Page 315 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes Depreciation in the hands of the resulting company: The depreciable assets base for tax purposes
in the hands of the resulting company would be tax written down value in the hands of the
demerged company.
Reduction from book value of assets in the hands of the demerged company: The tax depreciable
assets base for the demerged company will be reduced by the tax written down value of the
assets transferred in the demerger process.

Task Take any Indian company of your choice and comment on its process of carry
forward and set-off of losses in detail.

Cost of Acquisition of Shares in the Resulting Company

In a demerger transaction, the shareholders of the demerged company are allotted shares in the
resulting company by virtue of the demerger.
The cost of acquisition of the shares of the demerged company in the hands of the shareholders
will be calculated by apportioning the cost of acquisition of the shares of the demerged company
in the ratio of net assets transferred (to the resulting company) to the net worth of the demerged
company.

In case, the shareholders transfer these shares subsequent to the demerger, the cost of such shares
will be calculated as under:

Table 13.1: Calculation of Cost of Acquisition of Shares
Cost of acquisition of Shares in resulting Cost of acquisition of
Company Shares held by assessee Net book value of
= X assets transferred
Net Worth of the demerged company in the demerged in demerger.
immediately before demerger company

Source: http://www.lexvidhi.com/article-details/taxation-aspects-of-demerger-in-india-46.html

Example: We can illustrate and substantiate the concept by means of an example of
Reliance Industries Limited which is the Demerged Company and the new companies of which
shares were issued are the Resulting Companies.
In this case, Reliance Industries Ltd. (RIL) has transferred four of its businesses to four separate
companies. The telecom leg has been transferred to Reliance Communication Ventures Ltd, the
coal based energy system has been transferred to Reliance Energy Ventures Ltd, the fi nancial
services leg has been transferred to Reliance Capital Ventures Ltd. And lastly the gas based
energy business has been transferred to Reliance Natural Resources Ltd.

Consequence of the Demerger

The existing shareholders of RIL got one share each in the Resulting Companies for every share
that they held in RIL.

Tax impact of the above

As per the Income Tax Act, a transaction of demerger, per se, has no tax implications on the
shareholders. In other words, when the shareholders of RIL are allotted the new shares in each of
the four companies, there would be absolutely no tax implication whatsoever.

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