The Income Tax Department is considering initiating proceedings against Bhushan Power and Steel Ltd (BPSL) over tax benefits claimed as part of the company’s acquisition by JSW Steel in 2020, two senior government officials said.
The department, however, is unlikely to take any action in the coming days as it is waiting for clarity on further developments post the Supreme Court’s annulment of the acquisition on May 2, an I-T official told Moneycontrol.
On May 2, the Supreme Court cancelled JSW Steel’s Rs 19,700 crore acquisition of BPSL and ordered the company's liquidation. JSW had bid for BPSL via the corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code (IBC), which was approved by the National Company Law Tribunal (NCLT) in 2019.
In the coming days, the Committee of Creditors (CoC) led by Punjab National Bank is likely to join hands with JSW Steel in seeking a review of the Supreme Court's verdict in the Bhushan Power and Steel (BPSL) case, Moneycontrol has learnt.
Loss provision under IBC
Currently, one of the major tax implications in the acquisition of a company—especially a financially distressed or insolvent one—is the treatment of carried-forward business losses and unabsorbed depreciation. The present laws, specifically Section 79 of the Income Tax Act, 1961, restrict the carry-forward and set-off of losses by the company if there is a change in its shareholding exceeding 51 percent.
For instance, if a company (say BPSL) records a loss in any financial year, according to Section 79, it cannot be carried forward to the next year. This means the loss would not be subtracted from the profit generated by the company in the subsequent financial year, which will increase its taxable amount. Typically, the I-T Act allows carry-forward of losses up to 8 assessment years.
However, a key exception is available for companies undergoing resolution under the Insolvency and Bankruptcy Code (IBC). As per the proviso to Section 79(2), if the change in shareholding results from a resolution plan approved by the NCLT under Section 31 of the IBC, the restriction does not apply.
"Hence, even though the shareholding of the company, which has been subject matter of IBC, changes completely (say 100 percent), its past income-tax losses continue to be available to such company in the future (subject to certain limits) to be set off against the subsequent year’s profits, thereby benefitting such company on account of lower/nil quantum of tax, post coming out clean-slate IBC process," explained Dipesh Jain, Partner, Economic Laws Practice.
During the IBC proceedings, in FY21, BPSL’s losses were close to Rs 7,000 crore, but post the acquisition, the company turned profitable and claimed benefits in the financial years FY22, FY23, and FY24.
Sandeep Sehgal, Partner, AKM Global, said: "This tax relief plays a crucial role in making distressed acquisitions financially viable and supports the broader policy objective of reviving companies under IBC by preserving legitimate tax benefits."
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