Angel Tax – Changes In Indian Taxation Landscape

Hello Readers,

As you may be aware, the Finance Act 2012 had introduced provision of section 56(2(viib) of the Income Tax Act, 1961.  Via this newsletter, we bring to you the salient features of the recent changes to the scheme introduced.

To give a context, the provision of section 56(2)(viib) intended to tax consideration received by closely held companies from residents for issue of shares that exceeds the face value of share. The provision covered consideration exceeding the fair market value of shares. The provision was made applicable only to residents with specific carveout for consideration for shares issued by a venture capital undertaking from a venture capital company, venture capital fund, specified fund or class of persons as notified. The provision was introduced as an anti-abuse measure to prevent circulation of unaccounted domestic money through share sale-purchase transactions. The Finance Act, 2023 has however extended the applicability of the provision to all categories of person, thereby bringing within the purview issuance of shares to non-resident.

Considering wide impact of the amendment, the government has by way of Notification No. 29/2023 dated 24 May 2023 excluded investment made by the following categories of foreign investors from applicability of the provisions:

  • Government and Government related investors, international or multilateral organizations and entities controlled by the Government or where direct or indirect government ownership is seventy-five percent or more;
  • Banks or Entities involved in Insurance Business;
  • Entities resident of 21 specified jurisdictions which are registered with SEBI as Category-I Foreign Portfolio Investors; endowment funds associated with a university, hospitals or charities; pension funds; Broad Based Pooled Investment Vehicle or fund where the number of investors is more than fifty (other than hedge fund or a fund which employs diverse or complex trading strategies). The specified jurisdictions notably exclude Singapore and Mauritius.

Further, as a result of the above amendment, representations were received from various stakeholders raising concerns that genuine non-resident investors may have to face undue hardship in matters related to valuation of shares etc. To address the concerns, the government has on 26 May 2023 issued draft notification for public comments proposing changes to the valuation rules as prescribed under Rule 11UA of the Income Tax Rules on the aspect of determining the fair valuation of the shares to assuage the concerns of various stakeholders.

Rule 11UA of the Income Tax Rules currently prescribes valuation based discounted cash flow (DCF) or net asset value (NAV) method. As per the draft rules, in addition to NAV and DCF method, the following are proposed for recognition as fair valuation:

  • where consideration is received by a venture capital undertaking for issue of shares, from a venture capital fund or a venture capital company or a specified fund, the price of the equity shares corresponding to such consideration will be regarded as the fair market value of the equity shares provided the consideration has been received within a period of ninety days of the date of issue of shares which are the subject matter of valuation.
  • where any consideration is received by a company for issue of shares, from any notified entity, the price of the equity shares corresponding to such consideration will be regarded as the fair market value of the equity shares provided the consideration from notified entity has been received within a period of ninety days of the date of issue of shares which are the subject matter of valuation.
  • Further in relation to consideration received from a non-resident, the fair market value of the unquoted equity shares can be additionally determined by a merchant banker in accordance with any of the following methods:
    • Comparable Company Multiple Method;
    • Probability Weighted Expected Return Method;
    • Option Pricing Method;
    • Milestone Analysis Method;
    • Replacement Cost Methods.

The proposed Rules further provide a safe harbor of 10 percent to accommodate variation between issue price and fair valuation determined as per prescribed valuation methods.

We will keep you updated as and when any further changes occur in this space. Thank you for your time. Till we meet again.

Best regards,

Research Desk at Aureus Law Partners

Should you have any queries, please feel free to reach out to our Practice Leader – Tax at

Tax Compliances Update for Charitable Trust in India


In India, existing Trusts were required to apply for registration/approval on or before 30 June 2021. However, on consideration of difficulties in the electronic filing of Form No. l0A, the Central Board of Direct Taxes (the Board) extended the due date for filing Form No. 10A in such cases to 25 November 2022 (Refer: Circular No. 22 of 2022 dated 1 November 2022). Such registration/approval are valid for a period of 5 years. Thus, existing Trusts are required to apply for fresh registration/approval and once the registration/approval is granted it is valid for five years.

New Trusts are required to apply for provisional registration/approval at least one month prior to the commencement of the previous year relevant to the assessment year from which the said registration/approval is sought. Such provisional registration/approval is valid for a maximum period of three years.

Provisionally registered/approved Trusts again need to apply for regular registration/approval in Form No. 10AB at least six months prior to the expiry of the period of provisional registration/approval or within six months of the commencement of activities, whichever is earlier. This registration/approval is valid for a period of five years.

Clarifications issued

On consideration of difficulties in electronic filing of Form No. 10AB the Board extended the due date for electronic filing to 30 September 2022 (Refer: Circular No 8 of 2022 dated 31 March 2022).

The Trusts once approved/registered for five years are required to apply at least six months prior to the expiry of the period of five years.

Deduction under section 80G of the Act in respect of a donation made by a donor to a fund or institution would be allowed to the donor only if a statement of such donations is furnished by the donee in Form 10BD. The certificate of such donation is required to be provided in Form No. 10BE. Further, Form No. 10BD and Form No. 10BE are required to be furnished on or before the 31st May immediately following the financial year in which the donation is received.

Finance Act, 2023 has, inter aIia, amended section 115TD of the Act, so as to provide that the accreted income of the Trusts not applying for registration/ approval, within the specified time, would be made liable to tax in accordance with the provisions of section 115TD of the Act. This amendment has come into effect from 01.04.2023 and therefore applies to assessment year 2023-24 and subsequent assessment years.

Extension of dates for filing

for Registration and Approvals

Several Trusts could not apply for registration/ approval within the required time due to genuine reasons. This led to rejection of applications simply on the ground that these were delayed.

In order to mitigate genuine hardship in such cases the Board has extended the due date of making an application till 30 September 2023 for both Forms 10A and 10AB.

The extension of due date as mentioned would also apply in case of all pending applications. Hence, in cases where the Trust has already made an application in Form No. 10AB but such application has been furnished after 30 September 2022 and where the Principal Commissioner or Commissioner has not passed an order before the issuance of this Circular, pending application in Form No. 10AB may be treated as a valid application. Also, in cases where the Trust had already made an application and the Principal Commissioner or Commissioner has rejected it only on account of delay, the Trust would be allowed to furnish a fresh application.

It has also been clarified that provisional registration of a Trust shall be effective from the assessment year relevant to the previous year in which the application is made and would be valid for a period of three assessment years.

for submission of Statement of Donation / Certification of donation

In consequence of the above, an extension has also been granted to the due date for furnishing of statement of donation / certificate of donation in respect of the donations received during the financial year 2022-23 to 30 June 2023.

for submission of Statement of Accumulation/Deemed Application

Finance Act, 2023 provides that Statement of Accumulation is required to be furnished at least two months prior to the due date of furnishing return of income.

The due date for furnishing the option for deemed Application of Income has been prescribed at least two months prior to the due date of furnishing return of income.

Now it has been clarified that the Statement of Accumulation would be required to be furnished at least two months prior to the due date of furnishing Return of Income so that it may be taken into account while auditing the books of account. However, the Accumulation/Deemed Application shall not be denied to a Trust as long as the Statement of Accumulation/Deemed Application is furnished on or before the due date of furnishing the return.

One of the conditions required to be fulfilled by the Trusts to be eligible to claim exemption is that where the total income of any Trust exceeds the maximum amount which is not chargeable to income-tax in any previous year, it is required to get its accounts audited.

It has also been clarified that account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account would be acceptable as mode of payment of taxes in addition to UPI and electronic transfers.

From the Aureus Law Partners’ research desk.  Published on 29 May 2023. 

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PE / VC Financing – A Broad Practice Process Perspective


According to Jame Koloski Morries, “Venture capital is defined as providing seed, startup, and first stage financing and also funding expansion of companies that have already demonstrated their business potential but do not yet have access to the public securities market or to credit-oriented institutional funding sources, Venture Capital also provides management in leveraged buyout financing”.

Venture Capital (VC) firms bring to the table expertise regarding the business in which it is investing, as well as managerial capability, aside from the funds required.

Not only is VC fund invested in businesses that use new technology to produce new products, they will typically, continuously involve themselves with the investments by way of providing managerial and other support.

While it is commonly understood that the VC investments are made in equity of the target entity, it is often seen that VCs insist on a modified instruments, often in the form of Compulsorily or Optionally Convertible Debentures or Preference Shares, etc.  Depending on the nature of the business and appetite of the VC firm in that business, it is possible that other creative instruments for investment may also be used.   Ordinarily, debt instruments ensure a running yield on the portfolio of the venture capitalists, and hence, may be considered safer by the VC, apart from providing a liquidity preference above equity holdings.

Venture Capitalists finance high risk-return ventures. Some of the ventures yield very high return in order to compensate for the heavy risks related to the ventures at the time of exit.  It depends on what the exit is defined as, however, typically a VC would retain several rights of exit upon the happening of specific occurrences.

Since VC funds invest on the basis of the business plan, when the business may not exist in the ground, they take a significant project risk. Private equity funds, however, come in when the business has taken off.  They prefer to invest in the growth of the business, when proof of concept is established, and scalability of the business is clear. Thus, VC funds can be viewed as ‘seed capital’, while PE funds can be viewed as “growth capital”.

The definition of the two types of funds under SEBI (Alternate Investment Funds) Regulations, 2012 is as follows:

  • “Private equity fund” means an Alternative Investment Fund which invests primarily in equity or equity linked instruments or partnership interests of investee companies according to the stated objective of the fund.
  • “Venture capital fund” means an Alternative Investment Fund which invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business model.

Investments by both PE and VC Firms are illiquid investments. While a PE would invest in the expectation of an IPO, most VC Firms do not remain in the target entity till the IPO stage.

PE funds may even invest post public issue or at the time of public issue of the target. These are called Private Investment in Public Equity (PIPE).  While the VC funds may not have a clear investment horizon and may be in the target entity for a longer investment horizon.  However, PE funds typically have a shorter investment horizon – anywhere between 5 – 7 years would be a typical time period.

Angel Funds, VC Funds and PE Funds are essentially progressions in terms of project risk, investment liquidity and stages in the life cycle of the business. Angels normally enter a business at the lowest valuations with PEs entering at the highest valuation amongst the three kinds of investors (Angel, PE and VC).

The Process

Normally, upon deal origination (which may depend on the internal policies of the VC firm, and the area of interest that they may have), the step that follow is roll out of a Term Sheet. It is entirely possible that the VC move to Evaluation or Due Diligence before rolling out the Term Sheet.  In case the business is absolutely new then the an evaluation into the quality of the entrepreneur is undertaken, before appraising the characteristics of the product, market or technology. Most venture capitalists ask for a business plan to make an assessment of the possible risk and expected return on the venture.  Oftentimes, the above procedure runs in parallel with the negotiation on a draft Term Sheet.

Thereafter, the process of Valuation may commence. Investment valuation is a specialised process, where various factors are considered including but not limited to the entrepreneur’s track record, the product itself, and whether it is innovating, overall economic scenario, unique proposition of the venture, size of the market and so on and so forth.

Assuming that the aforesaid steps are accomplished and an acceptable Term Sheet has been signed, the next step would be Deal Structuring.

Once the venture has been evaluated as viable, the venture capitalist and the investment company negotiate the terms of the deal, i.e., the amount, form and price of the investment. This process is termed as deal structuring. The discussions would also include protective covenants and earn-out arrangements. Covenants include the venture capitalists’ right to control the target company and to change its management if needed, buy back arrangements, acquisition, making Initial Public Offerings (IPOs), etc.  Discussions and agreement entered into would specify the entrepreneur’s equity share and the objectives to be achieved.  Various rights are retained by the VC, including that of replacement of the management in case the objectives are not met, or in case of specific circumstances arising.

The next important question, apart from the day to day operations and the VC Firm’s level of intervention in it is that of exit.  There could be:

  • Initial Public Offerings (IPOs)
  • Acquisition by Another Company
  • Buyback or Repurchase of the Venture Capitalist’s Share by the Investee Company / Promotors
  • Purchase of VC Firm’s Share by a Third Party

From a process perspective, the following stages are key:

Sourcing of proposal:  PE / VC funds receive proposals from Investment Banks as well as from the targets directly.  Most funds may not wish to directly engage with the promotors, especially when the promotors do not have a significant track records, and would prefer to pursue proposals that are initiated by Investment Bankers.

  • Initial contact / flier / pitch:  This refers to the stage when the Investment Bank or the promotor sends out a pithy flier, which may be just a page or two, outlining the bare details of the project – essentially, the issuer, the business and the nature of the proposed transaction.
  • Non-Disclosure Agreement:  If the fund is interested, they would seek further information by way of emails or by way of discussions.  To cover the subject matter and to ensure no possible leakages, a non-disclosure agreement is typically signed by the parties.
  • Information memorandum: Post the non-disclosure agreement, an Information Memorandum is shared between the parties. This may contain the following:
    • Highlights
    • Executive Summary
    • Promoter background
    • Industry background, regulatory environment, market structure and competitors
    • Key drivers of success in the business and the overall value chain
    • Company background, its management team and clients
    • Business model of the company
    • Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis of the company vis-à-vis the chosen business model
    • Capital expenditure plan and proposed means of financing
    • Revenue model and strengths / uncertainties associated with each stream of revenue
    • Cost and Margin structure
    • Historical financials
    • Projected financials for about 5 years, or longer for long gestation projects
    • Patents or any intangible assets owned by the company
    • Key successes of the company
    • Litigation or tax issues associated with the company or its promoters
    • Proposed transaction, including purpose of mobilisation, size of mobilisation, proposed dilution and the valuation.
    • Justification for valuation
    • Risks associated with the investment
    • Likely exit possibilities for the investor
    • Time frame, or any other key aspect not covered above

This document is required to be professionally prepared in the interest of completeness and should ordinarily be vetted by professionals who would be assisting in the transaction should it go forward.

  • Management presentation
  • Initial Due Diligence
  • Preliminary investment note:  This is typically prepared by the internal team of the fund, and is a document private to the fund.
  • Non-Binding Letter of Intent:  Post the above, a Non-Binding Letter of Intent is issued by the fund outlining the nature of the investment, the kind of instrument, key parameters, investment conditions, amounts and other terms.  The LoI would also outline the key liquidity events, time frame, board representation, expected stake, costs and who is to bear them.  Any specific area of concern may also be addressed in such an LoI.
  • Final Due Diligence (FDD): FDD occurs on several parameters including commercial, financial and legal.  Legal DD would normally cover the following:
    • Incorporation certificate and various registrations obtained by the company
    • Licences and approvals required for doing business, scheduled expiry date of each of these, likely terms of renewal on expiry, any permissions not obtained by the company, reasons therefor, and the implications in terms of costs, penalties and culpability of owners / managers
    • Approvals required for the proposed PE transaction within the company, from other business owners, from regulatory authorities and from any other commercial partners
    • Review of the memorandum and articles of association including confirmation that all changes to date are suitable reflected in them
    • Changes that will need to be incorporated in the memorandum and articles as part of the proposed transaction
    • Non-compete agreements executed by the company and their validity and duration
    • Claims made against the company by any party, the status of these claims with various authorities and relative strength of the parties to the claims
    • Meetings of the board and share-holders, the dates on which they were held and the compliance with regulatory requirements
    • Filing of annual returns, resolutions and other forms with the Registrar of Companies (ROC) and other regulatory authorities
    • Material contracts executed by the company for financing, sourcing etc. and especially contracts the company has made with owners or senior management of the company
    • Standard terms of employment with employees, and special arrangements made with senior management of the company
    • Confirmation of ownership of key assets reported by the company
    • Adequacy of insurance taken on the assets and other contingencies, the insurers, key clauses in the insurance policy, pending insurance claims, impact of claims on future premia payable on those insurance policies etc.
    • Patents, trademarks, brands, copyrights, industrial secrets, proprietary software and other intangible assets of the company, the certifications of their ownership and validity, measures taken to protect them, and any further steps to be taken on these matters if the proposed transaction goes through
    • Cases against the promoters or senior management, whether related to the business of the company or otherwise, and their status in relevant courts or with regulatory authorities.
  • Final Investment Memorandum: This document covers all the areas through the Information Memorandum, and findings of the FDD, as well as valuations.  All the approvals and closing steps are also discussed in the Final Investment Memorandum.  This document is ordinarily discussed in the meeting of the directors / partners, and the authorised signatory for signing the Term Sheet is then decided and authorised.
  • Term Sheet: Term Sheet can be seen as a binding LoI as opposed to a Non Binding LoI containing the details therein as well as addressing any other issues that may need to be addressed pursuant to the aforesaid steps.  The Term Sheet is then binding on the fund, while containing the term for which it would remain firm.
  • Closure of the deal: After the term sheet is signed, and before the fund releases the money to the company, various other processes need to be completed, such as:
    • Drafting and execution of subscription agreement outlining the respective parties’ rights and obligations
    • Making relevant changes in memorandum and articles of association and other agreements with various parties, as may have been decided
    • Permission of Cabinet Committee on Economic Affairs, SEBI, RBI, Ministry of Finance, relevant Ministry for that industry, state government, local authorities etc.
    • Obtaining any no-objection certificates that may have been highlighted as part of the legal due diligence
    • If the transaction structure provides for any escrow arrangements or other guarantees, then effecting the same
    • If the deal is subject to any changes in the financial structure of the company including fresh borrowings, then obtaining firm commitments for the same and concluding the relevant documentation

There may be conditions subsequent and precedent as well that need to be fulfilled upon or before closure of the deal.

Key Investment Conditions

Certain investment conditions are typically addressed by the Funds in the course of the deal.  These are:

  • Board Seat
  • Right to change management
  • Lock in of Promotors / Management
  • ESOPs
  • Assured Returns
  • Veto Rights
  • Right of First Refusal
  • Right of First Offer
  • Right to MIS
  • Right to Audit
  • IPO Facilitation

The aforesaid conditions are incorporated into the deal by way of various documents such as Share Subscription, Share Holders, Share Purchase Agreements.  The Memorandum and Articles of the Company are also amended in keeping with the transaction structure.

For the purposes of this article, one confines oneself to the practice aspects of PE / VC transactions.  Of course there are other nuances, such as taxation, regulations of AIFs by SEBI, and the entire ecosystem surrounding them, which may form a part of another offering from Aureus Law Partners.

Till then.

From the Aureus Law Partners’ research desk. 

For queries:

TDS/TCS Amendments in Income Tax laws

The Union Budget of India for the year 2023-24 (the Budget) has introduced various circumstances in which taxes are to be withheld  / collected by the payer.   Several taxpayers / citizens have approached us to understand the import and application of these amendments from time to time post the Budget speech.  This post seeks to provide an explanation to  such queries.

Tax Collection at Source Amendments

TCS rates on remittances made from India

Effective 1 July 2023, TCS would be required to be effected at the rate of 20% as against the existing rate of 5% for remittances under Liberalised Remittance Scheme (LRS) and overseas tour package. However, the TCS rate on remittances made for medical and education purposes in excess of INR 7 lakh continues to be at 5%. Further, in case remittance in excess of INR 7 lakh is made for educational purpose out of loan obtained from financial institution, the TCS rate of 0.5% remains unchanged.

Tax Deduction at Source (TDS) Amendments:

Benefit of tax treaty rate extended to specified income earned by non-residents

A non-residents in India when earning income from mutual fund units suffers a deduction of tax at source by the payer at the rate of 20%. From 1 April 2023, should the non-resident provide a Tax Residency Certificate to the payer, then the payer may discharge the TDS at the treaty rate.

Tax to be deducted on interest on specified securities

From  1 April 2023,  tax would be deducted on the interest payable on listed securities in dematerialized form.

Income from online Gaming.

From 1 July 2023 a payer needs to deduct tax at the rate of 30% on the ‘net winnings’ in the user account at the end of the Financial Year (FY) or at the time of withdrawal by the user. The method for computing the net winnings is yet to be prescribed.

It appears that treaty benefit for non-residents would not be available and the entire net winnings would be liable for tax deduction.

Clarification for tax deductibility on benefits/ perquisites

It has been clarified that the tax is to be deducted whether the benefit or perquisite is in cash or in kind or partly in cash and partly in kind.

SC Ruling in Rainbow Papers Limited– The debate on priority of Statutory Dues under IBC

The decision of the Hon’ble Supreme Court in the case of STATE TAX OFFICER (1) v RAINBOW PAPERS LIMITED rendered under the Insolvency and Bankruptcy Code (IBC) has ruled on a significant aspect of priority of Government dues. The Court has held that statutory dues under Gujarat VAT Act (GVAT Act) are secured creditors and would require consideration as such in the resolution plan. It was this held that Sec. 48 of the GVAT Act which states that-

“any amount payable by a dealer or any other person on account of tax, interest or penalty for which he is liable to pay to the Government shall be a first charge on the property of such dealer, or as the case maybe, such person

is not contrary to or inconsistent with Sec. 53 or any other provisions of the IBC. The Court further held that a resolution plan which does not confirm to the provisions of Sec. 31(2) of the IBC inter-alia prescribing payment of dues of operational creditors, dissenting financial creditors, etc. would not be binding on the parties to whom a debt in respect of dues arising under any law is owed. Such resolution plan ought to be rejected. The Court has also held that the time period of submitting the claims as prescribed under the IBC are not mandatory but only directory.

The decision of the court has raised considerable apprehensions, and rightly so, on the aspect of priority of settlement of statutory dues under the IBC.

SC Observations

The SC has made certain observation suggesting that if the corporate debtor is unable to pay statutory dues to the government and there is no plan to dissipate the debts, the corporate debtor would need to be liquidated and its assets sold. In this respect, the court observed as under:

“52. If the Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan.

  1. In other words, if a company is unable to pay its debts, which should include its statutory dues to the Government and/or other authorities and there is no plan which contemplates dissipation of those debts in a phased manner, uniform proportional reduction, the company would necessarily have to be liquidated and its assets sold and distributed in the manner stipulated in Section 53 of the IBC.
  2. In our considered view, the Committee of Creditors, which might include financial institutions and other financial creditors, cannot secure their own dues at the cost of statutory dues owed to any Government or Governmental Authority or for that matter, any other dues.”

The aforesaid observations, considered in isolation have far reaching implication. However, it would be reasonable to infer that such observation will have to be regarded in the context of the issue before hand. The court having held that statutory dues were secured creditors (by virtue of operation of law), such debts require consideration in the same light as other secured creditors. It is only if the resolution plan does not contemplate dissipation of such debts in the manner specified u/s 53 would the question of liquidation of the company arise. Reading beyond the context would render relevant provisions of the IBC and principles established over time nugatory which cannot be the intent.

Statutory dues are unsecured operational debts unless secured by operation of law

It is settled law that statutory dues are operational debts. This is also clear from the definition contained u/s 5(21) of IBC which defines ‘operational debt’ as under:

 “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority;

Such operational debts can however be ‘secured’ if a security interest is created on such debts. Sec. 2(31) of IBC defines “security interest” to means:

 “right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person”:

Security interest in relation to a debt thus implies creating a “right, title or interest or a claim to property”. Generally, assessment of statutory dues by government authorities does not create an automatic interest in the property of the debtor, unless mandated under law as was the case under Gujarat VAT Act under consideration by the SC or by specific action. Though the decision has been rendered in context of Sec. 48 of the Gujarat VAT Act, it has direct bearing on government dues under statutes which similarly create a charge over assets of the taxpayer.

Illustratively, similar provisions are specified u/s 82 of the CGST Act, 2017 and Sec. 142A of the Customs Act, 1962 which read as under:

Section 82 of the CGST Act, 2017:

“Tax to be first charge on property.- Notwithstanding anything to the contrary contained in any law for the time being in force, save as otherwise provided in the Insolvency and Bankruptcy Code, 2016, any amount payable by a taxable person or any other person on account of tax, interest or penalty which he is liable to pay to the Government shall be a first charge on the property of such taxable person or such person.”

Section 142A of the Customs Act, 1962

“Liability under Act to be first charge – Notwithstanding anything to the contrary contained in any Central Act or State Act, any amount of duty, penalty, interest or any other sum payable by an assessee or any other person under this Act, shall, save as otherwise provided in section 529A of the Companies Act, 1956 (1 of 1956), the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 (51 of 1993) and the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002 and the Insolvency and Bankruptcy Code, 2016 be the first charge on the property of the assessee or the person, as the case may be.”

The import of the aforesaid provisions under the GST and Customs laws is the classification of statutory dues as ‘secured debts’, and therefore a priority on distribution of assets as secured debts u/s 53 of IBC. However, the ruling cannot be regarded as laying the general proposition having application to all government and statutory dues. Nature of statutory dues will need to be examined on a case-to-case basis in light of specific legislative act.

Nature of Income tax dues

Income tax dues generally constitute a significant component of claims under a resolution process. Under the Income tax law, manner of recovery of taxes is provided u/s 222 of the Income Tax Act, 1961. As per the provisions, where the assessee is in default in making payment of taxes, the Tax Recovery Officer (TRO) can proceed to recover the taxes by way of attachment and sale of moveable or immovable property of the taxpayer. Such attachment requires positive action of the TRO as per prescribed rules. Till such process is set in motion, there may not be any question with regard to income tax dues being regarded as secured debts. Even where recovery of taxes is secured by attachment of property, it is argued that such act of attachment does not create ‘a right, title or interest or a claim to a property’ and hence income tax dues will stay outside the purview of ‘secured debts’.

The fine distinction between an attachment of property and charge created over the property was explained by the Gujarat High Court in Shree Radhekrushna Ginning and Pressing Pvt. ltd. Versus State of Gujarat (CA no. 5413 of 2022). The court explained as under:

“12 We take this opportunity to explain the effect of attachment and also the effect of charge. In Mulla’s Civil Procedure Code, 8th Edn., the law as applicable in India is thus summarised (p. 187):

“Attachment creates no charge or lien upon the attached property. It merely prevents and avoids private alienations; it does not confer any title on the attaching creditors. There is nothing in any of the provisions of the Code which in terms makes the attaching creditor a secured creditor or creates any charge or lien in his favour over the property attached. But an attaching creditor acquires, by virtue of the attachment, a right to have the attached property kept in custodia legis for the satisfaction of his debt, and an unlawful interference with that right constitutes an actionable wrong.”      

13 The Privy Council in Moti Lal v. Karrabuldin (1897) I.L.R. 25 Cal. 179, p.c. where Lord Hobhouse stated (p. 185):

“Attachment, however, only prevents alienation, it does not confer title.”

14 Similarly, in the Calcutta Full Bench case of Frederick Peacock v. Madan Gopal (1902) I.L.R. 29 Cal. 428, F.B. Sir Francis Maclean, in delivering the judgment of the Full Bench, says (p. 431):

“I think, therefore, it must be taken that the attaching creditor here did not obtain by his attachment any charge or lien upon the attached property, and if so, no question as to the Official Assignee only taking the property of the insolvent subject to any equities affecting it, can arise.”

And Mr. Justice Ghose says (p. 483):

“I am clearly of opinion that the attaching creditor did not acquire any title or charge upon the property by reason of the attachment in question.”


Thus, upon attachment of a property, the taxpayer is only debarred from dealing with the attached property except with the permission of TRO. It does not create security interest in favour of the income tax authorities. The proposition that income tax is not secured debts also find favor from various judicial pronouncement on the subject. Illustratively, in Bombay Stock Exchange v. V.S. Kandalganonkar & Ors. one of the points in controversy was whether the Income Tax Department can claim priority over the debts vis-a-vis Bombay Stock Exchange, which was a secured creditor. The Hon’ble Supreme Court held that the Income Tax Act does not provide for any paramountcy of dues by way of income-tax. In such background, it held that stock exchange being a secured creditor, will have precedence over the claim of dues made by way of income-tax by the Income Tax Department. Accordingly, the Bombay Stock Exchange being a secured creditor, would have priority over Government dues.

It thus seems clear that dues under Income tax Act do not create a charge on the assets of the taxpayer and therefore are outside the debate of being regarded as secured creditors for the purpose of waterfall distribution.

Concluding remarks

The jurisprudence developed over years indicate that tax dues towards the government generally have priority only over debts owed to unsecured creditors and such preferential right is not available over secured creditor. However, where the matter pertains to IBC, the waterfall distribution as regards the government dues is subordinate to even unsecured financial debts, workmen dues and wages. The position clarified by the Supreme Court categorizing government dues (protected by charge over assets of the taxpayer) as ‘secured debts’ has put a spanner bearing significant implication on the priority of stakeholders entitled to waterfall distribution.

While it seems certain that the statutory authorities will now approach with full force to exercise their claim in light of the judgement, it also opens a debate on the fate of numerous corporate resolutions which may have not regarded specific categories of government dues as ‘secured creditors. Perhaps the period of limitation to appeal against the resolution plans may come as a savior.

The variance amongst laws with respect to creation of charge over the property of the taxpayer has created uncertainty. There seems no justification for such differentiation in context of matters under IBC. The preamble to the Insolvency and Bankruptcy Code specifies the objective to include “alteration in the order of priority of payment of Government dues”. However, the categorization of statutory dues as ‘secured creditor’ would appear contrary to such objective necessitating a prompt legislative intervention to settle the debate.

Contributed by Yatin Sharma and Abhishek Dutta. 

Yatin can be reached at

Moratorium under IBC and Tax Proceedings

Has the Supreme Court (SC) in SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD v CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS legitimised tax proceedings during the period of moratorium set under the Insolvency & Bankruptcy Code?

Rendered in context of the custom law, in the aforesaid matter, SC has held that IBC would prevail over the Customs Act, to the extent that once moratorium is imposed in terms of sections 14 or 33(5) of the IBC, the respondent authority only has a limited jurisdiction to assess/determine the quantum of customs duty and other levies. The respondent authority does not have the power to initiate recovery of dues by means of sale/confiscation, as provided under the Customs Act. The Court observed that issuance of demand notices to seek enforcement of custom dues during the moratorium period would clearly violate the provisions of Sections 14 or 33(5) of the IBC, as the demand notices are an initiation of legal proceedings against the Corporate Debtor (CD). Thus, the SC has fairly settled that recovery of tax dues cannot be made, otherwise than in the manner prescribed under IBC.

However, what is noteworthy is further examination of the powers which the tax authority can exercise during the moratorium period under the IBC. The court has importantly observed that authorities could however initiate assessment or re-assessment of the duties and other levies. The Resolution Professional has an obligation to ensure that assessment is legal, and he has sufficient power to question any assessment, if he finds the same to be excessive. The court relied on the ratio of the judgement in S.V. Kondaskar v. V.M. Deshpande, AIR 1972 SC 878, wherein the court had held that the authorities can only take steps to determine the tax, interest, fines or any penalty which is due. However, the authority cannot enforce a claim for recovery or levy of interest on the tax due during the period of moratorium.

There has been varying positions vis-à-vis initiating or continuing tax proceeding during the period of moratorium. For instance, the Calcutta HC in SREI Equipment Finance Ltd. vs. Additional/Joint/Deputy/Assistant Commissioner of Income Tax and others has held that tax proceeding cannot be continued during moratorium. However, given the ratio of the ruling, moratorium for prohibiting initiation or continuation of tax proceedings will now have limited bearing.

In my personal view, continuation of tax proceedings already initiated against the CD before admission under IBC is rational since this is necessary to quantify the legitimate claim of the authorities under a process which has already been set in motion. However, what it does not address is the practicality of contesting the demand before appellate authorities during the time bound CIRP period. It is not uncommon for the tax authorities to make high pitched demands only to be quashed or revised pursuant to appellate relief, and therefore right quantification for admitting a claim assumes importance. As regards initiation of new proceedings, moratorium is a calm period providing the CD a window to restructure in a financially viable manner. Granting the Revenue Authorities opportunity to initiate new assessment proceedings and raise new claim not contemplated before initiation of CIRP may however not be in the spirit of law. It is desirable that the law be clarified to accommodate such distinction in light of moratorium provisions.

Contributed by Yatin Sharma with Abhishek Dutta. Yatin can be reached at

The Unanswered Question of Limitation– A contentious issue post Supreme Court ruling on reassessment controversy

The Hon’ble Supreme Court (‘SC’), in the case of Union of India & Ors vs. Ashish Agarwal has pronounced an exceptional decision concerning thousands of reassessment notices issued to taxpayers during the period 1.04.2021 to 31.06.2021 (‘specified period’), albeit under the reassessment provision of the Income Tax Act (‘the Act’) applicable till 31.03.2021. The decision has drawn immense interest given the consequence and uniqueness of the order.

The SC was faced with the challenge of balancing equity for both the taxpayer and the Revenue Authorities (‘RA’) given the magnitude of reassessment notices (90,000) and the impact on the government exchequer. The circumstances pivoted the SC to exercise its constitutional powers under Article 142 of the Indian Constitution to strike a balance, rather than adopt a strict technical view on this important subject. This can be inferred from the following observation of the Court:

“There is a broad consensus on the aforesaid aspects amongst the learned ASG appearing on behalf of the Revenue and the learned Senior Advocates/learned counsel appearing on behalf of the respective assessees. We are also of the opinion that if the aforesaid order is passed, it will strike a balance between the rights of the Revenue as well as the respective assesses as because of a bonafide belief of the officers of the Revenue in issuing approximately 90000 such notices, the Revenue may not suffer as ultimately it is the public exchequer which would suffer.’

Whatever the rationale for the decision, one would have hoped that the SC ruling would bring certainty and closure on this subject. Unfortunately, it may not be the last word yet on this contentious issue. One specific aspect that may now become a subject of dispute and litigation is the ‘question of limitation’ applicable to reassessment proceedings which have now been given a fresh lease of life consequent to the SC order.

Concurrence with High Court orders

The reading of the SC decision makes it clear that the court agreed with the proposition articulated by various High Courts holding that substituted reassessment provisions (effective 1.04.2021) would apply in respect of notices issued on or after 1.04.2021. This is inferable from the following observations:

“7. Thus, the new provisions substituted by the Finance Act, 2021 being remedial and benevolent in nature and substituted with a specific aim and object to protect the rights and interest of the assessee as well as and the same being in public interest, the respective High Courts have rightly held that the benefit of new provisions shall be made available even in respect of the proceedings relating to past assessment years, provided section 148 notice has been issued on or after 1st April, 2021. We are in complete agreement with the view taken by the various High Courts in holding so…..

…….It is true that due to a bonafide mistake and in view of subsequent extension of time vide various notifications, the Revenue issued the impugned notices under section 148 after the amendment was enforced w.e.f. 01.04.2021, under the unamended section 148. In our view the same ought not to have been issued under the unamended Act and ought to have been issued under the substituted provisions of sections 147 to 151 of the IT Act as per the Finance Act, 2021.”

It is accordingly decided by the SC that reassessment notices issued during the period 1.04.2021 to 30.06.2021 should have been issued under the substituted provision of Sec. 147 to 151 as per the Finance Act, 2021.

A middle ground for resolution

The legal consequence of the High Court orders was the carte blanche quashing of reassessment notices issued during the specified period as per the law applicable till 31.03.2021 (‘erstwhile law’). It was observed by the SC that the judgments of the several High Courts quashing the notices would result in no reassessment proceedings at all, even if the same are permissible under substituted Sec. 147 to 151 of the Finance Act, 2021. It would thus appear that to resolve this impasse, leeway has been given to proceed further with the reassessment proceedings as per the substituted provisions of Sec. 147 to 151 of the Finance Act, 2021. While adopting a middle ground, the SC has categorically stated that all defences/ rights/ contentions available to the assessee and the RA as under the Finance Act, 2021 and in law shall continue to be available. This is made clear by the following observations from the SC.

“However, at the same time, the judgments of the several High Courts would result in no reassessment proceedings at all, even if the same are permissible under the Finance Act, 2021 and as per substituted sections 147 to 151 of the IT Act. The Revenue cannot be made remediless and the object and purpose of reassessment proceedings cannot be frustrated…….

… …..There appears to be genuine non application of the amendments as the officers of the Revenue may have been under a bonafide belief that the amendments may not yet have been enforced. Therefore, we are of the opinion that some leeway must be shown in that regard which the High Courts could have done so. Therefore, instead of quashing and setting aside the reassessment notices issued under the unamended provision of IT Act, the High Courts ought to have passed an order construing the notices issued under unamended Act/ unamended provision of the IT Act as those deemed to have been issued under section 148A of the IT Act as per the new provision section 148A and the Revenue ought to have been permitted to proceed further with the reassessment proceedings as per the substituted provisions of sections 147 to 151 of the IT Act as per the Finance Act, 2021, subject to compliance of all the procedural requirements and the defences, which may be available to the assessee under the substituted provisions of sections 147 to 151 of the IT Act and which may be available under the Finance Act, 2021 and in law.”

It can therefore be inferred that the limited point of disagreement with the decision of the High Courts is only vis-a-vis the treatment of reassessment notices. As against the quashing of the notices by the High Courts, the SC has opined that such notices should be deemed as a show cause notice under amended Sec. 148A of the Act and consequent proceedings should be conducted subject to substituted reassessment provisions. Other than this specific aspect, the SC has not withered down any other aspect of the High Court decisions. The SC has accordingly partly allowed the petition filed by the RA and modified/substituted the judgements passed by the various High Courts only to the extent of the following:

  • Notices issued u/s 148 (of erstwhile Act) will be construed as notice u/s 148A(b) of the amended Act [requiring the assessee to show cause as to why a reassessment notice u/s 148 (of the emended law) should not be issued on the basis of information suggesting escapement of income]
  • The RA shall, within 30 days (from the date of SC order i.e. 04.05.2022) provide to the assessee information and material relied upon alleging escapement of income
  • The assessee will have the opportunity to file reply to the show cause notices within 2 weeks.
  • The RA shall thereafter pass orders in terms of Sec. 148A(d) i.e. determining whether it is a fit case for reassessment and thereafter proceed to issued notices under substituted Sec.148 of the Act
  • All defences available to the assesses including those available u/s 149 of the Act and all rights and contentions under Finance Act, 2021 shall be available.

Open question of Limitation

The reassessment notices in question were issued during the period 1.04.2021 to 30.06.2021 under the erstwhile Sec. 148 of the Act. Such notices were issued within the extended timelines specified under notifications issued under Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA). Further, such notices have primarily been issued in relation to assessment year (AY) 2013-14 to AY 2017-18.

The Finance Act 2021 has altered the scheme of reassessment substituting Sec. 147 to Sec 149 and Sec. 151 of the Act. The substituted Sec. 149 of the Act has curtailed the time limit for issuance of notice u/s 148 to 3 years (where the alleged concealment is less than INR 50 lacs) and 10 years where the monetary threshold is breached (subject to further grandfathering to 6 years for pre-amendment years).

The question thus arises is whether the limitation period as prescribed under amended Sec. 149 of the Act would be applicable in respect of the proceedings proposed to be regularized pursuant to the decision of the SC, or would such proceedings continue unabated, notwithstanding the period of limitation u/s 149 of the amended Act. This has significance considering that if the limitation under amended Sec. 149 of the Act were to apply, AY 2013-14 to AY 2017-18 would fall beyond the limitation period of 3 years (where allegation for concealment is less than INR 50 Lacs). Also, where the threshold is breached, AY 2013-14 and AY 2014-15 may still fall outside the limitation period [extended limitation of 10 years (restricted to 6 years for pre-amendment years)].

It should be possible to argue that the decision of the SC has merely regularized a step in the process to be followed under the amended reassessment law applicable w.e.f. April 2021. The SC has unequivocally agreed with the decision of the High Courts on the matter, however, with leeway to proceed with the proceedings as per the substituted reassessment provisions as per the Finance Act, 2021.

In this respect, the SC has only construed the reassessment notices issued u/s 148 of the unamended Act as a deemed notice to show cause as per the amended Sec. 148A(b). The SC has categorically stated that the judgements passed by the various High Courts, pursuant to the SC decision have been modified/substituted only to the limited extent as specified. There is no disagreement with the High Courts with respect to the proposition that notices issued on or after 1.04.2021 will be subject to reassessment provisions as amended. It may therefore be fair to state that SC has in fact affirmed the decision of the HCs which have held that the notification issued under TOLA have no applicability to the reassessment proceedings initiated on or after 1.04.2021.

The following extract of the decision of the Allahabad High Court which was under review by the SC clarifies this aspect.

“75. As we see there is no conflict in the application and enforcement of the Enabling Act and the Finance Act, 2021. Juxtaposed, if the Finance Act, 2021 had not made the substitution to the reassessment procedure, the revenue authorities would have been within their rights to claim extension of time, under the Enabling Act. However, upon that sweeping amendment made the Parliament, by necessary implication or implied force, it limited the applicability of the Enabling Act and the power to grant time extensions thereunder, to only such reassessment proceedings as had been initiated till 31.03.2021. Consequently, the impugned Notifications have no applicability to the reassessment proceedings initiated from 01.04.2021 onwards.

Upon the Finance Act 2021 enforced w.e.f. 1.4.2021 without any saving of the provisions substituted, there is no room to reach a conclusion as to conflict of laws. It was for the assessing authority to act according to the law as existed on and after 1.4.2021. If the rule of limitation permitted, it could initiate, reassessment proceedings in accordance with the new law, after making adequate compliance of the same. That not done, the reassessment proceedings initiated against the petitioners are without jurisdiction.”

Thus, given the limited modification of High Court orders primarily deeming the notices issued u/s 148 of the erstwhile reassessment provisions as show cause notice under the substituted provisions of Sec. 148A(b) of the Act and specifying the procedure to be followed thereafter, the SC has not disturbed the position stated by the Allahabad High Court that notifications issued under TOLA will not be applicable in relation to reassessment proceedings initiated on or after 1.04.2021. Further in light of unequivocal declaration by the SC that reassessment proceedings shall proceed as per substituted provisions of Sec. 147 to 151 of the Finance Act, 2021, the reassessment reinitiated should be subject to process, requirements, and limitations imposed (as under amended Sec. 149 of the Act). Thus, the view that reassessment proceedings will be subject to the period of limitation as prescribed under the substituted Sec.149 of the Act should be sustainable.


The moot point of debate now is whether the amended period of limitation as prescribed under the substituted Sec. 149 of the Act will have a bearing on the fate of reassessment notices regularized consequent to the SC order. It seems fair to take a view that reassessment proceedings thus initiated will be subject to limitation period as specified under the amended Sec. 149, in which case AY 2013-14 to AY 2017-18 would fall beyond the limitation period of 3 years (where allegation for concealment is less than INR 50 Lacs). Also, where the threshold is breached, AY 2013-14 and AY 2014-15 may still fall outside the limitation period. While the position seems justified, it is highly unlikely that the RA will give into the same without a legal fight. The stage seems set for the next round of legal battles on this contentious issue.

Contributed by Yatin Sharma. Yatin can be reached at

Immunity from imposition of Penalty & Prosecution under the Income Tax Act – An attractive litigation resolution strategy

Provisions of law

Section 270AA of the Income Tax Act enshrined in the statute effective April 2017 enables a taxpayer to seek immunity from (a) imposition of penalty u/s 270A (in case of under reporting of income other than on account of misreporting) and (b) initiation of prosecution proceedings for wilful attempt to evade taxes (section 276C) or failure to furnish return of income in due time (section 276CC). The immunity is subject to fulfilling the prescribed condition, namely:

  • Payment of assessed tax and interest within the stipulated time; and
  • Non filing of appeal against the order of assessment.

To avail such immunity, the taxpayer is required to make an application in the specified form (Form 68) within a period of one month from the end of the month in which the order is received. Upon receipt of the waiver application, the Assessing Officer, subject to fulfilment of eligibility condition, and on expiry of period prescribed for filing an appeal, is mandated to grant immunity from imposition of penalty and initiation of prosecution proceedings. The order accepting or rejecting such application is required to be passed within a period of one month from the end of the month in which the application is received. Further no order rejecting the application can be passed without given the taxpayer an opportunity of being heard.

The immunity scheme provides the opportunity to fast-track settlement of tax dispute and serve as an attractive strategy to reduce protracted litigation. The provisions however raise interesting questions some of which have recently been subject to judicial scrutiny.

Where penalty notice does not specify – “underreporting” or “misreporting” of income

One of the basic conditions for availing immunity from penalty and prosecution is that the notice for initiating penalty should be only in respect of under reporting of income other than on account of misreporting. In Schneider Electric South East Asia (HQ) Pte. Ltd vs. ACIT International Taxation Circle 3 (1)(2), New Delhi and Ors., the Hon’ble Delhi HC examined the question whether the taxpayer would be eligible to avail the immunity provisions where the penalty notice did not specify the limb (ie. ‘underreporting’ or ‘misreporting’ of income), under which the penalty proceedings had been initiated. Taking into regard the facts, the Court observed that the notice initiating penalty did not specify the particular limb under which penalty notice was issued. The Court further observed that the mere reference to the word ‘misreporting’ by the Assessing Officer in the assessment order could not form the basis to deny immunity (from imposition of penalty and prosecution) where there was no mention as to how the ingredients of “misreporting” were satisfied. Therefore, the impugned order rejecting application for grant of immunity was manifestly arbitrary. The Court accordingly directed the tax authorities to grant immunity under section 270AA.

The ruling brings to relevance the significance of specifying the particular limb under which penalty proceedings are initiated, non-specification of which can be inferred as a case of mere ‘underreporting’. Whether non-specification of specific limb can be a ground for quashing of the penalty notice itself would also be a point to ponder drawing analogy from the jurisprudence under the erstwhile penalty regime in relation to ‘concealment of income’ or ‘furnishing inaccurate particulars.

Failure to pass order accepting or rejecting the immunity application within stipulated period

Under the immunity scheme, the order accepting or rejecting application seeking immunity is required to be passed by the Assessing Officer within a period of one month from the end of the month in which the application is received. In Nirman Overseas Private Limied v NFAC Delhi, the Hon’ble Delhi High Court examined the question whether non issuance of the order by the Assessing Officer accepting or rejecting the immunity application under Section 270AA within the statutory timeline would be regarded as non-passing of the order granting immunity to the taxpayer or otherwise. The Court observed that under the scheme, there is prohibition for availing the benefit of immunity from penalty and prosecution under Section 270AA only in case where proceedings for levy of penalty have been initiated on account of alleged ‘misreporting’ of income. Further the scheme provides for satisfaction of specified condition i.e. payment of tax demand and non-institution of appeal. Where the aforesaid conditions are satisfied, the taxpayer cannot be prejudiced by the inaction of the assessing officer in passing an order (accepting or rejecting the application) within the statutory time limit considering the settled law that no prejudice can be caused to a taxpayer on account of delay/default on the part of the tax authorities. Consequently, penalty order u/s 270A of the Act was set aside with direction to grant immunity under Section 270AA of the Act. The decision of the Court brings forth the significance of the specified timeframe for passing the order accepting/rejecting the immunity application, non-conformance of which would impliedly mean acceptance of the immunity application.

Assessment order assessing a loss and nil tax liability

One of the eligibility conditions requires the taxpayer to pay the assessed tax and interest within the stipulated time before filing the application for grant of immunity. This raises a question whether immunity waiver can be availed in cases where no tax is assessed as payable, for instance where a loss return, after adjustment of variation proposed in the order still remain a loss. The plausible view in this regard is that such cases should also be eligible for the immunity scheme as any contrary interpretation would result in discrimination.

Take for instance a situation where an X amount is proposed as adjustment in case of 2 distinct taxpayer filing a loss return which results in assessed loss in case of taxpayer 1 and a marginal positive income of say Rs. 1000 (and consequentially tax and interest liability) in case of taxpayer 2. While there is no ambiguity regarding eligibility of taxpayer 2 to avail the immunity benefits, however in case taxpayer 1 is denied similar immunity benefit, this may result in discrimination in respect of same class of taxpayer which is constitutionally impermissible.

Also examining this from the perspective of ‘Doctrine of Impossibility’, it is now widely accepted by the courts that the law does not compel a man to do anything impossible or to do something which he cannot possibly perform. In the circumstances where income is assessed at a loss and there is Nil tax demand, the condition (to pay tax and interest) cannot be fulfilled and is arguably not applicable.

It will be useful to take note that case of Nirman Overseas Private Limited (supra) and similar case of Ultimate Infratech Private Limited v NFaC Delhi & Anr. decided in favour of the taxpayers were examined against the backdrop of the facts where the taxpayer was assessed at a loss and there was Nil tax liability, though this issue was not specifically contested by the parties. 

Immunity does not impact contentions in earlier years

A pertinent question which often arises in evaluating the option of availing the immunity scheme is whether it would have any adverse consequences on the issues assented (in connection with which immunity is sought) in relation to other years. To address any apprehension of adverse consideration by the Tax Authorities, the CBDT vide Circular No. 05/2018 dated 16 August 2018, has clarified that seeking immunity from penalty and prosecution u/s 270AA of the Act will not bar the taxpayer from contesting the same issue in any earlier assessment year. It has further been clarified that the Tax Authority shall not take an adverse view in penalty proceedings for earlier assessment years under old penalty regime merely because the taxpayer has applied for immunity under the new scheme.

Closing note

Tax litigation is time consuming and involves significant costs. The immunity scheme provides an attractive opportunity to stay clear from such litigations specially in cases where the amount of tax involved is not significant or the tax position adopted is less likely to be sustainable in higher litigation. This scheme would also be beneficial for taxpayer incurring losses with limited possibility to benefit from carry forward and setoff of such loss in future years. Taxpayers should therefore evaluate the scheme in interest of mitigating litigation and buying peace of mind.

Contributed by Yatin Sharma. Yatin can be reached at

IBC – Income Tax: Face off.

It is now settled by the Hon’ble Supreme Court that provisions of Insolvency and Bankruptcy Code (IBC) will prevail over provisions of Income Tax Act, 1961 (IT Act) to the extent inconsistent. Of the many interesting aspects emerging as the IBC law matures, a question that often arises is whether tax proceedings can continue during the period of moratorium when the corporate debtor (CD) is under resolution. This is in context of Section 14 of IBC which prescribes that on the insolvency commencement date, the Adjudicating Authority is required to declare moratorium for prohibiting, amongst others, the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority during the resolution period. The National Company Law Appellate Tribunal (NCLAT), in the matter of Mohan Lal Jain, In the capacity of Liquidator of Kaliber Associates Pvt. Ltd. Vs. Income Tax Officer, has fairly settled that there is no bar in making assessment during the period of moratorium. However, order cannot be enforced-meaning thereby that recovery of tax pursuant to the order cannot be made. The claim of the tax authorities will form part of the claim before the Resolution Professional. This position is logical considering that all parties are required to make their claim before the Resolution Professional as on the insolvency commencement date. Determination of tax claim would thus necessitate conclusion of tax proceedings during the resolution period.

Another interesting tax aspect is regarding applicability of Withholding Tax (WHT) on transfer of property of a CD in liquidation. Ordinarily, transfer of immoveable property entails TDS of 1% under Section 194IA of the IT Act. The NCLAT in case of Om Prakash Agrawal Liquidator-S.Kumars Nationwide Limited Vs. CCIT (TDS), has held that TDS under Section 194IA of IT Act, is an advance capital gain tax, recovered through transferee on priority over other creditors of the company. The priority of distribution of liquidation proceeds amongst the various stake holders is mandated under Section 53 of IBC which is a non-obstante provision overriding any other law enacted by the Parliament or any State Legislature. Hence, no TDS is warranted since it would run contrary to the waterfall mechanism provided under Section 53 of IBC. This principle will hold good for other Income tax deductions, as applicable during liquidation process.

Such developments reinforce the need for a holistic understating of inter-connected laws, oversight of which can have significant legal and financial implications.

Contributed by Yatin Sharma. Yatin can be reached at

Interest free loans held to be ‘financial debt’ under IBC

Recently, on July 26, 2021, a Division Bench of the Supreme Court pronounced a judgement[1] upholding that interest free loans would fall under the definition of ‘financial debt’ as defined under section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC).

Facts leading to Supreme Court’s decision

M/s Sameer Sales Private Limited (Original Lender), advanced a term loan of INR 1.60 crores to its sister concern, M/s Samtex Desinz Pvt. Ltd. (Corporate Debtor) for a period of two years for working capital requirement. The Original Lender assigned the outstanding loan to M/S Orator Marketing Pvt. Ltd. (Appellant).

The Appellant filed an application under section 7 of IBC for initiation of corporate insolvency resolution process (CIRP) against the Corporate Debtor. The adjudicating authority (AA) rejected the section 7 application vide its order dated February 1, 2020. While rejecting the application, the AA held that neither the loan agreement has any provision regarding the payment of interest nor there is any supporting evidence/document to establish applicable rate of interest to be paid on the said loan. Also, that the Appellant failed to prove that the loan was disbursed against consideration for time value of money, particularly when it has been affirmed that no interest has been paid and was not payable at any point of time. For this, the AA relied on the appellate tribunal’s decision of Dr. B.V.S. Lakshmi vs. Geometrix Laser Solutions Private Limited[2].

Further, the AA relied on the decision of appellate tribunal in the case of  Shreyans Realtors Private Limited & Anr. vs. Saroj Realtors & Developers Private Limited,[3] to observe that when corporate debtor never accepts the component of interest and has given no undertaking to repay the loan with interest, then such debt cannot be termed as ‘financial debt’ under section 5(8) of IBC.

Being aggrieved by the order of the AA, the Appellant preferred an appeal before the appellate tribunal. In appeal, the order of AA was confirmed, and accordingly, the appeal was dismissed. Against the said order of appellate tribunal, the Appellant preferred appeal before the Apex Court.

Apex Court’s Order

Apex Court referred to the definition of ‘financial debt’ as contained in section 5(8) of IBC to observe that the same cannot be read in isolation, without considering other relevant definitions. It then proceeded to discuss the definitions of ‘claim’ in section 3(6), ‘corporate debtor’ in section 3(8), ‘creditor’ in section 3(10), ‘debt’ in section 3(11), ‘default’ in section 3(12), ‘financial creditor’ in section 5(7) and, provisions of  sections 6 and 7 of the IBC.

Section 5(8) defines ‘financial debt’ to mean ‘a debt along with interest, if any, which is disbursed against the consideration of the time value of money and includes money borrowed against the payment of interest’. Basis the same, the Apex Court observed that the orders of AA and appellate tribunal are flawed as they  have overlooked the words ‘if any’, which the legislature, could not have intended to be otiose.

Apex Court proceeded to observe that ‘financial debt’ means outstanding principal due in respect of a loan and would also include interest thereon, if any interest were payable thereon. If there is no interest payable on the loan, only the outstanding principal would qualify as a ‘financial debt’.

Also, the court observed that both the appellate tribunal and AA have failed to notice clause(f) of section 5(8), which provides that ‘financial debt’ includes any amount raised under any other transaction, having the commercial effect of borrowing.

Apex Court also referred to the decision of Pioneer Urban Land and Infrastructure Ltd. Vs. Union of India,[4]where it was held that even individuals who were debenture holders and fixed deposit holders, are financial creditors who could initiate the CIRP.

Basis the aforesaid observations, the Apex Court held that ‘money borrowed against payment of interest’ is one type of financial debt, among various kinds of financial debt as enumerated under section 5(8)(a) to section 5(8)(i) of IBC. Also, that  the definition of ‘financial debt’ in section 5(8) of the IBC does not expressly exclude an interest free loan. Hence, the Apex Court held that ‘financial debt’ would have to be construed to include interest free loans advanced to finance the business operations of a corporate body.


This decision is solely based on the interpretation of term ‘if any’ as contained alongside ‘interest’ in the definition of ‘financial debt’ under section 5(8). However, the phrase ‘time value of money’ was not discussed. Essentially, this phrase assumes that money, for what it is worth today, would be more in future. Therefore, the question remains as to what constitutes ‘time value of money’ in an interest free loan. The Apex Court’s decision has not elaborated on this aspect.

Contributed by Manish Parmar. Manish can be reached at

Views are personal.

[1] M/s Orator Marketing Private Limited vs. M/s Samtex Desinz Private Limited, Civil Appeal No. 2231/2021

[2] Company Appeal (AT) (Insolvency) No. 38 of 2017

[3] Company Appeal (AT) (Insolvency) No.311 of 2018

[4] (2019) 8 SCC 416