Taxation & Stamp Duty aspects of Corporate Restructuring

“Capital Gains” under section 45 of the Income Tax Act, 1961 are defined as any profits or gains arising from transfer of a capital asset and are chargeable to tax under the head “Capital Gains.”

“Transfer” includes sale, exchange, relinquishment, or extinguishment of rights in a capital asset.

Tax concession to a foreign demerged company [Section 47(vic) of Income Tax Act,1961

Where a foreign company holds any shares in an Indian company and transfers the same, in case of a demerger, to another resulting foreign company, such transaction will not be regarded as transfer for the purpose of capital gain under section 45 if the following conditions are satisfied:

(a)the shareholders holding not less than three-fourths in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company; and

(b)such transfer does not attract tax on capital gains in the country, in which the demerged foreign company is incorporated:

Provided that the provisions of Sections 230 to 232 of Companies Act, 2013 shall not apply in case of demergers referred to in this Clause.

Therefore, such transaction of transfer of shares is not subject to tax for the purpose of capital gains under section 45 of the Income Tax Act, 1961

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 2A(iv) (Syllabus 2022).

Section 47(vic) of the Income Tax Act, 1961 deals with Tax concession to a foreign demerged company. It provides that:

Where a foreign company holds any shares in an Indian company and transfers the same, in case of a demerger, to another resulting foreign company, such transaction will not be regarded as transfer for the purpose of capital gain under section 45 of the Act if the following conditions are satisfied:

(a)the shareholders holding not less than three-fourths in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company; and

(b)such transfer does not attract tax on capital gains in the country, in which the demerged foreign company is incorporated:

Sections 230 to 232 of Companies Act, 2013) shall not apply in case of demergers referred to in this clause.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 1(c) (Syllabus 2017).

As per section 2(42C) of Income -tax Act 1961, ‘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.

The main reasons of slump sale are generally undertaken in India due to following reasons: -

•It helps the business to improve its poor performance.

•It helps to strengthen financial position of the company.

•It eliminates the negative synergy and facilitates strategic investment.

•It helps to seek tax and regulatory advantage associated with it.

Undertaking’ has the same meaning as in Explanation 1 to section 2(19AA) defining ‘demerger’. As per Explanation 1 to section 2(19AA) ‘Undertaking’ shall include any part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.

Explanation 2 to section 2(42C) clarifies that the determination of value of an asset or liability for the payment of stamp duty, registration fees, similar taxes, etc. shall not be regarded as assignment of values to individual assets and liabilities. Thus, if value is assigned to land for stamp duty purposes, the transaction will be a qualifying slump sale under section 2(42C).

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 2A(i) (Syllabus 2017).

According to section 2 (1B) of the Income Tax, 1961, “amalgamation”, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that –

(i)all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation;

(ii)all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation;

(iii)shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation, otherwise, than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company;

The given case deals with acquisition which does not result in does not result in the transferor Company losing its identity. Therefore, the takeover achieved in the above process through Section 235 of the Companies Act, 2013 Act will not fall within the meaning of amalgamation under the Income Tax Act, 1961 and as such benefits of amalgamation provided under the said Act will not be available to the acquisition under consideration. The takeover in the above process will not enable carrying forward of unabsorbed depreciation and accumulated losses of the transferor Company in the transferee

Company for the reason that the takeover does not result in the transferor Company losing its identity as it is stated in the question that this is takeover of an unlisted company through transfer of undertaking.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 1(d) (Syllabus 2022).

The resulting company shall be eligible for tax concessions only if the following two conditions are satisfied:

(i)The demerger satisfies all the conditions laid down in section 2(19AA); and

(ii)The resulting company is an Indian company.

The following concessions are available to the resulting company pursuant to a scheme of demerger:

(a)Amortisation of certain preliminary expenses (Section 35D): The benefit of amortization of preliminary expenses under section 35D of the Income-tax Act, 1961 are ordinarily available only to the assessee who incurred the expenditure. However, the benefit will not be lost in case the undertaking of an Indian company which is entitled to the amortization is transferred to another Indian company in a scheme of demerger within the 5 years period of amortisation. In that event the deduction in respect of previous year in which the demerger takes place and the following previous year within the 5 years period will be allowed to the resulting company and not to the demerged company.

(b)Treatment of bad debts [Section 36(1)(vii)]: Where due to demerger, the debts of the demerged company have been taken over by the resulting company and subsequently by such debt or part of debt becomes bad such bad debt will be allowed as a deduction to the resulting company. This is based upon the decision of the Supreme Court in the case of CIT v. Veerabhadra Rao (T.), K. Koteswara Rao & Co.(1985) 155 ITR 152 (SC).

(c)Exemption of Capital Gain Tax: Section 47 of the Income Tax Act, 1961 treats certain transactions from amalgamation as not transfer and hence capital gains tax will not be applicable w.r.t.

•transfer, in a demerger, of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company.

•any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of

the demerged company if the transfer or issue is made in consideration of demerger of the undertaking

(d)Expenditure on Amalgamation: Section 35DD of the Income-tax Act, 1961 provides that where an assessee being an Indian company incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation or demerger takes place.

(e)Forward and set off of business losses and unabsorbed depreciation of the demerged company [Section 72A (4) & (5)]: Notwithstanding anything contained in any other provisions of this Act, in the case of a demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall–

(a)where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company, be allowed to be carried forward and set off in the hands of the resulting company;

(b)where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting company, be apportioned between the demerged company and the resulting company in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company, and be allowed to be carried forward and set off in the hands of the demerged company or the resulting company, as the case may be.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 2(b) (Syllabus 2022).

Section 2(42C) of the Income Tax Act, 1961 defines slump sale as a means of transfer of one or more undertakings by any means for a lump sum consideration without values being assigned to the Individual assets and liabilities in such transfer.

The word any means now allows the transfer of a business undertaking not only ‘by way of sale’ but also ‘by way of an exchange’ or any other transfer structure defined in Section 2(47) of the Act to be included within its scope. Thus, sale of engineering division is considered as slump sale.

As per section 50B of the Income Tax Act, 1961 any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains from the transfer of long-term capital asset and shall be deemed to be the income of the previous year in which the transfer took place. The gain or loss resulting out of a slump sale shall be a Capital Gain/Loss under the Income Tax Act. The computation has been prescribed as follows:

Amount of Full Value of Consideration - Expenses in relation to transfer =Net Consideration-Cost of Acquisition / net worth =Capital Gain or (Loss)

Sale consideration to be calculated as per the Fair Market Value computation which includes monetary as well as non-monetary considerations.

The capital gain or loss as computed above will be either long term or short-term depending upon the period for which the undertaking is held. If the undertaking is held for more than 36 months, the resulting capital gain or loss shall be long-term and if it is held for less than 36 months, the resulting capital gain or loss shall be short term. Further, there will be no indexation benefit available in the computation of the capital gains.

Tax rates: The rates of tax applicable to the capital gain in a slump sale are as follows:

•Short Term Capital Gain: Normal Rates of taxation and

•Long Term Capital Gain: 20%.

In computing the net worth of the entity, the following points need to be considered:

1.The value of net worth should not take into account any change in the value of the asset or liability resulting from revaluation of such asset or liability.

2.In case of depreciable assets under the Income Tax Act, the Written Down Value of Block of assets as per the Act shall be considered.

3.In case of assets on which 100% deduction has been allowed under section 35AD (specified business), the value of such assets will not be considered.

4.In case of any other asset, value as appearing in the books of accounts shall be considered.

5.After considering the above points, if the resulting net worth is negative, then the cost of acquisition shall be taken as nil for the purpose of computation of capital gains.

6.Value of goodwill of business or profession (other than goodwill acquired by purchase from a previous owner) would need to be taken as NIL.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 2A(iii) (Syllabus 2022).

As per Income Tax Act, 1961 demerger in relation to companies, means the transfer, pursuant to a scheme of arrangement under Companies Act, 2013 by a demerged company of its one or more undertakings to any resulting company subject to conditions specified. The company before undertaking the demerger should consider the below mentioned provisions of Income Tax Act, 1961 with respect to the amortization of expenditure and carry forward & set-off of business losses and unabsorbed depreciation respectively:

Amortisation of expenditure in case of amalgamation or demerger

Section 35DD (1) of the Income Tax Act, 1961 provides that where an assessee, being an Indian company, incurs any expenditure wholly and exclusively for the purposes of demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the demerger takes place.

Further, as per section 35DD (2) of the Income Tax Act, 1961 no deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act.

Carry forward and set off of business losses and unabsorbed depreciation of the demerged company

Section 72A (2) of the Income Tax Act states that notwithstanding anything contained in sub-section (1), the accumulated loss shall not be set off or carried forward and the unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company unless—

( a )the amalgamating company—

( i )has been engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for three or more years;

( ii )has held continuously as on the date of the amalgamation at least threefourths of the book value of fixed assets held by it two years prior to the date of amalgamation;

( b )the amalgamated company—

( i )holds continuously for a minimum period of five years from the date of amalgamation at least three-fourths of the book value of fixed assets of the amalgamating company acquired in a scheme of amalgamation;

( ii )continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation;

( iii )fulfils such other conditions as may be prescribed 41 to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose.

In a case where any of the conditions laid down in sub-section (2) are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be the income of the amalgamated company chargeable to tax for the year in which such conditions are not complied with. [ Section 72A (3)]

Section 72A (4) of the Income Tax Act provides that notwithstanding anything contained in any other provisions of this Act, in the case of a demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall—

( a )where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company, be allowed to be carried forward and set off in the hands of the resulting company;

( b )where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting company, be apportioned between the demerged company and the resulting company in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company, and be allowed to be carried forward and set off in the hands of the demerged company or the resulting company, as the case may be.

Section 72A (5) of the Income Tax Act the Central Government may, for the purposes of this Act, by notification in the Official Gazette, specify such conditions as it considers necessary to ensure that the demerger is for genuine business purposes.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 2(c) (Syllabus 2017).

(i)Capital gains tax not attracted [Section 47(vib) of the Income-tax Act]

According to section 47(vib), where there is a transfer of any capital asset in case of a demerger by the demerged company to the resulting company, such transfer will not be regarded as a transfer for the purpose of capital gain provided the resulting company is an Indian company.

(ii)Tax concession to a foreign demerged company [Section 47(vic) of the Income-tax Act]

Where a foreign company holds any shares in an Indian company and transfers the same, in case of a demerger, to another resulting foreign company, such transaction will not be regarded as transfer for the purpose of capital gain under section 45 if the following conditions are satisfied:

(a)the shareholders holding not less than three-fourths in value of the shares of the demerged foreign

company continue to remain shareholders of the resulting foreign company; and (b) such transfer does not attract tax on capital gains in the country, in which the demerged foreign company is incorporated:

Provided that the provisions of Sections 391 to 394 of the Companies Act, 1956 (1 of 1956) (Now Sections 230 to 232 of Companies Act, 2013) shall not apply in case of demergers referred to in this clause;

(iii)any transfer in a demerger, of a capital asset, being a share of a foreign company, referred to in

Explanation 5 to clause (i) of subs-section (1) of section 9, which derives directly or indirectly its values substantially from the share or shares of an Indian Company, held by the demerged foreign company to the resulting foreign company will not be regarded as transfer for the purpose of capital gains if the following conditions are satisfied:

(a)Shareholders holding not less than three-fourths in value of the shares of the demerged foreign

company, continue to remain shareholders of the resulting foreign company and

(b)Such transfer does not attract tax on capital gains in the country in which the demerged foreign company

is incorporated.

(iv)Reserves for shipping business: Where a ship acquired out of the reserve is transferred in a scheme of

demerger, even within the period of eight years of acquisition there will be no deemed profits to the demerged company.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2023, Q. 2A(ii) (Syllabus 2017).

Section 2(19AA) of the Income Tax Act. 1961 defines the term demerger as follows:

“Demerger”, in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 231 to 232 of the Companies Act. 2013 by a demerged company of its one or more undertakings to any resulting company in such a manner that-

(i)all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger:

(ii)all the liabilities relatable to the undertaking being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger;

(iii)the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger:

Provided that the provisions of this sub-clause shall not apply where the resulting company records the value of the property and the liabilities of the undertaking or undertakings at a value different from the value appearing in the books of account of the demerged company, immediately before the demerger, in compliance to the Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015.

(iv)the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis except where the resulting company itself is a shareholder of the demerged company;

(v)the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or. its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger, otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company;

(vi)the transfer of the undertaking is on a going concern basis;

(vii)the demerger is in accordance with the conditions, if any, notified under subsection (5) of section 72A by the Central Government in this behalf.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2022, Q. 3(c) (Syllabus 2017).

Section 2(22)(e) of the Income Tax Act, 1961 defines the term deemed dividend as any payment by a company, not being a company in which public are substantially interested, of any sum by way of advance or loan to the following:

a.To a shareholder, being a person who is the beneficial owner of the shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits), holding not less than 10% of the voting rights, or

b.To any concern in which such shareholder is a member or a partner and in which he has a substantial interest, or

c.On behalf, of for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits.

Exceptions to deemed dividend:

a.any advance or loan made, to a shareholder or to such concern in which the shareholder is interested, by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company;

b.any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off;

c.any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of Section 68 of the Companies Act, 2013;

d.any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).

Finance Act, 2018 has bought the deemed dividend within the ambit of dividend distribution tax under section 115-0, at the rate of 30% in the hands of the closely held companies.

As per the provisions of Section 10(34), dividend income under section 2(24)(e) is 100% exempt in the hands of the shareholders as it is charged to Dividend Distribution Tax under section 115-0 of the Income Tax Act, 1961.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 3(a) (Syllabus 2017).

A Demerged Company can expect the following tax concessions are as under:

Capital gains tax not attracted [Section 47(vib)]

Where there is a transfer of any capital asset in case of a demerger by the demerged company to the resulting company, such transfer will not be regarded as a transfer for the purpose of capital gain provided the resulting company is an Indian company.

Tax concession to a foreign demerged company [Section 47(vic)]

Where a foreign company holds any shares in an Indian company and transfers the same, in case of a demerger, to another resulting foreign company, such transaction will not be regarded as transfer for the purpose of capital gain under section 45 if the following conditions are satisfied:

a.The shareholders holding not less than three- fourths in value of the shares of the demerged foreign company continue to remain shareholders the resulting foreign company; and

b.such transfer does not attract tax on capital gains in the country, in which the demerged foreign company is incorporated.

Reserves for shipping business:

Where a ship acquired out of the reserve is transferred in a scheme of demerger, even within the period of eight years of acquisition there will be no deemed profits to the demerged company.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 1(d) (Old syllabus).

Section 2(42C) of the Income Tax Act, 1961 defines slump sale as a means of transfer of one or more undertaking as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.

Tax treatment:

Normally, any sale of a capital asset will give rise to a capital receipt and any profit derived may give rise to capital gains in certain cases. This is true in the case of sale of an undertaking also.

Determination of the value of an asset or liability (for sole purpose of payment of stamp duty, registration fees or other similar taxes or fee) shall not be regarded as assignment of values to individual assets or liabilities.

As per section 50B of the Income Tax Act, 1961 any profit or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains from the transfer of long-term capital asset and shall be deemed to be he income of the previous year in which the transfer took place.

Any profit or gains arising from the transfer under the slump sale of any capital assets being one or more undertaking owned and held by an assessee for not more than the thirty-six months immediately preceding the date of transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 2A(iii) (Old syllabus).

Section 2(42C) of the Income Tax Act, 1961 defines slump sale as a means of 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 cases.

As per section 50B of Income Tax Act, 1961 any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income tax as capital gains from the transfer of long term capital asset and shall be deemed to be the income of the previous year in which the transfer took place.

Demerged company has been defined under section 2(19AA) of the Income Tax Act, 1961. According to section 47(vib), where there is a transfer of any capital asset in case of demerger by the demerged company to the resulting company, such transfer will not be regarded as a transfer for the purpose of capital gain provided the resulting company is an Indian company.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 3(b) (Syllabus 2017).

‘Capital asset’ is defined under section 2(14) of the Income-tax Act, 1961 as,

(a)Property of any kind held by an assessee, whether or not connected with his business or profession;

(b)Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under Securities and

Exchange Board of India Act, 1992.

But does not include the following:

(1)Any stock in trade (Other than the securities referred to in sub-clause (b)), consumables stores or raw materials held for the purpose of his business or profession

(2)Personal effect

(3)Agricultural land in India, which is not an urban agricultural land. In other words, it must be rural agricultural land.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 3(e) (Syllabus 2017).

When transfer takes place by virtue of a court order to a scheme of amalgamation, stamp duty is leviable. By virtue of Section 2(g) the Bombay Stamp Act, 1958, the order of the Court ordering the transfer of assets and liabilities of the transferor company to the transferee company is deemed to be a conveyance. The definition of conveyance is given below:

As per Section 2(g) of the Bombay Stamp Act, 1958, “Conveyance” includes–

(i)a conveyance on sale,

(ii)every instrument,

(iii)every decree or final order of any Civil Court,

(iv)every order made by the High Court under Section 394 of the Companies Act, 1956 in respect of amalgamation of companies;

The landmark decision of Bombay High Court in Li Taka Pharmaceuticals v. State of Maharashtra (1996) 8 SC 102 (Bom.) has serious implications for mergers covered not just by the Bombay Stamp Act, 1958 but also mergers covered by Acts of other States. The following are the major conclusions of the Court:

1.An amalgamation under an order of Court under Section 394 of the Companies Act, 1956 is an instrument under the Bombay Stamp Act, 1958.

2.States are well within their jurisdiction when they levy stamp duty on instrument of amalgamation.

3.Stamp duty would be levied not on the gross assets transferred but on the “undertaking”, when the transfer is on a going concern basis, i.e., on the assets less liabilities. The value for this purpose would thus be the value of shares allotted. This decision has been accepted in the Act and now stamp duty is leviable on the value of shares allotted plus other consideration paid.

The Calcutta High Court in the case of Emami Biotech Ltd. (2012) held that a Court order sanctioning a scheme of amalgamation or demerger under section 391 to 394 of the Companies Act, 1956 is an instrument and conveyance within the meaning of the Stamp Act applicable to the State of West Bengal and is accordingly, subject to stamp duty.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 4(b) (Syllabus 2017).

In exercise of power conferred by Entry 63, List II, the State Legislature can make amendment in the Indian Stamp Act, 1899 under article 372, in regard to the rates of stamp duty in respect of documents other than those specified in provisions of List I related to Union Government list.

Stamp duty is levied in India on almost all, except a few documents, by the States and hence the rate and incidence of stamp in different states vary. The State Legislature has jurisdiction to levy stamp duty under entry 44, List III of the Seventh Schedule of the Constitution of India and prescribe rates of stamp duty under entry 63, List II.

The landmark decision of Bombay High Court in [Li Taka Pharmaceuticals v. State of Maharashtra (1996) 8 SC 102 (Bom.)] has serious implications for mergers covered not just by the Bombay Stamp Act, 1958 but also mergers covered by Acts of other States.

The following are the major conclusions of the Court:

1.An amalgamation under an order of Court under Section 394 of the Companies Act,1956 is an instrument under the Bombay Stamp Act, 1958.

2.States are well within their jurisdiction when they levy stamp duty on instrument of amalgamation.

3.Stamp duty would be levied not on the gross assets transferred but on the “undertaking”, when the transfer is on a going concern basis, i.e. on the assets less liabilities. The value for this purpose would thus be the value of shares allotted. This decision has been accepted in the Act and now stamp duty is leviable on the value of shares allotted plus other consideration paid.

The Calcutta High Court in the case of Emami Biotech Ltd. (2012 ) held that a Court order sanctioning a scheme of amalgamation or demerger under section 391 to 394 of the Companies Act, 1956 [section 230 and 232 of Companies Act 2013] is an instrument and conveyance within the meaning of the Stamp Act applicable to the State of West Bengal and is accordingly, subject to stamp duty.

Therefore, it cannot be said that the State Legislature has no jurisdiction to levy such duty on an order of the High Court sanctioning a scheme of compromise or arrangement under section 394 of the Companies Act, 1956

As per point 3, Stamp duty will be leviable on value of shares allotted i.e. 500 cr plus other consideration paid i.e. ₹ 57 cr resulting into a total of ₹ 557 cr.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 2(d) (Syllabus 2022).

Amalgamation between Holding and Subsidiary Companies-Exemption from payment of Stamp Duty

The Central Government has exempted the payment of stamp duty on instrument evidencing transfer of property between companies limited by shares as defined in the Indian Companies Act, 1913, in a case:

i)where at least 90 percent of the issued share capital of the transferee company is in the beneficial ownership of the transferor company, or

ii)where the transfer takes place between a parent company and a subsidiary company one of which is the beneficial owner of not less than 90 percent of the issued share capital of the other, or

iii)where the transfer takes place between two subsidiary companies each of which having not less than 90 percent of the share capital is in the beneficial ownership of a common parent company:

Provided that in each case a certificate is obtained by the parties from the officer appointed in this behalf by the local Government concerned that the conditions above prescribed are fulfilled.

Therefore, if property is transferred by way of order of the High Court in respect of the Scheme of Arrangement/Amalgamation between companies which fulfil any of the above mentioned three conditions, then no stamp duty would be levied provided a certificate certifying the relation between companies is obtained from the officer appointed in this behalf by the local Government (generally this officer is the Registrar of Companies).

A circular was issued in the year 1937 vide which exemption was granted on payment of Stamp Duty when there is an amalgamation/merger between holding and subsidiary company. Delhi High Court in the case of Delhi Towers Ltd. Vs. GNCT of Delhi made reference to this circular.

However, stamp duty being a state subject, the above would only be applicable in those States where the State Government follows the above stated notification of the Central Government otherwise stamp duty would be applicable irrespective of the relations mentioned in the said notification.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 3(b) (Syllabus 2017).

A circular was issued in the year 1937 vide which exemption was granted on payment of Stamp Duty when there is an amalgamation/merger between holding and subsidiary company.

The exemption granted by the circular was applicable in three cases:

1.When the transferor company owns 90% of the issued capital of the transferee company, or

2.The transfer takes place between a holding a subsidiary company, or

3.When a transfer takes place between two subsidiary companies, and each of whose 90% shared capital is owned by a common parent company.

Provided, in all these three cases, a certificate is obtained by parties from the officer appointed in this behalf by the local government that the above conditions are fulfilled.

This exemption is only for those states, where the State government follows the Central government notification.

The Delhi High Court in a case made an observation about the aforesaid circular and its validity. It stated that even though, this notification is of pre-independence era, it is not superseded by any law made by the parliament. To revoke this circular, specific repeal is required.

Withdrawal of circular dated January 16, 1937

The notification was withdrawn by Delhi government, dated 1st June 2011. However, there is still no clarity whether the benefits of this notification will still persist in other states where the notification is not explicitly withdrawn.

Stamp duty being a State subject, the above would only be applicable in those States where the State Government follows the above stated notification of the Central Government otherwise stamp duty would be applicable irrespective of the relations mentioned in the said notification.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2022, Q. 3(b) (Syllabus 2017).

The Central Government has exempted the payment of stamp duty on instrument evidencing transfer of property between companies limited by shares as defined in the Indian Companies Act, 1913, in a case:

(i)where at least 90 percent of the issued share capital of the transferee company is in the beneficial ownership of the transferor company, or

(ii)where the transfer takes place between a parent company and a subsidiary company one of which is the beneficial owner of not less than 90 percent of the issued share capital of the other.

A circular was issued in the year 1937 vide which exemption was granted on payment of Stamp Duty when there is an amalgamation/merger between holding and subsidiary company. Delhi High Court in the case of Delhi Towers Ltd. vs. GNCT of Delhi made reference to this circular.

Otherwise, stamp duty is payable on such orders, being an instrument liable to duty as a Conveyance Deed as was held in Hindustan Lever Ltd. vs. State of Maharashtra (2003) 117 Comp Cas SC 758, Emami Biotech Ltd (2012).

However, stamp duty being a state subject, the above would only be applicable in those States where the State Government follows the above stated notification of the Central Government otherwise stamp duty would be applicable irrespective of the relations mentioned in the said notification.

Imposition of Stamp Duty is the prerogative of the State Government, hence applicable in only those states that have adopted the said circular.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 2(a) (Syllabus 2017).

‘Conveyance’ as is defined under section 2(10) of the Indian Stamp Act, 1899 refers to any instrument by which any moveable or immovable property is transferred inter vivos. Section 2(g)(iv) of the Bombay Stamp Act, 1958 specifically included orders under section 394 of Companies Act, 1956 that relates to amalgamation and absorption.

The landmark decision of Bombay High Court in Li Taka Pharmaceuticals v. State of Maharashtra (1996) 8 SC 102 (Bom.) has serious implications for mergers covered not just by the Bombay Stamp Act, 1958 but also mergers covered by Acts of other States. The following are the major conclusions of the Hon’ble Court:

(1)An amalgamation under an order of Court under Section 394 of the Companies Act, 1956 is an instrument under the Bombay Stamp Act, 1958.

(2)States are well within their jurisdiction when they levy stamp duty on instrument of amalgamation.

(3)Stamp duty would be levied not on the gross assets transferred but on the “undertaking”, when the transfer is on a going concern basis, i.e. on the assets less liabilities. The value for this purpose would thus be the value of shares allotted. This decision has been accepted in the Act and now stamp duty is leviable on the value of shares allotted plus other consideration paid.

Calcutta High Court has held in Emami Biotech Ltd (2012) with a similar view.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 3(a) (Old syllabus).

Amalgamation between a Holding and a Subsidiary company is exempt from the payment of Stamp Duty subject to certain conditions. These conditions are as under:

1.When at least 90% of the issued capital of the transferee company is in the beneficial ownership of the transferor company, or

2.When the transfer is between a parent and a subsidiary company, one of which is a beneficial owner of not less than 90% of the issued share capital of the other, or

3.When the transfer takes place between two subsidiary companies each of which is having not less than 90% of the share capital in the beneficial ownership of the parent company.

Stamp duty being a State subject, these exemptions will be applicable only in those States where the State Government follows the notification of the Central Government in this regard.

Stamp duty on transfer of assets is governed by the relevant State Stamp Act. In terms of stamp duty, though the State laws provide for rates of stamp duty to be paid on various instruments, it is observed that generally there is no specific entry for a High Court (now NCLT) order sanctioning the scheme of amalgamation or demerger, in the absence of which High Courts have taken the view that the High Court (now NCLT) order involving the transfer between two juristic persons of certain movable and immovable property, is a ‘conveyance’ and should therefore be chargeable to stamp duty.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 2(b) (Old syllabus).