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There is life after M&A for tax holiday
March, 13th 2007


Chennai March 12 A tax amendment that has been ruining the holidays of M&A professionals is the one about tax holiday. Reason: The latest Budget proposes to deny the tax holiday benefit for enterprises that are transferred in a scheme of amalgamation or demerger on or after April 1, 2007.

But there seems to be some hope, assures Mr Pritin Kumar, Senior Manager, Deloitte Haskins & Sells, Mumbai. "Even after the proposed amendment becoming law, it would be open to claim that the tax holiday is available to the amalgamated/resulting company that owns such undertaking," he says.

To know `how', Business Line posed a few quick questions to Mr Kumar.

First, on the section in question.

Section 80-IA of the Income-tax Act, 1961 grants a ten-year tax holiday for infrastructure facilities, telecommunication services, power, etc. The scheme of the tax holiday, inter alia, provides that in case of an amalgamation or demerger, the tax holiday would be available to the amalgamated or resulting company for the remainder period.

What is the current confusion?

Pursuant to the proposed amendment of Section 80-IA, taxpayers are uncertain about the tax holiday status in respect of reorganisations taking place on or after April 1.

Any advice to the hassled?

An analysis of the provisions of Section 80-IA shows that the benefit of the tax holiday is attached to the undertaking and not to the taxpayer. This is in contrast with, say, losses incurred by an undertaking, which are attached to the taxpayer and not the undertaking. This seems to suggest that the benefit of the tax holiday should continue to be available even after March 31, 2007.

Has the Board clarified the issue?

There is a clarification issued by the Central Board of Direct Taxes (CBDT) on December 13, 1963 in the context of tax holiday under section 84. The Board had indicated that it agreed with the view that the benefit of Section 84 attaches to the undertaking and not to the owner thereof and that the successor would be entitled to the benefit for the unexpired period of five years, provided the undertaking was taken over as a running concern.

Do we have any precedents to support your view?

The proposition that the benefit of the tax holiday vests in the amalgamated company has been put forth and accepted in a large number of judicial pronouncements, including those by the Bombay and Calcutta High Courts, and by the Mumbai and Pune Tribunals, which were rendered prior to the specific provision permitting transfer of the tax holiday under Section 80-IA. The decision of the Supreme Court in the case of Madurai Mills (89 ITR 45) in the context of taxability of capital assets pursuant to liquidation would also support the case of taxpayers, wherein it was held that the provision exempting such transactions from tax were originally enacted as a matter of clarification to allay fears and that the subsequent omission of such provision does not warrant the reference that such transactions were subsequently taxable.

There is life after M&A for tax holiday, you'd say?

True. All is not lost for the taxpayers. Assessees can claim that the proposed amendment to Section 80-IA does not impact the claim for the benefit of the tax holiday in the hands of the amalgamated or resulting company in a scheme of amalgamation or demerger after March 31, 2007.

D. Murali

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