Analytical Articles on Union Budget Direct Tax Proposals; Addition u/s 68; Power of CPC and lots more!

Ms. Urvi Asher (Consultant - Manohar Chowdhry & Associates) discusses proposals specifically impacting startups. She is of the view that extension of the time limit for set-off of losses from 7 years to 10 years may not be a material factor in commercial transactions, viz. where a startup founder decides to sell his venture completely or partially or a FDI investor exits the company after a few years. The author opines that by removing the exception of non-residents under Section 56(2)(viib), there may be heavy foreign exchange inflow from NRIs , HNIs and overseas family offices of Indians who invest in closely held Indian companies to enjoy the tax benefits, during the months of Feb and Mar 2023. She also foresees litigation due to amendment in Section 45(5A) as the Revenue may try to apply it in earlier years too citing that it is a clarificatory amendment.

Click here to read the article titled “Budget 2023: Proposals for Startups”

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In another article, Mr. Prashant Upadhyay (Chartered Accountant) throws light on the importance of the Tax Auditor’s report particularly on account of operation of Section 143(1)(a)(iv). He explains that there are several clauses in the tax audit report requiring just disclosures of the expenditure and does not require any adjustment while framing return of income, however the CPC is automatically making adjustments without even convincing itself. He remarks that “The draftsmen of Section 143(1)(a)(iv) should have atleast gone through the contents of Form 3CD where the details of expenditure is mentioned and not details of disallowance of expenditure” He underscores that there may be revision of tax audit report on account of typo or other errors noticed by CPC which were not noticed by auditors while filing the audit report which will put the integrity of profession under scrutiny. He briefly discusses recent judicial pronouncements in this regard and states that being a new provision, it has come under judicial scrutiny of Tribunals and Courts recently and it would now be emerging from Courts what auditor has reported, what should have been reported and what should not be considered as an adjustment although it has been reported in audit report.

Click here to read the article titled “Auditor is Always Right!!”

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Mr. A. Sekar (Chartered Accountant) writes about the proposed increase in TCS rate on foreign remittance made through the Liberalised Remittance Scheme (LRS). The author highlights that the TCS applicable to the category of ‘Overseas Tour Package’ and ‘any other case’, an exorbitant rate of 20% has been prescribed without any threshold limit. The author points out that TCS was introduced more as a provision for tracking such remittances, mapping them in the Annual Information Statement and in TRACES with the purpose of verification of such remittances with reference to the income returned by Assessees and scrutinise such returns for verification of sources of such remittances. The author remarks that it was never intended to be a tax collection tool or resource mobilisation tool. He states that the remittances are made out of tax paid incomes mostly, which has already suffered tax under relevant TDS provisions, thus, opines that imposing such a heavy rate of TCS on the foreign remittances would certainly amount to double deduction/collection of tax at source. Further he opines that, “Apart from the heavy financial burden cast on such remitters, this sort of double taxation is against the principles of equity and fair play”. The author seeks the shredding of unnecessary cloud of secrecy in the Budget making exercise and suggests that the stakeholders views may be solicited before announcing changes in TDS/TCS rates etc.

Click here to read the article titled "Budget 2023 - TCS on Foreign Remittance under Liberalised Remittance Scheme"

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Key Takeaways from Handpicked Rulings

1) ITAT: Confirms Sec. 68 addition on share application money emanating from fraudulent transactions - ITAT upholds addition under Section 68 on account of unexplained share application money received by the Assessee as accommodation entry from a shell/dummy company owned and controlled by entry providers; Holds that unexplained share application money by the way of accommodation entry shall be leviable to tax once the mechanism of fraud is established and the fact whether Assessee has any knowledge of accomodation entry becomes irrelevant; Assessee-Company engaged in the business of manufacturing of sponge iron and MS ignots filed return of income declaring loss of Rs.56.41 Lac for AY 2007-08 which was subsequently processed under Section 143(1); Revenue initiated reassessment proceedings under Section 147 based on the information received from DDIT(Investigation) which was formed in pursuance to the search conducted at the premises of the entry operators wherein incriminating material was found; Revenue alleged that the Assessee received an accommodation entry of Rs.25 Lac in the nature of share capital through dummy company which was owned and controlled by those entry operators and accordingly, treated the same as unexplained cash credit and made addition under Section 68; CIT(A) dismissed Assessee’s appeal and held that…………….Click here to read and download ITAT order

2) ITAT: Retention of gold during purification claimed as wastage charges not amenable to Sec.194C - ITAT allows Assessee's appeal, set aside CIT(A) order making disallowance under Section 40(a)(ia) for non-deduction of tax at source under Section 194C on account of wastage charges claimed in lieu of gold retained by goldsmith; Assessee-Company, a manufacturer of gold and silver, purchased old gold from customers gave it to a goldsmith for purification; During AY 2013-14, Assessee claimed wastage charges at the rate of 4.5% to 6% being the gold retained by goldsmith in lieu of making charges; Revenue disallowed the wastage charges and held that wastage would have to be in range of 0.5% to 1% and excess rate of gold was actually the one retained by goldsmiths in lieu of making charges; Accordingly, treated this wastage charges as payment to goldsmith without deduction of tax under Section 194C; CIT(A) dismissed Assessee's appeal and held that Assessee was liable to deduct tax at source under Section 194C and Revenue rightly made disallowance under Section 40(a)(ia); ITAT observes that TDS under Section 194C has to be deducted wherever there is credit of such sum to the account of contractor or payment thereof in cash or by any other mode, but in the present case, wastage charges were claimed by the Assessee without actual payment and accordingly, question of non-deduction of tax…………….Click here to read and download ITAT order

3) ITAT: CPC cannot go beyond the return of income filed - ITAT dismisses Assessee’s appeal, against NFAC order rejecting rectification petition filed u/s 154. ITAT holds that the Centralized Processing Centre (CPC) while processing the return of income u/s 143(1) can take into cognizance only the return of income (ROI) as accompanied document; Notes that the assessee had filed the ROI in Form No.5, however, no documents were filed along with the ROI justifying the claim for exemption u/s 11 of the Act. It is only after receipt of intimation, assessee took a plea that its income was exempt u/s 11 under registration u/s 12A of the Act and even the audit report was admittedly not filed along with the petition filed u/s 154 before the NFAC; ITAT holds that, when the assessee had filed the ROI in Form No.5, the natural inference to be drawn is that the assessee is a partnership firm and the return was filed as if it is a firm, it follows that computation of tax liability should be made on the basis that it is a partnership firm.…………….Click here to read and download ITAT order

4) ITAT: Inadvertent technical fault in filing the ROI cannot debar Assessee from claiming TDS credit. Assessee a salaried employee having a status of “Not Ordinarily Resident” (NOR), filed his return of income (ROI) and claimed credit for TDS amounting to Rs.42,21,551/-. While processing the ROI, the Centralized Processing Centre (CPC), Bengaluru on the allegation of mismatch with Form 26AS partially denied TDS credit amounting Rs.3,48,701/-. Against the intimation issued u/s 143(1), assessee filed an appeal before CIT(A) which was rejected; ITAT on a perusal of Form 26AS statement, observed that the amount of …………….Click here to read and download ITAT order

5) ITAT: Examining asset's nature introduced as capital sin qua non for chargeability under Sec.45 - ITAT remits appeal back to the Revenue with a direction to determine the nature of land introduced as capital by a partner to determine the changeability for capital gain under Section 45(3); Assessee-Firm, a real estate developer filed return of income declaring Nil income; During AY 2014-15, capital contribution of Rs.6.62 Cr by way of land was made by one partner as against liability of Rs.19.19 Cr shown in the name of the said Partner; Revenue noted that the Circle Rate of the agricultural land was below the value of property determined by the partner and adopted actual Circle Rate of agricultural land as Rs.1.03 Cr as against Rs. 6.62 Cr reported by the Partner and accordingly, made addition of Rs.5.29 Cr as excess value introduced in partner's capital as unexplained capital; As far as liability of Rs.19.19 Cr, Revenue made addition of the whole amount as unexplained liability in the name of Partner; CIT(A) allowed Assessee's appeal and held that Section 45 clearly stipulated that book value of the asset shall be deemed to be full value of consideration and Revenue erred in considering Circle Rate instead of book value recorded in books of accounts; Before ITAT, Revenue contended that there was no basis to record the amount in the books of accounts and CIT(A) erred in granting the benefit of Section 43(5) without realising the fact that the land was reported under current assets in the balance sheet instead of capital asset…………….Click here to read and download ITAT order

6) HC : Quashes reassessment proceedings as property transaction underwent scrutiny assessment - Bombay HC holds that initiation of reassessment proceedings based on change of opinion is impermissible; Holds that in the absence of reason pertaining to concealment/suppression of documents which were already examined in original assessment is without jurisdiction; During AY 2016-17, Assessee-Individual filed return of income declaring income from capital gains on sale of ancestral property by claiming deduction of Rs.1.64 Cr. as damages pertaining to acquisition/sale of that ancestral and was subjected to assessment under Section 143(3) and consequently, the correctness of capital gains and the deductions were accepted by the Revenue; Subsequently, the Revenue initiated reassessment proceedings on the premise that the claim of damages and compensation deducted from the sale consideration while computing capital gain was wrongly allowed in the original assessment and the said expenditure should not be treated as expenditure for the purpose of acquiring the property; Assessee raised objection that the correctness/claims of the said expenditure were duly considered and all the documents (including MOU for the breach of contract) were duly considered and the claim was allowed thereafter in the original assessment; Revenue dismissed Assessee's objection and accordingly, made addition of Rs.1.64 Cr; Assessee by way of writ petition, assailed the …………….Click here to read and download HC Judgment

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Analytical Articles on Union Budget Direct Tax Proposals; Addition u/s 68; Power of CPC and lots more!

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