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

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

(a) Govt. brings crypto assets under the purview of PMLA;

(b) ITAT could not remand the matter to AO if the case was remanded to it by HC with specific directions: HC;

(c) SEBI introduces additional restrictions for companies undertaking buy-back via Stock Exchange Route;

(d) High Court sets aside the show-cause notice and orders cancelling registration passed without giving any specific reasons;

(e) Delay in filing of appeal due to appellant’s illness should be condoned: HC; and

(f) Determining the classification of a land lease as a finance or operating lease: A case study

1. Govt. brings crypto assets under the purview of PMLA

The government has taken steps to tighten its regulatory control over cryptocurrencies, with certain trading activities involving digital assets now falling under the Prevention of Money Laundering Act (PMLA).

Section 2(1)(sa)(vi) grants the power to the government to designate specific individuals engaged in designated businesses or professions as “reporting entities” who must ensure compliance with the PMLA. These obligations include carrying out customer due diligence, monitoring transactions, reporting suspicious transactions, maintaining records, etc.

Exercising the powers under Section 2(1)(sa)(vi), the government has notified the following list of activities in respect of which the reporting entity has to ensure compliance under the PMLA:

(a) Exchange between virtual digital assets and fiat currencies;

(b) Exchange between one or more forms of virtual digital assets;

(c) Transfer of virtual digital assets;

(d) Safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets; and

(e) Participation in and provision of financial services related to an issuer’s offer and sale of a virtual digital asset.

Further, “virtual digital asset” shall have the same meaning assigned to it in clause (47A) of section 2 of the Income-tax Act, 1961.

The amendment aims to expand the scope of the Act to cover a wide range of cryptocurrency or virtual digital assets transactions under the purview of PMLA, 2002. By requiring reporting entities to track these transactions, the amendment aims to prevent financial crimes.

Read the Notification

2. ITAT could not remand the matter to AO if the case was remanded to it by HC with specific directions: HC

The assessee earned capital gains from the sale of land allegedly situated outside the municipal limits of Jaipur. Considering such land as agricultural land, the assessee filed its return of income, claiming such capital gains to be exempt. However, the AO contended that the land was within the municipal limits and refused to consider it agricultural land.

The matter reached the High Court. In disposal, the High Court gave directions to the Tribunal to consider and accordingly verify the distance of land in question from the city’s outskirts. However, in pursuance of the order, the Tribunal remanded the matter to AO for proper verification.

Consequently, a writ petition was filed to the High Court questioning whether the Tribunal was justified in remanding the matter to the AO when the directions of the High Court were strict to the ITAT itself to do the needful.

The High Court held that the Tribunal remanded the matter to AO merely because the distance verification required proper and supporting evidence, which was not provided to it. The Tribunal could have requested the revenue authority to make all the needed evidence available.

The Tribunal, being the last fact-finding authority, has the powers to record the finding which are akin to that of the Assessing Officer/CIT (Appeals). Also, when the High Court issues the direction, the Tribunal is expected to follow the same in pith and substance.

The Tribunal, without taking the help of the Revenue Authority, remanded the matter to the AO to record finding with regard to the distance of the land. It is entirely in derogation of the spirit of the order of the High Court.

Therefore, the Tribunal manifestly erred in remanding the matter to AO instead of recording the finding with regard to the distance of the land itself and is entirely in derogation of the spirit of the order of the High Court.

Read the Ruling

3. SEBI introduces additional restrictions for Companies undertaking buy-back via Stock Exchange Route

The SEBI, the regulatory body responsible for overseeing India’s securities market, has introduced amendments to the SEBI (Buy-Back of Securities) Regulations, 2018. These amendments include new restrictions on placing bids, price, and volume for companies carrying out buy-back through the stock exchange route.

To promote transparency and fairness, SEBI has also issued operational guidance. The ultimate goal of these changes is to regulate buy-back activities and ensure a level playing field for all market participants. The key highlights of the amendment are as follows:

(a) SEBI caps restrictions for purchasing shares or specified securities

Pursuant to Regulation 16 of the Buy-back Regulations, buy-back through stock exchanges shall be subject to the restrictions on the placement of bids, price and volume, as specified by SEBI.

In consultation with the stock exchanges, the SEBI has set new restrictions for companies undertaking buy-backs through the stock exchange route. The restrictions are as follows:

• • The company shall not purchase more than 25% of the average daily trading volume (in value) of its shares or other specified securities in the ten trading days preceding the day in which such purchases are made;
  • The company shall not place bids in the pre-open market, first thirty minutes and the last thirty minutes of the regular trading session;
  • The company’s purchase order price should be within the range of ±1% from the last traded price.

(b) Company and appointed broker to ensure compliance with newly imposed restrictions on buy-back

The company and its appointed broker are responsible for ensuring compliance with the newly imposed restrictions. The stock exchange shall monitor their compliance and impose appropriate fines and/or other enforcement actions as deemed fit in case of non-compliance.

(c) Margin requirements for deposits in Escrow Account

With regard to margin requirements for deposits in an escrow account, the escrow account should consist of cash and/or other than cash. The portion of the escrow account in the form of other than the cash shall be subject to an appropriate haircut in accordance with the SEBI Master Circular for Stock Exchange and Clearing Corporations dated July 05, 2021, as amended from time to time.

Also, the merchant banker overseeing the buy-back offer must ensure that an adequate amount, after the applicable haircut is available in an escrow account till the completion of all formalities of the buy-back.

(d) Applicability of the amendment

The amendments shall apply to all buy-back offers approved by a company’s Board of Directors on or after 30th day of the date of notification of this amendment in the official gazette (March 09, 2023).

Read the Circular

4. High Court sets aside the show-cause notice and orders cancelling registration passed without giving any specific reasons

The Delhi High Court has held that the show cause notice issued with a reason for proposed action in one word as ‘others’ without giving any specific reasons is vague in nature, and such SCN and order passed thereunder are liable to be set aside.

The department issued a show cause notice to the petitioner as to why registration should not be cancelled. The SCN stated the reason for cancellation as ‘others’. The petitioner replied to the SCN stating that the notice was issued without providing proper information. However, the order to cancel the registration of the petitioner was passed.

The petitioner filed a writ petition to challenge the cancellation order and contended that the SCN did not disclose any reason or ground for proposing the cancellation of its registration. Therefore it could not be addressed by the petitioner.

The High Court noted that the impugned SCN failed to disclose any reason for the proposed action of cancelling registration and was incapable of eliciting a meaningful response from the taxpayer. The Court also noted that the SCNs are not meant to be issued mechanically to comply with formality but to serve principles of natural justice.

Thus, any notice that does not clearly state allegations with reasons and enables the taxpayer to respond cannot be considered SCN. Therefore, it was held that the impugned SCN and order were liable to be set aside.

Read the Ruling

5. Delay in filing of appeal due to appellant’s illness should be condoned: HC

The Calcutta High Court has held that the appellate authority should condone the delay in filing an appeal not filed within the prescribed period due to illness. The Court has also noted that the appellant did not deliberately present the appeal beyond the condonable period and directed Appellate Authority to consider and decide the appeal on merits.

The appellant filed an appeal against the adjudication order, but the appellate authority dismissed the appeal on the ground of limitation. It filed a writ petition against the order of rejection of appeal, but the learned bench declined to interfere with the said order. Therefore, it filed an intra-Court appeal challenging the correctness of the order passed in the writ petition.

The High Court noted that as per Section 107(1) read with Section 107(4) of the CGST Act, 2017, the time limit for preferring the appeal beyond the period of three months is 30 days, which is a grace period. However, the statute does not state that beyond the said date, the appellate authority cannot exercise jurisdiction.

In the instant case, the appeal was not filed within the prescribed period on account of illness for which a doctor’s certificate was also enclosed. Therefore, it was not a case that the appellant had deliberately presented the appeal beyond the condonable period.

Therefore, the Court noted that while exercising jurisdiction under Article 226 of the Constitution, this Court can examine the factual circumstances and grant appropriate relief as the appellate remedy is a very valuable remedy since the appellate authority can re-appreciate the factual position.

Thus, the Court held that the delay in filing an appeal before Appellate Authority was to be condoned. The appellate authority was directed to consider and decide the appeal on merits.

Read the Ruling

6. Determining the classification of a land lease as a finance or operating lease: A case study

A corporation engaged in the allotment/leasing of land acquires land and then provides infrastructure like roads, electricity, water supply, storm-water drains, and a treatment plant within the industrial park. After that, it offers plots for leasing to industries for an initial period of 33 years, with the option of a buy-out after 10 years by paying 20% of the allotment cost as a buy-out premium or extending the lease up to 99 years. The allottees who have paid for the land in full without availing of instalments are exempted from the buy-out premium. The corporation charges an annual lease rental fee during the lease period and issues NOC to financial institutions/banks for the mortgage of lease rights with the first charge.

As per para 9 of Ind AS 116 (Leases), an entity shall assess, at the inception of a contract, whether a contract is or contains a lease. Therefore, the corporation is required to account for this arrangement of land leases in the books of account. In this regard, the corporation approached the EAC of ICAI to determine whether the arrangement is a lease and, if yes, how to classify the lease as a finance lease or an operating lease.

The Expert Advisory Committee (EAC) of ICAI has noted that the arrangement involves the corporation conveying the right to use (RoU) the land parcel to the lessee for a specified period of time, i.e., 33 years, in exchange for consideration. During the course of the lease period, the lessee has the right to substantially all of the economic benefits from the use of the land. Therefore, the committee is of the view that arrangement is in the nature of the lease within the scope of Ind AS 116. Moreover, the committee noted that every lessor classifies each of its leases as either operating or finance leases. Therefore, the corporation should make this classification on an individual lease-by-lease basis and not at the general overall level. In the extant case, the exercise price for the option in the lease agreements (which is Nil or 20% of the allotment price, which is equivalent to fair value at the inception of the lease) seems to be lower than the market price at the inception of the lease. Therefore, at the inception of the lease, it appears to be reasonably certain that such an option to buy out will be exercised by the lessee.

Accordingly, the committee is of the view the lease appears to satisfy the tests laid down in Ind AS 116 and hence, should be classified as a finance lease by the corporation.

Read the Story