Insolvency and Bankruptcy Code, - A game changer

Fact File

·     Over 2100 companies have cleared their outstanding dues of around Rs. 83,000 Crore to Banks due to fear of losing control over their businesses

·     Recoveries made by lenders (financial creditors) is around 70% of their claims value and 215% of the liquidation value in Jan-Mar’18 quarter (12 cases reaching resolution)and in many cases the recovery % is equal to or more than 100% of the claims admitted

·     Competitors / Companies find assets at attractive value which otherwise were lying idle – a win-win for buyers, lenders and promoters

·     Insolvency Code is being used as a Debt Recovery Tool – a potential abuse of the code by Operational Creditors? (60% cases filed by Operational Creditors till Dec-17)

·     Homebuyers given the status of Financial Creditors under IBC

What an achievement in the direction of unlocking the value locked in stressed assets of companies, which are either willful defaulters or have turned defaulters due to turn of economic events for them. 

Features of the Code making this succeed

The Insolvency and Bankruptcy Code was brought after unsuccessful efforts of many decades, to revive the sick companies or take them to conclusion of liquidation, backed by many laws including Companies Act, 2013 and Companies Act, 1956, Sick Industrial Companies Act, 1985, Recovery of Debts Due to Banks & Financial Institutions Act, 1993, etc. But finally, this Code is the one which seems to be working. As the data shows and experts feel that this has just the beginning and once the law evolves to maturity, the results could be surprising and beneficial in establishing the healthy credit market in India.

What is significant to know is that: 1) It enables even the goods and services providers having undisputed outstanding dues of Rs. 1,00,000 or more to get the insolvency resolution process started (even employees can initiate this process) viz.ask all stakeholders to gather through a legally formed committee of creditors and work out a plan of resolution to make the company run as going concern.  2) The entire process of finding a resolution is to be completed within a period of 180 days which in some cases can be extended to 270 days but only with the permission of Court (NCLT). 3) The process is run by a professional representative duly appointed by committee of creditors and is under the close watch of the regulator – Insolvency and Bankruptcy Board of India (IBBI), Professional Agencies (IIIPI, IIPICSI, IIPICAI) and Courts. 4) No civil court cases can be initiated  against this company under CIRP (Corporate Insolvency Resolution Process). 5) The waterfall (technical term for defining the order of payment of various types of dues) is defined and importantly, it does not keep the government dues at the top, unlike the earlier acts. 6) And at the end of it all, if it is concluded to the satisfaction of the court that the company fails to reach a resolution (in other words the company cannot pay off its dues to the satisfaction of the creditors), it shall be liquidated i.e. its assets sold off to pay off its dues, in another 2 years.

Big achievements or the just the beginning

The Bankruptcy Law Reforms Committee, the father of this law gathered the data of recovery from sick (defaulting) companies in India and estimated it at 26% of the claim value. As the above data shows(even though for a small population of 12 companies reaching resolution in Jan-Mar’18 period), the recoveries are at healthy ~70%. This is significant jump. 

Lets understand, why have companies come forward and paid back Rs.83,000 Crores, while they were unwilling to pay earlier? What in this law has made them to reach this conclusion of paying? This law works on the principle that the lenders shall take control of defaulting companies, if the promoters are not able to pay up. In the fear of losing control over the valuable assets (of course, value is not discovered now), the promoters are willing to do, all what is necessary to pay back the dues and retain control over their businesses.

Another significant attempt to stop dishonest promoters from getting the back door entry into their business, at a discount, through the resolution process has been made in the Act by way of Section 29A, which debars the willful defaulters to bid for their own companies in a resolution plan. I think this is only fair to do so, though there are pros and cons of blanket bans, of course.

But, unfortunately most of the big cases, as of now are in the courts due to various technical issues of the process being challenged. But, I feel this is the process of evolution for all including companies, promoters, lenders, creditors, courts and taxpayers. 

Now that a large community of the society i.e home buyers are also treated as  financial creditors under the Code (earlier they were other creditors), it would be interesting to see if this Code becomes a good recovery tool for the homebuyers or they are the losers at the end of it all, as it is being debated whether the bad projects can actually be revived through the process of insolvency resolution process or not

The opinions might differ about the achievements so far and the course correction needed to achieve its desired goal but its i certainly making its presence felt to all those whom it matters and in my opinion, the game of insolvency resolution has just begun! 

Filing of Income Tax Returns for Assessment Year 2018-19

Filing of Income Tax Returns (ITRs) of course is a normal yearly actvity conducted by all of us every year. What  is new this year which is prompting to write about this now. I can do this by 31^stJuly 2018, if I am an individual salaried person, and if could not finish it by then due to some reason, I shall do it latest by 31^stMarch 2019. I know all of this, right!

No, a few things have changed during this year which need your attention.

As per the changes applicable effective 1^stApril 2018, you need to file your return in time (by “due dates” as prescribed by Income Tax Act and Rules) and if you fail to do so, a madatory “Late filing fees” will be added to your tax liability, in addiiton to additional “Penal interest” which you need to pay anyways under section 234A, 234B and 234C of the Income Tax Act. 

You may note that w.e.f. 1st Apr 2018, a new section Sec 234F is inserted to levy penalty for late filing of ITR. Sec 234F is effective from  Assessment Year 2018-19 ( Financial Year 2017-18).

If ITR for AY 2018-19 is filed after due date (31th July for individuals without audit, 30th September for other persons) but before 31st  Dec 2018 then Late filing fees of Rs.5,000/- will be levied and if ITR is filed after 31st Dec then Rs. 10,000 will be levied as Late filing fees.

However, for small tax payers with income upto Rs. 5 Lakhs, Late filing fees will be restricted to Rs.1,000 only.

The Late filing fee (penalty) will be as follows:

Particulars	Fee (Penalty)
Return is filed on or before 31st December of Assessment Year but after due date and total Income exceeds Rs. 5 Lakh	Rs.5,000
Return is filed on or before 31st December of Assessment Year but after due date and total Income do not  exceeds Rs. 5 Lakh	Rs. 1,000
In any other case	Rs.10,000

There were enough disincentives for filing belated returns (i.e. filing after due dates but before the last date) even earlier for some classes of taxpayers such as business owners and Companies such as:

1.    the losses (other than house property losses) were not allowed to be carried forward for set off in next years

2.    the additional interest is chargeable under section 234A for late filing of ITR, in case there is any tax due to be paid. This is apart from additional monthly penal interest accruing u/s 234B and 234C, if the tax is due to be paid.

The last date for filing belated returns has already been reduced last year from “1 year after the end of the assessment year” to “the last day of the assessment year”. That means even belated returns for AY 2018-19 with Late filing fees can be filed only till 31^stMarch 2019. That means you cannot file ITR for AY 2018-19 after 31^stMarch 2019, in normal course.

The due dates for filings of ITR should be kept in mind:

1. Salaried Individuals, AOPs, Individual business owners, Firms whose books are not to be audited - it is 31st July 2018

2. Companies, Partnerships Firms and Trusts where the books are to be audited under IT Act or any other law or Partners of such Firms - 30th Sep 2018

3. For persons who are required to submit a report u/s 92E of the Income Tax Act - 30th Nov 2018

Investment in FMP / Liquid funds - Some interesting facts for your advantage

There is a news item in Economic Times on 9th Jan 2014 on page 10 "Liquid Funds Get Tech Edge to Lure Retail Investors now" and in that there is a Data shared by ET which says that the Liquid and money market funds corpus has gone up from Rs.1.29 lakh crores in Jul 2013 to Rs.2.46 lakh crores by Nov 2013. What is the reason?

There are many and I would like to share some of them :

1. These funds offer very good return in short term i.e. less than six months as compared to FD, the most popular fixed return option. For a period of 1 day to 180 days the rate of return is around the same i.e. 8.5% p.a. as of now whereas the FDs for this period offer only 6 to 7% p.a. maximum.
The taxation impact is same for both for this period.

That means it is good for those who want to park their money for short term period.

2. For medium term period i.e. more than 6 months upto 1 year, the rates are broadly the same for both FD and these funds and there is no difference in tax rate either.

Therefore, it is rate and tax neutral for these investors.

3. If the investment horizon is more than 1 year, the rates could be higher if the chose mode is FMP (Fixed Maturity Plan) as compared to FD. But the major gain arises from the tax arbitrage as the FDs are tax at the highest tax bracket of your income whereas these funds are taxed as Capital Gains and are allowed Indexation benefit and due to this the tax is virtually nil on these funds.
The difference in tax leads to post tax return of 9 - 10% approx for these as compared to post tax FD return of 6.5% for investors in 30% tax bracket.
Therefore, even for long term investors it is beneficial to invest in these debt / liquid funds / FMP. The return could higher by about 40% - 50%.

4. There is no fixed tenure for liquid funds and there is no exit load. But on debt funds, the exit load can reduce the exit earlier than six months and it could be upto 0.5%.
FDs charge a higher penalty for earlier exit and the penalty for pre mature withdrawals could work out to more than 1%.
FMPs, however, cannot be exited before the maturity and should be invested only if the funds are completely not needed for the defined period.

Therefore, for those who do not know for how many months the funds can be kept idle / or have funds being accumulated for a defined purpose, these can be parked in liquid funds / debt funds without worrying about the period of investment (ideal for short, medium or long term period)  etc. 

FMPs of more than 1 year, due to mainly their high return and tax arbitrage, offer very attractive investment fixed return option for idle funds.

These are my personal views and should not be considered as legal advise. You are requested to consult a professional before acting on this blog. 

For any query / suggestion on my blogs, feel free to write to me at piyushsgarg@gmail.com.

Earn more return through Tax Arbitrage

What is Tax Arbitrage?
The difference in tax rate due to various reasons on similar investments is tax arbitrage. That means two or more types of investments are earning similar rate of returns whereas you are paying more tax on one type as compared to other types.

How do you gain?
You will gain if you choose the lower taxed investment. However, the savings could differ from one individual to another depending upon which tax slab your income falls in. For example if your income is falling in highest tax bracket i.e. 30%, you may gain more as compared to others whose incomes are lower and fall in lower tax brackets of 20% or 10%.
That gives you all the more reason to read this carefully and implement for yourself.

Where is this arbitrage available and how to make use of that?
If you invest your funds in bank FDRs which is earning an interest of 8.5% p.a.and if you are taxed at 30% the net return on your would be calculated as => 8.5% minus tax i.e. 30% of 8.5% = 8.5% minus 2.55% = 5.95%. You may be surprised but this is the net rate of return which you are receiving currently.

Now the question is - how this return can improve?
There are similar variable interest bearing instruments called Debt / Liquid Mutual Funds which earn similar returns as compared to FDR but are taxed at much lower rates if the funds are invested for more than a year. The sample calculation of return from a debt fund is as under:

Gross Gain on Debt / Liquid MF earned in a year = 8.5%
Capital Gain on Debt MF would be calculated after indexation of purchase cost, if sold after a year as this is treated as Long Term Capital Gain (This is not taxed as interest)
This gain after indexation would be either zero or negative and there would be nothing to pay tax on.

Hence the Net return on Debt MF, if growth option is chosen = 8.5% p.a.
The growth option does not give your earnings in instalments and is paid to you at the time of closure / withdrawal of the fund. You may choose dividend payouts also, but the tax arbitrage is not applicable as the dividend is taxed at a higher rate.
Additionally, if there is any long term capital loss as calculated above, the same can be used to set off other capital gains (non STT paid) and can reduce your tax liability further.

In case, there is any gain after indexation as calculated above (though the chances are almost zero in the present infaltion situation), it would be very less and the tax would be payable on that @20% regardless of your tax slab and therefore the return would be high as compared to FD.

How safe are Debt / Liquid MF  as compared to FDR?
This is almost as safe as FDR and can be relied upon.

Additional Advantage in cash flow planning?
This offers additional advantage when you are unsure of the period for which the money can be spared for investment by you / you are saving for some specific objective in mind such as purchase of car / house / marriage / education of children etc. and not sure when you may need the funds. In FDR the return is linked to period of investment which is high if the period is 1 or more years and could be as low as 6% if the period is less e.g. 3 months or so and if you pre-mature your FDR, there is a interest rate penalty which reduces the return.
In Debt / Liquid funds, the return is earned daily and would not vary due to period / duration of investment. Therefore, if you plan to keep your money for undefined period, the rate would not be affected much due to this inability to predict the duration of investment.


Needless to mention that you can now call your MF agents if any and learn about these even more.

These are my personal views and should not be considered as legal advise. You are requested to consult a professional before acting on this blog. 

For any query / suggestion on my blogs, feel free to write to me at piyushsgarg@gmail.com.

Have you received a Notice of Income Tax Demand?

As explained in the previous blog, if there is any difference in the tax as per ITR filed by us and the calculations made by CPC / Income Tax officer while processing the ITR, the same is intimated to us vide intimation u/s 143(1). If this difference results in some tax payable by us, this is called Income Tax Demand and a notice u/s 156 may be issued. Even intimation u/s 143(1) is sufficient for you to get alert and understand that some additional tax liability has arisen.

Now, what should you do when a Demand of Income Tax has been ascertained and communicated?

No need to panic as this can all be corrected if there is a mistake!

You need to first read the intimation line by line, compare with the ITR filed and try to understand the cause of demand. The demand is generally due to following reasons:

a) Credit for TDS / Advance Tax paid by you / on your behalf is not allowed by CPC
b) Difference in interest payable calculated u/s 234A, 234B and 234C as compared to interest calculated by you
c) Some income has been taken twice / wrongly by CPC
d) Some deductions u/s 80C / other chapter VIA deductions are not allowed by CPC


What should be done if the demand is incorrect / is the result of some mistake by CPC?

If the demand is due to error in processing of ITR by CPC, you should file a "Rectification Request u/s 154". This should be filed online for all ITR filed online. There is a comprehensive procedure for doing this and you have to select the reason of error from the drop down lists and file it.

This Rectification Request is processed by CPC and the error should get corrected in due course of time. This is communicated to you by a order u/s 154.

If the error still persists / is only partially corrected, you may file Rectification Request once again following the same process.


What if there is no error in the order and Demand is actually payable?

If you are satisfied with the order and accept that the demand is payable, you may pay this through challan ITNS280 as per order. The payment should be done under the Type of Payment "Tax on regular Assessment (400)".


Is it enough to just pay and relax or what should I do further to ensure that it is nullified in IT records?

The demand once paid should be intimated to CPC by filing a Rectification Request online and mention the challan paid. This should be ensured that all the challans paid including the ones paid by you earlier for this assessment year as advance tax / self assessment tax should be mentioned here.

The other alternative is to file a letter with your assessing officer mentioning the details of demand raised and the challan paid and get the acknowledgement.

Both should result in nullifying the demand.

I hope the demand notices will not give you sleepless nights now.

These are my personal views and should not be considered as legal advise. You are requested to consult a professional before acting on this blog. 

For any query / suggestion on my blogs, feel free to write to me at piyushsgarg@gmail.com.

Are you done with filing? Is it complete yet?

I hope most of us who were to file their ITR in Jul would have done that or would be doing that in next couple of days as the date is extended to 5th Aug. But is your filing really over at uploading the ITR on Income Tax website (which we commonly know as e-filing now). The answer is "No".

What is left then if this uploading does not complete the filing process?

The uploading of ITR only completes part of the obligation. The ITR ones uploaded generates an Acknowledgement "ITR V" which needs to be printed and signed within 120 days of uploading it and to be sent physically (not scanned) to CPC, Bangalore at the address mentioned in the ITR V itself. If this does not reach CPC within 120 days, the return uploaded becomes invalid and is treated as if it is never filed.


Does this sending completes my part of work or it gets completed when it reaches CPC?

Since it is sent through post and CPC handles bulk, the chances of this getting lost somewhere in the process exist and you need to track this till it reached CPC, Bangalore and a confirmation is issued by them. This can be checked online in your e-filing login. Now, CPC sends confirmation through SMS and e-mails both. If it does not reach, even if you have sent it, you may have resend it and track it till receipt is issued by CPC.


Is it over now, after receipt is issued by CPC?

Yes, the filing process is over and now you can wait for your refund / confirmation that there is no demand from CPC which takes few months. CPC processes these ITRs filed by you and confirms if the ITR filed is accepted by them as it is / some changes are made by them.
An intimation u/s 143(1) is issued by CPC after it is processed which has 2 columns - 1 shows the numbers as mentioned by you in your ITR and the other mentions the numbers as calculated by CPC. If both are same, it is accepted as it is, but if CPC has calculated separate numbers, there is some issue and you may have to get that corrected / pay extra tax as demanded by CPC in the intimation u/s 143(1).

How to get the demand rectified if there is any mistake in CPC calculations, we shall discuss in next blog.

These are my personal views and should not be considered as legal advise. You are requested to consult a professional before acting on this blog. 

For any query / suggestion on my blogs, feel free to write to me at piyushsgarg@gmail.com.

31st July deadline for filing ITR - how relevant

What is the significance of this buzz about filing ITR by 31st July? Is it the last date? All of us face many such questions and are puzzled that if we do not file ITR by 31st July, what will be the implications. Here is a summary.

To whom this due date is applicable?

So far as individuals are concerned, this date is the specified due date for those who have income other than income from partnership firms as partners and should be complied with so far as possible.

What if you cannot file due to some reason? 

The implications of non filing are :

1. If some tax is payable even after deduction of TDS / payment of advance tax by you, penal interest would be charged @1% p.m. from the due date of filing to the actual date of filing. This interest u/s 234A is in addition to interest already being charged for short payment of TDS / advance tax u/s 234B and 234C.

That means if no tax is payable and entire tax liability is discharged either through TDS or through advance tax, there is no issue except the one mentioned below.

2. The ITR can be filed even after 31st July due date but this would be considered "Late or After Due Date" and this Late ITR cannot be revised if you identify some income is misreported / not reported.

3. There is another implication that if you have any loss under any head of income such as Business Income, Capital Gains etc., and if you fail to file return before 31st July, the loss cannot be carried forward for set off against income of future years.


Hope this enables you to take informed decision about the pressure which you should take to file it by 31st July.

These are my personal views and should not be considered as legal advise. You are requested to consult a professional before acting on this blog. 

For any query / suggestion on my blogs, feel free to write to me at piyushsgarg@gmail.com.