One of the existing conditions for tax-neutral demergers is that the resulting company should record the property and the liabilities of the undertaking at the value appearing in the books of accounts of the demerged company. It has been represented that Indian Accounting Standards (Ind-AS) compliant companies are required to record the property and the liabilities of the undertaking at a value different from the book value of the demerged company.

In order to facilitate, it is proposed to amend section 2 of the Act to provide that the requirement of recording property and liabilities at book value by the resulting company shall not be applicable in a case where the property and liabilities of the undertakings received by it are recorded at a value different from the value appearing in the books of account of the demerged company immediately before the demerger in compliance to the Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015.

This amendment will take effect, from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years.

[Clause 3]

Extract of Clause 3 of Finance Bill 2019

3. Amendment of section 2.

In section 2 of the Income-tax Act, in clause (19AA), in sub-clause (iii), the following proviso shall be inserted with effect from the 1st day of April, 2020, namely:—

“Provided that the provisions of this sub-clause shall not apply where the resulting company 40 records the value of the property and the liabilities of the undertaking or undertakings at a value different from the value appearing in the books of account of the demerged company, immediately before the demerger, in compliance to the Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015;”.

Note on Clause 3 of Finance Bill 2019

Clause 3 of the Bill seeks to amend section 2 of the Income-tax Act relating to definitions.

Clause (19AA) of the said section provides for the definition of the expression demerger for the purpose of providing tax neutrality where the property and liabilities of the undertaking transferred pursuant to the demerger shall be recorded at book value.

It is proposed to amend the said clause so as to provide that the requirement of recording property and the liabilities at book value shall not be applicable in a case where the property and the liabilities of the undertakings received by a resulting company are recorded at a value different from the value appearing in the books of account of the demerged company immediately before the demerger in compliance to the Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015.

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.

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