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Effect of demerger for the shareholder

Q: I am a shareholder in a company which demerged one of its units to a sister company, the shares of which have been additionally allotted to me. Is it possible that I may be made liable for tax on the ground that I have sold part of the original shares for acquiring new shares?

A: Though the value of the original shares have diminished on account of demerger and such dimunition in value has been compensated by the new shares, there is no exchange involved in law, since there is only dilution in value of shares of one company with fresh acquisition of shares in another. There has been only a splitting up of the shares. There is no taxable event as there is no transfer of any share by the assessee. The consequence of demerger and the new shares in the case of the assessee is by operation of law. Even for this reason, there should be no liability.

S. Rajaratnam

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