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: Will the sale of shares by Tirlok affect the tax benefit availed by KP(P) Ltd, and/or SA (P) Ltd?

Answer & Explanation:

No, sale of shares by Tirlok would not affect the tax benefits availed by KP (P) Ltd. or SA (P) Ltd. One of the conditions to be satisfied is that the shareholders holding not less than three fourths in the value of the shares in the demerged Company become shareholders of the resulting Company by virtue of the demerger. It is presumed that the condition is satisfied in this case. There is no stipulation that they continue to remain shareholders for any period of time thereafter.

Topics: Income Tax Act, 1961

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