Analysing the proposals relating to direct taxes in the Finance Bill, 1999, Bansi S Mehta, succintly summed up the proposals that made sense and those that did not. The speaker pointed out that as a result of the imposition of a 10 per cent surcharge on domestic companies (foreign companies are exempt), the dividend tax for the financial year 1998-99, will be 11 per cent.

However, there is a marginal possibility that for companies that have declared dividend by March 1999, the rate of 10 per cent will apply because of Sec 294 of the Income Tax Act.

This section has a provision which states that if on April 1 no provision has been made by a Central Act for changing the income-tax, the Income Tax Act shall take effect until such a provision is made, as if the rate more favourable to the assessee, were in force. By virtue of the surcharge, block assesment rate will be 66 per cent (as per provisions of Chapter XIVB of the Income-Tax Act, in search and seizure cases, assesment would bein respect of block period of 10 years.

Demergers

The proposed clause (19AA) in Sec 2 of the Income Tax Act defines demerger, which, in relation to companies, means the "transfer pursuant to a scheme of arrangement U/s 391 to 394 of the Companies Act...". This however, is a case of a drafting error, as (in the finance bill) instead of the word "or," "to" has been used. Sec 392 deals with the powers of High Court and Sec 393 deals with the explanatory statement and hence including these sections does not make sense.

For a "demerger" all the properties and liabilities of an undertaking, must be transfered to the demerged company. It was pointed out that at the time of nationalisation of the Elphinstone and Podar Mills, the question was whether the process house is an undertaking or a component for textile mills?

Similarly, how does one allocate general liabilities? One more condition for the transaction to qualify as a "demerger" is that the properties and liabilities must be transfered at bookvalue. Furthermore, if the purpose of the said demerger is for giving an equity stake to a foreign player or to introduce a strategic partner, why should assets be transfered at book value and not at a premium?

Another question is what happens if the swap is not just shares for shares, but shares and debentures? The Gujarat High Court, in the Gautam Sarabhai 173 ITR 216 case, held that exemption u/s 47(vii) is restricted to share for shares only. The Madras High Court, however, held in the case of M.C.T. M. Corporation P.Ltd. 221 ITR 524, that the exemption is available on the issue of debentures also. The Madras High Court had relied upon Rasiklal Maneklal (HUF) 177 ITR 198(SC). Which makes the settlement of this issue, a case for a decision by the very Apex legal body in the country--the Supreme Court.

Slump Sale

This, the speaker pointed out, was another problem area. Business itself is considered as a capital asset, as is the precedent set in the Mungeeram Bangur & Co 57 ITR 299 (SC) case,wherein the undertaking as well as stock in trade was transfered, but the value was not attached to undertaking. It is "clarified" that slump sale means the transfer of one or more undertakings as a result of the sale for a lump sum consideration with or without values being attached to the individual assets and liabilities in such sales. Why was this clarification required?

Artex Mfg. Co. 227 ITR 260(SC), the transaction was not considered as a slump sale, because it was found that during the negotiations, individual values were attached to assets. In Electric Controlgear Mfg. Co. 227 ITR (SC), no evidence of item-wise valuation was found and hence it was held that individual valuation cannot be done.

Thus the restriction imposed is that it has to be the "sale" of an undertaking. The terms "sale" and "exchange" have been defined in Ramkrishna Pillai's case (66 ITR 725 (SC)). The sale thus has to be for a price and the exchange includes, the exchange of shares and consideration from either side. Forimposition of the capital gains tax, a transfer is a pre-requisite. More importantly a slump sale does not allow one to avail of the benefit of indexation.

Sec 2(47) defines "transfer", it reads: "transfer" in relation to capital asset includes - (i) the sale, exchange, or relinquishment of the asset; or (ii) the extinguishment of any rights thereon; or .... In demerger, the shareholders of demerged company receives shares of the resultant company and this transaction is by virtue of the definition or the judgement of the Supreme Court not qualified as a transfer.

Clause 38 proposes that in a demerger, the accumulated loss is directly relatable to the undertaking, which would be allowed to be carried forward. The "Loss," is the result of computation and cannot be directly related. Sec 72 of the Income-Tax Act requires that the loss will be allowed to be carried forward, only if the business, in which loss has been incurred is continued. Clause 38 does away with this requirement. However, the same benefithas not been granted for unabsorbed depreciation. This is a lacuna.

Another requirement imposed by clause 38, refers to the availability of the benefits of carried forward loss and unabsorbed depreciation. Atleast 75 per cent of the assets (in value terms) of the amalgamating company should be held by the amalgamated company for a minimum period of five years. Post amalgamation, 100 per cent of the assets of the amalgamating company belong to amalgamted company. The debtors might be realised and stock/investment might be sold. Can these business transactions not be done to meet the requirement of 75 per cent? Similiarly, the objective of amalgamation need not be the revival of amalgamating company and hence five year requirement is a bit too harsh.