Weekly Round-up on Tax and Corporate Laws | 27th November to 2nd December 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from November 27^th to December 2^nd, 2023, namely:

(a) Assessee is duty bound to respond to notices, appear & offer explanations before AO; HC refuses to halt proceedings;

(b) Maximum penalty of Rs. 10,000 shall be levied for delay in payment of tax amount; penalty u/s 122 to be set aside: HC;

(c) No interference required in order imposing tax & penalty if assessee didn’t establish actual movement of goods: HC;

(d) SAT advises SEBI to include provisions in the Delisting Regulation for addressing grievances of misidentified promoters and

(e) Determining the Timing for Capitalization in Integrated Irrigation Projects under Ind AS 16

1. Assessee is duty bound to respond to notices, appear & offer explanations before AO; HC refuses to halt proceedings

The assessee filed the writ petition under Article 226 of the Constitution of India. The prayer of assessee was to issue a writ of mandamus to direct the Assessing Officer (AO) to drop all proceedings initiated against him based on the notices issued under provisions of the Income-tax Act, 1961 for the Financial Years of 2017-2018 to 2020-2021.

The Madras High Court held that the prayer made by the assessee appeared to be misconceived. The affidavit shows the petitioner received notice and an order under Section 148A(b) and 148A(d) of the Act, dated 23.03.2022 and 05.04.2022. It’s unclear if these proceedings cover all the financial years mentioned in the prayer, as the notice and order only cover some years.

Further, the assessee is also unclear whether any assessment order was passed for the periods in question.

Even if it appears that the assessee received orders under Section 148A(d) that have attained finality and was also in receipt of notices under Section 148 of the Act, it is for it to cooperate with the proceedings initiated by the Department and take matters to a logical conclusion, in accordance with the law.

Revenue also contended that notices were issued continuously and repeatedly to the assessee, but there had been no response from his side. It was incumbent on the part of the assessee to appear before AO and put forth any explanation that he may have in regard to the issues raised by the Department.

Accordingly, mandamus of the nature sought by the assessee cannot be granted in a case that involves an appreciation of various disputed facts. It is to be noted that in matters relating to assessment, filing of a representation is of no avail as the assessee is duty-bound to respond to notices, appear before the officer and offer explanations.

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2. Maximum penalty of Rs. 10,000 shall be levied for delay in payment of GST; penalty under section 122 to be set aside: HC

The Honorable Allahabad High Court has recently held that the maximum punishment would be penalty of Rs. 10,000 if the tax amount has been paid but after a delay, since there is no tax evasion. This ruling is given by the High Court of Allahabad in case of Clear Secured Services (P.) Ltd. v. Commissioner, State Tax GST.

Facts

In the present case, the petitioner received a notice alleging that it had not paid GST within the prescribed time and was liable for payment of penalty of approx. Rs. 28 lacs each in CGST and SGST in terms of Section 122(1)(iii). The petitioner could not reply because of COVID-19, and consequently, an ex-parte order was passed against the petitioner, imposing penalty indicated in the show-cause-notice. It filed an appeal, but the same was dismissed; thus, it filed writ petition against the demand.

High Court

The Honorable High Court noted that there was no material on record or even an allegation against the petitioner that amount was collected but not paid or evaded. The only allegation was that amount was not paid within time prescribed and was paid after a delay.

In such case, the maximum punishment would be Rs. 10,000, but the Appellate Authority had failed to follow general disciplines relating to the penalty, specifically provided under Section 126(2). Therefore, the Court held that the said order imposing penalty was to be set aside, and the petitioner was directed to pay Rs. 10,000 as penalty.

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3. No interference required in order imposing tax & penalty if assessee didn’t establish actual movement of goods: HC

The High Court of Allahabad has recently held that an order imposing tax and penalty along with interest upon the petitioner can’t be interfered with if the petitioner fails to discharge its onus to prove and establish beyond doubt actual transaction, actual physical movement of goods as well as genuineness of transactions. This ruling is given by the Honorable Allahabad High Court in case of Shiv Trading v. State of U.P.

Facts

The petitioner was engaged in purchasing and selling iron machinery parts and hardware. It availed input tax credit on purchases made from a company. The GST department conducted the inspection and found that said company was non-existent. Therefore it was alleged that transactions shown by the petitioner were bogus, fictitious and fake. Thereafter, an order imposing tax and penalty along with interest was passed upon the petitioner. It filed writ petition against the demand.

High Court

The Honorable High Court noted that the petitioner failed to discharge its onus to prove and establish beyond doubt the actual transaction, actual physical movement of goods, and genuineness of transactions. Since the burden of proving the correctness of ITC remains upon the dealer claiming such ITC, such burden of proof can’t be shifted to the revenue. Therefore, the Court held that the proceedings had rightly been initiated against the petitioner under Section 74 and no interference was called for said order.

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4. SAT advises SEBI to include provisions in the Delisting Regulation for addressing grievances of misidentified promoters

In the matter of Synthetic Marble and Resin Ltd. v. National Stock Exchange of India Ltd. [2023] 157 taxmann.com 39 (SAT – Mumbai), the Securities Appellate Tribunal observed that the Delisting regulation of 2021 has no provisions for redressal of the grievance of a person who has wrongly been shown as a promoter in a delisted company and consequent to which demat account of the said promoter has been frozen.

Further, it advised the SEBI to consider adding a provision for resolving such disputes. Accordingly, the SEBI was recommended to place some mechanism for redressing such grievances under its delisting regulations.

Brief facts of the case

The Companies SSTL and ESAL were listed companies. The Securities of both companies were compulsorily delisted from NSE on account of non-compliance with the listing agreement, pursuant to which directors and promoters of said companies, including the appellants, were debarred from assessing the securities market and their Demat accounts were frozen.

Appellant requested to defreeze its demat account because it was not a promoter and was wrongly shown as a promoter in said companies. However, NSE refused the appellant’s request, stating that the annual reports of two companies from 2001 to 2005 indicate the appellant as a promoter, and consequently, it could not help the appellant.

As per Section 21A of the Securities Contracts (Regulation) Act, 1956, and a SEBI circular from 7th September 2016, the directors and promoters faced a 10-year restraint from accessing the securities market, leading to the freezing of the appellant’s demat account.

Appellant’s actions

Since the NSE refused the appellant’s request, stating that the annual report of two companies from 2001 to 2005 indicated the appellant as a promoter, and, consequently, it could not help the appellant. The appellant, thus, filed an instant application seeking direction that the stock exchange be directed to instruct depositories to defreeze its demat account.

SAT’s observations

The SAT observed a lacuna in the existing delisting regulation 2009, which had been subsequently replaced by the delisting regulations 2021. Further, the 2021 regulation also had no provisions for redressal of a person who has wrongly been shown as a promoter in a delisted company, consequently causing the demat account of said promoter to be frozen. Thus, the SEBI should consider adding a provision for resolving such disputes.

SAT’s decision

The SAT noted lacunas in the existing delisting regulation, 2009, which had been replaced by the delisting regulations of 2021. 2021 regulation also had no provisions for redressal of such grievance.

Therefore, SAT directed SEBI to consider adding a provision for resolving such disputes. SEBI was recommended to place some mechanism for redressal of such grievance under its delisting regulations

Further, the appellant was directed to file an application/representation under regulation 43 of SEBI (Delisting of Equity Shares) Regulations, 2021, giving details and evidence for de freezing of its demat account and upon receipt of the application, the board would investigate and afford an opportunity of hearing to appellant and after considering all relevant facts and circumstances pass a reasoned order.

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5. Determining the Timing for Capitalization in Integrated Irrigation Projects under Ind AS 16

A government company is capitalizing its fixed assets, i.e. canals, upon substantial completion under the old GAAP framework. With the introduction of the Ind AS framework, the company is facing problems in capitalizing on constructing canals completed in tranches/stretches through multiple tenders.

The company delivers water to farmers through a system called Filed Irrigation Canals (FICs), the final stage of the canal project. Tenders for constructing FICs are awarded in shorter stretches, often without chronological order. Depending on the issuance of completion certificates, the company capitalize the canal components in its books of account. Regarding the timing of capitalization, the management approached the Expert Advisory Committee for its opinion.

In this regard, the Expert Advisory Committee noted that determining whether an asset is in a location and condition necessary for its intended operation as required under Ind AS 16 is a factual question to capitalize assets. Where the units of projects are interdependent on various units, the project cannot be considered capable of operating as intended. Therefore, in such cases, capitalization should be done upon completing the entire project.

Therefore, the integrated irrigation project cannot be considered usable until the Field Irrigation Canals (FICs) are completed. Until FICs are complete, the various units of the project are not in the necessary location and condition for the intended operation. Consequently, these units cannot be capitalized as Property, Plant, and Equipment (PPE) before the FICs are completed based on individual completion certificates. However, the company should also comply with the provisions of depreciation and impairment even when the project is still under construction.

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