Weekly Round-up on Tax and Corporate Laws | 22nd to 27th May 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 22^nd to 27^th May 2023, namely:

(a) CBDT prescribes a manner to compute ‘Net Winnings’ from online games under Section 115BBJ & Section 194BA;

(b) CBDT releases draft Rule 11UA incorporating 5 new valuation methods;

(c) Major change in IPO Process: SEBI makes underwriting agreement a pre-requisite under revised ICDR norms;

(d) CBIC issues Standard Operating Procedure for Scrutiny of Returns for FY 2019-20 onwards;

(e) Non-issuance of notice under Section 61 would not affect the validity of proceedings initiated under Section 74: HC;

(f) Section 10A absolutely and forever bars initiation of the CIRP for defaults committed between 25-3-2020 to 25-3-2021; and

(g) Ind AS Schedule III Checklist: Presentation and Disclosure of Other Equity in the Financial Statements.

1. CBDT prescribes a manner to compute ‘Net Winnings’ from online games under Section 115BBJ & Section 194BA

With effect from the assessment year 2024-25, a new Section 115BBJ has been introduced by the Finance Act 2023 to tax net winnings from any online games. A corresponding Section 194BA has also been inserted with effect from 01-04-2023 for the deduction of tax from the net winnings from online games.

The provisions provide that the net winnings shall be computed in the manner as may be prescribed. The manner of computation of net winning has been prescribed in Rule 133 of the Income-tax Rules 1962.

Further, the CBDT has issued removal of difficulty guidelines for the purpose of deduction of tax under Section 194BA. These guidelines are binding on the income-tax authorities and the person liable to deduct income-tax. It is to be noted that unlike Section 194BA, Section 115BBJ does not empower the CBDT to issue removal of difficulties guidelines to remove difficulties that may arise in implementing Section 115BBJ. A reference may be taken from these removal difficulties guidelines for Section 115BBJ, but they cannot be considered binding. It is settled law that tax collection provisions like TDS are not determinative of the nature of levy and taxability. What suffers TDS may not be taxable, while what is exempt from TDS may not necessarily be tax-exempt.

Read the Notification

Read the Circular

Read the Article

2. CBDT releases draft Rule 11UA incorporating 5 new valuation methods; invites public comments

The Finance Act, 2023, amended Section 56(2)(viib) to tax the excess consideration received from non-residents for the issue of shares. The section provides that if the consideration for the issue of shares exceeds the Fair Market Value (FMV) of the shares, it shall be chargeable to income tax under the head of ‘Income from other sources’. Rule 11UA prescribes the manner to compute the FMV of such shares.

Pursuant to the Finance Act 2023 amendment, the CBDT has released a notification proposing an amendment to Rule 11UA. The CBDT has requested the stakeholders and the general public to provide suggestions/comments on the draft Rule 11UA and send them to the email address ustpI2@nic.in latest by 5^th June 2023.

The changes proposed in the draft rule are mentioned below:

(a) 5 new valuation methods for non-resident investors

The draft rule introduced the following five new methods for the computation of the FMV of the unquoted shares determined by the merchant banker:

(a) Comparable Company Multiple Method;

(b) Probability Weighted Expected Return Method;

(c) Option Pricing Method;

(d) Milestone Analysis Method; and

(e) Replacement Cost Methods.

These new methods can be used only to determine the FMV of shares issued to non-resident investors.

(b) The price at which shares are issued to the notified entity can be treated as FMV for others

It has been proposed that if a company receives any consideration for the issue of shares from a notified entity, the price of the equity shares corresponding to such consideration may be taken as the FMV of the equity shares for other investors.

However, the following two conditions must be satisfied:

(a) The above benchmarking applies only to the extent of aggregate consideration received from the notified entity; and

(b) The company has received the consideration from the notified entity within 90 days of the date of the issue of shares which are the subject matter of valuation.

Along similar lines, venture capital undertaking can use the price of equity shares issued to a venture capital fund, venture capital company or specified fund.

For example, if a venture capital undertaking receives a consideration of Rs 50,000 from a venture capital company for the issue of 100 shares at the rate of Rs. 500 per share, then such an undertaking can issue 100 shares at this rate to any other investor within 90 days of the receipt of consideration from venture capital company.

(c) Merchant Banker’s report shouldn’t be older than 90 days

It has been proposed that the valuation report by the Merchant Banker would be acceptable if it is of a date not more than 90 days before the date of issue of shares which are the subject matter of valuation.

(d) 10% Safe harbor limit introduced

The draft rules has proposed a safe harbor limit of 10%. This means that if the price at which shares are issued is higher than the value determined per Rule 11UA, but the difference does not exceed 10%, the issue price will be held as the fair market value.

Read the Draft Notification

3. Major change in IPO Process: SEBI makes underwriting agreement a pre-requisite under revised ICDR norms

The SEBI has notified the amendment in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. The major amendments have been notified in underwriting provisions contained in Regulations 40 and 136.

The key highlights of the amendment are as follows:

(a) Mandatory underwriting agreement

The SEBI has notified amendments to Regulations 40 and 136 of the ICDR Regulations, which pertain to the ‘underwriting’. As per the amended norms, an issuer shall, before filing the prospectus, enter into an underwriting agreement with the merchant bankers or stock brokers registered with the Board to act as underwriters.

Earlier, the issuer intending to make an IPO (other than through the book-building process) and wanted to have the issue underwritten was required to appoint underwriters in compliance with SEBI (Underwriters) Regulations, 1993.

(b) SEBI mandates for complete industry report

Earlier, Schedule VI of the ICDR Regulations only required disclosing the industry overview. As per the amended norms, if an extract of any industry report is disclosed in the offer document, the complete industry report shall be provided as part of the material documents.

(c) Material contracts will be available for online inspection

The SEBI has notified amendment in clause 18(3) in Part A and clause 22(B) in Part B-1 of Schedule VI of the ICDR Regulations. Earlier, material contracts and material documents were available for inspection. Now, the SEBI has provided that the material contracts and material documents shall also be made available for inspection through online means.

Read the Notification

Read the Article

4. CBIC issues Standard Operating Procedure for Scrutiny of Returns for FY 2019-20 onwards

The Standard Operating Procedure (SOP) was issued earlier for online scrutiny of returns as an interim measure until a Scrutiny Module is made available on the ACES-GST application. Now, DG Systems has developed a functionality, “Scrutiny of Returns”, containing the online workflow to scrutinise returns in the CBIC ACES-GST application.

Therefore, the CBIC has issued modified SOPs regarding scrutiny of returns for financial years 2019-20 onwards. The GSTINs selected for scrutiny for the Financial Year 2019-20 have also been made available on the scrutiny dashboard of the proper officers on the ACES-GST application. In this regard, Instruction No. 02/2023-GST has been issued, which provides a scrutiny schedule, the process of scrutiny, along with timelines and reporting requirements.

It is also clarified that since the scrutiny functionality has been provided on the ACES-GST application only for the Financial Year 2019-20 onwards, the procedure specified in Instruction No. 02/2022 dated 22-03-2022 shall continue to be followed for the scrutiny of returns for the Financial Year 2017-18 and 2018-19. In this regard, Instruction No. 02/2023-GST dated 26^th May 2023 has been issued.

Read the Instruction

5. Non-issuance of notice under Section 61 would not affect the validity of proceedings initiated under Section 74: HC

The Allahabad High Court has held that non-issuance of notice under Section 61 of the CGST Act, 2017 would not affect the validity of proceedings initiated under Section 74. The Court has therefore held that proceedings of revenue to be considered valid, and the assessee is permitted to avail remedy of appeal.

The petitioner had submitted returns for the period 2019-20. The GST department had not issued any notice under Section 61 of the CGST Act, 2017, but it initiated proceedings under Section 74 against the petitioner on certain grounds with regard to classification and consequential tax payable of certain goods.

The department examined the issue and ultimately passed an order whereby the previously paid tax was found short, and a demand had been raised for deposit of appropriate shortfall in the deposit of tax, along with interest and penalty. It filed a writ petition against the assessment order. It contended that the department must have pointed out deficiencies in the returns submitted by the petitioner to allow it an opportunity to rectify the return before proceeding under Section 74 of the Act.

The High Court noted that the scrutiny proceedings of return and proceedings under Section 74, are two separate and distinct exigencies. Therefore, the issuance of notice under Section 61(3) cannot be construed as a condition precedent for initiating action under Section 74 of the Act.

Thus, the Court held that merely because no notices were issued under Section 61 of the Act, it would not mean that issues of classification or short payment of tax could not be dealt with under Section 74 as an exercise of such power was not dependent upon issuance of notice under Section 61. The Court dismissed the writ petition, and the petitioner was permitted to prefer an appeal against the impugned order.

Read the Ruling

6. Section 10A absolutely and forever bars initiation of the CIRP for defaults committed between 25-3-2020 to 25-3-2021

The NCLT held that Section 10A of the IBC bars the initiation of the CIRP under Sections 7, 9 and 10 of the IBC for defaults committed between 25-03-2020 and 25-03-2021. Therefore, the application filed by the financial creditor under Section 7 of the IBC for default that occurred on 24-03-2021 was time-barred.

The financial creditor provided the working capital facility to the principal borrower. Subsequently, the corporate debtor executed a guarantee agreement in favour of the financial creditor. The Principal Borrower failed to maintain the required Debt Service Reserve Account (DSRA) balance and pay interest. Financial Creditor invoked guarantee and filed IBC application under Section 7 for default of Rs. 149 crores.

It was observed that the initial demand notice was addressed to the corporate debtor on 05-03-2021, and the default with respect to the corporate debtor took place on the date when the demand notice was served upon it, i.e. 24-03-2021.

The NCLT held that Section 10A of the IBC absolutely and forever bars the filing of any application under Sections 7, 9 and 10 for defaults committed on or after 25-03-2020 up to 25-03-2021. Therefore, an instant application where the default by the corporate debtor took place on 24.03.2021 was also barred under the same.

Read the Ruling

7. Ind AS Schedule III Checklist: Presentation and Disclosure of Other Equity in the Financial Statements

The presentation and disclosure of other equity in financial statements are crucial elements of financial reporting according to the Indian Accounting Standards (Ind AS) Schedule III. Other equity refers to the portion of a company’s shareholders’ equity that is distinct from share capital and retained earnings. It includes various items like share premiums, revaluation reserves, capital reserves, and other reserves established by the company. Properly presenting and disclosing other equity ensures transparency and allows financial statement users to understand the composition, changes, and movements in the company’s equity structure. This checklist aims to outline important considerations for the presentation and disclosure of other equity in financial statements, taking into account the requirements of Ind AS Schedule III.

(a) Has the company disclosed the Share Application money pending allotment as a separate line item under Other Equity

(b) Whether the company has disclosed refundable share application money under other financial liabilities

(c) Has the company complied with Ind AS 32 by splitting compound financial instruments that have both an equity and liability component

(d) Has the equity component of the compound financial instrument been disclosed by the company as a part of Other Equity

(e) Has the company presented the liability component of compound financial instruments as a part of Borrowings

Read the Story