An income tax tribunal has barred auditors from issuing valuation certificates to the companies they are auditing. This is set to impact several tax disputes around valuations in companies including angel tax disputes involving start-ups.
The Bangalore Income Tax Appellate Tribunal (ITAT) said that auditors of a company cannot double up as accountants especially in situations while dealing with “share valuation for the purpose of excess share-premium taxability.”
In several cases the income tax department has disputed valuations of companies around the time of investments.
The ITAT ruling came in a case where the tax department had challenged valuation of a company by its auditor.
In most cases, valuations of startups were challenged by the tax department, leading to “angel tax.” The angel tax controversy surrounds the valuations during various rounds of startup funding. In several cases, the revenues at startups kept reducing or remained stagnant, but their valuations increased. The taxman is questioning the premiums paid by the investors and wants to categorise them as income that would be taxable at 30%. In most cases, the investments made by angel investors, venture capital funds or any other investor have been challenged by the taxman.
Many accountants and valuers are already facing heat from the tax department. ET had, on December 25, reported that the tax department has started issuing show-cause notices to valuation experts, questioning the premiums several startups fetched during their investments rounds.
Valuation experts, however, say that they merely projected and calculated future growth, using the facts and figures provided by the startups. Many tax experts point out that the tax department’s approach to the fair value as a benchmark for calculating premiums may not be accurate in the context of startups.
Income tax officers claim that the scrutiny on startups is mainly due to concerns that black money may have changed hands.
The Tribunal, while considering an appeal filed by the assessee-Company, held that the auditors of a company cannot double up as accountants especially in situations while dealing with “share valuation for the purpose of excess share-premium taxability.”
The Assessing Officer, while completing assessment against the assessee, had noted that the person who is said to have valued the share of the assessee company as on 15.11.2013 and 02.05.2014 respectively is none other than the person who has signed the Audit report under section 44AB of the Income Tax Act.
He further ignored the valuation report submitted by the assessee because the same is not as per Rule 11UA and therefore, determined the fair market value on the basis of NAV.
The Tribunal noted that the purposes of sub-rule (2) of rule 11UA, the auditor cannot be an accountant for the purposes of Rule 11UA (2).
Dismissing the appeal, the Tribunal held that “the AO has worked out the fair market value of assessee company at Rs. 714.38/- on the basis of NAV in the absence of any valuation report of any valuer who can be accepted as an Accountant as per Rule 11U(a) and taxed the excess amount of premium received by assessee over and above the permissible amount at Rs. 714.38/- per share in respect of 36957 shares and taxed the excess amount received of Rs. 1,32,29,088/- u/s. 56(2)(viib) of IT Act.
In the facts of the present case, I find no reason to interfere in the order of CIT(A) on this issue in this year also.” Before concluding, the Tribunal also held that “when an auditor cannot be accepted as an accountant for the purposes of Rule 11UA (2) read with Rule 11U(a), there is no option available to the AO but to accept the earlier report in A. Y. 2014 – 15 valuing the shares at Rs.100/- per share instead of Rs. 400/- per share as per a certificate by the auditor who cannot be accepted as an accountant for the purposes of Rule 11UA (2) read with Rule 11U(a), and adopt NAV method in A. Y. 2015 – 16.
This is very important to note that when a Chartered Accountant who can be accepted as an Accountant as per Rule 11UA (2) read with Rule 11U(a) certifies the value, the value certified as on 02.02.2012 is Rs. 100/- per share and when the auditor certifies such value on 15.11.2013 (just after 21 months approx), the value certified rises four times to Rs. 400/- per share.
These facts also suggest that such restriction as per Rule 11U(a) on the auditor’s acceptance as Accountant for the purposes of Rule 11UA (2) is well founded.”
Earlier, there were reports that the tax department has started issuing show-cause notices to valuation experts, questioning the premiums several startups fetched during their investments rounds.
With a view to promoting cashless transactions, the Central Board of Direct Taxes ( CBDT ) has issued an advisory on its official website regarding cash transactions over and above the prescribed limits specified under the law.
The advisory issued by the Board remind the taxpayers to not accept cash of two lakh or more in aggregate from a single person in a day or for one or more transactions relating to one event or occasion.
One of the major steps introduced by the Government after the demonetization was to restrict cash transaction above Rs. 2 lakh rupees.
Under the Finance Act, 2017, the amounts in excess of Rs. 20,000 or more shall be received or repaid in cash for transfer of Immovable Property and amount more than Rs. 10,000/- in cash relating to the expenditure of business/profession was also banned.
Further, amount in excess of Rs. 2,000/- in cash cannot be donated to a registered trust /political party.
The department further reminded that the contravention may result in the levy of tax/ penalty.
The CBDT advisory said that any payment made in cash on account of the premium on health insurance facilities is not allowable as a deduction under section 80D of the Income Tax Act.
“Any information regarding black money including information about undisclosed income/ assets (both in India as well as abroad) and Benami transactions can be given to the jurisdictional Director General/ Pr. General of Income Tax (Investigation),” it said.
The CBDT has recently announced a new scheme called Income Tax Informants Rewards Scheme 2018 through which the department will reward up to 5 crore rupees to informants.
The scheme regulates grant and payment of reward to a person who is an informant under this scheme.
Also, the Benami Transactions Informants Reward Scheme 2018 has been announced for regulating grant for informants giving information relating to benami property actionable under Prohibition of Benami Property Transactions Act, 1988, as amended by Benami Transactions (Prohibition) Amendment Act, 2016.
Amid SEBI banning as many as 239 entities for alleged money laundering, taxation consultancy PwC has called for a three-year locking-in for the entire pre-listing capital held by promoters to curb tax evasion and other illegal activities through market platforms.
The agency has called for imposing a similar lock-in even for preferential allotments, as prescribed under the capital and disclosure requirement (ICDR) norms so that only serious investors access the market. The PwC report is part of a BSE-mandated review of SME listing process.
The premier bourse last week said that 100 entities were trading on its SME platform. The regulator Securities and Exchange Board (SEBI) on June 29 banned four publicly traded SMEs and 235 other related entities for alledgely misusing the exchange’s platform for money laundering and tax evasion.
The SEBI, in an interim order alleged that these entities made Rs 614 crore in illegal gains through suspected money laundering and tax evasion activities. The four companies banned are EcoFriendly Food Processing Park, Esteem Bio Organic Food Processing, Channel Nine Entertainment and HPC Biosciences. These are traded on the BSE SME Platform.
“The institutional trading platform (ITP) could be utilised as a tool for tax planning by staying invested in an SME for a period more than 12 months and exiting at a very high stock price thereby making huge gains with no tax liability,” PwC said in the report.
Accordingly, the report has suggested that the entire pre-listing capital held by promoters should be locked in for three years as “such restrictive conditions would discourage people from accessing the platform only for tax planning”. The BSE had launched ITP for its SME platform to facilitate start-ups and other SMEs to list without the mandatory IPO process which is time-consuming and capital intensive that small companies can hardly afford.
According to PTI, in addition to allowing SMEs and start-up companies to raise capital, the BSE SME platrfom also provides easier entry and exit options for informed investors like angel investors, venture capitalists and private equity players, apart from offering better visibility and wider investor base and tax benefits to long-term investors.
Meanwhile, the report also called for a reduction in trading lot size and shorter interval for review of lot size after many SMEs, merchant bankers and market-makers cited this as a disincentive for entering the market. The report said market participants want the timeframe to review the lot size to be reduced from the current six months and lower the trading lot requirement of Rs 1 lakh to attract retail investors to the segment.
As SEBI continues to make business easier, it is important SMEs do not eye illegal gains through suspected money laundering and tax evasion activities.
India’s capital market regulator has proposed amendments to tighten laws governing auditors and other third-party individuals hired by listed companies for auditing financial results, among other things.
The Kotak Committee, formed to come up with proposals for improving corporate governance, last year recommended that the Securities and Exchange Board of India (SEBI) should have clear powers to act against auditors and other third-party individuals or firms with statutory duties under the securities law.
Auditing lapses have caused several frauds to go unnoticed for years and the capital market regulator has had no direct control on the auditing firms.
SEBI has proposed giving the board of directors of the company the authority to take appropriate action after conducting an investigation against the individual or firm that violates any regulations or submits a false certificate or report.
The proposed changes come months after Punjab National Bank, India’s second largest state-run lender, stunned markets after uncovering a $2 billion loan fraud that had gone undetected for years.
Merchant bankers, credit rating agencies, custodians, among others, are registered and regulated by SEBI but chartered accountants, company secretaries, valuers and monitoring agencies do not come under any direct regulators.
The amendments would mean auditors must ensure certificates or reports issued by them are true in all material respects and they must exercise all due care, skill and diligence with respect to all processes involved in issuance of the report or certificate.
The auditors would be responsible to report in writing to the audit committee of the listed company or the compliance officer on any violation of the securities law they noticed.
In January, SEBI barred Price Waterhouse from auditing listed companies in India for two years after an investigation into a nearly decade-old accounting fraud case in a software services company that became India’s biggest corporate scandal.
SEBI has sought feedback and comments on the draft regulations over the next 30 days.
ICAI have launched Unique Document Identification Number (UDIN) facility which is a unique number, which will be generated by the system for every document certified/ attested by a Chartered Accountant and registered with the UDIN portal available at https://udin.icai.org/ with effect from 1st July 2018.
It has been noticed that financial statements and documents were being certified/attested by third persons, in lieu of Chartered Accountants. As these statements are being relied upon by the authorities as true statements and certificates, UDIN can be generated by a practicing CA by registering his/her documents/ certificates on UDIN Portal for verification.
A practicing Chartered Accountant can generate a UDIN for certificate/ document attested by him either in individual capacity or as a partner.
At present, this facility is recommendatory. But ICAI is mulling to make the same compulsory in near future, so as to curb the menace of fake or forged documents.
No change is possible in the data already registered by a Chartered Accountant in the online system. Therefore, members are requested to thoroughly check the details in preview option before submission of their application.
Information filled in can be edited/ modified any number of times before the submission. But once it is submitted, it cannot be edited.
The UDIN once generated can be withdrawn or cancelled with narration. Hence if any user search for this UDIN, appropriate narration indicated by Member with the date of revoke will be displayed for reference.
The income tax (I-T) has barred all Chartered Accountants (CAs) from valuing shares of closely-held companies.
Earlier, the fair market value of unlisted equity shares was calculated at the option of the company on either the book value on the valuation date or by the discounted cash flow method. Calculated by a merchant banker or a CA.
However, the Central Board of Direct Taxes has removed the CAs from the list of authorised professionals in this regard. From Thursday, only a merchant banker may do this. This change brings this provision at par with Rule 3 of the I-T Act, which says only a merchant banker may calculate the value of unlisted shares issued under Employee Stock Ownership schemes.
Interestingly valuation of shares may still be done by CAs under the Companies Act.
So, unlisted shares or unlisted companies may be sold or valued by a CA’s valuation but, for I-T purposes, it will require a merchant banker’s valuation report.
It is expected that the government is considering a qualifying course for valuation; only those who clear it may do valuation.
The use of the internet has undergone rapid evolution in a matter of a few decades.
In the 1990s, the internet was described as “a wide-area hypermedia information retrieval initiative aiming to give universal access to a large universe of documents” or simply put, ‘The Internet of Information’ which was primarily used to access data resources and services administered on the web browsers.
Back then, no one would have thought how it would fundamentally change our daily lives in the future. It has rapidly evolved from a platform to gather information to a space where we can shop, bank and communicate. The digital revolution has made the world realise the value of the internet and its implementations.
So, today we are gradually moving towards what Canadian strategist Don Tapscott calls ‘The Internet of Value’; that is the fountainhead of digital assets. Blockchain, which allows us to enable the exchange of any asset across the globe in real-time, ranging from stocks and bonds to music and art, is the next inevitable step in the global progress towards ‘The Internet of Value’.
Various applications of the internet have been made possible which are efficient like peer-to-peer money transfer, because internet reduces the transactional and communication cost to a bare minimum. This is the same force driving the new platforms that have emerged to deliver goods and services at levels of efficiency previously unimaginable, and blockchain is leading the revolution in redefining the new-age internet.
Like a traditional ledger, blockchain is essentially a record of transactions. These transactions can be any movement of money, goods or secure data — for example, a purchase at a supermarket, or the assignment of an Aadhar number. It works in three basic steps. First, it gathers data that the user has provided in forms of smart contracts, transactions IDs. Second, it orders the received data into blocks and finally chains them together securely using cryptography making it decentralised and accessible via any computer/mobile device across the network.
Now the question here is why do we need it? What is it that will change the way groceries are bought, stocks are purchased, money is transferred, bills are paid, and land deeds are made? The answer possibly can be the demand for trust and security emerging from both people and enterprises alike. Blockchain best serves these purposes as the trust factor is native to the medium. For example, if you are transferring money online to your friend, then your medium becomes the internet and to secure your transfer, a clever programming code is written. The same concept is applied by blockchain, but the security is made more secure by cryptography.
Blockchain has the potential and can be implemented across diverse sectors such as banking, education, and health. For instance, we keep our savings, assets and cash with banks because they are trustworthy and secure. However, their data is centralised, making them quite prone to cybercriminals that can bring the entire banking system to a halt. Now consider a person working abroad who wants to send a remittance to his family back home but has to encounter multiple clearances before his family receives it. With blockchain technology, the concept of crypto currency comes into picture, thus resulting in an open-access registry of monetary flows which makes the intermediation of financial institutions unnecessary and even costs less.
Second, in the field of healthcare, while big data analytics and artificial intelligence are simplifying healthcare delivery by smartly diagnosing the diseases from the patterns of numerous plugged-in electrocardiograms, blockchain is turning out to be a perfect platform for recording the medical attention of a patient and identifying a trend from the data recorded. Consider health card: A database which can be perceived as your health identity as it carries your entire medical history. Such technologies can find effective application in reducing information asymmetries within the healthcare and insurance markets by providing the most accurate data on patients.
Finally, blockchain can reorient the education system by delivering academic transparency. It can build an e-portfolio of academic credentials which has your test scores since the day you entered school. Paying for school fee in crypto currency — which is decentralised — from anywhere around the world on a secured network is commendable. Hence, this multi-trillion-dollar industry of education is indeed revolutionising.
Also, if implemented in government operations, blockchain will help break down barriers built from bureaucracy and corruption by providing a means to bypass existing power structures. It could be used to transform the way charities are created and regulated. By implementing a transparent system of transactions that include deposits of cash, transfers of donation and expenses spending will bring about a paradigm shift on how rules are enforced for these organisations.
Moreover, this technology has the competence to revamp the present system by automating manual processes, eradicating frauds and controlling the issues for authorisation. Its implementation across diverse sectors can be a solution to the most foundational problems of mankind. Hence, blockchain could be the perfect platform to transform a knowledge-driven economy into a digital-inclusive society.