BGM_19.12.2014_Mergers_Companies_Act_13 - Indore

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Ronak Doshi
Bansi S.Mehta & Co

Purpose/ Intention
◦ Sale of Entire Company – Sale of
Amalgamation
◦ Sale
of
company/Division
–
Sale/Demerger/Slump Exchange


shares/
Slump
Tax implication different for buyer and seller
Indirect tax/ Stamp duty implications
required to be analyzed before finalizing the
mode of restructuring
December 20, 2014
2



Time period for carrying out arrangement
(Private Sale/Court Scheme)
Clear transfer of title in case of court
approved scheme. Ease of transfer of existing
contracts, etc.
Now in Court scheme- Tax Department NOC
required – General Circular 1/2014
December 20, 2014
3
Amalgamation/Merger
• Amalgamation of a company by way of a court
approved scheme
• Tax neutral on fulfilment on conditions in section 2(1B)
• Court Approved Process, hence time consuming
Demerger
• Hive off of an undertaking by way of court approved
scheme
• Tax neutral on fulfilment on conditions in section
2(19AA)
• Court Approved Process, hence time consuming
December 20, 2014
4
Slump Sale
• Transfer of undertaking as a whole for lump
sum consideration
Itemised Sale
• Sale of individual assets for specific
consideration
Outright Sale
• Transfer of shares to the buyer
December 20, 2014
5



All
the
property
of
the
amalgamating
company(ies) becomes the property of the
amalgamated company;
All
the
liabilities
of
the
amalgamating
company(ies) become the liabilities of the
amalgamated company and
Shareholders holding not less than 75% of the
value of the shares of the amalgamating
company
become
shareholders
of
the
amalgamated company.
December 20, 2014
6



All the properties/ liabilities of the undertaking
immediately before the demerger becomes the
properties/ liabilities of the resulting company;
The
property
&
the
liabilities
of
the
undertaking/s
are
transferred
at
values
appearing in its books of account immediately
before the demerger;
The resulting company issues, in consideration of
the demerger, its shares to the shareholders of
the demerged company on a proportionate basis;
December 20, 2014
7



The shareholders holding not less than 75% of
the value of the shares in the demerged company
become
shareholders
of
the
resulting
company(ies) by virtue of demerger;
The transfer of the undertaking is on a “going
concern basis” and
The demerger is in accordance with the
conditions, if any, notified u/s. 72A(5) by the
Central Government.
December 20, 2014
8



Slump Sale means transfer of one or more
undertakings as a result of sale for a lump sum
consideration without assigning values to
individual assets and liabilities;
The term “undertaking” includes any part of the
undertaking, or a unit or a division of an undertaking,
constituting a business activity;
“Net Worth” of the undertaking shall be deemed to
be the cost of acquisition – no indexation benefit;
December 20, 2014
9


Net Worth = Aggregate Value of Total Assets Aggregate Value of Total Liabilities
Computation of Aggregate Value of Total Assets
◦ Depreciable Assets - WDV as per Section 43(6)(c)(i)(C)
◦ Assets wherein whole expenditure is allowed/
allowable as a deduction u/s. 35AD – NIL
◦ Other Assets – Book Value

Report of an accountant in Form No. 3CEA
certifying the Net Worth of the undertaking, to be
furnished along with the Return of Income.
December 20, 2014
10

Reduction in WDV of Block as per Section
43(6)(c)(i)(C)
Particulars
Amo
unt
Actual Cost of Asset
XXX
(-)
Depreciation actually allowed upto AY 87-88
(X)
(-)
Depreciation that would have been allowable since
AY 88-89 if asset was only asset in block of assets
(X)
WDV to be Decreased by
XX
◦ WDV Decreased cannot Exceed written down value
December 20, 2014
11

Sale of individual assets for specific
consideration

Capital gains in the hands of the seller

Indexation Benefit Available

Less time consuming as no court approval
required
December 20, 2014
12

Sale of shares by the shareholders to the
buyer

Capital Gains in the hands of shareholder

Indexation Benefit Available

Less time consuming as no court approval
required
December 20, 2014
13




Receipt of new shares in the amalgamated company
in lieu of shares held in the amalgamating company
Extinguishment of rights in equity shares of the
amalgamating company
Section 47(vii) – Extinguishment of rights in equity
shares not regarded as “Transfer”, subject to the
conditions as prescribed.
Hence, such extinguishment of rights not taxable in
the hands of shareholders.
December 20, 2014
14

Section 2(42A) – Period of Holding
◦ Shall include the period for which the shares were held
by the shareholders in the amalgamating company

Section 49(2) – Cost of Acquisition
◦ Shall be deemed to be the cost of acquisition of the
shares in the amalgamating company subject to
indexation determined as per the period of holding
December 20, 2014
15


Section 47(vi) – Transfer of a capital asset in a
scheme of amalgamation to an Indian company – not
regarded as “Transfer” - not taxable in the hands of
amalgamating company.
Section 47(via) – Transfer of a capital asset being
shares held in an Indian company, by Amalgamating
Foreign Company to Amalgamated Foreign Company
- not regarded as transfer, if following conditions
fulfilled:
◦ 25 % or more of the shareholders of amalgamating foreign
company continue to remain shareholders of amalgamated
foreign company
◦ Such transfer does not attract capital gain tax in country in
which amalgamating company is incorporated
December 20, 2014
16



Section 49(1)(iii)(e) – Cost of Acquisition shall be
deemed to be the “cost” for which the previous owner
of the property acquired it plus the cost of
improvements
Explanation 7 to Section 43(1) - Actual Cost of
transferred capital asset to be the same as it would
have been if the amalgamating company had
continued to hold the capital asset.
Explanation 2(b) to Section 43(6) - Block of Assets –
Actual Cost of block shall be WDV as in the case of the
amalgamating company for immediately preceding PY
as reduced by the amount of depreciation actually
allowed in the said preceding PY.
December 20, 2014
17



Receipt of new shares in the Resulting company
in lieu of shares held in the Demerged company
Section 47(vid) – Transfer/issue of shares by
resulting company in demerger to shareholders
of demerged company, if transfer is in
consideration of undertaking
Hence, no income in the hands of shareholders.
December 20, 2014
18

Section 2(42A) – Period of Holding
◦ Shall include the period for which the shares were held
by the shareholders in the demerged company

Section 49(2C) – Cost of Acquisition
◦ Shall be deemed to be amount which bears to the cost of
acquisition of the shares in the demerged the same
proportion as the net book value of assets transferred in
demerger bears to net worth of demerged company
immediately before demerger
December 20, 2014
19


Section 47(vib) – Transfer of a capital asset in a
scheme of demerger to an Indian company – not
regarded as “Transfer” - not taxable in the hands
of demerged company.
Explanation 2A to Section 43(6) - Block of Assets
–WDV to be reduced by WDV of assets transferred
to resulting company pursuant to demerger
December 20, 2014
20



Section 49(1)(iii)(e) – Cost of Acquisition shall be
deemed to be the “cost” for which the previous owner
of the property acquired it plus the cost of
improvements
Explanation 7A to Section 43(1) - Actual Cost of
transferred capital asset to be the same as it would
have been if the demerged company had continued to
hold the capital asset.
Explanation 2B to Section 43(6) - Block of Assets –
WDV of the transferred assets immediately before the
demerger
December 20, 2014
21

Fifth proviso to Section 32(1)
◦ The aggregate deduction of depreciation shall not exceed the
depreciation as per prescribed rates
◦ Also applicable in case of slump sale, as business transferred as
a whole
◦ Depreciation in the year of transfer to be computed as if
transfer had not taken place
◦ Depreciation to be apportioned between transferor and
transferee on the basis of number of days for which assets were
used by them

In case of non qualifying merger/demerger –
depreciation on actual cost i.e on actual purchase
price based on Purchase Price Allocation
December 20, 2014
22

Applicability:
◦ A company owning an industrial undertaking or a ship or
a hotel
◦ Banking Company
◦ Public Sector Companies having a business of operation of
aircrafts

Accumulated loss and unabsorbed depreciation of
Amalgamating Company deemed to be loss /
unabsorbed
depreciation
of
Amalgamated
Company for PY in which amalgamation effected.
December 20, 2014
23

Conditions to be fulfilled
Amalgamating Company
Amalgamated Company
Engaged in the business for 3 or
more years;
Continues the same business for a
minimum period of five years from
the date of amalgamation;
Has continuously held till the date
of amalgamation and also held by
it 2 years prior to the date, atleast
75% of the book value of the fixed
assets.
Holds continuously for a period of
five years from the date of
amalgamation at least threefourths of the book value of fixed
assets acquired;
Other conditions – Rule 9C.
December 20, 2014
24


The set off of loss or allowance of
depreciation made in any PY in hands of
Amalgamated Company deemed to be
income of Amalgamated Company
Such deemed income shall be chargeable in
year in which conditions not complied with
December 20, 2014
25

Accumulated loss and unabsorbed depreciation of
Demerged Company shall
◦ Where directly relatable to undertakings transferred – be
allowed to be carried forward and set off in the hands of
resulting company
◦ Where not directly relatable to undertakings transferred –
be apportioned between demerged company and resulting
company in the proportion in which assets have been
retained by demerged company and transferred to
resulting company
December 20, 2014
26


In both cases, shares needs to be issued to
existing shareholders
The shares by transferee company needs not
be only ‘equity’ can be ‘preference too’
December 20, 2014
28

Appointed Date

Effective Date
◦ Date on which the assets and liabilities vest in and
stand transferred to the transferee company;
◦ Books of Accounts on the this date form the basis
for valuation of shares and determination of share
exchange ratio and
◦ Is relevant for the purpose of assessment of income
of the transferor and transferee company.
◦ Date on which certified copy of the High Court
Order is filed with the Registrar and
◦ Transferor company stands dissolved
December 20, 2014
29



Upon Scheme becoming effective, Transferee
Company is vested with all income, assets, etc. of
the Transferor from the Appointed Date [Marshall
Sons & Co. India Ltd. v/s ITO (223 ITR 809) – SC]
Therefore, Transferee Company to file return of
income in respect of income of Transferor
Company for period starting from the Appointed
Date
The assessment of such return will be in the hands
of the Transferee Company
December 20, 2014
30


Dalmia Cement Limited v. CIT(237 ITR 617)
As transferor assessee could not retain profits in its
own hands after sale agreement, profit post date of
agreement cannot be assessed in hands of assessee,
and ought to be assessed in hands of transferee
Marshall Sons & Co. India Ltd. v/s ITO (223 ITR
809) – SC]
December 20, 2014
31

If the accounts for the FY end are approved and
adopted in AGM before the Effective Date – cannot be
reopened or revised following the Circular No. 12/77
[1/1/77-CL-V and 2/331/75-CL-II], dated 21/11/77
◦ Effect of the scheme to be given in the next FY end Accounts,
disclosing results from the Appointed Date till the next FY end

If the accounts for the FY end are not approved –
effect of the scheme to be given from the Appointed
Date till the FY end following the ratio laid down by
SC in Marshall Sons & Co. (India) Ltd. V. ITO (223 ITR
809)
December 20, 2014
32

Whether carry forward and set off of unabsorbed
book depreciation/ book losses will be available for
adjustment
against
book
profits
of
the
amalgamated company?
◦ VST Tillers & Tractors Ltd v. CIT (2009 TIOL 26) (Bang.
ITAT)

Whether the MAT credit of the amalgamating
company will be available to the amalgamated
company?
◦
SKOL breweries Ltd. V. ACIT (2008 TIOL 741) (Mum. ITAT)
December 20, 2014
33

“Receipt” of unlisted shares

Section 56(2)(viia) provisions not triggered


Amalgamation/Demerger at fair value – valuation
report obtained
PNB Finance Ltd v. CIT (337 ITR 75) – Business sold
as a whole, cannot be split into parts
December 20, 2014
34



“Section 32(1)(ii) defines intangible assets as “know
how, patents, copyrights, trademarks, licenses,
franchises or any other business or commercial
rights of similar nature”.
Goodwill on amalgamation – falls within “any other
business or commercial rights of similar nature”.
Smifs Securities (348 ITR 302)(SC)
December 20, 2014
35

CIT v. K.H. Chambers (55 ITR 674) - ‘succession’
under section 170 involves change of ownership, that
is, the transferor goes out and the transferee comes
in; it connotes that the whole business is transferred

Post amalgamation, amalgamating company is not in
existence

Business of amalgamating company succeeded by
Amalgamated Company

Assessment to be made in the hands of amalgamated
company
December 20, 2014
36



In case of demerger/ slump sale, only an
undertaking is transferred
Not complete succession, but ‘partial’ succession
Assessment to be continued in the hands of
Demerged Company
December 20, 2014
37


CIT v. Artex Manufacturing Co.(227 ITR 260) (SC)
Identification of price attributable to individual
items (plant, machinery and dead stock) which are
sold as part of slump sale, may not entitle a
transaction to be qualified as slump sale . Contra
CIT V. Electric Control Gear (227 ITR 278)
Separate value is assigned to land/building under
the relevant stamp duty legislation, the slump sale
will not be adversely affected - Explanation 2 to S.
2(42C)
December 20, 2014
38
Mahindra
Sintered Products Ltd. v. DCIT, [95 ITD
380 (Mum.)
No liability was transferred to the buyer - transfer of
undertaking would not be regarded as a slump sale
Weikfield
Products Co. (I) (P.) Ltd. v. DCIT, [71 TTJ
518 (Pune)
Sale of chemical unit was not regarded as slump
sale, because there was transfer of assets without
transfer of liabilities
December 20, 2014
39

Rohan Software Pvt. Ltd. v. ITO (117 TTJ 490) (Mum)
◦ All business assets were transferred except for certain
assets such as building, motor cars an assets and
liabilities relating to income-tax matters.

ACIT v. J.L. Builders (P) Ltd. (ITA No. 714) (Mds)
◦ All the assets were transferred except for certain deposits
and liabilities
December 20, 2014
40


DCIT v. Summit Securities ltd. (Mum-Trib) (SB) –
Negative figure of Net Worth not to be ignored for
computing CG in case of a slump sale.
Zuari Industries Ltd. v. ACIT (105 ITD 569) (Mum) –
Reversed after the ruling laid down by SB as aforesaid.
December 20, 2014
41

Where assets are transferred for a consideration of another
asset other than money – Considered as exchange and not
sale
◦ CIT v. R.R. Ramkrishna Pillai (66 ITR 725) (SC)
◦ CIT v. Motors & General Stores (P.) Ltd. (66 ITR 692) (SC)
December 20, 2014
42


CIT v. Bharat Bijlee Limited (Bom) (364 ITR 581)-
Transfer of a business undertaking as a going concern
against issuance of bonds/ preference shares was not a
sale, but an exchange
SREI Infrastructure Finance Ltd. v. Income-tax Settlement
Commission (207 Taxman 74) - transfer of business in
exchange of another asset is sale – element of monetary
consideration involved
December 20, 2014
43



Avaya Global Connect Ltd. V. ACIT (26 SOT 397)
Sadanand S. Varde and Others v. State of Maharashtra and
Others (247 ITR 609) (Bom.)
Oudh Sugar Mills Ltd. v. ITO (35 ITD 76) (Mum.)
December 20, 2014
44



LLP Agreement to be prepared
Application to be made in Form 18 to ROC for
registration of LLP
Section 56 of LLP Act and Third Schedule to LLP Act
to be complied with



No security interest in assets at the time of application
Partners of LLP should be shareholders of company
and no one else
As per Third Schedule, upon registration, all
property, rights, interest, liabilities etc and whole of
the undertaking of the company vested in the LLP
December 20, 2014
45

Not transfer if conditions of 47(xiiib) satisfied




Turnover from PGBP < 60 lakhs for last 3 years
All assets and liabilities of firm to become assets and liabilities
of company
Shareholders to be partners in LLP
No other amount paid to partner

Absence of consideration, no capital gains

Statutory Vesting of Properties -Texspin Engg. & Mfg. Works
[129 Taxmann 1] and ACIT Vs. Unity Care & Health Service

Aravali Polymers LLP (65 SOT 11) (Kolkata)

Contention Arguable – prone to litigation
December 20, 2014
46

Section 233 of Companies Act 2013

Merger of 2 or more small companies
◦ Small company is a private company that meets
either of the following requirements:
 Paid-up capital does not exceed Rs 50 lakhs(or higher
amount, as may be prescribed, and should not be
more than Rs 5 crore).
 Its turnover (according to its last profit and loss
account) does not exceed Rs 2 crore(or a higher
amount, as may be prescribed, which will not be more
than 20 crore).
December 20, 2014
48


Merger between holding company and its
wholly owned subsidiary
Such other classes of companies as may be
prescribed
Merger u/s 233 to be approved by CG and
there will be no requirement to approach NCLT.
December 20, 2014
49


Schemes approved by the BoD to be sent to ROC
and the Official Liquidator (OL) for their
suggestions or objections within 30 days
Scheme to be considered in the meetings of
shareholders or creditors, with their suggestions or
objections, and to be approved by the following
classes of persons:
◦ Shareholders holding 90% of the total number of
shares at a general meeting
◦ Majority creditors (representing nine-tenth in value) in
a meeting convened with 21 days notice
December 20, 2014
50



After approval, scheme will have to be filed
with the OL, RoC and the Central Government.
No objection, would be deemed as approved
In case of objections, the scheme may be
referred by the Central Government to the
NCLT for it to consider the scheme under the
normal process of a merger
December 20, 2014
51


NCLT can either mandate that the scheme is
to be considered a normal merger or it may
confirm the scheme
Transferor and transferee companies will
need to file a declaration of solvency with the
RoC.
December 20, 2014
52


Under the 1956 Act, the criterion of “present
and voting” is essential for the conduct of
shareholders’ and creditors’ meetings.
However, the similar concept of “present and
voting” has not been included in the 2013
Act, and there is no clarity is required from
the Ministry
December 20, 2014
53
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