The Statutory Transfer of Tax Liability
On the sanction of a scheme, the transferor’s tax liabilities—whether crystallised or contingent—become the transferee’s liabilities. The Income-tax Act’s succession provisions apply, and the pending assessments continue against the transferee. The NCLT’s order typically includes a clause that the transferee “shall take over and discharge all tax liabilities of the transferor company, whether pending, completed, or likely to arise.”
The NCLT’s Requirement of an Undertaking
The NCLT will require the transferee to file an affidavit undertaking to discharge the transferor’s tax liabilities. A conditional undertaking is not accepted; the NCLT has directed petitioners to file a clear and unconditional affidavit. The tax department’s objection, if any, is considered before the scheme is sanctioned.
The GAAR Reservation
In the Cigniti–Coforge amalgamation, the NCLT expressly preserved the Income Tax Department’s right to invoke GAAR and to determine the tax implications of the amalgamation independently of the scheme. The Tribunal held that if the scheme is found to result in tax avoidance, the department may initiate appropriate action. The transferee’s undertaking to discharge tax liabilities does not immunise the scheme from a GAAR challenge.
The Pending Assessments
Pending assessments do not bar the scheme, but the transferee must be prepared to defend them. The NCLT may require the transferee to disclose the pending assessments and to provide for them in the scheme’s financial projections. A scheme that conceals a pending assessment is vulnerable to being set aside for suppression of material facts.
The Practical Due Diligence
The transferee should conduct a tax due diligence of the transferor, identify the pending assessments and contingent liabilities, and obtain an indemnity from the transferor’s promoters where possible. The scheme’s valuation should reflect the tax liabilities, and the NCLT should be informed of the basis of the valuation.
Call to Action: For scheme tax liability assessment, pending assessment due diligence, or GAAR risk review, contact office@anujdesaiassociates.com or 9619456656. Website: https://anujdesaiassociates.com. LinkedIn: linkedin.com/in/ca-anuj-desai-122547230.