In growing competition, sometimes companies find it difficult to sustain. Some get dissolved and some find other companies to support them. Mergers and Amalgamation has becoming very common today. For to survival and sustainment in competitive world, companies get merged or get amalgamated to become stronger.
Merger is a fusion between two or more enterprises, whereby the identity of one or more is lost and the result is a single enterprise whereas Amalgamation signifies blending of two or more existing undertakings into one undertaking, the blended companies losing their identities and forming themselves into a separate legal identity.
Government of India support the companies who wants to sustain and grow in competitive market even if it’s by way mergers and amalgamation. They made tax relief provisions for companies opting for amalgamation scheme.
As per Section 2(1B) of Income Tax Act, 1961, amalgamation is defined 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:-
- 1. 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.
- 2. 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
- 3. 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 to Amalgamating Company
- 1. Asset of the amalgamating company gets transferred to the amalgamated company. Normally transfer of capital assets give rise to capital gains. However, capital gain arising from such transfer is exempted under section 47(vi) of the Income Tax Act, 1961, if amalgamated company is an Indian Company and such transfer is not done for the purpose of capital gain.
- 2. In case of international restructuring, when amalgamation is between foreign companies, share of Indian company held by amalgamating company and same getting transferred to foreign amalgamated company, such transfer is exempted from tax under section 47(via) of the Income Tax Act, 1961, if following two conditions are satisfied: –
- 2.1. At least twenty-five per cent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and
- 2.2. Such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated.
Tax Relief to Shareholders of Amalgamating Company
- 1. Amalgamation of companies have impact on shareholders also. Shareholders are required to transfer share they are holding in amalgamating company. However, this transfer in the hands of shareholder shall be exempted under section 47(vii) of the Income Tax Act, 1961, if following conditions are satisfied: –
- 1.1. Transfer is made in consideration of allotment of shares of amalgamated company, and
- 1.2. Amalgamated company is an Indian Company.
Tax Relief to Amalgamated Company
- 1. Amount equal to one-fifth of the amalgamation expenditure shall be allowed for each successive five years to amalgamated company as deduction under section 35DD of the Income Tax Act, 1961.
- 2. After amalgamation, amalgamated company is allowed to write-off the preliminary expenses of amalgamating company which were not written off by them. The same shall be allowed as deduction under section 35D(5) of the Income Tax Act, 1961, to the amalgamated company in the same manner as would have been allowed to the amalgamating company.
- 3. Under section 36(1)(vii) of the Income Tax Act, 1961, amalgamated company shall be allowed deduction related to the debtors of amalgamating company who turns out to be bad after amalgamation.
- 4. As per section 72A of the Income Tax Act, 1961, when a sick company merges with a healthy company, amalgamated company can take advantage of carry forward of accumulated losses and unabsorbed depreciation of amalgamating company. However, the benefit of this section can only be availed if satisfied following conditions: –
- 4.1. There should be an amalgamation of –
- 4.1.1. a company owning an industrial undertaking or ship or a hotel with another company, or
- [The term ‘Industrial Undertaking’ shall mean any undertaking engaged in:
- (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
- (iv) mining, or
- (v) the construction of ships, aircrafts or rail systems, or
- (vi) the business of providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services.]
- 4.1.2. a banking company referred in section 5(c) of the Banking Regulation Act, 1949 with a specified bank, or [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 State Bank of India (Subsidiary Bank) Act, 1959 or a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970 or under section 3 of the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1980.]
- 4.1.3. 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.
- 4.2. The amalgamated company should be an Indian Company.
- 4.3. The amalgamating company having carry forward accumulated losses or unabsorbed depreciation should be engaged in the business for 3years or more.
- 4.4. The amalgamating company should hold 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.
- 4.5. The amalgamated company shall hold at least three-fourths fixed assets in the book value of the amalgamating company acquired in a scheme of amalgamation for continuously a minimum period of five years from the date of amalgamation.
- 4.6. The amalgamated company shall continue the business of the amalgamating company for a minimum period of five years from the date of amalgamation.
- 4.7. 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.
- 5. Amalgamating company into scientific research if transfers any asset represented by capital expenditure on the scientific research to the amalgamated Indian company in the scheme of amalgamation, provisions of section 35 shall be applicable: –
- 5.1. 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,
- 5.2. 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.
- 6. If the amalgamating company sells or transfer its license to operate telecommunication services to the amalgamated Indian company, the provisions of Section 35ABB of the Income Tax Act, 1961regarding expenditure to obtain the license which was applicable to the amalgamating company shall in the same manner become applicable to the amalgamated company. The expenditure on acquisition on license, if not yet written off by amalgamating company, shall be allowed to the amalgamated company in the same number of balance installments. However, if such license 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.
- 7. 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 under section 36(1)(ix) of the Income Tax Act, 1961.
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