1. Business Reorganizations and Restructuring including conversion of private limited company or a partnership into a LLP and tax issues
Direct Tax Convention-Rajkot
Presentation by
Yogesh Thar June 14, 2015

2. Background .....“Purpose/ Intention”
Sale of Entire Company – Sale of shares/ Amalgamation
Sale of company/Division – Slump Sale/Demerger/Slump Exchange
Tax implication different for buyer and seller
Indirect tax/ Stamp duty implications required to be analyzed before finalizing the mode of restructuring
Time period for carrying out arrangement (Private Sale/Court Scheme)
Clear transfer of title in case of court approved scheme. Ease of transfer of existing contracts, etc
Now in Court scheme- Tax Department NOC required – General Circular 1/2014

3. Itemised/ Outright Sale
Modes of restructuring
Modes
Amalgamation/ Merger
Demerger
Slump Sale
Buy- Back
Itemised/ Outright Sale

4. Various Modes of Restructuring (1/2)
Amalgamation/ Merger
Amalgamation of a company by way of a court approved scheme
Tax neutral on fulfilment on conditions in section 2(1B)
Court Approved Process, hence time consuming
Demerger
Hive off of an undertaking by way of court approved scheme
Tax neutral on fulfilment on conditions in section 2(19AA)
Court Approved Process, hence time consuming

5. Various Modes of Restructuring (2/2)
Slump Sale
Transfer of undertaking as a whole for lump sum consideration
Itemised Sale
Sale of individual assets for specific consideration
Outright Sale
Transfer of shares to the buyer

6. Tax Issues arising out of restructuring

7. Deduction u/s 80-IA- on Amalgamation /demerger
Section 80-IA(12A) - deduction not available to the Amalgamated/Resulting Company on transfer of undertaking claiming deduction u/s 80-IA
Section 80-IA(12) provided for deduction u/s 80-IA available to amalgamated/resulting company for period upto 1 April 2007
Memorandum states demerger should be tax neutral and not attract any additional liability to tax and the benefits should continue to be available upon transfer
Circulars* issued by CBDT clarifying that the transferee company would not be eligible for the deduction
Benefit of deduction u/s 80-IA is qua ‘undertaking’ and not qua assessee
Whether on transfer other than amalgamation/demerger- transferee eligible to avail 80-IA(12A)
* Circular no 3 of 2008 and Circular No 10 of 2014

8. Deduction u/s 80-IA – on transfer other than amalgamation/ demerger
Section 80-IA(12A) provide for claim of deduction in case of amalgamation / demerger of the undertaking
Circulars also state the tax holiday for residual period would not be available for transferee company on amalgamation/ demerger
The terms “Amalgamation/ demerger” used in aforesaid section and circulars would mean “amalgamation” as defined u/s 2(IB) of the Act and “demerger” as defined u/s 2(19AA)
CBDT Circular No.10 of 2014 further clarifies that transfer not by way of amalgamation or demerger, the transferee shall be eligible for the deduction for the unexpired period u/s 80- IA(12A)”
Decision of the Bombay High Court in the case of CIT v Sonata Software Ltd* held that tax holiday benefit attaches to the ‘undertaking’ and not to the taxpayer entity which houses the undertaking. Transfer of undertaking by way slump sale or as a going concern entitled to deduction u/s 10A
* [2012] 21 taxmann.com 23

9. Whether similar provision u/s 80-IC
Section 80-IC provides for deduction in respect of profits and gains derived by undertaking engaged in manufacture of article or things
Section 80-IC does not contain any corresponding amendment in sub-section (7) of section 80- IC restricting deduction u/s 80-IC to amalgamated /resulting company
Amalgamation/ demerger of the eligible undertaking – deduction allowed u/s 80-IC in the hands of transferee as per the provisions of sub-section (12) of section 80-IA

10. Whether partnership firm- party to amalgamation
Sections 2(1B) of the Act :
“Amalgamation” in relation to companies means merger of one or more companies with another company or the merger of two or more companies to form one company….
Section 2(19AA) of the Act :
“demerger”, in relation to companies, means the transfer …by a demerged company of its one or more undertakings to any resulting company
The term company is defined u/s 2(17) of the Act as under :
(i) any Indian company, or
(ii) any body corporate incorporated by or under the laws of a country outside India, or …”
Section 2(17)- Does not include partnership firm

11. Whether partnership firm- party to amalgamation
Section 582 of Companies Act, the expression “unregistered company” -
“(b) save as aforesaid, shall include any partnership, association or .....at the time when the petition for winding up the partnership, association or company, as the case may be, is presented before the Court”
Bombay High Court in M/s Kirtidas Kakiads Diamonds Exports P Ltd (In re) [2009] held that a partnership firm being unregistered company u/s 582(b) of the Companies Act, 1956
Corresponding section under Companies Act, 2013 (‘Co’s Act, 2013’)
Section 375* contains similar provisions
The principle to be tested under the Co’s Act, 2013
* To be enforced

12. Tax Implications- Non Compliant demerger
Capital Gains
There is transfer of assets
no consideration flowing from Resulting Company to Demerged Company – Allotment of shares directly to the shareholders of Demerged Company – Not regarded as payment of consideration
CIT V. Master Raghuveer Trust (Kar.) (151 ITR 368)
Hence, No Capital Gains Tax
Implications u/s 56(2):
On receipt of shares (not being shares of public company)
Hands of Demerged Company

13. Tax Implications- Non Compliant demerger
Capital Gains:
There is no Transfer – No exchange, relinquishment or extinguishment of any rights – No Capital Gains Tax
Dividend u/s 2(22):
Demerged company does not receive any consideration – Hence, reserves get depleted. But there is no distribution or payment made by the Company – Hence, not covered u/s 2(22)
Allotment of shares by the Resulting Company to shareholders of Demerged Company – Not a distribution of accumulated profits or assets to shareholders – Hence, not covered u/s 2(22)
Even if Reduction of Share Capital of Demerged Company – Cannot be covered u/s 2(22) as there would be no accumulated profits or reduction in capital of Resulting company, which would allot shares
Implications 56(2)(viib)
On issue of shares
Hands of Shareholders- Demerged Co

14. Demerger of Investment undertaking – compliant with section 2(19AA)
To qualify as an “undertaking” as per Explanation 1 to section 2(19AA)
Undertaking includes :
even a part of an undertaking ; or
division ; or
a business activity, which in itself constitutes “business activity”
Business activity does not necessarily mean income chargeable under business income
Shares held as investments or stock-in-trade, such acquisition of shares would be regarded as the business activity of the company
Investment activity to qualify as an undertaking u/s 2(19AA)
The division to be separately identified i.e. the assets, liabilities, employees, etc. attributable to the Division can be identified

15. Tax Compliant demerger
Shareholders
Company
Resulting Company
Holding Company
100%
Issue shares
Demerger of undertaking
Unit A
Whether issue of shares by the Holding Company of the resulting Company would qualify as tax compliant demerger u/s 2(19AA)

16. Definition of Resulting Company
As per section 2(41A) of the Act :
“resulting company” means one or more companies (including a wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a demerger and, the resulting company in consideration of such transfer of undertaking, issues shares to the shareholders of the demerged company and …;”
Section 2(41A) defines a resulting company as one or more companies which perform two obligations:
receiving the undertaking and
issuing shares
As per Section 2(19AA) the resulting has to be the recipient of an undertaking from the demerged company

17. Section 56(2) implications- on buy-back
in a buy-back, seller (shareholders) sells the shares and company buys it back
hence, it involves an act of “receiving” shares by the company itself
It makes no difference even if shares are its own and are to be cancelled soon thereafter
Section 56 (2)(viia) would apply and hence, the company would be required to be valued at fair market value

18. Conversion of a Private Company into an LLP – Procedural aspects
Section 56 and Third Schedule to LLP Act to be complied with
Partners of LLP should consists of all shareholders of converted private company and no one else
Application for conversion to be made in Form 18 along with
No objection Certificate from tax authorities/ Other requisite approvals
Prescribed forms for application and declarations
List of Creditors with their consent
Effect of Registration of LLP
all tangible (movable and immovable) property as well as intangible property vested in the company, all assets, interests, rights, privileges, liabilities, obligations relating to the firm and the whole of the undertaking of the firm shall be transferred to and shall vest in the LLP without further assurance, act or deed; and
the company shall be deemed to be dissolved

19. Conversion of a Private Company into an LLP – Tax Implications
Section 47(xiiib) specifically provides that conversion of a company into an LLP in accordance with section 56 or 57 of LLP Act would not be regarded as transfer, if following conditions are satisfied
The total turnover/ gross receipts in business do not exceed Rs 60 lakhs in 3 years prior to the previous year
Turnover means chargeable under the head “Profits and Gains from Business and Profession” – Circular No. 1/2011
All shareholders immediately before conversion become partners in LLP
The shareholders do not receive any consideration or benefit other than share in profit of LLP
The aggregate PSR of the erstwhile shareholders should not be less than 50%v of profits at LLP for 5 years from date of conversion
No provision under the Act specifically providing that conversion does not amount to transfer
All assets and liabilities of company immediately prior to conversion become assets and liabilities of LLP
No amount is paid, directly or indirectly to any partner out of accumulated profit of company on date of conversion for 3 years from date of conversion

20. Conversion of a Private Company into an LLP – Tax Implications
Section 47A(4) – If any conditions not complied with , capital gains on such transfer not charged earlier will be taxable in the hands of successor LLP in the previous year when such non- compliance takes place
Even if the conditions of section 47(xiiib) are not complied with
Assets and liabilities of the company vest in the LLP
Statutory Vesting of assets and liabilities is not transfer
Texspin Engg. & Mfg. Works;
ACIT Vs. Unity Care & Health Service
If capital gains to be taxed, what should be the value of consideration?
In the absence of consideration no capital gains can arise
Market value of asset transferred cannot be deemed to be consideration if transfer at book value and book value should be considered

21. Conversion of a Private Company into an LLP – Tax Implications
If conditions of section 47(xiiib) are violated in the year of conversion itself, whether section 47A(4) would be attracted?
If conditions of section 47(xiiib) violated in the year of conversion itself, it would mean that the assessee has not got 47(xiiib) benefit, and section 47(xiiib) would not be applicable to the assessee
Since section 47(xiiib) not applicable, section 47A(4) cannot be invoked
Aravali Polymers LLP v. JCIT (Kol)
Whether LLP can claim 80-IA/ similar deduction available to the private company?
Deduction attaches to the undertaking and not the owner thereof
However, LLP will have to pay AMT;
MAT credit of company would not be allowed to the LLP
Carry forward and set off of losses available to the company by the LLP
If conditions of section 47(xiiib) complied, section 72A permits carry forward and set off of losses to LLP ;
LLPA provides all “assets , interest, rights, privileges ” available with the company would vest in the LLP, therefore unabsorbed losses as well should vest in the LLP and be available for set off and carry forward ;
Akin to succession/inheritance

22. Conversion of a firm into an LLP – Procedural aspects
Section 55 and Second Schedule to LLP Act to be complied with
Partners of LLP should consists of all partners of converted partnership firm and no one else
Admission or retirement of partners can be done before or after conversion
Application for conversion to be made in Form 17 along with
Statement of consent of partners of the firm
Statement of Assets and Liabilities of the firm
acknowledgement copy of latest income tax return
Approval from an regulatory body/ authority, if any, required
List of Creditors along with their consent
Other prescribed forms
Effect of Registration of LLP
all tangible (movable and immovable) property as well as intangible property vested in the firm, all assets, interests, rights, privileges, liabilities, obligations relating to the firm and the whole of the undertaking of the firm shall be transferred to and shall vest in the LLP without further assurance, act or deed; and
the firm shall be deemed to be dissolved
All pending proceedings, conviction, ruling, order or judgments, existing agreements, contracts, etc. of the firm to apply to LLP

23. Conversion of a firm into an LLP – Tax Implications
No provision under the Act specifically providing that conversion does not amount to transfer
However, Explanatory memorandum to Finance Bill, 2009 provides an LLP and a general partnership are treated as equivalent under the Act
the conversion will have no tax implications
if the rights and obligations of the partners remain the same after conversion and
if there is no transfer of any asset or liability after conversion
if there is a violation of the conditions, the provisions of section 45 shall apply
It can still be argued that conversion does not result in ‘transfer’ within the meaning of Sec- 2(47) nor there is any specific provision U/s 45 to treat such a conversion as transfer
Vesting of assets and liabilities not a transfer - CIT vs Texspin Engineering and Manufacturing Works (263 ITR 345) [Bom]
Provisions pertaining presumption taxation u/s. 44AD which can be availed by partnership firm are not applicable to LLP

24. Changes in Capital Structure
Allotment at differential pricing to existing shareholders and to new investors :
Section 56(2)
Section 2(24)(iv)
Reduction of Capital- whether ‘transfer’ ?
Kartikey Sarabhaoi – 228 ITR 163 (SC)
G Narasimhan 236 ITR 327 (SC)
Effects of rights renunciation
Expenses on raising capital
Share Capital
Debt
Convertible
Non-Convertible
Expenses on Capital Reduction

25. Miscellaneous

26. MAT Issues- Business reorganization
Whether carry forward and set off of unabsorbed book depreciation/ book losses will be available for adjustment against book profits of the amalgamated company?
VST Tillers & Tractors Ltd v. CIT (2009 TIOL 26) (Bang. ITAT)
Whether the MAT credit of the amalgamating company will be available to the amalgamated company
MAT credit available to “assessee”
“Assessee” would include successor, as successor would be taxed on behalf of assessee
MAT credit is a relief provision, should be construed liberally
SKOL breweries Ltd. V. ACIT (2008 TIOL 741) (Mum. ITAT)

27. Miscellaneous
Meaning of “shares and “shareholders” in section 2(1B) and section 2(19AA)
In both cases, shares needs to be issued to existing shareholders
The shares by transferee company needs not be only ‘equity’ can be ‘preference too’
Applicability of section 56(2)(vii)
“Receipt” of unlisted shares
Amalgamation/Demerger at fair value – valuation report obtained
PNB Finance Ltd v. CIT (337 ITR 75) – Business sold as a whole, cannot be split into parts
Whether Goodwill arising on amalgamation is eligible for depreciation?
Section 32(1)(ii) defines intangible assets as “know how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature”.
Goodwill on amalgamation – falls within “any other business or commercial rights of similar nature”.
Smifs Securities (348 ITR 302)

28. Miscellaneous
Whether accounts are required to be redrawn if appointed date does not coincide with year end?
If the accounts for the FY end are approved and adopted in AGM before the Effective Date – cannot be reopened or revised following the Circular No. 12/77 [1/1/77-CL-V and 2/331/75- CL-II], dated 21/11/77 ;
Effect of the scheme to be given in the next FY end Accounts, disclosing results from the Appointed Date till the next FY end ;
If the accounts for the FY end are not approved – effect of the scheme to be given from the Appointed Date till the FY end following the ratio laid down by SC in Marshall Sons & Co. (India) Ltd. V. ITO (223 ITR 809)

29. Miscellaneous
How would Return of Income be filed where appointed date does not coincide with year end?
Upon Scheme becoming effective, Transferee Company is vested with all income, assets, etc. of the Transferor from the Appointed Date [Marshall Sons & Co. India Ltd. v/s ITO (223 ITR 809) – SC]
Therefore, Transferee Company to file return of income in respect of income of Transferor Company for period starting from the Appointed Date
The assessment of such return will be in the hands of the Transferee Company
Whether profits for period between appointed date and effective date to be assessed in hands of transferor or transferee?
As transferor assessee could not retain profits in its own hands after sale agreement, profit post date of agreement cannot be assessed in hands of assessee, and ought to be assessed in hands of transferee (Dalmia Cement Limited v. CIT (237 ITR 617))
Marshall Sons & Co. India Ltd. v/s ITO (223 ITR 809)

30. Miscellaneous
Whether issue of bonds / debentures alongwith shares conforms with the definition of “Amalgamation”?
Gautam Sarabhai Trust (173 ITR 216) (Guj)
Section 72A applies inter alia to a company owning “industrial undertaking”?
Defined in clause (aa) of sub-section (7)
Scope cannot be expanded to include service industry
Apollo Hospitals Enterprises Ltd. (300 ITR 167) (Mad)

31. Miscellaneous
Accumulated business loss and unabsorbed depreciation of the Amalgamating Company deemed to be loss/ depreciation allowance of the Amalgamated Company
Is the period exhausted by the Amalgamating Company to be considered for computing the period available for claim by the Amalgamated Company ?
Supreme Industries Ltd. (17 SOT 476)(Mum)(2007)
Whether Section 72A will override Section 79?
Section 79 – Non obstante clause – overriding other provisions of the Act.
Proviso of Section 79 – shall not apply in a situation where private company / company in which public are not substantially interested merges into another company
Section 72A specifically deals with amalgamations.
Objective of enacting Section 72A

32. Miscellaneous
Whether Amalgamation could be considered a design to avoid capital gains tax ?
Wood Polymer Limited and Bengal Hotels Pvt. Ltd. (109 ITR 177) (Guj)
Star Television Entertainment Ltd. (321 ITR 1) (AAR)
Tax savings effect of Demerger scheme-
Vodafone Essar Gujarat V DIT (24 taxmann.com 323) (Guj)
Scheme sanctioned by BIFR under SICA ?
Whether SICA to have overriding effect with respect to Income Tax Act ?
JK Corporation Ltd. (331 ITR 303) (Cal)
Whether tenancy rights get automatically transferred on amalgamation to the transferee ?
General Radio And Appliances Co. Ltd And Others v. M.A Khader (Decd) By Legal Representatives (60 Compcas 1013)

33. Slump Sale- Issues
Whether individual values can be assigned to assets in a slump sale
Identification of price attributable to individual items (plant, machinery and dead stock) which are sold as part of slump sale, may not entitle a transaction to be qualified as slump sale - CIT v. Artex Manufacturing Co.(227 ITR 260) (SC)
Contrary view in CIT V. Electric Control Gear (227 ITR 278)
Separate value is assigned to land/building under the relevant stamp duty legislation, the slump sale will not be adversely affected - Explanation 2 to S. 2(42C)
Can Assets be transferred in slump sale without transfer of liabilities?
No liability was transferred to the buyer - transfer of undertaking would not be regarded as a slump sale -Mahindra Sintered Products Ltd. v. DCIT, (95 ITD 380)(Mum.)
Sale of chemical unit was not regarded as slump sale, because there was transfer of assets without transfer of liabilities -Weikfield Products Co. (I) (P.) Ltd. v. DCIT, [71 TTJ 518 (Pune)

34. Slump Sale- Issues
Whether Negative Net Worth to be ignored for computing Capital Gains?
Summit Securities ltd. (Mum-Trib) (SB) – Negative figure of Net Worth not to be ignored for computing CG in case of a slump sale
Zuari Industries Ltd (105 ITD 569) (Mum) – Reversed after the ruling laid down by SB as aforesaid
Whether a sale of an undertaking considered as a Slump Sale when certain assets and liabilities pertaining to such undertaking are retained?
Rohan Software Pvt. Ltd. v. ITO (117 TTJ 490) (Mum)- All business assets were transferred except for certain assets such as building, motor cars an assets and liabilities relating to income-tax matters

35. Slump sale v. Slump Exchange
Where assets are transferred for a consideration of another asset other than money – Considered as exchange and not sale
CIT v. R.R. Ramkrishna Pillai (66 ITR 725) (SC)
CIT v. Motors & General Stores (P.) Ltd. (66 ITR 692) (SC)
CIT v. Bharat Bijlee Limited (Bom) (364 ITR 581)- Transfer of a business undertaking as a going concern against issuance of bonds/ preference shares was not a sale, but an exchange
SREI Infrastructure Finance Ltd. v. Income-tax Settlement Commission (207 Taxman 74) - transfer of business in exchange of another asset is sale as an element of monetary consideration involved

36. Can tax liability of Transferor Company be assessed in the hand of Transferee Company?
Amalgamation
amalgamating company is not in existence
Business of amalgamating co succeeded by Amalgamated Co.
Assessment made in the hands of Amalgamated Co.
Demerger/Slump sale
only an undertaking is transferred
Not complete succession, but ‘partial’ succession
assessment continued in the hands of Demerged Co
CIT v. K.H. Chambers (55 ITR 674) - ‘succession’ under section 170 involves change of ownership, that is, the transferor goes out and the transferee comes in; it connotes that the whole business is transferred

37. Other issues - business reorganization
Whether company is eligible to gift shares to another company
Applicability of section 56(2)(viia)- On reduction of share capital
Mirror image companies- demerger/ amalgamation- Fair value not required
Income u/s 2(24)(iv)- on issue of shares to a ‘person who has substantial interest’ in case of demerger
“Loss” arising on slump sale – whether eligible to be set-off

38. THANK YOU