As per the provisions of the Companies Act, 2013, when any company files scheme of arrangement, approval of various authorities is needed to be obtained viz. National Company Law Tribunal (‘NCLT’), Regional Director, Registrar of Companies. Further approval of Board of directors, shareholders and creditors is also required to be obtained. Further intimation needs to be sent to Income Tax Department (‘IT Department’). If during the proceedings of the Scheme of Arrangement, any objection is raised by above parties, same is taken into consideration by NCLT prior to giving its approval. In one such instance, in the case of Reliance Jio Infocomm Ltd (‘the Appellant’), IT Department raised an object to the Scheme of Arrangement filed by the Reliance Group. Details of the case is as under:
Facts of the Case:
Composite Scheme of Arrangement for Demerger of fibre and tower businesses of Reliance Jio Infocomm Ltd into Jio Digital Fibre Pvt. Ltd. (‘Jio Digital’) and Reliance Jio Infratel Ltd. (‘Jio Infratel’) (‘Demerger Scheme’) was filed with NCLT, Ahmedabad bench.
Under the Demerger Scheme, it was provided that, along with the demerger of business undertaking, the preference share capital, issued by Jio, and the Securities Premium received thereon, shall stand cancelled such that there is a constructive receipt of an identical amount as loan from the preference shareholders to Jio.
During the proceedings of the Demerger Scheme IT Department raised an objection to the Scheme of Arrangement on the ground that such conversion of redeemable preference shares was contrary to section 55 of the Companies Act, 2013 and that led to reduction of profitability or the net total income of Jio on account of interest expenses. Accordingly, the IT Department concluded that this Scheme was that of a tax planning to avoid payment of dividend distribution tax.
Aggrieved by the objection raised by IT Department, the Appellant preferred an appeal to National Company Law Appellant Tribunal, Ahmedabad Bench (‘NCLAT, Ahmedabad’)
Order of NCLAT, Ahmedabad:
The NCLAT, Ahmedabad has dismissed a petition of the IT Department which had objected to the order of NCLT, Ahmedabad, approving the Demerger Scheme.
Observations made by NCLAT, Ahmedabad are as under:
- It was noted that Jio had affirmed on Affidavit that it had no objection to being subjected to tax on the transactions under the Scheme as per law and that the sanctioning of the Demerger Scheme would not adversely impact the rights of the IT Department.
- It further observed that the IT Department had represented that it would reserve the right to ascertain aspect of any tax payable as a result of the Demerger Scheme.
- Accordingly, it was held that without placing any evidence, it was not open to the IT Department to hold that the Demerger Scheme is giving undue favour to the shareholders of the company and also the overall scheme of arrangement results into tax avoidance.
For detailed discussion on the above case, please feel free to connect at Contact@devadhaantu.in.
___________________________________________________________________________________________________________________
[1] Joint Commissioner of Income Tax vs. Reliance Jio Infocomm Ltd. & Ors. [2019] 112 taxmann.com 275 (NCLAT)]
