Weekly Round-up on Tax and Corporate Laws | 16th to 21st January 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 16th to 21st January 2023, namely:

(a) Supreme Court eliminates discrimination in Section 10(26AAA); Sikkimese women marrying non-Sikkimese and old Indian settlers are eligible for exemption;

(b) GSTN issues advisory on the facility of ‘Initiating Drop Proceedings’ of Suspended GSTINs;

(c) High Court condones delay in the opening of FCRA account and belated filing of FC-4 as no foreign funds were received till the opening of account;

(d) Accused was rightly acquitted in the cheque bounce case as the complainant’s ITR proved his financial incapacity to give a loan: SC;

(e) Supreme Court held that the High Court erred in entertaining a writ petition against a show-cause notice alleging evasion of tax and quashing the same; and

(f) NFRA introduces Annual Transparency Reports (ATR) by the Auditors/Audit Firms

1. Supreme Court eliminates discrimination in Section 10(26AAA); Sikkimese women marrying non-Sikkimese and old Indian settlers are eligible for exemption

The Supreme Court ends discrimination against a Sikkimese woman marrying a non-Sikkimese in the matter of Income-tax exemption under Section 10(26AAA). It also directed the Govt. to amend the Explanation to Section 10(26AAA) to suitably include a clause to extend the tax exemption to all Indian citizens domiciled in Sikkim on or before 26th April 1975.

The Association of Old Settlers of Sikkim and others have filed a writ petition under Article 32 of the Constitution of India, asking for a court order striking down Section 10(26AAA) of the Income-tax Act.

The petitioners have prayed to strike down Section 10(26AAA) to the extent it excludes Indians who have settled in Sikkim before the merger of Sikkim with India on 26-04-1975, but their names are not recorded as “Sikkim Subjects”.

Further, a request was also made to remove the Proviso to Section 10(26AAA), which excludes “Sikkimese women” who marry non-Sikkimese after 1st April 2008, from the exempt category.

The Supreme Court of India held the purpose of Section 10(26AAA) is to grant exemption to the residents of Sikkim. Therefore, all such Indian citizens who settled in Sikkim before the merger of Sikkim with India on 26-04-1975 are to be treated at par as they form the same group/class.

Just because the Indian citizens settled in Sikkim did not relinquish their Indian citizenship, or their ancestors were not registered under the Sikkim Subjects Regulations, 1961, at the time of its enactment, it cannot be concluded that they are no longer considered “Sikkimese”.

There is no nexus sought to be achieved in excluding the Indians, who had settled in Sikkim before the merger of Sikkim with India on 26-04-1975, but their names are not recorded as “Sikkim Subjects”. The Union of India has failed to satisfy any reasonable classification and/or nexus to exclude such a class of Indians who have settled in Sikkim before 26-04-1975.

Therefore, excluding long-time Indian settlers who settled in Sikkim before its merger with India on 26th April 1975 from the definition of “Sikkimese” in Section 10(26AAA) is unjust, unfair, and in violation of Article 14 of the Indian Constitution.

The Union of India shall amend the Explanation to Section 10(26AAA) to suitably include a clause to extend the exemption from payment of income tax to all Indian citizens domiciled in Sikkim on or before 26th April 1975.

Till such amendment is made by the Parliament, any individual whose name does not appear in the Register of Sikkim Subjects but it is established that such individual was domiciled in Sikkim on or before 26th April 1975 shall be entitled to the benefit of exemption. This direction is being issued in the exercise of powers under Article 142 of the Constitution.

About the objection to the Proviso in Section 10(26AAA) that excludes “a Sikkimese woman who marries a non-Sikkimese after 1st April 2008” from the exemption category, no valid reason has been provided by the Union of India for this exclusion.

It should be noted that there is no disqualification for a Sikkim man who marries a non-Sikkimese after 01-04-2008. Thus, there is clear discrimination based on gender, which is wholly violative of Articles 14, 15, and 21 of the Constitution of India.

A woman is not a chattel and has an identity of her own, and the mere factum of being married ought not to take away that identity. Therefore, the Proviso to Section 10 (26AAA) is also struck down as being ultra vires Articles 14, 15, and 21 of the Constitution of India.

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2. GSTN issues advisory on the facility of ‘Initiating Drop Proceedings’ of Suspended GSTINs

The GSTN has issued an advisory on the newly introduced functionality implemented on the GST Portal of “Automated Drop Proceedings” of GSTINs suspended due to the non-filing of returns. This functionality is available for the taxpayers who have filed their pending returns (6 monthly or 2 Quarterly returns).

If such taxpayers have filed all their pending returns, the system will automatically drop the proceedings and revoke the suspension. If the status of the GSTIN does not automatically turn ‘ACTIVE’, then taxpayers are advised to revoke the suspension once the due returns have been filed by clicking on ‘Initiate Drop Proceeding’ for which navigation is as follows:

“Log on to GST Portal > Services > User Services > View Notices and Orders > Initiate Drop Proceeding”

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3. High Court condones delay in the opening of FCRA account and belated filing of FC-4 as no foreign funds were received till the opening of account

The High Court has ruled in favour of an NGO, WNS Cares Foundation, with regard to a delay in opening an FCRA account and belated filing of FC-4 forms. The High Court held that since the NGO received no foreign funds until the opening of the FCRA account, the delay should be excused.

In the instant case, a petition was filed by the petitioners seeking directions to the Respondent (Union of India, Ministry of Home Affairs) to amend Form FC-4 to enable the petitioners to file annual returns for FYs 2019–20 and 2020–21, without providing details of the FCRA Account and also to extend the last date for filing annual returns.

Section 17(1) of the Foreign Contribution (Regulation) Act, 2010 was amended to provide as follows:

“17. (1) Every person who has been granted certificate or prior permission under section 12 shall receive foreign contribution only in an account designated as “FCRA Account” by the bank, which shall be opened by him for the purpose of remittances of foreign contribution in such branch of the State Bank of India at New Delhi, as the Central Government may, by notification, specify in this behalf.”

However, the petitioner could not submit their FCRA form on the Respondent’s online portal as they were required to first identify their designated FCRA account with SBI, Main Branch, New Delhi. Additionally, the online portal was designed to make it impossible for the petitioner to submit the form for a period before 29th September 2020, preventing them from filing returns for the years 2019-20 and 2020-21.

The High Court observed that the language used in Form FC-4 is that the receipt of foreign contribution “as on 31st March of the year ending” has to be provided, and the bank account has to be in the SBI Sansad Marg branch. Since the petitioner’s account was opened in August 2021 and the Foreign Contribution Regulation (Amendment) Act, 2020 was not in effect as on 31st March 2020, there appears to be some justification in the petitioners’ case.

The High Court held that the petitioner, having opened its FCRA account in August 2021, is permitted to fill up the said details of its FCRA account in serial no. 7 of Form FC – 4 and submit the same.

The High Court further held that the petitioners would not face any penalties for belatedly opening an FCRA account as long as they have not received any foreign contributions in the FYs 2019-2020 and 2020-2021. Thus, no penalty shall be imposed upon the petitioners if they file their returns for these financial years within a period of one month.

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4. Accused was rightly acquitted in the cheque bounce case as the complainant’s ITR proved his financial incapacity to give a loan: SC

The Apex Court upheld acquittal in a cheque bounce case as the Trial Court’s order had considered the complainant’s ITR, non-production of pro-notes, witnesses and all the other circumstances.

In the instant case, the Trial Court found that the Income Tax Returns of the complainant didn’t disclose that he lent the amount to the accused and that the declared income was insufficient to give a loan of Rs. 3 lakhs. Therefore, the case of the complainant that he had given a loan to the accused from his agricultural income was found to be unbelievable by the Trial Court.

The Trial Court also found that the complainant had failed to produce the promissory note alleged to have been executed by the accused. Thus, after analysing all pieces of evidence and after taking into consideration the defence witnesses and the attending circumstances, the Trial Court held the accused acquitted.

Thereafter, an appeal was filed with the High Court. The Court reversed the order of acquittal and convicted the accused. Then, an appeal was made to the Supreme Court against the order passed by the High Court.

The Supreme Court observed that the accused had examined the Income Tax Officer who produced certified copies of the Income-tax Returns of the complainant for the relevant financial years. The certified copies established that the complainant had not declared that he had lent Rs. 3 lakhs to the accused. Thus, it was clear that the complainant didn’t have the financial capacity to lend money, as alleged.

The Supreme Court held that the presumption under Section 139 of the Act is a rebuttable presumption, and the onus is on the accused to raise the probable defence. Thus, a borrower cannot take advantage of the same solely because such an amount does not reflect in the Income Tax Returns.

The Supreme Court further held that by applying this principle, the Trial Court found that the accused had rebutted the presumption on the basis of the evidence of the defence witnesses and attending circumstances. Thus, the scope of interference in an appeal against acquittal was limited.

In view of the above, the High Court was not justified in reversing the order of acquittal of the appellant.

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5. Supreme Court held that the High Court erred in entertaining a writ petition against a show-cause notice alleging evasion of tax and quashing the same

The Supreme Court has held that it would be premature for High Court to opine whether there would be any evasion of tax as same to be considered in an appropriate proceeding for which the appropriate authority has issued a notice. The High Court had materially erred in entertaining a writ petition against a show cause notice and quashing and setting side same. Therefore, the impugned judgement passed by High Court is to be set aside.

A show cause notice was issued to the assessee as to why the goods and the conveyance used to transport such goods shall not be confiscated under the provisions of Section 130 of the Punjab GST Act, 2017 and IGST Act, 2017 and CGST Act, 2017. The assessee approached the High Court and challenged the notice, and the Court held that the notice was wrongly issued under Section 130 by alleging the wrongful claim of the input tax credit. The department filed an appeal against the order of the High Court.

The Supreme Court observed that there was a specific allegation with respect to evasion of duty, which was yet to be considered by the appropriate authority that issued notice. However, in the exercise of powers under Article 226 of the Constitution of India, the High Court entertained a writ petition against show cause notice and set aside said show cause notice under Section 130.

Since it was premature for High Court to opine whether there was any tax evasion, the High Court had materially erred in entertaining a writ petition against show cause notice and quashing the same. Thus, it was held that the impugned judgement passed by High Court was liable to be set aside, and the matter was remanded to the appropriate authority.

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6. NFRA introduces Annual Transparency Reports (ATR) by the Auditors/Audit Firms

Indian companies have become significant constituents of the global economy, and there is a great expectation for sound and high-quality of financial reporting and audit services of Public Interest Entities (PIEs). Auditors play a critical role in the financial reporting of PIEs. Further, Regulators and Oversight Authorities in some overseas jurisdictions require audit firms carrying out an audit of PIEs to prepare and publish information in the form of Transparency Reports on an annual basis. In this regard, NFRA considers it appropriate to prescribe the publication of an Annual Transparency Report (ATR) containing certain following critical information:

A) Applicability: Statutory Auditors of Top 1,000 Listed Companies (by market capitalisation) from F.Y. ending on 31st March 2023.

B) Publication: ATR shall be published on the website of the Statutory Auditor within 3 months from the end of the relevant F.Y.

C) Contents:

• Description of the Statutory Auditor’s Legal Structure, ownership, Management Structure, and Governance Structure
• Details about the Network, if the Statutory Auditor is a member of any Network in India or Overseas
• Details about the Alliances, Collaborations, Licensing Arrangements, Knowledge/Resource Sharing Arrangements
• Details and Descriptions of Policies in relation to Internal Quality System, Compliance with Independence, Audit methodology, remuneration of partners, etc.D) Details of entities that are within the purview of NFRAE) Information about the total revenue of the Statutory Auditor and its network firms (with the relevant breakup)NFRA requests views/comments of stakeholders on the contents of the Annual Transparency Report via email at: nfra-comments@nfra.gov.in till 16th February 2023.

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