Chapter 8 Taxation & Stamp Duty Aspects of Corporate Restructuring – Corporate Restructuring Insolvency Liquidation & Winding Up Notes is designed strictly as per the latest syllabus and exam pattern.
Taxation & Stamp Duty Aspects of Corporate Restructuring – Corporate Restructuring Insolvency Liquidation & Winding Up Study Material
Question 1.
In a scheme of amalgamation between Eye Foundation Ltd. (transferor company) and Lasik Centre (India) Pvt. Ltd. (transferee company), the Regional Director raised objections that additional filing fee and stamp duty on the increase of share capital of the transferee company has to be paid and also against changing the name of the transferee company to Eye Foundation Ltd. which is the name of the transferor company, without complying with section 13. Will the objections of the Regional Director hold good? Explain. (Dec 2014, 5 marks)
Answer:
In Jaypee Cement Limited v. Jayprakash Industries Limited [2004] 2 Comp U105 (All) / [2004] XXXIV CS LW50 the Allahabad High Court held that the combining of the authorised share capital of the transferor company with that of the transferee company resulting in increase in the authorised share capital of the transferee company does not require the payment of registration fee or the stamp duty because there is no reason why the same fee should be paid again by the transferee company on the same authorised capital.
Also provisions which is applicable to the change of the name could be dispense with as Section 230-232 vested the Tribunal with powers to approve a scheme of amalgamation involving change of name.
Question 2.
(i) Discuss in brief the provisions regarding carry forward and set-off of accumulated business losses and unabsorbed depreciation by an amalgamated company. (Dec 2016) (5 marks)
(ii) Explain the tax aspects on slump sale. (5 marks)
Answer:
(i) Under Section 72A of Income Tax 1961, if there is an amalgamation of a:
- company owning an industrial undertaking or a ship or a hotel with another company
- banking company within the meaning of Banking Regulation Act 1949, with a specified bank or
- one or more public sector company or companies engaged in the business of operation of aircraft with one or more public sector company
- companies engaged in similar business
Then the accumulated loss and an unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or; as the case may be, allowance for depreciation of the amalgamated company for the previous year in which the amalgamation was effected
Conditions to be met:
(1) For amalgamating company-
(a) Must have engaged in the business in which the accumulated loss occurred or depreciation remains unabsorbed, for three or more years
(b) Must have continuously as on 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
(2) For amalgamated company –
(a) holds continuously for a minimum of five years from the date of amalgamation at least three fourth of the book value of fixed assets.of the amalgamating company acquired in a scheme of amalgamation
(b) continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation;
(c) fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose.
(ii) As per Section 2(42C) of Income Tax Act, 1961, unless the context otherwise requires, the term “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.
Computation of Capital Gains from Slump Sale
Special provisions relating to computation of capital gains from ‘Slump Sale’ under Section 50B of the Income Tax Act, 1961, are as under:
(1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place.
Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
(2) In relation to capital assets being an undertaking or division transferred by way of such sale, the “net worth” of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes, of Section 48 and 49 and no regard shall be given to the provisions contained in the second proviso to Section 48.
(3) Every assessee, in the case of slump sale, shall furnish in the prescribed form along with the return of income, a report of an accountant as defined in the Explanation below sub-Section (2) of Section 288, indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this Section.
Question 3.
Examine and explain the following statement citing relevant provisions of laws:
Name various documents which requires Stamping in case of merger. (June 2017, 3 marks)
Answer:
Following documents requires stamping in case of merger:
- an order of the High Court (NGLT) sanctioning a scheme of amalgamation.
- other documents:
- Usually, in a merger, several other documents, agreements, indemnity bonds, etc. are executed, depending on the facts of each case and requirements of the parties. Stamp duty would also be leviable as per the nature of the instrument and its contents.
- However, stamp is a matter of state, so one should check the state notifications before computing the stamp duty on the above instruments and documents.
Question 4.
“Price received on sale of an undertaking as a Going Concern is a Capital Receipt”. Comment on the statement with judicial pronouncements, supporting the statement. (Dec 2018, 3 marks)
Answer:
Normally, any sale of a capital asset will give rise to a capital receipt and any profit derived may give rise to capital gains in certain cases. This is true in the case of sale of an undertaking also.
In Doughty v. Commissioner of Taxes, the Privy Council laid down the following principles: The sale of a whole concern engaged in production process, e.g. dairy farming or sheep rearing, does not give rise to a revenue profit. The same might be said of a manufacturing business which is sold with the lease holds and plant, even if there are added to the sale piece goods in stock and even if these piece goods form a very substantial part of the aggregate sold.
Where, however, business consists entirely in buying and selling, it is difficult to distinguish for income tax purposes between an ordinary and realisation sale, the object in either case being to dispose of the goods at a profit. The fact that the stock is sold out in one sale does not render the profit obtained any different in kind from the profit obtained by a series of gradual and smaller sales.
In the case of such a realisation sale, if there is an item which can be traced as representing the stock-in-trade sold, the profit obtained by the sale of the stock-in-trade, though it is in conjunction with the sale of the whole concern, may be treated as taxable income.
But where there is a sale of the whole concern and a transfer of all the assets for a single unapportioned consideration, there cannot be said to be any revenue profit realised on the sale of the stock-in-trade which is sold with all the other assets, although the business of the concern may consist entirely in buying and selling.
The Supreme Court, based on the above decision held in the following two cases that the price received on the sale of industrial undertaking is a capital receipt.
Question 5.
Define capital assets as per Income Tax Act, 1961. (Dec 2019, 3 marks)
Answer:
‘Capital asset’ is defined under section 2(14) of the Income-tax Act, 1961 as,
(a) Property of any kind held by an assessee, whether or not connected with his business or profession;
(b) Any securities held by a Foreign Institutional investor which has invested in such securities in accordance with the regulations made under Securities and Exchange Board of India Act, 1992.
But does not include the following:
- Any stock in trade (Other than the securities referred to in sub-clause (b)), consumables stores or raw materials held for the purpose of his business or profession
- Personal effect
- Agricultural land in India, which is not an urban agricultural land. In other words, it must be rural agricultural land.
Question 6.
Payment of stamp duty under Indian Stamp Act, 1899 is required even in cases of orders made by National Company Law Tribunal (NCLT) in terms of Section 230 to 240 of the Companies Act, 2013. Are there any exceptions or exemptions? (Dec 2020, 5 marks)
Answer:
The Central Government has exempted the payment of stamp duty on instrument evidencing transfer of property between companies limited by shares as defined in the Indian Companies Act, 2013, in a case:
(i) where at least 90 per cent of the issued share capital of the transferee company is in the beneficial ownership of the transferor company, or
(ii) where the transfer takes place between a parent company and a subsidiary company one of which is the beneficial owner of not less than 90 per cent of the issued share capital of the other.
A circular was issued in the year 1937 vide which exemption was granted on payment of Stamp Dufy when there is an amalgamation/merger between holding and subsidiary company. Delhi High Court in tho case of Delhi Towers Ltd. vs. GNCT of Delhi made reference to this circular.
Otherwise, stamp duty is payable on such orders, being an instrument liable to duty as a Conveyance Deed as was held in Hindustan Lever Ltd. vs. State of Maharashtra (2003) 117 Comp Cas SC 758, Emami Biotech Ltd (2012).
However, stamp duty being a state subject, the above would only be applicable in those States where the State Government follows the above stated notification of the Central Government otherwise stamp duty would be applicable irrespective of the relations mentioned in the said notification.
Imposition of Stamp Duty is the prerogative of the State Government, hence applicable in only those states that have adopted the said circular.
Question 7.
Discuss the tax aspects on ‘slump sale’ and ‘demerged company’. (Aug 2021, 3 marks)
Answer:
Section 2(42C) of the Income Tax Act, 1961 defines slump sale as a means of 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 cases.
As per section 50B of Income Tax Act, 1961 any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income tax as capital gains from the transfer of long term capital asset and shall be deemed to be the income of the previous year in which the transfer took place.
Demerged company has been defined under section 2(19AA) of the Income Tax Act, 1961. According to section 47(vib), where there is a transfer of any capital asset in case of demerger by the demerged company to the resulting company, such transfer will not be regarded as a transfer for the purpose of capital gain provided the resulting company is an Indian company.
Question 8.
What is deemed dividend under Sec 2(22)(e) of the Income Tax Act, 1961 ? Discuss its taxability. (Dec 2021, 3 marks)
Answer:
Section 2(22) (e) of the Income Tax Act, 1961 defines the term deemed dividend as any payment by a company, not being a company in which public are substantially interested, of any sum by way of advance or loan to the following:
(i) To a shareholder, being a person who is the beneficial owner of the shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits), holding not less than 10% of the voting rights, or
(ii) To any concern in which such shareholder is a member or a partner and in which he has a substantial interest, or
(iii) On behalf, of for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.
Exceptions to deemed dividend:
a. any advance or loan made, to a shareholder or to such concern in which the shareholder is interested, by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company;
b. any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by. it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off;
c. any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of Section 68 of the Companies Act, 2013;
d. any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).
Finance Act, 2018 has bought the deemed dividend within the ambit of dividend distribution tax under section 115-0, at the rate of 30% in the hands of the closely held companies.
As per the provisions of Section 10(34), dividend income under section 2(24)(e) is 100% exempt in the hands of the shareholders as it is charged to Dividend Distribution Tax under section 115-0 of the Income Tax Act, 1961.
Question 9.
“Profit on slump sale is a Capital Receipt.” Explain and support the statement through decided Case Laws. (June 2022, 5 marks)
Question 10.
Does any tax concessions accrue to a foreign company in case of demerger? (June 2022, 3 marks)
Question 11.
Blueberry Ltd., a subsidiary of Greenberry Ltd., merged with its holding company. Greenberry Ltd. was holding 92% equity shares in merged subsidiary company. The management of holding company has sought your opinion about incidence of stamp duty payment. Give your opinion in light of the provisions of the Companies Act, 2013. (Dec 2015, 5 marks)
Answer:
The Central Government has exempted the payment of stamp duty on instrument evidencing transfer of property between companies limited by shares as defined in the Indian Companies Act, 2013, in a case:
- where at least 90 percent of the issued share capital of the transferee company is in the beneficial ownership of the transferor company, or
- where the transfer takes place between a parent company and a subsidiary company one of which is the beneficial owner of not less than 90 percent of the issued share capital of the other.
Thus, in the above case stamp duty will not be levied.
Question 12.
Delta Overseas Ltd., an industrial company incorporated in the year 2009, has merged with Mars India Ltd. Mention the tax benefits available to the remaining entity namely Mars India Ltd. (Dec 2015, 5 marks)
Answer:
The remaining company is entitled to the following benefits:
Amortization of Preliminary Expenses:
The benefit of amortization of preliminary expenses under section 35D are ordinarily available only to the assessee who incurred the expenditure.
However, the benefit will not be lost in case the undertaking of an Indian company which is entitled to the amortisation is transferred to another Indian company in a scheme of amalgamation within the 10 years/5 years period of amortisation. In that event the deduction in respect of previous years in which the amalgamation takes place and the following previous years within the 10 years/5 years period will be allowed to the amalgamated company and not to the amalgamating company.
Capital Expenditure on Scientific Research:
In the case of an amalgamation if the amalgamating company transfers to the amalgamated company, which is an Indian company, and asset representing capital expenditure on scientific research, provision of Section 35 would apply to the amalgamated company as they would have applied to amalgamating company if the latter had not transferred the asset.
Expenditure on Acquisition of Patent Right or Copyright:
Where the assessee has purchased patent right or copyrights he is entitled to a deduction under section 35A for a period of 14 years in equal instalments. The amalgamated company gets the right to claim the unexpired instalments as a deduction from total income.
The deduction under this section is however, available for expenditure incurred before 1st April, 1998 only.
Expenditure on Amalgamation:
Section 35DD provides that where an assessee being an Indian company incurs any expenditure on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation of demerger takes place.
Expenditure on know-how:
Section 35AB(3) of the Income-tax Act provides that where there is a transfer of an undertaking under a scheme of amalgamation or demerger and the amalgamating or the demerged company in entitled to a deduction under this section, then the amalgamated or the resulting company, as the case may be, shall be entitled to claim deduction under this section in respect of such undertaking to the same extent and in respect of the residual period as it would have been allowable to the amalgamating company or the demerged company, as the case may be, had such amalgamation or demerger not taken place.
The deduction under this section is however, available for any lump sum consideration paid in any previous year relevant to the assessment year commencing on or before 1.4.1998.
Expenditure for obtaining Licence to Operate Telecommunication Services (Section 35ABB)
The provisions of the Section 35ABB of the Income Tax Act relating to deduction of expenditure incurred for obtaining licence to operate communication services shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not transferred the licence.
Question 13.
Yellow Overseas Ltd. (YOL) merged with Yellow India Ltd. (YIL). YOL availed the benefit of amortisation of preliminary expenses only for two years till merger order. Whether YIL is eligible to avail this benefit for the remaining period? Substantiate your answer. (June 2016, 5 marks)
Answer:
The benefit of amortisation of preliminary expenses under section 35D are ordinarily available only to the assessee who incurred the expenditure. However, the benefit will not be lost in case the undertaking of an Indian company which is entitled to the amortisation is transferred to another Indian company in a scheme of amalgamation within the 10 years/5 years period of amortisation.
In that event the deduction in respect of previous year in which the amalgamation takes place and the following previous year within the 10 years/5 years period will be allowed to the amalgamated company and not to the amalgamating company.
Question 14.
A scheme of Merger of Happy Limited with Lucky Pvt. Ltd. was filed with the National Company Law Tribunal (NCLT). The Regional Director raised objections that the additional filing fees and stamp duty on the increased share capital of the Lucky Pvt. Ltd. is to be paid and also against the changing name of the transferee company, for not complying with Section 61 of the Companies Act, 2013.
Will the objection of the Regional Director hold good? Explain. (June 2017, 5 marks)
Answer:
In Jay pee Cement Limited v. Jayprakash Industries Limited [2004] the Allahabad High Court held that the combining of the authorised share capital of the transferor company with that of the transferee company resulting in increase in the authorised share capital of the transferee company does not require the payment of registration fee or the stamp duty because there is no reason why the same fee should be paid again by the transferee company on the same authorised capital.
Provisions of mergers and amalgamations in chapter XV of Company Act, 2013 is a complete code or a single window clearance system, NCLT may approve a change in the name of the transferee company as part of scheme of amalgamation for which no compliance is separately needed and provisions of Section 61 will be deemed to be complied with.
[PMP Auto Industries Ltd. [1992] 7CLA 94 [Bom.]
In view of the above decided case laws and the judgments of the Courts it is relevant to state that the objections of the Regional Director will not hold good and are not tenable.
Taxation & Stamp Duty Aspects of Corporate Restructuring Notes
Amalgamation under Income Tax Act
“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 merge 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 the 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-fourths 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 by virtue of the amalgamation, otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first mentioned company.
Carry forward and set off of accumulated loss and unabsorbed depreciation allowance
Linder Section 72A of Income Tax Act,1961, a special provision is made which relaxes the provision relating to carrying forward and set-off of accumulated business loss and unabsorbed depreciation allowance in certain cases of amalgamation.
Where there has been an amalgamation of a company owning an industrial undertaking or a ship or a hotel with another company, or an amalgamation of a banking company referred to in clause (c) of Section 5 of the Banking Regulations Act,1949 with a specified bank, or one or more public sector company or companies engaged in the business of operation of aircraft with one or more public sector company or companies engaged in similar business, then, not withstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or; as the case may be, allowance for depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and other provisions of this Act relating to set-off and carry forward of loss and allowance for depreciation shall apply accordingly.
It is to be noted that as unabsorbed losses of the amalgamating company are deemed to be the losses for the previous year in which the amalgamation was effected, the amalgamated company will have the right to carry forward the loss for a period of eight assessment years immediately succeeding the assessment year relevant to the previous year in which the amalgamation was effected.
However, the above relaxations shall not be allowed in the assessment of the amalgamated company unless,
(a) the amalgamating company-
- has been engaged in the business in which the accumulated loss occurred or depreciation remains unabsorbed, for three or more years;
- has held continuously as on 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 –
- holds continuously for a minimum of five years from the date of amalgamation at least three fourth of the book value of fixed assets of the amalgamating company acquired in a scheme of amalgamation;
- continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation;
- fulfills such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose.
In case of a demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall,
(a) where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company, be allowed to be carried forward and set off in the hands of the resulting company;
(b) where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting company, be apportioned between the demerged company and the resulting company in the same proportion in which assets of the undertaking have been retained by the demerged company and transferred to the resulting company, and shall be allowed to be carried forward and set off in the hands of the demerged company or the resulting company, as the case may be.
Capital Gains Tax
- Capital gains tax is leviable if there arises capital gain due to transfer of capital assets.
- The word ‘transfer’ under section 2(47) of the Income Tax Act, 1961 includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein
- Capital gain arises only when a capital asset is transferred.
- In an amalgamation capital gain arises if there is a transfer of capital asset. However, section 47 of the Income Tax Act, 1961 treats certain transactions from amalgamation as not transfer and hence capital gains tax will not be applicable.
Amortisation of Preliminary Expenses
The benefit of amortization of preliminary expenses under section 35D of the Income-tax Act, 1961 are ordinarily available only to the assessee who incurred the expenditure. However, the benefit will not be lost in case the undertaking of an Indian company which is entitled to the amortization is transferred to another Indian company in a scheme of amalgamation within the 5 years period of amortisation.
Capital Expenditure on Scientific Research
In the case of an amalgamation if the amalgamating company transfers to the amalgamated company, which is an Indian company, any asset representing capital expenditure on scientific research, provision of section 35 of the Income-tax Act, 1961 would apply to the amalgamated company as they would have applied to amalgamating company if the latter had not transferred the asset.
Expenditure on Amalgamation
Section 35DD of the Income-tax Act, 1961 provides that where an assessee being an Indian company incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation or demerger takes place.
Expenditure for obtaining Licence to Operate Telecommunication Services (Section 35 ABB)
The provisions of the section 35ABB of the Income Tax Act, 1961 relating to deduction of expenditure, incurred for obtaining licence to operate communication services shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not transferred the licence.
Tax aspects on slump sale
Section 2(42C) of the Income Tax Act, 1961 defines slump sale as a means of transfer of one or more undertakings as a resuit of the sale for a lump sum consideration without values being assigned to the Individual assets and liabilities in such sales.
As per section SOB of the Income Tax Act, 1961 any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains from the transfer of long-term capital asset and shall be deemed to be the income of the previous year in which the transfer took place.
Any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assesee for not more than thirty six months immediately preceding the date of transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.