Govt to provide tax relief to facilitate insolvency resolution

The government today said it would provide tax relief to facilitate insolvency resolution proceedings to help make stressed companies more attractive to potential buyers.
Amendments would be effected in the Income Tax Act in order to provide relief with respect to Minimum Alternate Tax (MAT) and carry forward of losses by companies undergoing insolvency proceedings.
The proposals, announced in the Budget for 2018-19, would be effective from April 1.
The move comes against the backdrop of rising number of cases coming up under the Insolvency and Bankruptcy Code (IBC), which took effect in December 2016.
According to the budget documents, the government has proposed that for computation of MAT the aggregate amount of unabsorbed depreciation and brought forward loss will be allowed to be reduced from the book profit in the case of companies where an application under the IBC has been admitted.

Besides, provisions in the Income Tax Act pertaining to carry forward and set off of losses in closely held companies would be relaxed for entities that are being dealt with under the Code.

Besides, an insolvency resolution professional would be allowed to verify the return of income in case of a company where an application under IBC, 2016 has been admitted.
More than 500 cases have already been admitted by the National Company Law Tribunal (NCLT) for resolution under the Code.
Advisory firm Corporate Professionals' Partner and Head (M&A and Insolvency Resolution Services) Manoj Kumar said the Budget has provided two major reliefs to boost insolvency resolutions and make stressed companies attractive to the acquirers.

Without the amendment in MAT provision, there could be huge MAT liabilities "due to notional gain out of haircut of loans and other liabilities as part of insolvency resolution", he said, adding that the same was informed by the CBDT through a notification in January.
"The amendment in the provisions relating to carry forward of losses even after change in control would make such companies attractive and a tool for tax planning for the profit making bidders," he noted.
MAT is levied on book profits and while computing the latter, there is provision for deduction in respect of the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account.

Consequently, where the loss brought forward or unabsorbed depreciation is nil, no deduction is allowed. This non-deduction is a barrier to rehabilitating companies seeking insolvency resolution, according to the budget document.
It is proposed to amend section 115JB of the Income Tax Act to provide that the aggregate amount of unabsorbed depreciation and loss brought forward (excluding unabsorbed depreciation) would be allowed to be reduced from the book profit. This would be only for companies where applications for insolvency resolution has been admitted, it added.
Further, a clarificatory amendment is also proposed to provide the provisions of section 115JB of the Act shall not be applicable and shall be deemed never to have been applicable to a foreign company subject to certain conditions.

"This amendment will take effect, retrospectively from 1st April, 2001 and will, accordingly, apply in relation to the assessment year 2001-02 and subsequent assessment years," the document said.