Regarding AS 22

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C.A. LINESH PATIL (Querist)
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28 July 2010 Whether purchasing company can create DTA in case of amalgamation where selling company has losses.and purchasing company has virtual certainty.let me know the treatment under both the method of amalgamation.also refer ASI 11 issued by ICAI.

Thanks in advance

srinath

srinath (Expert)
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28 July 2010 if it is the case of merger the following should be done
a. at the time of acqusition no DTAA should be provided
b. if conditions are favourable at the time of first balance sheet date after amalgamation DTA should be created by adjusting against revenue reserves
c. if after first date of balance sheet then by adjusting P&L

if it is purchase the following should be done
a. if it is recorded at fair value and condtions are favourable at the time of acquisition then it should be given effect by adjusting goodwil or capital reserve
b. if assets are recorded at the existing value no recognition at the time of acquisition
c. if conditions are favourable at the time of first balance sheet date after amalgamation then it should be recognised by adjusting goodwill or cpital reserve
d. anytime after that then P&L

C.A. LINESH PATIL

C.A. LINESH PATIL (Querist)
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28 July 2010 but sir income tax only recognize merger method and losses of selling company can be set off in case of merger only.
so how in case of purchase DTA can be created.as Income tax does not allow losses to be set off of selling company in case of purchase and this will lead to permanent difference hence how DTA created.

please reply
Thanks

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srinath

srinath (Expert)
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28 July 2010 wen u record the assets and liabilities of a company at fair value it is amalagamation in nature of purchase..it is not prohibited in IT act.

shareholders holding 90% of the shares should become shareholders as per AS-14. but in IT act 75% is sufficient.

there is quite a few diff between the amalgamation in nature of merger and amalgamation as per IT act

C.A. LINESH PATIL

C.A. LINESH PATIL (Querist)
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29 July 2010 but as per explanation 7 to section 43 under income tax all assets and liabilities has to be booked at book value.so how we can book at fair value and called it in the nature of purchase as u sad.also go through this link.
http://www.bcasonline.org/articles/artin.asp?431

Thanks

srinath

srinath (Expert)
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29 July 2010 section 43 is for claiming depreciation... if u book at fair value den i think dep wil be given at book value only and not fair value <br> but nothing prohibits to book at fair value. if u could go through the definition of amalgamation u wil understand it clear..

C.A. LINESH PATIL

C.A. LINESH PATIL (Querist)
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29 July 2010 Depreciation can only be claimed at book value only.there is no benefit to company by booking assets at fair value under income tax Act.also i read one article on the same which says income tax excludes the purchase method.
wording are as follows also i have given you the link of same.

The Accounting Standard issued by the Institute of Chartered Accountants of India (AS-14) deals with two types of amalgamation — amalgamation in the nature of merger and amalgamation in the nature of purchase. The Income-tax Act specifically excludes the second type of amalgamation from its ambit and it is not recognised as amalgamation for tax purposes. The accounting treatment for amalgamation by way of merger is the same as prescribed under the Income-tax Act with further refinements. Thus, all assets and liabilities of the amalgamating companies become the assets and liabilities of the amalgamated company and they are carried at book values in the financial statements. Whereas AS-14 requires 90% of the shareholders of the amalgamating companies to become shareholders of the amalgamated company the Income-tax Act has lowered this percentage from 90 to 75 w.e.f. 1.4.2000. The consideration for the amalgamation receivable by shareholders of the amalgamating companies will be discharged by the amalgamated company by issue of equity shares of the latter.
Thanks

srinath

srinath (Expert)
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30 July 2010 my dear i accept ur argument for fixed assets... nothing prohibits in income tax act to carry debtors stock at fair value.. there is no prohibition for carrying liabilities at fair value <br> and 75% is huge difference from 90%. if u could imagine a company like reliance getting approval from 90% of share holding is difficult <br> and the shareholders need not necessarily get shares in income tax act. the only disadvantage is that it would be capital gain in the hands of shareholders and nothing prohibits this in income tax act

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C.A. LINESH PATIL

C.A. LINESH PATIL (Querist)
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30 July 2010 sir debtor cant be book at fair value.debtor always booked at value which has to be realized frm them.there is no concept of fair and book value concept for debtor.it has to booked at transaction amount with customer and for bad debts or discount only it is set off.
and so far stock is concern under income tax it has to be booked as per commercial accounting practices which is mentioned under AS 2.
thanks

i know ur answer was based on ASI 11 by ICAI but now there is no ASI 11 on institute site i dont no why whther they hav withdrawn it or what.
also i could nt understand the logic behind the treatment given under ASI 11
everybody told me except u that there is only amalgamation in the nature og merger under TAx law

i m geting very confuse please help me
Thanks