tax benefit is subject to the lock in period of 7 years and other terms and conditions specified therein 2.   ICICI 2- “It has been stated that unit holders who have made investments under section 54EA and EB will be permitted to switch only after the completion of their respective lock in periods ”  An investor is required to give an undertaking to the effect that he having read and understood the contents of the offer document application is made for the units and that he agrees to abide by the terms, rules and regulations of the scheme. It is pertinent to discuss the scope and effect of section 54EB of Income Tax Act, 1961 : (2) where the long term assets is transferred or converted into money at any time within seven years from the date of its acquisition, the amount of capital gains arising from the transfer of the srcinal asset not charged under section 45 on the basis of such long term asset, shall be deemed to income chargeable under the head “capital gains” relating to long term capital asset of the  previous year in which it was converted or transferred into money. It is not in dispute that the KICs entered into the scheme which was open ended (also mentioned in the offer document). It is also an admitted fact that investment was made in the units re- purchasable after a period of 7 years of the allotment. It has also been admitted that the investment in the said long term specified assets enabled the KIC to enjoy the benefit of exemption from capital gains tax in terms of section 54EB of the Income Tax Act. That tax saving was available only to the units which were not re-purchasable before seven  years . It is true that the clause mentioned in the offer document was a “ restrictive clause ”  but restriction on repurchase within 7 years is a condition attached   to the unit at
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