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

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

(a) CBDT issues additional guidelines on deduction of tax under Section 194R;

(b) Delhi High Court upholds validity of re-assessment notice issued within period extended by TOLA 2020;

(c) The MCA further reduces the threshold for Small Companies. Let us see what’s in it for you!;

(d) Vicarious prosecution for cheque bounce can be quashed by High Court only if the director furnishes irrefutable evidence: SC;

(e) Assessee entitled to get a refund of IGST paid on ocean freight along with interest: HC;

(f) Flavoured milk is classifiable under Heading 22029930 as a “beverage containing milk”: AAAR; and

(g) Accounting treatment of expenditure incurred on the configuration design study.

1. CBDT issues additional guidelines on deduction of tax under Section 194R

The Finance Act, 2022 had inserted a new Section 194R to the Income-tax Act, 1961 providing for deduction of tax at source (TDS) on benefit or perquisite in respect of business or profession.

To remove difficulties in implementing the provisions of Section 194R, the CBDT, vide Circular No. 12 of 2022, dated 16-06-2022, issued guidelines that contained 10 FAQs on certain aspects of Section 194R. Now the CBDT has issued a new guideline to give more clarity on the FAQs released earlier. The summary of additional guidelines is discussed below:

(a) The board has clarified that the circular is applicable only in implementing provisions of Section 194R. It will not impact the taxability of income in the hands of the recipient as the same shall be governed by provisions of the Income-tax Act.

(b) Section 194R wouldn’t apply to the one-time loan settlement with borrowers or waiver of loan granted on reaching settlement with borrowers. However, this relaxation is available only when the loan has been taken from specified lenders.

(c) Amount incurred by ‘Pure Agent’ for which he is reimbursed by the recipient would not be treated as a benefit/ perquisite for the purpose of Section 194R. The Board has taken the reference of GST Valuation Rules, 2017 to define the meaning of ‘Pure Agent’.

(d) It has been clarified that if the out-of-pocket expense has been included as part of the professional fee and tax has been deducted under Section 194J on the entire amount, no further tax deduction under Section 194R is required.

(e) In respect of the dealer/business conference, any expenditure on the overstay of participants before and after the conference dates would be considered a benefit/perquisite for Section 194R. However, a day immediately before the actual start date and a day immediately following the actual end date of the conference would not be considered an overstay.

(f) Where benefit/perquisite is provided in a group activity in case of a dealer conference and it is difficult to match such benefit/perquisite to each participant, the benefit/perquisite provider may, at his option, not claim the expense, representing such benefit/perquisite, as deductible expenditure for calculating his total income. If he decides to opt so, he will not be required to deduct tax under Section 194R on such benefit/perquisite, and he will not be treated as an assessee in default under Section 201.

(g) Where a car has been received as a gift by the car dealer from a company, then the dealer is eligible to claim depreciation on such car, if the dealer includes the amount of benefit/perquisite in his income-tax return.

(h) Section 194R is not applicable on benefit/perquisite provided by an embassy, high commission, consulate, an organisation in the scope of The United Nations (Privileges and Immunity Act) 1947, etc.;

(i) Provision of Section 194R does not apply to the issuance of bonus or right shares by a company in which the public is substantially interested. However, bonus shares or right shares must be issued to all shareholders.

Read the Circular

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2. Delhi HC upholds the validity of the re-assessment notice issued within the period extended by TOLA 2020

A writ petition was filed challenging the order passed under Section 148A(d) of the Income-tax Act 1961, pursuant to a notice issued under Section 148 of the Act for the Assessment Year 2013-14 and the CBDT Instruction No. 1/2022, dated 11-05-2022.

The assessee-company submitted that as per the first proviso to Section 149 of the Act (as amended by Finance Act, 2021), no notice for re-assessment can be issued for the AY 2013-14, as the time limit for initiating the proceedings expired on 31-03-2020, as per the provisions of Section 149 (as it stood before its amendment by Finance Act, 2021). It contended that the present proceedings initiated in pursuance of the notice dated 29-06-2021 and judgment of the Supreme Court in the case of Union of India Vs. Ashish Agarwal [2022] 138 taxmann.com 64 (SC) is time-barred.

The revenue submitted that Section 3 of Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (‘TOLA’) applies to the unamended provisions of Section 149 of the Act (as it stood before its amendment by Finance Act, 2021). Therefore, the initial notice dated 29-06-2021 and the proceedings taken in continuation as per the judgment of Ashish Agarwal (supra) are not time-barred.

The Delhi High Court held in favour of the revenue as under:

The contention of the assessee that the present proceedings for the AY 2013-2014 are time-barred is not correct, which were initiated during the time limit extended by TOLA. The time limit for issuing notice under unamended Section 149, which fell between 20-03-2020 and 31-03-2021, was extended by Section 3 of TOLA read with Notification No. 20/2021 dated 31-03-2021, and Notification No. 38/2021 dated 27-04-2021, until 30-06-2021.

The initial notice in the present proceedings was issued on 29-06-2021, which was within the extended time limit. The said notice was quashed by the Court in the case of Mon Mohan Kohli v. Asst. CIT [2021] 133 taxmann.com 166 (Delhi) on the grounds that the mandatory procedure of Section 148A was not followed before issuing the said notice. The Court also struck down Explanations A(a)(ii) and A(b) to the said notifications. However, the relevant portion of the notification, which extended the time limit for issuance of time barring re-assessment notices until 30-06-2021, was not struck down by this Court. The Court categorically held (at paragraph 98) that the power of re-assessment that existed before 31-03-2021 stood extended till 30-06-2021.

Subsequently, the Supreme Court in Ashish Agarwal (supra) held that the Section 148 notices issued between 01-04-2021 to 30-06-2021 would be deemed to have been issued under Section 148A of the Act. Therefore, the notice dated 29-06-2021 issued to the petitioner stood revived.

Key ratios held

• Since the time period for issuance of re-assessment notice for the assessment year 2013-14 stood extended until 30-06-2021, the first proviso of Section 149 (as amended by the Finance Act, 2021) is not attracted in the facts of this case.
• The time limit for initiating assessment proceedings for AY 2013-14 stood extended till 30-06-2021. Consequently, the re-assessment notice dated 29-06-2021, which has been issued within the extended period of limitation, is not time-barred.
• The petitioner’s challenge of the CBDT Instruction No. 1/2022 dated 11-05-2022 on the grounds that the assessment for AY 2013-14 became time-barred on 31-03-2020 is incorrect.

Editor’s note:

In view of the Supreme Court decision in Ashish Agarwal’s case, the re-assessment notice issued under pre-amended section 148 should be treated as notice under section 148A. In this case, as the income alleged to have escaped assessment is more than 50 lakhs, the notice cannot be treated as time-barred as it is within the 10 years time limit stipulated by Section 149(1)(b) of the Act (as amended by the Finance Act, 2021)

Read the Ruling

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3. The MCA further reduces the threshold for Small Companies. Let us see what’s in it for you!

In February 2021, the MCA notified an amendment to the Companies (Specification of Definitions Details) Rules, 2014, that came into force on 01-04-2021, whereby the definition of the small company was amended by increasing the paid-up capital limit from Rs. 50 lakhs to Rs. 2 crores, and the turnover threshold enhanced from Rs. 2 crores to Rs. 20 crores.

In order to ensure ease of doing business for the corporates, the Govt. vide. Notification No G.S.R. 700(E) dated 15-09-2022 has further revised the definition of “small companies” by increasing the threshold limit for paid-up capital from Rs. 2 crores to Rs. 4 crores and turnover from Rs. 20 crores to Rs. 40 crores.

As a result, now more companies would fall under the ambit of small companies. Further, revision in the definition of small companies will benefit more companies in reducing their compliance burden. Some of the relaxations that the small companies enjoy are listed below:

(a) Exemption from the requirement of the preparation of the Cash Flow Statement (CFS);

(b) Advantages of preparing and filing an Abridged Annual Return in E-form MGT-7A;

(c) Exemption from the requirement of mandatory rotation of auditors;

(d) Exemption from reporting on the adequacy of the internal financial controls and its operating effectiveness in the auditor’s report;

(e) Exemption from the requirement of holding a minimum of 4 board meetings in a year;

(f) Exemption from the applicability of CARO, 2020;

(g) Annual return of the company can be signed by the company secretary, or where there is no company secretary, by a director of the company;

(h) Lesser penalties for small companies in case of defaults.

Read the Story

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4. Vicarious prosecution for cheque bounce can be quashed by HC only if the director furnishes irrefutable evidence: SC

The Supreme Court held that vicarious prosecution for cheque bounce could be quashed by the High Court only if a director furnishes irrefutable evidence.

Facts

An appeal was filed against the order passed by the Madras High Court, whereby the High Court allowed the application and quashed the criminal proceedings initiated against the respondent.

The High Court quashed a cheque bounce case against the accused (partner of a firm) on the ground that there was nothing to indicate the accused was in charge and responsible for the day-to-day affairs of the firm to make her liable for the alleged offence under Section 141 of the Negotiable Instruments Act, 1881.

The High Court held that merely by reciting the words used under Section 141 of the Negotiable Instruments Act, 1881 in the complaint, no vicarious liability can be fastened on the partner of the firm. Thereafter, an appeal was made to the Supreme Court against the order passed by the High Court.

Supreme Court

The Apex Court held that the primary responsibility of the complainant was to make specific averments in the complaint to make the accused vicariously liable. For fastening the criminal liability, there is no legal requirement for the complainant to show that the accused partner of the firm was aware of each and every transaction.

On the other hand, the first proviso to Section 141(1) of the Act clearly lays down that if the accused is able to prove to the satisfaction of the Court that the offence was committed without his/her knowledge or he/she had exercised due diligence to prevent the commission of such offence, he/she will not be liable of punishment.

The complainant was supposed to know only generally as to who was in charge of the affairs of the company or firm, as the case may be. It is only the directors of the company or the partners of the firm, as the case may be, who have the special knowledge about the role they had played in the company or the partners in a firm to show before the Court that at the relevant point of time they were not in charge of the affairs of the company.

Further, the existence of any special circumstance that makes them not liable is peculiarly within their knowledge, and it is for them to establish at the trial to show that at the relevant time, they were not in charge of the affairs of the company or the firm.

The final judgement and order would depend on the evidence adduced. Criminal liability is attracted only to those who, at the time of the commission of the offence, was in charge of and responsible for the conduct of the business of the firm.

If any Director wants the process to be quashed by filing a petition under Section 482 of the Code of Criminal Procedure on the ground that only a bald averment was made in the complaint and that he/she is really not concerned with the issuance of the cheque, he/she must either furnish some sterling incontrovertible material or acceptable circumstances to substantiate his/her contention.

In view of the above, the impugned order passed by the High Court was set aside. Accordingly, the appeal was to be allowed.

Read the Ruling

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5. Assessee entitled to get a refund of IGST paid on ocean freight along with interest: HC

The Gujarat High Court has held that the department should refund IGST paid on ocean freight along with statutory interest since notification under which IGST was charged on assessee was declared ultra vires.

Facts

The petitioner was a registered public limited company engaged in the business of importing natural gas. It paid IGST at 5% on ocean freight under reverse charge. It filed a petition under Article 226 of the Constitution of India and prayed to direct the authorities to grant a refund of the amount of GST and interest thereon.

High Court

The High Court observed that the levy of IGST on ocean freight through a notification had been declared ultra vires by the Apex Court in the case of Union of India v. Mohit Minerals Pvt. Ltd [2022] 138 taxmann.com 331 (SC).

The Court noted that since the impugned Notifications have already been declared as ultra vires, the present petition deserves to be allowed.

Therefore, the claim for refund of the petitioner towards IGST was liable to be favourably considered, and the department was directed to verify the amount of refund and grant the refund of the amount of IGST paid by the petitioner within eight weeks.

Read the Ruling

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6. Flavoured milk is classifiable under Heading 22029930 as a “beverage containing milk”: AAAR

The Gujarat AAAR has held that product flavoured milk is classifiable under Tariff Item 22029930 of First Schedule of the Customs Tariff Act, 1975 as a “beverage containing milk”.

Facts

The appellant was an apex body for marketing milk and milk products produced by various District Co-operative Milk Producer Unions. It filed an application for an Advance Ruling to determine the classification of flavoured milk. The Authority for Advance Ruling held that ‘Flavoured Milk’ is classifiable under HSN 22029030 as a beverage containing milk. It filed an appeal against the order.

AAAR

The AAAR observed that flavoured milk is produced from the standardisation of fresh milk according to fat contents, which is then heated at a certain temperature followed by filtration, pasteurisation and homogenisation, and after that mixing of sugar and various flavours and finally bottling is done. The milk constituent in the instant product is ‘standardised milk’ or ‘toned milk’, which is not full cream milk, or ‘skimmed milk’ as per definitions and Chapter Note I to Chapter 4 of Customs Tariff Act, 1975.

Therefore, this product would be excluded from the purview of Tariff Heading 0402. However, beverage, as per Oxford dictionary definition, includes any type of drink except water. Thus, flavoured milk would be treated as a beverage, and it would be classified under Tariff Item 22029930.

Read the Ruling

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7. Accounting treatment of expenditure incurred on the configuration design study

The configuration design study is fundamental for the construction of an integrated project and is used as a basis for preparing a feasibility report. The configuration forms the basis on which further stages of project implementation follow. Therefore, a configuration study is a starting point of the journey culminating with the construction of an integrated project.

A question arises whether the expenditure incurred on the configuration design study relates to ‘Research Activities’ as per Ind AS 38, or can be treated as ‘Directly Attributable Cost’ and to be capitalised as per Ind AS 16.

In this regard, the Expert Advisory Committee (EAC) noted that if the configuration design study for a project is neither carried out with an intention to gain new scientific or technical knowledge or understanding nor it is an application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services then the cost of such configuration study should neither be treated as research nor as development cost under Ind AS 38.

The Committee further noted that paragraph 16 of Ind AS 16 states that if any cost is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management should be included in the costs of an item of property, plant, and equipment. But, where such costs are not directly attributable to bringing the asset to the location and condition necessary for it to operate in the manner intended by management, then the same is expensed off in the Statement of Profit and Loss as incurred.

Thus based on the above, the Committee concluded that the costs of the configuration design study, that is required for setting up the project, could be capitalised as a part of the cost of property, plant, and equipment, only if such study is directly attributable to bringing the plant to the location and condition necessary for it to be capable of operating in the manner intended by the management.

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