Taxmann | This Week
Dear Reader,
This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 11th to 16th April 2022, namely:
(a) Company Law Committee proposes revolutionary changes to Cos Act, 2013 to promote ease of doing business;
(b) ITAT advises authorities to consider the circumstances before treating cash deposits as unexplained income
(c) IBBI proposes reformatory changes to CIRP Regulations to expedite the Insolvency resolution process;
(d) Stock of goods, Demat and current accounts necessary for the running of business can’t be provisionally attached; and
(e) Accounting Treatment of incentives given to customers under Ind AS 115.
Company Law Committee proposes revolutionary changes to Cos Act, 2013 to promote ease of doing business
The report of the Company Law Committee (2022) (CLC-2022) has recommended significant changes to the Companies Act 2013. The proposed changes include recognising the new concepts, fastening the corporate processes, improving compliance requirements, and removing ambiguities from existing provisions. The CLC-2022 also proposes changes to the Limited Liability Act 2008 to enable producer organisations to incorporate an LLP.
The Committee has sought to insert enabling provisions in the Companies Act 2013 to recognise various practices such as Stock Appreciation Rights (“SAR”), Restricted Stock Units (“RSU”), Special Purpose Acquisition Companies, etc.
The Committee also deliberated upon several proposals striving for structural changes to the framework under the Companies Act 2013 and streamlining the process for audits, mergers, and restoration of struck-off companies.
All these changes aim to facilitate and promote ease of doing business in India and effective implementation of the Companies Act 2013, the Limited Liability Partnership Act 2008, and the Rules made thereunder.
The report proposes amendments to bring Indian company law in tune with globally recognised best practices and improve ease of living for corporates and stakeholders. The recommendations of the Committee regarding the Companies Act 2013 are summarised hereunder:
a) Allowing certain companies to revert to the financial year followed in India;
b) Facilitating certain companies to communicate with their members in only electronic form;
c) Recognising issuance and holding of fractional shares, Restricted Stock Units and Stock Appreciation Rights;
d) Easing the requirement of raising capital in distressed companies;
e) Replacing the requirement of furnishing affidavits with the filing of self-certification/ declaration;
f) Clarifying the inclusion of ‘free reserves’ while determining the limit for buyback of equity shares;
g) Prohibiting companies from recording trusts on their register of members;
h) Allowing companies to hold general meetings in virtual, physical or hybrid modes;
i) Creating an electronic platform for maintenance of statutory registers by companies;
j) Clarifying provisions relating to Investor Education and Protection Fund;
k) Strengthening the National Financial Reporting Authority;
l) Reviewing and strengthening the audit framework and introducing mechanisms to ensure the independence of auditors;
m) Standardising the manner for auditors to provide qualifications;
n) Recognising and providing an enabling framework for the constitution of Risk Management Committees;
o) Clarifying the tenure of independent directors;
p) Revising provisions relating to the disqualification and vacation of the office of directors;
q) Clarifying the procedure for the resignation of key managerial personnel;
r) Strengthening the provisions relating to mergers and amalgamations;
s) Easing the restoration of struck off companies by enabling the Regional Director to allow restoration of names of companies in certain instances;
t) Recognising Special Purpose Acquisition Companies (SPACs) and allowing such companies, which are incorporated in India, to list on permitted exchanges;
u) Prohibiting the conversion of co-operative societies into a company;
v) Modernising enforcement and adjudication activities through electronic mode;
w) Strengthening the incorporation and governance framework for Nidhis;
x) Removing ambiguities from present provisions under the Companies Act, 2013 through changes of drafting & consequential nature.
ITAT gives relief to a senior citizen; advises authorities to consider the circumstances before treating cash deposits as unexplained income
The Pune Tribunal has ruled that the quasi-judicial authorities should look into the circumstances before resorting to any provisions of the Income-tax Act. When a senior citizen is receiving money from children for her day-to-day needs, such facts should be considered while making additions towards cash deposits.
Facts
The assessee was engaged in the business of readymade garments and also deriving income from bank interest. She had deposited a higher amount in cash in the bank against the gross turnover of the business. During the assessment, the assessee submitted evidence and filed an explanation regarding cash deposits.
The Assessing Officer (AO) accepted the explanation and made additions to income only regarding those cash deposits for which supporting evidence was not filed.
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However, the Pr. Commissioner initiated revisional proceedings under section 263 and held that such additions were required to be taxed under Section 115BBE. AO taxed the additions at the normal rate, and thus the assessment was erroneous and prejudicial to the interests of the revenue. The assessee filed the instant appeal before the Tribunal against such revisional proceedings.
Ruling
The Tribunal held that the assessee and her husband were super senior citizens. The assessee submitted that they had liquid funds/cash at their disposal to meet any urgent medical contingencies because of old age and health ailments.
Both son and daughter of the assessee were sending money to them for their day-to-day needs. These facts have not been disputed by the department at all.
The Tribunal has ruled that the quasi-judicial authorities should look into the circumstances before resorting to any provisions of the Income-tax Act. There are several families consisting of super senior citizens whose children are well-settled but staying away from them for the sake of the job.
It is common practice in our country for the children to take care of their parents financially even though the parents may be financially well off on their own. It is a part of moral responsibility on the part of the children for taking care of their aged parents at least by sending finances irrespective of whether they require it or not.
These facts were explained before the AO, and other relevant details were also furnished. AO had taken a plausible view after examining the relevant details. Thus, the order passed by the CIT under Section 263 was unjustified, invalid and liable to be quashed.
IBBI proposes reformatory changes to CIRP Regulations to expedite the Insolvency resolution process
IBBI has floated a consultation paper on 13-04-2022 to address the issues relating to delays in the CIRP and provide solutions to reduce such delays. The Board has identified 4 issues that, directly or indirectly, contribute to delays in the corporate insolvency resolution process and proposes change to the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) to expedite the insolvency resolution process.
One of the key proposals by the Board is to require the operational creditors to furnish copies of GSTR-1 & GSTR-3B along with a copy of the e-way bill for easier verification of claims. The key highlights of the discussion paper are summarized hereunder:
Delay in substantiation of default due to inadequate information given by Operational Creditors
The Board raised the issue of inadequate information/documents provided by operational creditors (OCs) to establish the transaction and the default at the time of filing application u/s 9 of the Insolvency and Bankruptcy Code, 2016. Section 9 of the Code provides a time limit of 14 days for admission or rejection of an application for initiating insolvency proceedings. However, the last year’s data reveals average time taken for admission from the date of filing was 650 days.
To reduce the timeframe for admission of the application under Section 9 of the Code, the Board has proposed to amend the CIRP Regulations by inserting Regulation 2B requiring operational creditors to furnish copies of GSTR-1, and GSTR-3B returns along with e-way bill as additional documentary evidence. IBBI also proposed that the same information may also be submitted as part of the claim documents submitted to the IRP for easier verification and admission of claims.
Timely facilitation of information for preparation of Information Memorandum (IM) and avoidance applications
The IBBI observed it is essential that the information available with the CD, its promoters, employees and the creditors be made available to the IRP/RP in a timely manner. It will strengthen the availability of information with the IRP/RP for the preparation of the IM and the avoidance applications.
The Board noted that a clear legal obligation must be placed on all these stakeholders to ensure that information sharing happens. Accordingly, the Board proposed to amend the CIRP Regulations:
Dealing with avoidance applications after the closure of a CIRP
The third issue identified by the Board for the delay in CIRP is that most jurisdictions provide several mechanisms to challenge transactions entered into by a CD before the commencement of the insolvency proceeding. These mechanisms, generally known as avoiding powers or claw-back actions, allow the retrospective avoidance of certain transactions.
The IBBI proposed that the CIRP Regulations be amended to provide that how the avoidance applications and proceedings will be pursued shall be mentioned explicitly as part of the resolution plan submitted to AA for approval.
The significant difference in valuations during a CIRP and the appointment of a third valuer
The last issue stated in the consultation paper by the Board is with respect to regulation 27(1) of the CIRP Regulations, which states that the RP shall, within seven days of his appointment but not later than forty-seventh day from the insolvency commencement date, appoint two registered valuers to determine the fair value and the liquidation value of the corporate debtor in accordance with regulation 35.
IBBI proposes a threshold limit of 25% difference in valuation for the appointment of a third valuer
To remove ambiguity, reduce any potential litigation, and provide a guiding factor in the appointment of the third valuer, the Board has proposed that the CIRP Regulation be amended to provide a threshold of 25% difference for appointing a third valuer. Different thresholds of difference for each asset class may also be considered if required.
Stock of goods, Demat and current accounts necessary for the running of business can’t be provisionally attached: HC
The Gujarat High Court has recently held that action of provisional attachment should not hamper normal business activities. The stock of goods, Demat and current accounts are necessary for the running of the business and cannot be provisionally attached. The High Court gives this ruling in the case of Arya Metacast (P.) Ltd. v. the State of Gujarat.
Facts
The search was conducted by the department on the premises of the petitioner. The order of provisional attachment of various properties, Demat accounts, current account, stock of goods, etc., was passed after conducting a search on the ground that the petitioner was engaged in bogus billing by entering into purchase transactions with 15 fictitious firms. It filed a writ petition challenging the order of the provisional attachment.
High Court
The High Court observed that the action of provisional attachment should not hamper normal business activities. However, in the instant case, the departmental authority attached not only stock of goods but also Demat and current accounts which would be valuable assets necessary for running the business. Therefore, the impugned order of provisional attachment qua stock of goods, two Demat accounts as well as the current account were liable to be quashed and set aside. Also, the mobile phone and laptop were directed to be released subject to undertaking that they would be retained in original form.
Accounting Treatment of Incentives given to customers under Ind AS 115
An incentive given to the customers in the form of cashback, a coupon, a voucher, discounts etc., raises the question of whether incentives should be accounted for as a reduction in revenue (Net Basis) or as an expense (Gross Basis).
In this regard, Para 70 of Ind AS 115 (Revenue from contracts with customers) states that “An entity shall account for consideration payable to a customer as a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service (as described in paragraphs 26-30) that the customer transfers to the entity. If the consideration payable to a customer includes a variable amount, an entity shall estimate the transaction price (including assessing whether the estimate of variable consideration is constrained) in accordance with paragraphs 50-58 of Ind AS 115”.
Whereas, as per para 71 of Ind AS 115, if consideration payable to a customer is a payment for a distinct good or service from the customer, then an entity shall account for the purchase of the good or service in the same way that it accounts for other purchases from suppliers.
That’s it from us for today! Stay Tuned for more updates from Taxmann.com
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