I have been holding 400 shares of Polaris Software for the last two years. Last year, ‘Intellect Design Arena’ was formed by the de-merger of Polaris.

I was allotted one equity share of this company for every share held in Polaris, free of cost.

I sold all the 400 shares of Intellect within six months of allotment. What is the tax implication?

M Hemaprabha

As per Income Tax Act, 1961, if the demerger of Polaris Software and Intellect Design Arena is one which satisfies the conditions in Section 2(19AA), no capital gains will arise on issue of shares by Intellect Design Arena.

However, it should be noted that any profit or gain (difference between sale proceeds and indexed cost of acquisition) arising from the sale of the shares received by you upon demerger will be chargeable to income tax under the head ‘capital gains’ in the year in which the transfer took place.

In such a case, the cost of acquisition of shares of Intellect Design Arena will be computed by the below mentioned formula: (cost of acquisition of the shares in Polaris before the demerger X net book value of assets transferred in the scheme of demerger)/net worth of Polaris Software before the demerger.

It is pertinent to note that in the case of a capital asset, being shares in an Indian company, which becomes the property of the assessee in consideration of a demerger, the period for which the shares were held in the demerged company by the assessee shall also be included to compute the period of holding.

Therefore, in your case, the gain would be long term capital gain (LTCG) since the shares of Polaris Software (listed Indian company) were held by you for more than 12 months. I understand that in your case, the resulting company, that is, Intellect Design Arena was a listed company at the time you sold the shares.

In case such sale transaction was chargeable to Securities Transaction Tax, the LTCG arising out of the transaction will be exempt from tax. Please note that the cost of acquisition of the original shares held by you in the demerged company, that is, Polaris Software, shall be deemed to have been reduced by the cost of acquisition amount arrived for the shares of Intellect Design Arena.

The writer is a practising chartered accountant. Send your queries to taxtalk@thehindu.co.in

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