KP (P) Ltd., a domestic Company having two undertakings engaged in manufacture cement and steel, decided to hive off cement division to SA(P) Ltd, a domestic Indian Company by way of demerger. The net book value of asset

CS Professional · Direct Tax Law & Practice · PYQS · June 2021
KP (P) Ltd., a domestic Company having two undertakings engaged in manufacture cement and steel, decided to hive off cement division to SA(P) Ltd, a domestic Indian Company by way of demerger. The net book value of assets of KP(P) Ltd. was ₹60 Crore before demerger. The net book value of assets transferred to SA(P) Ltd. was ₹15 Crore. The demerger was made in February 2021. In the scheme of demerger, it was fixed that for each equity shares of ₹10 each (fully paid up) of KP(P) Ltd, two equity shares of ₹10 each (Fully paid) were to be issued. Tirlok held 25,000 equity shares in KP(P) Ltd. which were acquired in the Financial Year 2002-03 for ₹6,00,000. Tirlok received 50,000 equity shares from SA(P) Ltd. Consequent to demerger in January 2021, he sold all the shares of SA(P) Ltd. for ₹8,00,000 in March 2021. In this background you are requested to answer the following: Does the transaction of demerger attract any Income Tax Liability in the hands of KP(P) Ltd. and SA(P) Ltd.?

Answer & Explanation:

No, the transaction of demerger would not attract any income tax liability in the hands of KP(P) Ltd or SA(P) Ltd. As per section 47(vi)(b) of the Income-tax Act, 1961, any transfer in a demerger of a capital asset, by the demerged company to the resulting company would not be regarded as Transfer for levy of Capital Gains tax liability if the resulting company is an Indian Company. Hence, Capital Gains tax liability would not be attracted in the hands of KP(P) Ltd. The demerged Company in this case, since SA(P) Ltd, is an Indian Company.

Topics: Income Tax Act, 1961

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