Weekly Round-up on Tax and Corporate Laws | 18th to 23rd September 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from September 18^th to 23^rd, 2023, namely:

(a) RBI issues draft master directions on treatment of ‘Wilful Defaulters and Large Defaulters’;

(b) ITAT restricts sec. 69A additions as it was impossible for NRI to furnish evidence for cash gifts received on marriage;

(c) Geocoding Functionality for the Additional Place of Business is now available for all taxpayers: GSTN Update;

(d) ITC can’t be denied due to discrepancies in GSTR-2A without proof of collusion between assessee and seller: HC; and

(e) Role of Statutory Auditors highlighted in SEBI Interim order related to Structured Rotation of Funds.

1. RBI issues draft master directions on treatment of ‘Wilful Defaulters and Large Defaulters’

The Reserve Bank of India (RBI) has taken a bold step in its annexation against wilful defaulters. With revamped guidelines and a sharper focus, the RBI’s mission to redefine the rules promises a brighter future for the Indian banking landscape.

Originally initiated in 1999, the RBI scheme has now been fine-tuned to better identify and tackle wilful defaulters. After meticulous scrutiny, RBI has issued a comprehensive ‘Draft Master Direction on Treatment of Wilful Defaulters and Large Defaulters.’ These fresh directives expand the scope for Regulated Entities to classify borrowers as wilful defaulters, redefine what constitutes wilful default, and streamline the identification process.

But that’s not all – the new guidelines also set stringent timelines. They mandate a swift review and finalization of wilful default aspects within six months of an account being classified as a non-performing asset (NPA). The dawn of this proactive approach promises to redefine the financial landscape for the better.

The key highlights of the draft circular are as follows:

(a) Applicability of the draft master directions on treatment of ‘Wilful Defaulters’

The provisions regarding wilful defaulters would apply to the ‘lenders’ as defined in these Directions. Asset Reconstruction Companies (ARCs), and Credit Information Companies (CICs) shall be bound by these directions only with regard to the reporting requirements.

As per para 3(1)(m), the term “lender” means an AIFI, a bank, or NBFC which has granted a credit facility to the borrower.

(b) Directors and Defaults: When Are They Truly Responsible?

As per the Draft Guidelines, a non-whole-time director, including an independent director/nominee director, would not be considered a wilful defaulter unless it is conclusively established that:

• The wilful default by the borrower or the guarantor has taken place with their consent or connivance or
• He/she was aware of the wilful default by the borrower or the guarantor, as revealed from the proceedings recorded in the minutes of the meeting of the Board or a Committee of the Board, but failed to record his/her objections to the same.

(c) RBI Mandates Swift Action: Identifying ‘Wilful Defaulters’ w.r.t. loans value Rs. 25 lakhs and above

The Draft Guidelines require the Lenders to evaluate the “wilful default” status for accounts with outstanding amounts of Rs. 25 lakhs or more, as specified by the RBI. They must complete the classification of a borrower as a wilful defaulter within 6 months of the account becoming a non-performing asset.

(d) Enforcement measures against wilful defaulters by lenders

The Guidelines prescribe certain measures which can be taken by the lenders. Such measures are criminal action by the lenders, publishing of photographs of wilful defaulters, penalties and other measures against wilful defaulters, Ineligible for restructuring, Initiation of legal action, etc.

(e) Reporting & Disclosure of Large Defaulters’ information to CICs

All entities regulated by the Reserve Bank, irrespective of their ‘lender’ status, must adhere to provisions concerning large defaulters. This mandates regular information sharing with credit information companies (CICs), encompassing accounts with pending lawsuits and those without lawsuits from large defaulters.

(f) Anticipated effects of the Master Directions:

The RBI’s proposed revisions to the ‘Treatment of Wilful Defaulters and Large Defaulters’ guidelines aim to boost accountability and transparency in managing defaulters in the financial sector. The updated framework involves a detailed process for identifying and classifying wilful defaulters, with opportunities for them to present their cases.

This move strengthens the RBI’s ability to tackle financial misconduct and sends a clear message that wilful defaulters will face serious consequences, promoting a culture of responsibility in lending.

Read the Master Direction

2. ITAT restricts Section 69A additions as it was impossible for NRI to furnish evidence for cash gifts received on marriage

Assessee-NRI, made a cash deposit of Rs. 1 crore in his bank account during the demonetization period. On being enquired by the Assessing Officer (AO), the assessee claimed that the amount was received in connection with his marriage celebrated on 7-12-2015 and claimed the same as exempt being gifts received during marriage under the proviso to section 56(1)(vii)(c).

The AO noted that the assessee had not furnished any material evidence to substantiate that he had received the gift of Rs. 1 crore during his wedding other than the wedding invitation card to prove the genuineness of his claim. Accordingly, AO made the addition of Rs. 1 crore as unexplained money as per the provisions of section 69A.

On appeal, CIT(A) held that the assessee was an NRI, and it was nearly impossible for him to prove gifts received on the occasion of marriage. Thus, CIT(A) restricted additions to Rs. 70 lakh. The assessee filed a further appeal before the Chennai Tribunal.

The Tribunal held that the assessee himself deposited cash in his bank account and tried to explain the sources through the cash gifts received during the occasion of marriage in December 2015. However, it rejected assessee’s contention that cash deposits made in the accounts can’t be treated as not income because he made such deposit during the demonetization period. The deeming provisions of section 69A are clearly applicable.

The assessee argued that a reasonable deduction on the basis of reasonable estimation should be made, but he could not produce any sort of evidence to substantiate his claim, either the names or their address or anything relating to the gift received in cash.

There was no direct evidence available from the assessee to substantiate his claim, but going through the customary system in Indian society, the observations of CIT(A) that no economic transaction can be divorced from the underlying social-cultural factors is to be agreed with. It is customary in Indian society and according to status that one receives gifts in marriage.

Hence, a further estimation was made, and Rs. 20 Lakhs was deleted, and subsequently, Rs. 50 Lakhs was treated as unexplained money under section 69A.

Read the Ruling

3. GSTN Update: Geocoding Functionality for the Additional Place of Business is now available for all taxpayers

The GSTN has issued an update to inform that the geocoding functionality for the “Additional Place of Business” address is now active across all States and Union Territories. This builds upon the geocoding functionality earlier implemented for the principal place of business, operational since February 2023.

This is a one-time activity, and post-submission, address revisions are not permitted. The taxpayers who have already geocoded their addresses through new registration or core amendment would not be required to do this as on the GST portal their address will be shown as geocoded.

Read the Update

4. ITC can’t be denied due to discrepancies in GSTR-2A without proof of collusion between assessee and seller: HC

The High Court of Kerala has recently held that denial of credit by the department solely on the basis of difference in GSTR-2A is not justified without proof of collusion between the assessee and seller. The Honorable Kerala High Court gave this ruling in the case of Diya Agencies v. State Tax Officer.

Facts

In the present case, the petitioner’s claim for input tax credit (ITC) had been denied on the ground that invoices were not shown in GSTR-2A as taxpayers were only eligible for ITC shown in GSTR-2A. It filed a writ petition and contended that ITC could not be denied merely on the grounds of the amount not mentioned in GSTR-2A for which the petitioner had any control.

High Court

The Honorable High Court noted that credit should not be denied unless collusion between the assessee and seller is proved and the genuineness of the transaction has to be proved by the assessee since the burden to prove the genuineness of the transaction would be upon the purchasing dealer. In the instant case, the petitioner had to discharge the burden of proof regarding the tax remittance to the seller by providing evidence.

Therefore, the Court held that the denial of ITC merely on the ground that in Form GSTR-2A, said tax was not reflected, was not sustainable, and the matter was to be remanded back. Also, the Court directed Revenue to allow the petitioner to provide evidence regarding his claim for Input Tax Credit.

Read the Ruling

5. Role of Statutory Auditors highlighted in SEBI Interim order related to Structured Rotation of Funds

In its interim order, SEBI highlighted severe regulatory violations, fraudulent activities, and potential collusion involving the company and its auditors. These actions seriously affect the company’s financial integrity and raise concerns about its compliance with legal and ethical standards. Key highlights of the orders are:

The company engaged in round-tripping of funds through promoter entities to falsely represent the receipt of warrant/share application money, diverting company assets for the benefit of these related entities. Further, shares allotted to promoter entities were also released from lock-in before the stipulated period, violating Regulation 167 of SEBI ICDR Regulations, 2018.

The company did not provide adequate information to SEBI on using funds raised through preferential issues. Moreover, the company submitted fabricated bank account statements to SEBI to mislead the investigation.

In his audit report, the statutory auditor misrepresented that the company had realized the application/allotment money from the allottee(s) against the allotment of equity shares, thereby circumventing the proper verification of financial records and reporting to the stock exchange.

The statutory auditor failed to report under section 143(1)(b) and (f) of the Companies Act 2013 about the transactions which are represented merely by book entries and are prejudicial to the interests of the company, and where any shares have been allotted for cash, whether cash has been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading.

The Statutory Auditor failed to report the fraud to the Central Government under section 143(12) of the Companies Act, 2013 involving the structured circulation of funds because of which no cash flowed to the company.

The Statutory Auditor misreported under the CARO report that the company had complied with provisions of the Companies Act, 2013 w.r.t preferential issues and also misrepresented that funds raised therefrom were used for the purposes for which the same were raised and also failed to provide the details with respect to the amount involved and nature of non-compliance.

The incoming statutory auditor was associated with the outgoing firm, thereby violating the mandatory rotation of auditors under Rule 6(3) of the Companies (Audit and Auditors) Rules, 2014, read with Section 139 of the Companies Act, 2013.

The auditors did not follow SA 505 in obtaining external confirmations from banks and relied on potentially manipulated internal bank statements. The auditor should have obtained the external balance confirmations from the bank by himself instead of relying on the documents given by the management.

Read the Story