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ITAT mumbai quashesld the tax demand of Rs 5,872 Cr on a demerger transaction of Grasim

Here is an interesting decision by ITAT Mumbai wherein rhe demand raised as a result of the demerger.

The case detail is as under:

Grasim Industries Ltd (ITA Nos. 1935/MUM/2020 & 41/MUM/2021)

Let us have a short overview of the case:

Facts:

1. In 2017, the Ahmedabad bench of NCLT approved the merger of Aditya Birla Nuvo Ltd. with Grasim Industries. And in the second step, demerger of financial services business, housed under Nuvo, to Aditya Birla Capital. The second part of the transaction came under scrutiny.

2. The AO had held that the demerger of the company failed to comply with Section 2(19 AA) of the Income Tax Act that require the undertaking to be transferred as a going concern. It was a mere transfer of assets and liabilities and the demerged entity does not constitute an undertaking itself.

3. Also the value of shares allotted by Aditya Birla Capital to shareholders of Grasim in exchange of the financial services business should be considered as deemed dividend u/s 2(22)(a) of the Act and must be taxed as such.

4. The AO had directed Grasim to deposit the tax demand of Rs 5,872.13 crore.

ITAT held as below:

1. The magnitude of financial assets held by the merged entity is testimony to the fact that the financial business was existing in the demerged entity. There is no dispute that assets and liabilities of the company have been transferred to the demerged entity. The demerged entity is in fact a core investment company which has been hived off.

2. The allegations of the authorities that dividend distribution tax must be levied on the demerged entity also does not hold as it is not applicable to any distribution of shares pursuant to demerger.