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

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  • Last Updated on 28 November, 2023

Weekly Round-up

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

(a) SEBI’s board meeting approves significant amendments; Investment by AIFs beyond September 2024 to be in demat form;

(b) Last date mentioned u/s 245C to file SetCom application should be read as 31-03-2021 instead of 01-02-2021: HC;

(c) Half-yearly reporting of mutual fund/capital gains transactions in SFT instead of quarterly: CBDT;

(d) Penalty shouldn’t be imposed if vehicle was carrying valid e-way Bill but not reached destination due to breakdown: HC;

(e) Appellate Authority has duty & obligation to look into merits of matter even in absence of assessee during proceedings: HC; and

(f) NFRA debars Auditor for not issuing “Adverse Opinion” on CFS for non-consolidation of material subsidiary.

1. SEBI’s board meeting approves significant amendments; Investment by AIFs beyond September 2024 to be in demat form

In its 203rd Board Meeting on November 25, 2023, the Securities Exchange Board of India (SEBI) approved several frameworks and amendments. These transformative measures encompass a spectrum of sectors, from providing impetus to Not-for-Profit Organizations (NPOs) on the Social Stock Exchange to introducing a new era for Small and medium Real Estate Investment Trusts (SM REITs).

The SEBI’s initiatives extend to Alternative Investment Funds (AIFs), introducing investor-focused reforms emphasizing compliance simplicity and fortifying investor safeguards. Let’s delve into the key highlights and implications of these groundbreaking regulatory changes.

(a) Minimum Issue Size Slashed for NPOs’ Zero Coupon Instruments on Social Stock Exchange

To provide impetus to fundraising by Not for Profit Organizations (NPOs) on the Social Stock Exchange (SSEs), the SEBI has reduced the minimum issue size in case of public issuance of Zero Coupon Zero Principal Instruments (ZCZP) by NPOs on SSE from Rs. 1 Crore to Rs. 50 lakhs.

Further, the minimum application size for ZCZP public issuance by NPOs on SSE was reduced from Rs 2 lakh to Rs 10,000, encouraging broader participation, especially from retail investors. Also, the nomenclature of “Social  Auditor” will be changed with “Social  Impact Assessor” to comfort NPOs and convey a positive approach towards the social sector.

(b) Index Providers Set to Drive Transparency and Governance in Financial Benchmarks

The Board has endorsed a regulatory framework for Index Providers to enhance transparency and accountability in the governance and administration of financial benchmarks within the securities market.

The forthcoming regulations will establish a structure for registering Index Providers licensing ‘Significant Indices,’ as notified by SEBI through objective criteria. Aligned with IOSCO Principles for Financial Benchmarks, this regulatory framework exclusively applies to ‘Significant Indices.’

(c) SEBI Paves the Way for Small & Medium REITs

The Board has approved amendments to the SEBI (REIT) Regulations, 2014, introducing a regulatory framework to support Small and medium REITs (SM REITs). The revised regulations set a minimum asset value of at least Rs. 50 crore for SM REITs, a significant departure from the Rs. 500 crore requirement for existing REITs.

Notably, SM REITs gain the flexibility to establish separate schemes for real estate asset ownership through special purpose vehicles constituted as companies. The regulatory framework greenlit by the Board for SM REITs includes provisions for the structure of SM REITs, the transition of existing structures meeting specified criteria, and the responsibilities of the investment manager.

Also, this encompasses criteria such as net worth, experience, minimum unitholding requirements, considerations for investment conditions, minimum subscription, distribution norms, asset valuation, and more.

(d) SEBI Unveils Investor-Focused Reforms for Alternative Investment Funds

To enhance compliance simplicity and fortify investor safeguards in Alternative Investment Funds (AIFs), the Board has approved the following measures:

I. Dematerialization Requirement:

Any new investment by an AIF after September 2024 must be held in dematerialized form. Existing investments are exempted, with exceptions for cases where:

      • The investee company is legally obligated to facilitate the dematerialization of its securities.
      • The AIF, independently or with other SEBI registered intermediaries/entities mandated to hold investments in dematerialized form, exercises control over the investee company.

II. Custodian Appointment Mandate:

The mandate for appointing a custodian, currently applicable to Category III AIFs and Category I and II AIFs with a corpus exceeding Rs. 500 Crore, is extended to all AIFs. AIFs can appoint a custodian associated with the manager or sponsor, subject to conditions like those outlined in SEBI (Mutual Funds) Regulations, 1996, for permitting a related party of a Mutual Fund sponsor to serve as its custodian. The Board acknowledges that the average cost of compliance for schemes falling under this mandate is approximately Rs. 88,000 per annum, based on an analysis of sample data.

Read the Press Release

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2. Last date mentioned under section 245C to file SetCom application should be read as 31-03-2021 instead of 01-02-2021: HC

Assessee filed an instant petition to challenge the constitutional validity of the amendment to section 245A discontinuing operations of settlement commission w.e.f. 1-4-2021. This was done by inserting various sub-clauses and proviso to the existing sections and inserting new sections 245AA and 245M by way of the Finance Act, 2021, with retrospective effect from 1-2-2021.

The above amendment was challenged on the ground that such amendment was arbitrary, illegal and void and also infringed the fundamental rights conferred under articles 14, 19(i)(g), 20, 20(2) and 21 of the Constitution of India 1950.

Assessee also challenged the validity of Circular, dated 28-9-2021, in as much as it restricted filing of the application before the Interim Board for Settlement only by assesses who were eligible to file an application for Settlement on 31-1-2021.

The Madras High Court held that the Income-tax Settlement Commission (ITSC) was made inoperative with effect from 1-2-2021 by virtue of proviso to section 245B. Similarly, section 245C(5) also played an embargo that no application shall be made under the section on or after 1-2-2021. The proviso to section 245D(2C) deemed that if no order was passed as of 31-1-2021 under the section, the application was deemed to be valid.

The legislation in question was given retrospective effect starting from February 1st, 2021 when the Bill was introduced in the Parliament. This move aimed to inform taxpayers and the public about the impending policy decision to render the ITSC inoperative.

The retrospective period spans merely two months, evidenced by the Act being officially notified on 01-4-2021. Importantly, this action doesn’t pertain to imposing taxes. Thus, it can’t be argued that the parties acted as per the law in force at the relevant time. Therefore, the act of the State in abolishing the ITSC with effect from a cutoff date per se cannot be illegal or ultra vires the Constitution.

However, until March 31st, 2021, the Income Tax Settlement Commission (ITSC) remained legally and factually operational. Eligible assesses retained the right to approach the ITSC if they had pending cases. Even for assessments or reopening proceedings initiated between February 1st, 2021, and March 31st, 2021, the assessees could approach the Commission.

Any applications submitted without a final order before January 31st, 2021, were considered ‘pending applications’. The legislation’s primary goal was to abolish the ITSC and establish an Interim Board to handle these pending applications. Notably, even cases arising before the Act’s notification on April 1st, 2021, but after the cutoff date of February 1st, 2021, were eligible for ITSC consideration.

The purpose of the retrospective legislation is to make the ITSC inoperative right from the date of the introduction of the Bill and to send all the pending applications to the Interim Board. As a matter of fact, the Central Government has to make a Scheme for Settlement with respect to pending applications by the Interim Board as per section 245D(11), and such a scheme has to be placed before the Parliament.

Thus, there was no intent, nor was it within the purpose to do away with the ‘pending applications’ with respect to matters in which the ‘cases’ arose from 1-2-2021 to 31-3-2021. Thus, it was necessary to read down the last date mentioned for filing applications in section 245C(5) as 31-3-2021, and consequently, the last date mentioned in the Circular should also be read as 31-3-2021.

Read the Ruling

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3. Half-yearly reporting of mutual fund/capital gains transactions in SFT instead of quarterly: CBDT

The Board vide Notification Nos. 3 & 4 of 2021, dated 30-04-2021, specified the guidelines for preparation and submission of statements of financial transaction (SFT) in relation to capital gains/mutual fund transactions.

The Board has issued a corrigendum to said notifications tweaking norms related to the filing of SFTs, which has been discussed below:

  • Starting April 1, 2023, SFT will switch from quarterly to half-yearly submission. This means that data for the first half of the fiscal year ending on September 30th and the second half ending on March 31st will now be provided by October 31st and April 30th, respectively.
  • The holding period for UTI units is set at 12 months if over 35% of the proceeds are in domestic equity shares. For Business Trust and Other Units, the holding period is 36 months under the same conditions.
  • Starting from 01-04-2023, if the UTI unit, Business Trust and Other Units invest 35% of less of its total proceeds in the equity shares of domestic companies, (Specified Mutual Fund), it will always be classified as short-term capital asset.
  • The Corrigendum includes Market Linked Debentures in the classification of short-term capital assets starting from April 1, 2024.
  • Regarding SFT in Depository Transactions, the Corrigendum specifies that the matching credit should be identified using the First in, First Out (FIFO) method for each debit transaction. The estimated acquisition cost for the credit should be calculated using the weighted average price of the asset. This involves considering the actual transaction value if the purchase was made after February 1, 2018, or the end-of-day price if the purchase was made before that date, as available with the depository.
  • Corrigendum further clarifies that the estimated acquisition cost is considered NIL for off-market purchases, corporate actions, or any transactions outside the Exchange. Additionally, IPO credits will be regarded as market credits, with the acquisition cost calculated using the formula ‘Number of allotted shares x Per unit price at the time of allocation’.

Read the Corrigendum

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4. Penalty shouldn’t be imposed if vehicle was carrying valid e-way Bill but not reached destination due to breakdown: HC

The High Court of Allahabad has recently held that penalty for expired e-way bill shall not be imposed if goods are accompanied by valid e-way Bill, and the vehicle carrying goods is delayed due to unavoidable circumstances. This ruling is given by the Honorable Allahabad High Court in case of Sun Flag Iron and Steel Co. Ltd. v. State of U.P.


The petitioner was engaged in the business of manufacturing & selling basic iron and steel etc. In the normal course of business, the petitioner dispatched the consignment and the goods were accompanied with e-tax invoice & e-way Bill valid up to 1-6-2023. While in transit, the vehicle became stuck in mud. With the assistance of a crane, it was successfully pulled out; however, the engine failed to start. The driver contacted a mechanic to address the breakdown and then headed to Jhansi to procure spare parts.

Meanwhile, the vehicle was intercepted and a show cause notice was issued on the ground that the e-way Bill accompanying the goods in question expired on 1-6-2023. The petitioner replied to the notice, but the department passed an order imposing a penalty on the petitioner and filed a writ petition against the demand order.

High Court

The Honorable High Court noted that the vehicle could not reach its destination within the time mentioned in the e-way Bill as the situation was beyond the petitioner’s control. Moreover, the petitioner had no intention to evade tax payment; thus, the penalty levy was not justified.

Therefore, the Court held that the impugned order was liable to be quashed, and the revenue authority was directed to refund the amount, if any, deposited by the petitioner.

Read the Ruling

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5. Appellate Authority has duty & obligation to look into merits of matter even in absence of assessee during proceedings: HC

The High Court of Patna has recently held that the Appellate Authority has duty and obligation under statute to look into the merits of the matter and decide the issue on the merits after examining grounds raised by the assessee, even if there is no presence of the assessee. This ruling is given by the Honorable Patna High Court in case of S K Construction and Co. v. State of Bihar.


In the present case, the assessee filed an appeal before the appellate Authority. The Appellate Authority dismissed the appeal due to the absence of the assessee or its authorized representative during proceedings. It filed writ petition against the order and contended that the ground stated in the impugned order for rejection of appeal was cursory and without any discussion of facts and figures.

High Court

The Honorable High Court noted that the Appellate Authority has a duty and an obligation under Section 107 to look into the matter’s merits and examine grounds raised by the assessee, even if there is no presence recorded of the assessee before the Appellate Authority.

The Court further noted that the Authority must have decided the issue on merits in this case. Therefore, the Court held that the impugned order was to be set aside, and the appeal was to be restored before the Appellate Authority. The assessee was also directed to appear before the Appellate Authority.

Read the Ruling

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6. NFRA debars Auditor for not issuing “Adverse Opinion” on CFS for non-consolidation of material subsidiary

NFRA, in its recent order dated 22.11.2023 issued against the auditor of a Mumbai-based company following the receipt of information from the Securities and Exchange Board of India (SEBI) regarding financial irregularities committed by the company in pursuance of section 132(4) of the Companies Act, 2013. The Engagement Partner (EP) has ‘Qualified’ his opinion on Consolidated Financial Statements (CFS), stating that the Financial Statements reflected a ‘true and fair view’ except for the effect of non-consolidation of a wholly-owned subsidiary, which constituted about 19.20% and 28.96 % respectively of the assets and liabilities of the Parent Company. The Authority observed the following lapses:

  • Engagement Partner failed to comply with SA 705 by not issuing an “Adverse Opinion” on non-consolidation of the financial statements of a wholly owned subsidiary (WOS) where the assets and liabilities of the WOS form a material part of the assets and liabilities of the parent company. There was a dispute among promoters regarding control over the WOS, and the matter was pending in the Bombay High Court. The EP issued the ‘Qualified’ under the impression that since the matter is pending with the High Court, there is no requirement to consolidate the WOS. However, NFRA found that the Court has not granted any stay on the consolidation of account irrespective of the matter pending with the Court.
  • The Authority observed multiple anomalies in the audit file clearly evidencing tampering by the creation of additional documents at a later stage to mislead NFRA. Further, there was no audit evidence as to who performed the audit work, who reviewed the audit work performed, and the date and extent of such review. The EP has also failed to document discussions of significant matters with TCWG, including the nature of significant matters discussed and when and with whom the discussions occurred, clearly violating the provisions of SA 230.

The working papers presented establish not only the tampering of the Audit File but also the complete ignorance of the EP about the applicable accounting framework and auditing standards.

  • NFRA found no documentation evidencing that EP had performed the generally accepted audit procedure of obtaining independent external confirmation of Trade Receivables balances prescribed under SA 505.
  • There is no evidence in the Audit File of the performance of the audit through the development of the audit plan, audit strategy, and any changes made thereto during the engagement. This clearly depicts the violation of SA 300.
  • NFRA noticed a substantial decrease in key financial parameters vis-a-vis the previous financial year; revenue from operations decreased by 23.80 %, and profit before tax decreased by 53.27 %. Audit documentation does not contain any evidence in relation to any analytical procedure performed by the EP as required by SA 520.
  • The Authority did not find any evidence in the Audit File to show that any risk assessment procedures had been performed by the EP required under SA 315.
  • The Authority observed that the EP has discussed crucial matters only with the management. There is no evidence in the Audit File of his discussion with TCWG to support that EP has communicated even once.

Considering the proven professional misconduct, nature of violations, and principles of proportionalities, NFRA, in the exercise of powers under section 132(4)(c) of the Companies Act, 2013, hereby orders the imposition of a monetary penalty of Rs. 5,00,000 and debarred for 5 years from being appointed as an auditor or internal auditor of the functions and activities of any company or body corporate.

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