Weekly Round-up on Tax and Corporate Laws | 12th to 17th December 2022

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 12th to 17th December 2022, namely:

(a) Key recommendations of the 48th GST Council Meeting;

(b) Attachment effected under Benami Transactions (Prohibition) Act can be questioned/challenged only under the said Act: NCLAT;

(c) Dept. to refund the amount recovered from the electronic credit ledger within 49 days instead of the statutory period of 3 months: HC

(d) Marked-to-market loss from forward contracts deductible under Section 37(1): Delhi High Court; and

(e) ICAI has issued the Implementation Guide to SA 230 Audit Documentation (Revised 2022 Edition).

1. Key recommendations of the 48th GST Council Meeting

On 17th December 2022, the GST Council met under the Chairmanship of the Union Minister for Finance & Corporate Affairs, Smt. Nirmala Sitharaman. The GST Council, in its 48th meeting, has made several recommendations relating to changes in GST tax rates, measures for the facilitation of trade and measures for streamlining compliances in GST. The key recommendations are:

(a) An amendment in CGST Rules, 2017 to prescribe the procedure for filing an application for refund by the unregistered buyers where the contract/agreement for the supply of services, like construction of a flat/house and long-term insurance policy, is cancelled.

(b) Allow unregistered suppliers and composition taxpayers to make an intra-state supply of goods through E-Commerce Operators (ECOs), subject to certain conditions. The Council has recommended that the scheme may be implemented w.e.f. 01-10-2023.

(c) Raise the minimum threshold of tax amount for launching prosecution under GST from Rs. 1 crore to Rs. 2 crores except for fake invoice cases.

(d) Reduce the compounding amount from the present range of 50% to 150% of the tax amount to the range of 25% to 100%.

(e) Decriminalize certain offences, namely obstructing or preventing any officer from discharging his duties, deliberate tempering of material evidence and failure to supply the information.

(f) Restrict filing of returns/statements to a maximum period of three years from the due date of filing of the relevant return/statement.

(g) Conduct a pilot in the State of Gujarat for Biometric-based Aadhaar authentication and risk-based physical verification of registration applicants. This is recommended to tackle the menace of fake and fraudulent registration.

(h) The Council clarified that the higher rate of compensation cess of 22% applies to SUVs with engine capacity exceeding 1500cc, length exceeding 4000mm and a ground clearance of 170mm or above.

(i) No GST is payable where the residential dwelling is rented to a registered person if it is rented to him for his own residence and not on account of his business.

Read the Press Release

2. Attachment effected under Benami Transactions (Prohibition) Act can be questioned/challenged only under the said Act: NCLAT

In the instant case, the following questions were raised before the National Company Law Appellate Tribunal (NCLAT):

(a) Whether an attachment effected under Benami Transactions (Prohibition) Act can be questioned/challenged under the said Act only?

(b) Whether the Appellate Tribunal is empowered to determine issues/points pertaining to an attachment under the said Act?

In the instant case, the corporate debtor was ordered to be liquidated by the Adjudicating Authority and the Dy. CIT (Benami Prohibition) (hereinafter referred to as the respondent) provisionally attached the property under Section 24(1) of the Benami Transactions (Prohibition) Act, 1988.

After that, the appellant-liquidator filed an application before the NCLT stating that the attachment of the immovable property of the corporate debtor by the respondent was illegal and the said properties were not the company’s properties. Thus, the same couldn’t fall under the liquidation estate.

However, the NCLT dismissed the application and held that the liquidator had to take appropriate steps before the concerned forum to get an order to remove the attachment. An appeal was made to the NCLAT against the order passed by the NCLT.

The appellant contended that the impugned order passed by the Adjudicating Authority was incorrect in law, as the respondent was not justified in passing the order of attachment of the immovable property of the corporate debtor when a moratorium under Section 14 was in force.

NCLAT’s Ruling

The NCLAT held that an attachment effected under ‘The Benami Transactions (Prohibition) Act, 1988 can be questioned/challenged only under the said Act, which is an inbuilt and a self–contained one, and the Appellate Tribunal is not empowered to determine the issues/points pertaining to the attachment under the said Act.

The NCLAT further held that the appellant was not entitled to prefer an application to the Adjudicating Authority under Section 60 of the IBC challenging the provisional attachment of the immovable property of the corporate debtor. Therefore, an appeal against the order of the Adjudicating Authority (NCLT) was devoid of merits.

Accordingly, the appeal was to be dismissed.

Read the Ruling

Check out Taxmann's Law Relating to Prohibition of Benami Property Transactions Act 1988 which provides a comprehensive section-wise commentary on the law relating to the Prohibition of Benami Property Transactions. It is rendered in an easy to read & follow 'FAQ' format. It also includes the Legislative History and effective date of applicability based on given Case Laws. Flow charts & tables have been provided in this book for ease of reference. This book will be helpful for practitioners of Civil Law, Criminal Law, Company Law, Income-tax, etc. 

Here is a Sample Read for your Reference.

3. Dept. to refund the amount recovered from the electronic credit ledger within 49 days instead of the statutory period of 3 months: HC

The Calcutta High Court has held that recovery of the demand amount before the three months of the statutory period provided under Section 78 of the CGST Act violates provisions, and the department must refund the excess money.

Facts

The department recovered the demand arising out of adjudication by debiting the electronic credit ledger. The petitioner challenged the impugned action of recovery of the demand arising out of the adjudication order and contended that the department’s action violated Section 78 of the CGST Act, 2017.

High Court

The High Court noted that an adjudication order was passed on 14th December 2021, and within 49 days (on 1st February 2022), the department recovered the demand amount without giving the petitioner three months to file the statutory appeal, which is mandatory before initiating any recovery proceeding. Therefore, the department’s action was a clear violation of the provision of Section 78 of the CGST Act.

Thus, the Court held that the department shall refund the money within 15 days which it has collected in excess of 10% pre-deposit amount for filing of appeal against the impugned adjudication order on condition that the petitioner will file the appeal against the impugned adjudication order within 15 days.

Read the Ruling

Check out Taxmann's Practical Guide to GST Compliances which is a perfect blend of question-answers, commentary, and tabular & diagrammatic presentations to deal with critical issues in GST compliances. It suggests a preventive, corrective, and defensive approach to tackle the problems in GST compliances. 

Here is a Sample Chapter for your Reference.

4. Marked-to-market loss from forward contracts deductible under Section 37(1): Delhi High Court

In the instant case, the assessee was engaged in the business of providing engineering, consultancy, and related services. The assessee claimed a loss of Rs. 9.20 crores against a forward contract entered into to hedge the risk against foreign exchange fluctuations to cover the exports and imports. Out of the total loss, the loss of Rs. 7.12 crores was related to unmatured forward contracts.

The Assessing Officer (AO) held that the loss on forward contracts was speculative and to be disallowed in terms of the CBDT Instruction No. 3/2010. The said Instruction explained ‘Marked to Market’ as a concept where financial instruments are valued at market rate to report their actual value on the date of reporting. Such ‘Marked to Market’ losses represent notional losses and are required to be added back to compute taxable income.

On appeal, the CIT(A) set aside the disallowance. On further appeal, the Tribunal concurred with the decision of the CIT(A) and held that the loss on forward contracts could not be disallowed in terms of the CBDT Instruction. Aggrieved-AO filed the instant appeal before the Delhi High Court.

The main questions raised before the High Court were whether the losses on account of foreign exchange fluctuations on forward contracts are allowable under Section 37(1) and covered as hedging transactions under Section 43(5)(a) or should be disallowed as speculation losses under Section 43(5) of the Act in view of the CBDT Instruction No. 3/2010?

The High Court held that there is no dispute that the forward contracts were entered into by the assessee to hedge against foreign exchange fluctuations. Thus, the transaction falls within the exceptions of proviso (a) to Section 43(5) of the Act and should not be treated as speculative. The Court held that the forward contracts, in the present case, are hedging transactions.

On the issue of the deductibility of the loss, the High Court relied on the case of the CIT v. Woodward Governor India Pvt. Ltd. [2009] 179 Taxman 326 (SC), wherein the Supreme Court had referred to AS-11. In terms of AS-11, the exchange difference arising on foreign currency transactions must be recognized as income or expense in the period in which they arise, except in cases of exchange differences arising on repayment of liabilities for acquiring fixed assets.

Applying the above ratio, the High Court held that as the assessee was reinstating its debtors and creditors in connection with the execution of contracts entered into with foreign entities based on the value of the foreign exchange, the loss on account of forward contracts would require to be recognized.

The Court upheld the order of CIT(A) and the Tribunal in finding that the loss, on account of Forward Contracts, cannot be considered speculative, and the AO had erred in disallowing the same.

Read the Ruling

Check out Taxmann's Master Guide To Income Tax Act | 2022 which covers section-wise commentary on the Finance Act 2022 along with Income Tax Practice Manual. It also covers a section-wise digest of landmark rulings from 1922 – 2022 and the gist of Circulars & Notifications from 1961 – 2022 (Feb.).

Here is a Sample Chapter for your Reference.

5. ICAI has issued the Implementation Guide to SA 230 Audit Documentation (Revised 2022 Edition)

The Auditing and Assurance Standards Board (AASB) of ICAI was formed with the main objective of formulating Engagement and Quality Control Standards, Guidance Notes on generic and industry-specific issues in auditing, Technical Guides, Implementation Guides and other publications for the guidance of the members. To update the knowledge of the members and provide members with resources, the Board regularly issues and revises Implementation Guides to Standards on Auditing, which play an important tool in applying the principles of these Standards in real-life audit scenarios.

Standard on Auditing (SA) 230, “Audit Documentation”, prescribes the basic principles of audit documentation. These principles need to be followed by auditors while complying with requirements of SA 230 and specific documentation requirements of other Standards on Auditing.

The AASB of ICAI published “Implementation Guide to SA 230, Audit Documentation” in 2013 to provide practical implementation guidance to auditors on this Standard. Based on the suggestions received from stakeholders that more guidance on the aspect of assembly of the final audit file is to be included in the Implementation Guide, AASB has revised the implementation guide. This revised edition has been written in simple and easy-to-understand language in a “Question-Answer” format containing a Summary of the Standard, an Introduction, FAQs on SA 230 with a response, a checklist and an Illustrative Working Paper Format for documentation. The revised edition of the Implementation Guide will enable auditors to comply with the requirements of SA 230 effectively as it brings out additional clarity on various aspects of SA 230.

Read the Story