By SR Patnaik
The Insolvency and Bankruptcy Code, 2016, was introduced to promote the ease of doing business in India, with an objective of addressing the issue of liquidity in cases relating to insolvency/bankruptcy in the country. Undermining the importance of time, the IBC prescribes a time-bound process of resolution to free up funds stuck in such cases so that the said cases can be circulated. However, this has resulted in the IBC being in conflict with a few other legislations due to their overlapping influence. While the IBC clearly specifies that it will override any other legislation in cases of conflict, a number of unresolved issues still remain. And there are certain issues arising on account of the Income-tax Act, 1961.
Waiver of loans: As a part of the resolution, lenders generally have to bear a part of the losses on the loans given to the corporate debtor. Taxability of waiver of loans in the hands of the borrower has been a contentious issue. The Supreme Court, in the Mahindra and Mahindra case, held that if a loan was taken and utilised for capital purposes, the waiver of such loans could be construed as capital receipt, whereas if a loan was taken for working capital purposes, the same should be treated as business income and be liable to tax.
The minimum alternate tax (MAT) is levied as per the book profit of a company, per the Companies Act, 2013. As the waiver of loan has to be routed through the profit-and-loss account, the company may be liable to pay MAT since the I-T Act does not provide any specific exception from the levy of MAT.
Brought forward of losses: Most of the companies going under the resolution process under the IBC have huge losses. As per the I-T Act, unabsorbed tax losses would lapse if more than 51% shareholding changes during the year in cases of closely-held companies. This was considered as an obstacle because the buyers were keen to continue with tax losses. Recently, the government, taking cognisance of such requests, amended the I-T Act to allow such tax losses to continue to the corporate debtor, in spite of a change in the shareholding.
Transfer: Certain anti-abuse provisions of the I-T Act prescribe that in case any share is transferred/allotted at a price less than the fair market value, such differential shall be taxed in the hands of the beneficiary. Similarly, in case shares are transferred at a lower price, the differential price could be taxed in the hands of the transferor. In this regard, it may be pertinent to note that the fair market value of the shares of the company going through insolvency proceedings could be based on a number of factors such as state of business, etc, and therefore the value could be at a significant discount. Similarly, if, owing to certain specific situations, the value of the corporate debtor is significantly more than the fair market value as per the I-T Act, then such differential amounts could also be taxed.
Any tax implications arising from these anti-abuse provisions could directly impact the resolution process as the parties may not be keen to further pay an additional tax on account of these transitions. In view of these discussions, it may be advisable for the government to come out with specific amendments to clarify that no tax implications shall arise in cases of bankruptcy because nobody will be keen to pay additional taxes.
Past tax dues: The tax department has also triggered another controversy by insisting on having priority in the collection of past tax dues from companies going through a resolution mechanism under the IBC. Thankfully, the Andhra Pradesh High Court, in the Leo Edibles & Fats Ltd case, held that the department cannot claim any such priority. It must also be noted that the National Company Law Tribunal, in the cases of Synergies Dooray Automotive Ltd and Kiran Global Chem Ltd, held that the tax department would fall under the category of ‘operational creditors’, and therefore it cannot insist on getting any preference in the payment of past tax dues, but is only entitled to file a claim with the resolution professional, which will be paid by the resolution professional based on the merits of the case.
It is imperative that all the important aspects of the IBC that are in conflict with other laws be addressed immediately, so that the IBC is widely accepted by other participants. India is desperately in need of a time-bound resolution mechanism and, hence, it is important for the government to make the IBC more popular. On such lines, if the I-T Act may also be appropriately modified, it would go a long way in making the IBC more acceptable.
(The writer is Partner & head, Taxation, Cyril Amarchand Mangaldas. With assistance from VP Thangadurai, senior associate, Cyril Amarchand Mangaldas.)