[sbinews] IT REcast

  • From: sbistcbangalore@xxxxxxxx
  • To: sbinews@xxxxxxxxxxxxx
  • Date: Wed, 24 Dec 2003 10:53:11 +0500

I-T dept targets cos trying to cut tax bills through recast

NEW DELHI: Companies facing, or likely to face, heavy income tax demands may 
have to think twice before embarking on any major restructuring exercise 
entailing sale or transfer of assets to subsidiaries. 

The income-tax department is keeping a close tab on such companies and would 
clamp down on any parent company hiving off assets for meagre considerations to 
its subsidiaries which, in turn, jeopardises collection of pending income tax 

“We will take stringent action if it is established that any parent company, 
against whom tax demands are either pending or are likely to be raised, 
undertakes a questionable restructuring exercise,” said a top Central Board of 
Direct Taxes (CBDT) official. 

The remarks are to be viewed in the light of a recent investigation launched on 
a liquor company with a substantial amount of disputed tax demands. The 
department concluded that the assessee company’s activities were reduced to a 
bare minimum with no significant assets to be disposed off. The assessee 
company had virtually become a shell company under the garb of a holding 

The CBDT official, however, made it clear that the tax department had no 
problems if financially sound parent companies undertake demergers to further 
consolidate their businesses. 

Demergers were recognised as a relatively new phenomenon when the government 
brought in a number of amendments in the income tax legislation in the Finance 
Act 1999. The objective was to ensure that business reorganisation enables 
industry to become globally competitive. 

The amendments were based on broad principles. One, demergers should be tax 
neutral and should not attract additional liability to tax. Two, in demergers, 
the tax benefits and concessions available to any undertaking should be 
available to the said undertaking on its transfer to the resulting company. 
Three, tax benefits to such business reorganisation should be limited to 
transfer of specific assets which would amount to sale of assets and not 
business reorganisation. 

Four, the accumulated losses in unabsorbed depreciation in a demerger should be 
allowed to be carried forward to the resulting company if these can be directly 
related to the undertaking proposed to be transferred. Where it is not possible 
to relate these to the undertaking, the said losses and depreciation should be 
apportioned between the demerged company and the resulting company in 
proportion of these assets coming to the share of each as a result of demerger. 

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