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High Court Rejects Demerger on Grounds of Tax Evasion


The Gujarat High Court has rejected the scheme of business reorganisation filed by Vodafone Essar Gujarat Limited for demerger of its passive infrastructure assets into Vodafone Essar Infrastructure Limited. Pursuant to the issue of the public notice (by the Court) for the demerger, objections to the scheme were raised by the Income Tax Department. After hearing detailed arguments of Vodafone Essar Gujarat and the Income Tax Department, the Court held that it was unable to accord its sanction to the scheme. Taxand India summarises the findings of the Gujarat High Court.

Taxand's Take

This is an important ruling and first of its kind where the High Court has refused to grant sanction to a scheme of a demerger predominantly due to a finding that the scheme resulted in tax evasion. The High Court has made detailed observations on facts of Vodafone Essar and it appears that the absence of a business justification for the scheme has been one of the main factors that prompted the Court to reach its conclusions. While there is no doubt a scheme of merger or demerger should also pass the test of not being designed for tax evasion, some of the specific observations of the Court would add to the debate that there is a fine line between tax planning and tax avoidance.

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Mukesh Butani
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Taxand's Take Author