Seven years after Tata Steel concluded the acquisition of Bhushan Steel Ltd under India’s bankruptcy law, the company has received an income tax show cause notice and order reassessing an amount of ₹25,185 crore in debt waiver as income.

The company has filed a writ petition in the Bombay High Court challenging the authority of the assessing officer in conducting the reassessment of the taxable income. It has also vowed to seek appropriate legal remedies before relevant judicial/quasi-judicial forums contesting the matter on merits and challenging the contents of the order passed by the AO.

The move of the revenue department could open up a new phase of uncertainty for thousands of transactions under the Insolvency & Bankruptcy Code, 2016, which has been hailed as a game changer of a regulation by the Modi government, cleaning up bank balance sheets and reviving sick companies in India.

Background

In May 2018, Tata Steel, through its wholly owned subsidiary — Bamnipal Steel Limited, had acquired erstwhile Bhushan Steel Limited (renamed as Tata Steel BSL Limited) under the resolution process of IBC, and quickly turned around the sick company into a profitable one.

Consequent to this acquisition, the debt of ₹25,185.51 crore was waived off in favour of TSBSL, which was later amalgamated into and with Tata Steel Limited effective November 2021 along with Bamnipal.

The company said that the IT return of Bhushan Steel for FY 2018-19 was accepted by the IT department in June 2020 without any demand in connection to the waiver. Under IBC, loan write off by creditors and a clean slate from litigation were the two biggest draws which endeared corporate India to the process.

Present status

In a notice to the bourses, Tata Steel said it received a show cause notice seeking further documents on the waiver amount for the purpose of reassessment of taxable income for AY 2019-20 by the AO on March 13.

On March 31, it received an assessment order, reassessing the taxable income for FY 2018-19 (AY 2019-20) and increasing the taxable amount for FY 2018-19 by the amount of debt waived.

The order further provides that the company is allowed to file necessary documents with the tax authorities for computation of final tax liability.

Tata Steel filed the writ petition with Bombay HC on March 24 challenging technical infirmities in conducting the reassessment proceedings, in the view of past judicial precedents available on the subject.

The company said it believes that in terms of the relevant provisions of the IT Act, 1961, waiver of debt cannot be treated as taxable income in the hands of TSBSL at the relevant point in time, more so when such a waiver was a sequel to an acquisition under the IBC proceedings.

Even though the disclosure came post market hours, the Tata Steel stock was down 8.59 per cent, or ₹13.20 a share, to close the day at ₹140.45.