2022 (12) TMI 684 - AT - Income Tax

Schemes of merger and demerger approved by NCLT - AO exceeding his jurisdiction - Deemed dividend addition u/s 2(22)(e) - demerger of the financial services business ( FSB ) by the Appellant to the resulting company - Proceedings u/s 115O before LD Assessing officer - demerger of the assessee as in accordance with provision of section 2 (19AA) of the ACT - Whether approval of NCLT does not preclude revenue from examining the scheme for tax compliances? - Whether scheme can override the existing provision of the Act? - As per AO 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 - HELD THAT - 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 AO 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. The order of the 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 assessing officer. The order of the National Company Law Tribunal does not says that if any tax liability arises in the hands of the assessee that cannot be examined by the assessing officer. The dispute between assessee and revenue is the claim of the assessee that the learned assessing officer is rewriting the scheme which is already approved by national company law tribunal. We do not agree with the contention of the assessee. No attempt by the learned AO to tinker with the scheme approved by NCLT. He is merely examining that according to the terms and condition of the scheme the assessee fulfils the conditions of demerger for tax neutrality u/s 2 (19 AA) of the act as well as the chargeability of deemed dividend in the hands of the shareholders of the assessee company. According to us he is duty-bound to do so. None of the decisions cited by the learned senior advocate held that the revenue does not have an authority to compute the tax liability of the assessee in pursuance to the scheme of corporate reorganization approved by the National Company Law Tribunal. Further the object of the representation before the National Company Law Tribunal is only with respect to the scheme if it is to defraud the revenue. Naturally any scheme which is framed for with the object of defrauding the revenue cannot be approved by the NCLT. The circular of Ministry of corporate affairs as well as the instructions of central board of direct taxes are also conveying the same intent that if revenue has any objections to the scheme it should make available its view before the NCLT. Both these above instructions and circular does not prevent the assessing officer in applying the provisions of the income tax act to the return of income of the assessee filed in compliance with the scheme approved by National Company Law Tribunal. The ld. Special Counsel has also placed before us decision of NCLT in Panasonic India Pvt Ltd V Panasonic Life Solutions India P Ltd. 2022 (5) TMI 1490 - NATIONAL COMPANY LAW TRIBUNAL where in even NCLT has agreed that even if a proposal of a scheme of amalgamation is approved by the Adjudicating Authority it is clarified that no provision of such a scheme can override the existing provision of the Act. In any case the issues may come up before the ld. AO at time of the assessment of those companies 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. 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. Thus in present case the ld. AO has not exceeded his jurisdiction and has also not ceded his jurisdiction. Accordingly ground no 3 of the appeal of assessee is dismissed. Accordingly appeal of assessee is partly allowed. Computation of deemed dividend - As in view of our finding in appeal of assessee that there is no deemed dividend chargeable to tax in the impugned case these grounds also do not survive hence are dismissed.

Summary

Issues Involved:
1. Whether the demerger of the financial services business constitutes an undertaking as per Section 2(19AA) of the Income Tax Act.
2. Whether the Revenue can go behind the scheme approved by the NCLT.
3. Applicability of Section 2(22)(a) regarding deemed dividend.
4. Valuation of the shares for the purpose of deemed dividend.
5. Levy of interest under Section 115P of the Act.

Issue-wise Detailed Analysis:

1. Whether the Demerger Constitutes an Undertaking as per Section 2(19AA):
The Tribunal examined whether the demerger of the financial services business (FSB) by the assessee complied with the conditions laid down in Section 2(19AA). The Tribunal noted that the financial services business was indeed carried out by Aditya Birla Nuvo Ltd (ABNL) as one of its business segments. The assets and liabilities transferred included fixed assets, equity shares in Aditya Birla Finance Ltd, fund-based lending, and investments in mutual funds, along with corresponding liabilities. The Tribunal held that the demerger was compliant with Section 2(19AA) as all assets and liabilities of the undertaking were transferred on a going concern basis, satisfying the conditions of the section.

2. Whether the Revenue Can Go Behind the Scheme Approved by the NCLT:
The Tribunal agreed with the Revenue that the approval of the scheme by the NCLT does not preclude the Revenue from examining the tax implications of the scheme. It was held that the Revenue is duty-bound to determine the tax liability of the assessee under the Income Tax Act, and this does not amount to rewriting the scheme approved by the NCLT. The Tribunal emphasized that the assessing officer is merely examining whether the scheme complies with the tax provisions, particularly Section 2(19AA).

3. Applicability of Section 2(22)(a) Regarding Deemed Dividend:
The Tribunal held that there was no distribution by the assessee of any of its assets to the shareholders. The shares of Aditya Birla Capital Ltd issued to the shareholders of the assessee were not previously assets of the assessee but were newly issued shares by Aditya Birla Capital Ltd. The Tribunal noted that the provisions of Section 2(22)(a) do not apply as there was no release of accumulated profits by the assessee to its shareholders. Additionally, the exception under Section 2(22)(v) for shares issued pursuant to a demerger by the resulting company to the shareholders of the demerged company was applicable.

4. Valuation of the Shares for the Purpose of Deemed Dividend:
Given that the Tribunal held that there was no deemed dividend chargeable to tax, the issue of valuation of shares for the purpose of deemed dividend did not arise. Consequently, the grounds related to the valuation of shares in the Revenue's appeal were dismissed.

5. Levy of Interest Under Section 115P of the Act:
As the Tribunal concluded that there was no deemed dividend and no dividend distribution tax was payable, the issue of levy of interest under Section 115P did not survive. Therefore, the ground related to the levy of interest was dismissed.

Conclusion:
The Tribunal allowed the assessee's appeal in part, holding that the demerger complied with Section 2(19AA) and that the provisions of Section 2(22)(a) regarding deemed dividend were not applicable. The Revenue's appeal concerning the valuation of shares for deemed dividend purposes was dismissed, as was the issue of levy of interest under Section 115P.