Tax Query: Setting off capital losses in delisted shares

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Kindly guide whether there is any method by which capital loss under Income Tax provisions can be set off against the shares which get delisted and are not traded, or have become unmarketable? Please also guide about the tax treatment on equity shares where capital reduction has been effected.

E Madhavan NairAs per the provisions of Section 71 of the Income-tax Act, 1961 (‘the Act’), losses under the head of capital gains can be set-off against income under the head of capital gains only. Further, as per the provisions of Section 70 of Act, Short-Term Capital Loss can be set-off against Long-Term or Short-Term Capital Gain. However, Long-Term Capital Loss can be set-off only against Long-Term Capital Gains. Holding period of capital asset determines the nature of Capital Assets viz. a Long-Term Capital Asset or a Short-Term Capital Asset. As per the provisions of the Act, assets in the nature of unlisted equity share would qualify as Long-Term Capital Asset, if at the time of selling, the same has been held for a period of 24 months or more. Otherwise, the same would qualify as Short-Term Capital Asset. In order to answer the query, additional facts and clarity would be required. However, in the instant case, if the subject Capital Loss is Short-Term in nature (to be ascertained based on the period of holding and nature of the asset), such loss can be set off against Short-Term / Long- Term Capital Gain arising from any other capital asset. However, if such loss is Long-Term in nature, the same can be set off against Long-Term Capital Gain arising from any other capital asset. In case of a Capital Reduction, if the shareholders receive any payout the tax treatment as per the provisions of the Act would be twofold as mentioned below:

Taxability as Dividend: As per the provisions of section 2(22)(d), distribution by company on capital reduction (to the extent attributable to its accumulated profits), shall be considered as deemed dividend. It is also important to note that as per the amendments made by Finance Act 2020, companies are no longer required to pay dividend distribution tax. Dividend income is taxable in the hands of the shareholder at applicable slab rates. The payor company would be required to deduct Taxes at Source (TDS) on such dividend under section 194 of the Act at 10 per cent, for dividends paid in cash. For dividends paid via any mode other than cash, TDS shall be required, if aggregate payment exceeds ₹5,000. Taxability as Capital Gain / Loss: Taxation for distribution of profits (over and above accumulated profits) has been a matter of debate. There are judicial precedents which suggest that such distributions shall be regarded as transfer and would result in Capital Gain / Loss in the hands of the shareholder.

The writer is a practising chartered accountant

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Interest on interest refunds: Lenders make provisions in Q4FY21

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Post the announcement of fourth quarter results by banks and finance companies, it has come to light that many have made provisions for refunding the interest on interest on the loan moratorium to all borrowers.

Private sector lender HDFC Bank has kept aside ₹500 crore for interest on interest provisions while ICICI Bank said it has provided ₹175 crore for the purpose. For Axis Bank, the estimated impact of the interest on interest refund is ₹160 crore.

Mahindra Finance has kept aside ₹32 crore for this purpose.

In its fourth quarter results, PNB Housing Finance had said that the methodology for calculation of the amount of such ‘interest on interest’ has been recently circulated by the IBA.

“The company is in the process of suitably implementing this methodology and has created a liability towards estimated interest relief and reduced the same from the interest income for the year ended March 31, 2021,” it had said.

In a recent note, ICICI Securities had said that the waiving ‘interest on interest’ on loans above ₹2 crore during the moratorium period on all loans will lead to a fresh burden of ₹11,200 crore on the industry. This will include about ₹3,200 crore for private banks and small finance banks, ₹5,500 crore for public sector lenders and ₹2,000 crore for all NBFCs and housing finance companies, it had said.

IBA finalises methodology

While some lenders have sought clarifications, the IBA has recently finalised the uniform methodology for refund or adjustment as per the Supreme Court judgement.

Under the norms, borrower accounts which were standard as on February 29, 2020 including SMA-0, SMA-1 and SMA-2 will be eligible for the refund. All loans, working capital, trade products, which had outstanding during the moratorium period shall be considered.

The Supreme Court, in its judgement in March, had ruled that all borrowers will be eligible for waiver of interest on interest for the loan moratorium due to the Covid-19 pandemic.

On April 7, the Reserve Bank of India had asked all lenders to compensate borrowers for the interest on interest during the moratorium whether they had taken the moratorium or not. Earlier, the Centre had picked up the tab for waiver of interest on interest for loans up to ₹2 crore.

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Ind-Ra revises banking sector outlook for FY22 to Stable

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India Ratings and Research (Ind-Ra) has revised its outlook on the overall banking sector to stable for FY22 from negative.

The credit rating agency estimated that overall stressed assets (gross non-performing assets/GNPA + restructured) could increase 30 per cent for the banking system, with the increase being almost 1.7 times in the retail segment in the second half (October 2020 till March-end 2021) FY21.

Also read: States’ fiscal deficit to moderate to 4.3% of GDP in FY22: India Ratings & Research

The agency estimates gross non-performing assets (GNPAs) at 8.8 per cent in FY21 (FY22: 10.1 per cent) and stressed assets at 10.9 per cent (11.7 per cent).

Along with revision in outlook, Ind-Ra has upgraded its FY21 credit growth estimates to 6.9 per cent from 1.8 per cent and 8.9 per cent in FY22, with the improvement in the economic environment in 2H FY21 and the government of India’s (GoI) focus on higher spending, especially on infrastructure.

Referring to the revision in outlook, Ind-Ra observed that the substantial systemic measures have brought the system-wide Covid-19-linked stress to below expected levels.

Further, banks have also strengthened their financials by raising capital and building provision buffers.

According to its assessment, provisioning cost has fallen from the earlier estimate of 2.3 per cent for FY21 to 2.1 per cent (including Covid-19-linked provisions); it is estimated at 1.5 per cent for FY22.

Outlook for PSBs

Ind-Ra

revised the outlook on public sector banks (PSBs) to Stable for FY22 from Negative.

The agency reasoned that regulatory changes led to an improvement in the ability of PSBs to raise Additional Tier (AT) I capital, a high provision cover on legacy NPAs, overall systemic support resulting in lower-than-expected Covid-19 stress, and minimal surprises arising out of amalgamation of PSBs.

Also, the fact that the GoI has earmarked ₹34,500 crore for infusion in PSBs in 4Q (January-March) FY21d should suffice for their near-term growth needs.

Outlook for private banks

Ind-Ra

said the outlook remains Stable for private banks, which continue to gain market share, both in assets and liabilities, while competing intensely with PSBs.

“Most have strengthened their capital buffers and proactively managed their portfolios. As growth revives, large private banks would benefit from credit migration due to their superior product and service proposition,” the agency said in a note.

Stressed assets

According to Ind-Ra’s estimates, stressed assets will rise 30 per cent in 2HFY21 and 8 per cent in FY22.

The agency estimates that about 1.24 per cent of the total bank book is under incremental proforma NPA and about 1.75 per cent of the total book could be restructured by end-FY21.

“As a conservative measure, the agency has not adjusted for overlaps between those categories. This is the incremental stress purely on account of the Covid-19 pandemic and does not include the slippages that banks would witness in the normal course of business,” said the note.

Also read: Lenders remain risk averse to additional lending or alter lending terms: Ind-Ra

Ind-Ra estimated the stock of stressed retail assets for PSBs could increase to 2.9 per cent in FY22 from 2.1 per cent in FY21, while it could increase from 1.2 per cent to 4.3 per cent for private banks.

Provisions

Excluding Covid-19-linked stress, Ind-Ra expects the provision coverage ratio (excluding technical write-offs) for both PSBs and private banks to reach 75 per cent-80 per cent by end-FY21.

“If we consider the provision on proforma gross NPAs (still not considering Covid-19 provisions), the resultant provision cover could be about 70 per cent at end-FY21 and FY22, while the historic slippage rate will continue and banks would still have Covid-19 provisions as buffers.

“PSBs have 0.2 per cent-0.5 per cent provisions while private banks have 1 per cent-2 per cent Covid-19 provisions, most of which is unutilised,” the agency said.

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Federal Bank Q3 net slips 8%

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Federal Bank reported an 8 per cent decline in third quarter net profit at ₹404 crore against ₹441 crore in the year-ago quarter.

The bottomline was weighed down by a 161 per cent year-on-year (yoy) jump in provisions (other than tax) and contingencies at ₹421 crore (₹161 crore in the year-ago period).

Also read: Federal Bank reports 12 per cent increase in total deposits

Net interest income was up 24 per cent yoy to ₹1,437 crore (₹1,155 crore). Other income increased by 18 per cent to ₹482 crore (₹408 crore).

Gross non-performing assets (NPAs) declined to 2.71 per cent of gross advances against 2.84 per cent in the preceding quarter.

Net NPA position improved to 0.60 per cent of net advances against 0.99 per cent in the preceding quarter.

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