Weekly Round-up on Tax and Corporate Laws | 06th to 11th December

This weekly newsletter analytically summarizes the key stories reported at taxmann.com during the previous week from 06th to 11th December 2021, namely:

(a) The Tribunal ruled that AO couldn’t disallow cost of improvement merely relying on inquiries made with the assessee’s neighbour

(b) The Apex Court has ruled that the Tribunal has no power to recall its order

(c) Gujarat High Court sets aside confiscation order as SCN and order were not served on the owner of goods

(d) Supreme Court upholds constitutionality of RBI’s decision to ban ‘Merchanting Trade Transactions’ pertaining to PPE kits

(e) ITC not allowed on goods/services procured for distribution of sales promotion rewards: AAR

(f) Narrow scope amendments issued by IASB and how these amendments will improve the usefulness of comparative information?

1. AO can’t disallow cost of improvement merely relying on inquiries made with the assessee’s neighbour

The Chennai Tribunal has quashed the order of the Assessing Officer (AO) that disallowed the benefit of cost of improvement done by the assessee. The AO had made disallowance merely relying upon an inspector’s report who only made inquiries with the assessee’s neighbour.

Facts

The assessee had purchased a flat and incurred expenditure of Rs. 23 lakhs to renovate the house. He claimed the cost of improvement as a deduction. The Assessing Officer (AO) asked the assessee for bills and vouchers for the above expenditure incurred by him. The assessee did not file bills and vouchers and submitted that he had purchased an old flat and incurred expenditure on renovation of the house.

The AO deputed an Inspector to make an inquiry about the house and to find out if the assessee had carried any renovation work or not. The inspector visited the house, took photographs, and inquired with neighbours. The neighbours said they were not aware of improvements done by the assessee. Based on reports submitted by the Inspector, AO concluded that the assessee had not carried out any improvement, and accordingly, he disallowed the entire amount.

On appeal, CIT(A) directed AO to allow improvement cost to the assessee. Aggrieved by the order, AO filed an appeal before the Tribunal.

Ruling

The Chennai Tribunal held that the assessee resided at Mumbai and had purchased an old house at Chennai. He subsequently carried repairs in the house. The repairs were carried by the assessee five years ago. Therefore, he could not produce evidence before the AO. Further, the entire repair works/improvements were carried out by his relatives, and he could not collect the bills and vouchers since he is residing in Mumbai.

It was found from the Assessment Order that the inspector had enquired with the neighbours, and the neighbours had stated before him that they were not aware of the improvements carried out by the assessee. Mainly, based on the enquires made with the neighbours, the AO concluded that the assessee had not carried out any improvement work and disallowed the entire expenditure claimed by the assessee

If AO wanted to know precisely about the assessee’s improvement works, he should have been enquired through a builder who constructed the building instead of neighbours.

Therefore, the ITAT held that the CIT(A) was justified in deleting disallowance and directing AO to allow the cost of the improvement.

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2. Supreme Court rules that ITAT has no power to recall its order even if submissions were filed on merits

The Supreme Court of India has ruled that in exercise of powers under section 254(2), the ITAT may amend any order passed by it to rectify only mistake apparent from the record. The Tribunal has no power to recall its earlier order.

Facts

The assessee entered into a Supply Contract with Ericsson A.B. It filed an application under section 195(2) before the Assessing Officer (AO), to make payment to the non-resident company for the purchase of software without TDS. It was contended by the assessee that it was for the purchase of software and since Ericsson A.B. had no permanent establishment in India, the amount paid is not taxable in India.

The AO passed an order rejecting the assessee’s application under section 195(2). After deducting the tax, the assessee appealed to the CIT(A), who held in favour of the assessee. On further appeal, ITAT upheld the view taken by AO and reversed the order of CIT(A). Against the ITAT order, the assessee filed a miscellaneous application for rectification under section 254(2).

The ITAT allowed the miscellaneous application filed under section 254(2) and recalled its original order. Aggrieved and dissatisfied with the order passed by the ITAT, revenue preferred appeal before the High Court, which was dismissed. Thus, revenue filed the appeal before the Supreme Court.

Ruling

The Supreme Court held that the order passed by the ITAT recalling its earlier order is beyond the scope and ambit of the powers under section 254(2). In exercise of powers under section 254(2), the ITAT may amend any order passed by it to rectify any mistake apparent from the record only. The Tribunal cannot revisit its earlier order and go into detail on merits.

The Apex Court held that powers under Section 254(2) are only to correct or rectify the mistake apparent from the record. Merely because the assessee might have filed detailed submissions, it does not confer jurisdiction upon the ITAT to pass the order de hors Section 254(2). Therefore, the said order could not have been recalled by ITAT in the exercise of powers under section 254(2). If the assessee believed that the order passed by the ITAT was erroneous, either on facts or in law, the only remedy available was to prefer the appeal before the High Court.

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3. Gujarat HC sets aside confiscation order as SCN and order were not served on the owner of goods

The High Court of Gujarat held that the confiscation order was not sustainable when show cause notice and order were not served on the owner of goods, but the driver of vehicle and hearing opportunity was not provided to the owner. The Honorable Gujarat High Court gives this ruling in the case of Tanay Creation v. State of Gujarat.

Facts

The petitioner was engaged in the trading of gray fabrics. The department detained the goods of the petitioner on the grounds that there was a mismatch in the invoice and E-Way Bill, absence of receiver’s name, and complete address in the documents. The tax and penalty were paid, but goods were not provisionally released. The department passed a confiscation order. The petitioner filed a petition before the High Court contending that show cause notice and order were served on the truck driver, and a personal hearing was not provided.

High Court

The Honorable High Court observed that the owner of goods was not afforded the opportunity for personal hearing, and no show cause notice was issued to him or the owner. The order was served to the truck driver instead. Thus, the impugned order was liable to be quashed and set aside as there was a complete breach of principles of natural justice. Also, the department was directed to issue fresh show-cause notice and give an opportunity of personal hearing to the owner of goods.

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4. SC upholds constitutionality of RBI’s decision to ban ‘Merchanting Trade Transactions’ pertaining to PPE kits

In the matter of Akshay N Patel v. Reserve Bank of India [2021] 133 taxmann.com 53 (SC), the Supreme Court upheld the measures adopted by the Reserve Bank of India to implement the ban imposed by the Union Government on the export of Personal Protective Equipment(PPE) Kits in view of the Covid-19 pandemic.

Facts

The petitioner was the managing director of a firm that manufactured and traded pharmaceuticals and healthcare products like PPE kits. He secured a contract to serve as an intermediary for the sale of PPE products by a supplier in China to a buyer in the United States. However, the Revised Guidelines on Merchanting Trade Transactions (MTT), issued by the RBI in January 2020, banned the export of PPE products.

The petitioner wrote a letter to his bank seeking documents such as a letter of credit to execute the Merchanting Trade Transactions (MTT) contract to execute the transaction. However, he was denied the same. The petitioner argued that the prohibiting export of PPE products violates his right to equality and is arbitrary. However, the appellant received no response.

The appellant then filed a writ petition under Article 226 before the Madhya Pradesh High Court. The High Court upheld Clause 2(iii) of the Revised Guidelines on Merchanting Trade Transactions issued by the RBI.

On appeal, disagreeing with the argument raised by the petitioner, the Apex Court reasoned that the prohibition was based on a legitimate goal. The Court said that the “democratic interests that secure the well-being of the masses cannot be judicially aborted to preserve the unfettered freedom to conduct the business of the few”.

Supreme Court

The Court rejected the argument of a business person that the restrictions amounted to a violation of his fundamental right to freedom to trade and business guaranteed under Article 19(1)(g) of the Constitution of India.

“When an Indian entity facilitates the trade of PPE products to another nation, it takes away from India’s possible stock in the global market. There is a rational nexus in the prohibition of MTTs in respect of PPE products and the public health of Indian citizens,” Court held.

The Apex Court held that the ban imposed on Merchanting Trade Transactions in respect of all commodities whose exports were banned by the prevailing FTP, under Clause 2(iii) of 2020 Revised Guidelines on Merchanting Trade Transactions issued by RBI under sections 10(4) and 11(1) of FEMA,1999, was proportional and not unconstitutional under Article 19(1)(g) of the Constitution of India in so far as it pertained to PPE Kits.

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5. ITC not allowed on goods/services procured for distribution of sales promotion rewards: AAR

The Authority for Advance Ruling has recently held that input tax credit is not available for the GST paid on goods/services procured to distribute sales promotion rewards to retailers on achieving sales targets. The Tamil Nadu AAR gives this ruling in the case of GRB Dairy Foods (P.) Ltd.

Facts

The applicant was engaged in the business of manufacture and supply of ghee and other products. It launched a sales promotional offer ‘Buy-n-Fly’ scheme for retailers to enhance sales of its products. It applied for an advance ruling to determine whether GST paid on inputs/input services such as Trip to Dubai, Gold Vouchers, Television, and Air-coolers to implement the promotional scheme would be eligible for Input Tax Credit (ITC).

AAR

The Authority observed that the applicant extended the promotional rewards voluntarily without any consideration in money or money’s worth on achieving the sales target by the retailers. The rewards were not in the nature of discounts on the products but were in the nature of personal consumables, and therefore, they would qualify to be termed as gifts.

Moreover, Section 17(5)(h) of the CGST Act, 2017 expressly restricts ITC on such gifts, even if they are procured in the course of furtherance of business. Therefore, it was clear that the tax paid on the goods/services procured for distribution as rewards extended by the applicant in the ‘Buy-n-Fly’ scheme would not be available as ITC.

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6. Narrow scope amendments issued by IASB and how these amendments will improve the usefulness of comparative information?

On 9th December 2021, the International Accounting Standards Board (IASB) has issued amendments to ‘Initial Application of IFRS 17 (Insurance Contracts)’ by providing an alternative to insurers to improve the usefulness of comparative information to investors.

At present, IFRS 17 (Insurance Contracts) and IFRS 9 (Financial Instruments) have different requirements for presenting comparative information. Due to this, there are some temporary accounting mismatches between financial assets and insurance contract liabilities at the first application of these IFRS. By this amendment, these temporary mismatches will be eliminated by providing insurers with an option to present comparative information about financial assets. Therefore, these amendments will improve the usefulness of comparative information of investors.

This amendment is effective for annual reporting periods starting on or after 1st January 2023.

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