Weekly Round-up on Tax and Corporate Laws | 12th February to 17th February 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from February 12th to 17th, 2024, namely:

a) Supreme Court strikes down Electoral Bonds Scheme as Unconstitutional;

b) Expenses incurred to construct bridge on a culvert in front of shop to provide access to customers is capital in nature: ITAT;

c) CBIC cautions against fraudsters sending fake and fraudulent Summons for GST violations;

d) HC sets aside order demanding tax on post-supply volume discount being not includible in transaction value

e) MCA operationalises the Central Processing Centre (CPC) for corporate filings to promote ease of doing business; and

f) Consequences of discovery of fraud after the reporting date

1. Supreme Court strikes down Electoral Bonds Scheme as Unconstitutional

The Supreme Court, in the matter of Association for Democratic Reforms v. Union of India, held that electronic bonds violate the right to information under Article 19(1)(a) of the Constitution. Accordingly, the scheme has been declared unconstitutional, allowing unlimited corporate political donations.

Further, the Court directed the issuing bank, the State Bank of India (SBI), to stop the issuance of electronic bonds and submit the details of the bonds purchased since the interim order of the Court dated April 12, 2019, till date to the Election Commission of India (ECI).

Brief facts of the case

In the present case, the petitioners challenged the constitutional validity of the Electronic Bond Scheme, which introduced anonymous financial contributions to political parties.

The petitioners argued that the anonymity associated with electronic bonds undermines transparency in political funding and encroaches upon voters’ right to information. They further contended that the scheme facilitates contributions through shell companies, raising concerns about accountability and integrity in electoral finance.

In defence of the scheme, the Union of India had asserted its role in promoting the use of legitimate funds in political financing, ensuring transactions occur through regulated banking channels. They cited the need for donor anonymity to shield contributors from potential retribution by political entities.

What are Electoral Bonds?

The Electronic Bond Scheme, 2018, was introduced vide Notification no. S.O. 29(E), dated: 02.01.2018. This scheme allowed specific State Bank of India (SBI) branches to offer electoral bonds for 10 days in January, April, July and October of each year in the following denominations: Rs 1000, Rs 10,000, Rs. 1,00,000, Rs 10,00,000 and Rs 1,00,00,000

An electronic bond is defined as a “bond issued in the nature of promissory note which shall be a bearer banking instrument and shall not carry the buyer’s or payee’s name”.

Issues raised before the Supreme Court

The issues raised before the Supreme Court were as follows –

a) Firstly, whether the non-disclosure of information on voluntary contributions to political parties under the Electronic Bond Scheme and the amendments to Section 29C of the Representation of the People Act (RPA), Section 182(3) of the Companies Act and Section 13A(b) of the Income Tax Act are violative of the right to information of citizens under Article 19(1)(a) of the Constitution?

b) Secondly, does unlimited corporate funding to political parties, as envisaged by the amendment to section 182(1) of the Companies Act, infringe the principle of free and fair elections and violate Article 14 of the Constitution?

Observations by Supreme Court

The Supreme Court observed that the infringement of the right to information does not satisfy the proportionality standard concerning curbing black money. Even if the argument that the Electoral Bond Scheme fulfils the purpose is accepted, non-disclosure of information on political funding is not the least restrictive means to achieve this purpose.

Further, the Supreme Court observed that the infringement of the right to information does not satisfy the proportionality standard concerning guaranteeing informational privacy, as protecting donor privacy is not a legitimate purpose. Even if donor privacy is necessary, the public interest in free and fair elections trumps the private interest in confidentiality.

The right to information on political funding, traceable to Article 19(1)(a), can only be restricted on the grounds stipulated in Article 19(2). The purpose of curbing black money and recognising donor privacy is not traceable to the grounds in Article 19(2). Even if the purposes are traceable to Article 19(2), the Scheme is unreasonable and disproportionate to increasing political funding through banking channels and reducing political funding through non-banking channels.

The Supreme Court also observed that the amendment to section 182 of the Companies Act, 2013, must be read along with other provisions on financial contributions to political parties under the RPA and the IT Act. Neither the RPA nor the IT Act places a cap on the contributions which an individual can make. The amendment to section 182 is manifestly arbitrary for (a) treating political contributions by companies and individuals alike, (b) permitting the unregulated influence of companies in the governance and political process, violating the principle of free and fair elections, and (c) treating contributions made by profit-making and loss-making companies to political parties alike.

Supreme Court Ruling

The Supreme Court held that the Electoral Bond Scheme, the proviso to Section 29C(1) of the Representation of the People Act 1951 (as amended by Section 137 of Finance Act, 2017), Section 182(3) of the Companies Act (as amended by Section 154 of the Finance Act, 2017) and Section 13A(b) (as amended by Section 11 of Finance Act, 2017) are violative of Article 19(1)(a) and unconstitutional.

Deleting the proviso to Section 182(1) of the Companies Act, 2013, permitting unlimited corporate contributions to political parties is arbitrary and violative of Article 14. Further, SBI must stop the issuance of Electoral Bonds. SBI must submit details of the Electoral Bonds purchased since the interim order of this Court dated 12 April 2019 to date to the ECI. The details shall include the date of purchase of each Electoral Bond, the name of the purchaser of the bond and the denomination of the Electoral Bond purchased;

SBI must submit the details of political parties which have received contributions through Electoral Bonds since the interim order of this Court dated 12 April 2019 till date to the ECI. SBI must disclose details of each Electoral Bond encashed by political parties, which shall include the date of encashment and the denomination of the Electoral Bond;

Also, the SBI must submit the information to the ECI within 3 weeks from the date of this judgment, i.e. by March 6, 2024. The ECI must publish the information shared by the SBI on its official website within 1 week of the receipt of the information, i.e. by March 13, 2024.

Electoral Bonds, which are within the validity period of 15 days but have not been encashed by the political party yet must be returned by the political party or the purchaser, depending on who is in possession of the bond to the issuing bank. The issuing bank, upon their turn of the valid bond, must refund the amount to the purchaser’s account.

Read the Ruling

2. Expenses incurred to construct bridge on a culvert in front of shop to provide access to customers is capital in nature: ITAT

For the relevant assessment year, the assessee constructed a concrete bridge on the culvert in front of the shop so that the customers could have direct access to the shop in order to increase business turnover. During the year under consideration, the assessee sold such shop and showed capital gains in the return of income and the construction cost was claimed as a cost of improvement.

During the assessment proceedings, the Assessing Officer (AO) disallowed said claim on the ground that the assessee had been conducting business since the assessment year 2005-06 and the construction of the shop was completed in said year.

On appeal, the CIT (A) confirmed the additions made by AO. Aggrieved by the order, the assessee filed an appeal to the Amritsar Tribunal.

The Tribunal held that it was evident that the disputed cost was used for constructing a bridge in front of the shop for improvement. The CIT(A) failed to appreciate the vital fact that the amount spent for the construction of the bridge was a capital expenditure and was essential to provide access to the shop from the road and to provide improved accessibility to the shop to facilitate greater footfall and capital value addition in turn.

Further, the source of construction was duly explained and confirmed before the authorities. The material facts of the construction cost of the bridge are further supported by the assessee with the site plan and the shop photographs. However, AO had not brought any evidence or findings on record to prove that the cost of improvement or construction was never incurred. The AO disallowed such cost by merely relying upon the fact and presumption that the assessee had been running the business in the shop. The documentary evidence on record was sufficient to prove that necessary construction was made.

Also, there is no bar to incur capital expenditure while the business runs. The capital expenditure would not become revenue expenditure merely because it was incurred in connection with the cost of improvement for the promotion of business activities, which ultimately resulted in efficiently carrying on day-to-day business.

Accordingly, it is held that the cost of improvement to the shop by constructing the culvert was capital expenditure and would be allowable as cost of improvement as claimed by the assessee.

Read the Ruling

3. CBIC cautions against fraudsters sending fake and fraudulent Summons for GST violations

The CBIC has recently noticed that some individuals with fraudulent intent are creating and sending fake summons to taxpayers who may or may not be under investigation by the DGGI. For the awareness the taxpayers, it is reminded that taxpayers can verify the genuineness of any communication from the Department by using the ‘VERIFY CBIC-DIN’ window on the CBIC website or the DIN Utility Search on the online portal of Directorate of Data Management (DDM), CBIC.

The taxpayers may immediately report to DGGI/CBIC jurisdictions in case of suspicion of bogus summons so that necessary action against those responsible for these fraudulent activities can be taken. In this regard, press release dated February 10th, 2024 has been issued.

Read the Press Release

4. HC sets aside order demanding tax on post-supply volume discount being not includible in transaction value

The High Court of Madras has recently held that the supplier’s post-supply volume discount is not included in the transaction value of goods supplied by assessee to its customers. This ruling is given by the Honorable Madras High Court on case of Supreme Paradise v. Assistant Commissioner.

Facts

The petitioner was engaged in the retail sale of mobile phones. The GST Authorities had issued a notice to the petitioner demanding a tax on the discount offered by the supplier. The Department was of the view that the discount should be included in the transaction value and that the petitioner should pay GST on the discount value. The authorities argued that the discount could be allowed only in cases specified in Section 15(3)(a) and (b) of the CGST Act, 2017.

The petitioner challenged the order on the grounds that the volume discount should not be included in the transaction value and that the transactional value should be the value on which GST was levied and paid on the entire invoice amount, which included the volume discount.

The petitioner further argued that the discount was not deducted for GST levy purposes and that the invoice value (without deduction of the volume discount), including GST, was paid to the vendor supplier as the discount offered to the petitioner can impact only the transaction value of the supplier. Hence, the petitioner did not need to pay further tax on the volume discount amount.

High Court

The Honorable High Court noted that a further sale or supply of goods or services by the recipient of such goods or services at a discounted price cannot form part of “transaction value” of such recipient/seller unless such discount was on account of subsidy for such supply given by a 3rd party and was disguised as a discount. A discount linked to subsidy alone can form part of “transaction value”.

The Court also noted that in the present case, the discount was offered to the petitioner by its supplier. The discounted price at which the petitioner effected further sales to its customers were two independent transactions. There was no scope for intermingling them to demand tax from the petitioner. The Court, therefore, quashed the impugned orders and remitted the case back to the respondent authority to pass the order on merits.

Read the Ruling

5. MCA operationalises the Central Processing Centre (CPC) for corporate filings to promote ease of doing business

MCA vide. Press Release dated February 16, 2024 has operationalised the Central Processing Centre (CPC) for centralised processing of corporate filings without requiring physical interaction with the stakeholders to promote ease of business. The Ministry reported that 12 forms/applications have begun to be processed at CPC from Feb 16, 2024, followed by other forms from April 1, 2024 onward. Later, forms/applications filed under the LLP Act are also proposed to be centralised.

Presently, 4,910 forms have been received by CPC after commencing operations. The forms shall be processing a time-bound and faceless manner. Processing of applications at CRC and C-PACE also does not require physical interaction with the stakeholders.

The Central Registration Centre (CRC), Centralised Processing for Accelerated Corporate Exit (C-PACE), and CPC will ensure speedy processing of applications and forms filed for incorporation, closure, and for meeting regulatory requirements so that the companies are incorporated, closed can alter and raise capital, and can complete their various compliances under the corporate laws with ease.

After the establishment of CPC, the jurisdictional Registrar of Companies (ROC) is expected to concentrate more on its core functions of inquiries, inspection, and investigation to ensure robust corporate governance. Further, it has been noted that the incorporation of LLPs and companies is highest compared to any of the previous financial years as of 14.02.2024.

Read the Press Release

6. Consequences of discovery of fraud after the reporting date

Ind AS 10, Events after the Reporting Period, prescribes when an entity should adjust its financial statements for events after the reporting period and disclosures that an entity should give about events after the reporting period. Two types of events may occur after the end of the reporting period but before the date when the Board of Directors approves the financial statements in the case of a company: adjusting and non-adjusting events. Adjusting events offer evidence of conditions that existed at the end of the reporting period, requiring adjustments to the financial statements. On the other hand, non-adjusting events indicate conditions that have arisen after the reporting period and do not require adjustment in the financial statements.

For events that provide evidence for the existence of conditions at the end of the reporting period are required to be adjusted in the financial statements. However, identifying whether a condition exists at the end of the reporting period is challenging. In such instances, the professional judgment of management plays a big role. For instance, the discovery of fraud after the end of the reporting period but before the date of approval of financial statements may require close analysis of para 9(e), which states, “An example of adjusting events after the reporting period that require an entity to adjust the amounts recognised in its financial statements is the discovery of fraud or errors that show that the financial statements are incorrect”.

In this regard, the standard’s para 9(e) only pertains to “the discovery of fraud or errors that show that the financial statements are incorrect”. Here, the word ‘discovery’ holds great significance as para 9(e) only talks about the “discovery of frauds” after the reporting period and not about “committing or occurrence of frauds” after the reporting period. Further, the words “that show that the financial statements are incorrect” in Para 9(e) clearly indicate fraud was committed or had occurred prior to the balance sheet date but was discovered after the balance sheet date.

Thus, where fraud relates to the reporting period and was discovered later, this is an event that provides evidence of conditions that existed at the end of the reporting period (adjusting events after the reporting period). Therefore, the company is required to adjust the amounts recognised in its financial statements for the reporting period.

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