Union Budget 2019 – New Finance Minister Smt. Nirmala Sitharaman’s first budget after the huge and unprecedented electoral win of Sh. Narendra Modi Government has the backing of a mammoth public mandate and as such is expected to be a reform oriented budget and not a populist one.
However, along with the bold and reform oriented initiatives, a bigger thrust on facilitating and ensuring “ease of doing business” in real and effective sense, is the necessity of the hour, which shall include further rationalization, refinement and streamlining of provisions of Direct Tax Law.
The Author’s Wish-list for incorporation of some of the crucial, desirable and much needed amendments/clarifications/rationalisation in the provisions of Income Tax Act in the upcoming Union Budget 2019/ Finance Bill 2019, includes the following:
(i) Relaxation in the applicability of provisions concerning fair market valuation of shares u/s 56(2)(viia)/56(2)(x) of the Income Tax Act in the cases of fresh issuance of shares/bonus issue/right issue and buy back of shares by companies:
Central Board of Direct Taxes had issued Circular No. 10/2018 dated 31.12.2018 to clarify that provisions of section 56(2)(viia) of the Income-tax Act, 1961 being anti-abuse provisions shall not be applicable in cases of receipt of shares by the specified company or firm as a result of fresh issuance of shares including by way of bonus shares, rights shares and preference shares or transactions of similar nature by the specified company. However, on reconsideration it was found that the matter relating to interpretation of the term ‘receives’ used in section 56(2)(viia) of the act is pending before judicial forums and stakeholders have sought clarifications on other similar provisions in section 56 of the Act. Accordingly, with the idea of issuing a fresh comprehensive circular on the subject, the circular no. 10/2018 was withdrawn by circular no. 02/2019 dated 04.01.2019. While withdrawing the circular no. 10/2018, it was also clarified that the said circular shall be considered to have never been issued.
Subsequently, it was clarified vide circular no. 3/2019 dated 21.01.2019 that the view, taken in circular no. 10/2018 (subsequently withdrawn by circular no. 02/2019) that section 56(2)(viia) of the Act would not apply to fresh issuance of shares, would not be a correct approach, as it could be subject to abuse and would be contrary to the express provisions and the legislative intent of section 56(2)(viia) or similar provisions contained in section 56(2) of the Act. Accordingly, it was further clarified that any view expressed by the Board in Circular No. 10/2018 shall be considered to have never been expressed and, the said circular shall not be taken into account by any Income-tax authority in any proceedings under the Act.
Ironically, the view expressed in CBDT Circular No. 10/2018 dated 31.12.2018 concerning the non-applicability of provisions of section 56(2)(viia) {now amended as section 56(2)(x)} of the Income Tax Act, in cases of receipt of shares by the specified company or firm as a result of fresh issuance of shares including by way of bonus shares, rights shares and preference shares or transactions of similar nature, was in complete harmony and conformity with the legislative intent of introduction of the said anti-abuse provision of section 56(2)(viia) by the Finance Act 2010.
The Explanatory Memorandum to Finance Bill 2010 explaining the rationale of introduction of the said section 56(2)(viia), interalia provided that,
“In order to prevent the practice of transferring unlisted shares at prices much below their market value, it is proposed to amend Section 56(2) to also include within its ambit, transactions undertaken in shares of a company (not being a company in which public are substantially interested) either for inadequate consideration or without consideration where recipient is a Firm or a Company”
Thus it is amply clear and duly evident from above that the legislative intent of introduction of section 56(2)(viia) was to prevent the practice of transferring unlisted shares at prices below their fair market value. The expression “transfer” has altogether different connotation and meaning than the expression “issuance” and as such the provisions of said section 56(2)(viia) were meant to be applicable in cases of receipt of shares by a company or a firm on subsequent transfer of unlisted shares after their initial issuance by the issuing company.
Therefore, in view of the above stated legislative intent of introduction of section 56(2)(viia) and in order to give the much needed flexibility to the corporate sector in raising its capital for its genuine financial needs, a suitable amendment either by way of insertion of an explanation or a proviso in now applicable section 56(2)(x) to the effect that provisions of the said section are applicable only in cases of receipt of shares as a result of transfer of such shares and are not to be made applicable in cases of receipt of shares by the specified company or firm as a result of fresh issuance of shares including by way of bonus shares, rights shares and preference shares or transactions of similar nature, is requested to be made in the upcoming Finance Bill 2019.
(ii) Review and Rationalisation of the provisions u/s 50C and 43CA of the Income Tax Act concerning adoption of stamp duty valuation rates for purchase and sale of immovable property so as to bring them in alignment with the actual transaction rates:
In view of the currently prevailing sluggishness and slow-down in the real estate sector, the property transactions of sale and purchase, in large number of areas, are taking place at prices/rates at even much below their respective circle/stamp duty valuation rates.
In such cases, the application of the provisions of section 50C/43CA, deeming the sale/purchase consideration equivalent to the applicable circle rates irrespective of the fact that the actual sale/purchase consideration is lesser than the circle rates, is resulting in a lot of undue hardships both in the hands of sellers as well as buyers, in the form of increased income tax liability on even notional sale/purchase consideration towards immovable property.
It needs to be appreciated that the legislative intent of introduction of the said sections 50C/43CA was to plug the cash dealings and under-recording of sale/purchase consideration of immovable properties in the arena, whereby market rates of properties were substantially higher than the circle rates.
However, presently times have changed. Circle Rates have been revised on a substantially higher side whereas the market rates of properties have comparatively fallen in view of the sluggishness in the real estate sector, and as such the gap between the market rates and circle rates of properties has narrowed down considerably and infact in large number of areas, the actual transaction rates/market rates of properties are even lower than the circle rates.
Therefore, in view of the changed scenario, there is a crucial need for review and rationalisation of the provisions of section 50C/43CA, so as to bring them in alignment with the actual transaction rates of immovable properties, in order to provide the much needed push and fillip to the real estate sector.
(iii) Suitable Amendment to ensure Non-Applicability of the provisions of section 56(2)(x) & 50CA to the insolvent companies whose resolution plans for their revival have been approved by NCLT under IBC Act 2016:
The repealing of the erstwhile SICA Act and its substitution with the new Insolvency & Bankruptcy Code (IBC) 2016, is being considered as a path-breaking initiative of the Modi Government. The new IBC Act 2016 is more holistic and sensitive in its approach to ensure more effective financial revival of the insolvent companies as well as protecting the interests of all stakeholders & financial & operational creditors.
Thus, it becomes all the more important and crucial to incentivize and boost the potential buyers/bidders to encourage them to come out with effective resolution plans under IBC. However, potential buyers/bidders desirous of acquiring insolvent companies face the bottlenecks of tax authorities challenging the valuation aspects of the acquisition under section 50CA and 56(2)(x) of the Income Tax Act.
Under Sections 50CA and 56(2)(x) of the Income Tax Act, the differential between the fair market value and the bidding consideration is taxable if the bidding consideration is lower than the fair market value. Section 50CA imposes a tax on this notional capital gain income on the seller and Section 56(2)(x) imposes a tax on the buyer by treating the difference as income from other sources.
The FMV of the securities has to be calculated as per the Rule 11UA of the Income Tax Rules, 1962 with book value or stock market prices to be taken into account. There may be situations, where the bid price of these securities is lower than the FMV determined under Rule 11UA. Since these transactions of bidding are being undertaken in the open market through a competitive bidding process, it would be grossly unfair to tax the sellers and buyers on this notional income.
Since the government has identified the success of IBC as a key determinant of economic growth, it is therefore imperative for the concerned finance ministry and revenue authorities to have a more compassionate and rational view as far as taxing such strategic acquisitions of insolvent companies under IBC.
Thus, in order to augment the success of such a noble initiative of IBC 2016, suitable amendments in section 56(2)(x) & 50CA are requested to be made in the upcoming Finance Bill 2019, so as to make them inapplicable on such insolvent companies whose resolution plans for their financial revival have been approved by NCLT under IBC Act 2016.
(iv) Amendment in sections 28(iv) & 41(1) to ensure non taxability of the waiver of loans/liabilities of the insolvent companies under IBC Act 2016:
The waiver of loans and liabilities of the insolvent companies by the financial and operational creditors form an integral part of all the resolution plans aimed at financial revival of insolvent companies under IBC 2016.
Recently the Hon’ble Supreme Court in the case of Mahindra and Mahindra Ltd. [2018] 93 taxmann.com 32 (SC), has laid down the law that waiver of loan shall not be taxable either u/s 28(iv) or s.41(1).
The Apex court has now clarified that ‘waiver of loan’ should be treated as ‘receipt of money’ and hence such receipt of money would fall outside the purview of s.28(iv) and accordingly cannot be taxable.
The Apex Court has also held that ‘waiver of loan’ does not amount to cessation of trading liability and as such the same would not fall within the purview of s.41(1).
Therefore, in view of the binding nature of the above judgement of the Hon’ble Supreme Court and more importantly in order to provide the much needed boost and push to IBC 2016 aimed at ensuring financial revival of insolvent companies, suitable amendments in section 28(iv) and 41(1) of the Income Tax Act are requested to be made so as to ensure their non-applicability to the waiver of loans and liabilities of insolvent companies under IBC 2016.
Similar amendments are requested to be made under MAT provision u/s 115JB so as to ensure non-inclusion of such waiver of loans and liabilities in book profits of insolvent companies under IBC, for the purpose of MAT determination.
(v) Relaxation in provisions of section 2(1B), 2(19AA) & 72A of the Act concerning allowability of carry forward and setoff of losses and unabsorbed depreciation in case of insolvent companies under IBC Act 2016:
In making strategic acquisitions of insolvent companies under IBC 2016, the consideration of income tax benefit of availment of set-off benefit towards brought-forward business losses and unabsorbed depreciation of insolvent companies plays a very significant role in luring the potential bidders/buyers and it is a universal phenomenon in almost all strategic business acquisitions under IBC 2016.
The conditions for availing the benefit of set-off towards brought-forward business losses and unabsorbed depreciation of the amalgamating/demerging entity is stipulated in section 72A of the Act within the meaning of section 2(1B) or 2(19AA) of the Act.
The primary conditions as envisaged in section 72A are that atleast 75% of the shareholders of the amalgamating/demerging entity must be given shareholding in the amalgamated/demerged entity, amalgamated/demerged company must hold at least 75% of the book value of fixed assets of the amalgamating/demerging entity for a minimum period of five years from the date of amalgamation/demerger; and that the new entity must continue the business of the stressed company for a minimum period of five years from the date of amalgamation/demerger. If either of the conditions is not met, the tax benefit of loss and depreciation is to be taxed in the year the condition is breached.
All these conditions, may in a certain type of resolution plans, be difficult to comply with. Plans which require significant divestment of fixed assets for reasons of business viability may be hit by this embargo. The limitation on the continuation of the old business after amalgamation hampers the flexibility of the acquirer to bring about a turnaround by restructuring the old business into a new business which is viable. In such situations, acquirers/bidders would be hampered by not being able to take the amalgamation route.
In view of above, suitable relaxations in section 2(1B), 2(19AA) and section 72A of the Act are requested to be made in the upcoming Finance Bill 2019, so as to make them inapplicable on insolvent companies under IBC 2016, so as to encourage more potential buyers and bidders to participate in the resolution plans for ensuring the financial revival of such insolvent companies.
(vi)Incorporating time bound limitation period for issuing income tax refunds in the Income Tax Act:
Delay in processing of income tax refunds of assesses has become a recurring and universal phenomenon. In order to meet out the budgetary targets of demand, refunds are being withheld for no justifiable reasons. Currently apart from the nominal compensatory interest for delay in refund, there is no other provision in the Income Tax Act stipulating any limitation period for issuing refunds. In view of the Governments’ objective of ensuring “ease of doing business” and the CBDT’s goal of ensuring taxpayer friendly regime, suitable provisions must be incorporated in the Income Tax Act itself to incorporate time bound limitation periods for issuing refunds and fixing accountability for delays beyond that limitation period.
vii) Rationalisation and streamlining of the prosecution provisions u/s 276B of the Act to eliminate the arbitrariness and draconian-ness :
The present framework of law in the context of section 276B of the Income Tax Act, treats every assessee who has defaulted in payment of TDS, on equal footing, irrespective of the severity of default. This is totally unwarranted and uncalled for.
Numerous instances have come to fore, where even for a delay of 2-3 months in depositing the TDS with the Exchequer, Prosecution Proceedings u/s 276B are being launched. This high handed approach is clearly not justifiable and desirable.
For judicious, equitable and effective implementation of the Prosecution Provision u/s 276B of the Income Tax Act, first and foremost, the defaulters must be categorized into different categories based on the nature and severity of default in terms of quantum, duration and intent parameters and depending upon the severity of the default, the penal consequences must follow.
In determining the categorization of defaulters, the status of pendency or otherwise of the regular undisputed income- tax refund of the defaulter assessee deserves to be given a significant and major consideration.
Keeping in view the above, the existing stringent provision u/s 276B of the Income Tax Act must be reviewed and suitable amendments must be incorporated in it so as to enable an effective action against the willful and habitual tax evaders only and not against the bonafide assessees who create wealth for the Nation.
All the above mentioned desirable amendments in the provisions of relevant sections of Income Tax Act in the upcoming Finance Bill 2019, are essential and crucial for reducing the unnecessary litigations and ensuring a taxpayer friendly regime and facilitating “ease of doing business” in real and effective sense.
Author Bio
44AD provisions be restored for allowing deduction of Salary and interest paid to partners in partnership firms. It was withdrawn and this be allowed in the interest of justice and ease if doing business by coming together and avoid breakup of partnership firm.