Month: April

A writ petition was instituted by the Bombay Chartered Accountants’ Society (BCAS) jointly with the Chamber of Tax Consultants (CTC) and several public charitable trusts, challenging orders passed by the Commissioner of Income-tax (Exemptions) rejecting applications for renewal of registration under section 12AB of the Income-tax Act, 1961, on the ground of absence of an irrevocable clause or a dissolution clause in the trust deed.

The Bombay High Court, in Writ Petition (L) No. 7587 of 2026 (order dated 9 March 2026), has rendered a significant ruling, allowing the petition, and granting relief to many trusts, particularly old and established ones, which did not have such clauses.

BACKGROUND AND CONTROVERSY

Pursuant to the revamped registration regime effective from 1 April 2021, the trusts had applied for renewal of registration under section 12AB by filing Form 10AB. The applications were rejected on the following grounds:

•  the trust deeds did not contain an express clause declaring the trust to be “irrevocable” or providing for dissolution; and
• the applicants had answered “Yes” to the query in Form 10AB regarding existence of irrevocable clause in the trust deed, which was treated as furnishing “false or incorrect information” and consequently regarded as a “specified violation”.

The challenge before the Court was not merely to address individual rejection orders, but to the approach adopted by the Department, particularly in Mumbai, which had the potential to affect a large number of charitable institutions.

STATUTORY SCHEME

Section 12AB of the Act empowers the Commissioner to grant or refuse registration upon satisfaction regarding:

1.  the objects of the trust or institution;
2. the genuineness of its activities; and
3. compliance with requirements of other laws material for the purpose of achieving its objects.

The provision does not prescribe the presence of any specific clause, such as irrevocability or dissolution, in the trust deed.

CORE ISSUE

The principal issue before the Court was whether the absence of an express irrevocability clause in the trust deed renders the trust “revocable” in law so as to disentitle it from registration under section 12AB.

DECISION AND REASONING

(i) Impermissibility of importing additional conditions

The Court held that the Commissioner had travelled beyond the statutory mandate by insisting upon the presence of an irrevocability clause. Section 12AB does not contemplate such a requirement, either expressly or by necessary implication. The enquiry under the provision is confined to the objects and genuineness of activities, and cannot be expanded by administrative interpretation.

(ii) Proper construction of sections 60 to 63

The Revenue’s reliance on sections 60 to 63 (relating to revocable transfers) was rejected. The Court emphasised that:

•  Section 63 defines a “revocable transfer” as one where the instrument contains a provision for re-transfer or confers a right to reassume power over the income or assets;
• such a provision for revocation must be positively found in the instrument;
• the statute does not provide that the absence of an irrevocability clause renders a transfer revocable.

The Court held that the Department’s approach effectively reversed the legal test laid down in the statute.

(iii) Public charitable trusts under the MPT Act

A substantial part of the judgment is devoted to the scheme of the Maharashtra Public Trusts Act, 1950. The Court noted that:

• upon dedication, the settlor is completely divested of the trust property;
•  even where a trust is revoked or deregistered, the property cannot revert to the settlor but is required to be dealt with in accordance with statutory provisions, including vesting in the Public Trusts Administration Fund;
• Section 55 of the MPT Act embodies the doctrine of cy-pres, ensuring that the property continues to be applied to charitable purposes.

On this basis, the Court concluded that public charitable trusts governed by the MPT Act are inherently irrevocable and the possibility of reversion of assets to the settlor, central to the concept of “revocable transfer” under section 63 does not arise.

(iv) Distinction between “revocable trust” and “revocable transfer”

The Court also clarified that the reference to sections 60 to 63 in section 11 pertains to specific transfers or contributions that may be revocable and not to the nature of the trust itself. A trust may be irrevocable in character, yet receive a donation subject to a revocable condition, in which case the tax consequences are governed by those provisions.

(v) Consistency with earlier precedents

The Court reaffirmed its earlier decision in CIT v. Tara Educational & Charitable Trust ((Income Tax Appeal No. 247 of 2015 dated 31.07.2017), holding that absence of a dissolution clause is not a valid ground for refusal of registration. It noted that the substantive conditions for registration under section 12AB are not materially different from those under section 12AA.

(vi) Adequacy of statutory safeguards

The apprehension of the Revenue regarding possible misuse was found to be unfounded in light of existing safeguards, including:

• section 13 (denial of exemption where income or property is applied for the benefit of specified persons);
• section 115TD (tax on accreted income upon conversion or dissolution); and
• conditions typically imposed while granting registration restricting diversion of assets.

(vii) Defect in Form 10AB

The Court also took note of the practical difficulty arising from the e-filing utility, which compelled applicants to select a particular response in order to upload the form. The subsequent reliance on such response to allege furnishing of incorrect information was held to be arbitrary and unsustainable.

CONCLUSION

The High Court set aside the rejection orders and held that:

• absence of an express irrevocability or dissolution clause cannot constitute a ground for refusal or cancellation of registration under section 12AB;
• a public charitable trust is to be regarded as irrevocable unless a power of revocation is expressly reserved; and
• the Commissioner cannot impose conditions not contemplated by the statutory framework.

The ruling provides much-needed clarity in the administration of the re-registration regime and is likely to have wide application across similarly placed trusts.

ACKNOWLEDGMENT

The petitioners were represented by Mr. Percy Pardiwalla, Senior Advocate along with Mr. Dharan Gandhi Advocate. Their lucid articulation of the statutory scheme assisted the Court in resolving the issues involved. Their contribution is gratefully acknowledged.

BCAJ Admin

ICAI’s New Era of Responsible Professional Visibility: Analysing the Revised Advertising and Branding Framework for Chartered Accountants

Effective April 2026, the ICAI is introducing a revised ethical framework that shifts from strict advertising restrictions to “responsible professional visibility”. While the core prohibition on direct solicitation under the Chartered Accountants Act remains, the updated Code of Ethics allows CAs to actively engage in thought leadership, share educational insights on digital platforms, and host knowledge-sharing webinars. Furthermore, firms can now provide detailed descriptions of specialized services on their websites rather than just basic write-ups. However, all communication must remain truthful, factual, and devoid of exaggerated claims to maintain professional dignity.

INTRODUCTION

For decades, the chartered accountancy profession in India has been defined by a distinctive professional culture, one that emphasised credibility, independence, and restraint in public communication. Chartered accountants have long played a pivotal role in guiding businesses through taxation, regulatory compliance, financial reporting, and governance. Yet despite this central role, the profession historically maintained a conservative approach toward professional publicity.

Unlike consulting firms, legal practices, and financial advisory organisations that actively communicate their expertise through publications, seminars, and digital platforms, chartered accountants traditionally relied on reputation and referrals rather than marketing to build professional visibility.

This approach was firmly rooted in the ethical framework governing the profession. Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949 provides that a member shall be deemed guilty of professional misconduct if he solicits professional work directly or indirectly through advertisements, circulars, personal communication, or other forms of publicity.

Over the years, the Institute of Chartered Accountants of India (ICAI) supplemented this statutory restriction through detailed guidance under the Code of Ethics and Council Guidelines on Advertisement and Website, which further limited the scope of permissible professional communication.

However, the professional services landscape has evolved significantly. Businesses increasingly identify advisors through digital platforms, research publications, and professional networks. Chartered accountants today operate alongside consulting firms, law firms, and financial advisory organisations that actively communicate their expertise through structured branding and thought leadership.

Recognising these developments, ICAI has introduced important revisions to its ethical framework governing advertising and professional communication. The revised provisions, proposed to be effective from 1 April 2026, signal a calibrated shift toward what may be described as responsible professional visibility.

Rather than removing the prohibition on solicitation, the revised framework clarifies the forms of professional communication that may be permissible when conducted ethically and responsibly. This article analyses these changes from a marketing and professional communication perspective and explores their implications for the future of branding within the chartered accountancy profession.

LEGAL FOUNDATION: THE ETHICAL FRAMEWORK

The regulation of advertising and professional communication within the chartered accountancy profession is primarily anchored in Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949, which prohibits solicitation of professional work through advertisements or other forms of publicity.

Historically, this provision has been interpreted conservatively, resulting in strict limitations on marketing or promotional communication by chartered accountants.

Further guidance is provided through the ICAI Code of Ethics, particularly under Section 300 – Marketing of Professional Services. This section clarifies that professional accountants may communicate information regarding their services provided that such communication:

• is not misleading or deceptive
• does not make exaggerated claims
• does not disparage other professionals
• can be substantiated if challenged

The revised framework must therefore be understood not as a removal of the prohibition on solicitation but as a clarification of the types of professional communication that may fall within the ethical boundaries of the profession.

THE EARLIER POSITION: A CULTURE OF RESTRAINED VISIBILITY

Under the earlier regulatory framework, chartered accountants were permitted to maintain professional websites; however, the content of such websites was restricted to what ICAI guidelines referred to as a firm write-up.

The permissible content typically included basic information such as:

• name and address of the firm
• names and qualifications of partners
• contact details
• broad description of services offered

Promotional language, detailed descriptions of expertise, or marketing-oriented narratives were discouraged.

Similarly, the use of social media platforms for professional communication remained a grey area. Many practitioners avoided sharing professional insights publicly due to concerns that such communication might be interpreted as solicitation of professional work.

While these restrictions were designed to preserve professional dignity, they also limited the ability of chartered accountants to communicate their expertise in an increasingly digital and knowledge-driven professional environment.

THE REVISED FRAMEWORK: TOWARD RESPONSIBLE PROFESSIONAL COMMUNICATION

The revised ethical framework reflects a more contemporary approach to professional communication. While the prohibition on solicitation under Clause (6) remains unchanged, the revised Code of Ethics recognises that professionals may communicate their expertise through educational and informational platforms.

Under Section 300 of the Code of Ethics, communication relating to the marketing of professional services is permissible provided that it remains truthful, factual, and not misleading.

This shift acknowledges that activities such as technical publications, regulatory analysis, and professional commentary may serve the public interest by improving understanding of complex financial and regulatory issues.

The revised framework therefore introduces greater clarity regarding permissible professional communication while continuing to safeguard the integrity of the profession.

KEY DEVELOPMENTS IN ADVERTISING AND PROFESSIONAL VISIBILITY

The revised framework introduces several developments that affect how chartered accountants may communicate their services and expertise.

EXPANDED WEBSITE CONTENT

Under the earlier framework, websites were limited to basic firm write-ups. The revised guidelines allow firms to provide more structured descriptions of their professional services and areas of expertise.

This includes the ability to describe specialised services such as forensic accounting, startup advisory, international taxation, sustainability reporting, and management consultancy services.

These changes are reflected in the updated Council Guidelines on Advertisement and Website issued under Clause (6).

RECOGNITION OF THOUGHT LEADERSHIP

The revised Code of Ethics recognises thought leadership as an important form of professional engagement.

Under Section 300 – Marketing of Professional Services, chartered accountants may communicate professional insights through technical articles, regulatory commentary, research publications, and professional analyses.

Such communication contributes to knowledge dissemination and enhances public understanding of financial and regulatory issues.

DIGITAL PLATFORMS AND PROFESSIONAL ENGAGEMENT

The revised framework acknowledges the growing role of digital platforms in professional communication. Professional networks and digital knowledge platforms allow chartered accountants to share insights on regulatory developments and financial governance practices. Such engagement, when conducted responsibly, supports professional education while maintaining ethical discipline.

PROFESSIONAL KNOWLEDGE EVENTS

Professional seminars, webinars, and knowledge sessions are also recognised as legitimate forms of professional engagement. These initiatives enable chartered accountants to contribute to professional education and regulatory awareness among businesses and stakeholders.

TRANSPARENCY IN DESCRIBING EXPERTISE

Another important development is the recognition that professionals may describe their areas of expertise transparently. Firms may communicate their professional capabilities and practice areas provided that such communication remains factual and does not imply superiority over other professionals.

UNDERSTANDING THE SHIFT IN PROFESSIONAL VISIBILITY

The transition from the earlier framework to the revised approach is best understood not as a binary change, but as a shift in how professional communication is interpreted.

Under the earlier regime, communication by chartered accountants was characterised by caution and minimalism. Professional presence was largely confined to static information, with limited scope for articulation of expertise or engagement beyond formal interactions.

In contrast, the revised framework introduces a more enabling environment. Communication, when undertaken within ethical boundaries, is now recognised as a legitimate extension of professional practice.

Firm websites, which were previously restricted to basic descriptions, may now reflect structured and detailed articulation of services. Similarly, digital platforms — once approached with hesitation — are now acknowledged as avenues for sharing knowledge and contributing to professional discourse.

Perhaps most significantly, activities such as publishing technical insights and participating in knowledge forums are no longer viewed conservatively, but are recognised as integral to thought leadership.

This shift reflects a broader transition from restricted visibility to responsible and purposeful professional presence.

APPLYING ETHICAL BOUNDARIES IN PRACTICE

While the revised framework expands the scope of professional communication, it also necessitates careful judgement in its application.

Certain forms of communication remain clearly within acceptable boundaries. These include factual descriptions of services, educational insights shared on professional platforms, and technical or analytical publications that contribute to knowledge dissemination. Similarly, participation in seminars and webinars that are oriented towards education rather than promotion aligns with the intended spirit of the framework.

At the same time, there exists a category of communication that requires thoughtful consideration. Language that moves beyond factual description into subtle positioning, or content that may indirectly promote services without explicit solicitation, must be approached with caution. Likewise, references to professional experience must ensure that confidentiality is preserved and identification risks are minimised.

There are, however, clear boundaries that remain unchanged. Any form of direct or indirect solicitation, exaggerated claims, misleading statements, or explicit client testimonials continues to fall outside permissible limits. The use of communication channels for overt promotional intent remains inconsistent with the ethical foundations of the profession.

The distinction, therefore, lies not merely in the medium of communication, but in its intent, tone, and substance.

CONCLUSION

The revised advertising and professional communication framework introduced by ICAI represents a significant evolution in the regulatory landscape governing the chartered accountancy profession in India.

While the earlier framework focused primarily on restricting publicity, the revised approach recognises that responsible professional visibility is necessary in a modern and digitally connected professional environment.

At the same time, the ethical foundations of the profession remain unchanged. Professional communication must continue to be truthful, factual, and consistent with the dignity and credibility of the profession. When exercised responsibly, the ability to communicate professional expertise can strengthen public trust, enhance regulatory awareness, and contribute meaningfully to the financial ecosystem.

BCAJ Admin

The article examines India’s complex fraud-reporting landscape, highlighting tensions among regulatory frameworks that define fraud differently and impose varying reporting obligations. Companies face challenges with inconsistent standards across SEBI, NFRA, ICAI, and criminal law, creating timing conflicts and interpretational difficulties that require integrated compliance approaches

1. INTRODUCTION

Over the past decade, India has undergone a significant transformation in the perception of and approach to fraud in the corporate sector. Once regarded as an internal issue that could be discreetly investigated and resolved, fraud now stands prominently under the scrutiny of regulators, shareholders, auditors, and the public.

Despite the widely accepted understanding of fraud as a deceptive act that causes harm, there is no unified, formal definition of fraud. Instead, a mosaic of laws, ranging from the Companies Act, 2013 (the “Act”) and the Bharatiya Nyaya Sanhita, 2024 (“BNS”) to various sectoral regulations, establishes differing standards of evidence, reporting obligations, and consequences. This variation arises from the diverse objectives pursued by these regulations. As a result, different regulators consider a fraud to have occurred at different events. Previously, the impact of these differences was softened by lenient oversight; however, the increasing assertiveness of regulators such as the National Financial Reporting Authority (“NFRA”) and the Securities and Exchange Board of India (“SEBI”) has brought these issues to the forefront. Companies can no longer afford to wait until an investigation concludes to determine their compliance strategy. Instead, they must implement an integrated approach in which investigative processes and compliance strategies continuously inform and strengthen each other, ensuring that every stage of the investigation aligns with all relevant regulatory frameworks.

2. THE REGULATORY LANDSCAPE FOR FRAUD

2.1. Criminal Dimensions: Understanding Fraud in the Eyes of Law Section 447¹ of the Act offers an expansive definition of fraud, encompassing any act, omission, concealment of facts, or abuse of position by any person, including an employee, with the intent to deceive, gain undue advantage, or injure the interests of the company, its shareholders, creditors, or others. This broad definition implies that even atypical deceptive acts committed by any person, such as theft of confidential information or insider trading, are classified as fraud regardless of whether they result in a wrongful gain or loss. Section 448² of the Act, a coterminous provision, criminalises “false statements” or “omissions of material facts” in documents or returns required under the Act.

Although the substantive provisions of criminal law under the Bharatiya Nyaya Sanhita (“BNS”) do not explicitly define “fraud,” Section 2(9) of the BNS defines “fraudulently” as acting with the intent to defraud, but not otherwise³. Many provisions of the BNS, including those related to cheating and criminal breach of trust, address or closely align with conduct considered fraudulent.

The offenses mentioned above are classified as criminal because they carry the possibility of imprisonment. The standard of proof required for such violations is “beyond a reasonable doubt”,⁴ meaning that the evidence must eliminate any reasonable doubt in a reasonable person’s mind regarding the defendant’s guilt. While the BNS does not mandate reporting these offenses, companies are guided by the principles of their governance framework when considering whether to file a complaint with the appropriate authorities.

1 Section 447 of the Companies Act, 2013, https://www.indiacode.nic.in/bitstream/123456789/2114/5/A2013-18.pdf, 
Last Accessed on March 28, 2025.

2 Section 448 of the Companies Act, 2013, https://www.indiacode.nic.in/bitstream/123456789/2114/5/A2013-18.pdf, 
Last Accessed on March 28, 2025.

3 Section 2(9) of the Bharatiya Nyaya Sanhita, https://www.mha.gov.in/sites/default/files/250883_english_01042024.pdf, 
Last Accessed on March 28, 2025.

4 Goverdhan vs State of Chattisgarh, 2025, SCC Online, SC 69 

2.2. CIVIL RAMIFICATIONS OF FRAUD: THE LOWER BURDEN OF PROOF

In civil proceedings under the law and disciplinary proceedings for violations of company policies, which generally include fraud, the standard of proof is typically a “preponderance of probabilities”⁵ rather than “beyond a reasonable doubt.” To establish alleged misconduct, it is sufficient to demonstrate on the basis of the evidence, misconduct is more likely than not.

For instance, if an employee submits inconsistent travel receipts and expense reports, this may indicate a misappropriation of assets under the preponderance of probabilities standard, suggesting it is more likely than not that the employee acted improperly. However, that evidence might not meet the higher “beyond reasonable doubt” standard required in criminal proceedings. Additional evidence, such as clear intent to defraud, eyewitness testimony, or a confession, would be necessary to eliminate any reasonable doubt of guilt.

5 Goverdhan vs State of Chattisgarh, 2025, SCC Online, SC 69

2.3. REPORTING OBLIGATIONS FOR LISTED COMPANIES

For listed companies, SEBI’s Listing Obligations and Disclosure Requirements (“LODR”) impose disclosure requirements in various circumstances, which inter-alia include one where directors⁶ or senior management commit fraud, or if employees commit material fraud⁷ that could affect investor decisions. When contrasted with Section 447 of the Act, fraud under LODR has broader applicability as it also encompasses fraud⁸ as contemplated under the Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market Regulations, 2003 (“PFUTP”). Fraud under PFUTP includes acts that induce another person to deal in securities. Crucially, an intent to deceive is not a prerequisite (when contrasted with Section 447 of the Act), and as such, erroneous financial statements, such as due to reckless application of accounting standards, may be classified as fraud under PFUTP accounting standards, may be classified as fraud under PFUTP.
Fraud under LODR is to be reported at two junctures⁹; when the fraud is “unearthed”, followed by subsequent reporting when the facts and figures surrounding the fraud are conclusively established. However, the term “unearthed” is undefined within the LODR. This omission creates a subjective threshold for each listed entity, which must decide, based on its specific circumstances and internal procedures, when a potentially fraudulent act has been sufficiently identified to trigger the initial disclosure obligation. Some companies might consider the fraud “uncovered” when there is a credible allegation, while others might wait for preliminary investigations to yield stronger evidence before reporting. This inherent subjectivity means that timing for initial disclosure can vary widely, posing compliance risks if regulators or investors later determine that information was inordinately withheld.

6 Point 6 of Paragraph A of Part A of Schedule III of the SEBI 
(Listing Obligations and Disclosure Requirements) Regulations, 2015, Last Accessed on March 28, 2025

7 Point 9 of Paragraph B of Part A of Schedule III of the SEBI
 (Listing Obligations and Disclosure Requirements) Regulations, 2015, Last Accessed on March, 28, 2025

8 Regulation 2(c) of the Prohibition of Fraudulent and
 Unfair Trade Practices relating to Securities Market Regulations, 2003, Last Accessed on March 28, 2025.

9 Circular No SEBI/HO/CFD/CFD-PoD-1/P/CIR/2023/123 dated July 13, 2023, 
issued by SEBI, https://www.sebi.gov.in/legal/circulars/jul-2023/disclosure-of-material-events-information-by-listed-entities-under-regulations-30-and-30a-of-securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-201-_73910.html

2.4. STATUTORY AUDITORS AS GATEKEEPERS: HIGH STAKES IN FRAUD REPORTING

Section 143(12) of the Act mandates that auditors report to regulators if they have “reason to believe” that employees or officers of the company have committed fraud exceeding ₹1 Crore. The Institute of Chartered Accountants of India (ICAI) has opined¹⁰ that possessing knowledge evidencing the commission of fraud meets this threshold; a standard similar to that implied under LODR. Notably, this standard is lower than the “preponderance of probabilities” and “beyond reasonable doubt.” Further, the ICAI has also clarified¹¹ that an auditor’s obligation qua fraud reporting is to be restricted to matters involving fraudulent financial reporting or misappropriation of assets.

NFRA regulates¹² auditors of listed and certain specified companies, while the auditors of the rest, including private companies, are regulated by ICAI. While the ICAI, through its guidance note, has opined that obligations under Section 143(12) of the Act would arise only if the auditor had identified or detected the fraud, NFRA has mandated that frauds have to be reported by auditors regardless of the¹³ source of identification. These differing directions have led to uncertainty and inconsistent practices among private company auditors, with some adhering to the NFRA’s directions and others following the ICAI’s guidelines.

Furthermore, an auditor must file a report along with the Company’s responses within 60 days of the auditor having knowledge about the fraud¹⁴. Realistically, it would be infeasible for a Company to investigate fraud in such a short span, mainly when the objective of the investigation is to meet more rigorous evidentiary standards.

10 Section VIII of Overview of Guidance Note on reporting of fraud under 
Section 143(12) of the Companies Act issued by the ICAI, https://resource.cdn.icai.org/41297aasb-gn-fraud-revised.pdf, Last Accessed on March 28, 2025.

11 Section III of Overview of Guidance Note on reporting of fraud under 
Section 143(12) of the Companies Act issued by the ICAI, https://resource.cdn.icai.org/41297aasb-gn-fraud-revised.pdfread with Para 3 of SA 240 - The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements issued by the ICAI, https://resource.cdn.icai.org/15374Link9_240SA_REVISED.pdf, , Last Accessed on March 28, 2025.

12 Rule 3 of the National Financial Authority Rules, 2018 of the Companies Act 2013,  
https://www.indiacode.nic.in/bitstream/123456789/2114/5/A2013-18.pdf, Last Accessed on March 28, 2025.

13 Circular dated June 26, 2023, issued by the NFRA, 
https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2023/06/2023062673.pdf, Last Accessed on March 28, 2025

14 Rule 13(2) of the Companies (Audit and Auditors) Rules, 2014 of the Companies Act, 2013, , 
https://www.indiacode.nic.in/bitstream/123456789/2114/5/A2013-18.pdf, Last Accessed on March 28, 2025.

3. DIVERGENT TIMELINES AND DEFINITIONS: EMERGING COMPLEXITIES

While the preceding sections outline the distinct evidentiary thresholds and reporting requirements across various statutes and regulations, two overarching complexities merit closer scrutiny. First, differing disclosure obligations create a timing mismatch, often resulting in a single incident being disclosed at multiple junctures. Second, the lack of a uniform definition of fraud across regulatory frameworks fosters interpretational hurdles that can create confusion and discord among stakeholders.

3.1. TENSIONS IN TIMING AND STAKEHOLDER EXPECTATIONS

A pressing concern for listed companies involves the tension between prompt disclosure obligations, such as the near-immediate reporting required under LODR, and management’s desire to confirm or conclusively investigate any alleged wrongdoing before making it public. On one side, transparency and investor protection principles motivate SEBI’s mandate for swift disclosures. Conversely, management must weigh the reputational harm and legal risks of publicising suspicions that may prove baseless later. While there is no obligation to proactively report suspected fraud to auditors, withholding of information from the auditors, particularly when requisitioned, may lead to erosion of the trust between auditors and management and can compromise audit effectiveness.

These conflicts can create a sub-optimal environment where management is reluctant to reveal potential fraud to auditors or regulators before an internal investigation is complete, leading to partial or delayed disclosures. This may also trigger parallel investigations by auditors or regulators, resulting in duplication of effort, complexity, and stakeholder fatigue.

3.2. DISPARITIES IN DEFINITIONS: INTERPRETATIONAL QUAGMIRES

A second layer of complexity arises from how differently fraud is defined under diverse legal and regulatory frameworks. Section 447 of the Act sets out an expansive definition encompassing virtually any deceptive act intended to injure or secure an undue advantage. Meanwhile, LODR captures a broad spectrum of misconduct by not only encompassing fraud committed by directors, senior management, or other employees that could materially affect investor decisions, but also including potential violations under PFUTP, which do not necessarily require an element of deceit.

Under Section 143(12), statutory auditors focus on fraudulent financial reporting or misappropriation of assets above certain thresholds, guided by a standard of “reason to believe.” Management, by contrast, may hesitate to label certain incidents as fraud unless they meet criminal or civil criteria. Such definitional divergences can lead to conflicting interpretations between stakeholders. Auditors might deem a matter reportable under Section 143(12), while management may view it as an infraction that does not rise to the level of fraud. In industries with additional sector-specific regulations, this definitional patchwork can become even more daunting, prompting uncertainty about whether—and under which law—an official complaint or self-reporting obligation is triggered. The result can be inconsistent enforcement and uneven approaches to investigations, ultimately exposing companies to the risk of contradictory outcomes under different legal regimes.

4. MANAGING COMPLEXITIES – AUDITEES PERSPECTIVE

To tackle the regulatory complexities surrounding fraud reporting, companies would benefit from implementing a comprehensive and integrated compliance framework that proactively reconciles the diverse standards across various regulatory regimes. This could inter alia include the following measures:

•  Establishing a cross-functional fraud response committee comprising representatives from legal, finance, compliance, and audit would create a centralised decision-making body capable of navigating the multifaceted reporting obligations. This committee should develop a tiered disclosure protocol that carefully balances the immediacy required by SEBI’s LODR with the necessity for thorough investigation, potentially utilising preliminary notifications followed by more detailed disclosures as facts emerge.
•  Companies should also establish clear internal definitions of fraud that encompass the broadest applicable regulatory standards, ensuring that potential incidents are evaluated against all relevant frameworks simultaneously rather than sequentially.
•  Regular tabletop simulations of fraud scenarios would enhance organisational readiness, allowing management to rehearse responses to various regulatory triggers and stakeholder expectations.
•  Furthermore, developing robust documentation procedures that thoroughly record the rationale behind disclosure decisions would provide defensible evidence of good faith compliance efforts.
•  Continuous engagement with auditors through formalised information-sharing protocols could help bridge the disclosure timing gap, fostering transparency while managing reputational risks.

Ultimately, the objective should be to transform what is currently a reactive and often disjointed approach into a strategically integrated system that anticipates regulatory intersections, addresses definitional discrepancies, and harmonises the timing of mandatory disclosures across the regulatory landscape.

5. MANAGING COMPLEXITIES – AUDITORS PERSPECTIVE

Auditors facing the complexities of fraud reporting must establish a robust methodological framework to navigate the regulatory landscape effectively. As gatekeepers with significant reporting obligations under

Section 143(12) of the Companies Act, auditors should develop comprehensive internal protocols that clearly define what constitutes “reason to believe” in potential fraud scenarios, along with detailed documentation templates that capture their decision-making process at each evaluation stage.

Auditors would benefit from maintaining ongoing communication channels with management while preserving their independence, perhaps through structured quarterly fraud risk assessment sessions that facilitate information exchange without compromising objectivity. They should consider implementing a graduated approach to potential fraud indicators, establishing internal thresholds that trigger progressively more intensive scrutiny and documentation before formal reporting obligations are invoked. Given the divergent guidance from NFRA and ICAI, audit firms may consider developing unified firm-wide policies that lean toward the more stringent standard while thoroughly documenting their rationale.

Additionally, training programs that focus on fraud detection techniques and reporting obligations across various regulatory frameworks would enhance auditors’ abilities to identify reportable incidents earlier in the audit process. These measures would empower auditors to meet their statutory obligations while helping to close the timing and definitional gaps that currently complicate the fraud reporting ecosystem.

6. CONCLUSION

In essence, the variability of definitions, evidentiary benchmarks, and reporting obligations highlights the evolving complexity of India’s regulatory framework. What was once a fairly insular exercise, i.e. evaluating misconduct internally and unobtrusively deciding on criminal or civil recourse, now warrants a more transparent and collaborative approach. While there is no singular solution, recognising the complications stemming from varying and sometimes incongruent regulations is crucial for prudent decision-making. Whether establishing a core compliance panel, updating internal procedures for phased disclosures, or strengthening legal and operational processes, each enterprise will have to define its trajectory towards compliance. What endures unchanged, however, is the underlying mandate: the sooner businesses address the potential for discordance in reporting obligations, the better they can shield themselves against the reputational and legal pitfalls that loom large under the heightened regulatory glare.

BCAJ Admin

India’s pursuit of Ease of Doing Business and Ease of Living is severely choked by “regulatory cholesterol”. To unblock economic growth, India must transition from reliance on foreign standards to building home-grown domestic frameworks. Policymakers must focus on process reforms to eliminate systemic frictions, transforming regulations into enabling “trampolines” rather than restrictive safety nets. Key solutions include decriminalizing civil omissions, ensuring perpetual registrations, minimizing duplicative reporting, and enforcing strict timelines with a “silence is consent” rule. Ultimately, achieving true economic freedom requires a comprehensive civil services reform rather than mere superficial tweaks.

It doesn’t matter if a cat is black or white, so long as it catches mice – Deng Xiaoping

In the previous article (BCAJ, March 2026), we examined a “lipid profile” of regulations affecting Ease of Doing Business (EoDB) and Ease of Living (EoL). In this part, we consider certain causes, effects and ways to reduce regulatory cholesterol.

1. STRATEGIC

There are order-setting regulations and there are directional ones. EAM of India talks of Strategic Autonomy. There are many areas where we have none. Consider sovereign rating agencies: We largely depend on global agencies such as S&Ps. We don’t have our own standards¹, we depend on western reports, they rank us and we abide by those norms. China has changed this. A recent image circulating in terms basic things used by India and China demonstrated this – our dependence on external. In areas such as social media platforms (we let KOO die), operating systems, financial messaging systems (like SWIFT), and quality standards (ISO), we rely significantly on external frameworks. Even indices such as the SENSEX carry external branding S&P.

1  Say Digitisation of medical records, how can we analyse this massive 
data of reports now available to prepare for prevention, care and predictive analytics

We need domestic, home-grown, home governed, home rooted entities to do work much of what happens in India and see it from Indian lenses. Dependence, identity and confidence go hand in hand and therefore must evolve together. Encouragingly, in capital markets, the dependence on foreign institutional investors has reduced relative to domestic SIP flows. Similar shifts are required across sectors.

We need more changes like this and build our turf on our terms. Regulations, therefore, must enable the creation of domestic institutions, standards, technologies, and services—rooted in Indian conditions and perspectives. This is the strategic dimension of regulation: laws that enable the development of Bharat in a sustained and accelerated manner.

2. STRUCTURAL VS. PROCESS REFORMS

This is already underway, especially we have heard from Shri Sanjeev Sanyal of EAC to the PM, about structural reforms (GST, IBC, Tax, and so on) already undertaken, and now we need more of process reforms to even out frictions in the system.

Process reforms address frictions that, while seemingly small, have large cumulative effects. For instance, closing a company still takes months or years. Similarly, certain public sector entities continue despite diminished relevance, while sectors that are more critical remain understaffed. Process reforms aim to remove these inefficiencies and improve system responsiveness.

He calls these nuts and bolts reforms².

2 https://dsppg.du.ac.in/wp-content/uploads/2023/11/Process-Reforms-Working-Paper-Nov-2023_Final.pdf

3. ENABLING

Regulations must enable the very objectives they seek to regulate – growth, quality, employment, and so on. They should remove peripheral burdens and allow focus on core activity. Regulations should create orbits and facilitate shifts in them—not destroy or constrain them. The emphasis must be on enabling transformation rather than constraining activity.

Enabling means removing dross around the core and keeping the main thing the main thing.

4. FACILITATING:

Regulations should act as problem-solvers for businesses. Recent GST changes³ demonstrate movement towards trade facilitation. Such responsiveness should become a general principle.

Regulation should rapidly take market inputs, and become the greatest facilitator of free enterprise, which is an expression of freedom and liberty. They should be tested on this question: What can they impede vs. what can they serve. At times, impedance is itself justified as serving a purpose, leading to a self-reinforcing cycle.

3 Referred to as GST 2.0

5. QUANTUM:

A key question is: how much regulatory effort is required merely to remain compliant? Say the number of core regulations to run a business or time spent on compliance vs. to do core work.

Typically, regulatory requirements fall into three categories:

• Registration
• Operations (dos and don’ts)
• Reporting

Registrations should ideally be one-time or long-term, without repeated renewals. Instead of frequent re-registration⁴, non-compliant entities can be addressed through targeted enforcement.Permissions should be minimal. Regulations should define clear and simple rules of the game, with regulators acting as overseers rather than controllers.

Reporting should be:

• Infrequent
• Consolidated
• Non-duplicative

Currently, reporting often involves duplication across multiple authorities who do not share data effectively. Over time, reporting requirements also tend to expand beyond their original intent a ‘Stretching’ of sorts. Take UDIN⁵ when it comes to reporting.

4 Section 80G and 12A – These were withdrawn now brought to life from the grave
 instead of targeting certain entities involved in anti-national, conversion, illegal activities.

5 UDIN was meant for authenticity by correlating: Document – Person - Date. 
Now it’s asking way too many things specific to the content.

6. VOLUME AND CHANGES IN REGULATIONS

How many Regulations do authorities introduce and tweak each year? In US 3000 come each year⁶. India likely experiences similar numbers or more. The concern is:

° how many regulations are introduced,

° how many are amended, and

° how many are repealed?

Every ministry needs to report this. Look at any sarkari agency’s web page—‘new’ red-coloured announcements pop up as if they were badges of honour. Arbitrary changes at any time have become the norm. There is limited institutional incentive for removal of outdated regulations, leading to a cumulative increase. Frequent and sometimes unpredictable changes add to compliance uncertainty.

6 Nikhil Kamath talking to Ruchir Sharma - https://www.youtube.com/watch?v=lTCzIDITaac&t=2212s at 33.50 min

7. BENEFICIARIES OF REGULATIONS

Regulations often favour incumbents by creating entry barriers. Compliance complexity disproportionately affects small and medium enterprises, both in terms of cost and managerial bandwidth.

In contrast, larger entities may navigate complexity more effectively due to scale and resources. This asymmetry needs to be recognised and addressed.

Biggies flourish from obfuscation, maze of regulation and complexities. Biggies often write the laws for lawmakers. Take the example of ICFR. Authorities applied it to all entities in year one—crazy stuff. Then they withdrew it and adjusted it to cover only those entities that needed them. Obviously, someone pushed this through and some parties benefitted from it, adding no value to the actual ground situation.

8. SAFETY NET VS. TRAMPOLINE:

Erstwhile Singapore PM⁷ Tharman (now president) gave this example. A BBC reporter asks him about safety nets, obviously trying in a cheeky way to trap him. Tharman said they create Trampoline instead safety nets. Both are made of the same thing, however, trampoline allows people who fall into it to bounce back, to rise. Trampoline is meant to propel and accelerate out of the net. Safety net safeguards against setbacks. It prevents and protects. Trampolines amplify trajectory through responsibility, skill development, exposure and innovation.

In India, we have created many safety nets. We need to tweak them to become trampolines – where the same net protects against setbacks but doesn’t make one dependent. We should not make support perpetual and unconditional, but instead design it to enable a person to earn one’s success eventually.

7 https://youtu.be/nPZ8Kj1nIAU?si=c2EU4QSrplAQ2CLE

9. POLITICS

Laws pass through the colour of politics (preservation and extension of votes), and are often made/repealed that way so that someone can hijack them – like trade unions where job preservation is presented as job creation. Trade unions should rather fight for improvement in ESIC or PF or EPS – for better services and thousands of crores stuck in the so-called ‘inoperative accounts’.

Votes override constitutional fundamentals. Politicians talk about ideas like reservation in the private sector. While reservation, being birth based benefit is a problem and is akin to discrimination based on birth. Laws are made to punish people simply based on a certain person complaining, making acts non bail-able. This is just for political purposes – where objectivity and reason goes missing in favour of outright discrimination. Politicising is a magic show where self-interest is garbed as national interest.

10. DECENTRALISE

Greater decentralisation can improve responsiveness. Proximity of decision-making to stakeholders often results in better outcomes.

Keeping power proximate to people is best, instead of situating it in Delhi. Deregulation often means decentralisation.

11. ABSENCE OF TIMELINES

A critical issue is the absence of defined timelines for regulatory approvals.

We need a count of permissions or approvals from administration that lack a timeline whereas every compliance imposes a timeline on the business. These regulations require free citizens to petition the unelected civil servants for permissions. Where timelines are not specified, applicants are effectively dependent on administrative discretion. Introducing enforceable timelines, along with accountability mechanisms, can significantly improve efficiency.

12. THE REGULATED

To be fair, we have to call out the group whose careless disregard fuels this mess. That is Indians against Indians. I was at Surat station waiting for the train to come. One man walking up the platform ate the last biscuit and simply threw the wrapper on the platform and kept walking. When I see such people, my hope shatters.

It will be a shame to call for rules for basics, which otherwise needs sensitivity – say how to park near the kerb; where to stop on the road or to walk on the footpath (when there is one) instead of on the road. Careless disregard for others – fellow citizens – is a consistent and pervasive element. However, we have seen that better processes – say at the Metro where there is certain order is possible. It is a pity that our own conduct and lapses, trigger regulatory reprimand.

DESTRAGULATION, REFORM & EFFECTIVENESS

There is a saying: power corrupts, and absolute power corrupts absolutely. In our context this means: Regulations corrupts, absolute regulations corrupt absolutely. This often happens (apart from the quantum and excessive severity) when legislation, execution and adjudication are bundled with one set of civil servants / department. Here is a partial checklist to accomplish destrangulation:

Registration vs. Approval / Permission – The idea of ‘permissions’ should be terminated except for prohibited sectors like defence. Registration should be default means to kick start something in business sphere. Recent Charity Trust Re-registration by income tax department, is asking what is already supplied in previous ITRs and Audit Reports already with the department. Registrations should be perpetual once there is periodic reporting.

Compliances: We should call this reporting. Reporting should be minimum, non-duplicating, infrequent and easy. Currently, multiple agencies seek overlapping information, often with strict timelines. A rationalised reporting framework, particularly for SMEs, is necessary.

Decriminalisation: Remember, minor TDS delays led to prosecution! Instead of inventing thousands of ways to prove citizens criminal, let’s be civil again. The state compels the deductor to act as its agent. If the government doubts the deductor’s reliability, it should transfer the responsibility to the payee.

Digitisation: Zero officer interface. Filings flow through automated acceptance and processing as standard practice. Interrelated data sharing eliminates duplication. Once a company enters its CIN or PAN, all other registrations should follow automatically, or any single number (like a consolidated folio) should suffice for all reporting. The same applies to cancellations—companies should be able to opt out of GST online when it’s not applicable. This requires databases and departments to communicate with one another.

Timelines: The legislature must evict laws that let bureaucrats sit on paperwork forever. Implement a ‘Silence is Consent’: if authorities ignore a filing beyond the deadline, the system auto-approves it. No ‘No’ in time? We take that as ‘Yes.’ Non-working portals automatically extend compliance timelines.

Regulatory Opacity and Inefficiency without recourse: Implementation fails because citizens have little to no recourse when the government doesn’t enforce laws as required. Authorities routinely auto-close grievances without verifying whether the taxpayer’s problem was actually resolved.

On the ‘Surprise!’ method of governance: When the government makes abrupt policy U-turns, it shatters trust and paralyzes risk-takers. It is hard to build a business when the floor can keep turning into lava. The government must disclose upcoming changes well in advance and explain implementation methods clearly. All changes should come in a bundle through a consolidated master circular / directions once a year for business laws. Predictability builds the trust that citizens expect from their government.

Process as Punishment: Jail provisions for otherwise civil omissions are threat-based governance. Add bureaucratic discretion and you get corruption and court congestion. The Jan Vishwas principle rejects micromanagement⁸ in favour of accountability⁹ and prioritises actual harm¹⁰ over paperwork¹¹ variations.

8 By inspectors breathing down your throat

9 Trust based compliance and civil fine for delay

10 Fraud, poisoning the environment etc.

11 Removes jail time for missing paperwork and saves it for ‘harm’

Democracy vs. Economic Growth—A False Choice: Some portray mass prosperity and mass democracy as competing goals. Yet if we can manage mass democracy despite our nation’s vast differences, why should mass prosperity prove harder? Obviously, people in power take helicopter view instead of worm’s eye view. We still have too many people farming instead of working in other sectors. We don’t have jobs problem; we have wage problem. Wages stagnate because productivity stagnates. And productivity stagnates because regulations make it so difficult to establish factories that could train college graduates as apprentices.

CONCLUSION: THE HEALTHY RANGE

First, let me clarify which regulatory cholesterol we’re discussing: the harmful kind—Non-HDL cholesterol beyond acceptable biological limits. Just as Vitamin D affects bone health when deficient but becomes toxic when in excess, regulations require constant monitoring. For regulatory cholesterol, statins or stents cannot cure or even manage an over-regulated system. We need comprehensive lifestyle change across all levels and sectors.

Post-1991 liberalization didn’t deliver Poorna Swaraj. India still waits for crisis-driven transformation. This doesn’t mean abolishing all regulations—or Afghanistan would be a unicorn factory. We need laws that let our people sprint, not crawl. EoDB and EoL remain fundamentally civil services reform problems. Deng said it best: “Reform is China’s second revolution.” In Gandhian terms, Poorna Swaraj remains a distant goal until we achieve genuine EoDB and EoL.

BCAJ Admin

Under the GST framework, transferring a business as a “going concern” is exempt from tax, ensuring neutrality for genuine reorganizations, whereas itemized asset transfers attract GST. During mergers or demergers, merging entities remain distinct taxable persons until the NCLT order date.

Under Section 18(3) and Rule 41, the transferor can pass unutilized Input Tax Credit (ITC) to the transferee via FORM GST ITC-02, provided liabilities are also transferred. While controversies exist regarding transitional ITC mismatches and unadjusted advances, courts have affirmed the transferee’s right to unutilized ITC and ruled that tax proceedings against non-existent amalgamated entities are void ab initio.

The GST implication on the sale or transfer of a business depends fundamentally on the manner in which such transfer is structured. Under the GST framework, a business may be transferred either as a going concern or through an itemized transfer of individual assets and liabilities, with materially different tax consequences in each case. While the transfer of a business as a going concern is recognized as a distinct category of supply and is eligible for exemption subject to prescribed conditions, an asset-wise transfer attracts GST depending upon the nature of the goods or services involved.

TRANSFER OF BUSINESS AS A GOING CONCERN

Under the GST law, the taxability of a business transfer depends on how a transaction is structured. Paragraph 4(c) of Schedule II to Central Goods and Services Act, 2017 (CGST Act) read with Notification No. 12/2017–Central Tax (Rate), exempts services by way of transfer of a business as a going concern, whether as a whole or as an independent part thereof. Though “going concern” is not defined under GST law, it is a well-established accounting and commercial concept signifying continuity of operations, transfer of assets along with liabilities and absence of intent to liquidate.

Paragraph 4 of the said Schedule II further provides that when a person ceases to be a taxable person, goods forming part of business assets are deemed to be supplied immediately before such cessation, unless the business is transferred as a going concern. Accordingly, where a division or undertaking is transferred in entirety pursuant to a merger or demerger, together with employees, contracts and liabilities, the deeming fiction does not apply, ensuring tax neutrality for genuine reorganisations. The following illustrations provide further clarity on the distinction.

Illustration-1: Where a company discontinues one of its business divisions and cancels its GST registration for that division while retaining the underlying assets such as machinery, inventory or office equipment, the transfer of such assets would be treated as a deemed supply under Paragraph 4 of Schedule II and GST would be payable on their value. However, where the same division is transferred in its entirety to another company as a going concern, together with employees, contracts and liabilities, pursuant to a scheme of demerger or slump sale, the deeming provision would not apply, and no GST would be payable on the transfer of such business assets.

Illustration-2: Where a partnership firm dissolves and the partners distribute the closing stock and capital assets among themselves without transferring the business as a going concern, such distribution would be treated as a deemed supply and GST would be payable on the value of the assets so distributed. However, if the partnership firm is converted into a company and the entire business is transferred to the company as a going concern, with continuity of operations and transfer of liabilities, the deeming provision would not apply, and no GST would be leviable on the transfer of business assets.

REGISTRATION REQUIREMENTS UNDER GST

GST registration is State-specific and entity-specific under Section 25 of the CGST Act. Corporate restructuring approved by the National Company Law Tribunal (NCLT) or Ministry of Corporate Affairs (MCA) does not automatically alter GST registrations. In terms of Section 87(2) of the CGST Act, amalgamating or merging companies are treated as distinct taxable persons up to the date of the NCLT order, notwithstanding any retrospective appointed date mentioned in the scheme. Consequently, the transferor entity must continue to comply with GST obligations, including filing returns and paying tax, until its registration is cancelled.

Post-restructuring, the transferee or resulting entity is required to obtain a fresh GST registration or amend its existing registration to include the transferred business. Cancellation of registration of the transferor operates prospectively and does not extinguish past liabilities. Transfer of ITC on Sale / Merger / Demerger

Section 18(3) of the CGST Act specifically provides that where there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of business, and such change is accompanied by specific provisions for transfer of liabilities, the registered person is permitted to transfer the unutilized input tax credit (ITC) lying in its electronic credit ledger to the transferee. The manner and conditions for such transfer are prescribed under Rule 41 of CGST Rules 2017 as further clarified by Circular No. 133/03/2020-GST dated 23 March 2020 .

ILLUSTRATION

In a case where a transferor entity transfers only its plant and machinery and unutilized ITC to a transferee entity without transferring its liabilities since the transaction does not involve transfer of liabilities, the conditions of Section 18(3) of the CGST Act read with Rule 41 are not satisfied. Accordingly, the transferor entity is not permitted to transfer the unutilized ITC to the transferee entity.

Under Rule 41, the transferor is required to file FORM GST ITC-02 on the common portal, furnishing details of the transaction and seeking transfer of unutilized ITC. In the case of a demerger, the ITC is required to be apportioned in the ratio of the value of assets of the resulting units as specified in the approved demerger scheme. The term “value of assets” has been clarified to mean the value of the entire assets of the business, irrespective of whether ITC has been availed thereon.

As per Section 232(6) of the Companies Act 2013, a scheme of demerger is deemed to be effective from the appointed date specified therein. Accordingly, for the purpose of apportionment of ITC under Rule 41, the ratio of asset values should be determined as on the appointed date of demerger.

Additionally, the transferor is required to furnish a certificate from a practicing chartered accountant or a cost accountant certifying that the transaction provides for transfer of liabilities. Upon acceptance of FORM GST ITC-02 by the transferee on the common portal, the specified ITC stands credited to the transferee’s electronic credit ledger.

Major Controversies on ITC Mismatches, Credit Notes, Transitional Issues, Unadjusted Advances.

1 Notification No. 16/2019-Central Tax dated 29.03.2019 w.e.f. 29.03.2019

TRANSITIONAL ITC ISSUES

A recurring controversy prevails on the issue of mismatch of ITC between the appointed date under the demerger scheme and the date of filing FORM GST ITC-02. While Rule 41 requires apportionment based on asset values as on the appointed date, the actual transfer is restricted to the ITC available in the electronic credit ledger on the ITC-02 filing date. Since ITC may be availed or reversed during the intervening period due to ongoing operations, disputes arise on whether such intervening adjustments should form part of the transferable ITC pool. Further, ITC transferred through ITC-02 often pertains to pre-demerger periods and may not reflect in the transferee’s GSTR-2B, exposing the transferee for automated mismatch notices and demands.

Another major issue may arise when the transferor is engaged in both taxable and exempt supplies, where Rule 42 reversal of common ITC is applicable. The GST department may insist on a proportionate reversal by the transferor before filing ITC-0 and failing which excess or ineligible ITC gets transferred to the transferee. Taxpayers, on the other hand, contend that Rule 41 does not mandate prior Rule 42 reconciliation as a precondition, and that ITC-02 merely transfers the net balance legally lying in the electronic credit ledger on that date. Insisting on retrospective reversals post ITC-02 effectively results in double adjustment once by restricting transferable credit and again by demanding reversal contrary to the scheme of seamless credit under Section 18(3) which is a vested right of the taxpayer.

Although Section 155 of CGST Act places the burden of proving eligibility of ITC or any claimed benefit on such person, i.e., the transferee, it cannot be invoked to compel the transferee to disprove vague or unquantified past liabilities, especially where the relevant tax periods precede the effective date of transfer and the statutory compliance stood in the name of the transferor.

Another significant issue under Rule 41 arises from post-transfer scrutiny of eligibility, place of supply and nature of credit at the transferee’s end, despite such issues having never been disputed in the hands of the transferor.

Issues on Credit Notes, Debit Notes & Unadjusted Advances

Section 87 of CGST Act provides that the transferor and transferee entities are to be treated as distinct taxable persons up to the date of the order. Accordingly, all inter-se supplies made during the period from the appointed date to the date of the order remain taxable, and any price revision or adjustment must be effected only through debit or credit notes issued between the respective entities. Credit notes issued under Section 34 of CGST Act require corresponding ITC reversal by the recipient, while debit notes permit additional tax payment and ITC availment, subject to the prescribed statutory limits.

Similarly, unadjusted advances create practical difficulty where GST has been paid by the transferor on advances, but the actual supply is made by the transferee post-transfer. Further, under the said Section 87, the transferor and transferee are jointly and severally liable for GST dues up to the date of transfer, to the extent of the business transferred, and any allocation of liabilities in the NCLT scheme operates only inter se between the parties and does not bind the GST authorities.

JUDICIAL DEVELOPMENTS

Recently in the case of Alstom Transport² Hon. Gujarat High Court examined whether an amalgamating company could claim refund of unutilized ITC after merger. The Court held that upon the merger of Alstom Rail Transportation India Pvt. Ltd. into Alstom Transport India Ltd., pursuant to an NCLT order dated 10 August 2023 effective from 22 September 2023, the transferor entity ceased to exist in law and its GST registration ought to have been cancelled from the effective date. Consequently, unutilized ITC could only be transferred to the transferee in accordance with Section 18(3) read with Rule 41 and could not be partly retained for claiming refund under Section 54(3) of CGST Act as refund is a statutory concession requiring strict compliance. The refund granted to the transferor was therefore held to be legally unsustainable.

2 Alstom Transport India Ltd vs. Additional commissioner, CGST and Central Excise (appeals) & Ors (Writ Petitions (SCA Nos. 11025–11043 of 2025) (23-01-2026)

Further, in another case of Umicore Autocat³ Hon’ble High Court of Bombay (GOA Bench) held that the transferee company is entitled to utilise the unutilised ITC lying in the electronic credit ledger of the transferor company, irrespective of territorial boundaries, since upon amalgamation the transferor had ceased to function and all its assets and liabilities, including ITC, stood vested in the transferee. The Hon’ble Court further directed the GST Council and the Goods and Services Tax Network (GSTN) to evolve an appropriate mechanism to address situations involving inter-State transfer of ITC by upgrading the GSTN system.

Similarly in FLY TXT Mobile⁴ (AAR -Kerala) it was held that upon merger, the closing balance of CGST and IGST lying in the electronic credit ledger of the transferor can be transferred to the resulting company even where the GST registrations are not within the same State.

3 Umicore Autocat India Pvt. Ltd. vs. Union of India ((2025) 32 Centax 416 (Bom.) [10-07-2025])

4 Flytxt Mobile Solutions Pvt. Ltd. (2025) 36 Centax 149 (A.A.R. - GST - Ker.) [23-07-2025]

PROCEEDINGS AGAINST NON-EXISTENT ENTITIES

Upon amalgamation, the transferor entity ceases to exist in the eyes of law and any proceedings initiated or continued against such a non-existent entity are legally untenable.

In the case of HCL Infosystems⁵, Hon’ble Delhi High Court held that once a company is dissolved pursuant to amalgamation, any proceedings initiated or continued against such a company are void ab initio. The Hon’ble Court further held that that Section 87 of the CGST Act merely deals with apportionment of liabilities and does not authorize continuation of proceedings against a non-existent entity. Similar views have been expressed by the Karnataka High Court in the case of Trelleborg India⁶.

5 HCL Infosystems Ltd. vs. Commissioner of State Tax (2024) 25 Centax 72 (Del.)/2025 (93) G.S.T.L. 279 (Del.) [21-11-2024]

6 Trelleborg India Pvt. Ltd. vs. State of Karnataka (2024) 20 Centax 355 (Kar.)/2024 (89) G.S.T.L. 37 (Kar.) [02-07-2024]

CONCLUSION

Thus, GST implication in sales, transfers, mergers, and demergers is determined based on transaction structuring. Services by way of transfer of a business as a going concern enable tax neutrality and seamless ITC transfer under Section 18(3) and Rule 41, while asset-wise transfers may attract GST depending upon the nature of the goods or services involved. Proactive planning, robust documentation, clarity in drafting agreement clauses, defining nature of the transaction to be undertaken as well as valuation aspect are essential to mitigate risks and prevent future disputes.

BCAJ Admin

The National Financial Reporting Authority (NFRA) has issued two circulars shifting auditing from “implied compliance” to “demonstrated governance”. The December 16, 2025 circular strictly mandates contemporaneous audit documentation. Auditors must assemble final files within 60 days and submit them within 7 days of an NFRA request, with zero post-facto alterations or metadata-stripping format conversions allowed. Furthermore, the January 2026 circular enforces robust, documented two-way communication with appropriately identified “Those Charged with Governance” (TCWG). It mandates at least two meetings annually to meaningfully discuss strategic risks, fraud, and controls, actively rejecting superficial presentations.

The Indian audit landscape is undergoing a fundamental shift, moving from mere procedural adherence to a regime of substantive accountability. Two recent circulars issued by the National Financial Reporting Authority (NFRA) dated December 16, 2025, and January 7, 2026 represent a pivotal moment in corporate governance. These mandates collectively signal that NFRA is no longer just observing; it is actively re-engineering the DNA of audit evidence and the bridge of communication between auditors and Those Charged with Governance (TCWG). The “tone at the top” must now resonate with the reality that an audit not documented contemporaneously and communicated transparently is, in the eyes of the regulator, an audit not performed. NFRA has observed notable deficiencies, prompting a clear articulation of compliance requirements.

THE REGULATORY PURVIEW: REALITY CHECK

The reach of NFRA is extensive, covering Public Interest Entities (PIEs) as defined under Rule 3 of the NFRA Rules, 2018. The regulator’s recent outreach indicates a heightened focus on the “middle tier,” with a 2025 survey garnering participation from 383 firms across India to tailor audit quality initiatives.

NFRA STANCE ON TIMELINES, MAINTENANCE, ARCHIVAL AND INTEGRITY OF AUDIT FILES.

The circular dated December 16, 2025, addresses chronic deficiencies in how audit firms maintain and submit their work papers. NFRA has issued a timely reminder and a firm warning to all statutory auditors of PIEs must rigorously adhere to the existing Standards on Auditing (SAs) and Standard on Quality Control (SQC)1 regarding the maintenance, archival, and submission of audit documentation. NFRA has observed notable deficiencies, prompting a clear articulation of compliance requirements.

THE NON-NEGOTIABLE: CONTEMPORANEOUS DOCUMENTATION

The foundational principle of SAs is that audit documentation must be prepared contemporaneously as the audit is performed. NFRA highlights observed instances where audit firms requested unreasonable extensions, using that time to convert file formats or even worse, prepare fresh/additional documentation after the fact. This practice is a direct violation of professional standards and compromises the integrity of the audit process.

Practical Problem: An audit firm receives an NFRA request for a 3-year-old audit file. The original electronic workpapers were poorly maintained, and the firm considers “tidying up” or regenerating certain schedules before submission.

Circular’s Stance: This is explicitly prohibited. Any modification or addition to original workpapers is a violation. The documentation must exist in its final, archived form (assembled within 60 days of the report date) and be ready for submission on short notice.

INTEGRITY OF ELECTRONIC RECORDS

A major point of concern for NFRA is the loss of data integrity during format conversions. The circular emphasizes that audit evidence obtained or prepared originally in electronic form must be preserved and maintained in that exact form.

Practical Problem: To compile a submissiondossier, a firm prints original MS-Excel worksheets and then scans them into a single, unsearchable PDF for NFRA or provides printed manual file to NFRA.

Circular’s Stance: This practice is unacceptable. Printing electronic documents and / or scanning them removes crucial metadata (timestamps, authorship, history of changes), formulas, and links to underlying data. This loss of evidentiary value means the documents “cannot constitute valid audit evidence”. Original electronic files must be preserved electronically unless conversion to any other form can be done without loss of evidentiary value.

RETENTION BEYOND SEVEN YEARS: A CRITICAL CAVEAT

Paragraph 82 and 83 of SQC 1 read with A23 of SA 230 suggests a minimum retention period of seven years from the auditor’s report date. However, NFRA clarifies a critical legal requirement often overlooked by firms.

Practical Problem: A regulatory investigation begins in year six of the retention period. The auditor assumes they can delete the files once the seven years are complete, regardless of the ongoing case.

Circular’s Stance: The auditor must retain the audit files even beyond the standard seven-year timeline if legal or regulatory proceedings have been instituted and are ongoing. Preservation of evidence is a legal requirement under Indian law once production in a proceeding is compelled. Such documents must be retained until the proceedings attain finality.

ACTIONABLE COMPLIANCE POINTS

Firms must update their internal policies immediately to reflect these points of compliance:

• Submission Window: Be prepared to submit complete files within 7 days of an NFRA request.
•  Extension Requirements: Extensions are for exceptional circumstances only and require detailed justification and upfront submission of key audit documents (Audit Strategy and Audit Plan, Risk Assessment Summary, Summary of corrected and uncorrected misstatements and copies of all communication with Audit Committees and Board of Directors. Details ascertaining completeness of the Audit file are also required to be submitted which includes details such as total number of pages of paper audit file and / or total volume of electronic file in MBs, The index of the paper audit file and / or list of documents in the electronic file are also required to be submitted along with the application for seeking extension within seven days of receipt of communication from NFRA. These requirements ensure completeness of file integrity to be produced by the entity and would act as a deterrent for preparation of fresh / additional documents to improve the file post the archival date.

• File assembly and archival: Final files must be assembled and archived within the 60-days from the date of the audit report. If NFRA requisitions a file, it must be submitted within 7 days.

STRENGTHENING THE BRIDGE: COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE (TCWG)

The Circular dated January 7, 2026, focuses on the “two-way” nature of communication required by SA 260 and SA 265. This circular is applicable to all listed companies, companies and bodies corporate as specified in Rule 3 of NFRA Rules, 2018 and auditors of such companies.

Action items for stakeholders.

NFRA has noted instances where auditors incorrectly identified Management Executives as TCWG or relied solely on the engagement letter for communication. To improve governance, NFRA suggests:

•  Inadequate evaluation and Incorrect identification of TCWG: SA 260 defines TCWG “as those with responsibility of overseeing the strategic direction of the company and obligations relating to the accountability of the entity”. For some entities, those charged with governance may include management personnel, for example, executive members of a governance board of a private or public sector entity, or an owner-manager It casts mandatory requirement for an auditor to determine appropriate persons as TCWG within the governance structure. The Board of Directors (BOD) or a sub-group thereof could qualify for being considered as TCWG. In case the sub-group of BOD is identified as a TCWG, it would be incumbent on the auditor to determine whether there would arise a need to communicate with the full Board.

SA 260 defines Management as “The person(s) with executive responsibility for the conduct of the entity’s operations. For some entities, management includes some or all of those charged with governance, for example, executive members of a governance board, or an owner-manager” A practical issue would arise in distinguishing TCWG from Management and often discussions with management are erroneously construed as discussions with TCWG.

Executive responsibility involves the mandate of executive leadership to administer and enforce laws and policies through operational oversight. The difference lies in the fiduciary scope of oversight held by the board of directors, focused on “supervision and guidance” of the company’s long-term interests and fiscal performance. It involves a “duty of care” to make informed decisions and a “duty of loyalty” to safeguard shareholder interests versus the duty of execution administrative duty to “carry laws and policies into effect,” focusing on day-to-day operations and tactical implementation.

•  Documentation of Two-way Communication: Oral communications must be documented in writing with clear communication in an unambiguous manner of auditor’s responsibilities, the form of communication, date and time of communication along with the participants must be specified. The Communications should include discussions such as strategic decisions, suspected or identified fraud discussions, auditors approach for testing internal controls, specialised skill requirements such as fair value measurements, expected credit loss allowance and critical management estimates and forecasts, compliance statements by auditors in relation to Code of Ethics, non-audit services ( section 141 and 144 of CA 2013 compliance) and matters of concern to senior management including from the internal audit function.

Some of the critical aspects of documentation requirements are enunciated as below:

› Purpose and objective of communications to have better understanding of relevant issues and the expected actions arising from the communication process.

› The nodal officers who would represent the engagement team and TCWG respectively.

›  The auditor’s expectation that communication will be two-way, and that those charged with governance will communicate with the auditor matters they consider relevant to the audit, for example, strategic decisions that may significantly affect the nature, timing and extent of audit procedures, the suspicion or the detection of fraud, and concerns with the integrity or competence of senior management.

›  The process for acting and reporting back on matters communicated by the auditor and the process of taking matters back to TCWG and escalation if required.

›  Matters that may be discussed with management in the ordinary course of an audit

›  Manner of communication with third parties for example bankers or lawyers or certain regulatory authorities. Or the Manner in which written communications by the auditor’s may be presented to third parties by TCWG

› Effective means of communications could be structured presentations and written reports as well as less structured communications, including discussions. Written communications may include an engagement letter that is provided to those charged with governance.

›  Audit Committee Meeting (ACM) presentations in bullet form without adequate supporting documentation or e-mail communications with caveats or without management comments or responses are unacceptable.

•  Frequency of meetings: NFRA has recommended that, auditors and TCWG should meet in person or virtually at least twice a year—once before the audit starts and once before the approval of financial statements. Often presentations made to Audit Committee at the time of approval of financial statements are the only evidence available in the audit file which evidences meetings with lesser frequency.
• Communication of critical matters not communicated: NFRA identified that often matters such as weakness and deficiencies in internal controls, related party transactions and assessment of arm’s length, significant unusual transactions, non-compliance of laws and regulations, discussions with group entities, borrowings and supplier finance arrangements, land advances, significant investments and matters required to be communicated as prescribed by Standards of Auditing are not communicated to TCWG.
• Specific Agenda: Interactions must include quantification of materiality, assessment of Risk of Material Misstatement (ROMM), and status of work, significant findings, significant difficulties encountered during the audit must be communicated to TCWG and an agenda for the matters to be communicated and timing and frequency thereof must be finalised at the commencement of the audit engagement for the year.

THE MIRROR OF INTROSPECTION

The dual mandates from NFRA are not merely administrative updates; they are a redefinition of the auditor’s burden of proof. The December 16, 2025 circular, on maintenance, archival, retentions and submission of audit files unmasks the excuses for delayed or altered documentation and emphasis on contemporaneous documentation of audit files.

The circular dated January 7, 2026 on effective two-way communication removes the veil of “management-only” discussions. As practitioners, we must ask ourselves:

• If a regulator were to demand our audit file today, would it reveal a contemporaneous record of professional scepticism, or a hurried reconstruction of events?
• Would the minutes of our meetings with the Board reflect a robust challenge of accounting estimates, or a “bullet-point presentation” with no evidence of meaningful dialogue?

The era of “implied compliance” is over. We are now in the age of “demonstrated governance.” It is time for every firm, from the local practices to the global networks to look within and introspect. The files we archive today are the only source of defence we will have tomorrow. The question remains; are we truly ready for that that scrutiny?

BCAJ Admin