Weekly Round-up on Tax and Corporate Laws | 1st to 6th May 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 1^st to 6^th May 2023, namely:

(1) Govt. announced ‘Vivad se Vishwas scheme’ to provide relief to MSMEs for the COVID-19 period;
(2) AO can’t presume the income of the assessee relying upon school admission forms of children: ITAT;
(3) SC upholds Section 327(7) of Cos. Act 2013 which denies priority to workers’ dues in the liquidation of a company under IBC;
(4) CBIC issues guidelines for Special All-India Drive against fake registrations;
(5) Ex-parte order passed solely based upon SIB report without providing the report or hearing opportunity to be set aside: HC; and
(6) Presentation of interest accrued but not credited on saving deposit under Statement of Cash Flows.

1. Govt. announced ‘Vivad se Vishwas Scheme’ to provide relief to MSMEs for the COVID-19 period

The Union Finance Minister, Smt. Nirmala Sitharaman, announced the ‘Vivad se Vishwas Scheme’ in the Union Budget 2023-24 to provide relief to MSMEs for the COVID-19 period. The government, vide Press Release dated 02-05-2023, launched a scheme, “Vivad se Vishwas I – Relief to MSMEs”.

Under the scheme, Ministries have been instructed to refund performance security, bid security and liquidated damages forfeited or deducted during the pandemic. The relief provided under this scheme is in continuation of the government’s efforts to promote and sustain the MSME sector.

Earlier, the Department of Expenditure, Ministry of Finance, issued an order on 06-02-2023 outlining the broad structure of the scheme. Final instructions in this regard, extending the relief to cover more cases and relaxing the limits of refunds, were issued on 11-04-2023. The scheme commenced on 17-04-2023, and the last date for submission of claims is 30-06-2023.

The Ministry of Finance, through this scheme, has decided to give the following benefits to eligible MSMEs affected during the COVID-19 period:

(a) 95% of the performance security forfeited shall be refunded.

(b) 95% of the bid security shall be refunded.

(c) 95% of the Liquidated Damages (LD) deducted shall be refunded.

(d) 95% of the Risk Purchase amount realized shall be refunded.

(e) In case any firm has been debarred only due to default in the execution of such contracts, such debarment shall also be revoked by issuing an appropriate order by the procuring entity.

Read the Press Release

2. AO can’t presume the income of the assessee relying upon school admission forms of children: ITAT

Assessee, an individual, filed his return of income declaring the amount of Rs. 2.64 lakhs. A search action was carried out on the residence of the assessee. In the statement recorded under Section 132(4), the assessee stated that his household expenses and education expenses of two kids were Rs. 14 lakhs, which his younger brother bears.

To verify the claim, the AO issued a notice under Section 133(6) to the school to furnish the admission form, fee paid by the assessee and bifurcation thereof. On perusal of the school form, the AO noted that in the school admission form, the assessee had mentioned his monthly income as Rs. 4.00 lakhs per month.

Further, the assessee and his wife signed a declaration wherein they certified that the information given in the admission form was true to their knowledge and belief that incorrect information supplied in the admission form would jeopardize selection and enrolment.

Thus, the AO took his view that the assessee was having annual income of Rs. 48 lakhs per annum and made additions under Section 69A.

On appeal, the CIT(A) upheld the additions made by the AO. Aggrieved-assessee filed the instant appeal before the Tribunal.

The Tribunal held that AO estimated the assessee’s income solely on the school admissions form of his children, wherein the assessee filled up his monthly income of Rs. 4 lakhs per month. The assessee explained that the entry on the school admission form was made only to secure the admission of his children.

In the search proceedings, no tangible material or evidence was found that the assessee had unaccounted income. AO made additions solely relying upon the information gathered from the school under Section 133(6), which was also gathered at the back of the assessee.

Under the law, it is a settled position that only real income accrued or earned by an individual can be brought to tax, and there is no place for any presumption.

Thus, the appeal was restored back to the file of AO with the direction to grant the opportunity to the assessee to explain the nature and relevance of the school admission form and to lead any other evidence, if so desired by the assessee to disprove the contents of such school admission form.

Read the Ruling

3. SC upholds Section 327(7) of Cos. Act 2013 which denies priority to workers’ dues in the liquidation of a company under IBC

The Apex Court upheld the validity of Section 327(7) of the Companies Act 2013, which denies priority to workers’ dues after the liquidation of a company under the Insolvency and Bankruptcy Code, 2016 (IBC).

The question raised before the Apex Court was whether the waterfall mechanism under Section 53 of the IBC would be applicable to the workmen’s dues or not. The mechanism determines the order of priority for the distribution of the proceeds from the sale of the liquidation assets.

Section 53 of the IBC read as follows:

53. (1)Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force,the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely:

(a) the insolvency resolution process costs and the liquidation costs paid in full;

(b) the following debts which shall rank equally between and among the following:

• • Workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and
  • Debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;

(c)  wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

(d) financial debts owed to unsecured creditors;…….

The Supreme Court noted that as per Section 327(7) of the Companies Act, 2013, Sections 326 and 327 of the Act, 2013 shall not be applicable in the event of liquidation under the IBC. Sections 326 and 327 of the Cos. Act provide for preferential payments in a winding up under the provisions of the Cos. Act.

However, in view of introducing a new regime under the IBC, in case of liquidation under the IBC, distribution is to be made as per Section 53 of the IBC. As per Section 53(1)(b) of IBC, the workmen’s dues are for the period of twenty-four months preceding the liquidation commencement date.

The Supreme Court referred to Section 53(1)(b), which specifies that debts owed to workmen as workmen’s dues for a period of 24 months before the commencement of the liquidation and debts owed to the secured creditor who has relinquished their security as per Section 52 shall rank equally between and amongst the workmen and the secured creditors.

The Supreme Court further noted that the waterfall mechanism prescribed by Section 53 is based on a structured mathematical formula, which should not be disrupted as it could lead to instability and cascading effects on the balance of rights and interests of all stakeholders, including secured and unsecured creditors, and the government.

The Supreme Court held that the objective of the Code is to maximize the value of assets of all persons and balance the interests of all stakeholders.

The Supreme Court further held that the unpaid dues of the workmen are adequately and significantly protected in line with the objectives sought to be achieved by the Code and in terms of the waterfall mechanism prescribed by Section 53 of the Code.

Therefore, Section 327(7) of the Cos. Act cannot be said to be arbitrary and/or violative of Article 21 of the Constitution of India. In case of the liquidation of a company under the IBC, the distribution of the assets shall have to be made as per Section 53 of the IBC.

In view of the above, the Supreme Court upheld Section 327(7) of the Companies Act 2013, which denies priority to workers’ dues after the liquidation of a company under the IBC.

Read the Ruling

4. CBIC issues guidelines for Special All-India Drive against fake registrations

The issue of unscrupulous elements misusing the identity of other persons to obtain fake/ bogus registration under GST to defraud the Government exchequer was deliberated during the National Co-ordination Meeting of the State and Central GST officers held at New Delhi on 24-04-2023. The menace of fake registrations and issuance of bogus invoices for passing the fake ITC has become a serious problem, wherein fraudulent people engage in dubious and complex transactions, causing revenue loss to the government.

Therefore, it was agreed that a nationwide effort in the form of a Special Drive should be launched on an All-India basis to detect such suspicious/ fake registrations, and thus, the CBIC has issued guidelines for such concerted action on fake dealers/ fake billers in a mission mode. The Special All-India Drive would be launched by Central and State Tax administrations from 16-05-2023 to 15-07-2023 for the identification of fraudulent GSTINs. In this regard, Instruction No. 01/2023-GST, dated 04-05-2023, has been issued.

Read the Instruction

5. Ex-parte order passed solely based upon SIB report without providing the report or hearing opportunity to be set aside: HC

The Allahabad High Court has held that ex-parte order passed solely based upon the SIB report is not sustainable where a copy of the report is not provided to the assessee and the opportunity of a personal hearing is also not granted.

The petitioner was registered under GST. The Deputy Commissioner (SIB) conducted an inspection of the premises and prepared a report. Thereafter, the summon was issued to the petitioner, which the petitioner attended. Subsequently, after about three years, the petitioner was served with a show-cause notice on the basis of the SIB survey report. It asked for an adjournment and was waiting for the supply of the SIB report. However, an ex-parte order was passed. It filed a writ petition to challenge the order.

The High Court noted that in the instant case, the principle of natural justice was violated as, admittedly, the SIB report, which was the foundation, was never supplied to the petitioner. It is equally well settled that any document proposed to be relied upon should be provided to the assessee before the conclusion of the proceedings. The Court also noted that no opportunity for a hearing was granted to the petitioner before passing the order.

Moreover, Sections 61 and 67 are steps towards the initiation of the proceedings, but they do not form any basis for concluding the evasion of tax. A mere report of inspection and discrepancy in the scrutiny of returns is not enough to assess and levy the tax. Therefore, it was held that the impugned order was not sustainable and liable to be set aside.

Read the Ruling

6. Presentation of interest accrued but not credited on saving deposit under Statement of Cash Flows

Para 20 of Ind AS 7 (Statement of Cash Flows) states that under the indirect method, the net cash flow from operating activities is determined by adjusting profit or loss for the effects of items for which the cash effects are investing or financing cash flows. In order to comply with the provision of Ind AS 7, a company has adjusted the total interest income, including accrued interest from the operating cash flow, so that the total effect of the investing transaction is nullified from the net profit before tax under cash flow from the operating activities and added the same to the cash flow from investing activities.

However, the auditor issued a memo regarding the presentation of the interest amount received by the company. It states that the interest received by the company has been incorrectly depicted in cash flows from investing activities due to non-adjustment of accrued interest. The company has sought the opinion of the Expert Advisory Committee (EAC) on the above presentation of the interest income in the statement of cash flows.

The Expert Advisory Committee (EAC) has noted that the company has deducted total interest income from the profit to reach the actual cash flows from operating activities, and the same amount is shown in cash flow from investing activities. However, this total interest income includes interest income accrued but not credited, which is a non-cash transaction. This portion of accrued interest which is non-cash should be excluded from the cash flows from investing activities. Accordingly, the inclusion of accrued interest under the cash flows from investing activities in the statement of cash flows is not correct.

Read the Story