Budget 2019- amendment in definition of demerger- should be made retrospective to avoid litigation on well settled principals.

[CA DEV KUMAR KOTHARI]

Budget 2019- amendment in definition of demerger- should be made retrospective to avoid litigation on well settled principals.

CA Dev Kumar Kothari

Demerger:

Related terms “demerger” “demerged company” and “resulting company” are defined in clauses (19AA), (19AAA) and (41A) respectively in the Income-tax Act, 1961. All these were inserted long-ago w.e.f.01.04.2000 vide the FA, 1999.

There is proposal to amend the meaning of demerger. This has been considered important by honorable FM and therefore find specific mention in her budget speech also in paragraph 7 under head Rationalisation measures. And honorable FM has stressed that it is It is proposed to relax one of conditions in case of ‘demerger’.

However, as per proposal and notes on clause the proposed amendment is made applicable w.e.f. 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.

In the memorandum explaining proposals we find that it is placed under the following heading:

H. REMOVING DIFFICULTIES FACED BY TAX PAYERS

Facilitating demerger of Ind-AS compliant companies

Therefore, this proposal is to remove difficulties faced by tax payers and to facilitate demerger of Ind-AS compliant companies.

Request to honorable FM:

It seems that there is inadvertent mistake in drafting of proposal and notes thereon. As discussed earlier, the amendment is a measure of rationalization and to relax conditions applicable in case of demerger and is therefore to remove difficulties. Furthermore, the amendment is to take into account ground realities and make the provision more practicable and reasonable.

It is well settled by several judgments of honorable Supreme Court that such amending provisions are clarification and are applicable since inception of original provision. Readers can easily search such judgments on websites.

Therefore, the amendment being in nature of clarification and curative, must be specifically made retrospective w.e.f. 01.04.2000 – the date when original provision became applicable.

Therefore, author request honorable FM to:

Make the amendment as an Explanation instead of a Proviso.

Make it specifically w.r.e.f. 01.04.2000

This will avoid un-necessary litigation.

Though implementation of this suggestion will reduce work for author and his professional colleagues, however, we professionals must not look be greedy so as to see only personal interest. We must not indulge into un-necessary litigation and must also make attempt to reduce litigation. Hence this suggestion to honorable FM. I hope greedy professional fellows will pardon me for this.

Budget proposal and related notes, speech and explanations are reproduced below with highlights and catch word highlighted are, added by author:

Statutory Provisions

FINANCE (No. 2) BILL, 2019

CHAPTER III

DIRECT TAXES

Income-tax

Amendment of section 2.

3. In section 2 of the Income-tax Act, in clause (19AA), in sub-clause (iii), the following proviso shall be inserted with effect from the 1st day of April, 2020, namely:-

“Provided that the provisions of this sub-clause shall not apply where the resulting company records the value of the property and the liabilities of the undertaking or undertakings at a value different from the value appearing in the books of account of the demerged company, immediately before the demerger, in compliance to the Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015;”.

Notes On above clause:

Clause 3 of the Bill seeks to amend section 2 of the Income-tax Act relating to definitions.

Clause (19AA) of the said section provides for the definition of the expression demerger for the purpose of providing tax neutrality where the property and liabilities of the undertaking transferred pursuant to the demerger shall be recorded at book value.

It is proposed to amend the said clause so as to provide that the requirement of recording property and the liabilities at book value shall not be applicable in a case where the property and the liabilities of the undertakings received by a resulting company are recorded at a value different from the value appearing in the books of account of the demerged company immediately before the demerger in compliance to the Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015.

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-2021 and subsequent assessment years.

From budget speech: 7. Rationalisation measures

7.1 It is proposed to relax the definition of ‘demerger’ to allow the resulting company to record the value of the property and liabilities at a value different from the book value in compliance with the Indian Accounting Standards.

From memorandum explaining proposals:

H. REMOVING DIFFICULTIES FACED BY TAX PAYERS

Facilitating demerger of Ind-AS compliant companies

One of the existing conditions for tax-neutral demergers is that the resulting company should record the property and the liabilities of the undertaking at the value appearing in the books of accounts of the demerged company. It has been represented that Indian Accounting Standards (Ind-AS) compliant companies are required to record the property and the liabilities of the undertaking at a value different from the book value of the demerged company. In order to facilitate, it is proposed to amend section 2 of the Act to provide that the requirement of recording property and liabilities at book value by the resulting company shall not be applicable in a case where the property and liabilities of the undertakings received by it are recorded at a value different from the value appearing in the books of account of the demerged company immediately before the demerger in compliance to the Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015.

This amendment will take effect, from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent assessment years. [Clause 3]