Taxation and Stamp Duty Aspects – Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions
Question 1.
Define capital assets as per Income Tax Act, 1961
Answer:
As per section 2(14) of the Income Tax Act, 1961, a ‘Capital asset’ is defined as
(a) Property of any kind held by an assessee, whether or not connected with his business or profession;
(b) Any securities held by a Foreign Portfolio Investor which has invested in such securities in accordance with the regulations made under Securities and Exchange Board of India Act, 1992.
(c) But does not include the following:
- Any stock in trade, consumables stores or raw materials held for the purpose of his business or profession;
- Personal effects; and
- Agricultural land in India, (not an urban agricultural land) i.e. rural agricultural land.
Question 2.
“Orders sanctioning amalgamation or absorption are covered by the Indian Stamp Act as if it were a Conveyance Deed.” Justify statement with judicial pronouncements. [Dec. 2019 – Old Syllabus – 3 Marks]
Answer:
- Stamp duty is an important consideration in planning any merger, since the incidence of stamp duty on transfer of immovable property is high.
- As per the Indian Stamp Act, 1899, an instrument includes every document by which any right or liability is or purports to be created, transferred limited extended, extinguished or recorded.
- As per section 2( 10) of the Indian Stamp Act, 1899, ‘Conveyance’ refers to any instrument by which any movable or immovable property is transferred.
- Conveyance includes sale conveyance, every instrument, every decree or final order of any Civil Court, and every order made by the Tribunal in respect of amalgamation of companies; by which property, whether movable or immovable, or any estate is transferred to, any other person.
- In the landmark case of Li-taka Pharma. Vs. State of Maharashtra, it was held that sanction order of the Tribunal requiring transfer of assets and liabilities of the Transferor Company to the Transferee Company is a conveyance and hence chargeable to stamp duty.
Following are important conclusions of this landmark ruling:
- An amalgamation under Tribunal order is an instrument under Bombay Stamp Act, 1958.
- States are within their jurisdiction to levy stamp duty on instrument of amalgamation.
- Stamp duty would be levied on the ‘undertaking’, when the transfer is on a going concern basis, ie. assets less liabilities. The value used for levying stamp duty would be the value of shares allotted plus other consideration paid. Similar view given in Emami Biotech Ltd.
Question 3.
The incidence of stamp duty is an important consideration for the planning of any merger. Discuss the stamp duty payable when amalgamation is between a holding company and a subsidiary coritpany.
Answer:
- Stamp duty is an important consideration in planning any merger, since the amount of stamp duty on transfer of immovable property is high.
- Article 265 of the Constitution permits levy and collection of tax by an authority of law. In India, stamp duty is levied by the States and hence rate and incidence of stamp in different states varies.
- As per the Indian Stamp Act, 1899, an instrument includes every document by which any right or liability is or purports to be created, transferred limited extended, extinguished or recorded.
- In the landmark case of Li-taka Pharma, vs. State of Maharashtra, it was held that Tribunal order for sanctioning a merger and requiring transfer of assets and liabilities of the Transferor Company to the Transferee Company is a conveyance and hence chargeable to stamp duty.
- However, there are certain exemptions from payment of stamp duty. No stamp duty is payable on an instrument sanctioning an amalgamation for rehabilitating business and undertaking of a sick industrial company.
- Further, the Central Govt, has exempted payment of stamp duty for cases of amalgamation between Holding and Subsidiary company, subject to fulfilment of following conditions –
- When at least 90% of the issued capital of the transferee company is in the beneficial ownership of the transferor company, or
- When the transfer is between a parent and a subsidiary company, one of which is beneficial owner of not less than 90% of the issued share capital of the other, or
- When the transfer takes place between two subsidiary companies each of which is having not less than 90% of the share capital in the beneficial ownership of the parent company.
- However, since stamp duty is a State matter, above exemption (Holding-Subsidiary) will be applicable only in those States where the State Govt, follows the notification of the Central Govt.
Question 4.
“In comparison to demerger, slump sale is not generally tax efficient.” Comment briefly with any case that had taken place.
Answer:
- Demerger is a corporate partition of a company into two or more undertakings, thereby retaining one undertaking with it and transferring the other undertaking to the Resulting Company.
- Slump sale involves sale of an undertaking for lumpsum consideration without values being assigned to the individual assets and liabilities.
- Demerger and slump sale are different forms of corporate restructuring and hence different legal provisions are applicable.
- Section 2 (19AA) of the Income Tax Act, 1961 defines demerger and provides tax benefits, subject to fulfilment of certain conditions. As per Section 47, where there is a transfer of any capital asset in a demerger by Demerged Company to Resulting Company, such transfer will not be regarded as a transfer for the purpose of capital gains provided the Resulting Company is an Indian company. Thus, there is no income tax on such transaction.
- However, slump sale transaction does not attract such tax benefits. As per section 50B of the Income Tax Act, 1961 any profits or gains arising from a slump sale effected in the previous year shall be chargeable to income-tax as capital gains. If an undertaking being transferred is held for more than 36 months, it shall be treated as long-term capital gains, and where the period of holding is up to 36 months, it is treated as short term capital gains. However, even in case of long-term capital asset, no indexation benefit is available for slump sale transaction, which increases the tax liability.
- Hence, although slump sale is a legal transaction, it is not a tax efficient transaction. Example – in the year 2010, Abbott Healthcare acquired the Formulation Business from Piramal Health Care Ltd. on a slump sale basis.
Question 5.
“Price received on sale of an undertaking as a Going Concern is a Capital Receipt”. Comment on the statement with judicial pronouncements, supporting the statement. [Dec. 2018 – Old Syllabus – 3 Marks]
Answer:
- As per section 2(420) of Income Tax Act, slump sale is defined as transfer of one or more undertakings (on a going concern basis or during winding-up) as a result of sale for a lump-sum consideration without values being assigned to individual assets and liabilities
- Normally, any sale of a capital asset is considered as capital receipts and subjected to capital gain tax and stock in trade is subjected to tax as revenue profit or loss.
- As per section 50B of the Income Tax Act, 1961 any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains, and shall deemed to be the income of the previous year in which the transfer took place.
- In the cases of CIT vs. West Coast Chemicals and CIT vs. Mugneeram Bangur, the Supreme Court held that any money received from sale of an undertaking is a capital receipt and hence capital gain tax shall be attracted. If the undertaking is held for more than 3 years, it shall be Long Term Capital Gains, else as Short-Term Capital Gains.
- The Gujarat and Bombay High Courts have also held that there will be a capital gain only when a sale of business as a whole occurs. Undertaking of a business is a capital asset as its disposal at slump price is capital receipt which can attract capital gain tax alone.
Question 6.
Apart from availing the benefit of set off and carry forward of unabsorbed depreciation and accumulated losses, what are the other tax benefits if the strategy of the acquirer to merge with a loss-making company is in the form of a reverse merger?
Answer:
→ In any merger or amalgamation, financial aspects of the transaction are of prime importance as the same are expected to accrue financial benefits. Tax considerations play a vital role in designing the scheme of merger and amalgamation.
→ Hence, tax planning is most crucial element decision-making. Every company planning a merger must do intensive tax planning before finalizing the deal to get the maximum tax concessions.
→ One of the modes of corporate restructuring strategy is to merge with a sick or a company with accumulated losses. If the scheme of merger gets approval of the competent authority under section 72A of the Income-tax Act, 1961, the resultant company avails the opportunity of getting losses of sick undertakings offset against profit making undertakings of the transferee company.
→ Apart from set-off and carry-forward benefits, the merged undertakings may avail other benefits and privileges as detailed below under the Income-tax Act, 1961
(a) Benefit of amortization of preliminary expenses under section 35D for the balance unexpired period out 5 years shall be available to the resultant company.
(b) Capital expenditure on scientific research u/s 35 can be availed by the resultant company.
(c) Expenditure for patent or copyrights u/s 35A for balance unexpired period of out of 14 years.
(d) Section 35DD for expenses towards amalgamation or demerger for next 5 years equally.
Question 7.
Name various documents which requires Stamping in case of merger.
Answer:
→ Article 265 of the Constitution permits levy and collection of tax by an authority of law. In India, stamp duty is levied by the States and hence rate and incidence of stamp in different states varies.
→ As per the Indian Stamp Act, 1899, an instrument includes every document by which any right or liability is or purports to be created, transferred limited extended, extinguished or recorded.
→ Following documents require stamping in case of merger
(a) Tribunal Order: When transfer takes place by virtue of a Tribunal order to a scheme of amalgamation, stamp duty is payable. The Tribunal order directing the transfer of assets and liabilities of the transferor company to the transferee company is deemed to be a conveyance.
(b) Other documents: Usually, in a merger, several other documents, agreements, indemnity bonds, etc. are executed, depending on the facts of each case and requirements of the parties. Stamp duty would also be leviable as per the nature of the instrument and its contents.
Question 8.
Discuss in brief the provisions regarding carry forward and set-off of accumulated business losses and unabsorbed depreciation by an amalgamated company.
Answer:
→ In any merger or amalgamation, tax considerations play a vital role in designing the scheme. Hence, tax planning is most crucial element decision-making. Every company planning a merger must do intensive tax planning before finalizing the deal to get the maximum tax concessions.
→ Section 72A of Income Tax Act, 1961 provides for carry forward and set-off of accumulated business losses and unabsorbed depreciation in certain cases of amalgamation.
→ For example: industrial undertaking, ship, hotel, banking company etc. Industrial undertaking includes an undertaking involved in manufacture, processing of goods, computer software, electricity, telecommunications, mining etc.
→ It shall be noted that as unabsorbed losses of the amalgamating company are deemed to be the losses for the previous year in which the amalgamation was sanctioned.
→ The amalgamated company will have the right to carry forward the loss for a period of 8 assessment years immediately succeeding the assessment year relevant to the previous year in which the amalgamation was approved.
→ Following conditions shall be satisfied to avail the set-off benefit – (a) the amalgamating (loss-making) company
- has been engaged in the business in which the accumulated loss occurred or depreciation remains unabsorbed, for 3 or more years;
- has held continuously as on date of the amalgamation at least 3/4th of the book value of fixed assets held by it 2 years prior to the date of amalgamation;
(b) the amalgamated company
- holds continuously for a minimum of 5 years from date of amalgamation at least 3/4th of book value of fixed assets of amalgamating company acquired in amalgamation scheme;
- continues the business of the amalgamating company for a minimum period of 5 years from the date of amalgamation;
- fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company.
→ It further provides that in case where any of the above conditions are not complied with, the set-off of loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be the income of amalgamated company chargeable to tax for the year in which such conditions are not complied with.
Question 9.
Explain the tax aspects on slump sale.
OR
Question 10.
Explain the provisions of the Income-tax Act, 1961 in relation to computation of capital gains arising out of slump sale.
Answer:
- As per section 2(42C) of Income Tax Act, 1961, slump sale is defined as transfer of one or more undertakings (on a going concern basis or during winding-up) as a result of sale for a lump-sum consideration without values being assigned to individual assets and liabilities?
- Normally, any sale of a capital asset is considered as capital receipts and subjected to capital gain tax and stock in trade is subjected to tax as revenue profit or loss.
- As per section 50B of the Income Tax Act, 1961 any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains, and shall deemed to be the income of the previous year in which the transfer took place.
- Any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than 36 months immediately preceding the date of transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
- In case of slump sale, every assessee shall furnish in the prescribed form along with the return of income, a report of an accountant indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at.
- Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is deemed to be the cost of acquisition and cost of improvement for the purpose of calculation of capital gains tax.
Capital Gains = Sale Consideration (-) Net-worth of the Undertaking
Net Worth = Value of Total Assets (-) Value of Total Liabilities
Value of Total Assets = WDV of Fixed Assets (+) Book value of other assets
Question 11.
Yellow Overseas Ltd. (YOL) merged with Yellow India Ltd. (YIL). YOL availed the benefit of amortisation of preliminary expenses only for two years till merger order. Whether YIL is eligible to avail this benefit for the remaining period? Substantiate your answer.
Answer:
- In any merger or amalgamation, tax considerations play a vital role in designing the scheme. Hence, tax planning is most crucial element decision-making. Every company planning a merger must do intensive tax planning before finalizing the deal to get the maximum tax concessions.
- Apart from the set-off and carry-forward benefits (u/s 12k), the merged undertakings may avail benefit of amortization of preliminary expenses u/s 35D of the Income Tax Act, 1961.
- As per section 25D, amortization of preliminary expenses is deductible only to the assessee who incurred the expenditure. However, the benefit will be available in case of a merger.
- As per section 35D, the benefit of amortization expenses is available to the amalgamated company for the balance unexpired period out 5 years.
- Hence, the amount of preliminary expenses of the amalgamating company to the extent not yet written off shall be allowed as deduction to the amalgamated company in the same manner as would have been allowed to the amalgamating company.
- In the given case, Yellow Overseas Ltd. (YOL) merged with Yellow India Ltd. (YIL). YOL availed the benefit of amortization of preliminary expenses only for two years till merger order. Thus, YIL is eligible to avail this benefit for the remaining period of three years.