As banks rush to sell properties, stocks, paintings and other assets that once belonged to large defaulters, such as Vijay Mallya or Nirav Modi, lenders will not be liable for tax obligations, experts say .
Mallya and Modi, for example, will be solely responsible for taxes – capital gains levies or any other applicable income tax.
In accordance with applicable regulations supported by rulings of supreme courts, income tax or any other tax resulting from the sale of assets should be borne by the defaulter – and not by the lenders auctioning the confiscated assets for recover their advances. “Any pledged asset always belongs to the promoters and, therefore, the tax payable on the disposal of the assets will have to be borne by them. The pledged property sold can be the satisfaction of a pledged debt created by them, ”said Paras Savla, partner at KPB & Associates. “Such debt satisfaction is an application of income and not a non-conforming title transfer. Lenders are only the custodians of these assets and this is not only clarified in the law, but there is also a Supreme Court judgment on this principle.
In June, a special court under the Prevention of Money Laundering Act (PMLA) allowed banks to sell defaulted assets worth ₹ 5,646 crore. These include several bungalows and some parts.
Ideally, when selling real estate, capital gains apply. And in the case of shares, the 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 the sale of these assets may become obvious in cases where the defaulter is on the run or is not a resident of India.
“It’s pretty clear that the tax should be paid by defaulters and not by lenders. The complication arises when the developers or the owner of the property are not based in India, ”said Girish Vanvari, founder of tax consultancy Transaction Square. “The tax rules for Non-Resident Indians are separate and in many cases potential buyers want lenders to provide tax clarification as they have withholding obligations.”
In some transactions, the buyer must pay tax directly to the government – or withhold taxes, tax experts say.
The income tax service has opened investigations in this regard and some of the defaulters, whose assets are being sold, will soon start receiving notices, people familiar with developments have said. “In cases where certain pledged shares have been sold by certain lenders, the taxes should be borne by the owner of the shares and not by the lenders or any other intermediary,” said a person familiar with the development.
The lenders who had taken personal guarantees from some of the developers are now aggressively attacking their personal properties to recover money.