Tax Planning Relating to Merges and Demergers to Companies

Section 2(1B) of Income Tax Act defines ‘amalgamation’ as merger of one or more companies with another company or merger of two or more companies to from one company in such a manner that

(I) All the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation.

(II) All the liabilities of the amalgamating company or companies immediately before the amalgamation becomes the liabilities of the amalgamated company by virtue of the amalgamation.

(III) Shareholders holding at least three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamated company or its nominee) becomes the shareholders of the amalgamated company by virtue of the amalgamation.

Tax Relief’s and Benefits in case of Amalgamation

If an amalgamation takes place within the meaning of section 2(1B) of the Income Tax Act, 1961, the following tax reliefs and benefits shall available:-

1. Tax Relief to the Amalgamating Company:

Exemption from Capital Gains Tax [Sec. 47(vi)]: Under section 47(vi) of the Income-tax Act, capital gain arising from the transfer of assets by the amalgamating companies to the Indian Amalgamated Company is exempt from tax as such transfer will not be regarded as a transfer for the purpose of Capital Gain.

Exemption from Capital Gains Tax in case of International Restructuring [Sec. 47(via)]: Under Section 47(via)} in case of amalgamation of foreign companies, transfer of shares held in Indian company by amalgamating foreign company to amalgamated foreign company is exempt from tax, if the following two conditions are satisfied:

At least twenty-five per cent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and

Such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated

2. Tax Relief to the shareholders of an Amalgamating Company:

Exemption from Capital Gains Tax [Sec 47(vii)]: Under section 47(vii) of the Income-tax Act, capital gains arising from the transfer of shares by a shareholder of the amalgamating companies are exempt from tax as such transactions will not be regarded as a transfer for capital gain purpose, if:

The transfer is made in consideration of the allotment to him of shares in the amalgamated company; and

Amalgamated company is an Indian company.

3. Tax Relief to the Amalgamated Company:

o Carry Forward and Set Off of Accumulated loss and unabsorbed depreciation of the amalgamating company [Sec. 72A]: Section 72A of the Income Tax Act, 1961 deals with the mergers of the sick companies with healthy companies and to take advantage of the carry forward of accumulated losses and unabsorbed depreciation of the amalgamating company. But the benefits under this section with respect to unabsorbed depreciation and carry forward losses are available only if the followings conditions are fulfilled:-

There should be an amalgamation of –

(a) a company owning an industrial undertaking (Note 1) or ship or a hotel with another company, or

(b) a banking company referred in section 5(c) of the Banking Regulation Act, 1949 with a specified bank (Note 2), or

(c) one or more public sector company or companies engaged in the business of operation of aircraft with one or more public sector company or companies engaged in similar business. 

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