Madras High Court Says Tax Authorities Must Consider Demerger Impact, Remands Grace Infrastructure Case

The Madras High Court on 20 July held that tax authorities must consider the impact of a court-approved demerger before revising an assessment and set aside a revision order passed without examining the effect of the restructuring on Grace Infrastructure Private Limited's financial statements.

Justice C. Saravanan remitted the matter to the Principal Commissioner of Income Tax for fresh adjudication, directing it to reconsider the assessment after allowing the company to file a revised return based on its post-demerger audited financial statements. He held:

“It is evident that the impugned order has been passed in a hurry to ensure that the proceedings are completed within the limitation period prescribed under Section 263 of the Income Tax Act, 1961, while there is no doubt that the Assessing Officer had a prima facie view that the assessment that was completed earlier on 30.09.2022 was both erroneous and prejudicial to the interest of the revenue.”

The dispute arose after the tax department revised the completed assessment of Grace Infrastructure Private Limited under Section 263 of the Income Tax Act, 1961 (which empowers the Principal Commissioner to revise an assessment that is erroneous and prejudicial to the interests of revenue), on the ground that the Assessing Officer had failed to properly examine the tax implications of the company's demerger.

The company had undergone a demerger approved by the National Company Law Tribunal (NCLT), under which its Nut Division was transferred to Fastenex Private Limited with effect from 1 April 2019. The demerger had retrospective effect, but the original assessment was completed based on financial statements prepared before the restructuring.

Although Grace Infrastructure Private Limited subsequently filed a revised return, the Court noted that it was filed before the revised audited balance sheet and profit and loss account reflecting the impact of the demerger were prepared.

The Court observed that the revisional order suffered from non-application of mind as the authorities failed to properly examine the effect of the approved demerger, including the exemption claimed on the transfer of assets and the computation of capital gains.

Relying on the Supreme Court's ruling in Dalmia Power Ltd. v. Assistant Commissioner of Income Tax, it reiterated that assessments following an approved corporate restructuring must take into account revised returns filed pursuant to such restructuring. It held that the revisional order was passed without proper consideration of the material on record and observed that it appeared to have been issued hurriedly to meet the statutory limitation period under Section 263 of the Income Tax Act, 1961.

The Bench directed Grace Infrastructure Private Limited to file a revised return based on the revised audited financial statements prepared after the NCLT-approved demerger. It also directed the Principal Commissioner of Income Tax to pass a fresh order within six months after granting the company a reasonable opportunity of hearing, while clarifying that it had not expressed any opinion on the merits of the tax issues.

Accordingly, the High Court quashed the revisional order and remitted the matter to the Principal Commissioner of Income Tax for fresh adjudication.

For Petitioner: K.Ravi, Senior Counsel

For Respondent: Dr.C.P.Priya, Senior Counsel