The National Company Law Appellate Tribunal (NCLAT) has dismissed a petition of the income tax department which had objected to Reliance Jio Infocomm demerging its fibre and tower businesses.

The Ahmedabad-bench of NCLT had earlier this year granted permission to the composite scheme of arrangement through which Reliance Jio Infocomm set up Jio Digital Fibre Pvt Ltd and Reliance Jio Infratel.

However, the tax department had contended that Jio Infocomm has sought to convert redeemable preference shares into loans through the scheme of arrangement.

Conversion of equity into debt is contrary to the well settled principles of company law as well as Section 55 of the Companies Act, 2013, the tax authorities said.

Besides, it would reduce the profitability or the net total income of the transferor company — Jio Infocomm — causing a loss of revenue to the government. I-T had also alleged that the structure of the adopted by Jio was a tool to avoid tax payment.

However, the NCLAT dismissed the petition saying the NCLT has already dealt with the issue. “Mere fact that a scheme may result in reduction of tax liability does not furnish a basis for challenging the validity of the same. We are not inclined to interfere with the scheme of arrangement as approved by the Tribunal (NCLT). Both the appeals are dismissed,” the appellate tribunal said.

Jio had submitted that it previously had separate divisions for its optic fibre and tower infrastructure undertakings. As a consideration for the demerger of the optic fibre undertaking, preference shares of Jio Digital Fibre Pvt Ltd would be issued to the shareholders of Jio Infocomm on a proportionate basis. Similarly, the shareholders would also receive preference shares of Jio Infratel Pvt Ltd as consideration for the slump sale of the tower infrastructure undertaking.

Under Clause 4 of the scheme with effect from March 31, 2019, the preference share capital and corresponding share premium would be cancelled and converted into an equal amount of loans.

On April 2, Reliance Jio said it had transferred control of its fibre and mobile tower units to two infrastructure investment trusts set up by Reliance Industrial Investments and Holdings Ltd, a wholly owned subsidiary of Reliance Industries.