Every time structural reforms are undertaken, the Government always has the income-tax code in mind. Rather than provide direct cash assistance to corporates, the Government generally prefers fiscal stimulus by amending the I-T law. This is what is being contemplated in the proposed merger of Indian with Air India. The merger of the two airlines should help Air India absorb the losses of Indian and, thereby, avoid payment of corporate tax. However, in this context, Section 72A of the I-T Act comes into play. The section contains an exception to the general rule that the unabsorbed depreciation allowance of the previous owner of a business cannot be carried forward and set off by the successor and that a business loss can be carried forward and set off against the business profits of a subsequent year only by the assessee who had incurred the loss.

The section, in its original form, applied only to the manufacturing sector. In 1998, both Sections 47 and 72 A were taken up for special amendments to encourage amalgamation of industrial undertakings by offering a tax neutral system for restructuring. Year after year, the scope of the benefit of Section 72A has been extended. The categories of businesses eligible for the benefits of carry forward of unabsorbed depreciation and business losses have now been enumerated. The global consultant evaluating the proposed merger of the two airlines has suggested extending fiscal concessions, by amending Section 72A, so as to include airlines in the scheme of benefits.

Stamp duty

An important issue relating to mergers and amalgamations (M&A) is stamp duty. Corporate tax benefits may be extended by amending Section 72A and introducing Section 72AAA. But revaluation of assets before merger will necessitate payment of high stamp duty. That will mean coaxing various State governments to pass necessary laws for exempting the merged entity from stamp duty. It should be remembered that fixed assets of the airlines are located in almost every State capital.

The way Section 72A is begin modified year after year makes one wonder if there can be an alternative mode of prescribing an omnibus clause for extending merger benefits, by specifying such of those businesses or entities which will be outside the purview of Section 72A. Section 72 was originally contemplated for rehabilitation of sick industrial units. The very basis has undergone a metamorphosis now. Profit-making entities are allowed to take over loss-making units and are given tax benefits. Of course, stringent conditions are prescribed in the law.

Amendments to Section 72 will certainly give a boost to M&A in the domestic sector. Synergies of M&A will provide better technology and larger markets. Public interest should be taken care of by ensuring that no M&A is resorted merely for tax gain. The sooner the company law tribunal is set up, the better for everyone concerned.

T. C. A. Ramanujam
(The author is a former Chief Commissioner of Income-Tax.)