Weekly Round-up on Tax and Corporate Laws | 15th to 20th May 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 15^th to 20^th May 2023, namely:

(a) 10 things to know about RBI’s decision to discontinue Rs. 2,000 Banknote;

(b) Impact of using an International Credit Card for international transactions on limit under LRS;

(c) ‘Bitumen’ is not a ‘valuable article’; No Section 69A addition if transporter does not deliver it to Govt.: SC;

(d) CBDT proposes changes in Rule 11UA; introduced 5 more valuation methods for NR investors;

(e) Rummy is predominantly a game of skill, not chance; HC quashes SCN issued to Gameskraft;

(f) Late fees can’t be levied for the period from the date of filing of the revocation application and the date of restoration of GSTIN: HC and

(g) Corporate Social Responsibility Provisions, Audit Checklist and Reporting Responsibilities.

1. 10 things to know about RBI’s decision to discontinue Rs. 2,000 Banknote

In pursuance of the “Clean Note Policy”, the RBI has decided to withdraw the Rs. 2,000 banknotes from circulation. However, it will continue to be legal tender. Such notes can be deposited into accounts or be exchanged into other denominations’ banknotes

Here are 10 key things to know about the withdrawal of the Rs. 2,000 bank notes from circulation:

• Legal Tender: The Rs. 2,000 banknotes continue to be legal tender at least until 30^th September 2023. The RBI will subsequently decide if it will remain a legal tender after that date.
• Time limit: RBI has directed banks to provide deposit and or exchange facilities for Rs. 2,000 notes until 30^th September 2023.
• Banks can no longer issue Rs. 2,000 notes: RBI has advised banks to stop issuing Rs. 2,000 notes with immediate effect
• Where to deposit: Facility for deposit of Rs. 2,000 notes will be available at all banks and Regional offices of RBI until 30^th September 2023.
• Operational limit: The public can exchange notes into other denominations but up to Rs. 20,000 at a time.
• Effective date for exchange facility: The exchange facility will begin on 23^rd May 2023
• Exchange facility can be availed by non-customers (non-account holders): Non-account holders can also avail of the facility for the exchange of Rs. 2,000 banknotes from any branch.
• Exchange facility is free: The exchange facility will be provided free of cost
• Business correspondents can also provide an exchange facility: Exchange of Rs. 2,000 banknotes can be through BCs up to a limit of Rs. 4000 per day for account holders.

Read the Press Release

Read the FAQs

Read the Article

2. Impact of using an International Credit Card for international transactions on limit under LRS

Rule 5, read with Schedule III of the FEM (Current Account Transactions) Rules, prescribes that individuals can avail of the foreign exchange facility for the specified purposes within the limit of USD 2,50,000. Any additional remittance above the said limit shall require prior approval of the RBIs. However, as per Rule 7 of the FEM (Current Account Transactions) Rules, 2000, the use of international credit cards for payments by a person towards meeting expenses while such a person is on a visit outside India shall be out of the purview of the LRS.

The Ministry of Finance issued a notification on 16^th May 2023 to omit Rule 7 to take away this exemption. Later, the Govt. released another press release on 19-05-2023 stating that any payments by an individual using international debit or credit cards up to Rs 7 lakh per financial year will be excluded from the LRS limits, and hence no TCS will be charged. The position on that date is that the relaxation from TCS has been given only for overseas spending using international debit or credit cards if the threshold limit of Rs 7 lakhs per financial year is not breached. Any remittance in foreign currency from India will be counted towards the LRS, and the TCS shall apply on such remittance as per Section 206C(1G).

Read the Notification 

Read the Press Release

3. ‘Bitumen’ is not a ‘valuable article’; No Section 69A addition if transporter does not deliver it to Govt.: SC

The assessee carried on business as a carriage contractor for bitumen. It was involved in a scam of misappropriating the bitumen and not delivering the quantity lifted to the various divisions of the Road Construction Department of the Government of Bihar. Finding out that the actual quantity was not delivered, the AO invoked Section 69A and made additions due to the short supply of bitumen.

The matter reached the Supreme Court of India.

The Apex court held that the instant case was short delivery of bitumen by the transporter (assessee) to Govt. Department. The assessee at any point did not claim ownership over the bitumen not delivered to the authorities. It was also not a case where the assessee exercising rights available in law entitling it to possess goods as of right or pass on the title to another under law as permitted. At best, the assessee’s possession was a shade better than that of a thief as the possession had its origin under a contract of bailment.

It would be straining the law beyond justification if the Court recognised a thief as the property owner within the meaning of Section 69A. Recognising a thief as the property owner would also mean that the owner would cease to be recognised as the owner, which would indeed be the most startling result.

When the facts are clear that the assessee is not the owner and somebody else is the owner, then treating the assessee as the owner may produce the most illegal results apart from being unjust.

The intention of the law-giver in introducing Section 69A was to get at income not reflected in the books of account but found to belong to the assessee. Not only must it belong to the assessee, but it must be other valuable articles.

Applying the Principle of Ejusdem Generis, bitumen would stand out as a strange bedfellow in the company of its immediate predecessor words, viz., money, bullion, and jewellery. Bitumen is a clear misfit and could not have been the legislative intention to treat it as another valuable article.

Bitumen is a residual product in petroleum refineries and is usually used in road construction. It may be found in small quantities or large quantities. If the ‘article’ is to be found ‘valuable’, then in small quantity, it must not just have some value, but it must be ‘worth a good price’ or ‘worth a great deal of money’. If this is so, Section 69A would then stand attracted.

But if treating it as a ‘valuable article’ requires ownership in large quantity and multiplying the value in large quantity, a ‘good price’ or ‘great deal of money’ is arrived at, then it would not be valuable.

Thus, the AO acted illegally in holding that assessee was the ‘owner’ and made the addition under Section 69A on the said basis.

Read the Ruling

4. CBDT proposes changes in Rule 11UA; introduced 5 more valuation methods for NR investors

The Finance Act, 2023, amended Section 56(2)(viib) to bring into account the consideration received from non-residents for the issue of shares. The section provides that if the consideration for the issue of shares exceeds the Fair Market Value (FMV) of the shares, it shall be chargeable to income tax under the head of ‘income from other sources’.

Pursuant to the amendment, the CBDT proposed changes to Rule 11UA for the purpose of the valuation of shares.

Currently, Rule 11UA outlines two approaches, namely Discounted Cash Flow (DCF) and Net Asset Value (NAV) methods, for valuing shares for resident investors.

It is proposed to include 5 more valuation methods available for non-resident investors in addition to DCF and NAV methods. Further, in case of receipt of consideration by a company with respect to the issue of shares from a non-resident entity notified by the Central Govt., the price of the equity shares corresponding to such consideration may be taken as the FMV of the equity shares for resident and non-resident investors subject to the following:

1. To the extent, the consideration from such FMV does not exceed the aggregate consideration that is received from the notified entity; and
2. The consideration has been received within a period of 90 days of the date of issue of shares which are the subject matter of valuation.

It is also proposed to notify certain classes of non-resident investors to whom section 56(2)(viib) shall not be applicable. This includes:

1. Government and Government-related investors, including entities controlled by the Government or where direct or indirect ownership of the Government is 75% or more.
2. Banks or Entities involved in the insurance business where such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident.
3. Any of the following entities, which is a resident of certain countries or specified territories having robust regulatory framework:

• • Entities registered with the SEBI as Category-I Foreign Portfolio Investors.
  • Endowment Funds associated with a university, hospitals or charities,
  • Pension Funds created or established under the law of the foreign country or specified territory,

Broad-Based Pooled Investment Vehicle or Fund where the number of investors in such vehicle or fund is more than 50 and such fund is not a hedge fund or a fund which employs diverse or complex trading strategies.

Read the Press Release

5. Rummy is predominantly a game of skill, not chance; HC quashes SCN issued to Gameskraft

The Karnataka High Court has held that games like Rummy, whether played online or physically, with or without stakes, are considered games of skill. The Court has also quashed the show cause notice of Rs. 21,000 crores issued by the GST department on Gameskraft’s online gaming activities.

The petitioner was running a technology platform, namely Rummy, that allowed users to play skill-based online games against each other. The department issued SCN to the petitioner, alleging that the petitioner was involved in ‘betting/gambling’ and supply of ‘actionable claims’ and guilty of evasion of GST by misclassifying supply as services under SAC 998439.

It filed a writ petition to challenge the impugned SCN and submitted that “games of skill” played with monetary stakes do not partake in the character of betting. The main question for consideration in the petition was whether offline/online games such as Rummy would be tantamount to ‘gambling or betting’ as contemplated in Entry 6 of Schedule III of the GST Act.

The High Court noted that there is a distinct difference between games of skill and games of chance. The Court noted that a game of skill, whether played with stakes or without stakes, is not gambling, and games such as Rummy, etc., whether played online or physically, with or without stakes, would be games of skill and test of predominance would apply. The taxation of games of skill is outside the scope of the term “supply” in view of Section 7(2) of the CGST Act, 2017 read with Schedule III of the Act.

Therefore, it was held that Online/Electronic/Digital Rummy games and other Online/Electronic played on the petitioner’s platform would not be taxable as ‘Betting’ and ‘Gambling’, and the Court also set aside the impugned SCN being illegal, arbitrary and without jurisdiction or authority of law.

Read the Ruling

6. Late fees can’t be levied for the period from the date of filing of the revocation application and the date of restoration of GSTIN: HC

The Delhi High Court has held that the period from the date of filing the application for revocation of cancellation of registration to the date of its restoration is liable to be excluded for the purpose of calculating any penalty for late filing of returns.

The petitioner had not filed the GST returns for a period of more than six months. The department issued a show cause notice, and the petitioner did not respond to the notice but it filed GST returns. However, the department issued an order dated 29-07-2020 to cancel the GST registration of the petitioner.

It filed an application for revocation of cancellation of registration on 16-10-2020, but the same was rejected. Thereafter, it filed an appeal against the order, and the appellate authority directed that the petitioner’s GSTIN registration would be restored. The registration was restored on 22-04-2022, and it filed a petition against the levy of penalty for the late filing of the returns.

The High Court observed that the revocation of the cancellation application was ultimately allowed by Appellate Authority, but registration was not restored immediately. The Court also noted that the petitioner could not be held responsible from the date of filing an application for revocation of its cancellation for not filing its returns during the period when registration stood cancelled.

Thus, the Court held that the period 16-10-2020 to 22-4-2022, when the petitioner’s registration was restored, would be excluded for the purpose of calculating any penalty for late filing of returns.

Read the Ruling

7. Corporate Social Responsibility Provisions, Audit Checklist and Reporting Responsibilities

Corporate Social Responsibility means and includes projects or programs relating to activities undertaken by a company as specified in Schedule VII to the Companies Act, 2013 (e.g. tree plantation undertaken by the coal mining company).

CSR Audit refers to a systematic assessment and evaluation of a company’s CSR practices and performance. It involves a comprehensive review of the company’s social, environmental, and ethical initiatives to determine their alignment with established CSR standards, guidelines, and regulatory requirements. To ensure an efficient and effective CSR audit, auditors can utilise the following checklist as a guide:

• The auditor needs to check whether the activities performed under CSR by the company are within the purview of Schedule VII of the Companies Act, 2013
• Has the auditor checked whether any contributions or donations made as CSR activity comply with the specific categories outlined in Schedule VII of the Act?
• Whether separate disclosure of expenditure on CSR activities, as required by Schedule III of the Act, has been disclosed by the company?
• Has the auditor ensured that the administrative overheads shall not exceed 5% of the total CSR expenditure of the company for the financial year?

Read the Article