Auditor of Jumbo Ltd. has informed following to the Board of directors : (i) Tax neutrality of a demerger may get affected on adoption of IND-AS 103. Examine the correctness of the observations made by the auditor.

Tax neutrality of Demerger on Adoption of IND AS 103 In the context of demergers, tax benefits are available only if the conditions of demerger provided in section 2(19AA) of the Income-Tax Act, 1961 are met. One such condition is that assets and liabilities are to be recorded by the transferee company at the book value of the transferor company. However, under IND-AS 103, the requirement is to record assets and liabilities at fair value in case of non-common control business combination which may create problem in achieving a most tax efficient demerger. Accordingly, the observations of the auditor appear to be correct.