UNIT – IV

- Reorganization of industry, restructuring of production system and better utilization of

resources, which have become necessary with a view to enable the Indian industry to
rearrange itself to become globally competitive.
- This business and economic environment of the country has made the need for
rationalization of laws relating to reorganization of business.
- For this purpose
- the Finance Act, 1998 introduced tax concessions to conversion of proprietary
concern / firms into company;
- the Finance Act, 1999 introduced the following new provisions which relate to :
a. demerger of a company,
b. sale or transfer of business as a going concern through slump sale;
c. rationalization of tax provisions relating to amalgamation; etc.
- The Income-tax Act now provides for tax concessions in the following cases of
business rationalization:
a. Amalgamation / merger of companies;
b. Conversion of proprietary concern/firm into a company;
c. Demerger of a company;
d. Slump sale.

Important term in Financial Management

1. Merger:
- Merger is a combination of two or more companies into one company.
- It may involve either absorption or consolidation.
- Absorption: A merger, in which one of the companies loses its identity and assets and
liabilities of this company are taken over by the other (acquiring) company, is referred
to as absorption.
- Amalgamation: A merger, in which all the participating companies go out of
existence to form a new company, is referred to as Amalgamation.
- Examples for Absorption variety includes the merger of Tata Oils Mills Co. with
Hindustan Lever Ltd.; merger of Reliance Petrochemicals with Reliance Industries,
etc.
- Examples for the amalgamation variety include the merger of Tetrapack and Alfa
Level to form Tetra Level; the merger of the two Tata Group of companies – Forbes
Campbell with Gokak Patel Volkart to form a new company Forbes Gokak; and the
merger of the two advertising agencies owned by Mudra Communication, Interact
Communication and Vision Advertising to form a new company Interact Vision.

2. Acquisition/takeover:
- Acquisition or takeover involves the transfer of controlling interest in a company from
one management group to another.
- In this bidding company makes a tender offer directly to the shareholders of the target
company.

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- The tender offer is an offer to purchase the share of the target company at a fixed price
per share from shareholder who ‘tenders’ their shares.
- The tender price is usually set above the current market price, it makes the shareholders
of target company to sell their shares.
- Using this tender offer the acquiring company by passes the management of the target
company.
- The term ‘takeover’ is also used to refer to this process.
- Examples include acquisition of controlling interest : (a) in Chloride Indian by the S K
Birla Group; (b) in Harrision Malayalam Plantation by the R P Goenka groups; (c) in
Rallis India by Tata Tea and (d) in Consolidated Coffee by Tata Tea.

3. Demerger:
- The term ‘demerger’ signifies spinnings of or hiving off the existing divisions of the
company into a separate company.
- Thus, demerger is a split or a division of the company.
- The division is hived off could be transferred to the new company or it can be sold to
an existing company.
- The demerger may take place due to various reasons like internal restructuring or
family settlements.
- It ma also be undertaken as a tool of tax – planning.

4. Slump Sale:
- Slump sale refers to the sale of the undertaking as a whole including all the assets and
liabilities as a going concern.
- In this case the consideration is not fixed for each and every asset separately but a lump
sum consideration is determined for the undertaking / division as a whole.

AMALGAMATION:
- According to Sec. 2(1B), Amalgamation in relation to companies means:
a. the merger of one or more companies with another company; or
b. the merger of two or more companies to form a new company.
- The company or companies which so merge are known as ‘amalgamating company’
and companies or company with which the merger takes place or the new company
which is formed as a result of the merger is known as the ‘amalgamated company’.
- Any such merger will be treated as amalgamation only if the following occur by virtue
of the amalgamation:
a. all the assets of the amalgamating company or companies should become the
property of the amalgamated company;
b. all the liabilities of the amalgamating company or companies should become
the liabilities of the amalgamated company;
c. Shareholders holding not less than 75% in value of the shares in the
amalgamating company or companies should become shareholders of the
amalgamated company.

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Tax concessions/incentives in case of Amalgamation: If any amalgamation takes place
within the meaning of Sec. 2(1B) of the income tax, the following tax concessions are
available:
1. Tax concessions to amalgamating company;
2. Tax concession to shareholders of the amalgamating company and
3. Tax concession to amalgamated company.

1. Tax concessions to amalgamating company:

a. Capital Gains tax not attracted:
- As per Sec. 47(vi) transfer of any asset in the scheme of amalgamation, by an
amalgamating company to the amalgamated company, such transaction will not
be treated as a transfer for the purpose of capital gains.
- It should be noted that amalgamated company (i.e. to whom such assets have been
transferred) should be an Indian company.
b. Tax concession to a foreign amalgamating company:
- As per Sec. 47(via) if a foreign company holds any shares in an Indian company
and transfers the same, in the scheme of amalgamation, to another foreign
company, such transaction will not be treated as transfer for the purpose of
capital gains u/Sec. 45 if the following conditions are satisfied:
i. Atleast 25% of the shareholders of amalgamating company should
continue to remain shareholders of amalgamated foreign company and
ii. Such transfer should not attracted tax on capital gains in the country, in
which the amalgamating company is incorporated.
2. Tax concessions to the shareholders of a amalgamating company:
- If a shareholder of an amalgamating company transfers his shares, in a scheme of
amalgamation, such transaction will not be treated as a transfer for capital gains
purposes, if the following conditions are satisfied:
i. the transfer of shares is made in consideration of the allotment to him of
any share or shares in the amalgamated company and
ii. the amalgamated company is an Indian company.
3. Tax concessions to the amalgamated company (the new company which is formed
as a result of the merger is known as the ‘amalgamated company’):
- The amalgamated company is eligible for tax concessions only if the following
conditions are satisfied:
i. The amalgamation satisfies all the three conditions laid down in Sec. 1B);
and
ii. The amalgamated company is an Indian Company.
a. Expenditure on Scientific Research [Sec. 35(5)]:
- If an amalgamating company transfers any asset represented by capital
expenditure on the scientific research to the amalgamated Indian company in a
scheme of amalgamation, the provision of Sec. 35 which were applicable to
amalgamating company shall become applicable to the amalgamated company,
consequently,
i. Unabsorbed capital 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.

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 ii. If such asset ceases to be used in a previous year for scientific research
related to the business of amalgamated company and is sold by the
amalgamated company without having being used for other purposes, the
sale price, to the extent of the cost of the asset shall be treated as business
income of the amalgamated company. The excess of the sale price over
the cost of the asset shall be subject to the provisions of the capital gains.
b. Expenditure for obtaining licence to operate telecommunications service [Sec.
35ABB(6)]:
- If any license fees paid for operating telecommunication services is allowed as
deduction in equal installments during the number of years for which the
license will be in force.
- In the scheme of amalgamation or demerger, deduction will be allowed to the
resulting company or amalgamated company in the same manner as allowable
to the demerged or amalgamating company.
- In other words, the amalgamated company or the resulting company, shall be
allowed to write off the balance amount of license fees which was not written
off by the amalgamating company or demerged company in the same manner as
was allowed to the amalgamating company or demerged company.
c. Treatment of Preliminary Expenses [Sec. 35D(5)]:
- In the scheme of amalgamation or demerger, the amount of preliminary expenses
of the amalgamating company, which are not yet written off, will be allowed as
deduction the amalgamated company in the same manner as would have been
allowed to the amalgamating company.
d. Amortization of expenditure in case of amalgamation or demerger[Sec. 35DD]:
- If an Indian company incurs any expenditure for the purpose of amalgamation or
dermerger, the assessee shall be allowed a deduction over 5 equal installments
starting from the year in which the amalgamation or demerger takes place.
e. Treatment of expenditure on prospecting, etc. of certain minerals [Sec.
35E(7A)]:
- Deduction: If any Indian company or a person engaged in any operations relating
to prospecting for or extraction or production of specified minerals, the assessee
is allowed to amortize such expenditure in ten (10) equal installments.
- In the scheme of amalgamation or demerger, if the Indian company is transferred
to another Indian company before the expiry of the said period of 10 years, the
provisions of this section shall apply to the amalgamated company as they
would have applied to the amalgamating company.
f. Treatment of capital expenditure on Family Planning [Sec. 36(1)(ix)]:
- Deduction:
i. Any revenue expenditure incurred by a company for promoting
family planning among the employees shall be allowed as
deduction.
ii. Any capital expenditure incurred by the company for promoting
family planning among the employees shall be allowed in 5 equal
annual installments.
- If the asset representing the capital expenditure on family planning is transferred
by the amalgamating company to the Indian amalgamated company, in a

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 scheme of amalgamation, the provisions of Sec. 36(1)(ix) to the amalgamating
company shall become applicable, in the same manner, to the amalgamated
company.
- Consequently,
i. The capital expenditure on family planning not yet written off shall be
allowable to the amalgamated company in the same number of balance
installments.
ii. If such assets are sold by amalgamated company, the treatment of the
deficiency or surplus will be same as would have been in the case of
amalgamating company.
g. Treatment of Bad Debts [Sec. 36(1)(vii)]:
- In the scheme of amalgamation, if the debts of amalgamating company have been
taken over by the amalgamated company and subsequently such debt or part of
the debt becomes bad, such bad debt will be allowed as a deduction to the
amalgamated company.
h. Deductions available under Secs. 80-IA or 80-IB or 80-IC:
- If any deduction is available u/Sec. 80-IA or 80-IB or 80-IC to any undertaking,
and the same is transferred in the scheme of amalgamation before the expiry of
the period of deduction, then
i. no deduction u/Sec. 80-IA or 80-IB or 80-IC shall be available to the
amalgamating company for the previous year in which amalgamation
takes place, and
ii. deduction u/Sec. 80-IA or 80-IB or 80-IC is available to amalgamated
company in such a manner in which they would have applied to the
amalgamating company.
j. Carry forward and set off of business losses and unabsorbed depreciation of the
amalgamating company:
- In addition to the above benefits or concessions, 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 mentioned in
Sec. 72a are satisfied.

DEMERGER:
- According to Sec. 2(19AA), ‘demerger’ in relation to companies, means the
transfer, (pursuant to a scheme of arrangement under Secs. 391 to 394 of the
Companies Act, 1956), by a demerged company of its one or more undertakings
to any resulting company in such a manner that
a. 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;
b. all the liabilities relatable to the undertaking, being transferred by the
demerged company, immediately before the demerger, become the liability of
the resulting company by virtue of the demerger;
c. the property and liabilities of the undertaking or undertakings being
transferred by the demerged company are transferred at values appearing in

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 its books of account immediately before the demerger (revaluation is to be
ignored);
d. the resulting company issues, I n consideration of the demerger, its shares to
the shareholders of the demerged company on a proportionate basis;
e. the shareholders holding not less than three-fourths in value of the shares in
the demerged company become shareholders of the resulting company;
f. the transfer of undertaking is on a going concern basis;
g. the demerger is in accordance with the conditions, if any, notified under
subsection (5) of sec. 72A by the Central Govt. in this behalf.

Tax concessions/incentives in case of demerger: If any demerger takes place with the
meaning of Sec. 2(19AA) of the Income-tax Act, the following tax concessions are
available:
1. Tax concessions to demerged company,
2. Tax concessions to shareholders of demerged company and
3. Tax concessions to resulting company.
1. Tax concessions to demerged company:
a. Capital gains tax not attracted [Sec. 47(vib)]:
- As per this section, if there is a transfer of any capital asset in a demerger by the
demerged company to the resulting company, such transfer will not be regarded
as a transfer for the purpose of capital gain provided the resulting company is an
Indian company.
b. Tax concession to a foreign demerged company [Sec. 47(vic)]:
- As per Sec. 47(via) if a foreign company holds any shares in an Indian company
and transfers the same, in a demerger, to another resulting foreign company, such
transaction will not be treated as transfer for the purpose of capital gains u/Sec.
45 if the following conditions are satisfied:
i. Atleast 75% of the shareholders of demerged foreign company should
continue to remain shareholders of resulting demerged foreign company
and
ii. Such transfer should not attracted tax on capital gains in the country, in
which the demerged company is incorporated.
2. Tax concessions to the shareholders of the demerged company [Sec. 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 regarded as a transfer,
if the transfer or issue is made in consideration of demerger of the undertaking.
3. Tax concessions to the resulting company:
- The resulting company is eligible for tax concessions only if the following
conditions are satisfied:
i. The demerger satisfies all the conditions laid down in Sec. 2(19AA); and
ii. The resulting company is an Indian Company.
- the following concessions are available to the resulting company pursuance to a
scheme of demerger.
a. Expenditure for obtaining licence to operate telecommunications service [Sec.
35ABB(6)]:

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 - Deduction: If any license fees paid for operating telecommunication services is
allowed as deduction in equal installments during the number of years for
which the license will be in force.
- In the scheme of amalgamation or demerger, deduction will be allowed to the
resulting company or amalgamated company in the same manner as allowable
to the demerged or amalgamating company.
- In other words, the amalgamated company or the resulting company, shall be
allowed to write off the balance amount of license fees which was not written
off by the amalgamating company or demerged company in the same manner as
was allowed to the amalgamating company or demerged company.
b. Treatment of Preliminary Expenses [Sec. 35D(5)]:
- In the scheme of amalgamation or demerger, the amount of preliminary expenses
of the amalgamating company, which are not yet written off, will be allowed as
deduction the amalgamated company in the same manner as would have been
allowed to the amalgamating company.
c. Amortization of expenditure in case of amalgamation or demerger[Sec. 35DD]:
- If an Indian company incurs any expenditure for the purpose of amalgamation or
dermerger, the assessee shall be allowed a deduction over 5 equal installments
starting from the year in which the amalgamation or demerger takes place.
d. Treatment of expenditure on prospecting, etc. of certain minerals [Sec. 35E(7A)]:
- Deduction: If any Indian company or a person engaged in any operations relating
to prospecting for or extraction or production of specified minerals, the assessee
is allowed to amortize such expenditure in ten (10) equal installments.
- In the scheme of amalgamation or demerger, if the Indian company is transferred
to another Indian company before the expiry of the said period of 10 years, the
provisions of this section shall apply to the amalgamated company as they
would have applied to the amalgamating company.
e. Treatment of Bad Debts [Sec. 36(1)(vii)]:
- In the scheme of demerger, if the debts of demerged company have been taken
over by the resulting company and subsequently such debt or part of the debt
becomes bad, such bad debt will be allowed as a deduction to the resulting
company.
f. Deductions available under Secs. 80-IA or 80-IB or 80-IC:
- If any deduction is available u/Sec. 80-IA or 80-IB or 80-IC to any undertaking,
and the same is transferred in the scheme of demerger before the expiry of the
period of deduction, then
g. no deduction u/Sec. 80-IA or 80-IB or 80-IC shall be available to the
demerged company for the previous year in which demerger takes place,
and
ii. deduction u/Sec. 80-IA or 80-IB or 80-IC is available to resulting
company in such a manner in which they would have applied to the
demerged company.
h. Carry forward and set off of business losses and unabsorbed depreciation of the
demerged company:
- In addition to the above benefits or concessions, the resulting company shall be
allowed to carry forward and set off the business losses and unabsorbed

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 depreciation of the demerged company if these are directly relatable to the
undertaking proposed to be transferred.
- If it is not relatable, such loss and depreciation shall be apportioned between the
demerged company and the resulting company in proportionate of the assets
coming to the share of each as a result of demerger.