Weekly Round-up on Tax and Corporate Laws | 05th to 09th August 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from August 05 to 09, 2024, namely:

1. Changes proposed in the Finance (No. 2) Bill 2024 as passed by the Lok Sabha;
2. HC remanded matter for fresh consideration since order wrongly confirmed previously dropped amounts;
3. HC remanded matter for fresh consideration allowing submission of additional documents to establish exemption;
4. RBI introduces key enhancements to Digital Payment Systems and Financial Services;
5. MCA extends C-PACE services to facilitate voluntary closure of LLPs;
6. MCA launches e-adjudication platform; mandates e-adjudication for penalty proceedings under Cos Rules; and
7. Residual Value Dilemmas: PPE Disposal Cost exceeding the Recoverable Amount.

1. Changes proposed in the Finance (No. 2) Bill 2024 as passed by the Lok Sabha

On August 7, 2024, the Lok Sabha passed the Finance (No. 2) Bill 2024, which included over 30 amendments to the original bill introduced on July 23, 2024. While most amendments are consequential, two significant changes have been made, which are as follows:

Grandfathering of long-term capital gain from land or building in case of resident individual/HUF

In light of the removal of the indexation benefit for long-term capital gains and the introduction of a uniform tax rate of 12.5% on long-term capital gains, a grandfathering provision is proposed to be introduced under section 112 by the Finance (No. 2) Bill 2024 as passed by the Lok Sabha.

This grandfathering provision has the following implications:

• It applies only to resident individuals and resident Hindu Undivided Families (HUFs). A non-resident person, company, partnership firm or any other assessee is not eligible for this benefit.
• It applies only to the transfer of a long-term capital asset, being land or building or both. This provision does not cover other long-term capital assets, such as gold or bullion.
• The land or building must have been acquired on or before 22-07-2024 to qualify for the grandfathering benefit.
• The provision is applicable if the tax on long-term capital gains from the transfer of such land or building computed under the new law (i.e., law proposed by the Finance (No. 2) Bill, 2024) exceeds the tax computed under the old law (i.e., the law as it stood immediately before the amendment proposed by the Finance (No. 2) Bill, 2024 )
• If the amount of tax under the new law exceeds the amount of tax under the old law, the excess amount shall be ignored.

The proviso to Section 192(2B) is substituted to allow the benefit of TDS/TCS while computing TDS on salary income

The Finance (No. 2) Bill 2024, as introduced in the Lok Sabha, substituted sub-section 192(2B) to allow the benefit of all other TDS/TCS while computing tax deductible from salary income.

The proviso inserted in Section 192(2B) provides that the tax-deductible from salary income cannot be reduced due to the inclusion of other income and the tax deducted/collected under the Act. However, the tax-deductible can be reduced due to the loss under the head “Income from house property” which is adjusted against salary income. The proviso is nearly identical to what existed before the amendment.

The effect of this proviso is that the employer, when calculating TDS from salary, must ensure that the tax-deductible from salary income is not reduced below the amount that would have been deducted if other incomes (except loss from house property) and all TDS/TCS were not considered.

This proviso would not provide any logical benefit to salaried employees as certain TDS/TCS do not have any corresponding taxable income, like Section 194N, TCS on LRS or Motor car, etc. If these TDS/TCS are considered, it will reduce the tax to be deducted under Section 192.

Thus, even after amending section 192(2B), the employee will not get benefit of all other tax deducted and collected under the Act.

To remove this ambiguity, the Finance (No. 2) Bill, 2024 as passed by the Lok Sabha has substituted the Proviso to section 192(2B) to provide that the tax-deductible from salary income cannot be reduced except in cases where a loss from “income from house property” and the tax deducted or collected under the Act have been taken into consideration while computing the TDS on salary.

In other words, the tax-deductible from salary income can be reduced if only the following items are taken into consideration:

• Loss from “income from house property; and
• Tax deducted or collected under the Act.

Get the Copy of the Finance (No. 2) Bill 2024 as passed by the Lok Sabha

2. HC remanded matter for fresh consideration since order wrongly confirmed previously dropped amounts

The Honorable Madras High Court recently set aside an assessment order that confirmed previously dropped amounts and remanded the matter for fresh consideration after granting the petitioner an opportunity to reply subject to a 10% deposit of the disputed tax. This ruling is given in the case of Jesus Ginning and Raymond Seeds v. Superintendent of GST & Central Excise.

Facts

The petitioner was earlier issued with a notice whereby it was called upon to give an explanation for the discrepancies between the return filed by the petitioner in Form GSTR-1 and in Form GSTR-3B. The petitioner replied to the same & demand was dropped. Thereafter, another notice was issued, which was not replied to by the petitioner, and the department passed an order confirming demands, including the previously dropped amount. It filed a writ petition and contended that there was a violation of the principles of natural justice.

High Court

The Honorable High Court noted that the petitioner had earlier issued a notice for discrepancies in returns, and the demand was dropped. Thereafter, the department issued another notice, but the petitioner failed to respond. Therefore, the Court held that the department cannot be wholly blamed on the facts and circumstances of the case.

However, the amount that was dropped in the earlier proceedings was also confirmed, and there was no application of mind to this aspect. Thus, the Court held that the impugned order be set aside, and the case was remitted back to the department to pass a fresh order on merits and in accordance with law. The Court also directed the petitioner to deposit 10% of the disputed tax.

Read the Ruling

3. HC remanded matter for fresh consideration allowing submission of additional documents to establish exemption

The Honorable Madras High Court has recently remanded for fresh consideration since exemption was denied on ground that the petitioner did not provide the contract agreement. However, the petitioner has already provided the relevant work orders as enclosures to reply and he would have submitted other documents such as certificates from the Coimbatore Municipal Corporation if called upon to produce the same. This ruling is given in case of Tvl. Hosur Builders v. Assistant Commissioner (ST)(FAC).

Facts

The petitioner was awarded contracts by the Coimbatore Municipal Corporation for providing services in relation to cleaning of drains, sanitary work and solid waste management. It received a show cause notice with respect to audit observation, for which the petitioner replied and contended that audit observation was liable to be dropped on account of exemption under Notification No.12/2017. However, the department issued order rejecting exemption claim. It filed writ petition against the order.

High Court

The Honorable High Court noted that the petitioner had provided the relevant work orders as enclosures to reply. In spite of providing such documents, the claim for exemption was rejected on the ground that the petitioner did not provide the contract agreement. However, the contract agreement was not called for by the department and the petitioner would have submitted other documents such as certificates from the Coimbatore Municipal Corporation if called upon to produce the same. Therefore, the Court held that the order was to be set aside and matter was required to be remanded for fresh consideration after giving opportunity to assessee.

Read the Ruling

4. RBI introduces key enhancements to Digital Payment Systems and Financial Services

On August 8, 2024, the RBI proposed various innovative measures to enhance the digital and financial ecosystem. These initiatives are designed to increase convenience, improve security, and expand inclusivity in digital transactions. Some of the key proposals include (a) increasing the transaction limit for tax payments via UPI from Rs 1 lakh to Rs 5 lakh, (b) introducing a ‘Delegated Payments’ facility via UPI, (c) creating a public repository for digital lending apps to curb unauthorised players, and (d) accelerating cheque clearance to just a few hours. The key highlights of these proposals are discussed in detail below –

Increase in transaction limit for tax payments via UPI from Rs 1 lakh to Rs 5 lakh

Presently, the transaction limit for UPI is Rs 1 lakh. However, the RBI has periodically increased these limits by recognising the need for higher limits in specific categories such as capital markets, IPO subscriptions, loan collections, and essential services like insurance, medical, and education. The RBI has now decided to raise the transaction limit for tax payments via UPI from Rs 1 lakh to Rs 5 lakh per transaction.

Introduction of ‘Delegated Payments’ facility via UPI to set transaction limits

The RBI has proposed introducing a ‘Delegated Payments’ facility via UPI. This facility would allow an individual (primary user) to set a UPI transaction limit for another individual (secondary user) on the primary user’s bank account.

Creation of a public repository for digital lending apps to curb unauthorised players

The RBI has proposed to create a public repository of Digital Lending Apps (DLAs) deployed by RBI-regulated entities (REs), which will be available on the RBI’s website. Further, the repository will be based on data submitted by the REs directly to it (without any intervention by RBI). It will be updated when the REs report the details, i.e., adding new DLAs or deleting any existing DLA.

RBI proposes to increase the frequency of reporting credit information to CICs

The RBI has decided to increase the frequency of reporting credit information to credit information companies (CICs) from monthly intervals to a fortnightly basis or at shorter intervals as mutually agreed between the Credit institution (CI) and CIC.

Proposal to accelerate the cheque clearance to just a few hours

To improve the efficiency of cheque clearing, reduce settlement risk for participants, and enhance customer experience, the RBI has proposed transitioning the Cheque Truncation System (CTS) from the current approach of batch processing to continuous clearing with ‘on-realisation-settlement’. Cheques will be scanned, presented, and passed in a few hours and continuously during business hours. The clearing cycle will reduce from the present T+1 days to a few hours.

Read the Press Release

5. MCA extends C-PACE services to facilitate voluntary closure of LLPs

The Hon’ble Finance Minister, in her budget speech, announced that the services of the Centre for Processing Accelerated Corporate Exit (C-PACE) would be extended to facilitate the voluntary closure of Limited Liability Partnerships (LLPs).

Accordingly, the Ministry of Corporate Affairs (MCA) vide. Notification Dated August 5, 2024, has notified the Limited Liability Partnership (Amendment) Rules, 2024. An amendment has been made to Rule 37 of the LLP Rules, 2009. Under these amended rules, the application for voluntary closure of LLPs will now be approved by C-PACE instead of the Registrar. These rules shall come into force w.e.f August 27, 2024.

The amendment to the LLP Rules, shifting the approval process for voluntary LLP closure to the C-PACE, is expected to streamline and expedite the LLP closure process. By reducing administrative burden, this change not only speeds up the exit process but also provides greater clarity and efficiency. It represents another step towards enhancing the ease of doing business in India’s corporate landscape.

Read the Notification

6. MCA launches e-adjudication platform; mandates e-adjudication for penalty proceedings under Cos Rules

Earlier, the Ministry of Corporate Affairs (MCA), vide a Press Release Dated February 5, 2021, proposed to launch the e-adjudication, e-scrutiny, e-consultation, Compliance Management System (CMS) and MCA Lab in MCA21 during the fiscal year 2021-22.

Now, the MCA vide. Notification dated August 5, 2024, notified the Companies (Adjudication of Penalties) (Amendment) Rules, 2024, by inserting a new rule 3A, “Adjudication Platform.” The new Rule mandates the use of electronic modes for all proceedings under these rules.

As per the new rule, all proceedings (including issuing notices, filing replies or documents, presenting evidence, holding hearings, attending witnesses, passing orders, and paying penalties) of the adjudicating officer and Regional Director under these rules must be conducted electronically through the e-adjudication platform developed by the Central Government.

Further, in cases where the email address of the person to whom notice or summons is required to be issued is unavailable, the adjudicating officer must send the notice via post at the last intimated address or address available in the records. Also, the officer must preserve a copy of such notice in the electronic record in the e-adjudication platform. If the person’s address is unavailable, the notice must be placed on the e-adjudication platform.

This change is expected to streamline interactions between adjudicating officers, Regional Directors, and stakeholders through the e-adjudication platform, reducing delays and ensuring a smoother flow of communication and decision-making. This shift to a fully electronic adjudication process marks a significant step towards improving the overall efficiency of the adjudication system.

Read the Notification

7. Residual Value Dilemmas: PPE Disposal Cost exceeding the Recoverable Amount

According to para 6 of the Ind AS 16 (Property, Plant & Equipment), the residual value of an asset is the estimated amount that an entity would currently obtain from the disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

Further, the residual value and useful life of an asset shall be reviewed at least at each financial year-end, and if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate under Ind AS 8, Accounting Policies, i.e. Changes in Accounting Estimates and Errors.

In accordance with Schedule II of the Companies Act, 2013, the useful life of an asset shall not ordinarily be different from the useful life specified under the schedule, and the residual value of an asset shall not be more than 5% of the original cost of the asset.

However, where a company adopts a useful life different from what is specified in Schedule II or uses a residual value different from the limit specified above, the financial statements shall disclose such difference and justify on this behalf duly supported by technical advice.

For example, a company owns and operates natural gas pipelines, multiple processing plants, and petrochemical facilities. Being critical assets for the company’s operations the company accounted it in accordance with Ind AS 16, Property, Plant, and Equipment (PPE) and Schedule II of the Companies Act, 2013. The company maintains a residual value of 5% for its pipelines as part of its accounting policy. Later on, the company replaced the old pipeline with a new pipeline.

The carrying value of the existing pipeline was Rs. 19 crores in its books of account. The replacement process incurred a cost of Rs. 24 crores for digging out and disposing of the old pipeline. The old pipeline was sold for Rs. 14 crores.

During the audit of the financial statement of the company, the auditor raised the concern that the cost of disposal (24 Crores) for the pipeline exceeded the recovery amount (14 Crore), indicating that the residual value should be considered zero. Additionally, the Auditor observed that the company had not established an accounting policy for periodically reviewing the residual value and useful life of assets, and also was not reviewing the residual value of PPE in accordance with Ind AS provisions.

Based on the above facts mentioned in the example and relevant provisions Company’s accounting treatment of maintaining a residual value of 5% for its pipelines without considering the cost of extraction, is incorrect and does not comply with Ind AS 16 and Schedule II of the Companies Act, 2013. The company must establish an accounting policy for periodically reviewing residual values and useful lives, making adjustments based on actual costs and recovery amounts. This ensures compliance with Ind AS 16 and Schedule II of the Companies Act, 2013.

Read the Story