Weekly Round-up on Tax and Corporate Laws | 11th to 16th December 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from December 11^th to 16^th 2023, namely:

(a) CIT cannot extend time limit to submit special audit report under section 142(2A) as power vests with AO only: HC;

(b) Section 14 of IBC allows a moratorium on tax recovery but doesn’t bar finalizing assessment/adjudication post-resolution admission;

(c) SLP dismissed against HC order where demand of ITC reversal was set aside holding that investigation against supplier is a pre-requisite;

(d) Assessee’s request to amend/rectify Form GSTR-1 could not be rejected if wrong GSTIN mentioned inadvertently: HC; and

(e) Accounting for the waiver of loan from the Government.

1. CIT cannot extend time limit to submit special audit report under section 142(2A) as power vests with AO only: HC

Assessee-company is engaged in the construction and allied services business. It was subjected to a search under Section 132 of the Income Tax Act, 1961. Subsequently, the Assessing Officer (AO) informed the assessee to have a special audit under Section 142(2A).

Subsequently, CIT approved conducting a special audit of the assessee’s accounts and appointed a Chartered Accountancy firm. The timeframe for completion of the audit was fixed as 120 days. However, at the request of the special auditor, CIT provided an extension of 60 days for furnishing the audit report.

Against such an extention, the matter reached before the Delhi High Court.

The High Court held that since the initial timeframe for the conduct of the audit was mandatorily required to be fixed by the AO as per section 142(2C), the power to vary the original timeframe by way of extension under the proviso appended to it has been consciously conferred by the legislature only on the AO.

The answer to whether the power conferred on the AO can be exercised by an authority other than the AO lies in ascertaining the authority in which the legislature has invested statutory discretion. As long as the authority retains the power to exercise the discretion vested in it by the statute, no fault can be found if it employs ministerial means in effectuating the exercise of discretionary power by the authority in which such power is reposed.

Accordingly, the discretionary power invested in the specified authority should be exercised by that authority alone and none else, even if it causes administrative inconvenience, except in those cases where it is reasonably inferred to be a delegable power.

In the instant case, the AO transmitted the request received by the auditors to his superiors, who then processed the matter and directed a grant of extension of time for completion of the audit. The decision to get an audit conducted under Section 142(2A) is a step in the process of assessment proceedings and, therefore, is clearly not an administrative power; the appointment of a special auditor entails civil consequences.

Therefore, the initial exercise of the power has been explicated as one that is not administrative. The CIT could not have extended the time based on the AO’s recommendation.

Read the Ruling

2. Section 14 of IBC allows a moratorium on tax recovery but doesn’t bar finalizing assessment/adjudication post-resolution admission

In the matter of Platino Classic Motors India (P.) Ltd. v. Deputy Commissioner Of Central Tax And Central Excise [2023] 157 taxmann.com 276 (Kerala), the High Court upheld that Section 14 of the Insolvency and Bankruptcy Code, 2016 does not create a bar for finalization of assessment and adjudication proceedings in respect of taxes. Thus, subsequent to admission of resolution, there is moratorium for recovery of tax dues but there is no bar for such finalization of assessment and adjudication proceedings.

Brief facts of the case

In the instant case, a liquidation order in terms of section 33 was passed by the NCLT against the corporate debtor, and accordingly, the liquidator was appointed, and the moratorium commenced.

The Respondent/Commissioner of Tax assessed taxes applicable to the corporate debtor’s assets and finalized said assessment via order. The liquidator issued a public notice and received claims from creditors of the corporate debtor, including the respondent.

An instant writ petition was filed by the corporate debtor against the impugned order, contending that the impugned order was issued after the commencement of the moratorium under section 14, and it was not afforded an opportunity by NCLT to present its case.

It was noted that show cause notice was issued to the corporate debtor, to which a reply was filed, and after hearing parties, the impugned order was finalized.

High Court’s Ruling

The High Court held that Section 14 does not create a bar for finalizing assessment and adjudication proceedings regarding taxes. It was held that subsequent to the admission of the resolution, there was moratorium for recovery of tax dues, but there is no bar to finalization of assessment and adjudication proceedings. Thus, the writ petition was to be dismissed, and the respondents’ claims were to be considered according to law.

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3. SLP dismissed against HC order where demand of ITC reversal was set aside, holding that investigation against supplier is a pre-requisite

The Apex Court has recently dismissed the Special Leave Petition (SLP) filed by the Revenue against the decision of the Calcutta High Court, which has held that the recipient can’t be forced to reverse ITC without taking action against the supplier. The petition is dismissed since the amount involved is on the lower side. This ruling is given by the Supreme Court in the case of Assistant Commissioner of State Tax v. Suncraft Energy P. Ltd.

Facts

In the present case, the taxpayer was asked to reverse ITC on the supplies on which the tax was alleged to be not paid by the supplier. The department contended that the ITC was not reflected in Form GSTR-2A of the taxpayer. Hence, the condition of Section 16(2) of the CGST Act 2017 was not met, and the ITC was required to be reversed.

The Calcutta High Court noted that the taxpayer had produced the tax invoice for the bank statement proving that they had paid for the supplies and tax to the seller, thereby demonstrating that all other conditions of Section 16 of the CGST Act are satisfied.

Further, no action was taken by the department against the supplier. It noted that where the supplier does not pay a tax, an action is required to be taken against him first, and reversal of ITC by the recipient should be the last resort in extreme cases. Hence, the High Court set aside the demand order.

Supreme Court

The Hon’ble Supreme Court held that having regard to the facts and circumstances of the case and since the amount of tax involved was on the lower side, it was not inclined to interfere in the matter and upheld the decision of the High Court.

Read the Ruling

4. Assessee’s request to amend/rectify Form GSTR-1 could not be rejected if wrong GSTIN was mentioned inadvertently: HC

The Honorable Bombay High Court has recently directed the department to permit the assessee to amend Form GSTR-1 since the wrong GSTIN was mentioned inadvertently since there was not an iota of illegal gain being derived by the assessee. This ruling is given by the High Court of Bombay in case of Star Engineers (I) (P.) Ltd. v. Union of India.

Facts

In the present case, the assessee carried out delivery of goods under “Bill-to-Ship-to-Model” in line with instructions received from its customer during the period July 2021, November 2021 and January 2022 and the GSTIN of a third party was wrongly mentioned instead of its customer. It filed an application before the Deputy Commissioner seeking approval to modify/amend Form GSTR-1 for the financial year 2021-22. However, the Deputy Commissioner said the matter was time-barred, and the petitioner’s application was rejected. It filed writ petition seeking permission to amend GSTR-1.

High Court

The Honorable High Court noted that the assessee had correctly issued e-invoices by appropriately citing GSTIN. However, at the time of filing of Form GSTR-1, inadvertently GSTIN of third parties to whom the shipment was delivered, was reported instead of its customer. The Court further noted that the errors of assessee were inadvertent and bonafide, and there was not an iota of an illegal gain being derived by assessee.

Therefore, the Court held that the instant petition was to be allowed, and GST authorities were directed to permit the assessee to amend/rectify Form GSTR-1 for the relevant period either through online or manual means within four weeks.

Read the Ruling

5. Accounting for the waiver of loan from the Government

According to Ind AS 20, Accounting for Government Grants and Disclosure of Government Assistance, a forgivable loan from the Government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan. However, complexities arise in accounting when an entity follows Accounting Standards (AS) instead of Ind AS, particularly concerning the classification of a waived loan amount, i.e. whether to classify it as a “Government Grant” or record it under “Other Income.”

Since AS lacks specific provisions for the forgiveness of government loans, it is essential to draw an analogy from the relevant guidelines in Ind AS (Indian Accounting Standards) to present a true and fair view of the financial statements.

To effectively handle this matter for an entity adhering to Accounting Standards (AS), the initial step is determining whether the loan waiver is contingent upon meeting any conditions. If the waiver is linked to the fulfilment of any specific conditions, the analogy can be drawn from the relevant provisions of Ind AS 20. In such a scenario, the waiver of the loan will be considered a “government grant” only if there is a reasonable assurance that the entity will fulfil the terms for loan forgiveness.

However, when the loan waiver is unconditional, it is categorized as an “Exceptional Item” according to AS 5, “Net Profit or Loss for the period, Prior period items and changes in Accounting Policies.” This standard emphasizes that if income and expense items within the profit or loss from ordinary activities are significant in size, nature, or incidence, requiring disclosure for a comprehensive understanding of the enterprise’s performance for the period, they should be separately disclosed as exceptional items.

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