Page 303 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes 13.2 Amalgamations

Amalgamation is a restructuring phenomenon in which two or more companies are liquidated
and a new company is formed to acquire business. In simpler terms, it means that a new company
is formed that buys the business of minimum two companies. The new company or the acquiring
company is known as the amalgamated company. It acquires the assets and liabilities of the other
companies known as amalgamating companies. Commonly, such companies are also referred as
target companies or merging companies.

Did u know? Amalgamations are considered to be a safe route for sick units who want to
save their existence.
Many other companies facing possible bankruptcy also opt for amalgamations.
Similarly, cash-rich firms that have lot of liquid assets but no profi table business

opportunities aim for it as a long-term investment.
The most challenging task in any amalgamation is to create a sense of co-operation among
the employees of different amalgamating companies.
Ultimately, the success of any venture depends upon people handling it.

In India, mergers and amalgamations are used interchangeably in legal parlance. However, they
are an entirely different accounting treatment. It is a complicated procedure involving lot of
legal, tax, and accounting considerations Therefore, one need to be very careful while evaluating
an amalgamation proposal. Tax treatment is an important aspect of amalgamation. According to
the Income Tax Act, the amalgamating companies are not liable to pay the capital gain tax levied
on them following their liquidation. The incidence of tax falls on the amalgamated company.
Moreover, all expenses related to amalgamation are not tax-deductible.

In the context of taxation, amalgamation includes not only the merger of one existing company
with another existing company but also the merger of two or more existing companies to form a
third company.
13.2.1 Definition as per Income Tax, 1961

The Income-tax Act, 1961 defines amalgamation in section 2(1 B) as a merger of one or more
companies with another company, or the merger of two or more companies to form one company,
in such a manner that:
1. All the properties of the amalgamating company or companies immediately before the
amalgamation, become the properties of the amalgamated company by virtue of the
amalgamation;
2. All the liabilities of the amalgamating company or companies immediately before the
amalgamation, become the liabilities of the amalgamated company by virtue of the
amalgamation; and
3. Shareholders holding not less than 75% in value of the shares in the amalgamating company
or companies (other than shares already held therein immediately before the amalgamation
by, or by a nominee, for the amalgamated company or its subsidiary) become shareholders
of the amalgamated company.
Amalgamation is assumed to take effect on the date on which it is approved by the High Court.
Once amalgamation is approved, it should be treated as relating back to the appointed date
with reference to which the accounts of both the amalgamating and amalgamated companies are
made up.

298 LOVELY PROFESSIONAL UNIVERSITY