2009 (4) TMI 212 - AT - Income Tax

Summary

Issues Involved:
1. Validity of the scheme of arrangement/amalgamation.
2. Tax implications of the amalgamation.
3. Treatment of capital reserve and depreciation.
4. Credit for dividend tax paid by the amalgamating company.

Summary:

Validity of the Scheme of Arrangement/Amalgamation:
The assessee-company proposed a composite scheme of arrangement/amalgamation involving its subsidiary, Lakshmi Auto Components Ltd. (LAC). The scheme, sanctioned by the Hon'ble Madras High Court, involved transferring LAC's rubber and plastic division to Sundaram Auto Components Ltd. (SAC) and amalgamating the remaining business of LAC with the assessee-company. The Assessing Officer (AO) denied the claim, arguing that the scheme was not a true amalgamation u/s 2(1B) of the Income-tax Act but merely an arrangement u/s 391 to 394 of the Companies Act, 1956. The CIT(Appeals) held that the remaining business of LAC was indeed amalgamated with the assessee-company, making the scheme binding on all authorities.

Tax Implications of the Amalgamation:
The AO argued that the scheme was designed to avoid tax, citing the decision in Wood Polymer Ltd., In re [1977] 109 ITR 177. However, the Tribunal found no such finding in the Assessment Order and noted that the scheme was sanctioned by the High Court, making it binding. The Tribunal referred to the Supreme Court decision in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 7064, which stated that valid legal steps cannot be ignored based on hypothetical assessments of underlying motives.

Treatment of Capital Reserve and Depreciation:
The CIT(Appeals) held that the capital reserve received from LAC could not be taxed as deemed dividend, and depreciation was allowable on the block of assets taken over from LAC. The Tribunal upheld this view, stating that the amalgamation involved the transfer of all assets and liabilities, meeting the definition of amalgamation u/s 2(1B) of the Income-tax Act.

Credit for Dividend Tax Paid by the Amalgamating Company:
The CIT(Appeals) allowed credit for dividend tax paid by LAC in the hands of the assessee-company. The Tribunal agreed, noting that after the amalgamation, LAC ceased to exist, and all transactions were for and on behalf of the assessee-company. Therefore, the dividend received by the assessee-company from LAC could not be construed as dividend u/s 115-O of the Act.

Conclusion:
The Tribunal concluded that the scheme of arrangement/amalgamation was valid and binding, and the tax implications were correctly addressed by the CIT(Appeals). The capital reserve, depreciation, and credit for dividend tax were to be treated as per the sanctioned scheme.