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: Is Tirlok eligible to avail any tax exemption under any of the provisions of the Income Tax Act, 1961 on the sale of shares of SA(P) Ltd. ? If so, state in brief.

Answer & Explanation:

Since the resultant capital gain on sale of shares of SA (P) Ltd. is a long term capital gain (on account of the period of holding of shares in demerged Company being considered by virtue of section 2(42)), Tirlok can avail exemption: under section 54EE, by investing the long-term capital gain in units of specified fund, within a period of 6 months from the date of transfer. under Section 54F of Income Tax Act by investing the entire net consideration in purchase (within one year before and two years after the date of transfer) or construction (within three years after the date of transfer) of one residential house in India. If part of the net consideration is invested, only proportionate exemption would be available.

Topics: Income Tax Act, 1961

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