We hived off a division under a court-sanctioned scheme and claimed section 47(vib) and section 72A(4). The Assessing Officer says it is not a "demerger". What exactly does section 2(19AA) require, and what is the position where Ind AS forced us to record the assets at a different value?
Section 2(19AA) requires a transfer pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956, by a demerged company of one or more of its undertakings to a resulting company, AND seven further conditions: all the property of the undertaking passes; all the liabilities relatable to it pass; the property and liabilities are transferred at values appearing in the demerged company's books immediately before the demerger; the resulting company issues its shares to the demerged company's shareholders on a proportionate basis; shareholders holding not less than three-fourths in value of the shares of the demerged company become shareholders of the resulting company; the transfer of the undertaking is on a going-concern basis; and the demerger accords with any conditions notified under s.72A(5). The book-value condition now carries a proviso which disapplies it where the resulting company records a different value in compliance with the Indian Accounting Standards specified in the Annexure to the Companies (Indian Accounting Standards) Rules, 2015.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2020-04-01, reported as Income-tax Act, 1961, s.2(19AA), as printed on the departmental Year 2025 page, with the proviso to sub-clause (iii) inserted by Act No. 23 of 2019 w.e.f. 1 April 2020. It bears on section 2(19AA), section 2(1B), section 45, section 47(vib), section 47(vic), section 47(vicc), section 47(vid), section 72A(4), section 72A(5) of the Income Tax Act 1961, in Capital Gains, Capital Gains Exemptions and How Tax Law Is Read matters.
Unlike "amalgamation", the demerger definition does require a scheme of arrangement — but the scheme is only the gateway, and practitioners routinely stop there. The conditions that actually decide cases are the ones a scheme draftsman controls only imperfectly. "All the liabilities relatable to the undertaking" is expanded by Explanation 2 to include liabilities arising out of the activities or operations of the undertaking, specific loans or borrowings raised, incurred and utilised solely for it, and a proportionate slice of general or multipurpose borrowings computed on the ratio the value of the transferred assets bears to the total assets of the demerged company immediately before the demerger — so a scheme that transfers assets but leaves general borrowings entirely behind is exposed. "Undertaking" is defined in Explanation 1 to include any part of an undertaking, or a unit or division, or a business activity taken as a whole, but expressly NOT individual assets or liabilities or any combination of them not constituting a business activity: a bare asset transfer wrapped in a scheme is not a demerger. Explanation 3 tells you that in testing the book-value condition any change in the value of assets consequent to their revaluation is to be ignored — the revaluation is stripped out, not honoured. The Ind AS proviso is a genuine relief and is often missed: where the resulting company must record a different value to comply with Ind AS, the book-value condition does not apply. Explanations 4 and 5 create two deeming routes — the splitting up or reconstruction of a statutory authority, local authority or public sector company, and of a company that ceased to be a public sector company on a transfer of its shares by the Central Government — but both are conditional on the Central Government notifying conditions, so neither is self-executing. Note carefully that the printed text still refers to sections 391 to 394 of the Companies Act, 1956; those sections have been replaced in the companies-law scheme by the Companies Act, 2013, and the effect of that on the tax definition is a live question this entry does not answer. There is now a decided case on the point that these conditions are cumulative and mandatory, and it went against the taxpayer: in Avaya Global Connect Ltd. v. ACIT Range 7(3) (ITAT Mumbai, 29 July 2008, assessment year 2002-03) the Tribunal held at para 19 that "All the conditions laid down in Section 2(19AA) have to be satisfied in a case to be called a demerger for the purpose of Section 47(vib) of the Act", rejected the argument that sub-clauses (iv) and (v) apply only where there is consideration for the transfer, and held that the transfer before it "cannot be regarded as a 'demerger' within the meaning of Section 2(19AA) of the Act".
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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As printed on the Year 2025 departmental page, clause (19AA) reads: "demerger", in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that— (i) all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger; (ii) all the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger; (iii) the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger: Provided that the provisions of this sub-clause shall not apply where the resulting company 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; (iv) the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis except where the resulting company itself is a shareholder of the demerged company; (v) the shareholders holding not less than three-fourths in value of the shares in the demerged company (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 the demerger, otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company; (vi) the transfer of the undertaking is on a going concern basis; (vii) the demerger is in accordance with the conditions, if any, notified under sub-section (5) of section 72A by the Central Government in this behalf. Explanation 1 defines "undertaking" to include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but not individual assets or liabilities or any combination thereof not constituting a business activity. Explanation 2 expands the liabilities in sub-clause (ii) to include (a) liabilities arising out of the activities or operations of the undertaking, (b) specific loans or borrowings (including debentures) raised, incurred and utilised solely for the activities or operations of the undertaking, and (c) otherwise, so much of the general or multipurpose borrowings of the demerged company as stand in the same proportion which the value of the assets transferred in a demerger bears to the total value of the assets of such demerged company immediately before the demerger. Explanation 3 directs that in determining the value of the property referred to in sub-clause (iii) any change in the value of assets consequent to their revaluation shall be ignored. Explanations 4 and 5 deem certain splittings up or reconstructions — of an authority or body constituted under a Central, State or Provincial Act, a local authority or a public sector company, and of a company that ceased to be a public sector company on a transfer of its shares by the Central Government — to be demergers if they fulfil such conditions as may be notified in the Official Gazette by the Central Government.
A transfer is a "demerger" for the Income-tax Act only where it is made pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 and satisfies all seven conditions in s.2(19AA), read with Explanations 1 to 3. Sanction of the scheme is a necessary element of the definition but is not sufficient: the going-concern requirement, the transfer of all property and all relatable liabilities, the book-value requirement and the proportionate-issue and three-fourths shareholder requirements are independent statutory conditions. From 1 April 2020 the book-value requirement does not apply where the resulting company records a different value in compliance with the Indian Accounting Standards specified in the Annexure to the Companies (Indian Accounting Standards) Rules, 2015.
Not applicable — this is a statement of statutory text and of the departmental insertion note printed on the same family of pages. No judicial reasoning is involved.
Provided that the provisions of this sub-clause shall not apply where the resulting company 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;
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Handle my notice → Ask a CA on WhatsAppSection 2(19AA) requires a transfer pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956, by a demerged company of one or more of its undertakings to a resulting company, AND seven further conditions: all the property of the undertaking passes; all the liabilities relatable to it pass; the property and liabilities are transferred at values appearing in the demerged company's books immediately before the demerger; the resulting company issues its shares to the demerged company's shareholders on a proportionate basis; shareholders holding not less than three-fourths in value of the shares of the demerged company become shareholders of the resulting company; the transfer of the undertaking is on a going-concern basis; and the demerger accords with any conditions notified under s.72A(5). The book-value condition now carries a proviso which disapplies it where the resulting company records a different value in compliance with the Indian Accounting Standards specified in the Annexure to the Companies (Indian Accounting Standards) Rules, 2015. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 2(19AA), section 2(1B), section 45, section 47(vib), section 47(vic), section 47(vicc), section 47(vid), section 72A(4), section 72A(5) of the Income Tax Act 1961. It is reported as Income-tax Act, 1961, s.2(19AA), as printed on the departmental Year 2025 page, with the proviso to sub-clause (iii) inserted by Act No. 23 of 2019 w.e.f. 1 April 2020. Unlike "amalgamation", the demerger definition does require a scheme of arrangement — but the scheme is only the gateway, and practitioners routinely stop there. The conditions that actually decide cases are the ones a scheme draftsman controls only imperfectly. "All the liabilities relatable to the undertaking" is expanded by Explanation 2 to include liabilities arising out of the activities or operations of the undertaking, specific loans or borrowings raised, incurred and utilised solely for it, and a proportionate slice of general or multipurpose borrowings computed on the ratio the value of the transferred assets bears to the total assets of the demerged company immediately before the demerger — so a scheme that transfers assets but leaves general borrowings entirely behind is exposed. "Undertaking" is defined in Explanation 1 to include any part of an undertaking, or a unit or division, or a business activity taken as a whole, but expressly NOT individual assets or liabilities or any combination of them not constituting a business activity: a bare asset transfer wrapped in a scheme is not a demerger. Explanation 3 tells you that in testing the book-value condition any change in the value of assets consequent to their revaluation is to be ignored — the revaluation is stripped out, not honoured. The Ind AS proviso is a genuine relief and is often missed: where the resulting company must record a different value to comply with Ind AS, the book-value condition does not apply. Explanations 4 and 5 create two deeming routes — the splitting up or reconstruction of a statutory authority, local authority or public sector company, and of a company that ceased to be a public sector company on a transfer of its shares by the Central Government — but both are conditional on the Central Government notifying conditions, so neither is self-executing. Note carefully that the printed text still refers to sections 391 to 394 of the Companies Act, 1956; those sections have been replaced in the companies-law scheme by the Companies Act, 2013, and the effect of that on the tax definition is a live question this entry does not answer. There is now a decided case on the point that these conditions are cumulative and mandatory, and it went against the taxpayer: in Avaya Global Connect Ltd. v. ACIT Range 7(3) (ITAT Mumbai, 29 July 2008, assessment year 2002-03) the Tribunal held at para 19 that "All the conditions laid down in Section 2(19AA) have to be satisfied in a case to be called a demerger for the purpose of Section 47(vib) of the Act", rejected the argument that sub-clauses (iv) and (v) apply only where there is consideration for the transfer, and held that the transfer before it "cannot be regarded as a 'demerger' within the meaning of Section 2(19AA) of the Act". If it applies to you, the first step is this: Test the scheme against each of the seven conditions separately and record the working. Say which instrument you are construing at each step — s.2(19AA), not the sanction order.
As printed on the Year 2025 departmental page, clause (19AA) reads: "demerger", in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that— (i) all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger; (ii) all the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger; (iii) the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger: Provided that the provisions of this sub-clause shall not apply where the resulting company 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; (iv) the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis except where the resulting company itself is a shareholder of the demerged company; (v) the shareholders holding not less than three-fourths in value of the shares in the demerged company (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 the demerger, otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company; (vi) the transfer of the undertaking is on a going concern basis; (vii) the demerger is in accordance with the conditions, if any, notified under sub-section (5) of section 72A by the Central Government in this behalf. Explanation 1 defines "undertaking" to include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but not individual assets or liabilities or any combination thereof not constituting a business activity. Explanation 2 expands the liabilities in sub-clause (ii) to include (a) liabilities arising out of the activities or operations of the undertaking, (b) specific loans or borrowings (including debentures) raised, incurred and utilised solely for the activities or operations of the undertaking, and (c) otherwise, so much of the general or multipurpose borrowings of the demerged company as stand in the same proportion which the value of the assets transferred in a demerger bears to the total value of the assets of such demerged company immediately before the demerger. Explanation 3 directs that in determining the value of the property referred to in sub-clause (iii) any change in the value of assets consequent to their revaluation shall be ignored. Explanations 4 and 5 deem certain splittings up or reconstructions — of an authority or body constituted under a Central, State or Provincial Act, a local authority or a public sector company, and of a company that ceased to be a public sector company on a transfer of its shares by the Central Government — to be demergers if they fulfil such conditions as may be notified in the Official Gazette by the Central Government. The matter was decided on 2020-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. A transfer is a "demerger" for the Income-tax Act only where it is made pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 and satisfies all seven conditions in s.2(19AA), read with Explanations 1 to 3. Sanction of the scheme is a necessary element of the definition but is not sufficient: the going-concern requirement, the transfer of all property and all relatable liabilities, the book-value requirement and the proportionate-issue and three-fourths shareholder requirements are independent statutory conditions. From 1 April 2020 the book-value requirement does not apply where the resulting company records a different value in compliance with the Indian Accounting Standards specified in the Annexure to the Companies (Indian Accounting Standards) Rules, 2015.
Not applicable — this is a statement of statutory text and of the departmental insertion note printed on the same family of pages. No judicial reasoning is involved. In the words reproduced by the source cited on this page: "Provided that the provisions of this sub-clause shall not apply where the resulting company 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;"
It was decided by the CBDT Circulars & Instructions on 2020-04-01 and is reported as Income-tax Act, 1961, s.2(19AA), as printed on the departmental Year 2025 page, with the proviso to sub-clause (iii) inserted by Act No. 23 of 2019 w.e.f. 1 April 2020. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 2(19AA), section 2(1B), section 45, section 47(vib), section 47(vic), section 47(vicc), section 47(vid), section 72A(4), section 72A(5), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. A transfer is a "demerger" for the Income-tax Act only where it is made pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 and satisfies all seven conditions in s.2(19AA), read with Explanations 1 to 3. Sanction of the scheme is a necessary element of the definition but is not sufficient: the going-concern requirement, the transfer of all property and all relatable liabilities, the book-value requirement and the proportionate-issue and three-fourths shareholder requirements are independent statutory conditions. From 1 April 2020 the book-value requirement does not apply where the resulting company records a different value in compliance with the Indian Accounting Standards specified in the Annexure to the Companies (Indian Accounting Standards) Rules, 2015. It arises in Capital Gains, Capital Gains Exemptions and How Tax Law Is Read matters, on section 2(19AA), section 2(1B), section 45, section 47(vib), section 47(vic), section 47(vicc), section 47(vid), section 72A(4), section 72A(5) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Build the liability transfer from Explanation 2, including the proportionate share of general or multipurpose borrowings computed on the assets ratio. Do not assume the scheme's own liability schedule satisfies condition (ii). Establish that what moved is an "undertaking" within Explanation 1 — a business activity taken as a whole — and not a bundle of assets. This is the condition most often failed by hive-downs of a product line. Transfer at the values appearing in the demerged company's books immediately before the demerger, and ignore any revaluation when testing the condition (Explanation 3). If Ind AS compelled the resulting company to record different values, invoke the proviso to sub-clause (iii) expressly in the return and in any reply, and keep the accounting justification. The proviso was inserted by Act No. 23 of 2019 with effect from 1 April 2020, so do not deploy it for an earlier year. Check the proportionate-issue condition in sub-clause (iv): shares of the resulting company to the demerged company's shareholders on a proportionate basis, with the carve-out where the resulting company is itself a shareholder of the demerged company. Compute the three-fourths test in sub-clause (v) in VALUE of the demerged company's shares, excluding shares already held immediately before the demerger by, or by a nominee for, the resulting company or its subsidiary. Do not rely on Explanation 4 or Explanation 5 unless you can produce the Central Government notification each of them requires.
Still good law. The Year 2025 departmental page is the most recent edition of s.2 I could reach this pass, and its text is corroborated for every sub-clause and Explanation by the Year 2018 page, which differs only in lacking the proviso to sub-clause (iii) that the Year 2019 (No. 2) page records as inserted by Act No. 23 of 2019 w.e.f. 1 April 2020. No Finance Act text was read this pass, and I did not check judicial treatment of s.2(19AA) generally. The reference in the opening words to sections 391 to 394 of the Companies Act, 1956 is reproduced as printed and its operation after the Companies Act, 2013 is not addressed. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Clause (19AA) was transcribed in full, with all seven sub-clauses and Explanations 1 to 5, from https://incometaxindia.gov.in/w/section-2-66, which printed the Act name "Income-tax Act, 1961", the section heading "Definitions" and the stamp "Year: 2025". It was transcribed independently from https://incometaxindia.gov.in/w/section-2-67 (Year: 2018), which prints every sub-clause and Explanation in the same words but WITHOUT the proviso to sub-clause (iii); https://incometaxindia.gov.in/w/section-2-68 (Year: 2019 (No. 1)) likewise prints sub-clause (iii) with no proviso. The dating of the proviso does not rest on my inference from those two pages: https://incometaxindia.gov.in/w/section-2-60 (Year: 2019 (No. 2)) prints, immediately after sub-clause (iii), the departmental note "Following proviso shall be inserted in sub-clause (iii) of clause (19AA) of section 2 by the Act No. 23 of 2019, w.e.f. 1-4-2020", followed by the proviso itself in the same words as the Year 2025 page. I deliberately give the amending statute by its Act number as the departmental page gives it, and I did NOT verify from any source read this pass which popular-name Finance Act "Act No. 23 of 2019" is; build 127's error in this library was precisely a date-and-Act-number error, so the number is stated and the name is not. TWO POINTS I COULD NOT RESOLVE AND WHICH A LATER PASS SHOULD TAKE UP. First, the Year 2025 text still refers to "sections 391 to 394 of the Companies Act, 1956 (1 of 1956)" although those provisions were superseded by the Companies Act, 2013; I retrieved no source this pass on how that reference is to be read for a scheme sanctioned by the NCLT under sections 230 to 232 of the 2013 Act, and I therefore state the reference as printed and make no claim about its effect. Second, I could not establish that a Year 2026 departmental page for s.2 exists. Note that in Bharti Airtel Ltd v PCIT (ITAT Delhi, 21 February 2025), read this pass, the Tribunal said at para 11.9 that "Section 2(19AA) of the Act specifically refers to the provisions of Companies Act for the purpose of determining if it is a case of demerger" — consistent with the printed text but not a decision on the 1956/2013 point. 'decided_on' is the commencement date of the proviso to sub-clause (iii), 1 April 2020, as recorded in the departmental insertion note; it is not a decision date. 'bench' and 'favours' are inapplicable. CONTRARY AUTHORITY ADDED ON VERIFICATION. The verifier located a Revenue-side decision on the s.2(19AA) conditions which this pass did not find: Avaya Global Connect Ltd. (formerly Tata Telecom Ltd.) v. ACIT Range 7(3), ITAT Mumbai, Shri N.V. Vasudevan, Judicial Member, assessment year 2002-03, pronounced 29 July 2008, https://indiankanoon.org/doc/349413/, para 19, transcribed verbatim on two independent routes. It is cited here for the proposition stated and has not otherwise been read in full; it should be written up as a separate entry. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
A transfer is a "demerger" for the Income-tax Act only where it is made pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 and satisfies all seven conditions in s.2(19AA), read with Explanations 1 to 3. Sanction of the scheme is a necessary element of the definition but is not sufficient: the going-concern requirement, the transfer of all property and all relatable liabilities, the book-value requirement and the proportionate-issue and three-fourths shareholder requirements are independent statutory conditions. From 1 April 2020 the book-value requirement does not apply where the resulting company records a different value in compliance with the Indian Accounting Standards specified in the Annexure to the Companies (Indian Accounting Standards) Rules, 2015.
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