Weekly Round-up on Tax & Corporate Laws | 27th September to 2nd October

This weekly newsletter analytically summarizes the key stories reported at taxmann.com during the previous week from 27th September to 02nd October 2021, namely:

(a) CBDT notifies rules for implementing amendments made in provisions of indirect transfer of Indian assets;

(b) SEBI approves framework for Gold Exchange;

(c) Supreme Court held that the burden to prove default and plea is not barred by limitation is on financial creditor;

(d) The Tribunal ruled that a sum reflected in Form 26AS cannot be taxed unless it was established that the assessee was the actual beneficiary;

(e) Writ petition challenging the summons issued by DGGST is not maintainable: Gujarat HC;

(f) NFRA seeks stakeholders’ comments on the removal of statutory audit for Medium and Small Cos.

1. CBDT notifies rules for implementing amendments made in provisions of indirect transfer of Indian assets

The Taxation Laws (Amendment) Act, 2021 (hereinafter referred to as TLA, 2021) inserted three provisos (Fourth, Fifth, and Sixth Proviso) in Explanation 5 to Section 9(1)(i) to give relief to certain eligible entities impacted by the retrospective amendment made to Section 9 by the Finance Act, 2012.

These amendments provide that the provisions of indirect transfer of assets in India shall not apply to the assets transferred before 28-05-2012 (i.e., the date on which the Finance Bill, 2012 received the assent of the President). Accordingly, all pending assessments shall be deemed to have been concluded without additions for such income.

It is further provided that the demand raised in concluded assessments or rectification orders for indirect transfer of Indian assets made before 28-05-2012 shall be nullified. Such relief is to be allowed on the fulfillment of specified conditions such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking to the effect that no claim for cost, damages, interest, etc., shall be filed. Further, the amount paid/collected in these cases shall be refunded, without any interest, on fulfillment of the said conditions. The CBDT had issued the draft rules on 28-08-2021, prescribing the specified conditions to claim the above relief.

After examining the stakeholder comments on the draft rules, the CBDT has notified the final rules vide Notification No. GSR 713(E), dated 01-10-2021, wherein the following rules have been inserted to the Income-tax Rules, 1962:

(a) Rule 11UE provides for the specified conditions to claim relief under TLA 2021; and

(b) Rule 11UF provides the form and manner of furnishing the undertaking for withdrawal of pending litigation, etc.

Rule 11UE provides the following conditions to be fulfilled by a declarant and interested parties:

(a) Furnishing of undertaking in Form 1;

(b) Withdrawal of all proceedings or appeals;

(c) Withdrawal or waiver of all rights;

(d) Waiver of right to seek any cost in respect of any proceedings;

(e) Waiver of right in relation to any event which may otherwise be available;

(f) Indemnifying India from any cost arising from filing a claim after furnishing Form 1;

(g) Refrainment from assisting any person in raising any claim or reward; and

(h) Issue of public notice.

All the conditions mentioned above are required to be fulfilled cumulatively by the declarant. Further, the undertaking and indemnity bond from the declarant and all the interested parties should be duly authorized by all necessary corporate action, including but not limited to any board resolution or similar authorization under applicable law. The declarant shall furnish a copy of such board resolution and legal authorization.

Further, Rule 11UF prescribes guidelines for furnishing undertaking in Form 1 and process to be followed by the jurisdictional Pr. Commissioner or Commissioner.

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2. Key highlights of SEBI’s Board Meeting held on 28-09-2021

The SEBI Board held its meeting in Mumbai on 28-09-2021 under the chairmanship of Shri Ajay Tyagi. The key decisions taken by the Board include the following:

Framework for Gold Exchange

The SEBI has approved the framework for establishing a Gold Exchange to trade the gold in the form of electronic gold receipts. The exchange would be a national platform for buying and selling Electronic Gold Receipt’ (EGR). EGRs will have the trading, clearing, and settlement features just like any other ‘security’. The denomination for the trading of EGR and conversion of EGR into gold can be decided by the recognized stock exchange with the approval of SEBI.

Framework for Vault Managers

The SEBI has also approved the framework for Vault Managers as specified under the SEBI (Vault Managers) Regulations, 2021. SEBI has authorized that Vault Manager should be a body corporate incorporated in India having a net worth of at least Rs. 50 crores. The Vault Manager would be responsible for accepting deposits, storing and safekeeping gold, creating EGR, withdrawing gold, grievance redressal, and periodic reconciliation of physical gold with the depository’s records.

Framework for Social Stock Exchange

With an aim to help social and voluntary organizations which work for social causes to raise capital as equity or debt or a unit of a mutual fund, the SEBI has approved of the creation of the Social Stock Exchange (SSE), under the regulatory ambit of SEBI, for fundraising by social enterprises (SE).

Framework for Superior Voting Rights Shares

The Board has agreed to relax the Superior Voting Rights Shares (SR) framework’s eligibility restrictions. As per the present rules, an SR shareholder with a net worth of more than Rs. 500 crores cannot be a member of a promoter group. This limit has been increased to Rs. 1,000 crores. In addition, the minimum time between issuing of SR shares and timeline for filing of the Red Herring Prospectus has been lowered from 6 months to 3 months

Introduction of Silver Exchange Traded Funds

In line with the existing regulatory system for Gold ETFs, the SEBI has approved an amendment to the mutual fund’s norms to enable the introduction of the Silver Exchange Traded Funds with certain safeguards and riders. Silver (ETFs) would bring in another sanctioned commodity for retail investors looking for investment in the metal segment.

Resident Indians can become constituents of FPIs in IFSCs

The Board has approved a proposal to amend the SEBI (Foreign Portfolio Investors) Regulations, 2019 to allow Resident Indians to become constituents of FPIs, in order to facilitate investment in Indian securities markets through the FPI route by Alternative Investment Funds (AIFs) set up in International Financial Services Centres (IFSCs). Such Resident Indians will be the FPI’s Sponsor/Manager, and their participation in the FPI will be subject to the Board’s restrictions.

Inclusion of Cost Accountants for share reconciliation audit

To broaden the area of work for the Cost Accountant, the Board has approved an amendment to the SEBI (Depositories & Participants) Regulations, 2018. Now Practicing Cost Accountants would be able to conduct a share capital reconciliation audit of issuing businesses as a result of this change.

Investor Charter for the securities market

The Board examined and adopted a ‘SEBI Investor Charter’ for securities market investors. The Investor Charter comprises, among other things, the Vision Statement, Mission Statement, Investor Rights and Responsibilities, Do’s and Don’ts for Securities Market Investors, and so on. The Investor Charters would assist investors in the securities markets to obtain pertinent information in one location, such as their rights, the various services provided by entities to investors, timelines related to various services provided to investors, and an investor grievance redress mechanism, among other things.

Review of regulatory provisions on Related Party Transactions

The Board considered and approved the amendments to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, in relation to regulatory provisions on related party transactions (RPTs). The amendment includes expanding the scope of the definition of related party and related party transactions, the requirement of prior approval from shareholders if material RPTs have a threshold of Rs. 1,000 crores, approval of audit committee on the specified transaction, and enhanced disclosures.

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3. Burden of proving default and that plea filed isn’t barred by limitation is on financial creditor: SC

In this significant ruling in the matter of Rajendra Narottamdas Sheth v. Chandra Prakash Jain [2021] 131 taxmann.com 2 (SC), the Supreme Court held that the burden of proving the occurrence of default and that the application filed under Section 7 of the IBC is within the period of limitation, is entirely on the financial creditor.

Facts

In this case, the financial creditor filed an application under Section 7 of the IBC seeking initiation of the corporate insolvency resolution process. The adjudicating authority admitted the application and rejected the corporate debtor’s contention that the application was not maintainable as a power of attorney holder filed it and that it was barred by limitation. On appeal, the appellant corporate debtor reiterated that the application under Section 7 of the Code was barred by limitation before the NCLAT.

Dismissing the appeal, the NCLAT observed that the corporate debtor could not demonstrate any error in the order of the adjudicating authority. The NCLAT examined the power of attorney given and found no merit in the argument of the corporate debtor that the application under Section 7 of the Code was not maintainable as a power of attorney holder filed it.

On further appeal, the Apex Court held that burden to prove the occurrence of the default and that the application is filed within the period of limitation is entirely on the financial creditor.

The Court held that the plea of Section 18 of the Limitation Act not having been raised by the financial creditor in the application filed under Section 7 cannot rescue the appellants in the facts of this case. Accordingly, the court clarified that the onus on the financial creditor, at the time of filing of an application, to demonstrate default with respect to a debt, which is not time-barred, is not sought to be diluted herein.

Dismissing the plea, the court observed that “In the present case, if the documents constituting acknowledgment of the debt beyond April 2016 had not been brought on record by the corporate debtor, the application would have been fit for dismissal on the ground of lack of any plea by the financial creditor before the Adjudicating Authority with respect to an extension of the limitation period and application of Section 18 of the Limitation Act.”

The Court further observed that while the decision to admit an application under Section 7 is typically made on the basis of material furnished by the financial creditor, the Adjudicating Authority is not barred from examining the material that is placed on record by the corporate debtor to determine that such application is not beyond the period of limitation.

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4. Sum reflected in Form 26AS can’t be taxed unless it was established that assessee was actual beneficiary

The Surat Tribunal has ruled that a payment reflected in Form-26AS could not be brought to tax if it could not be established that assessee was actual beneficiary of said payment. Once assessee denied transaction reflected in Form 26AS, the onus was on the revenue to establish that the assessee had entered into any such transactions.

Facts

Assessee was a doctor by profession and was a resident of Surat City, State of Gujarat. He filed a return claiming a refund of Rs. 450. However, the CPC, Bangalore, while processing the return of income, made the addition of Rs. 5,63,952.

The CPC made these additions based on the statement of TDS in Form-26AS, being tax deducted at source (TDS) by Electricity Distribution Division Gajraula-UP and other entries by way of salary income and TDS deducted by Electricity test division Amroha-UP. However, the assessee denied having earned any such income on which tax was deducted. On appeal, the CIT(A) confirmed the additions made by CPC. Aggrieved-assessee filed the instant appeal before the Tribunal.

Ruling

The Tribunal held that the assessee had no concern or casual connection or any relation with the alleged deductor; the entry of TDS in the Form-26AS issued to the assessee was wrong. The assessee submitted her response to CPC Bangalore and before CIT(A) and specifically denied having earned such income.

Further, it was submitted by the assessee that it is far from the imagination that the assessee served such organization, which is based 1,000 KM away from the residence of the assessee.

Once the assessee denied such transaction, the onus was on the revenue to establish that the assessee had entered into any such transactions. The CIT(A) had not made any verification or effort to verify such transactions. There was the possibility of entering the wrong PAN, which belonged to the assessee, and the assessee had been unnecessarily put under mental pressure by making such additions despite denying such income. Thus, addition merely based on TDS reflected in the Form-26AS, ignoring the submissions of the assessee, was liable to be deleted.

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5. Writ petition challenging the summons issued by DGGST is not maintainable: Gujarat HC

The Honorable Gujarat High Court held that a writ petition challenging summons issued by DGGST on the ground that a parallel inquiry was also initiated by jurisdictional authority is not maintainable. This ruling was given by the Honorable High Court in case of Himanshu Balram Gupta v. Union of India.

Facts

The assessee was registered under the provisions of the GST Act at Delhi and was under the jurisdictional control of the Competent Authority, Delhi South. The jurisdictional Competent Authority, Delhi South, issued the summons under section 70 and also granted permission to search the business premises of the assessee on the basis of his reasonable belief. Meanwhile, the Directorate General of GST (DGGST), Ahmedabad, also issued summons under section 70 with respect to the same investigation. It filed a writ petition challenging the summons issued by the DGGST and submitted that there was no good and justifiable reason for the DGGST to undertake a parallel inquiry with respect to the same subject matter and issue summons under section 70.

High Court

The Honorable High Court observed that the assessee raised a grievance with respect to one subject matter that two authorities are conducting the inquiry. Therefore, the only question for consideration was whether High Court should interfere at the stage of the issue of summons under section 70. The High Court relied on the decision of the Supreme Court in the case of Union of India v. Rajnish Kumar Tuli [Special Leave Criminal Appeal No. 30 of 2011], wherein it was held that a writ petition challenging a summon is not maintainable. Thus, it was held that this writ application would fail and hence be rejected.

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6. Will it no longer be mandatory for MSMCs (Net Worth below 250 crores) to conduct the statutory audit?

Major economies of the world require a statutory audit for small companies only in case some minimum criteria of public interest are satisfied. Even in India, an income tax audit is now not compulsory where the turnover is Rs. 10 crores or less provided not more than 5% of the transactions are in cash. GST audit has also been completely done away with.

National Financial Reporting Authority (NFRA) has issued a consultation paper on “Statutory Audit and Auditing Standards for Micro, Small and Medium Companies (MSMCs)”. It has conducted a preliminary analysis of the key financial parameters of India’s companies, which have made MCA-21 filings. The focus of the analysis is companies with Net worth below Rs. 250 crores (referred to as MSMCs). MSMC, as a category used by NFRA in this Consultation Paper, is mainly for research purposes keeping in mind that the net worth threshold of Rs. 250 crores are a critical threshold differentiating AS and Ind AS companies.”.

As per the preliminary analysis done by NFRA, the number of active companies in India is 11,49,167, out of which only 6,03,055 files their Annual Financial Statements/MGT-7 for FY 2018-19. If it is implemented, then 5,99,487 companies (net worth below Rs. 250 crores) shall no longer be mandatory to conduct the statutory audit. Further, NFRA has noted that, as per the preliminary analysis conducted, the fees paid to auditors by a large majority of MSMCs are way below what an audit, when performed in compliance with the letter and spirit of the Standards of Auditing, would require. NFRA has formulated four specific questions in the aforesaid consultation paper with the objective to seek the comments/suggestions of the wider stakeholder group.

Questions formulated by NFRA related to Issues about the Auditing Areas of MSMCs:

Question No. 1 – Do you think that Micro, Small, and Medium Companies (MSMCs), depending upon some criteria and threshold, should be exempted from the mandatory statutory audit under the Companies Act, 2013? If not, why not, and if yes, what would be the criteria and thresholds for exemption?

Question No. 2 – Do you think there is a requirement for a separate set of auditing standards for MSMCs as it exists for accounting standards? If no, why not, and if yes, what should be the basis for the same?

Question No. 3 – Do you think the current exemption thresholds for CARO, ICFR, and statutory audit applicability must be standardized and made uniform? If no, why not, and if yes, what would be the criteria and thresholds?

The last date for receipt of comments is 10th November 2021. The comments may be submitted by email at: comments-tac.paper@nfra.gov.in

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