Weekly Round-up on Tax and Corporate Laws | 19th to 24th December 2022

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 19th to 24th December 2022, namely:

(a) Repealing Section 144B(9) by FA 2022 with retrospective effect isn’t unconstitutional: High Court;

(b) Independent director, who is not a signatory, shall not be liable for cheque bounce in case of general complaint: Delhi HC;

(c) High Court set aside the final audit report as the time limit of 30 days to file a reply to the draft audit report was not allowed;

(d) No GST payable on notice pay recovery by the employer as it is not a consideration for tolerating an act of premature quitting of employee: HC

(e) How to recognise the funds provided to a wholly-owned subsidiary by GoI through SPV for financial restructuring?

1. Repealing Section 144B(9) by FA 2022 with retrospective effect isn’t unconstitutional: High Court

The assessee was engaged in the business of running a flour mill, manufacturing flour from wheat. The assessee filed a writ petition before the Allahabad High Court on the grounds that the omission of sub-section (9) of Section 144B of the Income-tax Act was unconstitutional.

Section 144B(9) provided that the assessment proceedings would be invalid if the specified procedure of faceless assessment were not followed. The Finance Act 2022 had omitted the provisions of sub-section (9) of Section 144B with retrospective effect, i.e. from 01-04-2021, i.e. from the date of its inception.

It was argued that the omission of Section 144B(9) makes the entire Section 144B unconstitutional since the omission of the check/safeguard would result in an arbitrary, whimsical, capricious decision-making process.

The High Court held that sub-section (9) of Section 144B was omitted to streamline the faceless assessment process and address legal and procedural issues that arose during the implementation of this section, which was introduced in 2020.

The amendments made by the Finance Act 2022, which are the subject of this challenge, are procedural in nature and are intended to simplify the process and resolve any issues that have arisen.

The omission of sub-section (9) of Section 144B was with various new measures for checks and balances having been provided in the procedure prescribed under Section 144B.

For instance, under the pre-amendment version of Section 144B, an assessee could request a personal hearing, and this request would only be granted if the Chief Commissioner or Director General believed the request met certain criteria. However, the amendments made by the Finance Act of 2022 to Section 144B have changed this process, and personal hearing is allowed without any approval.

Sub-section (9) of Section 144B, which is a procedural statute, did not give the taxpayer any rights, including substantive rights. It only outlined a procedure for conducting an assessment and stated that it would be considered invalid if the assessment was not conducted in accordance with this procedure.

The purpose of sub-section (9) of section 144B was to place a burden on the department rather than granting rights to the taxpayer. The inclusion of this sub-section has caused numerous technical legal disputes due to difficulties in implementing the faceless assessment process, as noted in the amendment bill.

Thus, the challenge to the amendment brought by the Finance Act 2022, omitting sub-section (9) of Section 144B, cannot be sustained.

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2. Independent director, who is not a signatory, shall not be liable for cheque bounce in case of general complaint: Delhi HC

The Delhi High Court held that the vicarious prosecution of an independent director for cheque bounce by the company was to be quashed when he was not a signatory of the cheque and only general allegations were made in the complaint.

In the instant case, 16 cheques were issued in favour of the drawer company against certain agreements. Later, the cheques were drawn on account of Central Bank of India, Morena, MP maintained by the drawer company, and the same was returned dishonoured with remarks showing “Funds Insufficient”.

The complaint was filed against the company and directors (including past, non-executive and nominee directors).

A question was raised as to whether Independent Director can be vicariously prosecuted for cheque bounce by a company when he was not the signatory of the cheque, and only general allegations were made in the complaint.

It was observed that pursuant to Section 141 of the Negotiable Instruments Act, 1881 and Section 149 of the Companies Act, 2013 petitioner could have been held vicariously liable only if it was shown that he was in charge of and was responsible for the conduct of the business of the company at the time of the commission of the offence, and not otherwise.

As per settled legal propositions, it was to be specifically averred in the complaint as to how the petitioner, being an independent director, was in charge of day to day affairs of the company as well as the conduct of business.

Where only general allegations had been made against all the directors of the accused company that they were in charge of managing the day-to-day affairs of the company, and there were no specific averments or allegations carving out a specific role attributable to the petitioner in relation to the conduct of the business of the accused company, the petitioner-director cannot be made vicariously liable criminally for the dishonour of cheque of the company not signed by him and there being a material on record to show that he was an independent director in the company.

A mere general allegation or a bald assertion may be sufficient to implicate the Managing directors as well as those who are signatories to the cheque but not the other directors or persons, especially independent or non-executive directors.

The High Court held that, in the absence of any specific averments or allegations carving out a specific role attributable to the petitioner, merely making statements that all the accused persons/directors were in charge and responsible for the day-to-day affairs of the company does not suffice to make the petitioner herein vicariously liable for dishonouring of the cheques.

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3. High Court set aside the final audit report as the time limit of 30 days to file a reply to the draft audit report was not allowed

The Orissa High Court has held that the time limit of 30 days to file a reply to the draft audit report is mandatory, and if such time is not provided to the petitioner, then the final audit report is liable to be set aside. The Court has also granted an extension to complete the audit; otherwise, it would render the whole audit exercise futile.

In this case, the petition was filed to quash the draft audit report and final audit report on the ground that no opportunity was granted to the petitioner to file a reply to the draft audit report. The petitioner submitted that paradoxically, the draft and final audit reports were issued on the same day.

The High Court noted that as per Section 65 of the CGST Act, the audit shall be completed within three months from the date of commencement of the audit. But, in the instant case, the deadline of three month period had already been crossed, and the authorities issued both the draft audit report and the final audit report on the same day. Thus, the procedural requirement to give 30 days time to file a reply to the draft audit report was not followed. Therefore, the Court held that the final audit report was liable to be set aside. However, the extension to complete the audit was granted as otherwise, it would lead to the automatic quashing of the draft audit report, thereby rendering the whole audit futile.

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4. No GST payable on notice pay recovery by the employer as it is not a consideration for tolerating an act of premature quitting of employee: HC

The Kerala High Court has held that notice pay recovered by the employer is not a consideration for tolerating an act of premature quitting of employment by the employee. Therefore, the employer is not liable to pay GST on notice pay.

In the instant case, the issue was whether the petitioner-employer was liable to pay tax on notice pay received from its former employees. The petitioner filed the writ petition against the appellate authority’s order, which rejected the claim for a refund made by the petitioner for a refund of GST paid on notice pay received from the erstwhile employees. It submitted that it had no other remedy since the GST Appellate Tribunal was not constituted.

The Honorable High Court noted that the CBIC has already clarified through Circular No. 178/10/2022-GST, dated 03-08-2022, that amount is recovered by the employer not as consideration for tolerating the act of premature quitting of employment but as penalties. Thus, the employer would not be liable to pay GST on notice pay. The circular is binding on the department, and since it is clarificatory in nature, it would apply retrospectively. Therefore, it was held that the order rejecting a refund of GST paid on notice pay received from erstwhile employees was liable to be quashed.

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5. How to recognise the funds provided to a wholly-owned subsidiary by GoI through SPV for financial restructuring?

As per para 3.3.1 of Ind AS 109, an entity shall remove a financial liability or a part of it from its balance sheet as and when, and only when, it is extinguished. Further, para B3.3.1 of Ind AS 109 states that a financial liability or part of it is extinguished when the debtor either (a) discharges the liability or part of it by paying the creditor, normally with cash, other financial assets, goods or services; or (b) is legally released from primary responsibility for the liability or part of it either by process of law or by the creditor.

Here clarity is required on the accounting treatment adopted by the company on the following transaction. A company has transferred its debts from various banks and Non-Convertible Debentures (NCDs) along with the non-core assets, i.e. identified subsidiaries, to a wholly GoI-owned company (SPV). The company has decided that (a) the NCD debt would be derecognised at the carrying amount; (b) on receiving cash, it will record a financial liability and other equity; (c) the given liability will be reduced on receipt of proceeds of immovable property.

In this regard, the Expert Advisory Committee (EAC) of ICAI has noted that GoI being the parent of the SPV, provides necessary funds to the company in order to legally release the company from its liability towards the NCD holders and, therefore, the same should be derecognised by the company. As per the restructuring agreement, the SPV shall have the ownership rights of the identified subsidiaries with significant risks and rewards of ownership of the subsidiaries. Therefore, the company shall derecognise the investment. The contributions can be considered to be made by the GoI via a company owned 100% by the GoI itself. Hence, in substance, the financial assistance is in the nature of an equity contribution from the GoI. Therefore, the funds represent the shareholder’s contributions and hence shall be recognised directly in equity under ‘Other Equity’.

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