Dragon Esquire Ltd. Indian company demerged plastic toys division into Zen Ltd. If demerger satisfies conditions of section 2(19AA) of the Income Tax Act, 1961, advise Zen Ltd, regarding the tax concession available to t

The resulting company shall be eligible for tax concessions only if the following two conditions are satisfied: (i) The demerger satisfies all the conditions laid down in section 2(19AA); and (ii) The resulting company is an Indian company. The following concessions are available to the resulting company pursuant to a scheme of demerger: (a) Amortisation of certain preliminary expenses (Section 35D): The benefit of amortization of preliminary expenses under section 35D of the Income-tax Act, 1961 are ordinarily available only to the assessee who incurred the expenditure. However, the benefit will not be lost in case the undertaking of an Indian company which is entitled to the amortization is transferred to another Indian company in a scheme of demerger within the 5 years period of amortisation. In that event the deduction in respect of previous year in which the demerger takes place and the following previous year within the 5 years period will be allowed to the resulting company and not to the demerged company. (b) Treatment of bad debts [Section 36(1)(vii)]: Where due to demerger, the debts of the demerged company have been taken over by the resulting company and subsequently by such debt or part of debt becomes bad such bad debt will be allowed as a deduction to the resulting company. This is based upon the decision of the Supreme Court in the case of CIT v. Veerabhadra Rao (T.), K. Koteswara Rao & Co. (1985) 155 ITR 152 (SC). (c) Exemption of Capital Gain Tax: Section 47 of the Income Tax Act, 1961 treats certain transactions from amalgamation as not transfer and hence capital gains tax will be applicable w.r.t. transfer, in a demerger, of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company. 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 (d) Expenditure on Amalgamation: Section 35DD of the Income-tax Act, 1961 provides that where an assessee being an Indian company incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation or demerger takes place. (e) Forward and set off of business losses and unabsorbed depreciation of the demerged company [Section 72A (4) & (5)]: Notwithstanding anything contained in any other provisions of this Act, in the case of a demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall- (a) where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company, be allowed to be carried forward and set off in the hands of the resulting company; (b) where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting company, be apportioned between the demerged company and the resulting company in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company, and be allowed to be carried forward and set off in the hands of the demerged company or the resulting company, as the case may be.