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Faceless Appeal Scheme 2021: A Forward-Looking Initiative

The Central Board of Direct taxes (“CBDT”), with an objective of bringing in more transparency in the appeal proceedings and “honoring the honest”, had introduced the “Faceless Appeal Scheme 2020”[1] (“Old Scheme”), on September 25, 2020. The Old Scheme was introduced with an aim to eliminate human interference between the taxpayer and the First appellate authority (Commissioner Appeals), thereby ensuring that the appeals are disposed in a fair manner and are not influenced by any relation and human biasness.

The Old Scheme was introduced with the noble intention of curbing malpractices, easing compliance and make appeal process seamless and faceless. However, there were some post implementation hiccups experienced and accordingly taxpayers requested certain modifications in the Old Scheme.

In order to fix the hiccups and incorporate the changes requested by taxpayers, the CDBT, in supersession of the Old Scheme, has introduced a new appeal scheme called as “Faceless Appeal Scheme 2021”[2] (“New Scheme”) on December 28, 2021.

In this alert, we have made an effort to apprise the readers with the changes introduced in the New faceless appeal Scheme vis-à-vis the Old Scheme.

Key Changes in the New Faceless Appeal Scheme, 2021

The key changes brought in by the New Appeal Scheme are as follows:

  1. Mandatory personal hearing, if requested

In the Old Scheme, the appellant or his authorized representative had to make a request for personal hearing and the Chief Commissioner or Director General in charge of the Regional Faceless Appeal Centre (RFAC) had the discretion to approve such request, if he was of the opinion that the request is covered by the circumstances laid down by the CBDT.

In the New Scheme, there is no requirement for prescribed circumstances and the discretion for grant of personal hearing has been completely removed. CIT(A) shall allow personal hearing if requested by the appellant anytime during the course of the proceedings.

  1. Restructuring of the appeal center

In the Old Scheme, CBDT had set up a three-layer structure with National Faceless Appeal Centre (NFAC) at the top to conduct appeals in a centralized manner (nodal agency), followed by RFAC to support NFAC and Appeal Unit (AU) at the bottom, to facilitate the conduct of e-appeal proceedings and dispose them. In the composition structure, each AU unit had one or more Commissioner Appeals [CIT(A)].

In comparison, the New Scheme has done away with the RFAC and has set up a two-layered structure headed by NFAC and AU will directly coordinate with NFAC and conduct the appeal and dispose them. Further, in the New Scheme, each AU will have only one CIT(A).

  1. Elimination of review by multiple AUs

In the Old Scheme, the NFAC on receipt of draft order from AU, would  review the order and if the payable amount in respect of disputed issue was more than a specified amount, then send the draft order to another AU, other than the AU which had prepared it. In any other case, the NFAC would  examine the order based on the specified risk management strategy and then finalise the appeal or send the draft order to another AU.

The other AU who was assigned such case, would  either concur with the order or suggest variations as it would  deem fit. In case of variation, the NFAC would  assign the said appeal to another AU other than the one who had prepared or reviewed the draft order. The NFAC would then pass the final order, based on the order received from the last AU.

In the New Scheme, the CIT(A), after examining the submissions, shall now pass the order by digitally signing the same and send it to NFAC, along with details of penalty proceedings, if any, to be initiated therein.

Such order shall be final and will not be reviewed at multiple AUs as provided in the erstwhile scheme. NFAC shall communicate such order to the appellant and such other officers as may be prescribed.

  1. Penalty Proceedings

In the Old Scheme, AU in the event of any non-compliance during the appeal proceedings, had to send a recommendation to NFAC to initiate penalty proceedings. However, in the New Scheme, there is no need to send such recommendation and the CIT(A) can directly send the penalty notice through NFAC.

FM Comments:

The modifications provided in the New Scheme are certainly a move in the right direction by easing the process and building a robust appeal scheme. The CDBT, by removing the discretionary power of the authorities for grant of personal hearing, has also made an effort to meet the constitutional validity criteria, which has also been one of the matters, challenged before the Courts.

References: 

[1] Notification No 76/2020 dated 25 September 2020

[2] Notification No 139/2021 dated 28 December 2021

Image Credits: Photo by Arina Krasnikova from Pexels

In order to fix the hiccups and incorporate the changes requested by taxpayers, the CDBT, in supersession of the Old Scheme, has introduced a new appeal scheme called as “Faceless Appeal Scheme 2021”[2] (“New Scheme”) on December 28, 2021.

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Decoding the India - US Transitional Approach on 2% Equalization Levy

Addressing tax issues arising in the digital economy has been a priority of the international community since past few years. In order to deliver a consensus-based solution and ensure that Multinational Enterprises (MNEs) pay a fair share of tax in the jurisdiction they operate, the Organization for Export Co-operation and Development (OECD) / G20, by way of a Statement/Deal had, on the 8th of October 2021, introduced a major reform in the international tax framework.  In all, 136 countries, including India and the USA, out of a total of 140 countries, have agreed to this Statement.

The Statement/Deal provides for an Inclusive Framework that requires countries to remove all digital services tax and other similar unilateral measures and provide for a Two-pillar solution, consisting of two components viz: Pillar One, which is about reallocation of an additional share of profit to the market jurisdictions and Pillar Two, consisting of minimum tax and subject to tax rules. For a detailed discussion on the OECD/G20 inclusive framework, kindly refer our article on OECD BEPS Framework: Recent Development.  

 

Post the issuance of the said Statement/Deal, on October 21, 2021, the United States of America (US), Austria, France, Italy, Spain, and the United Kingdom reached an agreement on a transitional approach to the existing Unilateral Measures, while implementing Pillar One. A similar transitional approach has been agreed by India and the US on the 24th of November and notified by way of a Press Release by the Government of India- Ministry of Finance, the same has been elaborated below: 

 

Press Release dated 24th November on India and USA Agreement on Equalization Levy 

 

As per the Press Release, India and the US have agreed that the same terms that apply under the joint statement released by the US with five European countries on 21 October 2021, shall apply between the US and India, during the interim period before Pillar One rules comes into effect.

 In light of the Press Release and 21 October joint statement, impact on India’s 2% EL could be as follows:  

 

  • India will not be required to withdraw the 2% EL until Pillar One takes effect.
  • India will allow a credit of the excess of 2% EL chargeable on non-resident (NR) e-commerce operator (NR EOP), belonging to a multinational enterprise (MNE), during the “interim period”, vis-a-vis the tax liability determined under Pillar One – Amount A, for the said interim period, once Pillar One rules are in effect. As per the Press Release, this interim period will begin from 1 April 2022, till the implementation of Pillar One or 31 March 2024, whichever is earlier.
  • The US will terminate its proposed trade actions against India regarding the 2% EL.
  • India and the US will remain in close contact to ensure that there is a common understanding of the respective commitments and endeavour to resolve any further differences of views on this matter through constructive dialogue.
  • The final terms of the India-US agreement are awaited and is expected to be issued by 1 February 2022.

 

FM Comments: 

While the fine print of this agreement between the India and US is still awaited, it would be interesting to see how the 6% EL on online advertisement revenues, are proposed to be dealt with, as apparently, the same does not seem to form a part of the deal. 

It also remains to be seen what kind of potential hiccups this deal would entail, should there be a delay in the implementation of Pillar One, beyond the time provided in the deal, and the potential impact of this on the business of MNEs. 

At the given point of time, the above seems to be merely a statement of intent by the two major economies, so as to streamline the long pending issues of digital taxation. One can only hope that the said deal is not a result of threat of trade actions by the US and would indeed be a win- win for both the countries. 

Image Credits: Photo by Antonio Quagliata from Pexels

Post the issuance of the said Statement/Deal, on October 21, 2021, the United States of America (US), Austria, France, Italy, Spain, and the United Kingdom reached an agreement on a transitional approach to the existing Unilateral Measures, while implementing Pillar One. A similar transitional approach has been agreed by India and the US on the 24th of November and notified by way of a Press Release by the Government of India- Ministry of Finance

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Additional Guidelines Issued on TDS/TCS Under Sections 194-O, 194Q & 206C(1H)

The Central Board of Direct Taxes (CBDT) has issued Circular No 20/2021 dated November 25, 2021, providing more clarification on deduction and collection of tax at source on certain transactions under sections 194-O, 194Q & 206C(1H) of the Income Tax Act.

Finance Act, 2020 inserted section 194O and section 206(C)(1h), effective from 01 October 2020, requiring E-commerce operators and sellers, respectively, to deduct Tax at Source (TDS)/ collect tax (TCS) on sale of goods, under prescribed circumstances. Subsequently, Finance Act, 2021 inserted section 194Q, effective from 01 July 2021, requiring buyer of goods, to deduct TDS on payment made to seller under prescribed circumstances.

In this regard, CBDT vide Circular no. 17/2020, dated 29.09.2020 and Circular no. 13/2021, dated 30.06.2021, issued guidelines to clarify the scope and applicability of the above sections and thereby removing the difficulties faced by the assessee.

In continuation to the above, to further remove the difficulties, CBDT with the approval of the Central Government (CG), has issued the following guidelines to clarify on the scope of the above TDS provisions:

 

Guidelines:

 

I. E-auction services carried out through electronic portal

It has been represented by various stakeholders involved in the business of e-auction services that provisions of section 194-O shall not be applicable to them based on the following arguments:

  • E-auctioneer conducts e-auction services for its clients in its electronic portal and is responsible for the price discovery only which is reported the client.
  • The price negotiations may happen directly between the parties and may not necessarily happen at the price discovered through e-auction process.
  • The transaction of purchase / sale takes place directly between the buyer and the seller party outside the electronic portal maintained by the auctioneer.
  • The e-auctioneer is not responsible for purchase / sale of goods except for limited purpose of price discovery.
  • Negotiation and payments terms happens only between the purchaser and seller offline and e-auctioneer does not have any further information or role to play to in this.
  • On the service charges payable to e-auctioneer, the client deducts TDS under the relevant provisions other than section 194-O of the Income tax Act (Act).

In this regard, it has been clarified by the CBDT that provisions of section 194-O shall not be applicable in cases where all the above features are cumulatively satisfied. Further, the buyer and seller would still be liable to deduct/ collect tax u/s. 194Q / 206C(1H) of the Act, as the case may be.

II. Adjustment of various State levies and taxes other than GST

It has been represented that while the clarification with respect to treatment of TDS on GST component is provided in the earlier Circular no. 13/2021, the same is silent on other non-GST levies such as VAT, Excise duty, Sales tax, etc.

In this regard, it has been clarified by CBDT that in case of purchase of goods exigible to other levies, if the component of VAT/Sales tax/Excise duty/CST, as the case may be, has been indicated separately in the invoice, then the tax is to deducted u/s. 194Q of the Act, without considering levies such as VAT/Sales tax/Excise duty/CST. However, in case of advance payment, the tax is to be deducted on the whole amount, as it will not be possible to identify the VAT/Sales tax/Excise duty/CST component to be invoiced in the future.

 

III. Applicability of Section 194Q of the Act in case where exemption has been provided under section 206C (1A) of the Act

Section 206C(1A) of the Act provides that, if the buyer furnishes to the seller a declaration in respect of  goods viz liquor, forest produce, scrap etc (specified in section 206C(1)) are to be utilized for the purpose of manufacturing, processing or producing article or thing or for the purposes of generation of power and not for trading purposes, than tax is not required to be collected. It has been requested to clarify whether the provisions of section 194Q of the Act will be applicable in such a case.  

Section 194Q of the Act does not apply in respect of those transaction where tax is collectible u/s. 206C [except sub-section (1H)]. Accordingly, it is noted that since section 206C(1A) exempts tax collection in respect of goods specified in section 206C(1),  it is hereby clarified that in such cases, the provisions of section 194Q of the Act will apply and the buyer shall be liable to deduct tax under the said section, if the conditions specified therein are fulfilled.

 

IV. Applicability of the provision of section 194Q in case of department of Government not being a public sector undertaking or corporation

It has been represented by both Central and State Government (department), to enquire if such department is required to deduct tax under the provision of section 194Q of the Act.

The provision of section 194Q requires tax to be deducted by a person, whose total sales, gross receipt or turnover from business carried on by that person, exceeds specified limit. Accordingly, it is clarified that in case department is not carrying any business or profession, the primary requirement of being considered as “buyer” will not be fulfilled. Hence, provision of section 194Q will not be applicable. However, if such department is carrying business or profession, then the provisions of section 194Q will be applicable.

In case where department is a seller, it is clarified that for the purpose of deduction of tax under section 194Q, department shall not be considered as “seller” and no tax should be deducted by the buyer.

In continuation to the above, it is further clarified that any other person, such as a public sector undertaking or corporation established under central or state Act, shall be liable to comply with provisions of section 194Q.

 

FM Comments:

The above are  welcome clarifications issued by the CBDT to bring more clarity and remove the hardship faced by the stake holders. However, there is still no clarity with respect to transactions where TDS / TCS is already deducted / collected and if by virtue of this clarification, the above provisions were not applicable, then whether in such cases refund can be claimed or not.

 

Image Credits: Photo by Nataliya Vaitkevich from Pexels

Finance Act, 2020 inserted section 194O and section 206(C)(1h), effective from 01 October 2020, requiring E-commerce operators and sellers, respectively, to deduct Tax at Source (TDS)/ collect tax (TCS) on sale of goods, under prescribed circumstances. Subsequently, Finance Act, 2021 inserted section 194Q, effective from 01 July 2021, requiring buyer of goods, to deduct TDS on payment made to seller under prescribed circumstances.

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OECD BEPS Framework: Recent Development

Addressing tax issues arising in the digital economy has been a priority of the international community since past several years. It aims to deliver a consensus-based solution and ensure Multinational Enterprises (MNEs) pay a fair share of tax in the jurisdiction they operate. After years of intensive negotiations, the Organization for Export Co-operation and Development (OECD) / G20 has recently introduced a major reform in the international tax framework for taxing the Digital Economy.

The OECD / G20 inclusive framework on Base Erosion and Profit Shifting (BEPS) [“IF”] has issued a Statement, on 8th October 2021, agreeing on a two pillar-solution to address the tax challenges arising from the digitalization of the economy. There are 136 countries, including India, out of a total of 140 countries, representing more than 90% of the global GDP, that have agreed to this Statement. All members of the OECD countries have joined in this initiative and there are four G20 country members  (i.e. Kenya, Nigeria, Pakistan & Sri Lanka) who have not yet joined. The broad framework of the two-pillar approach as per the Statement is as follows:

 

Pillar One

 

Introduction and applicability:

  • Pillar One focuses on fairer distribution of revenue and allocation of taxing rights between the market jurisdictions (where the users are located), based on a ‘’special purpose nexus’’ rule, using a revenue-based allocation.
  • Applicable to large MNEs with a global turnover in excess of  Euro 20 Billion and profitability above 10% (i.e. profit before tax)[1]. This revenue threshold is expected to be reduced to Euro 10 Billion, upon successful review, after 7 years of the IF coming into force.
  • The regulated financial services sector and extractive industries are kept out of the scope of Pillar One.

 

Calculation Methodology:

  • Such allocation will help determine the ‘’Amount A’’ under Pillar one.
  • The special-purpose nexus rule will apply solely to determine whether a jurisdiction qualifies for Amount A allocation based on which 25% of residual profits, defined as profit in excess of 10% of revenue, would be allocated to the market jurisdictions using a revenue-based allocation key.
  • Allocation vis-à-vis nexus rule will be provided for market jurisdictions in which the MNE derives at least Euro 1 Million  of revenue  [Euro 250,000  for smaller jurisdictions (i.e. jurisdiction having  GDP lower than Euro 40 Billion )]
  • Profits will be based on financial accounting income, subject to:
    • Minimal adjustments; and
    • Carry forward of losses
  • Detailed revenue sourcing rules for specific categories of transactions shall be developed to ensure that revenues are sourced to end market jurisdiction, where goods or services are consumed.
  • Safe harbour rules will be separately notified, so as to cap the allocation of baseline marketing and distribution profits of the MNE, which may otherwise already be taxed in the market jurisdiction.

 

Tax Certainty:

  • Rules will be developed to ensure that no double taxation of profits gets allocated to the market jurisdiction, by using either the exemption or the credit method.
  • Commitment has been provided to have mandatory and binding dispute prevention and resolution mechanisms to eliminate double taxation of Amount A and also resolve issues w.r.t transfer pricing and business profits disputes.
  • An elective binding dispute resolution mechanism for issues related to Amount A will be available only for developing economies, in certain cases. The eligibility of jurisdiction for this elective mechanism will be reviewed regularly.

 

Implementation:

  • Amount A will be implemented through a Multilateral Convention (MLC), which will be developed to introduce a multilateral framework for all the jurisdictions that join the IF.
  • The IF has mandated the Task Force on the Digital Economy (TFDE) to define and clarify the features of Amount A (e.g. elimination of double taxation, Marketing and Distribution Profits Safe Harbour), develop the MLC, and negotiate its content so that all jurisdictions that have committed to the Statement will be able to participate.
  • MLC will be developed and is expected to be open for signature in the year 2022, with Amount A expected to come into effect in the year 2023.
  • IF members may need to make changes to domestic law to implement the new taxing rights over Amount A. To facilitate consistency in the approach taken by jurisdictions and to support domestic implementation consistent with the agreed timelines and their domestic legislative procedures, the IF has mandated the TFDE to develop model rules for domestic legislation by early 2022 to give effect to Amount A.
  • The tax compliance will be streamlined allowing in-scope MNEs to manage the process through a single entity.

 

Unilateral Measures:

  • The MLC will require all parties to remove all digital service tax (DST) and other similar taxes (eg: Equalisation levy from India perspective) with respect to all companies and to commit not to introduce such measures in the future.
  • No newly enacted DST or other relevant similar measures will be imposed on any company from 8 October 2021 and until earlier than 31 December 2023 or coming into force of the MLC.

 

Pillar Two

 

Introduction:

 

  • Pillar Two consists of Global anti-Base Erosion Rules (GloBE) to ensure large MNEs pay a minimum level of tax thereby removing the tax arbitrage benefit which arises by artificially shifting the base from high tax jurisdiction to low tax jurisdiction with no economic substance.
  • Pillar Two is a mix of several rules, viz. (i) Income Inclusion Rule (IIR); (ii) Undertaxed Payment Rule (UTPR); and (iii) Subject to Tax Rule (STTR).
  • IIR imposes a top-up tax on parent entity in respect of low taxed income of a constituent entity
  • UTPR denies deductions or requires an equivalent adjustment to the extent low tax income of a constituent entity is not subject to tax under an IIR.
  • STTR is a treaty-based rule which allows source jurisdiction to impose limited source taxation on certain related-party payments subject to tax below a minimum rate. The STTR will be creditable as a covered tax under the GloBE rules.
  • There would be a 10-year transition period for exclusion of a certain percentage of the income of intangibles and payroll which will be reduced on year on year basis
  • GloBE provides de minimis exclusion where the MNE has revenue of less than Euro 10 Million and profit of less than Euro 1 Million and also provides exclusion of income from international shipping.

 

Calculation Methodology:

 

  • Pillar Two introduces a minimum effective tax rate (ETR) of 15% on companies for the purpose of IIR and UTPR and would apply to MNEs reporting a global turnover above Euro 750 Million under country-by-country report.
  • The IIR allocates top-up tax based on a top-down approach, subject to a split-ownership rule for shareholdings below 80%. The UTPR allocates top-up tax from low-tax constituent entities, including those located in the Ultimate Parent Entities (UPE) jurisdiction. However, MNEs that have a maximum of EUR 50 million tangible assets abroad and that operate in no more than 5 other jurisdictions, would be excluded from the UTPR GloBE rules in the initial phase of their international activity.
  • IF members recognize that STTR is an integral part of Pillar Two for developing countries and applies to payments like interest, royalties, and a defined set of other payments. The minimum rate for STTR will be 9%, however, the tax rights will be limited to the difference between the minimum rate and tax rate on payment.
  • GloBE rules would not be applicable to Government entities, international organizations, non-profit organizations, pension funds or investment funds that are UPE of an MNE Group or any holding vehicle used by such entities, organizations, or funds.

 

Implementation:

  • Model rules to give effect to the GloBE rules are expected to be developed by the end of November 2021. These model rules will define the scope and set out the mechanics of the GloBE rules. They will include the rules for determining the ETR on a jurisdictional basis and the relevant exclusions, such as the formulaic substance-based carve-out.
  • An implementation framework that facilitates the coordinated implementation of the GloBE rules is proposed to be developed by the end of 2022. This implementation framework will cover agreed administrative procedures (e.g. detailed filing obligations, multilateral review processes) and safe-harbors to facilitate both compliance by MNEs and administration by tax authorities.
  • Pillar Two is proposed to be effective in the year 2023, with the UTPR coming into effect in the year 2024.

 

FM Comments :

 

With the introduction of the OECD/G20 inclusive framework on BEPS, OECD expects revenues of developing countries to go up by 1.5-2% and increase in overall reallocation of profits to developing countries of about USD 125 Billion. India, being a huge market to large MNEs, has always endorsed this global tax deal. However, with the introduction of this framework, India will have to abolish all unilateral measures, such as equalization levy tax and Significant Economic Presence (digital permanent establishment) provisions. MNEs will also have to re-visit their structure to ring-fence their tax positions based on the revised digital tax norms.  This Statement lays down a road map for a robust international tax framework w.r.t taxing of the digital economy,  not restricted to online digital transactions.

References

[1] Calculated, using an “averaging mechanism”, details of which are awaited.

Image Credits: Photo by Nataliya Vaitkevich from Pexels

With the introduction of the OECD/G20 inclusive framework on BEPS, OECD expects revenues of developing countries to go up by 1.5-2% and increase in overall reallocation of profits to developing countries of about USD 125 Billion. India, being a huge market to large MNEs, has always endorsed this global tax deal.

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Heightened Onus on Assessee to Prove Genuineness of Share Subscription Money Routed Through Web of Entities

The Hon’ble Mumbai Tribunal in the case of Leena Power Tech Engineers Pvt Ltd[1] has held that the onus (i.e. burden) is on the assessee to prove the ‘bonafides’ or ‘genuineness’ of the share application money credited in the books of accounts. The Tribunal further remarked that it would be superficial approach to examine assessee’s claim only on the basis of documents filed and overlook the unusual pattern in the documents filed by the assessee and pretend to be oblivious of the ground realities.  

Considering the fact that the monies were routed through complex web of entities, which failed to inspire any confidence about the genuineness of the investing company and made it looks like a shell company, the Tribunal upheld the additions made by the Assessing Officer (AO) in the hands of the assessee with respect to the receipt of share application money.

 

Facts – Leena Power Tech Engineer’s Pvt. Ltd.:

In the instant case, the assessee had received share application monies from Rohan Vyapar Private Limited (RVPL) and Manbhawan Commercial Pvt Ltd (MCPL). The equity shares were issued at 900% premium on the face value of Rs 10 each i.e. Rs 90 per share. The assessee had issued 3,78,290 equity shares to RVPL and accordingly received an amount aggregating to Rs 3,78,29,600. Similarly, the assessee had received an amount aggregating to Rs 4,35,00,000 from MCPL.

The case of the assessee was reopened by the Assessing Officer (‘AO’) on the basis of certain information received from the investigation wing which mentioned that the assessee has received share application money from RVPL which was subjected to routing through several layers and ultimately has its source in of huge cash deposits in one of the branches of ICICI Bank.

The transaction flow has been elaborated below for ease of reference.



Assessee’s Contentions: Relevant documentary evidence produced

The Assessee’s contentions have been summarized below:

The assessee contended that it had submitted all the relevant documentary evidence such as details of the subscribers to the share capital, share premium, bank statement, justification of share premium (computed on a scientific basis), share valuation by cash flow method, and ledger confirmation from the subscribers. The assessee further submitted that the Revenue had also issued a notice under section 133(6) of the Income-tax Act, 1961 (Act) which was duly replied along with the details of the transaction with the assessee, ledger account, return of income, audited balance sheet, etc. and accordingly it was contended that the assessee had discharged its initial onus cast upon it and now it is for the revenue authorities to prove otherwise.

It was further contended that the proviso to section 68[2] of the Act inserted with effect from 1 April 2013 cannot have retrospective operation. In this regard, reliance was placed on the ruling of Hon’ble jurisdictional High Court in the case of Gagandeep Infrastructure Pvt Ltd[3].

The Assessee further contended that the companies from which the assessee had received the share subscriptions were companies with proper net-worth and these companies were properly assessed to tax and have not been declared as shell companies by the Government or any official body and just because five levels below these companies, there are cash deposits in some bank accounts, the receipts cannot be rejected as lacking bonafide.

Accordingly, it was contended that the entries in the books of accounts of the companies subscribing to the shares cannot be brought to tax in the hands of the assessee.

Revenue’s Contentions: Assessee has failed to prove ‘Bonafides’

The primary contention of the Revenue was that the assessee has failed to prove the ‘bonafides’ of the share application money. Further, the Revenue further contended that the surrounding circumstance of the transaction clearly demonstrates that the transaction is not bonafide and the assessee is a beneficiary of a sophisticated money-laundering racket wherein the money is routed through multiple layering of accounts to the accounts of entities subscribing to the share capital of the assessee.

The Revenue further contended that it was the responsibility of the assessee to show the genuineness of the share application money received and merely producing PAN, income-tax returns, and financial statements of the subscriber do not prove that the transaction is bonafide. It was pointed out that there were hardly any overnight balances in the bank accounts of the companies subscribing to the shares of the assessee company, and all this indicates that these companies are merely conduit companies.

Issue Before the Tribunal:

The question which arose before the Tribunal was whether the learned Commissioner of Income-tax (Appeals) was justified in deleting the addition of Rs 8,13,29,600 as unexplained credit under section 68 of the Act in the hands of the assessee.

Mumbai Tribunal’s Ruling:

The Mumbai Tribunal observed and held as under:

At the outset, the Tribunal observed that there cannot be any dispute on the fundamental legal position that the onus is on the assessee to prove ‘bonafides’ or ‘genuineness’ of the share application money credited in the books of accounts and to prove the nature and source on the money to the satisfaction of the assessing officer.

The Tribunal placed reliance on the cases of Youth Construction Pvt Ltd[4], United Commercial and Industrial Co (P.) Ltd[5] & Precision Finance (P.) Ltd[6] and noted the kind of explanations which assessee is expected to provide:

  1. proof regarding the identity of the share applicants;
  2. their creditworthiness to purchase the shares; and
  3. genuineness of the transaction as a whole.

The Tribunal remarked that the onus of the assessee of explaining nature and source of credit does not get discharged merely by filing confirmatory letters, or demonstrating that the transactions are done through the banking channels, or even by filing the income tax assessment particulars.

The Tribunal further went on to add that, being a final fact-finding authority, it cannot be superficial in its assessment of the genuineness of a transaction and this call has to be taken not only in the light of the face value of the documents presented before the Tribunal but also in the light of all the surrounding circumstances, the preponderance of human probabilities and ground realities. The Tribunal placed reliance on the case of Durga Prasad More[7] wherein it was held that “If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax. A little probing was sufficient in the present case to show that the apparent was not real. There may be a difference in subjective perception on such issues, on the same set of facts, but that cannot be a reason enough for the fact-finding authorities to avoid taking subjective calls on these aspects and remain confined to the findings on the basis of irrefutable evidence.”

The Tribunal further analyzed the financial statements of RVPL and observed that RVPL has earned only an interest income of Rs 1.13 lakhs and has not carried out any substantial activity during the relevant period. Further, the Tribunal found it difficult to believe that company handling investments in excess of Rs 10 crores and making such aggressive investments as buying shares for Rs 3.78 crores, at a huge premium of nine times the face value of shares, in the private limited and wholly unconnected companies, without any management control, will operate in such a modest manner. This defies logic and such transactions do not take place in the real-life world. The Tribunal also examined the bank account of RVPL and noted that there are series of transactions that do not inspire any confidence about the genuineness of the investing company but make it looks like a shell company acting as a conduit.

The Tribunal also observed that the entities involved in the transaction only provide different layers to the transaction and de facto hide the true investor. The assessee was also unaware of the actual beneficial investor in his company.

Additionally, the Tribunal examined, in detail, the valuation carried out by the assessee on the basis of Discounted Cash Flow (DCF) method and rejected the same thereby holding that the share premium at which the shares are issued is wholly unrealistic.   

A similar analysis was also carried out by the Tribunal with respect to another investor ‘MCPL’.

In light of the above facts and circumstances, the Tribunal rejected the assessee’s contention and held that the transactions under consideration are not ‘bonafide’ and accordingly restored the additions made by the AO.

Our Observation:

The order of the Mumbai Tribunal has, indeed, widened the scope of ‘onus’ placed on the assessee to prove the genuineness of a particular transaction. Such ‘onus’ will not be deemed to be discharged by merely filing the documents before the tax authorities, but the assessee would have to go one step further to justify the rationale of such transactions in order to prove that the transaction has not been entered as a colorable device to defraud the Revenue. The judgment further emphasizes taking a holistic view of the matter based on the surrounding circumstances rather than just relying upon the documentary evidence. Having said this, one has to keep in mind that documentary evidence will always be the primary source of substantiation of a particular transaction.

Going forward, it would be interesting to see the repercussions of this judgment and whether the other Tribunal and lower tax authorities would adopt a similar path and undertake a holistic view of the matter in order to differentiate between the apparent and the real.’

References

[1] [TS-883-ITAT-2021(Mum)]

[2] It provides that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless— (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory.

 

[3] (2017) 80 taxmann.com 172 (Bom)

[4] [(2013) 357 ITR 197 (Del)]

[5] [1991] 187 ITR 596 (Cal)]

[6] [1994] 208 ITR 465 (Cal)]

[7] 1971) 82 ITR 540 (SC)

 

 

Image Credits: Photo by Nataliya Vaitkevich from Pexels

The order of the Mumbai Tribunal has, indeed, widened the scope of ‘onus’ placed on the assessee to prove the genuineness of a particular transaction. Such ‘onus’ will not be deemed to be discharged by merely filing the documents before the tax authorities, but the assessee would have to go one step further to justify the rationale of such transactions in order to prove that the transaction has not been entered as a colorable device to defraud the Revenue.

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Income Tax Due Date Extension: Return of income and Various Audit Reports

In view of the difficulties faced by the taxpayers and other stakeholders in e-filing of Return of Income (‘ROI’) and various audit reports for the Assessment Year (AY) 2021-22, the Central Board of Direct Taxes (‘CBDT’), vide Circular No. 17/ 2021 dated 9 September 2021, has notified the income tax due date extension for filing of return and various audit reports. The same have been summarized as under:

Income tax due date extension and relaxation for filing of return and various audit reports under the Income-tax Act, 1961:

Sr No

Compliance (AY 2021-22)

Original Due Date

Existing Due Date[1]

Extended Due Date[2]

1

ROI due date for taxpayers (such as individuals, firms, etc. not liable to audit)

31 July 2021

30 September 2021

31 December 2022

2

Furnishing of various audit reports (such as tax audit report u/s 44AB of the Act)

30 September 2021

31 October 2021

15 January 2022

3

Furnishing of transfer pricing report with respect to international / specified domestic transactions under section 92E of the Act

31 October 2021

30 November 2021

31 January 2022

4

ROI due date for taxpayers who are required to get their accounts audited under the Act or any other law for the time being in force (excluding taxpayers covered under Sr. No. 5 below)

31 October 2021

30 November 2021

15 February 2022

5

ROI due date for taxpayers who are required to furnish transfer pricing report under section 92E of the Act

30 November 2021

31 December 2021

28 February 2022

6

Belated / Revised ROI

31 December 2021

31 January 2022

31 March 2022

 

 

Clarification on interest calculation following the Income Tax due date extension:  

It is pertinent to note that, although, the due date for furnishing the ROI have been extended, however, the extended due date shall not be applicable for the purpose of computing interest under section 234A of the Act in a scenario where the payment of self-assessment tax exceeds INR 1,00,000.  

It is further clarified that, in case of a resident senior citizen not having any income chargeable to tax under the head business or profession, the tax paid till the original due date of filing of ROI shall be treated as an advance tax and accordingly no interest shall be chargeable on such amount.

 

Reason for the Income Tax due date extension:

The CBDT has launched the new income tax e-filing portal on 7 June 2021. However, since its launch, the taxpayers are facing various technical glitches in filing of various forms, certificates, and reports on this portal. In view of the difficulties faced, the ‘Finance Minister’ has given a deadline of 15 September 2021 to Infosys to resolve all the technical glitches such that taxpayers and professionals can work seamlessly on the portal. However, even if the technical glitches are resolved within the said date, it would leave a very short period for the taxpayers/professionals to file the return of income and audit reports on the portal.

Thus, the CBDT acknowledged the hardship caused to the various taxpayers and other stakeholders and accordingly extended the various dues dates with respect to filing of return of income and various audit reports under the Act. This, indeed, is a welcome move and provides much needed relief to the taxpayers.

Prior to this, the CBDT had issued Circular No. 16/ 2021, dated 29 August 2021, and extended the due dates w.r.t various other direct tax compliances.  

 

References:

[1] Circular No. 9/2021 dated 20 May 2021

[2] Circular No 17/2021 dated 9 September 2021 and press release dated 9 September 2021

Image Credits:

Photo by freestocks on Unsplash

The CBDT acknowledged the hardship caused to the various taxpayers and other stakeholders and accordingly extended the various dues dates with respect to filing of return of income and various audit reports under the Act. This, indeed, is a welcome move and provides much needed relief to the taxpayers.

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Extensions Granted for e-Filing of Various Tax Forms

In view of the difficulties faced by the taxpayers and other stakeholders in electronic filing of various forms, resulting in hardship and difficulty vis-à-vis complying with various due dates under the Income tax Act, 1961 (‘the Act’), the Central Board of Direct Taxes (‘CBDT’), vide Circular No. 16/ 2021, dated 29 August 2021, has extended the due dates w.r.t various direct tax compliances. The same have been summarized as under:

Relaxation and extension of time limits for electronic filing of various forms under the Income-tax Act, 1961

Sr NoCompliance ParticularsOriginal Due DateExtended Due Date[1]
1

Application for registration or intimation or approval under Sections 10(23C), 12A, 35(1)(ii)/(iia)/(iii) or 80G of the Act in Form No. 10A

30 June 202131 March 2022
2

Application for registration or approval under Sections 10(23C), 12A or 80G of the Act in Form No. 10AB

28 February 202231 March 2022
3

Equalization Levy Statement in Form 1 for Financial Year 2020-21

30 June 202131 December 2021
4

Quarterly Statement in Form 15CC to be furnished by Authorized Dealer in respect of foreign remittances made for the quarter ended 30th June 2021

15 July 202130 November 2021
5

Quarterly Statement in Form 15CC to be furnished by Authorized Dealer in respect of foreign remittances made for quarter ending on 30th September 2021

15 October 202131 December 2021
6

Uploading declaration received from recipients in Form No 15G / 15H for quarter ended 30th June 2021

15 July 202130 November 2021
7

Uploading declaration received from recipients in Form No 15G / 15H for quarter ending on 30th September 2021

15 October 202131 December 2021
8

Intimation by Sovereign Wealth Fund in respect of investments made by it in India in Form II SWF for the quarter ended 30th June 2021

31 July 2021

30 November 2021

9

Intimation by Sovereign Wealth Fund in respect of investments made by it in India in Form II SWF for the quarter ending on 30th September 2021

31 October 202131 December 2021
10

Intimation by a Pension Fund in respect of investment made by it in India in Form No. 10BBB for the quarter ended 30th June 2021

31 July 2021

30 November 2021

11

Intimation by a Pension Fund in respect of investment made by it in India in Form No. 10BBB for the quarter ending on 30th September 2021

31 October 202131 December 2021
12

Intimation, in Form 3CEAC, by a constituent entity (resident in India) of an international group, the parent entity of which is not resident in India

30 November 202131 December 2021
13

Reporting in Form 3CEAD by a parent entity or an alternate reporting entity or any other constituent entity, resident in India

30 November 202131 December 2021
14

Intimation on behalf of an international group under proviso to section 286(4) in Form No. 3CEAE

30 November 202131 December 2021

Further, considering the difficulties being faced in issuing and amending Form No 3, which is a prerequisite for making payment by the declarant under Vivad se Vishwas Act, 2020 (‘VSV Act’), the CBDT, vide Notification No. 94/2021[2] dated 31 August 2021, has also extended the last date of payment (without any additional amount) under VsV Act from 31 August 2021 to 30 September 2021.

However, it is further clarified that there is no change in the last date for payment of the amount (with additional amount), which remains as 31 October 2021.

References:

[1] Circular No 16/2021 dated 29 August 2021 and Press Release dated 29 August 2021

[2] Notification No. 94/2021F.No.IT(A)/01/2020-TPL (Part-I)-(Part- I) dated 31 August 2021 and Press Release dated 29 August 2021

Image Credits:

Photo by Nataliya Vaitkevich from Pexels

The CBDT, vide Notification No. 94/2021 dated 31 August 2021, has also extended the last date of payment (without any additional amount) under the Vivad se Vishwas Act from 31 August 2021 to 30 September 2021.