It is mandatory for every company registered under the Companies Act, to get its accounts audited by the statutory auditor and present it before the stakeholders every year. An audit is an important activity for every business and the auditor must present his views in an unbiased way.
The principle of Audit Rotation implies periodic breaks to audit engagements and is imposed to avoid long-term relationships between an auditor and the client. Audit breaks/rotation is a major provision to enhance the Audit quality and maintain the trust of various stakeholders in the company.
Section 139(2) of the Companies Act, 2013 deals with the mandatory auditor/audit firm rotation principle and provides for the rules and regulations in this regard.
Auditor Rotation Applicability
Section 139(2) of the Companies Act, 2013 provides for mandatory rotation of auditor or audit firm by listed and certain class or classes of companies. The Section specifies that no listed company or a company belonging to such class or classes of companies as specified shall appoint or reappoint
An individual as auditor for a more than one term of five consecutive years and
An audit firm as auditor for more than two terms of five consecutive years.
Therefore rotation of auditor is applicable to all listed companies and such other classes of companies as may be prescribed. The list of “such other class of Companies” is provided in Rule 5 of Companies (Audit and Auditors) Rules, 2014. Except for small companies and one-person companies, rotation of auditors is applicable to the following companies:
Sr. No.
Category of company
Threshold limit
1.
Unlisted public companies
Having paid-up capital of Rs. 10 crores or more
2.
Private limited companies
Having paid-up capital of Rs. 50 crores or more
3
Any company having paid-up capital below threshold limits as specified under points (1) and (2) above but having public borrowings from a financial institution, banks, or public deposits
Rs. 50 crore or more
Therefore from the above explanation, it is clear than Auditor Rotation is not applicable to the following companies:
One Person Company
Small Company
Unlisted public companies having paid-up capital less than Rs. 10 crore or borrowings less than Rs 50 crore
Private Limited companies having paid-up capital less than Rs. 50 crore or borrowings less than Rs 50 crore
Can the Outgoing Auditor be Reappointed in the same company after the completion of his term of the audit?
First Proviso to Section 139(2) provides that after the completion of the audit term (5 consecutive years or 10 consecutive years as the case may be), the outgoing auditor shall not be eligible for re-appointment in the same company:
In the case of individual Auditor
For a period of 5 years from the completion his term
In the case of an Audit Firm
For a period of 5 years from the completion of his term
Therefore post completion of the term of audit, a cooling period of 5 years is provided to be eligible for reappointment as an auditor in the same company.
Provision related to Common Partner in Audit Firm
Second Proviso to Section 139(2) of the Companies Act, 2013 provides that if Audit Firms i.e. incoming audit firm and outgoing audit firm whose tenure has expired in a company immediately preceding the financial year, are having common partner or partners, then such incoming audit firm is not eligible to get appointed as auditor of the same company for a period of 5 years.
Manner of Rotation of Auditors by the companies on expiry of their term
Recommendation for an appointment:
The Audit Committee, where there is one of the Board shall consider the matter of rotation of auditors and shall recommend his appointment at the annual general meeting of the company.
Prior Period must be taken into consideration:
While calculating the consecutive 5 years or 10 years, the prior period before commencement of the Act, served as Auditor (whether individual or firm) shall be taken into account.
Not eligible for appointment if belongs to the same Network
The incoming Auditor shall not be eligible for appointment if he or any partner of the firm is associated with the outgoing auditor or auditor firm under the “same network of audit firms.”
Rule 6(3) of the Companies (Audit and Auditors) Rules, 2014, provides that while calculating the period of five consecutive years or 10 consecutive years as the case may be the period for which an individual or firm has held office as auditor prior to the commencement of the Act shall be taken into account. The following illustration will help to understand how an appointment shall be made in the first AGM after the commencement of this Act, i.e., 1st April 2014
Illustration 1 (For individual auditor) :
Number of consecutive years for which an individual auditor has been functioning as an auditor in the same company [in the first AGM held after the commencement of provisions of Section 139(2)]
Maximum number of consecutive years for which he may be appointed in the same company (including the transitional period)
The aggregate period which the auditor would complete in the same company in view of columns I and II
I
II
III
5 years (or more than 5 years)
3 years
8 years or more
4 years
3 years
7 years
3 years
3 years
6 years
2 years
3 years
5 years
1 year
4 years
5 years
Illustration 2 (in case of Audit Firm)
Number of consecutive years for which an individual auditor has been functioning as an auditor in the same company [in the first AGM held after the commencement of provisions of Section 139(2)]
Maximum number of consecutive years for which he may be appointed in the same company (including the transitional period)
The aggregate period which the auditor would complete in the same company in view of columns I and II
I
II
III
10 years (or more than 10 years)
3 years
13 years or more
9 years
3 years
12 years
8 years
3 years
11 years
7 years
3 years
10 years
6 year
4 years
10 years
5 years
5 years
10 years
4 years
6 years
10 years
3 years
7 years
10 years
2 years
8 years
10 years
1 year
9 years
10 years
What is the same network of Audit Firms?
Here the same network includes the firms operating or functioning, hitherto or in the future, under
1. Same brand name or 2. Same trade name or 3. It has a common control.
As per the guidelines issued by the Institute of Chartered Accountants of India, for determining whether the firms or individual auditors are operating or working under the same network, the following factors must be considered:
Ownership or control or management of the firms
Sharing of professional resources amongst the firms
Quality control processes among the firms
Co-operation amongst the Audit Firms.
Other important provisions related to rotation
Change in Audit Firm by Partner who certifies the financial statements of the company
Explanation to Rule 6 provides that a firm shall not be eligible for appointment if a partner of an existing firm (outgoing firm), who certifies the financial statements of the company, retires from the said firm and joins another firm of Chartered Accountants. Such a firm shall be ineligible for an appointment for a period of 5 years.
Consecutive 5 years
Consecutive years shall mean all the preceding financial years for which the individual auditor has been the auditor until there has been a break by five years or more.
Rotation in case the company has appointed joint Auditors
Where a company has appointed two or more individuals or firms or a combination thereof as joint auditors, the company may follow the rotation of auditors in such a manner that both or all of the joint auditors, as the case may be, do not complete their term in the same year.
Term of Audit amongst Partners
The members of the company may resolve for:
a) in the audit firm appointed by it, the auditing partner and his team to be rotated at such intervals as may be resolved by members; or
(b) the audit shall be conducted by more than one auditor.
Auditors’ right to resignation and the company’s right to remove an auditor
The rights of the company to remove the auditor or the right of the auditor to resign before the expiry of the term are retained. Also, the company can remove the auditor before the expiry of the term.
Applicability of Auditor rotation in case of a private limited company
Rule 5 of Companies (Audit and Auditors) Rules, 2014 provides that, the Rotation of Auditor is applicable in the case of private limited companies if,
The paid-up share capital of the company is Rs. 50 crore or more; or
Has public borrowings from financial institutions, banks, or public deposits of Rs. 50 crore or more.
The companies below the threshold limits as mentioned above, small companies, and One Person Companies are not required to follow the provisions related to the rotation of Auditor or Audit Firm. The Auditor in such companies can be an auditor for any number of years.
On June 6, 2018, the Insolvency and Bankruptcy Code (Amendment) Ordinance was passed, which was replaced by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (“2018 Amendment Act”) on August 17, 2018. By way of the said amendment, an explanation of Section 5(8)(f) of the IBC was added, which provides a definition of “financial debt”. It was clarified that the amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing. It was further clarified that the expressions “allottee” and “real estate project” shall have the meanings assigned to them under the Real Estate (Regulation and Development) Act, 2016 (“RERA”). As a result, Homebuyers/allottees were expressly recognized as financial creditors under the IBC, which enabled them to start corporate insolvency resolution proceedings (“CIRP”) against a defaulting developer under Section 7 of the IBC. It may be noted that homebuyers have been recognized as allottees under RERA. [See Section 2(d)].
The 2018 Amendment Act was challenged before the Supreme Court in Pioneer Urban Land and Infrastructure Limited v. Union of India on the grounds of it being violative of Article 14 and Article 19(1)(g) read with Article 19(6) of the Constitution of India. The Supreme Court rejected the challenges and upheld the constitutional validity of the 2018 Amendment Act. The Supreme Court on reading and interpreting Section 5(8)(f) of the IBC, observed that Homebuyers/allottees were included in the main provision i.e. Section 5(8)(f) from the very inception of the Code, the Explanation being added in 2018 merely to clarify doubts that had arisen in relation the status of Homebuyers. Therefore, the Court held that the 2018 Amendment Act does not infringe Article 14 and Article 19(1)(g) read with Article 19(6), or 300-A of the Constitution of India.
On December 28, 2019, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, was promulgated which was replaced by the Insolvency and Bankruptcy Code (Amendment) Act, 2020 (“2020 Amendment Act”)inserting provisos to Section 7 of the IBC. The second proviso states that with Homebuyers, an application for initiating CIRP under Section 7 of the IBC is to be filed jointly by at least 100 allottees or 10% of the total allottees under the said project, whichever is lesser. The third proviso further stated that matters already filed by individual Homebuyers but not yet admitted by the adjudicating authority before the commencement of the 2020 Amendment Act shall be dismissed if they are not modified to fulfill the minimum threshold requirement as stated above within 30 days from the commencement of the 2020 Amendment Act. The Apex Court upheld the constitutional validity of the 2020 Amendment Act in the case of Manish Kumar v. Union of India.
The above clarifies that the courts, as well as the legislature, have taken an active approach in not only recognizing but also protecting the rights of homebuyers. There are a host of issues that periodically arise for consideration vis-à-vis their rights, and one such issue is regarding the submission of claims by homebuyers.
Once a Section 7 application is admitted, the adjudicating authority has to pass an order under Section 14 of the IBC, declaring a moratorium and appointing an interim resolution professional (“IRP”). The IRP is required to then make a public announcement which is required to mention the last date for submission of claims by creditors. In terms of Regulation 6 read with Regulation 12 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”), the creditors may submit their claims within 14 days from the appointment of the IRP, failing which the claim may be submitted within a period of 90 days from the insolvency commencement date. In many judgments, the National Company Law Tribunal (“NCLT”) has clarified that rejection of the claim on the grounds of delay beyond the 90-day period is not sustainable, as the aforesaid provision is merely directory and not mandatory.
While this appears to be settled law, on June 1, 2022, the Principal Bench of the National Company Law Appellate Tribunal (“NCLAT”), New Delhi, comprising Justice Ashok Bhushan, Ms. Shreesha Merla, Mr. Naresh Salencha granted further relief to Homebuyers in relation to the filing of their claims. In the said case titled Puneet Kaur v. K V Developers Private Limited,[8] the NCLAT held that even claims of those Homebuyers ought to be included in the information memorandum who did not file their claims if the same were reflected in the record of the corporate debtor. The NCLAT held that non-consideration of such claims would lead to inequitable and unfair resolution.
The Appellate Tribunal further noted the difficulty faced by homebuyers in filing their claims. It was observed that the public announcement inviting claims is normally done in the area where the corporate debtor has its registered office and corporate office, and there is every likelihood that all the Homebuyers who are usually hundreds in number neither come to know about the CIRP nor do they file their claims within the stipulated period. The NCLAT thus observed that non-submission of claims within the prescribed time is a common feature in the insolvency process of almost all real estate projects. The Appellate Tribunal went on to hold that once the allotment letters have been issued to the Homebuyers and payments have been received, there is an obligation on the part of the real estate company to provide possession of the houses along with other attached liabilities. Therefore, the Homebuyers have every right to agitate their claim.
The NCLAT has recognized the difficulties faced by Homebuyers, who, as the NCLAT recorded in its judgment dated June 1, 2022, usually belong to the “middle class of society”, most of whom have taken loans from banks and other financial institutions, saddling them with liability. In doing so, the NCLAT furthered the trend of the courts, viewing homebuyers with a fair mindset and reiterating the need to protect homebuyers from the technical rigors and procedures contemplated in the IBC.
Mandatory Deduction Of 1/3rd For Value Of Land Held Ultra Vires–Gujarat High Court.
Case Details:
Munjaal Manishbhai Bhatt Vs Union of India
Appeal No.:
1350, 6840 of 2021 & 5052 of 2022,
Ruling pronounced by:
Gujarat High Court
Date of Order:
6th May 2022
The Hon’ble High Court of Gujarat vide its order dated 6th May 2022 in the matter of Munjaal Manishbhai Bhatt Vs Union of Indiain R/Special Application No.s – 1350, 6840 of 2021 & 5052 of 2022, held that the deeming fiction of mandatory deduction of 1/3rd of the value of the land while ascertaining the taxable value in view of entry 3(if) of Notification No. – 11/2017 – Central Tax (Rate) and similar notification in the State Tax along with paragraph 2 of both the notifications is ultra vires, and the same was struck down. The writ Applicant preferred the Writ application praying for striking down entry 3(if) of Notification 11/2017 – Central Tax (Rate) as well as the similar entry 3(if) in notification No. 11/2017 – State Tax (Rate) along with paragraph No. 2 of both the notifications being ultra-vires and the Section 7(2) of the GST Act read with Entry 5 of Schedule III to GST Act as well as the Section 9 (1) and Section 15 of the GST Act. Further, the aforesaid entry of both the notification was prayed to be struck down as being manifestly arbitrary, grossly discriminatory, and violating Article 14 as well as ultra-vires Article 246A of the Constitution of India. It was also urged to declare that paragraph 2 of both notifications would be applicable in case wherein undivided share in land is transferred along with constructed flat without separate consideration being fixed towards the sale of land as well as GST cannot be imposed on sale and purchase of land. Facts: – ⦁ The writ applicant is a practicing Advocate in this High Court and entered into a contract with Respondent No. 4 i.e., Navratna Organisers and Developers Pvt. Ltd. for the purchase of a plot of land measuring about 1021 square meters located the Unit No. 937, “Kalhar Blues and Greens”, Bopal-Sanand Bypass Road, Ahmedabad as well as for the construction of Bungalow on the said plot by Respondent No. 4. ⦁ That a separate consideration was agreed upon for the sale of land and construction of Bungalow on the land. ⦁ That as per the terms of the agreement, the writ-applicant was under a bonafide belief, as the liability of all taxes including GST was on him, that he would be liable to pay GST on the construction of Bungalow. ⦁ That, however, the respondent No. 4 in view of entry 3(if) of Notification 11/2017 – C.T. (Rate) dated 28.06.2017 and similar entry and notification in State Tax (Rate) read with paragraph 2 of both the notifications, raised an invoice for collection of GST on 1/3rd of the entire consideration received for the sale of land and construction of bungalow, and without excluding the consideration for the sale of land in computing GST. Hence, the present writ application. Writ-Applicant Submissions: – ⦁ It was submitted on the behalf of the writ-applicant that Section 9 is a charging Section. The scope of supply is defined under Section 7 and by virtue of Section 7(2), the transactions specified in Schedule III to GST Act, which includes ‘sale of land’ at entry 5, are excluded from the purview of Supply. Thus, the imposition of a tax on the sale of land is ultra-vires Section 7 & 9 of the GST Act. ⦁ That referring to the terms/clauses of the booking agreement between the writ-applicant and the developer, it was submitted that it is quite evident from the agreement that the consideration towards the land is separately fixed and agreed, upon and is outside the purview of the GST Act. ⦁ Further, it was submitted that the booking agreement was entered after the land was fully developed, so no further activity is to be done by the developer in respect of the said booking agreement. ⦁ The writ-applicant explained the situation with an illustration submitted that ‘Total Amount’ is defined in the impugned notifications and the liability fixed by deeming fiction presuming only 1/3rd of total consideration towards land is ultra-vires the CGST Act. Moreover, the liability computed in view of the said deeming fiction is more than the liability computed as per the provisions of the statute. ⦁ That relying on the decisions of Indian Express Newspapers (Bombay) Private Limited v. Union C/SCA/1350/2021 CAV JUDGMENT DATED: 06/05/2022 of India & Ors.; (1985) 1 SCC 641, Kerala Financial Corporation v. Commissioner of Income Tax; (1994) 4 SCC 375, Deputy Commercial Tax Officer v. Sha Sukraj Peerajee; AIR 1968 SC 67 11 and on ITW Signode India Ltd. v. Collector of Central Excise; (2004) 3 SCC 48, it was submitted that delegated legislation cannot travel beyond the scope of parent legislation. ⦁ Further, reference was made to the 14th GST Council meeting to show that before the issuance of impugned notifications deliberations were made with regard to the sale of Apartment/Flat, and abatement of 1/3rd value of land was thought of only with respect to the sale of Apartment/Flats. However, the said entry in the notification was inserted with a wide scope as to even include the sale of plots along with the construction of bungalows, is arbitrary and contrary to the object sought to achieve by the deeming fiction. ⦁ It was submitted on the behalf of the writ-applicant that the legislative history of tax on construction is required to be looked into, which can be divided into two parts (i) tax on goods ‘element’ and (ii) tax on ‘service’ element, of the construction contracts. The legislative history with respect to the goods element involved in the construction contracts is as under: –1. That Entry 54 of List II to the Constitution of India empowered the State legislatures to impose a tax on the sale or purchase of goods. The legislative competence of the State legislatures to impose a tax on goods used in the course of execution of indivisible works contracts came up for scrutiny before the Supreme Court of India in the case of State of Madras v/s Gannon Dunkerley and Co. (Madras) Ltd. (1958) 9 STC 353 (1st Gannon Dunkerley’s case) wherein it was held that ‘The property in goods does not pass as chattel pursuant to the agreement of sale and therefore it is not sale as per the Sale of Goods Act, 1930’. 2. The 46th Constitutional amendment was made effective to nullify the said judgment of Hon’ble Supreme Court in Gannon Dunkerley, and the transfer of property in goods involved in the course of execution of works contract was deemed to be sales. 3. The next issue which arose was on what amount such tax would be imposed, the issue was settled and explained by the Supreme Court in Gannon Dunkerley and Co. v/s State of Rajasthan (1993) 1 SCC 364 (Second Gannon Dunkerley’s case), wherein it was held that that tax ‘could be imposed only on the value of goods incorporated in the works contract and that the labor expenses and profit thereon were to be excluded’. 4. In view of the above decision various states formulated valuation procedures for Works Contract. However, so far as the State of Gujarat is concerned, Section 2(30) (c) of the Gujarat Value Added Tax Act, 2003 provided for ‘taxable turnover’ to be determined after deduction of charges towards labor, service, and like charges and Rule 18AA of Gujarat Value Added Tax Rules, 2006 provided the manner of determining the taxable value in Works Contract. It was provided that actual value is to be taken if the value is ascertainable. 5. That various states provided for a lump-sum tax on the total value of Works Contract at the option of the dealer, its validity was upheld by the Supreme Court in State of Kerala v/s Builders Association of India (1997) 2 SCC 183 as well as Mycon Construction Ltd. v/s State of Karnataka and Another (2003) 9 SCC 583. 6. Thereafter as the question arose, it was held in Raheja Development Corporation vs the State of Karnataka (2005) 5 SCC 162 – that even a tripartite agreement involving the construction of flats for the prospective buyer would constitute a sale in the course of the execution of works contract. 7. The above decision of Raheja was doubted and referred to a larger bench, which later on was affirmed in Larsen and Toubro Ltd. v/s State of Karnataka (2014) 1 SCC 708, however it was clarified in para 110 that only after the developer enters into a contract with the flat purchaser the activity of the construction provided by the developer would be considered as works contract and the goods transferred in the said activity of construction would be chargeable to tax. Further, in para 112, it was observed that at the time or after the completion of construction, if there is no agreement between the developer and the flat purchaser for construction, the goods used could not be deemed to be sold by the builder. 8. While conceiving the impugned Notification regarding deduction towards land, the aforesaid judgment in 1st Larsen and Toubro Ltdwas discussed however not followed and ad hoc deduction of 1/3rd towards land was proposed. ⦁ That relying on the observations in Larsen and Toubro Ltd. (Supra) the exclusion of land and building has a historical perspective. Hence, the sale of land and fully constructed buildings is excluded from the purview of the GST Act as well. Further, if the agreement is entered after the land has been fully developed, the supply of goods and services would be to the extent of construction activity only, however, prior to execution of the contract, such activity would not be covered under Section 7 of GST Act and there is no charge of tax on the activity. ⦁ That in view of the above, the sale of land, whether developed or not, would not be exigible to GST and the tax liability is to be restricted to the construction activity only. ⦁ That referring to the observations made in Gannon Dunkerley’s case (2nd case), Builders Association of India & Mycon Construction Ltd., it was submitted that the impugned notification prescribed the fixed percentage of i.e., 1/3rd without taking into consideration the variants of contract and size of the land, thus contrary to the judgment of Supreme Court in 2nd Gannon Dunkerley’s case. ⦁ Thereafter referring to legislative history pertaining to service element, it was submitted: –1. Service tax was introduced for the first time by the Finance Act, 1994 by way of a positive list of taxable services. 2. Section 65(105) of the Finance Act, 1994 contained a list of taxable services which were amended from time to time. Clause (zzq) and (zzh) of the said provision included construction service within the ambit of service tax. 3. Clause (zzzza) in Section 65(105) in 2007 for ‘services in relation to the execution of Works contract’. 4. Thereafter as the question arose, the Hon’ble Supreme Court in the matter of Commissioner, Central Excise and Customs, Kerala v/s Larsen and Toubro Ltd. (2016) 1 SCC 170, held that Works Contract Service was made taxable from 2007 and prior to that only pure service contract can be taxed under construction service. 5. That in the Finance Act, 2010 clause (zzzh) was introduced whereby ‘construction of a complex intended for sale was deemed to be service by builder to the buyer unless entire consideration was received after granting of completion certificate by the competent authority. 6. The imposition of tax on builder services was challenged before the Delhi High Court in Suresh Kumar Bansal v/s Union of India (2016) 92 VST 330 (Del.) wherein it was held by the Hon’ble High Court that ‘there was no mechanism for computing service tax in case of a transaction involving the transfer of land and no service tax can be demanded in absence of computation mechanism. The contention of the revenue was rejected on the ground that mere abatement by way of notification could not be a substitute for the statutory valuation mechanism which was absent. 7. Later to overcome the judgment of Suresh Kumar Bansal, Rule 2A of Service Tax (Determination of Value) Rules were amended retrospectively to provide for deduction of amount charged for land and undivided share of land and for lump-sum deduction where value cannot be determined. ⦁ It was further contended that in the judgment of Suresh Kumar Bansal, it was held that the abatement by way of notification is not sufficient and there has to be a specific provision excluding the value of land from the taxable value of the works contract. Thus, the impugned notifications under GST providing for a fixed percentage of the deduction for land by way of abatement are against the judgment of Suresh Kumar Bansal of the Delhi High Court. ⦁ The statement of objects and reasons for the enacting of the GST Act is to merge and consolidate earlier laws relating to indirect taxes. Moreover, when GST Council considered the judgment of the Supreme Court in Larsen and Toubro, the legislative history of earlier laws has to refer to deciding the validity of the impugned notification, from which it is quite evident that the tax can be imposed only on construction activity provided by the developer. Further, in view of entry 5 of schedule III, and when it has been clearly held that where actual value can be ascertained then the fictional value cannot be taken into consideration, the impugned notification is against the provisions of the Statue and thus ultra-vires. ⦁ It was contended that the total value of land is deemed to be 1/3rd of total consideration irrespective of the nature and size of the land on which the construction is to be carried on. ⦁ The deeming fiction is ex-facie discriminatory, completely arbitrary, and in violation of Article 14 as the person like the writ-applicant has to pay a higher tax for the construction of bungalow on only 10-20% of the land, and a similar deduction is given to a flat buyer in multi-storied building, where the major portion of agreement value is towards construction. Further, in the present case, the seller and the developer are different persons. ⦁ That strong reliance was placed on Wipro Ltd. v/s Assistant Collector of Customs and Others (2015) 14 SCC 161, wherein ‘the Rule provided for adding 1% of the FOB value of goods towards loading, unloading and handling charges even though the actual value of such charges was ascertainable, was held to be ultra-vires the provisions of Customs Act’. ⦁ That reliance was also placed on the Commissioner of Central Excise, Pondicherry v/s Acer India Ltd. (2004) 8 SCC 173, wherein it was held by the Hon’ble Court that the tax cannot be indirectly levied on software by including its value in the value of computers. ⦁ Further, taking reference to the law stated in Section 15 of GST Act, Rule 27, Rule 28, Rule 29, and rule 30,31, it was submitted that a detailed valuation mechanism is available in the statute primarily based on actual consideration and such provisions cannot be ignored by simply providing an arbitrary abatement of land by way of a notification. ⦁ That referring to the contention raised by the respondents in an affidavit in reply filed, it was submitted that Section 15(5) provides for fixing of value of goods & services, and the value of the sale of land cannot be prescribed under Section 15(5). As per Section 2(87) ‘prescribed’ means prescribed by rules, thus prescription of value for the purpose of Section 15(5) can be done only by rules, not notification. ⦁ That strongly relying on the case of Wipro Ltd. (supra), it was submitted that an arbitrary notification, as in the present case, could not be saved simply on the ground that the government has the power to issue such notifications. ⦁ That the respondent’s reliance on entry 5(b) of Schedule II is totally misconceived as the sole purpose of Schedule II is to provide whether a supply will be a supply of goods or supply of services. It does not provide for any deeming fiction so as to enlarge the scope of supply. ⦁ Lastly reliance was placed on the decision of State of Rajasthan v/s Rajasthan Chemists Association (2006) 6 SCC 773, wherein it was held observed’ that tax cannot be imposed on a value unconnected with the subject of tax’, and submitted that the impugned notification is ultra-vires as it leads to a consequence whereby tax is imposed on land which is never sought to be taxed by the statute. Submissions with respect to Special Civil Application No. 6840 of 2021 & 5052 of 2022: ⦁ It was submitted on the behalf of the writ-applicants that the writ-applicants are developers and sought an advance ruling about the taxability under the GST Act on the supply of developed land. The Advance ruling authority in its order held that the deduction for the sale of land is available only to the extent of 1/3rd of the total consideration in view of the impugned notifications. Further, the said advance ruling order was affirmed by the Appellate Authority for advance ruling. Thus, the present writ application challenges the validity of the impugned notification and the order of the Appellate Authority for the Advance ruling. ⦁ That relying on Supreme Court decision in Mangalore Ganesh Beedi Works v/s Commissioner of Income Tax (2015) 378 ITR 640 (SC), Mohit Marketing v/s CIT Tax Appeal No. 157 of 2000 & Commissioner of Income Tax v/s Parle International Ltd. Tax Appeal No. 1905 of 2009, it was submitted that once a particular consideration was agreed for the sale of land between two parties, it was not open to the taxing authorities to re-write the terms of the agreement. ⦁ Further reliance was placed on the Supreme Court decision on Commissioner of Income Tax, Hyderabad v/s Motor and General Stores (P) Ltd. AIR 1968 SC 200 ‘wherein it was observed that if a document in question was intended to be acted upon and there was no suggestion of malafide or bad faith or fraud, then the taxing statute was required to be applied in accordance with the legal rights of the parties to the transaction.’ ⦁ It was submitted that developed land would be included within the meaning of the term ‘land’ and if the impugned notification is not to be struck down as ultra-vires, the same is required to be read down as inapplicable where the value of land is ascertainable separately. ⦁ At last, it was argued that the Appellate orders of Advance Ruling, which held that 1/3rd of the deduction would be available in view of the impugned notification, were also liable to be set aside and quashed. Submissions on the behalf of Respondents: – ⦁ It was submitted on the behalf of the respondents that Article 246A (1) of the Constitution empowers the Parliament and the Legislature of every state to make laws in respect of the Goods and Service Tax to be imposed by State or Central Government. Section 9 provides for the levy of GST on the supply of goods and services. As per Article 279A (4), the GST Council shall make recommendations to the Union and the States on the issue related to GST. Section 9(1) provides that GST will be levied on all intra-State supplies of goods and services, on the value determined under Section 15. Thus, the levy of CGST shall be on the value as determined under Section 15. Section 15(5) of the CGST Act, 2017 provides that notwithstanding anything contained in sub-section (1) or sub-section (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manner as may be prescribed. ⦁ That the GST Council in the 34th meeting also agreed to apply tax at a new rate to be applicable to new projects or ongoing projects. Thereafter, notification 3/2019 Central Tax (Rate) dated 29.03.2019 was issued on the recommendation of the GST Council, which provided for deemed valuation of land as provided in paragraph 2 of the impugned notification. Thus, the contention that the determination of the value of the supply by subordinate legislation, when the value of land and cost of construction are separately ascertainable, is ultra-vires Section 15 of the CGST Act does not hold ground. Further, the contention that deduction of deemed value of land is beyond the scope of a delegation under Section 9 (1) of the CGST Act has no legal basis at all. ⦁ That reliance was placed on the Supreme Court decision in Union of India v. Nitdip Textile Processors Pvt. Ltd. (2012) 1 SCC 226, wherein ‘it is observed that the legislature enjoys very wide latitude in classification for taxation. Reference was also made to Anant Mills Co. Ltd. vs. State of Gujarat & Ors., (1975) 2 SCC 175. ⦁ That the Government is empowered to decide the rate in the public interest on the basis of recommendations from the GST Council and the GST Council is well within its power to recommend such reduction. ⦁ Thereafter relying on the judgments of the Union of India (UOI) and Ors. Vs. VKC Footsteps India Pvt. Ltd. AIR 2021 SC 4407, 2021 [52] G.S.T.L. 513, Spences Hotel Pvt. Ltd. and Ors. Vs. State of West Bengal and Ors. (1991) 2 SCC 154, Khyerbari Tea Co. Ltd. and Ors. Vs. The State of Assam AIR 1964 SC 925, it was submitted that the impugned Notification is not ultra-vires Section 7(2), Section 9 (1), Section 15 of CGST Act and Article 14 and Article 246A. ⦁ That taking reference to Para 5(b) of Schedule – II, it was submitted that in case of a transaction that involves the construction of a building, civil structure, or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, wherein the completion certificate with respect to such constructions have not been received, such transactions shall be treated as services under Paragraph 5(b) of Schedule II and therefore, shall be taxed as per the aforestated Notifications. ⦁ It was contended that the transaction in the present case comprises land, construction of Bungalow, and the development of various amenities, facilities, and common areas. None of these components of the transaction can be separated and are integral parts of the transaction. ⦁ Taking reference to the Supreme Court decision in Narne Construction P. Ltd. and Ors. Vs. Union of India (UOI) and Ors. (2012) 5 SCC 359, it was submitted that the transaction in the present case is for the sale of a developed piece of land and not of plain land and therefore; it is subject to many conditions, limitations, prohibitions, and restrictions unlike a transaction of sale of land. ⦁ The present transaction is one of the development and construction of a building, civil structure or part thereof, intended to be sold to the writ applicant, and therefore, the present transaction falls squarely under Paragraph 5(b) of Schedule II not under Schedule III. ⦁ Further explaining the formula in paragraph 2 of the notifications for ascertaining the value of land, submitted that deeming fiction in the notifications was recommended by the GST Council to consider the land portion in supply, apart from construction and other development services. Further, the consideration as provided in the booking agreement, entered between the parties, with respect to land and construction activity might not reflect the actual value of the land involved in the transaction. ⦁ That as per the booking agreement with the developer, it’s not only land but a developed land with all facilities, amenities, and common area as part of the plotting scheme. Hence, land includes these developments also and the value of such development cannot be ascertained as the same is to be enjoyed by all the occupants of the scheme. ⦁ That is the contention of the writ-applicants is accepted it may lead to absurd results as the buyer and developer may mutually decide that 99% of the total consideration is towards value of land and the rest is for construction. This may lead to huge losses to the public exchequer. ⦁ It was argued that inequities cannot render a provision susceptible to challenge to its legality/constitutionality. Further, relying on the decision of the Supreme Court in Union of India & Ors. vs. VKC Footsteps India Pvt. Ltd. AIR 2021 SC 4407, it was submitted that the Hon’ble Supreme Court after referring to its earlier decisions, held ‘that the formula is to evolved/read down by the Courts only if it leads to absurd results or is unworkable’. ⦁ That in respect of advance ruling orders, it was argued that the writ application under Article 226 of the Constitution of India in not maintainable against such orders. Held: – ⦁ The Hon’ble High Court after considering the submissions from both sides, facts of the case, and law applicable, took note of the law stated in Section 9, Section 7, Schedule – II & Schedule – III of the CGST Act. ⦁ That after perusal of the above sections and schedules, it was observed that supply includes all forms of supply made or agreed to be made for a consideration by a person in the course or furtherance of business. Further, the activities falling under Schedule II would be considered as supply of service or goods and the activities falling under Schedule III would not be considered as supply of goods or services. ⦁ Further taking note of entry 5(b) of Schedule II which states ‘construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of the completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier and entry 6 as well as entry 5 of Schedule III which states ‘Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building’, it was observed that it is not in dispute that the sale of land and building is not subject to GST, however, the exclusion is subject to entry 5(b) of Schedule II, which provides that the transaction pertaining to the sale of land is taxable as construction services unless the consideration is received after the grant of completion certificate or occupation whichever is earlier. ⦁ The Hon’ble High Court after the perusal of entry 3(if) and paragraph 2 of the impugned notifications observed that in the case of construction services involving the transfer of land, the deduction of such transfer of land or undivided share will be given to the extent of 1/3rd of the total consideration charged. What sought to be taxed by the Parliament and State Legislatures? ⦁ Taking reference to legislative history relied upon by the writ-applicants, it was observed that the controversy with respect to taxability of construction contracts was first raised before the Hon’ble Supreme Court in the 1st Gannon Dunkerley’s, wherein ‘it was held that wherein it was held that the State legislatures do not have the legislative competence to impose sales tax on indivisible works contracts since they did not involve the sale of goods as understood under the Sales of Goods Act, 1930’. ⦁ Further, relying on the observation of the Supreme Court in the said judgment it was found that in a building construction contract the contract is forgetting the building constructed not for the sale of goods used in the course of construction and the property in goods would pass to the buyer through the theory of accretion. ⦁ It was found based on the observations of the Supreme Court that when the goods are embedded into the earth pursuant to the construction contract, such contract could not be said to be for the sale of goods. ⦁ From the 46th Constitutional amendment, the state legislature was granted the powers to impose a tax on the property in goods involved in the Works Contract. Then, the question arose regarding the determination of the value of goods in the indivisible works contract, which was answered in the 2nd Gannon Dunkerley’s case wherein it was held that the value of goods can be determined by excluding the value of labor and profit element. However, these contracts were only purely construction contract,s not development agreements that involve the sale of land as well. ⦁ The decision of the Supreme Court inRaheja Development Corporation wherein it was held that the tripartite agreements would also be considered as works contract and would involve deemed sale of goods, was doubted and referred to a larger bench. ⦁ The Larger Bench in the 1st Larsen and Toubro also held that even the tripartite agreement between the buyer, developer, and owner for construction of flats at the behest of the buyer, thus it involved the taxable deemed sale of goods. It was further held that the construction which was undertaken after agreement with the purchaser was held to involve a works contract. ⦁ That when the impugned notifications were discussed and finalised by the GST Council, the decision of the Supreme Court in 1st Larsen and Toubro Ltd. (Supar) was specifically referred in the 14th GST Council meeting. Thus, the base of the levy is not changed under CGST Act. The construction which is carried on by a developer as per the terms of the contract with the buyer, which was earlier taxable under VAT/Service tax is now sought to be taxed under the CGST Act, and therefore the deduction is given for the sale of land. ⦁ That as Section 7 of CGST Act, includes the supply of goods and services made or agreed to be made for a consideration, implies that supply would be initiated only after the agreement between the supplier and the receiver is entered. The similar ratio has been laid down by Supreme Court in 1st Larsen and Toubro Ltd. that there cannot be a sale in respect of construction undertaken prior to agreement with the buyer. ⦁ Thus, from the legislative history, it is quite evident that there is no intention to impose tax on the supply of land in any form and for this reason, only it has been provided in Schedule III of the CGST Act. Relevance of Developed vis-à-vis Undeveloped land: – ⦁ The Hon’ble Court rejecting the contention of the revenue found that if Schedule III provides for ‘sale of land’ then it can be land in any form, so even in the case of the tripartite agreement for the sale of land and building, the imposition of the tax would be on construction activity only. ⦁ That if the agreement is entered after the land is already developed by the developer, then such development activity was not undertaken for the prospective buyer, therefore GST cannot be imposed on the developed land and only construction activity can be taxed as supply. ⦁ The fact that the land is not a plain parcel of land but a developed land cannot be a ground for imposing a tax on the sale of such land. Thus “sale of land” under Schedule III to the GST Acts covers the sale of developed land even as per the impugned notification. The measure of Tax: – ⦁ Taking note of Section 15, it was observed that ordinarily, the value of the supply of goods and services should be the actual price paid or payable, however, subsections (2) & (3) provide for certain inclusions and exclusions from the value of supply. ⦁ In the case of Writ-applicant Special Civil Application 1350 of 2021, as per the booking agreement consideration for the sale of land and construction of bungalow, has been specifically mentioned. Thus, the fixed deduction as per the impugned notification would not be applicable in the present case when the statutory provisions provide for valuation in accordance with the actual price paid or payable. Deeming Fiction can be applied only where the actual price is not ascertainable. ⦁ The above proposition is squarely covered by the decision of the Supreme Court in the 2nd Gannon Dunkerley’s case wherein it was held that ‘if the actual value of labor was available then the same was to be deducted and if in case actual value was not ascertainable deeming fiction could be applied’. ⦁ Further, in the 1st Larsen and Toubro case (supra), one of the points to be considered before the Supreme Court was whether a rule in the Maharashtra Value Added Tax Rules capping the value of the land at 70% of the agreement value was permissible or not. It was held by the hon’ble Supreme Court that Taxing the sale of goods element in a works contract is permissible even after incorporation of goods provided tax is directed to the value of goods at the time of incorporation and does not purport to tax the transfer of immovable property. The mode of valuation of goods provided in Rule 58(1-A) has to be read in the manner that meets this criterion and we read down Rule 58(1-A) accordingly. ⦁ Further reference was also made to the judgment of the Supreme Court in the matter of Wipro Ltd. (Supra) ⦁ The Hon’ble Court with the all above findings held that deeming fiction of 1/3rd of deduction of total consideration for the value of land where the actual value of land is ascertainable is clearly contrary to the provisions and scheme of CGST and therefore ultra-vires the statutory provisions. The arbitrariness of the Deeming Fiction by the Impugned Notification: – ⦁ Apart from being contrary to provisions the impugned notifications are also arbitrary as the deeming fiction is uniformly applied irrespective of the size of the plot of land and construction on it. ⦁ There is no distinction between a flat and bungalow as far as deduction provided in the deeming fiction is concerned. The deduction as per the deeming fiction has been applied without any regard to the size of land and the area constructed on such land. ⦁ In the 14th GST Council meeting, the discussion was in respect of flats while the ultimate notification was issued and made applicable even to other transactions such as the sale of land with the construction of bungalows. ⦁ Such deeming fiction which leads to arbitrary and discriminatory consequences could be clearly said to be violative of Article 14 of the Constitution of India which guarantees equality to all and also frowns upon arbitrariness in law. Arbitrary Deeming Fiction has led to measure of Tax having no nexus with Charge: – ⦁ The Hon’ble Court referring to the decision of Hon’ble Supreme Court in Govind Saran Ganga Saran v. CST [1985 Supp SCC 205 : 1985 SCC (Tax) 447 : AIR 1985 SC 1041] held that the arbitrary deeming fiction by way of delegated legislation has led to a situation whereby the measure of tax imposed has no nexus with the charge of tax on supply of construction service. Section 15 (5) does not further the case of the Respondents: – ⦁ It was noticed by the Hon’ble Court that it was the case of the respondents that the impugned notification is issued in exercise of powers under Section 15(5) of the CGST Act. In this regard it is to be noted that in Section 2(87) – prescribed” means prescribed by rules made under this Act on the recommendations of the Council;”. Thus, the prescription under Section 15 (5) has to be by way of rules not notification. ⦁ Taking reference to the judgment of the Supreme Court in Wipro Ltd. (supra), it was held that where a delegated legislation is challenged as being ultra-vires and in violation of Article 14 of the Constitution of India, the same cannot be defended merely on the ground that the Government had the competence to issue such delegated piece of legislation. What if the Supplier Artificially Inflates the price of land thereby Deflating the value of the Construction Service? – ⦁ The Hon’ble Court rejecting the contention of the revenue, i.e., that the parties may artificially fix a higher value for land so as to reduce tax the liability under the GST Acts, held that value, as mentioned in the agreement, are not challenged in the affidavit in reply, therefore, such contention is not applicable. ⦁ That the possibility of obtaining indirect consideration cannot be ruled out for any supply transaction in view of Section 15(4) which states ‘Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed.” ⦁ It was held that the revenue was not remediless even in a case where there is a doubt about the correctness of value assigned in the contracts toward construction. The resort can be made to valuation rules – Rule 27, Rule 28, Rule 29, Rule 30, and Rule 31 for ascertaining the value of construction. ⦁ When such a detailed statutory mechanism for determination of value is available, then the impugned deeming fiction cannot be justified on the basis that it is meant to curb avoidance of tax when in fact such fiction is leading to arbitrary consequences. Already similar mechanism existed under Service Tax Law which is not required to be deviated from: – ⦁ When in view of the judgment of the Delhi High Court in Suresh Kumar Bansal (Supra) Deduction at a fixed percentage was made applicable only where the actual value was not ascertainable. When such a workable mechanism for deduction of land was already in force under the service tax regime, the same ought to have been continued. Instead, the Government has chosen to fix a standard rate of deduction without any regard for different possible factual scenarios which is completely arbitrary and violates Article 14 of the Constitution of India. Entry 5(b) of Schedule II is not relevant for determining the validity of Impugned Notification: – ⦁ Originally clause (d) of Section 7(1) includes transaction enlisted in Schedule II of CGST Act however such clause was deleted retrospectively and a new clause (1A) was inserted which provides that if a transaction qualifies as supply, then it would be treated as a supply of goods or services in accordance with Schedule II. The Parliament clarified that Schedule II to GST is not meant for expanding the scope of supply but only to clarify whether a particular transaction qualifies as supply or not. Thus entry 5(b) of Schedule II is not relevant for deciding the issue in the matter. ⦁ Further, it was held that the judgments of VKC Footsteps Pvt. Ltd. and Narne ConstructionLtd. are completely misplaced and are not applicable to the facts of the present case. Conclusion: – ⦁ With the above findings, it was held by the Hon’ble Court that the impugned Paragraph 2 of the Notification No. 11/2017-Central Tax (Rate) dated 28.6.2017 and identical notification under the Gujarat Goods and Services Tax Act, 2017 which provide for a mandatory fixed rate of deduction of 1/3rd of total consideration towards the value of land is ultra-vires the provisions as well as the scheme of the GST Acts and in violation of Article 14 of the Constitution of India. ⦁ The mandatory deduction as per paragraph 2 will not be mandatory in nature and can be permitted at the option of the taxable person where the actual value of land is not ascertainable. ⦁ That in Special Civil Application No. 1350 of 2021 the writ-applicant has deposited the amount of GST charged by the supplier i.e. Respondent No. 4. That amount is to be refunded to the writ-applicant with interest at the rate of 6% p.a. as the burden of tax has been borne by the writ-applicant. ⦁ In the other two writ applications numbered Special Civil Application No. 6840 of 2021 & 5052 of 2022, since the advance ruling appellate orders are based on the impugned notification providing for mandatory deeming fiction for deduction of the value of land, the said orders are hereby quashed and set aside. Contact us for GST Advisory, Litigation, GST Assessment, GST Return Filing, GST Registration, GST Appeal Filing, and other GST Related Services. ⦁ Visit us–https://akhilamitassociates.com/, http://akhilamitandassociates.com/, https://akhilamitandassociates.business.site/ ⦁ Follow us on Twitter ⦁ Follow us on LinkedIn–https://www.linkedin.com/in/akhilamitandassociates1/, https://www.linkedin.com/company/akhilamitandassociates/ ⦁ Follow us on Google (Chinchwad Branch), Follow us on Google (Wakad Branch). ⦁ Follow us on Facebook
The Insolvency and Bankruptcy Board of India (IBBI/Board) notified the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2016 (CIRP Regulations) on June 14, 2022.
The amendment provides the operational creditors to furnish extracts of Form GSTR-1, Form GSTR-3B and e-way bills, wherever applicable along with the application filed under section 9 of the Insolvency and Bankruptcy Code, 2016. These additional set of documents, can be used as evidence of transaction with the corporate debtor, debt and default easing the process of admission. These documents will also to be submitted as part of the claims submitted to the resolution professional to help collation of claims. Further, creditors filing applications under section 7 or 9 of the Code are required to furnish details of their PAN and Email ID to ensure smooth correspondence.
In order to improve information availability, the amendment places a duty on corporate debtor, its promoters or any other person associated with the management of the corporate debtor to provide the information in such format and time as sought by the resolution professional.
The amendment places a duty on the creditors to share information regarding the assets and liabilities of the corporate debtor, the financial statements and other relevant financial information from their records and available reports to help the resolution professional in preparation of the information memorandum and relevant extracts from the transaction or forensic audit reports to aid the resolution professional in preparation of the avoidance application.
The Amendment also addresses the issue of treatment of avoidance applications filed with the Adjudicating Authority after closure of the corporate insolvency resolution process (CIRP). It provides that the resolution plan shall provide for manner in which such applications will be pursued after the approval of the resolution plan and the manner in which the proceeds, if any, from such proceedings shall be distributed.
The amendment includes a definition of significant difference in valuations during CIRP and enables the committee of creditors to make a request to the resolution professional regarding the appointment of a third valuer.
The CBDT has well in advance notified the Income-tax Return (ITR) Forms for the AY 2022-23 vide Notification No. 21/2022 dated 30-03-2022 & Notification No. 23/2022 dated 01-04-2022. There are various changes in the disclosure requirements in the new ITR Forms. Let us have a look at some of the key changes in the ITR that may be relevant to most taxpayers.
1. Applicability of ITR Forms:
The new ITR forms do not tinker with the applicability of ITR forms. The criteria for selecting the ITR forms for the AY 2022-23 shall be the same as that of the AY 2021-22.
2. Schedule of Capital Gain:
New ITR forms require the following additional disclosures in the Schedule of Capital Gain:
(a) Date of purchase & sale of Land/Building (b) Country and Zip Code if the property is situated in a foreign country (c) Disclosure of FMV & consideration received in slump sale transaction (d) Year-wise details of the cost of improvement to land/building (e) Separate disclosure of cost & indexed cost of acquisition Further, new ITR 5 has been suitably amended for disclosure of deduction allowable u/s 48(iii) in respect of the capital gains of firm u/s 45(4).
3. Disclosure of the taxable EPF interest:
FA-2021 has amended Sections 10(11) and 10(12) to provide that no exemption shall be allowed in respect of interest income from the recognized and statutory provident fund to the extent it relates to the amount of the contribution made by the employee exceeding Rs. 2,50,000 in any year on or after 01-04-2021. The new ITR forms have amended “Schedule OS” (Other Sources) to incorporate specific reporting of such interest income.
4. Change in “Schedule FA” (i.e., Foreign Assets): Schedule FA requires the reporting of foreign assets. The new ITR Forms have replaced the expression “Accounting Period” with “Calendar Year ending as on 31st December 2021”. As a result, the taxpayers shall be required to furnish the details of all foreign assets held between 01-01-2021 and 31-12-2021 in return to be filed for AY 2022-23.
5. Taxation of ESOP:
New Schedule has been inserted for reporting of tax-deferred on ESOP whereby an employee can defer the payment or deduction of tax in respect of shares allotted under ESOP (Specified Securities) by an eligible start-up referred U/s 80-IAC. The New ITR Forms have inserted a “Schedule: Tax-Deferred on ESOP” to keep a proper track of such transactions.
6. Nature of employment of pensioner:
In earlier ITR forms, an individual receiving a pension was just required to choose the option of ‘Pensioners’ in the dropdown menu ‘Nature of Employment. Now, the following options have been further incorporated for pensioners (i) Pensioners–CG (ii) Pensioners–SC (iii)Pensioners–PSU, and (iv) Pensioners–Others.
7. Taxpayers who have opted for alternative tax regime U/s 115BAC:
Now, taxpayers have an option of a new tax regime of lower tax without any deduction or exemption. The following disclosures are required in ITR 3 and ITR 4:
(a) Whether the assessee has opted for an alternative tax regime, u/s 115BAC & filed Form 10-IE in AY 2021-22;
(b) For the AY 2022-23, the assessee has to choose from the following options: · Opting in now · Not opting · Continue to opt · Opt-out
8. Taxpayers who have opted for alternative tax regime U/s 115BA/115BAA/ 115BAB/ 115BAD:
All taxpayers who have opted for an alternative lower tax regime are now required to give the details of the year wherein the option was first exercised as well as the details of having filed the prescribed form (like Form No. 10IB, 10 IC etc). Similarly, if the taxpayer is continuing the option, then the details of filing such a prescribed form in an earlier year are also required to be given.
9. Disclosure for a person not opting for audit u/s 44AB:
Audit u/s 44AB is not mandatory for taxpayers with turnover between Rs. 1 crore to 10 Cr if the cash receipt and cash payment do not exceed 5%. Now, for the purpose of computing the limit of 5%, payment or receipt by cheque drawn on a bank or by a bank draft, which is not an account payee, shall be deemed to be the payment or receipt in cash only [FA-2021]. The old ITR Forms required the assessee to furnish the response regarding cash receipts and payments only. Now, the following additional disclosures are required regarding Audit Information:
(a) Whether total sales, turnover or gross receipt is between Rs. 1 Cr & Rs. 10 Cr? If not, is it below Rs. 1 Cr or exceeds Rs. 10 Cr?
(b) The new ITR forms require aggregation of receipts and payment in cash and non-account payee cheque or DD while computing the limit of 5% as mentioned above.
10. Residential Status:
In the new ITR, it is now mandatory to choose the suitable option in support of residential status in India. Few more options have been added to the ITR forms so as to ascertain the exact nature of the residential status of the taxpayers.
11. Disclosure of Deemed Dividend Separately:
Until last year, there was no separate disclosure of dividend income taxable u/s 2(22)(e) i.e., Deemed Dividend. Now, in the new ITR forms, dividend income taxable u/s 2(22)(e) has to be reported separately.
12. Capping the surcharge on dividend income:
In the case of individuals, HUF, AOP, BOI, or AJP, the surcharge on tax on dividend income is attracted @ 10% if it exceeds Rs. 50 lakh but does not exceed Rs. 1 Cr and @ 15% if it exceeds Rs. 1 crore. The consequential change has been done in Schedule Part B–TTI (Computation of tax liability on total income).
13. Exempt Income Disclosure:
The New ITR Form now requires disclosure of exempt income u/s 10(23FB), 10(23FBA), 10(23FC)/10(23FCA), etc. Earlier there was no need to make specific disclosure of the applicable section.
14. Disclosures in respect of Significant Economic Presence:
In the new ITR forms, the non-resident has to confirm if there is a Significant Economic Presence (SEP) in India or not. If there is a SEP in India, the details of the transactions & users are to be incorporated into the ITR Form.
The information in the database of the income tax department has increased drastically and so are the reporting requirements of the reporting in the ITR forms. Artificial intelligence is going to play a vital role in tax administration. Taxpayers need to be all the more careful and cautious while filing their income tax returns.
The taxpayers for whom the tax audit is not required have to file the income tax return of their income earned during the period of 1st April 2020 to 31st March 2021 on or before 31st July 2022 unless extended.
Losses incurred (other than house property loss) are not allowed to be carried forward in subsequent years. You cannot set off these losses against future gains if the return has not been filed within the due date. However, if there are losses under house property, carry forward of losses is permitted.
Interest on the delay of filing a return
If the taxpayer fails to file the ITR by the due date, then under section 234A penalty interest at the rate of 1% per month or part thereof is levied on the outstanding tax until the payment of tax.
Late filing fees u/s 234F
A late filing fee is applicable for filing your returns after the due date under Section 234F. The maximum penalty of Rs 5,000 will be levied if you file your ITR after the due date. However, there is a relief given to small taxpayers–if their total income does not exceed Rs 5 lakh, the maximum penalty levied for delay will be Rs 1000.
Delayed Refunds
If one is entitled to receive a refund from the government for excess taxes paid, he/she must file the returns before the due date to receive the refund at the earliest.
Prosecution–As per Section 276 CC
As per Section 276 CC, the income tax officer can initiate proceedings for prosecution if the person willfully fails to file a return, even after issuing notices. The imprisonment can be for a term of three months to two years with a fine. If the tax you owe to the income tax department is higher, the prosecution period may extend to seven years.
Filing of Income Tax Return – Section 139(1) of the Income Tax Act, 1961 prescribes the categories of the person who is required to file their return on or before the due date of filing return. Such a person includes:
1. A company or a firm
2. Any person other than a company or firm, if his total income during the previous year exceeds the maximum amount chargeable to the Income Tax.
In addition to the above, the following persons are also required to file income tax returns compulsorily as per clauses (i) to (iv) of the seventh proviso to section 139(1):
Clause
Compulsory filers category
Clause (i)
The person depositing Rs. 1 crore or more in one or more current accounts with a bank or co-operative bank
Clause (ii)
The person who has incurred expenditure on foreign travel for self or any other person exceeding Rs. 2 Lakhs
Clause (iii)
The person who has incurred expenditure exceeding Rs. 1 Lakh towards electricity consumption
Clause (iv)
The person who fulfills such other conditions as may be prescribed
The CBDT issued Notification No. 37/2022 dated 21st April 2022 by which a new Rule 12AB has been inserted referring to clause (iv) as above by which following persons have also been notified who shall be required to file their income tax return compulsorily:
Rule
Conditions for compulsory filing of ITR
12AB(i)
If the total sales, turnover or gross receipts in the business exceeds Rs. 60 Lakhs during the previous year
12AB (ii)
If the gross receipts from profession exceed Rs. 10 Lakhs during the previous year
12AB (iii)
If the aggregate of TDS/TCS during the previous year is Rs. 25,000 or more (Rs. 50,000 or more in the case of senior citizens),
12AB (iv)
If the deposits in one or more saving accounts in the aggregate are Rs. 50 Lakhs or more during the previous year.
The Maharashtra Authority of Advance Ruling (AAR) consisting of Rajib Magoo and T.R. Ramnani, has ruled that GST is not payable on fees collected towards training in respect of football, basketball, athletics, cricket, swimming, karate, and dance.
The association, M/s Navi Mumbai Sports Association, has constructed an international sports complex on land allotted by M/s CIDCO to it. The main aim and object of the association are to encourage and foster sports, and cultural and social activities. It also provides health and sports education.
The applicant association is regulated and managed by an elected body, i.e., the managing committee, which looks into the affairs of the association and makes policy decisions that aim at the promotion of sports, fellowship, and fitness for individuals, families, schools, institutions, and corporate bodies.
For the promotion of sports, annual camps are held to select talents and rigorous workouts are given to make them champions. Schools and colleges provide the association’s infrastructure for sports and competitions. For fellowship, it has affiliations with prestigious clubs across India and abroad for the benefit of its members. The sports complex is equipped with various facilities for achieving its objectives, which include indoor badminton, squash, table tennis courts, gym and health club, retiring rooms, football and cricket grounds, swimming pools, restaurants, conference halls, etc.
The applicant has sought an advance ruling on the issue of whether the amount collected by the applicant in respect of entrance/admission fees, which forms part of the corpus fund, annual subscription fees, and annual maintenance fees from its members is liable to GST.
Yet another issue raised was whether the amount/fees collected towards rendering training/coaching in recreational and sports activities are exempt from payment of GST under entry no.80 of notification 12/2017-CTR dated June 28, 2017.
As per Entry 80 of the notification 12/2017-CTR dated June 28, 2017, no GST is payable on the Services by way of training or coaching in recreational activities relating to arts or culture, or sports by charitable entities registered under section 12AA of the Income-tax Act.
The AAR observed that football, basketball, athletics, cricket, swimming, and karate are sports, and “dance” would be covered under the arts. However, physical fitness can not be considered a sport, art, or culture. Further, the term “summer coaching” is a general term that cannot cover sports, arts, or culture.
“We find that training and coaching in football, basketball, athletics, cricket, swimming, karate, and dance by the applicant would be covered under Entry No. 80 of notification 12/2017-CTR dated June 28, 2017, as amended, and “physical fitness” training and “summer coaching” are not covered under the said Entry No. 80 mentioned above.
Startup India Seed Fund Scheme (SISFS) provides financial assistance to startups for proof of concept, prototype development, product trials, market entry, and commercialization. Eligible startups can apply for the scheme on the Startup India portal. The Seed Fund will be disbursed to selected startups through eligible incubators across India.
How much seed funding can a startup receive under the scheme?
Seed Fund to an eligible startup by the incubator shall be disbursed as follows:
Up to Rs. 20 Lakhs as a grant for validation of Proof of Concept, prototype development, or product trials. The grant shall be disbursed in milestone-based installments. These milestones can be related to the development of prototypes, product testing, building a product ready for market launch, etc.
Up to Rs. 50 Lakhs of investment for market entry, commercialization, or scaling up through convertible debentures or debt or debt-linked instruments
A startup applicant can avail of seed support in the form of grants and debt/convertible debentures each once as per the guidelines of the scheme.
Can I apply for the scheme as an individual entrepreneur, or do I need a team?
Does the scheme support startups from specific sectors?
SISFS is a sector agnostic scheme, which means that startups from any sector can apply for the scheme. However, preference would be given to startups creating innovative solutions in sectors such as social impact, waste management, water management, financial inclusion, education, agriculture, food processing, biotechnology, healthcare, energy, mobility, defense, space, railways, oil and gas, textiles, etc. This list of sectors is indicative and not exhaustive.
Are there any minimum education qualification criteria for founders to apply for SISFS?
There is no minimum education qualification required for founders to apply for SISFS.
Are there any exemptions to any of the eligibility criteria?
No, there are no exemptions to any of the eligibility criteria. All the criteria must be met on the date of application submission.
What is a DPIIT-recognized startup?
An entity shall be considered a “Startup” –
If it’s incorporated as either a Private Limited Company or Registered Partnership Firm or Limited Liability Partnership. A sole proprietorship or a public limited company is not eligible for the startup
If it is up to 10 years from the date of its incorporation/ registration,
If its turnover for any of the financial years has not exceeded INR 100 crore
If it is working towards innovation, development, or improvement of products or processes or services, or if it is a scalable business model with a high potential for employment generation or wealth creation
Should not have been formed by splitting up or reconstructing a business already in existence.
Seed fund shall strictly not be used by startups for the creation of any facilities and shall be utilized for the purpose it has been granted for. A grant can be used for validation of Proof of Concept, prototype development, or product trials. A debt/ convertible debenture can be used for Market entry, commercialization, or scaling up.
Application Process
How can I apply to SISFS?
An online call for applications is hosted on an ongoing basis on the Startup India portal and will be opened soon. DPIIT-recognized startups can log in using the credentials used during the startup recognition process to apply for the scheme.
Is the SISFS application process completely online?
The application submission is completely online, and no physical submission of documents is required.
Is there a fee for applying to this scheme?
There are no application fees for the scheme. Even after the selection of a startup by an incubator for assistance under this scheme, the startup shall not be charged any fees. The incubator or any of its staff members shall not charge any fee in cash or in-kind from applicants or beneficiaries under the scheme for any process of selection, disbursement, incubation, or monitoring.
Why is the application form allowing me to apply to 3 incubators?
The scheme aims to maximize the chances of each startup applicant getting supported through seed funds. It also aims to give startups an opportunity to get supported by a relevant incubator that can give the necessary guidance to them. Thus, we give startups an option to apply to 3 different incubators according to their preference. For example, if incubators at Preference 1 and Preference 2 both select a startup, the funding shall be given by the Preference 1 incubator. If Preference 1 incubator rejects and Preference 2 incubator selects, the funding shall be given by the incubator at Preference 2, and so on.
How do I choose the incubators to apply to?
The incubator preference should be filled at the startup applicants’ discretion. Applicants can choose incubators basis their sector, stage, business needs, and strategic goals. Details of the incubators which are part of the scheme will be available on the Seed Fund Portal soon.
I can see an option to apply either for a grant or convertible debenture or loan instruments. What is the difference between these? How do I choose?
A grant and debt/convertible debenture are different financing instruments to cater to different startup needs. The following table can help an applicant startup decide which instrument shall suit their needs better. The final decision on this should be at the startup applicants’ discretion.
Parameter
Grant
Debt/Convertible Debenture
Stage
Ideation Stage
Commercialization & Scale-up stage
Need to be Catered by the fund
Validation of Proof of Concept, Prototype development, or Product trials
Market entry, commercialization, or scaling up
Max. funding amount
Up to Rs. 20 Lakhs
Upto Rs. 50 Lakhs
Financing Terms
Under this scheme, the grant will be disbursed in milestone-based installments. These milestones can be related to the development of prototypes, product testing, building a product ready for market launch, etc.
For startups being supported through convertible debentures, debt, or debt-linked instruments, funds shall be provided at a rate of interest of not more than the prevailing repo rate. The tenure should be fixed at the time of sanctioning the loan by the incubator, which shall be not more than 60 months (5 years). A moratorium of up to 12 months may be provided for the startups. Because of the early stage of the startups, this shall be unsecured and no guarantee from the promoter or third party will be required.
What are the terms and conditions of seed fund under the scheme?
Is the information provided by me in the application form kept confidential? – Startup India Seed Fund Scheme
We maintain the confidentiality of all the proposals we receive under the scheme. I only shared your application with the incubators you apply to for the purpose of evaluation, and with the EAC for the purpose of monitoring.
Do I need to be physically present at an incubator’s premises to avail of seed funds under this scheme?
To apply for the scheme, it is not mandatory to be physically present at the incubator’s location. For startups being monitored virtually by the incubator, it is required for both parties to touch base every 30 days. This is to ensure that an incubator will be able to keep a check on the progress of the startup and a startup will take guidance for their business from the incubator.
Can I apply to the Startup India Seed Fund Scheme again after receiving a rejection?
Yes, you can apply to the SISFS again after 3 months of receiving a rejection. This buffer time is given to ensure that you have worked on the feedback received from incubators and are ready to be considered again.
Evaluation Process
Who is going to review my application?
The application of each startup will be reviewed by an Incubator Seed Management Committee (ISMC) formed by the incubators you apply to. The committee will also be responsible for future assessment of the performance of the startup and disbursement of further tranches. Each ISMC constitutes of the following members:
Nominee of Incubator (Chairman)
A representative from the State Government’s Startup Nodal Team
A representative of a Venture Capital Fund or Angel Network
A domain expert from the industry
A domain expert from academia
Two successful Entrepreneurs
Any other relevant stakeholder
What are the parameters for the evaluation of startup applicants?
Criteria
Details
Is there a need for this Idea?
Market size, what market gap is it filling, does it solve a real-world problem?
Feasibility
Feasibility and reasonability of the technical claims, the methodology used/ to be used for PoC and validation, a roadmap for product development
Potential Impact
Customer demographic & the technology’s effect on these, national importance (if any)
Novelty
USP of the technology, associated IP
Team
Strength of the team, Technical and business expertise
Fund Utilization Plan
Roadmap of money utilization
Additional Parameters
Any additional parameters considered appropriate by the incubator
Presentation
Overall assessment
What is the process of evaluation?
The startups shall be selected through an open, transparent, and fair process, comprising, inter-alia:
Startups submit their application on the Startup India portal and an email confirmation is shared with them. Applicants can apply for seed funds to any three incubators selected as disbursing partners for this scheme in order of their preference.
All applications received will be shared online with respective incubators for further evaluation.
For all incomplete applications, a prompt for resubmission will be sent to the startup.
The incubators shall shortlist applicants as per eligibility criteria
Eligible applications will be evaluated by Incubator Seed Management Committee (ISMC) using the following criteria:
Criteria
Details
Weightage (%)
1
Is there a need for this Idea?
Market size, what market gap is it filling, does it solve a real-world problem?
p
2
Feasibility
Feasibility and reasonability of the technical claims, methodology used/ to be used for PoC and validation, roadmap for product development
q
3
Potential Impact
Customer demographic & the technology’s effect on these, national importance (if any)
r
4
Novelty
USP of the technology, associated IP
s
5
Team
Strength of the team, Technical and business expertise
t
6
Fund Utilization Plan
Roadmap of money utilization
u
7
Additional Parameters
Any additional parameters considered appropriate by the incubator
v
8
Presentation
USP of the technology, associated IP
Overall assessment
100%
The incubator may shortlist applicants based on their evaluation for a presentation before ISMC
ISMC shall evaluate applicants based on their submissions and presentations and select startups for Seed Fund within 45 days of receipt of the application
Selected startups shall receive seed funding under the respective incubator that selects them as beneficiaries as per their preference shared during application (for example, if incubators at Preference 1 and Preference 2 both select a startup, the funding shall be given by the Preference 1 incubator. If Preference 1 incubator rejects and Preference 2 incubator selects, the funding shall be given by the incubator at Preference 2, and so on.)
All applicants will be able to track the progress of their application on the Startup India portal on a real-time basis
Applicants who are rejected will also be notified through email.
How much time will it take for my application to get processed?
After the receipt of the application, each Incubator shall evaluate applicants based on their submissions and presentations and select startups for the Seed Fund within 45 days.
How can I track the status of my application?
Once the startup has submitted its seed fund scheme application, a dashboard can be accessed using their login credential to check the real-time application status.
After Selection of Startups
I had filled the order of preference for incubators while applying. Can I change this preference order after the application?
Applications once filled and submitted are final. The preference order of the incubator cannot be changed at a later stage.
I have been selected for a seed fund, but the quantum of fund/ terms and conditions being set by the incubator are not agreeable to me. What should I do?
I need to hire a legal or financial consultant for my seed fund discussions with the incubator. Who will bear the cost of these services?
The startup shall bear the cost of any consultants required to guide them through documentation, negotiations with incubator, signing of the agreement with incubator, reporting progress after approval of seed fund, etc. Hiring such an external consultant is not mandatory at all, and shall be at the discretion of the startup.
I have been selected for a seed fund. Is it mandatory to sign a legal agreement with the incubator?
Yes, it is mandatory to sign a legal agreement with the incubator to avail of the seed fund you have been granted.
I had applied for a certain amount of seed fund, but the approved amount is lower/higher. Can I negotiate this?
The applicant can discuss the quantum of the seed funds and the milestones associated with the tranches to be disbursed by the Incubator Seed Management Committee. The decision of the Committee shall be final.
Will my living expenses be borne if I want to be physically incubated at the incubator that is funding me?
The selected incubator shall provide physical infrastructure to the selected startups for regular functioning, support for testing and validating ideas, mentoring for prototype or product development or commercialization, and developing capacities in finance, human resources, legal compliances, and other functions. They are also expected to provide networking with investors and opportunities for showcasing at various national and international events. Any other expenses, including living expenses, shall be borne by the startup.
How much time will it take for the first installment of the seed fund to be released to me?
For grants, the first installment to any selected startup shall be released not more than 60 days from receipt of application from the startup. The startup shall submit the interim progress update and utilization certificate to initiate the release of a subsequent installment of the grant. For debt or convertible debentures, a similar timeline will be aimed, but it is understood that due diligence and documentation in these cases can be sometimes time-consuming.
Where can I receive the seed funds?
Startups will receive the funds in their company bank accounts.
How often do I have to report back on my progress after receiving a seed fund?
Each startup will be required to touch base with the incubator team and share updates with them at least once in 15 days via videoconferences or physical meetings. These updates should be shared on the scheme dashboard, at least on a monthly basis. In the case of milestone-based disbursements, the startup shall submit the interim progress update and utilization certificate to initiate the release of a subsequent installment of the grant. The startup shall also submit the final report and audited utilization certificate at the end of the project’s duration.
I have been selected for a seed fund, but I would not like to take the process forward. What do I do?
A startup can choose to not avail of the support being offered to them under the scheme. The procedure for the same depends on the stage of the startup in the application process.
If the startup has been selected and the seed funding has been approved, they will be required to write a short letter mentioning the reason to pull out of the process. Post the acknowledgment of the letter, they will find a cancel application button on the application tracker tab of their dashboard, which will allow them to cancel their application.
If the startup has already received any seed fund, it will be required to write a short letter mentioning the reason to pull out of the process. Post acknowledgment of the letter, they will be required to return the fund within 15 days. Post the acknowledgment of the refund, they will find a cancel application button on the application tracker tab of their dashboard.
What if my startup fails after receiving the seed fund? Will there be any liability on me or my company?
It is understood that every startup cannot be successful. The legal agreement that you sign with the incubator will have provisions related to the failure of startups supported under the scheme. For failed ventures, the entrepreneur shall share his/her learnings and the reasons for failure in the report and submit this, along with the utilization certificate for the fund amount.
