Tax planning with reference to

new businesses and M&A

Udisha Agarwal
Anubhav Marwah
Ashish Jain
Prabhakaran Natraj

Tax Planning with reference to setting up a new business

When new business is formed or established,

government provide benefits to the owners so that
business may grow well.
As per the income tax Act,1961 there are so many
sections which is beneficial for the new business.
These sections play an important role at the time of
tax planning.
Planning depends upon:
- Nature and size of business
- Location of business
- Form of business organization
- Capital structure

Location of business
Tax planning is relevant for location point of view. There are certain
locations which are given special tax treatment. Some of these are:
Fully exemption under Sec10AA for initial 5 years, 50% for
subsequent 5 years and further deduction of 50% for a further
period of 5 years in the case of newly established units in SEZ on
or after 1.4.2005
Deduction under Sec80-IAB in respect of profits and gains by an
undertaking or an enterprise engaged in the development of SEZ
Deduction under Sec80-IB in case of a newly set up industrial
undertaking in a industrially backward state or district.
Deduction under Sec80-ID in respect of profits and gains from
business of hotels and convention centers in specified areas or a
hotel at world heritage site.
Deduction under Sec80-IE in respect of certain undertakings in
North-Eastern states.

Nature of business
Tax planning is also relevant while deciding upon the
nature of business. There are certain businesses which
are given special tax treatment. Some of these are:
Tea, Coffee and Rubber Development Account under
Sec 33AB
Special provisions in case of Shipping business under
Sec 44B
Special provisions in case of business of operation of
business crafts under Sec 44BBA
Special provisions in case of certain turnkey power
projects under Sec 44BBB
Site restoration fund under Sec 33ABA

SPECIAL ECONOMIC ZONE

[ SECTION 10AA]
SPECIAL PROVISION IN RESPECT OF NEWLY ESTABLISHED UNITS
IN SPECIAL ECONOMIC ZONE. The following conditions should be
satisfied to claim deduction u/s 10AA :

Condition 1 : Assessee, being an entrepreneur as referred to in

clause (j) of section 2 of the Special Economic Zones Act, 2005.
Entrepreneur is a person who has been granted a letter of approval
by the Development Commissioner to set a unit in a Special Economic
Zone.
Conditions 2 : The Unit in Special Economic Zone who begins to
manufacture or produce articles or things or provide any services
during the previous year relevant to any assessment year
commencing on or after the 1st day of April, 2006.

Conditions 3 : It is not formed by the splitting up, or reconstruction,

of a business already an existence.


Conditions 4 : It not formed by the transfer to a new
business, of old plant and machinery. However, it can be
formed by transfer of old plant or machinery to the
extent of 20%.

Condition 5 : The assessee has income from export of

articles or thing or from services from such unit. In other
words, the assessee has exported goods or provided
services out of India from the Special Economic Zone by
land, sea , air, or by any other mode, whether physical
or otherwise.

Conditions 6 : Books of Accounts of the taxpayer should

be audited. The Tax payer should submit Audit Report in
Form No.56F along with the return of income.

Amount of Deduction
Deduction depends upon quantum of Profit derived from Export of Articles or
things or services ( including computer software). It is calculated as under
Profit of the Business of the undertaking X Export turnover
Total Turnover of the business
Deduction for First 5 Assessment Years 100% of Profits and Gains derived
for a period of five consecutive assessment years beginning with the
assessment year relevant to the previous year in which the Unit begins to
manufacture or produce such articles or things or provide services.
Deduction for 6th Assessment Year to 10th Assessment Years : 50% of such
Profits and Gains for further five assessment years and thereafter;
Deduction for 11th Assessment Year to 15th Assessment Year :Amount not
exceeding 50% of the profit as is debited to the profit and loss account of the
previous year in respect of which the deduction is to be allowed and credited
to a reserve account (to be called the Special Economic Zone Re-investment
Reserve Account) to be created and utilized for the purposes of the business
of the assessee.

Deduction in case of merger and

demerger (Sec 10AA5)
Where any undertaking is transferred, before
the expiry of the period specified in this section,
to another undertaking, under a scheme of
amalgamation or demerger,
Deductions shall be allowable in the hands of
the amalgamated or the resulting company
No deduction shall be admissible under this
section to the amalgamating or the demerged
Unit for the previous year in which the
amalgamation or the demerger takes place

Provision illustrated:
The following illustrations are given to explain the impact of
aforesaid provisions
X Ltd. owns an industrial undertaking in a notified special economic
zone. It starts manufacturing on April 10, 2004. It can claim
deduction under sections 10A and 10AA as follows
First 5 years: For the assessment years 2005-06 to 2009-10, it can
claim 100 per cent deduction under section 10A.
Next 5 years: For the next two assessment years, i.e., 2010-11 and
2014-15, it can claim 50 per cent deduction under section 10A.
Next 5 years: For the next five assessment years, i.e., 2015-16 to
2019-20, it can claim 50 per cent deduction (subject to an additional
requirement of transferring an equivalent amount to Special
Economic Zone Re-investment Reserve Account) under section
10AA(1)(ii).

Special Provisions In Respect Of

Certain Undertakings Or Enterprises In
Certain Special Category States [Sec.
80-IC]

This section applies to any undertaking which fulfils all the

following conditions, namely:it is not formed by splitting up, or the reconstruction, of a
business already in existence
it is not formed by the transfer to a new business of machinery or
plant previously used for any purpose
Industrial Undertaking should be set up in certain special category
of States.
The Industrial Undertaking should manufacture / produce
specified goods / articles.
Manufacture or production should be started within a stipulated
time limit.
Return of Income should be submitted on or before due date of
submission of return of income.
The Books of Accounts of taxpayer should be audited and the
Audit Report in Form No-10CCB should be submitted along with
the Return of Income.

INDUSTRIAL ZONES GIVEN UNDER

SECTION 80-IC(2)
Following are the Industrial Zonesnotified by the Board for the
relevant State :
(i) Industrial Area means such areas, which the Board, may, by
notification in the Official Gazette, specify in accordance with the scheme
framed and notified by the Central Government;
(ii) Industrial Estate means such estates, which the Board, may, by
notification in the Official Gazette, specify in accordance with the scheme
framed and notified by the Central Government;
(iii) Industrial Growth Centre means such centres, which the Board,
may, by notification in the Official Gazette, specify in accordance with the
scheme framed and notified by the Central Government;
(iv) Industrial Park means such parks, which the Board, may, by
notification in the Official Gazette, specify in accordance with the scheme
framed and notified by the Central Government;
(v) Integrated Infrastructure Development Centre means such
centres, which the Board, may, by notification in the Official Gazette, specify
in accordance with the scheme framed and notified by the Central
Government;

(vi) North-Eastern States means the States of Arunachal

Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and
Tripura;
(vii) Software Technology Park means any park set up in
accordance with the Software Technology Park Scheme notified
by the Government of India in the Ministry of Commerce and
Industry;
(viii) substantial expansion means increase in the
investment in the plant and machinery by at least fifty per cent of
the book value of plant and machinery (before taking
depreciation in any year), as on the first day of the previous year
in which the substantial expansion is undertaken;
(ix) Theme Park means such parks, which the Board, may, by
notification in the Official Gazette, specify in accordance with the
scheme framed and notified by the Central Government.

AMOUNT & PERIOD OF

DEDUCTION
If the aforesaid conditions are satisfied , the deduction u/s
80 IC may be computed as under :

Tax planning for Hospitals

Constructed between 1/04/2008 to 31/03/2013.
At least 100 beds for patients.
Assesse submits an audit report in the prescribed
form on demand certifying that the deductions
has been correctly claimed.

Deductions
A) Hospital located anywhere in India other than
excluded area (Sec.80 IB(11C)
) Business of operating and maintaining a hospital
100% of such profits from GTI.
) The deduction shall be available for 5 assessment
years, beginning from the initial year in which the
undertaking begins to provide medical services.

Excluded areas
Greater Mumbai urban agglomeration
Delhi urban agglomeration.so on
B) Deduction regarding capital expenditure
If assesse incurs capital expenditure in respect of
business of building and operating a new hospital
anywhere in India , he will be entitles to deduct such
expenditure from income of such business.

Contd
Conditions:
Should be new business and not splitting up or
reconstruction of business.
Commenced after 31/03/2010.
Capital expenditure is incurred prior to the
commencement of its operations.
Amount is capitalized in the books of account on
date of commencement of operations.
If during previous year the expenses are more
than the receipts, the unabsorbed loss will be
carried forward and set-off against income of such
hospital or any other specific business.

Deduction under Section 80IB[Section 80-IB(11C)

(11C) Amount of deduction in the case of an
undertaking deriving profits from the business, shall be
100 per cent of the profits and gains derived from such
business for a period of five consecutive assessment
years, beginning with the initial assessment year, if
(i) the hospital is constructed and has started or starts
functioning at any time during the period beginning on
the 1st day of April, 2008 and ending on the 31st day
of March, 2013;
(ii) the hospital has at least 100 beds for patients;
(iii) the construction of the hospital is in accordance
with the regulations or bye-laws of the local authority;
(iv) the assesse furnishes along with the return of
income, a report of audit in such form and containing
such particulars.

Hotel Industry
A) Hotel Industry
Condition
Only to Indian Company
Not formed by splitting up
Not formed by transfer of old building
Paid Up Capital is at least Rs. 5 Lac
Hotel located in a hilly area / rural area / pilgrimage
Approved by prescribed authority
Deduction to specified & non specified hotels both.

Contd
Condition for approval
Not more than 300 rooms of 3 star category.
Place is specified
Hilly Area means above 1000 mtrs from sea
level;
Period of Deduction:
100% of profit and gains derived from business
for 5 consecutive assessment years for 10 years

B) Exception
Any machinery or plant which was used outside
India by any person other than the assesse shall
not be regarded as machinery to plant previously
used for any purpose if following conditions are
full filled:
- such machinery or plant was not used in India
before Installation by the assesse;
- It is imported into India from outside India;
- NO depreciation has been allowed or allowable
under this act for any period prior to installation of
the P&M by the assesse.

C) An undertaking engaged in business

hotel located in North eastern states

If such hotel has started or starts functioning

between 1.04.2007 and 31.03.2017
Quantum and period of deduction:
-100% profits for 10 consecutive assessment
years

D) Deduction regarding capital

expenditure
Conditions:
Should be a new business
Should be commenced after 31.03.2010
The capital expenditure is incurred prior to the
commencement of operations.
CE shall not include expenditure incurred on
acquisition on land or goodwill or financial
instrument.
The assesse shall get his accounts audited and
submit the report on demand by the A.O

Deductions
(a) 50% of the profits and gains derived from the
business of such hotel for a period of ten consecutive
years beginning from during the period beginning on the
1st day of April, 1990 and ending on the 31st day of
March, 1994 or beginning on the 1st day of April, 1997
and ending on the 31st day of March, 2001.
Provided further that the said hotel is approved by the
prescribed authority for the purpose of this clause in
accordance with the rules made under this Act and
where the said hotel is approved by the prescribed
authority before the 31st day of March, 1992, shall be
deemed to have been approved by the prescribed
authority for the purpose of this section in relation to the
assessment year commencing on the 1st day of April,
1991;

Contd
(b) 30% of the profits and gains derived from the
business of such hotel as is located in any place other
than those mentioned in sub-clause (a) for a period of
ten consecutive years beginning from the initial
assessment year .
(c) the deduction under clause (a) or clause (b) shall
be available only if,
(i) the business of the hotel is not formed by the
splitting up, or the reconstruction, of a business
already in existence;
(ii) the business of the hotel is owned and carried on
by a company registered in India with a paid-up capital
of not less than five hundred thousand rupees;
(iii) the hotel is for the time being approved by the
prescribed authority:

Amalgamation under Incometax Act

According to Section 2(1B) of the ITA, "Amalgamation in relation to one or more
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:
1.All the property of the amalgamating company or companies immediately before
the amalgamation becomes the property of the amalgamated company by virtue
of amalgamation.
2.All the liabilities of the amalgamating company or companies immediately before
the amalgamation become the liabilities of the amalgamated company by virtue of
amalgamation.
3.Shareholders holding not less than three-fourths in value of the shares in the
amalgamating company or companies (other than shares held therein immediately
before the amalgamation or by a nominee for the amalgamated company or its
subsidi-ary) 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 distribution of such property to the other company
after the winding up of the first-mentioned company.

Merger which is not

Amalgamation
Amalgamation by virtue of Transaction of Sale - Where
the property of company A is sold to other company B
Amalgamation by virtue of Liquidation -Where the
company A is wound-up in liquidation and the
liquidator distributes the property of A to B

Provisions for carry forward and

set off of accumulated losses
Conditions to be fulfilled by Amalgamated company to carry
forward the unabsorbed depreciation and accumulated losses of
the Amalgamating company:
There should be Amalgamation of A company owning an Industrial Undertaking or Ship or Hotel
with another Company
A Banking company with a specified Bank
One or more Public Sector Company(s) engaged in the
business of operating Aircraft with one or more Public Sector
Company(s) engaged in the similar business.
The Amalgamating company has been engaged in the business,
in which the accumulated losses occurred or depreciation
remains unabsorbed, for 3 or more years.
The amalgamating company has held continuously as on the
date of Amalgamation at least 75% of the book value of fixed
assets held by it two years prior to the date of Amalgamation.

Example
Assets and Book Value of company A
as on 5.11.2009:
Assets

Book Value in Lakhs

25

50

55

70

Assets carrying book value of atleast

(75% of 200) = 150 Lakhs as on
5.11.2009 should be held on
5.11.2011

 The Amalgamated company holds continuously for a

minimum period of 5 years from the date of Amalgamation at
least 75% of the book value of fixed assets of the
Amalgamating company.
The Amalgamated company continues the business of the
Amalgamating company for a period of 5 years from the date
of Amalgamation.
The Amalgamated company shall achieve the level of
production or at least 50% of the installed capacity of the
Amalgamating company before the end of 4 th year and
maintain the said level of production till the end of 5 th year
from the date of Amalgamation.

 Central Government may relax this condition of achieving

the minimum level of production or the period during which
the same is to be achieved in suitable cases having regard
to the genuine efforts made to attain the prescribed level of
production and the circumstances preventing such efforts
from achieving the same.
If these conditions are met then
The Accumulated Losses of the Amalgamating company
shall become the Business Loss of the Amalgamated
company for fresh 8 years.
The Unabsorbed Depreciation of the Amalgamating
company shall become the Unabsorbed Depreciation of
the Amalgamated Company and can be carried forward
indefinitely.

Consequences if the above conditions

are not satisfied
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.
The Balance Accumulated Loss and Unabsorbed
Depreciation not yet set off shall not be allowed to
carry forward and set off.

Seller and Buyer perspectiveMerger could be tax Neutral

Sellers perspective
No tax for the amalgamating company or its share-holders.
Cost of acquisition for new shares received would be the same as the
cost of acquisition for shares held in amalgamating company. The
period of holding of shares also to be reckoned from the time shares
were held in amalgamating company.

Buyers perspective
Amalgamated entity can avail the tax benefit in relation to the
accumulated losses and the unabsorbed depreciation of the
amalgamating company, in the previous year in which the
amalgamation was effected, subject to prescribed conditions.
Tax Benefits in the nature of tax incentive for export oriented units,
expenditure for scientific research, acquisition of patent
rights/copyrights, expenditure on prospecting for minerals and
amortization of preliminary expenses pertaining to transferor company
will be available to transferee company.
Depreciation on assets both intangible and tangible will be
proportionately available to the transferor and transferee.

Tax concessions to the

Amalgamating Company
Any transfer of capital assets, in the scheme of
amalgamation, by an amalgamating company to an Indian
amalgamated company is not treated as transfer under
section 47(vi) of the Act and so no capital gain tax is
attracted in the hands of the amalgamating company.
Tax Concession to a foreign Amalgamating Company [Section
47(via)]
In case the Amalgamating company is a foreign company
having shares in an Indian company, the transfer of such
shares to another foreign Amalgamated company will not
be regarded as transfer for the purpose of Capital Gain
only if:
At least 25% of the shareholders of Amalgamating
Foreign
company
should
continue
to
remain
shareholders of Amalgamated Foreign company

Tax concessions to the

Shareholders of an
Amalgamating Company

When the shareholder of an amalgamating company

transfers shares held by him in the amalgamating company
in consideration of allotment of shares in amalgamated
company in the scheme of amalgamation, then such transfer
of shares in not considered as transfer under section 47(vii)
of the Act and consequently no capital gain is attracted in
the hands of the shareholder of amalgamating company
Where an Indian target entity is sought to be acquired by a
foreign entity, it may be noted that the corporate laws permit
only domestic companies to be amalgamated. So the foreign
acquirer have to create a local special purpose vehicle (SPV)
in India to give effect the amalgamation with the Indian
company and more over the SPV avails the tax benefits on
amalgamation under the Act since the same are subject to
the amalgamated company being an Indian company.

Tax concessions to the

Amalgamated Company

If the amalgamating company has incurred any expenditure

eligible for deduction under sections (35(5), 35A(6),35AB(3),
35ABB, 35D, 35DD, 35DDA, 35E and/or 36(1)(ix)) prior to its
amalgamation with the amalgamated company as per
section 2(1B) of the Act and if the amalgamated company is
an Indian company, then the benefit of the aforesaid
sections shall be available to the amalgamated company, in
the manner it would be available to the amalgamating
company had there been no amalgamation.
Under section 72A of the Act, the amalgamated company is
entitled to carry for-ward the unabsorbed depreciation and
unabsorbed accumulated business losses of the
amalgamating company provided certain conditions are
fulfilled

Expenditure on scientific
research [section 35(5)]
Any unabsorbed capital expenditure on scientific
research of the Amalgamating company will be allowed
to be carried forward and set off in the hands of the
Amalgamated company.
If such an asset ceases to be used in a previous year
for scientific research related to the business of the
Amalgamated company and is sold, the sale price, to
the cost of asset will be treated as business income of
the Amalgamated company and will be subjected to
the provisions of the capital gains.

Expenditure for obtaining license

to operate telecom services
(Section 35ABB)
Section 35ABB is applicable in case of Transfer or Sale of
license by amalgamating company to the amalgamated
company
Expenditure on acquisition of telecom license(capital
expenditure) is written off in equal installments.
Transfer of license by amalgamating company, write off allowed
to amalgamated company in the same manner as
amalgamating company earlier.
Write off shall be adjusted in case of sale of license by new
company.
Note Spectrum Charges not akin to license fee. (MTNL vs CIT)

Treatment of preliminary expense

[section 35D)
Treatment of preliminary expenditure in case of a
business organization U/S 35D
Any capital expenditure done before the
commencement of operation of specified business is
allowable as deduction in 5 equal annual installments
Only specified expenditure allowed:
a) Expenditure for preparation of report
b) Legal charges for drafting agreements
Incase of expansion of activities, preliminary expense
is allowed
Determining Qualifying amount

Preliminary Expenditure in case

of Amalgamation [section 35D95)
The amount of preliminary expense of the
Amalgamating company, which are not yet written-off,
shall be allowed as deduction to the Amalgamated
company in the same manner as would have been
allowed to the Amalgamating company.

Amortization of expenditure
[section 35DD]
Where an assessee incurs any expenditure, wholly and
exclusively for the purpose of Amalgamation or
Demerger of an undertaking, the assessee shall be
allowed a deduction of an amount equal to 1/5th of
such expenditure for each of the five successive
previous years beginning with the previous year in
which Amalgamation or Demerger takes place.

Treatment of voluntary
retirement expense [section
35DDA]
When the undertaking of an Indian company, entitled
to deduction for amortization of voluntary retirement
expenses, is transferred before the expiry to another
Indian company, in a scheme of Amalgamation, the
deduction shall continue to be available to the
Amalgamated company.

Treatment of expenditure on prospecting

of certain minerals
[section 35E(7A)]
The amount of expenditure on prospecting, etc. of
certain minerals of the Amalgamating company, which
are not yet written off, shall be allowed as deduction to
the Amalgamated company.

Treatment of Capital expenditure

on family planning
[section 36(1)(ix)]
Businesses can claim deduction of capital expenditure
on family planning for its employees in five equal
installments.
The capital expenditure on family planning not yet
written off shall be allowable to the Amalgamated
company in the same manner of balance installments.
Treatment in case of sale of such assets will be same
as would have been in the case of Amalgamating
company.

Treatment of bad debts

[section 36(1)(vii)
The debts of the Amalgamating company which were
taken over by the Amalgamated company, becomes
BAD and are allowed as a deduction to the
Amalgamated company.

SLUMP SALE
The term slump sale means transfer of one or more
undertakings by way of sale for a lump sum consideration,
without values being assigned to the individual assets and
liabilities.
Any profit and gain arising from the slump sale in the
previous year, is chargeable to income-tax as capital gains
arising from the transfer of the undertaking.
Where the undertaking is owned and held by the transferor
for 36 months or less immediately preceding the transfer,
the undertaking would be regarded as short-term capital
asset and the gains taxed accordingly. In other cases, the
undertaking would be regarded as a long-term capital asset
even though such undertaking may have acquired certain
assets which are held for less than 36 months58.

Demerger
A demerger is a reorganization of a company where
the assets and liabilities of an undertaking or part of an
un-dertaking are transferred to one or more additional
entities, viz. resulting companies.