Weekly Round-up on Tax and Corporate Laws | 20th to 25th March 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 20^th to 25^th March 2023, namely:

(a) Analysis of changes introduced in the Lok Sabha-approved Finance Bill 2023;

(b) Transfer of stock exchange membership card by a non-whole time director to a Co. wouldn’t entitle ‘fee continuity benefit’ to such Co.;

(c) NCLT can’t make any changes to an approved Resolution Plan once it has been approved by the CoC: SC;

(d) Opportunity of personal hearing is mandatory before passing adverse order creating huge liability: HC;

(e) Registration can’t be cancelled solely on the ground that a reply to SCN was not given without assigning any reason: HC; and

(f) A case study on Ind AS 16: Treatment of capitalisation of insurance policy premium taken for a project under construction

1. Analysis of changes introduced in the Lok Sabha-approved Finance Bill 2023

The Lok Sabha and Rajya Sabha passed the Finance Bill, 2023. The Bill has been passed with more than 60 changes in the Finance Bill introduced on February 01, 2023. New amendments have been made and some proposed amendments have been modified.

We have prepared a snippet of all changes made in the Finance Bill, 2023 as passed by the Lok Sabha viz-a-viz the Finance Bill, 2023.

A few of the changes covered in the article are mentioned below:

(a) Marginal relief to a resident individual opting for new tax scheme.

(b) Scope of Section 50AA has been expanded to cover specified mutual funds.

(c) Change in the tax rates under Section 115A on specified income of non-residents.

(d) TDS provision under Section 194BA on winning from online games is effective from 01-04-2023.

(e) Section 206AB (non-filer of ITR) will not apply in respect of TDS on winning from online games.

(f) 100% deduction to be allowed under Section 80LA in remaining 5 years to income of Offshore Banking Units.

(g) No surcharge and cess is to be levied on income from securities held by the specified fund referred to in Section 10(4D).

(h) New TCS rate under Section 206C will apply even if the remittance is made under LRS within India.

(i) Amendment relating to GST Appellate Tribunal.

(j) Removing the requirement of compulsory registration where exemption is granted by the Government through notification.

(k) Extension in time limit from 30 days to 60 days to apply for revocation of cancellation of GST registration.

Read the Complete Article

2. Transfer of stock exchange membership card by a non-whole time director to a Co. wouldn’t entitle ‘fee continuity benefit’ to such Co.

The Apex Court held that the transfer of a stock exchange membership card by a non-whole time director to a company would not entitle the company to claim ‘fee continuity benefit’ under clause (4) of Schedule III of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.

In the instant case, Mr. Srikant Mantri was a member of the Calcutta Stock Exchange (CSE) and registered as a stock broker. He was also a director of Mantri Finance Ltd, which later became GPSK Capital Pvt. Ltd. (i.e. the ‘appellant company’).

Mr. Mantri transferred his CSE membership to the appellant company, and the latter became a registered stockbroker. Meanwhile, clause 4 was incorporated in Schedule III of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. The provision exempted a corporate entity from payment of fees if it was formed by converting an individual or partnership membership card of the exchange and if such individual or member had already paid the fees.

The provision also requires that the individual or partner shall be the whole-time director of the corporate member so converted and that such director holds a minimum of 40% shares of the paid-up equity capital of the corporate entity for a period of at least 3 years from the date of conversion.

The appellant company claimed the benefit of clause 4 of Schedule III of the SEBI Regulations and sought exemption from payment of fees on the ground that Mr. Srikant had already paid the fees.

However, SEBI rejected the claim of the appellant company, stating that Mr. Srikant was only a director and not a whole-time director in the company during the 3 years after the transfer of his membership. Therefore, the conditions prescribed under clause 4 of Schedule III were not satisfied, and thus, no exemption could be given.

Thereafter, an appeal was made to the Securities Appellate Tribunal (SAT), and the following issues were raised:

(a) Whether the stock broker requires single or multiple registrations to operate on more than one stock exchange(s); and

(b) Whether the appellant company was entitled to fee continuity benefits provided under clause 4 of Schedule III?

The SAT held that a single registration with SEBI is sufficient even if the stock broker has multiple memberships and functions from several stock exchanges. Therefore, the appellant company was not entitled to exemption of fees as Mr. Srikant was only a director and not a whole-time director in the company. Then, an appeal was made to the Supreme Court.

The Supreme Court observed SEBI’s contention that a corporate entity is entitled to claim exemption from the payment of registration fee only if an individual or partnership membership had been converted into a corporate entity. However, Mr. Srikant did not convert himself into a corporate entity. Instead transferred his membership card to an existing company and became a director.

The Supreme Court held that at the time of the transfer of the membership card of CSE to the company, Srikant Mantri was not a whole time director; however, he was only a director as indicated in various papers and ROC filings and held less than 40% shareholding of the company. Therefore, the company would not be entitled to claim fee continuity benefit under Clause (4) of Schedule III of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. Accordingly, the appeal was to be dismissed.

Read the Ruling

3. NCLT can’t make any changes to an approved Resolution Plan once it has been approved by the CoC: SC

The Apex Court ruled that once a resolution plan stands approved by the Committee of Creditors (CoC), it may be approved or disapproved by the Adjudicating Authority (NCLT). However, no alterations or modifications are permissible to it by the NCLT.

In the instant case, Deccan Chronicle Holdings Ltd. (DCHL/Corporate debtor), is a company engaged in the business of printing, publication and sale of daily newspapers under the trademarks of “Deccan Chronicle” (English) and “Andhra Bhoomi” (Telugu).

The appellant (i.e. a successful resolution applicant of the corporate debtor) submitted a resolution plan that included a provision stating that the corporate debtor held perpetual and exclusive rights to use the trademarks without any financial implications.

The Committee of Creditors (CoC) approved the resolution plan with 81.39% of voting rights. An application was filed before the National Company Law Tribunal (NCLT) seeking a declaration that the corporate debtor was the owner of trademarks and that they should be treated as part of its assets.

Subsequently, the NCLT approved the resolution plan as compliant with Sections 30(2) and 30(4) of the IBC. The NCLT held that the corporate debtor had the exclusive right to use the trademarks and that these trademarks belonged to the corporate debtor.

However, the National Company Law Appellate Tribunal (NCLAT) set aside the NCLT’s order, stating that any ownership claimed after the approval of the resolution plan by the CoC stands extinguished. Further, any declaration regarding ownership of trademarks would amount to modification/alteration of the resolution plan, which is impermissible in law.

Then, the appellant challenged the NCLAT’s order before the Supreme Court, contending that the observation made regarding the resolution plan being modified was misconceived.

The Supreme Court observed that the resolution plan approved by the CoC with 81.39% of its voting clearly indicates that the corporate debtor had a perpetual, exclusive right to use the trademarks, and it shows nowhere the right of ownership over the trademarks/brands.

The Supreme Court held that any right or ownership claimed over the trademarks after the approval of the resolution plan by the CoC stands extinguished. Accordingly, the appellant could only use the corporate debtor’s existing trademarks without financial implications. However, such trademarks could no longer be considered under the ownership of the corporate debtor. Accordingly, the appeal was to be dismissed.

Read the Ruling

4. Opportunity of personal hearing is mandatory before passing adverse order creating huge liability: HC

The Allahabad High Court has held that the opportunity for a personal hearing is mandatory before passing adverse order. The opportunity must be granted even if the taxpayer had selected “NA” against personal hearing in online mode.

The petitioner received a notice seeking his reply within 30 days. It submitted a reply, and an adverse order was passed. In the impugned order, demand in excess of Rs. 10 crores was raised against the petitioner. It filed a writ petition to challenge the adjudication order on the ground that the opportunity of hearing was not granted.

The Revenue contended that the petitioner was denied the opportunity of hearing because it had tick marked the option ‘No’ against the option for a personal hearing.

The High Court noted that this Court has already laid down by way of the principle of law that the assessee is not required to request for an opportunity for personal hearing, and it is mandatory for the authority to afford such opportunity before passing an adverse order. The Court also noted that marking of “NA” would be of no legal consequence, and minimal opportunity of hearing shall be necessary as this opportunity would ensure observation of natural justice.

In the instant case, the order created huge liability, and such an opportunity would have ensured that authority shall pass appropriate order and allow better appreciation at the appellate stage. Therefore, the Court held that the impugned order was to be set aside, and the matter was remitted to Adjudicating Authority to issue fresh notice.

Read the Ruling

5. Registration can’t be cancelled solely on the ground that a reply to SCN was not given without assigning any reason: HC

The Allahabad High Court has held that GST registration cannot be cancelled solely on the ground that a reply to show cause notice was not given without assigning any reason since non-submission of reply to SCN cannot be a ground for cancellation of registration.

The petitioner was engaged in the business of civil work contracts and was registered under GST Act. A show cause notice was issued proposing cancellation of registration, which was not replied to by the petitioner. It could not submit the reply within the stipulated time, and an order came to be passed whereby the registration of the petitioner was cancelled.

Against the said order, the petitioner filed an appeal which was dismissed by the appellate authority on the ground of delay. It filed a writ petition against the order of cancellation of registration and contended that the Order-in-Original was passed on the ground that a reply to SCN was not given.

The High Court noted that the non-submission of a reply to SCN couldn’t be a ground for cancellation of registration. In the instant case, registration was cancelled without assigning any reasons, solely on the ground that a reply to SCN was not given. The order cancelling registration or any other order passed without application of mind does not stand the test of scrutiny under Article 14 of the Constitution of India. Therefore, it was held that the order-in-original and order-in-appeal were to be set aside, and the authority was directed to consider the issue afresh.

Read the Ruling

6. A case study on Ind AS 16: Treatment of capitalization of insurance policy premium taken for project under construction

As per para 16 (b) of Ind AS 16 (Property, Plant and Equipment) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management are required to be added to the cost of an item of property, plant and equipment. Therefore, emphasising the above para, the company is inclined towards capitalising the expenses on account of project-related insurance to the cost of an item of project asset, considering as directly attributable expenditures to bring the project to the location and condition necessary for it to be capable of operating in the manner intended by the management.

But confusion arises when the auditor raised a query on the capitalisation of insurance premiums to the cost of project assets stating that expense on account of insurance is not ordinarily essential for construction activity and cannot be considered directly attributable costs. Therefore should be recognised in the statement of profit and loss.

The Expert Advisory Committee (EAC) of ICAI has noted incurrence of insurance expense is a pre-condition/ essential for obtaining project-related approvals, without which construction activities cannot be commenced, and the project cannot be commenced/ brought to the location and condition necessary for it to be capable of operating in the manner intended by management. Accordingly, the insurance expenses are directly attributable expenditures to bringing the project assets to the location and condition necessary for it to be capable of operating in the manner intended by the management and, therefore, should be capitalised with the cost of an item of PPE under the provisions of Ind AS 16.

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