Weekly Round-up on Tax and Corporate Laws | 10th to 15th June 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from June 10 to 15, 2024, namely:

1. HC justified invoking GAAR as issuance of bonus shares was an artificial arrangement to avoid tax obligations;
2. Demat and Mutual Fund accounts won’t be frozen over non-submission of nomination: SEBI;
3. HC remanded matter as documents produced by assessee were disregarded, and order was passed by merely reproducing SCN;
4. No interest is payable on refund of amount deposited during search by way of adjustment of credit amount in ECL: HC; and
5. Accounting for Factoring of Receivables in Bill Discounting Agreements: Ind AS 109.

1. HC justified invoking GAAR as issuance of bonus shares was an artificial arrangement to avoid tax obligations

In the given case, the assessee sold the shares of a company to a private limited company. Before the sale, the company issued bonus shares to its shareholders. Due to the issuance of bonus shares, the face value of each share of the company was reduced. The sale of shares resulted in a short-term capital loss to the assessee.

The assessee set off the short-term capital loss against the long-term gains made on another transaction of the sale of shares. The Assessing Officer (AO) treated said transaction as an impermissible avoidance arrangement as per the General Anti-Avoidance Rules (GAAR) under Chapter X-A starting from Section 95-102 of the Income Tax Act.

Assessee filed writ petition before the Telangana High Court.

Assessee contended that the transactions resulting in bonus stripping were subject to the specific provisions of Section 94(8), which is a Specific Anti Avoidance Rule (SAAR). Any loss incurred on account of the purchase and sale of shares, resulting in bonus stripping, must be computed as per Section 94(8). However, the AO sought to treat the transactions as impermissible avoidance arrangements as per the GAAR.

Assessee also relied upon 2012 Shome Committee Report. It was submitted that the Committee recommended that where SAAR is applicable to a particular transaction, then GAAR should not be invoked to look into that element.

The High Court held that the assessee’s argument was rooted in the belief that the Specific Anti Avoidance Rules (SAAR), particularly Section 94(8), should take precedence over the General Anti Avoidance Rule (GAAR). This contention, however, was fundamentally flawed and lacked consistency.

Given the multiple transactions that the taxpayer had undertaken, the case should fall under the umbrella of Chapter X-A and not Chapter X. Section 94(8) might be relevant in a simple, isolated case of the issuance of bonus shares, provided such issuance has an underlying commercial substance. However, this provision did not apply to the current case, as the issuance of bonus shares here was evidently an artificial avoidance arrangement that lacked any logical or practical justification.

It was clear that the assessee’s arrangement was primarily designed to sidestep tax obligations in direct contravention of the principles of the Act. The landmark Vodafone judgment provides crucial insight into this issue. The judgment implies that the business intent behind a transaction could be strong evidence that the transaction isn’t a deceptive or artificial arrangement. The commercial motive behind a transaction often reveals the true nature of the transaction.

The GAAR chapter, which comprises sections 95 to 102, provides a detailed account of various types of transactions that could be considered illegal tax avoidance arrangements. This Chapter lists these transactions and provides an extensive definition of conditions that render a transaction or arrangement devoid of commercial substance.

Furthermore, Section 100 of this Chapter clarifies that this Chapter is applicable in addition to or as a substitute for any other existing method of determining tax liability. This provision emphasizes the legislative intention that the GAAR provisions should act as an all-encompassing safety net. It’s designed to capture all illicit arrangements, ensuring that tax on these arrangements is calculated using the provisions of this Chapter.

Further, the Committee’s stance that SAAR should generally supersede GAAR mainly pertains to international agreements, not domestic cases. This stand, as per the report, is further substantiated by the Finance Minister’s declaration, made on January 14, 2013. During this announcement, the Minister stated that the applicability of either GAAR or SAAR would be determined on a case-by-case basis.

Therefore, the assessee’s contention that the case should have otherwise fallen under Section 94(8) was not acceptable. It was clear and convincing that the entire arrangement was intricately designed to evade tax. Assessee, on his part, hadn’t been able to provide substantial and persuasive proof to counter this claim. Accordingly, the writ petition was dismissed, and AO was allowed to proceed.

Read the Ruling

2. Demat and Mutual Fund accounts won’t be frozen over non-submission of nomination: SEBI

On December 27, 2023, SEBI extended the deadline for investors to submit nominations for their demat accounts and mutual fund folios to June 30, 2024. This move was initially meant to prevent account freezing due to the non-submission of nominations. However, in a significant move, SEBI vide circular no. SEBI/HO/MIRSD/POD-1/P/CIR/2024/81, dated June 10, 2024, made important decisions for existing and new investors. These decisions include: (a) Demat and mutual fund accounts will no longer be frozen due to the non-submission of nominations, (b) Listed companies/RTAs cannot withhold payments due to the absence of nominations. These provisions are effective immediately, providing greater flexibility and security for investors.

a) SEBI’s vital decisions for existing investors and unitholders

SEBI has made some vital decisions for existing investors and unitholders to enhance compliance and investor convenience. Firstly, demat and mutual fund (MF) accounts will no longer be frozen for non-submission of the ‘choice of nomination’.

Secondly, SEBI allows security holders with physical securities to lodge grievances or access services from RTAs without submitting a ‘choice of nomination’. Additionally, they can receive payments such as dividends, interest, or redemption money without making nomination choices. These decisions aim to enhance convenience for investors and ensure seamless access to their accounts, regardless of their nomination status.

Thirdly, listed companies and RTAs cannot withhold pending payments of security holders due to lack of nominations, thereby ensuring immediate processing of payments and preventing unnecessary delays.

b) Mandatory Nomination Requirements for New investors/Unitholders

SEBI mandates all new investors/unitholders to provide a ‘Choice of Nomination’ for their demat accounts and MF folios, except for jointly held demat accounts and MF folios. This requirement aims to designate beneficiaries clearly.

c) SEBI encourages existing investors to provide nomination choices for smooth transmission of securities

SEBI encourages all existing investors/unitholders to provide their nomination details to ensure the smooth transmission of securities and to prevent the accumulation of unclaimed assets in the securities market. This step aims to facilitate a seamless transition of assets and reduce the risk of unclaimed securities.

d) Email Reminders from DPs, RTAs and AMCs for updating Nomination details

Depository Participants (DPs) for demat accounts and RTAs and Asset Management Companies (AMCs) for mutual fund folios must encourage account holders to update their nomination details by sending communications via emails and SMS to those holders who haven’t provided this information. This proactive approach significantly improves the management of investor records.

e) Providing a Pop-up reminder facility to existing investors for nomination submission

A new pop-up facility must be provided on a web/mobile application or platform when investors log into their demat and MF accounts, encouraging them to provide a ‘choice of nomination’. This facility will be provided by Depositories and Depository Participants for demat accounts and by AMCs for MF accounts.

Further, this pop-up will only appear for clients whose MF folios or demat accounts lack a ‘choice of nomination’. These provisions shall be effective from October 01, 2024, ensuring continuous reminders for investors to update their nomination details.

f) Conclusion

SEBI’s new initiative enhances investor flexibility and convenience by removing the risk of account freezes due to non-submission of nominations. These measures promote continuous access to investments, ensure proper beneficiary designation, boost investor confidence, and streamline the asset transmission process in the securities market.

Read the Circular

3. HC remanded matter as documents produced by assessee were disregarded and order was passed by merely reproducing SCN

The High Court of Madras has recently quashed the assessment order and remanded the case for reconsideration since the assessing officer disregarded the assessee’s reply & documents and passed order without a fair hearing. This ruling is given by the Honorable Madras High Court in case of Jai Bhairav Stones v. State Tax Officer (ST).

Facts

The petitioner was a dealer in granite slabs and a registered person under GST. It received an intimation alleging that the petitioner had fraudulently availed of Input Tax Credit (ITC). It replied to the intimation and submitted all the requisite documents. It also pointed out that previously uploaded documents should be taken into consideration.

However, the GST department issued a show cause notice, and it was stated that certain suppliers were issuing fake invoices, and the petitioner was a beneficiary of them. It replied to the show cause notice and submitted all the requisite documents. However, the Assessing Officer passed an order disregarding the petitioner’s documents and without providing reasonable opportunity for hearing. It filed writ petition against the order issued by the GST department.

High Court

The Honorable High Court noted that the relevant documents, such as the invoice, the transporter’s invoice and bank statements, were attached to the replies submitted by the petitioner. The Court also noted that the impugned assessment order did not refer to or discuss any of these documents and instead merely reproduced the show cause notice.

Therefore, the Court held that the impugned assessment order was liable to be set aside as it was passed without application of mind to documents produced by petitioner. The Court also directed the department to reconsider the matter after providing reasonable opportunity to submit additional documents and pass fresh assessment orders within two months.

Read the Ruling

4. No interest is payable on refund of amount deposited during search by way of adjustment of credit amount in ECL: HC

The High Court of Delhi has recently held that no interest would be liable to be paid on the amount deposited by way of an adjustment of the credit amount standing in the Electronic Credit Ledger. This ruling is given by the Honorable Delhi High Court in case of Sushil Kumar v. Delhi State GST Govt. NCT of Delhi.

Facts

The petitioner was engaged in manufacturing and trading ferrous and non-ferrous metals. It was subjected to search, and during search operation, the amount towards alleged stock variation and alleged wrongful input tax credit was recovered without statutory demand. The petitioner filed writ petition and contended that the deposit was involuntary and amount to be refunded with interest.

High Court

The Honorable High Court noted that the deposit was made at 3 AM during ongoing search operation and could not be termed voluntary. The Court also noted that as per Board instruction, no recovery can be made during search and requires deposit post search.

The Court further noted that no interest would be liable to be paid on the amount deposited by way of an adjustment of the credit amount standing in the Electronic Credit Ledger unless an appropriate application had already been made prior to the alleged non-voluntary deposit, claiming refund or as an adjustment towards tax due. Therefore, the Court held that the deposit was involuntary and directed to refund the amount towards alleged stock variation with interest and towards the alleged wrongful input tax credit without interest.

Read the Ruling

5. Accounting for Factoring of Receivables in Bill Discounting Agreements: Ind AS 109

According to Ind AS 109, an entity should derecognize a financial asset only when it transfers the contractual rights to the cash flows from the asset and when the financial asset transfer qualifies for derecognition.

When an entity transfers a financial asset, it shall evaluate whether it retains the risks and rewards of ownership of the financial asset:

• Where all the risks and rewards of ownership of the financial asset is transferred: An entity shall derecognize the financial asset.
• Where all the risks and rewards of ownership of the financial asset is not transferred: An entity shall continue to recognize the financial asset.
• Where the entity neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset: An entity shall determine whether it has retained control of the financial asset.

1. 1. If the control is not retained:  An entity shall derecognize the financial asset and recognize separately as assets or liabilities any rights and obligations created or retained in the transfer.
   2. If the control is retained: An entity shall continue to recognize the financial asset to the extent of its continuing involvement in the financial asset.

Further, if the transfer does not result into the derecognition because the entity has retained substantially all the risks and rewards of ownership of the transferred asset, the entity shall continue to recognize the transferred asset in its entirety and shall recognize a financial liability for the consideration received.

In subsequent periods, an entity shall recognize any income on the transferred asset and any expense incurred on the financial liability.

For example:

If an entity entered into a contract with scheduled commercial banks for bill discounting where the bank can recover unpaid amounts and associated charges from an entity, in case of debtor default, indicating that the entity retains the substantial risks and rewards of ownership of the receivables despite their transfer. Therefore, there is no basis to derecognize these receivables (financial assets) from the company’s financial statements.

Read the Story