Weekly Round-up on Tax and Corporate Laws | 11th to 16th November 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from November 11^th to 16^th, 2024, namely:

1. AO can’t tax unutilized amounts in CGAS account before the expiry of 3 years from date of transfer of asset: ITAT;
2. GSTN Update: Form GST SPL-01 and Form GST SPL-02 are under development; would be available from January 2025;
3. GSTN Advisory regarding IMS during initial phase of its implementation;
4. GSTN Update: Supplier View of IMS has also been made available on portal;
5. SEBI proposes to raise the maximum investment limit for Angel Funds in start-ups from Rs 10 crore to Rs 25 crore and
6. NFRA proposes updates to SQC1, SQM 1, SQM 2, and SAs aligned with global standards, effective from April 2026.

1. AO can’t tax unutilized amounts in CGAS account before the expiry of 3 years from date of transfer of asset: ITAT

During the year, the assessee sold a capital asset on which he had earned Long Term Capital Gain. Out of such capital gains, a sum was deposited under the Capital Gain Account Scheme (CGAS), 1988, and exemption under section 54F was claimed while furnishing the return of income.

The Assessing Officer (AO) observed that the assessee had, during the year under consideration, as well as in the immediately preceding and succeeding years, made withdrawals from the CGAS account. It was further observed that the assessee had paid taxes on the amounts withdrawn from his CGAS account in the respective years of withdrawal.

AO contended that the withdrawals made by the assessee from the CGAS account revealed an attempt on his part to defer his tax liability on LTCG. Accordingly, the AO made additions to the assessee’s income with respect to the premature withdrawal of the amount from the CGAS account.

On appeal, the CIT(A) upheld the order of the AO and the matter reached before the Raipur Tribunal.

The Tribunal held that on a perusal of the CGAS, 1988 (the scheme), it was found that Para-9 prescribes that the amount deposited by the assessee in ”Account-B” and ”Account-A” of the said scheme can be withdrawn for utilising the same for the specified purpose, viz. purchase or construction of the new property.

Further, Para-13 provides that the assessee can close his account after obtaining the approval of the Assessing Officer, who has jurisdiction over his case. However, the scheme does not provide for the manner in which the premature withdrawals of the unutilised amount lying in the CGAS account are to be brought to tax. Rather, it is the ”1st proviso” to section 54F(4), which contemplates that in case an amount deposited in the CGAS is not utilised wholly or partly for the purchase or construction of the ”new asset” within the specified period, then the amount deposited in the CGAS shall be brought to tax in the hands of the assessee under section 45, as his income of the previous year, in which the period of three years from the date of the transfer of the original asset expires.

Accordingly, though the assessee was entitled to withdraw the unutilised amount in accordance with the scheme but the same would be liable to be assessed in his hand under section 45 during the previous year, in which the period of three years from the date of the transfer of the original asset expires.

In the present case, the unutilized amount lying in the assessee’s CGAS account was withdrawn by him in the immediately succeeding year as per the mandate of the ”1st proviso” to section 54F(4) could have only be brought to tax in the said latter year.

Therefore, the view taken by the AO could not be accepted, and the additions of LTCG made by the Assessing Officer were vacated.

Read the Ruling

2. GSTN Update: Form GST SPL-01 and Form GST SPL-02 are under development; would be available from January 2025

The GSTN has issued an update to inform that Form GST SPL-01 and Form GST SPL-02 are under development, and the same will be made available on the common portal tentatively from the first week of January 2025. As per the waiver scheme, the taxpayers are required to file an application in FORM GST SPL-01 or FORM GST SPL-02, respectively, on the common portal within three months from the notified date, which is 31.03.2025.

It is also clarified that taxpayers can pay the demanded tax amount through the “payment towards demand” facility in case of demand orders and through Form GST DRC-03 in case of notices. However, if payment has already been done through Form GST DRC-03 for any demand order then taxpayer need to link the said Form GST DRC-03 with such demand order through Form GST DRC-03A, which is now available on the common portal. In this regard, GSTN Update dated 8th November, 2024 has been issued.

Read the GSTN Update

3. GSTN Advisory regarding IMS during initial phase of its implementation

The GSTN has issued an update to inform that the recipient can change the action on the Invoice Management System (IMS) in respect of an invoice/record and can re-compute his GSTR-2B at any time till the filing of GSTR-3B for the corresponding tax period. Even if taxpayer fails to correct then he can edit such wrongly populated ITC/liability in their GSTR-3B, to correctly avail ITC or pay correct tax liability as per the documents/records available.

Notably, IMS is an optional facility introduced in October 2024 on the GST Portal, on which the invoices/records saved/furnished by the supplier in GSTR-1/1A/IFF can be accepted, rejected or kept pending by recipients. Based on the action taken by the recipient on the IMS, the system will generate the GSTR 2B of the recipient on the 14th of the subsequent month, but IMS, being a new functionality introduced on the portal, there may be cases where in the initial phase of implementation of IMS, the recipient may make error/mistake while taking action (like acceptance/rejection/keeping pending) on the IMS in respect of an invoice/record. In this regard, the GSTN Update dated November 12th, 2024, has been issued.

Read the GSTN Advisory

4. GSTN Update: Supplier View of IMS has also been made available on portal

The GSTN has issued an update to inform that the Supplier View of IMS has also been made available where the action taken by their recipients on the records/invoices reported in GSTR-1/1A/IFF, will be visible to the suppliers in the ‘Supplier View’ functionality. This will help a supplier taxpayer to see the action taken on their reported outwards supplies and will help to avoid any wrong action taken by the recipient taxpayer.

Further, this is to be reiterated again that any action taken on records can be changed by the recipient taxpayer till the filing of GSTR-3B of the return period. In case the taxpayer changes any action after the generation of GSTR-2B, they need to click the GSTR-2B re-compute button to re-compute their GSTR-2B based on the new actions taken. In this regard, GSTN Update dated November 13th, 2024 has been issued.

Read the GSTN Update

5. SEBI proposes to raise the maximum investment limit for Angel Funds in start-ups from Rs 10 crore to Rs 25 crore

Angel Funds, classified under Category I AIFs – Venture Capital Funds, have become key drivers of startup innovation, channelling vital capital through angel investors. Despite their impressive growth, operational ambiguities, limited investor access, and regulatory constraints continue to restrict their full potential.

In response to the growing industry demands, SEBI’s Consultation Paper, dated November 13th, 2024, redefines the regulatory framework for Angel Funds. With a focus on streamlining fundraising, strengthening governance, and enhancing operational flexibility, SEBI is working to create a more transparent, efficient, and inclusive investment ecosystem. As of March 2024, with 82 registered funds, the time is ripe for regulatory reforms that align with the dynamic needs of the startup ecosystem.

Proposals and Key Changes

(a) Regulation of Angel Funds under AIF Regulations

The consultation paper has deliberated on the necessity of continuing the regulation of Angel Funds under SEBI’s Alternative Investment Funds (AIF) Regulations, despite the abolition of Angel Tax. While direct investments by angel investors have become more attractive, the regulatory framework for Angel Funds ensures professional fund management, operational efficiency, and ease of investment for startups.

Based on the recommendations of the Alternative Investment Policy Advisory Committee (AIPAC), it is proposed to maintain Angel Funds as a regulated structure under AIF Regulations. This will provide investors with expert fund management and help channelize investments into the startup ecosystem in a more structured manner, balancing innovation with prudential safeguards.

(b) Enhancing Eligibility Criteria and Investor Verification for Angel Funds

The current eligibility criteria for Angel Investors require individuals to have a net tangible asset of at least Rs. 2 crores (excluding their primary residence) and specific professional or entrepreneurial experience. Corporate entities must have a net worth of Rs. 10 crores. To expand participation and improve inclusivity, it is proposed to include entities such as Hindu Undivided Families (HUFs), family trusts, and accredited investors while reducing the net-worth criteria for body corporate.

Also, third-party verification is recommended to ensure investor eligibility, as reliance on self-declarations has been found insufficient. Furthermore, it is suggested to restrict Angel Funds to Accredited Investors who meet enhanced eligibility requirements. This will ensure that only those with the requisite risk appetite and investment knowledge participate in these high-risk, high-reward ventures.

(c) Revised Investment Limits and Risk Mitigation Measures for Angel Funds

Noting the evolving landscape of the angel investment ecosystem, the consultation paper proposed to reduce the minimum investment limit from Rs. 25 lakhs to Rs. 10 lakhs and increase the maximum investment limit from Rs. 10 crores to Rs. 25 crores. These changes reflect the growing interest in this asset class and the increasing capital needs of startups. The existing requirement that no more than 25% of a fund’s total investments be allocated to a single venture is proposed to be removed. However, to prevent over-concentration of risk, it is suggested that each investment involves contributions from at least three Accredited Investors, excluding the fund manager or sponsor.

(d) Strengthening Governance, Transparency, and Investor Alignment in Angel Funds

To enhance governance, it is proposed to reduce the one-year lock-in period for Angel Fund investments in startups to six months, provided exits are made to third parties and not to promoters or their affiliates. Additionally, investment opportunities should be offered to all investors within a fund, with the allocation methodology clearly disclosed in the Private Placement Memorandum (PPM). This ensures fairness and prevents preferential treatment among investors. It is also proposed that sponsors or fund managers maintain a minimum continuing interest of 0.5% of the investment amount or ₹1,00,000, whichever is higher, in each individual investment to ensure alignment of interests.

(e) Simplifying Compliance and Strengthening Disclosure Framework for Angel Funds

To streamline compliance, the consultation paper has proposed a standardized template PPM for Angel Funds, aligned with those used by other AIFs but tailored to the specific features of Angel Funds. It also proposes removing the requirement to file term sheets before launching investments, replacing this with robust periodic reporting to SEBI. Furthermore, Angel Funds with total investments exceeding Rs. 100 crores will be subject to a PPM audit to ensure compliance with disclosure norms. A first-close requirement is proposed, mandating Angel Funds to onboard at least five Accredited Investors within 12 months of filing their PPM with SEBI to maintain transparency and accountability.

Conclusion

In conclusion, the proposed changes aim to modernize the regulatory framework for Angel Funds, aligning it with evolving market dynamics and investor needs. By enhancing eligibility criteria, revising investment limits, strengthening governance, and simplifying compliance, SEBI seeks to create a robust ecosystem that balances flexibility with prudential safeguards.

Read the Consultation Paper

6. NFRA proposes updates to SQC1, SQM 1, SQM 2, and SAs aligned with global standards, effective from April 2026

The National Financial Reporting Authority (NFRA), in its recent meetings, has proposed significant updates to align Indian auditing and quality control standards with global benchmarks. The proposed changes include revisions to the “Standard on Quality Control (SQC 1)” and the “Standards on Quality Management (SQM 1 and SQM 2)”, along with an updated “SA 600, Using the work of another auditor standard. This updated SA 600 is specifically tailored for Public Interest Entities, excluding public sector banks and PSUs, while amendments to SA 299, Joint Audit of Financial Statements aim to enforce joint and several accountability among joint auditors.

Furthermore, NFRA has recommended naming the auditing standards as “IndSAs” and has proposed their implementation from April 1, 2026, subject to approval by the Central Government. NFRA also advocated for adopting global standards such as “SAs 800, 805, and 810” within the framework of the Companies Act. The proposals received support from all regulatory bodies, though there was dissent from members of the Institute of Chartered Accountants of India (ICAI).

These revisions are poised to strengthen audit quality and enhance compliance with international practices, reflecting NFRA’s commitment to modernizing the regulatory landscape.

Read the Press Release