TaxTMI 
TaxTMI 
2024 (1) TMI 254
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....onal Misconduct by the Firm and CA K E. Penalty & Sanctions EXECUTIVE SUMMARY 3. In August 2022 the Director General of Income Tax (Investigation), Bengaluru (IT department) shared information about claim of deduction under section 80 JJAA of Income Tax Act totalling Rs 1135.41 crores by Quess based on form 10 DA issued by two chartered accountants for Financial Years 2016-17, 2017-18, 2018-19, 2019-20 & 2020-21. NFRA Suo motu initiated action under Section 132(4) of the Companies Act 2013 ('Act' hereafter) to look into the professional conduct of the chartered accountants and their firms involved in the said certification. 4. NFRA's investigations inter alia revealed that the CA failed to exercise due diligence and obtain sufficient information before issuing reports under the Income Tax Act. The CA failed to apply the necessary checks, e.g., (a) verify reorganization of business with various parties; (b) exclude employees whose EPS [EPS - Employees' Pension Scheme] contribution was paid by the Government; (c) correctly report the number of additional employees during FY 2020-21; (d) verify that payment of additional employee cost was made by account payee ch....
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....s in form 1ODA, which formed the basis of Quess claiming deduction under section 80JJAA of the Income Tax Act for FY 2018-19, 2019-20 and 2020-21. 9. NFRA Suo motu initiated proceedings under section 132(4) of the Act and on 23.09.2022 the CA was advised to submit the working files relating to the deduction claimed by Quess. The CA submitted the Files on 29.09.2022 and 11.10.2022. Based on their examination, NFRA, after observing prima facie professional misconduct, issued a Show Cause Notice ('SCN' hereafter) dated 21.06.2023 under section 132(4) of the Act, for (a) failure to exercise due diligence and being grossly negligent in the conduct of professional duties, and (b) failure to obtain an appropriate information necessary for expression of an opinion or its exceptions to negate the expression of an opinion. All of these constituted professional misconducts. 10. The CA sought extension of 7 days for replying, which was allowed. Vide email dated 28.07.2023 he submitted the reply to SCN. A personal hearing was also scheduled for 21.08.2023, but CA Pawan Jain sought extension of four weeks' time. On 18.08.2023, NFRA rescheduled the personal hearing for 04.09.2023. V....
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....e amount of deduction eligible u/s 80JJAA in respect of payments for the emoluments paid or payable to the additional employee. 12. CA Pawan Jain had issued 4 reports in Form 10 DA based on which Quess had claimed deduction of Rs. 970.82 crores from its taxable income, the details of which are as under in Table 1: One of the basic preconditions to this deduction is that the business should not be formed due to the splitting up, reconstruction or reorganization of any business. Subsection 2 of section 80JJAA is quoted below: "80JJAA(2) : No deduction under sub-section (1) shall be allowed,- (a) if the business is formed by splitting up, or the reconstruction, of an existing business: Provided that nothing contained in this clause shall apply in respect of a business which is formed as a result of re-establishment, reconstruction or revival by the assessee of the business in the circumstances and within the period specified in section 33B; (b) if the business is acquired by the assessee by way of transfer from any other person or as a result of any business reorganization; (c) unless the assessee famishes along with the return of income the report of the accountant, as d....
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.... merged with effect from 01.04.2019), it is obvious that the number of employees for whom the benefit was claimed included those of Aravon & MSSPL. Table-3 Sr no. Particulars 1. Total employees on 31.03.2019 2,23,322 2 Total employees on 31.03.2020 2,89,792 3 Additional employees during 2019-20 (2-1) 66,470 4 Additional employees who did not complete 240 days in FY 2019-20, hence not eligible for deduction u/s 80 JJAA 24,023 5 Balance additional employees, in respect of whom benefit u/s 80 JJAA was claimed (3-4) 42,447 15. CA Pawan Jain had relied on para 1 and 2 of Management Representation Letter (MRL) dated 30.03.2021, which stated that "1. Business of the company is not formed by splitting up or the reconstruction of an existing business. 2. Business is not acquired by the company by way of transfer from any other person or as a result of any business reorganization". The factual position is that eight companies were acquired during the period as mentioned in para 13 above. CA Pawan Jain did not obtain evidence on this matter, but simply relied on this MRL. 16. The above clearly prove the charge that CA Pawan Jain failed to obtain sufficient & approp....
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.... reply along with Annexure -2 to his reply, containing a list of 7 employees with details of month wise PMRPY receipt, we find that in the initial one or two months of employment of new employees, the respective columns reflecting amount of PMRPY receipt from government are blank. This is because of the time lag in reimbursement of money by the Government as salary/wages are paid on the last day of the month or first week of next month and thereafter the claim is submitted to the Government. After processing the claim, the government reimburses the money to the claimant. Section 80 JJAA does not use the words 'entire period'. Therefore, in case "entire contribution" has been paid by the Government for a specific period, then also the Taxpayer is not entitled for deduction u/s 80 JJAA for that specific period. We note that the words 'entire contribution' used in sub section 2 of section 80 JJAA of the Income Tax Act means entire contribution payable under Employee Pension Scheme (EPS). As per EPS, 8.33% is paid by the employer and 1.16% is paid by the Central Government. However, to incentivize employment generation, under PMRPY scheme, the employer share is also pai....
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....ores u/s 80 JJAA in respect of 24,023 spillover employees of 2019-20. Therefore, even after considering 24,023 spillover employees, additional employees should have been considered as 4,827 (24,023-19,196). 24. The response of CA Pawan Jain was that Quess was eligible for deduction in respect of whole of 24,023 spill over employees without any adjustment due to the provisions of the second proviso to explanation (ii) of sub-section 2 of the section 80 JJAA. 25. We note that increase in the actual number of employees is fundamental to section 80 JJAA as is evident from:- (a) Explanation (i) to said section that the additional employee cost shall be Nil if "there is no increase in the number of employees from the total number of employees employed as on the last day of the preceding year" ; (b) Explanation (ii) to said section that "additional employee means an employee who has been employed during the previous year and whose employment has the effect of increasing the total number of employees employed by the employer as on the last day of the preceding year ........ ". Explanation (ii) goes on to further list out those who will not qualify for new employees even if their empl....
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.... software is designed to function with minimal manual intervention; and that only minimal cash balance was maintained by Quess. 29. This reply is not supported by any evidence in the Working Files. The CA has not verified even a single case, to ascertain that salary was paid to an "additional employee" by way of an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account. Therefore, the basic requirement of the section enabling the company to claim the deduction was not verified by the CA while issuing the reports to enable claims under section 80 JJAA of the Income Tax Act. This constitutes gross negligence on the part of the CA. V. Failure to verify salary limit of Rs 25,000 per month for new employees 30. The explanation (ii) to section 80 JJAA of Income Tax Act states that ""additional employee" means an employee who has been employed during the previous year and whose employment has the effect of increasing the total number of employees employed by the employer as on the last day of the preceding year, but does not include (a) an employee whose total emoluments are more than twenty-five thousand rupees per month;" The....
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....tion per student was calculated by the assessing officer based on annual contribution made by Gujarat Milk to Anandalaya Education Society, which imparts education to children of Gujarat Milk's employees. Further, the CA referred to the case of Delhi Public School (DPS) (2012) 247 CTR 308 (P&H). On perusal of this case, we find that the facts of this case are not relevant as they pertain to deductibility of Rs 1,000/- per month (taken as Rs 12,000 per year) from the cost incurred by the employer for free education provided to the children of DPS's employees; and the method of calculation was not commented upon by the Hon'ble High Court of Punjab and Haryana. Hence both the cases relied upon are not relevant to the facts of this case, as the Income Tax law is specific in its requirement for assessee to avail of the deduction under section 80JJAA. 32. The salary contract would be the appropriate document to peruse as it would give the breakup of pay, allowances and eligible reimbursements. All of this is necessary for determining whether the emoluments of the 'additional employees' are within the permissible threshold. The CA has given no reply in respect of veri....
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....are required to be checked by the CA who certifies eligibility of the amount of Income Tax deduction to be claimed by the assessee company. These relate to ascertaining whether the new employees participated in a recognized Provident fund, whether there was no rehiring of old employees, and whether additional employees were employed for not less than 240 days. Besides these, there were deficiencies in sample testing done by the CA. The CA was charged with non-verification of the same. While denying all of these charges, the CA claimed that he had looked into these matters. As stated earlier, none of these are evidenced in the working file and therefore, we are unable to accept his defense. D. Findings on the Articles of Charges of Professional Misconduct 35. The Income Tax Act, requires the accountant (in this case CA Pawan Jain) to provide a report/certificate in form 10 DA, to "certify" certain numbers based on which Quess would claim specific tax benefits. The certification requires utmost professional skepticism, due diligence and sufficient & appropriate evidence to ensure that the certificate is true and correct. However, as explained in the above paras, CA Pawan Jain has f....