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

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

(a) HC directed a hearing opportunity to the assessee as a telephonic conversation is not a hearing;

(b) CBDT notifies SOP for making application for recomputation of income of co-operative society under Section 155;

(c) ITAT held that the penalty could not be imposed for not getting books of account audited if no books were maintained;

(d) Andhra Pradesh High Court upheld the vires of time limit for availing ITC prescribed under Section 16(4);

(e) IIISLA, promoted by IRDAI for grating of license for ‘Surveyors and Loss Assessor’, lies outside CCI’s Jurisdiction; and

(f) Chartered Accountant Debarred for Omitting Accrued Interest in Financial Statements.

1. HC directed a hearing opportunity to the assessee as a telephonic conversation is not a hearing

The Delhi High Court held that mere telephonic conversations for a brief period could not be a substitute for a personal hearing, and it wouldn’t be construed as a hearing at all.

The assessee alleged that the department raised a huge tax demand and a penalty without affording the assessee an opportunity for a hearing. However, the department submitted that the applicability of principles of natural justice is not a rule of thumb or a straightjacket formula. The department also contended that the assessee had violated the provisions of the CGST Act and had nothing more to argue than what was contended in reply to the show cause notice considered by Adjudicating Authority. It was also contended that a telephonic conversation with the assessee could be termed equivalent to a personal hearing.

The High Court noted that Section 75 of the CGST Act itself provides that a hearing is required to be given to a person against whom an adverse decision is contemplated, and it cannot be contended on behalf of authorities that same is not mandatory. Moreover, telephonic conversations for a brief period cannot be a substitute for a personal hearing or, for that matter, be construed as a hearing at all.

Therefore, the Court held that the impugned demand notice was to be set aside, and the matter was to be remanded to pass a fresh order after affording the petitioner a due opportunity of being heard.

Read the Ruling

2. CBDT notifies SOP for making application for recomputation of income of co-operative society under Section 155

Sugar factories operating in the co-operative sectors in certain States pay sugarcane growers a final amount often referred to as Final Cane Price (FCP). This amount exceeds the Statutory Minimum Price (SMP) fixed by the Central Government under the Sugarcane Control Order 1996. FCP is decided based on the factory’s working results after considering all the revenues and expenditures incurred by the factory. The payment of FCP by the sugar co-operative societies over and above the SMP for the purchase of sugarcane often resulted in tax litigation.

Consequently, the Finance Act 2015 inserted a clause (xvii) in Section 36(1) with effect from the assessment year 2016-17. This provision provides a deduction for expenditure incurred by a sugar co-operative society for purchasing sugarcane at a price equal to or less than the price fixed or approved by the Government.

The said amendment came into force w.e.f. 01-04-2016 and was applicable from AY 2016-17 onwards. However, the demands and litigation pertaining to AYs before 2016-17 were pending. Therefore, to conclude the matter logically and to extend the relief to all the applicable years, the Finance Act 2023 inserted sub-section (19) in Section 155 with effect from 01-04-2023.

Section 155(19) provides that in the case of a sugar co-operative society, where any deduction in respect of any expenditure incurred for the purchase of sugarcane has been claimed by an assessee and such deduction has been disallowed wholly or partly, the Assessing Officer shall, based on an application made by such assessee, recompute the total income of such assessee for such previous year.

The following Standard Operating Procedure has been outlined to standardize the manner of filing an application and its disposal by the Jurisdictional Assessing Officer (AO) under Section 155(19):

(a) The applicant must be a “co-operative society”, as defined in Section 2(19) of the Income-tax Act, engaged in manufacturing sugar;

(b) The application by such a co-operative society can be filed for AY 2015-16 or any earlier assessment year (AY).

(c) AO may seek the following documents for recomputation under Section 155(19):

• • • Computation of Tax, Audit Report under Section 44AB, Audited Profit & Loss Account and Balance Sheet;
    • Assessment Order/Appellate Order(s) of various appellate fora, as applicable, with respect to the disallowance made on account of the excess price paid for the purchase of sugarcane above the Statutory Minimum Price (SMP);
    • Notice of Demand issued under Section 156;
    • Challan of taxes paid, if any;
    • Copy of Order(s)/Other legal instrument(s) regarding price fixation by the Government based on which excess price was paid for the purchase of sugarcane over and above Statutory Minimum Price (SMP);
    • Documentary evidence regarding registration of a co-operative society under State/Central Act;
    • Any other document as considered necessary by the AO for the purposes of recomputation of total income.

(d) AO shall recompute the total income of such co-operative society under the provisions of sub-section (19) of Section 155 read with Section 154;

(e) AO shall pass an order under Section 155(19) read with Section 154 within six months from the end of the month in which he receives the application.

It must be noted that the rectification under Section 155(19) read with Section 154, can be made till 31-03-2027.

Read the Circular

3. ITAT held that the penalty could not be imposed for not getting books of account audited if no books were maintained

The assessee, an individual, filed the return of income for the relevant assessment year declaring income from business activities. The assessee was not maintaining any books of account, and even tax consultants of the assessee refused to sign the tax audit report on the ground that the assessee did not maintain the books of account.

During the assessment, Assessing Officer (AO) imposed a penalty upon the assessee under Section 271B for violation of provisions of Section 44AB. On appeal, the CIT (A) upheld the imposition of the penalty. Aggrieved by the order, the assessee filed an appeal to the Jaipur Tribunal.

The Tribunal held that the assessee had mentioned that he filed his return of income by collecting information available to him, i.e., sales and purchases. The assessee had also categorically mentioned that he failed to produce books of account and bills/vouchers to verify purchases and other expenditures claimed in the Profit & Loss account; hence, the assessee’s net profit was not verifiable.

When the assessee did not maintain regular books of account, the question of auditing the books of account does not arise. There was a violation of provisions of Section 44AA, and said violation could not be extended to Section 44AB. The provisions of Section 44AB can only be invoked when the assessee has first complied with the provisions of Section 44AA.

Therefore, the violation of Section 44AA cannot continue because once it is found that the assessee did not maintain the regular books of account, the said violation cannot travel beyond the provisions of Section 44AA. Hence, it cannot be held as a further violation of Section 44AB.

Since the assessee was not found to have maintained the books of account, no penalty can be imposed for not getting the books of account audited as prescribed under Section 271B for violation of Section 44AB.

Read the Ruling

4. Andhra Pradesh High Court upheld the vires of time limit for availing ITC prescribed under Section 16(4)

The Andhra Pradesh High Court has held that the time limit prescribed for claiming ITC under Section 16(4) of APGST Act/CGST Act, 2017 is not violative of Articles 14, 19(1)(g) and 300-A of the Constitution of India.

In the present petition, the validity of Section 16(4) of the CGST Act, which imposed a time limit for claiming Input Tax Credit (ITC), was challenged. It was submitted by the petitioner that once returns were accepted with late fees, then ITC can’t be denied.

It was further contended that this section violated Article 14, 19(1)(g) and 300-A of the Constitution of India since ITC is a statutory right, which an assessee is entitled to claim, and this section placed stumbling blocks by way of imposing a time limit.

The High Court noted that ITC is a mere concession/rebate/benefit, not a statutory or constitutional right. The imposing conditions, including time limitation for availing said concession, would not violate the Constitution or any statute.

Thus, it was held that the time limit prescribed for claiming ITC under Section 16(4) of the APGST Act/CGST Act is not in violation of Article 14, 19(1)(g) and 300-A of the Constitution of India.

The Court also held that the collection of late fees is only for the purpose of admitting returns for verification of taxable turnover of the petitioner, and a mere filing of a return with a delay fee would not act as a springboard for claiming ITC if such ITC was claimed beyond the prescribed time limits.

Read the Ruling

5. IIISLA, promoted by IRDAI for grating of license for ‘Surveyors and Loss Assessor’, lies outside CCI’s Jurisdiction

In the matter of Shrikant Ishwar Mendke v. IRDAI, the CCI held that the IRDAI is a statutory body created under IRDAI Act, 1999, and IIISLA is a body promoted by IRDAI in the discharge of its functions under Section 14(2)(k) of IRDAI Act, 1999.

Further, the membership of IIISLA has been made mandatory by IRDAI for the grant and renewal of licences for Surveyors and Loss Assessors and its functions, being regulatory in nature, are not per se amenable within the jurisdiction of CCI.

In the present case, information was filed by the Informant under Section 19(1)(a) of the Competition Act, 2002 against IRDAI and the Indian Institute of Insurance Surveyors and Loss Assessors (IIISLA), alleging contravention of the provisions of Sections 3 and 4 of the Act. The Informant was stated to be the holder of a license to act as a Surveyor and Loss Assessor.

Further, as per the Informant, IIISLA was established and incorporated to promote and regulate Surveyors and Loss Assessors. The Informant had submitted that it had applied for the renewal of the license, which IRDAI had allegedly withheld for the sole reason that the Informant was not a member of IIISLA.

The Informant alleged that IIISLA had abused its dominant position by resorting to unfair and restrictive trade practices, which are in contravention of the provisions of Section 4 of the Act.

As per the Informant, IRDAI had created a monopoly in favour of IIISLA by making membership with it a statutory requirement for a grant of licence by IRDAI. It was alleged that IIISLA was not dealing with the application of the Informant for membership and was further raising irrelevant queries, thereby abusing its dominant position.

In addition to the above, the Informant also alleged that to strengthen the IIISLA to serve its purposes, IRDAI empowered its status by mandating membership of IIISLA as an eligibility criterion for the grant of a valid licence to act as a Surveyor and Loss Assessor. As per the Informant, such action, being in concert, contravened Section 3 of the Act.

The Informant had also sought an interim relief under Section 33 of the Act seeking a direction to IRDAI to approve the applications of the Informant for renewal of a licence to act as Surveyor and Loss Assessor.

The CCI observed that the IRDAI is a statutory body created under the IRDAI Act, 1999, and IIISLA is a body promoted by IRDAI in discharging its functions under Section 14(2)(k) of the IRDAI Act, 1999.

Further, mandating membership of IIISLA for the grant and renewal of licences for Surveyors and Loss Assessors were regulatory in nature and are not per se amenable within the jurisdiction of the Commission as held by the Delhi High Court in the case of ICAI v. CCI & Ors.

The CCI held that the regulatory powers are not subject to review by the CCI. It is important to note that the CCI’s power is for regulating markets; it does not extend to addressing any grievance regarding arbitrary action by any statutory authority.

In view of the above, the information filed was directed to be closed in terms of provisions of Section 26(2) of the Act. Consequently, no case for the grant of relief under Section 33 of the Act arose. Thus, the prayer for the same was also rejected.

Read the Ruling

6. Chartered Accountant Debarred for Omitting Accrued Interest in Financial Statements

Upon receiving information from the Ministry of Corporate Affairs (MCA) regarding irregularities in the financial statements of a company, the National Financial Reporting Authority (NFRA) conducted an investigation against a Chartered Accountant (CA) who served as the statutory auditor for that company.

The investigation was prompted by the report from the Financial Reporting Review Board (FRRB) of ICAI and revealed that a significant amount of accrued interest on loans from banks and NBFCs was omitted from the company’s financial statements, resulting in a material misstatement. Properly accounting for the accrued interest would have increased the reported loss by nearly eight times the reported amount.

Additionally, the company recognized Deferred Tax Assets (DTA) despite consistent losses, and the auditor’s failure to report this significantly understated the company’s loss for the financial year.

The CA justified the actions by claiming ongoing negotiations with the bank for a one-time settlement of the loan. However, NFRA found no evidence of such negotiations in the audit file.

Consequently, NFRA charged the CA with non-compliance with Sections 128 and 129 of the Companies Act, 2013, and violations of provisions under AS 22, Accounting for Taxes on Income and AS 1, Disclosure of Accounting Policies provisions. The CA was penalized with a monetary fine of Rs. 100,000 and debarred from being appointed as an auditor or internal auditor of any entity for one year.

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