Budget Series #1- ICAI Budget 2022 recommendations – Section 2(1B) – Definition of Amalgamation


It is suggested that the provisions of Section 2(1B) be amended to clarify that the shares are to be issued by the amalgamated company to the shareholders of amalgamating company as they exist on the effective date and not on the appointed date. (SUGGESTION FOR RATIONALIZATION OF THE PROVISIONS OF DIRECT TAX LAWS)

Issue & Justification

Section 2(1B) of the Act provides for definition of Amalgamation in relation to the companies. The definition also contains various conditions to be satisfied for the amalgamation to be treated as tax neutral under the Act. The conditions contained in item (iii) of the said clause is that the shareholders holding at least three fourth in value of shares in the amalgamating company immediately before amalgamation should become shareholders of the amalgamated company. It is a known fact that the Amalgamation is given effect from the appointed date whereas the shares are issued on the effective date. Generally, there is time lag between the Appointed date and the effective date. In case of change in the shareholding in between the two dates, it would not be able to comply with the condition if read literally. It is also a fact that shares can be issued to the shareholders of the amalgamating company only after the effective date as shares cannot be issued retrospectively from the Appointed date. In order to clarify the position and avoid any litigation on the matter it needs to be provided that the condition needs to be satisfied with reference to the shareholders as on the effective date and not the Appointed date.