Bankruptcy Law panel recommends unified insolvency code for Cos, LLPs, firms and individuals

The Finance Ministry has put up the Insolvency and Bankruptcy Bill, 2015 (‘the draft bill’) on its website for public comments till November 19 2015, after which the bill will be placed before Parliament in the winter session for approval. The draft bill contains provisions to speed up the process of revival of financially distressed companies and limited liability entities. The draft legislation is based on the report of a high-level panel headed by former law secretary T.K. Viswanathan.

The Draft Bill aims to consolidate the existing laws relating to insolvency of companies, limited liability entities (including limited liability partnerships and other entities with limited liability), unlimited liability partnerships and individuals which are presently scattered in a number of legislations, into a single legislation.

Major recommendations of Bankruptcy panel:

1.Fast track insolvency resolution: The draft Bill provides for a fast track insolvency resolution process for certain categories of entities wherein the insolvency resolution process has to be completed within a period of 90 days from the trigger date

2.Formation of Insolvency Regulator: It proposes creation of an insolvency regulator and setting a time limit of 180 days (which can be 90 days in special cases) to deal with insolvency resolution cases.

3. Insolvency Professionals: The draft Bill proposes to regulate insolvency professionals and insolvency professional agencies. Under Regulator’s oversight, these agencies will develop professional standards, codes of ethics and exercise a disciplinary role over errant members leading to the development of a competitive industry for insolvency professionals

4.  Insolvency Information Utilities: The draft Bill proposes for information utilities which would collect, collate, authenticate and disseminate financial information from listed companies and financial and operational creditors of companies. An individual insolvency database is also proposed to be set up with the goal of providing information on insolvency status of individuals

5.   Bankruptcy and Insolvency Processes for Companies and Limited Liability Entities: The draft Bill prescribes a swift process and timeline of 180 days for dealing with applications for insolvency resolution. This can be extended for 90 days by the Adjudicating Authority only in exceptional cases. If 75 % of the creditors approve the plan, the insolvency resolution process can kick off. If not, the adjudicating authority can order liquidation of the company.

6.   Bankruptcy and Insolvency Processes for Individuals and Unlimited Liability Partnerships: The draft Bill also proposes an insolvency regime for individuals and unlimited liability partnerships. As a precursor to a bankruptcy process, there can be two processes that are followed. In the fresh-start process, individuals with annual gross income of less than Rs.60,000 and aggregate asset value of less than Rs.20,000 shall be eligible to make a fresh start through a specified process. In the insolvency resolution process, creditors and the debtor will engage in negotiations to arrive at an agreeable repayment plan, supervised by a resolution professional.

IASB issues exposure draft on Application of Materiality

International Accounting Standards Board (IASB) has issued exposure draft providing guidance on application of materiality while preparing financial statements as per International Financial Reporting Standards (IFRS).It will help management of company to apply the concept of materiality in preparation and presentation of both annual and interim financial statements of the company. The draft specifies the factors that should be considered at the time of determination of materiality of an information, guidance on presentation and disclosure of material information. It also includes some practical examples to clarify the guidance.

As per the Conceptual Framework for Financial Reporting, an information is said to be material when non-disclosure or omission of the information could influence the decision about the entity taken by users of financial statements on the basis of financial statement. As per the exposure draft on application of concept of materiality, materiality of an information is a matter of judgement. The management of an enterprise make assessment of an information to check whether the information is material or not. While making assessment of materiality management should take into consideration requirements of primary users of financial statements and types of decisions they are taking, nature and size of the information etc. The assessment of materiality should be done on both on individual basis and on collective basis.

The exposure draft states that apart from assessment of materiality, the management of an entity should also use its judgement in deciding way of disclosure and presentation of a material information on the financial statement. Material information should be disclosed in the financial statement in such a way that disclosure of the same would not defeat the objective of financial statement. Any immaterial information should not be disclosed, unless non-disclosure of the same reduce level of understandability of any material information. Further, material information can be aggregated or disaggregated at the time of presentationin financial statement. The management should decide about aggregation or disaggregation of material information and the draft provides guidance to the management thereon. The information can be presented either on face of primary financial statements or in the notes to primary financial statements. An information representing a bulk of other information can be presented on face of primary financial statements, otherwise in the notes.

The disclosure requirements specified in different IFRS are minimum disclosure requirements. Apart from IFRS requirement management can disclose other information if the information is judged as material. At each reporting date, management of an entity should review earlier disclosures.

As pet the draft, if management identified any material misstatements before the issuance of financial statements, the management should amend the financial statement.

Stakeholders can submit their comments on IASB website by 26 Feb 2016.

HC sets aside penalty on ‘Flipkart’ for effecting sales without registering under Kerala VAT Act

CST & VAT: Kerala VAT- ‘Flipkart’ is merely facilitating sales, purchase and delivery of goods, it can’t be considered as dealer of goods under Kerala VAT Act.

Facts

a)   ‘Flipkart’ (assessee), being an online service provider facilitating sales or purchases, was registered under service tax law. Notice was issued to ‘Flipkart’ under Kerala VAT Act (KVAT) for neither registering as a dealer nor filing returns. Accordingly, penalty was levied on it for such default.

b)   Flipkart’ argued that it was only a service provider which was not engaged in business of sale or purchase of goods. It merely facilitated transactions of sale or purchase through its online portal and made arrangements for the delivery of goods. Therefore, the provisions of KVAT Act were not applicable to it.

The High Court held as under:

1)  The tenor of notice gave ample implication that the department had made up its mind to impose penalty on assessee without any supported reasons. It did not consider the contentions of assessee that the said transactions were inter-State sales. These sales transactions were effected by sellers who were registered on online portal of ‘Flipkart’ and all sales were inter-State sales on which tax had been paid by seller under the CST Act.

2)  The contention of department that the online portal could be seen as an intangible shop was legally flawed because it is well settled that the situs of a sale is wholly irrelevant to a determination of the issue of whether a sale is inter-State sale or not

3)  The department had imposed penalty on ‘Flipkart’ due to non-filing of returns and due to its failure to maintain true and correct accounts. However, there was no indication in notice as to why the ‘Flipkart’ was to be considered as a dealer and why said transaction was to be treated as local sales against inter-State sales.

4)   The department has proceeded against the assessee without first having ascertained whether these transactions would come under the coverage of Act. The matter must be first referred to the concerned Assessing Officers before invoking penal provisions since no tax can be levied except by authority of law – Flipkart Internet (P.) Ltd. vs. State of Kerala [2015] 62 taxmann.com 387 

Land acquired under an agreement not to be held as compulsory acquisition under Sec. 194LA

The question of compulsory acquisition will arise only where the compensation cannot be determined by agreement. In other words when the compensation is based on an agreement between State Government and owner of the land, no more can we say that it is a compulsory acquisition.

The disputed issue is as under:

Whether acquisition of land under an agreement by Karnataka Industrial Area Development Board (a state Government Undertaking) with landowners under the Karnataka Industrial Areas Development Act, 1966 (‘KIA Act’) would be deemed as compulsory acquisition within the meaning of Sec.194LA?”

Held:

1)    Section 194LA applies only when there is a compulsory acquisition under law. Under compulsory acquisition, the seller has no option but to sell the land. He cannot even negotiate the price as same is fixed by statute itself.

2)    In the instant case, the land owners and a State Government Undertaking (i.e., assessee) entered into an agreement whereby they mutually agreed for the amount of compensation which was fixed in accordance with Section 29(2) of the KIA Act.

3)    The question of compulsory acquisition will arise only where the compensation cannot be determined by agreement. In other words when the compensation is based on an agreement between State Government and owner of the land, no more can we say that it is a compulsory acquisition.

4)    In the instant case, compensation was based on an agreement between State Government and owner of the land, and, therefore, it could not be said to be a case of compulsory acquisition. Thus, once the acquisition is not considered as compulsory, Sec.194LA of the IT Act will not be applicable.

5)    The matter was remanded back to AO for verification whether in all the cases payment was made under agreement only. Once it was found that the acquisition resulted through an agreement, it would not be considered as compulsory acquisition- Karnataka Industrial Area Development Board v. ITO [2015] 62 taxmann.com 393 (Bangalore - Trib.)

Set-off of losses allowed despite change in shareholding if control over Co. remains unchanged

Facts

a)  Assessee-company (‘APSL’) was wholly owned subsidiary of AMCO Batteries Limited (‘ABL’).

b)  ABL transferred 45% and 49% of its shareholding to its subsidiary company (‘APIL’) and Tractors and Farm Equipments Limited (‘TAFE’), respectively.

c)  Consequently, ABL retained only 6% shares and 45% of shares held by its subsidiary, APIL. The remaining 49% shares were with TAFE.

d)  As shareholding of the ABL in APSL reduced to 6% in the relevant assessment year, meaning thereby, it was left with less than 51% shares. Thus, AO did not allow APSL to carry forward and set-off the business losses of that year as per section 79 of the Income-tax Act (‘Act’).

e)  On appeal, CIT(A) confirmed the order of AO. However, on further appeal, the Tribunal sets aside the order of AO.

f)  Aggrieved by the order of Tribunal, revenue filed the instant appeal before the High Court.

The High Court held in favour of assessee as under-

1)  Section 79 provides that where there is a change in shareholding of a Company, no losses (incurred in any year prior to the previous year) shall be carried forward and set-off against the income of the previous year, unless on the last day of the previous year the shares of the company carrying not less than 51% of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred.

2)  The expression ''not less than 51% of voting power..."used in Section 79 indicates that only voting power is relevant and not the shareholding pattern.

3)  In the instant case, despite the transfer of shares, the holding-company (ABL) still holds effective control over the assessee-company (ABSL) as it holds 51% of shareholding along with its subsidiary (APIL).

4)  Section 79 was introduced to prevent misuse of carry forward of losses by the new owner. But, in the instant case, effective control over the assessee-company (APSL) remained unchanged even after the change in shareholding. Therefore, losses could be carry forward and set-off- CIT v. AMCO Power Systems Ltd. [2015] 62 taxmann.com 350 (Karnataka)

Excess money refunded on cancellation of booking of flats couldn't be held as interest for purpose of sec. 194A TDS

Builder could not be held liable to deduct tax on excess amount refunded to purchasers on cancellation of booking of apartments as such excess payment could not be qualify as interest as defined under section 2(28A)

Facts

a)  Assessee-Builder entered into construction agreements with various customers.

b)  After entering into the agreements and making certain payments, some purchasers opted out of the agreement and, accordingly, assessee entered into fresh agreements with new buyers at prices that were higher than what was agreed with the old purchasers.

c)  Out of the receipts from the new buyers, the assessee refunded to the old purchasers the amount paid by them and a portion of the excess amount received from the new buyers.

d)  The Assessing Officer (AO) held that the excess amount so paid by the assessee to old purchasers had to be treated as interest paid on deposit and, hence, liable for TDS under section 194A and that having failed to do so, assessee was an assessee-in-default and, accordingly, assessment was completed under section201.

e)  The order of AO was set aside by the first appellate authority. However, the said order was reversed by the Tribunal.

f)  Aggrieved by the order of the tribunal, assessee filed the instant appeal before the High Court.

The High Court held in favour of assessee as under-

1)  Section 2(28A) which defines ‘interest’ can be attracted only in cases where there is debtor-creditor relationship and payments are made in discharge of a pre-existing obligation.

2)  The amount refunded to the purchasers represented the consideration the purchasers paid towards the undivided shares in the property agreed to be purchased and also the cost of construction of the apartment, which work was entrusted to the assessee-builder.

3)  Such a relationship between assessee and purchasers could not spell out a debtor-creditor relationship nor was the payment made by the assessee to the purchaser in discharge of any pre-existing obligation to be termed as interest as defined in section 2(28A).

4)  Further, there was no finding in the assessment order or in the order of the Tribunal that the amount paid by the purchasers, which was refunded, was accounted for as deposit or advance received from them or that there was any debtor-creditor relationship between the parties, obliging the assessee to pay the amount to the purchasers.

5)  There was also no case for the revenue that the excess amount paid by the assessee was based on any agreement between them or that it was quantified at rates that were already agreed between the parties.

6)  In such circumstances, the payments made would not qualify to be interest as defined in section 2(28A) of the Act and the assessee did not have the obligation to deduct tax at source as provided under section 194A nor could they be proceeded against under section 201A, treating them as assessee-in-default- Beacon Projects (P.) Ltd. v. CIT [2015] 62 taxmann.com 177 (Kerala)

ICAI withdraws 5 Guidance Notes on various Accounting Aspects

The Institute of Chartered Accountants of India has decided to withdraw 5 Guidance Notes on different accounting aspects. The list of the Guidance notes which have been withdraws are as follows:-

1.  Guidance Note on Accounting for Depreciation in Companies.

2.  Guidance Note on Treatment of Reserve Created on Revaluation of Fixed Assets.

3.  Guidance Note on Some Important Issues Arising from the Amendments to Schedule XIV to the Companies Act, 1956.

4.  Guidance Note on Remuneration Paid to Key Managerial Personnel - Whether a Related Party Transaction.

5.  Guidance Note on Applicability of Accounting Standard (AS) 20, Earning Per Share.

These Guidance notes have been withdrawn because the guidance provides in these guidance notes have been addressed by changes made in the Companies Act, 2013.

CBDT extends due date for filing of return and tax audit report up to 31-10-2015 in all States

Pursuant to the order of High Courts of Gujarat and Punjab & Haryana, the CBDT vide order No. 225/207/2015/ITA.II dated September 30, 2015, extended the due date for filing of return only for the taxpayers in the State of Gujarat, Punjab, Haryana and Chandigarh.

Thereafter, Bombay and Orissa High Courts also directed the CBDT to extend the due date up to October 31, 2015. Thus, to avoid discrimination with taxpayers residing in other states, CBDT decides to extend the due date up to 31-10-2015 for all tax payers across the Country for filing of return and tax audit report.

Activity of distribution of lottery isn't liable to service-tax, rules Sikkim High Court

Service Tax: Activity of buying and selling of lottery is not service. Department cannot demand service tax on said activity on basis of Rule 6(7C) of Service Tax Rules since it is an optional scheme of payment of tax and does not create a charge of service tax.

Facts

1)  Assessee was engaged in business of sale of paper and online lottery tickets organized by Government of Sikkim.

2)  Section 65B(44) defines service. It excludes transaction in money or actionable claim. An Explanation was inserted vide Finance Act, 2015 to restrict the meaning of transaction in money or actionable claim. Explanation excluded, from purview of transaction in money or actionable claim, activity carried out by a lottery distributor or selling agent in relation to promotion, marketing, organising, selling of lottery or facilitating in organising lottery of any kind.

3)  Section 66D provides negative list of services. Any service listed under Section 66D is outside the ambit of service tax net. An Explanation was inserted in Section 66D to exclude aforesaid activity from purview of negative list of services.

4)   The effect of aforesaid amendments was: said activities in relation to lottery became subjected to service tax. Department demanded service tax from assessee on the basis of aforesaid amendments.

5)  The assessee challenged said levy of service tax.

The High Court held in favour of assessee as under:

a)  Section 65B(44) defines service. Principal requirements of said provision is that the activity should be carried out by a person for another and that such activity should be for a consideration. Activity of assessee did not establish the relationship of principal and agent but rather that of a buyer and a seller on principal to principal basis. Nature of transaction being bulk purchase of the lottery tickets by the assessee from the State Government on full payment of price as a natural business transaction. There is no privity of contract between State and assessee. It was held in an earlier case of assessee and this position is not changed even after Finance Act, 2015.

b)   Department demanded service tax on the strength of Rule 6(7C) the Service Tax Rules, 1994. In earlier case of assessee it was held that Rule 6(7C) only provides an optional composition scheme for payment of service tax which by itself does not create a charge of service tax. This Rule is only a piece of subordinate legislation framed under the rule making power provided in the Finance Act, 1994 and, therefore, in view of the position of law that Subordinate Legislation cannot be override the statutory provisions, Rule 6(7C) cannot go beyond the provision of the Finance Act, 1994. This provision has not changed even now.

c)  Assessee in buying and selling the lottery tickets was not rendering service to the State and, therefore, their activity does not fall within the meaning of 'service' as provided under Section 65B(44) and, therefore, outside the purview of impugned Explanation as well.

d)  Hence levy of service tax on activities carried out by assessee is invalid. - Future Gaming & Hotel Services (P.) Ltd. v. Union of India [2015] 62 taxmann.com 238 (SIKKIM)

ITAT refused to invoke LOB clause of India-UAE treaty as shipping Co. wasn’t a conduit Co. in UAE

Shipping company in UAE could not be said to have been created for the purpose of availing India-UAE tax treaty benefits on the ground that such company was owned by shareholders in Switzerland when treaty protection in respect of income of such a nature was anyway available under India-Swiss tax treaty

Facts

a)  The Assessing officer denied benefit of India-UAE DTAA to shipping company by invoking Limitation of Benefit ('LOB') clause of DTAA.

b)  The AO had given two reasons for invoking LOB clause – First, that vessel is owned by an entity based in Marshall Island which has no tax treaty with India; and – Second, that the assessee company is owned by shareholders in Switzerland and if the assessee company were to carry on business directly, the treaty protection would not have been available.

Held

A.  On first ground

1)    Though the merchant vessel was owned by a Marshall Island based entity and it was given to the assessee under long-term time charter arrangement but ownership of vessel is not a sine qua non for availing treaty protection of shipping income under Article 8.

2)    Article 29 of DTAA can be pressed into the service only when main purpose, or one of the main purposes of the creation of an entity was to obtain benefits of DTAA which would otherwise not be available but then since nothing really turns on the situs of ownership of the ships so far as treaty benefits, are concerned, the fact of the ships being owned by an entity in Marshall Island is wholly irrelevant for invoking Article 29.

B.  On second ground

1)    Coming to the second ground on which the AO had invoked Article 29, it has been stated that the income from operations of ships of the Switzerland based entities in international traffic is not covered by Article 8 of India-Swiss DTAA and therefore, if the shareholders, which wholly own capital of the assessee-company, were to carry on business directly, the treaty protection would not have been available.

2)    Whether a Swiss tax resident earns Indian sourced income from operations of ships in international traffic or whether a UAE tax resident earns Indian sourced income from operations of ships in international traffic, the income is not taxable in India – in the former case because of provisions of Article 22(1) of India-Swiss tax treaty, and in the later case of because of provisions of Article 8 of India-UAE tax treaty.

3)    When treaty protection in respect of income of such a nature was anyway available, though under a different kind of provision of the India-Swiss tax treaty, the assessee entity could not be said to have been created for the purpose of availing India-UAE tax treaty benefits. The action of the AO in invoking the provisions of Article 29 was vitiated in law on this count- ITO v. MUR Shipping DMC Co., UAE [2015] 62 taxmann.com 319 (Rajkot - Trib.)