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TMI BlogCORPORATE RESTRUCTURING - DE-MERGERX X X X Extracts X X X X X X X X Extracts X X X X ..... ting products from the parent organization. Shareholders of the parent company receive equivalent shares in the new company in order to compensate for the loss of equity in the original stocks; thus, at the moment of spin-off, the ownership of the original and spun-off companies are identical. However, shareholders may then buy and sell stocks from either company independently; this potentially makes investment in the companies more attractive, as potential share purchasers can invest in only the portion of the business they think will have the most growth. The companies Act, 1956 does not contain the concept of 'De - merger' as such , but it does indirectly recognize it in: (a) Section 391/394 (as a scheme of compromise, scheme or arrangements (b) Section 293(1)(a) (sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company, or where the company owns more than one undertaking, of the whole, or substantially the whole, of any such undertaking) Modes of Demerger 1. Demerger by agreement - It may be effected by agreement where under the demerged company spins off its specific undertaking to a resulting company, formed with anothe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Notice of the meetings of members/ creditors * Holding meeting of members and creditors * Reporting the result of the meeting by the Chairman to Tribunal. * Petition to the Tribunal for sanctioning the scheme of demerger. * Obtaining Order of the Tribunal sanctioning the scheme * Tribunal's order on petition sanctioning the scheme of demerger - Section 394 of Companies Act Tax reliefs to Demerged Company 1. Capital gains tax not attracted - According to Section 47(vib) of the Income Tax, 1961 where there is any transfer, in a demerger, of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company shall not be regarded as a transfer for the purposes of capital gains. 2. Tax relief to a foreign demerged company - According to Section 47(vic) of the Income Tax, 1961 where there is any transfer in a demerger, of a capital asset, being a share or shares held in an Indian company, by the demerged foreign company to the resulting foreign company, if-- (a) the shareholders holding not less than three-fourths in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them. 2. Expenditure on acquisition of patent rights and copyrights - Section 35A (1) of the Income Tax, 1961 provides in respect of any expenditure of a capital nature incurred after the 28th day of February, 1966 but before the 1st day of April, 1998, on the acquisition of patent rights or used for the purposes of the business, there shall, subject to and in accordance with the provisions of this section, be allowed for each of the relevant previous years, a deduction equal to the appropriate fraction of the amount of such expenditure. Section 35A (7) Where in a scheme of demerger, the demerged company sells or otherwise transfers the rights to the resulting company (being an Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emerger had not taken place 6. Amortization of expenditure in case of amalgamation or demerger - Section 35DD(1) of the Income Tax, 1961 provides that where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation or demerger takes place. 7. Computation of actual cost to resulting company of capital assets transferred - Explanation 7A to Sub- section (1) of Section 43 of the Income Tax, 1961 Where, in a demerger, any capital asset is transferred by the demerged company to the resulting company and the resulting company is an Indian company, the actual cost of the transferred capital asset to the resulting company shall be taken to be the same as it would have been if the demerged company had continued to hold the capital asset for the purpose of its own business. However, such actual cost shall not exceed the written down value of such capital asset in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years. Where any undertaking of an Indian company which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another Indian company in a scheme of amalgamation or demerger-- (a) no deduction shall be admissible under this section to the amalgamating or the demerged company for the previous year in which the amalgamation or the demerger takes place; and (b) the provisions of this section shall, as far as may be, apply to the amalgamated or the resulting company as they would have applied to the amalgamating or the demerged company if the amalgamation or demerger had not taken place. 11. Tax on income from bonds or Global Depository Receipts purchased in foreign currency or capital gains arising from their transfer - Section 115AC(5) of the Income Tax, 1961 provides that where the assessee acquired Global Depository Receipts or bonds in an amalgamated or resulting company by virtue of his holdin ..... 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