Tax Dues May Warrant The Return Of Dead Companies

Act in haste and repent at leisure—that old adage is how tax experts describe the government’s decision to deregister lakhs of companies only to discover that many of them may have outstanding tax dues.

On Dec. 29, the Central Board of Direct Taxes issued instructions to tax officers that it may request restoration or revival of any company that was struck off the companies register in order to recover tax dues.

The circular was issued in light of uncertainty regarding existing and potential tax liabilities of a company that has ceased to exist.

The Back Story

In September last year, the Narendra Modi-led government deregistered over 2 lakh companies for failing to have filed annual returns or financial statements for the preceding three financial years. While the action was ostensibly to ensure compliance with the company law, it was also seen as the main offensive in the government’s crackdown on shell companies.

It subsequently froze bank accounts of these companies and disqualified over 3 lakh directors. But when doing so, it may have missed an important detail: what happens to pending and future tax liabilities of these companies?

Now The Fix

The Dec. 29 circular says the tax department will request or appeal for restoring an entity’s name in the companies register if tax proceedings are already in progress or being contemplated and also where departmental appeals, penalty proceedings and prosecution proceedings have been initiated and are pending.

The circular says assessing officers shall, on a case-to-case basis, immediately make a reference to the respective regional Registrar of Companies for restoration of struck-off companies from the day they were deregistered.

It also points out that due emphasis must be made that the restoration is being requested to protect the legitimate interests of revenue and that time is of essence as some proceedings may get time-barred—that is tax department may run out of time to make claims.

Will The CBDT Succeed In Restoring These Deregistered Companies?

The circular suggests an alternative as well—an appeal before the National Company Law Tribunal for revival of the company, the process for which is provided for in the company law.

Can A Company That Does Not Exist Have Future Liabilities?

Section 248 of the company law that allows for the deregistration of a company also says that assets of the company will be used to settle any liability, even after the company has been struck off the list.

It also allows the registrar to obtain an undertaking from the company’s director or any other person in charge of its management for payment of its unforeseen or foreseen liabilities.

But can new proceedings, that lead to fresh liabilities, be initiated against a company that has already been struck off and therefore no longer exists? CBDT seems to think so. Experts are not so sure.

In terms of known liabilities, the Companies Act, 2013 provides recourse and clarity, Abhishek Goenka, tax partner at PwC, told BloombergQuint. But if the company is no longer in existence then the question that arises is how does one deal with tax liabilities that have not yet been crystallised?

Goenka put the confusion down to a hastily made decision by the government to deregister lakhs of companies.

One wing of the government now attempting to restore a company which has already been struck off by its another wing does not present a coordinated approach, he said.

TP Ostwal, partner at chartered accountancy firm TP Ostwal & Associates, also pointed out that in most of these cases, it will be very difficult to recover any dues since these “shell companies” may not have any assets.

Frozen bank accounts and disqualified directors will make it a doubly difficult task.