assessment on deceased assessee - Guntur Branch of SIRC

News Letter- MAY, 2016

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ASSESSMENT ON DECEASED ASSESSEE

"Only two things are certain in life: Death and taxes- Benjamin Franklin".

We all agree with the above quote. Death will certainly put end to so many issues but not taxissues! In this article, we shall understand the assessment proceedings pertaining to a deceased assesseewith the help of judgment of Honourable High Court in the case of CIT vs. M Hemanathan.

The background of the caseis that the Department even though they had notice of death of theassessee,proceeded to initiate revision proceedings against the deceased assessee.

The issue before the Honourable High Court of Madras is whether the proceedings initiated againstthe deceased assessee are valid when the legal heir has participated in the proceedings?

Facts of the case:

Assessee filed the return of income and the return was processed under Section 143(1) of the Act.Later the assessee case was selected for scrutiny and notice under Section 143(2) issued. A refundorder was passed after taking into account the information submitted by the assessee.

After two years of passing assessment order, the CIT issued a notice under Section 263. The showcause notice was addressed to the assessee. Three months before the issue of show cause notice theassessee has passed away. The show cause notice returned with the endorsement "assessee deceased".This fact was informed by the ITO to the Commissioner. Thereafter department served the sameshow cause notice to the son of the deceased assessee through messenger. Son participated in theproceedings through authorized representative.

Pursuant to show cause notice the case was remitted back to the assessing officer for passing afresh order. The assessing officer passed an order raising the demand for payment of tax.

Son (legal heir) preferred an appeal against the order passed under Section 263 to the Tribunal.The appeal is allowed by the Tribunal holding that the order U/S 263 against a deceased person isnull.

Department has filed an appeal against the order of the Tribunal before Honourable High Court.

INCOME TAX

Guntur Branch of SIRC of ICAI

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Department Contention:

o The Tribunal was wrong in setting aside the order under Section 263 as null as it was passedagainst a deceased person as the legal heir participated in proceedings;

o Though the notice was issued on the deceased person it was served on the legal heir and legalheir participated in the proceedings. Therefore, the provisions of section 292BB will apply;

o As per the provisions of section 159(2) legal representative will deemed to be an assessee.

High Court Verdict:-

o Any proceedings initiated against the deceased person is a nullity. Law permits the proceedingsto continue after the death of the assessee provided they initiated when he was alive and nototherwise.

o The purpose of issue of notice is to make the person aware of the nature of the proceedings.Once the nature of proceedings is made known and understood by the assessee, he shouldnot be allowed to take advantage of certain procedural defects. The provisions of section 292BBcannot be invoked where the very initiation of proceedings is against deceased person.

o Provisions of section 159(1) would apply to a case where a liability has already crystallized. Inthis case the very initiation of proceedings was done after the death of the assessee. Despite theknown fact that the assessee had passed away the department chose to pursue very samenotice and hence department can't take the advantage of Section 159(2)(b).

o As the notice issued against deceased person the provisions of section 159(3) are not applicable.

o The very initiation of the proceedings against the deceased person and the continuation of thesame despite having noticed the factum of death of the assessee, cannot be approved.

Remarks:

As the notice was issued in the name of the deceased assessee the proceedings are null. There is

distinction between a case where proceedings are initiated against person, who is alive, but continued

after his death and a case where proceedings are initiated against a deceased person himself. Former

case is valid as per the Act while later is null.


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TDS/TCS provisions: (w.e.f. 01/06/2016)

Changes in Threshold Limits:

Section Particulars New Threshold 192A Payment of accumulated balance of PF Rs. 50,000/- 194BB Winning from Horse Races Rs. 10,000 194C Payment to Contractors Rs. 1,00,000/-

(Aggregate amount) 194D Insurance Commission 15,000/- 194G Commission on sale of Lottery Tickets

Rs. 15,000/-

194H Commission or Brokerage Rs. 15,000/- 194LA PaymentofCompensationonacquisitionof

Immovable Property Rs. 2,50,000/-

Changes in Rates:

Section Section New Rate 194DA Payment in respect of LIP 1% 194EE Payment in respect of NSS

Deposits 10%

194D Insurance Commission 5% 194G Commissiononsaleof lottery

tickets 5%

194H Commission or Brokerage 5%

Declaration in Form 15G/15H:

Section 194-I also eligible for filing self-declaration in Form no 15G/15H for non-deduction oftax at source in accordance with the provisions of section 197A.

Seller shall collect the tax at the rate of one per cent from the purchaser on sale of motor vehicleof the value exceeding ten lakh rupees and sale in cash of any goods (other than bullion andjewellery), or providing of any services (other than payments on which tax is deducted at sourceunder Chapter XVII-B)

exceeding two lakh rupees. (w.e.f. 01/06/2016)


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CARO-2016I)Introduction:

Companies (Auditor's Report) order 2015 has been issued under sec 143(ii) of Companies Act2013 superseding the order of 2003 issued under 227(4A) of the Companies Act 1956. Now a freshorder has been issued on 29th March 2016 in supersession of the said order with some additions,modification and deletions. A brief discussion is made on the order in the Article.

II) Applicability:

The order is applicable to all companies including a foreign company but does not apply to a)banking company b) Insurance Company c) a company registered under sec 8 of the CompaniesAct d) One person company and a small company and e) a private limited company which is not asubsidiary or holding company of a public company, its paid up capital and reserves and surplusdoes not exceed rupees one crore as on the date of Balance sheet and the total borrowings from abank or financial institution does not exceed rupees one crore at any point of time during the yearand total revenue as per the financial statements does not exceed rupees ten crore for the year.

The major amendment regarding applicability of the order is i) it is not applicable to the auditor'sreport on consolidated financial statements and ii) in case of private company increase of paid upcapital and reserves from fifty lakh to one crore, increase of borrowings from fifty lakh to one crorebut anytime during the year has been added and increase of turn over from five crore to ten crorewith substitution of total revenue. Further this order will be applicable if the private company is aholding or subsidiary of a public company.

III) Additions:

a) Fixed Assets: The auditor has to report whether the title deeds of immovable properties are heldin the name of the company. Otherwise he has to mention the details in the report.

b) Loans, Guarantees etc.: If the company advances any loan, makes any investments, provides anyguarantee or security the auditor has to comment on the compliance of Sec. 185 regardingloans, guarantee or security to certain related parties and compliance of Sec. 186 regarding theloans and investments made and also guarantees and securities provided by the company intotal to others including related parties.

c) Managerial Remuneration: In case of a Public Company the remuneration to the Managerialpersonnel has to be paid within the limits prescribed in Sec. 197 read with schedule V of thecompanies Act 2013. In case of any violation the auditor has to mention in the report regardingthe steps taken by the company to recover from the person concerned.

d) Nidhi Companies: It has to be mentioned in the report whether the company has complied withNet owned funds to deposits in the ratio of 1:20 to the liability and whether the company is


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maintaining 10 % of its funds in unencumbered term deposits as specified in Nidhi rules 2014.e) Related Parties: In case of transactions with related parties whether they are in compliance with

Sec. 177 and 199 of the Companies Act 2013 wherever applicable and disclosed the details inthe financial statements as required by the Accounting Standards concerned.

f) Utilization of funds: If the company has made a preferential allotment or private placement ofshares, fully or partly convertible debentures, whether the company has complied with theprovisions of Sec. 42 of the companies Act 2013 regarding the utilization of funds for the purposefor which the same were raised. The report shall give details of noncompliance and the amountinvolved in the same.

g) Non-cash transaction: In case the company has entered into any non-cash transactions with directorsor other parties it shall be mentioned in the report on the compliance of sec. 192 of the CompaniesAct 2013.

h) Registrations: In case of Non-Banking Finance Company whether the company has been registeredwith Reserve Bank of India under Sec. 45IA of the Reserve Bank of India Act 1934.

IV) Modifications:

a) Inventories: Matter regarding physical verification, maintenance of records, accounting ofdiscrepancies of Inventories have been clubbed and inserted as a singleitem.

b) Default of Loans: In modification of the existing item, the details regarding default in repaymentof loans to a financial institution, bank, Government or dues to debenture holders, the periodand amount of default to be mentioned in the report. In addition lender wise details has to beprovided in case of defaults to banks, financial institutions and Government.

c) Utilization of funds: In partial modification of utilization of funds, in addition to term loans,funds from initial public offer, further public offer has been added.

V) Omission:

a) Internal Control: Comment on the adequacy of internal control for purchases fixed assets, salesand services has been withdrawn since the auditor has to comment on the internal financialcontrols regarding the financial statements in the main audit report separately.

b) Investor Education and protection fund: The comment regarding transfer of amount to InvestorEducation and Protection Fund has been removed since the auditor has to report on the samematter in the main audit report itself. Note: The above two points have been removed from theorder to avoid duplication of reporting.

c) Accumulation losses: In case of a company registered for more than five years, the comment onaccumulated loss and cash loss incurred during the period of audit and in the immediate precedingperiod has been withdrawn.


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VI) Analysis:

The authorities have increased the responsibilities of the auditor in case of loans, guarantees andsecurity provided by the company. According to Sec. 185 a holding company can do any such act toits company wholly owned subsidiary and a Private Company can do such acts provided threeconditions are satisfiedi) No body corporate is a member in the companyii) the borrowing from banks or financial institution or anybody corporate is less than twice of its

paid up capital or fifty crore rupees whichever is lower and

iii) the company has not made any default in repayment such borrowings. Further a companywhose business is mainly providing loans or giving guarantee or security to others can do suchacts without any restriction. So the auditor shall exercise reasonable care in analyzing thetransactions covered under Sec 185 of the Act before coming to a conclusion that the transactionshave been executed in compliance of the Act.

Section 186 of the Act contains the provisions regarding limits of investments, loans and guaranteesby the companies. The auditor shall analyse that necessary procedures have been followed by thecompany to comply with the Act.

The auditor of a public limited company has to mention whether managerial remuneration paidis within the limits prescribed under Sec. 197 read with Schedule V of the Act. It may be on profits oreffective capital of the company. In certain cases prior approval of the Central Government is necessary.

Regarding related party transactions, the auditor has to see the compliance of Sec. 188 of the Actand confirm that Board Resolution or Special resolution has been passed. He shall also see aboutthe exemption regarding the transactions in the usual course of business and is at arm's length price.The auditor has to make a thorough analysis on the non-cash transactions with directors and otherparties since restriction has been placed under Sec 192 of the Act and the auditor has comment onthe effect of such transactions in the main report itself. The auditor shall also pay special attention tothe allotment of shares and debentures through preferential allotment or private placement and seewhether the funds raised has been utilized for the purpose or not.

In case of public companies if any funds are raised through initial public offer or further publicoffer the auditor has to comment on the utilization of funds on par with term loans.

VII) Conclusion:

The Government has amended the order to have more transparent opinion of auditor on financialstatements and a thorough scrutiny of certain items by the auditor to protect the interest of the company,its members, investors, lenders and also the public. So the auditor has to be more cautious in planning,conducting and monitoring the audit and also make proper risk assessment before coming to aconclusion on the report to be submitted as per law.


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Use of Digital Signature and Electronic maintenance ofrecords under Central Excise and Service Tax

On improvement of technology there has been change in the way of working among varioussectors which is decreasing the execution time, increasing the accuracy and also reducing the usageof the paper, keep in this in mind Government of India has in the recent past launched its dreaminitiative of 'Digital India' which promises to integrate the government departments and the peopleof India ensuring that the government services are made available to citizens electronically andthereby increasing the work efficiency and reducingthe paperwork. There has been an amendmentunder Central Excise and service tax also wherein Notification No. 8/2015-CE (NT) dated01.03.2015was issued to provide that:

" The records may be preserved in electronic form and every page of the record so preservedshall be authenticated by means of a digital signature.

" An invoice issued by a manufacturer may be authenticated by means of a digital signature:Provided that where the duplicate copy of the invoice meant for transporter is digitally signed, a

hard copy of the duplicate copy of the invoice meant for transporter and self attested by themanufacturer shall be used for transport of goods".

Similar amendment was also introduced in the Service Tax Rules, 1994 vide Notification No. 5/2015-ST dated 01.03.2015. Further it was informed that the board may, by notification, specify theconditions, safeguards and procedures to be followed by an assessee preserving digitally signedrecords or issuing digitally signed invoices.

In order to give effect to the above amendments, CBEChas issued a notification No. 18/2015 CENT dated 06.07.2015 providing the conditions, safeguards and procedures to be complied. Thisarticle is intended to provide the insights of the said conditions and its practical applicability asbelow:

Type of Digital Signature Certificate (DSC) to be obtained

Every assessee proposing to use digital signature shall use Class 2 or Class 3 Digital SignatureCertificate duly issued by the Certifying Authority in India

. Comments:Information Technology Act, 2000 has given legal recognition to digital signaturesmeaning that the digital signatures have the same value as handwritten or signed signatures affixedto a document for its verification. Hence there is no issue as for the validity of the same.

Generally, there are four classes of digital signature certificatesviz Class 0, 1, 2 and 3, each class ofCertificate provides specific functionality and security features and corresponds to a specific level oftrust, Class 3 being highly secured and provides for higher level of trust. Class 1 and class 2 DSC'sare used for basic purposes such as testing or to just check the validity of an email etc. whereas Class2 DSC's are generally used for filing documents under Income Tax, Registrar of Companies and VATetc. Class 3 DSC's are used for more complex applications such as online e-tendering, e-commerce


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etc. which requires higher security levels and trust. For the purpose of authentication under Central Excise & Service Tax only Class 2 or class 3

digital signature certificates are recognized as valid. So one has to be very clear on the type thedigital signature that needs to be opted.

Prior intimation to AC/DC

Every assessee proposing to use digital signatures shall intimate the following details to thejurisdictional AC/DC, at least 15 in advance:

a) Name, e-mail id, office address and designation of the person authorised to use the digitalsignature certificate;

b) Name of the Certifying Authority;c) Date of issue of digital certificate and validity of the digital signature with a copy of the certificate

issued by the Certifying Authority along with the complete address of the said AuthorityIntimation of change in details In case of any change in the details submitted to the jurisdictional

AC/DC, complete details shall be submitted afresh within 15 days of such change.

Intimation even if already using digital signature

Every assessee already using digital signature shall intimate to the jurisdictional AC/DC, theabove details within 15 days of issue of this notification.

Comments: Although Central Excise and Service Tax law has now explicitly provided for the useof digital signature/ maintenance of electronic records butthe same was followed by many assesseseven before the existence of the said amendment, as digital signature/digital maintenance of recordsweregiven legal validity undersection 4 of Information Technology Act, 2000 which overrides allother laws.

For all such assesses already using digital signatures, it is advised to intimate the details beforeJuly 21, 2015. This intimation is only required for the assesses already using digital signatures. It isnot required for assesses already using electronic records.

Separate electronic records for each registration

It is specified that every assessee opting to maintain electronic records having more than onefactory or service tax registration then shall maintain separate electronic records for each factory oreach service tax registration.

Comments:In this regard, following must be noted:

" Separate Daily Stock Accounts in electronic form must be maintained for each factory;" Separate output tax computations, CENVAT register must be maintained for each registered

premises;" v This requirement is only for electronic maintenance of records and not for digital signatures,

therefore single digital signature shall suffice even for multiple registrations of the same assessee.


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Warm Greetings ,

I hope, the members are relieved from their hectic audit schedule of bank branchaudits and after successful completion of the bank branch audits, I am sure many ofus are in the midst of the statutory audits.I am sure the students have prepared well fortheir examinations and writing the same with confidence. I wish all the best to themand I am confident that they will come out with flying colours.

I would like to quote a saying of Swami Vivekananda "Arise, Awake and Stop notuntil the goal is reached."

Orientation Programme for all the Members of the Managing Committees of Branchesof SIRC of ICAI

We are glad to inform that ,SIRC of ICAI has organised an Orientation Programme for all the managingCommittee Members of the Branches of SIRC of ICAI on 25th and 26th April 2016 at Tirupati. ICAIPresident CA. M. Devaraja Reddy and ICAI Vice-President CA. Nilesh Shivji Vikamsey have graced theoccasion with their august presence. The Programme was inaugurated by Shri chadalawada Krishnamurthy,Chairman Tirumala Tirupati Devasthanam Trust Board. All the branch members has attended this programand the program helped us to know how better we can perform well for development of branch and overalldevelopement of our esteemed institute ICAI.I Witnesses that this kind of orientation programme willstrengthen the Branch Management capabilities of our Members.

Renewal of MembershipI would like to remind the members to renew their Membership and Certificate of Practice for the year

2016-17 by remitting requisite fee at the earliest. Eventhough, we are all are aware that the last date ofrenewal is 30th September, 2016, it is better to take timely action to avoid the process of removal andrestoration.

Mock-Tests for IPCC and Final Courses: Hyderabad Branch has conducted two series of Mock-tests for both IPCC and Final Courses during

the months of March & April, 2016. The students have attended the same in large number and witnessedtheir level of preparation for their examinations.

Multiple Batches of GMCS, Orientation Programme (OP) and ITT Classes: The Branch has announced multiple batches of GMCS I & II, OP and ITT for the benefit of the students

for which a large number of students have been registered. Keeping in view of the demand from thestudents, we are also planning few more batches of the same and will be announced shortly. The studentsare advised to take the advantage of the same to avoid delay in the registration of articleship.

I would like to conclude my write up with a quote

" START BY DOING WHAT'S NECESSARY; THEN DO WHAT'S POSSIBLE; AND SUDDENLYYOU ARE DOING THE IMPOSSIBLE"

Regards

Cherukuri Sambasiva Rao

Chairman.


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assessment on deceased assessee - Guntur Branch of SIRC

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