(a) A Ltd. has acquired the business of B Ltd., whose Balance Sheet as at 31st March, 2024 is as under : I – Equity and…

(a) Amalgamation of B Ltd. with A Ltd.

Method. B Ltd.'s equity shareholders receive cash as well as shares, so the conditions for an amalgamation in the nature of merger under AS 14 are not met. This is an amalgamation in the nature of purchase. A Ltd. records B Ltd.'s identifiable assets and liabilities at the agreed values; B Ltd.'s goodwill and reserves are not carried over. Of the workmen compensation reserve, only the expected liability of ₹10,000 is taken over. The debentures are a liability taken over and settled separately, so they are not part of the purchase consideration.

Purchase consideration

• Preference shareholders: 8,000 shares × (₹10 cash + one 9% preference share of ₹100) = ₹80,000 cash + ₹8,00,000 shares = ₹8,80,000
• Equity shareholders: 16,000 shares × (₹20 cash + one equity share worth ₹140) = ₹3,20,000 cash + ₹22,40,000 shares = ₹25,60,000
• Total = ₹34,40,000 (cash ₹4,00,000; shares ₹30,40,000)

Goodwill

• Assets taken over at agreed values: L&B 11,00,000 + P&M 13,00,000 + Patents 40,000 + Inventories 3,00,000 + Receivables 3,60,000 = ₹31,00,000
• Less liabilities taken over: Debentures 4,20,000 (4,000 × ₹105) + Trade payables 2,40,000 + Workmen compensation claim 10,000 = ₹6,70,000
• Net assets = ₹24,30,000
• Goodwill = 34,40,000 − 24,30,000 = ₹10,10,000, plus liquidation expenses reimbursed ₹20,000, so total goodwill = ₹10,30,000

Journal entries in the books of A Ltd.

1. Business Purchase A/c Dr ₹34,40,000; To Liquidator of B Ltd. ₹34,40,000 (purchase consideration due)
2. Land & Building A/c Dr ₹11,00,000; Plant & Machinery A/c Dr ₹13,00,000; Patents A/c Dr ₹40,000; Inventories A/c Dr ₹3,00,000; Trade Receivables A/c Dr ₹3,60,000; Goodwill A/c Dr ₹10,10,000; To Trade Payables A/c ₹2,40,000; To Provision for Workmen Compensation Claim A/c ₹10,000; To Debentureholders of B Ltd. A/c ₹4,20,000; To Business Purchase A/c ₹34,40,000
3. Liquidator of B Ltd. Dr ₹34,40,000; To 9% Preference Share Capital A/c ₹8,00,000; To Equity Share Capital A/c ₹16,00,000; To Securities Premium A/c ₹6,40,000 (16,000 × ₹40); To Bank A/c ₹4,00,000
4. Debentureholders of B Ltd. A/c Dr ₹4,20,000; To 7% Debentures A/c ₹4,00,000; To Securities Premium A/c ₹20,000
5. Goodwill A/c Dr ₹20,000; To Bank A/c ₹20,000 (liquidation expenses of B Ltd. reimbursed)

Journal entries in the books of B Ltd.

1. Realisation A/c Dr ₹32,40,000; To Land & Building ₹8,00,000; To Plant & Machinery ₹12,00,000; To Goodwill ₹4,80,000; To Patents ₹1,00,000; To Inventories ₹3,00,000; To Trade Receivables ₹3,60,000 (assets other than cash transferred)
2. 6% Debentures A/c Dr ₹4,00,000; Trade Payables A/c Dr ₹2,40,000; To Realisation A/c ₹6,40,000 (liabilities taken over)
3. Workmen Compensation Reserve A/c Dr ₹16,000; To Realisation A/c ₹10,000 (liability taken over); To Equity Shareholders A/c ₹6,000 (surplus)
4. A Ltd. A/c Dr ₹34,40,000; To Realisation A/c ₹34,40,000 (purchase consideration)
5. Interest Payable on Debentures A/c Dr ₹24,000; Realisation A/c Dr ₹25,000 (liquidation expenses); To Bank A/c ₹49,000
6. Bank A/c Dr ₹20,000; To Realisation A/c ₹20,000 (expenses reimbursed by A Ltd.)
7. Bank A/c Dr ₹4,00,000; 9% Preference Shares in A Ltd. A/c Dr ₹8,00,000; Equity Shares in A Ltd. A/c Dr ₹22,40,000; To A Ltd. A/c ₹34,40,000
8. 6% Preference Share Capital A/c Dr ₹8,00,000; Realisation A/c Dr ₹80,000 (excess paid to preference shareholders); To Preference Shareholders A/c ₹8,80,000
9. Preference Shareholders A/c Dr ₹8,80,000; To Bank A/c ₹80,000; To 9% Preference Shares in A Ltd. A/c ₹8,00,000
10. Equity Share Capital A/c Dr ₹16,00,000; Capital Reserve A/c Dr ₹2,00,000; Profit & Loss A/c Dr ₹1,00,000; To Equity Shareholders A/c ₹19,00,000
11. Realisation A/c Dr ₹7,65,000; To Equity Shareholders A/c ₹7,65,000 (profit on realisation)
12. Equity Shareholders A/c Dr ₹26,71,000; To Bank A/c ₹4,31,000 (3,20,000 + 1,11,000); To Equity Shares in A Ltd. A/c ₹22,40,000

Checks

• Realisation profit: credits 6,40,000 + 10,000 + 34,40,000 + 20,000 = 41,10,000; debits 32,40,000 + 25,000 + 80,000 = 33,45,000; profit ₹7,65,000.
• B Ltd.'s cash: 1,40,000 − 49,000 + 20,000 + 4,00,000 − 80,000 − 4,31,000 = 0. The ₹5,000 of liquidation expenses not reimbursed is borne by the equity shareholders.

(b) Buy-back of equity shares by A Ltd. (figures in ₹ '000 unless stated)

Workings

• Shares bought back: 20% × 6,00,000 = 1,20,000 shares; consideration 1,20,000 × ₹15 = 1,800 (face value 1,200 + premium 600).
• Investments of 6,000 sold for 5,000, so the loss of 1,000 is charged to Profit and Loss (P&L falls from 3,600 to 2,600).
• Section 68 tests: buy-back (1,800) is within 25% of paid-up capital plus free reserves = 25% × (10,000 + 11,600) = 5,400 (free reserves = revenue reserve 8,000 + securities premium 1,000 + P&L 2,600; capital reserve is excluded); the shares bought back (20%) are within 25% of paid-up equity capital; after the buy-back, debt (800) is far below twice the capital and free reserves. The buy-back needs a special resolution because it exceeds 10%.
• The premium of 600 is charged to Securities Premium, and under Section 69 a sum equal to the nominal value bought back (1,200) is transferred from Revenue Reserve to Capital Redemption Reserve.

Journal entries (₹)

1. Bank A/c Dr 50,00,000; Profit & Loss A/c Dr 10,00,000 (loss on sale); To Non-current Investments A/c 60,00,000
2. Equity Share Capital A/c Dr 12,00,000; Securities Premium A/c Dr 6,00,000; To Equity Shareholders A/c 18,00,000 (1,20,000 shares at ₹15)
3. Equity Shareholders A/c Dr 18,00,000; To Bank A/c 18,00,000
4. Revenue Reserve A/c Dr 12,00,000; To Capital Redemption Reserve A/c 12,00,000

Balance Sheet of A Ltd. after buy-back (₹ '000)

I. Equity and Liabilities

• Share capital: 4,80,000 equity shares of ₹10 each = 4,800; 40,000 9% preference shares of ₹100 each = 4,000; total 8,800
• Reserves and surplus: Capital Reserve 20; Capital Redemption Reserve 1,200; Revenue Reserve 6,800; Securities Premium 400; Profit & Loss 2,600; total 11,020
• Non-current liabilities: 10% Debentures 800
• Current liabilities: Trade Payables 80
• Total 20,700

II. Assets

• Non-current assets: Property, plant and equipment 5,500; Non-current investments 4,000; total 9,500
• Current assets: Inventories 2,000; Trade receivables 4,000; Cash and cash equivalents 5,200; total 11,200
• Total 20,700

Check: cash 2,000 + 5,000 − 1,800 = 5,200; total 23,500 − 1,000 − 1,800 = 20,700.

(c) Capital gains under the Income-tax Act, 1961

(i) Methods of computing short-term and long-term capital gains

Classification (Section 2(42A)). For transfers on or after 23 July 2024, an asset is short-term if held for not more than 12 months (listed securities and equity-oriented fund units) or 24 months (all other assets); earlier the limits were 12, 24 or 36 months.

Short-term capital gain (Section 48) = full value of consideration − (cost of acquisition + cost of improvement + expenses on transfer), without indexation. STCG on STT-paid listed equity is taxed at 20% under Section 111A (15% for transfers before 23 July 2024); other STCG is taxed at normal slab rates.

Long-term capital gain uses the same formula, with these differences:

• Indexation (transfers before 23 July 2024): indexed cost = cost × CII of the year of transfer ÷ CII of the year of acquisition (or of 2001-02, where fair market value on 1 April 2001 may be taken as cost for older assets).
• From 23 July 2024: no indexation and tax at 12.5% under Section 112. Resident individuals and HUFs transferring land or buildings acquired before that date may choose 20% with indexation instead.
• Listed equity (Section 112A): 12.5% on gains above ₹1.25 lakh a year, with cost grandfathered to the value on 31 January 2018.
• Exemptions under Sections 54, 54B, 54EC and 54F are available for reinvested gains, and Section 49 takes the previous owner's cost for gifted or inherited assets.

(ii) Section 50: transfer of depreciable assets

For an asset forming part of a block of assets on which depreciation has been allowed, the written down value replaces the cost of acquisition:

1. Block continues: if the consideration for assets transferred during the year exceeds the aggregate of (expenses on transfer + opening WDV of the block + actual cost of assets added during the year), the excess is deemed short-term capital gain.
2. Block ceases to exist (all assets in it transferred): the consideration minus that aggregate is a short-term capital gain, or a short-term capital loss if negative.
3. Otherwise no capital gain arises; the WDV of the block is reduced and depreciation continues on the balance.

Such a gain is always short-term, whatever the holding period, and indexation is not allowed, because depreciation has already given relief for the cost. Goodwill of a business is not a depreciable asset from AY 2021-22 and is dealt with outside the block.