Weekly Round-up on Tax and Corporate Laws | 21st to 26th October 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from October 21st to 26th, 2024, namely:

1. Properties acquired in name of wife & sons using unaccounted amount to be treated as Benami;
2. CBIC issued corrigendum to provide RCM is applicable only on renting of commercial “immovable” property;
3. GSTN introduces an update to facilitate the registration compliance for buyers of metal scrap through form GST REG-07;
4. SC upholds HC’s ruling allowing pre-arrest bail for an applicant already in custody for another case and
5. Disclaimer of opinion doesn’t exempt auditors from fraud reporting under section 143(12): NFRA.

1. Properties acquired in name of wife & sons using unaccounted amount to be treated as Benami

The assessee was found to have acquired various immovable properties illegally in the name of his two sons and his wife while working in the agriculture department office. Many immovable properties were purchased at the time when both the sons of the assessee were minors, and they had no source of income. Apart from that, bank deposits and residential plots or agricultural land in the assessee’s name were far higher than income from his known sources, and he was the only earning member of this family.

After inquiry and investigation, the Initiating Officer concluded that the assessee did not have sufficient income to make such an investment. Accordingly, a notice was issued to the benamidaar and beneficial owner regarding the acquisition of property to disclose the sources.

The immovable and movable properties acquired in the names of two sons and the assessee’s wife were attached. The matter was reached before the Appellate Tribunal Safema.

The Tribunal held that the finding had been recorded even going against the definition of ‘benami transaction’ given under section 2(9)(A) despite the satisfaction of both the limbs of the definition. It was a case where the property was transferred or held by a person for which consideration was provided or paid by another person. It was the case where the wife and sons did not have sufficient means to acquire properties of the value given by the appellant and also that the acquisition of property was for the immediate or future benefit of the persons who provided consideration, i.e., the father.

It was found that the assessee could earn a salary while in service, and if no part of it was spent on his livelihood, he could not have acquired the property in the name of his wife and son.

If the total income of all the appellants was also considered, it did not come to the amount of property purchased. After deducting 30 percent of the income, the net earnings were not sufficient to acquire the property. The property was acquired for a value more than the earnings.

It was out of the assessee’s illicit income while in service of the agriculture department. The unaccounted amount was used to acquire the property in the name of his wife and sons for his own benefit, and therefore, it becomes a case of ‘Benami transaction’

Read the Ruling

2. CBIC issued corrigendum to provide RCM is applicable only on renting of commercial “immovable” property

The CBIC has issued corrigendum to provide that Reverse Charge (RCM) is applicable only on renting of commercial “immovable” property by adding word “immovable”.

Earlier, a new entry 5AB “Service by way of renting of any property other than residential dwelling” has been inserted in Notification No. 13/2017-Central Tax (Rate), dated 28th June, 2017 which specifies services covered under RCM and now immovable word is inserted. In this regard, Corrigendum G.S.R. 652(E) dated October 22nd, 2024 has been issued.

Read the Corrigendum

3. GSTN introduces an update to facilitate the registration compliance for buyers of metal scrap through form GST REG-07

The GSTN has introduced an update to facilitate the registration compliance for buyers of metal scrap through form GST REG-07 and taxpayers in this category are required to select “Others” in Part B of Table 2 under the “Constitution of Business” section. A text box will appear where the taxpayer must enter “Metal Scrap Dealers.” This entry is mandatory for those selecting the “Others” option.

Once this is completed, the remaining details in form GST REG-07 should be filled and submitted on the common portal to meet the registration requirements as per Notification No. 25/2024 – Central Tax, dated October 9^th, 2024. In this regard, GSTN Update dated October 22nd, 2024 has been issued.

Read the GSTN Update

4. SC upholds HC’s ruling allowing pre-arrest bail for an applicant already in custody for another case

The Supreme Court, in the matter of Dhanraj Aswani v. Amar S. Mulchandani [2024] 167 taxmann.com 564 (SC), upheld the order passed by the High Court whereby the High Court held that when an applicant was already in custody in one case, he could not be precluded from seeking pre-arrest bail in connection with another case in which he apprehends arrest.

Brief facts of the case

In the instant case, the Respondent/accused was arrested in connection with the ECIR. While in custody, he apprehended arrest in connection with a criminal case under sections 420, 406, 409, 465, 467, 468, 471 and 34 of the Indian Penal Code registered against him at the instance of the appellant.

In such circumstances, he prayed for anticipatory bail before the High Court. The appellant intervened in the proceedings of the said anticipatory bail application and raised an objection that as the respondent was already in custody in connection with the ECIR, he could not pray for anticipatory bail in connection with a complaint.

The High Court overruled the objection raised by the appellant as regards the maintainability of the anticipatory bail application filed by the respondent and thereby took the view that although the respondent was in custody in connection with ECIR, he would be entitled to pray for anticipatory bail in connection with a different case. Thereafter, an appeal was made before the Supreme Court against the order passed by the High Court.

Supreme Court Observations

It was noted that under Section 438 of the CrPC, the pre-condition for a person to apply for pre-arrest bail is a “reason to believe that he may be arrested on an accusation of having committed a non-bailable offence”. Further, the custody in one case does not have the effect of taking away apprehension of arrest in a different case.

The Supreme Court observed that while a person already in custody in connection with a particular offence apprehends arrest in a different offence, the subsequent offence is a separate offence for all practical purposes. This would necessarily imply that all the rights conferred by the statute on the accused and the investigating agency in relation to the subsequent offence are independently protected.

Supreme Court Ruling

The Supreme Court held that the investigating agency, if it deems necessary for the purpose of interrogation/investigation in an offence, can seek remand of the accused whilst he is in custody in connection with a previous offence so long as no order granting anticipatory bail has been passed in relation to the subsequent offence.

However, if an order granting anticipatory bail in relation to a subsequent offence is obtained by the accused, it shall no longer be open to the investigating agency to seek remand of the accused in relation to the subsequent offence.

Further, the Supreme Court held that if an order of police remand is passed before the accused is able to obtain anticipatory bail, it would thereafter not be open to the accused to seek anticipatory bail. The only option available to him would be to seek regular bail.

In view of the aforesaid discussion, an instant appeal against the order of the High Court was to be dismissed, and it was decided that the High Court would now proceed to decide the anticipatory bail application filed by the respondent on its own merits.

Read the Ruling

5. Disclaimer of opinion doesn’t exempt auditors from fraud reporting under section 143(12): NFRA

The National Financial Reporting Authority (NFRA) recently issued an order regarding an Engagement Partner (EP) responsible for auditing a company for the Financial Year (FY) 2017-18, highlighting significant lapses in the audit process. The deficiencies identified include failure to report potential fraud indicators, inadequate audit evidence concerning the valuation of investments, and non-adherence to auditing standards, specifically SA 240 and SA 500. The NFRA concluded that the EP did not uphold the required professional skepticism or due diligence despite warning signs, such as substantial Expected Credit Loss (ECL) provisions related to trade receivables and advances. The EP’s excessive reliance on management experts and insufficient documentation further exacerbated the audit’s shortcomings.

NFRA’s detailed findings revealed four primary issues in the EP’s audit conduct:

• Omission of Fraud Indicators:The EP failed to report potential fraud signs, notably not adhering to Section 143(12) of the Companies Act, 2013. Key red flags included a significant 2,583.39% rise in ECL provisions and the execution of new sales to already defaulting parties.
• Insufficient Audit Evidence:The EP did not gather adequate evidence for investment valuation in subsidiaries, relying on a management expert’s report without critically assessing its assumptions or methods.
• Non-Compliance with Ind AS 16:The EP did not ensure compliance with Ind AS 16 regarding the disclosure of property, plant, and equipment (PPE) restrictions pledged as security, affecting the clarity of financial statements.
• Inappropriate Disclaimer of Opinion on Internal Controls:The EP issued a disclaimer on Internal Financial Controls based solely on the initiation of the Corporate Insolvency Resolution Process (CIRP) without documenting sufficient grounds for audit evidence limitations.

As a consequence, NFRA imposed a penalty of Rs 5,00,000 on the EP, underscoring the need for auditors to adhere to statutory standards with due diligence. This order serves as a reminder of the professional standards essential for preserving the integrity of financial reporting.

Read the Order