Taxation of
Business Restructuring
- Anup P. Shah
Chartered Accountant
13th July 2012
JB Nagar CPESC & WIRC of ICAI
Scope
Restructuring
Acquisition
Sale
Conversion
Return of
Capital
Merger
Demerger
Part IX
Reduction
Takeover
Slump/
Asset Sale
S.47(xiii)
Others
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2
ACQUISITION
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Merger
4
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Definition of Merger - S.2(1B)
(A)
Only of Companies: Not for LLPs / Firms
A
B
B
A
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A
B
C
5
S.2(1B) – Definition
(B)
Three Conditions:

All properties

All liabilities

At least 75% shareholders (Valuewise) of Tor Co. should
become shareholders of Tee Co.
The above conditions are cumulative
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Forward Merger
X Ltd.
Loss Making Co.
Merger
A Ltd.
Profitable
Reverse Merger
X Ltd.
Loss Making Co.
MERGER
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A Ltd.
Profitable
7
Forward v. Reverse Merger
- Comparison
Forward Merger
Reverse Merger
C/f Bus. Loss
Available?
Available?
C/f Unabs. Dep
Available?
Available?
MAT Credit of
Loss making Co.
Listing
Available?
Continues?
Unlisted
listed?
Capital Reduction
Required?
Advisable?
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can
be
8
Forward Merger – S.72A

Available to companies owning a few selected industrial
undertakings :

Mfg. / IT/ Shipping / Telecom/ Hotel / Bank / Mining

Q. Loss-making companies in trading, finance, real estate, stock
broking, etc?

Q. Hospital - Whether an “Industrial Undertaking”?

Apollo Hospitals Enterprises Ltd., 300 ITR 167 (Mad)
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Forward Merger – S.72A

Conditions u/s. 72A & Rule 9C





Tor engaged in Bus. For 3 years or more
Tor held 75% of BV of FA for 2 yrs prior to Merger
Tee continues to hold 75% of BV of FA for 5 years
 Q. Meaning of BV – Purchase Price or Book WDV?
Tee carries on Business for 5 years
Tee achieves production level of 50% of Installed
Capacity before 4 yrs from merger and continues for 5 yrs
from Merger
 CA’s Certificate for the same - Form 62
 From year of Capacity utilisation till 5 years from
Merger
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Forward Merger – S.72A

Would a company which has an eligible undertaking
and
a
non-eligible
undertaking
(e.g.,
industrial
undertaking and trading or financing business) be
covered?

B/f Bus. loss of Tor Co becomes Current Year’s Loss
of Tee Co

Can be set off against CG of Tee Co

Q. If 8th year of B/f Business loss – Any solution?
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Reverse Merger & Taxation

Merger of a healthy co. with a loss-making co.

Better than Forward Merger

All losses and UAD will be allowed to be carried forward
and set off.

Any conditions to be fulfilled?

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Appointed Date Of Merger

Merger with retrospective date – valid?

Marshall Sons & Co. (SC)

Appointed Date:

Effective Date:

Effective Date relevant for Taxation?

Scheme must provide for Appointed Date

Q. GAAR for Retrospective AD?
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Appointed Date Of Merger

Merger with retrospective date – valid?

Scheme of merger modified to take effect from an earlier date to
enable transferee Co. to take advantage of losses of transferor
co - Merger otherwise in public interest

Q.
Can sanction be refused?
Ambalal Sarabai Enterprises (Guj)
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Appointed Date & Assessment …

Transferee Co. can file Revised Return after Merger


Beyond Due Date u/s. 139(5)?
Assessment on Transferor after Merger

Even for periods prior to amalgamation for which assessment
was not completed.
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Tax Implication For Tee Co.

Benefit of substitution of FMV on 1.4.1981 available?

Depreciation

In year of transfer–pro rata to Transferor & Transferee

On what value To Transferee?

Merger Exp.– Equal Dedn. to Transferee in 5 Years

Period of Capital asset held by Transferor included for
determining Holding Period of Transferee
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Tax Implication For Tee Co.

Cessation of Transferor liability’s - Taxable to Transferee
u/s. 41(1)

Debtors of Transferor – Turn Bad in Transferee’s Hands


Allowable?
Gratuity / Bonus to Transferor’s Employees

Allowable?


SIT of Tor which becomes SIT of Tee Co.

Sold as SIT by Tee Co.
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Depn. on Goodwill


Goodwill arising on Merger?

Can Transferee claim Depreciation on Goodwill?

Is It a Mere Accounting Entry required under AS14?
What if Brand Acquired under Merger?

Depreciation Allowed?

Same as Goodwill?
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Taxation of Shareholder of Tor Co.

Any transfer by SH of Transferor – Not a Transfer (s.47(vii))

Period of holding for shares in Transferee = Transferor Co.

CoA of shares in Transferee = that in Transferor Co.


If not a tax-neutral Amalgamation
Exemption u/s. 47 for Trader?

Q. Whether Taxable?
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Taxation of Shareholder of Tor Co.

Q. If SHs of Tor Co. receive Debentures/Cash,
would CGT exemption be available?

Gujarat High Court
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Taxation of Shareholder of Tor Co. on
Sale of New Shares

Q. Benefit of substitution of FMV on 1.4.1981 available?:


Q. Indexation available from which date – Holding in
Transferor Co. or Transferee Co.?

Manjula Shah (Mum SB)

Kotak Bank (Mum)
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Merger – Tax Avoidance
 Can you do merger for tax avoidance?

Wood Polymer (Guj)


Indo Continental Hotels (Raj)


Konark Investments, 97 Comp. Cas 52 (SC)
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Merger – Tax Avoidance … Cont

Star Television (AAR) 

Merger of Foreign Co. into Indian Co.
Vodafone Essar (Del) - Demerger without consideration
Vodafone Essar (Guj) - Demerger without consideration

GAAR?
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Merger of WOS with HoldCo

Q.Whether it would be exempt u/s.47(vi) because no
shares issued?



Whether Deemed Dividend by WOS to Holdco?
Does Transferor have to pay DDT?

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Merger & s.47A
Year 1
Year 4
Holding Co.
Subsidiary merged
into Holding Co.
Transfer of
Capital Asset
Wholly-owned
Sub
No CGT –
s.47(iv)
S.47A(1):
• Parent should own 100%
of Sub for 8 years:
• Is it possible to apply
this section?
• Is provision frustrated?
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Foreign Co Merger With Indian Co

Q. Can you merge Foreign Co. with an Indian Co.?


Tax Implications?


CGT by Fco.
For Business in India?
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Merger / Sale wef Prior Date

Q. In whose hands is profit after Appointed Date
taxable?

Transferor

Transferee?
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Merger

Q. Is Capital Reserve (Excess of NA over Shares
issued) arising on merger not taken to Capital
Reserve
but
Credited
to
General
Reserve
taxable?

Is it Merely an Accounting Entry?
 Is
it Business Income u/s. 28(iv)?

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Acquisition of Shares
Tax on CGT (Domestic Sellers)
Period of Holding
On-market & STT paid
Off-market (Listed)
Unlisted Shares
MAT for Company SH
LTCG
STCG
More than 12 months
– even for Unlisted
Cos.
Less than 12 months
Nil
15%
10% or 20% with
Indexation
Normal Tax Rates /
30%
20% with Indexation
Normal Tax Rates /
30%
Yes
Yes
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Sale of Shares

Sale at below FMV

Notional CGT on Seller?



GAAR?
S.56(2)(vii) / (viia) for Buyer



FMV = Book Value u/R. 11UA
Purchase price at or above FMV
Appreciation in underlying assets irrelevant
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Tax on Sale of Listed Shares by FCo.




Thru Market & LTCG : No Tax
Thru Market & STCG: 15%
Off-market Sale of shares

With Indexation – 20%

Without Indexation – 10%
Q. Concessional rate of 10% available to FCo? (s.112)

Judicial Controversy?
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Sale of Unlisted Shares by FCo.

LTCG taxable @ 10%

STCG @ 42%

No Tax if DTAA provides tax in Country of
Residence


Mauritius

Cyprus

Singapore
Vodafone
Benefits
Amdt.
does
not
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attack
Treaty
33
Tax on Sale of Unlisted Shares

To claim DTAA benefits

PO Box Office & Professional Directors with TRC
sufficient ?

Substantial Presence necessary?

What if DTAA does not contain a LOB Clause?

Treaty override by GAAR?

Singapore better than Mauritius?
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Sale of Unlisted Shares by F Co.

Capital Gains Tax on sale of shares by FCo.


Buyer & Seller located in USA
 Shares of ICo. Sold / Purchased
 Payment received in USA

Q. Whether taxable in India?

Under DTAA ?

U/s. 9(1)(i) & u/s.163?
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Ardex Investments
Ardex Invst
Mauritius
Trf of I Co.
shares
Ardex GmBH
(Germany)
Abroad
India
I Co.
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Ardex Investments

Whether Trf of I Co. shares is taxable in India?

Held:

As per Indo-Mauritius Treaty?

Is Treaty Shopping valid? Now GAAR?

If shares are held for a long period of time can
an enquiry be made

Return to be filed?
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Goodyear – Transfer Pricing
GTRC
USA
Gift of Shares
of GIL India
GOCPL
Singapore
Singapore
India
GIL
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Goodyear – Transfer Pricing

Gift of Indian Sub’s shares by Foreign Holdco
to Foreign Sub

Capital Gains Tax applicable?

S.56(2)(viia) Applicable?

Whether Donee required to deduct tax u/s. 195?

Transfer Pricing applicable?

Even if no tax payable?

Amendment by FA 2012
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Transfer of CCDs


Z Ltd (AAR)

Transfer of CCDs by a Mauritius Co.

AAR held CCDs are nothing but Debt till converted
into Shares

Indo-Mauritius DTAA exempts Capital Gains

Income arising on CCDs is Interest Income which is
not Exempt
Correctness?
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S. 79 - Sale of Shares Unlisted Co.

SITUATION :





Unlisted Co.
Unabsorbed Depn. & B/f Business Loss
Existing SHs want to sell 100% stake
Buyer wants benefit of Depn. & Loss
PROBLEM

S.79 - Can’t Transfer > 49% stake
till b/f loss set off
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S. 79 - Sale of Shares Unlisted Co.
 Whether
S.79 applies to UAD or only to
Business Loss?

 What
about business loss?
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S. 79 - Sale of Shares Unlisted Co.

Merger of 98% HCo. with its SCo. - no
change in management of SCo. :


Q. Carry forward of loss allowable?
Q. S.79 requires 51% voting power or
shares?

Q. Would transfer by Sub Co. to HoldCo trigger s.79?
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S. 79 - Sale of Shares Unlisted Co.

Transfer of shares by HoldCo. to Director

Can it be said that s.79 N.A. since Transfer within Group?


S.79 N/A if Indian unlisted Co. is Sub Co. of Listed
Indian H Co.
Q. Whether S.79 applicable if ICo is a subsidiary of
Listed Fco?

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44
S. 79 - Sale of Shares Unlisted Co.

Would s.79 override a Merger which is eligible u/s.
72A?

In case of unlisted companies

Would c/f of losses of Transferor be disallowed
since change of Shareholding takes place?


Express Provisions?
Would s.79 nullify the provisions of S.72A?
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45
TOR & CG for Inter Se Transfers

For acquisition & merger it may be necessary to make
internal transfer of shares

Under TOR, ‘inter se promoter transfer’ and
‘inter se Relatives transfer’ exempt

Necessary that shares which are acquired
are those sold by Seller


Else, Open Offer may be required if Limits breached
Under I.T. Act, LTCG is exempt
if sold through SE & STT paid
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46
TOR & CG for Inter Se Transfers

Issues:
 Identification of shares not possible when
shares held in demat

How to sell shares through SE
& ensure Sale to Promoters / Relatives?

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47
Land Sale by Co.
• Land in Co.- Substantial appreciation – Less than 3
years
• Shares in Co. owned for more than 12 months
• No Other Businesses
• Substantial Stamp duty on sale of Land• Sale of Shares of Co.
• ST / LT
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48
SALE
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49
Demerger
Demerger-s.2(19AA)

Demerger of Undertaking

A&L of Demerged Co. that of Resulting Co.


Specific Loans /Debentures that of RCo.

Apportion Other Loans – Assets Trfd./Total Assets
Transfer @ Book Values only


Revaluation to be Ignored
SH of 3/4th in value of DCo. - SH in RCo.

RCo. Issues shares to SH of DCo. Proportionately
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Demerger-s.2(19AA)

Can Resulting Co. issue to SH of D Co.:


Transfer on a going concern basis


Any other Instruments
 Business must be carried on
As per Conditions by CG

Nothing prescribed like for Mergers
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Tax Consequences

Any trf. of a Capital Asset – not a Taxable Trf.

Issue of Shs. By RCo. to SH of DCo. – not a
Taxable Trf.

CoA of shares in Rco.
= CoA in DCo. * Net Book Value of Assets Trf.
Net Worth of DCo.

CoA of Shares in DCo.= Cost – Cost of RCo.

Period of Holding of Shs in RCo.= that in DCo.
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Tax Consequences

Total Depn. to be allocated between DCo. &
RCo. Based on No. of Days used

Actual Cost to DCo.= that of Rco.

WDV to DCo.= that of Rco.

WDV for DCo. = Total WDV (-) Assets Trfd.

 Would have to work out WDV separately for
each Unit
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Undertaking


Undertaking includes:

any part of undertaking or

a unit or division of an undertaking or

a business activity taken as a whole, but does not include
individual assets or liabilities or a combination thereof not
constituting a business activity
Q. X Ltd. has a business of BPO & Investment in
Shares:

Demerger of Shares into a New Entity

Is it an Undertaking as per Expln. 1 to s. 2 (19AA)?

Does it constitute a Business Activity?
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Demerger of all Assets

A Ltd. has one activity – software business

Q. Can entire Software business be demerged into
a New Co.?

No assets / liabilities left behind in A Ltd.

Only nominal capital & cash / bank left behind

Is such a Demerger possible?

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56
Slump / Itemised Sale
Slump / Itemised Sale
Seller
Slump / Asset Sale of Bus.
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Buyer
58
Slump vs Itemised Sale
Factors
Slump Sale
Itemised Sale
What is sold
Business as a Going concern
Individual A & L
Valuation
DCF / ECM / Ad-hoc without
assigning separate Values
Separate Values to
each A & L
Undertaking
Must constitute a Business
Activity
No such condition
Must all A&L be
sold
Generally yes, unless facts
permit otherwise
No
Sale only
Slump Sale – not Exchange
Can be an Exchange
also
Taxation
S.45(1) r.w. s.50B
S.45 / s.50 / s.50C
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59
Tax Consequences

Slump Sale

Lump sum consideration – No itemised break-up

Excess of SC over Networth = LTCG / STCG


Revaluation to be ignored

Gains Taxable u/s. 45 r.w. s.50B

S.50C applicable?
Itemised Sale

Itemised Break-up over A&L

Gains Taxable:

S.50C applicable even to S.50?
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60
Slump Sale

Negative Networth

Should it be Ignored or Considered u/s. 50B


Slump Exchange

Issue of shares against Transfer as Going Concern

Sale v Exchange ~ Difference?

Is it Taxable

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61
Slump Sale v Demerger

Avaya Global (Mum)

Loss-making Unit hived-off by Court Scheme

No consideration paid by Transferee

Is it a Demerger since no shares issued?

Alternatively is it a Slump Sale?

Final Decision
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62
Slump or Asset Sale?

Retention of Some Assets by Seller


Is a Slump Sale if going concern not disturbed

Tech. K-how sold later on

Building for IT Co.

Doubtful Loans & Contingent Liabilities
Treated as Itemised Sale (on Facts)

Factory not sold

Land because of ULCR Act

Liabilities not sold
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63
Slump or Asset Sale?

Q. of Fact and Not Documentation

Sale of IPR, Assets & Goodwill by 9 separate Agr.
Assigning separate Values

Held, to be a Slump Sale not Itemised Sale

Substance over form prevails. Totality of Agreements to
be seen

A/c. Treatment + Agr. Not conclusive

Dir. Report / Absorption of Employees on Continuity /
Non-Compete / Clauses showed it as a Slump Sale

Just because land not sold irrelevant fact

For this Biz., IPR was important not land

Mahindra Mainers Eng. (Mum)
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64
Slump Acquisition

Buyer acquired a Going Concern by Slump
Acquisition

Excess Payment over NAV was termed by Buyer as
Goodwill

Depreciation claimed on Goodwill

Depreciation allowed?
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65
Exempt Sales

CG on transfer of Capital Asset to WOS
Exempt u/s. 47(iv)

Is Capital Loss on such Transfer allowable?


Exemption for transfers between Holdco-WOS

Necessary that 100% shares must be in name of
Holdco?

© PRAVIN P. SHAH & CO.
66
Exempt Sales

Can Holdco claim exemption for sale to Sub
of Sub?

Sub of Sub is a Subsidiary under Company Law

Exemption available u/s. 47(iv) / (v)?

© PRAVIN P. SHAH & CO.
67
CONVERSION
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Part IX Conversion

Firm  Co. u/s. 565 of Cos. Act (“Part IX”)

Q. Any liability for SD or I.T?

No Transfer of Undertaking from Firm to Co.

Statutory provision – ROC must Incorporate Co.

No separate Conveyance reqd.

Statutory vesting of property

SD payable on such Conversion?

© PRAVIN P. SHAH & CO.
69
Part IX Conversion

Any Transfer of Undertaking from Firm to Co.

Capital Gains payable on such Conversion

S.45(4), applicable?


Ch.VI-A Deductions of Firm continue?
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Part IX Conversion

No Capital Gains payable on Conversion


Even if Revaluation of Assets done prior to conversion?
Can s.45(1) or 45(4) apply in such a case?


C/f of Losses of Firm – allowed to Co?

S.72A(6) provides for c/f in case of s.47(xiiii) case?
© PRAVIN P. SHAH & CO.
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Part IX Conversion

Conditions

Registered Firm

7 or more Members of Co.

On Conversion Co. only has Partners as Members

Do conditions of s.47(xiii) need to be satisfied?

© PRAVIN P. SHAH & CO.
72
Sale by Firm to Co. & Exemption

Slump / Itemised Sale by Firm / LLP for to
Buyer Co.:


Exemption u/s.47(xiii):

All A / L of Firm / AOP become that of Co.

All Partners become SHs in same proportion

Partners do not receive any other consideration

SH of all Partners is at least 50% of Voting Power

50% SH of Partners continues for 5 years
Exemption N.A. if Sale to LLP
© PRAVIN P. SHAH & CO.
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Sale by Firm to Co. & Exemption

Analysis of s. 47(xiii):


Can it be a New Co.?

Firm can trf. 2 Businesses to 2 Cos.?

Only Business A/L to be trf.?

Can RPS be issued to partners?

Shares can be issued at a Premium?

Transfer inter se Partners permissible in 5 years?
If conditions violated
© PRAVIN P. SHAH & CO.
74
RETURN OF CAPITAL
© PRAVIN P. SHAH & CO.
75
Reduction of Capital



Court Process u/s. 100 of Companies Act
Capital in Excess paid back to Shareholders
Capital Gains:

Amount Received (-) Cost of Shares


Receipt on Reduction : Accumulated profits taxed
as Deemed Dividend

Who pays Tax on Deemed Dividend?
Any Exemption?

Excess over Dividend

© PRAVIN P. SHAH & CO.
76
Reduction of Capital

Does
Distribution
of
cash
&
immovable
properties on Reduction amount to transfer?

Reduction
by
reducing
FV
of
Shares
of
Shareholders

No. of shares not changed – remain same

Is it a Transfer?

Capital Gain or Loss on such a Reduction?
© PRAVIN P. SHAH & CO.
77
Buyback by Co.

Deemed Dividend by Co. on Buyback?


Capital Gains on Shareholder

Gains = SC – Cost of Acquisition

Indexation also available

Buyback through Tender Offer:


Buyback through Open Market Operations:

© PRAVIN P. SHAH & CO.
78
Buyback by Co.

Capital Gains exempt if DTAA provides

A Ltd (AAR)


Buyback offered only by Mauritian Co.

AAR ~ Device to evade DDT

Exemption denied and Income recharecterized as
Dividend

Spirit of GAAR applied
Correctness?
© PRAVIN P. SHAH & CO.
79
Redemption of RPS - Tax Issues

Redemption at par


Redemption at Premium


Redemption = Transfer, results in Capital Gains
Premium on redemption  Deemed Dividend
Issue of RPS within the Group


Redemption a Sham?
Indexation available?
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81