Assets Stripped, Defaulters will have to Also Pay Tax on their Sale by Lenders

After banks, loan defaulters will also have to deal with the tax authorities on the assets seized -and auctioned- by lenders.

As banks rush to sell properties, shares, paintings and other assets once owned by big defaulters, such as Vijay Mallya or Nirav Modi, the lenders will not be responsible for tax liabilities, experts say.

Mallya and Modi, for instance, will solely be responsible for the taxes- capital gains levies or any other income tax applicable.

As per current regulations supported by apex court rulings, income tax or any other tax arising out of asset sale has to be borne by the defaulter-and not the lenders auctioning confiscated assets to recover their advances. “Any assets that is pledged is still owned by the promoters and so the tax liability upon disposal of assets will have to be borne by them. The pledged property sold, may be satisfaction of pledge-debt, created satisfaction of pledge-debt, created by them,” said Paras Savla, partner at KPB & Associates. “Such satisfaction of debt is an application of income and not the transfer by overriding title. Lenders are merely custodians of these assets and this is clarified not just in the law but there is also a Supreme Court judgment on this principle.”

In June, a special Prevention of Money Laundering Act (PMLA) court allowed banks to sell defaulter assets worth Rs. 5,646 crores. These include several bungalows and some shares.

Ideally, when real estate is sold, capital gains are applicable. And in the case of shares, short-term or long-term capital gains tax is again applicable. In the normal course, the seller. Tends to pay these taxes.

Tax experts say that selling these assets may become clear in cases where the defaulter is either absconding or not a resident of India.

“It’s quite clear that the tax has to be paid by defaulters and not lenders. The complication arises when the promoters or the owner of the property are not based in India,” said Girish Vanvari, founder of tax advisory firm Transaction Square. “Taxation rules for nonresident Indians are separate and in many cases, the potential buyers want lenders to provide clarity on the tax front as they have withholding obligations.”

In certain transactions, the buyer has to directly pay the tax to the government- or withhold taxes, say tax experts.

The income tax department has begun investigations in this regard and some of the defaulters, whose assets are soon, said people aware of the development. “In cases where some pledged shares were sold off by some lenders, taxes have to be borne by the owner of the shares and not by the lenders or any other middleman,” said a person close to the development.

Lenders that had taken personal guarantees from some of the promoters are now aggressively going after their personal properties as well to recover money. S-ET

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