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TaxTMI 
TaxTMI 
TaxTMI 
2026 (1) TMI 751
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....y the AO u/s 56(2) of the Act by the L'd CIT(A), whether on the facts and circumstances of the case and in law, the L'd CIT(A) has erred in not holding that the liabilities relatable to the real estate undertaking had not been correctly transferred resulting in violation of the condition set out in Section 2(19AA)(ii) of the Act. 3. Whether in the facts and circumstances of the case and in law, the Ld CIT(A) erred in observing that the Rule 11UA only applied to Section 56 of the Act, and would be gross error in invoking and applying the same under Section 2(19AA)(iv) of the Act. 4. Whether in the facts and circumstances of the case and in law, the Ld CIT(A) erred in observing that NFAC cannot take a contrary view departing from the NOC even under instance that conditions under section 2(19AA) are not met. 5. Whether in the facts and circumstances of the case and in law, the Ld CIT(A) erred allowing the assessee's appeal against the direction of the NFAC to the AO for making protective addition u/s 56(2)(x) of the Act in AY 2020-21 when the demerger is effective from 01.04.2019. 6. Whether in the facts and circumstances of the case and in law, the....
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....AY 2020-21) and the effective date of the order passed by the Hon'ble NCLT was dated 10.08.2021 (AY 2022-23), pursuant to which necessary steps were taken to give effect to the terms of the scheme of demerger. The assessee accounted the demerger of the real estate undertaking into its books of accounts from 01.04.2019 onwards. 3.2 The assessee filed return of income on 7.3.2022 declaring total income of Rs. 3,11,97,970/-. The case of the assessee for AY 2021-22 was selected for scrutiny and statutory notice u/s 143(2) and notices u/s 142(1) along with questionnaire were issued and duly served upon the assessee. The AO vide several notices issued u/s 142(1) of the Act had raised issues regarding the scheme of demerger and according to the AO, the demerger was not in compliance with the provisions of Section 2(19AA) of the Act. The AO is found to have held that, though all the current assets of Rs. 112.38 crores pertaining to the real estate undertaking was transferred, but according to him, the liabilities of Rs. 112.38 crores which corresponded to these assets were not transferred by the assessee resulting in violation of the condition laid down in Section 2(19AA)(ii) of the Act....
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....7 crores which inter alia comprised of (a) Land at 2, Jessore Road, Kolkata valued at Rs. 400.51 crores and (b) Shares of Delta PV valued at Rs. 11.76 crores. According to the AO, the fair value of consideration paid by the assessee for these assets by way of issuance of shares to the shareholders of OSAIPL was Rs. 37.73 crores [99,05,000 X Rs. 38.per share] and accordingly, taxed the net shortfall of Rs. 374.53 crores [400.51 crores + 11.76 crores - 37.73 crores] u/s 56(2)(x) of the Act. 3.5 In the appellate proceedings, the Ld. CIT(A) allowed the appeal of the assessee after taking into consideration, the contentions and submissions of the assessee. Aggrieved, the Revenue is now in appeal before us. 3.6 After hearing the rival contentions and perusing the materials available on record, we find that though the Revenue has not disputed the fact that the 'real estate undertaking' of OSAIPL had been demerged into the assessee, but it is the Revenue's case that the correct value of liabilities which were relatable to the undertaking was not transferred, which resulted in violation of condition laid down in Section 2(19AA)(ii) of the Act. The Ld. DR appearing for the Revenue reli....
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....e Ld. DR was also not able to pin point any infirmity in the above details of liabilities nor was he able to show as to which of these liabilities did not relate to the demerged undertaking. We thus find no reason to interfere with the following findings of the Ld. CIT(A) holding that, the there was no violation of section 2(19AA)(ii) of the Act, in the given facts of the present case. "6.1.1 The first reasoning of the NFAC for holding the scheme of demerger to be in violation of Section 2(19AA) of the Act was on the premise that excess liabilities had been transferred by the demerged entity OSAIPL to the appellant resulting in violation of condition set out in Section 2(19AA)(ii) of the Act. For arriving at this inference, the NFAC has relied upon the segmental reporting appearing in the "Notes to the audited stand-alone financial statements of OSAIPL for the year ended 31.03.2019" which stated the segmental liabilities of 'real estate undertaking' at Rs. 20,28,82,370/-. The NFAC therefore held that the liabilities worth Rs. 112.38 crores which were transferred to the resultant entity i.e. the appellant was excessive and was thus not in compliance of section 2(19AA) (ii) ....
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....ontention that that there was no violation of section 2(19AA)(ii) of the Act and therefore denial of benefit of Section 47(vib) on this count was wholly unjustified." 3.8 The Ld. DR supporting the order of the AO further argued that, the assessee ought to have issued shares to the shareholders of OSAIPL upon demerger, in accordance with valuation as per Rule 11UA of the IT Rules, 1962 and not having done so violated the provisions of Section 2(19AA)(iv) of the Act. Having gone through the relevant provisions of law and the Ld. CIT(A)'s order, we firstly agree with the argument of the ld counsel for the assessee that, Section 2(19AA)(iv) only stipulates proportionate share allotment of resulting company to shareholders of demerged company and there is no mention of any share valuation therein and therefore the case sought to be made out by the Revenue is wrong and misplaced. Also, it is seen that, Rule 11UA has been notified only for the purposes of Section 56 of the Act and not for other provisions. Therefore the AO is not justified in importing the said Rule into Section 2(19AA)(iv) of the Act, even when the provision itself does not stipulate so. We further note that, the Ld. ....
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....pplicable to a scheme of demerger. The appellant has brought my attention to several decisions holding that AO is not empowered to change the method of valuation adopted by the appellant from DCF Method to NAV Method. Moreover, the reliance placed by NFAC on Rule 11UA for the purposes of ascertaining purported compliance to Section 2(19AA)(iv) of the Act is misplaced for the reason that this rule has been notified only for the purposes of Section 56 of the Act and no other provision. In view of discussion above, I hold that AO has erred on facts and in law in holding the scheme of demerger to be in violation of Section 2(19AA)(ii) & (iv) of the Act to deny the benefit of Section 47(vib) of the Act, and thereby making the impugned addition of Rs. 374,53,83,754/- u/s 56(2)(x) of the Act. It is explicitly clear that the provisions of Section 56(2)(x) of the Act does not apply to scheme of demergers by virtue of the exception set out in clause (IX) of proviso (c) to Section 56(2)(x) which clearly states that transactions covered u/s 47(vib) are outside the purview of Section 56(2)(x) of the Act. Hence, no addition is permissible u/s 56(2)(x) of the Act in relation to the assets receive....
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....ckitt Benckiser Healthcare India (P.) Ltd. v. Dy. CIT [2025] 171 taxmann.com 694. In our opinion, the reliance placed by the Ld. CIT(A) on the decision of Hon'ble Calcutta High Court in the case of CIT vs. Purbanchal Power Co. Ltd (145 Taxmann.com 215) was factually distinguishable as in that judgment, the scheme was approved by the High Court and not the NCLT. To this extent, we not in agreement with the Ld. CIT(A). 3.11 Further, the Ld. DR was also unable to controvert the fact that the scheme of demerger became effective from the Appointed Date 01.04.2019 i.e. AY 2020-21 and that there was no event of demerger in FY 2020-21 relevant to impugned AY 2021-22. It is also seen that, the order of NCLT was passed on 10.08.2021 and the assets were received by the assessee pursuant to issuance of shares to shareholders of OSAIPL only on 15.09.2021, i.e, during AY 2022-23. We are therefore in agreement with the Ld. CIT(A)'s findings that there was no event which took place pursuant to the scheme of demerger, in the relevant AY 2021-22, for which any tax consequence could have been legally inferred or arisen in the relevant AY 2021-22. We are therefore, also in agreement with the follow....
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....er, in the relevant year AY 2021-22 suffered from fundamental infirmity and is unsustainable and untenable on facts and in law." 3.12 For the reasons set out above, we uphold the order of Ld. CIT(A) deleting the addition made by the AO u/s 56(2)(x) of the Act. These ground Nos 1 to 4 are dismissed. 4. The issue raised in Ground No. 5 is against the Ld. CIT(A)'s finding quashing the direction given by AO to make protective addition u/s 56(2)(x) of the Act in AY 2020-21. After hearing the rival contentions, since we have upheld the Ld. CIT(A)'s deleting the substantive addition on merits, we concur with the Ld. CIT(A) vacating this direction and dismiss this ground no. 5 of the Revenue. 5. The issue raised in Ground Nos. 6, 8 & 9 is against the Ld. CIT(A)'s action of deleting the direction given by the AO of the assessee to the AO of OSAIPL to make addition u/s 50C of the Act by denying the benefit of Section 2(19AA) r.w. Section 47(vi) of the Act. Since we have upheld the Ld. CIT(A)'s findings holding the scheme of demerger to be compliant with Section 2(19AA) r.w. Section 47(vi) of the Act, we agree with the Ld. CIT(A) deleting this direction issued by the AO and dismiss t....