An NCLT scheme is not automatically tax-neutral. The Income-tax Act, 1961 grants neutrality only where the transaction satisfies the specific conditions in Sections 47, 72A, and 2(19AA). The conditions differ for an amalgamation and a demerger, and a failure to satisfy any one condition can result in a significant tax cost.
The Amalgamation Conditions
An amalgamation is tax-neutral under Section 47(vi) where the transferor company transfers its assets to the transferee company in a scheme of amalgamation. The condition is that the transferee company must be an Indian company, and the amalgamation must be under the Companies Act. The transferee company must also satisfy the conditions of Section 72A for the carry forward of the transferor’s accumulated losses.
The Demerger Conditions
A demerger is tax-neutral under Section 47(vib) only where the conditions of Section 2(19AA) are satisfied: the transfer is pursuant to a scheme, all the property and liabilities of the undertaking are transferred, the transfer is of a going concern, the resulting company issues shares on a proportionate basis, and the shareholders holding at least three-fourths in value become shareholders of the resulting company. The Ahmedabad ITAT’s Reckitt Benckiser ruling illustrates that the failure to transfer the liabilities destroys the tax neutrality.
The Scheme Design
The scheme should be designed to satisfy the tax-neutrality conditions from the outset. The valuation, the share exchange ratio, and the treatment of the liabilities must be consistent with the conditions. The scheme should also address the carry forward of the losses and the MAT credit.
A technically sound scheme includes a tax chapter that maps each condition to the scheme clause, and it is reviewed by the tax advisor before the first motion is filed.
Call to Action
Anuj Desai & Associates advises companies on the tax neutrality of an NCLT scheme—from the Section 47 and Section 2(19AA) conditions to the Section 72A carry forward and the MAT credit. If your scheme involves a significant tax attribute, we can help you structure the neutrality.
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