Weekly Round-up on Tax and Corporate Laws | 11th October to 17th October

This weekly newsletter analytically summarizes the key stories reported at taxmann.com during the previous week from 11th to 17th October 2021, namely:

(a) High Court quashes assessment order passed by the AO without application of mind; warns for recovery of cost from him if such order continues;

(b) CBDT exempts certain non-residents from the furnishing of ITR;

(c) CBIC exempts import of Crude Soya-bean oil, Crude Palm oil, etc. from customs duty and AIDC;

(d) Respondents who booked units with an assured return plan in a mall would fall within the purview of financial creditors: NCLAT;

(e) Financial creditor to get the benefit of exclusion of time spent in recovery proceeding before DRT: NCLT;

(f) High Court held that pre-deposit for filing an appeal under GST to be paid through cash ledger and not from credit ledger; and

(g) Treatment of depreciation, amortization, and project insurance expense relating to under-construction plant.

1. HC quashes assessment order passed by AO without application of mind; warns recovery of cost from him if such order continues

The Bombay High Court has taken a strong view against the Assessing Officer showing casualness in passing a faceless assessment order under Section 144B. The Court has cautioned to impose substantial costs on the assessing officer and recover the same from his salary if he continues to pass the assessment order without application of mind.

Facts

The assessee filed the instant writ petition against the notice of demand issued under section 156. According to the assessee, the assessment order was passed without following the principles of natural justice. He pleaded that his request for an adjournment, a personal hearing, and his reply/objection filed in response to the show-cause notice with the draft assessment order had not been considered.

Ruling

The Bombay High Court held that revenue had passed the assessment order without application of mind, without considering the two replies dated 23rd and 27th April 2021 filed by the assessee and without considering the request for personal hearing sought by the assessee.

Strangely in the affidavit, it was stated that the records show that the submission dated 23rd and 27th April 2021 both were taken on record and considered. But the assessment order did not reflect this.

It is a wonder how the affiant knows something which the assessment order does not reflect. Another point raised in the affidavit was that assessee had not furnished the quantitative details in item 35(b) in Form 3CD. It has not given any justification for non-furnishing such details. This was also contrary to what was stated in the same affidavit that the records show that the submission dated 27th April 2021 had been taken on record and considered.

The Court compared the details provided by the assessee and Form 35(b) annexed to the affidavit in rejoinder. No difference was found except that in the response dated 27th April 2021, the product manufactured, viz., Wet Grinders, is mentioned. Thus, the Court is compelled to set aside the assessment order and also the consequential notices.

Further, the High Court has directed to circulate this order from the Revenue Secretary to everybody in the Finance Ministry. If such orders continue to be passed, the Court will impose substantial costs on the concerned Assessing Officer, which shall be recovered from his salary. It also directed the department to place such judicial orders in the career records of such Assessing Officer.

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2. CBDT exempts certain non-residents from furnishing ITR subject to fulfillment of conditions

The Central Board of Direct Taxes (CBDT) has exempt the following class of persons from the requirement of furnishing a return of income under section 139 if they satisfy prescribed conditions:

Non-resident or foreign company

A non-resident not being a company or a foreign company shall be exempt from furnishing ITR if the following conditions are satisfied during the previous year:

(a) The non-resident does not earn any income in India other than the income from investment in the specified fund referred to in Section 10(4D)(c)(i);

(b) The provisions of section 139A do not apply to him subject to fulfillment of conditions mentioned in Rule 114AAB(1) of the Income-tax Rules, 1962; and

(c) He has not been issued a notice to file a return of income under provisions of Section 142(1) or Section 148 or Section 153A or Section 153C.

Eligible Foreign Investor

A non-resident being an eligible foreign investor shall be exempt from furnishing ITR if the following conditions are satisfied during the previous year:

(a) The non-resident has made transactions only in capital assets referred to in section 47(viiab), which are listed on a recognized stock exchange located in any International Financial Services Centre (IFSC), and the consideration for transfer of such capital asset is paid or payable in foreign currency;

(b) The non-resident does not earn any income in India other than the income from the transfer of capital assets referred to in Section 47(viiab); and

(c) The provisions of Section 139A do not apply to him subject to fulfillment of the conditions mentioned in Rule 114AAB(2A) of the Income-tax Rules, 1962;

(d) He has not been issued a notice to file a return of income under provisions of Section 142(1) or Section 148 or Section 153A or Section 153C.

The exemption from filing return of income is available to the above class of persons from Assessment Year 2021-22 and onwards.

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3. CBIC exempts import of Crude Soya-bean oil, Crude Palm oil, etc. from customs duty and AIDC

The CBIC has issued notifications to provide exemption on importing Crude Soya-bean oil, Crude Palm oil, etc., from Customs Duty and AIDC. The first notification provides full exemption from Customs Duty on importing Crude Soya-bean oil, Crude Palm oil, and Crude Sunflower seed oil. This notification has also provided partial exemption to several other edible oils such as Soya-bean oil, Sunflower oil, etc.

Another notification is issued to provide an exemption from Agriculture Infrastructure and Development Cess (AIDC) on importing Crude Soya-bean oil and Crude Sunflower seed oil in excess of 5% and for Crude Palm oil in excess of 7.5%.

In this regard, Notification No. 48/2021-Customs and Notification No. 49/2021-Customs Dated 13th October 2021 are issued. These notifications will come into effect from 14th October 2021 and will be applicable till 31st March 2022.

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4. Respondents who booked units with an assured return plan in a mall would fall within the purview of financial creditors: NCLAT

In this significant case in the matter of JM Financial Asset Reconstruction Company Ltd. v. Dr. Anil Kumar Tandon [2021] 131 taxmann.com 48 (NCLAT- New Delhi), the respondents had booked a unit in a mall being constructed by the corporate debtor. A unit was purchased under an assured return plan. The corporate debtor defaulted in payment of assured monthly returns to the respondents. Meanwhile, CIRP was initiated against the corporate debtor, and an RP was appointed. The respondents sought to be included in the Committee of Creditors (CoC) as financial creditors. The RP believed that neither respondents’ claims did fall within the definition of financial debt nor respondents could be termed a ‘financial creditor’.

It was noted that the definition of ‘financial debt’ had been amended, and in view of the revised definition, any amount raised from an allottee under a real estate project is deemed to be covered by the definition of ‘financial debt’. Thus, the amount paid by respondents was financial debt, and respondents were to be treated as financial creditors, and RP was directed to include respondents in CoC.

In another matter, an order for liquidation of the corporate debtor had been passed by NCLT in view of the application under section 33(2) filed by the Resolution Professional (RP). The appellant-operational creditor’s case that RP had not conducted CIRP properly, and thus, the liquidation order passed by NCLT was to be set aside. The Appellate Tribunal noted that regarding the alleged conduct of RP, the operational creditor had already made a complaint before the IBBI wherein the RP had justified the action taken and IBBI being a regulatory authority for RP had ceased matter. Thus, the operational creditor could not agitate said issue before Appellate Tribunal, and therefore, appeal against the order of NCLT was to be dismissed.

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5. Financial creditor to get the benefit of exclusion of time spent in recovery proceeding before DRT: NCLT

In the instant case of JM Financial Asset Reconstruction Co. Ltd. v. Samay Electronics (P.) Ltd. [2021] 131 taxmann.com 11 (NCLT – Ahd.) the bank had granted and disbursed the loan to the corporate debtor in 1998, and the loan repayment terms were extended from time to time. Since the corporate debtor committed default persistently, in 2010, the bank filed recovery proceedings in DRT after serving notice under SARFAESI Act, 2002.

On 26-10-2010, the bank and the corporate debtor arrived at a settlement, and accordingly, an award was passed in that proceeding based on consent terms.

Later on, the promoters of the corporate debtor filed an appeal against the consent decree before DRAT, and that appeal was still pending.

However, the bank assigned debt to the financial creditor, an asset reconstruction company, by deed of assignment dated 26-2-2014, and the financial creditor continued with the appeal in DRAT.

On 28-5-2018, the financial creditor filed an application under section 7 against the corporate debtor to initiate CIRP of the corporate debtor on the ground that the corporate debtor committed default in paying a financial debt. Thereafter, the corporate debtor contested the claim on the ground that the claim was time-barred.

The NCLT passed the order of admission. However, while doing so, both members of the Bench wrote separate orders. The Member technical held that continuous proceeding for the same debt was going on from 2010 and appeal was still pending in DRAT, Mumbai and, therefore, the CIRP against the corporate debtor was to be admitted. In contrast, the Member Judicial held that time spent in the proceeding before DRT and DRAT (under SARFAESI Act) was not permitted to be excluded for the purpose of limitation to file instant proceedings and, therefore, the claim was time-barred.

The NCLT held that the application under section 7 filed against the corporate debtor in 2018 for default in 2014 was maintainable and not barred as financial creditors benefited from exclusion of time spent in recovery proceedings against a corporate debtor before DRT. Thus, CIRP against the corporate debtor was to be admitted.

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6. Pre-deposit for filing an appeal under GST to be paid through cash ledger and not credit ledger: Orissa HC

The Orissa High Court has recently held that the electronic credit ledger cannot be debited for making payment of pre-deposit at the time of filing of the appeal. The payment must be paid through a cash ledger only. This ruling was passed by the Orissa High Court in the case of Jyoti Construction v. Deputy Commissioner of CT & GST, Jajpur.

Facts

The petitioner was a partnership firm engaged in the business of execution of works contract including civil, electrical, and mechanical. The Additional Commissioner rejected the appeal filed by the petitioner, holding that the appeals filed were defective. He was of the view that the petitioner had made payment of the pre-deposit being 10% of the disputed amount under the IGST, CGST, and SGST by debiting its electronic credit ledger. It did not pay it from the electronic cash ledger, and this was in contravention of Section 49(3) of CGST Act, 2017. The petitioner filed a writ petition against the same.

High Court

The High Court observed that output tax as defined under section 2(82) of CGST Act could not be equated to pre-deposit required to be made in terms of Section 107(6) of CGST Act. The petitioner was required to make a payment equivalent to 10% of the disputed amount of tax arising from the order against which the appeal was filed. The credit ledger cannot be debited for making payment of pre-deposit at the time of filing of the appeal. Therefore, the court found no merits, and the writ petition was liable to be dismissed.

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7. Treatment of depreciation, amortization, and project insurance expense of under-construction plant

Example

A Ltd. incorporated for setting up of a new gas-based ammonia-urea plant. For this project, the company has taken land on lease and incurred certain expenses, including depreciation on enabling assets, amortization expense of leasehold land, and project insurance expense. The company has capitalized all these expenses under the head capital work-in-progress in its books of accounts.

Whether the accounting treatment adopted by A Ltd. in respect of expenses as mentioned above correct?

Answer

The Expert Advisory Committee (EAC) of ICAI has held that the accounting treatment adopted by A Ltd. is not correct.

As per Ind AS 16 (Property, Plant, and Equipment), only those costs are capitalized, which are directly attributable to bringing the asset to the location and condition necessary for it to be operating in the manner intended by the management.

Generally, insurance expense is incurred to protect the asset from unforeseen future loss and may not be essential for construction. Therefore, insurance expenses shall not be capitalized under the cost of the project.

Further, depreciation expense is written off through profit and loss unless its future economic benefits are absorbed to produce other assets, like depreciation expense incurred for manufacturing of goods is included in the costs of conversion of inventories.

Further, to determine whether the expense incurred for amortization on leasehold land is capitalized or not would depend upon the type of lease. If the land is taken on operating lease, then only the amount of lease rental shall be capitalized with the cost of the asset till that time asset is capable of using in the manner intended by management.

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