1.Relief for Double Taxation Section 90, 90A and 91 By: CA Shailesh PrajapatiCA Shailesh Prajapati

2. Relief of Double Taxation Foreign Income of a person is Taxable in Country in which Income is earned Country in which the person is residentDouble taxation of such income is avoided by means of Double Taxation Avoidance Agreement Section 90 Where income accrues or arise in a country with which no agreement exists, unilateral tax relief is provided on doubly taxed Income CA Shailesh Prajapati 3. Relief of Double Taxation Two modes of granting relief under DTAA Exemption Method Income is Taxed in one of the two Countries Tax Credit Method Taxable in both countries in accordance with their respective tax laws read with ADT Agreement Effect of ADT If no tax liability imposed under the Act, the question of restoring to the agreement would not arise CA Shailesh Prajapati 4. Relief of Double Taxation Effect of ADT contd If a tax liability is imposed by the ADT, the agreement may be resorted to for reducing it.. In case of difference between the provision of Act and Agreement, the provision of the agreement prevail over the provision of the Act and can be enforced by the Appellate Authorities and the court.CA Shailesh Prajapati 5. Relief of Double Taxation Section 91 Certain Conditions.. Assessee must be resident in India Income must have accrued or arisen to him during that previous year outside India In respect of that income which accrued or arisedn outside India, he must have paid by deduction, or otherwise taxed under the law in force in the country in question.CA Shailesh Prajapati 6. Transfer Pricing Section 92CA Shailesh Prajapati 7. Section 92-ITA, 1961 Sec 92 requires that income arising from an international transaction shall be computed having regard to the arms length price Thus, the provision deals with any kind of incomeThe term international transaction is defined as: A transaction between two or more associated enterprisesCA Shailesh Prajapati 8. Associated Enterprise An enterprise which participated directly or indirectly in the management or control or capital of the other enterprise; or An enterprise in respect of which the person (s) who participate, directly or indirectly in management or control or capital also participate in the management or control or capital of the other enterprise The above two conditions are classified as primary circumstances CA Shailesh Prajapati 9. Associated Enterprise Situation 1 Direct ParticipationAParticipates in managementBCA Shailesh Prajapati 10. Associated Enterprise ASituation 2 Participation through IntermediaryIParticipates in managementIntermediary CA Shailesh PrajapatiB 11. Associated Enterprise A Participates in management, capital controlCParticipates in management, capital controlDIn the above situation C and D are associated enterprises by virtue of A participating in the management, capital or Control of both C & D CA Shailesh Prajapati 12. Deemed- Associate Enterprise When an enterprise holds 26 % or more of the voting power in the other enterprise When one enterprise advances loan of 50 % or more of its assets to the other enterprise When one enterprise guarantees more than 10 % of the borrowings of other enterprise When more than half of the directors or executives of one enterprise are appointed by the other or by a common person When more than 90% of the raw material is sourced from other enterprise ..cont CA Shailesh Prajapati 13. Deemed- Associate Enterprise When both enterprises are controlled by the same individual alone or together with his relative; or When both enterprises are directly or indirectly subject to the control of a Hindu undivided family; or If one enterprise is a firm, association or a body of individuals the other enterprise holds at least a 10 per cent interest in the same; or. Cont CA Shailesh Prajapati 14. Deemed- Associate Enterprise There exists between the two enterprises, any relationship of mutual interests, as may be prescribed, The goods manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and the other conditions relating thereto are influenced by such other enterprise, The manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of knowhow, patents, copyrights, TMs, licences, franchises or any other business or commercial rights of similar nature or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights. CA Shailesh Prajapati 15. Holds at least 26% of Equity SharesX Ltd USAY Ltd IndiaHold 100% Equity Shares X Ltd USAAssociated EnterpriseHolds at least 26% of Equity SharesZ Ltd IndiaY Ltd IndiaAssociated EnterpriseX Ltd USA P Ltd GermanyAssociated Enterprise Holds more than 26% of Equity SharesA Ltd USAAssociated Enterprise CA Shailesh Prajapati 16. Appoints 8 Directors X Ltd USA Associated EnterpriseY Ltd India ( Board of Directors 14 Directors)Appoints 7 out of 10 Directors Appoints one Executive Director Y Ltd X Ltd A Ltd India India UK Associated EnterpriseCA Shailesh Prajapati 17. Supplied more than 90% of RM Y Ltd IndiaZ Ltd USADirects Z Ltd to Supply X Ltd. RM to Germany Y Ltd Other EnterpriseAssociated EnterpriseContract Associated Enterprise Holds at least 10% interest ( Controls)Influenced pricing and other conditions of the Contract Firm/AOP BOIAssociated EnterpriseCA Shailesh Prajapati 18. Associated Enterprise AE comes into existence if any of the criteria is met at any time during the PY Transactions entered into by an enterprise before becoming an AE and after ceasing to be AE would not be covered The relationship of AE must subsist at the time of entering into a international transaction CA Shailesh Prajapati 19. International Transaction A very wide definition 92B(1) It covers transactions in the nature of purchase, sale or lease of tangible or intangible property, provision of services, financial transactions, cost sharing arrangements and any transactions that may have a bearing on the profits, income, losses or assets of associated enterprise CA Shailesh Prajapati 20. International Transaction The requirement of one of the parties to be nonresident would put transactions between an Indian entity and its overseas branch out of the purview of the TP Transactions between the foreign entity and its PE (Indian branch) would be covered Transactions between two PE in India would be covered as both are NR in India CA Shailesh Prajapati 21. Conditions for applicability of ALP in International Transaction Two or more enterprise Enterprise should be regarded as Associate Enterprises International Transaction should be carried our by the AE. It should be: A transaction between two or more enterprises ( either or both are non resident) A transaction having bearing on profits. Income, losses or assets of such AECA Shailesh Prajapati 22. International Transaction For E.g. X of India, Y of Aus are AE. Z of Sing is not an AE of X Y and Z enter into an agreement for determining the terms of transaction between X and Z The transaction as may be entered between X and Z which is governed by such an agreement existing between Y and Z shall be deemed to be a transaction between AE CA Shailesh Prajapati 23. Associate Enterprise Y Ltd (Aus)X Ltd India The Transaction Between X and Z will Be deemed To be AEZ Ltd. Singapore Not an AE of XAgreement for determining the terms of transaction between X and ZCA Shailesh Prajapati 24. International Transaction For E.g: There are 2 US Co which are AE If the Indian Subsidiary of one such US Co enters into a transaction with the Indian Branch or PE in India of the Other US Co The transaction has originated, executed, and concluded within India Even though the above is true, the same shall be International Transaction as it is between two AE and one of them is NR CA Shailesh Prajapati 25. Associate Enterprise 2 US1 USIndian SubsidiaryNon- ResidentEnters into TransactionsIndia Branch or PEAssociate EnterpriseCA Shailesh Prajapati 26. Arms Length Price ALP is the internationally accepted TP standard which must be applied for tax purposes by MNEs and tax administration The Indian TP Regulations recognise determination of pricing between AE on an ALP CA Shailesh Prajapati 27. Arms Length Price Meaning : is price applied when two unrelated persons enter into a transaction in uncontrolled conditions. Meaning of Uncontrolled conditions : Conditions which are not controlled or suppressed or moulded for achievement of a pre determined results are said to be uncontrolled conditions. If a buyer is related to a seller or where prices are governed by the Government policy then transaction is said to be taking place under controlled conditions. CA Shailesh Prajapati 28. Arms Length Price Conditions for applicability of arms length price in International Transaction Two or more enterprises- International Transaction is subjected to the arms length price only in case of transaction between tow entities called associate enterprise. Enterprises should be regarded as associate enterprises : An enterprise would be regarded as an associated enterprise of another enterprise if : It participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprises; or In respect of it one or more persons who participate, directly or indirectly or through one or more intermediaries , in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. Deemed Associated Enterprises are also covered in this section. CA Shailesh Prajapati 29. Computation of Arms Length Price Comparable uncontrolled price method (CUP); Resale price method (RPM); Cost plus method (CPLM); Profit split method (PSM); Transactional net margin method (TNMM); Any other method that may be prescribed by the CBDT ( no other method prescribed till date)CA Shailesh Prajapati 30. Comparable uncontrolled price method the price charged or paid for property transferred or services provided in comparable uncontrolled transaction, (i.e a transaction between enterprises other than associated enterprises whether resident or non-resident ) or number of such transaction, is identified; Such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in open market; The adjusted price arrived at under b supra is taken to be an arms length price in respect of property transferred or services provided in the international transaction. CA Shailesh Prajapati 31. XYZ of Japan Sells to ABC (India) and MNO (UK) {APL under CUP Method} INR ParticularsMNORelatedSelling PriceABCNot- Related5,0004,0001,000500Less: Cost of ServicesOne Year Normal Comparable Price4,000No of Pieces Sold1,000ALPSix Months3,500Difference Excess TP Charged3,500500 500,000 CA Shailesh Prajapati 32. Resale Price Method The price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified Such resale price is reduced by the amount of normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions; The price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; The price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices if any, between the international transaction and the comparable uncontrolled transaction; The adjusted price arrived at under (d) supra is taken to be an arms length price in respect of the purchase of property or obtaining of the services by the enterprise from the associated enterprise CA Shailesh Prajapati 33. Most applicable for the Enterprises doing only Marketing, Sales and distribution Function UK company A Sells a cosmetic perfumes to its related enterprise B at Rs. 60/- per Piece. B resale to unrelated parties at Rs. 100/- The total cost of the product to B is Rs. 80/- including admin and Selling expenses of Rs. 20/- per piece. In this Trade normal Margin is 25%A Ltd Sells Perfumes at Rs. 60/UK ALP 100-25% = Rs. 75 Less: Cost of B 20 Rs. 55B Ltd RelatedSells Perfumes at Rs. 100/Resale to C Ltd UnrelatedTP of Rs. 60 is excess by Rs. 5/- p.u. reducing the Profit of B causing leakage in Country CA Shailesh Prajapati 34. Cost Plus Method The direct and indirect cost of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; The amount of normal gross profit mark up to such cost arising from the transfer is determined The normal gross profit mark up referred to in (b) supra is adjusted to take into account the functional and other differences, including differences in accounting practices if any, between the international transaction and the comparable uncontrolled transaction; The sum arrived after the adjusted profit mark up is to be taken as arms length price in relation to supply of the property or provision of services by the enterprise.CA Shailesh Prajapati 35. Cost Plus Mehtod ABC transfers goods to ParticularsCost of Production GP ( %) Gross Profit Selling Price Less: Selling Cost Adjusted GP Margin Adjusted GP Margin (%) Increased GP Per Unit Alte rna tive lyINR MNO Not- Related Rs. P.u.X YZ Related Rs. P.u. (a) (b) a+b=c d c-d= e e/a=f e-e=g43.00 20% 8.60 51.60 4.20 4.40 10.23%43.00 40% 17.20 60.20 3.40 13.80 32.09%9.40ALP = Selling Price + Increase in GPM ( 51.60+9.40) Quantity Sold to X YZ 50000 units Actual Rev enue Booked for X YZ Limited Sales at ALP Increased Income as per ALP61.00 2,580,000 3,050,000 470,000CA Shailesh Prajapati 36. Profit Split Method This method is applicable mainly in international transactions involving transfer of unique intangibles or in multiple international transactions which are so interrelated that they cannot be evaluated separately for the purpose of determining the arms length price of any one transaction. As per this method, which The combined net profit of the associated enterprises arising from the international transaction in which they are engaged, is determined; The relative contribution made by each of the associated enterprises to the earning of such combined net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risk assumed by each enterprise and on the basis of reliable external market data. The combined net profit is then split amongst the enterprises in proportion to their relative contributions The profit thus apportioned to the assessee is taken in to account to arrive at an arms length price in relation to the international transaction: CA Shailesh Prajapati 37. Transaction Net Margin Method The steps involved in the application of this method: Identify the net profit margin realised by the enterprise from the International Transaction. The net profit margin may be computed in relation to costs incurred or sales effected or assets employed or any other relevant base; Identify the net profit margin from a comparable uncontrolled transaction or a number of such transactions having regard to the same base;CA Shailesh Prajapati 38. Transaction Net Margin Method The steps involved in the application of this method: The net profit margin so identified is adjusted to take into account the differences if any between the international transaction and the comparable uncontrolled transaction. The differences should be those that could materially affect the net profit margin in the open marketCA Shailesh Prajapati 39. Transaction Net Margin Method The steps involved in the application of this method: The adjusted net profit margin is taken into account to arrive at the ALP in relation to the international transactionCA Shailesh Prajapati 40. Computation of Arms Length Price The regulations do not prescribe any hierarchy in the choice of methodology. The tax payer is required to select the most appropriate method. The primary onus to determine an arms length price and substantiate with the prescribed documentation is on the tax payer. The documentation is required to be retained for a period of eight years. CA Shailesh Prajapati 41. Income should not decrease on applying ALP [sec 92(3),92C(4)] The Provision of TP shall not be applicable in a case where the application of ALP results in a downward revision in the income chargeable to tax in India. Total Income of the recipient AE will not be recomputed if (a) total income of payer (AE) is recomputed by AO on determination of ALP, and (b) tax has been deducted or deductible at source by the payee enterprise. CA Shailesh Prajapati 42. Maintenance of document and information Every one entering into international transactions should maintain documents and information as prescribed. The assessing officer or commissioner may require the documents which should be furnished within a period of thirty days from the date of receipt of a notice issued in this regard. CA Shailesh Prajapati 43. Tax Planning with reference to Insurance Compensation Section 45 (1A) By: CA Shailesh Prajapati 44. Insurance Claim Insurance claim received on account of destruction of Asset is not chargeable to tax as destruction does not amount to transfer. Refer Vania Silk Mills Private Ltd v/s CIT (1991) 59 Taxman 3, Supreme Court held the above. The effect of the judgment has been nullified to some extent by inserting subsection(1A) in section 45 with effect from the A.Y. 2000-01 45. Attraction of Section 45 (1A) When Section 45 (1A) is attracted : Condition One :The compensation is received because of damage to or destruction of any capital Asset. If it is not a capital asset, then, section 45 (1A) is not applicable. Condition Two : The damage or destruction is as a result of four circumstances Flood, Cyclone, earthquake or other convulsion of nature Riot or civil disturbance Accidental fire explosion Action by an enemy or action taken in combating an enemy ( whether with or without declaration of war) 46. Consequences where Section 45(1A) applicable Where a person receives at any time during the previous year any money or other assets under any Insurance from an insurer an the Conditions are satisfied, then; Taxability of Income: Any profit or gains form receipts of such money or other assets shall be charged under Capital Gain Year : It shall be deemed to be the income of such person for the previous year in which such money or other asset is received. Full value of Consideration: The value of any money or the FMV of other Assets ( on the date of receipt) shall be deemed to be the FVOC received as a result of trf of asset. 47. When Section 45(1A) is not applicable When Insurance compensation is a capital receipt If two conditions are not satisfied, then section 45 (1A) is not applicable and consequently, insurance compensation ( if it is a capital receipt) will not be chargeable to tax as per ruling given by the Supreme court. Eg. A road Accident takes place in which vehicles and Machinery or furniture being carries are destroyed. A ship, overweight, is sunk and assets are lostThe receipt in such circumstances are not chargeable to tax under section 45(1A) 48. When Section 45(1A) is not applicable When Insurance compensation is a revenue receipt If two conditions mentioned is not satisfied and insurance compensation is a revenue receipt, then section 45(1A) is not applicable but the receipt may be taxable as trading receipt under section 28 or 56. Eg. Insurance compensation for theft of stock in trade is not taxable under section 45(1A) but it will be taxable as business income under section 28. 49. Format for Calculation of Capital Gain Block of AssetsXXXAdd: Cost of Additional FAXXXLess: Money Payable in respect of assets destroyed (Subject to BOA) Written Down ValueXXX XXXXCurrent year DepreciationXXXDepreciated value of BOAXXXX 50. Format for Calculation of Capital Gain Sales Consideration ( Amount of Compensation)XXXLess: Cost of Acquisition ( As per section 50XXXShort Term Capital GainXX( Section 50 is not applicable if the BOA does not ceases to exist or WDV of Block is not reduced to zero.)Information 51. Restructuring Business An Overview By: CA Shailesh PrajapatiShailesh Prajapati & Associates 52. Meaning Composed of two different words Business RestructuringBusiness includes trade, commerce etc, Restructuring means rearranging the affairs Business Restructuring refers to the process by which the Business enterprises rearrange their affairs Shailesh Prajapati & Associates 53. Reason for Restructuring To acquire competitive strength To vertically integrate Forward or Backward To achieve synergies through consolidation To avail tax related benefits To grow in size To keep pace with changing technologies Timely updation in Business strategies Shailesh Prajapati & Associates 54. Mode of Business Restructuring Amalgamation De-merger Conversion of sole proprietary in to company Conversion of Firm into Company Slump Sale Transfer of Assets between Holding and Subsidiary CompanyShailesh Prajapati & Associates 55. Amalgamation Amalgamation is blending of two or more undertaking into One undertaking Shareholders of each blending company become substantially the shareholders in the company which is to carry on the business of blended undertakings There may be amalgamation either by transfer of two or more undertaking to a new company, or by the transfer to an existing company. Shailesh Prajapati & Associates 56. Meaning under Income Tax Means either merger of one or more companies with another company or the merger of two or more companies to form one company The definition of amalgamation u/s 2(1B) Merger of A Ltd with X Ltd Merger of A Ltd and B Ltd with X Ltd Merger of A and B Ltd in to New Company X Ltd. A Ltd, B Ltd is Amalgamating Co and X Ltd is amalgamated Company Shailesh Prajapati & Associates 57. Conditions All the properties of the amalgamating company immediately before the amalgamation should become the property of the amalgamated company by virtue of the amalgamation. All liabilities of the amalgamating company immediately before the amalgamation should become the liabilities of the amalgamated company by virtue of the amalgamation Shailesh Prajapati & Associates 58. Condition Shareholders holding not less than 3/4th ( in value) of the shares in the amalgamating company ( other than shares already held by the amalgamated company or by its nominee) should become shareholders of the amalgamated company by virtue of amalgamation. For the purpose of the above the share holders may be equity share holders or preference shareholders. Consequently, person holding at least 75% of equity and pref. shares ( in value) in amalgamating company should become the shareholders of amalgamated co. Shailesh Prajapati & Associates 59. Conditions Where A Ltd merges with X ltd., in a scheme of amalgamation, and immediately before the amalgamation, X Ltd held 20% of the shares in A Ltd., the above mentioned condition will be satisfied if shareholders holding not less than3/4th ( in value0 of the remaining 80% of the shares in A Ltd i.e 60% thereof ( x 80), become shareholders of X Ltd, by virtue of the amalgamation. ( Circular No. 5P dated October 9. 1967 ) Shailesh Prajapati & Associates 60. Transaction not treated as Amalgamation Section 2 (IB)- There is no amalgamation though the element of merger exists Where the property of the company which merges is sold to the other company and the merger is a result of a transaction of sale. Where the company which merges is wound up in liquidation and the liquidator distributes its property to the other company.Shailesh Prajapati & Associates 61. Actual Cost and WDV when assets are transferred When Capital Asset (other than a block of asset) is transferred [Expln. 7 to section 43 (1)] Where an asset is transferred, in a scheme of amalgamation, to an Indian company, the actual cost of transferred assets will be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purpose of its own business.Shailesh Prajapati & Associates 62. Actual Cost and WDV when assets are transferred When Block of asset is transferred [Expln. 2 to section 43 (6)] Where in any previous year, any block of assets is transferred in a scheme of amalgamation, then, actual cost of BOA in the case of amalgamated company, shall be the WDV of BOA as in the case of amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said previous year. This rule is however, applicable only if the amalgamated company is an Indian company Shailesh Prajapati & Associates 63. Transfer of Capital Assets When not treated as transfer Transfer of Capital Assets to amalgamated Indian Company [ Section 47 (vi)]: Any Transfer in scheme of amalgamation of capital assets by the amalgamating company to amalgamated company is not taken as transfer if the following conditions are satisfied If the scheme of amalgamation satisfies the conditions of section 2(IB) The amalgamated company is Indian Company.Shailesh Prajapati & Associates 64. Transfer of Capital Assets When not treated as transfer Transfer of shares in an Indian company held by a foreign company to another foreign company in a scheme of amalgamation [ Section 47 (via)]: Shares in an Indian company are held by a foreign company The business of the above foreign company ( including shares mentioned above ) is taken over by another foreign company; At least 25% of the share holders of the amalgamating foreign company continue to remain share holders of the amalgamated foreign company Such transfer does not attract tax on capital gains in the country in which amalgamating company is incorporated. Shailesh Prajapati & Associates 65. Transfer of Capital Assets When not treated as transfer Allotment of shares in amalgamated company to the share holders of amalgamating company [Sections 47 (vii and 49 (2)]: Any transfer by a shareholder in a scheme of amalgamation of shares held by him in the amalgamating company shall not be regarded as transfer if Transfer is made in consideration of allotment to him of shares in the amalgamated company; Amalgamated company is an Indian Company. According to Section 49 (2), the cost of shares of the amalgamating company shall be the cost of shares of the amalgamated company. Shailesh Prajapati & Associates 66. Carry fwd & set off of loss and depreciation- Sec72A Section 72A of the Act deals with the permissibility of and set off of loss and Depreciation in the hands of amalgamated Co. If the following conditions are satisfied, then the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss/depreciation of the amalgamated company for the previous year in which amalgamation is effected Shailesh Prajapati & Associates 67. Carry fwd & set off of loss and depreciation- Sec72A There is an amalgamation of a company owning industrial undertaking, ship or hotel with another company The accumulated losses or depreciation remains unabsorbed for 3 or more years. The amalgamating company has held continuously as on the date of the amalgamation at least 3/4th of the book value of fixed assets held by it two years prior to the date of amalgamation. Shailesh Prajapati & Associates 68. Carry fwd & set off of loss and depreciation- Sec72A The amalgamated company continues to hold at least 3/4th in the book value of the fixed assets of the amalgamating company which is acquired as a result of amalgamation for five years from the effective date of amalgamation. The amalgamated company continues the business of amalgamating company for a minimum five years from the date of amalgamation. Shailesh Prajapati & Associates 69. Carry fwd & set off of loss and depreciation- Sec72A The amalgamated company, which has acquired an industrial undertaking of the amalgamating company by way of amalgamation, shall achieve the level of production of at least 50% of the installed capacity of the said undertaking before the end of 4 years from the date of amalgamation and continue to maintain the said minimum level of production till the end of 5 years from the date of amalgamation. However CG, on an application, may relax this condition. Shailesh Prajapati & Associates 70. Carry fwd & set off of loss and depreciation- Sec72A The amalgamated company shall furnish to AO, a certificate in form No. 62. If the above all the conditions are satisfied, the accumulated Depreciation and Loss shall be deemed to be of amalgamated company for the previous year in which amalgamation is effected. In case the above conditions are not fulfilled, then that part of brought forward of loss and unabsorbed depreciation which has been set off by the amalgamated company shall be treated as the income of the amalgamated company for the year in which the failure to fulfill the conditions occurs. Shailesh Prajapati & Associates 71. Expenditure on Amalgamation- Sec 35DD Where an assessee, being an Indian Company, incurs expenditure, wholly and exclusively for the purpose of amalgamation or de merger, the assessee shall be allowed a deduction equal to one fifth of such expenditure for 5 successive pervious years beginning with the previous year in which amalgamation takes place. Even capital expenses would be available for deduction under section 35DD. Shailesh Prajapati & Associates 72. De- merger Meaning [Section 2 (19AA)]: One division of a company is hived off from the company. The company whose undertaking is transferred pursuant to de-merger is known as de-merged company. The company to which the undertaking is transferred is known as resulting Company. Shailesh Prajapati & Associates 73. De- merger- conditions Entities involved should be companies De-merger is possible between companies only. De-merger of a division of a firm with a company would not to be covered by the definition under the Act although it is permitted under the Companies Act.Section 391 to 394 of the Companies Act should be satisfied It Involves transfer of an division/unit. Shailesh Prajapati & Associates 74. De- merger- conditions All property of the undertaking should be transferred to the resulting company It Includes all assets ( fixed, Current) but does not include miscellaneous expenditure ( like Preliminary expenses, discount allowed o issue of shares and other deferred revenue expenditure) which appears on assets side of a Balance sheet.The resulting company should take over all liabilities of the undertaking. Shailesh Prajapati & Associates 75. De- merger- conditions The Liabilities shall include: The liabilities which arise out of the activities or operations of the undertaking The specific loans or borrowing for the activities or operations of the undertaking If any multipurpose borrowing, the same to be apportioned in the value of the assets transferred in a demerger bears to the total value of the assets of such demerged company immediately before demerger.Shailesh Prajapati & Associates 76. De- merger- conditions Liabilities/properties are to be transferred at book value Shares in the resulting company are issued to the shareholders of de-merged company. The resulting company issues shares to the shareholders of the de-merged company on a proportionate basis as a consideration for de-merger.Shailesh Prajapati & Associates 77. De- merger- conditions Person holding 75% shares in a demerged company to become shareholders in the resulting company. Transfer should be ongoing concern basis. It means the business should be continuing at the time of demerger. Shailesh Prajapati & Associates 78. AC and WDV when assets are transferred in a De-merger When Capital Asset (other than a block of asset) is transferred [Expln.7A to sec 43 (1)] Capital Asset is transferred by the de-merged company to resulting company, the AC of the transferred asset to the resulting company shall be taken to be the same as it would have been if the de-merged company had continued to hold the assets. Such AC shall not exceed the WDV of such capital assets in the hands of de-merged company.Shailesh Prajapati & Associates 79. AC and WDV when assets are transferred in a Demerger When an asset forming part of BOA is transferred [Explns. 2A and 2B to Sec 43 96)] Expln 2A provides that where in any P.Y. any assets forming part of BOA is transferred by a de-merged company to the resulting company, the WDV of the BOA of the de-merged company for the immediately preceding year shall be reduced by the WDV of the assets transferred to the resulting company.Shailesh Prajapati & Associates 80. AC and WDV when assets are transferred in a Demerger Explanation 2B provides that where any assets forming part of a BOA transferred by a de-merged company to the resulting company, the WDV of the BOA in the case of resulting company shall be the WDV of the transferred assets of the de-merged company immediately before the de-merger For the aforesaid purpose, the WDV of the assets transferred by de-merged company shall be determined on the assumption that the assets transferred were the only assets in the block since their acquisition Shailesh Prajapati & Associates 81. De-merger vis-a vis CG The following are not treated as transfer by virtue of Section 47 Any transfer in a de-merger of a capital assets by demerged company to a resulting company provided that resulting company is an Indian Company [Sec 47 (vib)] Any transfer of shares held in an Indian company by a demerged foreign company to the resulting foreign company if the certain conditions are satisfied:Shailesh Prajapati & Associates 82. De-merger vis-a vis CG The shareholders holding not less than 3/4th in value of shares of the de-merged foreign company continue to remain shareholders of the resulting foreign company and Such transfer does not attract tax on capital gain in the country, in which the de-merged foreign company is incorporated. [ Section 47(ic)] Any transfer or issue of shares by the resulting company in a scheme of de-merger to the shareholders of the de-merged company if the transfer or issue is made in consideration of the de-merger of the undertaking [Section 47 (id)] Shailesh Prajapati & Associates 83. Cost of Acquisition of shares in a Resulting Company COA of shares in the resulting company shall be the amount which bears to the COA of shares held by the assessee in the de-merged company the same proportion as the NBV of the assets transferred in a de-merger bears to the Net worth of the de-merged company immediately before such de-merger. Net worth means the aggregate of the paid up share capital and Gen Reserves as appearing in the books of account of the de-merged company immediately before the de-merger. Shailesh Prajapati & Associates 84. Cost of Acquisition of shares in a Resulting Company Following should be noted: To find out whether or not shares in the resulting company are long term capital asset, the period of holding shall be determined from the date of acquisition of shares in the de merged company. The indexation will start from the date of allotment of shares in the resulting company Shailesh Prajapati & Associates 85. Expenditure on De-merger Where an assessee, being an Indian Company, incurs expenditure, wholly and exclusively for the purpose of amalgamation or de-merger, the assessee shall be allowed a deduction equal to one fifth of such expenditure for 5 successive pervious years beginning with the previous year in which amalgamation takes place. Even capital expenses would be available for deduction under section 35DD. Shailesh Prajapati & Associates 86. Carry forward and set- off of Losses/Depreciation The accumulated loss and unabsorbed depreciation of the de-merged company will be allowed to be carried forward and set off in the hands of resulting company. If the loss/depreciation is directly relatable to the undertaking transferred to the resulting company, then such loss/depreciation shall be allowed to be carried forward in the hands of the resulting company. Shailesh Prajapati & Associates 87. Carry forward and set- off of Losses/Depreciation Where however such loss or unabsorbed depreciation is not directly relatable to the undertaking transferred to the resulting company, it will be apportioned between the DC and RC in the same proportion in which the assets of the undertaking have been retained by the DC and transferred to the RC, and it will be allowed to be carried forward and set off in the hands of the DC or the RC, as the case may be.Shailesh Prajapati & Associates 88. Conversion of Sole Proprietary into Company If the following conditions are satisfied, then transfer of capital assets in case of conversion of sole proprietary business into Company is not chargeable to tax by virtue of sec 47 (xiv) All Assets and Liabilities of the sole proprietary concern relating to the business immediately before the succession shall become the assets and liabilities of the company.Shailesh Prajapati & Associates 89. Conversion of Sole Proprietary into Company The shareholding of the sole proprietor in the company is not less than 50% of the total voting power in the company and the shareholding shall continue to so remain for a period of five years from the date of succession. The sole proprietor does not receive any consideration or benefit directly or indirectly, in any form or manner other than by way of allotment of shares in the company.Shailesh Prajapati & Associates 90. Conversion of Firm into Company If the following conditions are satisfied, then transfer of capital assets in case of conversion of Firm into Company is not chargeable to tax by virtue of [Section 47(xiii)] All Assets and Liabilities of the Firm relating to the business immediately before the succession shall become the assets and liabilities of the company.Shailesh Prajapati & Associates 91. Conversion of Firm into Company All the partners of the firm immediately before the succession become the shareholders of the company in he same proportion in which their capital account stood in the books of the firm on the date of succession. The partners of the firm do not receive any consideration or benefit directly or indirectly, in any form or manner other than by way of allotment of shares in the company andShailesh Prajapati & Associates 92. Conversion of Firm into Company The aggregate of the share holding in the company of the partners of the firm is not less than 50% of the total voting power in the company and their share holding continues to be as such for a period of five years from the date of succession. If after conversion, any of the conditions of section 47(xiii)/(xiv) are not satisfied, then capital gain ( which was not taxed earlier) will become chargeable to tax in the hands of company. Shailesh Prajapati & Associates 93. Set off and Carried fwd of Loss of PC/Firm by Company The accumulated loss and the unabsorbed depreciation of the predecessor firm or proprietary concern, as the case may be, shall be deemed to be the loss/unabsorbed depreciation of the successor company for the previous year in which business reorganization was effected. When conditions of sections 47(xiii)/(xiv) are not complied with, the set off of loss or allowance of depreciation in the hands of he successor company shall be deemed to be the income of the company chargeable to tax in the year in which such conditions are not complied with. Shailesh Prajapati & Associates 94. Slump Sale Definition: Slump sale means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. [Section 2 (42C)] Conditions: The Tax payer should own an undertaking ( division/unit) He transfers the undertaking by way of sale The transfer is for lump sum consideration without assigning values to individual assets and liabilities. Shailesh Prajapati & Associates 95. WDV in the hands of transferor WDV of a Block of Assets shall be determined as follows, in the case of slump sale Find out Depreciated value of Block on the first day of the previous year Add: Actual Cost of the assets acquired during the previous year Less : Money received/receivable in respect of assets sold/discarded/demolished during the year.Shailesh Prajapati & Associates 96. Capital Gain in case of Slump Sale ( Section 50B) Long Term Capital Gain if assets transferred >36 months Short Term Capital Gain if assets transferred