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2022 (12) TMI 684
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....artly allowed. The learned CIT - A confirmed applicability of provisions of Section 2 (22) (a) of The Act holding that demerger of the assessee is not in accordance with provision of section 2 (19AA) of the ACT and therefore there is a distribution by assessee company of its accumulated profits, which entails the release by the company to its shareholders of all or any part of the assets of the company, so it has distributed dividend to its shareholder. However, the amount of dividend determined by the learned AO amounting to Rs. 48,93,44,40,253/- was reduced to Rs. 13,380.68 crores for the purpose of charging dividend distribution tax. Therefore, both the parties are aggrieved with the appellate order and are in appeal before us. 2. The assessee is appellant in ITA No. 1935/MUM/2020 raising following grounds of appeal: - "GROUND NO. 1: 1.1 On the facts and in the circumstances of the case and in law, the id. CIT(A) erred in party confirming the order dated 14.03.2019 passed by the learned Assessing Officer u/s 115Q r.w.s 115-O of the Act for the financial year 2017-18 and holding that dividend distribution tax of Rs 2723,99,21,942/- was payable by the Appellan....
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....ing to the aforesaid conclusion, erred in disregarding the settled judicial precedents cited by the Appellant and the submissions made by the Appellant. 3.2 On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in upholding the order of the Id. AO of going behind and doubting the entire basis of the scheme of arrangement approved by the Hon'ble NCLT and alleging that the issuance of the shares by the resulting company to the shareholders of the Appellant is an indirect exercise by the Appellant of distributing the proceeds of the transferred undertaking to the of the Appellant. 3.3 On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in upholding the action of the Id. AO in imputing illegality to the action of the Appellant under section 123 of the Companies Act, 2013. 3.4 Without prejudice, the Appellant submits that once the Revenue had not availed of the opportunity provided to it by law to object to the scheme of the arrangement on the notice dated 03.03.2017 served to the learned Assessing Officer prior to the approval granted by the Hon'ble NCLT, thereafter, it is not open to the learned .AO to c....
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.... share for the purpose computing deemed dividend u/s 2(22)(a) of the Act. 5.2 Without prejudice to the above, the Id CIT(A) failed to appreciate that if at all deemed dividend is to be computed u/s 2(22)(a) of the Act, then the liability of DDT payable in respect of Appellant's non-resident shareholders is to be computed having regard to provisions of the respective Double Taxation Avoidance Agreement. 5.3 The Appellant submits that the valuation adopted by the Id. CIT(A) for computing the amount of DDT is not sustainable in law. GROUND NO. 6. ORDERS PASSED BY THE AO AND THE CIT(A) CONTRARY TO THE PRINCIPAL OF NATURAL JUSTICE: 6.1 On the facts and in the circumstances of the case and in law, the orders passed by the Id. AO and the Id. CIT(A) are bad in law and liable to be quashed being contrary to the principals of natural justice. GROUND NO. 7: LEVY OF INTEREST UNDER SECTION 115P OF THE ACT: 7.1 On the facts and in the circumstances of the case and in law, the Id. AO, and the Id. CIT(A) erred in levying interest under section 115P of the Act. 7.2. The Appellant prays that the interest levied under section 115P of ....
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....Birla global finance Ltd, a nonbanking finance company by amalgamation with effect from 1 September 2005. In the explanatory statement in relation to amalgamation of Indian rayon and industries Ltd which is letter known as Aditya Birla Nuvo limited and Birla global finance Ltd the reason behind amalgamation mentioned that Aditya Birla Nuvo Ltd and Birla global finance Ltd belonged to the same group and amalgamation would further overall objective of the group to consolidate financial service business within Aditya Birla Nuvo limited. Birla global finance Ltd was a nonbanking financial company engaged into the business of retail asset financing, capital market, corporate finance, investment and as financial intermediary. 6. Prior to merger Aditya Birla Nuvolimited [ABNL] hasa wholly owned subsidiary in the name of Aditya Birla financial services limited [ABFSL]. Aditya Birla financial services limited [ ABFSL] holds 90.23% equity shares in another company i.e. Aditya Birla finance limited [ ABFL] , further balance 9.77% in Aditya Birla finance limited is held by Aditya Birla Nuvo limited. 7. Board of directors of the assessee on 11 August 2016 approved a composite scheme of ar....
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....tal limited issued 92,02,66,951 equity shares to the shareholders of the assessee company. 11. Thus, the corporate structure existing i. Prior to 30 June 2017 it shows that Grasim industries limited is an independent company. Aditya Birla Nuvo limited has 100 % wholly owned subsidiary by the name of Aditya Birla financial services limited. ii. There is one more entity by the name of Aditya Birla finance limited whose 90.23% equity is held by Aditya Birla financial services limited and 9.77% of the equity is held by Aditya Birla Nuvo limited. iii. On 30 June 2017, Aditya Birla Nuvo limited, out of its 100 % holding of Aditya Birla financial services limited, offloaded 3.93% of its stake to one investor, i.e. PI opportunity fund. Therefore now, in Aditya Birla financial services limited, it holds 96.07% equity and PI opportunity fund holds 3.93% equity. iv. On 1/7/2017 amalgamation took place between Grasim industries limited and Aditya Birla Nuvo limited. Thus, Aditya Birla Nuvo limited merged with Grasim industries limited. Therefore now the merged entity owns 9.77% equity of Aditya Birla finance limited and 96.07% equity of Aditya Birla finan....
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....2 (22) (a) of the act. This notice was replied by assessee on 5 February 2019. Subsequently a show cause notice was issued on 11 February 2019 asking as to why the provisions of Section 115O of the act should not be applied to the deemed dividend of Rs. 13,380.68 crores (being the value of 92,02,66,951 equity shares of ABC Ltd at the rate of Rs. 145.40 per share i.e. at this price another investor i.e. PI opportunity fund acquired the shares of ABC Ltd on 30 June 2017) paid by the assessee to the shareholders of the assessee and why the assessee should not be deemed to be a "assessee in default' within the meaning of Section 115 Q of the act for non-payment of dividend distribution tax at the rate of 15% amounting to Rs. 2007.10 crores. Assessee requested for time, which was rejected and subsequently assessee was directed to file reply on or before 25 February 2019 which was replied by the assessee on the date. 14. Assessee submitted that demerger is tax neutral and is following the provisions of Section 2 (19AA) of the act. It was stated that i. Aditya Birla Nuvo limited was engaged in the financial services business merged into the assessee and ii. Subsequent....
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....ertaking as well as of going concern is not fulfilled and iv. accordingly the assessee is subject to dividend distribution tax as the allotment of 92,02,66,951 equity shares of ABC allotted to the shareholders of the assessee are the new shares and the value of the shares is to be taken at the fair market value of Rs. 261.20 per share (this was the price at which the shares were listed on 1/9/2017 on Bombay stock exchange) v. Accordingly the dividend of Rs. 24037,37,27,600 is deemed dividend chargeable to dividend distribution tax u/s 2 (22) (a) of the act. vi. The show cause notice was based on the annual accounts of the assessee, Aditya Birla Nuvo limited and other information available on the website of these companies and return of income as well as assessment proceedings in case of those companies. 16. This notice was further applied by assessee on 11 March 2019 mostly reiterating submissions already made. Assessee further stated that i. Aditya Birla Nuvo limited was carrying on financial services business from assessment year 2005 onwards and stated that the quantum of investment in that business grew from Rs. 364 crore to Rs. 5589 crore....
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.... on 14 March 2019 u/s 115Q read with Section 115O of the act determining the deemed distribution of dividend u/s 2 (22) (a) of the act amounting to rupees 24037,37,18,198 being the value of 92,02,66,915 shares at the rate of Rs. 261.20 per share determining the dividend distribution tax payable of Rs. 48,934,440,243 and interest thereon amounting to Rs. 9,786,888,044 4 the financial year 2017 - 18. The main reasons for which the assessee was held to be an assessee in default by the learned AO are: - i. the following are the assets and liabilities of the transferred Financial services business : - particulars Rs. in crores Assets Tangible assets 16.67 Non-current investment (a minority stake in Aditya Birla finance Ltd, a subsidiary) 1728.93 Current investments 117.13 Loans and advances 13.43 Other current assets 0.21 Total assets (A) 1876.37 Liabilities Deferred tax liability 103.26 Short term borrowings 51.27 Employee liability 0.22 Total liability (B) 154.75 Net assets acquired (c) = (A)-(B) 1721.62 Consideration paid by issue of 92,02,66,951 equity shares of face value o....
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....ected that learned AO is rewriting the scheme approved by the NCLT, it was held that the AO is merely applying the provisions of the law to the return of income filed by the assessee vii. justifying the applicability of provisions of Section 2 (22) (a) of the act stating that there is a release of the assets by the assessee to Aditya Birla capital limited and in turn Aditya Birla capital limited issued the shares to the shareholders of the assessee company in the guise of demerger by allotment of 92.02 crores equity shares having the fair market value of 24,037.37 crores. Therefore there is a transfer of assets by the assessee company to its shareholders through Aditya Birla capital limited and therefore the transaction falls into the category of deemed dividend u/s 2 (22) (a) of the act. viii. For the purpose of deriving at the amount of deemed dividend, the learned assessing officer noted that the shares of Aditya Birla capital limited were listed on stock exchange on 1 September 2017, which derived the market value i.e. the fair market value of the shares through exchange on that date. As there is no other evidences were available to derive at the fair market v....
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....ugned order. Reasons in Appellate Order Passed by the LD CIT (A) 21. The learned CIT - A perused written submissions made by the assessee, obtained the remand report of the learned assessing officer, rejoinder of the assessee on 21/2/2020 decided the issue holding that: - i. so far as the affairs of assessee are concerned, it did not have a standalone financial business unit and whatever of it's in the form of shares of Aditya Birla finance limited which have been transferred to Aditya Birla capital limited could not qualify to be an undertaking, capable of being run independently as a business unit as envisaged u/s 2 (19 AA) of the act. ii. Assets and liabilities transferred by the assessee could not constitute an independently running business and further the businesses of subsidiary companies of Aditya Birla financial services limited and not of the appellant company and therefore there is just no question of own independent business of financial services of Assessee. iii. Merely some assets in the nature of shares of Aditya Birla financial services limited to the tune of Rs. 1721.62 crores along with some minor other assets are transferred along....
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....mulated profits of general reserve of Grasim industries limited on standalone basis and not Rs. 31,293 crores as taken by the AO of consolidated general reserve after adding the reserve of subsidiaries, therefore, the profit can be distributed only to the extent of Rs. 16,138 crores, contention of the assessee was accepted xiii. with respect to the valuation of equity shares of Aditya Birla capital limited taken by the learned assessing officer at Rs. 261.20 per share on the basis of listing of Aditya Birla capital limited shares at Bombay stock exchange on 1/9/2017, the learned CIT - A rejected the report Under rule 11 UA of the income tax rules produced by the assessee deriving the value of each share at Rs. 39.51 per share, and also rejected the valuation by the assessing officer, he took valuation of shares allotted to PI opportunity fund by the assessee on 30/6/2017 on private placement basis which was invested on the basis of valuation report dated 29/6/2017 at Rs. 145.40 per share. xiv. Rejected the argument of the assessee made by letter dated 25/8/2020 that liability of dividend distribution tax payable in respect of foreign shareholders is required to be....
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....erred but not reproduced here. 25. The 2nd submission made by the learned senior advocate was as Under: Pursuant to conclusion of the hearing on April 21, 2021 on the primary issue of existence of the undertaking for the purpose of demerger, as desired by the Hon'ble Bench herein below are the synopsis of arguments in two parts - "PART A - Submissions on issues argued during the course of the hearing" and "PART B - Submissions on balance issues yet to be argued": PART A - Submissions on issues argued during the course of the hearing 1. The Appellant is a widely held public listed company and its shares are listed on recognized stock exchanges. On August 11, 2016, the Board of Directors of the Appellant approved a "composite scheme of arrangement" ("the scheme") between the Appellant ("GIL"), Aditya Birla Nuvo Limited ("ABNL") (also a widely held public listed company) and Aditya Birla Capital Limited ("ABCL") [which was earlier known as Aditya Birla Financial Services Limited ("ABFSL")] and their respective shareholders and creditors under section 391 to 394 of the Companies Act, 1956 and other applicable provisions of the Companies Act, 1956 and the Compani....
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....ronage of ABNL, the financial services business attained significant growth. ABNL"s strong financial strength, reputation and credit rating, provided capital and support to the financial services business to raise further capital from market. ABNL was also actively involved in the decision making, drawing up strategies, preparing operating plans, preparing risk reward matrix, performing risk management function, periodic performance review, fund raising and treasury function of these subsidiaries/JVs, which were engaged in the financial services business. ABNL"s investment in financial services business grew from Rs.341.90 crores (before acquiring BGFL in 2005) to Rs. 5,588.88 crore (before merging with the Appellant) which simply reflects the extent to which ABNL participated in the FS business. Following chart depicts the picture aptly, ABNL under its umbrella, through itself, its Subsidiaries, JVs, and Sub-Subsidiaries, had the FSB. The FSB of ABNL was an undertaking and independent business activity and would in any case, tantamount to part of an Undertaking which can function independently as a going concern, if not the entire Undertaking. This establishes that the Ap....
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....rasim industries Limited becoming effective, demerger of the financial services business of Grasim industries Ltd, the Demerged Undertaking (as defined hereinafter), and transfer of the same Aditya Birla Financial Services Limited pursuant to the provisions of Section 391 to 394 of the Companies Act, 1956 add other applicable provisions of the Companies Act, 1956 and/or the Companies Act, 2013 to the extent notified applicable." (Emphasis supplied) 5.2 Clause 1.1 (Pg. No. 29 - 30 Vol I FPB) of Part I, defines "Demerged Undertaking",inter alia, as under: "Demerger Undertaking" shall mean the financial services business engaged in the activity of finder based on lending, making, holding and nurturing investments in financial services sector together with all its undertakings, assets, properties, investments, and liabilities of whatsoever nature and kind, and where server situated, of the demerged undertaking, in relation to hand pertaining to the financial services business, as the effective date as defined hereinafter and shall include without limitation:..." From the above, it is evident that the Scheme is based on the fundamental aspect that there is a Financi....
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....ices business and tap opportunities available in low penetrated market with support from its strong balance sheet. (c) the proposed demerger of the financial services business to the Resulting Company will unlock for the shareholders, attract investors, and provide greater flexibility in accessing capital. (d) it is believed that the scheme will create enhance the value for shareholders and allow a focused strategy which will be in the best interest of all the stakeholders the restructuring proposed by the scheme will also provide flexibility to the investors to select investments which best suit their investment strategies and risk profile." (Emphasis supplied) 5.5 Clause F (Pg. No. 28 of Vol I FPB) of Scheme states that provisions of section 2(1B) and section 2(19AA) of the Act are satisfied. The same is reproduced here with for ready reference: "F. The arrangement under this Scheme will be effected under the provisions of section 391 to 394 of the Companies Act, 1956 and other applicable provisions of the Companies Act, 1956 and / or the Companies Act, 2013 (to the extent notified and applicable). The amalgamation of the Transferor Company ....
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....gation Proceedings (Pg. No. 59 of Vol I FPB), 5.8 Clause20.1 of Part III of the Scheme provides for Consideration for Vesting of Demerged Undertaking (Pg. No. 59 of Vol I of FPB). The said Clause provides that under the Scheme no consideration was payable to the Demerged Company(the Appellant). The relevant extract is produced as under: "Upon the effectiveness of Part III of this Scheme and in consideration of the transfer and vesting of the Demerged Undertaking into the Resulting Company pursuant to provisions of this Scheme, the Resulting Company shall, without any further act or deed, issue and allot to each Shareholder of the Demerged Company, whose name is recorded in the register of members and records of the depository as members of the Demerged Company, on the Record Date 2, 7(seven) equity shares of Rs. 10(Indian Rupees Ten) each of Resulting Company credited as fully paid up for every 5(five) equity shares of Rs. 2(Indian Rupees Two) each held by such shareholders in the Demerged Company ("Resulting Company New Equity Shares"). The ratio in which equity shares of the Resulting Company are to be issued and allotted to the shareholders of the Demerged Comp....
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....ceeds on the basis that FSB being an undertaking has been demerged by the Appellant to ABCL on a going concern basis. The allegations / findings of the AO / CIT(A) and submission of the Revenue before the Hon'ble Tribunal that (i) no FSB undertaking exists; (ii) there was no transfer of business activity on a going concern basis; and (iii) the entire scheme is a colorable device to merely transfer shares of ABFL is clearly contrary to the entire substratum of the scheme as approved by NCLT. Ground No. 2 & 3 of Assessee"s Appeal: FSB was an undertaking Allegations of the AO in the impugned Order: The conclusion of the Ld. AO that there existed no FSB Undertaking in ABNL and, therefore, conditions of section 2(19AA) of the Act are not satisfied, is based on the following four allegations: Disclosure in Annual Reports and Return of Income 9. In the Profit and Loss Account and notes thereto, ABNL"s source of income are under various heads other than "financial services" (Para 13.1(ii), Pg. 42 of AO Order and Para 13.2 Pg. 43 - 44 of AO Order). [dealt with in Para 53 - 54 below]. 10. Interest income from lending to its Associates and....
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....nt of clause I to sub section 2(19AA) of the Act is not satisfied. (Para 16.1, Pg. 58 of AO Order) Not capable of being run independently on a Going Concern Basis: 15. Hiving off FSB is basically a transaction for transfer of valuable shares of ABFL and doesn"t constitute an independent business activity (Para 14, Pg. 51-53 of AO Order). Out of total assets worth of Rs. 1876 crore, Rs.1728 crore related to Equity shares of Aditya Birla Finance Limited (ABFL), which is subsidiary Co of ABCL. Therefore, assets and liabilities substantially consisted of Equity shares of ABFL only and such transfer of asset is not capable of being run as FSB on Going Concern basis (Para 14.1, Pg. 51 and 17.2 to 17.3, Pg. 63 - 64 of AO Order) [Factually incorrect please refer Para 43 - 44 below]. The Scheme itself is a colorable device: 16. "Since the business of "financial services" did not exist in either of the Companies that amalgamated, the transfer of few assets and liability, purported to be indicating the business of "financial services" can at best be termed as a mere transfer of assets and liabilities, chose "randomly" or cherry picked to give it a colour of....
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....7.10, Pg. 156 - 159 and Para 17.11, Pg. 161 - 163 of CIT(A) Order). 22. After analysis of the ITR in Para 17.10 / Pg. 159 - 161 and Para 17.11, Pg. 163 - 164 of CIT(A) Order, the CIT(A) held that as income by way of interest in the case of finance Company is shown as NIL, no separate FSB business of the Appellant was in existence.(Para 17.12 / Pg. 164 of CIT(A) Order) [dealt with in Para 53 - 54 below] There existed no Financial Service Business in either of the Companies: 23. ABNL was in fact engaged in the business of manufacturing of Viscose Staple Fiber, Chemicals and Textiles etc., as is clear from Appellant"s submission. It was never engaged in the FSB. (Para 17.1, Pg. 150 of CIT(A) Order) [Factually incorrect please refer Para 41, 43-44, 48-50 below].Only subsidiaries of the ABNL were engaged in some financial activities. (Para 17.1, Pg. 150 of CIT(A) Order). 24. In the impugned order of the CIT(A), it has been held / claimed that FSB of the Appellant was hived off by way of this demerger, when actually no such independent unit or business ever existed. It is clear that no business of FS either being conducted or ever existed in the hands ....
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....ect please refer Para 5 above and 72 - 77below] 29. CIT(A) accepts that the AO cannot rewrite the scheme approved by the Court, however, holds that examination of tax implications of a scheme does not amount to rewriting the scheme as approved by the Hon'ble NCLT. Through the Scheme of merger and demerger, the Appellant has avoided payments of capital gains tax on transfer of shares (Para 23.3, Pg. 182 of CIT(A) Order).[Factually incorrect please refer Para 5 above and 72-80 below] 30. The AO has neither change the Scheme of merger/demerger nor he can do so. What the Ld. AO has mentioned is that the demerger part of the Scheme is not tax compliant and, therefore, he has observed that provisions of section 2(22)(a) are applicable and the assessee is liable for deemed dividend. (Para 23.5, Pg. 183 of CIT(A) Order) 31. Merely because physical payment has not been made by the Appellant to its shareholders, it cannot be said that there was no distribution made by the Company. Release of assets and distribution can happen in kind. (Para 29.3, Pg. 216 of CIT(A) Order) Submission of the Revenue during the hearing before the Hon'ble Bench and in the Writt....
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....e Department to analyze the consequences arising out of the Scheme. Reliance was placed on the decision of the Hon'ble Delhi High Court in the case of CIT vs. Salora International Ltd. (386 ITR 580) and the decision of the Hon'ble Gujarat High Court in the case of Vodafone Essar Gujarat Ltd. vs. CIT (24 taxmann.com 323)(Pg. No. 436 - 464 of Legal Paper Book, Vol. II). Reliance also placed on the decision of Hon'ble Delhi High Court in the case of Indo Rama Textile Ltd (2012)(23 taxmann.com 390) (Pg. No. 43 - 58 of Legal Paper Book, Vol. I). 40. It was also contended that the approval given by the NCLT to the demerger of FSB as an undertaking was considering the definition of "undertaking" under section 180 of the Companies Act, 2013 and, the same being different from the definition under the Income-tax Act, one has to independently see whether the transferred assets and liabilities would constitute undertaking under the Act. FSB was an 'undertaking' of ABNL- 41. As stated above in the background facts (Refer Para 3, Pg. 1 to 3 above) ABNL was in the business of Financial Services by itself through fund-based lending and by making, holding, and nurturing i....
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.... that the assets and the liabilities transferred by the Appellant, even dehors the shares of ABFL (only to meet the allegation of ld. AO and ld. CIT(A)), are more than sufficient for constituting an Undertaking. Further, it is submitted that not just shares of ABFL, as alleged by AO, were transferred. All assets / liabilities of the undertaking were transferred being: • Demerged Undertaking comprised of all assets, liabilities, employees, borrowings, contracts, ongoing litigations etc. (Page No. 1332 of FPB 2) Assets, liabilities, borrowings etc. # Particulars Rs. Crs. 1. Fixed assets (Office premises, furniture, computers, office equipment and vehicle) 16.67 2. Equity shares of Aditya Birla Finance Limited - 6,12,73,146 nos. (9.77% stake) 1,718.72 3. 8% Compulsorily Convertible Redeemable Preference Shares of Aditya Birla Finance Limited 10.21 4. Fund based lending (ICD) 13.63 5. Deposit - BEST Undertaking for office premises 0.01 6. Investment in Mutual Fund units 117.13 Total Assets 1,876.38 7. Borrowings 51.27 8. Current Liabilities 0.23 9. Deferred Tax l....
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....ommon assets are to be transferred and which are retained. 45. The allegation by the AO and CIT (A) that out of a gross total asset of 1876.37 Crores of the financial service business, shares of ABFL constitutes Rs.1728.93 Crores and, therefore, such a transfer is a case of mere transfer of the assets and liabilities and nothing more is completely wrong. The Appellant submits that the AO failed to appreciate that merely because one investment constitutes major chunk of the total assets of the undertaking does not mean that the undertaking ceased to be so. The other assets which have been transferred by itself are of substantial amount of Rs.147.44 Crores which cannot be said to be of no consequence so as to be completely disregarded as has been the submission of the AO and the CIT(A). The Appellant submits that other assets include tangible assets, current investments, non-current investments, loans, etc., all of which constitutes part of the undertaking of financial service business of ABNL. The AO and CIT(A) has also erred in not appreciating that along with the assets, the Appellant has also transferred, its office premises of the financial services business, its employ....
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....ictory stand in the impugned order. Having accepted interest as business income, it is not open to the Revenue to allege that FSB was not an Undertaking. Settled principle of consistency is laid down in the following decisions: a) RadhasoamiSatsangVs CIT (193 ITR 321) (SC) (@ Para 13 - 14, Pg. 109, Pg. 104-110 of Legal Paper Book, Vol. I) b) CIT Vs Quest Investment Advisors P. Ltd (2018) (96 taxmann.com 157) (Bom HC) (@ Para 7 - 9, Pg. 113 & 114, Pg. 111-114 of Legal Paper Book, Vol. I) 51. The allegation of the AO and the CIT(A) that in the Return of Income, separate business of financial service has not been disclosed and, therefore, it must be concluded that there is no financial service business of the Appellant in also not justified. The Appellant submits that in the Return of Income there are only 3 columns to mention the line of business of the assessee [Pg. 584 - 599 Vol II FPB, @ page 586 AY (13-14), @ page 589 (14-15), @ page 592 (15-16), @ page 595 (16-17) and page 599 (17-18) of FPB - Vol. II].Therefore, for an assessee like the Appellant which has multiple business, it is not possible to mention all the businesses in 3 column and, therefore, ....
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....ompanies carrying on activities which are in the nature of "business of non-banking financial institute" as defined u/s 45I(f) of RBI Act, 1935 shall be considered as a finance company. As per RBI Press release (1269 dated April 8, 1999), a Company can be identified as NBFC, if its financial assets are more than 50% of total assets and income from financial assets are more than 50% of gross income. ABNL did not satisfy both the criteria and, therefore, principal business of the Appellant was not NBFC and, therefore, the Appellant could not be considered as Finance Company and interest income could not have been disclosed as interest (in the case of Finance Company). However, it is pertinent to note that if the appellant were carrying on only the activity of financial services and no other activity, then the Appellant would be characterized as a finance company and the interest income would have been reflected as interest (in case of finance Company). If according to the Revenue, it would have constituted a business activity and undertaking when only this activity is being carried on, then there is no justification for any different view, merely because other business activities are....
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....g of the AO. Holding investment in subsidiary companies is recognized manner of conducting business activity: 60. As stated above, ABNL was also involved in making, holing and nurturing investments in FSB, in addition to doing Fund Based lending by itself. Under ABNL various subsidiaries were promoted and structured. (Pg. 866 of Vol II FPB). There are Regulatory and contractual compulsions for conducting business through separate SPVs. Regulatory compulsions: • SEBI Regulations which mandate that Asset management company shall not undertake any other business activity other than management and advisory services. (Para 4.2.2.2, Pg. 73 of CIT(A) order) • IRDA Regulations, inter alia, mandate that only those companies whose sole purpose is to carry on life insurance business or general insurance or re-insurance business, can apply for license. (Para 4.2.2.2, Pg. 74 of CIT(A) Order). ABNL did not satisfy the criteria. Therefore, mandatory to carry out the business through a separate entity, while significant control and management remained with ABNL. • Other criteria also such as Adequacy norms, net worth criteria etc. ....
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....e options and investments were not held as stock in trade, and, as such, any income from such investments, even by substituting ALP for the actual consideration, cannot be a business income. What this plea overlooks that even holding investments can constitute business and give rise to business income. The concept of business of holding investments is not alien to income tax law. While dealing with the concept of 'business of holding investments', we may refer to following observations made by legendry Justice K S Hegde (as he then was) in the case of CIT v. Distributors (Baroda) Pvt. Ltd [[1972]83 ITR 377 (SC)] at page 382-383........" b) DCIT Vs Colgate Palmolive India Ltd (ITA 5485/Mum/2009) (Mumbai ITAT)(Para 7 onwards - Pg. 128 -130, Pg. 124-135 of Legal Paper Book, Vol. I) (wherein, one of the Hon'ble Members, the Hon'ble VP is a party to the order). The Hon'ble Tribunal has, inter alia, negated the contention of the Ld. AO that in books of accounts of shares being shown as investments and, therefore, income from the same will be treated as income from other source by holding that treatment in books of accounts cannot negate the fact that shares were purchase....
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....bscription to the Government Loan was conducive to its business, the loss arose in the course of the business, and that, therefore, the assessee was entitled to a deduction of the loss claimed by it. A coordinate bench of this Tribunal upheld the claim made by the assessee. The Tribunal found that having regard to the sequence of events and the close proximity of the investment with the receipt of the Government orders, the conclusion was inescapable that the investment was made in order to further the sales of the assessee and boost its business. In the circumstances, the Tribunal held that the investment was made by way of commercial expediency for the purpose of carrying on the assessee's business and that, therefore, the loss suffered by the assessee on the sale of the investment must be regarded as a revenue loss. Upholding the stand of the Tribunal, Hon'ble Supreme Court held that the Tribunal was right in its view. It is thus clear that as long as investment is justified on the grounds of commercial expediency, the loss on sale of such investment is to be considered a business loss. The nature of business expediency could vary from case to case but what is important is t....
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....ncluded that the loss of Rs. 5.50 crores are a business loss in the hands of the assessee. He set aside the order of the Assessing Officer. 8. The Revenue carried the matter in appeal and the Tribunal has dealt with this issue extensively. In paragraph 7 of its order, the Tribunal has upheld the conclusion of the Commissioner and by giving additional reason. 9. Upon a perusal of this material, we are unable to agree with Mr. Pinto that question 5.1 reproduced above is a substantial question of law. Given the peculiar facts and circumstances and the nature of the investment so also being for commercial expediency, the view taken by the Commissioner and the Tribunal concurrently cannot be termed as perverse. That view being imminently possible in the given facts and circumstances. It does not raise any substantial question of law. (Emphasis supplied) Further, Revenue has not challenged the aforesaid finding before the Supreme Court and the same has become final, as evident from SC SLP dismissal order dt. 21.12.17 (In Civil Appeal No. 25987/2015). (Pg. 140-153 of Legal Paper Book, Vol. I) Similar view has been taken in the following decisio....
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....f ABFL, Mutual Funds Units, various Inter Corporate Deposits and Preference Shares of ABFL. Further, the Undertaking (looked independently) fulfilled the criteria of being a Core Investment Company ("CIC") prior to demerger as well. ABCL was NBFC, CIC ND SI before and after demerger and therefore, no fresh registration was required. If the resulting company was a new company, it would have required registration as NBFC and would be regarded as CIC. (Para 4.2.7, Pg. 110 - 111 of CIT(A) Order and Pg. 1256 Vol III FPB (Conditions for being qualified as NBFC CIC). 67. The Appellant further submits that contention of the Revenue that 'onus / burden' is on the Appellant to establish there existed an "Undertaking "which has been demerged by the Appellant is not justified. The Appellant submits that the scheme as approved by NCLT records that the Appellant has demerged the FSB which was an undertaking and that the said undertaking has been transferred as going concern. Therefore, the Appellant submits that if the revenue wants to allege that the said facts are not correct, then the 'onus / burden' is clearly on the revenue to show as to how the said facts are not correct. The Appe....
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....rt is not in agreement with the Applicant's submissions that in a Scheme of Demerger by virtue of Section 2(19AA) of the Act, 1961, all the properties of the undertaking become the property of the resulting company. This Court is of the view that non-transfer of some of the pervious common assets being used by the transferee undertaking will not affect IRTL status as a going concern. 43. In fact, it is settled legal position that there is no requirement under the provisions of the Act, 1961 or Act,1956 for transfer of all common assets and/or liabilities relatable to the Undertaking being demerged. The Applicant's submission that all common assets that cannot be divided must be transferred to the transferee namely, IRTL overlooks the explicit language of Section 2(19AA)(i) of the Act, 1961, which states that ''all the properties of the undertaking being transferred by the demerged company, immediately before the demerger becomes the property of resulting company by virtue of the demerger''. The expression ''being transferred'' is relatable to such assets as are being transferred to make it a going concern. Moreover, if the applicant&....
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....rn. (Kindly refer Para68 to 71 above). Therefore, the Appellant submits that the interpretation canvassed by the Revenue that there was no FSB undertaking in existence and that the undertaking was not transferred as a going concern is nothing but an attempt to re-write a Sanctioned Scheme, which is not permissible. 73. The Appellant submits that once the Scheme has been approved by the NCLT, Revenue cannot seek to over-reach or depart/differ from the explicit provisions of the scheme. It is respectfully submitted that the terms of the Scheme are binding on the AO, and it is not open to the AO to proceed on the basis that the scheme was effected solely with a view to transfer shares of ABFL as circuitous transaction. Further, once the Scheme has been approved by the appropriate authority, Revenue cannot allege it to be against public policy, which includes taxation. It is settled position of law that once the Scheme is approved it attains binding force not only inter se the Transferor and Transferee Companies, but also in rem. The Appellant relies upon following decisions where it has been held that once scheme has been approved it has a binding force and cannot be allowed ....
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....170 ITD 507) (T) Kol) (2018) (Pg. 424-435 of Legal Paper Book, Vol. II) "4.4 We find that the scheme of amalgamation would be approved by the Hon'ble High Court only after ensuring that the same is not prejudicial to the interests of its members or to public interest. Hence the merger scheme approved by the Hon'ble High Court having in mind the larger public interest, cannot be disturbed by the revenue merely because the assessee is not entitled for benefits u/s 72A of the Act. The expression 'Public interest' was discussed by the Hon'ble Gujarat High Court in the case of Wood Polymer Ltd. (supra) wherein the Hon'ble Court refused to sanction the scheme of amalgamation formulated solely for the purpose of avoiding taxes. It was held that: ................................. Hence it could be safely inferred that the Court would exercise due diligence and would conduct detailed enquiries before sanctioning the scheme. A scheme formulated for the purposes of tax evasion cannot be held to be in 'public interest' and hence the same cannot be sanctioned under the provisions of Companies Act, 1956. The fact that the Hon'ble Cal....
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....56, Pg. 436-464 of Legal Paper Book, Vol. II), • Priapus Developers (176 ITD 223) (Para 13 onwards (Pg. 478), Pg. 465-484 of Legal Paper Book, Vol. II), 75. From the above, it is clear that the argument of the revenue to the extent that the same is contrary to the scheme is not sustainable in law. Therefore, the Appellant submits that it is neither open to the revenue to argue that FSB undertaking was not in existence before the demerger nor that the undertaking was not transferred as a going concern. The Appellant submits that once the scheme is approved, then the facts stated in the scheme are sacrosanct and the same cannot be changed, altered or discarded without challenging the scheme itself. In the present case, admittedly, the scheme has not been challenged by the revenue and, therefore, it is not open to revenue to contend anything contrary to the scheme. 76. The Appellant further submits that the reference to section 180 of the Companies Act, 2013 to allege that it is still open to the revenue to contend that FSB is not an undertaking for the purpose of section 2(19AA) of the Act, as undertaking is separately defined under the companies Act is....
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....py of letter dated 03.03.2017 duly acknowledged by the Assessing Officer of GIL is at (Page No. 292 to 294 of Vol I FPB). The Appellant submits that that being the statutory position, if the tax department, after almost 19 months of the scheme being approved is allowed to raise such objections to the scheme, the same would amount to giving permission to an authority exercising quasi-judicial function to take benefit of its own wrong. 79. Further, Circular No. 1/2014 issued by MCA dated January 15, 2014, provided that Regional Director shall invite comments from IT Department, if no comments are received it may be presumed that IT department has no objection (Pg. 1241 - 1242 Vol III FPB). The Appellant submits that the aforesaid well settled legal position has been re-iterated by the CBDT itself vide Instruction No. F. No. 279/Misc./M-171/2013-ITdated April 11, 2014 (Refer Pg. No. 1243 FPB Vol III), wherein the CBDT has categorically stated that only opportunity available to the Department to object to the scheme of amalgamation if it is found to be prejudicial to the interest of the Revenue is at the stage of sanctioning of the scheme. Authorities were directed to send the....
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.... the same percentage of shares in the Transferee company pre and post-merger. 37. The above rationale presented by the petitioner company is without any Justification. Petitioner has to comply with all applicable laws. By this scheme of amalgamation and arrangement Gabs/shareholders of Gabs are avoiding full tax liability which is strenuously objected by the Income-tax Department as discussed Supra. Any transfer of property from one entity to other has to be treated as sale/transfer and the same has to comply with applicable provisions of law including applicable tax liability, stamp duty. In the instant case, the transferor is a private Ltd. company which is a separate legal entity and any transfer of shares to other entity including individuals from the legal entity would attract applicable tax liability. Therefore, we are of the considered view that the Bench can sanction/approve the scheme only if it complies with all applicable provisions of the Act, Rules and if the scheme is in the interest of public, shareholder etc. However, the petitioner companies did not provide details with regard to compliance of tax liability raised by the Income-tax Department, their undert....
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....s because, it is implied that the revenue has given its consent in the impugned scheme of amalgamation by raising no objection in response to the letter issued by the regional director of the MCA as discussed above. Furthermore, had there been any grievances to the revenue, then it should have approached to the Hon'ble High Court through the regional director of the MCA. But it did not do so. As such the revenue on one hand is issuing circulars to its officers to object the scheme of amalgamation if it is found prejudicial to the interest of revenue but on the other hand it remains silent when such opportunity was afforded to it and raising the same issue during the assessment proceedings which in our considered view is not desirable." (Emphasis supplied) 81. In any case, Revenue cannot recharacterize a transaction, as held by Bombay High Court in DIT-IT vs. Besix Kier Dabhol SA (210 Taxman 151) (Pg. Pg. 539-541 of Legal Paper Book, Vol. II) 82. The Appellant submits that the reliance placed by the Revenue on the decision of the Delhi High Court in the case of CIT vs. Salora International Ltd. (386 ITR 580), is misplaced. The Court in that case was merely c....
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....ncial service business to ABCL, there is no enrichment to the shareholders of any of the entities. On account of the merger, the shareholders of ABNL have got shares of the Appellant of the same value as the value of the shares held in ABNL. Further, since ABCL is a subsidiary of the Appellant, on account of the demerger of the financial service business, the shareholders of the Appellant have received the shares of ABCL, the consequence of which is that the value of the shares of the Appellant has reduced to the extent of the receipt of shares of ABCL. For example, if the value of shares of the Appellant was Rs.100/- before demerger, the value of the shares of the Appellant reduced to Rs.80/- after demerger and correspondingly, share of ABCL of Rs.20/- was received by the shareholders. Therefore, in the hands of the shareholders, there is no enrichment at all under the said scheme. The Appellant submits that pursuant to the demerger, the shareholding of the shareholders in the Appellant is split into two shares i.e. of the Appellant and ABCL. Therefore, the allegation of The AO is clearly unfounded. 86. The Appellant further submits that the reference to indirect tax prov....
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.... The Appellant submits that in the present case, none of the aforesaid 4 conditions are satisfied and, hence, the question of applicability of section 2(22)(a) in the present case, does not arise. 89. The Appellant submits that in the present case, there is no 'distribution' by the Appellant Company. The Appellant submits that the transfer and vesting of the FSB by the Appellant to ABCL under the scheme of arrangement cannot be regarded as a distribution. The Appellant submits that as per the clear and undisputable terms of the Scheme of arrangement, that consideration on account of the demerger, is receivable by the Shareholders only and not by the Appellant (Refer Para 4.8 above) and adjustment on account of the transfer of the financial service undertaking by the Appellant has been carried out in the reserve of the Appellant (Refer Para 21.1.2, Pg. No. 63 of FPB, Vol I). The Appellant has made the adjustment in the Amalgamation Reserve, which is a Capital Reserve, which, by definition, is not capable of being distributed as dividend. Hence, the Appellant submits that there is no distribution by the company of its accumulated profits and therefore, the order dated Mar....
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....emerged company which the Demerged company has distributed to its shareholder. The Appellant submits that the submission of the Revenue will, therefore, clearly lead to absurdity. Further, if such an argument cannot be canvassed for the purpose of section 2(19AA), the same would certainly also not hold good for the purpose of section 2(22). The Appellant places reliance on the decision of the Hon'ble Hyderabad Tribunal in the case of ITO vs. Zinger Investments P. Ltd. (147 ITD 694) (copy attached herewith as Annexure F), wherein the Hon'ble Tribunal has held that in the Court approved scheme no consideration was due to the transferor (Appellant), therefore, no consideration under the Scheme is attributable to the Assessee. Therefore, there can be no question of transfer of any assets by the Appellant to its shareholders whether actual or presumed. 92. The Appellant also places reliance on the decision of Ajai Choudhary vs. DCIT (74 ITD 350) (Page No. 542 - 547 of LPB, vol. II, @ Para 24 - 28, Pg. 546) in context of 2(22)(d) of the Act. The Hon'ble Tribunal rejected the contention of the Commissioner that on demerger of computer business of a Company in which the Assessee w....
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....he assets of the transferee company, nor can they be said to have held any interest in the assets of the transferee company - Bacha F. Guzdarv. CIT AIR 1955 SC 74. Right from the time of Salomon"s case [Salomon& Co. [1897] AC 22], a company has always been treated as a separate and distinct juristic person with a personality of its own different from that of its shareholders. No shareholder can legitimately claim to have an interest in any of the properties or assets held by the company. The judgment of the Supreme Court in Accountant & Secretarial Services (P.) Ltd. v. Union of India AIR 1988 SC 1709, was pressed into service to contend that a bank constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, though materially controlled by the Central Government, has a distinct personality of its own and its property cannot be said to be the property of the Union of India. Hence, it is contended that by the act of amalgamation, there was no sale of any assets by the transferor company (sixth respondent) to the transferee company (ninth respondent) in the amalgamation. Thus, it is urged that there being no sale or exchange or lease of immovable prop....
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....l HC (Pg. 507-511 of Legal Paper Book, Vol. II). 96. The Appellant further submits that the presumption that such imaginary dividend is out of "accumulated profits" is also a result of Ld. AO consciously ignoring the actual facts, the scheme and the accounting entries as per which the debit in respect of net assets has gone to amalgamation reserve account and not to accumulated profits. Indeed, as submitted earlier, amalgamation reserve, by definition is a capital reserve which can never be distributed as dividend under the provisions of the Companies Act. Capital reserve arising pursuant to a scheme is not an accumulated profit (CIT Vs STADS Ltd (2015) (373 ITR 313/61 taxmann.com 33)(Mad) (Para 11, Pg. 566, Pg. 564-567 of Legal Paper Book, Vol. II) and ITO VsShreyans Investments (P) Ltd (2013) (141 ITD 672)(T) (Kol) (Para 8, Pg. 573, Pg. 568-575 of Legal Paper Book, Vol. II). Further on an imaginary situation, deeming provisions cannot be invoke a deeming section. Reliance is placed on CIT Vs. Moon Mills Ltd 59 ITR 574 (SC) (Pg. 552, Pg. 548-554 of Legal Paper Book, Vol. II), CIT Vs. KhimjiNanshy 194 ITR 192 (Bom HC) (Para 10, Pg. 557, Pg. 555-557 of Legal Paper ....
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....e in report of Dr. Raja Chelliah Committee (197 ITR (St.) 177), wherein it has been suggested that in order to remove any controversy or doubt as to the taxability of any shares or assets received by the Shareholders in Scheme of Reconstruction, it may be clarified that provisions of section 2(22)(a) of the Act will not be applicable. The Appellant further submits that Clause (v) in section 2(22) has been inserted out of abundant caution and to allay fears that when there is reduction of capital, deemed dividend wouldn't be attracted (CIT vs. Madurai Mills Co. Ltd. (89 ITR 45)) (Pg. 580, Pg. 576-581 of Legal Paper Book, Vol. II). The interpretation canvassed by the AO would lead to a situation that prior to amendment all such transfers were subject to provisions of section 2(22) of the Act. Settled position that interpretation which leads to absurdity must be avoided. (CIT vs. JH Gotla 156 ITR 323) (Para 45 and 46, Pg. 708, Pg. 698-709 of Legal Paper Book, Vol. II). 101. The Appellant further submits that the Dr. Raja Chelliah Committee also observed that that there is no likelihood of the Scheme of comprise being abused or misused, as the High Court is empowered under Cha....
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.... take a different stand than the stand taken in the affidavit filed before the Hon'ble Court. In DCIT Vs. Ozone land Agra Pvt. Ltd. (4854/M/16) (Mum ITAT) (Pg. 665-677 of Legal Paper Book, Vol. II) it is held that when statute provides for rule to compute fair value, the AO cannot choose any other method. 106. The Appellant submits that the CIT(A) ought not have rejected the Valuation Report under Rule 11UA submitted by the Appellant without bringing on record any evidence contradicting the finding given in the Report. The CIT(A) erred in rejecting the valuation report merely on the basis of standard disclaimers made in the Report, which at best would lead to a fresh determination of Valuation under Rule 11UA. Once the position is accepted that valuation has to be done as per Rule 11UA, the CIT(A) ought to have carried out such an exercise on its own, if the valuation submitted by the Appellant was to be rejected. It is pertinent to note that similar disclaimers are also given in the PWC Report on which the CIT(A) has vehemently relied upon (Pg. No. 1044 Vol III of FPB) 107. Without prejudice, Valuation Report of ABFL states that the value of Shares as per Rule 11....
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....erim or otherwise)", shall be charged to additional income tax at the rate of fifteen percent. The Appellant submits that dividend referred to sub-section 1 of section 115-O of the Act refers to dividend declared and approved under the Companies Act and no other Dividend. The Appellant submits that deeming fiction provided under section 2(22)(a) of the Act do not travel beyond the provisions of that section. It is settled proposition that legal fictions are restricted to the purpose it sought to achieve and cannot expand beyond its legitimate field. The Appellant submits that any other interpretation would make the words used subsequent to dividend being "whether interim or otherwise" a dead letter. The Appellant submits that only interpretation which can be advanced to make the subsequent words not a dead letter is to hold that dividend referred to in section 115-O of the Act is "dividend" as declared under the Companies Act. The Appellant submits that it is settled principle that words employed by the legislature cannot be reduced to a dead letter and such an interpretation must be avoided." 26. Further the 3rd submission of the learned senior advocate is as Under: - ....
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....harged with additional income tax over and above its total income when such company declares, distributes, or pays dividend (whether interim or otherwise). The Appellant submits that the Appellant has not declared, distributed, or paid any amount to its shareholders. It is further submitted that such amount has to be paid 'by way of dividend', which condition is admittedly not fulfilled in the present case as the Appellant has neither given any amount to its shareholders by way of dividend. In relation to the condition of "distribution" of dividend, the Appellant reiterates the submission made in relation to non-applicability of section 2(22)(a) of the Act that;(a)There has been no distribution at all in as much as shares of Aditya Birla Capital Limited came into existence on allotment; and further (b) There has been no distribution made by the Appellant to its shareholders. Further, even if one was to take the view that there is a distribution of asset as contemplated under section 2(22)(a) of the Act, still there is no 'distribution of dividend' as required under section 115-O of the Act. Hence, the provision of section 115-O is not applicable. ii) The dividend referred ....
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....provision is omitted from the statute, without any saving clause, it means that the said provision must be held as never being on the statute in view of section 6 and 6A of General Clauses Act, 1897. The Appellant in this regard draws Your Honors attention to Pg. No. 755 - 756 of Principles of Statutory interpretation by Justice G.P. Singh (14th Edition): "Under the common law rule the consequence of repeal of a statute are very drastic. Except as to transaction past and closed, a statute after its repeal is as completely obliterated as it had never been enacted. The effect is to destroy all inchoate rights and causes of action that may have arisen under the repealed statute. Therefore, leaving aside cases where proceedings were commenced, prosecuted and brought to finality before the repeal, no proceedings under the repealed statute can be commenced or continued after the repeal." The Supreme Court in the case of Fiber Board P. Ltd. vs. CIT (376 ITR 596) has held that "repeal "would include "omission" and any other interpretation would be wholly superfluous. Therefore, the Appellant submits that once the Explanation providing for extended meaning of "dividend" ha....
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.... official liquidator respondent. Further the income tax department did not raise any objection to the scheme before the NCLT. 29. On 5/4/2022 he referred to the relevant extract of the balance sheet, profit and loss account and note on deferred tax liability as per the annual report of the assessee for financial year 2017 - 18 and breakup of the deferred tax liability related to financial services business and statement showing net assets of financial services business after excluding the shares of Aditya Birla finance limited and deferred tax liability pertaining to those shares to demonstrate that the assessee has transferred an undertaking of financial services business which is capable of running on its own on standalone basis and is a going concern. He also explained the net worth of the financial services business undertaking transferred. 30. To demonstrate the above aspect further on 6/4/2022 he referred to the relevant extract of notice dated 15/2/2017 sent to shareholders, secured and unsecured creditors, statement of assets and liability of financial services business as on 31/12/2016 and approval dated 30/1/2019 obtained by the assessing officer from the principal ....
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.... with the law and not permissible. Submissions on behalf of the Assessee post directions of LD DRP dated 30/6/2022 for AY 2018-19 whenThe Ld. DRP in assessment proceedings have held that Demerger of the assessee complies with all the conditions of section 2 (19AA) of The Act, 35. At the fag end of hearing, Assessee submitted the copies of directions of LDDRP dated 30-6-2022 in assessment proceeding of the assessee. ld. Sr Advocate submitted that the assessee has filed return of income on 30/11/2018 which was revised on 29/3/2019. In revised return the assessee company has declared total income of Rs. 20,701,265,313 for assessment year 2018 - 19. The learned Deputy Commissioner of Income Tax, Transfer Pricing - 2 (2) (1), Mumbai passed an assessment order dated 30/7/2021 making an adjustment of Rs. 2,033,833,017/- on account of international transaction and domestic transactions. The draft assessment order in this case was passed on 30/9/2021 u/s 143 (3) of the income tax act. The assessee filed an objection before The Dispute Resolution Panel - 1, Mumbai. In the assessment order the learned assessing officer has held that the transaction of demerger is not covered within the ....
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....ph number 15.2.9 of the scheme which provides that all assets , liabilities, loans, obligation, duties etc. of the demerged undertaking are transferred to the resulting company and on verification of the details of liabilities and assets the subsection (ii) of Section 2 (19 AA) is satisfied. v. The DRP further held that that the learned assessing officer has not disputed that the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in books of accounts immediately before the demerger and therefore it is compliant of clause (iii) of the provisions of Section 2 (19 AA) of the act. vi. The learned dispute resolution panel further held that there is no dispute with respect to the compliance with subsection (iv) and (v) of Section 2 (19 AA) of the act. vii. The learned dispute resolution panel further held that the transfer of the undertaking is on a going concern basis and therefore it complies with the provisions of subsection (vi) of the act viii. the learned dispute resolution panel further rejected the finding of the learned assessing officer that scheme is a....
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....s infructuous and hence should be dismissed. SUBMISSION OF REVENUE PRIOR TO SUBMISSION OF Direction of The Ld. DRP 38. The learned ASG Shri Anil Singh along with Shri Akhileshwar Sharma, Special Counsel led argument on behalf of the learned assessing officer. The revenue has filed 2 volume of paper books containing 634 pages, made written submission on 16/4/2021 of 27 pages relying heavily on the decision of the Honourable Supreme Court in case of CIT versus Sutlej cotton Mills supply agency Ltd (1975) 100 ITR 706 (SC) and the decision of the Honourable Delhi High Court in case of CIT versus Salora international Ltd 386 ITR 580 (Delhi) (2016) submitting that details of financial services business as claimed by the assessee of Aditya Birla Nuvo limited is merely a high sounding word and it is like an ordinary activity of fund management which is common in any business of group concern. And therefore, it is apparent that there is no financial services business carried on by Aditya Birla Nuvo limited. It was further claimed that there is no rewriting of the scheme by the learned assessing officer but he is merely examining whether the arrangement complies with the conditions of ....
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....as merely holding shares of other companies, providing funds to the companies that were allegedly engaged in financial services business. As Aditya Birla Nuvo limited was not carrying on a business activity, the question of the same being transferred as a whole cannot and does not arise and what has been transferred are merely individual assets and liabilities which do not constitute an undertaking and business activity which do not fall within the ambit of the provisions of Section 2 (19 AA) of the act. 40. Further on 19/05/2021, once again the learned special counsel reiterated that there is a distinction between the assessee's business and business of subsidiaries. The assessee has failed to show that who are its clients, service recipient, how many transactions took place as financial transactions, what are the taxes charged on the processing fees, payment of goods and service tax, service tax and securities transaction tax or any other indirect tax collected on the processing fee charged from its clients, periodic return with regulatory authorities and licenses issued in its own name to conduct financial services business. It was submitted that unless this is shown it canno....
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....amation and not the demerger. The presently the issue is of demerger and therefore that circular does not apply. 41. On the appeal of the ld. AO It was further stated that the valuation adopted by the CIT - A is not proper and the valuation adopted by the learned assessing officer is correct because the learned assessing officer has taken the value arrived at the traded price of those shares which is most transparent and proximate in time with the comparable taken from the stock market when the shares of Aditya Birla capital limited was listed on 1/9/2017 at Bombay stock exchange. It was further claimed that levy of interest u/s 115P is proper and consequential. 42. Further submission was made on 7/7/2021, relying on the decision of the Honourable Delhi High Court in case of salora international Ltd (supra), it was submitted that that the present distribution of shares to the shareholder of the assessee is nothing but a distribution and/or payment of dividend to the shareholders of the assessee and is correctly chargeable to tax u/s 115O of the act. 43. On 9/7/2021,on query by the bench, whether on the deemed dividend envisaged u/s 2 (22) of the act, the provisions of Sect....
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.... 3. ABFL owned 90.29% of ABFL. 4. There was merger of ABNL into GIL. i.e., the assessee. Therefore, ABNL did not exist after merger. 5. Since ABNL, merged into GIL, all its shareholders merged with GIL. 6. ABFSL, continued to have 90.23% in ABFL (which was earlier 100% reduced as certain percentage went to private companies") 7. 4.7.2017: Transfer takes place whereby the alleged financial services business of merged GII went to ABFSL (renamed as ABCL). 8. Thus, ABFSL became 100% holding company of ABFL and for this transfer ABFSL allotted shares of ABFSL directly to the shareholders of merged GII 9. The entire purpose and object of the scheme was to benefit the shareholder of original GIL and ABNL or the merged GIL. Had this demerger step not taken place either ABNL or merged GIL would have been constrained to sell 9.77% of ABFL to ABFSL. 10. For this sale ABFSL would have paid monies to merged GIL, which monies would be accumulated profits, which would then be given to the shareholder of merged GIL as dividend/liable to tax and therefore to avoid tax this entire scheme has been worked out. 11. Our submis....
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.... 3. a unit or 4. division of an undertaking or 5. a business activity taken as a whole, 6. but does not include individual assets or liabilities or any thereof not constituting a business activity. 3. Hence, the Assessee would have to show that what has been transferred pursuant to a scheme of demerger is a business activity taken as a whole and not individual or liabilities or any combination thereof not constituting a business activity. 4. This aspect can be further broken down into two issues which may need to be addressed viz: - 1. Is there an existing business activity which was being carried out and demerged? 2. If no, then no further enquiry would arise. 3. if yes, then whether that business activity has been transferred as a going concern basis 5. It is submitted that a distinction needs to be drawn here between carrying out financial services business and being the holding company of companies that may be carrying on financial services business. 6. As would be evident from the record, highlighted herein below, ABNL did not carry out financial services business itself but was the hol....
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.... services division in ABNL as is now being claimed (Pg 116 to 183 of the Assessee Paper Book). 12.Hence, it is submitted that firstly, these alleged investments, cannot and do not constitute a business and secondly, that this allegation of the Assessee is contrary to its own past conduct and hence, it would now be estopped from contending to the contrary Case of Separate Division carrying out investment through subsidiaries and JVs 13. It is submitted that the other submission of the Assessee is that ABNL was the head and heart of the financial services business run by it through its subsidiaries and JVs. It is submitted that assuming whilst denying this to be true, the business of financial services even if controlled by ABNL, cannot and would not amount to ABNL carrying out the business of financial services. The business of financial services was being done only by the subsidiaries and JVs 14. The subsidiaries and JVs being separate juristic entities under the law cannot be equated to ABNL and would stand on a separate and independent footing. 15. Hence, on the face of it, ABNL was not carrying on financial services business. At the highest, i....
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....ness and business of subsidiaries. The Assessee has failed to show what are his own business activities of financial services business. The Assessee has not shown 1. Who are its clients/ Service Recipients. 2. How may transactions take place allegedly as financial transactions. 3. What are the taxes charged on the processing fee. 4. Payment of GST, Service Tax, STT or any other indirect taxes collected on the processing fee charged from its clients/service recipient. 5. Filing of periodic return with the Regulatory Authority. 6. Licenses issued in their own name to conduct Financial Services business. 25. The record of 1994, 2004 or 2005 will be of no help to Assessee. The Assessee must show its financial services business at the time of amalgamation and particularly demerger. The Assessee has failed to give any particulars of the financial business service activity. 26. The arguments of the Revenue is that the scheme in question does not pass the test under the Income-tax Act 1961. 27. The Revenue is not challenging the scheme. It is merely determining the incidence of tax, and this is clearly permiss....
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....rs. 34. Thus, where Assessee directs third party to pay consideration in respect of any transaction transfer, the same tantamount to two separate transactions: firstly, receipt of consideration by the company and secondly, the distribution of the consideration to the shareholder. This is because the contract is between the company and the purchaser only, the benefits are transferred to the shareholders. Therefore, merely because physical payment has not been received by Assessee it cannot be concluded that there is no distribution made by the company to the shareholders. 35. Section 2(22) would have to be analyzed in detail. 36. A perusal of the same would show that the Assessee does not fall under what is not dividend in light of the fact that there has been no demerger as contemplated under Section 2(19AA). 37. The definition of what is dividend is an illustrative definition which begins by the word "includes" Hence, the Legislative intent to ensure that the word dividend is construed broadly, except for the few exceptions mentioned in the Section itself is evident. 38.Relevant facts 1. Pre-transfer/alleged demerger, the share....
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....n. 2. Part 2-Dividend Distribution 1. Instead of receiving the consideration for the sale of the shares in its coffers, the Assessee, directed these very "profits" of the Assessee to be distributed amongst its shareholders. 2. Hence, it is submitted that the Assessee has distributed its profits amongst its shareholders which would be nothing but dividend distribution. 40. In this connection, attention is invited to the Division Bench judgment of the Delhi High Court of Commissioner of Income tax v. Salora International Ltd. reported in [2016] 70 taxmann.com 92 (Delhi), wherein, it has been observed, inter alia, as under: - "18, ...However, we are unable to appreciate any material difference, in so far as the incidence of tax is concerned, between a scheme of arrangement which has been approved by a Company Court under the provisions of the Companies Act, 1956 (or the Companies Act 2013) or any other binding arrangement agreement. Mere sanctioning or approval under Section 391- 394 of the Companies Act 1956 would not alter the character of the scheme or the nature of transaction embodied therein for the purposes of levy of income tax unde....
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....nd that it did not receive it but was discharged by MTAIC by issuing fully paid shares to the shareholders of the Assessee in terms of the Scheme." 41. Considering the above, it is submitted that the four tests, as even identified by the Assessee, are covered and/or met in the present case: - a. Any distribution by a company - Assessee has distributed the sale proceeds receivable against the sale of its assets (i.e. the shares of ABFL) to the shareholders of the Assessee. b. Distribution must be of accumulated profits - the sale proceeds had they been received by the Assessee from ABCL, would have been a part of its accumulated profits. c. distribution must entail release of all or any part of the assets of the company-Assessee has released its assets i.e. shares of ABEL d. Distribution must be to its shareholders - sale proceeds which are due and payable to the Assessee only and not its shareholders have been distributed to its Shareholders. 42. Hence, it would be evident that there has been a distribution of dividend, which is thus, liable to be taxed as such. 43. Lastly, without prejudice to the fact that there is no....
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....und Rs.261.20 Share market value BSE as on 1st Sep 2017 47. There is an element of subjectivity and possible bias in each valuation EXCEPT the transaction value of shares in the Bombay Stock Exchange. In the circumstances, the value arrived at by the Assessing Officer is the most transparent without any element of subjectivity which is the quoted price of shares in BSE. Further, the date of listing has been taken as it is most proximate date on which market value of shares of ABCL is available. The market value of the share is the most appropriate even for the reason that the listing of shares is done for the purpose of unlocking the true value of the shares. 48. Even otherwise and without prejudice to the above and assuming whilst denying that Rule 11UA is applicable even then the fair market value of quoted shares shall be the transaction value as recorded in such stock exchange 49. The findings of the CIT(A) is contrary to the apex judgment in CIT v. Central India Industries Ltd. 82 ITR 555 (SC) (Pg. 152-158) wherein the apex court held as "Therefore when dividend is received in kind, in order to find out the true income received by an assessee, ....
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.... of the assessment proceedings of the assessee for assessment year 2018 - 19 (direction dated 30/6/2022) 45. When the learned senior advocate placed on record the direction issued by the learned dispute resolution panel in assessment proceedings of the assessee for assessment year 2018 - 19 dated 30 June 2022, where the learned Dispute Resolution Panel has accepted that the demerger is tax compliant i.e. as per the provisions of Section 2 (19 AA) of the act, now the learned assessing officer has also accepted the same by passing assessment order u/s 143 (3) rws 144C(13) of The Act , there is nothing left to be argued by revenue. Thebench also raised a question that in the impugned appeal the argument of the revenue is directly opposite to the direction of the learned Dispute Resolution Panel in the assessment proceedings of the assessee with respect to the taxability on account of the demerger. The bench also read out the relevant paragraphs of the dispute resolution panel's direction to show that all the arguments raised by the revenue in this appeal , impugned order of The ld. AO in this appeal and Appellate order of the learned CIT - A - advanced before us, comes to a nullity....
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....e, notwithstanding anything to the contrary contained in section 153 or section 153B, the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received. As per the provisions mentioned above, the term 'shall' is used in the clause (10) & (13) of the Section 144C, so, it was compulsory to pass the order giving effect in the stipulated time frame in conformity of the directions of Hon'ble DRP. Further, it is submitted that earlier there was a provision to file further appeal u/s 253(2A) of the Act before the Appellate Tribunal against the directions/order of the Hon'ble DRP with the approval of the Principle Commissioner or Commissioner. However, this provision was omitted by the Finance Act, 2016 w.e.f. 01.06.2016. So, at present, there is no provision to file further appeal against the order/directions of DRP Accordingly, the Order Giving Effect passed on 26.07.2022 is the compliance to the provision of clause(13) of Section 144C. In respect to it, it is submitted that the department has not accepted the directions of the Hon the DRP on me....
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....concerned, it did not have a standalone "financial business unit" (para 17.1 on page no. 150 of CIT(A) order). Therefore, once it is held that there was no financial services business carried out by assessee, it would be only subsidiary companies of the assessee, which were doing the financial services business. The business carried out by subsidiary companies cannot be regarded as business of the assessee. It is settled position that subsidiary company pays tax on its own income and assessee does not pay tax on the income of the subsidiary company. As a corollary, the business of the subsidiary cannot be considered to be business of the assessee. IV. The DRP has erred in not considering the contention of the revenue that the shares of ABFL were shown as investments and not as current assets, indicating that they were not part of a business of sale / purchase of shares either (para 17.4 on page no. 152 of CIT(A) order). This supports the case of the revenue as disclosing the assets as part of investment and not as stock in trade in books of accounts also shows that assessee is not carrying out any financial services business. V. Revenue has relied on various judic....
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....hat- (i) all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger; (ii) all the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger; (iii) the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger: 2[Provided that the provisions of this sub-clause shall not apply where the resulting company records the value of the property and the liabilities of the undertaking or undertakings at a value different from the value appearing in the books of account of the demerged company, immediately before the demerger, in compliance to the Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015;] (iv) the resulting company issues, in consideration of the demerger, its shares to the shareholders of the deme....
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.... be, shall be deemed to be a demerger if such split up or reconstruction fulfils 4[such conditions as may be notified in the Official Gazette5, by the Central Government]. ^6[Explanation 5.-For the purposes of this clause, the reconstruction or splitting up of a company, which ceased to be a public sector company as a result of transfer of its shares by the Central Government, into separate companies, shall be deemed to be a demerger, if such reconstruction or splitting up has been made to give effect to any condition attached to the said transfer of shares and also fulfils such other conditions as may be notified7 by the Central Government in the Official Gazette.] ^8[Explanation 6. -For the purposes of this clause, the reconstruction or splitting up of a public sector company into separate companies shall be deemed to be a demerger, if such reconstruction or splitting up has been made to transfer any asset of the demerged company to the resulting company and the resulting company- (i) is a public sector company on the appointed day indicated in such scheme, as may be approved by the Central Government or any other body authorized under the provisions of....
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....rovided that in respect of dividend referred to in sub-clause (e) of clause (22) of section 2, this sub-section shall have effect as if for the words "fifteen per cent", the words "thirty per cent" had been substituted.] ^72[(1A) The amount referred to in sub-section (1) shall be reduced by, - ^73[(i) the amount of dividend, if any, received by the domestic company during the financial year, if such dividend is received from its subsidiary and,- (a) where such subsidiary is a domestic company, the subsidiary has paid the tax which is payable under this section on such dividend; or (b) where such subsidiary is a foreign company, the tax is payable by the domestic company under section 115BBD on such dividend: Provided that the same amount of dividend shall not be taken into account for reduction more than once;] (ii) the amount of dividend, if any, paid to any person for, or on behalf of, the New Pension System Trust referred to in clause (44) of section 10. Explanation. -For the purposes of this sub-section, a company shall be a subsidiary of another company, if such other company, holds more than half in nominal value ....
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....**]] : ^77[Provided that the provisions of this sub-section shall cease to have effect from the 1st day of June, 2011.] ^78[(7) No tax on distributed profits shall be chargeable under this section in respect of any amount declared, distributed or paid by the specified domestic company by way of dividends (whether interim or otherwise) to a business trust out of its current income on or after the specified date: Provided that nothing contained in this sub-section shall apply in respect of any amount declared, distributed or paid, at any time, by the specified domestic company by way of dividends (whether interim or otherwise) out of its accumulated profits and current profits up to the specified date. Explanation.-For the purposes of this sub-section,- (a) "specified domestic company" means a domestic company in which a business trust has become the holder of whole of the nominal value of equity share capital of the company (excluding the equity share capital required to be held mandatorily by any other person in accordance with any law for the time being in force or any directions of Government or any regulatory authority, or equity shar....
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.... the taxability of the demerger of the financial services business undertaking under the provisions of Section 2 (19AA) of the income tax act. The direction of the learned dispute resolution panel deals with the objection number 14 - 15 - 16 raised by the assessee against the draft assessment order passed by the AO. The relevant objections are as Under: - "Objection no 14 Demerger considered to be not compliant with the provisions of Section 2 (19 AA) of the act 1. Erred in passing the impugned order without providing opportunity of personal hearing to the assessee and with premeditated mindset. Further the conclusion of the learned AO was preordained, and the show cause notice was mere formality 2. erred in passing the impugned order and making following additions to the income of the assessee i. long-term capital gain Rs. 16595,24,91,129/- ii. short-term capital gain Rs. 6176,73,22,832/- iii. depreciation allowance disallowed Rs. 28,978,988/- iv. reduction in block of assets Rs. 285,744,847/- 3. erred in holding that the demerger of financial services business (FSB) undertaken by the assessee is not ....
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.... viii. considering and heavily relying on the decision of the AO as well as the CIT (A) in the proceedings u/s 115Q read with Section 115O of the act without appreciating the fact that the same has not attained finality and has been challenged by the assessee before the ITAT ix. erred in not accepting that the term undertaking as defined in explanation 1 to Section 2 (19 AA) of the act is an inclusive definition which includes any part of an undertaking or a unit or division of an undertaking or business activity taken as a whole. The learned AO also add in not appreciating that the demerged financial services business was an undertaking and was transferred on a going concern basis x. erred in not appreciating that the income from fund based lending was always taxed by the learned AO as business income xi. erred in not appreciating that the demerger was compliant with the provisions of Section 2 (19 AA) of the act and is expressly exempt u/s 47 of the act xii. in addition to the provisions of explanation 1 to Section 2 (19 AA) of the act, the learned AO erred in concluding that the conditions mentioned in clause (i), clause(ii) and clause (vi)....
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.... assessee is to state that even if court approved scheme results in reduction in tax liability, it does not become basis for the Department to challenge the same ix. erred in holding that there is no intention to attempt being made to alter/modify or rearrange the scheme and conclusion drawn on the basis of the scheme approved by the NCLT x. erred in not appreciating that the revenue cannot read in words directly or indirectly for drawing its conclusions OBJECTION NO 16 disregarding the demerger in taxing the transaction as capital gains in the hands of the assessee i. erred in holding that the transaction of demerger is not covered within the exceptions contained in the provisions of Section 47 of the act as it is not a tax compliant demerger. Also the learned AO erred in relying on the order of the learned AO and CIT - A in the proceedings u/s 115Q read with Section 115O of the act without appreciating the fact that same is challenged before the ITAT by the assessee ii. erred in stating that Simon tenuously merger and demerger is for enrichment of shareholders of the assessee in camouflaged manner and avoiding payment of taxes....
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....distribution tax Under the provisions of Section 115 O of the income tax act. 52. The Ld. DRP passed direction on 30/06/2022 as under: - "Discussion and Directions of the DRP on Objection No. 14 to 16: 25.1 The submissions of the assessee are carefully considered. The facts are that the Assessee is a widely held public listed company and its shares are listed on recognized stock exchanges On August 11, 2016, the Board of the Assessee approved a scheme of arrangement u/s 391 to 394 of the Companies Act, 1956 and other applicable regulations for merger of Aditya Birla Nuvo Ltd. (ABNL) with the Assessee and subsequent demerger of the 'Financial Services Business' (FSB) into Aditya Birla Capital Ltd (ABCL) earlier known as Aditya Birla Financial Services Ltd (ABFSL) Subsequently, the NCLT, Ahmedabad Bench, vide order dated June 01, 2017 approved the scheme as per which, the merger became effective from July 01. 2017 and the demerger became effective from July 04, 2017. 25.2 However, during the assessment proceedings, the Assessing Officer (AO) held that the demerger of FSB is not in accordance with the conditions of section 2(19AA) of the Income-ta....
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....Para 9.1(7), Pg. 147 of AO Order). c. Based on findings in Annual Reports. Returns of income and Assessment Records, it has been established beyond any iota of doubt that there was no Undertaking carrying on the business of financial services leave alone as a Going Concern which are absolutely cardinal for the purpose of holding terming the transfer as Demerger (Para 12.3, Pg. 161 of AO Order) 25.4.2 It is noted that in terms of the composite scheme, it has been claimed that ABNL was in the business of FSB (a) by itself through fund-based lending and (b) by making, holding and nurturing investments in the financial services sector Further, the Explanatory Statement to Amalgamation of ABNL and Birla Global Finance Ltd (BGFL), effected in 2006, also mentioned the reason behind amalgamation that ABNI and BGFL belonged to the same group and amalgamation would further the overall objective of the Group to consolidate Financial Services Business within ABNL. 25.4.3 The panel has considered the rival contentions it is noted that the term Finance Company is not defined anywhere in the Income-tax Act 1961 (the 'Act') Guidance Note of ICAI on Revised Schedule VI st....
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.... as interest (in the case of Finance Company). However, the panel is in agreement with the contention of the assessee that if ABNL were carrying on only the activity of financial services and no other activity, then it would be characterized as a finance company and the interest income would have been reflected as interest (in case of finance Company). 25.4.8 If the contention of the AO is accepted then no demerger is possible in any company which carries out multiple lines of business. What is to be seen in the present context is whether viewed in isolation, the hived off entity existed as a unit pre-demerger, and if yes, whether it could have sustained itself had it been hived off in isolation. 25.4.9 Moreover, a Core Investment Company is defined to mean a non-banking financial company carrying on the business of acquisition of shares and securities and which satisfies the following conditions as on the date of the last audited balance sheet: -- it holds not less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies: -- its investments in the equity shares.....
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....15 to A.Y. 2017-18 in form 3CD furnished u/s 44AB (reference- page no. B-1984- 1997 of paper book filed before the DRP) wherein all the business of the assessee are required to be mentioned in Item No. 10A, and noted that 'financial services' has been recognized as a business of the Assessee in each of the years. 25.4.13 It is also seen from paper book page number B-1998 - B-2019 submitted before the DRP, in the report furnished by chartered accountant for AY 2015-16, 2016-17, and 2017-18 which was obtained by the assessee to certify the expenses related to exempt income u/s 14A, it has been mentioned (para 1.2) that ABNL has businesses carried on in various divisions (also called units). The annexure 1 of the report gives the list of units. One of the distinct divisions/units mentioned therein is Finance Services Division, situated in Mumbai which is stated to be engaged in asset based financial services. 25.4.14 The Assessee has further submitted that interest income from fund-based lending earned by ABNI has always been disclosed under the head 'business income' in the computation of income and has been so accepted by the Assessing Officer in scrutiny assessmen....
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....s held as FSB and subsequently demerged to ABCL. As all the financial assets related to FS business stood identified and demerged, the conclusion that there was a distinct business segment related to financial services which was later on demerged under the Scheme. 25.4.16 Considering the details of assets and abilities transferred by Assessee to demerged company, it is clear that the same was capable of being run as a Going Concern. Further, it is also noted that in the consolidated scheme at clause 15.1 and 15.2.1, it is stated that the undertaking is transferred as a going concern. The panel is of the view that unless the AO establishes that the scheme fails to conform to the express provisions of the Act [most prominent of which in this case is section 2(19AA)], a scheme duly approved by NCLT has to be complied with. In view of the above, it is held that ABNL did carry out a Financial Services Business prior to the implementation of the Scheme. 25.5 Applicability of Section 2(19AA) 25.5.1 Demerger has been defined under the Act in sub-section 19AA of section 2 For ready reference, the provisions of section 2(19AA) are extracted below: ....
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.... an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity. Explanation 2. - For the purposes of this clause, the liabilities referred to in Sub-clause (1) shall include- (a) the liabilities which arise out of the activities or operations of the: undertaking. (b) the specific bans of borrowings (including debentures) raised, incurred and utilized solely for the activities or operations of the undertaking and (c) in cases, other than those referred to in clause (a) or clause (b), so much of the amounts of general or multipurpose borrowings, if any, of the demerged company as stand in the same proportion which the value of the assets transferred in a demerger bears to the total value of the assets of such demerged company immediately before the demerger. Explanation 3 - For determining the value of the property referred to in sub clause (iii), any change in the value of assets consequent to their revaluation shall be ignored. Explanation 4 - For the purposes of this clause, the splitti....
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....iabilities also specifically provides that transfer of the demerged undertaking is in accordance with the provisions of section 2(19AA) of the Act. It is noted that the AO was issued notice on 03.03.2017 as required u/s 230(5) of the Companies Act 2013 to submit its representations. There is nothing on record to suggest that the assessing authorities did. in any manner, object to the implementation of the Scheme. 25.5.4 Section 230(5) of the Companies Act, 2013 reads as below: (5) A notice under sub-section (3) along with all the documents in such form as may be prescribed shall also be sent to the Central Government, the income-tax authorities, the Reserve Bank of India, the Securities and Exchange Board, the Registrar, the respective stock exchanges, the Official Liquidator, the Competition Commission of India established under sub-section (1) of section 7 of the Competition Act, 2002 (12 of 2003), if necessary, and such other sectoral regulators or authorities which are likely to be affected by the compromise or arrangement and shall require that representations, if any, to be made by them shall be made within a period of thirty days from the date of receipt of....
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.... the demerged company has become the property of the resulting company by virtue of the demerger. 25.5.9 It is noted that Para 15.2 of the Scheme, inter alia, states that all the asses properties vestments, movable properties, immovable properties etc. of the demerged undertaking shall be to and vested in the resulting company. Further, there appears to be no dispute with respect to assets transferred to ABFSL (now ABCL) As such, it is clear that sub-section (1) of section 2(19AA) satisfied in the present case. Sub-section (i): all the liabilities relatable to the undertaking, being transferred by the demerged company, Immediately before the demerger, become the labilities of the resulting company by virtue of the demerger; 255.10 In para 12.2 of his order, the A.O. has pointed out following defects in the claim of the assessee: (i) that the total assets transferred to ABFSL adds up to Rs. 1876.37 crore, which is mainly composed of minority stakes 19.77%) in ABFL, being Rs. 1728 93 crore and cumint investment of Rs 11713 crore. It was further stated that the balance sheet of ABNL and Gil 5 on 31.03.2017 did not show any current Investmen....
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....any. As such, the panel holds that sub-section (i) of section 2(19AA) is satisfied in the present case. Sub-section (iii) the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger: 25 5.11 Transfer of assets and liabilities of demerged undertaking has taken place at book values in accordance with clause (iii) of section 2(19AA) This has also not been disputed by the A.O. Sub-section (iv): the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis except where the resulting company itself is a shareholder of the demerged company: Sub-section (v): the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger, otherwise than as a result of the acquisition of the property ....
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....eing carried on by ABNL for several years. As brought out in para 25.4.13 above. ABNL was showing interest income and income from other financial services as Business Income consistently and was assessed so us 143(3) of the Act by the AO till as late as AY 2018-19. 25.5.16 It is also seen that the assets and abilities of the undertaking transferred are sufficient for it to function independently as a separate business Transferred assets and liabilities are sufficient to constitute an independent NBFC as per the requirement of the RBI If the undertaking were to be transferred to a new company, it would only had to seek registration from RBI as a NBFC, as the demerged undertaking considered on standalone basis met all the conditions of being an NBFC and a CIC. Reference in this regard can be made to the discussion in para 25.4.9 above. All the assets and abilities transferred including the office space, fixtures, employees, current assets etc. are sufficient to run the business of financial service as a going concern. 25.5.17 It follows that the demerged undertaking is capable of being run as an independent undertaking on a going concern basis as it, on a standalone....
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.... 25.5.21 Considering the above, it is clear that the demerged entity was capable of being run as a "going concern' on its own, and therefore the demerger of FSB to ABFSL was on going concern basis. Sub-section (vii): the demerger is in accordance with the conditions, if any, notified under sub-section (5) of section 72A by the Central Government in this behalf. 25.5.22 As no condition has been notified under section 72A(5) of the Act. clause (vii) of section 2(19AA) is not relevant. 255.23 In view of the above discussion, supported by documentary evidences, the panel holds that the demerged financial services undertaking is 'undertaking' in terms of Explanation to section 2(19AA) of the Act. Further, the conditions prescribed in section 2(19AA) are complied with in the instant case: 1. All assets, properties and liabilities of the demerged company became the assets, properties and liabilities of the resulting company. 2. All assets, properties and liabilities have been transferred by the assessee at book value; 3. Resulting company issued shares to the shareholders of the assessee, 4. Shareholders holding not les....
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.... on its own. As the panel has already held that there was a financial services business in GIL/ABNL which could have continued doing business as a Finance Company on stand-alone basis, the conclusion of the AO, that the Scheme is nothing but a mere transfer of a few assets and liabilities cannot be accepted. 25.7 The so-called FSB was not capable of running as a Going Concern 25.7.1 This issue has already been dealt with in para 25.5 above. 25.8 FSB hived off for only enrichment of shareholders of GIL 25.81 In para 10.4 of the draft assessment order, the AO has observed that the logical reason for the whole scheme of merger and demerger was the enrichment of shareholders of M/s Grasim Industries Limited in camouflaged manner and avoiding payment of taxes on capital gains and dividend distribution tax in the hands of Assessee Company. 25.8.2 The panel has gone through the facts of the case, and the Scheme, thoroughly. Various clauses of the Scheme bring out the fact that the transaction that of a demerger. It is a well settled law that apparent state of affairs must be considered as real unless otherwise proved. The underlying presumption....
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....ce. Though the Scheme approved by NCLT does have force of law, it has still to pass the test of being in conformity with specific provisions enacted in the Act to claim desired reliefs. In the present case, it is basically the provisions of section 2(19AA) which need to be sated for the Scheme to qualify as a tax-compliant demerger. 25.9.2 However, the panel has already held in para 25.5 that the Scheme satisfies a the conditions laid down under section 2(19AA) of the Act Once it is held that a valid demerger has indeed taken place in terms of the provisions of the Act, it is the view of the panel that the same has to be accepted without attempting to re-write the Scheme which has duly been approved by NCLT 25.10 Considering the above, the panel holds that there was a distinct financial services business being carried out regularly over the years by ABNL which was also duly recognized by the AO in assessment proceedings consistently over the years. Upon merger with GIL, the resulting company demerged all the assets held by under financial services business to ABCL. In fact, the only two assets which not included in the demerger were shares of ABCL, itself and equi....
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....cifically provide for income tax implication in case of a demerger so as to bring clarity about the taxation on capital gain and other concessions. The demerger is not defined under the companies act 1956 or 2013. Therefore, Income Tax Act provided that if demerger is carried out in certain fashion complying with certain conditions, there would not be any tax implication thereof. Accordingly, provisions of Section 2 (19 AA) of the act were introduced which provided that in case if the companies in the scheme of arrangement of demerger are companies, then if they satisfy the condition laid down therein i.e. u/s 2 (19 AA) of the act, the demerger would be tax compliant and liability of capital gain on transfer of the asset i.e. capital gain and other consequential issues such as carry forward of losses, set-off of tax credit will not arise. The demerger of the undertaking should be carried out pursuant to the provisions of the companies act and scheme of such arrangement between the company and its shareholders and creditors should be approved by the High Court/national company law tribunal. If a company, in a scheme of demerger, transfer is its undertaking/undertakings to another co....
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....section is liable to be interpreted to mean "the unit", the business as a going concern, the activity of the company duly integrated with all its components in the form of assets and not merely some asset of the undertaking. Having regard to the object of the provision, it can, at the most, embrace within it all the assets of the business as a unit or practically all such constituents. If the question arises as to whether the major capital assets of the company constitute the undertaking of the company while examining the authority of the board to dispose of the same without the authority of the general body, the test to be applied would be to see whether the business of the company could be carried on effectively even after disposal of the assets in question or whether the mere husk of the undertaking would remain after disposal of the assets ? The test to be applied would be to see whether the capital assets to be disposed of constitute substantially the bulk of the assets so as to constitute the integral part of the undertaking itself in the practical sense of the term. Mr. Cooper, learned counsel for respondents Nos. 1 and 3, invited my attention to the judgment of the....
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....e various types of business and assets are threads which cannot be taken apart from the weft." It appears that the undertaking means a "unit", a business or a project. Each factory of a company may be considered as a separate undertaking. In the above-referred case, the Supreme Court was considering the meaning of the word "undertaking" as used in the Bank Nationalisation Statute of 1969. The above-referred observation, though not directly an interpretation of section 293(1)(a) of the Act is of some assistance in finding out the true meaning of the word "undertaking" used in section 293(1)(a) of the Act. It appears to me that, for the purpose of section 293(1)(a) of the Act, all the capital assets of the undertaking taken together would be embraced by the expression "undertaking" as, otherwise, it would be very easy to defeat the legislative intention and avoid procurement of the consent of the general body when the legislative intention is clear that the directors cannot dispose of the entire or substantially the whole business of the company without the consent of the general body. If, after disposal of practically all the capital assets of a company, what remains is onl....
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....hemicals and Dyes Trading Limited. [1986] 2 SCR 126 and Management of Hindustan Steel Ltd. v. Their Workmen [1973] 3 SCR 303. Mr. Cooper relied on the judgment of the Supreme Court in the case of Madras Gymkhana Club Employees' Union v. Management of the Madras Gymkhana Club Employees' Union, AIR 1968 SC 554, 563 (para 26). I am afraid that none of these judgments can be considered relevant for the purpose of interpreting and applying section 293(1)(a) of the Companies Act (1 of 1956), which has a different legislative mission to serve. Mr. S. D. Parekh, learned counsel appearing for the Indian Bank, invited my attention to the judgment of the. High Court of Calcutta in the case of Pramod Kumar Mittal v. Andhra Steel Corporation Ltd. [1985] 58 Comp Cas 772. In this case, the court had appointed a committee of management in a petition under sections 397 and 398 of the Act. The committee of management disposed of certain assets, including plant and machinery, under orders of the court. Some of the interested shareholders challenged the said sale. It was held by the honourable Division Bench that the Dankuni unit of the company had remained closed for a period of five....
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....ities, which have arisen in relation thereto." (emphasis supplied) For the sake of brevity, I am not extracting all the meanings of the expression "undertaking" given in the said standard work. I am in agreement with the meaning given in the above standard work to the effect that an undertaking means a business or an enterprise. It is, however, not possible for me to agree that the word "undertaking" as used in section 293(1)(a) of the Act can mean or embrace within itself even one of the several capital assets used by the owner in connection with the undertaking. To this limited extent, I disagree, having regard to the language used in section 293(1)(a) of the Act, its legislative history and its avowed object. At any rate, the assets in question must be substantially all (if not all) the assets of the undertaking so as to leave nothing of the business or the running concern in the business sense of the term after the asset intended to be disposed of is disposed of. It is impossible to accept the wider proposition that disposal of a single asset of the company (even a vessel) would mean disposal of the undertaking itself. If the asset to be disposed of is the sol....
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....ments of that company. Past history of that company of its merger with Birla Global Finance Ltd also shows that it was carrying on Financial services Business. Therefore, out of the many business segments of Aditya Birla Nuvo limited one of the segments was of financial business services. Merely because in the return of income separate business of financial services has not been disclosed, it does not go against the assessee and we failed to concur r with the view of the lower authorities that Aditya Birla Nuvo Ltd did not have the financial service business as one of the business segment of the assessee. Further, assessee has also shown that in the return of income there are only 3 columns to mention the line of the business, however, in the tax audit report the assessee has given the detailed description of the business where financial serviceshas also been recognized as a business of the assessee In past as well as in the impugned assessment year. Further facts also show those in earlier years, the income arising from the lending in the form of intercorporate deposits have always been offered as a business income and accepted by the revenue as such. It is also to be noted that t....
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.... xii. The dispute is whether the transfer of the undertaking is made on a going concern basis or not. For this the, assessee company has shown that it has transferred fixed assets, along with the investments, interoperate deposits and investment in mutual funds along with their corresponding liability coupled with employees. All contracts, litigations were also transferred. It was not shown to us that what are those assets which were though part of the financial services business but not transferred to the resulting company. Further it is apparent that the financial services business is a business activity, which is capable of being run independently for a foreseeable future. It is also not the case of the revenue that subsequently the undertaking did not carry on the business on its own.Evidenceproves otherwise. xiii. Thus none of the individual assets or liabilities or any combination thereof which does not constitute an undertaking is transferred but, the financial services business constituted an undertaking and same were transferred on a going concern basis. xiv. In view of this we find that the findings given by the learned dispute resolution panel are ....
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....) the distribution has entailed release of all or any part of the assets of the company as assessee has released its assessed in the form of shares of Aditya Birla finance limited, and (iv) distribution is made to its shareholders as the sale proceeds which are due and payable to the assessee company only and not to its shareholders, have been distributed to its shareholders. Therefore, the transaction squarely falls Under the definition of deemed dividend u/s 2(22)(a) of the act. 58. Countering the above submission, it was stated that there is no distribution by the appellant company as there is a transfer and vesting of the financial services business by the appellant to the Aditya Birla capital limited under the scheme of demerger. In case of demerger the shares are required to be issued only to the shareholders of Assessee Company. It was submitted that there is no other way in the demerger because it complies the provisions of Section 2 (19 AA) (iv) of the act wherein it is provided that the resulting company issues in consideration of the demerger its shares to the shareholders of the demerged company on a proportionate basis. It was further stated that the assessee has ma....
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....f demerged company. According to the provisions of Section 2 (19 AA) of the act, clause (iv) provides that the resulting company should issue its shares in consideration of the demerger, to the shareholders of the demerged company on proportionate basis, to qualify as tax neutral demerger. The resulting company has been defined u/s 2 (41A) of the act which means one or more companies to which the undertaking of the demerged company is transferred in a demerger and the resulting company in consideration of such transfer of undertaking issues shares to the shareholders of the demerged company. Therefore, here resulting company is Aditya Birla capital limited. Demerged company is also defined u/s 2 (19 AAA) of the act which means the company whose undertaking is transferred pursuant to a demerger to resulting company. Here the demerged company is assessee. In the present scheme, the Aditya Birla capital limited has issued in consideration of the demerger, shares of Aditya Birla capital limited to the shareholders of the Grasim industries limited on a proportionate basis. Thus, it satisfies condition provided u/s 2 (19AA) (iv) of the act. Further the exceptions to the deemed dividend a....
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....algamated company to the amalgamating company. 3. Under sub-clause (c) of section 2(22), "dividend" includes any distribution made by a company to its shareholders on its liquidation to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not. This provision is attracted only in a case where a company goes into liquidation and not where it merges with another company in a scheme of amalgamation without going into liquidation. 4. The Board are, therefore, of the view that the provisions of sub-clause (a) or (c) of section 2(22) are not attracted in a case where a company merges with another company in a scheme of amalgamation. 61. According to paragraph number 2 of the above circular it is categorically held that where a company transferred assets/another company in a scheme of amalgamation, such transfer may not be regarded as a distribution by the company of its accumulated profits to shareholders even though its accumulated profits are embedded in the assets transferred by it. This is specifically with reference to the provisions of Section 2 (22) (a) of the a....
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....stribution tax and interest thereon does not arise. 65. In view of our above findings, ground number 2, 4 and 5 of the appeal of the assessee are allowed. 66. Ground number 1 is general in nature, therefore, same is dismissed. 67. Ground number 6 challenging the issue of principle of natural justice also becomes redundant and hence dismissed. 68. Ground number 7 is with respect of levy of interest u/s 115P of the act, in view of our earlier findings, does not survive and therefore same is dismissed. 69. The last issue that remains is ground number 3 of the appeal where the assessee has challenged that the learned assessing officer does not have any authority to go behind and alleging doubt on the genuineness of the scheme of arrangement approved by the national company law tribunal. The claim of the assessee is that the learned assessing officer has alleged that the scheme of arrangement entered into by the appellant for demerger of financial services business to the resulting company as approved by the national company law tribunal was not genuine and further the learned assessing officer does not have any authority of going behind and doubting the entire business o....
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.... the schemes of merger and demerger approved by NCLT. It was also submitted that the reliance placed by the learned lower authorities on the decision of Indo Rama textile Ltd (2012) 23 taxmann.com 390 particularly on paragraph number 47 to argue that whether the demerger is a tax compliant demerger or not is to be determined by the tax authorities post demerger for the reason that the learned assessing officer is trying to rewrite the scheme to hold that arrangement is not a tax compliant demerger. It was further stated that only opportunity to object a scheme is before the scheme is sanctioned by the National Company Law Tribunal. He further submitted that a notice on 3/3/ 2017 was issued under the provisions of Section 230 (5) of The Companies Act 2013 to submit its representations within 30 days and no representation was made. He further referred to circular number 1/2014 issued by the Ministry of corporate affairs on 15 January 2014 which provides that regional director shall invite comments from the income tax department and if no comments are received, it may be presumed that the income tax Department has no objection. He further referred to instruction number 279 dated 11 Ap....
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.... paragraph number 25.9 this issue has been dealt with. The learned dispute addition panel agreed with the learned assessing officer that the approval of NCLT does not preclude revenue from examining the scheme for tax compliances. We do not have any hesitation in upholding the finding of the learned dispute resolution panel that it is the duty of the learned assessing officer to examine the impact of the scheme for tax purposes. It is not the case of the learned assessing officer and as confirmed by the learned Additional Solicitor General, that there is any attempt by revenue to rewriting the scheme of merger and demerger, but it merely doing an exercise of determining the true and correct taxliability of the assessee under the income tax act. It is also the fact that the order of the learned National Company Law Tribunal has not examined the tax liability of the assessee pursuant to the above scheme but has merely approved the scheme. The determination of the tax liability on the basis of the scheme of composite merger and demerger approved by the learned national company law tribunal, looking at all the terms and conditions laid down therein, is the statutory duty of the assessi....
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...., and the department can analyze the scheme and is entitled to take any decision as per the provisions of the Income Tax Act on issues including issues in NCLT order. That decision also noted that Transferee Company has deposited anundertaking before court/NCLT also to that effect. 73. In commentary of Kanga , Palkhivala and Vyas in "the Law and practice of income tax "it has been observed that provisions relating to the taxation of the companies involved in the demerger and their shareholders are applicable only if the demerger fulfils the conditions provided u/s 2 (19 AA) of the act, 1961. Mere sanction of scheme is by High Court of demerger under the companies act 1956 is by itself not sufficient. 74. Hon Bombay High court in Casby CFS P Ltd in re [ 2015] 56 taxmann.com 263 (Bombay)/[2015] 231 Taxman 89 (Bom.) has alsoheld asunder: - "39. According to the Petitioners, since the Regional Director has stated that the tax issues arising out of the Scheme shall be subject to the final decision of the Income Tax Authority and the approval of the scheme will not deter the Income Tax Authority from scrutinizing the Income Tax Returns filed by the Petitioners and the deci....