AMALGAMATION AND DEMERGER |
DEFINITIONS
Amalgamation : means merger of
either one or more companies with another company or merger of two or more companies
to form one company in such a manner that :
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All the property/liability of the
amalgamating company/companies becomes the property/liability of amalgamated
company.
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Shareholders holding minimum 75%
of the value of shares become shareholders of the amalgamated company.
Demerger : means the transfer
of one or more undertakings to any resulting company pursuant to a scheme of
arrangement under Sections 391 to 394 of the Companies Act, 1956 in such a manner
that :
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All the property/liability of the undertaking becomes the
property/liability of the resulting company.
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All the property/liabilities are
transferred at book value (excluding increase in value due to revaluation).
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The resulting company issues
shares to the shareholders of demerged company on a proportionate basis, except where
resulting company is a shareholder of the demerged company.
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Shareholders holding minimum 75%
of the value of shares become shareholders of the resulting company.
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The transfer of an undertaking is
on a going concern basis.
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The demerger is in accordance
with the conditions notified under Section 72A(5).
Undertaking : includes any part of an undertaking or a
unit or division of an undertaking or a business activity taken as a whole, but
excludes individual assets or liabilities or combination of both not constituting a
business activity.
Demerged Company : means the
company whose undertaking is transferred to a resulting company pursuant to a
demerger.
Resulting Company : means one
or more companies (including wholly owned subsidiary thereof) to which the
undertaking of the demerged company is transferred in a demerger and the resulting
company in consideration of such transfer of undertaking, issues shares to
shareholders of the demerged company and includes any authority or body or local
authority or public sector company or a company established, constituted or formed as
a result of demerger.
Provisions applicable to Company
— Amalgamation/Demerger
Capital Gain
Carry forward of accumulated
loss and/or unabsorbed depreciation
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Accumulated loss and
unabsorbed depreciation of an amalgamating company owning an industrial undertaking
or a ship or a hotel or a banking company or a company or companies engaged in the
business of operating aircraft can be transferred to the amalgamated company
provided:
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it continuously holds 3/4th value of
the assets acquired in a scheme of amalgamation for at least five years from the date
of amalgamation
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it continues to carry on business of
amalgamating company for at least five years from the date of amalgamation and the
amalgamating company
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was engaged in business in which the accumulated
loss has occurred or the unabsorbed depreciation remains unabsorbed for three or more
years.
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has continuously held 3/4th of the value of
assets held by it two years prior to amalgamation.
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Amalgamated company, which acquired
the amalgamating company shall achieve at least the level of 50% of the installed
capacity before the end of 4 years from the date of amalgamation.
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Amalgamated company to submit
certificate in Form 62 along with return of income.
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Accumulated loss and
unabsorbed depreciation of a demerged company will be transferred to resulting
company:
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Where it is directly relatable to
undertaking transferred, it should be such relatable amount.
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Where it is not directly relatable to
the undertaking transferred, it should be apportioned in the ratio of assets retained
by the demerged company and transferred to resulting company.
Carry forward of accumulated loss and/or unabsorbed
depreciation of the banking company in a Scheme of amalgamation with banking
institution
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In a Scheme of
amalgamation sanctioned and brought in force by the Central Government u/s. 45(7) of
the Banking Regulation Act, 149, the accumulated loss and unabsorbed depreciation of
the banking company shall be deemed to be loss or depreciation of the banking
institution for the previous year in which the Scheme of Amalgamation is brought in
force and other provisions relating to set-off and carry forward of loss and
allowance of depreciation shall apply accordingly with effect from Assessment Year
2005-06. (S. 72AA)
Reorganisation in case of firm/proprietorship
to company and private company/unlisted public company to LLP
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In cases where a
firm/proprietary concern is succeeded by a company fulfilling all conditions laid
down u/s. 47(xiii)/47(xiv), then notwithstanding anything contained in any other
provisions of the Act, accumulated losses and unabsorbed depreciation of the
firm/proprietary concern will be considered that of the company.
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In case where provisions
of section 47(xiii) or (xiv) as the case may be, are not complied with, any set off
of business loss or allowance for depreciation in the hands of successor will be
deemed to the income of the successor company in the year in which such conditions
are not compiled with.
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Similar provisions are
also applicable to private company or unlisted public company succeeded by a limited
liability partnership fulfilling conditions laid down u/s. 47(xiiib).
Allowability of
expenditure relating to amalgamation/demerger
Depreciation in the year of
amalgamation/demerger
Actual cost
Written Down Value
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WDV in the hands of
amalgamated company shall be the WDV of the block of assets in the hands of the
amalgamating company less depreciation allowed in the year of amalgamation.
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WDV in the hands of the
resulting company shall be the WDV of transferred assets as per books of the demerged
company immediately before demerger.
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WDV in the hands of the
demerged company shall be the WDV of the block of assets before demerger less book
value of assets transferred to the resulting company.
Non-withdrawal of
Incentives
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Deduction claimed under
Section 33AC (Reserve for shipping business) would not be withdrawn on sale or
transfer of a ship in any scheme of demerger.
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Transfer of patent rights
or copyrights (S. 35A) or transfer of licence to operate telecommunication services
(S. 35ABB) or transfer of business for prospecting etc. mineral oil (S. 42) in a
scheme of amalgamation/demerger will not be treated as either sale or transfer.
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The deductions hitherto
granted to amalgamating/demerged company relating to patent rights and copyrights (S.
35A) / Expenditure on know-how (S.35AB) / Licence fees to operate telecommunication
services (S. 35ABB) / Preliminary expenses (S. 35D) / expenditure for prospecting
etc., for certain minerals (S. 35E) / business for prospecting etc., for mineral oil
(S. 42) would be available for balance period to the amalgamated/resulting
company.
Provisions applicable to
Shareholders
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Gains arising on transfer
of shares of amalgamating company in exchange of shares of amalgamated company, being
an Indian Company is exempt.
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Acquisition of shares of
the resulting company by the shareholders in demerger will not be taxed either as
capital gain or deemed dividend.
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Cost of acquisition of
shares of:
— the amalgamated company will be the
cost incurred for acquiring shares of amalgamating company.
— the resulting company will be the
:
— Original cost of shares of demerged
company X net book value of assets transferred to resulting company/net worth of the
demerged company before demerger (net worth is equal to Paid-up Share Capital +
General Reserve as per books.)
— the demerged company will be the
original cost of shares of demerged company – cost of shares of the resulting
company as computed above.
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