Weekly Round-up on Tax and Corporate Laws | 29th August to 3rd September 2022

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 29^th August to 3^rd September, namely:

(a) FAQs on Tax Audit under Section 44AB for AY 2022-23;

(b) Planning to avail loan digitally? Things you shouldn’t miss out;

(c) Reference to DVO under Section 142A can’t be made for ascertaining expenditure which assessee incurred to purchase land: ITAT;

(d) SC grants a one-month extension to GSTN to allow the filing of TRAN-1; Window will start from 1^stOctober;

(e) Mandatory pre-deposit of 10% for entertaining appeal under Maharashtra VAT Act is a reasonable condition: Bombay HC;

(f) Reporting requirement under Clause 44 of Form 3CD

1. FAQs on Tax Audit under Section 44AB for AY 2022-23

The tax audit season has started. The tax audit is governed by Section 44AB, Rule 6G of the Income-tax Rules, CBDT’s Circular, ICAI’s guidance notes and many of the Court’s decisions, making it a challenging task for the auditors.

We thought to identify all complex queries on a tax audit and provide clarity to our readers.

In this special write-up, we have covered 75+ Frequently Asked Questions (FAQs) and thoroughly answered them in a simple language.

A few questions covered in this write-up are:

(a) How to calculate the gross receipt or sales turnover for a tax audit?

(b) Analysis of the applicability of tax audits under different scenarios in the case of professionals.

(c) How to check the threshold limit if the assessee is carrying on business and profession?

(d) How to calculate the turnover of a share broker?

(e) Whether the provisions of tax audit apply to the Charitable/Religious Trust?

(f) Is a salaried employee required to get accounts audited if he is also doing trading in derivatives such as futures and options?

(g) Who has to follow ICDS?

(h) Should the reporting in Form 3CD be made as per books of account or after adjustment as per the ICDS?

(i) Whether adoption of Ind AS for the first time could be considered a ‘Change in Method of Accounting’?

Read the FAQs

Check out Taxmann's Tax Audit which provides a detailed commentary/clause-by-clause analysis on provisions relating to Tax Audit and clauses of Form 3CA, 3CB and 3CD, along-with Guidance Notes issued by ICAI & Tax Audit Reckoner. This book is amended by the Finance Act, 2022.

Here is a Sample Read for your Reference.

2. Planning to avail loan digitally? Things you shouldn’t miss out

The RBI has issued guidelines on digital lending. These guidelines aim to protect the data of borrowers using digital lending apps from being misused. The guidelines apply to existing customers availing fresh loans and new customers getting on board from this circular date. However, to ensure a smooth transition, regulated entities would be given time till 30^th November, 2022 to put in place adequate systems.

The key highlights of the guidelines on digital lending are discussed hereunder:

(a) Applicability of Digital Lending Guidelines

The guidelines apply to digital lending extended by all Commercial Banks, Primary (Urban) Co-operative Banks, State Co-operative Banks, District Central Co-operative banks and Non-Banking Financial Companies (including Housing Finance Companies). All these together are known as Regulated Entities (REs).

(b) A third party can’t store borrowers’ personal data except for some minimal basic information

A third party can’t store borrowers’ personal data except for some minimal basic information like name, address, contact details of the customer, etc., which is required to carry out the operations.

(c) Borrowers must be informed about the storage of customer data

The borrowers must be informed about the storage of customer data, including the type of data that can be stored, the length of time for which data can be stored, restrictions on the use of data, data destruction protocol, standards for handling security breach, etc. Further, borrowers must be provided with a Key Fact Statement (KFS) in a standardised format for all digital lending products.

(d) Rate of penal interest/charges shall be disclosed upfront to the borrower

The penal interest/charges levied, if any, on the borrowers shall be based on the outstanding amount of the loan. Further, the rate of such penal charges shall be disclosed upfront on an annualised basis to the borrower in the Key Fact Statement (KFS).

(e) Disbursement of loan to be made directly to the borrower

In its guidelines, the RBI has instructed the regulated entities to ensure that all loan servicing, repayment, etc., shall be executed by the borrower directly in the Regulated Entities (RE’s) bank account without any pass-through account/ pool account of any third party.

(f) Cooling-off period to be provided to the borrowers

REs should also provide the borrowers with a cooling off/ look-up period, which is a time window that shall be given to borrowers for existing digital loans, to cancel a loan agreement in case a borrower decides not to continue with the loan.

(g) Lending Service Providers to have a nodal grievance redressal officer to deal with digital lending complaints

The registered entities shall ensure that they and the LSPs engaged by them shall have a suitable nodal grievance redressal officer to deal with FinTech/digital lending related complaints/issues raised by the borrowers.

(h) Borrower’s creditworthiness must be assessed by banks/NBFCs before extending any loan

The registered entities (Banks/NBFCs) shall capture the economic profile of the borrowers covering (age, occupation, income, etc.) before extending any loan over their own DLAs and/or through LSPs engaged by them.

(i) No automatic increase in credit limit without explicit consent of the borrower

The registered entities, i.e. banks/NBFCs, shall ensure that there is no automatic increase in credit limit unless explicit consent of the borrower is taken on record for each such increase.

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3. Reference to DVO under Section 142A can’t be made for ascertaining expenditure which assessee made on purchases of land: ITAT

Assessee filed return declaring nil income. The case was selected for scrutiny, and a notice was issued under Section 143(2). The Assessing Officer (AO) noticed that he purchased two tracts of land. Thus he referred matter to the valuation officer (DVO).

DVO estimated the value of the land is less than 10% of the value adopted by the Stamp Valuation Authority. AO proceeded to treat the difference as unexplained expenditure under Section 69C.

On appeal, the CIT(A) upheld the action of AO. Aggrieved-assessee filed the instant appeal before the Delhi Tribunal.

The Delhi Tribunal held that there is no dispute that AO in the assessment order had stated an addition regarding unexplained expenditure under Section 69C. AO had not brought on record that the mentioning of Section 69C was on account of any typographical error.

It was also clear from the assessment order that the AO had referred to the issue of the market value of the property in question under Section 142A. However, as per Section 142A, such reference can be made to ascertain the value of any investment referred to in Section 69 or Section 69B or the value of any bullion, jewellery or any other valuable article referred to in Section 69A or Section 69B. There was the conspicuous exclusion of Section 69C.

In the present case, a reference under Section 142A was not made regarding ascertaining the correct market value of the investment in property. But, it was to ascertain the expenditure that the assessee made on the purchases. Thus, the reference to DVO under Section 142A for Section 69C is invalid.

Read the Ruling

Check out Taxmann's Yearly Tax Digest & Referencer | Set of 2 Volumes which is a Section-wise Case Book of Judgements of Supreme Court/High Courts/Income-tax Appellate Tribunal reported in 2021. It also includes Circulars & Notifications issued by the Dept. along with Words & Phrases taken from the reported case laws. 

Here is a Sample Read for your Reference.

4. SC grants a one-month extension to GSTN to allow the filing of TRAN-1; Window will start from 1^stOctober

The Supreme Court of India has granted a one-month extension to GSTN to open a common portal for availing transitional credit through TRAN-1 and TRAN-2. The window will start on 1^st October 2022.

Facts

The revenue had filed an SLP against the decisions of various High Courts in which the Court had allowed writ petitions filed by registered taxpayers seeking directions to avail transitional credit beyond the statutory time limit. The Apex Court held that any aggrieved registered assessee could claim benefit irrespective of whether they have filed a writ petition before the High Court or not, and GSTN was to open a common portal for filing concerned forms for availing Transitional Credit through TRAN-1 and TRAN-2 for two months, i.e. w.e.f. 1^st September 2022 to 31^st October 2022. The revenue requested the Supreme Court to provide an extension of one month to open the GSTN Portal.

Supreme Court

The Apex Court considered the application filed by the revenue seeking an extension of time for opening the GSTN Portal. Thus, the Supreme Court has extended the time for opening the GST Common Portal for a further period of four weeks. Now, GSTN is directed to open the common portal for filing concerned forms for availing transitional credit through TRAN-1 and TRAN-2 from 1^st October 2022.

Read the Ruling

Check out Taxmann's GST Practice Manual which is a comprehensive guide for day-to-day compliance with GST, helping you understand topics related to GST such as background, concepts, execution, challenges, and solution(s). It also explains the provisions of the GST law lucidly. This book is amended by the Finance Act 2022. 

Here is a Sample Chapter for your Reference.

5. Mandatory pre-deposit of 10% for entertaining appeal under Maharashtra VAT Act is a reasonable condition: Bombay HC

The Bombay High Court has held that a mandatory pre-deposit of 10% of the amount for entertaining an appeal under the Maharashtra VAT Act is a reasonable condition, and it is neither onerous nor violating Article 14 or 19(1) (g) of the Constitution.

Facts

The Maharashtra Tax Laws (Amendment and Validation) Act, 2019 has amended the provisions of the Maharashtra Value Added Tax Act, 2002 to incorporate mandatory pre-deposit for filing appeals against the assessment orders pertaining to all the goods after 16^th September 2016. In this writ petition, the question before the Bombay High Court was:

Whether the condition of 10% pre-deposit for entertaining appeal by appellate authority is onerous, unreasonable and violating Article 14 of the Constitution?

High Court

The Court observed that the pre-amended provisions gave discretion to the appellate authority to pass an order of deposit from 0% to 100%, which gave a chance or hope for getting a waiver. However, later on, the State Government provided a package wherein it prescribed a condition of pre-deposit of 10% amount, which resulted in staying recovery of 90% as a pre-condition for entertaining an appeal. The amended section prescribed 10% as the amount of pre-deposit and stayed recovery of 90%, which will not take away vested rights, if any.

The Government can enact a law stating no appeal shall lie, or it may lie on fulfilment of pre-condition, and such enactment can’t be said to be violating Article 14 or 19(1)(g) of the Constitution. Therefore, it was held that the amendment was constitutionally valid and a pre-deposit of 10% amount would be a reasonable condition, and it could not be considered onerous.

Read the Ruling

Check out Analysis of The Maharashtra Settlement of Arrears of Tax, Interest, Penalty, or Late Fee Act, 2022 which provides deep analytical insight and a theoretical and practical understanding of The Maharashtra Settlement of Arrears of Tax, Interest, Penalty or Late Fee Act, 2022. This book will be helpful for both the Taxpayers & Tax Professionals.

Here is a Link to Buy this Book

6. Reporting requirement under clause 44 of Form 3CD

Section 44AB of the Income-tax Act, 1961, requires certain classes of taxpayers to get their accounts audited if their gross turnover or receipts during the previous year exceed the prescribed threshold limit. It is intended to ensure that the books of account and other records are properly maintained and correctly compute the taxpayer’s true income.

The findings and observations from the tax audit are reported in Form Nos. 3CA/3CB and 3CD. Form 3CD is a statement of particulars required to be furnished under Section 44AB of the Income-tax Act. One of the items in Form 3CD relates to the furnishing of details of total expenditure in Clause 44, wherein the break-up of total expenditure both for entities registered and not registered under GST is required.

The reporting under Clause 44 of Form 3CD was kept in abeyance till 31^st March 2022. It has now become mandatory for all the reports submitted on or after 1^st April 2022. The following information is required to be furnished in Clause 44:

(a) Total expenditure incurred during the year;

(b) Expenditure in respect of entities registered under GST

• • • Relating to goods or services exempt from GST;
    • Relating to entities falling under the composition scheme;
    • Relating to other registered entities;
    • Total payment to registered entities;

(c) Expenditure relating to entities not registered under GST.

For reporting under this clause, guidance on various aspects has also been provided by ICAI, such as:

(a) Head-wise/nature-wise expenditure details are not envisaged in this clause;

(b) The word ‘payment’ should harmoniously be interpreted as ‘expenditure’;

(c) It is necessary that the capital expenditure should also be reported in the format prescribed as the word used is ‘expenditure’ in the clause;

(d) The amount which is not in the nature of expenses shall not be quoted, for example, depreciation, provision for expenses, etc.

(e) Schedule III to the CGST Act, 2017 lists out activities or transactions which are treated neither as a supply of goods nor a supply of services and thus, expenditure incurred in respect of such activities need not be reported.

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