Weekly Round-up on Tax and Corporate Laws | 01st to 06th July 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from July 01 to 06, 2024, namely

1. SEBI prohibits transactions via ‘mule accounts’ for indulging in manipulative, fraudulent and unfair trade practices;
2. Set-off of STCL on which STT was paid against STCG not subject to STT is valid: ITAT;
3. Payment of tax made before completion of search could not be retained by revenue without proper acknowledgement: HC;
4. Penalty equivalent to tax can’t be levied u/s 129 if machinery was transported from port to factory after customs clearance;
5. RBI mandates ADs to obtain Form A2 for all cross-border remittances;
6. RBI removes cap on remittance via online submission of Form A2; and
7. Exploring SA 500: Audit Evidence Checklist and Best Practices

1. SEBI prohibits transactions via ‘mule accounts’ for indulging in manipulative, fraudulent and unfair trade practices

SEBI vide Notification No. SEBI/LAD-NRO/GN/2024/187, Dated June 27, 2024, has notified the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) (Amendment) Regulations, 2024. An amendment has been made to Regulation 4(1) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

SEBI clarified that transactions via ‘mule accounts’ for indulging in manipulative, fraudulent and unfair trade practices must be prohibited. Further, any act of diversion, misutilisation or siphoning off of assets or earnings of a company whose securities are listed or any concealment of such act or any device, scheme or artifice to manipulate the books of accounts or financial statements of such a company that would directly or indirectly manipulate the price of securities of the company must also be prohibited.

Also, the term ‘mule account’ has been defined under Reg. 2(da). It refers to a trading account maintained with a stock broker or a dematerialised account or bank account linked with such trading account in the name of a person, where the account is effectively controlled by another person, regardless of whether the consideration for transactions in the account is paid by such other person. This clear definition helps to identify and prevent the misuse of such accounts for fraudulent activities.

This amendment aims to enhance the integrity of the securities market by preventing the misuse of accounts for fraudulent activities. It strengthens the regulatory framework, ensuring greater transparency and protection for investors by prohibiting deceptive practices that could manipulate stock prices.

Read the Notification

2. Set-off of STCL on which STT was paid against STCG not subject to STT is valid: ITAT

Assessee, a Mauritius-based company, was registered with the Securities and Exchange Board of India as a foreign portfolio investor (FPI). During the relevant assessment year, the assessee earned short-term capital gain that was not subject to securities transaction tax (STT) and was taxable at the rate of 30 percent. The assessee also incurred short-term capital loss subject to STT and was in the 15% tax category.

While furnishing the return of income, the assessee had set off short-term capital losses against the short-term capital gains.  During the assessment proceedings, the Assessing Officer (AO) contended that the set off of losses having lower taxability with gains of higher taxability was not in order.  Thus, the AO computed set-off of short-term capital loss covered under section 111A against short-term capital gains chargeable to tax at the rate of 15% and did not grant any set-off short-term capital gain which was chargeable to tax at the rate of 30%.

On appeal, the Dispute Resolution Panel (DRP) also confirmed the action of the AO. Aggrieved by the order, the assessee preferred an appeal to the Mumbai Tribunal.

The Tribunal held that Section 70(2) provides that where the assessee suffers a short-term capital loss, the assessee shall be entitled to set off such losses against capital gain computed similarly as under sections 48 to 55 of the Act. According to section 70(3), where the assessee suffers long-term capital loss, the assessee shall be entitled to set off such losses against the long-term capital gains computed similarly as provided under sections 48 to section 55.

Sections 48 to 55 do not provide for the tax rate on capital gain. It specifically lays down the computation mechanism of capital gain and certainly not tax on such capital gains. It is not the case that either in the computation of short-term capital gains or short-term capital loss, there is any difference in the manner of computation. Therefore, short-term capital gain and short-term capital loss arising during the year are computed similarly as provided under sections 48 to 55 of the Act.

Thus, there was no reason to deprive the assessee of set-off of short-term capital losses suffered by the assessee for the same year against the short-term capital gains earned by the assessee. Such a claim was in accordance with the provisions of section 70(2) of the Act.

Read the Ruling

3. Payment of tax made before completion of search could not be retained by revenue without proper acknowledgement: HC

The Honorable Calcutta High Court has recently held that payment of tax during the course of the search could not have been stated to be voluntarily made as there are also discrepancies in the timing of the search & departure of officers from the premises of the assessee, and a refund should be granted if there was no acknowledgement given in GST DRC-04.

Digest

The assessee made a payment of tax during the course of the search, but there was no intimation given to the assessee regarding non-payment or short payment of taxes. The assessee submitted that it was compelled to pay a sum of Rs.30,00,000/- under threat of arrest, coercion and undue influence during the course of search. It filed a writ petition for a refund of the amount paid during the search, but the petition was dismissed on the grounds that there was proper authorization in INS-01. It filed an appeal against the order of dismissal of the petition.

The Honorable High Court noted that as per instructions issued by Commissioner (GST-Inv.), CBIC, there may not be any circumstances necessitating recovery of tax dues during course of search or inspection or investigation proceedings. So far as voluntary payment by taxpayer is concerned, it should be against an ascertainment of their liability on non-payment/ short payment.

In the instant case, such ascertainment had not taken place and there was no intimation given to assessee regarding non-payment or short payment of taxes. Therefore, it was held that the payment of Rs.30,00,000/- during course of search could not have been stated to be voluntarily made and the same was required to be refunded as the amount could not be retained by revenue without proper acknowledgment.

Read the Ruling

4. Penalty equivalent to tax can’t be levied under section 129 if machinery was transported from port to factory after customs clearance

The High Court of Bombay has recently held that transportation of goods to the assessee’s own factory after Customs clearance is a non-taxable supply as it does not constitute a supply under Section 7. Therefore, in the absence of an e-way bill, a penalty equal to one hundred per cent of the tax payable could not be invoked.

Digest

The petitioner imported machinery from China under EPCG scheme and arranged transport to its own factory. The vehicle in which machinery was being transported was intercepted in Maharashtra, and it was found that the e-way bill did not accompany the vehicle. The department levied a penalty under Section 129(1) of the CGST Act, 2017, equivalent to tax applicable on the value of machinery. The petitioner filed a writ petition against the penalty levy and contended that there would be no GST liability when goods are transported by an importer to his own factory.

The Honorable High Court noted that the activity of transporting machinery from the port to the petitioner’s own factory would not fall within Section 7, which deals with the scope of supply. In the instant case, when the machinery was being transported to the petitioner’s own factory after Customs clearance, there would be no tax payable under the GST Act. Therefore, the first limb of Section 129(1)(a), which provides for a penalty equal to one hundred per cent of tax payable, could not be invoked in an instant case.

Moreover, the second limb of Section 129(1)(a) would be applicable, which provides a penalty equal to two per cent of the value of goods or 25,000, whichever is less, in the case of exempted goods. In the instant case, two per cent of the value of goods is more than Rs.25,000 and therefore, as per Section 129(1)(a), the penalty that could be levied would be Rs.25,000 because it is lesser of two amounts. Thus, it was held that the penalty of Rs. 25,000 would be levied, and the writ petition was disposed of.

Read the Ruling

5. RBI mandates ADs to obtain Form A2 for all cross-border remittances

Under the erstwhile norms, Authorized Dealers were permitted to release foreign exchange for any current account transactions up to USD 25,000 based on a simple letter containing basic information. They were not required to obtain any other documents, including Form A2, and the payment was to be made by the applicant via demand draft or a cheque drawn on his/her bank account.

To streamline regulatory compliances and operational procedures, the RBI, vide Circular No. RBI/2024-25/47 A.P. (DIR Series) Circular No. 13, Dated July 03, 2024, has mandated that the authorised dealers (ADs) must obtain Form A2 in physical or digital form for all cross-border remittances, irrespective of the value of the transaction. Consequently, the above-mentioned norms stand withdrawn with immediate effect.

This mandate enhances compliance and transparency in cross-border transactions by requiring Form A2 for all remittances, irrespective of the transaction value. This decision aims to strengthen the documentation process and ensures thorough vetting of all cross-border transactions. While this change may seem burdensome to some, it is expected to boost regulatory oversight, reduce the risk of fraud and improve the integrity and transparency of foreign exchange operations in India.

Read the Circular

6. RBI removes cap on remittance via online submission of Form A2

As per paragraph 4 of the A.P. (DIR Series) Circular No. 50, dated Feb 11, 2016 and A.P. (DIR Series) Circular No. 2, dated April 12, 2023 the RBI permitted AD Category-I banks and AD Category-II entities to allow their customers to submit Form A2 via online mode, subject to certain restrictions. However, the online facility was available for transactions with an upper limit of USD 25,000 for individuals and USD 1,00,000 for corporates.

To improve the ease of doing business, the RBI has now allowed all Authorised Dealers (AD Category-I banks and AD Category-II entities) to facilitate remittances based on the online or physical submission of Form A2 and other related documents. Further, there will be no limit on the amount that can be remitted using the ‘online’ Form A2.

This change allows for unlimited remittances via the online submission of Form A2. It simplifies the process for individuals and corporations, fostering greater efficiency and smoother financial operations.

Read the Circular

7. Exploring SA 500: Audit Evidence Checklist and Best Practices

Audit evidence includes all information obtained by the auditor during the audit on which he bases the audit opinion. The auditor shall obtain sufficient and appropriate audit evidence to reduce the audit risk to an acceptably low level and thereby form conclusive audit opinion. Considering the pivotal role of audit evidence in auditor’s conclusion, it becomes necessary to comply with the requirement of SA 500, Audit Evidence. The given checkpoints shall assist the auditor in complying with SA 500 and thereby form appropriate conclusion:

(a) Designing and performing audit procedures to obtain Sufficient Appropriate Audit Evidence (SAAE)

• Have you performed Risk Assessment Procedure (RAP), Test of Control (TOC) and substantive procedures as appropriate in the circumstances?
• In addition to the inquiry, have you performed inspection, observation, external confirmation, recalculation, re-performance and analytical procedures to obtain the audit evidence?
• When designing audit procedure, have you determined the sufficiency of audit evidence to be obtained after considering assessed risk of material misstatement and quality of audit evidence?

(b) Inspection of assets and documents

• While inspecting tangible assets whether you have considered that the inspection of tangible assets provides evidence regarding the existence of assets but not regarding their rights and obligation or valuation?
• Have you considered the following guidance while performing inspection/examination of documents?

1. 1. Inspection used as a test of controls is the inspection of records for evidence of authorisation
   2. Inspecting an executed contract may provide audit evidence relevant to the revenue recognition policies applied by the entity.
   3. Inspection of records and documents provdes audit evidence of varying degrees of reliability

(c) Reliability of information produced by a Management’s Expert

• Where the information to be used as audit evidence is prepared by the management’s expert, have you performed the following procedures?

1. 1. Evaluated the competence, capabilities and objectivity of that expert
   2. Obtained an understanding of the work of that expert
   3. Evaluated the appropriateness of that expert’s work as audit evidence for the relevant assertion

• Whether you have indulged yourself in discussion with expert and identified any interests or relationships that may create threats to the expert’s objectivity?
• Where there exist any engagement letter or other written form of agreement between the entity and management’s expert, have you evaluated the appropriateness of the following:

1. 1. The nature, scope and objectives of that expert’s work
   2. The respective roles and responsibilities of management and that expert
   3. The nature, timing and extent of communication between management and that expert, including the form of any report to be provided by that expert?

Read the Story