Weekly Round-up on Tax and Corporate Laws | 8th to 13th May 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 8th to 13th May 2023, namely:

(a) Govt. expands the scope of PMLA to bring CA/CS/CWA, directors, nominee shareholders, and formation agents under its ambit;

(b) Sec. 80-IA deduction available even if assessee entered into an agreement with Govt. recognised nodal agency: ITAT;

(c) Time limit extended to 31-05-2023 for exercising the option to pay tax by GTAs under forward charge for FY 2023-24;

(d) Threshold limit for generating e-invoices under GST reduced to Rs. 5 crores w.e.f. 01-08-2023;

(e) CBIC rolls out Automated Return Scrutiny Module for GST returns;

(f) High Court can’t entertain writ challenging e-auction notices of banks as an appeal to DRT under SARFAESI is an alternative remedy; and

(g) Checklist for audit of Management Information System (MIS) to be used by Internal Auditor.

1. Govt. expands the scope of PMLA to bring CA/CS/CWA, directors, nominee shareholders, and formation agents under its ambit

Money laundering is a sophisticated process that involves disguising the proceeds of illegal activities as legitimate funds. In 2002, India introduced the Prevention of Money Laundering Act (PMLA) to combat money laundering and terrorist financing. The PMLA aims to prevent and control money laundering activities and confiscate property involved in such activities.

Recently, the Central Government made amendments to Section 2 of the PMLA. As per the amended norms, financial transactions carried out by practising CA/CS/CWA on behalf of their clients will now fall under the scope of the PMLA. Further, directors or secretaries of a company, partners of a firm, trustees of an express trust, and nominee shareholders of a company have been added as reporting entities under the PMLA.

The key highlights of the amendments:

(a) Practicing CA, CS, and CWA termed as a

“person carrying on designated business or profession”

Section 2(1)(sa) of the PMLA talks about the

“person carrying on designated business or profession.”

The Central Government, using the power specified under section 2(1)(sa)(f), notifies that the financial transactions carried out by a Practicing Chartered Accountant (CA), Company Secretary (CS) and Cost and Works Accountant (CWA) on behalf of his client, in the course of his or her profession, in relation to the following activities, shall be an activity for the purposes of said sub-section:

• • • buying and selling of any immovable property;
    • managing client money, securities or other assets;
    • management of bank, savings or securities accounts;
    • organisation of contributions for the creation, operation or management of companies;
    • creation, operation or management of companies, limited liability partnerships or trusts, and buying and selling business entities.

(b) Certain activities to be covered under PMLA

The Central Government, using the authority under Section 2(1)(sa)(vi), has notified that certain activities, when carried out on behalf of or for another person in the course of business, will be regarded as activities for the purpose of this sub-clause. These activities are as follows:

• • • Acting as a formation agent of companies and LLPs;
    • Acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a firm or a similar position in relation to other companies and LLPs;
    • Providing a registered office, business address or accommodation, correspondence or administrative address for a company or an LLP or a trust;
    • Acting as (or arranging for another person to act as) a trustee of an express trust or performing the equivalent function for another type of trust; and
    • Acting as (or arranging for another person to act as) a nominee shareholder for another person.

(c) Scope of ‘person carrying on designated business or profession’ expanded

The Ministry of Finance has notified an amendment to Section 2(1)(sa) of the PMLA to expand its coverage to include individuals acting as formation agents of companies and limited liability partnerships. This means that all individuals involved in the process of incorporating and forming a company or LLP will now be subject to the provisions of PMLA.

(d) Director/secretary/partner to be covered under PMLA

The provisions of PMLA will now apply to a person acting as a director or secretary of a company, a partner of a firm or a similar position in relation to other companies and LLPs, necessitating their compliance with various obligations such as maintaining records of financial transactions, identifying and verifying clients etc.

Conclusion

The recent amendment to the Prevention of Money Laundering Act has broadened the scope of the Act and imposed additional compliance obligations on various individuals and entities. These amendments are designed to address the challenges of money laundering and terrorist financing by extending the scope of reporting requirements and strengthening the accountability of entities engaged in financial transactions.

Read the Notification SO 2036

Read the Notification SO 2135

2. Sec. 80-IA deduction available even if assessee entered into an agreement with Govt. recognised nodal agency: ITAT

Assessee entered into an agreement with an entity (KSPL) for the development of a Mechanised Coal Handling System in Kakinada Deep Water Port. KSPL was appointed as Nodal Agency by the Government of Andhra Pradesh (GoAP) for the development and maintenance of the infrastructure facilities of the entire port.

The Government of Andhra Pradesh entered into a separate agreement with KSPL for the development of a new infrastructure facility at the port. Subsequently, the assessee derived permission from the appropriate authorities, developed the infrastructure as required and obtained a certificate from the Port Authorities that it forms part of the infrastructural facility of the port.

Since the assessee developed, maintained and operated the new infrastructure facility, it claimed a deduction under Section 80-IA(4). The Assessing Officer (AO) denied the deduction because the agreement for such development was not directly with the Central Government, a State Government, a local authority, or any other statutory body.

The Dispute Resolution Panel (DRP) also upheld the findings of the AO, and the matter then reached the Kolkata Tribunal.

The Tribunal held that the agreement provides for subrogation of rights and obligations to a body corporate with the consent of GoAP and also with its prior approval on the shareholding pattern. Pursuant to such a provision in the agreement, a ‘Special Project Company’ (SPC) in the form of KSPL was set up. The GoAP recognises this SPC (KSPL) for all legal and operational purposes and shall be a successor for the rights, duties, and obligations under the agreement.

Further, the Tribunal relied upon the CBDT Circular No. 10/2005, dated 16-12-2005, whereby it had relaxed the second condition prescribed under Section 80-IA(4) and, therefore, the only requirement which remained was to obtain the certificate from the concerned authority that the infrastructural facility forms part of the port.

The Tribunal also considered a letter issued by KSPL which confirms that on expiry of the concession period, the structures, buildings constructed by or belonging to KSPL or their sub-contractors, sub-lessees and assignees free from all encumbrances and liabilities shall automatically become the property of GoAP without any obligation to reimburse therefor.

Moreover, the argument canvassed by the AO that the agreement between the assessee and KSPL does not satisfy the condition prescribed in Section 80-IA(4) is too rigid an interpretation. It frustrates both the purpose of creating such nodal agencies and the legislative intent of granting deduction to the assessee engaged in infrastructure development projects.

Therefore, after considering all the aspects, the deduction under section 80-IA(4) cannot be denied to the assessee, the ITAT held.

Read the Ruling

3. Time limit extended to 31-05-2023 for exercising the option to pay tax by GTAs under forward charge for FY 2023-24

The CBIC has issued a notification to provide that the option for the Financial Year 2023-2024 to pay tax under Forward Charge by Goods Transport Agency (GTA) shall be exercised on or before 31-05-2023. Earlier, this option was required to be exercised on or before 15-03-2023.

It is also provided that a GTA who commences a new business or crosses the threshold for registration during any financial year may exercise the option to pay itself GST on the services supplied by it during that financial year by making a declaration in Annexure-V before the expiry of forty-five days from the date of applying for GST registration or one month from the date of obtaining registration whichever is later.

Read the Notification

4. Threshold limit for generating e-invoices under GST reduced to Rs. 5 crores w.e.f. 01-08-2023

The CBIC has issued a notification to provide that the e-invoice is required to be generated by the registered persons whose aggregate turnover in any preceding financial year from 2017-18 onwards exceeds Rs. 5 crore, and this change shall be effective from 01-08-2023.

It is to be noted that currently the threshold limit for generating e-invoice is Rs. 10 crores which has now been reduced to Rs. 5 crores.

Read the Notification

5. CBIC rolls out Automated Return Scrutiny Module for GST returns

The CBIC has rolled out an Automated Return Scrutiny Module for GST returns after the directions from the Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitharaman. In the module, discrepancies on account of risks associated with a return are displayed to the tax officers.

The tax officers are provided with a workflow for interacting with the taxpayers through the GSTN Common Portal for communication of discrepancies noticed under Form ASMT-10, receipt of taxpayer’s reply in Form ASMT-11 and subsequent action in form of either issuance of an order of acceptance of reply in Form ASMT-12 or issuance of show cause notice or the initiation of audit/investigation.

Read the Press Release

6. High Court can’t entertain writ challenging e-auction notices of banks as an appeal to DRT under SARFAESI is an alternative remedy

The Apex Court ruled that the High Court cannot entertain a writ petition under Article 226 of the Constitution of India challenging the e-auction notices of banks under Section 13 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) when an alternative statutory remedy exists under Section 17 of the Act.

In the instant case, a real estate builder (i.e. Borrower/Respondent No. 3) had availed a loan facility from the bank (i.e. Respondent No. 2) for the development of a multi-storey housing project. When the borrower failed to repay the loan, the bank initiated recovery proceedings under Section 13 of the SARFAESI, 2002.

Consequently, the bank attached the borrower’s properties, including flats, under Section 13(4) of the SARFAESI Act. The borrower challenged this action before the Debt Recovery Tribunal (DRT), which granted liberty to the borrower to file a list of intending buyers for some of the flats to repay the dues.

Later, the borrower and the bank entered into a Memorandum of Understanding (MoU) for the sale of Flat No. 6401, and it was agreed that an Agreement to Sell would be executed by the borrower after seeking clearance.

However, the borrower executed an Agreement to Sell with Respondent No. 1 (i.e. third party) without seeking the consent of the Bank or DRT.

Subsequently, the bank issued an auction notice on 28-07-2016, including the flat in the same. The borrower filed an application seeking a stay of the auction by the DRT. However, the same was rejected. The DRT declared the transaction void.

During the auction of Flat No. 6401, the appellant emerged as the successful bidder and deposited 25% of the bid amount. Subsequently, Respondent No.1 filed a writ petition before the High Court seeking the quashing of the auction notice in respect of the flat. The writ petition does not disclose that the auction had already taken place.

The High Court conditionally stayed the auction and directed Respondent No. 1 to deposit the amount, which was later complied with. The bank and the appellant argued before the High Court that an equally efficacious remedy existed under Section 17 of the SARFAESI Act, and the Agreement to Sell had been declared void by the DRT.

However, the High Court allowed the writ petition, relying on Section 13(8) of the SARFAESI Act, which provides that the secured creditor would not proceed with the sale of the secured asset if the borrower tenders the dues of the secured creditor any time before the date fixed for the sale of assets.

Consequently, the appellant filed an appeal before the Supreme Court against the High Court’s order.

The Supreme Court observed that the e-auction notice dated 28-07-2016 was issued by the bank in view of Section 13(4) of the SARFAESI Act. Respondent No. 1 filed the writ petition after the e-auction had been concluded on 31-08-2016, and the appellant being the successful bidder, had deposited 25% of the bid amount on the same day.

The Supreme Court further observed that against any steps taken by the Bank under Section 13(4) of the SARFAESI Act, the aggrieved party has a remedy under the SARFAESI Act by way of appeal under Section 17 of the SARFAESI Act to approach the DRT.

The Supreme Court held that the High Court ought not to have entertained the writ petition under Article 226 of the Constitution of India challenging the e-auction notice, considering the availability of an alternative statutory remedy under Section 17 of the SARFAESI Act.

The Supreme Court further held that the High Court committed a very serious error in entertaining the writ petition under Article 226 of the Constitution of India, challenging the e-auction notice issued by the bank in the exercise of power under Section 13(4) of the SARFAESI Act.

Read the Ruling

7. Checklist for audit of Management Information System (MIS) to be used by Internal Auditor

A Management Information System (MIS) is an automated database that keeps financial data and generates regular operating reports for all levels of management within a corporation. For executives, MIS is a great resource for assessing the efficiency of their corporate operations. It provides a thorough examination of a company’s financial controls and assists managers in making critical business choices. Managers are equipped with the necessary tools through MIS to effectively organise, evaluate, and manage various departments within an organisation. As technology advances, it is critical for internal auditors to stay current on the newest practices and standards for auditing MIS. Internal auditors are critical in evaluating and assuring the efficacy of an organisation’s MIS. This checklist serves as a guide for internal auditors, outlining key areas to focus on during an audit of the MIS. Internal auditors can comprehensively analyse the system’s reliability, accuracy, and compliance with rules and regulations by using the below checklist.

(a) Whether the internal auditor has ensured and confirmed the design of the organisational structure, which defines the individual’s job responsibility towards MIS with their job title is available;

(b) Whether the internal auditor has ensured as well as confirmed that the minutes of the board meeting are maintained properly;

(c) Whether the internal auditor has ensured the existence of documentation that separates the Electronic Data Processing (EDP) Department;

(d) Whether the internal auditor has ensured as well as confirmed that the senior management appoints a high-level committee to provide appropriate direction to IT and information systems;

(e) Whether the internal auditor has ensured that the information technology deployment is in tune with the enterprise goals and objectives;

(f) Whether the internal auditor has ensured as well as confirmed that efficient and effective documentation of IT strategy planning is deployed.

Read the Story