NCLT rejects merger approval over tax avoidance, money laundering concerns

The Income Tax Department revealed a significant tax demand pending against the Transferee Company and noted that its case had been reopened under Section 147 of the Income Tax Act.

The National Company Law Tribunal (NCLT) has rejected an application for the merger of three companies, citing concerns that the proposed amalgamation was intended to legitimise suspicious transactions, avoid tax and launder money.

The tribunal found that the merger “is aimed at legitimising the paper transactions carried out by the three applicant companies to artificially increase the value of shares of the transferee company and thereby avoid payment of due taxes and to use this as a vehicle for money laundering”.

The order was delivered by Harnam Singh Thakur (Member - Judicial) and Subrata Kumar Dash (Member - Technical).

The income tax department submitted that a significant tax demand was pending against the transferee company and noted that its case had been reopened under Section 147 of the Income Tax Act. The department described the transferee company as a “conduit paper company.”

Upon reviewing the financial transactions of the applicant companies, the Tribunal observed that the “narrations lend credence to the observation of the income tax department that these are merely accommodation entries among a clutch of companies being controlled by one individual.”

In its ruling, the NCLT determined that the proposed merger did not fulfill its stated objectives, such as achieving synergy or reducing overhead costs and concluded that the scheme was ‘unfair, unreasonable, and not in the public interest’, and thus could not be approved.