Business Law: Demerger Concepts
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Questions and Answers

What minimum value of shares must shareholders hold in a demerged company to become shareholders in the resulting company, according to the conditions of a demerger?

  • Two-thirds
  • Four-fifths
  • One-half
  • Three-fourths (correct)

    • Besides shareholder continuity, what other condition ensures the validity of a demerger concerning the transfer of an undertaking?

  • The transfer must involve only tangible assets.
  • The transfer must be done on a going concern basis. (correct)
  • The transfer must result in increased market share.
  • The transfer must be approved by all creditors.

    • If a public sector company is reconstructed into separate companies, under what condition is this deemed a demerger regarding asset transfer?

  • If such reconstruction is approved by the local government.
  • If the resulting company is a public sector company on the appointed day. (correct)
  • If the asset transfer is intended primarily for debt restructuring.
  • If the resulting company is a private entity.

    • According to the provided definitions, which entity transfers its undertaking in a demerger?

    <p>The demerged company (C)</p> Signup and view all the answers

    In a demerger, what does the resulting company issue to the shareholders of the demerged company in consideration for the transfer of the undertaking?

    <p>Shares (A)</p> Signup and view all the answers

    Which of the following entities can be considered a 'resulting company' after a demerger?

    <p>One or more companies, including a wholly-owned subsidiary (A)</p> Signup and view all the answers

    Besides shareholder continuity and going concern basis, what additional condition is stipulated for a demerger to be valid?

    <p>Compliance with conditions notified by the Central Government. (A)</p> Signup and view all the answers

    For a reconstruction of a public sector company to be deemed a demerger, what authorization is required for the scheme that involves the transfer of assets?

    <p>Approval by the Central Government or any other body authorized under the Companies Act (D)</p> Signup and view all the answers

    What is the minimum percentage of total proceeds that an equity oriented fund must invest in the units of another fund traded on a recognized stock exchange?

    <p>90% (D)</p> Signup and view all the answers

    In the case where an equity oriented fund does not invest in other funds, what is the required minimum percentage of its total proceeds to be invested in equity shares of domestic companies?

    <p>65% (D)</p> Signup and view all the answers

    What is a prerequisite for another fund to be included in the investment of an equity oriented fund?

    <p>It must invest a minimum of 90% in equity shares listed on a recognized stock exchange. (A)</p> Signup and view all the answers

    How is the percentage of equity shareholding computed for an equity oriented fund?

    <p>With reference to the annual average of the monthly averages of the opening and closing figures. (B)</p> Signup and view all the answers

    Which of the following defines an equity oriented fund?

    <p>A fund that invests in the equity shares of domestic companies listed on a recognized stock exchange. (A)</p> Signup and view all the answers

    What tax percentage applies to LTCG on transfer of land or building acquired before 23.7.2024 but transferred on or after that date, without indexation benefit?

    <p>12.5% (C)</p> Signup and view all the answers

    Which of the following statements is true regarding the computation of LTCG tax for resident individuals or HUF?

    <p>Benefits of indexation are only applicable under Section 112 for certain transfers. (D)</p> Signup and view all the answers

    What is the lower tax rate applied to LTCG on transfer of property with indexation benefit?

    <p>20% (D)</p> Signup and view all the answers

    What is a key restriction regarding the use of indexation benefits for resident individuals or HUF when computing capital gains?

    <p>Indexation is not to be considered under the head 'Capital Gains' for certain transfers. (B)</p> Signup and view all the answers

    Which of the following correctly describes the tax treatment of LTCG for assets acquired before a specific date and transferred after?

    <p>Tax computation may vary based on indexation benefits depending on dates. (C)</p> Signup and view all the answers

    What is the condition regarding the amalgamated company in a scheme of amalgamation?

    <p>It must be an Indian company. (D)</p> Signup and view all the answers

    What happens to shares held by a shareholder in the amalgamating company during an amalgamation?

    <p>They are transferred in exchange for shares in the amalgamated company. (A)</p> Signup and view all the answers

    In a scheme of demerger, what type of company must the resulting company be?

    <p>An Indian company. (C)</p> Signup and view all the answers

    What occurs when a shareholder receives shares as part of a scheme of amalgamation?

    <p>They are taxed only on the increase in market value. (D)</p> Signup and view all the answers

    What condition applies if the amalgamating company is also the shareholder of the amalgamated company?

    <p>It cannot issue shares to itself. (D)</p> Signup and view all the answers

    When is a transfer or issue of shares by a resulting company taxable?

    <p>If it is in consideration of the demerger. (A)</p> Signup and view all the answers

    How is an exchange treated when a shareholder is allotted shares of higher market value in amalgamation?

    <p>It is treated as capital gain on the increase in value. (A)</p> Signup and view all the answers

    What must occur for the demerged company to transfer a capital asset to the resulting company?

    <p>The resulting company must be an Indian company. (A)</p> Signup and view all the answers

    What is the tax implication of distributing a capital asset during a partial partition of a Hindu undivided family?

    <p>No capital gains tax liability arises. (D)</p> Signup and view all the answers

    Under which provision is the conversion of bonds into shares not regarded as a transfer for capital gains?

    <p>Section 47(x) (D)</p> Signup and view all the answers

    What treatment does the reverse mortgage transaction by Mr. Abhishek receive regarding capital gains?

    <p>No capital gains tax is applicable. (B)</p> Signup and view all the answers

    What does Section 10(43) provide regarding amounts received under a reverse mortgage?

    <p>It is exempt from income tax. (B)</p> Signup and view all the answers

    Is alienation of a residential house in a reverse mortgage transaction treated as a transfer?

    <p>No, it is not regarded as a transfer. (D)</p> Signup and view all the answers

    How long must zero coupon bonds be held to be classified as long-term capital assets?

    <p>14 months (A)</p> Signup and view all the answers

    What defines a zero coupon bond?

    <p>A bond with no payments or benefits before maturity. (A)</p> Signup and view all the answers

    In the context of reverse mortgage transactions, what triggers a capital gain assessment?

    <p>There are no triggers for capital gain assessments. (A)</p> Signup and view all the answers

    What is the deemed full value of consideration for shares transferred under a gift or irrecoverable trust?

    <p>Market value on the date of transfer (D)</p> Signup and view all the answers

    How should non-residents compute capital gains from the transfer of shares in Indian companies?

    <p>Applying the TTBR and TTSR rates during acquisition and transfer (D)</p> Signup and view all the answers

    What tax rate applies to long-term capital gains for non-residents on unlisted securities transferred before 23.7.2024?

    <p>10% (A)</p> Signup and view all the answers

    What type of assets are exempt from the benefit of indexation for non-residents?

    <p>Unlisted securities (C)</p> Signup and view all the answers

    What is the tax rate for long-term capital gains applicable to foreign companies after 23.7.2024?

    <p>12.5% (D)</p> Signup and view all the answers

    Which of the following is NOT a requirement for the calculation of capital gains by non-residents?

    <p>Use of local market prices for acquisitions (C)</p> Signup and view all the answers

    Which of the following transactions qualifies for concessional tax rates for non-residents?

    <p>Transfer of unlisted securities before 23.7.2024 (A)</p> Signup and view all the answers

    What must non-residents do when converting capital gains back to Indian currency?

    <p>Apply the TTBR on the date of transfer (A)</p> Signup and view all the answers

    Flashcards

    Equity Oriented Fund

    A mutual fund scheme that invests a minimum of 65% in equity shares of domestic companies listed on stock exchanges.

    Minimum Investment Requirement

    For equity-oriented funds, 90% of proceeds must be in another fund or 65% directly in equities.

    Recognised Stock Exchange

    An official platform where securities are traded, allowing investment in listed domestic companies.

    Average Monthly Figures

    Computation for equity holdings is based on average monthly opening and closing prices of shares.

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    Domestic Companies

    Firms based within a country that are listed on a recognized stock exchange.

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    Capital Asset Transfer (Amalgamation)

    Transfer of a capital asset from an amalgamating company to the amalgamated Indian company as per Section 47(vi).

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    Capital Asset Transfer (Demerger)

    Transfer of a capital asset from a demerged company to a resulting Indian company under Section 47(vib).

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    Share Transfer (Demerger)

    Transfer or issue of shares by resulting company to shareholders of the demerged company under Section 47(vid).

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    Shareholder Transfer (Amalgamation)

    Transfer of shares by a shareholder in the amalgamating company during amalgamation, per Section 47(vii).

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    Conditions for Shareholder Transfer

    Conditions for transfers in amalgamation: share allotment and amalgamated company must be Indian.

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    Example of Amalgamation Case

    A Ltd. cannot issue shares to itself but must to B Ltd. shareholders after amalgamation.

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    Market Value Adjustment

    Adjusting value of shares received after amalgamation compared to previous holdings.

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    Assessing Officer's Role

    Evaluates transactions and may propose to tax capital gains from share exchanges.

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    LTCG Tax on Land/Building

    Tax on long-term capital gains from land or building transferred on or after 23.7.2024.

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    Indexation Benefit

    Option to adjust gain for inflation when computing tax for LTCG.

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    Tax Rates Under Section 112

    Tax on LTCG can be 12.5% without indexation or 20% with indexation.

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    Acquisition Date Impact

    Acquired assets before 23.7.2024 qualify for indexation.

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    Capital Gains Inclusion

    Indexation benefit not used in calculating gross total income.

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    Section 47(i)

    Distribution of capital assets in kind during partition of Hindu undivided family is not a transfer for capital gains taxation.

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    Section 47(x)

    Conversion of bonds into shares is not considered a transfer for capital gains.

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    Reverse Mortgage

    A financial agreement allowing homeowners to convert equity into loans without selling property.

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    Section 47(xvi)

    Transfer of a capital asset in a reverse mortgage is not treated as a transfer for capital gains tax.

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    Capital Gain Tax

    A tax levied on the profit from the sale of a non-inventory asset.

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    Section 10(43)

    Loan amounts received from a reverse mortgage to senior citizens are exempt from income tax.

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    Zero Coupon Bond

    A bond that does not pay interest but is sold at a discount; profit is earned at redemption.

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    Capital Assets

    Types of property that can generate capital gains taxes when sold or exchanged.

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    Employee Stock Option Plan

    A plan allowing employees to purchase shares at a predetermined price.

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    Market Value on Transfer

    The market value at the time of transferring shares or securities is considered the full value of consideration.

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    Non-Resident Capital Gains

    Capital gains for non-residents are calculated with specific currency conversion rules when transferring shares or debentures.

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    Telegraphic Transfer Rates

    Rates used to convert foreign capital gains into Indian currency during transactions.

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    Demerger

    A process where a company splits into separate entities, transferring its assets to the resulting company.

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    No Indexation Benefit

    Non-residents cannot benefit from indexation while computing capital gains on certain transfers.

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    Shareholders in a Demerger

    Shareholders holding at least three-fourths of the shares become shareholders in the new company after a demerger.

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    Transfer of Undertaking

    The transfer of a company's operation or business to another company as part of a demerger on a going concern basis.

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    Concessional Tax Rate

    A reduced tax rate of 10% for long-term capital gains on certain share transfers for non-residents until July 2024.

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    Unlisted Securities Tax

    Long-term capital gains on unlisted securities are taxed at 10% for non-residents before a specified date.

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    Resulting Company

    A company formed from the demerger to which the demerged company’s assets are transferred.

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    Currency Risk Relief

    The prescribed computation method helps non-residents mitigate risks from currency fluctuations.

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    Demerged Company

    The original company that undergoes demerger to transfer its assets to one or more new companies.

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    Going Concern Basis

    A principle stating that the business will continue its operations for the foreseeable future, which applies during the transfer of undertaking in a demerger.

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    Public Sector Company

    A company owned and operated by the government, which can be a resulting company in a demerger.

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    Central Government Notifications

    Regulations or conditions set by the Central Government that may apply to the process of demerger.

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    Study Notes

    Capital Gains

    • Capital gains are profits or gains arising from the transfer of a capital asset in a given financial year.
    • A capital asset is any property held by an assessee, whether or not connected with their business or profession. This includes securities held by foreign institutional investors in accordance with SEBI regulations, and units-linked insurance policies (ULIPs) issued after February 1, 2021.
    • Capital gains can be long-term or short-term, depending on the holding period of the asset.

    Short-term Capital Assets

    • Short-term capital assets are held for not more than 36 months and are subject to a different tax rate than long-term capital assets.
    • As of July 23, 2024, the holding period for short-term capital assets is now 24 months.

    Long-term Capital Assets

    • Long-term capital assets are held for more than 36 months (as of July 23, 2024, this is now 24 months). They are taxed at different rates than short-term assets.

    Computation of Capital Gains

    • The full value of consideration received or accruing as a result of the transfer is computed.
    • Deductions are made for expenses wholly and exclusively related to the transfer, such as brokerage, stamp duty, etc.
    • If the asset is depreciable, cost of improvement is also deducted.
    • The applicable exemptions or deductions are subtracted (e.g., exemptions under sections 54, 54B, 54D, 54EC, 54F).
    • The remaining amount is the capital gain
    • Specific rules may apply to different kinds of assets. Example; stock-in-trade, rural agricultural land, and others.

    Computation of Capital Gains in case of transfer of depreciable assets

    • Where the assets in the block are transferred for a consideration more than the written-down value of the block, the result is a short-term capital gain.
    • If the assets are transferred for a consideration less than the written-down value of the block, the result is a short-term capital loss.
    • No indexation benefit is available in this case.

    Computation of Capital Gains in case of Market Linked Debentures or Units of a Specified Mutual Fund

    • The full value of the consideration, less the cost of acquisition and expenses related to the transfer, is the capital gain.
    • Security transaction tax deductions are not considered.

    Computation of Capital Gains in case of Slump Sale

    • The net worth, comprising the aggregate of total assets reduced by liabilities, is considered in computing the cost of acquisition.
    • The full fair market value of the asset on the date of sale is considered in computing the sale consideration.

    Transfer

    • Transfer refers to any event where ownership of a capital asset changes hands. This includes sales, exchanges, relinquishments, and even compulsory acquisitions.
    • Certain transactions are not considered transfers in the context of computing capital gains.

    Exemptions

    • Various exemptions apply to capital gains, depending on the type of asset, the holder, the holding period, and the investment of the capital gain.
    • Several sections specify exemptions for different assets and situations.

    Year of Chargeability

    • Capital gains are chargeable to tax in the financial year during which the sale or transfer occurs, not necessarily when the agreement is made.

    Cost of Acquisition and Cost of Improvement

    • The cost of acquisition is based on the price the asset was purchased for, which can be adjusted for depreciation on some assets.
    • It can be the fair market value where the previous owner's cost of acquisition isn't certain.
    • For depreciable capital assets, improvements are added to the cost of acquisition.
    • Any expenses incurred during the transfer are also relevant for determining the acquisition cost.

    Capital Gains Computation - Applicability of Section 50

    • Section 50A applies to assets forming part of a block.
    • In instances where the full value exceeds the combined sum of expenditures and WDV of the relevant assets, section 50 overrides section 48.

    Other Important Points

    • Taxation of capital gains may vary depending on the nature of the asset, the holder, and other factors, including whether it's listed or unlisted.
    • The long-term capital gains exemption limit is ₹2 crore.
    • Separate rules to deal with the cost of acquisition and computation of long-term capital gains are applicable based on whether the property was transferred before or after July 23, 2024, for the provisions of section 112.
    • Other regulations may apply to specific situations (e.g., for agricultural property).
    • If the date of agreement is different from the date of registration, the stamp duty value of the agreement date may be considered.

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    Income Tax Law - Capital Gains - PDF

    Description

    Test your knowledge on the legal concepts related to demergers in business law. This quiz covers conditions for shareholder entitlement, asset transfer criteria, and the nature of resulting companies post-demerger. Ideal for students of corporate law and business management.

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