Restructuring

• Amalgamation
• Demerger
• Conversion of Sole Proprietorship into Company
• Conversion of Firm into Company
• Slump Sale
• Transfer of Assets between Holding and Subsidiary
Company
• Amalgamation or Demerger of Cooperative Banks
 Amalgamation
• Meaning: Either merger of one or more companies with
another company or the merger of two companies to form one
company.
• Covers Following cases
– Merger of A with X and A ceases to exist
– Merger of A and B with X and A and B cease to exist
– Merger of A and B to form newly incorporated X and A and B cease to
exist
– Merger of A, B and C to form newly incorporated X and A,B and C
cease to exist
• In such cases A,B and C are amalgamating companies while X is
amalgamated company
 Conditions
• For a Merger to be considered an amalgamation it should
satisfy the following conditions
– All properties of amalgamating company immediately before
amalgamation should become property of amalgamated company bz
virtue of the amalgamation
– All liabilities of amalgamating company immediately before
amalgamation should become liabilities of amalgamated company by
virtue of the amalgamation
– Shareholders holding not less than three forth (in value) of shares in
amalgamating company (other than shares already held by
amalgamated company or by its nomineee) should become
shareholders of the amalgamted companz bz virtue of the
amalgamation.
 Not Amalgamations Section 2(1B)
• Where property of company which merges is
sold to other company and merger is result of
sale
• Where merging company is wound up in
liquidation and liquidator distributes its
property to other company
• Actual cost and written down value when assets are transfered
in scheme of amalgamation
• When a Capital asset (other than a block of assets) is Transferred
– When transfered to an Indian company Actual cost is taken to be same
as if amalgamating company had continued to hold asset for business
purpose
• When a Block of assets is transferred
– Actual cost shall be written down value of block of assets as in case of
amalgamating company for immediately preceding year as reduced by
amount of depreciation actually allowed in relation to said previous
year
– Applicapable only if amalgamated company is an Indian company
Transfer of Capital Assets in Amalgamation
• When not treated as “transfer”
• In Transfer of capital assets to amalgamated Indian company
– The scheme of amalgamation satisfies the conditions of Section 2(1B)
– The amalgamated company is an Indian company
• Transfer of shares in an Indian company held by a foreign company to
another foreign company in scheme of amalgamation
– shares in Indian company are held by foreign company
– Business of above foreign company taken over by another foreign
company in scheme of amalgamation
– At least 25% of shareholders of amalgamating foreign company
continue to remain shareholders of amalgamated foreign company
– Such transfer does not attract tax on capital gains in country in which
amalgamated company is incorporated
• Allotment of shares in amalgamated company to the shareholders of
amalgamating company
– Transfer is made in consideration of allotment to shareholder of shares in the
amalgamated company
– Amalgamated company is an Indian company
• Cost of shares According to Section 49(2) OF amalgamating company is
cost of shares of amalgamated company
– To find out if shares in amalgamated company are long term capital asset ,
period of holding shall be determined from date of acquisition of shares in
amalgamating company
– Indexation will start from date of allotment of shares in amalgamated company
– If besides shares, shareholders are allotted bonds or cash in consideration of
transfer of their shares , then they cannot get the benefits under Section 47(vii)
and such transfer shall be chargeable to capital gains
 If Capital Assets are transferred as stock-in-
Trade Section 43C
• An asset not referred to in Section 45(2)which has become property of
amalgamated company , is sold after Feb 29 1988 as stock in trade , in
computing profits and gains from sale of such asset , cost of acquisition of
such asset to amalgamated company shall be cost of such asset to
amalgamating company as increased by cost , if any, of any improvements
made and expenditure incurred in such transfer
• Provision of Section 43C applicable to following cases of revaluation
– Where stock in trade of amalgamating company is taken over at
revaluated price by the amalgamated company under scheme of
amalgamation
– Where a capital asset of amalgamating company is taken over as stock
in trade by amalgamated company after revaluation
• Where a capital asset of amalgamating company is taken over as stock in
trade by amalgamated company after revaluation
• Where capital asset is converted into stock in trade by amalgamating
company with revaluation and the revalued asset is taken over by the
amalgamated company
• Where capital asset is taken over as stock in trade by amalgamated
company at revalued price at time of amalgamation
• Where the capital asset of amalgamating company is taken over by
amalgamated company , as a capital asset and then converted into stock
in trade and revalued
 Carry Forward and Set off Loss and
Depreciation
• Condition one : there is an amalgamation of a company owning
industrial undertaking, ship or hotel with another company or a
banking company with a SBI or any subsidiary of SBI.
• From assessment year 2008-09, 72A also applicable in case of
amalgamation of two public sector airlines
• Condition Two: Amalgamating company has been engaged in
the business in which accumulated loss occurred or
depreciation remains un absorbed for 3 or more years.
• Condition Three: Amalgamating company has held continuously
on date of amalgamation at least three fourth of book value of
fixed assets held by it two years prior to amalgamation
• Condition Four: The Amalgamated company continues to hold at least
three fourth in book value of fixed assets of amalgamating company
which is required as result of amalgamation for five years from date of
amalgamation
• Condition Five: The amalgamated company continues the business of
the amalgamating company for a min. of five years from date of
amalgamation
• Condition Six: Amalgamated company which has acquired industrial
undertaking of amalgamating company shall achieve level of
production of at least 50% of installed capacity before end of 4 years
from date of amalgamation and continue to maintain said minimum
till end of 5years from date of amalgamation. Central Govt. on
application from amalgamated company may relax this condition
• Condition Seven: Amalgamated company shall
furnish to assessing officer a certificate in Form No.
62 duly verified by an accountant , with reference to
the books of account and other documents showing
particulars or production along with return of
income for the assessment year relevant to the
previous year during which the prescribed level of
production is achieved and for subsequent
assessment years relevant to previous years falling
within 5 years from date of amalgamation.
 Consequences
• Consequences when above conditions are satisfied
:accumulated business loss and depreciation shall be
deemed to be loss and depreciation of amalgamated
company for previous year in which amalgamation is
effected
• Consequences when above conditions are not satisfied
after adjusting Loss and Depreciation:Part of brought
forward of loss and unabsorbed depreciation which has
been set off by amalgamted company shall be treated as
income of the amalgamated company for year in which
failure to meet conditions occurs
Loss/Allowances of XY PQ Ltd
before amalgamation
Unabsorbed Depreciation If amalgamation satisfies
of 98-99: Rs 36,000 conditions of section 72A it
is deductable otherwise it
is not deductible
Brought forward business If amalgamation satisfies
loss of 2000-01:Rs conditions of section 72A it
10,00,000 can be set off and carried
forward by PQ Ltd
otherwise such right is not
available
Unabsorbed Scientific Allowed subject to
Research Expanses: Rs conditions of section 35
11,000
Bad Debts: Rs 15,000 Allowed
Capital Gain: Rs 2,50,000 Not taxable in Hands of PQ
Ltd . If sold in course of
amalgamation, cost of
acquisition for purpose of
XY Ltd
As XY Ltd ceased to exist
after amalgamation is not
entitled for deduction
XY Ltd cannot carry it
forward as it has ceased to
exist
It cannot be carried
forward as it has ceased to
exist
Not allowed deduction
Not taxable as transfer of
assets in scheme of
amalgamation to Indian
company does not amount
Set Off of Losses of a Banking company
against profit of a Banking Institution
• 1. There is amalgamation of a Banking
company with any other banking institution .
• 2. The amalgamation is sanctioned and
brought into force by Central Govt. under
Section45(7) of Banking Regulation Act 1949
• Provisions of Section 2(1B)(i)/(ii)/(iii) may or
may not be satified
• Provisions of section 72A may or may not be
satisfied
 Consequences
• If Satisfied: Accumulated loss and unabsorbed
depreciation of amalgamating banking co.
shall be deemed to be loss or allowance for
depreciation of banking institution for
previous year in which scheme of
amalgamation is brought into force
 Expenditure on Amalgamation
• When Indian company incurs expenditure
wholly and exclusively for the purpose of
amalgamation or demerger, he will be allowed
a deduction equal to 1/5th of such expenditure
for 5 successive previous years beginning with
previous year in which in which amalgamation
or merger takes place
• No deductions under any other provisions of
the act
 Notes on Provisions
• If expenditure is allowed as deduction under section 35DD ,
its is not allowed under any other provision of the Act
• Unlike section 37(1)which prohibits deduction in respect of
capital expenditure, 35DD does not stipulate such
restrictions
• In case of amalgamation, amalgamating co. ceases to exist
and can therefore claim 1/5th amalgamation expenditure in
year in which amalgamation takes place.
• Amalgamated co. can claim in the year of amalgamation
and subsequent 4 years
 Date of Amalgamation
• Necessarily provide date with amalgamation
scheme
• Open to court to modify date
• “The Transfer Date”