Description
This is a report describes income tax issues in relation to business re-organization including conversion of partnership firms/sole proprietary business into company.
Income-tax issues in relation to business re-organisations, including conversion of partnership firms/sole proprietary business into company
CA. Anil Talreja
9 May 2009
Key takeaways from the session
• • • • • Business Re-organisation – what does it mean? Why re-organise? Mechanics of re-organisation Income tax issues – business re-oganisation Corporatisation of sole proprietorships/partnerships • Open session
Seminar on business re-organisation – ICAI
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3
Business Re-organisation – what does it mean?
• Re-organise means „organising differently? or „organise again? • According to The Random House College Dictionary
? Re-organisation - “ a thorough or drastic reconstruction of a business corporation” ? Organise – „to form as or into a whole consisting of interdependent or coordinated parts”
• Altering the current structure
Seminar on business re-organisation – ICAI
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Why re-organise?
• • • • • • • Releasing excess cash Business synergies – size and dominance Unlocking business – focus on core business Entity rationalisation – simplification of structure Family arrangements Global acquisition Achieving tax efficiency
Seminar on business re-organisation – ICAI
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6
Mechanics of Re-organisation
Defn. of Transfer – Sec. 2(47) Capital Gains – Chapter IV E
Business Re-organisation
Corporates only
Amalgamations/ Merger Sec. 2(1B)
Demerger
Acquisitions
Sec. 2(19AA) Asset Purchase Stock Purchase
Slump Sale Sec. 2(42C) and Sec. 50B
Seminar on business re-organisation – ICAI
Itemized Sale Sec. 50 and Sec. 50C
7
Amalgamation
• Section 2(1B) defines amalgamation – includes an acquisition or merger
Amalgamating company
Assets & Liabilities
Transfer
Amalgamated company
Shareholders
> 75% Shareholders (in value)
Otherwise than as a result of purchase or distribution of a property on winding up of the Amalgamating Co.
Seminar on business re-organisation – ICAI
8
Amalgamation – income tax issues
A Ltd. B Ltd. • Continuity of shareholding Amalgamating Amalgamated – type of shares to be company company considered • Remission/cessation of liability taken over from A Ltd. – guidance available - Sec. 41 explains „successor in business? • Disallowance under Sec. 43B suffered by A Ltd. – whether allowable to B Ltd. on payment basis • MAT credit available to A Ltd. – whether can be used by B Ltd. • Special Provision with regard to specified assets – Sec 43C
Seminar on business re-organisation – ICAI
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Amalgamation – income tax issues
A Ltd. B Ltd. • Debts of A Ltd. taken over Amalgamating Amalgamated by B Ltd. and subsequently company company written off – whether deduction under section 36(1)(vii) available– compliance with requirements of section 36(2) • Provision for bad debts made by A Ltd and disallowed these debts now written off by B Ltd. – no debit to P/L of B Ltd. – whether claim can be made? • Provision for bad debts made by A Ltd and disallowed - now reversed by B Ltd. - whether claim can be made?
? ? ? ?
CIT v/s. T Veerabhadra Rao -155 ITR 152 (SC) CIT v/s. Pandit Lakshmikant Jha – 84 ITR 481(SC) CIT v/s. RSA Shankara Ayyar – 20 ITR 597 (SC) CIT v/s. Bombay Hing Supply Co. – 61 ITR 672 (Bom) 10
Seminar on business re-organisation – ICAI
Amalgamation – income tax issues
A Ltd. B Ltd. • Continuity of benefits of tax Amalgamating Amalgamated holiday under sections 10A/ company company 10AA/10B/80-IA/80-IB /80-IAB ? Whether can be availed by A Ltd. for part of the year ? Impact of amendment made by Finance Act, 2008 • TDS on transactions between A Ltd. and B Ltd. between the appointed date and effective date – whether can be claimed – equated with „advance tax?.
Seminar on business re-organisation – ICAI
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Amalgamation – income tax issues
• Amalgamation of WOS (B Ltd.) into its holding Co. (A Ltd) – whether qualifies the test of Sec. 2(1B) • Restriction on carry forward and set off of business loss with regard to closely held companies – Sec. 79
A Ltd. Holding company (Amalgamated company)
B Ltd. (Wholly owned subsidiary) (Amalgamating company)
Seminar on business re-organisation – ICAI
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Amalgamation – income tax issues
• Issues with regard to accumulated losses/ unabsorbed depreciation
A Ltd. Amalgamating company B Ltd. Amalgamated company
? Section 72A - Whether IT enabled services covered under the definition of „Industrial undertaking?? ? Whether manufacture of „computer software? include IT enabled services – Can one apply definition contained in Ss.10A / 10B / 80 HHE read with Notification issued by CBDT (SO.890(E) dated 26-92000) ? Issues with regard to compliance of conditions ? Whether loss of A Ltd. gets a new life
Seminar on business re-organisation – ICAI
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Amalgamation – income tax issues
Issues vis-à-vis shareholders
• Benefit of S.47(vii) available provided –
A Ltd. Amalgamating company B Ltd. Amalgamated company
? transfer is made in consideration of the allotment of share or shares of the amalgamated company;
? Issue of debentures or bonds in addition to shares
? CIT v. M. Ct. M. Corporation Pvt. Ltd. 221 ITR 524 (Mad) ? CIT v Gautam Sarabhai Trust 173 ITR 216 (Guj.)
? amalgamated company is an Indian company
• Implications of non satisfaction of conditions -fair value of shares of amalgamated company could be regarded as consideration for computing capital gains • Impact if shares held as stock in trade
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Case Study # 1
A Ltd.
Facts • A Ltd. engaged in the pharmaceutical sector.
• B Ltd. engaged in the same sector and has brought forward unabsorbed depreciation
• B Ltd. is amalgamated into A Ltd. Issue • Whether the brought forward unabsorbed business loss/depreciation pertaining to B Ltd. can be carried forward in A Ltd. given the fact that the conditions stipulated by section 72A are not complied with.
B Ltd.
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Case Study # 1
A Ltd.
Analysis • The WDV of the fixed assets taken over by A Ltd. could be increased by the amount of depreciation allowable but not given effect to in the case of B Ltd. • The depreciation can be claimed on such higher value by A Ltd. • Observations of the Hon?ble Bombay High Court in the case of CIT V/s. Hindustan Petroleum Corporation Ltd. reported in (1991) 187 ITR page 1
B Ltd.
• Expl. 3 to section 43(6) will not apply to such a case
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Case Study # 1
A Ltd.
Analysis (contd.) • Expl. 3 to section 43(6): “Any allowance in respect of any depreciation carried forward under sub-section (2) of section 32 shall be deemed to be depreciation “actually allowed”. • Reference can be made to the decisions of the Apex Court in the case of Mahadeva Upendra Sinai v/s. UOI (1975) 98 ITR 209, CIT v/s. Straw Products (1966) 60 ITR 156 and CIT v/s. Dharampur Leather Co 60 ITR 165
B Ltd.
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Demerger
• Section 2(19AA) defines demerger
Demerged Co. (Undertaking-a going concern)*
Assets & Liabilities
Resulting Co. (Undertaking)
Consideration
Shareholders
Shares issued on proportionate basis > 75% Shareholders (in value)
* Otherwise than as a result of acquisition of property by the resulting company from the demerged co.
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Demerger – income tax issues
• Meaning of undertaking A Ltd. B Ltd. Demerged Co. Resulting Co. • Requirement of minimum two undertakings Undertaking 1 Undertaking 2 • Discharge of consideration • All conditions needs to be satisfied ? Avaya Global Connect Limited v/s. ACIT (ITA No. 832/Mum/07 – Mumbai Tribunal) • Deemed dividend – Sec. 2(22)(e) v/s. Sec. 2(19AA) • Recording assets in the books of resulting company • Identification of assets to be demerged – block of assets • TDS on transactions between A Ltd. and B Ltd. between the appointed date and effective date – whether can be claimed or equated with „advance tax?.
Seminar on business re-organisation – ICAI
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Demerger – income tax issues
• Bad debts, 43B – issues A Ltd. B Ltd. Demerged Co. Resulting Co. similar to amalgamation • Continuity of benefits of tax Undertaking 1 Undertaking 2 holiday under sections 10A/ 10AA/10B/80-IA/80-IB/80-IAB ? Whether can be availed by A Ltd. for part of the year ? Impact of amendment made by Finance Act, 2008 • Specific provisions for carry forward of loss – section 72A(4) ? No requirement of industrial undertaking • Restriction on carry forward and set off of business loss with regard to closely held companies – Sec. 79
Seminar on business re-organisation – ICAI
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Demerger – income tax issues
• Demerger from holding to subsidiary • Demerger from subsidiary to holding
A Ltd. Holding company
• Is there a need to desubsidiarise?
B Ltd. (Wholly owned subsidiary)
Seminar on business re-organisation – ICAI
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Demerger – income tax issues
Issues vis-à-vis shareholders
A Ltd. Demerged Co.
Undertaking 1
B Ltd. Resulting Co.
Undertaking 2
• Lock in period • Cost of acquisition
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Case Study # 1
A Ltd.
Facts • A Ltd. is a listed company engaged in providing financial services to retail consumers. • It, through its subsidiaries and associate companies is also engaged in the business of construction – development of real estate • The real estate business is reflected in its financial statements in the form of Land, shares in its subsidiaries/associate companies, loans advanced and bank balance Retail consumers
Seminar on business re-organisation – ICAI
Sub Co.
Associated Cos.
23
Case Study # 1
A Ltd.
Financial services
Real estate
Facts (contd.) • It wants to demerge its real estate business to another company. Issue • Does its „real estate business? constitute an „undertaking? for the purpose of section 2(19AA).
Sub Co.
Associated Cos.
Retail consumers
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Case Study # 1
A Ltd.
Financial services
Real estate
Sub Co.
Associated Cos.
Retail consumers
Seminar on business re-organisation – ICAI
Analysis • „Undertaking? – meaning of - Reference can be drawn from the Expl. 1 to section 2(19AA) “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.” • „Undertaking means the entire organisation. A company whether it has a plant or whether it has an organisation within itself is considered as one whole unit and the entire business of the going concern is embraced within the word „undertaking? – Rustom Cavasjee Cooper v/s. UOI AIR 1970 SC 564. 25
Case Study # 1
A Ltd.
Financial services
Real estate
Analysis (contd.) • „Undertaking? – means a concern started or formed for a specific purpose or a project engaged in – Madras Machine Tools Manufacturers Ltd. v/s. CIT (1975) 98 ITR 127 (Mad.)
Sub Co.
Associated Cos.
Retail consumers
Seminar on business re-organisation – ICAI
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Case Study # 2
A Ltd.
Other activities
Undertaking
Facts • A Ltd. is a listed Company. It demerges one of its undertaking to B Ltd. • Included in the assets demerged, are shares of C Ltd. which is also an Indian Company
C Ltd.
Shares will be held by B Ltd. subsequent to demerger
• B Ltd. proposes to sell these shares to an outside party
B Ltd.
Seminar on business re-organisation – ICAI
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Case Study # 2
B Ltd.
Issue • Whether the period of holding of these shares should be reckoned from the date when A Ltd. acquired these shares or from the date of demerger. • Whether cost to previous owner (A Ltd. in the instant case) can be considered while computing the capital gains or whether the cost to B Ltd. can be considered.
Outside buyer
Transfer of shares of C Ltd.
C Ltd.
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Case Study # 2
Analysis • Transfer of assets by A Ltd. to B Ltd. not subject to tax – section 47(vib)
B Ltd.
• No reference in Section 49 to such a case • No reference in Section 2(42A) to such a case • Reference can be made from the observations of the Hon?ble Bombay High Court in the case of CIT V/s. Surat Cotton Spinning and Weaving Mills Pvt. Ltd. reported in (1979) 118 ITR page 746
Outside buyer
Transfer of shares of C Ltd.
C Ltd.
Seminar on business re-organisation – ICAI
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Slump Sale – specific provisions
• Section 50B(2) – Cost of acquisition – net worth ? Net worth = Aggregate value of total assets less Aggregate value of total liabilities ? Depreciable assets – Income-tax WDV ? For other assets – book value
• Revaluation of assets to be ignored
• I.T. WDV to be reduced by seller from the block – Sec. 43(6)(c)(i)(C) the ITA. The reduction should not exceed the written down value of the block. • No Indexation benefit for long term assets
Seminar on business re-organisation – ICAI
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Slump Sale – specific provisions
• Accountant?s report to be furnished • Determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities. – Expl. 2 to Sec. 2(42C) • For determining Long Term/Short Term capital asset - the Undertaking as a whole needs to be considered – Section 50B(1)
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Slump Sale – income issues
• Treatment of brought forward losses & unabsorbed depreciation related to the undertaking slump sold? • Actual cost for the assets slump sold for the buyer – Sec. 43(1) of the ITA – to be allocated to various assets based on fair value – Guidance – AS 10 of ICAI • Implications of section 281 / section 170 • Going concern requirements • Section 50B v/s. Section 50C • Expenditure on slump sale • Continuity of benefits • Treatment of loss of the undertaking • If Net worth = negative – whether to be considered as zero?
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Case study # 1
Shareholders Acquirer
• Division B of Target Co sold under the slump sale scheme to acquirer • Following are some details of transaction:
Target
Slump Sale
INR (in?000) Sale Consideration 10,000 Total Assets (Fixed + Current) 3,000 Liabilities 3,800
Division A
Division B
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Seminar on business re-organisation – ICAI
Case study # 1
• • • • Calculation of Capital gain liability in hands of target co. Sale Consideration – 10,000 Cost of Acquisition – Net Worth Calculation of “Net Worth” as per Sec. 50B(2):
Total Assets Less: Liabilities Net Worth 3,000 3,800 (800)
• Capital Gain = Sale Consideration – Cost of Acquisition = 10,000 – (– 800) = 10,800 ! • Can it be said that capital gain would be more than sale consideration therefore, taxable capital gain in hand of target would be 10,800?
Seminar on business re-organisation – ICAI
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Case study # 1
• Capital gain is always a portion of sale consideration and it in no case exceeds the sale consideration. • Therefore, in the above case since, net worth is negative can one take that as Nil. • Therefore, Income chargeable to tax under the head Capital Gain in the hands of Target Co. = Sale Consideration i.e. 10,000
? Zuari Industries Ltd Vs. ACIT (Mum) 105 ITD 569 ? Paperbase Co. Ltd v. ACIT (Del) 19 SOT 163
Seminar on business re-organisation – ICAI
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Case study # 2
Co. 2
Co.1 purchases an undertaking from Co. 2 in year 1
Co. 1
Outside buyer approaches to buy the undertaking in year 2
Transfers the undertaking
Sale of Subsidiary
Sub
Transfer of shares in the Subsidiary
Outside buyer
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Itemised sale – Tax provisions
• Sale of assets in normal course
• In the case of depreciable assets – Provisions of Sec. 50 of ITA would apply - short term capital gain / loss.
• In the case of capital assets – Provisions in Chapter IV E would apply • Provisions of Sec. 50C would be applicable in respect of Land/building
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Itemised sale – income tax issues
• Whether tax benefit attached to the undertaking would be available to the successor of business if the entire „undertaking? is sold by way of itemized sale ?
• Whether amount disallowed under Sec. 43B in the hands of seller would be available to the buyer company?
• Whether certificate under Sec. 281 of ITA would be required before transfer of an undertaking?
Seminar on business re-organisation – ICAI
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Itemised sale – income tax issues
• Sale of an undertaking as a going concern Sankeya Chemicals Limited 8 SOT 50 (Mum) and Coromandel Fertilizers Ltd 90 ITD 344 (Hyd.) • Sale of rights together with tangible assets – tax treatment - Skyline Caterers v ITO (20 SOT 266) (Mum)
Seminar on business re-organisation – ICAI
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Case Study # 1
Facts • A Ltd. is a listed Company. It was the owner of a brand „POPULAR?. The cost of acquisition of this Brand is Rs. 2 mio • In view of the unsuccessful performance of the Brand, it sold this Brand to B Ltd. for 1.5 mio. (WDV in A Ltd.)
POPULAR
A Ltd.
Seminar on business re-organisation – ICAI
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Case Study # 1
A Ltd.
Facts (contd.) • Both A Ltd. and B Ltd. have claimed depreciation on this Brand.
POPULAR
B Ltd.
41
Seminar on business re-organisation – ICAI
Case Study # 1
B Ltd.
Facts (contd.) • B Ltd. is able to turn around this Brand and after 4 years from the first sale, A Ltd. decides to purchase this Brand from B Ltd. and pays INR 10 mio. Issue • Whether A Ltd. can claim depreciation in respect of the amount of INR 10 mio paid by it or will it be hit by Expl. 4 to Section 43(1)
POPULAR
A Ltd.
42
Seminar on business re-organisation – ICAI
Case Study # 1
B Ltd.
Analysis • Expl. 4 to Section 43(1) Where any asset which had once belonged to the assessee and had been used by him for the purposes of his business or profession and thereafter ceased to be his property by reason of transfer or otherwise, is reacquired by him, the actual cost to the assessee shall be— (i) the actual cost to him when he first acquired the asset as reduced by— (b) the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988, as if the asset was the only asset in the relevant block of assets; or (ii) the actual price for which the asset is re-acquired by him, whichever is less. 43
POPULAR
A Ltd.
Seminar on business re-organisation – ICAI
Stock Purchase – Tax provisions
• Section 45 “45(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B ……. be chargeable to income-tax under the head “Capital gains”, and shall be deemed to be the income of the previous year in which transfer took place” • Requirement of section 45 ? Applicable only in the case of a capital asset – Sec. 2(14) ? The capital asset is transferred by the assessee –Sec.(47) ? Profit and gains on transfer is exempt from tax under Sec. 54, 54B, 54D, 54E, 54EA, 54EB,54EC, 54F, 54G and 54GA.
Seminar on business re-organisation – ICAI
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Stock Purchase – Tax provisions
• Determination whether the asset is a “Short-term capital asset” or a “Long-term capital asset” • Mode of Computation
? Capital gain = Full value of consideration - expenditure in connection with transfer - less cost of acquisition - less cost of improvement
• Capital gains to be computed in foreign currency by non residents – no indexation available • Exemption for investment in specified assets • Special provisions for set off and carry forward of capital losses –Sec. 70 / 74 of the ITA • Carry forward and set-off of losses may be lost – Sec. 79 of the ITA
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Implications of Equity Purchase V/s. Assets Purchased
Equity purchase • Dividend Distribution Tax (DDT) on distribution of consideration to shareholders • If the transaction is funded by debt – No deduction in respect of interest (Sec. 14A of ITA)
Seminar on business re-organisation – ICAI
Assets Purchase • No question DDT will arise
• If transaction is funded by using debt – deduction available in respect of interest
46
47
Conditions to be complied – S. 47(xiii/xiv)
• All assets & liabilities of Prop or partnership firm become assets & liabilities of the Co. • All partners become shareholders of company in the same proportion in which their capital accounts stood in the books of the firm on the date of succession • Shareholding in either case should not be less than 50% of the total voting power • Lock in period • Sole proprietor or partners not to receive any consideration or benefit directly or indirectly, in any form or manner, other than by way of allotment of shares in the company ? Bonds, debentures, etc. not possible
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Conditions to be complied – S. 47(xiii/xiv)
• Non-compliance of conditions triggers taxation – chargeable profits and gains taxed in the hands of the successor company in the year of contravention - S.47A(3) of the ITA • „Accumulated loss? and unabsorbed depreciation allowance of Prop transferred to successor company – S.72A(6) – no separate conditions to be complied with • Non-compliance of conditions contained in S.47(xiv) will result in the loss and depreciation amount set off earlier being regarded as income of the year in which contravention is made
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Issues
• Can minors who are partners in the firm be counted for the total of seven shareholders required as per Companies act? • Can HUF, a partner in the firm, be taken as one of the seven shareholders? • Suppose the partner's have both capital and current account in the firm's books, whether both will be added for the issue of shares in the ltd company?
• Can shares be issued at a premium?
• Can shares be issued for part amount due to the partner and balance be treated as loan with interest? ? Can this be done if such a clause is provided in the partnership deed? • Implications u/s. 79 • Implications in case of LLP?
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Issues
• Necessity of a new company • Succession qua the business or qua the firm • Can a company be successor to two or more firms? • Transfer of tenancy
• Treatment for non-business assets
• Can preference shares be issued? • Partners having debit balances • Treatment of reserves • Partners not entitled to assets of the firm
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Issues
• Allowability of bad debts and other issues applicable in case amalgamation • Tax planning in the context of depreciable assets • Capital gains on subsequent sale of assets by the company • Amalgamation of successor companies
• Effect of Part IX conversion
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Others types of re-organisations
• Re-organisation in turbulent times
• Buy-back / capital reduction
• Impact of recent decisions • Debt restructuring
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54
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doc_725150887.pdf
This is a report describes income tax issues in relation to business re-organization including conversion of partnership firms/sole proprietary business into company.
Income-tax issues in relation to business re-organisations, including conversion of partnership firms/sole proprietary business into company
CA. Anil Talreja
9 May 2009
Key takeaways from the session
• • • • • Business Re-organisation – what does it mean? Why re-organise? Mechanics of re-organisation Income tax issues – business re-oganisation Corporatisation of sole proprietorships/partnerships • Open session
Seminar on business re-organisation – ICAI
2
3
Business Re-organisation – what does it mean?
• Re-organise means „organising differently? or „organise again? • According to The Random House College Dictionary
? Re-organisation - “ a thorough or drastic reconstruction of a business corporation” ? Organise – „to form as or into a whole consisting of interdependent or coordinated parts”
• Altering the current structure
Seminar on business re-organisation – ICAI
4
Why re-organise?
• • • • • • • Releasing excess cash Business synergies – size and dominance Unlocking business – focus on core business Entity rationalisation – simplification of structure Family arrangements Global acquisition Achieving tax efficiency
Seminar on business re-organisation – ICAI
5
6
Mechanics of Re-organisation
Defn. of Transfer – Sec. 2(47) Capital Gains – Chapter IV E
Business Re-organisation
Corporates only
Amalgamations/ Merger Sec. 2(1B)
Demerger
Acquisitions
Sec. 2(19AA) Asset Purchase Stock Purchase
Slump Sale Sec. 2(42C) and Sec. 50B
Seminar on business re-organisation – ICAI
Itemized Sale Sec. 50 and Sec. 50C
7
Amalgamation
• Section 2(1B) defines amalgamation – includes an acquisition or merger
Amalgamating company
Assets & Liabilities
Transfer
Amalgamated company
Shareholders
> 75% Shareholders (in value)
Otherwise than as a result of purchase or distribution of a property on winding up of the Amalgamating Co.
Seminar on business re-organisation – ICAI
8
Amalgamation – income tax issues
A Ltd. B Ltd. • Continuity of shareholding Amalgamating Amalgamated – type of shares to be company company considered • Remission/cessation of liability taken over from A Ltd. – guidance available - Sec. 41 explains „successor in business? • Disallowance under Sec. 43B suffered by A Ltd. – whether allowable to B Ltd. on payment basis • MAT credit available to A Ltd. – whether can be used by B Ltd. • Special Provision with regard to specified assets – Sec 43C
Seminar on business re-organisation – ICAI
9
Amalgamation – income tax issues
A Ltd. B Ltd. • Debts of A Ltd. taken over Amalgamating Amalgamated by B Ltd. and subsequently company company written off – whether deduction under section 36(1)(vii) available– compliance with requirements of section 36(2) • Provision for bad debts made by A Ltd and disallowed these debts now written off by B Ltd. – no debit to P/L of B Ltd. – whether claim can be made? • Provision for bad debts made by A Ltd and disallowed - now reversed by B Ltd. - whether claim can be made?
? ? ? ?
CIT v/s. T Veerabhadra Rao -155 ITR 152 (SC) CIT v/s. Pandit Lakshmikant Jha – 84 ITR 481(SC) CIT v/s. RSA Shankara Ayyar – 20 ITR 597 (SC) CIT v/s. Bombay Hing Supply Co. – 61 ITR 672 (Bom) 10
Seminar on business re-organisation – ICAI
Amalgamation – income tax issues
A Ltd. B Ltd. • Continuity of benefits of tax Amalgamating Amalgamated holiday under sections 10A/ company company 10AA/10B/80-IA/80-IB /80-IAB ? Whether can be availed by A Ltd. for part of the year ? Impact of amendment made by Finance Act, 2008 • TDS on transactions between A Ltd. and B Ltd. between the appointed date and effective date – whether can be claimed – equated with „advance tax?.
Seminar on business re-organisation – ICAI
11
Amalgamation – income tax issues
• Amalgamation of WOS (B Ltd.) into its holding Co. (A Ltd) – whether qualifies the test of Sec. 2(1B) • Restriction on carry forward and set off of business loss with regard to closely held companies – Sec. 79
A Ltd. Holding company (Amalgamated company)
B Ltd. (Wholly owned subsidiary) (Amalgamating company)
Seminar on business re-organisation – ICAI
12
Amalgamation – income tax issues
• Issues with regard to accumulated losses/ unabsorbed depreciation
A Ltd. Amalgamating company B Ltd. Amalgamated company
? Section 72A - Whether IT enabled services covered under the definition of „Industrial undertaking?? ? Whether manufacture of „computer software? include IT enabled services – Can one apply definition contained in Ss.10A / 10B / 80 HHE read with Notification issued by CBDT (SO.890(E) dated 26-92000) ? Issues with regard to compliance of conditions ? Whether loss of A Ltd. gets a new life
Seminar on business re-organisation – ICAI
13
Amalgamation – income tax issues
Issues vis-à-vis shareholders
• Benefit of S.47(vii) available provided –
A Ltd. Amalgamating company B Ltd. Amalgamated company
? transfer is made in consideration of the allotment of share or shares of the amalgamated company;
? Issue of debentures or bonds in addition to shares
? CIT v. M. Ct. M. Corporation Pvt. Ltd. 221 ITR 524 (Mad) ? CIT v Gautam Sarabhai Trust 173 ITR 216 (Guj.)
? amalgamated company is an Indian company
• Implications of non satisfaction of conditions -fair value of shares of amalgamated company could be regarded as consideration for computing capital gains • Impact if shares held as stock in trade
Seminar on business re-organisation – ICAI
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Case Study # 1
A Ltd.
Facts • A Ltd. engaged in the pharmaceutical sector.
• B Ltd. engaged in the same sector and has brought forward unabsorbed depreciation
• B Ltd. is amalgamated into A Ltd. Issue • Whether the brought forward unabsorbed business loss/depreciation pertaining to B Ltd. can be carried forward in A Ltd. given the fact that the conditions stipulated by section 72A are not complied with.
B Ltd.
Seminar on business re-organisation – ICAI
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Case Study # 1
A Ltd.
Analysis • The WDV of the fixed assets taken over by A Ltd. could be increased by the amount of depreciation allowable but not given effect to in the case of B Ltd. • The depreciation can be claimed on such higher value by A Ltd. • Observations of the Hon?ble Bombay High Court in the case of CIT V/s. Hindustan Petroleum Corporation Ltd. reported in (1991) 187 ITR page 1
B Ltd.
• Expl. 3 to section 43(6) will not apply to such a case
Seminar on business re-organisation – ICAI
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Case Study # 1
A Ltd.
Analysis (contd.) • Expl. 3 to section 43(6): “Any allowance in respect of any depreciation carried forward under sub-section (2) of section 32 shall be deemed to be depreciation “actually allowed”. • Reference can be made to the decisions of the Apex Court in the case of Mahadeva Upendra Sinai v/s. UOI (1975) 98 ITR 209, CIT v/s. Straw Products (1966) 60 ITR 156 and CIT v/s. Dharampur Leather Co 60 ITR 165
B Ltd.
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Demerger
• Section 2(19AA) defines demerger
Demerged Co. (Undertaking-a going concern)*
Assets & Liabilities
Resulting Co. (Undertaking)
Consideration
Shareholders
Shares issued on proportionate basis > 75% Shareholders (in value)
* Otherwise than as a result of acquisition of property by the resulting company from the demerged co.
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Demerger – income tax issues
• Meaning of undertaking A Ltd. B Ltd. Demerged Co. Resulting Co. • Requirement of minimum two undertakings Undertaking 1 Undertaking 2 • Discharge of consideration • All conditions needs to be satisfied ? Avaya Global Connect Limited v/s. ACIT (ITA No. 832/Mum/07 – Mumbai Tribunal) • Deemed dividend – Sec. 2(22)(e) v/s. Sec. 2(19AA) • Recording assets in the books of resulting company • Identification of assets to be demerged – block of assets • TDS on transactions between A Ltd. and B Ltd. between the appointed date and effective date – whether can be claimed or equated with „advance tax?.
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Demerger – income tax issues
• Bad debts, 43B – issues A Ltd. B Ltd. Demerged Co. Resulting Co. similar to amalgamation • Continuity of benefits of tax Undertaking 1 Undertaking 2 holiday under sections 10A/ 10AA/10B/80-IA/80-IB/80-IAB ? Whether can be availed by A Ltd. for part of the year ? Impact of amendment made by Finance Act, 2008 • Specific provisions for carry forward of loss – section 72A(4) ? No requirement of industrial undertaking • Restriction on carry forward and set off of business loss with regard to closely held companies – Sec. 79
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Demerger – income tax issues
• Demerger from holding to subsidiary • Demerger from subsidiary to holding
A Ltd. Holding company
• Is there a need to desubsidiarise?
B Ltd. (Wholly owned subsidiary)
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Demerger – income tax issues
Issues vis-à-vis shareholders
A Ltd. Demerged Co.
Undertaking 1
B Ltd. Resulting Co.
Undertaking 2
• Lock in period • Cost of acquisition
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Case Study # 1
A Ltd.
Facts • A Ltd. is a listed company engaged in providing financial services to retail consumers. • It, through its subsidiaries and associate companies is also engaged in the business of construction – development of real estate • The real estate business is reflected in its financial statements in the form of Land, shares in its subsidiaries/associate companies, loans advanced and bank balance Retail consumers
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Sub Co.
Associated Cos.
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Case Study # 1
A Ltd.
Financial services
Real estate
Facts (contd.) • It wants to demerge its real estate business to another company. Issue • Does its „real estate business? constitute an „undertaking? for the purpose of section 2(19AA).
Sub Co.
Associated Cos.
Retail consumers
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Case Study # 1
A Ltd.
Financial services
Real estate
Sub Co.
Associated Cos.
Retail consumers
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Analysis • „Undertaking? – meaning of - Reference can be drawn from the Expl. 1 to section 2(19AA) “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.” • „Undertaking means the entire organisation. A company whether it has a plant or whether it has an organisation within itself is considered as one whole unit and the entire business of the going concern is embraced within the word „undertaking? – Rustom Cavasjee Cooper v/s. UOI AIR 1970 SC 564. 25
Case Study # 1
A Ltd.
Financial services
Real estate
Analysis (contd.) • „Undertaking? – means a concern started or formed for a specific purpose or a project engaged in – Madras Machine Tools Manufacturers Ltd. v/s. CIT (1975) 98 ITR 127 (Mad.)
Sub Co.
Associated Cos.
Retail consumers
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Case Study # 2
A Ltd.
Other activities
Undertaking
Facts • A Ltd. is a listed Company. It demerges one of its undertaking to B Ltd. • Included in the assets demerged, are shares of C Ltd. which is also an Indian Company
C Ltd.
Shares will be held by B Ltd. subsequent to demerger
• B Ltd. proposes to sell these shares to an outside party
B Ltd.
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Case Study # 2
B Ltd.
Issue • Whether the period of holding of these shares should be reckoned from the date when A Ltd. acquired these shares or from the date of demerger. • Whether cost to previous owner (A Ltd. in the instant case) can be considered while computing the capital gains or whether the cost to B Ltd. can be considered.
Outside buyer
Transfer of shares of C Ltd.
C Ltd.
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Case Study # 2
Analysis • Transfer of assets by A Ltd. to B Ltd. not subject to tax – section 47(vib)
B Ltd.
• No reference in Section 49 to such a case • No reference in Section 2(42A) to such a case • Reference can be made from the observations of the Hon?ble Bombay High Court in the case of CIT V/s. Surat Cotton Spinning and Weaving Mills Pvt. Ltd. reported in (1979) 118 ITR page 746
Outside buyer
Transfer of shares of C Ltd.
C Ltd.
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Slump Sale – specific provisions
• Section 50B(2) – Cost of acquisition – net worth ? Net worth = Aggregate value of total assets less Aggregate value of total liabilities ? Depreciable assets – Income-tax WDV ? For other assets – book value
• Revaluation of assets to be ignored
• I.T. WDV to be reduced by seller from the block – Sec. 43(6)(c)(i)(C) the ITA. The reduction should not exceed the written down value of the block. • No Indexation benefit for long term assets
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Slump Sale – specific provisions
• Accountant?s report to be furnished • Determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities. – Expl. 2 to Sec. 2(42C) • For determining Long Term/Short Term capital asset - the Undertaking as a whole needs to be considered – Section 50B(1)
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Slump Sale – income issues
• Treatment of brought forward losses & unabsorbed depreciation related to the undertaking slump sold? • Actual cost for the assets slump sold for the buyer – Sec. 43(1) of the ITA – to be allocated to various assets based on fair value – Guidance – AS 10 of ICAI • Implications of section 281 / section 170 • Going concern requirements • Section 50B v/s. Section 50C • Expenditure on slump sale • Continuity of benefits • Treatment of loss of the undertaking • If Net worth = negative – whether to be considered as zero?
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Case study # 1
Shareholders Acquirer
• Division B of Target Co sold under the slump sale scheme to acquirer • Following are some details of transaction:
Target
Slump Sale
INR (in?000) Sale Consideration 10,000 Total Assets (Fixed + Current) 3,000 Liabilities 3,800
Division A
Division B
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Seminar on business re-organisation – ICAI
Case study # 1
• • • • Calculation of Capital gain liability in hands of target co. Sale Consideration – 10,000 Cost of Acquisition – Net Worth Calculation of “Net Worth” as per Sec. 50B(2):
Total Assets Less: Liabilities Net Worth 3,000 3,800 (800)
• Capital Gain = Sale Consideration – Cost of Acquisition = 10,000 – (– 800) = 10,800 ! • Can it be said that capital gain would be more than sale consideration therefore, taxable capital gain in hand of target would be 10,800?
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Case study # 1
• Capital gain is always a portion of sale consideration and it in no case exceeds the sale consideration. • Therefore, in the above case since, net worth is negative can one take that as Nil. • Therefore, Income chargeable to tax under the head Capital Gain in the hands of Target Co. = Sale Consideration i.e. 10,000
? Zuari Industries Ltd Vs. ACIT (Mum) 105 ITD 569 ? Paperbase Co. Ltd v. ACIT (Del) 19 SOT 163
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Case study # 2
Co. 2
Co.1 purchases an undertaking from Co. 2 in year 1
Co. 1
Outside buyer approaches to buy the undertaking in year 2
Transfers the undertaking
Sale of Subsidiary
Sub
Transfer of shares in the Subsidiary
Outside buyer
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Itemised sale – Tax provisions
• Sale of assets in normal course
• In the case of depreciable assets – Provisions of Sec. 50 of ITA would apply - short term capital gain / loss.
• In the case of capital assets – Provisions in Chapter IV E would apply • Provisions of Sec. 50C would be applicable in respect of Land/building
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Itemised sale – income tax issues
• Whether tax benefit attached to the undertaking would be available to the successor of business if the entire „undertaking? is sold by way of itemized sale ?
• Whether amount disallowed under Sec. 43B in the hands of seller would be available to the buyer company?
• Whether certificate under Sec. 281 of ITA would be required before transfer of an undertaking?
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Itemised sale – income tax issues
• Sale of an undertaking as a going concern Sankeya Chemicals Limited 8 SOT 50 (Mum) and Coromandel Fertilizers Ltd 90 ITD 344 (Hyd.) • Sale of rights together with tangible assets – tax treatment - Skyline Caterers v ITO (20 SOT 266) (Mum)
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Case Study # 1
Facts • A Ltd. is a listed Company. It was the owner of a brand „POPULAR?. The cost of acquisition of this Brand is Rs. 2 mio • In view of the unsuccessful performance of the Brand, it sold this Brand to B Ltd. for 1.5 mio. (WDV in A Ltd.)
POPULAR
A Ltd.
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Case Study # 1
A Ltd.
Facts (contd.) • Both A Ltd. and B Ltd. have claimed depreciation on this Brand.
POPULAR
B Ltd.
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Seminar on business re-organisation – ICAI
Case Study # 1
B Ltd.
Facts (contd.) • B Ltd. is able to turn around this Brand and after 4 years from the first sale, A Ltd. decides to purchase this Brand from B Ltd. and pays INR 10 mio. Issue • Whether A Ltd. can claim depreciation in respect of the amount of INR 10 mio paid by it or will it be hit by Expl. 4 to Section 43(1)
POPULAR
A Ltd.
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Seminar on business re-organisation – ICAI
Case Study # 1
B Ltd.
Analysis • Expl. 4 to Section 43(1) Where any asset which had once belonged to the assessee and had been used by him for the purposes of his business or profession and thereafter ceased to be his property by reason of transfer or otherwise, is reacquired by him, the actual cost to the assessee shall be— (i) the actual cost to him when he first acquired the asset as reduced by— (b) the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988, as if the asset was the only asset in the relevant block of assets; or (ii) the actual price for which the asset is re-acquired by him, whichever is less. 43
POPULAR
A Ltd.
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Stock Purchase – Tax provisions
• Section 45 “45(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B ……. be chargeable to income-tax under the head “Capital gains”, and shall be deemed to be the income of the previous year in which transfer took place” • Requirement of section 45 ? Applicable only in the case of a capital asset – Sec. 2(14) ? The capital asset is transferred by the assessee –Sec.(47) ? Profit and gains on transfer is exempt from tax under Sec. 54, 54B, 54D, 54E, 54EA, 54EB,54EC, 54F, 54G and 54GA.
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Stock Purchase – Tax provisions
• Determination whether the asset is a “Short-term capital asset” or a “Long-term capital asset” • Mode of Computation
? Capital gain = Full value of consideration - expenditure in connection with transfer - less cost of acquisition - less cost of improvement
• Capital gains to be computed in foreign currency by non residents – no indexation available • Exemption for investment in specified assets • Special provisions for set off and carry forward of capital losses –Sec. 70 / 74 of the ITA • Carry forward and set-off of losses may be lost – Sec. 79 of the ITA
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Implications of Equity Purchase V/s. Assets Purchased
Equity purchase • Dividend Distribution Tax (DDT) on distribution of consideration to shareholders • If the transaction is funded by debt – No deduction in respect of interest (Sec. 14A of ITA)
Seminar on business re-organisation – ICAI
Assets Purchase • No question DDT will arise
• If transaction is funded by using debt – deduction available in respect of interest
46
47
Conditions to be complied – S. 47(xiii/xiv)
• All assets & liabilities of Prop or partnership firm become assets & liabilities of the Co. • All partners become shareholders of company in the same proportion in which their capital accounts stood in the books of the firm on the date of succession • Shareholding in either case should not be less than 50% of the total voting power • Lock in period • Sole proprietor or partners not to receive any consideration or benefit directly or indirectly, in any form or manner, other than by way of allotment of shares in the company ? Bonds, debentures, etc. not possible
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Conditions to be complied – S. 47(xiii/xiv)
• Non-compliance of conditions triggers taxation – chargeable profits and gains taxed in the hands of the successor company in the year of contravention - S.47A(3) of the ITA • „Accumulated loss? and unabsorbed depreciation allowance of Prop transferred to successor company – S.72A(6) – no separate conditions to be complied with • Non-compliance of conditions contained in S.47(xiv) will result in the loss and depreciation amount set off earlier being regarded as income of the year in which contravention is made
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Issues
• Can minors who are partners in the firm be counted for the total of seven shareholders required as per Companies act? • Can HUF, a partner in the firm, be taken as one of the seven shareholders? • Suppose the partner's have both capital and current account in the firm's books, whether both will be added for the issue of shares in the ltd company?
• Can shares be issued at a premium?
• Can shares be issued for part amount due to the partner and balance be treated as loan with interest? ? Can this be done if such a clause is provided in the partnership deed? • Implications u/s. 79 • Implications in case of LLP?
Seminar on business re-organisation – ICAI
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Issues
• Necessity of a new company • Succession qua the business or qua the firm • Can a company be successor to two or more firms? • Transfer of tenancy
• Treatment for non-business assets
• Can preference shares be issued? • Partners having debit balances • Treatment of reserves • Partners not entitled to assets of the firm
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Issues
• Allowability of bad debts and other issues applicable in case amalgamation • Tax planning in the context of depreciable assets • Capital gains on subsequent sale of assets by the company • Amalgamation of successor companies
• Effect of Part IX conversion
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Others types of re-organisations
• Re-organisation in turbulent times
• Buy-back / capital reduction
• Impact of recent decisions • Debt restructuring
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doc_725150887.pdf