Weekly Round-up on Tax and Corporate Laws | 6th to 11th November 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from November 06^th to 11^th, 2023, namely:

(a) IBBI releases discussion paper on real-estate related proposals; proposes mandatory registration of projects with RERA;

(b) Commissioner can exercise powers under section 264 even in cases where errors are committed by assessee: HC;

(c) Govt. introduces 2-Factor Authentication for e-Way Bill and e-Invoice System;

(d) Diesel supplied free of cost by service recipient to GTA to be added to value of supply of service: HC; and

(e) Treatment of Revaluation surplus on re-classification of PPE to “asset held for sale”.

1. IBBI releases discussion paper on real-estate related proposals; proposes mandatory registration of projects with RERA

The Insolvency and Bankruptcy Board of India (IBBI), on November 6^th, 2023, released a discussion paper dealing with certain issues being faced in the insolvency processes of real-estate projects. The key highlights of the discussion paper include:

(a) RERA Registration and the Road to Resolution Success

Legal provisioning as per RERA

According to Section 3 of the Real Estate (Regulation and Development) Act, 2016 (RERA Act), all real estate projects are required to be registered with the respective state’s RERA where the area of land proposed to be constructed exceeds 500 square meters or the number of apartments proposed to be constructed exceeds 8.

IBBI’s proposal

The IBBI is now planning to require the IRP/RP to register all real estate projects under RERA or to renew the registration of real estate projects where it has expired or is nearing expiration.

Impact

Registration of real estate projects under RERA is a pivotal step in fostering transparency and accountability, essential for a more efficient and successful resolution process. This sector-specific legislation significantly bolsters the prospects of a favourable outcome.

(b) IBBI Proposes Dedicated Bank Accounts for Real Estate Projects in CIRP

Legal provisioning as per RERA

Under RERA, each project is registered separately and given a unique identification number. The approvals, filings, etc., are all done on a project basis. The RERA registration facilitates systematic record-keeping and mandates project-wise separate accounts. Developer/Management must maintain and provide detailed records related to the project.

IBBI’s proposal

In line with the RERA provision for maintaining separate accounts for each project and to ensure transparency in the process, IBBI has now proposed that IRP/ RP should operate a separate bank account for each project undergoing CIRP.

Impact

Establishing dedicated bank accounts for each real estate project will comprehensively document all financial transactions, providing invaluable data for project-specific insolvency proceedings and facilitating distinct resolution plans for individual real estate projects.

(c) IBBI’s Proposal Streamlines Real Estate Handovers During CIRP

Present scenario

Managing continuity in a business undergoing a Corporate Insolvency Resolution Process (CIRP) often involves acquiring and selling inventory. However, the real estate sector poses a distinctive challenge. In certain instances, creditors have fulfilled their contractual obligations, and the corporate debtor (CD) has completed construction, yet formal ownership transfer remains pending. Some courts have utilized their inherent powers to authorize ownership and registration transfers for select projects during CIRP.

IBBI’s proposal

To facilitate the smooth handover of occupied units or where possession has been transferred to home buyers, IBBI has now proposed to allow RP to hand over the ownership of a plot, apartment, or building to the allottees through transfer during the resolution process, with the approval of CoC.

Further, to avoid delays due to unnecessary holds-ups, it is also proposed that with the approval of the CoC, RP may also be permitted to hand over the possession of units to the allottees on an ‘as is where is’ basis or on payment of balance amount, if any, after taking in to account the funds due and funds required for completing the unit.

Impact

This proposal will potentially reduce the disputes. Further, the transactions will be formalized through the transfer of such units during the resolution process with the approval of the CoC.

(d) CoC to examine and invite separate plans for each project:

Present scenario

Generally, the CD associated with real estate has multiple projects at different stages of construction. Some projects have been completed, some are partially completed, and some are in the initial construction phase. However, investing in all projects by one resolution applicant requires huge capital and thus limits the number of resolution applicants.

IBBI’s proposal

The IBBI has proposed to clarify that CoC, on examination, may direct the RP to invite a separate plan for each project.

Impact

This proposal would also encourage the association of allottees of a real state project to bring their own resolution plan and resolve issues in a specific project.

Read the Discussion Paper

2. Commissioner can exercise powers under section 264 even in cases where errors are committed by assessee: HC

The assessee sold a flat and offered the capital gains in the return of income without considering the allowance of indexed cost of improvement with respect to renovation expenses. The Assessing Officer (AO) made an addition under section 50C by taking the stamp duty value as the full value of consideration while computing the capital gains arising from the sale of said flat. No adjustment was made to the allowances claimed from the full value of consideration to determine the capital gains.

On appeal, the CIT(A) confirmed the addition made by the AO. Subsequently, the assessee filed an application under section 154 to allow the deduction of the indexed cost of improvement being renovation expenses.

However, the application was filed on the ground that the claim was made the first time in the application under section 154, and it was never brought to the notice earlier. Afterwards, the assessee filed an application under section 264, which was also rejected.

The Ruling

The Court held that the proceedings under section 264 are intended to meet a situation faced by an assessee who cannot approach the Appellate Authorities for relief and has no other alternative remedy available under the Income-tax Act.

The Commissioner is bound to apply his mind to the question of whether the assessee was taxable on that income, and his powers are not limited to correcting the error committed by the subordinate authorities but could even be exercised where the assessee commits errors. It would even cover situations where the assessee, because of an error, has not put forth a legitimate claim when filing the return and the error is subsequently discovered and raised for the first time in an application under section 264.

Accordingly, the order was to be quashed, and the matter was to be remanded to the Commissioner for denovo consideration.

Read the Ruling

3. Govt. introduces 2-Factor Authentication for e-Way Bill and e-Invoice System

To enhance the security of the e-Way Bill/e-Invoice System, National Informatics Centre (NIC) has introduced 2- Factor Authentication for logging in to the e-Way Bill/e-Invoice system. In addition to username and password, OTP will also be authenticated for login.

It is also provided that there are three different ways of receiving the OTP, and the user may enter any of the OTPs and login to the system. Once users have registered for 2-factor authentication, the same applies to both e-Way bills and e-Invoice systems.

Read the News

4. Diesel supplied free of cost by service recipient to GTA to be added to value of supply of service: HC

The High Court of Chhattisgarh held that Section 15(2)(b) cannot be by-passed by GTA by way of an agreement with the service receiver wherein diesel was agreed to be supplied free of cost by the service recipient to GTA. It was held that the diesel provided free of cost by service recipient would be added to the value for the purpose of GST. The Honorable Chhattisgarh High Court gives this ruling in the Shree Jeet Transport v. Union of India case.

Facts

The petitioner is a Goods Transport Agency (‘GTA’) service provider engaged in providing transportation services of goods by road. The petitioner entered into an agreement with the service recipient for providing GTA services, wherein the service recipient was held responsible for providing fuel in the trucks/trailers supplied by the GTA on a free-of-cost basis (FOC), and thus, it was agreed that component of fuel would not be the responsibility of the GTA.

The petitioner filed a writ petition and challenged the decision of the Authority for Advance Ruling, Chhattisgarh, wherein it was held that GST would be leviable on the value of diesel provided by the service recipient to GTA free of cost. It was contended that the Appellate Authority for Advance Ruling also denied giving a ruling due to differences of opinion.

High Court

The Honorable High Court noted that transportation is interdependent on the supply of fuel, and fuel would be a crucial component in running GTA’s business. Moreover, Section 15(2)(b) provides that the value of supply shall include any amount that the supplier is liable to pay in relation to such supply.

The High Court observed that in normal conditions, the expenses to fill the diesel vehicle are to be incurred by GTA. Thus, fuel is an integral part that cannot be bifurcated to overcome a tax liability. Moreover, the legal provisions of Section 15(2)(b) cannot be bypassed by an agreement wherein diesel is agreed to be supplied free of cost by the service recipient to GTA. Thus, the Court dismissed the petition and held that diesel provided free of cost by service recipient would be added to value for the purpose of GST.

Read the Ruling

5. Treatment of Revaluation surplus on re-classification of PPE to “asset held for sale”

According to Ind AS 16, Property, Plant and Equipment (PPE), an asset whose fair value can be reliably measured after recognition should be carried at a revalued amount. This revalued amount is determined by subtracting any subsequent accumulated depreciation and impairment losses from its fair value at the revaluation date. If the carrying amount of the asset increases due to revaluation, this increase is recognized in other comprehensive income and accumulated in equity under the heading of revaluation surplus.

However, if the management decides to categorize the PPE as an “asset held for sale,” the following set of considerations comes into play:

(a) The reclassification of PPE to assets held for sale should not be construed as a disposal or de-recognition of assets.

(b) The outstanding revaluation surplus balance as of the reclassification date remains unaffected. There is no alteration to the reclassification of assets concerning the revaluation surplus.

(c) When the company eventually sells the asset in the subsequent year, the PPE is removed from assets held for sale, and the revaluation surplus is transferred to the free reserve.

For instance, consider a company with a freehold land asset purchased for Rs. 35,00,000. At the year’s end, its carrying amount is Rs. 50,00,000, reflecting a revaluation gain of Rs. 15,00,000 recognized in Other Comprehensive Income (OCI). At the beginning of the subsequent year, the management decided to classify it as “held for sale.” Upon the actual sale of the freehold land, the company transfers the revaluation reserve amount to the free reserve by derecognizing the freehold land.

Read the Story