Direct Tax Amicus: October 2018

Amalgamation – Action in concert for tax benefit?
By Subhashree R
In a recent case before NCLT, the income tax department objected to the scheme of amalgamation proposed by the petitioner/applicant companies which had common shareholders stating that the main purpose of the amalgamation was avoidance of tax and that it amounted to abuse of the provisions of the Income Tax Act. The NCLT declined to sanction the scheme stating that tax concerns must be addressed prior to approaching the NLCT for sanction. The objection of tax department was that ideally the company should have sold its investment or property and paid tax on the business income, applicable taxes on distribution of dividend. Such objections have been raised in the past, but decisions have tended to favour applicants for amalgamation reasoning that an otherwise legitimate or commercially sound transaction should not be questioned only because it confers some tax benefits. Interestingly, GAAR provisions were cited at the stage of sanction and perhaps, all that the revenue authorities had to show was the likelihood or possibility of detriment. The applicability of GAAR to this transaction is not free from doubt also from the angle of ‘appointed date’. This can surely become hurdle to business plans unless one is able to demonstrate the commercial substance in transactions....

Notification

• CBDT notifies transactions to which condition of Securities Transaction Tax (STT) having been paid would not apply

Ratio decidendi

• Interpretation of Articles 12 and 14 of Indo-German and Indo-Swiss DTAAs – More beneficial Article to apply – ITAT
• Test of privity and locus with source of income to determine whether there is diversion by overriding title – Karnataka High Court
• Interest on mobilisation advance given to contractor for construction of plant is capital receipt – Kerala High Court
• Liquidated damages received for failure to construct building could form part of consideration for relinquishment of capital asset – ITAT
• Compounding fee which is compensatory in nature is an allowable expense – ITAT