View my other posts on Section 57 of the Income Tax Act, 2058 here:
What the bug is Section 57?
Principles underpinning the Ncell Case
Section 57: Taxing Rule or Anti-Abuse Rule?
Issues that arises when applying Section 57
Harvesting of Tax Attributes: but mostly tax losses
Involuntary Disposal with Replacement: Definitive Analysis
Transfer of tax base between associates
Section 45 and 46 of ITA: the balance
M&A Taxes in Nepal: Anatomy of the Problem
Rollup Transactions: M&A Ep03
Common Control Transactions: M&A Ep02
M&A FAQs from Tax Perspective: M&A Ep01
Puja International v/s IRD
Link to the decision: Puja International v/s IRD
Okay, let’s discuss the court decision related to a Section 57 related tax dispute involving the appellant taxpayer, Pooja International Nepal Pvt. Ltd. against the respondent Inland Revenue Department.
In this particular decision, there is mention of a case filed in the Morang district court to cancel the share sale deed and registration related to the change of ownership through Office of Company Registrar’s decision date 2076.12.05 vide 075-CP-2543 Jagadish Agrawal v/s Puja International. An assessment was made in 2076.03.31 based on the share transfer (that was later canceled through the Morang District Court’s decision on 2076.12.05 – but the case for invalidation of the share transfer was sub-judice at the time of the tax assessment) for the taxes under Section 57 of the Income Tax Act, 2058. When the case was presented to the Revenue Tribunal on 2077.07.23 the condition for the assessment under Section 57 didn’t exist anymore so the tribunal strangely decided to send the assessment back to the originating Large Taxpayer’s Service Office to have the taxes assessed based on the actual latest share ownership records in the Office of Company Registrar’s.
Critique: The decision of the Revenue Tribunal can be critiqued for potentially allowing the appellant to gain an unfair advantage by being able to submit a new situation post to the date of assessment as evidence. The primary concern lies in the timing of the evidence. In the initial tax assessment, the calculation was based on information available up to a certain date. However, due to subsequent legal proceedings in the Morang District Court, certain share transactions and ownership details were invalidated. Allowing the appellant to introduce new evidence after the fact means they could essentially benefit from hindsight. This could potentially create a situation where the tax liability is determined based on a more favorable set of circumstances, which were not applicable at the time of the original assessment. This may be seen as unfair to the tax authority and to other taxpayers who do not have the opportunity to adjust their assessments based on post-assessment events. It raises questions about the consistency and equity of the tax assessment process.
An alternative view: Here the Tax Authorities issued a tax assessment decision while the matter concerning the assessment was concurrently pending adjudication at the Morang District Court. In such a situation, it becomes pertinent to analyze whether the Revenue Tribunal, in its capacity as an appellate body, exercised its discretion in permitting the taxpayer to present information or evidence relating to events occurring subsequent to the date of the original assessment. It is conceivable that the Tribunal allowed this consideration because of the ongoing legal proceedings at the district court, which could potentially impact the assessment’s validity or accuracy. Nonetheless, it is noteworthy that the Income Tax Act, 2058, does not expressly contain provisions delineating the authority of the tax office to grant such exemptions or allowances for issues that are sub-judice. The absence of specific legal provisions in this regard introduces a need for the framework to ascertain the scope of discretion afforded to the tax authorities in making tax assessments in issues that are concurrently under judicial scrutiny.
Bhudev Trading v/s LTPO
Link to the decision: Bhudev Trading v/s LTPO 075-RB-0245 from Revenue Tribunal
The Revenue Tribunal’s decision in this case is indeed noteworthy and prompts some considerations. The Tribunal’s decision primarily revolved around the identification of an error in the revised tax assessment order. Specifically, the Tribunal highlighted discrepancies related to Section 57 and Section 7(2) within the Income Tax Act, 2058.
In essence, the Tribunal concluded that the gains specified in Section 57 should not be subject to inclusion under Section 7(2). This particular interpretation was met with some puzzlement, as Section 57 essentially focuses on tax implications arising from significant changes in share ownership within an entity. It requires a reevaluation of assets and liabilities based on market values, ensuing from alterations in ownership. Section 7(2)(c) of the Income Tax Act, 2058 details the components of net gains arising from the disposal of business assets or liabilities, as calculated under Chapter 8. Concurrently, Chapter 8 explicitly encompasses net gains resulting from asset disposal due to ownership changes under Section 57.
However, entirely perplexingly, the Revenue Tribunal determined that the initial tax assessment order, dated 2075.04.09, necessitated revision due to perceived errors in the interpretation of the Income Tax Act, 2058, on the basis that gains under Section 57 were not subject to inclusion under Section 7(2). It is difficult to comprehend the reasoning made by the Revenue Tribunal, particularly as the legal provisions are relatively straightforward and well-established. Even if we were to consider the hypothetical scenario in which Section 57’s provisions didn’t apply due to the absence of gains, this would not warrant an exemption from Section 57. It is important to note that Section 57 primarily serves as an anti-abuse provision, designed to prevent the exploitation of tax benefits during share transactions by the means of loss harvesting. Thus, the Tribunal’s decision raises questions about the interpretation of established legal provisions, particularly those concerning Section 57, and the necessity to maintain the anti-abuse framework, even in scenarios where gains may not materialize.
More discussions on the loss harvesting topic and anti-abuse provision of Section 57 here:
1. Section 57: Taxing Rule or Anti-Abuse Rule?
2. Harvesting of Tax Attributes: but mostly tax losses