Income Tax Act, 1961 – Demerger

Income Tax constitutes the biggest transaction cost in M&A transactions. Therefore, planning restructuring exercise from the Income Tax angle makes a lot of sense.

Hive Off or demerger is not defined by the Income Tax Act. However, it is a generalized term which classifies the transfer of an undertaking as a whole or some or all of the assets of an undertaking of businesses. In other words hive off is the transaction wherein a part of the company is transferred to another entity.

Definition of DEMERGER as per Income Tax Act, 1961

Various issues that arise from the definition are

Which all kind of entities can undertake a demerger?

What if any partnership Firm or Proprietary Concern is to be demerged?

Whether a company can issue Preference Share as consideration for Demerger? If yes, what is the tax liability on such an issue?

Whether debentures can be issued by the resulting company as a consideration?

What constitutes an Undertaking?

Tax Liability in the Hands of the Demerged Company

Tax Liability in the Hands of the Resulting Company

Tax liability in the hands of shareholders of the demerged company

What will be the cost of acquisition in the hands of the shareholders?

Concept Previous Year in case of Demerger

Transfer of Allowances like Depreciation, demerger expenses, bad debts etc

Transfer of Business Loss and Unabsorbed Depreciation

Treatment of Stock in Trade in Demerger

Concept of Demerger & Deemed Dividend

Whether benefit under sections 115J, 115JAA & 115JB relating to MAT is available?