Weekly Round-up on Tax & Corporate Laws | 20th to 25th September

This weekly newsletter analytically summarizes the key stories reported at taxmann.com during the previous week from 20th to 25th September 2021, namely:

(a) Govt. issued notifications for decisions taken in 45th GST council meeting;

(b) The Assessing Officer couldn’t disregard a transaction just because it resulted in tax advantage to the assessee: Mumbai ITAT;

(c) The Apex Court held that parties engaged in commercial litigation must weigh commercial interests and avoid filing mindless appeals;

(d) No cessation of liability if proceedings for recovery of the amount from assessee were pending before the court;

(e) Cenvat Credit availed based on debit notes can’t be denied when the eligibility of credit is not disputed;

(f) MCA directs RoCs to extend the due date of AGM for the financial year ending 31st March 2021 by two months;

(g) Resolution applicant can change nature of business of corporate debtor as long as the objective of IBC isn’t hampered; and

(h) NFRA issues Audit Quality Review (AQR) report of statutory audit of IL&FS Transportation Networks Limited (ITNL) for the financial year 2017-18.

1. Govt. issued notifications for decisions taken in 45th GST Council Meeting

In pursuance of the 45th GST Council meeting, the Government has amended the CGST Rules, 2017 vide Notification No. 35/2021 – Central Tax, Dated 24th September 2021. The brief of these amendments are as under:

(a) Aadhaar authentication is mandatory for persons already registered under the GST law to file a revocation of cancellation of registration and for filing of refund applications under Rule 89, including a refund of IGST paid on export of goods;

(b) The bank account furnished on the GST portal should be in the name of a registered person and must be linked with the PAN. The refund would be granted in such a bank account only. For proprietors, linking of Aadhaar with PAN is now mandatory;

(c) Changes in the frequency of filing of Form GST ITC-04;

(d) Restriction on the filing of GSTR-1 if the GSTR-3B of the previous month is not filed;

(e) Specific rules are introduced for granting refund of tax paid under the wrong head.

Read the Notification

BONUS:
Read Taxmann’s Sectoral Analysis of the 45th GST Council Meeting

Drafted by Taxmann’s Indirect Tax Research & Advisory Team

2. AO can’t disregard a transaction just because it results in tax advantage to the assessee

The Mumbai Tribunal has justified the action of the assessee in booking loss in the year in which he had earned profit from another transaction to enable him to set-off the losses. The Tribunal held that it is legitimate tax planning without using colourable devices.

Facts

The assessee had sold a property and reported long-term capital gain. It has also reported a long-term capital loss on sale of shares of VCAM Investment Managers Pvt Ltd. The Assessing Officer (AO) was of the view that long-term capital loss was attributed on account of equity shares of VCAM that appeared to be prima facie fictitious and not entitled to be adjusted against any taxable income.

Thus, the AO rejected the assessee’s claim on the ground that the net worth of VCAM was entirely eroded and wiped out by losses. The value of shares sold was negative, with no future profit-earning capacity or any future business prospects. Thus, the loss was prima facie fictitious and premeditated and was created to avoid the tax liability on account of the sale of immovable property.

The assessee carried the matter before the CIT(A) but without any success. Aggrieved-assessee filed the instant appeal before the Tribunal.

The Ruling

The Mumbai Tribunal held that the benefit of long-term capital loss could not be declined to the assessee, only on the ground that if the assessee had not taken these proactive measures, he would have paid more taxes. The assessee may so end up saving taxes, but then that is perfectly legitimate.

The AO cannot disregard a transaction just because it results in a tax advantage to the assessee. Just as much as we cannot legitimize and glorify tax evasion through colorable devices and tax shelters, we cannot also deprecate and disapprove genuine tax planning within the framework of the law. The line of demarcation between what is permissible tax planning and what turns into impermissible tax avoidance may be somewhat thin, but that cannot be excuse enough for the tax authorities to err on the side of excessive caution.

Thus, the AO was directed to allow set-off of this long-term capital loss on the sale of shares in VCAM against the long-term capital gains on the sale of the property.

Read the Ruling

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3. Parties engaged in commercial litigation must weigh commercial interests and avoid filing mindless appeals: SC

In the instant case, the Government of Tamil Nadu invited a tender in a matter of production and supply of polyester-based hologram excise labels on a turnkey basis. The stickers were to be pasted across caps of bottles of liquor sold by the State Government through one of its instrumentalities, the Tamil Nadu State Marketing Corporation. Two prospective tendering parties filed writ petitions in this matter. The single bench dismissed the writ petition. However, the division bench allowed it. The Division bench found that tender conditions were tailor-made in favour of some companies.

On appeal to Supreme Court, it held that the court could not be made an appellate authority for scrutinizing as to whom tender should be awarded. Economics must be permitted to play its role for which tendering authority knows best as to what is suited in terms of technology and price for them.

The Supreme Court further observed that a tenderer or contractor with a grievance can always seek damages in a civil court. Thus, attempts by unsuccessful tenderers with imaginary grievances, wounded pride, and business rivalry, to make mountains out of molehills of some technical/procedural violation or some prejudice to self, and persuade courts to interfere by exercising the power of judicial review, should be resisted.

Read the Ruling

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4. No cessation of liability if proceedings for recovery of the amount from assessee were pending before court

The Mumbai Tribunal has ruled that the foundational condition to bring an amount to tax under section 41(1)(a) is that there has to be a benefit in respect of such trading liability by way of ‘remission and cessation’. Thus, when a proceeding to recover an amount from an assessee was pending before the Court, such amount can’t be treated as ceased liability under the said section.

Facts

The assessee was a company engaged in the business of trading. During the assessment, Assessing Officer (AO) noted that the assessee had two creditors. The assessee had purchased and sold the consignment, and since the consignment was not of good quality, the payments to these parties were not made.

Accordingly, the AO held that amount to be paid to these creditors was trading liability and was not paid to date. Thus, the same should be treated as deemed income of business by cessation of trading liability under Section 41(1)(a) of the Income-tax Act. The assessee opposed treatment because the liability had not ceased as the same was disputed before judicial forums. However, the AO rejected the assessee’s contentions.

The CIT(A) reversed the order of AO. The aggrieved assessing officer filed the instant appeal before the Tribunal.

The Ruling

The Mumbai Tribunal held that it was an undisputed position that at the relevant point of time, the proceedings against the assessee for recovery of amounts payable to creditors were pending before the Hon’ble judicial forum.

To bring an amount to tax under Section 41(1)(a), three fundamental conditions must be satisfied. One of the very foundational conditions is that there has to be a benefit in respect of such trading liability through ‘remission and cessation’.

In the instant case, that condition was not satisfied due to the pendency of recovery proceedings initiated by creditors against the assessee. Thus, the order of CIT(A) deleting additions was to be upheld.

Read the Ruling

5. Cenvat Credit availed on the basis of debit notes can’t be denied when the eligibility of credit is not disputed: CESTAT

The honorable CESTAT has recently held that credit cannot be denied because it is taken on the basis of debit notes, and there is no dispute about the payment of tax and its eligibility. Thus, because the document on which credit is availed is a debit note, the denial of credit is not legal or proper. This ruling is given in the case of Gates Unitta India Company Pvt. Ltd. vs. Commissioner of GST & Central Excise.

Facts

The appellant was engaged in the manufacture of goods and availed CENVAT credit on inputs and input services availed. It took input service credit based on debit notes, and the department issued a notice alleging that credit was not allowed on the basis of debit notes and denied the credit availed. It filed an appeal against the same.

CESTAT

The honorable CESTAT observed that though Rule 9(1) of CENVAT Credit Rules, 2004 does not mention debit note as a document on which credit can be availed but in case all necessary particulars are mentioned, then the credit cannot be denied only because credit is taken on the basis of the document which is a debit note. Moreover, in case the department did not dispute the payment of service tax on the amounts raised in the debit notes, the credit can’t be denied. Therefore, the denial of credit on the ground that the document on which credit was availed was a debit note was not legal or proper and liable to be set aside.

Read the Ruling

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6. MCA directs RoCs to extend the due date of AGM for the financial year ending 31st March 2021 by two months

The Central Government had received representation seeking extension of Annual General Meetings for Financial Year 2020-21 citing many difficulties faced by stakeholders during the second wave of Covid-19 and consequent lockdown. Accordingly, the Central Government has decided to advise the Registrar of Companies (RoCs) to accord approval for extension of time for two months beyond the due dates. The Govt. has also prescribed a standard template for the order to be issued by RoCs under Section 96(1) of the Companies Act, 2013 to grant an extension of time for conducting AGM for the Financial year 2020-21.

As per the third proviso to Section 96(1) of the Companies Act, 2013, the Registrar of Companies may, for any special reason, extend the time within which any annual general meeting other than the first annual general meeting shall be held by a period not exceeding three months.

Read the Office Memorandum

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7.Resolution applicant can change nature of business of corporate debtor as long as the objective of IBC isn’t hampered

In this significant ruling in the matter of Next Orbit Ventures Fund v. Print House (India) (P.) Ltd., the appellate Tribunal held that a resolution applicant could change the nature of business of corporate debtor as long as the objective of IBC isn’t hampered

Facts

A Resolution Professional of the Corporate Debtor filed an application invoking the provisions of Section 30(6) of the Code read with Regulation 39(4) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 for approval of the resolution plan in respect of the Corporate Debtor, against whom CIRP has been initiated before the NCLT, Mumbai.

The suspended directors and promoters of the Corporate Debtor filed an application before Adjudicating authority objecting to the approval of resolution plan, on the ground that the Resolution Applicant – ‘Sify Technologies Limited’ intends to change the main business of the ‘Corporate Debtor’ from printing business to running data centers. The Adjudicating Authority dismissed the said application.

NCLAT’s Ruling

On appeal, the NCLAT held that the IBC provides for the restructuring of the corporate debtor or change in portfolio of goods and services produced/rendered by the corporate debtor as long as scope and objective of code are not hampered. Therefore, if the resolution plan submitted by the successful resolution applicant contemplated a change in nature of the business to another line when the existing business was obsolete or non-viable, it could not be construed that the Resolution plan was not ‘feasible or viable’.

Read the Ruling

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8. NFRA issues Audit Quality Review (AQR) report of statutory audit of IL&FS

Transportation Networks Limited (ITNL) for the financial year 2017-18
Pursuant to Section 132(2) of the Companies Act, 2013 and NFRA Rules, 2018, the National Financial Reporting Authority (NFRA) has issued AQR report of statutory audit of IL&FS Transportation Networks Limited (ITNL) for the financial year 2017-18. The statutory auditor for the engagement was SRBC & Co. LLP, Chartered Accountants.

The NFRA has highlighted the concerns in its report not just about the initial appointment and continued appointment of SRBC & Co. LLP as the company’s statutory auditor but also about the concerned auditor’s professional skepticism. The auditor has failed to monitor and enforce the compliance with Accounting Standards and Auditing Standards relevant to the performance of the engagement, according to the NFRA.

The report issued by NFRA explains some significant conclusions on Audit Quality Review (AQR).

1. The appointment and continuation of SRBC & Co LLP was prima facie illegal and void.

2. The auditor has failed to evaluate the going concern principle and thus failed to report the implications of the same in the Auditor’s Report.

3. Financial exposure to its group entities amounting to Rs. 3346 crore was not properly valued.

4. EQC partner of the audit firm has failed to exercise due diligence while reviewing the financial statements.

5. The auditor has failed to report the material misstatements known to him.

6. The auditor has failed to maintain the documents in compliance with SA 230 Audit Documentation.

Read the Story

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  • Notifications issued under NFRA
  • Companies (Auditor’s Report) Order, 2016

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