 "Adi Godrej and his cousin Jamshyd Godrej")
The multi-billion-dollar amicable split of Godrej Group into two, between patriarch Adi Godrej/Nadir Godrej family and his cousin Jamshyd Godrej/Smita Godrej Crishna family, may not attract tax, say lawyers.
The multi-billion-dollar Godrej family has decided to amicably split Godrej Group, which spans from real estate to consumer products, into two groups by untangling the cross-holdings held by the two family branches across group companies with a division of businesses and assets between Adi/Nadir family and Jamshyd Godrej/Smita Godrej Crishna family.
Statements sent by the group’s listed companies to exchanges late on Tuesday said the promoters — Adi Godrej, Nadir Godrej, Jamshyd Godrej, and Smita Godrej Crishna, heads of the respective family branches — have sent a joint letter about a family settlement agreement (FSA) and a brand and non-compete agreement having been entered into amongst some members of the Godrej family.
“With a transaction of this size and nature, the tax implications can be quite significant and at times can break the complete exercise despite all agreements. However, the fact that this is a family settlement will come to the favour of Godrej Group,” said Ankit Jain, partner, Ved Jain & Associates.
He said the courts have held that the transfer of shares pursuant to a family settlement would not attract any capital gains tax.
“The courts have held that members of a family may, to maintain peace or to bring about harmony in the family, enter into such a family arrangement and if the arrangement is bona fide, then no capital gains tax will apply,” Jain said.
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A family settlement is defined as an arrangement between members of the family with the intent to avoid disputes, settle rival claims, maintain peace, or to maintain the reputation of the family wherein the various constituents with rights in the business or property take a share in the assets owned by the “family”.
Pallav Pradyumn Narang, partner, CNK, said that from a tax perspective, a family arrangement is not considered a transfer and is therefore not subject to tax. However, Narang says that questions may arise under Section 56(2)(x) of the Income-Tax (I-T) Act which stipulates that the value of assets/property received without adequate consideration be taxed in the hands of the recipient.
“While gifts received from relatives are outside the purview of Section 56(2)(x) of the I-T Act, there have been a number of decisions that have held that maintaining family peace, settlement of disputes, and relinquishing of other claims is enough consideration and that no tax should be leviable on assets received upon a family settlement even if such assets were received from non-relatives,” he said.
However, if the family settlement also involves companies as parties to the arrangement, in that some companies are alienating assets to other entities as part of the arrangement, then the same ratio may not apply, and tax could be levied in such an instance, he added.
Jain echoes the same perspective.
“If the above restructuring necessitates the transfer of shares owned by the company to another person, then such transfer may not enjoy the exemption available as above. Those transfers of shares would be taxable. The company would need to undertake a valuation of the company as laid down under Rule 11UA of the I-T Rules, and the difference between such value and the amount invested would attract a capital gains tax,” he explained.
