Module-2

NJSMTI_ABHANI DHARA K.
The ITAcontemplates and recognizes the following types
of mergers and acquisitions activities:
 Amalgamation (i.e. a merger which satisfies the
conditions mentioned below )

 Demerger or spin-off;

 Slump sale/asset sale; and

 Transfer of shares.

NJSMTI_ABHANI DHARA K.
 The ITA defines an ‘amalgamation’ as the merger of
one or more companies with another company, or
the merger of two or more companies to form one
company. The ITA also requires that the following
conditions must be met by virtue of the merger, for
such merger to qualify as an ‘amalgamation’ under
the ITA:

NJSMTI_ABHANI DHARA K.
 all the property of the amalgamating company(ies)
becomes the property of the amalgamated company;
 all the liabilities of the amalgamating company(ies)
become the liabilities of the amalgamated company;
and
shareholders holding not less than 75% of the value of the
shares of the amalgamating company become
shareholders of the amalgamated company.
 (Example: Say, X Ltd merges with Y Ltd in a scheme of
amalgamation and immediately before the
amalgamation, Y Ltd held 20% of shares in X Ltd, the
above mentioned condition will be satisfied if
shareholders holding not less than 75% in the value of
remaining 80% of shares in X Ltd i.e. 60% thereof,
become shareholders in Y Ltd by virtue of
amalgamation)
NJSMTI_ABHANI DHARA K.
 The motive of giving this definition is that the
benefits/concession under Income Tax Act,
1961 shall be available to both amalgamating
company and amalgamated company only
when all the conditions, mentioned in the
said section, are satisfied. ‘Amalgamating
company’ means company which is merging
and ‘amalgamated company’ means the com-
pany with which it merges or the company
which is formed after merger. However,
acquisition of property of one company by
another is not ‘amalgamation’.

NJSMTI_ABHANI DHARA K.
 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. Let us take an example of X
Ltd and Y Ltd. Here following situations may
emerge:-
 (a) X Ltd Merges with Y Ltd. Thus X Ltd goes out
of existence. Here X Ltd is Amalgamating
Company and Y Ltd is Amalgamated Company.
 (b) X Ltd and Y Ltd both merges and form a new
company say, Z Ltd. Thus both X Ltd and Y Ltd
goes out of existence and form a new company Z
Ltd. Here X Ltd and Y Ltd are Amalgamated
Company and Z Ltd is Amalgamated Company

NJSMTI_ABHANI DHARA K.
NJSMTI_ABHANI DHARA K.
 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:-

NJSMTI_ABHANI DHARA K.
 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:

NJSMTI_ABHANI DHARA K.
 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

NJSMTI_ABHANI DHARA K.
 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.

NJSMTI_ABHANI DHARA K.
 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.

NJSMTI_ABHANI DHARA K.
 The amalgamated company should be an
Indian Company.
 The amalgamating company should be
engaged in the business, in which the
accumulated loss occurred or depreciation
remains unabsorbed, for 3 years or more.
 The amalgamating company should held
continuously as on the date of amalgamation
at least three-fourth of the book value of the
fixed assets held by it two years prior to the
date of amalgamation.

NJSMTI_ABHANI DHARA K.
 The amalgamated company holds continuously for a
minimum period of five years from the date of
amalgamation at least three-fourths in the book
value of fixed assets of the amalgamating company
acquired in a scheme of amalgamation
 The amalgamated company continues the business
of the amalgamating company for a minimum period
of five years from the date of amalgamation.
 The amalgamated company fulfils such other
conditions as may be prescribed to ensure the revival
of the business of the amalgamating company or to
ensure that the amalgamation is for genuine business
purpose.

NJSMTI_ABHANI DHARA K.
 When an amalgamating company transfers any asset
represented by capital expenditure on the scientific
research to the amalgamated Indian company in a
scheme of amalgamation provisions of section 35
shall be applicable-
 Unabsorbed expenditure on scientific research of the
amalgamating company will be allowed to be carried
forward and set off in the hands of the amalgamated
company,
 If such asset ceases to be used in the previous year
for scientific research related to the business of
amalgamated company and is sold by the
amalgamated company the sale price to the extend of
cost of asset shall be treated as business income and
the excess of sale price over the cost shall be subject
to the provisions of capital gain.

NJSMTI_ABHANI DHARA K.
 Under Sec 35DD for expenditure incurred in
connection with the amalgamation the
assessee shall be allowed 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 takes place.

NJSMTI_ABHANI DHARA K.
 When and amalgamating company merges
with an amalgamated company under a
scheme of amalgamation, the amount of
preliminary expenses of the amalgamating
company to the extend not yet written off
shall be allowed as deduction to the
amalgamated company in the same manner
as would have been allowed to the
amalgamating company.

NJSMTI_ABHANI DHARA K.
 Where in a scheme of amalgamation, the amalgamating
company sells or otherwise transfer its licence to the
amalgamated company (Being an Indian Company), the
provisions of Section 35ABB which were applicable to the
amalgamating company shall become applicable in the
same manner to the amalgamated company, consequently:
 o The expenditure on acquisition on license, not yet
written off, shall be allowed to the amalgamated company
in the same number of balance installments.
 o Where such licence is sold by the amalgamated
company, the treatment of the deficiency/surplus will be
same as would have been in the case of amalgamating
company.

NJSMTI_ABHANI DHARA K.
 If Asset representing capital expenditure on
family planning is transferred by the
amalgamating company to the amalgamated
company under a scheme of amalgamation,
such expenditure shall be allowed as
deduction to the amalgamated company in
the same manner as would have been allowed
to the amalgamating company.

NJSMTI_ABHANI DHARA K.
 When due to amalgamation debts of the
amalgamating company has been taken over
by amalgamated company, and subsequently,
such debts turn out to be bad, it shall be
allowed as deduction to the amalgamated
company.

NJSMTI_ABHANI DHARA K.