I.T. MIRROR 23-24 VOL 3

Income Tax Bar Association Room No. 204, Nature View Building, Nr. Mrudul Tower, Ashram Road, Ahmedabad - 380009. Tel. No. : 079-48011947 I e-mail: [email protected] I www.incometaxbar.org Vol.3 August 23 Nation First, Always First

GLIMPSES OF BLOOD DONATION CAMP

2 Chairman's Message 3 President's Message 4 Hon. Secretary's Message - CA (Dr.) Vishves Shah - CA Ashish Tekwani - CA Jaykishan Pamnani 5 Message of Vice Chancellor 6 10 13 16 18 28 32 36 1 Adv. Ashutosh R. Thakkar Adv. (Dr.) Dhruven V. Shah Adv. (Dr.) Kartikey B. Shah Dhruvin D. Mehta (IPP) Bhavesh K. Govani Hiren C. Thakkar CA Kenan M. Satyawadi Narendra D. Karkar CA Parth H. Doshi Parth K. Katharia CA Pratik P. Kaneria CA Suvrat S. Shah Adv Dhiresh T Shah President Emeritus CA Ashish T. Tekwani President CA Shridhar K. Shah Vice President CA Jaykishan P. Pamnani Hon. Secretary CA Maulik B. Patel Hon. Joint Secretary CA Shivam K. Bhavsar Hon. Treasurer CA (Dr.) Vishves Shah Chairman CA Nisha Tekwani CA Suvrat Shah CA Rajesh Mewada Co – Chairman Jinal Shah CA Kaivan Parekh CA Pratik P. Kaneria Members Room No. 204, Nature View Building, Nr. Mrudul Tower, Ashram Road, Ahmedabad - 380009. Tel. No. : 079-48011947 I e-mail: [email protected] I www.incometaxbar.org Mouth Piece of Income Tax Bar Association INVITEE MEMBERS COMMITTEE MEMBERS IT MIRROR COMMITTEE OFFICE BEARERS Vol.3 - August 23 CONTENTS Controversies surrounding valuation under Rule 11UA(2) of Income Tax Rules, 1962 read with Section 56(2)(viib) of Income Tax Act, 1961 - CA Rohit Pansari & CA Mustufa Mankada Futures & Options-Tax, Accounting & Audit Issues - CA Pramod Jain Goods And Services Tax Network And The Prevention Of Money Laundering Act. 2002 - Adv. Bharat L Sheth Amendment in Small Company definition – A Move towards Ease of Doing Business - CA Parag Raval Evaluating Financials “True and Fair View” from a GST Perspective - CA Jaykishan Vidhwani Audit Trail : Role of Auditor and Audit Approach - CA Jyoti Harpalani Issues Pertaining To Scrutiny Assessment Towards Donation Made To Political Party - CA Sulabh Padshah Demystifying the Importance, Meaning and Terms & Conditions of Agreement for Sale and Sale Deed - CA Harsh Mehta & Adv. (CS) Lokesh Shah - Prof. Rama Shanker Dubey

Chairman’s Message CA (Dr.) VISHVES SHAH Chairman 2 Dear Members, I am delighted to present the Third Volume of IT Mirror, the mouthpiece of Income Tax Bar Association for the Activity Year 2023-24. This issue contains various articles covering topics in Direct Tax, Indirect Tax, RERA and Allied Laws. I hope you will find them informative and useful for your practice. I must congratulate the hardworking team of IT Mirror Committee and President for putting Third Volume in Third Month. August is a special month for us as Indians, as we celebrate our Independence Day on 15th August. It is a day to remember the sacrifices and struggles of our freedom fighters, who fought against the colonial rule and gave us the gift of democracy. It is also a day to reflect on our achievements and challenges as a nation, and to renew our commitment to the ideals of justice, equality, and fraternity. As tax professionals, we have a vital role to play in nation-building. We are the bridge between the taxpayers and the tax authorities, and we have to ensure that both sides adhere to the law and fulfil their obligations. We have to uphold the highest standards of ethics and integrity in our profession, and to contribute to the development of a fair and efficient tax system. In this regard, I would like to draw your attention to the continuous changing taxation landscape and our role as the tax professionals towards taxpayers and nation both. These are some of the major reforms that have been undertaken by the government to improve the ease of doing business, promote compliance and curb tax evasion in India. As tax professionals, we have to keep ourselves updated with these changes, and advise our clients accordingly. We also have to cooperate with the tax authorities in implementing these reforms and provide constructive feedback and suggestions for further improvement. I urge you all to read the articles in this issue of IT Mirror, which cover these topics in detail, and share your views and opinions with us. I also invite you to contribute your articles for future issues of ITMirror, which will help us enrich our knowledge base and enhance our professional skills. I wish you all a very happy Independence Day. Jai Hind! Yours sincerely, CA(Dr.) Vishves A. Shah Chairman - ITMirror

3 Dear Members I am pleased to present to you the latest issue of our I.T. Mirror which showcases the excellent work of our contributors and IT Mirror Committee. This issue covers a range of topics, from tax developments to valuation rules, futures and options audit, GSTN & PMLA, Audit Trail and other developments related to RERA. This issue is a result of the hard work and dedication of IT Mirror committee members and writers / contributors, who have contributed their expert insights on various topics. I would like to thank each of them for their valuable contribution for making this issue a success. The IT Mirror is a leading source of information and analysis on current issues and developments in taxation, both nationally and internationally. Our articles are written by experts in the field, who provide insights and perspectives that are relevant and useful for practitioners, academicians, policymakers, and students. I am proud of the achievements and reputation of our journal, and I look forward to continuing our mission of advancing the knowledge and understanding of taxation in the future. The IT Mirror strives to maintain the highest standards of quality, rigor, and relevance in its publications. We welcome submissions from authors with diverse backgrounds, perspectives, and expertise, who can contribute to the advancement of knowledge and practice in the field of taxation. We also encourage constructive feedback from our readers, who can help us improve our editorial policies and processes. I would also like to acknowledge the efforts of our IT Mirror Committee and its Chairman who worked tirelessly to ensure the quality and timeliness of the publication. Without their dedication and professionalism, this journal would not have been possible. This month as we celebrate the Independence Day it is the time to remember the freedom fighters who laid down their lives for the country. Their supreme sacrifice has given us the freedom to live in this independent country and we as a nation shall always remain indebted to them. Happy Independence Day in advance to all the readers. I hope you enjoy reading this journal as much as I do. We also welcome your feedback and suggestions on how to improve our magazine and make it more useful and appealing to you. If you have any comments or queries, please feel free to contact us at [email protected]. We would love to hear from you. Sincerely, CA Ashish Tekwani President Income Tax Bar Association President’s Message CA ASHISH TEKWANI President

Dear Members, It is my privilege to address you as the Secretary of the Income Tax Bar Association, Ahmedabad. I am honored to have been given this opportunity to serve the association and its members and contribute to their growth and development. I hope this message finds you and your loved ones in good health and high spirits. It gives me immense gratification as the Secretary of the ITBar Association and as a member myself that our own IT Bar Association is issuing its 3rd edition of IT Mirror for the activity year 2023–24. I must say that all the members and officers of the Association are really making efforts to publish IT Mirror. I trust that every member of the Association will find IT Mirror useful and worth reading. It shows the efforts and dedication of all the Committee Members of the Association, the members who have contributed by writing an article on topics that are valuable to the readers. Without their efforts, the publication of the magazine would not have been possible. As we all know, Kargil Diwas, also known as Kargil Vijay Diwas, is observed on July 26th every year in India to honor and remember the brave soldiers who sacrificed their lives during the Kargil War in 1999. It is a solemn occasion to pay tribute to the indomitable spirit, valor, and sacrifices of our armed forces. We, all the members of the association, pay tribute and remember the brave martyrs of the Indian Army who made the sacrifice in the service of our nation. On 15th August, India will celebrate 76years of Independence. We, as Indians, pay respect to all the leaders who fought bravely for the nation's freedom. On this occasion, we remember all the brave leaders, soldiers, and all those who sacrificed their lives and fought against British rule. Taking 15th August, 1947, as our frame of reference, we find that there are several fields like Science and Technology, economy, and human development where India has shown remarkable progress. In conclusion, I would like to thank all the respected members of the Association for their support and encouragement. I look forward to working with you all and taking our Association to new heights of success and achievement. I wish you all prosperity and success in your personal and professional endeavors. Happy reading!!! Warm Regards. Yours Sincerely, CA Jaykishan Pamnani Hon. Secretary Income Tax Bar Association Hon. Secretary’s Message CA JAYKISHAN PAMNANI Hon. Secretary 4

5 Message of Vice Chancellor

Controversies surrounding valuation under Rule 11UA(2)of the Income Tax Rules, 1962 read with Section 56(2)(viib) of Income Tax Act, 1961 BACKGROUND “Projected free cash flow considered by the assessee need not be equal to the actual performance of the company in subsequent years, because actual performance may be different with projected financials for various reasons.” These are the exact words cited in the decision of Hon'ble Income Tax Appellate Tribunal ('ITAT') Chennai in the case of Brio Bliss Life Science (P.) Ltd. v. Incometax Officer [2023] 149 taxmann.com 89 (Chennai - Trib.) which demonstrates intricacies and controversies surrounding valuation of shares by closely held companies. Objective of this article is to analyse controversy surrounding the application of Discounted cash flow method for the purpose of ascertaining the Fair Market Value under Rule 11UA of the Income Tax Rules, 1962. As we all are aware that the provisions of section 56 of the Income Tax Act,1961 ('the Act') were introduced with the objective to tax the gifts. Further clause (viib) was inserted in section 56(2) by Finance Act, 2012 as an antiabuse provision to prevent generation and circulation of unaccounted money through share premium received by a closely held company in excess of its fair market value. It taxed the consideration or premium above the fair market value ('FMV') on issue of shares in the hands of the closely held company. DETAILED EXPLANATION OF SECTION 56(2)(viib)AND RULE 11UA(2) Section 56(2)(viib) of the Act Provisions of section 56(2)(viib) of the Act provides to tax the consideration received by closely held company for issue of shares at a price that exceeds the FMV as determined under Rule 11UA(2). However, there are exceptions for companies where, • Company receives consideration from venture capital company or a venture capital fund or a specified fund or • Company receiving consideration is a startup company recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) vide notification no. 13/2019 Rule 11UA(2) of the Income Tax Rules, 1962 There are numerous provisions where requirement of determination of FMV arises. Rule 11UA prescribes valuation procedures for arriving at the FMV of immovable property, jewellery, shares, etc. Rule 11UA(2) provides determination of FMV of unquoted equity shares issued by closely held companies as provided under section 56(2)(viib) of the Act.To determine the value of shares, taxpayer can select any option mentioned under the Rule i.e. clause (a) or clause (b). • Clause (a) to Rule 11UA(2) prescribes net asset value method to determine FMV of the shares. • Clause (b) to rule 11UA(2) of the Act prescribes the FMV of the unquoted equity shares determined by a merchant banker as per the Discounted Free Cash Flow ('DCF') method. CA MUSTUFA MANKADA CA ROHIT PANSARI 6

7 I. T. MIRROR (2023-24) PRACTICAL ASPECTS / CONTROVERSIES ALLIED TO VALUATIONS MADE AS PER DCF METHOD UNDER RULE 11UA(2) Department's 'projections vs. actuals' comparison – Few judicial precedents discussed below: • As discussed above, Taxpayer gets an option to select valuation methodology. Accordingly, companies issue shares to its investors at a price arrived at after following methods prescribed under the Rules. However, at the time of assessment / reassessment proceedings, the Income Tax Department have often rejected the valuation citing companies received heavy premium along with face value of the shares. • Hon'ble High Court of Madras, in the case of Commissioner of Income Tax, Corporate Circle-3, Chennai v. VVA Hotels (P.) Ltd[2020] 122 taxmann.com 106 (Madras) held that“when the assessee has adopted a particular method of valuation as provided under the Act and Rules and in the absence of any material that such method was adopted to defraud the Revenue, merely because the Assessing Officer is of the view that NAV method alone has to be adopted is not a ground to reject the DCF method.” • Co-ordinate Bench of ITAT, Delhi in the case of Rockland Diagnostics Services Pvt. Ltd. v. ITO in ITA No. 316/Del/2019 wherein it was affirmed that “in absence of any specific inaccuracy or shortcoming in the DCF valuation method other than stating that year wise results as projected are not matching with the actual results declared in the final accounts, the AO cannot substitute his own valuation in place of the value determined either on DCFmethod or NAVmethod.” • Hon'ble ITAT has held in case of Brio Bliss Life Science (P.) Ltd. v. Income-tax Officer [2023] 149 taxmann.com 89 wherein the Taxpayer company had followed discounted cash flow ('DCF') method to arrive at the FMV of shares issued. The Taxpayer has justified issue of share premium at Rs. 22/- per share with the help of valuation report from an independent valuer. The AO, rejected explanation furnished by the Taxpayerstating that there are some infirmities in projections considered by the Taxpayer to arrive at a free cash flow, where the projected turnover and profit before tax considered by Taxpayer for the relevant assessment year is much higher than the actual turnover achieved for relevant assessment years. Thereafter, AO rejected valuation report submitted by the Taxpayer and determined fair value of equity shares under rule 11UA of the Income Tax Rules, 1962 by adopting Net Asset Value (NAV) method. In the said case, Hon'ble ITATheld as under: “when actual financials differentiates with projected figures, it may not be the reason for the AO to change the method adopted by the assessee… …Further, the projected financials under DCF method need not be equal to the actual performance of the company in subsequent years. However, there should be some degree or fair estimation and assumption while arriving at projected free cash flow… …the AO is completely erred in arriving at a conclusion that DCF method followed by the assessee is incorrect only on the basis of one element, difference in projected financials and actual performance of the company for two financial years,… …However, the AO is free to examine correctness of DCF method and method followed by the assessee to arrive at a free cash flow and relevant ratios considered for arriving at projected revenue and expenditure….” • In Vodafone M-Pesa Ltd v. Pr. CIT [2018] 92 taxmann.com 73 (Bom.) it was held that the Assessing Officer cannot change the method of valuation opted for by the Taxpayer though the valuation report could be subjected to scrutiny and determination afresh either by the Assessing Officer or by calling for a final determination from an independent valuer to confront the Taxpayer. Further, foundation of DCF method is based on deriving the FMV of shares from the present valuation of future cash flows which may or may not correctly match with the facts and circumstances in the future.

I. T. MIRROR (2023-24) 8 • There were instances, where judiciary held in favour of department rejecting claims of the Taxpayer. In Agro Portfolio (P.) Ltd. V. Income Tax Officer, Ward 1 (4), New Delhi[2018] 94 taxmann.com 112 (Delhi - Trib.), wherein Taxpayer had submitted valuation report issued by merchant banker and relied on the DCF computed as per valuation report. However, the Hon'ble Tribunal held that, “This is more particularly in view of the long disclaimer appended by the merchant banker at page no. 16 & 17 of the paper book which clearly establishes that no independent enquiry is caused by merchant banker to verify the truth or otherwise the figures furnished by the assessee at least on test basis. The merchant bankers solely relied upon an assumed without independent verification, the truthfulness accuracy and completeness of the information and the financial data provided by the company. A perusal of this long disclaimer clearly shows that the merchant banker did not do anything reflecting their expertise, except mere applying the formula to the data provided by the assessee.” PRECAUTIONS TO BE TAKEN TO AVOID LITIGATION AND OVERCOME CONTROVERSY • Before conducting transaction of issuance of shares, first step for the entity is to conduct valuation of its business. As per provisions, valuation of shares needs to be done by merchant banker. While valuing the shares, entities should carry out extensive research and seek help from a management consultant for preparing an Information Memorandum and to attract syndicate investors for investment in the company. • Documentation to support the projections should be robust and be undertaken in a very scientific manner i.e. the same should be based on the director/ investor's experience, industry analysis of the management consultants and their understanding of the sector expansion and scaling opportunities. The estimated projections as per the valuation report needs to be backed up by robust working / the projected volume as per the market trends. • Various pointers to be analysed to conduct industry analysis. For example, capacity utilisation in manufacturing industry, per day average footfall in retail industry, average daily rate which is a metric used in the hospital industry to indicate the average realized room rental per day. • Another aspect which needs to be considered is credibility of investors. Investors of high standing will make investments in a company only after undertaking due diligence and are intelligent investors with a remarkable portfolio who foresaw future growth potential in the company. • Above given steps help companies to avoid litigation. Even in case of litigation, Taxpayer can genuinely put forward their claims before the department and judiciary. ADDITIONAL RECENT UPDATES WHICH MAY IMPACT THE FUTURE VALUATION EXERCISE · The Finance Act, 2023, amended section 56(2)(viib) to bring into its ambit, the consideration received from non-residents for the issue of shares. Though exchange control regulations permit issuance of shares at higher value as compared to DCF, going forward due to amendment in section 56(2)(viib), issuance of shares at higher value as compared to DCF may not be feasible as the same would be taxable in the hands of issuing company. • Further, pursuant to the Finance Act 2023 amendment, the Central Board of Direct Taxes (CBDT) has released a notification proposing an amendment to Rule 11UA. The CBDT has requested the stakeholders as well as the general public to provide suggestions/comments on the draft Rule 11UA. The changes proposed in the draft rule are summarised below: - 5 new valuation methods for non-resident investors

I. T. MIRROR (2023-24) 9 - The price at which shares are issued to the notified entity can be treated as FMV for others - Merchant Banker's report shouldn't be older than 90 days - Introduction of 10% Safe harbour limit CONCLUSION Taxation is a matter of balancing the interests of the Taxpayer and the State. It is unacceptable if judicial activism is allowed to make each and every transaction taxable even though the legislative intent reflects otherwise. In view of the language and conflicting rulings, the department and corporate taxpayers would be enticed for legal tussle on the issue of adoption of methods to determine FMV. However, with an intent to reduce litigation, usher confidence in corporate taxpayers/ investor community, it is imperative that the Indian Government provides necessary guidelines based on varied situations.

HEAD OF INCOME UNDER WHICH F&O TRANSACTIONS ARE TAXABLE According to Proviso (d) and (e) of Section 43(5) of the Income Tax Act, 1961 trading in derivatives of the Securities carried out in a recognised stock exchange and trading in commodity derivatives carried out in a recognised stock exchange, respectively are not speculative transactions. Hence, trading in Futures and Options being derivatives would not be a speculative business but a normal business income, which could either be a net gain or net loss and taxable under the head 'Profits and Gains from Business'. However, according to section 2(14)(b) of the Income Tax Act, 1961 any securities held by a Foreign Institutional Investor (FII) which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 is a capital asset. According to section 2(i) of the Securities and Exchange Board of India Act, 1992 “securities” has the meaning assigned to it in section 2 of the Securities Contracts (Regulation) Act, 1956 and as per section 2(h)(ia) of the Securities Contracts (Regulation) Act, 1956 securities include derivatives. Hence for FII derivatives being capital asset, any gain thereof would be taxable under the head 'Capital Gains'. DETERMINATION OF TURNOVER In case, derivatives are taxable under the head 'Profits and Gains from Business', the method for determination of turnover is not provided under the Income Tax Act, 1961. However, as per generally accepted accounting practice and as per ICAI Guidance Note on Tax Audit revised for AY2022-23, it should be as follows: - The total of favourable and unfavourable differences (Profit/Loss) shall be taken as turnover (In other words, all the differences, whether positive or negative are aggregated for calculating the turnover). - Premium received on sale of options is also to be included in turnover. However, where the premium received is included for determining net profit for transactions, the same should not be separately included. - In respect of any reverse trades entered, the difference thereon, should also form part of the turnover. Example of calculation of Turnover of Futures: Future Units Buying Selling Total Sell Total Buy Gain / Rate Rate Value Value Loss (A) (B) (C) (D) (E = B x D) (F = B x C) (G) Index A 75 18000 17100 Rs. 1282500 Rs. 1350000 Rs. - 67500 Company B 6750 240 260 Rs. 1755000 Rs. 1620000 Rs. 135000 Index C 100 38000 38000 Rs. 3800000 Rs. 3800000 Rs. 0 Total Turnover Rs. 202500 Futures & Options Tax, Accounting & Audit Issues - CA PRAMOD JAIN 10

Example of calculation of Turnover of Options: Options Units Buying Selling Gain / Loss Premium Turnover Rate Rate Received (A) (B) (C) (D) [E= (B) x (D-C)] (F= D x B) (G) Index A XX CE 100 300 210 Rs. -9,000 Rs. 21000 Rs. 9000 Company B XX PE 500 0 70 Rs. 35000 Rs. 35000 Rs. 35000 Index C XX CE 125 348 400 Rs. 6500 Rs. 50000 Rs. 6500 Total Turnover Rs. 50500 ACCOUNTING & FILING OF FINANCIAL STATEMENTS IN ITR Accounting of gains or losses in Futures & Options may be done gain-wise and loss-wise only. It has been also explained in the Tax Audit Guidance Note (Revised AY 2022-23) that though the contract notes are issued for the full value of the underlined shares or securities or commodities purchased or sold out, but entries in books of accounts are made only for the differences. For example, in the example given above F&O gain / loss account should be created and loss of Rs. 67500/- and gain of Rs. 135000/- should be entered in this account. It is the choice of the assessee to have a single account for gain and loss or separate account for gain and loss respectively. While filling the data in ITR in the Profit & Loss Account, assessee should fill the loss or gain accordingly, and nothing should be filled in the column of turnover. This is so, as the determination of turnover is only for the purpose of applicability of audit, TDS or any other similar purpose. Balance Sheet of only the F & O business should be filled in business head of the ITR. AUDIT Audit under Income Tax Act would be required only if the business is covered under any of the clauses of section 44AB. In case an assessee has no other business activity, then audit in case of Futures & Options would be required only where his turnover (as determined above in this document) exceeds Rs. 10 Crores in a financial year. This is so, as transactions in F&O are always through proper banking channels mainly online through RTGS / NEFT/ IMPS, etc. hence as per proviso to section 44AB(a), the limit for getting the audit done would be Rs. 10 Crores. FEW COMMONLY ASKED QUESTIONS Below are few questions, which have been commonly asked: Question Answer F&O Turnover is Rs. 3 Crores in AY 2023-24, is tax audit required? No, as there being no cash transactions, the limit for tax audit is Rs. 10 Crores. F&O Turnover is Rs. 80 Lacs & there is a net loss from it, is tax audit required? No, as the assessee never availed s. 44AD earlier, hence provisions of s. 44AB(e) are not applicable. I. T. MIRROR (2023-24) 11

I. T. MIRROR (2023-24) Question Answer Assessee being salaried employee who has no other income. F&O loss is not allowed to be settoff by CPC why? This is so as under section 71(2A) loss from business is not allowed to be set-off against salary income. Can an individual claim benefit of s. 44AD in F&O trading? Yes, there is no restriction, however, disclose the actual profits which may be more than 6% Salaried Individual, having F&O loss, which ITR would be filed? ITR -3, filing the profit & loss and balance sheet of F&O business. Can an assessee claim expenses against F&O gains? Yes, actual expenses can be claimed which would include STT, brokerage, cess, etc. 12

PREAMBLE The Goods and Services Tax [“GST”] Act, 2017 (12 of 2017) defines “common portal” in section 2(26). It defines the “common portal” as the common Goods and Services Tax electronic portal referred to in section 146. Section 146 of the GST Act, 2017 provides details about the Common Portal. It provides that “The Government may, on the recommendations of the Council, notify the Common Goods and Services tax Electronic Portal for facilitating registration, payment of tax, furnishing of returns, computation and settlement of integrated tax, electronic way bill and for carrying out such other functions and for such purpose as may be prescribed”. Notification No.4/2017 Central tax dated 19-6-2017, in exercise of the power conferred by Section 146 of the GST Act, read with Section 20 of the Integrated Goods and Services Tax Act, 2017 (‘‘IGST Act”) notifies www.gst.gov.inas Common GST Electronic Portal for facilitating registration, payment of tax, furnishing of returns, computation and settlement of integrated tax, electronic way bill. The notification has come in to force on the 22nd day of July 2017. The Explanation to this notification explains that for the purpose of this notification, “www.gst.gov.in” means the website managed by The Goods and Services Tax Network [“GSTN”], a company incorporated under the provision of section 8 of The Companies Act, 2013,(18 of 2013). The Goods and Services Tax Network-GSTN GSTN is government enterprise incorporated on 28th March 2013. GSTN was registered as a non-government, not-for-profit, private limited company under section 25 of the Companies Act 1956 with the following equity structureCentral Government 24.5% State Governments & EC 24.5% HDFC 10% HDFC Bank 10% ICICI Bank 10% NSE Strategic Investment Co 10% LIC Housing Finance Ltd 11% As per decision of GSTCouncil, the shares held by non-Government Financial Institutions are being transferred to Central and State Governments so that both hold 50% shares each of GSTN and it becomes a 100% government owned company. Pursuant to approval granted by Registrar of Companies (ROC), Ministry of Corporate Affairs (MCA), Government of India the status of GSTN has been changed to Government Company in terms of Section 2(45) of the Companies Act, 2013. The Board of GSTN in its 49th Meeting held on 30th June, 2022, has approved the conversion of GSTN into Government Company and hence 100% of the shareholding is being held by Government in GSTN. Goods and Services Tax Network and The Prevention of Money Laundering Act. 2002 ADV. BHARAT L SHETH 13

I. T. MIRROR (2023-24) Pursuant to conversion of GSTN into 100% Government owned company; the shareholding structure of GSTN is as under: Name of Shareholder Nos. of shares % of Shareholding Government of India 50,00,000 50% States 50,00,000 50% Total 1,00,00,000 100% GSTN has built Indirect Taxation platform for GST to help taxpayers in India to prepare, file returns, make payments of indirect tax liabilities and do other compliances. It provides IT infrastructure and services to the Central and State Governments, taxpayers and other stakeholders for implementation of the GSTin India. The GSTSystem Project is a unique and complex ITinitiative as it established for the first time a uniform interface for the taxpayer under indirect taxes through a common and shared IT infrastructure between the Centre and States. The Centre and State indirect tax administrations which used to work under different laws, regulations, procedures and formats and consequently the IT systems worked as independent sites, were integrated into one system with uniform formats and interfaces for taxpayers and other external stakeholders. GSTN provides a strong IT Infrastructure and Service back bone which enables capture, processing and exchange of information amongst the stakeholders including taxpayers, States and Central Governments, Accounting Offices, Banks and RBI. The website of GSTN www.gstn.org.in provides more details about Goods and Services Tax Network. PREVENTION OF MONEY LAUNDERING ACT, 2002 The Ministry of Finance vide Notification No. G.S.R. 381(E), Dated 27.06.2006, had specified a list of agencies that were required to share information with the Enforcement Directorate (ED), the Financial Intelligence Unit (FIU) and other investigative agencies under the Prevention of Money laundering Act, 2002 (PMLA). Now, the Central Government has expanded the scope of PMLA by including the GSTN in the list of agencies. GSTN is an information technology system responsible for managing the GST portal. These changes have been made with respect to section 66 of PMLA, which mandates the disclosure of information by the person as specified by the director or any other specified authority. Section 66 of PMLAreads as under66. Disclosure of information.—The Director or any other authority specified by him by a general or special order in this behalf may furnish or cause to be furnished to— (i) any officer, authority or body performing any functions under any law relating to imposition of any tax, duty or cess or to dealings in foreign exchange, or prevention of illicit traffic in the narcotic drugs and psychotropic substances under the Narcotic Drugs and Psychotropic Substances Act, 1985 (61 of 1985); or (ii) such other officer, authority or body performing functions under any other law as the Central Government may, if in its opinion it is necessary to do so in the public interest, specify, by notification in the Official Gazette, in this behalf, any information received or obtained by such Director or any other authority, specified by him in the performance of their functions under this Act, as may, in the opinion of the Director or the other authority, so specified by him, be necessary for the purpose of the officer, authority or body specified in clause (i) or clause (ii) to perform his or its functions under that law. 14

I. T. MIRROR (2023-24) Prior to this inclusion, there were already 25 agencies, including the Competition Commission of India, Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDA), Serious Fraud Investigation Office (SFIO), and Director General of Foreign Trade (DGFT). The inclusion of GSTN has been made as the 26th entry in the list of agencies. At present, Section 158 of the GST Act gives the power to disclose the information it has with regard to any prosecution under the Indian Penal Code and even under any other law in force for the time being. However, there was no corresponding power under PMLA to disclose information to the GSTN unless notified under Section 66(1)(ii) of PMLA. With the current notification, GSTN has now been included in the list. The inclusion of GSTN in the list facilitates the effective sharing of sensitive data, aiding the Enforcement Directorate (ED) in investigating and recovering evaded revenue through money laundering. This decision is expected to have a significant impact on enhancing the effectiveness of prosecutions and investigations in the cases of GSTrelated violations. The notification will now facilitate the sharing of information or material in possession between the ED and GSTN, if ED, has reasons to believe that the GSTprovisions have been contravened. REPERCUSSIONS OF BRINGING GSTN UNDER THE PMLA Inclusion of GSTN in the notification issued under section 66(1)(ii) of PMLA does not mean that the offences under GSTAct are brought under PMLA. As per Section 2(1)(y) “scheduled offence” means— (i) the offences specified under Part Aof the Schedule; or (ii) the offences specified under Part B of the Schedule if the total value involved in such offences is one crore rupees or more; or (iii) the offences specified under Part C of the Schedule. Part A contains 29 paragraphs.Paragraph 11 notifies offences under Section 12A read with section 24 and section 24 of the SEBI Act, 1992 (15 of 1992), Paragraph 12 notifies offences under section 135 of the Custom Act, 1962 (52 of 1962) and Paragraph 29 notifies offences under section 447 of The Companies Act, 2013 (18 of 2013). Part B notifies offences under section 132 of The Custom Act, 1962 (52 of 1962). Part C notifies an offence which is the offence of cross border implications and is specified in,— (1) Part A; or (2) * * * * * (3) the offences against property under Chapter XVII of the Indian Penal Code (45 of 1860).] (4) The offence of willful attempt to evade any tax, penalty or interest referred to in section 51 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (22 of 2015). CONCLUSION The offences relating to GST have not been notified as scheduled offence in the Schedule to Section 2(1)(y) of PMLA. So offence related to GSThas not been brought under PMLA. 15

NEW DEFINITION OF SMALL COMPANY W.E.F. 15TH SEPTEMBER, 2022 In exercise of the powers conferred by sub-sections (1) and (2) of Section 469 of the Companies Act, 2013, the Central Government, vide Notification GSR 700(E) dated 15th September, 2022 has amended the Companies (Specification of Definitions Details) Rules, 2014. MCA is frequently amending the definition of Small Company to provide many advantages to Corporates. This move of MCAis expected to lighten the compliance burden of about 4,00,000 companies in India. The move is likely to get more companies under the 'small' category and benefit them in terms of the compliance requirements. As due to this move, many Companies will get exemptions from slew of compliances as contained in Companies Act, 2013.This move would benefit Start-ups in India. Therefore, it is believed, the decision to amend definition of small company is a pragmatic and growth-oriented step initiated by the GoI. The limit of paid-up capital and turnover for the 'Small Company' has been increased to Rs. four crores (earlier it was Rs. two crores) and Rs. forty crores (earlier it was Rs. twentycrores) respectively. SMALL COMPANY: Needless to mention, Small companies represent the entrepreneurial aspirations and innovation capabilities of lakhs of citizens and contribute to growth and employment in a significant manner. The move is likely to get more companies under the 'small' category and benefit them in terms of the compliance requirements. Pursuant to the last amendment in the Companies (Specification of Definitions Details) Rules, 2014, a new clause (t) has been inserted in the Rule 2, in sub-rule (1), after clause (s). APrivate Company, to be qualified as a Small Company, requires to meet both the conditions as prescribed above. ACompany is not a Small Company If : 1. It is a Public Company. 2. It is a Holding of another company. 3. It is a subsidiary of another company. 4. It is a Section 8 Company. 5. It is a Company governed by any Special Act. MEANING OF SMALL COMPANY - FROM15.09.2022: NEW DEFINITION “Small company”means a company, other than a public company, which has : (i) Paid up share capital of not more than 4 Crore rupees, and (ii) Turnover of which as per its last profit and loss account does not exceed 40 crores rupees. Asmall company is not mandated to file any form to convert itself into a non-small company. Until the Company is within the eligible bracket of a small company definition, it will continue to be a small company. Once the Company crosses the limits given in the definition, it will automatically get converted to a non-small company. Amendment in Small Company definition – A Move towards Ease of Doing Business - CA PARAG RAVAL 16

I. T. MIRROR (2023-24) BENEFITS TO SMALL COMPANIES : 1. Fewer Mandatory Board Meetings: Every Small Company shall hold a minimum number of Two meetings of its Board of Directors every year in such a way that the Minimum gap between the two meetings should not be Less than 90 (Ninety) days. (Section 173). ANon-Small Companyis required to hold at least four Board Meetings in a year. 2. Exempt from reporting under CARO: Small Companies are not mandated to attach CARO Report along with Auditors Report. Therefore, Auditors of small Company are not required to verify/ report on the compliances under CARO. 3. E-forms Certifications: There is no necessity of certification of the e-forms of a Small Company by any Professional (CA/CS/ADV). 4. No need to prepare Cash Flow Statement : Small Companies are not required to prepare Cash Flow Statement as part of the Financial Statements. 5. No IFC Reporting: Auditor of a Small Company is not required to report on the adequacy of Internal Financial Controls and the operating effectiveness of the company in the Audit Report. 6. Abridged Directors report: The MCAhas introduced the abridged format of Directors Report for a Small Company. There will be less disclosure requirements in the Directors Report of a Small Company with the introduction of abridged report. Directors Report of a Small Company shall be prepared as per Rule 8A of Section 134 of Companies Act, 2013. In other words, Directors Report of a Small Companies are not required to give detailed disclosures as requiredby Section 134(3). 7. Rotation of Auditor [139(2)]: Provisions of Section 139(2) concerning rotation of auditor are not applicable to a Small Company. There is no obligation on a Small Company to change the auditor by rotation. An audit firm or individual auditor can resume auditorship in a Small Company even after 5 years or 10 years of appointment as well. 8. Lesser Penalties (446B): Notwithstanding anything contained in this Act, if a penalty is payable for noncompliance of any of the provisions of this Act by a small company or by any of its officer in default, or any other person in respect of such company, then such company, its officer in default or any other person, as the case may be, shall be liable to a penalty which shall not be more than one-half of the penalty specified in such provisions subject to a maximum of Rs. 2 lakh in case of a company and Rs. 1 lakh in case of an officer who is in default or any other person. POINTS TO PONDER: a. Only a Private Company can be classified as a Small Company, subject to fulfilment of other requirements b. If a Company doesn't cross the limits given in the definition, yet, if such a Company is a holding company or a subsidiary company of any other company, then such a company cannot be regarded as a Small Company. c. APublic Company cannot be a Small Company. d. ASection 8 Company cannot be a Small Company. CONCLUDING REMARKS : It seems that the government is committed to initiate measures which create a more conducive business environment for law-abiding companies, including reduction of compliance burden on such companies. To further improve ease of doing business in the country, the government has taken slew of measures, including decriminalisation of various provisions under the Companies Act. 17

INTRODUCTION The primary objectives of an auditor is to (a) obtain reasonable assurance as to whether the Financial Statements, as a whole are free from material misstatement, whether due to fraud or error; and (b) to ensure that the Financial Statements give a true and fair view in conformity with the accounting principles generally accepted in India, of the state of affairs of the entity as at the date of closing of accounts, of its profit/ loss and other comprehensive income, consolidated changes in equity (if applicable) and cash flows for the year/ period then ended. To achieve the above stated objective, it is imperative that an auditor should also check for compliance with GST law and regulations. The due date for filing of FORM GSTR-9 & FORM GSTR-9C is 31st of December, following the end of the financial year. The due date prescribed for submission of audited accounts under various other Acts such as Companies Act, 2013 and the Income Tax Act, 1961 is earlier to the date prescribed under the GST Act. Consequently, the business entities and the auditors generally finalise the Financial Statements and file the same with the Registrar of Companies (in the case of corporates) and the Income Tax authorities and then commence the process of preparing the Annual Return prescribed under the GST Act. This process may not be the right approach as errors of omission and commission noticed during the GST audit process may result in material misstatement of the Financial Statements affecting the 'True & Fair' view. To ensure that there are no major/ material misstatements, it is imperative that an auditor checks compliance with GST laws and rules even during the finalisation and audit of the Financial Statement under other statutes. It will not be out of place to state that the auditor should broadly review the reconciliation items for differences between books of accounts and GST returns before issuing audit report to ensure that there are no major surprises during GSTAnnual reconciliation for filing GSTR 9 and GSTR 9C. REVIEW OF BALANCE SHEET ASSETS A. Property, Plant and Equipment Property, plant and equipment are commonly classified as land, land and building, plant and machinery, furniture and fixtures, office equipment, computers and related equipments and vehicles, etc. During finalisation of accounts, the following points are to be considered while auditing such assets- (i) Blocked/ Ineligible credits In general, all assets purchased will have a GST component which can be taken as input tax credit. However as per section 17(5) of CGST Act, input tax credit is not available in respect of the following categories of assets- (a) Motor vehicles Input tax credit shall not be available in respect of motor vehicles for transportation of persons having approved seating capacity of not more than 13 persons (including the driver) including leasing, renting or Evaluating Financials “True and Fair View” from a GST Perspective -CA JAYKISHAN VIDHWANI 18

I. T. MIRROR (2023-24) hiring thereof, except when they are used for making the following taxable supplies- (i) Further supply of such vehicles; or (ii) Transportation of passengers; or (iii) Imparting training on driving such motor vehicles. (b) Vessels and aircraft Input tax credit shall not be available on vessels and aircraft except when they are used- (i)

For making the following taxable supplies- (a) Further supply of such vessels or aircraft; or (b) Transportation of passengers; or (c) Imparting training on navigating such vessels; or (d) Imparting training on flying such aircraft; (ii) For transportation of goods. It may also be noted that input tax credit shall not be allowed in respect of services of general insurance, servicing, repairs and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to above, except when such services are used for specified purposes stated above. (c) Construction of immovable property Input tax credit shall not be available in respect to goods or services or both received by a taxable person for construction of an immovable property i.e. building, other than plant and machinery. Action Points for Auditor The auditor should verify the correctness of the amount capitalized in the books of accounts to ensure that the GST on ineligible items are not taken as input tax credit. (ii) Assets in the custody of third parties Capital assets like moulds, dies, jigs, fixtures and tools can be held by third parties (job workers) for an indefinite period of time as may be decided by the principal. This will not have any impact under GST law. However, the auditor should ensure that the principal maintains all relevant data in terms of location of the third party, nature of asset held etc. Capital assets other than moulds, dies etc. with a job worker are to be returned within a period of 3 years or as extended from time to time by the appropriate authority. This must be reviewed on a regular basis to avoid any legal consequences. Action Points for Auditor The auditor should verify whether the capital assets other than mould, dies, jigs, fixtures and tools, sent to job workers, if any, have been returned within the specified timeline. If the same is not returned the auditor has to ensure that the same has been declared as deemed supply and relevant tax discharged on the said assets. (iii) RCM on import of services There are several services such as erection and commissioning, technical consulting services, architect's services, etc. which are capitalized as part of cost of asset as per AS-10/ IND AS-16. These services will be treated as import of services when they are rendered by persons outside India and the recipient is liable to discharge GST on reverse charge basis. 19

I. T. MIRROR (2023-24) Action Points forAuditor The auditor should verify whether there are import of services in case of assets purchased. For the import of services, the auditor should verify whether liability has been discharged as per the relevant provisions. The auditor must ensure that the tax paid under RCM is not claimed as ITC, if the same has been paid for construction of building. (iv) Disposal of assets on which input tax credit taken As per section 18(6) of CGST Act, in case of disposal of capital goods or plant and machinery, on which input tax credit has been availed, the registered person shall pay an amount equal to the input tax credit availed on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher. Example : Cost of capital asset

Rs. 10,00,000 ITC claimed


Rs. 1,80,000 Max life of asset as per GSTrules: 5 years Asset sold after 3 years of use for Rs. 4,25,000 (A) ITC to be reversed (ITC availed/ Max life of the asset in months) x Remaining useful life of the asset in months = Rs. 1,80,000 x 24/60 = Rs. 72,000 (B) GSTpayable on sale value = Rs. 4,25,000 x 18% = Rs. 76,500 Higher of (A) & (B) will be the GSTliability. In aforementioned example Rs 76,500/- would have to be discharged as GSTliability. In cases where refractory bricks, moulds and dies, jigs and fixtures are disposed of as scrap, the registered taxpayer shall pay tax on the transaction value of such goods determined under section 15. Action Points forAuditor The auditor should identify the impact on the said transaction with relevance to Rule 44(6) of CGSTrules. (v) Right of Use Assets under IND AS In the case of companies where IND AS is followed, right to use assets would be created in the books of accounts. There will not be any impact in relation to GST as the ITC can be taken only on the basis of actual invoices without considering any factors like time value, discounting etc. Action Points forAuditor The auditor, in those cases, should take additional care if any input tax credit has been availed by the entity. B. Inventories Inventories consist of raw materials, work-in-progress, finished goods and stock-in-trade. In terms of the finalisation of accounts with reference to GST, following points are to be considered: (i) Goods In Transit In case of goods-in-transit, the input tax credit shall be available on the invoices from the suppliers only when the goods are actually received by the entity. This will cause a timing difference in terms of input tax credit available vis-a- vis availed. 20

I. T. MIRROR (2023-24) Action Points forAuditor The auditor should verify the goods-in-transit to ensure that the input tax credit is availed in the books only when the goods are received by the business entity, as this is one of the primary conditions to be satisfied for availing credit under section 16. (ii) Goods at third party site- Job Worker A job worker is a person who carries out a process or a treatment on goods belonging to another registered person. Ajob worker need not be a registered person. A registered person (principal) sends goods to a job worker/ sub-contractor for say, finishing or polishing related activities. In this case the entity should maintain a record of inventories sent and should have proper documentation in terms of delivery challan. Similarly, there can be cases where the raw materials are directly sent to job workers premises from the vendors' location, without passing through the principal. In this situation the principal can claim ITC only when the goods are physically received by the job worker. There can also be cases where the goods move to multiple job workers e.g. textile industry for various stages of production. It must be noted that the goods sent to the job worker must be returned to the principal within a period of twelve months which may be extended to 24 months with the prior approval of the appropriate authority. Action Points forAuditor The auditor, while finalizing the accounts of an entity, should verify whether the goods lying at third party are returned within the prescribed time limits. If the same is not returned within the prescribed time limits, the same will be treated as deemed supply and creation of liability and payment of tax would be warranted on the said goods. (iii) Goods at third party site- Sale on Approval Basis In the case of goods sent on sale or approval basis, the supply shall be deemed, either at the time of supply or six months from the date of removal, whichever is earlier. Action Points forAuditor In case goods are sent on “Sale on approval basis”, the auditor should verify the compliance in terms of GST provisions. If the goods are not returned within 6 months, it should be treated as deemed supply and creation of liability and payment of tax would be warranted on the said goods. (iv) Adjustments to inventory on account of physical verification Discrepancies noticed on physical verification of inventory between book stock and physical stock must be examined and suitable action taken. These differences may arise due to expired goods (beyond shelf life), theft, damage, distribution of free samples, return to vendors and non-accounting of purchases in the financial records, etc, Some of these differences must be written off or written back. Action Points forAuditor The auditor must ensure that ITC must be reversed when goods are written off. C. Trade Receivables In case of export of services, the GST mandates various conditions like location of recipient of services outside India, place of supply outside India, the receipt of sale proceeds should be in convertible foreign exchange or Indian rupees wherever permitted by RBI etc. Further, if the exports are made under Letter of Undertaking (LUT) without payment of any duty under GST, rule 96Astipulates that convertible foreign currency or Indian rupees are to be received before the expiry of one year, or such further period as may be allowed by the Commissioner, from the date of issue of the 21

I. T. MIRROR (2023-24) invoice for export. In the event of non-realization of the proceeds from export of services within the stipulated time as mentioned above, GSTis payable on the same. Further GST, rule 96B Inserted vide Notification No. 16/2020 - Central Tax, dated: 23.03.2020, stipulates that convertible foreign currency or Indian rupees are to be received within period allowed under the Foreign Exchange Management Act, 1999 (42 of 1999), including any extension of such period. In the event of non-realization of the proceeds from export of goods within the stipulated time as mentioned above, GSTis payable on the same. In export of services, there can be sub-contracting of some services outside India. In cases where such subcontracting is involved to any other person outside India, then the impact of sub-contracting will lead to import of services in India and accordingly liability is to be discharged by the Indian entity. Action Points for Auditor An auditor before finalizing the audit, must look into various aspects in relation to exports of services or goods from the perspective of GSTand should ensure whether the liability and input credits are properly accounted for. From finalisation perspective, the auditor is expected to verify whether the export of services criteria is met in terms of receivables in foreign currency and whether the export proceeds for goods and services is received within the stipulated period. In case the same is not done and if the tax payable is material, it may affect the 'True & Fair View' of the Financial Statements. Due care must be exercised during finalisation and audit of the Financial Statements. D. Disclosure of GST liability/ GST asset in the Financial Statements The GST input credit balances and output liability shall be allowed to be off- set when the entity has legally enforceable right to set-off the recognized amounts. The excess of input credit over output payables shall be disclosed as part of other current assets and excess of output liability over input credits shall be disclosed as other current liabilities. If the right to off-set is not statutorily available, then the same shall be disclosed as gross numbers i.e. output liabilities will be shown as current liabilities and input credit shall be shown as other current assets. Example: If a company has CGST input credit and SGST payable then the same are to be disclosed separately as they are not allowed to be set-off underGSTlaws. LIABILITIES E. Trade Payables During verification of trade payables balances in the balance sheet, the auditor should necessarily verify the GST provisions for the purpose of allowability of input tax credit. The auditor should verify the following from GSTperspective for finalisation of accounts. (a) In case of foreign creditors, particularly service vendors, the auditor should verify the impact of import of services and where applicable should review whether RCM has been properly discharged. (b) For domestic creditors, review of payment is sine qua non as ITC claimed must be reversed in case payment to the creditor is not made within a period of 180 days from the date of invoice and necessary interest to be provided on such reversal. Auditor must also ensure that ITC so reversed is reclaimed when the payment is made to the creditor. (c) In case of e-commerce companies, provisions relating to TCS have to closely monitored and discharging of liability should be done on a periodic basis as envisaged by the GST Act read along with relevant rules. 22

I. T. MIRROR (2023-24) REVIEW OF STATEMENT OF PROFIT AND LOSS REVENUE During the course of verification of the credit items in the statement of profit and loss, the auditor should necessarily map the revenue as per books with the GST returns. The turnover or outward supply disclosed in the statement of profit and loss should normally tally with the turnover reported in FORM GSTR-3B and FORM GSTR-1. However, invariably there will be differences and it is incumbent for an auditor to reconcile the differences as per GST returns with the books of accounts and ensure that there are no material or unexplained differences. A. Activities treated as supply, even if, made without consideration The auditor should verify whether GSTliability has been discharged and proper disclosure been made in the books of accounts. Activities treated as supplies without consideration can be verified from the various Notes/ Schedules and also during the course of audit, which may not form part of financial statements. The following are generally considered as deemed supplies under GSTAct. (a) Supply of services between related persons Import of services by a taxable person from a related person or from any of his other establishments outside India, for business purposes, without any consideration will be treated as supply and will attract GST liability under RCM. Example: ABC Inc. incorporated in the US is the holding company of B Ltd. (subsidiary) in India. Services/ recharges (IT Implementation etc.) are imported by B Ltd. from ABC Inc. without any consideration. GST should be paid by B Ltd. on reverse charge basis. (b) Permanent Transfer of Business Assets where ITC has been availed on such assets Permanent transfer or sale of business assets on which input tax credit has been availed will also be treated as supply, even if, no consideration is received. GST is applicable on sale of business assets only. It does not apply to the sale of personal land / building and other personal assets. “Permanent transfer” means transfer without any intention of receiving the goods back. Action Points for Auditor Generally, transactions between related persons without any considerations are not reflected in the Financial Statements of the entity. However, the auditor has to satisfy himself based on the discussion with management, understanding of the organisation during the course of audit that there are no transactions of such nature. The auditor should verify the transactions during the year to understand, if any such deemed supplies have taken place during the year. The auditor may also consider the disclosure made under Accounting Standard 18 – “Related Party Disclosure” to cross check and to ensure that no transaction is missed out from verification for GST compliance. In case such supply has taken place, the auditor should ensure that the GST liability on the said transactions along with interest, if any, are accounted and discharged as per the provisions of the GSTAct. In case the same is not done and if the tax payable is material, it may affect the 'True & Fair' view of the Financial Statements. Due care must be exercised during finalisation and audit of the Financial Statements. B. Classification of Supply under various Chapters (HSN Classification) In case of an entity operates in multiple products, the entity must discharge its tax liability based on the Chapter heading under which such goods are classified. There can be cases where the goods can be defined under multiple Chapters. Similarly, there can be goods which can have different duty structure within the same Chapter. The entity may inadvertently choose a lower rate which will result in short recovery and payment of GST. 23

I. T. MIRROR (2023-24) Example – All items under Chapter 64 (Footwear, gaiters and the like: parts of such articles) are taxed at 18% IGST or 9% CGST + 9% SGST, except, Footwear with retail sale price not exceeding Rs.1000 per pair which is subject to 5% IGST or 2.5% CGST + 2.5% SGST, if such sale price is marked or embossed on the footwear itself. This difference in rate must be properly captured in the stock item master and the auditor must ensure that footwear taxable at 18% have not been taxed at 5%. Action Points for Auditor The auditor must satisfy himself that the entity has classified the goods dealt by it according to the relevant Chapter. In case there is a difference in the Chapter heading, GST liability may vary and, if material, would affect the true and fair view of the Financial Statements. C. Non- GST supplies An auditor while finalising the books of accounts of an entity, has to review if any supplies are made outside the purview of GSTlaw and if so, has to review the completeness of the said transactions by various auditing approaches to conclude on the Financial Statements. Generally, the following items are considered to be out of the scope of GST: (a) Services by an employee to the employer in the course of or in relation to his employment. (b) Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering India. (c) Supply of warehoused goods (warehoused goods as defined in the Customs Act) to any person before clearance for home-consumption. (d) Supply of goods by the consignee to any other person, by endorsement of documents of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption. Although the above items do not have any impact on GST liabilities, input tax credit availed, if any, must be reviewed for allow ability and if not allowable should be transferred to the profit and loss account. Action Points for Auditor The auditor should conclude on the completeness of the above transactions by reviewing various agreements with the customers and related parties and significant transactions, if any. If any transactions are present, then the impact of the said transactions on input tax credit/ liability discharged are to be accounted appropriately. D. Accounting Standard and IND-AS Adjustments The company and entities preparing its Financial Statements following IND AS or GAPP principles as applicable may adopt accounting policies which may not match with the provisions of the GST Act and Rules made thereunder. Generally, the following items are considered to be out of the scope of GST: (a) In case of supply of goods, transfer of risk and reward may not happen at the year end, However, the entity will raise a bill under GST for the goods once the same is sent out of factory. (b) Revenue from rendering of services is recognised either on completion of services basis or on percentage of completion method. However, for discharging the liability under GST, the value of outward supply must be disclosed (i) in the return for the month in which an advance, if any, is received or (ii) in the return for the month in which an invoice/ progressive billing is raised as per the time frame stipulated in the Act. (c) IND AS-115 states that revenue shall be postponed to subsequent periods, if the stipulated conditions are not satisfied within the same year. Eg. If the goods are sold along with a warranty clause, then 24

I. T. MIRROR (2023-24) revenue in relation to the warranty period cannot be accounted immediately and has to be postponed to the subsequent period. However, as per the provisions of GST Act for goods sold, invoices are to be raised within the timeline prescribed by the Rules and tax discharged in the subsequent month. Action Points for Auditor The auditor should review the accounting policy adopted by the entity. In cases where the accounting treatment mandated by the Accounting Standards is not in consonance with those dictated by the GST Act/ Rules, then the auditor should ensure that the adjustments are meticulously kept on record as part of reconciliation. Any liability on account of the said adjustments are to be discharged at the appropriate time as prescribed under the GSTAct. EXPENSES During verification of the debit items in the statement of profit and loss, the auditor should review the impact of GST on various expenses and ensure that the same have been properly accounted for. This will ensure that the Financial Statements are not materially misstated for ineligible or wrong credits availed. An entity should follow a robust system of maintaining the vendor masters along with the GSTIN of the vendor to ensure that the input tax credit is taken only on eligible items. The entities should also satisfy the following conditions as per Section 16 of CGSTAct 2017 to take input credits The auditor needs to look into the following matters for the purpose of review of expenses with reference to GST Act and Rules made thereunder: (A) Blocked Credits. (i) Supply of food and beverages, outdoor catering, health services, life insurance and health insurance. GST on supply of food and beverages is not allowed as input tax credit as the same is for personal consumption and not in furtherance of business or subsequent taxable supply. Example: ABC Ltd. arranges refreshments/ tea/ coffee as part of staff welfare to its employees. It will not be able to claim ITC on the same. Exception: ITC would be available when inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply. (ii) Membership Fees of a club, health and fitness centre, travel benefits for employees. GST on membership fees is not allowed as input tax credit as the same is in the nature of personal consumption and not in the furtherance of the business or subsequent taxable supply. Example: Mr. A, a Managing Director has taken membership of a club and the company pays the membership fees, ITC will not be available to the company or Mr. A. Example: A Ltd. offers a travel package to its employees for personal holidays. ITC on GST paid by A Ltd. for the holiday package will not be allowed. (iii) ITC on personal use of assets/ goods/ services ITC will not be available for the goods and services used for personal purposes. (iv) Maintenance of vehicles used for transportation of passengers. GST paid on servicing and maintenance of such motor vehicles and aircraft will not be allowed as input tax credit as the same are explicitly blocked under section 17(5) except in case of vehicles with a seating capacity of more than 13 persons (including driver) or in cases of exclusions provided in the said section. 25

I. T. MIRROR (2023-24) Action Points forAuditor The auditor while reviewing the expenses must ensure that the entity has reversed the input credits taken, if any, on the above line items and expenses in its statement of profit and loss. (B) Expenses on which GSTis payable on reverse charge basis. As per section 9(3) of CGSTAct, the Government has provided a list of goods/ services on which GSThas to be paid on a reverse charge basis. The following is an illustrative list of such goods/ services. Sr. No. Nature of Supply Supplier Recipient Purchase of used vehicles, seized and confiscated goods, old and used goods, waste and scrap Central Government, State Government, Union territory or a local authority 1 Any registered person 2 Purchase of Cement Any person Promoter in Real Estate Services of Goods Travel Agency (GTA) Goods Transport Agency (GTA) 3 Any factory, society, cooperative society, registered person, body corporate, partnership firm, casual taxable person located in the taxable territory Legal Services of advocates An individual advocate including a senior advocate or firm of advocates 4 Any business entity located in the taxable territory Director’s services (except remuneration) A director of a company or a body corporate 5 The company or a body corporate located in the taxable territory Services by way of transfer of development rights or Floor Space Index (FSI) (including additional FSI) for construction of a project 6 Any person Promoter in real estate Security services Any person other than a body corporate 7 A registered person, being a body corporate located in the taxable territory 26

I. T. MIRROR (2023-24) (C) Import of Services. As per the GST provisions, import of service in the course or furtherance of business will be subject to GST on reverse charge basis. For a transaction to be considered as import of services, the following criteria have been prescribed by the IGSTAct: (a) Supplier of service is located outside India. (b) Recipient of service is located in India. (c) Place of supply of service is in India. Example: ABC and Co., an architecture consultancy firm of USA provided its services to XYZ & Associates, a Chartered Accountant firm in India for designing its office at Bangalore for a consideration of Rs. 10,00,000. Action Points The auditor should verify the statement of profit and loss and review for any services which are liable to be paid as part of import of services under reverse charge mechanism. Further, the auditor should also review the reconciliation of the supplies made under RCM/ import of services disclosed in FORM GSTR-3B returns with the financial statements to ensure completeness of the data submitted. CONCLUSION In conclusion, it is essential for auditors to consider the compliance with GST laws and regulations when finalizing and auditing financial statements. By considering GSTcompliance during the entire financial statement preparation and audit process, auditors can mitigate the risk of major misstatements and enhance the accuracy and reliability of financial information. This proactive and integrated approach strengthens the integrity of financial reporting and supports the overall objectives of obtaining reasonable assurance and presenting a true and fair view of the entity's financial position. 27

ROLE OF AUDITOR To comment on whether the company is using an accounting software which has a feature of recording audit trail of each and every transaction, the auditor would be expected to verify the following: • whether the trail feature is configurable (i.e., if it can be disabled)? • whether the feature was enabled/available throughout the year? • whether all transactions recorded in the software are covered in the audit trail feature? • whether the audit trail has been preserved as per record retention requirements? • whether the audit trails have been tampered with? AUDIT AUDIT TRAIL : Role of Auditor and Audit Approach - CA JYOTI HARPALANI 28 Identification Stage Review Stage Reporting Stage Reporting Under Section 143(3)(i) 1. IDENTIFICATION STAGE: a. Identify the records and transactions that constitute books of account under section 2(13) of the Companies Act [“the Act”]; b. Identify the software i.e., IT environment (including applications, web-portals, databases; Interfaces, Data Warehouses, data lakes, cloud infrastructure etc.) or any other IT component used for processing and or storing data for creation and maintenance books of accounts c. The audit trail feature is enabled (not disabled); d. The audit trail captures changes to each and every transaction; (e.g. when changes were made, who made those changes, what data was changed) e. The audit trail is enabled at the database level (if applicable) for logging any direct data changes f. Audit trail is appropriately protected from any modification, and is retained as per statutory record retention requirements. g. Controls over maintenance and monitoring of audit trail and its features are designed and operating effectively throughout the period of reporting. h. Evaluation of design and implement specific internal controls (predominantly IT)

I. T. MIRROR (2023-24) 2. REVIEWSTAGE: a. The Auditors need to verify certain controls such as restricting access to the administrators and monitoring changes to configurations that may impact the audit trail. b. Auditors are accordingly expected to evaluate management’s policies in this regard and test such controls to determine whether the feature of audit trails has been implemented and operating effectively throughout the reporting period. c. Audit trail log may generate voluminous data and thus there may be a need for management to ensure that administrative access to manage the audit trail is granted to authorized representatives only. d. To verify the system configuration that controls enabling or disabling of the audit trail and whether it was enabled throughout the period. e. Any changes to the audit trail configuration during the period. f. Periodic review mechanism implemented and operated by management for any changes to the audit trail configuration. g. Completeness and accuracy of an audit trail or edit logs that are generated through the software functionalities. 3. REPORTING STAGE: An auditor is expected to evaluate the reporting implication specifically giving due consideration to SA250 “Consideration of Laws and Regulations in an Audit of Financial Statements”. In respect of audit trail, the following are likely expected scenarios: i. Management may maintain adequate audit trail as required by the Account Rules. ii. Management may not have identified all records/transactions for which audit trail should be maintained. iii. The accounting software does not have the feature to maintain audit trail, or it was not enabled throughout the audit period. Scenarios (ii) and (iii) mentioned above would result in a modified/adverse reporting against this clause. Illustrative wordings for modified reporting 29 Illustrative wordings “Based on our examination, the company has used accounting software for maintaining its books of accounts which has a feature of recording audit trail (edit log) facility except in respect of maintenance of fixed asset records wherein the accounting software did not have the audit trail feature enabled throughout the year. Further, the audit trail facility has been operating throughout the year for all material and relevant transactions recorded in the software except for the instances reported below Also, based on our testing we did not come across any instance of audit trail feature been tampered with. “………except that the audit trail feature of YYY software used by the company to maintain payroll records did not operate throughout the year…..” “…..except that no audit trail enabled at the database level for applications AAA (database SQL) and BBB (database db2) to log any direct data changes………” Nature of exception Audit trail feature was disabled for one of the books of account records or for an accounting software - (e.g. fixed asset software did not have audit trail) Audit Trail feature is not operating effectively during the reporting period

Accounting software if maintained by third party and auditor is unable to assess whether audit trail feature can be disabled during the reporting period The audit trail has not been preserved by the company as per the statutory requirements for record retention. Migration from one software to the other happened during the year or higher version of software installed and auditor is unable to obtain sufficient and appropriate Evidence Illustrative wordings “Based on our examination, the company, has used an accounting software ABC which is operated by a third party software service provider, for maintaining its books of accounts and in absence of [state the type of control report] we are unable to comment whether audit trail feature of the said software was operating throughout the year for all material and relevant transactions recorded in the software or whether there were any instances of audit feature been tampered with.” “… the audit trail has not been preserved by the company as per the statutory requirements for record retention” Note: This illustration is relevant from 2nd year of reporting and onwards The Company has migrated to [name of the software] from [old software/manual] during the year and is in the process of establishing necessary controls and documentation regarding audit trail. Consequently, we are unable to comment on the audit trail feature of the said software. Nature of exception 4. REPORTING UNDER RULE 11 (g) VIS-À-VIS REPORTING UNDER SECTION 143(3)(i): Sec 143(3)(i) requires the auditor to state whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls. Para 52 of the Guidance Note on Audit of Internal Financial Controls over Financial Reporting [“IFCoFR “] issued by ICAI uses the expression ‘audit trail’ to describe control activities in relation to policies and procedures related to information processing system, however, it does not entail any detailed audit procedures in respect of reporting against Rule 11(g) of the Companies [Audit and Auditors] Rules, 2014. Accordingly, where the audit trail feature has not operated throughout the year, the auditor may need to appropriately modify his comment while reporting under Rule 11(g) depending upon the further testing as may be required to conclude on wider impact on the reporting implication. However, it should be noted that mere non-availability of audit trail does not necessarily imply failure or material weakness in the operating effectiveness of IFCoFR. OBTAINING WRITTEN REPRESENTATIONS: The auditor shall obtain written representations from management on the following: • Acknowledging management’s responsibility for establishing and maintaining adequate controls for identifying, maintaining, controlling, and monitoring audit trails as per the Companies Act requirements on a consistent basis. • Stating that management has performed an evaluation and assessed the adequacy and effectiveness of company’s procedures for complying to the requirements prescribed for audit trails. • Stating management’s conclusion, as set forth in its assessment, about the adequacy and effectiveness of company’s procedures in relation to audit trails. • Stating that management has disclosed to the auditor, all deficiencies identified in the design or operation of controls maintained for audit trails. I. T. MIRROR (2023-24) 30

• Describing instances where identification fraud if any, resulting in a material misstatement in the company's financial statements is identified while reviewing and testing the samples related to the disablement of the audit trail facility of the accounting software. • Stating whether control deficiencies identified and communicated to the audit committee in relation to audit trails during previous engagements have been resolved, and specifically identifying any deficiency that have not been resolved. The auditor may document the work performed on Audit Trails such that it provides: (a) Asufficient and appropriate record of the basis for the auditor’s reporting under Rule 11(g); and (b) Evidence that the audit was planned and performed in accordance with this Implementation guide, applicable Standards on Auditing and applicable legal and regulatory requirements. In this regard, the auditor may comply with the requirements of SA 230 “Audit Documentation” to the extent applicable. I. T. MIRROR (2023-24) 31

A. FACTS AND HISTORY : On 7-9-2022, the Income Tax Department carried out major search operations at more than 100 premises of various political parties at a time, with a team of more than 1000 Income tax officers, inspectors as well as Police staff. This is one of the biggest search operations in the history of Income Tax Department. This operation is also known as RUPP Group Search. RUPP stands for “Registered Unrecognized Political Parties”. During the course of search operations and post search investigation, the Investigation wing of I.T. Dept. had recorded statements of Presidents, Vice presidents and Principal officers of Political parties, wherein some of the persons had confessed / admitted about their engagement in bogus donation activities. On the basis of various materials found and statement recorded, the Investigation wing had forwarded appraisal report to the Central Circle (Jurisdictional Officer) along with list of donors/ beneficiaries. B. DONOR / BENEFICIARIES IN TROUBLE : As per the provisions for reopening of assessment u/s 148A of the Income Tax Act, cases only up to three years can be reopened and not beyond that, in case of escapement of income. Beyond three years, cases can be reopened only if the escapement of income is exceeding Rs 50 lacs for that particular year in form of asset. Upon completion of post search proceeding, as a part of consequential actions, various donors/ beneficiaries have been served notices as per the provisions of Section 148A& 148 of the Income Tax Act for A.Y.2019- 20 towards reopening their cases on the ground that the donations made by them are bogus. C. ARGUMENTS TO BE MADE IN CASE OF GENUINE DONOR : · On going through the reasons for reopening of assessment in most of the cases, it appears that the Assessing Officer has not provided any such document, information, material or statement recorded on which he has relied while issuing notices/order u/s 148A/148 of the Act. There are no such concrete basis or evidences with the assessing officer on record except incomplete verification report supplied by Investigation Wing and thus there is no question of escapement of income merely on basis of general information received. Accordingly, whole proceeding initiated u/s 148Aof the Act is bad in the eyes of law. · On going through the attachments provided in most of the cases, it appears that the one attachment titled as “Case Related Information Detail”, wherein it can be seen that the Investigation officer who passed on information, reported that no Specific Documents have been found and has forwarded only General Documents in form of 'Appraisal Report' & 'Others'. In absence of any specific documents provided by Wing, all the notices issued u/s 148A(b) of the Act are invalid. In fact, in many extracts of appraisal reports supplied with notice u/s 148A(b), the wing officer has stated that due to time constraint, the inquiry has not been completed and it requires further verification. As per the provisions of Section 148A of the Act, when the inquiry/verification has not been completed by Wing, then first, the Officer has to issue notice u/s 148A(a) of the Act, has to complete inquiry and if he is satisfied that there is an escapement of income, then and only then he can issue notice u/s 148A(b) of the Act. On this ground, all the notices issued u/s 148A(b) and consequential notices issued u/s 148 of the Act are invalid. Issues Pertaining to Scrutiny Assessment Towards Donation Made to Political Party W.R.T. Deduction Claimed U/S 80GGB/80GGC of Income Tax Act,1961 - CA SULABH PADSHAH 32

· At the time of reopening or thereafter, the officer has not provided a single piece of paper or any specific documentary evidence till the date showing that – i) How the political party was involved in taking bogus donation, ii) How assessee was involved in making the bogus donation, iii) How the donation made by assessee to Party is bogus and on what grounds, iv) how and on what basis, they are alleging that the donation made is bogus and returned back to the assessee. All these questions still remain unanswered. Thus, at present the allegation made by the IT Dept. regarding bogus donation appears to be completely baseless. · It is always open for the assessee to ask for specific evidences showing donation by him as bogus. You can further ask the officer to show your specific name or involvement through statement recorded or any other material or documentary evidences on which he has relied upon and has formed an opinion that the donation made to Party is bogus. Until, such concrete basis or evidences are provided to assessee, there is no question of treating the donation made by him as bogus merely on basis of general information received. · To further justify genuineness of the political party, the assessee can submit Certificate issued by the Election Commission of India, the most trusted body of the Government. He can further contest that he has gathered information to the extent available on various platform and to the best of his knowledge about party before making donation. Just like, the Party has been established since long and is actively involved in Political movement around all over India. The Party is one of the largest Political party in India contesting election regularly. The party is always participating in Election activities and consistently contesting elections every time with more than 100 candidatures from the party all over India. According to information available, the Party has contested and also won the seats in past elections, which you can verify from the Election Commission website. Party is also having its own website and strongly and actively does Election campaigning on social media and present everywhere on various public platform such as face book, you tube, Twitter etc. from which Election activity of Party can be viewed and verified. Thus, the assessee was able to convince himself about genuineness of the party and accordingly made the donation. Thus, the liability to verify the genuineness party has been duly discharged by the assessee at his end and is eligible for deduction u/s 80GGB/80GGC of the Act. · Apart from above, the donor has made the donation through approved banking channel i.e. approved mode under Income tax Act and also obtained the donation receipt from the party. · While making the donation, the donor has also verified and obtained the letter from the Political party that it is registered u/s 29Aof Representation of people Act and accordingly approved and authorized for receiving such donation, which is eligible for deduction u/s. 80GGB/80GGC of Income tax Act 1961. · At the time of making donation, the donor has also verified from the sources that the Registration of Political party has not been cancelled by the Election Commission till that date and thus its legal status is undoubted. · The Political party has valid bank account as per the banking norms prescribed by the RBI and in that account, the donor has made the donation in good faith and also the bank account was operative at that time and RBI or any other body has not blocked or restricted bank account of the party. Else the donor was not able to make the donation. · The donors are least concerned about what the political party is doing with the donation received, as it is none of their business. It is the sole responsibility of the party to make good use of it for the defined object provided in its constitution as held by various ITATs and High Courts in their decisions. There is no such strong evidence on record provided to the assessee by the Income tax department, that the assessee has received back cash in lieu of donation made by him · The opportunity of Cross examination is always available with the donor/assessee during course of proceeding as per settled law of Supreme Court that no addition/disallowance can be made without providing opportunity of cross examination as held in Andaman Timber Industries Vs CCE and also in other cases. I. T. MIRROR (2023-24) 33

· Most importantly, the Hon'ble Gujarat High Court has recently admitted Writ Petition challenging issue of reopening of assessment in case of beneficiary made the donation to one of political parties of the RUPP Group, wherein the Court has directed the Assessing officer not to pass the final order and accordingly grant interim relief. (M/s. PA Polymer Vs ITO - R/ Special Civil Application No. 9665 of 2023 dated 27-6- 2023) · Also, the Hon'ble Gujarat High Court in case of THE PRINCIPALCOMMISSIONER OFINCOME TAX-3 Versus M/S THAKKAR GOVINDBHAI GANPATLAL HUF – R/TAX APPEAL NO. 881 of 2019, has held that “we have duly considered rival The AO is harping upon an information supplied by the survey team of Calcutta. He has not specifically recorded statement of representative of the donee. He has not brought on record a specific evidence wherein donee has deposed that donations received from the assessee was paid back in cash after deducting commission. On the basis of general information collected from the donee, the donation made by the assessee cannot be doubted. Neither representatives of the donee have been put to cross-examination, nor any specific reply deposing that such donation was not received, or if received the same was repaid in cash, has been brought on record. In the absence of such circumstances, donation given by the assessee to the donee, on which the assessee no mechanism to check the veraci, can be doubted, more particularly, when certificate to obtain donation has been cancelled after two years of the payment of donation. It is fact which has been unearthed subsequent to the donations. Therefore, there cannot be any disallowance on this issue. We allow this ground” In the facts of the present case, the CIT(Appeals) has given the finding of the fact that the amount of donation was transferred to the Herbicure through Bank channel and there is no evidence that the same is returned back in cash.” · The Hon'ble ITATAhmedabad in case of ACIT v. Armee Infotech [2022] 136 taxmann.com 128, has held as under : Section 80GGC of the Income-tax Act, 1961 – Deductions – Political contribution (Allowability of) – Assessment years 2012-13 and 2014-15 – Whether section 80GGC provides deduction of any amount of contribution made by an assessee in previous year to a political party, however, donation should not be given by a local authority or by a corporation funded by Government – Held, yes – Whether Act nowhere puts obligation upon donor to ensure how funds are utilized by donee towards their objects – Held, yes – Whether further, once donation has been made, donee is also not under obligation to keep a track of donation and no donee will be under influence of donor for arranging its affairs – Held, yes – Whether therefore, funds given by assessee as donation to political parties and charitable Institutions (donees) under section 80GGC could not have been disallowed treating same as bogus on ground that donees failed to use it for object which had been eligible to receive donation – Held, yes [Para 32] [In favour of assessee] Relying the upon the above decisions, the donation made totally genuine and rightly claimed u/s 80GGC of the Act in the ITR filed and thus the same cannot be considered as bogus. The above decisions being decisions of Jurisdictional ITAT and High Court decision are clearly binding on you and not accepting the view taken by the Jurisdictional Authority is clearly a contempt of court. In view of the above submission and documentary evidences attached herewith, it is proved beyond the doubt that the donation made to Political party is genuine and is eligible for deduction as per the provisions of Section 80GGC of Income Tax Act. Therefore, the proceedings initiated by issuing notice u/s 148A(b) of the Act is totally illegal and invalid in the eyes of law, as there is no any escapement of income. I therefore request you to drop the proceedings initiated u/s 148A(b) of the act and oblige. If you require any further information in this regard, please let me know before passing any order in this regard. · Recently, the Hon'ble ITAT Mumbai in one of the casesheld that 'Disallowance cannot be made in respect of donation made to an institution based on valid CBDTapproval'. Facts: 1. Assessing Officer noticed that assessee has given donation of Rs.1,10,00,000/- to School of Human Genetics and Population Health (SHGPH) and claimed deduction of Rs.1,92,50,000/- under section 35(1)(ii) of the Act being 175% of the donation amount. I. T. MIRROR (2023-24) 34

2. The Assessing Officer stated that information was received from the office of DGIT(Inv), Kolkata that survey action was carried out in the case of SHGPH and it was found that they were engaged in providing accommodation entries of bogus donation to the donors and they have accepted that they have refunded amount after deducting commission charges. 3. Therefore, a show cause notice was issued to the assessee as to why the deduction under section 35(1)(ii) claimed by the assessee should not be disallowed. 4. In response, the assessee filed his submission alongwith copy of receipt issued by SHGPH and appreciating that the disallowance of donation on the basis of certain statements recorded of the Donee Trust without giving any opportunity to cross-examine the said persons is bad in law. 5. However, Assessing Officer disallowed the claim of deduction under section 35(1)(ii). ITATMumbai held as below: 1. It is noticed that CBDT vide its notification No.82/2016 F.No.2003/64/2009/ITA-II has withdrawn notification granting approval under section 35(1)(ii) on 15/09/2016 which showed that notification was valid at the time the donation was made. 2. In this regard, we have perused the decision of ITAT, Mumbai Bench “H” in ITANo.1202/Mum/2022 order dated 15/09/2022 wherein it was held that at the time of making donation to SHGPH, the concern was having valid approval granted under the Act by the CBDT. 3. So, the AO is directed to allow the claim of deduction. D. TAXABILITY & PENALTY, IN CASE OF ADDITION/DISALLOWANCE : In case , the genuineness of donation is not be proved by the donor/assessee, the Income tax department may make addition/disallowance of donation made. In such case, it is also interesting to see that whether the Income tax department is considering such addition/disallowance at regular tax rate or considering it as unexplained u/s 69/69A/69B/69C of the Act and determine tax at special rate as provided u/s 115BBE of the Act i.e 60% tax +Surcharge+ Education cess and considering penalty, the effective rate u/s 115BBE of the Act comes to around 83%. The interest liability will be additional in both the above scenario. Further the Income tax department may levy the penalty u/s 270Aof the Act upto 200% of tax liability, if the tax liability is determined at normal rate of tax. I. T. MIRROR (2023-24) 35

When it comes to purchasing a property in India, understanding the Agreement for Sale and Sale Deed is crucial. These legal documents provide a formal structure to verbal agreements between buyers and sellers, ensuring that both parties are protected. In this article, we will delve into the important terms and conditions found in these documents and discuss their significance in property transactions in India. AGREEMENT FOR SALE VS. SALE DEED: An Agreement for Sale, also known as the Sale Agreement, outlines the terms and conditions agreed upon by the buyer and seller. It serves as a roadmap for the transaction, covering details such as the property's location, sale price, payment plan, completion timeline, and other essential terms. On the other hand, a Sale Deed, also known as the conveyance deed, is the legal document that transfers ownership of the property from the seller to the buyer. It is executed once the property transaction is complete and all terms of the Agreement for Sale have been fulfilled. MODEL AGREEMENT FOR SALE PRESCRIBED UNDER RERA AND IMPORTANT CLAUSES: The Real Estate (Regulation and Development) Act, 2016 (RERA) has introduced a Model Agreement for Sale that acts as a reference for developers and buyers when drafting a sale agreement. This model agreement includes several pertinent clauses such as the payment plan, completion timeline, carpet area, and penalty clauses for delays. These clauses provide clarity and protection for both parties involved in the property transaction. COMPULSORY REGISTRATION OF AGREEMENT FOR SALE UNDER RERA: RERA mandates the compulsory registration of an Agreement for Sale for both ongoing and new projects. This registration ensures that the agreement incorporates essential details like the carpet area, number of units, sale price, payment plan, and other necessary terms and conditions. By making registration compulsory, RERAaims to enhance transparency and safeguard the interests of buyers. CONTENTS OF THE AGREEMENT FOR SALE: The Agreement for Sale should include the following crucial information: 1. Description of the property: This section should provide an accurate and comprehensive description of the property, including its address, size, legal description, and other relevant details. 2. Parties to Sale Deed: Include detailed information about the buyer and seller, such as their names, addresses, contact numbers, and PAN card numbers. Demystifying the Importance, Meaning and Terms & Conditions of Agreement for Sale and Sale Deed ADV (CS) LOKESH SHAH CA HARSH MEHTA 36

3. Property Description: This section should provide a detailed description of the property being sold, including the unit number, address, carpet area, boundaries, and type of property (flat, plot, or house). 4. Purchase Price and Payment Terms: Clearly state the purchase price along with the payment schedule and mode of payment. Specify the payment plan, including the payment schedule, amount of earnest money, and the balance payable upon executing the sale deed. 5. Timeline: Set a specific timeline for the completion of the sale. If the sale is not concluded by the agreed-upon date, the agreement may be canceled, and any advance consideration should be refunded. 6. Due Diligence: Ensure that the seller provides complete assistance and cooperation to the buyer for undertaking due diligence of the property. This includes facilitating the verification of the property's title and addressing any queries the buyer may have. 7. Encumbrances: Unless agreed otherwise, state that the property should be sold free from any encumbrances. Additionally, the seller must clear all dues and liabilities (property taxes, electricity charges, maintenance charges, etc.) related to the property until the date of sale. 8. Right to Abort: Reserve the buyer's right to abort the deal under certain circumstances without facing any financial penalties. This includes discovering defects in the property's title or non-compliance with the agreed terms and conditions by the seller. 9. Indemnity against Legal Defects: Include an indemnity clause in the agreement to safeguard the buyer against any adverse claims arising from defects in the property's title or the actions/inactions of the seller. 10. Updating Government Records: Ensure that the seller provides all necessary assistance to update government records reflecting the buyer as the new owner of the property. 11. Exclusivity of the Sale: Include a clause on exclusivity, prohibiting the seller from conducting discussions or negotiations with third parties regarding the property while the sale is in progress. 12. Default: Specify the consequences if either party defaults on their obligations. This may include penalties, the right to terminate the agreement, or both. I. T. MIRROR (2023-24) 37

13. Dispute Resolution: Specify how disputes will be resolved, whether through arbitration, litigation, or RERA's dispute resolution mechanisms. RIGHTS OF THE SELLER UNDER AN AGREEMENT TO SELL The seller possesses certain rights under an Agreement to Sell, which are as follows: 1. Right to Receive the Sale Consideration: The seller has the right to receive the sale consideration from the buyer upon the completion of the transaction. The consideration can be provided in cash or any mutually agreed-upon mode of payment. 2. Right to DeliverPossession of the Property: The seller has the right to deliver possession of the property to the buyer once the transaction is completed. It is the seller's responsibility to ensure that the property is in good condition and free from any encumbrances before handing over possession to the buyer. 3. Right to Sue the Buyer forSpecific Performance of the Contract: If the buyer breaches the terms and conditions of the agreement, the seller has the right to sue the buyer for specific performance of the contract. This means that the seller can legally compel the buyer to fulfill their obligations as per the agreed-upon terms and conditions. 4. Right to Terminate the Contract: The seller has the right to terminate the contract in case of a breach by the buyer. However, the seller must provide prior notice to the buyer and adhere to the terms and conditions outlined in the agreement. 5. Right to Withdraw from the Sale: In the absence of an agreement or if either party cancels or withdraws from the sale, the seller has the right to completely withdraw from the transaction. CONTENTS OF THE SALE DEED The Sale Deed should contain the following details: 1. Parties to the Sale Deed: The sale deed must include the names, addresses, contact numbers, and PAN card numbers of both the buyer and the seller. 2. Property Description: A detailed description of the property being sold, including its address, area, boundaries, type (flat, plot, or house), and other relevant information should be mentioned in the sale deed. 3. Sale Consideration: The sale deed must specify the agreed-upon sale price between the buyer and the seller. Additionally, it should state the mode of payment, such as cash, cheque, or online transfer, and the sale consideration should be mentioned in both words and figures. I. T. MIRROR (2023-24) 38

4. Payment Terms: The sale deed should outline the payment terms agreed upon by the parties, including the mode of payment, payment schedule, and any other relevant details. 5. Encumbrances: It is important to mention in the sale deed whether the property is free from any encumbrances, such as mortgages, liens, or charges. In case of any encumbrances, they should be specified in the sale deed. 6. Indemnity: The sale deed should include an indemnity clause in which the seller indemnifies the buyer against any losses or damages arising from defects in the title, misrepresentations, or other breaches of the sale deed. 7. Possession: The sale deed should mention the exact date of transfer of possession of the property. Any conditions related to possession, such as vacant possession or possession subject to existing tenancies, should also be specified. 8. Dispute Resolution: A clause related to dispute resolution should be included in the sale deed. This clause outlines that any dispute arising out of the sale deed will be resolved through arbitration or the court system. STAMP DUTY AND REGISTRATION FEES The stamp duty and registration fees payable for an Agreement for Sale and Sale Deed vary depending on the state where the property is located. It is advisable for the buyer and seller to consult with a lawyer to determine the exact amount of stamp duty and registration fees that will be applicable. EXECUTION PROCESS IN INDIA The execution process of an Agreement for Sale and Sale Deed in India involves the following steps: 1. Drafting and signing of the agreement by both parties. 2. Payment of token money by the buyer to the seller as a sign of good faith. 3. Registration of the sale agreement with the Sub-Registrar of Assurances within four months of signing. 4. The seller providing all necessary documents, such as the possession letter and society transfer forms, to the buyer. 5. Payment of the balance amount by the buyer and execution of the sale deed. EXECUTION OF AGREEMENT IN ABSENCE OF A PERSON IN INDIA THROUGH POA If one of the parties is not present in India during the execution of the agreement, they can appoint a Power of Attorney (POA) holder to act on their behalf. The POA holder must be authorized in writing and possess the requisite documents to execute the agreement. PRESENCE OF PARTIES Presence of only the seller is required at the time of registration of the agreement for sale before the registrar. However, both parties must be physically present at the time of executing the sale deed. I. T. MIRROR (2023-24) 39

CONCLUSION In conclusion, an Agreement for Sale and Sale Deed are two essential legal documents that must be executed while purchasing a property in India. It's crucial to include all the necessary clauses in the agreement to safeguard the interests of both parties. Stamp duty and registration fees are payable while executing the agreement, and the execution process involves several steps. In exceptional circumstances, the parties can execute the agreement through POA or video conferencing. The model agreement prescribed under RERA and the compulsory registration of agreements are two significant provisions that must be considered while drafting an agreement for sale. Here are some additional tips while drafting the agreement and sale deed: · Be sure to use clear and concise language. · Avoid using jargon or technical terms. · Be as specific as possible. · Have the agreement reviewed by a lawyer. I. T. MIRROR (2023-24) 40

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