Business Restructuring

Income Tax treatment of M&A in

India
 Amalgamation
• Amalgamation is a blending of two or more existing
undertakings into one undertaking.
• The shareholders of 75% of shares of the blending
company become the shareholders in the company
which is to carry on the business of blended
undertakings.
• There may be amalgamation either by the transfer of
two or more undertakings to a new company, or by
the transfer of one or more undertakings to an
existing company.
 Examples of amalgamation
• Merger of A Ltd. with X Ltd.
– A Ltd. goes out of existence
• Merger of A Ltd. and B Ltd. with X Ltd.
– A Ltd. and B Ltd. go out of existence
• Merger of A Ltd. and B Ltd. into a newly incorporated
company X Ltd.
– A Ltd. and B Ltd. go out of existence
• Merger of A Ltd., B Ltd. and C Ltd., into a newly incorporated
company X Ltd.
– A Ltd., B Ltd. and C Ltd. go out of existence
• In the aforesaid cases, A Ltd., B Ltd. and C Ltd. are
amalgamating companies, while X Ltd. is an amalgamated
company.
 Conditions for amalgamation
1. All the properties and liabilities of the
amalgamating company (A) immediately before the
amalgamation should become the property and
liabilities of the amalgamated company (X)
2. Shareholders holding atleast 75% (in value) of the
shares in the amalgamating company (other than
shares already held by the amalgamated company
or by its nominee) should become shareholders of
the amalgamated company
 Example of provision 2
• A Ltd. merges with X Ltd., in a scheme of amalgamation, and
immediately before the amalgamation, X Ltd. held 20 per cent
of the shares in A Ltd.,
• shareholders holding not less than 3/4 (in value) of the
remaining 80 per cent of the shares in A Ltd., i.e., 60 per cent
thereof (3/4 × 80), become shareholders of X Ltd., by virtue of
the amalgamation.
• Where, however, the whole of the share capital of a company
is held by another company, the merger of the two companies
will qualify as an amalgamation, if condition no.1 is fulfilled
 No “amalgamation” when:
• Section 2(1B) specifically provides that in the
following two cases there is no “amalgamation” for
the purpose of the Income-tax Act, though the
element of merger exists :
a. where the property of the company which merges is
sold to the other company and the merger is a result
of a transaction of sale ;
b. where the company which merges is wound up in
liquidation and the liquidator distributes its property
to the other company.
 Impact of amalgamation
• Any transfer of capital assets by the
amalgamating company to the amalgamated
company is not taken as “transfer” if the
following conditions are satisfied—
a. the scheme of amalgamation satisfies the
conditions of amalgamation; and
b. the amalgamated company is Indian company.
 ALLOTMENT OF SHARES IN AMALGAMATION

• Any transfer by a shareholder of shares held by him in the

amalgamating company shall not be treated as transfer if—
a. transfer is made in consideration of allotment to him of shares
in the amalgamated company ; and
b. amalgamated company is an Indian company.

• According to section 49(2), in the above cases, the cost of

shares of the amalgamating company shall be cost of shares
of the amalgamated company.
 Example
• X Ltd., an Indian company, takes over the business of Y Ltd.
• Z has purchased 100 shares in Y Ltd. in 1994 for Rs. 60 per
share.
• As per the scheme of amalgamation, he gets 50 shares in X Ltd.
in lieu of 100 shares in Y Ltd.
• Consequently, the cost of shares in X Ltd. will be taken as Rs.
120 per share [i.e., Rs. 6,000, being cost of 100 shares in Y Ltd.
÷ 50 shares in X Ltd.].
• the period of holding shall be from the date of acquisition of
shares of Y Ltd.
• The indexation will start from the date of allotment of shares in
Y Ltd.
• If the shareholders of X Ltd. are allotted something more
besides shares, say bonds or cash, etc., then the shareholders
cannot get the benefit under section 47(vii) and such transfer
shall be chargeable to capital gains
 If capital assets are transferred as stock-in-
trade
• X Ltd. purchases an immovable property on April 6, 1984 for
Rs. 2,00,000 and spends Rs. 10,000 for making some
alterations.
• This asset is later on transferred to Y Ltd., which is mainly
dealing in immovable property, at Rs. 2,40,000 in the scheme
of amalgamation of the two companies.
• Y Ltd. sells the stock-in-trade for Rs. 5 lakh on May 6, 2018.

• Business income of Y Ltd. will be Rs. 2.90 lakh (i.e., Rs. 5 lakh
minus cost of the capital asset to X Ltd. : Rs. 2 lakh minus
improvement expenses : Rs. 10,000).
 Carry forward and set-off of loss and
depreciation - [Sec. 72A]
• The accumulated loss and the unabsorbed
depreciation of the amalgamating company shall be
allowed to the amalgamated company if the
following conditions are satisfied:
1. There is an amalgamation of a company owning
industrial undertaking, ship or a hotel with another
company
– Also includes Bank with SBI; public sector airlines with
another public sector airlines; public sector companies
 Meaning of industrial undertaking
• an industrial undertaking is an undertaking engaged
in
– the manufacture or processing of goods, or
– the manufacture of computer software or
– the business of generation or distribution of electricity or
any other form of power or
– mining or
– the construction of ships, aircrafts or rail systems,
– the business of providing telecommunication services
whether basic or cellular, including radio paging, domestic
satellite service, network of trunking, broadband network
and internet services.
 Conditions for carry forward of losses
(contd.)
2. The amalgamating company has been engaged in the
business, in which the accumulated loss occurred or
depreciation remains unabsorbed, for 3 or more years.
3. The amalgamating company has held continuously as on the
date of the amalgamation at least three-fourths of the book
value of fixed assets held by it two years prior to the date of
amalgamation.
4. The amalgamated company continues to hold at least three-
fourths in the book value of fixed assets of the amalgamating
company which is acquired as a result of amalgamation for
five years from the effective date of amalgamation.
5. The amalgamated company continues the business of the
amalgamating company for a minimum period of 5 years from
the date of amalgamation.
 Conditions (contd.)
6. The amalgamated company, shall achieve the level
of production of at least 50 per cent of the installed
capacity of the amalgamating undertaking before
the end of 4 years from the date of amalgamation
and continue to maintain the said minimum level of
production till the end of 5 years from the date of
amalgamation.
Expenditure on amalgamation/ demerger [Sec.
35DD]
• Expenditure is wholly and exclusively for the purpose
of amalgamation
• It could also be capital in nature
• Cannot be allowed as deduction under any other
section, if allowed here
• deduction equal to one-fifth of such expenditure is
allowed for 5 successive previous years beginning
with the previous year in which amalgamation or
demerger takes place.
 Also to be considered
• Weighted average deduction for scientific research
• Amortization of telecom license fees
• Amortization of preliminary expenses (5 years)
• Amortization of VRS expenses- 5 years
• Amortization of expenses on prospecting- 10 years
• Recovery of expenses claimed as deductions
• Sec. 80IA/IB deductions continue
 Demerger
• The company whose undertaking is
transferred is known as “demerged” company.
The company to which the undertaking is
transferred is known as “resulting” company.
• Entities involved should be companies
• Sections 391 to 394 of the Companies Act
should be satisfied
• It involves transfer of an undertaking
 Demerger (contd.)
• All property of the undertaking should be transferred
to the resulting company
• The resulting company should take over all liabilities
of the undertaking
• Liabilities/properties are to be transferred at book
value
• Shares in the resulting company are issued to the
shareholders of demerged company
• Shareholders holding 75 per cent shares in the
demerged company to become shareholders in the
resulting company
• Transfer should be on going concern basis