Weekly Round-up on Tax and Corporate Laws | 24th to 29th October 2022

In this weekly newsletter, we analytically summarise the key stories reported at taxmann.com during the previous week from 24th to 29th October, namely:

(a) The ITAT advises the Govt. to bring a mechanism to collect tax dues on the sale of securitised assets by banks;

(b) PMLA: SC directs Trial Court to reconsider bail plea afresh as a medical report of petitioner showed blockages of arteries;

(c) Opportunity of personal hearing to be provided even if the request for personal hearing not made: HC;

(d) ITC benefit to be passed as soon as same was availed since the buyer can’t be asked to wait till completion of the project: NAA; and

(e) Mere classification of borrowings as NPAs by banks doesn’t relieve the company from interest or principal payment: NFRA clarifies.

1. Govt. should bring a mechanism to collect tax dues on the sale of securitised assets by banks: ITAT

The Mumbai Tribunal has found a lacuna in the taxability of the sale of securitised assets by banks if borrowers failed to repay loans. The Tribunal has raised a concern that the Government should consider protecting its legitimate interests by ensuring a mechanism to ensure that the tax liability on the capital gains is duly recovered from the borrower whose property is sold by banks.

Facts

The assessee was a director and had given his personal guarantee to the State Bank of India (SBI) regarding his company’s commercial borrowings. Later, the SBI recalled the credit facilities given to the company and invoked the personal guarantee given by the assessee.

SBI entered into an assignment agreement with Asset Reconstruction Co. (ARC). The land, offered as collateral security, was assigned to the ARC, and the said land was sold to Advent Developers Pvt. Ltd. (ADPL). The assessee was the confirming party to this sale transaction between ARC and ADPL.

The Assessing Officer (AO) held that the assessee had earned long-term capital gains on selling such land and was liable to pay tax. The assessee carried the matter in appeal before the CIT(A) but without success, and the matter reached before the Tribunal.

The Ruling

The Tribunal held that what is important in the instant case is the year in which the transfer takes place from the ARC to the end-buyer. As the ARC is selling the property as the owner of the property, it indicates that the transfer from the assessee to the ARC (via SBI) might have occurred at an earlier stage. That is the year of transfer in which the taxability arises so far as the assessee is concerned

However, it is unclear what is the date the transfer took place from the assessee to the SBI and what the documentation or court/DRT orders in this regard. Thus, the matter is remanded back to the CIT(A) for recording a specific finding in this regard.

Further, there is also a fundamental point regarding the protection of legitimate interests of the revenue. In most cases where the assets are taken over as part of the recovery of commercial borrowing, there is no mechanism to ensure that the tax dues are secured in the process of the sale of such properties.

The owners of these assets have no money to pay the tax as they are already bankrupt, and no part of the sale consideration reaches them anyway. The recipients of sale considerations in these transactions (SBI and ARCs) have no liability to make such payments of taxes even in the vicarious capacity as tax withholdings.

Thus, it is time that the Government should seriously consider protecting its legitimate interests by ensuring some mechanism to ensure that the tax liability on the capital gains is duly recovered from the borrower whose property is sold. Furthermore, when it is not possible to do so on account of the borrower’s genuine financial difficulties, the tax dues may be recovered from the person who receives the proceeds of the sale of such assets.

Read the Ruling

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2. PMLA: SC directs Trial Court to reconsider bail plea afresh as the medical report of petitioner showed blockages of arteries

The Supreme Court directed the Trial court to reconsider the petitioner’s bail application afresh when fresh medical evidence showed blockages of arteries.

Facts

The petitioner was arrested in two cases. The Economic Offences Wing lodged the first case, and the Directorate of Enforcement lodged the second one for the offences punishable under the Prevention of Money Laundering Act, 2002.

During the first case, the petitioner was granted the facility of interim bail for a while because of his medical condition. The petitioner was arrested in connection with the second case by the Directorate of Enforcement. Since then, he has been in custody.

During the second case, the Trial Court rejected the prayer for bail, and the petitioner had not raised any further challenge on that behalf. In that matter, the report from the Medical Board was called for by this Court, and after examining the report, it was found that the medical condition of the petitioner was quite stable. In light of the said report, the request for interim bail was rejected by this Court.

Later, relying on certain certificates, including one given by the Senior Medical Officer, prayer for bail on the medical condition was made to the Apex Court. The medical report stated that there was about 80% blockage in one left artery, 90% blockage in another artery and 50% blockage in the third artery. Further, the petitioner was also suffering from trigeminal neuralgia.

Supreme Court’s Ruling

After considering the requisite reports, the Supreme Court held that the petitioner was entitled either to file a fresh application for bail on the projected medical ground before the Trial Court or raise the challenge to the order on the grounds of merits and the projected medical condition of the petitioner.

Read the Ruling

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3. Opportunity of personal hearing to be provided even if the request for personal hearing not made: HC

The High Court has held that the opportunity for a personal hearing has to be provided when any adverse decision is contemplated, even if a request for a personal hearing was not made by the party.

Facts

The petitioner was manufacturing automobile components and exported the goods outside India under the Letter of Undertaking without payment of GST. It reported the value of exports under GSTR-3B in the Column for nil rated/exempt supply and not in the Column for Zero-rated supply. The department proposed a demand of ITC along with interest and penalty, and the order was passed. It filed a writ petition against the order.

High Court

The High Court observed that as per Section 75(4) of the CGST Act, 2017, an opportunity for a hearing is to be provided where a request is received in writing from the person chargeable with tax or penalty or where any adverse decision is contemplated against such person.

The department also submitted that the opportunity of hearing was not granted since the same was not requested. However, while so arguing, the provision of Section 75(4) has been missed out. Even without any request being made when any adverse decision is contemplated, a personal hearing is a must. Hence, the same was missing in the instant case. Therefore, the impugned order was quashed since the opportunity for a personal hearing was not granted. The department was directed to consider the matter afresh by giving an opportunity of being heard.

Read the Ruling

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4. ITC benefit to be passed as soon as same was availed since the buyer can’t be asked to wait till completion of the project: NAA

The National Anti-profiteering Authority has held that ITC benefit shall be passed as soon as same was availed, and buyer can’t be asked to wait till completion of the project.

Facts

The assessee benefited from additional ITC on the supply of construction services after implementing GST. However, the benefit of additional ITC had not been commensurately passed on to customers. The assessee was directed to reduce prices to be realised from buyers of flats commensurately and to pass on the profiteered amount to customers with 18% interest. The issue was whether the time for passing on the ITC benefit would be during the implementation of the project or after the issuance of the completion certificate.

National Anti-profiteering Authority

The National Anti-profiteering observed that the assessee couldn’t misappropriate the amount of ITC and enrich himself at the expense of common buyers by denying them benefits which he is not paying from his own pocket. The buyers can’t be asked to wait till the completion of the project while the assessee avails benefit every month. Therefore, it was held that the assessee was required to pass on the ITC benefit as soon as the same was availed and directed to pass on the profiteered amount to customers with 18% interest.

Read the Ruling

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5. Mere classification of borrowings as NPAs by banks doesn’t relieve the company from interest or principal payment: NFRA clarifies

During a disciplinary action under Section 132(4) of the Companies Act, 2013, NFRA found that several companies discontinued recognising interest expense on their bank borrowings classified as NPA by the lender banks. This accounting treatment resulted in contravention of provisions of applicable accounting standards.

Such discontinuation of interest expense recognition solely based on the classification of the company’s borrowings as NPAs by the lender banks without evidence of the legally enforceable contractual documents resulted in incorrect/erroneous presentation of financial performance and financial position of the borrowing company to its shareholders, investors, creditors, and lenders. In this context, it is relevant to note that the RBI guidelines also require the banks to maintain a Memorandum Record of Accrued Interest on the loans classified as NPAs, stating the fact that the bank has not yet legally released the borrowers from their contractual liability to pay interest on their borrowings from the bank.

To draw the attention of all companies, audit committees, and statutory auditors to avoid such violations and present a true and fair view of the company’s financial statements, NFRA issued a circular on 20-10-2022 on this subject. Wherein it has been clarified that mere classification of the borrowings as NPAs by the lender banks does not relieve the borrowing company from its liability towards payment of interest and/or principal.

Read the Press Release

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