Weekly Round-up on Tax and Corporate Laws | 17th to 22nd January 2022

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 17th to 22nd January 2022, namely:

(a) CBDT issues clarifications on allowing Section 10(10D) exemption from ULIPs

(b) CBDT notifies Rule to compute capital gains from ULIPs which are not exempt under Section 10(10D)

(c) Inherited property of an issueless and heirless female Hindu dying intestate goes back to the source: SC

(d) High Court directs Competent Authority to decide on applications filed for refund of unutilised ITC within six weeks

(e) Supreme Court upholds NCLAT order to wind up DEVAS on the grounds of fraud

(f) The auditor’s obligation while conducting an audit of loan given to the related party at a zero rate

1. CBDT issues clarifications on determining the exemption under Section 10(10D) in respect of ULIPs issued on or after 01-02-2021

Section 10(10D) provides an exemption for any sum received under the life insurance policy, including Unit Linked Life Insurance Policy (ULIP). However, no exemption is allowed if the premium payable for any of the years during the policy term exceeds 10% of the actual capital sum assured (‘excess premium policy’).

With effect from Assessment Year 2021-22, a fourth proviso has been inserted to Section 10(10D). It provides that no exemption for any sum received under ULIP issued on or after 01-02-2021 shall be allowed if the premium payable for any of the previous years during the policy term exceeds Rs. 2,50,000 (i.e., ‘high premium ULIPs’).

Thus, exemption under section 10(10D) in respect of ULIPs issued on or after 01-02-2021 shall be allowed only when the premium payable for any of the years during the policy term does not exceed Rs. 2,50,000, and 10% of the sum assured (‘low premium ULIPs’).

Further, where the premium is payable by a person for more than one ULIPs issued on or after 01-02-2021, the ULIP should not only be a low premium ULIP, but the aggregate premium of all such low premium ULIPs should not exceed Rs. 2,50,000 during the term of any of those policies. Where the aggregate premium of such ULIPs exceed Rs. 2,50,000 in any year during the term of all such policies, the exemption shall be allowed for those low premium ULIPs, the aggregate of which does not exceed Rs. 2,50,000. This condition is specified in the fifth proviso.

To clarify these amendments, the CBDT has issued this circular to provide guidelines on different situations that may arise while looking for exemption for ULIPs issued on or after 01-02-2021.

Situation 1: Where no consideration is received, or assessee claims no exemption on the sum received

An assessee has not received any sum from eligible ULIPs or if the sum is received, but the assessee did not claim exemption on such sum. In such cases, the exemption under Section 10(10D) for the current previous year shall be determined in the following manner:

(a) Sum is received from one ULIP only

The assessee shall be eligible to claim exemption only if the annual premium payable does not exceed Rs. 2.5 lakh in any year during the term of such one ULIP. If the premium payable exceeds Rs. 2.5 lakh in any year, the fourth proviso is attracted, and the sum received from ULIP shall not be eligible for exemption under Section 10(10D).

(b) Sum is received from more than one ULIPs

The assessee shall be eligible to claim the exemption for all ULIPs if the aggregate of premium payable on all such ULIPs does not exceed Rs. 2.5 lakh in any year during their policy term. If the aggregate of premium payable on all ULIPs exceeds Rs. 2.5 lakh in any of the years, the consideration received from only those ULIPs shall be exempt whose aggregate premium payable does not exceed Rs. 2,50,000.

Situation 2: Where an exemption is claimed for consideration received from ULIP in any previous year

The assessee has received any sum from eligible ULIPs during the preceding year and claimed the exemption for the same (‘old ULIPs’). In such a case, the exemption under Section 10(10D) during the current previous year shall be determined in the following manner:

(a) Sum is received from one ULIP only

The assessee can claim exemption only if the premium payable on such ULIP and old ULIPs does not exceed Rs. 2.5 lakh in any year during the term of such ULIP. If the premium payable exceeds Rs. 2.5 lakh in any year, the sum received from such ULIP shall not be eligible for exemption under Section 10(10D).

(b) Sum is received from more than one ULIPs

The assessee can claim exemption only if the premium payable on more than one ULIPs and old ULIPs on which exemption was claimed in the prior year does not exceed Rs. 2.5 lakh in any year during their term. If the premium payable exceeds Rs. 2.5 lakh in any year, the sum received from ULIP shall not be eligible for exemption under section 10(10D).

Read the Circular

Read the article on Taxation of ULIPs

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2. CBDT notifies Rule to compute capital gains from ULIPs not exempt under section 10(10D)

The Finance Act, 2021 has inserted sub-section (1B) to Section 45 to provide that when a person receives any amount under Unit Linked Insurance Policy (ULIP), to which exemption under Section 10(10D) does not apply on account of the fourth and fifth proviso, any profits arising from such receipt shall be chargeable to tax under the head capital gains (‘high premium ULIPs’).

In such a case, the income taxable under head capital gains shall be calculated in such manner as may be prescribed. Accordingly, the CBDT has notified Rule 8AD prescribing manner to compute capital gains for Section 45(1B). The capital gain arising from sum receipt under high premium ULIPs is calculated in the following manner:

(a) Sum received from high premium ULIPs for the first time

If the assessee has received the sum from high premium ULIPs for the first time, then the capital gains shall be calculated in the following manner:

Amount received for the first time from ULIP

Add: Amount allocated by way of bonus on such policy

Less: Aggregate of premium paid during the term of the policy till the date of receipt of the amount

(b) Sum received from high premium ULIPs for the second time and subsequently

If the sum received from high premium ULIPs isn’t the sum received for the first time, then the capital gains shall be calculated in the following manner:

Amount received from such ULIP

Add: Amount allocated by way of bonus on such policy

Less: Amount received from the same policy and considered while computing capital gains in earlier previous years

Less: Aggregate of premium paid during the term of the policy till the date of receipt of the amount

Less: Premium already considered for calculation of taxable amount in earlier previous year

Read the Rule

Read the article on Taxation of ULIPs

Check out Taxmann’s Taxation of Capital Gains which provides complete in-depth & thorough analysis on each aspect of capital gains, with the help of ‘relevant’ judicial pronouncements, Circulars & Notifications, illustrations, checklists of actions to claim deductions & FAQs. This book covers the following:
1. Taxation of ULIPs with FAQs
2. Taxation of reconstitution of firms/LLPs/AOPs/BOIs with FAQs
3. Finance Act 2021 measures [Section 43CA amendments] to boost real estate with FAQs

3. Inherited property of an issueless and heirless female Hindu dying intestate goes back to the source: SC

In this landmark ruling, the Supreme Court held that if a female Hindu dies intestate without leaving any issue, then the property inherited by her from her father or mother would go to the heirs of her father. Whereas the property inherited by her from her husband or father-in-law would go to the heirs of the husband.

Background

The property in question was admittedly the self-acquired property of Marappa Gounder (deceased). The property was purchased through Court auction sale by Mr Marappa Gounder on 15-12-1938. After his death, the property was inherited by his sole surviving daughter Kupayee Ammal. Later on, Kupayee Ammal also died issueless in 1967. The appellant raised two questions before the court.

(a) Whether the late Gounder’s sole surviving daughter Kupayee Ammal could inherit the same by inheritance and the property shall not devolve by survivorship to the father’s brother’s son. This question arose because Marappa Gounder died before the commencement of the Hindu Succession Act, 1956.

(b) The next question was regarding the order of succession after the death of daughter, which was after the enactment of the Hindu Succession Act, 1956.

The Supreme Court held that “if a property of a male Hindu dying intestate is a self-acquired property or obtained in the partition of a co-parcenery or a family property, the same would devolve by inheritance and not by survivorship, and a daughter of such a male Hindu would be entitled to inherit such property in preference to other collaterals.”

The court held that this right is well recognised under the old customary Hindu Law and by various judicial pronouncements. Therefore the property was rightly inherited by Kupayee Ammal (daughter).

As far as the question regarding the order of succession after the death of Kupayee Ammal is concerned, the court held that Section 15 and 16 of the Indian Succession Act, 1956 clearly defines the order of the succession after the death of a female.

The court held that if a female Hindu dies intestate without leaving any issue, then the property inherited by her from her father or mother would go to the heirs of her father, whereas the property inherited from her husband or father-in-law would go to the heirs of the husband.

In case a female Hindu dies, leaving behind her husband or any issue, then Section 15(1)(a) comes into operation. The properties left behind by her, including the properties which she inherited from her parents, devolves simultaneously upon her husband and her issues as provided in Section 15(1)(a) of the Act.

The primary aim of the legislature in enacting Section 15(2) is to ensure that inherited property of a female Hindu dying issueless and intestate go back to the source. Section 15(1)(d) provides that failing all heirs of the female specified in Entries (a)-(c), but not until then, and all her property howsoever acquired will devolve upon the heirs of the father.

The devolution upon the heirs of the father shall be in the same order if a female Hindu dies intestate without leaving any issue. The property inherited by her from her father or mother would go to the heirs of her father. Whereas the property inherited from her husband or father-in-law would go to the heirs of the husband according to the same rules as would have applied if the property had belonged to the father and he had died intestate in respect thereof immediately after her death.

Read the Ruling

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4. HC directed Competent Authority to decide within six weeks on applications submitted for the refund of unutilised ITC

The Delhi High Court has held that the department can’t sit over the refund for 3 years where the petitioner has provided all the details to the dept. to process the refund. The court directed the department to decide on the applications within six weeks. The Delhi High Court gave this ruling in the case of Medical Bureau v. Commissioner of Central Goods and Service Tax Delhi North.

Facts

The petitioner was engaged in the business of purchase and exports of pharmaceutical products. The writ petition was filed seeking direction to the department to refund the amount of Rs. 1.35 crore, being unutilised input tax credit for the period October 2017 to July 2018 along with interest thereon. It submitted that the applications for refund of unutilised input tax credit were not disposed of for over 3 years.

High Court

The Honorable High Court observed that the petitioner should have been allowed 90% of the refund on a provisional basis and the remaining amount within sixty days as per section 54 sub-sections (6) and (7) of the CGST Act. The petitioner has made available all the details for the processing of refund. Hence, there would be no reason or ground whatsoever for the department to sit over the refund and deny the same. Therefore, the court directed the original Adjudicating Authority to decide the said refund applications within six weeks in accordance with the law.

Read the Ruling

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5. SC upholds NCLAT order on winding up of DEVAS on the grounds of fraud

In this significant case, the DEVAS Multimedia becomes the first company in India to be wound up for fraud under Section 271(1)(c) of Companies Act, 2013 as the Supreme Court upholds the order of NCLAT/NCLT. The Supreme Court dismissed the appeal filed by Devas Multimedia challenging the orders passed by the NCLT and NCLAT that allowed the winding up of the company on a petition filed by Antrix Corporation Ltd (Antrix).

Facts

Antrix, incorporated under the Companies Act, 1956, is the commercial arm of the ISRO. Antrix entered into the MOU with one of the advisors for business advisory purposes and otherwise. Advisors made a presentation proposing an Indian Joint venture, “DEVAS” (Digitally Enhanced Video and Audio Services), to provide multimedia services to mobile users using the leased S-band satellite spectrum.

Antrix entered into an agreement with Devas Multimedia Private Limited (Devas) for the lease of space segment capacity of ISRO/Antrix S-Band spacecraft. Antrix, later on, terminated the agreement on the ground of force majeure that GOI had taken a policy decision not to provide orbital slots in S-Band for commercial activities.

Meanwhile, CBI also filed an FIR on Devas under Section 420 read with Section 120B of IPC and Section 13(2) of the Prevention of Corruption Act, 1988. On 18-01-2021, Antrix filed the winding-up petition under Section 271(c) of the Companies Act, 2013 before NCLT, Bengaluru Bench. NCLT admitted the petition of Antrix and passed the order of winding up, saying that it was formed for “fraudulent and unlawful purposes.

Later on, Devas and its shareholder Devas Employees Mauritius Pvt Ltd challenged the order to wind up before the Chennai bench of the NCLAT, which also dismissed the petition. Later on, the matter went to the Supreme Court to set aside the NCLT/NCLAT order to wind up Devas.

Grounds taken by Devas

Devas contended on various grounds, including the following:

(a) Definition of ‘fraud’ for section 271(1)(c) purpose

(b) Auditors reported no frauds in CARO Report

(c) A statement by NCLAT in its order that “the allegations are prima facie made out” a company cannot be ordered to be wound up based on prima facie findings.

(d) Petition under Section 271(c) should have been preceded, at least by a report from the Serious Fraud Investigation Office, which has now gained statutory status under Section 211 of the Companies Act, 2013.

(e) Company cannot be wound up for fraud until criminal complaint filed for the offences punishable under Section 420 read with Section 120B IPC have been taken to a logical end

Supreme Court’s Observations

Supreme Court quashed the above grounds on the following basis.

The Supreme Court called the deal between Antrix and Devas to build the satellites as “fraud”.

“If the seeds of the commercial relationship between Antrix and Devas were a product of fraud perpetrated by Devas, every part of the plant that grew out of those seeds, such as the Agreement, the disputes, arbitral awards, etc., are all infected with the poison of fraud,” said the court. Fraud in section 271(1)(c) has a wider meaning than that assigned to it in Contract Act or Section 447 of the Companies Act, 2013. What is covered by Section 271(c) of the Companies Act, 2013 is a fraud that goes beyond what lies in the realm of contract or in the realm of the penal provisions of the Companies Act, 2013.

As far as the question of “No Fraud” reporting by the auditor is concerned, the auditor’s report can neither be taken as gospel truth nor act as estoppel against the company. The statement in the auditor’s report is as per the information given to them or as per the information culled out to the best of their ability.

Supreme Court after analysing the judgements passed by NCLT and NCLAT observed that merely because NCLAT used an erroneous expression, those findings cannot become prima facie. The detailed findings recorded by the Tribunal show that they are final and not prima facie.

The outcome of one need not depend upon the outcome of the other, as the consequences are civil under the Companies Act, 2013 and penal in the criminal proceedings. The Supreme Court dismissed the appeal filed against the order of NCLT/NCLAT orders and upheld the decision of winding up of the company.

“We do not find any merit in the above submission. If fraud, as projected by Antrix, stands established, the motive behind the victim of fraud, coming up with a petition for winding up, is irrelevant. If the seeds of the commercial relationship between Antrix and Devas were a product of fraud perpetrated by Devas, every part of the plant that grew out of those seeds, such as the agreement, the disputes, arbitral awards etc., are all infected with the poison of fraud,” the court ruled.

Read the Ruling

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6. Obligation of the auditor while conducting an audit of loan given to the related party at a zero rate

Section 186 of the Companies Act states that a company cannot lend at a rate of interest lower than the prevailing yield of one, three, five or ten years government security closest to the tenure of the loan. Unless it is provided to a Company established with the object of providing infrastructural facilities.

Practical problem which may arise during the audit of financials

Suppose PQR Ltd., a JV engaged in the infrastructure business in which S Ltd. has a 45% stake, has reported an increase in negative net worth. The S Ltd. had extended a loan to PQR Ltd. at a zero rate. Although the company continuously reported negative net worth, the auditor of S Ltd. did not question the management on their decision to extend loans at zero rate. Further, the auditor, in his opinion, stated that the loan given to PQR Ltd. was not prejudicial to the interest of the company. The auditor’s opinion was based on the opinion obtained by the management from an external expert, and the auditor did not verify the source data provided to the expert by conducting any independent verification of information provided by S Ltd.

Furthermore, the external expert clearly stated in his report that his opinion was restricted to the facts provided by S Ltd., and the expert has not independently examined any facts in relation to the issues raised. Whether the audit opinion made by the auditor merely on the reliance of an external expert is correct? If not, what responsibilities does an auditor lack while performing an audit?

Relevant Laws and Regulations

Section 143(1)(a) of the Companies Act 2013, states that it is the duty of the auditor to inquire whether loans made by the company based on security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members.

As per SA 500, an auditor has to design and perform those audit procedures that are appropriate in the circumstances to obtain sufficient appropriate audit evidence. At the time of designing and performing audit procedures, the auditor shall consider the relevance and reliability of the information to be used as audit evidence. Further, at the time of designing tests of controls and tests of details, the auditor shall determine means of selecting items for testing that are effective in meeting the purpose of the audit procedure.

CARO 2020, puts liability on the auditor to check & report whether the investments made, guarantees provided, security given, and the terms and conditions of the grant of all loans provided are not prejudicial to the company’s interest.

SA 265 states that if the auditor has identified any deficiencies in internal control, he shall determine whether they constitute significant deficiencies individually or in combination. If yes, the auditor shall communicate the same in writing to TCWG on a timely basis.

Conclusion

In the aforesaid situation since PQR Ltd. was continuously reporting negative net worth for the past few years, a significant doubt arises on the capability of the company whether it is capable of repaying the loan or not.

Despite the provision mentioned under Section 186 of the companies act 2013, the auditor has to check the compliance with the provision of Section 143 of the Companies Act 2013. Further, in the aforesaid situation, the auditor failed to design and perform appropriate audit procedures, failed to communicate the significant deficiencies in internal control identified during the audit to TCWG, because it is expected that the auditor should have noticed this lacuna in the internal control over credit monitoring and exercised the highest degree of professional due diligence. Also, he failed to report under CARO 2020 correctly.

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