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Unit 13: Tax Treatment for Business Restructuring

(other than shares already held therein immediately before the amalgamation by, or by Notes
a nominee, for the amalgamated company or its subsidiary) become shareholders of the
amalgamated company.

Under section 47(vi), capital gains arising from the transfer of assets by the amalgamating
companies to the Indian amalgamated company are exempt from tax.
Sub-section (1) of section 72A provides that where there is an amalgamation of a company,
owning an industrial undertaking or a ship or a hotel with another company or the
amalgamation of a banking company with a specified bank, then the accumulated loss and

unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or
allowance for depreciation of the amalgamated company for the previous year in which
the amalgamation was effected and other provisions of the Act shall apply accordingly.

In determining the period for which a capital asset is held by an assessee, the period for
which the shares were held in the amalgamating company shall be considered. This benefi ts
the shareholders of the amalgamating company.

Where an undertaking entitled to deduction under these two sections is transferred to
another company in a scheme of amalgamation, no further deduction will be allowable to
the amalgamating companies and the provisions will apply to the amalgamated company,
as they would have to the amalgamating companies.

The aggregate deduction in respect of depreciation shall not exceed the deduction at the
prescribed rates, as if the amalgamation has not taken place, and such deduction will be
apportioned between the amalgamating and amalgamated companies in the ratio of the
number of days for which the assets were used by them.
The term ‘sale’ does not include a transfer in a scheme of amalgamation.
Where in a scheme of amalgamation, the amalgamating company sells or transfers any
assets on which investment allowance has been allowed, the amalgamated company

should continue to fulfil the conditions in respect of the reserve created. If any balance of
investment allowance is outstanding to the amalgamated company, it shall be allowed to
the amalgamated company.

Where the amalgamating company sells or transfers to the amalgamated company any
assets representing expenditure of a capital nature on scientific research, the amalgamating

company shall not be allowed any further deduction and the amalgamated company will
be subjected to the provisions of S. 35, as if sale or transfer of assets had taken place.
The concept of demerger was introduced in the context of taxation by Finance Act, 1999.
The objective was to enable corporate undertakings to undertake business restructuring
in a tax neutral form. Section 2(19AA) defines demerger in relation to companies, as the

transfer, pursuant to a scheme of arrangement under section 391 to 394 of the Companies
Act, 1956.
As per section 47 (vib) of the Income Tax Act, the transfer of any capital asset by the
demerged company to the resulting company will not be regarded as transfer for the
purpose of capital gain.
Section 2(22) has been amended by inserting a new clause (v) to provide that no dividend
income shall arise in the hands of shareholders of demerged company on demerger.

13.5 Keywords

Absorption: It is the other type of merger which is nothing but dissolution of a company’s identity
into other company’s identity.

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