Business Restructuring: formula sheet

Key formulas

Amalgamation test (property and liabilities)

All property + all liabilities of amalgamating company(ies) → amalgamated company

Partial transfer of assets or leaving some liabilities behind fails the definition.

Amalgamation test (shareholders)

Shareholders holding ≥ 75% in value of shares of amalgamating company become shareholders of amalgamated company

Exclude shares held by the amalgamated company, its nominee or its subsidiary when finding the base. The test is on value, not number of shareholders.

Company-level relief

Section 70(1)(e): transfer of capital asset by amalgamating company to amalgamated company is not a transfer, if amalgamated company is an Indian company

The Indian-company condition applies to the amalgamated company.

Shareholder-level relief

Section 70(1)(f): transfer of shares in amalgamating company is not a transfer, if (i) made in consideration of allotment of shares in amalgamated company and (ii) amalgamated company is Indian

A shareholder that is itself the amalgamated company is excluded from the allotment condition.

Foreign amalgamation relief

Section 70(1)(g) and (h): ≥ 25% of shareholders of amalgamating foreign company continue + no capital gains tax in country of incorporation

Applies to Indian company shares (clause g) and to foreign company shares deriving value substantially from Indian company shares (clause h).

Eligible cases (section 116(1))

Industrial undertaking / ship / hotel company amalgamating with another company; banking company with a specified bank; public sector companies with public sector companies; erstwhile public sector company in strategic disinvestment case

Listed cases only. Relief is deemed loss or depreciation of the amalgamated company for the tax year of amalgamation. For the strategic disinvestment case, the amalgamation must be within five years from the end of the tax year in which the restriction in the share purchase agreement ends.

Conditions on the amalgamating company (section 116(4)(a))

Business in which loss/depreciation arose carried on for ≥ 3 years; ≥ 3/4 of book value of fixed assets held 2 years before amalgamation held continuously up to the date of amalgamation

Both conditions must be met.

Conditions on the amalgamated company (section 116(4)(b))

Hold ≥ 3/4 of book value of acquired fixed assets for ≥ 5 years from amalgamation; continue the business for ≥ 5 years; fulfil other prescribed conditions

All must be met. Under section 116(5), non-compliance with any condition in section 116(4), on either company, makes the loss or depreciation already set off income of the amalgamated company in the year of non-compliance.

Time limit on carry forward (section 116(12))

Accumulated loss carried forward ≤ 8 tax years after the tax year the loss was first computed for the original predecessor entity

For amalgamations on or after 1 April 2025. Section 116(12) caps only the loss forming part of the accumulated loss; unabsorbed depreciation is not covered by that cap. The eight years run from the tax year the loss was first computed for the original predecessor entity, so years elapsed before the amalgamation count.

Meaning of accumulated loss

Business loss (excluding speculation loss) that would have been eligible for carry forward under section 112 to the amalgamating company

Capital loss and speculation loss are not included.

Industrial undertaking (section 116(13)(b))

Manufacture or processing of goods; computer software; power generation or distribution; telecom services; mining; construction of ships, aircraft or rail systems

Trading or pure service business generally does not fit unless listed.

Strategic disinvestment (section 116(3)(c))

Sale of shareholding that reduces government or public sector holding to below 51% (it must have exceeded 51% before) and transfers control to the buyer

Loss claim is limited to the loss and depreciation of the public sector company on the date it ceases to be one (section 116(2)).

Loss directly relatable to transferred undertaking

Accumulated loss / unabsorbed depreciation of the transferred undertaking → resulting company (section 116(6)(a))

The resulting company carries forward and sets it off under the other loss provisions of the Act.

Loss not directly relatable

Share of resulting company = Common loss × (Assets transferred ÷ Total assets of the undertakings, i.e. transferred + retained); Share of demerged company = Common loss × (Assets retained ÷ Total assets)

Section 116(6)(b) apportions in the proportion in which assets of the undertakings are retained by the demerged company and transferred to the resulting company.

Meaning of accumulated loss

Business loss (excluding speculation loss) that would have been eligible for carry forward and set off to the demerged company under section 112 had the demerger not occurred

Section 116(13)(a). Loss under other heads and speculation business loss are not covered.

Meaning of unabsorbed depreciation

Depreciation allowance that remains to be allowed and would have been allowed to the demerged company had the demerger not occurred

Section 116(13)(e).

Genuine business purpose conditions

Central Government may notify conditions to ensure the demerger is for genuine business purposes

Section 116(7). It only empowers the Government to notify conditions. Any consequence of breach depends on the notified conditions, so read the facts for any condition.

Capital gain on slump sale

Capital gain = Full value of consideration (FMV of capital assets) − Net worth

Net worth is deemed to be the cost of acquisition and the cost of improvement (section 77(3)). Do not deduct any other cost of acquisition or improvement.

Net worth

Net worth = Aggregate value of total assets − Value of liabilities (as per books)

Revaluation of assets is ignored (section 77(5)(a)).

Value of assets for net worth

Depreciable assets = WDV of block under section 41(1)(c); goodwill not purchased from previous owner = nil; assets whose entire expenditure is allowed or allowable under section 46 = nil; other assets = book value

These are the rules in section 77(5)(b). Purchased goodwill is taken at book value.

Character of gain

Undertaking held for 36 months or less = short-term; otherwise = long-term

Section 77(1) and (2). The test is on the undertaking, not on each asset.

Tax on long-term gain

Tax = 12.5% × long-term capital gain

Section 197(1)(b). The 12.5% rate applies to the gain itself; the rest of total income is taxed at normal rates.

Firm or proprietary concern to company: loss transfer

Predecessor's accumulated loss + unabsorbed depreciation = deemed loss / depreciation of the successor company for the tax year of reorganisation

Section 116(8). Applies when the conditions of section 70(1)(zd) (firm) or 70(1)(zf) (proprietary concern) are met.

Company to LLP: loss transfer

Predecessor company's accumulated loss + unabsorbed depreciation = deemed loss / depreciation of the successor LLP

Section 116(10). Predecessor must be a private company or unlisted public company meeting section 70(1)(ze).

Consequence of non-compliance

Set-offs made in any tax year = income of the successor, taxed in the year of non-compliance

Section 116(9) for companies, 116(11) for LLP. The tax falls in the year of breach, not in the earlier years.

Eight-year limit

Inherited loss can be carried forward for at most 8 tax years after the tax year the loss was first computed for the original predecessor entity

Section 116(12). Applies to reorganisations effected on or after 1 April 2025. The clock does not restart.

Accumulated loss

Business loss, excluding speculation loss, that was eligible for carry forward under section 112 in the predecessor's hands

Section 116(13)(a). Losses under other heads are not covered.

Conditions for relief

Section 70(1)(zd): firm to company. Section 70(1)(zf): proprietary concern to company. Section 70(1)(ze): private or unlisted public company to LLP

Check the exact conditions in the clause text. Section 116(4) conditions apply to amalgamation, not to these conversions.

Covered amalgamations

Industrial undertaking / ship / hotel company; banking company with specified bank; PSU with PSU; erstwhile PSU after disinvestment

Sub-section (1). Loss and unabsorbed depreciation become those of the amalgamated company for the year of amalgamation.

Amalgamating company conditions

Business for 3 or more years; holds at least 3/4 of book value of fixed assets held 2 years before amalgamation, continuously till the date

Sub-section (4)(a).

Amalgamated company conditions

Holds at least 3/4 of book value of acquired fixed assets for 5 years; continues the business for 5 years; meets other prescribed conditions

Sub-section (4)(b). Period runs from the date of amalgamation.

Consequence of default

Loss/depreciation set off earlier = income of the amalgamated company in the year of non-compliance

Sub-section (5).

Eight-year limit

Carry forward ≤ 8 tax years after the year the loss was first computed for the original predecessor

Sub-section (12), for events on or after 1 April 2025.

Demerger losses

Directly relatable: to resulting company. Otherwise: split in ratio of assets retained to assets transferred

Sub-section (6).

Strategic disinvestment

Government/PSU holding above 51% falls below 51% and control passes to buyer

Sub-section (3)(c). Loss cap: PSU loss on the date it ceases to be a PSU (sub-section 2).

Meaning of international transaction

International transaction = transaction between two or more associated enterprises + at least one is a non-resident (s.163(1))

Both conditions must be met. The list of items in clauses (a) to (g) is inclusive.

Business restructuring rule

Restructuring with an associated enterprise = international transaction, even if no effect on profit, income, losses or assets now or later (s.163(1)(e))

The test is the nature of the transaction, not its profit effect.

Deemed international transaction

Deal with other person + (prior agreement OR terms determined in substance with the associated enterprise) + enterprise or associated enterprise or both non-resident = deemed international transaction (s.163(2))

The other person may be resident or non-resident.

Cost-sharing income rule

Cost allocated or contributed = determined having regard to arm's length price of the benefit, service or facility (s.161(3))

Applies to allocation or contribution arrangements between associated enterprises.

Arm's length price

ALP = price applied or proposed in a transaction between persons other than associated enterprises, in uncontrolled conditions (s.173(a))

Section 161(1) and (2) apply it to income and to allowances for expense or interest.

Section 161(4) limit

s.161 does not apply if the ALP determination reduces income chargeable to tax or increases loss computed on book entries

Adjustment works only to raise income or reduce loss.

Quick revision

• Amalgamation of co-operative banks needs all assets and liabilities immediately before the merger to become those of the amalgamated bank, other than assets transferred, by sale or distribution on winding up, to the amalgamated bank.
• Under Section 65, 75% or more of voting rights of members must move to the amalgamated co-operative bank.
• Shares held by the amalgamated bank, its nominee or subsidiary are excluded from the 75% value test.
• In a co-operative bank demerger, the assets and liabilities of the undertaking must pass to the resulting bank at the values in the demerged bank's books immediately before the transfer, other than changes consequent to revaluation.
• Resulting bank must issue membership to members of the demerged bank on a proportionate basis.
• In demerger, shareholders holding 75% or more in value of the shares in the demerged bank (other than shares held by the resulting bank, its nominee or subsidiary) must become shareholders of the resulting bank, otherwise than as a result of the acquisition of the assets.
• Demerger transfer must be on a going concern basis and meet conditions notified by the Central Government.
• Conversion means a primary co-operative bank becoming a banking company under the notified RBI scheme.
• Predecessor bank means the one succeeded; successor bank means amalgamated or resulting bank.
• Slump sale is a transfer of an undertaking and is not a tax-neutral restructuring.
• Always test every condition before you state any tax benefit.
• Link restructuring with transfer pricing when related parties are in different countries.

Common mistakes

• Treating every merger as tax neutral Fix: Merger is only the commercial label. Tax relief needs the defined conditions: all property and liabilities transferred and the 75% shareholder test.
• Counting the 75% on number of shareholders Fix: The test is on value of shares held. Compute it in rupees of share value.
• Treating every amalgamation as eligible to carry forward losses. Fix: Section 116(1) lists specific cases. Check the type of company first.
• Carrying forward capital losses or speculation losses of the amalgamating company. Fix: Accumulated loss means business loss excluding speculation loss. Unabsorbed depreciation is separate.
• Treating a demerger like a slump sale Fix: Ask what is received. Shares issued to shareholders with court approval points to a demerger. A lump sum for the undertaking points to a slump sale.
• Allocating all losses by asset ratio Fix: Take directly relatable loss first. Only the loss not directly relatable is apportioned.
• Using revalued figures of assets in net worth. Fix: Ignore any revaluation. Use book values without revaluation effects, as section 77(5)(a) says.
• Taking depreciable assets at book value instead of the WDV of the block. Fix: Take depreciable assets at the WDV of the block under section 41(1)(c). Only other assets go at book value.
• Applying the section 116(4) conditions (three years of business, three-fourths of fixed assets, five-year holding) to a firm or proprietor converting into a company. Fix: Sub-section (4) is tied to amalgamation under sub-section (1). For conversions, the test is the conditions of section 70(1)(zd), (ze) or (zf).
• Carrying forward speculation loss or losses under other heads to the successor. Fix: Section 116(13)(a) covers only business or profession loss, excluding speculation loss, that was eligible for carry forward under section 112.

Exam tips

• In case scenarios, write the definition test first. Marks are usually given for naming both conditions: all property and liabilities, and 75% in value.
• Show the 75% computation with the base after excluding the amalgamated company's own holdings. A clear fraction earns method marks.
• Always state the Indian company condition for the amalgamated company. It is a favourite trap in MCQs.
• Quote the clause numbers of section 70, such as (e) for company assets and (f) for shareholders, only as they appear in the Act. Do not add section numbers you are unsure of.
• End with a one-line conclusion: tax neutral or taxable, and for whom.
• Write the section 116(1) eligible case first. Examiners give marks for identifying why the case qualifies.
• In case studies, check the number of years in each condition carefully. Changing 3 to 2 years is a common trap.
• List the conditions in two groups: amalgamating company and amalgamated company. This is easier to read and mark.