Exemptions of amalgamation available under the Income-tax Act, 1961:

•  Exemption from capital gains in the hands of the amalgamating companies: Under section 47(vi), capital gains arising from the transfer of assets by the

amalgamating companies to the Indian amalgamated company is exempt from tax.

•  Exemption from capital gains for the shareholders of the amalgamating companies: Under section 47(vii), capital gains arising from the transfer of

shares by a shareholder of the amalgamating companies are exempt from tax, if:

(a) the transfer is made in consideration of the allotment to him of shares in the amalgamated company except where the shareholder itself is an amalgamated company; and

(b) the amalgamated company is an Indian company.

The issue of exemption from capital gains is not free from doubt where the transaction is not structured as a share for share exchange and the consideration is paid in other forms. There are two contrary High Court judgments in this regard.

In the case of CIT vs. Gautam Sarabhai Trust [1988] 173 ITR 216, the Gujarat High Court held that to qualify for exemption under section 47(vii), the shareholder should receive the entire consideration in the form of shares of the amalgamated company alone. In other words, if besides the share or shares in the amalgamated company, the shareholders of the amalgamating company is allotted something more, namely, bonds or debentures in consideration of the transfer of his share or shares in the amalgamating company, he cannot get the benefit of section 47(vii).

The other view is based on the judgment in the case of CIT vs. M.Ct.M Corporation Private Ltd. [1996] 221 ITR 524. In this case, the Madras High Court held that in as much as shares and debentures are allotted to the assessee on account of the amalgamation of the two companies and in view of the fact that the identity of the transferor company got lost in the amalgamation, there was no transfer or extinguishment of any right in allotting the shares and debentures in favour of the assessee under the provisions of section 2(47). Even if there was a transfer, the gains arising there from, where entitled to exemption under section 47(vii).

•  Exemption from capital gains in case of international restructuring : Under section 47(via), in case of amalgamation of foreign companies, transfer of

shares held in Indian company by amalgamating foreign company to amalgamated foreign company is exempt from tax, if the following two conditions are satisfied:

a. At least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company; and

b. The amalgamation is tax-free in the foreign company.