In any M&A transaction, the buyer’s primary concern is inheriting the seller’s undisclosed tax liabilities. Section 281 of the Income Tax Act, 1961, is an anti-evasion provision designed to mitigate this risk.

• The Statutory Risk of a “Void” Transfer

Section 281 mandates that if a seller transfers certain assets while an income tax proceeding is pending or an outstanding tax demand exists, the transfer is considered void against the claim of the Income Tax Department. This means the acquired asset could be claimed by the Department to recover the seller’s old tax debt.

• Key Capital Assets Covered (if not Stock-in-Trade of the Seller):
• Immovable Property: Land and Building.
• Business Assets: Machinery and Plant.
• Financial Assets: Shares, Securities, and Fixed Deposits.
• The Buyer’s Shield: AO Permission

To ensure the transfer is not void, the deal must meet two conditions: it must be for adequate consideration without the buyer having notice of the tax issues, AND it must be done with the previous permission of the Assessing Officer (AO).

Buyers, therefore, insist on obtaining the Section 281 Certificate (the AO’s permission) as a Condition Precedent to closing. This certificate acts as a legal ‘No Objection Certificate,’ fully insulating the acquired asset from the seller’s past tax disputes.

At times, a practical approach of obtaining a 281 certificate from a Chartered Accountant is adopted to meet the transaction timelines.

• Seller’s Proactive Duty

Sellers must proactively study and clear their pending tax proceedings and outstanding demands before entering the transaction. This crucial step assists in avoiding deal delays, perpetual indemnities, large escrow arrangements, and sale price adjustments.

Globeview Advisors can provide comprehensive support by assisting sellers with the proactive clearance of their Indian tax status and advising buyers on robust M&A structuring and tax due diligence to effectively manage Section 281 risks. Contact us regarding your specific M&A Tax and Compliance needs.