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Accounting and Income Tax Aspects - Demerger

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Here we are trying to list the taxation and accounting implications for a typically Demerger of companies.

The Implications are studied for Resultant and the Demerged Company

Published in: Economy & Finance
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Accounting and Income Tax Aspects - Demerger

  1. 1. www.huconsultancy.com Accounting & Taxation Aspects Of Demerger
  2. 2. Accounting & Taxation Aspects Of Demerger FOCUS  Demerger  Tax Aspects  Transfer of Allowance
  3. 3. Accounting & Taxation Aspects Of Demerger CONCEPT- DEMERGER CO “B” Demerger Transfers all the assets and liabilities, employees, contracts and everything of the division ‘Y’ Shareholder 1 Issues consideration (Share, Debentures, Warrants, cash etc.) In all the Demergers, the demerging company (Co “A”) exists after the demerger. Exception to issuing consideration: Company “A” is 100% subsidiary of Company “B” Division YDivision X Shareholder 2 Shareholder 3
  4. 4. Accounting & Taxation Aspects Of Demerger DEFINITIONS  DEMERGER [Section 2(19AA)] Though the term demerger is not defined in the Companies Act, the Income Tax Act defines the term as follows: "Demerger", in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that- All the property and liabilities of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property or liabilities of the resulting company by virtue of the demerger.
  5. 5. Accounting & Taxation Aspects Of Demerger DEFINITIONS  The property and the liabilities are transferred at values appearing in its books of account immediately before the demerger.  The resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis.  The shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger.  The transfer of the undertaking is on a going concern basis.
  6. 6. Accounting & Taxation Aspects Of Demerger TAXATION  Tax Liability in the Hands of the Demerged Company  The demerged company is not liable to tax as it is a transferor company as transfer of capital assets in the course of a demerger has specifically been excluded from the tax purview, thus there is no tax liability.  Tax Liability in the Hands of the Resulting Company  There would not be tax implication even in the hands of the resulting company during the demerger.
  7. 7. Accounting & Taxation Aspects Of Demerger TAXATION  Tax liability in the hands of shareholders of the demerged company  Where a scheme for demerger is sanctioned by the High Court, the shareholders of the demerged company are issued shares in the resulting company and the shareholders are not required to pay any consideration for the shares so allotted. The tax liability in such a case would arise in the hands of shareholders only on sale of the shares of the resulting company received by the shareholders.
  8. 8. Accounting & Taxation Aspects Of Demerger ALLOWANCE ALLOWED IN TAXATION  Depreciation : Proportionate depreciation in ratio to the number of days assets is used by the demerged company in relation to the total days in a year is allowable for deduction while computing tax liability.  Depreciation : Proportionate depreciation in ratio to the number of days the assets are used is allowable for deduction while computing tax liability. Resulting Company Year in which Demerger took place Demerged Company
  9. 9. 9 ALLOWANCE ALLOWED IN TAXATION Resulting CompanyDemerged Company  Demerger Expenses:  Expenses wholly incurred for demerger are allowable as deduction over a period of 5 years in equal installments from the year in which such demerger has taken place.  Bad Debts :  Bad debts pertaining to the resulting company are transfer to resulting company.  Demerger Expenses:  Deduction of expenses over a period of 5 years is also available to the resulting company.  Bad Debts :  Any recovery of bad debts transferred from the demerged company is treated as taxable income in the hands of the resulting company.
  10. 10. Accounting & Taxation Aspects Of Demerger  Treatment of Stock in Trade in Demerger : The Stock-in-trade is to be transferred at book value only. Hence the cost of stock in trade will be the same to the transferee company.  Business Loss and Unabsorbed Depreciation [Section 72A]: In a case of demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall be allowed to be carried forward and set off in the hands of the resulting company, where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company ALLOWANCE ALLOWED IN TAXATION
  11. 11. Accounting & Taxation Aspects Of Demerger THANK YOU

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