In a decision that will help corporates restructure businesses, the Chennai bench of Income-tax Appellate Tribunal (ITAT) has held that tax benefit could not be denied to business restructuring, if the exercise fulfills all the conditions mentioned under the Income-Tax Act.

The ruling in the case of Chennai-based TVS Motors Company comes as a relief to all corporates which are at dispute with the I-T department for tax benefits denied to genuine amalgamation or business restructuring. Such disputes arise when tax authorities view it as an exercise intended to avoid tax; corporates argue that the restructuring is for business convenience. The ITAT decision is in tune with the I-T laws governing such issues, said senior chartered accountant TP Ostwal.

The case revolved around a composite scheme of arrangement involving TVS Motors, which held over 66% stake in Laxmi Auto Components (LAC). LAC had transferred its rubber and plastic division to another group company, Sundaram Auto (SAC). At the time, the rest of LAC, including the engine components business, investment in SAC and other investments were transferred to TVS Motors.

The scheme of rearrangement was cleared by the Madras High Court. However, the assessing officer declined to accept it as an amalgamation on the ground that the full assets and liabilities of LAC were not transferred to TVS Motors, and therefore, do not fulfil the conditions required for tax neutrality of an amalgamation. According to him, the exercise at best could be described as rearrangement under Section 391 to 394 of the Companies Act, and therefore, not an amalgamation. The assessing officer, thus, taxed the capital reserve arising out of amalgamation, disallowed the depreciation claims arising from the transfer of LACs assets to TVS and also denied the credit for the dividend distribution tax paid by LAC.

The ITAT did not accept the I-T departments stand. The tribunal held that amalgamation as well as rearrangement are dealt under Sections 391 to 394 of the Companies Act, and therefore, there is no merit in the departments decision to deny tax neutrality to a restructuring exercise. When all assets and liabilities are taken over by a company, such an exercise can be considered an amalgamation. In this case, the tax department could not prove that some assets were left behind. ITAT further observed that there is no merit in the contention that the whole exercise was meant for avoiding tax.