Weekly Round-up on Tax and Corporate Laws | 18th to 23rd November 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from November 18^th to 23^rd, 2024, namely:

1. SEBI issues guidelines to strengthen governance of Stock Exchanges, Clearing Corporations and Depositories;
2. FA 2022 amendment allowing discontinuation of Sec. 80DD deposits couldn’t be applied retrospectively: SC;
3. GSTR-2B will not be generated if taxpayers haven’t filed their previous period GSTR-3B: GSTN Update;
4. HC remanded matter as assessee was unaware of order confirming demand due to accountant’s failure to inform about notice; and
5. Classification and Disclosure of Late Payment Interest in Financial Statements.

1. SEBI issues guidelines to strengthen governance of Stock Exchanges, Clearing Corporations and Depositories

SEBI, vide circular dated November 22, 2024, issued specific guidelines to strengthen the governance of Stock Exchanges, Clearing Corporations, and Depositories (collectively referred to as MIIs). The key measures focus on enhancing accountability through regular meetings of Public Interest Directors (PIDs) and mandatory quarterly and half-yearly reporting by compliance and risk officers. The guidelines also outline procedures for disciplinary actions against KMPs, improve whistle-blower policies, and encourage the adoption of regulatory technologies (RegTech) to monitor MII operations. The guidelines mandate the training of directors on the Governing Board of MII and emphasise policies for secure data sharing. Some of the guidelines are as follows –

1.1 Meetings of Public Interest Directors (PIDs) and their reporting

To enhance accountability within MIIs, SEBI directed Public Interest Directors (PIDs) to meet at least once every 6 months to exchange views on critical issues concerning the MII. All PIDs must mandatorily attend such meetings. These meetings focus on reviewing compliance with guidelines issued by SEBI, assessing the functioning of critical areas such as operations, regulatory compliance, risk management and investor grievances and evaluating the adequacy of financial and human resources for these functions.

1.2 Quarterly reporting by Compliance Officer and Half-yearly reporting by Chief Risk Officer

Compliance Officers are required to report any compliance with any Act, rules, regulations, or directions issued and for redressal of investors’ grievances on a quarterly basis. The report must be submitted to SEBI within 45 days from the end of the quarter.

Similarly, the Chief Risk Officers are required to submit half-yearly reports to SEBI on the overall risk management of the MII within 90 days from the end of the half-year.

1.3 Standard Operating Procedures for undertaking disciplinary actions against KMPs

All market infrastructure institutions (MIIs) must devise internal standard operating procedures (SOPs) to undertake disciplinary actions against KMPs for non-compliance with regulatory provisions and internal guidelines.  The policy must be approved by the Nomination and Remuneration Committee (NRC) and the Governing Board of the MII. The SOP must include the list of actions that may be initiated against a KMP for breach of any provision, including advisory, warning, impact on annual increment or promotion, suspension and termination.

1.4 Whistle-Blower Policy of MIIs

To strengthen the whistle-blower mechanism further, SEBI has directed the MIIs to resolve whistle-blower complaints within 60 days of receiving them. Further, the Audit Committee must receive and investigate the complaints and make appropriate decisions, including any further course of action. The MIIs must disclose the policy on their respective websites.

1.5 Advanced Technologies to strengthen regulatory and monitoring mechanism of MIIs

MIIs must adopt advanced technologies such as Regulatory Technologies (RegTech) and Supervisory Technologies (SupTech) to strengthen their regulatory and supervision mechanisms. They must also enable systems that require their members or participants (such as stock brokers, clearing members, depository participants, and warehouse service providers) to make most of the submissions online and reduce reliance on physical information sharing. Further, MIIs must disclose all material information pertaining to their members or participants on their websites.

1.6 Internal Policies for periodic monitoring of Back Office Vendors or Outsourced Agencies

In order to ensure compliance with various regulatory requirements by the back office vendors or outsourced agencies appointed by the MII and/or by their members or participants, the MIIs must have policies for the appointment and monitoring of such back office vendors or outsourced agencies. The policy must clearly outline the risks that may arise from the back-office vendors or outsourced agencies and steps to eliminate or reduce such risks.

1.7 Training or knowledge upgradation of directors on Governing Board of MII

At the time of joining a new director on the Governing Board, the MII must provide familiarization programme to such directors with regard to their roles & responsibilities and expectations from them. Further, MIIs must also provide a list of applicable regulatory provisions, including the code of conduct applicable to directors, amongst other materials, for ease of reference.

1.8 Policy on Data Sharing

MIIs must have an internal policy for sharing and monitoring of confidential and sensitive data. The policy must adequately cover all data-sharing methods online and offline, including e-mails and social media, with appropriate delegation of powers for data sharing. The policy must be reviewed for its effectiveness annually by the Standing Committee on Technology (SCOT). The data sharing must be done on a non-discriminatory basis.

1.9 Conclusion

The guidelines by SEBI aim to improve the governance and operational efficiency of MIIs. By introducing measures such as PID meetings and their reporting, advanced regulatory technologies, SOPs for disciplinary actions against KMPs, whistle-blower mechanisms and data-sharing policies, SEBI ensures greater transparency and compliance. These initiatives collectively enhance the strength of MIIs, building trust and ensuring integrity in the financial market system. The Circular shall be effective from April 1, 2025.

Read the Circular

2. FA 2022 amendment allowing discontinuation of Sec. 80DD deposits couldn’t be applied retrospectively: SC

Section 80DD deals with the payment of an annuity of a lump sum amount for the benefit of a dependant, a person with a disability, in the event of death of the individual or the member of a Hindu Undivided Family (HUF) in whose name the subscription to the scheme stipulated in the said provision has been made. The Parliament amended section 80DD by virtue of the Finance Act 2022, with effect from 1-4-2023. Consequently, on attaining the age of 60 years or more by an individual subscriber or a member of a HUF, the payment or deposit to the scheme envisaged under section 80DD could be discontinued, and the monetary benefit that would have accumulated could be made use of.

The assessee submitted that the amendment ought to be made retrospective as the same was with effect from 1-4-2023 to the existing policies as it would benefit a large number of subscribers who were interested in making use of the benefit of such policies for the benefit of the disabled persons on turning 60 years of age. An option could be reserved for the subscribers to benefit from the amendment regarding policies made much prior to 2014, as in the said year, such policies had been discontinued.

He contended that if the amendments were given a retrospective effect, many subscribers, as well as disabled persons, would benefit, and hence, the concerns of the assessee being purely in the public interest might be considered, and relief might be granted.

Considering the Public Interest involved, the assessee filed a writ petition under Article 32 of the Constitution of India as a Public Interest Litigation before the Supreme Court of India.

The Apex Court held that it was difficult to accept the plea made by the assessee to the effect that the amendment made to section 80DD be applied retrospectively to policies that were taken prior to 2014 so that the benefit of the amendment is given to those subscribers also. The whole object of Jeevan Adhar’s Policy was to benefit disabled persons by making provisions for the subscriber after his demise.

The concern and apprehension of a caregiver or subscriber of a policy for a disabled family member or other person for whose benefit the policy is taken after the demise of the caregiver is of utmost significance. It is only with that object that the caregiver or a subscriber would take such a policy so that he would not leave a disabled person in the lurch on his demise.

If that is the object of the policy, then the subscriber or the caregiver of the subscriber should not be given the liberty to discontinue the policy during his lifetime upon attaining 60 years of age. That would only go against the object with which the policy has been taken and against the beneficiary’s interest, namely, a disabled person.

The plea for retrospective operation of the amendment was not in the interest of the disabled persons, nor can this Court give a retrospective operation to the amendment. This was particularly concerning because an insurance contract is, in a sense, a commercial contract, having specific terms and conditions, and the sub-stratum of the contract cannot be removed by giving a retrospective operation to the amendment. The benefit under section 80DD would have been availed by the subscribers when they subscribed to the policy. Accordingly, the writ petition was disposed of.

Read the Ruling

3. GSTR-2B will not be generated if taxpayers haven’t filed their previous period GSTR-3B: GSTN Update

The GSTN has noticed that it has been reported by a few taxpayers that their GSTR-2B for the October 2024 period was not generated on 14th November 2024. In this regard, the GSTN has issued an update to inform that as per the design of IMS, GSTR-2B will not be generated by the system in below scenarios:

• In case the taxpayer has opted for QRMP scheme (Quarterly filers), GSTR-2B will not be generated for first and second month of the quarter. For example, for the quarter Oct-Dec 2024, the quarterly taxpayer will get GSTR-2B for the December-2024 period only and not for October-2024 & November-2024.
• In case the taxpayer has not filed their previous period GSTR-3B, GSTR-2B will not be generated by the system. Such taxpayers need to file their pending GSTR-3B in order to generate GSTR-2B on demand. For example, if the taxpayer has not filed GSTR-3B for September 2024, their GSTR-2B for October 2024 will not be generated. Once the taxpayer files their GSTR-3B for September 2024, they will be able to generate their GSTR-2B for October 2024 by clicking the “Compute GSTR-2B (OCT 2024)” button on the IMS dashboard.

Read the News

4. HC remanded matter as assessee was unaware of order confirming demand due to accountant’s failure to inform about notice

The Honorable Madras High Court has recently remanded the matter back since the accountant of the assessee firm failed to inform about notices that preceded the impugned order confirming the demand. The Court also directed the department to provide an opportunity to the assessee to ventilate its grievance. This ruling is given in the case of Diamong Cargo Movers v. State Tax Officer II.

Facts

The petitioner was aggrieved by the demand order passed by the GST department. It filed a writ petition against the demand order and contended that the accountant of the petitioner had failed to inform it about the notices that preceded the impugned orders, and only after the department insisted on the petitioner paying disputed tax did the petitioner become aware of the impugned orders.

High Court

The Honorable High Court noted that the petitioner failed to take advantage of the show cause notices issued by the department before the impugned orders were passed. However, the Court held that the petitioner could be given an opportunity to ventilate his grievance before the department. Therefore, the Court set aside the demand order and remitted the matter back to the department for fresh adjudication. Also, the petitioner shall deposit 25% disputed tax and file a consolidated reply within a period of 30 days from the date of receipt of copy of this order.

Read the Ruling

5. Classification and Disclosure of Late Payment Interest in Financial Statements

Under Ind AS 1, Presentation of Financial Statements, the profit or loss section of financial statements must include key items such as revenue, finance costs, and significant expenses. Material items require separate disclosure, with clear details of their nature and amount to maintain transparency. Additionally, expenses must be analysed based on their nature, ensuring consistent and relevant reporting. Materiality is a fundamental concept, as information is deemed material if its omission or misstatement could influence users’ decisions, necessitating careful evaluation of the size and nature of such items.

Entities often face challenges in classifying late payment interest, particularly whether to present it as “Finance Costs” or “Other Expenses.” Based on expert guidance, late payment charges arising from overdue payments under a supply agreement should be classified as “Finance Costs.” These charges represent interest on financial liabilities, measured at amortized cost per Ind AS 109, Financial Instruments, and are consistent with the requirements of Ind AS 32, Financial Instruments: Presentation. Consequently, they must be reflected under “Finance Costs” in the Statement of Profit and Loss.

Regarding their classification as exceptional items, Ind AS Schedule III requires a separate presentation of exceptional items but does not define the term. Since late payment charges are routine costs associated with business operations, they do not qualify as exceptional. However, due to their material nature, these charges should be disclosed separately within “Finance Costs,” accompanied by detailed notes to ensure transparency and provide users with a clearer understanding of the financial performance.

For example, in a scenario where significant late payment charges were incurred under a supply agreement, an entity initially classified these as “Finance Costs.” Auditors raised concerns, suggesting reclassification as “Other Expenses” and separate disclosure as exceptional items due to a substantial year-over-year increase. The entity argued that the charges were financing costs related to working capital, aligning with Ind AS principles. Upon expert review, it was confirmed that these charges should remain under “Finance Costs” and not be categorised as exceptional. Appropriate disclosures in the financial statement notes were recommended to enhance clarity and compliance with Ind AS requirements.

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