ICAI and its members

ICAI publication on ‘Disciplinary Cases’ gives decisions by the Disciplinary Committee. Some of these decisions are given below. Names of members are not given for the sake of confidentiality. Page Numbers given below are from the Publication Vol.I – (Part II)

(i) Re. SRK:
If this case the CIT, Mumbai, had written to the Institute that the member had conducted Tax Audit u/s. 44 AB of an assessee for A/Y: 2004-05. In this case, the assessee had claimed Rs. 3.74 crore as interest paid to Bank on Loan. Out of this Rs.3.10 crore was not paid. According to CIT this was not allowable u/s. 43B. This fact was not pointed out by the member and this amounted to gross negligence on the part of the member.

The defence of the member was that section 43B(e) of the Income tax Act was amended w.e.f. 2004 -05 whereby the interest to Bank on loans and advances, if not paid by due date, was not allowed. Prior to this amendment the provision applied to interest on term loan from bank. Moreover, the assessee had brought forward losses of Rs.10 crore and therefore there was no loss to revenue. The member pleaded that it was only due to oversight that he failed to notice this amendment and therefore failed to give effect to it in the Tax Audit Report.

The DC has held that A.Y 2004-05 was the first year wherein the said amendment was made applicable and the member should have been careful in giving effect to it. Further, due to past losses, there was no loss of revenue by this non-disclosure. The D.C. was of the view that there was negligence on the part of the member but there was no mala fide intention on the part of the member. On this basis, the member was held to be “Not Guilty” of any Professional misconduct (P. 144 – 147)

(ii) Re. TRM: In this case, the outgoing auditor of a co-operative Bank had complained that the Member had accepted the audit for the subsequent year without first communicating with him and that the Bank had not paid his fees. The defence of the member was as under.
(a) T he appointment was made through empanelment with Registrar of Co-operative Dept and not by the Bank.
(b) T he communication about the appointment was made by a letter to the previous auditor which was sent through Courier. This letter was not by Regd. Post or Speed Post but there was evidence that it was received by the previous auditor.
(c) A s regards the outstanding fees the member was informed by the Bank that the audit fees fixed by the Registrar were only Rs. 9,000/- but the previous auditor had raised bill of over Rs. 66,000/-. Hence, this was in dispute and therefore not paid by the Bank.

The DC has held as under:

(a) T here was evidence to the effect that the member had sent communication about his appointment to the previous auditor and, therefore, this charge was not proved.
(b) A s regards the Fees it was proved that there was dispute with the Bank. It was also proved that subsequently the undisputed amount of audit fees of Rs. 9,000/- was paid by the Bank to the previous auditor.

On the basis of the above finding, the D.C. held that the member was not guilty of professional misconduct (P 167 – 172).

2 Financial reporting review board (frrb):

ICAI has published a “Study on compliance of Financial Requirements”. Some of the observations from this publication are given below.

(i) Disclosure about Prior Period Items: In some published Annual Reports disclosure about prior period items is made as under.

(a) Prior period expenses and income are adjusted in respective heads of expenses and income in the Profit & Loss A/c.
(b) P rior period expenses are shown under the head of selling and administrative expenses. (c) P rior period adjustment (net) is shown in the P & L A/c.
(d) P rior period expenses are shown under the head of other expenses.
(e) D epreciation charged during the year includes an amount of depreciation pertaining to previous year.

Observation of FRRB:

The disclosures are contrary to Para 15 of AS.5. Under AS-5, the nature of prior period items is required to be disclosed in the P & L in the schedules or in the Notes. Clubbing the prior period adjustments in their respective heads does not enable the reader to understand the effect of such adjustments on the current profit or loss which is against the requirements of AS-5.

(ii) Disclosure of Depreciation Policy:
Annual Report of one of the Companies stated that “Depreciation Rates on some of the Fixed Assets have been revised so as to keep them as per the requirements of Schedule XIV of the Companies Act”.

Observation of FRRB:

When Depreciation Rates are revised during the year, it will lead to change in Accounting Estimate as provided in Para 27 of AS-5. This may result in provision of depreciation which may be of higher or lower amount then that of provision at pre-revised rates. This will have material impact on the finance statements. In this particular case, the company has not complied with Para 27 of AS-5. The Company should have disclosed the aggregate effect of the revision in depreciation rates on the Profit/Loss for the year.

3 Accounting Treatment of Expenditure incurred on Stamp Duty and Registration Fees for Increase in Authorised Capital:

(Page 249 – 253)

A company was incorporated under the Companies Act, 1956 as a private Limited company. The company is registered as a non-banking financial company (NBFC) (non deposit accepting) as defined u/s. 45-1A of the Reserve Bank of India Act, 1934 (RBI). The company is primarily engaged in the business of lending for purchase of equipments.

The Company’s Authorised Share Capital as on 31st March, 2013 was Rs.7,00,00,000/- The Company received share application money of Rs. 55,62,55,000/-. To be able to allot further equity shares, the shareholders of the company, have approved increase in authorised share capital to Rs. 75,00,00,000/-. The company has incurred an expenditure of Rs. 47,60,000 /-(Rs. 34,00,000 towards stamp duty and Rs.13,60,000 towards registration fees paid to the Registrar of Companies) for the said increase in authorised share capital.

Post increase in authorised capital, the Board of Directors of the company has passed a resolution for allotment of 5,56,25,500 equity shares of the company of Rs. 10/- each at par amounting to Rs. 55,62,55,000/-.

The issue relates to accounting treatment of the expenditure of Rs. 47,60,000/- incurred by the company for increase in authorised capital.

Query:
On the basis of the above, opinion of the EAC is sought by the company, whether the company can treat the whole of the expenditure incurred on increase in authorised capital as ‘share issue expenses’?

EAC Opinion:
The Committee noted from the Facts of the Case that the company has received share application money in excess of the authorised share capital and subsequently increased its authorised share capital and made allotment of shares. The Committee notes that the query raised is in relation to expenses (stamp duty and registration fee) incurred for increase in authorised share capital of the company.

After considering paragraph 5 of accounting standard (AS) 26  ‘intangible assets’ and Guidance note on terms used  in  financial  statements,  the  Committee  is  of  the view that increase in authorised share capital is an independent process which does not necessarily lead to issue of shares. The need to increase the authorised capital and to incur expenses for increasing the same would not have arisen had the additional allotment of shares was within the limits of existing authorised capital. Accordingly, the Committee is of the view that the expenses incurred on increase in authorised share capital are distinct and separate from the expenses incurred on share issue. additionally, the Committee is of the view that accounting depends on the nature of expense and the fact that the share application money was received before increase in authorised share capital will not change the nature of expense. further, increase in authorised share capital does not represent issue of additional share capital and only sets a limit for the paid up capital of a company at any given point of time. Accordingly, the Committee is of the view that the expenses incurred on increasing the authorised share capital cannot be termed as share issue expenses

Further considering the paragraph 6.2 of as 26, the Committee notes that if an expenditure does not result into acquisition of an asset, it should be recognised as an expense as and when incurred. the Committee also notes that the amount spent towards increase in authorised share capital does not give rise to any resource controlled by the enterprise. in fact, such expenses are only permitting the company to enhance the limit for the paid up capital of the company which does not ensure any flow of funds to the company. Accordingly, it does not meet the definition of an asset. Thus, the amount aggregating to rs. 47,60,000/- incurred towards stamp duty and fees paid to the registrar of  Companies should be recognised as expense in the statement of profit and loss as per the requirements of paragraph 56 of as26.

[Pl. Refer page nos. 249 to 253 of C. A. Journal – August,2014]

4    ICAI News
Note: (page numbers given below are from C.A. journal of august, 2014)

(i)    Final C.A Examination (May 2014) results (TOI 9.8.2014)
final   C.A.,   may   2014,   examination   results   were declared on 8th august 2014. a comparative chart of pass percentage for last 3 examinations is as under.

In may, 2014, examination out of 42,533 students who appeared for the examination in both Groups only 3100 passed. Names of first three Rank Holders are as under:

First        : Shri sanjay nawandhar (jaipur)
Second  : Shri Kunal jethani (jodhpur)
Third    : Ms. harsha Bhatted (pune)

Our Congratulations and Best Wishes to each of the above candidates.

(ii)    New Publication of ICAI(278)
Technical guide on internal audit of it software industry.

(iii)    Ind AS Implementation (P.147)
The  president  in  his  presidential  message  has  stated that the finance minister has proposed in paragraph 128 of the Budget speech for the year 2014-15 that there is urgent need to converge current indian accounting standards  with  international  financial  reporting  standards (IFRS) and that the new indian accounting standards (ind as) converged with ifrs shall be adopted by the Indian Companies from the financial year 2015- 16  voluntarily  and  from  the  financial  year  2016-17 on mandatory basis.