Under Income Tax Act, 1961
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:-
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.
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
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. (Example: Say, X Ltd merges with Y Ltd in a scheme of amalgamation and immediately before the amalgamation, Y Ltd held 20% of shares in X Ltd, the above mentioned condition will be satisfied if shareholders holding not less than 75% in the value of remaining 80% of shares in X Ltd i.e. 60% thereof, become shareholders in Y Ltd by virtue of amalgamation)
The motive of giving this definition is that the benefits/concession under Income Tax Act, 1961 shall be available to both amalgamating company and amalgamated company only when all the conditions, mentioned in the said section, are satisfied. ‘Amalgamating company’ means company which is merging and ‘amalgamated company’ means the company with which it merges or the company which is formed after merger. However, acquisition of property of one company by another is not ‘amalgamation’.
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. Let us take an example of X Ltd and Y Ltd. Here following situations may emerge:-
(a) X Ltd Merges with Y Ltd. Thus X Ltd goes out of existence. Here X Ltd is Amalgamating Company and Y Ltd is Amalgamated Company.
(b) X Ltd and Y Ltd both merges and form a new company say, Z Ltd. Thus both X Ltd and Y Ltd goes out of existence and form a new company Z Ltd. Here X Ltd and Y Ltd are Amalgamated Company and Z Ltd is Amalgamated Company.
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:
o 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.
o 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:
o At least twenty-five per cent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and
o 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:
o 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:
o The transfer is made in consideration of the allotment to him of shares in the amalgamated company; and
o Amalgamated company is an Indian company.
3. Tax Relief to the Amalgamated Company:
o 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:-
o There should be an amalgamation of – (a) a company owning an industrial undertaking (Note 1) 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.
[Note 1. The term ‘Industrial Undertaking’ shall mean any undertaking engaged in : (i) the manufacture 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) mining, or (v) the construction of ships, aircrafts or rail systems, or (vi) the business of providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services. Note 2. Specified bank means the State Bank of India constituted under the State Bank of India Act, 1955 or a subsidiary bank as defined in the State Bank of India (Subsidiary Bank) Act, 1959 or a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970 or under section 3 of the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1980.]
o The amalgamated company should be an Indian Company.
o The amalgamating company should be engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for 3 years or more.
o The amalgamating company should held continuously as on the date of amalgamation at least three-fourth of the book value of the fixed assets held by it two years prior to the date of amalgamation.
o The amalgamated company holds continuously for a minimum period of five years from the date of amalgamation at least three-fourths in the book value of fixed assets of the amalgamating company acquired in a scheme of amalgamation
o The amalgamated company continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation.
o The amalgamated company fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose.
o Expenditure on scientific research [Sec. 35(5)]: When an amalgamating company transfers any asset represented by capital expenditure on the scientific research to the amalgamated Indian company in a scheme of amalgamation provisions of section 35 shall be applicable-
o Unabsorbed 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,
o If such asset ceases to be used in the previous year for scientific research related to the business of amalgamated company and is sold by the amalgamated company the sale price to the extend of cost of asset shall be treated as business income and the excess of sale price over the cost shall be subject to the provisions of capital gain.
o Amortization of expenditure in case of Amalgamation [Sec. 35DD]: Under Sec 35DD for expenditure incurred in connection with the amalgamation the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation takes place.
o Treatment of preliminary expenses [Sec. 35D(5)]: When and amalgamating company merges with an amalgamated company under a scheme of amalgamation, the amount of preliminary expenses of the amalgamating company to the extend not yet written off shall be allowed as deduction to the amalgamated company in the same manner as would have been allowed to the amalgamating company.
o Expenditure for obtaining a licence to operate telecommunication services [Sec. 35ABB(6)]: Where in a scheme of amalgamation, the amalgamating company sells or otherwise transfer its licence to the amalgamated company (Being an Indian Company), the provisions of Section 35ABB which were applicable to the amalgamating company shall become applicable in the same manner to the amalgamated company, consequently:
o The expenditure on acquisition on license, not yet written off, shall be allowed to the amalgamated company in the same number of balance installments.
o Where such licence is sold by the amalgamated company, the treatment of the deficiency/surplus will be same as would have been in the case of amalgamating company.
o Treatment of capital expenditure on family planning [U/S 36(1)(ix)]: If Asset representing capital expenditure on family planning is transferred by the amalgamating company to the amalgamated company under a scheme of amalgamation, such expenditure shall be allowed as deduction to the amalgamated company in the same manner as would have been allowed to the amalgamating company.
o Treatment of bad debts [Sec. 36(1)(vii)]: When due to amalgamation debts of the amalgamating company has been taken over by amalgamated company, and subsequently, such debts turn out to be bad, it shall be allowed as deduction to the amalgamated company.
Earlier Article of this Series
Corporate Restructuring - A Phenomenon
Merger and Amalgamation - An Overview
To be continued.........
CMA. Sanjay Gupta