Case Law Details
Recently, the Chennai bench of Income Tax Appellate Tribunal, in the case of ACIT Vs TVS Motors Co. Ltd. [2010] 36 DTR 89 (Chennai) held that, a composite scheme of arrangement cannot be denied the tax benefits if all the conditions for amalgamation under the Income Tax Act, 1961 (the Act) are fulfilled.
Facts of the case
TVS, an Indian company held 66.07 percentage share capital of Lakshmi Auto Components Ltd (LAC). Under a composite scheme of arrangement, the rubber and plastic divisions of LAC are transferred to Sundaram Auto Components Ltd. (SAC) with effect from (w.e.f.) 1 April 2003 and LAC along with the remaining business, consisting of the engine components business, investments in equity shares of SAC (including the shares received upon slump sale) and other investments, was amalgamated with TVS w.e.f. 2 April 2003. The scheme was sanctioned by the Madras High Court vide order dated 23 March 2004.
The Assessing Officer (AO) denied the benefits of tax neutrality arising from the amalgamation of LAC with TVS. The AO observed that the scheme was only a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 and not a true amalgamation as all the assets and liabilities were not transferred by LAC to TVS under the said scheme and hence, all conditions of section 2(1B)(i) of the Act are not fulfilled.
Based on aforesaid the AO made the following additions/ dis allowances:
- Capital reserve arising on the said amalgamation was to be taxed as income;
- Entire depreciation on the net block of assets transferred from LAC to TVS on amalgamation was disallowed;
- Denied the credit in the hands of TVS for Dividend Distribution Tax (DDT) paid by LAC on dividends declared after the appointed date.
Issues before the Tribunal
- Whether the composite scheme of arrangement can be regarded as amalgamation in the light of the fact that entire business of LAC was not transferred to TVS under the said scheme?
- Accordingly, whether the above-mentioned actions of the AO were correct?
Tax department’ contentions The tax department contented that:
- All the three companies belonged to the same group and hence the High Court was concerned with the interest of the shareholders of all the three companies and the scheme was sanctioned for limited purpose only.
- LAC had transferred a part of its assets on slump sale basis to SAC and had transferred only the remaining assets to TVS.
- No specific purpose for this composite arrangement was spelt out on enquiry and therefore the only purpose of the arrangement was to avoid tax.
- The order of the High Court u/s. 391 to 394 did not mention about amalgamation of the two companies it was not an amalgamation.
- The scheme of arrangement sanctioned by the High Court cannot be called as amalgamation under section 2(1B) of the Act;
Rejoinders by the taxpayer The taxpayer contented that:
- In terms of the scheme, all assets and liabilities of LAC remaining after slump sale to SAC along with the employees were transferred to TVS and the shareholders other than LAC were allotted shares and the shares held by TVS in LAC were cancelled.
- Simply because there is no mention of amalgamation (in the Order of the High Court u/s. 391 of the Companies Act), it cannot be held that the scheme of arrangement which aims to amalgamate was not amalgamation.
- The AO has never made a case for tax avoidance and at this stage of the proceedings a new case cannot be made.
- Dividend was declared by LAC after 2 April 2003, but prior to receipt of the order confirming amalgamation and LAC had paid DDT on the same. The distribution of dividend, to the extent received by TVS, could not be regarded as dividend since after amalgamation, LAC became part of TVS and TVS could not distribute dividend to itself. Hence, the DDT paid on the said amount should be allowed as credit in the hands of TVS.
Tribunal’s ruling
- There is no force in the argument of the tax department that since the scheme sanctioned under sections 391 to 394 of the Companies Act, 1956 which deal with arrangement and therefore strictly cannot be called amalgamation. Amalgamation is in fact dealt with by these sections of the Companies Act, 1956 only.
- From a plain reading of the provisions of section 2(1B) of the Act it becomes clear that when all assets and liabilities are taken over by the transferee company then such a process will be known as amalgamation.
- There is no finding by the tax department that some of the assets or liabilities were not taken over by TVS.
- There is no finding in the assessment order that the amalgamation was proposed for tax avoidance. Giving the decision of the Gujarat High Court in the case of Wood Polymer Ltd. [1977] 109 ITR 177 (Guj), where the High Court refused to sanction the Scheme of amalgamation as it was for avoidance of capital gains tax, it held that the High Court had sanctioned the Scheme, and therefore it cannot be argued that in the instant case the motive was to avoid tax.
- All assets and liabilities have been transferred by LAC which remained after hiving off the rubber and plastic divisions to SAC and the shares held by TVS in LAC were cancelled. Further, shares were issued to the remaining shareholders leading to a complete takeover of assets and liabilities of LAC, as sanctioned by the High Court and thus, it would amount to an amalgamation.
- Further, the capital reserve arose because of the acquisition of all assets and liabilities of LAC and hence cannot be taxed as deemed dividend in the hands of TVS.
- Depreciation to be allowed to TVS on the WDV of assets so acquired under the scheme, particularly in view of the fact, that profits earned by deploying such assets have been taxed in the hands of TVS.
- Distribution of dividend after the date of sanction of the said scheme could not be treated as income in the hands of TVS and hence, credit to be allowed for the proportionate tax paid as DDT by LAC, in the hands of TVS.
- Accordingly the appeal filed by tax department was dismissed.
