NCLT Clears Kirloskar Group Merger; Holds Tax Benefit Not Equal To Tax Avoidance

BACKGROUND

• The Mumbai Bench of the NCLT has sanctioned the Scheme of Amalgamation between The Kolhapur Steel Ltd (“Transferor Company”) and Karad Projects and Motors Ltd (“Transferee Company”), both part of the Kirloskar Brothers Group.
• The Income Tax Department had objected to the scheme, alleging that it was structured primarily to avoid tax by utilising accumulated losses of the Transferor Company.

FACTS

• The Transferor Company, engaged in the business of steel products, is a wholly owned subsidiary of the Transferee Company, which manufactures energy efficient motors.
• The Appointed Date for the amalgamation was 03 October 2024.
• The merger formed part of a broader group-level rationalisation initiative undertaken by KBL to streamline operations and unlock efficiencies across its engineering and manufacturing businesses.
• The scheme was also positioned as a business revival measure – the Transferor Company had been incurring losses for several years, and its integration with a financially stronger holding entity was aimed at stabilising operations and preserving employment.
• The merger was expected to yield tangible benefits in the form of:
  • Simplification of the group's corporate structure under a single management;
  • Cost rationalization through shared services and elimination of overlapping overheads;
  • Improved utilization of manufacturing assets; and
  • Enhanced strategic and operational alignment within the Kirloskar Group.
• The applicants submitted that the merger was commercially driven and aimed at ensuring business continuity and long-term sustainability.

CONTENTIONS OF THE INCOME TAX DEPARTMENT

• The Principal Commissioner of Income Tax, Satara, opposed the scheme on the ground that it was primarily structured to obtain tax advantages.
• It was argued that the Transferor Company had substantial brought-forward losses and unabsorbed depreciation, and that the merger would allow these to be set off against the profits of the Transferee Company – effectively reducing its tax liability.
• The department contended that:
  • The merger lacked genuine business purpose and amounted to a colourable device;
  • The claimed synergies could have been achieved without amalgamation since both companies belonged to the same group; and
  • The transaction may be subjected to General Anti-Avoidance Rules (GAAR) and limited by the newly inserted section 72A(6B) of the Finance Act, 2025, which restricts the carry-forward of accumulated losses post-restructuring.

REPLIES BY THE APPLICANT COMPANIES

• The applicant companies refuted the allegations, asserting that the amalgamation was driven by commercial necessity and group-level efficiency considerations, not by tax motives. They submitted that:
  • Section 72A of the Income-tax Act, 1961, was enacted to encourage genuine business reorganisations and revivals — its benefit cannot be denied merely because tax advantages arise as a consequence;
  • All conditions under section 72A and Rule 9C would be duly complied with, and the carry-forward of losses would remain within the statutory eight-year limit; and
  • Legitimate tax benefits conferred by law cannot be equated with tax evasion.
• The applicants relied on judicial precedents including Sadashiva Sugars Ltd., Bhoruka Engineering Industries Ltd., and Vodafone Essar Gujarat Ltd., which affirm that lawful tax planning within the framework of law does not amount to avoidance.

NCLT DECISION

• The Tribunal found the objections of the Income Tax Department unsubstantiated, noting that:
  
  “strategic business and financial planning through mergers among group companies, aimed at reviving the business of the transferor company and saving loss of production, employment and capital, should not be assumed as a device to avoid tax merely because the transaction yields a tax benefit.”
  
  
• The Bench also highlighted that the Income-tax Act already provides sufficient safeguards — through the conditions laid down in section 72A and Rule 9C – to ensure that only genuine business revivals qualify for such benefits.
• It concluded that the scheme was fair, reasonable, and in conformity with law and public policy.

AURTUS COMMENTS

• The Tribunal reaffirmed that commercially justified restructurings supported by sound business rationale should not be viewed solely through the prism of tax avoidance, even where incidental tax advantages arise.
• Interestingly, this approach contrasts with the recent Hinduja Global Solutions ruling, where GAAR authorities classified a similar reorganisation as an “impermissible avoidance arrangement” on the ground that it lacked commercial substance and primarily sought tax benefits.
• The Kolhapur Steel–Karad Projects decision thus reinforces that, so long as a restructuring is backed by genuine business purpose and commercial rationale, group restructurings driven by operational and revival objectives should not be tainted merely by the presence of tax outcomes.

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