Business restructuring is an built-in portion of the new economic paradigm. As control and limitations give manner to competition and free trade, rationalisation and reorganisation are a necessary accompaniment. The different principles for concern combinations, acquisitions, amalgamations, by-products, divestitures and demergers co-exist without any contradiction. In the words of Dhananjaya Y. Chandrachud, ‘Corporate Restructuring is one of the agencies that can be employed to run into the challenges and jobs which confront concern. The jurisprudence as evolved in the country of amalgamations and mergers has recognized the importance of the Court non sitting as an appellant authorization over the commercial wisdom of those who seek to restructure concern. ‘[ 1 ]
Amalgamation is but simply one of the many signifiers in which corporate restructuring may happen. The term by and large denotes an agreement whereby the assets of two companies vest in one.[ 2 ]The more specific legal term used in Companies Act, 1956 is ‘amalgamation ‘ , in which two or more companies are fused into one by amalgamation or by taking over by another.[ 3 ]Amalgamation may happen either by the transportation of two or more projects to a new Company, or by the transportation of one or more projects to an already bing company. Strictly talking, merger does non embrace within its range the mere acquisition by a company of the portion capital of another, go forthing the latter to go on its project. However, the context in which the term has been used clip and once more may bespeak that it is intended to include such an acquisition.[ 4 ]On the footing of the implicit in aims and modes involved, farther categorization of the different sorts of corporate restructuring is besides possible, like Leveraged Buy-Outs ( LBO ) and Management Buy-Outs ( MBO ) etc. Amalgamation may besides take topographic point as a portion of ‘reconstruction ‘[ 5 ]of two or more companies. The term coup d’etat, though distinguishable from amalgamation as per the proportion of acquisition, keeping of control and the modes involved, is frequently considered to be a portion of the wider look ‘mergers and acquisitions ‘ or ‘M & A ; A ‘ . Assorted growing schemes are adopted by companies as portion of their restructuring programs. In instances where the bing portfolio is sought to be retained, the schemes by and large adopted include joint ventures, rights issue, new equity and penchant issues. But in cases where the corporation is taking at revamping its expression, it goes for amalgamations, merger and direction buy-outs.
There are several advantages in amalgamations and acquisitions ( M & A ; A ) – cost film editing, efficient usage of resources, acquisition of competency or capableness, revenue enhancement advantage and turning away of competition are a few. While coup d’etats are regulated by SEBI, M & A ; A falls under the Companies Act. Companies frequently undertake M & A ; A to acquire the benefit of carry frontward and set off of operating losingss or revenue enhancement recognition.
Amalgamation, being a concern combination, attracts particular intervention in assorted financial legislative acts. The term signifies the creative activity of an entity, which either took in its crease the bing concern of other entities or the creative activity of a new entity by uniting the concern of different entities. Need to hold particular financial Torahs to minimise the ambiguities in determining revenue enhancement liabilities of the combined entity led to the specific revenue enhancement commissariats in the Income Tax Act 1961. This necessitates a particular expression at the revenue enhancement inducements provided under the Income Tax Act in instance of an M & A ; A. While the IT Act involves several complex characteristics and commissariats refering to unifying companies, dearth of clip and infinite has precluded the research worker from discoursing all those commissariats in item and merely those commissariats ordering inducements in instance of a amalgamation have been examined in this undertaking.
Tax INCENTIVES IN MERGERS AND ACQUISITIONS UNDER THE INDIAN LAW
Definition of ‘Amalgamation ‘[ 6 ]
The term ‘amalgamation ‘ , though non defined under the Companies Act, 1956 has been defined in the Income Tax Act in the undermentioned words:
Section 2 ( 1B ) : merger in relation to companies means the amalgamation of one or more companies with another company[ 7 ]or the amalgamation of two or more companies to organize one company ( the company or companies which so unify being referred to as the mixing company and the company with which they merge or which is formed as a consequence of the amalgamation, as the coalesced company ) in such a mode that –
( I ) all the belongings of the mixing company instantly before the merger becomes the belongings of the amalgamated company by virtuousness of the merger ;
( two ) all the liabilities of the mixing company instantly before the merger becomes the liabilities of the amalgamated company by virtuousness of the merger ;
( three ) stockholders keeping non less than three-quarterss in value of the portions in the amalgamating company ( other than portions already held in this instantly before the merger by, or by a campaigner for, the coalesced company or its subordinate ) become stockholders of the amalgamated company by virtuousness of the merger, otherwise than as a consequence of the acquisition of the belongings of one company by another company pursuant to the purchase of such belongings by the other company or as a consequence of the distribution of such belongings to the other company after the weaving up of the first-mentioned company.
The separating character of this definition is that the stockholders, who hold at least three-fourths in value of the portions in the amalgamating company, continue as stockholders of the amalgamated company by virtuousness of the merger. However, antecedently, this sum was nine-tenths, which was substituted with the present sum by the Finance Act, 1999. The term has been widely defined under the Act with an aim to promote merger in public involvement, giving an chance of revenue enhancement salvaging to the concerned companies.
In fact, revenue enhancement commissariats and the jurisprudence associating merger are frequently perceived as in a ‘hand and glove ‘ relationship, with the former holding sporadically enhanced the latter ‘s range by legislative amendments and departmental handbills.
Incentives provided by the Income Tax Act
In a turning economic system like India, amalgamations of corporate entities have ever been encouraged to ease a better operation, more capital, improved substructure, more production and better result. This is the ground why authoritiess provide so many benefits to corporations traveling in for amalgamation. Taxation benefits feature high on the list because the assorted inducements given in this facet are moneymaking for any company looking to take down their fiscal load and for companies taking high fiscal additions. Following are certain inducements provided by the Income Tax Act, 1961 in the event of merger and amalgamations
A. Carry Forward and Set off of accrued loss and unabsorbed depreciation allowance
Section 72A applies to merger of a company having an industrial project or a ship or a hotel with another company or that of a banking company, referred to in S. 5 ( degree Celsius ) of the Banking Regulation Act, 1949 with a specified bank, whereby accrued loss shall be deemed to be the loss of the coalesced company, and the unabsorbed depreciation of the mixing company shall be given allowance for the old twelvemonth in which the merger was effected. The undermentioned conditions have to be fulfilled to avail this advantage: a ) the mixing company has been engaged in concern for three or more old ages and has held continuously as on the day of the month of merger at least three-quarterss of the book value of fixed assets held by it two old ages prior to the amalgamation.
B ) the amalgamated company holds continuously for minimal five old ages from the day of the month of merger at least three-quarterss of the book value of fixed assets of the mixing company acquired in a strategy of merger, continues the concern of the mixing company for at least five old ages after acquisition and fulfils such other conditions ( e.g. Rule 9C Income Tax Rules, 1962 )[ 8 ]as may be prescribed to guarantee that the merger is for echt concern intents.
The consequence of this proviso is that the benefit of depreciation and unabsorbed losingss are available to the amalgamated company for eight old ages get downing from the old twelvemonth in which the merger took topographic point.
B. Outgo incurred in set uping merger
Under S. 35DD of the Act, if any assessee being an Indian company incurs any outgo entirely and entirely for the intent of a amalgamation, so the assessee shall be allowed a tax write-off of an sum equal to one-fifth of such outgo for each of the five consecutive old old ages get downing with the old twelvemonth in which the amalgamation takes topographic point. It was inserted by the Finance Act, 1999, with a position to ease a smooth amalgamation.
C. Shipping Business
Indian transportation companies are allowed a tax write-off under S. 33AC, in regard of militias created on the status that it is utilised for geting a new ship for the intent of concern. However, if it is being sold or transferred within 3 old ages, the amount utilised for geting the ship will be treated as net incomes indictable to revenue enhancement in the twelvemonth of such sale or transportation, thereby easing any sort of acquisition.
In the instance of an merger, the entire depreciation allowance calculated for any twelvemonth for any plus which are transferred will be apportioned as between the two sets of companies in the ratio of figure of yearss for which the assets were used by them. The 5th provision to S. 32 ( 1 ) ( two ) mandates for aggregative tax write-off in regard of depreciation of edifice, machinery, works or furniture as touchable assets or know-how, patent, right of first publication, hallmark, license, franchises or any other commercial right as intangible assets involved in an merger. This proviso, along with others takes into history depreciation of assets of a company in the event of a amalgamation and allows tax write-off of the same. In geting at the written down value of assets for the intent of claiming depreciation, it is the existent cost of the mixing company less depreciation really allowed to the company and the unabsorbed depreciation which was non set-off or carried frontward could non be taken into history.[ 9 ]
E. Expenditure on Scientific Research
Under S. 35 ( 5 ) , where in a strategy of merger, sale or transportation of any plus stand foring outgo of capital nature on scientific research takes topographic point between the two sets of companies, the commissariats of S. 35 wherein companies are allowed certain tax write-offs are applicable to the amalgamated company.
F. Expenditure on acquisition of patent or right of first publication and on know-how
As per S. 35A ( 6 ) of the Act, if under a strategy, the mixing company sells or transfers the patent or right of first publication to the amalgamated company, certain tax write-offs under this proviso shall besides use to the latter. Similarly, As per S. 35AB ( 3 ) , if the mixing company is eligible for tax write-off for outgo on know-how, so the amalgamated company will besides be entitled to such tax write-off.
G. Bad Debts of the transferor company
A replacement in concern can claim tax write-offs of bad debts in regard of debitors taken over from Predecessor Company.
H. Deduction in regard of net incomes of certain companies
Sections 80-IA[ 10 ], 80HHA[ 11 ], 80HH[ 12 ], 80-I[ 13 ]supply certain inducements to industrial projects on the footing of net incomes derived by them. This benefit is besides available to the amalgamated company for the unexpired period.[ 14 ]
I. Levy of Interests
Sections 234A, 234B and S. 234C provide for levy of involvements for late filing of return of income, default in payment of Advance Tax and for postponement of Advance Tax severally. In a strategy of merger, the coalesced company can non presume that its income will be more than the prescribed bound under the Act for the payment of Advance Tax and therefore involvement under these subdivisions can non be levied.
J. Investment Allowance
Under S. 32A ( 1 ) , with regard of a ship, aircraft, machinery, works etc that is owned by the assessee and is entirely used for the intent of concern, a tax write-off in the nature of investing allowance of a sum equal to 25 % ( 20 % for the ship, aircraft, machinery, works etc. specified in S. 32 ( 8B ) ) of the existent cost will be allowed. As per Section 32A ( 6 ) , if any of these assets has been transferred by a strategy of merger, so the amalgamated company shall go on to bask the balance of the said allowance outstanding to the mixing company, with the allowed period for such allowance being carried frontward in the appraisals of the former, but every bit long as the prescribed period of eight old ages has non lapsed, with the coalesced company being subjected to the same conditions as the mixing company sing those assets.
Applicability of Capital Gains Tax
S. 45 of the Act negotiations of levy of capital additions revenue enhancement in the event of transportation of capital assets. S. 47 lists out transportations, which shall non be considered for capital additions revenue enhancement. Subsection ( six ) reads as follows: Any transportation, in a strategy of merger, of a capital plus by the mixing company to the amalgamated company if the latter is an Indian company.
This is the place of jurisprudence since the mixing company merges it self with the amalgamated company and thereby dissolves itself without weaving up. The stockholders in the amalgamating company are allotted in stead of their original portions and therefore no capital additions revenue enhancement is attracted.[ 15 ]This proviso goes a long manner in easing amalgamations and acquisitions by giving a immense revenue enhancement alleviation.
After a elaborate treatment on the commissariats of Income Tax offering inducements for amalgamations and acquisitions, it remains to see the existent image.
Lacunae in the jurisprudence
It is sometimes argued that the benefit of unabsorbed depreciation, carry frontward of losingss etc are available to specific sectors like fabrication, telecom, transportation, hotels etc under S. 72A and non the service sector. The inquiry arises as to why this benefit is non available to the service sector as a whole, particularly when service sector in India is turning at a frantic infinite. Consequently, the revenue enhancement benefits should be extended to the service sector as a whole, including air hoses, health care, fiscal services, etc.
On the other manus, another job with the revenue enhancement inducement proviso relates to the conditions that are by and large attached. The post-merger conditions are particularly rather restrictive e.g. the status for go oning the loss-making concern for 5 old ages and having 75 per cent of the fixed assets for 5 old ages. A amalgamation is by and large effected to cut down on the losingss being incurred by the mixing company. If the coalesced company is forced to go on the same concern, so it is non profitable for the project at all.
There are besides a few ambiguities present in the commissariats because of the manner they have been drafted. Under S. 80-IB, revenue enhancement vacation is non available to the mixing company in the twelvemonth of merger. Consequently, in instance the amalgamation is effectual from a day of the month other than April 1, the revenue enhancement vacation is non available to either of the companies for the period get downing April 1 till the day of the month of consequence. A more rational attack would be to let the revenue enhancement benefit for the twelvemonth to be split between the companies based on the day of the month of consequence, as is allowed in instance of current twelvemonth depreciation.[ 16 ]
Misuse of the jurisprudence
It has been noted on juncture more than one that companies routinely amalgamate and merge with their loss-making sister concerns to avoid paying revenue enhancements. Furthermore they sometimes claim to hold set up a air current energy works or something like that and claim 100 per cent depreciation. These have been happening with changeless frequence and therefore needs attending of the legislators. All these revenue enhancement grants or loopholes in the Torahs allow companies to lawfully cut down their revenue enhancement load by smart revenue enhancement planning. It should be the privilege of the authorities to look into into each instance of merger before allowing the inducements, and hence amend the jurisprudence consequently.