DY CIT CC-1(4), MUMBAI vs. M/S GRASIM INDUSTRIES LTD., MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL ―G‖ BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, AM AND SHRI PAVAN KUMAR GADALE, JM ITA No. 1935/MUM/2020& SA NO 135/M/2021 (Assessment Year 2018-19) DCIT, Central Circle-1(4) Grasim Industries Ltd. Room No. 902, 9th Floor, Old A-Wing, 2nd Floor, Aditya CGO Building Annex, Vs. Birla Centre, S.K. Ahire Pratishtha Bhavan, M.K. Marg, Worli, Mumbai-400 030 Road, Mumbai- 400 020 (Appellant) (Respondent) ITA No. 41/MUM/2021 DCIT, Central Circle-1(4) Grasim Industries Ltd. Room No. 902, 9th Floor, Old Aditya Birla Centre, A-Wing, CGO Building Annex, 4th Floor, S.K. Ahire Marg, Vs. Pratishtha Bhavan, M.K. Worli, Mumbai-400 030 Road, Mumbai- 400 020 (Appellant) (Respondent) PAN No. AAACG4464B Assessee by : Shri. J.D Mistry, Sr. Adv. Shri Madhur Agrawal, Adv. Shri Fenil Bhatt, Shri. Hemant Kadel, Shri. Sushil Chopra, Shri. Jayesh Ganatra, Shri. Chaitanya Joshi Revenue by : Shri Anil Singh, Additional Solicitor general Shri. Akhileshwar Sharma, (Special Counsel) Date of hearing: Last heard on 05.09.2022 (Refer Para 22 and 23 of the order forhistory ofhearing) Date of pronouncement: 30,November 2022 O R D E R PER PRASHANT MAHARISHI, AM:

“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

1.2 The Appellant prays that the impugned order passed us 1150ws 115-0 of the Act be held as bad in law and therefore be quashed.

GROUND NO. 2: DEMERGED „FINANCIAL SERVICES BUSINESS‟ CONSTITUTES AN „UNDERTAKING‟ AS PER SECTION 2(19AA) OF THE ACT AND DEMERGER FULFILLS THE CONDITIONS LAID DOWN IN SECTION 2(19AA) OF THE ACT:

2.1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in confirming the order of the Id AO holding that the demerger of the "financial services business" ("FSB") by the Appellant to the resulting company is not a tax compliant demerger falling under and complying with the provisions of section 2(19AA) of the Act.

2.2 On the facts and in the circumstances of the case and in law, the Id. CIT(A) further erred in confirming the order of the id AD holding that the Appellant was never engaged in the FSB and the demerged FSB did not constitute an „undertaking‟ as defined in Explanation 1 to section 2(19AA) of the Act.

2.3 On the facts and in the circumstances of the case and in law, the id. CIT(A) when concluding that FSB did not constitute an „undertaking,‟ did not properly consider and failed to appreciate the factual material and detailed submissions filed by the Appellant. The Appellant submits that considering the same, the Ld. CIT(A) ought to have held that the Appellant was engaged in the FSB and that the

2.4 The finding by the Id. AO/ld. CIT(A) that FSB does not constitute an „undertaking‟ is bad in law and liable to be quashed as no person reasonable instructed could come to such conclusion on the facts of the present case.

2.5. The Appellant prays that it be held that the demerger of FSB was a tax compliant demerger under section 2(19AA) of the Act.

GROUND NO. 3: GOING BEHIND AND ALLEGING DOUBT ON THE GENUINENESS OF THE SCHEME OF ARRANGEMENT APPROVED BY THE HON'BLE NATIONAL COMPANY LAW TRIBUNAL (“NCLT”):

3.1 On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in confirming the order of the Id. AO alleging that the scheme of arrangement entered by the Appellant for demerger of FSB to the resulting company as approved by the Hon'ble NCLT was not genuine. The Id. CIT(A) in coming 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

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 challenge the object, rationale, basis or genuineness of the said scheme.

3.5 The Id. CIT(A) ought to have held that the Id. AO cannot assume motives, objects envisage situations, and reach conclusions which are not in accordance with the basis, stated objects, rationale and fundamentals of the Scheme of Arrangement approved by the Hon'ble NCLT.

3.6 On the facts and in the circumstance of the case and in law, the conclusion reached by the ld. AO and the Id CIT(A) amounts to rewriting the scheme of arrangement as approved by the NCLT, which is not permissible, contrary to law and beyond the jurisdiction of the Income-tax Authorities.

WITHOUT PREJUDICE TO GROUND NO 1 TO 3:

GROUND NO. 4: PROVISIONS OF SECTION 2(22) (a) OF THE ACT ARE NOTAPPLICABLE:

4.1 On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in confirming the order of the Id. AO holding that provisions of section 2(22)(a) of the Act were applicable to the transaction of transfer of FSB by the Appellant to the resulting company and the issue of shares of the resulting company by the resulting company to the shareholders of the Appellant under the scheme of arrangement approved by the NCLT.

4.2 On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in concluding that the provision of section 2(22)(a) of the Act is applicable to the present case and failed to consider the irrefutable and apparent interpretation of the provisions of section 2(22)(a) which were pointed out to him.

4.3 The Appellant prays that the provision of section 2(22)(a) of the Act are not applicable to the case of the Appellant and the impugned order of the ld. AO be quashed being bad in law.

GROUND NO. 5: QUANTUM OF ALLEGED DIVIDEND DISTRIBUTED:

5.1 On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in directing the Id. AO to adopt value of the shares of the resulting company at Rs.145.40 per 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:

7.2. The Appellant prays that the interest levied under section 115P of the Act be deleted.”

“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in determining value of the shares of ABCL at ₹ 145.40 per share instead of ₹ 261.20 adopted by AO ignoring the fact that it was most proximate market value of shares.

Brief background of the case

Proceedings u/s 115O before LD Assessing officer

Reasons in Order of the ld. AO passed u/s 115O RWS 115 Q of The Act dated 17. The learned AO after examination of details submitted by the assessee rejected the contentions of the assessee and passed an order 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 ₹ 261.20 per share determining the dividend distribution tax payable of ₹ 48,934,440,243 and interest thereon amounting to ₹ 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 16.67 Tangible assets 1728.93 Non-current investment (a minority stake in Aditya Birla finance Ltd, a subsidiary) 117.13 Current investments 13.43 Loans and advances 0.21 Other current assets 1876.37 Total assets (A) Liabilities 103.26 Deferred tax liability

ii. The financial service business which is demerged by the assessee to Aditya Birla capital limited does not constitute an ‗undertaking‘ as defined in explanation 1 to Section 2 (19 AA) of the act for the reason that Aditya Birla Nuvo limited was not carrying on business in the nature of financial services on itsown inferred from the annual accounts and income tax returns for the reason that:- a. Aditya Birla Nuvo limited source of income in the profit and loss account are Under various heads other than financial services b. Aditya Birla Nuvo limited shows interest income from lending Under the head income from other sources c. the primary source of income is shown as sale of products/sale of services d. the Aditya Birla Nuvo limited has shown all the activities in the subsidiary financial accounts and therefore the argument that standalone financial of Aditya Birla Nuvo limited has shown separate segment for financial service business is incorrect

Writ petition before Honourable Bombay high court by Assessee in and consequent orderdated 14 August 2019

Reasons in Appellate Order Passed by the LD CIT (A)

History of earlier hearing of the appeals of the parties before ITAT

Submissionson behalf of assessee 24. Coming to the appeal of the assessee, the learned senior advocate during the course of hearing placed on record 3 written submissions. In submission no 2 and 3 all the issues are covered. However submission no 1 dated 19-4-2021 is referred but not reproduced here.

The 2nd submission made by the learned senior advocate was as Under: 25.

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

 Consolidation of Financial Services Business (“FSB”) in ABNL in 2005 Looking at the larger opportunities in financial services sector and limited capacity of BGFL to raise funds, BGFL merged with ABNL w.e.f. 1st September 2005.

With this merger, ABNL became full-fledged financial services company engaged in retail asset finance, corporate finance, capital market, investment, life insurance, asset financing, asset management, insurance distribution, general insurance broking and other ancillary businesses. ABNL carried out financial services business directly as a separate Division / business activity as well as through subsidiaries and JVs.  Growth of the Financial Services Division of ABNL FSB of ABNL, was engaged in the activity of fund-based lending, making, holding and nurturing investments in the financial services sector i.e. FSB of ABNL consisted of direct business of financial service as well as holding and nurturing investments in companies carrying on financial service

5,589.48 5,588.88 TOTAL INVESTMENT (IN CR.) 5,173.49 2,868.24 2,473.22 2,468.25 1,924.14 1,924.14 1,924.14 1,887.93 1066.68 341.90 590.46

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 Appellant is carrying out organized and systematic activity of business. 4. Treatment in Tax Records  Recognition in the Assessment Orders In the assessment orders of ABNL for various assessment years, the AO has clearly mentioned „financial services business‟ as one of the businesses of ABNL. [Pg. 248 – 272 Vol I FPB, @ page 250 mentioned in list of main items (AY

 Interest income always taxed under the head “Profits and Gains of business or profession”:

Interest income earned on inter corporate deposits given by the Appellant has all along been offered for tax by the Appellant under the head “Profits and gains of business or profession” and the same has always been taxed by the Department under the head “Profits and gains of business or profession”. (Extract of return and assessment order for AY 13-14 and AY 15-16 on Pg. 1312 to 1330 of FPB 2.)

 Disclosure in Tax Audit Reports

In the tax audit report (Form 3CD), column 10(a) requires disclosure of „nature of business or profession‟ carried out by the assessee. The Tax Auditor, being independent expert, has specifically stated „Financial Services Sector‟ as one of the businesses every year. Please refer tax audit of ABNL for last five years i.e. AY 2013-14 to AY 2017-18 [Pg. No. 600-615, @ 601 (AY 13-14), @ 605 (AY 14-15), @ 609 (AY 15-16), @ 612 (AY 16-17) and @ 615 (AY 17-18 of FPB, Vol. II)].

Details of Merger of ABNL with the Appellant and subsequent demerger of FSB by the Appellant to ABCL: 5. As stated above, ABNL merged with the Appellant. Thereafter, the FSB business, which was earlier carried out by ABNL, upon merger came to the Appellant and through the same Scheme was demerged to ABCL. The relevant clauses of the Scheme of arrangement are as under:

5.1. The relevant extract of the Preamble of the Scheme (Pg. No. 26 of Vol I FPB)is as under: “(a) Amalgamation of Aditya Birla Nuvo Limited pursuant to the provisions of Sections 391 to 394 Companies at, 1956 and other applicable provisions of the Companies Act, 1956 and/or the Companies act, 2013 to the extent notified in applicable; and

5.3 Clause B(Pg. No. 26 - 27 of Vol I FPB), inter alia, provides description of the Transferor Company and Demerged Company and the relevant business carried out by them including FSB carried out by ABNL, relevant extract is reproduced herewith for ready reference:

“Aditya BirlaNuvoLimited is a public company, limited by shares, incorporated under the provisions of the Companies Act, 1956, under Corporate Identity No.L17199GJ1956GPLC0011 07, and having its registered office at Indian Rayon Compound, Veraval, Gujarat - 362266 [“Transferor Company”]. Transfer Company is a diversified conglomerate with various business interests including manufacturing of fertilizers, viscose, filament yarn, chemicals, insulators, textiles, etc., financial services and telecom. The equity shares of the transferor company are listed on BSE Limited add the National Stock Exchange of India Limited. The financial service business is a division of the Transferor Company which is engaged

Aditya Birla Financial Services Limited is a public company, limited by shares, incorporated under the provisions of the Companies Act, 1956, under Corporate Identity No. U67120GJ2007 PLC058890 and having its registered office at Indian Rayon Compound, Veraval, Gujarat -362266 [“Resulting Company”]. The Resulting Company is a systematically important non-deposit taking core investment company registered with the Reserve Bank of India and has business interests including that of non-banking financial institution, housing finance, asset management, brokerage, wealth advisory and health insurance. The entire share capital of the resulting company is directly and indirectly held by the Transferor Company.” (Emphasis supplied) 5.4 Clause C of the Scheme (Pg. No. 27 of Vol I FPB) explains the Rationale behind the Arrangement. The same is reproduced hereunder: “(a) the proposed restructuring will create a large and well diversified company, having a portfolio of leading manufacturing and services businesses within the society cash flows and long-term growth opportunities. (b) The Demerged Company will be participating in high growth financial services 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:

5.6 Clause 15 of Part III (Pg. No. 51 – 56 of Vol I FPB) deals with transfer of assets and liabilities of the Demerged Undertaking and provides that the same is done in accordance with the provisions of section 2(19AA) of the Act as well as the fact that the transfer of the undertaking is on a „going concern‟ basis. The relevant extract is as under:

“15.1.Subject to implementation of Part II of this Scheme and with effect from the Effective Date 2, and subject to the provisions of this Scheme in relation to the mode of transfer and vesting of the Demerged Undertaking shall, without any further act, instrument or deed, be and stand transferred to and vested in, and / or be deemed to have been and stand transferred to and vested in the Resulting Company on going concern, basis, so as to become on and from the Effective Date 2, the estate, assets, rights, title, Interest and authorities of the Resulting Company, pursuant to Section 394(2) of the Act and all other applicable provisions, if any, of the Act and in accordance with the provisions of Section 2(19AA) of the Income tax Act, 1961.”

15.2 Without prejudice to the generality of clause 15.1 above, on and from the Effective Date 2:

15.2.1 The Demerged Undertaking including all its assets, properties, Investments, shareholding interest in other companies, claims, title, interest, assets of whatsoever nature such as licenses and all other rights, title, interest, contracts or powers of every kind, nature and description of whatsoever nature and wheresoever situated shall, pursuant to the provisions of section 394 and other applicable provisions, if any, of the Act, and pursuant to the order of the High Court sanctioning this scheme and without further act or deed or instrument, but subject to the charges affecting the same as on

5.7 Clause16 &17 of Part III of the Scheme deals with Transfer of permits and licenses and Employees, respectively under the Scheme (Pg. No. 56 – 58 of Vol I FPB) and Clause 19 of Part III – Transfer of Litigation 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 Company is referred to as the “Share Entitlement Ration (Demerger)”. It is clarified that no cash consideration shall be paid by the Resulting Company to the Demerged Company or its shareholders.” (Emphasis supplied) It is evident from the above extract that under the Scheme no consideration was due to the Appellant, only the Shareholders were entitled to receive the shares of the Resulting Company directly from the Resulting Company.

5.9 An Intimation/ Letter dated March 3, 2017 was sent to the Ld. AO, intimating about the scheme of arrangement and calling for objections, if any, as mandated by Section 230(5) of the Companies Act, 2013 (Page No. 292 to 294 of Vol I FPB).

“Considering the entire facts and circumstances of the case and on perusal of the Scheme and the proceedings, it appears that the requirements of the provisions of sections 230-232 of the Companies Act, 2013 are satisfied. The Scheme is genuine and bona fide and in the interest of the shareholders and creditors. I, therefore, accordingly allow the Company Petitions and approve the Scheme. The Scheme, which is at “Annexure J” to the respective Company Petitions, is hereby sanctioned and it is declared that the same shall be binding on Aditya Birla Nuvo Limited and Grasim Industries Limited and Aditya Birla Financial Services Limited and their respective shareholders, creditors and all persons concerned under the Scheme…...” (Emphasis supplied) The Scheme has become final, as the same has not been challenged further and binding on all the parties, including the Revenue.

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].

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 „Demerger‟.” Conclusion, reached by the Ld. AO in Paragraph 16.6. Pg. 62 of AO Order.

Allegations of the CIT(A) in its Order: Disclosure in Annual Reports and Return of Income 20. It is not apparent that Appellant was engaged in FSB on its own and it is also clear that interest income has been shown by it only under the head “other income” (Para 17.7, Pg. 155 of CIT(A) Order).

Not capable of being run Independently on a Going Concern Basis: 26. Only investment in shares of a sister concern namely ABFL of Rs. 1728.93 crore, some current investments of Rs. 117.13 crore and a few tangible assets, valued at Rs. 167.67 crore were transferred. On the contrary liability transferred are even smaller and are in the nature of deferred tax liability of Rs. 103.26 crore and short-term borrowings of Rs. 51.27 crore. The CIT(A) concluded that “A cursory look on these assets and liabilities would convey that these assets and liabilities could not constitute an independently running business and it could not qualify to be an undertaking as defined u/s 2(19AA) of the I.T. Act. In fact, explanation to section 2(19AA) clearly lays down that a mere transfer of some assets will not constitute a demerger, which actually seems to be happening in the present case. “Therefore, it only had few assets in the form of shares of ABFL, which have been transferred to ABCL, and the same could not qualify as an undertaking capable of running independent business. (Para 17.2, Pg. 151 of CIT(A) Order)[Factually incorrect please refer Para 41, 43-44, 48-50 below and also 68 – 77 below].

The Scheme itself is a colourable device: 28. It is more like transfer of shares held by Appellant to ABCL, which would result in capital gains. The CIT(A) observed that “real arrangement looks like transfer of minority stake in ABFL, held by ABNL, to unlock the potential market value by way of transfer of listed shares of ABCL to shareholders of GIL.” (Para 17.5, Pg. 153 of CIT(A) Order). [Factually incorrect please refer Para 5 above and 72 – 77below]

Submission of the Revenue during the hearing before the Hon‟ble Bench and in the Written Submissions dated April 15, 2021, and April 19, 2021 32. If the merger/demerger had not taken place, sale of the shares would have attracted capital gains and the Appellant would have earned accumulated profits, which then would have been distributed to the shareholders.

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 investments in the financial services sector. In the Explanatory Statement which was issued in relation to Amalgamation of Indian Rayon and Industries Ltd. (later known as ABNL) and Birla Global Finance Ltd. (―BGFL‖), reason behind amalgamation was mentioned as ABNL and BGFL belong to the same group and amalgamation would further the overall objective of the Group to consolidate FS Business within ABNL. (Para 9, Pg. 937 Vol II FPB). Since then, ABNL has been engaged in the FS Business.

'Undertaking' is not in its real meaning anything which may be described as a tangible piece of property like land, machinery

The Appellant submits that although the aforesaid decisions were rendered in the context of interpretation of provisions of other acts / section, but the Appellant is relying on the same for undertaking the meaning of the term ‗undertaking‘ as is generally understood. 43. The definition of undertaking in the Explanation to section 2(19AA) is an inclusive definition and does not mandate a minimum threshold of assets / liabilities which would be required to constitute an ‗Undertaking‘ under the said section. The Appellant submits 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, 16.67 furniture, computers, office equipment and vehicle) 2. Equity shares of Aditya Birla 1,718.7 Finance Limited – 6,12,73,146 2 nos. (9.77% stake) 3. 8% Compulsorily Convertible 10.21

 Employees – CFO of ABNL took over position of CFO in ABCL. Following employees of ABNL transferred to ABCL (Page No. 1332 of FPB 2): # Name Qualification 1. Dhirendra P. Mishra M. Com, ICWA 2. Ajay Singh Jhala C A 3. Pramod Bohra M B A 4. Siddesh Ajgaonkar C A 5. Pankaj Chaudhari B. Com. 6. Himanshu Redkar C A

 Litigation (Page No. 1332 of FPB 2) o AIDEK Tourism Services Pvt Ltd &Ors. Vs. Aditya Birla Nuvo Limited (Bombay High Court - 5 cases by petitioner and 5 cases by respondent) o Aditya Birla Nuvo Limited Vs. State of Maharashtra &Ors (Bombay High Court) o Eight cases in the 44th Court of Metropolitan Magistrate, Andheri (Para 4.2.8.1., Pg. 105 -106 of CIT(A) Order and 1332 of FPB 2)

In re: Indo Rama Textile Ltd (2012)(23 taxmann.com 390) (Del HC) (@ Para 41- 43 Pg. 56, Pg. 43-58 of Legal Paper Book, Vol. I)– the Delhi High Court notes that the transferred unit would be regarded as an undertaking, if it can satisfy the test of being business activity which is carried on as a going concern. The High Court further notes that the demerged company and the resulting company negotiate as to which common assets are to be transferred and which are retained.

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. Contractual Compulsions:  Relevant business could not be carried out in ABNL, as it would mean that third parties would become stake holders in all other business of ABNL. (Para 4.2.2.2., Pg. 76 of CIT(A) order)

“150. Learned counsel's next arguments that the 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

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 purchased out of commercial expediency. Relevant extract of the aforesaid decision, for Your Honour‘s ready reference is reproduced hereunder:

“…………….We see substance in the plea of the company that anyone buying a company would like to buy a company with minimum liabilities, it was considered appropriate to first pay off the dues by the company, even by raising the funds through fresh issue, and then sell the company. This explanation is in consonance with the ground business realities and we find no infirmity in the same. The advances given by the assessee were finally converted into equity, as the assessee company subscribed to the Camelot shares to enable Camelot to pay off its dues to the assessee company. On these facts, in our humble understanding, the assessee had invested in the Camelot, and extended financial help to Camelot, purely for commercial expediency. The head under which investments in subsidiaries is shown is governed by the disclosure requirements under Schedule VI to the Companies Act, and, therefore, the fact that an asset is shown as „investment‟ per se does not, and cannot, negate the fact that the such investments are made on the grounds of commercial

“7. The Commissioner and the Tribunal concurrently found that the Camelot was fully owned subsidiary of the assessee and engaged in the manufacturing of toothbrushes exclusively for the sole client, namely, the assessee. Shares purchased of Camelot were also sold by the assessee to one Ramesh Sukharam Vaidya for a consideration of Rs. 45,00,000. The Assessing Officer held that the sum of Rs. 5,50,00,000 which was invested by the assessee in the equity of Camelot on March 17, 2003, and which have been used to repay the loan to the assessee- company, amounting to Rs. 5.50 crores, before March 1, 2003, would demonstrate that the purpose of investment was to give a long-term enduring benefit to the assessee. Merely because it was made in the normal course of business, it cannot be termed as anything but long-term investment. This conclusion of the Assessing Officer was challenged in the appeal before the first appellate authority and the Commissioner concluded that the main reason for setting up Camelot was to manufacture toothbrushes exclusively for the assessee. Since the assessee was relying on Camelot for manufacturing of

Similar view has been taken in the following decisions:

d) SA Builder vs CIT (288 ITR 1)(SC) (Para 25, Pg. 175, Para 31, Pg. 176, Pg. 170-177 of Legal Paper Book, Vol. I) e) Nawn Estates (P) Ltd Vs CIT (1977)(106 ITR 45)(SC) (Pg. 118, Pg. 115-123 of Legal Paper Book, Vol. I)

b. Sanofi Pasteur Holding S.A. vs. DOR (354 ITR 316 AP HC) (Pg. 313 – 314, Pg. 247-365 of Legal Paper Book, Vol. I). In this case also the allegation of the Revenue was a colourable device formulated by the Assessee for avoiding capital gains tax and the Step-down subsidiary was only for the purpose of defrauding legitimate revenues. The High court, inter alia, held as under.

―Creation of wholly owned subsidiaries or joint ventures either for domestic or overseas investment is a well-established business/commercial organizational protocol; and investment is of itself a legitimate, established and globally well recognized business/commercial avocation.”

Transferred as Going Concern: 68. The Appellant submits that the AO and CIT(A) erred in holding that the undertaking is not transferred as a going concern as the financial service business could not have come into being as an independent undertaking. The Appellant submits that such finding has been made without substantiating the same on the basis of the facts and figures available on record. The Appellant submits that as part of the undertaking, tangible assets i.e. office, current assets, investments, non-current assets, employees, liabilities, borrowings, continuing litigation, employees‘ obligations etc. have been transferred to the demerged company. The Appellant submits that considering the assets and liabilities transferred by the Appellant to the

Similar view has been taken by the Hon‘ble Bangalore Tribunal in the case of KBD Sugars & Distilleries Ltd Vs ACIT (ITA 1362 and 1363/Bang/2011) (Para 8.1.3, Pg. 88 onwards, Pg. 59-103 of Legal Paper Book, Vol. I)

Re-writing of a Court approved Scheme, not permitted:

Accordingly, the Appellants filed their Revised Returns on 27.11.2018. The re-computation would have a bearing on the total income of the Appellants with respect to the A.Y. 2016-2018, particularly on matters in relation to carrying forward losses, unabsorbed depreciation etc.

………………..

On a plain reading of section 119(2)(b), we find that this provision would not be applicable where an assessee has restructured their business and filed a revised Return of Income with the prior approval and

b) Electrocast Sales India Ltd. v. DCIT (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 Calcutta High Court had accorded its sanction to the scheme of amalgamation in the assessee's case implies that the same had been done by considering representations from the various fields and by duly considering the tax evasion point for income tax purposes.

……………………………….

Hence if there be any objections for the income tax department, they could raise the same at that stage i.e., prior to sanction of scheme by the court. Once the scheme is approved, it implies that the same has

c) ITO vs. Pubanchal Power Co. Ltd. (ITA No. 201/Kol.2010) (Pg. 492, Pg. 485-506 of Legal Paper Book, Vol. II) From the above provisions of section 394A of the Companies Act, 1956, legal position enunciated in the decisions of Hon‟ble Gujarat High Court in the case of Wood Polymer Ltd., in re and Bengal Hotels Pvt. Ltd. in re, supra and Vodafone Essar Gujarat Ltd., supra, evidently makes the purpose clear that if the revenue wants to object to the proposed scheme of amalgamation, it has to do so in the course of proceedings before the High Court but before the final order is passed. Whenever such objections have been raised, these have been considered on merits by the concerned High Court and also incorporated the condition for safeguarding the interest of revenue in the very scheme. As a matter of public policy, once a scheme of amalgamation is approved by Hon‟ble High Court no authority should be allowed to tinker with the scheme. In the present case of the assessee, neither the official liquidator nor the Regional Director nor Central Government raised any objection to the scheme of amalgamation. In such circumstances, we are of the view that the revenue has nothing to say at the time of approval of scheme by Hon‟ble High Court in the present case. (Emphasis supplied)

From the aforesaid it is clear that once the scheme is approved it cannot be disregarded or its terms sought to be differed from or modified by the Revenue.

Only Opportunity to object a Scheme is before the Scheme is Sanctioned:

―30.14 From the above circular, it is transpired that the Revenue was conscious about the fact that there was the possibility of misusing the provisions of the Income- tax Act in the name of the scheme of amalgamation as provided under section 2(1B) causing prejudice to the Revenue. But the Revenue despite having the opportunity in its hand did not raise any objection within the time allowed by the MCA or subsequently by raising the objection in the impugned scheme of amalgamation. Thus, from the conduct of the Revenue, it is revealed that there was no grievance in the impugned scheme of amalgamation. Had there been any grievance of the Revenue, the same could have been brought to the notice of the regional director of the MCA, then the suitable action should have been initiated against the impugned scheme of the amalgamation. In this regard, we note that recently the Mumbai bench of NCLT in one of the petitions for amalgamation in case of Gas Investment (P.) Ltd (Transferor) and Ajanta Pharma Ltd. (Transferee) in CPS No 995 and 996/2017 has not approved the scheme of amalgamation on the objection raised by the revenue. The relevant extract of the order reads as under:

“36. The rationale given in the scheme among others things are the proposed amalgamation of the transferor company into Transferee Company by the scheme, as a result of which the shareholders of the transferor company viz. the promoters of the

From the above, it is inferred that the Income-tax Department, being aggrieved with the scheme of amalgamation, raised the objection, which was duly accepted by the NCLT and accordingly, the scheme of amalgamation was disapproved in the above case.

30.15 Now, the question arises whether the scheme once approved by the Hon'ble Gujarat High Court after receiving no objection from the Income-tax Department, the AO/revenue has authority to challenge the same. What is the inference that flows from a cumulative consideration of all the aforesaid contending facts is that the revenue cannot object the impugned scheme of amalgamation. It is 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

a. As per section 66B r.w.s. 66D(n)(i) of the Finance Act, 1994, Service tax was not applicable to interest income as the same was in the list of activities excluded from the ambit of service tax.

Therefore, the Appellant submits that the question of separate registration of FSB and consequently filing of return of income of FSB does not arise.

Ground No. 4 of Assessee‘s Appeal: Provisions of Section 2(22)(a) of the Act are not applicable:

"dividend" includes— (a) any distribution by a company of accumulated profits, whether capitalized or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company.

Form the reading of the aforesaid section it is clear that the provision is attracted only when the following conditions are cumulatively fulfilled – a. any distribution by a company. b. distribution must be of accumulated profits.

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.

“98.It is true that in a case of amalgamation, there is a share exchange ratio prescribed according to which the shareholders of the transferor company would be entitled to the shares of the transferee company. This, however, does not make it a situation of exchange of immovable property, or relinquishment of any right to immovable property so as to make the transaction amenable to section 269UA of the Income-tax Act. There is neither sale nor purchase in a case of amalgamation. Section 54 of the Transfer of Property Act defines „sale‟ as a transfer of ownership in exchange for a price, „price‟ being defined in section 2(10) of the Sale of Goods Act as any consideration paid for sale of the goods. In CIT v. Motors & General Stores (P.)Ltd. [1967] 66 ITR 692 , it was pointed out by the Supreme Court that the presence of money consideration is an essential element of a transaction of sale. Tested by this yardstick, it would appear that in an amalgamation, no consideration in any form much less in the form of money—flows from the transferee company to the transferor company, which was the erstwhile owner of the assets. The shares are

From the aforesaid, it is clear that the Jurisdictional High Court has held that it cannot be presumed that consideration has been received by the transferor Company under the scheme of demerger.

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 Book, Vol. II)

The Appellant further submits while interpreting a deeming provision, in case of an ambiguity, it has to be resolved in favour of the Assessee. Reliance is placed on the decision of the Hon‘ble Supreme Court in the case of Gopal and Sons HUF vs. CIT 391 ITR 1 (Para 12, Pg. 562, Pg. 558-563 of Legal Paper Book, Vol. II.

Submission for the proposition Dividend covered under section 2(22)(a) does not come within the ambit of section 115-O.

Further the 3rd submission of the learned senior advocate is as Under: - 26. ―On the conclusion of the hearing on July 7, 2021, the Hon‘ble Bench has required the Appellant if it so chooses, to file a short written note on the question of whether the extended definition of dividend as per section2(22)(a) of the Income-tax Act, 1961 (‗the Act‘) will fall within the ambit of section 115- O. In addition to contentions raised vide our submission dated April 29, 2021, we submit as under:-

“Tax on distributed profits of domestic companies. 115-O. (1) Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2003 but on or before the 31st day of March, 2020, whether out of current or accumulated profits shall be charged to additional income-tax hereafter referred to as tax on distributed profits at the rate of fifteen per cent:

[Provided 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].”

Finance Act2018have inserted proviso, w.e.f. 01-04- 2018

“115Q. If any principal officer of a domestic company and 2018 the company does not pay tax on distributed profits in accordance with the provisions of section 115-

Explanation. —[***]”

*** Omitted by Finance Act, 2018, w.e.f 1-04-2018, Prior to its omission, Explanation read as under:

“Explanation - For the purpose of this Chapter, the expression “dividends” shall have the same meaning as is given to “dividend” in clause (22) of section 2 but shall not include sub-clause (e) thereof”

i) Section 115-O of the Act provides that a domestic company shall be charged 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.

The Appellant submits that the proviso to section 115- O(1) cannot be pressed into service to contend that the extended definition given in section 2(22) ought to be applied to section 115-O.It is well settled proposition that a proviso normally does not extend the scope of the main section and it only creates an exception to the main section. Therefore, the proviso cannot be interpreted to extend the scope of the main section. Without prejudice, even if it is held that the proviso extends the meaning of the term dividend, in section 115-O, it can only extend it to dividend referred to in sub- clause (e) of section 2(22) of the Act and no other sub-clauses of section 2(22) of the Act.

The Appellant submits that Revenue has not appreciated the difference between sub-clauses (a) to (d) of section 2(22) of the Act on the one hand and sub-clause (e) of section 2(22) of the Act on the other hand. Whereas sub-clauses (a) to (d) deal with distribution, inter alia, including of assets to shareholders, sub-clause (e) deals with payment of any sum, which can only be in monetary terms. Therefore, the Appellant submits that there is no

iii) The Appellant further submits that Explanation to section 115Q of the Act which previously widened the scope of the term ―dividend‖ has been omitted from April 1, 2018. The Appellant submits that it is settled position of law that once a 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‖ has been omitted, dividend has to be interpreted as understood in its common parlance as provided for in the Companies Act.

The Appellant says that it is possible to contend that the present appeal is concerned with assessment year 2018-19, therefore, the law as on the first day of the assessment year i.e. 1st April, 2018 has to be seen, as

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,

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

Transaction/Scheme of Merger 1. Originally there were all together three companies' which had inter connection of holding with each other (pre-composite scheme ABNL.ABFSI. (Later became ABCL) and ABFL 2. ABNL owned 9.77% of ABFL and 100% of AFSL (Later became ABCL) 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).

Broad Outline of Submissions on the Issues

a) The submission of the Assessee is, inter alia, that Birla Global Finance Limited was a registered with RBI carrying on financial services (Pg 462). This company was acquired by ABNL in 2005 (Pg 464); -With this merger, ABNL became full-fledged financial services company engaged in retail asset finance, capital market, investment, life insurance, asset financing. b) ABNL carried out financial services business directly as a separate Division and through subsidiaries and JVs (Pg 465) c) Thus, the submission of the Assessee was that it carries on the business through a separate Division and through its subsidiaries and joint venture companies. d) Revenue Submissions 1. A perusal of Section 2(19AA) would evince that the sine qua non for the applicability of the said provision is that there must be a transfer by a demerged company of its one or more undertakings to a resulting company by fulfilling the conditions mentioned therein. 2. An Undertaking is defined as section 2(19AA). 2a. Therefore an undertaking as defined above clearly postulates the following elements viz.

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 merit. So, department, in the absence of any appeal filing opportunity against the direction, has raised a rectification request under rule 13 of the Income Tax (DRP) Rules, 2009 as there are mistakes/errors

 L&T Finance Ltd Vs. Deputy Commissioner of Income-tax, Circle 2(2)(4), Mumbai (2017) 87 taxmann.com 03 (Mumbai-Trib.)  Duchem Laboratories Ltd v/s ACTT (2010) 47 DTR 0484 (Mumbai - Tribunal)  Avaya Global Connect Lid v/s ACIT (2008) 13 DTR 0309) - Mumbai Tribunal  CIT v/s Bharat Bijlee Ltd. (2014) 365 ITR 258 (Dom) - Hon'ble High Court of Bombay

B) Section 2 (22) (a) and exceptions to deemed dividend (22) 14"dividend"15 includes— (a) any distribution15 by a company of accumulated profits15, whether capitalized or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company ;

but "dividend" does not include— (v) any distribution of shares pursuant to a demerger by the resulting company to

Interest payable for non-payment of tax by domestic companies. 115P. Where the principal officer of a domestic company and the company fails to pay the whole or any part of the tax on distributed profits referred to in sub-section (1) of section 115-O, within the time allowed under sub- section (3) of that section, he or it shall be liable to pay simple interest at the rate of 81[one] per cent for every month or part thereof on the amount of such tax for the period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid.

Reasons and Decision 49. We have carefully considered the rival contention and perused the orders of the lower authorities as well as the direction of the learned Dispute Resolution Panel dated 30 June 2022 in assessment year 2018 – 19 in case of the assessee. 50. We find that the direction of the learned Dispute Resolution Panel covers all the issues with respect to 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 ₹ 6176,73,22,832/- iii. depreciation allowance disallowed ₹ 28,978,988/-

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-tax Act, 1961 (the Act) citing the following reasons and went on to compute capital gains in the hands of Assessee: i) No business activity in the nature of Financial Services by GIL/ABNI (Para 10.2 of the draft assessment order):

iii) No new resulting company came in existence post demerger (para 10.5 of the draft assessment order); iv) Conditions prescribed under sub-clause (i), (ii) and (vi) of section 2(19AA) of the Act are not satisfied as a new resulting company capable of running finance business has not come into existence (para 10.7/12.1/12.2/12.3 of the draft assessment order). v) Approval of the scheme of demerger by NCLT does not automatically mean that it is a valid demerger in terms of the provisions of section 2(19AA) of the Act unless mandatory conditions prescribed therein are satisfied; vi) As no financial service business existed either in GIL or ABNL, the scheme is a mere transfer of assets and liabilities (para 12.5 of the draft assessment order); vi) The so-called FSB demerged from GIL was not capable of being run as a Going Concern (para 13.3 of the draft assessment order); vii) Proceedings before NCLT are non-obstante to the proceedings under Income-tax Act, 1961 (para 14 of the draft assessment order). 25.3 The panel has carefully considered the submissions of the assessee, the issues raised by the AO in the draft assessment order, the Composite Scheme of merger of GIL with ABNL and subsequent (purported) demerger of Financial Services Business (FSB) of GIL to ABFSL, now known as ABCL, and relevant provisions of law The findings of the panel on the issues raised by the AO in draft assessment order are as brought out in the following paragraphs. 25.4 Whether there was a Financial Services Business carried out by GIL/ABNL

25.4.1 The AO in his draft order held that there was no business activity in the nature of Financial Services carried out by GIL or ABNL for following reasons:

a. Interest in case of Financial Company) is shown at NIL (Para 9.1(5), Pg. 147 of AO Order);

b. The Other income (interest income in case of a company other than a finance company) is shown (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 states that Finance Company is not defined under

25.4.4 As per RBI Press release (1269 dated April 8, 1999), a Company is to be identified as NBFC, if its financial assets are more than 50% of total assets (netted off by intangible assets) and income from financial assets are more than 50% of gross income. As per these criteria, Pre-demerger, ABNL as a company was not an NBFC as:

-It did not satisfy the criteria of financial asset constituting more than 50% of the Total assets; and also -It did not satisfy the criteria of income from financial asset constituting more than 50% total income.

25.4.5 However, the panel notes that for the issue at hand, it is not relevant whether ABNL, as a whole, could have been regarded as a Finance Company. What is to be analyzed is whether the observation of the AO that ABNL did not possess any Financial Services business segment is correct or not. 25.4.6 Viewed from this angle, it is noted that during the period prior to the implementation of the composite scheme (the Scheme), Financial Services Segment of ABNL did satisfy the above mentioned two tests but it could not be regarded as an NBFC as the said definition is qua an entity and not qua a division. This is clearly borne out of a perusal of assets, liabilities, borrowings etc. hived off in The Scheme:

Sr Particulars ₹ (crore) No 1. Fixed assets (Office premises, 16.67

-- Satisfies the criteria of financial asset constituting more than 50% of the Total assets.

-- Satisfies the criteria of income from financial asset constituting more than 50% of total income.

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... in group companies... constitute not less than 60% of its net assets as mentioned in clause above. --it does not trade in its investments in shares, bonds, debentures, debt or loans in group companies...

25.4.11 It may not be out of place to mention that even if the FSB were to be demerged in a new resulting company, the regulatory requirement of a minimum asset size of Rs 100 crore would have been satisfied and the new standalone resulting company could have carried on the business as a Systemically Important CIC under the RBI regulations. It would still have been a transfer on a going concern basis. This requirement would have been satisfied by the hived off entity even if one would disregard, though without any valid reasons, the value of shares of ABFL (Rs 1718.72 crore) held by it.

25.4.12 The AO has also stated 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 Assessee. The panel does not find the argument persuasive. In the Return of Income, there are only three columns to mention the line of business of the assessee. Therefore, for a

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 assessment of all the assessment years (including AY 2018-19); and that the AO having accepted interest income earned on fund-based lending business income, it is now not open to the Revenue to allege that FSB was not a separate ‗Business‘.

This being so, it is not possible to agree with the AO that there was no financial services business being carried out by ABNL prior to the implementation of composite scheme.

25.4.15 The panel has also noted that before the demerger, the GIL/ABNL held total financial assets of Rs. 5853.37 crore (carrying cost), and except for following two assets, all of them were part of the FSB demerged under the Scheme:

(1) Shares of ABCL (Rs. 4721.57 crore) were not included as a part of demerged undertaking as a company cannot receive its own shares. The same is also as per approved Scheme (clause (a) of para 1,1); and

The assessee also furnished a reconciliation of the valuation of assets 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:

Explanation 1.- For the purposes of this clause, "undertaking‖ shall include any part of 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

12-13[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 the Companies Act, 2013 (18 of 2013) or any other law for the time being in force governing such public sector companies in this behalf, and

25.5.2 As mentioned above, the NCLT, Ahmedabad Bench, vide order dated June 01, 2017, had approved the composite scheme as per which, the merger of ABNL with GIL became effective from July 01, 2017, and the demerger of Financial Services Business of GIL in to ABFSL (now known as ABCL) became effective from July 04 2017. 25.5.3 The NCLT at para 36 of the order approving the scheme has stated that the scheme is genuine, bonafide and is binding on all the persons concerned under the scheme Clause F of the scheme provides that demerger of FSB is compliant with section 2(19AA) of the Act Clause 15.1 of the Scheme in relation to Transfer of Assets and Liabilities 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

25.5.5 The aforesaid legal position has been re-iterated by the CBDT itself vide Instruction No. F No. 279/Misc.M-171/2013-IT dated April 11, 2014, wherein the CBDT has stated that only opportunity available to the Department to object to the scheme of amalgamation if it is found to be prejudicial to the of the Revenue is at the stage of sanctioning of the scheme. Authorities were directed to send their comments to Regional Director for placing it before the Court. Also, reference can be made to the decisions in the case of Dalmia Power Ltd v ACIT (112 taxmann.com 252) (SC) and Sadanand S. Varde State of Maharashtra (274 ITR 609) (Bombay HC) for reiteration of the same principle by Hon'ble Supreme Court and Hon'ble Bombay High Court.

25.5.6 Notwithstanding the above, and the finding by NCLT that the Scheme is compliant of section 2(19AA) of the Act, the panel has examined the Scheme vis- à-vis various clauses of section 2(19AA) of the Act.

Sub-section (1): all the property of the undertaking, being transferred by the demerged company, immediately before the

The above observation of the AO is considered. The A.O. has based his observation only on surmises and conjectures without bringing anything on record to refute the assertion of the assessee that current investments in the form of investments in Mutual Funds of Rs. 117.13 crore are transferred. The panel has also perused the segmental accounts of ABNL for the F.Y. 2016-17. It can be seen from Note 4C (Current Investment) that ABNL was holding current investments worth Rs. 532.10 crore in the form Mutual Funds as on 31.03.2017. Therefore, the observation of the AO that the balance sheet of ABNL and GIL as on 31.03.2017 did not show any current investments is not borne out of record. As regards the existence of business of Financial Services, the panel has already given its findings by holding that there did exist a business of Financial Services. (ii) that the nature of liabilities transferred, i.e., Deferred tax liabilities of Rs. 103.26 crore, short-term borrowing of Rs. 51.27 crore and employee's liability of Rs. 0.22 crore are not reflective of an undertaking carrying on business of 'Financial Services.‘ The panel does not find the above argument persuasive. The AO has once again based his arguments on his claim already discussed that no business of Financial Services was being carried out by ABNL prior to the demerger. What is important for the purposes of sub-section (i) of section 2(19AA) is to examine that whether all the liabilities of the undertaking before the demerger are taken over by the demerged company or not. There is no suggestion in the assessment order that this was not the case. Further, Para 15.2.9 of the scheme, inter alia, provides that all

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 or assets of the demerged company or any undertaking thereof by the resulting company:

25.5.12 It is noted that there appears to be no dispute on the conditions mentioned under sub-sections (iv) and (v) of section 2(19AA). However, the panel independently examined the Scheme, and perused Clause 20.1 of Part thereof which provides for consideration for vesting of demerged undertaking. The said clause states that in consideration for transfer and vesting of the demerged undertaking into the resulting company, the resulting company shall issue and allot to each shareholder of the demerged company, shares of the resulting company in specified ratio. It further provides that no cash consideration shall be paid resulting company to the demerged company or its shareholders.

Further, the assessee has submitted that in accordance with the terms of the Scheme as consideration of the demerger, the resulting company issued its equity shares to the shareholders of the demerged company on proportionate basis all the shareholders of the demerged company received shares from the resulting company in the proportion of their holding in demerged company. Sub-section (vi): the transfer of the undertaking is on a going concern basis: 25.5.13 The AO in para 12.3 of his order has stated that the condition of ‗the transfer of the undertaking being on a going concern Basis‘ is not satisfied. While reaching this conclusion it has been observed that: From the discussions contained in the preceding Paras, which are based on the findings in the Annual Report Returns of Income, and Assessment Records & 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 terming as 'Demerger‟

25.5.14 The panel has already held above that ABNL was carrying out Financial Services Business (FSB). However, it is recognized that while this a necessary condition for the demerged undertaking to be a 'going concern', it may not be sufficient for it to be able to operate on a going concern basis. As such, the panel has examined various aspects of the entity demerged from ABNL to see whether it can be deemed to be a ‗going concern‘

25.5.15 It is noted that FSB was being 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 basis, qualified to be NBFC CIC as per the RBI regulations, which requires that 90% of net assets should be in the form of investments in group companies and investment in equity shares in group companies is not less than 60% of its net

25.5.18 it is pointed out here that even if out of gross asset of Rs. 1,876 crores transferred under the demerger, an amount of Rs. 1,728 crores related to stake in a subsidiary company is not considered, the demerged entity included assets totaling to Rs. 157.66 crore, such as tangible assets, current investments, non- current investments, loans, etc. 255.10 Further the term ‗Business‘ is defined in section 2(13) in inclusive manner and deletion is very wide The term ‗undertaking‘ has been defined in section 218AA) of the Act to include why part of ‗undertaking‘, a unit or division of undertaking or a business activity taken as a whole ‗but does not include individual assets or liabilities or combination thereof not constituting a business activity. As held above, the assessee was carrying out a financial services business in ABNL the income from which was duly assessed as Business Income consistently by the A.O. it is also noted that Explanation 1 to section 2(19AA) goes as far as recognizing a ‗part of undertaking‘ to be ‗undertaking‘. Based on the facts of the case, it is apparent that the activities of the FSB are at least a part of the undertaking and FSB would therefore quality to be an ‗undertaking‘ for the purposes of section 2(19AA). 25.5.20 Fact that shares of ABFL held by the Assessee formed part of the FSB undertaking is irrelevant to the present proceedings. The FSB undertaking not only includes all the other assets and liabilities of demerged undertaking but also the share of ABFL as

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 less than three fourth in value of the shares assessee became the shareholders of ABCL by virtue of the said demerger; 5. The transfer of undertaking was on a going concern basis

25.6 The Scheme is a mere transfer of assets and liabilities

No new Resulting Company came in existence post demerger

25.6.1 The AO, in para 10.5 of the draft assessment order has noted that "No New Resulting Company came into being as a result of Demerger as the Demerged "Financial Services Business could not have come to being as an Independent Undertaking in absence of any such business being carried out by either of the companies, and also in view of the fact that, it was a case of mere transfer of few assets and liabilities including a 9.77% stake in ABFL that was transferred to "M/s Aditya Birla Financial Services Limited”. 25.6.2 In this regard, it is noted that the Act defines a Resulting Company in sub- section (41A) of section 2 in following manner: (41A) "resulting company means one or more companies (including a wholly owned subsidiary thereof) 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 and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger;

25.6.3 It can be seen from the definition that there is no reference to any precondition that a new entity or company must come in existence for the purpose of qualifying to be termed as resulting company. Rather by use of words ―.... One or more companies to which the undertaking of the demerged company is transferred……‖, intention of the legislature is clear that the undertaking of demerged company can be transferred to an existing company as well. As such, the argument that since no

25.6.4 As regards the Scheme being a mere transfer of a few assets and liabilities as perceived by the A.O., it is stated that the same could have been a case had there been no business of financial services in the demerged company or else the undertaking being demerged was not capable of being run on 'going concern Basis‘ 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 behind the observation of the AO appears to be that the shares of ABCL

25.8.5 Clause (iv) of section 2(19AA) clearly provides that in consideration of demerger, the resulting company shall issue its shares to the shareholders of the demerged company. The subject scheme is of demerger, and the scheme provides for issue of shares by the resulting company to the shareholders of the demerger company in consideration of demerger. If in a case of demerger, it is allowed to assume that the consideration was receivable by the Demerged company, then the provisions related to demerger will not work at off and become meaningless Consideration in case of a demerger is always receivable by the shareholders of the demerged company and not by the demerged company and if contentions of the accepted, no tax compliant demerger can take place.

“In my judgment, the expression "undertaking" used in this 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.

Thus it is clear that, if the assets are transferred which are a wholesome business unit, but not an individual assets, then only,

CIRCULAR: NO. 5-P, DATED 9-10-1967

Sd/- Sd/- (PAVAN KUMAR GADALE) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 30th November 2022 Dictated on Dragon software Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, True Copy//

Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai