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Amendments proposed by Finance Bill, 2018 for companies under IBC, 2016

Published: Feb 13, 2018

THE Insolvency and Bankruptcy Code, 2016 (IBC) was introduced for revival of distressed companies i.e. companies not able to meet their financial obligations. The National Company Law Tribunal (NCLT) is the adjudicating authority for insolvency and bankruptcy cases. As per a recent media report over 2,400 cases have been filed before the NCLT since the enactment of the IBC.

On one hand, the IBC provides support to distressed companies and on the other hand it helps banks resolve the mounting non-performing assets (NPAs) problem. Banks have to take a significant haircut on loans advanced and this would result in a write-back of liability in the books of the company under IBC.

In recent times, some of the big corporate houses of India have shown keen interest in acquiring distressed companies under the IBC. The prospective investor has to submit a resolution plan in the NCLT for revival of the company. The resolution plan would capture how the liabilities of the financial creditors, operational creditors etc. would be discharged. In certain cases it is also proposed that financial creditors are issued equity shares or convertible instruments in consideration for the loan.

The said restructuring of loan poses certain tax challenges which would be a hindrance for the investor in reviving the distressed company. Some key issues relating to the restructuring are as under:

• Brought forward losses may not be available on change in shareholding of more than 49%

• Tax on write-back of liabilities under normal provisions of the Income-tax Act, 1961 (the Act)and Minimum Alternate Tax (MAT) provisions

• For the purpose of computing book profit for calculating MAT, a deduction is allowed in respect of loss brought forward or unabsorbed depreciation as per books whichever is lower

In this regard various investors and bankers made a representation before the government to provide some relaxation to companies under IBC. The Central Board of Direct Taxes vide its press release dated 6 January 2018 indicated its intention to provide relief to companies under IBC.

With a view to reduce hardships faced by companies under IBC, the Finance Bill 2018 has proposed amendments which addresses some of the above mentioned issues. The amendments proposed in the Finance Bill 2018 vis-à-vis the current provisions are tabulated as under:

Current Provisions

Amendments proposed by the Finance Bill, 2018

As per section 79 of the Act, tax business losses of a company in which public is not substantially interested would lapse on account of change in shareholding of more than 49%.

Tax business loss of companies under IBC would not lapse on account of change in shareholding beyond 49% provided the resolution plan is approved after giving a reasonable opportunity of being heard to the Jurisdictional Principle Commissioner or Commissioner

As per section 115JB of the Act for the purpose of computing book profit for calculating MAT a deduction is allowed in respect of loss brought forward or unabsorbed depreciation as per books whichever is lower.

For companies under IBC,deduction is allowed in respect of aggregate amount of loss brought forward and unabsorbed depreciation (as per books)for computing book profit under section 115JB of the Act.

The amendments proposed by the Finance Bill, 2018 will provide some relief to investors/companies under IBC. This is a step taken in the right direction and will help companies under IBC to revive in due course.

[Shripal Lakdawala is a Partner, Madhvi Jajoo is a Manager and Rahul Khaitan is a Deputy Managerat Deloitte Haskins and Sells LLP. The views expressed are strictly personal.]