The main implications of various provisions regarding amalgamation and demergers are as follows. The benefit of accumulated losses and unabsorbed depreciation are available to amalgamated company if 75 per cent in value of assets of amalgamating company are retained by it for a period of at least five years and that amalgamated company carries on the business of the amalgamating company for at least five years from the date of amalgamation. The expenses incurred for the purpose of amalgamation or demerger shall be allowed deduction equal to one fifth of such expenditure for five successive previous years beginning with the previous year in which amalgamation or demerger takes place. Similarly the amortisation of preliminary expenses under Section 35D will continue to be available to amalgamated company by inserting a new provision sub section 5A in Section 35D.

Demerger in relation to companies means the transferpursuant to a scheme of arrangement under Section 391 & 394 of Companies Act 1956 by a demerged firm of its one or more undertakings is any resulting company in such manner that all properties and all liabilities are transferred by demerged company at values appearing in its books to become properties and liabilities of the resulting company by virtue of demerger. The resulting company issues in consideration of the demerger its shares to the shareholders of the demerged company on a proportionate basis. The shareholders holding not less than three fourth in value of the shares in the demerged company become shareholders of the resulting company by virtue of merger. The transfer of the undertaking is on a going concern basis.

Section 33AC of Income Tax Act is amended to provide that benefit available to shipping company to deduct 50 per cent of its profits to be credited to reserve account to be utilised in the prescribed manner, will be available to resulting company on demerger.

Section 35A of IncomeTax Act is amended so that deduction of expenditure on acquisition of patent rights or copy rights on transfer will be applicable resulting company and not to demerged company.

The expenses incurred for demerger will be allowed to resulting company to the extent of one-fifth of such expenditure for five years from the year in which demerger takes place. Similarly the amortisation of preliminary expenses will be available to the resulting company as if demerger had not take place.

New clause (vib) of Section 47 provides that liability of capital gains shall not apply to any transfer of a capital asset in a demerger by demerged company to the resulting company if resulting company is an Indian company New clause (vi d) of Section 47 provides that liability for capital gains shall not apply to transfer or issue of shares in a demerger to the shareholders of demerged company by the resulting company.

As in case of amalgamation, upon the demerger of an undertaking the accumulated loss and the unabsorbeddepreciation directly relatable to the undertaking transferred by the demerged company shall be allowed to be carried forward and set off in the hands of resulting company. If the accumulated loss of unabsorbed depreciation is not directly relatable to the undertaking the same will be apportioned between the demerged company and the resulting company in the same proportion in which the value of the assets have been transferred.

Benefits which are extended to amalgamating company and on demerger to resulting company will go long way and facilitate and speed up restructuring of business and industry. Indeed this is a welcome opportunity to business houses to increase and consolidate their productive capacity and scale of operations.

The Finance Bill has clarified tax liability in respect of buyback of shares by company Section 2(22) of Income Tax Act is amended to provide that dividend does not include any payment made by company on purchase of its own shares as per Section 77 of Comanies Act 1956. FurtherSection 46A is inserted to provide that consideration received by shareholder from any company on purchase of its own shares to the extent of difference between the cost of acquisition and value of consideration so received will be considered as capital gain and subject to provision of Section 48 of Income Tax Act.

(The author is a Mumbai-based chartered accountant)