[Barsha Dikshit is a Partner and Sourish Kundu a Senior Executive at Vinod Kothari & Co.]
The meaning of “undertaking” has been one of the most debated issues under Indian company law and tax law, particularly when it comes to the questions of whether shares or investments can be treated as an “undertaking”. While the term intuitively refers to a business or division of a company operating as a going concern, its application becomes complex when the company’s business primarily consists of holding investments in shares of other entities. This complexity raises important questions about whether such passive investment portfolios can be considered independent undertakings capable of being demerged under section 2(19AA) of the Income Tax Act, 1961 (now section 2(35) of the Income Tax Act, 2025).
This post examines the statutory framework, relevant judicial precedents, and the practical implications of treating an investment division as an “undertaking” for companies with diverse investment portfolios.
Meaning of ‘Undertaking’
Section 180(1)(a) of the Companies Act, 2013 restricts the board of directors of a company from selling, leasing, or otherwise disposing of the whole or substantially the whole of an undertaking without shareholders’ approval by way of special resolution. While the statutory provision does not offer a definitional explanation of what constitutes an “undertaking,” it does lay down quantitative thresholds:
- An undertaking is one where investment exceeds 20% of net worth or contributes 20% of total income in the preceding financial year.
- Disposal of “substantially the whole” of such undertaking means disposal of 20% or more of its value.
This numerical test merely sets out quantitative thresholds to determine when shareholders’ approval is required for the disposal of such an asset.
To understand what constitutes an “undertaking” and, in particular, whether a passive investment division, essentially a portfolio of shares, can independently qualify as an undertaking, reference can be drawn to the definition of “undertaking” provided under the Income Tax Act, 1961 as well as relevant judicial precedents.
Under the Income Tax Act, 1961, section 2(19AA) defines the term “demerger”, which requires the transfer of one or more undertakings from the demerged company to the resulting company, such that at least one undertaking remains with the demerged company. The meaning of the expression “undertaking” for this purpose is elaborated upon in the explanation to section 2(19AA) (now renumbered as section 2(35) under the Income Tax Act, 2025) as follows:
“Explanation-1–For the purposes of this clause, “undertaking” shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.” [emphasis added]
This definition emphasizes the need for functional and operational coherence in what is considered an undertaking, ruling out passive asset transfers that lack an identifiable business character.
The meaning of the term “undertaking” has also been clarified in several judicial precedents. For instance, in the landmark decision of Rustom Cavasjee Cooper v. Union of India (AIR 1970 SC 564), the Supreme Court explained that “‘undertaking’ clearly means a going concern with all its rights, liabilities and assets as distinct from the various rights and assets which compose it… is an amalgam of all ingredients of property and are not capable of being dismembered. That would destroy the essence and innate character of the undertaking. In reality the undertaking is a complete and complex weft and the various types of business and assets are threads which cannot be taken apart from the weft.”
The Court thus highlighted the holistic nature of an undertaking that it is not a disjointed collection of parts, but a complete and functional enterprise. [See also, P.S. Offshore Inter Land Services Pvt. Ltd. v. Bombay Offshore Suppliers and Services Ltd. [1992] 75 Comp Cas 583 (Bom)].
This brings us to a significant question: can a portfolio of shares held in a company’s books be regarded as a separate segment or “undertaking”?
This question assumes particular relevance in the context of schemes of arrangement, particularly those involving demergers, where a portfolio of investments is proposed to be transferred to a resulting company. In such schemes, the tax neutrality of the transaction often hinges on whether the transferred segment qualifies as an “undertaking” under the applicable tax laws.
For a unit to be regarded as an undertaking—and for the demerger to be treated as tax-neutral—both the demerged and remaining undertaking must possess the characteristics of a going concern, i.e., each must be capable of independent and sustainable commercial operations with the objective of earning profits. [See: Yallamma Cotton, Woollen and Silk Mills Co. Ltd., In re [[1970] 40 Comp Cas 466]
This criterion becomes particularly nuanced when the subject of demerger is a mere pool of passive investments, rather than an operational business unit. The key consideration is whether such a portfolio, in itself, demonstrates the organizational integrity, continuity of activity, and profit-making intent sufficient to satisfy the definition of an “undertaking”.
One of the most notable rulings on this issue is the Income Tax Appellate Tribunal (ITAT) decision in Grasim Investments Ltd. v. ACIT, wherein the ITAT was called upon to examine whether a division engaged primarily in holding and managing investments in shares could be treated as an undertaking for the purposes of a tax-neutral demerger under section 2(19AA) of the Income Tax Act, 1961.
The ITAT held that a mere pool of passive investments does not, by itself, constitute an undertaking. To qualify as an undertaking, the investment division must be more than a collection of financial assets; it must constitute a distinct business activity carried on with a certain degree of autonomy. The tribunal emphasized factors such as the presence of separate books of account, an identifiable organizational structure, and the existence of management and decision-making functions related specifically to the investment activity and the capability of generating independent business income, to consider a division as an “undertaking”.
In a recent ruling in Reckitt Benckiser Healthcare India Private Limited v DCIT, 2025 171, dated 18th February, 2025, the Ahmedabad ITAT reiterated the principles governing tax neutral merger. In this case, the assessee transferred only a portfolio of investments (constituting the so-called “Treasury Segment”) to the resulting company, while retaining the associated liabilities. The assessee attempted to justify this by arguing that the liabilities pertained to other business divisions and not to the Treasury Segment. However, the ITAT rejected this explanation, holding that such selective transfer is contrary to the statutory mandate. The tribunal emphasized that for a transaction to qualify as a tax-neutral demerger, it must strictly comply with the conditions prescribed under section 2(19AA) of the Act. One of the key requirements of this is that all the assets and liabilities pertaining to the transferred undertaking must be transferred to the resulting company.
Treating a Block of Investments as a Separate Undertaking
The real difficulty lies in the case of investment companies, or companies holding multiple blocks of shares in different entities. Can each such block of investments be regarded as a separate undertaking for purposes of demerger?
Here it becomes important to differentiate between active investments and passive investments. For instance, holdings in group companies—such as subsidiaries or associates—may be classified as active investments, given the element of strategic control or influence. On the other hand, investments in mutual funds, debt instruments, or derivatives are typically treated as passive investments, lacking operational involvement.
While judicial decisions have considered active investments as a separate undertaking, investment in mutual funds, securities, or similar financial instruments, when held passively, are typically regarded as individual assets forming part of a company’s investment portfolio , majorly on the ground that they do not, by themselves, represent a business or functional unit capable of independent operation.
In CIT v. UTV Software Communication Ltd., the Bombay High Court drew a sharp distinction between transfer of shares and transfer of an undertaking. The Court held that a mere transfer of shareholding, even to the extent of 49%, does not amount to a transfer of an “undertaking” under section 2(42C) of the Income Tax Act, 1961 (now section 2(103) of the 2025 Act). Relying on the Supreme Court’s rulings in Vodafone International Holdings B.V. v. Union of India and Bacha F. Guzdar v. Commissioner of Income Tax, Bombay, it concluded that passive shareholding does not confer ownership of the underlying business and cannot constitute an undertaking for tax or restructuring purposes.
However, the authors humbly differ from the view expressed by the Bombay High Court. In the authors’ opinion, such matters must be examined in light of the prevailing corporate structures wherein large business groups operate distinct business verticals through separate legal entities, including subsidiaries, joint ventures, and associates. In such cases, transfer of shares in a subsidiary or associate company may, in substance, result in divestment of an entire business segment.
Moreover, as discussed above, section 180(1)(a) of the Companies Act, 2013 provides a quantitative definition of “undertaking” and mandates shareholders’ approval by special resolution for the sale, lease, or disposal of a company’s undertaking. In this context, treating the transfer of shareholding as a mere transfer of shares and not an undertaking may arguably be a narrow interpretation, particularly when the transaction has the effect of transferring operational control and revenue-generating capabilities. The authors’ view also finds support in jurisprudence such as the Grasim Industries Ltd. ruling, where a financial services division, primarily holding investments in shares and securities, was accepted as a valid “undertaking” for the purposes of demerger under section 2(19AA) of the Act.
Conclusion
The concept of “undertaking” in Indian law is broader than a mere division of physical assets; it captures the idea of a self-sustaining business activity. In the context of investments, while passive shareholding may not qualify, an organized investment division with identifiable assets, liabilities, and management can constitute an undertaking capable of demerger. Thus, companies holding multiple investment portfolios may, subject to careful structuring, demerge them into resulting companies under sections 230-232 of the Companies Act and section 2(19AA) of the Income Tax Act.
– Barsha Dikshit & Sourish Kundu