The Mumbai Income Tax Appellate Tribunal (ITAT) has ruled that a holding company cannot perform a legal requirement meant for its subsidiary to claim tax benefits under a demerger, dealing a setback to Sterling Holiday Resorts Ltd. in a tax dispute involving more than Rs 240 crore.
The tribunal bench of Saktijit Dey, Vice President and Prabhash Shankar, Accountant Member, rejected the company’s claim to carry forward and set off accumulated business losses and unabsorbed depreciation, saying the conditions laid down in the Income Tax Act must be followed strictly.
The dispute arose from a corporate restructuring announced in 2014, involving Sterling Holiday Resorts India Ltd. (SHRIL), Thomas Cook (India) Ltd. (TCIL) and Thomas Cook Insurance Services Ltd. (TCISL), which is now known as Sterling Holiday Resorts Ltd.
Under a Bombay High Court-approved scheme, the resorts and time-share business of SHRIL was transferred to TCISL, while the remaining business was merged with Thomas Cook (India). After the restructuring, SHRIL ceased to exist.
Following the demerger, Sterling Holiday Resorts claimed that it was entitled to carry forward and set off more than Rs 240 crore of accumulated business losses and unabsorbed depreciation under the Income Tax Act. The company had claimed Rs 121.66 crore of business losses, Rs 113.29 crore of unabsorbed depreciation, and Rs 5.19 crore of brought-forward depreciation; the case pertains to assessment year 2015-16.
However, the Income Tax Department rejected the claim, saying the company had failed to meet an important legal condition for claiming the tax benefit.
Under the Income Tax Act, the company receiving the business in a demerger, known as the ‘resulting company’, must issue its own shares to the shareholders of the demerged company i.e., from the company from which new business has been transferred. In the Sterling Holiday case, however, the shares were issued by Thomas Cook (India), the holding company, even though the business had been transferred to its subsidiary TCISL, its wholly owned subsidiary.
Sterling Holiday argued that since both the holding company and its subsidiary were part of the same restructuring, so the requirement should be treated as complied. It also said the law should be interpreted in a way that supports genuine business reorganisations.
But the tax tribunal did not agree.
It held that tax laws must be interpreted strictly and courts cannot relax conditions that are clearly written by the parliament. The bench said a holding company and its subsidiary are separate legal entities and one cannot perform a legal obligation on behalf of the other unless it is specifically allowed.
Since the subsidiary that received the business did not issue the shares, the tribunal said the company failed to satisfy the conditions required to claim the tax benefit. It therefore upheld the tax department’s decision to deny the carry forward and set-off of over Rs 240 crore of business losses and unabsorbed depreciation.
The bench stated in its order, “the court cannot read anything into a statutory provision or a stipulated condition which is plain and unambiguous.” The bench concluded “we find no infirmity in the conclusion drawn by the lower authorities in denying the assessee, the benefit of set of carry forward losses and depreciation of the demerged company. Accordingly, the above ground is dismissed”.
However, the tribunal granted relief to the company on other issues. It allowed Sterling Holiday’s claim for deduction of Rs 3.19 crore towards employee stock option (ESOP) expenses, holding that such expenses are a legitimate business cost and are allowable under the Income Tax Act. The tribunal relied on several earlier judicial decisions that have consistently allowed ESOP-related deductions.
The bench also sent back to the assessing officer the issue of Rs 3.11 crore claimed as prior-period expenses for fresh examination. It said the tax authorities had rejected the claim without properly verifying whether the expenses had actually crystallised during the relevant financial year.
The ITAT also dismissed the Income Tax Department’s appeal against the deletion of an addition of Rs 44.69 crore on account of deferred income. It upheld Sterling Holiday Resorts’ method of recognising time-share income over the membership period, noting that earlier ITAT rulings in the company’s favour continue to hold good as they have neither been stayed nor reversed by a higher court
Experts say the ruling is significant as it emphasises that while companies are free to restructure their businesses, tax benefits linked to such reorganisations will be available only if every condition laid down in the Income Tax Act is fully complied with.
In March this year, Thomas Cook India announced a new demerger scheme of the resorts business into Sterling Holiday Resorts. The company said the demerger aims to separate the resorts business into Sterling Holiday Resorts, with Thomas Cook (India) shareholders receiving 0.81 shares of Sterling Holiday Resorts for every share held in Thomas Cook (India).
