Weekly Round-up on Tax and Corporate Laws | 13th to 18th February 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 13^th to 18^th February 2023, namely:

(a) Recommendations of 49thGST Council Meeting;

(b) CBDT notifies Income-tax return forms for AY 2023-24;

(c) Apex Court directs SAT to reconsider its decision on the responsibilities of a CS relating to the buyback of securities;

(d) High Court directs the AO to refund the excess amount adjusted beyond the 20% demand raised;

(e) Cancellation of registration on the ground that the petitioner was not present at the time of the spot visit is not sustainable: HC;

(f) How to account for the corporate guarantee given to the third party for a step-down subsidiary where the ultimate beneficiary is the parent co.?

1. Recommendations of the 49^th GST Council Meeting

The 49^th GST Council met under the Chairpersonship of Union Minister for Finance & Corporate Affairs Smt. Nirmala Sitharaman in New Delhi. The key recommendations made by the GST Council in its 49th Meeting are as follows:

(a) Council has adopted the report of the Group of Ministers on the GST Appellate Tribunal with certain modifications;

(b) GST rates reduced on pencil sharper from 18% to 12% and on Rab from 18% to 5% if sold pre-packaged and labelled, otherwise exempted;

(c) No compensation cess on coal rejects supplied to and by a coal washery arising (a) out of coal on which compensation cess has been paid;

(d) No GST on the National Testing Agency for conducting entrance examinations for admission to educational institutions;

(e) Time limit for making an application for revocation of cancellation of registration is to be increased from 30 days to 90 days;

(f) Rationalisation of late fee for Annual Return and Amnesty Scheme in respect of pending returns in Form GSTR-4, Form GSTR-9 and Form GSTR-10

In this regard, the press release has been issued by the Government.

Read the Press Release

2. CBDT notifies Income-tax return forms for AY 2023-24

The CBDT has released new Income-tax Return (ITR) Forms for the assessment year 2023-24 vide Notification No. 04/2023, dated 10-02-2023, and Notification No. 05/2023, dated 14-02-2023.

The CBDT said that to facilitate the taxpayers and ease of filing, no significant changes have been made to the ITR Forms compared to last year’s. Only the minimum changes necessitated due to amendments in the Income-tax Act have been made.

The applicability of the ITR forms for different taxpayers remains unchanged, and small taxpayers can still use the simple ITR forms (ITR 1 and ITR 4) without any additional conditions. However, ITR-1 can’t be filed by an individual who is otherwise not liable to file but has to file because of depositing more than Rs. 1 crore in one or more current accounts.

We have thoroughly analysed the new ITR Forms (ITR 1 to 7) and highlighted all key changes and new requirements in the current ITR forms viz-a-viz last year’s ITR Forms.

Read the Notification 

Read the Key Changes

3. Apex Court directs SAT to reconsider its decision on the responsibilities of a CS relating to the buyback of securities

The Supreme Court has directed the SAT to review its decision on the obligations of a Company Secretary concerning the buyback of securities.

The Court viewed that the role of a Company Secretary is not merely limited to addressing investors’ grievances, and they can be held responsible for any false or misleading open offer made by the company. The Court’s direction aims to clarify the responsibilities of a Company Secretary in the context of securities buyback and protect them from undue liability.

In the present case, a show cause notice was issued by the Whole Time Member (WTM) of SEBI to the company and the Company Secretary (hereinafter referred to as the respondent) to show cause as to why an enquiry should not be held against them, followed by the imposition of a penalty. The respondent participated in the enquiry.

The WTM held the respondent liable on the ground that he was a Company Secretary during the Financial Year 2010-11 when the company made a buyback offer worth Rs. 270 crores in violation of regulatory provisions.

The finding against the respondent was that as a ‘statutory official’ of the company, he should have exercised due diligence and checked the veracity of the buyback offer documents and legal compliance before authenticating them and signing the public announcement, which was found to have violated the provisions of the Companies Act 1956.

Consequently, the respondent was held liable for violating the provisions of Sections 68 and 77A of the Companies Act 1956 and of the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

The charges were also that the respondent had ascribed his signature on the public announcement for buyback in his capacity as a Company Secretary without exercising due diligence before authenticating such document. Thus, the respondent was equally liable for the alleged violation.

The SEBI, by order, imposed a penalty upon directors of the company and respondents for violation of Sections 68 and 77A of the Companies Act, 1956 and Regulations 3 and 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

Subsequently, an appeal was preferred against the order of SEBI with the Securities Appellate Tribunal (SAT). On appeal, the SAT by the impugned order held that role of a Company Secretary and compliance officer was limited to redressing the grievances of investors, and the respondent was not responsible for the false or misleading open offer made by the company and could not be made guilty for making a false or misleading open offer under Section 68 of the Companies Act, 1956.

Following the directive from the SAT, an appeal was lodged with the esteemed Supreme Court. The Apex Court observed that SAT had relied upon the latter part of Regulation 19(3) of SEBI (Buyback of Securities) Regulations, 1998, which deals with the redressal of investors’ grievances.

The crucial point that had been missed by SAT was that the compliance officer was also required to ensure compliance with buyback regulations as expressly stipulated by Regulation 19(3). The purpose of the nomination is twofold, namely:

(a) to ensure compliance with the buyback Regulations; and

(b) to redress the grievances of investors.

There is a patent error on the part of the Tribunal in interpreting the Regulations. The Tribunal held that the respondent’s role as a Company Secretary and compliance officer was limited to redressing investors’ grievances.

The Apex Court, however, held that since the interpretation had been placed by SAT relating to an interpretation of Regulation 19(3) was contrary to plain terms of Regulation 19(3), the impugned decision of SAT was to be set aside, and an appeal was to be remitted back for consideration afresh.

Read the Ruling

4. High Court directs the AO to refund the excess amount adjusted beyond the 20% demand raised

Assessee was a company registered in India. It filed a return of income declaring total income at Rs. 43 crores for the assessment year 2012-2013. The case was selected for scrutiny, and an assessment order was passed, raising tax demand upon the assessee. Assessee filed an appeal before the CIT(A) against the assessment order.

Centralized Processing Centre (CPC) adjusted the tax demand against the refund payable to the assessee for various years. 65.43% of the total demand raised on the assessee was adjusted against the refund payable.

Assessee filed an application before the AO requesting to release the refund of an amount adjusted beyond 20% of the tax demand. Assessee cited the CBDT memorandum, which prescribes the payment of 20% of the disputed amount if the demand is contested before the CIT(Appeals). However, AO rejected the application.

The assessee approached the Gujarat High Court for relief.

The Gujarat High Court held that as per the CBDT’s guidelines, AO is required to grant a stay of demand until disposal of the first appeal where the outstanding demand is disputed before the CIT (Appeals) on payment of 20% of the disputed demand.

The guidelines are issued by the Board for all Assessing Officers, who are to act upon the same quickly and to abide by the same observing its spirit. It is obviously to be applied on an application moved by the assessee in a pending appeal.

In the given case, almost 65% of the demand for the Assessment Year 2012-13 was adjusted with pending refunds. This was way beyond the percentage which has been contemplated under the CBDT’s  Memorandum.

The only reason given by the AO for denying and not acceding to the request of the assessee was that the adjustment of the refund against the demand was made by the CPC system. This highhanded approach on the part of AO was neither palatable nor endorsable.

It is a matter of concern that the CBDT’s attempts to establish guidelines and standardise procedures for the benefit of citizens will be ineffective unless officers in the field follow them literally and in spirit.

Thus, the writ petition was allowed, and AO was directed to refund the excess amount adjusted beyond the 20% demand raised for the assessment year 2012-13.

Read the Ruling

5. Cancellation of registration on the ground that the petitioner was not present at the time of the spot visit is not sustainable: HC

The Gujarat High Court has held that cancellation of registration without assigning proper reason is wholly mechanical, and such cancellation on the ground that the petitioner was not present at the time of the spot visit is not sustainable.

The department issued notice to cancel the registration certificate of the petitioner on the ground that it had not filed the returns under the GST Act for a continuous period of six months. It was also alleged that there was an absence of conduct of business in the principal place of business.

The petitioner replied to the notice, but the cancellation order was passed on the ground that he did not remain present during the visit to the premises even though he did submit the reply. The revocation application and appeal filed by the petitioner were also rejected by the department. Therefore, he filed a writ petition before the Court.

The High Court noted that the petitioner had shifted to a new address. The department conducted a spot visit, and registration was cancelled on the grounds that the petitioner was absent in the principal place of business at the time of the spot visit. However, the facts were explained by the petitioner when he appeared before the authority.

The Court also noted that in the absence of any intimation during the spot visit, it was difficult for the petitioner to remain present. Therefore, it was held that cancellation of registration on the ground that the petitioner was absent at the time of the spot visit was not valid, and cancellation of registration with the retrospective date was fully impermissible. Thus, the Court set aside the order of cancellation of registration.

Read the Ruling

6. How to account for the corporate guarantee given to the third party for a step-down subsidiary where the ultimate beneficiary is the parent co.?

A parent company has issued corporate guarantees on behalf of its step-down subsidiary, and as per the company’s assessment, presently, there is no possibility of default by the step-down subsidiary for meeting its obligation. The company is of the view that the fair value of the guarantees is ‘nil’ as the entire transaction is for the furtherance of the company’s business, wherein the company is the ultimate beneficiary of these guarantees. The company is disclosing the above guarantees in Notes to Accounts under details of Loans, Investments, Guarantees and security given by the company as per the requirements of Ind AS 107, ‘Financial Instruments: Disclosures’.

Para B2.5 of Ind AS 109 states that financial guarantee contracts may have various legal forms, such as a guarantee, some types of letter of credit, a credit default contract or an insurance contract. Their accounting treatment does not depend on their legal form. Further, para AG8 of Ind AS 32 states that the ability to exercise a contractual right or the requirement to satisfy a contractual obligation may be absolute or contingent on the occurrence of a future event. On a combined reading of the para(s), confusion arises whether disclosure only is sufficient or accounting to be done as per Ind AS 109. And if yes, how will the company account for the corporate guarantee given to third parties for the step-down subsidiary?

Concerning the accounting treatment of such financial guarantee, the Expert Advisory Committee (EAC) of ICAI is of the view that the guarantee obligations, as mentioned above, should be recognised and measured as per the requirements of Ind AS 109 by the company in its separate financial statements. Accordingly, in its separate financial statements, the company should recognise a liability at fair value which will be equivalent to an amount that the step-down subsidiary would have paid to obtain a similar guarantee in a standalone arm’s length transaction as per Ind AS 109.

Read the Story