Tax Implications of Demerger

[manoj gupta]

A Pvt. Ltd. company demerges into two companies. It transfers its stock of gold to two companies at book values. what are the tax implications of this. Pls. clarify.

[Rama Krishana]

What was the nature of stock of gold? Whether it was held as stock in trade or as capital assets? You may read section 47 of the Income Tax where in case of dmerger (in certain situations) transfer is not treated as transfer in the hands of transferor and or read explanation 7A to the section 43, which read as, "Explanation 7A.—Where, in a demerger, any capital asset is transferred by the demerged company to the resulting company and the resulting company is an Indian company, the actual cost of the transferred capital asset to the resulting company shall be taken to be the same as it would have been if the demerged company had continued to hold the capital asset for the purpose of its own business : Provided that such actual cost shall not exceed the written down value of such capital asset in the hands of the demerged company

[manoj gupta]

The gold was held as stock in trade. what are the implications.

AI Summary

Demerger tax treatment: asset characterization decides applicability of non transfer rules or capital asset cost carryover.
Tax consequences of asset transfers on demerger depend on whether the asset is stock in trade or a capital asset; a demerger non transfer provision and a capital asset carryover rule provide that, for capital assets, the resulting company takes the same actual cost as the demerged company subject to a cap that such cost shall not exceed the written down value in the hands of the demerged company. The gold was stated to be stock in trade, so the capital asset carryover rule does not apply and tax implications differ accordingly.