Anti-abuse provisions: Deft handling by CBDT needed, say tax experts

KR Srivats New Delhi | Updated on January 06, 2019 Published on January 06, 2019

Now that the CBDT’s move to withdraw its December 31 circular has created a furore in political circles, time is ripe for the Revenue Department to revisit the scope and intent of Section 56(2) (viia) or 56(2)(viib) of the Income Tax Act 1961— the deeming income provision which sought to curb abusive transactions related to valuation, say tax experts.

The circular related to alleged situations of undervaluation of issue price of shares to closely held unlisted companies including private companies. Had this circular not been withdrawan, every situation of fresh issue of shares to such closely held companies would be outside the tax net and any undervaluation in such shares cannot be brought to tax at the hands of the closely held companies.

The CBDT’s handling of this matter this past week comes out as a rushed act. The CBDT seems unable to fix the problem although it very well knows that the problem exists in certain ‘deemed income’ provisions of Section 56(2), they said.

It is now evident — going by the experience at the field level — that Income Tax assessing officers have indiscriminately and inconsistently applied Section 56 (2) (viia) or 56(2)(viib) — whether it be for angel tax purposes or for other situations.

Rather than invoking the anti-abuse provisions sparingly, it is now clear that the taxman is seemingly going one step forward and two steps backward and misusing the provisions in far too many occasions.

Focus on revenue

The problem is that taxman — who is focused on maximising revenue outcomes for the exchequer — now thinks every transaction is an abusive one, leaving little scope for even bonafide commercial transactions to go through. The days of legitimate tax planning is over and everything is viewed as abusive.

While anti-abuse provisions are laudable, care has to be taken that bonafide commercial decisions are not affected due to their invocation by the taxman.

Industry — which was hoping for quick resolution of its tax woes — is now caught in the political crossfire, given that December 31 circular may have given a handle to the lawyers of a leading Opposition party’s honchos (who are facing huge tax bill under Section 56 (2)) to claim relief.

Relief would have come their way as the December 31 circular would prove in their situation that CBDT has now conceded that it was never an intention for the department to bring to tax any deemed income arising from fresh issue of shares, tax experts said. With the CBDT withdrawing the circular that laid out this position, it is anybody’s guess as to how the proposed “comprehensive circular” would shift the direction of the entire case, said tax experts.

Aseem Chawla, Managing Partner, ASC Legal, a law firm, said: “It is the need of the hour that CBDT does revisit the scope and intent of the section. The indiscriminate and inconsistent manner of application by the assessing officer has had a regressive effect leading to some unintended consequences. The immediate withdrawal does not augur well, especially when considering the reasons cited for withdrawal. It has always been an expectation that tax policy needs to be stable and certain”.

Some experts feel that the December 31 circular was well intended, but had to be withdrawn because of the apparent political skirmish. This has left genuine trade and industry in a fix as an immediate solution to this is no longer in sight.

The CBDT’s December 31 Circular 10 highlights non-applicability of a section of Income Tax Act (Section 56(2)(viia)) on receipt of shares by a closely held company or a firm as a result of fresh issuance of shares. This provision sought to bring to tax situations where shares of unlisted company are received without consideration or with consideration which is less than the fair market value (of the shares) by a firm or closely held company.

Published on January 06, 2019
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