CA Final Course Paper 7 Direct Tax Laws Chapter 18 CA. Jaikumar Tejwani

S.No Title Slide No. 1 Amalgamation 5-19 2 Demerger 20-37 3 Conversion of Sole Proprietorship or firm

into Company 38-44

4 Conversion of Private company or unlisted company into limited liability partnership

45-50

5 Tax provisions related to Buy Back of Shares

51-52

6 Capital Reduction 53-56 7 Slump Sale 57-68 8 Redemption of Preference Shares 69 9 Conversion of Debentures into Shares 70 10 Conversion of an Indian branch of foreign

company into an Indian subsidiary company 71-72

There is free competition amongst businesses

To identify opportunities.

To redefine strategies.

To mate a value for the shareholder.

Amalgamation/merger

Demerger and spin off

Conversion of sole proprietary business into a company

Conversion of partnership firm into a company

Conversion of a private company or an unlisted public company into a Limited Liability Partnership (LLP)

Slump sale of business

Buy back of shares

Merger of one or more companies with another company, or the merger of two or more companies to form one company, in such a manner that:

All the properties of the amalgamating company or companies immediately before the amalgamation, become the properties 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; and

Shareholders holding not less than 75% in value of shares in the amalgamating company w companies (other than shares already held therein immediately before the amalgamation by, w by a nominee, for the amalgamated company or its subsidiary) become shareholders of the amalgamated company.

A LTD. AMALGAMATING COMPANY

B LTD. AMALGAMATED COMPANY

(Co. with which amalgamating co. merges

Amalgamates with

X Ltd. Y Ltd. AMALGAMTING COMPANIES

(Company/companies which so merge)

Z Ltd. AMALGAMTED CO.

(Formed as a result of Merger) Assets & Liabilities of X Ltd.

Assets & Liabilities of Y Ltd.

Assets & Liabilities of Z Ltd.

Acquisition of property of one co.(A Ltd.) by another co.(B Ltd.) (purchase of property, amalgamation scheme is not approved by court), thereafter A Ltd. Is liquidated.

Distribution of property. (A Ltd. Goes into liquidation and its assets are distributed to B Ltd., but amalgamation scheme is not approved by court).

Property of A Ltd. Being acquired by B Ltd.

A Ltd. Is liquidated after this.

Amalgamation scheme not approved by court.

A Ltd. Is winding-up after liquidation. Assets distributed to B Ltd.

As per sec. 47 : During amalgamation a shareholder t/f shares held by him in the amalgamating co., there is no transfer, hence No Capital Gains (if following conditions are satisfied) :-

i. Transfer is made in consideration of allotment to him of shares in

amalgamated co. (except if shareholder itself is the amalgamated co.); and

ii. Amalgamated co. is Indian co.

As per section 49(2), the cost of acquisition of the shares in the amalgamated company shall be the cost of acquisition of the shares in the amalgamating company.

As per section 2(42A), in determining the period for which the shares in

the amalgamated company are held, the period for which the shares were held in the amalgamating company shall also be included.

1.) As per section 47, no capital gains In the hands of amalgamating company

2.) As per section 47, there will be no capital gains on transfer of shares held in an Indian company in a scheme of amalgamation by the amalgamating foreign company to the amalgamated foreign company if the following conditions are satisfied : At least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of amalgamated foreign company, and Such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated.

A Ltd. (Singapore) Foreign Company holding shares of Indian Company

B Ltd. (U.K.)

Amalgamates with

Indian Company

Conditions to be satisfied for exemption u/s 47

• At least 25% existing shares A ltd. Must become shareholders of B Ltd.

• There should be no tax on such capital gains in Singapore.

SECTION 49(1)

SECTION 2(42A)

SECTION 35 • Expenditure on Scientific Research

Section 35D • Treatment of preliminary expenses

Section 35DD • Treatment of expenses of amalgamation

Section 36(1)(ix) • Treatment of capital expenditure on family planning

Section 35DDA • Amortization of expenditure incurred under Voluntary Retirement Scheme

Section 41(1)

Recovery of any allowance / deduction allowed to the amalgamating company

Section 41(4)

Bad debt recovery

Section 32

Depreciation

• Cost of acquisition of asset to the amalgamated company shall be the cost for which the amalgamating company acquired it.

As per section 49(1),

• the period for which the capital asset was held by the amalgamating company shall also be considered in determining the period of holding of such asset by the amalgamated company.

As per the section 2(42A),

• When any asset related to scientific research is transferred by amalgamating company to the amalgamated Indian company under amalgamation, then section 35 applicable to amalgamating company, also becomes applicable on such amalgamated Indian company.

Expenditure on Scientific Research

[Section 35]:

• If amalgamated company is entitled to deduction u/s 35D undergoes amalgamation, then such deduction shall become available to the resulted amalgamating company from such amalgamation.

Treatment of preliminary

expenses [Section 35D]:

• Deduction on such expenses shall be allowed in five successive A/Ys beginning with P/Y in which amalgamation takes place. The deduction shall be 1/5th of such expenditure on amalgamation.

Treatment of expenses of

amalgamation [Section 35DD]:

• When any asset related to family planning is transferred by amalgamating company to the amalgamated Indian company under amalgamation, then section 36(1)(ix) applicable to amalgamating company, also becomes applicable on such amalgamated company.

Treatment of capital expenditure on family planning [Section 36(1)(ix)]:

• An Indian Company entitled to deduction for amortized voluntary retirement expenses undergoes amalgamation before expiry of period, then amalgamated company shall continue to avails such deduction as if amalgamation had not taken place.

Amortization of expenditure incurred

under Voluntary Retirement Scheme

[Section 35DDA]:

• The amount recovered by amalgamated company(after amalgamation) which was allowed as deduction to amalgamating company(before amalgamation), such amount is charged to tax in that p/y.

Recovery of any allowance/deduction earlier allowed to the

amalgamating company [Section 41(1)]:

• If any bad debts of amalgamating company are recovered by amalgamated company, then there will be no income u/s 41(4) as per judgment of P.K. Kaimal.

Bad Debts Recovery:

• w/off as bad debts by amalgamated company shall be allowed deduction to Amalgamated Company as per Supreme Court in Veerabhadra Rao.

Debts of Amalgamating

Company

• The aggregate deduction, in respect of dep. Allowable to the amalgamating company and the amalgamated Company in the case of amalgamation, shall not exceed in any p/y, the deduction calculated at the prescribed rates as if the amalgamation had not taken place. Such deduction shall be apportioned b/w both companies in the ratios of number of days for which assets were used by them.

Depreciation [Section 32]:

The amalgamated company should continue the business of the

amalgamating company for a minimum period of 5 years from the date of

amalgamation.

The amalgamated company holds continuously for a minimum period of 5 years from the date of amalgamation at least 75% of the book value of the fixed

assets of amalgamating company acquired in amalgamation.

Conditions To Be Satisfied By Amalgamated Company

The amalgamating company should have been engaged in the business in which accumulated losses occurred or depreciation

remains unabsorbed for 3 years or more prior to the date of

amalgamation.

The amalgamating company should hold at least 75% of

book value of the fixed assets which it held two years prior to

the date of amalgamation.

• means so such of loss of the amalgamating company under head “Profits and Gains of business or profession” (not being a loss sustained in a speculation business) which the amalgamating company would have been entitled to carry forward & set-off under the provisions of section 72 if amalgamation had not taken place.

“Accumulated Loss”

• means so much of the allowance for depreciation of the amalgamating company which remains to be allowed & which would have been allowed to amalgamating company, under the provisions of this Act, if the amalgamation had not taken place.

“Unabsorbed Depreciation”

“Demerger” in relation to companies means • the transfer by a demerged company • of its one or more undertakings • to any resulting company • pursuant to a scheme of arrangement under Sections 391 to 394 of the

Companies Act, 1956 • and all the following conditions are fulfilled :-

• of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company.

All the property

• relating to the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the liabilities of the resulting company by virtue of the demerger.

All the liabilities

General or Multipurpose Value of assets transferred Borrowings, if any, of the in demerger Demerged company Total value of assets of such Demerged company immediately before demerger

The property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at the values appearing in its books of accounts immediately before demerger (i.e. Book Value).

Point to be noted: Revaluation of assets should be ignored

A company whose undertaking is transferred, pursuant to a demerger, to a resulting company.

Resulting Company

One or more companies (including a wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a demerger and the resulting company in consideration of such transfer of undertaking, issues shares to the shareholders of the demerged company.

Demerged Company

Section 2(22) has been amended to provide that dividend shall not include any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company). Thus, although there is a distribution of assets to the shareholders of the demerged company, there will be no dividend as per Section 2(22).

Section 47 has been amended to provide as under: -

There will be no transfer and hence no Capital Gains in the following cases: -

Section 47(vib) - Any transfer, in a demerger, of a capital asset by the demerged company to the resulting company if the resulting company is an Indian Company.

Section 47(vid) - Any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is made in consideration of demerger of the undertaking.

• there will be no capital gains in the hands of demerged company on transfer of assets to the resulting company

Therefore, by virtue of

Section 47(vib),

• Amendment of Section 2(42A) - In case of shares in an Indian Company which becomes the property of the assessee in consideration of demerger, there shall be included in the period of holding, the period for which the shares held in demerged company were held by the assessee. In other words, for calculating the period for which shares received upon demerger are held, the period for which the shares were held in the demerged company will also be reckoned.

Similarly, by virtue of Section 47(vid), there will be no capital gains in the hands of shareholders of demerged company when they receive in exchange of the shares of the demerged company, the reduced shares of demerged company and the new shares of resulting company.

• Insertion of new Section 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.

Section 49 which deals with the cost

of acquisition of assets has been

amended as under:-

• "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.

• Thus, the cost of acquisition of shares of the resulting company shall be:-

Point to be noted:

Cost of Acquisition of shares held Net Book Value of assets transferred in by the assessee in the demerged in demerger Company Net worth of the demerged company immediately before such demerger

Where Net Worth = Paid-up Share Capital + General Reserves

Insertion of new Section 49(2D) - The cost of acquisition of original shares held by the shareholder in the demerged company shall be deemed to have been reduced by the amount as so arrived at under Section 49(2C). Thus the cost of acquisition of shares in demerged company shall be equal to cost of acquisition of original shares in the demerged company as reduced by cost of acquisition of shares in the resulting company as calculated in Section 49(2C)

Explanation 2A to Section 43(6)

• Where in any previous year • any asset forming part of a

block of assets • is transferred by a demerged

company • to the resulting company • then, notwithstanding

anything contained in Section 43(1)

• the Written Down Value of the block of assets of the demerged company at the beginning of the previous year

• shall be reduced by the Written Down Value of the assets transferred to the resulting company pursuant to demerger.

Explanation 2B to Section 43(6)

• Where in a previous year • any asset forming part of a

block of assets • is transferred by a demerged

company to the resulting company

• then, notwithstanding anything contained in Section 43(1),

• the Written Down Value of the block of assets in the case of resulting company

• shall be the Written Down Value of the assets transferred, in the hands of the demerged company immediately before the demerger.

Section 32: Depreciation

• As per amendment in Section 32, the aggregate of depreciation available to the demerged company and the resulting company shall not exceed in the previous year, the depreciation calculated at the prescribed rates as if the demerger had not taken place and such depreciation shall be apportioned between the demerged company and the resulting company in the ratio of number of days the assets were used by them.

• means so much of the loss of the demerged company under the head "Profits and gains of business or profession" (not being a loss sustained in a speculation business) which such demerged company, would have been entitled to carry forward and set off under the provisions of section 72 if demerger had not taken place.

"Accumulated loss"

• means so much of the allowance for depreciation of the demerged company, which remains to be allowed and which would have been allowed to the demerged company, under the provisions of this Act, if the demerger had not taken place.

"Unabsorbed depreciation"

Therefore, if the loss and unabsorbed depreciation relates directly to the undertakings transferred such loss and depreciation shall be carried forward by the resulting company and not the demerged company.

However, if such loss and unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting company, then the loss and depreciation shall be apportioned between the demerged company and resulting company in the following proportion: -

• Assets retained by the demerged company : Assets transferred to the resulting company

By virtue of Section 47(vid), there will be no capital gains in the hands of shareholders of demerged company when they receive in exchange of shares of the demerged company the reduced shares of demerged company and the new shares of resulting company except where the resulting company itself is a shareholder of Demerged Company.

By virtue of amendment in Section 2(42A), for calculating the period for which the shares received upon demerger are held, the period for which shares were held in the demerged company shall also be considered.

By virtue of Section 49(2C), the cost of acquisition of shares of resulting company shall be:

Cost of Acquisition of shares held Net Book value of assets by the assessee in the demerged transferred in demerger Company Net Worth of the demerged Company immediately before Such demerger Where Net worth = Paid up Share Capital + General Reserves

• where the capital asset is received by the assessee on demerger and the actual cost of such asset has been allowed as deduction under section 35AD to demerged company, then its actual cost to resulting company shall be taken as Nil.

By virtue of Explanation 13

to section 43(1),

• where any asset forming part of block of assets is transferred by the demerged company to the resulting company, then the Written down Value of the block of assets of the resulting company shall be the Written Down Value of assets transferred in the hands of demerged company immediately before demerger.

By virtue of Explanation 28

to Section 43(6),

• As per amendment in Section 32, Depreciation shall be apportioned between the demerged company and the resulting company in the ratio of number of days for which assets were used by them.

Apportionment of Depreciation -

Carry forward of losses and depreciation - As per Section 72A, if the loss and unabsorbed depreciation of the demerged company directly relates to the undertakings transferred in the demerger, then such loss and depreciation shall be carried forward by the resulting company and not the demerged company. However, if such loss and unabsorbed depreciation is not directly relatable to the undertaking transferred to the resulting company, then the loss and depreciation shall be apportioned between the demerged company and the resulting company in the following proportion:-

Assets retained by the demerged Co.: Assets transferred to the resulting

Co. The loss and depreciation shall be allowed to be carried forward for the balance

number of years for which the demerged company would have carried forward. Section 35 has not been correspondingly amended in case of demerger.

Therefore, the unabsorbed Scientific Research Capital Expenditure shall be carried forward and set off the by the demerged company and not the resulting company.

Amendment of Section 35D-

New Section 35DD-

Where an undertaking which is entitled to deduction under Section 35D is transferred in a scheme of demerger by the demerged company to the resulting company, then the deduction under Section 35d shall be available to the resulting company in the same manner in which it would have been available to the demerged company.

Expenses on demerger shall be allowed in five successive Assessment Years beginning with the previous year in which demerger takes place. The deduction shall be 1/5th of such expenditure on demerger.

• there will be no capital gains, when a capital asset is transferred, in a demerger, by the demerged company to the resulting company, provided that the resulting company is an Indian company.

By virtue of Section 47(vib),

• The shareholders holding not less than 75% in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company and

• Such transfer does not attract tax on the capital gains in the country, in which the demerged foreign company is incorporated.

By virtue of Section 47(vic), there will be no capital gains on transfer of shares held in an Indian Company, by the demerged foreign company

to the resulting foreign company if the following Conditions are satisfied:-

• where any asset forming part of block of assets is transferred by the demerged company to the resulting company, then the Written Down Value of block of assets shall be reduced by the written down value of assets transferred to the resulting company pursuant to demerger.

By virtue of Explanation

2A to Section 43(6),

Apportionment of Depreciation -

• As per amendment in Section 32, Depreciation shall be apportioned between the demerged company and the resulting company in the ratio of number of days for which assets were used by them.

Carry forward of losses and depreciation

• As per Section 72A, if the loss and unabsorbed depreciation of the demerged company directly relates to the undertakings transferred in the demerger, then such loss and depreciation shall be carried forward by the resulting company and not the demerged company. However, if such loss and unabsorbed depreciation is not directly related to the undertaking transferred to the resulting company, then the loss and depreciation shall be apportioned between the demerged company and the resulting company in the following proportion:-

Assets retained by the resulting Co. :

• Assets transferred by the demerged company

The loss & depreciation shall be allowed to be carried forward for the balance number of years for which the demerged company would have carried forward.

Where a firm is succeeded by a company in the business carried on by it (conversion of profession of firm into company is not covered) as a result of which firm sells or otherwise transfers any capital asset or intangible asset to the company then as per section 47(xiii) of the Income Tax Act, 1961 that transaction would not be regarded as transfer and consequently no capital gain shall arise:

Provided that -

All the assets and liabilities of the firm relating to the business immediately before the succession becomes the assets and liabilities of the company;

All the partners of the firm immediately before the succession become the shareholders (preference/ equity) of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the succession;

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 (equity/ preference) in the company; and

The aggregate of the shareholding (equity) in the company of the partners of the firm is not less than fifty per cent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession;

Point to be noted :-

• If the company also allots shares to the wife or relatives or friends of partners and conditions of section 47(xiii) are satisfied, then also exemption is available. However, in computing the limit of 50%, shares held by wife/ relatives/ friends shall not be considered.

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 or intangible asset to the company then as per section 47(xiv) of the Income Tax Act, 1961 that transaction would not be regarded as transfer and consequently no capital gain shall arise:

• Provided that—

all the assets and liabilities of the sole proprietary concern relating to the business (residential house property/ personal jewellery is not covered) immediately before the succession become the assets and liabilities of the company;

the shareholding (equity) of the sole proprietor in the company is not less than fifty per cent of the total voting power in the company and his shareholding continues to remain as such for a period of five years from the date of the succession; and

◦ 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 (equity/ preference) in the company;

Point to be noted :- If the company also allots shares to the wife or relatives or friends of

proprietor and conditions of section 47(xiii) are satisfied, then also exemption is available. However, in computing the limit of 50%, shares held by wife/ relatives/ friends shall not be considered.

Cost of Acquisition Section 49(1): COA to the company = COA of previous owner + Cost of

Improvement incurred by the previous owner and the assessee.

Period of Holding Section 2(42A): • Period of holding of previous owner shall also be considered at the time of

transfer of assets by the company.

Withdrawal of exemption in certain cases (Section 47A) • Where any of the conditions {i.e., condition (d) of section 47(xiii) and

condition (b) of section 47(xiv)} laid down in the proviso to clause (xiv) of section 47 are not complied with, the amount of profit or gains (i.e., capital gain) from the transfer of such capital asset or intangible asset not charged under section 45 by virtue of conditions laid down in clause (xiii)/ (xiv) of section 47 shall be deemed to be profits and gains chargeable to tax of the successor company for the previous year in which the requirement of the proviso to clause (xiii)/ (xiv), as the case may be, are not complied with.

Exemption available for both long term as well as short term capital gains.

The same business shall be carried on by the company after succession. The company may add on any other line of business.

The transfer can also be made to an existing company as well subject to prescribed conditions.

Partner include minor partner admitted to the benefits of the partnership.

Allotment of shares should be in the ratio of capitals of the partners and not profit sharing ratio. Capital includes fixed capital as well as balances in current accounts. In any of the partner is having debit balance of capital then exemption is not possible since prescribed conditions cannot be satisfied. Such partner will have to convert his capital into positive

Business profits are not covered. Therefore the profits arising from transfer of stock in trade are not exempt. The firm should transfer the stock in trade to the company at cost.

Decision in “Sakthi Trading Company V CIT” shall apply where it was held that on dissolution following the death of one partner, assessee firm was reconstituted with remaining partners without discontinuation of business, closing stock of firm was to be valued at cost or market price, whichever is lower. • Exemption is not available to assessee carrying on profession.

Any transfer of a capital asset or intangible asset by a private company or unlisted public company (i.e. closely held company) (hereafter in this clause referred to as the company) to a limited liability partnership or any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a limited liability partnership in accordance with the provisions of section 56 or section 57 of the Limited Liability Partnership Act, 2008 :

• Provided that— • all the assets and liabilities of the company immediately before the conversion become the assets

and liabilities of the limited liability partnership; • all the shareholders (Equity/ Preference) of the company immediately before the conversion

become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in the limited liability partnership are in the same proportion as their shareholding (Equity/ Preference) in the company on the date of conversion;

the shareholders (Equity/ Preference) of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the limited liability partnership;

the aggregate of the profit sharing ratio of the shareholders (Equity/ Preference) of the company in the limited liability partnership shall not be less than 50% at any time during the period of five years from the date of conversion;

the total sales, turnover or gross receipts in the business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed sixty lakh rupees; and

no amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit (means reserve and surplus) standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion.

Cost of Acquisition Section 49(1): • COA to the LLP = COA of previous owner + Cost of Improvement incurred by the

previous owner and the assessee.

Period of Holding Section 2(42A): • Period of holding of previous owner shall also be considered at the time of transfer of

assets by the company.

Withdrawal of exemption in certain cases (Section 47A) • Where any of the conditions {i.e., condition (d) and (f) of section 47(xiiib)} laid

down in the proviso to clause (xiiib) of section 47 are not complied with, the amount of profit or gains (i.e., capital gain) from the transfer of such capital asset or intangible asset or share or shares not charged under section 45 by virtue of conditions laid down in clause (xiii)/ (xiv) of section 47 shall be deemed to be profits and gains chargeable to tax of the successor LLP or the shareholder of the predecessor company, as the case may be, for the previous year in which the requirement of the said proviso are not complied with.

MAT Credit u/s 115JAA shall not be allowed to successor LLP.

COA of the asset received by LLP which were allowed as 100% deduction u/s 35AD shall be taken as NIL {Explanation 13 to section 43(1)}.

Cost of acquisition of the block transferred shall be the WDV in the hands of company on the date of conversion {Explanation 2C to section 43(6)}.

Depreciation shall be apportioned between company and LLP on the basis of number of days (Section 32).

Where the company is converted into LLP, then the expenditure on VRS shall be amortized in hands of LLP as if such conversion has not taken place (Section 35DDA).

Exemption available for both long term as well as short term capital gains.

All the assets and liabilities should be transferred. It is not necessary that transfer should take place at book value.

All shareholders whether equity or preference shareholders should become partners of LLP. Exemption is not available if even a single equity/ preference shareholder does not become partner of LLP.

Profit on sale of stock in trade shall be taxable in hands of company if stock in trade is sold to LLP at higher than its cost price.

New partner may be added to LLP. The only condition is that the capital contribution and profit sharing ratio in LLP of the shareholders should be in proportion of their shareholding in the erstwhile company.

Deemed dividend includes: Any distribution to its shareholder By a company On reduction of its capital To the extent to which the company possesses accumulated

profits, whether capitalized or not. Point to be noted: The FMV of the assets distributed on the date of dissolution shall be

taken for determining the deemed dividend under section 2(22)(d). (Central India Industries Ltd.)

Exception: Any payment made by a company on purchase of its own shares

from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956 (i.e., Buy back of shares). Section 2(22)(iv)

Where a shareholder or a holder of other specified securities

Receives any consideration from any company for purchase of its own shares or other specified securities held by such shareholder or holder of other specified securities, then,

Subject to the provisions of section 48 (i.e., Indexation shall apply)

The difference between the cost of acquisition and the value of consideration received by the shareholder or the holder of other specified securities, as the case may be,

Shall be deemed to be the capital gains arising to such shareholder or the holder of other specified securities, as the case may be,

In the year in which such shares or other specified securities were purchased by the company.

Section 46A

Sale of capital asset is not the pre-condition for capital gains

Consequences of reduction in the face value of shares:

The share capital balance get reduced.

It also extinguishes the right of the preference shareholder to receive dividend on the shares held and the right to share in the distribution of the net assets on liquidation in proportion to the extent of reduction in the capital.

Such reduction in shareholder's right would amount to a transfer within the meaning of Section 2(47) of the Act.

• means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.

“Slump Sale“

• For removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sale purposes of payment of stamp duty, registration fees or other similar taxes fees shall not be regarded as assignment of values to individual’s assets or liabilities.

Explanation:

• For the purposes of this clause, “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.

Explanation:

"Undertaking" has been defined to include • Any part of undertaking • or a unit of an undertaking • or a division of an undertaking • or a business activity taken as a whole • But does not include individual assets or liabilities or any combination

thereof and constituting a business activity.

Therefore what is essential to constitute an "Undertaking" is that • part of undertaking or • unit of undertaking or • division of undertaking

should constitute a business activity as a whole. • Examples of undertaking can be:

• Telecommunications Division of Siemens Ltd. • Cement Division of Larsen and Turbo Ltd.

Every assessee, in the case of slump sale, shall furnish in the prescribed form along with the return of income, a report of an accountant in the prescribed format

• Explanation 1: For the purposes of this section, “net worth” shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account:

• Provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth.

• Explanation 2.—for computing the net worth, the aggregate value of total assets shall be:

In the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (C) of item (i) of sub-clause (c) of clause (6) of section 43;

In the case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction under section 35AD, nil; and

In the case of other assets, the book value of such assets.

If the agreement for transfer specifies the individual value of each asset to be transferred provisions of ''slump sale" shall not be applicable and capital gains on each asset shall be computed separately.

Capital gains shall arise on slump sale.

Capital gains shall be taxable in the previous year in which the slump sale is affected.

Nature of capital gains will depend on the period of holding of the undertaking transferred by slump sale. If the undertaking is held for more than 36 months immediately preceding the transfer, then the capital gains shall be long term. This is irrespective of the fact that the slump sale consist of certain assets which are short term capital assets.

No profits under the head P/G/B/P shall arise in case of a slump sale even if stock is Slump sale.

The cost of acquisition and cost of improvement of the undertaking shall be the "net worth”.

The benefit of indexation shall not be available.

No values should be assigned to the individual assets and liabilities

In case of a slump sale, the unabsorbed losses and unabsorbed depreciation of the undertaking shall not be available to the transferee for carry forward. There is no provision in law which enables the transferee to carry forward the unabsorbed losses and unabsorbed depreciation of the

undertaking or division so sold in slump sale. Therefore, transferee shall not carry forward the losses and depreciation of the undertaking transferred.

Illustration: Balance sheet of X Ltd. as on March 31, 2012 reads as under: UNIT A Rs.

(In Lakh)

UNIT B Rs. (In Lakh)

Fixed assets 100 150 Debtors 100 75 Liabilities 28 50 Stock-in-Trade 50 25 Reserves - 148 Share Premium - 22 (Revaluation Reserve) - 70

Paid up Capital Rs. 252 Lakh

The company acquired Unit B on April 1, 2010. It made certain capital additions in the form of generator set and additional building etc., for (25 lakh during the year 2010-11. The members of the company have authorized the Board in their meeting held on January 28, 2013 to dispose of the Unit B. The company decides to sell the Unit B by way of slump sale for ?225 lakh as consideration. The buyer has agreed with the vendor-company to give time for putting through the sale but not later than June 30, 2013 subject to a discount of 1% on agreed sale consideration. However, this discount is not applicable if the sale is completed after March 31, 2013. The company now approaches you to advise them as a measure of tax planning to determine the date of sole keeping in view of the capital gains tax.

In this question, the provisions of section 50B relating to slump sale shall be applicable. As per section 50B. Capital Gains= "Slump Sale Consideration" minus "Net worth of the undertaking or division" Net worth of the undertaking or division = Aggregate value of total assets of the undertaking or

division transferred minus value of liabilities of the undertaking or division transferred as appearing in its books of account.

Section 50B also provides that Revaluation of assets shall not be considered while computing the Net worth.

Net worth of Unit B is therefore as under: Fixed Assets 150 Lakh Less: Revaluation of Assets 70 Lakh 80 Lakh Add: Debtors 75 Lakh Add: Stock in trade 25 Lakh Less: Liabilities 50 Lakh 130 Lakh Note: WDV of assets cannot be worked out in absence of information. Note: It is assumed that only assets of Unit B have been revalued by Rs. 70 Lakhs.

Provisions of section 50B relating to slump sale is applicable

CASE -I: IF SLUMP SALE IS EFFECTED ON OR BEFORE 31.3.2013

CASE - II: IF SLUMP SALE IS EFFECTED AFTER 31.3.2013

Period of holding of undertaking: 01.04.2010 to 31.3.2013 Short Term Capital Gain Sale Price 225.00 Lakh Less: Discount 2.25 Lakh (1% of 225 Lakh)

Less: Net Worth 130.00 Lakh SHORT TERM CAPITAL GAIN 92.75 Lakh

Short Term Capital Gains of Rs 92.75 Lakh shall arise since the undertaking is held for 36 months or less.

Nature of Capital Gains = Long Term

Sales Price 225 Lakh Less: Net Worth 130 Lakh Long Term Capital Gain 95 Lakh

Tax on Short Term Capital Gains {CASE I}

Tax on Long Term Capital Gains {CASE II}

30% of 92.75 Lakhs = 27,82,500

Add: 5% Surcharge 1,39,125 29,21,625*

20% of 95 Lakhs = 19,00,000 Add: 5% Surcharge= 95,000 19,95,000*

*Plus 3% Education cess. It is assumed that total income of company exceeds Rs. 1 Crore. It is assumed that the tax rates for Assessment Year 2014-15 are the same as applicable to Assessment Year 2013-14.

The company redeems its preference shares only by paying the preference shareholders the value of the shares and taking back the preference shares.

In effect, the company buys back the preference shares from the shareholders.

The redemption of preference shares by the company, therefore, is a sale and squarely comes within the phrase 'sale, exchange or relinquishment' of an asset.

1) When a preference

share is redeemed by a company:

2.) Acquisition of irredeemable preference shares of a company in exchange of equity shares consequent to capital restructuring scheme of the company:

It cannot be an exchange of one kind of shares against another kind of shares having different rights and liabilities.

Where the assessee sells the preference shares within 6 months of their acquisition, the capital gain/loss shall be short-term in nature.

Case Law: Anarkali

Sarabhai vs. CIT {1997}

• Any transfer by way of conversion of bonds or debentures, debenture stock or deposit certificates in any form, of a company into shares or debentures of that company is not regarded as transfer under section 47(x).

• Hence, if any amount is paid in cash etc., the entire transaction will attract capital gains tax.

AS PER SECTION

47(x)

• Section 49(2A) states that where the capital asset, being a share or debenture in a company became the property of the assessee in consideration of a transfer referred to in clause (x) of section 47, the cost of acquisition of the asset to the assessee shall be deemed to be that part of the cost of debenture, debenture-stock or deposit certificates in relation to which such asset is acquired by the assessee.

AS PER SECTION

49(2A)

The provisions of this section apply to a foreign company engaged in banking business in India through its branch situated in India, which is converted into an Indian subsidiary company in accordance with the scheme framed by RBI.

If the conditions notified by the Central Government in this behalf are satisfied, then capital gains arising from such conversion would not be chargeable to tax in the assessment year relevant to the previous year in which such conversion takes place.

Also, the provisions of the Act relating to computation of income of foreign company and Indian subsidiary company would apply with such exceptions, modifications and adaptations as specified in the notification.

Further, the benefit of set-off of unabsorbed depreciation, set-off and carry forward of losses, tax credit in respect of tax paid on deemed income relating to certain companies available under the Act shall apply with such exceptions, modifications and adaptations as specified in the notification.

If the conditions specified in the scheme of RBI or notification issued by the Central Government are not complied with, then, all the provisions of the Act would apply to the foreign company and Indian subsidiary company without any benefit, exemption or relief under this section.

If the benefit, exemption or relief has been granted to the foreign company or Indian subsidiary company in any previous year and thereafter, there is a failure to comply with any of the conditions specified in the scheme or notification, then such benefit, exemption or relief shall be deemed to have been wrongly allowed.

In such a case, the Assessing Officer is empowered to re-compute the total income of the assessee for the said previous year and make the necessary amendment. This power is notwithstanding anything contained in the Income-tax Act, 1961.

The provisions of rectification under section 154, would, accordingly, apply and the four year period within which such rectification should be made has to be reckoned from the end of the previous year in which the failure to comply with such conditions has taken place.