The Income Tax Appellate Tribunal has quashed the Rs 5,872-crore tax demand on Grasim Industries Ltd. over the restructuring of its businesses.
The income tax authorities have erred in classifying the demerger of financial services business to Aditya Birla Capital Ltd. as a mere transfer of assets and liabilities, the ITAT said in its order.
In 2017, the Ahmedabad bench of NCLT approved the merger of Aditya Birla Nuvo Ltd. with Grasim Industries. And in the second step, demerger of financial services business, housed under Nuvo, to Aditya Birla Capital. The second part of the transaction came under scrutiny.
According to the 2019 demand by the tax authorities, the demerger of the company failed to comply with the provisions of the Income Tax Act that require the undertaking to be transferred as a going concern. It was a mere transfer of assets and liabilities and must be subjected to dividend distribution tax, the authorities had said.
Also, the value of shares allotted by Aditya Birla Capital to shareholders of Grasim in exchange of the financial services business should be considered as dividend and must be taxed as such, the tax authorities had said.
The ITAT order, however, said that Aditya Birla Nuvo did carry out financial services business prior to implementation of the scheme and the new entity was capable of functioning as a “going concern”.
The appellate tribunal, finding merit in Grasim’s appeal, held that the demerged entity is an undertaking having separate business activity in itself. Merely because the return of income has not been filed separately does not mean that Aditya Birla Nuvo did not have a financial service business, it said. The magnitude of financial assets held by the merged entity is testimony to the fact, the tribunal held. There is no dispute that assets and liabilities of the company have been transferred to the demerged entity, it said.
The allegations of the authorities that dividend distribution tax must be levied on the demerged entity also do not hold as the exception to income tax rules clearly bars any distribution of shares pursuant to demerger from the scope of such tax.