a) One person Company (OPC)
Section 2(62) of the Companies Act, 2013 has introduced the concept of “One Person Company” which means a company which has only one person as a member. Section 2(31) of the Income-tax Act, 1961 which defines person has to be amended to include within its ambit an OPC.
Section 2(68) of the Companies Act, 2013 defines “private company” to mean a company having a minimum paid-up share capital as may be prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company; From the above it can be inferred that one person company will be required to comply with the provisions applicable to private Limited Company. However, section 18 of the Companies Act, 2013 provides for conversion of companies already registered from one class to other class under that Act. This implies an OPC can be converted into a Private limited or a public Limited Company provided that conditions are fulfilled.
Suggestion by ICAI
It is suggested that OPC should be treated like any other company for taxation purposes. The concept of separate legal entity of OPC should be followed for Income tax. However a specific clarification may be inserted in the Income tax Act as to allow ability of remuneration paid by OPC to member.
(SUGGESTIONS FOR REMOVING ADMINISTRATIVE AND PROCEDURAL DIFFICULTIES RELATING TO DIRECT TAXES)
b) Reopening of accounts on Court’s/ Tribunal order under section 130 of the Companies Act, 2013
b) Section 130 of the Companies Act, 2013 provides for revision of the books of accounts and the financial statements of the Company on application made by the Central Government, the Income-tax Authorities, the SEBI and any other statutory regulatory body or authority or any person concerned. Such revision can, however, be done on an order by a court of competent jurisdiction or the Tribunal to the effect that the relevant earlier accounts were prepared in a fraudulent manner or the affairs of the company were mismanaged during the relevant period, casting a doubt on the reliability of the financial statements. Before passing the order notice of the same will be given to the Income tax authorities.
This revision may, however, give rise to three situations namely, no effect on the profits, higher profits or lower profits. These profits have a direct impact on the computation of income of Companies due to applicability of section 115JB of the Income- tax Act, 1961. In case the profits are higher, the Department can issue a notice under section 147 of the Income-tax Act. The issue will arise where the profits were inflated by the company and due to the reopening of accounts, the actual profits are lowered. The company in such a case may apply for refund by filing a revised return of income within the time limit prescribed under section 139(5) of the Income-tax Act, 1961.
a) A provision be inserted to provide that in cases where the financial statements have been revised by virtue of section 130 of the Companies Act, 2013, no refund shall be granted in case such revision has the effect of lowering of profits of the company.
b) A specific provision is required in the Income-tax Act to take care of adjustments required in taxable income due to revision of accounts. The provision may be in line with Section 155 of the income-tax Act.
c) Difference in the definition of “related party” in Companies Act, 2013 and Income tax Act,1961
The concept of related party is relevant for defining “specified domestic transactions” and “international Transactions” in the Income-tax Act, 1961. The Companies Act, 2013 also defines “covered transactions” and “related party” However, the definition in both the cases is different.
There is a need for alignment in the scope of related parties in Companies Act, 2013 with that of the Income-tax Act, 1961.
d) Amalgamati on
a) Section 72A of the Income-tax Act, which deals with treatment of unabsorbed losses and unabsorbed depreciation, in case of amalgamation, is restrictive in its application. Presently benefits of Section 72A are available only to company owning industrial undertaking or a ship or
a hotel or banking company. Due to this restriction, other sectors namely service sector and real estate sectors are not eligible for benefits in the form of handing over of loss from one company to another.
b) Presently MAT credit u/s. 115JAA cannot be carried forward by the amalgamated company
c) Companies Act, 2013 has permitted amalgamation of Indian company with foreign company. However, exemption from capital gains u/s 47 of the Income tax Act is available only when amalgamated company is an Indian Company.
a) It is suggested that sectoral restrictions u/s 72A may be removed and provisions of this section be made applicable for all the sectors.
b) The Income-tax Act needs to be amended so as to allow carry forward of MAT Credit in the hands of amalgamated company for remaining number of years.
c) Clause (vi) of Section 47 needs to be amended in order to make amalgamation with foreign company also a tax neutral transaction. Similar amendment is required in clause (vii) of Section 47 also, so that shareholders are not taxed when shares of amalgamated company are received and amalgamated company is not an Indian company.
e) Amalgamation and Demergers – Limitation on powers for assessment of cases dealing with Amalgamation and Demergers effected under the Companies Act, 2013
In recent times, tax litigation in relation to amalgamation and demerger has increased many folds. Certain examples of such litigations are as under:
a. Tax benefits of amalgamation and demerger have been denied on the ground that the assessee has not fulfilled the conditions stated under section 2(1B) in case of amalgamation and section 2(19AA) in case of demerger;
b. Litigation as to whether the transaction is in the nature of amalgamation, demerger or slump sale under the Income-tax Act;
c. In certain cases, the Tax department has alleged that the scheme was a Tax avoidance device;
d. Issues relating to carry forward of unabsorbed losses in the hands of transferee company, availability of credit for TDS and advance tax paid by the transferor company on behalf of transferee company, etc.
e. In certain cases, the AO has invoked provisions of Section 28(iv) in the hands of amalgamated company on the ground that the amalgamated company has acquired Reserve & Surplus from its amalgamating company under the scheme of amalgamation. The same was considered as a perquisite by the AO and taxed under section 28(iv) of the Income-tax Act after the scheme has been approved by the High Court.
Now, under Section 230(5) of the Companies Act, 2013, it is mandatory for the companies to send a notice of amalgamation and demerger to the income-tax department. Under the old Companies Act, 1956, such notice was not mandatorily required. Hence, now, such notices would ensure that the income tax department can make a representation in relation to the amalgamations and demergers before the same is approved.
Since now under the Companies Act, 2013, at the time of approval of Scheme, adequate representation has been given to the Income Tax Department, corresponding amendments should be made in Income-tax Act, 1961 (may be by way of introduction of a separate chapter or
by introducing new section dealing with these kind of assessments) to the effect that the tax issues under the Income-tax Act, 1961 relating to amalgamations/demer gers in the hands of the transferor company, transferee company and the shareholders of transferor/transferee company should be examined and adjudicated by the tax department at the stage of making representation itself. In such a case, the Assessing Officer shall not be allowed to re-examine and readjudicate the issues relating to amalgamation or demerger at the time of scrutiny assessment or reassessment.
The said amendment would have following positive effects:
a. Reduction in tax litigation in respect of amalgamations/demergers
b. The Assessees would be saved from hardship of the double scrutiny – one at the time of filing of the scheme and second at the time of assessment.
c. Certainty as to the tax treatment in relation to amalgamations and demergers, which will lead to improvement of investors’ sentiment;
d. Safeguard of shareholder’s interest since they would be aware about potential tax exposures to them and the company in respect of the amalgamation and mergers and would consider the same while voting in respect of the same;