Business Restructuring Under Income-tax Act refers to the reorganisation, merger, transfer, conversion, or restructuring of business entities and undertakings in a manner recognised under tax law to achieve commercial, operational, or strategic objectives while determining the tax implications of such transactions. It includes transactions such as amalgamation, demerger, slump sale, conversion of proprietorship or firm into a company, and conversion of a company into an LLP, along with the conditions for tax neutrality, capital gains exemption, succession, and withdrawal of exemptions under the Income-tax Act.
Table of Contents
- Amalgamation
- Demerger
- Slump Sale
- Conversion of Sole Proprietary Business to Company
- Conversion of Firm into Company
- Conversion of Private Limited Company/Unlisted Public Company into LLP
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1. Amalgamation
1.1 Definition [Sec. 2(1B)]
Amalgamation (in relation to companies) means:
(i) The merger of one or more companies with another company; or
(ii) The merger of two or more companies to form one company;
in such a manner that:
(a) All assets and liabilities of the amalgamating company or companies immediately before the amalgamation become the assets and liabilities of the amalgamated company;
(b) Shareholders (both equity or preference) holding not less than 75% 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 (equity or preference) of the amalgamated company.
1.2 Exceptions
Following mergers shall not be treated as amalgamation:
(i) Merger as a result of acquisition of the property of one company by another company pursuant to the purchase of such property by the other company; or
(ii) Merger as a result of distribution of such property to the other company after the winding up of the first-mentioned company.
1.3 Amalgamation & Shareholder of Amalgamating Company
Effect of amalgamation on a shareholder are as under:
| Transfer of Shares of Amalgamating Company | As per sec. 47(vii), any transfer by a shareholder, in a scheme of amalgamation, of share(s) held by him in the amalgamating company is not treated as transfer and hence not liable to capital gain tax, if following conditions are satisfied:
(i) The transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company; and (ii) The amalgamated company is an Indian company. |
| Cost of Shares in Amalgamated Company | The cost of shares in amalgamating company shall be deemed to be the cost of shares in amalgamated company. [Sec. 49(2)] |
| Determination of Nature of Assets | To find whether shares in amalgamated company are long-term or short-term capital asset, the period of holding shall be calculated from the date when shares in the amalgamating company were acquired. [Sec. 2(42A)] |
1.4 Amalgamation & Amalgamating Company
(i) As per sec. 47(vi), any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company is not treated as transfer (hence not liable to capital gain) provided the amalgamated company is an Indian company.
(ii) If amalgamation does not satisfy condition of sec. 2(1B) and of sec. 47(vi), then exemption is not available.
(iii) As per sec. 47(viab), any transfer, in a scheme of amalgamation, of a capital asset, being a share of a foreign company, (referred to in the Explanation 5 of sec. 9(1)(i)), which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the amalgamating foreign company to the amalgamated foreign company, if:
(a) At least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company; and
(b) Such a transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated.
(iv) As per sec. 47(via), 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 is not treated as transfer (hence not liable to capital gain) provided:
(a) At least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company; and
(b) Such a transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated.
2. Demerger
Demerger (in relation to companies) means the transfer, pursuant to a scheme of arrangement u/ss 230 to 232 of the Companies Act, 2013, by a demerged company of its one or more undertakings to any resulting company in such a manner that:
(i) All Assets and Liabilities are Transferred – All assets and liabilities of the undertaking, being transferred by the demerged company, immediately before the demerger, become the assets and liabilities of the resulting company.
(ii) Transfer at Book Value – Assets and liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at its book-value (without considering revaluation) immediately before the demerger.
Note – Any change in the value of assets consequent to their revaluation shall be ignored.
Exception – The provisions is not applicable where the resulting company records the value of the property and the liabilities of the undertaking or undertakings at a value different from the value appearing in the books of account of the demerged company, immediately before the demerger, in compliance to the Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015.
(iii) Consideration in Shares – Resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis except where the resulting company itself is a shareholder of the demerged company.
(iv) Common Shareholders – Shareholders holding not less than 75% 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.
(v) Going Concern – Transfer of the undertaking is on a going concern basis.
(vi) Other Specified Condition – The demerger is in accordance with the conditions, if any, notified u/s 72A(5) by the Central Government in this behalf.
2.1 Demerger and Shareholder of Demerged Company
As per sec. 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 if the transfer or issue is made in consideration of demerger of the undertaking.
2.2 Cost of Acquisition of the Shares in the Resulting Company [Sec. 49(2C)]
The cost of acquisition of the shares in the resulting company shall be the amount which bears to the cost of acquisition of shares held by the assessee in the demerged company the same proportion as the net book value of the assets transferred in a demerger bears to the net worth of the demerged company immediately before such demerger.
Net worth shall mean the aggregate of the paid-up share capital and general reserves as appearing in the books of account of the demerged company immediately before the demerger.
2.3 Cost of Acquisition of the Shares in Demerged Company [Sec. 49(2D)]
The cost of acquisition of the original shares held by the shareholder in the demerged company shall be deemed to have been reduced by the amount as so arrived at u/s 49(2C).
2.4 Demerger and Demerged Company
(i) As per sec. 47(vib), any transfer, in a demerger, of a capital asset by the demerged company to the resulting company is not treated as transfer (hence not liable to capital gain) provided the resulting company is an Indian company.
(ii) As per sec. 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 is not treated as transfer provided:
(a) The shareholders holding not less than ¾th in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company; and
(b) Such a transfer does not attract tax on capital gains in the country in which the demerged foreign company is incorporated.
The provisions of the Companies Act shall not apply in case of demergers referred to in this clause.
(iii) As per sec. 47(vicc), any transfer in a demerger, of a capital asset, being a share of a foreign company (referred to in the Explanation 5 of sec. 9(1)(i)), which derives, directly or indirectly, its value substantially from the share or shares of an Indian company, held by the demerged foreign company to the resulting foreign company, if:
(a) The shareholders, holding not less than 3/4th in value of the shares 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.
3. Slump Sale
Definition [Sec. 2(42C)] – It means transfer, by any means, of undertaking(s) for a lump sum consideration without assigning values to the individual assets of such undertaking(s).
Undertaking shall include any part of an 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 any combination thereof not constituting a business activity.
3.1 Computation of Capital Gain
Sale Consideration – Fair market value of the capital assets as on the date of transfer, calculated in the prescribed manner, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset
Accordingly, the CBDT has prescribed that the fair market value (FMV) of capital assets would be the higher of:
(a) FMV 1, being the fair market value of capital assets transferred by way of slump sale (determined on the date of slump sale); and
(b) FMV 2, being the fair market value of the consideration (monetary and non-monetary) received or accruing as a result of transfer by way of slump sale.
Cost of Acquisition or Improvement – Net worth of the undertaking
Nature of Gain Whether Short Term or Long Term – If undertaking is owned and held by the assessee for not more than 36 months, then capital gain shall be deemed to be short-term capital gain otherwise long-term capital gain.
Note – Where an undertaking is owned and held by an assessee for more than 36 months immediately preceding the date of its transfer, then it shall be treated as a long-term capital asset. It makes no difference that few of the assets of the undertaking are newly acquired (i.e. for less than 36 months).
Report of an Accountant – The assessee is required to upload one month prior to the due date of filing of the return of income, a report of a chartered accountant in Form 3CEA indicating the computation of the net worth of the undertaking or division and certifying that the net worth of the undertaking or division has been correctly arrived at in accordance with the provisions of this section.
4. Conversion of Sole Proprietary Business to Company
Transaction not regarded as transfer for the purpose of capital gain [Sec. 47(xiv)]
Where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset to the company, the transaction is not regarded as transfer provided following conditions are satisfied:
(a) All assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company;
(b) Proprietor holds not less than 50% of the total voting power in the company and his shareholding continues to remain as such for a period of 5 years from the date of succession; and
(c) The sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company.
5. Conversion of Firm into Company
Transaction not regarded as transfer for the purpose of capital gain [Sec. 47(xiii)]
Any transfer of a capital asset, by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, shall not be regarded as transfer provided following conditions are satisfied:
(a) All assets and liabilities of the firm relating to the business immediately before the succession become the assets and liabilities of the company.
(b) All the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of succession.
(c) The partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company; and
(d) The aggregate of the shareholding in the company of the partners of the firm is not less than 50% of the total voting power in the company and their shareholding continues to be as such for a period of 5 years from the date of succession.
Withdrawal of Exemption u/s 47(xiii)/47(xiv) [Sec. 47A(3)] – On violation of conditions, exemption earlier allowed shall be withdrawn and the amount of profits or gains arising from the transfer of such capital asset not charged earlier shall be deemed to be the profits and gains chargeable to tax of the successor company for the previous year in which the requirements of sec. 47(xiii)/(xiv) are violated
6. Conversion of Private Limited Company/Unlisted Public Company into LLP
Transaction not regarded as transfer for the purpose of capital gain [Sec. 47(xiiib)]
Any transfer of:
(a) A capital asset or intangible asset by a private company or unlisted public company (hereafter referred to as the company) to a limited liability partnership (LLP); or
(b) A share(s) held in the company by a shareholder as a result of conversion of the company into a limited liability partnership (LLP) shall not regarded as a transfer, if following conditions are satisfied:
(i) All the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the LLP;
(ii) All the shareholders of the company immediately before the conversion become the partners of the LLP and their capital contribution and profit sharing ratio in the LLP are in the same proportion as their shareholding in the company on the date of conversion;
(iii) The shareholders of the company do not receive any consideration or benefit other than by way of share in profit and capital contribution in the LLP;
(iv) The aggregate of the profit sharing ratio of the shareholders of the company in the LLP shall not be less than 50% at any time during the period of 5 years from the date of conversion;
(v) The total sales, turnover or gross receipts in business of the company in any of the 3 previous years preceding the previous year in which the conversion takes place does not exceed Rs.60 lakhs;
(vi) The total value of the assets as appearing in the books of account of the company in any of the 3 previous years preceding the previous year in which the conversion takes place does not exceed Rs.5 crores; and
(vii) No amount is paid (directly or indirectly) to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of 3 years from the date of conversion.
Withdrawal of Exemption u/s 47(xiiib) [Sec. 47A(4)] – On violation of aforesaid conditions, exemption earlier allowed to the company or shareholder shall be withdrawn and amount of profits or gains arising from the transfer of such capital asset or intangible asset or share(s) not charged earlier shall be deemed to be the profits and gains chargeable to tax of the successor LLP or the shareholder (of predecessor company) for the previous year in which the requirements of sec. 47(xiiib) are violated.
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