Professional Documents
Culture Documents
TAX IMPLICATIONS OF Amalgamations/ Mergers Demergers/Slump Sales Ms.B.Mala, Associate, M/s Subbaraya Aiyar, Padmanabhan & Ramamani (SAPR) Advocates
TAX IMPLICATIONS OF Amalgamations/ Mergers Demergers/Slump Sales Ms.B.Mala, Associate, M/s Subbaraya Aiyar, Padmanabhan & Ramamani (SAPR) Advocates
Ms.B.Mala, Associate, M/s Subbaraya Aiyar, Padmanabhan & Ramamani (SAPR) Advocates
Synopsis
.
Amalgamation/ Mergers
India has become a major country entering into even cross border transactions with
regard to business amalgamations. Today Mergers, Amalgamations, De-mergers are on
the agenda of most industrial groups intending to diversify the scope of their
operations. Some of the well known amalgamations in India are:
Reliance Power and Reliance Natural Resources at a deal of US $11 billion ICICI
Bank acquired Bank of Rajasthan at about Rs 3000 Crore GTL Infrastructure acquired
Aircel Towers at US $ 1.8 billion
.
Amalgamation/ Mergers
Tata Steel acquired UK based Corus Group at a deal value of US $ 12 million. Suzlon
Energy acquired Belgium based Hansen Group at US $ 565 million.
Ranbaxy Labs at a deal of US $ 324 million acquired Romania based Terapia SA Tata
Chemicals acquired British salt based in UK with a deal of US $ 13 billion. Fortis
Healthcare acquired Hong Kong's Quality Healthcare Asia Ltd for around Rs 882
Crore.
Amalgamation - Definition
Section 2(1B)
Amalgamating
All Property
Co.
Amalgamated
Co.
Property
All Liabilities
Liabilities
Shareholders
75% Shareholders
Amalgamation – Definition (contd.)
In South African Supply and Cold Storage Co., In re [1904] 2 Ch. D 268, the court
held that neither "reconstruction" nor "amalgamation" has any definite legal
meaning. Each word is a commercial and not a legal term
Amalgamated Co- Capital Gains
Amalgamated company is an Indian company relief under S. 47(vi)
Amalgamating Co.
Amalgamated Co.
Shareholders
25% Shareholders
Conditions
Amalgamating Co.
Amalgamated Co.
NA
3
2
NA
5
5@
@ Other conditions as per Rule 9C The limit of 8 years to be reckoned from the year
in which amalgamation takes place
Amalgamated Co. - Section 72A (contd.)
A Ltd. having losses from 1998-99. The losses can be carried forward for set off
till 2006-2007 i.e. for a period of 8 years A Ltd gets amalgamated with B Ltd from
2003-2004The losses can be carried forward till 2011-12
Amalgamated Co.-Section 72A (contd.)
Amalgamated Co. - Section 72A (contd.)
where any of the conditions laid down in sub sec (2) of sec 72A are not complied
with, the set off of loss or allowance of depreciation made in any previous year in
the hands of the amalgamated company shall be deemed to be the income of the
amalgamated company chargeable to tax for the year in which such conditions are not
complied with.
Amalgamated Co. - Section 72A / Section 79
Section 72A is not available to a company other than a company owning an industrial
undertaking In the case of amalgamation of any other company, if a private limited
company, provisions of Section 79 would apply Change in shareholding could
disentitle unabsorbed losses being carried forward Reverse merger could be possible
in such cases
Amalgamated Co.- Section 79
Section 79-- where a change in shareholding has taken place in a previous year—
Carry forward and set-off of losses may be lost Section applies to companies in
which public are not substantially interested Provisions apply only to business
loss and not to unabsorbed depreciation or unabsorbed development rebate [CIT v
Shri Subhulaxmi Mills Ltd. 249 ITR 795 (SC)] Deduction under section 10A/10B and 80
IA / 80 IB may be available.
Amalgamated Co.-Section 79 (contd.)
Reverse Merger
Preservation of losses (profit making company merges into the loss making company)
Amalgamated Co.- Section 79 (Reverse Merger)
Example Proposal for Merger of B Ltd with A Ltd in 2009-10 Section 72 A not
available Section 79 applicable – losses of B Ltd not available to A Ltd Effective
date of merger from 1st April 2008– with Retrospective effect Losses of B Ltd on
consolidated return will therefore be set off in profits of A Ltd.
Amalgamated Co.-Effective date
Scheme approved by court without any change of transfer date Effective date of
amalgamation is date when scheme arrived at Date of notification of scheme in
Official Gazette is not effective date Operations and resultant loss of transferor
to be treated as of transferee after effective date
Amalgamated Co. Effective date (contd.)
Marshall Sons & Co. (India) Ltd. v. ITO 223 ITR 809 (SC) Date of amalgamation of a
company is the date with effect from which, it is provided in the scheme of
amalgamation, that the amalgamation shall take place, if the same is not altered by
the Court sanctioning amalgamation amalgamation shall be deemed to have taken place
as and from that date even though the amalgamation was sanctioned by Court later
and the amalgamating company was struck off the register of companies on a later
date In such a case, assessment is to be made and can always be made on the
transferee company on the income of both the transferee and transferor companies
Amalgamated Co. Effective date (contd.)
Orissa Mining Corporation Ltd. v. CIT 293 ITR 502 there is always a time gap
between the amalgamation scheme and the period when the same is sanctioned by the
court. But after the said sanction, the effective date of amalgamation is the date
when the scheme is arrived at and when the date is fixed under the scheme, unless
the court specifies another date.
Amalgamated Co. Effective date (contd.)
Where Scheme is effective from retrospective date Beck India Ltd. v. Dy CIT 319 ITR
(A.T.) 253 Scheme of amalgamation approved by High Court subsequent to date of
filing of return, Scheme sanctioning amalgamation with retrospective effect,
Amalgamated company eligible for set off based on revised accounts Returns filed on
the basis of accounts finalized previously Requirement to file revised returns on
basis of Order of High Court after receipt of the Order.
Amalgamated Co. Effective date (contd.)
Issue-If one year from the end of the assessment year has lapsed, will revised
return be treated as valid ? Pentamedia Graphics Ltd. v. ITO 236 CTR (Mad) 204 :
Once the scheme is sanctioned with effect from particular date, it is binding on
statutory authorities. Revenue to act as per the scheme sanctioned with the
effective date and return filed reflecting the same cannot be ignored on the
strength of s. 139(5). Principle laid down in Marshall Sons & Co. (India) Ltd. v.
ITO to be noted. Apex Court held that once scheme is sanctioned with effect from a
particular date, it is binding on everyone including statutory authorities.
Amalgamated Co. Effective date (contd.)
CIT v. J. K. Corporation Ltd. 331 ITR 303 Effect of Special Provisions Act--Special
Provisions Act has overriding effect over Income-tax Act BIFR can specify date from
which its scheme becomes effective BIFR sanctioning retrospective operation of
scheme of amalgamation, assessee entitled to benefit of carry forward and set off
of losses of amalgamating company. Revised return of loss to be treated to have
been validly filed entitling benefit of carry forward and set off of loss The date
of effect of the scheme is the date as mentioned therein. IT authority has no
competence to read scheme differently as far as date of effect is concerned
Amalgamated Co. Allowable Deductions
Depreciation (Section 32)
In the year of amalgamation Depreciation = Total dep. for the previous year X No.
of days assets used (5th Proviso to S. 32(1)) Total no. of days Actual cost =
Income-tax W.D.V of the amalgamating co. (Explanation 7 to S. 43(1)) Unabsorbed
depreciation of amalgamating company is not be deducted from written down value of
assets taken over of amalgamated company
Amalgamated Co. Allowable Deductions
(contd.)
Block of assets = W.D.V. of the block of assets of the amalgamating co. for the
immediately preceding previous yr less dep. actually allowed in relation to the
said preceding previous year (Expl. 2 to S. 43(6)) CIT v. Silical Metallurgic Ltd.
324 ITR 29 Unabsorbed depreciation of amalgamating company cannot be deducted while
taking written down value of assets taken over of amalgamated company
Amalgamated Co. Allowable Deductions
(contd.)
Deduction under section 10A/ 10B (sub-section 7A), & section 10AA Depreciation on
intangible assets being self developed assets Scientific research (S. 35) Licenses
to operate telecommunication services (S. 35ABB) Amortization of preliminary
expenses (S. 35D) Expenses for the purpose of amalgamation (S. 35DD) Amortisation
of expenses under VRS (S. 35DDA)
Amalgamated Co. Allowable Deductions
(contd.)
Amalgamated Co. Allowable Deductions
(contd.)
Deductions Not specifically provided in the Act
Bad debts (S. 36(1)(vii)) Payments disallowable under section 40(a) Statutory
payments (S. 43B) Gratuity—amalgamation agreement stipulating that amalgamated
company would take over employees of amalgamating company—Gratuity paid to
employees taken over deductible Credit for taxes paid [Advance tax, TDS, DIT
Reliefs ] Carry forward of MAT credit (S. 115JAA) Could this be a proportion of the
total credit
Amalgamated Co. Allowable Deductions
(contd.)
Section 115-O Amalgamation sanctioned by the Hon‘ble High Court. As on the date of
sanction dividend had been paid by the Assessee to amalgamating company The
incidence of tax u/s.115-O is on distribution of dividend. Any subsequent act by
which dividend itself does not become taxable in the hands of the recipient of the
dividend will not be relevant. The payment of dividend distribution tax is not
dependent on the ultimate chargeability to tax in the hands of the recipient of the
dividend-The TATA Power Co Ltd v. Addl CIT 2011-TIOL-594-ITAT- MUM
Shareholders of Amalgamating Co.
Relief from capital gains tax on transfer of shares in an Indian company, in a
scheme of amalgamation -- Section 47(vii)
Cost
Value
Under the existing provisions contained in sub-clause (a) of clause (vii) of the
aforesaid section 47, in case of a merger, any transfer of capital asset being
shares, held by a shareholder in the amalgamating company, shall not be regarded as
transfer, if(a) such transfer is made in consideration of the allotment to him of
any share or shares in the amalgamated company, and (b) the amalgamated company is
an Indian Company. amendment w.e.f. 1-4-2013 to the aforesaid sub-clause so as to
provide that to the extent where the amalgamated company itself is the shareholder
in the amalgamating company, it shall not be necessary for it to issue share or
shares.
Shareholders of Amalgamating Co.
(contd.)
If under the scheme of amalgamation, besides the shares in the amalgamated company
the shareholders of amalgamating company are allotted something more, say bonds or
debentures in consideration of transfer of shares in amalgamating company, they
cannot claim exemption under s. 47(vii). CIT v. Gautam Sarabhai Trust
Demerger - Definition
S.2(19AA)
Dermerged Co. (Undertaking(s))
All Property
Resulting Co.
Property (at book value)
All Liabilities
Shareholders
Proportionate shares
Shareholders
75% Shareholders
The transfer should be pursuant to s. 391 to 394 of the Companies Act and on a
going concern basis and as per the conditions to be notified by the CG
Dermerger – Capital Gains
Resulting co. is an Indian co. relief under S. 47(vib) Resulting co. is a foreign
co. relief under S. 47(vic); only if
Demerged Co.
Shareholders
Resulting Co.
75% Shareholders
Directly relatable
Total Loss
Cost of shares = Cost of shares X Net book value of assets transferred (of the
resulting co.) Net worth of demerged co. before demerger
Cost of shares of demerged co. = Original cost less Cost attributable to shares of
resulting co.
Section 2(42C)- Definition of ‗Slump sale‘ ―Slump sale means the transfer of one or
more undertakings as a result of the sale for a lump sum consideration without
values being assigned to the individual assets and liabilities in such sales.‖
Section 50B--Special provision for computation of capital gains in case of slump
sale Section 50B was inserted in the Act vide the Finance Act, 1999 w.e.f 1st April
2000, in view of the decisions that ‗slump sales‘ were not taxable under the
capital gain provisions because it was not possible to compute cost of acquisition.
Slump sale – Relevant provisions (contd.)
the net worth of an undertaking is equal to the aggregate value of total assets of
the undertaking as reduced by the value of liabilities. The aggregate value of the
assets and the value of liabilities as per Expl. 2 is the w.d.v of the depreciable
assets, book value of other assets and the book value of all the liabilities.
'aggregate value of total assets' shall require not only the inclusion of recorded
but also unrecorded assets such as Goodwill and brand value, to which no specific
cost can be attributed. the value of assets is therefore the depreciated/book value
of all the assets recorded in books of account and Nil in case of intangible/other
unrecorded assets. Similarly the value of liabilities shall be that recorded as per
books of account plus the value of contingent liability, if any.
Slump sale-Relevant provisions (contd.)
Section 50B(1) – Long term or Short term Section 50B(2) – Cost of acquisition – net
worth Net worth = Aggregate value of total assets less Aggregate value of
liabilities
Depreciable assets – Income-tax WDV in the case of capital assets-Nil where the
whole of the expenditure has been allowed or is allowable as a deduction under
section 35AD, and
in the case of other assets, the book value of such assets. Revaluation of assets
to be ignored
Section 43(1) – Actual cost for buyer – allocation to various assets No carry
forward and set off of losses Sale as a going concern for a lump sum price
immovable property transferred – because certain value was shown for assets for
paying stamp duty it does not bring it under purview of Sec 55 Section 50C –Not
applicable
Itemised sale – Relevant provision
Assets on which depreciation not available - normal provisions of Act will apply
Assets on which depreciation is available – Section 50 – short term capital gain /
loss Section 43(6) – sale consideration to be reduced from block
Procedure for Amalgamation
Check Memorandum & Articles of Association and make suitable changes Draft Scheme
of Arrangement ( Amalgamation / Merger) Consider it in the Board Meeting Apply to
Court direction to call General Meeting Send to Central Government copy of
application made to High Court
Procedure for Amalgamation (contd.)
Send notices of General meeting with Scheme to shareholders Notice period shall not
be less than 21 days Notice can be by way of advertisement also At General Meeting
approve scheme, increase authorized share capital and to issue further shares as
required Forward at once notice and proceedings of meetings to Stock Exchanges
Procedure for Amalgamation (contd.)
Report the result of meeting to Court Move Court for approval of the Scheme by
filing petition in 7 days in form 40 Advertise the date of hearing fixed by the
Court On receipt of order from High Court file it with ROC Proceed on effecting the
Scheme of Amalgamation / Merger as approved by the High Court