The Income Tax Appellate Tribunal (ITAT) has quashed a Rs 5,872 crore demand for dividend distribution tax (DDT) on Grasim Industries, a ruling that reinforced tax neutrality of NCLT-approved corporate restructuring.
The Mumbai bench of the ITAT, in its order, held that the demerger of Aditya Birla group’s financial services business from AB Nuvo in 2016 as part of major restructuring was a “qualifying demerger” under the provisions of the Income Tax Act, 1961 and hence the provisions of “deemed dividend” are not applicable.
“As per the said order of the Tribunal, the demand of dividend distribution tax is not sustainable and hence quashed,” Grasim Industries said in a BSE filing.
The company had, in March 2019, received an order by the deputy commissioner of income tax raising a demand of Rs 5,872.13 crore on account of DDT, including interest.
“This ruling assumes great significance, since it clears the air on tax neutrality of a corporate restructuring scheme and is likely to have far-reaching impact in dissuading appeals from the tax department on duly approved scheme of corporate restructuring,” Amit Agarwal, Partner- M&A, Nangia & Co, said. Globally, group corporate restructuring, through a merger or demerger have enjoyed tax neutrality owing to the principles of mutuality, he added.
In its order, the ITAT said that in the scheme of demerger, there is no applicability of provisions of Section 2 (22) (a) of the Income Tax Act. “Hence the orders of the lower authorities holding that in the present scheme of demerger, assessee company has distributed its assets to its shareholders are not sustainable and hence quashed,” it further held.
“As we have already held that, there is no deemed dividend chargeable to tax in the hands of the shareholders of the assessee company pursuant to the scheme of demerger, where the shares have been issued by Aditya Birla Capital (ABCL) to the shareholders of the Grasim Industries, consequent issues of any computation of such deemed dividend, payment of dividend distribution tax and interest thereon does not arise,” the tribunal held.
The ITAT further upheld the revenue department’s powers to cast doubt on NCLT-approved scheme of corporate restructuring.
Post 2017, the tax department can challenge a scheme of corporate restructuring by applying general anti-avoidance rules (GAAR) provisions. However, the CBDT FAQ on GAAR, clearly provides that where the NCLT has explicitly and adequately considered the tax implication, GAAR ought not to be applied to a corporate restructuring scheme.
The restructuring was in pursuance of the merger of AB Nuvo with Grasim. After the merger, the financial services business was demerged to form a separate company. The demerger was approved by the National Company Law Tribunal, Ahmedabad in 2017.
The tax department had held that as the demerger of the demerged undertaking was not in compliance with Section 2(19 AA) of the Act, the value of shares allotted by ABCL to the shareholders of the company, in consideration of the transfer and vesting of the demerged undertaking into ABCL, amounted to “dividend,” within the meaning of the Act.