Weekly Round-up on Tax and Corporate Laws | 25th to 30th July 2022

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 25th to 30th July 2022, namely:

(a) Supreme Court upholds constitutional validity of amended Section 45 and other Sections of PMLA;

(b) ITAT grants benefit of TOLA to opt for Section 115BAA regime; Held that Form 10-IC filed on 31-03-21 would be valid even though the ITR deadline ended on 15-02-21;

(c) Writ jurisdiction at the stage of show cause notice cannot be exercised: HC

(d) Input Tax Credit is not available on inputs/input services procured for promotional schemes: AAAR;

(e) No penalty for non-deduction of tax at year-end if the amount payable to payees wasn’t identifiable: ITAT; and

(f) Comparison of the disclosure requirements related to inventories as per AS and Ind AS.

1. In a landmark judgement, the Supreme Court upheld the constitutional vires of amended Section 45 and other Sections of PMLA

In the case of Vijay Madanlal Choudhary. v. Union of India [2022] 140 taxmann.com 610 (SC), the Supreme Court upheld the constitutional validity of ‘twin conditions’ for bail under amended Section 45 of the Prevention of Money Laundering Act, 2002.

Facts

The petitioners had challenged the validity and interpretation of certain provisions of the Prevention of Money Laundering Act, 2002 and the procedure followed by the Enforcement Directorate while investigating offences under the PMLA.

One of those challenges was also presented earlier before the Supreme Court in the matter of “Nikesh Tarachand Shah v. Union of India”, whereby the petitioners had challenged the constitutional validity of Section 45(1) of the Prevention of Money Laundering Act, 2002 to the extent that it imposed two additional conditions for granting bail to a person accused of a crime under Part A of Schedule of PMLA.

Questions raised before the Court

(a) Whether the 2018 amendment to the bail conditions under the PMLA constitutional?

(b) Does the Nikesh Tarachand Shah v. Union of India judgement lay down the correct proposition of law on bail conditions?

(c) Whether Section 8 provisions concerning the possession of the property under PMLA violate the right to property under Article 300A?

Section 45(1) before and after the 2018 amendment was as follows:

The two conditions under Section 45(1) were – (a) the Prosecutor is given an opportunity to oppose the bail application, and (b) there are reasonable grounds for believing that the accused is not guilty of such offence and he is not likely to commit any offence while on bail.

Prior to the 2018 amendment, Section 45(1) only covered those offences which were punishable for a term of imprisonment of more than three years under Part A of the Schedule to PMLA. The Supreme Court declared such conditions to be unconstitutional, being violative of Articles 14 and 21 of the Constitution, as the conditions were restricted only to a particular class of offences and not to all offences under the Act.

However, post amendment, Section 45(1) talks about ‘offence under this Act’ without specifying any particular offence.

Section 45 of the Act takes away the presumption of innocence usually afforded to the accused persons under Criminal law. To be granted bail, the accused must prove prima facie that they were not guilty and satisfy the Court that they will not commit any further offence. The petitioners argued that the amendment undermined the Judgement and re-established the original twin conditions. The provisions of Section 45 of PMLA impose stringent conditions of bail on a person accused of an offence under the Act.

The petitioners also challenged the validity of Section 8(4), which allows the Enforcement Directorate to take possession of the attached property at the stage of confirmation of provisional attachment made by the Adjudicating Authority. This deprivation of a person’s right to property is unconstitutional and violates Article 300A. Further, the period of attachment increased from 90 days to 365 days is also unreasonable.

Ruling

The reasons which weighed with this Court in Nikesh Tarachand Shah for declaring the twin conditions in Section 45(1) of the 2002 Act, as it stood at the relevant time, as unconstitutional in no way obliterated the provision from the statute book; and it was open to the Parliament to cure the defect noted by this Court to revive the same provision in the existing form.

The provision of Section 45 of the 2002 Act, as applicable post amendment of 2018, is reasonable, has direct nexus with the purposes and objects sought to be achieved by the 2002 Act and does not suffer from the vice of arbitrariness or unreasonableness.

The challenge to the validity of Section 8(4) of the 2002 Act is also rejected subject to Section 8 being invoked and operated in accordance with the meaning assigned to it hereinabove.

Read the Ruling

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2. ITAT grants benefit of TOLA to opt for Section 115BAA regime; Held that Form 10-IC filed on 31-03-21 would be valid even though the ITR deadline ended on 15-02-21

The Mumbai Tribunal has ruled that the time permitted for filing Form 10-IC, by virtue of Section 3(1)(b) of TOLA, must be treated as 31-03-2021, even as the time permitted for filing of the income tax return was only up to 15-02-2021.

Facts

The assessee was a private limited company engaged in the business of trading, sourcing & supplying organic and natural produce from India to buyers internationally. The assessee had opted for the taxation under the concessional scheme under Section 115BAA for the Assessment Year 2020-21.

However, the Income-tax Dept. denied the benefit of Section 115BAA because the assessee opted for Section 115BAA while it furnished the belated return of income on 31-03-2021. The assessee failed to file Form 10-IC within the time prescribed under section 139(1), i.e., 15-02-2021 (as extended by Taxation and Other Laws (Relaxations and Amendments of Certain Provisions) Act 2020 [TOLA]).

Ruling

The Tribunal held that Section 115BAA unambiguously provides that

“nothing contained in this section shall apply unless the option is exercised by the person in a prescribed manner on or before the due date specified under Section 139(1) for furnishing the returns of income”.

However, this scheme was diluted under the scheme of TOLA when different treatment was accorded to “furnishing of return under Section 139” and “filing of any appeal, reply, application or furnishing of any report document, return or statement or such other record”.

When a relaxation provision, as the TOLA is, visualises separate parameters of relaxation for the income tax returns vis-à-vis other documents, it cannot be open to the revenue to negate the same on the ground that the scheme of the Income-tax Act 1961 treats the filing obligations in respect of the same at par.

The filing of the ITR and the exercise of an option for the concessional regime of taxation under Section 115BAA are two distinct obligations. When the overriding provisions of TOLA provide separate relaxations for the legal obligations with respect to the filing of return vis-à-vis filing of other documents, to that extent, specific relaxation provisions under the TOLA must make way for rather general provisions with respect to various statutory obligations.

Accordingly, the time permitted for filing of Form 10-IC, by virtue of Section 3(1)(b) of TOLA, must be treated as 31-03-2021, even as the time permitted for filing of the income tax return under the provision, in the light of the third proviso to Section 3(1) and read with subsequent notification, was only up to 15-02-2021.

Read the Ruling

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3. Writ jurisdiction at the stage of show cause notice cannot be exercised: HC

The Chhattisgarh High Court has held that writ jurisdiction at the stage of show cause notice cannot be exercised when the petitioner has the alternate statutory remedy for challenging the assessment or adjudication order.

Facts

A notice under Section 61 in Form GST ASMT-10 was issued to the petitioner, followed by a show-cause notice under Section 73 of the CGST Act. The petitioner did not reply to the notice and filed a writ petition against the same. It was contended that the notice was improper as a detailed show-cause notice was to be issued to the petitioner.

High Court

The High Court observed that the notice under Section 61 of the CGST Act called for an explanation of the discrepancies found by the authority to which the petitioner did not reply. After that, a show-cause notice under Section 73 of the CGST Act along with the summary of the show-cause notice, was also issued. However, the petitioner failed to reply to the notice. Thereafter, the revenue authority passed an order and determine tax liabilities, interest and penalty upon the petitioner. In the facts of the case, the Court was of the opinion that no exceptional circumstances were available for entertaining this writ petition, and the petitioner may file an appeal under Section 107 of CGST Act, 2017. The Court also held that writ jurisdiction at the stage of show cause notice could not be exercised when the assessee has the alternate statutory remedy for challenging the order.

Read the Ruling

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4. Input tax credit is not available on inputs/input services procured for promotional schemes: AAAR

The Tamil Nadu AAAR has held that input tax credit is not available on inputs/input services procured for the promotional scheme if said inputs/input services are supplied free of cost.

Facts

The appellant was engaged in the business of manufacturing and supply of ghee and other products and sold products through various retail stores across the country. To expand the market share, the appellant launched a sales promotional offer to enhance sales of its products. It filed an application for the advance ruling to determine whether ITC would be eligible for inputs/input services procured to implement the promotional scheme. The Authority for Advance Ruling held that GST paid on inputs/input services procured by the appellant to implement the promotional scheme was not eligible for the input tax credit under the GST law. It filed an appeal against the order.

AAAR

The AAAR observed that goods and services distributed under the promotional scheme were without consideration, and those goods and services were not for further supply but for consumption by retailers under the scheme. Moreover, the inputs and input services procured by the appellant were for his buyers provided as rewards and not for his own activity, such as advertising products. Since the rewards extended to retailers/stockists under the scheme were not in nature of discount, the ITC of GST paid on such inputs/input services procured would not be available.

Read the Ruling

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5. No penalty for non-deduction of tax at year-end if the amount payable to payees wasn’t identifiable: ITAT

The assessee was a company engaged in the business of providing engineering consultancy services, supply of the manpower services, and providing multidisciplinary consultancy services.

The Assessing Officer informed the assessee that there was a failure on the part of the assessee to deduct tax at the source. A show cause notice was issued by AO asking the assessee why a penalty under Section 271C read with Section 274(1) should not be imposed.

The assessee explained that it was not a case of non-deduction of tax. The assessee had duly deducted and deposited the taxes with the government treasury in the subsequent years when the liability to pay such expenses was crystallised on receipt of invoices.

The matter reached before the CIT(A), wherein the ruling was given in favour of the assessee. Aggrieved-AO filed the instant appeal before the Tribunal.

Ruling

The Tribunal upheld the order of CIT(A), wherein it was held that no income had accrued to the payees, and a mere ad-hoc provision was made in the books of accounts at the year-end. The existence/accrual of income in the hands of the payee is a pre-condition to fasten the liability of tax deduction at source in the hands of the payer.

In the instant case, the exact amount payable to the payees was not identifiable; therefore, no liability to deduct tax at source arose. The fact that the taxes have not been deducted on the year-end provision but have been subsequently deducted and deposited upon crystallisation of liability to pay the expenses will not automatically justify the imposition of penalty under Section 271C.

Thus, the assessee was prevented by a reasonable cause from withholding taxes on the year-end provisions.

Read the Ruling

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6. Comparison of the disclosure requirements related to inventories as per AS and Ind AS

With the implementation of Ind AS, the requirements to provide comprehensive and suitable disclosures, including disclosures of assumptions, estimations, business models, etc., have also increased. The importance of disclosures in financial reporting has also enhanced the role and responsibility of the auditors regarding financial statement disclosures to support their opinion on the financial statements as a whole. A comparison of disclosure requirements related to inventories amongst the AS 2 and Ind AS 2 is produced as below:

For the entities following Ind AS for the preparation of the financial statement, the following should be disclosed:

(a) the accounting policies adopted in measuring inventories;

(b) cost formula used while measuring the inventories;

(c) the total carrying amount of inventories;

(d) carrying amount in classifications appropriate to the entity;

(e) the carrying amount of inventories carried at fair value less costs to sell the inventory;

(f) inventories recognised as an expense during the period;

(g) the amount of any write-down of inventories recognised as an expense;

(h) the amount of any reversal of any write-down that is recognised as a reduction in the amount of inventories recognised as expense;

(i) the circumstances or events that led to the reversal of a write-down of inventories;

(j) the carrying amount of inventories pledged as security;

(k) Information about the carrying amounts held in different classifications of inventories such as merchandise, production supplies, materials, work in progress, and finished goods and the extent of the changes in these assets is useful to financial statement users;

(l) Disclosure of the costs recognised as an expense for raw materials and consumables, labour costs and other costs together with the amount of the net change in inventories for the period.

Whereas, for the entities following the AS for preparation of the financial statements, the following should be disclosed:

(a) accounting policies adopted in measuring inventories;

(b) cost formula used in measuring inventories;

(c) total carrying amount of inventories;

(d) classification of inventories appropriate to the entity;

(e) carrying amount of each class of inventory;

(f) changes in the assets held in different classifications of inventories.

Read the Story

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