(Bonus & dividend stripping, reduction in goodwill, definition of slump sale)

  1. Dividend and bonus stripping transaction in securities and units 
    EXISTING PROVISION 
    :- Presently as per Sec. 94 of the act where the owner of any securities
    (securities includes stocks and shares) sells or transfers those securities, and buys back or reacquires the securities (original securities or similar securities, securities shall be deemed to be similar if they entitle their holders to the same rights against the same persons as to capital and interest and the same remedies for the enforcement of those rights, notwithstanding any difference in the total nominal amounts of the respective securities), then, if the result of the transaction is that any interest (interest includes a dividend) becoming payable in respect of the securities is receivable otherwise than by the owner, the interest payable as aforesaid shall, whether it would or would not have been chargeable to income-tax apart from the provisions of Sec. 94(1), be deemed, for all the purposes of this Act, to be the income of the owner and not to be the income of any other person.

    If the result of any transaction relating to such securities or the income thereof is that, in respect of such securities within such year, either no income is received by him or the income received by him is less than the sum to which the income would have amounted if the income from such securities had accrued from day to day and been apportioned accordingly, then the income from such securities for such year shall be deemed to be the income of such person.

    If it is proved to the satisfaction of the Assessing Officer that there has been no avoidance of income-tax, or that the avoidance of income-tax was exceptional and not systematic and that there was not in his case in any of the three preceding years any avoidance of income-tax by a transaction of the such nature, then this provision will not be attracted.

Section 94(7) states that, “Where—

  1. any person buys or acquires any securities or unit within a period of three months prior to the record date;

  2. such person sells or transfers—

    1. such securities within a period of three months after such date; or

    2. such unit within a period of nine months after such date;

  3. the dividend or income on such securities or unit received or receivable by such person is exempt,

then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax”.

Section 94(8) states that, “Where—

  1. any person buys or acquires any units within a period of three months prior to the record date;

  2. such person is allotted additional units without any payment on the basis of holding of such units on such date;

  3. such person sells or transfers all or any of the units referred to in clause (a) within a period of nine months after such date, while continuing to hold all or any of the additional units referred to in clause (b),

then, the loss, if any, arising to him on account of such purchase and sale of all or any of such units shall be ignored for the purposes of computing his income chargeable to tax and notwithstanding anything contained in any other provision of this Act, the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such additional units referred to in clause (b) as are held by him on the date of such sale or transfer”.

As per Explanation ‘(aa) “record date” means such date as may be fixed by—

  1. a company for the purposes of entitlement of the holder of the securities to receive dividend; or

  2. a Mutual Fund or the Administrator of the specified undertaking or the specified company as referred to in the Explanation to clause (35) of section 10, for the purposes of entitlement of the holder of the units to receive income, or additional unit without any consideration, as the case may be’.

As per explanation (d) “unit” shall have the meaning assigned to it in clause (b) of the Explanation to section 115AB. (i.e. “unit” means unit of a mutual fund specified under clause (23D) of section 10 or of the Unit Trust of India),

Sec. 10(23D) states unit of mutual fund as :-

“(i) a Mutual Fund registered under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulations made thereunder;

 (ii) such other Mutual Fund set up by a public sector bank or a public financial institution or authorised by the Reserve Bank of India and subject to such conditions as the Central Government may, by notification in the Official Gazette, specify in this behalf.

Explanation.—For the purposes of this clause,—

  1. the expression “public sector bank” means the State Bank of India constituted under the State Bank of India Act, 1955, a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959, a corresponding new Bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 and a bank included in the category “other public sector banks” by the Reserve Bank of India;

  2. the expression “public financial institution” shall have the meaning assigned to it in section 4A of the Companies Act, 1956;

  3. the expression “Securities and Exchange Board of India” shall have the meaning assigned to it in clause (a) of sub-section
    (1) of section 2 of the Securities and Exchange Board of India Act, 1992”;

PROPOSED AMENDMENT going to be applicable from A.Y. 23-24:-

  1. Existing provisions of Sec. 94(8) were applicable only to units of mutual funds, now it is proposed to extend to securities (stocks and shares) also.

  2. It is proposed to substitute Explanation “aa”, to specify “record date” means such date as may be fixed by—

    1. a company;

    2. a Mutual Fund or the Administrator of the specified undertaking or the specified company referred to in the Explanation to clause (35) of section 10; or

    3. a business trust defined in clause (13A) of section 2; or

    4. an Alternative Investment Fund defined in clause (b) of sub- regulation (1) of regulation 2 of the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992,

    for the purposes of entitlement of the holder of the securities or units, as the case may be, to receive dividend, income, or additional securities or units without any consideration, as the case may be’,

  3. It is proposed to substitute clause (d), the following clause shall be substituted, namely:––

‘(d) “unit” shall mean,––

  1. a unit of a business trust defined in clause (13A) of section 2;

  2. a unit defined in clause (b) of the Explanation to section 115AB; or

  3. beneficial interest of an investor in an Alternative Investment Fund, defined in clause (b) of sub-regulation
    (1) of regulation 2 of the

Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992, and shall include shares or partnership interests.

EFFECT OF ABOVE PROPOSALS

Earlier Sec. 94(8) was applicable to only units of mutual fund specified U/s 10(23D) or units of Unit Trust of India, now it is proposed that Sec. 94(8) shall be applicable to securities (stocks and shares) also.

The existing provisions of Sec. 94(8) of the Act do not apply to bonus stripping undertaken in case of securities, now the proposed amendment seeks to include such bonus stripping also.

Sec. 94(8) also proposes to be applicable to units of Infrastructure Investment Trust (InvIT) or Real Estate Investment Trust (REIT) or Alternative Investment Funds (AIFs) by amending definition of units.

ITAT Bangalore in the case of DCIT v. Shri B.G. Mahesh in ITA No. 450/Bang/2012 and CO No. 99/Bang/2012 and ITAT Bangalore in the case of Lalit Kumar Raichur v. ITO, Bangalore on 15-3-2017 vide ITA No. 2100/Bang/2016 (AY 2009-10) held that provision of Sec. 94(8) is not applicable to bonus stripping transactions in securities, it is applicable only to units. Now these judgments are overruled by this proposed amendment.

The proposed amendment to provisions of Sec. 94(7) of the Act, pertaining to dividend stripping, are also going to be made applicable to the units of new pooled investment vehicles such as InvIT or REIT or AIFs.

Since dividend income has already become taxable in the hands of recipient w.e.f. A.Y. 2021-22 and Section 115-O has been abolished, therefore transactions where clause (c) of Sec. 94(7) does not attract, loss equal to amount of dividend shall not be denied.

It is further proposed to substitute clause (aa) of the Explanation to the said section, so as to substitute the definition of the expression “record date” to mean such date as may be fixed by a company, or a Mutual Fund or the Administrator of the specified undertaking or the specified company referred to in the Explanation to clause (35) of section 10; or a business trust as defined in clause (13A) of section 2; or an Alternative Investment Fund as defined in clause (b) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992, for the purposes of entitlement of the holder of the securities or units, as the case may be, to receive dividend, income, or additional securities or unit without any consideration, as the case may be.

  1. Withdrawal of concessional rate of taxation on dividend income under section 115BBD

EXISTING PROVISIONS :-

Sec. 115BBD of the act states, “(1) Where the total income of an assessee, being an Indian company, includes any income by way of dividends declared, distributed or paid by a specified foreign company, the income-tax payable shall be the aggregate of—

  1. the amount of income-tax calculated on the income by way of such dividends, at the rate of fifteen per cent; and

  2. the amount of income-tax with which the assessee would have been chargeable had its total income been reduced by the aforesaid income by way of dividends.

(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing its income by way of dividends referred to in sub-section (1).”

PROPOSED AMENDMENT A.Y. 2023-24 :-

To amend section 115BBD of the Income-tax Act relating to tax on certain dividends received from foreign companies.

The said section, inter-alia, provides that in case of an Indian company whose total income includes any income by way of dividends declared, distributed or paid by a foreign company, in which the said Indian company holds twenty-six per cent. or more in nominal value of the equity share capital, such dividend income shall be taxed at the rate of fifteen per cent.

It is proposed to insert a new sub-section (4) to provide that the provisions of this section shall not apply to any assessment year beginning on or after the 1st day of April, 2023 i.e. from A.Y. 2023-24.

This amendment will take effect from 1st April, 2023 and will, accordingly, apply in relation to the assessment year 2023-2024 and subsequent assessment years

EFFECT OF ABOVE PROPOSAL

Section 115BBD of the Act provides for a concessional rate of tax of 15 % on the dividend income received by an Indian company from a foreign company in which the said Indian company holds 26 % or more in nominal value of equity shares (specified foreign company).

This rate was aligned to the rate of tax provided under section 115-O of the Act.

Finance Act, 2020 abolished the dividend distribution tax provided in section 115-O to, inter-alia, provide that dividend shall be taxed in the hands of the shareholder at applicable rates plus surcharge and cess.

In order to provide parity in the tax treatment in case of dividends received by Indian companies from specified foreign companies vis a vis dividend received from domestic companies, it is proposed to amend section 115BBD of the Act to provide that the provisions of this section shall not apply to any assessment year beginning on or after the 1st day of April, 2023

Therefore now dividend received by Indian companies from specified foreign companies will not be entitled at concessional rate of 15%. However the said dividend is already deductible U/s 80M.

Sec. 80M of the act states as under :-

“(1) Where the gross total income of a domestic company in any previous year includes any income by way of dividends from any other domestic company or a foreign company or a business trust, there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of such domestic company, a deduction of an amount equal to so much of the amount of income by way of dividends received from such other domestic company or foreign company or business trust as does not exceed the amount of dividend distributed by it on or before the due date.

(2) Where any deduction, in respect of the amount of dividend distributed by the domestic company, has been allowed under sub-section (1) in any previous year, no deduction shall be allowed in respect of such amount in any other previous year.

Explanation.—For the purposes of this section, the expression “due date” means the date one month prior to the date for furnishing the return of income under sub-section (1) of section 139.]”.

  1. Reduction of Goodwill from block of assets to be considered as ‘transfer’

EXISTING PROVISION :-

Special provision for computation of capital gains in case of depreciable assets.

Sec. 50- “Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications :—

  1. where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely :—

    1. expenditure incurred wholly and exclusively in connection with such transfer or transfers;

    2. the written down value of the block of assets at the beginning of the previous year; and

    3. the actual cost of any asset falling within the block of assets acquired during the previous year,

    such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets;

  2. where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short- term capital assets:

[Provided that in a case where goodwill of a business or profession forms part of a block of asset for the assessment year beginning on the 1st day of April, 2020 and depreciation thereon has been obtained by the assessee under the Act, the written down value of that block of asset and short term capital gain, if any, shall be determined in such manner as may be prescribed.]” this proviso was inserted from 1-4-2021 i.e. from A.Y. 2021-22.

From the assessment year 2021-2022, goodwill of a business or profession is not considered as a depreciable asset and there would not be any depreciation on goodwill of a business or profession in any situation.

In case where goodwill is purchased by an assessee, the purchase price of the goodwill will continue to be considered as cost of acquisition for the purpose of computation of capital gains under section 48 of the Act subject to the condition that in case depreciation was obtained by the assessee in relation to such goodwill prior to the assessment year 2021-22, then the depreciation so obtained by the assessee shall be reduced from the amount of the purchase price of the goodwill.

CBDT had issued rule 8AC vide notification No. 77/2021 dt. 7-7-2021, sub-rule 3 to 5 of which states:-

“(3) Where the reduction under sub-item (B) of item (ii) of sub-clause (c) of clause (6) of section 43, for the previous year relevant to the assessment year commencing on the 1st day of April, 2021, exceeds the aggregate of the following amounts, namely:-

  1. the written down value of the block of assets at the beginning of the previous year relevant to the assessment year commencing on the 1 st day of April, 2021 without giving effect to reduction under sub-item (B) of item (ii) of sub- clause (c) of clause (6) of section 43; and

  2. the actual cost of any asset falling within the block of assets “intangible”, other than goodwill, acquired during the previous year relevant to the assessment year commencing on the 1st day of April, 2021, such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets.

(4) Without prejudice to the provisions of sub- rule (3) and section 55, where the goodwill of the business or profession was the only asset in the block of asset “intangible” for which depreciation was obtained by the assessee in the assessment year beginning on the 1st day of April, 2020, and the block of asset ceases to exist on account of there being no further asset acquired during the previous year relevant to the assessment year commencing on the 1st day of April, 2021 in that block, there will not be any capital gains or loss on account of the block of asset having ceased to exist.

(5) The capital gains or loss on transfer of goodwill, during the previous years relevant to the assessment year 2021-22 or subsequent assessment years, shall be determined in accordance with the provisions of section 48, section 49 and clause (a) of sub-section (2) of section 55.”

PROPOSED AMENDMENT going to be applicable w.r.e.f. A.Y. 2021-22 :-

When the amendment was carried out through the Finance Act 2021, consequential amendment was carried out in section 50 of the Act by insertion of a proviso to clause (2) of that section.

A further consequential amendment required is being proposed now.

Accordingly, it is proposed to clarify that for the purposes of section 50 of the Act, reduction of the amount of goodwill of a business or profession, from the block of asset in accordance with sub item (B) of item (ii) of sub-clause (c) of clause (6) of section 43, shall be deemed to be transfer.

Since the amendment to the effect that goodwill of a business or profession is not a depreciable asset has been made applicable from assessment year 2021-2022 the above amendment will take effect retrospectively from 1st April 2021 and will accordingly apply in relation to the assessment year 2021-22 and subsequent assessment years.

  1. PROVISIONS RELATING TO SLUMP SALE

EXISTING PROVISIONS

Sec. 2(42C) “slump sale” means the transfer of one or more [undertaking, by any means,] for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.

Explanation 1.—For the purposes of this clause, “undertaking” shall have the meaning assigned to it in Explanation 1 to clause (19AA).

Explanation 2.—For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities.]

[Explanation 3.—For the purposes of this clause, “transfer” shall have the meaning assigned to it in clause (47);]

PROPOSED AMENDMENT w.r.e.f. A.Y. 2021- 22 :-

Slump sale is defined in clause (42C) of section 2 of the Act, as the transfer of one or more undertaking, by any means, for a lump sum consideration without values being assigned to individual assets and liabilities in such sales.

Vide the Finance Act, 2021, the definition of “slump sale” was amended to expand its scope to cover all forms of transfer under slump sale.

However, in the last sentence of the definition of slump sale there is reference to the word “sales”, now it is proposed to substitute the word, ‘sales’, with the word, ‘transfer’, in Sec. 2(42C) w.r.e.f. A.Y. 2021-22.

EFFECT OF ABOVE PROPOSAL :- Sales word does not include transfer, but transfer includes sales and exchange etc. as defined U/s 2(47), therefore transfer word is substituted in place of the word sale.

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