Tax Planning with respect to Amalgamation

Introduction: In India, Income-Tax Act, 1961 is the primary legislation dealing with taxability of income arising in the hands of individual or business entity. Corporate restructuring practices like Amalgamation and Mergers are important tools of economic development and they also helps to gain market share and improve operational efficiency of an enterprise. In this regard, the income tax legislation in India is quite development oriented for domestic companies going in for mergers or amalgamations. In simple terms, tax incentives have been granted to the business houses under Income Tax act, 1961 for certain specified restructuring practices which are as follows:

• Amalgamation of Companies
• Demergers
• Slump sale
• Corporatization of an existing Non-Corporate Business
• Succession of a Private Company or An Unlisted Company by a Limited Liability Partnership (LLP)

: TAX PLANNING WITH RESPECT TO AMALGAMATION OF COMPANIES

Amalgamation: When two or more companies merge into one and a new company is formed, such process is called Amalgamation. In amalgamation, one company loses its identity into another company.

As per section 2 (IB) of Income-Tax act, 1961 Amalgamation means merger of one or more companies with another company or merger of two or more companies to form one company in such a manner that:

• All the properties / liabilities of the Amalgamating Company, becomes the property / liability of Amalgamated Company. 
• Shareholders holding at least 75% of the value of shares in the Amalgamating Company, becomes the shareholders of the Amalgamated Company.

Tax reliefs and benefits in case of amalgamation:-

If an amalgamation takes place within the meaning of section 2(IB) of Income-Tax act 1961, the following tax reliefs and benefits shall be available:

I. Tax benefits to Amalgamating Company

II. Tax benefits to the Shareholders of Amalgamating Company

III. Tax benefits to Amalgamated Company

I. TAX BENEFITS TO AMALGAMATING COMPANY:-

1. Exemption from Tax on Capital Gains [Section 47(vi)]:- This section states that the capital gain arising from the transfer of assets by the amalgamating company to the Indian amalgamated company is exempt from tax because such transfer will not be regarded as transfer, for the purpose of capital gain. It will benefit the amalgamating company because No Transfer = No Capital Gain Tax Liability.

2. Exemption from Capital Gains Tax in case of International Restructuring [Section 47(via)]:- In case of Amalgamation of Foreign Companies, transfer of shares held in Indian company by Amalgamating foreign company to an Amalgamated foreign company is exempt from tax if the following two conditions are satisfied:-

• At least 25% of the Shareholders of Amalgamating foreign company continue to remain Shareholders of the Amalgamated foreign company.
• Such transfer does not attract tax on capital gains in the country in which Amalgamating foreign company is incorporated.

II. TAX BENEFITS TO THE SHAREHOLDERS OF AMALGAMATING COMPANY:-

The shareholders of Amalgamating Company are to get payment either in the form of cash or shares of Amalgamated Company. As such, the transfer of shares of Amalgamating Company to Amalgamated Company may lead to any profit / loss to the Shareholders. Such profit is to be taxed under the head capital gains in the hands of shareholders. However, the Income-Tax act, 1961 provide following tax benefits to such Shareholders:-

1. Exemption from Tax on Capital Gains [Section 47(vii)]:- Any capital gain arising from the transfer of shares by shareholder of the Amalgamating Company in a scheme of Amalgamation, are exempted from tax, as such transactions will not be regarded as transfer for the purpose of capital gains if the following conditions are fulfilled:-

• The transfer is made as consideration to the shareholders by alloting shares in the Amalgamated Company.
• Amalgamated Company is an Indian Company.

2. The cost of shares allotted in Amalgamated Company shall remain same as was for the shares held in Amalgamating Company.

III. TAX BENEFITS TO AMALGAMATED COMPANY:-

1. Capital Expenditure on Scientific Research:- Under section 35(5) of Income-Tax act 1961, where the amalgamating company transfers any asset representing 'Expenditure of a Capital Nature on Scientific Research' to the Indian amalgamated company in a scheme of amalgamation then,

• The unabsorbed capital expenditure on scientific research can be carried forward by the amalgamated company.
• The gain / loss on transfer of such asset by amalgamated company later on, shall be treated under section 41(3) in the hands of amalgamated company.

2. Expenditure on Telecommunication License [ Section 35AAB]:- Where the amalgamating company transfers the telecommunication licence to the Indian amalgamated company in a scheme of amalgamation, then the amalgamated company can claim full deduction in respect of the unamortized amount of capital expenditure for obtaining licence to operate telecommunication services.

3. Amortization of Preliminary Expenses [Section 35D(5)]:- Where an undertaking which is entitled to deduction u/s 35D, is transferred in a scheme of amalgamation by the amalgamating company to Indian amalgamated company, the Amalgamated Indian Company can claim such deduction for the remaining number of years.

4. Amortization of Amalgamation Expenses [Section 35DD]:- Under this section of Income-Tax act 1961, where any Amalgamated Indian company have incurred expenditure for the purpose of carrying out Amalgamation, can claim a deduction of amalgamation expenses in 5 equal installments from the year beginning with the previous year in which such Amalgamation takes place.

5. Expenditure on Prospecting Minerals [Section 35E]:- Where the undertaking of an Indian company is entitled for a deduction in respect of expenses incurred on prospecting for, or extraction of minerals etc., is transferred to another Indian company in a scheme of Amalgamation, then in such a case, the Amalgamated Indian company shall be allowed to claim deduction of non written-off Expenditure for the remaining number of years.

6. Capital Expenditure on Promotion of Family Planning [Section 36(1)(ix)]:- Where an undertaking is entitled to deduction u/s 36(1)(ix), is transferred in scheme of amalgamation by the amalgamating company to the amalgamated company, the deduction on account of 'Capital Expenditure incurred for Promoting Family Planning' among its employees, shall continue to be available to the Indian Amalgamated Company for remaining number of years.

7. Deduction with respect to Bad-debts:- Where a part of the debts taken over by the Amalgamated Company from the amalgamating company becomes bad (Insolvent) subsequently, such bad-debts are allowed as deduction while computing the taxable income of the Amalgamated Company.

8. Carry forward and Set-off of accumulated losses and unabsorbed depreciation of the amalgamated company:- Section 72A of the Income-Tax act, 1961 deals with the merger of the sick companies with the healthy companies, and allows carry forward of accumulated losses and unabsorbed depreciation of the amalgamating company by Amalgamated Indian Company, only if following conditions are fulfilled:-

There should be an amalgamation of

• A company running- an industrial undertaking or a ship or a hotel with another company.
• A Banking company with a Specified Bank.
• One or more Public Sector Companies engaged in the business of operation of aircrafts with one or more Public Sector Companies engaged in similar business.

9. Amalgamation and Deduction u/s 80IAB, 80IB, 80IC and 80IE:- Where an undertaking which is entitled to claim deductions u/s 80IAB, 80IB, 80IC and 80IE of the Income-Tax act 1961, is transferred by an Amalgamating Company to another Indian Amalgamated Company in a scheme of Amalgamation, then in such a case the deduction shall be available to the Amalgamated Indian Company for the unexpired period as if no such Amalgamation has taken place.

No deduction shall be available to the Amalgamating Company for the Previous Year in which the Amalgamation takes place.

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