Weekly Round-up on Tax and Corporate Laws | 08th to 13th August 2022

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 08th to 13th August 2022, namely:

(a) CBDT notifies books and other documents to be maintained by the trusts;

(b) Condition of part payment by reversal of alleged fraudulent ITC as directed by Trial Court for bail is not illegal: High Court;

(c) High Court sets aside the assessment orders related to tax periods for which show-cause notices were not issued;

(d) IBBI cancels the registration of RP for initiating the liquidation of the corporate debtor without following the true spirit of the resolution process; and

(e) Auditor’s responsibility to evaluate the appropriateness of the entity’s ability to continue as a going concern.

1. CBDT notifies books and other documents to be maintained by the trusts

Under the Income-tax Act, ordinary taxpayers are required to maintain books of accounts and get them audited. The requirement to maintain the books of account is prescribed under Section 44AA. However, there was no specific provision under the Act for the books of accounts to be maintained by trusts or institutions.

The Finance Act 2022 amended Section 12A and Section 10(23C) to provide that where the total income of the trust or institution, before exemption under Section 10(23C) or Section 11 and 12, exceeds the maximum amount which is not chargeable to tax, such trust or institution shall keep and maintain books of account and other documents in such form, manner and at such place, as may be prescribed.

The CBDT has notified Rule 17AA prescribing books and other documents to be kept and maintained by a trust or institution registered under section 12A/10(23C). The key extracts of the newly notified Rule 17AA are given below:

(a) Every fund, institution, trust, university, other educational institution, hospital or other medical institution is required to keep and maintain the following books of account and other documents:

(i) Books of account, including the cash book, ledger, journal, copies of bills, original bills, and any other book to give a true and fair view;

(ii) Books of account for a business undertaking and business carried on by assessee other than business undertaking referred to in section 11(4);

(iii) Other documents for maintaining a record of:

• • • • All projects and institutions run by the person containing details of their name, address, and objectives;
      • Income in respect of voluntary contribution containing details of donor, income from property held under trust along with a list of such property, and other income of fund or institution or trust, etc.;
      • The application of income in and outside India, deemed application of income, income accumulated or set apart, money invested in the specified mode, etc.;
      • Voluntary contribution received and its application;
      • Loans and borrowings;
      • Properties held by trust;
      • The specified person.

(b) The books of account and other documents may be kept in written form, electronic form, digital form or as printouts of data stored digitally;

(c) The books of account and other documents shall be kept and maintained by the entities at their registered office. However, books may be kept in another place if management decides to do so by passing a resolution;

(d) The books of account and other documents shall be kept and maintained for 10 years from the end of the relevant assessment year.

Read the Notification

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2. Condition of part payment by reversal of alleged fraudulent ITC as directed by Trial Court for bail is not illegal: High Court

The Delhi High Court has held that the petitioner’s bail can’t be cancelled if he deposited part amount, as a condition of bail, by reversal of ITCs instead of cash. The condition fulfilled by part payment through the reversal of alleged fraudulent ITC as directed by the Trial Court for bail is not illegal.

Facts

The department arrested the petitioner, and it was alleged that he was the mastermind behind devising a mechanism of availing ITC on the strength of bills of various suppliers, which were non-existing and fictitious and availed fraudulent ITC worth Rs. 27.05 crores which were further passed on. He applied for bail before the Trial Court.

The Trial Court imposed a condition of a deposit of Rs. 2.70 crores for grant of bail. The petitioner deposited Rs. 1.10 crores through the cash ledger and Rs. 1.60 crores through reversals in the electronic ITC ledger. The department applied for cancellation of bail, and the Patiala House Court cancelled bail on the ground that the condition was not fulfilled as ITC was not paid in cash. He filed a writ petition against the same.

High Court

The High Court observed that non-compliance with the conditions of bail is a ground for cancellation of the same. However, in the present case, the condition was to deposit Rs. 2.70 crores with the department, which stands satisfied by the petitioner by depositing part amount by transfer of ITCs. Therefore, it can’t be said that the petitioner failed to fulfil the conditions imposed on him. Thus, the order of cancellation of bail was to be set aside.

Read the Ruling

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3. High Court sets aside the assessment orders related to tax periods for which show-cause notices were not issued

The Tripura High Court has held that where notice is issued for one assessment year, but 5 separate assessment orders are passed for different tax periods taking a stand that no notice was required for other tax periods would be sufficient to vitiate other assessment orders.

Facts

The Superintendent issued a show-cause notice (SCN) to the petitioner for recovery of unpaid tax and penalty for the financial year 2018-19. It replied to SCN, and the Superintendent issued the order of cancellation of registration of the petitioner and also issued separate orders confirming the tax and penalty demands against the petitioner for the tax periods 2017-18 till 2020-21. It filed a writ petition and submitted that SCNs were not issued for tax periods except the financial year 2018-19.

High Court

The High Court observed that the Superintendent of Taxes passed five separate orders for different tax periods starting with 2017-18 to 2020-21, raising tax demands with penalties, although SCN was issued only for the assessment period 2018-19. Moreover, the officer contended that once notice was issued for a particular tax period, no notice was necessary for other tax periods stems from utter ignorance of the law. In the instant case, the principles of natural justice were violated, and this fundamental breach was sufficient to vitiate the assessment orders.

Read the Ruling

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4. IBBI cancels the registration of RP for initiating the liquidation of the corporate debtor without following the true spirit of the resolution process

In the instant case, the Insolvency and Bankruptcy Board of India (IBBI) cancelled the registration of the Resolution Professional for deciding to liquidate the corporate debtor without following the true spirit of the resolution process.

Facts

The applicant was an Insolvency Professional (IP) registered with IBBI. A show-cause notice was issued to the applicant after examination of available records in respect of his role as an IRP/RP in the CIRP of a corporate debtor.

It was found that the applicant as IRP/RP did not verify claims received within the prescribed time, and he conducted four meetings of CoC without verification of claims. The CoC was constituted based on claim submission and not on the claims verified by the applicant as IRP/RP.

Further, two financial creditors related to the corporate debtor became members of CoC with a majority. The constitution of CoC was in violation of the proviso to Section 21(2)

It was further noted that the CIRP of the corporate debtor was admitted, and CoC took the decision in its fifth meeting to liquidate the corporate debtor. However, no Information Memorandum was issued, no registered valuers were appointed, no Expression of Interest was invited, and, thus, there seemed to be no intention to resolve the corporate debtor

The Board held that the decision of liquidation was taken without following the true spirit of resolving corporate debtor as a going concern. Since the entire process was conducted to ensure that no opportunity was given for resolution and the process ended in the liquidation of the corporate debtor, registration granted to the applicant was to be cancelled.

Read the Ruling

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5. Auditor’s responsibility to evaluate the appropriateness of the entity’s ability to continue as a going concern

Financial statements are prepared on the assumption that an enterprise will continue its operation in the foreseeable future. There is neither an intention nor a need to materially curtail its scale of operations. In other words, an enterprise is viewed to be a going concern.

If any financial statement is prepared on a different basis, for example, when the assets of an enterprise are stated at net realisable values in the financial statements, such basis should be disclosed in the financial statement.

AS 1 (Disclosure of Accounting Policies) states that no specific disclosure is required where financial statements are prepared on a going concern basis. However, disclosure is necessary where books are prepared on a basis other than going-concern.

To provide an opinion on the true and fair view of the state of affairs of the entity, an auditor is required to obtain sufficient appropriate audit evidence regarding the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements. The auditor has to conclude based on evidence whether a material uncertainty about the entity’s ability to continue as a going concern exists.

If there is an absence of any reference to material uncertainty regarding the entity’s ability to continue as a going concern in an auditor’s report, it cannot be viewed as a guarantee as to the entity’s ability to continue as a going concern.

If there are events or conditions that exist and cast significant doubt on the entity’s ability to continue as a going concern, sufficient appropriate audit evidence is required to be obtained through performing additional audit procedures. These procedures shall include:

(a) Where management has not yet performed an assessment of the entity’s ability to continue as a going concern, requesting management to make its assessment;

(b) Evaluating management’s plans for future actions relating to its going concern assessment, whether the result of these plans is likely to improve the situation and whether these plans are feasible in the situation;

(c) Where cash flow forecast has been prepared by the entity, and the analysis of the same is an important element in considering the future outcome of events or conditions in the evaluation of management’s plans for future actions;

(d) Evaluating the reliability of the underlying data generated to prepare the forecast;

(e) Determining whether there is adequate support for the assumptions underlying the forecast;

(f) Taking into consideration whether there is any additional facts or information that have become available since the date management made its assessment; and

(g) Asking for written representations from the management and, where appropriate, those in charge of governance relating to their plans for future actions and their feasibility.

Read the Story

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