“Demystifying Section 35DD of Income Tax Act 1961: Understanding Amortisation of Expenditure in Case of Amalgamation or Demerger”

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Hi, my name is Shruti Goyal, I have been working in the field of Income Tax since 2011. I have a vast experience of filing income tax returns, accounting, tax advisory, tax consultancy, income tax provisions and tax planning.

If you are a business owner contemplating an amalgamation or a demerger, it’s imperative to understand the tax implications of such transactions. One such provision that plays a crucial role in these transactions is Section 35DD of Income Tax Act 1961. This section deals with the amortisation of expenditure incurred on amalgamation or demerger and offers significant tax benefits to the companies involved. However, navigating this provision can be complex, and lack of understanding may result in significant tax liabilities.

Therefore, in this blog, we will delve into the intricacies of Section 35DD of Income Tax Act 1961 and help you understand the various aspects of amortisation of expenditure in case of amalgamation or demerger. We will cover the following topics:

• Applicability of Section 35DD
• Eligible Expenditure for Amortisation
• Amortisation Period
• Method of Amortisation
• Tax Benefits
• FAQs

Applicability of Section 35DD

Section 35DD applies to companies that have incurred expenditure on amalgamation or demerger. It offers tax benefits in the form of amortisation of such expenditure over a specified period. However, it’s essential to note that Section 35DD is applicable only if the following conditions are met:

• The amalgamation or demerger should be undertaken in accordance with the provisions of the Companies Act, 1956, or Companies Act, 2013.
• The amalgamation or demerger should result in the transfer of one or more undertakings to the amalgamated or resulting company.
• The expenditure should be incurred wholly and exclusively for the purposes of amalgamation or demerger.

If these conditions are not met, then the company may not be eligible to claim amortisation of expenditure under Section 35DD of Income Tax Act 1961.

Eligible Expenditure for Amortisation

Section 35DD allows for the amortisation of expenditure incurred wholly and exclusively for the purposes of amalgamation or demerger. Such expenditure can include the following:

• Expenses incurred in obtaining the necessary approvals for amalgamation or demerger, such as legal and professional fees.
• Expenses incurred in connection with the issue, allotment, or transfer of shares or debentures as a result of amalgamation or demerger.
• Expenses incurred in the reconstruction of the amalgamated or resulting company, such as expenses related to the formation of a new board of directors or changes in the company’s memorandum and articles of association.

It’s important to note that only the actual expenditure incurred for the above purposes is eligible for amortisation under Section 35DD. Any expenditure that is not related to the amalgamation or demerger is not eligible for amortisation.

Amortisation Period

Section 35DD allows for the amortisation of eligible expenditure over a period of five years, starting from the year in which the amalgamation or demerger takes place. The amortisation can be claimed in equal instalments over the five-year period.

It’s important to note that the amortisation period cannot be extended beyond five years, even if the entire eligible expenditure has not been amortised by the end of

the five-year period. Any unamortised expenditure cannot be carried forward to subsequent years for amortisation.

Method of Amortisation

The method of amortisation of expenditure under Section 35DD is straight-line. This means that the eligible expenditure can be claimed in equal instalments over the five-year period. For example, if a company has incurred eligible expenditure of Rs. 10,00,000 on amalgamation or demerger, it can claim Rs. 2,00,000 as an amortisation expense every year for five years.

It’s important to note that the amortisation of expenditure can only be claimed in the year in which it is incurred. Any expenditure incurred prior to the year of amalgamation or demerger cannot be claimed as an amortisation expense.

Tax Benefits

The tax benefits offered by Section 35DD of Income Tax Act 1961 are significant. By allowing for the amortisation of eligible expenditure over a period of five years, companies can reduce their taxable income and lower their tax liability. This, in turn, helps them save money and reinvest in their business operations.

For example, if a company has incurred eligible expenditure of Rs. 10,00,000 on amalgamation or demerger, it can claim an amortisation expense of Rs. 2,00,000 every year for five years. This would result in a total tax deduction of Rs. 10,00,000 over the five-year period. Assuming a tax rate of 30%, the company can save Rs. 3,00,000 in taxes.

It’s important to note that the tax benefits of Section 35DD are available only to companies that have incurred eligible expenditure on amalgamation or demerger. If a company has not incurred any such expenditure, it cannot claim any tax benefits under this provision.

FAQs

Q. Is there a limit to the amount of eligible expenditure that can be claimed for amortisation under Section 35DD?

A. No, there is no limit to the amount of eligible expenditure that can be claimed for amortisation under Section 35DD. However, the expenditure should be wholly and exclusively for the purposes of amalgamation or demerger.

Q. Can the unamortised expenditure be carried forward to subsequent years for amortisation?

A. No, any unamortised expenditure cannot be carried forward to subsequent years for amortisation. The amortisation period cannot be extended beyond five years.

Q. Can the tax benefits of Section 35DD be claimed by individuals or partnerships?

A. No, the tax benefits of Section 35DD are available only to companies that have incurred eligible expenditure on amalgamation or demerger.

Q. Is there any penalty for claiming ineligible expenditure as an amortisation expense under Section 35DD?

A. Yes, if a company claims ineligible expenditure as an amortisation expense under Section 35DD, it may be subject to penalties and interest under the Income Tax Act, 1961.

Conclusion

In conclusion, Section 35DD of Income Tax Act 1961 provides significant tax benefits to companies that have incurred eligible expenditure on amalgamation or demerger. By allowing for the amortisation of such expenditure over a period of five years, companies can reduce their tax liability and save money.

However, it’s essential to understand the intricacies of this provision to ensure that you comply with the conditions and claim only eligible expenditure for amortisation. Any mistake in claiming ineligible expenditure can result in penalties and interest under the Income Tax Act, 1961.

Therefore, if you are contemplating an amalgamation or demerger, it’s advisable to seek professional advice and understand the tax implications before proceeding with the transaction. With the right guidance and understanding, you