Weekly Round-up on Tax and Corporate Laws | 4th to 9th July 2022

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 4th to 9th July 2022, namely:

(a) CBIC issued notifications to implement recommendations of the 47thGST Council meeting;

(b) Section 56(2)(viib) applies to the conversion of Compulsorily Convertible Debentures (CCDs) into equity shares: ITAT;

(c) Non-submission of a certified copy of appealable order to be treated as a technical defect: HC;

(d) IBBI modifies the code of conduct for IPs, mandating IP to disclose his relationship with the Corporate Debtor & other related parties;

(e) Once the resolution plan has been approved and implemented, any new claims can’t be considered: NCLAT; and

(f) Illustrative Checklist on Clause 3(x) and 3(xi) of CARO, 2020.

1. CBIC issued notifications to implement recommendations of the 47^thGST Council meeting

The CBIC has issued several notifications to give effect to the recommendations of the 47^th GST Council meeting. However, the changes in rates of goods and services recommended by the Council are not yet notified. The key changes are as follows:

(a) Exemption continued from the filing of Annual Return to the registered persons whose aggregate turnover in the financial year 2021-22 is up to Rs. 2 crores;

(b) The due date for filing of Form GST CMP-08 by Composition Dealers for the quarter ending 30^thJune 2022 is extended till 31^st July 2022;

(c) The late fees for filing of GSTR-4 for FY 2021-22 have been waived till 28^thJuly 2022;

(d) The period from 1^stMarch 2022 to 28^th February 2022 is to be excluded from the calculation of  the limitation period for the filing of refund claims; and

(e) No requirement for reversal of input tax credit for the exempted supply of duty credit scrips by the exporters.

Read the Notification

Checkout Taxmann's PPT 47th GST Council Meeting – Decoding GST Council's Recommendation

Coverage:
✔️ Refund in case of inverted tax structure 
✔️ GST rate linked to LMA on specified goods 
✔️ GST on low-cost hotel accommodation 
✔️ GST on specified works contract services 
✔️ GST on electric vehicles 
✔️ GST on fly ash bricks 
✔️ GST rate on treated waters 
✔️ GST on health care services – Room rent 
✔️ GST on PLC in case of a long-term lease 
✔️ Real Estate – Developed plots 
✔️ Real Estate – Renting of Residential Dwelling 
✔️ Real Estate – Renting of residential dwelling 
✔️ GST Registration for ECOs suppliers 
✔️ Composition scheme for ECOs suppliers 
✔️ Other changes proposed

Here is the Link of the PPT.

2. Section 56(2)(viib) applies to the conversion of Compulsorily Convertible Debentures (CCDs) into equity shares: ITAT

The issue before the Kolkata Tribunal was the applicability of section 56(2)(viib) on the transaction of conversion of Compulsorily Convertible Debentures (CCDs) into Equity Shares of the assessee.

Facts

The assessee was a private limited company engaged in the manufacturing and selling of dairy products. The assessee had issued Compulsorily Convertible Debentures (CCDs) during AYs 2011-12 and 2012-13, which had been converted into equity shares during the relevant year.

The assessee contended that the assessee received the entire consideration at the time of issuance of CCDs. Conversion of CCDs by issuing equity shares did not entail any further payment of money. Thus, the provisions of Section 56(2)(viib) cannot be applied in the year of allotment of shares.

Ruling

The Kolkata Tribunal held that Section 56(2)(viib) contains the words “receives any consideration”. The term “consideration” is a term of wider import when compared with the words “amounts” or “money”. Thus, Section 56(2)(viib) encompasses consideration in all forms and is not limited to only receipt of money.

Receipt of money is one of the several modes for having a consideration in a transaction. It could be said that the assessee receives consideration for converting CCDs into equity shares which subsequently form part of the capital base of the assessee.

Here is a list of some of the considerations the assessee “receives” on the conversion of its CCDs into equity shares:

(a) The debt obligation on the assessee to repay is extinguished;

(b) The charge created on the assets/properties of the assessee to secure the debt obligation is released;

(c) The cost of servicing the debt obligation by paying periodic interest is mitigated;

(d) The capital-based in the form of own fund gets widened to leverage on the capital/stock markets;

(e) The debt-equity ratio becomes favourable to various stakeholders of the assessee making it more investor attractive/lucrative; and

(f) The risk of getting into the claim of insolvency resolution from the debt creditors in case of default in servicing their debt obligation is mitigated, and so forth.

Section 56(2)(viib) envisages a much wider outlook to the “receipt of any consideration” which cannot be limited to the receipt of money only.

Thus, the conversion of CCDs into equity shares entails receipt of consideration by the assessee, which is translated into the total issue price of shares, including share premium. Accordingly, the provisions of Section 56(2)(viib) apply in the present case.

Read the Ruling

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3. Non-submission of a certified copy of appellable order to be treated as a technical defect: HC

The Orissa High Court held that non-submission of a certified copy of the order while filing a memo of appeal has to be treated as a mere technical defect. The Court set aside the order rejecting the appeal merely on the ground of non-submission of a certified copy.

Facts

A demand order was raised against the assessee for the assessment year 2019-20. It filed an appeal within the prescribed time period but failed to submit a certified copy of the impugned order. The Appellate Authority issued notice and directed him to submit a certified copy of the impugned order in seven days, but it failed to do so. Thus, the Appellate Authority rejected the appeal. The assessee files a writ petition against the same.

High Court

The High Court observed that the petitioner had enclosed a copy of the impugned order as made available to it in the GST portal while filing the memo of appeal. It received notice from Appellate Authority to submit a certified copy of the order just one day before the time allowed. It applied for the order, obtained a certified copy of the impugned order and submitted such copy on the same day. However, the appeal was rejected on the ground that a certified copy was not provided within time. The non-submission of a certified copy had to be treated as a mere technical defect, and moreover, the same had been already submitted by the petitioner once received from the department. Therefore, the Court held that the petition deserved to succeed as it was a mere technical defect and the rejection order was set aside.

Read the Ruling

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4. IBBI modifies the code of conduct for IPs, mandating IP to disclose his relationship with the Corporate Debtor & other related parties

The Government has notified the IBBI (Insolvency Professionals) (Amendment) Regulations, 2022. As per the amended norms, the Insolvency Professional (IP) shall have to disclose his relationship, if any, with the corporate debtor, other professionals engaged by him, financial creditors, interim finance providers, and prospective resolution applicants to the insolvency professional agency within the prescribed timelines.

In addition to this, an Insolvency Professional shall have to ensure disclosure of the relationship, if any, of the other professionals engaged by him with himself, the corporate debtor, the financial creditor, the interim finance provider, if any, and the prospective resolution applicant, to the insolvency professional agency of which he is a member, within the prescribed timelines.

Further, an Insolvency Professional is required to ensure timely and correct disclosures by him, and other professionals appointed by him and are also required to provide a confirmation to the insolvency professional agency of which he is a professional member to the effect that the appointment, if any, of every other professional has been made at arms’ length relationship.

Additionally, for the purpose of these rules, the term “relationship” shall mean any one or more of the following four kinds of relationships at any time or during the three years preceding the appointment of other professionals:

(a) Where the insolvency professional or the other professional, as the case may be, has derived 5% or more of his/its gross revenue in a year from professional services to the related party;

(b) Where the insolvency professional or the other professional, as the case may be, is a shareholder, director, key managerial personnel or partner of the related party;

(c) Where a relative (spouse, parents, parents of spouse, sibling of self and spouse, and children) of the insolvency professional or the other professional, as the case may be, has a relationship of kind (a)or (b) with the related party;

(d) Where the insolvency professional or the other professional, as the case may be, is a partner or director of a company, firm or LLP, such as, an insolvency professional entity or registered valuer, the relationship of kind (a), (b)or (c) of every partner or director of such company, firm or LLP with the related party.

The amended regulations also provide that the disciplinary proceedings shall be conducted in accordance with the provisions of the IBBI (Inspection and Investigation) Regulations, 2017.

Read the Notification

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5. Once the resolution plan has been approved and implemented, any new claims can’t be considered: NCLAT

In the instant case, an appeal was filed under Section 61 of the IBC against the impugned order passed by the NCLT, whereby it was held that there was no legal provision in the IBC for recalling or reviewing the order approving the Resolution Plan for the Corporate Debtor.

Facts

The appellant (GNIDA) transferred certain land to the corporate debtor (Maple Realcon Private Limited) for the purpose of the development of a sports city through a lease deed. Subsequently, an application under Section 9 of the IBC was filed by the operational creditor (Bindals Merchandise) against the corporate debtor, and the CIRP was initiated by order of the NCLT. The appellant filed its claim, but the same was rejected by RP on the ground that the resolution plan was already approved by CoC, and the same was pending for approval by the NCLT.

The appellant argued that the appellant was a Statutory Authority, and it could not submit its claim as a financial creditor in the stipulated time period to the resolution professional as it was unaware of the ongoing CIRP process against the corporate debtor.

In addition to this, the appellant had prayed for setting aside the common impugned order or remanding the case back to the NCLT for reconsideration after giving him an opportunity of hearing.

Ruling

The NCLAT observed that the appellant was well aware of the ongoing CIRP and hence should have kept track of the various actions being taken under the CIRP to guard its interest. By being remiss, it had not only missed the opportunity to file its claim but had also filed its claim after much delay, after the lapse of respective limitations.

The NCLAT held that once the resolution plan has been approved and implemented, any new/undecided claims cannot be considered. In view of the above, the NCLAT agreed with the NCLT, who had correctly held that there was no legal provision that allowed it to recall or review its order approving the resolution plan for the corporate debtor. Accordingly, the appeal was to be dismissed.

Read the Ruling

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6. Illustrative Checklist on Clause 3(x) and 3(xi) of the CARO, 2020

The Central Government, in the exercise of the powers given, under Section 143(11) of the Companies Act, 2013, issued the CARO, 2020. It is applicable from the financial year 2021-22. Further, in this regard, ICAI has issued an Exposure Draft on CARO 2020 to provide guidance to auditors. Appendix V of this guidance note contains an Illustrative Checklist on the CARO, 2020. This write-up covers the illustrative checklist on Clause 3(x) and 3(xi) of CARO 2020.

Checklist for Clause 3(x)(a)

(a) Whether the company has raised money by way of IPO or FPO of equity shares, convertible securities or debt securities?

(b) Check the terms and conditions of the offer document on the basis of which the company has raised the above-mentioned money.

(c) Whether the end use of above-mentioned money is determined by the company? If not, state the fact for the same.

(d) To check whether the funds raised have been utilized for the purpose for which they were raised, examine various documents like, offer document & board report, etc.

(e) Whether management representation has been obtained to the completeness of the disclosures with regard to the end-use of money raised through IPO and FPO?

Checklist for Clause 3(x)(b)

(a) Whether the company has made any private placement or preferential allotment of shares or fully convertible debentures during the year?

(b) Obtain a statement which contains the terms of offer for private placement, including the purpose for which funds were raised and the details of subsequent application amounts, dates and the purpose.

(c) Check whether the offer and allotment of the above-mentioned securities are in compliance with Sections 42 and 62 of the Companies Act.

(d) Perform a test check of compliance with the requirements of the Companies Act.

(e) Where the auditor is failed to verify the end-use of fund, disclose the reasons due to which the auditor is unable to verify

Checklist for clause 3(xi)(a)

(a) Examine whether SA 240 been complied with?

(b) To ascertain whether any fraud has been reported or noticed by the management examine the following:

• • internal audit report.
  • company secretary report, if any.
  • cost auditor report, if any.
  • the auditor should enquire from the management about any frauds by the company or any fraud on the company that it has noticed or that has been reported to it.
  • discuss the matter with other employees and officers of the company.
  • examine the minutes book of the board meeting, audit committee etc., of the company in this regard.

(c) Check whether any fraud on or by the company has been noticed or reported? If yes, disclose the nature and amount of frauds.

(d) Inquire with management and those charged with governance, where applicable, with regards to corrective action taken by them.

(e) Obtain a management representation letter for matters related to fraud.

Checklist for clause 3(xi)(b)

 Whether any fraud has been reported by the auditor (either by statutory auditor/ company secretary in practice/ cost auditor in practice) up to the date of issuance of auditor’s report under Section 143(12) in Form ADT 4, the same should be reported under this clause.

Checklist for clause 3(xi)(c)

(a) whether the company has an ethics/whistle-blower/ hotline process with adequate procedures to handle anonymous complaints and to accept confidential submission of concerns about questionable accounting, internal control, or auditing matters?

(b) whether whistle-blower complaints are investigated and resolved?

(c) Examine whether vigil mechanism has been established in accordance with the requirements of the Companies Act, 2013.

(d) In the case of listed companies, examine whether a vigil mechanism has been established in accordance with the requirements of the SEBI LODR, 2015.

(e) Whether the auditor considered its impact on the financial statements and/ or internal controls?

Read the story

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