When a company incurs expenses exclusively for the purpose of amalgamation or demerger, it can claim a tax deduction for these expenditures under the Income Tax Act.

What You Need to Know

• Relevant Provision:
  The deduction is provided under Section 35DD of the Income Tax Act, 1961.

• Eligibility:

  • Only Indian companies that incur expenditure wholly and exclusively for amalgamation or demerger qualify.

  • The expenses must be directly related to the restructuring process.

• How the Deduction Works:

  • The entire expenditure is not deductible in a single year. Instead, it is spread out over five consecutive financial years.

  • This means you can claim 20% of the total expenditure each year as a deduction.

Step-by-Step Illustration

1. Expenditure Incurred: Suppose your company incurs ₹50 lakhs in amalgamation/demerger expenses during the financial year.

2. Annual Deduction:

   • Claim 20% of ₹50 lakhs = ₹10 lakhs per year.

3. Deduction Period:

   • You will get this deduction each year for five financial years (i.e., ₹10 lakhs per year for 5 years).

Important Considerations

• Documentation:
  It is essential to maintain proper documentation and records that demonstrate the expenses were incurred solely for amalgamation or demerger purposes.

• Exclusivity:
  No other tax deduction is available for these expenses under any other section. This is the only relief provided for amalgamation/demerger costs.

Key Takeaway

By spreading the deduction over five years, Section 35DD helps ease the tax burden on companies undergoing corporate restructuring, making it more manageable to recover the costs associated with amalgamation or demerger.