Merger, Demerger & Amalgamation- Tax implications on shareholder

TAX TALK-09.10.2017-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA

Chartered Accountant

There is a tax concession to the Shareholder of an Amalgamating Company where the shareholder transfer shares held by him in the amalgamating company in consideration of allotment of shares in amalgamated Indian company.

Merger, Demerger & Amalgamation- Tax implications on shareholder

 

Query 1]

1.      1000 equity shares of face value of Rs. 10 in N.F.C Ltd were allotted in March 1991. Consequent to composite scheme of arrangement and amalgamation of three companies, 1100 equity shares of Face value of Rupee 1 was allotted in N.F.C. Ltd. and 1000 equity shares of rupees one face value was allotted in another company in October 2011. Kindly clarify as to how Rs. 10,000/- invested in N.F.C. Ltd. in March 1991 is to be allocated between the above two companies and whether Profit/Loss on sale of the above said units is to be calculated only from October 2011? Further, please elaborate with relevant sections of the Income Tax Act. [Krishnaswamy Raghavan- raghavankrishnaswamy2011@gmail.com]

2.      My wife is holding 50 shares of Larsen & Tubro Ltd which was purchased by her in Rs. 11,200 through stock exchange. As a result of arrangement between  Grasim & L & T for transfer of the cement business of L&T, she was allotted 20 shares of UltraTech Cement Ltd and 20 shares of L&T in July 2004. What will be the capital gains implications on her if she now sell the shares that are held by her in the new allotment of UltraTech and L&T? [radh******@gmail.com]

Opinion:

“Tax Complexity itself is a kind of tax” - Max Baucus

First query:

1.      Tax Relief to the shareholders of an Amalgamating Company:
There is a tax concessions to the shareholders of an Amalgamating Company where the shareholder transfers shares held by him in the amalgamating company in consideration of allotment of shares in amalgamated Indian company in the scheme of amalgamation. Such transfer of shares is not regarded as transfer under section 47(vii) of the Income Tax Act & consequently no capital gain is attracted in the hands of the shareholder of amalgamating company.

2.      The cost of acquisition need to be worked out in accordance with sub section (2) or (2C) or (2D) to section 49. In your case, against 1000 shares of Rs. 10 each in N.F.C. Ltd, you have been allotted 1100 equity shares of Rs. 1 each of N.F.C. Ltd & 1000 equity shares of Rs. 1 each in some other company.
The cost of acquisition of Rs. 10,000/- need to be apportioned in between the NFC Ltd & the new company on the basis of ratio net book value of the assets transferred in a demerger bears to the net worth of the demerged company immediately before such demerger. That is to say, you would be required to obtain/extract the net book value of the assets transferred to the new company and on the basis of ratio of assets transferred to the new company out of the total net book value of the assets, cost of acquisition of the shares of new company would be required to be worked out [Section 49(2C)]. Rs. 10,000/- as reduced by the amount calculated in accordance with 49(2C) would be the cost of acquisition of 1100 shares of Rs. 1 each in N.F.C. Ltd allotted in October-2011.

3.      As far as the Period of holding of shares is concerned, it may be noted that the holding period of shares in amalgamated / resulting company will also include the period for which the shares in the amalgamating / demerged company were held by the share holder [Sections 2(42A)(c) and 2(42A)(g))]. In your case, you have acquired original shares in 1991 & it would be considered so for the new shares so allotted in a composite scheme of amalgamation.

Second query:

1.      The transaction of allotment of 20 shares of UltraTech & 20 shares of L&T appears to be as a result of a demerger of L&T. If this demerger is one which satisfies the conditions in Section 2(19AA) of the Income-Tax Act, no capital gains will arise on such conversion. However, the question relating to the computation of capital gains on the sale of shares of UltraTech will necessitates the computation of the cost of acquisition of such shares.

2.      Cost of acquisition:
The cost of acquisition of the 20 shares in L&T and the 20 shares of UltraTech, if this demerger is one within the meaning of the Income-Tax Act, will be computed as follows:
a] UltraTech (20 shares): Cost of acquisition of the shares in L&T before the demerger x net book value of assets transferred in the scheme of demerger / net worth of L&T before the demerger.
b] L&T (20 hares): Cost of acquisition of the shares in L&T before the demerger as reduced by the cost of acquisition of the shares in UltraTech after the demerger (computed as above).

3.      Tax Implications:
i] If the transfer of the business by L&T to UltraTech were not a demerger within the meaning of the I-T Act, capital gains would be attracted when the shares of UltraTech are allotted to your wife. The capital gains will be computed taking the market value on the date of allotment of the shares of UltraTech to your wife as the full value of consideration. This market value will also be treated as the cost of acquisition when your wife subsequently sells the shares of UltraTech.
ii] If the transfer of business by L&T to UltraTech is a demerger under the I-T Act, the period of holding of shares in L&T will also be taken into account in determining whether the gain is short term or long term. In your case, the gain would be long term as the shares of L&T have been acquired long back in the year 2000. However, if the transfer of the business by L&T to UltraTech is not a demerger under the I-T Act, then the period of holding of earlier shares of L & T would not have been for determining the period of holding of new shares.

In both queries referred above, the holding periods of all the shares are for a period exceeding 12 months. Further, it appears that (a) the shares are held as a capital asset (b) the companies are listed and (c) the sell is going to be done through stock exchange & will be subject to Securities transaction tax (STT). If it is so, then the amount received on sale of shares would be exempt from tax u/s 10(38) & computation of cost of acquisition & ascertaining date of acquisition would not be of much relevance.

 Query 2]

1.      I need a clarification. If some amount of retirement corpus is invested in the name of wife who is a housewife then the interest earned is to be added in taxable income of husband along with pension? Or, one can take benefit up to Rs. 2.50 Lakh interest while filing the IT return of wife? One can file the return in the name of wife use this as safe tax saving instrument to reduce tax burden?

2.      Which are the best option in which amount at the time of withdrawals is not taxable? [Sudhir Deshpande- svdeshu@hotmail.co]

Opinion:

1.      By virtue of specific clubbing provision, where an asset is transferred by an individual to his spouse directly or indirectly, otherwise than for adequate consideration, any income from such asset is deemed to be the income of the transferor.  As a result, amount invested by your wife out of the amount gifted by you would be clubbed with  your income and could not be used as a tax planning tool.

2.      Public Provident Fund (PPF), Equity linked saving scheme (ELSS), Investment in share market in equity for a period of more than 12 months, etc are few of the options wherein amount withdrawals after specified period is not taxable.

[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at

SSRPN & Co

10, Laxmi Vyankatesh Apartment

C.A. Road, Telephone Exch. Square

Nagpur-440008

or email it at nareshjakhotia@ssrpn.com].