Amalgamations and Demerger of Companies

8/2/2019 Amalgamations and Demerger of Companies

http://slidepdf.com/reader/full/amalgamations-and-demerger-of-companies 1/44

AMALGAMATIONS ANDDEMERGERS OF

COMPANIES

Presented By:

1. Srishti Jha2. Poonam Binayak3. Gaurav Thareja4. Kamal Munjal5. Puneet Singh

6. Ashima Kapoor



AMALGAMATION



Definition of Amalgamation

‘Amalgamation’ is a blending of two or moreexisting undertakings, the shareholder of eachblending company becoming substantiallyshareholders in the company which is to carry onthe blended undertakings.

The Income Tax Act,1961 defines Amalgamationin section 2 (IB) as a merger of one or morecompanies with another company, or the mergerof two or more companies to form one company,

provided – 75% in value of the shareholders of

amalgamating company must becomeshareholders of the amalgamated company.



Amalgamation :

Shareholder X Shareholder Y Shareholder X & Y

Company X Ltd. Company Y Ltd. Company XY Ltd.



When it is not amalgamation ?

I. In case the property of a company is sold toanother company, such event shall not amountto amalgamation.

II. When affairs of a company have been woundup due to liquidation and another companygets property of such liquidated company, itshall also not amount to amalgamation.

III. Take over bid i.e. an effort to purchase theshares of a company with the object to havecontrol over the company also does notamount to amalgamation.



Effective date ofamalgamation

Amalgamation can take place after the followinglegal procedures :

I. The permission of High Court of the Stateconcerned is must. As such amalgamation issaid to have taken place on the date on which itis approved by the High court. Once it is

approved, it should be treated as relating backto the appointed date with reference to whichthe accounts of both the amalgamating andamalgamated companies were made up.



Amalgamation and TaxConcessions Under Income Tax

Act

Tax concessions to amalgamating company

Tax concessions to amalgamated company Tax concessions to the shareholders of

amalgamating company



Tax Concession to AmalgamatingCompany

I. No Capital gain tax on transfer of Capital Assets to Indian Co. If the amalgamation is as per section 2(1B) then amalgamating company is

not required to calculate its capital gain or loss and will not be required topay any tax on any capital gain. This is only true in the case of an Indiancompany.

II. No Capital gain on transfer of shares held in Indian Company by the

amalgamating Foreign Company. This happens if the following conditions are fulfilled:

a) At least 25% of the shareholders of the amalgamating foreign companycontinue to remain shareholders of the amalgamated company,

b) Such transfer does not attract tax on capital gains in the country, in which itwas in incorporated.

III. No Capital gain tax on transfer of Capital asset by a bankinginstitution.

Where in a scheme of amalgamation a banking company transfers anycapital asset to a banking institution sanctioned and brought into force bythe Central Government under Section 45(7) of the Banking regulation Act,1949, then such transfer is also not regarded as transfer under section 47.



Tax Concessions to the AmalgamatedCompanyI. Apportionment of depreciation between amalgamating

company and amalgamated company [Section 32]. The aggregate deduction, in respect of depreciation allowable to the

amalgamating company and the amalgamated company in the case of amalgamation shall not exceed in any previous year.

II. Capital Expenditure on Scientific Research – provisions of

Section 35(5). Where, in a scheme of amalgamation, the amalgamating companysells or otherwise transfers to the amalgamated company any assetrepresenting expenditure of a capital nature on scientific research,

a) The transfer of asset from amalgamating company to amalgamatedcompany shall not be treated as transfer.

b) The unabsorbed capital expenditure on scientific research shall becarried forward by the amalgamated company in same manner as inthe case of amalgamating company.

c) In case any asset acquired for scientific research is transferred insome later year the gain or loss shall be treated u/s 41(3) in thehands of amalgamated company.



III. Expenditure on Patent /Trademark/Copy right – provisions of Section 35A(6).

Where, in a scheme of amalgamation, the amalgamating company sells orotherwise transfers to the amalgamated company any asset representingexpenditure of a capital nature on scientific research,

a) The transfer of asset from amalgamating company to amalgamatedcompany shall not be treated as transfer;

b) The unamortized capital expenditure on copyright/ trademark/ patentright shall be written off by the amalgamated company in same manneras in the case of amalgamating company for remaining number of years;

c) In case copyright/ trademark/ patent right is transferred in some lateryear, the gain or loss be treated u/s 35A in the hands of amalgamatedcompany.

IV. Expenditure on know-how- provisions of Section 35AB(3): Theexpenditure on Know-How is Capital Expenditure and is eligiblefor depreciation @ 25% on WDV basis.

The above provision can be simply stated in a following manner:a) The transfer of asset from amalgamating company to amalgamated

company shall not be treated or transfer;b) The unamortized capital expenditure on know how shall be written off by

the amalgamated company in same manner as in the case of amalgamating company for remaining number of years;

c) In case know how is transferred in some later year, the gain or loss betreated in the hands of amalgamated company.



V. Expenditure on Telecommunication License – provisions of Section 35ABB(6). The above provision can be simply stated in a following manner:

a) The transfer of asset from amalgamating company to

amalgamated company shall not be treated or transfer;b) The unamortized capital expenditure on license shall be written off

by the amalgamated company in same manner as in the case of amalgamating company for remaining number of years;

c) In case license is transferred in some later year, the gain or loss betreated in the hands of amalgamated company.

VI. Amortization of Preliminary Expenses- provisions of Section35D(5).

Where the undertaking of an Indian company which is entitled toclaim which is entitled to claim this deduction is transferredbefore the expiry of 10/5 years as specified u/s 35D(1), to anotherIndian company under a scheme of amalgamation:

a) No deduction shall be admissible under sub-section (1) in the case of the amalgamating company for the previous year in which theamalgamation takes place;

b) The provisions of this section shall, as far as may be, apply to theamalgamated company as they would have applied to theamalgamating company if the amalgamation had not taken place.



VII. Amortization of expenditure in case of amalgamation— provisions of Section 35DD(1)

Where an assessee, being an Indian company, incurs anyexpenditure, on or after the 1st day of April 1999, wholly andexclusively for the purposes of amalgamation of anundertaking the assessee shall continue to be available tothe amalgamated company for remaining number of years.

VIII. Amortization of Expenditure incurred underVoluntary Retirement Scheme— provisions of Section35DDA.

Where an assessee incurs any expenditure in any previousyear by way of payment of any sum to an employee at the

time of this voluntary retirement, in accordance with anyscheme or schemes of voluntary retirement, one- fifth of theamount so paid shall be deducted in computing the profitsand gains of the business for that previous year, and thebalance shall be deducted in equal installments for each of the four immediately succeeding previous years.



IX. Expenditure on prospecting minerals — provisions of Section 35eE(7).

Where the undertaking of an Indian company which isentitled to the deduction under sub- section (1) istransferred, before the expiry of the period of tenyears specified in sub- section (1), to another Indian

company in a scheme of amalgamation.a) No deduction shall be admissible under this section in

the case of the amalgamating company for theprevious year in which the amalgamation takes place,and

b) The provisions of the section shall, as far as may be,apply to the amalgamated company as they wouldhave applied to the amalgamating company if theamalgamation had not taken place.



X. Capital Expenditure on promotion of familyplanning- provisions of Section 36(1) (ix).

The companies are allowed to write off anycapital expenditure on promotion of familyplanning in India in five equal installments i.e. 1/5th every year. Where an undertaking which is

entitled to deduction u/s 36(1)(ix) is transferred ina scheme of amalgamation by the amalgamatingcompany to the amalgamated company , thedeductions shall continue to be available to the

amalgamated company for the remaining no. of years.



XI. Actual Cost of the block of assetstransferred under amalgamation-provisions

of Section 43(6). When due to amalgamation a block of assets is

transferred from the amalgamating company tothe amalgamated company , it is not regarded as

transfer. The W.D.V (Written down value)as shownin the books of amalgamating company on thefirst day of the previous year in whichamalgamation takes place shall become the actual

cost for charging depreciation by theamalgamated company.



XII. Exemption from capital gains in the handsof the amalgamating companies- provisions

of Section 47(vi). Capital gain arising from the transfer of assets by

the amalgamation companies to the Indianamalgamated company is exempt from tax

because such transfer of assets is not regarded astransfer.



Tax Concessions for Shareholders ofAmalgamating Company

Exemption From Capital gains on transfer of shares – where a shareholder of amalgamatingcompany transfer his such share or shares in ascheme of amalgamation, then such transfer of

share shall not be regarded as transfer as persection 47(vii) if the following conditions arefulfilled :

A. The transfer is made in consideration of the allotmentto him of any share or shares in the amalgamatedcompany.

B. The amalgamated company is an Indian Company.

• The cost of shares received under transfer asmentioned above u/s 47(vii).



The Cost of shares received under transfer :

a. The cost of shares allotted in amalgamated

company shall remain same as was for theshares held in amalgamating company.



Example :

Mr. Mahendra is shareholder D Ltd..He acquired300 shares of the company of the face value Rs.100 per share in 1972.The fair market value of the

shares as on 1-4-81 was Rs. 200 per share. Hemade a further purchase of 200 shares at therate of Rs. 300 per share in 1984-84.D Ltd issuedbonus shares in 1987-88 in the proportion 1:4.

XY Ltd. Company, in a scheme of amalgamation in2010-11,made a proposal o acquire the shares of D Ltd. As per offer given below:



Rs.600 per share in cash plus 1 share in XYLtd. for every two shares of D. Ltd.

The market value of shares of XY Ltd. On thedate of offer is Rs.350 per share.

Compute the capital gain if any arising toMahendra if he accepts the offer.

[ C.I.I. for 1981-82 is 100, for 1984-84 is 125 andfor 2010-11 is 711].



Solution :

i.) Cash received (Rs. 600 * 625) 3,75,000

ii.) Value of shares in XY Ltd. 1,09,200

(350*312 shares)Total Sale Price 4,84,200

Less : Cost of acquisition 7,67,880

Long term Capital loss 2,83,680



DEMERGER



Definition of Demerger

The term “Demerger” signifies spinnings of orhiving off the existing divisions of the companyinto a seperate company.

Thus,demerger is a split or division of thecompany.The division hived off could betransferred to the new company or it can be soldto the existing company.

Demerger takes place due to various reasons likeinternal restructuring or family settlements.

Undertaken as a tool of tax-Planning.







To recognise demergers ,

number of amendments wereMade by the finance act, 1999

on the basis of following principles.



a)Demergers, should be tax neutral and should notattract any additional liability to tax.

b)In demergers tax benefits & concessions

available to any undertaking should be availableto the said undertaking on its transfer to theresulting company.

c)Govt. May prescribe certain guidelines to ensure

that demergers are made for genuine businesspurposes.



d) Loss and unabsorbed depreciation should becarried forward by the resulting company if these are directly relatable to theundertaking proposed to be transferred.

e)Benefits for the demergers proposed to beextended to authorities or boards set up by

central or state govt.



Provisions relating to

demerger All the property of the undertaking , beingtransferred by the demerged company,immediately before the demerger , becomes

the property of the resulting company byvirtue of the demerger.

All the liabilities relatable to the undertaking,being transferred by the demergedcompany, immediately before thedemerger,becomes the liabilities of theresulting company by virtue of demerger.



The resulting company issues, inconsideration of the demerger, its shares tothe shareholders of the demerged company

on a proportionate basis. The transfer of the undertaking is on a going

concern basis.

The shareholder holding not less than three-fourth in value of the shares in the demergedcompany becomes shareholder of theresulting company by virtue of demerger.



Meaning of demerged company[sec 2(19AAA)

Means the company whose undertaking istransferred,pursuant to a demerger, to aresulting company.



Meaning of Resulting company[sec 2(41A)

Company to which the undertakings of thedemerged company is transferred in a demergerand , the resulting company in consideration of such transfer of undertakings, issues shares to

the shareholders of the demerged company.



Tax Incentives in case of

Demerger1. Tax incentive to demerged company.

2. Tax incentives to shareholders.

3. Tax incentives to resulting company.



Tax incentives to demerged

company No capital gains to demerged company[Sec 47(vib)].

Section 47 of the Income Tax Act ,1961 contains

certain transactions which are not treated astransfer and hence no capital gain shall bedeemed to have arisen.

Following are not regarded as transfers:

1. Any transfer of a capital asset owned by ademerged company to the resulting Indiancompany under a scheme of demerger[sec 47(vi b)].



2. In case of demerger of foreign companies istaking place and capital asset in the nature of shares of an Indian company held by such

demerged company are transferred to resultingcompany , it shall not be treated as transfer if :

Shareholders holding not less than 3/4th in value

of shares . There is no tax on such capital gain in the

country in which such foreign demergedcompany is incorporated.[Section 47 (vi c)]



Tax concession to the

shareholders Calculation of cost of shares of the resultingcompany[Section 49 (2c)].

Cost of acquisition of shares of resulting

company shall be:Cost of acquisition

Of the shares in the

Resulting company =Cost of acquisition Of the

shares held by the assessee in the demergedcompany x Net book value of the assetstransferred/ Net worth of the demergedcompany immediately before demerger.



Beneficial provision regarding counting of period of holding of new shares .

In case, an assessee gets shares in an Indiancompany, in consideration of demerger, forcounting the period of holding of such shares,there shall be included the period for which

the shares held in the demerged companywere held by the assessee.



Calculation of cost of shares held indemerged company.[Section 49 (2D)]

The cost of acquisition of original shares held bythe shareholders in the demerged companyshall be deemed to have been reduced by theamount as so arrived at under section 49(2c).



Tax concession to the

resulting company a)Expenditure for obtaining licence tooperate telecommunicationsservices[sec35ABB(7)]

b)Treatment of preliminary expenses[sec35D(5A)

c)Treatment of expenditure on prospecting ,

etc. Of certain minerals[sec35E(7A)



d)Treatment of voluntary retirement expenses[sec35DDA(3)

e)Treatment of bad debts [sec36(1)(vii)]

f)Amortisation of expenditure in case of demerger [sec35DD]



PVR Pictures to demerge into PVR

Limited 22.09.2011 | 09:20New DelhiHary M. Pillai A joint application has been filed by PVR Pictures Ltdand PVR Limited before the Delhi High Court on Tuesday inconnection with the demerger and financial restructuring of PVRPictures Ltd into PVR Limited.

It has been submitted before the court in the application that the

proposed scheme of arrangement has been approved by the Board of Directors of both the companies, and that secured and unsecuredshareholders have also consented to the scheme.

The application sought dispensing with the requirement of conveningmeetings of equity shareholders and secured creditors of thedemerged company – PVR Pictures Ltd. and also sought the court’s

supervision with regard to the proposed separate meeting of theunsecured creditors.

While allowing the application, Justice Manmohan Singh directedthat “in view of the written consents given by all the equityshareholders of the demerged company, requirement of conveningmeeting of equity shareholders is dispensed with”.



With regard to the meeting of unsecured creditors of thedemerged company, to be held under court supervision,Justice Singh directed that the same be held on 12November. The court also directed that separate meetingsof the equity shareholders and the unsecured and securedcreditors of the resulting company – PVR Limited, whichare to be held under the supervision of the court, shall alsobe held on 12 November.

The court further directed the applicants to publish theadvance notice in relation with the proposed meetings in

leading newspapers minimum 21days in advance before thescheduled date of meetings and that notices of saidmeetings be sent by ordinary post, also 21 days in advance.





Amalgamations and Demerger of Companies

Documents