Income-tax is an important consideration for any transaction, but over the past two and a half years of working in transaction advisory, I have observed that even qualified chartered accountants and lawyers don't fully grasp income-tax implications of M&A transactions. Through this deck, I attempt to throw some light on basic income-tax implications and ignite a fulfilling discussion with fellow professionals. I hope this assists and motivates readers to deep dive into the various aspects of income-tax in M&A transactions.

1. Rutvij H. R. Naik
Domestic
income-tax
aspects of
M&A
7 July 2020
By Rutvij H. R. Naik
CA., LL.B., B.Com.

2. Rutvij H. R. NaikDomestic income-tax aspects of M&A 2
Objective
The objective of this deck is to comprehensively guide professionals, students and interested readers
in understanding concepts and provisions of the Income-tax Act, 1961 relating to common M&A
transactions viz. share sale, mergers, demergers, slump sale and slump exchange.
To achieve the same, references to relevant sections of the Income-tax Act, 1961 have been included
throughout the deck. In some places, only section references have been mentioned, without
paraphrasing the text of provisions, in the endeavour to assist in further research and understanding
while avoiding verbosity.
Cross-border structures and tax-treaty implications have been deliberately left out to focus on
domestic income-tax aspects.
The author would be more than pleased to clarify and/ or discuss provisions and can be reached at
https://www.linkedin.com/in/rutvijhrnaik/

3. Rutvij H. R. Naik
Share sale Merger
Demerger/
Spin-off/
Hive off
Asset sale Capital
re-organisation
Organic
restructuring
Modes of
restructuring
Slump sale,
slump
exchange
Itemised sale
• Buy-back
• Capital
reduction
• Differential
voting,
• etc.
• Redomiciliation
• Succession
planning
• REIT/ InvIT
• etc.
3
How?
Domestic income-tax aspects of M&A

4. Rutvij H. R. Naik
Heads of income [S 14]
Salaries
Income from house property
Profits and gains from business or profession
Capital Gains [Capital asset + Transfer = Capital gains/ loss]
Income from other sources
4Domestic income-tax aspects of M&A

5. Rutvij H. R. NaikDomestic income-tax aspects of M&A 5
Share purchase

6. Rutvij H. R. Naik
Share purchase
Equity shares of a listed company
(STT paid)
Equity shares of an unlisted company
(STT not paid)
Long-term
(held > 12 m)
[S 2(29A) r/w
2(42A)]
Short term
(held < 12 m)
[S 2(42A)]
Capital gains in the hands of
the seller (w.e.f 01/04/2019)
• If LTCG <
1 L = NIL
• LTCG >
1 L = 10%
[S 112A]
15%
[S 111A]
Long-term
(held > 24 m)
[S 2(29A) r/w
2(42A)]
Short term
(held < 24 m)
[S 2(42A)]
As per
normal tax
rates
20%
[S 112]
Target
Acquiring Co
Shareholders/
promoters
• Accumulated losses of Target
lost if it is not a company in
which public are substantially
interested – S 79 r/w 2(18)
6Domestic income-tax aspects of M&A

7. Rutvij H. R. Naik
Share purchase (contd…)
7Domestic income-tax aspects of M&A
Cost for long term listed equity shares
[Grandfathering of investments prior to 31 January 2018]
[S 55(2)(ac)]
COA for capital gains on sale of long term listed equity shares
purchased before 1 February 2018 =
Amount Amount
FMV* as on 31 January 2018 (a)
Actual sale consideration (b) (i)
Actual COA (ii)
*Determination of FMV
If equity shares listed on 31 January 2018, FMV = highest market price on said date
If equity shares were not listed on 31 January 2018 but are listed as the time of transfer,
FMV = COA * CII(2017-18) / CII (year when asset held or 1 April 2001, whichever later)
Whichever
lower
Whichever
higher
CII = Cost Inflation Index; COA = Cost of Acquisition; FMV = Fair Market Value

8. Rutvij H. R. Naik
Share purchase (contd…)
8Domestic income-tax aspects of M&A
Comments
• Easiest to implement.
• For seller of shares
Gives rise to tax in the hands of the seller on Sales Consideration less Cost of the shares.
• For acquiring company
- Tax benefits such as accumulated losses are lost in certain cases.
- Acquiring company will also have to be mindful to acquire shares at the fair value or will also have to pay taxes
on the difference under S 56(2)(x).

9. Rutvij H. R. NaikDomestic income-tax aspects of M&A 9
Merger

10. Rutvij H. R. Naik
Merger
Amalgamating
Co
Amalgamated
Co
Shareholders/
promoters
General
• Definition of Capital asset – S 2(14)
• Definition of Transfer – S 2(47)
• Charging section – S 45
• Definition of amalgamation – S
2(1B)
(i) all the property and liabilities of the
amalgamating company or
companies immediately before the
amalgamation become the property
and liabilities of the amalgamated
company by virtue of the
amalgamation;
(ii) Shareholders holding at least 3/4th in
value of the shares in the amalgamating
company (not including shares held by a
nominee or a subsidiary of the
amalgamated company) become
shareholders of the amalgamated
company by virtue of the Amalgamation,
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;
10Domestic income-tax aspects of M&A

11. Rutvij H. R. Naik
Merger (contd…)
For the shareholders/ promoters
• Exempt transfer – S 47(vii)
• Cost of acquisition and period of holding shares post amalgamation – S 49(2)
and S 2(42A)(c) respectively
For the Amalgamating Co
• Exempt transfer – S 47(vi)
For the Amalgamated Co
• Accumulated losses and unabsorbed depreciation – S 72A
• Cost basis – S 43C, explanation 7 to 43(1), 49(1)
11Domestic income-tax aspects of M&A
Amalgamating
Co
Amalgamated
Co
Shareholders/
promoters

12. Rutvij H. R. Naik
Merger (contd…)
Non-qualifying amalgamation
• Capital gains u/s 45 exposure in the hands of the shareholders/ promoters
• Arguments for why no exposure for the amalgamating company – no
consideration received by the amalgamating company, therefore the
computation mechanism fails. In fact Palkhivala’s ‘Law and Practice of Income
tax’ expresses the view that section 47(vi) should be disregarded as there is no
basis for taxing the amalgamating company in the first instance, given the
absence of any consideration.
Alternatively, as the amalgamating company records the transfer at book
values, there will no on income imputation in it’s hands.
12Domestic income-tax aspects of M&A
Amalgamating
Co
Amalgamated
Co
Shareholders/
promoters

13. Rutvij H. R. Naik
Merger (contd…)
Tax objectives
• Retention of tax assets (accumulated losses, unabsorbed depreciation, etc.)
• Achieving cost step-up
• Profit repatriation
• Exit planning/ MAT mitigation
• Transfer of assets to Holding company/ Mitigate tax on conversion of capital asset into business asset
• Acquisition financing through SPV structure
13Domestic income-tax aspects of M&A

14. Rutvij H. R. NaikDomestic income-tax aspects of M&A 14
The GAAR angle

15. Rutvij H. R. Naik
Ajanta Pharma’s* case
• Department claimed the scheme was an
Impermissible Avoidance Agreement (“IIA”),
as it avoided
- Tax on business income (if GIPL had sold
shares to APL) and
- DDT (upon distribution to promoters
• NCLT rejected the scheme – no public
interest; no analysis of IIA
• Mere claiming of capital gains exemption =
IIA?
Azadi Bachao Andolan (SC) – Tax payer
has right to arrange his affairs in any
manner permitted so as to minimise tax
liability
• AVM Capital Services Pvt. Ltd [2012] 23
taxmann.com 222 (Bom HC)
15Domestic income-tax aspects of M&A
A Co GIPL
M, R & S
Agrawal
A
Agrawal
AJIL
A Agrawal
Trust A Co GIPL
M, R & S
Agrawal
A
Agrawal
AJIL
A Agrawal
Trust
100%
[Merger of GIPL into AJIL]
*Gabs Investments Pvt. Ltd and Ajanta Pharma Ltd. (CSP no. 995 of 2017 and 996 of 2017)

16. Rutvij H. R. NaikDomestic income-tax aspects of M&A 16
Demerger

17. Rutvij H. R. Naik
Demerger
A Co B Co
Shareholders/
promoters
Definition – S 2(19AA)
(i) all the property and liabilities of the
undertaking, being transferred by the
demerged company, immediately before
the demerger, become the property and
liabilities of the resulting company by
virtue of the demerger;
(ii) the property and the liabilities are
transferred at book value (unless
otherwise required by Ind-AS);
(iii) the resulting company issues, in
consideration of the demerger, its
shares to the shareholders of the
demerged company on a proportionate
basis except where the resulting
company itself is a shareholder of the
demerged company;
(iv) Shareholders holding at least 3/4th
in value of shares in the demerged
company become shareholders of the
resulting company by virtue of the
demerger. Shares in demerged
company already held by the resulting
company or its nominee or subsidiary
are not considered in calculating 3/4th
in value.
(v) the transfer of the undertaking is on
a going concern basis;
(vi) 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.
Undertaking
Demerge
Consideration
17Domestic income-tax aspects of M&A

18. Rutvij H. R. Naik
Demerger (contd…)
• Explanation 1.—For the purposes of this clause,
"undertaking" shall include any part of an undertaking, or
a unit or division of an undertaking or a business activity
taken as a whole, but does not include individual assets
or liabilities or any combination thereof not constituting a
business activity.
• Explanation 2.—For the purposes of this clause, the
liabilities referred to in sub-clause (ii), shall include—
(a) the liabilities which arise out of the activities or
operations of the undertaking;
(b) the specific loans or borrowings (including
debentures) raised, incurred and utilised solely for the
activities or operations of the undertaking; and
(c) in cases, other than those referred to in clause (a) or
clause (b), so much of the amounts of general or
multipurpose borrowings, if any, of the demerged
company as stand in the same proportion which the
value of the assets transferred in a demerger bears to
the total value of the assets of such demerged company
immediately before the demerger.
• Resulting company – S 2(41A)
"resulting company" means one or more companies
(including a wholly owned subsidiary thereof) to
which the undertaking of the demerged company is
transferred in a demerger and, the resulting company
in consideration of such transfer of undertaking,
issues shares to the shareholders of the demerged
company and includes any authority or body or local
authority or public sector company or a company
established, constituted or formed as a result of
demerger;
18Domestic income-tax aspects of M&A

19. Rutvij H. R. Naik
Demerger (contd…)
For the shareholders/ promoters
• Exempt transfer – S 47(vid)
• Cost of shares in demerged company – S 49(2D)
= Original cost – cost of shares of resulting company
• Cost of shares in resulting company – S 49(2C)
= (Cost of shares of demerged company x BV of net
• assets transferred) / Net-worth of demerged company
For A Co/ demerged company and for B Co/ resulting company
• Exempt transfer – S 47(vib)
• Depreciation on assets transferred – Proviso 5 to S 32
• WDV of assets for the demerged company – S 43(6)
• Accumulated losses and unabsorbed depreciation – S 72A
19Domestic income-tax aspects of M&A
A Co B Co
Shareholders/
promoters
Undertaking
Demerge
Consideration

20. Rutvij H. R. Naik
Demerger (contd…)
Non-qualifying demerger
• No specific provision in the Act which
taxes non-qualifying demergers.
Department uses various other
sections to tax transactions.
• Capital gains exposure in the hands
of demerged company treating it as
slump sale and applying fair values to
assets u/s 50C.
• Share issued by resulting company
may be treated as deemed dividend
u/s 2(22)(v); demerged company
could be liable to DDT @ 15% (plus
applicable cess and surcharge)
[Please refer to the Grasim Industries
Ltd. case]
• Income imputation in hands of
resulting company u/s 56(2)(x), which
taxes the recipient for receiving
property for inadequate consideration.
A Co B Co
Shareholders/
promoters
Undertaking
Demerge
Consideration
20Domestic income-tax aspects of M&A

21. Rutvij H. R. Naik
Demerger (contd…)
Tax objectives
• Change in holding company jurisdiction
• Transfer of wholly owned subsidiary
• Profit repatriation
• Fresh investment planning
• Segregation of asset-heavy undertaking
21Domestic income-tax aspects of M&A

22. Rutvij H. R. NaikDomestic income-tax aspects of M&A 22
Undertaking

23. Rutvij H. R. Naik
Meaning of ‘Undertaking’
As per courts
• The expression “undertaking” is an
amalgam of all ingredients of
property and is not capable of being
dismembered. The undertaking is a
complete and complex weft and the
various types of business and assets
are threads which cannot be taken
apart from the weft - R.C. Cooper
vs. Union of India (SC) 40 Com
Cases 325
• A business undertaking as a going
concern includes all rights, assets,
contingent or definite, corporeal and
incorporeal and all interest in
advantage, present or future. It also
includes the management, executive
employees and anything which goes
as part of organization - Avaya
Global Connect Ltd. Vs. ACIT (ITAT-
Mum) 122 TTJ 300
• An undertaking should be
interpreted to mean any venture or
enterprise which a person
undertakes to do - CIT v. Textile
Machinery Corporation (Cal HC) 80
ITR 428
Sale of shares = transfer of
undertaking?
[UTV Software Communication Ltd
case (2019) (Bom HC)]
• All shareholders of UHEL individually
sold their stakes to a third party
UHEL
Others
Undertaking
UEMC
USCL
(Taxpayer)
49%
UTV Software Communication Ltd
(2019) (Bom HC)
1% 50%
23Domestic income-tax aspects of M&A

24. Rutvij H. R. Naik
Meaning of ‘Undertaking’ (contd…)
• ITAT held that the respondent had
only sold its shares in UHEL and that
the undertaking of UHEL was not the
subject matter of the sale. Reliance
was placed on Bacha F. Guzdar v.
CIT (SC) [1955] 27 ITR 1 and
Vodafone International Holdings B.V.
v. Union of India (SC) [2012] 341
ITR 1
• Hon’ble Bom HC, upholding the
order of the ITAT observed that
“what has been transferred are mere
shares of the respondent in UHEL
There has been no transfer of an
undertaking of UHEL. The
undertaking continues to be vested
in UHEL. Only there has been
change in pattern of its share
holdings which would not make it
slump sale.”
• The Hon’ble Karnataka HC in the
case of Bhoruka Engineering
Industries Ltd. (2013) (356 ITR 25)
has held that sale of shares in a
company having land as the only
asset could not be treated as a sale
of the underlying land.
• It can be concluded that in the
absence of specific provisions of the
Act, transfer of shares does not
result in transfer of underlying
assets.
24Domestic income-tax aspects of M&A
UHEL
Others
Undertaking
UEMC
USCL
(Taxpayer)
49%1% 50%
UTV Software Communication Ltd
(2019) (Bom HC)

25. Rutvij H. R. NaikDomestic income-tax aspects of M&A 25
Slump sale and
Slump exchange

26. Rutvij H. R. Naik
Slump sale and slump exchange
A Co
B Co
Slump sale
• Definition of slump sale – S 2(42C)
transfer of one or more undertakings
as a result of the sale for a lump
sum consideration without values
being assigned to the individual
assets and liabilities in such sales.
• "undertaking" shall have the
meaning assigned to it in
Explanation 1 to clause (19AA).
• Computation mechanism – S 50B
Capital gains to be levied in the
hands of the transferor on,
(Consideration for the slump sale
less the ‘net worth’ of the
undertaking), N/W means the
aggregate value of assets less the
value of liabilities of the undertaking.
The value of the assets and
liabilities to be considered for the
computation is the depreciated book
value of such assets or liabilities,
with certain exceptions.
If undertaking held for >= 36
months; long term CG, or else short
term CG
Contd…
U1 Slump sale
Cash
consideration
U2
A Co
B Co
U1 Slump
exchange
Issue of
securities
U2
26Domestic income-tax aspects of M&A

27. Rutvij H. R. Naik
Slump sale and slump exchange (contd…)
Slump exchange
• Arguments
- S 2(42C) refers to sale (and not
exchange);
- Sale is different from exchange;
- Computation mechanism given in
S 50B fails
• Bharat bijlee (2014) (46
taxmann.com 257) (Bom HC)
relying upon Motors & General
Stores (P.) Ltd. (1967) 66 ITR 692
(SC)
• ‘Sale’ and ‘exchange’ not defined in
the IT Act. However both terms
used separately in the definition of
transfer.
Definition of sale in TOPA [S 54] –
"Sale" is a transfer of ownership in
exchange for a price paid or
promised or part-paid and part-
promised.
Price not defined in TOPA, but it is
well-settled that the word "price" is
used in the same sense in this
section as in section 4 of the Sale of
Goods Act. Section 2(10) of the
Sale of Goods Act defines "price" as
meaning the money consideration
for a sale of goods. If the
consideration is not money but
some other valuable consideration it
may be an exchange or barter but
not a sale.
27Domestic income-tax aspects of M&A
A Co
B Co
U1 Slump sale
Cash
consideration
U2
A Co
B Co
U1 Slump
exchange
U2
Issue of
securities

28. Rutvij H. R. Naik
Slump sale and slump exchange (contd…)
• TOPA also defines exchange
separately [S 118]
When two persons mutually transfer
the ownership of one thing for the
ownership of another, neither thing
or both things being money only, the
transaction is called an 'exchange’.
• Chitty on Contracts, 22nd edition,
volume II, page 582)
"The difference between a sale and
an exchange is this, that in the
former the price is paid in money,
whilst in the latter it is paid in goods
by way of barter.".
What about ‘transfer’ of one or more
undertakings? Even if this argument
is taken, then how will value
employees, information, etc.
transferred as part of the
undertaking on a going concern
basis? Computation mechanism
fails.
• Contrary opinion
Senior counsel opinion - Can issue
of fresh securities be justified as
exchange? An exchange should
have two things being exchanges
that are already in existence.
28Domestic income-tax aspects of M&A
A Co
B Co
U1 Slump sale
Cash
consideration
U2
A Co
B Co
U1 Slump
exchange
U2
Issue of
securities

29. Rutvij H. R. NaikDomestic income-tax aspects of M&A 29
Thank you