Companies Act, 2013, do not define “amalgamation” and it has been expressed as the scheme of arrangement and merger in terms of section 230 and 232 of the Companies Act, 2013. However, section 2(1B) of the Income Tax Act defines amalgamation as merger between one or more companies with another company or the merger or two or more companies to form one company. The company which so merge being referred to as the amalgamating company or companies and the companies with which they are being merged are defined as the amalgamated company.
A recent trend of amalgamation is one where one company was referred to the corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 and another Company submits a plan for the resolution of corporate insolvency of the company and later acquires the Transferor Company and the resolution plan submitted by the Transferee company was approved by the Tribunal. Now, the same company which was acquired under resolution plan by taking majority share control turns to be the subsidiary of the company which has acquired the company during the process of resolution. So, the prevalent trend is that such subsidiary is being amalgamated later on into parent company.
In the case of amalgamation between SALASAR STEEL AND POWER LIMITED and SINGHAL ENTERPRISES PRIVATE LIMITED (Company Petition (CAA) No.190/KB/2023) the factory of the Transferor Company was situated in close proximity to the factory of the Transferee Company at a distance of only 6kms therefrom. However, the business of the Transferor Company was adversely impacted whilst under its erstwhile management and the Transferor Company was referred to the corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016. Considering, inter alia, the proximity of the factory of the Transferor Company to the factory of the Transferee Company and potential of the business of the Transferor Company, the Transferee Company submitted a plan for resolution of corporate insolvency of the Transferor Company and acquiring the Transferor Company. The resolution plan submitted by the Transferee Company was approved by the Hon’ble NCLT, Kolkata Bench under Section 31 of the Insolvency and Bankruptcy Code, 2016 and thereafter, sometime petitioner company approached the NCLT for amalgamation citing that amalgamation will facilitate and complete the process of consolidation of the Undertaking of the Transferor Company with the undertaking of the Transferee Company and enable the operations and business of the Transferor Company to be pursued and revived more fully and effectively in the amalgamated entity and said scheme of amalgamation was approved by the honourable tribunal.
One of the important reasons for amalgamation is unabsorbed losses and depreciation of amalgamation company are available to the amalgamating company. Section 72A of the Income Tax Act provides tax relief in cases of amalgamation by allowing the amalgamated company to carry forward and set off the accumulated business losses and unabsorbed depreciation of the amalgamating company. The objective of this provision is to encourage the revival of sick or loss-making companies through genuine mergers. This benefit is available only when both entities are Indian companies and certain conditions are satisfied, such as the amalgamating company having carried on business for a minimum period and holding a substantial portion of its fixed assets prior to the merger, and the amalgamated company continuing the business and retaining the assets of the amalgamating company for a specified period after amalgamation. If these conditions are not complied with, the tax benefit claimed under Section 72A may be withdrawn.
An amalgamation is an arrangement centric to the shareholders while insolvency resolution is the creditor centric. Therefore, to avoid the chances on any sort of dispute by tax department as going concern or that amalgamation during resolution is a settlement so benefits of section 72A of income tax are not available the company prefers a clean strategy of amalgamation post successful resolution.
-Dixit Mehta, Partner, Ductus Legal
DUCTUS EDGE 