Income Tax Act Amendments Corresponding to Insolvency and Bankruptcy Code
Summary: To align the Income Tax Act, 1961 with the Insolvency and Bankruptcy Code (IBC), the Union Budget 2018-19 introduced key amendments. The changes address tax implications during insolvency proceedings. One crucial amendment is to Section 79, allowing companies undergoing resolution to carry forward and set off losses even if there’s a change in shareholding, provided the resolution plan is approved under the IBC. This offers companies a chance to recover financially without immediate tax burdens. Additionally, changes to Section 115JB relax the minimum alternate tax (MAT) computation for companies in insolvency by permitting the deduction of both unabsorbed depreciation and carried-forward losses from book profits. Section 140 also now permits insolvency professionals to verify income tax returns, recognizing their management authority during the insolvency process. These amendments, effective from AY 2018-19, aim to streamline tax procedures for companies in distress, ensuring smoother corporate insolvency resolution. However, ongoing cooperation between tax authorities, insolvency professionals, and legal bodies is essential for successful implementation.
To match the Insolvency and Bankruptcy Code, 2016 (IBC), the Union Budget 2018-19 brought numerous significant changes to the Income Tax Act, 1961. These amendments seek to guarantee suitable tax treatment and help to enable the seamless application of corporate insolvency resolution procedures under the IBC. Let’s closely review the main changes.
Section 79 Amendment – Carry Forward and Set Off of Losses
In some circumstances where company shareholding changes, Section 79 of the Income Tax Act limits the carry forward and sets off of losses. It specifically forbids the carry forward and sets off losses for businesses in which the public is not significantly interested, should a change in shareholding produce persons with 51% of the voting power on the last day of the year in which the loss was incurred not holding that 51% voting power on the last day of the year in which the loss was incurred.
The Finance Bill 2018 has included a significant exception to this norm for businesses resolving insolvency under the IBC. “Provided also that nothing contained in this section shall apply to a company where a change in the shareholding takes place in a previous year whereby a resolution plan approved under the Insolvency and Bankruptcy Code, 2016, after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner,” Section 79 adds a new proviso.
This amendment acknowledges that the insolvency process under IBC sometimes entails a change in management and ownership of the troubled company. The new owners who take over the company as part of the resolution plan should be let to start and carry forward the accumulated losses of the company. Disallowing such set off would immediately tax the settled company’s finances and reduce the likelihood of a good comeback.
This exemption is only accessible for shareholding changes carried out in line with an IBC resolution plan approved under the IBC. After the committee of creditors approved the resolution plan, the final approval given by the Adjudicating Authority (National Company Law Tribunal) under Section 31 of the IBC is the one referred above.
This change will become operative from Assessment Year 2018-19 forward. It offers much-needed clarification on how losses treated tax-wise in circumstances of corporate insolvency resolution. Companies undergoing resolution, however, will have to make sure they get the approval of the jurisdictional tax authorities as specified in the proviso before claiming this advantage.
The pertinent Income Tax Act clauses as well as the IBC form the regulatory framework controlling this change. Effective implementation of this clause will rely on cooperation between tax officials and insolvency experts. The Income Tax Appellate Tribunal and higher appellate bodies could decide any disagreements about the relevance of this exemption.
Section 115JB Amendment: Book Profit computation
Section 115JB has clauses allowing minimum alternate tax (MAT) on businesses determined by book earnings. The Finance Bill 2018 has brought a significant relaxation in the computation of book profits for businesses undergoing IBC-mediated bankruptcy resolution.
Added in Explanation 1 to Section 115JB(2), a new clause (iih) reads: “(iih) the aggregate amount of unabsorbed depreciation and loss brought forward in case of a company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10 of the Insolvency and Bankruptcy Code, 2016.”
This change lets businesses going through insolvency resolution lower the total loss pushed forward—including unabsorbed depreciation—from the book profit in order to calculate MAT.
Companies were once authorised to cut only the lowest of unabsorbed depreciation or pushed forward losses from book earnings. More permissive in nature, the new clause will assist enterprises admitted into the corporate insolvency resolution system have less MAT load.
It is relevant to underline that this advantage starts as soon as the National Company Law Tribunal admits under Section 7, 9 or 10 of the IBC the application for starting the procedure of corporate insolvency resolution. It does not, unlike the Section 79 amendment, call for the approval of the resolution plan.
This adjustment will take effect going back to Assessment Year 2018-19. It will lower MAT liability during the settlement phase, therefore relieving businesses experiencing insolvency of instant relief.
Following this clause will call for cooperation between the National Company Law Tribunal and the tax authorities. Companies will have to show proof of acceptance of the insolvency application in order to get this advantage while calculating MAT obligation. The tax authorities and appellate courts might decide any disagreements about unabsorbed depreciation or loss quantification.
Section 140 Amendment: Verification of Income Return
The Income Tax Act’s Section 140 names the individuals authorised to confirm the income reported by different types of assessees. Usually for firms, the managing director checks the return. Any director of the company can check the return should either there be no managing director or the managing director is unable to confirm.
After the second proviso to Section 140, the Finance Bill 2018 adds a new clause (c) to handle the matter of corporations going through insolvency resolution. “Where in respect of a company, an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10 of the Insolvency and Bankruptcy Code, 2016, the return shall be verified by the insolvency professional appointed by such Adjudicating Authority.” the new clause says.
This modification acknowledges that the powers of the board of directors of the firm are suspended once the corporate insolvency resolution mechanism under the IBC is started. The appointed temporary resolution professional or agent gains management authority for the company. Consequently, it is suitable that the insolvency practitioner checks and signs the income tax return over this period.
It is noteworthy that the phrase “insolvency professional” employed here relates to the interim resolution professional or resolution professional designated by the Adjuduating Authority (NCLT). When an insolvency application is admitted, first an interim resolution professional is assigned. The committee of creditors can then either name a new resolution professional or confirm the interim professional.
This amendment puts great obligation on the insolvency practitioner. Before confirming the accuracy of the income tax return, they will have to pay due attention and, should necessary, seek professional assistance. Any error or misrepresentation in the return can subject the insolvency professional to Income Tax Act penalties.
The execution of this clause will need close cooperation among the NCLT, bankruptcy experts, and tax officials. As they file and confirm the return, the insolvency expert will have to show proof of their appointment to the tax authorities. Appellate courts and the tax authorities could decide any conflicts on the power to confirm the return.
Final Thought and Direction Forward
Important first steps towards matching the Income Tax Act with the new insolvency resolution system the IBC proposed are the above stated adjustments. They deal with certain important problems that might have hampered the flawless application of corporate insolvency resolution strategies.
Still unresolved are several issues, though. For example, more clarity is needed regarding the tax consequences of debt write-offs included into resolution strategies. Write-back of liabilities in the company’s books follows from creditors cutting their dues. This could perhaps draw tax under MAT obligation or Section 41(1) of the Income Tax Act, therefore burdening the resolved company.
The government could have to propose more modifications going forward to fully handle all tax concerns resulting from bankruptcy settlement. Close collaboration between the Ministry of Finance, Ministry of Corporate Affairs and the bankruptcy and Bankruptcy Board of India would be essential to ensure that the tax rules do not hamper the objectives of the bankruptcy resolving process.
Effective implementation of these new clauses will depend on cooperation among the tax authorities and insolvency experts. On procedural elements, the tax department may need specific guidelines. The appellate authority and courts will be very crucial in interpreting these clauses and settling conflicts as the jurisprudence develops.
All things considered, these changes represent a welcome first step towards establishing an enabling tax environment for the efficient application of the Insolvency and Bankruptcy Code. They show how dedicated the government is to ensure a seamless and successful resolution of business insolvency.
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