Holding Company Cannot Issue Shares On Behalf Of subsidiary To Claim Demerger Tax Benefit: ITAT Mumbai

A holding company cannot issue shares on behalf of its subsidiary to satisfy the conditions for claiming tax benefits arising from a demerger, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has held.

"The Holding company cannot issue shares on behalf of the subsidiary and its obligations are restricted to its own legal liabilities and obligations under the law," the tribunal observed.

A bench of Vice President Saktijit Dey and Accountant Member Prabhash Shankar partly allowed Sterling Holiday Resorts Limited's appeal and dismissed the Revenue's cross-appeal for the assessment year 2015-16.

The dispute arose after the tax department denied Sterling Holiday Resorts the benefit of carrying forward business losses and unabsorbed depreciation following a demerger.

It also disallowed the set-off of brought forward unabsorbed depreciation of ₹5.19 crore and the carryforward of business losses and unabsorbed depreciation of about ₹234.95 crore.

Under a court-approved scheme of arrangement, the resorts and timeshare undertaking of Sterling Holiday Resorts India Limited was transferred to Sterling Holiday Resorts Limited. However, shares under the scheme were issued by Thomas Cook (India) Limited, the assessee's holding company, to the shareholders of the demerged company.

Sterling Holiday Resorts argued that both the holding company and its wholly owned subsidiary fell within the definition of a resulting company. It contended that the issuance of shares by the holding company amounted to substantial compliance with the statutory requirement.

The tribunal rejected the contention. It held that the statutory provisions were clear and could not be interpreted beyond their plain meaning.

It further observed, "The fact remains that in this case, the assessee did not issue shares to the demerged company, thus failing to satisfy the conditions laid therein."

The tribunal consequently upheld the denial of the benefit of carrying forward and setting off the losses and depreciation claimed by the assessee.

On a separate issue, however, the tribunal allowed Sterling Holiday Resorts' claim for deduction of about ₹3.20 crore towards Employee Stock Option Plan (ESOP) expenses. It observed that "ESOP expenses are allowable in the hands of assessee under section 37 of the Act."

The tribunal also restored the issue relating to prior-period expenses of about ₹3.12 crore to the Assessing Officer for fresh examination. It noted that the lower authorities had not properly verified whether the liability had crystallised during the relevant assessment year.

In the Revenue's appeal, the tribunal upheld the deletion of an addition of about ₹44.69 crore towards deferred income. It held that the Commissioner (Appeals) had correctly followed earlier Tribunal decisions in the company's own case, as there was nothing on record to show that those decisions had been stayed or reversed