Tag: Central Board of Direct Taxes

Ten steps for overhaul of ARCs as competition for bad bank arrives, BFSI News, ET BFSI

Banking & Finance

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In a bid to streamline the functioning of asset reconstruction companies (ARCs), a Reserve Bank committee has come out with a host of suggestions including the creation of an online platform for the sale of stressed assets and allowing ARCs to act as resolution applicants during the IBC process.

Amortise loss

To incentivise lenders to sell their financial assets to ARCs at an early stage of stress, the RBI panel has recommended a dispensation to lenders, on an ongoing basis, to amortise the loss on sale, if any, over a period of two years. To optimise upside value realisation by lenders, it recommends a higher threshold of investment in security receipts (SRs) by lenders, below which provisioning on SRs held by them may be done on the basis of Net Asset Value (NAV) declared by the ARC instead of IRACP norms.

Online platform

An online platform may be created for sale of stressed assets and infrastructure created by the Secondary Loan Market Association (SLMA) may be utilised for this purpose. For all accounts above Rs 500 crore, two bank-approved external valuers should carry out a valuation to determine the liquidation value and fair market value and for accounts between Rs 100 crore to Rs 500 crore, one valuer may be engaged. Also, the final approval of the reserve price should be given by a high-level committee that has the power to approve the corresponding write-off of the loan.

Acquiring financial assets

In the interest of debt aggregation, the scope of Section 5 of the SARFAESI Act, and other related provisions, may be expanded to allow ARCs to acquire ‘financial assets’ as defined in the Act, for the purpose of reconstruction, not only from banks and ‘financial institutions’ but also from such entities as may be notified by RBI. RBI may consider permitting ARCs to acquire financial assets from all regulated entities, including AIFs, FPIs, AMCs making investment on behalf of MFs and all NBFCs (including HFCs) irrespective of asset size and from retail investors. ARCs should be allowed to sponsor SEBI registered AIFs with the objective of using these entities as an additional vehicle for facilitating restructuring/ recovery of the debt acquired by them.

Binding on lenders

If 66% of lenders (by value) decide to accept an offer by an ARC, the same may be binding on the remaining lenders and it must be implemented within 60 days of approval by majority lenders (66%). 100% provisioning on the loan outstanding should be mandated if a lender fails to comply with this requirement. Given that the debt aggregation is typically a time-consuming process, the planning period is elongated to one year from the existing six months. In cases where ARCs have acquired 66% of debt of a borrower, the Act should provide for two years of moratorium on proceedings against the borrower by other authorities. The Act should also provide that Government dues including revenues, taxes, cesses and rates due to the Central and state governments or local authority will be deferred in such cases.

Equity sale

For better value realisation for originators and enhancing the effectiveness of ARCs in recovery, even the equity pertaining to a borrower company may be allowed to be sold by lenders to ARCs which have acquired the borrower’s debt. The Committee recommends that ARCs may be allowed to participate in the IBC process as a Resolution Applicant either through a SR trust or through the AIF sponsored by them.

Allowing HNIs to buy SRs

For giving impetus to listing and trading of SRs, the list of eligible qualified buyers may be further expanded to include HNIs with minimum investment of Rs 1 crore, corporates (Net Worth-Rs 10 crore & above), all NBFCs/ HFCs, trusts, family offices, pension funds and distressed asset funds with the condition that (a) defaulting promoters should not be gaining access to secured assets through SRs and (b) corporates cannot invest in SRs issued by ARCs which are related parties as per SEBI definition.

Minimum SR investment

The interest of investors and investing lenders should be weighed against the need for distribution of risk among the willing investors. Therefore, it recommends that for all transactions, per SR class/ scheme, the minimum investment in SRs by an ARC should be 15% of the lenders’ investment in SRs or 2.5% of the total SRs issued, whichever is higher.

Credit rating agencies

Recognising the critical role of Credit Rating Agencies (CRAs) in the valuation of SRs and, therefore, the need for continuity in engagement of CRAs, the Committee recommends that ARCs must retain a CRA for at least three years. In case of change of a CRA, both parties must disclose the reason for such change.

Tax pass through

In the matter related to taxation of income generated from investment in SRs issued by ARCs, the possibility of a ‘pass-through’ regime for AIF investors may be looked into by the Central Board of Direct Taxes (CBDT). The CBDT may consider clarifying on the tax rate applicable to FPIs.



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IT department freezes Rs 53-crore deposits of Maharashtra-based urban cooperative bank, BFSI News, ET BFSI

Banking & Finance

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The Income Tax Department has frozen deposits worth over Rs 53 crore of an urban credit cooperative bank in Maharashtra after it found “glaring irregularities” in the opening of accounts in a recent raid, the CBDT said on Saturday. The department raided the headquarters of the bank and the residence of its chairman and a director on October 27, it said.

While the official statement did not name the searched entity, sources identified it as Buldana Urban Cooperative Credit bank.

“The analysis of bank data on core banking solutions (CBS) and the statements of key persons recorded during the search action have revealed glaring irregularities in opening the bank accounts.

“More than 1,200 new bank accounts were opened in the said branch without PAN (permanent account number),” the Central Board of Direct Taxes, which frames policy for the tax department, said in a statement.

The investigations, it said, found that these bank accounts were opened “without following KYC (know your customer) norms and all account opening forms are filled in by the bank staff and they have put their signature/thumb impressions”.

The department alleged that multiple cash deposits of “exact” denomination of Rs 1.9 lakh each were made and they totalled Rs 53.72 crore.

“Out of these, more than 700 bank accounts have been identified which were opened in a series where cash deposits of more than Rs 34.10 crore were made immediately within seven days of the opening of bank accounts, mainly during the period August 2020-May 2021,” it said.

“These deposits have been structured to avoid the mandatory PAN requirement for cash deposits over Rs 2 lakh,” it added.

The money was subsequently converted into fixed deposits in the same branch, the statement claimed.

The CBDT said enquiries in a few cases of such account holders showed that they were “not aware of cash deposits in the bank and categorically denied any knowledge of such bank accounts or even the fixed deposits”.

“The chairman, CMD and the manager of the branch, could not explain the source of cash deposits and accepted that these were done at the behest of one of the directors of the bank, who is a prominent local businessman engaged in trading of grains.

“On the basis of the evidences gathered and statements recorded, the entire amount of Rs 53.72 crore has been restrained,” the statement said.



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NCLT orders freeze of Venugopal Dhoot, Videocon’s senior management’s assets, BFSI News, ET BFSI

Personal Finance

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It may not end for defaulting promoters with losing their companies. Their assets are at risk too.

The National Company Law Tribunal (NCLT) has ordered a countrywide search and freeze of the assets of Venugopal Dhoot, his wife, his company and the firm’s chief financial officer as well as company secretary.

The order was in response to a petition filed by the Ministry of Corporate Affairs (MCA) against the bankrupt group. The MCA’s move comes in the wake of banks being able to recover only 4% of their admitted claims of Rs 64,838 crore under the bankruptcy process.

The government had approached the tribunal under Section 241 and 242 of the Companies Act, which empowers the MCA to act if there is a fraud, misfeasance or persistent negligence.

Notices to be served

Responding to the petition, the tribunal has instructed the MCA to serve notices to disclose on affidavit moveable and immovable properties/assets, including bank accounts, owned by them in India or anywhere in the world. It also
directed the Central Depository Services (CDSL) and National Securities Depository (NSDL) to freeze all securities held by the respondent, which include the Dhoots, the company and senior management.

The Central Board of Direct Taxes has also been asked to disclose the information it has in its possession of all the respondents.

Bank accounts, lockers to be frozen

The Indian Banks Association has been directed to facilitate disclosures of the details of the bank accounts, lockers owned by the respondents and such bank accounts and lockers also be frozen with immediate effect.

Finally, the MCA has been instructed to write to state governments and Union Territories to identify and disclose all details of immovable properties held by the respondents.

Despite receiving a bid for only 4% of the admitted debt, which was close to the liquidation value, lenders had agreed to sell Videocon to Twin Star, a Vedanta company.

Unlike enforcement authorities that have sweeping powers, banks under insolvency can only pursue assets of the company that has gone bankrupt. The sale was, however, stalled as the appellate tribunal granted a stay following an appeal from Bank of Maharashtra — a dissenting creditor. In its order on Wednesday, the NCLT said, “This bench is

surprised with the manner in which the financial institution has come forward to grant loans to a sinking ship and again come forward to file petition under Section 7 of IBC and again supports this petition. This certainly rises the eyebrows of the common man in the public.”

Personal guarantees

In July, banks had approached the National Company Law Tribunal for invoking personal guarantees of promoters of 17 defaulting companies.

The defaulting promoters include those of Punj Lloyd, Amtek Auto, ABG Shipyard, Videocon, Varun Shipping, and Lanco, according to reports.

Armed with a Supreme Court order, banks are looking to invoke personal guarantees of tycoons from Venugopal Dhoot to Kapil Wadhawan to recover unpaid loans from their delinquent firms



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Taxpayer Charter: Why execution matters

Personal Finance

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The Centre recently unveiled a new Taxpayer Charter, listing out an income taxpayer’s rights and obligations.

The UK and Australia have similar charters in place.

This move comes a year after the Centre abolished the Tax Ombudsman institution that was established nearly a decade ago. The Charter is trying to address this gap in a way. It addresses only income taxpayers, while the ombudsman scheme was available for both direct and indirect taxpayers. The Charter emphasises that the Income Tax (I-T) Department trusts the taxpayers upfront.

However, there are no new elements in the charter as such because the rights and obligations are already part of the Income Tax Act, 1962.

Global experience

Australia and the UK have strived to codify their tax charters into an institutional philosophy on how revenue-collecting agencies deal with taxpayers. There are frequent reviews of implementation of their charters based on the experience of taxpayers. In India, there has been no such information yet, except the one page that enumerates rights and obligations of a taxpayer.

It doesn’t stem from any legal provision in the I-T Act either. The announcement of the charter seems to be an attempt to tone down the adversarial approach that the I-T Department has taken in the past with some taxpayers.

The charter seems to dovetail the new faceless assessment and appeal scheme that the Centre has unveiled.

Here, the assessment proceedings have been de-linked from the taxpayer’s location, and will be distributed to income-tax officials across the country in a randomised manner.

There is not enough clarity as to whether all cases will be taken up through this faceless assessment and appeal scheme, or how documents that are needed for assessment proceedings will be allowed to be shared with the assessing officer or at the level of commissioner appeals.

Execution is key

The Taxpayer Charter seems to have resurrected the complaint mechanism that was earlier available through the ombudsman scheme.

Taxpayers who are unhappy or perceive the handling of their assessment proceedings to be contrary to the Taxpayer Charter can approach the Principal Chief Commissioner of Income Tax of their respective zones.

How this will work in an environment where assessments are distributed across the country to income-tax officials is still not clear. One will have to wait for more details.

One reason the Taxpayer Charter might not work well in the current environment is the practice of assigning steep revenue targets to income-tax officials.

Only if the I-T Act, its rules and the Central Board of Direct Taxes’ regulations make complying with the charter mandatory, can there be any meaningful change in the experience of an income taxpayer.

It needs to be seen whether this new charter changes the income taxpayer’s experience while dealing with officials while undergoing scrutiny assessments.

It also needs to be seen whether the charter evolves into a more robust grievance redressal mechanism. The current mechanism available through the Income Tax Department’s return e-filing portal and ASK centres allows grievances such as non-processing of returns, not receiving refunds, return rectification pending with assessing officer and correction of incorrect outstanding demand.

It will be interesting to see how the charter evolves these processes to make the interaction of Income Tax Department with taxpayers easier, especially in cases involving alleged harassment.

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