Weekly Round-up on Tax and Corporate Laws | 22nd to 27th August 2022

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 22nd to 27th August 2022, namely:

(a) 2016 Amendment to Benami Act can’t be applied retroactively to transactions entered into before 25-10-2016: Apex Court;

(b) Sum paid to a party allowable as bad debts only if it was lent in the ordinary course of money lending business: Apex Court;

(c) Govt. tweaks overseas investment norms; simplifies the existing framework for making investments outside India;

(d) Right to appeal could not be deprived even if the amount is paid for releasing of detained goods or conveyance: HC;

(e) CBIC notifies Customs (Compounding of Offences) Amendment Rules, 2022; and

(f) Accounting treatment of changes in the scrap inventory.

1. 2016 Amendment to Benami Act can’t be applied retroactively to transactions entered into before 25-10-2016: Apex Court

The issue before the Supreme Court was:

“Whether the Prohibition of Benami Property Transactions Act, 1988 [1988 Act], as amended by the Benami Transactions (Prohibition) Amendment Act, 2016 [2016 Act] has a prospective effect.”

The Supreme Court held that the main thrust of the argument put forth by the Union of India was that the amended 2016 Act only clarified the 1988 Act. The 1988 Act had already created substantial law for criminalising the offense, and the 2016 amendments were merely clarificatory and procedural to give effect to the 1988 Act.

The court held that the criminal provisions under the unamended 1988 Act were arbitrary and incapable of application. Thus, through the 2016 amendment, the law couldn’t retroactively apply for confiscation of those transactions entered between 05-09-1988 and 25-10-2016, as the same would be tantamount to punitive punishment in the absence of any other form of punishment.

In this unique circumstance, the confiscation contemplated between 05-09-1988 and 25-10-2016 would characterise itself as punitive if such confiscation is allowed retroactively. Usually, when confiscation is enforced retroactively, the logical reason for accepting such an action would be that the continuation of such property or instrument would be dangerous for the community to be left free in the circulation.

When we come to the present enactment, history points to a different story wherein Benami Transactions were an accepted form of holding in our country. At one point, the Privy Council had praised the sui generis evolution of the doctrine of trust in Indian law.

The response by the Government and the Law Commission to curb the Benami Transactions was also not sufficient as it was conceded before this Court that Sections 3 and Section 5 of the 1988 Act, in reality, dehors the legality, remained only on paper, and were never implemented on the ground. Any attempt by the legislature to retroactively impose such restrictions would no doubt be susceptible to prohibitions under Article 20(1) of the Constitution.

If looked at from a different angle, the continuation of only the civil provisions under Section 4 would mean that the legislative intent was to ensure that the ostensible owner would continue to have full ownership over the property without allowing the real owner to interfere with the rights of Benamidar.

If that is the case, then without effective enforcement proceedings for a long span of time, the rights that have crystallised since 1988 would be in jeopardy. Such implied intrusion into the right to property cannot be permitted to operate retroactively, as that would be unduly harsh and arbitrary.

Read the Ruling

Check out Taxmann's Law Relating to Prohibition of Benami Property Transactions Act 1988 which provides a comprehensive section-wise commentary on the law relating to the Prohibition of Benami Property Transactions. It is rendered in an easy to read & follow 'FAQ' format. It also includes the Legislative History and effective date of applicability based on given Case Laws. Flow charts & tables have been provided in this book for ease of reference. This book will be helpful for practitioners of Civil Law, Criminal Law, Company Law, Income-tax, etc.

Here is a Sample Read for your Reference.

2. Sum paid to party allowable as bad debts only if it was lent in the ordinary course of money lending business: Supreme Court

The assessee carries on real estate development business, trading in transferable development rights (TDR) and finance. During scrutiny assessment, the Assessing Officer (AO) disallowed a sum of Rs. 10 crores claimed as a bad debt. The CIT(A) confirmed the disallowance. However, the Tribunal allowed the assessee’s plea.

On subsequent appeal, the Bombay High Court ruled that no question of law requiring a decision arose in the appeal and consequently declined to entertain AO’s plea. AO approached the Supreme Court of India.

The Supreme Court held that for computing income chargeable to tax, besides specific deductions, ‘other deductions’ enumerated in different clauses of Section 36 can be allowed by the AO.

Each of the deductions must relate to the business carried out by the assessee. If the assessee carries on a business and writes off a debt relating to the business as irrecoverable, it would, without doubt, be entitled to a corresponding deduction under Section 36(1)(vii) subject to the fulfilment of the conditions set forth in Section 36(2).

Further, merely stating a bad and doubtful debt as irrecoverable without the appropriate treatment in the accounts, as well as non-compliance with the conditions in Section 36(1)(vii), 36(2), and Explanation to Section 36(1)(vii) would not entitle the assessee to claim a deduction.

In the present case, the record shows that the accounts of the assessee nowhere showed that the advance was made by it in the ordinary course of business.

In support of its argument that the amount was given as a loan, the assessee nowhere established the duration of the advance, the terms and conditions applicable to it, interest payable, etc. Though the assessee conceded that it had received interest income, it could not establish that any interest was paid (or shown to be payable in its accounts).

Further, there was nothing on record to suggest that the requirement of the law that the bad debt was written off as irrecoverable in the assessee’s accounts for the previous year had been satisfied.

Thus, the assessee’s claim for deduction of Rs. 10 crores as a bad and doubtful debt could not be allowed. The findings of the ITAT and the High Court were insubstantial and to be set aside.

Read the Ruling

Check out Taxmann's Yearly Tax Digest & Referencer | Set of 2 Volumes which is a Section-wise Case Book of Judgements of Supreme Court/High Courts/Income-tax Appellate Tribunal reported in 2021. It also includes Circulars & Notifications issued by the Dept. along with Words & Phrases taken from the reported case laws. 

Here is a Sample Read for your Reference.

3. Govt. tweaks overseas investment norms; simplifies the existing framework for making investments outside India

The RBI has notified the FEM (Overseas Investment) Rules, 2022 and FEM (Overseas Investment) Regulations, 2022 [together referred to as “New Norms”].

The new norms aim to simplify and liberalise the existing framework for overseas investment by a person resident in India to cover a wider economic activity and significantly reduce the need for seeking specific approvals, thereby significantly increasing the ease of investment outside India. The FEM (Overseas Investment) Rules, 2022 subsumes extant regulations pertaining to FEM (Transfer or Issue of Any Foreign Security) Regulations, 2004 and FEM (Acquisition and Transfer of Immovable Property outside India) Regulations, 2015. The key amendments are summarised hereunder:

• • ‘Overseas Portfolio Investment’ has been defined to remove the ambiguity;
  • Investment in 10% or more of the paid-up equity capital of a listed foreign entity will amount to ODI;
  • Recognition of payment on a deferred basis for acquisition or transfer under ODI;
  • Relaxation in the timelines for repatriation of dues receivable from a foreign entity to India;
  • Reporting of the Annual Performance Report rationalised;
  • Provisions regarding Late Submission Fees (LSF) are prescribed;
  • ‘Disinvestment’ is defined;
  • Disinvestment norms are rationalised;
  • No further financial commitment/transfer is allowed until the delay in reporting is regularised;
  • Entities under investigation are allowed to make ODI after obtaining NOC from investigating agencies;
  • NPA account holders/wilful defaulters are required to obtain NOC from the lender bank before making ODI;
  • Arm’s length pricing to be followed for issue/transfer of foreign entity’s equity in place of fair value;
  • Net Worth calculation norms prescribed for registered Partnership firms and LLPs;
  • Meaning of ‘Debt instruments’ & ‘Non-debt instruments’ are defined in the ODI regulations;
  • Investment in a foreign entity which has made an investment in India (commonly known as the ODI-FDI Structure) is now permitted subject to conditions; and
  • Investment in Financial services liberalised.

Read the Story

Check out Taxmann's Foreign Exchange Management Manual | Set of 2 Volumes which is a compendium of amended, updated & annotated text of FEMA, FCRA, PMLA & FDI. It includes all relevant Rules/Regulations, Notifications, Master Directions, Case Laws, FEMA & FDI ready reckoner, etc., on the foreign exchange laws in India. 

Here is a Sample Chapter for your Reference.

4. Right to appeal could not be deprived evn if the amount paid for releasing of detained goods or conveyance: HC

The Kerala High Court has held that the right to appeal by an assessee continues even if he opts to pay the amount of tax and penalty to release detained goods/conveyance/documents. The right to appeal could not be deprived irrespective of the fact that the order was issued or not by the department.

Facts

The department detained goods and conveyance of the petitioner. The petitioner made payment to get goods and conveyance documents released, and an order was issued in Form MOV-09. It decided to file an appeal but failed as a summary of order/demand in form DRC-07 was not issued. It filed a writ petition and contended that it couldn’t be deprived of the right to file an appeal on the grounds that amounts were paid and proceedings were concluded, and a summary order was not generated.

High Court

The High Court observed that it was the responsibility of the departmental officer to pass an order and upload a summary order irrespective of whether or not the taxpayer opted to make payment to get their detained goods/conveyance/documents. The provisions of Section 129(5) only contemplate that the procedure for detention or seizure of goods/conveyance/documents comes to an end if payment is made, but it shall always be open for the assessee to challenge the order if he feels that demand had been illegally raised. Therefore, the right to file an appeal could not be deprived merely because of the culmination of proceedings.

Read the Ruling

Check out Taxmann's GST Manual with GST Law Guide & Digest of Landmark Rulings (Set of 2 Vols.) which contains a compilation of amended, updated & annotated text of CGST/IGST/UTGST Act & Rules along with Forms (including Action Points), Notifications (including Rate Notifications), Circulars & Clarifications, etc. It also incorporates a 380+ Pages GST Law Guide (Short Commentary) & a Section-wise Digest of Landmark Rulings.

Here is a Sample Chapter for your Reference.

5. CBIC notifies Customs (Compounding of Offences) Amendment Rules, 2022

The CBIC has notified Customs (Compounding of Offences) Amendment Rules, 2022 to amend the Customs (Compounding of Offences) Rules, 2005 and fix the compounding amount for offences covered under Section 135AA relating to the protection of data.

The compounding amount shall be Rs. 1 lakh for the first offence, which shall be increased by 100% of this amount for each subsequent offence. It has also been provided that if the offence is punishable only under Section 135AA, immunity from prosecution shall be granted.

Read the Notification

Check out R.K. Jain’s Customs Law Manual | Set of 2 Volumes which provides the complete text of the Customs and Allied Laws with a Commentary on Customs Law & Procedure. It exhaustively covers the amended & up to date Acts, Rules, Regulations, Notifications, Forms, Allied Laws, SEZ, Circulars, Public Notices, and Clarifications. This book is amended by the Finance Act 2022.

Here is a Sample Chapter for your Reference.

6. Accounting treatment of changes in the scrap inventory

Inventories are assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies consumed in the production process or for the rendering of services. But, the same does not include the stock of scrap arising from the manufacturing process.

Also, the Guidance Note on Schedule III to the Companies Act, 2013, issued by the ICAI, does not provide any guidance on disclosure of changes in the stock of scrap. But, it suggests that the sale of manufacturing scrap arising from operations should be treated as other operating revenue since the same arises on account of the company’s main operating activity.

In the absence of any particular guidance for the accounting treatment of such changes in the inventory of scrap, one may disclose it either under “Changes in inventories of finished goods and work in progress”, or it can be shown as part of “Other operational income”.

In this regard, the Expert Advisory Committee provided that, though the guidance note requires that the sale of manufacturing scrap arising from operations should be treated as other operating revenue, it does not provide any guidance on the disclosure of ‘change in the inventory of scrap’.

Thus, drawing the analogy from the other items disclosed under “Revenue from Operations”, it was concluded that only the sale of scrap should be disclosed under ‘other operating revenue’ and not the changes in inventory of scrap.

It was further decided that the inventory of scrap shall be accounted for as by-product inventory, i.e. as internally manufactured components. Hence, the ‘change in the inventory of scrap’ should also be disclosed separately under the classification, ‘Changes in inventories of finished goods, work in progress and stock in trade’.

Read the story

Check out Taxmann's Illustrated Guide to Indian Accounting Standards (Ind AS) which provides a comprehensive commentary on Ind AS as amended by the Companies (Indian Accounting Standards) (Amendment) Rules 2021 & thorough analysis of amended Schedule III of the Companies Act 2013.  It features process flow diagrams of major Ind ASs, charts, illustrations, and case studies, along with the definitions and application guidance to help the reader understand and comprehend the nuances of each Ind AS in its simplest form. 

Here is a Sample Chapter for your Reference.