Weekly Round-up on Tax and Corporate Laws | 24th to 29th April 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 24^th to 29^th April 2023, namely:

(a) Loss due to confiscation of smuggled stock-in-trade not allowable under Section 37: Apex Court;

(b) New facility launched to verify Document Reference Number on offline communications from State GST authorities;

(c) An unstamped arbitration agreement is not enforceable: Supreme Court;

(d) ICSI floats the revised format of the Annual Secretarial Compliance Report (ASCR);

(e) Investing in IFSCs becomes easy as investors may keep idle funds in foreign currency accounts for 180 days;

(f) Pre-import condition in Foreign Trade Policy for availing the benefit of exemption is not arbitrary or unreasonable: SC; and

(g) Ind AS Schedule III Checklist: Presentation and Disclosure Requirement for Fixed Assets and Intangible Assets.

1. Loss due to confiscation of smuggled stock-in-trade not allowable under Section 37: Apex Court

The assessee was in the business of making jewellery. A search was conducted by the Directorate of Revenue Intelligence (DRI) officers at the premises taken on rent by the assessee and recovered slabs of silver.

Since the assessee failed to explain the source of the acquisition of silver, additions were made under Section 69A and an assessment order was passed. Later, the assessee claimed that the loss due to confiscation by the DRI official of the Customs Department was a business loss.

The matter reached the High Court, wherein loss was duly allowed relying upon the Supreme Court Ruling in the case of Piara Singh [1980] 3 Taxman 67 (SC). The revenue filed the instant appeal before the Supreme Court.

The Supreme Court held that the judgement in the case of Piara Singh wrongly relied upon as the same pertained to an assessee who was engaged in the business of smuggling currency notes and for whom confiscation of the currency notes was a loss occasioned in pursuing his business.

In the instant case, the main business of the assessee was dealing in silver, and his business cannot be said to be the smuggling of silver bars, as was in the case of Piara Singh (supra).

In the assessee’s case, he was carrying on an otherwise legitimate silver business. To make larger profits, he indulged in the smuggling of silver, which was an infraction of the law.

The word ‘any expenditure’ mentioned in Section 37 takes in its sweep loss occasioned in the course of business, being incidental to it. As a consequence, any loss incurred by way of expenditure by an assessee for any purpose which is an offence or which is prohibited by law is not deductible in terms of Explanation 1 to Section 37.

Such an expenditure/loss incurred for any purpose which is an offence shall not be deemed to have been incurred for the purpose of business or profession or incidental to it, and hence, no deduction can be made.

A penalty or a confiscation is a proceeding in rem. Therefore, a loss in pursuance to the same is not available for deduction regardless of the nature of the business, as a penalty or confiscation cannot be said to be incidental to any business. Therefore, an appeal of revenue was allowed, and an order passed by the High Court stand set aside.

Read the Ruling

2. New facility launched to verify Document Reference Number on offline communications from State GST authorities

The GSTN has introduced a new facility to verify Document Reference Number (RFN) mentioned on offline communications issued by State GST authorities. It will enable the taxpayers to ascertain whether an offline communication (which is not system-generated) was indeed sent by the State GST tax officer or not.

To verify a Reference Number mentioned on the offline communications sent by State GST officers, the taxpayers can navigate to Services > User Services > Verify RFN option and provide the RFN that must be verified. In case the RFN is of an offline communication generated by the State GST officer, the details with the valid RFN will be displayed. In this regard, GSTN has issued an update dated 28-04-2023 on its portal.

Read the Story

3. An unstamped arbitration agreement is not enforceable: Supreme Court

The Apex Court ruled that an arbitration agreement that attracts stamp duty and which is either unstamped or inadequately stamped cannot be enforced without following the process of impounding and paying the required duty. The Apex Court held this decision by a 3:2 majority.

In the instant case, the petitioner and respondent had entered into a sub-contract that contained an arbitration clause. Certain disputes arose, and the respondent invoked the Bank Guarantee furnished by the petitioner. Consequently, a suit was filed regarding the invocation of the guarantee.

Later, the respondent filed an application under Section 8 of the Arbitration and Conciliation Act 1996 in the suit and sought a reference of disputes to arbitration. However, the Commercial Court rejected the application. Thereafter, the respondent filed a revision application before the Bombay High Court.

The High Court granted liberty to the respondent to withdraw the review and file a writ petition. Subsequently, in the writ petition, the High Court held that the Section 8 application was maintainable.

One of the issues before the High Court was whether the arbitration agreement was unenforceable since the sub-contract was unregistered and unstamped. The High Court noted that the said issue could be raised in an application under Section 11 or before the Arbitral Tribunal. Then, an appeal was made to the Supreme Court.

The Supreme Court was presented with the question of whether an arbitration clause in a contract, which is legally required to be registered and stamped, can still be considered valid and enforceable if it has not been properly registered and stamped.

The Supreme Court observed that an arbitration agreement, as defined by Section 7 of the Arbitration and Conciliation Act, is subject to stamp duty. It cannot be enforced as per Section 35 of the Stamp Act without being impounded and paying the necessary duty if it is not stamped adequately.

The Supreme Court further observed that the provisions of Section 33 and the bar under Section 35 of the Stamp Act would render the arbitration agreement invalid until the instrument is duly stamped and validated under the Stamp Act.

The Supreme Court also observed that a certified copy could be produced at the Section 11 stage only if it clearly indicates the stamp duty paid. If the same is not mentioned, the Court should not act on the said certified copy.

The Supreme Court held that an arbitration agreement, within the meaning of Section 7 of the Arbitration and Conciliation Act 1996 which attracts stamp duty and which is not stamped or insufficiently stamped, cannot be acted upon, in view of Section 35 of the Stamp Act, unless following impounding and payment of the requisite duty.

The Supreme Court concluded that the provisions of Section 33 and the bar under Section 35 of the Indian Stamp Act would render the arbitration agreement contained in such an instrument as being non-existent in law until the instrument is validated under the Stamp Act.

Read the Ruling

4. ICSI floats the revised format of the Annual Secretarial Compliance Report (ASCR)

The ICSI has revised the format of the Annual Secretarial Compliance Report (ASCR) to make it easier for Practising Company Secretaries to issue the ASCR. Regulation 24A of SEBI (LODR) Regulations, 2015 requires a listed entity and its material unlisted Indian subsidiaries to annex an ASCR by a Practising Company Secretary in its annual report.

Some of the key highlights of the newly introduced format of the Annual Secretarial Compliance Report are as follows:

• The listed entities are provided with a specific checklist of the applicable laws, regulations, secretarial standards, etc., that must be complied with. They are required to mark the status of compliance, along with observations/remarks by PCS.
• A new section has been introduced that requires listed entities to provide details about compliance related to the resignation of statutory auditors from their material subsidiaries.
• In the new format for the report, disclosure norms have been enhanced. The Practising Company Secretary is required to provide more detailed information on deviations, actions taken, type of action, details of violation, management response, and fine amount.
• In addition to the information required in the earlier format, the Practising Company Secretary must also provide its Unique Document Identification Number (UDIN) and Professional Registration (PR) number.

Read the Story

5. Investing in IFSCs becomes easy as investors may keep idle funds in foreign currency accounts for 180 days

The RBI has permitted resident individuals investing in IFSCs to keep funds idle in a Foreign Currency account without the requirement of repatriating to their domestic INR account in India.

On February 16, 2021, the RBI issued a circular on “Remittances to International Financial Services Centres (IFSCs) in India under the Liberalised Remittance Scheme (LRS)”. This circular permitted resident individuals to make remittances under LRS to IFSCs in India, subject to certain conditions.

One of the conditions was that resident individuals are permitted to open a non-interest-bearing Foreign Currency Account (FCA) in IFSCs for making permissible investments under LRS. However, any funds lying idle in the account for up to 15 days from the date of receipt needed to be immediately repatriated to the investor’s domestic INR account in India.

In order to align LRS for IFSCs set up under the IFSCA Act, the RBI has now withdrawn the condition of repatriating funds lying idle in the account for up to 15 days from the date of receipt with immediate effect.

As per Master Direction on LRS, an investor who has remitted funds under LRS can retain and reinvest the income earned on the investments. The received, realised, unspent and unused foreign exchange, unless reinvested, shall be repatriated and surrendered to an authorised person within a period of 180 days from the date of such receipt/realisation/purchase/acquisition or date of return to India.

This change is expected to positively impact the resident individuals who want to remit funds to IFSCs in India, providing them with greater flexibility in managing their investments. Now, resident individuals can hold funds in IFSC FCA for up to 180 days (against 15 days).

Also, the withdrawal of the restrictive timeline removes major hurdles for resident individuals. It can be seen as another step by the Government to make IFSC a more attractive platform for investments under LRS.

Read the Circular

6. Pre-import condition in Foreign Trade Policy for availing the benefit of exemption is not arbitrary or unreasonable: SC

The Apex Court has held that ‘Pre-import condition’ in Foreign Trade Policy for availing the benefit of exemption from levy of integrated tax and GST compensation cess on import under the Advance Authorisation Scheme is not arbitrary or unreasonable. The Apex Court concluded that the inconvenience caused to exporters having to pay two duties and claim refunds could not be a ground to hold the ‘pre-import’ condition as arbitrary.

The Directorate of Revenue Intelligence initiated an investigation and issued summons to the manufacturers on the ground that exemption claimed from all custom duty levies, including IGST and compensation cess, was not admissible. It was argued that exemption was not allowed when goods manufactured were first exported in anticipation of licence/authorisation, with duty-free import against the authorisation having been undertaken later. The assessee approached the High Court against it and challenged the pre-import condition.

The Gujarat High Court had struck down the ‘pre-import’ condition in Foreign Trade Policy for availing the benefit of exemption from levy of integrated tax and GST compensation cess on import under Advance Authorisation (AA) as unconstitutional. The revenue challenged the order of the High Court and filed an appeal before the Apex Court.

The Supreme Court noted that the inconvenience caused to exporters by paying two duties and claiming refunds could not be a ground to hold the ‘pre-import’ condition as arbitrary. Therefore, the Apex Court set aside the Gujarat High Court judgment and held that the pre-import condition in Foreign Trade Policy for availing the benefit of exemption is not arbitrary or unreasonable.

However, the Supreme Court has directed the revenue to permit the manufacturer-exporters who were enjoying interim orders until the impugned judgments were delivered, to claim a refund or input credit, and they shall approach the jurisdictional Commissioner and apply with documentary evidence within six weeks from the date of the judgment.

Read the Ruling

7. Ind AS Schedule III Checklist: Presentation and Disclosure Requirement for Fixed Assets and Intangible Assets

Ind AS Schedule III provides guidelines for the presentation and disclosure of financial statements of companies in India. In accordance with Ind AS Schedule III, companies are required to provide detailed information regarding their fixed assets and intangible assets in their financial statements. This information is crucial for investors and other stakeholders to assess the company’s financial performance and sustainability. Therefore, it is essential for companies to ensure compliance with the disclosure requirements related to fixed assets and intangible assets. In this regard, a checklist is drawn, which can be used as an effective tool to ensure that all the necessary information is provided in the financial statements.

I. Whether the company has separately classified the Property Plant and Equipment (PPE) as Land, Buildings, Plant and Equipment, Furniture and Fixtures, Vehicles, Office equipment, Bearer Plants, or Others (specify nature).

II. Whether ‘assets under lease’ has been separately disclosed under each class of asset or not

III. Whether a reconciliation of gross and net carrying amounts of each class of Property, Plant and Equipment at the beginning and end of the reporting period showing additions, disposals, acquisitions through business combinations, and amount of change due to revaluation has been separately disclosed

IV. Whether land and building are presented as two separate classes of property, plant and equipment

V. Whether the company has classified any capital advances/advances for the purchase of capital assets as capital work-in-progress instead of another non-current asset

Read the Story