1. 1
Tax issues in Business
Re-structuring

2. • Income-tax issues of business re-structuring
such as -
• Amalgamation
• De-merger
• Conversion of Sole Proprietary into Company
• Conversion of Firm into company
• Slump Sale
• Transfer of Assets between holding and
subsidiary company
2
Index

3. Income-tax issues of Amalgamation
3

4. Amalgamation : Definition &
Conditions
• 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…….”
• Conditions
• All properties to be transferred to the amalgamated company
• All liabilities to be transferred to the amalgamated company
• Shareholders holding at least 3/4th in value of shares of the
amalgamating company should become shareholders of the
amalgamated company

5. Amalgamation
5
• Amalgamation defined in S.2(1B) of the ITA
A Co.
+
B Co.
=
C Co.

A Co. Shldrs.
B Co. Shldrs.
Scenario 1 Scenario 2
A Co. Shldrs. B Co. Shldrs.
A Co.
+
B Co.
=
B Co.

A Co. Shldrs.
B Co. Shldrs.
A Co. Shldrs. B Co. Shldrs.

6. Amalgamation …
6
Hold Co.
+
Sub. Co.
=
Hold Co.
A Co. Shldrs.
Hold Co.
A Co. Shldrs.
Scenario 3 Scenario 4
Hold Co.
Sub. Co.
=
Hold Co.
A Co. Shldrs.
A Co. Shldrs.

Assets distributed to
Hold Co. on winding
up of Sub. Co.

Circular No. 5P (LXXVI-63) dated 9 October 1967

7. Amalgamation …
7
Undertaking
of A Co.
+
B Co.
=
B Co.
A Co. Shldrs.
B Co. Shldrs.
A Co. Shldrs. B Co. Shldrs.
 
‘demerger’
Foreign
Co.
+
B Co.
=
C Co.

A Co. Shldrs.
B Co. Shldrs.
A Co. Shldrs. B Co. Shldrs.
Indian entity
Scenario 5 Scenario 6
Indian entity

8. Transactions not considered as
Amalgamation
8
• Where the property of the company which
merges is sold to the other company and
merger is a result of a transaction of sale.
• Where the company which merges is wound up
in liquidation and the liquidator
distributes its property to the other company

9. Amalgamation …
9
Implications for the amalgamating company
• Transfer of the capital assets disregarded for S.45 of
the ITA – refer S.47(vi)
• Benefit available only if the amalgamated company is an
Indian Company [defined in S.2(26) of the ITA]

10. Amalgamation …
10
• Implications for the amalgamated company
• Block of assets of the amalgamated company to be
increased by the WDV of the assets of the
amalgamating company – Expln. 2(b) below
S.43(6) of the ITA
• Depreciation allowance to be apportioned between
the entities on the basis of number of days assets
used by each entity – 5th proviso to S.32 of the ITA
• Cost of acquisition of non-depreciable assets = cost
to previous owner – S.49(1)(iii)(e) of the ITA
• Period of holding = period of holding of previous
owner – Expln. 1(i)(b) below S. 2(42A) of the ITA

11. Amalgamation …
11
• Deduction from profits as was available to the
amalgamating company prior to the amalgamation
would be available to the amalgamated company –
relevant provisions S.10A / 10 AA / 10B / 80-IA /
80 - IAB / 80 – IB, etc.
• Deduction of expenditure also available to the
amalgamated company (illustrative)
• Capital expenditure on scientific research – S.35(5) of the
ITA
• Capital expenditure incurred before 1 April 1998 for
acquisition of patent rights or copyrights – S. 35A(6) of the
ITA
• Amortisation of VRS expenditure – S.35DDA(2) of the ITA

12. Amalgamation …
12
Losses of amalgamating company – S.72A of the ITA
Amalgamating
Co. owns
an industrial
undertaking /
ship / hotel or
amalgamation
of banking co.
Business loss Unabsorbed
depreciation
Speculation loss Capital loss House
Property loss
  Lapses

Lapses

Lapses

• ‘industrial undertaking’ defined to include an
undertaking engaged in mfg. of ‘computer software’
• IT enabled services covered? – Can one apply definition
contained in Ss.10A / 10B / 80 HHE read with Circular of
CBDT
• ‘accumulated loss’ means loss under the head
‘profits and gains of business or profession’

13. Amalgamation …
• Conditions to be satisfied for availing the benefit of
13
S. 72A of the ITA by –
• Amalgamating company should –
• own an ‘industrial undertaking’ or a ship or a hotel or
should be a banking company
• have been engaged in the business in which the loss was
incurred or depreciation remains unabsorbed for atleast 3
years
• have held continuously as on the date of amalgamation at
least 3/4th of the book value of fixed assets for 2 years prior
to the date of amalgamation
• Start ups (between 2 to 3 years) will not be able to satisfy
these requirements

14. Amalgamation …
14
• Amalgamated company should –
• hold continuously for a minimum period of 5 years from
the date of amalgamation at least 3/4th of the book value of
assets of the amalgamating company
• Stringent – will impair the ability of amalgamated company to
replace old machinery
• continue the business of the amalgamating company for at
least 5 years from the date of amalgamation
• Amalgamating company in business of manufacture of
chocolates –post amalgamation machinery used by
amalgamated company for manufacture of biscuits – whether
condition satisfied?

15. Amalgamation …
• fulfill such other conditions as may be prescribed to ensure
revival of the business of the amalgamating company or to
ensure that the amalgamation is for genuine business
purpose
• Subjective test i.e. determination whether amalgamation is
15
for genuine business purpose – once Scheme sanctioned by
Court can Income-tax authorities conclude otherwise?

16. Amalgamation …
16
• Rule 9C of the IT Rules requires amalgamated
company to
• achieve at least 50% of installed capacity within 4 years of
the date of amalgamation
• Same machinery for different outputs has different installed
capacity – how does one determine the installed capacity and
satisfy this test
• Indicate installed capacity in the Scheme for each product that is
capable of being manufactured
• Maintain 50% capacity for the 4th and 5th year
• Submit accountant’s certificate
• Non-compliance of conditions results in loss or
depreciation allowance allowed earlier being taxed
as income of the year in which conditions are not
complied with – S.72A(3) of the ITA

17. Amalgamation …
17
Amalgamation of closely held companies – position of losses – S. 79
A Family Shldrs. B Family Shldrs.
100% 100%
B Pvt. Co.
A Pvt. Co. + =
B Family Shldrs.
B Pvt. Co.
A Family Shldrs.
Surviving entity
- has losses
• S. 79 applies only to companies other than ‘company in
which the public are substantially interested’ – S.2(18) of the
ITA
• Does not affect the ability to carry forward unabsorbed
depreciation
• Shri Subhulaxmi Mills Ltd. 249 ITR 795 (SC)
• Whether S. 72A overrides S. 79
70% 30%
S. 79 could
apply

18. Amalgamation …
18
• Applicability of S. 79 to Indian Sub. of foreign
company
• S.79 will not trigger provided 51% of shldrs. of
foreign amalgamating company continue to be
shldrs. of the foreign amalgamated company –
proviso to S.79 of the ITA

19. Amalgamation …
19
• Implications for the shareholders of
amalgamating company
• Transfer of shares of the amalgamating company
and receipt of shares of the amalgamated company
disregarded for S. 45 of the ITA – refer S.47(vii) of
the ITA and accordingly no capital gains tax liability.
• Exempting provision whether necessary?
• Rasiklal Maneklal – 177 ITR 198 (SC)
• Meaning of ‘transfer’ as contained in the 1922 Act interpreted
and held no ‘transfer’
• Mrs. Grace Collis – 248 ITR 323 (SC)
• S.2(47) of the 1961 Act … ‘extinguishment of any rights
therein’ – rights in shares get extinguished

20. Amalgamation …
20
• Benefit of S.47(vii) available provided –
• transfer is made in consideration of the allotment of share
or shares of the amalgamated company;
• Issue of debentures or bonds in addition to shares
• CIT v. M. Ct. M. Corporation Pvt. Ltd. 221 ITR 524 (Mad)
• CIT v Gautam Sarabhai Trust 173 ITR 216 (Guj.) – contrary
• amalgamated company is an Indian company
• Non satisfaction of conditions amalgamation could
result in capital gains tax liability in the hands of
the shareholders
• Fair value of shares of amalgamated company could be
regarded as consideration accruing for computing Capital
Gains

21. Amalgamation …
21
• Cost of acquisition of shares of amalgamated
company = cost of shares of amalgamating
company – S.49(2) of the ITA
• Period of holding to include the period for which the
shares of the amalgamating company were held –
Expln. 1(c) below S.2(42A) of the ITA
• Implications for employees who have been granted
stock options under a qualifying ESOP
• New plan to be formulated by amalgamated
company
• Fresh stock options to be granted

22. 22
Income-tax issues in a demerger

23. Demerger …
• Demerger defined in S.2(19AA) of the ITA – w.e.f.1 April 2000
Scenario 1 Scenario 2
23
A Foreign Co.
+
B Co.
=
Result B Co. + India
branch of A Co.
A Co. Shldrs.
B Co. Shldrs.
A Co. Shldrs. B Co. Shldrs.

Undertaking
of A Co.
+
B Co.
=
Result B Co. +
Undertaking of A
A Co. Foreign Co.
 Co.
A Co. Shldrs.
B Co. Shldrs.
A Co. Shldrs. B Co. Shldrs.
India Branch
Demerger to satisfy requirements contained in S.2(19AA) of the ITA

24. Demerger …
D Co. Shldrs.
Sale of Project 1 Div. Z
Project
24
A Co.
+
C Co. Shldrs. C Co.
=
A Co. 
A Co. Shldrs. B Co. Shldrs.
Div. X Div. Y
B Co.
Div.P Div. Q
A Co. Shldrs. B Co. Shldrs.
Scenario 3
B Co.
C Co. Shldrs.
Result C Co.
Div. X Div. Q
D Co.
Div. Y Div. P Project 1
D Co. Shldrs.
D Co.
Div. Z
Demerger to satisfy requirements contained in S.2(19AA) of the ITA

25. Demerger …
25
• ITA recognises transfer of one or more
‘undertakings’ as a ‘demerger’ provided it is
carried on in the manner prescribed in S.2(19AA)
of the ITA
• What is an ‘undertaking’? – defined in Expln. 1
below S.2(19AA) of the ITA, to include
• any part of an undertaking;
• a unit of an undertaking;
• a division of an undertaking;
• a business activity taken as a whole
excludes individual assets or liabilities or any
combination thereof not constituting a business activity

26. Demerger …
26
• Would these constitute an ‘undertaking’
• Accounting department of a company – may not
have revenue streams - could be transferred to
another entity
• IP rights of a company
• Retail customers (bank accounts / loans, etc.) of a
banking company
• Project under construction – no revenue streams
flowing
• Should demerged company have at least two
undertakings to be able to demerge one of them

27. Demerger …
27
• Conditions to be satisfied for a qualifying
‘demerger’
• Transfer of the undertaking should be pursuant to a
scheme of arrangement under Ss.391 to 394 of the
Co. Act
• All property and liabilities of the undertaking
immediately before demerger become property and
liabilities of resulting company
• All property and liabilities of the undertaking are
transferred by the demerged company at values
appearing in its books of accounts immediately
before demerger – revaluation to be ignored
• Can the resulting company record the assets of the
undertaking at fair values?

28. Demerger …
28
• Resulting company issues, in consideration of the
demerger its shares to the shareholders of the
demerged company on a proportionate basis
• Only equity or preference or combination of equity and
preference?
• In addition to shares can the company issue debentures,
etc.?
• Shareholders holding not less than 3/4th in value of
the shares of the demerged company become
shareholders of the resulting company or
companies
• If liabilities of the undertaking exceed its assets – should
shares be issued? – could result in goodwill in the books of
the resulting company or utilisation of its reserves for issue
of shares
• Demerger of undertaking by WOS to Hold Co. – no shares
may be issued – is it necessary to desubsidiarise?

29. Demerger …
29
• Demerger to satisfy conditions, if any, notified by
the Central Government
• ‘Liabilities’ of the undertaking to include –
• Liabilities which arise out of the activities or operations of
the undertaking
• Specific loans or borrowings (including debentures) raised,
incurred and utilised solely for the activities or operations
of the undertakings; and
• in case, other than those referred to above i.e. the general
or multipurpose borrowings to be split in the proportion of
assets transferred and retained by the demerged company
• Need for relaxation – lenders may not agree
• Position if only own funds were utilised for the undertaking
that is being demerged?

30. Demerger …
30
• Implications for the demerged company
• Transfer of the capital assets disregarded for S.45
of the ITA – refer S.47(vib) – provided the resulting
company is an Indian company [defined in S.2(26)
of the ITA]
• Block of assets of the demerged company to be
reduced by the WDV of the assets of the
undertaking transferred to the resulting company –
Expln. 2A below S.43(6) of the ITA
• Computation of WDV of each asset of the demerged
undertaking – separate accounts to be maintained?
• Depreciation allowance to be apportioned between
the entities on the basis of number of days assets
used by each entity – 5th proviso to S.32 of the ITA

31. Demerger …
31
• Issue of shares by resulting company – not
regarded as dividend – clause (v) of S.2(22) of the
ITA
• Exclusion unnecessary
• No release of assets by demerged company to its
shareholders
• Non-qualifying demerger i.e. one of the
requirements of S.2(19AA) not met
• ‘undertaking’ transferred to resulting company – whether
shares issued by resulting company can be regarded as
consideration accruing to demerged company?

32. Demerger …
32
• Issue of shares by resulting company – can this be
regarded as dividend to the extent of ‘accumulated profits’
– requirement to pay ‘dividend distribution tax’ in terms of
S.115-O of the ITA
• ‘accumulated profits’ whether includes ‘securities premium
account’
• Bharat General Fire Insurance Co. Ltd. 53 ITR 108 (SC)
• Consideration due to demerged company discharged by
resulting company by issue of its shares to the shldrs. of
demerged company
• Release of assets to the shareholders of the demerged company –
S.2(22)(a) of the ITA
• Consequent to reduction of capital - S. 2(22)(d) of the ITA

33. Demerger …
33
• Implications for the demerged company
• Transfer of the capital assets disregarded for S.45
of the ITA – refer S.47(vib) – provided the resulting
company is an Indian company [defined in S.2(26)
of the ITA]
• Block of assets of the demerged company to be
reduced by the WDV of the assets of the
undertaking transferred to the resulting company –
Expln. 2A below S.43(6) of the ITA
• Computation of WDV of each asset of the demerged
undertaking – separate accounts to be maintained?
• Depreciation allowance to be apportioned between
the entities on the basis of number of days assets
used by each entity – 5th proviso to S.32 of the ITA

34. Demerger …
34
• Implications for the resulting company
• Block of assets of the resulting company to be
increased by the WDV of the assets of the
undertaking of the demerged company – Expln. 2B
below S.43(6) of the ITA
• Depreciation allowance to be apportioned between
the entities on the basis of number of days assets
used by each entity – 5th proviso to S.32 of the ITA
• Cost of acquisition of non-depreciable assets = cost
to previous owner ?
• Period of holding = period of holding of previous
owner ?
• Harmonious construction

35. Demerger …
35
• Deduction from profits as was available to the
undertaking of the demerged company prior to the
demerger would be available to the resulting
company – relevant provisions S.10A / 10 AA /
10B / 80-IA / 80 - IAB / 80 – IB, etc.
• Deduction of expenditure relatable to the
undertaking available to the resulting company
(illustrative)
• Capital expenditure incurred before 1 April 1998 for
acquisition of patent rights or copyrights – S. 35A(7) of the
ITA
• Amortisation of VRS expenditure – S.35DDA(3) of the ITA

36. Demerger …
36
Losses directly relatable to the demerged undertaking – S.72A of the ITA
No requirement
that the
undertaking
should be an
industrial
undertaking /
ship / hotel or
amalgamation
of banking co.
Business loss Unabsorbed
depreciation
Speculation loss Capital loss House
Property loss
    
• ‘accumulated loss’ means loss under the head
‘profits and gains of business or profession’
• Central Government has power to specify conditions
as it considers necessary to ensure that demerger is
for a genuine business purpose
• No conditions specified as yet

37. Demerger …
37
• Quantum of ‘Accumulated loss’ and unabsorbed
depreciation deemed transferred to resulting
company
• Directly relatable – the entire amount
• Not directly relatable – apportioned between
demerged company and resulting company in the
proportion of assets of retained undertakings v.
assets of demerged undertaking

38. Demerger …
38
Demerger of closely held companies – position of losses – S. 79
A Family Shldrs. B Family Shldrs.
100% 100%
Undertaking
of A Pvt. Co.
B Pvt. Co.
A Family Shldrs.
+ =
B Family Shldrs.
B Pvt. Co. + Undertaking of
A Pvt. Ltd.
• S. 79 applies only to companies other than ‘company in
which the public are substantially interested’ – S.2(18) of the
ITA
• Does not affect the ability to carry forward unabsorbed
depreciation
• Shri Subhulaxmi Mills Ltd. 249 ITR 795 (SC)
• Whether S. 72A overrides S. 79 (this being a latter provision
in the ITA)
Resulting co. -
has losses
70% 30%
S. 79 could
apply

39. Demerger …
39
• Applicability of S. 79 to Indian Sub. of foreign
company
• S.79 will not trigger provided 51% of shldrs. of
foreign demerged company continue to be shldrs.
of the foreign resulting company – proviso to S.79
of the ITA

40. Demerger …
40
• Implications for the shareholders of demerged
company
• Receipt of shares of the resulting company not
regarded as dividend – clause (v) of S.2(22) of the
ITA
• Exempting provision whether necessary?
• Non-compliance of S.2(19AA) – whether dividend
distribution tax payable by demerged company where
shares issued by resulting company?
• On what amount – face value or book value or market value?
• In case demerger does not satisfy the requirements
contained in S.2(19AA) can it result in any tax liabilities in
the hands of the shareholders

41. Demerger …
• Cost of acquisition of shares of resulting company
41
= Cost of shares X Net book value of assets transferred
Net worth of demerged co. before demerger
• Cost of acquisition of shares of demerged company =
actual cost less cost attributable to share of resulting
company
• Period of holding to include the period for which the
shares of the demerged company were held – Expln.
1(g) below S.2(42A) of the ITA

42. Demerger …
• Implications for employees who have been granted
stock options under a qualifying ESOP
42
• New plan to be formulated by resulting company
• Taxation may not be deferred to the point of sale
as shares would be allotted to employees of the
demerged company

43. Succession of partnership firm by a
company
43

44. Succession of PF by a Co.
44
AB Co.
A , an
individual
A, an
individual .

ITA

Scenario 1 Scenario 2
B Co.
PSR:50:50
Capital: 10:90
AB
B Co.
10% 90%

Co. Act – Part IX
min. 7 partners

Partners 8 to 14
Partners 1 to 7 Partners 8 to 14
ABCD Co.

Partners 1 to 7
AB
CD
50% 50%

45. Succession of PF by a Co. …
45
• Conversion of PF into a Co. in terms of Part IX of
the Co. Act – does not trigger taxation
• Texspin Engineering and Manufacturing Works 263
ITR 345 (Bom.) – AY 1996-97
• Transfer of a capital asset or intangible asset by a
firm to a company as a result of succession of the
firm by a company in the business carried on by
the firm is disregarded for S.45 of the ITA – refer
S.47(xiii) inserted in the ITA vide Finance Act
(No.2), 1998 – w.e.f. 1 April 1999
• Whether amendment necessary?

46. Succession of PF by a Co. …
46
• Benefit of S.47(xiii) available provided –
• All assets and liabilities of the PF relating to the
business become assets and liabilities of the
company
• PF carrying on two businesses – only one is proposed to be
housed in a company – possible?
• Revaluation of assets?
• all partners become shldrs. of company in the same
proportion in which their capital accounts stood in
the books of the firm on the date of succession
• Fixed v Current account
• Equity – voting v non-voting
• Equity v Preference

47. Succession of PF by a Co. …
• partners not to receive any consideration or benefit
47
directly or indirectly, in any form or manner, other
than by way of allotment of shares in the company
• Bonds, debentures, etc. not possible
• aggregate shareholding of partners in the company
should not be less than 50% of the total voting
power and should continue for a period of 5 years
from the date of succession
• Non-compliance of conditions triggers taxation –
chargeable profits and gains taxed in the hands of
the successor company in the year of
contravention - S.47A(3) of the ITA

48. Succession of PF by a Co. …
48
• ‘Accumulated loss’ and unabsorbed depreciation
allowance of PF transferred to successor company
– S.72A(6) – no separate conditions to be
complied with
• Non-compliance of conditions contained in S.47(xiii)
will result in the loss and depreciation amount set
off earlier being regarded as income of the year in
which contravention is made
• Period of holding shares of the successor company
for partners = date of allotment or date from
which the partner joined partnership?
• Cost of acquisition of shares of the successor
company = capital account immediately before the
date of succession?

49. Succession of a sole proprietorship
by a company
49

50. Succession of sole proprietorship
concern by a Co.
50
• Sale or transfer of a capital asset or intangible
asset by a sole proprietorship concern to a
company as a result of succession of the sole
proprietorship concern by a company in the
business carried on by the sole proprietorship
concern is disregarded for S.45 of the ITA – refer
S.47(xiv) inserted in the ITA vide Finance Act
(No.2), 1998 – w.e.f. 1 April 1999

51. Succession of sole proprietorship
concern by a Co. …
51
• Benefit of S.47(xiv) available provided –
• All assets and liabilities of the sole proprietorship
concern relating to the business being succeeded
become assets and liabilities of the company
• Revaluation of assets?
• shareholding of the sole proprietor in the company
should not be less than 50% of the total voting
power and should continue for a period of 5 years
from the date of succession
• sole proprietor not to receive any consideration or
benefit directly or indirectly, in any form or manner,
other than by way of allotment of shares in the
company

52. Succession of sole proprietorship
concern by a Co. …
52
• Non-compliance of conditions triggers taxation –
chargeable profits and gains taxed in the hands of
the successor company in the year of
contravention - S.47A(3) of the ITA
• ‘Accumulated loss’ and unabsorbed depreciation
allowance of PF transferred to successor company
– S.72A(6) – no separate conditions to be
complied with
• Non-compliance of conditions contained in S.47(xiv)
will result in the loss and depreciation amount set
off earlier being regarded as income of the year in
which contravention is made

53. Succession of sole proprietorship
concern by a Co. …
• Period of holding shares of the successor company
53
for sole proprietor = date on which business
commenced ?
• Cost of acquisition of shares of the successor
company in the hands of sole proprietor = net
book value of assets transferred or intrinsic value
of business transferred?

54. Slump Sale
• Slump Sale means the transfer of one or more
54
undertaking as a result of the sale for a lump
sum consideration without values being
assigned to individual assets and liabilities in
such sale.
• Conditions;
• 1. Tax payer owns an undertaking
• 2. He transfers the undertaking by way of sale.
• 3. The transfer is for lump sum consideration
without assigning values to individual assets.

55. Slump Sale
55
• Actual Cost & WDV
• Capital Gains
• Accumulated Losses & Depreciation.

56. Thank You !
56