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Unit 13: Tax Treatment for Business Restructuring

The issue of exemption from capital gains is not free from doubt where the transaction is Notes
not structured as a share for share exchange and the consideration is paid in other forms.
There are two contrary High Court judgments in this regard.

Notes In the case of CIT vs. Gautam Sarabhai Trust [1988] 173 ITR 216, the Gujarat High
Court held that to qualify for exemption under section 47(vii), the shareholder should
receive the entire consideration in the form of shares of the amalgamated company alone. In
other words, if besides the share or shares in the amalgamated company, the shareholders
of the amalgamating company are allotted something more, namely, bonds or debentures
in consideration of the transfer of his share or shares in the amalgamating company, he

cannot get the benefit of section 47(vii).
The other view is based on the judgment in the case of CIT vs. M.C.T.M Corporation Private
Ltd. [1996] 221 ITR 525. In this case, the Madras High Court held that in as much as shares
and debentures are allotted to the assessee on account of the amalgamation of the two
companies and in view of the fact that the identity of the transferor company got lost in
the amalgamation, there was no transfer or extinguishments of any right in allotting the
shares and debentures in favour of the assessee under the provisions of section 2(47). Even
if there was a transfer, the gains arising there from, where entitle to exemption under
section 47(vii).

3. Exemption from capital gains in case of international restructuring: 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 satisfi ed:
(a) At least 25% of the shareholders of the amalgamating foreign company continue to
remain shareholders of the amalgamated foreign company; and
(b) The amalgamation is tax-free in the foreign company

Transfer of Capital Assets

Transfer of Capital a in a Scheme of Amalgamation where the Amalgamated Company
is an Indian Company [Sec. 47 (vi)]

Any transfer of a capital asset by the amalgamating company to the amalgamated company in
the scheme of amalgamation is not treated a “transfer”, provided amalgamated company is an
Indian Company. [Sec. 47 (vi)]

Transfer of Shares of an Indian Company by an Amalgamating Foreign Company to a
Foreign Amalgamated Company. [Sec. 47 (via)]

Any transfer of shares of an Indian Company by a foreign company to another foreign company
is not treated transfer, provided the following conditions are satisfi ed:
(i) The transfer of shares is under a scheme of amalgamation between two foreign
companies;

(ii) At least 25% of the shareholders of the Amalgamating Foreign Company continue to
remain shareholders of the Foreign Amalgamated Company.
(iii) No tax is levied on such capital gain in the country where foreign amalgamating company
is incorporated. [Sec. 47 (via)]

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