So what is Section 57? (AKA Change in Control)
Example One: If a person sells an asset of cost price (CP) to another person at a selling price (SP) his profit is SP-CP. In the purview of taxation, he disposes the tax base of his asset CP for an income of SP and is taxed at the profit of SP-CP. In this transaction, the item being transacted is the asset and there aren’t any other underlying assets to this transaction.
Example Two: If a person sells his shares of cost price (CP) to another person at a selling price (SP) his profit is SP-CP. In the purview of taxation, he disposes the tax base of his shares CP for an income of SP and is taxed at the profit of SP-CP. In this transaction, the item being transacted is the asset but there are other assets (the net assets of the entity whose share is being transacted) which are underlying assets to this transaction.
Analysis of above examples: If we evaluate the first transaction the income (SP) of the seller is the cost for the buyer. This cost is attributed to actual underlying asset in the transaction. However, in the second transaction, the cost is being attributed to the instrument representative of the underlying asset in the transaction (i.e. shares) but not to actual underlying asset in the transaction (i.e. the net assets of the entity whose share is being transacted).
Symmetric Interpretation: In doing business, when we buy an asset, we use that asset, derive benefit from it and sell those assets when it is not usable in the business. Under normal business scenario, business assets are transacted at their intended value-in-use and the taxation jurisprudence works in relative to that value-in-use of business. However, when the transaction is made through the instruments representative of the underlying asset in the transaction (i.e. shares) such value-in-use of the asset is not reflected in the actual underlying asset in the transaction (i.e. the net assets of the entity whose share is being transacted).
Symmetric Justice by Section 57: When there is a substantial change in ownership of an entity, the entity shall be treated as disposing of any assets owned by it and any liabilities owed by it. With this provision, the transaction of change in ownership is taxed
- at the actual profit of the disposal of instruments (taxation on seller)
- at the deemed profit from disposal of net assets of the entity (taxation on entity)
Is this a double taxation?: It is not a double taxation per se, as different person are being taxed. It also cannot be interpreted as economic double taxation because the income that is being taxed are different to different person. However, it is a taxation on unrealized gains of the entity that may be an economic burden to the entity.
Rationale for Section 57
Rationale for Change in ownership
Agreed, Section 57 is an economic burden for the taxpayers. But why do countries have this provision for “Taxation on Entity at the point of Change in Ownership” including Nepal?
Symmetric interpretation of Taxation
In doing business, when we buy an asset, we use that asset, derive benefit from it and sell those assets when it is not usable in the business. Under normal business scenario, business assets are transacted at their intended value-in-use and the taxation jurisprudence works in relative to that value-in-use of business. However, when the transaction is made through the instruments representative of the underlying asset in the transaction (i.e. shares) such value-in-use of the asset is not reflected in the actual underlying asset in the transaction (i.e. the net assets of the entity whose share is being transacted). Section 57 eliminates this asymmetry by taxing on the deemed profit from deemed disposal of net assets of the entity whose substantial ownership has been changed.
Capturing offshore transactions
Taxation of offshore transaction relating to gain on disposal of shares that are attributable to the asset situated in Nepal is not possible under any other Sections of Income Tax Act 2058 excepting the characterization from Anti Avoidance Rules (Not to start about the complications with Anti Avoidance Rules). Further to this, “Article on Capital Gains” of Double Taxation Avoidance Agreement under OECD model explicitly states that the taxation of capital gains of resident of an state arising from states other than the contracting states (e.g. gains from disposal of equity instruments in countries other than contracting state by resident of a contracting state) shall be taxable in resident state only. However, Section 57 is a taxation on entity situated in Nepal, so this taxation would be able to capture the offshore ownership change in Nepal, without violating the terms of Double Tax Avoidance Agreement.
Capturing the non-market transaction of the buyer and seller
There might be situations where the non-market transfer of the shares may occur between buyer and seller and they might not be captured by Section 45 of the Income Tax Act in all cases. This might occur due to the limitation in tax administration and for reasons that the buyer and sellers are not subject to the local tax jurisdictions. In such scenario, the deemed disposal of the net assets of the entity as per Section 57 will be able to capture the gains (some gains, if not all) in such non-market transaction of the buyer and seller.
Preventing asset & loss stripping benefits
Entities might engage in the practice of taking over a n entity in financial difficulties and selling each of its assets separately at a profit and also utilizing the losses carried over by such entities to generate tax benefits through eligible deductions under the provisions of the Income Tax Act. After the change in control is triggered by the provision of Section 57, the entity after the change in ownership is deemed to be a different entity than the entity prior to the such change, so losses are not allowed to be carried over and loss stripping will not be possible. This will also discourage entities to be taken over simply for the purpose of asset stripping that occurs in situations other than normal business as the stripping gains will be entirely taxed in absence of carried forward losses.
How is Change in Control triggered?
At the outset it is to be understood that the term “ownership” is intended to include “underlying ownership” as well. This further supported by the case Dwarikanath Dhungel vs. Large Taxpayer’s Office (Ncell Case).
What is ownership as per Income Tax Act 2058?
The term ownership is not defined in Income Tax Act 2058. However, reading the definition of underlying ownership provided by the Income Tax Act 2058, Ownership can be defined as
- In relation to an entity: The interest in an entity, or
(As per Section 2(Ma), Interest in an entity means a right, including a contingent right, to participate in the income or capital of an entity.) - In relation to an asset: The right to possession or the right to beneficial ownership
(Beneficial Ownership has not been explicitly defined in Income Tax Act 2058 but has been implied in various Chapters including Chapter 8 of the Act)
What is underlying ownership (indirect ownership) as per Income Tax Act 2058?
As per Section 2(Ra) Underlying ownership means following ownership:
- In relation to an entity: An ownership created on basis of an interest held in the entity directly or indirectly through one or more interposed entities by an individual or by an entity (in which no individual has an interest); or
- In relation to an asset owned by an entity: An ownership of the asset that is determined on basis of proportion to the ownership held by the persons having underlying ownership of the entity.
Due to the interpretation of the word ownership as both direct ownership and indirect ownership there has been room for interpreting the provisions under Section 57 to be applied even if the underlying ownership in fact has not been changed. However, we should not be of two-minds here. It is a fact that, an entity suffers a change in control where there is change in underlying owners in fact.
- Although the Nepalese translation of the Income Tax Act 2058 doesn’t mention “निहित स्वामित्व” but simply only mentions the word “स्वामित्व” only, the English translation of the Section 57 (which is the first hand draft of the author of Nepal Tax, Peter Harris himself), specifies that the the ownership to be considered for the purpose of Section 57 is the “underlying ownership”. In determining whether there is a change of control, it is the “underlying ownership” that counts.
- One could say that this is just a translation fluke and may not hold its meaning/rational but for corroboration we can compare this with Income Tax Act of Tanzania (which was drafted by Peter Harris as well). Section 56 of Tanzania’s Income Tax Act is very much similar to Income Tax Act of Nepal which also states that only the change in underlying ownership should be considered for the purpose of counting change in ownership.
An important Example
Direct Status: A holds 80% in B and C. B holds 80% in D
(Underlying Status: A holds 80% in B and C. A holds 64% in D)
Transaction: B sold its 80% holding in D to C.
Direct Status: A holds 80% in B and C. C holds 80% in D
(Underlying Status: A holds 80% in B and C. A holds 64% in D)
Question: Now, will Section 57 be applicable on D by the reason of this transaction?
Answer: If we examine the change in ownership in D by considering direct ownership then Section 57 will be applicable. However, if we examine the change in ownership in D by considering indirect ownership then Section 57 will not be applicable. Of course, both interpretation can’t coexist only one has to prevail.
What is the conclusion: In the Ncell Case, Ncell had narrated that there had been no change in the ownership structure of Ncell and hence is not liable to taxation by the application of Change in Control (i.e. Ncell pleaded that Section 57 would not apply because of the examination of the change in ownership by considering direct ownership). However, the decision of the supreme court on this was that, the Change in Control had actually occurred because the ultimate owner of Ncell had changed (i.e. Supreme Court decided that Section 57 would apply because of the examination of the change in ownership by considering indirect ownership). However, since the Supreme Court only decided that the ownership had changed due to the change in underlying ownership, it could be said that there still is a grey area where ownership change by the reason of mere change in direct ownership could be construed as Change in Ownership under Section 57. But, logically, it has to be one way or the other. Either only direct change should be considered or only the underlying change. For now, from Ncell case maybe it will be safe to assume that change in ownership would be triggered only by the reason of change in underlying ownership.
Section 57(1): Where there is a change of 50% or more in the ownership of an entity as compared with its ownership 3 years previously, the entity shall be treated as disposing of any assets owned by it and any liabilities owed by it.
Section 57(1Ka): For the purpose of calculating the change of 50% or more in the ownership of the entity as specified in Section 57(1), only the following ownership shall be included:
a. The ownership occupied by the shareholder holding 1% or more of the total ownership of the entity, and
b. The ownership occupied by any of the shareholders holding less than 1% of the total ownership of the entity but associated with the shareholder holding 1% or more ownership of the entity
As per Section 57(1Ka), in computing the change in ownership, the ownership occupied by a shareholder with <1% holding shall not be included unless he is associated with another shareholder with ≥1% holding.
Example: Let’s say a has 0.5% (i.e. <1%) holding. His ownership shall not be considered for computation. However, if he is associated with another person who holds 2% (i.e. ≥1%) then his ownership shall be considered for computation.
Who are associated person?
As per Section 2(KaNa) of the Income Tax Act, Associated Persons means two or more persons or group of such persons where one may reasonably be expected to act in accordance with the intentions of the other and includes:
- An individual and a relative of the individual; or
- An individual and a partner of the individual; or
- A foreign permanent establishment and its owner; or
- An entity and a person who, either alone or together with an associate or associates controls or may benefit from 50 percent or more of the rights to income, capital, or voting power of the entity, as the case requires, either directly or through one or more interposed entities; or
- A person who is an associate of such person
Provided that, the term does not include the following persons: Employees, Persons prescribed by the department as not being associate persons.
An example: Let’s say an entity has following transactions in its share registers:
- Status: A(40%), B(30%), C(20%), D(10%)
- During Year 2: A sold 40% to E
Section 57 is not triggered - During Year 3: C sold 15% to F
Section 57 is triggered - Status: B(30%), C(5%), D(10%), E(40%), F(15%)
- During Year 4: B sold 30% to G
Section 57 not triggered - During Year 5: E sold 20% to H
Section 57 is triggered - Status: C(5%), D(10%), E(20%), F(15%), G(30%), H(20%)
- During Year 6: G sold 30% to C, H sold 20% to C, D sold 10% to C
Section 57 is triggered - Status: C(65%), E(20%), F(15%)
For change in ownership calculation with associate relationship refer the tab “Excel Computation”.
This is a complicated topic. A set of step-by-step mathematical process needs to be made to compute the percentage of change in ownership.
Step 0: Download this worksheet to understand these steps
Refer this worksheet to understand the steps mentioned below. Change in Ownership
Step 1: List all the transactions in the table format
Make a table in the format below and list all the transactions. You could say that this table is the Share Capital ledger but in terms of the units of shares. Note that:
- A buy/sell transaction would lead to 2 entries
Example: A sold 20 units to E- One entry for reduction of A’s units by 20
- Another entry for addition of B’s units by 20
- A new issue of share would lead to a single entry
Example: Issued 20 new shares to E- One entry for addition of E’s units by 20
- A buyback of share would lead to a single entry
Example: 20 units of A bought back- One entry for reduction of A’s units by 20
Step 2: Get three important date for the making the analysis
To go any further into change in ownership analysis we need these three important dates
- inspectionDate: This is the date for which we are going to analyze the percentage of change in ownership. Remember, that percentage of change in ownership differs from transaction to transaction. In our case we are taking “1/1/2013” as the Inspection Date. We will analyze the change in ownership occurred in this date.
- lastSection57Date: This is the date in which the Section 57 of Income Tax Act 2058 was applicable to the entity. You might not have this date if the company is new or there has been no Change in Ownership as per Section 57 till now. In our case also, there were no any application of Section 57 on the entity so the date would be ” “.
- 3YearsPreviousDate: This is the date exactly 3 years before the inspectionDate. Our inspectionDate is “1/1/2013” (i.e. 2069.09.17). In our case 3YearsPreviousDate would be “1/1/2010” (i.e. 2066.09.17). Note that while computing the 3YearsPreviousDate it should be computing by considering Nepali Calendar dates.
Step 3: Now filling the “Type” column in the above table
Now we will fill in the “Type” column in the above table with three important attributes:
- Balance: If the Date in the row is less than MAX(lastSection57Date,3YearsPreviousDate) then mark that row as “Balance”
- Since: If the Date in the row is less than inspectionDate then mark that row as “Since”
- Others: Mark other remaining dates as “Others”
Step 4: Creating a Pivot Table and tweaking the pivot table
Now with the table we have obtained after following the above steps we will create a Pivot Table as follows:
- The Row Label of the Pivot Table should contain “Person”
- The Column Label of the Pivot Table should contain “Type”
- The Values Label of the Pivot Table should contain “Units”
- Filter out Type Label of “Others” from Column Label
- Right click any Value Column as ‘Summarize Values as % of Column Total”
- Create a new column adjacent to the Row Total and insert this formula MAX(RowTotalColumns%-BalanceColumn%, 0)
- Obtain the sum total of the new columns created
Step 5: Obtain your answer
The column total obtained from the step above is the percentage change in ownership. Happy?
There aren’t any mathematical limitations in calculating the change in ownership. However, it might be tedious working to analyze the transaction wise percentage change in ownership.
The excel computation method shared in previous tab may not be efficient to all kind of organizations. Such organizations may use the steps/algorithms shared in previous tab to produce dedicated software or addins to the existing share register software, so that the % change in ownership can be tracked accurately.
There is always a question among taxpayers. How efficient is the existing tax system to track the substantial changes in ownership as per Section 57?
Answer is, it is not very efficient. The discussion on Section 57 has been a hot thing recently. Efficient systems to track these changes is still to be introduced. These may be the administrative reforms in this regard:
- Requiring taxpayers to submit changes in ownership structure in regular basis
- Coordinating with Registrar of Companies to keep track of changes in ownership structure
What happens when Change in Control is triggered?
Where to start? There are plenty of things to be done after Change in Control as per Section 57 is triggered. Follow these tabs:
As per Section 57(3), where there is a change in ownership of the type referred to in Section 57(1) during the income-year of an entity, the parts of the income-year before and after the change in ownership are treated as separate income years.
Meaning
This means that the entity’s normal income year is divided into several income years as need be, as per the change in ownership. For example say the Change in control occurred only one during the fiscal year, the fiscal year would be separated into two parts:
- Part One: From the beginning of the fiscal year to the date of change in ownership
- Part Two: From the day immediately following the date of change in ownership till the end of the fiscal year
When to file the Income Tax Return?
As per Section 96 of the Income Tax Act 2058, every person shall file at the place prescribed by the Department not later than 3 months after the end of each income year a return of income for the year. So, the “Change in Control Return” shall be filed within three months from the date of change in ownership.
As per Section 57(1) the entity shall be treated as disposing any assets owned by it and any liabilities owed by it once the Change in Control as per Section 57 is triggered.
How to determine the taxable amount for the case of disposal of net assets?
Section 40(3)(e) of the Act has identified the deemed disposal under Section 57 of the Act as Disposal with Retention. Further, Section 41 of the Act has specified the amount of incoming and outgoings for this deemed disposal:
- The person shall be treated as deriving an amount in respect of the disposal equal to the market value of the net assets at the time of the disposal; and
(meaning the incomings for the deemed disposal shall be the market value of the net assets) - For the purpose of subsequent disposal of the net assets, the net outgoings for the net assets to the time of the disposal under this Section shall be treated as equal to the amounts derived.
(meaning, the market value treated as incomings, shall be treated as the cost for the future)
So, the entity shall be taxed on the following transactions at the point of filing the tax returns for the “Change in Control”
- Transactions from the beginning of the fiscal year to the date of change in ownership
- Market value of the net assets reduced by the tax base of the net assets
How to pay installment taxes in fiscal year where Section 57 is triggered?
We know that a person who derives taxable income during the year is required to pay tax for the year by three instalments as follows:
- By the end of Poush: 40% of the estimated tax
- By the end of Chaitra: 70% of the estimated tax
- By the end of Ashad: 100% of the estimated tax
Meaning income tax is collected in installments before the end of the fiscal year. Any delay in submitting the tax in instalment as above attracts interest at the rate of 15% per annum. A 10% margin is allowed for any difference that might occur by the reason of the inaccuracy in estimate as per Section 118(1)(Kha) of the Act.
Now the question arises, if there are any relaxation in payment of instalment taxes in situation where Section 57 is triggered? No, there aren’t any relaxations. The entity is supposed to pay the taxes in instalments as usual.
How to pay the taxes? Once Section 57 is triggered the taxable amount and tax liability till the date of change in ownership is computed. If any due date for instalment tax payment had fallen before that date, taxpayer should have deposited the instalment amount accordingly and any amount remaining thereafter should be deposited within 3 months from the end of the income year.
Example: Let’s say Section 57 triggered on an entity on Magh end during an income year and the total tax to be paid including the transactions till Magh and gain from deemed disposal under Section 57 came out to be Rs. 100,000 and total tax to be paid after the date of Change in control came out to be Rs. 50,000.
- Liability of Rs. 100,000
- 100,000×40% should be deposited within Poush End
Elsewise u/s 118(1): Interest @15% p.a. until Baisakh End - Any remaining amount should be deposited within Baisakh End
Elsewise u/s 119(1): Interest @15% p.a. after Baisakh End
3 months from the end of Magh End is Baisakh End
- 100,000×40% should be deposited within Poush End
- Liability of Rs. 50,000
- 50,000×70% should be deposited within Chaitra End
Elsewise u/s 118(1): Interest @15% p.a. until Ashad End - 50,000×100% should be deposited within Ashad End
Elsewise u/s 118(1): Interest @15% p.a. until Ashoj End - Any remaining amount should be deposited within Ashoj End
Elsewise u/s 119(1): Interest @15% p.a. after Baisakh End
3 months from the end of Ashad End is Ashoj End
- 50,000×70% should be deposited within Chaitra End
Now that we know the disposal is deemed to be made at Market Value, the question is what is Market Value?
As per Section 2(Sh) of the Income Tax Act 2058 Market Value of an asset and services denotes the normal buying and selling price for the asset or services in the ordinary course of a business amongst unrelated parties.
The definition of the Market Value is not very far from the definition of Fair Value as per International Financial Reporting Standard (IFRS). IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).
Different assets of the entity may have separate treatment for computation of Market Value:
- Tangible Assets
- Trading Stock: @ Market Value (not Net Realizable Value)
- Depreciable Asset: @ Market Value (not piecemeal approach but holistic approach)
- Business Asset
- Financial Instruments: @ Market Value (also adjust for bad debts)
- Bank Balances
- Local Currency: @ Market Value (No restatement needed)
- Foreign Currency: @ Market Value (NRB Buying Rate)
- Land: @ Market Value (huge burden as Land is not further depreciable)
- Intangible Assets
- Goodwill: n/a (goodwill is not an identifiable asset as per tax)
- License/Copyright/Trademark: @ Market Value (valuation of intangibles is a topic for separate discussion)
As per Section 57(2) where there is a change in ownership of the type referred to in Section 57(1), after the change the entity is not permitted to: Deduct interest carried forward under Section 14(3) that was incurred by the entity prior to the change;
Meaning
Section 14(2) of the Act has the restrictive provision that limits the amount of interest paid to exempted controller that can be deducted as an expense. This is in line with the OECD plan to prevent base erosion through thin capitalization mechanism. By this limitation in the amount of interest that can be claimed for deduction, some interest expense that cannot be claimed during the year are treated as interest expense for the following income year. However, once the Change in Control as per Section 57 is triggered then this is not allowed to be carried over. The amount of interest expense accumulated by this reason lapses and is not eligible to be carried forward in the next income year.
As per Section 57(2) where there is a change in ownership of the type referred to in Section 57(1), after the change the entity is not permitted to:
- Deduct a loss under section 20 that was incurred by the entity prior to the change;
- Carry back a loss under Section 20(4), Section 59, or Section 60 that is incurred after the change to an income-year occurring before the change;
- Reduce under Section 36 gains from the disposal of assets or liabilities after the change by losses incurred on the disposal of assets or liabilities before the change;
Meaning
Section 20 of the Income Tax Act states that a resident person may for the purposes of calculating the income of a person for an income-year from a business or investment, there shall be deducted any unrelieved loss of the previous 7 income years incurred by the person from any business. Provided that, in case of electricity projects involving in building power station, generating and transmitting electricity and the projects conducted by any entity so as to build public infrastructure, own, operate and transfer to the GON, any unrelieved loss of the previous 12 years shall be deducted. However, once the Change in Control as per Section 57 is triggered then this is not allowed to be carried over. The amount of deductible losses accumulated by this reason lapses and is not eligible to be carried forward for deduction in the next income year. Similarly, once the Change in Control as per Section 57 is triggered the person is not eligible to reduce gains under Section 36 from the disposal of assets or liabilities after the change by losses incurred on the disposal of assets or liabilities before the change.
As per Section 57(2) where there is a change in ownership of the type referred to in Section 57(1), after the change the entity is not permitted to: carry forward foreign income tax under Section 71(3) that is paid with respect to foreign income prior to the change.
Meaning
Section 71 of the Income Tax Act states that a resident person may claim a foreign tax credit for an income-year for any foreign income tax paid by the person to the extent to which it is paid with respect to the person’s assessable foreign income for the year. However, such foreign tax credit to be claimed shall not exceed the average rate of Nepal income tax of the person for the year applied to the person’s assessable foreign income. Any amount of foreign income tax that could not be claimed by the reason of this limitation may be carried forward. However, once the Change in Control as per Section 57 is triggered then this is not allowed to be carried over. The amount of foreign income tax accumulated by this reason lapses and is not eligible to be carried forward in the next income year.
As per Section 57(2) where there is a change in ownership of the type referred to in Section 57(1), after the change the entity is not permitted to: In a case where the entity accounted for an amount or expense in terms of Section 24(4) prior to the change and after that change the amount or expense is corrected in terms of Section 24(4), make the adjustments referred to in Section 24(4);
Meaning
Section 24(4) of the Income Tax Act 2058 states that In case where a person includes a payment to which the person is entitled or deducts a payment that the person is obliged to make in calculating the person’s income from a business or investment on an accrual basis, and the actual payment received or made by the person comes to be different including by reason of a change in currency valuations that took place afterwards, an appropriate adjustment should be made at the time the payment is received or made so as to account for the inaccuracy.
For example, in this table we will follow an expense incurred in Year 1 and settled in Year 2
| Year | Event | Ledger | Dr/Cr | Accounts | Tax | Difference | Reason for difference |
| Year 1 | Expense of 1 USD incurred | Expense | Dr | 110 | 110 | – | |
| (Rate: 110NPR/USD) | USD Payable | Cr | (110) | (110) | – | ||
| Restatement at end of Income Year | Forex | Dr | 5 | – | 5 | Realized forex of 0 allowed for tax. | |
| (Rate: 115NPR/USD) | USD Payable | Cr | (5) | – | (5) | ||
| Year 2 | Actual Payment Date | Forex | Dr | 5 | 10 | (5) | Realized forex of 10 (Including unrealized forex of 5 from Year 1, now realized) allowed in tax. |
| (Rate: 120NPR/USD) | USD Payable | Dr | 115 | 110 | 5 | ||
| Bank | Cr | (120) | (120) | – | |||
| Total | – | – | – |
The above table shows what happens in a normal situation. In normal situation Income Tax Act allows the deduction of forex gain/loss only after they are realized.
However, once the Change in Control as per Section 57 is triggered then even the realized forex loss that pertains to the settlement of foreign currency asset/liability created in prior period is not allowed to be deducted. In the above example if the separate income years Year 1 and Year 2 is by the reason of Change in Ownership then the forex loss of Rs. 10 in Year 2 is not allowed to be deducted for tax purposes as it pertains to the to the settlement of foreign currency asset/liability created in prior period.
As per Section 57(2) where there is a change in ownership of the type referred to in Section 57(1), after the change the entity is not permitted to: In a case where the entity accounted for an amount in terms of Section 25(1)(b) prior to the change and after that change the entity disclaims an entitlement to receive the amount or, in the case where the amount constitutes a debt claim of the person, the person writes-off the debt as bad, make the adjustments referred to in Section 25(1);
Meaning
A person accounting for an amount derived on an accrual basis may later disclaim the entitlement to receive such amount. Similarly, the person may also write-off the amount as bad debt where the amount constitutes a debt claim of the person. For tax purposes such amount disclaimed/written-off can be written off as bad debt only after the person has taken all reasonable steps in pursuing payment and the person reasonably believes that the entitlement or debt claim will not be satisfied as per Section 25(2).
However, once the Change in Control as per Section 57 is triggered then the person will not be eligible to claim such amount as bad debt even after satisfying the conditions under Section 25(2), that were accounted for or accrued in the period prior to the Change in Control.
As per Section 57(2) where there is a change in ownership of the type referred to in Section 57(1), after the change the entity is not permitted to: In a case where the entity accounted for a premium in terms of Section 60(2)(b)(1) prior to the change and the entity after that change returns the premium to the insured, claim a deduction under that provision;
Meaning
Section 60 of the Income Tax Act deals with General Insurance Business. Return of Premium means the situation where an insured intends to cancel the policy and gets refunds for the amount of premium that remained unutilized in respect of the policy. In normal situation those payments are allowed to be deducted as per Section 60(2)(b)(ii). However, once the Change in Control as per Section 57 is triggered then such returns of premiums cannot be claimed for deduction in respect of policies that were issued prior to the Change in Control.