AAmmaallggaammaattiioonn &&

TTaakkeeoovveerr

TThhee 77 DDiimmeennssiioonnss

–– TTaaxxaattiioonn AAssppeecctt By CS. K.K.Chhaparia

EIRC of I.C.S.I. 27th April 2013

Topics of discussions

Companies Act vs. Income Tax Act o Amalgamation vs. Demerger vs. Takeover – Strategic

decision between the three Implications, Benefits and Precautions under tax laws CASE STUDIES

Amalgamation - as per Income Tax Act – Sec.2(1B)

What is amalgamation Merger of one or more companies into another company All the property and liabilities of amalgamating co. to pass on to the

amalgamated co. at book value. Shareholders holding more than 3/4th in value of shares of

amalgamating co. become shareholders of the amalgamated co., other than shares held by amalgamated co into amalgamating co

I.T.Act - Silent Consideration paid in form of equity shares, debentures, cash or a mix of

all.

Amalgamation

Case study 1 Loss Making Co. merging into profit making co.

A Company - Unabsorbed business loss of Rs. 10 crore Loss adjusted in seven years – Rs. 2 crore only Advise

Amalgamate into another co., even a new company

Carry Forward of Accumulated

Loss and Unabsorbed Depreciation Sec 72A allows losses to be c/fd only when

Conditions to be fulfilled by Amalgamating Company Amalgamating co. owning industrial undertaking or ship or

hotel or bank …. Has to be engaged in same business for more than 3 years. Has continuously held 3/4th of book value of such fixed assets

for a period of two years

To be fulfilled by amalgamated company Holds continuously for 5 years 3/4th of book value of such fixed

assets acquired in terms of scheme. Continues the business of amalgamated co. for 5 years. Fulfils the conditions prescribed in Rule 9C

Amalgamation

Case study 2

Profit making Co into loss making Co– Reverse Merger A Co.- A Profit making company B Co.- A loss making co., not a manufacturing unit Advise

o A merging into B o Same business criteria discontinued w.e.f. A.Y.01-02 o Check s.79 of I.T.Act

Amalgamation

Case study 3 MAT Planning

A having unit in Backward State and profit of 5 crore B having trading business & earning profit of 5 crore. A paying MAT of Rs. 75 lacs B paying tax of Rs. 150 lacs Advise

o Merger o Tax liability to reduce to Rs. 150 lacs total

Takeover

As is commonly understood Takeover is the purchase by one company of :

controlling interest of the other company Takeover of the division of one company by another

Takeover of division

Demerger Vs. Slump sale Takeover of company

Income tax presently do not have any specific clause for same Section 56 – cannot acquire shares at price less than Book Value

Proposed GAAR provisions – underlying asset

Section 79 – c/fd of loss when >50% of shareholding transfer

Demerger - as per I.T. Act – S.2(19AA) Transfer pursuant to s.391 to 394 of Companies Act

One or more undertaking is transferred from existing co. (demerged co.) to a newly formed company or an existing co. (resulting co.)

Both the demerged co. and resulting co. retain their

existence after demerger.

Demerger - as per I.T. Act – S.2(19AA) What is Demerger All the property and liabilities of undertaking of demerged co. to

pass on to the resulting co. at book value. Shareholders holding more than 3/4th in value of shares of demerged

co. become shareholders of the resulting co. Transfer is on going concern basis

Demerger fulfils conditions specified u/s 72A(5) by CG. Resulting co issues shares to the shareholders of the demerged

company (Except where the resulting co itself is the shareholder of the demerged co )

Demerger vs. slump sale Demerger

Case study 4 Family Arrangement

AB co. has the following assets: Textile Shop Rs. 10 crore &

Electronic Shop Rs. 8 crore Textile shop managed by one brother and Electronic Shop

managed by another brother Advice

Demerger of Electronic Unit to another co. Cancellation of cross holdings

Demerger Case study 5 A Ltd. Engaged in real estate projects It wants to enter into joint venture for its hotel project

on one of its land. Joint Venturist wants Equity Participation Advice

Demerge “Hotel Division” from A into another company.

Carry Forward of Loss in

case of Demerger Section 72A(4) : The accumulated loss/unabsorbed

depreciation of demerged company Loss or unabsorbed depreciation directly relatable- loss

pertaining to such division Not directly relatable- to be apportioned on the basis of

proportion of assets

Slump Sale – S. 2(42C) Sec 2(42C) inserted w.e.f AY 00-01 defines “Slump Sale”

Transfer of one or more undertaking as a result of lump sum consideration without values being assigned to individual assets and

liabilities In slump sale there is no requirement to file petition u/s

394 in HC.

Taxability of Slump Sale Sec 50B has been inserted w.e.f AY 2000-01

Profit on sale of undertaking - LTCG or STCG No indexation benefit No benefit of carry forward or set off of loss Even depreciable asset may be treated as long term If not slump sale, then the provision are

On sale of stock – business income On sale of depreciable asset – STCG

On sale of land, investment etc. – LTCG if applicable.

Slump sale

Case study 6 Co. has readymade division whose assets are

Depreciable Assets Rs. 150 Stock in hand Rs. 200 Sale value of division Rs. 500

Advise : “Slump Sale”

Rs. 150 chargeable as LTCG at lower tax rate Higher WDV in the books of transferee co., entitling to

higher depreciation

Capital Gain Implication Section 47

To the amalgamating or demerged company No capital gains on assets transferred in terms of scheme

To the Investor No capital gains on receipt of shares of transferee co. in lieu of

shares of transferor co.

Cost to an Investor Amalgamation

Cost of Shares of amalgamating co.

Demerger Resulting co.- Proportionate basis

Demerged co.- Original Cost less cost mentioned above

Slump Sale Investor not affected

Amalgamation v/s

Demerger v/s Slump sale

Some other Income Tax

Provisions Section 35DD

Expenses on amalgamation or demerger allowed as deduction - 1/5th for five years

Actual cost in hands of amalgamated or resulting co. Cost or WDV as in the hands of transferor company.

Withdrawal of incentives Benefits u/s 10A, 10B etc generally allowable in the hands of transferee

company for the balance period

Unabsorbed MAT Credit Income tax Act silent

Can Income Tax Dept.

object to Scheme? Requirement to inform Income Tax Dept?

Sec 394A of Companies Act requires notice of petition to be given to CG only- power delegated to Regional Director Bangeswari Cotton Mills ltd. In e 37 CC 195 (Cal)- application

for calling of meeting to be ordered ex-parte

What about back

liabilities or Pending

Proceedings Income tax Act is silent on this issue Even Companies Act is silent However, Scheme of arrangement cannot be mean to

relieve party from its legal obligation. CIT v. T.V. Sundaram Iyengar & Sons Pvt. ltd[238 ITR 328

(Mad)] Arguments that no proceedings can be taken against a dissolved

co. would not apply in a Scheme of Arrangement

Transfer Date

Retrospective-Implicatio

ns Landmark Judgment- Marshall Sons & Company (India)

Ltd (230 ITR 809) ‘Transfer Date’ is the relevant date and not the date when

the court sanctions the Scheme Pending Sanction, a protective asst could be made in the

hands of the amalgamating co.

Excise Laws Information to the Dept.- Not required

Registration/ de-registration – required

Rule 9 of CER silent For closure – CE Notification 35/2001 dt 26.06.2001

Transfer of unutilized CENVAT credit Rule 10(1) and Rule10(2) of CENVAT credit Rules-Possible

Liabilities, stock and fixed assets should be taken over

Sales Tax Implications Sale of business as a going concern, including fixed

assets (immovable as well as moveable), Stock etc. – No Sales Tax

Sri Ram Sahai v/s CST [14 STC 275 (All)] Monsanto Chemicals of India (Pvt.) Ltd v/s State of TN [51

STC 278 (Mad)]

• Item wise sales of these assets – applicable Coromondel Lubricants v/s Commissioner of Commercial

Taxes [102 STC 274]

Suggested Changes Section 72A – More types of companies should be added MAT Credit – should be specifically allowed 3/4th value of assets and three years business – may require

amendment.

TThhaannkk YYoouu

K.K.Chhaparia