Brief note on tax implication on Amalgamation

Motichand Gupta

Note on Tax implication on amalgamation of ABC Ltd. with XYZ Ltd.

ABC Ltd. is a 50:50 joint venture between XYZ Ltd and PQR Ltd based in Belgium. The joint venture was set up in 31.12.2003. As on 31.3.2018 as per ROI, it is having accumulated business loss of Rs. 32,00,00,000/-and accumulated unabsorbed depreciation of Rs. 50,00,00,000/-.

The management proposes to buy the  50% stake held by the Belgium based company to make ABC Ltd its 100% subsidiary and then merge it with XYZ Ltd  and wishes to know the tax implications.

1. Amalgamation as defined U/s 2(1B) of the IT Act-

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“Amalgamation” in relation to companies means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merged being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that –

i. All the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of amalgamation ;

ii. 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;

iii. Shareholders holding not less than three-fourth in the value of the shares of the amalgamating company or companies become the shareholders of the amalgamated company.

2. Section 72A under Chapter VI of the Act governed provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation.

i. When there is amalgamation, the accumulated losses and unabsorbed depreciation of the amalgamating company shall be deemed to be loss or, as the case may be, allowance for the unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected.

ii. Accumulated loss shall not be set off or carried forward and unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company unless-

a) The amalgamating company –

i. Has been engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for three or more years;

ii. Has held continuously as on the date of the amalgamation at least three-fourth of the book value of fixed assets held by it two years prior to the date of amalgamation;

b) The amalgamated company-

(i) Holds continuously for a minimum period of five years from the date of amalgamation at least three-fourth of the book value of the fixed assets of the amalgamating company acquired in a scheme of the amalgamation;

(ii) Continues business of the amalgamating  company for a minimum period of five years from the date of amalgamation;

iii. In a case where any of the conditions mentioned under clause (ii) above are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be the income of the amalgamated company chargeable to tax for the year in which such conditions are not complied with.

iv. “Accumulated loss” means so much loss of the amalgamating company under the head         ” Profits and  gains of business or profession” would have been entitled to carry forward and set off under the provisions of section 72 & “unabsorbed depreciation” means so much of the allowance for depreciation of the amalgamating company which would have been allowed to amalgamating company if the amalgamation had not taken place.

3. As per Return of Income for AY 2017-18, the IEWL is having year wise business losses as under :–

Assuming that, the amalgamation is effective from 1.4.2018, the amalgamated company is in position to take business loss benefit from AY 2011-12 amounting to Rs. 28,00,00,000.

Also, the company is able to take unabsorbed depreciation benefit of Rs. 50,00,00,000, aggregating to Rs. 78,00,00,000.