Tax Planning

Tax Planning with Reference to: Location of Undertaking

 Sec.[10A]: Tax Holiday for newly established undertaking in Free Trade

Zone: 
 First 5 Years – 100 % of profits and gains is allowed as deduction
 Next 2 Years : 50% of such Profit and Gains is deductible for further 2
assessment years.
 Next 3 Years:  for the next three consecutive assessment years, so much of
the amount not exceeding 50% of the profit as is debited to the profit and loss
account year in respect of which the deduction is to be allowed and credited
to a reserve account (to be called the ”Special Economic Zone Re-investment
Allowance Reserve Account”) to be created and utilized for the purposes of
the business of the assesses
 A free-trade zone (FTZ) is a class of special economic zone It is a geographic
area where goods may be landed, stored, handled, manufactured, or
reconfigured and re-exported under specific customs regulation and generally
not subject to customs duty. 
 Free trade zones are generally organized around major seaports, 
international airports, and national frontiers—areas with many geographic
advantages for trade
 A special economic zone (SEZ) is an area in which the business and trade
laws are different from the rest of the country.
 SEZs are located within a country's national borders, and their aims include
increased trade balance, employment, increased investment, job creation
and effective administration.
 Sec.[80IA]: an [undertaking] which is
 (a) is set up in any part of India for the generation or generation and
distribution of power if it begins to generate power at any time during the
period beginning on the 1st day of April, 1993 and ending on the 31st day of
March, 2010;
 (b) starts transmission or distribution by laying a network of new transmission
or distribution lines at any time during the period beginning on the 1st day of
April, 1999 and ending on the 31st day of March, 2010.
 (c) Undertakes substantial renovation and modernization of the existing
network of transmission or distribution lines at any time during the period
beginning on the 1st day of April, 2004 and ending on the 31st day of March,
2010. 
 Deductions allowed is 100% or 30% of profits from such eligible business
 Sec.[80IB]: Deduction in respect of Profits of Industrial Undertaking located in
backward State or District.
 Deduction allowed is either 100% and /or 30% for 10 years depending upon case to
case.
 Sec. [80IB(11B)] : The amount of deduction in the case of an undertaking
deriving profits from the business of operating and maintaining a hospital in a
rural area shall be 100% of the profits and gains of such business for a period
of five (5)  consecutive assessment years, beginning with the initial assessment
year.
 Sec.[80IC]: Profits from Industrial Undertaking located in the specified States,.
States are State of Jammu & Kashmir, Himachal Pradesh, Uttaranchal and
North Eastern States.
 Section 80-IC of the Act provides 100 per cent deduction of profits and gains for
first five assessment years commencing with the initial assessment year and
thereafter 25 per cent (or 30 per cent where the taxpayer is a company) of the
profits and gains
 Sec. [80 LA]: 
 Deduction under section 80-LA can be claimed by specified assessee like 
 A scheduled bank or a foreign bank having offshore banking unit in a SEZ
 A unit of International Financial Services Centre

 Under this section, eligible assessee will get tax deduction on profit for specified
period provided certain conditions given under this section is satisfied.
 (i) Being a scheduled bank, or, any bank incorporated by or under the laws of a
country outside India; and having an Offshore Banking Unit in a Special Economic
Zone- first five years 100% of income, next five years 50% of income
 (ii) Being a Unit of an International Financial Services Centre , there shall be
allowed a deduction from such income, of an amount equal to— From A.Y.
2020-21 100% of income of any 10 consecutive years out of 15 years beginning
with year in which necessary permission obtained.
 "Offshore Banking Unit" means a branch of a bank located in a Special
Economic Zone and which has obtained the permission under clause (a) of sub-
section (1) of section 23 of the Banking Regulation Act, 1949. [Section 2(u) of
the Special Economic Zones Act, 2005] 
 "International Financial Services Centre" means an International Financial
Services Centre which has been approved by the Central Government under sub-
section (1) of section 18 of the Special Economic Zones Act, 2005. [Section 2(q)
of the Special Economic Zones Act, 2005]
 Tax Planning with Reference to: Type of Activity

 1. Sec. [ 10(1) ] :Agricultural Income– fully exempted (100%.

 2. Sec. [10(23FB)] : Dividend or Long-Term Capital Gain ( LTCG) accruing to Venture
Capital or a Venture Company – 100% tax exempted.
 “venture capital company” means such company which has been granted a certificate of
registration under the Securities and Exchange Board of India Act, 1992 
 “venture capital fund” means such fund
 (i) Operating under a trust deed registered under the provisions of the Registration Act,
1908 or operating as a venture capital scheme made by the Unit Trust of India established
under the Unit Trust of India Act, 1963;
 (ii) Which has been granted a certificate of registration under the Securities and
Exchange Board of India Act, 1992 .
 Sec. [ 33 AB) ] :Tea Development Account, Coffee Development Account and
Rubber Development Account:
 Where an assessee carrying on business of growing and manufacturing tea or
coffee or rubber in India has, before the expiry of six months from the end of the
previous year or before the due date of furnishing the return of his income,
whichever is earlier,—
 Deposited with the National Bank any amount or amounts in an account the
assessee shall be allowed a deduction of—
 (a) A sum equal to the amount or the aggregate of the amounts so deposited
 (b) A sum equal to 40% [forty] per cent of the profits of such business (computed
under the head “Profits and gains of business or profession” before making any
deduction under this section),
whichever is less :
 The assessee must satisfy the following conditions for claiming deduction u/s
33AB, the amount of deduction being:   
 The sum deposited in Special Account as mentioned below;
 40% of the profits before making any deduction u/s 33AB & before adjustment of
brought forward losses of the assessed business; Whichever is LOWER
Condition Description

The assessee must be engaged in Tea/ Coffee/ Rubber

I
Plantation.

It must make a Deposit in a Special Account opened by an

II assessee in accordance with the purposes specified in
scheme framed by Tea/ Coffee/ Rubber Board of India.

The deposit must be made within 6 months from the end of

III the previous year or before due date of furnishing of Income
return, whichever is earlier.

The accounts of the assessee should be audited by a

Chartered Accountant & the report of the auditor in Form
IV
no. 3AC is to be filed along with the return of income of the
relevant assessment year.
Sec. [ 35 D ] :  Amortization of Certain Preliminary Expenses
 Amortization of preliminary expenses incurred prior to the commencement of
business, extending an existing business, setting up a new unit etc. are
eligible to be amortized under section 35D of the Income Tax Act, 1961.
 An eligible assessee for the purpose of section 35D includes Indian Companies or
a person other than a company who is a resident of India.
Expenditure that is incurred in connection with the following:
 Preparation of feasibility reports, project reports, market survey reports,
engineering service reports
 Legal charges for drafting necessary agreements for the purpose of carrying out
business, for drafting Memorandum of Association and Articles of Association
 Charges incurred for registering the company with the ROC
 Underwriting commission, brokerage, and charges paid in connection with the
issue of shares and debentures or issue of the prospectus
The deduction allowed shall be lower of actual expense incurred or:
 5% of the cost of a project (cost of project= cost of fixed assets as on the last day
of the previous year)
 5% of capital employed- applicable to a company (capital employed= paid up
capital+debentures+long term borrowings as on the last day of the previous year)
 The amount so calculated above shall be allowed as a deduction equally over
a period of 5 years.
 [Section-35E] : Amortization of Expenditure on
Prospecting etc., for Development of Certain Minerals.

 Section 35E provides for the amortization of expenditure incurred wholly and exclusively on any
operation relating to prospecting for the minerals or group of associated minerals or on the
development of a mine or other natural deposit of any such minerals or group of associated
minerals specified in the Seventh Schedule.
 Deduction under section 35E is allowed only in the case of Indian companies and resident
assessees other than companies.
 The qualifying expenditure should be incurred during the “year of commercial production” and
four years immediately preceding that year.
 Expenditure incurred wholly and exclusively on any operations relating to prospecting for any
mineral (or group of associated minerals) specified in the Seventh Schedule or on the development
of a mine or other natural deposit of any such mineral or group of associated minerals, is
“qualifying expenditure”
 However, a few expenses (like expenses met by any other person, expenditure on acquisition of
site, capital expenses on acquiring building, plant, machinery and furniture) are excluded.
Amount and Period of Deduction - 
 The amortisation of qualifying expenditure is allowed in equal instalments over a
period of 10 years. The amount deductible for each year is— 
 1/10 th. of “qualifying expenditure”; or 
 income (before section 35E deduction) of the previous year arising from
commercial exploitation of any mine or deposit of minerals of any other
nature, 
 whichever is less. 
Deduction under section 80-IA : Tax Holiday for
enterprises engaged in Infrastructure development,
etc
 Tax holiday under section 80-IA is available to the assessees who are engaged
in providing infrastructure development facility.
 Under this section, eligible assessee will get tax deduction on profits under
business head for specified period of time.
 Provision of infrastructure facility
 Telecommunication services
 Industrial parks or special economic zone
 Power generation, transmission and distribution
 Undertaking set up for reconstruction of a power unit and
 A cross country natural gas distribution network
Undertaking Eligibility Conditions Amount of
Deduction
Infrastructure facility An Indian company engaged in •Commencement 100% of profit for 10
infrastructure facility between 01 April, consecutive A.Y. 
1995 to 01 April, *Initial A.Y. should
2017 start within 15 A.Y.
•ITR should be filed in which assessee
on time & deduction start its operation
should be claimed
•Audit to be done by
a CA
Telecommunication An undertaking engaged in providing •Commencement First 5 years =
services telecommunication services between 01 April, 100% of profit Next
1995 to 31 March, 5 years = 30% of
2005 profit 
•ITR should be filed *Initial A.Y. should
on time & deduction start within 15 A.Y.
should be claimed in which assessee
•Audit to be done by start its operation
a CA
•It should be a new
enterprise (with
some exceptions
discussed below)
Industrial parks or An undertaking which •Commencement 100% of profit for 10
special economic zone develops and operates between consecutive A.Y. 
industrial park or For SEZ  : 01 April, *Initial A.Y. should start
special economic zone 1997 to 31 March, within 15 A.Y. in which
notified by central 2005  assessee start its
government. For Industrial parks : operation
01 April, 2009 to 31
March, 2011 

•ITR should be filed on

time & deduction
should be claimed
•Audit to be done by a
CA
Power generation, An undertaking which •Commencement 100% of profit for 10
transmission and is set up in any part of between consecutive A.Y. 
distribution India for the Operation between 01 *Initial A.Y. should
generation or April,1993 to 31 start within 15 A.Y. in
generation & March, 2017. which assessee start
distribution of power. Transmission its operation
between 01 April,
1999 to 31 March,
2017
Restoration and
Improvement between
01 April, 2004 to 31
March, 2011.
•ITR should be filed
on time & deduction
should be claimed
•Audit to be done by a
CA
•It should be a new
enterprise (with some
exceptions discussed
below)
Reconstruction of a An Indian company engaged
power unit  in set up for reconstruction or
revival of a power generating
plant
•Formation with majority 100% of profit for 10
equity participation before 30 consecutive A.Y. 
November, 2005  *Initial A.Y. should start within
Operation begins before 31 15 A.Y. in which assessee
March, 2011 start its operation
•ITR should be filed on time &
deduction should be claimed
•Audit to be done by a CA

Cross country natural An Indian company engaged
gas distribution in carrying on business of
network laying & operation cross -
country natural gas
distribution network including
pipelines & storage facilities
being an integral part of such
network.
•Start functioning on or after
01 April, 2007
•ITR should be filed on time &
deduction should be claimed
•Audit to be done by a CA.
•It should be a new enterprise
(with some exceptions
discussed below)
100% of profit for 10
consecutive A.Y. 
*Initial A.Y. should start within
15 A.Y. in which assessee
start its operation
 Sec. [ 35 ABB ] : Expenditure for obtaining license to operate telecommunication
services : In respect of any expenditure, being in the nature of capital
expenditure, incurred for acquiring any right to operate telecommunication
services and for which payment has actually been made to obtain a license, there
shall be allowed a deduction equal to the appropriate fraction of the amount of
such expenditure.
[Section 36(1)(viii)] : Special Reserve Created and Maintained
by Financial Corporation (Transfer to Special Reserve)

 Deduction under this section is allowed to a specified entity of an amount

not exceeding 20% of the profits derived from eligible business computed
under the head profits and gains of business or profession (before making any
deduction under this clause) carried to special reserve account created and
maintained by such specified entity.
 However where the aggregate of the amount carried to such reserve account
from time to time exceeds 200% of the amount of the paid up capital and of
general reserves of the specified entity, the excess amount is not deductible.
 Who is eligible

Specified Entity Eligible Business

(A)  

i.a Finance Corporation specified in section 4A of the Companies The business of providing long term
Act, 1956 finance for 
ii.a Finance Corporation which is a public sector company a.industrial or agricultural development
iii.a banking company or 
iv.a co-operative bank other than a primary agricultural credit b.development of infrastructure facility in
society or a primary cooperative agricultural and rural India or 
development bank c.development of housing in India

(B)  

A Housing Finance Company The business of providing long-term

finance for the construction or purchase
of houses in India for residential purpose

(C)  

Any other financial corporation including a public company The business of providing long-term
finance for development of infrastructure
facility in India.
 Sec. [ 44 BBA ] : Special provision for computing
profits and gains of the business of operation of
aircraft in the case of non-residents
 in the case of an assessee, being a non-resident, engaged in the business of
operation of aircraft, a sum equal to 5% ( five per cent ) of the aggregate of
the amounts shall be deemed to be the profits and gains of such business
chargeable to tax under the head “Profits and gains of business or
profession”. 
 Sec. [ 44 AF ] : Special provisions for computing profits and gains of retail
business
 If the assessee engaged in retail trade in any goods or merchandise, a sum
equal to 5% (five per cent ) of the total turnover shall be deemed to be the
profits and gains of such business chargeable to tax under the head “Profits
and gains of business or profession”. 
 Sec. [ 44B ] : Special provision for computing profits and gains of shipping
business in the case of non-residents.
in the case of an assessee, being a non-resident, engaged in the business of
operation of ships, a sum equal to 7½ % (seven and a half per cent ) of the
aggregate of the amounts shall be deemed to be the profits and gains of such
business chargeable to tax under the head “Profits and gains of business or
profession”. 
 Sec. [ 44 BBA ] : Special provision for computing profits and gains of the
business of operation of aircraft in the case of non-residents
in the case of an assessee, being a non-resident, engaged in the business of
operation of aircraft, a sum equal to 5% ( five per cent ) of the aggregate of the
amounts shall be deemed to be the profits and gains of such business chargeable
to tax under the head “Profits and gains of business or profession”. 
Tax Planning relating to Ownership
OWNERSHIP PATTERN
 The first aspect of setting up of new business entity is deciding the form of
organization/ownership pattern.
 The selection of particular form of organization depends not only on the
magnitude of financial requirements and owner’s liability, but also on the tax
considerations.
 Normally, depending upon the level of operation, expected profitability need
for external financing and expected requirements of technical expertise, a
suitable form can be chosen.
 Tax liability is an important consideration guiding the choice of a legal form of
business organization.
 When there is freedom of choice taxation becomes an important
consideration.
 Partnership Firm or Limited liability Partnership
 Flat rate of 30% on the total income after deduction of interest and remuneration to
partners/Designated Partners at the specified rates

 Income Tax Rate for Partnership Firm(AY 2020-21)

 A partnership firm (including LLP) is taxable at 30%.
 Plus:

Surcharge:- 12% of tax where total income exceeds Rs. 1 crore.

Health and Education cess: 4% of income tax plus surcharge.
 Provision related to Interest & Remuneration to Partners U/s. 40(b) of the Income Tax Act,
1961
 Section 40(b) of Income Tax Act places some restrictions and conditions on the deductions of
expenses available to an assessee assessable as a partnership firm in relation to the
remuneration and interest payable to the partners of such firm.
 The deductions regarding salary to partners and any payment of interest to partners cannot
exceed the monetary limits specified u/s 40(b) and are available subject to the fulfillment of
conditions mentioned therein.
 The following conditions must be satisfied before claiming any deduction in respect of
salary/remuneration or interest payable to partner by a partnership firm:
1.Partner to be paid Interest & Remuneration must be a working partner
 The partners of a partnership firm whose accounts are to be credited with the salary,
remuneration, commission, bonus or by whatever name called, by the firm, must be working
partners and not the silent partners.
 Working partner in general terms means the partner who is actively engaged in the business
of the partnership firm and is not a partner for merely enjoying the profits/benefits of the
partnership business.
 If a partner is not a working partner then remuneration to such partner will not be eligible for
deduction as per section 40(b) of Income Tax Act 1961.
2. Remuneration or interest to Partners must be authorized by the Partnership
Deed
 As per section 40(b) only that salary, remuneration, bonus, commission etc
payable to working partners or any payment of interest payable to any partner
will be allowed as deduction only if it is authorized by the partnership deed.
 If the partnership deed does not contain such provisions then the deductions
may be disallowed if the same is claimed by the partnership firm.
3. Quantification of remuneration to the partners in the partnership deed is a
must.
 CBDT in its circular no. 739 dt 25/03/1996 have clarified that no deduction
under section 40(b)(v) will be admissible unless the partnership deed either
specifies the amount of remuneration payable to each individual working
partner or lays down the manner of quantifying such remuneration.
 Thus quantification of remuneration is required to be there in the partnership
deed for it to be considered as authorized by the partnership deed and to avoid
any disallowance u/s 40(b). 
4. No Interest & Remuneration to Partner to be allowed which relates to any period falling
prior to the date of such partnership deed
 As per section 40(b)(iii) the remuneration will be allowed as deduction only for that period
onwards where from the partnership deed authorizes such remuneration
 If a Partnership deed is executed on 01-04-2009 which doesn’t authorizes payment of
remuneration  to the partners and subsequently the deed is amended by a subordinate
partnership deed to provide for such authorization on 01-04-2010 then remuneration to
partners will not be allowed for period between 01-04-2009 to 01-04-2010 since during
that period it is not authorized by the deed.
5. Remuneration to Partners exceeding the limit prescribed u/s 40(b) to be disallowed:
 As per section 40(b)(v)  any payment of remuneration to any partner who is a working
partner, which is authorised by, and is in accordance with, the terms of the partnership
deed and relates to any period falling after the date of such partnership deed in so far as
the amount of such payment to all the partners during the previous year exceeds the
aggregate amount computed as hereunder will be disallowed:
(a) on the first Rs.3,00,000 of the book-profit or in case of a loss Rs.1,50,000 or at the rate of
90 per cent. of the book-profit, whichever is more;
(b) on the balance of the book-profit at the rate of 60 per cent.
6. Any interest to any partner exceeding 12% disallowed:
 As per Section 40(b)(iv) any payment of interest to any partner which is
authorised by, and is in accordance with, the terms of the partnership deed and
relates to any period falling after the date of such partnership deed in so far as
such amount exceeds the amount calculated at the rate of 12[twelve] per cent
simple interest per annum shall be disallowed.
 Thus payment of any simple interest to any partner is allowed only to the extent
of 12% per annum as deduction as per section 40(b). Even if the partnership deed
authorizes any payment of higher rate of interest than 12% to any partner, the
excess of interest will not be deducted.
 It is here to be noted that where remuneration/salary etc is allowable only to the
working partners as per section 40(b)(iii) but payment of interest not exceeding
12% per annum is allowable to any partner whether working or not, since the
word any partner is used in 40(b)(iv).
 Sole proprietorship
 Sole proprietorship business is not taxed as a separate legal entity, but rather, the owners
file their business taxes on their personal tax returns.
 Business income of a sole proprietorship businesses gets added to the owner’s individual
income, after taking our related business expenses, tax deductions and other incomes if any.
 From gross receipts, all business expenses are deducted to find out the business income.
This income has been considered as “incomes under the head profits and gains of business
or profession” and with this, other incomes like interest from bank, salary, house rent are get
added to find out the gross total income.
 Sole proprietorship business is entitled to all IT deductions applicable to the individual
assessee being the owner of such business.
 From the gross total income, IT deductions as applicable to the owner are allowed to find out
the taxable income. On that taxable income, sole proprietors pay tax based on the slab rates
as applicable to the owner.
Hindu Undivided Family (HUF)

  Hindu Undivided Family (‘HUF’) is treated as a ‘person’ under section 2(31)​of the Income-tax
Act, 1961 (herein after referred to as ‘the Act’).
 HUF is a separate entity for the purpose of assessment under the Act. 
 Under Hindu Law, an HUF is a family which consists of all persons lineally descended from a
common ancestor and includes their wives and unmarried daughters.
 An HUF cannot be created under a contract, it is created automatically in a Hindu Family. 
 Jain and Sikh families even though are not governed by the Hindu Law, but they are treated as
HUF under the Act.
Assessment of HUF

An HUF is recognized as a separate assessable entity under the

Act. Its income may be assessed if following two conditions are
satisfied: 
There should be a coparcenership. In this connection, it is worthwhile to
mention that once a joint family income is assessed as that of HUF, it
continues to be assessed as such in subsequent assessment years till
partition is claimed by coparceners. 
There should be a joint family property which consists of ancestral
property, property acquired with the aid of ancestral property and
property transferred by its members. 
Ancestral Property: Ancestral property may be defined as the property
which a man inherits from any of his three immediate male ancestors,
i.e. his father, grandfather and great grandfather.
Therefore, property inherited from any other relation is not treated as
ancestral property.
 Income from ancestral property held by following families is
taxable as income of HUF: 
a) A family of widow mother and sons (may be minor or major) ; 
b) Family of husband and wife, having no child ; 
c) Family of two widows of deceased brothers ; 
d) Family of two or more brothers ; 
e) Family of uncle and nephew ; 
f) Family of mother, son and son’s wife ; 
g) Family of a male and his late brother’s wife. 
 Taxability of HUF
 In order to compute the income of an HUF, first its income under the different
heads of income (ignoring incomes exempted under sections 10 to 13A of the
Act)need to be ascertained.
 The following points should be keep in mind while computing income:
  ■  If funds of an HUF are invested in a company or a firm, fees or remuneration
received by the member as a director or a partner in the company or firm may be
treated as income of the family (if fees or remuneration is earned essentially as a result
of investment of funds).
■  However, if fees or remuneration is earned for services rendered by the member
in his personal capacity, it will be treated as the personal income of the member.
  ■  If any remuneration is paid by the HUF to the karta or any other member for
services rendered by him, remuneration is deductible from income of HUF if such
payment is genuine and not excessive and paid under a valid andbona
fide agreement.
 The following incomes are not taxed as income of HUF:-
  ■  If a member has converted or transferred without adequate
consideration his self-acquired property into join family property,
income from such property is not taxable in hands of the family.
■  Income of impartible estate (though it belongs to family) is taxable in
the hands of holder of estate and not in hands of HUF.
  ■  Personal income of the members cannot be treated as income of HUF.
■  "Stridhan" is absolute property of a woman, hence income arising
therefrom is not taxable as income of HUF.
■  Income from individual property of daughter is not taxable in hands
of HUF even if such property is vested into HUF by daughter.
 Deduction from gross total income: An HUF is entitled for deductions
available under Chapter VI-A (as applicable) while calculating its taxable
income.
 2 Rate of Tax:
■  An HUF is taxed on same slab rates which are applicable to an Individual.
■  An HUF is liable to pay Alternate Minimum Tax if the tax payable is less than
18.5 per cent (including cess and surcharge) of "Adjusted Total Income" subject to
prescribed conditions.
 
Tax Planning relating to Mergers &
Demergers
 Mergers
 Section 2(1B) of Income Tax Act defines ‘amalgamation’ as merger of one or more companies
with another company or merger of two or more companies to from one company in such a
manner that
(I) All the property of the amalgamating company or companies immediately before the
amalgamation becomes the property of the amalgamated company by virtue of the
amalgamation.
(II) All the liabilities of the amalgamating company or companies immediately before the
amalgamation becomes the liabilities of the amalgamated company by virtue of the
amalgamation.
(III) Shareholders holding at least three-fourths in value of the shares in the amalgamating
company or companies (other than shares already held therein immediately before the
amalgamated company or its nominee) becomes the shareholders of the amalgamated company by
virtue of the amalgamation.
Tax Relief’s and Benefits in case of Amalgamation

 If an amalgamation takes place within the meaning of section 2(1B) of the Income Tax Act, 1961,
the following tax reliefs and benefits shall available:-
1. Tax Relief to the Amalgamating Company:
 Exemption from Capital Gains Tax [Sec. 47(vi)]: Under section 47(vi) of the Income-tax Act,
capital gain arising from the transfer of assets by the amalgamating companies to the Indian
Amalgamated Company is exempt from tax as such transfer will not be regarded as a transfer for
the purpose of Capital Gain.
 Exemption from Capital Gains Tax in case of International Restructuring [Sec. 47(via)]: Under
Section 47(via)} in case of amalgamation of foreign companies, transfer of shares held in Indian
company by amalgamating foreign company to amalgamated foreign company is exempt from tax, if
the following two conditions are satisfied:
 At least twenty-five per cent of the shareholders of the amalgamating foreign company continue to
remain shareholders of the amalgamated foreign company, and
 Such transfer does not attract tax on capital gains in the country, in which the amalgamating
company is incorporated
2. Tax Relief to the shareholders of an Amalgamating Company:
 Exemption from Capital Gains Tax [Sec 47(vii)]: Under section 47(vii) of the
Income-tax Act, capital gains arising from the transfer of shares by a
shareholder of the amalgamating companies are exempt from tax as such
transactions will not be regarded as a transfer for capital gain purpose, if:
(i) The transfer is made in consideration of the allotment to him of shares in the
amalgamated company; and
(ii) Amalgamated company is an Indian company
 3. Tax Relief to the Amalgamated Company:
 Carry Forward and Set Off of Accumulated loss and unabsorbed depreciation of the
amalgamating company [Sec. 72A]: Section 72A of the Income Tax Act, 1961 deals with
the mergers of the sick companies with healthy companies and to take advantage of the
carry forward of accumulated losses and unabsorbed depreciation of the amalgamating
company.
 But the benefits under this section with respect to unabsorbed depreciation and carry
forward losses are available only if the followings conditions are fulfilled:-
 There should be an amalgamation of –
(a) a company owning an industrial undertaking or ship or a hotel with another company, or
(b) a banking company referred in section 5(c) of the Banking Regulation Act, 1949 with a
specified bank (Note 2), or
(c) one or more public sector company or companies engaged in the business of operation of
aircraft with one or more public sector company or companies engaged in similar business. 
 Demergers
 Demerger is an arrangement whereby some part /undertaking of one company is
transferred to another company which operates completely separate from the
original company.
 Shareholders of the original company are usually given an equivalent stake of
ownership in the new company.
 The company that transfers such business operation is known as the “demerged”
company, while the company to which the business is transferred is known as
the “resulting” company. 
 The demerger under Section 2(19AA) of Income-tax Act, 1961 is defined as follows:
Demerger means the transfer of one or more undertakings to any resulting company
pursuant to a scheme of arrangement under Sections 391 to 394 of the Companies Act,
1956 in such a manner that:
 All the property/liability of the undertaking becomes the property/liability of the
resulting company.
 All the property/liabilities are transferred at book value (excluding increase in value
due to revaluation).
 The resulting company issues shares to the shareholders of demerged company on a
proportionate basis
 Shareholders become shareholders of the resulting company
 The transfer of an undertaking is on a going concern 
basis.
 The demerger is in accordance with the conditions notified under Section 72A(5) of IT
Act, 1961.
Provisions applicable to company

 Capital Gain (Sections 47(vi) and 47(vid))

Gains arising on transfer of a capital asset in a scheme of amalgamation/demerger
to the amalgamated/resulting company being an Indian Company is exempt.
 Carry forward of accumulated loss and/or unabsorbed depreciation (Section
72A)
Accumulated loss and unabsorbed depreciation of a demerged company can be
carried forward by the resulting company for set off against its profits (Section
72A(4)):
 Where it is directly relatable to undertaking transferred, it should be such
relatable amount.
 Where it is not directly relatable to the undertaking transferred, it should be
apportioned in the ratio of assets retained by the demerged company and
transferred to resulting company.
 Allowability of expenditure relating to amalgamation/demerger (Section 35DD)
An Indian company will be allowed a deduction of 1/5th of the expenditure incurred for the
purposes of amalgamation or demerger for five years from the year in which
amalgamation/demerger takes place.
 Depreciation in the year of amalgamation/demerger (fifth proviso to Section 32(1))
Depreciation to amalgamated company and amalgamating company in the year of
amalgamation and depreciation to demerged company and the resulting company in the year
of demerger shall be apportioned in the ratio of the number of days for which the assets
were used.
 Written Down Value (‘WDV’) (Sections 32 and 43(6)(c))
 WDV in the hands of amalgamated company shall be the WDV of the block of assets in the
hands of the amalgamating company immediately before amalgamation.
 WDV in the hands of the resulting company shall be the WDV of transferred assets of the
demerged company immediately before demerger.
 WDV in the hands of the demerged company shall be the WDV of the block of assets before
demerger less WDV of assets transferred to the resulting company.
Provisions applicable to Shareholders
 Capital Gains arising on transfer of shares of amalgamating company in exchange
of shares of amalgamated company, being an Indian Company is exempt (Section
47(vii)).
 Acquisition of shares of the resulting company by the shareholders of demerged
company pursuant to demerger will not be taxed either as capital gains or
deemed dividend. (Sections 47 (vid) and 2(22)(v))