15 October 2011
we are a group of companies wherein our two undertakings are loss making unit. we are desirous to merger the two units in our one profi making unit so that we can get the advantage of merger from taxation point of view. the two loss making cos. are engaged in business since last two years and the amt. of unabsorbed loss and depreciation is Rs. 3.5 crores.wat will be the effect of such unabsorbed loss in the amalgamated company? pls advise if any other tax planning suggestions in this regard.
15 October 2011
ONLY NON SPECULATIVE BUSINESS LOSS CAN BE CARRY FORWARD OR SET OFF U/S 72 FROM THE YEAR IN WHICH AMALAGAMATION OR MERGER TAKES PLACE.....LOSS CAN BE CARRY FORWARD BY AMALAGAMATING COMAPNY
15 October 2011
thts true bt there is a condition tht the amalgamating company should be engaged in busuness for not less than 3 years before the date of amalgamation
03 August 2024
When dealing with the merger of loss-making units into a profit-making unit, particularly from a tax perspective, it's important to understand the implications of carrying forward unabsorbed losses and depreciation. Here’s a detailed guide on the effects of such a merger and possible tax planning suggestions:
### 1. **Unabsorbed Losses and Depreciation**
**a. **Carry Forward of Losses and Depreciation:**
- **Tax Benefits:** Under the Income Tax Act, 1961, unabsorbed business losses and depreciation of the merging companies can be carried forward and set off against the profits of the amalgamated company. This can provide significant tax relief by offsetting the future taxable income of the profit-making unit.
- **Conditions:** - **Three-Year Requirement:** As you mentioned, one of the conditions for carrying forward and setting off losses and depreciation is that the amalgamating companies must have been in business for at least three years before the date of amalgamation. This condition is specified in Section 72A of the Income Tax Act, which governs the carry-forward and set-off of losses in case of amalgamation. - **Form 3CEB:** Ensure compliance with the transfer pricing regulations if applicable, and file Form 3CEB for disclosure of the merger.
**b. **Eligibility for Carry Forward:**
- **Tax Filing:** Ensure that all tax returns of the merging companies are filed up-to-date before the merger. Unabsorbed losses and depreciation must be carried forward in the tax records of the merging companies. - **Certification:** Obtain a certificate from a chartered accountant confirming the availability of unabsorbed losses and depreciation, and that the companies have been in business for the required period.
### 2. **Procedural Steps for Merger**
**a. **Merging Process:**
- **Board and Shareholders’ Approval:** Obtain approval from the board of directors and shareholders of the merging and amalgamated companies for the merger. - **Scheme of Amalgamation:** Prepare and file a scheme of amalgamation with the National Company Law Tribunal (NCLT) and obtain approval. - **Legal Compliance:** Follow all legal requirements for the merger, including filing with the Registrar of Companies (ROC).
**b. **Post-Merger Compliance:**
- **Amalgamated Company:** Ensure that the amalgamated company complies with all requirements under the Income Tax Act, including the set-off of unabsorbed losses and depreciation. - **Records:** Maintain detailed records and documentation of the merger, including the unabsorbed losses and depreciation that are carried forward.
### 3. **Tax Planning Suggestions**
**a. **Optimizing Losses:**
- **Carry Forward Losses:** Ensure that the losses and depreciation of the merging units are utilized effectively against the future profits of the amalgamated company. - **Tax Incentives:** Explore other tax incentives and deductions available under the Income Tax Act to optimize tax savings post-merger.
**b. **Other Tax Planning Criteria:**
- **Revaluation of Assets:** Consider revaluation of assets if applicable, to reflect their fair value in the books of the amalgamated company. - **Transfer Pricing:** Ensure compliance with transfer pricing regulations if there are inter-company transactions involved in the merger. - **Legal and Tax Advice:** Engage with legal and tax advisors to structure the merger in a way that maximizes tax benefits and ensures compliance with all regulations.
**c. **Alternative Tax Planning Strategies:**
- **Asset Sale:** If the merging units are not eligible for tax benefits due to the three-year requirement, consider asset sale or restructuring options where unabsorbed losses and depreciation might still be beneficial. - **Strategic Alliances:** Explore strategic alliances or joint ventures that might provide tax benefits without the need for a formal merger.
### Summary
1. **Unabsorbed Losses and Depreciation:** The amalgamated company can carry forward and set off unabsorbed losses and depreciation from the merging companies, provided the merging companies meet the three-year business requirement.
2. **Tax Planning Suggestions:** Utilize all available tax benefits, ensure compliance with tax and legal requirements, and consider alternative tax planning strategies if the three-year requirement poses a challenge.
It is crucial to consult with tax professionals and legal advisors to ensure that all regulatory requirements are met and to optimize the tax benefits from the merger.
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