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

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

(a) Authorised cheque signatory of a Co. isn’t drawer under Section 143A of NI Act and can’t be ordered to pay interim compensation: HC;

(b) Circular 6/2016 giving a choice to treat shares as stock-in-trade or capital asset has a retro effect: HC;

(c) Unsecured creditors must accept scaled down value of their dues as per the BIFR-approved rehabilitation scheme: SC;

(d) HC directs Dept. to follow the procedure prescribed in the circular to allow ITC for bonafide mistakes in returns for FY 19-20;

(e) HC permits the assessee to rectify an error in the GSTR-1 return that will not cause any loss to revenue; and

(f) Bank Audit: ICAI has issued Guidance Note on Audit of Banks (2023 Edition).

1. Authorised cheque signatory of a Co. isn’t ‘drawer’ under Section 143A of NI Act and can’t be ordered to pay interim compensation: HC

The High Court held that the authorised signatory of a company who signs a cheque on its behalf could not be considered the ‘drawer’ under Section 143A of the Negotiable Instruments Act, 1881 and, therefore, cannot be directed to pay interim compensation.

In the instant case, the following questions of law were placed before the High Court for consideration:

(a) Whether the signatory of the cheque, authorised by the company, is the “drawer” and can be directed to pay interim compensation under Section 143A of the Negotiable Instruments Act, 1881?

(b) Whether a deposit of a minimum sum of 20% of the fine or compensation is necessary under Section 148 of NI Act in case where an appeal is filed by persons other than the “drawer” against the conviction under Section 138 of the NI Act?

The High Court noted that as per Section 7 of the NI Act, the maker of a bill of exchange or cheque is called the “drawer”. In order to be liable under Section 138 of the NI Act, the cheque must be drawn from the account of the drawer.

Further, Section 143A of the Act empowers the Trial Court to order the drawer to pay interim compensation to the complainant for the pendency of the trial, using the word “drawer”.

The High Court further observed that the word “drawer” in Section 143A has a clear and unambiguous meaning. By specifically fastening the liability on the drawer/issuer, the legislature excluded anyone else from being made liable to pay interim compensation. Thus, the drawer alone would have been the offender if the Act didn’t contain section 141.

Section 141 of the NI Act, 1881 read as follows:

“141 Offences by companies. —

(1) If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

*** ”

The High Court held that the expression “drawer” in Section 138 does not include either signatory of the cheque or the signatory director. Both the signatories of a cheque and the in-charge director are held vicariously liable under Section 141. Moreover, there is no power under Section 141 of the NI to direct the payment of interim compensation.

The High Court further held that since the term “drawer”, as referred to in Section 138, does not include an authorised signatory in the case of a company, the Appellate Court cannot direct the authorised signatory to deposit the amount in an appeal.

Also, the High Court held that the Appellate Court has the power under Section 389 of the CrPC to direct the deposit of an amount in an appeal under Section 148 of NI Act by persons other than the drawer.

Read the Ruling

2. Circular 6/2016 giving a choice to treat shares as stock-in-trade or capital asset has a retro effect: HC

Assessee-company was engaged in the business of manufacture and sale of plywood and related products. During the relevant assessment year, it filed its return of income declaring long-term and short-term capital gains from the sale of shares and units of mutual funds.

During the assessment proceedings, the Assessing Officer (AO) noticed the number of transactions for selling and purchasing such securities. He treated such profit as business profits rather than capital gains. AO rejected the assessee’s reference to CBDT’s Circular No. 6/2016, as the dispute was related to AYs prior to the date of issue of such a circular.

On appeal, CIT(A) affirmed the treatment done by the AO, which the Tribunal subsequently deleted. Aggrieved by the order, an appeal was preferred to the Calcutta High Court.

The High Court held that the long-term shares were held as investments in the books of account, which the AO accepted in earlier assessment years.

The Court held that Circular No. 6/2016 dated 29-02-2016, issued by the CBDT, relating to the taxability of surplus on the sale of shares and securities as capital gains or business income. The circular clarified that the assessee could have an investment and trading portfolio and thus may have income under the head capital gains and business income.

The circular clarifies that, in respect of listed shares and securities held for a period of more than 12 months, if the assessee desires to treat the income arising as capital gains, the same shall not be put to dispute by the Assessing Officer. Also, it was stated that once the assessee takes such a stand in a particular assessment year, it shall remain applicable in subsequent assessment years.

Therefore, the AO cannot take a different view in the subsequent years without any fresh materials warranting such a departure.

Further, the need for issuing such circular arose on account of disputes on the applications of the principles laid down by the courts mentioning different parameters to distinguish the shares held as investments from the shares held as stock-in-trade. Thus, the benefit of the circular should be extended to the assessee, especially when it is a beneficial circular in favour of the assessee.

Therefore, Circular No. 6/2016 will be applicable with retrospective effect even though it was issued in a later year.

Read the Ruling

3. Unsecured creditors must accept scaled down value of their dues as per the BIFR-approved rehabilitation scheme: SC

The Apex Court held that the rehabilitation scheme approved under Section 18 of the Sick Industrial Companies Act, 1985 (SICA) binds all the creditors including the unsecured creditors, and the unsecured creditors have to accept the scaled down value of its dues provided under the rehabilitation scheme.

In the instant case, an appeal was made to the Supreme Court against the order passed by the High Court of Delhi. The High Court held that on approval of a scheme by the BIFR under SICA, the unsecured creditors have an option not to accept the scaled-down value of their dues.

In this regard, the question was raised before the Supreme Court whether, on approval of a scheme by BIFR under SICA, an unsecured creditor has the option to reject the scaled-down value of its dues and to wait till the rehabilitation scheme has worked itself out with an option to recover the debt with interest post such rehabilitation.

The Supreme Court opined that under SICA, the primary concern of the BIFR would be the revival of the sick company and to save the sick company from winding up. Further, Sections 22 and 22A of the SICA ensure that the Scheme of Rehabilitation is not frustrated because of certain legal proceedings or unwarranted disposal of the sick company’s assets.

Further, once the rehabilitation scheme under Section 18 of SICA was prepared by the operating agency and sanctioned by the BIFR, which may include the scaled-down value of dues of the unsecured creditors, the same shall bind all. Otherwise, the rehabilitation scheme would not be workable, and the object & purpose of enactment of the SICA, 1985 will be frustrated.

The Court noted that if a sick company is ordered to wind up, the unsecured creditors will not get anything. However, on the other hand, on sanctioning the rehabilitation scheme under Section 18, the unsecured creditors may get part of their dues or debts.

Section 18(8) of the SICA, 1985, provides that a sanctioned scheme shall be binding on the sick industrial company, shareholders, creditors, guarantors and employees of the company.

The Supreme Court also noted that the intention of the legislature was very clear, as creditors include unsecured creditors. The Court disagreed with the submissions made on behalf of the unsecured creditors that the word ‘creditors’ is not defined and, therefore, the scheme shall not bind the unsecured creditors.

Looking at the object and purpose of the SICA, 1985 and the provisions of Sections 18 and 19 of the SICA, 1985, the word “creditors” shall have to be construed in a broad manner; otherwise, the object and purpose of rehabilitation scheme shall be frustrated

The Supreme Court held that the scaling down of the value of the dues was under the rehabilitation scheme prepared under Section 18 of the SICA, which has a binding effect on all creditors. Therefore, the same cannot be said to be violative of Article 300A of the Constitution of India.

The Supreme Court further held that the High Court erred in stating that the unsecured creditors have an option not to accept the scaling down of the value of its dues and to wait till the rehabilitation scheme of the sick company has worked itself out with an option to recover the debt with interest post such rehabilitation. Thus, the same deserved to be quashed and set aside and was accordingly quashed and set aside.

Read the Ruling

4. HC directs Dept. to follow the procedure prescribed in the circular to allow ITC for bonafide mistakes in returns for FY 19-20

The High Court has held that input tax credit for mentioning the wrong GSTIN of the recipient in the GSTR-1 return will be available subject to verification as per the procedure prescribed in CBIC Circular on the mismatch of ITC in GSTR-2A and GSTR-3B for FY 2019-20 also. The Court further noted that even though the circular applies to FYs 2017-18 and 2018-19, if an error is identical, the said circular applies even to FY 2019-20.

The petitioner committed an error in showing the wrong GSTIN number in the invoices which were carried forward in filing GSTR-1. It filed a petition before the High Court seeking to allow rectification of Form GSTR-1 with respect to invoices issued to the recipient recording wrong GSTIN to enable the actual recipient of supply to avail ITC.

The High Court noted that the error committed in the present case by mentioning the GSTIN of another group company of the recipient is bona fide and occurred due to unavoidable circumstances and due to sufficient cause. The Court noted that the CBIC Circular No. 183/15/2022-GST provides rectification of bona fide and inadvertent mistakes committed at the time of filing returns.

However, the circular applies to FYs 2017-18 and 2018-19, if the error is identical, then the said circular is applicable even to FY 2019-20. Therefore, the Court directed the department to follow the procedure prescribed in the circular and allow ITC subject to verification.

Read the Ruling

5. HC permits the assessee to rectify an error in the GSTR-1 return that will not cause any loss to revenue

The High Court has held that allowing the petitioner to rectify an error in the GSTR-1 return will not cause any loss to the department and therefore directed the department to enable the petitioner to rectify the error in GSTR-1 wherein B2B supply was reported under B2C.

The petitioner filed a writ petition before the High Court seeking a direction for the department to permit the rectification of GST returns filed for the periods 2017-18 and 2018-19. It was contended that it had wrongly filed an outward supply return of GSTR-1 by showing supplies under B2C instead of B2B, due to which the recipient could not avail of the input tax credit. The department contended that the time limit for rectification had already expired.

The High Court observed that there would be no loss caused to the department if the petitioner shall be permitted to rectify the error as there was no escapement of tax. However, the petitioner would be prejudiced if the relief would not be granted. The Court also noted that in a similar case, the Madras High Court had accepted such a plea and directions were given to file a corrected form. Therefore, it was held that the petitioner would be permitted to resubmit the corrected GSTR-1 return, and the authorities were directed to receive forms manually and enable uploading in the GST portal.

Read the Ruling

6. Bank Audit: ICAI has issued Guidance Note on Audit of Banks (2023 Edition)

The performance of a statutory audit is a crucial aspect of the banking industry’s control mechanism, as it bolsters the reliability and assurance of financial information provided to investors at the close of each fiscal year. The primary goal of a bank audit is to identify any non-compliance with applicable laws and regulations and to assess the appropriateness and effectiveness of the bank’s accounting practices. Without proper guidance, it can be challenging for auditors to evaluate the accuracy and completeness of financial statements produced by banks, leading to increased stress for those involved in the audit process.

Thus, to deliver detailed guidance and to require the attention of statutory auditors on the latest developments, a Guidance Note on Audit of Banks (2023 edition) has been recently issued to update the members on the various aspects of the Audit of Banks. The Guidance Note on Audit of Banks (2023 edition) is bifurcated into two sections, namely:

(a) Statutory Central Audit (Section A):

• This section encompasses the crucial aspects involved in the bank audit,

a) Personal & Retail Banking,

b) International Banking & Treasury Operations,

c) Audit of Information Technology and Digital Banking Division,

d) Credit Recovery Department & Risk Management Department,

e) Consolidation of Balance Sheet Operations,

f) Audit of Information Technology and Digital Banking Division, and

g) Consolidation of LFARs for the Banks, etc.

• The banking industry’s use of advanced technology has made it highly dynamic, but it also presents risks that can impact all levels of operations. Therefore, IT audits are essential to address the evolving needs of the changing IT environment.

(b) Bank Branch Audit (Section B):

• This section of the Guidance Note outlines concise audit procedures for Bank Branch Audits aimed at confirming compliance with regulatory laws and regulations.
• This section covers the primary areas of focus for Bank Branch Audits, which can pose significant challenges for Branch Auditors,

(a) Bank Branch Audit Planning & Audit Documentation,

(b) Investments (For Branches outside India),

(c) Reporting for Advances & agricultural advances,

(d) Balances with other Banks,

(e) Borrowings and Deposits,

(f) Books and Records & Profit and Loss Account

(g) Clearing House Operations by Service Branches

(h) Recovery of Non- performing Assets by Asset Recovery Branches etc.

Along with the detailed guidance on the above aspects, the note also provides the Appendices, Illustrative formats of relevant audit reports, certifications, relevant Master Circulars issued by the RBI, relevant Master Directives, relevant pronouncements, etc. This note provides comprehensive guidance to aid members in conducting bank audits, enabling them to adapt effectively to the changing landscape of the banking industry and incorporate the latest industry developments into their audits.

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