Weekly Round-up on Tax and Corporate Laws | 28th October to 02nd November 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from October 28th to November 02nd, 2024, namely:

1. Delhi HC upholds reassessment initiated by jurisdictional AO; distinguishes with Hexaware ruling;
2. SEBI’s Proposals to strengthen and streamline the ‘Securitised Debt Instruments Market’;
3. Refund of pre-deposit to be allowed if assessee filed appeal and decided in its favor due to Section 16(5) & 16(6);
4. GSTN to bar filing of GST returns after the expiration of three years from the due date; and
5. Recognition and depreciation of major spare parts in compliance with Ind AS 16.

1. Delhi HC upholds reassessment initiated by jurisdictional AO; distinguishes with Hexaware ruling

The instant writ petition was filed questioning the validity of the reassessment action initiated under Section 148 by the Jurisdictional Assessing Officer (JAO). The question before the High Court was:

“Whether a notice issued by the JAO would be valid and compliant with the Faceless Scheme of Assessment, which had come to be adopted by virtue of Sections 144B and 151A?”

The Delhi High Court that the provisions of the Faceless Reassessment Scheme 2022, supported by the extensive material presented by the respondents, bolsters the clear intent underlying each phase of the faceless assessment process. The scheme clearly contemplates the initial enquiry and formation of opinion to reassess being part of one defined process followed by actual assessment facelessly. It divides the reassessment process into two stages. When viewed in that light, it is manifest that it strikes a just balance between the obligation of the JAO to scrutinise information and the conduct of assessment itself through a faceless allocation.

The functions of the JAO and NFAC are complementary and concurrent, as contemplated under the various schemes and statutory provisions. This balanced distribution underscores the legislative intent to create a seamless integration of traditional and faceless assessment mechanisms within a unified statutory framework.

Section 144B, which provides for the faceless assessment, cannot be viewed as the solitary basis for the initiation of reassessment. The statute conceives various scenarios where the case of an individual assessee may be selected for examination and scrutiny based on information and material that falls into the hands of the Jurisdictional Assessing Officer (JAO) directly or is otherwise made available with or without the aid of the Risk Management System (RMS).

The faceless system of assessment does not nullify the JAO’s role in conducting assessments. The Court held that the JAO retains powers that do not conflict with, but rather complement, the objectives of neutrality and efficiency. The faceless assessment scheme centralises processes under the Faceless Assessing Officer (FAO) to reduce direct interaction.

However, this structure does not diminish the JAO’s authority. Instead, the JAO’s retained jurisdiction is vital for ensuring continuity and accountability, acting as a complementary element to the faceless assessment framework. The JAO’s retention of original jurisdiction provides a critical balance, ensuring that human oversight remains available within the faceless assessment structure when needed. Importantly, the Court highlighted that the JAO’s authority is not merely residual but an active, complementary role that reinforces the flexibility of the assessment system.

In Hexaware Technologies [2024] 162 taxmann.com 225 (Bombay), the Bombay High Court ruled that the JAO lost jurisdiction to issue reassessment notices after the introduction of the Faceless E-Assessment Scheme 2022. The Court concluded that there could be no concurrent jurisdiction between the JAO and the FAO.

However, the judgment did not refer to the notification dated August 13, 2020, which gave NFAC officers concurrent powers with the AO. The Delhi High Court disagreed with Hexaware Technologies, considering multiple information sources that could aid a JAO in determining if income escaped assessment.

Accordingly, it was held that JAO could not be entirely stripped of the authority to assess or reassess solely due to the introduction of Section 144B and the Faceless Reassessment Scheme.

Read the Ruling

2. SEBI’s Proposals to strengthen and streamline the ‘Securitised Debt Instruments Market’

The SEBI has released a consultation paper dated November 1, 2024, on reviewing the SEBI (Issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008. The key proposals include (a) a minimum investment threshold for RBI-regulated entities and unregulated entities undertaking securitization, (b) mandatory issuance and transfer of securitized debt instruments in demat form and (c) removing the requirement of obtaining prior approval from SEBI for removal or replacement of trustees. The key proposals of the Consultation Paper are discussed hereunder:

2.1 SEBI proposes a minimum investment threshold for RBI-regulated entities and unregulated entities undertaking securitization to Rs 1 crore

Securitization is a process in which assets/receivables are pooled together and re-packaged into pass-through instruments. The cash flow from these underlying assets/receivables is passed on to the purchasers/investors in the pass-through instruments.

SEBI has proposed a minimum ticket size, i.e., the size of investment by a single investor, whether at the time of initial subscription or subsequent purchase of Securitized Debt Instrument (SDI), to Rs 1 crore. The minimum ticket size must be as follows –

(a) For originators that are RBI-regulated entities – The minimum ticket size for RBI-regulated entities (i.e. scheduled commercial banks, small finance banks, NBFCs including HFCs and All-India Term Financial Institutions) must be as specified by the RBI from time to time. Currently, the limit specified is Rs 1 crore.

(b) For originators not regulated by RBI and undertaking securitization, the minimum ticket size will be Rs 1 crore.

(c) For SDIs with underlying listed securities, the amount must be at least the face value specified for listed securities.

2.2 Mandatory issuance and transfer of Securitized Debt Instruments in demat form

SEBI has proposed making the issuance and transfer of securitised debt instruments (SDIs) mandatory in demat form only. SDIs are financial products created by pooling together various types of debt, such as loans, mortgages, or receivables, and then selling them as securities to investors. Investors in these instruments receive returns based on the performance of the underlying debt pool, with risk spread across multiple assets, offering attractive returns.

2.3 Limitation on no. of investors to whom offer can be made for issuance of securitized debt instruments on private placement basis

SEBI has introduced limitations on the number of investors to whom an offer or invitation can be made in case of issuance of securitised debt instruments (SDIs) on a private placement basis and which are proposed to be listed. The maximum number of investors proposed is 200. However, an offer or invitation to investors in excess of this limit will be undertaken as a public issue of SDIs.

Further, SEBI also proposes that an offer or invitation to qualified institutional buyers will be excluded while calculating the limit of 200 persons.

2.4 Minimum and Maximum offer period for Securitized debt instruments

SEBI has proposed the minimum and maximum number of days the public offer can be kept open to 3 and 10 days, respectively. Further, advertisement requirements for SDIs must be aligned with those specified in the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021.

2.5 Proposal to redefine ‘debt or receivables’ for Securitized debt instruments

SEBI has proposed to amend the definition of debt or receivables under Regulation 2(g) of the SEBI (Issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008. Such definition must specify listed debt securities, trade receivables (arising from bills/invoices duly accepted by the obligors), rental receivables and equipment leasing receivables. Further, SEBI may notify other types of debt or receivables from time to time. No other debt or receivable (including unlisted debt securities) must be permitted to be underlying for an SDI.

2.6 Proposal to dispense with requirement of obtaining prior approval from SEBI for removal or replacement of trustees

SEBI has proposed to dispense with the requirement of obtaining prior approval from SEBI for the removal or replacement of trustees. Further, the procedure for removing trustees is to be aligned with NCS Regulations and/or SEBI (Mutual Fund) Regulations. Also, the procedure for calling and holding the meetings for trustee removal and replacement must be specified.

2.7 Periodic disclosure of Information on Securitized Debt Instruments

SEBI has proposed to mandate the disclosure of updated information regarding SDIs on a semi-annual basis. Further, Debenture Trustees (DT) and Credit Rating Agencies (CRAs) will be required to update any rating changes to the stock exchanges on a continuous basis.

Also, a standardized format for the semi-annual disclosures will be introduced to ensure consistency and clarity in the information provided.

2.8 Conclusion

In conclusion, these proposals aim to enhance transparency, investor protection, and operational efficiency within the securitized debt instruments market. By setting clear investment thresholds, mandatory demat issuance, and standardized disclosure requirements, SEBI seeks to streamline processes and ensure stronger regulatory oversight. Additionally, limiting investor numbers for private placements and redefining eligible underlying assets for SDIs are steps towards reducing risk and promoting market stability.

Read the Consultation Paper

3. Refund of pre-deposit to be allowed if assessee filed appeal and decided in its favor due to Section 16(5) & 16(6)

Earlier, the CBIC issued Circular No. 237/31/2024-GST wherein para 4 clarified that no refund of tax already paid or input tax credit already reversed would be available where such tax has been paid or input tax credit has been reversed on account of contravention of provisions of sub-section (4) of section 16 of the CGST Act, and where such input tax credit is now available as per the provisions of sub-section (5) or sub-section (6) of section 16 of the CGST Act.

Now, the CBIC has issued Corrigendum to clarify that restriction on refund under section 150 of the Finance (No. 2) Act, 2024 will not apply to the refund of an amount paid as pre-deposit by the taxpayer as per sub-section (6) of section 107 or sub-section (8) of section 112 of the CGST Act, at the time of filing of an appeal, where such appeals are decided in favor of the said taxpayer.

Read the Circular

4. GSTN to bar filing of GST returns after the expiration of three years from the due date

The GSTN has issued an advisory to inform that the taxpayers shall not be allowed to file their GST returns after the expiry of a period of three years from the due date of furnishing the said return under Section 37 (Outward Supply), Section 39 (payment of liability), Section 44 (Annual Return) and Section 52 (Tax Collected at Source) as per the Finance Act, 2023 implemented w.e.f. 01-10-2023 vide Notification No. 28/2023 – Central Tax dated 31th July, 2023.

The said changes are going to be implemented in the GST portal from early next year (2025). Hence, the taxpayers are advised to reconcile their records and file their GST Returns as soon as possible if not filed till now.

Read the Update

5. Recognition and depreciation of major spare parts in compliance with Ind AS 16

Under Ind AS 16, Property, Plant, and Equipment, tangible items intended for the production or supply of goods or services and expected to be utilized over multiple periods are recognized as property, plant, and equipment (PPE). The criteria for recognizing an asset include the probability of future economic benefits and the ability to measure its cost reliably. Spare parts can be classified as PPE if they meet these definitions, otherwise, they are classified as inventory. The standard also states that the depreciation should commence when the asset is ready for use, which is when it is in the necessary location and condition for its intended operation. The systematic allocation of depreciation must reflect the pattern of future economic benefits expected from the asset.

But, an issue arises when companies have policies regarding the capitalization and depreciation of major spare parts. Many organizations maintain that depreciation on these spare parts should start only when they are fitted into the machinery, thus being ready for operation. For example, a manufacturing company might have a policy stating that the depreciation of spare parts like motors, pumps, or compressors begins only after these items are installed in the main machinery. This policy might be based on the belief that the spare parts are not “in use” until they are actively operational within the equipment.

However, auditors often challenge this approach, indicating that spare parts are generally available for use upon purchase, which means that depreciation should begin from the acquisition date rather than the installation date. For instance, if the company acquires a spare motor for its production line in January, but does not install it until March, under the auditors’ view, depreciation should start from January, when the motor was purchased and ready for use, rather than waiting until March when it is installed.

This discrepancy raises questions about the alignment of company policies with the provisions of Ind AS 16, leading to potential compliance issues. The Expert Advisory Committee (EAC) has addressed this matter, asserting that spare parts should be recognized as PPE if they fulfill the relevant definition and recognition criteria. Once classified as PPE, all requirements of Ind AS 16 apply, including the stipulation that depreciation is systematically allocated over the spare part’s useful life. The EAC opined that since spare parts are typically available for use immediately upon acquisition, the commencement of depreciation should begin at the time of purchase, regardless of whether they have been installed in the machinery.

Read the News