Law:

Section:

Section 281 of the Income-tax Act, 1961 - Certain transfers to be void - Assessment year 2003-04 - Where scheme of demerger was void under section 281 and said scheme was created to avoid capital gain tax, such scheme could not be sanctioned [In favour of revenue] The petitioner-company had filed petition to obtain the sanction of this Court to a scheme of arrangement under sections 391 to 394 and other applicable provisions of the Companies Act, 1956. The Income-tax Department alleged that the present scheme was neither arrangement nor a compromise as contemplated under section 391. He had further submitted that under the present scheme the passive infrastructure assets were sought to be transferred without any corresponding liabilities and free from all encumbrances to the transferee company without any consideration. He had further submitted that the scheme was nothing but a garb to legitimate a simple transaction of transfer between two separate commercial legal entities in order to evade the legitimate taxes which would be payable, if the transaction would have been effected by way of simplicitor transfer. Held that the transaction might be held to be void under section 281 of the Income-tax Act and if it was so, the Court will not exercise its jurisdiction, if any, to sanction a transaction which was pointed out to be void under law. Thus, the scheme appeared to be a camouflage to circumvent the mandatory provisions of the Income-tax Act. The present section did not require any proceedings to be initiated by the Department for the transaction to be declared as void. Since no liabilities were transferred including the employees relating to the passive infrastructure assets, the expenses will continue to be borne by the transferor companies which would artificially deplete the taxable profit and will not give a true and fair view of the accounts, thus affecting adversely the taxable profits. The entire tax payable on the market value of the assets to be transferred to one of transferor companies was sought to be evaded by the present scheme. Had the transaction been done directly with one of transferor companies, the same would not be exempt as it would…

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