TAXATION OF MERGERS AND DEMERGERS

A. Merger

1. Introduction

The term ‘merger’ according to Oxford Advanced Learner’s Dictionary(8th edition 2010), means the act
of joining two or more organisations into one. Black’s Law Dictionary (7thedition) defines ‘merger’ as the
act or an instance of combining or uniting.
The term ‘amalgamate’ according to Oxford Advanced Learner’s Dictionary (8th edition 2010), means to
put two or more things together so that they form one. If two or more organizations amalgamate or are
amalgamated, they join together to form one large organization. The term ‘amalgamate’ is synonymous
to ‘merge’. Black’s Law Dictionary (7thedition) gives the meaning of amalgamation as the act of
combining or uniting; consolidation – amalgamation of two small companies to form a new corporation.
As can be seen from the above definitions, the terms ‘merger’ and ‘amalgamation’ are quite synonymous
and can be interchangeably used.
Generally, the company that merges or amalgamates is known as the ‘amalgamating company’ or
‘transferor company’.The corporate identity of the transferor company ceases to exist post
amalgamation.The company into which the amalgamating or transferor company merges or
amalgamates is known as the ‘amalgamated company’ or ‘transferee company’.

2. Implications related to income tax on merger

A host of income tax issues/questions may need to be considered while dealing with a transaction of
merger / amalgamation of companies.The Income Tax Act, 1961 (‘Act’) provides for certain tax
concessions to companies involved in the scheme of merger and alsoto their shareholders. The ensuing
paragraphs discuss the relevant key income tax provisions/ implicationsof tax neutral merger of
companies

(a) Amalgamation – meaning and conditions

(b) Key income tax implications for the transferor (amalgamating) company

(c) Key income tax implications for shareholders of the amalgamating company

(d) Key income tax implications for the transferee (amalgamated) company

(e) Amalgamation of foreign companies holding shares of Indian companies (directly or indirectly)
with another foreign company

(a) Amalgamation – meaning and conditions

The Act [1] defines ‘amalgamation’ as under:

‘‘”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 liabilities of the amalgamating company or companies immediately before the amalgamation
become the liabilities of the amalgamated company by virtue of the amalgamation;
ii. 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;
iii. shareholders holding not less than three-fourths 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.

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.’

The definition of the term ‘amalgamation’ was inserted by Finance (No 2) Act, 1967 and correspondingly
various related sections of the Act were amended. The Central Board of Direct Taxes (‘CBDT’) [2] has
explained the purpose and rationale behind these amendments. The explanation is as follows:

‘… with a view to facilitating the merger of uneconomic company units with other financially sound company
units in the interest of increased efficiency and productivity. A few of the amendments… are intended to clarify
the intention underlying the provisions which existed previously, while others are designed to remove certain
tax liabilities which are attracted in the case of an ‘amalgamating company’ (i.e., the company which merges
into another company) as well as the shareholders of the amalgamating company who receive shares in the
‘amalgamated company’ (i.e., the company in which the enterprise of the other company is merged) in lieu of
their shareholdings in the amalgamating company…’

Typically, following are the pre-requisites to qualify as an ‘amalgamation’ under the Act:
All properties of the transferor company become the properties of the transferee company;
All liabilities of the transferor company become the liabilities of the transferee company;
Shareholders holding 75% or more in value of the shares in the transferor company (excluding
shares already held immediately before the amalgamation by the transferee company or its
subsidiaries or its nominees) become shareholders of the transferee company; and
The above must be achieved by virtue of the merger and not by way of purchase of properties by
one company by another or by way of distribution of properties pursuant to the winding up of a
company concerned.

An amalgamation that satisfies the above-mentioned conditions is considered to be a tax-neutral

amalgamation provided the amalgamated company is an Indian company.

(b) Key income tax implications for the transferor (amalgamating) company

(i) Capital gains on transfer

In an amalgamation process, business of the transferor company stands transferred to the transferee
company, and in consideration thereof, transferee company issues its shares [3] to shareholders of the
transferor company (except shares held by transferee company or subsidiary of transferee company).

The Act specifically provides [4] that any transfer of capital assets in a scheme of amalgamation by an
amalgamating company to an amalgamated company (if the amalgamated company is an Indian company)
would not be regarded as a transfer and accordingly would not attract capital gains tax. In view of the specific
exclusion provided under the Act, capital gains tax implications should not apply for the transferor company on
the business transfer pursuant to amalgamation.

(ii) Deemed dividend

In case where a wholly-owned subsidiary gets amalgamated into its immediate holding company, all the assets
of the wholly-owned subsidiary are transferred to the holding company. The holding company does not issue
any shares in consideration for this transfer, but instead cancel its investments in the wholly-owned subsidiary.
The issue for consideration is whether this amalgamation can be regarded as distribution of assets (dividend)
by the wholly owned subsidiary to its shareholder (that is, the holding company).
The CBDT has clarified [5] that when a company transfers its assets pursuant to amalgamation, such transfer
should not be regarded as ‘distribution of accumulated profits’ by the transferor company and accordingly
there may be no deemed dividend tax implications for the transferor company, even though accumulated
profits embedded in the assets are transferred to the transferee company on merger.

(c) Key income tax implications for shareholders of the amalgamating company

(i) Capital gains

In a typical case of amalgamation, assets and liabilities of the transferor company are transferred to the
transferee company. In consideration thereof, transferee company issues its shares to the shareholders of the
transferor company and their shareholding in the transferor company stands extinguished.

The Act [6] provides that any transfer of shares by shareholders of the transferor company in a scheme of
amalgamation would not attract capital gains tax if:

The shareholders of the transferor company (except when transferee company itself is a shareholder)
receive shares of the transferee company in consideration of such transfer; and
The transferee company is an Indian company.

It may be noted that Section 2(1B) conditions require that 75% in value of the shareholders become
shareholders of amalgamated company. The section provides for a window of 25% for dissenting shareholders.
Accordingly, a plausible interpretation is that there is compliance of Section 2(1B) conditions even when cash
or consideration in some other form is given to the extent of 25% in value of the shareholders.

The benefit of exemption is available to shareholders of the transferor company only when the consideration is
received in the form of shares of the transferee company. If the consideration is received in any form other
than shares of transferee company or received partly in shares and partly in some other form then the
shareholder may not be eligible to claim exemption under the provision of the Act [7] .

When consideration is given in the form of shares to some shareholders and cash is paid to the balance
shareholders, the benefit of exemption is available only to those shareholders who have received consideration
in the form of shares of the transferee company.

(ii) Income from other sources

A new provision has been introduced in the Act [8] which provides that the difference between the
consideration and prescribed fair market value [9] of property [10] received by any person is liable to be taxed
as income from other sources in the hands of the recipient if they are acquired without consideration or for a
consideration that is lower than the aggregate fair market value (provided aggregate fair market value of such
properties exceeds consideration paid, if any, by more than INR50,000).

The Act [11] has provided a specific exemption from the aforesaid provision to shareholders of transferor
company when shares of the transferee company are received as a consideration in a tax neutral
amalgamation and the transferee company is an Indian company.

(iii) Cost of acquisition and period of holding of the shares of transferee company and cost inflation
index

In order to compute capital gains in the hands of the shareholders at the time of future transfer, it is important
to ascertain the cost and the period of holding of the shares acquired pursuant to amalgamation.

As issuance of shares to shareholders of the transferor company by the transferee company in an

amalgamation is not regarded as transfer, the Act [12] provides that cost of the shares of the transferee
company would be equal to the cost of the shares of the transferor company.

The period of holding of the shares received on amalgamation to include the period of holding of shares of the
transferor company [13] .

(d) Key income tax implications for the transferee company

The key income tax implications for the transferee company have been discussed under the following
headings:

i. Taxability of gains from remission of liability

ii. Allowability of expenses on amalgamation or demerger
 iii. Tax holiday benefits
iv. Carry forward of losses of transferor company
v. Actual cost, written-down value (WDV) and depreciation in respect of capital assets transferred
vi. Actual cost in respect of stock-in-trade transferred
vii. Amortization of preliminary expenses
viii. Tax in the hands of the transferee company under the head ‘Income from other sources’
ix. Tax in the hands of the amalgamated or resulting company on issuance of shares
x. Disallowance under Section 43B of the Act
xi. Bad debts

(i) Actual cost, WDV and depreciation in respect of capital assets transferred

The Act [14] provides that when a capital asset is transferred by a transferor company to a transferee company
pursuant to an amalgamation, transferee being an Indian company, the actual cost of the transferredasset in
the hands of the transferee company should be the same as it would have been to the transferor company, as
if the amalgamation had not taken place.

Tax depreciation is calculated differently for the year in which the amalgamation has taken place. The
aggregate annual depreciation in the year of amalgamation in respect of depreciable assets(not being goodwill
of a business or profession)that are transferred by a transferor company to the transferee company pursuant
to amalgamation is required to be apportioned between the amalgamating and amalgamated company in the
ratio of the number of days of usage of those assets by the respective companies as if the amalgamation had
not taken place [16] .

The Act provides thatthe cost of goodwill as reduced by the depreciation that would have been allowable would
need to be reduced in computing the Written Down Value of the block of assets on which depreciation can be
made admissible.Therefore, goodwill which forms part of block of assets as on April 1, 2020 would not be
eligible for depreciation from AY 2021-22 and onward.

(ii) Actual cost in respect of stock-in-trade transferred

The Act [17] provides that when any stock-in-trade is transferred by a transferor company to a transferee
company pursuant to an amalgamation, then for the purpose of computing profits in the hands of transferee
company from sale of such stock-in-trade, the actual cost of stock-in-trade to the transferee company should
be equal to the actual cost to the transferor company.

(iii) Carry forward of losses of transferor company

The Act [18] provides that the accumulated business loss(except loss sustained in a speculative
business)/unabsorbed depreciation of transferor company (being a company owning an industrial undertaking
[19] or a ship or a hotel or a banking company orpublic sector companies)would be deemed to be those of the

transferee company, provided the following conditions are fulfilled:

(i) The transferor company has been engaged in the business, in which the accumulated loss occurred or
depreciation remains unabsorbed, for three or more years;

(ii) The transferor company has held continuously as on the date of amalgamation at least 75% of the book
value of the fixed assets held by it two years prior to the date of amalgamation;

(iii) The transferee company continues to hold 75% of the book value of the fixed assets of the transferor
company acquired pursuant to amalgamation for at least five years;

(iv) The transferee company carries on the business of the transferor company for at least five years;

(v) In case the transferee company owns an industrial undertaking of the transferor company pursuant to
amalgamation, the transferee company should achieve the level of production of at least 50% of the installed
capacity before the end of four years from the date of amalgamation. It should also continue to maintain the
same level of production till the end of five years from the date of amalgamation. The particulars of production
need to be furnished in the form of a certificate, duly verified by an accountant [20] , along with the tax return,
starting with the year in which the said capacity utilization is achieved till the end of the five years from the
date of amalgamation.

However, if the transferee company makes an application to the Central Government, the Central Government
may relax the conditions of achieving the level of production or the period during which the same is to be
achieved or both, in suitable cases, having regard to the genuine efforts made by the transferee company to
attain the prescribed level of production and circumstances preventing such efforts from achieving the same.

As mentioned above, if the prescribed conditions are fulfilled, a plausible interpretation is that, pursuant to
amalgamation, the transferee company may get a fresh lease of eight-year period to carry forward the
accumulated tax losses of the transferor company. Further, there is no time limit for carrying forward the
unabsorbed depreciation.

(iv) Allowability of expenses on amalgamation

Certain expenses like stamp duty, court fees, professional fees are likely to be incurred for giving effect to the
scheme of amalgamation. The transferee company is allowed a deduction of one-fifth of the expenditure
incurred wholly and exclusively for the purpose of scheme for each of five successive previous years (i.e. 20%
in each year), beginning from the year in which the amalgamation takes place [21] .

(v) Benefits of Tax holiday

It is provided that when a business or an undertaking eligible for any tax holiday under the Act [22] is
transferred on amalgamation or demerger, before the expiry of the tax holiday period, the benefit should not
be lost for the unexpired period of the tax holiday. In such cases:

No tax holiday deduction would be allowed to the transferor company in the year of amalgamation or
demerger as the case may be;
The amalgamated / resulting company would be entitled to the tax holiday for the unexpired period, as if
the amalgamation or demerger as the case may be had not taken place.

It may be noted that the Act has been amended w.e.f. 1 April 2008stating that tax holiday continuity
provisions would not apply in cases where the eligible enterprise or undertaking is transferred pursuant to a
scheme of amalgamation or demerger on or after 1 April 2007 [23]

The CBDT circular [24] explains the intention of this amendment in the following terms:

‘35. Tax benefit under section 80-IA not available to undertaking/enterprise of Indian companies undergoing
amalgamation or demerger after 31 March 2007.

35.1 Sub-section (12) of section 80-IA provides that where any undertaking of an Indian company which is
entitled to the deduction under the said section is transferred before the expiry of the period specified therein,
to another Indian company in a scheme of amalgamation or demerger, the provisions of the said section 80-IA
shall apply to the amalgamated or the resulting company as they would have applied to the amalgamating or
the demerged company if the amalgamation or demerger had not taken place. The main intention in
providing benefit under section 80-IA had been to provide incentive to those who had taken initial
investment and entrepreneur risk. Hence, it was felt that there was no justification for passing on
the benefit to someone who had not taken these risks and had only acquired the eligible
undertaking much later when the risks had reduced. Hence, a new sub-s (12A) has been inserted in
section 80-IA so as to provide that the provisions of sub-s (12) shall not apply to any undertaking or
enterprise which is transferred in a scheme of amalgamation or demerger after 31.3.2007. Thus, if an
undertaking or an enterprise is transferred in a scheme of amalgamation or demerger after 31.3.2007, the
benefit of deduction under section 80-IA will not be available to the amalgamated or demerged undertaking or
enterprise. The content of this circular will supersede whatever contrary has been stated, on this issue, in any
other circular, issued by the Central Board of Direct Taxes earlier.’ (emphasis supplied)

Basis the above Circular, a plausible view that has emerged is that tax holiday benefit under Section 80-IA
would not be available to the transferee company on amalgamation or demerger.

However, it may be noted that this amendment has been made only in section 80-IA and not in other
provisions relating to continuity of tax holiday benefit on merger or demerger such as section 10AA, 80-IB etc.
Accordingly, a plausible interpretation is that in absence of a specific amendment in these sections, tax holiday
under these sections would continue to be available to the transferee company after a merger or demerger.
The issue is however not free from doubt, and it is important to review its judicial developments while
evaluating the matter.

(vi) Taxability of gains from remission of liability

If deduction for certain expenditure has been taken in the past and the taxpayer obtains any benefit in respect
of such expenditure, by remission or cessation of the relevant trading liability or otherwise, the same is taxable
in the year of obtaining such benefit [25] .
Accordingly, if a transferor company was allowed a deduction and the transferee company obtained a benefit in
respect of such expenditure in a subsequent year, the transferee company would be taxed on the amount of
such benefit.

(vii) Amortisation of preliminary expenses

The Act allows deduction of certain preliminary expenses incurred by an Indian company over a period of five
years. [26]

In a scheme of amalgamation, when any business entitled to such deduction is transferred by the transferor
company to the transferee company, the above deduction is not allowed to a transferor company in the year in
which amalgamation takes place but shall be allowed to the transferee company as if the amalgamation has
not taken place.

(viii) Tax in the hands of the transferee company under the head ‘Income from other sources’

As discussed above, a new provision has been introduced in the Act [27] w.e.f. April 1, 2017, which provides
that the difference between the consideration and the fair market value of property received by any person is
liable to be taxed as income from other sources in the hands of the recipient if they are acquired without
consideration or for a consideration that is less than the aggregate fair market value (provided aggregate fair
market value of such properties exceeds consideration paid, if any, by more than INR50,000).

The Act [28] has provided a specific exemption from the aforesaid provision where capital assets of the
amalgamating company are transferred to the amalgamated company pursuant to a scheme of amalgamation
and the amalgamated company is an Indian company.

(ix) Tax in the hands of the amalgamated company on issuance of shares

The Act [29] provides that where a closely-held company issues its shares to a resident at a premium at a
price which is more than its fair market value, then the amount received in excess of the fair market value of
shares will be charged to tax in the hand of the company as income from other sources.

A scheme of amalgamation may involve issuance of shares at a value exceeding the fair market value of the
net assets received on amalgamation and may be questioned by the Indian revenue authorities. While a
plausible interpretation is that the aforementioned provision is not applicable on issuance of shares under a
scheme of amalgamation, the issue is not free from doubt. It is important to review judicial developments on
the subject when the matter is being evaluated.

(x) Disallowance under Section 43B of the Act

As per the Act [30] deductions in respect of certain expenses are permitted only on payment basis. The issue
under consideration is on merger, which company shall be entitled to claim deduction in respect of liabilities
incurred by transferor company but paid for by the transferee company.

There could be two possibilities here: payment is made within the due date of filing return of income or
payment is made after the due date of filing the return of income. While the issue is not free from doubt,
following is a plausible view on the subject:

If payment is made within the due date

Deduction is allowed to the transferor company for the period upto the date of mergerif payment is made by
the transferee company prior to the due date of filing the return of income.Deduction may be admitted to the
transferor company, so as to allow the provision of Section 43B to operate such that the payment made upto
the date of return of income virtually relates back to the year of incurrence of expenditure enabling the
transferor company to claim the deduction in the same manner in which it would have claimed had the
amalgamation or mergernot taken place.

If payment is made beyond the due date

If payment is made by the transferee company beyond the due date of filing return of income, the deduction
may be admitted to the transferee company in subsequent assessment years.

It may be noted that the issue is not free from doubt and it is important to review judicial developments on the
subject when the matter is being evaluated.

(xi) Bad debts

Transferor company may have offered certain income on accrual basis in respect of which the
transferee company may suffer bad debt post-merger. Allowability of such deduction to the transferee
company is an issue for consideration.

In the context of takeover of business of a partnership firm by another, the Supreme Court has held that
successor firm should get the deduction for the bad debt since the debt had been considered in computing the
income of the predecessor firm and had subsequently been written off as irrecoverable in the accounts of the
successor or the amalgamated firm. [31]

Though this decision was rendered in the situation of a partnership firm taking over the business of another
partnership firm, a plausible view may be taken that ratio of this decision may also apply in the context of
merger of an undertaking. The issue is not free from doubt and it is important to review judicial developments
on the subject when the matter is being evaluated.

(e) Amalgamation of a foreign company holding shares of Indian companies (directly or indirectly)
with another foreign company

Income tax implications may arise in India on overseas mergers, if the transferor foreign company owns
shares of an Indian company (directly or indirectly).

The Act specifically provides that transfer of a capital asset being shares in an Indian company [32] or shares
of a foreign company, which derives directly or indirectly its value substantially from shares of an Indian
company [33] by a transferor foreign company to the transferee foreign company pursuant to amalgamation is
not a transfer for the purpose of capital gains tax if the following two conditions are fulfilled:

At least 25% of the shareholders of the transferor foreign company remain shareholders of the
transferee foreign company;
Such transfer is not chargeable to capital gains tax in the country in which the transferor foreign
company is incorporated.

The Act also provides that overseas mergers satisfying the aforementioned conditions should not attract any
tax implications under Section 56(2)(X) for the transferee foreign company. [34]

It may be noted that in a scheme of overseas merger owning shares of an Indian company (directly or in
directly) no exemption has been provided in the Act for shareholder of transferor foreign company receiving
shares of the transferee foreign company pursuant to such merger.

B. Demerger

1. Introduction

Demerger as is generally understood, for tax purposes, involves a National Company Law Tribunal (‘NCLT’)
process.It is achieved through a scheme of compromise or arrangement under Sections 230 to 232 of the
Companies Act, 2013. The process involves an arrangement by which the demerged company (or transferor
company) transfers its identified undertaking on a going concern basis to another company called the resulting
company (or transferee company). As consideration for such transfer of business undertaking, shares are
issued to the shareholders of demerged company by the resulting company.

‘Resulting company’ [35] is defined to mean one or more companies, including a wholly owned subsidiary of
the resulting company, to which the undertaking of the demerged company is transferred in a demerger.
Resulting company also includes any authority or body or local authority or public sector company or a
company established, constituted or formed as a result of demerger.

2. Implications related to income-tax of demerger

A host of income tax issues / questions may need to be considered while dealing with a transaction of
demerger. The Act provides for certain tax concessions to companies involved in the scheme of demerger
and alsoto their shareholders. The ensuing paragraphs discuss relevant key income tax provisions/
implications of a tax neutral demerger of companies

(a) Demerger – meaning and conditions

(b) Key income tax implications for the demerged company

(c) Key income tax implications for the resulting company

(d) Key income tax implications for shareholders of the demerged company
 (e) Demerger of foreign companies holding shares of Indian companies (directly or indirectly) with
another foreign company

(a) Demerger – meaning and conditions

The Act provides for certain tax concessions to companies involved in a demerger and alsoto their
shareholders. For this purpose, the Act defines demerger [36] to mean a transfer that fulfills the following
conditions:

The entities involved in a demerger are companies and that the transfer is pursuant to a scheme of
arrangement under Sections 230 to 232 of the Companies Act, 2013;
The demerger involves transfer of one or more undertakings (demerged undertaking) by the transferor
company (demerged company) to the transferee company (resulting company);
All the property of the demerged undertaking, immediately before the demerger, becomes the property
of the resulting company by virtue of the demerger;
All the liabilities of the demerged undertaking, immediately before the demerger, become the liabilities of
the resulting company by virtue of the demerger;
The property and the liabilities of the undertaking are transferred at values appearing in its books of
account immediately before the demergeror at a value in accordance with Ind AS;
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;
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) becomes shareholders of the resulting company or companies by
virtue of the demerger, otherwise than as a result of the acquisition of property or assets of the
demerged company or any undertaking thereof by the resulting company.
The transfer of the undertaking is on a going concern basis; and
The demerger is in accordance with the conditions, if any, notified under Section 72A(5) of the Act by the
Central Government in this behalf.

If any of the above-mentioned conditions are not fulfilled, the demerger is not to be considered as a tax
neutral demerger under the Act.

Meaning of an undertaking

As per the definition [37] , an undertaking includes the following:

Any part of an undertaking; or

A unit or division of an undertaking; or
A business activity taken as whole.

But it does not include individual assets or liabilities or any combination thereof, not constituting a business
activity.

Each of the conditions of demerger has been elaborated hereunder:

All Property of the undertaking should be taken over

The condition requires that all the properties of the demerged undertaking tangible or intangible should
become the properties of the resulting company.

A question that may arise is whether non-transfer of certain assets/liabilities pertaining to the undertaking
could vitiate tax neutrality conditions of demerger. It may be noted that the undertaking includes even
part of undertaking.Based on judicial precedent [38] a plausible view that may be taken is that once test of
going concern and continuity of transferred business is satisfied with adequate commercial rationale, non-
transfer of certain assets or liabilities may not vitiate the requirements of the section. The issue is however not
free from doubt, and it is important to review judicial developments on the subject when the matter is being
evaluated.

Property to be transferred at book value

Another condition is that the assets/properties of the undertaking are transferred to the resulting
company at values appearing in the books of demerged company immediately before the demerger. The
 Act also provides that while determining the book value of property, any change in the value of assets
consequent to their revaluation needs to be ignored.
It must be noted that the definition of demerger has been amended by Finance (No. 2) Act, 2019. The
amendment provides that aforesaid condition shall not be considered as breached if the resulting
company was to record the property / liabilities of the demerged company at a value different from the
value at which they were recorded in the books of the demerged company, immediately prior to
demerger, only to comply with the Indian Accounting Standards specified in Annexure to the Companies
(Indian Accounting Standards) Rules, 2015.

Liabilities of the undertaking should be taken over

The condition requires that all liabilities of the demerged undertaking to be taken over by the resulting
company.

Liabilities for the purposes of Section 2(19AA) shall include the following:

Liabilities arising from activities or operations of the undertaking;

Specific loans or borrowings (including debentures) raised, incurred and utilized solely for the activities
or operations of the undertaking; and
In cases, other than specific liabilities as stated above, 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.

Consideration in the form of shares to be issued to shareholders of the demerged company

This condition requires issuance of shares [39] by the resulting company to the shareholders of the
demerged company on a proportionate basis. The clause further mandates that the resulting company is
not expected to reciprocate in any form other than by way of issuance of shares. The number of shares
agreed to be allotted by the resulting company should be distributed to the consenting shareholders on a
proportionate basis.
Further, the conditions require that 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) should become shareholders of
the resulting company or companies by virtue of the demerger.

Transfer to be on going concern basis

For a demerger to be tax neutral, demerged undertaking should be transferred on a going concern basis.
In other words, business should be continued at the time of demerger to the resulting company. The
intention of this clause is to encourage transfers driven by strategic economic considerations and not to
encourage transfer of individual assets of an undertaking under the guise of demerger.

Demerger to be in accordance with notified conditions

Demerger needs to be in accordance with conditions as notified under Section 72A(5) of the Act by the
Central Government. Till date, no such conditions have been notified.

(b) Key income tax implications for the demerged company

(i) Capital gains on transfer

Under the Act, any gains arising on the transfer of a capital asset is chargeable to income tax as capital gains
in the year of transfer unless specifically exempted.

Pursuant to the demerger, assets belonging to the demerged company stand transferred to the resulting
company.

The Act [40] specifically exempts from capital gains transfer of capital assets owned by the demerged company
to the resulting company, pursuant to a scheme of demerger, provided the resulting company is an Indian
company.

(ii) Depreciation claim in the year of demerger

As per the Act [41] , the aggregate annual depreciation in the year of demerger in respect of depreciable assets
(not being goodwill of a business or profession) transferred by demerged company to the resulting company is
required to be apportioned between the demerged company and resulting company in the ratio of the number
of days of usage of those assets by the demerged and resulting companies as if no demerger had taken place
during the previous year.

(iii) WDV of a block of assets

Where, in any financial year, assets forming part of a block of assets are transferred by a demerged company
to a resulting company by virtue of a demerger, WDV of the block of assets of the immediately preceding
previous year will be reduced by the amount of WDV of assets transferred to the resulting company pursuant
to demerger42]. In the year subsequent to the year of demerger, depreciation may be allowed to the
demerged company on the WDV so computed after adjustments on account of the acquisition and sale of
depreciable assets and depreciation claimed in the year of demerger.

The Act provides that the cost of goodwill as reduced by the depreciation that would have been allowable
would need to be reduced in computing the Written Down Value of the block of assets on which depreciation
can be made admissible.Therefore, goodwill which forms part of block of assets as on April 1, 2020 would not
be eligible for depreciation from AY 2021-22 and onwards.

(iv) Deemed dividend

As part of the demerger, undertaking of the demerged company (which includes accumulated profits) is
transferred to the resulting company entailing a reduction in its reserves. An issue that may ariseis
whether such reduction of reserves results in deemed dividend implications under Section 2(22) of the
Act especially if the resulting company is a shareholder of the demerged company.

Sub-clause (v) of Section 2(22) of the Act specifically provides that deemed dividend does not include
any distribution of shares by the resulting company to the shareholders of the demerged company,
pursuant to demerger, whether or not there is a reduction of capital in the demerged company. This
exemption applies only to distribution of shares and does not cover distribution of other securities or
cash.

A plausible view that may be taken is that even when there is distribution of other securities or cash,
there are no deemed dividend tax implications as the distribution is made by the resulting company and
not by the demerged company to its shareholders. The issue is however not free from doubt and it is
important to review judicial developments on the subject when the matter is being evaluated.

In the context of a merger of a wholly-owned subsidiary with the holding company, the CBDT, vide
Circular [43] , had taken a view that the vesting of assets of the wholly owned subsidiary pursuant to the
Court order does not amount to distribution by the company of its accumulated profits to its
shareholders, even though its accumulated profits are embedded in the assets so transferred by it. A
plausible interpretation is that the aforementioned CBDT Circular may also support the proposition in
principle that vesting pursuant to Court order is not the event of distribution and accordingly deemed
dividend implication may not arise.

(c) Key income tax implications for the resulting company

(i) Depreciation in the year of demerger

As mentioned earlier, in the year of demerger, aggregate annual depreciation in respect of depreciable assets
(not being goodwill of a business or profession) that are transferred by the demerged company to the resulting
company is required to be apportioned between the demerged company and resulting company in the ratio of
the number of days of usage of those assets by the demerged and resulting company.

(ii) WDV of block of assets

As per the Act [44] , the WDV of the block of assets acquired by resulting company should be the tax WDV of
such assets in the hands of demerged company immediately before the demerger.

(iii) Cost of acquisitionand period of holding of capital asset

The provisions of the Act [45] provide that the cost of acquisition of a capital asset, which becomes the
property of the resulting company under a demerger will be deemed to be the cost for which the previous
owner acquired it, as increased by the cost of improvement incurred by the demerged company, if
any.Similarly, the period of holding for the resulting company would include the period for which
the asset was owned by demerged company.

(iv) Carry forward of accumulated losses and unabsorbed depreciation

The Act [46] provides for carry forward and set off of accumulated business loss (except loss sustained in
speculation business) and unabsorbed depreciation of the undertaking being demerged for the unexpired
period in the hands of the resulting company. The same is given below:

Scenario Method of allocation

Where the accumulated business loss and Entire amount of directly relatable losses and
unabsorbed depreciation are directly relatable to the unabsorbed depreciation is allowed to be carried
demerged undertaking forward in the hands of the resulting company

Where the accumulated business loss and
unabsorbed depreciation are not directly relatable to
the demerged undertaking
Accumulated business loss and unabsorbed
depreciation should be apportioned between the
resulting company and the demerged company in the
ratio of the assets transferred to the resulting
company and assets retained by the demerged
company

(v) Expenditure incurred for demerger

Certain expenses, namely, compliance costs like stamp duty, professional fees etc. are incurred for giving
effect to the scheme of demerger.

The Act provides that deduction of one-fifth of the expenditure incurred wholly and exclusively for the purpose
of demerger is allowed to an assessee (being an Indian company) in each of the five successive years,
beginning from the year in which the demerger takes place [47] . A plausible interpretation is that reference to
assessee can cover both a demerged or a resulting company.

It may be noted that the Delhi Tribunal in NIIT technologies [48] has taken a view that deduction for expenses
incurred on demerger is not allowable to the resulting company but is allowed only to the demerged company.

Having regard to the diverse views it is important to review judicial developments on the subject when matter
is being evaluated.

(vi) It may be noted that, in principles, the implications as discussed at Points (v) to (xi) under the caption
‘Implications for the transferee company’ in the context of a scheme of merger would as equally apply to a
resulting company in a scheme of demerger post review of judicial developments on the subject when matter
is being evaluated.

(d) Key income tax implication for the shareholders of demerged company

(i) Capital gains

The shareholders of the demerged company, under the scheme of demerger, would receive shares in the
resulting company. As mentioned earlier, unless specifically exempted, gains arising on the transfer of capital
assets are chargeable to income tax as capital gains.

The Act [49] specifically provides that any issuance of shares by the resulting company to the shareholders of
the demerged company in a scheme of demerger shall not be taxable if shares are issued in consideration of
demerger of the undertaking.

Benefit of exemption is available to shareholders of the demerged company only when consideration is
received in the form of shares of the resulting company. If consideration is received in any form other than
shares of the resulting company or received partly in shares and partly in any other form then that shareholder
will not be eligible to claim exemption under the provision of the Act [50] .

When consideration is given in the form of shares to some shareholders and cash is paid to the balance
shareholders, benefit of exemption is available only to those shareholders who have received consideration in
the form of shares of the transferee company.

(ii) Period of holding of shares received in resulting company

The Act [51] provides that in case of a capital asset, being a share or shares in an Indian company (i.e.
resulting company), which becomes the property of the taxpayer in consideration of a demerger, there shall be
included the period for which the share or shares held in the demerged company were held by the taxpayer.

(iii) Cost of acquisition of shares of resulting company

The cost of acquisition of the shares issued by the resulting company to the shareholders of the demerged
company would be the amount as calculated by applying the following formula [52] :

Cost of shares in demerged company x Net book value of the assets transferred in the demerger
______________________________________________

Net worth of the demerged company before the demerger

Determination of the cost base is of relevance to the shareholder for the purpose of subsequent sale of
shares of the resulting company.
For the purposes of this section, "net worth" shall mean the aggregate of the paid-up share capital and
general reserves as appearing in the books of account of the demerged company immediately before the
demerger [53] .

(iv) Cost of acquisition of shares of demerged company

The cost of the original shares held by the shareholders in the demerged company shall be deemed to be
reduced by the cost of the shares assigned to the shares of the resulting company [54] .
When there is demerger of a business undertaking by a subsidiary company to its holding company, the
holding company cannot issue shares to itself. A question that arises is whether the cost of shares held
by holding company in the subsidiary company continues or does it reduce on account of above
provisions. A plausible view is that this provision is applicable only when shares are issued. In this case
as no shares are issued, the applicability of the Section fails, and the original cost remains protected in
the hands of the shareholders of the demerged subsidiary company.

(v) Income from other sources

A new provision has been introduced in the Act [55] which provides that difference between the consideration
and prescribed fair market value [56] of property [57] received by any person is liable to be taxed as income
from other sources in the hands of the recipient if they are acquired without consideration or for a
consideration that is lower than the aggregate fair market value (provided aggregate fair market value of such
propertiesexceeds consideration paid, if any, by more than INR50,000).

The Act [58] has provided a specific exemption from the aforesaid provision to shareholders of transferor
company where such shares are received as consideration for demerger and the resulting company is an
Indian company.

(e) Cross-border demerger involving transfer of shares of an Indian company

Income tax implications may arise on overseas demerger, if the transferor foreign company owns shares of an
Indian company (directly or indirectly).

The Act specifically provides that transfer of a capital asset being shares in an Indian company [59] or shares
of a foreign company, which derives directly or indirectly its value substantially from shares of an Indian
company [60] by a transferor foreign company to the transferee foreign company pursuant to demerger is not a
transfer for the purpose of capital gains tax if the following two conditions are fulfilled:

At least 75% of the shareholders of the transferor foreign company remain shareholders of the
transferee foreign company; and
Such transfer is not chargeable to capital gains tax in the country in which the transferor foreign
company is incorporated.

The Act also provides that overseas demergers satisfying the aforementioned conditions should not attract any
tax implications under Section 56(2)(x) for the transferee foreign company. [61]
It may be noted that in a scheme of overseas demerger owning shares of an Indian company (directly or
indirectly) no exemption has been provided in the Act for shareholder of transferor foreign company receiving
shares of the transferee foreign company pursuant to such demerger.

C. Other relevant Income Tax issues relating to amalgamation / demerger

Certain other income tax issues that could be relevant to amalgamation /demergerare as follows:

1. Depreciation claim on goodwill acquired on amalgamation

2. Availability of MAT credit of transferor company
3. Accumulated profits of amalgamated company for the purposes of dividend
4. Applicability of GAAR on a merger / demerger
5. Succession of business

The aforementioned issues have been discussed below in detail.

1. Depreciation claim on goodwill acquired on amalgamation

The controversy as to whether “Goodwill” of a business is an “intangible asset” eligible for depreciation was
settled by the Hon’ble Supreme Court (‘SC’) in the case of Smifs Securities Ltd. The Supreme Court in case of
Smifs Securities Limited [62] ruled that goodwill acquired on amalgamation (that is, excess of consideration
paid over value of net assets acquired) is an intangible asset under section 32(1)(ii) of the Act and hence
eligible for depreciation claim under the Act.

The SC in this case affirmed that goodwill acquired pursuant to amalgamation of a business is an intangible
asset eligible for depreciation under section 32 of the Income-tax Act, 1961. Several subsequent judicial
precedents which have relied upon the aforesaid SC decision and granted the benefit of depreciation on
goodwill to the taxpayer.

However, significant amendments have been enacted by the Finance Act, 2021 (‘FA 2021’) in this regard. As
per the amendments in FA 2021, ‘goodwill’ is not considered to be a part of block of assets and hence is not
eligible for depreciation.

The amendments enacted vide FA 2021 are listed below:

a. Section 2(11): Definition of ‘block of assets’ amended to exclude ‘goodwill’ from its ambit.
b. Section 32: Goodwill also excluded from list of qualifying intangible assets eligible for depreciation.
c. Determination of cost of acquisition of goodwill as per section 55: Purchase price to be reduced
by depreciation already obtained till Assessment Year (‘AY’) 2020-21.
d. Amendment in definition of Written Down Value (‘WDV’) – Section 43(6) of the Act has been
amended so as to reduce the actual cost of goodwill falling within the block (net of depreciation
allowable) from the opening WDV.
e. Proviso to section 50(2): A proviso has been inserted to section 50(2)wherein the Central Board of
Direct Taxes (‘CBDT’) has been empowered to prescribe a manner to determine the WDV of the block of
asset and short-term capital gains (‘STCG’), if any, in a case where goodwill forms part of the block of
asset for Assessment Year (‘AY’) 2020-21 and depreciation thereon has been obtained by the assessee.

These amendmentsare applicable from AY 2021-22 onwards i.e., no depreciation shall be available on
‘Goodwill’ forming part of the ‘block of assets’ as on 1 April 2020. The rationale for not allowing depreciation
on‘Goodwill’ was discussed in the Memorandum to the Finance Bill, 2021. The Budget Memorandum explained
that while ‘Goodwill’ is a depreciable asset (as held by Supreme Court), depreciation on mergeris governed by
other provisions in the Act [63] and based on these provisions, the benefit of depreciation claim may not be
available in certain cases. Further, it also explained that considering the nature of ‘Goodwill’, there is a little
justification for depreciation on goodwill. Goodwill, in general, is not a depreciable asset and in fact
depending upon how the business runs; goodwill may see appreciation or in the alternative no
depreciation to its value. Prima-facie, it seems that the said amendment should not apply to intangible
assets other than ‘Goodwill’. However, the matteris not free from doubt and could be litigative.

As stated above, there is also anamendment made in section 50 of the Act as well(section 50 the Actprovides
for computation of capital gains in case of depreciable assets).As per the amendments brought invide Finance
Act, 2022, reduction of the amount of goodwill of a business or profession, from the block of asset shall be
deemed to be transfer. In the context of amalgamation, the said amendmentsuggest that where goodwill forms
part of block of assets (of the amalgamated company) as on 1 April 2020 and the depreciation thereon has
been claimed by the amalgamated company, then the written down value of such block of asset and the short-
term capital gains (if any) upon transfer need to be determined in the prescribed manner [64] . This
amendment in section 50 of the Act shall be relevant in the cases where the amalgamated company has
claimed depreciation on goodwill, placing reliance on the Supreme Court ruling in case of Smifs Securities
Limited(supra).

Further, the Finance Act, 2021 has also made an amendment to section 55(2)(a) of the Act in relation to
determination of cost of acquisition of certain intangible assets, including goodwill.

Practical issues and challenges

Given the amendment vide FA 2021, depreciation on goodwill will not be allowed as a deduction
henceforth. However, the following issues merit consideration:

A. Depreciation claim for past years – Whether impacted?

The Explanatory Memorandum appears to give the impression that depreciation claim for the past years
should be allowed basis the SC decision in CIT v. Smifs Securities Ltd [2012] 348 ITR 302 (SC). Given the
same, matters which have already been adjudicated or pending for adjudication (pertaining to years prior
to AY 2021-22) should arguably not get impacted by this amendment. However, another reading of the
Memorandum also appears to imply that the depreciation on goodwill arising out of tax neutral business
reorganisations in any case was always impermissible.

A taxpayer should be able to contend that depreciation already claimed in years prior to AY 2021-22 be
tested applying the ratio of the decision of Supreme Court in the case of Smifs Securities without any
reference to the Memorandum to the Finance Bill, 2021 or the amendments which are in any case
effective only from AY 2021-22.

B. Unabsorbed depreciation brought forward from earlier years – Whether impacted?

Once depreciation has been claimed and allowed in respect of any previous ear, unless there is
retrospective amendment, the depreciation already allowed cannot be subject to any change on account of
any subsequent amendment. If one goes by the legislative history and the judicial precedents on the
changes made in the provisions pertaining to unabsorbed depreciation, it becomes clear that the
amendment made in section 32(2) which deems the unabsorbed depreciation as depreciation of the
current year, was only to facilitate its set-off against income from other heads (apart from income from
business or profession) and to permit its carry forward and set-off without any time limit.

Furthermore, in absence of any specific restriction (like section 115BAA, 115BAB etc.) for disallowing
depreciation pertaining to goodwill from the quantum of unabsorbed depreciation, the amount of
unabsorbed depreciation need not be disturbed and should be allowed to be set-off in full.

Also, given that the amendment is effective from AY 2021-22 and onwards, the unabsorbed depreciation
of past years should remain protected on this count as well.

C.Historic Purchase Price Allocation (‘PPA’) - Need and ability to revisit?

Depending upon the level of PPA undertaken in the past and disclosures around such intangibles in the
block of assets, a taxpayer would need to explore whether reallocation of higher amounts to non-goodwill
intangibles (such as trademarks, license, customer contracts, knowhow, distribution network, etc) is
possible. Since the law has now been amended retroactively, it can be contended that given the
depreciation rate on intangibles was the same, there was never a need to bifurcate goodwill into other
intangible components at that point of time and therefore all intangibles were clubbed under a common
head called ‘Goodwill’.

There are several judicial precedents which have geld that even though different intangibles may be
clubbed under a single head of ‘goodwill’, such intangibles are eligible for depreciation even on a
standalone basis if they answer the criteria of being regarded as a ‘business or commercial right of a
similar nature’. This will strengthen the view that value of other intangibles appearing in the block needs
to be separated from the value of goodwill pursuant to the amendment.

An argument can also be put forth that since depreciation on goodwill is not allowable on account of the
amendment, it becomes imperative to carve out goodwill from other intangibles which as a matter of
practice may have been clubbed in a common basket and termed as ‘goodwill’ in the financial statements.
The amendment in section 43(6) requires the assessee to exclude the standalone WDV of goodwill
(calculated as difference between actual cost of goodwill and depreciation allowable on such goodwill till
31 March 2020) from the block of intangibles.

D. Insertion of Rule 8AC for computation of STCG and WDV

 In exercise of the powers conferred by the aforementioned proviso to section 50(2) of the Act, the CBDT
vide Notification No. 77 of 2021 has inserted Rule 8AC for computation of STCG and WDV. This Rule
contains provisions for computation of capital gains if the block of assets comprises of goodwill and other
intangible assets. It provides that if the standalone WDV of goodwill (actual cost of goodwill less
depreciation allowable on such goodwill till AY 2020-21) exceeds the aggregate of opening WDV of block of
intangible assets and the actual cost of other intangible assets acquired during FY 2020-21, then such
excess amount shall be deemed to be capital gain arising from the transfer of short-term capital asset. It
should be noted that the gains sought to be taxed by way of Rule 8AC(3) are not arising due to ‘transfer’
of any intangible asset, but they are arising due to reduction of standalone WDV of goodwill from the block
of intangible assets. It is a settled position that the pre-requisite to create a charge of income under the
head ‘capital gain’ is that there has to be a ‘transfer’ of an asset. In the absence of a ‘transfer’ or any
other deeming charging provision in the statute, a question arises as to whether the notional capital gains
arising due to reduction of standalone WDV of goodwill be brought within the ambit of ‘capital gains’
merely by inserting a Rule to this effect?

2. Availability of MAT [65] [65]credit of transferor company

MAT credit is the difference between the MAT payable on book profit and the tax payable on normal income
(normal tax). MAT credit is available as a credit for succeeding 15 years for set-off against the excess of
normal tax over MAT.

On amalgamation, all assets and liabilities of the transferor company stand vested to the transferee company,
which includes credit for prepaid taxes (advance tax and withholding taxes). A question that arises is whether
similar treatment would apply in the case of MAT credit.

While the issue is contentious and not free from doubt, a plausible view is that MAT credit of the transferor
company may be available to the transferee company if the scheme of merger specifically provides that the
MAT credit of the transferor company is to be transferred to the transferee company. This view has been
endorsed by the Mumbai Tribunal [66] .Similarly, the Ahmedabad Tribunal has allowed the resulting
entity to utilize MAT credit of demerged entity [ [67] ].

3. Accumulated profits of amalgamated company for the purposes of dividend

The Act [68] defines ‘dividend’ to include distribution of accumulated profits (whether capitalized or not) to its
shareholders by a company, whether it is in the nature of:

a. release of all or any assets by the company;

b. debentures, debenture stock or deposit certificate (with or without interest) or distribution of bonus to
preference shareholders;
c. distribution of proceeds on liquidation;
d. on capital reduction; or
e. loan or advance given by closely held company to a shareholder having shareholding 10% or above or to
a concern in which such shareholder holds substantial interest (exceeding 20% of shareholding) or any
payment by such company on behalf of or for the individual benefit of such shareholder.

‘Accumulated profits’ have been defined to include all profits of the company up to the date of distribution or
payment referred to in clauses (a) to (e) above.

The Act [69] with effect from 1 April 2018 has been amended to widen the scope of the term ‘accumulated
profits’, which provides that in the hands of the amalgamated company, accumulated profits or loss shall be
increased by the accumulated profits of the amalgamating company, whether capitalized or not, on the date of
amalgamation.

Basis language of the aforesaid amendment in Explanation 2A to Section 2(22), a plausible interpretation is
that amendment applies only in the case of amalgamation and not to a demerger. In absence of clarity on the
issue it is important to review judicial developments on the subject when matter is being evaluated.

4. Applicability of GAAR on a merger / demerger

General Anti Avoidance Rules (‘GAAR’) [70] introduced w.e.f. 1 April 2017 is a tool for checking aggressive tax
planning, especially transactions or business arrangements, which are entered into with the object of avoiding
taxes. GAAR provisions come into effect if the revenue authorities are able toestablish that the main purpose
of the arrangement is to obtain a tax benefit. GAAR provisions grant wide powers to the revenue
authorities inter-alia to disregard or even recharacterize the transactions. Invocation of GAAR may
lead to wide ramifications including denial of treaty benefits.A plausible issue is on applicability of GAAR
provisions to a transaction of merger / demerger.

CBDT in a circular [71] has indicated that where NCLT has explicitly and adequately considered the tax
implications while sanctioning the arrangement, then GAAR provisions will not apply to such arrangement.

However, it may be noted that GAAR provisions have recently been implemented and there are no judicial
precedents or explanatory guidelines to infer meaning of the term ‘explicitly’ and ‘adequately’. There may be
practical challenges on when it can be regarded that NCLT has explicitly and adequately considered the tax
implications while sanctioning the arrangement. In absence of clarity on the issue it is important to review
judicial developments on the subject when matter is being evaluated.

5. Succession of business

As per the Act [72] , where a person carrying on business or profession (‘predecessor’), has been succeeded by
any other person (‘successor’), who continues to carry on that business, then the successor can be held liable
in respect of the:

Income earned after the date of succession;

Income of the Financial Year in which the succession takes place and the previous year preceding that
year, if the predecessor cannot be found or the tax payable cannot be recovered from the predecessor.

An issue that arises is whether transfer of business by way of merger / demerger amounts to succession of
business.

The SC in K.H. Chambers [73] observed that ‘succession’ involves a change in ownership wherein the transferor
goes out and the transferee comes in, such that there is takeover of the whole of the business enabling the
transferee to run the business in anunhampered manner.

Judicial precedents in the context of amalgamation [74] have held that amalgamation constitutes succession,
since post amalgamation, the amalgamating company ceases to exist.

Unlike in the case of merger, in a demerger, the demerged entity may not cease to exist. Even in this case, a
plausible interpretation is that if entirety ofthe business is transferred to the resulting company, such that the
demerged company is unable to continue the transferred business and continuity of business is preserved in
the hands of the transferee companythere may be succession of business.The issue is however litigative and in
absence of clarity on the issue it is important to review judicial developments on the subject when matter is
being evaluated.

In the past, the Courts have held that in case the predecessor ceases to exist pursuant to a business
reorganisation, then the tax proceedings against predecessor become illegal and void.

To address this, amendmentshave been brought in vide Finance Act, 2022, that theassessment, reassessment
or other proceedings made or initiated against the predecessorduring the ‘pendency’ ofsuccession would be
deemed to be made or initiated against the successor. ‘Pendency’ means the period between the date of filing
of application with prescribed authority and receipt of such order by the specified tax authorities.

The effects of amalgamation / demerger apply from the appointed date as mentioned in the scheme approved
by NCLT [75] . With effect from such date, all assets, liabilities, profits, etc. of the predecessor company vest
into successor company. As a result of which, the successor company is liable to pay taxes on income earned
by predecessor on or after the appointed date. Finance Act, 2022 has introduced new provisions to enable the
successor company to file modifies return, in prescribed manner, within 6 months from the end of the month in
which NCLT order is issued.

1. Section 2(1B) of the Act

2. Circular No 5-P, dated 9 October 1967.

3. Shares include equity shares and preference shares.

4. Section 47(vi) of the Act.

5. Circular No. 5P (LXXVI-63) of 1967, dated 9 October 1967.

6. Section 47(vii) of the Act.

 7. CIT v. Gautam Sarabhai Trust ([1988]173 ITR 216(Gujarat)) read with Supreme Courtruling in CIT v.
Grace Collis[2001] 248 ITR 323 (SC)

8. Section 56(2)(x) of the Act effective from April 1, 2017.

9. As per Rule 11UA(1) of the Income-tax Rules, 1962.

10. Property means capital assets in the form of immoveable property being land or building or both, shares
and securities, jewellery, archaeological collections, drawings, paintings, sculptures, any work of art or
bullion and virtual digital asset.

11. Clause (IX) to proviso to Section 56(2)(x) of the Act.

12. Section 49(2) of the Act.

13. Explanation 1(i)(c) to Section 2(42A) of the Act.

14. Explanation 7 to Section 43(1) of the Act and Section 49(1)(iii)(e) of the Act.

15. Explanation 2 (b)to Section 43(6) of the Act.

16. Sixth proviso to Section 32(1) of the Act.

17. Section 43C(1) of the Act.

18. Section 72A(2) of the Act read with Rule 9C of the Income-tax Rules, 1962.

19. As per Section 72A(7)(aa) of the Act, the term “industrial undertaking" means any undertaking which is
engaged in(i) themanufacture or processing of goods; or (ii) the manufacture of computer software; or
(iii) the business of generation or distribution of electricity or any other form of power; or (iv) the
business of providing telecommunication services, whether basic or cellular, including radio paging,
domestic satellite service, network of trunking, broadband network and internet services; or (v) mining;
or (vi) the construction of ships, aircrafts or rail systems.

20. The term “accountant” is defined as per Explanation to Section 288(2) of the Act.

21. Section 35DD of the Act.

22. Section 80IA(12) of the Act

23. Section 80IA(12A) of the Act

24. Circular no 3 – 12 March 2008

25. Section 41(1) of the Act.

26. Section 35D(5) of the Act

27. Section 56(2)(x) of the Act

28. Clause (IX) to proviso to Section 56(2)(x) of the Act.

29. Section 56(2)(viib) of the Act

30. Section 43B of the Act

31. CIT v. T Veerabhadra Rao, K Koteswara Rao & Co. (1985) 155 ITR 152 (SC)

32. Section 47(via) of the Act.

33. Section 47(viab) read with Explanation 5 to Section 9(1)(i) of the Act.

34. Proviso (IX) to Section 56(2)(x) of the Act

35. Section 2(41A) of the Act

36. Section 2(19AA) of the Act

37. Explanation 1 to Section 2(19AA) of the Act

38. Premier Automobiles Ltd (PAL) v. ITO 264 ITR 193 (Bom)
39. Shares include equity and preference shares

40. Section 47(vib) of the Act.

41. 6thProviso to Section 32(1) of the Act

42. Explanation 2A to Section 43(6) of the Act

43. Circular No. 5P dated 9 October 1967

44. Explanation 2B to Section 43(6) of the Act.

45. Explanation 7A to Section 43(1) and Section 49(1)(iii)(e) of the Act.

46. Section 72A(4) of the Act

47. Section 35DD of the Act

48. TS- 73-ITAT-2020

49. Section 47(vid) of the Act

50. CIT v. Gautam Sarabhai Trust ([1988] 173 ITR 216 (Gujarat)) read with Supreme Court ruling in CIT v.
Grace Collis [2001] 248 ITR 323 (SC)

51. Explanation 1(i)(g) to Section 2(42A) of the Act

52. Section 49(2C)of the Act

53. Explanation to Section 49(2E) of the Act

54. Section 49(2D) of the Act

55. Section 56(2)(x) of the Act

56. As per Rule 11UA(1) of the Income-tax Rules, 1962

57. Property means capital assets in the form of immoveable property being land or building or both, shares
and securities, jewellery, archaeological collections, drawings, paintings, sculptures, any work of art or
bullion and virtual digital asset.

58. Clause (IX) to proviso to Section 56(2)(x) of the Act

59. Section 47(vic) of the Act.

60. Section 47(vicc) read with Explanation 5 to Section 9(1)(i) of the Act.

61. Clause (IX) to proviso to Section 56(2)(x) of the Act

62. CIT v.Smifs Securities Ltd.(SC)348 ITR 302

63. Explanation 2 to section 43(6), Explanation 7 to section 43(1) of the Act.

64. Rule 8AC of the Income-tax Rules, 1962.

65. Not applicable for transferor company or transferee company opting for concessional tax regime under
Section 115BAA and Section 115BAB of the Act.

66. SKOL Breweries Ltd v. ACIT [2008] 28 ITATINDIA 998 (Mum).

67. Adani Gas Ltd. v. ACIT ITA Nos. 2241 & 2516/Ahd/2011

68. Section 2(22) of the Act

69. Explanation 2A to Section 2(22) of the Act

70. Chapter X-A of the Act

71. Circular No. 7 of 2017 dated 27 January 2017

72. Section 170 of the Act

73. 55 ITR 674

74. Hewlett Packard India (P) Ltd v. ACIT IT Appeal No. 4016 (Delhi) of 2005 and Pampasar Distillery v.
ACIT[2007] 15 SOT 331 (Kolkata)
75. Marshall Sons & Company India Ltd v. ITO (1997) 223 ITR 809 (SC)