Merger vs Demerger Under Companies Act 2013 and Income-tax Act 2025

Merger or Demerger: A Simple Guide to Choosing the Right Restructuring Route Under the Companies Act, 2013 and the Income-tax Act, 2025

Summary: The article explains the distinction between merger and demerger under the Companies Act, 2013 and the  Income-tax Act, 2025. It states that mergers combine companies while demergers separate a business undertaking, with Sections 230 to 232 providing the principal scheme process and Section 233 providing a faster route for specified situations. For tax purposes, it identifies Section 2(6) as the definition of amalgamation, Sections 2(34) and 2(35) as provisions concerning demerged company and demerger, Section 70 as the capital gains relief provision, Section 116 as the general loss carry-forward provision, and Sections 117 and 118 as separate provisions for specified bank, insurance and co-operative-bank reorganisations. The article also addresses the appointed date under Section 232(6), GST input tax credit under Section 18(3) of the CGST Act read with Rule 41 of the CGST Rules, regulatory approvals, valuation and accounting, stamp duty, and FEMA considerations. It discusses Miheer H. Mafatlal v. Mafatlal Industries Ltd. and Marshall Sons & Co. (India) Ltd. v. ITO in relation to scheme approval and appointed dates. The practical conclusion is that the appropriate restructuring route depends first on whether the business objective is consolidation or separation, followed by independent company-law, tax, carried-forward-loss and commercial checks.

Short Answer

A merger is the right route when the goal is to become one company: to add scale, cut duplicate costs, or bring a target company fully inside the buyer. The company being taken over stops existing, but it is not wound up in the usual sense; the law simply removes it from the register once the merger is complete. A demerger is the right route when the goal is to split: to separate a risky business from a safe one, to let a fast-growing division raise its own money, or to divide a family business between branches of the family. Both routes go through the same court-like body, the National Company Law Tribunal (“NCLT”), under Sections 230 to 232 of the Companies Act, 2013. A faster route without the NCLT, under Section 233, is also available, but only for specific situations explained below; it is mainly used for mergers, though the law does allow it to be used more widely in certain cases. On the tax side, both a genuine merger and a genuine demerger can be free of capital gains tax if they meet the conditions written into the Income-tax Act, 2025. But “tax neutral” does not mean “no tax questions at all”. Other things such as carried-forward losses, stamp duty, and GST credit still need separate checking.

Applicable Legal Provisions

• Sections 230 to 232, Companies Act, 2013: the main law for both mergers and demergers. Section 230 lets a company propose a deal (called a “scheme”) to its creditors or members. Section 231 lets the NCLT watch over and enforce the scheme after it is approved. Section 232 is the section that actually allows a merger or a demerger to happen, including transfer of the business, issue of new shares, and closing down the company that has merged away.
• Section 233, Companies Act, 2013: a shorter, faster process that skips the NCLT and goes through the Regional Director instead. It is written mainly for mergers between a holding company and its own wholly-owned subsidiary, and for mergers between small companies. But Section 233(12) also says the same fast process can be used for a plain compromise or arrangement under Section 230, and for a division or transfer of a company under Section 232(1)(b), which is the part of the law that covers demergers. So Section 233 is not strictly limited to mergers; whether it can be used for a specific demerger needs to be checked case by case, along with the current Rules made under this section. Section 233 of Companies Act, 2013 and its fast-track procedure are discussed on TaxGuru.
• Section 234, Companies Act, 2013: allows an Indian company to merge with a foreign company, subject to RBI approval and to the country list notified by the Central Government. Section 234 has been reproduced and discussed on TaxGuru.
• Sections 235 to 240, Companies Act, 2013: smaller, supporting rules, covering buying out shareholders who object to the scheme, keeping old company records safe after a merger, and making clear that a director or officer who committed a wrong before the merger can still be held responsible for it afterwards.
• Section 2(6), Income-tax Act, 2025 (this replaces Section 2(1B) of the old 1961 Act): defines “amalgamation” for tax purposes. It asks for two things: first, that all the property and all the liabilities of the company being merged away become those of the new company; and second, that shareholders holding at least three-fourths in value of the old company’s shares become shareholders of the new company, other than shares the new company already held or bought separately.
• Section 2(34) and Section 2(35), Income-tax Act, 2025 (these replace Sections 2(19AA) and 2(19AAA) of the old Act): define “demerged company” and “demerger”. A demerger under tax law must be carried out through an NCLT scheme under Sections 230 to 232 of the Companies Act, must move the whole business unit (not just some assets), must be done at book value, and must give at least three-fourths of the demerged company’s shareholders, by value, shares in the new company.
• Section 70, Income-tax Act, 2025 (this replaces Section 47 of the old Act): the section that actually gives capital gains tax relief. It says a transfer made through a genuine amalgamation or demerger is not treated as a “transfer” for capital gains purposes, both for the companies involved and for their shareholders.
• Section 52, Income-tax Act, 2025 (this replaces the old Sections 35DD and 35DDA): lets a company spread out, over five years, the money it genuinely spends only for carrying out an amalgamation or demerger, instead of claiming the whole cost in one year.
• Section 116, Income-tax Act, 2025 (this replaces Section 72A of the old Act): the general rule for what happens to accumulated business losses and unused depreciation when companies merge, and also when a company demerges. This is the section that actually applies to most ordinary mergers and demergers.
• Section 117, Income-tax Act, 2025 (this replaces Section 72AA of the old Act): a narrow, separate rule that applies only to specified mergers between banking companies, certain banks set up by the Government, and Government-owned general insurance companies. It is not a general rule for ordinary company mergers.
• Section 118, Income-tax Act, 2025: a further separate rule dealing only with the reorganisation of co-operative banks.
• Section 536, Income-tax Act, 2025: the section that decides which law applies, the old 1961 Act or the new 2025 Act, when something (such as a loss or a deduction) relates partly to the period before 1 April 2026 and partly to the period after. Section 536 of the Income-tax Act, 2025 is discussed on TaxGuru.
• Companies (Compromises, Arrangements and Amalgamations) Rules, 2016: the detailed rulebook and forms used to actually file a scheme with the NCLT or the Regional Director. The fast-track mechanism under Section 233 and Rule 25 is also discussed in TaxGuru’s discussion of the Section 233 procedure.
• Section 18(3), CGST Act, 2017, read with Rule 41 of the CGST Rules, 2017: allows unused GST input tax credit to be transferred to the new company after a merger or demerger, using Form GST ITC-02. Section 18(3), CGST Act and Rule 41 are discussed on TaxGuru.
• Section 5, Competition Act, 2002: sets asset and turnover limits above which a merger or demerger needs prior approval from the Competition Commission of India (“CCI”) before it can be completed.
• SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015: extra approval and disclosure steps that apply only where a listed company is involved. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 are available on TaxGuru.
• MCA General Circular No. 09/2019 dated 21 August 2019: explains what “appointed date” means under Section 232(6), covered further below. MCA General Circular No. 09/2019 is reproduced and discussed on TaxGuru.

Relevant Extracts

Section 230(6), Companies Act, 2013 (in simple words): if, at the meeting called for the scheme, a majority of the people present, holding at least three-fourths in value of the shares or debts being voted, agree to the scheme, and the NCLT then approves it by an order, the scheme becomes binding on the company and on everyone covered by that meeting, whether or not they personally agreed to it.

Section 232(3), Companies Act, 2013 (in simple words): once the NCLT approves the scheme, the property, rights and debts of the company being merged away pass automatically to the new company, without any separate paperwork being needed for each item; any court case by or against the old company simply continues against the new company; new shares are issued as agreed; and the old company is removed from the register without going through a normal winding-up.

Section 2(6), Income-tax Act, 2025 (in simple words): “amalgamation” means one or more companies merging into another company, or two or more companies merging to form a new company, in a way where all property and liabilities of the old company become those of the new company, and where shareholders holding at least three-fourths in value of the old company’s shares become shareholders of the new company.

Section 2(35), Income-tax Act, 2025 (in simple words): “demerger” means moving one or more business units of a company to a new company, through a scheme approved under Sections 230 to 232 of the Companies Act, where the whole unit (assets and matching liabilities) moves at book value, and shareholders holding at least three-fourths in value of the old company’s shares get shares in the new company.

Section 70, Income-tax Act, 2025 (in simple words, as far as it applies here): when property moves from the old company to the new company under a genuine amalgamation, or from a demerged company to the new company under a genuine demerger, it is not treated as a “transfer” for capital gains tax, as long as the new company is an Indian company. A similar rule protects the shareholder who receives new shares in place of old shares.

Legal Position

It helps to keep four separate questions apart, because people often blend them into one and get confused.

First, is it allowed under company law? This is a Sections 230 to 232 question, or a Section 233 question if the deal is eligible for the fast route. It asks nothing about tax. A scheme can be perfectly valid under the Companies Act and still fail the tax test explained next.

Second, does it qualify for tax relief? This is a separate test. A merger only counts as an “amalgamation” for tax purposes if it meets the exact conditions in Section 2(6). A demerger only counts as a “demerger” for tax purposes if it meets the exact conditions in Section 2(35), including a point that is often missed: the business being moved must be a real, functioning “undertaking”, meaning a business activity taken as a whole, not just a handful of assets picked out and bundled together. If the company simply hands over a building and a bank balance and calls it a demerger, the tax law will likely not agree, even though the Companies Act scheme may still go through.

Third, even if tax relief applies, what happens to old tax numbers? Getting capital gains relief under Section 70 does not automatically solve everything. The new company still has to separately work out what happens to old losses (Section 116), the cost of the assets it now owns, the depreciation already claimed, and other tax figures carried over from the old company. These are Section 116, 117 and 118 questions, and, as explained below, they are not one single rule.

Fourth, does it make business sense? This is the commercial question a board actually cares about day to day. Merging usually makes sense to gain size, cut overlapping costs, or bring a target fully inside the buyer. Demerging usually makes sense to protect a safe business from a risky one, let a growing business raise its own funds, or split a family business fairly.

Procedurally, the standard Sections 230 to 232 process runs through fixed steps. The board approves a draft scheme. Where the deal involves a share-exchange ratio or similar valuation, a registered valuer’s report and an auditor’s certificate on the accounting treatment are prepared and placed before the NCLT. The company then applies to the NCLT to call (or skip) meetings of shareholders and creditors. Notice goes out to the Registrar of Companies, the Income-tax Department, and, for a listed company, to SEBI and the stock exchanges. At the meeting, the scheme needs approval from a majority of those present, holding at least three-fourths in value of the shares or debts being voted. A second application then deals with any objections raised. Once the NCLT signs off, the order is filed with the Registrar, and only then does the merger or demerger actually take legal effect. After that, shares are issued, statutory registers are updated, and the accounting entries are passed.

The “appointed date” needs careful drafting. Section 232(6) requires every scheme to state an “appointed date”, the date from which the merger or demerger is treated as effective. Many people wrongly assume this must always be a fixed calendar date. MCA General Circular No. 09/2019, dated 21 August 2019, makes clear that the appointed date can instead be tied to an event, such as getting a specific regulatory approval, and that this date also counts as the “acquisition date” for accounting under Ind AS 103. The Supreme Court’s ruling in Marshall Sons & Co. (India) Ltd. v. Income Tax Officer, (1997) 223 ITR 809, confirms that this appointed date can be earlier than the date the NCLT actually signs the order.

Section 233’s fast route is wider than it first looks, but is still mainly used for mergers. For a merger between a holding company and its wholly-owned subsidiary, or between small companies, Section 233 skips the NCLT entirely and goes through the Regional Director, which is much faster. Section 233(12) extends the same simplified process, with the changes needed to fit the context, to a plain compromise or arrangement under Section 230 and to a division or transfer of a company under Section 232(1)(b). In practice, this route is still mostly used for straightforward mergers, and using it for a demerger-style transaction needs a fresh, careful check against the current Rules and against how the Registrar and Regional Director are actually treating such filings at the time, since this is a developing area of practice. The Section 233 fast-track procedure is discussed on TaxGuru.

Exemptions / Relaxations

There is no general exemption from the Chapter XV scheme process itself, private companies, Section 8 companies, small companies and OPCs all still need to go through Sections 230 to 232, or Section 233 where eligible. The relief that genuinely exists sits on the tax side and is always conditional, not automatic:

• Capital gains relief under Section 70 applies only if the merger meets the Section 2(6) test, or the demerger meets the Section 2(35) test. If shareholder continuity falls below three-fourths in value, or if the business moved is not a proper “undertaking”, the relief is lost and the deal is taxed like an ordinary sale.
• Loss carry-forward relief under Section 116 is conditional relief, not a guarantee. It applies only where the new company keeps running the business for the period the law requires and meets the other conditions written into that section.
• The Section 233 fast route is itself a form of relief from the longer NCLT process, but it is available only to the specific classes of companies the section names, plus whatever is allowed through Section 233(12) as explained above; it is not a general shortcut for every small deal.

Case Laws / Professional Interpretation

Miheer H. Mafatlal v. Mafatlal Industries Ltd., (1997) 1 SCC 579: the Supreme Court set the test the NCLT still uses today to decide whether to approve a scheme. It checks that the correct procedure was followed, that the scheme does not break any law or go against public policy, and that it is fair and reasonable from the point of view of a sensible businessperson. The court does not second-guess the business decision itself once the required majority has approved it.

Marshall Sons & Co. (India) Ltd. v. ITO, (1997) 223 ITR 809 (SC): already explained above. This case allows the appointed date to be earlier than the date the scheme is actually approved by the court or the NCLT.

There is not yet a settled body of case law on how Section 233(12) applies to demerger-style transactions in practice, or on how the new Income-tax Act, 2025 numbering will be read by courts and tribunals, since the new Act only came into force from 1 April 2026. Both points should be treated as areas where the safer, more cautious reading is followed until clearer guidance or rulings appear.

Practical Interpretation

1. Work out the goal first, then pick the route. If the aim is to become bigger, combine two teams, or absorb a company fully, this is a merger question under Section 232 (or Section 233 if eligible). If the aim is to separate a business, protect it from risk, or split ownership fairly, this is a demerger question under Section 232.

2. Check the “undertaking” test carefully before calling something a demerger. Under Section 2(35), the part of the business being moved must be a real business activity taken as a whole, not just a chosen set of assets or liabilities. Getting this wrong is one of the most common ways a demerger loses its tax relief.

3. Get the valuation and accounting method settled early, where the deal needs one. A registered valuer’s report and an auditor’s certificate on the accounting treatment are ordinarily needed wherever the scheme involves a share-exchange ratio or similar consideration; simpler intra-group deals, such as a wholly-owned subsidiary merging into its parent, may need a lighter version of this exercise, so check what the specific structure actually requires rather than assuming one standard checklist fits every deal.

4. Fix the appointed date deliberately, and explain the choice in the scheme itself. If it is more than a year before the date of filing, be ready to justify that to the NCLT, in line with MCA General Circular No. 09/2019.

5. Map every approval the deal actually needs, not just NCLT approval. Depending on the companies involved, this can include the Competition Commission of India (if the asset or turnover limits under Section 5 of the Competition Act, 2002 are crossed), SEBI and the stock exchanges (for listed companies), the RBI (for cross-border mergers under Section 234, or where a regulated financial company is involved), and sector regulators such as IRDAI or the RBI for NBFCs.

6. Check GST input tax credit separately. Section 18(3) of the CGST Act, along with Rule 41 of the CGST Rules, allows unused GST credit to move to the new company through Form GST ITC-02. In a demerger, this credit is split between the companies in the ratio of the value of assets each one receives, so this needs its own working, separate from the income tax analysis.

Get the loss carry-forward analysis right, and do not treat Sections 116, 117 and 118 as the same rule. Section 116 is the section that actually applies to most ordinary mergers and demergers. Within Section 116, sub-section (12) has closed an old planning route: for amalgamations and reorganisations covered by Section 116(1), (8) or (10) done on or after 1 April 2025, losses of the original company can now be carried forward for no more than eight tax years from the year the loss first arose for that original company. Passing the loss through a further merger no longer restarts this eight-year clock. Section 117 is a separate, narrow rule that applies only to specified bank and Government-insurance-company mergers, and should not be quoted for an ordinary company merger. Section 118 applies only to co-operative banks.

Wherever the deal touches a section that carries a penalty, for example, failing to file the NCLT’s order with the Registrar under Section 232(5), or a defect in the valuer’s or auditor’s certificate, check the exact penalty amount in the Act as it stands today before quoting it in any opinion. The Companies (Amendment) Act, 2020 removed jail terms from many of these provisions and changed several fine amounts, so a figure remembered from an older reading is a common and avoidable mistake.

Finally, treat the following as a working checklist rather than an afterthought, since each one can change the outcome of the deal: stamp duty on the transfer of property under the sanctioned scheme (this is payable in both a merger and a demerger, and the rate depends on the State where the property or registered office sits); whether existing loan agreements or other contracts contain a clause that blocks assignment or triggers on a change of control; whether employees automatically continue under the new company, and what the employment contracts actually say; how pending court cases are handled once the transferring company changes; and, where any shareholder is based outside India, whether FEMA rules on inbound or outbound investment are triggered by the share allotment.

Merger vs Demerger: A Quick Comparison

Example

Bright Fabrics Private Limited runs two businesses under one roof: textile manufacturing and a fast-growing online retail arm. The promoters want the online business to raise its own outside funding without diluting ownership in the manufacturing business, and want each business to have its own dedicated management. This is a demerger. The online retail undertaking, being a real, complete business activity and not just a few chosen assets, is moved on a going-concern basis into a new company, “Bright Retail Private Limited”, through a Section 230 to 232 scheme. Existing shareholders of Bright Fabrics get matching shares in Bright Retail. Separately, if Bright Fabrics later wants to fold a dormant, wholly-owned subsidiary back into itself just to simplify the group structure, that is a merger, and because it is a holding-subsidiary merger, it can normally use the Section 233 fast route through the Regional Director instead of the full NCLT process.

Conclusion

A merger and a demerger are opposite moves that happen to share the same procedural home in the Companies Act, 2013. Getting the route right starts with one plain question: does this company need to become one thing, or two? But choosing the right route under company law is only the first of four separate checks. The deal also has to independently qualify for tax relief, its old tax numbers, especially carried-forward losses, have to be worked out correctly, and it has to make real business sense. The Income-tax Act, 2025 keeps the basic idea of tax-free restructuring alive, but it has renumbered nearly every section a professional used to know by heart, and it has tightened the loss carry-forward rule through Section 116. Treat every section number against the current Act, not against old habit, and treat “tax neutral” as the start of the analysis, not the end of it.

FAQs

Can Section 233’s fast route be used for a demerger? Not automatically. Section 233 is written mainly for specific merger situations. Section 233(12) does extend the same process to a compromise or arrangement under Section 230 and to a division or transfer under Section 232(1)(b), which can cover demerger-style deals, but this needs a fresh check against the current Rules and against how it is being applied in practice at the time. It should not be assumed as a default option.

Does a demerger always need a brand-new company to be set up? No. The business unit can be moved into an existing company, as long as that company also meets the going-concern and shareholder-continuity conditions under Section 2(35). Using a new company is common, but it is not a legal requirement.

Is stamp duty payable on both a merger and a demerger? Yes. Once the NCLT sanctions the scheme, stamp duty applies under the relevant State law on the transfer of property the order brings about, in both cases. The exact rate and how it is calculated depend on the State where the immovable property or the registered office is located.

If a scheme meets the tax definition of amalgamation or demerger, does that mean there is no tax to worry about at all? No. It only means the transfer itself is not treated as a taxable “transfer” for capital gains. Other questions, such as what happens to carried-forward losses, the cost of assets going forward, and GST input tax credit, still need to be worked out separately.

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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at [[email protected]](mailto:[email protected])).