Reporting of GAAR and GST in tax audit report deferred

The amended tax audit report form notified on 20 July 2018 included clauses pertaining to, among other things, the general anti-avoidance rule (GAAR) (ie, the disclosure of impermissible avoidance arrangements) and goods and services tax (GST) (ie, the break up of expenditure into that from GST-registered entities and entities not registered under GST).

Owing to several representations, the above reporting requirements have been deferred for tax audit reports furnished on or before 31 March 2019.(1)

Valuation rules for conversion or treatment of inventory as capital assets

In the case of inventory converted into or treated as capital assets, the fair market value (FMV) of the inventory on the date of such conversion or treatment will be subject to income tax as profits and gains from the business or profession.(2) For the purpose of determining the FMV, the CBDT has prescribed Rule 11UAB, which is summarised below.

Type of inventory

Determination of FMV

Immovable property (ie, land, buildings or both)

Value adopted, assessed or assessable by any central or state government for the purpose of paying stamp duty.

Jewellery, archaeological collections, drawings, paintings, sculptures, works of art, shares or securities

Value determined as per Rule 11UA:

  • Shares – the transaction value on a stock exchange, the book value or as per the discounted free cash-flow method.
  • Others – invoice value or open market price or price such property would fetch upon its sale in the open market.

Other

The price such property would fetch upon its sale in the open market.

Draft rules for permanent account number applications

Section 139A of the IT Act requires a resident person (other than an individual) entering into a financial transaction exceeding Rs250,000 to apply for a permanent account number (PAN).(3) Further, managing directors, directors, partners and trustees of such person must also apply for a PAN. To give effect to this requirement, the CBDT has issued a draft notification proposing amendments to Rule 114 dealing with procedural requirements. It provides that PAN applications should be made by the 31 May immediately following the financial year in which such financial transaction was entered into.

Immunity from penalty for under-reporting income

Until fiscal year 2016-17, penalties could be levied under Section 271(1)(c) of the IT Act for concealing income or providing inaccurate particulars.(4) With effect from fiscal year 2017-18, the new Section 270A of the IT Act provides a penalty for under-reporting or misreporting income. In parallel, the new Section 270AA of the IT Act grants immunity from the penalty for under-reporting if certain conditions are met.

However, concerns have arisen over taxpayers applying for immunity from the penalty levied under Section 270A of the IT Act where a previous penalty was awarded under Section 271(1)(c) of the act based on the same issue. In such situations, the tax authorities may argue that the taxpayer had previously acknowledged the issue by seeking immunity under Section 270AA of the act and thus may take an adverse view in the penalty proceedings under Section 271(1)(c) of the IT Act. The CBDT has clarified that an application for immunity will not prevent the taxpayer from contesting the same issue for previous assessment years. The tax authorities cannot take an adverse view in penalty proceedings under Section 271(1)(c) merely because immunity under Section 270AA of the IT Act is preferred.

Deduction for free trade zone undertakings

Section 10A of the IT Act sets out a deduction for profits and gains derived from exports.(5) This deduction is calculated in proportion to the undertaking's export turnover versus its total turnover. The following are excluded from an undertaking's export turnover:

  • freight;
  • telecoms charges;
  • insurance attributable to the delivery of articles or items outside India; and
  • expenses incurred while providing technical services outside India.

In relation to the controversy of whether these charges or expenses can also be excluded from an undertaking's total turnover, the CBDT has clarified in the affirmative following a Supreme Court judgment.

E-assessments

To reduce human involvement, the CBDT has mandated that assessments be conducted electronically for the 2018-19, except:(6)

  • where an assessment is made following a search and seizure, income escaping assessment or best judgement assessment;
  • for set aside assessments;
  • for assessments in non-PAN cases;
  • where paper or hard copy tax returns have been filed and the taxpayer has no e-filing account;
  • in specified places with limited bandwidth;
  • where a substantial hearing has already taken place through conventional means; and
  • where, due to exceptional circumstances, conventional means of assessment have been permitted by a jurisdictional commissioner.

Further, during the course of e-proceedings, personal hearings may take place and be attended in the following situations, subject to the details of these meetings subsequently being uploaded online:

  • examinations of books of accounts;
  • cases where a tax officer issues a summons to enquire or investigate an issue;
  • witness examinations by the taxpayer or tax officer; and
  • cases where a taxpayer has requested a personal hearing through an e-filing account following a tax officer issuing a show cause notice proposing an adverse view.

?Amendment pertaining to filing appeals by department

With the objective of reducing litigation, the CBDT issued Circular 3 on 11 July 2018 restricting the filing of appeals before the Tax Tribunal, the high courts and the Supreme Court where the tax effect is less than the prescribed monetary limits.(7) Further, Paragraph 10 of the circular provides for an exception whereby appeals against adverse judgments can be filed on the merits. The CBDT has further amended Paragraph 10 to cover the following instances in the list of exceptions:

  • cases where the addition relates to undisclosed foreign income;
  • cases where the addition is based on information received from law enforcement agencies (eg, the Central Bureau of Investigation, the Directorate of Enforcement, the Directorate of Revenue Intelligence, the Serious Fraud Investigation Office or the Directorate General of GST Intelligence); and
  • cases where the tax authorities have filed a prosecution and this is pending in the court.

For further information on this topic please contact Pranay Bhatia at BDO in India by telephone (+91 22 3332 1600) or email (pranaybhatia@bdo.in). The BDO in India website can be accessed at www.bdo.in.

Endnotes

(1) Circular 6/2018 [F 370142/9/2018-TPL], 17 August 2018.

(2) Notification SO 4213(E), 42/2018 (F 370142/05/2018-TPL), 30 August 2018.

(3) Press release (F 370142/40/2016-TPL)], 31 August 2018.

(4) Circular 5/2018 (F 370149/155/2018-TPL), 16 August 2018.

(5) Circular 4/2018 (F 279/MISC/140/2015/ITJ), 14 August 2018.

(6) Instruction 3/2018 (225/249/2018-ITA II), 20 August 2018.

(7) Letter [F 279/MISC 142/2007-ITJ (PT)], 20 August 2018.

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