Income tax issues in IBC

-Vinod Kothari and Sikha Bansal | finserv@vinodkothari.com

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Analysing Current Issues in Liquidation under IBC & Future Reforms

– Sikha Bansal & Barsha Dikshit, Partner | resolution@vinodkothari.com

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Regulatory developments in   Insolvency and bankruptcy law in 2022 – a quick round-up

– Sikha Bansal, Partner & Barsha Dikshit, Partner | resolution@vinodkothari.com

IBC, in a very short span of its life, has undergone multifarious amendments. In 2022, there were no amendments in the Code, but almost all regulations were amended.   Majority of the amendments aimed at compressing the timelines. Few other amendments filled the gaps in law and provided clarity.

A quick snapshot of the key changes introduced in the CIRP regulations, Liquidation regulations, voluntary liquidation regulations and IP regulations, in the year 2022 is provided below. A brief discussion can also be referred to in our video on the same.

Key Amendments in IBBI (Insolvency Resolution Process For Corporate Persons) Regulations, 2016[1]

IBBI introduced several changes in the IRPCP Regulations vide Notifications dated 9th February, 2022, 14th June, 2022, 13th September, 202216th September, 2022, and 20th September, 2022. The amendments mostly focused on reducing the timeline of corporate insolvency resolution process, removing ambiguities, facilitating IPs thereby increasing value and realisation for stakeholders.

Resolution Professionals have been empowered to invite EOI for resolution plans for one or more assets of CD with approval of CoC,  if no resolution plan for CD is received within the given timeline. Resolution plan shall  also provide for the manner of pursuing  avoidance transaction application and distribution of realisation therefrom, if any. Timelines for certain activities during CIRP have been reduced.

Further, the regulations now also provide for payment of a regulatory fee at the rate of 0.25% of the realisable value  under approved resolution plan to the Board w.e.f 1st October, 2022 which will form part of CIRP cost.

Read more

Voluntary Liquidation under IBC

– Team Resolution | resolution@vinodkothari.com

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Distributive justice between workmen’s dues and secured creditors rights, w.r.t sec. 52 and 53 of the Code

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Accounting and Tax considerations in Going Concern Sale in Liquidation

By Devika Agrawal, Executive, Vinod Kothari and Company

devika@vinokothari.com

Background

The preamble to the Insolvency and Bankruptcy Code, 2016 (‘Code’) enlists value maximisation as one of its key objectives. In line with the said objective, the Code included ‘Going Concern Sale’ (‘GCS’) of the corporate debtor or the business of the corporate debtor in liquidation, vide the Amendment dated 22nd October, 2018[1] in the Liquidation Process Regulations, as one of the modes of sale. The underlying intent of introducing GCS in liquidation was to maximise value. It was expected that introduction of GCS in liquidation would give a breather and will be looked forward to by Corporate Debtors undergoing liquidation process, however, the statistics presented by the Quarterly Newsletter of the IBBI, for the quarter ended 30th September, 2021[2] give a different view as only six out of the 1419 orders for commencement of liquidation, were closed by a sale as a going concern under liquidation process. For an enhanced understanding of a GCS, our Articles on the topic can be referred to.[3]

One probable reason for lesser use of GCS may be tax considerations attached to such sale, (for example, questions concerning write back of liabilities, continuation of tax benefits, carry forward of losses and unabsorbed depreciation). Besides, given how different GCS in liquidation is from a conventional GCS and a GCS in CIRP, acquirers often face issues in accounting for assets acquired under a GCS in liquidation. Further, there remains uncertainty with respect to the accounting for and recording of transactions. In this article the author attempts to discuss accounting and tax issues in GCS in liquidation.

GCS in liquidation vs. conventional GCS vs. GCS in CIRP

As stated above, it is important to note that a GCS in liquidation is different from a conventional GCS and a GCS in CIRP by way of a resolution plan. The difference lies not just in the circumstances under which a GCS takes place in each of the said three modes but also the manner of treatment of assets, liabilities, profits, losses and share capital. The accounting and tax considerations depend on the same. When one talks about accounting and taxation, it becomes important to see what happens to each component when a transaction takes place.

A snapshot of the treatment of these components under different modes of sale specified above has been tabulated below.

Sl. NoBasisGCS in liquidationConventional GCSGCS by way of a Resolution Plan in CIRP
1.Transfer of liabilitiesAll liabilities are settled from the sale proceeds, in accordance with Section 53. Thereafter, pending liabilities, if any stand extinguished.Liabilities associated with the assets  are transferred to the acquirer.Liabilities are in the form of claims on the CD. They are paid off in a manner provided for in the Resolution Plan as approved by CoC.
2.Valuation of AssetsThe successful auction bidder pays a lump sum, without assigning values to individual assets.   In a GCS in liquidation, the value of assets may be  comparatively lower because it bears the burden of a failed resolution process.The buyer pays a lump sum, without assigning values to individual assets.The buyer pays a lump sum, without assigning values to individual assets.
3.Carry forward of lossesThe benefit of carry forward of losses has not been provided for the purpose of a GCS in liquidation. However, in certain rulings[4], the Hon’ble NCLT has allowed carry forward of losses, but again, subject to approval of IT Authorities. See discussion below.The Income Tax Act, 1961, does not allow carry forward and set off of losses when a business is sold as a going concern.Section 79(2)(c) of the Income Tax Act, provides an incentive to resolution applicants and has allowed the benefit of carry forward losses where a change in shareholding takes place pursuant to a resolution plan. 
4.ProfitsProfits during liquidation, if any, get subsumed in the liquidation estate, and distributed in accordance with section 53.Assets and liabilities are transferred on a particular date.As consented to between CoC and resolution applicant – see para 68 of Committee of Creditors of Essar Steel Limited v. Satish Kumar Gupta (SC).

At this juncture, having discussed the difference between the above mentioned modes of sale, it becomes important to discuss the accounting and taxation concerns which may have become the probable reasons for lesser use of GCS in Liquidation.

Accounting Concerns 

Preparation of books of accounts in liquidation – Obligation of the Liquidator or Auction purchaser?

Section 35 of the Code enlists the duties and powers of the liquidator appointed under the Code, which has to be read with the provisions of the Liquidation Regulations.

Liquidation is a terminal process and as such, it is a settled principle that during the liquidation process, the liquidator does not prepare any balance sheet or profit and loss account.  Instead, reg. 15(3) requires the liquidator to prepare a  receipt and payments account on a cash-basis. Hence, the question of any preparation of profit and loss account or balance sheet does not arise.

However, after a GCS is completed, sale consideration is received and a sale certificate is issued by the liquidator in favour of the auction purchaser, the corporate debtor is transferred to the auction purchaser. At this juncture, an important question that raises its head is, who would be responsible to prepare the books of accounts of the corporate debtor post the completion of a GCS – Liquidator or an Auction purchaser.

Once the sale is completed, it becomes the responsibility of the acquirer to take all the necessary steps viz-a-viz the corporate debtor. It was held in the case of Gaurav Jain Vs. Sanjay Gupta (Liquidator of Topworth Pipes & Tubes Pvt Ltd)[5]:  

“The Corporate Debtor survives, only the ownership is transferred by the Liquidator to the purchaser. All the rights, titles and interest in the Corporate Debtor including the legal entity is transferred to the purchaser. After the sale as a ‘going concern’, the purchaser will be carrying on the business of the corporate debtor.”

Thus, it may be concluded that once the corporate debtor is transferred to the acquirer, it should become the responsibility of the acquirer to prepare the books of accounts and annual financial statements of the Company. The Liquidator remains responsible only for the preparation of the receipts and payments account until the liquidation process is over.

However, the situation can get tricky when GCS takes place in the middle of a financial year. In such a situation, the following questions need to be answered for a smooth completion of GCS of the CD in liquidation.

  • What date should be considered as the date of sale?
  • Who prepares the financial statements for the entire financial year in which the sale takes place?

On the first question, one may note Schedule I of the Liquidation Regulations which states:

“On payment of the full amount, the sale shall stand completed, the liquidator shall execute a Certificate of sale or sale deed to transfer such assets and the assets shall be delivered to him in the manner specified in the terms of sale.”

Hence, ideally, the date on which sale certificate is issued should be taken as the date of sale.

On the second question, say, the sale takes place on 15th January, 2022. Should the acquirer prepare the financial statements for the entire FY 2021-22? Or, should the liquidator provide completed financial statements to the acquirer as on 31st March, 2022?

As indicated earlier, after sale, the responsibility to prepare financial statements, is that of the acquirer. Before sale, the liquidator does not prepare any balance sheet/profit and loss statement. Hence, the acquirer shall prepare financial statements from the period 15th January to 31st March, 2022 to close the accounts of the financial year.

Given how liabilities and assets are dealt with in a GCS in liquidation, the accounting shall be done as follows:

Asset Side:

In a GCS, the buyer pays a lump sum amount as sale consideration, without assigning values to individual assets. Therefore, the valuation of individual assets of the corporate debtor after completion of sale as a going concern shall be the responsibility of the acquirer. The acquirer puts a value on the assets of the corporate debtor, which is his bid price – it may, therefore, spread the purchase consideration paid by him to various assets of the corporate debtor as is commonly done in case of a slump sale.

Liabilities side:

All liabilities of the corporate debtor, including the share capital becomes a claim on the liquidation estate. As such the same are settled in terms of sec. 53 of the Code. Therefore, the question of carryover of any liabilities of the corporate debtor onto the books of the entity, acquired under GCS, does not arise. 

In the matter of Gaurav Jain v. Sanjay Gupta (Supra), it was held by the Hon’ble NCLT, Mumbai bench that,

“The Applicant shall not be responsible for any other claims / liabilities / obligations etc. payable by the corporate debtor as on this date to the Creditors or any other stakeholders including Government dues. All liabilities of the Corporate Debtor as on the date stands extinguished, as far as the Applicant is concerned.”

“Creditors of the corporate debtor which include creditors in any form or category including government departments shall stand extinguished qua the Applicant”

[Emphasis Supplied]

As it has been discussed, there is no case of remission or cessation of liability, as it becomes a claim on the liquidation estate and not the corporate debtor. Thus, the question of writing off liabilities does not arise, let alone the taxability of the same under section 41(1) (a) of the Income Tax Act, 1961.

Note that, in certain cases, by agreement, buyers may take over certain liabilities. In that case, the acquired liabilities too, will appear on the new balance sheet.

Share Capital:

As for the share capital of the Corporate Debtor, the existing shares shall stand cancelled without there being any payment to the shareholders, since such shareholders assume the nature of claimholders upon commencement of liquidation, who shall be paid  in terms of sec. 53 of the Code, only if proceeds from liquidation estate are that sufficient.

As regards recording of capital by the auction purchaser, the corporate debtor issues new shares to the extent of the share capital. It is understood that the consideration received from the acquirer will be split into share capital and liabilities, based on the capital structure that the acquirer decides.

Reference may be drawn from the IBBI Discussion paper dated 27th April, 2019,[6] which discusses the modalities of a GCS and says as follows;

“The consideration received from the sale will be split into share capital and liabilities, based on a capital structure that the acquirer decides. There will be an issuance of shares by the corporate debtor being sold to the extent of the share capital. The existing shares of the corporate debtor will not be transferred and shall be extinguished. The existing shareholders will become claimants front he liquidation proceeds under section 53 of the Code”

[Emphasis Supplied]

Tax Considerations

Tax issues under GCS would arise as a result of confusion surrounding the following:

  • Carry forward and set off of losses and unabsorbed depreciation – Section 115JB and Section 79(2)(c) of Income Tax Act, 1961.
  • Writing off Liabilities

Carry forward and set off of losses and unabsorbed depreciation – Section 115JB and Section 79(2)(c) of Income Tax Act, 1961

  • Carry Forward and set off of losses and unabsorbed depreciation – Section 115JB

Section 115JB of the Income Tax Act, 1961,[7] provides for levy of a minimum alternate tax (MAT) on the “book profits” of a company. For the purpose of computation of book profits, the said section allows a deduction in respect of the amount of loss brought forward or unabsorbed depreciation, whichever is less as per the books of accounts.

However, for companies whose application for CIRP under the Code has been admitted by the AA, a carve out has been provided. Accordingly, an aggregate of unabsorbed depreciation and loss brought forward shall be allowed to be reduced from the book profits, if any.

The Act provides that;

“(iih) the aggregate amount of unabsorbed depreciation and loss brought forward in case of a—

 (A) company, and its subsidiary and the subsidiary of such subsidiary, where, the Tribunal, on an application moved by the Central Government under section 241 of the Companies Act, 2013 (18 of 2013) has suspended the Board of Directors of such company and has appointed new directors who are nominated by the Central Government under section 242 of the said Act;

(B) company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016).”

[Emphasis supplied]

It can be clearly deduced from the provisions of the said section that the above mentioned carve out has been provided specifically for the purpose of a Resolution Plan during CIRP and not for a GCS in liquidation. 

  • Carry forward of losses – Section 79(2)(c)

Additionally, Section 79(2)(c) of the Income Tax Act, 1961 (‘Act’)[8], provides that the benefit carry forward of loss cannot be taken where there has been a change in shareholding. However, to provide an incentive to resolution applicants, the Income Tax Act has allowed the benefit of carry forward losses where such change in shareholding takes place pursuant to a resolution plan. 

However, no such exemption has been provided for the purpose of a GCS in liquidation. Hence, there exists uncertainty w.r.t the same. At this juncture, reliance may be drawn to certain NCLT rulings[9], wherein such benefit has been allowed by the Adjudicating Authority, subject to the approval by the concerned Income Tax Authorities under the relevant provisions of the Act.

Conclusion

While the process w.r.t. conduct of GCS has been explained by the Liquidation Regulations, the above discussed points have not been explicitly mentioned or ascribed in any guidance note or standards. Due to these uncertainties, these questions have often been subject to litigation, which leads to further delays. Hence, the need of the hour is a clear set of rules and standards, addressing the questions discussed above, as a result of which GCS is expected to gain further traction and deliver better results.


[1] The Insolvency and Bankruptcy Board of India (Liquidation Process) (Second Amendment) Regulations, 2018

[2] IBBI Quarterly Newsletter, July – September, 2021

[3] Enabling Going Concern sale in Liquidation – by Resolution Service Team, Vinod Kothari & Company

  Liquidation sale as a Going Concern – The concern is Dead, Long Live The Concern, authored by Vinod Kothari

  Concerns on Going Concern Sale under IBC – to be or not to be, authored by Parth Ved

  Sale of Legal Entity as an asset: A step towards value maximisation, authored by Megha Mittal

[4]Nitin Jain Liquidator of PSL Limited vs. Lucky Holding Private Limited

[5] Gaurav Jain (Supra)

[6] Discussion Paper dated 27th April, 2019

[7] Section 115JB of Income Tax Act, 1961

[8] Section 79 of the Income Tax Act, 1961

[9] Gaurav Jain (Supra)

Nitin Jain Liquidator of PSL Limited vs. Lucky Holding Private Limited

Takeaways from Budget 2022-23 – Fast Track Exit for Companies

By Shaivi Bhamaria – Associate, [shaivi@vinodkothari.com]

Introduction

Over the past few years the Government of India has been increasingly focusing on ‘ease of doing business’ by corporates, and has taken several initiatives towards the same, such as exemption to private companies from the requirement of minimum paid up capital by way of the Companies (Amendment) Act, 2015; establishment to the Central Registration Centre (‘CRC’) under section 396 of the Companies Act, 2013 (‘CA, 2013’) for providing speedy incorporation related services; launch of the integrated web form SPICe+ and integration of the MCA21 system with the CBDT for issue of PAN and TAN to a company incorporated using SPICe+; launch of  web based service R.U.N. (Reserve Unique Name) for reserving a name for a new company, etc..

However, the term ‘ease of doing business’ includes not only a seamless start to a business or making the journey less cumbersome, but also involves the ease of exit. While there are various modes of exit available to corporates,  such as winding up, summary liquidation, mergers and amalgamations etc[1], given that in voluntary modes of exit like striking off or voluntary liquidation under IBC, the company is either solvent enough to meet its liabilities or holds nil assets and liabilities, ideally, the closure processes is expected to be fast and simple, However, it has been observed that these voluntary modes have not been essentially ‘easy’ given the significant delays associated with them.

It is in the backdrop of such delays, the Union Budget, 2022-23[2] has proposed certain reforms, specifically for speeding up the striking off process under section 248 (2) of the Companies Act. Further, the Insolvency and Bankruptcy Board of India (‘IBBI’) has issued a Discussion Paper dated 1st February, 2022[3] proposing amendments in the IBBI (Voluntary Liquidation) Regulations, 2016, for ensuring a faster closure of voluntary liquidation processes.

In this write up, the author discusses the two sets of proposed reforms as mentioned above, and attempts to gauge their effectiveness at present and post implementation of the proposed amendments. Read more

Can companies donate out all their assets?

– Is sarvasva samarpan by companies valid?

Companies are creatures of their shareholders. If the company is a private company, the business and wealth of the company is the property of its shareholders. Technically, shareholders own the shares of the company, and certainly, a shareholder may donate his shares out. There are several iconic examples of such demonstrations of charitable intent, such as Mark Zuckerberg giving away 99% of his holdings in Facebook and Bill Gates donating 95% of his wealth to their charitable foundation and ultimately utilizing the same for charitable purposes.

However, can the shareholders resolve that the business and assets of the company that they own be donated out? Conceptually, there should be no difference between emptying out the assets of the company to the same charitable cause to which shareholders would have considered donating the shares. There are various judicial precedents[1] to refer to when it comes to checking the admissibility of a shareholder to transfer his shares by way of gift. However, in case of donation of shares, the company would remain up and running, and the charity will become simply the owner of the shares. However, if the business or assets of the company are donated out, that amounts to a mode of winding up, because the charity will not obviously run the business. So, can such donation be used as a mode of emptying the company out, so as to spend all its substratum, and once the company that empties out itself, it may just become a dud company, good for a strike off action u/s 248 (2) of the Companies Act, 2013 (‘Act’).

Surely enough, it will be unusual for the Memorandum of Association (‘MoA’) of the company to have the power to donate all its assets out. Normally, MoA will have charity as one of the incidental powers, but incidental powers can only be used in furtherance of the business or in conjunction thereof. There is no question of using incidental powers to donate the business out itself. So, can a corporate entity take such a drastic action, as to donate out all assets? And if yes, what will be the modality of doing the same? Also, what happens to the donee?

We have started with the donee being a charity. By way of argument, if one could donate all assets out to a charity, one can do it even to another entity. However, there may be taxation implications in that case, also discussed in this article.

Permissibility for a corporate person to make gifts

A doubt may arise as to whether a company, being a corporate person, can make a gift. Before answering that question, let us first understand the legality of making gifts. As per Section 25 of the Indian Contract Act, 1972, a contract without consideration is void. The same is also contemplated through the latin maxim ex nudo pacto nor oritur action meaning ‘a contract without consideration is void’. Here the adequacy of the consideration is not necessary and only the presence of the same suffice the requirement for constituting a valid contract.

However, Section 25 provides certain exceptions under which a contract is valid even if the same is not backed by consideration, which are –

  1. A written and registered document made on account of natural love and affection between the parties, i.e., a gift
  2. Compensation for voluntary services given by the recipient in the past
  3. Time barred debt

Explanation 1. —Nothing in this section shall affect the validity, as between the donor and donee, of any gift actually made.

Now given the fact that one can make gifts to the other, however, in the context of of a corporate person, the component of natural love and affection cannot be said to be present. The same was a question raised for determination before the ITAT – Mumbai bench in the matter of KDA Enterprises Pvt. Ltd., Mumbai vs Department Of Income Tax, ITA No.2662/M/2013, where both the donor as well as the donee were companies. In the matter of KDA Enterprises (supra), the AO was of the view that gifts can be given only by natural persons and therefore, a gift by a company is not tenable[2], against which, an appeal was preferred by the Company. However, the ITAT shifted the attention of the contended AO to the explanation u/s 25 of the Contract Act which states that the section does not have any effect on the validity of the gifts between donor and donee.

The AO, in the instant case, had further submitted that no gift deed has been executed, which is again, not a prerequisite for a valid gift. Here, one may refer to the definition of gift given under Section 122 of the Transfer of Property Act, 1822, which defines gift as –

“Gift is the transfer of certain existing moveable or immoveable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee.”

From the above definition, the three essential components of gift can be noted –

  1. Transfer or delivery of property
  2. Voluntary, i.e., with a donative intent
  3. Acceptance by donee

The aforementioned components of a gift may be present in case of a company as a donee and therefore, the contention of the AO that the transfer is not a gift on the basis of either of the grounds does not survive merit consideration.

In view of the above, the ITAT in the matter of KDA Enterprises (supra), has allowed the admissibility of gift by a company to a company and held that –

“… the companies are competent to receive and make gifts. All the three requirements of a valid gift, viz. identity of the donor, capacity/source and the genuineness stands proved in the case of the assessee. All the donor companies and the assessee are authorized by their Memorandum and Articles of Association for giving and receiving gifts. Proper resolutions in the Board Meeting have been passed by all the four companies for making the gift to the assessee and assessee has also accepted the said gifts by way of adopting a resolution in the meeting of Board of Directors.” [Emphasis supplied]

In another similar case of D.P. World Pvt. Ltd. vs. DCIT, ITA No. 3627, which related to the gift of shares made by a company to another, the view was upheld that a company can make a gift. The relevant extract is reproduced below –

“It would not be out of place to mention that a combined reading of Sec. 82 of the Companies Act, Section 5 and Section 122 of the TPA suggest that a company can validly transfer the shares by way of gift, provided where Articles of Association of the donor company permits the same. In case of donor is a foreign company, the relevant corporate/commercial law of the jurisdiction where the donor is based needs to be considered. In the light of the above discussion, we have no hesitation to hold that a company can gift shares and such transaction may appear as ‘strange’ transaction but cannot be treated as “non – genuine” transaction.” [Emphasis supplied]

Power of shareholders regarding disposal of all assets of a company

While the Act does permit the disposal of assets of a significant value in the company after obtaining shareholders’ approval, however, the shareholders’ authority cannot extend beyond the MoA of the company. Where the disposal of assets has the effect of impacting the going concern status of the company, the same cannot be done without express authorization for the same in the MoA of the company. This is evident from the rulings cited above as well, since in each of the said rulings, the company(ies) had express authority for making/ receiving gifts/donations through its/their MoA.

Points for consideration in case of disposal of entire assets of a company as a gift/donation

The above discussions clearly entail that a company is competent enough to make and/or receive gifts and/or donations. Having said that, consider the case of a company which wants to dispose off all its assets by way of donations/ gifts. The following points are significant to be considered while making the gift / donation:

  • Board’s / shareholder’s power to make charitable contributions u/s 181 of the Companies Act (‘Act’)

The Act recognizes the power of directors to make contributions to bona fide charitable and other funds u/s 181 of the Act, subject to the shareholders’ approval if the same exceeds 5% of the preceding three years’ average net profits.

  • Disposal of undertaking u/s 180(1) (a) of the Act

Section 180(1)(a) of the Act restricts the powers of the board with respect to disposal of substantial undertaking(s) of a company. It requires shareholders’ consent by way of a special resolution in order to dispose of the whole or substantially the whole of undertakings of the company.

For the purposes of the said sub-section, undertaking would mean an undertaking in which the company’s investments exceed 20% of its net worth or which generates income equal to 20% or more of the total income of the company. ‘Substantial’ part of undertaking would mean 20% or more of the undertaking of the company.

Further, undertaking has not been defined under the Act and its meaning can be taken from the provisions of the Income Tax Act, 1961 (‘IT Act’). The explanation to Section 2(19AA) of the IT Act, defines undertaking as –

“undertaking shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.”

 In a case where a company wishes to donate all its assets, it definitely calls for taking approval of the shareholders and in fact considering the disposal of the entire assets, the unanimous approval from the shareholders should rule out any defiance from a third party.

  • Disposal of assets without cleaning of liabilities may attract section 45 of the IBC and 447 of the Act

While there may be no bar on the disposal of all the assets of a company, thereby leading it to dissolution, the same can be done only after all the external liabilities have been paid. Where a company has disposed off all its assets for free, without settlement of the external liabilities, the same may amount as an undervalued transaction under Section 45  of the Insolvency and Bankruptcy Code, 2016 (‘IBC’), and may be rendered void and therefore, directed to be reversed.

Done with the intent to defraud the creditors, the same also attracts the provision of Section 447 of the Act and imposes mandatory imprisonment on the person guilty of such offence.

Impact of disposal of all assets of a company

The disposal of all the assets of the company leads to the loss of substratum of the company. In the matter of Mohan Lal & Anr vs Grain Chamber Ltd, 1968 SCR (2) 252, “Substratum of the Company is said to have disappeared when the object for which it was incorporated has substantially failed, or when it is impossible to carry on the business of the Company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities.” This, in turn, becomes a ‘just and equitable ground’ u/s 271 for winding up of the company.

In another matter of Rajan Naginds Doshi And Anr. vs British Burma Petroleum Co. Ltd, 1972 42 CompCas 197 Bom, the Bombay High Court held that –

“…. the company has ceased to carry on business, its substratum is gone, it has carried on ultra vires business and that the said business has been carried on by meddlers and that it will be just and equitable that the company should be wound up.”

However, as per Section 274(2) of the Act, a petition for winding up on the basis of just and equitable grounds can be dismissed by the Tribunal if it is of the opinion that a remedy other than winding up is available to the petitioners and seeking winding up of the company is unreasonable.

Tax implications on gifts/donations

Gifts and donations are not prohibited to be made by the companies, rather regulated and made taxable over and above the specified limits. The provisions of IT Act by way of certain clauses of Section 56, provides for taxability in case of transfer of shares without consideration, over and above a specified amount. Similarly, Section 80G of the IT Act also permits various donations and voluntary contributions.

  • No capital gains

Any transfer of a capital asset under a gift or to an irrevocable trust is an exempted transfer under section 47(iv) of the IT Act, and therefore, not taxable as capital gains. However, reference may be made of the ruling of Madras High Court in the matter of Principal Commissioner Of Income Tax vs M/S.Redington (India) Limited, T.C.A.Nos.590 & 591 of 2019, in which, on the facts of the case it was found that the transfer of shares, camouflaged in the nature of a gift made to its subsidiary, is actually an attempt of corporate restructuring and does not include the necessary elements of a gift (para 6).

The receipt/giving of such gifts/donations cannot be said to be related to the business of an assessee and therefore, cannot be made taxable as profits and gains of business or profession (refer cases above).

  • Chargeability as income from other sources

Section 56 of the IT Act admits taxability of certain gifts (both movable and immovable) without consideration beyond a specified limit. As per clause (x) of Section 56, gifts (cash/movable property/immovable property) is not taxable upto a certain threshold, being Rs. 50 lacs. Over and above the specified limit, gifts are taxable as ‘income from other sources’ except when the same qualifies as an exception under the proviso to the said clause. Here also, benefits can be availed by a trust or an organisation registered under Section 12A, 12AA or 12AB or u/s 10(23C) for charitable or religious purposes.

Concluding Remarks

Disposal of all assets of a company does not seem to be prohibited and can be sought as a good means of providing closure to the business, subject to the same being authorised through the charter documents and sanctioned through shareholders’ consent. However, the same should not be designed as a ‘tax avoidance’ exercise, since if the malicious intent becomes evident, it may attract payment of taxes along with fine and penalty and may even lead to prosecution based on the severity of the case.

[1] Manjula Finance Ltd., New Delhi vs Ito, Ward-16(2), New Delhi

Direct Media Distribution … vs Pr.Cit – Range -6, Mumbai

 

[2] The sin qua non of a gift is that the transaction is without any consideration and out of natural love and affection, as held in various judicial pronouncements. Since company is an artificial judicial person, so there cannot be any natural love & affection by a company or between the companies. Hence, a transaction of gift cannot be said to be valid or legally tenable between companies or where one of the parties is a company.”

Micro-consultative mode in liquidation: Will liquidations become more efficient?

[Sikha Bansal is Partner at Vinod Kothari & Company and can be reached at resolution@vinodkothari.com]

This article was first published on IndiaCorpLaw Blog and can be read here

IBBI recently came up with IBBI (Liquidation process) (Second Amendment) Regulations, 2021 (‘Amendment Regulations’) making certain important changes in the provisions pertaining to liquidation process under Insolvency and Bankruptcy Code, 2016 (‘IBC). One important amendment pertains to ‘Stakeholders Consultation Committee’ (‘SCC’) covered under regulation 31A of the IBBI (Liquidation Process) Regulations,2016 (‘Liquidation Regulations’).

The provisions relating to SCC were inserted vide IBBI (Liquidation Process) (Amendment) Regulations, 2019 (‘2019 Amendments’), read with Circular dated 26th August, 2019 (’IBBI Circular’). It required that the liquidator shall constitute an SCC (consisting of representatives of stakeholders entitled to distribution under section 53) within 60 days of the liquidation commencement, to advise the liquidator on the matters relating to sale under regulation 32.

While the obligation of the Liquidator to constitute the SCC within 60 days still remains the same, however, the role of SCC has been enlarged vide the Amendment Regulations, as discussed below –

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