Weekly Round-up on Tax and Corporate Laws | 25th to 30th September 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from September 25 to 30, 2023, namely:

(a) AO rightly imposed penalty under the Black Money Act for non-disclosure of foreign assets in Schedule FA of ITR: ITAT;

(b) No more double taxation on ocean freight; CBIC amends IGST Rate Notifications;

(c) Govt.notifies October 1, 2023 as effective date of applicability of CGST (Amendment) Act, 2023;

(d) CBIC notifies Central Goods and Services Tax (Third Amendment) Rules, 2023;

(e) 28% GST shall be levied on online gaming and Casinos w.e.f 1.10.2023: Notification;

(f) IBBI proposes innovative paths to accelerate insolvency proceedings for Personal Guarantors; and

(g) NFRA’s Inquiry: Revealing the EQC Reviewer’s Ignorance.

1. AO rightly imposed penalty under Black Money Act for non-disclosure of foreign assets in Schedule FA of ITR: ITAT

The Mumbai Tribunal has confirmed the imposition of a penalty on the taxpayer for failing to disclose foreign assets in the Schedule FA of ITR. The Tribunal stated that reporting interest income in the ITR from said foreign asset does not exempt the taxpayer from the obligation to disclose the assets in Schedule FA.

Facts

Assessee and her husband have made a joint investment in Global Dynamic Opportunity Fund Ltd. Assessee’s share in the said investment was 40%. The assessee invested out of funds transferred from India to HSBC Bank in Jersey.

Assessee declared interest income from the foreign investment in AY 2016-17. Said asset was sold, and capital gain was offered to Tax in AY 2019-20. However, the assessee didn’t disclose foreign assets while filing the return of income (ITR) for AY 2016-17 to AY 2018-19 under schedule FA.

Assessing Officer (AO) levied penalty towards the non-disclosure under section 43 of the Black Money Act 2015 (BMA) for each of the assessment years. On appeal, the CIT(A) upheld the levy of penalty. The aggrieved assessee filed the instant appeal before the Tribunal.

The Ruling

The Mumbai Tribunal held that section 43 of the BMA contains provisions for the levy of penalty for failure to furnish information or furnish inaccurate particulars about an asset (including financial interest in any entity) located outside India in ITR.

As per said section, a resident and ordinarily resident person is liable for a penalty if he fails to furnish or files inaccurate particulars of investment outside India while filing the return of income under section 139. Foreign investments/assets are to be disclosed in ITR Schedule FA.

It is apparent from the language of section 43 that the disclosure requirement is not only for the undisclosed asset but any asset held by the assessee as a beneficial owner or otherwise. Undisputedly, the assessee had not disclosed the foreign asset in the return of income – Schedule FA. Thus, the penalty was rightly levied upon the assessee.

The assessee contended that the levy of penalty is not mandatory but is at the discretion of the AO since the word used in the section is that the AO “may” levy penalty.

It was held that even if it is assumed that in the light of the expression “may” used in section 43 of BMA, the AO has the discretion to levy penalty. The assessee failed to substantiate that the AO has exercised his discretion extravagantly.

After examining the facts of the case, AO formed his opinion to levy penalty. He exercised his discretion judiciously. No material was brought to show that AO levied penalty arbitrarily and unjustifiedly.

Further, the provisions of section 43 do not provide any room not to levy penalty even if the foreign asset is disclosed in books since the penalty is levied only towards non-disclosure of foreign assets in schedule FA.

Read the Ruling

2. No more double taxation on ocean freight; CBIC amends IGST Rate Notifications

The CBIC has amended IGST Rate notifications in order to ensure that IGST will not be levied on importers under RCM on the supply of ocean freight services by foreign shipping lines to foreign exporters. In this regard, three notifications have been issued, which shall be effective from October 1, 2023.

Notably, these changes are incorporated to give effect to the decision of Apex Court in the case of Mohit Minerals since the Government has already amended place of supply provisions for services of transportation of goods by vessel. In this regard, Notification No. 11/2023- Integrated Tax (Rate), Notification No. 12/2023- Integrated Tax (Rate) & Notification No. 13/2023- Integrated Tax (Rate) dated September 26, 2023 have been issued.

Read the Notification

3. Govt. notifies October 1, 2023 as effective date of applicability of CGST (Amendment) Act, 2023

The Government has notified that the amendments made in the CGST Act, 2017, via the CGST Amendment Act, 2023 would be effective from 01-10-2023. Based on the recommendations of the 50th and 51st GST Council meeting, certain changes were introduced to the CGST Act, 2017 through the CGST Amendment Act, 2023.

However, the effective date of the same was not notified. The Government has now notified that the amendments would be effective from 01-10-2023. Parallel amendments were made in the IGST Act, 2017, and the effective date of the same has also been notified as 01-10-2023. Notably, the amendments majorly relate to the taxability of the specified actionable claims such as online gaming, casinos, etc., and the place of supply provisions in case of supply made to unregistered persons. In this regard, Notification No. 48/2023-Central Tax, dated September 29, 2023, has been issued.

Read the Notification

4. CBIC notifies Central Goods and Services Tax (Third Amendment) Rules, 2023 w.e.f October 1, 2023

The CBIC has issued a notification under Section 15(5) to notify that the valuation of the supply of online gaming, online money gaming and actionable claims in casinos will be determined in a notified manner. In this regard, Rule 31B and Rule 31C have been inserted under the CGST Rules to determine the value of the supply of online gaming (including online money gaming) and the supply of actionable claims in casinos, respectively. The rules will be made effective from 01-10-2023.

Section 15(5) empowers the Government to notify certain supplies, the valuation of which shall be determined in a prescribed manner. The same would be notified based on the recommendations of the Council. In this regard, the Government has now issued a notification under Section 15(5) of the CGST Act to notify that the valuation of the supply of online gaming, online money gaming and actionable claims in casinos would be determined in a prescribed manner.

Further, Rule 31B and Rule 31C have been inserted under the CGST Rules to prescribe the manner of valuation of supplies relating to online gaming, online money gaming and casinos. Notably, the rules were initially introduced through Notification No. 45/2023-Central Tax, dated September 6, 2023. Subsequently, Notification No. 51/2023-Central Tax, dated September 29, 2023, has been released, reinserting the rules, albeit with a new effective date of October 1, 2023.

Read the Notification

5. 28% GST shall be levied on online gaming and Casinos w.e.f 1.10.2023

The Government has issued a notification to provide that the actionable claims classified as ‘specified actionable claims’ under Section 2(102A) of the CGST Act, 2017 would be leviable to GST at the rate of 28% with effect from 01-10-2023. This includes the supply of actionable claims involved in or by way of betting, casinos, gambling, horse racing, lottery, and online money gaming.

It has further been notified that where a word or expression is not defined in the rate notification, notification no. 01/2017- Central Tax (Rate), but the same has been defined in the GST law, the same meaning would be assigned to it for the purpose of the rate notification. In this regard, Notification No. 11/2023-Central Tax (Rate), dated September 29, 2023 has been issued.

Read the Notification

6. IBBI proposes innovative paths to accelerate insolvency proceedings for Personal Guarantors

The Insolvency and Bankruptcy Code (IBC) plays a crucial role in providing a well-structured framework for insolvency resolution processes, with a strong emphasis on fairness and transparency. Its primary focus is rehabilitating the debtor rather than simply declaring them insolvent. Instead of relying on an act of insolvency, the Code establishes an objective trigger for initiating the insolvency resolution process.

In a significant development on September 27, 2023, the Insolvency and Bankruptcy Board of India (IBBI) released a discussion paper. This paper addresses the appointment of the Resolution Professional (RP), sharing the report prepared by the RP with the personal guarantor (PG) and mandating the convening of a creditors’ meeting.

The discussion paper outlines key highlights as follows:

(A) Appointment of RP in Personal Guarantor Cases to streamline insolvency proceedings

Regulation 4(1)(a) of the IBBI (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019, states that an insolvency professional (IP) shall be eligible to be appointed as RP if he is independent of the PG. Further, one of the clauses in the explanation specifies that the IP shall be treated as independent of the PG if he has not acted or is not acting as an interim resolution professional (IRP), RP or liquidator during the CIRP or liquidation process of the CD, as the case may be.

(a) Present issues:

The Board has noticed that the appointed RPs often face challenges when trying to submit reports as mandated by section 99. This difficulty emerges due to the lack of cooperation on the part of personal guarantors (PGs). The RPs dealing with PG cases have limited access to the PGs’ financial records, making it complex for them to fulfil their duties as outlined in the Code, Rules, and Regulations.

(b) IBBI’s proposal:

The IBBI has proposed that the Insolvency Professional (IP) overseeing the corporate debtor’s insolvency process could also aptly assume the role of RP in personal guarantor cases. This alignment promises to enhance the efficiency and professionalism of insolvency proceedings.

(B) Sharing a copy of the RP report with the debtor and the creditor for enhanced clarity

Section 99(10) serves as a crucial mandate, requiring the RP to share a copy of the report with the debtor or the creditor, as the case may be. Therefore, this provision empowers either the debtor or the creditor to receive a copy of the report prepared by the RP. A stringent interpretation of section 99(10) implies that the RP is obligated to give a copy of the report to either the debtor or the creditor.

(a) Present issues:

In certain instances, the IBBI observed that the Adjudicating Authority requests notices to be issued to both parties when considering applications under Section 100. These notices are served along with reports submitted by the Resolution Professional (RP). To expedite the process, it is important to clarify that these reports should be shared with both parties.

(b) IBBI’s proposal:

IBBI has now proposed to clarify the requirement for the RP to share the report of recommendations prepared under section 99(7) with both the debtor and the creditor in all cases, thus promoting transparency and informed decision-making.

(C) Mandatory creditor’s meeting in all Personal Guarantor insolvency matters

Under the extant provisions, a PG submits a repayment plan u/s 105 to the RP. Subsequently, the RP assesses the viability of the repayment plan and compiles a report on the payment proposal. Along with the report, the RP recommends the calling of the meeting of the creditors, if necessary.

(a) Present issues:

While the provision was intended to expedite the resolution of matters in low-value cases, it is felt that the meeting of the creditors should be necessary in the case of PGs as such cases are complex in comparison to other cases of individual insolvencies. The existing provisions, while well-intentioned, seem to overlook the intricacies surrounding PG cases.

(b) IBBI’s proposal:

The IBBI has proposed to mandate convening a meeting of creditors in all PG insolvency matters, irrespective of the amount defaulted. This visionary step ensures that creditors collectively contribute to the resolution process, offering a comprehensive view of the repayment plan.

Conclusion

In conclusion, the recent discussion paper released by the IBBI marks a significant stride towards improving the effectiveness and transparency of the insolvency resolution process for Personal Guarantors. The proposed amendments aim to address key challenges faced by Resolution Professionals (RPs) in PG cases, setting a positive precedent for India’s insolvency framework’s ongoing development.

Read the Discussion Paper

7. NFRA’s Inquiry: Revealing the EQC Reviewer’s Ignorance

NFRA emphasized on the duty of an Engagement Quality Control (EQC) Reviewer to conduct the review of the work of the Engagement Team (ET) and ensure that the Independent Auditor’s Report is appropriate. The EQC Reviewer was required to ensure compliance with SAs to ensure the audit quality and lend credibility to Financial Statements. However, the EQC Reviewer failed in his duty and was found to be negligent in several areas of the audit. He failed to apply professional skills and due diligence sufficiently and adequately to critically evaluate the work of the Engagement Partner (EP) and the ET.

• NFRA found that the EQC Reviewer lacked sufficient and appropriate experience and authority, highlighting the importance of having relevant industry expertise and experience. There should not be too much asymmetry in the experience of the Engagement Partner and the EQC Reviewer.
• The EQC Reviewer questioned NFRA’s jurisdiction, but NFRA cited the provisions under section 132 (4)(a) of the Companies Act 2013 to assert its authority to investigate professional misconduct by any member or firm of chartered accountants.
• The EQC Reviewer failed to demonstrate to NFRA through working papers a review of the auditor’s work, independence checks, and proper audit documentation by the engagement team, and non-compliance with the firm’s quality control manual provisions. EQC Reviewer shall always maintain his own working papers and review files to establish the performance of EQC review engagement.
• The work of the EQC Reviewer shall be separately identifiable from that of the Engagement Partner/Engagement Team. In other words, the EQC Reviewer should prepare his own workings to check and corroborate the workings of the Engagement Partner/Engagement Team.
• The EQC Reviewer has violated fundamental principles related to professional behaviour and competence, leading to a charge of professional misconduct.
• EQC Reviewer should comply with the stipulations regarding EQC Review contained in firm’s Quality Control Manual.
• The appointment of EQC Reviewer shall be in writing. Verbal appointment will not suffice.

NFRA held EQC Reviewer guilty of professional misconduct and other misconduct in terms of his obligation and responsibilities set out in the relevant paras of SA 220 read with SQC 1 and imposed a monetary penalty of Rs.1,00,000 and a one-year debarment from audit-related roles.

Read the Story