Library / Income-tax Act, 2025: The Professional's Master Guide

30. Mergers and Acquisitions

Most restructurings in India can be done in a tax-neutral way if the conditions in the Act are met. The skill lies in knowing those conditions and checking them before the scheme is filed with the Tribunal. This chapter covers the main routes and their tax effects.

30.1 Choosing the route

Route	Tax on seller or transferor	Buyer's position	Losses	Stamp duty
Amalgamation (merger)	Neutral if conditions met	Assets at transferor's tax values	Can carry over if section 116 met	As per state law on order
Demerger	Neutral if conditions met	Assets at book values of transferor	Proportionate carry over	As per state law
Slump sale	Capital gains on lump sum less net worth	Allocate price to assets; no goodwill depreciation	Stay with seller	On asset transfer
Itemised asset sale	Gains asset by asset; business income on stock	Cost = price paid	Stay with seller	On each asset
Share acquisition	Capital gains to shareholders	Company continues; tax history comes along	At risk under section 119	On shares only

30.2 Amalgamation: meaning and tax neutrality

Amalgamation is defined in section 2 of the Act. A merger qualifies only if (a) all property and all liabilities of the amalgamating company become those of the amalgamated company, and (b) shareholders holding at least three fourths in value of the shares of the amalgamating company (other than shares already held by the amalgamated company) become shareholders of the amalgamated company.

Tax effect	Section	Result
Transfer of assets by amalgamating company to Indian amalgamated company	70 (old 47(vi))	Not a transfer, no capital gains
Shareholder gets shares of amalgamated company in exchange	70 (old 47(vii))	Not a transfer if consideration is only shares (cash for fractions allowed)
Cost and holding period of new shares	73	Cost and period of old shares carried over
Depreciation in year of amalgamation	33	Split between the two companies by number of days
Actual cost and WDV of assets	39, 41	Same as in amalgamating company's hands
Unamortised deductions (35D, 35DDA etc.)	Relevant sections	Continue in amalgamated company
Expenses of amalgamation	52 (old 35DD)	1/5 each year for 5 years
Brought forward losses	116 (old 72A)	Allowed only if conditions met; see below

Illustration 106: Shareholder in a merger

Mr. Iyer holds shares of Alpha Ltd. bought in 2019 for Rs. 10 lakh. On 1 October 2026, Alpha merges into Beta Ltd. and he receives Beta shares worth Rs. 25 lakh. No tax on the exchange. He sells the Beta shares in 2027 for Rs. 30 lakh. Cost is Rs. 10 lakh and the holding period runs from 2019, so LTCG = Rs. 20 lakh.

Illustration 107: Depreciation split

Alpha Ltd. merges into Beta Ltd. with the appointed date 1 October 2026. Depreciation on Alpha's assets for the full year would be Rs. 20,00,000. Alpha gets 183/365 = Rs. 10,02,740 (1 April to 30 September) and Beta gets 182/365 = Rs. 9,97,260.

30.3 Carry forward of losses in amalgamation (section 116)

Accumulated loss and unabsorbed depreciation of the amalgamating company are treated as the loss of the amalgamated company only if:

The amalgamating company owns an industrial undertaking, a ship, a hotel, or is a banking company or specified public sector entity.
It has been in the business in which the loss arose for 3 or more years and has held at least three fourths of the book value of fixed assets held two years before the amalgamation, continuously till the date of amalgamation.
The amalgamated company holds at least three fourths of the book value of those fixed assets for 5 years and continues the business for 5 years, and meets the conditions in the Rules (including the revival certificate, Form 29, old Form 62).
For amalgamations effective on or after 1 April 2025, the loss can be carried forward only for the remaining period of the original 8 years, counted from the year the loss first arose.

Illustration 108: Remaining life of a loss

Alpha Ltd. incurred a business loss of Rs. 8 crore in Tax Year 2021-22 and merges into Beta Ltd. on 1 April 2026. Conditions of section 116 are met. Beta can set off the loss only up to Tax Year 2029-30 (8 years after 2021-22), not 8 fresh years from the merger. If Beta sells more than one fourth of Alpha's fixed assets within 5 years, the loss already set off is taxed as income in the year of breach.

30.4 Demerger

A demerger is tax-neutral if, among other conditions: all property and liabilities of the undertaking are transferred at book values; the resulting company issues shares to shareholders of the demerged company proportionately; shareholders holding at least three fourths in value of the demerged company's shares become shareholders of the resulting company; the undertaking is transferred as a going concern; and the scheme is under sections 230 to 232 of the Companies Act, 2013. The definition refers to sections 230 to 232 and not to section 233 (fast track), so whether a fast track demerger qualifies should be examined before relying on it.

Effect	Result
Transfer of undertaking	Not a transfer for capital gains
Shares issued by resulting company to shareholders	Not a transfer; not dividend
Cost of shares in resulting company	Cost of original shares x (net book value of undertaking transferred / net worth of demerged company before demerger)
Cost of shares in demerged company	Original cost less cost allocated above
Losses	Directly related to the undertaking go to the resulting company; common losses apportioned by assets

Illustration 109: Cost split on demerger

Neha holds shares of Delta Ltd. costing Rs. 10 lakh. Delta demerges its retail undertaking to Retailco Ltd. The net book value of the retail undertaking is 40% of Delta's net worth. Cost of Retailco shares = 40% x 10 lakh = Rs. 4 lakh. Revised cost of Delta shares = Rs. 6 lakh. Holding period of Retailco shares includes the period she held Delta shares.

30.5 Slump sale (section 77, old 50B)

A slump sale is the transfer of one or more undertakings for a lump sum consideration without assigning values to individual assets and liabilities. The gain is taxed as capital gains.

Cost = net worth of the undertaking: tax WDV of depreciable assets, book value of other assets (ignoring revaluation), less book value of liabilities. Goodwill that was not purchased is valued at nil.
Sale value = higher of actual consideration and the FMV computed under the Rules.
Long-term if the undertaking was held for more than 36 months, taxed at 12.5% without indexation; otherwise short-term at normal rates.
An accountant's report on net worth must be obtained and filed at least one month before the return due date.

Illustration 110: Slump sale

Orbit Ltd. sells its engineering division, held for 8 years, for Rs. 50 crore. Net worth of the division as computed above is Rs. 30 crore; FMV under the Rules is Rs. 48 crore, so actual consideration is used. LTCG = Rs. 20 crore. Tax at 12.5% = Rs. 2.5 crore, plus 12% surcharge and 4% cess = Rs. 2.912 crore (company in the normal regime).

Key point

A "slump exchange", where the consideration is paid in shares instead of cash, is also treated as a transfer under section 77. Do not assume it is tax-neutral.

30.6 Conversion into LLP or company

Conversion of a firm into a company, or of a private or unlisted company into an LLP, is not a transfer if the conditions in section 70 are met. For company to LLP conversion, broadly: all assets and liabilities pass to the LLP, all shareholders become partners in the same ratio, no consideration other than profit share and capital, shareholders hold at least 50% of profit share for 5 years, turnover did not exceed Rs. 60 lakh and total assets did not exceed Rs. 5 crore in any of the preceding three years, and no amount is paid to partners out of accumulated profits for 3 years. If conditions are later breached, the exempted gain becomes taxable.

30.7 Share acquisitions: points for the buyer and seller

Seller: capital gains at 12.5% (long-term) or normal rates. For unlisted shares, sale value cannot be below the FMV in the Rules (section 79).
Buyer: if shares are bought below FMV, the difference above Rs. 50,000 is taxable as other income in the buyer's hands (section 92).
Non-resident seller: the buyer must withhold tax under section 393(2) at the applicable rate or the treaty rate, obtain Forms 145 and 146 (old 15CA and 15CB), and may apply for a lower withholding certificate under section 395.
Losses: check the 51% continuity test (section 119). A change in control can wipe out losses.
Indirect transfers: shares of a foreign company that derive substantial value from Indian assets are taxable in India under section 9 and Schedule I.
Warranties and escrow: keep tax indemnities for pre-closing periods, since reassessment can go back up to 5 years in large cases.

Illustration 111: Buying from a non-resident

A UK company sells 100% of an Indian private company to an Indian buyer for Rs. 200 crore. Its cost was Rs. 120 crore and it held the shares for 6 years. LTCG = Rs. 80 crore. Under the India-UK treaty, gains on shares of an Indian company are taxable in India. The buyer withholds tax at 12.5% plus surcharge and cess on the gain (not on the full price, if a lower withholding certificate under section 395 or a properly computed gain is used), deposits it, and issues the TDS certificate.

Practice note

Prepare a tax due diligence checklist for every acquisition: pending assessments and demands, TDS defaults, section 37 MSME exposure, transfer pricing adjustments, loss continuity, GST and stamp duty. Most post-deal disputes start from items that were in the files but not read.

30.8 Tax due diligence: what to review

Area	Key checks
Income tax assessments	Status for the last 6 to 10 years; pending notices, demands, appeals; reassessment exposure; search history
TDS and TCS	Defaults, short deductions, interest, section 35 disallowances, characterisation of payments (contractor vs professional)
Transfer pricing	Adjustments in past years, secondary adjustment status, APAs, documentation quality
Losses and MAT credit	Quantum, expiry dates, section 119 continuity, MAT credit usability after Finance Act 2026
Incentives	Tax holidays, section 140 or 146 claims and their conditions, SEZ compliance
Indirect taxes	GST, customs and stamp duty exposures, though outside this guide
Related party transactions	Section 36 exposure, deemed dividends, loans to promoters
Structure	Holding structure, treaty eligibility of foreign holding companies, GAAR risk

Findings feed into the price (a reduction for quantified exposures), the share purchase agreement (specific indemnities and escrow), and the post-deal integration plan.

30.9 Tax-neutral routes: conditions checklist

Route	Key conditions for tax neutrality
Amalgamation	All assets and liabilities transferred; 75% in value of shareholders become shareholders of amalgamated company; amalgamated company is Indian
Demerger	All assets and liabilities of the undertaking transferred at book value; shares issued proportionately; 75% in value of shareholders become shareholders; going concern; scheme under sections 230 to 232
Transfer between holding and wholly owned Indian subsidiary	Holding company owns 100% of subsidiary; asset not stock-in-trade; conditions to continue for 8 years, failing which exemption withdrawn
Conversion of firm to company	All assets and liabilities transferred; all partners become shareholders in the same proportion; partners hold at least 50% of voting power for 5 years; consideration only by way of shares
Conversion of company to LLP	Turnover up to Rs. 60 lakh and total assets up to Rs. 5 crore in each of the three preceding years; all shareholders become partners in the same proportion; at least 50% profit share for 5 years; no payment out of accumulated profits for 3 years
Share swap in amalgamation of foreign companies	Transfer of shares of an Indian company by the amalgamating foreign company is not a transfer if 25% of shareholders continue and the foreign country does not tax the gain

30.10 Merger step by step: timeline and tax actions

Stage	Tax actions
Structuring	Choose route; model tax on each party; check loss carry forward conditions; GAAR and commercial rationale note
Board approval and filing with the Tribunal	Notice of the scheme is given to the income tax department, which may file objections
Appointed date	Date from which the scheme takes effect for accounting and tax; the amalgamated company files returns including the amalgamating company's income from the appointed date
Effective date (Tribunal order filed)	Returns already filed for the period after the appointed date may need to be revised; the Act allows a modified return within 6 months of the end of the month of the order
Post merger	Transfer PAN and TAN related compliances; claim TDS credit of the amalgamating company; file Form 29 (old 62) where losses are claimed; update registrations

Judicial view: Assessment on a non-existent company

PCIT v. Maruti Suzuki India Ltd. (Supreme Court, 2019): an assessment order passed in the name of an amalgamating company that had ceased to exist on amalgamation was held void, even though the department knew of the merger. After a merger is effective, notices and orders must be in the name of the amalgamated company.

Judicial view: Appointed date

Marshall Sons and Co. (India) Ltd. v. ITO (Supreme Court, 1997): a scheme of amalgamation sanctioned by the court takes effect from the transfer (appointed) date specified in the scheme, and income from that date is to be assessed in the hands of the amalgamated company.

30.11 Valuation for tax purposes

Several provisions require a fair market value under the Rules: section 79 (sale of unquoted shares below FMV), section 92 (receipt of shares below FMV), section 77 (slump sale), section 8 (assets distributed by firms), and transfer pricing. The Rules prescribe methods such as net asset value for unquoted equity shares (with adjustments for immovable property at stamp value and jewellery and art at their FMV) and permit certain other methods backed by a valuer's report in specified cases.

Illustration 112: Unquoted shares below FMV

Prakash sells 10,000 unquoted shares of a private company to his friend at Rs. 100 per share. The FMV under the Rules is Rs. 180. Seller: sale value taken at Rs. 180 x 10,000 = Rs. 18 lakh under section 79. Buyer: difference of Rs. 8 lakh (above Rs. 50,000) is taxable as other income under section 92. The same transaction is taxed at FMV on both sides.

30.12 Deferred and contingent consideration

In many deals part of the price is paid later, or depends on future performance (earn outs). Capital gains accrue in the year of transfer on the full consideration that has accrued, even if not received. Contingent amounts that have not accrued are taxed only when they become payable. If an amount already taxed is not received, the seller may face difficulty claiming a reduction; it is better to structure contingent consideration so that it accrues only on the happening of the event.

Illustration 113: Earn out

A founder sells shares in January 2027 for Rs. 20 crore upfront plus an earn out of up to Rs. 5 crore payable in 2028 if revenue targets are met. Capital gain in Tax Year 2026-27 is computed on Rs. 20 crore. If Rs. 3 crore is paid in 2028 on meeting targets, it is taxed when it accrues. The buyer deducts TDS on each payment where required (for non-resident sellers).

30.13 Business transfer vs slump sale: practical comparison

Point	Slump sale	Itemised sale
Tax on seller	One capital gain on net worth basis; long-term if undertaking held above 36 months	Gain or loss asset by asset; stock gives business income; depreciable assets reduce blocks
Buyer's tax cost	Price allocated to assets as per valuation; goodwill not depreciable	Cost is the price paid for each asset
GST	Transfer of business as a going concern is generally exempt	GST on movable assets
Stamp duty	On the conveyance, depending on state law and assets	On each conveyance
Losses of the seller	Stay with seller	Stay with seller

30.14 Carry forward of MAT credit and unabsorbed depreciation in mergers

MAT credit of an amalgamating company is not expressly provided to pass to the amalgamated company in all cases; the position has been debated in tribunals. Unabsorbed depreciation and losses pass only under section 116. Where section 116 conditions cannot be met (for example, the amalgamating company is a service company, not an industrial undertaking), the losses lapse, which should be factored into the decision to merge rather than, say, to transfer the business of the profitable company into the loss company.

30.15 Indirect transfers

Transfer of shares of a foreign company is taxed in India if the shares derive their value substantially from assets in India. "Substantially" means the Indian assets exceed Rs. 10 crore and represent at least 50% of the value of all assets of the foreign company. Small shareholders (not holding control and less than 5% of voting power or capital) are exempt. Reporting obligations apply to the Indian entity whose shares are indirectly transferred.

Judicial view: Background to indirect transfer taxation

Vodafone International Holdings B.V. v. Union of India (Supreme Court, 2012): the transfer of shares of a Cayman Islands company that indirectly held an Indian telecom business was held not taxable in India under the law then in force. Parliament responded with retrospective provisions deeming such transfers taxable; the retrospective demands were withdrawn by the Taxation Laws (Amendment) Act, 2021, while the prospective rules on indirect transfers continue.

Illustration 114: Indirect transfer

A Singapore company owns 100% of an Indian subsidiary worth Rs. 400 crore, which forms 80% of the Singapore company's assets. A US buyer acquires the Singapore company's shares from its Dutch parent. The shares derive substantial value from India, so the gain attributable to the Indian assets is taxable in India, subject to any treaty protection. The Indian subsidiary must report the transaction within the prescribed time.

30.16 Cross-border mergers

Mergers between Indian and foreign companies are allowed under the Companies Act and the FEMA cross-border merger regulations. The tax position differs by direction:

Type	Tax treatment
Inbound (foreign company merges into an Indian company)	Can be tax-neutral under section 70 if the amalgamated company is Indian and the definition of amalgamation is met. Losses of the foreign company generally do not carry over
Outbound (Indian company merges into a foreign company)	The amalgamated company is not Indian, so the section 70 exemption for the transfer of assets is not available; the Indian company and its shareholders may be taxed. Such mergers are rare for this reason
Merger of two foreign companies holding Indian shares	Transfer of shares of an Indian company is exempt if at least 25% of the shareholders of the amalgamating foreign company continue in the amalgamated company and the gain is not taxable in the foreign country

30.17 A merger decision: where do the losses sit?

Illustration 115: Merging a loss-making sister company

Prime Ltd. is profitable. Its sister company Loss Ltd., a software services business (not an industrial undertaking), has accumulated losses of Rs. 20 crore. The group wants one entity.

Option 1: Loss Ltd. merges into Prime Ltd. Section 116 allows carry forward only for industrial undertakings, ships, hotels and certain banks. Loss Ltd. is a service company, so its losses lapse. Tax value lost at 25.168% = about Rs. 5.03 crore.

Option 2: Prime Ltd. merges into Loss Ltd. (reverse merger). Loss Ltd. survives, so its losses remain its own. But: (a) if Prime's shareholders receive more than 49% of Loss Ltd.'s voting shares and Loss Ltd. is closely held, section 119 extinguishes the losses; (b) GAAR may be examined if the main purpose is to use losses.

Conclusion: the structure must be tested against sections 116 and 119, and the commercial reasons documented. Often the value of losses is lower than it first appears.

30.18 Merger of a subsidiary into its holding company

Where a wholly owned subsidiary merges into its parent, the parent cancels its investment in the subsidiary's shares and issues no new shares. The condition that shareholders holding 75% in value become shareholders of the amalgamated company does not apply to shares already held by the amalgamated company. The transfer of assets is tax-neutral. The difference between the cost of investment and the net assets taken over is an accounting matter (capital reserve or goodwill) and has no tax effect; goodwill arising is not depreciable.

Chapter summary

• Amalgamation and demerger are tax-neutral if the definitions and conditions are met.

• Losses carry forward only under section 116 and only for the remaining original period.

• Slump sale is taxed on consideration less net worth; long-term after 36 months.

• Share deals must consider section 79, section 92, section 119 and withholding for non-resident sellers.

• Indirect transfers of foreign shares deriving value from India are taxable.

PART F: INTERNATIONAL TAXATION

Non-residents, treaties, withholding, foreign tax credit, transfer pricing and anti-avoidance

Cross-border income raises questions of source, residence, treaties and pricing between related parties. This part explains how non-residents are taxed, how treaties and withholding work, the position of NRIs, transfer pricing in practice, and the anti-avoidance rules that sit on top.