Budget: Reducing stress on acquiring distressed company

By Shripal Lakdawala, Parthiv Kamdar and Ronak Surana

Our nation witnessed a plethora of cases during FY19 involving bankruptcy, corporate defaults, etc. Such cases had a severe impact on the financial sector and on the overall business scenario. The government has been constantly undertaking various remedial measures in this direction such as speedy insolvency proceedings, appointment of professional boards, etc.

The Hon’ble Finance Minister highlighted record recovery of NPAs over INR 4 trillion mainly due to the Insolvency and Bankruptcy Code, 2016 (IBC). This indicates that corporate houses have shown great interest for acquisition of distressed assets. However, there were various tax hurdles arising pursuant to such acquisition in the hands of acquirer, seller and company and it was crucial to address the same at the earliest.

In this relation, the Finance Act 2018 provided following relaxations to companies facing insolvency proceedings under IBC: Such companies can carry forward tax losses after change in shareholding pursuant to resolution plan, which would otherwise lapse in case of change of shareholding beyond stipulated threshold u/s. 79 of the Income-tax Act, 1961 (Act).

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For computation of MAT liability u/s. 115JB of the Act, such companies can reduce the book profit with an aggregate of brought forward loss and unabsorbed depreciation, whereas earlier provision would allow deduction of either of the two, whichever is lower.

The Finance Bill, 2019 proposes to extend the above relaxations (w.e.f. AY 2020-21) to companies where – Board of directors have been suspended by the National Company Law Tribunal (NCLT) and new directors have been appointed by the central government; and Change in shareholding of such company, its subsidiaries and subsidiary of such subsidiary has taken place pursuant to a resolution plan approved by NCLT after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner.

The rationale of providing reasonable opportunity of being heard to the Income Tax Department prior to approval of resolution plan is not entirely clear (similar to the earlier amendment for IBC cases). It also remains ambiguous whether reasonable opportunity of being heard to the Income Tax Department is applicable only for the distressed company or also for the subsidiary of such company.

Further, in case of acquisition of distressed companies, the consideration for transfer of shares is determined by NCLT after considering bids from various acquirers. If the fair market value (FMV) of such shares computed as per prescribed tax rules is lower than the actual sales consideration, the difference could be taxable under the provisions of section 56(2)(x) (tax in the hands of acquirer on acquisition of shares for inadequate consideration) and section 50CA (FMV deemed as full value of consideration on transfer of unquoted shares in the hands of transferor).

The taxpayers were facing genuine hardships in such cases as the transferor has no control over determination of actual consideration, and relaxation/ relief was expected. The Finance Bill, 2019 proposes that the provisions of section 56(2)(x) and section 50CA should not be applicable in case of transfer of shares of distressed companies (including IBC cases) pursuant to a resolution plan approved by NCLT (w.e.f. AY 2020-21). CBDT would prescribe the transactions to which the above relaxation would apply.

The above proposals are welcome and would provide relief on acquisition of distressed companies. The government has demonstrated that it will address the concerns proactively arising on account of resolution process with respect to distressed companies.

(The authors of this article are the Partner, Director and Assistant Manager, respectively, at Deloitte Haskins and Sells LLP)