1. Corporate Accounting – II Bangalore University

2. AMALGAMATION S/H Co. A.Co B S/H Issue of Shares Merger

3. DEMERGER S/H Co. A. Co. B S/H U/T 1U/T 2 Issue of shares Demerger

4. SLUMP SALE / PURCHASE S/H Co. A Co. B S/H U/T 1U/T 2 Sale consideration Sale

5. PURCHASE OF ASSETS S/H Co. A.Co.B S/H A1A1 A2A2 L2A3A4L1 Sale consideration Sale

6. PURCHASE OF SHARES S/H Co. A.Co.B S/H Sale price Sale of shares of Co. A

7. Companies Act, 1956. Accounting Standards (AS) issued by the Institute of Chartered Accountants of India. Accounting Standard Interpretation (ASI).Indian Accounting Standard (Ind AS).Issues in Accounting.

9.  Power to compromise or make arrangements with creditors and members (Section 391).  Power to enforce compromise and arrangement (Section 392).  Provisions for facilitating reconstruction and amalgamation of companies (Section 394).

10.  Pursuant to Order u/s. 391, the Court may give directions: ◦ On any matter connected with compromise / arrangement to ensure that it is fully and effectively carried out [Section 394(1)] ◦ Modifying the compromise / arrangement for its proper working [Section 392(1)].

11.  Application to Court  Directions by Court for meeting of Creditors / Members  Notice of Compromise / Arrangement to the Central Government  Sanction of Scheme by the Court  Filing of Order of Court with Registrar of Companies

12.  Section 211 – Form and Contents of BS and P&L A/c.  Section 211 (3A) - BS and P&L A/c to comply with AS.  Section 211 (3C) – AS means AS recommended by ICAI, as may be prescribed by the Central Government  AS prescribed through Companies (Accounting Standards) Rules, 2006, in consultation with NACAS.

13.  AS – 14 Accounting for Amalgamations  AS – 10 Accounting for Fixed Assets  AS – 26 Intangible Assets

14.  Specifically excludes from its purview an acquisition in which acquired company is not dissolved and its separate entity continues to exist i.e., a case of Demerger.  Therefore, presently, Demerger transactions will be accounted based on the structure of the transaction and the general accounting principles applicable.

15.  Amalgamation in the nature of Merger (satisfy all the following conditions) (Para 29) ◦ All assets & liabilities – transferred. ◦ Not less than 90% of shareholders. become shareholders of transferee company. ◦ Consideration - Equity shares in the transferee company. ◦ Intention to carry on same business. ◦ Transfer at Book Value. Amalgamation in the nature of Purchase (Para 30) Violation of any one or more conditions specified for amalgamation in the nature of Merger– regarded as amalgamation in the nature of Purchase.

16. Pooling of Interest Method ( amalgamation in the nature of Mergers) (Para 33 - 35) Assets, liabilities and reserves are recorded at their existing carrying amounts. Identity of reserves is preserved and appears in FS of the transferee company. The transferor and the transferee companies to follow uniform accounting policies. Changes arising to be accounted in terms of AS – 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. Difference between amount recorded as share capital issued and amount of share capital of the transferor company to be adjusted in reserves.

17. Purchase Method (amalgamation in the nature of Purchase) (Para 36 - 39) Assets and liabilities are recorded at : Their existing carrying amounts, or By allocating consideration to individual identifiable assets and liabilities based on fair values at the date of amalgamation. Reserves of transferor company, other than statutory reserves not to be included in the financial statements of the transferee company.

18. Purchase Method (Para 36 - 39) Amount of consideration deducted from net assets of transferor company. Excess of Consideration – difference debited to GOODWILL. Excess of Net Assets – difference credited to CAPITAL RESERVE. Goodwill to be appropriately amortised, generally over 5 years. Statutory reserves of the transferor company to be continued by the transferee company (subject to relevant statutory requirements being complied with), corresponding debit to a suitable account (say Amalgamation Adjustment Account).

19. May consist of: Securities Cash Other Assets Should be recorded at fair values. Where fair values cannot be reliably assessed, at respective net book values. Where consideration is to be adjusted contingent upon future events, such adjustment amount to be included in consideration if payment is probable and the amount can be reasonably estimated.

20. Where Scheme of Amalgamation is sanctioned under any Statute and it prescribes a treatment to be given to reserves – same is to be followed. Where treatment other than that required by the Standard is specified in such Scheme for any Reserves, following disclosure to be made in the first Financial Statements after Amalgamation: Description of accounting treatment given along with reasons for different treatment. Deviations in accounting treatment given to reserves as prescribed by Scheme as compared to requirements of the Standard. Financial effect, if any arising due to such deviation.

21. In the first Financial Statements after the Amalgamation: Name & General Nature of business of both the companies Effective Date Method of Accounting Particulars of Scheme Sanctioned Additional disclosure where Pooling of Interest Method followed: Description and number of shares issued Share Exchange Ratio Difference between consideration and net assets acquired along with treatment thereof Additional disclosure where Purchase Method followed: Consideration and modes of consideration Difference between consideration and net assets acquired along with treatment thereof (including amortisation of any goodwill)

22.  Lump sum consideration paid in a sale of business / undertaking on a slump basis.  Such consideration to be allocated by the acquirer / transferee to various assets and liabilities acquired.  AS 10 - Para 35 – such consideration to be apportioned to various assets on a fair basis as determined by competent valuers.

23.  AS 26 – Para 20 and 31 - Recognition of Intangibles to be subject to the criteria being met – future economic benefits to the transferee and cost measurable reliably.  Amalgamation by way of Merger – Intangibles reflected by the transferor to be continued by the transferee in its FS.  Amalgamation by way of Purchase and other modes of Acquisitions – Intangibles to be recognised at fair values.

24.  Ind AS 103 – Business Combinations (Not yet effective)

25. Business Combination – transaction or other event in which an acquirer obtains control of one or more businesses. Business – integrated set of activities and assets capable of being conducted and managed for the purpose of providing return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. Control – power to govern financial and operating policies of an entity to obtain benefits from its activities. Including without transferring consideration Acquisition Date – date on which acquirer obtains control of the acquiree.

26.  Acquisition Method to account for Business Combination: ◦ Identify acquirer. ◦ Determine Acquisition Date. ◦ Recognise and Measure identifiable assets and liabilities taken over and any non-controlling interest in acquiree. ◦ Recognise and Measure Goodwill / Gain from Bargain Purchase.  Identifiable assets acquired and liabilities assumed to be measured at their Acquisition Date Fair Values.  Consideration transferred also to be measured at Fair Value.

28. Issue 1 – What is the relevant date for accounting of acquisitions? Appointed Date Date on which assets and liabilities vest in and stand transferred. Accounts on the Date - basis for valuation of shares and determination of share exchange ratio. Relevant for - assessment of income of both Companies. Marshall Sons & Co. Ltd.. vs. ITO (1996) : 223 ITR 809 (SC). Effective date Date on which scheme is complete & effective. Certified copy of the High Court Order - filed with Registrar or last of the approvals required. Amalgamation is effective; Transferor Company stands dissolved.

29. Issue 2 – How will the transferee account for acquisition as at Appointed date, when Transferor has closed its accounts for period thereafter? Transferee to record assets and liabilities as at the Appointed Date (Based on BS as at that date). Transferee to record all transactions between Appointed and Effective Dates, since, the Transferor carries on business during such period for and on behalf of the Transferee. Incremental of assets and liabilities between Appointed Date and following Closure Date also to be accounted. For the period from such Closure to the Effective Date, all transactions to be recorded by the Transferee.

30. Issue 3 – Which accounting policies to be followed by Transferee when they are different from those followed by the Transferor Company?  Para 29 – AS 5 - The Transferee Company will need to follow its own Accounting Policies consistently, since, such policies could be changed only if: ◦ So required by Statute, ◦ Required for compliance with an AS, ◦ Would result in more appropriate presentation.

31. Issue 3 – Contd. Therefore, the Scheme should provide for Accounting Treatment for such differences. Where not so provided, account for transferred assets and liabilities as per Scheme and thereafter account for the differences in the carrying values so as to bring them in line with the Policies of the Transferee. the difference arising on such adjustments to carrying values to be accounted depending upon availability of relevant reserve of the Transferor.

32. Issue 4 – How to account for transfer in a Demerger where consideration given to the shareholders of the Transferor Company?  As the Transferor Company transfers the assets but does not receive consideration, upon the demerger being effective, part of its paid up share capital will not be represented by available assets.  Hence, the Transferor Company to effect reduction of share capital u/s. 100.

33. Issue 5 – How will a Transferee account for Goodwill already appearing in the books of the Transferor and acquired as part of acquisition?  Goodwill if acquired by the Transferor, to be continued to be recognised by the Transferee.  Goodwill, if self generated by the Transferor, not to be continued by the Transferee (Para 35 - AS 26). The resultant difference to be accounted depending upon availability of relevant reserve of the Transferor.

34. Issue 6 – How to account deferred tax assets / liabilities in cases of Acquisition by the transferee?  Amalgamations - ASI 11 ◦ Amalgamation in the nature of Merger –DTA not to be recognised at the time of amalgamation. However, if unrecognised DTA, if recognised in the first Annual BS after the Amalgamation based on Para 19 of AS 22, corresponding adjustment to be made to Revenue Reserves.

35. Issue 6 – Contd.  Amalgamations - ASI 11 ◦ Amalgamation in the nature of Purchase – Where the transferee records assets at the existing carrying values of the transferor, DT effects not recognised at the time of amalgamation. However, if unrecognised DTA, if recognised in the first Annual BS after the Amalgamation based on Para 19 of AS 22, corresponding adjustment to be made to Goodwill. However, where the assets are recorded by the transferee based on allocation of consideration on fair valuation, recognition of DTA at the time of amalgamation only subject to the conditions of prudence as per Para 15 / 17 of AS 22 by the transferee.

36. Issue 6 – Contd.  Other Modes of Acquisitions: ◦ DTA to be recognised, following the principles of ASI 11 applicable to amalgamation by Merger / Purchase Method as the case may be.

37. Amalgamations / MergersDemergersCommon Provisions applicable to Amalgamation /DemergerSlump SaleIssues in Taxation

39.  Section 2(1B) – “Amalgamation” means merger of one or more companies with another company or merger of two or more companies to form one company.  Consequence – ◦ Amalgamating Company disappears. ◦ Amalgamated Company could be a new / existing company.

40.  All the Properties / Liabilities should be transferred  Shareholders holding not less than 75% of the value of shares in the transferor company (other than shares which are held by, or by a nominee for, the transferee company or its subsidiaries) become shareholders of the transferee company.

41.  Tax Implications for: ◦ Shareholders of the Amalgamating Company ◦ Amalgamating Company ◦ Amalgamated Company

42.  Receipt of new shares results in extinguishment of right in equity shares of the Transferor Company.  Section 47(vii) – Extinguishment of right in equity shares not regarded as “Transfer”.  Conditions: ◦ Amalgamated Company is an Indian company ◦ It is in consideration of the allotment of shares in the Amalgamating Company.

43.  Section 2(42A) - Period of Holding ◦ Include the period for which the shares in Amalgamating Company were held by Shareholder ◦ Cost Indexation – available accordingly  Section 49(2) – Cost of Acquisition ◦ Shall be deemed to be cost of shares in Amalgamating Company.

44. Section 47(vi) - Transfer of capital assets in a Scheme of Amalgamation to an Indian company - not regarded as “Transfer”. Hence, no capital gain tax in the hands of the Amalgamating Company. Section 47(via) – transfer of a capital asset being shares held in an Indian company, by Amalgamating Foreign Company to Amalgamated Foreign Company, not regarded as transfer, if following conditions fulfilled: 25 % or more of the shareholders of amalgamating foreign company continue to remain shareholders of amalgamated foreign company, and Such transfer does not attract capital gain tax in country in which amalgamating company is incorporated.

45.  Cost of Acquisition ◦ Explanation 7 to Section 43(1) - Actual Cost of transferred capital asset to be the same as it would have been if the amalgamating company had continued to hold the capital asset. ◦ Explanation 2 to Section 43(6) - Block of Assets – Actual Cost of block to be WDV for immediately preceding PY as reduced by the amount of depreciation actually allowed in PY.

46.  Applicability ◦ A company owning industrial undertaking or ship or hotel, ◦ Banking company ‘ ◦ Public sector company engaged in the business of operation of aircraft.  Accumulated loss and the unabsorbed depreciation of amalgamating company deemed to be loss / unabsorbed depreciation of amalgamated company for PY in which amalgamation effected.

47.  FOR AMALGAMATING COMPANY ◦ has been engaged in the business for three or more years; ◦ has held continuously for two years prior to the date of amalgamation at least three- fourths of the book value of fixed assets.  FOR AMALGAMATED COMPANY ◦ holds continuously for a period of five years from the date of amalgamation at least three- fourths of the book value of fixed assets acquired; ◦ continues the same business for a minimum period of five years from the date of amalgamation; ◦ other conditions – Rule 9C.

48.  Company owning industrial undertaking to achieve at least 50% level of production of the installed capacity before end of 4 years from the date of amalgamation and continue to maintain the said level till the end of 5 years from date of amalgamation: ◦ Central Government may relax this condition in suitable cases.  Company to furnish to AO - certificate in Form No.62, duly verified by an accountant from the year of achieving 50% level of production upto completion of 5 years from amalgamation.

49.  The set off of loss or depreciation made in PY in hands of amalgamated company deemed to be income of amalgamated company.  Income chargeable in year in which conditions not complied with.

51.  Section 2(19AA) – “Demerger” means transfer, pursuant to a scheme of arrangement under Sections 391 to 394 of the Companies Act, 1956, by a demerged company of its one or more undertaking to any resulting company.

52.  All Properties / Liabilities (relatable to UT) – transferred.  Transfer of Properties / Liabilities at Book Values.  Discharge of consideration by issue of shares of Resulting Company to shareholders of demerged company on proportionate basis.  Shareholders holding 3/4th or more in value of shares in demerged company become shareholders in resulting company.  Transfer of undertaking is on a “going concern basis”.

53.  Tax implications for: ◦ Shareholders of a Demerged Company ◦ Demerged Company ◦ Resulting Company

54.  Section 47(vib) - No capital gain on transfer of capital asset. ◦ Condition – Resulting Company to be an Indian Company.  Section 47(vid) - No capital gain on Transfer / Issue of shares by the Resulting Company to the shareholders of Demerged Company.  Section 49 (2C) – Cost of Acquisition in Resulting Company ◦ (Cost of shares in demerged Company ) X (Net Book Value transferred) / (Net Worth of Demerged Company pre- demerger).

55. Section 49(2D) - Cost of original shares shall be deemed to be reduced by the amount so arrived u/s. 49(2C). Cost Indexation – available accordingly. Section 2(22)(v) Deemed Dividend – No implication on issue of shares by resulting company. Clause (g) of Explanation 1 to Section 2(42A) – Period of Holding.  Include the period for which the share in the demerged company were held by shareholder.

56.  Section 47(vib) – transfer of capital asset by Demerged Company to Resulting Company – not regarded as transfer if Resulting Company is an Indian Company.  Explanation 2A to Section 43(6) – WDV of the block of assets shall be reduced by WDV of the assets transferred in demerger.

57.  Explanation 7A to Section 43(1) - transfer of any capital asset by the Demerged Company to Resulting Company - Actual cost of transferred asset in the hands of Resulting Company = Actual Cost in the hands of Demerged Company.  Explanation 2B to Section 43(6) – WDV of the block of assets for the Resulting Company shall be WDV at the time of Demerger.  Section 41(1) - Resulting Company chargeable to tax as successor.

58.  If the loss and unabsorbed depreciation relates directly to the undertaking transferred, such loss and depreciation to be carried forward by the Resulting Company.  If the loss and unabsorbed depreciation is not directly relatable to the undertaking transferred, then such loss or depreciation to be apportioned between Demerged Company and resulting company in the same proportion in which assets of the undertakings are retained by Demerged Company and Resulting Company.

60.  The aggregate deduction of depreciation shall not exceed the depreciation as per prescribed rates.  Such deduction shall be apportioned between Amalgamating Company / and Amalgamated Company in ratio of number of days for which assets were used by them.

61.  Section 2(24)(xv) read with Section 56(2)(viia) - Income to include value of shares issued at Nil consideration / lower than FMV.  Proviso to Section 56(2)(viia) - However, where such shares are issued under amalgamation / demerger Schemes - not to be regarded as “Income”.

62. Amalgamated / Resulting Company can claim deduction in respect of the following expenditure:  Scientific Research (Section 35 )  Acquisition of Patent Rights / Copyrights Section 35A  Know-How (Section 35AB )  For obtaining license to operate telecommunications services (Section 35ABB )  Amortisation of certain preliminary expenses (Section 35D )  Amortisation of expenditure in case of Amalgamation / Demerger (Section 35DD)  Amortisation of expenditure under VRS (Section 35DDA )  Prospecting for certain minerals (Section 35E)

63. Amalgamated / Resulting Company eligible for unexpired period of Tax Holidays as per following provisions: ◦ Newly established undertaking in FTZ – Section 10A ◦ Newly established undertaking in SEZ – Section 10 AA ◦ Newly established 100% Export Oriented Undertakings- Section 10B

64. Amalgamated / Resulting Company eligible for following deduction provided Amalgamating/ Demerged Company and Amalgamated / Resulting Company Indian Company: Deduction in respect of profits and gains by an undertaking or enterprise engaged in SEZ [Section 80IAB(3)] Deduction in respect of profits and gains from certain industrial undertaking other than Industrial Development undertaking [Section 80IB(13)] Special provisions in respect of certain undertakings or enterprises in certain special category states [Section 80IAC(7)] Special provisions in respect of certain undertakings in North eastern States [Section 80IE(6)]

66.  Section 2(42C) Sale of an undertaking for lump sum consideration without assigning values to individual assets and liabilities.  “Undertaking” includes part of undertaking. However, it must constitute a business unit carrying on business.  Consideration discharged by transferee company – any mode  Consideration is received by transferor company and not shareholders.

67.  Cost of acquisition – apportioned to the assets as per value determined by independent valuer.  Section 32 – Cost so apportioned will be considered for depreciation.  Other pertinent aspects: ◦ Approval of High Court not required ◦ Lesser time frame ◦ Simple to implement

68.  Section 50B – Capital Gain on transfer of Undertaking ◦ Capital gain = Full Value of consideration – Networth of Undertaking ◦ Networth = Aggregate Value of WDV of Block of assets + Book Value of other assets - Value of Liabilities ◦ Ignore Revaluation ◦ Benefit of Indexation not available ◦ Losses and unabsorbed depreciation – remain with transferor ◦ LTCG - Undertaking held for more than 36 months ◦ STCG – Undertaking held for less than 36 months

70. Issue 1 : How will the Return of Income be filed where Appointed Date does not coincide with the FY end (i.e. March 31) ?  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 (89 Taxman 619 - SC).  Therefore, transferee company to file return of income for the period even prior to the effective date in respect of income of the transferor.  The assessment of such return will be in the hands of the transferee company.

71. Issue 2: Will the Goodwill arising on Amalgamation be 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, whether or not already recognised by the amalgamating company, should be of any specific category of intangibles or “any other business or commercial rights of similar nature”. Judicial pronouncements have held various business rights/ advantages as “any other business or commercial rights of similar nature”, such as: Business information - Skyline Caterers P. Ltd v ITO (20 SOT 266) (Mum ITAT)

72. Issue 2: Contd.  Goodwill acquired by amalgamating company and recognised by amalgamated company could involve such business or commercial rights. In that case, it would fall within the definition and hence depreciation can be claimed.  Goodwill arising upon amalgamation may not involve business or commercial rights and hence would not fall within the definition. Therefore depreciation would not be allowable on such goodwill.

73. Issue 3: How taxable income will be computed when immovable assets included in an undertaking which is demerged / sold ?  In a qualifying Demerger, since transfer of assets - not considered as “Transfer” in terms of Section 47(vib), entire transfer would be tax neutral.  Section 50B specifically deals with computation of capital gains in a slump sale.  Since the seller sells for a slump consideration, no values can be assigned to any assets.  Hence, for immovable properties forming part of such undertaking, Section 50C would not apply.

74. Issue 4: 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 mergers into another company. ◦ In such a case Section 72A is applicable. ◦ Also, this interpretation is in line with objective of enacting Section 72A.

75. Issue 5: Whether the indexation benefit will be available from the date of acquisition of shares in amalgamating company or date of acquisition of shares in amalgamated company?  The period of holding of shares acquired in amalgamation includes period of holding of shares in the amalgamating. [Section 2(42A)].  Therefore, cost indexation at the time of sale of shares of the amalgamated company would be computed, considering such period.  Kotak Mahindra Bank Ltd. Vs. ACIT (2009 TIOL 383 – ITAT – Mum)