Question

Tax planning for mergers and acquisitions in india

Answer 1

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:-   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. 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 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. (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)   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 com­pany with which it merges or the company which is formed after merger. However, acquisi­tion of property of one company by another is not ‘amalgamation’.   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.     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:   o    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. o    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: o   At least twenty-five per cent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and o   Such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated