Jan 31, 2023

Whether Alleged Tax Benefit to Amalgamated Company Can Be Permissible Ground for Rejection of Scheme by NCLT?

As per the settled position of law, the National Company Law Tribunal (‘NCLT’ or ‘Tribunal’) can reject a scheme of arrangement only in cases where: (a) the scheme is proved to be a sham or colorable device undertaken with the sole objective of avoidance of tax; or (b) there is a violation of the fundamental provisions pertaining to amalgamation/ demerger under the Companies Act, 2013 or the Income Tax Act, 1961 (‘ IT Act’); or (c) the scheme is found to be contrary to public interest.

However, in the recent past there have been several instances wherein schemes of arrangement preferred before NCLT have been rejected owing to the objections raised by the Income Tax Department (‘ITD’). One of the primary objections raised by ITD is that the arrangement would lead to tax benefits / savings in the hands of the merged entity.

In a recent decision rendered by NCLT, Delhi Bench, the scheme of arrangement (‘Scheme’) filed by Minda TG Rubber Pvt. Ltd[1] (transferor company) was rejected on the ground that upon merger, the transferee entity would be entitled to claim benefit of the brought forward business losses and depreciation available with transferor company and would lead to loss of revenue to the ITD.

In our view, rejection of schemes merely because they result in an alleged tax benefit to the transferee company would not be the correct representation of the legal position. This issue was examined by the Gujarat High Court in the case of Vodafone Essar Gujarat Ltd. vs. DIT[2], wherein the High Court whilst allowing the scheme observed “It is, no doubt, true that in case the Scheme is sanctioned, it may result into tax avoidance on the part of the appellant, but it is required to be noted that even if the ultimate effect of the Scheme may result into some tax benefit or even if it is framed with an object of saving tax or it may result into tax avoidance, it cannot be said that the only object of the Scheme is tax avoidance.”

The decision of the Gujarat High Court was affirmed by the Apex Court[3]. The ratio laid down by the Gujarat High Court has been subsequently followed in various decisions[4], wherein the Courts have reiterated that “Where IT department opposed composite scheme of arrangement of petitioner companies on ground that scheme was a tool to avoid and evade taxes, NCLT as well as NCLAT having clarified that IT department was entitled to take out appropriate proceedings for recovery of any tax statutorily due from transferor or transferee company or any other person who was liable for payment of such tax due, impugned judgment and orders passed by NCLAT as well as NCLT approving scheme could not have been interfered with”.

Thus, de hors any allegation that the sole purpose of the amalgamation was to obtain a tax benefit and that the scheme was merely a device, the mere fact that the scheme would result in transfer and carry forward of tax losses and unabsorbed depreciation of the amalgamating company to the amalgamated company or would lead to tax benefit to the amalgamated company, should not be a ground for rejection of scheme by the NCLT. Lastly and most importantly, the sanction to a scheme by NCLT does not preclude or restrict the right of the ITD to examine the scheme in accordance with the provisions of the IT Act. The ITD has full powers to examine the compliance of the Scheme with the provisions of the IT Act during assessment proceedings. Therefore, any alleged non-compliance with certain provisions of the IT Act, should not act as a hurdle for companies seeking to restructure their business.


[1] Order dated 23.12.2022 in Company Petition No. (CAA)-111(ND)/ 2021 (NCLT, New Delhi).

[2] [2012] 24 taxmann.com 333 (Gujarat).

[3] [2015] 373 ITR 525 (SC).

[4] Joint Commissioner of Income Tax Vs. Reliance Jio Infocomm Ltd. & Ors. Company Appeal: Order dated 20.12.2019 in Company Appeal (AT) No. 113 of 2019 (NCLAT, New Delhi) affirmed in [2022] 145 taxmann.com 642 (SC); M/s. Pangenomics International Private Limited: Order dated 20.10.2022 in CP (CAA) 57/AHM/2021 In CA (CAA) 48/AHM/2021 (NCLT, Ahmedabad); Panasonic Life Solutions India Pvt. Ltd.: CP(CAA) No. 8/CHD/HRY/2021 (NCLT, Chandigarh).




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