SC gives IBC process a boost on loan waivers PDF Print E-mail
Friday, 11 May 2018 04:34
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SC dismissing taxing of loan waiver under Section 28 or 41 means haircuts by banks can’t be taxed as income


Given how a large part of the government’s plan to revive investments is predicated on a successful conclusion of the insolvency process under the Insolvency and Bankruptcy Code (IBC), and the selling of most IBC firms after banks waive off a part of existing loans, it is critical all pending concerns be addressed at the earliest. In the power sector, where NPA pressures are getting built up, as this newspaper argued on Tuesday, there has been little movement on ensuring fuel linkages as well as power purchase agreements with the state electricity boards for projects running into several lakh crore rupees. Some tax issues also remain unresolved and could prove to be deal-breakers in the cases of companies where the number of buyers is limited and where the upside for the new buyer is not as great.

Section 50CA of the Income Tax Act, for instance, deals with companies buying other companies at less than the Fair Market Value (FMV). In such a case, the taxman can determine what the FMV is and then apply the tax on this basis — it is not clear what the tax treatment will be in IBC cases where the company will be bought at a discount to the market value perceived by the taxman. It was hoped the issue would have been addressed in the budget, but this didn’t happen. The Budget, though, did address the issue of unabsorbed depreciation and brought-forward losses continuing, even when ownership of a company changed.

The Budget didn’t address the issue of the taxman writing back loan write-offs under Section 28 or 41 either, but fortunately this has just been addressed by the Supreme Court (SC)—though the matter pertained to a case involving Mahindra & Mahindra, its implications are much wider. In the current case, Mahindra & Mahindra had a Rs 57 lakh loan that was waived by the lender. The taxman added this back to Mahindra & Mahindra’s income under Section 28. The income tax tribunal, however, dismissed this and ruled in favour of Mahindra & Mahindra. Various high courts have also ruled on such transactions differently—the Delhi and Bombay High courts have ruled that this cannot be taxed while the Madras High Court has held that it can.

The Mahindra & Mahindra loan waiver, SC said, could not be added back to income under Section 28(iv) as it was not a benefit or a perquisite. And, it couldn’t be considered as income under Section 41 (1) since Mahindra & Mahindra had never sought to deduct the interest payments on the loan but had only depreciated the capital asset.
This then gets translated quite easily to all IBC sales. If Company A has a bank loan of Rs 5,000 crore that gets reduced to Rs 2,500 crore, normally it would attract Section 41(1) and Company A’s tax liability would rise—to the extent it was bought over by Company B, B’s tax liability would rise. But if the Rs 5,000 crore loan was used to buy capital assets—which would then be depreciated—the Supreme Court has ruled that Section 41(1) will not apply. Given this was a big concern for all potential buyers during the IBC, the SC verdict is a big relief.


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