Weekly Round-up on Tax and Corporate Laws | 11th to 16th July 2022

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 11th to 16th July 2022, namely:

(a) Sufficiency or inadequacy of “reasons to believe” cannot be examined while considering the validity of search: Supreme Court;

(b) Land acquisition on behalf of Govt. to execute a project can’t be treated as capital expenditure: ITAT

(c) CBIC issues various notifications to implement the recommendation of the GST Council;

(d) Proper officer has no jurisdiction to issue SCN to a person whose taxable turnover is less than the threshold limit: HC;

(e) SEBI proposes to extend the applicability of insider trading norms to the units of Mutual Funds;

(f) No public announcement is required for fresh acquisition of shares when an individual together with PAIC holds 15% or more voting rights: SC; and

(g) Professional skepticism while planning and performing an audit

1. Sufficiency or inadequacy of “reasons to believe” cannot be examined while considering the validity of the search: SC

The revenue filed the instant appeal against the order of the Gujarat High Court, wherein it was held that authorisation to search the premises of the assessee was invalid and could not be sustained. The assessee had challenged the act of authorisation for search and seizure on the ground that it was a fishing enquiry. The High Court held that none of the reasons to believe to issue authorisation met the requirement of Section 132(1)(a), (b), and (c).

Ruling

The Supreme Court held that reasons to believe are not the final conclusions the revenue would arrive at while framing block assessment in terms of Chapter XIV-B of the Act. The reply in the counter affidavit shows that the revenue intended to uncover the layer of money suspected to be done by the assessee.

The sufficiency or inadequacy of the reasons to believe recorded cannot be gone into while considering the validity of an act of authorisation to conduct search and seizure. The belief recorded alone is justifiable but only while keeping in view the Wednesbury Principle of Reasonableness. Such reasonableness is not a power to act as an appellate authority over the reasons to believe recorded.

The Supreme Court has restated and elaborated the principles in exercising the writ jurisdiction in the matter of search and seizure under Section 132, which are as follows:

(a) The formation of opinion and the reasons to believe recorded is not a judicial or quasi-judicial function but administrative. The information must be in possession of the authorised official based on the material, and the formation of opinion must be honest and bona fide.

a) A reasonable belief can be founded by an authority that:

• • • • The person concerned has omitted or failed to produce books of accounts or other documents for the production of which summons or notice had been issued, or such person will not produce such books of accounts or other documents even if summons or notice is issued to him; or
      • Such person has any money, bullion, jewellery, or other valuable article which represents either wholly or partly income or property which has not been or would not be disclosed.

b) Such reasons may have to be placed before the High Court in the event of a challenge to the formation of the belief of the competent authority, in which event the Court would be entitled to examine the reasons for the formation of the belief, though not the sufficiency or adequacy thereof.

c) Such reasons forming part of the satisfaction note are to satisfy the judicial consciousness of the Court, and any part of such satisfaction note is not to be made part of the order.

d) The question as to whether such reasons are adequate or not is not a matter for the Court to review in a writ petition. The sufficiency of the grounds which induced the competent authority to act is not a justiciable issue.

e) The relevance of the reasons for the formation of the belief is to be tested by the judicial restraint as in administrative action as the Court does not sit as a Court of appeal but merely reviews the manner in which the decision was made. The Court shall not examine the sufficiency or adequacy thereof.

Read the Ruling

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2. Land acquisition on behalf of Govt. to execute a project can’t be treated as capital expenditure: ITAT

Assessee-Co. was a public sector undertaking under the Ministry of Water Resources. Its main business was the civil construction of dams, bridges, tunnels, powerhouses, flyovers, buildings, canals, and other infrastructure projects.

During the financial year 2013-14, it executed a Border Out Post (BOP) works for the Ministry of Home Affairs (MHA) and made payment of Rs. 5.26 crores to various States towards the cost of land acquisition and electrification charges and claimed deduction of same as revenue expenditure.

The Assessing Officer (AO) held that payment made for land acquisition and electrification was of a capital nature and not allowable as revenue expenditure. On appeal, the Commissioner (Appeals) treated expenditure as revenue expenditure and allowed the same. Aggrieved revenue filed the instant appeal before the Tribunal

Ruling

The Delhi Tribunal held that the assessee had paid on behalf of MHA (GoI), and corresponding income against these expenses has been booked as turnover in the profit and loss account. Amount paid for land acquisition compensation and other incidental charges had been booked as revenue expenditure under the head ‘Incidental Charges on Works’.

It could be noted that no property was held by the assessee. The expenditure incurred towards land acquisition compensation for BOPs works on behalf of MHA, and the asset was created in favour of and held by BSF (an organisation under the control of the Ministry of Home Affairs) and not the assessee. There was no capital asset in the name of the assessee.

Thus, it was clear that expenditure incurred by the assessee during the financial year 2013-14 towards land acquisition compensation was part and parcel of the contract agreement, and the same was included in the total project cost. Hence these expenditures on behalf of MHA as project costs couldn’t be treated as capital expenditure as no assets were created in the name of the assessee.

Read the Ruling

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3. CBIC issues several notifications to implement the recommendations of GST Council in GST Rates

The CBIC has issued several notifications to implement the recommendations made by the GST Council with respect to changes in GST Rates of goods & services. These recommendations have been made in the 47th GST Council meeting, and now these changes have been notified, which shall be effective from July 18th, 2022.

The key changes are:

a) Earlier, the benefit of a concessional rate of 5% was available when several prescribed items were supplied to a Public funded research institution or a University or an Indian Institute of Technology or Indian Institute of Science, Bangalore etc. Now, this benefit has been withdrawn, and the benefit will not be available when those items are supplied to the aforementioned notified institutes.

b) Earlier, GST was exempted on specified food items, grains etc., when not branded, or the right on the brand has been foregone. Now, pre-packaged and labelled retail packs in terms of the Legal Metrology Act would be excluded from the exemption. However, such food items sold in loose shall continue to enjoy exemption.

c) All taxable services of the Department of Posts would be subject to a forwarding charge.

d) Now, a person giving premises on rent to a registered person for residential purposes shall be taxable, and it will be covered under reverse charge.

e) Hotels, Inns, Guest Houses, Clubs, or Campsites shall be required to charge GST at the rate of 12% even if they charge less than Rs. 1,000 per day.

f) Service by GTA where consideration charged for the transportation of goods on a consignment transported in a single carriage does not exceed Rs. 1,500 or where the consideration charged for transportation of all such goods for a single consignee does not exceed Rs. 750 were enjoying exemption, but now this exemption has been withdrawn.

g) Goods transport agency (GTA) shall have an option to pay GST at 5% without Input Tax Credit or 12% with Input Tax Credit under forwarding charge. If GTA does not want to pay GST under forwarding charge, then the recipient shall be required to pay GST under reverse charge as per the ongoing practice.

Read the Notification

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 Coverage: 
✔️ Refund in case of inverted tax structure 
✔️ GST rate linked to LMA on specified goods 
✔️ GST on low-cost hotel accommodation 
✔️ GST on specified works contract services 
✔️ GST on electric vehicles 
✔️ GST on fly ash bricks 
✔️ GST rate on treated waters 
✔️ GST on health care services – Room rent 
✔️ GST on PLC in case of a long-term lease 
✔️ Real Estate – Developed plots 
✔️ Real Estate – Renting of Residential Dwelling 
✔️ Real Estate – Renting of residential dwelling 
✔️ GST Registration for ECOs suppliers 
✔️ Composition scheme for ECOs suppliers 
✔️ Other changes proposed 

Here is the Link of the PPT.

4. Proper officer has no jurisdiction to issue SCN to a person whose taxable turnover is less than the threshold limit: HC

The Delhi High Court has held that GST proper officer does not have jurisdiction to issue show cause notice, and pass orders against the taxpayer where the taxable turnover is less than the threshold limit fixed for the supply of tobacco products.

Facts

The petitioner was engaged in the business of tobacco products. A show-cause notice was issued against the petitioner and based on incorrect advice by the petitioner’s Chartered Accountant, it deposited the amount determined in the notice. It filed a writ petition against the notice on the ground that the show cause notice issued, order-in-original and order-in-appeal passed were outside the jurisdiction of proper officers.

High Court

The High Court observed that the taxable turnover of the petitioner after excluding taxes and cesses was less than the threshold limit of Rs. 20,00,000 fixed for tobacco products and the same was evident from Annexure-1 appended to the impugned notice. Therefore, the concerned officer did not have jurisdiction to issue show cause notice or pass orders as the taxable turnover was less than the threshold limit. Thus, the impugned show cause notice, order-in-original and order-in-appeal were set aside, and the department was directed to refund the amount deposited along with interest at 6%.

Read the Ruling

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Here is a Sample Chapter for your Reference.

5. SEBI proposes to extend the applicability of insider trading norms to the units of Mutual Funds

The SEBI has floated a consultation paper on the applicability of SEBI (Prohibition of Insider Trading), Regulations, 2015 (PIT Regulations) to Mutual Fund (MF) units. The objective of the consultation paper is to solicit public comments/views on the proposal to cover dealing in units of Mutual Funds under

“PIT Regulations so as to harmonise the regulations governing trading in securities, while in possession of Unpublished Price Sensitive Information (UPSI)”.

The SEBI stated that it felt a need to harmonise the provisions in PIT Regulations to initiate serious enforcement actions against those who misuse the sensitive non-public information pertaining to the scheme of Mutual Fund, directly or indirectly, to which they have access, by virtue of their fiduciary capacity.

The SEBI has considered including a separate chapter in PIT Regulations to cover transactions in the units of Mutual Funds schemes, both close-ended and open-ended, to avoid complexities and unintended consequences. Accordingly, the SEBI has proposed the following:

a) Amendment to the definition of ‘securities’: The discussion paper proposed to amend the definition of the term “securities” to do away with the exclusion of MF units. The term ‘trading’ has also been proposed to be amended to include redeeming, switching or agreeing to redeem or switch securities.

b) Obligation on AMC to disclose units of MF schemes held by a Designated person of AMC and their relatives: The SEBI has proposed to put an obligation on AMC to disclose the details of holdings in the units of the Mutual Fund schemes held by the Designated Persons of AMC /Trustees, their immediate relatives and any other person for whom such person takes trading decisions on an independent platform and the date as specified by SEBI and to require disclosures on a quarterly basis thereafter.

c) Prescription of minimum standard of code of conduct for designated persons: The discussion paper prescribes a minimum standard of code of conduct for designated persons in line with provisions of existing Schedule B of PIT Regulations.

d) Determination of a closure period during the possession of UPSI: SEBI has proposed to specify that the compliance officer of the AMC shall determine the closure period during which a designated person or class of designated persons can reasonably be expected to have possession of unpublished price-sensitive information, their immediate relatives, and any other person for whom such person takes trading decisions cannot transact in units of the Mutual Fund.

Further, it has been proposed to specify a closure period that would not be applicable, trading in the Mutual Fund Units by designated persons, their immediate relatives, and any other person for whom such person takes trading decisions, including for initiation of systematic transactions, shall be subject to pre-clearance by the compliance officer.

Read the Consultation Paper

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Here is the Link.

6. No public announcement is required for fresh acquisition of shares when an individual together with PAIC holds 15% or more voting rights: SC

In the instant case, appeals were preferred by the SEBI challenging the order of the Securities Appellate Tribunal (SAT) as to whether a public announcement is required for a fresh acquisition when an individual together with a Person Acting In Concert (PAIC) holds 15% or more voting right?

The primary question of law raised in the appeals was regarding the interpretation of Regulation 10 of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997.

The Supreme Court’ Ruling

With regard to the interpretation of Regulation 10 of the SEBI Regulations, 1997, it was observed that the shareholding/voting rights of the ‘acquirer’ decide whether the ‘acquirer’ is required to make a public offer/announcement in terms of Regulation 10, which applies when the voting rights of the ‘acquirer’ before acquisition were less than 15 %, but on fresh acquisition exceed 15% of the voting rights in the company.

Regulation 10 does not apply when the ‘acquirer’ already holds more than 15% shares or voting rights in the target company. The ‘acquirer’, for the purpose of the said Regulation, means not only the individual person but also the ‘person acting in concert’ with the individual person. In such cases, Regulation 11(1) may apply when the ‘acquirer’ who holds between 15% to 55% of shares or voting rights, post the acquisition of the additional shares or voting rights, is entitled to exercise more than 5% of the voting rights.

“No Public Announcement is required under Regulation 10 of Takeover Regulations 1997 for fresh acquisition taking individual shareholder’s stake to 15% or more if collective voting rights of individual & Persons acting in concert (PAIC) together are already 15% or more on the date of acquisition of fresh shares/voting rights. This is because there is no change in substantial ownership of the company in such a case.”

The Court held

The Court concluded that if an individual shareholder without any persons acting in concert is holding less than 15% of voting power in a company and acquires further shares in the company which will take his voting rights to 15% or more, then he is required to make a Public announcement.

Read the Ruling

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7. Professional Skepticism While Planning and Performing an Audit

Professional skepticism is an attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence. SA 200 requires the auditor to plan and perform an audit with ‘professional skepticism’.

But, there were many instances that were reported by NFRA in its AQRR wherein the auditor not only failed to exercise professional skepticism but also failed to challenge the management assumptions and claims in key areas of financial reporting such as impairment of investments, evergreening of loans, approval of related party transactions, recording of revenue, violation of capital and leverage ratios, etc.

Following are the instances of lapses that were found by NFRA while examining the audit documentation of the auditor:

• • Failure to see, document and verify the compliance of the investment policy of the company.
  • Failure to verify and access whether the accounting policy on investments of the company complies with the relevant accounting standard or Indian Accounting Standard.
  • Failure to provide any explanation regarding the total quantum of investments for which the company had done impairment analysis.
  • Ignorance of the visible impairment indicators such as insolvency proceedings, negative net worth, etc., and non-reporting of any non-provision of impairment.
  • Failure to assess the competence, capabilities, objectivity and appropriateness of the management experts and auditor’s experts and blindly relied on their work
  • Failure to document the two-way communication took place between the auditor and the auditor’s expert.
  • Failure to identify and assess the risk of material misstatement in the financial statement
  • Failure to verify and obtain audit evidence that the related party transactions were appropriately authorised and approved by the audit committee.

Thus, these lapses in the audit of investments, including impairment on investment, results in an inflated profit for the company. If the auditor had been vigilant, shown professional skepticism, challenged management assumptions and claims, and strictly complied with its audit responsibilities, the real financial position of the company would have been detected much earlier.

Read the story

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