Weekly Round-up on Tax and Corporate Laws | 17th to 22nd July 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 17^th to 22^nd July 2023, namely:

(a) NRIs with inoperative PAN are requested to intimate residential status to AO: CBDT;

(b) Framework to freeze PAN of designated persons during ‘Trading Window Closure period’ set to include all Listed Cos.;

(c) SEBI allows Mutual Funds to offer multiple ESG schemes with diverse strategies;

(d) Amnesty Schemes for non-filers of annual returns & revocation of GST cancellation extended till 31^stAugust 2023;

(e) Email directing reversal of ITC without providing details of the cancellation of supplier’s registration was to be quashed: HC; and

(f) Accounting treatment of auctioned collateral assets under Ind AS 105 and Ind AS 109.

1. NRIs with inoperative PAN are requested to intimate residential status to AO: CBDT

Non-resident Indians (NRIs) and Overseas Citizenship of India (OCIs) have raised concerns regarding their PANs becoming inoperative, despite being exempted from linking PAN with Aadhaar. Additionally, PAN holders whose PANs have become inoperative due to non-linking with Aadhaar have expressed concerns about the consequences.

In light of this, the following clarifications are provided by the Income-tax Dept. on its Twitter handle:

• The Income Tax Department has mapped the residential status of NRIs based on their income tax returns (ITR) in the last three assessment years or if they have informed their Jurisdictional Assessing Officer (JAO) about their residential status. PANs have been rendered inoperative if any of these criteria are not met. NRIs with inoperative PANs are requested to inform their respective JAOs about their residential status along with supporting documents, requesting an update in the PAN database.
• Individuals can still file their Income Tax Returns (ITR). Only following are the consequences of an inoperative PAN.
• Pending refunds and interest on such refunds will not be issued to inoperative PANs; and
• Tax will be required to be deducted/collected at a higher rate for inoperative PANs in accordance with Section 206AA/206CC.

Read the Story

2. Framework to freeze PAN of designated persons during ‘Trading Window Closure period’ set to include all Listed Cos.

In a significant move to upload fairness and integrity in the Indian stock market, the SEBI has taken a momentous step. SEBI has extended the framework to freeze the PAN of Designated Persons (DPs) during the “trading window closure” for financial results for all listed companies in a phased manner.

This amendment, governed by Clause 4 of Schedule B read with Regulation 9 of SEBI (Prohibition of Insider Trading) Regulations, 2015, is set to revolutionize the way trading activities are conducted by DPs.

Clause 4(1) of Schedule B, read with Regulation 9, states that the trading window should be closed when the compliance officer determines that a designated person or class of designated persons can be expected to have possession of Unpublished Price Sensitive Information (UPSI).

Such closure shall be imposed in relation to such securities to which such UPSI relates. Designated persons and their immediate relatives should not trade in securities when the trading window is closed.

Additionally, Clause 4(2) of Schedule B, read with Regulation 9, states that the trading restriction period shall be made applicable from the end of every quarter till 48 hours after the declaration of financial results.

This visionary framework initially applies only to listed companies that are part of benchmark indices like NIFTY 50 & SENSEX. However, from 1^st October 2023, the framework will extend to the top 1,000 companies in terms of BSE Market Capitalization, and then to the next 1,000 companies from 1^st January 2024 & finally to the remaining companies from 1^st April 2024.

The main objective behind this initiative is to prevent inadvertent non-compliance with PIT Regulations by DPs during the trading window closure period. By freezing PAN at the security level, SEBI aims to curtail any possible trading based on UPSI, ensuring a level playing field for all market participants.

Read the Ruling

3. SEBI allows Mutual Funds to offer multiple ESG schemes with diverse strategies

SEBI has embraced the rising tide of green investing in a significant shift towards sustainability. Earlier, the SEBI allowed Mutual Funds to launch only one scheme with ESG investing under the thematic category for Equity schemes. Now, SEBI responds to industry demands by permitting the launch of multiple ESG schemes with diverse strategies, catering to the escalating need for green financing.

To ensure transparency and combat risks of misselling and greenwashing, SEBI took decisive action by forming an ESG Advisory Committee, which offered valuable recommendations to expand disclosure norms for ESG funds. As a result, SEBI is set to introduce measures that facilitate green financing, emphasizing enhanced disclosures and safeguarding against greenwashing risks, and nurturing a responsible investing environment.

Key Recommendations

• Introduction of a separate sub-category for ESG investments under Thematic Schemes
• ESG scheme to invest a minimum of 65% of assets under management (AUM) in companies that are reporting on BRSR
• Mandatory disclosures for ESG Schemes by Mutual Funds
• AMCs to obtain an independent reasonable assurance regarding their ESG schemes portfolio
• Certification of compliance with regulatory requirements for ESG schemes by the BODs of AMCs in the scheme’s annual report.

SEBI has taken commendable strides to promote sustainable investing through ESG funds in a decisive move towards a greener and more responsible financial landscape. With these measures, SEBI aims to foster green financing, encourage sustainable investment practices and pave the way for a brighter and more sustainable future for India’s financial ecosystem.

Read the Circular

4. Amnesty Schemes for non-filers of annual returns & revocation of GST cancellation extended till 31^stAugust 2023

The CBIC has earlier issued an amnesty scheme to provide a waiver of a certain amount in late fees for the registered persons who fail to furnish a return in Form GSTR-4, GSTR-9, and GSTR-10. Also, an amnesty scheme was issued for revocation of registration cancelled till 31^st December 2022 for taxpayers who failed to file revocation within the time prescribed. These amnesty schemes can be availed till 30th June 2023.

Another amnesty scheme for deemed withdrawal of best judgment assessment order was also provided if the return could not be filed within 30 days of the assessment order, but it shall be filed along with due interest and late fees till 30^th June 2023.

All these amnesty schemes have been extended by 2 months till 31^st August 2023 for all taxpayers.

Read the Notification

5. Email directing reversal of ITC without providing details of the cancellation of supplier’s registration was to be quashed: HC

The Calcutta High Court has held that the department can’t demand a reversal of ITC merely by giving a direction to reverse ITC by way of an email. The Court has set aside the communication through email in which the assessee has been directed to reverse ITC without providing any details of the cancellation of the supplier’s registration.

In the present case, the department sent an email and directed the appellant to reverse the input tax credit (ITC) against the supply on the ground that it had purchased materials from a dealer whose registration had been cancelled.

It filed a writ petition and contended that the cancellation of the selling dealer’s registration would not automatically grant the department the authority to compel purchasing dealer to reverse ITC. The learned Single Bench declined to grant any interim order, and it filed an Intra-Court appeal.

The High Court noted that the procedure adopted by the authority while directing the reversal of ITC without providing details of the cancellation of the selling dealer’s registration and thereafter compelling the appellant to pay the amount was in violation of the principles of natural justice.

Therefore, the Court held that the direction to reverse ITC by way of email was not sustainable. The Court also issued a direction to the authority to remit the amount of ITC reversed by the appellant.

Read the Ruling

6. Accounting Treatment of Auctioned Collateral Assets under Ind AS 105 and Ind AS 109

A finance company generally offers a wide range of loan products which are secured through mortgages of collateral assets. Collateral assets are pledged by borrowers to secure loans and assure lenders that they can recover their funds in case of a default. Though such default does not give direct possession to the lender, it empowers them to initiate the auction process for actual/physical repossession of such assets. Further, a customer still has the right to take back possession of the collateral and repay the loan before the final sale of the property. Furthermore, lenders also have participative rights in such an auction to retain the repossessed assets to sell collateral at a later period of time.

Now, the confusion arises as to whether the recording of these collateral assets in the books of the lender be classified as “Non-current Assets held for Sale” or “Financial Assets” when the buyer still has the right to reacquire the collateral from the lender.

In this regard, the Expert Advisory Committee (EAC) provided that in the event of a borrower’s default, the company repossesses the collateral. However, the repossessed collateral cannot be directly offset against the outstanding loan amount. Instead, sale proceeds from the auction can be used to offset the outstanding loan amount. In certain cases, if the auction fails due to distressed market conditions, the company may acquire the asset itself in the final auction.

The Committee further stated that the loan asset is held by the company for collecting contractual cash flows and not for immediate selling. Thus, the loan asset cannot be classified as held for sale at any stage. Further, the company should recognize the collateral as its asset only after the right of redemption of the transferor has expired, i.e. the company can only recognize the collateral as an asset where the company acquires or purchases the collateral in the final auction process.

On the basis of the above, Committee opined that loan assets should neither be classified as ‘Held for Sale’ nor recognize collateral as a financial asset at any stage, except when acquired by the company in the final auction process.

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