Section 2(19AA)

Section 2(19AA) — the law in short

What the courts have decided on section 2(19AA), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• CIT v Eastman Exports Global Clothing Pvt Ltd High CourtHelps taxpayerNo later treatment found
  The Commissioner has issued a s.263 notice saying the transferor companies had not been in business for three years, so the losses we took over cannot be carried forward. Our arrangement was a demerger, not an amalgamation. Does the three-year condition apply?
  No. The three-year condition is in s.72A(2), which governs amalgamation. A demerger is governed by s.72A(4), which contains no such condition. The Madras High Court held that a revision order built on the wrong sub-section, and which merely remitted the matter to the assessing officer for enquiry, did not satisfy the requirement that the order sought to be revised be erroneous.
• Triune Projects P Ltd v DCIT High CourtHelps taxpayer
  We left some written-off assets out of the business transfer. Does that stop it being a slump sale?
  No. The definition of 'undertaking' does not require every asset on the transferor's books to pass. If the business activity taken as a whole moves — live contracts, employees, tangible assets and know-how — leaving out bad debts and assets already written off does not take the transaction outside s.2(42C) read with s.50B.
• Bharti Airtel Limited v. PCIT, Delhi-1 (ITAT Delhi) — a section 263 revision holding a demerger was really an acquisition, and why it did not survive ITATHelps taxpayerNo later treatment found
  The Commissioner has revised our assessment under section 263 saying the scheme was an acquisition and not a demerger, so the section 72A(4) losses go. What did the Tribunal make of that argument?
  The Tribunal allowed the assessee's appeal. It held that the Principal Commissioner had drawn his inferences without taking cognizance of the Composite Scheme of Arrangement on the record, that a scheme of arrangement approved by the court carries the force of a statute, and that a restructuring in the telecom sector could not be branded an exercise to claim set-off of brought forward losses by a bald allegation. It recorded that section 2(19AA) refers to the provisions of the Companies Act for determining whether there is a demerger, and that the basic requirement for eligibility under section 72A(4) is that the transfer of the undertaking be in pursuance of a scheme of arrangement under the Companies Act by the demerged company. On the facts it found that the demerged company had been engaged in the consumer wireless mobile business, had been incurring loss since inception, that the entire business loss related to that undertaking alone, and that all the assets and liabilities relating to the demerged business had been transferred and vested in the assessee.
• Reckitt Benckiser Healthcare India Pvt Ltd v DCIT ITATHelps department
  Our demerger was sanctioned by the High Court. The AO now says it is not a demerger under s.2(19AA) and has taxed capital gains and dividend distribution tax. Can he go behind the sanctioned scheme?
  Yes, on the tax conditions. The Tribunal held that the legal obligation of the revenue authorities to examine taxability under ss.2(22) and 2(19AA) is not pre-empted by the High Court's sanction of the scheme, and that the assessee had failed to comply with s.2(19AA)(ii) and (iii). A segment whose liabilities were knocked off against its assets, so that only assets and nil liabilities passed to the resulting company, does not satisfy the requirement that all liabilities relatable to the undertaking be transferred.
• ACIT, Circle-13(2), Kolkata v. M/s. Padma Logistics & Khanij Pvt. Ltd. (ITAT Kolkata) — where section 72A(4) read with section 2(19AA) is satisfied, the demerged company's losses pass to the resulting company from the appointed date ITATHelps taxpayerNo later treatment found
  The Assessing Officer refused to consider our revised return claiming the demerged undertaking's brought forward losses. Does section 72A(4) transfer them from the appointed date, and does the revised return matter?
  The Tribunal held that all the conditions in section 72A(4) read with section 2(19AA) had been fulfilled, that the resulting company was accordingly eligible to claim set off of the brought forward losses transferred from the demerged company, and that the carried forward losses and unabsorbed depreciation in respect of the demerged undertaking were transferred pursuant to section 72A(4) from the demerged company to the resulting company with effect from the appointed date, 1 March 2010. It held that the claim was as per law, that the Assessing Officer had erred in refusing to consider the revised return of income, and that the Commissioner (Appeals) had rightly allowed the claim; the Revenue's grounds on this issue were dismissed as lacking merit.
• Statutory position — s.47A: the four withdrawals of exemption, the year each is charged and in whose hands, and the amalgamation and demerger clauses it does not touch CBDT Circulars & InstructionsCuts both ways
  Our amalgamation stopped satisfying a condition after the event. Can the department invoke section 47A to take back the section 47(vi) exemption, and if it can, in which year and on whom?
  Section 47A does not reach the amalgamation and demerger clauses at all. It withdraws the exemption in exactly four situations: sub-section (1), where a capital asset transferred under s.47(iv) or (v) — the holding company to wholly-owned subsidiary transfers — is converted into or treated as stock-in-trade, or the whole of the share capital ceases to be held, within eight years; sub-section (2), where shares allotted on a s.47(xi) conversion of a stock exchange membership are transferred within three years; sub-section (3), where a condition in the proviso to s.47(xiii) or (xiv) is broken; and sub-section (4), where a condition in the proviso to s.47(xiiib) is broken. Clauses (vi), (via), (vib), (vic), (vicc), (vid) and (vii) — the amalgamation and demerger exemptions — appear nowhere in section 47A.
• Statutory position — s.2(1B): the three conditions of an "amalgamation", and why a scheme sanctioned by a court or tribunal does not by itself produce one CBDT Circulars & InstructionsCuts both ways
  The NCLT has sanctioned our scheme and the order calls it an amalgamation. The Assessing Officer says it is not an amalgamation for income-tax and has refused section 47 and section 72A. Can he do that?
  Yes, he can. "Amalgamation" for the Income-tax Act is defined by s.2(1B) and by nothing else: the merger must be in such a manner that all the property and all the liabilities of the amalgamating company become those of the amalgamated company, and that shareholders holding not less than three-fourths in value of the shares of the amalgamating company — leaving out shares already held by the amalgamated company, its nominee or its subsidiary — become shareholders of the amalgamated company. A tribunal or court order sanctioning a scheme is what makes the merger effective as a matter of company law; it is not a finding that these three conditions are satisfied, and s.2(1B) nowhere requires such an order.
• Statutory position — s.47(vi), (via), (vib), (vic), (vicc), (vid) and (vii): the amalgamation and demerger transfers that are not transfers, with the cost rules in s.49(2), (2C) and (2D) CBDT Circulars & InstructionsCuts both waysNo later treatment found
  Which transfers in an amalgamation or a demerger are outside section 45, and what cost and holding period do the shares in the transferee company carry afterwards?
  Seven clauses of section 47 take reorganisation transfers out of section 45. At company level: (vi) a transfer in a scheme of amalgamation of a capital asset by the amalgamating company to the amalgamated company, if the amalgamated company is an Indian company; (vib) a transfer in a demerger of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company; (via) a transfer in a scheme of amalgamation of shares held in an Indian company by an amalgamating foreign company to an amalgamated foreign company, on two conditions; and (vic) and (vicc), the corresponding foreign demerger cases. At shareholder level: (vid) any transfer or issue of shares by the resulting company in a demerger to the shareholders of the demerged company in consideration of the demerger; and (vii) a transfer by a shareholder in a scheme of amalgamation of shares in the amalgamating company, if made in consideration of the allotment of shares in the amalgamated company except where the shareholder is itself the amalgamated company, and the amalgamated company is an Indian company. Clause (vi) is the central one: any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company, if the amalgamated company is an Indian company — this is what takes the transfer of the undertaking itself out of section 45. On cost, s.49(2) gives the shareholder who receives shares in an amalgamated Indian company on a s.47(vii) transfer the cost of his shares in the amalgamating company; s.49(2C) splits the cost of the demerged company's shares to the resulting company's shares in the ratio the net book value of the assets transferred bears to the net worth of the demerged company immediately before the demerger; and s.49(2D) reduces the cost of the original shares by the amount so arrived at.
• Statutory position — the exclusions in s.2(22)(i) to (v) and Explanations 1, 2 and 2A: what "accumulated profits" means, and the exclusion clause (iv) for buy-backs that was DELETED with effect from 1 October 2024 CBDT Circulars & InstructionsCuts both ways
  How is "accumulated profits" measured for a deemed dividend, what falls outside the definition of dividend altogether, and what happened to the clause that used to keep buy-back payments out of it?
  One of these exclusions is the hinge of the 1 October 2024 buy-back changeover: exclusion clause (iv), which had kept a company's payment on purchase of its own shares outside the definition of "dividend" since 1 April 2000, was OMITTED by Act No. 15 of 2024 with effect from 1 October 2024, at the same moment sub-clause (f) was inserted to bring such a payment IN — so a buy-back before 1 October 2024 is not a dividend and a buy-back on or after that date is. The surviving exclusions are: (i) a distribution under (c) or (d) on a share issued for full cash consideration where the holder is not entitled on liquidation to participate in the surplus assets; (ia) a distribution under (c) or (d) attributable to capitalised profits representing bonus shares allotted to equity shareholders after 31 March 1964 and before 1 April 1965; (ii) an advance or loan to a shareholder or concern by a company in the ordinary course of its business where lending money is a substantial part of that business; (iii) a dividend set off against a sum previously treated as a dividend within sub-clause (e); and (v) a distribution of shares by the resulting company to the shareholders of the demerged company pursuant to a demerger, whether or not there is a reduction of capital in the demerged company. "Accumulated profits" is then fixed by Explanation 1 (certain capital gains excluded), Explanation 2 (all profits up to the date of distribution or payment, or up to liquidation for sub-clause (c), with a carve-out for compulsory acquisition) and Explanation 2A (an amalgamated company's accumulated profits are increased by those of the amalgamating company on the date of amalgamation).
• Statutory position — s.2(19AA): the seven conditions of a "demerger", the going-concern requirement, transfer at book value and the Indian Accounting Standards proviso CBDT Circulars & InstructionsCuts both ways
  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.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.