Tax reliefs to Demerged Company
1. Capital gains tax not attracted – According to Section 47(vib) of the Income Tax, 1961 where there is any transfer, in a demerger, of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company shall not be regarded as a transfer for the purposes of capital gains.
2. Tax relief to a foreign demerged company - According to Section 47(vic) of the Income Tax, 1961 where there is any transfer in a demerger, of a capital asset, being a share or shares held in an Indian company, by the demerged foreign company to the resulting foreign company, if—
(a) the shareholders holding not less than three-fourths in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company; and
(b) such transfer does not attract tax on capital gains in the country, in which the demerged foreign company is incorporated :
Provided that the provisions of sections 391 to 394 of the Companies Act, 1956 shall not apply in case of demergers referred to in this clause, shall not be regarded as a transfer for the purposes of capital gains.
3. Tax relief to the Shareholders of the demerged company - According to Section 47(vid) of the Income Tax, 1961 when there is any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is made in consideration of demerger of the undertaking shall not be regarded as a transfer for the purposes of capital gains.
Cost of acquisition of Shares in resulting Company = Cost of acquisition of shares in demerged company x Net Book Value of Assets transfered in demerger
Net worth of demerged company before demerger.
Tax relief to resulting company
The resulting company is eligible for tax relief if
The demerged satisfies all the conditions laid down in Section 2(19AA) of the Income Tax ACT, 1961
The resulting company is an Indian company.
1.Depreciation on assets transferred to resulting company – Section 32(1) of the Income Tax, 1961 provides that in respect of depreciation of—
(i) buildings, machinery, plant or furniture, being tangible assets;
(ii) know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,
owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed
(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;
(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed