Common Difficulties in Filing Returns and Tax Audit

2. Case Study 1: Clause 34A & 21(b)

Proviso to sec 40(a)(ia) – report only the amount on which TDS needs to be deducted

• A Co. has to pay ₹ 4 cr as professional fees to 4 different entities and has deducted TDS only towards 3 deductees and deposited to Government.
• As regards to the 4th deductee, since the amount of tax along with interest was deposited by deductee and certificate was also issued to the deductor, A Co was not in default
• While reporting under clause 34A of the Tax audit report A Co reported TDS deductible and TDS deducted which resulted into reporting of short deduction of TDS which factually is not the case
• The consequences of the same can be on disallowance u/s 40(a)(ia) reported in clause 21(b)
• How to report the said compliance of 40(a)(ia) of the Act

Alternative Solution – Assessee can obtain Form – 26A and Auditor can rely on it and giving observations in Form 3CA

3. Case Study 2: GAAR clause 30C Demerger of a loss making company and merging it with the profit making company

A Ltd: A logistics company having network in major parts of India

B Ltd: Logistics company, subsidiary company of A ltd. formed for acquiring business of different networks

B Ltd. had different units and all loss making units. A Ltd wants to acquire the business from B Ltd. of a certain network where A Ltd. is not still have reached which will in turn benefit them after acquisition.

The Scheme was approved on 27.10.2019 with effective from 01.04.2018

Co. A & Co B filed its return before the scheme was approved and claimed the losses of the undertaking independently without giving an effect to demerger.

• Whether Co. A will be able to claim the loss of demerged Co. for the previous assessment
  years as same is reported in c/f scheduled of Co. B in past years
• Whether Co. A will be able to claim TDS credits in respect to income on which TDS is deducted in Co B and reflected in 26AS of Co B?
• Whether Co. B will be able to reduce the losses already claimed?
• Considering following commercial substance which are attached to the said arrangement whether GAAR provisions can be attracted and whether reporting is required under clause 30C

This Scheme of Arrangement is expected to enable better realisation of potential of the businesses and yield beneficial results and enhanced value creation for the Companies, their respective shareholders, creditors, lenders, consumers and employees.

The rationale for the Scheme is set out below:

a) The proposed demerger will result in consolidation of logistics business of Co. A and Co. B in a single entity;

b) It will facilitate in streamlining the operating structure, pave way for expansion and smooth conduct of Co. A’s current operations by adding similar lines of business;

c) It will help in achieving and sustaining competitiveness and development of internal core competencies of the Companies in the long term;

d) Synergies arising from the proposed demerger are expected to bring in cost savings in marketing, selling and distribution expenses as well as give benefit of economies of scale to Co. A.

4. Case Study 3: GAAR clause 30C

AB PVT LTD. – Owned by A & B

CD PVT LTD. – Owned by wives of A & B i.e. C & D

AB PVT. LTD. has huge amount of accumulated profits

• Whether loan given by ABPL to CDPL will be considered as Deemed Dividend?
• Whether SAAR will apply or GAAR?
• In this case if there are two options with ABPL to pay off this accumulated profits i.e. either buyback the shares wherein the Co. will pay taxes @ 20 % and to pay dividend wherein the owners will pay tax @ 30%? Whether can this be GAAR?

When there are two methods to achieve purpose and either of the purpose give tax benefit – CBDT says GAAR will not apply – buyback or dividend distribution