Our honourable Finance Minister presented the budget for 2018 on 1st Feb 2018. We have listed some noteworthy amendments which has an effect on corporate restructuring viz. mergers, amalgamations, demergers and acquisitions.

Section Excerpts of amendments to sections Effective from which date Comments/Reason
Sec 2(22) Inclusion in the meaning of accumulated profits.

For the purpose of deemed dividend, the meaning of accumulated profits is amended to include the following:

In section 2 in clause (22), after Explanation 2, the following Explanation shall be inserted, namely:

“Explanation 2A.–– In the case of an amalgamated company, the accumulated profits, whether capitalised or not, or loss, as the case may be, shall be increased by the accumulated profits, whether capitalised or not, of the amalgamating company on the date of amalgamation.”;

1st April 2018 i.e. from Assessment Year 2018-19 and subsequent assessment years. Newly inserted clause in order to charge to tax, the amount distributed to shareholders shall also include profit and loss of amalgamating companies.
Analysis/Reason

There is no clarity whether this will be applicable only for reduction of capital due allotment of preference share or reduction in equity capital or accounting accumulated profits as capital reserve as part of amalgamation i.e. clause (d) of section 2(22) or to all clauses. However, as per latest accounting standard, accounting as capital reserve is allowed in case of amalgamation of companies which is not within sane control.

However as per memorandum explanation the reason being that Instances have come to light whereby companies are resorting to abusive arrangements in order to escape liability of paying tax on distributed profits. Under such arrangements, companies with large accumulated profits adopt the amalgamation route to reduce capital and circumvent the provisions of sub-clause (d) of clause (22) of section 2 of the Act.

Sec 2(22)(e) DDT payable by company @ 30% without grossing up.

In section 115-O of the Income-tax Act, in sub-section (1), the following proviso shall be inserted, namely:

‘Provided that in respect of dividend referred to in sub-clause (e) of clause (22) of section 2, this sub-section shall have effect as if for the words “fifteen per cent.”, the words “thirty per cent.” Had been substituted;’;

In section 115-O in sub-section (1B), the following proviso shall be inserted, namely:––

“Provided that this sub-section shall not apply in respect of dividend referred to in sub-clause (e) of clause (22) of section 2.”.

In section 115Q, Explanation to CH XII-D occurring after 115Q is proposed to be deleted.

1st April 2018 and applicable from AY 18-19 and subsequent assessment years.
  1. Earlier deemed dividend u/s 2(22)(e) was taxable in the hands of recipient at the applicable marginal rate.
  2. As per the amendment, the company is liable to pay dividend distribution tax on deemed dividend u/s 2(22)(e) @ 30% without grossing up under section 115-O.
  3. Further, the company will not have the benefit to set off the deemed dividend distributed u/s 2(22)(e) against the dividend received from its subsidiary company.
Analysis/Reason

The deemed dividend under sub-clause (e) of clause (22) of section of 2 the Act is currently taxed in the hands of the recipient at the applicable marginal rate.

The taxability of deemed dividend in the hands of recipient has posed serious problem of the collection of the tax liability and has also been the subject matter of extensive litigation.

With a view to bringing clarity and certainty in the taxation of deemed dividends, it is proposed to bring deemed dividends also under the scope of dividend distribution tax under section 115-O.

Section 56

Amendment in clause (IX) of Sec 56(x) to exclude the transfer of capital asset between holding company and its wholly owned Indian subsidiary company and between subsidiary company and its Indian holding company, which are not regarded as transfer under clause (iv) or clause (v) of section 47.

(II) in the fourth proviso, in clause (IX), after the words, brackets and figure “clause (i) or”, the words, brackets and figures “clause (iv) or clause (v) or” shall be inserted;

1st April 2018 and applicable from AY 18-19 and subsequent assessment years.
  1. Clause (IX) of 4th proviso of Sec 56(x) is amended to exclude transfer of capital asset u/s 47(iv) and Section 47(v).
  2. Hence any sum of money or any property received by way of transfer between holding and wholly owned subsidiaries according to sec 47(iv) and Sec 47(v) will not be taxed under the head Income from Other Sources
Analysis/Reason Section 47 provides for certain tax neutral transfers. Section 56 also excludes income arising out of certain tax neutral transfers from its ambit. However, the transfers referred to in clause (iv) and clause (v) of section 47 have not been excluded from the scope of section 56. It is proposed to have more clarity
Rationalization of section 43CA, section 50C and section 56. The Bill seeks to amend section 50C of the Income-tax Act relating to special provision for full value of consideration in certain cases. It is proposed to insert a proviso to sub-section (1) 1st April 2019 and applicable from assessment year 2019-2020 and subsequent years. Where the value adopted or assessed or assessable by the stamp valuation authority does not exceed one hundred and five per cent. of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of section 48, be deemed to be the full value of the consideration.
Analysis/Reason The difference is taxed as income both in the hands of the purchaser and the seller.
It has been pointed out that this variation can occur in respect of similar properties in the same area because of a variety of factors, including shape of the plot or location. In order to minimize hardship in case of genuine transactions in the real estate sector, it is proposed to provide that no adjustments shall be made in a case where the variation between stamp duty value and the sale consideration is not more than five percent of the sale consideration.
Section 56 (2)(x) to be read in continuation with the above rationalization of section 43CA and section 50C

In section 56 of the Income-tax Act, in sub-section (2) in clause (x), in sub-clause (b), for item (B), the following item shall be substituted with effect from the 1st day of April, 2019, namely: (B) for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely:

  1. the amount of fifty thousand rupees; and
  2. the amount equal to five per cent. of the consideration:”
1st April 2019 and applicable from assessment year 2019-2020 and subsequent years.

If the difference between Sale consideration and Stamp duty value is more than higher of the:

  1. Amount of Rs 50,000
    And
  2. Amount equal to 5% of the consideration.

Then the said amount is taxed under the head Income from other source.

Taxation of Stock in trade conversion into Capital Assets

With effect from the 1st day of April 2019

In section 2 in clause (24) after sub-clause (xii), the following sub-clause shall be inserted, namely:

  • “(xiia) the fair market value of inventory referred to in clause (via) of section 28;”;

In section 28 of the Income-tax Act, with effect from the 1st day of April, 2019, after clause (vi), the following clause shall be inserted, namely: –

  • “(via) the fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner;”.

In section 2 in clause (42A), in Explanation 1, in clause (i), after sub-clause (b), the following sub-clause shall be inserted, namely:

  • “(ba) in the case of a capital asset referred to in clause (via) of section 28, the period shall be reckoned from the date of its conversion or treatment;”.

In section 49 of the Income-tax Act, after sub-section (8), the following sub-section shall be inserted with effect from the 1st day of April, 2019, namely:

  • “(9) Where the capital gain arises from the transfer of a capital asset referred to in clause (via) of section 28, the cost of acquisition of such asset shall be deemed to be the fair market value which has been taken into account for the purposes of the said clause.”.
1st April 2019 and applicable from assessment year 2019-2020 and subsequent years.

Reason for amendment

  1. In cases where the stock in trade is converted into, or treated as, capital asset, the existing law does not provide for its taxability.
  2. So therefore, in the year of conversion the difference between Fair Market Value and Cost of Acquisition of Stock In Trade shall be taxed as Business Income.

Post conversion of stock in trade into capital asset, if the company decides to sell the said capital asset then following sections will apply:

  1. As per Section 49(9), the cost of acquisition shall be Fair Market Value arrived at as per clause (via) of section 28 for the purpose of calculating Capital Gains on the date of conversion of stock in trade into capital asset
  2. According to the Section 2(42A)(ba) the period of holding of the said asset shall be considered from the date of its conversion till the date of sale.
  3. Accordingly, Long term or Short-Term gains shall be calculated and taxed respectively.
Analysis/Reason

Section 45 of the Act, inter alia, provides that capital gains arising from a conversion of capital asset into stock-in-trade shall be chargeable to tax. However, in cases where the stock in trade is converted into, or treated as, capital asset, the existing law does not provide for its taxability.

In order to provide symmetrical treatment and discourage the practice of deferring the tax payment by converting the inventory into capital asset, it is proposed to amend the provisions

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