Demerger is a legal device aimed towards restructuring business operations.
It can take either of the two forms:
- Spin-off, which includes transferring an undertaking/unit to a new/subsidiary company.
- Split-off where the demerged entity segregates itself into independent companies such that the original/parent company ceases to exist.
In the process of demerger, expenses are incurred. The relevant provisions in the Income Tax Act for claiming deduction in respect of such expenses are provided under Section 35DD which reads as follows:
Where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of April 1999, wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation or demerger takes place.
If the undertaking/ unit is transferred to a company already in existence and demerger expenses are incurred by the latter, then for the purpose of Section 35DD, “assessee” would mean the resultant company eligible for deduction of demerger expenses in the manner provided under Section 35DD. However, in cases where the resultant company comes into existence on account of demerger itself, then the term “assessee” would imply “Demerged Company” since the former wasn’t in existence before and so could not have incurred the expenses related to Demerger.
Hence, for the purpose of Section 35DD, the term “assessee” may include Resultant Company, depending on the type of Merger. The same view has been affirmed by Delhi High Court in the case of Coforge Limited dated 5.07.2021.
