New Delhi: In a setback to mining mogul Anil Agarwal, the government today said it will not allow him to merge subsidiary Cairn India with his flagship firm Vedanta Ltd unless the Rs 10,247 crore tax issue is settled.


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"Cairn-Vedanta merger cannot be allowed unless the tax liability is settled," a top government official said here.


Agarwal's Vedanta Group had in 2011 acquired Cairn India from its British promoters, Cairn Energy plc, and last year proposed to merge the cash-rich firm with BSE-listed Vedanta Ltd. However, a tax demand on both Cairn Energy plc and Cairn India under a retrospective legislation is now hindering the merger.


"Cairn will have to first to settle the tax liability," the official told reporters here.


The Income Tax Department using retrospective tax legislation had slapped a Rs 10,247 crore tax notice on Cairn Energy in January 2014. In February this year, the department issued a final assessment order seeking over Rs 29,000 crore in tax from Cairn Energy including Rs 18,800 crore in interest.


To ensure compliance, it had in April 2014 also slapped Cairn India with a tax demand of Rs 20,495 crore, half of it being interest, for failing to deduct withholding tax on alleged capital gains made by its erstwhile parent company, Cairn Energy in 2006-07 when it reorganised India business.


Cairn Energy still holds 9.8 per cents take in Cairn India but these shares have been frozen by the I-T Department.


"Cairn Energy can't sell shareholding in Cairn India as assets are attached," the official said. "Cairn will have to first to settle the tax liability."


Agarwal's Cairn India moved Delhi High Court against the tax demand in April last year and the next date of hearing is April 18. Cairn Energy on the other hand has initiated an arbitration against the tax demand saying no tax was due on an internal business reorganisation.


On the government offer to settle the retrospective tax cases if the companies concerned paid the principal tax amount after interest and penalties are waived off, the official said it was up to the companies to come forward to settle tax liability.


"Government will notify time limit for settling retrospective cases under settlement window announced in budget," he said adding government continues to follow the judicial process in Cairn as well as Vodafone case.


The one-time settlement offer "will be a time bound window. Notification to come after passage of Finance Bill by mid May," he said.


The tax demand was in respect of Cairn UK Holdings Ltd, a subsidiary of Cairn Energy Plc, transferring shares of Cairn India Holdings Ltd to Cairn India as part of an internal group reorganization in 2006-07, resulting in Rs 24,503.50 crore of capital gains, preceding an initial public offering (IPO) of shares by Cairn India.