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Tax Benefits In A Composite Scheme Of Arrangement
The Chennai Bench of the Income-tax Appellate Tribunal ("the Tribunal") has delivered an important ruling in the context of amalgamation of companies. In the case of TVS Motors Company Limited ("TVS"), the Tribunal held that the tax benefits cannot be denied if all the conditions for amalgamation under the Income-tax Act, 1961 ("Act") are fulfilled. Taxand India summarises the objections and the ruling of the Tribunal.
TVS held 66.07% share capital of Lakshmi Auto Components Limited ("LAC"). TVS along with LAC and Sundaram Auto Components Limited ("SAC" (subsidiary of LAC)) entered into a composite scheme of arrangement ("the Scheme") under the Companies Act, 1956 ("Co Act"). Under the Scheme, LAC transferred its rubber and plastic division to SAC on a slump sale basis on 1 April 2003 and the remaining business containing Engine Components and Investments was amalgamated with TVS with appointed date as 2 April 2003. The Scheme was filed and the same was approved by the High Court of Madras ("the High Court"). As a result of the amalgamation, TVS credited an amount of Rs 64.3 million to the capital reserve account.
Two principal issues were raised before the tribunal:
- Whether the Scheme can be regarded as amalgamation considering that the entire business of LAC was not transferred to TVS?
- Whether the tax benefits arising out of amalgamation can be denied albeit the sanction of the Scheme by the High Court and satisfaction of all the conditions prescribed for amalgamation in the Act?
The Tribunal has held that once all the assets and liabilities are transferred and the conditions mentioned under section 2(1B) have been satisfied there is amalgamation under the Act. The Tribunal held that the amalgamation becomes effective from the date specified in the scheme and not from the date of the order sanctioning the Scheme, therefore the benefits of depreciation and credit of Dividend Distribution Tax paid has to be given to TVS.
It is also important to note that the Tribunal has observed that once the High Court has approved the Scheme, it cannot be argued that there is any motive to avoid tax.
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