Exemption in Income-tax on purchase of shares at a discounted price in firms under Insolvency proceedings

The Central Board of Direct Taxes (CBDT) has provided a notification stating on June 30, 2020, that” no income tax shall be charged on the purchase of discounted shares of the companies undergoing resolutions under insolvency procedure and whose board has been taken over by the Government”. It was also stated that the exemptions will be open to being availed with effect from April 1, 2020, and shall be applicable for the assessment year 2020-21 and thereafter."

Taking note of the fact that whenever a company goes into insolvency proceeding and is looking for ways to maintain its perpetuity and reconstructing the business with the help of better management. Thus, there will be no income tax levied on the purchase of shares at discounted rates with a view to lower the overall price of shares on a purchase than the market price in the companies undertaking insolvency proceedings and whose management has been taken over by the government as a result of the insolvency proceedings.

The abovementioned relaxation is being offered on any movable property, including the unquoted shares of a company and its subsidiaries to be subscribed by a shareholder, where the tribunal on an application moved by the central government has suspended the board of directors and where the resolution plan has been approved by the tribunal. 

The notification is being provided at the time when the Yes Bank is going through a procedure of reconstruction, and the banks are surrounded with shareholders in the Yes Bank and have subscribed shares at a value inferior to the fair market value (FMV), such investors have been specified to provide further exemptions on such investment price.

 As a result of proceedings under the Yes Bank Reconstruction Scheme 2020, wherever such discounted shares being purchased and received by any shareholder or stakeholder bank and where such share has been allotted by such bank under the scheme of reconstruction at the value lesser than the fair market value (FMV) of such share has also been provided to be also covered under the list of exemption. 

Conclusion:

As a result of the above-provided notification, the Government is looking for a way to provide the necessary encouragement to the intending investors to participate in the Reconstruction scheme  2020 for the Yes Bank or any other scheme of reconstruction for companies as specified under the proceedings mentioned under sections 241 and 242 of Companies Act  2013  and where the insolvency unresolved and pending proceedings before the NCLT in case of alleged oppression and mismanagement. Such exclusions will accordingly result in offering encouragement for the investors to purchase shares after reconstruction and make the schemes more attractive, viable, and lucrative to prospective investors.

Author:

eStartIndia Team