Taxation of Companies, LLPs and Business Reorganisations (CA Final)

Understand Taxation of Companies, LLPs and Business Reorganisations

Key rules to remember

Amalgamation: shareholder test

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

Shares held by the amalgamated company, its subsidiary or its nominee are left out of the test. Successor must be an Indian company for tax neutrality.

Amalgamation: cost and holding period of new shares

Cost of new shares = cost of old shares; holding period includes the period for old shares

Exchange of shares in the amalgamation is not a transfer for the shareholder.

Demerger: cost of shares in resulting company

Cost = Cost of shares in demerged company × (Net book value of assets transferred ÷ Net worth of demerged company immediately before demerger)

Net worth = paid-up share capital + general reserves per the books immediately before demerger. This split applies only if the demerger conditions are met: all property and liabilities of the undertaking transfer, assets move at book value (net of depreciation), shares are issued to shareholders of the demerged company in proportion, and shareholders holding at least 75% in value of the demerged company continue as shareholders of the resulting company.

Demerger: cost of original shares

Revised cost of original shares = Original cost − Cost allocated to resulting company shares

The holding period of the new shares includes that of the original shares.

Slump sale: capital gain

Capital gain = Lump sum consideration − Net worth of undertaking

Long-term if undertaking held for more than 36 months, otherwise short-term. Use the rate in the Finance Act applicable to your attempt.

Slump sale: net worth

Net worth = Total assets − Liabilities; depreciable assets at block WDV, other assets at book value, revaluation ignored

Self-generated goodwill and similar intangibles with no cost are not valued. A CA report in the prescribed form is needed.

Conversion of proprietorship or firm into company

Not a transfer if all assets and liabilities pass, no consideration except shares, and ≥ 50% of total voting power is held by the proprietor or partners for 5 years

This is a 50% voting power test, not the 75% test of amalgamation. For a firm, partners must become shareholders in the same proportion as their capital in the firm, and no partner may receive any consideration or benefit other than shares.

Conversion of company into LLP

Not a transfer if the company is a private company or unlisted public company, turnover or gross receipts do not exceed ₹60 lakh in any of the 3 preceding previous years, total asset value in books does not exceed ₹5 crore in any of those years, and the erstwhile shareholders' aggregate profit share in the LLP is ≥ 50% at all times during 5 years from conversion, along with the other continuity conditions

Shareholders become partners in the same proportion as their shareholding. No consideration except LLP interest and no benefit except profit share. No revaluation of assets. Any profit share of other persons must stay within what the 50% limit allows. Conditions run for 5 years.

LLP and firm: partner remuneration limit

On first ₹6,00,000 of book profit (or loss): higher of ₹3,00,000 or 90%; on balance: 60%

Only to working partners, authorised by the deed, for the period after the deed. Interest to partners is allowed up to 12% simple.

MAT (regular regime company)

MAT applies if tax on total income < 15% of book profit; credit = MAT paid − regular tax

The 15% rate and the 15-year carry-forward are as per the Finance Act applicable to your attempt. Credit is available only under the regular regime and is set off only against the excess of regular tax over MAT. Not applicable to the concessional 22% regime. Check the MAT and credit position applicable to your attempt.

How to solve Taxation of Companies, LLPs and Business Reorganisations questions

1. 1Identify the event: amalgamation, demerger, slump sale, buyback, conversion, or plain tax on a company or LLP.
2. 2Check the form of the parties. For amalgamation and demerger, is the successor an Indian company? Are the property, liabilities and shareholding conditions met?
3. 3List the conditions in the question facts and tick each one. A missing 75% shareholder test, a revaluation of assets, or a break within the 5-year period decides the answer.
4. 4State the consequence for each person separately: the transferor company, the successor company, and the shareholders or partners.
5. 5Compute only after the treatment is settled: cost of shares, net worth, capital gain, or tax liability.
6. 6Note the character and period of the gain (long-term or short-term), and carry-forward of losses or MAT credit where relevant.
7. 7Write provision, facts, conclusion. Give the final figure with the tax effect and any condition that could reverse the relief.

Quickest way: Condition-first scan

Common mistakes in Taxation of Companies, LLPs and Business Reorganisations

• Treating every merger or split as tax neutral

  Students remember the exemption but skip the conditions.

  Fix: Tick each condition from the facts. A foreign successor, shareholders below 75%, or assets not moved at book value defeats the relief.

• Taxing a slump sale as a normal asset-wise sale

  The word sale triggers item-by-item gain computation.

  Fix: Look for a lump sum without individual values. If so, use consideration minus net worth, with no separate cost for each asset.

• Including revaluation in net worth

  Students take balance sheet figures directly.

  Fix: Ignore revaluation. Use WDV for depreciable assets and book value (excluding revaluation) for others.

• Using the wrong denominator in demerger share-cost split

  Net worth and net assets are confused.

  Fix: The denominator is net worth immediately before demerger (paid-up capital + general reserves). The numerator is the net book value of assets transferred.

• Applying the 75% shareholder test to conversions, or ignoring the entry limits for company-to-LLP

  Students carry the amalgamation rule over to every reorganisation.

  Fix: For proprietor or firm into company, test 50% voting power held for 5 years. For company into LLP, check it is a private or unlisted public company, turnover does not exceed ₹60 lakh and assets do not exceed ₹5 crore in any of the 3 preceding previous years.

• Forgetting continuity conditions after conversion

  Students treat relief as permanent once granted.

  Fix: Note the 5-year holding conditions. Breach makes the relief withdrawable, so mention the consequence in the answer.

• Stating buyback tax from an old or memorised rule

  Treatment has changed across years and sources.

  Fix: Read the question's date, apply the law applicable to your attempt, and state the basis in your first line.

Worked examples