Monday, 6 January 2020

Unit 13: Tax Treatment for Business Restructuring

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Unit 13: Tax Treatment for Business Restructuring


Corporate restructuring is the process of rearrangement of business activities and has become the buzzword to cope with the fierce competitive environment prevailing all throughout the globe in the era of globalisation and liberalisation.


Corporate restructuring is the process of redesigning one or more aspects of a company.

The process of reorganising a company may be implemented due to a number of different factors, such as positioning the company to be more competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction.

Here are some examples of why corporate restructuring may take place and what it can mean for the company.


Corporate restructuring may take place as a result of the acquisition of the company by new owners.

The acquisition may be in the form of a leveraged buyout, a hostile takeover, or a merger of some type that keeps the company intact as a subsidiary of the controlling corporation.

When the restructuring is due to a hostile takeover, corporate raiders often implement a dismantling of the company, selling off properties and other assets in order to make a profit from the buyout.

What remains after this restructuring may be a smaller entity that can continue to function, albeit not at the level possible before the takeover took place.


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.


The conditions to be fulfilled in merger includes: 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; 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 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.


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 benefits 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.


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

Amalgamation: It is a restructuring phenomenon in which two or more companies are liquidated and a new company is formed to acquire business.

Business restructuring: It refers to a rearrangement of the corporate structure.

Copy rights: It is a legal concept, enacted by most governments, giving the creator of an original work exclusive right to it, usually for a limited time.

Demerger: It is a form of corporate restructuring in which the entity’s business operations are segregated into one or more components.

Joint Venture: Joint Venture is an entity formed by two or more companies for a specific period with a specific objective.

Patent rights: These are the rights reserved exclusively to the inventor or the person to whom the patent has been issued as per the law.

Reverse Merger: When financially weak company absorbs financially strong company it is corporate restructuring made in the form of Reverse Merger.

Spin-off: It is a kind of restructuring in which a company distributes its shareholding in subsidiary to its shareholders thereby not changing the ownership pattern.

Split-off: It is the form of demerger where shareholders of existing company form a new company to takeover specific division of existing company.

Subdivision of shares: It is a strategy used to increase market price of share which is also type of corporate restructuring.

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