Weekly Round-up on Tax and Corporate Laws | 2nd to 7th September 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from September 02nd to 7th, 2024, namely:

1. FAQs on Tax Audit for AY 2024-25;
2. Tax Audit Checklist on Clause 26 and 27 of Form 3CD under the Income Tax Act, 1961;
3. LIC Mutual Fund isn’t public financial institution; interest payable to it isn’t covered by section 43B: HC;
4. AD Category-I banks are no longer required to submit LRS monthly returns starting from Sept., 2024: RBI;
5. New advisory on reporting of supplies to un-registered dealers in GSTR-1/GSTR-5: GSTN Update;
6. GSTN Update: Launching of New Invoice Management System; and
7. Proceedings are not vitiated if notice is not uploaded on the common portal but served by other means: HC;

1. FAQs on Tax Audit for AY 2024-25

Taxpayers are required to maintain books of accounts and get them audited if their gross turnover or receipts during the previous year exceed the prescribed threshold limit. The requirement to keep the books of accounts is specified under Section 44AA, and to get them audited is mentioned in Section 44AB of the Income-tax Act.

The purpose of a tax audit is to ensure that the taxpayer maintains proper books of account and complies with various provisions of the Income-tax Act relating to claims for deductions, offering of incomes to tax, TDS deduction, TCS collection, filing of SFT, TDS returns, TCS returns, CBCR reports, etc. The chartered accountant conducting the tax audit is required to provide his findings, observations, etc., in the form of an audit report. The audit report under Section 44AB shall be furnished electronically at the e-filing portal in Form No. 3CA/3CB-3CD.

The ICAI has released the Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2023) [hereinafter referred to as ‘2023 GN’ for short]. The 2023 GN makes a lot of changes in recommendations vis-a-vis Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 (Revised 2022)[‘2022 GN’]. The ICAI has also issued an Implementation Guide on Tax Audit in 2024 covering the amendments to Form No. 3CD notified vide Notification No. 27/2024, dated 05-03-2024.

The Frequently Asked Questions (FAQs) about the tax audit as updated by the ‘2023 GN’ and the Implementation Guide of 2024. A few FAQs covered in the article are mentioned below:

• How to calculate the turnover in the case of derivatives?
• How to check the threshold limit if the assessee is carrying on business and profession at the same time?
• Is a tax audit required if turnover exceeds the specified limit but total income is below the maximum exemption limit?
• Is a non-resident conducting business liable to get his accounts audited under Section 44AB?
• Is a salaried employee required to get accounts audited if he is also trading in derivatives (futures and options)?
• How to check the threshold limit if the assessee is carrying on business and profession at the same time?
• Whether AO has the authority to summon a tax auditor and levy a penalty under Section 271J
• What if the due date of the deposit of employees’ PF contribution fell on a Sunday and the assessee paid it on the next working day?
• Can the buyer avoid disallowance under Section 43B(h) by paying the MSE supplier’s dues with interest under Section 16 for late payment?
• Is disallowance under Section 43B for the interest expense converted into a loan permanent in nature?

Read the Article

2. Tax Audit Checklist on Clause 26 and 27 of Form 3CD under the Income Tax Act, 1961

Clause 26 of Form 3CD requires tax auditors to report on sums incurred and paid under Section 43B of the Income Tax Act, 1961, which allows deductions for certain liabilities (taxes, duties, etc.) only when paid during the previous year or by the due date of the income tax return. Auditors must confirm the payment status of these liabilities and report whether indirect taxes are properly reflected in the profit and loss account.

Clause 27(a) of Form 3CD requires reporting on CENVAT credit availed or utilized during the previous year, its treatment in the profit and loss account, and the outstanding balance. Since excise duty was replaced by GST on July 1, 2017, this clause now applies mainly to assessees dealing in products like petroleum and tobacco. The ICAI’s Tax Audit Guidance Note points out that while the form mentions only CENVAT credit, the e-filing utility extends this to GST Input Tax Credit (ITC). This has led to the interpretation that Clause 27(a) may not apply to most assessees, a view supported by the ICAI.

Clause 27(b) addresses prior period items of income or expenses. Auditors are not required to assess compliance with GAAP for CENVAT or ITC but must issue a qualified opinion if the treatment is found improper.

The checkpoints play a pivotal role in assisting the tax auditor in ascertaining whether the provision of clause 26 and clause 27 has been duly complied with. The given checkpoints can be helpful while validating these clauses:

2.1 Checklist on Clause 26 of Form 3CD – Sums Payable under Section 43B

• Verify if the assessee follows the cash or mercantile system. If the cash system is used, the clause is not applicable.
• Obtain details of liabilities covered by Section 43B and verify them against the books of account and returns for the relevant years. Also, obtain a “Management Representation Letter (MRL)” for payment status.
• Exclude reporting under Clause 26 for liabilities already covered under other clauses like Clause 21.
• Verify the payment status of GST, sales tax, customs duty, excise duty, and other indirect taxes, ensuring proper debiting in the profit and loss account.
• Interest for delayed payment of indirect taxes is not covered under Section 43B and should not be reported in this clause.
• Ensure pre-deposits are treated as tax payments, and clarify that furnishing bank guarantees is not equivalent to tax payment.
• Verify compliance with Section 40(a)(iv) in respect of Provident Fund (PF), superannuation, and gratuity funds.
• Contributions to non-approved gratuity funds should be reported under Clause 21(f), not Clause 26.
• Confirm that amounts classified as bonuses/commissions to employees are not disguised dividends.
• Obtain and verify details of amounts payable to railways, ensuring payments for railway assets are separated and dates of payment are accurate.

2.2 Checklist on Clause 27(a) of Form 3CD – CENVAT Credit and GST Input Tax Credit (ITC)

• Check if the assessee deals in petroleum crude, diesel, petrol, aviation turbine fuel, natural gas, or tobacco. If not, no further checks are required.
• Ensure reconciliation of CENVAT credit as per the books of account with relevant excise records.
• Verify the consistency of CENVAT credit balances with audited financial statements and excise records.
• Ensure that the opening balance, credit availed, credit utilized, and closing balance are correctly reported with appropriate descriptions in the e-filing utility.
• Ensure accurate reflection of CENVAT credit in the Profit & Loss account and balance sheet as per the relevant sections.

2.3 Checklist on Clause 27(b) of Form 3CD – Prior Period Items

1. Determine if the assessee follows the cash or mercantile system of accounting. If the cash system is followed, this clause is not applicable.
2. Ensure that prior period items in the tax audit align with those in statutory audits, if applicable. If discrepancies are identified, they should be reported.
3. For assessees not subjected to a statutory audit, scrutinize the General Ledger for identifying prior period items.
4. Distinguish between prior period items and changes in accounting estimates, and ensure compliance with AS 5 and Ind AS 8.
5. Provide detailed reporting of prior period items, head-wise, rather than aggregated amounts. Ensure material adjustments are correctly treated.

Read the Checklist on Clause 26

Read the Checklist on Clause 27

3. LIC Mutual Fund isn’t public financial institution; interest payable to it isn’t covered by section 43B: HC

During the relevant assessment year, LIC Mutual Fund purchased certain unsecured debentures of the assessee company. The assessee extended the interest on unsecured debentures payable during the year to LIC Mutual Fund for another two years. It claimed deduction of the interest payable to LIC Mutual Fund. The Assessing Officer (AO) invoking the provisions of section 43B disallowed the interest on the ground that it had not been paid within the stipulated period.

On appeal, CIT(A) allowed the assessee’s appeal. Subsequently, the order was reversed by the Tribunal, disallowing the deduction claimed by the assessee. Aggrieved by the order, an appeal was filed to the Calcutta High Court.

The High Court held that as per clause 2(q) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (SEBI Mutual Funds Regulations), mutual fund means the fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities, money markets, gold or gold related instruments, silver or silver related instruments, real estate assets and other assets and instruments as may be specified by the Board from time to time.

Clause 14 mandatorily requires that a mutual fund be constituted as a trust, and the instrument of a trust shall be a deed duly registered under the provisions of the Indian Registration Act, 1908, executed by the sponsorer in favour of the trustees named in such an instrument. Thus, LIC Mutual Fund is a trust, and the trust deed has been duly registered under the Indian Registration Act.

LIC Mutual Fund is a trust of movable property, which has been created in terms of section 6 of the Indian Trust Act, 1882. The Life Insurance Corporation of India can be said to be an author of the trust or settlor of the trust, but the said trust and the Life Insurance Corporation of India are both separate legal entities. While the LIC Mutual Fund Trust is governed by the provisions of the Indian Trust Act read with SEBI Mutual Fund Regulations, the Life Insurance Corporation of India is governed by the provisions of the Life Insurance Corporation Act, 1956.

Clause (d) of section 43B refers to any sum payable by the assessee as interest on any loan or borrowing from any public financial institution. Explanation 4(a) to section 43B provides that public financial institutions shall have the meaning assigned to them under section 4A of the Companies Act, 1956.

Section 4A specifically mentions the Life Insurance Corporation of India, established under section 3 of the Life Insurance Corporation Act, 1956. It does not mention LIC Mutual Fund which is a trust established under the Indian Trust Act. Further, section 4A(2) empowers the Central Government to specify, by notification in the official gazette, such other institutions as it may think fit to be a public financial institution, provided that no institution shall be so specified unless:

1. it has been established or constituted by or under any Central Act, or
2. not less than 51 per cent of the paid-up share capital of such institution is held or controlled by the Central Government.

Neither LIC Mutual Fund Trust is mentioned in the list under sub-section (1) of section 4A of the Companies Act, 1956, nor has the LIC Mutual Fund Trust been established or constituted by or under any Central Act. Therefore, the LIC Mutual Fund Trust is not a public financial institution under section 4A. Consequently, clause (d) of section 43B is not attracted under the facts and circumstances of the case.

Accordingly, it could not be disallowed in the hands of the assessee on the grounds of non-compliance with conditions of section 43B, and the disallowance of interest invoking the provisions of section 43B cannot be sustained.

Read the Ruling

4. AD Category-I banks are no longer required to submit LRS monthly returns starting from Sept. 2024: RBI

The Reserve Bank of India (RBI) vide Circular, Dated September 06, 2024, has introduced changes to the reporting requirements for Authorised Dealer (AD) Category-I banks under the Liberalised Remittance Scheme (LRS).

The RBI has now decided to discontinue the requirement for submission of the LRS monthly return. From September 2024 onwards, AD banks will be required to upload only transaction-wise information under the LRS daily return at the close of business of the next working day on the Centralised Information Management System (CIMS) (CIMS return code: R010) (URL: https://sankalan.rbi.org.in).

However, it is to be noted that, in cases where there is no data to be furnished, AD Category-I banks must upload a ‘NIL’ report. This change is effective from the reporting month of September 2024 onwards.

Under the erstwhile norms, AD Category-I banks were required to furnish information on the number of applications received and the total amount remitted under LRS on a monthly basis in the Centralised Information Management System (CIMS).

By adopting a transaction-wise reporting framework, the RBI aims to enhance transparency and regulatory oversight, allowing for real-time monitoring of foreign exchange outflows. This change also reduces the burden on AD banks by streamlining the reporting process, ensuring that regulatory compliance is achieved in a more efficient and organised manner. Moreover, it simplifies operational requirements for banks, reducing delays and minimizing the risk of non-compliance due to monthly reporting backlogs.

Read the Circular

5. New advisory on reporting of supplies to un-registered dealers in GSTR-1/GSTR-5: GSTN Update

The GSTN has issued an advisory to inform that it is in the process of developing functionality to report invoice-wise details of inter-state outward taxable supplies made to unregistered dealers above 1 Lakh and will be made available shortly.

Till the time new functionality is made available on the portal for reporting invoice-wise details of inter-state supplies made to unregistered dealers above 1 Lakh, the taxpayers may continue reporting the invoice-wise details which are more than 2.5 Lakhs in Table 5 of Form GSTR-1 and Table 6 of GSTR-5. In this regard, GST Update dated September 3rd, 2024 has been issued.

Read the GSTN Advisory

6. GSTN Update: Launching of New Invoice Management System

The GSTN has issued an update to inform that a new communication process called the Invoice Management System (IMS) is being brought up at portal to enable taxpayers to efficiently address invoice corrections/amendments with their suppliers through the portal.

This will also facilitate taxpayer in matching of their records/invoices vis a vis issued by their suppliers for availing the correct Input Tax Credit (ITC) and shall allow the recipient taxpayers to either accept or reject an invoice or to keep it pending in the system, which can be availed later. This facility shall be available to the taxpayer from 1st October onwards on the GST portal. In this regard, GSTN Update dated September 4th, 2024 has been issued.

Read the GSTN Update

7. Proceedings are not vitiated if notice is not uploaded on the common portal but served by other means: HC

The Honorable Calcutta High Court has recently held that proceedings shall not be vitiated even if show cause notice under the GST Act is not uploaded on the common portal but served by other means. This ruling is given in the case of Messers Sreema Rice Mill v. Union of India [2024] 164 taxmann.com 487 (Calcutta).

Facts

The assessee filed writ petition to challenge the demand order passed against it. It was contended that neither the show cause cum demand notice nor the adjudication order was uploaded on the common portal.

The department submitted that the show cause notice was served through speed post, and assessee had responded to the same. The petitioner, in response to the said show cause notice not only filed its reply but also availed the opportunity of personal hearing.

High Court

The Honorable High Court noted that in the instant case, the show-cause notice was duly served on the petitioner by speed post and proceedings were not vitiated if notice served by other means. The petitioner had also responded to the notice, however, the adjudication order must be uploaded on portal to allow filing of appeal. Therefore, the Court directed the department to upload order within 7 days and the assessee was allowed to file appeal within 3 months from date of judgment or uploading of order, whichever is later.

Read the Ruling