The Statutory Gateway
Tax neutrality for a merger or demerger depends on the scheme satisfying the definitions in Section 2(1B) (amalgamation) or Section 2(19AA) (demerger) of the Income-tax Act, 1961, corresponding to the provisions of the Income Tax Act, 2025. The NCLT’s sanction under Sections 230–232 is necessary but not sufficient. A scheme that is approved by the NCLT but does not meet the tax definition is taxable.
The Demerger Conditions
A demerger is tax-neutral under Section 2(19AA) only if: the transfer is pursuant to a scheme under Sections 230–232; the whole business undertaking is transferred; the transfer is at book value; the resulting company issues shares to the shareholders of the demerged company on a proportionate basis; and at least three-fourths of the shareholders of the demerged company become shareholders of the resulting company. The transfer of capital assets is then exempt from capital gains, and the cost and holding period carry over.
The Fast-Track Exclusion
The Income Tax Act recognises only the NCLT route for tax neutrality and is silent on demergers undertaken through the fast-track route under Section 233. The Income Tax Bill 2025 restricts tax neutrality to schemes under Sections 230–232, excluding Section 233 fast-track demergers. A company that elects the fast-track route for speed may lose tax neutrality.
The NCLT’s Scrutiny of Tax Compliance
The NCLT’s review of a scheme is not limited to procedural compliance. The Bengaluru Bench has refused to sanction an amalgamation where the scheme was accompanied by tax non-compliance, creditor opposition, and insolvency exposure. The Tribunal has observed that the pendency of the scheme does not dispense with the statutory obligation to file returns.
Call to Action: For scheme tax-neutrality assessment, Section 2(19AA) condition review, or fast-track vs. NCLT route comparison, contact office@anujdesaiassociates.com or 9619456656. Website: https://anujdesaiassociates.com. LinkedIn: linkedin.com/in/ca-anuj-desai-122547230.