SC Ruling in Rainbow Papers Limited– The debate on priority of Statutory Dues under IBC

The decision of the Hon’ble Supreme Court in the case of STATE TAX OFFICER (1) v RAINBOW PAPERS LIMITED rendered under the Insolvency and Bankruptcy Code (IBC) has ruled on a significant aspect of priority of Government dues. The Court has held that statutory dues under Gujarat VAT Act (GVAT Act) are secured creditors and would require consideration as such in the resolution plan. It was this held that Sec. 48 of the GVAT Act which states that-

“any amount payable by a dealer or any other person on account of tax, interest or penalty for which he is liable to pay to the Government shall be a first charge on the property of such dealer, or as the case maybe, such person

is not contrary to or inconsistent with Sec. 53 or any other provisions of the IBC. The Court further held that a resolution plan which does not confirm to the provisions of Sec. 31(2) of the IBC inter-alia prescribing payment of dues of operational creditors, dissenting financial creditors, etc. would not be binding on the parties to whom a debt in respect of dues arising under any law is owed. Such resolution plan ought to be rejected. The Court has also held that the time period of submitting the claims as prescribed under the IBC are not mandatory but only directory.

The decision of the court has raised considerable apprehensions, and rightly so, on the aspect of priority of settlement of statutory dues under the IBC.

SC Observations

The SC has made certain observation suggesting that if the corporate debtor is unable to pay statutory dues to the government and there is no plan to dissipate the debts, the corporate debtor would need to be liquidated and its assets sold. In this respect, the court observed as under:

“52. If the Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan.

  1. In other words, if a company is unable to pay its debts, which should include its statutory dues to the Government and/or other authorities and there is no plan which contemplates dissipation of those debts in a phased manner, uniform proportional reduction, the company would necessarily have to be liquidated and its assets sold and distributed in the manner stipulated in Section 53 of the IBC.
  2. In our considered view, the Committee of Creditors, which might include financial institutions and other financial creditors, cannot secure their own dues at the cost of statutory dues owed to any Government or Governmental Authority or for that matter, any other dues.”

The aforesaid observations, considered in isolation have far reaching implication. However, it would be reasonable to infer that such observation will have to be regarded in the context of the issue before hand. The court having held that statutory dues were secured creditors (by virtue of operation of law), such debts require consideration in the same light as other secured creditors. It is only if the resolution plan does not contemplate dissipation of such debts in the manner specified u/s 53 would the question of liquidation of the company arise. Reading beyond the context would render relevant provisions of the IBC and principles established over time nugatory which cannot be the intent.

Statutory dues are unsecured operational debts unless secured by operation of law

It is settled law that statutory dues are operational debts. This is also clear from the definition contained u/s 5(21) of IBC which defines ‘operational debt’ as under:

 “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority;

Such operational debts can however be ‘secured’ if a security interest is created on such debts. Sec. 2(31) of IBC defines “security interest” to means:

 “right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person”:

Security interest in relation to a debt thus implies creating a “right, title or interest or a claim to property”. Generally, assessment of statutory dues by government authorities does not create an automatic interest in the property of the debtor, unless mandated under law as was the case under Gujarat VAT Act under consideration by the SC or by specific action. Though the decision has been rendered in context of Sec. 48 of the Gujarat VAT Act, it has direct bearing on government dues under statutes which similarly create a charge over assets of the taxpayer.

Illustratively, similar provisions are specified u/s 82 of the CGST Act, 2017 and Sec. 142A of the Customs Act, 1962 which read as under:

Section 82 of the CGST Act, 2017:

“Tax to be first charge on property.- Notwithstanding anything to the contrary contained in any law for the time being in force, save as otherwise provided in the Insolvency and Bankruptcy Code, 2016, any amount payable by a taxable person or any other person on account of tax, interest or penalty which he is liable to pay to the Government shall be a first charge on the property of such taxable person or such person.”

Section 142A of the Customs Act, 1962

“Liability under Act to be first charge – Notwithstanding anything to the contrary contained in any Central Act or State Act, any amount of duty, penalty, interest or any other sum payable by an assessee or any other person under this Act, shall, save as otherwise provided in section 529A of the Companies Act, 1956 (1 of 1956), the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 (51 of 1993) and the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002 and the Insolvency and Bankruptcy Code, 2016 be the first charge on the property of the assessee or the person, as the case may be.”

The import of the aforesaid provisions under the GST and Customs laws is the classification of statutory dues as ‘secured debts’, and therefore a priority on distribution of assets as secured debts u/s 53 of IBC. However, the ruling cannot be regarded as laying the general proposition having application to all government and statutory dues. Nature of statutory dues will need to be examined on a case-to-case basis in light of specific legislative act.

Nature of Income tax dues

Income tax dues generally constitute a significant component of claims under a resolution process. Under the Income tax law, manner of recovery of taxes is provided u/s 222 of the Income Tax Act, 1961. As per the provisions, where the assessee is in default in making payment of taxes, the Tax Recovery Officer (TRO) can proceed to recover the taxes by way of attachment and sale of moveable or immovable property of the taxpayer. Such attachment requires positive action of the TRO as per prescribed rules. Till such process is set in motion, there may not be any question with regard to income tax dues being regarded as secured debts. Even where recovery of taxes is secured by attachment of property, it is argued that such act of attachment does not create ‘a right, title or interest or a claim to a property’ and hence income tax dues will stay outside the purview of ‘secured debts’.

The fine distinction between an attachment of property and charge created over the property was explained by the Gujarat High Court in Shree Radhekrushna Ginning and Pressing Pvt. ltd. Versus State of Gujarat (CA no. 5413 of 2022). The court explained as under:

“12 We take this opportunity to explain the effect of attachment and also the effect of charge. In Mulla’s Civil Procedure Code, 8th Edn., the law as applicable in India is thus summarised (p. 187):

“Attachment creates no charge or lien upon the attached property. It merely prevents and avoids private alienations; it does not confer any title on the attaching creditors. There is nothing in any of the provisions of the Code which in terms makes the attaching creditor a secured creditor or creates any charge or lien in his favour over the property attached. But an attaching creditor acquires, by virtue of the attachment, a right to have the attached property kept in custodia legis for the satisfaction of his debt, and an unlawful interference with that right constitutes an actionable wrong.”      

13 The Privy Council in Moti Lal v. Karrabuldin (1897) I.L.R. 25 Cal. 179, p.c. where Lord Hobhouse stated (p. 185):

“Attachment, however, only prevents alienation, it does not confer title.”

14 Similarly, in the Calcutta Full Bench case of Frederick Peacock v. Madan Gopal (1902) I.L.R. 29 Cal. 428, F.B. Sir Francis Maclean, in delivering the judgment of the Full Bench, says (p. 431):

“I think, therefore, it must be taken that the attaching creditor here did not obtain by his attachment any charge or lien upon the attached property, and if so, no question as to the Official Assignee only taking the property of the insolvent subject to any equities affecting it, can arise.”

And Mr. Justice Ghose says (p. 483):

“I am clearly of opinion that the attaching creditor did not acquire any title or charge upon the property by reason of the attachment in question.”

…….”

Thus, upon attachment of a property, the taxpayer is only debarred from dealing with the attached property except with the permission of TRO. It does not create security interest in favour of the income tax authorities. The proposition that income tax is not secured debts also find favor from various judicial pronouncement on the subject. Illustratively, in Bombay Stock Exchange v. V.S. Kandalganonkar & Ors. one of the points in controversy was whether the Income Tax Department can claim priority over the debts vis-a-vis Bombay Stock Exchange, which was a secured creditor. The Hon’ble Supreme Court held that the Income Tax Act does not provide for any paramountcy of dues by way of income-tax. In such background, it held that stock exchange being a secured creditor, will have precedence over the claim of dues made by way of income-tax by the Income Tax Department. Accordingly, the Bombay Stock Exchange being a secured creditor, would have priority over Government dues.

It thus seems clear that dues under Income tax Act do not create a charge on the assets of the taxpayer and therefore are outside the debate of being regarded as secured creditors for the purpose of waterfall distribution.

Concluding remarks

The jurisprudence developed over years indicate that tax dues towards the government generally have priority only over debts owed to unsecured creditors and such preferential right is not available over secured creditor. However, where the matter pertains to IBC, the waterfall distribution as regards the government dues is subordinate to even unsecured financial debts, workmen dues and wages. The position clarified by the Supreme Court categorizing government dues (protected by charge over assets of the taxpayer) as ‘secured debts’ has put a spanner bearing significant implication on the priority of stakeholders entitled to waterfall distribution.

While it seems certain that the statutory authorities will now approach with full force to exercise their claim in light of the judgement, it also opens a debate on the fate of numerous corporate resolutions which may have not regarded specific categories of government dues as ‘secured creditors. Perhaps the period of limitation to appeal against the resolution plans may come as a savior.

The variance amongst laws with respect to creation of charge over the property of the taxpayer has created uncertainty. There seems no justification for such differentiation in context of matters under IBC. The preamble to the Insolvency and Bankruptcy Code specifies the objective to include “alteration in the order of priority of payment of Government dues”. However, the categorization of statutory dues as ‘secured creditor’ would appear contrary to such objective necessitating a prompt legislative intervention to settle the debate.

Contributed by Yatin Sharma and Abhishek Dutta. 

Yatin can be reached at yatin.sharma@aureuslaw.com

Moratorium under IBC and Tax Proceedings

Has the Supreme Court (SC) in SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD v CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS legitimised tax proceedings during the period of moratorium set under the Insolvency & Bankruptcy Code?

Rendered in context of the custom law, in the aforesaid matter, SC has held that IBC would prevail over the Customs Act, to the extent that once moratorium is imposed in terms of sections 14 or 33(5) of the IBC, the respondent authority only has a limited jurisdiction to assess/determine the quantum of customs duty and other levies. The respondent authority does not have the power to initiate recovery of dues by means of sale/confiscation, as provided under the Customs Act. The Court observed that issuance of demand notices to seek enforcement of custom dues during the moratorium period would clearly violate the provisions of Sections 14 or 33(5) of the IBC, as the demand notices are an initiation of legal proceedings against the Corporate Debtor (CD). Thus, the SC has fairly settled that recovery of tax dues cannot be made, otherwise than in the manner prescribed under IBC.

However, what is noteworthy is further examination of the powers which the tax authority can exercise during the moratorium period under the IBC. The court has importantly observed that authorities could however initiate assessment or re-assessment of the duties and other levies. The Resolution Professional has an obligation to ensure that assessment is legal, and he has sufficient power to question any assessment, if he finds the same to be excessive. The court relied on the ratio of the judgement in S.V. Kondaskar v. V.M. Deshpande, AIR 1972 SC 878, wherein the court had held that the authorities can only take steps to determine the tax, interest, fines or any penalty which is due. However, the authority cannot enforce a claim for recovery or levy of interest on the tax due during the period of moratorium.

There has been varying positions vis-à-vis initiating or continuing tax proceeding during the period of moratorium. For instance, the Calcutta HC in SREI Equipment Finance Ltd. vs. Additional/Joint/Deputy/Assistant Commissioner of Income Tax and others has held that tax proceeding cannot be continued during moratorium. However, given the ratio of the ruling, moratorium for prohibiting initiation or continuation of tax proceedings will now have limited bearing.

In my personal view, continuation of tax proceedings already initiated against the CD before admission under IBC is rational since this is necessary to quantify the legitimate claim of the authorities under a process which has already been set in motion. However, what it does not address is the practicality of contesting the demand before appellate authorities during the time bound CIRP period. It is not uncommon for the tax authorities to make high pitched demands only to be quashed or revised pursuant to appellate relief, and therefore right quantification for admitting a claim assumes importance. As regards initiation of new proceedings, moratorium is a calm period providing the CD a window to restructure in a financially viable manner. Granting the Revenue Authorities opportunity to initiate new assessment proceedings and raise new claim not contemplated before initiation of CIRP may however not be in the spirit of law. It is desirable that the law be clarified to accommodate such distinction in light of moratorium provisions.

Contributed by Yatin Sharma with Abhishek Dutta. Yatin can be reached at yatin.sharma@aureuslaw.com

The Unanswered Question of Limitation– A contentious issue post Supreme Court ruling on reassessment controversy

The Hon’ble Supreme Court (‘SC’), in the case of Union of India & Ors vs. Ashish Agarwal has pronounced an exceptional decision concerning thousands of reassessment notices issued to taxpayers during the period 1.04.2021 to 31.06.2021 (‘specified period’), albeit under the reassessment provision of the Income Tax Act (‘the Act’) applicable till 31.03.2021. The decision has drawn immense interest given the consequence and uniqueness of the order.

The SC was faced with the challenge of balancing equity for both the taxpayer and the Revenue Authorities (‘RA’) given the magnitude of reassessment notices (90,000) and the impact on the government exchequer. The circumstances pivoted the SC to exercise its constitutional powers under Article 142 of the Indian Constitution to strike a balance, rather than adopt a strict technical view on this important subject. This can be inferred from the following observation of the Court:

“There is a broad consensus on the aforesaid aspects amongst the learned ASG appearing on behalf of the Revenue and the learned Senior Advocates/learned counsel appearing on behalf of the respective assessees. We are also of the opinion that if the aforesaid order is passed, it will strike a balance between the rights of the Revenue as well as the respective assesses as because of a bonafide belief of the officers of the Revenue in issuing approximately 90000 such notices, the Revenue may not suffer as ultimately it is the public exchequer which would suffer.’

Whatever the rationale for the decision, one would have hoped that the SC ruling would bring certainty and closure on this subject. Unfortunately, it may not be the last word yet on this contentious issue. One specific aspect that may now become a subject of dispute and litigation is the ‘question of limitation’ applicable to reassessment proceedings which have now been given a fresh lease of life consequent to the SC order.

Concurrence with High Court orders

The reading of the SC decision makes it clear that the court agreed with the proposition articulated by various High Courts holding that substituted reassessment provisions (effective 1.04.2021) would apply in respect of notices issued on or after 1.04.2021. This is inferable from the following observations:

“7. Thus, the new provisions substituted by the Finance Act, 2021 being remedial and benevolent in nature and substituted with a specific aim and object to protect the rights and interest of the assessee as well as and the same being in public interest, the respective High Courts have rightly held that the benefit of new provisions shall be made available even in respect of the proceedings relating to past assessment years, provided section 148 notice has been issued on or after 1st April, 2021. We are in complete agreement with the view taken by the various High Courts in holding so…..

…….It is true that due to a bonafide mistake and in view of subsequent extension of time vide various notifications, the Revenue issued the impugned notices under section 148 after the amendment was enforced w.e.f. 01.04.2021, under the unamended section 148. In our view the same ought not to have been issued under the unamended Act and ought to have been issued under the substituted provisions of sections 147 to 151 of the IT Act as per the Finance Act, 2021.”

It is accordingly decided by the SC that reassessment notices issued during the period 1.04.2021 to 30.06.2021 should have been issued under the substituted provision of Sec. 147 to 151 as per the Finance Act, 2021.

A middle ground for resolution

The legal consequence of the High Court orders was the carte blanche quashing of reassessment notices issued during the specified period as per the law applicable till 31.03.2021 (‘erstwhile law’). It was observed by the SC that the judgments of the several High Courts quashing the notices would result in no reassessment proceedings at all, even if the same are permissible under substituted Sec. 147 to 151 of the Finance Act, 2021. It would thus appear that to resolve this impasse, leeway has been given to proceed further with the reassessment proceedings as per the substituted provisions of Sec. 147 to 151 of the Finance Act, 2021. While adopting a middle ground, the SC has categorically stated that all defences/ rights/ contentions available to the assessee and the RA as under the Finance Act, 2021 and in law shall continue to be available. This is made clear by the following observations from the SC.

“However, at the same time, the judgments of the several High Courts would result in no reassessment proceedings at all, even if the same are permissible under the Finance Act, 2021 and as per substituted sections 147 to 151 of the IT Act. The Revenue cannot be made remediless and the object and purpose of reassessment proceedings cannot be frustrated…….

… …..There appears to be genuine non application of the amendments as the officers of the Revenue may have been under a bonafide belief that the amendments may not yet have been enforced. Therefore, we are of the opinion that some leeway must be shown in that regard which the High Courts could have done so. Therefore, instead of quashing and setting aside the reassessment notices issued under the unamended provision of IT Act, the High Courts ought to have passed an order construing the notices issued under unamended Act/ unamended provision of the IT Act as those deemed to have been issued under section 148A of the IT Act as per the new provision section 148A and the Revenue ought to have been permitted to proceed further with the reassessment proceedings as per the substituted provisions of sections 147 to 151 of the IT Act as per the Finance Act, 2021, subject to compliance of all the procedural requirements and the defences, which may be available to the assessee under the substituted provisions of sections 147 to 151 of the IT Act and which may be available under the Finance Act, 2021 and in law.”

It can therefore be inferred that the limited point of disagreement with the decision of the High Courts is only vis-a-vis the treatment of reassessment notices. As against the quashing of the notices by the High Courts, the SC has opined that such notices should be deemed as a show cause notice under amended Sec. 148A of the Act and consequent proceedings should be conducted subject to substituted reassessment provisions. Other than this specific aspect, the SC has not withered down any other aspect of the High Court decisions. The SC has accordingly partly allowed the petition filed by the RA and modified/substituted the judgements passed by the various High Courts only to the extent of the following:

  • Notices issued u/s 148 (of erstwhile Act) will be construed as notice u/s 148A(b) of the amended Act [requiring the assessee to show cause as to why a reassessment notice u/s 148 (of the emended law) should not be issued on the basis of information suggesting escapement of income]
  • The RA shall, within 30 days (from the date of SC order i.e. 04.05.2022) provide to the assessee information and material relied upon alleging escapement of income
  • The assessee will have the opportunity to file reply to the show cause notices within 2 weeks.
  • The RA shall thereafter pass orders in terms of Sec. 148A(d) i.e. determining whether it is a fit case for reassessment and thereafter proceed to issued notices under substituted Sec.148 of the Act
  • All defences available to the assesses including those available u/s 149 of the Act and all rights and contentions under Finance Act, 2021 shall be available.

Open question of Limitation

The reassessment notices in question were issued during the period 1.04.2021 to 30.06.2021 under the erstwhile Sec. 148 of the Act. Such notices were issued within the extended timelines specified under notifications issued under Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA). Further, such notices have primarily been issued in relation to assessment year (AY) 2013-14 to AY 2017-18.

The Finance Act 2021 has altered the scheme of reassessment substituting Sec. 147 to Sec 149 and Sec. 151 of the Act. The substituted Sec. 149 of the Act has curtailed the time limit for issuance of notice u/s 148 to 3 years (where the alleged concealment is less than INR 50 lacs) and 10 years where the monetary threshold is breached (subject to further grandfathering to 6 years for pre-amendment years).

The question thus arises is whether the limitation period as prescribed under amended Sec. 149 of the Act would be applicable in respect of the proceedings proposed to be regularized pursuant to the decision of the SC, or would such proceedings continue unabated, notwithstanding the period of limitation u/s 149 of the amended Act. This has significance considering that if the limitation under amended Sec. 149 of the Act were to apply, AY 2013-14 to AY 2017-18 would fall beyond the limitation period of 3 years (where allegation for concealment is less than INR 50 Lacs). Also, where the threshold is breached, AY 2013-14 and AY 2014-15 may still fall outside the limitation period [extended limitation of 10 years (restricted to 6 years for pre-amendment years)].

It should be possible to argue that the decision of the SC has merely regularized a step in the process to be followed under the amended reassessment law applicable w.e.f. April 2021. The SC has unequivocally agreed with the decision of the High Courts on the matter, however, with leeway to proceed with the proceedings as per the substituted reassessment provisions as per the Finance Act, 2021.

In this respect, the SC has only construed the reassessment notices issued u/s 148 of the unamended Act as a deemed notice to show cause as per the amended Sec. 148A(b). The SC has categorically stated that the judgements passed by the various High Courts, pursuant to the SC decision have been modified/substituted only to the limited extent as specified. There is no disagreement with the High Courts with respect to the proposition that notices issued on or after 1.04.2021 will be subject to reassessment provisions as amended. It may therefore be fair to state that SC has in fact affirmed the decision of the HCs which have held that the notification issued under TOLA have no applicability to the reassessment proceedings initiated on or after 1.04.2021.

The following extract of the decision of the Allahabad High Court which was under review by the SC clarifies this aspect.

“75. As we see there is no conflict in the application and enforcement of the Enabling Act and the Finance Act, 2021. Juxtaposed, if the Finance Act, 2021 had not made the substitution to the reassessment procedure, the revenue authorities would have been within their rights to claim extension of time, under the Enabling Act. However, upon that sweeping amendment made the Parliament, by necessary implication or implied force, it limited the applicability of the Enabling Act and the power to grant time extensions thereunder, to only such reassessment proceedings as had been initiated till 31.03.2021. Consequently, the impugned Notifications have no applicability to the reassessment proceedings initiated from 01.04.2021 onwards.

Upon the Finance Act 2021 enforced w.e.f. 1.4.2021 without any saving of the provisions substituted, there is no room to reach a conclusion as to conflict of laws. It was for the assessing authority to act according to the law as existed on and after 1.4.2021. If the rule of limitation permitted, it could initiate, reassessment proceedings in accordance with the new law, after making adequate compliance of the same. That not done, the reassessment proceedings initiated against the petitioners are without jurisdiction.”

Thus, given the limited modification of High Court orders primarily deeming the notices issued u/s 148 of the erstwhile reassessment provisions as show cause notice under the substituted provisions of Sec. 148A(b) of the Act and specifying the procedure to be followed thereafter, the SC has not disturbed the position stated by the Allahabad High Court that notifications issued under TOLA will not be applicable in relation to reassessment proceedings initiated on or after 1.04.2021. Further in light of unequivocal declaration by the SC that reassessment proceedings shall proceed as per substituted provisions of Sec. 147 to 151 of the Finance Act, 2021, the reassessment reinitiated should be subject to process, requirements, and limitations imposed (as under amended Sec. 149 of the Act). Thus, the view that reassessment proceedings will be subject to the period of limitation as prescribed under the substituted Sec.149 of the Act should be sustainable.

Conclusion

The moot point of debate now is whether the amended period of limitation as prescribed under the substituted Sec. 149 of the Act will have a bearing on the fate of reassessment notices regularized consequent to the SC order. It seems fair to take a view that reassessment proceedings thus initiated will be subject to limitation period as specified under the amended Sec. 149, in which case AY 2013-14 to AY 2017-18 would fall beyond the limitation period of 3 years (where allegation for concealment is less than INR 50 Lacs). Also, where the threshold is breached, AY 2013-14 and AY 2014-15 may still fall outside the limitation period. While the position seems justified, it is highly unlikely that the RA will give into the same without a legal fight. The stage seems set for the next round of legal battles on this contentious issue.

Contributed by Yatin Sharma. Yatin can be reached at yatin.sharma@aureuslaw.com

Immunity from imposition of Penalty & Prosecution under the Income Tax Act – An attractive litigation resolution strategy

Provisions of law

Section 270AA of the Income Tax Act enshrined in the statute effective April 2017 enables a taxpayer to seek immunity from (a) imposition of penalty u/s 270A (in case of under reporting of income other than on account of misreporting) and (b) initiation of prosecution proceedings for wilful attempt to evade taxes (section 276C) or failure to furnish return of income in due time (section 276CC). The immunity is subject to fulfilling the prescribed condition, namely:

  • Payment of assessed tax and interest within the stipulated time; and
  • Non filing of appeal against the order of assessment.

To avail such immunity, the taxpayer is required to make an application in the specified form (Form 68) within a period of one month from the end of the month in which the order is received. Upon receipt of the waiver application, the Assessing Officer, subject to fulfilment of eligibility condition, and on expiry of period prescribed for filing an appeal, is mandated to grant immunity from imposition of penalty and initiation of prosecution proceedings. The order accepting or rejecting such application is required to be passed within a period of one month from the end of the month in which the application is received. Further no order rejecting the application can be passed without given the taxpayer an opportunity of being heard.

The immunity scheme provides the opportunity to fast-track settlement of tax dispute and serve as an attractive strategy to reduce protracted litigation. The provisions however raise interesting questions some of which have recently been subject to judicial scrutiny.

Where penalty notice does not specify – “underreporting” or “misreporting” of income

One of the basic conditions for availing immunity from penalty and prosecution is that the notice for initiating penalty should be only in respect of under reporting of income other than on account of misreporting. In Schneider Electric South East Asia (HQ) Pte. Ltd vs. ACIT International Taxation Circle 3 (1)(2), New Delhi and Ors., the Hon’ble Delhi HC examined the question whether the taxpayer would be eligible to avail the immunity provisions where the penalty notice did not specify the limb (ie. ‘underreporting’ or ‘misreporting’ of income), under which the penalty proceedings had been initiated. Taking into regard the facts, the Court observed that the notice initiating penalty did not specify the particular limb under which penalty notice was issued. The Court further observed that the mere reference to the word ‘misreporting’ by the Assessing Officer in the assessment order could not form the basis to deny immunity (from imposition of penalty and prosecution) where there was no mention as to how the ingredients of “misreporting” were satisfied. Therefore, the impugned order rejecting application for grant of immunity was manifestly arbitrary. The Court accordingly directed the tax authorities to grant immunity under section 270AA.

The ruling brings to relevance the significance of specifying the particular limb under which penalty proceedings are initiated, non-specification of which can be inferred as a case of mere ‘underreporting’. Whether non-specification of specific limb can be a ground for quashing of the penalty notice itself would also be a point to ponder drawing analogy from the jurisprudence under the erstwhile penalty regime in relation to ‘concealment of income’ or ‘furnishing inaccurate particulars.

Failure to pass order accepting or rejecting the immunity application within stipulated period

Under the immunity scheme, the order accepting or rejecting application seeking immunity is required to be passed by the Assessing Officer within a period of one month from the end of the month in which the application is received. In Nirman Overseas Private Limied v NFAC Delhi, the Hon’ble Delhi High Court examined the question whether non issuance of the order by the Assessing Officer accepting or rejecting the immunity application under Section 270AA within the statutory timeline would be regarded as non-passing of the order granting immunity to the taxpayer or otherwise. The Court observed that under the scheme, there is prohibition for availing the benefit of immunity from penalty and prosecution under Section 270AA only in case where proceedings for levy of penalty have been initiated on account of alleged ‘misreporting’ of income. Further the scheme provides for satisfaction of specified condition i.e. payment of tax demand and non-institution of appeal. Where the aforesaid conditions are satisfied, the taxpayer cannot be prejudiced by the inaction of the assessing officer in passing an order (accepting or rejecting the application) within the statutory time limit considering the settled law that no prejudice can be caused to a taxpayer on account of delay/default on the part of the tax authorities. Consequently, penalty order u/s 270A of the Act was set aside with direction to grant immunity under Section 270AA of the Act. The decision of the Court brings forth the significance of the specified timeframe for passing the order accepting/rejecting the immunity application, non-conformance of which would impliedly mean acceptance of the immunity application.

Assessment order assessing a loss and nil tax liability

One of the eligibility conditions requires the taxpayer to pay the assessed tax and interest within the stipulated time before filing the application for grant of immunity. This raises a question whether immunity waiver can be availed in cases where no tax is assessed as payable, for instance where a loss return, after adjustment of variation proposed in the order still remain a loss. The plausible view in this regard is that such cases should also be eligible for the immunity scheme as any contrary interpretation would result in discrimination.

Take for instance a situation where an X amount is proposed as adjustment in case of 2 distinct taxpayer filing a loss return which results in assessed loss in case of taxpayer 1 and a marginal positive income of say Rs. 1000 (and consequentially tax and interest liability) in case of taxpayer 2. While there is no ambiguity regarding eligibility of taxpayer 2 to avail the immunity benefits, however in case taxpayer 1 is denied similar immunity benefit, this may result in discrimination in respect of same class of taxpayer which is constitutionally impermissible.

Also examining this from the perspective of ‘Doctrine of Impossibility’, it is now widely accepted by the courts that the law does not compel a man to do anything impossible or to do something which he cannot possibly perform. In the circumstances where income is assessed at a loss and there is Nil tax demand, the condition (to pay tax and interest) cannot be fulfilled and is arguably not applicable.

It will be useful to take note that case of Nirman Overseas Private Limited (supra) and similar case of Ultimate Infratech Private Limited v NFaC Delhi & Anr. decided in favour of the taxpayers were examined against the backdrop of the facts where the taxpayer was assessed at a loss and there was Nil tax liability, though this issue was not specifically contested by the parties. 

Immunity does not impact contentions in earlier years

A pertinent question which often arises in evaluating the option of availing the immunity scheme is whether it would have any adverse consequences on the issues assented (in connection with which immunity is sought) in relation to other years. To address any apprehension of adverse consideration by the Tax Authorities, the CBDT vide Circular No. 05/2018 dated 16 August 2018, has clarified that seeking immunity from penalty and prosecution u/s 270AA of the Act will not bar the taxpayer from contesting the same issue in any earlier assessment year. It has further been clarified that the Tax Authority shall not take an adverse view in penalty proceedings for earlier assessment years under old penalty regime merely because the taxpayer has applied for immunity under the new scheme.

Closing note

Tax litigation is time consuming and involves significant costs. The immunity scheme provides an attractive opportunity to stay clear from such litigations specially in cases where the amount of tax involved is not significant or the tax position adopted is less likely to be sustainable in higher litigation. This scheme would also be beneficial for taxpayer incurring losses with limited possibility to benefit from carry forward and setoff of such loss in future years. Taxpayers should therefore evaluate the scheme in interest of mitigating litigation and buying peace of mind.

Contributed by Yatin Sharma. Yatin can be reached at yatin.sharma@aureuslaw.com

RBI issues guidelines for dividend declaration by NBFCs – Links it to capital and NPA norms

The Reserve Bank of India (RBI) on June 24, 2021 has issued guidelines for distribution of dividends by non-banking financial companies (NBFCs) from the profits of financial year (FY) ending March 31, 2022 and onwards.

These guidelines shall be applicable to all NBFCs regulated by the RBI.

Board Oversight

While considering a dividend proposal, the Board of Directors of NBFCs (BoD) has to take into account supervisory findings of the RBI and National Housing Bank (NHB) for Housing Finance Companies (HFCs) on divergence in classification and provisioning for non-performing assets (NPAs). The BoD shall also take into account any qualification in the auditor’s report to the financial statements, and the long-term growth plans of such NBFC.

RBI has mandated the BoD to ensure that the total dividend payout in a FY does not exceed the ceilings prescribed under these guidelines.

Prudential Norm

The RBI has linked declaration of dividend by NBFCs to certain minimum prudential norms on capital and bad loans. Guidelines prescribe the following requirements:

# Parameter Requirement
1. Capital Adequacy a.     NBFCs (other than Standalone Primary Dealers[1] (SPDs)) should have met the applicable regulatory capital requirements[2] for each of last 3 financial years;

b.     SPDs should have maintained a minimum CRAR[3] of 20 percent for the financial year for which dividend is being proposed.

2. Net NPA Net NPA ratio to be less than 6 percent in each of the last three FYs, including at the close of the FY for which dividend is proposed to be declared.
3. Other criteria a.     NBFCs to maintain the Reserve Fund[4] in accordance with the RBI Act, 1934, and other applicable RBI regulations / guidelines;

b.     HFCs to maintain the Reserve Fund[5] in accordance with the NHB Act, 1987;

c.      RBI and NHB (for HFCs) should not have prescribed any other explicit restrictions on declaration of dividends.

Dividend Payout Ratio (DPR)

DPR is the ratio between the amount of the dividend payable in a FY and the net profit as per the audited financial statements for FY for which the dividend is proposed. Proposed dividend to include dividend on equity shares and compulsorily convertible preference shares eligible for inclusion in Tier 1 Capital[6].

In case the net profit for the relevant FY indicates an overstatement[7] of net profit, the same shall be reduced from net profits while determining the DPR.

RBI has prescribed following overall ceilings on DPR:

# NBFCs Maximum DPR (percentage)
1. NBFC not accepting public funds and not having any customer interface No ceiling
2. Core Investment Company 60
3. SPDs 60
4. Other NBFCs 50

Further, NBFCs (other than SPDs), which do not meet the prescribed Prudential Norms, may declare dividend up to 10 percent DPR, provided that it meets the capital adequacy requirement for the FY for which dividend is being declared, and has less than 4 percent NPA.

Also, for SPDs, which have CRAR between 15 to 20 percent, the DPR shall not exceed 33.3 percent.

Reporting Requirements

Details of declared dividend to be reported to RBI within a fortnight of such declaration.


[1] In 1995, the RBI introduced the system of Primary Dealers (PDs) in the Government Securities Market, which comprised independent entities undertaking PD activity. In order to broad base the PD system, banks were permitted to undertake PD business departmentally in 2006-07. Further, the standalone PDs were permitted to diversify into business activities, other than the core PD business, in 2006-07, subject to certain conditions.

[2] Capital requirements applicable to different categories of NBFCs as on June 24, 2021.

[3] Capital to Risk-Weighted Assets Ratio is the ratio of a bank’s capital to its risk. In April 1992, RBI introduced a CRAR system for banks (including foreign banks) in India as a capital adequacy measure in line with the Capital Adequacy Norms prescribed by Basel Committee.

[4] Section 45IC of the RBI Act, 1934

[5] Section 29C of the NHB Act, 1987

[6] Tier I Capital includes (a) paid-up capital (ordinary shares), statutory reserves, and other disclosed free reserves, if any; (b) perpetual non-cumulative preference shares (PNCPS); innovative perpetual debt instruments; and capital reserves representing surplus arising out of sale proceeds of assets.

[7] includes any exceptional and/or extra-ordinary profits/ income or the financial statements are qualified (including ’emphasis of matter’) by the statutory auditor that indicates an overstatement of net profit.

Contributed by Manish Parmar. Manish can be reached at manish.parmar@aureuslaw.com.

Whither Balance Sheet Entries For Extension of Limitation In Insolvency Cases?

Section 18 of the Limitation Act 1963 (the Limitation Act) provides for extension of the limitation period where there is an acknowledgement of the debt by a borrower. In various cases, it has been held that an entry in the financials of a borrower to the effect that there is an amount due to a debtor amounts to such an acknowledgement. However, recently the NCLAT has set a cat amongst the pigeons as it were by holding that Insolvency & Bankruptcy Code, 2016 (IBC) would in effect be an exception to this general rule laid down by various other judicial authorities. There is a bit of a history to this pronouncement.

On August 17, 2018, the Second Amendment to IBC was made. This amendment added section 238A to the IBC, effectively making the provision of section 18 of the Limitation Act to all insolvency proceedings. The Second Amendment was made effective from June 6, 2018.

The Saga of the Second Amendment

The Second Amendment came on the heels of a debate over the applicability of limitation to proceedings under the IBC. Recall that ordinarily, a money debt can be claimed anytime within 3 years of the debt being due and payable. Beyond this period of 3 years, statutory limitation would come to apply such that a claimant couldn't then assert her rights over the debt due. Paraphrasing the Supreme Court, the rationale behind having such limitation period is to prevent disturbance of a right acquired in equity and justice by long enjoyment by the debtor1. Essentially, via a period of limitation of 3 years, the law ensures that if the lender has not acted or claimed the debt for a period of 3 years then the borrower acquires the right to enjoy it forever due to long enjoyment and should not be deprived of it under the principles of equity and justice.

Prelude to the Saga

Now, prior to the Second Amendment, the highest quasi-judicial authority dealing with insolvency matters had arrived at certain judgements holding that the Limitation Act did not apply to IBC proceedings.2 This was on the basis that the IBC was not a law for recovery of money but for resolution of insolvency3 and attendant liquidation (if resolution doesn't materialize). The NCLAT then went on to state that if there is a debt including interest due and there is default of debt and has a continuous cause of action, the argument that the claim of money is barred by limitation cannot be accepted.4

Amongst the rationale given by NCLAT was also that IBC is a complete code in itself. It does not provide for, or indeed incorporate any reference to the Limitation Act. Hence, per the NCLAT, before the Second Amendment Act came into effect, Limitation Act could not have applied to proceedings under the IBC.5

These pronouncements, collectively, had the effect of allowing a 'right to sue' to keep running for a creditor indefinitely.

What happened next

Needless to add, there were various cases where the debate regarding limitation cropped up. The decision in Speculum Plast Pvt. Ltd.6 was pronounced on November 7, 2017. Wheels, however, were already in motion in relation to, amongst other such questions, the question of limitation elsewhere. The Injeti Srinivas led Insolvency Law Committee (the Committee) was set up on November 16, 2017.

Its report (the Report) was submitted to the Union Minister of Finance and Corporate Affairs on March 26, 2018. Doubtless, there were several issues that were deliberated upon by the Committee. One amongst the issue was also in relation to limitation that is the subject matter of this document. Thought the topic of limitation was not mentioned in the Preface to the Report issued, the application of Limitation Act to IBC first finds mention at page 72 as a summary of its detailed recommendation and then again at Chapter 28 of the Report. In about three paragraphs and just about one page of space, the Report succinctly states that the intent was not to package the IBC as "a fresh opportunity for creditors and claimants who did not exercise their remedy under existing laws within the prescribed limitation period"7. And thus, came to be inserted section 238A into the IBC Code on August 17, 2018 (with effect from June 6, 2020).

Supreme Court on applicability of limitation

With the question of applicability of Limitation Act to IBC now settled, the pages turned quickly to BK Educational Services Pvt. Ltd. v. Parag Gupta & Associates8. This case was culmination of various appeals filed against various NCLAT judgements on limitation before the Report had been released - one amongst them the case law of Speculum Plast Pvt. Ltd.9. On various grounds, the Supreme Court proceeded to decide that Limitation Act is indeed applicable to the IBC - this was the decision of the Supreme Court even without recourse to the Second Amendment10. However, the Supreme Court also noted that such applicability would be only from the inception of the IBC, i.e. in the same vein as the Speculum Plast Pvt. Ltd.11 (i.e. section 137 of the Limitation Act would be relevant).

Subsequently, the Apex Court in K. Sashidhar v. Indian Overseas Bank12 reiterated the ratio laid down in B.K. Educational Services Case.

Then came Jignesh Shah v. Union of India13 where three judges of the Supreme Court were faced with a winding up petition filed by IL&FS Financial Services Ltd. against La-Fin Financial Services Pvt. Ltd. Such winding up petitions after enactment of the IBC were converted to section 7 proceedings under IBC.

Above decision, while holding that a winding up petition was time-barred, having been filed beyond three years, made a passing observation that an "acknowledgment of liability under Section 18 of the Limitation Act would certainly extend the limitation period". This therefore, neatly brings us to the controversy at hand - extension of limitation period under section 18 of the Limitation Act.

Recall that in the beginning of this article, the authors had referred to section 18 of the Limitation Act. This provision provides for a fresh period of limitation, where there is 'acknowledgment of liability', which is to be computed from the date of 'acknowledgment'.14

The Saga Continues

It has been held in several cases15 that an entry in the balance sheet amounts to an acknowledgement of the debt. Therefore, if any entry is indeed made, then a fresh period of limitation under section 18 of the Limitation Act would begin from the date of such accounts. With the Second Amendment, the question of applicability of the Limitation Act to proceedings under IBC was put to rest in that Limitation Act would indeed apply.

However, what was intended to be a final settlement of the issue of applicability of limitation to IBC threw up a vexed problem. The latter would need some explanation - what usually occurs is that even though the 'date of default' as per the records of financial creditors occurs upon the happening for certain pre-defined events, filing of a petition under IBC is delayed beyond a period of 3 years from such date of default. One such case was that of Babulal Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd.16. In this case, the bank had proceeded against the corporate debtor in 2011 after its accounts were declared non-performing assets in a proceeding under the RDBFI Act17. Suffice it to say that a case came to be filed before the NCLT in March 2018 (note that the default had occurred in 2011, well beyond 3 years earlier). The NCLT admitted the application and the process under IBC commenced. However, not to be outdone, Mr. Babulal Gurjar who was one of the directors of the company, appealed to the NCLAT. One amongst his pleas was to do with limitation - i.e. having been filed well after 3 years' time, the case filed in the NCLT was barred by limitation. The NCLAT dismissed his appeal summarily. Mr. Gurjar being of a strong bent of mind, approached the Supreme Court against the NCLAT order where he contended that the NCLAT shouldn't have summarily rejected his appeal and instead, at the least, heard him on the various issues he had raised, including that of limitation. The Supreme Court agreed with the point of view regarding limitation and directed the NCLAT to hear the matter again, specifically in relation to limitation.

The NCLAT, under the Supreme Court's express orders thereafter, re-heard the matter, and came to the conclusion that its earlier decision was correct. It based its decision on the fact that limitation would be counted only from December 2016, i.e. when the IBC came into effect, and also that even otherwise, there were mortgaged properties that were involved, the limitation for invocation of which is anyways 12 years.

Mr. Gurjar, being of a resilient bent of mind, approached the Supreme Court a second time against this pronouncement of the NCLAT. The Supreme Court on August 14, 2020 stated that the application filed by the creditors was barred by limitation as it had been filed after the period of 3 years had expired from the date of default as mentioned in the application itself. The Supreme Court also held that there is no basis to the assertion that limitation would commence only from the date on which IBC was enacted.

Now, it must be pointed out here that in the above case, the books of the corporate debtor did reflect that it owed the amounts in question to the bank / financial institution. However, the Supreme Court, having been apprised of this particular quirk of the case, said that since the application itself records the date of default as July 8, 2011, the records of the corporate debtor would not be of assistance in extending the limitation period.

As it would transpire, before the judgement of the Supreme Court in Babulal Vardharju Gurjar's case could have been pronounced, the NCLAT had already arrived at a conclusion even more far reaching.

This was the seminal judgement rendered in V. Padmakumar Vs. Stressed Assets Stabilization Fund (SASF)18 (the "First Padmakumar case") by the NCLAT.

Decision in the case of Padmakumar Case (supra) was rendered by a 4:1 majority, which in itself was a result of reference to a Larger Bench to resolve conflicting decisions of coordinate benches19 of the NCLAT. Majority decision had held that balance sheets / annual returns being mandatory requirements under the CA'13, cannot amount to acknowledgement under section 18 of the Limitation Act.

The NCLAT observed that the Apex Court and various High Courts have consistently held that an entry made in the company's balance sheet amounts to an acknowledgment of debt under section 18 of the Limitation Act. Accordingly, reference was made to a larger bench to reconsider the Padmakumar Case (supra).

Soon however, a matter came to be heard in the NCLAT - Yogeshkumar Jashwantlal Thakkar v. Indian Overseas Bank20 where the date of default mentioned in the application was January 1, 2016 but the application for commencement of proceedings under IBC was filed on April 1, 2019 (i.e. 3 months beyond the 3 year limitation, to the day). What makes this case stand apart is the fact that the bank in question had obtained a "debit confirmation" from the borrower on March 31, 2017. This "debit confirmation" was seen by the NCLAT as the acknowledgement of debt under section 18 of the Limitation Act. Thus, the NCLAT held in this case on September 14, 2020, that the application, even though having been filed on April 1, 2019, was well within 3 years from March 31, 2017, i.e. the date of "debit confirmation". This case, as is wont, has been challenged before the Supreme Court and is pending as on date of going to press.

Despite the aforesaid judgement being pending in appeal before the Supreme Court, on September 25, 2020, a three-member bench of the NCLAT in Bishal Jaiswal vs. Asset Reconstruction Company (India) Ltd. & Anr.21, "with the great respect to the Hon'ble Members of the Judgement" (sic) in the First Padmakumar case, thought it fit to refer the First Padmakuma case for reconsideration.

The NCLAT in reference proceedings initiated in Bishal Jiswal (supra), observed that the majority decision in First Padmakumar case (supra) had dealt with the conflict between the decision of the coordinate benches22, and had observed that Ugro (supra) cannot be relied upon as Apex Court's decisions were not brought to the notice of the bench during the proceedings. Accordingly, the NCLAT dismissed the reference, and held that the date of default with regard to application under Section 7 of the Code is the date of classification of the account as NPA. Most importantly it observed that limitation cannot be impacted by an acknowledgement of liability under section 18 of Limitation Act to keep the 'debt' alive for the purpose of insolvency proceedings.23 This decision on reference was rendered by the NCLAT on December 22, 2020.

This order of reference was challenged before the Supreme Court24, which rendered its ruling on April 15, 2021. The Bench comprising of Justices RF Nariman, BR Gavai and Hrishikesh Roy, while answering the legal question of 'Whether acknowledgement of debts in the balance sheet will be considered for Section 18 of Limitation Act", held that balance sheets can amount to an acknowledgement of debt for insolvency matters.

The court also examined the provisions under the Companies Act, 2013 qua any compulsion of law for filing of balance sheets and acknowledgements made therein25. It observed that there is no doubt that the filing of balance sheet is mandatory, violations of which being punishable under law. However, Section 134(7) of the Companies Act expressly recognises the auditor's report and notes annexed to the said financial statement, which may provide for caveats with regard to 'acknowledgements' made in the books of account / balance sheet. In relation to the same, the Court appreciated the law laid down by the Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff26. In the said judgment, the court had held that though the filing of a balance sheet is by compulsion of law, the acknowledgement of a debt is not necessarily so. In fact, it is not uncommon to have an entry in a balance sheet with notes annexed to or forming part of such balance sheet, or in the auditor's report, which must be read along with the balance sheet.

Now therefore, coming to the central question posed by this article.

Whither balance sheet entries for extension of limitation in insolvency matters?

While the application of Article 137 of the Limitation Act to IBC matters has been consistently upheld by the NCLAT and the Supreme Court, there was still confusion that whether balance sheet entries constitutes a valid 'acknowledgment' for extending the limitation period. Pursuant to the aforesaid judgment of April 15, 2021, the Supreme Court has clarified that entries in the balance sheet of the corporate debtor shall qualify as an 'acknowledgement' in terms of section 18 of the Limitation Act.

Therefore, the position as of date appears to be that if a Corporate Debtor has acknowledged a 'debt' in the form of a balance sheet entry, such entry would extend the period of limitation for the purposes of IBC. However, it is to be noted that the Supreme Court also observed that treatment of an entry in corporate debtor's balance sheet as an 'acknowledgment', would depend on facts of each case as to whether a balance sheet entry qua any particular creditor is unequivocal or is saddled with caveats. Then, the said balance sheet entries along with caveats, if any, would have to be examined on a case to case basis in order to establish the extension of limitation under section 18 of the Limitation Act. In fact, while doing so, the Supreme Court has itself put a 'caveat' to the law regarding the treatment of balance sheet entries as a valid 'acknowledgment' under IBC. However, this also gives rise to some practical issues, some of which the author has summarised hereunder:

  1. Where the corporate debtor has not put a caveat to the balance sheet entries of previous financial year, then in such a situation, whether such entries would constitute a valid 'acknowledgement'. Also, prior to the April 15, 2021 judgment of the Supreme Court, balance sheet entries were held to be not a valid acknowledgement as per the NCLAT's five-member bench's decision27.
  2. How does it impact the operational debt owed by the corporate debtor to its suppliers of goods and services. In situations, where such operational creditor fails to demand the due amount within 3 years, then whether the balance sheet entries would extend the limitation under IBC.

It remains to be seen how courts answer the aforesaid questions.

One of the key takeaway from the Supreme Court's decision is that it casts a responsibility on the key managerial personnel along with the secretarial and audit officers to examine each loan transaction(s) entered by the corporate debtor. Accordingly, balance sheet and reports prepared and authenticated by the management of corporate debtor would ultimately determine the admissibility of IBC petitions. Hence, it may prudent to put in place a mechanism to examine each and every loan transaction(s) in order to put proper caveats. To illustrate, where the normal period of limitation i.e. 3 years have elapsed, the corporate debtor(s) may while acknowledging the debt, may put caveat to the effect that a particular debt is beyond the period of limitation.

Abhishek Dutta, Partner with inputs from Yatin Sharma, Partner and Manish Parmar, Senior Associate.

Guidelines on Provisional Attachment of Property under GST

Central Board of Indirect Taxes and Customs (“CBIC”) has issued Circular No. CBEC-20/16/05/2021-GST/359 dated February 23, 2021 providing guidelines for provisional attachment of property under Section 83 of the Central Goods and Services Tax Act, 2017 (“CGST Act, 2017”).

Section 83 provides for provisional attachment of property for the purpose of protecting the interest of revenue during the pendency of any proceeding under Section 62 (Assessment of non-filers of returns) or Section 63 (Assessment of unregistered persons) or Section 64 (Summary assessment) or Section 67 (Power of inspection, search and seizure) or Section 73 (Demand of tax) or Section 74 (Demand of tax by invoking extended period of limitation) of the CGST Act. In relation to the same, Rule 159 of the CGST Rules provides the procedure to be followed by the proper officer.

We have culled out the highlights of the Guidelines herein below.

Grounds for provisional attachment of property

  • Commissioner must exercise due diligence and duly consider as well as carefully examine all the facts of the case, including the nature of offence, amount of revenue involved, established nature of the business, and extent of investment in capital assets before attaching the property.
  • Commissioner must have reasons to believe that the taxable person may dispose of or remove the property if not attached provisionally.
  • Commissioner should duly record the ‘reasons to believe’ on file.
  • CBIC has directed that the power of provisional attachment must not be exercised in a routine/mechanical manner and should be based on careful examination of all the facts of the case. It has been mandated that the collective evidence, based on the proceedings/ enquiry conducted in the case, must indicate that prima-facie a case has been made out against the taxpayer, before going ahead with any provisional attachment.
  • As the provisional attachment of property may affect the working capital of the taxable person, the investigation and adjudication should be completed at the earliest.

Cases fit for provisional attachment of property

Provisional attachment should not be invoked in cases of technical nature and should be resorted to mainly in cases where there is an evasion of tax or where the wrongful input tax credit (“ITC”) is availed or utilized or wrongfully passed on. Provisional attachment can be resorted to in following cases:

  • Where taxable person has supplied any goods or services without issue of any invoice with an intention to evade tax; or
  • Where taxable person has issued any invoice without supply; or
  • Where taxable person has availed ITC using the invoice or bill issued without any corresponding supply or fraudulently availed ITC without any invoice; or
  • Where taxable person has collected any amount as tax but has failed to pay the same to the Government beyond a period of 3 months; or
  • Where taxable person has fraudulently obtained refund; or
  • Where taxable person has passed on ITC fraudulently to the recipient(s) but has not paid the commensurate tax.

Aforesaid list is not exhaustive and is illustrative only.

Procedure for provisional attachment of property

  • Commissioner should duly record the ‘reasons to believe’ on file and pass an order in Form GST DRC -22 with proper Document Identification Number (“DIN”) recording the details of property being attached.
  • Copy of order in Form GST DRC – 22 to be sent to the concerned revenue authority / transport authority / bank or the relevant authority to place encumbrance on the attached property. The property, thus attached, shall be removed only on the written instructions from the Commissioner.
  • Copy of such attachment order shall be provided to the taxable person as early as possible so that objections, if any, to the said attachment can be made by the taxable person within 7 days.
  • If such objection is filed by the taxable person, Commissioner should provide an opportunity of being heard. After considering the facts presented by the person in his written objection as well as during the personal hearing, if any, the Commissioner should form a reasoned view whether the property is still required to be continued to be attached or not, and pass an order in writing.
  • In case, the Commissioner is satisfied that the property was or is no longer liable for attachment, he may release such property by issuing an order in FORM GST DRC- 23.
  • Even in cases where objection is not filed within the time prescribed under Rule 159(5) of CGST Rules i.e. 7 days, the Commissioner should pass a reasoned order.
  • Each such provisional attachment shall cease to have effect after the expiry of a period of one year from the date of the order of attachment.
  • In case the attached property is of perishable/hazardous nature, then such property shall be released to the taxable person by issuing order in FORM GST DRC-23, after taxable person pays an amount equivalent to the market price of such property or the amount that is or may become payable by the taxable person, whichever is lower, and submits proof of payment.
  • In case the taxable person fails to pay the said amount, then the perishable / hazardous property may be disposed of and the amount recovered from such disposal of property shall be adjustable against the tax, interest, penalty, fee or any other amount payable by the taxable person.
  • Further, the sale proceeds thus obtained must be deposited in the nearest Government Treasury or branch of any nationalised bank in fixed deposit and the receipt thereof must be retained for record, so that the same can be adjusted against the amount determined to be recoverable from the said taxable person.

Types of property that can be attached

  • Value of property attached should not be excessive and should be reasonable to the estimated amount of pending revenue. More than one property can be attached.
  • Provisional attachment can be made only of the property belonging to the taxable person, against whom the proceedings under Section 83 of the Act are pending.
  • Movable property should normally be attached only if the immovable property, available for attachment, is not sufficient to protect the interests of revenue.
  • As far as possible, it should also be ensured that such attachment does not hamper normal business activities of the taxable person. This would mean that raw materials and inputs required for production or finished goods should not normally be attached by the Department.
  • In cases where the movable property, including bank account, belonging to a taxable person has been attached, such movable property may be released if taxable person offers any other immovable property which is sufficient to protect the interest of revenue.

(Circular No. CBEC-20/16/05/2021-GST/359 dated February 23, 2021 issued by Central Board of Indirect Taxes and Customs)

By Manish Parmar. Views are personal.  Manish can be reached at manish.parmar@aureuslaw.com.

As on: Tuesday Feb 23, 2021

From Yatin’s Desk: Income escaping assessment – A revamped law on reassessment proceedings

As the dust settles and the excitement subsides over Budget 2021 announcements, it is now an opportune time to examine the fine print of tax proposals. One such proposal which have drawn considerable attention and has the effect of substantially rewriting the law relates to the provision of Income Escaping Assessment i.e. Reassessment Proceedings.

A Look back at the extant provisions

The extant law relating to reassessment are codified under S. 147, to S. 153 of the Income Tax Act, 1961 (‘the Act’). The provisions enable the Assessing Officer (‘AO’) who has ‘reason to believe’ that an income has escaped assessment to reopen concluded assessment years to reassess the escaped income and any other income which comes to his notice subsequently in the course of such proceedings. However, where the assessee has been subject to scrutiny assessment in relation to a year, no reassessment can be made beyond a period of 4 years from the end of relevant assessment year (‘AY’) unless the assessee has failed to ‘disclose fully and truly all material facts necessary for his assessment’ for the year. Where the income likely to have escaped amounts to Rs. 1 lac or more, assessment can be reopened upto 6 years from the end of relevant AY[1]. Before making any reassessment, the AO is required to ‘record his reasons’ for reopening the assessment and serve a notice requiring the assessee to file a tax return. Re-opening of assessment beyond a period of 4 years requires sanction of the Principal Chief Commissioner/Chief Commissioner/Principal Commissioner/Commissioner.

Reopening of assessment – an evergreen controversy  

Reassessment proceedings, often, have been challenged in writ proceedings before the High Courts on the ground that the notice for reassessment lacks legal validity on account of failure by the AO to follow due process of law enshrined in the provisions and established under common law.  Rather than the merits of concealment, courts are overwhelmed with cases to decide upon the sustainability of the core issue of initiation of reassessment i.e. whether the AO had ‘reasons to believe’, did he ‘record his reasons’ appropriately, did the assessee fail to ‘disclose fully and truly all material facts necessary for his assessment’, was proper ‘sanction’ of the appropriate authorities taken, etc.

The Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. vs. ITO & Ors. has laid that when a notice for reopening of assessment u/s 148 of the Act is issued, the proper course of action for the assessee is to file the return and, if he so desires, to seek reasons for issuing the notices. The AO is bound to furnish reasons within a reasonable time. On receipt of reasons, the assessee is entitled to file objections to issuance of notice and the AO is bound to dispose the same by passing a speaking order.

Recently the Hon’ble Supreme Court in the case of New Delhi Television Limited v DCIT (Civil Appeal No. 1008 Of 2020), in the context of disclosure of ‘fully and truly all material facts necessary for his assessment’ has held that the obligation of the assessee is to disclose all primary facts before the AO and he is not required to give any further assistance to the AO by disclosure of other facts.  It is for the AO at this stage to decide what inference should be drawn from the facts of the case.  The court went on to hold that non-disclosure of other facts which may be termed as secondary facts is not necessary.

Further, numerous court decisions have repeatedly stated that while the AO has to record reasons for reopening, there should be proper application of mind and it should not just be a mechanical process.

As the reality stands, proper reopening in the manner provided under law has remained wanting. The courts have over and again expressed anguish over the mechanical approach of reopening assessment without adherence to the provisions which have resulted, more often than not, reassessment proceedings being quashed on the issue of proper exercise of jurisdiction itself.

Budget proposal 2021 – revamp of reassessment procedure

The Finance Minister brought smiles by announcing in her budget speech the proposal to reduce time-limit for reopening of assessment to 3 years from the present 6 years, and in serious cases where there is evidence of concealment of income in a year of Rs. 50 lakh or more, upto 10 years. However, on examining the details, one can observe that far-reaching changes have been proposed to the entire scheme of reassessment.

The proposals substitute the exiting provisions of S. 147 with a new section which pari materia contain similar provisions to the extent enabling the AO to assess the escaped income and any other income which comes to his notice subsequently in the course of proceedings. The new substituted S. 148 however makes a significant departure from the existing provisions which put the onus upon the AO to form a belief that an income has escaped assessment.  The new provisions propose to provide a monitored criterion, having application across jurisdiction and assesses, to establish when the AO would be considered to have information which suggests that the ‘income chargeable to tax has escaped assessment’.

Defined meaning of expression ‘income chargeable to tax has escaped assessment’

The expression, forming the basis for triggering reassessment proceedings has now been defined in a restrictive manner to mean –

(i) any information flagged in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Central Board of Direct Taxes (CBDT) from time to time. Such flagging would largely be done by the computer based system;

(ii) any final objection raised by the Comptroller and Auditor General of India to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of this Act.

In case of Search & Seizure (S. 132), Survey (S. 133A), Requisition of books of accounts, etc relating to the assessee (S. 132A)  or where money, bullion, jewellery or other valuables articles are sized in case of another person but belong to the assessee or books of accounts or documents seized or requisitioned in case of another person pertain to the assessee or contain information related to the assessee, the AO is ‘deemed to have information suggesting escapement of income’ chargeable to tax for 3 AY preceding the AY relevant to the year in which the aforesaid proceedings is conducted (i.e. 4 preceding financial years). These provisions principally seek to simplify and align the special procedure presently applicable to matters relating to search & seizure etc., with the new procedure for reassessment.

It is pertinent to note that the information flagged in accordance with the risk management strategy should necessarily pertain to ‘the assessee’ and thus it appears that information flagged in the case of thirds party, even if implicating the assessee cannot be made a basis of issuance of notice. Perhaps it may have to be seen whether the mechanism to be formulated by the CBDT ensures checks and balances to identify such delinquent taxpayers also.

Procedure to be followed before issuing notice for reassessment

The new provisions further codify the procedure to be followed by the AO before issuing a notice for reassessment. The provisions required the AO to:

  • Conduct any enquiry, if required, with prior sanction of the specified authority, with respect to the information suggesting escapement of income;
  • Provide the assessee an opportunity of being heard by serving a notice to show cause within such time (being not less than 7 days and not exceeding 30 days) as to why a notice under section 148 should not be issued on the basis of information suggesting escapement of chargeable income and results of enquiry conducted, if any;
  • Consider the reply of assessee, if any, furnished and basis the material including reply of the assessee, decide whether a notice is to be issued by passing an order, with the prior approval of specified authority, within 1 month from the end of the month in which the reply referred to in received/ time allowed to furnish a reply expires.

The aforesaid procedure is not required to be followed in cases relating to search and seizure, or where books of account, other documents or any assets are requisitioned under section 132A, etc. (i.e. situations where AO is deemed to have information suggesting escapement of assessment.)

Time limit for issuance of reassessment notice

The new provisions reduce the time-limit for re-opening of assessment to 3 years from the end of relevant AY. For instance, in relation FY 2017-18 corresponding to AY 2018-2019, the reassessment proceedings can be opened only upto 31 March 2022 (being 3 years from the end of relevant AY). FY 2016-17 and prior years will henceforth be barred by limitation if a notice is issued after 31 March 2021 (as against FY 2013-14 and prior years under existing law). In case where the AO has in his possession books of accounts or other documents or evidence which reveal that the income chargeable to tax, ‘represented in the form of assets’, which has escaped assessment amounts to Rs. 50 lacs or more, the assessment can be re-opened upto 10 years.

Grandfathering period of limitation for AY 2021-22 and prior years

The new reassessment provisions are applicable from April 1, 2021. The provisions grandfather issuance of notice for reopening of assessment for financial years (FY) ending till 31 March 2021 upto the end of 6 assessment years relevant to such assessment year (for which notice is issued) as prescribed under the existing provisions. This would imply that if a notice for reassessment was to be issued in FY 2021-22, notice for reassessment can be issued only for FY 2017-18 and subsequent years (i.e. 3 years limitation under new provisions). Further, if it is a case where the quantum of income escaped is Rs.50 lacs or more, notice for reassessment can be issued only for FY 2015-16 and subsequent years on account of grandfathering provisions. The extended period of 10 years would not apply in such case.

Analysing the changes

The proposals, in all fairness are in the right direction. Reduction of period of limitation from 6 to 3 years would provide much desired certainty and closure to a large section of taxpayers. Further restricting reopening based on risk management strategy of CBDT and objections raised by CAG will bring an end to the often-abused powers of reopening exercised by AO, typically at the fag end of the limitation period. By providing a clear mechanism of inquiry, issuance of notice and its timeframe, the proposal will, to a major extent, aid in streamlining the procedure. The unpleasant surprise of receiving reassessment notice on the last day of the financial year will now be a thing of the past given that the new provisions require a detailed procedure to be followed and opportunity to be granted to the assessee to provide his reply before issuance of notice.  

The proposal for extended 10 years limitation where the alleged income, ‘represented in the form for assets’, has escaped assessment exceeds ‘Rs. 50 lacs or more’, principally seem reasonable. Prima-facie, it appears that since the revelation of escaped income has to be ascertained from ‘the books of accounts or other documents or evidence in possession of the AO’, this may typically apply to cases of search and seizure, survey, requisition of books, etc. However there seems to be some ambiguity which could have far reaching implications.

The new provision in so far as relate to matters of search & seizure, requisition of books etc. prescribe that where the aforesaid proceeding are initiated, the AO shall be deemed to have information suggesting escapement of chargeable income for 3 AY immediately preceding AY relevant to the FY in which such proceedings are undertaken. Thus, for instance, if search proceedings are initiated against an assessee in FY 2021-22 (relevant AY being 2022-23), income will be deemed to have been concealed for 3 immediately preceding AY i.e. AY 2019-20, AY 2020-21& AY 2021-22, (corresponding to FY 2018-19, FY 2019-2020 & FY 2020-21). Thus, notice would be issued for all the 3 years. Consider this in light of the operative provision which prescribes that where income chargeable to tax has escaped assessment for any assessment year, the AO shall reassess such income for such assessment year. The combined reading of law appears to suggest that in case of aforesaid matters, reassessment proceedings can be undertaken only for 3 years prior to the year in which search proceedings are initiated. If this was to hold good, the question arises whether the extended period of 10 year is really redundant for search & seizure/survey/requisition of books, etc. matters?

This leads to the next pertinent question – in which situations will the 10-year limitation period apply?

The limitation period beyond 3 year and upto 10 year is applicable where the AO ‘is in possession’ of books of accounts or other documents or other evidence which reveal escapement of income chargeable to tax and represented in the form of assets. Ordinarily, AO obtains possession of bocks of accounts/other documents/evidence in proceedings relating to search & seizure/survey/requisition of books, etc. matters. As discussed above, given the provisions as presently stated, one possible reading is that reassessment proceedings can only be undertaken for 3 years prior to the year in which search proceedings, etc are initiated. Would this imply that the extended period of 10 years would apply to matters other than search & seizure/survey/requisition of books, etc.?

In light of the aforesaid, the expression “Assessing Officer has in his possession books of accounts or other documents or evidence which reveal that…”, a necessary condition for exercising extended limitation of 10-year, merits consideration. Would it therefore mean that the documents gathered during regular assessment proceedings may well be regarded as relevant ‘documents or evidence’ being in the possession of the AO. ‘Books of accounts’ are typically not given in possession during assessment proceedings, and therefore how it fits into the scheme of things remains a grey area. Further, would the information mined and provided under the ‘risk mitigating strategy’ of CBDT also be regarded as ‘evidence’ in possession of the AO.

While this may still be debatable, any such inference would be a huge damper as it would now enable reopening assessment for 10 years (subject to Rs. 50 lacs threshold) as against 4 year under the existing law even where the assessee has made full and true disclosure of material facts during the course of prior assessment. Take for instance a case where risk management strategy of CBDT flags substantial increase in loans and advances or investments as a data point for triggering reassessment. The same would logically have been disclosed in the balance sheet. In such a situation, inspite of such disclosure, there could perhaps be possibility to reopen reassessment proceedings upto 10 year (subject to monetary threshold), effectively giving the CBDT a 10-year timeframe to refine its data intelligence and risk-based criterion. This would certainly be an area of concern.

Overall, it is encouraging to note a transformational change in the provisions relating to reassessment proceedings. There is a fundamental shift from an obscure and discretionary regime to systematic and risk-based criterion applicable uniformly across jurisdictions and taxpayers, without bias and subjectivity. It will however be interesting to see how the authorities go about enforcing the extended period of limitation given the ambiguity involved. One can hope the same is not enforced against the interest of taxpayer, specifically taking a liberal interpretation of 10 years extended limitation period, which otherwise will be a huge disappointment.   

[1] Extended period of 16 years is prescribed in case of escaped income in relation to an asset located outside India.

Yatin can be reached at yatin.sharma@aureuslaw.com. Views are personal. 

SEBI Directions on Listed Companies going through CIRP

On December 16, 2020, the SEBI Board met for what is its last meeting before the full budget for Financial Year 2020-21. Certain key decisions were announced in relation to shareholding norms for listed companies going through Corporate Insolvency Resolution Process (CIRP). 

Presently, during Corporate Insolvency Resolution Process (CIRP) where the public shareholding falls below 10%, listed companies are required to bring the public shareholding to at least 10% within a period of 18 months and to 25% within 36 months.  Per the Press Release the following has been reported:

"..., the Board has decided the following in respect of companies which continue to remain listed as a result of implementation of the resolution plan under the Insolvency and Bankruptcy Code: 

"i. Such companies will be mandated to have at least 5% public shareholding at the time of their admission to dealing on stock exchange, as against no minimum requirement at present. 

"ii. Further, such companies will be provided 12 months to achieve public shareholding of 10% from the date such shares of the company are admitted to dealings on stock exchange and 36 months to achieve public shareholding of 25% from the said date. 

"iii. The lock-in on equity shares allotted to the resolution applicant under the resolution plan shall not be applicable to the extent to achieve 10% public shareholding within 12 months. 

"iv. Such companies shall be required to make additional disclosures, such as, specific details of resolution plan including details of assets post-CIRP, details of securities continuing to be imposed on the companies’ assets and other material liabilities imposed on the company, proposed steps to be taken by the incoming investor/acquirer for achieving the minimum public shareholding (MPS) and quarterly disclosure of the status of achieving the MPS."

Source: https://www.sebi.gov.in/media/press-releases/dec-2020/sebi-board-meeting_48451.html.