A composite scheme of arrangement between petitioner companies was approved by NCLT. The Revenue opposed said scheme on grounds that conversion of preference shares into the loan would substantially reduce the profitability of the demerged company, which would act as a tool to avoid and evade taxes. NCLT clarified that the Revenue would be free to examine the aspect of any tax payable as a result of the sanction of the scheme and in case it is found that the scheme of arrangement ultimately results in tax avoidance or is not in accordance with the demerger provisions of the Income-tax Act, 1961, then they would be at liberty to initiate appropriate course of action as per law. It was further clarified by the NCLT that any sanction to the scheme of arrangement under sections 230 to 232 of the Companies Act, 2013 would not adversely affect the rights of the Revenue or any past, present or future proceedings. These clarifications were reiterated by NCLAT.

On appeal before Supreme Court, the Revenue submitted that impugned orders and/or sanction of Scheme might come in their way while framing the assessment and to that extent, interest of revenue would be affected. The Supreme Court held that the NCLT as well as the NCLAT had already clarified that the Revenue would be entitled to take out appropriate proceedings for recovery of any tax statutorily due from transferor or transferee company or any other person who was liable for payment of such tax due. Therefore, dismissing the Revenue’s appeal, it held that the impugned judgment and orders passed by NCLAT as well as NCLT approving scheme could not have been interfered with.