Weekly Round-up on Tax and Corporate Laws | 4th to 9th November 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from November 4^th to 9^th, 2024, namely:

1. No disallowance of salary just because employee gave it back as an interest-free loan to employer: ITAT;
2. Time Limit of 30 days for reporting GST e-Invoice on IRP Portal for taxpayers with AATO of 10 crores and above;
3. Form GST DRC-03A is now available on GST portal;
4. SEBI proposes measures to strengthen Corporate Governance Standards for ‘High-Value Debt Listed Entities’; and
5. ICAI announces revised classification criteria of Non-Company Entities for the applicability of Accounting Standards

1. No disallowance of salary just because employee gave it back as interest-free loan to employer: ITAT

The assessee, a partnership firm, paid salary to an employee after deducting tax at source and claiming the deduction as business expenditure. The employee was the administrative head and relative of the partner. Subsequently, the employee immediately gave the amount of salary back as an interest-free unsecured loan to the assessee.

The Assessing Officer (AO) treated such an amount as bogus salary expenses and disallowed it by invoking the provisions of section 40A(2)(b). On appeal, CIT(A) confirmed the AO’s disallowance, and the matter reached the Ahmedabad Tribunal.

The Tribunal held that the basic and foremost requirement of allowability of expenditure is that it should be incurred wholly or exclusively for the purpose of business and should not be in the nature of capital or personal expenses as per section 37 read with section 40A. If the sum paid to the persons covered by the provisions of section 40A(2)(b) was found to be excess or illegitimate, though incurred for the purpose of business or profession, it was not allowed as a deduction.

In the instant case, the employee was paid compensation for the work she did and services rendered to the assessee. Therefore, the expenditure was wholly and exclusively incurred for the purpose of business and very much eligible as deduction.

Even if a non-relative person had been paid the said salary, the tax liability would remain the same, and even in such circumstances, the assessee would have been eligible to derive benefit at the rate of 30 per cent as per its taxation rate being a partnership firm. Merely because the employee was a related person, the same cannot be a ground to disentitle the assessee when no extra benefit was given, particularly when the salary was as per the present market rate. The service was rendered by a competent person capable enough to look into allocated responsibility.

Further, payment of salary and granting of interest-free loans are two different transactions, and there is no scope for clubbing the same to attract the provision of section 40A(2)(b). None of the orders passed by the authorities below doubted the services so rendered by the employee nor alleged to have been paid salary excessive or unreasonable, which is sine qua non in invoking the provision of section 40A(2)(b), in the absence of which, the order of disallowance is found to be not sustainable, bad in law and, therefore, quashed.

Read the Ruling

2. Time Limit of 30 days for reporting GST e-Invoice on IRP Portal for taxpayers with AATO of 10 crores and above

The GSTN has issued an advisory to inform that from 1st April 2025, taxpayers with an AATO of 10 crores and above would not be allowed to report e-Invoices older than 30 days from the date of reporting on IRP portals. This restriction would apply to all document types (Invoices/Credit Notes/Debit Notes) for which an IRN is to be generated.

It is further clarified that there would be no such reporting restriction on taxpayers with an AATO of less than 10 crores as of now and in order to provide sufficient time for taxpayers to comply with this requirement, the above limit would come into effect from 1st April 2025 onwards. In this regard, GSTN Update dated November 5th, 2024 has been issued.

Read the GSTN Update

3. Form GST DRC-03A is now available on GST portal

The GSTN has issued an advisory to inform that it has developed the new Form GST DRC-03A on the GST portal, which is available now to adjust the paid amount through DRC-03 against the corresponding demand order.

Therefore, it is advised to the taxpayers to use the DRC-03A form to link the payment made vide DRC-03 with the demand order. In this regard, GSTN Update dated November 5th, 2024 has been issued.

Read the GSTN Update

4. SEBI proposes measures to strengthen Corporate Governance Standards for ‘High-Value Debt Listed Entities’

SEBI has released a consultation paper dated October 31, 2024, on reviewing the provisions of LODR Regulations relating to corporate governance norms for ‘High-Value Debt Listed Entities’. The objective of the consultation paper is to seek public comments on the proposals related to the review of provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, pertaining to corporate governance norms for High-Value Debt Listed Entities (HVDLEs). The comments on the same may be submitted by September 6, 2024. Some of the key proposals are as follows –

(a) Introduction of a separate chapter for corporate governance norms in the LODR Regulations for ‘High-Value Debt Listed Entities’

SEBI has proposed to introduce a separate chapter for HVDLEs comprising all provisions relating to corporate governance norms and carving out only those provisions that differ from equity-listed entities in a separate chapter. This facilitates ease of reference for HVDLEs to adhere to corporate governance norms.

• Meaning of ‘High-Value Debt Listed Entities’

Listed entities having an outstanding value of listed non-convertible debt securities of Rs 500 crores and above are referred to as ‘High-Value Debt Listed Entities’ (HVDLEs).

(b) Relaxation in the threshold for identification of ‘HVDLEs’ for applicability of governance norms

Currently, corporate governance norms are applicable based on the outstanding value of listed non-convertible debt securities, and an entity is identified as HVDLE as and when it hits the threshold of Rs 500 crore.

SEBI has proposed increasing the listed outstanding non-convertible securities threshold for identifying a debt-listed entity as HVDLE from Rs 500 crore to Rs 1000 crore.

(c) Introduction of Corporate Governance Compliance Report in XBRL format

SEBI observed from the filings made by HVDLEs on the websites of stock exchanges that the filings are made in uniform formats. In most cases, it is made in PDF format, which hampers readability and monitoring of clause-wise compliance by stock exchanges. Hence, it is proposed to specify that quarterly compliance report as specified in Regulation 27(2) of the LODR Regulations must be in XBRL format.

Further, in the case of reporting for corporate governance compliance, SEBI has proposed harmonizing the format for HVDLEs with the format specified for equity-listed entities.

(d) Introduction of Business Responsibility and Sustainability Report for HVDLEs on a voluntary basis

Regulation 34(2)(f) of the LODR Regulations mandates the top 1000 listed companies (by market capitalization) to provide disclosures as per the Business Responsibility and Sustainability Report (BRSR).

To inculcate the practice of good governance at par with equity listed, HVDLEs may voluntarily comply with the requirements of publishing BRSR.

(e) Upfront disclosure of amount of RPT in Offer Documents by issuer at time of issuance of non-convertible securities

Regulation 23 of the LODR Regulations specifies the regulatory requirements pertaining to related party transactions (RPTs), including forming a policy on the materiality of RPTs, prior approval of the audit committee for all RPTs, and prior approval of shareholders for material RPTs.

SEBI has proposed that the issuer, at the time of issuance of non-convertible securities (proposed to be listed), may provide a declaration upfront in the offer document regarding the amount (percentage of issue size) of RPT the issuer proposes to undertake over the tenor of the proposed non-convertible securities.

Further, the issuer must declare upfront in the offer document the debt-equity ratio, debt service coverage ratio, internet service coverage ratio, and such other financial/non-financial covenants that will be maintained by the issuer over the tenor of non-convertible securities. The debenture trustee must monitor such ratios, including covenants.

Conclusion

The proposed norms aim to enhance corporate governance standards for High-Value Debt Listed Entities, aligning their practices more closely with those of equity-listed companies. By simplifying compliance and setting clear expectations for governance and sustainability, SEBI’s proposals intend to build confidence, promote responsible management and contribute to a more transparent debt market in India.

Read the Consultation Paper

5. ICAI announces revised classification criteria of Non-Company Entities for the applicability of Accounting Standards

The Institute of Chartered Accountants of India (ICAI) has announced a revision to the classification criteria for Non-Company Entities (NCEs) concerning the applicability of Accounting Standards (AS). This change, effective from accounting periods beginning on or after April 1, 2024, replaces the previous four-level classification system (Level I to IV) with two simplified categories i.e. Micro, Small, and Medium-Sized Entities (MSMEs) and Large Entities.

Key Highlights of the revised classification are:

• MSMEs are non-publicly listed entities (excluding banks, financial institutions, and insurance companies) with turnover not exceeding ₹250 crore and borrowings capped at ₹50 crore. MSMEs are also not holding or subsidiary companies of a non-MSME entity. Entities that do not meet these criteria will be classified as “Large Entities”.
• Large Entities must comply fully with all Accounting Standards, ensuring comprehensive financial reporting.
• MSMEs will receive specific exemptions and relaxations similar to those previously available to entities classified under Levels II, III, and IV. These include non-mandatory application of certain standards such as AS 3, Cash Flow Statement and AS 17, Segment Reporting.
• MSMEs that avail of exemptions or relaxations must disclose their MSME status and compliance with applicable AS in their financial statements.
• If an MSME no longer qualifies for exemptions, the relevant standards will apply from the current accounting period, with no need to revise prior period figures.
• Entities transitioning from non-MSME to MSME status will not be eligible for exemptions until they remain an MSME for two consecutive years.
• MSMEs may choose to fully comply with the relevant Accounting Standards, foregoing exemptions if preferred.

This updated classification framework supersedes the March 2021 guidelines, providing a more streamlined structure for non-company entities.

Read the Announcement