Auditors barred from putting a value on companies they are auditing

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.

ITAT Ruling

CBDT warns Cash Transactions above Permissible Limits

CBDT warns Cash Transactions above Permissible Limits

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.

World Bank projects India’s FY19 GDP growth at 7.3%

The World Bank’s biannual publication, India Development Update: India’s Growth Story, expects the economy to clock a growth rate of 6.7 per cent in the current fiscal ending March 31.

The World Bank today projected India’s GDP growth at 7.3 per cent for the next financial year and accelerate further to 7.5 per cent in 2019-20.

The World Bank’s biannual publication, India Development Update: India’s Growth Story, expects the economy to clock a growth rate of 6.7 per cent in the current fiscal ending March 31.

The report, however, observed that a growth of over 8 per cent will require “continued reform and a widening of their scope” aimed at resolving issues related to credit and investment, and enhancing competitiveness of exports.

“The Indian economy is likely to recover from the impact of demonetisation and the GST, and growth should revert slowly to a level consistent with its proximate factors — that is, to about 7.5 per cent a year,” the report said.

 In November 2016, the government had scrapped high value currency notes of Rs 500 and Rs 1,000 in a bid to check black money, among others.

Later, India implemented its biggest indirect tax reform — Goods and Services Tax (GST).

Both of these initiatives had impacted the economic activities in the country in short run.

India’s economic growth had slipped to a three year low of 5.7 per cent in April-June quarter of the current fiscal, though it recovered in the subsequent quarters.

The economy is expected to grow at 6.6 per cent in the current fiscal ending March 31, as per the second advanced estimates of the Central Statistics Office (CSO), compared to 7.1 per cent in 2016-17. The earlier estimate was 6.5 per cent.

The Economic Survey tabled in Parliament has projected a growth rate of 7 to 7.5 per cent in the 2018-19 financial year.

The World Bank report further said that accelerating the growth rate will also require continued integration into global economy.

It pitches for making growth more inclusive and enhancing the effectiveness of the Indian public sector.



Shell companies crackdown: Govt removes exemptions from ITR filing

The Union Budget 2018-19 has rationalised the I-T Act provision relating to prosecution for failure to furnish returns.

Seeking to crackdown on shell companies, the government has proposed to remove exemption available to firms with tax liability of up to Rs 3,000 from filing I-T returns beginning next fiscal.

The Union Budget 2018-19 has rationalised the I-T Act provision relating to prosecution for failure to furnish returns.

Thus, a managing director or a director in charge of the company during a particular financial year could be liable for prosecution in case of any lapse in filing I-T returns for any financial year beginning April 1.

“The income tax departments would now track investments by these companies. Also, the focus will be on those firms that show less profit and also those who file I-T returns for the first time,” a senior finance ministry official said.

There are around 12 lakh active companies in the country, out of which about 7 lakh are filing their returns, including annual audited report, with the ministry of corporate affairs. Of this, about 3 lakh companies show ‘nil’ income.

The Section 276CC of the Income Tax Act provided that if a person wilfully fails to furnish in due time the return of income, he shall be punishable with imprisonment and fine.

However, no prosecution could be initiated if the tax liability of an assessee does not exceed Rs 3,000.

The government has amended the provision with effect from April 1, 2018 and removed the exemption available to companies.

“In order to prevent abuse of the said proviso by shell companies or by companies holding benami properties, it is proposed to amend the provisions… so as to provide that the said sub-clause shall not apply in respect of a company,” it said.

The official said that as many as 5 lakh are companies not filing returns and they could be a potential source of money laundering. “These could be small firms which are engaged in honest business, but there could be some which are a potential threat. We have to look into the data.”

Nangia & Co Managing Partner Rakesh Nangia said though the amendment has been brought about to prevent abuse by shell companies/benami properties, checks similar to those placed in the law for invoking GAAR, should be in place to avoid genuine hardship.

“Though the taxman may be driven by compulsions to ensure proper tax compliance, care must be taken while taking such action. In most developing countries, prosecution for tax matters is applied only in cases of serious tax frauds and not in general compliance matters,” Nangia said.

The Budget announcement follows the recommendation of the task force on shell companies, which was set up in February last year.

In the government’s fight against black money, shell companies have come to the fore as they are seen as potential for money laundering.

Till the end of December 2017, over 2.26 lakh companies were deregistered by the MCA for various non-compliances and being inactive for long.

Shell companies are characterised by nominal paid-up capital, high reserves and surplus on account of receipt of high share premium, investment in unlisted companies, no dividend income and high cash in hand.

Also, private companies as majority shareholders, low turnover and operating income, nominal expenses, nominal statutory payments and stock in trade, minimum fixed asset are some of the other characteristics.

Since last year, the Central Board of Direct Taxes (CBDT) — the apex policy making body of the I-T department — has been sharing with the MCA specific information like PAN data of corporates, Income Tax returns (ITRs), audit reports and statement of financial transactions (SFT) received from banks.


Source: Times of India

Investment in participatory notes hits 6-month high of Rs.1.5 lakh cr in December

According to SEBI data, the total value of P-note investments in Indian markets – equity, debt, and derivatives – increased to ₹1,52,243 crore at December-end from ₹1,28,639 crore at the end of November.

Investments in domestic capital markets through participatory notes (P-notes) surged to a six-month high of over ₹1.5 lakh crore at December-end despite stringent norms put in place by regulator SEBI to check their misuse.

P-notes are issued by registered foreign portfolio investors to overseas investors who wish to be part of Indian stock markets without registering themselves directly. They, however, need to go through a proper due diligence process.

According to SEBI data, the total value of P-note investments in Indian markets – equity, debt, and derivatives – increased to ₹1,52,243 crore at December-end from ₹1,28,639 crore at the end of November.

This is the highest level since June when the cumulative value of such investments stood at ₹1.65 lakh crore.

Of the total investments in November, P-note holdings in equities were at ₹1.2 lakh crore and the remaining in debt and derivatives markets.

Besides, the quantum of FPI investments via P-notes surged to 4.6% during the period under review from 4% in the preceding month.

Prior to the recent surge, P-note investments were on a decline since June and hit an over eight-year low in September. However, these investments slightly rose in October but fell in November.

These declines could be attributed to several measures taken by markets regulator Sebi to stop the misuse of the controversy-ridden participatory notes.

In July, SEBI notified stricter P-notes norms stipulating a fee of $1,000 that would be levied on each instrument to check any misuse for channelising black money.

Also, SEBI prohibited FPIs from issuing such notes where the underlying asset is a derivative, except those which are used for hedging purposes.

The move was a follow-through of the SEBI board’s approval of a relevant proposal in June. These measures were an outcome of a slew of other steps taken by the regulator in the recent past.

In April, SEBI had barred resident Indians, NRIs and entities owned by them from making the investment through P- notes.

The decision was part of efforts to strengthen the regulatory framework for P-notes, which have been long seen as being possibly misused for routing black money from abroad.

Here’s why India has decided to crank up its crackdown against Bitcoins

I-T department issues notices to 4 lakh high networth individuals across the country who were trading in bitcoins on exchanges

Here’s why India has decided to crank up its crackdown against Bitcoins

The rising craze for bitcoin, a cryptocurrency that has rocketed to shocking highs, has come under the government’s lens. Bitcoin can be an easy way to evade tax or snare unsuspecting small investors in ponzi schemes. The government has begun a crackdown on illegal uses of this unregulated virtual currency.

Widening its probe into bitcoin investments and trade, the Income Tax (IT) department is set to issue notices to 4 to 5 lakh high networth individuals (HNI) across the country who were trading on the exchanges of this unregulated virtual currency, the PTI reported.

The move comes after the IT department conducted survey operations last week at major bitcoin exchanges across the country on suspicion of alleged tax evasion. These operations were undertaken for gathering evidence for establishing the identity of investors and traders, the transaction undertaken by them, identity of counter-parties and related bank accounts.Earlier this month, there was a spurt in the value of bitcoin. It rose from under $10,000 at the start of the year to close to $20,000, before a sharp 20 per cent plunge within hours.

In addition to financial risks—the value of bitcoins has seen huge falls within hours—the regulators are worried about their use for illicit and illegal activities, subjecting the users to an unintentional breach of laws against money laundering and terror finance.Concerns also emanate from some unscrupulous entities indulging in illicit money-pooling activities—commonly known as ponzi schemes—with the promise of huge returns from investment in bitcoins and other variants, which they claim are minted through blockchain, a distributed ledger technology that was created to mint bitcoins and comprises of extremely complex algorithms with several thousand nodes for each chain.

There is a suspicion that some so-called cryptocurrencies and bitcoin investments may actually have nothing to do with any blockchain-developed virtual currency and are just new ways devised by scamsters to ride the wave and what they may be offering could be ‘e-ponzi’ schemes.

The financial regulators are worried that a complete lack of regulatory regime for such cryptocurrencies may give rise to ‘e-ponzi’ schemes.

The financial sector watchdogs, including RBI and Sebi, as also various government agencies, will soon get into a huddle to prepare a framework to safeguard the gullible investors and to clamp down on the fraudsters who may try to manipulate the regulatory gaps, PTI reported, quoting a senior official.

There are quite a few proposals on the table and those include applying to cryptocurrencies the existing regulations aimed at checking the spread of ponzi schemes or illicit money-pooling activities, money laundering and black money generation and circulation, another official said.

The jury is still out on whether such virtual currencies should be allowed as legal payment tender or investments, though there are also suggestions from some quarters for allowing them with necessary checks and balances.

Government tightens screws on assets owned by deregistered companies

According to the minister, since the country-wide land records have been computerised, it would not take much time for the states to provide the requisite information to the district authorities and the central government.

The corporate affairs ministry today asked states to complete identification of properties owned by deregistered companies at the earliest and ensure district administrations prevent transactions in those assets.

Amid intensifying efforts to fight the black money menace, the ministry has also urged the states to initiate disciplinary action against the officials concerned in case such transactions go through.

The names of around 2.25 lakh companies which have not been carrying out business activities for long have been struck off the official records and a number of directors associated with such firms have been disqualified.

Against this backdrop, Minister of State for Corporate Affairs P P Chaudhary today held a review meeting with representatives from various states on action taken with respect to properties belonging to around 2.09 lakh deregistered companies.

During the meeting, Chaudhary asked the states’ representatives to complete the process of identification and tracking of properties belonging to such companies at the earliest, according to an official release.

In this regard, the states have been requested to share information with the ministry in a time-bound manner.

On September 12, the ministry had sent a letter to states for identification and tracking of properties belonging to around 2.09 lakh companies that were deregistered. Now, the number of such firms is about 2.25 lakh.

Additional state-wise information pertaining to such companies was also shared with the state representatives.

According to the minister, since the country-wide land records have been computerised, it would not take much time for the states to provide the requisite information to the district authorities and the central government.

Since the names of the companies have been struck off, any transaction pertaining to properties owned by them, their directors or authorised signatories would be “void ab initio and a nullity till such companies are restored by an order of the National Company Law Tribunal (NCLT), the release said.

“In fact, by virtue of the company’s name having been struck off from the Register of Companies under the Companies Act, 2013, its identity as a legal person had been lost and hence, the legal ownership of properties belonging to such a company was non-existent,” it added.

Chaudhary advised the representatives to ensure that requisite directions are urgently issued to all the district authorities dealing with registration of properties to put in place appropriate mechanism to prevent transactions in properties belonging to the deregistered companies.

Officials allowing registration of transactions in such properties by ignoring the requisite directions may be subjected to disciplinary action, he told the representatives.

Emphasising that tackling of shell companies is an imperative element in the fight against black money, Chaudhary said such a drive would help unearth benami properties and discourage illegal practices, which would create a healthy economic environment for honest businessmen.