Weekly Round-up on Tax and Corporate Laws | 27th February to 04th March 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 27th February to 04th March 2023, namely:

(a) Section 66(1) of IBC is not unconstitutional: HC

(b) Company is entitled to depreciation and maintenance expenses of sports car purchased for commuting key managerial personnel: ITAT

(c) National Testing Agency to be treated as an educational institution for conducting entrance examination: CBIC

(d) Tax to be paid under RCM on services provided by Courts and Tribunals: CBIC;

(e) Non-compliance with Ind AS 36: Failure to reverse impairment loss in separate financial statements for subsidiary investment.

1. Section 66(1) of IBC is not unconstitutional: HC

The High Court ruled that Section 66(1) of IBC is not unconstitutional for being ultra vires of Article 14 of the Constitution of India. The Court held that there is no arbitrariness or manifest arbitrariness in the provision.

The petitioner filed a writ petition under Article 226 of the Constitution of India before the High Court. The petitioner sought a writ of Mandamus, or in the nature thereof, to issue appropriate orders or directions to declare Section 66(1) of the IBC as ultra vires on the grounds of being manifestly arbitrary and unconstitutional under Article 14 of the Constitution of India.

The petitioner contended that Section 66(1) of the IBC should be declared ultra vires unless the Court expands the powers and jurisdiction of the National Company Law Tribunal (NCLT) to declare fraudulent business transactions as void, independently of other related sections of the IBC.

Section 66(1) of the IBC read as follows:

66. (1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.

The High Court examined the provisions of Section 66(1) of the IBC and compared them to other provisions of the Code, including Sections 43, 45, 47 and 50 of the IBC. The Court observed that, unlike these other provisions, an application made exclusively under Section 66(1) is not made for the avoidance of any transaction.

The High Court noted that Section 66(1) limits the power of the NCLT to fix liabilities on the persons responsible for conducting the business of the corporate debtor, which is fraudulent or wrongful. Additionally, Section 66(1) contemplates that an application can only be made by the resolution professional and not by any other person.

The High Court held that Section 66(1) of the IBC restricts the power of the NCLT to those cases where it is satisfied that any business of the corporate debtor has been carried out with the intent to defraud creditors or the corporate debtor or for any other fraudulent purpose.

Further, if satisfied, the NCLT can only pass an order against those responsible for the conduct of such fraudulent business of the corporate debtor with mensrea to make them personally liable to contribute to the assets of the corporate debtor as it may deem fit.

In view of the above, the High Court concluded that there is no arbitrariness, matchless manifest arbitrariness in Section 66(1) of IBC to entertain the instant petition to declare the said provisions as ultra vires of Article 14 and unconstitutional as alleged or otherwise.

Therefore, the High Court dismissed the petition and upheld the constitutionality of section 66(1) of IBC.

Read the Ruling

2. Company is entitled to depreciation and maintenance expenses of sports car purchased for commuting key managerial personnel: ITAT

The assessee, a private limited company, filed its return of income for the relevant assessment year. For the year, the assessee’s case was selected for scrutiny. During proceedings, the AO noticed that the assessee purchased a sports car and claimed a deduction for depreciation and maintenance expenses for the same.

The AO contended that the sports car was used primarily for car racing activities. The requirement of such a car in the case of the assessee, being a unit engaged in manufacturing suits and trousers, cannot be considered wholly and exclusively necessary for the purpose of the business. He disallowed the deduction for depreciation and maintenance expenses.

Aggrieved by the order, the assessee preferred an appeal to CIT(A). CIT(A) upheld the additions, and the matter reached the Mumbai Tribunal.

The Tribunal held that the assessee was a private limited company and was to be considered a separate person and distinct assessable entity as per Section 2(31) of the Act. A company is inanimate, and there cannot be anything personal about such an entity. By virtue of its very nature, the company cannot have any “personal use”.

It cannot be stated the vehicle is used personally by the company, even though the vehicle is used by the directors for personal purposes. In addition, once the expenditure was in terms, as provided in Sections 309 and 198 of the Companies Act, there could not be any ‘non-business’ purpose.

Therefore, the action of AO in disallowing depreciation and maintenance charges on the sports car owned and used by the assessee for the purpose of business was not justified.

Read the Ruling

3. National Testing Agency to be treated as an educational institution for conducting entrance examination: CBIC

The CBIC has issued a notification to provide that any authority, board or body set up by the Government, including the National Testing Agency, for conducting entrance examinations for admission to educational institutions shall be treated as an educational institution for a limited purpose.

Now, the services by way of conducting entrance examinations for admission to educational institutions by the National Testing Agency or any other authority/board set up by the Central Government or State Government shall be exempt under GST.

Read the Notification

4. Tax to be paid under RCM on services provided by Courts and Tribunals

The CBIC has issued notifications to provide that services provided by Courts and Tribunals shall be covered under RCM, and provisions of RCM notification shall apply to Courts and Tribunals as they apply to the Central Government and State Governments. Also, the rate on pencil sharpeners has been reduced from 18% to 12%.

It is also provided that Rab which is not pre-packaged and labelled shall be exempt and the rate on pre-packaged and labelled Rab shall be 5%. Recently, the GST Council has recommended a reduction in the rate of Rab, considering it a liquid form of jaggery.

Read the Notification

5. Non-Compliance with Ind AS 36: Failure to reverse impairment loss in separate financial statements for subsidiary investment

A company acquired a subsidiary by paying a higher purchase consideration than the proportionate net assets of the subsidiary company. The difference was recognised as goodwill on the business combination in the consolidated and separate financial statements. The company accounted the investments in subsidiary companies at a cost in accordance with Ind AS 27. Later company accessed an impairment loss and charged against the associated goodwill in the consolidated financial statements and provided against the carrying value of the investment in standalone financial statements, considering a permanent decline in the value of underlying assets.

A few years later, the recoverable amount of the subsidiary was computed to be higher than the carrying value of assets of the subsidiary company. The company contended that the carrying value of such investment is diminished permanently to the extent of diminution in the value of goodwill, and reversal of impairment loss is not possible. The company also construed that provisions of Ind AS do not specifically deal with the reversal of impairment loss in respect of investment in the subsidiary in case of permanent decline. Is it appropriate for the company not to reverse the impairment loss that was previously recognised in the standalone financial statements against the carrying value of the investment in a subsidiary?

The Expert Advisory Committee (EAC) of ICAI has noted that Para 124 of Ind AS 36, Impairment of Assets, prohibits recognition of reversal of impairment loss applies only to goodwill and not to any other assets. Further, if the Standard had intended to prohibit, partly or fully, the recognition of reversal of impairment on investment in the subsidiary, similar to the prohibition in case of goodwill, the Standard would have specifically mentioned the same. Accordingly, it can be concluded that the view of the company not to reverse the impairment loss against the carrying value of its investment in the subsidiary is not in line with the requirements of Ind AS 36.

Read the Ruling