Is It Fair To Deny Tax Neutrality To A Demerger The MCA Has Just Approved?

A promoter walks into her Corporate Law Advisor’s office wanting to hive off one business line from another. Her group is unlisted, clean on defaults, and comfortably under the two hundred crore rupee borrowing threshold. The Corporate Law Advisor gives her the good news first: under the amended Rule 25(1A) of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, her restructuring qualifies for the fast-track demerger route under section 233 of the Companies Act, 2013. No NCLT filing, no year-long wait for a hearing date. Board approval, member and creditor consent, a registered valuer’s report, and the Regional Director’s confirmation, and the whole process is completed in a few months.

Then she meets her tax adviser, and the mood changes. The very same transaction, cleared in full by the Ministry of Corporate Affairs, is not a “demerger” for the purposes of section 2(35) of the Income-tax Act, 2025. No tax neutrality. Capital gains arise at the company level on the transfer of the undertaking, her shareholders may face capital gains on shares they receive for no cash consideration at all, and the accumulated losses of the demerged company cannot travel to the resulting company. She asks the question any reasonable person would ask: how can one arm of government call this a legitimate restructuring and another arm tax it as though she had sold the business to a stranger? Strip a