Under Section 2(19AA) of the Income Tax Act (IT) Act ‘demerger’ denotes the transfer of one or more undertakings or divisions of a demerged company on going concern basis with all the assets and liabilities of the conveyed divisions, to any resulting company in a scheme of arrangement under Section 391 to 394 of the Companies Act, in exchange of shares of the resulting company to the shareholders of the demerged company, where at least 3/4th shareholders in value of the demerged company also become shareholders of the resulting company.
Under Section 2(19AA) of the Income Tax Act (IT) Act ‘demerged company’ means the company whose division or undertaking is transferred in a demerger to a resulting company.
Under Section 2(41A) of the IT Act ‘resulting company’ denotes one or more transferee companies to which any division or undertaking of the demerged company is transferred in a demerger and the ‘resulting company’ as consideration issues its shares to the shareholders of the demerged company.
Demerger has also been made tax neutral.
Under Section 47 (vib) of the IT Act any transfer of a capital asset in a demerger by the demerged company to the resulting company does not give rise to capital gains.
Under Section 47 (vid) of the IT Act any transfer or issue of shares by the resulting company in a scheme of demerger to the shareholders of the demerged company does not give rise to capital gains.
Under Section 47 (vic) of the IT Act any transfer of shares of an Indian company by a demerged foreign company to the resulting foreign company, does not give rise to capital gains, when the shareholders of at least ¾th in value of the demerged foreign company continue to remain shareholders of the resulting foreign company provided such transfer does not attract tax on capital gains in the country in which the demerged foreign company is incorporated.
Under Section 72A of the IT Act in demerger the accumulated loss and unabsorbed depreciation of the demerged company is allowed and carried forward to be set off in the hands of the resulting company to reduce its tax liability. The Central Government may by notification in the Official Gazette specify such conditions as it considers necessary to ensure that the demerger is for genuine purposes.
