Taxation Aspects

Implications under the Income Tax Act, 1961

Tax implications can be understood from the
following three perspectives:
a) Tax concessions to the Amalgamated (Buyer)
Company
b) Tax concessions to the Amalgamating
(Seller) Company
c) Tax concessions to the shareholders of an
Amalgamating (Seller)Company

Tax concessions to the Amalgamated Company
The Income-tax Act, 1961 provides for
continuance of deduction of certain
expenditure incurred by the amalgamating
company in the hands of the amalgamated
company post amalgamation viz. capital
expenditure on scientific research, expenditure
on acquisition of patents or copyrights,
expenditure on know how, expenditure for
obtaining license to operate telecommunication
services.

Also under section 72A of the Act, the
amalgamated company is entitled to carry
forward the unabsorbed depreciation and
unabsorbed accumulated business losses of the
amalgamating company provided certain
conditions are fulfilled.


Tax concessions to the Amalgamating
Company
Any transfer of capital assets, in the scheme of
amalgamation, by an amalgamating company
to an Indian amalgamated company is not
treated as transfer under section 47(vi) of the
Act and so no capital gain tax is attracted in the
hands of the amalgamating company.
Tax concessions to the Shareholders of an
Amalgamating Company
When the shareholder of an amalgamating
company transfers shares held by him in the
amalgamating company in consideration of
allotment of shares in amalgamated company
in the scheme of amalgamation, then such
transfer of shares in not considered as transfer
under section 47(vii) of the Act and
consequently no capital gain is attracted in the
hands of the shareholder of amalgamating
company.

Slump Sale/Hive off
The Income-tax Act, 1961 defines "slump sale"
as follows:
"Slump sale" means the transfer of one or more
undertakings as a result of the sale for a lump
sum consideration without values being
assigned to the individual assets and liabilities
in such sales.
In a slump sale, an acquiring company may
not be interested in buying the whole
company, but only one of its divisions or a
running undertaking on a going concern basis.



The sale is made for a lump sum price without
values being assigned to individual assets and
liabilities transferred. The business to be hived
off is transferred from the transferor company
to the transferee company.
A Business Transfer Agreement is drafted
containing the terms and conditions of business
transfer.


Tax characterisation of sale of business/slump
sale
For a sale of business to be considered as a
slump sale the following conditions need to
fulfilled:
There is a sale of an undertaking;
The sale is for a lump sum consideration; and
No separate values being assigned to
individual assets and liabilities.


If separate values are assigned to assets, the
sale will be regarded as an itemised sale.
In a slump sale, the profits arising from a sale
of an undertaking would be treated as a capital
gain arising from a single transaction.

Where the undertaking being transferred was
held for at least 36 months prior to the date of
the slump sale, the income from such a sale
would qualify as long-term capital gains at rate
of 20% (plus surcharge and cess). If the
undertaking has been held for less than 36
months prior to the date of slump sale, then the
income would be taxable as short-term capital
gains at the rate of 30% (plus surcharge and
cess).

Whereas an itemized sale of individual assets
takes place, profit arising from the sale of each
asset is taxed separately. Accordingly, income
from the sale of assets in the form of "stock-in-
trade" will be taxed as business income, and
the sale of capital assets is taxable as capital
gains. Significantly, the tax rates on such
capital gains would depend on the period that
each asset (and not the business as a whole) has
been held by the seller entity prior to such sale.