Amalgamation and Demergers

Amalgamation under section 2(1B) of Income-tax Act, 1961 is defined as follows:

Amalgamation means merger of either 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 property/liability of the amalgamating company/companies becomes the property/liability of amalgamated company.
• Shareholders holding minimum 75% of the value of shares in the amalgamating company (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company.

The demerger under Section 2(19AA) of Income-tax Act, 1961 is defined as follows:

Demerger means the transfer of one or more undertakings to any resulting company pursuant to a scheme of arrangement under Sections 391 to 394 of the Companies Act, 1956 (now Sections 230 to 232 of the Companies Act, 2013) in such a manner that:

• All the property/liability of the undertaking becomes the property/liability of the resulting company.
• All the property/liabilities are transferred at book value (excluding increase in value due to revaluation). However requirement of recording property and liabilities at book value by the resulting company shall not be applicable in a case where the property and liabilities of the undertakings received by it are recorded at a value different from the value appearing in the books of account of the demerged company immediately before the demerger in compliance to the Indian Accounting Standards as per Companies (Indian Accounting Standards) Rules, 2015.
• The resulting company issues shares to the shareholders of demerged company on a proportionate basis, except where resulting company is a shareholder of the demerged company.
• Shareholders holding minimum 75% of the value of shares become shareholders of the resulting company (other than shares already held therein immediately before the demerger by, or by a nominee for, the resulting company or its subsidiary).
• The transfer of an undertaking is on a going concern basis.
• The demerger is in accordance with the conditions notified under section 72A(5) of IT Act, 1961.

Undertaking: Includes any part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole, but excludes individual assets or liabilities or combination of both not constituting a business activity.

Demerged Company: Means the company whose undertaking is transferred to a resulting company pursuant to a demerger.

Resulting Company: Means one or more companies (including wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a demerger and the resulting company in consideration of such transfer of undertaking, issues shares to the shareholders of the demerged company and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger.

Provisions applicable to company

Capital Gains (Sections 47(vi) and 47(vid))

• Gains arising on transfer of a capital asset in a scheme of amalgamation/demerger to the amalgamated/resulting company being an Indian Company is exempt.

Carry forward of accumulated loss and/or unabsorbed depreciation (Section 72A)

• Accumulated loss and unabsorbed depreciation of an amalgamating company can be carried forward by the amalgamated company for set-off against its profits, in case of:
  1. Amalgamation of company owning an industrial undertaking or a ship or a hotel with another company; or
  2. Amalgamation of a public sector company or a company engaged in the business of operating aircraft with another public sector company or company engaged in similar business; or
  3. Amalgamation of a banking company with a specified bank
     1. Amalgamated company has to fulfil the following conditions to avail the benefit:
        1. It continuously holds 3/4th of the book value of the fixed assets acquired in a scheme of amalgamation for at least five years from the date of amalgamation
        2. It continues to carry on business of amalgamating company for at least five years from the date of amalgamation
        3. It achieves at least the level of 50% of the installed capacity before the end of 4 years from the date of amalgamation and maintains that level till the 5th year
     2. Amalgamating company has to fulfil the following conditions:
        1. It was engaged in the business in which the accumulated loss has occurred or the unabsorbed depreciation remains unabsorbed for three or more years.
        2. It has continuously held 3/4th of the book value of fixed assets held by it two years prior to amalgamation.
• Accumulated loss and unabsorbed depreciation of a demerged company can be carried forward by the resulting company for set-off against its profits (section 72A(4)):
  1. Where it is directly relatable to undertaking transferred, it should be such relatable amount.
  2. Where it is not directly relatable to the undertaking transferred, it should be apportioned in the ratio of assets retained by the demerged company and transferred to resulting company.

Carry forward of accumulated loss and/or unabsorbed depreciation of the banking company in a Scheme of amalgamation with banking institution (Section 72AA)

• In a Scheme of amalgamation of a banking company with a banking institution sanctioned and brought into force by the Central Government u/s. 45(7) of the Banking Regulation Act, 1949, the accumulated loss and unabsorbed depreciation of the banking company can be carried forward by the the banking institution for set-off against its profits.

Reorganisation in case of firm/proprietorship to company and private company/unlisted public company to LLP (section 72A(6))

• In cases where a firm/proprietary concern is succeeded by a company fulfilling all conditions laid down u/ss. 47(xiii)/47(xiv), accumulated losses and unabsorbed depreciation of the firm/proprietary concern can be carried forward by the company for set off against its profits.
• In case conditions specified in sections 47(xiii)/(xiv) are not complied with, any set off of business loss or allowance for depreciation claimed by the successor company will be deemed to be the income of the successor company in the year in which such conditions are not complied with.
• Similar provisions are also applicable to private company or unlisted public company succeeded by a limited liability partnership fulfilling conditions laid down 
  u/s. 47(xiiib).

Allowability of expenditure relating to amalgamation/demerger (section 35DD)

• An Indian company will be allowed a deduction of 1/5th of the expenditure incurred for the purposes of amalgamation or demerger for five years from the year in which amalgamation/demerger takes place.

Depreciation in the year of amalgamation/demerger (fifth proviso to section 32(1))

• Depreciation to amalgamated company and amalgamating company in the year of amalgamation and depreciation to demerged company and the resulting company in the year of demerger shall be apportioned in the ratio of the number of days for which the assets were used.

Written Down Value (‘WDV’) (Sections 32 and 43(6)(c))

• WDV in the hands of amalgamated company shall be the WDV of the block of assets in the hands of the amalgamating company immediately before amalgamation.
• WDV in the hands of the resulting company shall be the WDV of transferred assets of the demerged company immediately before demerger.
• WDV in the hands of the demerged company shall be the WDV of the block of assets before demerger less WDV of assets transferred to the resulting company.

Provisions applicable to Shareholders

• Capital Gains arising on transfer of shares of amalgamating company in exchange of shares of amalgamated company, being an Indian Company is exempt (section 47(vii)).
• Acquisition of shares of the resulting company by the shareholders of demerged company pursuant to demerger will not be taxed either as capital gains or deemed dividend. (sections 47(vid) and 2(22)(v)).
• Period of holding of shares of the amalgamated/resulting company will include the period for which the shares in the amalgamating/demerged company were held by the shareholder. (sections 2(42A)(c) and 2(42A)(g)).
• Cost of acquisition of shares of:
  • The amalgamated company will be the cost incurred for acquiring shares of amalgamating company. (section 49(1))
  • The resulting company in case of demerger will be the (section 49(2C)):

    Original cost of shares of demerged company X net book value of assets transferred to resulting company/net worth of the demerged company before demerger

    Net worth = Paid-up Share Capital + General Reserve as per books of demerged company immediately before demerger

  • The demerged company will be the original cost of shares of demerged company as reduced by the cost of shares of the resulting company as computed above (section 49 (2D)).