Weekly Round-up on Tax and Corporate Laws | 08th to 13th November

This weekly newsletter analytically summarizes the key stories reported at taxmann.com during the previous week from 08^th to 13^th November 2021, namely:

(a) RBI announces the launch of Retail Direct Scheme; allows retail investors to trade in G-Secs;

(b) Interest paid by a builder on failure to construct a flat is compensatory in nature and out of the ambit of section 194A;

(c) CBIC issued guidelines for disallowing debit of electronic credit ledger;

(d) Fish meal is exempt from GST as exemption provided by Notification can’t be taken away by issuing a circular;

(e) Education Society is not a corporate person for IBC proceedings; CIRP plea rejected;

(f) SEBI amends LODR norms; widens the definition of related party transaction; and

(g) Applicability of accrual basis accounting standards where trust is formed to establish AIF.

1. RBI announces ‘Retail Direct Scheme’ to allow retail investors to buy G-Secs

The Reserve Bank of India (RBI) announces the activation of the RBI Retail Direct Scheme. The scheme was launched virtually by the Hon’ble Prime Minister, Shri Narendra Modi, on 12-11-2021. The scheme will bring Government Securities (G-Secs) within reach of the common person by simplifying the process of investment. Under the scheme, individual retail investors can open a Retail Direct Gilt (RDG) Account from an online portal  (https://rbiretaildirect.org.in). Investors can invest in the following routes:

• • Primary issuance of G.Secs: Investors can place a bid as per the non-competitive scheme for participation in the primary auction of G-Secs. and Sovereign Gold Bonds (SGB).
  • Secondary market: Investors can buy and sell G-Secs. on NDS-OM (‘Odd Lot’ and ‘Request for Quotes’ segments).

NDS-OM is an RBI’s screen-based, anonymous electronic order matching system for trading in G-Secs. in the secondary market.

It is a significant milestone in the development of the market for G-Secs. The scheme aims to provide a safe, simple, direct, and secured platform to investors. Payment for transactions can be made conveniently using a savings bank account through internet banking or Unified Payments Interface (UPI). Investors can obtain help and other support facilities on the portal itself and through a toll-free telephone number 1800–267-7955 (10 am to 7 pm) and email. Investor services include provisions for transaction and balance statements, nomination facility, pledge or lien of securities, and gift transactions. No fees will be charged for facilities provided under the scheme.

Read the Press Release

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2. Interest paid by a builder on failure to construct a flat is compensatory in nature which is out of the preview of Sec. 194A: High Court

The Bombay High Court has given an important ruling on the applicability of TDS provisions on the interest received by the buyer as compensation from the builder. The Court has ruled that no tax shall be deducted under Section 194A from interest paid by the builder while refunding the advance to the buyer on its failure to hand over possession of the flat.

Facts

The assessee entered into an agreement with a builder for the purchase of various flats. However, the builder failed to hand over possession of flats on time. Consequently, Real Estate Regulatory Authority (RERA) directed the builder to refund the advance amount paid by the assessee with compensatory interest.

Builder deducted TDS under Section 194A on the amount of compensatory interest paid to the assessee. The assessee filed the writ petition before the Bombay High Court, contending that tax deduction on the interest portion wasn’t in accordance with the law.

Ruling

The Bombay High Court held that the term ‘interest’ is defined under Section 2(28A) of the Income-tax Act. From such definition, it appears that the term ‘interest’ has been made entirely relatable to money borrowed or debt incurred and various gradations of rights and obligations arising from either of the two.

In the instant case, the assessee had not given the money to the builder by way of deposit, nor had the builder borrowed the amount from the assessee. The sum paid to the assessee was a refund of the advance given to the builder. The interest was paid on account of damages suffered by the assessee on failure in delivering the flats.

Since the payment couldn’t establish a debtor-creditor relationship between the assessee and the builder, the said sum or any part thereof cannot be liable for tax deduction under the relevant provisions of the Act. Therefore, the provisions of Section 194A were not applicable, and the builder was clearly wrong in deducting the TDS from the interest payable to the assessee.

Read the Ruling

3. CBIC issued guidelines for disallowing debit of electronic credit ledger

Rule 86A of CGST Rules, 2017 empowers the authorized officers to disallow debit of electronic credit ledger and block the credit based on a reasonable belief that credit of input tax available in the ledger has been fraudulently availed or is not eligible. In some cases, the Honorable High Courts have emphasized the need for laying guidelines for invoking Rule 86A.

Now, CBIC has issued detailed guidelines for the officers to exercise the powers of Rule 86A. In these guidelines, the CBIC has clarified grounds for disallowing debit of an amount from electronic credit ledger, proper authority, and procedure for same, etc. In this regard, the CBIC has issued Circular CBEC-20/16/05/2021-GST/1552, dated 02-11- 2021.

Read the Circular

4. Product fish meal is exempt from GST as exemption provided by a notification can’t be taken away by issuing a circular: Madras High Court

The High Court of Madras has held that exemptions provided by the Government by exercising its powers either under Section 11(1) of CGST Act, 2017 or under Section 6(1) of IGST Act, 2017 are substantive rights. Such exemptions cannot be taken away by issuing clarificatory circulars by the board exercising its power under Section 168 of CGST Act, 2017. This ruling is given in the case of Jenefa India v. Union of India.

Facts

The petitioner was a manufacturer of fish meal. In the manufacturing process, the petitioner procures fresh fish, and after processing, it is converted in powder form of fish meal and packed in sacks for sale. It was treated as exempt goods. The department inspected the premises of the petitioners’ factories and demanded the tax at the rate of 5%. The petitioner challenged it and filed a writ petition.

High Court Held

The Honorable High Court observed that fish meal used for feeding fish, aqua, prawn, etc., flours, meals, and fish pellets in powdered form are exempt from tax under Sl. No. 102 under Notification No. 2/2017, dated 28-6-2017. However, a circular was issued to provide that exemption was for finished products and not for raw material. Based on this circular, it was alleged that the fish meal was also used as raw material, and the exemption would not be available. It was noted that the GST exemption provided by issuing a notification could not be taken away by issuing a circular. Therefore, the petitioners, so long as they would make a finished product fish meal from their manufacturing units, can enjoy the exemption.

Read the Ruling

In this ruling in the matter of the Asset Reconstruction Company (India) Ltd. v. Mohammadiya Educational Society [2021] 132 taxmann.com 37 (NCLAT- New Delhi), the NCLAT held that Education Society is not a corporate person for IBC proceedings.

Facts

The appellant-financial creditor filed an application under Section 7 against the respondent corporate debtor claiming that the respondent defaulted in payment of an amount. The respondent was a society governed by the AP Societies Registration Act, 2001. The appellant claimed that as per Section 18 of the AP Act, registration of society would render it to a corporate body and, thus, respondent was governed by definition under Section 3(7) and the application filed by it for initiating CIRP against the corporate debtor was maintainable. However, the respondent claimed before NCLT that it was a society registered under the Societies Registration Act, 1860. It did not fall under the purview of section 2 of the IBC.

The respondent claimed that it was not a body corporate and remained an unincorporated body. The respondent also claimed that Section 18 of the AP Act confers the status of a body corporate for such societies registered thereunder. The status of Body Corporate was not afforded to societies registered under the ‘1860 Act’.

The Adjudicating Authority held that the respondent was not a body corporate and dismissed the application filed by the appellant under section 7.

On appeal, the question was raised whether Section 2 would apply to such a society even if it is accepted to be a deemed body corporate. It was held that if Section 2 is considered, it lays down that the provisions IBC shall apply to entities and individuals as mentioned in this Section.

The National Company Law Appellate Tribunal (NCLAT) held that since respondent was not a company as defined in Section 2(20) of Companies Act, 2013 or ‘limited liability partnership’ as defined under Limited Liability Partnership Act, 2008 or any other person incorporated with limited liability under any law for the time being in force, respondent society could not be said to be ‘corporate person’ to whom provisions of IBC could apply.

Read the Ruling

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6. SEBI amends LODR norms; widens the definition of related party transaction

SEBI vide. Notification No. SEBI/LAD-NRO/GN/2021/55, Dated 09-11-2021, has notified the SEBI (Listing Obligations and Disclosure Requirements) (Sixth Amendment) Regulations, 2021. The amendment has been made to Regulation 23, which deals with related party transactions. The existing Explanation has been amended to provide that a transaction with a related party shall be considered material if the transaction(s) to be entered into (individually or taken together with previous transactions during a financial year) exceeds Rs. 1,000 crores or 10% of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity, whichever is lower.

Amendment has also been made to the definition of ‘related party’ and ‘related party transactions. The amendment provides that any person or entity forming a part of the promoter or promoter group of the listed entity, or any person or any entity holding equity shares – (i) of 20% or more or (ii) of 10% or more w.e.f. April 1, 2023, in the listed entity either directly or on a beneficial interest basis as provided under Section 89 of the Companies Act, at any time, during the immediately preceding FY, shall be deemed a related party.

The amended regulation further provides that the audit committee of a listed entity shall define “material modifications” and disclose it as part of the policy on materiality of related party transactions and dealing with related party transactions.

It further provides that the related party transaction to which the subsidiary of a listed entity is a party (and not the listed entity) shall require prior approval of the audit committee of the listed entity. Such approval shall be required if the transaction exceeds the limit.

Some mandatory disclosures have also been introduced, which prescribes that the listed entity shall submit disclosures of related party transactions to the stock exchanges and publish the same on its website. However, a ‘high-value debt listed entity’ shall submit such disclosures along with its standalone financial results for the half-year. However, the listed entity shall make such disclosures every six months on the date of publication of its standalone and consolidated financial results with effect from April 1, 2023.

Read the Notification

7. Is it necessary to follow accrual basis accounting standards while preparing a general-purpose financial statement of a trust where it formed to establish AIF?

Example

An Investment Advisory entity is formed as a ‘trust’ to launch a registered Alternative Investment Fund (AIF) under the SEBI Alternative Investment Funds Regulations, 2012. The entity states that being a trust, AIF can prepare its general purpose financial statement on a cash basis where no mandatory requirement to prepare financial statement on an accrual basis and a proper discloser is made for the same. The entity prepares its general purpose financial statements on a cash basis and makes adequate disclosures in the financial statements.

Whether the accounting practice followed by the entity is correct? If not, what should be the correct accounting treatment for the same?

Answer

The Expert Advisory Committee (EAC) of ICAI has held that the accounting practice followed by the entity is not correct.

A trustee is bound to maintain clear and accurate accounts of the property of the trust and furnish complete information about the amount and state of the trust property at the request of the beneficiary. Also, as per SEBI regulation, the books of AIF shall be audited annually. Moreover, the ICAI has made an announcement that Accounting Standards shall mandatorily apply to all the entities, including trust in respect of general purpose financial statements for periods beginning on or after 01-04-1993, where such statements are statutorily required to be audited under any law.

Since the above provision put a statutory requirement that the books of AIF shall be audited annually, the accrual basis of accounting standards is mandatorily applicable on the AIF. Therefore, based on the provision, we can conclude that the AIF in the extant case should follow the accrual basis of accounting standards.

Read the Story

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