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: Compute the capital gain that could arise in the hands of Tirlok on receipt of shares of SA(P) Ltd.

Answer & Explanation:

There would be no capital gains liability in the hands of Tirlok on receipt of shares of SA(P) Ltd. Since as per Section 47(vi)(d), any issue of shares by the resulting demerger to the shareholders of the Company being demerged will not be regards as transfer for levy of capital gains tax, if the issue is made in consideration of demerger of the undertaking.

Topics: Income Tax Act, 1961

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