AMALAGAMATION [Sec.

2(1B)]:
According to section 2(1B) of the Income-tax Act, 1961, the term amalgamation
means:
When one or more companies merge with another existing company or two or more
companies merge to form a new company, it is known as amalgamation. The
company which so merges is known as the amalgamating company and the company
with which the merger takes place or the company which is formed as a result of the
merger is known as the amalgamated company.
In order to constitute a valid amalgamation for income-tax purposes, it must be in
such a manner that:
1. All the property of the amalgamating companies immediately before the
amalgamation becomes the property of the amalgamated company;
2. All the liabilities of the amalgamating companies immediately before the
amalgamation becomes the liabilities of the amalgamated company;
3. Shareholder (equity and preference) holding not less than 75% in the value of the
shares in the amalgamating companies become shareholders of the amalgamated
company. However, the value of the shares already held before the amalgamation by
the amalgamated company or by its nominee or by its subsidiary company shall be
excluded in computing aforesaid 75% value of shares.

For example, X company holds 30% shares of Y company which wants to merge
with X company. Shareholders of Y company holding at least 75% of the remaining
shares i.e., 52.5% (7570/100) should become the shareholders of X company.
Where, however, the whole of the share capital of a company is held by another
company, the merger of the two companies will qualify as an amalgamation within
section 2(1B), if the other two conditions are fulfilled.

TAX incentives to amalgamating company:

1. Exemption from capital gains tax:
There shall be no liability for capital gains tax on the transfer of capital assets by the
amalgamating company if the amalgamated company is an Indian company. [Sec.
47(vi)]
2. Tax concession to foreign company:
There shall be no liability for capital gains tax on the transfer of shares of an Indian
company by a foreign company to another foreign company in pursuance of a
scheme of amalgamation between the two foreign companies, if:
a. at least 25% of the shareholders of the amalgamating foreign company continue to
remain shareholders of the amalgamated foreign company;
b. such transfer does not attract tax on capital gains in the country in which the
amalgamating company in incorporated. [Sec. 47(via)]
3. Exemption from tax liability on transfer of license to operate telecommunication
services etc.:
There shall be no tax liability on transfer of license to operate telecommunication
services (under section 35ABB) or on transfer of a business of prospecting for or
extraction or production of petroleum and natural gas (under section 42) by the
amalgamating company if the amalgamated company is an Indian company.

TAX incentives to shareholders of amalgamating company:

1. Period of holding of shares of the amalgamated company:
When shares (a capital asset) in an Indian company, which become the property of
the assessee in consideration of shares transferred in case of amalgamation, there
shall be included the period for which the shares in the amalgamating company were
held by the assessee. [Sec. 2(42A)(C)]
2. Exemption from tax on exchange of shares:
The shareholders of the amalgamating company are not liable to capital gains tax,
when they are allotted shares by the Indian amalgamated company in lieu of shares
held by them in the amalgamating company.

TAX incentives to amalgamated company:

1. Capital expenditure on scientific research:
Where a company is amalgamated before claiming full deduction in respect of capital
expenditure on scientific research, the amalgamated company (being an Indian
company) is entitled to claim deduction of such unabsorbed amount. [Sec. 35(5)]
2. Expenditure incurred to obtain license to operate telecommunication services:
Where a company is amalgamated before claiming full deduction in respect of
expenditure to obtain license to operate telecommunication services, the
amalgamated company (being an Indian company) is entitled to claim deduction in
respect of remaining installments of such expenditure. [Sec. 35ABB]
3. Preliminary expenses:
Where an Indian company is amalgamated before claiming full deduction in respect
of certain preliminary expenses, the amalgamated company (being an Indian
company) is entitled to claim deduction in respect of remaining installments of such
expenses. [Sec. 35D(5)]
4. Expenses for amalgamation:
Where an Indian company incurs expenditure wholly and exclusively for the purposes
of amalgamation, it shall be allowed a deduction @ 20% of such expenditure for each
of five successive previous years beginning with the previous year in which
amalgamation takes place. [Sec. 35DD]
5. Expenses incurred under voluntary retirement scheme:
Where an Indian company is amalgamated before claiming full deduction in respect
of expenses incurred under voluntary retirement, the amalgamated company (being
an Indian company) is entitled to claim deduction in respect of remaining
installments of such expenses. [Sec. 35DDA(2)]
6. Expenses on prospecting etc. of certain minerals:
Where an Indian company is amalgamated before claiming full deduction in respect
of expenditure incurred on prospecting for, or extraction or production of certain
minerals, the amalgamated company (being an Indian company) is entitled to claim
deduction in respect of remaining installments and unabsorbed amount of such
installments. [Sec. 35E(7)]

7. Capital expenses on family planning:

Where a company is amalgamated before claiming full deduction in respect of capital
expenditure incurred for the purpose of promoting family planning amongst its
employees, the amalgamated company (being an Indian company) is entitled to claim
deduction in respect of remaining installments and unabsorbed amount of such
installments. [Sec. 36(1)(ix)]
8. Expenses on prospecting etc. of petroleum and natural gas:
Where a company is amalgamated before claiming full deduction in respect of capital
expenditure incurred on prospecting for or extraction or production of petroleum
and natural gas, the amalgamated company (being an Indian company) is entitled to
claim deduction in respect of such expenditure.
Bad debts:
Where a part of debts taken over by the amalgamated company from the
amalgamating company becomes bad subsequently, such bad debt is allowed as a
deduction in computing the income of the amalgamated company.
10. Actual cost of an asset:
Where, in a scheme of amalgamation, any capital asset is transferred by the
amalgamating company to amalgamated company and the amalgamated company is
an Indian company, the actual cost of transferred capital asset to the amalgamated
company shall be taken to be the same as it would have been if the amalgamating
company had continued to hold the capital asset for the purpose of its own business.
[Sec. 43(1) Explanation 7]
11. Actual cost of depreciable assets:
Where, in any previous year, any block of assets is transferred by an amalgamating
company to the amalgamating company in a scheme of amalgamation, and the
amalgamated company is an Indian company, then the actual cost of the block of
assets to the amalgamated company shall be the WDV of the assets to the
amalgamating company for the immediately preceding previous year as reduced by
the amount of depreciation actually allowed in relation to the said preceding
previous year. [Sec. 43(6) Explanation 2(b)]