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Direct Tax Vista Your weekly Direct Tax recap Edn. 4 – 3rd May 2022 By Vivek Jalan Partner, Tax Connect Advisory Services LLP |
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Netting of Reimbursement of expenditure (As Pure Agents) with the expenditure can be a ground for reopening
Some C&F Agents net off the reimbursement of the expenditure with the cost incurred and the entire transaction does not get recorded in the Financial Statements. The Ledgers in the books of accounts are also not produced before the authorities during scrutiny. In terms of Rule 33 of The CGST Rules 2017 these can be termed as Pure Agent Services.
However, non-declaration of these reimbursements completely can become a ground of reopening incase the AO detects the same at a later stage from the Form 26AS where the principals have deducted TDS on such reimbursements, or from other records. In a similar matter in the case of DISTRIBUTORS INDIA (SOUTH) Vs UNION OF INDIA [2022-VIL-109-ALH-DT] it was held that there was prima facie material available on record before the AO for issuing a notice for reassessment under Section 148 after conducting an investigation and going through the income tax return and other related documents of the assessee and after forming reason to believe that the assessee did not truly and fully disclose all the material facts, because of which income has escaped assessment.
It is also pertinent to note that such reimbursements are ‘no supply’ under GST too and should be disclosed under Form GSTR 9 even though there is no place to disclose the same in GSTR 1 and GSTR 3B.
Revenue should respect the Relief under National Litigation Policy and adhere to the limits under Circular dated 23/2019 by CBDT, for filing appeals
The National Litigation Policy is based on the recognition that government and its various agencies are the predominant litigants in courts and tribunals in the country. Its aim is to transform government into an efficient and responsible litigant. This policy is also based on the recognition that it is the responsibility of the government to protect the rights of citizens, to respect fundamental rights and those in charge of the conduct of government litigation should never forget this basic principle. Keeping in view the policy & plans of the Government, in a cohesive and organized manner, Litigation Policy is also under consideration as declared in the Parliament in December 2021 by The Government.
In view of this policy, The CBDT had issued Circular No. 3/2018 dated 11th July 2018 laying down modified limits for the Income Tax Dept. to file appeals before the ITAT/ High Court/ Supreme Court. This Circular was modified by Circular No. 17/2019 dated 8th August 2019 clarifying that those cases where there was an organized tax evasion activity, could be pursued after obtaining special order from CBDT.
Now, the question is that incase where the taxpayer himself declares to pay tax during a search and seizure operation and later retracts his statement, whether these CBDT Circulars come to the rescue of the assessee. On this point it was held by the Hon’ble Bombay High Court in the case of THE COMMISSIONER OF INCOME TAX Vs SHRI SURENDRA SHANTILAL PEETY [2022-VIL-110-BOM-DT], that revenue cannot be allowed to pursue these appeals, since the tax effect involved in this bunch of appeals is less than the monetary limit prescribed in the earlier circulars and where there was no order of the CBDT too. The Hon’ble High Court clearly directed the revenue to respect the monetary limits in the interest of not burdening the Courts with additional litigation.
Reconciling ITR with Service Tax Returns and VAT Returns for overlapping of Turnover
Various goods/services like Construction, Works Contract, Restaurant Service, AMCs, etc were doubly taxed under both erstwhile Indirect Tax Laws – Service Tax and VAT for the entire or a part of the turnover. Where the assessee makes and files a reconciliation statement explaining turnover reported in service tax return and VAT return as well as financial statement for the relevant AY and proves that there is no difference between financial statement, when compared to turnover reported in service tax return and VAT return filed for relevant AYs, there cannot be an addition made by the AO to the turnover and consequently towards estimation of gross profit on turnover. The same was held in the case of THE DEPUTY COMMISSIONER OF INCOME TAX Vs M/s PRECISION INFORMATIC (MADRAS) PVT LTD [2022-VIL-524-ITAT-CHE]
Similar additions are made by the VAT/Service Tax officers also. It is thus important to reconcile the Income Tax Returns with the Indirect Tax Returns and submit the same during assessments to avoid unnecessary litigation.
Principle of consistency to be addressed while weighing whether Twin Conditions are satisfied for reopening u/s 263
The assessee challenged the issuance of notice and order passed u/s 263 of the Act since the two pre-requisite need to be satisfied to exercise revisionary powers - that the order of the A.O. should be erroneous and it should also be prejudicial to the interest of the revenue.
It was held in the case of THE SPORTS CLUB OF GUJARAT LTD Vs PR. CIT [2022-VIL-523-ITAT-AHM] that the assessee has been earning entrance membership and the assessee has been regularly assessed to tax, but entrance membership had never been brought to tax as revenue receipts in the hands of the assessee; Therefore, on principles of consistency, if the Revenue has taken a certain position in the case of the assessee in prior years, unless there is a material change in the facts, the same position should be adopted in the later years as well. PCIT has erred in facts and in law, erred in initiating proceedings u/s 263 of the Act in setting aside the assessment order on the ground that it is erroneous and prejudicial to the interests of the Revenue.
RBI sets ‘BBB-’ as minimum invest grade rating for NBFCs’ deposits
The Reserve Bank of India issued RBI/2022-23/37 DOR.FIN.REC. No. 30/03.10.001/2022-23 that the minimum investment grade credit rating for non-banking finance companies to accept deposits should be ‘BBB–‘ from any of the Securities and Exchange Board of India-registered credit rating agencies. The central bank's notification comes after it reviewed its earlier 2016 master direction on NBFCs' acceptance of public deposits.
There are seven approved rating agencies namely CRISIL, ICRA, CARE Ratings, Fitch Ratings India, Brickwork Ratings, Acuite Ratings and Research and Infomerics Valuation and Rating. The minimum investment grade was 'BBB' for CARE, Brickwork and Infomerics.
Updated Return in ITR-U Launched
CBDT introduced a new concept ‘Update Return” on 29th April 2022 notifying Rule 12AC of the Income Tax Rules 1962. There are circumstances, an assessee failed to file income tax return, and time for filing income tax return, belated return has already been expired, income tax return filed within due date but subsequently found that income was under reported or some heads of income was not reported in the income tax return already filed for an assessment year, and time for revised return has expired. Failure to furnish a return, under reporting or mis-reporting of income has many consequences. Under reporting income or misreporting of income may attract penalty from 50% to 200%, prosecutions resulting imprisonment may be up to seven years. Update return is an opportunity to assessee to file a return due date of which has been expired. Underreporting of income can be reported through update return even after expiry for time specified for filing revised return. The ITR form - ITR-U has been notified to file update Income Tax return.
Individual, HUF, LLP, AOP, BOI, Local Authority, Artificial Juridical person, company, political party are eligible to file update return. Update return can be filed up to 24 months form end of relevant Assessment Year. Assessee is required to pay additional Income tax 25% plus interest if filed within 12 months from end of relevant Assessment year, and 50% plus interest if filed after 12 months but before 24 months from end of relevant assessment year. This update return facility is available w.e.f 1st April 2022. From now onwards an assessee can for update return for the Assessment year 2020-21 and 2021-22. Update return for the AY 2020-21 can be filed up to 31st March 2023. Update return cannot be revised. Update return can be filed for additional Income only. No update return is filed resulting loss, resulting lower tax liability, resulting increase in refund. No update return is permitted where search proceedings u/s 132 is initiated, where books of account or assets etc. are requisitioned in case of the assessee, in case survey conducted against the assessee, where documents or assets seized or requisitioned in case of any other person belong to the assessee, an assessee shall not be eligible to file an updated return of the year of which assessment or reassessment or recomputation or revision is pending or has been completed.
A taxpayer filing the updated return disclosing additional income, can eliminate or mitigate the penal consequences related to non-reporting or underreporting of income. No prosecution under section 276CC shall be launched for failure to furnish a return of income if an updated return is furnished by the assessee.
TDS u/s 195 on FTS only incase it is ‘made available’ in India
In an Important judgement explaining the principle of ‘making available’, it was held as follows in the case of M/s IRUNWAY INDIA PRIVATE LIMITED Vs DCIT [2022-VIL-516-ITAT-BLR]
FTS is taxable in India only when the recipient of the payment ‘makes available’ technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. Technology will be considered made available, when the person acquiring the service is enabled to apply the technology. Purely litigation oriented or services with regard to patent registration or patent search process cannot be considered as ‘making available’ technical knowledge. Consequently, there was no obligation on the part of the assessee to deduct tax at source at the time of making payment.
CBDT has Notified list of countries for the purposes of sub clause (ii) of clause (a) of Explanation to clauses (viiac) and (viiad) of section 47 of the Income tax Act, 1961
On and from 27th April 2022, as per Notification No. 46/2022/ F. No. 370142/ 1 / 2022-TPL (Part-I) dated 27th April, 2022, Government of India has specified the countries or territories with whom India is having DTAA and the funds established in such specified countries or territories have made investment in India. The transactions specified under Sections 47 (viiac) and 47 (viiad) of such funds will not be treated as transfer for the purpose of computation of capital gains.
Constitution of Committee to deal with taxpayer’s grievance from high pitched assessments: CBDT
Under faceless assessments in Income Tax, we all keep hearing of strange cases. In one such case heard of, where documents were submitted in response of notice u/s 142(1), suddenly assesses were handed over best judgement orders u/s 144.
To deal with such issues, The CBDT has issued fresh directions for the functioning of the 2015 constituted Income Tax departments regional or local committees of officers to deal with grievances of tax payers who have been served with high-pitched assessments during scrutiny. The new guidelines for the functioning of these committees according to a CBDT Instruction F.no. 225/101/2021-ITA-II, dated 23-04-2022 have been issued keeping in mind the changes in the organisational set up of the department following the launch of the faceless aseessment regime in 2019-20 where taxpayers whose cases fall under scrutiny were given the option to contest their cases with taxmen over the Internet and without going to the tax office.
The following are a few key points of the revised instructions:
1. Constitution of Local Committees: Local Committees are required to be constituted in each Pr. CCIT region across the country, including the Pr.CCIT (Exemption) and Pr.CCIT (International Taxation). Adequate publicity shall be given for filing of grievance petitions regarding High-Pitch Scrutiny Assessments.
2. Receipt of Grievances: NaFAC will receive grievances through dedicated e-mail ID: samadhan.faceless.assessment@incometax.gov.in For a non-faceless assessment regime, grievances will be received by the office of Pr. CCIT concerned, physically or through e-mail. All such grievances shall be forwarded to Local Committees.
3. Action to be taken by Local Committees: On receipt of grievance, Local Committees would examine whether is there a prima facia case of High-Pitched Assessment, non-observance of principle of natural justice, non-application of mind or gross negligence of Assessing Officer/Assessment Unit; Whether any sound reason or logic does not back the additions made in order; Whether the provisions of the law have grossly been misinterpreted or obvious and well-established facts on records have been outrightly ignored.
The Local Committee may call for the relevant assessment records to peruse from the Jurisdictional Pr. CIT concerned.
This is a positive and timely move by the CBDT and it is expected that there would be some relief for taxpayers.
(The author is a FCA, LL.M & LL.B and Partner at Tax Connect Advisory Services LLP. The views expressed are personal. The author is The Chairman Indirect Tax Core Group of CII and The Chairman of The Fiscal Affairs Committee of The Bengal Chamber of Commerce. He has Authored more than 15 books on varied aspects of Direct and Indirect Taxation. E-mail - vivek.jalan@taxconnect.co.in)