Page 18 - Union Budget_2019

Union Budget 2019

CAPITAL GAINS

3.1 Facilitating demerger of Ind-AS compliant companies

Demerger is an arrangement whereby a part of the business or business undertaking is transferred from

the demerged company to the resulting company for a consideration. This is generally carried out as a part
of corporate restructuring.

As per Section 47(vib), transfer arising on account of demerger shall not be regarded as transfer in the
hands of demerged company, hence no capital gains shall be attracted in the hands of demerged company.

However, to provide tax neutrality for demerger transaction, the following conditions specified in Section
2(19AA) of Income tax Act, 1961 has to be satisfied.

• All the properties of the undertaking shall be transferred to the resulting company

• All the liabilities of the undertaking shall be transferred to the resulting company

• All the properties and liabilities shall be transferred to the resulting company at the book value
• The resulting company shall issue consideration to the shareholder of the demerged company
• The shareholders holding not less than 75% in value of the shares in the demerged company shall

become shareholders of the resulting company
• The transfer of undertaking is a going concern

• The demerger is in accordance with further conditions as notified by the Central Government.

As per Indian Accounting Standards (Ind-AS) 103 “Business Combination”, identifiable assets acquired,

liabilities assumed and non-controlling interest in an acquire shall be recorded at fair value in the books of
acquirer.

In order to make demerger tax natural, conditions specified in Section 2(19AA) has to be satisfied. One such
condition is to record the assets and liabilities transferred at their book values in the resulting company.

As per Ind AS-103 “Business Combination”, Acquiring company in demerger shall record the assets acquired

at fair value. This would result in deviation of conditions specified in Section 2(19AA). Eventually, capital
gains shall be attracted in the hands of the demerged company.

After considering representations made by stakeholders owing to practical difficulties as mentioned above,
it is proposed to amend the Section 2(19AA) to provide that the requirement of recording the property and
liabilities at book value shall not apply in a case where it is recorded at a different value in compliance of

Ind-AS.

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