The Insolvency and Bankruptcy Code (IBC) stands out among the series of reforms the present government has brought about as the Indian banking system juggles with the huge pile of non-performing assets (NPAs) of over Rs 8 lakh crore.

However, as in the case of any new law, the IBC too has certain loopholes and implementation-related issues, which came to the fore as the process progressed.

Even as the government and the Insolvency & Bankruptcy Board of India (IBBI) are being proactive in aiding resolution of NPAs, according to my understanding, there are certain major issues relating to income tax law in the insolvency resolution process that should be addressed in Budget

The implication of deemed income under section 56(2)(x) of the Income Tax Act

This sub-section provides that when shares are acquired at a price lower than the fair value of such shares the difference between the price paid by the acquirer and such fair value would be taxable in the acquirer’s hands as notional income. Since last financial year, this provision is applicable to the acquisition of shares of a listed company and now any discount to the ruling market price would attract tax to the acquirer. As many big stressed companies are listed but their acquisition price could be at significant discount to the market price, this could bring in an immediate tax burden on the acquirer. Hence, the Government should exempt transactions relating to transfer of shares of a listed companies under insolvency resolution plans.