Our demerger was sanctioned by the High Court. The AO now says it is not a demerger under s.2(19AA) and has taxed capital gains and dividend distribution tax. Can he go behind the sanctioned scheme?
Yes, on the tax conditions. The Tribunal held that the legal obligation of the revenue authorities to examine taxability under ss.2(22) and 2(19AA) is not pre-empted by the High Court's sanction of the scheme, and that the assessee had failed to comply with s.2(19AA)(ii) and (iii). A segment whose liabilities were knocked off against its assets, so that only assets and nil liabilities passed to the resulting company, does not satisfy the requirement that all liabilities relatable to the undertaking be transferred.
Decided by the ITAT (Dr. B.R.R. Kumar, Vice-President and Ms. Suchitra Kamble, Judicial Member) on 2025-02-18, reported as I.T.A. No. 1184/Ahd/2018 and I.T.A. No. 1225/Ahd/2018, ITAT 'B' Bench Ahmedabad, AY 2011-12; heard 20.11.2024 and 17.12.2024. It bears on section 2(19AA), section 2(22), section 2(22)(a), section 45, section 47(vib), section 47(vid), section 14A, section 80-IC, section 115JB of the Income Tax Act 1961, in Capital Gains, Capital Gains Exemptions and How Tax Law Is Read matters.
This is the answer to the most dangerous assumption in restructuring practice — that court or NCLT sanction settles the tax character of the scheme. It does not. The Tribunal expressly reconciled the two positions: the scheme once approved cannot be re-visited by a statutory authority, but the Income-tax Act prescribes its own conditions for the benefit, and the mere fact of sanction does not ipso facto entitle an assessee to claim it. The Tribunal quoted the Bombay High Court's own clarification in the Thomas Cook Insurance Services scheme petition that sanction does not in any way bind the Income-tax Department to take a particular view of the tax implications. The specific trap here is a 'treasury' or investment segment carved out as an undertaking: the Assessing Officer's case was that it was never separately demarcated, that its investments were capital assets rather than business assets, and that it was not transferred as a going concern. There is a competing line, and the reader must know it: the Mumbai Tribunal in Cyquator Media Services held the Revenue could not brand a sanctioned amalgamation a colourable device having raised no objection before the High Court. The two are reconcilable — going behind the scheme to test the statutory conditions is one thing, re-characterising the scheme as a sham is another — but the tension is real.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee, engaged in manufacturing and marketing pharmaceutical and cosmetic products, filed its return for AY 2011-12 on 18.11.2011 declaring total income of Rs.27,56,70,614 and book profit under s.115JB of Rs.1,28,80,47,039. It claimed to have transferred its 'treasury unit' to M/s Sterling Addlife India Ltd under an order of the Gujarat High Court in Company Petition No. 88 of 2010, in response to which Sterling issued 2,68,01,557 of its shares to the assessee's shareholders in the ratio of 2,961 shares of Sterling for every 1,000 shares held in the assessee. The Assessing Officer issued a show cause notice dated 05.03.2015 and held that the treasury segment had never been clearly demarcated from the assessee's assets as a whole, that all assets and liabilities of the segment had not been transferred, that it had not been transferred as a going concern, and that this violated s.2(19AA)(i) and (ii); shares in Blue Information Ltd, Trent Ltd, IDBI Ltd and Shivalik Waste Management Ltd were not reflected as assets of the undertaking in the trial balance, and there was a mismatch in mutual fund investments. He completed the assessment on 30.03.2015 at total business income of Rs.84,94,28,649, adding Rs.13,19,12,485 as capital gains and Rs.129,12,24,408 to book profits under s.115JB. The assessee's case was that all the treasury undertaking's properties had passed at book value, that the segment had no liabilities in its trial balance on the date of demerger so the condition stood fulfilled, that the investment in Shivalik had been transferred inadvertently and bought back in AY 2012-13, and that the transfer was on a going concern basis, so that s.47(vib) applied. The CIT(A) confirmed the Assessing Officer.
Grounds 1 and 2 of the assessee's appeal — the levy of capital gains under s.45 on the footing that the demerger of the treasury undertaking was a non-qualifying demerger, and the levy of dividend distribution tax — were dismissed and the CIT(A)'s order on those grounds was affirmed. Reading s.2(19AA)(ii), which mandates that all the liabilities relatable to the undertaking be transferred, together with the explanation that existing liabilities of Rs.37.15 crore had been knocked off against the transfer of assets of Rs.39.23 crore, the Tribunal held that this was against s.2(19AA)(ii): the assessee had transferred only the assets while keeping the liabilities with itself, and the explanation that the liabilities belonged to other segments while the assets belonged to the treasury segment could not be accepted. The revenue authorities had therefore rightly treated the demerger as a transfer of capital assets. There was no conflict between the High Court's order and the revenue authorities' orders, because the legal obligation of the revenue authorities to examine taxability under ss.2(22) and 2(19AA) cannot be treated as pre-empted by the High Court. The assessee had failed to comply with s.2(19AA)(ii) and (iii). On other grounds the s.14A interest disallowance of Rs.7,74,777 was deleted and the Revenue's grounds on product registration expenditure, the s.80-IC quantum and scrap sale income were dismissed.
The Tribunal proceeded on the statutory conditions rather than on the sanction. It accepted that a scheme of demerger once approved by the jurisdictional High Court cannot be re-visited by a statutory authority, but held that the Income-tax Act prescribes the conditions on which the benefits of a demerger are accorded, so that the mere fact of sanction does not ipso facto entitle an assessee to claim the benefit; the Income-tax Act operates in its own arena in conjunction with the order of the High Court, and a harmonious interpretation of corporate law and tax law is required. It set out how ss.47(vib) and 47(vid) exempt the transfer by the demerged company and the issue of shares by the resulting company, but only where the s.2(19AA) conditions are met. On the facts, the decisive finding was on liabilities: the netting of Rs.37.15 crore of liabilities against Rs.39.23 crore of assets meant only assets moved, which is against s.2(19AA)(ii). The Tribunal recorded the Assessing Officer's and CIT(A)'s reasoning that the treasury segment's investments had always been treated by the assessee as capital assets and never as stock-in-trade or business assets, that no income from the financial or treasury activity had been shown as business income, that the assessee continued to invest in mutual funds after the demerger, and that the Bombay High Court in the Thomas Cook Insurance Services scheme petition (Company Scheme Petition No. 99 of 2015, order dated 10.09.2015) had clarified that sanctioning a scheme does not bind the Income-tax Department to take any particular view of the tax implications.
Thus, it can be found that the assessee has only transferred the assets while keeping the liabilities with them.
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Handle my notice → Ask a CA on WhatsAppYes, on the tax conditions. The Tribunal held that the legal obligation of the revenue authorities to examine taxability under ss.2(22) and 2(19AA) is not pre-empted by the High Court's sanction of the scheme, and that the assessee had failed to comply with s.2(19AA)(ii) and (iii). A segment whose liabilities were knocked off against its assets, so that only assets and nil liabilities passed to the resulting company, does not satisfy the requirement that all liabilities relatable to the undertaking be transferred. This was decided by the ITAT (Dr. B.R.R. Kumar, Vice-President and Ms. Suchitra Kamble, Judicial Member) and bears on section 2(19AA), section 2(22), section 2(22)(a), section 45, section 47(vib), section 47(vid), section 14A, section 80-IC, section 115JB of the Income Tax Act 1961. It is reported as I.T.A. No. 1184/Ahd/2018 and I.T.A. No. 1225/Ahd/2018, ITAT 'B' Bench Ahmedabad, AY 2011-12; heard 20.11.2024 and 17.12.2024. This is the answer to the most dangerous assumption in restructuring practice — that court or NCLT sanction settles the tax character of the scheme. It does not. The Tribunal expressly reconciled the two positions: the scheme once approved cannot be re-visited by a statutory authority, but the Income-tax Act prescribes its own conditions for the benefit, and the mere fact of sanction does not ipso facto entitle an assessee to claim it. The Tribunal quoted the Bombay High Court's own clarification in the Thomas Cook Insurance Services scheme petition that sanction does not in any way bind the Income-tax Department to take a particular view of the tax implications. The specific trap here is a 'treasury' or investment segment carved out as an undertaking: the Assessing Officer's case was that it was never separately demarcated, that its investments were capital assets rather than business assets, and that it was not transferred as a going concern. There is a competing line, and the reader must know it: the Mumbai Tribunal in Cyquator Media Services held the Revenue could not brand a sanctioned amalgamation a colourable device having raised no objection before the High Court. The two are reconcilable — going behind the scheme to test the statutory conditions is one thing, re-characterising the scheme as a sham is another — but the tension is real. If it applies to you, the first step is this: Before the scheme is filed, test each limb of s.2(19AA) separately: all property of the undertaking passing, ALL liabilities relatable to the undertaking passing, transfer at book values, proportionate issue of shares, and transfer on a going concern basis.
The assessee, engaged in manufacturing and marketing pharmaceutical and cosmetic products, filed its return for AY 2011-12 on 18.11.2011 declaring total income of Rs.27,56,70,614 and book profit under s.115JB of Rs.1,28,80,47,039. It claimed to have transferred its 'treasury unit' to M/s Sterling Addlife India Ltd under an order of the Gujarat High Court in Company Petition No. 88 of 2010, in response to which Sterling issued 2,68,01,557 of its shares to the assessee's shareholders in the ratio of 2,961 shares of Sterling for every 1,000 shares held in the assessee. The Assessing Officer issued a show cause notice dated 05.03.2015 and held that the treasury segment had never been clearly demarcated from the assessee's assets as a whole, that all assets and liabilities of the segment had not been transferred, that it had not been transferred as a going concern, and that this violated s.2(19AA)(i) and (ii); shares in Blue Information Ltd, Trent Ltd, IDBI Ltd and Shivalik Waste Management Ltd were not reflected as assets of the undertaking in the trial balance, and there was a mismatch in mutual fund investments. He completed the assessment on 30.03.2015 at total business income of Rs.84,94,28,649, adding Rs.13,19,12,485 as capital gains and Rs.129,12,24,408 to book profits under s.115JB. The assessee's case was that all the treasury undertaking's properties had passed at book value, that the segment had no liabilities in its trial balance on the date of demerger so the condition stood fulfilled, that the investment in Shivalik had been transferred inadvertently and bought back in AY 2012-13, and that the transfer was on a going concern basis, so that s.47(vib) applied. The CIT(A) confirmed the Assessing Officer. The matter was decided on 2025-02-18 by the ITAT (Dr. B.R.R. Kumar, Vice-President and Ms. Suchitra Kamble, Judicial Member). On those facts the ITAT held as follows. Grounds 1 and 2 of the assessee's appeal — the levy of capital gains under s.45 on the footing that the demerger of the treasury undertaking was a non-qualifying demerger, and the levy of dividend distribution tax — were dismissed and the CIT(A)'s order on those grounds was affirmed. Reading s.2(19AA)(ii), which mandates that all the liabilities relatable to the undertaking be transferred, together with the explanation that existing liabilities of Rs.37.15 crore had been knocked off against the transfer of assets of Rs.39.23 crore, the Tribunal held that this was against s.2(19AA)(ii): the assessee had transferred only the assets while keeping the liabilities with itself, and the explanation that the liabilities belonged to other segments while the assets belonged to the treasury segment could not be accepted. The revenue authorities had therefore rightly treated the demerger as a transfer of capital assets. There was no conflict between the High Court's order and the revenue authorities' orders, because the legal obligation of the revenue authorities to examine taxability under ss.2(22) and 2(19AA) cannot be treated as pre-empted by the High Court. The assessee had failed to comply with s.2(19AA)(ii) and (iii). On other grounds the s.14A interest disallowance of Rs.7,74,777 was deleted and the Revenue's grounds on product registration expenditure, the s.80-IC quantum and scrap sale income were dismissed.
The Tribunal proceeded on the statutory conditions rather than on the sanction. It accepted that a scheme of demerger once approved by the jurisdictional High Court cannot be re-visited by a statutory authority, but held that the Income-tax Act prescribes the conditions on which the benefits of a demerger are accorded, so that the mere fact of sanction does not ipso facto entitle an assessee to claim the benefit; the Income-tax Act operates in its own arena in conjunction with the order of the High Court, and a harmonious interpretation of corporate law and tax law is required. It set out how ss.47(vib) and 47(vid) exempt the transfer by the demerged company and the issue of shares by the resulting company, but only where the s.2(19AA) conditions are met. On the facts, the decisive finding was on liabilities: the netting of Rs.37.15 crore of liabilities against Rs.39.23 crore of assets meant only assets moved, which is against s.2(19AA)(ii). The Tribunal recorded the Assessing Officer's and CIT(A)'s reasoning that the treasury segment's investments had always been treated by the assessee as capital assets and never as stock-in-trade or business assets, that no income from the financial or treasury activity had been shown as business income, that the assessee continued to invest in mutual funds after the demerger, and that the Bombay High Court in the Thomas Cook Insurance Services scheme petition (Company Scheme Petition No. 99 of 2015, order dated 10.09.2015) had clarified that sanctioning a scheme does not bind the Income-tax Department to take any particular view of the tax implications. In the words reproduced by the source cited on this page: "Thus, it can be found that the assessee has only transferred the assets while keeping the liabilities with them." The decision followed or applied Thomas Cook Insurance Services, Company Scheme Petition No. 99 of 2015 (Bombay High Court), order dated 10.09.2015 — relied on for the proposition that sanction of a scheme does not bind the Income-tax Department.
It was decided by the ITAT on 2025-02-18 and is reported as I.T.A. No. 1184/Ahd/2018 and I.T.A. No. 1225/Ahd/2018, ITAT 'B' Bench Ahmedabad, AY 2011-12; heard 20.11.2024 and 17.12.2024. 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 2(19AA), section 2(22), section 2(22)(a), section 45, section 47(vib), section 47(vid), section 14A, section 80-IC, section 115JB, 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 department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. Grounds 1 and 2 of the assessee's appeal — the levy of capital gains under s.45 on the footing that the demerger of the treasury undertaking was a non-qualifying demerger, and the levy of dividend distribution tax — were dismissed and the CIT(A)'s order on those grounds was affirmed. Reading s.2(19AA)(ii), which mandates that all the liabilities relatable to the undertaking be transferred, together with the explanation that existing liabilities of Rs.37.15 crore had been knocked off against the transfer of assets of Rs.39.23 crore, the Tribunal held that this was against s.2(19AA)(ii): the assessee had transferred only the assets while keeping the liabilities with itself, and the explanation that the liabilities belonged to other segments while the assets belonged to the treasury segment could not be accepted. The revenue authorities had therefore rightly treated the demerger as a transfer of capital assets. There was no conflict between the High Court's order and the revenue authorities' orders, because the legal obligation of the revenue authorities to examine taxability under ss.2(22) and 2(19AA) cannot be treated as pre-empted by the High Court. The assessee had failed to comply with s.2(19AA)(ii) and (iii). On other grounds the s.14A interest disallowance of Rs.7,74,777 was deleted and the Revenue's grounds on product registration expenditure, the s.80-IC quantum and scrap sale income were dismissed. It arises in Capital Gains, Capital Gains Exemptions and How Tax Law Is Read matters, on section 2(19AA), section 2(22), section 2(22)(a), section 45, section 47(vib), section 47(vid), section 14A, section 80-IC, section 115JB of the Income Tax Act 1961, and was decided by Dr. B.R.R. Kumar, Vice-President and Ms. Suchitra Kamble, Judicial 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. Do not net inter-unit or inter-segment balances against the assets transferred. That is what defeated this assessee: liabilities of Rs.37.15 crore were knocked off against assets of Rs.39.23 crore, leaving nil liabilities to transfer. Build the audit trail that the segment WAS an undertaking: segment reporting in the audited accounts, separately demarcated assets and liabilities, and income shown from its activities. The Assessing Officer here relied on the annual reports showing no income from the segment. Be ready for the argument that investments held as capital assets cannot constitute a business undertaking; if the segment is an investment or treasury segment, that argument will be made. Do not rely on the sanction order as an answer to the tax conditions, and expect the department to cite the Bombay High Court's clarification in the Thomas Cook Insurance Services scheme petition. Check the consequences on both sides of the balance: failure means capital gains under s.45 on the transfer AND a dividend distribution exposure under s.2(22)(a) on the shares issued to shareholders.
Validity check could not be completed. Validity check could not be completed, and the position is unusually layered. (1) The order was PARTLY RECALLED on the assessee's miscellaneous application: in M.A. No. 26/Ahd/2025 in ITA No. 1184/Ahd/2018, order dated 20.06.2025, the same Bench held that ground no. 1 — the s.2(19AA) and capital gains finding — was 'categorically dismissed with the elaborate finding' and disclosed no mistake apparent on record, so the order 'to that extent' could not be interfered with; but because no separate speaking finding had been given on grounds 2 and 2.1 to 2.4 (dividend distribution tax), the order was recalled to that extent and directed to be placed for hearing on those grounds only. The dividend distribution tax findings are therefore NOT final; the s.2(19AA) finding stands. That recall order contains an evident typographical slip, recording the recalled order as 'dated 18-10-2025' where it means 18-02-2025. (2) The Revenue has filed a tax appeal in the Gujarat High Court against the order of 18.02.2025: in R/Civil Application (For Condonation of Delay) No. 107 of 2026 in F/Tax Appeal/34649/2025, PCIT-3 Ahmedabad v. Reckitt Benckiser Healthcare India Private Limited, order dated 28.01.2026, a delay of 99 days was condoned and the Registry directed to number the appeal. I could not determine which grounds that Revenue appeal raises; since the Revenue succeeded on the s.2(19AA) point, its appeal is presumably directed at other grounds, but I did not verify this. (3) I located no decision doubting the s.2(19AA) reasoning. 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 an internal inconsistency in the order that a reader should see. At paragraph 5.6 the Tribunal says 'it was submitted that no liabilities were existing on the date of demerger, it can be considered that the conditions of Section 2(19AA) are fulfilled', but at paragraph 5.7 it reaches the opposite conclusion on the same facts, and at 5.9 it holds the assessee 'failed to comply with the provisions of Section 2(19AA) (ii) & (iii)'. Paragraph 5.9 and the disposal of grounds 1 and 2 are the operative findings. Note also that the sanction is described in the order as by the Gujarat High Court in Company Petition No. 88 of 2010, while paragraph 5.9 in one place refers generally to High Court sanction. A large part of what the indiankanoon rendering carries in paragraph 5.7 onward is the CIT(A)'s reasoning reproduced by the Tribunal; the sentences relied on here are the Tribunal's own. IMPORTANT: this order was partly recalled — see the validity note. 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.
Grounds 1 and 2 of the assessee's appeal — the levy of capital gains under s.45 on the footing that the demerger of the treasury undertaking was a non-qualifying demerger, and the levy of dividend distribution tax — were dismissed and the CIT(A)'s order on those grounds was affirmed. Reading s.2(19AA)(ii), which mandates that all the liabilities relatable to the undertaking be transferred, together with the explanation that existing liabilities of Rs.37.15 crore had been knocked off against the transfer of assets of Rs.39.23 crore, the Tribunal held that this was against s.2(19AA)(ii): the assessee had transferred only the assets while keeping the liabilities with itself, and the explanation that the liabilities belonged to other segments while the assets belonged to the treasury segment could not be accepted. The revenue authorities had therefore rightly treated the demerger as a transfer of capital assets. There was no conflict between the High Court's order and the revenue authorities' orders, because the legal obligation of the revenue authorities to examine taxability under ss.2(22) and 2(19AA) cannot be treated as pre-empted by the High Court. The assessee had failed to comply with s.2(19AA)(ii) and (iii). On other grounds the s.14A interest disallowance of Rs.7,74,777 was deleted and the Revenue's grounds on product registration expenditure, the s.80-IC quantum and scrap sale income were dismissed.
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