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?