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Tax Benefits in Amalgamation

Mergers and acquisitions are an important tool of economic development and every effort should be made to incentivize the merger process in the country. Fiscal statutes form an important means of economic development by providing benefits to the concerned businesses. Large scale mergers are occurring at a fast pace within and outside the country. In this regard the income tax legislation in India is quite development oriented for domestic companies going in for merger or amalgamation and acquisition. In India, the Income Tax Act, 1961 is the primary legislation dealing with taxability of income arising in the hands of an individual or business entity. An important question that arises here is: What are the benefits available under the Income Tax Act, 1961, to companies going in for merger or acquisition. These benefits are available in the form of allowable deductions from the income in the hands of an individual or companies. They apply equally to companies going in for merger or acquisition in India. The focus of the present paper is to highlight the deductions available to companies going in for mergers. A firm can achieve growth in several ways. It can grow internally or externally. Internal Growth can be achieved if a firm expands its existing activities by up scaling capacities or establishing new firm with fresh investments in existing product markets. Where a firm grows internally, it can face problems with regard to the size of the existing market or product, no growth potential in future or government restriction on capacity enhancement. The income tax legislation acts as an aid to external growth by providing deductions under its provisions. Fiscal statutes are a significant source of economic development and create space for growth of industrial activities within the country. Therefore a legal metamorphosis occurs when a merger takes place. The Income Tax Act, 1961 contains special provisions so as to minimize the ambiguities in ascertaining the tax liabilities of the merged entity. In India, the primary fiscal legislation dealing with mergers is concerned solely with the amalgamation of companies and does not refer to amalgamation between other forms of legal entities like  partnership firms or sole proprietorship. The following type of mergers is envisaged: merger of one or more company with some other company and the merger of to or more companies form a new company.

Though the income tax deductions stand discontinued at any time, but being part of legislations point towards their recurring nature and availability at any time for a company. [1]    


The nature of the study is a doctrinal one. The subject matter of the study being on the notions of Tax Benefits in Amalgamation, it would have been impracticable to carry out a non-doctrinal research project without analyzing such clauses and that too in absentia of the latest case laws. Therefore, the researcher has opted for doctrinal research project.


It is made clear at the outset that the scope is confined to the provisions of

Income Tax Act, 1961

Securities laws

Exchange control regulations

Company law

Stamp Duty laws


The object behind carrying out this non-doctrinal research on the subject matter of the provisions of Indian Tax Act is to have thorough understanding of Benefits of Tax whenever a company amalgamates with another and the reasons and objects envisaged behind the same.


In order to conduct a research work, some important hypotheses are to be formulated. The focal points and assumptions are normally available through the formulation of hypothesis. The major hypotheses developed on the basis of study of available literature and evaluation of primary as well as secondary data and work done earlier including related studies is that:

i) The researcher assumes that the object behind having Prevention of Food Adulteration Act is for the benefit of the people i.e. it is a Social Beneficial Legislation.

ii) The researcher also presumes that for the intepretation of the Act, Judicial Trend has to be seen.


What are the benefits of tax while dealing in context of



The quality and value of research depends upon the proper and particular methodology adopted for the completion of research work. Looking at the vastness of the research topic, doctrinal legal research methodology has been adopted. To make an authenticated study of the research topic ‘Tax Benefits of Amalgamation’ enormous amount of study material is required. The relevant information and data necessary for its completion has been gathered from both primary as well as secondary sources available in the books, journals, periodicals, research articles and proceedings of the books on Taxation law and websites.

Keeping in view the need of present research, various cases filed in the Supreme Court as well as in the High Court on the issue of interpretation of non obstante clauses and the judgments therein have also been used as a source of information. The judgments pronounced in the cases have been analysed in detail and included a means of diagnosis.

From the collected material and information, researcher proposes to critically analyse the topic of the study and tries to reach the core aspects of the study.

Chapter II

Tax Benefits or Aspects of Amalgamation Under Income Tax Act 1961


Section 2(1B) of the Income Tax Act, 1961 defines the term “amalgamation" as follows :

“amalgamation", in relation to companies, means the merger of one or more companies with another company or the merger of two or more 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

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 ;

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;

shareholders holding not less than 14(three-fourths) in value of the shares in the amalgamating company or companies (there than shares already held therein immediately before the amalgamation by, or by a nominee for, 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,

otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company." [2] 

It will be noticed that the definition uses the expression “amalgamating company" and “amalgamated company" to refer to the expressions “transferor company" and “transferee company" respectively. [3] An important issue that arises in the case of amalgamation is that of capital gains arising from the transfer of shares or any kind of capital gains arising with respect to taxation of the capital gains. [4] However the company may also stand to lose in cases of amalgamation as mergers in the Indian context are viewed as a tax planning measure. [5] The deductibility has to be seen in the hands of the transferee company. [6] 

To constitute “amalgamation" under the Income Tax Act, there must be satisfied the three conditions specified clauses(i) , (ii) and (ii) of the definition.



Investment allowance in the Act has been inserted in place of Development Rebate. The purpose of this allowance is to provide for deduction on any purchases made in the form of ship, aircraft, machinery, plant. The rate of investment allowance is 25% of the actual cost of the ship, aircraft, machinery or plant. Therefore it could be termed as a deduction on the investment made by the person which is allowed to him at the time of calculation of his taxable income. The section provides for exemption from application of the provision in certain cases mentioned in the Section itself. Sub section (2) of the section assumes importance in light of the fact that it provides for the meaning to be given to the words ship, aircraft and plant and machinery by stating their purposes or the object with which it is to be used. For example, clause (b) of sub section (2) provides for the purposes of installation of plant or machinery which may be generation of electricity or distribution of the same, in a small scale industrial undertaking for the manufacture of any article, for the purposes of business of construction, manufacture or production of any article. Sub section (5) of the section provides for disallowance of the investment allowance in certain circumstances. [7] The purpose of creation of an investment allowance is the creation of a reserve called the Investment Allowance Reserved Account for the purposes of acquiring new ship or aircraft or machinery and plant, and for other purposes of business of the undertaking except for distribution of dividends, profits or remittances outside India as profits. Sub section (6) stipulates conditions to be followed in case of an amalgamation and the amalgamated company is supposed to take over the mantle of the maintenance and creation of the reserve for the aforesaid utilization in the business.  

The term manufacture in the provision is to be understood in the manner concerning production of articles for use from raw or prepared materials by giving such materials new forms, qualities or combinations whether by hand, labour or machines and if the change made in the article results in a new and different article then it would amount to manufacturing activity.

CURRENT STATUS OF THE BENEFIT: Notification dated 19 March 1990 was issued to discontinue investment allowance from the assessment year 1991-92. 


This rebate is granted at varying rates, in respect of ships, machinery and plant provided:

the machinery or plant is not an office appliance, or a road transport vehicle.

it is not installed in any office premises.

the asset is new.

it is owned by the assessee.

it is wholly used for the purposes of the assessee’s business.

the particulars prescribed for the purpose of depreciation allowance have been furnished.

a development rebate reserve is created and the asset is not transferred for eight years as provided in S.34(3).

Sub section (3) provides for cases in which amalgamation of companies occurs and it says that the amalgamated company shall continue to fulfill the conditions mentioned in sub section (3) of section 34 in respect of the reserve created by the amalgamating company and in respect of the period within which the ship, machinery or plant shall not be sold or otherwise transferred and accordingly provides for any default. The same sub section provides for the balance amount of the development rebate to be allowed to the amalgamated company or the new entity.

The section further provides for the fulfillment of certain conditions for the allowance of development rebate which says that development rebate shall be allowed in respect of a ship, machinery or plant installed on or after 1 Jan 1958, S.34(3) enacts that development rebate should be allowed only if the following conditions are fulfilled which are as follows:

An amount equal to 75% of the development rebate to be actually allowed should be debited to the P&L A/c and should be credited to a reserve account. The reserve so created is utilized for a period of eight years.

For distribution by way of dividends or profits.

For remittance outside India as profits.

For any other purpose which is not a purpose of the business of the undertaking.

The clause requires maintaining a reserve of the value of 75% of the development rebate actually allowed.

CASE OF AMALGAMATION: The right to development rebate would be lost even if a transfer of the asset is affected within eight years merely as a step in business reorganization or expansion. Only in two cases of business reorganization is the bar against transfer of assets removed ie: when the two companies amalgamate and when a firm is succeeded by a company. But this benefit is available only when the amalgamation takes place as per the conditions laid down in s 2(1B) of the Income Tax Act, 1961.

CURRENT STATUS OF DEVELOPMENT REBATE: The development rebate has been discontinued from 31 May 1977 and at present stands discontinued.


Under section 33 A, an assessee who is carrying on the business of growing and manufacturing tea in India is entitled to a deduction while  computing his profits by way of development allowance with reference to the actual cost of planting tea bushes.  Here the actual cost planting comprises the cost of planting and replanting and the cost of upkeep thereof, for the previous year in which the land has been prepared for planting and the three succeeding years. [8] This benefit of deduction is available under the current legal provision to companies carrying on similar kind of business and going in for amalgamation. The section is applicable to an assessee carrying on the business of growing and manufacturing tea in India. The allowance is available only if the assessee grows and manufactures tea in the country. Allowance is granted under this section at the following rates:

50% of the actual cost of planting tea bushes, where such tea bushes are planted on a land and not planted with any other tea bushes planted earlier (such cost being incurred between 1 Apr 1965 and 31 Mar 1990).

30% of the actual cost of planting tea bushes where tea bushes are planted in replacement of tea bushes that have died or have become permanently useless on any land already planted (such cost being incurred between 1 Apr 1965 and 31 Mar 1970).

Sub section (5) provides that all the conditions relating to creation and maintenance of reserve and sale and otherwise transfer of the land should be fulfilled by the amalgamated company just as they would have been fulfilled by the amalgamating company.



According to section 35(5), where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers to the amalgamated company (being an Indian company) any asset representing expenditure of a capital nature on scientific research [9] - 

the amalgamating company shall  not be allowed the deduction under clause (ii) or clause (iii) of sub-section (2); and

the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not so sold or otherwise transferred the asset

The Madras High Court held in Tamil Nadu Civil Supplies Corporation Ltd v CIT [10] that, after the Research Centre was taken over by the assessee, entire actual expenditure incurred by assessee was allowable, therefore, the Tribunal was not justified in allowing proportionate expenditure. The research, for the purposes of the present section, need not necessarily be related to present manufacturing activity. It was held in CIT v National Rayon Corporation Ltd. [11] that, ‘the expression “related to business" does not mean related to present manufacturing activities of the assessee. In this case assess was all along using imported wood pulp for the manufacture of rayon incurred expenditure on research for making pulp out of bamboo since it proposed to set up a plant for making bamboo pulp.  The expenditure on such research could not be disallowed because it did not relate to the present manufacturing activity of the assessee.


Section 35 A of the Income Tax Act deals with expenditure on acquisition of patent rights or copyrights. 

According to its sub-section (1), in respect of any expenditure of a capital nature incurred after the 28th day of February, 1966 but before the 1st day of April, 1998, on the acquisition of patent rights or copyrights, used for the purposes of the business, there shall, be allowed for each of the relevant previous year, a deduction equal to the appropriate fraction of the amount of such expenditure. Sub-section (6) of this section provides that, where, in a  scheme of amalgamation, the amalgamating company sells or otherwise transfers the rights to the amalgamated company (being an Indian company),

the provisions of sub-sections (3) and (4) shall not apply in the case of the amalgamating company ; and

the provisions of this section shall, as for as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not so sold or otherwise transferred the rights.

Sub-section (6) was inserted in section 35(A) by the Finance (No.2) Act, 1967, to provide deduction to amalgamated companies.  The scope of its insertion is elaborated in the following extract of the circular No 5-P, dated 9.10.1997, which read as under:

“Where the amalgamating company sell or otherwise transfers to the amalgamated company (being an Indian Company) any capital assets used by it for scientific research related to its business or any capital asset of the nature of patent right or copyrights or any capital assets used for promoting family planning amount its employee, the amalgamated company will be entitled to amortize the capital cost of such assets against its profits under the relevant provision of the Income Tax Act, viz., sections 35, 35A and 36 (1) (ix), in the same manner and to the same extent as the amalgamating company would have been, if it had not sold or transferred the asset to the  amalgamating company will not be entitled to any of the terminal benefits under the provisions of section 35, 35 A and 36 9i) (ix)." [12] 

Where an assessee has purchased patent rights or copyrights, he is entitled to a deduction under section 35 A for a period of 14 years in equal installments.  If during such period the assessee merges with another company, the amalgamated company would then have the right to claim the unexpired installment as a deduction from its total income.  However, where the whole or any part of the right are sold by the amalgamated company after amalgamation and the sale proceeds exceeds the amount of the cost of acquisition of the asset which remains unallowed as deduction, the excess amount would be chargeable to income-tax in the hands of  the amalgamated company.  If the sale price even exceeds the cost of acquisition, the difference between such price and the cost would be the capital gains which would be taxed in the hands of the amalgamated company.


Section 35D of the Income Tax Act deals with amortization of certain preliminary expenses.  According to its sub-section (1), where an assessee being an Indian Company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2)

before the commencement of his business, or

after the  commencement of his business, in connection with the extension of his industrial undertaking or in connection with his setting up a new industrial unit,

the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation. The section grants deduction in respect of expenditure which may otherwise be disallowed as an expenditure of a capital nature. This implies that expenses of a capital nature which are generally disallowable as deductions at the time of calculation of taxable income, may be allowed by virtue of this section of the Act. The expenditure may be incurred in respect of any of the following:

preparation of feasibility report.

preparation of project report.

conducting  market survey or any other survey necessary for the business of the assesse.

engineering services relating to the business of the assessee.

legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee.

where the assessee is a company, also expenditure, by way of legal charges for drafting the Memorandum and Articles of Association of the company.

On printing of the Memorandum and Articles of Association.

By way of fees for registering the company under the provisions of the Companies Act, 1956.

In connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus.

Such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of this Act) as may be prescribed.

Section 35D is an enabling provision which enables an assessee to amortize w.e.f. assessment year 1999-2000 its  preliminary expenses incurred after 31.3.1998 by an Indian Company or a person resident in India.  The expenses can be amortized in five equal installments for five successive previous years i.e one fifth of the expenditure shall be allowed as deduction, for a period of five successive previous years. And the aggregate amount of the preliminary expense incurred after 31.3.98 should not exceed 5% of the cost of project and in case of a company as its option, 5% of the capital employed.  However, if it exceeds 5% then the expenditure shall be limited to 5% of the cost of project. This certainly depends on a case to case basis. [13]  


Section 35DD has been inserted in the Income Tax Act w.e.f 1 April, 2000 by the Finance Act, 1999 to provide for amortization of expenditure in case of amalgamation and demerger. It provides that, where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation or demerger of an undertaking , the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the  previous year in which the amalgamation or demerger takes place. However, no deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act. According to sub-section (1) of section 35DD, any expenditure incurred in connection with amalgamation or demerger of any undertaking is allowable in five equal installments over a period of five years beginning with the year of amalgamation or demerger.  However, following conditions need to be fulfilled:

The entity making the expenditure shall be an Indian company

The expenditure shall be incurred on or after 1-4-1999.

Further, no deduction shall be allowed under any other provisions of the Act, as per sub-section (2) of section 35DD.

The separation of two or more existing business undertakings operated by a single corporate entity can be effected in a tax-neutral manner. The tax-neutral separation of a business undertaking is termed a de-merger. The key provisions under Indian law relating to de-merger are discussed below.


Tax Neutrality: under Indian tax law de-merger is defined as the transfer of one or more undertakings to any resulting company, pursuant to an arrangement under sections 391 to 394 of the Indian Companies Act 1956, in such a manner that as a result of the de-merger:

All the property and liabilities relating to the undertaking being transferred by the de-merged company immediately before the de-merger become the property and liabilities of the resulting company.

Such property and liabilities of the undertaking(s) should be transferred at values appearing in the books of account of the de-merged company. For determining the value of the property, any revaluation should be ignored.

In consideration of a de-merger, the resulting company issues its shares to the shareholders of the de-merged company on a pro-rata basis.

Shareholders holding three-quarters of the shares in the de-merged company become shareholders of the resultant company (the shares already held, if any, by the resultant company or its nominees are excluded for the purposes of calculation).

The transfer of the undertaking is on a going-concern basis.

Undertaking is defined to include any part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole, but excludes individual assets or liabilities, or any combination thereof not constituting a business activity.

In a de-merger, the shareholders of the de-merged company receive shares in the resultant company. The cost of acquisition of original shares in the de-merged company is split between the shares in the resultant company and the de-merged company in the same proportion as the net-book value of the assets transferred in a de-merger bears to the net worth [14] of the de-merged company before de-merger.

Generally, the transfer of any capital asset is subject to transfer tax (capital gains tax) in India. However, a de-merger enjoys a dual tax-neutrality with respect to transfer taxes under Indian tax law; both the de-merged company transferring the undertaking and the shareholders transferring their part of the value of shares in the de-merged company are exempted from tax. To achieve tax neutrality for the de-merged company transferring the undertaking, the resultant company should be an Indian company.

Other implications of income tax law are as follows:

The unabsorbed business losses, including depreciation (that is, amortization of capital assets) of the de-merged company directly related to the undertaking transferred to the resultant company are treated as unabsorbed business losses or depreciation of the resultant company. If such losses, including depreciation, are not directly related to the undertaking being transferred, the losses should be apportioned between the de-merged company and the resulting company in the proportion in which the assets of the undertaking have been retained by the de-merged company and transferred to the resulting company.

If any undertaking of the de-merged company enjoys any tax incentive, generally the incentive can be claimed by the resulting company for the unexpired period, even after the de-merger.

The total depreciation on assets transferred to the resulting company in a financial year shall be apportioned between the de-merged company and the resulting company in the ratio of the number of days for which the assets were used by each during the year. Depreciation up to the effective date of transfer shall be available to the de-merged company and, thereafter, to the resulting company.

The expenses of a de-merger can be amortized in five, equal annual installments commencing with the year in which the de-merger takes place.

Step-up in the value of the assets is not permissible either in the books or for tax purposes.


Section 43C of the Income Tax Act provides that, where an asset, which become the property of an amalgamated company under a scheme of amalgamation, is sold after the 29th February, 1998, be the amalgamated company as stock-in-trade of the business carried on by it, the cost of acquisition of that asset to the amalgamated company in computing the profits and gains from the sale such asset be the cost of acquisition of that asset to the amalgamating company, as increased by the cost, if and, of any improvement made to it and the expenditure, if any, incurred, wholly and exclusively in connection with such transfer by the amalgamating company. This means that in case where an amalgamation occurs, the cost of an asset to be ascertained for the purposes of taxing the gains or profits made from the sale of such asset, is to be taken at the same value which might have been incurred by the amalgamating company and any expenditure made by the amalgamated company on the asset should be taken into consideration while providing for deduction to the amalgamated company.


This section constitutes an exception to the general rule that the unabsorbed depreciation allowance of the previous owner of a business cannot be carried forward and set off by the successor and that a business loss can be carried forward and set off the business profits of a subsequent year only by the assessee who has incurred the loss. Where a company owning an industrial undertaking, ship, hotel or a banking company merges into another company this section permits set off if certain conditions are fulfilled. Theses conditions are as follows:

The amalgamated company shall continuously hold at least three fourths in value of the assets of the amalgamating company for a minimum period of five years from the date of amalgamation.

The amalgamated company shall continue the business of the amalgamating company for at least five years from the date of amalgamation.

It should fulfill other conditions notified by the Central Government to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose.

After the amendment made by the Finance Act of 2003 with effect from 1 Apr 2004, two further conditions need to be fulfilled which are as [15] :

it should have been engaged in the business for at least three years during which the accumulated loss ha occurred or the unabsorbed depreciation had accumulated.

It should have continuously held on the date of amalgamation at least three fourths of the book value of the fixed assets, which it held two years prior to the date of amalgamation.

Under the old provisions, in a case of amalgamation, shareholders holding not less than nine-tenths in value of shares in the amalgamating company were required to become shareholders of the amalgamated company.  This condition has been relaxed.  After the Amendment vide Finance Act, 1999, shareholders holding tree-fourths in value of the share shall be required to become shareholders of the amalgamated company. The provisions of section 72A of the Income-Tax Act, 1961, have been on the statute book since 1977.  The main object of enacting this provision was to encourage merger of sick companies with profitable ones.  Unfortunately, this provision has not served its purpose in view of the vague and onerous conditions, subject of litigation. 

From the provision of erstwhile section 72A, it may be seen that there were number of conditions including satisfaction of the Government, on the recommendation of the specified authority, laid down for such amalgamation. Besides, the amalgamated company was required to submit proposed scheme of amalgamation to the specified authority and thereupon, such an authority would make a recommendation to the Central Government, in that behalf. All these conditions have omitted, after the amendment of section 72A, vide Finance Act, 1999, with effect from 1st April 2000.

Sub-section (1) of section 72A provides that, where there has been an amalgamation of a company owning an industrial undertaking or a ship with another company, then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for depreciation company for the previous year in which the amalgamation was effected, and other provisions of this Act relating to set-off carry forward of loss and allowance for depreciation shall apply accordingly.


Tax Benefit on Slump Sale

Section 293 of the Companies Act empowers the Board of Directors of a company, after obtaining the consent of the company in general meeting to sell lease or otherwise dispose off the whole or substantially the whole of the undertaking(s) of a company. The transaction in this case, is normally of either of the following type:

Sale of a running concern.

Sale of a concern which is being wound up.

2.1.Sale of a Running Concern

This type of sale as a going concern provides for the continuation of the running of the undertaking without any interruption. But there is always a problem of fixing a value in the case of a running concern for all tangible and intangible assets including fixing a value for the infrastructure and other environmental facilities available. In view of all this, the seller normally fixes a lump sum price called ‘slump price’. The noun ‘slump’ means ‘a gross amount, a lump’. Similarly, ‘slump sum’ means a ‘lump sum’. [16] A slump sale transaction would, therefore, mean a sale or a transaction which has a lump sum price for consideration.

2.2. Sale in the Course of Winding up

On the other hand a sale in the course of winding up, is nothing but a realization sale aimed at collecting the maximum price for distributing to the creditors and the balance to the contributories (the shareholders). By the very nature of the transaction, this is a piece meal sale and not a slump sale. In this case, there will be liability to tax as per the provisions of the Income-tax Act. Slump sale as defined under Section 2(42C) of the Income-tax Act, 1961 means the transfer of one or more undertaking as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. In other words, it is a sale where the assessee transfers one or more undertaking as a whole including all the assets and liabilities as a going concern. The consideration is fixed for the whole undertaking arid received by the transferor. It is not fixed for each of the asset of the undertaking. The assessee may also transfer a division instead of the undertaking as a whole by way of such sale. Thus it may be noted that the undertaking as a whole or the division transferred shall be a capital asset.


Normally, any sale of a capital asset will give rise to a capital receipt and any profit derived may give rise to capital Gains in certain cases. This is true in the case of sale of an undertaking also.

In Doughty v. Commissioner of Taxes [17] , the Privy Council laid down the following principles: The sale of a whole concern engaged in production process, e.g. dairy farming or sheep rearing, does not give rise to a revenue profit. The same might be said of a manufacturing business which is sold with the lease holds and plant, even if there are added to the sale piece goods in stock and even if these piece goods form a very substantial part of the aggregate sold. Where, however, business consists entirely in buying and selling, it is difficult to distinguish for income tax purpose between an ordinary and realization sale, the object in either case being to dispose of the goods at a profit. The fact that the stock is sold out in one sale does not render the profit obtained any different in kind from the profit obtained by a series of gradual and smaller sales. In the case of such a realization sale, if there is an item which can be traced as representing the stock-in-trade, though it is in conjunction with the sale of the whole concern and a transfer of all the assets for a single unapportion consideration, there cannot be said to be any revenue profit realised on the sale of the stock-in-trade which is sold with all the other assets, although the business of the concern may consist entirely in buying and selling. The Supreme Court, based on the above decision held in the following two cases that the price received on the sale of industrial undertaking is a capital receipt. CITv. West Coast Chemicals and Industries Ltd. [18] - Where a slump price is paid and no portion is attributable to the stock-in-trade, it may not be possible to say that there is a profit other than what results from the appreciation of capital. The essence of the matter, however, is not that an extra amount has been gained by the selling out or the exchange but whether it can fairly be said that there was a trading was a trading, from which alone profit can arise in business. CIT v. Mugneeran Bangur and Co. [19] - In the case of a concern carrying on the business of buying land, developing it and then selling it, it Is easy to distinguish a realization sale from an ordinary sale, and it is very difficult to attribute part of the slump price to the cost of land sold in the realization sale. The mere fact that in the schedule the price of land was stated does not lead to the conclusion that part of the slump price is necessarily attributable to the land sold.

The same view was also reiterated by the Gujarat High Court in the following cases:

1. Sarabhai M. Chemicals Pvt. Ltd. v. P.M. Mittat, Competent Authority [20] .

2. Artex Manufacturing Co. v. CIT- [21] .

At the same time, the Gujarat High Court also recognized that when an undertaking as a whole is sold as a going concern there will be liability under the head Capital Gains, In 126 ITR 1 the Gujarat High Court stated as follows:

It is well settled that business is property and the undertaking of a business is a capital assets of the owner of the undertaking. When an undertaking as a whole is transferred as a going concern together with its goodwill and all other assets, what is sold is not the individual itemized property but what is sold is the capital asset consisting of the business of the undertaking and any tax that can be attracted to such a transaction for a slump price at book value would be merely capital gains tax and nothing else but capital gains tax. Plant or machinery of any fixture or furniture is not being sold as such. What is sold is the business of undertaking for a slump price. It the capital assets, namely, the business of the undertaking, has a greater value than its original cost of acquisition, then, capital gains may be attracted in the ordinary case of a sale of an undertaking.

The Bombay High court also recognized that there will be a capital gains tax when a sale of business as a whole occurs. [22] 

Transfer of shares by shareholders of amalgamated company

The term “transfer" has been defined in Section 2 (47) of the Income-tax Act, 1961. The given definition is not exhaustive but inclusive. It hints at sale, exchange, relinquishment of an asset, extinguishment of any right therein, compulsory acquisition thereof etc. Therefore, other modes of transfer as are understood in particular contexts or in their ordinary sense are also liable to capital gain subject to the other conditions regarding taxability under the head “Capital gains". However, Section 47 of the Income-tax Act, 1961 contains a large number of transactions which are not regarded as transfer for the purpose of taxability under the head “Capital gains". Sub-section (vii) of Section 47 specifically exempts from taxability of 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, if –

The transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company, and

The amalgamated company is an Indian company. No exchange or relinquishment involved.

It has been held in CITv. Rasiklal Manektal (HUF) [23] that in the event of amalgamation of companies, transfer of shares by the shareholders of the amalgamating company and allotment of shares in their names by the amalgamated company does not involve “exchange" or “relinquishment".


From the aforementioned it could be seen that the following tax benefits pertain to the transferor company by virtue of the specific provisions of the Income Tax Act, 1961 after an amalgamation: [24] 

Investment Allowance- under Section 32A(6)

Development Rebate- under Section 33(3)

Development allowance- under Section 33A(5)

Scientific research expenditure- under Section 35(5)

Expenditure on acquisition of patent rights or copyrights- under Section 35A(6)

Amortization of certain preliminary expenses- under Section 35D(5)

Deduction for expenditure on prospecting, etc. for minerals- under Section 35E(7)

Merger of an Indian company into a foreign company is not envisaged by the Companies Act, 1956. No tax exemption has been provided under Income-tax Act, 1961 in case of amalgamation of an Indian company into a foreign company wherein the amalgamated company is a foreign company. Recommendation by JJ Irani Report followed by Companies Bill 2008 on Company Law is to allow merger of an Indian company into foreign company. Short form mergers are also proposed. All these provisions and reforms prove to be advantageous not only to the Indian Inc. but also to the foreign entities as well as taxing authorities in long term leading to the smooth running of business.

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