In a major setback to the AV Birla Group, theincome tax department has turned the heat on two group entities, Idea Cellular and Aditya Birla Telecom Limited(ABTL), slapping a tax demand of nearly Rs 4000 crores on a telecom business de-merger executed in 2009, three sources familiar with the development.

Idea Cellular has been issued a tax demand order of Rs 1500 crores on business income arising out of the transfer of telecom licenses, assets & liabilities from Aditya Birla Telecom Limited as part of the de-merger. ABTL, which is a subsidiary of Idea Cellular has been issued a tax demand of Rs 2400 crore.

"The income tax department has treated the transfer of licenses, assets & liabilities from ABTL to Idea Cellular as a slump sale on which capital gains arose. " said a source close the development.

When contacted, Idea confirmed the development and said, "Idea Cellular and its subsidiary have received Tax Assessment Orders dated the last day of the Financial Year which was a Sunday. The demands are inconsistent with established tax laws and past precedents. The company believes the demands are unjustified and based on an erroneous interpretation of the current tax laws and the facts of the case. Idea Cellular has always maintained the highest standards of tax compliance and holds that these demands are misplaced and no tax is applicable.

These demands mainly pertain to a Scheme of Arrangement, specifically approved by the relevant Honorable High Courts in December 2009 and January 2010, under Section 391 to 394 of the Companies Act, 1956. The transaction involves a scheme of restructuring between a wholly owned subsidiary and a parent company with the sole objective of administrative consolidation of a telecom licenseof one service area in the parent company, without any financial transaction or transfer of funds. The company is evaluating all options including challenging the demand in the appropriate forums." (Economic Times)