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Merger and Acquisition

 

Merger and Acquisition

Merger and Acquisition

Merger Concept

► Absorption of one company by another or amalgamation of two companies to form a new company

► Involves transfer of entire property, liabilities and employees of amalgamating company to the amalgamated company

► Amalgamated Co issues its shares to the shareholders of amalgamating cos

► Swap ratio – Valuations

► Transferor company is automatically wound up and no separate liquidation proceedings are required

► High Court driven process – Section 391-394

► Requires approvals from the Board of Directors, shareholders and creditors of the respective companies

► Reports from the Regional Director, ROC, and official liquidator (in case of a merger) required prior to obtaining final order from the High Court

► Accounting under AS – 14

Key implications

Income Tax

► Appointed date vs. Effective date

► Merger should be tax neutral subject to fulfillment of conditions as per the Income Tax Act

► Tax incentives continue to be available to merged company*

► Amalgamation should allow carry forward & set off of losses / unabsorbed depreciation of merging company in certain cases – fresh lease of life for losses

► Depreciation allowable on proportionate basis to the merging and merged company

► Bad debts in the books of merging company allowable to merged company

► Specific expenses (viz. scientific research expenses) incurred by the merging company available to the merged company for unexpired period

► Merger expenses are amortisable by the merged company for 5 years for tax purposes Indirect Tax

► Sales tax / VAT should not apply on merger

► Possible to transfer outstanding service tax credits, other indirect tax credits, etc, through certain procedures

Key implications

Stamp Duty

► Stamp Duty is a state-specific levy and is applicable on an ‘instrument ‘

► A High Court Order approving the Scheme of Amalgamation – Whether an instrument effecting the transfer liable to stamp duty?

► Affirmative decisions that such instrument is “conveyance” chargeable to duty

► Li Taka Pharmaceuticals Ltd. V. State of Maharashtra (Bombay High Court)

► Hindustan Lever (Supreme Court)

► Delhi Towers (Delhi High Court)

► Duty payable in the States:

► where order approving the scheme is passed; and

► where the properties of transferor company are located

► Specific entry in the Schedule levying duty on High Court order sanctioning amalgamation – Maharashtra, Gujarat, Rajasthan, Karnataka, Madhya Pradesh, West Bengal and Andhra Pradesh

Merger and Acquisition

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