GMR Infrastructure Ltd. (GIL) demerged its EPC and urban infrastructure business into a new company viz. GMR Power and Urban infrastructure Ltd. (GPUIL) w.e.f. April 1, 2021. The company allotted to its shareholders 1 share of ₹5 each in GPUIL for every 10 shares of ₹1 held in GIL. GIL informed that cost of acquisition of equity shares allotted in GPUIL should be 7.29 per cent of the total cost of acquisition of equity shares held in GIL, prior to demerger. If I acquired 100 shares of GIL from market ₹50 each (total ₹5,000) prior to April 1, 2021, then will it be correct to treat the cost of acquisition of 10 GPUIL equity shares (of ₹5 each) post demerger as ₹364.50 (₹Rs.3.645 per equity shares), being 7.29 per cent of ₹5,000, and revise cost of acquisition of 100 shares of GIL as ₹4,635.50 (₹46.355 per share), being 92.71 per cent of ₹5,000? Will date of acquisition of equity shares of GPUIL be April 1, 2021 or will it be the original date of acquisition of shares of GIL?
Cost of acquisition of shares of resulting entity i.e. GPUIL: As per the provisions of Section 49(2C) of the Income-tax Act, 1961 (‘the Act’), the cost of acquisition of the shares of the resulting company i.e. GPUIL shall be the amount which bears to the cost of acquisition of shares held by the assessee in the demerged company i.e. GIL, 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.
Cost of acquisition of shares in the resulting company i.e. GPUIL = Cost of acquisition of shares in the demerged company i.e. GIL X (Net book value of the assets in the resulting company/Net book value of the assets of the demerged company before demerger)
In the instant case, since the company has informed that the cost of the shares of GPUIL would be 7.29 per cent of the cost of acquisition of the original shares, we assume that the same is as per the provisions of section 49(2C) of the Act. Hence the cost of the new shares would be ₹3,64.5 (i.e. ₹5,000*7.29 per cent). Accordingly, cost per share would be ₹3.645.
Cost of acquisition of the original share of the demerged company: As per the provisions of Section 49(2D), cost of acquisition of the original shares held by the shareholder in the demerged company i.e. GIL shall be deemed to have been reduced by the amount so arrived at under sub-section (2C) i.e. ₹4,635.5 (i.e. ₹5,000 minus 364.5). Your understanding is correct, cost per share of GIL would be ₹46.355.
Date of acquisition of equity shares of GPUIL: As per explanation 1 to the provisions of Section 2(42A), the period of holding with the demerged company (i.e. with GIL) shall be considered while looking at the period for which the shares were held by the shareholder in the new company. That is to say, the date of purchase of the new shares (GPUIL) would be the same as the date of purchase of original shares of the demerged company (GIL).
The writer is a practising chartered accountant
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