Weekly Round-up on Tax and Corporate Laws | 02nd to 07th January 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 02^nd to 07^th January 2023, namely:

(a) ITAT criticizes AO for ordering a special audit to get more time to pass the assessment order;

(b) Recoveries under SARFAESI Act with respect to secured assets would prevail over recoveries under MSMED Act: SC;

(c) CBDT extends the deadline to comply with Sec. 54 to 54GB provisions considering the then-prevailing COVID-19;

(d) Application for refund of IGST paid wrongly instead of CGST and SGST to be filed separately; no adjustment allowed;

(e) Reimbursement paid by the assessee to employees covered under Schedule-III, not liable to tax nor under RCM: AAR; and

(f) Accounting treatment of future tax liability for ‘Rate Regulated Entity’ under IndAS 114.

1. ITAT criticizes AO for ordering a special audit to get more time to pass the assessment order

The Chandigarh Tribunal has come down heavily on the Assessing Officers ordering special audits under Section 142(2A) only to get an extension of time for passing the assessment order.

The issue before the Chandigarh Tribunal was

“Whether the Assessing Officer (AO) was justified to order the appointment of a special auditor under Section 142(2A) and thereby get additional time to frame the assessment in terms of Section 153?”

The Tribunal held that per Section 142(2A), it was only the nature and complexity of the accounts for which the matter could be referred by the AO to the special auditor.

However, in the instant case, the AO did not look at the accounts before forming the opinion that the same was complex. Even the assessee was not given the opportunity to object to the said action.

The service of notice was defective and could not be treated to have been served in the eyes of the law. During the assessment proceedings, there were no allegations of non-compliance on the part of the assessee, and all notices were properly served. However, the service of notices under Section 142(2A) for the appointment of a special auditor was shown to have been effected through substituted service (i.e., by affixture). This violated the principles of natural justice.

The Tribunal also emphasized that the Supreme Court in Sahara India (Firm) [2008] 169 Taxman 328 (SC) did not restrict the right of an assessee to contest an order for reference to a special auditor under Section 142(2A). In fact, the Supreme Court specifically recognized this right for the assessee.

Thus, the order appointing Special Auditor under section 142(2A) passed by the AO is bad in law. Since the extended period was taken by the AO under the guise of a special audit, the same could not be counted for computing the period of limitation to pass the assessment order.

Read the Ruling

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2. Recoveries under SARFAESI Act with respect to secured assets would prevail over recoveries under MSMED Act: SC

In the matter of Kotak Mahindra Bank Ltd. v. Girnar Corrugators (P.) Ltd [2023] 146 taxmann.com 119 (SC), the Apex Court held that the recoveries under the SARFAESI Act, with respect to secured assets, would prevail over the recoveries under the MSMED Act, 2006 to recover the amount under the award/decree passed by the Facilitation Council.

In the instant case, the appellant bank preferred an appeal before the Supreme Court against the order passed by the Division Bench of the High Court. The High Court held that the MSMED Act, 2006, being the later enactment, will prevail over the SARFAESI Act, 2002 to recover the amount under the award/decree passed by the Facilitation Council.

The debtors were advanced credit facilities by the appellant bank. In order to secure the credit facilities, certain plots were mortgaged by the debtor along with certain movable fixed assets. Later, due to default in payment of a debt, the bank initiated recovery actions in respect of the secured assets covered by Section 13(2) of the SARFAESI Act.

The appellant bank, being the secured creditor, filed an application before the District Magistrate under Section 14 of the SARFAESI Act seeking assistance from the District Magistrate for taking possession of the secured assets. The District Magistrate subsequently approved the same and issued directions to Naib Tehsildar for obtaining possession.

However, Naib Tehsildar refused to take possession on the ground that the recovery proceeding was pending for the recovery of certain amounts under the provisions of the MSMED Act. Further, Naib Tehsildar observed that MSMED Act being a special enactment enacted after SARFAESI Act, would have an overriding effect. Therefore, MSMED Act would prevail over the SARFAESI Act.

The question raised before the Supreme Court is whether the MSMED Act will prevail and have the overriding effect over the SARFAESI, 2002.

The Supreme Court held that the object and purpose of the enactment of the SARFAESI Act are required to be considered. SARFAESI Act has been enacted to regulate the securitization and reconstruction of financial assets and enforcement of security interest and to provide for a central debt of security interest created on property rights and for matters connected therewith or incidental thereto.

Therefore, SARFAESI Act has been enacted, providing specific mechanisms/provisions for financial assets and security interests. It is special legislation for enforcement of security interests created in favour of the secured creditor– financial institution.

The Supreme Court further held that unlike Section 26E of the SARFAESI Act, the MSMED Act does not provide any priority over the debt dues of the secured creditor. At the most, the decree/order/award passed by Facilitation Council shall be executed as such and micro or small enterprises in whose favour the award or decree has been passed by Facilitation Council shall be entitled to execute the same like other debts/creditors.

Read the Ruling

3. CBDT extends the deadline to comply with Sec. 54 to 54GB provisions considering the then-prevailing COVID-19

The CBDT has extended the deadlines for taxpayers to comply with the provisions of Section 54 to 54GB due to the then COVID-19 pandemic and related restrictions.

Taxpayers who need to make investments or deposits to claim an exemption under these sections and who had a deadline falling between April 1, 2021, and February 28, 2022, now have until March 31, 2023, to complete these requirements.

The board had previously granted relief to taxpayers through Circular No. 12 of 2021, dated 25-06-2021 by extending deadlines to complete these requirements falling between April 1, 2021, and September 29, 2021 until September 30, 2021,.

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4. Application for refund of IGST paid wrongly instead of CGST and SGST to be filed separately; no adjustment allowed

The Telangana High Court has held that there is no provision for adjustment of erroneously paid IGST with CGST and SGST. The assessee has to pay CGST and SGST and file an application separately for the refund of IGST paid erroneously.

The petitioner was engaged in the business of providing motor vehicles for transporting passengers on a rental basis to various individuals for commercial usage located in different states. During the inspection, it was found that in one transaction, it paid IGST instead of paying CGST and SGST. The department issued a show cause notice to the assessee to pay CGST and SGST. It filed a writ petition for quashing of show cause notice issued by the department and further direction for adjustment of IGST paid towards CGST and SGST.

The High Court noted that the petitioner mapped the State of Telangana as the State of Andhra Pradesh in its IT system and wrongly paid IGST instead of paying CGST and SGST. As per Section 19(1) of the IGST Act, a registered person who has paid IGST on a supply by considering it an inter-state supply but which is subsequently held to be an intra-state supply shall be granted a refund of IGST so paid in the prescribed manner.

Therefore, the assessee could separately file an application for the refund of IGST but could not claim adjustment of IGST with CGST and SGST as there was no provision for adjustment of erroneously paid IGST with CGST and SGST as contended. Thus, the Court directed the petitioner to comply with the show cause notice and pay CGST and SGST, and file an application under Section 19(1) of the IGST Act for the refund of IGST paid erroneously.

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5. Reimbursement paid by the assessee to employees covered under Schedule-III, not liable to tax nor under RCM: AAR

The Karnataka AAR has held that the amount reimbursed by the assessee to its employees, which they incur on certain expenses on behalf of the company, would not amount to ‘consideration’ under CGST Act, 2017 and reimbursement of expenses incurred would not be liable to GST.

The applicant was an integrated Custom Research and Manufacturing Services (CRAMS) provider offering single-point access to discovery services, CPRD (Chemical Process Research and Development), drug production development & regulatory support services to global pharmaceuticals and biotech companies. The employees incurred some expenses on behalf of the assessee and got reimbursement on a periodical basis. It filed an application for the advance ruling to determine whether reimbursement of expenses at an actual cost would be liable to tax.

The AAR noted that the amount paid by the employee to the supplier of service would represent the amount paid by ‘any other person’ and shall be covered under the term “consideration” paid by the applicant to the service provider for services received by employees on behalf of the assessee. This amount reimbursed by assessee to the employee would not amount to consideration for supplies received as services of the employee to his employer in the course of his employment. Hence, it would not be treated as a supply of goods or services in terms of clause 1 of Schedule III of the CGST Act, 2017. Therefore, it was held that reimbursement of expenses would not be liable for imposition of tax.

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6. Accounting treatment of future tax liability for ‘Rate Regulated Entity’ under IndAS 114

Para 33 of Ind AS 1 ( Presentation of Financial Statements) allows offsetting of income and expense, assets and liabilities, when offsetting reflects the substance of the transaction or other event, detracts from the ability of users to understand the transactions, other events and conditions that have occurred and to assess the entity’s future cash flows. For this purpose, the company has decided to net off deferred tax liability against the deferred assets in the form of adjustment against the future tariff.

But confusion arises while netting deferred tax liability against the deferred asset (adjustable in future tariff) wherein it is decided to treat the deferred tax amount which is shown as recoverable from the future tariff, as part of the regulatory deferral account balance.

In this regard, the Expert Advisory Committee (EAC) of ICAI has noted Ind AS 12 does not allow deferred tax liabilities to be offset with assets other than deferred tax assets. Since ‘Deferred asset against deferred tax liability’ is not a deferred tax asset under Ind AS 12, but rather is a regulatory deferral account balance, the same cannot be offset with deferred tax expense or liability in the financial statements. Further deferred regulatory asset against the deferred tax liability, relates to deferred tax liability, but these are governed by different regulators (Power regulator and Income-tax authority). Therefore, the Committee is of view that these should not be offset in the financial statements.

Accordingly, the presentation by the entity of deferred tax balance in the Statement of Profit and Loss net of ‘adjustable in future tariff’ is not in compliance with the requirements of Ind AS 114, Ind AS 1 and Ind AS 12.

Read the Story

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