The issue of shares by the resulting company is not a transfer at all, because s.47(vid) takes it out. Your original cost is then split: s.49(2C) gives the resulting company's shares a share of the old cost in the proportion that the net book value of the assets transferred bears to the net worth of the demerged company, and s.49(2D) reduces the cost of the original shares by the same amount. Nothing is taxed until you sell.
A demerger produces a shareholder-level event that looks like a windfall and is not one. Section 47(vid) provides that nothing in s.45 applies to "any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is made in consideration of demerger of the undertaking". So the shares that appear in the demat account on the record date are not taxable receipts, and the shareholder has no capital gain to declare.
What happens instead is that a single cost base becomes two. Section 49(2C) fixes the cost of the new holding: "The cost of acquisition of the shares in the resulting company shall be the amount which bears to the cost of acquisition of shares held by the assessee in the demerged company the same proportion as the net book value of the assets transferred in a demerger bears to the net worth of the demerged company immediately before such demerger." Section 49(2D) then takes that amount out of the old holding: "The cost of acquisition of the original shares held by the shareholder in the demerged company shall be deemed to have been reduced by the amount as so arrived at under sub-section (2C)." The two costs add back to the original cost, so nothing is created and nothing is lost.
The denominator is defined and it is not what an analyst would use. The Explanation provides that "For the purposes of this section, 'net worth' shall mean the aggregate of the paid up share capital and general reserves as appearing in the books of account of the demerged company immediately before the demerger." That is paid-up capital plus general reserves out of the books, taken immediately before the demerger. It is not market capitalisation, it is not the price ratio at which the two shares open for trading, and it is not the swap ratio.
That last point is where most computations go wrong. The ratio in s.49(2C) is an accounting ratio - net book value of the assets transferred over net worth as defined - and the company is the only source for it. Listed companies that demerge normally publish the percentage in a shareholder communication or an exchange filing precisely because shareholders need it for this computation. Use that figure and keep the filing on the file; do not derive a ratio from the first day's closing prices.
A worked shape. If the original holding cost 1,00,000 and the company states that the net book value of the transferred undertaking is 30% of net worth as defined, the resulting company's shares carry a cost of 30,000 and the original shares are left with 70,000. On a later sale of either holding, that is the cost that goes into s.48.
On the holding period, the shareholder does not start again. Explanation 1, clause (i), item (g) to s.2(42A) provides that "in the case of a capital asset, being a share or shares in an Indian company, which becomes the property of the assessee in consideration of a demerger, there shall be included the period for which the share or shares held in the demerged company were held by the assessee". So the resulting company's shares carry the period for which the original holding was held, and the classification consequences are at period-of-holding-after-the-finance-no-2-act-2024.
The corpus already has the amalgamation counterpart. CIT v. Grace Collis, at cit-v-grace-collis-extinguishment-of-rights, deals with the shareholder's position on a merger, where the rights in the old shares are extinguished, s.47(vii) applies and the cost moves across under s.49(2). The demerger case is structurally different because the old shares survive - they are not extinguished, they are merely worth less - which is why the statute needed a proportionate split rather than a straight substitution.
Shareholders in demerged listed companies sell one leg and keep the other, and the broker's capital gains statement will usually show the resulting company's shares at nil cost or at the first traded price. Both are wrong, and both produce a return that the department can contradict from the company's own filing. Getting the ratio right also matters on the other side: understating the cost of the new shares overstates the gain now, and overstating it stores up a dispute for whenever the original holding is sold.
The Assessing Officer wants to tax what my client received on redemption of stock appreciation rights granted by the foreign parent as a perquisite. Is there Supreme Court authority on this?
I handed over possession of my factory and the buyer credited me with the price, but the sale deed came much later. In which year did I make the capital gain?
The company redeemed my preference shares and paid me the face value. Is that a transfer, or just a repayment?
My land was notified and an award was made under the Land Acquisition Act, but I thought the award was too low, negotiated a higher figure and executed a sale deed. The Assessing Officer now says that was a voluntary sale and denies s.10(37). Is he right?
I sold my firm's business to a company as a going concern for one lump sum. Is the surplus on plant and machinery still taxable as a balancing charge?
My mortgaged property was auctioned and the department kept what I owed it out of the proceeds. Do I pay capital gains on the whole price or only on what reached me?
We sold the goodwill our own firm built up over the years. It cost us nothing to acquire. Is the price taxable as a capital gain?
Our JDA was never registered and the project collapsed. Am I still taxed on capital gains?
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