Page 317 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes For the per share cost, the above values be divided by the number of shares. For example,
Rakesh’s new cost of acquisition of RIL post demerger would be ` 27,768 divided by 100 which
work out to ` 277.68.
Now let’s say he sells the all the above shares on January 15th. As explained earlier, since he has
bought the shares on Jan 10th last year, 12 months have elapsed and hence the RIL shares will
be long-term capital assets. Similarly, for the new shares, the period of holding RIL will be taken
into account, thereby making these too long-term assets.
Therefore, since long-term capital gains are tax-free, if any or all of the above shares are sold on
a recognised stock exchange, there would be absolutely no tax payable by Rakesh in the entire
process.

Expenditure of Demerger

The Act 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 demerger of an
undertaking, the assessee shall be allowed a deduction under section of an amount equal to
of one-fifth of such expenditure for each of the successive previous years beginning with the

previous year in which the amalgamation or demerger takes place.
Deductibility of certain Expenditure Incurred by Demerged Companies

The Act provides for continuance of deduction of certain expenditure incurred by the demerged
company as the case may be in the hands of the amalgamated company or resulting company, post
amalgamation or demerger viz. expenditure on acquisition of patents or copyrights, expenditure
on know-how, expenditure for obtaining license to operate telecommunication services.

Notes
Advantages:
1. Segregation of business verticals into independent entities
2. Focus on core competencies
3. Value separately captured for each business
4. Taxation benefi ts
5. No capital gains tax
6. Carry forward and set-off of losses
7. Indirect tax benefi ts
8. Automatic listing of transferee company in case the transferor company is a listed
company
Consequences:
1. Time consuming process – Court approval
2. Demerged asset must constitute an undertaking for availing taxation benefi ts

Self Assessment

Fill in the blanks:
11. The concept of demerger was introduced in the context of taxation by ........................

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