Insights on Reconstruction and Restructuring Issues Under IT Act, 1961

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Explore important issues in merger and corporation restructuring under the IT Act, 1961, including aspects such as Insolvency & Bankruptcy Code, profits and gains on sale of assets, buy-back of shares, and more. Gain valuable insights from a Chartered Accountant's perspective.

  • Merger
  • Restructuring
  • IT Act
  • Chartered Accountant
  • Taxation
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  1. Reconstruction and Restructuring (merger and corporation ) Important issues under I.T. Act, 1961 Saturday , 05.10.2024 The Park Kolkata EIRC of ICAI Pradip N. Kapasi Chartered Accountant

  2. Synopsis -I Insolvency & Bankruptcy Code, 2016 Interplay With ITA Buy-back of shares Gift by company Slump sale Amalgamation Demerger Company to LLP Pradip N. Kapasi Chartered Accountant 2

  3. Synopsis- II Corporatisation Part XXI of Companies Act, 2013 Firm to company Proprietary concern to company Firm to LLP Holding Subsidiary Holding Liquidation Deemed dividend Case Studies Pradip N. Kapasi Chartered Accountant 3

  4. IBC & ITA I S.2(24), 4, 5, 28(i)(iv), 41(i), 43B, 45, 56, 79, 115JB, 140, 170, 170A, 178 and 194R Rebates Reliefs and Waivers by NCLT/ AT Sundry creditors for goods Sundry creditors for services Labour dues Outstanding interest payable Advances against goods Deposits Cash credits and overdrafts Secured loans Unsecured loans Government dues Issue of shares against liabilities Pradip N. Kapasi Chartered Accountant 4

  5. IBC & ITA - II Profits and gains on sale of assets Unabsorbed depreciation Unabsorbed loses and S.79 IBC expenses Minimum Alternative Tax, post IBC effects TDS u/s 194R S.30 and s.238 of IBC Resolution plan and order of NCLT AS and Ind AS 109 Pradip N. Kapasi Chartered Accountant 5

  6. IBC & ITA - III Press Release and FA, 2018 Circular No.18 dated 10.09.2022 Circular No. 12 dated 16.06.2022 GST implications Types of Resolutions Clean slate concept Pradip N. Kapasi Chartered Accountant 6

  7. Buy-Back of Shares -I (S. 2(22)(f), 46A, 57) W.e.f. 1st October 2024 Dividend to include any payment by a company (to a shareholder) in purchase of from a shareholder its own shares (any type) as per S. 68 of Companies Act, 2013 Clause (iv) omitted from exclusions Computation of Capital Gains as per S.46A Buy Back to be transfer of shares FVC deemed to be nil Resulting loss and s.70 & s.71 Pradip N. Kapasi Chartered Accountant 7

  8. Buy-Back of Shares -II No deduction from amount taxed u/s 2(22)(f) not even 1/5th of expenses No Tax exemption u/s 10(34A) for income on buy back No BBT u/s 115QA for buy back taking place on or after 1.04.2024 TDS u/s 194 @ 10% w.e.f. 01.10.2024 Pradip N. Kapasi Chartered Accountant 8

  9. Buy-Back of Shares III To Note set-off and carry forward of loss anomalous examples in EM year of receipt and payment inconsistencies in 3 provisions entire receipt is dividend applicability only to buy back of shares other securities not covered cases of non-s.68 payments Anarkali Sarabhai, 224 ITR 422(SC) relevance of Rule 40BB higher rate of tax for non-companies benefit of s. 80M for companies accumulated profits & Explanations dividend and DTAA, RST 348 ITR 368 (AAR) Cognizant Technology Solutions India (P.) Ltd, 416 ITR 462(Mad.) opting - out ; effect any type of shares higher buy back price better option for legislature G. Narasimhan [1999] 236 ITR 327 (SC) Pradip N. Kapasi Chartered Accountant 9

  10. Gift by company I (S. 47 (iii)) Amendment of 2024 w.e.f. 01.04.2025 Transfer by an individual or HUF Of capital asset Under a gift or will or an irrevocable trust Not regarded as a Transfer On amendment restricted to individual and HUF Omission of Provision for excluding ESOP Substitution w. r. effect of a similar clause Exempting transfer including for ESOP for all assesses Pradip N. Kapasi Chartered Accountant 10

  11. Gift by company - II Implication of amendment Intention to bring to tax perceived gains as capital gains To hold gift as a case of transfer Mandatory computation of capital gains u/s 48 FVC minus COA/COI and expenditure Factually no FVC agreed, received, receivable, accrued or arisen FVC as per deeming fiction of s.50 C, CA, D Wisdom of s. 45 profits and gains accrual or arising no consideration moving in case of gift transfer without right to receive FVC in case of gift without accrual and profits & gains deeming fiction to apply only on some accrual Re. 1 possible substitution of Re. 1 Pradip N. Kapasi Chartered Accountant 11

  12. Gift by company - III Capital gains on gift by non-exempt persons money; FVC- COA = Nil shares; 50CA FVC COA land & building ; 50C- COA other assets; agreement value or actual receipts where FVC not determinable - s.50D Deduction for COA in all cases Case of Family settlement Independent of amendment in s.47(iii) Kay ARR Enterprises, 97 ITD 291 (Chennai) Pradip N. Kapasi Chartered Accountant 12

  13. Gift by company - IV Did s.47(iii) stated the obvious before amendment Case of over legislation Taxation in hands of Donee Receipt of gifts Recipient based tax under s. 56(2)(x) Receipt by Family Trust Effect of omitting of Proviso for ESOP Position for Gifts up to 31.03.2024 Bakhtavar Construction Co (P) Ltd 459 ITR 402 (Bom.) DP World (P) Ltd. 162 TTJ 0446 (Mum) Gujarat Infrapipes (P) Ltd. ,111 ITR (Trib) (S.N.) 47 [Ahm.]) Reddington, 430 ITR 298 (Mad.) Jai Trust, 160 taxmann.com 690 (Bom.) Jayneer Infrapower & Multiventures (P.) Ltd., 176 ITD 15 (Mum.) Deemed gift not exempted u/s 47(iii) M. Suseela, 125 ITD 253 (Visakhapatnam) Gagan Infraenergy Ltd., 32 NYPTTJ 562(Del.) Pradip N. Kapasi Chartered Accountant 13

  14. Slump sale I (S.50B) Exchange on allotment of shares amendment Bharat Bijlee Ltd, 365 ITR 258 (Bom.) Finance Act, 2021, w.e.f 01.04.2022 Non-compliant slump sales B.V. Reddy, 222 Taxman 309 (Karn.) Deed of conveyance for immovable property Mahabaleswara Enterprises, 218 Taxman 287 (Karn.) Negative Networth Zuari Industries Ltd., 108 TTJ 140 (Mum.) Summit Securities Ltd, 135 ITD 99 (SB) (Mum.) Payment for non-compete agreement Sangeeta Wig, 221 Taxman 159 (Mag.)(Delhi) Pradip N. Kapasi Chartered Accountant 14

  15. Slump sale-II Sale to holding or subsidiary company Section 47(iv) and (v) Transfer of depreciable asset and section 50 Akzo Noble India Ltd., 440 ITR 185 (Cal.) Amalgamation and Slump sale Investment Trust of India Ltd., 211 TTJ 777 (Chennai) Networth, STCL PVR Ltd., 211 TTJ 132 (Hyd.) Pradip N. Kapasi Chartered Accountant 15

  16. Slump sale-III Period of holding of unit Anamoly Equinox Solution (P.) Ltd., 393 ITR 566 (SC) Item wise valuations Vatsala Shenoy, 391 ITR 363 (SC) Transfer under an order of Court itatonline.org COA for successor Dharampal, 380 ITR 527 (Delhi) Pradip N. Kapasi Chartered Accountant 16

  17. Amalgamation -I (S.2(1B), 47(vi) & (vii)) Date of Amalgamation- Marshall & Sons, 223 ITR 809(SC) Effective date & Appointed date Consolidated Accounts Revised Audit Reports & TAR GN ,AS and Ind AS Inter se transactions - cancellation MAT & MAT credit Tax Credit 75% of All types of shareholders & allotment of types of shares Cross holdings and cancellations, 244 ITR 631(Del.) Subsequent changes in shareholdings Block assessments Pradip N. Kapasi Chartered Accountant 17

  18. Amalgamation -II Receipt of consideration partly in cash Gautam Sarabhai Trust, 173 ITR 216 (Guj.) M.C.T.M. Corpn.,231 ITR 524( Mad.) Composite considerations and consequences Partial exemption, computation of capital gains & COA of shares Stock-in-trade Royal Ind. 14 TC 22 Ramkumar Agarwal, 205 ITR 251(SC) Excess treated as business income Spencer & Co., 137 ITD 141 (TM)(Chd.) Application of s.28(iv) Deduction for expense interest post amalgamation/demerger Aamby Valley Ltd., 198 TTJ 662 (Delhi) Pradip N. Kapasi Chartered Accountant 18

  19. Amalgamation -III S.47(vi) v. 56(2)(via) Vertex Project LLP, 105 ITR (T) 105(Hyd.) Payment of interest Ofisade (P) Ltd., 29 TTJ (Ahd.) 80 Goodwill & Depreciation Smiffs Securities Ltd.(SC), Amendment of 2022 Position in hands of Amalgamated company Bad debts,155 ITR 152 (SC) Chapter VI-A deductions, cir. No. 15/563-IT(A-1) dt. 13.12.1983 Expenses of amalgamation, 219 ITR 639 Section 35 DD for spread over 5 years Write backs & s.41(1) Notice and assessments s.170A Mahagun Realtors Ltd, 443 ITR 194 (SC) Maruti Suzuki India Ltd, 416 ITR 613 (SC) Pradip N. Kapasi Chartered Accountant 19

  20. Demerger (S.2(19AA), 47(vib), (vic) & (vid)) Business , Unit & Undertaking Transfer at Book value Issue of 25% shares to Demerged company Continued holding of undertaking & assets no LIP No deemed dividend; Explanation V, s.2(22)( e) COA of shares of Resulting company Net book value of assets tfd. / Net worth of company C/f of Direct and Proportionate depreciation &losses Demerger v. Slump sale Avaya Global Connect Ltd., 122 TTJ 300( Mum.) S.2(22)(a) not applicable Grasim Industries Ltd., 222 TTJ 40(Mum.) Chartered Accountant Pradip N. Kapasi 20

  21. Company to LLP I (S.47(xiiib), 47A) Non-compliant conversion Celerity Power LLP, 197 TTJ 45 (Mum.) Tenancy rights General Radio &Appliances, 60 CC 1013(SC) Loan to partners of LLP clause (c ) Aravali Polymers LLP, 65 SOT 11 (Kol.) Pradip N. Kapasi Chartered Accountant 21

  22. Company to LLP II Consideration to shareholders, only cl(c) Capital contribution in LLP Share in profits of LLP Nature of prohibition under cl(c) One time (?) all time (?) 5 years(?) Related to conversion or independent Flowing from agreement or not For services to LLP To partners and not shareholders Remuneration and interest to partners of LLP Pradip N. Kapasi Chartered Accountant 22

  23. Company to LLP III Revaluation before conversion abenefit K. T. C. Automobile P. Ltd. 62 SOT 59 (Cochin) Alfa Inter-chem 20 ITR (T) 103 (Ahd) Joe Marcelinho Mathias 156 TTJ 777 (Panaji) Nayan L. Mepani 156 TTJ 768 (Mum) Transfer of reserves aperquisite Kyal Developers P. Ltd. 63 SOT 93 (Chennai) Pradip N. Kapasi Chartered Accountant 23

  24. Company to LLP IV Shareholders to share at least 50% or more cl. (d) Period of 5 years Profits - need not be losses Amongst erstwhile shareholders as a group 100% at the time of conversion Subsequent changes in constitution No exception for death, insolvency, gift, etc. Transfer of interest, only, in LLP Continuity for 5 years in-built Pradip N. Kapasi Chartered Accountant 24

  25. Company to LLP V Annual sales, turnover, gross receipts < Rs. 60 lakhs - cl. (e) Each of the 3 preceding previous years Sales, etc. of business Cir. No. 1 dt. 06.04.2011 Not average sales Year of conversion not included Cases of incorporation within 3 years Pradip N. Kapasi Chartered Accountant 25

  26. Company to LLP VI Prohibition on payment out of accumulated profits cl. (ea) Standing in the accounts of company Restriction for a period of 3 years Direct or indirect payment Negative balance of partners Withdrawal of partners Losses of LLP > Capital contribution Accumulated profits not defined Capital and revenue reserves Statutory and voluntary reserves Share Premium Account Bonus shares before conversion Pradip N. Kapasi Chartered Accountant 26

  27. Company to LLP VII Value of asset cl. (g) Book value or fair value Stock-in-trade, Investment & other assets Pradip N. Kapasi Chartered Accountant 27

  28. Chapter XXI of Companies Act, 2013 - I Sections 366 to 374 of the Act (part 1) Partnership firm, LLP, society, any business entity Formed under any other law Similar to part IX of Companies Act, 1956 Registration & Stamp duty Rama Sundari Ray, 2 Cal 1 Vali Pattabhi Rao, 60 CC 568 (AP) L.K.S Gold House Pvt Ltd., (2004) CC 896 (Mad.) Pradip N. Kapasi Chartered Accountant 28

  29. Chapter XXI of Companies Act, 2013-II S.45 of IT Act Texspin, 263 ITR 345 (Bom.) Unity Care, 103 ITD 53 (Bang) Baroda Refrigeration, 10 DTR (Ahd.) 4 Well pack 78 TTJ (Ahd.) 448 Rita mechanical works, 344 ITR 544 (P&H) S.45(4) and 9B Sachdeva and Sons, 4 SOT 413 (Asr.) Krishna Electrical, 4 SOT 143 (Delhi) Lincoln Pharma, 5 SOT 599 (Ahd.) Texspin, (supra) R.L. Kalathia & Co., 381 ITR 180 (Guj.) CADD Centre, 383 ITR 258 (Mad.) Pradip N. Kapasi Chartered Accountant 29

  30. Chapter XXI of Companies Act, 2013-III Implication of revaluation before conversion Few relevant aspects PAN, TAN, ROI, Depreciation, Loses POH, COA, Bad debt, S.43B, S.10AA, Ch. VI-A Amin Machinery P Ltd. 114 ITD 413 (Ahd.) Well pack , (supra) Possibility of claiming exemption u/s 47(xiii) Pradip N. Kapasi Chartered Accountant 30

  31. Firm and Proprietary to Company - I (S.47 (xiii) & (xiv)) Manner of transfer Itemised sale - business assignment - slump sale Max India Ltd., 319 ITR 68 Premier Automobile Ltd., 182 CTR 202 (Bom.) Non- compliant transfer S.45, 48, 50, 50B, 72 and 32 Time for issue of shares Prakash Electric Co., 407 ITR 340 (Karn.) Sale of assets to company Ana Labs, 371 ITR 295 (AP.) Oriental Dyeing And Finishing Mills,175 TTJ 430 (Chandigarh) Pradip N. Kapasi Chartered Accountant 31

  32. Firm and Proprietary to Company - II Succession of business K.H. Chambers, 55 ITR 674 (SC) Continuity of firm Transfer of one business only to company Need not be a new company Stock-in-trade and itemised sale Effect of Supreme Court decisions A.L.A Firm, 189 ITR 285 (SC) Sakthi Trading Co., 250 ITR 871 (SC) Period of carry forward of losses Pradip N. Kapasi Chartered Accountant 32

  33. Firm and Proprietary to Company III Bank account continued Revaluation before assignment Nayan L Mepani, 49 SOT 641 (Mum.) One of the businesses of proprietor Vikram Vishwanath, 149 ITD 517(Bang.) Date of allotment Loan and Current Account Minor partner Negative balance Pradip N. Kapasi Chartered Accountant 33

  34. Firm and Proprietary to Company - IV HUF partner Working partner with disproportionate capital Change in voting power within 50% Issue of preference shares & Convertible preference shares Continuous period Stamp duty PIB press release dated 05.08.1999 Circular No. 5/99 dated 19.05.1999 Veisting and transfer Pradip N. Kapasi Chartered Accountant 34

  35. Firm to LLP ; Non-compliant - I Benefit of statutory exemption u/s. 47(xiiib) not possible For company For shareholders Benefit of setoff of unabsorbed depreciation & losses u/s.72A(6A) not possible No future taxation immediate taxation, if any Actual cost, WDV and cost of acquisition Deeming fiction not to apply Pradip N. Kapasi Chartered Accountant 35

  36. Firm to LLP;Non-compliant - II S. 54 and 55 of LLP Act and Schedule 2 of LLP Act Assurances FM s speech & Memorandum Explaining Finance Bill, 2009 314 ITR 226 (St) Circular No. 5 dated 03.06.2010 324 ITR 293 (St) All partners of firm to be partners of LLP All assets and liabilities of firm to be of LLP Rights and obligations to be same No transfer of assets and liabilities Pradip N. Kapasi Chartered Accountant 36

  37. Firm to LLP ;Non-compliant - III No transfer on statutory vesting Cases decided under part IX of Companies Act, 1956 Valli Patabhirama Rao v. Shri Ramanuja Ginning & Rice Factory (P) Ltd. 60 CC 568 (1986) (AP) Ram Sundari Roy v. Syamendra Lal Roy 1 LR (1974) 2 (Cal) L. K. G. Gold Homes P. Ltd. (2004) CC 896 (Mad) Press Release dt. 05.08.1999 by CLB Circular No. 5 dt. 19.05.1999 u/s. 565 of Companies Act Companies Act v. LLP Act Passed to and vest v. transferred to and shall vest Pradip N. Kapasi Chartered Accountant 37

  38. Firm to LLP ;Non-compliant -IV Possible case for exemption from taxation Statutory vesting by operation of law No transfer to another person Texspin Eng. & Mfg. Works 263 ITR 345 (Bom) Well Pack Packaging 78 TTJ 448 (Ahd) Unicore Fin. Luxembourg 323 ITR 25 (AAR) Unique Care & Health 103 ITD 53 (Bang) Same status of firm Slump sale Madan Mohan Chandak 47 SOT 207 (Chennai) Pradip N. Kapasi Chartered Accountant 38

  39. Holding Subsidiary Holding (S.47(iv) & (v)) Lock-in-period of assets transferred Sale of shares to subsidiary Shahibaug Enterpirse, 320 ITR 695 (Guj.) Whole of share capital Anusandhan, 40 SOT 205 (Mum.) Transfer to Step-down subsidiary Emami Infrastructure, 91 taxmann.com 62 (Kol.) Non-compliant transfer and loss Kalindi Investment Ltd. 81 TTJ 196(Ahd.) Transfer of Know-how GSFC Ltd. 47 TTJ 279 (Ahd.) MAT and TP Mother Dairy Ltd., 141 TTJ 97 (Delhi) Business income v. Capital gains Navdeep Ind. P. Ltd., 49 TTJ 471 (Ahd.) Pradip N. Kapasi Chartered Accountant 39

  40. Liquidation (S.46) S.46(i) and(ii) a possible exit option COA of asset received on distribution- s.55(2)(b)(iii) & 49(1) Brahmi Investment (P.) Ltd., 286 ITR 66 (Guj.) T.R. Srinivasan, 36 SOT 312 (Chennai) Eligibility for reinvestment benefits Ruby Trading Co. (P) Ltd., 259 ITR 54(Raj.) Jaikrishan Vallabhdas, 231 ITR 108(Guj.) Asset for s.46 Year of taxation Distribution over years S. 47 v. s.46 Pradip N. Kapasi Chartered Accountant 40

  41. Deemed dividend I (S.2 (22)) Accumulated profits as per IT Act Depreciation and WDV Navnitlal C. Jhaveri, 80 ITR 582 (Bom.) In hands of registered shareholders only Namdhari Seeds Ltd , 224 Taxman 194 ( Karn.) Receipt in family settlement SKM Shree Shivkumar, 65 SOT 232 (Chennai) Provisions for taxation duties Vikram K Kothari, 218 Taxman 59 (Mag.)(All.) Loan to Beneficiary of trust Krupesh N Patel, 359 ITR 504 (Guj.) Inter-corporate deposit IFB Argo Industries, 42 taxmann.com 246(Kol.) Pradip N. Kapasi Chartered Accountant 41

  42. Deemed dividend- II Flow of funds Pravin Bhimshi Chheda, 228 Taxman 340 (Bom.) Undisclosed income Promod Dang, 105 TTJ 511 (Delhi) Issue of bonus preference shares to equity shareholders Briggs and Burton, 274 ITR 595 (AAR) Receipt of subsidy Rajasthan Wires (P.) Ltd, (2003) 1 SOT 648 (Jp) Forfeiture of shares Jaikisan Dadlani, 4 SOT 138( Mum.) Debit balance of P&L Account Ocsar Investment Ltd, 99 TTJ 1202 (Mum.) Pradip N. Kapasi Chartered Accountant 42

  43. Deemed dividend- III Shareholding of individual and HUF Kunal Organics (P) Ltd, 164 Taxman 169 (Ahd.) Redemption of preference shares S.2(22)(d) Uday K. Pradhan , 9 NYPTTJ 1861 (Mum) IT Park Ltd, 99 ITR (T) 633 (Bangalore) Net amount to be deemed dividend Sunil Kapoor 235 Taxman 279 (Madras) Buy-back of shares S.2(22)(d) Goldman Sachs (India) Securities (P.) Ltd, 70 taxmann.com 46 (Mum) NBFC Sindhu Holdings, 46 ITR (T) 771 (Delhi) More than one shareholder proportionate Puneet Bhagat, 157 ITD 353 (Delhi) Pradip N. Kapasi Chartered Accountant 43

  44. Deemed dividend- IV Share premium Shree Balaji Glass Manufacturing (P.) Ltd., 386 ITR 128 (Cal.) Mahesh Chandra, 234 Taxman 158 (Cal.) Indirect shareholder Rajeev Chandrashekar, 239 Taxman 216 (Karn.) Intermediate- subsidiary Farida Holdings (P), 243 Taxman 428 (Mad.) Current year s profit V. Damodaran, 2 Taxman 397(SC) Exempt capital gains Mahesh J. Sanzgiri, 1 Taxman 120(Bom.) Pradip N. Kapasi Chartered Accountant 44

  45. Case Studies Pradip N. Kapasi Chartered Accountant 45

  46. Case study- I; S.115 BAB Special incentive for specified manufacturing domestic companies Rate of tax at 15% + SC and EC Case of a company with two undertakings Demerger of the company Transfer of one undertaking to resulting company Compliance of conditions of s.115BAB(2) Benefit for a company set-up on or after 01.10.2019 Benefit not limited to new manufacturing unit Not conditioned by split-up or reconstruction Other conditions to be fulfilled Pradip N. Kapasi Chartered Accountant 46

  47. Case Study II; Firm to LLP Conversion under schedule II of LLP Act, 2008 Statutory vesting Non-compliance of s.47(xiiib) At book value or market value Impact under Income Tax Act Capital gains Stock-in-trade Unabsorbed business loss Unabsorbed depreciation Actual cost for LLP Cost of acquisition for LLP Celerity Power LLP, 197 TTJ (Mumbai) 45 Pradip N. Kapasi Chartered Accountant 47

  48. Case Study III ; Company to LLP Company to LLP under schedule III of LLP Act, 2008 Domestic company with two units Fixed assets at book value Rs. 2 cr + Rs. 4 cr = Rs. 6 cr Investment assets at book value Rs. 1 cr ( fair value Rs. 10 cr ) Difficulty in compliance of clause (ea) of s.47 (xiiib) Demerger & transfer of one unit to resulting company Conversion of Demerged company into LLP Effect and consequences Pradip N. Kapasi Chartered Accountant 48

  49. Case Study IV; Dividend Distribution Case of F.H.Co. with Subsidiary I.Co. Share capital with substantial reserves Investment in productive assets Liable to payment of tax on distribution of dividend Remittance of dividend and FEMA Set-up of a new 100% subsidiary I.Co. II of F.H.Co. Issue of shares at a premium Merger of both I.Co. Conversion of newly formed company into LLP Withdrawal of funds by F.H.Co. Pradip N. Kapasi Chartered Accountant 49

  50. Case Study V; Merger of companies Holding company with two 100% CHC subsidiaries One loss making company with negative net worth Another profit-making company with good net worth Merger of profit-making co. into loss making co. Satisfaction of s.2(1B) and s.79 of IT Act Impact of GAAR Disregarding merger Effect on losses Future tax benefit whether a benefit ? Pradip N. Kapasi Chartered Accountant 50

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