Weekly Round-up on Tax and Corporate Laws | 06th to 11th February 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 06^th to 11^th February 2023, namely:

(a) ITAT approves additions as the father let out the property to his daughter at an exorbitant low rent;

(b) CBDT notifies Centralised Processing of Equalisation Levy Statement Scheme, 2023;

(c) SEBI brings reformative changes to end the buyback via the odd lot method;

(d) Tribunals have no power to issue instructions on the dress code of advocates appearing before them: High Court;

(e) GST is not leviable on vouchers being in the nature of instruments: Karnataka HC;

(f) High Court sets aside the summary order issued within 5 days of SCN without giving any opportunity for a hearing; and

(g) Should funds received to set up an infrastructure facility be recognised as revenue at or throughout the life of the facility?

1. ITAT approves additions as the father let out the property to his daughter at an exorbitant low rent

The assessee-individual filed a return of income for the relevant assessment year declaring rental income from house property. The assessee rented the house to his daughter for an annual rental of Rs. 5,500.

During the assessment proceedings, the Assessing Officer (AO) noticed that the assessee rented the same property to a third party (a corporate entity) in earlier years at Rs. 24 lakhs. The AO concluded that the lower rent was charged because of the relationship between the assessee and his daughter, and he made additions to the income of the assessee and computed the tax liability accordingly.

Aggrieved by the order, the assessee filed an appeal to the CIT(A). The CIT(A) confirmed the additions, and the matter reached the Pune Tribunal.

The Tribunal held that the assessee’s contention that the Fair Market Rent (FMV) of the property as per the Municipal Authorities is around Rs. 6,000, which is approximately equal to the actual rent received, is not acceptable. AO wasn’t considering the Annual Let Out Value (ALV) of any other property but the same property in the previous year. Assessee himself disclosed an ALV of around Rs. 24 lakhs in the previous year.

Once a disparity is examined and demonstrated by the department, the onus to prove it otherwise lies on the assessee. It is the responsibility of the assessee to demonstrate possible reasons and explanations relating to such disparity.

Since the assessee failed to demonstrate appropriate reasons for such discrepancy, it is considered that the rent is determined at such a lower rent only out of natural love and affection as the same property was rented at a much higher amount to a third party.

Therefore, it is nothing but the relationship aspect that reduced the rental income, the said additions are upheld, and the income of the assessee is enhanced by the same amount.

Read the Ruling

2. CBDT notifies Centralised Processing of Equalisation Levy Statement Scheme, 2023

The CBDT has notified the Centralised Processing of Equalisation Levy Statement Scheme, 2023. This scheme applies to the processing of the Equalisation Levy Statements. The scheme provides that the Centralised Processing Centre (CPC) shall process a valid Equalisation Levy Statement in the following manner:

(a) Equalisation levy shall be computed after adjusting for any arithmetical error in the statement.

(b) Interest (if any) shall be computed based on the sum deductible or payable as computed in the statement;

(c) The sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the amount computed under Sections 166(2)(b), 166A, 170, and any amount paid otherwise by way of tax or interest;

(d) No intimation shall be sent after the expiry of one year from the end of the financial year in which the statement or revised statement is furnished;

(e) If a revised statement is furnished, the CPC shall process only the revised statement, and no further action shall be taken on the original statement.

Scheme also provides that no assessee shall be required to appear personally or through an authorised representative before CPC in connection with any proceedings. Written or electronic communication in the format specified by CPC shall be a sufficient compliance with the query or clarification received from CPC.

Read the Notification

3. SEBI brings reformative changes to end the buyback via the odd lot method

The SEBI regulates the buyback of securities through SEBI (Buyback of Securities) Regulations, 2018, aiming to streamline the buyback of securities on recognised stock exchanges. These regulations provide guidelines on eligibility criteria, disclosure requirements, and other related matters for issuers, intermediaries and stock exchanges. The SEBI has amended the buyback regulations to only allow buyback through a tender offer or open market method. The key highlights of the amendment are as follows:

(a) SEBI introduces the definition of ‘frequently traded shares’

The amended regulation introduces the definition of frequently traded shares, which shall have the same meaning as defined under the SEBI (SAST) Regulations, 2011.

(b) Buyback limits shall now be based upon standalone ‘or’ consolidated financial statements of the company

Presently, all the limits, including maximum limits under Regulation 4(i), are based on the company’s standalone and consolidated financial statements. The new limits will be based on the company’s standalone or consolidated financial statements, whichever sets out a lower amount.

(c) SEBI to stop buyback from the open marketthrough the stock exchange

Presently, the buyback from the open market shall be less than 15% per cent of the paid-up capital and free reserves of the company. Now, SEBI has prescribed new limits for this buyback as follows:

• It shall be less than 15% of the paid up capital and free reserves of the company till March 31, 2023.
• It shall be less than 10% of the paid up capital and free reserves of the company till March 31, 2024.
• It shall be less than 5% of the paid up capital and free reserves of the company till March 31, 2025.

The SEBI has also clarified that buy-back from the open market through the stock exchange shall not be allowed with effect from April 1, 2025

(d) ‘Buyback via odd lots’ is no longer allowed

The SEBI eliminates buyback from odd-lot holders from the allowed methods. Now, the available methods are tender offers, and open market methods.

(e) Board can increase the buyback price and decrease the number of securities

The SEBI has now opened up the option for the company to increase the maximum buyback price and decrease the number of securities proposed to be bought back. It has been clarified that there shall be no change in the aggregate size of the buyback of securities.

(f) The securities certificates shall be extinguished and destroyed in the presence of the Secretarial Auditor

Earlier, the company was required to extinguish and physically destroy the securities certificates so bought back in the presence of a registrar to an issue or the Merchant Banker and the Secretarial Auditor within 15 days of the date of acceptance.

The period has been reduced from 15 to 7 days. The company shall also furnish a certificate to the Board for the same, duly certified and verified by the secretarial auditor.

(g) SEBI exceeds the minimum earmarked amount for buyback via open market route

Earlier, the company was required to ensure that at least 50 % of the amount earmarked for the buyback is utilised for buying-back shares or other specified securities. Now, the limit of 50% has been enhanced to 75%. Also, the company shall ensure that a minimum 40% of the amount earmarked for the buyback is utilised within the initial half of the specified duration.

(h) SEBI notifies changes in constituents of the escrow account

Cash, including bank deposits deposited with any SCBs, government securities, or units of mutual funds invested in gilt funds and overnight schemes, can also be used in an escrow account. Various modifications in the definition were notified.

Read the Notification 

4. Tribunals have no power to issue instructions on the dress code of advocates appearing before them: High Court

In the instant case, the question was placed before the High Court whether the Tribunals have the authority to prescribe a dress code for the Advocates appearing before them.

The petitioner was a practising advocate in the Courts and Tribunals of Chennai, including the National Company Law Tribunal (NCLT). He was also a member of the Institute of Company Secretaries of India (ICSI). He filed a Public Interest Litigation seeking a writ of declaration to declare the order dated 14-11-2017 passed by the NCLT relating to the imposition of dress code for advocates appearing before the Tribunal as invalid and without legal authority.

The High Court observed that the statute has itself conferred powers on the High Court with reference to the prescription of the dress code. Hence, any instruction, direction, or advisory by the Tribunal, especially when it runs contrary to statutory rules, is ultra-vires, without any source of power for issuance of such directions.

Further, on the conjoint reading of Section 34 of the Advocates Act and Bar Council of India Rules, it is clear that only the High Courts can frame rules for dress code for the appearance of Advocates before it, Courts and Tribunals, subordinate to it.

Section 34 of the Advocates Act, 1961 states that it is only the High Court which has powers to frame rules laying down the conditions for practice, which undoubtedly includes the dress code.

Also, the powers prescribed under Rule 51 of the NCLT Rules, 2016 are merely for discharging functions as per Act, in accordance with principles of natural justice and equity. Hence, the same cannot be said to confer power to prescribe the dress code, especially when it is contrary to Bar Council of India Rules.

The High Court held that wearing a gown is optional and not compulsory for advocates appearing in courts other than the Supreme Court or High Courts. Additionally, the Court declared that the notification issued by the Registrar of the NCLT, making it mandatory for the advocates appearing before its bench to wear gowns, was to be quashed and set aside.

Read the Ruling

5. GST is not leviable on vouchers being in the nature of instruments: Karnataka HC

The Karnataka High Court has held that vouchers would qualify neither as a supply of goods nor as a supply of services. Consequently, the GST is not leviable on the vouchers as they are in nature of the instruments covered under the definition of ‘money’.

The assessee was engaged in the transactions of procuring pre-paid payment instruments of gift vouchers, cash-back vouchers and e-vouchers from the issuers and supplying them to its clients for specified face value. It filed an application for the advance ruling to determine the taxability of vouchers. The Authority for Advance Ruling (AAR) held that the supply of vouchers would be taxable as goods. The Appellate Authority affirmed the order passed by the AAR, and it filed a writ petition against the same.

The High Court noted that vouchers are mere instruments accepted as consideration for the supply of goods or services and do not have any inherent value of their own. Since vouchers qualify as instruments, they would be covered under the definition of ‘money’ and money is excluded from the definition of goods and services. Therefore, the tax would not be payable on vouchers as the transaction shall be restricted to the procurement of printed forms and delivering the same to clients.

Read the Ruling

6. High Court set aside the summary order issued within 5 days of SCN without giving any opportunity for hearing

The Jharkhand High Court has held that the show-cause notice issued without striking out irrelevant particulars is vague in nature. The Court has further held that the summary order passed within 5 days of issuing an SCN without granting any opportunity for hearing is not sustainable.

The petitioner was engaged in trading two-wheeler bikes and their parts. The department issued a show cause notice along with Form GST DRC-01 stating that the petitioner had violated provisions. Thereafter, the summary of the order was issued within 5 days without giving any opportunity for hearing. The petitioner filed a writ petition and contended that SCN issued was in a format without striking out irrelevant particulars, and the order was passed without the hearing opportunity.

The High Court observed that the summary of SCN should be issued “along with” SCN that provides for contraventions. The word “along with” would indicate that SCN and a summary of SCN both have to be issued. However, in the instant case, the SCN was vague in nature since it didn’t spell out the contraventions against the petitioner.

Further, the Court noted that as SCN issued was vague, the foundation of proceedings would suffer from material irregularity. Moreover, a summary of the order issued within 5 days of issuing a summary of SCN was also in violation of the principles of natural justice. Thus, it was held that the summary of SCN and the summary of the order issued were liable to be set aside, and the matter was remanded for fresh consideration.

Read the Ruling

7. Should funds received to set up an infrastructure facility be recognised as revenue at or throughout the life of the facility?

Para 69 of the Ind AS 115 (Revenue from Contracts with Customers) states that if a customer contributes goods or services (for example, materials, equipment or labour) to facilitate an entity’s fulfilment of the contract, the entity shall assess whether it obtains control of those contributed goods or services. If so, the entity shall account for the contributed goods or services as non-cash consideration received from the customer. In this context, a company has capitalised the assets funded by customers and shown under property, plant and equipment and recognises revenue during the reporting period to the extent of depreciation provided on such customer-funded assets. Thus, recognising the revenue over the useful life of the customer-funded asset.

But confusion arises in relation to the control of such assets, which are acquired out of the funds provided by the customer. The company contended that these assets are to be used only for the specific project of the customer and will remain within the control of the company even after the end of the project and at liberty to use these assets for other projects of the same customers.

In this regard, the Expert Advisory Committee (EAC) of ICAI has noted that the control of an asset refers to the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. The company cannot deploy the assets (facility) in its activities or use/deal with the asset as it pleases, e.g., cannot sell/exchange, pledge etc. and, accordingly, does not have the right to direct the use of the asset.

Therefore, the facility cannot be considered and accounted for as non-cash consideration received from the customer and should also not be recognised as property, plant and equipment by the company. Accordingly, the revenue in respect of funds received from the customer for the manufacturing facility should be recognised as or when the control over the manufacturing facility is transferred to the customer.

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