Corporate Restructuring
has gained its significance in the recent Indian Corporate scenario. Amalgamations,
mergers, demergers, reverse mergers etc take place in various levels ranging
from small companies to corporate giants in India. These corporate actions take
place both horizontally (between companies having similar line of businesses)
as well as vertically (between companies having different areas of businesses).
At present sections 391 to 396 of the
Companies Act 1956, deals with law relating to Amalgamations / demergers /
Arrangements.
Companies considering one of these
corporate actions take into consideration various “pre and post scheme” implications
both positive and negative before entering into such a huge initiative. As in
many cases, one of the Companies (The transferee company in most cases) loses
its existence post the arrangement, dozens of factors were considered before
entering into a corporate action.
One of the major concerns of the
companies involved is the Tax implications involved in the Corporate Action.
Income Tax Act 1961
and Amalgamation – An overview:
1
- Section 72A – Set off / Carry forward of losses / depreciation:
·
Applicability - Industrial undertaking, or a
ship or a hotel with other Company / banking Company as defined under the
Banking Regulations Act1949 with a Bank / public sector company or companies
engaged in the business of operation of aircraft with similar public sector
Company
·
Provision for set off / carry forward
- The
accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be
the loss or, as the case may be, allowance for unabsorbed depreciation of the
amalgamated company for the previous year in which the amalgamation was
effected, and other provisions of the Act relating to set off
and carry forward of loss and allowance for depreciation shall apply
accordingly.
·
Conditions prescribed for Amalgamating Company-
a)
Must have been
engaged in the business in which such losses / depreciation occurred for
atleast 3 years.
b)
Must hold 3/4th
of book value of its fixed assets on the date of Amalgamation which was held 2
years prior to the Amalgamation
·
Conditions prescribed for Amalgamated Company-
a)
Must hold at
least 3/4th of the fixed assets of the Amalgamating Company for
minimum 5 years after the date Amalgmation.
b)
Must continue
the business of the Amalgamating Company for minimum 5 years.
c)
Must fulfill
such other conditions as may be notified to ensure the revival of business of
the Amalgamating Company or to ensure that the amalgamation is genuine.
·
Failure to fulfill any of the conditions prescribed- 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.
·
Meaning of “Accumulated losses”
- under the
head “Profits and gains of business or profession” (not being a loss sustained in a
speculation business), which the amalgamating Company
would have been entitled
to carry forward and set off under the provisions of section 72, if the amalgamation had
not taken place.
·
Meaning of “Industrial undertaking”- Any Industry engaged in any of the following
business.
·
Meaning of “unabsorbed depreciation”- Such amount allowed to the amalgamating company if
the amalgamation had not taken place.
2. Section
47 (vi) & (vii) – Capital Gains Tax on Transfer:
·
Section 2 (47)
defines transfer as a sale or relinquishment of the asset / extinguishment of
right / compulsory acquisition / act involving transfer of possession of
immovable propery.
·
Section 47
(vi) provides that, any transfer, in a scheme of amalgamation , of a
capital asset by the amalgamating company to the amalgamated company is not a
transfer under Section 2 (47) if the amalgamated company is an Indian company
·
Section 47
(via) provides that any transfer, in a scheme of amalgamation of a
capital asset being a share or shares held in an Indian company, by the
amalgamating foreign company to the amalgamated foreign company, is not a
transfer under Section 2 (7) if
a)
At least
twenty-five per cent of the shareholders of the amalgamating foreign
company continue to remain shareholders of the amalgamated foreign company, and
b)
such transfer
does not attract tax on capital gains in the country, in which the amalgamating
company is incorporated.
·
Section 47
(vii) provides that any transfer by a shareholder, in a scheme of amalgamation,
of a capital asset being a share or shares held by him in the amalgamating
company is not a transfer under Section 2 (47), if
a)
the 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;
3. Section
35(5) – Expenditure on Scientific research:
·
In a scheme of
amalgamation, the amalgamating company sells or otherwise transfers to the
amalgamated company (being an Indian company) any asset representing
expenditure of a capital nature on scientific research, then the provisions of
this section is applicable
·
2 (ii) and 2 (iii) of this Section is not
applicable.
1 4. Section
35A(6) – Expenditure on Scientific research:
·
In a scheme
of amalgamation, the amalgamating company sells or otherwise transfers the
rights to the amalgamated company (being an Indian company), the provisions of this section shall, as far as may be, apply to
the amalgamated company as they would have applied to the amalgamating company
if the latter had not so sold or otherwise transferred the rights
·
sub- sections (3) and (4)
shall not apply in the case of the amalgamating company
1 5. Section
35AB – Expenditure on Know how:
- In case of lump sum consideration paid in any previous year for acquiring any know- how for use for the purposes of business, one- sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years
2 6. Section
35ABB – Expenditure on obtaining license to operate telecommunication services:
- In case of such expenditure, a deduction equal to the appropriate fraction of the amount of such expenditure is allowed.
- The provisions of sub-sections (2), (3) and (4) shall not apply in the case of the amalgamating company.
7. Section
35ABB – Amortisation of expenditure in case of amalgamation :
.
- If an Indian Company incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation of an undertaking, then 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 or demerger takes place is allowed.
- No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act.
