Meaning and Features of Demerger as defined of the income Tax Act, 1961 of Tax Planning and Management

Meaning of Demerger

As per Section 2(19AA) of the Income Tax Act, 1961, "Demerger" means the transfer, pursuant to a scheme of arrangement under sections 230 to 232 of the Companies Act, 2013, by a demerged company of its one or more undertakings to any resulting company, in such a manner that:

1. All the property of the undertaking, being transferred, immediately before the demerger, becomes the property of the resulting company by virtue of demerger.
2. All the liabilities relatable to the undertaking being transferred, immediately before the demerger, become the liabilities of the resulting company by virtue of demerger.
3. The shares allotted by the resulting company, pursuant to the demerger, are allotted to the shareholders of the demerged company on a proportionate basis.
4. The shareholders holding not less than three-fourths in value of the shares in the demerged company or companies (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or its subsidiary) become shareholders of the resulting company or companies by virtue of demerger.

Features of Demerger:

1. Transfer of Undertaking: A demerger involves the transfer of one or more undertaking from a company to another resulting company.
2. Scheme of Arrangement: The demerger is carried out under a scheme of arrangement under sections 230 to 232 of the Companies Act, 2013.
3. Transfer of All Properties and Liabilities: All the properties and liabilities related to the undertaking being transferred are transferred to the resulting company.
4. Proportionate Allotment of Shares: The shares of the resulting company are allotted to the shareholders of the demerged company on a proportionate basis.
5. Shareholders Approval: The scheme of demerger requires the approval of shareholders holding not less than three-fourths in value of the shares in the demerged company.
6. Tax Implications: Demerger can have significant tax implications for both the demerged and resulting companies, as well as their shareholders, which should be carefully considered before proceeding.

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