Weekly Round-up on Tax and Corporate Laws | 03rd to 7th October 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from October 03^rd to 7^th, 2023, namely:

(a) Govt. excludes Aircraft related transactions or arrangements under International conventions from moratorium norms;

(b) Recommendations of 52nd GST Council Meeting: Press Release;

(c) Violation of natural justice can’t be argued if the assessee didn’t submit reply to SCN or appear for personal hearing: HC;

(d) Sum received for giving up rights to buy a property is taxable under head capital gains: ITAT; and

(e) Communicating KAM para in the auditor’s report is not a substitute for expressing a modified opinion: NFRA

1. Govt. excludes Aircraft related transactions or arrangements under International conventions from moratorium norms

On November 16, 2001, a significant milestone was reached when the Convention on International Interests in Mobile Equipment, along with its Protocol focusing on matters specific to aircraft equipment, was collectively adopted by the esteemed bodies of the International Civil Aviation Organization and the International Institute for the Unification of Private Law.

In a testament to its commitment to international cooperation, India subsequently became a signatory to these pivotal agreements. On March 31, 2008, India formalized its participation by depositing the instruments of accession with the International Institute for the Unification of Private Law.

In a recent development, the Ministry of Corporate Affairs has issued Notification No. S.O. 4321(E), dated October 3, 2023. This progressive notification effectively removes the “moratorium” provisions of the IBC from affecting transactions, arrangements, or agreements related to Aircraft, aircraft engines, airframes, and helicopters as governed by the Convention and the Protocol.

1.1 Key reason for exemption from ‘moratorium’ provisions

The moratorium provisions of the IBC can significantly impact the rights of creditors and lessors by preventing them from recovering their assets during insolvency proceedings.
This could potentially lead to substantial financial losses for them, affecting their ability to finance and lease such assets in the future, given the high value of Aircraft and related equipment involved.

1.2 Recent statistics regarding the aviation industry

Recently, India’s commercial fleet has undergone a remarkable shift, with nearly 80% of it being leased, a significant leap compared to the global average of 53%. Instead of outright aircraft purchases, leasing offers airlines the advantage of freeing up substantial capital.

Leasing allows airlines to strategically allocate capital, potentially leading to more cost-effective operations and business expansion, rather than being burdened by heavy loan repayments. To sustain this trend, lessors need confidence in the Indian aviation industry. Doubts about asset recovery may result in stricter lease terms and higher costs.

1.3 Shaping the Aviation Industry’s Moratorium Decision: The Impact of Go First’s Insolvency

In the case of Go First, formerly under the ownership of the esteemed Wadia Group, which entered into insolvency proceedings, the initial moratorium granted by the NCLT served as a protective shield for the airlines against lessors and creditors. However, this gave rise to challenges for lessors who sought to reclaim their leased Aircraft, leading to complex legal disputes and an atmosphere of uncertainty.

1.4 Amendment connecting Indian laws with international standards

As a signatory to the Convention on International Interests in Mobile Equipment and its Protocol on Aircraft Equipment, India needs to align its domestic laws with these agreements. This commitment involves the exclusion of Aircraft, helicopters, and engines from the IBC’s moratorium provisions, ensuring legal consistency, and promoting international aviation financing and leasing transactions, to benefit industry stakeholders.

India is harmonizing its insolvency laws with international standards by excluding Aircraft, helicopters, and engines from the IBC’s moratorium provisions.

1.5 Conclusion

In conclusion, India’s decisive step to align its insolvency laws with international standards by excluding Aircraft, helicopters, and engines from the moratorium provisions of the Insolvency and Bankruptcy Code is pivotal. This change revitalizes aviation financing, instils confidence in lessors, and supports the growth of the Indian aviation industry.

By harmonizing domestic regulations with global agreements, India positions itself as a favourable destination for international aviation financing and leasing transactions, benefiting all industry stakeholders.

Read the Notification

Read the Article

2. Recommendations of 52nd GST Council Meeting

The 52nd GST Council met under the Chairpersonship of Union Minister for Finance & Corporate Affairs Smt. Nirmala Sitharaman in New Delhi on October 07, 2023. The key recommendations of GST Council are:

• The Council recommends GST exemption on “Food preparation of millet flour in powder form, containing at least 70% millets by weight”, falling under HS 1901 if sold in other than pre-packaged and labelled form. Also, the recommendations are made to reduce the GST rate on molasses from 28% to 5%.
• The Council also recommends conditional IGST exemption to foreign flag foreign going vessels when they convert to coastal run subject to its reconversion to foreign going vessels in six months.
• GST Council has also recommended to exempt services of water supply, public health, sanitation conservancy, solid waste management and slum improvement and upgradation supplied to Governmental Authorities
• Supply of all goods and services by Indian Railways is recommended to be taxed under the Forward Charge Mechanism to enable them to avail of ITC.
• Amnesty Scheme is recommended for filing appeals against demand orders passed before March 31^st, 2023 where an appeal could not be filed within the allowable time period. In all such cases, filing of appeal by the taxpayers is to be allowed against such orders up to 31st January 2024.
• The Council has also recommended issuing a circular clarifying that no GST is to be levied when no consideration is paid by the company to the director in any form, directly or indirectly, for providing personal guarantees to the bank/ financial institutes on their behalf.
• The Council has recommended amendments to ensure that an advocate with ten years of experience in litigation under indirect tax laws is eligible for appointment as a judicial member. President and Members shall have tenure up to a maximum age of 70 years and 67 years, respectively.

In this regard, the Government has issued a Press Release dated October 7th, 2023 to provide all recommendations relating to changes in GST tax rates, measures for facilitation of trade and measures for streamlining compliances made by the GST Council.

Read the Press Release

Read the Analysis

3. Violation of natural justice can’t be argued if assessee didn’t submit reply to SCN or appear for personal hearing: HC

The High Court of Jharkhand has recently held that the assessee can’t contend violation of principles of natural justice if the assessee failed to submit any reply to SCN and didn’t attend the personal hearing where date of personal hearing was fixed four times. The Honorable Jharkhand High Court gives this ruling in the case of Rajeev Kumar v. Principal Commissioner of Central Goods and Services Tax, Ranchi.

Facts

The petitioner was a proprietorship firm and engaged in the business of civil contract work. A demand-cum-notice of show cause was issued to the petitioner, and no reply to SCN was ever submitted. He filed a writ petition against the demand order passed against him by contending that there was a violation of principles of natural justice as any opportunity for hearing was not provided. The department submitted that the date of personal hearing was fixed four times, but the petitioner did not respond.

High Court

The Honorable High Court noted that a reply was given only at the stage of enquiry regarding pre-SCN queries made by the Range Officer, but admittedly, the petitioner did not reply to SCN. The Court further noted that ample opportunity to appear before Adjudicating Authority was given to the petitioner, but he failed to appear, and letters of personal hearing were issued to him at the address provided by him in GST registration, but the letters were returned undelivered.

Also, the letters were sent through e-mail ID, which was available to the department, but he did not respond to said letters. Therefore, the Court held that the contention of the petitioner that the principle of natural justice had not been complied with was without any basis. Thus, the instant writ application was not maintainable.

Read the Ruling

4. Sum received for giving up rights to buy a property is taxable under head capital gains: ITAT

The assessee entered into an agreement to purchase a property in 2005 and paid consideration of Rs. 14 lakhs. However, the seller could not transfer such property to the assessee and refunded Rs. 28 lakhs to the assessee in the year 2012 (relevant assessment year).

While furnishing the return of income for the relevant assessment year, the assessee considered the amount of Rs. 14 lacs as purchases and availed the indexation benefit, thereby offering such income to tax under the head of Capital Gains in accordance with the provisions of Section 45.

The Assessing Officer (AO) accepted the sale consideration of Rs. 28 lakhs and accepted the purchase value of Rs. 14 lakhs but assessed the difference of Rs. 14 lakhs straight away as income from other sources instead of Capital Gains. On appeal, CIT(A) upheld the order of AO. Aggrieved by the order, the assessee filed an appeal to the Tribunal.

The Tribunal held that as per the contents of the compromise agreement, the seller was unable to get the sale deed of said land executed in favour of the assessee, and both parties decided to settle their dispute without any litigation. For that purpose, both parties decided to abandon their respective claims, and the assessee agreed to forgo his right to buy the land. Consequently, the assessee was entitled to a payment of Rs. 28 lacs, and the original agreement to sell became null and void.

In the instant case, the amount so received by the assessee was towards relinquishment of his rights to buy the property, and the same would qualify as property of any kind and, thus, a capital asset. Where such an asset is transferred by way of relinquishment, the compensation for such relinquishment so received is chargeable to tax under the head of “Capital gains”, and the amount initially paid shall be treated as cost of acquisition for acquiring such rights.

Therefore, the income was rightly offered to tax under the head of “Capital gains”, and the same cannot be brought to tax under the head of “Income from other sources”

Read the Ruling

5. Communicating KAM para in the auditor’s report is not a substitute for expressing a modified opinion: NFRA

To ensure the reliability of the financial reports, the statutory auditors are required to adhere to the Standards on Auditing (SAs). However, sometimes, statutory auditors may inadvertently fail to meet these standards, leading to questions about the accuracy of their reports. In its recent order, the National Financial Reporting Authority (NFRA) investigated several cases of alleged audit failures, each highlighting a different lapse in compliance with auditing standards. These cases emphasize the importance of maintaining the highest level of diligence in the auditing profession to protect stakeholder interests and preserve the credibility of the audit process.

1. The auditor’s inability to re-assess the risks due to the restraint imposed by management from obtaining external confirmation is a clear violation of SA 505, External Confirmation. The auditor failed to perform alternative audit procedures to mitigate such risk, and relying on management contention is a lapse in the audit procedure.
2. The auditor failed to comply with SA 700, Forming an opinion and reporting on financial statements, by issuing an unmodified audit report ignoring the fact that restraint (Limitation on scope of Audit) has been imposed by the management on their independent audit.
3. Management imposing a limitation on the scope of the audit and the auditor’s concluding that they had obtained sufficient appropriate audit evidence and issuing an unmodified opinion is a clear violation of the principles of SA 705, Modifications to the Opinion in the Independent Auditor’s Report.
4. Auditors failed to comply with SA 501, Audit Evidence—Specific Considerations for Selected Items, which mandates an auditor to attend the physical count of the inventory, and if it is impracticable to attend the physical count and not possible to apply alternative audit procedures, then the auditor is required to modify the audit opinion. The auditor failed to modify his report on such an audit lapse in the current scenario.
5. The auditor added the “Key Audit Matter (KAM)” para in his audit report without communicating the same with the management/ TCWG prior to their inclusion in the KAM is a violation of SA 701, Communicating Key Audit Matters in the Independent Auditor’s Report.
6. The auditor communicating that the company unilaterally wrote back substantial amounts of its liabilities, adopted a flawed accounting policy to account for the finished goods at the estimated market price etc., through KAM para cannot be the basis of reporting under KAM para on which modification of report is based.
7. The auditor failed to check compliance and disclosure required as per the provisions of the Companies Act 2013 regarding the related party disclosure. The auditor failed to obtain sufficient appropriate audit evidence to verify that related party transactions are on an arm’s length basis as required by the SA 550, Related Parties.
8. The Auditors failed to show professional skepticism while reporting under CARO about the proper utilization of money raised from the IPO, especially in light of the observed instances of artificial inflation of profits and reduction of liabilities by unilateral write-back of outstanding payables, and significant payments to the related party from the IPO proceeds.

As a consequence of the aforementioned deficiencies in audit practices, the NFRA has levied a monetary penalty of Rs. 5,00,000 and debarment of 3 years from being appointed as an auditor.

Read the Story