Direct Tax Vista Your weekly Direct Tax recap Edn. 9 – 7th June 2022 By Vivek Jalan, Partner, Tax Connect Advisory Services LLP

 

 

1. SCN in New Scheme u/s 148 is purposeful and cannot be made a mere formality: Section 148A(c) of the Act by using the word “shall” casts a duty on the AO to consider the reply of the assessee in response to notice under Section 148A(b)

It is seen that in a majority of reassessment cases post 1st April, 2021, the orders under Section 148A(d) of the Act use a general reason to reject the defence of the assessee on merits. There is significance of issuance of a show cause notice under Section 148A of the Act at a stage prior to issuance of a reassessment. A progressive as well as futuristic scheme of re assessment whose intent is laudatory has in its implementation not only been rendered nugatory but has also had an unintended opposite result. The Delhi High Court quashed one such Order in the case of FIRST SOLAR POWER INDIA PRIVATE LIMITED Vs ASSISTANT COMMISSIONER OF INCOME TAX [2022-VIL-136-DEL-DT].

 

The taxpayers now have a precedence in such cases.

 

2. Apply the ‘Purpose Test’ for determining whether a grant-in-aid is capital receipt or revenue receipt

One has to apply the ‘purpose test’ for determining whether a grant-in-aid is capital receipt or revenue receipt. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme does not suggest a scope of profit generation or revenue for the assessee, the amount received by the assessee by way of grant-in-aid thus could not be termed to be revenue receipt.

 

This was laid down by The Hon'ble Supreme Court in the case of COMMISSIONER INCOME TAX Vs PONNI SUGARS AND CHEMICAL LTD., (2008)306 ITR 392 and relied upon in the case of M/s H.P. NURSING REGISTRATION COUNCIL Vs PRINCIPAL COMMISSIONER OF INCOME TAX [2022-VIL-139-HP-DT]

 

3. A mere option of amortisation would not de bar an expenditure claim which is otherwise admissible as per law

Whether a particular expenditure should be treated as capital expenditure or revenue expenditure for the purpose of business must be determined on consideration of all facts and circumstances of the case and by application of principles of commercial trading (i.e. in the context of business necessity or expediency). One of the tests which is relevant for the purpose of determining as to whether expenditure is capital or revenue in nature is test of enduring benefit. Any expenditure shall be considered to be capital in nature only when such expenditure results in any advantage or benefit of enduring nature to the Respondent. The Hon'ble Apex Court's in the case of Taparia Tools Ltd. Vs. JCIT (2015) [372 ITR 605] (SC) held that the mere option of amortisation would not de bar an expenditure claim which is otherwise admissible as per law. 

 

4. CBDT clarifies mistake made in issuance of RC to Trusts and NGOs; Also clarifies that they would be under scrutiny

Many of the Trusts who were granted registration under the new scheme were surprised to find that Form 10AC was issued to them with the heading “Order for provisional registration”. It was doubtful whether any further ‘final RC’ would be issued to them. Now the CBDT has clarified the glitch that if due to technical glitches, Form No. 10AC has been issued during FY 2021-2022 with the heading “Order for provisional registration” or “Order for provisional approval” instead of “Order for registration” or “Order for approval”, then all such Form No. 10AC shall be considered as an “Order for registration or approval”.

 

Further, The Finance Act, 2022 has inserted amended provisions of the Income-tax Act allowing the Principal Commissioner or Commissioner of Income-tax to examine if there is any ‘specified violation’ by the trust or institution registered or provisionally registered. After examination, an order is required to be passed for either cancellation of the registration or refusal to cancel the registration. In view of the amendments made vide Finance Act, 2022, the conditions subject to which the registration/approval or provisional registration/ provisional approval was granted to trusts and institutions needed to be revised to align the same with the amendments made by Finance Act, 2022. Thus, the CBDT has issued a circular with the revised conditions that should be followed by the trust or institution seeking Re-registration and provisional registration under section 12AB, Re-approval and provisional approval under section 10(23C), and Re-approval and provisional approval under section 80G

 

5. CBDT amends Guidelines relating to Compulsory Selection of Income Tax Returns for Complete Scrutiny for Search Cases

In the Direct Tax Vista Edn 6, we had discussed the understanding of the CBDT guidelines for Compulsory Scrutiny of Returns dated 11th May 2022. In the same month, The CBDT has amended the guidelines relating to compulsory selection of returns for complete scrutiny of search cases. The intent is to increase the scope of compulsory scrutiny of returns.

 

The Board clarified that where return has been furnished in response to notice u/s 142(1) of the Act and such notice u/s 142(1) of the Act was issued due to the information contained in NMS Cycle/SFT information/information received from Directorate of I&CI, such return will not be taken up for compulsory scrutiny. Selection of such cases for scrutiny will be done through CASS cycle.

 

In the revised guidelines it is stated that for cases relating to search & seizure/requisition on or after April 01, 2021, the cases shall be selected for scrutiny with prior administrative approval of Pr. DIT/CIT/DIT concerned, who shall ensure that such cases are transferred to Central Charges u/s 127 of the Act within 15 days of service of notice u/s 143(2)/142(1) of the Act by the Assessing Officer concerned.

 

6. Tendency to frame high-pitched and unreasonable assessment orders create harassment for taxpayers and lead to generation of unproductive work for Department as well as Appellate Authorities

The CBDT has issued fresh directions for the functioning of the 2015 constituted Income Tax departments regional or local committees of officers to deal with grievances of tax payers who have been served with high-pitched assessments during scrutiny. The same was discussed on DTV Edn. 4 – 3rd May 2022. Now the Allahabad High Court issued a Writ of mandamus in the case of HARISH CHANDRA BHATI Vs PRINCIPAL COMMISSIONER OF INCOME TAX [2022-VIL-135-ALH-DT] directing that the instructions issued by the CBDT, in exercise of powers conferred under Section 119 and statement made by the Revenue Secretary to the Government of India in the personal affidavit needs to be implemented truly and effectively.

 

7. RBI issues Master Direction – RBI (Variation Margin) Directions, 2022

The RBI has issued the Master Direction – RBI (Variation Margin) Directions, 2022. These Directions shall come into force with effect from December 01, 2022. These Directions shall apply to the following contracts, which are entered into on or after the date on which these Directions come into force:

 

- Non-centrally cleared foreign exchange derivative contracts undertaken in terms of the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000 (Notification No. FEMA 25/RB-2000 dated May 3, 2000) and Master Direction – Risk Management and Inter-Bank Dealings dated July 05, 2016, as amended from time to time;

- Non-centrally cleared interest rate derivative contracts undertaken in terms of the Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019 (Notification No. FMRD.DIRD.20/2019 dated June 26, 2019), as amended from time to time;

- Non-centrally cleared credit derivative contracts undertaken in terms of Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2022 (Notification No. FMRD.DIRD.11/14.03.004/2021-22 dated February 10, 2022), as amended from time to time; and

- Any other non-centrally cleared derivative (NCCD) contract as may be specified by the Reserve Bank.

 

Covered Entities

(1) The following entities shall be classified as Domestic Covered Entities under these Directions:

- Entities regulated by a financial sector regulator (including branches of foreign banks operating in India) and having an Average Aggregate Notional Amount (AANA) of outstanding NCCDs of Rs.25,000 crore and above, on a consolidated group wide basis.

- Other resident entities having an AANA of outstanding NCCDs of Rs.60,000 crore and above, on a consolidated group wide basis.

(2) The following entities shall be classified as Foreign Covered Entities under these Directions:

- Non-resident financial entities having an AANA of outstanding NCCDs of USD 3 billion and above, on a consolidated group wide basis.

- Other non-resident entities having an AANA of outstanding NCCDs of USD 8 billion and above, on a consolidated group wide basis.

 

Directions for Covered Entities

A Domestic Covered Entity shall exchange Variation Margin with a counter-party to an NCCD transaction if the counterparty is a Domestic Covered Entity or a Foreign Covered Entity. A Domestic Covered Entity shall put in place appropriate processes for ascertaining whether a counter-party to an NCCD transaction is a Domestic Covered Entity or a Foreign Covered Entity.

Note: The provisions of these Directions shall not be applicable to an NCCD transaction in which one of the counter-parties is any of the following entities:

- Government of India and State Governments;

- A Foreign Sovereign;

- A Central Bank;

- Bank for International Settlements; and

- Multilateral Development Banks (MDBs)

 

Calculation and exchange of Variation Margin

- Variation Margin shall be calculated on a daily basis, and called and exchanged at the earliest time possible after the transaction date or margin recalculation date, but no later than three local business days from the transaction date or margin recalculation date.

- Variation Margin shall be exchanged to fully collateralise to market or settle to market, the mark-to-market exposure of an NCCD contract. In the event that the exposures cannot be marked-to-market, a pre-agreed alternative process or fallback mechanism, as set out in the credit support Annex, shall be used for the purpose of calculation of Variation Margin.

- Variation Margin shall be calculated and exchanged on an aggregate net basis, across all NCCD contracts that are executed under a single, legally enforceable netting agreement.

- A minimum transfer amount, not exceeding Rs.3.5 crore, may be applied for the exchange of Variation Margin. The entire margin amount shall be exchanged if the Variation Margin amount exceeds the minimum transfer amount.

 

8. CBDT Notifies Rule on Filing Appeal To High Court On Ruling Pronounced By Board For Advance Rulings

The CBDT has issued the Income-tax (Sixteenth Amendment) Rules, 2022 to further amend the Income-tax Rules, 1962 wherein Rule 44FA has been inserted which specifies Form and manner of filing appeal to the High Court on ruling pronounced or order passed by the Board for Advance Rulings under sub-section (1) of section 245W. It states that the form and manner of filing appeal to the High Court under sub-section (1) of section 245W of the Act against a ruling pronounced or order passed by the Board for Advance Rulings by the assessee, or the Assessing Officer on the directions of the Principal Commissioner or Commissioner, shall be the same as provided in the applicable procedure laid down by the jurisdictional High Court for filing an appeal to the High Court.

 

(The author is a FCA, LL.M & LL.B and Partner at Tax Connect Advisory Services LLP. The views expressed are personal. The author is The Chairman Indirect Tax Core Group of CII and The Chairman of The Fiscal Affairs Committee of The Bengal Chamber of Commerce. He has Authored more than 15 books on varied aspects of Direct and Indirect Taxation. E-mail - vivek.jalan@taxconnect.co.in)