Tax neutral conversion of Urban Cooperative Bank into Banking Company

Section 44DB of Act provides for computing deductions in the case of business re-organization of cooperative banks. Further, the said section, inter alia, provides that where such business reorganization of co-operative banks takes place, the deductions under sections 32, 35D, 35DD and section 35DDA will be apportioned between the predecessor co-operative bank and the successor co­operative bank in the proportion of the number of days before and after the date of business reorganization. Further transfer of a capital asset by the predecessor co­operative bank to the successor co-operative bank, as well as transfer of shares by the shareholders in the predecessor co-operative bank, in a case of business reorganization under section 47 of the Act, is also not regarded as transfer.

The Reserve Bank of India (RBI) has permitted voluntary transition of primary co­operative bank [urban co-operative banks (UCB)] into a banking company by way of transfer of Assets and Liabilities vide Circular reference no. DCBR.CO.LS.PCB. Cir.No.5/07.01.000/2018-19 dated September 27, 2018.

It is proposed to expand the scope of business reorganization to include conversion of a primary co-operative bank to a banking company and the deductions available under section 44DB of the Act shall also be made applicable in relation to such conversion of primary co-operative bank to the banking company. Further it is also proposed that transfer of a capital asset by the primary co-operative bank to the banking company as a result of conversion shall not be treated as transfer under section 47 of the Act. Consequently, the allotment of shares of the converted banking company to the shareholders of the predecessor primary co-operative bank shall not be treated as transfer under the said section of the Act.

Necessary amendments to this effect have been proposed in section 44DB and in clause (vica) and clause (vicb) of section 47 of the Act.

These amendments will take effect from 1st April, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years.

[Clauses 13 and 15]

Text of the Relevant Clause of the Finance Bill 2021

Clause 13 of the Bill seeks to amend section 44DB of the Income-tax Act relating to special provision for computing deductions in the case of business reorganisation of co­operative banks.

The said section, inter alia, provides that where business reorganisation of co-operative banks takes place, the deductions under section 32, 35D, 35DD and 35DDA shall be apportioned between the predecessor co-operative bank and the successor co-operative bank in the proportion of the number of days before and after the date of business reorganisation.

It is proposed to expand the scope of the said section so as to include conversion of a primary co-operative bank to a banking company under its ambit.

It is also proposed to define the expressions “banking company”, “converted banking company”, “conversion” and “primary co-operative bank” and to make consequential amendment to the definition of “predecessor co-operative bank”.

These amendments will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.

Clause 15 of the Bill seeks to amend section 47 of the Income-tax Act relating to transactions not regarded as transfer.

The said section, inter alia, provides that any transfer of a capital asset by the predecessor co-operative bank to the successor co-operative bank in a case of business reorganisation shall not be regarded as transfer.

It is proposed to amend clause (vica) of the said section to expand the scope of the said clause so as to provide that any transfer of a capital asset by the primary co-operative bank which has been converted into a banking company as a result of conversion shall not be considered as transfer for the purposes of capital gains.

Further, it is also proposed to amend clause (vicb) of the said section so as to provide that the allotment of shares of the converted banking company to the shareholders of the predecessor co-operative bank as a result of this conversion shall not be treated as transfer for the purposes of capital gains.

It is also proposed to amend the Explanation to clause (vicb) of the said section so as to provide that the expression “converted banking company” shall have the meaning assigned to it in section 44DB.

These amendments will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.

It is proposed to insert new clauses (viiac) and (viiad) in the said section so as to provide that any transfer, in relocation, of a capital asset by the original fund to the resultant fund shall not be considered as transfer for the purpose of Capital gains tax. It is further proposed that the allotment of shares of the resultant fund to the shareholders of the original fund as a result of this relocation shall not be treated as transfer for the purpose of capital gains.

It is also proposed to define the expressions “original Fund”, “relocation” and “resultant fund”.

These amendments will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.

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