Tax Issues

TAX ISSUES IN RELATION TO AMALGAMATION & DEMERGERSPresented By: Ashish KumarSubham AgrawalPresented To:Prof: Neetu PurohitAmalgamation under Income Tax Act According to section 2 (1B) 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 one company in such a manner that All the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated by virtue of amalgamationAll the liabilities of the amalgamating company immediately before the amalgamations becomes the liability of the amalgamated company by virtue of amalgamation.

Share holders holding not less than 3/4th in value of the shares in amalgamating company (other than shares held therein before the amalgamation or by nominee for the amalgamated company or it is subsidiary ) becomes share holders of the amalgamated company by virtue of the amalgamation.Example: Where A merges with another company B in a scheme of amalgamation, and immediately before the amalgamation, company B held 20% of the shares in company A, the above mentioned condition will be satisfied if shareholders holding not less than 3/4th in value of the remaining 80% of share in company A i.e. 60% thereof ( th of 80) , becomes the shareholder of the company B by virtue of the amalgamation.

Provisions relating to Carry forward and set off of losses, in amalgamation [section 72A] As per section72A , amalgamated company is entitled to carry forward the unabsorbed depreciation and accumulated losses of the amalgamating company provided the following conditions are satisfied :There should be an amalgamation of A company owing an industrial undertaking or ship or a hotel with another company, or A banking company referred in section 5(c) of the Banking Regulation Act, 1949 with a specified bank, orOne or more public sector company or companies engaged in the business of operation of Aircraft with one or more public sector company engaged in similar business.2) The following conditions laid down under section 72A are satisfied by the amalgamating company and the amalgamated company as the case may be.Conditions to be satisfied by the amalgamating companyThe amalgamating company has been engaged in the business in which the accumulated loss occurred or depreciation remains unabsorbed for three years or more The amalgamating company has held continuously as on the date of the amalgamation at least 75% of the book value of fixed assets held by it two yrs prior to the date of amalgamation

b) Conditions to be satisfied by the amalgamated company The amalgamated company holds continuously for the minimum period of five yrs from the date of amalgamation at least 75% of the book value of fixed assets of the amalgamating company acquired in the scheme of amalgamation;The amalgamated company continues the business of amalgamating company for a period of 5 years from the date of amalgamation.The amalgamated company fulfills such other conditions as may be prescribed to ensure the revival of business of the amalgamating company or to ensure that the amalgamation is for genuine business purposes laid down by section 72 A(2)(b)(iii).

Tax concession(s)/ incentive(s) in case of amalgamation Assets in amalgamation is not treated as transferAccording to [sec 47(vi)] Where there is any transfer of any capital asset by an amalgamating company to the amalgamated company , it will not be regarded as transfer for the purpose of capital gain provided that amalgamated company is an Indian company.According to [sec47(via)] the transfer of shares of an Indian company by a foreign company to a foreign company is not regarded as transfer for the purpose of capital gain if following conditions are satisfied :-At least 25% of shareholders of amalgamating and amalgamated co. are sameSuch transfer does not attract tax on capital gains in the country in which amalgamating country is incorporatedTo the shareholders of amalgamating companyAccording to [sec 47(vii)] if any shareholder of an amalgamating company transfers his shares such transfer is not considered for capital gain purposes if following conditions are satisfied:-Transfer of shares is made in consideration of the allotment to him of any shares in the amalgamated company and; but if in cash Amalgamated co. is an Indian companyTo the amalgamated companyEligibility condition of tax concession :-

Amalgamation satisfies all the three conditions laid down in sec 2(1b);The amalgamated co is an Indian company

Expenditure on Amalgamation/ DemergerWhen an assessee being an Indian company , incurs any expenditure (on of after April1, 1999) wholly and exclusively for the purpose of amalgamation or demerger , the assessee shall be allowed a deduction equal to 1/5th of such expenditure for 5 successive previous years in which the amalgamation or demerger takes place.The following points should be noted If expenditure is allowed under sec.35DD , then the same is not allowed as deduction under any other provision of the act. Unlike sec.37(1) which prohibits deduction in respect of capital expenditure , sec.35DD does not stipulate any such restriction. Consequences of amalgamationIn pursuance of amalgamation the amalgamated company in case it is an Indian com. Shall be entitled to benefits available under sections 35, 35AB, 35ABB, 35d, 35DDA, 35E, 41, 80-IA, and 80-IB as they would have applied to amalgamating company. if no amalgamation had taken placeMEANING OF DEMERGER"Demerger", in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that -(i) All the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger

14(ii) All the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger;(iii) The property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger(iv) The resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis;

(vi) The transfer of the undertaking is on a going concern basis;(vii) The demerger is in accordance with the conditions, if any, notified under sub-section (5) of section 72A by the Central Government in this behalf.

TAX BENEFITS TO DEMERGED COMPANY:

1.Capital Gain Tax not attracted:As per section 47 (vi b) of the Income Tax Act, the transfer of any capital asset by the demerged company to the resulting company will not be regarded as transfer for the purpose of capital gain.2.Tax relief to Foreign Demerged Company: a foreign company holds any shares in an Indian company and transfer the same to resulting company in the course of demerger, such transfer will not be regarded as Transfer for the purpose of capital gain, if following conditions are satisfied:75% of the shareholders of demerged foreign company continue to remain shareholders of the resulting foreign company.Capital gains tax is not attracted on the demerged foreign company in the country of its incorporation.

TAX BENEFITS TO THE SHAREHOLDERS OF THE DEMERGED COMPANY As per section 47 (vi d), any transfer or issue of shares by the resulting company to the shareholders of the demerged company, in scheme of demerger, is not regarded as Transfer for the purpose of Capital Gains.

Tax Concession to the Resulting CompanyThe resulting Company shall be eligible for tax concessions only if the following two conditions are satisfied (I) the demerger satisfies all the conditions laid down in section 2(19AA) (ii) the resulting company is an Indian companyThe following Concessions available to resulting companyExpenditure for obtaining license to operate telecommunication services.Treatment of preliminary expenses.Treatment of expenditure on prospecting, etc of certain mineralsTreatment of bad debtsAmortization of expenditure in case of demergerCarry forward and set off of business losses and unabsorbed depreciation of the demerged company.Amortization of expenditure in case of demergerWhere 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 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 demerger takes place.

Carry forward and set off of business losses and unabsorbed depreciation of the demerged company.

The accumulated loss and Unabsorbed depreciation, in a demerger, should be allowed to be carried forward by the resulting company if these are directly relatable to the undertaking proposed to be transferred.

Where it is not possible to relate the undertaking, such loss and depreciation shall be APPORTIONED between demerged company and resulting company in a proportion of the assets coming to the share of each as a result of demerger.THANK YOU