India: Tribunal Reiterates No Capital Gains Tax On Demergers Without Consideration

In a huge relief to the Birla Group, the Mumbai Bench of the Income-tax Appellate Tribunal (Tribunal) has recently set aside a capital gains addition of over INR 5,200 crores made by the revenue authorities in relation to the demerger of Aditya Birla Telecom Limited's telecom undertaking in the Bihar service area to Idea Cellular Limited (ICL).


  1. Pursuant to a scheme of arrangement which was duly approved by the High Courts of Bombay and Gujarat in March 2010, Aditya Birla Telecom Limited (Company) demerged its telecom business in the Bihar service area for nil consideration to its parent, ICL. Under the scheme, the Company also revalued its existing investment held in Indus Towers Limited (Indus), an asset separate from the demerged telecom undertaking, at fair value. The difference between the fair value and book value of the investment was recorded as a "Business Restructuring Reserve" (BRR) in the books of the Company.
  2. The revenue department held the demerger to be a slump sale under Section 50B of the Income-tax Act, 1961 (IT Act) and thereby proceeded to compute short term capital gains in the hands of the Company by treating the amount credited in BRR on revaluation of assets as the full value of consideration for the transfer of the telecom undertaking.

Tribunal Ruling

  1. The Tribunal held that in the absence of any consideration received by the Company for the demerger of its telecom undertaking to ICL, no capital gains could be said to have accrued to it. Therefore, the addition made by the revenue department to the Company's income in relation to the demerger was liable to be deleted.
  2. Reliance was placed on the landmark decision of the Supreme Court in the case of B C Srinivasa Setty1 to hold that it was a cardinal principle of law that the charging and computation provisions together constituted an integrated code under the IT Act. Therefore, where computation provisions could not be applied at all, the implication was that such a case was not intended to fall within the scope of the charging provision. In other words, when the computation provision in the IT Act fails, the charging provision also fails.
  3. The Tribunal took note of a catena of cases which supported the proposition that no capital gains could be levied due to a failure of the computation mechanism, including inter alia, PNB Finance Limited v CIT2, In re: Amiantit International Holdings Limited3 and Avaya Global Connect Limited v ACIT4.
  4. The Tribunal noted that the revenue department had failed to understand that the BRR created in the books of the Company was merely an accounting entry recorded in its books on account of revaluation of its investment in Indus and that the amount representing an accounting entry could not possibly be deemed to be the value of consideration for the transfer of the telecom undertaking. The BRR merely represented a notional reserve created to bring the value of the investment held in Indus to its fair value.
  5. The Tribunal also relied on the decision of the Authority for Advance Rulings in the case of Dana Corporation5 to hold that profit or gain or the full value of the consideration cannot be arrived at on a notional or hypothetical basis. The profit or gain to the transferor must be a distinctly and clearly identifiable component of the transaction. The consideration for the transfer of a capital asset cannot be implied or assumed and gain cannot be inferred on a deeming or presumptive basis. What can be taxed in the hands of the transfer under the IT Act is real or actual gain that accrues / arises from the transfer of a capital asset and hence, in the absence of any sale consideration (and resultant profit from such transfer) no notional gain could be imputed and consequently taxed.
  6. The Tribunal observed that there were only two other provisions in the IT Act, namely Sections 50C and 50D, which provided for imputation of consideration, both of which were inapplicable in the instant case:

    • Section 50C provides that where consideration received / accruing as a result of transfer of a capital asset, being land or building or both, is less than the value adopted for stamp duty purposes, then the stamp duty value shall be deemed to be the sale consideration for the purposes of computing capital gains.
    • Section 50D of the IT Act provides for assumption of fair value of an asset as its sale consideration in cases where sale consideration accruing / received as a result of a transfer is indeterminate or not ascertainable. Since Section 50D of the Act has been inserted by the Finance Act, 2012, with effect from assessment year 2013 – 2014, the provision could not be applied as the assessment year under consideration was 2010 – 2011.
  7. Basis the foregoing, the Tribunal concluded that wherever considered appropriate, the legislature itself had inserted specific provisions for assumption of sale consideration for the transfer of assets in specified cases. It was therefore unjust and unwarranted to impute / assume consideration in cases which clearly did not fall within the ambit of such specified provisions.
  8. Further, the flow of consideration necessarily required at least two parties (i.e. the payer and the recipient) and since in the instant case, the BRR was created on account of a unilateral action by the Company, the same could not be treated as consideration received from ICL.
  9. Reliance was placed on the decision of the Gujarat High Court in the case of CIT v Vania Silk Mills Private Limited6 to hold that a sine qua non for the levy of capital gains tax is a "transfer" in terms of the IT Act. Further, there ought to be a causal nexus between the "transfer" of the capital asset and the profit or gain accruing to or received by the taxpayer. In the instant case, there was no nexus between the transfer of the telecom undertaking by the Company and the revaluation of the investment in Indus, except that both transactions independently arose from the same scheme of arrangement.
  10. The Tribunal therefore concluded that since no consideration was received by the Company on account of the demerger, no profit or gain arose which could be exigible to tax.

KCO Comments

For a demerger to qualify as tax neutral under the IT Act, certain conditions are required to be satisfied which inter alia include that shareholders holding not less than three-fourths in value of the shares in the demerged company (i.e. the Company in this case) other than shares already held therein by the resulting company (i.e. ICL in this case) must receive shares of the resulting company as consideration. While ICL held 100% of the equity shares of the Company, the Company also had some preference shareholders who had consented to the scheme of arrangement in its entirety and no shares were required to be issued to them. However, this aspect has not been dealt with in the case.

The Tribunal has only ruled on the computation and chargeability of capital gains tax in the absence of consideration and not on whether the demerger is otherwise tax neutral. This ruling is in line with the settled position that in absence of consideration, the same cannot be imputed (unless the specific provisions under which consideration can be imputed are attracted).


1. (1981) 128 ITR 294 (SC)

2. 307 ITR 75 (SC)

3. (2010) 322 ITR 678 (AAR)

4. 122 TTJ 300

5. 321 ITR 178 (AAR)

6. 107 ITR 300

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions