Dalmia Bharat under I-T lens post HC nod on reopening of assessment

Madras HC rules in favour of tax department on reopening Dalmia Cement's case involving KKR's ₹500 crore investment, triggering fresh scrutiny over round-tripping

The Dalmia Bharat group is facing an income tax (I-T) scrutiny following a recent ruling by the Madras High Court, which upheld the reopening of I-T assessment proceedings against Dalmia Cement (Bharat) Ltd (DCBL) in a transaction involving US-based private equity giant KKR & Co.

 

The tax authorities have alleged that an investment of ₹500 crore made by KKR Mauritius Cement Investment Ltd, a KKR & Co investment vehicle, in DCBL in 2010-11 for a 14.99 per cent stake, prima facie suggests round-tripping of unaccounted money by the company.

 

An email sent to the Dalmia Bharat group on Tuesday did not elicit any response till the time of going to the press. KKR & Co declined to comment.

 

KKR & Co itself is not a party to the case and has not been accused of any wrongdoing so far. A legal source said the matter is between the tax authorities and Dalmia Cement, and KKR & Co has not been a party to the court proceedings in any way. Accordingly, there is nothing for KKR to appeal against the court order, the source said. 

 

The I-T department’s suspicion arose as Dalmia Bharat (DBL) bought back the shares sold to KKR Mauritius Cement Investment Ltd for ₹1,218 crore in January 2016, in the form of ₹600 crore in cash and ₹618.75 crore in DBL shares. This reportedly gave KKR & Co an 18 per cent compounded return and a total exit value of ₹2,138 crore, including gains from a later off-market exit.

 

The I-T department subsequently proposed to reopen the search assessments of the three companies.

 

The latest judgment by the high court supports the tax department’s power to reopen assessments based on new information with regard to potential tax avoidance schemes involving foreign entities. The order marks a significant win for the I-T department, which has, in recent years, ramped up scrutiny of cross-border investment flows amid concerns of money-laundering and tax avoidance.

 

"The Madras High Court judgment in the Dalmia Bharat-KKR tax assessment reopening matter raises significant concerns regarding its treatment of globally reputable financial institutions. The court’s deference to the tax department assessing officer’s ‘reason to believe’ standard and certain speculative allegations of round-tripping, without a rigorous examination of the underlying evidence, is alarming, to say the least," said Hardeep Sachdeva, senior partner, AZB & Partners.

 

In the judgment delivered on April 23 this year, a division bench of the Madras High Court overturned an earlier single-bench order quashing the reopening notice, ruling that Dalmia Cement failed to make a “full and true disclosure” of material facts during the original assessment. 

 

The tax department, acting on a 2018 tip-off from its investigation wing, claimed the investment was merely a façade, citing the suspicious buyback of shares by Dalmia's holding company DBL at an inflated price.

 

"The materials relied upon by the assessing officer (I-T department) prima facie indicate that KKR Mauritius is a shell company. The scale of returns and the manner in which the transactions had been conducted also prima facie suggest round-tripping," the division bench said.

 

Interestingly, the holding company as well as DCBL had entered into definitive agreements — namely, a share subscription agreement and a shareholders' agreement — with KKR Mauritius Cement Investment in May 2010. However, copies of the agreement were allegedly not placed before the department.

 

The high court emphasised that the tax department’s move was backed by credible material and not “market gossip”. The court also remarked that “when an equity firm invests ₹500 crore and exits with over ₹2,000 crore in a few years, there is more than meets the eye”. 

Case at a glance

 

• May 7, 2010: DCBL, its holding company DBL, and KKR Mauritius Cement Investments sign share subscription and shareholders agreements
• September 3, 2010: KKR invests ₹500 cr in DCBL, gets 37.9 mn shares 
• January 15, 2016: DBL buys back KKR’s shares in DCBL for ₹1,218 cr via cash-and-share deal
• March 28, 2018: I-T dept sends a tax evasion petition, suggesting KKR was round-tripping of Dalmia’s black money
• July 30, 2018: DCBL, group companies file writ petitions in Madras HC
• October 30, 2019: Single-judge Bench of HC quashes reopening notices, holding that disclosures were adequate
• April 23, 2025: Division Bench of HC overturns 2019 ruling, upholding reassessment as valid due to failure to disclose full facts