1. A project report on
Tax aspects of Mergers and acquisitions

2. AMALGAMATION [Section 2(1B) of I.T. 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 nine-tenths 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.

3. TAX CONCESSIONS/ INCENTIVES IN CASE OF AMALGAMATION:
1. Tax concessions to amalgamating company
2. Tax concessions to shareholders of the amalgamating company
3. Tax concessions to amalgamated company
1. Tax concessions to amalgamating company:
U/S 47(vi) any transfer, in a scheme of amalgamation, of a capital asset by the
amalgamating company to the amalgamated company if the amalgamated company is an
Indian company; shall not be regarded as transfer for the purpose of capital gains.
U/S 47 (vi) (a) Any transfer, in a scheme of amalgamation, of a capital asset being a
share or shares held in an Indian company, by the amalgamating foreign company to the
amalgamated foreign company, shall not be regarded as transfer for purpose of capital
gains if -
(a) At least twenty-five per cent of the shareholders of the amalgamating foreign
company continue to remain shareholders of the amalgamated foreign company, and
(b) Such transfer does not attract tax on capital gains in the country, in which the
amalgamating company is incorporated.
2. Tax concessions to shareholders of the amalgamating company:
U/S 47 vii) Any transfer by a shareholder, in a scheme of amalgamation, of a capital
asset being a share or shares held by him in the amalgamating company, shall not be
regarded as transfer for the purpose of capital gains if –
(a) The transfer is made in consideration of the allotment to him of any share or shares in
the amalgamated company, and
(b) The amalgamated company is an Indian company.

4. 3. Tax concessions to amalgamated company:
Conditions to be satisfied for being eligible for tax concession:
• The amalgamation satisfies all the three conditions laid down in section 2
(1B);and
• The amalgamated company is an Indian country.
a. Expenditure on scientific research [U/S 35(5)]:
When an amalgamating company transfers any asset represented by capital
expenditure on the scientific research to the amalgamated Indian company in a
scheme of amalgamation provisions of section 35 shall be applicable-
• unabsorbed expenditure on scientific research of the amalgamating company
will be allowed to be carried forward and set off in the hands of the
amalgamated company,
• if such asset ceases to be used in the previous year for scientific research
related to the business of amalgamated company and is sold by the
amalgamated company the sale price to the extend of cost of asset shall be
treated as business income and the excess of sale price over the cost shall be
subject to the provisions of capital gain.
b. Expenditure on acquisition of patent rights or copyrights[U/S 35A(6)]:
If patent or copyright acquired by the amalgamating company is transferred to
amalgamated Indian company, provisions of section 35A shall be applicable to
the amalgamated company
The expenditure on patent rights or copyrights to the extend not yet written off
shall be allowed as deduction to the amalgamated company in the same number of
balanced installments.
However if such expenditure is incurred by the amalgamating company after
31-3-1998, deduction U/S 35A is not allowed and such expenditure shall be
eligible for depreciation as intangible asset.

5. c. Treatment of preliminary expenses [U/S 35D(5)]:
When and amalgamating company merges with an amalgamated company under a
scheme of amalgamation, the amount of preliminary expenses of the
amalgamating company to the extend not yet written off shall be allowed as
deduction to the amalgamated company in the same manner as would have been
allowed to the amalgamating company.
d. Treatment of capital expenditure on family planning [U/S 36(1)(xi)]:
If Asset representing capital expenditure on family planning is transferred by the
amalgamating company to the amalgamated company under a scheme of
amalgamation, such expenditure shall be allowed as deduction to the
amalgamated company in the same manner as would have been allowed to the
amalgamating company.
e. Treatment of bad debts[U/S 36(1)(vii)]:
When due to amalgamation debts of the amalgamating company has been taken
over by amalgamated company, and subsequently, such debts turn out to be bad, it
shall be allowed as deduction to the amalgamated company.
f. carry forward and set off of business losses and unabsorbed depreciation of
the amalgamating company
The amalgamated company shall be allowed to carry forward and set off the
business losses and unabsorbed depreciation of the amalgamating company, if all
the conditions of section 72A are satisfied.

6. Conditions:
• The amalgamation should be of a company owning an industrial undertaking or
ship
• The amalgamated company holds at least 3/4th of the book value of the fixed
assets of the amalgamating company for a continuous period of 5 years from the
date of amalgamation
• The amalgamated company continues the business of the amalgamating company
for a period 5 years from the date of amalgamation
• The amalgamated company fulfills such other conditions as may be prescribed to
ensure to ensure the revival of the business of the amalgamating company.
g. Deduction available U/S 80-IA & 80-IB:
When an undertaking which is entitled to deduction U/S 80-IA & 80-IB is
transferred under a scheme of amalgamation to the amalgamated company,
before the expiry of period of deduction then-
• No deduction shall be available to the amalgamating company for the previous
year in which the amalgamation takes place under the section
• Deduction shall be available to the amalgamated company in the same way in
which it would have been available to the amalgamating company.

7. DEMERGER [section 2(19AA)]:
"Demerger", in relation to companies, means the transfer, pursuant to a scheme of
arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a
demerged company of its one or more undertakings to any resulting company in such a
manner that - (i) All the property of the undertaking, being transferred by the demerged
company, immediately before the demerger, becomes the property of the resulting
company by virtue of the demerger;
(ii) All the liabilities relatable to the undertaking, being transferred by the demerged
company, immediately before the demerger, become the liabilities of the resulting
company by virtue of the demerger;
(iii) The property and the liabilities of the undertaking or undertakings being transferred
by the demerged company are transferred at values appearing in its books of account
immediately before the demerger;
(iv) The resulting company issues, in consideration of the demerger, its shares to the
shareholders of the demerged company on a proportionate basis;
(v) The shareholders holding not less than three-fourths in value of the shares in the
demerged company (other than shares already held therein immediately before the
demerger, or by a nominee for, the resulting company or, its subsidiary) become
shareholders of the resulting company or companies by virtue of the demerger, otherwise
than as a result of the acquisition of the property or assets of the demerged company or
any undertaking thereof by the resulting company;
(vi) The transfer of the undertaking is on a going concern basis;
(vii) The demerger is in accordance with the conditions, if any, notified under sub-section
(5) of section 72A by the Central Government in this behalf.
TAX CONCESSIONS/ INCENTIVES IN CASE OF DEMERGER:
1. Tax concessions to demerged company
2. Tax concessions to shareholders of the demerged company
3. Tax concessions to the resulting company

8. 1. Tax concessions to demerged company:
U/S 47 (vib) any transfer, in a demerger, of a capital asset by the demerged company to
the resulting company, shall not be considered as transfer for capital gain purposes if the
resulting company is an Indian company
U/S 47(vic) any transfer in a demerger, of a capital asset, being a share or shares held in
an Indian company, by the demerged foreign company to the resulting foreign company,
shall not be treated as transfer for capital gain purposes if–
(a) At least seventy-five per cent. Of the shareholders of the demerged foreign company
continue to remain shareholders of the resulting foreign company; and
(b) Such transfer does not attract tax on capital gains in the country, in which the
demerged foreign company is incorporated.
2. Tax concessions to shareholders of the demerged company[U/S 47(vid)]:
Any transfer or issue of shares by the resulting company, in a scheme of demerger to the
shareholders of the demerged company, shall not be treated as transfer for capital gain
purpose, if the transfer or issue is made in consideration of demerger of the undertaking.
In case of a demerger the existing shareholders of the demerged company will now hold
Shares in resulting company and shares in demerged company.
In case if the shareholders transfer any of the above shares subsequent to the demerger,
the cost of such shares shall be calculated as under:
Cost of acquisition of the shares=
Cost of acquisition of shares held by net book value of the assets transferred in demerger
The assessee in the X
Demerged company net worth of the demerged company before demerger

9. 3. Tax concessions to the resulting company:
The resulting company shall be eligible for tax concessions only if the following two
conditions are satisfied:
• The demerger satisfies all the conditions laid down in section 2(19AA);
and
• The resulting company is an Indian company.
a. Expenditure on acquisition of patent rights or copyrights [U/S 35A (7)]:
If patent or copyright acquired by the demerged company is transferred to
resulting Indian company, provisions of section 35A shall be applicable to the
resulting company
The expenditure on patent rights or copyrights to the extend not yet written off
shall be allowed as deduction to the resulting company in the same number of
balanced installments.
However if such expenditure is incurred by the demerged company after
31-3-1998, deduction U/S 35A is not allowed and such expenditure shall be
eligible for depreciation as intangible asset.
b. Treatment of preliminary expenses [U/S 35D(5)]:
When the undertaking of an Indian company which is entitled to deduction of
preliminary expenses is transferee before the expiry of 10/5 years, as the case may
be, to another company under a scheme of demerger, amount of preliminary
expenses of the demerged company to the extend not yet written off shall be
allowed as deduction to the resulting company in the same manner as would have
been allowed to the demerged company. The demerged company shall not be
allowed deduction of the same after demerger.

10. c. Treatment of bad debts [U/S 36(1)(vii)]:
When due to demerger, debts of the demerged company are taken over by the
resulting company and subsequently, such debt becomes bad, then it shall be
allowed as deduction to the resulting company.
d. Carry forward and set off of business losses and unabsorbed depreciation of
the amalgamating company [U/S 72A(4) 7 (5)]:
The accumulated loss and unabsorbed depreciation, in a demerger, are
allowed to be carried forward by the resulting company if these are directly
relatable to the to the undertaking proposed to be transferred. Where it is not
possible to directly relate it to the undertaking, such loss and depreciation
shall be apportioned between the demerged and resulting company in the
proportion of assets coming to the share of each as a result of the demerger.
e. Deduction available U/S 80-IA & 80-IB:
When an undertaking which is entitled to deduction U/S 80-IA & 80-IB is
transferred under a scheme of demerger to the resulting company, before the
expiry of period of deduction then
 No deduction shall be available to the demerged company for the
previous year in which demerger takes place under the section
 Deduction shall be available to the resulting company in the same
way in which it would have been available to the demerged
company.