Lecture Meetings

Date    : 20-10-2010

After a brief introduction of the topic for the evening, the learned speaker took up the Completed Contract Method (CCM) as the first issue to be discussed. The Supreme Court in the case of Bilahari Investment (299 ITR 1) held that the CCM which was acceptable in accountancy was also acceptable in the case of income tax. The propositions laid down by the Supreme Court in this decision were that the CCM was an accepted method of accounting, it was an objective method and it was a revenue-neutral method. Based on the observations of the Supreme Court, the speaker opined that the CCM would be acceptable provided that there was no accounting standard in force prohibiting use of the CCM.

The speaker then proceeded to discuss certain recent developments in accountancy which have a bearing on the topic. It was noted that AS-7 was revised to provide that the revenue for all contracts entered into on or after 1-4-2003 would have to be recognised for on a Percentage Completion Method (PCM) only?: the option to use CCM has been withdrawn. Further, the revised AS-7 is not applicable to builders and developers but only to contractors. The speaker referred to the opinion of the Expert Advisory Committee of ICAI which has opined that the revenue recognition of builders and developers would be in accordance with AS-9 read with AS-2. Reference was made to the Exposure Draft of ASI which had clarified that the revenue was required to be recognised in cases of builders and developers only at the time of parting with the possession of the premises and not at the time of mere execution of the agreement for sale. However, the Draft was not finalised and instead, the Guidance Note 23 was issued, which states that it would be reasonable to assume that the property in goods passes on the execution of agreement and therefore, revenue recognition should occur at that stage provided work had commenced. Attention was drawn to the GN which provided that in cases where substantial work is yet to be performed at the time of execution of the agreement, one would have to recognise the revenue in stages by reverting to AS-7 for following the PCM. Thereafter, the speaker discussed some important aspects of relevant IFRS on this topic, viz., IAS 11, IAS 18, IAS 40 and IFRIC 15.

Thereafter, the learned speaker addressed the issue of how the taxation of real estate industry would be affected by the various accounting changes that have or will take place. The speaker opined that given all the accounting changes, in view of S. 145 and S. 145A and the tribunal decisions in the case of Greater Ashoka LDC. (P) Ltd. (89 TTJ 281) and Growth Techno Projects Ltd. (29 SOT 59), following the CCM would not be difficult.

The speaker then highlighted that the cost of acquisition of land is to be ignored in considering the value of the work completed and also in determining the stage of completion of work. He explained that the base unit for computing the work completion can be w.r.t. — area, cost, time or sales value. He expressed that the time of passing the effective control and management by the builder-developer was crucial in deciding the time for recognition of revenue. The speaker opined that the revenue may be recognised once the stage of completion of work reached 25% of the total work to be done. He also referred to some pertinent issues arising in valuation of stock/land/WIP.

The next point of discussion was whether the borrowing cost incurred (being in the nature of period cost) was allowable as deduction in computing the income for tax purposes?? It was explained that the Bombay High Court in the case of Lokhandwala Constructions (260 ITR 579) held that the interest should be allowed as a deduction as it was in the nature of business expense u/s. 36(1)(iii). On the topic of ‘Borrowing Cost’, the speaker also discussed the cases of Wallstreet Constructions [101 ITD 156 (Mum.) (SB)], K. Raheja [102 ITD 414 (Mum.)], Thakkar Developers [115 TTJ 841 (Pune)].

The next question was whether sharing of land or real estate of any kind, in any manner, would by default lead to formation of a joint venture?? If yes, another question would be whether this JV would then be an AOP and taxable as a separate entity?? He highlighted the acute controversy prevailing on account of the conflicting decisions of the AAR in the cases of Van Ord 248 ITR 399, and Geo Consult GmbH (304 ITR 283). In the opinion of the speaker, the arrangement of land sharing without sharing the profit does not amount to joint venture.

In the area of indirect taxation and allied laws, the speaker discussed the developments in the following areas?:

•   Service tax on sale of flats — Harekrishna Developers AIT, 2008 128 (AAR), Magus Constructions P. Ltd., 2008 TIOL 321 (Gau.).

•     Consumer Protection Act — Fakirchand Gulati v. Uppal, (SC), ITAT Online.

•     VAT on sale of flats — Review of K. Raheja’s decision by larger Bench of SC in L&T’s case, Amendment of 2006 w.e.f. 20-6-2006, Trade Cir-cular dated 7-2-2007 and Amendment of 2010.

•     Stamp Duty — Development agreements and tenancy transfers.

Thereafter, the speaker discussed whether a development agreement results into a transfer in the hands of the landlord and if yes, at what point of time does the liability to pay tax arise?? The decision of Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia (260 ITR 491) was discussed and debated and the serious consequences following this decision were highlighted.

Next, in the cases redevelopment of tenanted properties, the speaker said that in case the land-lord himself develops the property, there would be no transfer in his hands. However, in case the landlord does not develop the property himself, in such cases, the above decision of the Bombay High Court would be applicable.

Other situations and alternatives arising from the decision of Chaturbhuj Dwarkadas Kapadia such as development pending the approval, willingness to perform, deferred possessions, piecemeal transfers, partial retention, need for written agreement, etc. were discussed.

Next point was redevelopment. In case of redevelopment of tenanted property, there could be three situations in respect of the tenant on redevelopment?:

•   The tenant of old property becomes tenant of new property after the redevelopment — Would this result in capital gains in the hands of the tenant?? There is a transfer, however, capital gains would arise only if there is a full value of consideration.

•     Tenant remains a tenant immediately after the redevelopment, but after a while, he becomes the owner — There are two views on transfer when tenancy is converted to ownership. One view, to which the speaker subscribed, is that there is a new right in place of the old right and thus, there is transfer. The other view is that tenancy provides an occupancy right and upon conversion to ownership, there is a merger of an inferior interest to superior interest but no transfer.

•     Tenancy is converted to ownership immediately on redevelopment — Whether when such ownership property is transferred shortly after conversion to ownership, would it be long-term or short-term?? Courts have held that this is short-term capital asset as what was transferred was the ownership right which was acquired only in the short term.

In case of redevelopment of society property, issue is whether there is any liability to tax when the society and owners transfer the development rights to developers. If yes, the issue would be that since the transferable development rights (TDR) have no cost of acquisition, there would be no capital gains tax. In this regard, the decision in the case of Shakti Insulated Wires Ltd. (87 ITD 56), should be noted which stated that the cost of acquisition was to be determined by pro-rating the cost of acquisition of the land. However, later there were decisions in the cases of Jethalal D. Mehta (2 SOT 422) and Om Shanti CHS Ltd. (41-B BCAJ 265) which held that since TDR and additional FSI have no cost of acquisition, there was no capital gains tax. However, in case of transfer of unutilised FSI, there would be capital gains tax.

Another issue in this case would be whether taxability would be in the hands of the society or members. In case of Auroville CHS Ltd., the Mumbai Tribunal has taken a view that the taxability should be in the hands of the members. However, at present, this issue has not been examined in detail by any court of law.

The meeting ended with the vote of thanks.

Subject : Important Practical and Legal Issues arising out of first and second appeal and relevant amendments related to appeals in DTC

Speaker : Dr. K. Shivram, Advocate

Date    : 24-11-2010

Dr. K. Shivram, Advocate, addressed the members on the subject of “Important Practical and Legal Issues arising out of first and second appeal and relevant amendments related to appeals in DTC” on November 24, 2010 at IMC. The speaker in his exhaustive style covered various issues with regard to procedures and legal concepts in relation to appeals. He discussed not only the main legal and procedural issues in relation to appeals, but also the practical issues in representation and documentation which can cause damage unless not observed diligently.

The speaker started with appeals at the first appellate stage. He covered in detail the fundamental procedural requirements of grounds of appeal and the statement of facts required for every appeal. He stressed on the importance of each document and the ramifications if irregularities crop up in the same. He also dealt with reassessment proceedings and instances where an assessee can ask for squashing of the proceedings.

The speaker ably covered significant issues including that of making a claim in the course of assessment proceedings, inclusion of additional grounds for the first time before the appellate authority, raising of the jurisdictional issue at a later point of time, production of additional evidence, etc.

For the benefit of participants, he listed out various instances in which defects in an appeal can be cured under the maxim of judicial propriety. He also gave a list of judicial precedents to support each instance.

•     In the later part of his speech, Dr. K. Shivram elaborated on the various issues regarding appeals to the Income-tax Appellate Tribunal.

He highlighted specific points in relation to filing of appeal, service of order, etc. He detailed various rules in relation to rights of respondent, rectification of mistake, presentation of paper book, filing fees, etc.

•     For each major issue, he provided anecdotes from his vast personal experience to drive home the point. Further, his speech was bolstered by a gamut of legal precedents which found immense favour with all participants. He also gave an insight on important aspects of the Direct Tax Code wherever relvant.

•     At the end, he provided a detailed referencer on various guidelines and regulations. It is said that for every legal argument, the presentation of the argument is as important as the content. To that end, Dr. K. Shivram capped his exhaustive presentation by providing resources for the participants on the art of representation.

•     The participants also got a chance to get their queries answered from the learned speaker. His enthusiasm coupled with his deep knowledge of the subject was well appreciated by all the participants.

Subject : Recent Developments in IFRS – Globally and in India

Speaker : Mr. N. P. Sarda, Chartered Accountant

Date    : 08-12-2010

Mr. N.P. Sarda, started his lecture by briefing about the journey of the formation of Accounting Standards. In 1977, India had to decide whether to adopt the International Accounting Standards in totality or to formulate its own Accounting Standards. The Accounting Standards Committee decided to formulate its own standards; accordingly Indian Accounting Standards came into existence. The Indian Accounting Standards are being followed since last three decades.

In 2007, again a debate arose whether to follow the International Financial Reporting Standards (IFRS) and adopt the same in totality or to bridge the gap between Indian Accounting Standards and IFRS by converging the standards. The decision was taken to adopt the convergence process.

The journey of IFRS was explained. Initially, there were 41 International Accounting Standards (IAS) as they were termed prior to being termed as IFRS. Out of these 41 IAS, 12 standards were withdrawn or superseded by new standards, leaving 29 IAS. Presently, there are nine IFRS and 16 interpretations on IFRS known as IFRICs. Finally there are 11 interpretations on IAS also. To sum up, at present IFRS has total of 65 documents to be referred.

To be at the level where all the accounting standards are accepted by the world at large, a country has to pass through three stages, namely:

•     Harmonisation;

•     Convergence; and

•    Adoption

India, has successfully harmonised its Accounting Standards to suit the local needs of stakeholders. It has decided not to directly adopt the IFRS, but will be passing through the second stage of convergence of Indian Accounting Standards with the IFRS. In convergence, there is right to ‘carve out’ i.e. right to differ from IFRS.

Section 211 of the Companies Act, 1956 will have to deal with two categories of Financial Statements.

•     Financial Statements prepared as per IFRS Converged Accounting Standards for the entities where the adoption of IFRS Converged Accounting Standards is mandatory; and

•     Financial Statements prepared by other entities, where they will continue to prepare them as per the Indian Accounting Standards.

The two main challenges for convergence are:

•     Fair Value; and

•     Tax Implications.

The above two challenges are of a very great concern and they are considered to be major barriers to the smooth implementation of IFRS.

There will have to be legislative changes to the provisions of Sections 78, 100, 205, etc, taking into consideration the treatment given under IFRS. For example:

•     Redeemable Preference Capital which is part of Equity as per Indian AS, will have to be treated as debt as per IFRS;

•    Fully Convertible Debentures, which till the time of conversion is treated as debt, will have to be segregated and the element of Equity will have to be shown under Equity.

There will have to be a separate Schedule VI for Financial Statements under IFRS. Even Schedule XIV will also have to be amended for IFRS compliant Financial Statements, in view of the fact that as per IFRS, depreciation on assets has to be pro-vided as per the actual useful life of the asset. The existing Schedule XIV prescribes standard rates of depreciation for various categories of fixed assets, irrespective of its useful life.

There have to be rules of the game for convergence, which are covered in IFRS 1 – First Time Adoption of IFRS.

There are five items where the effect of the changes due to adoption of IFRS is to be ignored for the past years and the effect has to be considered from the year of adoption only. It means there will not be retrospective changes required to be made to the Financial Statements in such cases.

There are 17 items, wherein an option is given to the entity to apply treatment prescribed under IFRS with effect from a particular date in past on adoption of IFRS.

Regarding the change in Accounting Policy, as per the Indian AS, the difference due to the change is taken to the current year’s profit and loss account and the impact on the profit/loss of the current year due to such change is quantified.

As per the IFRS, instead of working on the current year for the impact, the change has to be carried out in the previous year figures, which are part of the comparative figures with the current year.

Further, there is an additional statement in IFRS known as Other Comprehensive Income (OCI) Statement, which deals with the unrealised gains/ losses on fair valuing the assets and liabilities. As IFRS follows a Balance Sheet approach to the Financial Statements, it requires that all the assets and liabilities are reflected at their fair values. In view of the same, wherever there are adjustments to the assets and liabilities, which are only on account of fair valuing the same, such adjustments are taken to OCI.

A conceptual difference between IFRS and Indian GAAPs is that the IFRS follows Fair Value Accounting which is relevant in today’s context, whereas Indian GAAPs follows Historical Cost concept which is a reliable concept but may not be relevant in today’s context.

Another Conceptual difference between IFRS and Indian GAAPs is that of Substance over Form.

•     Indian GAAP gives more importance to the legal aspect of the transaction than the beneficial aspect;

•     IFRS believes in beneficial aspect than the legal aspect and hence judgment plays a vital role in the preparation of accounts under IFRS.

Mr. Sarda concluded by stating that the User should know from the Financial Statements what the Pre-parer of Financial Statements knows.

The learned speaker thereafter replied questions raised by audience.

The meeting terminated with a vote of thanks to the speaker.