Kolkata Tribunal case: Can the AO challenge share swap ratios backed by valuer?

Background of the case

In the recent ruling of the Kolkata Tribunal (“the Tribunal” or “ITAT”) in the case of Emami Realty Limited¹ (“the assessee”), the Tribunal examined the scope and interplay of Sections 2(19AA), 47(vib), and 56(2)(x) of the Income-tax Act, 1961 (“the Act”) in the context of a court-approved demerger. The central controversy relates to whether an Assessing Officer may deny demerger-related exemption on the ground of alleged non-compliance with Section 2(19AA)(ii) (transfer of proportionate liabilities) and Section 2(19AA)(iv) (proportionate share allotment), and whether an addition under Section 56(2)(x) can be sustained in the hands of the resulting company on account of assets received pursuant to such a scheme.

Facts of the case:

• The assessee, a publicly listed company engaged in real estate development, entered into a Joint Development Agreement with Oriental Sales Agencies (India) Pvt. Ltd. (OSAIPL) for development of a real estate project at Jessore Road, Kolkata.
• Pursuant to a Scheme of Arrangement sanctioned by the NCLT, Kolkata, the real estate undertaking of OSAIPL was demerged into the assessee with effect from the appointed date of 1 April 2019. The NCLT order was passed on 10 August 2021 and shares were issued to the shareholders of OSAIPL on 15 September 2021.
• The assessee filed its return of income for AY 2021-22 on 07.03.2022 declaring total income of INR 3,11,97,970. The case was selected for scrutiny.
• The Assessing Officer held that the demerger did not comply with Section 2(19AA) on two grounds:
  1. liabilities worth INR 112.38 crores transferred to the assessee were excessive, on the basis that segmental reporting in the audited financial statements of OSAIPL for the year ended 31 March 2019 reflected real estate liabilities at only INR 20.28 crores, thereby violating Section 2(19AA)(ii); and
  2. the share swap ratio was not determined in accordance with Rule 11UA of the Income-tax Rules, 1962, thereby violating Section 2(19AA)(iv).
• On the basis that the demerger did not satisfy Section 2(19AA), the Assessing Officer denied the exemption under Section 47(vib) and invoked Section 56(2)(x), valuing the undertaking at INR 412.27 crores (comprising land at INR 400.51 crores and shares of Delta PV at INR 11.76 crores) against consideration of INR 37.73 crores, and made an addition of INR 374.53 crores.
• On appeal, the Commissioner (Appeals) deleted the addition, against which the Revenue has filed the present appeal.

Key Issues

1. Whether the transfer of liabilities amounting to INR 112.38 crores pursuant to the scheme of demerger constituted a violation of the condition prescribed under Section 2(19AA)(ii) of the Act.
2. Whether the Assessing Officer was justified in importing Rule 11UA of the Income-tax Rules, 1962 into Section 2(19AA)(iv) of the Act, and whether the share valuation exercise carried out by the registered valuer resulted in a violation of Section 2(19AA)(iv).
3. Whether the sanction of a scheme of demerger by the NCLT is binding on the Income-tax Department in respect of the tax consequences arising from such scheme.

Key Takeaways

1. Compliance with Section 2(19AA)(ii)

• The Tribunal held that the liabilities of INR 112.38 crores transferred pursuant to the scheme were in fact related to the real estate undertaking of OSAIPL.
• The figure of INR 20.28 crores appearing in the segmental notes to the financial statements for the year ended 31 March 2019 was a mistaken reporting by the auditor, which had been corrected and acknowledged in the auditor’s certificate dated 5 March 2020 and restated in the audited financial statements of OSAIPL for the year ended 31 March 2020, both filed prior to the assessment proceedings.
• The transferred liabilities comprised security deposits received towards the real estate project (INR 20 crores) and advances received from customers towards sale of flats (INR 92.05 crores), the character and nexus of which to the demerged undertaking the Revenue was unable to dispute.
• Thus, the Tribunal found no infirmity warranting interference with the findings of the Commissioner (Appeals) and held that there was no violation of Section 2(19AA)(ii).

2. Applicability of Rule 11UA to Section 2(19AA)(iv)

• The Tribunal held that Section 2(19AA)(iv) stipulates only proportionate allotment of shares of the resulting company to shareholders of the demerged company and contains no reference to any specific valuation methodology.
• The Assessing Officer’s attempt to read Rule 11UA into this provision was held wrong and without statutory basis. The Tribunal held that Rule 11UA has been notified exclusively for the purposes of Section 56 of the Act and cannot be imported into other provisions. Since the exception under clause (IX) to the proviso to Section 56(2)(x) covers transfers not regarded as transfers under Section 47(vib), Section 56(2)(x) had no application to the assets received pursuant to the scheme.
• The Tribunal noted that the registered valuer had valued the assessee’s shares at INR 90 per share, supported by a Fairness Opinion from a SEBI-registered Merchant Banker. The prevailing market price on the appointed date of 1 April 2019 was INR 120.55 per share, which was higher than the valuation price, demonstrating that there was no undervaluation and consequently no inadequacy of consideration paid to OSAIPL’s shareholders. The Assessing Officer’s reliance on the traded price of INR 38.10 per share as of 5 March 2020, a date subsequent to the Appointed Date, was found to be factually erroneous and accordingly rejected.
• The Tribunal further observed that the share valuation report had received the approval of the shareholders of both companies, SEBI, Stock Exchange, the Income-tax Department, and the NCLT. The Assessing Officer was therefore not justified in substituting his own valuation methodology in the absence of any statutory mandate.

3. Binding effect of NCLT sanction on the Income-tax Department

• The Tribunal held that mere sanction of a scheme of demerger by the NCLT does not bind the Income-tax Department on questions of tax implications arising from the scheme.
• It is always open to the Revenue to independently examine the scheme for its tax consequences, and such examination is the exclusive domain of the tax authorities at the time of assessment. This independence subsists even where the Revenue did not file objections before the NCLT during the pendency of the scheme.
• The Tribunal relied on the Bombay High Court’s ruling in Thomas Cook Insurance Services (India) Ltd.² and the Ahmedabad ITAT’s ruling in Reckitt Benckiser Healthcare India (P.) Ltd.³ in support of this position.

Conclusion

The Kolkata Tribunal dismissed the Revenue’s appeal and upheld the order of the CIT(A), holding that the scheme of demerger satisfied the conditions prescribed under Section 2(19AA) and consequently qualified for tax neutrality under Section 47(vib) of the Act. The Tribunal held that the Revenue’s attempt to invoke Section 56(2)(x) by questioning the transfer of liabilities and the valuation of shares was legally unsustainable.

Kretha Comments

The ruling provides useful clarity on the scope of Section 2(19AA) and the extent to which the Assessing Officer can examine a scheme of demerger sanctioned by the NCLT. The Tribunal’s finding that the Revenue is not bound by the NCLT’s order on tax implications is well-established, and the decision appropriately demarcates the domain of tax authorities from corporate law proceedings.

The ruling reaffirms that Rule 11UA, being a valuation mechanism specifically prescribed for Section 56, cannot be imported into Section 2(19AA)(iv) to challenge the validity of a court-approved demerger or the share swap ratio adopted by the parties. Companies undertaking demergers should nonetheless ensure that valuations are supported by registered valuer reports and, where applicable, Fairness Opinions from SEBI-registered merchant bankers, as these carry significant evidentiary weight in assessment proceedings.

1. IT APPEAL NO. 1457 (KOL) OF 2024 ↩︎
2. [2015] 60taxmann.com 253 (Bombay) ↩︎
3. [2025] 171 taxmann.com 694 (Ahmedabad – Trib.) ↩︎