Facts of the Case

The assessee, Emami Realty Limited, is a listed company engaged in real estate development. Pursuant to a scheme of arrangement approved by the NCLT, the real estate undertaking of Oriental Sales Agencies (India) Pvt. Ltd. was demerged into the assessee with the appointed date of 01.04.2019. The NCLT order approving the scheme was passed on 10.08.2021 and shares were issued to the shareholders of the demerged entity on 15.09.2021. For Assessment Year 2021-22, the assessee filed its return declaring total income of ₹3,11,97,970. During scrutiny, the Assessing Officer held that the scheme of demerger did not satisfy the conditions of Section 2(19AA), denied exemption under Section 47(vib), and made an addition of ₹374.53 crores under Section 56(2)(x) on the alleged ground that assets were received for inadequate consideration. The CIT(A) deleted the addition, against which the Revenue filed appeal and the assessee filed cross-objection.

Issues Involved

Whether the scheme of demerger complied with the conditions of Section 2(19AA), whether exemption under Section 47(vib) was rightly available, whether Rule 11UA could be invoked to test compliance with Section 2(19AA)(iv), whether Section 56(2)(x) was applicable to a court-approved demerger, and whether any taxable event arose in Assessment Year 2021-22.

Petitioner’s Arguments

The Revenue contended that liabilities relatable to the real estate undertaking were not correctly transferred, violating Section 2(19AA)(ii), and that share valuation was not carried out as per Rule 11UA, violating Section 2(19AA)(iv). It was argued that the assessee received assets far in excess of the value of shares issued and therefore the differential amount was taxable under Section 56(2)(x). The Revenue further contended that directions issued by the AO relating to protective addition, application of Section 50C in the hands of the demerged entity, and applicability of Section 194-IC were justified in the interest of revenue.

Respondent’s Arguments

The assessee submitted that all assets and liabilities relating to the real estate undertaking were transferred as per the NCLT-approved scheme and that the alleged discrepancy in liabilities arose from a clerical error in earlier segmental reporting, which was subsequently corrected and certified by the statutory auditor. It was argued that Section 2(19AA)(iv) requires only proportionate share allotment and does not mandate valuation as per Rule 11UA, which applies only for Section 56. The assessee further contended that transactions covered by Section 47(vib) are expressly excluded from the ambit of Section 56(2)(x) and that no taxable event occurred in AY 2021-22 since the demerger became effective from AY 2020-21 and shares were issued only in AY 2022-23.

Court Order / Findings

The ITAT Kolkata held that the liabilities of ₹112.38 crores transferred pursuant to the demerger indeed pertained to the real estate undertaking and that the Revenue failed to establish any violation of Section 2(19AA)(ii). The Tribunal further held that Rule 11UA could not be imported into Section 2(19AA)(iv), as the provision only requires proportionate allotment of shares and Rule 11UA is notified solely for the purposes of Section 56. It was observed that transactions qualifying under Section 47(vib) are expressly excluded from the scope of Section 56(2)(x). The Tribunal also held that no taxable event occurred in Assessment Year 2021-22 since the scheme became effective from 01.04.2019 and shares and assets were received only in Assessment Year 2022-23. Directions relating to protective addition, Section 50C and Section 194-IC were also found to be unsustainable. Accordingly, the order of the CIT(A) deleting the addition was upheld.

Important Clarification

The Tribunal clarified that while sanction of a scheme by the NCLT does not preclude examination of tax implications by the Income-tax Department, tax authorities cannot disregard statutory exemptions available to tax-neutral demergers compliant with Section 2(19AA). Further, income can be taxed only in the year in which the taxable event actually occurs and cannot be brought to tax in an incorrect assessment year.

Final Outcome

The appeal filed by the Revenue was dismissed and the cross-objection filed by the assessee was rendered infructuous. The deletion of the addition of ₹374.53 crores made under Section 56(2)(x) for Assessment Year 2021-22 was upheld, and all consequential directions issued by the Assessing Officer were set aside.

Source Link - https://itat.gov.in/public/files/upload/1768223223-2p5n3J-1-TO.pdf  

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