Weekly Round-up on Tax and Corporate Laws | 2nd to 6th January 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 02^nd to 6^th January 2024, namely:

(a) SC upholds SEBI’s authority in Adani-Hindenburg Case, rejects transfer to SIT and refuses to revoke FPI & LODR amendments;

(b) Interest paid on capital account of partner to be allowed if it was borrowed to settle debt of partnership firm: ITAT;

(c) GSTN issued advisory on filing of online declaration in Annexure V and Annexure VI for GTA Taxpayers;

(d) NIC issues new advisory on requirement of HSN Code on E-Way Bill Portal;

(e) CBIC notified special procedure for persons engaged in manufacturing of Pan Masala & Tobacco products from 01.04.2024;

(f) SEBI unveils comprehensive framework on short-selling in the Indian securities market; and

(g) NFRA penalizes CA for failure to exercise due diligence in certifying form 10DA.

1. SC upholds SEBI’s authority in Adani-Hindenburg Case, rejects transfer to SIT and refuses to revoke FPI & LODR amendments

In the matter of Vishal Tiwari v. Union of India [2024] 158 taxmann.com 85 (SC), the Supreme Court of India declined to transfer the Adani-Hindenburg probe from SEBI to SIT and to direct SEBI to revoke amendments to Foreign. Portfolio Investors & Listing Obligations and Disclosure Requirements Regulations.

Brief facts of the case

On January 24, 2023, Hindenburg Research, an activist short seller, released a report accusing the Adani group of manipulating share prices and violating SEBI regulations by not disclosing transactions with related parties. This led to Public Interest Litigations (PILs) filed in the Supreme Court, specifically Vishal Tiwari v. Union of India – [2023] 148 taxmann.com 48 (SC). Later, on March 2, 2023, the Supreme Court established a committee to investigate regulatory failures. The SEBI was directed to probe the allegations against the Adani Group and the initial two-month investigation period concluded on May 2, 2023.

Later, the SEBI sought a six-month extension from the Supreme Court in May to conclude a complex investigation, citing intricate transactions. The regulator approached eleven international regulators under IOSCO’s Multilateral Memorandum of Understanding regarding Minimum Public Shareholding norms, necessitating additional time.

Consequently, the Supreme Court extended the deadline to August 14, 2023. As the second deadline approached, SEBI requested an extra 15 days, citing substantial progress and the preparation of an interim report based on available materials. The SEBI had sought information from foreign agencies and regulators, intending to evaluate it for future actions.

Apex Court’s observations

The SC outlined that the facts of this case do not warrant a transfer of investigation from the SEBI. In an appropriate case, the Supreme Court can transfer an investigation carried out by the authorized agency to an SIT or CBI. Such a power is exercised in extraordinary circumstances when the competent authority portrays a glaring, willful and deliberate inaction in the investigation. The threshold for the transfer of investigation has not been demonstrated to exist.

Apex Court’s Ruling

The Supreme Court upheld SEBI’s amendments to FPI and LODR Regulations, citing no valid grounds for revocation. Then, the Court held that the amended regulations aimed to enhance scrutiny. It was observed that the SEBI completed 22 out of 24 investigations against the Adani group, and the Court directed the remaining two to be concluded within three months.

Further, the Union Government and SEBI were urged to consider an Expert Committee’s suggestions for regulatory strengthening. The Apex Court also instructed the SEBI and the Government agencies to investigate potential legal infractions related to Indian investors’ losses due to Hindenburg Research and other entities taking short positions. Suitable action is to be taken if any violations are found.

Read the Ruling

2. Interest paid on capital account of partner to be allowed if it was borrowed to settle debt of partnership firm: ITAT

Assessee-firm was engaged in the business of running a hotel. During the relevant assessment year, the firm reconstituted with the retirement of ‘4’ partners and the induction of a new partner. The retiring partners were paid their proportionate share in the assets of the partnership firm. The firm borrowed a loan from the bank and raised fresh capital from the incoming partner to settle the debt and capital account of retiring or outgoing partners.

The assessee claimed the interest paid on such loan as a deduction while computing the income. During the assessment proceedings, the Assessing Officer (AO) contended that the payment to outgoing partners was a family settlement. Thus, any interest paid on such family settlement cannot be considered as interest paid on a loan borrowed for the purpose of the assessee’s business. Accordingly, the AO disallowed the interest paid on such loan and made additions to the income of the assessee.

On appeal, the CIT(A) confirmed the additions made by AO. Aggrieved-assessee filed the instant appeal before the Tribunal.

The Tribunal held that the firm was carrying on the business of running a hotel called the ‘Hotel President’. The firm borrowed a loan from Punjab National Bank and raised fresh capital from incoming partners to settle the debt or capital account of retiring/outgoing partners. The settlement of the capital account of outgoing partners becomes debt of the partnership firm.

The discharge of said debt out of borrowed funds assumes the character of loans/funds borrowed for the assessee’s business. The firm has claimed depreciation on the building on which the hotel was constructed and managed. Therefore, when the partnership firm owned the asset, any settlement out of assets belonging to the firm to the outgoing partners cannot be considered a settlement of family property just because the partners were family members. Therefore, it is very clear that retired partners take a portion of the value of the firm’s assets, and thus, just because the asset has been revalued before the reconstitution of the partnership firm cannot be a reason for the AO to treat the settlement of firm properties among partners as settlement of family property.

Since the loan borrowed from the Bank and capital raised from an incoming partner was for the purpose of the business of the assessee, any interest paid on said loan and capital account is nothing but the interest paid on the loan borrowed for the business of the assessee and allowable as per the provisions of the Act.

Accordingly, the additions made by the AO were directed to be deleted.

Read the Ruling

3. GSTN issued advisory on filing of online declaration in Annexure V and Annexure VI for GTA Taxpayers

The GSTN has issued an advisory to inform that online filing in Annexure V Form and Annexure VI Form is available on the portal for the existing GTA taxpayers for filing declaration in Annexure V Form or Annexure VI Form for the succeeding FY 2024-25 from 01.01.2024 to 31.03.2024.

The Existing/Newly registered GTA taxpayers who have already submitted Declaration in Annexure V Form for the FY 2023-24 manually with the jurisdictional authority are requested to upload their duly acknowledged legible copy of the Annexure V Form on the portal.

However, the GTAs who filed declaration for the FY 2024-25 on the portal for the period from 27.07.2023 till 22-08-2023 have been considered as filed and valid. Those taxpayers are requested that they need not file the declaration in Annexure V Form for the subsequent FYs if they wish to continue their option to pay GST on the Forward charge mechanism. In this regard, an Update dated January 1st, 2024, has been issued by GSTN.

Read the GSTN Advisory

4. NIC issues new advisory on requirement of HSN Code on E-Way Bill Portal

The NIC has issued an advisory to inform that the requirement of 6 digit HSN code for all the B2B and Export transactions by the taxpayers whose Annual Aggregate Turnover (AATO) is more than Rs. 5 Crores shall be implemented in the e-way bill System from 1st February 2024. The taxpayers, with AATO less than Rs. 5 Crores, would need to provide at least a 4-digit HSN code.

Hence, the taxpayers are advised to make necessary changes in their systems and enter 4/6 digit HSN codes while generating the e-way bills through web and API systems from 1st Feb. 2024. In this regard, Press Release dated January 5th, 2024 has been issued.

Read the Press Release

5. CBIC notified special procedure for persons engaged in manufacturing of Pan Masala & Tobacco products from 01.04.2024

The CBIC has notified special procedure which shall be followed by registered persons engaged in manufacturing of Pan Masala & Tobacco products from 01.04.2024. The registered persons engaged in the manufacturing of tobacco, pan masala and other similar items were required to follow a specific procedure such as furnishing the details of packing machines, maintaining additional records, and submitting special monthly statements with effect from 01-01-2024.

However, the Government has deferred the implementation of special procedures till 01-04-2024. Further, some modifications have been made to the procedural aspects of machine registration and special monthly returns. The requirement to maintain daily records in Form SRM-IIIA and Form SRM-IIIB has been removed. The previous notification prescribed maintaining a daily record of inputs and production/clearance in each place of business in the format specified in Form SRM-IIIA and Form SRM-IIIB, respectively. In this regard, Notification No. 04/2024- Central Tax dated January 5th, 2023 has been issued.

Read the Notification

6. SEBI unveils comprehensive framework on short-selling in the Indian securities market

Earlier, the SEBI, through Master Circular No. SEBI/HO/MRD2/PoD-2/CIR/P/2023/171, dated October 16, 2023, released the Master circular on ‘Short Selling and Securities Lending and Borrowing Scheme.’ Subsequently, on January 5, 2024, the SEBI has issued a Circular no. SEBI/HO/MRD/MRD-POD-3/P/CIR/2024/1 outline the short-selling framework.

What is short Selling?

‘Short selling’ is defined as selling a stock the seller does not own at the time of trade. As per the new framework, all classes of investors, viz., retail and institutional investors, shall be permitted to short-sell.

Key Regulations Governing Short Selling and Trading Practices in the Indian Securities Market

Naked short Selling is prohibited in the Indian securities market, and all investors must fulfil their obligation to deliver securities during settlement. Institutional investors are not permitted to engage in day trading; their transactions are grossed at the custodians’ level, and obligations must be met on a gross basis. Custodians, however, still settle deliveries with stock exchanges on a net basis.

Further, the securities traded in the F&O segment shall be eligible for short Selling. SEBI may review the list of stocks that are eligible for short-selling transactions from time to time.

SEBI Introduces Disclosure Framework for Short Selling

In the context of short Selling, institutional investors must disclose whether a transaction is a short sale at the time of placing the order. On the other hand, retail investors have the flexibility to make a similar disclosure by the end of the trading day.

Also, the brokers are required to collect and upload scrip-wise short-sell position details to stock exchanges before the start of trading the next day. Stock exchanges will consolidate this information and share it on their websites weekly for public information, subject to periodic reviews approved by SEBI.

Conclusion

SEBI’s recent initiatives establish a comprehensive framework for market participants. The definition of short Selling is clarified, with both retail and institutional investors allowed to engage in such transactions. Stringent regulations prohibit naked short Selling, mandate delivery obligations, and impose specific rules on institutional investors, ensuring transparency and fairness.

Read the Circular

7. NFRA penalizes CA for failure to exercise due diligence in certifying Form 10DA

NFRA, in its Order No. 001/2024, dated 03.01.2024, has fined a CA with Rs. 50 Lakhs for failure to exercise due diligence and to obtain sufficient appropriate evidence in issuing certificate in Form 10DA regarding the correctness of deduction claimed by it under section 80JJAA of the Income-Tax Act, 1961 to a listed company.

On receiving information from Director General of Income Tax (Investigation), Bengaluru (IT department), NFRA suo-motu initiated action under Section 132(4) of the Companies Act, 2013 to look into the professional conduct of the Chartered Accountants about claim of deduction under section 80 JJAA of the Income Tax Act totalling Rs. 1,135.41 crores by listed company based on form 10DA issued by two chartered accountants for three years. NFRA observed the following lapses-

• CA completely relied on the Management Representation Letter to verify the basic preconditions to deduction u/s 80JJAA: a business should not be formed due to the splitting up, reconstruction, or reorganization of any business. NFRA observed that CA failed to cross-check with the data in the company’s annual report and provide the number of employees brought in before issuing the report in Form 10DA.
• CA failed to exclude the number of employees with respect to whom the ‘entire contribution’ was paid by the Government under the Pradhan Mantri Rojgar Protsaahan Yojana (PMRPY) scheme. CA wrongly interpreted the words’ entire contribution’ with ‘entire period’, failing to exclude the employees whose ‘entire contribution’ is paid by the Government even for a specific period of time in a year. This failure has resulted in excessive deduction u/s 80JJAA as against the intention of the legislature.
• NFRA observed that CA had determined the excessive number of additional employees for deduction under this section of the Income-tax Act. CA certifies that the company is eligible for deduction of Rs. 140.57 crores u/s 80 JJAA in respect of 24,023 spill-over employees. However, he failed to verify the basic condition of the increase in the number of employees. The eligibility of employees will have to be evaluated in terms of all the provisions of section 80 JJAA. NFRA observed an increase of only 4,827 employees during the year as against certification done by the CA for 24,023 employees.
• CA failed to verify payment of additional employee cost by account payee cheque/draft/electronic means and only relied on the Management Representation Letter from the company intimating that the additional employee cost was paid through prescribed mode of payment.
• CA failed to verify the employment contract (appointment letter) issued to new employees and placed excessive reliance on the company’s internal financial controls for its workings. However, as a diligent professional, he was required to independently perform appropriate procedures to rule out any possibility of bifurcation of total emoluments to ensure that entire emoluments do not exceed the limit of Rs 25,000, which he failed to do. This clearly shows a lack of due diligence on the part of CA.

Key takeaways from the NFRA’s decision are as follows-

1. NFRA seems to have taken the view that its jurisdiction not only extends to auditors of listed companies appointed u/s 139 of the Companies Act, 2013, but also to CAs appointed by listed companies to issue certificates under any other Act, such as the Income-Tax Act, 1961.
2. CA abstains from placing excessive reliance on the Management Representation Letter (MRL) and instead performs appropriate procedures to ascertain compliance with the provisions of relevant Acts.
3. Cross-check facts with annual report/public documents before issuing certificates to companies.
4. Excessive reliance on statutory audit reports on financial statements or reports of statutory auditors on IFC should not be placed while issuing certificates under the Income-Tax Act, 1961.

Read the Story