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Unit 14: Restructuring: Conversion and Slump Sale

(f) Any transfer in a demerger, of a capital asset, being a share or shares held in an Indian Notes
company, by the demerged foreign company to the resulting foreign company, if –
(i) At least seventy-five per cent of the shareholders of the demerged foreign company

continue to remain shareholders of the resulting foreign company; and
(ii) Such transfer does not attract tax on capital gains in the country, in which the
demerged foreign company is incorporated.
Provided that the provisions of sections 391 to 394 of the Companies Act, 1956 (1 of 1956) shall
not apply in case of demergers referred to in this clause.

Self Assessment

State whether the following statements are true or false:

13. A holding company may have no control on more than one company.
14. Each company in a group is a separate entity for tax purposes.
15. A member is any person that is entered into a company’s register of members.
16. Any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company
to the amalgamated company if the amalgamated company is a foreign company.

Case Study Swastik Research Centre and Operation Research Group
(Transfer of Assets to Subsidiary Company)
peration Research Group, in 1974, transferred the industrial undertakings and
businesses of Swastik Household & Industrial Products Division, business of
OOperation Research Group and the Sarabhai Research Centre to its subsidiary
company, M/s. Ofisade Pvt. Ltd. The Income-tax Officer in his order refers to this

transfer “as a going concern to its subsidiary company. In the earlier transfer, goodwill
of the business was transferred at ` 2 crores. Scanning the details regarding the present
transfer, the ITO came to the conclusion that the transfer did not represent in its terms the
correct position. The value ascribed to goodwill, the other assets, etc., was not realistic.
In effect, he came to the conclusion that on account of the transfer the asessee had gained
substantial amounts taxable under Section 41(2). Read with the order of the Inspecting
Asst. Commissioner under Section 144B, the order of the ITO reveals that he found that
the assets have been transferred at their written down value without having any regard to
their present market value. The fact that an amount.
Attributable to goodwill, in fact, reflected the value of the fixed assets transferred to the

subsidiary company. The assessee-company itself had not supplied any material regarding
the market value of the assets. Under the direction of the IAC, therefore, the ITO ascertained
the difference between the actual value of the assets transferred and the written down value
and treated the difference as income taxable under Section 41(2). The ITO also held that any
amount over and above the actual cost of the asset transferred would constitute capital
gains; but in view of the provisions of Section 47(iv), the capital gains would not be taxable
in respect of a transfer made to a subsidiary company. The ITO, therefore, assessed a sum
of ` 4 crores as profit under Section 41(2). He, however, noted that this working would be

subject to modifications on the ascertainment of the actual cost of the assets, if furnished by

the assessee. On appeal, the CIT (Appeals) went in detail into the facts. According to him,
the claim of the assessee that there was a slump sale could not be accepted on facts. Even
in the case of a slump sale.
Contd...

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