One-fifth of it a year for five years, if the claimant is an Indian company and the expenditure was wholly and exclusively for the purposes of an amalgamation or a demerger. s.35DD(1) allows "an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation or demerger takes place", and s.35DD(2) shuts off every other route: "No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act." The two places claims fail are the threshold - the transaction has to be an amalgamation within s.2(1B) or a demerger within s.2(19AA), not a share purchase - and the words "wholly and exclusively for the purposes of", which do not cover the general cost of thinking about a deal.
The provision, in full. s.35DD(1): "Where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation or demerger takes place." s.35DD(2): "No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act." The section was inserted by the Finance Act, 1999 with effect from 1 April 2000, and the departmental page carries no later amendment footnote.
Four things follow from the words. The claimant must be an Indian company - a foreign company, an LLP or a firm incurring merger costs has no claim under this section, whatever the transaction. The expenditure must be incurred on or after 1 April 1999. The five years run from the previous year in which the amalgamation or demerger takes place, not from the year the money was spent, so professional fees paid across two or three earlier years all begin their five slices together in the year the scheme becomes effective. And the deduction is one-fifth a year, with no option to accelerate and no provision for a shorter or longer spread.
What falls inside the expenditure. The test is purpose, not description: expenditure "wholly and exclusively for the purposes of amalgamation or demerger of an undertaking". On that wording the professional fees for drawing and prosecuting the scheme, the valuation and share-exchange-ratio reports, the fees of counsel, the NCLT filing and petition costs, the advertisement and notice costs the scheme requires, and the stamp duty and registration cost on the order sanctioning the scheme are all naturally within it, because each is incurred for the amalgamation and for nothing else. What is not within it is expenditure that also serves the ordinary running of the business or a wider strategic exercise - a retainer for general corporate advice, integration and rebranding costs after the scheme, or the cost of an exploratory review of several options only one of which was a merger. Those fail the "wholly and exclusively" test on their own facts, and once they fail it s.35DD(2) does not bar them, because s.35DD(2) only shuts out another deduction for expenditure that is within sub-section (1); expenditure outside sub-section (1) stands or falls under s.37(1) on ordinary capital-or-revenue principles.
The threshold that decides most disputes. s.35DD opens only where there is an "amalgamation" or a "demerger". Both are defined terms. s.2(1B) requires the merger of one or more companies with another company, or of two or more to form one, with all the property and all the liabilities of the amalgamating company becoming those of the amalgamated company by operation of law, and shareholders holding not less than three-fourths in value of the shares (excluding those already held by the amalgamated company or its nominees) becoming shareholders of the amalgamated company - and expressly not by way of purchase of property, and not by distribution on liquidation. s.2(19AA) requires, for a demerger, a transfer under a scheme of arrangement of one or more undertakings, property and liabilities passing by operation of law, transfer at book values immediately before the demerger, the resulting company issuing its shares to the demerged company's shareholders on a proportionate basis, three-fourths in value of the shareholders becoming shareholders of the resulting company, transfer on a going-concern basis, and compliance with the conditions notified by the Central Government. A takeover carried out by buying shares, a business transfer agreement or a slump sale is none of these things, however much it is called a merger in the board minutes, and the costs of it do not come into s.35DD at all. The corpus page on slump sale under s.50B and the entry in Triune Projects deal with the neighbouring question of what a slump sale is.
The line against s.35D. s.35D is a different provision and is not an alternative. It amortises preliminary expenditure - the cost of setting the company up, and expenditure in connection with the extension of an undertaking or the setting up of a new unit - and it is subject to a ceiling computed as a percentage of cost of the project or capital employed, which is what Berger Paints and Adani Power in the corpus are about. The corpus page on s.35D sets out that ceiling and how each slice is sized. s.35DD has no ceiling at all: the whole of the qualifying expenditure is spread, and the only limit is the purpose test. Practitioners sometimes claim merger costs under s.35D because there is a familiar form for it; that is the wrong section, and s.35D(6) would in any event bar a second deduction for the same expenditure.
What happens if the company amalgamates again. Nothing in s.35DD says. This is not an oversight in the drafting of the Act as a whole - Parliament wrote succession rules into the neighbouring amortisation provisions and not into this one. s.35D(5) provides that where the undertaking of an Indian company entitled to the deduction is transferred to another Indian company in a scheme of amalgamation, "no deduction shall be admissible under sub-section (1) in the case of the amalgamating company for the previous year in which the amalgamation takes place" and "the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the amalgamation had not taken place", with s.35D(5A) doing the same for a demerger. s.35DDA carries the same machinery for voluntary retirement expenditure in its sub-sections (2) to (5), covering amalgamation, demerger and business reorganisation, and denying the predecessor the deduction for the year of the event. s.35DD has neither. So where a company with unclaimed s.35DD instalments is itself amalgamated, there is no express provision transferring the balance to the amalgamated company, and the department's position is likely to be that the balance is simply lost. That is a reason to expect a challenge, not a settled answer; no decision either way has been located, and the point is flagged in gaps.
The Income-tax Act, 2025. The department's navigator between the two Acts maps "35DD Amortisation of expenditure in case of amalgamation or demerger" and "35DDA Amortisation of expenditure incurred under voluntary retirement scheme" both to section 52 of the new Act, and s.35D to section 44. s.52 works through a Table: entry 1 is "Expenditure incurred by an Indian company, wholly and exclusively for the purposes of amalgamation or demerger", deductible in equal instalments over five tax years beginning with the year in which the amalgamation or demerger takes place; entry 2 is the voluntary retirement payment, also over five years; entries 3 and 4 are spectrum fee and telecom licence fee, spread over the period of validity. s.52(4) reproduces the bar - no deduction under any other provision of the Act for the expenditure in entries 1 and 2, and no depreciation under s.33 where s.52 applies to spectrum or licence fee. On the reading of s.52 taken here, s.52(6) provides a business-reorganisation continuation for the entry 2 (voluntary retirement) expenditure and not for entry 1, which would carry the same gap forward. The 2025 Act takes effect from 1 April 2026.
Merger costs are large, are almost always capital, and are therefore not deductible under s.37(1) at all. s.35DD is the only route, and s.35DD(2) makes it the only route. That puts all the weight on two questions decided at the planning stage rather than in the assessment: whether the transaction has been structured as an amalgamation within s.2(1B) or a demerger within s.2(19AA), and whether the invoices are drawn so that the purpose of each engagement is visible on its face. A single retainer covering deal advice and general corporate work is a disallowance waiting to happen, and it cannot be rescued under s.37(1) if it is within sub-section (1), or under s.35DD if it is not.
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