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A project report on

Tax aspects of Mergers and acquisitions
AMALGAMATION [Section 2(1B) of I.T. Act]

"Amalgamation", in relation to companies, means the merger of one or more compan...
TAX CONCESSIONS/ INCENTIVES IN CASE OF AMALGAMATION:

 1. Tax concessions to amalgamating company
 2. Tax concessions to s...
3. Tax concessions to amalgamated company:

Conditions to be satisfied for being eligible for tax concession:

       •   ...
c. Treatment of preliminary expenses [U/S 35D(5)]:

When and amalgamating company merges with an amalgamated company under...
Conditions:

•   The amalgamation should be of a company owning an industrial undertaking or
    ship
•   The amalgamated ...
DEMERGER [section 2(19AA)]:



"Demerger", in relation to companies, means the transfer, pursuant to a scheme of
arrangeme...
1. Tax concessions to demerged company:

U/S 47 (vib) any transfer, in a demerger, of a capital asset by the demerged comp...
3. Tax concessions to the resulting company:

The resulting company shall be eligible for tax concessions only if the foll...
c. Treatment of bad debts [U/S 36(1)(vii)]:

 When due to demerger, debts of the demerged company are taken over by the
re...
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Tax[1]

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Tax[1]

  1. 1. A project report on Tax aspects of Mergers and acquisitions
  2. 2. AMALGAMATION [Section 2(1B) of I.T. Act] "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 (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 become the liabilities of the amalgamated company by virtue of the amalgamation; (iii) Shareholders holding not less than nine-tenths in value of the 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 of the amalgamated company by virtue of the amalgamation.
  3. 3. TAX CONCESSIONS/ INCENTIVES IN CASE OF AMALGAMATION: 1. Tax concessions to amalgamating company 2. Tax concessions to shareholders of the amalgamating company 3. Tax concessions to amalgamated company 1. Tax concessions to amalgamating company: U/S 47(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; shall not be regarded as transfer for the purpose of capital gains. U/S 47 (vi) (a) 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, shall not be regarded as transfer for purpose of capital gains 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. 2. Tax concessions to shareholders of the amalgamating company: U/S 47 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, shall not be regarded as transfer for the purpose of capital gains 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.
  4. 4. 3. Tax concessions to amalgamated company: Conditions to be satisfied for being eligible for tax concession: • The amalgamation satisfies all the three conditions laid down in section 2 (1B);and • The amalgamated company is an Indian country. a. Expenditure on scientific research [U/S 35(5)]: When an amalgamating company transfers any asset represented by capital expenditure on the scientific research to the amalgamated Indian company in a scheme of amalgamation provisions of section 35 shall be applicable- • unabsorbed expenditure on scientific research of the amalgamating company will be allowed to be carried forward and set off in the hands of the amalgamated company, • if such asset ceases to be used in the previous year for scientific research related to the business of amalgamated company and is sold by the amalgamated company the sale price to the extend of cost of asset shall be treated as business income and the excess of sale price over the cost shall be subject to the provisions of capital gain. b. Expenditure on acquisition of patent rights or copyrights[U/S 35A(6)]: If patent or copyright acquired by the amalgamating company is transferred to amalgamated Indian company, provisions of section 35A shall be applicable to the amalgamated company The expenditure on patent rights or copyrights to the extend not yet written off shall be allowed as deduction to the amalgamated company in the same number of balanced installments. However if such expenditure is incurred by the amalgamating company after 31-3-1998, deduction U/S 35A is not allowed and such expenditure shall be eligible for depreciation as intangible asset.
  5. 5. c. Treatment of preliminary expenses [U/S 35D(5)]: When and amalgamating company merges with an amalgamated company under a scheme of amalgamation, the amount of preliminary expenses of the amalgamating company to the extend not yet written off shall be allowed as deduction to the amalgamated company in the same manner as would have been allowed to the amalgamating company. d. Treatment of capital expenditure on family planning [U/S 36(1)(xi)]: If Asset representing capital expenditure on family planning is transferred by the amalgamating company to the amalgamated company under a scheme of amalgamation, such expenditure shall be allowed as deduction to the amalgamated company in the same manner as would have been allowed to the amalgamating company. e. Treatment of bad debts[U/S 36(1)(vii)]: When due to amalgamation debts of the amalgamating company has been taken over by amalgamated company, and subsequently, such debts turn out to be bad, it shall be allowed as deduction to the amalgamated company. f. carry forward and set off of business losses and unabsorbed depreciation of the amalgamating company The amalgamated company shall be allowed to carry forward and set off the business losses and unabsorbed depreciation of the amalgamating company, if all the conditions of section 72A are satisfied.
  6. 6. Conditions: • The amalgamation should be of a company owning an industrial undertaking or ship • The amalgamated company holds at least 3/4th of the book value of the fixed assets of the amalgamating company for a continuous period of 5 years from the date of amalgamation • The amalgamated company continues the business of the amalgamating company for a period 5 years from the date of amalgamation • The amalgamated company fulfills such other conditions as may be prescribed to ensure to ensure the revival of the business of the amalgamating company. g. Deduction available U/S 80-IA & 80-IB: When an undertaking which is entitled to deduction U/S 80-IA & 80-IB is transferred under a scheme of amalgamation to the amalgamated company, before the expiry of period of deduction then- • No deduction shall be available to the amalgamating company for the previous year in which the amalgamation takes place under the section • Deduction shall be available to the amalgamated company in the same way in which it would have been available to the amalgamating company.
  7. 7. DEMERGER [section 2(19AA)]: "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; (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; (v) The shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger, otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company; (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 CONCESSIONS/ INCENTIVES IN CASE OF DEMERGER: 1. Tax concessions to demerged company 2. Tax concessions to shareholders of the demerged company 3. Tax concessions to the resulting company
  8. 8. 1. Tax concessions to demerged company: U/S 47 (vib) any transfer, in a demerger, of a capital asset by the demerged company to the resulting company, shall not be considered as transfer for capital gain purposes if the resulting company is an Indian company U/S 47(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, shall not be treated as transfer for capital gain purposes 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. 2. Tax concessions to shareholders of the demerged company[U/S 47(vid)]: Any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company, shall not be treated as transfer for capital gain purpose, if the transfer or issue is made in consideration of demerger of the undertaking. In case of a demerger the existing shareholders of the demerged company will now hold Shares in resulting company and shares in demerged company. In case if the shareholders transfer any of the above shares subsequent to the demerger, the cost of such shares shall be calculated as under: Cost of acquisition of the shares= Cost of acquisition of shares held by net book value of the assets transferred in demerger The assessee in the X Demerged company net worth of the demerged company before demerger
  9. 9. 3. Tax concessions to the resulting company: The resulting company shall be eligible for tax concessions only if the following two conditions are satisfied: • The demerger satisfies all the conditions laid down in section 2(19AA); and • The resulting company is an Indian company. a. Expenditure on acquisition of patent rights or copyrights [U/S 35A (7)]: If patent or copyright acquired by the demerged company is transferred to resulting Indian company, provisions of section 35A shall be applicable to the resulting company The expenditure on patent rights or copyrights to the extend not yet written off shall be allowed as deduction to the resulting company in the same number of balanced installments. However if such expenditure is incurred by the demerged company after 31-3-1998, deduction U/S 35A is not allowed and such expenditure shall be eligible for depreciation as intangible asset. b. Treatment of preliminary expenses [U/S 35D(5)]: When the undertaking of an Indian company which is entitled to deduction of preliminary expenses is transferee before the expiry of 10/5 years, as the case may be, to another company under a scheme of demerger, amount of preliminary expenses of the demerged company to the extend not yet written off shall be allowed as deduction to the resulting company in the same manner as would have been allowed to the demerged company. The demerged company shall not be allowed deduction of the same after demerger.
  10. 10. c. Treatment of bad debts [U/S 36(1)(vii)]: When due to demerger, debts of the demerged company are taken over by the resulting company and subsequently, such debt becomes bad, then it shall be allowed as deduction to the resulting company. d. Carry forward and set off of business losses and unabsorbed depreciation of the amalgamating company [U/S 72A(4) 7 (5)]: The accumulated loss and unabsorbed depreciation, in a demerger, are allowed to be carried forward by the resulting company if these are directly relatable to the to the undertaking proposed to be transferred. Where it is not possible to directly relate it to the undertaking, such loss and depreciation shall be apportioned between the demerged and resulting company in the proportion of assets coming to the share of each as a result of the demerger. e. Deduction available U/S 80-IA & 80-IB: When an undertaking which is entitled to deduction U/S 80-IA & 80-IB is transferred under a scheme of demerger to the resulting company, before the expiry of period of deduction then  No deduction shall be available to the demerged company for the previous year in which demerger takes place under the section  Deduction shall be available to the resulting company in the same way in which it would have been available to the demerged company.

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