Weekly Round-up on Tax and Corporate Laws | 12th to 17th May 2025

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from May 12^th to 17^th, 2025, namely:

1. Interest-free advances given to farmers to tie them up with the Co. to earn rent from cold storage is business expediency: ITAT;
2. Stamp duty on a scheme of arrangement under the Maharashtra Stamp Act is based on share value and consideration, not net worth;
3. Notice issued to revenue as compliance with deficiency memo should not be considered as new refund application: HC;
4. Visit note signed by only one person i.e. Superintendent-CGST, couldn’t be relied upon for cancellation of GST registration: HC; and
5. Accounting treatment of advance payment received with a significant financing component under Ind AS framework.
   

   1. Interest-free advances given to farmers to tie them up with the Co. to earn rent from cold storage is business expediency: ITAT

The assessee was operating a cold storage facility. During the year, the assessee raised interest-bearing loans from banks and claimed a deduction for the interest paid on these loans. The Assessing Officer (AO) disallowed the interest paid to the banks on the ground that interest-free advances were given by the assessee to the farmers out of interest-bearing loans raised by it and made an addition to the assessee’s income.

On appeal, CIT(A) upheld the order of AO. The aggrieved assessee filed the instant appeal before the Tribunal. Before the Tribunal, the assessee contended that it was running a cold storage facility and had to keep the farmers tied up with it so that these farmers could store their potatoes in its cold storage. It could earn rent from the potatoes stored in its cold storage.

The Tribunal held that the assessee had given complete details of the advances paid to the farmers during assessment proceedings. The AO asked the assessee to produce 20 farmers, and the assessee claimed to have produced 17 farmers, as two farmers had died, and one was army personnel on duty. These farmers have also given affidavits. The assessee claimed that the AO recorded the statement of three farmers produced by the assessee before the AO, but did not record the statements of the remaining farmers produced by the assessee, as the AO held that the farmers were tutored.

The assessee asked the AO to issue a summons to the farmers. The AO did not issue a summons to the farmers to unravel the truth. Nor did CIT(A) make any enquiry and/ or verification with the farmers. The powers of CIT(A) are co-terminus with the powers of the AO, including the power of enhancement.

The ITAT held that the assessee had duly explained the business expediency of providing interest-free advances to potato growers, i.e., to tie up with the farmers so that they store their potato crop or produce in the assessee’s cold storage. The assessee can earn rent from potatoes that the farmers keep in the assessee’s cold storage. Revenue cannot sit in the armchair of a business person and then decide how the business will be run.

Rather, business people have to arrange their affairs, keeping in view business expediencies, to maximize their revenues and profits. Thus, the addition made by the Assessing Officer was directed to be deleted.

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2. Stamp duty on a scheme of arrangement under Maharashtra Stamp Act is based on share value and consideration, not net worth

The High Court, in the matter of Bharti Airtel Ltd. v. Chief Controlling Revenue Authority [2025] 174 taxmann.com 476 (Bombay), held that under Article 25(da) of the Schedule to the Maharashtra Stamp Act, 1958, stamp duty on a scheme of arrangement is to be computed based on the market value of shares issued and allotted in exchange plus the consideration paid for such a transaction and, not on the net worth of the demerged undertaking.

2.1 Brief facts of the case

In the instant case, the petitioner was engaged in the business of providing telecommunication services in the country, including mobile, telephone services, high-speed data, enterprise services, etc., under the brand name ”Airtel”. Tata Teleservices (Maharashtra) Limited (TTML) was also engaged in the business of providing telecommunication services in the State of Maharashtra.

A scheme of arrangement for the demerger of the consumer mobile business of TTML (Transferor Company) into the petitioner as a going concern was entered into as per mutual understanding between the shareholders of the two companies. The scheme was sanctioned by the NCLT, Mumbai and NCLT, Delhi.

Thereafter, TTML applied to the Collector of Stamps for adjudication of the stamp duty payable under section 31 of the Maharashtra Stamp Act, 1958. The Collector of Stamps assessed the stamp duty at Rs. 7.39 crores, based on 0.7% of the net worth of the demerged undertaking of TTML’s consumer mobile business. The petitioner preferred an appeal before the Chief Controlling Revenue Authority (CCRA) under the provisions of section 53(1A) of the Act against the order passed by the Collector of Stamps.

The CCRA held that the stamp duty payable on the scheme of arrangement was Rs. 7.39 crores and called upon the petitioner to pay the deficit amount of stamp duty within seven days, failing which interest was threatened to be levied. The petitioner then filed a writ petition challenging the order passed by the CCRA before the High Court.

2.2 Legal Provisions

As per the provisions of Article 25(da) of the Schedule to the Maharashtra Stamp Act, the normal stamp duty payable on a scheme of arrangement is 10% of the aggregate market value of the shares issued or allotted in exchange or otherwise and the amount of consideration paid for such amalgamation.

However, as per the first proviso, the amount of duty chargeable under the article 25(da) cannot exceed

(i) an amount equal to 5% of the true market value of immovable property located within the State of Maharashtra of the transferor company, or

(ii) the amount equal to 0.7% of the aggregate market value of shares issued or allotted in exchange plus the amount of consideration paid for such amalgamation, whichever is higher.

2.3 High Court Observations

The High Court observed that, under Article 25(da) of the Schedule to the Stamp Act, stamp duty on a scheme of arrangement is to be computed based on the market value of shares issued and allotted in exchange, plus the consideration paid for such transaction and not on the net worth of the demerged undertaking.

Further, the High Court observed that Article 25(da)(ii) does not provide for the levy of stamp duty on the net worth of the demerged undertaking. Accordingly, the Collector of Stamps could not have assumed that the market value of shares issued/allotted within the meaning of article 25(da)(ii) would be the net worth of the demerged undertaking.

2.4 High Court Ruling

The High Court held that since no separate consideration was paid under the scheme, the value of shares allotted by the petitioner to the equity shareholders of TTML would alone form the entire consideration for the scheme.

Further, the High Court held that, despite the availability of figures of the market value of shares issued and allotted by the petitioner in exchange, the Collector of Stamps had erroneously determined the stamp duty payable on the scheme of arrangement by considering the net worth of the demerged undertaking of TTML’s consumer mobile business unit. Therefore, the order passed by the Collector of Stamps was unsustainable and liable to be set aside.

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3. Notice issued to revenue as compliance with deficiency memo should not be considered as new refund application: HC

The Hon’ble Gujarat High Court held that compliance with a deficiency memo under Section 54 of the CGST Act does not constitute a fresh refund application for computing the period of limitation. It clarified that rectification of procedural deficiencies is a continuation of the original refund claim if the initial application was filed within the statutory timeframe, and such compliance does not reset the limitation clock. This was held in Savex Technologies (P.) Ltd. vs. Union of India – [2025].

3.1 Facts

The petitioner, a registered assessee under the CGST Act filed a refund application under Section 54(1) within the prescribed time limit. Upon scrutiny, the jurisdictional officer issued deficiency memos citing certain procedural gaps. The petitioner duly complied with these memos on multiple occasions. However, the refund application was subsequently rejected on the ground of limitation, with the authorities treating the petitioner’s compliance with the deficiency memos as a fresh refund application. Aggrieved by this, the petitioner filed an appeal before the Appellate Authority, which also dismissed the appeal on identical grounds. In support of their contention that such compliance cannot be equated to a new application, the petitioner placed reliance on the judgment of the High Court in M/s. La-Gajjar Machineries Private Limited v. Union of India & Others and the matter was brought before Gujarat High Court.

3.2 Held

The Hon’ble Gujarat High Court held that compliance with a deficiency memo issued under Section 54 cannot be treated as a fresh refund application for the purpose of determining limitation. The Court clarified that once an application is filed within the statutory time limit, the subsequent rectification of deficiencies is a continuation of the original process and does not reset the limitation period. Observing that the petitioner had complied with the procedural requirements in good faith, the Court directed that notice be issued to the respondents and listed the matter for further consideration.

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4. Visit note signed by only one person i.e. Superintendent-CGST couldn’t be relied upon for cancellation of GST registration: HC

The Hon’ble Madhya Pradesh High Court held that a visit note signed only by the Superintendent-CGST, without any independent witness or accompanying officer, is insufficient to justify cancellation of GST registration. It stressed that cancellation based on a single-officer inspection lacks procedural validity and contravenes principles of fair verification. This was held in Empire Steel Holdings vs. Union of India – [2025].

4.1 Facts

The petitioner, a registered taxpayer under the CGST Act was operating her business from a rented premises, which she later vacated due to financial constraints and shifted to her residential address. During a physical verification conducted by the GST department, the registered business premises was found locked, prompting issuance of a show cause notice for cancellation of registration. Subsequently, the petitioner’s registration was cancelled with retrospective effect, and her application for revocation was rejected on the ground of ‘Non-Genuineness of Party’. Aggrieved by this action, the petitioner filed a writ petition before the Hon’ble High Court contending that the inspection was conducted behind her back and without any independent witness, thereby violating procedural fairness. She submitted that her business operations were temporarily slowed due to her husband’s health issues and that the relocation to a residential address was necessitated by inability to pay rent. The petitioner also produced a valid Gumasta License issued by the District Labour Officer to support her operational status.

4.2 Held

The Hon’ble High Court held that the physical verification conducted in the absence of any witness and based solely on a visit note signed by the Superintendent-CGST was procedurally deficient and legally unsustainable. It observed that the Superintendent neither recorded the statement of nearby shopkeepers nor obtained any witness signature, and no other GST officer accompanied him during the inspection, which rendered the visit note unreliable for such a drastic consequence as cancellation of registration. The Court further noted that the Joint Commissioner had acknowledged the existence of the petitioner and the non-operational status being limited to the registered premises only. Moreover, the Commissioner had already undertaken a detailed examination of the petitioner’s Form GSTR-2A for Financial Year 2017-18 to Financial Year 2022-23 and confirmed the existence and activeness of the supplier, thereby affirming the genuineness of the petitioner’s inward supplies. The Court concluded that the entire cancellation was based on a flawed presumption of the firm being bogus merely because the premises was found locked, and accordingly, directed restoration of the GST registration under Section 29 of the CGST Act/Madhya Pradesh GST Act.

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5. Accounting treatment of advance payment received with a significant financing component under Ind AS framework

Under Ind AS 115, Revenue from contracts with customer, revenue must be recognised when or as the entity satisfies a performance obligation by transferring control of the promised goods or services to the customer. When payment terms indicate that the customer or the entity is receiving a significant benefit of financing, the promised consideration must be adjusted for the effects of the time value of money. This ensures that revenue reflects the price the customer would have paid had they paid cash at the time of transfer of control and not earlier or later.

In many commercial arrangements, especially those involving advance payments, there is a risk of overlooking the financing element embedded in the transaction. If a contract allows the customer to pay significantly less in exchange for paying well in advance of delivery, this suggests that the entity is receiving financing from the customer. In such situations, the amount received should initially be recorded as a contract liability. Over the period until the performance obligation is fulfilled, this liability should be unwound by recognising interest expense using the entity’s incremental borrowing rate. Revenue should then be recognised only upon the actual transfer of control inclusive of the financing adjustment.

For example, a customer is given two options: payment of ₹6,000 upon delivery after two years or ₹4,800 upfront. The customer opts for the upfront payment. If the entity recognises the full ₹4,800 as revenue in the year of receipt, despite delivery being scheduled two years later, such treatment is inconsistent with Ind AS 115. The amount received should be recognised as a contract liability, with interest expense accrued over the two-year period using an appropriate rate, and total revenue should be recognised at the time of delivery. The ₹1,200 difference between the two options, the two-year gap, and the implied interest rate of approximately 11.8% clearly indicate a significant financing component.

Ignoring significant financing components can lead to premature revenue recognition and misstatement of financial results. Adhering to the requirements of Ind AS 115 ensures revenue recognition faithfully reflects the economic reality of the arrangement.

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