Weekly Round-up on Tax and Corporate Laws | 31st July to 05th August 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from  July 31^st to August 05^th 2023, namely:

(a) No penalty for misreporting of income if additions are made due to deeming fiction of Section 43CA/56(2)(x): ITAT;

(b) CBDT notifies Form 3AF to be furnished by assessee claiming deduction under section 35D;

(c) No GST registration is required for small dealers to supply goods through e-commerce operators;

(d) CBIC notifies special procedures for e-Commerce Operators in respect of the supply of goods made by Composition Dealers;

(e) Special procedure notified which shall be adopted by e-Commerce Operators w.r.t supplies made by unregistered persons;

(f) GST Council recommends GST on valuation of supply of online gaming and actionable claims in casinos at entry level;

(g) SEBI’s Transparency Drive: Standardized ‘Terms of Reference’ for auditing Portfolio Managers firm-level Performance Data; and

(h) NFRA imposes penalty on auditor despite issuance of Qualified Opinion.

1. No penalty for misreporting of income if additions are made due to deeming fiction of Section 43CA/56(2)(x): ITAT

Assessee-company filed its return of income for the relevant assessment year, and the case was selected for scrutiny. During the scrutiny proceedings, the Assessing Officer (AO) made addition under section 43CA read with section 56(2)(x). By virtue of this addition, penalty proceedings under section 270A were initiated on account of misreporting of income.

The appeal of the assessee in quantum had been disposed of by the Commissioner (Appeals) against the assessee. After that, the penalty order under section 270A was finalized, and penalty was imposed without waiting for the outcome of the quantum appeal.

The matter reached Mumbai Tribunal.

The Tribunal held that Section 270A deals with deeming income only in the case of additions made in Section 115JB , i.e. MAT provisions. In the instant case, additions were made by virtue of section 43CA read with section 56(2)(x), i.e. deeming provisions. In case of applicability of deeming provisions, there is no option in the statute except to make adjustments as per the figures derived from deeming sections vis-a-vis figures disclosed by the assessee.

In that situation, the assessee’s case does not fall in the category of under-reporting of income. In the cases where deeming provisions applied for the addition of income, neither concealment of income nor under-reporting of income can be established against the assessee as there is no active participation of the assessee can be established in doing so.

Penalty initiated and imposed under section 270A for misreporting of income is not only erroneous but also arbitrary and bereft of any reason as in the penalty notice, the revenue has failed to specify the limb “under-reporting” or “misreporting” of income, under which the penalty proceedings had been initiated. There was not even a whisper about which limb of section 270A was attracted and how section 270A(9) was satisfied.

In the absence of such particulars, the mere reference to the word “misreporting” by the revenue in the assessment order for the imposition of penalty makes the impugned order manifestly arbitrary. Therefore, no penalty can be imposed in this case, as there was no misreporting by the assessee for the purposes of section 270A.

Read the Ruling

2. CBDT notifies Form 3AF to be furnished by the assessee claiming deduction under section 35D

Section 35D provides that an Indian company or any resident person can claim a deduction under this provision in respect of preliminary expenses. The preliminary expenditures are those incurred before or after the business’s commencement in connection with the extension of an undertaking or in connection with setting up a new unit.

One of the conditions for claiming a deduction of such expenses is that the work in connection with these activities should be carried out within the organization of the assessee. Where it is entrusted to an outside concern, that concern should be approved by the CBDT.

The Finance Act 2023 eased the condition for claiming amortization of such preliminary expenses. The amendment was made to make it mandatory for the assessee to furnish a statement containing the particulars of this expenditure within the prescribed period to the prescribed authority in the prescribed Form and manner.

Following this amendment, the CBDT inserted Rule 6ABBB requiring the assessee to furnish the statement in Form No. 3AF. The Form is required to be furnished one month before the due date for furnishing the return of income as specified under section 139(1). The Form must be furnished electronically under digital signatures or through an electronic verification code.

Form 3AF requires disclosures containing:

• General information (Name, Residential Status, PAN, TAN, Aadhar Number, Address etc.);
• Relevant Previous Year;
• Expenditure in connection with the nature of the Activity (Preparation of feasibility report, project report, Conducting market survey or any other survey necessary for business of the assessee, Engineering services relating to the business of the assessee);
• Name, PAN and Address of the person carrying out the activity;
• Amount of Expenditure (whether paid in cash or any other mode);
• Respective section or amount of tax, in case tax deducted at source.

Read the Notification

3. No GST registration is required for small dealers to supply goods through e-commerce operators

The CBIC has issued a notification to exempt dealers from taking GST registration whose turnover does not exceed the threshold limit of registration and making supplies of goods through an electronic commerce operator subject to certain conditions.

A few such conditions are that persons shall not make any inter-State supply of goods; persons shall not make the supply of goods through electronic commerce operator in more than one State or Union territory etc.

In this regard, Notification No. 34/2023-Central tax, dated July 31, 2023, has been issued, and it shall come into force with effect from October 01, 2023.

Read the Notification

4. CBIC notifies special procedures for e-Commerce Operators in respect of the supply of goods made by Composition Dealers

The CBIC has issued a notification to notify special procedures for the electronic commerce operators (ECOs) regarding the supply of goods made through them by Composition Dealers. It is provided that the ECOs shall not allow any inter-State supply of goods through it by composition dealers. ECOs shall collect tax at source in respect of the supply of goods made through it & pay to the Government, and ECOs shall furnish the details of supplies of goods made through it in the statement in FORM GSTR-8.

In this regard, Notification No. 36/2023- Central Tax, dated August 04, 2023, has been issued, effective October 01, 2023.

Read the Notification

5. Special procedure notified which shall be adopted by e-Commerce Operators w.r.t supplies made by unregistered persons

The CBIC has issued a notification providing special procedures for electronic commerce operators (ECOs) regarding the supply of goods made through it by the persons exempted from obtaining registration.

It has been provided that ECOs shall allow the supply of goods through it by such persons only if an enrolment number is allotted to them on the common portal. ECOs shall not allow unregistered persons any inter-State supply of goods through it. Also, the ECOs shall not collect tax at source from them but furnish the details of supplies of goods made through it by such persons in the statement in FORM GSTR-8.

In this regard, Notification No. 37/2023- Central Tax, dated August 04, 2023, has been issued, effective October 01, 2023.

Read the Notification

6. GST Council recommends GST on valuation of supply of online gaming and actionable claims in casinos at entry level

The 51st GST Council met under the Chairpersonship of Union Minister for Finance & Corporate Affairs Smt. Nirmala Sitharaman via video conferencing in New Delhi.

The GST Council has recommended that the valuation of the supply of online gaming and actionable claims in casinos may be done based on the amount paid or payable to or deposited with the supplier by or on behalf of the player (excluding the amount entered into games/ bets out of winnings of previous games/ bets) and not on the total value of each bet placed.

The Council has also recommended that CGST Rules, 2017 may be amended to insert specific provisions for the valuation of the supply of online gaming and the supply of actionable claims in casino accordingly. The Council has also decided that effort will be made to complete the process of making amendments in the Act at the earliest and bring the amendments into effect from October 01 2023.

Read the Press Release

7. SEBI’s Transparency Drive: Standardized ‘Terms of Reference’ for auditing Portfolio Managers firm-level Performance Data

On March 20, 2023, SEBI issued a Master Circular directing Portfolio Managers to furnish audit reports concerning their firm-level performance data to the SEBI within 60 days from the end of each financial year. Accordingly, for the purpose of audit of firm-level performance data, the portfolio managers are obligated to consider all the clients’ portfolios managed by them (i.e. clients of both discretionary and non-discretionary portfolio management services).

Now, in order to bring uniformity in the audit procedure, SEBI, in consultation with the Association of Portfolio Managers in India (APMI), has specified following –

(a) Standardized Terms of Reference (ToR) for the audit of firm-level performance data

SEBI, in consultation with the Association of Portfolio Managers in India (APMI), specified standardized Terms of Reference (ToR) for the aforesaid audit of firm-level performance data. The standard ToR shall be effective from 01^st Oct, 2023.

These standardized ToR mandate portfolio managers to consider clients’ portfolios under all services for the purpose of auditing firm-level performance data. However, the performance of advisory clients can be excluded  if the performance of such clients, either individually or cumulatively, is not reported or published in any marketing material or website.

(b) Confirmation of compliance is to be sent within 60 days of closure of FY

The Portfolio managers are required to submit the confirmation of compliance with the requirement of an annual audit of firm-level performance data in line with the standard ToR specified by APMI to SEBI within 60 days from the end of each financial year.

The report on confirmation of compliance to SEBI needs to be certified by directors/partners of the portfolio manager or by persons authorized by the Board of Directors/partners of the portfolio manager.

Conclusion:

SEBI’s initiative to mandate portfolio managers in India to submit audit reports on firm-level performance data and adhere to standardized terms signifies a significant stride towards enhancing transparency, accountability, and uniformity within the portfolio management industry. By incorporating clients’ portfolios and emphasizing timely compliance reporting, this measure is expected to foster investor trust and enhance market credibility.

Read the Circular

8. NFRA imposes penalty on auditor despite issuance of Qualified Opinion

The National Financial Reporting Authority (NFRA) is taking proactive measures to issue directives against auditors, highlighting instances of inadequate adherence to audit quality standards. In light of this, prompted by a communication from the Registrar of Companies (RoC), NFRA initiated an investigation into the statutory auditor of the company, wherein the company had prepared the financial statements on a going concern basis despite reporting loss, and having negative net worth, negative working capital, high debts, and defaults in payments.

While reviewing the audit working papers related to the company’s ability to keep operating normally, NFRA discovered that the auditor had doubts that the company might be unable to use the going concern assumption to prepare financial statements. Therefore, the auditor included an Emphasis of Matter Paragraph (EOM) to report on the uncertainty of going concern in the auditor’s report. As a matter of working paper, the auditor prepared a going concern consideration programme based on an unsigned Management Representation Letter (MRL).

NFRA further noticed that even though the auditor had these concerns, the auditor did not apply professional skepticism and gather enough information to confirm whether the company’s assumption of going concern basis was accurate. Had the auditor acted with professional skepticism, he would have easily assessed the uncertainty in the going concern assumption.

Though the auditor has expressed a qualified opinion on other elements of financial statements, he ignored the instances depicting the uncertainty related to going concern and reported the same under EOM para instead of making it a basis for expressing the qualifying opinion. Hence, NFRA held the auditor guilty of professional misconduct and imposed a monetary penalty of Rs. 1,00,000/- on him.

Read the Story