The AO says our amalgamation was a colourable device to move shares tax-free and has taxed their market value under s.56(1). Can he disregard a scheme the High Court sanctioned?
Not on these facts. The Mumbai Tribunal reversed the finding that the scheme was a tool for evasion, holding that the High Court had approved the scheme and its terms, the Department had raised no objection at that time before the High Court, and it could not now claim the scheme was a colourable device. The exemption in s.47(vi) was therefore available and the addition of Rs.1,466.60 crore under s.56(1) went.
Decided by the ITAT (Shri Aby T. Varkey, Judicial Member and Shri Gagan Goyal, Accountant Member) on 2023-03-06, reported as I.T.A. Nos. 4312/Mum/2017 and 4478/Mum/2017 with Cross Objection No. 302/Mum/2018, ITAT 'C' Bench Mumbai, AY 2012-13; heard 12.12.2022. It bears on section 47(vi), section 2(1B), section 56(1), section 68, section 14A of the Income Tax Act 1961, in Capital Gains, Capital Gains Exemptions, Cash Credits & Unexplained Money and How Tax Law Is Read matters.
This is the taxpayer-side authority on going behind a sanctioned scheme, and it should be read together with Reckitt Benckiser Healthcare, which points the other way on the s.2(19AA) conditions. The two are reconcilable: testing whether the statutory conditions of s.2(1B) or s.2(19AA) are met is one exercise, and branding the sanctioned scheme itself a sham is another. Two further points here carry practical weight. First, the Tribunal held that the valuation report and the exchange ratio are irrelevant to whether the conditions of s.2(1B) read with s.47(vi) are satisfied, and could at most bear on the position of the shareholders of the transferor and transferee, who are the only ones who gain or lose by the ratio. It also rejected the Revenue's reliance on Rule 11UB, which was inserted with effect from 28.06.2016 and is in any event not relevant to a s.2(1B) amalgamation. Second, and usefully, the Tribunal held it was not open to the Revenue to cherry-pick: having accepted the amalgamation in respect of other net assets of Rs.96,798.49 lakh received under the same scheme, it could not disregard it only for the ZEEL shares.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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Under a scheme of amalgamation sanctioned by the High Court, Essel Business Process Ltd amalgamated with the assessee, Cyquator Media Services Pvt. Ltd. Among the assets that vested in the assessee were 13,08,88,822 equity shares of Zee Entertainment Enterprises Ltd, together with other net assets aggregating Rs.96,798.49 lakh. The Assessing Officer took the view that the transfer of the ZEEL shares from Essel Business Process Ltd to the assessee had been done in the garb of amalgamation with the sole intent of avoiding tax, that the scheme was a colourable device carried out with no business intent, and that the transfer at nil consideration should be taxed. He disregarded the subsidiary-holding relationship, denied the benefit of s.47(vi), held there was a transfer generating income in the assessee's hands, and brought the market value of the ZEEL shares as appearing in the assessee's books, Rs.1,466,60,00,000, to tax as income from other sources under s.56(1). The department had been put on notice of the scheme and its terms by the assessee's letter dated 02.09.2011, filed before the Regional Director, Department of Company Affairs, with a copy to the Income-tax Department. The CIT(A) deleted the addition but made observations disregarding the scheme and describing it as a colourable device; the Revenue appealed against the deletion and the assessee cross-objected against those observations. The Revenue also relied on the valuation report and the exchange ratio, and on Rule 11UB, to support the addition.
The Tribunal reversed the orders of the lower authorities in so far as they disregarded the scheme of amalgamation and held it to be a tool for evasion of tax. The High Court had approved the scheme of amalgamation and its terms; the Department had not raised any objection at that time before the High Court; and the Revenue could not now claim that the scheme was a colourable device. There was accordingly no reason for the lower authorities to deny the benefit of the exemption in s.47(vi). The valuation report and the exchange ratio were of no relevance to the conditions laid down in s.2(1B) read with s.47(vi), and could at most bear on the position of the shareholders of the transferor and transferee companies, who alone gained or lost by the ratio; the reliance on Rule 11UB was misplaced, that Rule being neither applicable nor relevant to a s.2(1B) amalgamation and having been inserted only with effect from 28.06.2016. Nor could the Revenue cherry-pick: having not disregarded the scheme or denied s.47(vi) in respect of the other net assets of Rs.96,798.49 lakh received under it, it was incorrect to single out the ZEEL shares as a taxable event.
The Tribunal's route was procedural before it was substantive. The scheme had been placed before the sanctioning court, the statutory authorities and the Income-tax Department; none objected; and the High Court's amalgamation order is a judicial order with statutory force, so the department, having had sufficient time to object before the High Court, could not afterwards say the amalgamation had been used as a tool for tax evasion or as a colourable device. Having removed the colourable-device characterisation, the Tribunal returned to the statutory conditions and found nothing in s.2(1B) read with s.47(vi) that made the valuation report or the exchange ratio relevant to the tax consequence in the hands of the resulting company: those are matters between the shareholders of the two companies. It reproduced s.2(1B) with its three conditions, including the requirement that shareholders holding not less than three-fourths in value of the shares in the amalgamating company become shareholders of the amalgamated company. It also relied on the proposition, drawn from the authorities it cited, that even if a scheme results in some tax benefit or is framed with an object of saving tax, it cannot be said that its only object is tax avoidance. Finally it applied a consistency point: the same scheme could not be accepted for Rs.96,798.49 lakh of net assets and disregarded for the ZEEL shares.
In view of the above decisions (supra), we therefore reverse the order of the lower authorities disregarding the scheme of amalgamation and holding it to be a tool for evasion of tax. We note that, the Hon'ble High Court had approved the scheme of amalgamation and the terms contained therein. The Department did not raise any objection at that time before the Hon'ble High Court and therefore for the reasons already discussed earlier, the Revenue cannot now claim that the scheme was a 'colourable device'.
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Handle my notice → Ask a CA on WhatsAppNot on these facts. The Mumbai Tribunal reversed the finding that the scheme was a tool for evasion, holding that the High Court had approved the scheme and its terms, the Department had raised no objection at that time before the High Court, and it could not now claim the scheme was a colourable device. The exemption in s.47(vi) was therefore available and the addition of Rs.1,466.60 crore under s.56(1) went. This was decided by the ITAT (Shri Aby T. Varkey, Judicial Member and Shri Gagan Goyal, Accountant Member) and bears on section 47(vi), section 2(1B), section 56(1), section 68, section 14A of the Income Tax Act 1961. It is reported as I.T.A. Nos. 4312/Mum/2017 and 4478/Mum/2017 with Cross Objection No. 302/Mum/2018, ITAT 'C' Bench Mumbai, AY 2012-13; heard 12.12.2022. This is the taxpayer-side authority on going behind a sanctioned scheme, and it should be read together with Reckitt Benckiser Healthcare, which points the other way on the s.2(19AA) conditions. The two are reconcilable: testing whether the statutory conditions of s.2(1B) or s.2(19AA) are met is one exercise, and branding the sanctioned scheme itself a sham is another. Two further points here carry practical weight. First, the Tribunal held that the valuation report and the exchange ratio are irrelevant to whether the conditions of s.2(1B) read with s.47(vi) are satisfied, and could at most bear on the position of the shareholders of the transferor and transferee, who are the only ones who gain or lose by the ratio. It also rejected the Revenue's reliance on Rule 11UB, which was inserted with effect from 28.06.2016 and is in any event not relevant to a s.2(1B) amalgamation. Second, and usefully, the Tribunal held it was not open to the Revenue to cherry-pick: having accepted the amalgamation in respect of other net assets of Rs.96,798.49 lakh received under the same scheme, it could not disregard it only for the ZEEL shares. If it applies to you, the first step is this: Put the department on notice of the scheme before sanction and keep proof — the letter to the Regional Director and the copy sent to the Income-tax Department were decisive here.
Under a scheme of amalgamation sanctioned by the High Court, Essel Business Process Ltd amalgamated with the assessee, Cyquator Media Services Pvt. Ltd. Among the assets that vested in the assessee were 13,08,88,822 equity shares of Zee Entertainment Enterprises Ltd, together with other net assets aggregating Rs.96,798.49 lakh. The Assessing Officer took the view that the transfer of the ZEEL shares from Essel Business Process Ltd to the assessee had been done in the garb of amalgamation with the sole intent of avoiding tax, that the scheme was a colourable device carried out with no business intent, and that the transfer at nil consideration should be taxed. He disregarded the subsidiary-holding relationship, denied the benefit of s.47(vi), held there was a transfer generating income in the assessee's hands, and brought the market value of the ZEEL shares as appearing in the assessee's books, Rs.1,466,60,00,000, to tax as income from other sources under s.56(1). The department had been put on notice of the scheme and its terms by the assessee's letter dated 02.09.2011, filed before the Regional Director, Department of Company Affairs, with a copy to the Income-tax Department. The CIT(A) deleted the addition but made observations disregarding the scheme and describing it as a colourable device; the Revenue appealed against the deletion and the assessee cross-objected against those observations. The Revenue also relied on the valuation report and the exchange ratio, and on Rule 11UB, to support the addition. The matter was decided on 2023-03-06 by the ITAT (Shri Aby T. Varkey, Judicial Member and Shri Gagan Goyal, Accountant Member). On those facts the ITAT held as follows. The Tribunal reversed the orders of the lower authorities in so far as they disregarded the scheme of amalgamation and held it to be a tool for evasion of tax. The High Court had approved the scheme of amalgamation and its terms; the Department had not raised any objection at that time before the High Court; and the Revenue could not now claim that the scheme was a colourable device. There was accordingly no reason for the lower authorities to deny the benefit of the exemption in s.47(vi). The valuation report and the exchange ratio were of no relevance to the conditions laid down in s.2(1B) read with s.47(vi), and could at most bear on the position of the shareholders of the transferor and transferee companies, who alone gained or lost by the ratio; the reliance on Rule 11UB was misplaced, that Rule being neither applicable nor relevant to a s.2(1B) amalgamation and having been inserted only with effect from 28.06.2016. Nor could the Revenue cherry-pick: having not disregarded the scheme or denied s.47(vi) in respect of the other net assets of Rs.96,798.49 lakh received under it, it was incorrect to single out the ZEEL shares as a taxable event.
The Tribunal's route was procedural before it was substantive. The scheme had been placed before the sanctioning court, the statutory authorities and the Income-tax Department; none objected; and the High Court's amalgamation order is a judicial order with statutory force, so the department, having had sufficient time to object before the High Court, could not afterwards say the amalgamation had been used as a tool for tax evasion or as a colourable device. Having removed the colourable-device characterisation, the Tribunal returned to the statutory conditions and found nothing in s.2(1B) read with s.47(vi) that made the valuation report or the exchange ratio relevant to the tax consequence in the hands of the resulting company: those are matters between the shareholders of the two companies. It reproduced s.2(1B) with its three conditions, including the requirement that shareholders holding not less than three-fourths in value of the shares in the amalgamating company become shareholders of the amalgamated company. It also relied on the proposition, drawn from the authorities it cited, that even if a scheme results in some tax benefit or is framed with an object of saving tax, it cannot be said that its only object is tax avoidance. Finally it applied a consistency point: the same scheme could not be accepted for Rs.96,798.49 lakh of net assets and disregarded for the ZEEL shares. In the words reproduced by the source cited on this page: "In view of the above decisions (supra), we therefore reverse the order of the lower authorities disregarding the scheme of amalgamation and holding it to be a tool for evasion of tax. We note that, the Hon'ble High Court had approved the scheme of amalgamation and the terms contained therein. The Department did not raise any objection at that time before the Hon'ble High Court and therefore for the reasons already discussed earlier, the Revenue cannot now claim that the scheme was a 'colourable device'."
It was decided by the ITAT on 2023-03-06 and is reported as I.T.A. Nos. 4312/Mum/2017 and 4478/Mum/2017 with Cross Objection No. 302/Mum/2018, ITAT 'C' Bench Mumbai, AY 2012-13; heard 12.12.2022. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 47(vi), section 2(1B), section 56(1), section 68, section 14A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Tribunal reversed the orders of the lower authorities in so far as they disregarded the scheme of amalgamation and held it to be a tool for evasion of tax. The High Court had approved the scheme of amalgamation and its terms; the Department had not raised any objection at that time before the High Court; and the Revenue could not now claim that the scheme was a colourable device. There was accordingly no reason for the lower authorities to deny the benefit of the exemption in s.47(vi). The valuation report and the exchange ratio were of no relevance to the conditions laid down in s.2(1B) read with s.47(vi), and could at most bear on the position of the shareholders of the transferor and transferee companies, who alone gained or lost by the ratio; the reliance on Rule 11UB was misplaced, that Rule being neither applicable nor relevant to a s.2(1B) amalgamation and having been inserted only with effect from 28.06.2016. Nor could the Revenue cherry-pick: having not disregarded the scheme or denied s.47(vi) in respect of the other net assets of Rs.96,798.49 lakh received under it, it was incorrect to single out the ZEEL shares as a taxable event. It arises in Capital Gains, Capital Gains Exemptions, Cash Credits & Unexplained Money and How Tax Law Is Read matters, on section 47(vi), section 2(1B), section 56(1), section 68, section 14A of the Income Tax Act 1961, and was decided by Shri Aby T. Varkey, Judicial Member and Shri Gagan Goyal, Accountant Member. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the AO calls the scheme colourable, ask on the record whether the department objected before the sanctioning court, and pin the answer down. Test compliance with s.2(1B) limb by limb — all property and all liabilities of the amalgamating company becoming those of the amalgamated company, and shareholders holding not less than three-fourths in value becoming shareholders of the amalgamated company. That fraction was NINE-TENTHS before the Finance Act 1999; say which regime your year falls in. Resist attempts to import valuation into the s.2(1B) conditions: the exchange ratio is a shareholder question, not a condition of the definition. Point to every other asset received under the same scheme that the department has accepted, and press the cherry-picking objection.
Validity check could not be completed. Validity check could not be completed. I located no appeal from this order in the Bombay High Court and did not search that court's records systematically. The reader should note a competing line within the Tribunal: in Reckitt Benckiser Healthcare India Pvt Ltd v. DCIT (ITAT Ahmedabad, 18.02.2025) the Tribunal held that the revenue authorities' obligation to examine taxability under ss.2(22) and 2(19AA) is not pre-empted by the High Court's sanction of the scheme, and relied on the Bombay High Court's own clarification in the Thomas Cook Insurance Services scheme petition that sanction does not bind the Income-tax Department. The two decisions are reconcilable — testing the statutory conditions is not the same as re-characterising the scheme as a sham — but they pull in opposite directions on how much weight the sanction carries, and this label vocabulary cannot express that. Note also that s.2(1B) requires shareholders holding not less than three-fourths in value; the Finance Act 1999 reduced that fraction from nine-tenths, so any authority on the fraction for a year before AY 2000-01 must be read against the earlier text. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
There is a year discrepancy inside the order: the appeals are for AY 2012-13 on the cause title, but the paragraph rejecting the Revenue's reliance on Rule 11UB says the Rule 'was thus not applicable in AY 2011-12'. The assessment year on the cause title is 2012-13; the reference to 2011-12 appears to be a slip. I retrieved the header, the grounds, and paragraphs 11, 12, 14, 27, 30 and the paragraph on the valuation report and exchange ratio, all verbatim, together with the disposal at paragraphs 59 to 61. The disposal is itself internally confused: paragraph 60 describes BOTH ITA 4312/Mum/2017 and ITA 4478/Mum/2017 as "the appeals preferred by the Revenue" and then, in the same paragraph, describes ITA 4478/Mum/2017 as "the assessee's cross-appeal"; and it records the appeals as "partly allowed to the extent of dismissing Ground Nos. 5 to 8 and partly dismissed to the extent of allowing Ground Nos. 1 to 4", which is self-contradictory on its face. What is clear, and is what this entry rests on, is that Grounds 1 to 4 — which carry the s.47(vi) and s.56(1) issue — went the assessee's way, and that the cross-objection was allowed. The operative reasoning is paragraph 27, which is reproduced verbatim in the key quote. The order also reproduces s.2(1B) in its post-1999 form with the three-fourths fraction. Section 68 and s.14A issues in the same order are not covered by this entry. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Tribunal reversed the orders of the lower authorities in so far as they disregarded the scheme of amalgamation and held it to be a tool for evasion of tax. The High Court had approved the scheme of amalgamation and its terms; the Department had not raised any objection at that time before the High Court; and the Revenue could not now claim that the scheme was a colourable device. There was accordingly no reason for the lower authorities to deny the benefit of the exemption in s.47(vi). The valuation report and the exchange ratio were of no relevance to the conditions laid down in s.2(1B) read with s.47(vi), and could at most bear on the position of the shareholders of the transferor and transferee companies, who alone gained or lost by the ratio; the reliance on Rule 11UB was misplaced, that Rule being neither applicable nor relevant to a s.2(1B) amalgamation and having been inserted only with effect from 28.06.2016. Nor could the Revenue cherry-pick: having not disregarded the scheme or denied s.47(vi) in respect of the other net assets of Rs.96,798.49 lakh received under it, it was incorrect to single out the ZEEL shares as a taxable event.
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