Weekly Round-up on Tax and Corporate Laws | 28th August to 2nd September 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from August 28^th to September 2^nd, 2023, namely:

(a) Portuguese law doesn’t allow wife to hold 50% voting rights in the husband’s shares; deemed dividend applicable: HC;

(b) CBDT notifies Form 71 to allow TDS credit in respect of income disclosed in ITR filed in earlier years;

(c) Banks/FIs must duly follow the procedure laid down by RBI for recovery of loans/repossession of hypothecated vehicles: HC;

(d) GSTN introduces Electronic Credit Reversal and Reclaimed Statements on the GST portal;

(e) GST refund filed within time can’t be rejected on grounds of limitation if the proper officer demands further documents: Delhi HC; and

(f) Key lessons for auditors from NFRA Orders for appropriate reporting under CARO.

1. Portuguese law doesn’t allow wife to hold 50% voting rights in the husband’s shares;deemed dividend applicable: HC

In a recent ruling, the Bombay High Court has held that for section 2(22)(e) purposes, the wife married under the Portuguese Civil Code cannot be said to be the holder of 50% of voting rights in shares of a Co. registered exclusively in the husband’s name.

Facts

Assessee-individual held 33% shares in a private limited company. Assessee was married to his spouse as per the provisions of the Portuguese Civil Code, as applicable to the State of Goa.

As per section 5A of the Income-tax Act, if the Portuguese Civil Code governs the husband and wife, the income of the husband and wife under any head of the income, except income derived from “salaries”, shall be apportioned equally between them.

A search was conducted in the Company’s office and director’s residences. After the search, the Assessing Officer (AO) held that various payments made by the assessee through the Company were deemed dividends under section 2(22)(e).

Applying the Portuguese Civil Code, the assessee contended that his wife was the beneficial owner of half of the 33% shares (16.5% shares) in the said Company. Since the qualifying limit of 20% referred to in Section 2(22)(e) isn’t satisfied, the deemed dividend provisions aren’t applicable.

Ruling

The Bombay High Court held that if the wife doesn’t make any statement under Section 187-C(2) of the Companies Act, 1956, asserting her ownership of a 50% beneficial interest in the shares held by her husband, then the husband would be considered sole owner of entire 33% share portion. This ownership would come with complete voting rights and authority linked to these shares.

A shareholder would be one whom the Company recognizes as the person to whom dividends declared are legally payable. The Memorandum of Articles essentially binds the shareholders of the Company to itself through the various covenants contained therein, which regulate and restrict the liabilities of the shareholders in relation to the Company, which is a separate juristic entity.

In the present case, the wife did not claim to have had a name entered into the Register or Members of the Company. She did not participate in passing resolutions or exercising any voting rights, as she did not hold any shares in the Company.

The provisions of the Civil Code could not create any right in a spouse who is not a registered shareholder of the Company. The Company Act provisions exclusively regulate the relationship between the Company and a shareholder. The wife would have no voting powers under the scheme of the Companies Act attached to any of the shares, which have been exclusively registered in the husband’s name.

Consequently, the submission that the wife of the assessee, married under the provisions of the Portuguese Civil Code, would be entitled to the beneficial ownership of the husband’s shares was to be rejected. Thus, the provisions of section 2(22)(e) would fully apply to the husband.

Read the Ruling

2. CBDT notifies Form 71 to allow TDS credit in respect of income disclosed in ITR filed in earlier years

The Finance Act 2023 inserted sub-section (20) to Section 155 with effect from 01-10-2023. This new sub-section is applicable when an income has been reported in an income tax return for a specific assessment year, and tax was withheld by the deductor and paid to the Government in a later financial year.

This situation arises when a deductor withholds tax in the year in which the income is paid to the taxpayer. However, the taxpayer has already included that income on an accrual basis in his earlier tax returns. This causes a TDS mismatch, as the income has already been taxed on an accrual basis, but tax is only deducted later when payment is made.

Section 155(20) enables the assessee to apply to the AO within two years of the financial year in which the tax was withheld, and the AO will amend the assessment and allow credit for the tax.

The Central Board of Direct Taxes (CBDT) issued Income-tax (Twentieth Amendment) Rules, 2023 and inserted Rule 134 to implement this provision. This rule mandates the assessee to furnish an application in Form No. 71.

This form shall be furnished electronically under digital signature or via electronic verification code. It seeks the following information from the assessee:

• Personal details (Name, Address, PAN, Aadhaar, Residential Status, E-mail Id, Mobile Number and relevant assessment year, date of furnishing return of income, etc.).
• Total income of the assessee returned in the relevant assessment year, amount of specified income and rate at which such specified income was subject to tax.
• Amount of tax deducted, date of deduction of tax, section and rate at which tax deducted, date of payment of tax deducted to the Central Government and amount of tax claimed for the relevant assessment year.
• Name, PAN and TAN of the deductor.

Read the Notification

3. Banks/FIs must duly follow the procedure laid down by RBI for recovery of loans/repossession of hypothecated vehicles: HC

In the matter of Dhananjay Seth v. Union of India [2023] 153 taxmann.com 212 (HC-Patna), the High Court ruled that banks and financial institutions are governed by guidelines issued by the RBI regarding the appointment of recovery agents and the procedures required for loan recovery, as well as the repossession and sale of hypothecated vehicles.

Further, banks and finance companies cannot act in conflict with India’s fundamental principles and policies, which means that no person may be deprived of his livelihood and right to live with dignity without following the established procedure of law.

Thus, the right to recovery of these banks and financial institutions, if pitted against the constitutional right of life of a person to live with dignity, constitutional rights of a person shall prevail.

Brief facts of the case

The petitioners purchased their respective vehicles with the financial assistance of Rs 10 lakh from respondent banks. Later, the petitioners committed a default in repayment of EMI against their respective vehicle loan accounts.

Consequently, the respondents forcibly seized the vehicles while they were on their way and thereafter, auctioned some of the vehicles. In one case, bus passengers were compelled to de-board the bus on the way, and then the vehicle was repossessed. While doing so, the respondents neither followed the procedure prescribed under the SARFAESI Act, 2002, and the Rules framed thereunder nor gave any notice to the petitioners seeking to repossess the vehicle.

The Bank did not even allow the petitioners to know the vehicle’s valuation. The petitioner tried to approach the bank authorities, but they did not hear the petitioner’s grievance.

Petitioner Contentions

In all the writ applications, the petitioner’s grievance was that its respective vehicles were seized and possessed by the Finance Companies without taking recourse to the process of law. The petitioners sought directions for the respondents to hand over their respective vehicles with all papers. They also sought compensation for the loss of reputation and other kinds of compensation.

High Court Observations

The High Court observed that the petitioners complained of a violation of their fundamental rights to earn their livelihood with dignity. They complained of ‘deprivation’ in the hands of respondents without following the law and by use of force, which could not be permitted in a State governed by the rule of law.

The High Court stated that Article 21 of the Constitution guaranteed every person that he shall not be deprived of his life and liberty except according to the procedure established by the law.

The High Court relied on Kaushal Kishore v. State of Uttar Pradesh (2023) 4 SCC 1, wherein the Supreme Court held that Article 21 did not state that the State shall not deprive a person of his life and liberty but stated that

“no person shall be deprived of his life or personal liberty”.

Thus, this Court opined that the livelihood and all those aspects of life that make a man’s life meaningful, complete and worth living were included within the meaning of the words “the Right to Life”.

In the present case, the High Court noted that the respondent’s action in seizure/repossession of the vehicle without following the RBI guidelines and law was wholly illegal, and, hence, they could not continue with the same.

High Court Ruling

The High Court held that the Banks/financial institutions are governed by guidelines issued by the Reserve Bank of India in the matter of appointment of recovery agents and procedures that must be followed in the matter of recovery of loans and repossession/sale of hypothecated vehicles.

Thus, where vehicles were not sold, the petitioners and the Bank, through its authorized representative, would sit together and reconcile the account to determine the amount due in the loan account. However, the Bank would not charge any interest for the period during which the vehicle remained in seizure.

Further, in cases where the vehicle had been sold to a third party, and the Bank was not in a position to restore the vehicle, the High Court held that they would be liable to pay the petitioners to the extent of the value of the vehicle as per their insurance value on the date of their seizure.

Read the Story

4. GSTN introduces Electronic Credit Reversal and Reclaimed Statements on the GST portal

The Government has earlier notified certain changes in Table 4 of Form GSTR-3B to enable taxpayers to report correct information regarding ITC availed, ITC reversal, ITC reclaimed, and ineligible ITC vide Notification No. 14/2022 – Central Tax dated July 5th, 2022.

Now, to facilitate the taxpayers in correct and accurate reporting of ITC reversal and reclaim thereof and to avoid clerical mistakes, a new ledger, Electronic Credit and Reclaimed Statement is being introduced on the GST portal.

This statement will help the taxpayers in tracking their ITC that has been reversed in Table 4B(2) and thereafter reclaimed in Table 4D(1) and 4A(5) for each return period, starting from the August return period. The taxpayers can declare their opening balance for ITC reversal till November 30th 2023.

Read the Story

5. GST Refund filed within time can’t be rejected on the ground of limitation if the proper officer demands further documents: Delhi HC

The High Court of Delhi had recently held that the period of limitation would stop running if the refund application is filed in the prescribed ‘form and manner’ before two years from the relevant date, irrespective of the fact that the proper officer required further documents or material to satisfy himself that refund claimed was due or not. The Honorable Delhi High Court gives this ruling in the case of National Internet Exchange of India v. Union of India.

Facts

The petitioner applied for a refund on 31-10-2019 in ‘form and manner’ as prescribed under Section 54. The application was accompanied by documents prescribed under rule 89(2) of CGST Rules, 2027. The proper officer noticed certain document discrepancies and issued a deficiency memo, and the petitioner was asked to submit a fresh application for refund.

The petitioner submitted the fresh application, and the officer issued deficiency memo again and again. After submission of the application for 4th time, SCN was issued to show cause as to why its refund application should not be rejected on the ground that it was filed after the prescribed period of two years. Later, the application was rejected on the grounds of limitation. The petitioner filed writ petition against the rejection of refund.

High Court

The Honorable High Court noted that an application for the refund must be made within two years from the relevant date, and the application can be rejected as deficient only where any deficiencies are noted. In the instant case, the deficiency memo did not indicate that the application filed by the petitioner was incomplete in terms of rule 89(2).

The nature of the deficiencies, as set out in the deficiency memo, clearly indicated that the application filed by the petitioner was not incomplete. Also, the petitioner had submitted the required statement containing the number and date of invoices and relevant bank realization certificates/foreign inward remittances certificates. Thus, the Court held that the application for refund filed by the petitioner could not be ignored or rejected.

Read the Story

6. Key lessons for auditors from NFRA Orders for appropriate reporting under CARO

NFRA is becoming more active in initiating action under section 132(4) of the Companies Act 2013. It has issued various orders against the auditors of the listed entities who failed to meet the relevant requirements of the Standards on Auditing (‘SA’ hereafter), Accounting Standards (AS), Ind AS, and the Companies Act 2013 in respect of several significant areas, reflecting a serious lack of professional competence to perform audit of a Public Interest Entity (PIE).

In many of the orders and reports issued by NFRA, various instances of inappropriate reporting under CARO were observed. The following key lessons can be drawn from these instances and should be heeded by auditors in their forthcoming assignments:

1. Never ignore the internal audit reports, and deficiencies pointed out by the internal audit reports since Clause 3 (xiv) (b) of CARO, 2020 now requires the auditor to state
   

   “whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor”.

2. Wherever the auditor’s findings are at variance with those in internal audit reports, inconsistency in the findings of the internal audit report vis-a-vis the findings of the Auditors had to be resolved. The Auditors had to determine what modifications or additions to audit procedures were necessary to resolve the matter. They had to consider the effect of the matter, if any, on other aspects of the audit.
3. Where internal audit reports state that no physical verification of PPE was carried out by management, the auditor cannot report that physical verification of PPE was carried out in the CARO report just 10 days after the date of the internal audit report unless he has documented evidence that physical verification was done between the two dates.
4. When management does not comply with some information request (e.g. user credentials or login details for Income Tax, GST, and other Govt websites), the auditor must follow up persistently and document each follow-up correspondence. If still management does not comply, it must be taken up with TCWG. If there is still no compliance, then Auditors are required to deal with the situation as per Para 11 of SA 705, according to which if, after acceptance of the audit, the management imposes limitations on the scope of the audit, which can result in auditor qualifying or disclaiming the audit opinion, then the auditor is required to request the management to remove such limitation. If the scope limitation is not removed, the auditor shall determine whether it is possible to perform alternative procedures to obtain sufficient appropriate audit evidence.
5. Where auditors become aware of any income tax demand, they must assess whether provision is required for the same or disclosure as contingent liability is required in terms of applicable Ind AS/AS. If provision and/or disclosure is required and the same is not made, the auditor must modify his opinion on the accounts.
6. Disputed income-tax demand is to be reported by the auditor in the CARO report under clause 3(vii)(b) of CARO,2016 (now Clause 3(vii)(b) of CARO, 2020) regardless of whether any modification of opinion is required or not. In other words, reporting under clause 3(vii)(b) of CARO is required even if the possibility of an outflow of resources to satisfy the liability is remote. Hence, neither provision nor disclosure is made in accounts.

The auditor should consider the above-mentioned learnings from the instances of inappropriate reporting observed from the NFRA Order.

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