Library / Income-tax Act, 2025: The Professional's Master Guide

54. Case Study 7: Merger of Group Companies

Facts. Aarav Industries Ltd. (a manufacturer) proposes to amalgamate its wholly owned subsidiary Aarav Components Pvt. Ltd. (also a manufacturer) into itself with the appointed date 1 April 2026. Aarav Components has: business loss of Tax Year 2022-23 of Rs. 6 crore; unabsorbed depreciation of Rs. 2 crore; plant WDV of Rs. 15 crore; land (book value Rs. 3 crore, market value Rs. 12 crore). It has been in business for 7 years and held all its fixed assets throughout.

54.1 Tax analysis

Issue	Analysis
Is it an amalgamation?	Yes: all assets and liabilities pass; the parent holds 100%, so the 75% shareholder test is met by excluding shares held by the amalgamated company
Capital gains on transfer of land and plant	Not a transfer under section 70; no tax on the Rs. 9 crore embedded gain in land
Cost and holding period for the parent	Land at Rs. 3 crore with the subsidiary's holding period; plant block at WDV Rs. 15 crore
Losses and depreciation (section 116)	Industrial undertaking, in business 3 or more years, held 75% of fixed assets for 2 years: conditions met. Parent must hold 75% of the assets and continue the business for 5 years
Remaining life of the loss	Loss of Tax Year 2022-23 can be set off only up to Tax Year 2030-31. Unabsorbed depreciation has no time limit
Expenses of the merger	Legal and filing costs deductible over 5 years under section 52
Stamp duty	Payable on the Tribunal order as per state law; not a tax deduction until incurred as expense
Procedure	Notice of the scheme to the department; returns for Tax Year 2026-27 filed by the parent including the subsidiary's income; Form 29 for loss carry forward

Value. The loss and depreciation of Rs. 8 crore, used against the parent's profits in the normal regime (29.12% for the parent's turnover level), are worth about Rs. 2.33 crore of tax, provided the conditions are maintained for 5 years.