Weekly Round-up on Tax and Corporate Laws | 29th January to 3rd February 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from January 29^th to February 03^rd 2024, namely:

(a) Interim Budget 2024 – Changes proposed in the Income-tax Act & GST Act

(b) CBDT notifies ITR Forms 2, 3, and 5; Individuals/HUFs subject to tax audit can verify ITR using EVC;

(c) SEBI issues ad-interim ex-parte order restraining ‘Growpital’ from mobilizing funds without CIS registration;

(d) Delhi HC upheld the constitutional validity of Anti-profiteering measures under Section 171;

(e) No reversal of ITC on ground that supplier was non-existent if documentary evidence; and

(f) Export incentives linked to operations shall be classified as ‘Other income’ under Ind AS 20

1. Interim Budget 2024 – Changes proposed in the Income-tax Act & GST Act

Finance Minister Nirmala Sitharaman presented the Interim Budget for 2024-25 in the Parliament on February 01, 2024. The emphasis of the 2024 Interim Budget was on empowering youth and women, developing infrastructure, supporting agriculture, promoting green growth, and enhancing the railway sector.

No significant tax announcements were proposed, with only a few necessary proposals introduced concerning Income Tax and GST. The changes proposed in the Finance Bill 2024 have been discussed below:

Changes proposed under the Income-tax Act

TCS provisions proposed to be amended to align them with the Govt.’s Press Release

The Finance Act 2023 has brought substantial changes in the provisions related to the collection of tax at source under section 206C(1G). In response to the comments and suggestions submitted by the stakeholders, the government decided to make changes to the TCS provisions. The Govt. has issued a press release dated 28-6-2023, announcing several changes to Section 206C(1G).

To implement such changes introduced by the Press Release, the Finance Bill proposes the necessary amendments to Section 206C(1G).

Extension of sunset dates under various provisions

The Finance Bill 2024 proposes to extend the sunset date for several provisions under the Income-tax Act, which includes section 10(4D), section 10(4F), section 10(23FE), Section 80-IAC and more.

Withdrawal of small outstanding direct tax demands

In budget speech, the finance minister proposed withdrawing or waiving small, unresolved, unverified, or disputed direct tax demands related to financial years up to 2014-15. This initiative aims to address concerns related to demands amounting to Rs. 25,000 for the period up to financial year 2009-10 and Rs. 10,000 for financial years 2010-11 to 2014-15

Changes proposed under the GST

Distribution of ITC on common input services mandated through ISD

The Finance Bill 2024 has proposed to amend the definition of ISD and the procedure of distributing common credit using the ISD mechanism. The proposed definition eliminates the requirement of issuing prescribed documents. Consequently, where an office receives input services on behalf of deemed distinct persons, it would be considered an ‘ISD’, and thus, it would become liable to comply with the relevant provisions for the distribution of common credit.

The impact of the proposed amendment is as follows:

1. The person who receives common ITC for the deemed distinct persons would be required to obtain mandatory registration as ISD.
2. For the distribution of ITC of the services liable to RCM, tax is required to be paid by the normal registration in the State of ISD.
3. The said proposed amendment, when made effective, would mandate the distribution of common ITC on services through the ISD mechanism only. Concurrently, there would be a need for corresponding amendments in the rules to establish the framework for providing the manner of distribution of ITC.

Non-Registration of machines under special procedure by tobacco manufacturers will result in heavy penalty

The Finance Bill, 2024 has proposed the introduction of new Section 122A within the Penalties Chapter, specifying penalties for persons engaged in the manufacture of specified goods who fail to register the machines in accordance with the special procedure.

Section 122A prescribes a penalty of Rs. 1 lakh for each machine not registered as per the special procedure. Notably, this penalty is in addition to any penalty paid or payable under Demand and Recovery provisions or any other sections of the Penalties Chapters. Consequently, non-compliance with the special procedure may lead to the imposition of multiple penalties by the proper officer under the GST law.

Read the Finance Bill 2024

Read the Article on Income-tax Changes

Read the Article on GST Changes

2. CBDT notifies ITR Forms 2, 3, and 5; Individuals/HUFs subject to tax audit can verify ITR using EVC

The Central Board of Direct Taxes (CBDT) has notified Income-tax Return Forms 2, 3 and 5 for the Assessment Year 2024-25. The new Forms will be applicable for filing income-tax returns with respect to income earned during the previous year 2023-24 (between 01-04-2023 and 31-03-2024). Earlier, the CBDT notified ITR-1, ITR-4, and ITR-6.

Further, the CBDT has also amended Rule 12, which prescribes ITR forms and procedures for submitting and authenticating them. Rule 12 has been amended to allow individuals and HUF, who are liable to tax audit under section 44AB to verify the return of income through an electronic verification code. Earlier, they are only authorized to verify returns through digital signature.

The applicability of ITR forms to different taxpayers remains unchanged in the new versions. Nevertheless, the new forms require additional details from taxpayers. Further, many changes in the ITR forms are consequential to the amendments made by the Finance Act 2023.

We have thoroughly analyzed new ITR Forms and highlighted all key changes and new requirements in current ITR forms viz-a-viz last year’s ITR Forms. These changes include the following:

1. Individuals/HUFs liable for audit can verify ITR using EVC;
2. Reporting of all banks held at any time;
3. New Schedule 80DD seeks details towards maintenance & medical treatment of the person with a disability;
4. Schedule 80U inserted for claiming deduction if the assessee is a person with a disability;
5. Adjustment of unabsorbed depreciation (pertaining to additional depreciation) from WDV of the block of assets as of 01-04-2023;
6. Schedule – Tax Deferred on ESOP’ seeks PAN and DPIIT Registration Number of the eligible startup;
7. New Schedule 80-IAC seeks details in respect of eligible startup.

Read the Notification

Read the Article on ITR Changes

3. SEBI issues ad-interim ex-parte order restraining ‘Growpital’ from mobilizing funds without CIS registration

Own a piece of farmland for Rs. 5,000 and become a business partner, get an assured return from crops, and enjoy tax-free income. Sounds like a perfect investment plan, right? A similar investment scheme relating to raising funds for Agricultural projects was going well for Growpital until SEBI received a complaint and started an investigation. On a prima facia, the SEBI found Growpital to be violating ‘collective Investment scheme norms, and accordingly, on Jan 29, 2024, the market regulator issued an ad-interim ex-parte order restraining ‘Growpital’ from mobilizing funds without CIS registration.

What does Growpital?

Growpital is an agricultural investment platform that claims to offer tax-free fixed-profit sharing to investors ranging from 10% to 15% on investments. The funds are invested in agricultural project portfolios, where investor capital serves as working capital for farming.

The platform oversees farm projects internally or collaborates with established market players. Partnering with farmers, it offers standardized farming procedures. Growpital likens its model to a mutual fund, cultivating diverse crops across its projects.

Growpital’s Tax-Free Profit-Sharing Sparks Regulatory Scrutiny

Growpital faced controversy due to offering tax-free fixed-profit sharing of 10%-15% to investors in agricultural projects, resembling a mutual fund. Concerns arose over the lack of control for investors in fund allocation and the complexity of LLP ownership. Additionally, the firm’s claims of quick liquidity and risk reduction were questioned, raising regulatory scrutiny over crowdfunding practices and transparency in fund management.

Modus operandi

• When investors invest through the Growpital platform, they become partners in a Limited Liability Partnership (“LLP”) floated by Growpital. The amount invested is treated as capital contribution to the LLP. Multiple LLPs were incorporated for this purpose, prefixed with the name of “ZF Project” (such as ZF Project 1, ZF Project 2, etc., collectively referred to as “ZF Project LLPs”).
• The amount pooled from investors is then claimed to be invested in agricultural projects. The farm projects are managed through an in-house team or by partnering with established market players. 70+ crops grown across 14+ states
• After the sale of agricultural produce, profits are claimed to be paid to partners (other than designated partners) as agreed in the LLP Agreement.

SEBI’s Probe into Potential CIS Violations

In the instant matter, the questions that arose before the SEBI were as follows:

• Is the scheme/arrangement operated through the Growpital platform prima facie a Collective Investment Scheme (“CIS”)?
• Whether the Entities have prima facie violated any provisions of the SEBI Act, CIS Regulations and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market)?
• Who is responsible for the violations?
• Should urgent directions be issued against those responsible for the prima facie violations, if any?

SEBI’s Observations

The SEBI observed that under the guise of an LLP, the designated partners of the ZF Project LLPs were sponsoring a pooled investment scheme. With the promise of assured returns, retail investors are being attracted to become “partners” in the LLP by making a “contribution” to the capital of the LLP. The contribution of each investor/partner is then apparently invested into agricultural projects to generate profits/returns for all the partners. Hence, the instant scheme/arrangement prima facie satisfies the first condition of “pooling of contribution or payments”, stipulated in Section 11AA(2)(i) of the SEBI Act, which specifies the conditions for being called CIS.

It was observed that a CIS was being operated and run through the Growpital platform without obtaining any certificate of registration from SEBI, and over Rs. 132 crores had been mobilized through the Growpital platform in ZF Project 1 LLP alone.

Secondly, LLP agreements allow easy investor entry and exit, resembling a veiled investment scheme where funds are channelled into projects with profits distributed based on investor consent letters.

It was found that designated partners manage the whole scheme, exercising extensive authority over LLP operations, implying management on behalf of investors. The investors, however, lacked day-to-day control over management and operations, indicating limited control. SEBI concluded that Growpital’s scheme meets all conditions under Section 11AA, qualifying it as a Collective Investment Scheme (CIS) without falling under any exceptions outlined in Section 11AA(3).

SEBI’s ruling

The SEBI issued an interim order against Growpital and its directors/partners. SEBI instructed them to halt CIS activities, cease fund solicitation, refrain from fund diversion, and disclose asset inventory within 15 days. All materials related to unregistered CIS had to be withdrawn, and market access was prohibited.

Further, the ad-interim ex-parte order ensured that additional funds were not mobilized through the Growpital platform under its scheme/arrangement/plans and to safeguard assets acquired from funds of the investing public until full facts and materials were brought out and the final decision was taken in the matter.

Additionally,  any open derivative contracts were to be closed within three months, Cashfree Payments India Private Limited was also directed to stop accepting payments for Growpital, and bank/demat accounts were to be frozen. Copies of the order were to be sent to relevant institutions for compliance, with SEBI reserving the right to take further action.

Read the Order

4. Delhi HC upheld the constitutional validity of Anti-profiteering measures under Section 171

The High Court of Delhi has recently held that anti-profiteering measures under Section 171 of CGST Act, 2017, as well as Rules 122, 124, 126, 127, 129, 133 and 134 of CGST Rules, 2017, are constitutionally valid, and there is no requirement of Judicial Member for Constitution of National Anti-profiteering Authority. This ruling is given by the Honorable Delhi High Court in the case of Reckitt Benckiser India (P.) Ltd. v. Union of India.

Facts

In the present case, the petitioner challenged the constitutional validity of the Anti-profiteering measures under section 171 of the CGST Act, 2017. It was submitted that the provisions of Section 171 of the CGST Act, 2017, are ultra vires to the Constitution as they violate articles 19(1)(g) and 300A of the Constitution of India.

High Court

The High Court held that the CGST Act 2017 intends to provide a common national market, boost productivity, increase competitiveness, broaden the tax base and make India a manufacturing hub. As a measure, Section 171 mandates that tax foregone has to be passed on as a commensurate reduction in price. Thus, Section 171 falls within the law-making power of the parliament under Article 246A of the Constitution.

Moreover, Section 171 lays out a clear legislative policy and does not delegate any essential legislative function. Further, the provisions of Section 171 of the CGST Act are not a price-fixing mechanism; neither do they violate either Article 19(1)(g) or Article 300A of the Constitution. The High Court upheld the constitutional validity of anti-profiteering provisions under GST.

The Court also held that there is no requirement for judicial members for the Constitution of National Anti-profiteering Authority. Also, the Court held that there is no scope for governmental interference in functions exercised by the National Anti-profiteering Authority. However, the Court held that for the arbitrary exercise of power under the anti-profiteering mechanism by erroneously enlarging the scope of proceedings beyond the jurisdiction or on account of not considering the genuine basis of variations, such orders were to be set aside.

Read the Ruling

5. No reversal of ITC on ground that supplier was non-existent if documentary evidence was duly produced: HC

The Madras High Court has recently held that an order directing to revere ITC is to be set aside if the assessee has produced all relevant materials to establish that purchases were genuine but not considered by the department and the matter is to be remanded for reconsideration. This ruling is given by the Honorable Madras High Court in case of TVL.Cleon Optobiz (P.) Ltd. v. Assistant Commissioner (ST).

Facts

The petitioner was a registered person under GST laws. It received both an intimation and the show cause notice from the department. Eventually, the order was issued by which Input Tax Credit (ITC) availed by the petitioner in respect of purchases made from a supplier was reversed on the ground that the said entity was non-existent and not conducting business. It filed a writ petition against the order and contended that the impugned order was liable to be quashed.

High Court

The Honorable High Court noted that the assessee produced the invoices, e-way bills and proof of payment of invoices in the form of relevant bank statements before the department. However, the impugned order recorded finding that the taxable person had not produced documents as required under Section 16 of the CGST Act, 2017.

The Court also noted that the assessee was not put on notice that the goods it dealt with were different from those dealt with by its supplier, but a finding was recorded on this issue in the impugned order. Therefore, it was held that the impugned order was liable to be quashed, and the matter was to be remanded for reconsideration.

Read the Ruling

6. Export incentives linked to operations shall be classified as ‘Other income’ under Ind AS 20

An entity is entitled to receive export incentives in the form of scrips, determined by the value of its export activities. These export incentives, represented by scrips, serve a dual purpose—they can either be utilized to settle customs duties for imports or traded in the open market. Given that these scrips are intricately linked to the revenue generated from exports, the export incentives shall be classified as “other operating revenue” in accordance with Ind AS 115.

However, based on the provisions given under para 3 of Ind AS 20, Accounting for Government Grants and Disclosure of Government Assistance, which states that Government grants are assistance by the government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity, it can be argued that the export incentive is in the nature of government grant which does not fall within the scope of Ind AS 115, as it is not revenue arising from contract with customer. Therefore, while recognizing the income arising from the export scheme, the company should apply the provisions of Ind AS 20 and not Ind AS 115.

To provide clarity upon the above classification issue, i.e. whether the Export incentives linked to operations shall be classified as ‘Other income’ as per Ind AS 20 or “other operating income” as per Ind AS 115, the ICAI has provided its guidance upon the issue wherein it has opined that the objective of these schemes is essentially to compensate the exporter for the cost of duty/taxes paid on the inputs or materials used in exported goods and to promote export. The value of duty credit scrips/ incentives is directly linked with sale value and arises from the company’s main operations. Furthermore, para 3 of Ind AS 20 also clarifies that this export incentive is in the nature of a government grant and is not revenue from an export contract with the customer. Therefore, such grants related to income are required to be separately disclosed under the heading ‘Other income’ or reduce the related expense.

Read the Story