Further Tax Scrutiny of Mergers

In the last few years, mergers of
companies (undertaken through schemes of arrangement that require the approval
of the High Court) have been subject to greater scrutiny by the tax
authorities. One example of a merger that was strongly objected to by the tax
authorities is the case involving Vodafone Essar Gujarat Limited (discussed here),
although the scheme was sanctioned on appeal to a division bench of the Gujarat
High Court.
More recently, the manner of
raising objections before the court have been streamlined
through a circular of the Ministry of Corporate Affairs (MCA) dated January 15,
2014, which provides that the Regional Director (RD) functioning under the MCA
ought to consolidate all objections from various governmental authorities that
may have a view on the scheme. A specific mention has been made to the Income
Tax Department (ITD) whereby the RD is required to notify the ITD of a scheme
and to incorporate the ITD’s comments in the report filed before the court
considering the scheme. However, the MCA circular specifically states that “if
no response from the [ITD] is forthcoming, it may be presumed that the [ITD]
has no objection to the action proposed …”.
In order obviate any doubt and to
ensure that the ITD’s voice is heard by the court, the Central Board of Direct
Taxes (CBDT) has issued a letter
dated April 11, 2014 requesting all Chief Commissioners of Income Tax to ensure
that the ITD places all comments relating to a scheme before the court,
especially when schemes have adverse tax implications to the revenue. Referring
to the receipt of notice from the RD, the letter emphasizes the role of the
It is emphasised that
this is the only opportunity with the Department to object to the scheme of amalgamation
if the same is found prejudicial to the interest of Revenue and therefore, it
is desired that the comments/objections of the Department are sent by the
concerned CIT to Regional Director, MCA for incorporating them in its response
to the Court, immediately after receiving information about any scheme of
amalgamation or reconstruction, etc.
Although this new development is
largely procedural in nature, it represents an effort on the part of the ITD to
ensure that its objections are properly placed before the court. From an
M&A structuring perspective, the taxation aspects would therefore have to
be dealt with clearly so as to withstand scrutiny by the tax authorities, as Lubna
Kably also analyzes.

Further, as previously
, this procedural position may change substantially under the
section 230(5) of the Companies Act, 2013 once that provision is brought in
force because it requires the company to directly provide notice of a scheme to
various government departments (including the income tax authorities) without
requiring any intermediation on the part of the RD.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • One important aspect is the retrospective applicability of the January 15 Circular. Though the Circular per se does not empower retrospective applicability, the schemes pending since early 2012 and now approaching the final stages, are also being sent to the ITA for scrutiny.

    It would be interesting to see if this is challenged at any HC.

  • Quite interesting is the order of the Bombay High Court in Income Tax Appeal (L) 1369 of 2012, CIT v. Finolex Cables. The question arose as to whether the losses of a loss-making entity amelgamated with a profi-making company can be set off in the hands of the profit-making company. Some extracts (full text: http://bombayhighcourt.nic.in/generatenewauth.php?auth=cGF0aD0uL2RhdGEvb3JpZ2luYWwvMjAxMy8mZm5hbWU9SVRYQTEzNjkxMjMwMDExMy5wZGYmc21mbGFnPU4=)

    As regards question (a) is concerned, counsel on both sides state that the said issue is concluded by the decision of this Court in the matter of Commissioner of Income Tax V/s. Swastik Rubber Products Limited reported in (1983) 140 ITR 304 (Bom). Mr.Gupta, learned Advocate appearing for the Revenue relied upon the decision of the Supreme Court in the matter of Marshall Sons and Co (India) Limited V/s. Income­tax Officer reported in (1997) 223 ITR 809, wherein the Court had observed that:

    “We, however, make it clear that we have not expressed any opinion on the plea of the learned counsel for the Revenue that the amalgamation itself is a device designed to evade the taxes legitimately payable by the subsidiary company. If the income­tax authorities think that they are entitled to raise this question in the proceedings under the income­tax Act, it is open to them to do so by way of separate proceedings according
    to law.”

    The aforesaid observations of the Supreme Court only enables the Revenue to challenge the order of the Court sanctioning amalgamation in accordance with law. Once the Court has sanctioned the amalgamation, it is not open to the Revenue to disregard the same unless the same is varied by a competent Court…


    In view of this, what exactly is the scope for interference by the IT Department?

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