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Tax clearance necessary for restructuring/ M&A schemes

India

The Ministry of Corporate Affairs (MCA) has issued a Circular mandating all Regional Directors to seek inputs in all cases of arrangements or reconstructions undertaken in accordance with Section 391-394 of the Companies Act1956 from the Income Tax Department and other sectoral regulators. Taxand India summarises the key changes introduced by MCA and the related impact.  

Prior to the Circular, any scheme of restructuring used to be approved on behalf of the Government by the relevant Regional Director, Department of Company Affairs. As a matter of practice, the Regional Directors used to only call for reports from the Registrar of Companies, in order to ascertain the compliance with the provisions of the 1956 Act and thereafter, submitted their report to the jurisdictional High Court.  

The Circular issued now requires Regional Directors to issue notice, within 15 days of receipt of notice from the jurisdictional High Court under Section 394A of the 1956 Act, to the Income Tax Department seeking specific comments/ inputs. In case the Income Tax Department is not forthcoming in its response to the notice issued by the Regional Directors, the Circular provides that it may be presumed that the Income Tax Department does not have any objection to the scheme of restructuring proposed under Section 391-394 of the 1956 Act.  

The Circular states that Regional Directors are not required to decide the correctness or otherwise of the objections/ views of the Income Tax Department or other sectoral regulators. Regional Directors, as part of their representation, will submit the views of the Income Tax Department/ other sectoral regulators to the jurisdictional High Court. The Circular also states that in case the Regional Directors have compelling reasons for doubting the correctness of the views of the Income Tax Department/ other sectoral regulators, they must make a reference of the matter to the MCA requesting them to discuss the matter with concerned ministry before filing the representation with the jurisdictional High Court.  

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Your Taxand contact for further queries is:
Vivek Gupta
T. +91 124 339 5052
E. vivek.gupta@bmradvisors.com 

Also published in Thomson Reuters' Taxnet Pro, 14 February 2014

Taxand's Take

The Circular comes into effect from its the date of its issuance ie 15 January 2014. It will be interesting to observe whether the Regional Directors will issue notices pursuant to the Circular even in cases where the notices have already been served on their offices under Section 394 of the 1956 Act.  

Going forward, it will be important to observe how the Income Tax Department and other sectoral regulators respond to such notices and in the absence of a response whether such schemes will be deemed to be in compliance with the provisions of Income-tax Act and other applicable laws. It will also be interesting to observe the manner in which the jurisdictional High Courts will deal with the observations of the Income Tax Department and other sectoral regulators in the representations submitted by Regional Directors.  

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