MERGERS AND AMALGAMATION

Submitted in partial fulfillment of the requirements for the degree of

L.L.B

By

Name of Candidate

(Roll No……...)

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INDEX

CONTENTS PAGE NO.

Introduction 03-04

Definitions 05-13

Legal Provisions as Per Companies Act 1956 14-45

Provisions under the Sick Industrial Companies Act’1985 46-52

Provisions under the Income Tax Act’1962 53-92

Accounting Treatment for M&A 93-107

United Western Bank Ltd. Scheme ‘2006 108-122

Dabur India Scheme for Amalgamation 123-138

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INTRODUCTION

The sweeping wave of economic reforms and globalization has transformed the business scenario all over the world. One

of the most significant developments is the integration of national economies with market oriented global economy. The

business strategy has been on consolidation and synergy in business operations and optimum use of resources. The

objective is to achieve and sustain superior performance and larger share of global market. Corporate India has also been

restructuring and repositioning itself to seize the opportunities and meet the challenges thrown open by globalization. The

management strategy is on mergers and acquisitions (M&A) – to achieve an optimum size as a means of survival and

growth in the competitive economy. The trend is to acquire profitable companies, which can contribute for profit and

growth of the group and sell those, which are drain on resources.

In recent years, mergers and amalgamations have attracted widespread interest as an effective growth and value creation

strategy. A recent Accenture/ Economist Intelligence Unit global survey shows that as much as 70% of senior global

executives are either planning or undertaking an M& A transaction within a year. There is an increasing demand for

M&A, enhanced by convergence of low interest rates, easier availability of funds, from venture capitalists, initial public

offerings, and the perceived lack of organic growth opportunities.

Accenture M&A professionals have found that unless there’s a dedicated plan, companies can lose 1-2% of their planned

growth during integration. Those that keep the details in mind even as they look at the big picture have a higher chance of

success.

According to a recent KPMG study, finance sense is not enough to make success of global M&A. In fact several M&A

fail when diverse cultures fail to integrate. In fact, integration of international cultures plays a big factor in developing

global expertise. It is important to understand how people think, work; interact in a foreign workplace to build a

successful organization. The ability to work effectively in a global economy and diverse cultures is a core skill that needs

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to be developed by the Indian Companies. At, the same time cultural diversity has tremendous potential for innovation,

arising from the presence of multiple perspectives.

One of the issues that M&A transactions in emerging markets have in common with businesses everywhere is that

leadership matters. More than anything else, local leaders determine the success or failure of a cross border deal. The top

executives know their customers, suppliers and employees, as well as their customs and cultures, and they function as the

critical link between the buyer and those important stakeholder groups. Pulling them out and replacing them with foreign

nationals breaks all of those links. The savvy acquirer retains competent local leaders and uses clear incentives to align

their interest with its interest and business goals.

In cultures where participative management is common, as in the US, success is more likely when top and middle level

management jointly identifies problems and create change solutions. In other cultures, top down approach to change is

more appropriate. From the acquirers perspective some management problems can be avoided by solving them before

closing the deal. For example, if due diligence reveals that workforce reduction or a change in local leadership is

necessary, the acquirer might insist that the target company handle those issues as a pre-condition to a deal.

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Definitions

AS PER THE COMPANIES ACT, 1956

The terms compromise, arrangement, reconstruction, amalgamation although used in the Companies Act’ 1956, but

are not defined in the Act and has no precise legal meaning. Generally speaking, however, these terms may be

regarded as describing any form of internal reorganization of the company or its affairs, as well as schemes for the

merger of two or more companies or for the division of one company into two or more companies. (Palmer’s

Company Law, Volume 2, para12.001).

Compromise means a settlement of differences by mutual concessions; an agreement by adjustment of conflicting or

opposing claims by reciprocal modification of demands.

Arrangement denotes a final settlement; adjustment by agreement. Sec 390(b) of the Companies Act’1956, states that

the expression “arrangement” includes a reorganization of the share capital of the company by the consolidation of

shares of different classes or by the division of shares into shares of different classes or, by both these methods.

Arrangement is a word of wide import and is not synonymous with the word “compromise” although it must mean

something analogous in some sense to “compromise”. As compared with the word compromise, it is not necessary for

an arrangement that there should be some dispute or controversy. [India Flour Mills, In re (1934) 4 Comp Cas 137:

AIR 1934 Sind 54].

According to Section 394 of the Companies Act ’1956, any such compromise or arrangement may be for the purposes

of, or in connection with, a scheme for the reconstruction of any company or companies, or the amalgamation of any

two or more companies, which involves the transfer of the whole or any part of the undertaking, property or liabilities

of one company (‘transferor company”) to another company (“transferee company”).

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The transferee company must be a “ company’ as defined in Section 3 of the Companies Act 1956 but the transferor

company may be any body corporate whether a company as defined in Section 3, or not. Thus, a foreign company

may be a transferor company. Section 3 of the companies Act defines a company as:

(1) Unless the context otherwise requires, the expressions "company", "existing company, subject to the

provisions of subsection (2), have the meanings specified below:

(i) "Company" means a company formed and registered under this Act or an existing company as defined in

clause (ii);

(ii) "Existing company" means a company formed and registered under any of the previous companies laws

specified below:

(a) any Act or Acts relating to companies in force before the Indian Companies Act, 1866 (10 of 1866) and

repealed by the Act;

(b) the Indian Companies Act, 1866 (10 of 1866);

(c) the Indian Companies Act, 1882 (6 of 1882);

(d) the Indian Companies Act, 1913 (7 of 1933);

(e) the Registration of Transferred Companies Ordinance 1942 (54 of 1942); and

(f) any law corresponding to any of the Acts or the Ordinance aforesaid and in force-

(1) in the merged territories or in a Part B State (other than the State of Jammu and Kashmir), or any part

thereof, before the extension thereto of the Indian CompaniesAct, 1913(7of1913);or

(2) in the State of Jammu and Kashmir, or any part thereof, before the commencement of the Jammu and

Kashmir (Extension of Laws) Act, 1956 (62 of 1956), 2[in so far as banking, insurance and financial

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corporations are concerned, and before the commencement of the Central Laws (Extension to Jammu

and Kashmir) Act, 1968 (25 of 1968) insofar as other corporations are concerned];] and

(3) the Portuguese Commercial Code 4[***], in so far as it relates to "sociedades anonimas";]

No company involved in amalgamation need be financially unsound or under winding up though as per Sec 390(a),

for the purposes of Sec 391, ‘company’ means “any company liable to be wound up “ But it does not debar

amalgamation of financially sound companies. [Bank of India Ltd. V. Ahmedabad Manufacturing & Calico Printing

Co. Ltd. (1972) 42 Comp Cas 211 (Bom); Re Rossell Inds Ltd. (1995) 5 SCL 79 (Cal)].

Section 390(a) is applicable to a company incorporated outside India. If court has jurisdiction to wind up such a

company on any of the grounds specified in the Act, Court has jurisdiction to sanction scheme of amalgamation if a

company incorporated outside India is a transferor company. [Bombay Gas Co/ Pvt Ltd v. Regional Director (1996)

21 CLA 269 (Bom)]. There is no bar to a company amalgamating with a fifteen day old company having no assets

and business. [Re Apco Industries Ltd (1996) 86 Comp Cas 457 (Guj)].

Amalgamation involving a ‘sick industrial company’ as transferor or transferee company is outside the purview of

Companies Act 1956. It is governed by the Sick Industrial Companies (Special Provisions) Act 1985 (SICA).

Amalgamation of a company licensed under Sec 25 of the Companies Act 1956 with commercial, trading or

manufacturing company could be sanctioned under Sec 391/ 394. [Re Sir Mathurdas Vissanji Foundation (1992) 8

CLA (Bom); Re Walvis Flour Mills Company P Ltd. (1996) 23 CLA 104]. There is nothing in law to prevent a

company carrying on business in shares from amalgamating with one engaged in transport.[Re EITA India Ltd.(1997)

24 CLA 37 (CAL)].

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A reconstruction or amalgamation is essentially a kind of a compromise or arrangement proposed between a company

and its members or creditors of any company or companies. According to Oxford Law Dictionary “reconstruction of a

company” (in the liquidation of a company) means the transfer of property of a registered company in a voluntary

winding up to another company in exchange of shares in that company to be distributed among members of the

company in liquidation. The liquidator effects the reconstruction with the authority of a special resolution (members’

voluntary winding up) or the consent of the court or liquidation committee (creditors’ voluntary winding up). A

member who does not agree to the arrangement can require the liquidator to buy his shares. However, under section

394, reconstruction of a company which is not in liquidation is permissible.

For the purposes of Companies Act 1956, the terms ‘merger’ and ‘amalgamation’ are synonymous. Merger means the

fusion or absorption of one company by another, latter relating its own name and identity and acquiring assets,

liabilities, franchises and powers of former, and absorbed company ceasing to exist as separate entity. It differs from a

consolidation wherein all the corporations terminate their existence and become parties to a new one. [Black’s Law

Dictionary, 5th edition, page 891].

Merger means an amalgamation between companies in which either the members of the merging companies exchange

their shares for shares in a new company or the members of some of the merging companies exchange their shares for

shares in another merging company.

The word ‘amalgamation’ has no definite legal meaning. It contemplates a state of things under which two companies

are so joined as to form a third entity, or one company is absorbed into and blended with another company. Two

companies can amalgamate in either two ways: Company A can sell its business and undertaking to Company B in

consideration of shares in Company B. Company A then goes into liquidation and distributes the shares in company B

amongst its shareholders, and the result of it all is that, whereas there were previously two companies, A and B,

Company A has now merged in Company B. Now, there is one company carrying on one undertaking with one set of

shareholders. Another way in which it is frequently done is that a third company, a new company, is formed,

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Company C, and both the Companies A and B sell their undertakings to Company C in consideration of shares in

company C. The shares in A and B are then distributed amongst the shareholders by means of liquidation, and

companies A&B cease.

In Saraswati Industrial Syndicate Limited v CIT (1991) 70Comp Cas 184, the Supreme Court observed:

“Amalgamation or reconstruction has no precise legal meaning. In amalgamation two or more companies are fused

into one by merger or by taking over by another, when two companies are merged and are so joined as to form a third

company or one is absorbed into one or blended with another, the amalgamating company loses its identity.

Amalgamation is a blending of two or more existing undertakings into one undertaking, the shareholders of each

blending company becoming substantially the shareholders in the company which is to carry on the blended

undertakings. There may be amalgamation either by transfer of two or more undertakings to a new company, or by

the transfer of one or more undertakings to an existing company. The question whether a winding up is for the

purposes of reconstruction or amalgamation depends upon whole of the circumstances of the winding up. [Halsbury’s

Laws of England, 4th edition, vol.7, page 1539].

It is an organic unification or amalgam of two (or more) entities or undertakings, or fusion of one with the other.

There is no bar to more than two companies being amalgamated under one scheme. [Re Patrakar Prakashan P Ltd

(1997) 13 SCL 33 (MP)].

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AS PER THE MANDATORY ACCOUNTING STANDARD AS 14 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

The following terms are used in this standard with the meanings specified:

a. Amalgamation means an amalgamation pursuant to the provisions of the Companies Act, 1956 or any other

statute which may be applicable to companies.

b. (b)Transferor Company means the company which is amalgamated into another company.

c. Transferee Company means the company into which a transferor company is amalgamated.

An amalgamation may be either –

A. An amalgamation in the nature of merger, or

B. An amalgamation in the nature of purchase.

A. AMALGAMATION IN THE NATURE OF MERGER

An amalgamation should be considered to be an amalgamation in the nature of merger when all the

following conditions are satisfied:

1. All the assets and liabilities of the transferor company become, after amalgamation, the assets and

liabilities of the transferee company.

2. Shareholders holding not less than 90% of the face value of the equity shares of the transferor company

(other than the equity shares already held therein, immediately before the amalgamation, by the transferee

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company or its subsidiaries or their nominees) become equity shareholders of the transferee company by

virtue of the amalgamation.

3. The consideration for the amalgamation receivable by those equity shareholders of the transferor

company who agree to become equity shareholders of the transferee company is discharged by the

transferee company wholly by the issue of equity shares in the transferee company, except that cash may

be paid in respect of any fractional shares.

4. The business of the transferor company is intended to be carried on, after the amalgamation, by the

transferee company.

5. No adjustment is intended to be made to the book values of the assets and liabilities of the transferor

company when they are incorporated in the financial statements of the transferee company except to

ensure uniformity of accounting policies.

B. AMALGAMATION IN THE NATURE OF PURCHASE

An amalgamation should be considered to be an amalgamation in the nature of purchase, when any one or

more of the conditions specified above for amalgamation in the nature of merger is not satisfied.

AS PER THE INCOME TAX ACT, 1961

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In normal parlance, Amalgamation takes place when two or more companies combine and form a new corporate

entity after the previous corporate entities are dissolved.

A merger signifies the absorption of one company by another which retains its name and corporate entity with the

added capital, franchises and powers of a merged corporation.

Section 2(1B) of Income-tax Act, 1961 defines ‘Amalgamation’ as follows:

"Amalgamation", in relation to companies, means the merger of one or more companies with another company or

the merger of two or more companies to form another company (the company or companies which so merge

being referred to as the amalgamating company or companies and the company with which they merge or which

is formed as a result of the merger, as the amalgamated company) in such a manner that -

i. all the property of the amalgamating company or companies immediately before the

amalgamation becomes the property of the amalgamated company by virtue of the

amalgamation;

ii. all the liabilities of the amalgamating company or companies immediately before the

amalgamation becomes the liabilities of the amalgamated company by virtue of the

amalgamation;

iii. shareholders holding not less than three-fourths (substituted for nine tenths in value (and not

in numbers) of the shares (shares include both Equity and Preference shares) in the

amalgamating company or companies (other than shares already held therein immediately

before the amalgamation by, or by a nominee for, the amalgamated company or its

subsidiary) become shareholders by virtue of the amalgamation,

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Otherwise than as a result of the acquisition of the property of one company by another company pursuant to the

purchase of such property by the other company or as a result of the distribution of such property to the other

company after the winding up of the first mentioned company.

Thus, for a merger to be qualified as an ‘amalgamation’ for the purpose of the Income Tax Act, the above three

conditions have to be satisfied.

"company" is defined under section 2(17) of IT Act as meaning any Indian Company, any body corporate

incorporated by or under the laws of a country outside India or any institution, association or body

assessed or assessable as a company under Income Tax Act or which is declared by the Board as a

Company.

NOTE:

The definition given in the Income Tax Act is for the purposes of that Act only. It is limited in scope. It cannot

be lifted and read in the Companies Act 1956. [Re Patrakar Prakashan P Ltd. (1997) 13 SCL 33 (MP)].

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LEGAL PROVISIONS UNDER THE COMPANIES ACT’1956

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Provisions of the Companies Act, 1956

Section 390 Interpretation of Sections 391 and 393

Section 391Power to Compromise or make arrangements with Creditors or Members

Section 392Power of High Court to enforce Compromise or Arrangements

Section 393Information as to Compromise or Arrangement with Creditors or Members

Section 394Provisions for facilitating Reconstruction and Amalgamation of Companies

Section 394A Notice to be given to Central Government for Applications under Sections 391 and 394

Section 395 Power and Duty to Acquire Shares of Shareholders Dissenting from Scheme or Contract Approved by Majority

Section 396 Powers of Central Government to Provide for Amalgamation of Companies in Public Interest

Section 396APreservation of Books and Papers of Amalgamating Company

Section 376Conditions prohibiting reconstruction or amalgamation of company

Section 494 Power of Liquidator to accept Shares etc as Consideration for sale of Property of the Company

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Section 390: Interpretation of sections 391 and 393

In sections 391 and 393,-

(a) the expression "company" means any company liable to be wound up under this Act;

(b) the Expression "arrangement" includes a reorganization of the share capital of the

company by the consolidation of shares of different classes, or by the division of shares

into shares of different classes or, by both those methods; and

(c) Unsecured creditors who may have filed suits or obtained decrees shall be deemed to be of

the same class as other unsecured creditors.

Analysis:

Bombay Gas Co. Pvt Ltd. Regional Director (1996) 21 CLA 269 (Bom): held that -

Section 390(a) is applicable to a company incorporated outside India. If court has

jurisdiction to wind up such a company on any grounds specified in the Act, court has

jurisdiction to sanction scheme of amalgamation if a company incorporated outside India is

a transferor company.

Re Apco Industries Ltd (1996) 21 CLA 269 (Bom): held that -

There is no bar to a company amalgamating with a fifteen day old company having no

business and assets.

Bank of India Ltd v. Ahmedabad Manufacturing and Calico Printing Co Ltd. (1972) 42 Comp Cas 211 (Bom): held that -

As per section 390(a) no company involved in amalgamation need be financially unsound

or under winding up. As per Sec 391, ‘company’ means “any company liable to be wound

up”. It implies that it does not debar amalgamation of financially sound companies.

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Hari Charan Karanjai v. Ulipur Bank Ltd. [1942] 12 Comp Cas 110 (Cal)

Creditors who are decree holders cannot claim any special rights other than those of

unsecured creditors.

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Section 391: Power to compromise or make Arrangements with Creditors and Members

(1) Where a compromise or arrangement is proposed-

(a) Between a company and its creditors or any class of them;

Or

(b) between a company and its members or any class of them, the 1[Tribunal] may, on the application of the

company or of any creditor or member of the company or, in the case of a company which is being wound up, of

the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the

case may be to be called, held and conducted in such manner as the 1[Tribunal] directs.

The first step in the process of amalgamation is that the Board of Directors of the company will pass a

resolution -

(a) To approve the scheme of compromise or arrangement

(b) To authorize a Director/ Company Secretary/ other officer to make an application / petition

to the Tribunal;

(c) To authorize a Director/ Company Secretary/ other officer to sign the application, petition,

affidavit, notice of the meeting and other document in connection therewith.

(d) To do such other things, acts and deeds as may be necessary or expedient in connection

therewith, including changes in the Scheme.

An application under Sec 391 (1) for an order convening meetings of creditors and/or members or any

class of them shall be made by a judge’s summons supported by an affidavit in Form No. 34, a copy of

the proposed scheme of compromise or arrangement shall be annexed to the affidavit as exhibit thereto.

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Save as provided in Rule 68, the summons shall be moved ex parte. The summons shall be in Form No.

33 in Companies (Court) Rules, 1959. [Rule 67]

Meaning of ‘class of members/creditors”

If shares of the company are divided in different classes, such a equity, preference, deferred, promoters

etc, they are said to be divided into differerent classes. Classification of shares is based on the rights

attaching to the shares and to ascertain the rights reference must be made to the Articles of Association of

the company.

Notice of the Meeting

Notice of the meeting must be given to the members or any class of them and the creditors or any class of

them atleast 21 clear days before the meeting as per the Tribunal directions in Form No.36 in Companies

(Court) Rules, 1959. The notice must be accompanied by:

(a) The proposed scheme of compromise or arrangement.

(b) A statement u/s 393;

(c) Proxy in Form No. 37 in Companies (Court) Rules, 1959.[ Rule 73]

The notice must be sent individually to each of the members and creditors (or class of them) by-

a. The Chairman appointed for the meeting by the Tribunal

b. If the Tribunal so directs, by the company;

c. The Liquidator;

d. Any other person as the Tribunal may direct.

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e. The notice must be sent by post under certificate of posting to the last known addresses

of the members/creditors.

Non receipt of notice by any member/ creditor would not invalidate proceedings of the meeting. [Eita

India Ltd.]

The notice of the meeting must be published in newspapers atleast 21 days before the date fixed for the

meeting.

Voting at these meetings to be taken by poll only. Voting by show of hands is not allowed. Proxies are

permitted to vote, provided proxies in the form prescribed duly signed by the person entitled to attend and

vote at the meeting are filed with the company at its registered office not later than 48 hours before the

meeting.

(2) If a majority in number representing three-fourths in value of the creditors, or class of creditors, or members,

or class of members as the case may be, present and voting either in person or, where proxies are allowed 2[under

the rules made under section 643], by proxy, at the meeting, agree to any compromise or arrangement, the

compromise or arrangement shall, if sanctioned by the 1[Tribunal], be binding on all the creditors, all the

creditors of the class, all the members, or all the members of the class, as the case may be, and also on the

company, or, in the case of a company which is being wound up, on the liquidator and contributories of the

company.

Thus, 51% majority in number, and 75% in value present and voting at the meeting must approve the scheme.

For example, if at the meeting 100 persons (members in person and proxies) are present, atleast 51 of them must

vote for the resolution and they must be holding atleast 75% of the paid up share capital carrying voting rights. In

the case of creditors, those voting in favour must have the claim not less than 75% of the total amount of claim of

all the creditors present and voting.

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The majority is dual in number and in value. A simple majority of those voting is sufficient whereas the three

fourth requirements relates to the value.

This is neither an ordinary resolution nor a special resolution within the purview of section 189 of the Act. This is

an extraordinary resolution. A copy of this resolution need not be filed with the Registrar of Companies under

Section 192.

Where a scheme is not approved at a meeting, by the requisite majority, but is subsequently approved by

individual affidavits, the Tribunal may sanction the scheme as Sec 391 (2) is not mandatory but is merely

directory and there should be substantial compliance thereof.[SM Holdings Finance Pvt Ltd. V. Mysore

Machinery Mfrs ltd. (1993) 78 Comp Cas (Kar)]

Where neither a meeting has been held nor individual consent has been obtained, the court would not sanction a

Scheme.[Bharat Synthetics Ltd. V. Bank of India (1995) 82 Comp Cas (Bom)]

3[Provided that no order sanctioning any compromise or arrangement shall be made by the 1[Tribunal] unless the

1[Tribunal] is satisfied that the company or any other person by whom an application has been made under sub-

section (1) has disclosed to the 1[Tribunal], by affidavit or otherwise, all material facts relating to the company,

such as the latest financial position of the company, the latest auditor's report on the accounts of the company, the

pendency of any investigation proceedings in relation to the company under sections 235 to 351, and the like.]

(3) An order made by the 1[Tribunal] under sub-section (2) shall have no effect until a certified copy of the order

has been filed with the Registrar.

(4) A copy of every such order shall be annexed to every copy of the memorandum of the company issued after

the certified copy of the order has been filed as aforesaid, or in the case of a company not having a memorandum,

to every copy so issued of the instrument constituting or defining the constitution of the company.

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(5) If default is made in complying with sub-section (4), the company, and every officer of the company who is in

default, shall be punishable with fine which may extend to 4[one hundred rupees] for each copy in respect of

which default is made.

(6) The 1[Tribunal] may, at any time after an application has been made to it under this section stay the

commencement or continuation of any suit or proceeding against the company on such terms as the 1[Tribunal]

thinks fit, until the application is finally disposed of.

5[***]

1. Subs. by Act 11 of 2003, sec. 39, for "Court".

2. Ins. by Act 65 of 1960, sec. 151 (w.e.f. 28-12-1960).

3. Added by Act 31 of 1965, sec. 48 (w.e.f. 15-10-1965).

4. Subs. by Act 53 of 2000, sec. 174, for "ten rupees" (w.e.f. 13-12-2000).

5. Sub-section (7) omitted by Act 11 of 2003, sec. 39.

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Section 392: Power of Tribunal to enforce Compromise and Arrangement.

1Power of Tribunal to enforce compromise and arrangement -

(1) Where the Tribunal makes an order under section 391 sanctioning a compromise or an arrangement in respect

of a company, it-

(a) shall have power to supervise the carrying out of the compromise or an arrangement; and

(b) may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or

make such modifications in the compromise or arrangement as it may consider necessary for the proper working

of the compromise or arrangement.

(2) If the Tribunal aforesaid is satisfied that a compromise or an arrangement sanctioned under section 391 cannot

be worked satisfactorily with or without modifications, it may, either on its own motion or on the application of

any person interested in the affairs of the company, make an order winding up the company, and such an order

shall be deemed to be an order made under section 433 of this Act.

(3) The provisions of this section shall, so far as may be, also apply to a company in respect of which an order has

been made before the commencement of the Companies (Amendment) Act, 2001 sanctioning a compromise or an

arrangement.

1. Subs. by Act 11 of 2003, sec. 40, for section 392

Thus, apart from the power to supervise the carrying out of the scheme, the Tribunal can also give directions on

any matter or make modifications in the compromise or arrangement for the proper working of the scheme.

In Ramlal Anand v. Bank of India 46 Comp Ca 307 (Del), it was held that the order u/s 392 can be passed by the

Tribunal suo motto. It is not necessary for the Tribunal to wait for an application for that purpose.

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In Divya Vasundhara Financiers Ltd. V. K.N. Samant 69 Comp. Cas. 646, it was held that the Tribunal has the

power to issue directions for the proper working of the scheme to any person who may neither be a creditor nor a

member.

Thus, the role of the Tribunal is stressed in unmistakable terms in Section 392. Tribunal has the power to

supervise, modify and also pass winding up order as and when the situation arises in terms of Section 392 itself.

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Section 393: Information as to Compromises or Arrangements with Creditors and Members

(1) Where a meeting of creditors or any class of creditors, or of members or any class of members, is called under

section 391,-

(a) with every notice calling the meeting which is sent to a creditor or member, there shall be sent also a statement

setting forth the terms of the compromise or arrangement and explaining its effect; and in particular, stating any

material interests of the directors, managing director 1[***] or manager of the company, whether in their capacity

as such or as members or creditors of the company or otherwise, and the effect on those interests of the

compromise or arrangement if, and in so far as, it is different from the effect on the like interests of other persons;

and

(b) in every notice calling the meeting which is given by advertisement, there shall be included either such a

statement as aforesaid or a notification of the place at which and the manner in which creditors or members

entitled to attend the meeting may obtain copies of such a statement as aforesaid.

(2) Where the compromise or arrangement affects the rights of debenture-holders of the company, the said

statement shall give the like information and explanation as respects the trustees of any deed for securing the

issue of the debentures as it is required to give as respects the company's directors.

(3) Where a notice given by advertisement includes a notification that copies of a statement setting forth the terms

of the compromise or arrangement proposed and explaining its effect can be obtained by creditors or members

entitled to attend the meeting, every creditor or member so entitled shall, on making an application in the manner

indicated by the notice, be furnished by the company, free of charge, with a copy of the statement.

(4) Where default is made in complying with any of the requirements of this section, the company, and every

officer of the company who is in default, shall be punishable with fine which may extend to 2[fifty thousand

rupees]; and for the purpose of this sub-section any liquidator of the company and any trustee of a deed for

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securing the issue of debentures of the company shall be deemed to be an officer of the company:

Provided that a person shall not be punishable under this sub-section if he shows that the default was due to the

refusal of any other person, being a director, managing director, 1[***] manager or trustee for debenture holders,

to supply the necessary particulars as to his material interests.

(5) Every director, managing director, 1[***] or manager of the company, and every trustee for debenture holders

of the company, shall give notice to the company of such matters relating to himself as may be necessary for the

purposes of this section; and if he fails to do so, he shall be punishable with fine which may extend to 3[five

thousand rupees].

1. The words "managing agent, secretaries and treasurers," omitted by Act 53 of 2000, sec. 175 (w.e.f. 13-12-

2000).

2. Subs. by Act 53 of 2000, sec. 175, for "five thousand rupees" (w.e.f. 13-12-2000).

3. Subs. by Act 53 of 2000, sec. 175, for "five hundred rupees" (w.e.f. 13-12-2000).

Analysis

The explanatory statement required under Section 393 is different from one required under Section 173.

The former does not ordain disclosure of all material facts.[Re Tata Oil Mills Co. Ltd. (1994) 14

CLA13(Bom)].

It should state the share exchange ratio but need not give details of calculation thereof, nor is it necessary

to circulate the valuation report to shareholders. [Hindustan Lever Employees Union v. Hindustan Lever

Limited (1995) 83 Comp Cas30].

As regards disclosure of Directors Interest, the Supreme Court has laid down following parameters in

Mihir Mafatlal v. Mafatlal Industries Ltd. (1996) 23 CLA 1 (SC) case:

26

(a) It must be a special interest different from other interest of Directors.

(b) The Compromise or Arrangement which is put to vote must have an effect on such special

interest of the Director.

(c) Such effect must be different from the effect of Compromise and Arrangement on similar

interest of other persons who are called upon to vote upon the meeting.

27

Section 394: Provisions for facilitating Reconstruction and Amalgamation of Companies

(1) Where an application is made to the 1[Tribunal] under section 391 for the sanctioning of a compromise or

arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown

to the 1 [Tribunal]-

(a) that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme

for the reconstruction of any company or companies, or the amalgamation of any two or more companies; and

(b) That under the scheme the whole or any part of the undertaking, property or liabilities of any company

concerned in the scheme (in this section referred to as a "transferor company") is to be transferred to another

company (in this section referred to as "the transferee company");

The 1 [Tribunal] may, either by the order sanctioning the compromise or arrangement or by a subsequent order,

make provision for all or any of the following matters:-

(a) the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities

of any transferor company;

(b) the allotment or appropriation by the transferee company of any shares, debentures policies, or other like

interests in that company which, under the compromise or arrangement, are to be allotted or appropriated

by that company to or for any person;

(c) the continuation by or against the transferee company of any legal proceedings pending by or against any

transferor company;

(d) the dissolution, without winding up, of any transferor company;

(e) the provision to be made for any persons who, within such time and in such manner as the Court directs

dissent from the compromise or arrangement; and

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(f) such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction

or amalgamation shall be fully and effectively carried out:

2Provided that no compromise or arrangement proposed for the purposes of, or in connection with, a scheme for

the amalgamation of a company, which is being wound up, with any other company or companies; shall be

sanctioned by the 1[Tribunal] unless the Court has received a report from 3 [***] the Registrar that the affairs of

the company have not been conducted in a manner prejudicial to the interests of its members or to public interest.

Provided further that no order for the dissolution of any transferor company under clause (iv) shall be made by

the 1[Tribunal] unless the Official Liquidator has, on scrutiny of the books and papers of the company, made a

report to the 1[Tribunal] that the affairs of the company have not been conducted in a manner prejudicial to the

interests of its members or to public interest.

Analysis

Section 394 comes into operation only in the case of reconstruction of any company or companies or the

amalgamation of any two or more companies.

Even a reconstruction or amalgamation may involve a compromise or arrangement with members or

creditors as the case may be.

The prerequisite for invoking the powers of the Tribunal u/s 394 is an application to be made u/s 391.

A reading of section 391 with 394 proves that the starting point of the whole exercise is the drawing up of

the scheme, which in all probability will take one of the forms, viz.: ‘arrangement’, compromise’,

‘reconstruction’ or ‘amalgamation’.

For Sec 394 to be attracted, the scheme of compromise or arrangement drawn up should be for the

purpose of or in connection with a scheme of reconstruction or amalgamation of companies.

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Some of the most informative and clearly defined schemes of amalgamation have emanated from the

Unilever Group. The Broad headings to be covered at the time of drafting an amalgamation scheme are

as under:

Definitions

Share Capital

Transfer of Undertaking

Treatment of specified properties/rights

Treatment of specified shares

Transfer of guarantees

Trademarks

Contracts, Deeds, Bonds and other instruments

Legal Proceedings

Operative Date of Scheme

Transferor company’s staff, workmen and employees

Conduct of business by transferor company till effective date

Issue of shares by transferee company

Dividends, Profits, bonus/ right shares

Application to the Tribunal

30

Modifications/ amendments to the scheme

Scheme conditional on approvals/ sanctions

Effect of non receipt of approvals/ sanctions

Expenses connected with the scheme

Thus, a well laid out scheme can be exactly fitted within the provisions of Section 394.

(2) Where an order under this section provides for the transfer of any property or liabilities, then, by virtue of the

order; that property shall be transferred to and vest in and those liabilities shall be transferred to and become the

liabilities of the transferee company and in the case of any property, if the order so directs, freed from any charge

which is, by virtue of the compromise or arrangement, to cease to have effect.

(3) Within 4 [thirty] days after the making of an order under this section, every company in relation to which the

order is made shall cause a certified copy thereof to be filed with the Registrar for registration.

If default is made in complying with this sub-section, the company, and every officer of the company who is in

default, shall be punishable with fine which may extend to 5 [five hundred rupees].

(4) In this section-

(a) "Property" includes property rights and powers of every description; and "liabilities" includes duties of every

description; and

(b) "Transferee company" does not include any company other than a company within the meaning of this Act;

but "transferor company" includes any body corporate, whether a company within the meaning of this Act or not.

1. Subs. by Act 11 of 2003, sec. 41, for "Court".

2. Added by Act 31 of 1965, sec. 49 (w.e.f. 15-10-1965).

31

3. The words "the Company Law Board or" omitted by Act 11 of 2003, sec. 41.

4. Subs. by Act 31 of 1965, sec. 62 and Sch., for "fourteen" (w.e.f. 15-10-1965).

5. Subs. by Act 53 of 2000, sec. 176, for "fifty rupees" (w.e.f. 13-12-2000)

32

Section 394A: Notice to be given to Central Government for applications under sections 391 and 394

1 A Notice to be given to Central Government for applications under sections 391 and 394. The 2 [Tribunal] shall

give notice of every application made to it under section 391 or 394 to the Central Government, and shall take

into consideration the representations, if any, made to it by that Government before passing any order under any

of these sections.

1. Ins. by Act 31 of 1965, sec. 50 (w.e.f. 15-10-1965).

2. Subs. by Act 11 of 2003, sec. 42, for "Court".

Analysis

Notice need not be given to the Central Government once again when the Tribunal proceeds to pass final

order t dissolve the transferor company. [Vikram Organics P Ltd. V. Anirox Pigments Ltd. (1997) 25 CLA 157

(Cal)].

The Central Governments power under this section is delegated to Regional Directors of the Department

of Company Affairs. Hence, the notice must be given to the concerned Regional Director within whose

jurisdiction the registered office of the company falls.

The role played by the Central Government u/s 394A is that of an impartial observer, who acts in public

interest, but Tribunal would sanction the scheme if it is otherwise in the mutual interest of companies. [ Re Ucal

Fuel Systems Ltd. (1994) 3 Comp LI 259 (Mad)]

No other authority need to be given a notice of the petition.

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No special notice need to be given to Income Tax Department to find out whether there is a motive of tax

evasion in the proposed amalgamation; general public notice in newspapers is sufficient.[ Re Vinay Metal

Printers Pvt. Ltd (1996) 87 Comp Cas 266 (AP)]

Section 395: Power and duty to acquire shares of shareholders dissenting from scheme or contract approved by majority

(1) Where a scheme or contract involving the transfer of shares or any class of shares in a company (in this

section referred to as "the transferor company") to another company (in this section referred to as "the transferee

company"), has, within four months after the making of the offer in that behalf by the transferee company, been

approved by the holders of not less than nine-tenths in value of the shares whose transfer is involved (other than

shares already held at the date of the offer by, or by a nominee for, the transferee company or its subsidiary), the

transferee company may, at any time within two months after the expiry of the said four months, give notice in

the prescribed manner to any dissenting shareholder, that it desires to acquire his shares; and when such a notice

is given, the transferee company shall, unless, on an application made by the dissenting shareholder within one

month from the date on which the notice was given the 1[Tribunal] thinks fit to order otherwise, be entitled and

bound to acquire those shares on the terms on which, under the scheme or contract, the shares of the approving

shareholders are to be transferred to the transferee company:

Provided that where shares in the transferor company of the same class as the shares whose transfer is involved

are already held as aforesaid to a value greater than one-tenth of the aggregate of the values of all the shares in the

company of such class, the foregoing provisions of this sub-section shall not apply, unless-

(a) The transferee company offers the same terms to all holders of the shares of that class (other than those

already held as aforesaid) whose transfer is involved; and

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(b) the holders who approve the scheme or contract besides holding not less than nine-tenths in value of the

shares (other than those already held as aforesaid) whose transfer is involved, are not less than three-fourths in

number of the holders of those shares.

(2) Where, in pursuance of any such scheme or contract as aforesaid, shares, or shares of any class, in a company

are transferred to another company or its nominee, and those shares together with any other shares or any other

shares of the same class, as the case may be, in the first-mentioned company held at the date of the transfer by, or

by a nominee for, the transferee company or its subsidiary comprise nine-tenths in value of the shares, or the

shares of that class, as the case may be, in the first-mentioned company, then,-

(a) the transferee company shall, within one month from the date of the transfer (unless on a previous transfer in

pursuance of the scheme or contract it has already complied with this requirement), give notice of that fact in the

prescribed manner to the holders of the remaining shares or of the remaining shares of that class, as the case may

be, who have not assented to the scheme or contract; and

(b) Any such holder may, within three months from the giving of the notice to him, require the transferee

company to acquire the shares in question,

and where a shareholder gives notice under clause (b) with respect to any shares, the transferee company shall be

entitled and bound to acquire those shares on the terms on which, under the scheme or contract, the shares of the

approving shareholders were transferred to it, or on such other terms as may be agreed, or as the 1[Tribunal] on

the application of either the transferee company or the shareholder thinks fit to order,

(3) Where a notice has been given by the transferee company under sub-section (1) and the 1[Tribunal] has not,

on an application made by the dissenting shareholder, made an order to the contrary, the transferee company

shall, on the expiry of one month from the date on which the notice has been given, or, if an application to the

1[Tribunal] by the dissenting shareholder is then pending, after that application has been disposed of, transmit a

copy of the notice to the transferor company together with an instrument of transfer executed on behalf of the

35

shareholder by any person appointed by the transferee company and on its own behalf by the transferee company,

and pay or transfer to the transferor company the amount or other consideration representing the price payable by

the transferee company for the shares which, by virtue of this section, that company is entitled to acquire; and

2[the transferor company shall-

(a) Thereupon register the transferee company as the holder of those shares, and

(b) Within one month of the date of such registration, inform the dissenting shareholders of the fact of such

registration and of the receipt of the amount or other consideration representing the price payable to them by the

transferee company.

Provided that an instrument of transfer shall not be required for any share for which a share warrant is for the time

being outstanding.

(4) Any sums received by the transferor company under this section shall be paid into a separate bank account,

and any such sums and any other consideration so received shall be held by that company in trust for the several

persons entitled to the shares in respect of which the said sums or other consideration were respectively received.

3(4A) (a) The following provisions shall apply in relation to every offer of a scheme or contract involving the

transfer of shares or any class of shares in the transferor company to the transferee company, namely:-

(i) every such offer or every circular containing such offer or every recommendation to the members of the

transferor company by its directors to accept such offer shall be accompanied by such information as may be

prescribed;

(ii) every such offer shall contain a statement by or on behalf of the transferee company, disclosing the steps it

has taken to ensure that necessary cash will be available;

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(iii) every circular containing, or recommending acceptance of, such offer shall be presented to the Registrar for

registration and no such circular shall be issued until it is so registered;

(iv) the Registrar may refuse to register any such circular which does not contain the information required to be

given under sub-clause (i) or which sets out such information in a manner likely to give a false impression; and

(v) An appeal shall lie to the 1[Tribunal] against an order of the Registrar refusing to register any such circular.

(b) Whoever issues a circular referred to in sub-clause (iii) of clause (a) which has not been registered, shall be

punishable with fine which may extend to 4[five thousand rupees].]

(5) In this section-

(a) "Dissenting shareholder" includes a shareholder who has not assented to the scheme or contract and any

shareholder who has failed or refused to transfer his shares to the transferee company in accordance with the

scheme or contract;

(b) "Transferor Company" and "Transferee Company" shall have the same meaning as in section 394.

(6) In relation to an offer made by the transferee company to shareholders of the transferor company before the

commencement of this Act, this section shall have effect-

(a) with the substitution, in sub-section (1), for the words "the shares whose transfer is involved (other than shares

already held at the date of the offer by, or by a nominee for, the transferee company or its subsidiary)," of the

words "the shares affected" and with the omission of the proviso to that subsection;

(b) with the omission of sub-section (2);

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(c) with the omission in sub-section (3) of the words "together with an instrument of transfer executed on behalf

of the shareholder by any person appointed by the transferee company and on its own behalf by the transferee

company" and of the proviso to that sub-section; and

(d) With the omission of clause (b) of sub-section (5).

1. Subs. by Act 11 of 2003, sec. 42, for "Court".

2. Subs. by Act 31 of 1965, sec. 51, for certain words (w.e.f. 1540-1965).

3. Ins. by Act 31 of 1965, sec. 51 (w.e.f. 15-10-1965).

4. Subs. by Act 53 of 2000, sec. 177, for "five hundred rupees" (w.e.f. 13-12-2000).

38

Section 396: Power of Central Government to provide for Amalgamation of Companies in 1 Public Interest

The main purpose behind the enactment of this section is to empower the Central Government to speedily

complete the amalgamation process between companies, if the amalgamation is in public interest. The section has

been used by the government when as per government policy, companies are amalgamated. The examples of such

cases are the amalgamations that occurred between public sector banks, sick textile mills, and also involving

public sector companies.

The section provides for the following:

(1) Where the Central Government is satisfied that it is essential in the 1 [public interest] that two or more

companies should amalgamate, then, notwithstanding anything contained in sections 394 and 395 but subject to

the provisions of this section, the Central Government may, by order notified in the Official Gazette, provide for

the amalgamation of those companies into a single company with such constitution; with such property, powers,

rights, interests, authorities and privileges; and with such liabilities, duties, and obligations; as may be specified in

the order.

(2) 2The order aforesaid may provide for the continuation by or against the transferee company of any legal

proceedings pending by or against any transferor company and may also] contain such consequential, incidental

39

and supplemental provisions as may, in the opinion of the Central Government, be necessary to give effect to the

amalgamation.

(3) Every member or creditor (including a debenture holder) of each of the companies before the amalgamation

shall have, as nearly as may be, the same interest in or rights against the company resulting from the

amalgamation as he had in the company of which he was originally a member or creditor; and to the extent to

which the interest or rights of such member or creditor in or against the company resulting from the

amalgamation are less than his interest in or rights against the original company, he shall be entitled to

compensation which shall be assessed by such authority 3[as may be prescribed and every such assessment shall

be published in the Official Gazette],

The compensation so assessed shall be paid to the member, or creditor concerned by the company resulting from

the amalgamation.

4(3A) Any person aggrieved by any assessment of compensation made by the prescribed authority under sub-

section (3) may, within thirty days from the date of publication of such assessment in the Official Gazette prefer

an appeal to the 5[Tribunal] and thereupon the assessment of the compensation shall be made by the 5[Tribunal].

(4) No order shall be made under this section, unless-

(a) a copy of the proposed order has been sent in draft to each of the companies concerned; 6[***]

4(aa) the time for preferring an appeal under sub-section (3A) has expired, or where any such appeal has been

preferred, the appeal has been finally disposed of; and

(b) the Central Government has considered, and made such modifications, if any, in the draft order as may seem

to it desirable in the light of any suggestions and objections which may be received by it from any such company

within such period as the Central Government may fix in that behalf, not being less than two months from the

40

date on which the copy aforesaid is received by that company, or from any class of shareholders therein, or from

any creditors or any class of creditors thereof.

(5) Copies of every order made under this section shall, as soon as may be after it has been made, be laid before

both Houses of Parliament.

1. Subs, by Act 65 of 1960, sec. 152, for "national interest" (w.e.f. 28-12-1960).

2. Subs. by Act 35 of 1985, sec- 3, for "The order aforesaid may" (w.e.f. 24-5-1985).

3. Subs. by Act 35 of 1985, sec. 3, for "as may be prescribed" (w.e.f. 24-5-1985).

4. Ins. by Act 35 of 1985, sec. 3 (w.e.f. 24-5-1985).

5. Subs. by Act 11 of 2003, sec. 43, for "Company Law Board".

6. The word "and" omitted by Act 35 of 1985, sec. 3 (w.e.f. 24-5-1985).

Thus, Section 396 which overrides Section 394 and 395 provides for a faster process of amalgamation of companies,

provided they are in public interest.

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1 Section 396A: Preservation of books and papers of Amalgamated Company

The books and papers of a company which has been amalgamated with, or whose shares have been acquired by,

another company under this Chapter shall not be disposed of without the prior permission of the Central

Government and before granting such permission, that Government may appoint a person to examine the books

and papers or any of them for the purpose of ascertaining whether they contain any evidence of the commission of

an offence in connection with the promotion or formation, or the management of the affairs, of the first-

mentioned company or its amalgamation or the acquisition of its shares.

1. Ins. by Act 31 of 1965, sec. 52 (w.e.f. 15-10-1965).

Analysis

When shares are acquired of a transferor company u/s 395, the transferor company continues its legal

existence and becomes a subsidiary of the transferee company. In these circumstances one normally

expects only the transferee company to preserve its books. However, this section takes a departure

provided the shares are acquired under the provisions of section 395.

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Before granting permission, the Central Government the Central Government may appoint a person to

examine the books and papers for the purpose of ascertaining whether they contain any evidence of the

commission of the offence in connection with the following events of the transferor company:

(a) Promotion or formation of the transferor company

(b) Management of the affairs

(c) Its amalgamation with the transferee company

(d) The acquisition of the shares of the transferor company.

1 Section 376: Conditions Prohibiting Reconstruction or Amalgamation of Company.

Where any provision in the memorandum or articles of a company, or in any resolution passed in general meeting

by, or by the Board of Directors of the company, or in an agreement between the company and any other person,

whether made before or after the commencement of this Act, prohibits the reconstruction of the company or its

amalgamation with any body corporate or bodies corporate, either absolutely or except on the condition that the

managing director or manager of the company is appointed or reappointed as managing director or manager of the

reconstructed company or of the body resulting from amalgamation, as the case may be, shall become void with

effect from the commencement of this Act, or be void, as the case may be.

1. Subs. by Act 53 of 2000, sec. 169, for section 376 (w.e.f. 13-12-2000)

43

Section 494: Power of liquidator to accept shares, etc., as consideration for sale of property of Company.

Section 494 of the Companies Act provides another mode of reconstruction of a company. This section occurs in

Chapter III of part VII of the Companies Act and it deals with voluntary winding up. The relevance of this section

in the context of compromise, arrangements and reconstruction is spelt out clearly in the judgement of Calcutta

High Court in Hari Krishna v. Hoolungooree Tea Co. AIR 1969 Cal 312. The relevant extract is as follows:

“It may be said that there are four methods for effecting reorganization of a company. One as per Section 391,

second Compulsory amalgamation by Government u/s 396, third would be what is contemplated by sec 494 and

the fourth method is amalgamation without coming to the court”

The section provides for the following:

(1) Where-

(a) a company (in this section called "the transferor company") is proposed to be, or is in course of being, wound

up altogether voluntarily; and

44

(b) the whole or any part of its business or property is proposed to be transferred or sold to another company,

whether a company within the meaning of this Act or not (in this section called "the transferee company").

the liquidator of the transferor company may, with the sanction of a special resolution of that company conferring

on the liquidator either a general authority or an authority in respect of any particular arrangement,-

(i) receive, by way of compensation or part compensation for the transfer or sale, shares, policies, or other like

interests in the transferee company, for distribution among the members of the transferor company; or

(ii) enter into any other arrangement whereby the members of the transferor company may, in lieu of receiving

cash, shares, policies, or other like interests or in addition thereto, participate in the profits of, or receive any other

benefit from, the transferee company.

(2) Any sale or arrangement in pursuance of this section shall be binding on the members of the transferor

company.

(3) If any member of the transferor company who did not vote in favour of the special resolution expresses his

dissent therefrom in writing addressed to the liquidator, and left at the registered office of the company within

seven days after the passing of the resolution he may require the liquidator either-

(a) to abstain from carrying the resolution into effect; or

(b) to purchase his interest at a price to be determined by agreement or by arbitration in the manner provided by

this section.

(4) If the liquidator elects to purchase the member's interest, the purchase money shall be paid before the

company is dissolved, and be raised by the liquidator in such manner as may be determined by special resolution.

(5) A special resolution shall not be invalid for the purposes of this section by reason only that it is passed before

or concurrently with a resolution for voluntary winding up or for appointing liquidators; but if an order is made

45

within a year for winding up the company by 1[the Tribunal], the special resolution shall not be valid unless it is

2[sanctioned by the Tribunal].

(6) The provisions of the Arbitration Act, 1940, other than those restricting the application of that Act in respect

of the subject-matter of the arbitration, shall apply to all arbitrations in pursuance of this section.

1. Subs. by Act 11 of 2003, sec. 84, for "or subject to the supervision of the Court".

2. Subs. by Act 11 of 2003, sec. 84, for "sanctioned by the Court".

PROVISIONS UNDER SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT 1985 (SICA)

46

Sick Industrial Companies (Special Provisions) Act 1985 (SICA)

Amalgamation involving a ‘sick industrial company’ as transferor or transferee company is outside the purview

of the Companies Act 1956. It is governed by the Sick Industrial Companies (Special Provisions) Act 1985

(SICA).

SECTION 18: PREPARATION AND SANCTION OF SCHEMES.

(1) Where an order is made under sub-section (3) of section 17 in relation to any sick industrial company, the

operating agency specified in the order shall prepare, as expeditiously as possible and ordinarily within a period

of ninety days from the date of such order, a scheme with respect to such company providing for any one or more

of the following measures, namely:-

(a) the financial reconstruction of the sick industrial  company;

(b) the proper management of the sick industrial company by change in or take over of, management of the

sick industrial company;

(c) the amalgamation of –

(i) the sick industrial company with any other company, or

47

(ii) any other company with the sick industrial company (hereafter in this section, in the case of

sub-clause (i), the other company, and in the case of sub-clause (ii), the sick industrial

company, referred to as 'transferee company');

(iii) the sale or lease of a part or whole of any industrial undertaking of the sick industrial

company;

(da) the rationalization of managerial personnel, supervisory staff and workmen in accordance with law;

(d) such other preventive, ameliorative and remedial measures as may be appropriate

(e) such incidental, consequential or supplemental measures as may be necessary or expedient in connection

with or for the purposes of the measures specified in clauses (a) to (e).

(2) The scheme referred to in sub-section (1) may provide for any one or more of the following, namely –

(a) the constitution, name and registered office, the capital, assets, powers, rights, interests, authorities and

privileges, duties and obligations of the sick industrial company or, as the case may be, of the transferee

company;

(b) the transfer to the transferee company of the business, properties, assets and liabilities of the sick

industrial company on such terms and conditions as may be specified in the scheme;

(c) any change in the Board of Directors, or the appointment of new Board of Directors, of the sick industrial

company and the authority by whom, the manner in which and the other terms and conditions on which, such

change or appointment shall be made and in the case of appointment of a new Board of Directors or of any

director, the period for which such appointment shall be made;

48

(d) the alteration of the memorandum or articles of association of the sick industrial company or, as the case

may be, of the transferee company for the purpose of altering the capital structure thereof, or for such other

purposes as may be necessary to give effect to the reconstruction or amalgamation;

(e) the continuation by, or against, the sick industrial company or, as the case may be, the transferee company

of any action or other legal proceeding, pending against the sick industrial company immediately before the

date of the order made under sub-section (3) of section 17;

(f) the reduction of the interest or rights which the shareholders have in the sick industrial company to such

extent as the Board considers necessary in the interests of the reconstruction, revival or rehabilitation of the

sick industrial company or for the maintenance of the business of the sick industrial company;

(g) the allotment to the shareholders of the sick industrial company, of shares in the sick industrial company

or, as the case may be, in the transferee company and where any shareholder claims payment in cash and not

allotment of shares, or where it is not possible to allot shares to any shareholder the payment of cash to those

shareholders in full satisfaction of their claims –

(i) in respect of their interest in shares in the sick industrial company before its reconstruction or

amalgamation; or

(ii) where such interest has been reduced under clause (f) in respect of their interest in shares as so reduced;

(h) any other terms and conditions for the reconstruction or amalgamation of the sick industrial company;

(a) sale of the industrial undertaking of the sick industrial company free from all encumbrances and all

liabilities of the company or other such encumbrances and liabilities as may be specified to any person,

including a co-operative society formed by the employees of such  undertaking and fixing of reserve price

for such sale;

49

(j) Lease of the industrial undertaking of the sick industrial company to any person including a co-operative

society formed by the employees of such undertaking;

(k) Method of sale of the assets of the industrial undertaking of the sick industrial company such as by public

auction or by inviting tenders or in any other manner as may be specified and for the manner of publicity

therefore;

(l) transfer or issue of the shares in the sick industrial company at the face value or at the intrinsic value

which may be at discount value or such other value as may be specified to any industrial company or any

person including the executives and employees of the sick industrial  company;

(m) Such incidental, consequential and supplemental matters as may be necessary to secure that the

reconstruction or amalgamation or other measures mentioned in the scheme are fully and effectively carried

out.

(3)(a) The scheme prepared by the operating agency shall be examined by the Board and a copy of the

scheme with modification, if any, made by the Board shall be sent, in draft to the sick industrial company and

the operating agency and in the case of amalgamation, also to any other company concerned, and the Board

shall publish or cause to be published the draft scheme in brief in such daily newspapers as the Board may

consider necessary, for suggestions and objections, if any, within such period as the Board may specify; 

(b) The Board may make such modifications, if any, in the draft scheme as it may consider necessary in the

light of the suggestions and objections received from the sick industrial company and the operating agency

and also from the transferee company and any other company concerned in the amalgamation and from any

shareholder or any creditors or employees of such companies: 

Provided that where the scheme relates to amalgamation the said scheme shall be laid before the company

other than the sick industrial company in the general meeting for the approval of the scheme by its

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shareholders and no such scheme shall be proceeded with unless it has been approved, with or without

modification, by a special resolution passed by the shareholders of the company other than the sick industrial

company. 

(4) The scheme shall thereafter be sanctioned, as soon as may be, by the Board (hereinafter referred to as the

'sanctioned scheme') and shall come into force on such date as the Board may specify in this behalf:

Provided that different dates may be specified for different provisions of the scheme.

(5) The Board may on the recommendations of the operating agency or otherwise, review any sanctioned

scheme and make such modifications as it may deem fit or may by order in writing direct any operating

agency specified in the order, having regard to such guidelines as may be specified in the order, to prepare a

fresh scheme providing for such   measures as the operating agency may consider necessary.

(6) When a fresh scheme is prepared under sub-section (5) the provisions of sub-sections (3) and (4) shall

apply in relation thereto as they apply to in relation to a scheme prepared under sub-section (1).

(6A) Where a sanctioned scheme provides for the transfer of any property or liability of the sick industrial

company in favour of any other company or person or where such scheme provides for the transfer of any

property or liability of any other company or person in favour of the sick industrial company, then, by virtue

of, and to the extent provided in, the scheme, on and from the date of coming into operation of the sanctioned

scheme or any provision thereof, the property shall be transferred to, and vest in, and the liability shall

become the liability of, such other company or person or, as the case may be, the   sick industrial company;

(7) The sanction accorded by the Board under sub-section (4) shall be conclusive evidence that all the

requirements of this scheme relating to the reconstruction or amalgamation, or any other measure specified

therein have been complied with and a copy of the sanctioned scheme certified in writing by an officer of the

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Board to be a true copy   thereof, shall, in all legal proceedings (whether in appeal or otherwise) be admitted

as evidence.

(8) On and from the date of the coming into operation of the sanctioned scheme or any provision thereof, the

scheme or such provision shall be binding on the sick industrial company and the transferee company, or as

the case may be, the other company and also on the shareholders, creditors and guarantors and employees of

the said companies. 

(9) If any difficulty arises in giving effect to the provisions of the sanctioned scheme, the Board may, on the

recommendation of the operating agency or otherwise, by order do anything, not inconsistent with such

provisions, which appears to it to be necessary or expedient for the purpose of removing the difficulty.

(10) The Board may, if it deems necessary or expedient so to do, by order in writing, direct any operating

agency specified in the order to implement a sanctioned scheme with such terms and conditions and in

relation to such sick industrial company as may be specified in the order.

(11) Where the whole of the undertaking of the sick industrial company is sold under a sanctioned scheme,

the Board may distribute the sale proceeds to the parties entitled thereto in accordance with the provisions of

section 529A and other provisions of the Companies Act, 1956 (1 of 1956).

(12) The Board may monitor periodically the implementation of the sanctioned scheme.

Thus, it is to be noticed that the provisions contained in Sec 391 to 394 are all engrafted in Section 18 of SICA.

Thus, SICA helps in rehabilitation of a sick company in the fastest manner, with attendant financial relief’s from

banks and financial institutions and the short cutting of various procedures contained in the Companies Act 1956.

Section 18 now provides for effecting both normal and reverse merger. Reverse merger takes place when a

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healthy company amalgamates with a financially weak company. One can sum up by saying that the fastest route

of merger is through SICA as this is the only act apart from IRBA Act which acts as a single window clearance.

PROVISIONS UNDER THE INCOME TAX ACT ‘1962

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CAPITAL GAINS AND AMALGAMATION

Is there any capital gains incidence at the time of amalgamation?

Under Section 45 of the Income Tax Act, any profit or gain arising from the sale or transfer of a capital asset is

chargeable to tax under the head ‘Capital Gains”.

As per section 2(47) of the Income Tax Act , Transfer in relation to a capital asset includes sale, exchange, or

relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under

any law.

As per Section 2(14) “Capital Asset” is defined to include property of any kind, whether fixed or circulating, movable

or immovable, tangible or intangible.

The learned author Sh. N.A. Palkhiwala in his book ‘The Law and practice of Income Tax Act, in his own usual style

rules out the incidence of capital gains tax in the following manner:

Where company A amalgamates with and merges into company B and the shareholders of company A are

allotted shares in company B in their own right and not as nominees of company A , question arises as to

54

whether those shareholders are liable to tax under the head ‘Capital Gains’. It is clear that such amalgamation

does not involve any transfer or sale of the shares of company A. It does not involve any exchange either.

Whereas the allotment of shares by company B to the shareholders of company A does not involve a transfer

of property by either of the two parties to the other. There is no transfer of assets by the shareholders of

company A to company B; the transfer of assets of company A cannot be regarded as transfer by its

shareholders. Nor there is any transfer by company B when it allots its share capital to the shareholders of

company A. The allotment of shares by the company cannot be regarded as a transfer of property by that

company.

The merger does not involve ‘relinquishment of the asset’ because relinquishment postulates the continued

existence of the asset over which the rights of its holder are relinquished or surrendered, whereas upon

amalgamation the shares in company A cease to exist.

The amalgamation does not involve extinguishment of the assets, viz. shares in company A; but the better

view is that it does not involve ‘extinguishment of any rights therein’ which expression seems to indicate the

continued existence of the capital asset over which the rights of its holders are extinguished. Section 2(47)

refers to extinguishment of any rights in the capital asset; it does not use the expression ‘the extinguishment

of the capital asset or any rights therein’.

Therefore, amalgamation would not involve a transfer within section 2(47) and no tax under the head ‘capital

gains’ would be payable by the shareholders of the company.

In CIT v. Rasik Lal Manek Lal (1975) 95 ITR 656 it was held that amalgamation does not involve an

exchange or relinquishment of shares by amalgamating company.

SPECIFIC EXEMPTION CONTAINED IN SECTION 47 OF THE INCOME TAX ACT WITH RESPECT TO AMALGAMATION:

Section 47: TRANSACTIONS NOT REGARDED AS TRANSFER.

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Nothing contained in section 45 shall apply to the following transfers:

(vi) Any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the

amalgamated company if the amalgamated company is an Indian company; 

(via) Any transfer, in a scheme of amalgamation, of a capital asset being a share or shares held in an Indian

company, by the amalgamating foreign company to the amalgamated foreign company, if – 

(a) At least twenty-five per cent of the shareholders of the amalgamating foreign company continue to remain

shareholders of the amalgamated foreign company,

And

(b) Such transfer does not attract tax on capital gains in the country, in which the amalgamating company is

incorporated;

(vib) Any transfer, in a demerger, of a capital asset by the demerged company to the resulting company, if the

resulting company is an Indian company;

(vic) Any transfer in a demerger, of a capital asset, being a share or shares held in an Indian company, by the

demerged foreign company to the resulting foreign company, if - (a) At least seventy-five per cent of the

shareholders of the demerged foreign company continue to remain shareholders of the resulting foreign company;

And

(b) Such transfer does not attract tax on capital gains in the country, in which the demerged foreign company is

incorporated:

Provided that the provisions of sections 391 to 394 of the Companies Act, 1956 (1 of 1956) shall not apply in case

of demergers referred to in this clause; 

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(vid) Any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the

demerged company if the transfer or issue is made in consideration of demerger of the undertaking;

(vii) Any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held

by him in the amalgamating company, if - 

(a) The transfer is made in consideration of the allotment to him of any share or shares in the amalgamated

company,

And

(b) The amalgamated company is an Indian company; 

Thus, the above clauses of Section 47 specifically exempt transactions involving Amalgamations.

Is Capital Gains Exemption Available to the Shareholder if he gets Shares and Bonds in Exchange of Shares?

In CIT v. Goutham Sarabhai Trust, Gujarat High Court held that if the shareholders of amalgamating

company are allotted something more than shares in the amalgamated company viz. bonds or debentures,

benefit under section 47(Vii) will not be available.

The same High Court again reconsidered the matter in CIT v. Leena Sarabhai and held that there is no

transfer as defined under section 2(47) when the assessee receives shares and bonds in exchange of shares in

the scheme of amalgamation.

Thus, in a typical case where shares and bonds (including convertible) are allotted in exchange of shares,

there is no capital gains liability.

This idea can be used for structuring the capital gearing of the amalgamated company in the post merger

scenario.

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TAX BENEFITS THAT WILL CONTINUE EVEN AFTER AMALGAMATION IN THE HANDS OF THE TRANSFEREE COMPANY/ AMALGAMATED COMPANY:

Scientific Research Expenditure u/s 35

Expenditure on acquisition of Patent Rights or Copyrights u/s 35A

Expenditure on know how u/s 35AB

Expenditure for obtaining license to operate Telecommunication Services u/s 35ABB

Amortization of certain Preliminary Expenses u/s 35D

Expenditure on Amalgamation u/s 35DD

Expenditure on prospecting, etc for minerals u/s 35E

Special provision for deductions in the case of business for prospecting, etc., for mineral oil.

Income u/s 41(1)

Section 72 A St off and Carry Forward of losses

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Section 35: EXPENDITURE ON SCIENTIFIC RESEARCH.

(1) In respect of expenditure on scientific research, the following deductions shall be allowed -

  (i) Any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research

related to the business.

Explanation : Where any such expenditure has been laid out or expended before the commencement of the

business (not being expenditure laid out or expended before the 1st day of April, 1973) on payment of any salary

[as defined in Explanation 2 below sub-section (5) of section 40A] to an employee engaged in such scientific

research or on the purchase of materials used in such scientific research, the aggregate of the expenditure so laid

out or expended within the three years immediately preceding the commencement of the business shall, to the

extent it is certified by the prescribed authority 535 to have been laid out or expended on such scientific research,

be deemed to have been laid out or expended in the previous year in which the business is commenced;

(ii)  Any sum paid to a scientific research association which has as its object the undertaking of scientific research

or to a university, college or other institution to be used for scientific research.

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Provided that such association, university, college or institution is for the time being approved for the purposes of

this clause by the prescribed authority by notification in the Official Gazette;

(iii) Any sum paid to a university, college or other institution to be used for research in social science or statistical

research.

Provided that such university, college or institution is for the time being approved for the purposes of this clause

by the prescribed authority by notification in the Official Gazette;

(iv) In respect of any expenditure of a capital nature on scientific research related to the business carried on by the

assessee, such deduction as may be admissible under the provisions of sub-section (2):

Provided that the scientific research association, university, college or other institution referred to in clause (ii) or

clause (iii) shall make an application in the prescribed form and manner to the prescribed authority for the

purpose of grant of approval, or  continuance thereof, under clause (ii) or, as the case may be, clause (iii) :

Provided further that the prescribed authority may, before granting approval under clause (ii) or clause (iii), call

for such documents (including audited annual accounts) or information from the scientific research association,

university, college or other institution as it thinks necessary in order to satisfy itself about the genuineness of the

activities of the scientific research association, university, college or other institution and that authority may also

make such inquiries as it may deem necessary in this behalf :

Provided also that any notification issued by the prescribed authority under clause (ii) or clause (iii) shall, at any

one time, have effect for such assessment year or years, not exceeding three assessment years (including an

assessment year or years commencing before the date on which such notification is issued) as may be specified in

the notification.

(2) For the purposes of clause (iv) of sub-section (1), -

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(i) In a case where such capital expenditure is incurred before the 1st day of April, 1967, one-fifth of the capital

expenditure incurred in any previous year shall be deducted for that previous year; and the balance of the

expenditure shall be deducted in equal installments for each of the four immediately succeeding previous years;

(ia) In a case where such capital expenditure is incurred after the 31st day of March, 1967, the whole of such

capital expenditure incurred in any previous year shall be deducted for that previous year:

Provided that no deduction shall be admissible under this clause in respect of any expenditure incurred on the

acquisition of any land, whether the land is acquired as such or as part of any property, after the 29th day of

February, 1984.

Explanation 1 : Where any capital expenditure has been incurred before the commencement of the business, the

aggregate of the expenditure so incurred within the three years immediately preceding the commencement of the

business shall be deemed to have been incurred in the previous year in which the business is commenced;

Explanation 2 : For the purposes of this clause, -  (a) "Land" includes any interest in land; and  (b) the acquisition

of any land shall be deemed to have been made by the assessee on the date on which the instrument of transfer of

such land to him has been registered under the Registration Act, 1908 (16 of 1908), or where he has taken or

retained the possession of such land or any part thereof in part performance of a contract of the nature referred to

in section 53A of the Transfer of Property Act, 1882 (4 of 1882), the date on which he has so taken or retained

possession of such land or part;   

(ii) Notwithstanding anything contained in clause (i), where an asset representing expenditure of a capital nature

incurred before the 1st day of April, 1967,  ceases to be used in a previous year for scientific research related to

the business and the value of the asset at the time of the cessation, together with the aggregate of deductions

already allowed under clause (i) falls short of the said expenditure, then -   (a) There shall be allowed a deduction

for that previous year of an amount equal to such deficiency, and   (b) no deduction shall be allowed under that

clause for that previous year or for any subsequent previous year;

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(iii) If the asset mentioned in clause (ii) is sold, without having been used for other purposes, in the year of

cessation, the sale price shall be taken to be the value of the asset at the time of the cessation; and if the asset is

sold, without having been used for other purposes, in a previous year subsequent to the year of cessation, and the

sale price falls short of the value of the asset taken into account at the time of cessation, an amount equal to the

deficiency shall be allowed as a deduction for the previous year in which the sale took place;

(iv) Where a deduction is allowed for any previous year under this section in respect of expenditure represented

wholly or partly by an asset, no deduction shall be allowed under clause (ii) of sub-section (1) of section 32 for

the same or any other previous year in respect of that asset;

(v) Where the asset mentioned in clause (ii) is used in the business after it ceases to be used for scientific research

related to that business, depreciation shall be admissible under clause (ii) of sub-section (1) of section 32.

(2A) Where, before the 1st day of March, 1984, the assessee pays any sum (being any sum paid with a specified

direction that the sum shall not be used for the acquisition of any land or building or construction of any building)

to a scientific research association or university or college or other institution referred to in clause (ii) of sub-

section (1) or to a public sector company to be used for scientific research undertaken under a programme

approved in this behalf by the prescribed authority having regard to the social, economic and industrial needs of

India, then, -  (a) There shall be allowed a deduction of a sum equal to one and one-third times the sum so paid;

and

(b) No deduction in respect of such sum shall be allowed under clause (ii) of sub-section (1) for the same or any

other assessment year.

Explanation: For the purposes of this sub-section, "public sector company" shall have the same meaning as in

clause (b) of the Explanation below sub-section (2B) of section 32A.

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(2AA) Where the assessee pays any sum to a National Laboratory or a University or an Indian Institute of

Technology with a specific direction that the said sum shall be used for scientific research undertaken under a

programme approved in this behalf by the prescribed authority, then – 

(a) There shall be allowed a deduction of a sum equal to one and one-fourth times the sum so paid; and

(b) No deduction in respect of such sum shall be allowed under any other provision of the Income-tax Act:

Provided that the prescribed authority shall, before granting approval, satisfy itself about the feasibility of

carrying out the scientific research and shall submit its report to the Director General in such form as may be

prescribed.

Explanation : For the purposes of this section, -  (a) "National Laboratory" means a scientific laboratory

functioning at the national level under the aegis of the Indian Council of Agricultural Research, the Indian

Council of Medical Research, the Council of Scientific and Industrial Research, the Defence Research and

Development Organization, the Department of Electronics, the Department of Bio-Technology or the Department

of Atomic Energy and which is approved as a National Laboratory by the prescribed authority in such manner as

may be prescribed;

(b) "University" shall have the same meaning as in Explanation to clause (ix) of section 47;

(c) "Indian Institute of Technology" shall have the same meaning as that of "Institute" in clause (g) of section 3 of

the Institutes of Technology Act, 1961 (59 of 1961).

(2AB)(1) Where a company engaged in the business of manufacture or production of any drugs, pharmaceuticals,

electronic equipment, computers, telecommunication equipment, chemicals or any other article or thing notified

by the Board incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land

or building) on in house research and development facility as approved by the prescribed authority, then, there

shall be allowed a deduction of a sum equal to one and one-fourth times of the expenditure so incurred. 

63

(2) No deduction shall be allowed in respect of the expenditure mentioned in clause (1) under any other provision

of this Act.

(3) No company shall be entitled for deduction under clause (1) unless it enters into an agreement with the

prescribed authority for co-operation in such research and development facility and for audit of the accounts

maintained for that facility.

(4) The prescribed authority shall submit its report in relation to the approval of the said facility to the Director-

General in such form and within such time as may be prescribed.

(5) No deduction shall be allowed in respect of expenditure referred to in clause (1) which is incurred after the

31st day of March, 2000

(2B)(a)   Where, before the 1st day of March, 1984, an assessee has incurred any expenditure (not being in the

nature of capital expenditure incurred on the acquisition of any land or building or construction of any building)

on scientific research undertaken under a programme approved in this behalf by the prescribed authority having

regard to the social, economic and industrial needs of India, he shall, subject to the provisions of this sub-section,

be allowed a deduction of a sum equal to one and one-fourth times the amount of the expenditure certified by the

prescribed authority to have been so incurred during the previous year.

(b) Where a deduction has been allowed under clause (a) for any previous year in respect of any expenditure, no

deduction in respect of such expenditure shall be allowed under clause (i) of sub-section (1) or clause (ia) of sub-

section (2) for the same or any other previous year. 

(c) Where a deduction is allowed for any previous year under this sub-section in respect of expenditure

represented wholly or partly by an asset, no deduction shall be allowed in respect of that asset under clause (ii) of

sub-section (1) of section 32 for the same or any subsequent previous year.

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(d) Any deduction made under this sub-section in respect of any expenditure on scientific research in excess of

the expenditure actually incurred shall be deemed to have been wrongly made for the purposes of this Act if the

assessee fails to furnish within one year of the period allowed by the prescribed authority for completion of the

programme, a certificate of its completion obtained from that authority and the provisions of sub-section (5B) of

section 155 shall apply accordingly.

(3) If any question arises under this section as to whether, and if so, to what extent, any activity constitutes or

constituted, or any asset is or was being used for, scientific research, the Board shall refer the question to the

prescribed authority, whose decision shall be final.

(4) The provisions of sub-section (2) of section 32 shall apply in relation to deductions allowable under clause

(iv) of sub-section (1) as they apply in relation to deductions allowable in respect of depreciation. 

(5) Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers to the

amalgamated company (being an Indian company) any asset representing expenditure of a capital nature on

scientific research, -  (i) The amalgamating company shall not be allowed the deduction under clause (ii) or clause

(iii) of sub-section (2); and

(ii) The provisions of this section shall, as far as may be, apply to the amalgamated company as they would have

applied to the amalgamating company if the latter had not so sold or otherwise transferred the asset.

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Section 35A: Expenditure on acquisition of Patent Rights or Copyrights

(1) In respect of any expenditure of a capital nature incurred after the 28th day of February, 1966 but before the

1st day of April, 1998, on the acquisition of patent rights or copyrights (hereafter, in this section, referred to as

rights) used for the purposes of the business, there shall, subject to and in accordance with the provisions of this

section, be allowed for each of the relevant previous years, a deduction equal to the appropriate fraction of the

amount of such expenditure.

Explanation: For the purposes of this section, - 

(i) "Relevant previous year" means the fourteen previous years beginning with the previous year in which such

expenditure is incurred or, where such expenditure is incurred before the commencement of the business, the

fourteen previous years beginning with the previous year in which the business commenced :

Provided that where the rights commenced, that is to say, became effective, in any year prior to the previous year

in which expenditure on the acquisition thereof was incurred by the assessee, this clause shall have effect with the

substitution for the reference to fourteen years of a reference to fourteen years less the number of complete years,

which, when the rights are acquired by the assessee, have elapsed since the commencement thereof, and if

fourteen years have elapsed as aforesaid, of a reference to one year;

66

(ii) "Appropriate fraction" means the fraction the numerator of which is one and the denominator of which is the

number of the relevant previous years.

(2) Where the rights come to an end without being subsequently revived or where the whole or any part of the

rights is sold and the proceeds of the sale (so far as they consist of capital sums) are not less than the cost of

acquisition thereof remaining unallowed, no deduction under sub-section (1) shall be allowed in respect of the

previous year in which the rights come to an end or, as the case may be, the whole or any part of the rights is sold

or in respect of any subsequent previous year.

(3) Where the rights either come to an end without being subsequently revived or are sold in their entirety and the

proceeds of the sale (so far as they consist of capital sums) are less than the cost of acquisition thereof remaining

unallowed, a deduction equal to such cost remaining unallowed or, as the case may be, such cost remaining

unallowed as reduced by the proceeds of the sale, shall be allowed in respect of the previous year in which the

rights come to an end, or, as the case may be, are sold.

(4) Where the whole or any part of the rights is sold and the proceeds of the sale (so far as they consist of capital

sums) exceed the amount of the cost of acquisition thereof remaining unallowed, so much of the excess as does

not exceed the difference between the cost of acquisition of the rights and the amount of such cost remaining

unallowed shall be chargeable to income-tax as income of the business of the previous year in which the whole or

any part of the rights is sold.

Explanation: Where the whole or any part of the rights is sold in a previous year in which the business is no

longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that previous

year.

(5) Where a part of the rights is sold and sub-section (4) does not apply, the amount of the deduction to be

allowed under sub-section (1) shall be arrived at by - (a) Subtracting the proceeds of the sale (so far as they

consist of capital sums) from the amount of the cost of acquisition of the rights remaining unallowed; and

67

(b) Dividing the remainder by the number of relevant previous years which have not expired at the beginning of

the previous year during which the rights are sold.

(6) Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers the rights to the

amalgamated company (being an Indian company), -

(i) The provisions of sub-sections (3) and (4) shall not apply in the case of the amalgamating company,

And 

(ii) The provisions of this section shall, as far as may be, apply to the amalgamated company as they would have

applied to the amalgamating company if the latter had not so sold or otherwise transferred the rights.

(7) Where in a scheme of demerger, the demerged company sells or otherwise transfers the rights to the resulting

company (being an Indian company), - 

(i) The provisions of sub-sections (3) and (4) shall not apply in the case of the demerged company;

And 

(ii) The provisions of this section shall, as far as may be, apply to the resulting company as they would have

applied to the demerged company, if the latter had not sold or otherwise transferred the rights.

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Section 35AB: EXPENDITURE ON KNOW-HOW.

(1) Subject to the provisions of sub-section (2), where the assessee has paid in any previous year relevant to the

assessment year commencing on or before the 1st day of April, 1998 any lump sum consideration for acquiring

any know-how for use for the purposes of his business, one-sixth of the amount so paid shall be deducted in

computing the profits and gains of the business for that previous year, and the balance amount shall be deducted

in equal installments for each of the five immediately succeeding previous years.

(2) Where the know-how referred to in sub-section (1) is developed in a laboratory, university or institution

referred to in sub-section (2B) of section 32A, one-third of the said lump sum consideration paid in the previous

year by the assessee shall be deducted in computing the profits and gains of the business for that year, and the

balance amount shall be deducted in equal installments for each of the two immediately succeeding previous

years.

(3) Where there is a transfer of an undertaking under a scheme of amalgamation or demerger and the

amalgamating or the demerged company is entitled to a deduction under this section, then, the amalgamated

company or the resulting company, as the case may be, shall be entitled to claim deduction under this section in

respect of such undertaking to the same extent and in respect of the residual period as it would have been

69

allowable to the amalgamating company or the demerged company, as the case may be, had such amalgamation

or demerger not taken place.

Explanation : For the purposes of this section, "know-how" means any industrial information or technique likely

to assist in the manufacture or processing of goods or in the working of a mine, oil well or other sources of

mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto).

Section 35ABB: EXPENDITURE FOR OBTAINING LICENCE TO OPERATE TELECOMMUNICATION SERVICES.

(1) In respect of any expenditure, being in the nature of capital expenditure, incurred for acquiring any right to

operate telecommunication services either before the commencement of the business to operate

telecommunication services or thereafter at any time during any previous year 554e ] and for which payment has

actually been made to obtain a licence, there shall, subject to and in accordance with the provisions of this

section, be allowed for each of the relevant previous years, a deduction equal to the appropriate fraction of the

amount of such expenditure.

Explanation : For the purposes of this section, - (i) "Relevant previous years" means, -   (A) In a case where the

licence fee is actually paid before the commencement of the business to operate telecommunication services, the

previous years beginning with the previous year in which such business commenced;

(B) In any other case, the previous years beginning with the previous year in which the licence fee is actually

paid,  and the subsequent previous year or years during which the licence, for which the fee is paid, shall be in

force;

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(ii) "Appropriate fraction" means the fraction the numerator of which is one and the denominator of which is the

total number of the relevant previous years;

(iii) "Payment has actually been made" means the actual payment of expenditure irrespective of the previous year

in which the liability for the expenditure was incurred according to the method of accounting regularly employed

by the assessee.

(2) Where the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums) are less

than the expenditure incurred remaining unallowed, a deduction equal to such expenditure remaining unallowed,

as reduced by the proceeds of the transfer, shall be allowed in respect of the previous year in which the licence is

transferred.

(3) Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far as they consist

of capital sums) exceed the amount of  the expenditure incurred remaining unallowed, so much of the excess as

does not exceed the difference between the expenditure incurred to obtain the licence and the amount of such

expenditure remaining unallowed shall be chargeable to income-tax as profits and gains of the business in the

previous year in which the licence has been transferred.

Explanation: Where the licence is transferred in a previous year in which the business is no longer in existence,

the provisions of this sub-section shall apply as if the business is in existence in that previous year.

(4) Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far as they consist

of capital sums) are not less than the amount of expenditure incurred remaining unallowed, no deduction for such

expenditure shall be allowed under sub-section (1) in respect of the previous year in which the licence is

transferred or in respect of any subsequent previous year or years.

(5) Where a part of the licence is transferred in a previous year and sub-section (3) does not apply, the deduction

to be allowed under sub-section (1) for expenditure incurred remaining unallowed shall be arrived at by -

71

(a) Subtracting the proceeds of transfer (so far as they consist of capital sums) from the expenditure remaining

unallowed; and

(b) Dividing the remainder by the number of relevant previous years which have not expired at the beginning of

the previous year during which the licence is transferred.

(6) Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers the licence to

the amalgamated company (being an Indian company), - (i) The provisions of sub-sections (2), (3) and (4) shall

not apply in the case of the amalgamating company; and 

(ii) The provisions of this section shall, as far as may be, apply to the amalgamated company as they would have

applied to the amalgamating company if the latter had not transferred the licence.

(7) Where, in a scheme of demerger, the demerged company sells or otherwise transfers the licence to the

resulting company (being an Indian company), -  (i) The provisions of sub-sections (2), (3) and (4) shall not apply

in the case of the demerged company; and 

(ii) The provisions of this section shall, as far as may be, apply to the resulting company as they would have

applied to the demerged company if the latter had not transferred the licence."

(8) Where a deduction for any previous year under sub-section (1) is claimed and allowed in respect of any

expenditure referred to in that sub-section, no deduction shall be allowed under sub-section (1) of section 32 for

the same previous year or any subsequent previous year.

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Section 35D: AMORTISATION OF CERTAIN PRELIMINARY EXPENSES.

(1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India,

incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2), - 

(i) Before the commencement of his business, or 

(ii) After the commencement of his business in connection with the extension of his industrial undertaking or in

connection with his setting up a new industrial unit,  the assessee shall, in accordance with and subject to the

provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of

the ten successive previous years beginning with the previous year in which the business commences or, as the

case may be, the previous year in which the extension of the industrial undertaking is completed or the new

industrial unit commences production or operation.

Provided that where an assessee incurs after the 31st day of March, 1998, any expenditure specified in sub-

section (2), the provisions of this sub-section shall have effect as if for the words "an amount equal to one-tenth of

73

such expenditure for each of the ten successive previous years", the words "an amount equal to one-fifth of such

expenditure for each of the five successive previous years" had been substituted.

(2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the

following clauses, namely:- 

(a) Expenditure in connection with –

(i) Preparation of feasibility report;

(ii) Preparation of project report;

(iii) Conducting market survey or any other survey necessary for the business of the assessee;

(iv) Engineering services relating to the business of the assessee

Provided that the work in connection with the preparation of the feasibility report or the project report or the

conducting of market survey or of any other survey or the engineering services referred to in this clause is carried

out by the assessee himself or by a concern which is for the time being approved in this behalf by the Board;

(b) Legal charges for drafting any agreement between the assessee and any other person for any purpose relating

to the setting up or conduct of the business of the assessee;

(c) Where the assessee is a company, also expenditure – 

(i) By way of legal charges for drafting the Memorandum and Articles of Association of the company; 

(ii) On printing of the Memorandum and Articles of Association;

(iii) By way of fees for registering the company under the provisions of the Companies Act, 1956 (1 of 1956); 

74

(iv) In connection with the issue, for public subscription, of shares in or debentures of the company, being

underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the

prospectus; 

(d) Such other items of expenditure (not being expenditure eligible for any allowance or deduction under any

other provision of this Act) as may be prescribed.

(3) Where the aggregate amount of the expenditure referred to in sub-section (2) exceeds an amount calculated at

two and one-half per cent –

(a) Of the cost of the project, or

(b) Where the assessee is an Indian company, at the option of the company, of the capital employed in the

business of the company, the excess shall be ignored for the purpose of computing the deduction allowable under

sub-section (1).

Provided that where the aggregate amount of expenditure referred to in sub-section (2) is incurred after the 31st

day of March, 1998, the provisions of this sub-section shall have effect as if for the words "two and one-half per

cent, the words "five per cent had been substituted.

Explanation: In this sub-section, -

(a) "Cost of the project" means – 

(i) In a case referred to in clause (i) of sub-section (1), the actual cost of the fixed assets, being land, buildings,

leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of

land and buildings), which are shown in the books of the assessee as on the last day of the previous year in which

the business of the assessee commences;

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(ii) In a case referred to in clause (ii) of sub-section (1), the actual cost of the fixed assets, being land, buildings,

leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of

land and buildings), which are shown in the books of the assessee as on the last day of the previous year in which

the extension of the industrial undertaking is completed or, as the case may be, the new industrial unit commences

production or operation, in so far as such fixed assets have been acquired or developed in connection with the

extension of the industrial undertaking or the setting up of the new industrial unit of the assessee;

(b) "Capital employed in the business of the company" means -

  (i) In a case referred to in clause (i) of sub-section (1), the aggregate of the issued share capital, debentures and

long-term borrowings as on the last day of the previous year in which the business of the company commences;

(ii) In a case referred to in clause (ii) of sub-section (1), the aggregate of the issued share capital, debentures and

long-term borrowings as on the last day of the previous year in which the extension of the industrial undertaking

is completed, or, as the case may be, the new industrial unit commences production or operation, in so far as such

capital, debentures and long-term borrowings have been issued or obtained in connection with the extension of

the industrial undertaking or setting up of the new industrial unit of the company;

(c) "Long-term borrowings" means – 

(i) Any moneys borrowed by the company from the Government or the Industrial Finance Corporation of India or

the Industrial Credit and Investment Corporation of India or any other financial institution which is for the time

being approved by the Central Government for the purposes of clause (viii) of sub-section (1) of section 36 or any

banking institution (not being a financial institution referred to above), or

(ii) Any moneys borrowed or debt incurred by it in a foreign country in respect of the purchase outside India of

capital plant and machinery, where the terms under which such moneys are borrowed or the debt is incurred

provide for the repayment thereof during a period of not less than seven years.

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(4) Where the assessee is a person other than a company or a co-operative society, no deduction shall be

admissible under sub-section (1) unless the accounts of the assessee for the year or years in which the expenditure

specified in sub-section (2) is incurred have been audited by an accountant as defined in the Explanation below

sub-section (2) of section 288, and the assessee furnishes, along with his return of income for the first year in

which the deduction under this section is claimed, the report of such audit in the prescribed form duly signed and

verified by such accountant and setting forth such particulars as may be prescribed 570 .

(5) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is

transferred, before the expiry of the period of ten years specified in sub-section (1), to another Indian company in

a scheme of amalgamation, - (i) No deduction shall be admissible under sub-section (1) in the case of the

amalgamating company for the previous year in which the amalgamation takes place; and 

(ii) The provisions of this section shall, as far as may be, apply to the amalgamated company as they would have

applied to the amalgamating company if the amalgamation had not taken place.

(5A) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is

transferred, before the expiry of the period specified in sub-section (1), to another company in a scheme of

demerger, -

(i) No deduction shall be admissible under sub-section (1) in the case of the demerged company for the previous

year in which the demerger takes place; and

(ii) The provisions of this section shall, as far as may be, apply to the resulting company, as they would have

applied to the demerged company, if the demerger had not taken place.  

(6) Where a deduction under this section is claimed and allowed for any assessment year in respect of any

expenditure specified in sub-section (2), the expenditure in respect of which deduction is so allowed shall not

qualify for deduction under any other provision of this Act for the same or any other assessment year.

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Section 35DD: AMORTISATION OF EXPENDITURE IN CASE OF AMALGAMATION OR DEMERGER.

(1) Where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999,

wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be

allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous

years beginning with the previous year in which the amalgamation or demerger takes place.

(2) No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other

provision of this Act.

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Section 35E: DEDUCTION FOR EXPENDITURE ON PROSPECTING, ETC., FOR CERTAIN MINERALS.

(1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, is

engaged in any operations relating to prospecting for, or extraction or production of, any mineral and incurs, after

the 31st day of March, 1970, any expenditure specified in sub-section (2), the assessee shall, in accordance with

and subject to the provisions of this section, be allowed for each one of the relevant previous years a deduction of

an amount equal to one-tenth of the amount of such expenditure.

(2) The expenditure referred to in sub-section (1) is that incurred by the assessee after the date specified in that

sub-section at any time during the year of commercial production and any one or more of the four years

immediately preceding that year, wholly and exclusively on any operations relating to prospecting for any mineral

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or group of associated minerals specified in Part A or Part B, respectively, of the Seventh Schedule or on the

development of a mine or other natural deposit of any such mineral or group of associated minerals :

Provided that there shall be excluded from such expenditure any portion thereof which is met directly or

indirectly by any other person or authority and any sale, salvage, compensation or insurance moneys realised by

the assessee in respect of any property or rights brought into existence as a result of the expenditure.

(3) Any expenditure – 

(i) On the acquisition of the site of the source of any mineral or group of associated minerals referred to in sub-

section (2) or of any rights in or over such site;

(ii) On the acquisition of the deposits of such mineral or group of associated minerals or of any rights in or over

such deposits; or

(iii) Of a capital nature in respect of any building, machinery, plant or furniture for which allowance by way of

depreciation is admissible under section 32, shall not be deemed to be expenditure incurred by the assessee for

any of the purposes specified in sub-section (2).

(4) The deduction to be allowed under sub-section (1) for any relevant previous year shall be -  

(a) An amount equal to one-tenth of the expenditure specified in sub-section (2) (such one-tenth being hereafter in

this sub-section referred to as the installment); or  

(b) Such amount as is sufficient to reduce to nil the income (as computed before making the deduction under this

section) of that previous year arising from the commercial exploitation [whether or not such commercial

exploitation is as a result of the operations or development referred to in sub-section (2)] of any mine or other

natural deposit of the mineral or any one or more of the minerals in a group of associated minerals as aforesaid in

respect of which the expenditure was incurred,  whichever amount is less :

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Provided that the amount of the installment relating to any relevant previous year, to the extent to which it

remains unallowed, shall be carried forward and added to the installment relating to the previous year next

following and deemed to be part of that installment, and so on, for succeeding previous years, so, however, that

no part of any installment shall be carried forward beyond the tenth previous year as reckoned from the year of

commercial production.

(5) For the purposes of this section, - 

(a) "Operation relating to prospecting" means any operation undertaken for the purpose of exploring, locating or

proving deposits of any mineral, and includes any such operation which proves to be infructuous or abortive;

(b) "Year of commercial production" means the previous year in which as a result of any operation relating to

prospecting, commercial production of any mineral or any one or more of the minerals in a group of associated

minerals specified in Part A or Part B, respectively, of the Seventh Schedule, commences;

(c) "Relevant previous years" means the ten previous years beginning with the year of commercial production. 

(6) Where the assessee is a person other than a company or a co-operative society, no deduction shall be

admissible under sub-section (1) unless the accounts of the assessee for the year or years in which the expenditure

specified in sub-section (2) is incurred have been audited by an accountant as defined in the Explanation below

sub-section (2) of section 288, and the assessee furnishes, along with his return of income for the first year in

which the deduction under this section is claimed, the report of such audit in the prescribed form duly signed and

verified by such accountant and setting forth such particulars as may be prescribed 571 .

(7) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is

transferred, before the expiry of the period of ten years specified in sub-section (1), to another Indian company in

a scheme of amalgamation – 

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(i) No deduction shall be admissible under sub-section (1) in the case of the amalgamating company for the

previous year in which the amalgamation takes place; and 

(ii) The provisions of this section shall, as far as may be, apply to the amalgamated company as they would have

applied to the amalgamating company if the amalgamation had not taken place.

(7A) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is

transferred, before the expiry of the period of ten years specified in sub-section (1), to another Indian company in

a scheme of demerger, - 

(i) No deduction shall be admissible under sub-section (1) in the case of the demerged company for the previous

year in which the demerger takes place; and

(ii) The provisions of this section shall, as far as may be, apply to the resulting company as they would have

applied to the demerged company, if the demerger had not taken place.

(8) Where a deduction under this section is claimed and allowed for any assessment year in respect of any

expenditure specified in sub-section (2), the expenditure in respect of which is so allowed shall not qualify for

deduction under any other provision of this Act for the same or any other assessment year.

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Section 42: SPECIAL PROVISION FOR DEDUCTIONS IN THE CASE OF BUSINESS FOR PROSPECTING, ETC., FOR MINERAL OIL.

(1)  For the purpose of computing the profits or gains of any business consisting of the prospecting for or

extraction or production of mineral oils in relation to which the Central Government has entered into an

agreement with any person for the association or participation of the Central Government or any person

authorized by it in such business (which agreement has been laid on the Table of each House of Parliament), there

shall be made in lieu of, or in addition to, the allowances admissible under this Act, such allowances as are

specified in the agreement in relation – 

(a) To expenditure by way of infructuous or abortive exploration expenses in respect of any area surrendered prior

to the beginning of commercial production by the assessee;

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(b) After the beginning of commercial production, to expenditure incurred by the assessee, whether before or after

such commercial production, in respect of drilling or exploration activities or services or in respect of physical

assets used in that connection, except assets on which allowance for depreciation is admissible under section 32 :

Provided that in relation to any agreement entered into after 31st day of March, 1981, this clause shall have effect

subject to the modification that the words and figures "except assets on which allowance for depreciation is

admissible under section 32" had been omitted;

(c) To the depletion of mineral oil in the mining area in respect of the assessment year relevant to the previous

year in which commercial production is begun and for such succeeding year or years as may be specified in the

agreement; and such allowances shall be computed and made in the manner specified in the agreement, the other

provisions of this Act being deemed for this purpose to have been modified to the extent necessary to give effect

to the terms of the agreement.

Explanation: For the purposes of this section, "mineral oil" includes petroleum and natural gas.

(2) Where the business of the assessee consisting of the prospecting for or extraction or production of petroleum

and natural gas is transferred wholly or partly or any interest in such business is transferred in accordance with

the agreement referred to in sub-section (1), subject to the provisions of the said agreement and where the

proceeds of the transfer (so far as they consist of capital sums) – 

(a) Are less than the expenditure incurred remaining unallowed, a deduction equal to such expenditure remaining

unallowed, as reduced by the proceeds of transfer, shall be allowed in respect of the previous year in which such

business or interest, as the case may be, is transferred; 

(b) Exceed the amount of the expenditure incurred remaining unallowed, so much of the excess as does not

exceed the difference between the expenditure incurred in connection with the business or to obtain interest

therein and the amount of such expenditure remaining unallowed, shall be chargeable to income-tax as profits and

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gains of the business in the previous year in which the business of interest therein, whether wholly or partly, had

been transferred:

Provided that in a case where the provisions of this clause do not apply, the deduction to be allowed for

expenditure incurred remaining unallowed shall be arrived at by subtracting the proceeds of transfer (so far as

they consist of capital sums) from the expenditure remaining unallowed. 

Explanation : Where the business or interest in such business is transferred in a previous year in which such

business carried on by the assessee is not longer in existence, the provisions of this clause shall apply as if the

business is in existence in that previous year; 

(c) Are not less than the amount of the expenditure incurred remaining unallowed, not deduction for such

expenditure shall be allowed in respect of the previous year in which the business or interest in such business is

transferred or in respect of any subsequent year or years.

Provided that where in a scheme of amalgamation, the amalgamating company sells or otherwise transfers the

business to the amalgamated company (being an Indian company), the provisions of this sub-section –

(i) Shall not apply in the case of the amalgamating company; and

(ii) Shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating

company if the latter had not transferred the business or interest in the business.

Explanation - For the purposes of this section, "mineral oil" includes petroleum and natural gas.

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Section 41: PROFITS CHARGEABLE TO TAX.

(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure

or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and

subsequently during any previous year, -

(a) The first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in

respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or

cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to

be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that

previous year, whether the business or profession in respect of which the allowance or deduction has been made is

in existence in that year or not; Or

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(b) The successor in business has obtained, whether in cash or in any other manner whatsoever, any amount in

respect of which loss or expenditure was incurred by the first-mentioned person or some benefit in respect of the

trading liability referred to in clause (a) by way of remission or cessation thereof, the amount obtained by the

successor in business or the value of benefit accruing to the successor in business shall be deemed to be profits

and gains of the business or profession, and accordingly chargeable to income-tax as the income of that previous

year.

Explanation 1: For the purposes of this sub-section, the expression "loss or expenditure or some benefit in respect

of any such trading liability by way of remission or cessation thereof" shall include the remission or cessation of

any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under

clause (b) of that sub-section by way of writing off such liability in his accounts.

Explanation: For the purposes of this sub-section, "successor in business" means, -

(i) Where there has been an amalgamation of a company with another company, the amalgamated company;

(ii) Where the first-mentioned person is succeeded by any other person in that business or profession, the other

person;

(iii) Where a firm carrying on a business or profession is succeeded by another firm, the other firm;

(iv) Where there has been a demerger, the resulting company.

"(2) Where any building, machinery, plant or furniture, - 

(a) Which is owned by the assessee.

(b) In respect of which depreciation is claimed under clause (i) of sub-section (1) of section 32; and

87

(c) Which was or has been used for the purposes of business, is sold, discarded, demolished or destroyed and the

moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the

amount of scrap value, if any, exceeds the written down value, so much of the excess as does not exceed the

difference between the actual cost and the written down value shall be chargeable to income-tax as income of the

business of the previous year in which the moneys payable for the building, machinery, plant or furniture became

due.

Explanation: Where the moneys payable in respect of the building, machinery, plant or furniture referred to in this

sub-section become due in a previous year in which the business for the purpose of which the building,

machinery, plant or furniture was being used is no longer in existence, the provision of this sub-section shall

apply as if the business is in existence in that previous year.

(3) Where an asset representing expenditure of a capital nature on scientific research within the meaning of clause

(iv) of sub-section (1), or clause (c) of sub-section (2B), of section 35 read with clause (4) of section 43, is sold,

without having been used for other purposes, and the proceeds of the sale together with the total amount of the

deductions made under clause (i) or, as the case may be, the amount of the deductions under clause (ia) of sub-

section (2), or clause (c) of sub-section (2B), of section 35 exceed the amount of the capital expenditure, the

excess or the amount of the deductions so made, whichever is the less, shall be chargeable to income-tax as

income of the business or profession of the previous year in which the sale took place.

Explanation : Where the moneys payable in respect of any asset referred to in this sub-section become due in a

previous year in which the business is no longer in existence, the provisions of this sub-section shall apply as if

the business is in existence in that previous year.  

(4) Where a deduction has been allowed in respect of a bad debt or part of debt under the provisions of clause

(vii) of sub-section (1) of section 36, then, if the amount subsequently recovered on any such debt or part is

greater than the difference between the debt or part of debt and the amount so allowed, the excess shall be deemed

88

to be profits and gains of business or profession, and accordingly chargeable to income-tax as the income of the

previous year in which it is recovered, whether the business or profession in respect of which the deduction has

been allowed is in existence in that year or not.

Explanation: For the purposes of sub-section (3), -

(1) "Moneys payable" in respect of any building, machinery, plant or furniture includes

(a) Any insurance, salvage or compensation moneys payable in respect thereof;

(b) Where the building, machinery, plant or furniture is sold, the price for which it is sold,  so, however, that

where the actual cost of a motor car is, in accordance with the proviso to clause (1) of section 43, taken to be

twenty-five thousand rupees, the moneys payable in respect of such motor car shall be taken to be a sum which

bears to the amount for which the motor car is sold or, as the case may be, the amount of any insurance, salvage

or compensation moneys payable in respect thereof (including the amount of scrap value, if any) the same

proportion as the amount of twenty-five thousand rupees bears to the actual cost of the motor car to the assessee

as it would have been computed before applying the said proviso;  

(2) "Sold" includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in

force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to

the amalgamated company where the amalgamated company is an Indian company. 

(4A) Where a deduction has been allowed in respect of any special reserve created and maintained under clause

(viii) of sub-section (1) of section 36, any amount subsequently withdrawn from such special reserve shall be

deemed to be the profits and gains of business or profession and accordingly be chargeable to income-tax as the

income of the previous year in which such amount is withdrawn. 

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Explanation: Where any amount is withdrawn from the special reserve in a previous year in which the business is

no longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that

previous year.

(5) Where the business or profession referred to in this section is no longer in existence and there is income

chargeable to tax under sub-section (1), sub-section (3) sub-section (4) or sub-section (4A) in respect of that

business or profession, any loss, not being a loss sustained in speculation business  which arose in that business or

profession during the previous year in which it ceased to exist and which could not be set off against any other

income of that previous year shall, so far as may be, be set off against the income chargeable to tax under the sub-

sections aforesaid.

(6) References in sub-section (3) to any other provision of this Act which has been amended or omitted by the

Direct Tax Laws (Amendment) Act, 1987 shall, notwithstanding such amendment or omission, be construed, for

the purposes of that sub-section, as if such amendment or omission had not been made.

Section 72A: PROVISIONS RELATING TO CARRY FORWARD AND SET OFF OF ACCUMULATED LOSS AND UNABSORBED DEPRECIATION ALLOWANCE IN AMALGAMATION OR DEMERGER, ETC. –

(1) Where there has been an amalgamation of a company owning an industrial undertaking or a ship with another

company and the Central Government, on the recommendation of the specified authority, is satisfied that the

following conditions are fulfilled, namely: - 

(a) The amalgamating company was not immediately before such amalgamation, financially viable by reason of

its liabilities, losses and other relevant factors;

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(b) The amalgamation was in the public interest; and 

(c) Such other conditions as the Central Government may, by notification in the Official Gazette, specify, to

ensure that the benefit under this section is restricted to amalgamations which would facilitate the rehabilitation or

revival of the business of the amalgamating company,  then, the Central Government may make a declaration to

that effect, and thereupon, notwithstanding anything contained in any other provision of this Act, the accumulated

loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case

may be, allowance for depreciation of the amalgamated company for the previous year in which the

amalgamation was effected, and the other provisions of this Act relating to set off and carry forward of loss and

allowance for depreciation shall apply accordingly.

(2) Notwithstanding anything contained in sub-section (1), the accumulated loss shall not be set off or carried

forward and the unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company

unless the following conditions are fulfilled, namely:- 

(i) During the previous year relevant to the assessment year for which such set off or allowance is claimed, the

business of the amalgamating company is carried on by the amalgamated company without any modification or

reorganization or with such modification or reorganization as may be approved by the Central Government to

enable the amalgamated company to carry on such business more economically or more efficiently;

(ii) The amalgamated company furnishes, along with its return of income for the said assessment year, a

certificate from the specified authority to the effect that adequate steps have been taken by that company for the

rehabilitation or revival of the business of the amalgamating company.

(3) Where a company owning an industrial undertaking or a ship proposes to amalgamate with any other company

and such other company submits the proposed scheme of amalgamation to the specified authority and that

authority is satisfied, after examining the scheme and taking into account all relevant facts, that the conditions

referred to in sub-section (1) would be fulfilled if such amalgamation is effected in accordance with such scheme

91

or, as the case may be, in accordance with such scheme as modified in such manner as that authority may specify,

it shall intimate such other company that, after the amalgamation is effected in accordance with such scheme or,

as the case may be, such scheme as so modified, it would make (unless there is any material change in the

relevant facts) a recommendation to the Central Government under sub-section (1).

(4) Where there has been reorganization of business, whereby, a firm is succeeded by a company fulfilling the

conditions laid down in clause (xiii) of section 47 or a proprietary concern is succeeded by a company fulfilling

the conditions laid down in clause (xiv) of section 47, then, notwithstanding anything contained in any other

provisions of this Act, the accumulated loss and the unabsorbed depreciation of the predecessor firm or the

proprietary concern, as the case may be, shall be deemed to be the loss or allowance for depreciation of the

successor company for the previous year in which business reorganization was effected and other provisions of

this act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly :-

Provided that if any of the conditions laid down in the proviso to clause (xiii) or the proviso to clause (xiv) to

section 47 are not complied with, the set off of loss or allowance of depreciation made in any previous year in the

hands of the successor company, shall be deemed to be the income of the company chargeable to tax in the year

in which such conditions are not complied with.

(5) For the purposes of sub-section (4), -

(a) "Accumulated loss" means so much of the loss of the predecessor firm or the proprietary concern, as the case

may be, under the head Profits and gains of business or profession' (not being a loss sustained in a speculation

business) which such predecessor firm or the proprietary concern would have been entitled to carry forward and

set off under the provisions of section 72 if the reorganization of business had not taken place,

(b) "Unabsorbed depreciation" means so much of the allowance for depreciation of the predecessor firm or the

proprietary concern, as the case may be, which remains to be allowed and which would have been allowed to the

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predecessor firm or the proprietary concern, as the case may be, under the provisions of this Act, if the

reorganization of business had not taken place.

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ACCOUNTING TREATMENT FOR M&A

Accounting Standard (AS) 14 Accounting for Amalgamations

Contents

1. INTRODUCTION

2. DEFINITIONS

3. TYPES OF AMALGAMATIONS

4. METHODS OF ACCOUNTING FOR AMALGAMATIONS

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The Pooling of Interests Method

The Purchase Method

5. CONSIDERATION

6. TREATMENT OF RESERVES ON AMALGAMATION

7. TREATMENT OF GOODWILL ARISING ON AMALGAMATION

8. BALANCE OF PROFIT AND LOSS ACCOUNT

9. TREATMENT OF RESERVES SPECIFIED IN A SCHEME OF AMALGAMATION

10. DISCLOSURE

11. AMALGAMATION AFTER THE BALANCE SHEET DATE

12. MAIN PRINCIPLES

13. THE POOLING OF INTERESTS METHOD

14. THE PURCHASE METHOD

15. COMMON PROCEDURES

1. INTRODUCTION

This standard deals with accounting for amalgamations and the treatment of any resultant

goodwill or reserves. This standard is directed principally to companies although some of its

requirements also apply to financial statements of other enterprises.

This standard does not deal with cases of acquisitions which arise when there is a purchase by

one company (referred to as the acquiring company) of the whole or part of the shares, or the

whole or part of the assets, of another company (referred to as the acquired company) in

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consideration for payment in cash or by issue of shares or other securities in the acquiring

Company or partly in one form and partly in the other. The distinguishing feature of an

acquisition is that the acquired company is not dissolved and its separate entity continues to exist.

2. DEFINITIONS

The following terms are used in this standard with the meanings specified:

(a) Amalgamation means an amalgamation pursuant to the provisions of the Companies Act, 1956 or any

other statute which may be applicable to companies.

(b) Transferor company means the company which is amalgamated into another company.

(c) Transferee company means the company into which a transferor company is amalgamated.

(d) Reserve means the portion of earnings, receipts or other surplus of an enterprise (whether capital or

revenue) appropriated by the management for a general or a specific purpose other than a provision for

depreciation or diminution in the value of assets or for a known liability.

(e) Amalgamation in the nature of merger is an amalgamation which satisfies all the following conditions:

(i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and

liabilities of the transferee company.

(ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor

company (other than the equity shares already held therein, immediately before the amalgamation, by the

transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee

company by virtue of the amalgamation.

(iii) The consideration for the amalgamation receivable by those equity shareholders of the transferor

company who agree to become equity shareholders of the transferee company is discharged by the

transferee company wholly by the issue of equity shares in the transferee company, except that cash may

be paid in respect of any fractional shares.

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(iv) The business of the transferor company is intended to be carried on, after the amalgamation, by the

transferee company.

(v) No adjustment is intended to be made to the book values of the assets and liabilities of the transferor

company when they are incorporated in the financial statements of the transferee company except to

ensure uniformity of accounting policies.

(f) Amalgamation in the nature of purchase is an amalgamation which does not satisfy any one or more of

the conditions specified in sub-paragraph (e) above.

(g) Consideration for the amalgamation means the aggregate of the shares and other securities issued and the

payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor

company.

(h) Fair value is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a

knowledgeable, willing seller in an arm’s length transaction.

(i) Pooling of interests is a method of accounting for amalgamations the object of which is to account for the

amalgamation as if the separate businesses of the amalgamating companies were intended to be continued by the

transferee company.

Accordingly, only minimal changes are made in aggregating the individual financial statements of the

amalgamating companies.

3. Types of Amalgamations

Generally speaking, amalgamations fall into two broad categories.

In the first category are those amalgamations where there is a genuine pooling not merely of the assets and

liabilities of the amalgamating companies but also of the shareholders’ interests and of the businesses of these

companies. Such amalgamations are amalgamations which are in the nature of ‘merger’ and the accounting

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treatment of such amalgamations should ensure that the resultant figures of assets, liabilities, capital and reserves

more or less represent the sum of the relevant figures of the amalgamating companies.

In the second category are those amalgamations which are in effect a mode by which one company acquires

another company and, as a consequence, the shareholders of the company which is acquired normally do not

continue to have a proportionate share in the equity of the combined company, or the business of the company

which is acquired is not intended to be continued.

An amalgamation is classified as an ‘amalgamation in the nature of merger’ when all the conditions listed in

paragraph 3(e) are satisfied.

There are, however, differing views regarding the nature of any further conditions that may apply.

Some believe that, in addition to an exchange of equity shares, it is necessary that the shareholders of the

transferor company obtain a substantial share in the transferee company even to the extent that it should not be

possible to identify any one party as dominant therein. This belief is based in part on the view that the exchange

of control of one company for an insignificant share in a larger company does not amount to a mutual sharing of

risks and benefits.

Others believe that the substance of an amalgamation in the nature of merger is evidenced by meeting certain

criteria regarding the relationship of the parties, such as the former independence of the amalgamating companies,

the manner of their amalgamation, the absence of planned transactions that would undermine the effect of the

amalgamation, and the continuing participation by the management of the transferor company in the management

of the transferee company after the amalgamation.

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4. Methods of Accounting for Amalgamations

There are two main methods of accounting for amalgamations:

(a) The pooling of interests method; and

(b) The purchase method.

The use of the pooling of interests method is confined to circumstances which meet the criteria referred to in

paragraph 3(e) for an amalgamation in the nature of merger.

The object of the purchase method is to account for the amalgamation by applying the same principles as are

applied in the normal purchase of assets. This method is used in accounting for amalgamations in the nature of

purchase.

The Pooling of Interests Method

Under the pooling of interests method, the assets, liabilities and reserves of the transferor company are recorded

by the transferee company at their existing carrying amounts (after making the adjustments required).

If, at the time of the amalgamation, the transferor and the transferee companies have conflicting accounting

policies, a uniform set of accounting policies is adopted following the amalgamation. The effects on the financial

statements of any changes in accounting policies are reported in accordance with Accounting Standard (AS) 5,

Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.

The Purchase Method

Under the purchase method, the transferee company accounts for the amalgamation either by incorporating the

assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable

assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation. The

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identifiable assets and liabilities may include assets and liabilities not recorded in the financial statements of the

transferor company.

Where assets and liabilities are restated on the basis of their fair values, the determination of fair values may be

influenced by the intentions of the transferee company. For example, the transferee company may have a

specialized use for an asset, which is not available to other potential buyers. The transferee company may intend

to effect changes in the activities of the transferor company which necessitate the creation of specific provisions

for the expected costs, e.g. planned employee termination and plant relocation costs. Consideration

5. Consideration

The consideration for the amalgamation may consist of securities, cash or other assets. In determining the value

of the consideration, an assessment is made of the fair value of its elements. A variety of techniques is applied in

arriving at fair value. For example, when the consideration includes securities, the value fixed by the statutory

authorities may be taken to be the fair value. In case of other assets, the fair value may be determined by reference

to the market value of the assets given up. Where the market value of the assets given up cannot be reliably

assessed, such assets may be valued at their respective net book values

Many amalgamations recognize that adjustments may have to be made to the consideration in the light of one or

more future events. When the additional payment is probable and can reasonably be estimated at the date

accounting, it is included in the calculation of the consideration. In all other cases, the adjustment is recognized as

soon as the amount is determinable [Accounting Standard (AS) 4, Contingencies and Events Occurring after the

Balance Sheet Date].

6. Treatment of Reserves on Amalgamation

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If the amalgamation is an ‘amalgamation in the nature of merger’, the identity of the reserves is preserved and

they appear in the financial statements of the transferee company in the same form in which they appeared in the

financial statements of the transferor company. Thus, for example, the General Reserve of the transferor company

becomes the General Reserve of the transferee company, the Capital Reserve of the transferor company becomes

the Capital Reserve of the transferee company and the Revaluation Reserve of the transferor company becomes

the Revaluation Reserve of the transferee company. As a result of preserving the identity, reserves which are

available for distribution as dividend before the amalgamation would also be available for distribution as dividend

after the amalgamation. The difference between the amount recorded as share capital issued (plus any additional

consideration in the form of cash or other assets) and the amount of share capital of the transferor company is

adjusted.

If the amalgamation is an ‘amalgamation in the nature of purchase’, the identity of the reserves, other than the

statutory reserves is not preserved. The amount of the consideration is deducted from the value of the net assets of

the transferor company acquired by the transferee company. If the result of the computation is negative, the

difference is debited to goodwill arising on amalgamation. If the result of the computation is positive, the

difference is credited to Capital Reserve.

Certain reserves may have been created by the transferor company pursuant to the requirements of, or to avail of

the benefits under, the Income-tax Act, 1961; for example, Development Allowance Reserve, or Investment

Allowance Reserve. The Act requires that the identity of the reserves should be preserved for a specified period.

Likewise, certain other reserves may have been created in the financial statements of the transferor company in

terms of the requirements of other statutes. Though, normally, in an amalgamation in the nature of purchase, the

identity of reserves is not preserved, an exception is made in respect of reserves of the aforesaid (referred to

hereinafter as ‘statutory reserves’) and such reserves retain their identity in the financial statements of the

transferee company in the same form in which they appeared in the financial statements of the transferor

company, so long as their identity is required to be maintained to comply with the relevant statute.

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This exception is made only in those amalgamations where the requirements of the relevant statute for recording

the statutory reserves in the books of the transferee company are complied with. In such cases the statutory

reserves are recorded in the financial statements of the transferee company by a corresponding debit to a suitable

account head (e.g., ‘Amalgamation Adjustment Account’) which is disclosed as a part of ‘miscellaneous

expenditure’ or other similar category in the balance sheet. When the identity of the statutory reserves is no

longer required to be maintained, both the reserves and the aforesaid account are reversed.

7. Treatment of Goodwill Arising on Amalgamation

Goodwill arising on amalgamation represents a payment made in anticipation of future income and it is

appropriate to treat it as an asset to be amortized to income on a systematic basis over its useful life. Due to the

nature of goodwill, it is frequently difficult to estimate its useful life with reasonable certainty. Such estimation is,

therefore, made on a prudent basis. Accordingly, it is considered appropriate to amortize goodwill over a period

not exceeding five years unless a somewhat longer period can be justified.

Factors which may be considered in estimating the useful life of goodwill arising on amalgamation include:

(a) The foreseeable life of the business or industry;

(b) The effects of product obsolescence, changes in demand and other economic factors;

(c) The service life expectancies of key individuals or groups of employees;

(d) Expected actions by competitors or potential competitors; and

(e) Legal, regulatory or contractual provisions affecting the useful life.

8. Balance of Profit and Loss Account

In the case of an ‘amalgamation in the nature of merger’, the balance of the Profit and Loss Account appearing in

the financial statements of the transferor company is aggregated with the corresponding balance appearing in the

financial statements of the transferee company. Alternatively, it is transferred to the General Reserve, if any.

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In the case of an ‘amalgamation in the nature of purchase’, the balance of the Profit and Loss Account appearing

in the financial statements of the transferor company, whether debit or credit, loses its identity.

9. Treatment of Reserves Specified in a Scheme of Amalgamation

The scheme of amalgamation sanctioned under the provisions of the Companies Act, 1956 or any other statute

may prescribe the treatment to be given to the reserves of the transferor company after its amalgamation. Where

the treatment is so prescribed, the same is followed. In some cases the scheme of amalgamation sanctioned under

a statute may prescribe a different treatment to be given to the reserves of the transferor company after

amalgamation as compared to the requirements of this Standard that would have been followed had no treatment

been prescribed by the scheme. In such cases, the following disclosures are made in the first financial statements

following the amalgamation:

(a) A description of the accounting treatment given to the reserves and the reasons for following the treatment

different from that prescribed in this Standard.

(b) Deviations in the accounting treatment given to the reserves as prescribed by the scheme of amalgamation

sanctioned under the statute as compared to the requirements of this Standard that would have been followed had

no treatment been prescribed by the scheme.

(c) The financial effect, if any, arising due to such deviation.

10.Disclosure

For all amalgamations, the following disclosures are considered appropriate in the first financial statements

following the amalgamation:

(a) Names and general nature of business of the amalgamating companies;

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(b) Effective date of amalgamation for accounting purposes;

(c) The method of accounting used to reflect the amalgamation; and

(d) Particulars of the scheme sanctioned under a statute.

For amalgamations accounted for under the pooling of interests method, the following additional disclosures are

considered appropriate in the first financial statements following the amalgamation:

(a) Description and number of shares issued, together with the percentage of each company’s equity shares

exchanged to effect the amalgamation;

(b) The amount of any difference between the consideration and the value of net identifiable assets acquired, and

the treatment thereof.

For amalgamations accounted for under the purchase method, the following additional disclosures are considered

appropriate in the first financial statements following the amalgamation:

(a) Consideration for the amalgamation and a description of the consideration paid or contingently payable; and

(b) The amount of any difference between the consideration and the value of net identifiable assets acquired, and

the treatment thereof including the period of amortization of any goodwill arising on amalgamation.

11.Amalgamation after the Balance Sheet Date

When an amalgamation is effected after the balance sheet date but before the issuance of the financial statements

of either party to the amalgamation, disclosure is made in accordance with AS 4, ‘Contingencies and Events

Occurring After the Balance Sheet Date’, but the amalgamation is not incorporated in the financial statements.

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In certain circumstances, the amalgamation may also provide additional information affecting the financial

statements themselves, for instance, by allowing the going concern assumption to be maintained.

12.Accounting for Amalgamations - Main Principles

An amalgamation may be either –

(a) An amalgamation in the nature of merger, or

(b) An amalgamation in the nature of purchase.

An amalgamation should be considered to be an amalgamation in the nature of merger when all the following

conditions are satisfied:

(i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and

liabilities of the transferee company.

(ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor company

(other than the equity shares already held therein, immediately before the amalgamation, by the transferee

company or its subsidiaries or their nominees) become equity shareholders of the transferee company by

virtue of the amalgamation.

(iii) The consideration for the amalgamation receivable by those equity shareholders of the transferor

company who agree to become equity shareholders of the transferee company is discharged by the transferee

company wholly by the issue of equity shares in the transferee company, except that cash may be paid in

respect of any fractional shares.

(iv) The business of the transferor company is intended to be carried on, after the amalgamation, by the

transferee company.

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(v) No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company

when they are incorporated in the financial statements of the transferee company except to ensure uniformity of

accounting policies.

An amalgamation should be considered to be an amalgamation in the nature of purchase, when any one or more

of the conditions specified in paragraph above is not satisfied.

When an amalgamation is considered to be an amalgamation in the nature of merger, it should be accounted for

under the pooling of interests method.

When an amalgamation is considered to be an amalgamation in the nature of purchase, it should be accounted for

under the purchase method

13.The Pooling of Interests Method

In preparing the transferee company’s financial statements, the assets, liabilities and reserves (whether capital or

revenue or arising on revaluation) of the transferor company should be recorded at their existing carrying amounts

and in the same form as at the date of the amalgamation. The balance of the Profit and Loss Account of the

transferor company should be aggregated with the corresponding balance of the transferee company or transferred

to the General Reserve, if any.

If, at the time of the amalgamation, the transferor and the transferee companies have conflicting accounting

policies, a uniform set of accounting policies should be adopted following the amalgamation.

The effects on the financial statements of any changes in accounting policies should be reported in accordance

with Accounting Standard (AS) 5 Net Profit or Loss for the Period, Prior Period Items and Changes in. The

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difference between the amounts recorded as share capital issued (plus any additional consideration in the form of

cash or other assets) and the amount of share capital of the transferor company should be adjusted in reserves.

14.The Purchase Method

In preparing the transferee company’s financial statements, the assets and liabilities of the transferor company

should be incorporated at their existing carrying amounts or, alternatively, the consideration should be allocated

to individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation. The

reserves (whether capital or revenue or arising on revaluation) of the transferor company, other than the statutory

reserves, should not be included in the financial statements.

Any excess of the amount of the consideration over the value of the net assets of the transferor company acquired

by the transferee company should be recognized in the transferee company’s financial statements as goodwill

arising on amalgamation. If the amount of the consideration is lower than the value of the net assets acquired, the

difference should be treated as Capital Reserve.

The goodwill arising on amalgamation should be amortized to income on a systematic basis over its useful life.

The amortization period should not exceed five years unless a somewhat longer period can be justified.

Where the requirements of the relevant statute for recording the statutory reserves in the books of the transferee

company are complied with, statutory reserves of the transferor company should be recorded in the financial

statements of the transferee company. The corresponding debit should be given to a suitable account head (e.g.,

‘Amalgamation Adjustment Account’) which should be disclosed as a part of ‘miscellaneous expenditure’ or

other similar category in the balance sheet. When the identity of the statutory reserves is no longer required to be

maintained, both the reserves and the aforesaid account should be reversed.

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15.Common Procedures

The consideration for the amalgamation should include any non cash element at fair value. In case of issue of

securities, the value fixed by the statutory authorities may be taken to be the fair value. In case of other assets, the

fair value may be determined by reference to the market value of the assets given up. Where the market value of

the assets given up cannot be reliably assessed, such assets may be valued at their respective net book values.

Where the scheme of amalgamation provides for an adjustment to the consideration contingent on one or more

future events, the amount of the additional payment should be included in the consideration if payment is

probable and a reasonable estimate of the amount can be made. In all other cases, the adjustment should be

recognized as soon as the amount is determinable [see Accounting Standard (AS) 4, Contingencies and Events

Occurring After the Balance Sheet Date].

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Novel Scheme

The United Western Bank Limited (Amalgamation with Industrial Development

Bank of India Limited) Scheme, 2006.

Draft Amalgamation Scheme

Chapter -1

Preliminary

1. Short title and commencement:

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(1) The Scheme may be called The United Western Bank Limited (Amalgamation with Industrial Development

Bank of India Limited) Scheme, 2006.

(2) It shall come into force on such date as the Central Government may, by notification in the Official Gazette,

specify.

2. Definitions:

In the Scheme, unless the context otherwise requires –

(1) "Act" means the Banking Regulation Act, 1949 (10 of 1949);

(2) "Asset Account" means a notional account opened pursuant to subparagraph (2) of paragraph 5 of the Scheme

for the purpose of ascertaining the surplus or shortfall after adjustment from time to time of liabilities of the

transferor bank as provided in the Scheme;

(3) "Collection Account" means a notional account opened in accordance with paragraph 7 of the Scheme, for the

purpose of ascertaining the amount, if any, available for distribution to the members of the transferor bank after

adjustment of assets and liabilities;

(4) "prescribed date' means the date which the Central Government may specify under sub-paragraph (2) of

paragraph 1;

(5) "Scheme" means The United Western Bank Limited (Amalgamation with Industrial Development Bank of

India Limited) Scheme, 2006;

(6) "Transferor bank" means The United Western Bank Limited, a banking company having its Registered Office

at Satara, Maharashtra – 415001;

(7) "transferee bank" means the Industrial Development Bank of India Limited, a banking company having its

Registered Office at IDBI Towers, WTC Complex, Cuffe Parade, Mumbai – 400 005.

(8) Words and expressions used herein and not defined but defined in the Act shall have the meaning respectively

assigned to them in the Act.

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Chapter – II

Transfer of Business, Properties, Assets and Liabilities

Transfer of assets and liabilities and general effect thereof:

(1) On and from the prescribed date, all rights, powers, claims, demands, interests, authorities, privileges,

benefits, assets and properties of the transferor bank, movable and immovable, including premises subject to all

incidents of tenure and to the rents and other sums of money and covenants reserved or contained in the leases or

agreements under which they are held, all office furniture, loose equipments, plant apparatus and appliances,

books, papers, stocks of stationery, other stocks and stores, all investments in stocks, shares and securities, all

bills receivable in hand and in transit, all cash in hand and on current or deposit accounts (including money at call

or short notice) with banks, bullion, all book debts, mortgage debts and other debts with the benefits of securities,

or any guarantee therefor, all other, if any, property rights and assets, benefit of all guarantees in connection with

the business of the transferor bank shall, subject to the other provisions of the Scheme, stand transferred to, and

become the properties and assets of the transferee bank; and on and from the prescribed date, all the liabilities,

duties and obligations of the transferor bank shall be and shall become the liabilities, duties and obligations of the

transferee bank to the extent and in the manner provided hereinafter.

(2) Without prejudice to the generality of the foregoing provisions, all contracts, deeds, bonds, agreements,

powers of attorney, grants of legal representation and other instruments of whatever nature subsisting or having

effect immediately before the prescribed date shall be effective to the extent and in the manner hereinafter

provided against or in favour of the transferee bank and may be acted upon as if instead of the transferor bank, the

transferee bank had been a party thereto or as if they had been issued in favour of the transferee bank.

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(3) If on the prescribed date any suit, appeal or other legal proceedings of whatever nature by or against the

transferor bank is pending, the same shall not abate, be discontinued or be in any way prejudicially affected, but

shall, subject to the other provisions of the Scheme, be prosecuted and enforced by or against the transferee bank.

Provided that where a contravention of any of the provisions of any Act or of any rule, regulation, direction or

order made there under has been committed by, or any proceeding for a criminal offence has been instituted

against, a director or secretary, manager, officer or other employee of the transferor bank before the prescribed

date, such director, secretary, manager, officer or other employee shall, without prejudice to the application of

section 6 of the General Clauses Act, 1897, be liable to be proceeded against under such law and punished

accordingly as if the transferor bank, being a banking company had not been dissolved.

(4) If according to the laws of any country outside India, the provisions of the Scheme, by themselves, are not

effective to transfer or vest any asset or liability situated in that country which forms part of the undertaking of

the transferor bank to or in the transferee bank, the affairs of the transferor bank in relation to such asset or

liability shall, on the prescribed date, stand entrusted to the Chief Executive Officer for the time being of the

transferee bank and the Chief Executive Officer may exercise all powers and do all such acts and things as would

have been exercised or done by the transferor bank for the purpose of effectively transferring such assets and

discharging such liabilities. The Chief Executive Officer shall take all such steps as may be required by the laws

of any such country outside India for the purpose of effecting such transfer or vesting and in connection

therewith, the Chief Executive Officer may, either himself or through any person authorized by him in this behalf,

realise any assets or discharge any liability of the transferor bank and transfer the net proceeds thereof to the

transferee bank.

Closure of books of the transferor bank and preparation of balance sheet:

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(1) The books of the transferor bank shall be closed and balanced and balance sheet prepared in the first instance

as at the close of business on September 2, 2006 and thereafter as at the close of business on the date immediately

preceding the prescribed date and the balance sheet shall be got audited and certified by a chartered accountant or

a firm of chartered accountants approved or nominated by the Reserve Bank of India for the purpose.

(2) A copy of the balance sheet of the transferor bank prepared in accordance with the provisions of the foregoing

paragraph, shall be filed by the transferor bank with the Registrar of Companies as soon as possible after it has

been received and thereafter the transferor bank shall not be required to prepare balance sheet or profit and loss

accounts, or to lay the same before its members or file copies thereof with the Registrar of Companies or to hold

any board meeting or annual general meeting for the purpose of considering the balance sheet and accounts or for

any other purpose or to comply with the provisions of section 159 of the Companies Act, 1956 (1 of 1956) and it

shall not thereafter be necessary for the Board of Directors of the transferor bank to meet as required by Section

285 of that Act.

Valuation of assets and determination of liabilities:

The transferee bank shall, in consultation with the transferor bank, value the assets and reckon the liabilities of the

transferor bank in accordance with the following Provisions; namely:

(1)(a) Investments other than Government Securities shall be valued at the market rates prevailing on the day

immediately preceding the prescribed date;

(b) (i) The Government Securities shall be valued as on the day immediately preceding the prescribed date in

accordance with the principles laid down in the notification issued by Reserve Bank of India for the purpose of

Section 24 of the Banking Regulation Act,1949 (10 of 1949);

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(ii) The Securities of the Central Government such as Post Office Certificates, Treasury Savings Deposit

Certificates and any other securities or certificates issued under the small savings scheme of the Central

Government shall be valued at their face value or the encashable value as on the said date, whichever is higher;

(iii) Where the market value of any Government Security such as the Zamindari Abolition Bonds or other similar

security if any held by the transferor bank in respect of which the principal is payable in installments is not

ascertainable or is, for any reason, not considered as reflecting the fair value thereof or as otherwise appropriate,

the security shall be valued at such amount as is considered reasonable having regard to the installments of

principal and interest remaining to be paid, the period during which such installments are payable, the yield of

any security issued by the Government to which the security pertains and having the same or approximately the

same maturity, and other relevant factors;

(c) Where the market value of any security, share, debenture, bond or other investment is not considered

reasonable by reason of its having been affected by abnormal factors, the investment may be valued on the basis

of its average market value over any reasonable period;

(d) Where the market value of any security, share, debenture, bond or other investments is not ascertainable, only

such value, if any, shall be taken into account as is considered reasonable, having regard to the financial position

of the issuing concern, the dividends paid by it during the preceding five years and other relevant factors;

(e) Premises and all other immovable properties and any assets acquired in satisfaction of claims shall be valued

at their market value;

(f) The furniture and fixtures, stationery in stock and other assets, if any, shall be valued at the written down value

as per books or the realizable value as may be considered reasonable;

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(g) Advances, including bills purchased and discounted, book debts and sundry assets, will be scrutinized by the

transferee bank and the securities, including guarantees, held as cover therefor examined and verified by the

transferee bank. Thereafter the advances, including portions thereof, will be classified into two categories namely,

"Advances considered good and readily realizable" and "Advances considered not readily realizable and/or bad or

doubtful of recovery".

The transferee bank shall open on the prescribed date an account styled as "Asset Account". The aggregate

amount representing the value of the assets determined as readily realizable assets in accordance with this

paragraph shall be credited to the "Asset Account".

(i) Where the valuation of any asset cannot be determined on the prescribed date, it

may, with the approval of the Reserve Bank of India, be treated partly or wholly as

an asset realizable at a later date;

(ii) (ii) In the event of any disagreement between the transferee bank and the transferor

bank as regards the valuation of any asset and/or the classification of any advance

and/or the determination of any liability, the matter shall be referred to the Reserve

Bank of India, for its opinion, provided that until such an opinion is received, the

valuation of the item or portion thereof by the transferee bank shall provisionally

be adopted for the purpose of the Scheme;

(iii) It shall be competent for the Reserve Bank of India, in the event of its becoming

necessary to do so, to obtain such technical advice as it may consider to be

appropriate in connection with the valuation of any such item of asset or

determination of any such item of liability, and the cost of obtaining such advice

shall be payable in full out of the assets of the transferor bank.

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Determination of liability:

Liabilities for purposes of the Scheme shall include all contingent liabilities which the transferee bank may

reasonably be expected or required to meet out of its own resources on or after the prescribed date.

The valuation of the assets and the determination of the liabilities in accordance with the foregoing provisions

shall be binding on both the banks and the members and creditors thereof.

Chapter III

Payment to creditors and depositors

Discharge of liability of the transferor bank:

(1) In respect of: -

(a) any sums deposited by any employee of the transferor bank with that bank as staff security deposits,

together with interest, if any, accrued thereon up to the prescribed date shall be paid or provided for in

full;

(b) every savings bank account or current account or any other deposit account including a fixed deposit,

cash certificate, monthly deposit, deposit payable at call or short notice or any other deposits by whatever

name called with the transferor bank, the transferee bank shall open with itself on the prescribed date a

corresponding and similar account in the name of the respective holder(s) thereof crediting thereto full

amount including interest to the extent payable under the Scheme:

Provided that where the transferee bank entertains a reasonable doubt about the correctness of the entries made in

any particular account, it may with the approval of the Reserve Bank of India withhold the credit to be made in

that account for a period not exceeding three months from the prescribed date within which the transferee bank

shall ascertain the correct balance in such account.

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(2) In respect of every other liability of the transferor bank determined under sub-paragraph (4) of paragraph 5,

the transferee bank shall pay to the creditors the amount of such liability as and when they fall due.

(3) In respect of any interest bearing deposit accounts, the transferee bank shall pay interest at the rate applicable

in accordance with the directives of the Reserve Bank of India till the prescribed date. In respect of balances in

any current account or any other non-interest bearing account, no interest shall be payable to the account holder.

No account holder shall be entitled to claim any compensation for the non-payment of any deposit or other money

from his account during the period from September 2, 2006 till the prescribed date.

(4) Notwithstanding anything to the contrary contained in any contract, express or implied, interest from the

prescribed date shall be paid in respect of the new account opened with the transferee bank and credited in

accordance with the provisions of the Scheme only at such rates as the transferee bank normally allows to its own

depositors for such accounts.

(5) The transferee bank shall make an upfront payment in cash of Rs.28/- (Rupees twenty eight only) in respect of

every fully paid-up share in the transferor bank, to the members of the transferor bank, who were, as on the

prescribed date, registered as the holders of shares of the transferor bank, in partial satisfaction of their claim in

respect of their interest in such shares.

(6) The transferee bank shall make the payment under sub-paragraph (5) by means of an account payee cheque

drawn in the name of the registered shareholder and sent to his registered address. Payment in accordance with

this sub-paragraph shall give a full discharge to the transferee bank with respect to the payment under sub-

paragraph (5).

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(7) The credit balance in the "Asset Account" shall be appropriated to the extent required to meet the liability

under this paragraph. If the balance in the Asset Account is not sufficient, so much of the shortfall shall be treated

as amount spent by the transferee bank and to the extent possible, be recovered by it as provided in sub-paragraph

(7) of paragraph 7.

Chapter IV

Rights and liabilities of the members of the transferor bank:

(1) On the commencement of the Scheme, the entire amount of the paid-up capital and reserves of the transferor

bank, as reduced by the payment made under sub-paragraph (5) of paragraph 6, shall be treated as provision for

bad and doubtful debts and depreciation in other assets of the transferor bank.

(2) In respect of every share in the transferor bank, the amount of which was treated as paid-up towards share

capital by or on behalf of each shareholder immediately before the prescribed date, as reduced by the payment

made under sub-paragraph (5) of paragraph 6, and / or the amount paid on account of the calls made by the

transferee bank in pursuance of sub-paragraph (4) below shall be treated as a "Collection Account" and shall be

entered as such in the books of the transferee bank.

(3) The transferee bank shall call upon every person who was, as on the prescribed date, registered as the holder

of an ordinary share of the transferor bank (or would have been entitled to be so registered) to pay within three

months from such date or dates as may be specified, the uncalled amount remaining unpaid by him in respect of

such share or shares and the calls in arrears, if any.

(4) The transferee bank shall take all available steps having regard to the circumstances of each case to demand

and enforce the payment of the amounts due under sub-paragraph (3) above together with interest at six per cent

per annum for the period of the default.

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(5) The transferee bank shall in respect of the advances, bills purchased and discounted, book debts and sundry

debts and other assets, which are classified as "Advances considered not readily realizable and / or bad or

doubtful of recovery " or which are or may be realizable wholly or partly after the prescribed date, take all

available steps having regard to the circumstances of each case to demand and enforce payment, and may –

(a) Enter into a compromise or arrangement with the debtor or any other person or write off any such debt or

asset;

(b) sell or otherwise dispose of any securities transferred to it or any asset taken over by it.

(6) The transferee bank shall, in addition, take all available steps having regard to the circumstances of each case

to demand and enforce the payment of the amounts, if any, awarded as damages by the High Court against any

promoter, director, manager or other officer of the transferor bank under section 45L of the Banking Regulation

Act, 1949 (10 of 1949), read with section 45H thereof and also with section 543 of the Companies Act, 1956 (1 of

1956).

(7) The transferee bank may appropriate the realisations effected by it on account of the items mentioned in sub-

paragraphs (4), (5) and (6) above, in 10 the first instance towards expenses incurred for the recovery of such

amount and thereafter towards the shortfall referred to in sub-paragraph (7) of paragraph 6. If any surplus remains

after such appropriation, the transferee bank shall make payment or provision in respect of any contingent

liability as also with the prior approval of the Reserve Bank of India, in respect of any liability whether contingent

or absolute which was not assessed in terms of sub-paragraph (4) of paragraph 5 above and has arisen or been

discovered after the prescribed date.

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(8) If any surplus remains after the appropriation in terms of sub-paragraph(7) above, the transferee bank shall,

make payments pro rata from amount if any available towards the amounts, if any, due to the accounts of the

former shareholders of the transferor bank in the manner and to the extent specified below-

(a) in the first place, the amounts, if any, due to the accounts of the former preference shareholders of the

transferor bank till payment in full against all the accounts has been made;

(b) after all the amounts mentioned in sub-paragraph (a) above have been paid in full, the surplus, if any,

remaining in the hands of the transferee bank shall be distributed pro rata among the former ordinary shareholders

of the transferor bank:

Provided that if any question arises whether any amounts are due against an account mentioned in any of the

above sub-paragraphs, it shall be referred to the Reserve Bank of India for its decision.

(9) The amounts due to the collection accounts referred to in this paragraph shall be deemed to be a liability of the

transferee bank only to the extent provided for in the Scheme.

(10) On the expiry of twelve years from the prescribed date or such earlier period as the Central Government after

consulting the Reserve Bank of India may specify for this purpose, any item referred to in sub-paragraph (5) of

this paragraph which may not have been realized by that date shall be valued by the transferee bank in

consultation with the Reserve Bank of India and the transferee bank shall distribute any amount or amounts

determined in the light of that valuation, after deducting therefrom first any such amount necessary for meeting

the liabilities referred to in subparagraph (4) of paragraph 5 which may remain unsatisfied as on that date, in the

order and the manner provided in sub-paragraph (8) above.

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Chapter V

Rights and obligations of the Employees of Transferor Bank

Continuation of services of the employees:

(1) All the employees of the transferor bank shall continue in service and be deemed to have been appointed in

the transferee bank at the same remuneration and on the same terms and conditions of service, as were applicable

to such employees immediately before the close of business on September 2, 2006.

Provided that the employees of the transferor bank, who have by notice in writing given to the transferor bank or

the transferee bank at any time before the expiry of one month next following the prescribed date intimated their

intention of not becoming employees of the transferee bank, shall be entitled to the payment of such

compensation, if any, under the provisions of the Industrial Disputes Act, 1947 (14 of 1947) and such pension,

gratuity, provident fund and other retirement benefits as may be ordinarily admissible under the rules or

authorizations of the transferor bank as in force immediately before the close of business on September 2, 2006.

(2) The transferee bank shall, in respect of the employees of the transferor bank who are deemed to have been

appointed as employees of the transferee bank, be deemed also to have taken over the liability for them of

retrenchment compensation in the event of their being retrenched while in the service of the transferee bank on

the basis that their service has been continuous and has not been interrupted by their transfer to the transferee

bank.

(3) The transferee bank shall, not later than the expiry of the period of three years from the date on which the

scheme is sanctioned, pay or grant to the employees of the transferor bank whose services are continued in the

transferee bank under sub-paragraph (1), except such of the employees who cease to be in service under the

proviso to sub-paragraph (1), the same remuneration and the same terms and conditions of service as are

applicable to the employees of corresponding rank or status of the transferee bank subject to the qualifications

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and experience of the said employees of the transferor bank being the same as or equivalent to those of such other

employees of the transferee bank; Provided that if any doubt or difference arises as to whether the qualifications

or experience of any of the said employees are the same as or equivalent to the qualifications and experience of

the other employees of corresponding rank or status of the transferee bank or as to the procedure or principles to

be adopted for the fixation of pay of the said employees in

the scales of pay of the transferee bank, the doubt or difference shall be referred to the Reserve Bank of India

whose decision thereon shall be final.

(4) The trustees or administrators of any provident fund and gratuity fund constituted for the employees of the

transferor bank, or as the case may be, the transferor bank, shall on or as soon as possible after the prescribed date

transfer to the trustees of the employees' provident fund and gratuity fund constituted for the transferee bank or

otherwise as the transferee bank may direct, all the moneys and investments held in trust for the benefit of the

employees of the transferor bank

Provided that such latter trustees shall not be liable for any deficiency in the value of investments, or in respect of

any act, neglect or default done before the date of commencement of the Scheme.

Chapter VI

Miscellaneous

Demand by Depositors or Creditors: No depositor or creditor of the transferor bank shall be entitled to make any

demand against the transferor bank or the transferee bank in respect of any liability of the transferor bank to him

except to the extent prescribed by the Scheme.

Legal proceedings against Central Government, Reserve Bank of India, Transferee bank or Transferor bank: No

suit or other legal proceedings shall lie against the Central Government, the Reserve Bank of India or the

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transferee bank or the transferor bank for anything which is in good faith done or intended to be done in

pursuance of the Scheme.

Reorganization of branches of the transferor bank:

The transferee bank shall have the option of integrating branches of the transferor bank according to its

convenience and may close down or shift the existing loss making branches of the transferor bank. The aforesaid

option will, however, be exercised by the transferee bank with the prior approval of Reserve Bank of India, within

a period of one year.

Furnishing statement and information: The transferee bank shall submit to the Reserve Bank of India such

statements and information as may be required by the Reserve Bank of India from time to time regarding the

implementation of the Scheme.

Manner of service of notice: Any notice or other communication required to be given by the transferee bank shall

be considered to be duly given if addressed and sent by speed post or by courier or by pre-paid ordinary post or

otherwise to the addressee at the address registered in the books of the transferor bank, until a new address is

registered in the books of the transferee bank, and such notice shall be deemed to be served on the expiry of four

days after it has been posted. Any notice or communication, which is of general interest, shall be advertised, in

addition, in one or more daily newspapers, which may be in circulation at the places where the transferor bank

was transacting its business.

F.No. /2006-BOA (ii)]( )

Joint Secretary to the Government of India

To,

The Manager

Government of India Press

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Mayapuri Industrial Area

SCHEME OF AMALGAMATION AND ARRANGEMENT OF BALSARA HYGIENE PRODUCTS LIMITED

AND BESTA COSMETICS LIMITED ANDBALSARA HOME PRODUCTS LIMITED WITH

DABUR INDIA LIMITED ANDTHEIR RESPECTIVE SHAREHOLDERS

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1. DEFINITION

1.1 “Act” means the Companies Act, 1956 and shall include any statutory modifications, re-enactment or

amendments thereof for the time being in force.

1.2 “Appointed Date” means the 1st day of April, 2006 or such other date as may be approved by the High Court

of Judicature at Bombay and High Court of Delhi or any other appropriate authority.

1.3 “Balsara Hygiene” or “BHPL””means Balsara Hygiene Products Limited, a company incorporated under the

Companies Act, 1956 and having its registered office at Survey No. 225/4/1, Village Sayli, Dadra & Nagar

Haveli, Dist. Silvassa, Silvassa (U.T.) - 396 240.

1.4 “Besta””means Besta Cosmetics Limited having its registered office at Survey No. 225/4/1, Village Sayli,

Dadra & Nagar Haveli, Dist. Silvassa, Silvassa (U.T.) - 396 240.

1.5 “Balsara Home” means Balsara Home Products Limited having its registered office at Balsara House, 43,

Nagindas Master Road, Fort, Mumbai – 400 001.

1.6 “Dabur “ or “Transferee Company” means Dabur India Limited having its registered office at 8/3, Asaf Ali

Road, New Delhi- 110002.

1.7 “Effective Date” means the dates on which certified copies of the Orders of the High Court of Judicature at

Bombay and High Court of Delhi or any other appropriate authority under Sections 391 to 394 of the Act

sanctioning the Scheme are filed with the Registrar of Companies, Maharashtra at Mumbai, Registrar of

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Companies, Gujarat at Ahmedabad and the Registrar of Companies, NCT of Delhi & Haryana at New Delhi

respectively.

1.8 “High Court” means the High Court of Judicature at Bombay and High Court of Delhi and such other High

Court having jurisdiction in the matter.

1.9 “Record Date” means the date to be fixed by the Board of Directors of Dabur for the purpose of issue of

Equity Shares to the Equity Shareholders of BHPL.

1.10 “Scheme” or “the Scheme” or “this Scheme” means this Scheme of Amalgamation and Arrangement in its

present form submitted to the High Court or any other appropriate authority or with any modification(s) made

under Clause 15 of this Scheme.

1.11 “Transferor Companies” or “Balsara Group Companies” means BHPL, Besta and Balsara Home

collectively.

2. DATE OF TAKING EFFECT AND OPERATIVE DATE

The Scheme set out herein in its present form or with any modification(s) approved or imposed or directed by the

High Court or any other appropriate authority shall be operative from the Appointed Date but shall be effective

from the Effective Date.

3. SHARE CAPITAL

(Amount in Rs. Lacs) As on March 31, 2005

3.1 The share capital of BHPL as on March 31, 2005 is as under:

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Authorised Capital

5,000,000 Equity Shares of Rs. 10 each

Issued, Subscribed and Paid-up

3,880,800 Equity Shares of Rs. 10 each

As on date, 3,860,400 equity shares of Rs 10/- each fully paid-up are held by Dabur, making BHPL the subsidiary

of Dabur and 4 equity Shares of Rs. 10/- each fully paid up are held by Balsara Home jointly with its nominees.

3.2 The share capital of Besta as on March 31, 2005 is as under:

Authorised Capital

1,200,000 Equity shares of Rs 10 each

Issued, Subscribed and Paid up

900,000 Equity Shares of Rs. 10 each

As on date, 431,800 equity shares of Rs 10/- each fully paid-up are held by Dabur and 19,196 equity shares of Rs

10/- each fully paid-up are held by Balsara Home and 449,000 equity shares of Rs 10/- each fully paid-up are held

by BHPL and 4 equity Shares of Rs. 10/ - each fully paid up are held by Balsara Home jointly with its nominees.

3.3 The share capital of Balsara Home as on March 31, 2005 is as under:

Authorised Capital

14,400,000 Equity Shares of Rs. 10 each

600,000 6.5% Non-Cumulative redeemable preference shares of Rs.10 each

Issued, Subscribed and Paid-up

2,450,011 Equity Shares of Rs. 10 each

600,000 6.5% Non-Cumulative redeemable preference shares of Rs 10 each

Subsequent to March 31, 2005, the company has issued 10,000,000 equity shares of Rs10/- each fully paid-up.

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As on date, 159,300 equity shares of Rs 10/- each fully paid-up are held by BHPL and 12,290,711 equity shares

of Rs 10/- each fully paid-up are held by Dabur along with its nominees.

3.4 The share capital of Dabur as on March 31, 2005 is as under:

Authorised Capital

500,000,000 Equity Shares of Rs. 1 each

Issued, Subscribed and Paid-up

286,419,713 Equity Shares of Rs. 1 each

Subsequent to March 31, 2005, the company has issued 231,679 equity shares of Re 1 each fully paid-up to

employees under Employees Stock Option Scheme and 286,651,392 equity shares of Re 1 each as bonus shares.

Consequently, the Authorised Share Capital of the Company has also been increased.

The revised Share Capital of Dabur is as under:

Authorised Capital

1,250,000,000 Equity Shares of Rs. 1 each

Issued, Subscribed and Paid-up

573,302,784 Equity Shares of Rs. 1 each

4. VESTING OF UNDERTAKINGS

4.1 With effect from the Appointed Date, the entire business and whole of the undertakings of the Transferor

Companies including all its properties and assets (whether movable or immovable, tangible or intangible) of

whatsoever nature including but not limited to any brand name, trade mark or copy right, registrations, permits,

quotas, approvals, actionable claims, all rights / title or interest in property(ies) by virtue of any court order /

Decree, contractual arrangement, allotment, grant, possession or otherwise, lease, tenancy rights, permissions,

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incentives, licenses including but not limited to export license, import license, Industrial and other licenses, bids,

tenders, municipal and other statutory permissions, approvals including but not limited to right to use and avail

electricity connections, water connections, telephone connections, facsimile connections, telexes, e-mail, internet,

leased line connections and installations, all records, files, papers, engineering and process information, computer

programs, manuals, data, catalogues, quotations, sales and advertising materials, list of present and former

customers and suppliers, customer credit information and all other rights, title, interest, contracts, consent,

approvals or powers of every kind, nature and descriptions whatsoever, shall under the provisions of Sections 391

to 394 of the Act and pursuant to the orders of the High Courts or any other appropriate authority sanctioning this

Scheme and without further act, instrument or deed, but subject to the charges affecting the same as on the

Effective Date be transferred and/or deemed to be transferred to and vested in the Transferee Company so as to

become the properties and assets of the Transferee Company. The benefit of all brands, copyrights, trademarks,

actionable claims, all rights / title or interest in property (ies) by virtue of any court order / Decree, contractual

arrangement, allotment, grant, possession or otherwise, statutory and regulatory permissions, factory licences,

environmental approvals and consents, sales tax registrations or other licences and consents shall vest in and

become available to Transferee Company pursuant to this Scheme.

4.2 With effect from the Appointed Date, all debts, liabilities, contingent liabilities, duties and obligations of the

Transferor Companies as on the close of business on the date preceding the Appointed Date whether or not

provided in the books of the Transferor Companies shall be deemed to be the debt, liabilities, duties and

obligations of the Transferee Company and it shall not be necessary to obtain the consent of any third party or

other person who is a party to any contract or arrangement by virtue of which such debts, liabilities, contingent

liabilities, duties and obligations have arisen in order to give effect to the provisions of this sub-clause.

4.3 In respect of all the movable assets of the Transferor Companies and the assets which are otherwise capable of

transfer by physical delivery or endorsement and delivery, including cash on hand, shall be so transferred to the

Transferee Company and deemed to have been physically handed over by physical delivery or by endorsement

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and delivery, as the case may be, to the Transferee Company to the end and intent that the property and benefit

therein passes to the Transferee Company with effect from the Appointed Date.

4.4 Such delivery and transfer shall be made on a date mutually agreed upon between the respective Boards of

Directors of the Transferor Companies and the Transferee Company. However such date shall be within thirty

days from the Effective Date.

4.5 In respect of any intangible moveable assets of the Transferor Companies other than those mentioned in

Clause 4.3 above, including actionable claims, sundry debtors, outstanding loans, advances recoverable in cash or

kind or for value to be received and deposits with the Government, semi-Government, local and other authorities

and bodies and customers, the Transferor Companies shall if so required by the Transferee Company, and the

Transferee Company may, issue notices in such form as the Transferee Company may deem fit and proper stating

that pursuant to the High Court of Judicature at Bombay and High Court of Delhi having sanctioned this Scheme

between the Transferor Companies and the Transferee Company under Section 394 of the Act, the relevant debt,

loan, advance or other asset, be paid or made good or held on account of the Transferee Company, as the person

entitled thereto, to the end and intent that the right of the Transferor Companies to recover or realise the same

stands transferred to the Transferee Company and that appropriate entries should be passed in their respective

books to record the aforesaid changes.

4.6 It is clarified that since the Transferee Company beneficially owns over 90% of the issued share capital of the

Transferor Companies, the transfer of the undertakings of the Transferor Companies, in pursuance of this Scheme

shall be eligible to the benefit under Notification No. 1, dated January 16, 1937 issued under SectionH9(a) of the

Indian Stamp Act, 1899.

5. DISCHARGE OF CONSIDERATION

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5.1 Upon this Scheme becoming operative and in consideration of the amalgamation, Dabur shall issue and allot

to the equity shareholders of BHPL, other than the Transferee Company holding fully paid up equity shares in

BHPL and whose name appears in the Register of Members of BHPL as on the Record Date, his/her heirs,

executors, administrators or the successors-in-title, as the case may be, 7 ( seven) Equity Share(s) of the face

value of Re. 1 each of Dabur credited as fully paid-up, for every 2 (two) Equity Shares of the face value of Rs. 10

each of BHPL.

5.2 It is clarified that no Equity Shares will be issued to Dabur in its capacity as shareholder of BHPL since Dabur

cannot issue shares to itself.

5.3 It is further clarified that, save and except as provided in clause 5.1 above, shares of the Transferor Companies

held by the Transferee Company on the Record Date shall be cancelled without any further act or deed, and the

Transferee Company shall not issue shares to the extent of shares held by itself in the Transferor Companies as

well as shares held by the Transferor Companies inter-se as on the Record Date.

5.4 The shareholders of BHPL, to whom equity shares are to be issued by the Transferee Company pursuant to

Clause 5.1 above, shall be issued in dematerialized form. However, shareholders of BHPL shall have an option to

receive the certificate(s) of shares or receive credit in their demat accounts. Those, who wish to receive their

equity shares in dematerialized form, shall provide all details relating to their account with depository participant,

to the Transferee Company. In case no response is received, the Transferee Company shall issue the shares in the

form in which the BHPL shares were held as on the Record Date by the concerned shareholder.

5.5 Any fraction arising on issue of Equity Shares as above will be rounded off to the nearest integer.

5.6 The Equity Shares to be issued and allotted in terms hereof will be subject to the Memorandum and Articles

of Association of the Transferee Company.

5.7 The Transferee Company shall, if and to the extent required, apply for and obtain any approvals from

concerned regulatory authorities for the issue and allotment of Equity Shares to the members of the BHPL under

the Scheme.

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5.8 The approval of this Scheme by the shareholders of the Transferee Company shall be deemed to be due

compliance of the provision of Section 81 (1A) and other relevant and applicable provision of the Act for the

issue and allotment of Equity Shares by Dabur to the shareholder of BHPL, as provided in this Scheme.

6. ACCOUNTING TREATMENT IN THE BOOKS OF DABUR

6.1 On the Scheme becoming effective, the Transferee Company shall account for the merger in its books of

accounts as under:

(a) The face value of Equity Shares issued pursuant to Clause 5.1 above will be recorded as Share Capital.

(b) The investments held by Dabur in the Transferor Companies as well as investments held by the Transferor

Companies inter-se will stand cancelled and there shall be no further obligation/outstanding in that behalf;

(c) All the assets and liabilities as on the Appointed Date, recorded in the books of the Transferor Companies

shall be recorded by the Transferee Company at their book values as appearing in the books of the Transferor

Companies;

It is clarified that the above assets will not include the inter-se shareholding between the Transferor Companies,

which will stand cancelled,

(d) Inter-company balances if any, will stand cancelled;

(e) The difference between the value of shares issued as per sub-clause (a) above and the book value of net assets

taken over as per sub-clause (c), after accounting for the cancellation in sub-clauses (b) and (d) above shall be

debited to the Share Premium Account, the Capital Redemption Reserve Account and General Reserve and the

balance if any, shall be adjusted against the accumulated credit balance in the Profit and Loss Account;.

(f) If considered appropriate for the purpose of application of uniform accounting methods and policies between

the Transferor Companies and the Transferee Company, the Transferee Company may make suitable adjustments

and reflect the effect thereof in the General Reserve of the Transferee Company.

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(g) The application and reduction of the Share Premium Account (or any other name by whatsoever called) and

the Capital Redemption Reserve Account, as per sub-clause (e) above, shall be effected as an integral part of the

Scheme itself as the same does not involve either diminution of liability in respect of unpaid share capital or

payment to any shareholder of any paid up share capital and the order of the Court sanctioning the Scheme shall

be deemed to be an order under Section 102 of the Act confirming the reduction.

7. BUSINESS AND PROPERTY IN TRUST FOR DABUR

7.1 With effect from the Appointed Date and upto the Effective Date:

i) The Transferor Companies shall carry on and be deemed to have carried on its business and activities belonging

to each of the Transferor Companies and shall be deemed to have held and stood possessed of and shall hold and

stand possessed of the entire business and undertakings or the appropriate part thereof belonging to each of the

Transferor Companies for and on account of and in trust for the Transferee Company;

ii) All the profits or income accruing or arising to the Transferor Companies or expenditure or losses incurred by

the Transferor Companies in respect of its business and activities belonging to each of the Transferor Companies,

shall for all purposes be treated and deemed to be the profits or income or expenditure or losses of the Transferee

Company as the case may be.

7.2 Dabur shall be entitled, pending the sanction of the Scheme, to apply to the Central Government and all other

agencies, departments and authorities concerned as are necessary under any law for such consents, approvals and

sanctions which Dabur may require to carry on the business of the Transferor Companies.

8. CONDUCT OF BUSINESS

8.1 As and from the date of acceptance of this Scheme by the Board of Directors of the Transferor Companies and

the Board of Directors of Dabur till the Effective Date:

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(a) The Transferor Companies shall carry on their business with reasonable diligence and in the same manner as it

had been doing hitherto fore, and the Transferor Companies shall not alter or expand the business except with the

concurrence of Dabur.

(b) The Transferor Companies shall not, without the written concurrence of Board of Dabur, alienate, charge or

encumber any of its properties referred to in Clause 4 above except in the ordinary course of business or pursuant

to any pre-existing obligation undertaken prior to the date of acceptance of the Scheme by the respective Boards

of Directors of the Transferor Companies and Dabur.

(c) The Transferor Companies shall not vary or alter, except in the ordinary course of its business and as may be

required for reorganization, the terms and conditions of employment of any of its employees.

8.2 With effect from the Effective Date, Dabur shall commence and carry on and shall be authorized to carry on

the businesses carried on by the Transferor Companies.

9. STAFF, WORKMEN & EMPLOYEES

9.1 On the Scheme becoming operative, all staff, workmen and employees of the Transferor Companies in service

on the Effective Date shall be deemed to have become staff, workmen and employees of Dabur with effect from

the Appointed Date without any break in their service and on the basis of continuity of service, and the terms and

conditions of their employment with Dabur shall not be less favorable than those applicable to them with

reference to the Transferor Companies on the Effective Date.

9.2 It is expressly provided that, on the Scheme becoming effective, the Provident Fund, Gratuity Fund,

Superannuation Fund or any other Special Fund or Trusts created or existing for the benefit of the staff, workmen

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and employees of the Transferor Companies shall be transferred to and shall get consolidated with the

corresponding funds of Dabur. Dabur shall have the obligation to make contributions to the said Fund or Funds in

accordance with the provisions thereof as per the terms provided in the respective Trust Deeds, if any, to the end

and intent that all rights, duties, powers and obligations of the Transferor Companies in relation to such Fund or

Funds shall become those of Dabur. It is clarified that the services of the staff, workmen and employees of the

Transferor Companies will be treated as having been continuous for the purpose of the said Fund or Funds. Until

such time that Dabur creates/arranges for its own funds, Dabur may, subject to necessary approvals and

permissions if any, continue to make contributions pertaining to the employees of the Transferor Companies to

the relevant fund of the Transferor Companies. Such contributions and other balances pertaining to the employees

of the Transferor Companies shall be transferred to the funds created by Dabur on creation of relevant

funds/arrangements by Dabur.

10. LEGAL PROCEEDINGS

10.1 If any suit, appeal or other proceeding of whatever nature by or against the Transferor Companies is pending,

the same shall not abate or be discontinued or in any way be prejudicially affected by reason of or by anything

contained in this Scheme, but the said suit, appeal or other legal proceedings may be continued, prosecuted and

enforced by or against Dabur, as the case may be, in the same manner and to the same extent as it would or might

have been continued, prosecuted and enforced by or against the Transferor Companies as if this Scheme had not

been made.

11. CONTRACTS, DEEDS, ETC.

Subject to the other provisions of the Scheme, all contracts, including contracts for tenancies and licenses, deeds,

bonds, agreements and other instruments of whatsoever nature to which the Transferor Companies are party, or

the benefit to which the Transferor Companies may be eligible, subsisting or operative immediately on or before

the Effective Date, shall be in full force and effect against or in favour of Dabur as the case may be and may be

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enforced as fully and effectively as if instead of the Transferor Companies, Dabur had been a party or beneficiary

thereto.

The Transferee Company shall enter into and/or issue and/or execute deeds, writings or confirmation or enter into

any tripartite agreement, confirmations or novations, to which the Transferor Companies as the case may be will,

if necessary, also be a party in order to give formal effect to the provisions of this Scheme, if so required or

becomes necessary. Further, the Transferee Company shall be deemed to be authorized to execute any such deeds,

writings or confirmations on behalf of the Transferor Companies and to implement or carry out all formalities

required on the part of the Transferor Companies to give effect to the provisions of this Scheme.

12. SAVING OF CONCLUDED TRANSACTIONS

The transfer of the entire business and the undertaking of the Transferor Companies to Dabur and the continuance

of all contracts or proceedings by or against the Transferor Companies shall not affect any contracts or

proceedings already concluded by the Transferor Companies on or after the Appointed Date till the effective date,

to the end and intent that Dabur accepts and adopts all acts, deeds, matters and things done and/or executed by the

Transferor Companies in regard thereto as having been done or executed on behalf of Dabur.

13. GENERAL TERMS

13.1 It is clarified that all taxes payable by the Transferor Companies, relating to the transferred undertaking,

from the Appointed Date onwards including all or any refunds and claims shall, for all purposes, be treated as the

tax liabilities or refunds and claims of the Transferee Company. Accordingly, upon the Scheme becoming

effective, the Transferee Company is expressly permitted to

revise its VAT and Sales tax returns, Excise & Modvat/ Cenvat returns, other tax returns, and to claim refunds/

credits, pursuant to the provisions of this Scheme, if any

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13.2 In accordance with the Modvat / Cenvat Rules framed under the Central Excise Act, H1944, as are prevalent

on the Effective Date, the unutilized credits relating to excise duties paid on inputs/ capital goods lying to the

account of the Transferor Companies, if any, shall be permitted to be transferred to the credit of the Transferee

Company, as if all such unutilized credits were lying to the account of the Transferee Company. The Transferee

Company shall accordingly be entitled to set off all such unutilized credits against the excise duty payable by it.

14. WINDING UP

On the Scheme becoming effective, the Transferor Companies shall stand dissolved without being wound up.

15. APPLICATION TO THE HIGH COURT

The Transferor Companies and the Transferee Company shall, with all reasonable dispatch, make applications to

the High Court under whose jurisdiction the registered offices of The Transferor Companies and the Transferee

Company are situated, for sanctioning this Scheme under Sections 391 to 394 of the Act and for dissolution of the

Transferor Companies without being wound up.

16. MODIFICATIONS/AMENDMENTS TO THE SCHEME

The Transferor Companies and the Transferee Company by their respective Board of Directors may make and/or

consent to any modifications/ amendments to the Scheme or to any conditions or limitations that the Courts or

any other authority may deem fit to direct or impose or which may otherwise be considered necessary, desirable

or appropriate by them (i.e. the Board of Directors). The Transferor Companies and the Transferee Company by

their respective Board of Directors shall be authorised to take all such steps as may be necessary, desirable or

proper to resolve any doubts, difficulties or questions whether by reason of any directive or order of any other

authority or otherwise however arising out of or under or by virtue of the Scheme and/or any matter concerned or

connected therewith.

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17. CONDITIONALITY OF THE SCHEME The Scheme is and shall be conditional upon and subject to:

i) The Scheme being approved by the requisite majorities in number and value of such classes of persons

including the respective members and/or creditors of the Transferor Companies and the Transferee Company as

may be directed by the High Court.

ii) The sanction of the High Court under Sections 391 to 394 of the said Act in favour of the Transferor

Companies and the Transferee Company under the said provisions and to the necessary Order under Section 394

of the said Act being obtained.

iii) Certified or authenticated copy of the Order of the High Court sanctioning the Scheme being filed with the

Registrar of Companies, Maharashtra at Mumbai, Registrar of Companies, Gujarat at Ahmedabad and the

Registrar of Companies, NCT of Delhi & Haryana at New Delhi by Transferor Companies and the Transferee

Company respectively.

18. EFFECT OF NON-RECEIPT OF APPROVALS/SANCTIONS

In the event of any of the said sanctions and approvals referred to in Clause (16) not being obtained and/ or the

Scheme not being sanctioned by the High Court of Judicature at Bombay or the High Court of Delhi or such other

competent authority, this Scheme shall stand revoked, cancelled and be of no effect, save and except in respect of

any act or deed done prior thereto as is contemplated hereunder or as to any rights and/ or liabilities which might

have arisen or accrued pursuant thereto and which shall be governed and be preserved or worked out as is

specifically provided in the Scheme or as may otherwise arise in law. Each party shall bear and pay its respective

costs, charges and expenses for and or in connection with the Scheme.

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19. COSTS, CHARGES & EXPENSES

All costs, charges, taxes including duties, levies and all other expenses, if any of the Transferor Companies and

the Transferee Company arising out of or incurred in connection with and implementing this Scheme and matters

incidental thereto shall be borne by the Transferee Company.

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