Chapter XXII
Business reorganisation
22.1 Reorganisation of a business should, ordinarily, be tax neutral. Hence, the Code contains provisions dealing with reorganisation based on this principle. However, the provisions are subject to such conditions as are necessary to prevent abuse.
22.2 Under the Code, "business reorganisation" has been defined to mean reorganisation of business of two or more residents, involving an amalgamation or a demerger. It also includes a merger under a scheme sanctioned and brought into force by the Central Government under the Banking Regulation Act, 1949.
22.3 The term "amalgamation" has been defined so as to provide for amalgamation of companies, co-operative societies, unincorporated bodies and proprietary concerns. The term "demerger" has also been defined in the Code. Further, the "amalgamating" entity and, in the case of a demerger, the "demerged" entity are referred to as "predecessor" in a business reorganisation. Similarly, the "amalgamated" entity and the "resulting" entity are referred to as "successor" in a business reorganisation.
(A) Amalgamation
i. Companies
22.4 Amalgamation of companies will mean a merger of one or more companies with another company (amalgamated company) or merger of two or more companies to form one company (amalgamated company) subject to the following conditions :
(a) All the assets and liabilities of the amalgamating company or companies immediately before the amalgamation shall become the property of the amalgamated company.
(b) Shareholders holding seventy-five per cent. or more (in value) of the shares in the amalgamating company (other than shares already held by the amalgamated company or by its nominee) shall become shareholders of the amalgamated company by virtue of the amalgamation.
(c) The scheme of amalgamation shall be in accordance with the provisions of the Companies Act.
22.5 The amalgamating and amalgamated companies shall be entitled to the following benefits in the case of business reorganisation through amalgama-tion :
(a) The transfer of investment assets in amalgamation will not be considered as a transfer for the purposes of capital gains in the hands of the amalgamating company, if the amalgamated company is an Indian company.
(b) The transfer of investment assets (including shares held in an Indian company) by a foreign company to another foreign company in a scheme of amalgamation will not be considered as a transfer for the purposes of capital gains in the hands of the amalgamating company provided the scheme of amalgamation satisfies the conditions applicable to amalgamations contained in the Code.
(c) The exchange of shares in an amalgamating company for shares in the amalgamated company will not be considered as a transfer for the purposes of capital gains in the hands of the shareholders of the amalgamating company, if the amalgamated company is an Indian company.
(d) The accumulated losses of an amalgamating company shall be deemed to be the loss of the amalgamated company in the year in which the amalgamation is effected subject to fulfilment of specified conditions.
22.6 The aforesaid benefits shall be available to all companies irrespective of the nature of their business.
ii. Co-operative societies
22.7 Amalgamation of co-operative societies shall mean a merger of one or more co-operative societies with another co-operative society (amalgamated co-operative society) or merger of two or more co-operative societies to form one co-operative society (amalgamated co-operative society) subject to the following conditions :—
(a) All the assets and liabilities of the amalgamating co-operative society immediately before the amalgamation shall become the property of the amalgamated co-operative society.
(b) Shareholders holding seventy-five per cent. or more (in value) of the shares in the amalgamating co-operative society (other than shares already held by the amalgamated co-operative society or by its nominee) shall become shareholders of the amalgamated co-operative society by virtue of the amalgamation.
(c) The members holding seventy-five per cent. or more voting rights in the amalgamating co-operative society shall become members of the amalgamated co-operative society.
22.8 The amalgamating and amalgamated co-operative societies shall be entitled to the following benefits in the case of business reorganisation through amalgamation :
(a) The transfer of investment assets in amalgamation will not be considered as a transfer for the purposes of capital gains in the hands of the amalgamating co-operative society.
(b) The exchange of shares in an amalgamating co-operative society for shares in the amalgamated co-operative society will not be considered as a transfer for the purposes of capital gains in the hands of the shareholders of the amalgamating co-operative society.
(d) The accumulated losses of an amalgamating co-operative society shall be deemed to be the loss of the amalgamated co-operative society in the year in which the amalgamation is effected subject to fulfilment of specified conditions.
22.9 The aforesaid benefits shall be available to all co-operative societies irrespective of the nature of their business.
iii. Sole proprietary concern
22.10 Under the Code, a sole proprietary concern may be amalgamated with a company subject to the following conditions :
(a) All the assets and liabilities of the sole proprietary concern immediately before the amalgamation shall become the assets and liabilities of the company.
(b) The shareholding of the sole proprietor in the company shall be not less than 50 per cent. of the total value of the shares in the company.
(c) The sole proprietor shall not receive any consideration or benefit, directly or indirectly, in any form or manner other than by way of allotment of shares in the company.
22.11 On amalgamation of a sole proprietary concern with a company, the following benefits shall be available :
(a) The transfer of investment assets in an amalgamation will not be considered as a transfer for the purposes of capital gains in the hands of the proprietor, if the company is an Indian company.
(b) The accumulated losses of the sole proprietary business shall be deemed to be the loss of the company in the year in which the amalgamation is effected, subject to fulfilment of specified conditions.
iv. Unincorporated body
22.12 Under the Code, an unincorporated body may be amalgamated with a company subject to the following conditions :
(a) All the assets and liabilities of the unincorporated body immediately before the conversion shall become the assets and liabilities of the company.
(b) The aggregate of the shareholding of the participants of the unincorporated body in the company shall be not less than 50 per cent. of the total value of the shares in the company.
(c) The shareholding of the participants of the unincorporated body in the company shall, as regards each other, be in the same proportion in which their capital accounts stood, as regards each other, in the books of the firm on the date of succession/amalgamation.
(d) The participants of the unincorporated body shall not receive any consideration or benefit, directly or indirectly, in any form or manner other than by way of allotment of shares in the company.
22.13 On amalgamation of an unincorporated body with a company, the following benefits shall be available :
(a) The transfer of investment assets in the amalgamation will not be considered as a transfer for the purposes of capital gains in the hands of the unincorporated body, if the company is an Indian company.
(b) The accumulated loss of the unincorporated body shall be deemed to be the loss of the company in the year in which the amalgamation is effected, subject to the fulfilment of specified conditions.
(B) Demerger
22.14 Demerger in relation to a company shall mean the transfer by a company (demerged company) of its undertaking to another company (resulting company) subject to the following conditions :—
(a) The entities involved should be companies.
(b) The transfer shall be the transfer of an "undertaking". Undertaking shall include any part of an undertaking, or a unit or a division of an undertaking, or a business activity taken as a whole, but shall not include the transfer of individual assets or liabilities or any combination thereof not constituting a distinct business activity.
(c) The transfer of the undertaking is on a going concern basis.
(d) All assets and liabilities of the undertaking shall be transferred to the resulting company.
(e) The assets and liabilities of an undertaking transferred to the resulting company shall be valued at the book value as per the provisions of this Code on the date of demerger and such value shall be deemed to be the value of the assets and liabilities entered in the books of account of the resulting company.
(f) The resulting company shall issue shares to the shareholders of the demerged company on a proportionate basis as a consideration for the demerger.
(g) Shareholders holding not less than three-fourths (in value) of the shares in the demerged company (other than shares already held by the resulting company or by its nominee) shall become shareholders of the resulting company by virtue of the demerger.
(h) The scheme of demerger shall be in accordance with the provisions of the Companies Act.
(i) The transfer is in accordance with such other conditions as may be notified by the Central Government having regard to the necessity to ensure that the transfer is for genuine business purposes.
22.15 The companies shall be entitled to the following benefits in the case of business reorganisation through demerger of an undertaking :
(a) The transfer of investment assets in a demerger will not be considered as a transfer for the purposes of capital gains in the hands of the demerged company, if the resulting company is an Indian company.
(b) The transfer of investment assets (including shares held in an Indian company) by a foreign company to another foreign company in a scheme of demerger will not be considered as a transfer for the purposes of capital gains in the hands of the demerged company provided the scheme of demerger satisfies the conditions applicable to demergers contained in the Code.
(c) The exchange of shares in a demerged company for shares in the resulting company will not be considered as a transfer for the purposes of capital gains in the hands of the shareholders of the demerged company if the demerged company is an Indian company.
(d) The accumulated loss of the undertaking of the demerged company shall be deemed to be the loss of the resulting company in the year in which the demerger is effected subject to the fulfilment of specified conditions.
22.16 Under the Code, the accumulated losses of the predecessor in a business reorganisation shall be deemed to be the loss of the successor if the successor satisfies the test of continuity of business. This test shall be satisfied upon fulfilment of the following conditions :
(a) The successor holds at least three-fourths of the book value of the fixed assets of the predecessor acquired through business reorganisation continuously for a minimum period of five financial years immediately succeeding the financial year in which the business reorganisation takes place ;
(b) The successor continues the business of the predecessor for a minimum period of five financial years immediately succeeding the financial year in which the business reorganisation takes place ; and
(c) Such other conditions as may be prescribed to ensure the revival of the business of the predecessor or to ensure that the business reorganisation is for genuine business purposes.
22.17 In a case where the predecessor is a sole proprietary concern or an unincorporated body, the loss of the predecessor will be deemed to be the loss of the successor if the following conditions are fulfilled :
(a) the successor satisfies the test of continuity of business referred to in para 22.16 above ; and
(b) the shareholding of the sole proprietor or the participant, as the case may be, remains fifty per cent or more of the total value of the shares of the successor company at all times during the period of five years immediately succeeding the financial year in which the business reorganisation takes place.
22.18 The benefit of set off of the unabsorbed losses of the predecessor, allowed to the successor, shall be withdrawn by making appropriate rectification, if any of the conditions referred to in paras 22.16 and 22.17 is violated.
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