Weekly Round-up on Tax and Corporate Laws | 19th to 24th June 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 19^th to 24^th June 2023, namely:

(a) CBDT amends Income-tax Rules as per the new tax regime; notifies Rule 21AGA and Form 10-IEA to opt for the old tax regime;

(b) 73 FAQs on Income-tax Returns for Assessment Year 2023-24;

(c) RBI enables the remittance of funds under LRS for ‘Studies Abroad’ in IFSCs;

(d) The limitation period for filing an appeal under Section 107 of the GST Act is not 120 days but four months: HC;

(e) Incentives received for promotion of the sale of products purchased through distributors cannot be excluded from taxable value: AAAR; and

(f) Auditor debarred by NFRA for non-compliance with the Standards of Auditing.

1. CBDT amends Income-tax Rules as per the new tax regime; notifies Rule 21AGA and Form 10-IEA to opt for the old tax regime

The Finance Act 2023 amended provisions of Section 115BAC to provide the reduced tax rates under the new tax scheme for the assessment year 2024-25 and onwards. The new tax scheme is made the default scheme for taxpayers, and its scope also extended to the Association of Persons (AOP), Body of Individuals (BOI) and Artificial Juridical Person (AJP).

The Central Board of Direct Taxes (CBDT) has notified Income-tax (Tenth Amendment) Rules, 2023 to implement consequential changes. This amendment rule modifies the existing Rules 2BB, 3, and 5 and introduces a new Rule 21AGA.

Amendments in Rules 2BB, 3 and 5

Rule 2BB and Rule 3 pertain to the exempt allowance and the valuation of perquisites. Previously, it was stated that a person who exercised the option under Section 115BAC(5) would not be eligible for the benefits available under these rules (subject to certain conditions).

However, as the new tax regime under Section 115BAC is now the default tax regime for taxpayers, the rules have been amended to specify that person whose income is taxable under Section 115BAC(1A), the benefits of these rules will not be available.

Further, Rule 5, which talks about depreciation, has been amended to provide a ceiling limit on depreciation allowance. It has been provided that the depreciation rate of any block of assets entitled to more than 40% is restricted to 40%.

Further, if the income of an assessee is chargeable to tax under Section 115BAC(1A), the unabsorbed depreciation (attributable to the additional depreciation) would be allowed to be added to the written down value (WDV) of the block of assets as on 01-04-2023.

Insertion of new Rule 21AGA

A new Rule 21AGA has been inserted prescribing manners for opting out from the new tax regime under Section 115BAC.

Starting from the Assessment Year 2024-25, a person who wants to opt out of the new tax regime must furnish Form 10-IEA on or before the due date specified under Section 139(1). Form 10-IEA is to be furnished by the person who has income from business or profession. Form 10-IEA is to be furnished electronically either under a digital signature or electronic verification code.

If a person does not have income from business or profession, he can opt out of the new tax regime by exercising the option in the return of income to be furnished under section 139(1).

Re-entering into new tax regime

If a person wants to re-enter the new tax regime, then the same is done by furnishing Form 10-IEA if he has income from business or profession. If the person does not have income from business or profession, he can re-enter the new tax regime while furnishing the return of income.

Read the Notification

2. 73 FAQs on Income-tax Returns for Assessment Year 2023-24

The CBDT has released new Income-tax Return (ITR) Forms for the Assessment Year 2023-24 vide Notification No. 04/2023, dated 10-02-2022, and Notification No. 05/2022, dated 14-02-2023.

Compared to last year’s, no significant changes have been made to the ITR Forms. Only the bare minimum changes necessitated due to amendments in the Income-tax Act, 1961 have been made. These ITR Forms will be applicable to file income tax returns in respect of income earned during the period 01-04-2022 to 31-03-2023.

The applicability of the ITR forms for different taxpayers remains unchanged, and small taxpayers can still use the simple ITR forms (ITR 1 and ITR 4) without any additional conditions. However, ITR-1 cannot be filed by an individual who is otherwise not liable to file but has to file because of depositing more than Rs. 1 crore in one or more current accounts.

In this article, we have prepared 73 FAQs on the filing of ITRs and bifurcated those into various categories.

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3. RBI enables the remittance of funds under LRS for ‘Studies Abroad’ in IFSCs

On June 22, 2023, RBI issued a ground-breaking circular, unlocking opportunities under the Liberalised Remittance Scheme (LRS). Now, resident individuals have the privilege of remitting funds to International Financial Services Centres (IFSCs) for the purpose of studying abroad.

The funds can be remitted to pay fees to foreign universities or foreign institutions located in IFSC. This step by the RBI aligns with the Ministry of Finance’s recognition that foreign universities and institutions offering courses in fields like Financial Management, FinTech, Science, Technology, Engineering, and Mathematics within IFSCs are considered financial services.

Earlier, remittances to IFSCs under LRS could be made only for making investments in securities. The Ministry of Finance vide Notification No. S.O. 2374(E), dated 23-05-2022, notified that courses offered in Financial Management, FinTech, Science, Technology, Engineering and Mathematics by foreign universities or foreign institutions in the International Financial Services Centre are considered a financial service.

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4. The limitation period for filing an appeal under Section 107 of the CGST Act is not 120 days but four months: HC

The Allahabad High Court has held that the maximum limitation period prescribed under Section 107 of the CGST Act is not 120 days but four months, and the department cannot dismiss the appeal filed on the 121^st day merely on the ground that it was filed beyond 120 days by computing four months as each month would be of 30 days.

The petitioner filed a writ petition challenging the order of the Appellate Authority wherein the appeal was rejected. The Appellate Authority dismissed the appeal on the ground that it was filed beyond the maximum period. The petitioner contended that the appeals under Section 107 of CGST Act, 2017 were to be filed within 4 months of the adjudication order and not 120 days.

The High Court noted that the bare reading of Section 107 of CGST Act, 2017 reflects that the limitation period is not 120 days but four months. In the instant case, the appeal was filed on 121^st day, i.e. within four months, as it would depend upon the date on which Adjudicating Authority passed the order. The four months might be 121 days or 122 days, depending upon the months.

Therefore, it was held that the dismissal of appeal only on the ground that it was beyond 120 days by computing four months as each month would be of 30 days was not proper. The Court directed to restore the appeal, and Appellate Authority was directed to proceed with the appeal and decide it on merit in accordance with the law.

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5. Incentives received for promotion of the sale of products purchased through distributors cannot be excluded from taxable value: AAAR

The Appellate Authority for Advance Ruling, Maharashtra has held that the incentive from the manufacturer for the promotion of the sale of products purchased through distributors is not a trade discount and cannot be excluded from taxable value.

The appellant entered into an agreement with a foreign manufacturer to resell goods purchased through distributors. It filed an application for the advance ruling to determine whether the incentive received under the agreement for the completion of targets would be considered a trade discount. The Authority for Advance Ruling held that incentives received for the promotion of the sale of products purchased through distributors would not be treated as trade discounts.

It filed an appeal against the advance ruling holding that the incentive received from the manufacturer under an agreement would not be treatable as a trade discount and the same would be liable to be included in taxable value.

The Appellate Authority for Advance Ruling noted that the agreement was entered between the appellant and the manufacturer and not with distributors. The incentive was directly received from the manufacturer and was not specifically linked to invoices of goods purchased from distributors.

Therefore, the prescribed conditions for the exclusion of incentives as trade discounts from taxable value were not satisfied as incentives received were separate from transactions with distributors. Thus, it was held that the incentives would not be treated as trade discounts and cannot be excluded from the taxable value.

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6. Auditor debarred by NFRA for non-compliance with the Standards of Auditing

The National Financial Reporting Authority (NFRA) has released an order to a member of the Institute of Chartered Accountants of India (ICAI) who held the role of statutory auditor of the company involved in commodity futures trading. The engaging auditor has been accused of failing to conduct standard audit procedures to detect fraudulent accounting practices, disregarding auditing standards, and neglecting to challenge the management regarding inaccurate reporting. Key non-compliances observed by NFRA are discussed as follows:

• The company has inflated the turnover and purchases by recognizing the daily sale of “unsettled commodity future” at the day’s end and recognizing the same to the opening purchases the next day. Though such accounting does not impact the profit/loss of the company however it artificially inflates the values of purchases and sales of “commodity futures”. The auditor fails to report such practices of inflating sales and purchases in the audit report.
• The company experienced a significant increase in revenue, followed by a sharp decline in the subsequent year. Despite this, the auditor failed to notice fraud risk as per SA 240.
• The audit file contained no audit documentation reflecting the auditor’s efforts to comprehend the entity’s business nature which is a clear failure of SA 300, which requires the auditor to develop an audit plan that ensures efficiency and effectiveness in conducting the audit.
• Due to the limitation of time and cost, the auditor has failed to visit the company’s location physically. Relevant details were shared through email and, if necessary, by post. NFRA observed that the auditor has worked under conditions of scope limitation and could have chosen not to accept such audit engagement in accordance with SA 210.

On non-receipt of the external confirmations for debtor and creditor balances, the auditor did not adhere to the alternative audit procedures outlined, where confirmations from debtors and creditors are not obtained. NFRA has charged the auditor with failure to verify the balances of debtors and creditors as required by SA 505.

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