Furthermore, the partners have to maintain 50 per cent holding in the company for at least five years.

In this article, what is submitted is that relief to business re-organisation needs to be more than superficial. Take, e.g., a typical sale of undertaking. If it is structured as anamalgamation, satisfying the stringent conditions in section 2(1B) of the Income-tax Act, no tax needs to be paid by the transferee company or its shareholders. However, neither the company nor the shareholders can receive cash or any consideration other than cash, except shares. Further, all the assets (that is, all units) and liabilities have to be transferred. Business re-organisation is usually not this simple and far more flexibility is needed. A company may want to hive off units to subsidiaries (other than wholly-owned) or joint ventures, sell non-core units, take over companies, etc. None of these are exempt from tax. Just as units in export zones are exempt from tax for a period of time, these days of globalisation call for a blanket exemption to business restructuring for, say, ten years. While there may be some misuse, surely no one would sell his undertaking just for tax exemption--nor would a person would buy a unit merely for the tax incentive.

The present tax laws, in fact, have not evenrecognised business restructuring except for amalgamations. Terms such as takeovers or acquisitions have no special meaning under the I-T Act and their treatment would be the same as, e.g., sale of land, buildings and shares. Since there are no special provisions and since there is need to apply the generic provisions, confusion abounds. E.g., it is fairly simple to apply the principles of indexation when shares are sold, but how do you apply them when a whole unit consisting of many assets are sold? Similarly, how do you apply principles of substitution of market value as on 1-4-1981 to such sale of units. How do you account for the sale of depreciable assets of such unit in the books of the seller, when there is no consideration specifically identifiable to such assets? In fact, when the consideration is for the unit as a whole and no part can be identified to any asset, can there really be any capital gains? What has then happened is that, in the shelter of all such confusion, a view strongly taken inbusiness reorganisations being undertaken presently is that there would be no tax on any parties. There is an urgent need to at least consider and define business re-organisation and specify the tax treatment. While total tax exemption as advocated earlier may be preferable, many assessees may prefer clarity of treatment as even a higher priority.

Consider another common type of business re-organisation. A company hives off a unit to another company with the acquirer company paying the consideration directly to the shareholders of the transferor company in the form of shares. Common sense might suggest that the shares received by the shareholders are actually on behalf of the transferor company. In effect, it is as if the transferor company has directed the buyer to pay the consideration to the shareholders instead of to itself. However, in view of no provision in the tax laws to directly deal with it, a view is taken that no one pays tax-neither the transferor company nor the shareholders.

However, thisis being disputed by the department. The arguments on their side could be (i) that the transferor company should be liable to capital gains for the sale (ii) The shareholders of the transferor company should also pay tax on the shares received (iii) the transferor company may be liable to dividend tax since, in effect, it has distributed the shares received as consideration to the shareholders. The case of the assessees is also quite strong which, apart from others, is based on a fundamental principle that no tax can be charged without a specific provision. Here, again, there is an urgent need for clarity.

Another provision that also needs urgent attention relates to sale of depreciable assets. Strangely, while an ordinary capital asset is eligible for concessional tax on long term capital gains such as indexation, substitution of market value and lower tax rates, sale of depreciable assets has been, it is submitted, perversely, deemed to be sale of a short-term capital asset, irrespective of the period ofuse. The irony is that a person who does not claim depreciation may get all the benefits to long-term capital assets and, indeed, this is what is being done by assessees for assets having low rate of depreciation. Note that tax is levied on even the recovered depreciation, that is, the computation of capital gains is worked out taking the written down value of the asset. To add the proverbial insult to injury, since the profit is capital gains, it is argued, though, it is submitted, incorrectly, that carried forward business loss cannot be adjusted against such gain since these are not business profits.

This provision turns out to be a nightmare for an assessee contemplating business re-organisation. Hence, the foremost of appeal, to reiterate, is to provide clarity which will at least reduce controversies. Of course, if business reorganisation is to be encouraged, a step further in the form of full exemption will only work.

(The author is a Mumbai-based chartered accountant)