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Deciphering tax puzzle of loan-to-equity conversions
By Karanjot Singh Khurana, Prachi Bhardwaj and Sanjhi Agarwal
The article in this issue of Direct Tax Amicus discusses the adverse impact, under the Income Tax Act, 1961, of conversion of outstanding loan to equity. It in this regard discusses the legal position and the judicial precedents, and examines a recent decision of the Chandigarh ITAT holding that in the absence of receipt of any monetary consideration, Section 56(2)(viib) will not be applicable. It notes that the Tribunal also held that since (on the facts) there was no tax abuse, application of angel tax provisions was not warranted. The authors state that taxpayers may apply this precedent in cases involving issue of shares at premium or in case of implications on the lender of loan, under Section 56(2)(x), where the genuineness of transaction is not doubted. Further, the authors highlight that such conversions will also have an impact under Sections 269T and 271E, and that here also, the issue is far from settled. According to the authors, though the financial structuring by way of conversion of loan into equity shares has some added benefits for businesses, one needs to holistically consider the tax costs involved in such structuring to make it effective.
Notifications & Circulars
Section 47(viiab) – Securities transferred on stock exchange located in IFSC, which will not attract capital gains, notified
Exemption to specified income – Government bodies/authorities notified for purpose of Section 10(46)
Angel Tax – Income Tax Rule 11UA amended to include globally accepted methodologies of FMV calculation
Inventory valuation by cost accountant under Section 142(2A) – Form No. 6D notified
Concessional tax rate for co-operative societies under Section 115BAE – Manner of exercising option prescribed
Reporting details of substantial contributors in Form 10B/Form 10BB for AY 2023-24 clarified
Timelines extended by one month for filing Form 10B, Form 10BB and Form ITR-7
Ratio decidendi
Tax credit for dividend income is available even if such income is exempt under tax law of treaty country – Supreme Court
Enquiry under Section 148A to be conducted in a faceless manner post 29 March 2022 – Telangana High Court
Undisclosed income once taxed in the hands of group company when cannot be taxed again in the hands of investee upon its application – Delhi High Court
Reassessment under substituted Section 147 is invalid if initiated on mere change of opinion – Bombay High Court
Active Permanent Account Number (‘PAN’) is not a valid ground for issuance of reassessment notice to amalgamating company – Uttarakhand High Court
