CA (LLB) Abhitan Mehta
India Inc. always has a long wish list bet always it ends up being _ a bucket list which rarely gets ticked. The sigh of relief since the last few budgets has not been any big positive announcement (on the income tax front) but, no negative announcements or retrospective levies for India Inc. Even in this Finance Bill the beneficial provisions for corporates are far and few and if one excludes the benefit linked to start-ups and public sector divestment there is hardly a benefit for India Inc. which is even worth mentioning.
The good thing is that we are moving towards a stable tax regime and not significantly tinkering tax laws in every budget, the number of amendments even this year are no less (more than 100 amendments), but the majority of amendments are in the procedural sections and do not impact the general computation of income (other than amendments in relation to taxation Charities). One key thing to be noted by the corporates is that, the time period to commence manufacturing to avail the concessional tax regime of 15% (new manufacturing company) has not been extended and therefore the manufacturing should commence on or before 31.3.2024 (Section 115BAB). Therefore, the corporates planning for expansion through a new company should adhere to the timeline – even the commencement of manufacturing for one of the units prior to 31.3.2024 should suffice.
-There is no restriction on subsequent capacity expansion.
Extension of date of incorporation for eligible start-up
Currently, Section 80-IAC provides for a profit-
linked deduction to -an eligible start-up for a period of 3 years out of 10 years. The condition inter alia require that the Company/LLP is – incorporated after 1 April 2016 but before 1 April 2023. In order to further promote the development of start-ups in India the Finance Bill proposes to extend the period of incorporation of eligible start-ups to 1st day of April 2024.
This is consecutively the third budget wherein the period has been extended by one year. However, for incorporation of start-up there is no relief vis-à-vis the other conditions for the claim of deduction like the cap on the turnover, strict deployment of funds (e.g. the start-up cannot buy a car), etc.
The key difference in Section 80-IAC and Section 115BAB is that Section 80-IAC only requires the start-up should be incorporated prior to 1.4.2024, whereas in section 115BAB requires the company to commencemece the manufacturing prior to 31.3.2024. Therefore, for a start-up even if operations are commenced after 31.3.2024, the start-up should be eligible to claim deduction u/s 80-IAC.
Startups – Carry Forward and Set Off of Losses
Section 79 of the Income Tax Act restricts the carry forward of losses of a company in which public are not substantially interested (primarily unlisted companies which are not subsidiaries of a listed company) in case of change of more than 49% of the shareholding. The comparison of the shareholding is of the shareholding on the last day of the previous year in which the loss is incurred and the shareholding on the last day of the previous year in which the loss is intended to be set off. The objective of the section is to discourage the transfer of companies with the objective of taking the benefit of carried forward losses.
In case of start-ups the growth is primarily funded through the issue of fresh equity shares to investors, which may result in change of more than 49% of the shareholding and consequently would trigger the lapse of carry forward loss. Considering the hardships faced by the start-up a concession was granted to the eligible start- ups subject to the following conditions :
- All the shareholders of the company on the last day of the year of loss, continue to hold those shares on the last day of the previous year in the year of set off.
- The loss should have been incurred during the period of seven years beginning from the year of incorporation.
The Finance Bill proposes to increase the time period for loss of eligible start-ups to be considered for relaxation, from seven years to ten years from the date of incorporation. The reasons specified in the explanatory memorandum is to align the period in Section 79 with the period of benfit in Section 80-IAC
Practically, it is very difficult almost impossible to expect that all the shareholders of the start- up to continue without even taking a partial exit at the time of subsequent rounds of fund raising. Also, start-ups have a practice of giving significant employee remuneration through ESOPs; to expect all the employees to whom shares have been allotted, not to liquidate at the time of subsequent funding rounds or at the time of their exit from the company is an unreal expectation. Sometimes even the investors in the subsequent funding round, would prefer cleaning up of the cap table and would like to give exit to the present minority investors.
There may be ways and means to achieve technical compliance of the section and still achieve the commercial objective of dilution for example, if the shares of the start-up company are owned through an AIF, the unit holders can change by purchasing and selling units of the AIF but the AIF (trustees of the AIF) would continue to be the shareholders of the start-up. Similarly, start-up may issue bonus shares which are then sold by the founders and investors, so that the original shares continue to be with the founders and investors as required by the section. However, in the GAAR era, a challenge from the tax authorities on any structure entailing tax benefit cannot be ruled out.
To summarise, there is no downside of the proposed amendment but one seriously doubts if there is any real upside of the so called relaxation granted to the start up. It would have been more appropriate if the condition of continuation of shareholding is applied only to the shareholding of the to the founders of the start-up instead of applying it to all the shareholders.
Amortization of preliminary expenses
Section 35D of the Income Tax Act provides for amortization of certain preliminary expenses which are incurred in connection with extension of undertaking or setting up of a new unit. This includes expenditure in connection with preparation of feasibility report, project report, market survey etc.
The section inter alia provides that the work in connection with the preparation of feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services need to be carried out
Benefits to corporate taxpayers by Finance Bill, 2023 either by the assessee himself or by a concern which is approved by CBDT.
The Finance Bill proposes to remove the requirement of the said activities being done by assessee or approved concern. Instead, it is now proposed that the assessee shall furnish a statement containing the particulars of such expenditure within the prescribed period to the prescribed Income Tax Authority in the prescribed form and manner i.e. now it would be more of a reporting requirement to the tax officer for the claim of expense and the assessee would no longer be required to incur the expense through an approved concern.
It is certainly a welcome change, however, one fails to understand the need of filing a separate form, it would have been better if the requisite details are captured in the ITR and/or the tax audit report, instead of a separate reporting requirement.
Provisions related to business reorganisation
Where business reorganizations (merger or demerger) are approved with the appointed date covering the period for which income tax return is already filed and the timeline for filing revised return is elapsed, there were no enabling provisions in the Act to furnish a return of income duly giving effect to the business reorganizations.
Finance Act 2022 introduced Section 170A to provide that in case of business reorganisation, the successor shall file a modified return of income within a period of 6 months from the end of the month in which order approving the business reorganisation is issued, in respect of the period starting from the appointed date till the effective date of the order.
Finance Act 2022 did not provide for modification of return filed by the predecessor entity. Finance Bill proposes to amend the provisions of Section 170A to substitute the word “successor” with “entity” in order to enable modification of return filed by the predecessor entity.
Even now, the power to file the modified return is only with the successor and not with the predecessor. The only amendment is the successor now has the power to file a modified return for both the entities (successor and predecessor). This would work well in case of a merger as the amalgamating company would cease to exist and the successor has to file modified return for both entities.
However, in the case of a demerger, the problem would persist, as the demerged company does not have the power to file the modified return, only the resulting company (successor) has the power to file the modified return. Though the power of the successor is wide enough to file a revised return for both entities, a successor may not be comfortable in filing a revised return for the demerged company, for a host of reasons including that the successor is not aware of other operations of the demerged company and why should he take the responsibility for filing a tax return for the demerged company. Hopefully, this is a drafting issue and would be clarified.
Further, Finance Act 2022 did not provide for any procedure/ mechanism to be adopted by the Assessing for assessment/ reassessment once the modified return is submitted. Finance Bill proposes to amend of Section 170A to provide that where the assessment or reassessment proceedings for an Assessment Year relevant to a previous year to which the order in respect of the business reorganization applies:
- Have been completed on date of modified return – The Assessing officer shall pass order modifying the total income basis the modified return.
- Are pending as on the date of the modified return – The Assessing officer shall pass order considering the modified return.
Though the amendments help in providing further clarity on the implementation of business restructuring, couple of points which continue to remain vague are: (i) what if there is no pending proceeding (and no proceedings are completed), whether new assessment proceedings can be initiated based on return on the modified return
? (ii) What would be the power of the AO when he has to take into account the modified return, can he propose new additions/disallowances or he has to accept the modified return as is
? – this does not seem to be the intention, but
appropriate amendments would be required in the language of the proposed amendment to clarify the issues.
Facilitating strategic disinvestment
Section 72A allows carry forward and set off accumulated loss and unabsorbed depreciation allowance arising from the amalgamation or demerger. Carry forward of loss in the case of de-merger does not have any major conditions. However, carry forward of loss in case of merger has a host of conditions and is also primarily available in case of merger of industrial undertaking. To facilitate strategic divestment and without the lapse of carry forward loss, Finance Act, 2021 extended the benefit of carry forward of loss u/s 72A to the cases of strategic divestment.
The strategic divestment was defined as reduction in shareholding of Central Government and State Government below 51% with transfer of control to the buyer. The Finance Bill proposes to expand the definition of strategic divestment to cover divestment of shareholding even by public sector company.
Section 72AA deals with carry forward of loss in case of merger of banks. The scope
of the Section has been expanded to include the amalgamation of one or more banking company with any banking institution or company subsequent to strategic disinvestment provided the amalgamation is carried out within five years from the year of strategic disinvestment.
The Sections have a very niche applicability – divestments by the Government. However, one can only wonder about the disparity in taxation – we have Section 79 which restricts carry forward of loss in case of change in majority shareholding and we have provisions for strategic divestment wherein the carry forward of loss is explicitly allowed.
The budget is consistent with the Governments policy to move towards away investment-linked deductions, discontinue profit linked deduction to corporates and to try and plug any tax benefit or relief granted by the courts to the taxpayers which according to them is not justified. The draconian amendment of the budget according to the author is the amendment to Section 28(iv) wherein the Supreme Court ruling in the case of Commissioner v. Mahindra And Mahindra Ltd.1 has been overruled to expand the scope of Section 28(iv) to even include a benefit or perquisite in cash which coupled with the requirement of TDS u/s 194R is a nightmare. The amendment would give rise to a host of issues – including implications on waiver of loans, write-off of bad debt, discounts (not covered by the circular) etc. One often wonders whether the zeal to tax the last dime is worth the hardship caused to genuine taxpayers in carrying out their routine business transactions.
1.  404 ITR 1 (SC)