Weekly Round-up on Tax and Corporate Laws | 20th to 24th May 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from May 20 to 24^th, 2024, namely:

1. Supreme Court upholds ICAI’s limit of 60 tax audits per CA; makes it effective from 01.04.2024;
2. SC waives interest on tax dues on telcos resulting from its decision classifying Licence Fee as capital exp.;
3. HC remanded matter as assessee was unaware of proceedings in view of cancellation of its GST registration;
4. AO can’t attach property of assessee if he has already made requisite pre-deposit while filing an appeal: HC;
5. SEBI redefines the applicability of LODR norms; specifies period for calculating average market capitalization; and
6. Checklist for Clauses 1 to 4 of Form 3CD in Tax Audit under the Income Tax Act, 1961.

1. Supreme Court upholds ICAI’s limit of 60 tax audits per CA; makes it effective from 01.04.2024

In the given case, the petitioners, who were Chartered Accountants, challenged the validity of Clause 6 of Guidelines No.1 – CA(7)/02/2008 dated 08.08.2008 issued by the Institute of Chartered Accountants of India (ICAI) under powers conferred by the Chartered Accountants Act, 1949 (Act) on the ground that the same is illegal, arbitrary and violative of Article 19(1)(g) of the Constitution of India.

The petitioners challenged the mandatory ceiling on the number of tax audits a Chartered Accountant can accept under Section 44AB of the Income Tax Act, 1961, as per Clause 6.0, Chapter VI of the Guidelines. They also seek to quash the disciplinary proceedings initiated by the Institute in line with these guidelines.

The Apex Court held that the Council of the ICAI had the legal competence to frame the Guideline restricting the number of tax audits a Chartered Accountant could carry out. The Court held that the ICAI was established to regulate the profession of chartered accountants, ensuring that the profession in the country maintains high professional ethics and renders quality service.

The power of the Council to regulate the profession of Chartered Accountants is not only in the interest of the Chartered Accountants but also in the interest of the public at large. As the Parliament may not always be able to amend the Schedules to the Act to incorporate newer professional misconducts, the Parliament has delegated the power to the Council to make any regulation or Guideline, the breach of which would amount to misconduct. Therefore, the regulation or Guideline issued by the Council, the breach of which would result in professional misconduct, being a part of clause 1 of Part II of the Second Schedule, must be read as part and parcel of the Act itself.

Accordingly, the Council of the Institute had the legal competence to frame the Guideline restricting the number of tax audits that a Chartered Accountant could carry out, which was initially thirty and later raised to forty-five and thereafter to sixty in an assessment year.

Further, the restriction on the number of tax audits that could be undertaken by practicing Chartered Accountants doesn’t violate the right to practice the profession by a Chartered Accountant. It is a reasonable restriction and is protected under Article 19(6) of the Constitution. The Court observed that the power to control and impose taxes is a cornerstone of State sovereignty.

The restriction imposed by the ICAI on the number of tax audits that can be undertaken by a Chartered Accountant is not violative of Article 19(1)(g) of the Constitution. The restriction was imposed by the ICAI after taking into account the letter of CBDT and the CAG Report No. 32/2014. The restriction was imposed to eliminate the possibility of conducting tax audits in an insincere, unethical or unprofessional manner. The restriction was also supported by concerns and suggestions shared by experts and practitioners over a span of thirty years. It was imposed as the best conceivable and practical measure to rectify the targeted mischief and ensure the quality of tax audits conducted by the Chartered Accountants, which is in the general public’s interest.

The idea of compulsory tax audits was neither an inherent part of the practice of a Chartered Accountant nor an essential function that could be claimed as a fundamental right under Article 19(1)(g). As carrying out compulsory tax audit under Section 44AB of the Income Tax Act, 1961 is a ‘privilege’ & not a ‘right’ of a CA, the limit of 60 tax audits imposed by ICAI on every CA is to be upheld as it does not curtail the fundamental right of a CA to practice his profession.

If the Parliament, in its wisdom, at a certain future date, due to technological developments or any other reason, finds that expeditious and accurate assessments can be ensured without imposing on assessees the burden of additional requirements of the tax audit report and thereby deletes Section 44AB from the IT Act, 1961, it could not be possibly argued that the right under Article 19(1)(g) has been abridged.

Accordingly, the Court concluded that the limit of the maximum number of tax audits is valid and is not violative of Article 19(1)(g) of the Constitution as it is a reasonable restriction on the right to practise the profession by a Chartered Accountant and is protected or justifiable under Article 19(6) of the Constitution. However, the Guidelines dated 08.08.2008 and its subsequent amendment are deemed not to be effective until 01-04-2024.

Read the Ruling

2. SC waives interest on tax dues on telcos resulting from its decision classifying Licence Fee as capital exp.

The Supreme Court, in the case of CIT v. Bharti Hexacom Ltd. [2023] 155 taxmann.com 322 (SC), overruled the Delhi High Court’s ruling and held that payment of license fee to DoT under Telecom Policy, 1999 was capital in nature.

It was argued that this judgment necessitates new orders on interest payments for tax demands post-1999 Telecom Policy. This places a heavy burden on assessees from the 2000-2001 assessment year onwards, prompting them to seek a waiver of interest for this period.

Revenue objected to this submission by contending that now that the tax demand would have to be met by the Assessees, it is logical that the interest on the said demand would also have to be paid.

The Supreme Court observed that since the judgment of this Court was dated 16.10.2023, and having regard to the Telecom Policy, which commenced from the year 1999, the payment of interest for the period for which the tax demand is now to be met in respect of these cases stands waived.

The Supreme Court held that this order shall not be a precedent in any other case as this order has been passed, bearing in mind the peculiar facts of this case and having regard to the lapse of time in litigation before the Delhi High Court and Supreme Court.

Read the Ruling

3. HC remanded matter as assessee was unaware of proceedings in view of cancellation of its GST registration

The High Court of Madras has recently held that assessee had little reason to monitor GST portal on an ongoing basis after cancellation of assessee’s GST registration. Therefore, the Court has held that the order passed to be set aside since assessee was unaware of proceedings in view of the cancellation of its GST registration. This ruling is given by the Honorable Madras High Court in case of Tvl. E.Clouds v. Assistant Commissioner (ST).

Facts

The petitioner was providing power aggregation services. Due to lack of business, it opted for cancellation of registration with effect from 31.03.2023. It received an order confirming the tax proposal and imposing interest. It filed writ petition and contended that it was unaware of proceedings especially in view of the cancellation of the GST registration.

High Court

The Honorable High Court noted that the impugned order was preceded by an intimation, show cause notice and two reminders. However, on perusal of the order confirming the tax proposal, it was evident that such an order pertained to discrepancies between the petitioner’s GSTR 3B return and the auto-populated GSTR 2A. Especially in view of the cancellation of GST registration, the petitioner had little reason to monitor the GST portal on an ongoing basis.

Therefore, the Court held that the impugned order was to be set aside and matter was to be remanded for reconsideration on condition that the petitioner remitted 10% of the disputed tax amount.

Read the Ruling

4. AO can’t attach property of assessee if he has already made requisite pre-deposit while filing appeal: HC

The High Court of Madras has recently held that the Assessing Officer can’t attach the immovable property of assessee even before the expiry of the statutory period of three months. The Court has also directed to release attachment over the immovable property since assesse has already made the requisite pre-deposit while filing the appeal. This ruling is given by the Honorable Madras High Court in case of Tvl. Maxtile AAC Block v. State Tax Officer.

Facts

The petitioner was a taxable person, and an order was issued against it by confirming tax proposal pertaining to the discrepancy between GSTR-3B returns and auto-populated GSTR-2A. It filed an appeal against the said order and made the requisite pre-deposit as per Section 107 of CGST Act, 2017. However, the department attached the petitioner’s immovable property even before the expiry of the statutory period of three months after the order was issued. It filed writ petition seeking release of attachment and contended that such attachment was contrary to statutory provisions.

High Court

The Honorable High Court noted that the recovery measures should not be undertaken for a period of three months after the original order is issued so as to enable the taxpayer to file a statutory appeal. In the present case, the petitioner had placed the order in its original form and proof of filing of the appeal on record. It was evident that the petitioner had made the requisite pre-deposit of 10% of the disputed tax demand as per Section 107 of the CGST Act, 2017.

However, without waiting for statutory period of three months, the department had attached the immovable property of the petitioner. Therefore, it was held that the attachment was contrary to the statutory prescription, and the department was directed to release the attachment over the immovable property.

Read the Ruling

5. SEBI redefines the applicability of LODR norms; specifies period for calculating average market capitalization

SEBI vide notification no. SEBI/LAD-NRO/GN/2024/177, dated May 17, 2024 has notified the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2024. The key amendments include

• The introduction of the ‘New Market Cap Formula’, adopting a 6-month average calculation,
• Linking rumour verification to material price movement, and
• Mandating prompt and accurate responses from key executives for rumour verification,

The key amendments are discussed in detail below:

a. SEBI introduces a New Market Cap Formula, adopting a 6-month average calculation

Regulation 3(2) of LODR states that the listing regulations shall apply to listed entities based on market capitalization criteria and continue to apply to such entities even if they fall below the specified thresholds.

Now, SEBI has prescribed a revised methodology for calculating market capitalization (effective from December 31, 2024). Earlier, the ranking was based on the company’s market cap as of March 31 or the closing of the fiscal year.

Under the new norms, every recognized stock exchange must prepare a list of entities that have listed their specified securities at the end of the calendar year, i.e., December 31. These entities will be ranked based on the average market capitalization calculated for the period from July 1 to December 31 of that year.

b. Linking of rumour verification to Material Price Movements (MPM)

Extant norms require the top 100/250 companies to mandatorily respond to the market rumours w.e.f. June 01, 2024 and December 01, 2024, respectively. The entities shall verify the market rumours within 24 hours of the mainstream media reporting them. Now, SEBI has linked the rumour verification by listed companies to “Material Price Movement (MPM)”.

As per the amended norms, the company shall provide confirmation, denial or clarification within 24 hours from the trigger of the MPM. Further, SEBI has added a new proviso, requiring the removal of the material price movement period when determining the price of securities for certain corporate actions if the company confirms an event or information causing the price movement. In this regard, SEBI has issued a framework for top entities to consider unaffected prices in case of market rumours.

c. Mandatory prompt and accurate responses from key executives for rumour verification

A new Regulation 30(11A) has been inserted, requiring promoters, directors, key managerial personnel, or senior management of a listed company to promptly respond to any questions or explanations the listed entity needs to ensure compliance with Regulation 30(11). The company must then immediately share these responses with the stock exchanges.

d. Granting of an additional 3-month period to fill Key executive vacancies requiring Government approval

As per Regulation 26A of LODR, the listed entity shall fill vacancies in the office of Chief Executive Officer, Chief Financial Officer, Managing Director, Whole-Time Director, or Manager within three months from the date of such vacancy.

The amended norms provide that if the listed entity is required to obtain approval from regulatory, government, or statutory authorities to fill such vacancies, then the vacancies shall be filled within six months from the date of such vacancy. An additional three-month period is granted to fill the vacancy in such cases.

e. Mandatory uniform “Two-Day Notice” for stock exchange intimations

Under the extant norms, a listed entity was required to intimate the stock exchange for a board meeting at different time periods. Now, SEBI has specified a uniform time period of two working days prior to intimation for all events prescribed under Reg. 29. Prior intimation given to the stock exchange must now include the board meeting date when the proposals will be discussed.

f. Extension of an interval between two risk management committee meetings to 210 days

The extant norms provide that the gap between two risk management committee meetings shall not exceed 180 days. The amended norms extend the maximum gap between two risk management committee meetings to 210 days. This extension allows for greater flexibility in scheduling meetings, providing entities additional time to prepare comprehensive risk management strategies and reports.

Conclusion

The amendments aim to provide more accurate and stable assessments of market capitalization, ensure timely and precise responses to market rumours and offer greater flexibility for filling key executive vacancies and scheduling risk management meetings. These changes enhance transparency and compliance for listed entities.

Read the Notification

6. Checklist for Clauses 1 to 4 of Form 3CD in Tax Audit under the Income Tax Act, 1961

Section 44AB of the Income Tax Act, 1961 mandates the audit of books of accounts for an assessee engaged in business or profession if their gross turnover or receipts exceed the specified threshold. Part A of Form No. 3CD, which includes Clauses 1 to 8A, requires routine particulars. These requirements apply to all individuals, firms, companies, and entities subject to tax audits. Key clauses are:

• Clause 1: Name of the assessee, specifying branches if applicable.
• Clause 2: Assessee’s address.
• Clause 3: Permanent Account Number (PAN) or Aadhaar Number for individuals and PAN for other entities, with an option to indicate if PAN is not allotted.
• Clause 4: Indirect tax liabilities, including registration or GST numbers.

For reporting under clauses 1 to 4, the tax auditor shall ensure the following checkpoints to ensure thorough compliance and accurate reporting under Clauses 1 to 4 of Form 3CD, addressing critical aspects like verifying PANs, addresses, indirect tax liabilities, and proper documentation:

• Does the assessee have a PAN and obtain a self-attested copy for the same?
• Clarify in the engagement letter if the assessee lacks a PAN, advising early application.
• The assessee’s PAN is validated on the Income Tax Portal, and the address is verified from the income-tax records.
• Whether the screenshots of the PAN validation maintained?
• The name specified in the PAN/Aadhaar of the assessee is reported correctly.
• If the trade name differs from the name as per PAN/Aadhaar, report accordingly.
• The assessee’s profile in the e-filing account is verified, including the branch name, if applicable.
• If there is a change in the name during the financial year, is it verified and reported correctly, including disclosures in the annual report?
• The address reported matches the one communicated to the Income Tax department.
• In the case of branch audits, the addresses of all branches, including the registered office address for the company assessee, are disclosed.
• Determine if the assessee is liable to register under GST and report the GSTIN.
• All relevant registration numbers (e.g., GST, Service Tax, Excise, and VAT) are reported.
• Ensure all GSTINs are reported if the assessee is registered in multiple states or units
• Any mismatch between PAN in indirect tax registrations and PAN in Clause 3, is reported.
• If the assessee has multiple PANs, consider procedures for surrendering additional PANs.
• Whether a Management Representation Letter (MRL) regarding the assessee’s name and changes, self-attested address proof, a list of applicable indirect taxes and registration numbers supported by registration certificates obtained?

Read the Story