Weekly Round-up on Tax and Corporate Laws | 17th to 22nd June 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from June 17 to 22, 2024, namely

1. Key takeaways from 53rd GST Council Meeting
2. Section 50C not applicable on transfer of leasehold rights in land and building: ITAT;
3. HC remanded the matter as no annexure was supplied to assessee though SCN stated that working of excess ITC was appended;
4. SEBI unveils a ‘special call auction mechanism’ for price discovery of scrips of listed investment companies and
5. Classification of Mortgage Guarantee Contract as Financial Guarantee and its Revenue Recognition.

1. Key takeaways from the 53rd GST Council Meeting

On June 22, 2024, the 53rd GST Council met under the Chairpersonship of Union Minister for Finance & Corporate Affairs Smt. Nirmala Sitharaman in New Delhi. The Council has made several recommendations for facilitating trade and measures for streamlining compliance with GST. The key recommendations are:

(a) The GST Council has recommended inserting a new provision by insertion of Section 128A in the CGST Act to provide a conditional waiver of interest and penalty on demand notices issued under Section 73 of the CGST Act. This would apply only to the orders pertaining to financial years 2017-18, 2018-19, and 2019-20.
(b) The GST Council has recommended clarifying that the time limit to avail credit under Section 16(4) on RCM invoices is to be checked from the financial year in which the recipient issues the invoice.
(c) The GST Council has recommended amending Rule 88B to specify that amounts available in the Electronic Cash Ledger on the due date of filing GSTR-3B and debited while filing the return will not be included in interest calculations under section 50 of the CGST Act for delayed filings.
(d) It is recommended to reduce the pre-deposit amount for filing of appeals under GST to ease cash flow and working capital blockage for the taxpayers. The maximum amount for filing an appeal with the appellate authority has been reduced from Rs. 25 crores CGST and Rs. 25 crores SGST to Rs. 20 crores CGST and Rs. 20 crores SGST respectively. Further, the amount of pre-deposit for filing an appeal with the Appellate Tribunal has been reduced from 20% with a maximum amount of Rs. 50 crores CGST and Rs. 50 crores SGST to 10 % with a maximum of Rs. 20 crores CGST and Rs. 20 crores SGST respectively.
(e) The Council has also recommended reducing the rate of TCS collected by the ECOs for supplies made through them to 0.5% from 1%.
(f) It is also recommended to change the due date for filing of returns in FORM GSTR-4 for composition taxpayers from 30th April to 30th June.
(g) It is recommended to provide a new optional facility by way of FORM GSTR-1A to facilitate the taxpayers to amend the details in FORM GSTR-1 for a tax period and/or to declare additional details, if any, before filing a return in Form GSTR-3B for the said tax period.
(h) Exemption in filing of annual return in FORM GSTR-9/9A for the FY 2023-24 for taxpayers having aggregate annual turnover up to two crore rupees is also recommended.
(i) The GST Council has recommended implementing the biometric-based Aadhaar authentication of registration applicants in a phased manner across India.

In this regard, the Government issued a press release explaining all the Council’s recommendations.

Read the Press Release

2. Section 50C not applicable on transfer of leasehold rights in land and building: ITAT

Assessee, an individual, was a salaried employee. He filed his return of income for the relevant assessment year and declared income. The return of income was processed under section 143(1). Subsequently, the Assessing Officer (AO) reopened the assessee’s case based on AIR information that the assessee sold a right in a leasehold property for Rs. 60,00,000 but did not offer the capital gains tax.

Reassessment was completed at an income of Rs. 75,94,850 for stamp duty purposes against the actual sale consideration of Rs. 60,00,000. On appeal, the CIT(A) upheld the reassessment proceedings, and the matter reached before the Delhi Tribunal.

The Tribunal held that the leasehold right in a plot of land is neither ‘land or building or both’ as such nor can be included within the scope of ‘land or building or both’. The distinction between a capital asset being ‘land or building or both’ and any ‘right in land or building or both’ is well recognised under the Act.

Section 54D of the Act deals with certain cases in which capital gains on the compulsory acquisition of land and buildings are charged to tax. Section 54D(1) opens with: “Subject to the provisions of sub-section (2), where the capital gain arises from the transfer by way of compulsory acquisition under any law of a capital asset, being land or building or any right in land or building, forming part of an industrial undertaking…..”. Thus, it is palpable from section 54D that ‘land or building’ is distinct from ‘any right in land or building’.

Section 50C states that the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted for stamp valuation authority in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.

Relying upon the decision of the Hon’ble Supreme Court in the case of Amarchand N. Shroff [1963] 48 ITR 59 (SC), the Tribunal held that a deeming provision could be applied only in the scope of the law and not beyond the explicit mandate of the section. Hence, the provisions of Section 50C of the Act are applicable only with respect to ‘land or building or both’. If the capital asset under transfer cannot be described as ‘land or building or both’, then Section 50C will not apply.

Accordingly, the provisions of Section 50C do not apply to the transfer of leasehold rights in land.

Read the Ruling

3. HC remanded matter as no annexure was supplied to assessee though SCN stated that working of excess ITC was appended

The Delhi High Court recently set aside an order where a show-cause notice (SCN) was issued to the assessee stating that the working of excess ITC was appended to the notice as annexure B; however, no such annexure was supplied to the assessee. The Court has remanded the matter and directed the GST Department to provide the assessee with a hearing opportunity. This ruling is given by the Honorable Delhi High Court in Shree Padma Industries v. Union of India.

Facts

The department issued a show cause notice (SCN) to the petitioner and stated that working of excess ITC was appended to the notice as annexure B. The petitioner approached the authority and requested to provide a tabular chart annexed and further activate the GST portal to enable the petitioner to file a reply to SCN. However, the impugned order was passed, and demand and penalty were raised against the petitioner. It filed writ petition against the demand and penalty and contended that there was no annexure B as stated in the SCN.

High Court

The Honorable High Court noted that the only reason for passing the impugned order was that the petitioner had not filed a reply to SCN. The Court also noted that neither annexure B was supplied nor petitioner was informed that there was no annexure B. Therefore, the Court held that one opportunity needed to be granted to the petitioner to respond to SCN, and accordingly, the impugned order was liable to be set aside.

The Court also directed the petitioner to file a further reply to the notice within two weeks. The proper officer shall re-adjudicate SCN after giving the petitioner an opportunity for a personal hearing and shall pass a fresh speaking order in accordance with law within the period prescribed under Section 75 (3) of the Act.

Read the Ruling

4. SEBI unveils a ‘special call auction mechanism’ for price discovery of scrips of listed investment companies

On October 16, 2023, SEBI issued a master circular for ‘Stock Exchanges and Clearing Corporations’ prescribing the framework for call auction sessions. This framework is applicable for pre-open sessions, pre-open sessions for Initial Public Offer (IPO) & relisted scrips, and illiquid scrips. Subsequently, on June 20, 2024, SEBI vide circular no. SEBI/HO/MRD/MRD-PoD-3/P/CIR/2024/86, introduced a ‘special call auction mechanism’ for effective price discovery of scrips of listed investment companies (ICs) and investment holding companies (IHCs).

(a) Rationale behind introduction of a ‘special call auction mechanism’

SEBI observed that scrips of certain listed ICs and IHCs are traded infrequently and often at prices significantly lower than the book value disclosed by these companies in their latest audited financial statements. Moreover, these companies generally have no day-to-day operations and hold investments in different asset classes, including scrips of other listed companies.

Further, the variance in the market price and book value of such ICs and IHCs adversely affects liquidity, fair price discovery, and overall investors’ interest in these scrips. Therefore, to address this concern, SEBI introduced a “special call auction with no price bands” framework.

(b) Applicability of a ‘special call auction mechanism’

The first special call auction must be conducted in the month of October 2024 by stock exchanges based on the latest available audited financial statements of such companies. Further, the subsequent special call auctions must be done as and when the annual audited financial statements are published by the companies.

(c) Criteria for identification of ICs or IHCs eligible for ‘special call auction’

The criteria for identifying ICs or IHCs eligible for the ‘special call auction’ are as follows:

1. The ICs or IHCs must be identified based on the uniform industry classifications provided by stock exchanges.
2. The scrips must have been listed and available for trading for at least one year and are not suspended for trading.
3. The total assets of the company invested in scrips of other listed companies must be at least 50%.
4. The 6-month Volume Weighted Average Price (VWAP) of the scrip must be less than 50% of the book value per share of such company.

(d) Procedure for ‘Special Call Auction Mechanism’

Stock exchanges must initiate the process for a special call auction with no price bands for eligible ICs or IHCs, providing 14 days’ advance notice to the market. The notice must be disclosed by stock exchanges on their websites and brought to the investors’ attention. It must include information regarding the last traded price, the latest available overall book value of the company, the price of the latest buy-back or delisting, if any, offered by the company, etc.

Further, the special call auction session must be treated as successful if price discovery is based on orders from at least 5 Permanent Account Number (PAN) based unique buyers and sellers.  If the call auction fails to achieve price discovery on the first day, it must continue on the next day until the price is discovered. The special call auction mechanism must be provided only once a year.

(e) Conclusion

SEBI’s introduction of a ‘special call auction mechanism’ aims to improve trading conditions for less actively traded ICs and IHCs. By setting clear guidelines and enhancing transparency, SEBI seeks to ensure fairer prices and better investor confidence in these stocks. This initiative reflects SEBI’s dedication to strengthening India’s financial markets for all participants.

Read the Circular

5. Classification of Mortgage Guarantee Contract as Financial Guarantee and its Revenue Recognition

A financial guarantee contract is defined under Ind AS 109, Financial Instruments, as a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. Thus, for a financial guarantee under Ind AS 109 to exist, amongst others, there shall be a reimbursement for loss incurred by a specified debtor. This means that the entity is required to make payments only in the event of a default by the debtor following the terms of the instrument that is guaranteed.

Cash shortfalls, in the context of a financial guarantee contract, are the expected payments that the guarantor will make to cover a credit loss. These payments are intended to reimburse the debt instrument holder for the loss incurred due to the debtor’s default.

The cash shortfall is calculated by estimating the total expected payments required to cover the credit loss. The guarantor deducts any anticipated recoveries from the holder, the debtor, or any other party from this amount. The resulting net amount is the actual cash shortfall.

If the asset is fully guaranteed, the estimation of cash shortfalls for a financial guarantee contract would be consistent with the estimations of cash shortfalls for the asset subject to the guarantee.

For revenue recognition in the case of mortgage guarantee contracts, the principle prescribed under Ind AS 115 will be applied, wherein the revenue is recognised over time if the entity transfers control of a service over time. This means revenue should be recognised only when the entity performs the service and as the customer simultaneously receives and consumes the benefits, as the entity’s performance creates or enhances an asset controlled by the customer, or when the entity’s performance does not create an asset with an alternative use and the entity has an enforceable right to payment.

For each performance obligation satisfied over time, revenue should be recognised progressively based on the extent to which that obligation has been fulfilled. The aim is to accurately portray how the entity transfers control of the services promised to the customer throughout the duration of the contract.

In mortgage guarantee contracts, if the terms mandate that the company is responsible for covering the loan issued by financial institutions, and this obligation is triggered when borrowers default on their mortgage loans, the company must fulfill the guaranteed obligations. The Expert Advisory Committee has stated that such contracts require the company to make specific payments to the lending financial institutions to compensate for their losses. Therefore, these contracts meet the definition of a financial guarantee contract according to Ind AS 109.

Read the Story