Weekly Round-up on Tax & Company Laws | 6th Sep to 11th Sep

This weekly newsletter analytically summarizes the key stories reported at taxmann.com during the previous week from 6th to 11th September 2021, namely:

(a) ITAT held that Section 24(b) does not mandate possession of the property to claim a deduction of interest on housing loan;

(b) Madhya Pradesh High Court stays RBI circular dated 25-6-2021 w.r.t. appointment of MD/CEOs of Primary (Urban) Co-operative Banks;

(c) CBDT prescribes the manner for authenticating electronic records under EVC for faceless assessment;

(d) Relief for Road Contractors; NHAI to pay GST on annuity under HAM Model;

(e) SEBI amends LODR norms; enhances corporate governance for high-value debt listed entities;

(f) CBIC issued clarification regarding extension of time-limit to apply for revocation of cancellation of registration; and

(g) Whether benefit from the SEIS scheme can be recognized as Other Operating Revenue in P&L A/c?

1. Section 24(b) does not mandate possession of the property to claim a deduction of interest on housing loan: ITAT

The Mumbai Tribunal has granted relief to the assessee in respect of interest paid by him on capital borrowed to purchase residential house property. The Court has ruled that there is neither any precondition nor any eligibility criteria that the assessee should have taken possession of property purchased by him to claim a deduction of interest on housing loan under section 24(b).

Facts:

Assessee, a lawyer by profession, had e-filed his return of income for the assessment year 2015-16. During the assessment proceedings, it was observed by the Assessing Officer that the assessee had claimed deduction of interest paid on borrowed capital of Rs. 2 lakhs under Section 24(b).

On being queried, it was submitted by the assessee that the claim of interest pertained to the funds which he borrowed for purchasing a residential property. However, the assessee had not taken possession of the property yet.

The Assessing Officer passed an order disallowing the claim for deduction of interest. On appeal, CIT(A) also upheld the order of the Assessing Officer. The aggrieved assessee filed the instant appeal before the Tribunal.

Ruling

The Tribunal held that the view taken by CIT(A) while upholding the order of AO was misconceived. The CIT(A) held that in the absence of any control/domain over the property, the assessee would not receive any income from the same. Therefore, allowing deduction under Section 24(b) qua the said property would be beyond comprehension.

Insofar the determination of the annual lettable value of a property is concerned, Section 22 read with Section 23 is dependant on the ownership of the property, irrespective of the fact whether the assessee has taken possession of the same or not.

Further, as per the literal interpretation of Section 24(b), there is no bar on claiming a deduction of interest payable on a loan taken for purchasing a residential property, even if the possession of the same might not have been vested with him.

Thus, the interest that was admittedly paid on the capital borrowed for acquiring the property will be allowed under section 24(b) even if the assessee has not yet acquired possession of the property.

Read the Ruling

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2. MP High Court stays RBI circular dated 25-6-2021 w.r.t. appointment of MD/CEOs of Primary (Urban) Co-operative Banks

In this significant ruling in the matter of the Mahanagar Nagrik Sahakari Bank Maryadit v. Union of India, the Madhya Pradesh High Court stayed the operation of RBI circular dated 25-06-2021, which directed primary (urban) co-operative banks to appoint the Managing Directors and/or the Chief Executive Officers as per the eligibility criteria prescribed by the RBI.

Facts

A writ petition was filed challenging the constitutionality of the Banking Regulation (Amendment) Act, 2020, and the said RBI circular. The circular required the banks to remove/terminate all such MDs and CEOs who are not fit and proper as per the said circular.

The petition was filed on the ground that Section 4 of Banking Regulation (Amendment) Act, 2020, which amends Section 56 of the Banking Regulation Act, 1949 relating to the banking laws for co-operative societies, is ultra vires the Constitution. It was also alleged that the RBI circular relating to the appointment of MDs/CEOs in primary (urban) co-operative banks is also ultra vires the Constitution.

The Counsel for the petitioner contended that the Cooperative as a subject falls under Entry 32 in List-II – State list in the Seventh Schedule appended to the Constitution of India. In contrast, the Banking falls under Entry 45 in List-I – Union List of the Seventh Schedule.

It was, therefore, argued that the power to legislate in the field of Cooperative Societies falls exclusively with the State and does not lie within the domain of the Union, much less the Reserve Bank of India.

Further, when Part IX-B (Co-operative Societies) was inserted in the Constitution, all the provisions of the Banking Regulation Act, 1949 were made applicable to all such cooperative societies doing banking business. In this background, Parliament passed the Banking Regulation (Amendment) Act, 2020, by which all provisions relating to incorporation, regulation, and winding up were also made applicable to cooperative banks. It was contended that Parliament did not have the competence to legislate on the same, as it was a State subject under Entry 32 of List II.

The Counsel also drew the Court’s attention to the Supreme Court’s decision in Union of India v. Rajendra N Shah, which invalidated Article 243ZL, Part IXB of the Constitution and the grounds for enacting the Banking Regulation (Amendment) Act, 2020 by which the Banking Regulation (Amendment) Act, 2020 was also struck down.

High Court’s ruling

After hearing the arguments, the Court issued notice and stayed the effect and operation of the RBI’s circular.

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3. CBDT prescribes the manner for authenticating electronic records under EVC for faceless assessment

Section 144B provides that all the communications between the NFAC and assessees or his authorized representative or any other person shall be done exclusively by electronic mode. Further, all internal communication between the NFAC, RFAC and various units shall be done electronically.

The assessee or any other person shall authenticate the electronic records by affixing his digital signature, if he is required to furnish his return of income under digital signature, and by affixing his digital signature or under electronic verification code in any other case. The CBDT was empowered to prescribe how such authentication is to be made under an electronic verification code. In exercise of such power CBDT has inserted a new Rule 14C to prescribe such manner.

Thus, the persons mandatorily required to authenticate electronic records by digital signature shall be deemed to have authenticated the electronic records when they submit the record through their registered account in the Income-tax Department’s portal.

Read the Notification No. 101/2021
Read the Press Release

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4. Relief for Road Contractors; NHAI to pay GST on Annuity under HAM Model

The Government, after the 43rd Meeting of GST Council, clarified that Sl. No. 23A of exemption Notification issued for services would not apply to the annuity amount paid by the NHAI to the Road Contractors for construction services. The clarification created a hue and cry in the industry as Road Contractors were supposed to pay GST to the Government under forward charge mechanism.

Now, after considering the representations from the industry, the Ministry of Roads Transport and Highways has issued a clarification on the applicability of GST on road construction under HAM Mode. It has been clarified that NHAI will reimburse payment of GST on annuity amount up to 16th June 2021 wherever applicable. However, after 16th June 2021, GST would be payable by contractors on annuity & interest amount, and TDS under GST would also be applicable.

Read the Circular

Watch Taxmann’s Latest Video on GST on Annuity Payments under HAM Model – NHAI to pay GST to Road Contractors

5. SEBI amends LODR norms; enhances corporate governance for high-value debt listed entities

The SEBI has notified the SEBI (LODR) (Fifth Amendment) Regulations, 2021 on 7th September 2021, to amend the SEBI (LODR) Regulations, 2015 (LODR). The amendments shall significantly impact debt-listed companies as it provides for various mandatory requirements to be fulfilled by an entity that has listed its debt securities on stock exchanges. Key takeaways from the fifth amendment regulations include:

Applicability of Corporate Governance provisions to High-Value Debt Listed Entities (HVDLEs)

The provisions related to Corporate Governance apply to entities that have listed their non-convertible securities (“NCS“) on a recognized stock exchange and have outstanding listed debt securities of Rs. 500 crores or more. The provisions are applicable w.e.f. 7th September 2021, on a “comply or explain” basis. However, the provision shall be mandatory w.e.f. 31st March 2023.

Entities with Non-Convertible Securities to submit financial quarterly

The amendment regulation provides that all listed entities with non-convertible securities must submit their financial results every quarter (earlier financial results were required to be submitted half-yearly). Debt-listed entities are required to submit audited financial results within 60 days from the end of the financial year. Amendment regulations also specified additional accounting ratios to be disclosed by such companies.

Enhancement in disclosure requirements

Now, debt-listed entities would be required to make the following disclosure on their website:

(a) composition of the various committees of the board of directors;

(b) terms and conditions of appointment of independent directors;

(c) code of conduct of the board of directors and senior management personnel;

(d) details of the establishment of vigil mechanism/whistleblower policy;

(e) criteria of making payments to non-executive directors, if the same has not been disclosed in the annual report;

(f) secretarial compliance report as per Regulation 24A(2) of these regulations;

(g) policy on dealing with related party transactions;

(h) policy for determining ‘material’ subsidiaries;

(i) details of familiarization programmes imparted to independent directors.

Further, any change in the information shall be updated within 2 days. The stock exchange intimations must be kept on the website for a period of 5 years and archived after that.

Prior intimation to Stock exchanges

The amendment regulation requires prior intimation of at least 2 working days to Stock exchange with regard to alteration in nature of rights of holders, alteration in date of the interest/dividend/redemption payment of NCS, fund raising by way of NCS, Financial results both (quarterly/annually).

Event-Based Disclosures

Certain new disclosures have been inserted in Scheule III part B for entities listed ‘Non-convertible Securities’, namely:

(a) the listed entity shall have to disclose the outcome of meetings of the board of directors to the Exchange(s), within 30 minutes of the closure of the meeting, held to consider the decision concerning fund raising proposed to be undertaken by way of non-convertible securities, financial results:

(b) fraud/defaults by the promoter or key managerial personnel or director or employees of the listed entity or by listed entity or arrest of key managerial personnel or promoter;

(c) Any change in directors, KMP Auditor and Compliance Officer;

(d) detailed reasons for the resignation of the auditor shall be disclosed by the listed entities to the stock exchanges as soon as possible but not later than 24 hours of receipt of such reasons from the auditor;

(e) resolution plan/restructuring in relation to loans/borrowings from banks/financial institutions;

(f) Proceeding of General meeting of the listed entity;

(g) A one-time settlement with a bank;

(h) Winding-up petition filed by any party/creditors;

(i) Proceedings of annual and extraordinary general meetings of the listed entity.

Read the Notification

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• SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 with Clarifications
• Listing Obligations and Disclosure Requirements with Clarifications & Listing Agreements for Indian Depository Receipts
• 70+ SEBI Rules, Regulations and Guidelines
• COVID-19 Circulars

6. CBIC issued clarification regarding extension of time limit to apply for revocation of cancellation of registration

The CBIC has issued a circular to clarify the issues relating to the extension of timelines for application for revocation of cancellation of registration in view of Notification No. 34/2021-Central Tax dated 29th August 2021. The Government has issued this notification to extend the timelines for filing of the application for revocation of cancellation of registration to 30th September, 2021, where the due date of filing of application for revocation of cancellation of registration falls between 1st March, 2020 to 31st August, 2021 and registration was cancelled on account of non-filing of GST returns.

Now, the CBIC has clarified that the benefit of extension shall be available irrespective of the status of such applications. The benefit shall be available whether the taxpayer has not filed an application for revocation of cancellation of registration or where an application has already been filed but pending with the proper officer, or where the application was rejected irrespective of whether an appeal is filed against it or not.

The CBIC also clarifies the cases where the due date of filing applications for revocation of registration can be extended further for 60 days (30 + 30) by the Joint Commissioner/ Additional Commissioner/ Commissioner.

Read the Circular

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7. Whether benefit from the SEIS scheme can be recognized as Other Operating Revenue in P&L A/c?

Example

B Ltd. is engaged in the business of providing logistic support and related services – Inland Container Depots (ICDs), Container Freight Stations (CFSs) to its customers. Over a period, B Ltd. has built an extensive network of providing Export-Import (EXIM) services and creating logistic infrastructure services. B Ltd. is availing the grant facility under Services Export from India Schemes (SEIS) – an incentive by the Government of India to offset the associated infrastructural cost.

While accounting the above SEIS benefit, B Ltd. has treated this revenue as revenue arising from operations and disclosed it separately under the head ‘Other Operating Revenue’ in the statement of profit and loss. Whether the accounting treatment adopted by B Ltd. in respect of such benefit from the SEIS scheme is correct?

Answer

The Expert Advisory Committee (EAC) of ICAI has held that the accounting treatment adopted by B Ltd. is correct.

As per Ind AS 20 (Accounting for Government Grant and Disclosure of Government Assistance) for the presentation of these government grants, we have three options as prescribed in the relevant standard either show these grants separately or show it, under the heading of ‘other income’ or deduct it directly from related expense.

Further, as per Ind AS 115 (Revenue from Contracts with Customers), revenue may arise from contracts with parties other than customers, and these should be presented under a separate heading under Revenue from Operation in the statement of profit and loss.

The term ‘Other Operating Revenue’ is not defined anywhere in the Accounting Standards or Schedule III to the Companies Act, 2013. It is an item that can be determined based on the facts and circumstances of each case.

Also Read Taxmann’s Latest Blog on Ind AS 32: Financial Instruments (Presentation)

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Also Read Taxmann’s Latest Blog on Ind AS 32: Financial Instruments (Presentation)

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