For M&A deals structured as mergers (amalgamations), the goal is often to achieve tax neutrality — meaning no capital gains tax is triggered on the transfer of assets or shares during the merger process. Achieving this relief requires strict compliance with specific conditions under the Income Tax Act (ITA), 1961.

The Statutory Definition: Section 2(1B)

Section 2(1B) defines a legal ‘amalgamation’ for tax purposes, setting three critical hurdles:

1. Transfer of Assets: All property of the amalgamating company must immediately become the property of the amalgamated company.
2. Transfer of Liabilities: All liabilities must likewise become the liabilities of the amalgamated company.
3. Shareholder Continuity (The 3/4th Rule): Shareholders holding not less than three-fourths in value of the shares in the amalgamating company must become shareholders of the amalgamated company. This condition is not applied to the extent amalgamated company or its subsidiary holds shares in the amalgamating company.

The Tax Relief: Section 47

If the definition under Section 2(1B) is met, Section 47 provides tax relief (exemption from Capital Gains Tax) on two key transfers:

• Company Level (Sec 47(vi)): The transfer of capital assets from the Amalgamating Company to the Amalgamated Company is exempt, provided the amalgamated company is an Indian company.
• Shareholder Level (Sec 47(vii)): The transfer of shares by the shareholder of the amalgamating company in exchange for shares of the amalgamated company is exempt, provided the amalgamated company is an Indian company.

Key point: Any deviation from the 3/4th Rule or receipt of consideration by modes other than shares (e.g. cash) can affect the tax neutrality of merger, triggering significant tax implications.