Amalgamation represents one of the most tax-efficient corporate restructuring mechanisms available under Indian tax law, offering substantial reliefs and benefits to all parties involved in the transaction. The Income Tax Act, 1961 provides a comprehensive framework of tax incentives designed to facilitate genuine business consolidation while preventing abuse of these provisions
Tax Reliefs and Benefits Available in Amalgamation under Indian Tax Law
Definition and Legal Framework of Amalgamation
Under Section 2(1B) of the Income Tax Act, 1961, amalgamation is defined as the merger of one or more companies with another company or the merger of two or more companies to form one company, subject to specific conditions. The definition requires that all property and liabilities of the amalgamating company become those of the amalgamated company, and shareholders holding not less than three-fourths in value of shares in the amalgamating company must become shareholders of the amalgamated company.
This legal framework distinguishes amalgamation from other forms of corporate restructuring and establishes the foundation for tax-neutral treatment. The Supreme Court has clarified that amalgamation becomes effective from the “Appointed Date” specified in the court-approved scheme, not the effective date when regulatory approvals are completed
Tax Benefits for Amalgamating Companies
Capital Gains Tax Exemption under Section 47(vi)
The most significant benefit for amalgamating companies is the complete exemption from capital gains tax on the transfer of assets to the amalgamated company. Under Section 47(vi), any transfer of capital assets by the amalgamating company to an Indian amalgamated company is not regarded as a “transfer” for capital gains purposes, effectively eliminating what could otherwise be a substantial tax liability.
International Restructuring Benefits under Section 47(via)
For cross-border amalgamations involving foreign companies, Section 47(via) provides capital gains exemption when shares of an Indian company held by an amalgamating foreign company are transferred to an amalgamated foreign company. This exemption applies if at least 25% of shareholders of the amalgamating foreign company continue as shareholders of the amalgamated foreign company and the transfer does not attract capital gains tax in the country where the amalgamating company is incorporated.
Tax Benefits for Shareholders of Amalgamating Companies
Share Exchange Exemption under Section 47(vii)
Shareholders of amalgamating companies receive comprehensive capital gains tax exemption under Section 47(vii) when they exchange their shares for shares in the amalgamated company. This exemption applies provided the transfer is made in consideration of allotment of shares in the amalgamated company and the amalgamated company is an Indian company.
The cost of acquisition and period of holding of the original shares are preserved for the new shares received, ensuring continuity of tax attributes for shareholders. However, this exemption is available only when shareholders receive shares as consideration – any cash, debentures, or bonds received would be taxable.
Key Conditions for Tax Benefits in Amalgamation under Indian Income Tax Act
Tax Benefits for Amalgamated Companies
Carry Forward of Losses under Section 72A
The amalgamated company can carry forward and set off accumulated losses and unabsorbed depreciation of the amalgamating company under Section 72A, subject to stringent conditions. This provision applies to amalgamations involving:
• Companies owning industrial undertakings, ships, or hotels
• Banking companies with specified banks
• Public sector companies engaged in aircraft operations
Key Conditions for Section 72A Benefits
The amalgamated company must satisfy several conditions to avail loss carryforward benefits:
1. Business Continuity: The amalgamating company must have been engaged in the business where losses occurred for three or more years
2. Asset Holding: Continuous holding of at least three-fourths book value of fixed assets for two years prior to amalgamation
3. Post-Amalgamation Requirements: Continue the business for minimum five years and hold at least three-fourths of acquired fixed assets for five years
4. Capacity Utilization: Achieve at least 50% of installed capacity by the fourth year and maintain it through the fifth year
Critical 2025 Budget Reforms
The Finance Bill 2025 introduced significant amendments to Sections 72A and 72AA, fundamentally changing the loss carryforward mechanism. Previously, amalgamated companies could carry forward losses for a fresh eight-year period from the amalgamation date, potentially allowing indefinite extension of tax benefits through successive amalgamations.
Under the new provisions effective April 1, 2025, accumulated losses can only be carried forward for the remaining period within the original eight-year window from when losses were first computed by the predecessor entity. This change prevents the “evergreening” of losses and aligns with Section 72’s standard eight-year limitation.
Indirect Tax Benefits and Compliance
GST Treatment of Amalgamation
Amalgamation transactions benefit from favorable GST treatment as business transfers on a “going concern” basis are not considered taxable supplies. Under Section 18(3) of the CGST Act, amalgamated companies can transfer unutilized Input Tax Credit (ITC) from the amalgamating company, ensuring continuity of tax benefits.
Recent judicial developments have confirmed that ITC transfer is permitted between companies in different states, with the Bombay High Court ruling that GST law does not restrict such transfers based on geographical locations. This provides greater flexibility for multi-state amalgamations.
Stamp Duty Considerations
Amalgamation schemes involving immovable property transfers are subject to stamp duty under various state laws, with rates typically ranging from 1.5% to 10% of property value or consideration, whichever is higher. States like Maharashtra impose 10% stamp duty on the aggregate market value of shares issued, subject to certain caps.
However, certain pre-independence notifications provide stamp duty exemptions where at least 90% shareholding exists between parent and subsidiary companies or between companies with common ownership.
Practical Compliance Requirements
Documentation and Record Keeping
Companies must maintain comprehensive documentation to support tax exemption claims, including legal agreements, financial statements, shareholding patterns, and compliance certificates. Tax authorities may demand these documents during assessment proceedings to verify exemption eligibility.
NCLT Approval and Tax Authority Clearance
While NCLT approval sanctifies the amalgamation scheme, companies typically require “no objection certificates” from tax authorities to ensure smooth implementation. Recent NCLT decisions have clarified that schemes cannot be denied solely due to tax advantages if they serve legitimate commercial purposes.
The NCLT has consistently held that tax benefits being consequential to genuine business restructuring do not invalidate amalgamation schemes, particularly when adequate safeguards exist under tax laws to prevent abuse.
Recent Judicial Developments and Interpretations
Shareholding Continuity Requirements
The Chennai ITAT’s decision in Roca Bathroom Products highlighted the importance of measuring shareholding continuity as of the Appointed Date rather than the Effective Date. This interpretation could significantly impact amalgamation planning, particularly for listed companies where shareholding may fluctuate between these dates.
Tax Neutrality Conditions
Courts have emphasized that tax neutrality benefits are conditional upon strict compliance with statutory requirements. The Supreme Court’s analysis of “transfer” definition confirms that extinguishment of rights in shares constitutes transfer, making exemption provisions critical for tax-neutral treatment.
Strategic Implications and Future Outlook
The 2025 Budget reforms represent a balanced approach to preventing tax avoidance while maintaining legitimate business restructuring incentives. Companies planning amalgamations must now carefully evaluate the timing and commercial rationale for transactions, as the loss carryforward benefits are significantly constrained.
The emphasis on “genuine business purpose” in both tax law provisions and judicial interpretations suggests that amalgamations primarily driven by tax benefits may face greater scrutiny. Companies must demonstrate substantial commercial justification beyond tax advantages to ensure successful implementation.
These comprehensive tax reliefs and benefits make amalgamation an attractive option for corporate restructuring in India, provided companies carefully navigate the complex compliance requirements and recent regulatory changes. The key to successful implementation lies in early planning, proper documentation, and ensuring alignment with both commercial objectives and tax law requirements.
Key Takeaways
- Amalgamation under Section 2(1B) of the Income Tax Act provides tax-neutral treatment subject to specific conditions.
- Amalgamating companies enjoy capital gains tax exemption under Section 47(vi) and cross-border benefits under Section 47(via).
- Shareholders benefit from capital gains exemption on share exchange under Section 47(vii).
- Amalgamated companies can carry forward accumulated losses under Section 72A, subject to compliance with stringent conditions.
- 2025 Budget reforms restrict loss carryforward to the remaining period within the original eight-year window, preventing indefinite extensions.
- GST benefits include transfer of unutilized Input Tax Credit, even across states, while stamp duty may still apply based on state laws.
- NCLT and tax authority approvals are essential, with courts emphasizing genuine business purpose for tax neutrality.
- Strategic planning, compliance, and documentation are critical for availing tax benefits in amalgamations.
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