Weekly Round-up on Tax and Corporate Laws | 09th to 14th May 2022

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 09th to 14th May 2022, namely:

(a) The CBDT mandates PAN for cash deposit/withdrawal of Rs. 20 lakhs or more and opening of current & cash credit account;

(b) The CBDT issues instructions to implement the Supreme Court’s ruling upholding the validity of old reassessment notices;

(c) Interest & penalty to be imposed if credit was wrongly availed & utilised: High Court;

(d) State Laws such as Kerala/Gujarat Money Lenders Act have no application to NBFCs registered under RBI Act: Supreme Court;

(e) No vicarious liability of persons under Section 141 of Negotiable Instrument Act unless the entity has committed an offence as principal accused: Supreme Court;

(f) Karnataka High Court dismissed a writ petition challenging the power of the Municipal Corporation to levy advertisement tax;

(g) Key considerations for audit of cash and bank balances.

1. The CBDT mandates PAN for cash deposit/withdrawal of Rs. 20 lakhs or more and opening of current & CC account

Section 139A of the Income-tax Act prescribes certain transactions for which a person must obtain a Permanent Account Number (PAN). It also lists down the situations where quoting PAN is mandatory. Rule 114 provides the manner and timelines for making an application for the allotment of a PAN if Section 139A is applicable.

The CBDT has notified some additional transactions wherein a person is required to obtain PAN. The Board has notified new Rule 114BA and Rule 114BB, enhancing the scope of obtaining and quoting PAN. The Board has also amended the existing Rule 114, prescribing the time limit for making applications for PAN in newly notified transactions.

The changes brought by the Board have been discussed in the following paragraphs:

a) A new list of transactions

The Board has notified new Rule 114BA, which provides a list of transactions wherein it shall be mandatory for a person to obtain PAN. Obtaining PAN is mandatory if a person has entered into the following transactions:

• • • Cash deposit, aggregating to Rs. 20 lakhs or more, in a financial year in a bank or post office.
    • Cash withdrawal, aggregating to Rs. 20 lakhs or more, in a financial year from a bank or post office.
    • Opening of a current account or a cash credit account with a bank or a post office.

The provisions of Rule 114BA are applicable with effect from 25-05-2022.

Note: If a person has maintained one or more accounts with a bank, then the aggregate of deposit or withdrawal from each of such accounts shall be taken into consideration to calculate the limit of Rs. 20 lakhs.

Further, as per the new Rule 114BB, if a person has entered into any of the above-notified transactions, then it shall be mandatory for him to quote PAN or Aadhaar number in the documents pertaining to such transactions.

Every person who receives such document shall ensure that the PAN or Aadhaar number has been duly quoted and authenticated.

The provisions of Rule 114BB are applicable with effect from 09-07-2022.

b) The time limit for making an application to obtain PAN

The Board has amended the existing Rule 114 to provide the time limit for making an application in case a person intends to enter into transactions referred to in Rule 114BA.

It has been provided that such a person shall be required to make an application for allotment of PAN at least 7 days before the date on which he intends to enter into the said transaction.

READ THE NOTIFICATION

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2. The CBDT issues instructions to implement the Supreme Court’s ruling upholding the validity of old reassessment notices.

In the case of Ashish Agarwal [2022] 138 taxmann.com 64 (SC), the Supreme Court has upheld the validity of the reassessment notices issued by the Assessing Officers during the period 01-04-2021 30-06-2021 under the old provisions.

The Supreme Court held that the reassessment notices issued under old provisions shall be deemed as show-cause notices issued under new provisions of Section 148A. It also directed AO to follow the new reassessment procedure with respect to such notices and complete the proceedings accordingly.

To implement the judgment of the Supreme Court uniformly, the CBDT has issued an instruction that may be taken into consideration while implementing the ruling.

The Board has clarified that the judgment applies to all cases where extended reassessment notices have been issued, irrespective of the fact whether such notices have been challenged or not.

Further, the ruling of the Supreme Court read with the time extension provided by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA) will allow extended reassessment notices to travel back in time to their original date when such notices were to be issued and then new section 149 is to be applied at that point.

2.1. Assessment Years for which reassessment proceedings can be initiated pursuant to SC ruling

2.1-1. Assessment Years 2013-14, 2014-15, and 2015-16

Fresh notice under Section 148 can be issued with the approval of the specified authority only if the case falls under Section 149(1)(b). This means notices can be issued for these Assessment Years if the income escaping assessment amount is Rs. 50 lakhs or more.

2.1-2. Assessment Years 2016-17 and 2017-18

Fresh notice under Section 148 can be issued with the approval of the specified authority under Section 149(1)(a) since they are within three years from the end of the relevant assessment year.

2.2 Disposing of cases not falling within the period of limitation

Notices cannot be issued for AY 2013-14, AY 2014-15, and AY 2015-16 if the income escaping assessment amount is less than Rs. 50 lakhs. Thus, the Board shall issue a separate instruction prescribing the procedure to dispose of notices issued under old provisions under these cases.

2.3. Procedure to be followed by AOs to comply with the Supreme Court judgment

The Board has specified that the AO is required to follow the following procedure to comply with the order of the Supreme Court:

• • • AO shall provide the information and material relied upon by him for the issuance of extended reassessment notices by 02-06-2022. The assessee has two weeks to reply about why a notice under Section 148 of the Act should not be issued.
    • If the assessee makes a request seeking more time to file a reply to the show-cause notice, then such a request shall be considered by AO on merit.
    • After receiving the reply, AO shall decide, based on material available on record, including the reply of the assessee, whether or not it is a fit case to issue a notice under Section 148.
    • If it is a fit case to issue a notice under Section 148, AO shall serve on the assessee a notice under Section 148 after obtaining the approval of the specified authority under Section 151 of the new law.
    • If it is not a fit case to issue a notice under Section 148 of the Act, the order passed under Section 148A(d) to that effect shall be served on the assessee.

READ THE INSTRUCTION

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3. Interest & penalty to be imposed only if credit was wrongly availed & utilised: High Court

The Madras High Court, in the case of Aathi Hotel v. Assistant Commissioner (ST) (FAC), has recently held that interest/penalty can be imposed only when input tax credit has been wrongly availed and utilised. However, in an attempt to avail wrong credit, the petitioner would not be liable for the penalty, but considering the seriousness of the mistake committed by the petitioner, it would be liable for a token penalty.

Facts

The credit was wrongly availed of VAT paid on capital goods purchased for hotel business by the petitioner. It filed TRAN-1 and transitioned such credit, but the aforesaid credit was never utilised. The department levied interest and penalty on undue ITC claimed through TRAN-1. It filed a writ petition against the same.

High Court

The High Court observed that the petitioner reversed the entire transitional credit in the monthly returns of January 2020. Though the petitioner made an improper attempt to transition the aforesaid credit, but he had not utilised the same and had also reversed the same after a show-cause notice was issued. Since such credit was not utilised, the proper method would have been to levy a penalty under section 122 of CGST Act, 2017 and not under Section 73 or 74 of CGST Act. Therefore, considering the gravity of the mistake committed by the petitioner, a penalty Rs. 10,000 is imposed on the petitioner, and the order levying interest and penalty was partly quashed.

READ THE RULING

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4. State Laws such as Kerala/Gujarat Money Lenders Act have no application to NBFCs registered under RBI Act: SC

In the matter of Nedumpilli Finance Co. Ltd. v. State of Kerala [2022] 138 taxmann.com 191 (SC), the Apex Court held that State Laws such as Kerala/Gujarat Money Lenders Act would not apply to NBFCs registered under RBI Act.

Question before the Apex Court

In the instant case, the question that arose before the Apex Court for consideration was whether NBFCs regulated by the Reserve Bank of India could also be regulated by State enactments such as Kerala Money Lenders Act, 1958 (“Kerala Act”) and Gujarat Money Lenders Act, 2011 (“Gujarat Act”).

The Court held that one of the objects of the RBI Act, 1934 is “to operate the currency and credit system of the country to its advantage.

The Court observed that the RBI Act provides a supervisory role for the RBI to oversee the functioning of NBFCs. From the time of their incorporation till the time of their closure, all activities of NBFCs automatically come under the scanner of RBI. Consequently, the single aspect of taking care of the interest of the borrowers sought to be achieved by the State enactments gets subsumed in the RBI Act itself.

The power to determine policy and issue directions, available under Section 45JA, can always be invoked by RBI.

The Court highlighted that Section 45L(1)(b) confers power upon the RBI to give directions to NBFCs “relating to the conduct of business by them”. Therefore, to say that RBI has no power in respect of such an important aspect may not be correct. The fact that RBI generally leaves it to the market forces to determine the rate of interest without any direct intervention is not something that could be taken advantage of by the State of Kerala to step in and prescribe the maximum rate of interest chargeable by NBFCs on the loans advanced by them.

In view of the above, the Apex Court concluded that the Kerala Act and the Gujarat Act will have no application to NBFCs registered under the RBI Act and regulated by RBI.

READ THE RULING

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5. No vicarious liability of persons under Section 141 of Negotiable Instrument Act unless the entity has committed an offence as principal accused: SC

In the matter of Dilip Hariramani v. Bank of Baroda [2022] 138 taxmann.com 186 (SC), the Apex Court observed that unless a company or firm has committed an offence as a principal accused, persons mentioned in sub-section (1) or (2) would not be liable and convicted as vicariously liable.

Facts

In the instant case, the respondent – Bank of Baroda, had granted term loans and cash credit facility to a partnership firm – M/s. Global Packaging. It was alleged that in part repayment of the loan, the firm, through its authorised signatory, Simaiya Hariramani, had issued three cheques of Rs. 25,00,000 each.

However, the cheques were dishonoured on presentation due to insufficient funds. The Bank, through its Branch Manager, issued a demand notice to Simaiya Hariramani under Section 138 of the NI Act. Thereafter, it filed a complaint under Section 138 of the NI Act, against Simaiya Hariramani and the appellant, a partner of the firm.

The firm was not made an accused. The appellant and Simaiya Hariramani were convicted by the Judicial Magistrate First Class, Balodabazar, Chhattisgarh, under Section 138 of the NI Act. The High Court dismissed the appeal of the appellant.

Supreme Court’s Ruling

On appeal, the Apex Court held that the provisions of Section 141 impose vicarious liability by deeming fiction which presupposes and requires the commission of the offence by the company or firm. Therefore, unless the company or firm has committed the offence as a principal accused, the persons mentioned in sub-section (1) or (2) would not be liable and convicted as vicariously liable.

The Court stated that Section 141 of the NI Act extends vicarious criminal liability to officers associated with the company or firm when one of the twin requirements of Section 141 has been satisfied. Such person(s) then, by deeming fiction, is made vicariously liable and punished. However, such vicarious liability arises only when the company or firm commits the offence as the primary offender.

In view of the above, the Apex Court set aside the impugned judgment of the High Court, which confirmed the conviction and order of sentence passed by the Sessions Court, and the order of conviction passed by the Judicial Magistrate First Class.

READ THE RULING

6. Karnataka HC dismissed the writ petition challenging the power of the Municipal Corporation to levy advertisement tax

The Karnataka High Court, in the case of Hubballi Dharwad Advertisers Association v. State of Karnataka, has recently held that notice demanding advertisement tax by Municipal Corporation is valid even after implementation of GST as such tax is levied by the municipality on the license granted to put up hoarding. In contrast, GST is levied on the supply of services of making use of hoarding to display advertisements.

Facts

The petitioner was a registered association of advertising agencies. It challenged the demand for advertisement tax by the Municipal Corporation. It filed a writ petition before the High Court on the ground that there could be no demand for the advertisement tax after the enactment of GST.

High Court

The High Court observed that the petitioner has not challenged the relevant provisions but sought to quash the demand notice relating to advertisement tax. The incidence of advertisement tax or advertisement fee is on the license granted to the petitioner to put up hoarding or make use of hoardings. The levy of advertisement tax and levy of GST does not amount to double taxation as transactions are distinct, and the incidence of tax in both are different. There would be no conflict between the power to levy GST under GST law and the power of the Municipal Corporation to levy advertisement tax under Section 134 of the Karnataka Municipal Corporations Act. Therefore, the writ petition was liable to be dismissed.

READ THE RULING

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7. Key considerations for audit of cash and bank balances

As per Schedule III to the Companies Act, 2013 there is a separate disclosure requirement for cash and bank balances in the financial statements. In a various audit situation, there are many assertions that auditor employs to obtain reasonable assurance. However, in an audit of cash and bank balances, the auditor is primarily concerned with obtaining sufficient and appropriate audit evidence to corroborate management’s assertions regarding the existence, rights and obligations, completeness and valuation of the cash and bank balances. The following key points shall be considered during the audit of such cash and bank balances:

A. Existence of recorded cash and bank balance at the year end.

B. Verification of the rights and obligations related to cash and bank balances of the entity.

C. Checking of unrecorded cash or bank balances, if any.

D. Proper review and evaluation of the system of internal controls related to cash and bank balances by covering the following aspects:

• • • Segregation of duties relating to authorisation of transactions
    • Handling of cash/issuance of cheques and writing of books of account
    • Rotation of the duties periodically
    • Proper authorisation of cash and banking transactions
    • Daily recording of cash transactions
    • Safeguards such as the restrictive crossing of cheques, use of pre-printed, pre-numbered forms
    • Periodic reconciliation of bank balances
    • Reconciliation of cash-on-hand with book balance on a daily basis or at other appropriate intervals, including surprise checks by higher authorities
    • Safe custody of cash, chequebooks, receipt books etc.
    • Cash/fidelity insurance

E. Proper physical verification of cash and bank balances.

F. Reconciliation of cash balance shown in the financial statements with the results of the physical verification after taking into account the cash receipts and cash payments between the date of the physical verification and the date of the balance sheet.

G. Verification of post-dated cheques.

READ THE STORY

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