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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 ..... , technology and/or existing 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 speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 391[1] of Companies Act ) Obtaining Tribunal s order for holding meetings of members/ creditors. 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 for eign company t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own value thereof as may be prescribed The fifth proviso to clause (ii) of Section 32(1) of the Income Tax, 1961 the aggregate deduction, in respect of depreciation allowable to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 35D of is transferred, before the expiry of the period specified in sub-section (1), to another company in a scheme of demerger (i) no deduction shall be admissible under sub-section (1) in the case of the demerged company for the previous year in which the demerger takes place; and (ii) the provisions of this section shall, as far as may be, apply to the resulting company, as they would have applied to the demerged company, if the demerger 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been retained by the demerged company and transferred to the resulting company, and be allowed to be carried forward and set off in the hands of the demerged company or the resulting company, as the case may be. 10. Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc - Section 80-IA of the Income Tax, 1961 - Where the gross total income of an assessee includes any profits and gains derived by eligible business, there shall, in accordance with and subject to the provisions 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 dem ..... 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