Weekly Round-up on Tax and Corporate Laws | 10th to 15th October 2022

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

(a) Employee’s contribution to ESI/PF paid before filing of ITR not deductible even for AYs before 2021-22: Apex Court;

(b) Bar council of India couldn’t be said to be an enterprise, a review petition filed before Supreme Court dismissed;

(c) A supplier can’t give the extra quantity of the product instead of reducing prices for passing the benefit to consumers: Delhi HC;

(d) Seized goods are not liable to be released automatically on payment of pre-deposit amount: HC;

(e) AO can’t ask Start-up to submit bank statements/ITRs of reputed non-resident investors to verify funds raised from them: ITAT; and

(f) Accounting treatment of construction of facilities for import of additional requirement of power.

1. Employee’s contribution to ESI/PF paid before filing of ITR not deductible even for AYs before 2021-22: Apex Court

The issue before the Supreme Court was whether the deposit of an employee’s contribution to the EPF and ESI after the expiry of the due date under the relevant acts eligible for the deduction?

The Supreme Court held that the Parliament treated contributions under Section 36(1)(va) differently from those under Section 36(1)(iv). The latter is described as the “sum paid by the assessee as an employer by way of contribution towards a recognised provident fund”.

However, the phraseology of Section 36(1)(va) differs from Section 36(1)(iv). It allows a deduction for any sum received by the assessee from his employees, to which Section 2(24)(x) applies, if such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the due date.

This establishes that Parliament, while introducing Section 36(1)(va) along with Section 2(24)(x), was aware of the distinction between the two types of contributions. Under the Income-tax Act, there was a statutory classification between the two.

The essential character of an employee’s contribution, a part of the employee’s income held in trust by the employer, is underlined by the condition that it has to be deposited on or before the due date.

Amount retained by the employer out of the employee’s income is treated as income in the hands of the employer. The significance of this provision is that, on the one hand, it brought into the fold of “income”, and on the other hand, payment within the prescribed time is to be treated as a deduction Section 36(1)(va).

The other important feature is that this distinction between the employers’ contribution (Section 36(1)(iv)) and employees’ contribution required to be deposited by the employer (Section 36(1)(va)) was maintained and continues to be maintained.

Since there is a marked distinction between the nature and character of the two amounts – the employer’s liability is to be paid out of its income, whereas the second is deemed an income, this marked distinction has to be borne while interpreting the obligation of every assessee under Section 43B.

Accordingly, the benefit of Section 43B can’t be made available for the employee’s contribution deposited before the filing of the Income-tax Return.

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2. Bar council of India couldn’t be said to be an enterprise, a review petition filed before Supreme Court dismissed

In the instant case, the petitioner was an executive engineer in the Central Public Works Department (CPWD), Ministry of Urban Development, Government of India. He planned to take voluntary retirement to pursue a legal education.

According to the petitioner, the Bar Council of India (BCI) regulates legal practice and education in India. It enjoys the dominant position in controlling legal education and practice in India.

The petitioner stated that pursuant to Clause 28 of Schedule III, Rule 11 to Part IV – Rules of Legal Education, 2008, a part of BCI Rules enacted under the Advocates Act, 1961 according to which the candidates belonging to the general category who have attained the age of more than 30 years, was barred from pursuing a legal education.

The BCI had allegedly imposed maximum age restrictions, which act as an indirect barrier for the new entrants. The impugned clause 28 had been incorporated by the BCI in contravention of Section 4 of the Competition Act, 2002 by ‘misusing its dominant position’. Further, the BCI had also indulged in a colourable exercise of power.

Therefore, the petitioner had prayed before the Commission to declare the impugned Clause 28 as illegal and void ab initio and impose the maximum penalty on the BCI for violation of Section 4 and indulging in a colourable exercise of power. Further, the petitioner also prayed for interim directions under Section 33 for suspending the impugned clause 28.

The CCI opined that there was no prima facie case under Section 4 and directed the information filed to be closed immediately under Section 26(2) of the Act. Therefore, the aggrieved petitioner preferred an appeal before the NCLAT.

The NCLAT held that the Bar Council of India is a Statutory Body and has its primordial role in performing its duties. Hence, the Bar Council of India is not an ‘enterprise’ having any economic and commercial activity.

Further, the NCLAT held that the BCI is concerned with the standards of the legal profession and equipping those who seek entry into such profession with the relevant knowledge and skills.

Supreme Court’s Ruling

The Supreme Court, by the impugned order, upheld the order passed by the NCLAT. Then, the petitioner, by the instant petition, sought a review of the impugned order.

The Supreme Court held that the Bar Council of India is a statutory body established under Section 4 of the Advocates Act. It is the exclusive rule-making authority to set standards of legal education. Thus, it couldn’t be said to be an ‘enterprise’ within the meaning of Section 2(h) of the Competition Act, 2002.

The Supreme Court further held that the impugned order didn’t suffer from any apparent error warranting its reconsideration. Accordingly, the instant review petition was to be dismissed.

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3. A supplier can’t give extra products instead of reducing prices to pass the benefit to consumers: Delhi HC

The Delhi High Court has held that if duty is cast upon the supplier to extend the benefit of rate reduction by reducing the prices, he can’t insist that instead of lowering the prices, he will give extra grammage of product.

Facts

The National Anti-Profiteering Authority (NAA) found that the petitioner had not only collected excess base prices from his customers after a reduction in the rate of tax but also compelled them to pay additional GST. The petitioner contended that instead of reducing prices, it had given extra grammage of product. However, the NAA directed the petitioner to deposit profiteered amount as it denied the benefit of tax reduction to the ordinary buyers by charging excess GST. The petitioner filed a writ petition against the same.

High Court

The High Court observed that the petitioner had not only collected excess base prices from his customers after reducing the tax rate but also compelled them to pay additional GST. Thereby, it failed to grant a commensurate reduction in prices.

Under Section 171 of CGST Act, 2017 any benefit of reduction in the tax rate or of the input tax credit on any supply of goods or services can only be by way of a commensurate drop in prices. The Court noted that when a statute provides for a manner in which something is to be done, and a duty is cast upon the supplier to extend the benefit of rate reduction by way of commensurate reduction in prices, then the supplier can’t insist that instead of reducing prices, he will give extra grammage of product.

Therefore, the Court held that the petitioner had acted in contravention of provisions of section 171(1) and directed to deposit the principal profiteered amount after deducting GST imposed on the net profiteered amount in six equated instalments.

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4. Seized goods are not liable to be released automatically on payment of pre-deposit amount: High Court

The Madras High Court has recently held that seized goods are not liable to be released automatically on payment of the pre-deposit amount for filing an appeal. The question of the release of goods will have to be decided by the appellate authority upon the strength of the case made out by the appellant.

Facts

The vehicle and goods transported in the vehicle were detained by the department. The owner of the goods didn’t respond to the show cause notice, and after that, the order demanding tax and penalty was passed. The petitioner filed a writ petition to quash the detention order. It submitted that the vehicle and goods should be released as it had filed an appeal and made a pre-deposit.

High Court

The High Court noted that Section 107(6) of CGST Act, 2017 requires the appellant to make a pre-deposit, and after that, the recovery proceedings for the remaining amount shall stay. The appellate authority will decide the question of the release of goods upon the strength of the case made out by the assessee, including financial stringency and balance of convenience. But, it can’t be said that the seized goods would become liable to be released automatically after payment of the pre-deposit.

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5. AO can’t ask a start-up to submit bank statements or ITRs of reputed NR investors to verify funds raised from them: ITAT

The assessee was a start-up company producing fruit juices. Its case was selected for scrutiny under the CASS, in which one of the parameters was the new issue of share capital during the year. The assessee had received the share premium from reputed foreign investors.

The assessee furnished the background of the foreign investors along with their financial statements, PAN, Tax Residency Certificate, GBL License, and Certificate of Incorporation.

The Assessing Officer (AO) asked for their IT returns, bank statements, etc. which the assessee refused to provide, citing reasons that investors are reputed foreign entities over whom it does not exercise influence to compel them to furnish their confidential documents.

AO rejected the assessee’s contentions and made additions under Section 68, which was further confirmed by the CIT(A). Aggrieved-assessee filed the instant appeal before the Tribunal.

The Tribunal held that for Section 68, the ‘burden to proof’ begins with the assessee. Once the assessee submits evidence supporting the credit and makes out a prima facie case, the ‘onus of proof’ shifts to the revenue.

If the evidence on record weighs in favour of the assessee or if the explanation put forth cannot be said to be completely unsatisfactory, then the onus cast upon the assessee under section 68 can be said to have been discharged.

Thus, the initial burden on the assessee was only to substantiate the source of its share premium in as much as the identity and creditworthiness of the investors along with the genuineness of the transaction.

It is noted that the assessee had furnished the relevant foreign inward remittance certificates, FC-GPRs, etc., in support of the foreign investment received in accordance with the regulations of the Reserve Bank of India.

These investors are of reputation, holding Category-I Global License issued under the laws of Mauritius. Their financial statements also show that they had sufficient funds to invest in the capital of the assessee. The assessee had also provided the PAN details of these foreign investors.

If AO had even a remote suspicion regarding the foreign investors, he ought to have made an appropriate independent inquiry through proper channels rather than simply rejecting the documents furnished by the assessee.

Therefore, the addition made by the AO under Section 68 was unjustified.

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6. Accounting treatment of construction of facilities for import of additional requirement of power

The entities generally face an issue in the accounting treatment of the expenditure incurred for the construction of infrastructure facilities to import additional power to meet the power requirement of the project. Whether such expenditure is capital or revenue? The Expert Advisory Committee of ICAI has provided its opinion in this regard.

The Committee stated that in this case, the first issue is to examine whether such expenditure is capital or revenue. If it is a capital expenditure, whether the same is to be recognised as an individual item of Property, Plant and Equipment or to be capitalised as a part of the overall cost of the project.

The Committee noted that paragraph 16 of Ind AS 16 states that the cost of the project includes the cost directly attributable to the construction of the project for bringing it to its working condition. These are generally related costs that would have been avoided if the construction had not been made. Thus, if it is found that the project cannot be operated in the absence of the power that is accessed through the infrastructure facility created, then the above-said expenditure can be considered as directly attributable to bringing the project to the location and condition necessary for it to be capable of operating in the manner intended by management and can be included as a part of the cost of the project. Hence, the question of recognising it as a revenue expenditure does not arise.

The Committee further noted that an entity could recognise such expenditure as an intangible asset as per Ind AS 38 if the three conditions w.r.t identifiability, control over a resource, and the existence of future economic benefits are fulfilled. And to recognise the expenditure as an individual tangible asset, it is necessary that the resultant infrastructure facility is owned and operated by the entity, providing future economic benefits to the entity, and the cost for the same can also be measured reliably.

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