Tax Issues in Business Reorganization: Analysis & Insights

The term business reorganization includes amalgamation, merger, demerger, slump sale, internal reconstruction, insolvency and many others. When a business reorganization takes place a transaction advisory services is most sought after for a entity from a Chartered Accountant(‘’CA”). Here the role of CA comes handy whereby for a transaction to take place all aspects are to be taken which includes the following

• Whether the transaction is sham or it has commercial substance. Can General avoidance rule(‘’GAAR”) be invoked by department.
• What kind of business reorganization can be possible.
• Whether due diligence need to be carried by the target company or whether valuation is to be carried by registered valuer.
• How can Company go through scheme of amalgamation as laid under Companies Act 2013(‘’CA 2013’’).
• Whether a statutory auditor certificate is required as envisaged under CA 2013.
• What GST implication can be triggered with respect to statutory dues.
• How accounting will be impacted with respect to closure of books for amalgamating company. How the role of Ind AS103 can be relevant.

Income tax analysis

Based on multiple representations received   from stakeholder and various litigation issues Finance Act 2022 has addressed  as to how the tax treatment has to be done

As laid under Income-tax Act 1961(‘’Act’’) and read with Rule 12 AD of Income tax Rules where a business reorganization take place the successor entity shall file ITR A within six months from end of month in which business reorganization take place.

Example: PVR INOX Ltd (successor entity) is formed as result of merger between PVR cinemas and INOX Movies. Here this is a recent merger which took place in 2022 let us analyse the Income tax scenario with this illustration. Assume for simplicity the merger took place on 1^st April 2022. Therefore the successor entity need to file ITRA within September 30,2022. Through this ITR all details regarding to merger have been disclosed which completes transaction. But still as the saying goes Litigation cannot be erased but only minimized here also the Assessing officer can call for details relating to scheme of merger and other details as may be required. A pertaining issue arises can notice be issued for an entity which is nonexistent(amalgamating) entity as for this entity all statutory dues are transferred. Let me analyse recent case ruling in simplified form for better clarity.

1) PCIT vs Sony Mobile Communication India Private Ltd [2023]ITA no 115/2019(Delhi High Court)

• Sony Ericsson Mobile Communications India Private Ltd (name changed to Sony Mobile Communications India Private Ltd on April18,2012) was merged with Sony India Private Ltd April 1, 2013 based on sanction order July 23,2013 and the scheme of merger along with a letter intimating the merger was furnished to Revenue on Dec 06, 2013.
• Notice being issued to a non existing entity (Sony Ericsson Mobile Communication)Assessment order framed in the name of non existent entity is a mistake which can be corrected by taking recourse to Section 292B.

2) ACIT vs Vahanvati Consultants Private Limited(2022) SLP(C) 4094-(Supreme Court)

• ECD Electrons and Electrolysis Pvt. Ltd(non existent entity) was merged with Lenient Finvest Pvt. Ltd. as per Court’s order dated Nov 7, 2014 which later merged into Assessee-Company i.e. Vahanvati Consultants Private Ltd
• Notice issued to a non existent entity is a mistake and void by law.

3) Pr. CIT vs Maruti Suzuki India Ltd. (2019) 416 ITR 613(SC)

• Can notice under 143(1),143(2) be issued to a non existent entity (amalgamating company after approval of the scheme by high court and intimation of the same to AO a defect not curable u/s 292BB of the act.
• Notice issued in the name of amalgamating company despite of the fact that amalgamating company had informed the same to Assessing officer is void and participation in the proceeding by amalgamating company would not cure this illegality.

All above three case laws gives a common conclusion that notice cannot be issued to a non existent entity .

4) CIT vs M/s Mahagun Realtors(P) (2022) SLP(C)no 4063 of 2020(SC)

• Mahagun Realtors Private Limited (‘MRPL’) was the transferor company which amalgamated with Mahagun India Private Limited (‘MIPL’) by virtue of a High Court’s order MRPL’s liabilities devolved on MIPL. In March 2007, survey proceedings were conducted in respect of MRPL during which discrepancies in its books of account were noticed. Further search and seizure operations were carried out in the Mahagun group of companies, including at MRPL and MIPL.
• The issues before the Supreme Court was can notice be issued to a non existent entity MRPL .
• SC distinguishes the coordinate bench ruling in Maruti Suzuki by observing that in the present case too the assessment order was passed in amalgamating company’s name (MRPL, represented by MIPL) but the Revenue was not intimated about the amalgamation; SC observes that MRPL filed the ITR with its PAN for AY 2006-07 pursuant to notice under Section 153A which was issued after amalgamation (into MIPL) became effective wherein in the ‘Business Reorganization’ column, MRPL mentioned ‘not applicable’ in amalgamation section.

Conclusion is that despite the entity losses its corporate veil identity still notice is valid as the same was not being disclosed properly while filing ITR.

5) CIT vs Dadha Pharma Pvt ltd -Madras High court

There was amalgamation of Tamil Nadu Dadha Pharmaceuticals(TNDPL) with Sun pharma Industries ltd(SPIL). The issue under consideration was whether the tribunal was right in holding that since the amalgamation is a reality as to amount received by the assessee from amalgamated company can be subject to tax even before amalgamation. It was held by high court that the transaction pertaining to sale of shares to fall outside the preview of Section 47. It was held by high court that vehicle of amalgamation was used as smoke screen and  the schemes of Amalgamation being sanctioned by two HC with regard to Companies Act 2013 TNDPL stood merged with SPIL and ceased to exist. The HCs were not made aware of these underlying transactions prior to the petitions filed by these two companies.

Conclusion

In navigating the complexities of business reorganization, it is crucial to analyze the substance rather than just the form of the transaction. Seeking expert advice, complying with tax regulations, and ensuring transparent disclosure can minimize legal issues. Recent case rulings highlight the significance of proper disclosure in income tax matters related to business reorganization. Remember, while legal challenges may arise, thorough preparation and compliance are key to a successful merger or acquisition.