Section 2(1B)

Section 2(1B) — the law in short

What the courts have decided on section 2(1B), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Jindal Equipment Leasing Consultancy Services Ltd v CIT Supreme CourtCuts both ways
  My client held shares of the amalgamating company as stock-in-trade and received shares of the amalgamated company under the court-sanctioned scheme. Is there business income at that point, or only when those shares are sold?
  It depends. Section 28 does not require a sale, an exchange or a transfer - business profit can be realised in kind - so the substitution of shares on an amalgamation can be charged as business income where shares held as stock-in-trade are replaced by shares that are freely realisable and capable of definite valuation. It is not automatic: the Court laid down a fact-sensitive test of commercial realisability, put the burden of establishing it on the Revenue, and held that the charge is attracted only on allotment of the new shares and not on the appointed date or the date the scheme is sanctioned. The Delhi High Court's judgment was affirmed and the matter remitted to the Tribunal to decide, on the facts, whether the shares were stock-in-trade at all and whether what was received was freely realisable.
• Marshall Sons & Co (India) Ltd v ITO Supreme CourtHelps taxpayer
  Our scheme said the merger takes effect from 1 January but the NCLT only sanctioned it two years later. The Assessing Officer has issued notices to the transferor company for the two years in between. Which date governs?
  The date specified in the scheme, unless the Court fixed another one. The Supreme Court held that every scheme of amalgamation has necessarily to provide a date with effect from which the amalgamation or transfer shall take place; that it is open to the Court while sanctioning the scheme to modify that date and prescribe such date as it thinks appropriate, in which case that date governs; but that where the Court does not prescribe any specific date and merely sanctions the scheme presented to it, it should follow that the date of amalgamation or transfer is the date specified in the scheme as the transfer date. On that footing the notices issued to the transferor company for the intervening period were not warranted in law, and the business carried on by the transferor in the meantime is to be deemed to have been carried on for and on behalf of the transferee.
• Saraswati Industrial Syndicate Ltd v. Commissioner of Income-tax (Supreme Court, 4 September 1990) — on amalgamation the transferor company loses its entity and its corporate existence ceases from the date the amalgamation is made effective Supreme CourtHelps taxpayer
  After our amalgamation the Assessing Officer has taxed us under section 41(1) on a trading liability that had been allowed as a deduction to the company we absorbed. Can the allowance given to a company that no longer exists be taxed in our hands?
  No. The Supreme Court held that section 41(1) applies only to the assessee to whom the allowance or deduction was made, and that in order to attract it the identity of the assessee in the previous year and the subsequent year must be the same; if there is any change in the identity of the assessee there is no liability under section 41. On amalgamation the transferor company loses its entity and its corporate existence ceases with effect from the date the amalgamation is made effective, so the amalgamated company is a separate entity and a different assessee, and the allowance made to the transferor cannot be treated as its income.
• CIT v Eastman Exports Global Clothing Pvt Ltd High CourtHelps taxpayerNo later treatment found
  The Commissioner has issued a s.263 notice saying the transferor companies had not been in business for three years, so the losses we took over cannot be carried forward. Our arrangement was a demerger, not an amalgamation. Does the three-year condition apply?
  No. The three-year condition is in s.72A(2), which governs amalgamation. A demerger is governed by s.72A(4), which contains no such condition. The Madras High Court held that a revision order built on the wrong sub-section, and which merely remitted the matter to the assessing officer for enquiry, did not satisfy the requirement that the order sought to be revised be erroneous.
• DCIT v Cyquator Media Services Pvt Ltd ITATHelps taxpayerNo later treatment found
  The AO says our amalgamation was a colourable device to move shares tax-free and has taxed their market value under s.56(1). Can he disregard a scheme the High Court sanctioned?
  Not on these facts. The Mumbai Tribunal reversed the finding that the scheme was a tool for evasion, holding that the High Court had approved the scheme and its terms, the Department had raised no objection at that time before the High Court, and it could not now claim the scheme was a colourable device. The exemption in s.47(vi) was therefore available and the addition of Rs.1,466.60 crore under s.56(1) went.
• DCIT v Ozone India Ltd ITATHelps taxpayer
  On amalgamation we issued shares at face value against net assets worth far more. The AO has taxed the excess under s.56(2)(viib). Does that provision apply to a scheme of amalgamation at all?
  The Ahmedabad Tribunal held it does not. Section 56(2)(viib) contemplates a bilateral transaction in which a company receives consideration from a resident person for the issue of shares to that person; an amalgamation is a tripartite arrangement between the amalgamated company, the amalgamating company and the amalgamating company's shareholders — the vesting comes from one and the shares go to the others — and such arrangements are not contemplated by the deeming clause.
• Statutory position — s.47A: the four withdrawals of exemption, the year each is charged and in whose hands, and the amalgamation and demerger clauses it does not touch CBDT Circulars & InstructionsCuts both ways
  Our amalgamation stopped satisfying a condition after the event. Can the department invoke section 47A to take back the section 47(vi) exemption, and if it can, in which year and on whom?
  Section 47A does not reach the amalgamation and demerger clauses at all. It withdraws the exemption in exactly four situations: sub-section (1), where a capital asset transferred under s.47(iv) or (v) — the holding company to wholly-owned subsidiary transfers — is converted into or treated as stock-in-trade, or the whole of the share capital ceases to be held, within eight years; sub-section (2), where shares allotted on a s.47(xi) conversion of a stock exchange membership are transferred within three years; sub-section (3), where a condition in the proviso to s.47(xiii) or (xiv) is broken; and sub-section (4), where a condition in the proviso to s.47(xiiib) is broken. Clauses (vi), (via), (vib), (vic), (vicc), (vid) and (vii) — the amalgamation and demerger exemptions — appear nowhere in section 47A.
• Statutory position — s.2(1B): the three conditions of an "amalgamation", and why a scheme sanctioned by a court or tribunal does not by itself produce one CBDT Circulars & InstructionsCuts both ways
  The NCLT has sanctioned our scheme and the order calls it an amalgamation. The Assessing Officer says it is not an amalgamation for income-tax and has refused section 47 and section 72A. Can he do that?
  Yes, he can. "Amalgamation" for the Income-tax Act is defined by s.2(1B) and by nothing else: the merger must be in such a manner that all the property and all the liabilities of the amalgamating company become those of the amalgamated company, and that shareholders holding not less than three-fourths in value of the shares of the amalgamating company — leaving out shares already held by the amalgamated company, its nominee or its subsidiary — become shareholders of the amalgamated company. A tribunal or court order sanctioning a scheme is what makes the merger effective as a matter of company law; it is not a finding that these three conditions are satisfied, and s.2(1B) nowhere requires such an order.
• Statutory position — s.47(vi), (via), (vib), (vic), (vicc), (vid) and (vii): the amalgamation and demerger transfers that are not transfers, with the cost rules in s.49(2), (2C) and (2D) CBDT Circulars & InstructionsCuts both waysNo later treatment found
  Which transfers in an amalgamation or a demerger are outside section 45, and what cost and holding period do the shares in the transferee company carry afterwards?
  Seven clauses of section 47 take reorganisation transfers out of section 45. At company level: (vi) a transfer in a scheme of amalgamation of a capital asset by the amalgamating company to the amalgamated company, if the amalgamated company is an Indian company; (vib) a transfer in a demerger of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company; (via) a transfer in a scheme of amalgamation of shares held in an Indian company by an amalgamating foreign company to an amalgamated foreign company, on two conditions; and (vic) and (vicc), the corresponding foreign demerger cases. At shareholder level: (vid) any transfer or issue of shares by the resulting company in a demerger to the shareholders of the demerged company in consideration of the demerger; and (vii) a transfer by a shareholder in a scheme of amalgamation of shares in the amalgamating company, if made in consideration of the allotment of shares in the amalgamated company except where the shareholder is itself the amalgamated company, and the amalgamated company is an Indian company. Clause (vi) is the central one: any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company, if the amalgamated company is an Indian company — this is what takes the transfer of the undertaking itself out of section 45. On cost, s.49(2) gives the shareholder who receives shares in an amalgamated Indian company on a s.47(vii) transfer the cost of his shares in the amalgamating company; s.49(2C) splits the cost of the demerged company's shares to the resulting company's shares in the ratio the net book value of the assets transferred bears to the net worth of the demerged company immediately before the demerger; and s.49(2D) reduces the cost of the original shares by the amount so arrived at.
• Statutory position — s.72A(1) and s.72A(7)(aa): which amalgamations carry accumulated loss and unabsorbed depreciation across, and the closed definition of "industrial undertaking" CBDT Circulars & InstructionsCuts both ways
  We amalgamated a loss-making service company into ours. The Assessing Officer says section 72A does not apply at all because there is no industrial undertaking. Is that right, and what does the section actually cover?
  Section 72A(1) does not apply to every amalgamation. It applies to an amalgamation of (a) a company owning an industrial undertaking or a ship or a hotel with another company, (b) a banking company within s.5(c) of the Banking Regulation Act, 1949 with a specified bank, (c) one or more public sector companies with one or more public sector companies, or (d) an erstwhile public sector company with one or more companies where the share purchase agreement entered into under strategic disinvestment restricted immediate amalgamation and the amalgamation is carried out within five years from the end of the previous year in which that restriction ends. "Industrial undertaking" is exhaustively defined in s.72A(7)(aa) as an undertaking engaged in the manufacture or processing of goods, the manufacture of computer software, the business of generation or distribution of electricity or any other form of power, the business of providing telecommunication services (basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services), mining, or the construction of ships, aircrafts or rail systems.
• Statutory position — s.72A(2), s.72A(3) and Rule 9C: the five conditions, the fifty per cent production test, the Form No. 62 certificate and the year the set-off is taken back CBDT Circulars & InstructionsCuts both ways
  We took over an amalgamating company's brought-forward losses. What exactly must we satisfy under section 72A(2) and Rule 9C, and if we fail, in which year does the department take the set-off back?
  Section 72A(2) imposes five conditions in two groups. The amalgamating company must (a)(i) have been engaged in the business in which the accumulated loss occurred or depreciation remains unabsorbed for three or more years, and (a)(ii) have held continuously, as on the date of the amalgamation, at least three-fourths of the book value of fixed assets held by it two years prior to that date. The amalgamated company must (b)(i) hold continuously for a minimum of five years from the date of amalgamation at least three-fourths of the book value of the fixed assets of the amalgamating company acquired in the scheme, (b)(ii) continue the business of the amalgamating company for a minimum of five years from that date, and (b)(iii) fulfil the conditions prescribed by Rule 9C — achieving at least fifty per cent of the installed capacity of the amalgamating company's industrial undertaking before the end of four years from the date of amalgamation and maintaining it to the end of five years, and furnishing to the Assessing Officer a certificate in Form No. 62 verified by an accountant. If any condition in sub-section (2) is not complied with, s.72A(3) deems the set-off or depreciation allowance already made in any previous year to be the income of the amalgamated company chargeable to tax for the year in which the condition is not complied with.
• Statutory position — s.2(19AA): the seven conditions of a "demerger", the going-concern requirement, transfer at book value and the Indian Accounting Standards proviso CBDT Circulars & InstructionsCuts both ways
  We hived off a division under a court-sanctioned scheme and claimed section 47(vib) and section 72A(4). The Assessing Officer says it is not a "demerger". What exactly does section 2(19AA) require, and what is the position where Ind AS forced us to record the assets at a different value?
  Section 2(19AA) requires a transfer pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956, by a demerged company of one or more of its undertakings to a resulting company, AND seven further conditions: all the property of the undertaking passes; all the liabilities relatable to it pass; the property and liabilities are transferred at values appearing in the demerged company's books immediately before the demerger; the resulting company issues its shares to the demerged company's shareholders on a proportionate basis; shareholders holding not less than three-fourths in value of the shares of the demerged company become shareholders of the resulting company; the transfer of the undertaking is on a going-concern basis; and the demerger accords with any conditions notified under s.72A(5). The book-value condition now carries a proviso which disapplies it where the resulting company records a different value in compliance with the Indian Accounting Standards specified in the Annexure to the Companies (Indian Accounting Standards) Rules, 2015.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.