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CA Articals
Can a CA Certify Projected Financial Statements? Elevate Your Engagements: SAE 3400 Leads the Way!
🔔 Can a Chartered Accountant certify the Projected Financial Statements (Project Report) of an entity being submitted to the bank or any other stakeholder?
The answer to this question is affirmative because of the introduction of SAE 3400 i.e., The Examination of Prospective Financial Information. This SAE is effective in relation to reports on projections/forecasts, issued on or after April 1, 2007.
Applicability Non Applicability
  • 1. This standard is applicable for examination and reporting on prospective financial information including examination procedures suggested for best-estimate and hypothetical assumptions.
  • 2. “Prospective financial information” means financial information based on assumptions about events that may occur in the future and possible actions by an entity.
  • 3. Prospective financial information can be in the form of: forecast, a projection, or a combination of both.
  • 4. For example, a one-year forecast plus a five-year projection as given in the CMA data/projected future cash flows.
  • This SAE does not apply to the examination of prospective financial information expressed in general or narrative terms, such as that found in management’s discussion and analysis in an entity’s annual report.
🔔 What is the difference between a Forecast and a Projection?
Aspects Forecast Projection
  • Definition
  • Forecast is based on assumptions of expected future events and management’s action.
  • Projection is based on future events and management actions which are not necessarily expected to take place
  • Basis of Assumptions
  • Best Estimate Assumptions .
  • Hypothetical Assumptions or mixture of best estimate and hypothetical assumptions.
  • Scenario presented
  • It depicts the Possible scenario based on future events that will occur
  • It depicts the "What-if" scenario in which no surety is there of occurrence of future events
🔔 Who are the stakeholders for whom such prospective financial information is prepared?
SI Stakeholder Examples of Intended use
1
  • Internal management of the entity, employees, business partners
  • To assist in evaluating a possible capital investment, evaluating quality of services provided.
2
  • Potential Investors in entity
  • To provide information about future expectations from the business in terms of growth potential.
3
  • Shareholders, Banks, regulatory bodies, and other interested parties
  • Annual Report or projected financial statements for various statutory & regulatory compliances.
4
  • Lenders
  • Cash flow forecasts for evaluating the repayment capacity.
5
  • Analysts
  • For Investment recommendations.
🔔 Why is it important to have the prospective financial information certified by a Chartered Accountant?
  • Informed Decision making by the stakeholders
  • Enhances credibility of prospective financial information.
  • Management and identification of risks
  • Verification of accuracy of data
    • 🔔 Compliance with Chartered Accountants Act, 1949:
  • The guidance provided in this Standard is in line with the provisions of clause (3) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 [as amended by the Chartered Accountants (Amendment) Act, 2006]. A chartered accountant can participate in the preparation of profit or financial forecasts and can review them, provided he indicates clearly in his report the sources of information, the basis of forecasts and also the major assumptions made in arriving at the forecasts.
  • The auditor also needs to state that "he does not vouch for the accuracy of the information"
    • 🔔 Who can perform this engagement?
    A member performing such engagement services need not necessarily be the statutory auditor of the entity’s financial statements.
    🔔 Acceptance of Engagement:
    SI Points to consider for accepting an engagement When Auditor should not accept engagement
    1
    • The intended use of the information
    • When the assumptions are clearly unrealistic
    2
    • Whether the information will be for general or limited distribution
    • When the auditor believes that the prospective financial information will be inappropriate for its intended use.
    3
    • Nature of the assumptions (Best estimates or hypothetical assumptions)
    4
    • The elements to be included in the information;
    5
    • The period covered by the information
    🔔 What are the responsibilities of the Auditor as well as the management with respect to prospective financial information?
    SI Responsibilities of Management Responsibilities of Auditor
    1
    • Preparation and presentation of prospective financial information
    • Obtain a sufficient level of knowledge of the business to be able to evaluate whether all significant assumptions have been identified
    2
    • Identification and disclosure of
  • sources of information
  • Basis of forecasts
    		•
    • Need to become familiar with the entity’s process for preparing prospective financial information by considering the following:
  • The internal controls over the system
  • The expertise and experience of those persons preparing the prospective financial information
  • The nature of the documentation prepared by the entity supporting management’s assumptions
  • The extent to which statistical, mathematical and computer-assisted techniques are used
  • The methods used to develop and apply assumptions
  • The accuracy of prospective financial information prepared in prior periods, if any, and the reasons for any significant variances therein.
    		•
    3
    • Identification and disclosure of Underlying Assumptions
    • Consider the extent to which reliance on the entity’s historical financial information is justified to provide a historical yardstick for considering management’s assumptions.
    🔔 Which level of assurance can be provided by the auditor in audit of prospective financial information?
    Background Challenges faced by Auditor Level of Assurance
    Prospective financial information relates to events and actions that have not yet occurred and might not occur.
    • Auditor is not in a position to express an opinion as to whether the results shown in the prospective financial information will be achieved.
    • Moderate level of assurance provided by the auditor
    • Evidence available is generally future- oriented
    • Difficult for the auditor to obtain a level of satisfaction sufficient to provide a positive expression of opinion that the assumptions are free of material misstatement based on the evidences available
    Evidence is speculative in nature
    Evidence is not same as that in case of historical financial information
    🔔 Which points need to be considered by the auditor as per SAE 3400 while determining the examination procedures for the audit of prospective financial information?
    1 The knowledge obtained during any previous engagements
    2 Extent to which the prospective financial information is affected by the management’s judgment
    3 The auditor would focus on the extent to which those areas that are particularly sensitive to variation will have a material effect on the results shown in the prospective financial information.
    4 Management’s competence regarding the preparation of prospective financial information;
    5 Engagement team’s experience with the business and the industry in which the entity operates and with reporting on prospective financial information.
    6 The sources of information considered by the management for the purpose, their adequacy, reliability of the underlying data, including data derived from third parties, such as industry statistics, to support the assumptions.
    7 When engaged to examine one or more elements of prospective financial information, such as an individual financial statement, it is important that the auditor considers the interrelationship of other components in the financial statements.
    8 Stability of entity’s business
    🔔 Other Procedures:
    • The quantity of audit evidences for an area will have to be increased if the area is sensitive to variations and will have material effect on results shown in Prospective Financial Information (PFI)
    • Analysis of possible future trends in the relevant industry can be considered.
    • Verification of amendments in the laws and regulations relevant to the industry need to be conducted with respect to prospective financial information.
    • The auditor should obtain written representations from management regarding the intended use of the prospective financial information, the completeness of significant management assumptions and management's acceptance of its responsibility for the prospective financial information (MR Letter).
    🔔 What documentation needs to be maintained by the auditor as a part of such engagement?
    SI Particulars SI Particulars
    1
    • Sources of information
    		 6
    • Completeness of material assumptions
    2
    • Basis of forecasts and the assumptions made in arriving at the forecasts
    		 7
    • Management’s acceptance of its responsibility for the information
    3
    • Hypothetical assumptions
    		 8
    • Detailed audit plan
    4
    • Evidence supporting the assumptions
    		 9
    • The nature, timing, and extent of examination procedures performed
    5
    • Management representations regarding the intended use and distribution of the information
    		 10
    • Reasons for expressing a modified opinion or withdrawal from engagement, if any
    🔔 What are the reporting requirements by the auditor as a part of such engagement?
    The audit report on the prospective financial information shall contain the following elements:
    SI Contents of the Audit Report as per SAE 3400
    1
    • Basic contents like Title, Addressee, Date of report, Place of signature, Signature
    2
    • Identification of the prospective financial information
    3
    • Reference to the Standards on Auditing applicable to the examination of prospective financial information i.e., SAE 3400
    4
    • Statement that management is responsible for the prospective financial information including the underlying assumptions
    5
    • When applicable, a reference to the purpose and/or restricted distribution of the prospective financial information
    6
    • Statement that the examination procedures included examination, on a test basis, of evidence supporting the assumptions, amounts and other disclosures in the forecast or projection
    7
    • Statement of negative assurance as to whether the assumptions provide a reasonable basis for the prospective financial information
    8
    • Opinion as to whether the prospective financial information is properly prepared on the basis of the assumptions and is presented in accordance with the relevant financial reporting framework
    9
    • Appropriate caveats concerning the achievability of the results indicated by the prospective financial information
    10
    • The auditor also needs to state that "he does not vouch for the accuracy of the information" and only for the identification purposes the auditor affixes his stamp and signature on the prospective financial information in accordance with the principles of SAE 3400
    11
    • Presentation & disclosure requirements that need to be considered by the auditor are:
      • The presentation of prospective financial information is informative and not misleading
      • The accounting policies are clearly disclosed in the notes to the prospective financial information
      • The assumptions are adequately disclosed in the notes to the prospective financial information
      • The date as of which the prospective financial information was prepared is disclosed
      • The basis of establishing points in a range is clearly indicated and the range is not selected in a biased or misleading manner when results shown in the prospective financial information are expressed in terms of a range
      • There is any change in the accounting policy of the entity from that disclosed in the most recent historical financial statements and whether reason for the change and the effect of such change on the prospective financial information has been adequately disclosed
    🔔 Types of Opinion:
    SI Condition Type of Opinion Alternative
    1
    • Auditor believes that the presentation and disclosure of the prospective financial information is not adequate
    • Qualified or Adverse Opinion
    • Withdraw from engagement
    2
    • Auditor believes that one or more significant assumptions do not provide a reasonable basis for the prospective financial information prepared on the basis of best-estimate assumptions OR One or more significant assumptions do not provide a reasonable basis for the prospective financial information given the hypothetical assumptions
    • Adverse Opinion
    • Withdraw from engagement
    3
    • When the examination is affected by conditions that preclude application of one or more procedures considered necessary in the circumstances
    • Disclaimer of Opinion + describe the scope limitation
    • Withdraw from engagement
    🔔 Conclusion:
    A Chartered Accountant shall be deemed to be guilty of professional misconduct if he certifies prospective financials/ projected financials without adhering to the principles of SAE 3400 under Clause (3) of part II to Second Schedule of the Chartered Accountants Act, 1949.
    This article is written jointly by CA Abhishek Dhamne and CA Vishakha Deshpande. Author can be contact on abhishekdhamne@ssdca.in and vishakha.deshpande@ssdca.in. Please use professional discretion while accepting the engagement.
    CA Articles
    Is Partnership Deed Revision Required Post Amendment u/s 40(b)(v) in Finance Act, 2024? Partnership Deed Revision Insights!
    🔔 Is there a need to revise the deed of Partnership made between the partners of the firm prior to 1st April, 2024?
    Why this question has arisen in the minds of the partners of the firm is on account of the Finance Act, 2024. There has been an amendment in Section 40(b)(v) of the Income Tax Act, 1961 as per Finance Act, 2024 with respect to the allowable remuneration to the partners under the Income Tax Act, 1961. However, it may be explicitly noted that Section 40(b)(v) is only a means to calculate the allowance or disallowance of the payment made as remuneration to the working partners of the Firm. The actual remuneration paid/ payable to the partners may vary from the limits prescribed in Section 40(b)(v). Further, a new provision has been added vide section 194T of the Income Tax Act, 1961 wherein the TDS will be required to be deducted for any salary, remuneration, bonus or commission payments made to a partner by a firm at the rate of 10% if payment in a financial year exceeds Rs.20,000/-.
    🔔 What is Section 40(b)(v) of the Income Tax Act, 1961?
    Section 40 specifies the amounts not deductible from the computation of income chargeable under the head “Profits and gains of business or profession”. It is a disallowance section meaning any amount of expenditure beyond the limits specified under section 40 of the Income Tax Act, 1961 is not allowed to be claimed as a deductible expenditure for computing the taxable profits under the head “Profits and Gains of Business or Profession”. For the Assesses not opting for taxation on a presumptive basis u/s 44AD of Section 44ADA of the Income Tax Act, 1961, Section 40(b)(v) has specified a maximum limit up to which the deduction can be claimed for remuneration amounts paid/ payable to partners.
    🔔 Section 40(b)(v) of the Income Tax Act, 1961 states as follows (as amended by the Finance Act 2024):
    Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession":
    • (v) Any payment of remuneration to any partner who is a working partner, which is authorized by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder:
      • a. On the first Rs. 6,00,000 of the book profit or in case of a loss - Rs. 3,00,000 or at the rate of 90 percent of the book-profit, whichever is more.
      • b. On the balance of the book-profit at the rate of 60 percent.
    Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment. Explanations:
    • 3. For the purposes of this clause, "book-profit" means the net profit, as shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit.
    • 4. For the purposes of this clause, "working partner" means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner.
    🔔 What is the difference between the Old Provision and the New Provision as per Section 40(b)(v) of the Income Tax Act, 1961?
    SI Old Provision Amended Provision
    1 On the first Rs. 3,00,000 of the book profit or in case of a loss - Rs. 1,50,000 or at the rate of 90 percent of the book-profit, whichever is more. On the first Rs. 6,00,000 of the book profit or in case of a loss - Rs. 3,00,000 or at the rate of 90 percent of the book-profit, whichever is more.
    2 On the balance of the book-profit - at the rate of 60 percent. On the balance of the book-profit - at the rate of 60 percent.
    🔔 What is the effect of this amendment made to Section 40(b)(v) of the Income Tax Act, 1961?
    The effect of this aforementioned amendment is that the remuneration paid to the partners of the firm is a deductible expenditure while computing the taxable income of the firm. Upon amendment, the threshold limit of such remuneration has been increased, meaning that now the firms can claim a larger amount of such remuneration expenditure as an allowable expenditure while computing their taxable income. This shall have the result of reducing the taxable income of the firms thereby lowering the Income Tax liability of the firm to a certain extent.
    🔔 Let us have a practical example to understand the issue in more detail:
    SI Book Profit/ (Loss) Max Remuneration Allowed as per Old Provision Max Remuneration allowed as per New Provision Difference (Additional Remuneration allowed as per New Provision)
    1 Rs. 5,32,000 Rs. 4,09,200 Rs. 4,78,800 Rs. 69,600
    2 Rs. 9,00,000 Rs. 6,30,000 Rs. 7,20,000 Rs. 90,000
    3 Rs. 2,00,000 Rs. 1,80,000 Rs. 3,00,000 Rs. 1,20,000
    4 Rs. 5,00,000 Rs. 3,90,000 Rs. 4,50,000 Rs. 60,000
    5 (Rs. 2,00,000) Rs. 1,50,000 Rs. 3,00,000 Rs. 1,50,000
    6 Rs. 7,50,000 Rs. 5,40,000 Rs. 6,30,000 Rs. 90,000
    🔔 What does the Indian Partnership Act, 1932 say about the remuneration payable to the partners?
    As per the Indian Partnership Act, 1932, a partner is not entitled to receive remuneration for taking part in the conduct of the business as per section 13 of the Act stating the mutual rights and liabilities of the partners. However, it does not specifically prohibit any partner from receiving the remuneration if all the partners mutually agree for the payment of the remuneration to that partner. As a result, if all the partners mutually agree for the payment of remuneration, then such remuneration can be paid provided it has been specifically mentioned in the Partnership Deed. In substance, the Partnership Act, 1932 is silent on the amount of remuneration paid/ payable to the partners or the threshold limit of remuneration payable to its partners. As a business practice or as an industry standard practice, the partnership firms generally provide the clause for the remuneration payable to its working partners in the Partnership deed, specifically as per Section 40(b)(v) of the Income Tax Act, 1961, for the following reasons:
    • The Indian Partnership Act, 1932 is silent on the amount of remuneration or the threshold limit of remuneration paid/ payable to its partners.
    • For ease of transacting the business with the partners.
    • To avoid any probable conflicts between the partners on account of remuneration payable to them.
    • To ensure compliance with the provisions of u/s 40(b)(v), Income Tax Act, 1961, thereby avoiding any disallowance under the Income Tax Act, 1961 while computing the income under the head profits and gains from the business of profession.
    🔔 So, now coming back to our first question, is there any need to revise the deed of Partnership made between the partners of the firm prior to 1st April, 2024?
    The answer to this question varies from case to case basis, and we have covered here some of the possible scenarios which would make it easy to understand the context between the revision of the partnership deed and recent amendment in Section 40(b)(v) of the Income Tax Act, 1961 as per Finance Act, 2024.
    SI Scenario Change in Deed Reason
    1 When the partnership deed contains a clause for the remuneration payable to partners which mentions reference of the Section 40(b)(v) of the Income Tax Act, 1961 and has a further clause that above section has to be read and interpreted along with the applicable amendments from time to time. No Since there has been made a specific reference to the reading and interpretation of section 40(b)(v) along with its applicable amendments from time to time in the partnership deed itself, there will not be any ambiguity between the amended section and corresponding clause of remuneration payable to the partners as per the deed. As a result, in our opinion, there is not any requirement of revision of the partnership deed entered into before such amendment.
    2 When the partnership deed already contains a clause for the remuneration payable to its partners which is in line with the Section 40(b)(v) of the Income Tax Act, 1961, but does not contain specific reference that section 40(b)(v) has to be read and interpreted along with the applicable amendments from time to time. Yes Even though entire clause (v) has been reproduced in the Partnership Deed by giving specific reference to its governing section i.e., Section 40(b)(v) of the Income Tax Act, 1961, still it is suggested to make a corresponding revision in the deed of partnership entered prior to such amendment for the following reasons:
    • Since it has not been clearly mentioned in the partnership deed that the section 40(b)(v) has to be read and interpreted along with the applicable amendments from time to time, the clause of remuneration as per deed will be misinterpreted by taking reference of the old section.
    • This will create a gap between the remuneration payable as per the deed and remuneration actually paid to the partners as per amended provision of Section 40(b)(v), if any, and the actual remuneration paid may become ultra vires of the Partnership deed.
    • Also, it will create an ambiguity in interpreting the clause of remuneration payable to the partners as per the deed with reference to the amended section 40(b)(v).
    🔔 Conclusion:
    Remember, Section 40(b)(v) of the Income Tax Act, 1961 is only a means to calculate the allowance or disallowance of the payment made as remuneration to the working partners of the Firm. However, there is no specific restriction on whether to pay the remuneration or not and the amount of remuneration payable as per the Indian Partnership Act, 1932, provided it has been mutually agreed upon between the partners. As a result, a firm can pay whatever amount of remuneration to its partners as may be mutually agreed upon. Accordingly, depending on a case-to-case basis, the decision needs to be taken separately that whether an amendment in the partnership deed is required upon amendment in section 40(b)(v) of the Income Tax Act, 1961 as per Finance Act, 2024.
    This article is written jointly by CA Abhishek Dhamne and CA Vishakha Deshpande. You can connect to the Authors on abhishekdhamne@ssdca.in and vishakha.deshpande@ssdca.in respectively. Please use professional discretion while making any revision in the Partnership Deed.
    CA Articals
    Buy Back or Dividend: Maximizing Returns with Tax Efficiency
    🔔 What strategies of profit distribution are adopted by the Company for distributing its profits to the shareholders?
    Introduction: There are various methods of profit distribution that are used by the Companies in India to maximize the returns for the shareholders. Some of the methods for distribution of profits are Dividends, Stock Buybacks, Retained earnings and Bonus issue of shares. The best option for the Company will depend on its specific circumstances and goals.
    SI Name of Strategy Description
    1 Dividends Paying dividends to the shareholders is a popular method for distribution of profits. They involve the payment of a portion of profits to shareholders in the form of cash or stock. Dividends are typically paid on a quarterly basis and are based on the profits earned by the Company. Dividends provide a regular source of income for shareholders.
    2 Buy Back of Shares Share or stock buyback is the practice where companies decide to purchase their own share from their existing shareholders either through a tender offer or through an open market. In such a situation, the price of concerning shares is higher than the prevailing market price.
    3 Retained Earnings Retained earnings represent that portion of the profit a company has saved over time and therefore that portion of the profit that can be used to reinvest in the business by the Company in the form of acquisition of capital assets/ new equipment, Research & Development, or developing new marketing strategies/ branding rather than distributing it to the shareholders. They are a measure of a company's financial health and they can promote stability and growth.
    4 Bonus Issue of Shares A bonus issue of shares refers to the process where a company distributes additional shares to its existing shareholders at no extra cost, based on the number of shares they already own. This is done by capitalizing a portion of the company’s retained earnings or reserves. Essentially, instead of paying dividends in cash, the company issues new shares as a reward to shareholders. Bonus issues do not dilute ownership because every shareholder gets the same proportion of new shares.
    🔔 In this blog we shall discuss that which strategy for distribution of profit can be adopted by the Company- “Buyback of Shares or Distribution of Dividend”?
    A) Buy Back of Shares
    Pros Cons
    • Acts as a modern way for a company to return profits/cash to its shareholders
    • As per Companies At, 2013 Maximum Buyback permissible up to 25% of Shareholders Fund per Financial Year subject to maintenance of Debt Equity Ratio at 2:1 (Post Buyback)
    • With the reduction in outstanding shares, the Earnings per Share (EPS) of the company improves. This is a good indication of the company’s profitability
    • Reduces company's financial Outflow
    • Improves key profitability ratios like return on net worth, return on assets etc
    • As per Companies Act, 2013 No Fresh issue of same kind of shares is allowed within 6 months from Buyback except Bonus Shares, ESOPs, etc.
    • Buy back of shares may be tax efficient compared to dividend distribution (in case of individual shareholders and Co 30 % tax bracket)
    B) Distribution of Dividend
    Pros Cons
    • There is no such maximum or minimum limit on declaration of Dividend in any applicable Laws or as per Companies Act, 2013
    • The dividend received by the shareholders is taxable in the Hands of Shareholders as per normal tax rates in Income Tax Act, 1961.
    • Dividend declared is not taxable in hands of Company declaring dividend
    • In case of distribution of dividend, the number of equity shares outstanding at the Company remains the same and hence, No consolidation of shares happens.
    • Dividend represents immediate current payoff to an investor.
    🔔 What are the Valuation requirements for the Companies in case of Buy Back of Shares?
    Listed Companies Unlisted Companies
    • The SEBI Regulations do not prescribe any specific methodology for the valuation of the shares to be bought back.
    • As per Income Tax Act, 1961, no methodology is prescribed for fixing the buy-back price. However, reference to Rule 11UA for fair market valuation principles needs to be made.
    • However, the Board needs to a fixed price for the buyback of shares in a tender offer or a maximum price needs to be determined in case of open market operations.
    • As per Companies Act, 2013, no methodology is prescribed for determination of the buy-back price. Upon analysis of Rule 17 of Company (share Capital and Debentures) Rules and International Valuation Standard (IVS), the buy-back price can be determined by obtaining a valuation report from the Registered Valuer.
    • Generally, buyback is offered at a premium to the market value/book value per share but the amount of premium to be vested completely rests with the Board.
    🔔 What do the governing sections of Income Tax Act, 1961 say about the taxability of Buy Back of shares in a pre-budget scenario?
    Provisions of Income Tax Act, 1961 relating to Buy Back of shares/ securities before amendment as per Finance Act, 2024: Special provisions relating to tax on distributed income of domestic company for buy-back of shares
    Section 115QA. Tax on distributed income to shareholders

    (1) Notwithstanding anything contained in any other provision of this Act, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy-back of shares (not being shares listed on a recognised stock exchange) from a shareholder shall be charged to tax and such company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income.

    Explanation— For the purposes of this section :—

    • (i) "buy-back" means purchase by a company of its own shares in accordance with the provisions of section 77A of the Companies Act, 1956 (1 of 1956);
    • (ii) “Distributed Income" means the consideration paid by the company on buy-back of shares as reduced by the amount which was received by the company for issue of such shares.

    (2) Notwithstanding that no income-tax is payable by a domestic company on its total income computed in accordance with the provisions of this Act, the tax on the distributed income under sub-section (1) shall be payable by such company.

    (3) The principal officer of the domestic company and the company shall be liable to pay the tax to the credit of the Central Government within fourteen days from the date of payment of any consideration to the shareholder on buy-back of shares referred to in sub-section (1).

    (4) The tax on the distributed income by the company shall be treated as the final payment of tax in respect of the said income and no further credit therefor shall be claimed by the company or by any other person in respect of the amount of tax so paid.

    (5) No deduction under any other provision of this Act shall be allowed to the company or a shareholder in respect of the income which has been charged to tax under sub-section (1) or the tax thereon.

    Section 10(34A) Exemption towards income received by shareholders on buy back of shares

    Provisions of section 10(34A) exempt any income arisen to the shareholder on account of buy back of shares as referred under section 115QA of the Income Tax Act.

    Exemption provisions of section 10(34A) state as under: The income arisen to the shareholders on account of buy back of shares by the company is exempted from income tax. However, the buyback of shares by the company are taxed under section 115QA of the Income Tax Act in the hands of the Company. In nutshell, any income arising to the shareholders due to buy back of shares by the company, as referred to in section 115QA, is exempt from income tax in terms of section 10(34A).

    Capital Gains u/s 46A of Income Tax Act, 1961

    Section 46A of Income Tax Act, 1961 provides that Shareholders or a holder of other specified securities receives any consideration from any company for purchase of its own shares or other specified securities held by such shareholder or holder of other specified securities, then difference between cost of acquisition and the value of consideration received by the shareholder or the holder of other specified securities, as the case may be, shall be deemed to be the Capital Gains arising to such Shareholder or the holder of other specified securities in the year in which such shares or other specified securities were purchased by the company.

    Therefore, prior to introduction of Section 115QA any buy back of shares resulted in capital gains income for the Shareholder where the difference between Cost of Acquisition and Consideration received for such buy back resulted in any gains for such shareholder.

    However, Section 115QA begins with a non-obstante clause i.e. it overrides the other provisions of Income Tax Act 1961 to the extent that the other provisions are not consistent with the operation of Section 115QA. Therefore, in case of Buy Back of shares by an Indian Company (whether Listed or Unlisted) the provisions of Section 115QA overrides the provisions of Section 46A and will be applicable in such cases.

    Section 46A would remain applicable in cases where the buyback of shares is undertaken by a Foreign Company and the Shareholder is subjected to Indian Tax by reason of his residential status or source of such income being in India.

    🔔 In short, the pre-budget scenario in case of tax implications with respect to Buy Back of shares and Distribution of Dividend as per Income Tax Act, 1961 till 30th September, 2024 was as follows:

    A) Tax Implication for Buy Back of Shares

    SI Category Taxability U/s Taxability for Company Taxability for Shareholders
    1 Listed Company 115QA Taxable @ 23.30% Exempt u/s 10(34A)
    2 Unlisted/ Private Company 115QA Taxable @ 23.30% Exempt u/s 10(34A)
    3 Foreign Company 46A NA Taxable as Capital Gains

    b) Tax Implication for Dividend Distribution

    SI Category Taxability for Company Taxability for Shareholders
    1 Listed Company NA Taxable under head Other Income
    2 Unlisted/ Private Company NA Taxable under head Other Income
    3 Foreign Company NA Taxable under head Other Income
    🔔 What does the amendments to sections 46A, 115QA of the Income Tax Act, 1961 made in budget 2024 state about the taxability of Buy Back of shares in a post-budget scenario?
    Section 46A: In section 46A of the Income-tax Act, the following proviso shall be inserted before the Explanation, with effect from the 1st day of October, 2024, namely:- “Provided that where the shareholder receives any consideration of the nature referred to in subclause (f) of clause (22) of section 2 from any company, in respect of any buy-back of shares, that takes place on or after the 1st day of October, 2024, then for the purposes of this section, the value of consideration received by the shareholder shall be deemed to be nil.”
    Section 115QA:> In section 115QA of the Income-tax Act, in sub-section (1), after the proviso and before the Explanation, the following proviso shall be inserted with effect from the 1st day of October, 2024, namely:– “Provided further that the provisions of this sub-section shall not apply in respect of any buy-back of shares, that takes place on or after the 1st day of October, 2024.”
    Section 10(34A): In clause (34A) of section 10 of the Act, the following proviso shall be inserted with effect from the 1st day of October, 2024, namely:– “Provided that this clause shall not apply with respect to any buy back of shares by a company on or after the 1st day of October, 2024.”
    Section 2(22) (f): in clause (22) of Section 2, with effect from the 1st day of October, 2024,–– (I) after sub-clause (e) and before the long line, the following sub-clause shall be inserted, namely:–– “(f) any payment by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 68 of the Companies Act, 2013. ”
    🔔 What are the effects of amendments to sections 46A, 115QA, 10(34A) and Section 2(22)(f) of the Income Tax Act, 1961 made in budget 2024 on the taxability of Buy Back of shares in a post-budget scenario?

    With effect from 1st October, 2024, now the company is not required to pay the taxes on the buyback of the shares because the whole amount of buyback paid by the Company and received by the shareholders shall be treated as dividend in the hands of the shareholders and tax thereon is payable by the recipient as per the rates of income tax applicable to them.

    However, cost of acquisition of shares or cost of investment shall not be allowed to be reduced from the dividend amount received by the shareholders and shall be considered as capital loss, which is then allowed to be set off against the capital gain income only.

    Unutilised capital loss if any shall be allowed to be carried forward as per the provisions of the Income Tax Act, 1961.

    Effective from 1st October 2024, a new proviso was inserted in section 57 of the Income-tax Act, 1961 regarding the non-deduction of expenditure in respect of dividend income: - "Provided further that no deduction shall be allowed in case of dividend income of the nature referred to in sub-clause (f) of clause (22) of section 2." Meaning thereby shareholders cannot deduct any expenses from the dividend income they receive when calculating their total taxable income from other sources.
    🔔 In short, the post-budget scenario in case of tax implications with respect to Buy Back of shares and Distribution of Dividend as per Income Tax Act, 1961 w.e.f 1st October, 2024 is as follows:
    A) Tax Implication for Buy Back of Shares
    SI Category Taxability U/s Taxability for Company Taxability for Shareholders
    1 Listed Company Section 2(22)(f) Not Taxable but required to
    • Taxable as Other Income and no deduction u/s 57 deduct TDS u/s 194 .
    • Section 46A read with sec. 48 - Sale consideration to be considered NIL and hence loss (However, No Indexation would be allowed) to be carry forward as per section 74 and to be adjusted later
    2 Unlisted/ Private Company Section 2(22)(f) Not Taxable but required to
    • Taxable as Other Income and no deduction u/s 57 deduct TDS u/s 194 .
    • Section 46A read with sec. 48 - Sale consideration to be considered NIL and hence loss (However, No Indexation would be allowed) to be carry forward as per section 74 and to be adjusted later
    1 Foreign Company operating in India Section 2(22)(f) Not Taxable but required to
    • Taxable as Other Income and no deduction u/s 57 deduct TDS u/s 194 .
    • Section 46A read with sec. 48 - Sale consideration to be considered NIL and hence loss (However, No Indexation would be allowed) to be carry forward as per section 74 and to be adjusted later
    B) Tax Implication for Dividend Distribution.
    SI Category Taxability for Company Taxability for Shareholders
    1 Listed Company NA Taxable under head Other Income
    2 Unlisted/ Private Company NA Taxable under head Other Income
    3 Foreign Company NA Taxable under head Other Income
    🔔 Conclusion:
    Depending upon the aforementioned tax implications post amendment to Finance Act, 2024, the Company may select the best suitable option for distribution of its profits considering the most tax effective option and least outgo of taxation to the Company.
    This article is written jointly by CA Abhishek Dhamne and CA Vishakha Deshpande. You can connect to the Authors on abhishekdhamne@ssdca.in and vishakha.deshpande@ssdca.in respectively. Please use professional discretion while opting for any profit distribution strategies.
    Opportunities in IBC and NCLT for Chartered Accountants
    Opportunities in IBC and NCLT for Chartered Accountants: Unlocking the Future Potential
    🔔 Introduction
    The Insolvency and Bankruptcy Code (IBC) and the National Company Law Tribunal (NCLT) have emerged as crucial pillars of India’s evolving financial ecosystem. These developments offer a wealth of opportunities for Chartered Accountants (CAs), opening new avenues for professional growth, specialization, and practice. In this article, we explore the roles that CAs can play in the IBC and NCLT space and the future potential for practitioners in this domain.
    🔔 Role of Chartered Accountants in IBC Proceedings
    The Insolvency and Bankruptcy Code (IBC), 2016, has been a game-changer for the Indian economy, aimed at resolving insolvency in a time-bound manner. CAs possess the requisite financial and legal acumen, making them well-suited for various roles within the IBC framework.
    A. Insolvency Professionals (IP)
    CAs can register as Insolvency Professionals (IPs) after clearing the prescribed exams and gaining certification from the Insolvency and Bankruptcy Board of India (IBBI). As IPs, they are entrusted with the responsibility of managing the corporate debtor’s estate during insolvency resolution, preparing resolution plans, and ensuring compliance with statutory requirements. This role places CAs at the center of the resolution process, providing them with opportunities to lead complex financial restructuring and negotiations.
    B. Resolution Professionals (RP)
    Resolution Professionals oversee the Corporate Insolvency Resolution Process (CIRP). They assess claims from creditors, conduct the bidding process, and facilitate the submission of resolution plans to the Committee of Creditors (CoC). CAs, with their expertise in accounting, taxation, and finance, are naturally equipped to analyze financial data, evaluate assets and liabilities, and ensure legal and financial compliance.
    C. Liquidators
    When companies are liquidated under the IBC, liquidators are responsible for winding up the operations and selling the company’s assets. CAs can act as liquidators, utilizing their deep understanding of valuation, financial reporting, and tax implications to manage the process efficiently. This includes settling claims from creditors and distributing the remaining assets.
    🔔 Role of Chartered Accountants in NCLT Proceedings
    The National Company Law Tribunal (NCLT) adjudicates matters related to corporate insolvency, mergers, and oppression and mismanagement. CAs can play several critical roles in NCLT cases:
    A. Corporate Advisors
    With NCLT being a quasi-judicial body handling intricate financial and corporate issues, CAs can advise businesses on how to approach corporate restructuring, mergers, acquisitions, and other proceedings. Their knowledge of accounting, corporate law, and compliance makes them ideal advisors to corporates looking for resolution or restructuring under NCLT.
    B. Financial Reporting and Compliance Experts
    CAs can assist companies in ensuring that all financial reports and compliances are in place before appearing in the NCLT. Whether it is drafting financial statements, preparing forensic audits, or conducting due diligence, CAs can provide expert services to corporates engaged in disputes or seeking relief from NCLT.
    C. Representing Clients
    CAs are eligible to represent clients before NCLT in insolvency, financial disputes, and corporate matters. Their ability to interpret financial documents and the tax implications of business decisions places them in a strong position to argue cases effectively, either independently or alongside legal professionals.
    🔔 Future Potential of Practicing in IBC and NCLT
    The demand for insolvency professionals, corporate restructuring experts, and financial advisors has grown exponentially in recent years. This presents a sustainable and expanding area for CA practices to grow.
    A. Increasing Number of Insolvency Cases
    As the Indian economy grows and businesses scale, there is a concurrent rise in the complexity and volume of insolvency cases. More companies across various sectors are expected to enter insolvency proceedings due to financial distress, creating a demand for skilled professionals who can navigate the complexities of the IBC.
    B. Complex Cross-Border Insolvencies
    With increasing global trade and investment, cross-border insolvencies are becoming more common. The IBC is evolving to handle such cases, and CAs with expertise in international taxation, transfer pricing, and cross-border financial regulations will be sought after to handle these cases.
    C. Evolution of NCLT’s Jurisdiction
    The scope of the NCLT’s jurisdiction is likely to expand as more corporate law matters are directed toward the tribunal. CAs with specialization in corporate restructuring, financial litigation, and regulatory compliance will find themselves in greater demand as these cases grow more complex.
    D. Mergers and Acquisitions (M&A)
    As companies seek to restructure, merge, or acquire other entities to stay competitive, the role of financial experts becomes vital. CAs who can provide advisory services for mergers and acquisitions, corporate restructuring, and capital management will continue to have abundant opportunities.
    🔔 Upskilling and Specialization: The Way Forward
    For CAs to fully harness the potential of IBC and NCLT practices, continuous upskilling is essential. Gaining certification as an Insolvency Professional, staying updated with changes in corporate law, and developing expertise in forensic auditing, valuation, and financial due diligence are key factors for long-term success.
    🔔 Conclusion
    The IBC and NCLT have created a wealth of opportunities for Chartered Accountants, offering roles that leverage their expertise in finance, law, and corporate governance. With the increasing complexity of financial and insolvency matters, CAs are uniquely positioned to be at the forefront of these developments. By embracing the challenges of IBC and NCLT proceedings, CAs can not only expand their practice but also contribute significantly to India’s corporate and financial restructuring landscape.
    This article is written jointly by CA Abhishek Dhamne and CA Shubhada Dhamne. You can connect to the Authors at abhishekdhamne@ssdca.in and shubhada.dhamne@ssdca.in, respectively. Please use professional discretion along with comprehensive research and analysis while seeking opportunities in the field of IBC and NCLT by Chartered Accountants.
    CA Articals
    Image Building #CAIndia_Shining
    As Chartered Accountants, we play a crucial role in the GST compliance process, yet our contributions often go unrecognized. Every month, starting from the 5th, we kick off a 15-day cycle that includes sending emails, filing GST returns (GSTR 1), verifying 2A/2B, and finalizing GSTR 3B. This work ensures that the GST ecosystem runs efficiently and accurately, contributing significantly to overall revenue generation.
    While GST collections are officially credited to the government, we CAs are the backbone that ensures compliance. We also advice URD parties to register and pay taxes. It's time we speak for ourselves and highlight the value we bring - not just to our clients, but to the nation’s economy.
    One way we can do this is by displaying our firm’s contribution to GST collections (or for that matter Income Tax and other taxes) on our #Office_Notice_Boards. By showcasing our efforts at the firm, city, state, and national levels, we can build awareness and strengthen our CA brand.
    Let’s take pride in our role and ensure that our clients and stakeholders understand the critical work we do. After all, recognition starts with us!
    This article is written by CA Abhishek Dhamne. You can connect to the Author on abhishekdhamne@ssdca.in respectively. I’d love to hear your thoughts. Do let me know how would you showcase the value of your work?
    #GSTCompliance #CharteredAccountants #TaxConsulting #BrandBuilding #GST Narendra Modi

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