I-T exemption on buying shares at lower price in firms under insolvency

The CBDT has exempted from income tax the purchase of shares at rates lower than the market price in companies undergoing insolvency proceedings and whose board has been taken over by the government.

Also investors in troubled debt-ridden Yes Bank who have invested in shares at a price lower than the fair market value (FMV) have been given income tax (I-T) exemption on their discounted investment price.

The Central Board of Direct Taxes (CBDT) through a notification said the exemptions would come into effect from April 1, 2020, and shall be applicable for the assessment year 2020-21 and thereafter.

The I-T exemption has been given on any movable property, being unquoted shares, of a company and its subsidiary received by a shareholder, where, the tribunal on an application moved by the central government has suspended the board of directors of such company and has appointed new directors and where the resolution plan has been approved by the tribunal.

With regard to investors in Yes Bank Reconstruction Scheme 2020, the CBDT said equity shares received by the investor or the investor bank where the said share has been allotted by the reconstructed bank under the scheme at a price lower than the fair market value too would be exempt from the income tax.

Nangia Andersen LLP Partner Suraj Nangia said as per I-T Act, in case shares of a company are received for a consideration less than its fair market value (i.e. at a discount), then shareholder is required to pay tax on such discount.

Vide present notification, the Government has apparently sought to encourage investors to participate in the Yes Bank Reconstruction scheme or any other scheme for reconstruction of a company in whose case proceedings u/s 241 and 242 of Companies Act are pending before the NCLT in cases of alleged oppression and mismanagement, he said.

The government has given income tax exemption to any investor/shareholder receiving shares at a discounted price, under Yes Bank Reconstruction Scheme or any other reconstruction scheme approved by the NCLT in applications filed for alleged oppression and mismanagement of a company, he added.

Such exemption will encourage more investors and make such reconstruction schemes more lucrative and viable, Nangia said.