Can a demerger still qualify if shares are issued by the Holding Company?

Background of the case

In a recent ruling, the Mumbai Income-tax Appellate Tribunal (hereinafter referred to as “the Tribunal” or “ITAT”), in the case of Sterling Holiday Resorts Limited¹ (formerly known as Thomas Cook Insurance Services India Limited) (“the Assessee” or “SHRL” or “TCISL”), examined the statutory conditions governing a tax-neutral demerger under Section 2(19AA) of the Income-tax Act, 1961 (“the Act”) and the consequential eligibility to carry forward accumulated losses and unabsorbed depreciation of the demerged undertaking under Section 72A(4) of the Act.

While the ruling addressed several other disputes, including prior period expenses, Employee Stock Option Plan expenditure, and the taxability of deferred income, this summary is confined to the question of carry forward of losses and unabsorbed depreciation in the hands of the resulting entity. The central controversy turned on whether the definition of “resulting company” under Section 2(41A) of the Act was satisfied where the consideration for the demerger was discharged not by the company that received the demerged undertaking, but by its holding company.

Facts of the case

• Sterling Holiday Resorts India Limited (“SHRIL”), a listed company engaged in the resorts and time-share business, entered into a Court-approved scheme of arrangement sanctioned by the Bombay High Court involving three entities:
  1. SHRIL (demerged company)
  2. Thomas Cook (India) Limited (“TCIL”) (holding company of TCISL)
  3. The Assessee, a wholly owned subsidiary of TCIL (resulting company for the demerged undertaking)
• The scheme involved first the demerger of the resorts and time-share undertaking of SHRIL into TCISL on a going-concern basis; and then the amalgamation of the residual business of SHRIL into TCIL, consequent to which SHRIL ceased to exist.
• Post-demerger, TCISL received the demerged undertaking. However, the consideration for the demerger was discharged by TCIL, which issued its own shares to the shareholders of SHRIL on a proportionate basis. TCISL did not itself issue any shares to the shareholders of SHRIL.
• The Assessee claimed carry forward and set-off of accumulated business losses of approximately INR 121.67 crores and unabsorbed depreciation of approximately INR 113.29 crores under Section 72A(4) of the Act, along with set-off of brought-forward unabsorbed depreciation of approximately INR 5.19 crore against income for Assessment Year 2015–16.
• The Assessing Officer (AO) disallowed all of the above, holding that the scheme did not comply with Section 2(19AA)(iv) read with Section 2(41A) of the Act, since the shares were issued by TCIL (the holding company) and not by TCISL (the entity that received the demerged undertaking).
• The Commissioner of Income-tax (Appeals) confirmed the disallowance. Aggrieved by the order passed by the AO, the Assessee appealed before the Tribunal.

Key Issues

1. Whether the scheme of arrangement qualified as a “demerger” within the meaning of Section 2(19AA) of the Act, in circumstances where the shares were issued to the shareholders of the demerged company by TCIL, the holding company of the resulting company, rather than by TCISL, the company that received the demerged undertaking.
2. Whether the Assessee was entitled to carry forward and set off the accumulated business losses and unabsorbed depreciation of the demerged undertaking under Section 72A(4) of the Act, given the alleged non-compliance with the conditions of Sections 2(19AA) and 2(41A).

Key Takeaways

1. Validity of demerger and compliance with Section 2(19AA)(iv)

• The Tribunal held that Section 2(19AA)(iv) of the Act unambiguously requires the resulting company to issue its own shares to the shareholders of the demerged company in consideration of the demerger.
• It further held that a holding company and its subsidiary are distinct legal entities, each vested with independent rights and obligations. A holding company cannot issue shares on behalf of its subsidiary, and its obligations remain confined to its own legal liabilities under the law.
• Relying on the settled principle of strict interpretation of taxation statutes, as affirmed by the Supreme Court in Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company² and reaffirmed in decisions rendered in February 2026 concerning Section 44C of the Act in Director of Income Tax (IT)-I, Mumbai v. M/s American Express Bank Ltd and M/s Oman International Bank³, the Tribunal held that where the statutory language is plain and unambiguous, courts cannot read in words or imply an intent absent from the text.
• The Assessee contended that Section 2(41A), which defines “resulting company” to mean “one or more companies (including a wholly owned subsidiary thereof)” to which the undertaking is transferred, must be read to permit either the resulting company or its holding company to issue shares interchangeably. It was argued that the phrase “one or more companies” would include all companies including a company which is a wholly owned subsidiary of another company or for that matter a company which is a holding company of another subsidiary. The Tribunal rejected the assessee’s contention.
• Further, the assessee’s reliance on liberal or purposive interpretation, including the principle in CIT v. Vegetable Products Ltd.⁴, was also found to be misplaced and not relevant to the facts of the case.
• Accordingly, since the shares were issued by the Assessee’s holding company and not by the Assessee itself, the conditions prescribed under the provisions were held not to be satisfied.

2. Carry forward of accumulated losses and unabsorbed depreciation under Section 72A(4)

• The Tribunal held that since TCISL did not issue shares to the shareholders of SHRIL as required under Section 2(19AA)(iv), the scheme did not constitute a “demerger” within the meaning of the Act, and the precondition for invoking Section 72A(4) was therefore not met.
• The Tribunal upheld the disallowance of Set-off of brought-forward unabsorbed depreciation of approximately INR 5.19 crores, Carry forward of business losses of approximately INR 121.67 crores Carry forward of unabsorbed depreciation of approximately INR 113.29 crores. The ground of appeal on this issue was accordingly dismissed.

Conclusion

The Tribunal upheld the disallowance of carry forward and set off of accumulated business loss and unabsorbed depreciation under Section 72A(4), holding that the conditions prescribed under Section 2(19AA)(iv) read with Section 2(41A) of the Act were not satisfied, as shares in consideration of the demerger were issued by the Assessee’s holding company, TCIL, and not by the Assessee itself.

Kretha Comments

This is a significant ruling as it is arguably the first ruling to have examined the scope of Section 2(41A) of the Act in the context of the share issuance condition for a tax-neutral demerger. Notably, the Tribunal did not examine or interpret the phrase “one or more companies (including a wholly owned subsidiary thereof)” in Section 2(41A).

The ruling draws a sharp distinction between what may be sanctioned as a valid scheme of arrangement under the Companies Act, 2013 and what qualifies as a tax-neutral demerger under Sections 2(19AA) and 2(41A) of the Act. The Tribunal has made clear that the tax-neutral demerger regime operates on strict, literal compliance with each statutory condition, and that the requirement of share issuance by the resulting company cannot be substituted by issuance from its holding company regardless of the commercial rationale for the structure.

While the Tribunal relied on the Supreme Court’s settled principle that exemption provisions under the tax laws shall be interpreted strictly unless the statutory language is ambiguous, the key issue that remains for determination by the higher courts is whether the language used in Section 2(41A), particularly the phrase “one or more companies (including a wholly owned subsidiary thereof)”, is itself ambiguous. If the provision is found to be ambiguous, a strict literal interpretation may not necessarily be conclusive.

1. ITA No. 843/MUM/2024 and ITA No. 941/MUM/2024 (A.Y. 2015-16) ↩︎
2. AIR 2018 SUPREME COURT 3606, 2018 (5) ABR 802, AIRONLINE 2018 SC 73 ↩︎
3. Civil Appeal no 8291 of 2015 & 4451 of 2016 ↩︎
4. [(1973) 88 ITR 192 (SC)] ↩︎