CA Ashish Chadha has explained the provisions of Section 56(2)(x) of the Income-tax Act, 1961 and Rule 11UAC of the Income-tax Rules 1962 (which was inserted vide Notification No. 40/2020 dated 29th June 2020). He has pointed out the Rule provides relief from the levy of income-tax in case of resolution of stressed companies under specific scenarios, where the resolution is either initiated by the Central Government keeping the public interest in mind, i.e. the cases involving oppression and mismanagement, or in special cases like that of Yes Bank
The provisions of Section 56 of the Income-tax Act 1961 (‘the Act’) dealing with the incomes falling under the head ‘Income from Other Sources’ specify that every kind of income which is not to be excluded from the total income and is not chargeable under any other head specified under Section 14 of the Act, shall be chargeable to income-tax under this head. The provisions of sub-section (2) to Section 56 prescribe certain specific incomes which shall be charged to income-tax under this head.
In order to prevent the practice of receiving sum of money or property without consideration or for inadequate consideration, the Finance Act 2017 inserted a new clause (x) in Section 56(2) of the Act. The provisions of Section 56(2)(x) of the Act provide that receipt of sum of money or property by any person without consideration or for inadequate consideration in excess of INR 50,000 shall be chargeable to tax in the hands of the recipient under the head ‘Income from Other Sources’.
With regard to receipt of property other than immovable property, the provisions of sub-clause (c) under clause (x) to sub-section (2) of Section 56 of the Act specify that in a case where a person receives the propertyfrom any other person, on or after 1 April 2017:
► Without consideration, the fair market value of which exceeds INR 50,000, the whole of the fair market value shall be considered as its income;
► For a consideration less than the fair market value by an amount exceeding INR 50,000, the fair market value as exceeds such consideration shall be considered as its income.
The Explanation under clause (x) provides that the expression ‘fair market value’ of a property, other than an immovable property means the value determined in accordance with Rule 11UA of the Income-tax Rules, 1962.
Further, the proviso under clause (x) provides for certain exceptions, wherein the provisions of clause (x) to Section 56(2) of the Act shall not apply.
The Government, in the Finance Bill 2019, stated that the determination of fair market value based on the prescribed rules may result into genuine hardship in certain cases where the consideration for transfer of shares is approved by certain authorities and the person transferring the shares has no control over such determination. Accordingly, the Finance Act 2019 inserted a new clause (XI) under the proviso to Section 56(2)(x) of the Act. The relevant provisions read as under:
“Provided that this clause shall not apply to any sum of money or any property received—
(XI) from such class of persons and subject to such conditions, as may be prescribed.”
Introduction of Rule 11UAC
Now, in exercise of the powers conferred by the above clause (XI) of the proviso to Section 56(2)(x) of the Act, the Central Board of Direct Taxes (‘CBDT’) has inserted a new Rule 11UAC in the Income-tax Rules 1962, vide Notification No. 40/2020 issued on 29 June 2020. As per the said notification, such rules shall come into force from 1 April 2020 and shall be applicable for Assessment Year (‘AY’) 2020-21 and subsequent AYs.
The newly inserted Rule 11UAC prescribes the class of persons to which the provisions of clause (x) of sub-section (2) of Section 56 shall not apply. The provisions of this newly inserted rule have been encapsulated hereunder in brief:
► In a case where the shareholder receives unquoted shares, the provisions of Section 56(2)(x) of the Act shall not apply if all the following conditions are fulfilled:
(a)The Central Government has moved an application against a company before the National Company Law Tribunal (‘NCLT’) under Section 241 of the Companies Act 2013, which empowers the members of the company and the Central Government to make an application before the NCLT in situations where the company’s affairs are being conducted in a manner prejudicial to public interest, etc.;
(b) Based on the above application, the NCLT has suspended the Board of Directors of the company and appointed new Directors nominated by the Central Government under Section 242 of the Companies Act 2013;
(c) A reasonable opportunity of being heard is given to the jurisdictional Principal Commissioner/ Commissioner of Income-tax;
(d) The resolution plan is approved by the NCLT; and
(e) The shareholder receives unquoted shares of the company and its subsidiary and the subsidiary of its subsidiary pursuant to the resolution plan so approved. For the purposes of this clause, a company would be considered as a subsidiary of another company if such other company holds more than half in nominal value of the equity share capital of the company.
► In case of receipt of shares by an investor bank, the provisions of Section 56(2)(x) of the Act would not apply if all the following conditions are fulfilled:
(a) The shares are allotted under the Yes Bank Limited Reconstruction Scheme, 2020 (‘Yes Bank Scheme’) notified by the Ministry of Finance; and
(b) The shares are allotted at a price specified in the Yes Bank Scheme.
As per the Memorandum to Finance Bill 2019, the amendments empowering the CBDT were introduced to facilitate resolution of stressed companies. In line with the above intent, the CBDT has issued the notification giving relief from the levy of income-tax in case of resolution of stressed companies under specific scenarios described above. The CBDT has adopted a taxpayer-friendly approach towards the resolution of stressed companies, where the resolution has been either initiated by the Central Government keeping the public interest in mind, i.e. the cases involving oppression and mismanagement, or is a special case like that of Yes Bank Limited.
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