Weekly Round-up on Tax and Corporate Laws | 02nd to 07th May 2022

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 02nd to 07th May 2022, namely:

(a) Supreme Court upholds validity of Section 148 notices issued after 31-03-2021 under old provisions;

(b) Body corporates from border sharing countries cannot invest in privately placed securities without Govt.’s approval: MCA;

(c) Gujarat High Court held that the mandatory deduction of 1/3rd of total consideration towards the value of land under GST is arbitrary;

(d) Promoter failing to give possession of flat would be liable to return amount if allottee wishes to withdraw: Supreme Court;

(e) Power of attorney executed with assignment deed under SARFAESI Act wasn’t liable for separate stamp duty: Supreme Court;

(f) Key considerations in Audit of Debtors, Loans, and Advances

1. Supreme Court upholds validity of Section 148 notices issued after 31-03-21 under old provisions

Revenue had preferred an appeal before the Supreme Court against the order of High Courts wherein several reassessment notices issued under old provisions of Section 148 were quashed. The notices were set-aside on the ground that the same was bad in law in view of the amendment made by the Finance Act, 2021.

The Supreme Court has held that the respective High Courts had rightly held that the benefit of new provisions shall be made available if reassessment notice under Section 148 were issued on or after 01-04-2021. The Supreme Court is in complete agreement with the view taken by the various High Courts in holding so.

The Court further held that these judgments would result in no reassessment proceedings at all. Thus some leeway must be shown in that regard which the High Courts could have done so. The Revenue cannot be made remediless, and the object and purpose of reassessment proceedings cannot be frustrated.

Accordingly, the Supreme Court has proposed to modify the judgments and orders passed by the respective High Courts as under:

(a) Section 148 notices issued by the Assessing Officers shall be deemed to be treated as show­cause notices in terms of Section 148A(b);

(b) The Assessing Officers shall, within 30 days from 04-05-2022, provide the information and material relied upon so that the assessees can reply to the notices within two weeks thereafter;

(c) The requirement of conducting any enquiry with the prior approval of the specified authority under Section 148A(a) be dispensed with as a one­time measure vis­à­vis those notices which have been issued under the old provisions from 01-04-2021 till date, including those which have been quashed by the High Courts;

(d) Thereafter, the Assessing Officers shall pass an order in terms of Section 148A(d) after following the due procedure as required under Section 148A(b) in respect of each of the concerned assessees;

(e) All the defences available to the assessee under Section 149, available under the Finance Act, 2021 and in law, and whatever rights are available to the AO are kept open and shall continue to be available.

The Supreme Court has said that this order will strike a balance between the rights of the Revenue and the respective assessees. The Revenue may not suffer due to the bonafide belief of the AOs in issuing approximately 90,000 notices as ultimately it is the public exchequer which would suffer.

This order of the Supreme Court shall apply to pan India. Accordingly, all orders passed by different High Courts, wherein reassessment notices issued after 01-04-2021 were set aside, shall be governed by the present order and shall stand modified to the aforesaid extent.

The Supreme Court has passed this order in exercise of powers under Article 142 of the Constitution of India to avoid any further appeals on the very issue by challenging similar judgments and orders.

READ THE RULING

Watch Taxmann's Latest Video on Reassessment – In-depth Analysis of Supreme Court Decision for Taxmann by Tax Expert Mukesh Patel. On 4th May, 2022, Supreme Court pronounced its PAN INDIA Order in exercise of powers under Article 142 of the Constitution, holding that the same shall govern all similar matters decided or pending before High Courts.

Here is the Video.

2. Body corporates from border sharing countries can’t invest in privately placed securities without Govt.’s approval: MCA

The MCA vide Notification No. G.S.R 338(E), dated 05-05-2022, has notified the Companies (Prospectus and Allotment of Securities) Amendment Rules, 2022. As per the amended norms, a company shall not make any offer or invitation of securities to a body corporate incorporated in, or a national of, a country sharing a land border with India unless prior approval of Govt. has been taken by the body corporate under the FEM (Non-debt Instruments) Rules, 2019. The declaration is required to be attached along with a private placement offer-cum-application letter (PAS-4).

Subsequently, ‘Private Placement Offer-Cum-Application Letter,’ i.e. Form PAS-4 has been revised to include a declaration from the applicant that:

(a) No Govt. approval is required under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 prior to the subscription of shares; or

(b) Where the applicant is required to obtain the Govt. approval prior to the subscription of shares, the same has been obtained and enclosed herewith the form.”

Under the extant norms, no such declaration was required. This amendment is in line with FDI policy, whereby Govt.’s nod is necessary for any direct investment by neighbouring countries, and it shall protect the vulnerable companies from opportunistic takeovers.

READ THE NOTIFICATION

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Here is a Sample Chapter for your Reference.

3. Mandatory deduction of 1/3rd of total consideration towards the value of land is arbitrary: Gujarat HC

The Gujarat High Court, in the case of Munjaal Manishbhai Bhatt v. Union of India, has declared the mandatory fixed deduction of 1/3rd of total consideration towards the value of land ultra-vires the provisions of the GST Acts. It is also held that applying such a mandatory uniform rate of deduction is discriminatory, arbitrary and violative of Article 14 of the Constitution of India.
Facts

The applicant, a practising advocate, entered into an agreement to purchase a bungalow. A separate and distinct consideration was agreed upon between the parties for the sale of land and construction of a bungalow on the land. He received an invoice levying a tax of 9% CGST and 9% SGST on the entire consideration payable for land and construction of bungalow after deducting 1/3rd of the value towards the land. It filed a writ petition to challenge the mandatory deduction of 1/3rd of total consideration towards the value of land as the sale of land is neither supply of goods nor services.

High Court

The Honorable High Court observed that paragraph 2 of the Notification No. 11/2017-Central Tax (Rate) dated 28-06-2017 provides for a mandatory fixed rate of deduction of 1/3rd of total consideration towards the value of the land. Such deeming fiction is not only contrary to the scheme of the GST Acts, but a mandatory uniform rate of deduction is discriminatory, arbitrary and violative of Article 14 of the Constitution of India. It was also observed that when a detailed statutory mechanism for determination of value is available, then the impugned deeming fiction can’t be justified on the basis that it is meant to curb avoidance of tax when in fact, such fiction is leading to arbitrary consequences. Thus, it was held that the mandatory deeming fiction for deduction of the value of land was liable to be quashed and set aside.

READ THE RULING

Check out Taxmann's GST Issues | Decoding GST Issues & Litigation Trends which is an attempt to explore the various controversies (existing legal/future controversies) and enforcement of provisions of GST. This has been done by exploring various statutory provisions & reported judgements on GST issues. The book aims to provide information and analysis on various GST related constitutional and legal issues.

Here is a Sample Chapter for your Reference.

4. Promoter failing to give possession of flat would be liable to refund the amount if allottee wishes to withdraw: SC

In this significant ruling, the Apex Court held that the promoter-developer would be liable to refund the amount if he fails to give possession of the apartment and the allottee wishes to withdraw from the project.

In the instant case in the matter of Imperia Structure Ltd. v. Baljor Singh Jakhar Etc. [2022] 137 taxmann.com 402 (SC), the National Consumer Disputes Redressal Commission (NCDRC) by an impugned order allowed relief to aggrieved flat buyers by following a decision of the Supreme Court in Imperia Structures Ltd. v. Anil Patni [2020] 121 taxmann.com 52. In this ruling, the Apex Court had held that in terms of Section 18, if a promoter fails to complete or is unable to give possession of an apartment duly completed by the date specified in the agreement, the promoter would be liable to return the amount received by him in respect of that apartment if allottee wishes to withdraw from the project.

On appeal, the Apex Court held that since the NCDRC followed the decision of the Supreme Court in Imperia Structures Ltd. (supra), there was no reason to entertain an appeal against the said order.

READ THE RULING

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5. Power of attorney executed with assignment deed under SARFAESI Act wasn’t liable for separate stamp duty: SC

The Supreme Court held that where a deed of assignment had already been charged to stamp duty under Article 20(a), the draft of Power of Attorney contained in a deed of assignment was not liable to stamp duty under article 45(f) of Schedule 1 of Gujrat Stamp Act.

Facts

In the instant case, the Oriental Bank of Commerce (OBC) assigned a debt in favour of the appellant – an Asset Reconstruction Company (ARC).

Along with the assignment deed, the bank had executed an irrevocable Power of Attorney (PoA) in favour of the company, empowering the assignee, as an agent of the bank, to sell any immovable property. The assignment deed was registered with the Sub-Registrar, and the stamp duty was paid on it.

However, the Office of Accountant General raised an objection on the ground that the assignment deed contained a reference to a (PoA) and, therefore, it is chargeable to stamp duty under the Bombay Stamp Act, 1958. Thereafter, the Stamp Duty Collector referred the matter to the Chief Controlling Revenue Authority, who in turn issued a notice to the appellant.

After considering the reply submitted by the appellant, the Chief Controlling Revenue Authority passed an order setting aside the order of adjudication and directed recovery of the deficit stamp duty.

On the submission of the application, the Chief Controlling Revenue Authority referred to two questions for the opinion of the Court:

(a) Whether the objection raised by the accountant general proper or not?

(b) Whether the appellant is liable to pay the stamp duty as per the Bombay Stamp Act or not?

Accordingly, the Gujarat High Court held that separate stamp duty has to be paid on the PoA as well. Further, the High Court relied on Article 45(f) of Schedule-I to the Bombay Stamp Act, 1958, which makes a PoA given for consideration and contains an authority to sell any immovable property chargeable to stamp duty. The ARC approached the Supreme Court against the full Bench verdict.

On appeal, the Supreme Court held that the reasoning of the High Court could not be accepted as for invoking Article 45(f) of Schedule I to the Bombay Stamp Act, 1958, two conditions have to be satisfied, i.e. the PoA should have been given for consideration and authorization to sell any immovable property should flow out of the instrument.

In the present case, the consideration was paid by the ARC to the bank for the purpose of acquisition of the financial assets. Further, the authorization to sell any immovable property didn’t flow out of the PoA but instead flowed out of the provisions of the SARFAESI Act.

The Court observed that the High Court overlooked the fact that there was no independent instrument of PoA and that the power of sale of a secured asset flowed out of the provisions of the SARFAESI Act, 2002 and not out of an independent instrument of PoA.

The Court noted that under Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, sub-section (1A) was inserted in section 5 of the SARFAESI Act, exempting any document executed by any bank in favour of ARC from stamp duty. Though the amendment was not applicable to this particular case, the Court said that it had taken note of the amendment to show how far the Parliament has gone.

The Court also observed that once a single instrument has been charged under a correct charging provision of the Statute, the Revenue Authority cannot split the instrument into two, because of the reduction in the stamp duty facilitated by a notification issued by the Government. Accordingly, the appeal was to be allowed, and the demand for stamp duty on PoA was to be set aside.

READ THE RULING

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Here is a Sample Chapter for your Reference.

6. Key considerations for Audit of Debtors, Loans, and Advances

Debtors represent the amounts due to an entity for goods sold or services rendered or in respect of other similar contractual obligations but do not include the amounts which are in the nature of loans or advances.

Loans represent the claims of an entity in respect of such contractual obligations as the money lent. Advances represent payments made on account of, but before completion of, a contract or before acquisition of goods or receipt of services.

The following points are to be considered while auditing Debtors, Loans, and Advances:

a) Evaluation of the system of internal control relating to debtors, loans, and advances;

b) Verification of the basis for determination of credit limits for customers;

c) Verification of the system of obtaining balance confirmations;

d) Checking the procedure for preparation of the ageing schedule of debtors at regular intervals;

e) Review of the system of periodic reconciliation of various debtor balances with related control accounts;

f) Verification of the large balances due for a long time;

g) Completeness of the amount of debtors, loans, and advances reported in the financial statements;

h) Appropriate valuation for recognizing the debtors, loans, and advances;

i) Appropriate disclosures for debtors, loans, and advances;

j) Identification of cases where provisions for allowances, discounts and doubtful debts required;

k) Verification of bad debts written off or excessive discounts or unusual allowances provided; and

l) Adherence to the terms and conditions relating to the payment of interest, repayment of loans or adjustment of advances, etc.

READ THE STORY

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Here is a Sample Chapter for your Reference.