Weekly Round-up on Tax and Corporate Laws | 09th to 14th January 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 09^th to 14^th January 2023, namely:

(a) CIT can look into the report of ‘The Directorate of Vigilance & Anti-Corruption’ to invoke Sec. 263: High Court;

(b) CBDT removed the limit of Rs. 5,000 for submission of SFT to report interest income;

(c) CBIC issues clarification regarding GST rates and classification of certain goods;

(d) Karnataka High Court prescribes the grounds a borrower can’t take to escape from criminal liability under Section 138 of the NI Act;

(e) High Court sets aside the order of cancellation of registration passed on the ground that returns were filed belatedly; and

(f) Investments made out of the Policy holders’ Fund qualify to be consolidated under AS 21

1. CIT can look into the report of ‘The Directorate of Vigilance & Anti-Corruption’ to invoke Sec. 263: High Court

The Madras High Court has ruled that the CIT can also exercise the revisionary powers under Section 263 based on information received under any other Act.

The assessee, an individual, failed to file a return of income as per the time mentioned under Section 139(1). Subsequently, a notice under Section 144 was issued, and the assessee filed a return of income. However, the assessment was completed under Section 144 as the assessee failed to furnish any required documents.

Meanwhile, the Assessing Officer (AO) received a DVAC’s (Directorate of Vigilance and Anti-Corruption) Report in which the assessee was a beneficiary. A copy of the report was sent to AO, but he completed the assessment without considering it.

CIT invoked the revision powers under Section 263 as AO committed a mistake by ignoring DVAC’s report. Against such an order, the assessee preferred an appeal to the Tribunal, which duly granted relief to the assessee.

The Tribunal held that the revisionary powers under Section 263 could be exercised by the CIT only based on information available as per the Income-tax Act. DVAC’s report was out of the records and information received under the Income-tax act.

The Madras High Court held that the order passed by Tribunal in allowing the assessee’s appeal was unsustainable, and the orders passed were prejudicial to the interest of revenue. Further, the Tribunal was at fault not only for passing an impugned order but the Tribunal required to look into the matter and pay attention to the mistakes committed by the AO.

Overlooking of mistakes committed by AO resulted in an erroneous order passed in favour of the assessee. Therefore, Tribunal erred in allowing the assessee’s appeal.

Read the Ruling

2. CBDT removed the limit of Rs. 5,000 for submission of SFT to report interest income

The Statement of Financial Transaction (SFT) provides a reporting mechanism wherein specified entities are required to provide information about material financial transactions to the Income-tax Dept. The CBDT has issued Notification No. 16/2021, dated 12-03-2021, to include reporting of interest income.

Subsequently, vide Notification no 2 of 2021, dated 20-04-2021, the board provided format, procedure, and guidelines for submission of SFT for interest income by the banking company or a Co-op. Bank, Post Master General, and NBFCs.

As per the said notification, `reporting in SFT is required for all account/deposit holders where the cumulative interest exceeds Rs 5,000 per person in the financial year.

Now, the board has modified this reporting requirement to abolish the limit of Rs. 5,000. As per the modified reporting requirement, all account/deposit holders whose interest exceeds zero per account in the financial year must be reported. However, this will exclude Jan Dhan’s Accounts.

Read the Notification

3. CBIC issues clarification regarding GST rates and the classification of certain goods

The CBIC has issued clarification regarding GST rates and the classification of certain goods based on the recommendations of the GST Council in its 48^th meeting held on 17-12-2022. The key clarifications issued are as follows:

• Rab is appropriately classifiable under heading 1702, attracting a GST rate of 18%;
• No GST on by-products of milling of Dal/Pulses such as Chilka, Khanda and Churi/Chuni w.e.f 01-01-2023;
• ‘Carbonated Beverages of Fruit Drink’ or ‘Carbonated Beverages with Fruit Juice’ would fall under HSN 2202 99, and GST would be levied at the rate of 28% and Compensation Cess at the rate of 12%;
• Snack pellets (such as ‘fryums’) manufactured through the process of extrusion are appropriately classifiable under tariff item 1905 90 30 and taxable at 18%;
• Compensation Cess at the rate of 22% is applicable on Motor vehicles falling under heading 8703, which satisfy all four specifications (SUVs), the engine capacity exceeds 1,500 cc, the length exceeds 4,000 mm, and the ground clearance is 170 mm and above.

Read the Circular 

4. Karnataka High Court prescribes the grounds a borrower can’t take to escape from criminal liability under Section 138 of the NI Act

The Karnataka High Court has provided a list of excuses that wouldn’t exempt the borrower from criminal liability under Section 138 of the Negotiable Instruments Act 1881.

In the instant case, the appellant presented a cheque which was dishonoured due to insufficient funds. The appellant issued a demand notice, and the same was served to the wife of the accused. The accused had neither replied to the notice nor paid the amount covered under the cheque. Consequently, the complaint was filed to the Trial Court.

Later, after hearing both the parties, the Trial Court acquitted the accused from the charge levelled up against him for the offence under Section 138 of N.I. Act on the following grounds:

1. There was a material alteration in the cheque;
2. The debt was time-barred;
3. The transaction was hit by Section 269SS of the Income Tax Act;
4. Statutory legal notice of dishonour asking for payment from the lender was received and acknowledged by the borrower’s wife and not by the borrower himself.

Subsequently, an appeal was preferred to the High Court, challenging the correctness and legality of the acquittal order passed by the Trial Court.

Setting aside an acquittal order passed by the Trial Court, the High Court laid down the following grounds/excuses/defence along with their reasons based on which the borrower cannot escape from the prosecution and criminal liability for the dishonour of cheque under the NI Act:

• Overwriting in the year mentioned in the date of the cheque was not a material alteration and, therefore, doesn’t void the cheque;
• In a post-dated cheque, a validity period is to be reckoned from the date mentioned on the cheque;
• A cash loan in excess of the limit of Rs. 20,000 in violation of Section 269SS of the Income-tax Act does not make a loan an unenforceable debt;
• The borrower cannot plead that legal notice for cheque dishonour was received by his wife and not by the borrower himself.

In view of the above grounds, the accused was convicted for the offence under Section 138 of N.I. Act, he was sentenced to pay a fine of Rs. 2,00,000 and was prosecuted for three months imprisonment.

Read the Ruling

5. High Court sets aside the order of cancellation of registration passed on the ground that returns were filed belatedly

The Madras High court has held that cancellation of registration without giving a finding and merely on the ground that returns were filed belatedly is not sustainable. Therefore, the order of cancellation is liable to be set aside.

The petitioner was engaged in the business of providing works contract service, civil works, ground levelling and cleaning services. The department issued SCN due to the non-filing of returns, and registration was cancelled. It filed an appeal against the cancellation order, but the appeal was rejected on the grounds that returns were not filed within the prescribed time limit. It filed a writ petition against the appellate order.

The High Court noted that returns could not be filed for a specific period in view of the COVID-19 pandemic, and the petitioner submitted the reason. The Court also pointed out that the appellate authority should have gone into reasons regarding the belated filing of returns and should have given a finding before passing the order. Therefore, the Court held that in the absence of a finding, the order of cancellation was liable to be set aside, and the matter was to be remanded back to appellate authority to decide afresh based on materials on record.

Read the Ruling

6. Investments made out of the Policy holders’ fund qualify to be consolidated under AS 21

An entity consolidates its financials as per AS 21 only when it exercises control over the other entity. Further, control is exercised when (a) the ownership, directly or indirectly, through a subsidiary of more than one-half of the voting power of an enterprise; or (b) control of the composition of the board of directors in case of a company to obtain economic benefits from its activities.

But confusion arises when the investments are made by the company through and held by policy holders’ funds (PHF) rather than shareholders’ funds (SHF). Does such a transaction qualify to be consolidated under AS 21 or to be accounted as equity under AS 23 in the consolidated financial statements of the company?

In this regard, the Expert Advisory Committee (EAC) of ICAI has noted that the company has specifically stated for the investment made either from PHF or SHF, the rights and obligations w.r.t. investment is to be always borne by the company (i.e., ultimately by the shareholders). Further from the facts, it is clear that the company participates and engages with the management of the investee company in the capacity of owner of the investments held and not merely as a custodian of policy holders’. Further, as per AS 21, control is established either through control of the majority of voting power or control over the composition of the board of directors of the investee company.

Accordingly, the investment made through and held in PHF is an investment made by the company, and the same shall be consolidated/equity accounted in the consolidated financial statements as per requirements of AS 21 or AS 23.

Read the Story