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I recently received new shares after the demergerof NIIT. Similarly, I got Jio Financial shares after the demerger from Reliance Industries. Both these shares were bought 10 years ago.
Companies have given only acquisition ratios for calculating costs. How do I claim grandfathering with January 31, 2018, prices in demerger cases?
K V Rao
In case of demerger, section 47(vid) of the Income-tax Act, 1961 (“the Act”) provides that any transfer or issue of shares made in consideration of demerger of the undertaking is not considered as transfer and hence such an event does not attract capital gains tax. Explanation 1 to section 2(42A) states that in case shares in an Indian company become the property of the assessee pursuant to demerger, the holding period for such share shall include the period of holding in shares held in the demerged company by the assessee.
With regard to the cost of such shares for tax purpose, section 49(2C) of the Act states that the cost of acquisition of the shares in the resulting company shall be the amount which bears to the cost of acquisition of shares held by the assessee in the demerged company 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.
The acquisition ratios shared by the respective companies are based on the above mechanism prescribed under section 49(2C) of the Act. You would need to divide the cost incurred to acquire the shares in demerged company basis the said acquisition ratio shared.
The shares in the demerged company, in your case, are listed shares covered under section 112A, thus on transfer you shall be eligible for the benefit of grandfathering clause under the said section. For the purpose of grandfathering clause, the fair market value (FMV) as on 31.01.2018 is considered.
However, in the case of above scrips, since the quoted price as on 31.01.2018 is not available as the said companies were not in independent existence on the said date, we shall rely on the mechanism prescribed under the explanation to Section 55(ac)(ii) for the purpose of calculation of the FMV as on 31.01.2018.
The above provision of section 55(2)(ac) prescribes that in case of a share in a company that is not listed on a recognised stock exchange as on the 31st day of January, 2018, but listed on such exchange on the date of transfer; the FMV of the same shall be as under:
“Cost of acquisition calculated as per section 49(2C) of the Act” * (multiplied by) CII for FY 2017-18 / (divided by) CII as on 01.04.2001 Or CII for the first year in which the asset was held, whichever is later.
The FMV as on 31.01.2018 can be calculated basis the above formula.
The author is a practising chartered accountant
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