2021 (4) TMI 495 - AT - Income Tax

Stay on collection/ recovery of tax and interest demands - deemed dividend distribution of accumulated profits in the course of a demerger transaction which took place in the period relating to assessment year 2018-19 - Demand in question is on account of genuine differences about tax implications of a wholly internal business restructuring transaction - garnishee proceedings already initiated by the Assessing Officer - HELD THAT - It is not a fit case of unconditional stay on collection or recovery of the entire impugned demands of tax and interest aggregating to ₹ 3,786.34 crores. It is a fit case in which the assessee must pay or provide reasonable security for at least 20% of the disputed demand, and this amount, which comes to ₹ 757.26 crores, is rounded off to ₹ 760 crores. We must also take into account the fact that the amount of ₹ 760 crores is so substantial an amount, more so in these pandemic days, that such a huge cash outgo would cripple functioning of that business and bring it to a halt at least temporarily, and the fact that the conduct of the assessee, in not seeking any adjournment at all and thus making every effort for expeditious disposal of appeal, has not been wanting at all. While, on one hand, revenue authorities must safeguard and protect their legitimate interests, revenue authorities must take a pragmatic stand with compassion and with larger interest of the nation in mind. The assessee applicant is a well-established business houses, with firm roots, in India, the delay in disposal of appeal is on account of the delay in appointment of, and availability of, counsel by the income tax department, and the assessee has not been evasive or wanting in compliance or in conduct- at least so far as the appellate proceedings before this Tribunal are concerned. The demand in question is on account of genuine differences about tax implications of a wholly internal business restructuring transaction. Considering all these factors, while we have declined an unconditional stay on collection/ recovery of disputed demands, we also consider it fit and proper to permit the assessee to furnish a reasonable security of the value of ₹ 760 crores or more, in lieu of making payment of the aforesaid amount, to the satisfaction of the Assessing Officer, and we also deem it fit and proper to direct the Assessing Officer to accept such a security for the time being and keep all the coercive recovery proceedings in abeyance till the disposal of this appeal. As to what will constitute reasonable security is something which is in the exclusive domain of the Assessing Officer, and unless his decision is perverse or grossly unreasonable, obviously there is no occasion for any other authority to interfere in the matter. In case the assessee is aggrieved of the stand taken by the Assessing Officer in this regard, the Assessing Officer will give the assessee a period of two weeks, on the same lines as directed by Hon ble jurisdictional High Court in assessee s own case, before taking any recovery measures, so that the assessee can seek legal remedies, if so advised, against the same. The garnishee proceedings already initiated by the Assessing Officer shall also remain suspended, even if not withdrawn by the Assessing Officer, in the meantime. Even on merits, we have directed the assessee to furnish securities worth ₹ 760 crores, to the satisfaction of the Assessing Officer, which works out to almost 20% of disputed demands anyway, we see no need to deal with the broader question about the impact of amendment in the scheme of Section 254(2A) which is said to restrict powers of the Tribunal in granting the stay, unless the assessee makes a pre-deposit of 20% of the impugned demands or provides security in respect thereof. We grant a stay on collection/ recovery of the disputed impugned demands on account of dividend distribution tax, and interest thereon, aggregating to ₹ 3786.34 crores on the following conditions a) The assessee shall provide a reasonable security for an amount of ₹ 760 crores or more, to the satisfaction of the Assessing Officer, at the earliest possible, and, in no case, not later than two weeks from today; Provided, however, in case the Assessing Officer is, for any reasons whatsoever, not satisfied with the security offered by the assessee, the Assessing Officer shall pass a detailed speaking order in respect of the same, and will give a two week notice to the assessee, on the same lines as was directed by Hon ble jurisdictional High Court in assesee s own case (supra), before initiating any coercive recovery proceedings, so that the assessee can pursue appropriate legal remedies against the stand of the Assessing Officer, if so advised. b) The assessee will fully cooperate in expeditious disposal of appeal before this Tribunal, and will not seek any adjournment of hearing; and c) This stay will be in operation till 180 days from the date of this order, till the order on the related appeal is pronounced or till further orders- whichever is earlier.

Summary

Issues Involved:
1. Deemed dividend distribution in the course of a demerger transaction.
2. Computation of the value of deemed dividend distribution.
3. Obligation to pay dividend distribution tax under section 115O/115Q.
4. Validity of the demand raised without an assessment order.
5. Compliance with Section 2(19AA) of the Income Tax Act, 1961.
6. Legitimacy of the garnishee proceedings initiated by the Assessing Officer.
7. Impact of amendments to Section 254(2A) by the Finance Act 2020.

Detailed Analysis:

1. Deemed Dividend Distribution in the Course of a Demerger Transaction:
The primary issue is whether the allotment of new shares by the resulting new company to the shareholders of the assessee constitutes a distribution of accumulated profits under section 2(22)(a) of the Income Tax Act, 1961. The assessee argued that no distribution of accumulated profits occurred, as no assets were released to its shareholders. The Assessing Officer, however, viewed the issuance of shares as a distribution of accumulated profits, leading to a liability for deemed dividend distribution tax.

2. Computation of the Value of Deemed Dividend Distribution:
The value of the deemed dividend distribution was computed based on the market value of the shares. The Assessing Officer initially valued the shares at ?261.20 per share, resulting in a substantial tax demand. However, the CIT(A) later revised the valuation to ?145.40 per share. The assessee contended that the valuation should follow the method prescribed under rule 11UA, which would result in a significantly lower value.

3. Obligation to Pay Dividend Distribution Tax under Section 115O/115Q:
The assessee challenged the obligation to pay dividend distribution tax on the grounds that the demerger did not result in any distribution of accumulated profits. The Assessing Officer, however, held that the assessee was in default under section 115Q for not paying the dividend distribution tax, leading to a demand for tax and interest.

4. Validity of the Demand Raised Without an Assessment Order:
The assessee argued that the demand under sections 115O and 115Q could not be raised in the absence of an assessment order under section 143(3). The Tribunal noted that this issue required detailed examination, as it involved significant legal questions about the procedure for raising such demands.

5. Compliance with Section 2(19AA) of the Income Tax Act, 1961:
The Assessing Officer concluded that the demerger was not in accordance with Section 2(19AA), as it was merely a transfer of certain assets and liabilities without constituting a business activity. The assessee, however, argued that the demerger was compliant with Section 2(19AA) and had been approved by the National Company Law Tribunal (NCLT), which had given the income tax department an opportunity to object.

6. Legitimacy of the Garnishee Proceedings Initiated by the Assessing Officer:
The Assessing Officer issued garnishee notices under section 226(3) to recover the disputed demands. The Tribunal granted an ad-interim stay on these proceedings, noting that the assessee had a strong prima facie case and that the recovery of such a large demand would cripple the business.

7. Impact of Amendments to Section 254(2A) by the Finance Act 2020:
The Tribunal considered the recent amendments to Section 254(2A), which require a pre-deposit of 20% of the disputed demands or the provision of security for the same before granting a stay. The Tribunal noted that this issue was academic in the present case, as it had directed the assessee to provide security worth ?760 crores, which was almost 20% of the disputed demands.

Conclusion:
The Tribunal granted a conditional stay on the collection/recovery of the disputed demands, requiring the assessee to provide security worth ?760 crores to the satisfaction of the Assessing Officer. The stay would remain in operation for 180 days or until the disposal of the related appeal. The Tribunal emphasized the need for a detailed examination of the legal issues involved, including the validity of the demand without an assessment order, compliance with Section 2(19AA), and the impact of the recent amendments to Section 254(2A). The garnishee proceedings were suspended pending the outcome of the appeal.