AAmmaallggaammaattiioonn &&
TTaakkeeoovveerr
TThhee 77 DDiimmeennssiioonnss
–– TTaaxxaattiioonn AAssppeecctt By CS. K.K.Chhaparia
EIRC of I.C.S.I. 27th April 2013
Topics of discussions
Companies Act vs. Income Tax Act o Amalgamation vs. Demerger vs. Takeover – Strategic
decision between the three Implications, Benefits and Precautions under tax laws CASE STUDIES
Amalgamation - as per Income Tax Act – Sec.2(1B)
What is amalgamation Merger of one or more companies into another company All the property and liabilities of amalgamating co. to pass on to the
amalgamated co. at book value. Shareholders holding more than 3/4th in value of shares of
amalgamating co. become shareholders of the amalgamated co., other than shares held by amalgamated co into amalgamating co
I.T.Act - Silent Consideration paid in form of equity shares, debentures, cash or a mix of
all.
Amalgamation
Case study 1 Loss Making Co. merging into profit making co.
A Company - Unabsorbed business loss of Rs. 10 crore Loss adjusted in seven years – Rs. 2 crore only Advise
Amalgamate into another co., even a new company
Carry Forward of Accumulated
Loss and Unabsorbed Depreciation Sec 72A allows losses to be c/fd only when
Conditions to be fulfilled by Amalgamating Company Amalgamating co. owning industrial undertaking or ship or
hotel or bank …. Has to be engaged in same business for more than 3 years. Has continuously held 3/4th of book value of such fixed assets
for a period of two years
To be fulfilled by amalgamated company Holds continuously for 5 years 3/4th of book value of such fixed
assets acquired in terms of scheme. Continues the business of amalgamated co. for 5 years. Fulfils the conditions prescribed in Rule 9C
Amalgamation
Case study 2
Profit making Co into loss making Co– Reverse Merger A Co.- A Profit making company B Co.- A loss making co., not a manufacturing unit Advise
o A merging into B o Same business criteria discontinued w.e.f. A.Y.01-02 o Check s.79 of I.T.Act
Amalgamation
Case study 3 MAT Planning
A having unit in Backward State and profit of 5 crore B having trading business & earning profit of 5 crore. A paying MAT of Rs. 75 lacs B paying tax of Rs. 150 lacs Advise
o Merger o Tax liability to reduce to Rs. 150 lacs total
Takeover
As is commonly understood Takeover is the purchase by one company of :
controlling interest of the other company Takeover of the division of one company by another
Takeover of division
Demerger Vs. Slump sale Takeover of company
Income tax presently do not have any specific clause for same Section 56 – cannot acquire shares at price less than Book Value
Proposed GAAR provisions – underlying asset
Section 79 – c/fd of loss when >50% of shareholding transfer
Demerger - as per I.T. Act – S.2(19AA) Transfer pursuant to s.391 to 394 of Companies Act
One or more undertaking is transferred from existing co. (demerged co.) to a newly formed company or an existing co. (resulting co.)
Both the demerged co. and resulting co. retain their
existence after demerger.
Demerger - as per I.T. Act – S.2(19AA) What is Demerger All the property and liabilities of undertaking of demerged co. to
pass on to the resulting co. at book value. Shareholders holding more than 3/4th in value of shares of demerged
co. become shareholders of the resulting co. Transfer is on going concern basis
Demerger fulfils conditions specified u/s 72A(5) by CG. Resulting co issues shares to the shareholders of the demerged
company (Except where the resulting co itself is the shareholder of the demerged co )
Demerger vs. slump sale Demerger
Case study 4 Family Arrangement
AB co. has the following assets: Textile Shop Rs. 10 crore &
Electronic Shop Rs. 8 crore Textile shop managed by one brother and Electronic Shop
managed by another brother Advice
Demerger of Electronic Unit to another co. Cancellation of cross holdings
Demerger Case study 5 A Ltd. Engaged in real estate projects It wants to enter into joint venture for its hotel project
on one of its land. Joint Venturist wants Equity Participation Advice
Demerge “Hotel Division” from A into another company.
Carry Forward of Loss in
case of Demerger Section 72A(4) : The accumulated loss/unabsorbed
depreciation of demerged company Loss or unabsorbed depreciation directly relatable- loss
pertaining to such division Not directly relatable- to be apportioned on the basis of
proportion of assets
Slump Sale – S. 2(42C) Sec 2(42C) inserted w.e.f AY 00-01 defines “Slump Sale”
Transfer of one or more undertaking as a result of lump sum consideration without values being assigned to individual assets and
liabilities In slump sale there is no requirement to file petition u/s
394 in HC.
Taxability of Slump Sale Sec 50B has been inserted w.e.f AY 2000-01
Profit on sale of undertaking - LTCG or STCG No indexation benefit No benefit of carry forward or set off of loss Even depreciable asset may be treated as long term If not slump sale, then the provision are
On sale of stock – business income On sale of depreciable asset – STCG
On sale of land, investment etc. – LTCG if applicable.
Slump sale
Case study 6 Co. has readymade division whose assets are
Depreciable Assets Rs. 150 Stock in hand Rs. 200 Sale value of division Rs. 500
Advise : “Slump Sale”
Rs. 150 chargeable as LTCG at lower tax rate Higher WDV in the books of transferee co., entitling to
higher depreciation
Capital Gain Implication Section 47
To the amalgamating or demerged company No capital gains on assets transferred in terms of scheme
To the Investor No capital gains on receipt of shares of transferee co. in lieu of
shares of transferor co.
Cost to an Investor Amalgamation
Cost of Shares of amalgamating co.
Demerger Resulting co.- Proportionate basis
Demerged co.- Original Cost less cost mentioned above
Slump Sale Investor not affected
Amalgamation v/s
Demerger v/s Slump sale
Some other Income Tax
Provisions Section 35DD
Expenses on amalgamation or demerger allowed as deduction - 1/5th for five years
Actual cost in hands of amalgamated or resulting co. Cost or WDV as in the hands of transferor company.
Withdrawal of incentives Benefits u/s 10A, 10B etc generally allowable in the hands of transferee
company for the balance period
Unabsorbed MAT Credit Income tax Act silent
Can Income Tax Dept.
object to Scheme? Requirement to inform Income Tax Dept?
Sec 394A of Companies Act requires notice of petition to be given to CG only- power delegated to Regional Director Bangeswari Cotton Mills ltd. In e 37 CC 195 (Cal)- application
for calling of meeting to be ordered ex-parte
What about back
liabilities or Pending
Proceedings Income tax Act is silent on this issue Even Companies Act is silent However, Scheme of arrangement cannot be mean to
relieve party from its legal obligation. CIT v. T.V. Sundaram Iyengar & Sons Pvt. ltd[238 ITR 328
(Mad)] Arguments that no proceedings can be taken against a dissolved
co. would not apply in a Scheme of Arrangement
Transfer Date
Retrospective-Implicatio
ns Landmark Judgment- Marshall Sons & Company (India)
Ltd (230 ITR 809) ‘Transfer Date’ is the relevant date and not the date when
the court sanctions the Scheme Pending Sanction, a protective asst could be made in the
hands of the amalgamating co.
Excise Laws Information to the Dept.- Not required
Registration/ de-registration – required
Rule 9 of CER silent For closure – CE Notification 35/2001 dt 26.06.2001
Transfer of unutilized CENVAT credit Rule 10(1) and Rule10(2) of CENVAT credit Rules-Possible
Liabilities, stock and fixed assets should be taken over
Sales Tax Implications Sale of business as a going concern, including fixed
assets (immovable as well as moveable), Stock etc. – No Sales Tax
Sri Ram Sahai v/s CST [14 STC 275 (All)] Monsanto Chemicals of India (Pvt.) Ltd v/s State of TN [51
STC 278 (Mad)]
• Item wise sales of these assets – applicable Coromondel Lubricants v/s Commissioner of Commercial
Taxes [102 STC 274]
Suggested Changes Section 72A – More types of companies should be added MAT Credit – should be specifically allowed 3/4th value of assets and three years business – may require
amendment.
TThhaannkk YYoouu
K.K.Chhaparia