Weekly Round-up on Tax and Corporate Laws | 30th May to 4th June 2022

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 30th May to 4th June 2022, namely:

(a) NCLT held that GAAR couldn’t be invoked to deny approval for amalgamation as the tax department may invoke it during the assessment;

(b) Husband can’t be said to be the owner of a house bought in wife’s name even if he claimed Section 54 exemption on it: HC;

(c) Govt. tightens noose on transactions with body corporates from border sharing countries;

(d) Commissioner is not empowered to allow interest payment in instalments in respect of the amount due as per self-assessed returns: HC; and

(e) Accounting treatment of investment properties under various scenarios as per Ind AS 40.

1. NCLT held that GAAR couldn’t be invoked to deny approval for amalgamation as the tax department may invoke it during the assessment

A joint second motion application was filed by the petitioner companies, Panasonic India Private Limited and Panasonic Life Solutions India Private Limited, under Section 230-232 of the Companies Act, 2013 read with Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016.

The petitioners had prayed to sanction the scheme of amalgamation between the respective companies.

The Income-tax Dept. had filed its report contending that the scheme of amalgamation is not at arm’s length. It could not be treated as a prudent acquisition on any commercial or business terms as the entire benefit accrued to one company only, i.e. Panasonic Corporation, Japan. It was further stated that the merger is nothing but a vehicle to transfer accumulated losses eligible for set off from transferor to transferee company which would attract General Anti Avoidance Rules (GAAR)) and the provisions of Section 96(1) of the Income-tax Act.

The petitioners argued that the provisions of GAAR are not applicable as the amalgamation “is not an impermissible avoidance arrangement,” and its primary purpose is not to obtain a tax benefit.

The NCLT held that the scheme of amalgamation contemplated between the petitioners appears to be prima facie in compliance with all the requirements stipulated under the relevant sections of the Companies Act, 2013.

The provisions of Sections 72A and 79 of the Income-tax Act are sufficient to protect the interest of revenue in any case of any carrying forward and set off of accumulated loss/unabsorbed depreciation. If any issues come up for consideration before the Assessing Officer at the time of assessment of the petitioner companies, he can analyze the scheme and is entitled to take any decision as per the provisions of the Income Tax Act.

As regards the provision of GAAR, AO has the liberty to invoke the provisions if, during assessment or reassessment proceedings, he believes that GAAR should be invoked. Thus, the objections raised by the Income-tax Department had no merits with regard to the proposed scheme of amalgamation.

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2. Husband can’t be said to be the owner of a house bought in wife’s name even if he claimed Section 54 exemption on it: HC

The Karnataka High Court held that the residential house purchased in the wife’s name could not be considered a property owned by the assessee even if he has claimed Section 54 exemption in respect of the same property. Accordingly, it cannot be construed that the assessee owns the property for determining eligibility for exemption under section 54F.

Facts

During the relevant year, the assessee sold land and claimed long-term capital gain exemption under section 54F by investing in a residential house. The assessee claimed that he was the owner of only one residential house on the date of sale of such land.

However, the AO noticed that before the date of sale of such land, the assessee had purchased a residential house in the name of his wife. On said purchase of the residential house, the assessee also claimed the benefit of Section 54 exemption. Thus, he denied the exemption under section 54F on the grounds that the assessee was holding two residential houses on the date of sale of land.

Ruling

The High Court held that the phrase ‘owns’ used in the proviso (a)(i) to Section 54F(1) plays a significant role. What is relevant is the assessee should not own more than one residential house, other than the new asset, on the date of transfer of the original asset.

Section 54F encourages investment in a residential house. To qualify for the exemption under Section 54F, what is mandatory is the investment in a residential house in the name of the assessee only. Section 54F shouldn’t be construed liberally to give wide and liberal interpretation to the word ‘assessee’ so as to include the assessee’s legal heirs as well.

In the instant case, the second residential house property was standing in the name of the assessee’s wife as per the registered sale deed. For all practical purposes, and even as per Section 14 of the Hindu Succession Act, 1956, the property standing in the name of a female heir becomes her absolute property.

Even if the assessee had claimed Section 54 exemption by purchasing a house in the name of his wife but while considering the exemption under Section 54F, such house cannot be construed as the property owned by the assessee.

Accordingly, the residential house purchased in the wife’s name cannot be considered a property owned by the assessee. Thus, it cannot be construed as owned by the assessee for determining eligibility for exemption under Section 54F.

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3. Govt. tightens noose on transactions with body corporates from border sharing countries

The MCA has notified the Companies (Compromises, Arrangements, and Amalgamations) Amendment Rules, 2022. The amended norm requires a company/body corporate incorporated in a country sharing a land border with India to submit a declaration in Form CAA-16 at the time of making an application for compromise or arrangement.

In Form CAA-16, the following details need to be mentioned:

(a) Details of the transferee company/body corporate;

(b) Details of the transferor company/body corporate;

(c) A declaration from the authorized representative on behalf of the company/body corporate to the effect that:

• • • the company or body corporate is not required to obtain prior approval under the FEM (Non-Debt Instruments) Rules, 2019 or
    • where the company or body corporate is required to obtain prior approval under the FEM (Non-Debt Instruments) Rules, 2019, the same has been obtained and is enclosed herewith the form.

Also, the Government has notified the Companies (Appointment and Qualification of Directors) Amendment Rules, 2022. It now requires security clearance from Home Ministry for a person who seeks an appointment as a director or applies for Director Identification Number (DIN) if he belongs to a country that shares a land border with India. The necessary security clearance shall be attached along with the consent or application for DIN.

A list of countries sharing a land border with India is – China, Pakistan, Bhutan, Myanmar, Afghanistan, Nepal, and Bangladesh.

Similarly, last month, the MCA notified the Companies (Prospectus and Allotment of Securities) Amendment Rules, 2022. The amended norms restrict a company from making an offer or invitation of securities to a body corporate incorporated in, or a national of, a country sharing a land border with India unless prior approval of Govt. has been taken by the body corporate under the FEM (Non-debt Instruments) Rules, 2019. The same is required to be attached with a private placement offer cum application letter (PAS-4). Subsequently, the ‘Private Placement Offer Cum Application Letter’ (Form PAS-4) has been revised to include a declaration from the applicant in this regard.

In April 2020, India had stepped up scrutiny of investments from companies based in border sharing countries as a measure to stave off takeovers by Chinese firms during the coronavirus outbreak. In line with the same, the recent amendments aim to closely scrutinize the dealings by body corporates/foreign nationals of border sharing countries with Indian companies with respect to investment by way of private equity, the appointment of foreign nationals from the border sharing countries as director in Indian companies and application of compromise or arrangement.

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4. Commissioner is not empowered to allow interest payment in instalments in respect of the amount due as per self-assessed returns: HC

The Orissa High Court has held that the Commissioner is not empowered to allow interest payment in instalments in respect of the amount due as per self-assessed returns.

Facts

During the scrutiny of self-assessed returns furnished by the petitioner, the GST Officer noticed that the petitioner had filed the returns belatedly. The demand for payment of interest was raised, and it requested the Commissioner to allow the payment of interest in instalments under Section 80 of the CGST Act. The request to pay interest in instalments was rejected, and it filed a writ petition against the same.

High Court

The High Court observed that interest payable under Section 50(1) is compensatory and not penal in nature. The levy of interest arising out of statutory consequence is different from the levy of interest, which is dependent on the discretion of the assessing officer, as non-payment of tax in case of self-assessment would attract an automatic levy of interest. Therefore, it was held that the Commissioner was justified in rejecting prayer to deposit interest in instalments in respect of the amount due as per self-assessed returns. Thus, the petition was dismissed.

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5. Accounting treatment of investment properties under various scenarios as per Ind AS 40

Investment is property (land or a building—or part of a building—or both) held by the owner or by the lessee as a right-of-use asset to earn rentals or for capital appreciation or both, rather than for:

• • use in the production or supply of goods or services or for administrative purposes; or
  • sale in the ordinary course of business.

The accounting treatment of investment in properties has been explained in the following paragraphs.

Investment property held for more than one purpose

Properties held for more than one purpose comprise a portion that is held to earn rentals or for capital appreciation, and another portion is held for use in the production or supply of goods or services or for administrative purposes. If these portions could be sold separately (or leased out separately under a finance lease), an entity accounts for the portions separately.

Whereas, if the portions could not be sold separately, the property is investment property only if an insignificant portion is held for use in the production or supply of goods or services or administrative purposes.

Ancillary services provided to the occupants of investment property

If an entity provides ancillary services to the occupants of a property it holds, it shall treat such a property as investment property if the services are insignificant to the arrangement as a whole.

For example, security and maintenance services provided to the lessees by the owner of an office building shall be considered insignificant and treated in accordance with Ind AS 40.

If the services provided are significant, then the same shall not be accounted for in accordance with Ind AS 40.

Further, if it is difficult to determine whether ancillary services are significant or insignificant, then management judgment shall be applied in such cases.

Investment property leased to other group members

Where an entity owns property that is leased to and occupied by its parent or another subsidiary, the property does not qualify as investment property in the consolidated financial statements because the property is owner-occupied from the perspective of the group. However, from the perspective of the entity that owns it, the property is investment property if it meets the definition of investment property. Therefore, the lessor treats the property as investment property in its individual financial statements.

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