Weekly Round-up on Tax and Corporate Laws | 1st to 6th April 2024

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

a) Completed assessment can’t be invalidated/reopened merely relying upon SC’s ruling in Ashish Agarwal case: HC;

b) CBDT issues clarification on time limit to verify Income-tax Returns;

c) No GST on providing residential accommodation & food by private hostel to college students or working women: Madras HC;

d) Madras HC directed GST dept. to provide another opportunity of hearing to assessee who wasn’t aware of proceedings;

e) Criminal Court must abide by Civil Court’s ruling which declared disputed cheque to be only for security purposes: SC; and

f) Duty of the statutory auditor of a company to report on the audit trail.

1. Completed assessment can’t be invalidated/reopened merely relying upon SC’s ruling in Ashish Agarwal case: HC

The issue before the Delhi High Court was:

“Is it permissible for the Assessing Officer (AO) to issue a notice regarding concluded assessments, taking into consideration the Supreme Court ruling in the Ashish Agarwal case [2022] 138 taxmann.com 64 (SC)?”

The High Court held that in the instant case, the reassessment proceedings initiated pursuant to the notice had attained a closure consequent to a final order of assessment that was not disputed. The petitioner never questioned the validity of the original notices and chose to contest the reassessment proceedings on merits.

The family of provisions dealing with reassessment underwent significant statutory amendments consequent to promulgating the Finance Act 2021. The provisions so recast saw the introduction and placement of Section 148A in the statute book, which, for the first time, placed an express provision providing an opportunity for the assessee to question the initiation of reassessment and assumption of jurisdiction. Section 148A made provisions for such an opportunity being availed of by an assessee by clause (b).

In terms of Section 148A(d), the AO was placed under a statutory obligation to decide whether circumstances warranted assessment being undertaken in terms of Section 148 after taking into consideration the material available on the record as well as the objections or replies that an assessee may have tendered.

The procedure laid out in Ashish Agarwal stood confined to matters where, although notices may have been issued, proceedings have yet to attain finality. The Supreme Court prescribed a procedure where the Revenue was rendered remedied to assess escaped income even though material may have merited such an action being pursued solely because of a misinterpretation of the correct legal position.

In order to carve out an equitable solution, the Supreme Court invoked its powers conferred by Article 142 of the Constitution and ordained that all such notices would be treated as being under Section 148A(b) and for proceedings to be taken forward in accordance with law thereafter.

However, it was opined that Ashish Agarwal’s case neither intended nor mandated that the concluded assessments be reopened. The AO appeared to have erred in proceedings for the following reasons.

The judgement was principally concerned with judgments rendered by various High Courts’ striking down Section 148 notices holding that the AO had erred in proceeding based on the unamended family of provisions relating to reassessment. They had essentially held that the procedure constructed regarding the amendments introduced by the Finance Act 2021 would apply. None of those judgements were primarily concerned with concluded assessments. This indubitable position constrained the Supreme Court to frame directions requiring those notices to be treated as being under Section 148A(b) and for the AO proceeding after that to frame an order as contemplated by Section 148A(d).

The Supreme Court significantly observed that instead of quashing the impugned notices, the High Courts should have framed directions for those notices being construed and deemed to have been issued under Section 148A.

Ashish Agarwal’s case cannot possibly be read as mandating the hands of the clock being rewound and reversing final decisions that may have come to be rendered in the interregnum. There was, therefore, no justification for the respondent to have issued notices afresh seeking to reopen proceedings that had been rendered closed prior to the judgment rendered in Ashish Agarwal.

Read the Ruling

2. CBDT issues clarification on time limit to verify Income-tax Returns

In the year 2022, the DGIT(Systems) issued Notification No. 05 of 2022 dated 29.07.2022, specifying the time limit for verification of Income Tax Return (ITR) as 30 days from the date of transmitting   the data of ITR electronically.

Now, the Central Board of Direct Taxes (CBDT) has issued a notification wherein it is clarified that

a) The date of uploading the ITR will be considered as the date of furnishing the return of income if e-verification/ITR-V of such return of income is submitted within 30 days of uploading.

b) The date of e-verification/ITR-V submission shall be treated as the date of furnishing the return of income if the e-verification/ITR-V is submitted after the expiry of 30 days from date of uploading ITR. Accordingly, all the consequences of late filing of returns under the Act shall follow.

It must be noted that the date on which the duly verified ITR-V is received at CPC shall be considered for the determination of 30 days from the date of uploading the income-tax return. Earlier, the date of dispatch of Speed Post of duly verified ITR-V was considered for determination of the 30-day period from the date of electronically transmitting the data of income tax return.

Further, it has been clarified that the return of income not verified under the prescribed time limit will be treated as an invalid return. This Notification is applicable from 01.04.2024.

Read the Notification

 3. No GST on providing residential accommodation & food by private hostel to college students or working women: Madras HC

The High Court of Madras has recently held that services provided by way of leasing out residential premises as hostel to students and working professionals would be exempt as hostel would be used by the students for the purposes of residence. This ruling is given by the Honorable Madras High Court in the case of Thai Mookambikaa Ladies Hostel v. Union of India.

Facts

The petitioner was running lady’s hostels by providing hostel accommodation services. It applied the advance ruling to determine the taxability of hostel accommodation services. The Authority for Advance Ruling (AAR) held that services by way of providing hostel accommodation supplied by the petitioner would be taxable at the rate of 18%.

It filed an appeal against the ruling and contended that the services provided by leasing out residential premises as hostels to students and working professionals would be exempted from GST, but the Appellate Authority for Advance Ruling (AAAR) also upheld the order of AAR. It filed writ petition against the order of AAAR.

High Court

The Honorable High Court noted that the students would use the hostel for the purposes of residence, and the imposition of GST on hostel accommodation should be viewed from the perspective of the recipient of service. Since renting out hostel rooms to girl students and working women by petitioners is exclusively for residential purposes, the condition prescribed in the Notification in order to claim exemption, viz., ‘residential dwelling for use as a residence’ has been fulfilled by petitioners and, thus, said services are covered under Entry Nos.12 and 14 of Notification No. 12/2017-Central Tax (Rate) dated June 28, 2017.

Therefore, it was held that the services provided by the petitioner by leasing out residential premises as hostel to students and working professionals would be covered under Entry 13 of Notification No.9/2017 dated 28.09.2017 and exempted from GST.

Read the Ruling

4. Madras HC directed GST dept. to provide another opportunity of hearing to assessee who wasn’t aware of proceedings

The High Court of Madras has recently held that the department should allow the assessee to contest tax demand on merits who weren’t aware of proceedings after remitting 10% of the disputed tax demand within fifteen days. This ruling is given by the Honorable Madras High Court in case of Mrs. Preetha v. Deputy Commercial Tax Officer.

Facts

The petitioner was engaged in the trading of electrical and hardware goods. It received a notice in Form GST ASMT-10, and proceedings were initiated against the petitioner. It filed writ petition against the demand order and contended that it was unable to respond to the intimation and show cause notice because such notices were only uploaded on the GST portal and not communicated by any other mode.

High Court

The Honorable High Court noted that the impugned order was passed because the petitioner was not heard before the impugned order was issued and could not contest the tax demand. However, it should be noted that the petitioner did not fulfil the obligation to continually monitor the GST portal despite being a registered person.

Therefore, the Court held that the impugned order was liable to be quashed, and the petitioner was directed to remit 10% of the disputed tax demand. The Court also directed the department to provide a reasonable opportunity to the petitioner, including a personal hearing, and thereafter issue a fresh order within two months from the date of receipt of the petitioner’s reply.

Read the Ruling

5. Criminal Court must abide by Civil Court’s ruling which declared disputed cheque to be only for security purposes: SC

The Supreme Court, in the matter of Prem Raj v. Poonamma Menon [2024] 161 taxmann.com 161 (SC), ruled that when the substance of the dispute is the same in both civil and criminal proceedings, then the outcome of the civil proceedings shall be binding on the outcome of the criminal proceedings. This renders sentences/damages awarded in the criminal proceedings unsustainable under the law.

Brief facts of the case

In the instant case, the appellant/accused challenged the order passed by the High Court, whereby the High Court upheld the judgement of the Trial Court. The Trial Court convicted the accused to undergo simple imprisonment for one year and to pay compensation of Rs 2 lakh.

The appellant/accused borrowed a sum of Rs. 2 lakh from the complainant with a promise that he would repay it on demand. Upon receipt of such demand, he issued a cheque for the said amount. However, the cheque was dishonoured due to insufficient funds, and the drawer stopped payment.

The appellant/accused filed a civil suit to declare the said cheque as a security cheque, wherein the Additional District Munsif decreed the suit in favour of the accused. Before the Trial Court, the complainant filed a complaint u/s 138 of the Negotiable Instruments Act, 1881.

The Trial Court took cognizance of the complaint and convicted the accused to undergo simple imprisonment for one year as well as to pay compensation of Rs.2 lakh. The Appellate Court confirmed the order of the Trial Court. Subsequently, the High Court also agreed with the decision of both the Courts. Then, an appeal was made to the Supreme Court.

Supreme Court observations 

The Supreme Court observed that the same cheque was issued before the Civil Court proceedings, and a complaint was filed u/s 138 of the N.I. Act. The Supreme Court placed reliance on its various judicial precedents.

In M/s Karam Chand Ganga Prasad & Anr. vs. Union of India & Ors., it was held that the decisions of the Civil Courts are binding on the Criminal Courts, and the converse is not true. Further, in the case of K.G. Premshanker vs. Inspector of Police (2002) 8 SCC 87, the Supreme Court held that no straight-jacket formula could be laid down and conflicting decisions of civil and criminal courts would not be a relevant consideration except for the limited purpose of sentences and damages.

Thus, based on the observations passed in K.G. Premshanker’s case, it can be ascertained that the sentence and damages awarded in the criminal proceedings would be excluded from the conflict of decisions in both civil and criminal jurisdictions of the Courts.

Supreme Court Ruling 

Considering that the Court in criminal jurisdiction had imposed both sentence and damages, the Supreme Court, referring to the above-cited decisions, held that the Court in criminal jurisdiction would be bound by the Civil Court having declared cheque, the subject matter of dispute, to be only for security purposes.

Setting aside the High Court’s order, the Apex Court held that the criminal proceedings resulting from the cheque being returned unrealized due to the closure of the account would be unsustainable in law. Resultantly, the Apex Court directed the Courts to return the damages imposed upon the appellant/accused.

Read the Ruling

6. Duty of the statutory auditor of a company to report on the audit trail

Section 143(3)(j) of the Companies Act, 2013, read in conjunction with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, requires the auditor of a Company to report on whether the accounting software used by the company to maintain books of account has an audit trail feature. However, where a company maintains books of account entirely in manual mode without using any accounting software, reporting under Rule 11(g) is not applicable.

It is essential to note that under Rule 11(g), the auditor is expected to verify and comment upon the configurability, continuous functionality, and preservation of the audit trail by the accounting software. Importantly, the auditor’s role isn’t limited to transactions that have been recorded in the accounting software but also to the subsequent changes made to the transactions. He must report on the creation of an audit/ edit log of “each change made in books of account.”

The auditor has to keep in mind the following pointers while drafting his audit report-

a) Since a company is not bound to maintain its books of accounts entirely electronically, it is not required to use accounting software with an audit trail feature. Therefore, the company’s auditor must appropriately modify his comment while reporting under Rule 11(g).

b) At present, SEBI Regulations do not require the auditors to report on the audit trail feature of accounting software while issuing their limited review report on the financial results of a listed company.

c) Where the company has outsourced the maintenance of its books of account, it is still obligated to maintain audit trail under Rule 11(g).

d) Reporting obligation under Rule 11(g) will apply to both standalone financial statements and consolidated financial statements.

Interestingly, neither the Act nor the rule defines the term’ audit trail’. However, a comprehensive understanding of its nature and features can be derived from a combined reading of the Proviso to Rule 3(1) and Rule 11(g). Exploring various sources, it is evident that an audit trail is a chronological, date, and time-stamped record of a specific transaction from the time its entry is made in the accounting software through various changes to it until its deletion. Importantly, the following do not qualify as an ‘audit trail’-

• • Back-ups
  • Voucher listings
  • Error Logs
  • Feature in accounting software that does not allow subsequent modification to the transactions/ journal entries posted initially
  • The log of the last/latest changes is only maintained, and the log of the entire chain of changes is not maintained.

Read the Story