Transfer of capital asset as a result of business restructuring

Introduction

Any transfer of a capital asset under a scheme of business restructuring such as amalgamation, demerger, consolidation etc. is not regarded as transfer provided the specified conditions in respect thereof are satisfied.

1. About

The term 'transfer' has been defined under Section 2(109) of the Income-tax Act. The definition has been explained in an inclusive manner. It covers all deemed transactions prescribed in that provision besides what is otherwise understood as transfer in common parlance. However, certain transactions as provided in Section 70 are not regarded as transfer for the purpose of computing the capital gains tax. Therefore, any profit or gain arising from these transactions are not chargeable to tax under the head Capital Gains. One of such transactions is transfer of capital asset in a scheme of business reorganization (including amalgamation and demerger) provided the prescribed conditions are also satisfied.

2. Transfer in a scheme of amalgamation

2.1. Meaning of amalgamation

The term 'amalgamation' has been defined in Section 2(6) of the Income-tax Act. It means the merger of one or more companies with another company or merger of two or more companies to form one company provided certain conditions are satisfied. The company which is being merged is referred to as the 'amalgamating company' and the company with which the amalgamating company merge or which is formed as a result of the merger is referred to as the 'amalgamated company'. In simple words, the transferor company is known as the amalgamating company and the transferee company is known as the amalgamated company.

Following conditions must be satisfied to refer a reorganisation as amalgamation:

(a) All the properties and liabilities of the amalgamating company or companies immediately before amalgamation shall become property/liability of the amalgamated company during amalgamation; and

(b) Shareholders not less than 3/4

3.1. Meaning of demerger

As per Section 2(35), 'demerger' in relation to companies, means transfer (pursuant to a scheme of arrangement under Section 391 to 394 of the Companies Act, 1956) of one or more undertakings to any resulting company. Demerger shall take place if all of the following conditions are satisfied:

(a) All the property and liability of the demerged undertaking immediately before demerger becomes property or liability of the resulting company by virtue of demerger;

(b) Such properties and liabilities are transferred at values appearing at values appearing in the books of account immediately before demerger (revaluation shall be ignored for this purpose);

(c) The resulting company issues its shares to the shareholder of the demerged company on a proportionate basis (except where the resulting co. itself is a shareholder of the demerged co.);

(d) The shareholders holding not less than 3/4

(a) Transfer of shares of a foreign co. is under a scheme of demerger between two foreign companies;

(b) Shareholders holding not less than 75% in value of shares of demerged foreign company continue to remain shareholders of the resulting foreign company; and

(c) No tax is levied on such capital gain in the country where foreign demerged company (transferor) is incorporated.

4. In case of business reorganization

4.1. Transfer of a capital asset [Section 70(1)(n)]

Where any capital asset is transferred by the predecessor co-operative bank to the successor co-operative bank or to the converted banking company in a business reorganisation, it is not treated as transfer.

4.2. Transfer of Shares [Section 70(1)(o)]

Where in a scheme of business reorganisation a shareholder transfers shares held by him in the predecessor co-operative bank in consideration of the shares allotted to him by the successor co-operative bank or the converted banking company, it is not treated as transfer.

5. Other Provisions

5.1. Cost of acquisition of asset acquired

When a capital asset is transferred in a scheme of business restructuring (as discussed above), the cost of acquisition of the asset so acquired by the transferee shall be deemed to be the cost at which transferor of the property has acquired it. It shall be further increased by the cost of improvement, if any, incurred by the transferor or transferee.

5.2. Period of Holding of asset acquired

When a capital asset is transferred in a scheme of business restructuring (as discussed above), the period of holding of the capital asset in the hands of transferee is reckoned from the date of acquisition of the asset by the transferor and ending on the date on which such capital asset is transferred by the transferee.

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.