The Income-tax Act, 1961 (‘IT Act’) provides for tax-neutrality of ‘amalgamations’, subject to satisfaction of certain prescribed conditions. The term ‘amalgamation’ has been defined under Section 2(1B) of the IT Act. As per this definition, for an arrangement to qualify as an ‘amalgamation’, inter alia, “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”.

Typically, a scheme of arrangement (‘Scheme‘) provides for three different types of dates, namely, ‘Appointed Date’, ‘Effective Date’, and ‘Record Date’. ‘Appointed Date’ is a date from which the amalgamation is deemed to be effective, and, many a times, may be a retrospective date or a date different from the date of sanction of the Scheme. ‘Effective Date’ is the date when the amalgamation is completed in all respects after having gone through the formalities involved, including sanction by the National Company Law Tribunal / the High Court and the filing of the sanctioning order with the concerned Registrar of Companies. Further, it is not uncommon for the Scheme to provide for a ‘Record Date’, which is a date generally closer to the Effective Date, and which is taken into consideration for determining the shareholders of the amalgamating company, who are to be issued shares by the amalgamated company, pursuant to the amalgamation.

Further, Section 232(6) of the Companies Act, 2013 now provides that a Scheme must clearly indicate an Appointed Date. Previously, the concept of Appointed Date was established by way of judicial precedents, most notably, the Supreme Court’s decision in Marshall Sons & Co. (India) Ltd.^[1], wherein the Supreme Court held that the date of amalgamation / transfer is the date specified in the Scheme or the date specified by the Courts. Therefore, as soon as the formalities are completed, the transfer becomes effective and relates back to the date of transfer specified by the parties / Court.

The key issue that arises, therefore, is that which of the above-mentioned three dates should be reckoned for the purposes of determining “immediately before the amalgamation” in terms of Section 2(1B) of the IT Act.

Till recently, issue of shares by an amalgamated company to the shareholders of the amalgamating company as on the ‘Record Date’ / ‘Effective Date’ was considered to be in compliance of Section 2(1B) of the IT Act. However, in a recent case^[2], the Chennai Bench of the Income Tax Appellate Tribunal (‘Tribunal’) has held that for the purposes of Section 2(1B)(iii) of the IT Act, shareholding of the amalgamating company as on the Appointed Date is to be considered for the purpose of determining tax neutrality of the transaction. In other words, the term “immediately before the amalgamation” appearing in this section was interpreted to mean the Appointed Date. In this case, the Scheme provided for April 1, 2013 as the Appointed Date. However, as on this Appointed Date, the amalgamated company held 26% stake in the amalgamating company A, which was subsequently increased to 100% on February 14, 2014. This Scheme was approved by the High Court on April 28, 2014. Pursuant to the effectiveness of the scheme, the amalgamating company cancelled the shares held by its sole shareholder i.e., the amalgamated company and thereafter ceased to exist. Be that as it may, the Tribunal upheld the arguments of the Tax Department that this arrangement was not compliant with Section 2(1B) of the IT Act, since as on the Appointed Date, only 26% shares were held by the amalgamated company in the amalgamating company. As a result, the Tribunal rejected the claim of the amalgamated company qua carry-forward and set-off of loss under Section 72A of the IT Act.

In our view, if the reasoning in this decision is sustained in appellate proceedings, it may have a serious impact on corporate merger and acquisition transactions, particularly, as an example, in case of listed companies, where the shareholding of the amalgamating listed company would change frequently between the Appointed Date and the Effective Date. This may also have implications for other amalgamation transactions involving unlisted companies, where the Scheme provides for a retrospective Appointed Date, and there has been a change in shareholding of the amalgamating company in the interregnum period between the Appointed Date and the Effective Date.

While an appeal^[3] is pending against the Tribunal decision, it may not be unreasonable to expect the tax authorities to challenge the tax-neutrality benefits to amalgamations, where there has been a change in the shareholding of the amalgamating company post the Appointed Date.

[1]  Marshall Sons & Co. (India) Ltd. vs. ITO (1997) 223 ITR 809 (Supreme Court).

[2]  Roca Bathroom Products Pvt. Ltd. vs Deputy Commission of Income Tax, order dated June 21, 2021 in ITA No: 2767/Chny/2019 (ITAT Chennai).

[3]  TCA 460/2021.