The Mumbai Tribunal, in Sterling Holiday Resorts Ltd. v. DCIT[1], has denied carry forward of accumulated losses and unabsorbed depreciation aggregating to INR 240.15 crores (including set-off of brought forward unabsorbed depreciation of INR 5.19 crores against the current year’s income), holding that a holding company issuing shares on behalf of its wholly-owned subsidiary does not satisfy the "resulting company" definition under Section 2(19AA) of the Income-tax Act, 1961 (“Act”) read with Section 2(41A) of the Act. The ruling takes a strict, literal view on a question that, until now, appears not to have been squarely tested before any higher forum.

Brief Facts

The dispute traces back to a court-approved scheme of arrangement sanctioned by the Bombay High Court, with an appointed date of 1 April 2014, involving three group entities: Sterling Holiday Resorts (India) Limited ("SHRIL", the demerged company and a listed entity), Thomas Cook (India) Limited ("TCIL", the listed parent), and Thomas Cook Insurance Services Limited ("TCISL", later renamed Sterling Holiday Resorts Limited — the taxpayer, and a wholly-owned subsidiary of TCIL).

As depicted in the above diagram, demerged undertaking was transferred to TCISL, whereas shares were issued by TCIL to the shareholders of SHRIL, and not by TCISL itself. Further, at the time of sanctioning the scheme, the High Court had expressly left the question of tax compliance to the revenue authorities. That question came to a head when TCISL sought to carry forward accumulated business losses and unabsorbed depreciation of INR 240.15 crores (including set-off of brought forward unabsorbed depreciation of INR 5.19 crores) for AY 2015-16 under Section 72A(4) of the Act. The Assessing Officer denied the claim, holding that since TCISL itself had not issued shares, the statutory conditions for a tax-neutral demerger were not met. The CIT(A) affirmed.

The Core Issue

The entire case turned on a single definitional question: Can a holding company and its wholly-owned subsidiary both be treated as a "resulting company" under Section 2(41A), such that either one discharging the share consideration is sufficient compliance — or must the specific entity that received the demerged undertaking be the one to issue shares?

The Statutory Text at the Centre of the Dispute

Section 2(41A) of the Act defines "resulting company" as follows:

"'resulting company' means one or more companies (including a wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a demerger and, the resulting company in consideration of such transfer of undertaking, issues shares to the shareholders of the demerged company and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger."

Taxpayer's Position

The taxpayer's argument centered on the statutory language itself. Section 2(41A) of the Act defines "resulting company" to mean "one or more companies (including a wholly owned subsidiary thereof)" to which the undertaking is transferred. TCISL argued that this phrasing was broad enough to treat the Hold Co-WOS combination interchangeably as a single resulting company unit — and that any contrary interpretation would render the bracketed phrase "including a wholly owned subsidiary thereof" redundant. The taxpayer also raised a hypothetical argument to reinforce the redundancy point: if the roles were reversed — the holding company receiving the undertaking while the WOS issued the shares — the WOS' shares would not reflect the value of the demerged undertaking sitting with its parent, producing a structural mismatch. This, the taxpayer argued, is exactly the scenario Section 2(41A) parenthetical must have been drafted to address - meaning the provision has to work in both directions, not just the one the Revenue insisted on here. Reliance was placed on Supreme Court authority favouring liberal construction of restructuring and incentive provisions, including Bajaj Tempo[2], Gwalior Rayon[3], and Vegetable Products[4].

The taxpayer also argued that Section 2(19AA) of the Act defines the term “demerger” to mean transfer by a demerged company of its one or more undertakings to any resulting company and the word “any” ought to be read liberally, relying on the Supreme Court’s decisions in Shri Balaganesan Metals[5] and Illuri Subbayya Chetty & Sons[6].

Revenue's Position

The Revenue read the statute literally: a "resulting company" is the entity that receives the demerged undertaking (or its WOS), not its holding company and the obligation to issue shares under Section 2(19AA)(iv) sits squarely with that same entity. Since TCISL received the undertaking but TCIL issued the shares, the conditions were not satisfied, and Section 72A(4) benefit was consequently unavailable.

The Tribunal's Ruling

The ITAT sided decisively with the Revenue. It held that the statutory language was unambiguous and left no scope for the interpretation the taxpayer proposed and notably observed that the taxpayer had not been able to point to any judicial precedent from a higher court supporting its construction. The Bench invoked the well-established strict-construction principle for taxing statutes (drawing on Dilip Kumar & Co.[7], Ajmera Housing[8], Britannia Industries[9], Dharmendra Textiles[10], and Ambay Cements[11], among others), holding that nothing may be read into or implied where statutory language is plain. On the corporate separateness point, the Tribunal was equally direct: a holding company and its subsidiary are distinct legal persons, and a parent cannot discharge a statutory obligation that the law casts specifically on the subsidiary. Accordingly, the disallowance of both brought forward depreciation set-off and the carry-forward of business losses and unabsorbed depreciation were upheld in full.

Concluding Remarks

What's notable here isn't the outcome — it's what the Tribunal didn't address. The taxpayer's strongest textual argument that reading "resulting company" narrowly renders the bracketed WOS reference in Section 2(41A) redundant was not directly tested on its interpretative merits. Instead, it was rejected essentially for want of supporting higher-court precedent, with the Tribunal invoking Dilip Kumar’s strict interpretation framework as if it foreclosed the point. However, Dilip Kumar deals with reading words into a statute, not with ignoring words that are already there. It says nothing about the anti-surplusage rule. Whether a High Court will recognise this gap and actually engage with the redundancy argument on its own terms, instead of simply deferring to the Tribunal's reliance on Dilip Kumar, remains an open question.

Also unaddressed: the valuation mismatch point (a WOS issuing shares for value sitting with its parent), and the sharper practical stakes - a demerger that fails Section 2(19AA) doesn't just lose Section 72A(4) loss benefit; it also makes the demerger non-tax neutral and exposes the companies involved to tax exposure, a downside risk the order does not engage with at all. Given that the "resulting company" definition necessarily should be applied qua each specific demerger, and that this precise formulation does not yet appear to have been tested before a High Court, there is real scope for the point to be argued more fully and possibly decided differently, in appeal or in a fresh matter with sharper canvassing of the redundancy argument.

For now, the practical takeaway is one of risk management rather than legal certainty. Until the issue receives authoritative judicial resolution, the prudent course is to ensure that the entity receiving the demerged undertaking is also the entity issuing shares to the demerged company's shareholders. Routing share issuance through the parent, even where commercially convenient, and even where NCLT/ High Court sanction has been obtained, carries a live risk of the loss carry forward, the underlying capital gains exemption being denied and other tax consequences, since Court sanction of a scheme does not bind the tax authorities on the question of tax neutrality. Structures already in place on this pattern warrant review, and this space is worth watching for how higher courts eventually treat the redundancy argument the Tribunal left unaddressed.

Disclaimer: The views expressed in this article are personal views of the author(s). This article is intended to provide general information and should not be construed as professional advice. It should neither be regarded as comprehensive nor sufficient for the purposes of decision-making. The author(s) do not take any responsibility for the accuracy of the information or views contained in this article, nor undertake any legal liability for the contents thereof.

[1] ITA Nos. 843 /Mum/2024, order dated 25 June 2026 (AY 2015-2016) [TS-7145-ITAT-2026(Mumbai)-O]

[2] Bajaj Tempo Ltd. v/S. CIT [TS-3-SC-1992-O]

[3] CIT v/s. Gwalior Rayon Silk Mfg. Co. Ltd. [TS-10-SC-1992-O]

[4] CIT v. Vegetable Products Ltd. [TS-6-SC-1973-O]

[5] Shri Balaganesan Metals v/s. M. N. Shanmugham Chetty and Ors. (1987) 2 SCC 707

[6] Shri Illuri Subbayya Chetty & Sons. vs. State of Andhra [TS-5001-SC-1963-O]

[7] Commnr. Of Customs (Import), Mumbai vs M/S. Dilip Kumar and Company dated 30 July, 2018 in AIR 2018 SUPREME COURT 3606, 2018 (5) ABR 802, AIRONLINE 2018 SC 73

[8] Ajmera Housing Corporation and Another vs. CIT [TS-183-SC-2010-O]

[9] Britania Industries Ltd. vs. CIT [TS-9-SC-2005-O]

[10] Union of India vs. Dharmendra Textiles Processors and Others [TS-1-SC-2008-O]

[11] State of Jharkhand v. Ambay Cements (2005) 1 SCC 368