Transfer of Assets and no Liabilities to be treated as Non-Compliant Demerger - ITAT, Ahmedabad

Recently, Ahmedabad bench of the Income Tax Appellate Tribunal (“ITAT”) upheld the order of learned Commissioner of Income Tax (appeals) treating the transfer of “Treasury Business” as non-compliant demerger u/s 2(19AA) of the Income Tax Act, 1961 and levied tax in the hands of the demerged company & its shareholders.

- Anirudha Jain

Facts of the Case:

• Reckitt Benckiser Healthcare India Private Limited (“Assessee” or “Reckitt” or “Demerged Company”) is engaged in the business of manufacturing and marketing of pharmaceuticals & Cosmetic products.

• During AY 2011-12, the assessee transferred "Treasury Unit" as an undertaking to Sterling Addlife India Limited ("SAIL" or "Sterling" or "Resulting Company") through a demerger which was approved by Hon'ble High Court.

• Assessing Officer issued a show cause notice dated 05.03.2015 asking the assessee to show cause as to why the transfer of so-called treasury unit, which was claimed as demerger by the assessee company, should be treated as not a demerger within the meaning prescribed under the Income-Tax Act.

• In response to said transfer by way of a demerger, Sterling issued 2,68,01,557 of its shares to the shareholders of the assessee company

• On account of non-compliant demerger, AO levied tax in the hands of the Company as capital gains u/s 45 of the Act & deemed dividend (as shares issued by the resulting company treated as deemed release/distribution of assets by the assessee company.

Critical Issues Involved:

• As a part of the undertaking, the Assessee has not transferred certain investments in subsidiaries which are claimed to be a part of the core business. The department treated the same as not all assets pertaining to the undertaking were transferred. Further, there were certain mismatches w.r.t the amount of investment in mutual funds transferred which again treated as non-complaint demerger.