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Corporate Restructuring Through Amalgamation

6.1. Meaning of "Amalgamation"           

6.2. What  If  Conditions Of Section-2(1B) Is Complied With

6.2.1. Tax Incentives — For Amalgamating Company

6.2.2.  Tax Incentives — For Amalgamated Company

6.2.3.  Tax Incentives — For Shareholders Of Amalgamai’ing Company

6.2.4.  Provisions Relating To Carry Forward And Set Off Of Accumulated Loss And Unabsorbed Depreciation Allowance In Amalgamation, Demerger Or Succession Etc. [Section-72A. ]

 

Accumulated Loss — Meaning

Unabsorbed Depreciation — Meaning

 

6.2.5.  Provisions Relating To Carry Forward And Set Off Of Accumulated Loss And Unabsorbed Depreciation Allowance In Case Of Amalgamation

 

6.2.6.  Provisions Relating To Carry Forward And Set-Off Of Accumulated Loss And Unabsorbed Depreciation Allowance In Scheme Of Amalgamation Of Banking Company In Certain Cases [Section 72AA.]


6.1.   MEANING OF ‘AMALGAMATION’


(A)     INTRODUCTION  

 

“Amalgamation”, in relation to companies, means the


1.         Merger of one or more companies with another company; or


2.         The merger of two or more companies to form one company.


What is amalgamating company: The company or companies which so merge being referred to as the amalgamating company i.e. the company which is going out of existence is an Amalgamating company. (an old company)


What is amalgamated company: Companies and the company with which they merge or which is formed as a result of the merger, is the amalgamated company. (a new company)


E.g.
1: X Ltd. + Y Ltd. = Y Ltd. in this case X Ltd. is Amalgamating company and Y Ltd. is the Amalgamated company.


Eg.
2: P Ltd. + Q Ltd. = R Ltd. in this case P Ltd. and Q Ltd. is Amalgamating company and R Ltd. is the Amalgamated company.


Merger is a process through amalgamation takes place

 

(B)     SECTION 2(1B) :  

As per section 2(IB) the amalgamation should take place in such a manner that:

(i)         All the property of the amalgamating company(s) immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation.

(ii)        All the liabilities of the amalgamating company(s) immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation;

(iii)       Shareholders (Equity + Preference Shares) holding not less than 75% in value of the shares in the amalgamating company(s) (other than shares already held therein immediately before the amalgamation, or by a nominee for the amalgamated company or its subsidiwy) become shareholders of the amalgamated company by virtue of the amalgamation.

E.g. 1: A Ltd. + B Ltd. = B Ltd. B Ltd. along with subsidiary holds 20% of shares in A Ltd. immediately before the amalgamation. Remaining 80% shares in A Ltd. are held by 10 shareholders. As per section 2(1 B)(iü) atleast 75% of 80% = 60% of shares held by such 10 shareholders should become shareholder of B Ltd. Remaining 20% shares can be held by new shareholders.


E.g. 2: A Ltd.
+ B Ltd. = B Ltd. B Ltd. along with subsidiary holds 30% of shares in A Ltd. immediately before the amalgamation. How many shares B Ltd. has to acquire of A Ltd. to constitute amalgamation u/s 2(1 B). B Ltd. should acquire at least 75% of 70% = 52.5% shares of A Ltd.


(C) WHEN AN AMALGAMA1ION IS NOT TREATED AS AMALGAMATION U/S  2(1B)


1. Where amalgamation is as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company; or


2.         Where amalgamation is as a result of the distribution of such
property to the other company after the winding up of the first mentioned company.

 

6.2.   WHAT  IF  CONDIT1ONS OF SECTION - 2(1B)  IS COMPLIED WITH


If the conditions mentioned u/s 2(1B) is satisfied then tax incentives arc available to following assessee:


I.        Amalgamating Company.

2.      Amalgamated Company.

3.      Shareholders of amalgamating company.

 

6.2.1. TAX INCENTIVES — FOR AMALGAMATING COMPANY

Section 35ABB: There is no tax liability on transfer of a license to operate telecommunication services by amalgamating company to amalgamated company.


Section 42: There is no lax liability on transfer of a business of prospecting for or extraction or production of petroleum and natural gas by the amalgamating company if the amalgamated company is an Indian company.


Section 47(vi): There shall be no capital gain arising to amalgamating company consequent to transfer of capital asset to Indian amalgamated company.


Section 47(via): Any transfer, in a scheme of amalgamation, of a capital asset being a share(s) held in an Indian company, by the amalgamating foreign company to the amalgamated foreign company, if


1. At least 25% of shareholders of amalgamating company foreign company Continue to remain shareholders of
the amalgamated foreign company.


2. Such
transfer does not attract tax on capital gain in the country in which the amalgamating company is incorporated.


In such
case capital gain as not chargeable to tax.

6.2.2. TAX INCENTIVES — FOR AMALGAMATED COMPANY

Section 35(5): Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers to the amalgamated company (being an Indian company) any asset representing expenditure of a capital nature on scientific research, the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not so sold or otherwise transferred the asset.

Section 35ABB: The amalgamated Indian company can claim full deduction in respect of remaining installments of expenditure to obtain license to operate telecommunication services.

Section 35D(5): The amalgamated Indian company can claim remaining installments of preliminary expenses.

Section 35DD: The amalgamated Indian company can claim amalgamation expenses in 5 equal installments from the year beginning with the previous year in which amalgamation take place.

Section 35DDA(2): The amalgamated Indian company can claim remaining deduction on account of expenses incurred in respect of voluntary retirement scheme which is incurred by amalgamating company.

Section 35E(7): The amalgamated Indian company can claim remaining deduction on account of expenses incurred in respect of prospecting for, or extraction or production of certain minerals and also unabsorbed amount of such a instalments.

Section 36(I)(ix): The amalgamated Indian company can claim remaining deduction on account of expenses incurred in respect of capital expenditure incurred for the purpose of promoting family planning among its employees.

Section 42: The amalgamated Indian company can claim remaining deduction on account of expenses incurred in respect of prospecting for, or extraction or production of petroleum and natural gas.

Bad debts: Where a part of debts taken over by the amalgamated company from the amalgamating company becomes bad subsequenLly, such bad debt is allowed as a deduction in computing the income of the amalgamated company.

Section 43(1) Explanation 7: Actual cost of the asset to the amalgamated company shall be the same as would have been to the amalgamating company, if it continued to hold it.

Section 43(6) Explanation 2B: Actual cost of the asset to the amalgamated company = WDV of the Block of assets to the amalgamating company immediately preceding PY less depreciation actually allowed for such preceding PY.

Deduction u/s 80IA. 80IB & 80IC is allowed from gross total income to amalgamated company if certain conditions are complied with.

Exemption u/s 10A & 10B shall be allowed to the amalgamated company for the expired period.

Section 115VY: Where there is an amalgamation of a qualifying company with another company, the provisions relating to the tonnage tax scheme shall apply to the amalgamated company if it is a qualifying company.

Where the amalgamated company is not a qualifying company, it can exercise an option within 3 months from the date of the approval of the scheme of amalgamation.

6.2.3. TAX INCENTIVES — FOR SHAREHOLDERS OF AMALGAMAI’ING COMPANY

Section 2(42A)(C): The period of holding of shares shall be from the period the shares were held in amalgamating company.

Section 47(vii). There shall be no capital gain arising to the shareholders of amalgamating company, where shareholders transfer shares of amalgamating company in lieu of allotment of shares in Indian amalgamated company.

6.2.4. [ SECTION-72A. ] : PROVISIONS RELATING TO CARRY FORWARD AND SET OFF OF ACCUMULATED LOSS AND UNABSORBED DEPRECIATION ALLOWANCE IN AMALGAMATION, DEMERGER OR SUCCESSION ETC.


Section- 72 specifies that loss shall be carried forward only by the person who has incurred the loss. But Section 72A specifies an exception to this. Where certain conditions are satisfied accumulated losses and unabsorbed depreciation can be carried forward by amalgamated company also.


Study of sec. 72A can be divided in three parts:


Sec. 72A( I ) to 72A(3)
Carry forward and set off of accumulated loss and unabsorbed depreciation in case of amalgamation.


Sec. 72A(4) & (5) Carry forward and set off of accumulated loss and unabsorbed depreciation in case of demerger.


Sec 72A(6)
Carry forward and set off of accumulated loss and unabsorbed depreciation in case of succession.

ACCUMULATED LOSS MEANING

Accumulated loss means so much of the loss of the predecessor firm or the proprietary concern or the amalgamating company or the demerged company, as the case may be, under the head “Profits and gains of business or profession” (not being a loss sustained In a speculation business) which such predecessor firm or the proprietary concern or amalgamating company or demerged company, would have been entitled to carry forward and set off under the provisions of section 72 if the reorganization of business or amalgamation or demerger had not taken place.

 

UNABSORBED DEPRECIATION — MEANING

Unabsorbed depreciation means so much of the allowance for depreciation of the predecessor firm or the proprietary concern or the amalgamating company or the demerged company, as the case may be, which remains to be allowed and which would have been allowed to the predecessor firm or the proprietary concern or amalgamating company or demerged company,’ as the case may be, under the provisions of this Act. if the reorganization of business or amalgamation or demerger had not taken place.

6.2.5. [ Section 72A(1) ] : PROVISIONS RELATING TO CARRY FORWARD AND SET OFF OF ACCUMULATED LOSS AND UNABSORBED DEPRECIATION ALLOWANCE IN CASE OF AMALGAMATION

Section 72A( 1): Where there has been an amalgamation of a company owning:

A.      an industrial undertaking

(i) the manufacture or processing of goods; or

(ii) the manufacture of computer software; or

(iii) the business of generation or distribution of electricity or any other form of power;

or

(iiia) the business of providing telecommunication services, whether basic or cellular. including radio paging, domestic satellite service, network of trunking, broadband network and internet services; or

(iv) mining; or

(v) the construction of ships. aircrafts or rail systems;

B.      A Ship or

C.      A Hotel

D.      an amalgamation of a banking company referred to in section 5(c) of the Banking Regulation Act, 1949 with a Specified Bank.

Specified bank means the State Bank of India constituted under the State Bank of  India Act, 1955 or a subsidiary bank as defined in the SLate Bank of India (Subsidiary Banks)  Act, 1959 or a corresponding new bank constituted under section 3 of the Banking  Companies (Acquisition and Transfer of Undertakings) Act, 1970 or under section 3 of  the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980. with another company, then,

Notwithstanding anything contained in any other provision of this Act,

1.         the accumulated business loss of the amalgamating company. Accumulated loss means such loss that would have been entitled to carry forward and set off under the provisions of section 72 if the amalgamation had not taken place; and

2.         the unabsorbed depreciation of the amalgamating company. Unabsorbcd depreciation means so much of the allowance for depreciation of the amalgamating company which remains to be allowed and which would have bcen allowed to amalgamating company under the provisions of this Act, if the amalgamation had not taken place. Shall be deemed to be the loss (including unabsorbed depreciation), of the amalgamated company for the PY in which the amalgamation was effected. (i.e. the period of8 years shall be taken from the dare of amalgamation) and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.

 

6.2.6. [ SECTION 72AA.] : PROVISIONS RELATING TO CARRY FORWARD AND SET-OFF OF ACCUMULATED LOSS AND UNABSORBED DEPRECIATION ALLOWANCE IN SCHEME OF AMALGAMATION OF BANKING COMPANY IN CERTAIN CASES


1.         Notwithstanding anything contained in section 2(IB) or section 72A, [ It means conditions of section 2(1 B) or 72A may or may not be satisfied]

 

2          where there has been an amalgamation of a banking company with any other banking institution


3.         under a scheme sanctioned and brought into force by the Central Government under section 45(7) of the Banking Regulation Act, 1949,


4.         the accumulated loss and the unabsorbed depreciation of such banking company shall be deemed to be the loss or, as the case may be,


5.         allowance for depreciation of such banking institution for the previous year in which the scheme of amalgamation was brought into force and other provisions of this Act relating to set-off and carry forward of Loss and allowance for depreciation shall apply accordingly.

 

 
 
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