Taxation Aspects of Amalgamation and

Demerger

Presented by:
Umesh (G), Pradeep, Preeti &
Omprakash
 Some definitions
as per Income Tax Act, 1961

Amalgamation [section 2 (1B)]

Three conditions related to the followings
should be satisfied:
(1) Share holders
(2) Properties
(3) Liabilities

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 Case
ABC Ltd has a paid-up equity capital of Rs. 10
crore consisting of Rs. 10 each. It has no
preference share capital. 20% of its equity
shares are held by XYZ Ltd who has a paid-up
capital of Rs. 50 cr. consisting of Rs. 10 each. It
was decided to merge ABC with XYZ and to allot
1 share of XYZ for every 2 shares of ABC held to
the shareholders of ABC. As per above rule, not
less than the individual shareholders, of Rs. 6 cr.
(in value) of ABC, have to become shareholders
in XYZ by virtue of allotment.
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 Demerger [section 2 (19AA)]
The following conditions should be satisfied:
(1) Both the entities should be companies
(2) Conditions of sections 391 to 394 of the
Companies Act, 1956 should have been complied
with.
(3) There must be a transfer of an undertaking to
the resulting company
(4) All properties belonging to an undertaking
should be transferred to the resulting company

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 Demerger [section 2 (19AA)]
(5) The resulting company must take over all the
liabilities of undertaking being transferred
(6) All properties and liabilities are to be
transferred at the book value only
(7) The transfer of the undertaking should be on
going concern basis
- Only shares in the resulting company
- Allocation on proportionate basis

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Capital Asset [section 2(14)]
Capital asset means property of any kind
excluding:
(1) Stock in trade- raw mat., WIP, finished goods,
consumable stores, etc.
(2) Personal effects
(3) Rural agricultural land in India
(4) Specified bonds
Examples of C.A.- Immovable properties, jewellery,
securities ( shares/debentures/ bonds/ units of
UTI/ units of mutual funds), foreign currency held
on capital account, right to subscribe shares,
intangible assets (tenancy right/ loom hours/
goodwill/ licenses), business undertaking.
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 Transfer
Transfer includes [section 2 (47)]
(1) Sale of asset
(2) Exchange of asset
(3) Compulsory acquisition of asset by Govt.
(4) Conversion of capital asset into stock-in-
trade
(5) The maturity or redemption of a Zero
Coupon Bond
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 Capital Gain
Section 45 (1)
This sub-section provides that if the following
conditions are satisfied, the capital gain shall
be taxed as the income of assessee in the year
in which the transaction takes place:
(1) There is a capital asset
(2) Such asset is transferred
(3) There arises gain or loss

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 Classification of Capital Assets

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 Information required for
computation of capital gain
Relevant Dates:
DOA - Date of acquisition for computation of holding
period
DOA* - Date of acquisition for computation of indexed
cost of acquisition
DOI - Date of improvement
DOT - Date of transfer
T/Y - Taxability year

Relevant Amounts:
COA - Cost of acquisition
COI - Cost of improvement
S/P - Sales proceed
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 Computation of capital gain
Short term gain Long term gain
Sale proceeds XXX Sale proceeds XXX

Less: COA XXX Less: Indexed COA XXX

COI XXX Indexed COI XXX

COT XXX XXX ____ COT XXX XXX ____

Less: Exemptions XXX_ Less: Exemptions XXX_

Taxable gain XXX_ Taxable gain XXX_

Indexed COA= COA X C.I.I. for DOT

C.I.I. for DOA*
Indexed COI= COI X C.I.I. for DOT
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 Case- 1
ABC Ltd., an Indian company, had acquired a commercial
property for its branch at Pune on 3 June 1987 at the
cost of Rs. 5 lac. ABC Ltd. Was amalgamated with XYZ
Ltd., an Indian company, with 1 April 2004 as its
appointed date. Since XYZ Ltd. Adopted fair value
accounting, the property was transferred at Rs. 19 lac
in the books of XYZ Ltd. on 1 April 2004. On 6 June
2006, XYZ Ltd. sold this property for Rs. 50 lac. It paid
brokerage at 2% while selling the property. ABC Ltd
had incurred Rs. 2 lac on the improvement of the
property immediately upon acquisition. XYZ Ltd had
also spent Rs. 1 lac on the improvement of the
property in September 2005. What would be the
incidence of capital gains tax and at what stage?
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 Solution(s)
• There will be no incidence of capital gain tax
upon transfer of this property from ABC Ltd to
XYZ Ltd on 1 April 2004 since the transfer is in
the scheme of amalgamation and XYZ Ltd is an
Indian company.
• Upon sale by XYZ on 6 June 2006 capital gains
tax will be payable for the Assessment Year
2007-08

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 Solution(s)
• Even if XYZ was holding the property for less
than 36 months, by virtue of inclusion of the
period (of 16 yrs and 10 months) for which
ABC Ltd was holding it, the capital gains would
be treated as long-term capital gains. The COA
in the hands XYZ would be the same as COA to
ABC, i.e., Rs. 5 lac. In respect to the COA Rs. 5
lac and COI Rs. 2 lac incurred by ABC, the
indexation benefit will be available from 1
April 2004.
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 Solution(s)
Computation of C.G.T.
Particulars Rs. (Lac) (Indexed) Rs. (Lac) (Non-indexed)
Sale Proceeds 50 50
Less borkerage paid 1 1
Less Cost of Acquisition* 5.41 5
Less cost of improvement:
Cost by ABC* 2.16 2
Non-indexed Cost by XYZ 1 1
Taxable Capital Gain 40.43 41
Long Term CG Tax @ 20% 8.09
4.10
10% of Non-indexed CG
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 Case- 2
Mr. P had acquire 1000 shares of ABC Ltd on 15
November 2001 at a cost of Rs. 276. ABC was merged
with XYZ on appointed date of 1 April 2004. The
shareholders of ABC were issued 2 shares of XYZ for
every 1 share of ABC held by them. Allotment took
place on 17 October 2004. In June 2006, XYZ launched
a buy-back tender offer to acquire 22% of the paid-up
equity capital at Rs. 210/share. Mr. P tendered his
entire holding in XYZ. The response to tender offer
being poor, XYZ accepted the entire quantity by Mr. P.
He received the consideration on 7 August 2006.
What would be the incidence of capital gains tax and at
what stage?

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 Solution(s)
• There will be no incidence of capital gains tax
when shares of XYZ were allotted to Mr. P in
lieu of his holding in ABC
• Cost of Mr. P of shares of XYZ
= Cost of shares of ABC/ No. of shares of XYZ
= (1000 X 276)/ (2000)
= Rs. 138 per share of XYZ

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 Solution(s)
• The shares of XYZ were held by Mr. P for more than 12
months from the date of allotment, by virtue of his
holding of ABC’s shares, he would be liable to pay
LTCG tax
• With effect from AY 2005-06, any income by way of
long-term capital gain from sale or recognized stock
exchange, and the securities transaction tax (STT) is to
be paid. However, in Mr. P’s case, has transferred his
shares in a buy-back scheme where STT is not
applicable. Hence, Mr P will be liable to pay LTCG tax
@ 20% with indexation or at 10% without indexation

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 Solution(s)

Computation of Capital Gain Tax

Particulars Rs. (Indexed) Rs. (Non-indexed)
Amount received in buy-back 420000 420000
Less COA* 298425 276000
Taxable Capital gain 121575 144000
LTCG Tax @ 20% 24315
10% of Non-indexed CG 14400

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