Weekly Round-up on Tax and Corporate Laws | 24th February to 1st March 2025

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from February 24^th to March 01^st, 2025, namely:

1. SEBI allows ‘Association of Persons’ to open demat accounts in their own name for better transparency and compliance;
2. Sale deed executed by general power of attorney holder after death of original owner was invalid: SC;
3. Consent of one co-owner is sufficient when property is jointly owned for GST registration: HC;
4. Delay in filing revocation application to be condoned subject to deposit of all taxes, interest, late fee and penalty: HC;
5. Classification, measurement and recognition of convertible bonds under Ind AS framework

1. SEBI allows ‘Association of Persons’ to open demat accounts in their own name for better transparency and compliance

In a significant move to expand investment opportunities and simplify market participation, SEBI vide Circular dated February 25, 2025, has permitted ‘Association of Persons’ (AoPs) to open demat accounts in their own name for holding securities such ­- units of mutual funds, corporate bonds and government securities. Also, SEBI requires that AoPs must ensure that they subscribe only to financial instruments or securities permitted by statutes governing their constitution. However, these demat accounts cannot be used to subscribe or hold equity shares. This move is expected to strengthen regulatory oversight, enhance financial inclusion and provide AoPs with greater flexibility in managing their investments.

1. Background and Rationale

Para 1.2.6 of Section 1 of the Master Circular for Depositories allows an ‘Association of Persons’ to open a demat account only in the name of a natural person. However, there is no provision for opening a demat account directly in the name of AoPs. In this regard, SEBI received various representations requesting permission to allow direct account openings in the name of Association of Persons (AoPs).

1. SEBI permits AoPs to open demat accounts in their own name for holding securities

After examining the relevant legal provisions and engaging in detailed deliberations with stakeholders, the SEBI has permitted AoPs to open a demat account in their own name to hold units of mutual funds, corporate bonds, and government securities in dematerialised form, promoting ease of doing business. This approval is subject to certain conditions as follows –

3. • AoPs must be responsible for ensuring subscription to permitted financial instruments

AoPs must ensure they subscribe only to the financial instruments or securities permitted by the statutes governing their constitution.

• PAN Details of AoP and Principal Officer must be obtained

The PAN Card details of the AoP and the Principal Officer of the AoP must be obtained. The term “Principal Officer” refers to the secretary, treasurer, manager or agent or any person connected with the management or administration of the AoP.

• DP must obtain confirmation from AoP while opening a demat account

While opening a demat account in the name of AoP, Depository Participants (DPs) must obtain confirmation from the AoP w.r.t the following –

• The AoP holds only such securities in dematerialised form as permitted by statutes governing its constitution.
• The demat account is not used for subscribing to or holding equity shares.
• In case of any dispute, the Principal Officer of the AoP must be treated as the legal representative of the AoP.
• Members of the AoP must be jointly and severally liable on behalf of the AoP.

 

1. Conclusion

SEBI’s decision to allow AoPs to open demat accounts in their own name marks a significant regulatory development aimed at enhancing transparency, streamlining market participation and ensuring compliance with statutory requirements. This move simplifies investment processes for AoPs while strengthening accountability and ensuring strict adherence to financial regulations. By subscribing only to permitted financial instruments, this initiative boosts investor confidence and promotes a more inclusive financial ecosystem.

Additionally, the mandate to obtain PAN details of both the AoP and its Principal Officer enhances KYC norms, ensuring stronger monitoring and due diligence. The provisions shall be effective from June 2, 2025.

Read the Circular

2. Sale deed executed by general power of attorney holder after death of original owner was invalid: SC

The suit property was originally part of 1 acre 8 guntas of land in Chunchaghatta Village, Uttarahalli Hobli, Bangalore South Taluk, owned by the original owner, M @ R. He developed the land into individual plots and sold them to various buyers.

The original owner executed a General Power of Attorney (GPA) and an Agreement to Sell in favour of the holder of the GPA. After the owner’s death, the holder, in her capacity as a GPA holder, executed a registered sale deed in favour of her son, appellant No. 2.

The respondents contended that the sale deed was executed after the original owner’s death and was, therefore, invalid. On the other hand, the respondents claimed that after the death of the original owner, his legal heirs sold the suit property to a person through a registered sale deed.

Later, the person sold the property to another person via another registered sale deed. Finally, the person gifted the suit property to her daughter, the answering respondent, through a registered gift deed.

The High Court ruled in favour of the respondents, and the matter reached the Supreme Court.

The Supreme Court held that a power of attorney derives its basic principles from Chapter X of the Contract Act, which provides for ‘Agency’ along with sections 1A and 2 of the Powers of Attorney Act, 1882. The relationship between the executant of a general power of attorney and the holder of the power is one of principal and agent.

A principal is bound by the acts done by an agent or the contracts made by him on behalf of the principal. Likewise, the power of attorney in the nature of the contract of the agency authorizes the holder to do acts specified by the executant or represent the executant in dealings with third persons.

In the present case, it is evident from the contents of the GPA executed by the original owner in favour of the holder that the holder was authorized to manage the property. However, the import of the word ‘general’ in a POA refers to the power granted concerning the subject matter. The test to determine the nature of POA is the subject matter for which it has been executed. The nomenclature of the POA does not determine its nature. Even a POA termed as a ‘general power of attorney’ may confer powers that are special in relation to the subject matter. Likewise, a ‘special power of attorney’ may confer powers that are general in nature concerning the subject matter. The essence lies in the power and not in the subject-matter.

The holder of POA did not choose to register the agreement to sell executed by the original owner in her favour. Even if such an argument were to persuade the Court, the document must have been registered as per section 17(1)(b) of the Registration Act. In the absence of such registration, it would not be open for the holder of the POA to contend that she had a valid right, title and interest in the immovable property to execute the registered sale deed in favour of the appellant.

Read the Ruling

3. Consent of one co-owner is sufficient when property is jointly owned for GST registration: HC

The Hon’ble Allahabad High Court held that GST registration based on ownership proof does not require the consent of all co-owners. Since the electricity bill was in the name of the registered owner, the requirement under Clause (a) of Form REG-01 was satisfied, making the petitioner’s challenge unsustainable. This ruling was delivered in Satya Dev Singh vs. Union of India.

Facts

The petitioner and the husband of respondent were co-owners of a property. The respondent applied for GST registration, which was granted. The petitioner filed an application for cancellation of the registration, asserting that his consent, as a co-owner, had not been obtained. The application was rejected by the adjudicating authority, following which the petitioner appealed before the appellate authority. The appellate authority, while considering the appeal, referred to Form REG-01, which specifies the required proof of principal place of business for GST registration. The authority held that as the electricity bill was in the name of the registered owner, there was sufficient compliance with Clause (a) of Form REG-01, which governs ownership-based registration proof. Aggrieved by this ruling, the petitioner filed a writ petition before the High Court challenging the orders.

Held

The Hon’ble High Court held that under GST laws, an ownership document suffices for registration purposes without requiring the consent of all co-owners. The court analysed Form REG-01 and clarified that Clause (a) applies where the applicant is the owner, requiring only ownership proof. The Clause (c), which mandates a consent letter, is relevant only when the applicant is neither the owner nor the tenant. Since the electricity bill was in the name of the registered owner, it constituted sufficient compliance with Clause (a). Consequently, the authorities had rightly rejected the petitioner’s application for cancellation of GST registration. The writ petition was dismissed accordingly.

Read the Ruling

4. Delay in filing revocation application to be condoned subject to deposit of all taxes, interest, late fee and penalty: HC

The Hon’ble Orissa High Court held that delay in seeking revocation of GST registration cancellation can be condoned if the assessee complies with tax and procedural requirements. This ruling was given in the case of Saroj Kumar Maharana v. Superintendent, CGST and Central Excise.

Facts

The assessee, a registered person under the Odisha Goods and Services Tax Act, 2017, was issued a show-cause notice for cancellation of registration. Subsequently, the registration was cancelled by the proper officer. The assessee filed a writ petition before the Orissa High Court for condonation of delay in filing the application for revocation of the cancellation of registration.

Held

The High Court held that similar relief was granted by the High Court in the case of Mohanty Enterprises wherein the delay in invoking the proviso to Rule 23 of the Odisha Goods and Services Tax Rules, 2017 was condoned. The High Court directed that subject to the assessee depositing all the taxes, interest, late fee, penalty, etc., due and complying with other formalities, the assessee’s application for revocation would be considered in accordance with the law. Accordingly, the writ petition was disposed of.

Read the Ruling

5. Classification, measurement and recognition of convertible bonds under Ind AS framework

Proper classification and measurement of convertible bonds are essential for financial reporting compliance under Ind AS 109, Financial Instruments and Ind AS 32, Financial Instruments: Presentation. A common issue among companies issuing convertible bonds is the failure to distinguish between the liability and equity components of these instruments. Many companies recognize the entire proceeds as a liability, ignoring the equity component, and fail to discount the liability component using the appropriate market interest rate. This misclassification can lead to financial misstatements and non-compliance with accounting standards.

According to Ind AS 32, convertible bonds are compound financial instruments containing both a liability component (the obligation to pay interest and principal) and an equity component (the option to convert into shares). Ind AS 109 mandates that at the time of issuance, the liability component must be measured separately at the present value of future cash flows, using the market rate applicable for similar non-convertible bonds. The equity component is then determined as the residual amount after subtracting the liability component from the total proceeds. Failure to perform this separation results in overstatement of liabilities and understatement of equity, leading to incorrect financial reporting.

An example of such an issue is a publicly listed company that issued convertible bonds but recorded the full proceeds as a liability without accounting for the equity component. Additionally, the company did not discount the liability component using the correct market rate, further misrepresenting its financial position. This incorrect treatment violates Ind AS 109, which requires the liability component to be measured at its present value, while the equity component should remain unchanged in equity until conversion or maturity.

To ensure compliance, companies issuing convertible bonds must apply the correct classification and measurement approach. This includes recognizing the liability at its discounted present value, allocating the residual to equity, and using the effective interest rate method for subsequent measurement of the liability. Proper compliance with Ind AS not only enhances financial transparency but also ensures regulatory adherence and investor confidence. Companies should review their financial instruments’ classification and seek professional guidance if necessary to avoid regulatory scrutiny and financial misstatements.

Read the News