Weekly Round-up on Tax and Corporate Laws | 5th February to 9th February 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from February 05th to 09th, 2024, namely:

a) SEBI seizes Rs. 7.41 Cr. wrongful gains from Zee Business Guest Experts for stock recommendations and “Profit makers”;

b) Loose sheets found in house of 3rd party can’t be considered as evidence without producing corroborative evidence: HC;

c) Limitation period provided under Section 73 would be separately applicable for every assessment year: HC;

d) Penalty imposed on assessee for transporting goods purchased from supplier who was set up for bogus ITC to be set aside: HC; and

e) Consequences of stock damage after the reporting date on NRV for valuation purposes.

1. SEBI seizes Rs. 7.41 Cr. wrongful gains from Zee Business Guest Experts for stock recommendations and “Profit makers”

On February 8, 2024, In the matter of the Securities and Exchange Board of India (SEBI), Nirmal Kumar Soni., the SEBI barred 10 entities, including guest experts on a business news channel, from the securities market for the alleged ‘front-running’. It also directed the seizure of alleged unlawful gains totalling Rs 7.41 crore made by them through stock manipulation.

What is front running?

Front-running is an illegal activity in the stock market wherein an entity engages in trading using privileged information from a broker or analyst before it is disclosed to clients.

Collusion and Manipulation: The Deceptive Trading Scheme of Zee Business Guest Experts

Zee Business telecasts show whose format revolved around disseminating scrip/contract trading recommendations. These recommendations were made by a panel of experts who used to appear as guests on the shows. The said panel included Noticees being Guest Experts.

Before making recommendations on Zee Business, the noticees devised a scheme where Guest Experts communicated such information amongst each other and with Profit Makers in advance. These profit makers then execute the first leg of the trade just before the recommendation is to be aired and then, after the recommendation has been aired, in a close position with the second leg of the transaction and the process.

SEBI’s Investigation

The investigation by the SEBI was aimed at scrutinizing the strong correlation between the trading behaviours of specific entities and the stock recommendations provided by guest experts featured on various shows aired on Zee Business from February 1, 2022, to December 31, 2022.

Given the apparent correlation between the trading activities of these entities and the recommendations made by guest experts on Zee Business, a deeper investigation was initiated to gather evidence regarding potential violations of the SEBI Norms.

Market Regulator’s Observations

During its investigation, the SEBI observed that some guest experts shared advance information about their recommendations with specific entities known as “profit makers” before the recommendations were broadcast on Zee Business news channel.

Upon receiving this information, the profit makers entered positions in the scrip or contract and later reversed or squared off their positions after broadcasting the recommendation on Zee Business.

The entities made unlawful gains amounting to Rs 7.41 crore from such trades, and the profits were shared with the guest experts as per the prior understanding.

SEBI Order

Through its order, the SEBI stated that the evidence presented in the instant case illustrated a clear pattern of manipulation designed to deceive investors into taking positions in securities, allowing profit makers to make profits at the expense of these investors.

The unlawful gains earned illegally by the profit makers came from the investments of unsuspecting people who trusted the advice of guest experts without knowing about the fraudulent scheme. Accordingly, SEBI ordered that all the entities were jointly and severally liable for impounding the proceeds.

The SEBI further extended its restrictions to all 10 entities and barred them from participating in any securities trading activities, directly or indirectly, until further instructions. Additionally, the regulatory body has directed Zee Media Corporation to retain and safeguard all records, including documents and video footage, pertaining to guest experts and relevant shows until the issuance of the final order.

Read the Order

2. Loose sheets found in house of 3rd party can’t be considered as evidence without producing corroborative evidence: HC

The Assessing Officer (AO) filed the instant writ petition challenging the order passed by the single Judge of the Karnataka High Court. The case involved AO searching at the premises of one Rajendran in New Delhi and recovering certain diaries/loose sheets, which purportedly consisted of certain entries relating to the assessee.

Based on Rajendran’s statement during the investigation, AO initiated action against the assessee. The assessee challenged the action taken by AO, and the single Judge of the High Court set aside the initiation of proceedings by setting aside the notice issued to the assessee under Section 153C.

It was contended by the AO that single Judge was not right in referring to Section 34 of the Evidence Act and then holding that loose sheets cannot be considered as evidence. The single Judge failed to appreciate one more aspect: Section 132 refers to not only books of accounts but also other documents. Even if it is to be assumed that the loose sheets would not fall within the ambit of books of accounts, undoubtedly, the same would fall within the ambit of documents.

The Karnataka High Court held that the entire allegation was made based on loose sheets of documents, which do not come under the ambit and scope of ‘books of entry’ or as ‘evidence’ under the Indian Evidence Act.

The Hon’ble Supreme Court, in the case of Common Cause And Others v. Union of India [2017] 77 taxmann.com 245 (SC), has ruled that a sheet of paper containing typed entries in loose form, not shown to form part of the books of accounts regularly maintained by the assessee or his business entities, do not constitute material evidence.

Thus, the action taken by AO against the assessee based on the material contained in the diaries/loose sheets was contrary to the law declared by the Hon’ble Apex Court.

Accordingly, notices issued under Section 153C, based on the loose sheets/diaries, are contrary to law, which is required to be set aside in these writ appeals, as the same is void and illegal.

Read the Ruling

3. Limitation period provided under Section 73 would be separately applicable for every assessment year: HC

The Honorable Madras High Court has recently held that bunching of show cause notices for multiple assessment years under Section 73 of the CGST Act is invalid because it exceeded the individual three-year limitation period for each year. This ruling is given by the High Court of Madras in case of Titan Company Ltd. v. Joint Commissioner of GST & Central Excise.

Fact

The petitioner received a bunching of Show Cause Notices (SCNs) for GST dues spanning five assessment years. It filed writ petition against the same, contending that it violated Section 73 of the CGST Act, 2017’s three-year limitation period for each year.

High Court

The Honorable High Court noted that Section 73(10) of the Act specifically provides a time limit of three years from the due date for furnishing an annual return for the financial year to which the tax due relates. In the present case, notice was issued under section 73 of the Act for the determination of the tax, and therefore, the limitation period of three years as prescribed under section 73(10) would be applicable

Moreover, the time limit of three years would be separately applicable for every assessment year, and it would vary from one assessment year to another. It is not that it would be carried over or that the limitation would be continuing in nature, and the same can be clubbed. Therefore, the Court held that issuing a bunch of show cause notices would be against the spirit of provisions of Section 73 of the Act, and the same was liable to be quashed.

Read the Ruling

4. Penalty imposed on assessee for transporting goods purchased from supplier who was set up for bogus ITC to be set aside: HC

The Honorable Calcutta High Court has recently held that penalty shouldn’t be imposed on the recipient on the allegation of non-existence of supplier-company if it had deposited input tax before issuance of show cause notice. This ruling is given by the High Court of Calcutta in case of Fairdeal Metals Ltd. v. Assistant Commissioner of Revenue, State Tax, Bureau of Investigation (NB).

Facts

The petitioner was engaged in the business of trading goods. The department issued a show cause notice to the petitioner and mentioned that there was a need for a physical examination of the goods and other verification of the documents produced before the proper officer. The notice further mentioned that the supplier from whom the petitioner procured the goods was found to have filed returns in GSTR-3B for October and November 2023, but upon verification, certain discrepancies were noticed.

High Court

Thereafter, the penalty was calculated, and the petitioner was directed to show cause as to why the proposed tax and penalty should not be payable, failing which further proceedings would be initiated. The petitioner filed writ petition and contended that there was no allegation against the petitioner. Still, the entire allegation had been made against the supplier from whom the petitioner procured the goods. It was also submitted that the goods being transported did not have the coverage as per their GST registration and the supplier had deposited the input tax before issuing show cause notice.

The Honorable High Court noted that the supplier was registered by the registered authority in Assam. Had there been any deficiency on the supplier’s part in producing relevant documents, registration ought not to have been issued. After registration had been issued and tax paid by the supplier, the allegation made against the supplier did not stand. Since the petitioner was not connected with any of the allegations that had been levelled against the supplier, it could not be made liable to pay penalty. Therefore, the Court held that the detention order and the subsequent order imposing penalty were liable to be set aside and quashed.

Read the Ruling

5. Consequences of stock damage after the reporting date on NRV for valuation purposes

Ind AS 10, Events after the Reporting Period, states that two types of events might occur after the end of the reporting period but before the date when the financial statements are approved by the Board of Directors in the case of a company and by the corresponding approving authority in case of any other entity for issue: adjusting events and non-adjusting events. Adjusting events offer evidence of conditions that existed at the end of the reporting period, necessitating adjustments to the financial statements. On the other hand, non-adjusting events indicate conditions that have arisen after the reporting period and do not necessitate adjustment in the financial statements.

The events that provide evidence for the existence of conditions at the end of the reporting period are required to be adjusted in the amounts recognized in the financial statements. In contrast, for non-adjusting events that do not provide the condition’s existence, an entity shall not adjust the amounts recognized in its financial statements.

However, determining whether a condition persists in a specific scenario can pose challenges. In such instances, professional judgment becomes crucial for resolution. Consider, for instance, a fire breaking out after the reporting date but before the approval of financial statements by the board of directors, leading to partial damage to inventory and a subsequent reduction in its Net Realizable Value (NRV).

Given that inventory valuation is based on the lower of cost or NRV, the issue arises in classifying this event as an adjusting or non-adjusting event because it has now significantly impacted the NRV of the inventory, which had been previously assessed at the end of the reporting period.

In this regard, Ind AS 2, Inventories, states that the estimate of net realizable shall take into consideration fluctuations of price or cost directly relating to events occurring after the end of the period to the extent that such events confirm conditions existing at the end of the period.

Since the fire incident occurred subsequent to the reporting date and does not offer evidence of conditions related to the fire accident at the end of the reporting period, the entity is not required to take into account the impact of the fire on the valuation of inventory. Therefore, the consequences of stock damage resulting from the fire after the reporting date on the Net Realizable Value (NRV) need not be considered.

Read the Story