The Income Tax Appellate Tribunal (ITAT) has quashed a Rs 5,872-crore tax demand on Grasim Industries over a restructuring in 2016.

In August 2016, the board of Grasim had approved a scheme among the company, Aditya Birla Nuvo Ltd (ABNL) and Aditya Birla Financial Services Ltd (ABFSL — which was later renamed as Aditya Birla Capital Ltd or ABCL) for the merger of ABNL with Grasim. Subsequently, the financial services business (FSB) of the company was demerged into ABCL.

According to the scheme of merger and demerger, in the first step, with effect from July 1, 2017, ABNL was merged with Grasim and the latter issued 19.04 crore equity shares to the shareholders of ABNL.

In the next step, with effect from July 4, 2017, Grasim demerged its FCB to ABCL, following which the latter issued 92.02 crore shares to the shareholders of Grasim. Earlier, the FSB was carried on by ABNL.

The assessing officer (AO) had directed Grasim to deposit the tax demand of Rs 5,872.13 crore. The tax authorities held that the demerger was not in compliance with Section 2(19 AA) of the Income Tax Act, which deals with demergers that are tax neutral. It held that the value of shares allotted by ABCL to the shareholders of Grasim amounted to dividend.

The appellate tribunal in an order delivered on November 30, dismissed the contention of the tax authorities as regards the computation of deemed dividend.

The tribunal held that the demerger of FSB was a qualifying demerger under the provisions of the Income Tax Act, 1961 and therefore provisions of deemed dividend are not applicable. It added that the demand of dividend distribution tax is not sustainable and is therefore quashed.

The AO had earlier charged that hiving off the FSB was basically a transaction for the transfer of valuable shares of ABFL and it did not constitute an independent business activity, contested by Grasim.