Weekly Round-up on Tax and Corporate Laws | 23rd to 28th January 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 23rd to 28th January 2023, namely:

(a) Notice issued in the name of struck off co. is valid if NCLT restored its name after issuing the notice: HC;

(b) Doctors employed by subsidiary co. but providing services to group cos. are eligible for ESOPs: SEBI

(c) No late fees are to be charged if GST returns are not filed due to cancellation of GST registration which was restored subsequently: HC;

(d) Order cancelling registration without affording any opportunity of hearing to be set aside: HC;

(e) Interest on surplus funds deployed with the bank is to be treated as other operating revenue or other income.

1. Notice issued in the name of struck off co. is valid if NCLT restored its name after issuing the notice: HC

The Delhi High Court held that the reassessment notice issued in the name of the struck-off Co. is valid if NCLT restored its name after the reassessment notice is issued to recover tax dues.

Petitioner was a promoter and director of a private limited company. In 2017, the ROC struck off the name of the company due to defaults in filing the statutory return.

The assessing officer observed that the company had not filed its return of income for the assessment year 2012-13 despite earning huge income. Consequently, AO issued a notice for reassessment under Section 148.

Subsequently, AO obtained an affidavit from the National Company Law Tribunal (NCLT), wherein the petition for restoration of the company’s name was allowed as per Section 252 of the Companies Act, 2013.

Since the notice was issued in the name of the struck-off company and subsequent order for restoring the company was obtained after issuing such notice, the petitioner filed a writ petition with the Delhi High Court for quashing the impugned order.

The Delhi High Court emphasised Section 252 of the Companies Act 2013, which states that the company can be restored by the NCLT on application by a person feeling aggrieved by the order to strike off the company’s name. The restoration will be affected as if the name was never struck off. Therefore, even on the date of issuing notice, although not restored, the company will be deemed to be in existence.

In the instant case, ROC struck off the company’s name as it defaulted in its statutory filings but was restored by NCLT upon realising that it was prejudicial to the interest of the Income-tax Department. As the name was restored, the notice under Section 148 issued in the company’s name before its restoration was valid and justified.

Read the Ruling

2. Doctors employed by subsidiary co. but providing services to group cos. are eligible for ESOPs: SEBI

The SEBI has issued informal guidance to clarify that the doctors engaged by the subsidiary co. but providing services to the group companies (without any employer-employee relationship with any other entity) would be eligible employees under the SEBI (Share Based Employee Benefit and Sweat Equity) Regulations, 2021.

In the instant case, Kids Clinic India Limited, a company registered under the Companies Act, filed a Draft Red Herring Prospectus with the SEBI on 10th Feb 2022 to list its equity shares on a recognised stock exchange.

The company engaged super specialist doctors on a consultancy basis to provide professional medical services. To optimise the business of the company and the subsidiary, it was proposed to employ doctors exclusively in the subsidiary company to provide their expert advice. Further, those doctors would also be engaged on a consultancy basis by Kids Clinic India Limited.

In addition, the doctors were also permitted to separately carry on a private clinic practice/evening clinic outside the committed time of employment/engagement with the company and its subsidiary. The question that arose was whether stock options could be granted under the ESOP plan 2013 to the doctors who are proposed to be engaged as eligible employees.

Meaning of the term ‘Employee’ as per SEBI Regulations:

Pursuant to Regulation 2(1)(i) of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, the term “employee” has been defined to mean and include:

(i) an employee as designated by the company, who is exclusively working in India or outside India; or

(ii) a director of the company, whether a whole-time director or not, including a non-executive director who is not a promoter or member of the promoter group, but excluding an independent director; or

(iii) an employee as defined in sub-clauses (i) or (ii) of a group company, including subsidiary or its associate company, in India or outside India or of a holding company of the company.

The SEBI submitted that as per Regulation 2(1)(i)(iii) of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 a person who is designated as an employee by the company/its group/subsidiary/associate companies is also eligible for stock options.

In the instant case, doctors would be exclusively employed by the subsidiary and provide services to the group. Further, the company also mentioned there shall be no other employer-employee relationship with any other entity or company outside the group.

In view of the above, the SEBI stated that the said doctors would be eligible for the grant of share-based employee benefits under the SEBI (Share Based Employees Benefit and Sweat Equity) Regulations, 2021, if designated as exclusively employed with the subsidiary.

Read the SEBI Order

3. No late fees are to be charged if GST returns are not filed due to cancellation of GST registration which was restored subsequently: HC

The Calcutta High Court has held that the demand for late fees under Section 47 of CGST Act, 2017 is not sustainable when the assessee has failed to file returns due to cancellation of GST registration which has been subsequently restored.

The appellant was a registered dealer under GST, and its registration was cancelled on the ground that the appellant was a non-existing dealer. It filed an appeal, and its registration was restored, but demand for late fees of Rs. 5000 per return was raised when it tried to file GST returns. It challenged the demand by filing a writ petition. It contended that the department cancelled registration on a factually incorrect premise. The learned Judge declined to grant interim order, and the appellant filed the appeal.

The High Court noted that demand of late fees under Section 47 of CGST Act, 2017 can be raised for non-filing of return by the due date, but this provision can be invoked only when a person fails to file the return. In the instant case, the non-filing of the return was due to the cancellation of GST registration. However, the order of cancellation of registration was subsequently quashed, and the registration was restored. Therefore, it was held that the imposition of late fees by invoking provisions of Section 47 was not sustainable. The Court also directed the department to render the appellant necessary assistance in filing returns electronically and not to demand any late fees.

Read the Ruling

4. Order cancelling registration without affording any opportunity of hearing to be set aside: HC

The Gujarat High Court has held that the adjudication order to cancel the GST registration without affording any opportunity to hear is to be set aside since the show cause notice and order passed would be in absolute violation of the principles of natural justice.

A show cause notice was issued to the petitioner as to why GST registration should not be cancelled, and the reply was filed by the petitioner, following which proceedings were dropped. Thereafter, a fresh notice was issued as to why registration should not be cancelled, and an adjudication order was passed cancelling registration without affording any opportunity to hear. The petitioner filed a writ petition against the order, and the department contended that there was difficulty uploading notices due to technical glitches.

The High Court noted that in the instant case, the impugned order indicated non-application of mind as the reply was referred, but then the reply was stated as not received. Moreover, the show cause notice was issued, and the order was passed in violation of the principles of natural justice as no opportunity for personal hearing was granted. Thus, it was held that the order was liable to be set aside. The Court also directed the officer to decide the matter afresh after affording an opportunity for hearing and pass a speaking order, and the registration was directed to be restored.

Read the Ruling

5. Interest on surplus funds deployed with the bank is to be treated as other operating revenue or other income

According to para 9.1.7 of Guidance Note on Division I (Non-Ind AS Schedule III to the Companies Act, 2013, for a non-finance company), ‘revenue from operations’ includes ‘other operating revenue’. In the given case, the company earns interest on surplus funds kept with scheduled banks before being used in projects, and this interest is considered compensation for its operating activities. Additionally, the company receives Direction and General (D&G) charges from the government, and both interest and D&G charges are included in the company’s overall operating revenue.

But confusion arises on whether to disclose the interest earned on the surplus funds deployed with banks as other operating revenue or other income.

In this regard, the Expert Advisory Committee (EAC) of ICAI has noted that interest income disclosed under “Other Income” should include all forms of interest earned by a company (excluding finance companies), such as interest on fixed deposits and overdue customer interest. However, the committee has determined that disclosing interest as “other operating revenue” does not clearly demonstrate that the government has allowed the company to keep the interest as compensation for its operating activities. Accordingly, interest earned on surplus/idle funds deployed with the bank is to be treated as Other Income.

Read the Story

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