Weekly Round-up on Tax & Corporate Laws | 13th to 18th September

This weekly newsletter analytically summarizes the key stories reported at taxmann.com during the previous week from 13th to 18th September 2021, namely:

(a) Tribunal held that CSR expenses incurred by way of making donations are eligible for deduction under Section 80G;

(b) Apex Court ruled that there is no statutory obligation to maintain separate accounts of expenditure incurred on tax-free income;

(c) Supreme Court held that Rule 89(5), which denies refund of unutilized ITC of input services, is not ultra vires;

(d) 31st December 2021 is the notified last date of submitting applications under MEIS, SEIS, ROSCTL & ROSL schemes;

(e) The Apex Court ruled that moratorium ordered under Section 14 of IBC does not apply to proceedings initiated against promoters of the corporate debtor;

(f) Borrower to approach DRT/DRAT and not Civil Court if he has any grievance against measures taken by a lender; and

(g) Whether interest received on late payment of bill should be treated as cash flow from investing activity?

1. CSR expenditure by making donations is eligible for deduction under Section 80G: ITAT

In an interesting ruling, the Kolkata Tribunal has ruled that the assessee can claim the benefit of Section 80G deduction of the amount spent towards corporate social responsibility (CSR) by making a donation to an eligible trust.

Facts

The assessee was a mining service provider engaged in the business of management and operation of mines. The assessee claimed deduction under Section 80G of the donation given to Shree Charity Trust and Pt. Jasraj Music Academy Trust as a contribution towards Corporate Social Responsibility (CSR) activities. The Assessing Officer (AO) allowed the same.

However, the Principal Commissioner invoked revision jurisdiction under Section 263 on the ground that the action of the AO to allow deduction of CSR expenses under section 80G was erroneous as CSR expenditure could not be allowed as per express prohibition given under Explanation 2 to Section 37(1). The aggrieved assessee filed the instant appeal before the Tribunal.

Ruling

The Tribunal held that from a plain reading of the Explanation 2 to Section 37(1), expenditure incurred towards CSR activities shall not be allowed as ‘business expenditure’ and shall be deemed to have not been incurred for business. The embargo created by this Explanation 2 inserted in section 37 by the Finance (No. 2) Act, 2014 was to deny the deduction for CSR expenses incurred by companies, as and by way of regular business expenditure while computing ‘income under the head business’.

It can be seen that this Explanation 2 to Section 37(1), which denies a deduction for CSR expenses by way of business expenditure, applies only to the extent of computing ‘business income’ under Chapter IV-D. The said Explanation cannot be extended or imported to CSR contributions that are otherwise eligible for deduction under any other provision or Chapter, say donations made to a charitable trust registered under section 80G.

Further, Section 80G(2) put certain restrictions to only CSR expenditure regarding two donations included by an assessee as CSR expenditure, i.e., Swachh Bharat Kosh and Clean Ganga Fund. It has impliedly not made any prohibition/restriction regarding the claim of CSR expenses in other cases if it is otherwise eligible.

In this context, it was found that the assessee had made a donation by RTGS through bank, which was received by Shree Charity Trust, which was approved under Section 80G(5)(vi). Further, the assessee had made payment to Pt. Jashraj Music Academy Trust which was also approved under section 80G(5)(vi). Therefore, the assessee’s claim for deduction of CSR expenses/contribution under Section 80G was to be allowed.

Read the Ruling.

Also, Read Section 80G of the Income Tax Act: Tax Deductions for Donations

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2. There is no statutory obligation to maintain separate accounts for exp. incurred on tax-free income

The Supreme Court of India has ruled that Section 14A, does not enable the Department, to make disallowance of expenditure incurred for earning tax free income in cases where assessees, do not maintain separate accounts for the investments and other expenditures incurred for earning the tax-free income.

Facts

The assessee was a scheduled bank. It was also engaged in the business of investments in bonds, securities, and shares, which earn the assessee interest and tax-free dividend income.

In the absence of separate accounts for investment that earned tax-free income, the Assessing Officer (AO) made proportionate disallowance of interest attributable to the funds invested to earn tax-free income.

The CIT(A) had concurred with the view taken by the AO. However, ITAT noticed that the assessee had surplus funds and reserves from which investments could be made. Accordingly, it accepted the assessee’s case that investments were not made out of interest or cost-bearing funds alone. Later, the decision of ITAT was reversed by the High Court. The aggrieved assessee challenged the High Court’s ruling before the Supreme Court.

The Ruling

The Supreme Court held that in a situation where the assessee has mixed fund (made up partly of interest-free funds and partly of interest-bearing funds), and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest-free fund.

Furthermore, if investments in securities are made out of common funds, and the assessee has non-interest-bearing funds that are larger than the investments made in tax- free securities, then disallowance under Section 14A cannot be made.

The AO had failed to substantiate his argument that the assessee was required to maintain separate accounts. There is a statutory provision that obligates the assessee to maintain separate accounts, which might justify proportionate disallowance.

Read the Ruling

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3. Rule 89(5), which denies refund of unutilized ITC of input services, is not ultra vires: Supreme Court

The Honorable Supreme Court has recently held that Rule 89(5), which denies refund of unutilized input tax paid on input services accumulated on account of inverted duty structure, is not ultra vires and is in conformity with Section 54(3). The decision of the Gujarat High Court, which struck down Rule 89(5) was set aside. The Apex Court gave this ruling in the case of Union of India v. VKC Footsteps India Pvt Ltd.

Facts

The petitioners filed writ petitions before the High Court of Gujarat and the High Court of Madras to challenge the validity of Rule 89(5), which denies refund of unutilized ITC on input services on the ground that it is ultra vires the provisions of Section 54. The Gujarat High Court directed to allow the claim for a refund made by the petitioners before it, considering unutilized ITC on input services as part of “Net ITC” to calculate refund in terms of Rule 89(5), but the Madras High Court came to a contrary conclusion and upheld the validity of Rule 89(5). Therefore, the appeal was filed before the Supreme Court due to a divergence of views.

Supreme Court

The Honorable Supreme Court observed that the purpose of the formula in Rule 89(5) is to give effect to Section 54(3)(ii), which makes a distinction between input goods and input services for a grant of refund. Rule 89(5), which denies refund of ‘unutilised input tax’ paid on ‘input services’ as part of ‘input tax credit’ accumulated on account of inverted duty structure, conforms with Section 54(3), the Apex Court said. The Apex Court also observed that the formula under Rule 89(5) to create a legal bifurcation is a familiar terrain in fiscal legislation, including delegated legislation, and therefore, the decision of Gujarat High Court was liable to set aside which strike down the Rule 89(5) and upheld the decision of Madras High Court.

However, it was also noted that the practical effect of the formula might result in certain inequities but prescribing an order of utilization would take this court down the path of recrafting the formula and walk into the shoes of the executive or the legislature, which is impermissible. Therefore, the court would strongly urge the GST Council to reconsider the formula and take a policy decision regarding the same.

Read the Ruling

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4. Last date of submitting applications under MEIS, SEIS, ROSCTL & ROSL schemes is 31st December 2021

The Government has issued a notification to provide that the last date of submitting applications under various schemes such as MEIS, SEIS, ROSCTL, ROSL, etc. is revised to 31st December, 2021. This notification is issued in supersession of the existing provisions in the Hand Book of Procedures, 2015-20 with regard to the last date for submitting online applications for scrip-based claims.

It has also been provided that after 31st December, 2021, no further applications would be allowed to be submitted, and they would become time-barred. Further, it has been provided that the validity of any scrip issued under FTP on or after 16th September, 2021 shall be 12 months from the date of issue. In this regard, Notification No. 26/2015-20 dated September 16th, 2021 has been issued.

Read the Notification

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5. Moratorium ordered under Section 14 of IBC does not apply to proceedings initiated against promoters of Corporate Debtor: SC

In this significant ruling, the Apex Court held that petitioners-home buyers would not be prevented by the moratorium under Section 14 from initiating proceedings against the promoters of the Corporate Debtor in relation to honoring the settlements reached before the court.

Facts

Petitioners/home buyers and developer/corporate debtor entered into a homebuyer agreement which envisaged that delivery of possession in almost all cases was to be in 2014.

The Corporate debtor abandoned the project, as a result, the petitioners instituted proceedings before NCDRC seeking a refund of their monies, and NCDRC allowed their claim.

In the meantime, proceedings were initiated against the respondent/developer under section 9 by an operational creditor, and the same was admitted. CoC approved the resolution plan submitted by the consortium of home buyers, and the Adjudicating Authority was yet to decide on the application for approval of the resolution plan.

Petitioners submitted that during the course of instant proceedings, settlements were arrived at, and hence promoters of corporate debtor/ developer should be held liable personally to honor the settlements. Petitioners urged that instant court should direct the personal properties of promoters to be attached in view of provisions contained in the resolution plan.

Supreme Court

The Apex Court held that if the petitioners have any objections to the Resolution Plan, they have to submit them before the Adjudicating Authority. The NCLT was directed to ensure that the application for approval is disposed of expeditiously and preferably within six weeks from the date of receipt of a certified copy of the instant order.

The Court further clarified that the petitioners would not be prevented by the moratorium under Section 14 from initiating proceedings against the promoters of the Corporate Debtor in relation to honoring the settlements reached before an instant court. However, instant Court cannot issue a direction as sought by petitioners relying on a Resolution Plan which is still pending approval before an Adjudicating Authority.

Read the Ruling

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6. Borrower to approach DRT/DRAT and not Civil Court if he has any grievance against measures taken by a lender: Calcutta HC

In this case, the High Court of Calcutta held that borrower to approach DRT/DRAT and not Civil Court if he has any grievance against action taken by the lender-bank.

Facts

The petitioner took various loan facilities from the respondent bank. As security for such loans, the property in question was kept inequitable mortgage by the petitioner with the bank. The accounts of the petitioner were declared NPA (Non-Performing Assets) due to the petitioner having defaulted in repayment of the said loans/credit facilities. Thus, the bank took physical possession of the subject property.

The petitioner alleged that the bank had taken possession illegally without the appropriate order of the District Magistrate. It also alleged that the bank also sized movable assets from said property. Value of said movables had been alleged to be Rs. 16,72,762. However, the registered value of the bank had evaluated movable property at a partly sum of Rs. 25,000, which was gross undervaluation.

The present application under Article 227 of the Constitution of India had been filed, challenging the alleged illegal possession taken by the respondent authorities in respect of the petitioner’s property.

The High Court’s ruling

The High Court noted that the bank followed due process of law as contemplated under section 13(2) and 13(4) and the concerned Additional District Magistrate passed a specific order under Section 14 and, thus, possession of mortgaged property taken by the bank was not tainted by any illegality.

Further, various notices were given to the petitioner to take back movables. Still, the petitioner turned deaf ears to such requests, and hence, there was no other option before Bank but to have properties evaluated in accordance with law by its approved valuer.

Debt Recovery Tribunal gave sufficient opportunities to the petitioner to rebut valuation arrived at by approved valuer of Bank and to ventilate other grievances by cogent evidence.

However, the petitioner failed to do so. Further, if the petitioner had any grievance against measures taken by the bank, the petitioner had to approach DRT and not writ court. The HC ruled that the instant petition before the writ Court challenging possession of mortgaged property taken by the bank was not maintainable in view of the aforesaid.

Read the Ruling

7. Whether interest received on late payment of bill should be treated as cash flow from investing activity?

Query

X Ltd. is engaged in the business of generation and distribution of power. X Ltd. has adopted a policy to bill its commercial customers on a monthly basis and on a bi-monthly basis to its domestic customers. The customers are required to pay the bill amount within a period of 30 days. However, if any customer fails to pay the bill amount within the prescribed time, he has to pay an interest fee for late payment of the bill.

While accounting the above transaction, X Ltd. has disclosed these late payment interest fees under the head investing activities in the Cash Flow Statement. Whether the accounting treatment adopted by X Ltd. in respect of late payment interest fees in the Statement of Cash Flow is correct?

Answer

The Expert Advisory Committee (EAC) of ICAI has held that the accounting treatment adopted by X Ltd. in respect of late payment interest fees is correct.

As per Ind AS 7 (Statement of Cash Flows), interest income and dividend income are generally classified as financing activity, except in the case of financial institutions. In the case of financial institutions, it is recognized as a type of operating activity. Moreover, this late payment fee is charged for the time value of money. It depends more on the facts and circumstances whether the late payment fees are a penalty or compensation for the time value of money.

However, if late payment interest fees are fixed, irrespective of the delay in the number of days, it should be classified as cash flow under operating activities. On the basis of the above-mentioned guidance, it can be said that X Ltd. may present this late payment fee as cash flows from investing activities.

Read the Story

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