BCAJ | Bombay Chartered Accountant Journal

The beginning of the end of US GAAP

Accountant Abroad

The International Federation of Accountants (IFAC) has voiced
strong opposition to what it sees as attempts to radically change or suspend the
use of fair value accounting without proper due process.

The federation warns against making changes at a national or
regional level which would worsen reporting differences and further confuse
financial markets, resulting in a lessening of confidence in financial
reporting. This would be exact opposite of what is required in current
circumstances. Reducing transparency is not the answer . . . . and it will not
serve the interests of investors.

IFAC believes the additional guidance from the International
Accounting Standards Board (IASB) and the United States Financial Accounting
Standards Board, as well as the International Auditing and Assurance Standards
Board in its Staff Audit Practice Alert, Challenges in Auditing Fair Value
Accounting Estimates in the Current Market Environment, has been very
valuable and will contribute to the public interest through more consistent
application of the standards.

Investors require a single set of accounting rules but a
current European Commission review of fair value accounting threatens to
undermine transparency and comparability. The Commission is due to host a
meeting in Brussels to discuss accounting reform, including further relaxation
to fair value.

Transparency, comparability and consistency in financial
reports is of utmost importance to the investor. In the view of the Investment
Management Association, making changes suggested by the Commission by the end of
October poses a risk that this may not be maintained and that such changes could
result in unhelpful reporting. Even though the current credit crisis requires
swift measures by governments and regulators, fundamental changes in accounting
should be implemented only after due process and the involvement of all
stakeholders.

The International Accounting Standards Board agreed to rush
through changes that allowed some valuations of some financial instruments —
securities — to duck a fair value calculation by being reclassified from ‘held
for sale’ to ‘held for investment. The European Commission eventually endorsed
this move in mid week, but only after considering pushing through changes that
would have allowed financial institutions to reclassify a much wider spectrum of
financial assets, including derivatives.

The US Securities and Exchange Commission is to take
mark-to-market accounting to task in a series of roundtables that will examine
the role fair value played in the current market turmoil.

The first roundtable takes place on 29 October and consists
of two panels, one discussing the relationship between fair value and the
financial crisis that has enveloped the major banks and the second examining
potential changes to the current accounting models.

Fair value has been lambasted by financial figureheads and
politicians in the US, UK and Europe for intensifying the effects of the credit
crunch, with many calling for the model to be suspended during the current
turmoil.

(Source : www.accountancyage.com)

levitra

BCAJ Admin

From The President

From the President

From the President

Dear Esteemed Readers,

This year’s Deepawali was remarkable, with President Barrack
Obama visiting India. There were many firsts associated with his visit. He is
the first US President to visit India in his initial term, first to spend so
much time in India, first to visit Mani Bhavan in Mumbai and the first US
president to say "Jai Hind" in the Indian Parliament. Tonnes of paper have been
used up by newspapers and hundreds of hours of discussions have been aired by TV
channels in analysing what were the takeaways for India on Obama’s visit. In my
view, the biggest takeaway for India is President Obama provoked us to realise
our own intrinsic strength, as he rightly regarded India as the "rising global
power".

He said: "India is an ancient civilisation of science and
innovation. A fundamental faith in human progress. This is the sturdy
foundation upon which you have built ever since that stroke of midnight, when
the Tricolour was raised over a free and independent India. And despite the
skeptics who said that this country was simply too poor, too vast, too diverse
to succeed, you surmounted overwhelming odds and became a model to the world.
India has succeeded, not in spite of democracy; India has succeeded because of
democracy."

I think this revelation is the biggest-ever gain for India.
Is it not an irony that outside observers can perceive our strength better than
us? I am reminded of Dr. Abdul Kalam who said, "Why are we in India so
embarrassed to recognise our own strengths, our achievements? We are such a
great nation. We have so many amazing success stories but we refuse to
acknowledge them. Why? India must stand up to the world. Because I believe that
unless India stands up to the world, no one will respect us. Only strength
respects strength. We must be strong not only as a military power but also as an
economic power." The Indian leadership must recognise this and negotiate
with other nations from a position of strength; be it talks with neighbours or
trade negotiations with other countries of the world.

After the stupendous success of the Commonwealth Games, India
broke its own performance record at the 16th Asiad Games in Guangzhou, ranking
6th and bagging 64 medals, including 14 gold.

However, with the dazzling opening and spectacular closing,
together with a record win of 416 medals including 199 gold, China proved that
it is simply super in playing games as well as organising them. The major
reasons for such a poor performance by India in contrast with a one billion plus
population are the lack of good sports facilities and recognition of merit.
Consequently, parents do not encourage children opting for a sports career. A
majority of our sports persons are part-timers, with some other main occupation,
resulting in a lack of professionalism. The handful of people pursuing sports as
their career become victims of corruption and red-tapism. I hope that the way
the states have started competing with each other in good governance; they will
compete in sports as well. If corporate India patronises sports in a big way, a
lot can still be achieved.

The recent results of the Assembly elections in Bihar have
proved that "Good Governance is Good Politics". Earlier, Governments in Gujarat
and Chhattisgarh returned to power, surmounting anti-incumbency sentiments, by
securing positive votes as a reward for development and good governance. The
restraint shown by people, post the Ayodhya verdict, and the use of the Right

to Information Act to unearth scams and bring accountability in administration
shows that people are rising above the politics of caste, creed and religion.
The people of India are interested in peace and prosperity.

We are living in an era of scams. Each day a new scam
surfaces — bigger than the preceding one. First CWG, then Adarsh, 2G spectrum,
Cidco Land deal and now, "loan-mela" by LIC Housing Finance and others.

In a path breaking development, India has revised its
bilateral tax treaty with Switzerland whereby Indian authorities would be able
to obtain information about account-holders in Swiss banks from January 2011.
Under the revised pact, India will be able to obtain information not only in
case of tax frauds, but also in cases of tax evasion.

In respect of activities by the Society last month, members
can refer to the section "Society News". Nonetheless, the more notable amongst
them were the number of webinars on XBRL, the first ever three-day intensive
study course on XBRL from 12th to 14th November 2010, and the two-day course on
Direct Taxes Code on 26th and 27th November 2010. All the programs elicited
overwhelming participation.

The DTC course began with homage to the people who lost their
lives in the ghastly terror strike on Mumbai on 26th November 2008. A lot needs
to be done not only to heal the wounds of those who were afflicted but also to
prevent their recurrence. The solution is aptly found in the BCAS logo which
reads, "uk Ò¸ke pLrh txzr" meaning "the vigilant have no fear". We must be
vigilant not only in making our leaders accountable and working towards safety
and security of the masses but also by contributing our might in helping them
achieve this. Then and only then we would be able to see India as dreamt by the
great poet Rabindranath Tagore who wrote:

Where the mind is without fear and the head is held high

Where knowledge is free

Where the world has not been broken up into fragments

By narrow domestic walls

Where words come out from the depth of truth

Where tireless striving stretches its arms towards
perfection

Where the clear stream of reason has not lost its way

Into the dreary desert sand of dead habit

Where the mind is led forward by thee

Into ever-widening thought and action

Into that heaven of freedom, my Father, let my country
awake

Let this be our prayer and motto for the ensuing decade.

Last but not the least, season’s greetings and best wishes
for a prosperous 2011!

Regards,

Mayur Nayak

levitra

BCAJ Admin

From The President

From the President

Dear BCAJ Lovers,

As I begin writing this month’s President’s Page, the news
of the sad, sudden and premature death of Mr. Rahul Roy, a past president of
the ICAI at a young age of 46 was received by me with shock and sorrow. He
expired as a result of cardiac problems. This news comes close on the heels of
the news of the passing away of Mr. Ranjan Das, the CEO & MD of SAP India —
again at a very young age of 42 years. He died of a heart attack.

I did not know either Mr. Roy or Mr. Das personally. Yet,
their passing away has disturbed me. The reason being that what happened to
them (and what will now happen to their family members) can happen to any one
of us. Today, most people and specifically professionals are living highly
stressful lives and there are no signs of any changes happening even in the
distant future, leave aside the near future. I had already referred to this
aspect in the last month’s message. But the recent tragedies have prompted me
to communicate again on the same topic.

What are the typical lifestyles of most of us today ? In
large cities like Mumbai, I perceive the following scenarios :

Physical stress caused by several factors — long
working hours, very long and tiresome travel time (from home to office and
back); uncomfortable physical working conditions (including cramped work
spaces leading to bad body postures; several hours of working on computers;
lack of physical exercise, irregular eating habits; long gaps between meals;
frequent travel plans; lack of adequate sleep.

Mental stress caused by constant work pressure;
unplanned work schedules leading to haphazard time management; always having
to deal with deadlines;

Stress caused by the dilemma of witnessing
corruption through consistent interaction with Govt. departments and
taxpayer non-friendly actions and behaviour of bureaucrats.

The above are, of course, only a few important aspects.
There would be many more. But the main point to be noted is that, in general,
most of us are facing at least some, if not all, of the above situations in
our lives today.

Is there anything that we can do to deal with the above ?
Let us not forget that today, we are trying to cope with and adjust our lives
to this constant stress. But our children are born and are living in this
environment from day one. For them, stress will become a way of life from
birth itself. This is a very dangerous and scary scenario. Let us all strive
to change our life-styles. Slowing down the pace of life, reducing the number
of working hours, spending more time at home and also doing regular physical
exercises are a few basic things that we must work on immediately. The time to
act is now. There is no time left to delay this any longer. Can we not work
from homes (technology is there to allow us to do so) on at least 1-2 days a
week instead of travelling long distances ? Can we spare one day in a month to
get rid of useless papers from our table-top and cabinets, so that our offices
are not unduly cluttered up ? We sit at our office desks for almost 8-10 hours
a day. Have we spent any time and efforts to find out whether the seating
arrangement is suitable to our health ? Is your chair comfortable ? Is
the distance between your head and your computer screen adequate ? Are your
arms and wrists in the right position while you type on your keyboards ?
Nothing that I have mentioned involves rocket science. It’s just that we
simply don’t feel it is important enough or urgent enough to pay attention to.
Most readers would be paying for annual maintenance contracts for their
computers, fax machines and other equipments. What about the regular
maintenance of the most complicated equipment in the world — the human body ?

If you agree with me, please refresh your memory and
recollect what happens when stress reaches breaking point. Hopefully, this
will jolt some of the readers into action.

I guess, it’s time to move on to less morbid topics. The
IFRS month of the BCAS was kicked off on 25th November by Mr. N. P. Sarda, a
past president of ICAI and a person who must have taught thousands of CA
students what costing means (I remember standard costing even today, only
because he made it appear to be so simple). It’s always a pleasure to hear
him. He was at his best on 25th when he spoke on IFRS. The IFRS RRC that we
have arranged in mid December has received an overwhelming response. I am glad
that we took the decision to devote an entire month for IFRS-related events. I
thank the members of BCAS who have supported the Society at all times and have
made our programmes so successful.

One year has elapsed since the dastardly terrorist attacks
in Mumbai on 26th November, 2008. The memories of those 3 eventful days still
haunt most Mumbaikars even today. Has anything really changed since then ?
Have our authorities learnt any lessons ? Are we any bit safer today than what
we were a year back ? I wonder. We all need to get involved and be a catalyst
to bring about change in society.

Social networking sites have become a rage nowadays. Not
only youngsters but even seniors are taking to these sites in thousands every
day. The BCAS recognises the power and the potential of such sites in bringing
people from all over the globe together. I am determined to make BCAS known to
Chartered Accountants across the world through the medium of such sites. I
seek your support in harnessing this extremely powerful technological tool to
unleash the power of networking amongst professionals. Let us all get together
and form a cohesive force that thinks together, acts together and brings about
social and economic changes for the improvement of our society in general and
our laws in particular. A CFO of a company recently wrote to me after reading
my previous month’s President’s Page. He complimented me on what I had written
but commented that, as usual, there was nothing in the message relating to
members in industry. I agree with him and will devote some time from now
onwards in making efforts to draw CAs in industry into the BCAS fold. How I
will go about this and when I would achieve this — I am not sure. But what I
do know is that where there is a will, there is a way.

Finally (and I know that the Editor of BCAJ is going to be
pleased with me for restricting the size of this month’s message to about
1,000 words !), I hope that readers have voted in the ICAI elections. At the
BCAS, we tried our best to make a difference in these elections. Let us hope
that we get dynamic leaders who will lead the profession forward into a new
horizon, leaving behind the inglorious moments that we have been witnessing
for the past few months. Eternal optimism ? May be !

BCAJ Admin

From The President

“If you think for positive things in life, you will find
them.”

Over the last few months I have got used to hearing gloomy
predictions, meeting people with worry and concern writ large on their face, and
walking into business meetings which discuss a bleak future. So, when I bumped
into an old friend from the IT sector beaming from ear to ear, I was pleasantly
surprised. I enquired whether he had got a promotion. “No, in fact I have been
asked to take long leave, possibly some time before they show me the door !” he
laughed, “But I have never enjoyed life more than I have in the last month. I
just learnt what a great family I have. I have experienced a number of joys
because I stopped to pause and ponder something which I have not done in the
last ten years. As for my job, I will find a new one when I lose the one that I
have.” His words really set me thinking. I marvelled at his attitude. Any other
person would have grieved that he was about to lose his job and here was my
friend having a whale of a time with his family. It was all due to a positive
attitude.

If one really makes an analysis, the economic slowdown has a
large number of positives. The first is that we will all start to think and act
rather than react. When life is going at full pace we all tend to react to
situations; when things slow down we will have to be proactive and make things
happen, a habit which many of us have forgotten in the recent past.

The second positive is a welcome change in the mindset. The
situation has now forced us to do away with the linear mode of thinking. The
thought process of most people, especially those who belong to our profession is
to rely on precedent and predict the future. We tend to bench-mark everything on
past performance and past experience. Recent events have proved that the past is
not necessarily an indicator of future. Once we make a break from the past, we
will recognise and rediscover our ability to innovate. Some of the business
failures in the United States have not been on account of the financial crisis
but a sheer failure to innovate and deliver the products that the consumer
needed.

Another very significant positive fallout of the financial
turmoil is the recognition of the need to save in generation next. I saw this
manifestation when I visited a young relative of ours who is working with a
large KPO. A management graduate, she used to try and convince me that spending
drove economic activity and therefore needed to be encouraged. I was therefore
surprised to learn that she had decided not to go on her annual foreign jaunt,
but would settle for a short holiday in Kerala. I enquired as to whether her job
was safe. “Yes it is as of now, but who knows ?”

Having dwelt upon all these positives on the human front, I
think the single most important lesson that we have learnt is that the western
world is not infallible, and the United States is certainly not. For long, a
large part of the world has looked upon the U.S. as a powerful, super rich
saviour, whose actions were to be emulated. For more than six decades the US has
played the role of Big Brother. The follies that the institutions in the US and
the rest of the western world have committed have not only been witnessed by the
rest of the world, it is likely to suffer from their acts of commission and
omission in the next few years.

On the professional front, I believe this slowdown is a great
opportunity to sit down and introspect. Many of us have been accepting the
unending flow of professional work without paying heed to the creaking
infrastructure and the strain on our existing systems. Some of the problems the
profession has been facing are on account of lack of training of articled
students and staff.

In the next few years the government will have to increase
its spend on infrastructure in general, while we must invest our time and effort
enhancing the knowledge-base of our staff, remembering to upgrade our own
skills. Multidisciplinary firms are a reality. We must explore these
possibilities and network. When the inevitable turnaround comes, we must be
ready to seize all opportunities.

We must end 2008 on a cheerful note. Do not let the prophets
of doom bother you. Go on a holiday with your family and friends. If you are in
‘Aapli Mumbai’, enjoy whatever ‘winter’ the city offers you. Goodbye 2008 and
welcome 2009.

With warm regards,

Anil Sathe

P.S. :

As this issue goes to the press, the country has been facing
one of the gravest terrorist attacks. In the past two days we have seen in the
media, exemplary courage, and supreme sacrifice from the security personnel,
hotel staff, ordinary citizens, who beyond all were Indians. We salute these
brave individuals. We only hope that the powers that be, recognise this
sacrifice and act quickly, decisively. It is a time that we stand united and
show the world that our buildings can be attacked and weakened but our spirit
can never be. We the BCAS family are with those who lost their near and dear
ones. For those who are battling for their lives, we pray for a speedy recovery.
We pledge our support in the huge tasks that lie ahead. It is our duty not only
as professionals, intellectuals, but as concerned citizens of this great
country. We must demand competent governance from those in power. If we all
contribute our mite, India will emerge as a strong, vibrant nation.

levitra

BCAJ Admin

ICAI And Its Members

ICAI and its Members

1.
Companies Bill, 2009 — Accounts and Audit :

Companies Bill, 2009, was
introduced in the Parliament on 3-8-2009. It was referred to the Standing
Committee for Finance on 9-9-2009. The Report of the Finance Committee dated
26-8-2010 was presented to the Parliament on 31-8-2010. Based on this report the
Companies Bill is being modified by the Ministry of Corporate Affairs. The
modified Bill is likely to be discussed and adopted by the Parliament in the
Budget Session in February-May 2011. Some important changes, relating to
accounts and audit, as suggested by this Committee, are as under.

(i) Clause 117(3) of the
Bill provides that the accounts of subsidiary companies should be consolidated
in cases of all companies. The committee has suggested that unlisted companies
be exempted from this requirement.

(ii) Clause 118 of the Bill
provides that the Central Government shall constitute ‘National Advisory
Committee on Accounting and Auditing Standards’ (NACAAS) to advise the
Government on accounting and auditing polices and standards for adoption. The
committee has welcomed this provision and observed that NACAAS should be
institutionalised not only as a body for setting up auditing standards, but also
as a quasi-regulatory body for generally supervising the quality of audit
undertaken. Under clause 126(10), the Central Govt. has been given authority to
notify the auditing standards in consultation with NACAAS and the auditors will
have to comply with these standards. This provision, if implemented, will
restrict the authority of ICAI to issue the auditing standards.

(iii) The committee has
suggested that a new clause be added in the Bill to provide for appointment of a
Chartered Accountant or a Cost Accountant for conducting Internal Audit of the
books of accounts of specified classes of companies. The Government should
prescribe the Rules about the manner in which Internal Audit should be conducted
and reported.

(iv) Clause 123 of the Bill
provides that a company shall appoint an individual or a firm as an auditor at
the annual general meeting. The committee, in its report, has suggested the
following far-reaching changes in this clause, which will affect the entire
auditing profession :

(a) An individual Chartered Accountant or a firm of Chartered Accountants shall be appointed as auditor for not more than five consecutive years.

(b) An Individual auditor who has completed a five year term, shall not be reappointed as auditor for the next three years in that company.

(c) A firm of auditors who has completed a five years’ term, shall not be reappointed as auditor in the same company for the next five years.

(d) In the case of the firm, being auditor of a company, the auditing partner should be rotated every three years. The auditing partner rotated, as above, shall not be eligible to be the auditing partner for audit of the same company for the next three years.

(e) NACAAS should be entrusted to develop and prepare a comprehensive list of audit firms over a period of three years. Once this list is ready, it will be mandatory for any company to appoint an auditor from this list only. During this interim period, companies can appoint their auditors on their own.

(v) The Audit Committee has
to ensure and monitor that the independence criteria has been fulfilled by the
auditor of the company throughout the year.

(vi) The auditor who has
resigned or is proposed to be removed before the expiry of his term will have to
file with the company and the ROC the prescribed form giving reasons and other
relevant facts. The matter about resignation or removal of the auditor, with
reasons recorded by him, will have to be first considered by the Audit
Committee. The Board of Directors shall consider the recommendation of the Audit
Committee, and thereafter, with the approval of the General Meeting accept the
resignation of the auditor and appoint another auditor. In case of removal of
auditor, before expiry of his term, special resolution of General Meeting will
be required.

(vii) Clause 125 of the Bill
provides for remuneration of Auditors. It is suggested by the committee that the
notice for the General Meeting shall give justification for payment of the
amount of remuneration proposed. Further, the shareholders, while approving the
remuneration of Auditors, will have to take into consideration the net worth and
turnover of the company. If this suggestion is implemented, the present practice
in some companies to provide in the resolution that the audit fees payable to
Auditors will be fixed by the Board of Directors will have to be discontinued.

(viii) Clause 127 of the
Bill provides that a statutory Auditor of the company shall not render any other
services viz. (i) Accounting, cost accounting and book keeping, (ii) Internal
Audit, (iii) Design and implementation of any financial and cost information
system, (iv) Acturial services, (v) Investment advisory services, (vi)
Investment banking services, (vii) Rendering of outsourced financial services
and (viii) Management services. As regards other services, relating to tax
audit, tax representation, tax advisory services, etc. approval of Board of
Directors or Audit Committee will be required. The committee has suggested that
the statutory auditor of holding company also should not render the above
services listed in Clause 127 to a subsidiary company.

(ix) The committee has
suggested that Secretarial audit report should be attached to the financial
statements by companies exceeding certain threshold limit of paid-up share
capital.

(x) Clause 130 of the Bill,
after suggestion of the committee, provides for the following punishment for
contravention of certain provisions by the Auditors :

(a) If the auditor contravenes the provisions of Clauses 126, 127 and 128 dealing with powers and duties of auditors and compliance with auditing standards, rendering other services and signing of audit report, he shall be punishable with imprisonment for a term up to one year and with fine ranging from Rs.50,000 to Rs.25 lacs or with both.

(b) On conviction as above, the auditor will be liable to refund the remuneration received by him to the company and also pay damages for loss arising out of incorrect or misleading statements in the audit report.

(c) In the case of audit by a firm, if it is proved that the audit partner or partners have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, or by, the company or its directors or officers, the civil or criminal liability in any law shall be of the audit partner or partners as well as the firm jointly and severally.

(xi) As regards cost audit, the committee has suggested that Clause 131 of the Bill should be suitably amended and a Cost Auditor should be appointed by the shareholders at the AGM in the same manner as statutory auditors.

Some of the above suggestions of the committee, if accepted by the Government and enacted by the Parliament, will have far-reaching consequences on the practising members of our profession. Some of the provisions undermine the autonomy of our Institute granted to us six decades ago. It is surprising that no serious protest has been made by our Institute or the elected representatives in the Council. No public debate has been generated and our members are not aware about the implications of these far-reaching changes likely to be made in the company law in the next year.

2. Special Loan Scheme of Corporation Bank for our Members:

The Committee for Capacity Building of CA Firms and Small & Medium Practitioners, ICAI, has taken a major initiative to arrange financial assistance to all members in practice/firms in the form of specially designed loan scheme through Corporation Bank. Under this scheme, eligible Chartered Accountants can avail finance for setting up offices, including cost of furniture/ fixture/office equipments — computers and other accessories. The scheme would also enable Chartered Accountants to finance a part of working capital for building their profession and would also take care of the needs of fresher (CAs with experience below three years).

Members and firms are requested to avail the benefits of this loan scheme. For further details, please contact the nearest branch of Corporation Bank.

3. Special programme through video conferencing mode:

The Committee for Members in industry of the Institute of Chartered Accountants of India provides opportunity to employers to interact with newly qualified Chartered Accountants providing a cost effective mode of recruiting newly qualified Chartered Accountants.

Special placement programme is a step ahead as an extension to the same programme, but with a different objective. For the first time, CMII has taken an initiative to organise a separate special placement programme through video conferencing mode for Chartered Accountants for getting placed, not only within the country, but also for taking up jobs abroad. Many CAs are providing their services to organisations in Gulf Council Countries/Middle East. To facilitate employment of Chartered Accountants in the GCC/Middle East, CMII of ICAI is organising a special placement programme.

This programme would enable corporates working in Gulf Council countries (GCC)/Middle East to recruit Chartered Accountants through video conferencing mode from Chennai, Kolkata, Mumbai and New Delhi centres. (Refer P. 807 of C.A. Journal for November, 2010).

4. Online Articles Placement Portal:

The Board of Studies has introduced an optional campus placement scheme for selection of Articled Assistants by CA firms. The pilot campus placement programme was held in Delhi in August 2010 for the CA firms having their HOs/Branch Offices in Delhi/New Delhi and for eligible students who would like to service their articles in CA firms in Delhi/ New Delhi. Considering the good response, positive feedback and requests received from both CA firms and students, it has been decided to start an Online Articles Placement Portal — http://bosapp.icai. org from 5th October, 2010 to facilitate placement of Articles in CA firms on an all-India basis. Eligible candidates and CA firms can avail of this facility and register themselves online through the portal. The candidates shortlisted by CA firms would be informed by email through the portal, to appear for interviews/interactions at their respective offices, on the designated date and time. (Refer P. 690 of C.A. Journal for November, 2010).

BCAJ Admin

ICAI And Its Members

1. Disciplinary case :

In the case of ICAI v. Shri R. K. Tayal, the Bank had complained that it had sanctioned loan of Rs.630 lacs to one of its clients (Company) for its expansion- cummodernisation project. As per the terms and conditions of the sanction, the Company was to bring about Rs.135 lacs by way of promoter’s contribution. While requesting for disbursement of the sanctioned amount, the Company stated that it had already spent Rs.147.21 lacs for the project and, in support of this, it submitted a certificate from the member. In this certificate it was stated that the Company had already spent Rs.147.21 lacs for the project. Based on this certificate the Bank disbursed loan of Rs.315 lacs. In the above certificate the member had stated that certain payments were made which was found to be not correct. Hence, the Complainant Bank alleged that the member had not verified the records properly before issue of the certificate and that the said certificate did not mention about the end use of the funds.

The Disciplinary Committee, after examining the evidence, submitted a report to the Council that the member was guilty of professional misconduct under clauses (5) to (8) of Part I of Second Schedule to CA Act (Gross negligence in performance of professional duty). This finding was accepted by the Council and it recommended to the High Court that the name of the member be removed from the Register of Members for 3 months.

In its judgment, the Delhi High Court has held that the member was grossly negligent in his professional duties in giving the certificate to the Bank without proper verification of the records. The High Court observed that the lack of responsibility displayed by the member clearly showed that he had acted in a manner unbecoming of a Chartered Accountant. The High Court further observed that there has to be some degree of integrity and probity which is expected of a Chartered Accountant who is regularly concerned with the financial transactions and on the basis of whose recommendations and certificates, financial institutions, banks, etc. disburse loans or enter into other financial transactions. With these observations the High Court has accepted the recommendation of the Council to remove the name of the member from the Register of Members for 3 months (Refer page 737-738 of CA Journal for November, 2009).

2. Some ethical issues :

The Ethical Standards Committee of ICAI has issued the following clarifications on some ethical issues in the form of questions and answers for the benefit of members.

(i) Q. Can a Chartered Accountant in practice accept original professional work emanating from the client introduced to him by another member ?

Ans. : A Chartered Accountant in practice should not accept the original professional work emanating from a client introduced to him by another member. If any professional work of such client comes to him directly, it should be his duty to ask the client that he should come through the other member dealing generally with his original work.

(ii) Q. Can a member in practice solicit clients or professional work by advertisement ?

Ans. : The CA Act prohibits a member in practice from soliciting clients or professional work either directly or indirectly by circular, advertisement, personal communication or interview or by any other means.

However, there are following exceptions to it :

(i) A member can respond to tenders or enquiries issued by various users of professional services or organisations from time to time and securing professional work as a consequence.

(ii) A member may advertise changes in partnerships or dissolution of a firm, or of any change in the address of practice and telephone numbers, the advertisement being limited to a bare statement of facts and consideration given to the appropriateness of the area of distribution of the newspaper or magazine and number of insertions.

(iii) A member is permitted to issue a classified advertisement in the Journal/Newsletter of the Institute intended to give information for sharing professional work on assignment basis or for seeking professional work on partnership basis or salaried employment in the field of accounting profession provided it only contains the accountant’s name, address, telephone, fax number and e-mail address.

(iii) Q. Whether sponsorship or prizes can be instituted in the name of Chartered Accountants’ firms ?

Ans. : As per the CA Act it is not objectionable to institute prizes in the name of the individual Chartered Accountant and also in the firm’s name provided the designation ‘Chartered Accountant’, is not indicated in the prize and the clause relating to advertisements and publicity are complied with.

(iv) Q. Whether a Chartered Accountant in practice can give public interviews and also whether he can furnish details about himself or his firm in such interviews ?

Ans. : A Chartered Accountant in practice can give public interviews. While doing so, due care should be taken to ensure that such interviews or details about the members or their firms are not given in a manner highlighting their professional attainments, which may hit clauses (6) and (7) of the First Schedule of the CA Act.

(Refer Page 718 of CA Journal for November 2009)

3. ICAI accounts :

The Council has adopted audited accounts of ICAI for the year 2008-09 on 25-9-2009. Some salient features of the accounts are as under :

4. EAC opinion:

The Expert Advisory Committee (EAC) of ICAI has recently given an opinion on accounting for business of manufacture, erection and commissioning of Wind Electric Generators (WEGs).

The company based on negotiation prepares three separate purchase/works orders viz. (a) purchase order for supply of WEGs (b) work order for civil, electrical and infrastructure work and (c) order for erection and commissioning of WEGs. The company recognises revenue based on the completion of an activity covered in the aforementioned three purchase/works order separately.

The EAC of lCAl is of the view that the three sepa-rate contracts entered into by the company with its customers are in fact one composite contract which has been broken into three separate agreements.

Further, the committee noted that the performance in respect of sale of WEGs is not complete until the commissioning of WEGs and commissioning is an essence of the contract. Therefore, the company can not adopt the policy on revenue recognition independently for the three orders as these form part of the single composite contract. Hence, the company should recognise revenue only on commissioning of the WEGs.

[Pleaseseepage nos. 739 to 741 of c.A. Journal for November, 2009.]

5. Standards on Auditing – Exposure Drafts:

The following Exposure Drafts are published by lCAl for comments of members. Page Nos. given below are from CA Journal for November, 2009 :

i. Standard on Auditing (SA) 220 (Revised)

Quality Control for Audit of Financial Statements (P. 820)

ii. Standard on Auditing (SA) 501 (Revised)

Audit Evidence – Specific Consideration for Selected Items (P. 826)

iii. Standard on Auditing (SA) 505 (Revised)

Analytical Procedures (P. 830)

iv. Standard on Auditing (SA) 505 (Revised)

External Confirmations (P. 834)

v. Standard on Auditing (SA) 620 (Revised)

Using the Work of Auditors Expert (P. 840)

8. New publications by ICAI :

Details of the following publications are given on P. 811 of CA Journal for November, 2009:

i) Data Analysis of Auditors – Practical Case Studies on using CAATS

ii) XBRL – Primer

BCAJ Admin

ICAI And Its Members

ICAI and Its Members

1. Disciplinary case :

In the case of ICAI v. P. V. Mehta the Department of
Customs, Government of India, filed a complaint against the member. It was
alleged that the member had issued a false certificate about export performance
by two concerns. On the basis of such certificates the parties obtained import
licences, effected imports and cleared the goods imported free of duty. The
matter was investigated by the Disciplinary Committee which found that the
member was grossly negligent in the discharge of his professional duties under
clause (7) of Part I of the second schedule of the C.A. Act. The Council, after
accepting the above report, decided to recommend to the Bombay High Court for
removal of the name of the member for one month.

The Bombay High Court has accepted the recommendation of the
Council. The High Court has observed that the member has admitted that he did
not verify the books or the relevant records or documents as also the figures of
turnover of the two concerns. The member admitted that he had signed the export
performance certificates prepared by the Internal Auditor who was also a member
of the Institute. The High Court, after considering the facts of the case,
accepted the finding of the Disciplinary Committee and the Council and confirmed
the punishment of removal of the name of the member for one month (Refer page
831 of C.A. Journal for November, 2008).

2. EAC opinion :

The Expert Advisory Committee (EAC) of ICAI has considered
the question of valuation of investment in shares of a subsidiary company for
non-cash consideration on pages 788-790 of C.A. Journal for November, 2008. In
this case a State Government company (ABC Ltd.) engaged in mining and selling of
rock phosphate, gypsum, etc. received an ‘in-principle approval’ from the
Government of India for allocating coal blocks in certain Lignite mines to the
company. For this purpose, ABC Ltd. was required to form a separate company to
undertake this mining activity. The company entered into a joint venture with a
private sector company and decided to form one JVC Ltd. It was agreed between
the parties that JVC Ltd. will be a subsidiary of ABC Ltd. in which it will hold
51% share capital, and private sector company will hold 49% share capital.

JVC Ltd. issued certain shares to ABC Ltd. for which no
payment was made by ABC Ltd. In the J.V. agreement it was provided that ABC Ltd.
will obtain licences, approvals, etc. and will also contribute its local
knowledge, technical knowledge and other expertise in relation to the mines. JVC
Ltd. was required to allot equity shares carrying 51% voting right to ABC Ltd.
for which no payment was to be made. The private sector company was to hold 49%
shares, arrange entire investment and also provide management support.

ABC Ltd., on allotment of 51% shares in JVC Ltd., debited
face value of shares to Investment A/c. and credited the amount to Capital
Reserve A/c. The amount debited to Investment A/c. was shown by ABC Ltd. under
the head ‘Investments’ in the balance sheet. The Auditors qualified the audit
report by stating that this should have been valued at ‘Nil’ as no payment was
made. According to the Auditors, assets of ABC Ltd. were stated at a higher
figure to this extent.

The EAC has examined the issue on the basis of paras 28/29 of
AS-13 ‘Accounting for Investments’ and given the opinion that the correct
accounting treatment in the books of ABC Ltd. for shares of JVC Ltd. issued/to
be issued in future to ABC Ltd. would be to recognise the same at fair value of
the services and licence to be provided by ABC Ltd. to JVC Ltd. Whether ABC Ltd.
has made actual payment or not is not material. In this case, consideration is
in kind and, therefore, valuation of investment in JVC Ltd. should be made as
explained in para 28/29 of AS-13.

3. Companies Bill — 2008 :

Companies Bill, 2008, has been introduced by the Minister of
Company Affairs in Lok Sabha on 22nd October, 2008. This Bill contains 426
sections and there are no schedules. This Bill, when enacted, will replace the
existing Companies Act, 1956.

4. Limited Liability Partnership (LLP) :

Limited Liability Partnership Bill (LLP Bill) providing for
establishment of Limited Liability Partnerships (LLP) in our country was
introduced in the Rajya Sabha by the Minister of Company Affairs on 15th
December 2006. This Bill was referred to the Parliamentary Standing Committee.
This committee’s report was presented to Lok Sabha and Rajya Sabha on 27th
November 2007. Based on the report of the committee some changes were made in
the original Bill. The revised LLP Bill, 2008 was presented to Rajya Sabha on
21st October 2008, and passed by Rajya Sabha in October, 2008. It will now be
placed before the Lok Sabha in December and may, hopefully, be passed before the
end of the current year. It may be noted that the basic structure proposed in
LLP Bill, 2006, has been retained in LLP Bill, 2008. Some changes are made in
the original Bill, which are of procedural nature. Concept of LLP is accepted in
USA, U.K., Australia and other countries. The new Bill, when enacted, will
provide for an alternative corporate business vehicle that provides the benefits
of limited liability and allows its members the flexibility of organising their
internal structure as a partnership based on a mutually arrived agreement. This
enactment will come into force on the date to be notified by the Central
Government after the Bill is passed by the Parliament. Salient features of
revised LLP Bill are as under :

i) Any two or more persons can form LLP for the purpose of carrying on any business, trade, profession, service or occupation. Even a limited company, an LLP, Non-resident, foreign LLP/Company can be a partner in LLP.

ii) Every LLP has to have at least two designated partners, at least one of whom should be a resident Indian. Designated partners shall be responsible for compliance with all legal requirements of the LLP Act, Rules and other Laws.

iii) LLP has to get itself registered with the Registrar of Companies (ROC) by filing the pre-scribed form of incorporation document and on payment of the prescribed fees. The incorporation document is to be accompanied by a statement about legal compliance signed by an advocate, a chartered accountant, a company secretary or a cost accountant.

iv) Upon incorporation, LLP will be treated as a body corporate and will be considered as a legal entity separate from its partners. It shall have a common seal and perpetual succession.

v) The procedure for obtaining name of LLP is the same as in the Companies Act. For this purpose, the name has to be approved by ROC.

vi) The limit of 20 partners (for business or profession) and 10 partners (for banking business) which applies to partnerships will not apply to LLP. It will be possible for Chartered Accountants to form LLP for rendering management consultancy service and there can be more than 20 partners in such LLP.

vii) Upon incorporation of LLP, its partners will have to enter into a partnership agreement in writing, stating capital contribution of each partner, share of each partner in profits and losses, interest/remuneration payable to each partner and other rights and duties of partners of LLP. The agreement is to be filed with ROC. If no such agreement is executed, the relationship between the partners shall be governed by the provisions of the First Schedule to the LLP Act.

viii) Agreement is to be executed when there are changes in partners or there are changes in the terms and conditions of the partnership. Such agreement is also to be filed with the ROC.

ix) Every partner of LLP is an agent of LLP.How-ever, he is not an agent of other partners. The liability of each partner is limited to the extent of his contribution as specified in the partnership agreement. The liability of LLP is limited to the extent of its assets.

x) LLP has to maintain its books of accounts either on cash or on accrual basis. Such accounts have to be audited every year in such manner as may be provided by the rules. LLP has to file audited statements with a solvency statement with ROC within six months of close of financial year (i.e., on or before 30th September). It has also to file an annual return with ROC in the prescribed form within 60 days of close of Financial Year (i.e., 31st May).

xi) Any existing partnership can be converted into LLP by complying with the procedure laid down in the Second Schedule to the Bill.

xii) Similarly, a Private Limited Company or a Public unlisted company can also convert it-self into LLP by following the procedure laid down in the Third/Fourth Schedule to the Bill.

xiii) The Central Government is authorised to frame rules providing for procedure to wind up a LLP.

xiv) ROC is empowered to collect fees for filing documents with him and for levying penalties for defaults on the part of LLP. The Central Government is authorised to frame rules for administration of LLP Act.

xv) The National Company Law Tribunal is given powers to sanction arrangement, reconstruction, mergers, demergers, compromise with creditors, etc.

xvi) LLP Bill, 2008 is divided into 14 chapters and contains 81 sections and four schedules. The Central Government has power to alter any of the schedules.

xvii) The LLP Bill does not deal with tax aspects of LLP. The Income-tax Act will have to be amended for this purpose. It is likely that LLP will be considered as ‘Firm’ and all the provisions of the Income-tax Act applicable to Firms will apply to LLP. We have to await the amendments in this respect in the forthcoming Budget.

Standards on Auditing (SA) :

The following Exposure Drafts are published for comments in November, 2008, CA. Journal at pages stated below:

i) ‘Agreeing the Terms of Audit Engagements’ SA-210 (Revised) together with Explanatory Memorandum (Pages 912-924).

ii) “The Auditors’ Responsibility in Relation to Other Information in Documents containing Audited Financial Statements” SA-720 together with Explanatory Memorandum (Pages 925-930).

6. ICAI News:

(Note: Page Nos. given below are from CA. Journal for November,2008)

(i) New Certificate courses for members (Page 768):

Following two certificate courses are started for members:

(a) Forex and Treasury Management – This course covers the areas of foreign exchange market, money market, bond market operations and related financial products.

b) Derivatives – This course covers financial derivatives such as forward contracts, futures contracts, options, swaps and other new derivatives.

i) Enhancing Audit Quality:

Some observations made by reviewers while conducting peer review are listed in order to enable members to improve the quality of audit of corporate bodies. These observations relate to training programmes for staff (including articled and audit assistants) concerned with attestation function, including appropriate infrastructure (Page 910).

ii) ICAI – New Branch:

ICAI has opened a new branch in “Beawar” (CIRC) w.e.f. 5-10-2008 (Page 890).

iii) New Publication of ICAI :

Implementation Guide to Risk-based Audit of Financial Statements – (Page 892).

BCAJ Admin

Miscellaneous

From Published Accounts

2. Deferral of Income of
Restructuring Fees received

Tech Mahindra Limited —
(31-3-2010)

From Notes to Accounts :

During the year, a customer
has restructured long-term contracts with the Company from April 1, 2009, which
involves changes in commercial, including rate reduction, and other agreed
contract terms. As per the amended contracts the customer has paid the Company
restructuring fees of Rs.9,682 million. The services under the restructured
contracts would continue to be rendered over the life of the contract. The
restructuring fees received would be amortised and recognised as revenue over
the term of the contract on a straight-line basis. An amount of Rs.2,005 million
has been recognised as revenue for the year from April 1, 2009 to March 31, 2010
and the balance amount of Rs.7,677 million has been carried forward and
disclosed as deferred revenue in the Balance Sheet.

3. Non availability of
financial statements of step-down associate for consolidation purposes

Tech Mahindra Limited —
(31-3-2010)

From Notes to Accounts to
Consolidated Financial Statements :

TML through Venturbay
Consultants Private Limited, a wholly-owned subsidiary has acquired stake in
Satyam Computer Services Limited (SCSL), on May 5, 2009 through preferential
allotment, representing 31% of equity share capital. Thereafter the share
holding has further increased to 42.70% by July 10, 2009 through a combination
of open offer and a further preferential allotment. As per the share
subscription agreement dated April 13, 2009, these investments have a lock-in
period of three years from the date of allotment. As a result of this investment
SCSL has become an associate of TML as per Accounting Standard 23 ‘Accounting
for Investments in Associates in Consolidated Financial Statements’. Venturbay
Consultants Private Ltd. holds 42.67% of the shareholding of SCSL as of March
31, 2010.

SCSL is in the process of
restating its financial statements. The Honourable CLB vide its order dated
April 16, 2009 has given extension of time till December 31, 2009 to SCSL for
filing of the documents with various statutory authorities already due or to
become due, the same is further extended till June 30, 2010 vide the Honourable
CLB order dated October 15, 2009.

In the absence of audited
financials the amount of goodwill/capital reserve in the investment value as at
March 31, 2010 could not be computed and the investment in SCSL as at March 31,
2010 has been accounted for at cost. TML’s share of profit/loss in SCSL and its
subsidiaries for the year ended March 31, 2010 in accordance with Accounting
Standard 23 ‘Accounting for investments in associates in consolidated financial
statements’ has not been accounted in the consolidated financial statements of
the Company.

From Auditors’ Report :

4. As stated in Note 23 to
the consolidated financial statements, Venturbay Consultants Private Limited
(100% subsidiary of the Company) has acquired 31% stake in Satyam Computer
Services Limited (SCSL) on 5th May 2009 and subsequently increased the stake to
42.70% on 10th July 2009. SCSL is in the process of restating its financial
statements. The Honorable CLB vide its order dated October 15, 2009 has given
extension of time till June 30, 2010 to SCSL for filing of the documents with
various statutory authorities already due or to become due. We are informed that
the Accounts of SCSL are not available for consolidation and in the absence of
financial statement of SCSL we are unable to comment on the impact of
post-acquisition profit/loss of SCSL on ‘share of profit of associate’,
investment in associates and reserve and surplus in the consolidated financial
statement of the group.

5. . . . . . .

6. Based on our audit and on
consideration of the separate audit reports on individual financial statements
of the Company, its aforesaid subsidiaries and to the best of our information
and according to the explanations given to us, subject to our
observations in Para 4 above, in our opinion, . . . . . .

4. Adoption of Exposure
Draft of AS-10 (revised) for change in the method of accounting of costs on
major repairs and maintenance of its engines.

Kingfisher Airlines Limited
— (31-3-2010)

From Notes to Accounts :

During the year, the Company
has adopted the exposure draft on Accounting Standard-10 (Revised) ‘Tangible
Fixed Assets’ which allows such costs on major repairs and maintenance incurred
to be amortised over the incremental life of the asset. The Company has extended
the same treatment to costs and maintenance for engines pertaining to aircrafts
acquired on operating lease. Earlier, the Company used to charge off the cost of
such repairs and maintenance of its engines to the Profit and Loss Account as
and when incurred. Had the Company not changed its method of accounting, the
loss before and after tax for the year would have been higher by Rs.16,390.25
lacs and Rs.10,945.82 lacs, respectively. This revised accounting policy has
been confirmed by an independent expert and in the opinion of the management,
this accounting treatment has resulted in a fair depiction of the working
results and the state of affairs of the Company.

From Statement of
Significant Accounting Policies :

Fixed assets and Intangible
assets :

Fixed assets and intangible assets are stated at cost of acquisition less accumulated depreciation/ amortisation and impairment losses (if any). Cost comprises the purchase price and any attributable cost of bringing the asset to its working condition for its intended use and also includes cost of modification and improvements to leased assets.

Borrowing costs relating to acquisition of fixed assets are also included to the extent they relate to the period till such assets are ready to be put to use.

Advances paid towards the acquisition of fixed assets and the cost of fixed assets not ready for intended use as of the balance sheet date are disclosed under capital work-in-progress.

Depreciation:

Depreciation on fixed assets, except non-compete fees, trademarks, design — aircraft interiors, software, leasehold improvements, is provided on a straight-line basis at the rates prescribed under Schedule XIV to the Companies Act, 1956 which are estimated to be the useful life of fixed assets by the management. Additions are depreciated on a pro-rata basis from the date of installation till the date the assets are sold or disposed.

— Non-compete fees are amortised over the period of agreement (i.e., five years).

— Trademarks are amortised over the period of four years.
— Design — Aircraft Interiors are amortised over the period of seven years.
— Software is depreciated over a period of 1-4 years, based on estimated useful life as ascertained by the management.
— Leasehold improvements on operating leases are depreciated over the shorter of the period of the lease and their estimated useful lives.
— Cost of major maintenance and overhaul of the engines are amortised over the period of estimated useful life of the repairs.
— Movable cabins and mobile phones are depreciated over the period of five and two years, respectively, on a straight-line method.

From Auditors’ Report:

…….

Attention is invited to Note 29 of Schedule 21 regarding change in the method of accounting of costs incurred on major repairs and maintenance of engines of aircrafts taken on operating lease during the year aggregating to Rs.20,700.76 lacs which have been included under fixed assets and amortised over the estimated useful life of the repairs. In our opinion, the revised accounting treatment is not in accordance with current accounting standards.

From Directors’ Report:
……

As regards the observations in para 6 of the Auditors’ Report, your Company has adopted the Exposure draft on Accounting Standard-10 (Revised) ‘Tangible Fixed Assets’, which allows such costs on major repairs and maintenance incurred to be amortised over the incremental life of the asset. Your Company has extended the same treatment to costs incurred on major repairs and maintenance for engines pertaining to aircrafts acquired on operating lease.

BCAJ Admin

Some Recent Judgments

I High Court:

1 CENVAT credit:

Whether outdoor catering service is ‘input service’?

CCE, Nagpur v. Ultratech Cement Ltd., 2010 TIOL 745 HC Mum.-ST

Substantive question of law raised by the Revenue was, whether CESTAT was correct in considering outdoor catering as input service when catering service does not fall under ambit of the definition of input service. Based on Larger Bench’s decision of CESTAT in the case of CCE v. GTC Industries Ltd., 2008 (12) STR 468 (Tri.-LB), wherein it was held that cost of food borne by the factory would form part of the cost of product and credit of duty paid thereon was allowable, the appeal was allowed by the Commissioner (A) and upheld by the Tribunal. According to the Revenue, decision of GTC (supra) ought not to have been applied to this case as in that case, duty was paid on assessable value whereas in the instant case, the duty on cement was payable on tonnage basis and therefore, it was distinguishable. Further, the more recent Apex Court’s decision in Maruti Suzuki Ltd. v. CCE, 2009 (240) ELT 641 (SC) squarely applied and therefore the Revenue had a case.

Detailed submissions were provided and analysis of wide scope of ‘input service’ and the expression ‘in relation to’ were made by the assessee. Meaning of the words ‘such as’ and which was followed by an illustrative list also was discussed at length citing and relying on various decisions which inter alia included, Federation of Tax Practitioners Association v. Union of India, 2007 (7) SCC 527 and Division Bench judgment in Coca Cola India P. Ltd. v. CCE, 2009 (242) ELT 268 (Bom.).

The Court observed that the Apex Court in Maruti Suzuki’s case (supra) considered the expression ‘used in relation to the manufacture of final product’ in the definition of ‘input’ and held that the ratio laid down by the Apex Court equally applied while interpreting ‘activities relating to business’ in Rule 2(1) of the CENVAT Rules. However, there lay difference as inclusive part of the definition of ‘input’ was restricted to inputs used in or in relation to ‘manufacture of final products’, whereas inclusive part of the definition of ‘input service’ extended to services used prior, during the course of and after the manufacture of final products and that the definition of ‘input service’ was wider than that of ‘input’. However, there was no difficulty found in applying the ratio laid in the said case of Maruti Suzuki (supra) and held that services having integral connection with manufacture as well as business of manufacture of final product would qualify to be ‘input service’.

The Revenue’s contention that not only the ratio but the decision in the case of Maruti Suzuki (supra) must be applied ipso facto to the instant case was not accepted. It was further observed by the Court that the definition of ‘input service’ read as a whole made it clear that it not only covered services used directly/indirectly in relation to manufacture, but also other services integrally connected with the business of manufacturing final product and as such, credit of service tax paid as outdoor catering service would be allowable and the question of law raised was answered in affirmative in favour of the assessee.

2 Mandap keeper’s service:

(i) Can letting out lawn by a members’ club to its member be taxable under ‘Mandap Keeper Services’?
(ii) Is ‘member’ a ‘client’ of the club?

Karnavati Club Ltd. v. Union of India, 2010 (20) STR 169 (Guj.)

The appellant is a members’ club registered under the provisions of the Companies Act, 1956. It does not have any shareholders. It makes available facilities to its members and their guests and recovers the expenses. Persons are made members against payment of subscription.

The Court observed the following:

To make the activity of the above club taxable under ‘Mandap Keeper Services’, the members of the club should fall within the definition of ‘client’.

After referring to various definitions of ‘client’, the Court inferred that a client is a one who applies for service or advice or who retains a solicitor in the management of his suit. Since the principle of mutuality is squarely applicable in the current case, a member cannot be said to be a ‘client’ of the club.

Held that the activity of the club cannot be taxable under ‘Mandap Keeper Services’.

(P.S.?: The above case pertains to the period prior to 16-5-2008. With effect from 16-5-2008, the word ‘client’ has been replaced with ‘any person’ vide Circular 334/1/2008)

3 Rebate:

Whether a procedural lapse could result denial of rebate claim?

Commissioner of Service Tax v. Convergys India Pvt. Ltd., 2010 (20) STR 166 (P & H)

The question before the Tribunal was that whether the Department was justified in rejecting the rebate claim for want of declaration prior to making exports as provided in Notification No. 12/2005 ST, dated 19th April 2005. The High Court noticed that delay in filing of declaration, in the present case, was due to the respondents considering many options after introduction of such Notification and also delay in obtaining management’s approval for the same. The Supreme Court in the case of Mangalore Chemicals & Fertilisers v. Deputy Commissioner, [1991 (55) ELT 437] has held that the procedural requirement can be condoned for valid reasons and as such dismissed the appeal of the Revenue.

4 Registration:

Whether centralised registration is deemed to be granted within seven days?

Can the Department grant registration under the category other than what the assessee applied for?

Whether Circulars, which are challenged but the outcome is pending, are binding on the Department?

Karamchand Thapar & Bros. v. Union of India, 2010 (20) STR 3 (Cal.)

The petitioner applied for registration under ‘business auxiliary services’ under which he was covered with effect from 16th June 2005. Further, it also applied for a centralised registration to the Commissioner in November 2005. However, the Department granted centralised registration under the category of ‘clearing and forwarding agent’ on 11th September 2007.

The issues before the High Court were whether registration certificate is deemed to be granted within seven days, whether the Circulars, which were challenged by the Department, were binding on the Department. The High Court observed as follows:

Rule 4(5) of the Service Tax Rules, 1994 which portrays such deeming fiction is applicable only to the Superintendent and the same was not applicable to the Commissioners in case of centralised registration under Rule 4(2). Therefore, the centralised registration could not be deemed to be granted within seven days.

Further, there was no such time limit prescribed for the Commissioners to issue centralised registration certificate. However, the registration should be granted within a reasonable time. In the present case, in view of Circulars, seven days was a reasonable time.

The High Court also made a note that although S. 69 requires all registration applications to be submitted to the Superintendent, it does not dilute the authority of the Commissioner to grant such registration under Rule 4.

There are no provisions under the Service Tax Rules to refuse application for registration. Circular No. 72/2/2004 ST, dated 2nd January 2004 provides that the jurisdictional officer cannot question the correctness of declaration made by the applicant.

As held in various judgments, the Circulars are binding on the Department. Though the Supreme Court in the case of CCE, Bolpur v. Ratan Melting and Wire Industries [2008 (12) STR 416] has held that the Circulars can be challenged by the Department, the said judgment did not apply to facts of the case since neither there were contrary decisions nor was the Circular contrary to the statute.

Even when the Circular is challenged, the binding effect continues until the challenge succeeded.

Therefore, the registration should be granted under the category of ‘Business Auxiliary Services’ and the Commissioner did not have power to grant registration on his own without receiving any application for registration under that specific category.

There are no provisions in the service tax laws which lay down the consequences of delay in application for registration. Therefore, though there was a delay in application for registration by the petitioner, the Department could not reject the application, nor could he grant registration under a different category. However, recovery and/or penal proceedings might be initiated for non-payment of service tax.

II. TRIBUNAL:

5 Applicability of Service Tax:

Whether executory work like false ceiling, partitions, flooring, etc. undertaken without any advice, consultancy or technical assistance be covered as interior decorator services?

Spandrel v. Commissioner of C. Ex., Hyderabad/Kochi, 2010 (20) STR 129 (Tri.-Bang.)

The appellants were engaged in executing interior works such as pest control, demolition and dismantling, masonry work, wall preparation, partition of banks, firms, etc. The said work was intended to be taxed as ‘Interior Decorator Services’ by the Department.

The appellants put forth the claim that interior decorator means any person engaged in the business of providing by way of advice, consultancy and technical assistance. Further, the appellants referred to Circular No. B1/6/2005 TRU, dated 27th July 2005 and contended that execution of the above work falls under the category of ‘Commercial or Industrial Construction Services’ introduced from 16th June 2005. The appellants relying on various judgments claimed that these services were notified from 16th June 2005 and therefore, were not taxable earlier.

The Department argued that the scope of interior decorator was not only restricted to advice, consultancy or technical assistance, but also extends to beautification of spaces.

The Tribunal held as follows:

The Department did not have findings that the appellants were engaged in advice, consultancy and technical assistance or planning work and designing. The executory work of the appellants was specifically covered by commercial or industrial construction services and therefore, the same could be held to be covered under any other category prior to introduction of commercial or industrial construction services and allowed the appeal.

6 Appeal:

Whether legal representative can file the appeal on behalf of deceased assessee?

Abhay Intelligence & Security Service v. Commissioner of C. Ex., Vadodara, 2010 (20) STR 204 (Tri.-Ahmd.)

The appellants challenged the levy of penalty on dissolved proprietorship firm after death of the proprietor and relied on various decisions. The Tribunal observed that the ratio laid down in those decisions is that the appeal filed by a legal representative against penalty on deceased is not maintainable. However, the penalty being personal in nature can be recovered only from the person on whom it was imposed and as such it could not be recovered from a legal representative.

7 CENVAT Credit:

7.1 Whether CENVAT credit be allowed on Garden Maintenance Services?

ISMT Ltd. v. Commissioner of C. Ex. & Cus., Aurangabad, 2010 (20) STR 68 (Tri.-Mumbai)

The limited issue before the Tribunal was whether CENVAT credit was allowed on garden maintenance services. The appellants relied on Millipore India Ltd. v. CCE, Bangalore II [2009 (13) STR 616 (Tribunal); 2009 (236) ELT 145 (Tri-Bang.)], which held that modernisation, renovation and repairs, etc. of office premises and landscaping, the surroundings of factory can be considered as input services.

The Department relied on Kirloskar Oil Engines Ltd., [2009 (241) ELT 474 (Tribunal)] which held that ‘garden maintenance services’ do not have any nexus with the manufacture or clearance of final product. They also relied on the decision given in Maruti Suzuki Ltd. v. CCE, Delhi III [2009 (240) ELT 641] (SC) and stated that ‘input’ and ‘input services’ were identical and therefore, CENVAT credit was not admissible.

The Tribunal observed as follows:

Mumbai High Court in case of Coca Cola [2009 (15) STR 657] has held that input services include services used in relation to business. The Tribunal would look whether garden maintenance was related to business activities. It was also observed in the said case that the term ‘activities relating to business’ used in ‘input services’ widens the scope of such definition and conceptually any input service which forms part of the assessable value of final product should be eligible for CENVAT credit.

Maruti Suzuki case cited by the Department relates to definition of ‘input’. The definitions of ‘input’ and ‘input service’ are not comparable at all. Therefore, ratio of such judgment cannot be considered for the present case. The intention of the Legislature is very clear to have different definitions of ‘input’ and ‘input service’. The words ‘used in or in relation to manufacture of final product’ deployed in ‘input’ are not used in the definition of ‘input service’. Further, the Revenue has relied on the judgment of this Tribunal in the case of Kirloskar Oil Engines (supra) and Vikram Ispat (2009 (16) STR 195), but both these cases did not take a note of Coca Cola case (supra) delivered by the Mumbai High Court.

In Force Motors Ltd. v. CCE, Pune [2010 (18) STR 150], the Tribunal had observed that the definition of ‘input service’ should be considered in two parts, one inclusive and another exclusive part. Further, the activities specified after the phrase ‘such as’ are only illustrations and there fore the activities other than those illustrated may get covered.

A good garden increases the working efficiency and consumer also feels good and therefore, garden maintenance services are in relation to business activity. CENVAT credit was, therefore, allowed.

Kirloskar Oil Engines Ltd. v. Commissioner of C. Ex., Aurangabad, 2010 (20) STR 30 (Tri.-Mumbai)

The issue before the Tribunal again related to CENVAT credit on garden maintenance services. The Department put forth that there were contrary judgments on the disputed issue and therefore, the same should be referred to the Larger Bench. The Tribunal observed that the contrary judgment was given in case of the appellants itself and such matter was remanded back for fresh adjudication but the law was already settled in Coca Cola India Pvt. Ltd. v. CCE, [2009 (151) STR 657, 2009 (242) ELT 168]. The Tribunal allowed the CENVAT credit on garden maintenance following the decision given in ISMT Ltd. case discussed above.

7.2 Whether interest is leviable for wrong avail-ment of CENVAT credit?

Commissioner of C. Ex., Pondicherry v. Superfil Products, 2010 (20) STR 279 (Tri.-Chennai)

The manufacturer availed but not utilised CENVAT credit of inputs and capital goods and also availed benefit of exemption Notification No. 30/2004, dated 9th July 2004. However, the CENVAT credit on inputs lying in the factory and inputs in process etc. was not reversed.

The Department claimed that interest was payable even on wrong availment of CENVAT credit in view of Rule 14 of the CENVAT Credit Rules, 2004. However, the respondents alleged that there was sufficient balance in the CENVAT credit account and therefore, it has not got any pecuniary benefit. The respondents also relied on the judgment delivered by P & H High Court in the case of CCE, Delhi-III v. Maruti Udyog Ltd., (2007 (214) ELT 173) which was affirmed by the Apex Court in (2007 (214) ELT A50) wherein it has been held that in the absence of utilisation of CENVAT credit, interest shall not be leviable.

The Tribunal observed that for interpreting Rule 14 of the CENVAT Credit Rules, 2004, the words ‘taken or utilised’ should be construed as ‘taken and utilised’. It was held that in the present case, interest is not justifiable. However, in case when the CENVAT credit balance is less than the credit to be reversed, then the balance should be paid in cash with interest.

7.3 Whether CENVAT Credit is allowed on capital goods received in the factory before the assessee becoming liable to service tax?

ABC Engineering Works v. Commissioner of C. Ex., Guntur, 2010 (20) STR 145 (Tri.-Bang.)

The appellants were engaged in providing site formation and clearance, excavation and earth-moving and demolition services. The appellants took CENVAT credit on excavators during 30th September 2005 and 31st March 2006. However, such excavators were purchased prior to 16th June 2005 i.e., prior to the introduction of the above service in the service tax net.

The appellants submitted that the excavators were purchased after introduction of the CENVAT Credit Rules, 2004 and put to use after introduction of service. Such capital goods were not used in providing exempted services and therefore, CENVAT should be allowed. The appellants relied on the Tribunal’s judgment in the case of ACE Timez v. CCE, Bangalore, [2004 (170) ELT 371]. The Tribunal observed and held that in case of Spenta Interna-tional Ltd., [2007 (216) ELT 133], the Larger Bench of Tribunal held that eligibility of CENVAT credit has to be determined based on dutiability of final product on date of receipt of capital goods in the factory, instead of date of utilisation of CENVAT credit. Further ACE Timez case (supra) is based on different facts and ratio thereof cannot be applied to the present case. The assessee therein was availing exemption and therefore, provisions of Rule 6(4) of the CENVAT Credit Rules, 2004 did not apply to the assessee. The ratio laid down by the Board’s Circular No. 137/120/2008-CX-4, dated 24th June, 2008 relied on by the Commissioner provides that the CENVAT credit of CVD paid on the aircrafts before introduction of such services cannot be available to assessee even when the same is included in the definition of capital goods in view of Rule 6(4). Eventually, the Tribunal denied the CENVAT credit on excavators. However, since the question related to interpretation of law, the penalty was waived.

7.4 Whether CENVAT credit is available for input services utilised outside the factory premises?

Atul Auto Ltd. v. Commissioner of C. Ex., Rajkot, 2010 (20) STR 275 (Tri.-Ahmd.)

The appellants were denied CENVAT credit on erection, installation and commissioning services of wind mills for generation of electricity outside the factory premises.

The?Tribunal?observed?that?the power generated at the wind mills was not directly used by the appellants. It also relied on the decision given in Rajhans Metals (P) Ltd., [2007 (8) STR 498] and held that wind mill firm unit being not a part of the appellant’s factory premises, CENVAT credit cannot be allowed.

7.5 Whether CENVAT credit is allowed on agricultural work, on levelling of children park and tree plantation and construction of toilet in village?

Commissioner of C. Ex., Salem v. ITC Ltd., 2010 (20) STR 141 (Tri.-Mumbai)

The Tribunal held that service tax paid on agricul-tural work is allowed relying on the decision given in the case of Millipore India Ltd. v. CCE, [2009

(13) STR 616, 2009 (236) ELT 145). However, since levelling of children park and tree plantation and construction of toilet in village are not relating to business of the respondent, CENVAT credit was held to be disallowed.

8 Export of services:

Whether procuring orders for parent company abroad be considered as export of services?

Lenovo (India) Pvt. Ltd. v. Commissioner of C. Ex., Bangalore, 2010 (20) STR 66 (Tri.-Bang)

The appellants were procuring orders for their foreign parent company classifiable under ‘Business Auxiliary Services’ and were receiving commission for such services. Rebate was claimed under Rule 5 of the CENVAT Credit Rules, 2004 for service tax paid on such commission. The Department rejected the rebate claim on the ground that the appellants promote the product of Singapore-based parent company in India, therefore the said services are rendered in India and they do not qualify to be considered exports. Further, it also claimed that services are rendered to its own concern and the appellant’s office can be considered as office of foreign parent company. Therefore, the recipient of service is not located outside India.

The appellants claimed that they and the parent company were separate entities. Moreover, the recipient was located outside India and parent company does not have an office in India. Therefore, they argued that the services were utilised abroad. The appellants also took support of Blue Star v. CCE, Bangalore, [2008 (11) STR 23] and ABS Ltd. v. CCE, Bangalore, [2009 (13) STR 65] delivered by the Bangalore Tribunal. Since the issue was squarely covered by the said judgments, the ap-peal was allowed.

9 Refund of CENVAT:

9.1 Can Refund of CENVAT credit be denied if it is not filed in the same month?

Can it be disallowed as the invoices were raised on a person acting as Pure Agent and paid by such Agent?

Can credit on input services received for consultancy on acquisition of a business be disallowed because that business is not yet acquired? Whether credit can be disallowed in the absence of specified evidence as to why the credit was not admitted?

Commissioner of Central Excise, Mysore v. Chamundi Textiles (Silk Mills) Ltd., 2010 (20) STR 219 (Tri.-Bang.)

The respondent is a 100% EOU engaged in the business of manufacturing and exporting silk and allied fabrics. They had availed CENVAT credit of service tax paid on services received by them. But the Revenue rejected the claim of refund of the above CENVAT credit on the following grounds:

CENVAT credit was taken on the goods which were not manufactured in the month in which the claim was made.

The invoices were raised on a person acting as a Pure Agent, credit could not be allowed.

The commission received for acquisition of business outside India would not qualify as input service as the business was not acquired till that date.

The assessee failed to prove the nexus of invoices that were addressed to the Head Office but actually related to the Mysore Unit.

The Tribunal’s observations were as follows:

If some credit is admissible in a particular month, it shall be admissible in the succeeding month too. It is natural that there will be a time lag between availment of credit on the goods manufactured and the export of those goods. CBEC has prescribed a time limit of one year for filing the refund claim and the refund should be filed on a quarterly basis. Hence, it is natural that if an exporter is claiming refund after 9 months, it would not be relating to the goods of that month.

Thus, the claim of refund cannot be denied on this ground.

The invoice had been raised on a person acting as Pure Agent on account of the appellant. The Pure Agent had discharged liabilities which would otherwise have been discharged by the appellant.

Thus, the credit cannot be denied on this ground also.

In regard to the Consultancy Service (Commission) received for acquisition of business outside India, it was observed that the company was yet to be acquired and pending such acquisition, it could not be concluded if the consultancy received has been used in the business activity. Hence, CENVAT credit on the said service was not admissible.

The Tribunal also perused the invoices that were raised on the Head Office. It was found that they related to the activities of Mysore Unit. The respondent also submitted that no explanation was given by the Revenue regard-ing the inadmissibility of credit relating to such invoices. The Court thus dismissed the appeal of the Revenue on the grounds that there was no special evidence as to why the credit could not be allowed.

9.2 Whether airfreight services received by appellants till goods are loaded onto aircraft are eligible for CENVAT credit? Whether Department is justified in denying refund in months of no export?

Fine Care Biosystems v. Commissioner of C. Ex., Ahmedabad, 2010 (20) STR 193 (Tri.-Ahmd.)

The Department rejected the refund claim for the months where no export took place. Further, it also rejected the refund claim for the CHA and airfreight services.

The Tribunal made the observations that in Delhi Tribunal’s decision in case of Philco Exports v. CCE, New Delhi [2009 (234) ELT 568] it was held that the time lag between the date of receipt of inputs, the date on which they are used and the date of export are not relevant. The issue to be looked into is whether the input services were used in relation to manufacture of export goods. Accordingly, there is no restriction on availment of CENVAT credit for exporters and only when adjustment is not permissible, Rule 5 allows for refund of CENVAT credit. Therefore, for the months where no export sales were made, CENVAT credit cannot be denied. Further, in case of export sales made on FOB or CIF basis, the place of removal has to be the port of export. Therefore, the Com-missioner rightly allowed CENVAT credit on CHA services. Taking the same analogy, CENVAT credit on airfreight services till load port is allowable.

9.3 Whether Department justified in denying claim of refund on the basis of declaration in ARE-1 that the CENVAT credit was not availed by the assessee?

Fine Care Biosystems v. Commissioner of C. Ex., Ahmedabad, 2010 (20) STR 241 (Tri.-Ahmd.)

The Department denied refund claim to the ap-pellants, a 100% EOU, on the basis that the appellants had declared in ARE -1 that it has not availed CENVAT credit and such declaration should be treated as final. The Tribunal held that Rule 5 of the CENVAT Credit Rules, 2004 requires that goods should have been exported, the CENVAT credit taken should be eligible CENVAT credit and credit could not have been utilised for payment of duty of finished goods by way of adjustment. Further, there is no requirement under Rule 5 for giving any declaration in ARE-1. The declaration requirements are made to facilitate exporters to have their legitimate export benefit entitlement without delay and the same should not be used to deny the legitimate entitlement.

10 Remand:

Whether Commissioner (Appeals) has power to remand back the service tax cases? Commissioner of Service Tax, Delhi v. World Vision, 2010 (20) STR 49 (Tri.-Delhi)

The Tribunal held that the Commissioner (Appeals) can remand the matter u/s.85(4) and the provisions of S. 35, S. 35A and S. 35B of the Central Excise Act were not made applicable to service tax vide S. 83 of the Finance Act, 1994. It also concluded that S. 85(5) related to procedural aspects only and it cannot be interpreted to restrict the powers of the Commissioner (Appeals).

11 Unjust enrichment:

Whether booking of space or time in media are ‘Advertising Agency services’?? Whether unjust enrichment is applicable in case when Department does not have clear finding?

C.S.T., Ahmedabad v. Poornima Advertising & Pro-motion Pvt. Ltd., 2010 (20) STR 107 (Tri.-Ahmd.)

The assessee claimed refund of excess service tax paid without considering discount. The Commissioner (Appeals) held that though the assessee is eligible for refund on merits, refund cannot be allowed in the present case applying doctrine of unjust enrichment. The Tribunal held that refund is eligible on merits on the grounds that:

The Department contended that the scope of ‘Advertising Agency Services’ covers services in connection with advertisement including services connected with display or exhibition of advertisement and the services. However, Master Circular was against such interpretation. Therefore, merely canvassing advertisement for public on commission basis is classifiable under ‘Business Auxiliary Services’ and not under ‘Advertising Agency Services’. In respect of unjust enrichment, the Tribunal observed that the issue of credit note was sufficient to prove repayment of excess service tax and further that the Department did not have clear finding that such amount was not refunded. Thus, the appeal was allowed.

BCAJ Admin

Some Recent Judgments

I. High Court :

1. Binding nature of law laid down by High Court’s order :

A.C. Nielsen ORG – MARG Pvt. Ltd. v. UOI 2009 (16) STR 259 (Bom.)

Order dated : 22-7-2009

The petitioner in this case was denied waiver of pre-deposit by the Tribunal in the issue of service tax demand as recipient of service for the period prior to 18-4-2006, in spite of relying on the High Court decision in the case of Indian National Shipowners Association v. UOI, 2009 (13) STR 235 (Bom). The High Court ruled that once this Court lays down the law that the recipient of the service was not liable for paying service tax, that law was binding on all Tribunals and authorities functioning within the jurisdiction of this Court and accordingly, directed to proceed with the appeal without any pre-deposit.

2. When appeal relates to rate of duty, Supreme Court is the authority u/s.35L :

CST v. Delhi Gymkhana Club Ltd., 249 (16) STR 129 (Del.)

In the instant case, the Tribunal had dismissed the appeal made by the Revenue against the order of the Commissioner (Appeals) who, relying on the judgments of the Calcutta High Court in the cases of Saturday Club Ltd. v. A.C. Service Tax, 2006 (3) STR 305 (Cal.) and Dalhousie Institute v. AC Service Tax, 2006 (3) STR 311 (Cal.), had held that the service provided by a club to its members did not attract service tax as principle of mutuality prevailed in such cases. The Revenue, challenging the order of the Tribunal filed appeal in the Delhi High Court u/s.35 of the Central Excise Act read with S. 83 of the Finance Act, 1994. In terms of the provisions of S. 35G read with S. 35L of the Central Excise Act against certain orders of the Tribunals, appeal is to be made to the High Court, whereas in respect of certain other orders passed by the Tribunal, a direct appeal to the Supreme Court has to be made. The High Court in this case, accepting the respondent’s contention, held that the appeal would not be maintainable as the question decided by the Tribunal relates to the rate of duty and when the issue relates to the rate of duty or tax or value of goods or assessment, relying on the decision in the case of Navin Chemical Mfg. & Trading Co. Ltd. v. Collector, 1993 (68) ELT 3 (SC), the remedy for the appellant to file appeal u/s.35L was to be to the Supreme Court and therefore, the appeal was held not maintainable on this ground.

II. Tribunal :

3. CENVAT credit :

CCE & CUS Guntur v. CCL Products (India) Ltd., 2009 (16) STR 305 (Tri.-Bang.)

Final Order 216-220/2009 & Stay Orders 303-305/2009, all dated 20-3-2009

The issue involved related to denial of credit availed on service tax paid on insurance premium, repair of vehicles, AMC charges on telecom & courier charges not considering the said services as input services. Considering inclusive part of the definition of ‘input service’ as exhaustive and having a bearing on the main part of the definition and further considering expressions ‘in or in relation to’ expansive, the Commissioner (Appeals) held the services used by the manufacturer as in relation to the manufacture and clearance of final products. Relying on the Larger Bench’s decision in the case of Commissioner v. GTC Industries Ltd., 2008 (12) STR 468 (Tri.-LB) and which was followed in 2009 (13) STR 616 (Tri.), the Tribunal rejected the Revenue’s contention that courier services were akin to outward transportation of final goods and therefore they could not be treated as ‘input service’ under Rule 2(1) of the CENVAT Credit Rules as per decision in the case of Universal Cables Ltd. v. CCE, 2007 (7) STR 310 (Tri. Del.) and thus maintained the order of lower authority relying on the decision in the case of GTC Industries (supra).

Wrong classification by service provider cannot make credit ineligible :

CCE, Chennai v. Carborandum Universal Ltd., 2009 (16) STR 181 (Tri.-Chennai)

Input credit was considered ineligible on the ground that the service involved was classifiable under manpower recruitment and supply agency, and not business auxiliary service, although the same was claimed on valid documents on which service tax was paid by the respondent. The period in which credit was taken was prior to 16-6-2005, during which time the service of manpower supply was not taxable. Holding that service tax was paid by the provider of service under the business auxiliary service and it was so assessed, credit taken based on valid documents could not be questioned on the basis that the assessment of the service by the department at the end of service provider was incorrect, the appeal of the Revenue was dismissed.

Rebate under Notification No. 12/2005-ST : Liberal view of procedural lapse for exports :

CST Delhi v. Convergys India P. Ltd., 2009 (16) STR 198 (Tri.-Del)

The respondent provides customer care services on behalf of foreign clients through telephone, email and web-based interaction. These services being in the nature of exports, claim of rebate was lodged under Notification 12/2005-ST. They used several input services like advertising, courier, leased circuit, rent-a-cab services, security agencies, management consultancy services, air travel agencies, online information services, etc. and inter alia also used management consultancy services from outside India. Rebate claim was rejected on the grounds that declaration being a mandatory requirement was filed late and some of the services were not used for providing output services but used for maintaining capital assets/ goods, etc. and therefore could not be considered input services. Provisions of Notification 12/2005-ST were discussed at length. Late filing of declaration was considered procedural lapse, where by substantive benefit was considered not deniable. Further, rebate was considered admissible also considering that the definition of input service was inclusive and that when cost of the goods and services becomes part of cost of output services, such goods or services in common parlance are inputs and input services in relation to final products are output services. Accordingly, services used in connection with procurement of other input services are also to be treated as input services. Similarly, services used in day-to-day activity like maintenance services, etc. are input services. The eligible criteria under the CENVAT Credit Rules get satisfied if services in part or full are used for taxable services and therefore, the rebate would be admissible. The Tribunal further observed that in respect of exports, a liberal view requires to be taken.

4. Longer period of limitation:

Whether sustainable when disclosure provided in ST-3 Returns:

CCE Kanpur v. Taj Tours & Travels, 2009 (16) STR 273 (Tri.-Del.)

The respondent, a tour operator, provided services of monumental tours, local transportation, rail/ air ticket booking, etc. on behalf of principal agents. The turnover representing purchase of tickets and principal’s services was deducted from the value of taxable services, and accordingly remark was made in the ST-3Returns. Suppression was alleged by the Revenue. Since disclosure was made in the ST-3 Returns, charge of misstatement or suppression was held incorrect and the Commissioner (Appeals)’s ruling based on judgments in the cases of Anand Nishikawa Co. v. CCE, 1995 (75) ELT 721 (SC), etc. that mere failure to give some information did not amount to willful mis-declaration and that there must be a positive act from assessee to final willful suppression was upheld.

When Department has knowledge, whether invokable?

Mahaveer Generics v. CCE, Bangalore 2009 (16) STR 289 (Tri.-Chennai)

Stay Order dated 2-4-2009.

The appellant, a consignment agent of CIPLA, made a stay plea for non-applicability of longer period of limitation as the activity of the firm was known to the Department, as service tax demanded from the firm as clearing and forwarding agency was set aside by the Tribunal rejecting interpretation of the Revenue. Prima facie considering the appellant not guilty of suppression of facts with intent to evade-payment of duty so as to attract longer period of limitation, pre-deposit of service tax and penalty was totally stayed.

When invoked consequent upon audit:

Aditya College of Competitive Exams v. CCE, 2009 (16) STR 154 (Tri.-Bang.)

Appellant is a commercial training and coaching centre. It had collected certain amount towards service to be provided prior to the date on which levy was introduced viz. 1-7-2003. An amendment in S. 67 was made effective 13-5-2005 to levy service tax on advances received for the services to be provided. However, since this amendment was made later i.e., from 13-5-2005, it could not have retrospective effect according to the appellant. Further, the demand was made by the Assistant Commissioner based on audit objection. Relying on the decision in the case of Vikram Ispat v. CCE, Raigad 2007 (8) STR 554 (Tri.-Mum), the demand was held as barred by limitation and therefore penalty, etc. could not be upheld.

5. Penalty:

Deccan Mechanical & Chemical Industry Pvt. Ltd. v. CCE, Pune 2009 (16) STR 263 (Tri.-Mum.)

Order dated 24-3-2009

The appellant paid service tax with interest before issuance of show-cause notice and pleaded for waiver of penalty levied u/ s.76. The Revenue insisted on pre-deposit on the strength of judgment of the Supreme Court in the case of Union of India v. Dharmendra Textile Processor, 2008 (231) ELT 3 (sq. The Tribunal on weighing arguments by both the sides held that prima facie S. 76 was not comparable with penalty imposable u/s.ll AC of the Central Excise Act which provided for penalty on defaults arising on account of fraud, suppression or contravention of law with an intent to evade payment of duty and therefore held that on the strength of such case law, prima facie waiver of pre-deposit could not be resisted upon.

6. Rectification of mistake (ROM) :

Ridhi Sidhi Transport v. CCE, 2009 (16) STR 271 (Tri.-Bang.)

Order 25/ /2009, dated 5-5-2009.

In this case, the Tribunal in its order made a mention about contention of the appellant with regard to non-applicability of extended period of limitation. However, no finding on the issue was provided and therefore, ROM application was filed. Despite the Revenue’s view that ROM would mean review by the Tribunal itself, it was held that recalling was necessary in the interest of principles of natural justice and matter was decided to be reheard.

8. Valuation: Whether collection for ‘mess charge’ includible ?

Aditya College of Competitive Exams v. CCE, 2009 (16) STR 154 (Tri.-Bang.)

In this case, the Revenue demanded service tax by including mess charge collected by the college in the value of taxable service. It was held categorically that there should be nexus between the amount collected and services rendered. Mess charges were collected for availing facility of the mess. It cannot be brought under the category of receipt for commercial training and coaching service and subject it to service tax. There is no provision for inclusion of any amount whatsoever collected by the appellant. Demand was held as unsustainable.

BCAJ Admin

ORDERS OF CIC

Right to information

S. 2(f) :

S. 2(f) defines the word ‘Information’ :

Sunil Kumar had asked Department of Revenue a series of
questions aimed at eliciting from the Department of Revenue their interpretation
of the provisions of the Budget, the Finance Act and the notifications issued
thereof.

Citing certain decisions of the Commission and the definition
of information u/s.2 (f) of the RTI Act as well as on the basis of the
confidentiality of the Budget and its provisions including the Finance Act,
respondents declined to disclose the information through CPIO’s communication
dated 25-3-2010 and the decision of the Appellate Authority, dated 23-4-2010.

Central Information Commissioner (CIC), A. N. Tiwari, held
that ‘given the nature of the queries appellant had included in his RTI
application, it is obvious that he has been seeking from the respondents their
interpretation of various provisions of the Budget, the Finance Act and the
notifications thereof. This cannot qualify to be information u/s.2(f) and hence
has been rightly declined by the respondents.’

During the hearing, it was stated on behalf of the
respondents that on the basis of the feedback received from the citizens and
various trade and financial organisations, government, from time to time, issues
clarifications regarding specific points in various Acts, Rules, notifications,
etc. One such clarification has been issued by the Ministry of Finance covering
most of the grounds and the points mentioned in appellant’s RTI application.
Respondents were willing to provide a copy to the appellant for his reference
and use. They however reiterated their point that it was not open to any private
citizen to use the RTI Act to seek from the respondents their specific comments
about interpretation of laws, Acts, Rules and notifications. CIC held that
respondents’ contention is valid and was upheld.

[Sunil Kumar v. Department of Revenue, No. CIC/AT/A/2010/00342
dated 3-9-2010]

Co-operative
Bank

— whether Public Authority : S. 2(h) :

CIC Mr. M. L. Sharma has ruled that Co-operative Banks are
not Public Authority in the matter of two appeals by Preeti Goyal.

CIC stated that a bare reading of clause (h) of S. 2 of the
RTI Act would indicate that a private body or a co-operative society can be said
to fall in the domain of this clause, if it is substantially financed, directly
or indirectly, by the funds provided by the appropriate Government. Admittedly,
the society in question has not received any funds either from the Central
Government or the Government of Union Territory of Chandigarh. By this logic, it
cannot be said to be a public authority. Needless to say, once it is held that
the society in question is not a public authority, it has no liability to
provide any information under the RTI Act.

General Manager Mr. Dhillon of Chandigarh State Co-operative
Bank Ltd. appeared before the Commission and in a written representation relied
on certain decisions, the ratio whereof is that Co-operative Banks do not fall
in the ambit of S. 2(h) of the RTI Act.

The relevant para of the representation is extracted below :

“In the latest judgment reported as 2009 (5) RCR (Civil) 394
— Bidar District Central Co-operative Bank Ltd., Bidar v. The Karnataka
Information Commission, Bangalore and another and 2009 (5) RCR (Civil) 833;
Dattaprasad Co-operative Housing Society Ltd. v. The Karnataka Information
Commission, Bangalore and another, it has been held by the Karnataka High Court
that co-operative society does not fall within the purview of S. 2(h) of the RTI
Act. Similar view has been taken by the Bombay High Court in a judgment reported
as AIR 2009 Bombay 75, wherein it has been held that a Co-operative Bank
registered under the Maharashtra Co-operative Societies Act is not a public
authority.”

Based on above CIC held that the Chandigarh State
Co-operative Bank Ltd. is not a public authority.

[Preeti Goyal v. Chandigarh State Co-operative Bank Ltd.,
Appeals No. CIC/LS/A/2010/000657 & 658, decision dated 16-9-2010]

PART B : THE RTI ACT, 2005

In the last two issues of BCAJ, I had covered talks by Gopal
Krishna Gandhi and Nandan Nilekani at the inaugural and concluding sessions
respectively at CIC’s 5th annual convention held on 13th & 14th September 2010.
Hereunder is the brief summary of talks at the inaugural session by Mr. Veerappa
Moily and at four technical sessions in between :

Dr. Veerappa Moily agreed RTI has caught our imagination.

Right to Information has the key to strengthening
participatory democracy and ushering in people centred governance. For creation
of a global information society, it is essential to safeguard plurality of
opinions, and to promote ‘open access to networks for service and information
suppliers’ and ‘free expression of ideas’.

The 1st technical session ‘RTI and Public Private
Partnership Projects’ was chaired by A. N. Tiwari, CIC (now Chief Central
Information Commissioner).

He summarised the discussion and concluded that many
infrastructure projects on PPP mode satisfy the basic tenets of a Public
Authority as defined under the RTI Act. He also observed that in the years to
come the RTI may go a long way in operationalising the PPP more objectively. He
was of the opinion that the governments themselves should declare whether a
particular PPP project is a public authority under RTI Act or not.

The 2nd technical session : ‘Responsibility of Political
Leadership in Promoting RTI’ was chaired by V. Narayansamy, Hon’ble Minister
of State, Planning & Parliamentary Affairs.

Sri Narayansamy: Right to Information is a tool in the hands of citizens which keeps the bureaucracy on its toes. However, he stated that the citizens are suffering in getting the information, even though they fulfill all their obligations as required under the Act. They are given misleading, truncated and irrelevant information and some people misuse it as well. He commended the role of the Commissions and cited two decisions of CIC. In one of the cases the Commission directed the PMO to disclose the assets of the Ministers, which they complied and while in another case, the Commission, directed the DoPT to disclose file notings. The Hon’ble Minister expressed his grief over the killings/threats of RTI activists. He said that the Government is sensitive to the situation and is bringing about special legislation for whistle blowers protection and privacy Act. The role of the politicians, the law makers does not stop with the enactment, it includes efforts in ensuring implementation. Shri Narayansamy concluded that the Judiciary should be made accountable. All three wings of the government have to function under the provisions of the RTI Act.

The 3rd technical session : ‘RTI & Judiciary’ was chaired by Wajahat Habibullah. One of the panelists was Justice A. P. Shah. His conclusions were:

Conclusion : Demands for change to existing systems in the judiciary must be met rationally, bearing in mind the objectives sought to be achieved. Will the proposed changes promote public respect for the judiciary and the rule of law? Will they strengthen democratic principles ? How do they relate to the constitutional requirement of judicial independence? The guiding principle should always be accountability but let it always be commensurate with judicial independence and impartiality. The challenge is to develop mechanisms of accountability that do not undermine judicial independence.

The 4th Technical Session : ‘Challenges and Opportunities in RTI — Role and Responsibility of Media/CSO’ was chaired by Ms. Mrinal Pande, Chairperson, Prasar Bharti.

One of the panelists, Ms. Ravi Singh stated that RTI is as important as the right to food and right to education. Since constant vigilance is the price for freedom, the role of NGOs, the media, the courts and the civil society is important.

Another panelist, Shailesh Gandhi observed that all the stakeholders of the RTI have to work together to create a supportive environment for the Act to flourish.

Part C: Information On & Around

Ration offices in Mumbai and around:

Vigilance Committees play a crucial role in addressing the grievances of local residents against ration shops. But information obtained under the RTI has revealed that due to vacancies in these committees, several areas are under represented.

Anil Galgali, an RTI activist who procured this information, said, “A Vigilance Committee is supposed to meet once a month to redress the grievance of the residents. But the provision for a Vigilance Committee is meaningless if it does not have any members.”

The vigilance committee also ensures that commodities in rationing shops are sold as per the directives of the government. “An inefficient vigilance committee is a setback for below poverty line (BPL) ration card holders who rely heavily of essential items sold through ration shops. Absence of an efficient vigilance body means that there are no effective checks and balances on the public distribution system (PDS),” he added.

It has come to light that in five of the 53 rationing offices in Mumbai, Thane and Navi Mumbai, there is not a single member on the vigilance committee.

University of Mumbai flouting RTI Act:

PIO of the University of Mumbai and also AA never responded to the RTI Application/Appeal filed by S. K. Nangia, RTI activist even after repeated reminders. However, on the application dated 15-3-2010, finally, AA fixed the hearing on 30-10-2010.

Now, the activist has written to Rajan Welukar, vice-chancellor at the University of Mumbai, highlighting the problems faced by citizens in seeking information from the university. He has also asked for reasons for the delay of more than six months for an appeal hearing to be held.

Senior official at the university states that they were tied up with other routine work in the university and shall write a regret letter to the applicant for the delay.

Taxis in Mumbai:

According to the data provided by the RTO, from April 2009 to March 2010, 303 cases of refusals, 1,236 cases of meter tampering and over charging and 85 offences of rude behaviour were registered. In comparison, complaints launched between April and September shot up to 3,500, with the offence of drivers refusing multiplying eight times from 303 to 2,400 cases.

STOP PRESS

Information on selection of Judges:

A two-judge Bench of the Supreme Court wondered whether the time had come to make public the details of appointment of judges to the Supreme Court and High Courts. A Bench comprising Justices B. Sudershan Reddy and S. S. Nijjar referred to a constitution Bench, the crucial question on disclosing correspondence between the Chief Justice of India and the Law Minister on appointment of HC and SC judges under the RTI Act.

This is a significant development as 19 High Courts have opposed the order of the Delhi HC allowing disclosure of information on appointment of judges. Even the Delhi HC has opposed the pronouncement on administrative grounds. The sole exception is the Gauhati HC.

Echoing the views of the HCs, Attorney General G. E. Vahanvati told the Bench, “Information made available to the CJI in respect of appointment of judges of HCs as well as the SC is held by him in trust and in fiduciary capacity.”

Justice Reddy said, “The current debate is a sign of a healthy nation. This debate on the Constitution involves a great and fundamental issue.” Writing the judgment for the Bench, he said precedents relating to interpretation of the Constitution on this issue need not mean stagnancy. “The ultimate question must be, what do the words of the text (Constitution) mean in our time,” he said. The bench framed the following questions for the consideration of constitution Bench:

Whether the concept of independence of judiciary requires and demands prohibition of furnishing of the information sought?

Whether the information sought amounts to interference in the functioning of judiciary?

Whether the information sought cannot be furnished to avoid any erosion in the credibility of the decisions and to ensure a free and frank expression of honest opinion by all constitutional functionaries, which is essential for effective consultation and for taking the right decision ?

Whether the information sought is exempt u/s.8(1)(j) of the RTI Act?

Very sensitive and crucial issue for RTI to get wide spectrum of coverage now awaits fill this judgment gets pronounced.

BCAJ Admin

Right To Information

Part A: Decisions of the Court and CIC

S. 2(h), 2(f), 8(1)(e), 8(1)(j) of the RTI Act :

It is a very unusual court case when the Supreme Court of India (SCI) files writ petition to the Delhi High Court (DHC) ! The issue came up before the DHC whether the Chief Justice of India (CJI) is a Public Authority and whether CPIO of the SCI is different from the office of the CJI and if so, whether the RTI Act covers the office of CJI.

The writ petition covers a number of issues and the judgment runs into 70 printed pages (85 paras). Decisions on some of the issues are reported hereunder.

The CJI is a public authority u/s.2(h) of the RTI Act.

Asset declaration by the SC Judges, pursuant to the 1997 resolution is ‘Information’ within the meaning of the expression u/s.2(f) of the RTI Act. In Para 36 of the judgment, the DHC gave a very significant interpretation for this expression ‘Information’. It says :

As is evident, the definition is extremely wide; the crucial words are ‘any material in any form’. The other terms amplify these words, explaining the kind of forms in which information could be held by an authority. It also includes ‘information relating to any private body, which can be accessed by a public authority under any other law for the time being in force.’ Facially, the definition comprehends all matters which fall within the expression ‘material in any form’. There is no justification in cutting down their amplitude by importing notions of those materials which are mandatorily held by it. The emphasis is on the information available, having regard to the objectives of the Act; not the manner in which information is obtained or secured by the authority. Thus, inter se correspondence of public authorities may lead to exchange of information or file sharing; in the course of such consultative process, if the authority borrowing the information is possessed of it, even temporarily, it has to account for it, as it is ‘material’ held. As far as the later part of the definition, i.e., accessing of information by or under any law is concerned, it appears that this refers to what is with a private organisation, but can be accessed by the public authority, under law. The Court deduces this, because the theme is included by the conjunctive ‘and’; but for such inclusion, such private information would not have been subjected to the regime of the Act. Therefore, it is held that all ‘material in any form’ includes all manner of information; the absence of specific exclusion leads this Court to conclude that asset declarations by judges, held by the CJI are ‘information’, u/s.2(f).

CJI does not hold such declarations in a fiduciary capacity or relationship and hence not exempt under clause (e) of S. 8(1) of the RTI Act.

Contents of asset declarations pursuant to the 1997 and the 1999 Conference Resolution are entitled to be treated as personal information, and may be accessed in accordance with the procedure prescribed u/s.8(1)(j). Here, I also reproduce para 62 of the judgment which is very enlightening :

The right to access public information, that is, information in the possession of State agencies and governments in democracies, is an accountability measure empowering citizens to be aware of the action taken by such state ‘actors’. This transparency value, at the same time, has to be reconciled with the legal interests protected by law, such as other fundamental rights, particularly the fundamental right to privacy. Certain conflicts may underlie particular cases of access to information and the protection of personal data, arising from the fact that both rights cannot be exercised absolutely in all cases. The rights of all those affected must be respected, and no single right must prevail over others, except in clear and express circumstances. To achieve these objectives, and resolve the underlying tension between the two (sometimes) conflicting values, the Act reveals a well-defined list of 11 kinds of matters that cannot be made public, u/s.8(1). There are two types of information seen as exceptions to access; the first usually refers to those matters limited only to the State in protection of the general public good, such as national security, international relations, confidentiality in cabinet meetings, etc. The second class of information with State or its agencies, is personal data of individual citizens, investigative processes, or confidential information disclosed by artificial or juristic entities, like corporations, etc. Individuals’ personal data is protected by the laws of access to confidential data and by privacy rights. Often these guarantees — right to access information, and right to privacy, occur at the same regulatory level. The Universal Declaration of Human Rights, through Article 19 articulates the right to information; Article 12 at the same time, protects the right to privacy :

“no one shall be subjected to arbitrary interference with his privacy, family, home or correspondence, nor to attacks upon his honour and reputation. Everyone has the right to the protection of the law against such interference of attacks.”

[CPIO, Supreme Court of India v. Subhash Chandra Agarwal & Anr., W.P. (C) 288/2009 decided on 2-9-2009]

S. 8(1)(a), (e) and (j) of the RTI Act :

The applicant, Sh. Chetan Kothari (of Mumbai) filed an RTI application with the CPIO, Ministry of Health & Family Welfare seeking information about medical, surgical or such other health-related problems of the Prime Minister. Specific points as follows :

(a) Major and minor types of operations done on the Prime Ministers of India during their tenure as Prime Ministers during the last five years, giving yearwise break-up of major/minor surgeries separately;

(b) Medical-related expenses incurred during each such operation, giving yearwise break-up of last five years;

(c) For how many days were the patients hospitalised during such major/minor operations giving yearwise break-up with names of the hospitals for last five years;

(d) Who bore the medical expenditure, whether deducted from PM’s salary or paid by the Government of India in a yearwise break-up form;

Both CPIO and the first AA refused the information sought on the ground that the medical care scheme for the Prime Minister being a classified document, information pertaining to the same was exempt from disclosure.

The evasive response of the Respondent Public Authority compelled the appellant to file a second appeal before the ere. The appellant contended that denial of information by the respondent public authority without quoting the appropriate Section, under which exemption from disclosure was sought, indicated the deliberate attempt of the public authority of hiding the information and leading to wrongful denial of information.

Extracts from the decision:

The first query seeks information about the number of major and minor operations done on the Prime Minister / s during the last five years. This information is an indicator of the health and medical history of the present Prime Minister of the country and is classified as sensitive and ‘Secret’ information as per the Government Notification as also defined in the Office Memorandum of the Government of India, Ministry of Home Affairs, dated 6-2-2002 titled Guidelines on review of departmental security instructions wherein the Clause 2.1 of the Security Classifications clearly defined ‘Secret’ as “…. information and material, the unauthorised disclosure of which could be expected to cause serious damage to the national security or national interests or cause serious embarrassment to the Government in its functioning”. Thus this information is exempt u/s.8 (l)(a)’of the RTI Act since disclosure of information about the health and/ or medical problems of the Prime Minister could be misused and/or abused to the detriment of the national interest and security. Hence, such sensitive information, which could jeopardize national security and interest, need not be disclosed.

In so far as the information as sought by the appellant against the points (b), (c) and (d) is concerned, some information already exists in the public domain like the information pertaining to the present Prime Minister’s by-pass heart surgery, number of days spent in hospital, medical expenses incurred for the operation and as to who – paid for the operation.

The remaining information, if any, still unavailable in public domain, despite the wide coverage by the media, deals with information of personal nature and is exempt under the scope of S. 8(1)G) of the RTI Act. In fact, the appellant has not made out a case that the said information is sought to serve any cause of larger public interest.

The respondent in his oral submissions has further sought exemption from disclosure of information under provisions of S. 8(1)(e) of the RTI Act, on account of the said information being of fiduciary nature between the Prime Minister and his team of doctors and medical experts. At this juncture, ‘fiduciary relation’ needs to be analysed in the light of its various connotations. The word ‘fiduciary’ is derived from the Latin termfiducia meaning’trust’.

The fiduciary relationship can also be one of moral or personal responsibility due to the superior knowledge and training of the fiduciary as compared to the one whose affairs the fiduciary is handling. In short, it is a relationship wherein one person places complete confidence in another in regard to a particular transaction or one’s general affairs of business.

S. 16 of Indian Contract Act also clarifies ‘fiduciary relationship’ while defining ‘Undue Influence’.

In fiduciary relationship, a person with the legal duty to act primarily for another’s benefit enjoys a position of trust, good faith and responsibility.

Thus the word ‘Fiduciary’ is often used as an alternative term for ‘trustee’. The relationship between doctor-patient, lawyer-client or banker-customer are the various examples of fiduciary relationship. Thus, the Respondent Public Authority stands in fiduciary relation with the Prime Minister, holding the information in trust/ confidence.

In view of the above-mentioned facts and circumstances of the case, the Commission observes that the information, as sought by the appellant, and if not already available in the public domain, the respondent public authority holding the said information in fiduciary capacity on behalf of their patient (in this case, the Prime Minister), is exempt under provisions of S. 8(1)(e) of the RTI Act. So whether the patient is a Head of a State or a common person, the information nevertheless re-mains fiduciary and is exempt from disclosure to the public at large,since it is held in great confidence and trust.

Thus, it was held by the Commission that the information as sought by the appellant is exempt on the threefold grounds of national security, protection of individual’s right to privacy and also because the information is available with the DGHS in fiduciary capacity.

Therefore, among the information sought, the in-formation about the health and medical problems of the present and former Prime Ministers which already exists in the public domain, due to extensive media coverage or otherwise, like the recent cardiac surgery of the present Prime Minister, may be provided by the CPIO by 15 November, 2009 to the appellant.

[Sh. Chetan Kothari v. 1. Ministry of Health & Family Welfare 2. DGHS, CIC/ AD/C/2009/000620 decided on act. 15, 2009 by CIC Annapurna Dixit]

Part 2 : The RTI Act

Continuing from October & November BCAl, the summary of two reports :

One study by PriceWaterhouseCoopers (PWC), appointed by the Department of Personnel and Training (DOPT), is titled as ‘Understanding the key issues and constraints in implementing the RTI Act.’ Its final report as Executive Summary is published in June 2009.

Second study by National Campaign for People’s Right to Information (NCPRI) and RTI Assessment Analysis Group (RaaG) in collaboration with number of other social bodies including TISS, Mumbai under the title ‘Safeguarding the Right to Information’.

DOPT-PWC report :

Common infrastructure & capacity building:

The study also focussed on the information provid-ers to understand how well-equipped the Government/PA machinery is to respond to the needs of the RTI. This was studied from various aspects – training/knowledge, usage of IT, availability of basic infrastructure (like availability of photocopier at Panchayat level), etc. and whether adequate bud-gets existed to address the limitation.

o Key issues:

Record management:

o More than 38% of PIOs stated ineffective record management system for delay in pro-cessing

o Approximately 43% of the PIOs were not aware of the record management guidelines

Training/Knowledge:

o Approximately 45% of PIOs mentioned that they had not been provided training in RTI

o Approximately 43% of PIOs were not aware of the proactive disclosure of their PAs

o Approximately 39% of the PIOs were not aware of key SIC (State Information Commission) judgments

o Training was limited to the provision of the RTIAct. Key aspects related to public dealing, motivation, technology, service levels, etc were not addressed.

Usage of information technology:

o Lack of software application capturing details mentioned in S. 25(3)

o Lack of software application to improve effi-ciency at the Information Commission

Low motivation of PIOs :

o Most of the PIOs have taken up the role un-willingly, leading to low motivation among them. Often, junior officers have been given the role of the PIOs and First Appellate Authority

o There was a perception among PIOs that lack of adequate budget and infrastructure ham-pers RTI implementation

o Approximately 89% PIOs said that there was no additional allocation of staff for RTI, while their work has increased.

The gaps highlighted above are partly due to lack of clear accountability established through appropriate Government rules and lack of controls to measure the level! effectiveness of implementation. This has been addressed in the report through detailing the roles and responsibilities of various entities and establishing a control mechanism through the use of IT and Third-Party Audits.

o Recommendations:

Re-organisation of record management system to promote information management. A separate study is recommended to improve the current record management guidelines and make them ‘RTI friendly’.

The following interventions in training to be taken:

o Knowledge Resource Centre should be the owner of developing and updating the training content.

o At the State level, the State Nodal Department Agency should design a training implementation plan with support from the State Administrative Training Institute and National Training Agency.

Head of the Public Authority should own the responsibility of training the officials in its Department through State Administrative Training Institute or State-empanelled agencies.

Preparation of RTI ready plan: It is suggested that each Public Authority should do a self evaluation and identify areas of improvements and budget requirements. This would help in meeting the infrastructural needs, thereby meeting the requirements of the Act.

In order to ensure good performance of PIOs in implementing the RTI Act :

Allocation of responsibility of PIOs and AAs ~ to senior level officials in a Public Authority
is required.

o A mandatory column on the PlO’s performance must be added into the forms of Annual Confidential Reports (ACRs)/even if the posting as PlO is only a part of the over-all responsibilities handled by him/her.

o A monetary incentive for the PIOs may be considered at PA level. Often, the PIOs are”‘ liable to pay penalty, for reasons beyond their control. So while a penalty has been man-dated by the Act, the PAs should also get rewarded for good performance. This is important at places where PIOs handle a high volume of RTI applications.

Specific software applications/’information request management’ for implementation at Pub-lic Authority level and at the Information Commission.

Usage of RTI-compliant standard template for quick and rational responses to the applicant.

The ARC report had suggested that as a one time measure, GoI should earmark 1% of the funds of all flagship programmes for a period of five years for updating records, improving infrastructure, creating manuals, etc. (an amount not exceeding 25% of this should be utilised for awareness generation). This was a good suggestion to address the above-mentioned issues. On the same lines, it is suggested that all Central and State Ministries/Departments should earmark 1% of their planned budgets for implementing the recommendations suggested in this report.

Raag & NCPRI Report:

Current status and preliminary findings:

3) Analysis of RTI Rules made by States and High Courts:

Background: The RTI empowers State Governments and Competent Authorities to frame rules to operationalise the Act, as also to educate both Government functionaries and citizens about the Act. These rules are critical, since they detail application fees, payment for information requested, and mode of payment. Moreover, the RTI Act [So 7(5)] states that the application fee shall be ‘reasonable’, so as to facilitate the use of the Act by ordinary citizens.

The People’s RTI Assessment 2008 is analysing the RTI rules made by the Central and State Governments (appropriate government) and the Supreme Court, High Courts, the Parliament and State Legislatures (competent authorities) to determine whether they keep with the Act in letter and in spirit, and how people and transparency friendly they are. The necessary data was collected through desk research and by filing RTI applications asking for the required information.

The analysis of High Court RTI rules is now almost complete, as is that of the variety of RTI-related payment modes required by individual states.

Preliminary findings:

High Court R1’I rules – Of India’s 21 High Courts (excepting in [ammu and Kashmir), RTI rules have been framed for at least 17 (Allahabad, Andhra

Pradesh, Assam, Chhattisgarh, Delhi, Gujarat, Himachal Pradesh, Jharkhand, Karnataka, Kerala, Kolkata, Madras, Mumbai, Orissa, Patna, Punjab, Haryana, and Rajasthan).

A detailed analysis of these rules suggests that many of these rules seem to be in violation of the RTI Act, and some go beyond the scope of the RTI Act, under which they have been framed.

For example, the High Courts of Karnataka, Chhattisgarh, Delhi, Gujarat, Punjab and Haryana have through the rules, sought to add exemptions over and above the exemptions specified in the RTI Act, specifically in S. 8(1) and S. 9. These High Courts have also sought to set up, through the rules, an appeals process which is at variance with that laid down in the RTI Act. The RTI rules of the High Courts of Delhi, Kolkata, and Gujarat also ignore the penalties specified in the RTI Act and specify their own penalties which are at variance with the ones specified in the RTI Act.

Similarly, the High Courts of Patna, Punjab & Haryana, Gujarat, Delhi, and Himachal Pradesh have framed rules that explicitly violate S. 6(3) of the RTI Act. Whereas the RTI Act says that where a PlO receives an application that in whole or part asks for information that is with some other public authority, the PIa must transfer that information to the concerned PIa within 5 days. However, the rules of the said High Courts state that all applications shall be rejected if the information they seek is outside the jurisdiction of the public information officer. These rules go on to declare that applications will also be rejected if the information they seek can be obtained under High Court rules or other general rules (Civil/Criminal) operational in a High Court. This is despite the fact that the RTI Act specifies that where there is an inconsistency with any other law, the RTI Act will prevail (S. 22).

All this is despite the fact that there are several rulings of the Supreme Court of India saying that rules cannot go beyond or modify the statute under which they are framed.

Modes of payment – In filing RTI applications in states other than the one you reside in, a major problem is the transmission of application fee and the additional fee that is to be paid for photocopying, etc. Different states prescribe different modes of payment (and different rates of payment). In some states they only accept treasury chalans, but making treasury chalans in Delhi for other states has proved to be nearly an impossible task and despite spending nearly a week running around, we have not yet been successful. Others demand court fee stamps or non-judicial paper of their state – which of course is not available in Delhi or in any other state!

Demand Drafts are also sometimes problematic, since these can only be accepted if made in the name of a specifically-designated official and the name of the designated officer is often not available, not even on the PA website or the State RTI portal. The RAAG team had to call up each department, and even then it was difficult to get this information. In many cases, we were thus compelled to request our teams in the concerned state to make payment on our behalf. But this is not possible for all citizens to do.

Part C : Other News

Blatant case of corruption exposed:

In a blatant case of corruption, a civic body spent Rs.2.5 lakh on fitting paver blocks on a particular road. But the road continues to be in as pathetic a state as ever.

On paper, the Kalyan-Dombivli Municipal Corporation (KDMC) is said to have got the work done from a contractor, even paid him the money. But the paver blocks are nowhere in sight.

As per papers available with Mumbai Mirror, paver blocks were to be installed on a 300 metre stretch of Gaushala Road in Kalyan (W). The task was sanctioned in March 2008 and work began in November 2008, the work was completed in January 2009. What’s more, a month later KDMC even paid the contractor Rs.2.5 lakh !

The seam was exposed after Narsinh Deshmukh, from Kalyan, obtained details under the RTI Act, and even filed multiple complaints. When nothing came of the complaints, he decided to go on a hunger strike.

“I just sat on the footpath with all the documents. I also initiated a signature campaign. However, hours after I began my hunger strike, it started raining heavily and my resolve was weakened,” he said.

But friends and locals who had seen the papers pertaining to the road, got him umbrellas and stood by him.

Finally, KDMC Commissioner Govind Rathod heard about Deshmukh’s hunger strike, and decided to check things out. “I went to the road and found that paver blocks were not in sight. Later, I found that our engineers had got the paver blocks fixed on another road, which was a private area,” confirmed Rathod. He added that it is nothing but a blatant case of corruption.

Rathod immediately ordered an inquiry, and even issued show-cause notices to a deputy engineer and junior engineer concerned. It was only after the inquiry committee was set up that Deshmukh called off his hunger strike.

Rs.28 lakh on decoration, mostly on flowers!

When Karnataka Government decided to hold cabinet meeting in Gulbarga, they spent Rs.28 lakh on decoration alone – most of it on flowers. Information was obtained by The Times of India by filing RTI query.

The decoration expenditure included putting up many buntings and welcome arches for 34 ministers, their secretaries and staff, who had taken the trouble of travelling 623 km from Bangalore to Gulbarga for the cabinet meeting.

The total expenditure for this one meeting was a shade lower than Rs.1 crore – Rs.92.39 lakh.

Speed-Post is now ‘snail’ post! !

An article sent through Speed-Post is supposed to reach its destination – be it any part of the country within 24 hours. However, Post Office data shows that 27,774 items sent even within Mumbai limits from Post Offices in the western suburbs overshot the deadline.

The 2006 postal directive to all Post Offices states that under the money-back guarantee scheme, the sender has the right to ask for refund in case the article does not reach within the stipulated time. “It is unfortunate that things sent to destination even within Mumbai do not reach on time,” said Dadar based RTI activist Milind Mulay. Articles, worth around Rs.5.90 lakh, were delivered late. Mulay claimed that all the senders should now demand for
a refund.

Political posters in Mumbai :

In 2008, political parties plastered the city with approximately 20 lakh posters and hoardings of candidates – birthdays, festival greetings, victories, welcomes, etc. Of these, just 1,590 were legal as they had taken permission from the BMC. This means 19,98,410posters, etc. were liable to pay a fine to the BMC – between Rs.1,000 and Rs.5,000 each.

RTI application has revealed that not a single political party paid the fine, a loss of Rs.30 lakh approxi-mately, to the BMC exchequer.

This year too, till September 19, of the 52,788 political posters, just 1,349 had BMC permission. Here again not a rupee was paid to the BMC – a loss of Rs.12 lakh. The same was true for 2007. There are no figures available for the pre-assembly and post-poll posters, etc., but the figures would be phenomenal.

In contrast, the BMC collected Rs.51,89,901 as fine from non-political hoardings, primarily of films, product advertisements, etc.

R. B. Bhosale, Deputy Municipal Commissioner (Special) said, “It is very difficult to nail an offender in the case of illegal posters/banners/hoardings. For instance, if it’s a banner celebrating Vilasrao Deshmukh’s birthday, we can’t go and ask him to pay the fine. Even if it has the signature of the party’s office bearer’s name, he washes his hands off, saying he hadn’t authorised it. For non-political hoardings there is always a mention of a store or a product and it is easier to nail the offender.”

Leader of Opposition in RTI ambit :

After ruling that the office of the Supreme Court of India comes under the ambit of the Right to Information (RTI) Act, the Central Information Commission has ruled that the office of the Leader of Opposition in the Lok Sabha was also covered under the RTI Act. It is a public authority as it is created by a notification of the government, but reserved his decision on whether the office was part of the Lok Sabha Secretariat or an independent office. Disregarding the orders of the ClC, the Lok Sabha Secretariat has not set up the information office for the leader of opposition as per the requirement of the RTI Act despite repeated letters from L. K. Advani’s office.

How much of snacks, etc. in 8 months!

An RTI query revealed that Puducherry Chief Minister V. Vaithilingam and his five colleagues had spent more than Rs.36 lakh on tea, snacks and beverages while hosting visitors in just eight months between Sept. 2008 and April this year. Welfare Minister topped the list by spending Rs.l0.5 lakh.

Do the Right Thing:

The limes of India in the Editional on November 3, 2009 covers some significant points on life in a democracy. I reproduce it fully hereunder:

It has been four years since the Right to Information (RTI)Act came into force, ushering in a new era of transparency and accountability, or so it was hoped. While RTI might not have been the unqualified success many expected it to be, it is an important tool that civil society can use to keep the government honest. That’s why we are watching the debate raging over the appointment of the next Chief Information Commissioner (ClC) with some apprehension.

Civil society groups have every right to suggest a name for a post as important as that of the ClC. RTI is an instrument that gives citizens some measure of control over information, and it is understandable that civil society would be wary that excessive intervention from: the bureaucracy would blunt the Act’s powers. But by asking that decorated police officer Kiran Bedi be appointed to the top post and demanding that the merits of a different choice be explained to them, information rights activists have polarised the debate to the point of blackmaiL

Lobbies are a fact of life in a democracy, but the kind of pressure tactics that those lobbying on behalf of Bedi have employed are likely to put the government on the defensive. In entering into a confrontation with the government over the post of ClC, the activists have failed to take into account that it is not only they who have a stake in RTI and its functioning, the State is also a stakeholder, and as with all disagreements where many actors are involved, all views must be taken on board and a consensus involved.

Since its inception, RTI has met with mixed success. The results of a recent study into the conduct of information commissioners across the country indicate that only 27% of RTI applicants receive the information they asked for, while a significant chunk of the population remains unaware of how to file an application for information. Another potential problem is that only two of every 100 RTI Act violations are penalised. Even when Information Commissioners direct officers to release information, a majority- as much a 61% – ignore the order. With so many questions over the implementation of the Act, it is important that the debate over RTI is not restricted to the appointment of the ClC. Information rights activists should work towards strengthening RTI by beginning a discussion on how best to expand its scope.

(Arvind Kejriwal retorted on above as published in The Times of India on November 6, 2009. Though not reproduced here, due to constraint of space, you may view it on timesofindia.indiatimes.com)

BCAJ Admin

Part B — Some recent landmark judgments

New Page 1

1.
Board’s Circulars when in
conflict with SC’s decision : Whether binding ?

Supreme
Court (Constitution Bench) :

CCE v. Bolpur Ratan Melting and Wire Industries, 2008
TIOL 194 SC-CX-CB :

(i) In this case, a Bench of three Judges of the Supreme
Court made a reference to a Larger Bench whereby observations made in the
decision of the Supreme Court in the case of Dhiren Chemical Industries, 2002
(2) SCC 127 were referred to be clarified, since the decision in the case of
Dhiren Chemicals (supra) was given by a Bench of five judges, it was
considered appropriate that a Bench of similar strength hands down an
authoritative pronouncement.

(ii) Background :

In the case of Dhiren Chemicals (supra), the decision
of the Supreme Court in the case of Usha Martin Industries 1997 (7) SCC 477 was
overruled based on an interpretation of a particular phrase whereby benefit of
exemption notification was denied, however, as per Board’s clarification,
exemption was granted. However, during the hearing of case of Dhiren Chemicals,
it was pointed out that based on the Board’s Circular, benefit of exemption
notification was granted to many cases. These were likely to be reopened if
interpretation in the case of Dhiren Chemicals was to be followed. Therefore,
para in the judgment of Dhiren Chemicals (para 11 in SCC) included a para as
follows :

“We need to
make it clear that regardless of the interpretation that we have placed on the
said phrase, if there are Circulars which have been issued by the Central
Board of Excise and Customs which place a different interpretation upon the
said phrase, that interpretation will be binding upon the Revenue.”

This was done to ensure to bind the Department wherever
exemption benefit was granted.

(iii) The counsel for the assessee laid stress on the binding
nature of Circulars qua the revenue authorities and argued that even if a
circular ran counter to the decision of Supreme Court, the Revenue was bound by
the circular and it could not take advantage of the Supreme Court’s decision. It
was also contended that once a Circular was brought to the notice of the Court,
the Revenue’s appeal based on the ground contrary to the Circular should be
turned down.

(iv) The Apex Court in the instant case observed that while
Circulars issued by the Board are undoubtedly binding on the authorities under
the respective statutes, the law declared by the Supreme Court would be binding
in terms of Article 141 of the Constitution and as such, Circular cannot prevail
once Supreme Court order to deny appeal to the Revenue and lay content with the
Circular would mean that there is no scope for adjudication by the High Court or
Supreme Court and this would be against the concept of majesty of law of the
Supreme Court. The appeal by the Revenue was allowed.

2. Penalty u/s.11AC of the Central Excise Act : Whether
mandatory ?

Supreme Court : Larger Bench :

Union of India v. Dharmendra Textile Processors, 2008
(231) 3 ELT (SC)

(i) Background :

The Division Bench of the Supreme Court referred the
controversy involved in several appeals to a Larger Bench to examine whether the
view expressed in Dilip N. Shroff v. Joint Commissioner of Income-tax,
Mumbai, 2007 (219) ELT 15 (SC) was correct. The issue involved related to
whether mens rea was an essential ingredient for penalty leviable
u/s.11AC of the Central Excise Act, 1994, and whether or not there was a scope
for levying penalty below the prescribed minimum. The Revenue contended that
there was no discretion with the authority in the matter of imposition of
penalty and they were duty bound to impose penalty equal to the duty determined
or payable. The assessee’s contention was that it was open for the authority not
to impose any penalty, as the basic scheme of the said S. 11AC was identical to
one u/s.271(1)© of the Income-tax Act and in the given case, it was open to
the Assessing Officer not to impose penalty. The Division Bench held the view
that correct position in law was laid down in Chairman, SEBI v. Shriram
Mutual Fund & Anr., 2006 (5) SCC (361). Hence, the matter was referred to a
Larger Bench.

(ii) The Division Bench also made reference to Rule 96ZQ and
Rule 96ZO of the Central Excise Rules, 1944. It was noted that in some cases,
the assessee challenged vires of Rule 96ZQ(5) and the Gujarat High Court held
that the said Rule incorporated the requirement of mens rea. The Division
Bench stated that even if Larger Bench took a view that penalty under this
clause was mandatory, it was open for an assessee to challenge vires of Rule
96ZQ(5). Further, it was also agreed that similar issue was involved in Rule
96ZO. However, the Additional Solicitor General submitted that in Rules 96ZQ and
96ZO, there was no reference to any mens rea as in S. 11AC where mens
rea was prescribed statutorily. This was evident from the fact that extended
period of limitation was permissible u/s.11A of the Act. In essence, it was
contended that penalty was for statutory offence and it was observed that
proviso to S. 11A provided the time for initiation of action, whereas S. 11AC
meant only a mechanism for computation and the quantity of penalty. Thus the
onus lay on the Revenue to establish that extended period is applicable and on
crossing this hurdle, the assessee is exposed to penalty and the quantum is
already fixed. It was also observed that in the statutes where mens rea
exists, if any penalty limit or a maximum penalty, etc. is prescribed, it is to
be levied in accordance with the said limits, but if no variable is provided, no
discretion exists.

iii) On the other hand, on behalf of appellants, reference of SC’s decision in case of State of MP & Ors. v. Bharat Heavy Electricals, 1997 (7)SCC 1 was made to contend that even if the Court held that imposition of penalty was mandatory, yet there was a scope for exercise of discretion. It was further submitted that various degrees of culpability cannot be on the same footing and S. llAC could be con-strued in a manner by reading into it the discretion and that was considered a proper way of giving effect to statutory intention.

iv) Relevant provision of each of S. llAC, Rule 96ZQ, Rule 96Z0 and also of S. 271(1)(c) of the IT Act were gone into. Further, observations made in Chairman SEBI’s case were also gone into at length and it was contended that a specific Section in the SEBIAct viz. S. 24 dealt with criminal offences under the Act and its punishment. Therefore, penalty leviable under Chapter VIA of the said Act was neither criminal nor quasi-criminal, but related to breach of civil obligation i.e., default or failure of statutory obligation and as such, mens rea by the appellant was not required. A catena of decisions were gone into where it was held that mens rea was not an essential foundation for imposing penalty for breach of civil obligations.

v) The Court further observed that the decision of Bharat Heavy Electricals’ case (supra) was not of assistance to the assessee, as the same proceeded on the basis of concessions and even otherwise, it was not open to the Bench to read into a statute which was specific and clear, something which was not specifically provided. The Bench further observed, “The statute is an edict of the Legislature. The language employed in a statute is the determinative factor of legislative intent”. The Court cited observations of many decisions on similar issues which inter alia included, “Rules of interpretation do not permit the Courts to do so unless the provision as it stands is meaningless or of doubtful meaning. The Courts are not entitled to read words into the Act of Parliament unless clear reason for it is found within the four corners of the Act itself. (Per Lord Loreburn, L’C, in Vickers Sons)”. The Court at the end stated “it is of significance to note that conceptual and contextual difference between S. 271(1)(c) of the IT Act was lost sight of in Dilip Shroff’s case (supra).

vi) The explanations appended in S. 271(1)(c) entirely indicate the element of strict liability on the assessee for concealment or for providing inaccurate particulars while, filing the return. The penalty under that provision is a civil liability. The Section read with the explanations indicates that the said Section has been enacted to provide for a remedy for loss of revenue and willful concealment is not an essential ingredient to attract a civil liability as in the case of prosecution u/ s.276C of the IT Act. Accordingly it was ruled that penalty u/s.llAC of the Act was mandatory.

3. CENVAT Credit whether admissible on outdoor caterer’s service in canteen of a manufacturer:

Larger Bench decision:

CCE Mumbai 5 v. GTC Industries Ltd., 2008 (12) STR (Tri.LB)

i) The issue in the instant case relates to whether or not service of an outdoor caterer provided in the canteen of a manufacturer be considered ‘input service’ within the meaning of the definition of input service under Rule 2(1) of the CENVAT Credit Rules, 2004. The definition contains two parts – the first being the definition of input service and the second part is an inclusive clause listing various services. The Revenue contended that the inclusive clause is limited only to services enumerated in the said clause and since the disputed service i.e., out-door catering service is not one of them, it will not qualify as an input service.

ii) The appellant’s contention on the other hand was that the term ‘includes’ enhances the scope of the definition and therefore, a restrictive approach cannot be adopted. The appellant also contended that the words in the definition ‘activities relating to business’ were followed by the words ‘such as’ which was further followed by a list of services. Thus, the term ‘such as’ was used to provide only an illustrative list of services and not exhaustive. Any activity that related to business could form part of the expression ‘input service’.

(iii) The appellant also discussed an extract of press note dated August 12, 2004 along with the draft rules issued by the Ministry of Finance prior to introduction of CENVAT Credit Rules, 2004 which provided indication of the object of the Legislature. The notified rules expanded the scope of the draft rules by including the activities such as coaching and training, computer networking, credit rating, share registry and security, etc. In view of this, the appellant submitted that the argument of the Department that the scope of the definition was restricted to the services specified in the inclusive part of the definition was incorrect inasmuch as the scope of the term ‘activities relating to business’ was expanded and illustrated further when the rules were notified. Thus, the Legislature intended to allow credit on all such services which were activities relating to business. It was also argued that Service Tax being a value added tax and a consumption tax, it essentially formed part of the value of the goods
services, the credit of which could not be denied.

iv) In support of the above, para 4.1 of CAS-4 was referred to, which defined ‘cost of production’, and under the head ‘direct wages and salaries’ subsidised food is considered as part of direct wages and salaries being fringe benefits. It was also noted by the Tribunal that it was mandatory on part of the factories to provide canteen facility and failure of which attracts prosecution and penalty u/s.92 of the Factories Act, 1948. Service Tax on outdoor catering service is paid by the manufacturer for running the canteen, irrespective of the fact whether subsidised food is provided or not. Since this cost has bearing on the cost of production, it was held that catering services have to be considered as an input service relating to the business and CENVAT credit in respect thereof would be admissible. The view of the Tribunal expressed in the case of Victor Gaskets India Ltd. & Others, 2008 (10) STR 369 was accordingly approved.

BCAJ Admin

Right To Information

r2i

Part A : Decisions of CIC and SIC

Concept of privacy
vis-à-vis the public servant :

As reported in BCAJ of October 2008, 4 more Information
Commissioners have been appointed at the Central Information Commission, one of
them being the RTI Activist from Mumbai, Shailesh Gandhi. In the very first
month of performing as CIC, he has discharged his duties well. He has disposed
of 142 appeals, has issued show-cause notice for imposing penalty in 32 matters
and has levied penalty of Rs. 7,500 in one case. Hereunder, is a brief report on
one of the 142 appeals decided by Shailesh Gandhi :

Mrs. Shruti Singh Chauhan had sought information from
Additional Secretary (Home), Government of NCT of Delhi about prosecution of
certain officers during the period 1-1-2000 to 30-4-2007.

PIO replied that information relates to personal information,
the disclosure of which has no relationship to any public activity or interest
and it would cause unwarranted invasion of privacy of the individuals. First AA
dismissed the appeal “on grounds of non-merit of the case, as the information
sought for is voluminous, sensitive and does not serve any public interest.”

CIC held : Firstly, if charges have been investigated and
found to have been substantiated, leading to asking for a sanction for
prosecution, this information cannot be considered as relating to the privacy of
an individual. Acts of public servants, where there is a reasonable ground to
believe wrongdoing, cannot be a private matter of a public servant. It has been
well accepted that the charges against public servants must also be disclosed to
the people. It has also been held that Members of Parliament and other
representative bodies must themselves declare charges against themselves on
oath, even when they stand for an election. Given this background, a claim that
disclosing names of those against whom sanction for prosecution has been sought
is an invasion of privacy and has no public interest, is completely erroneous.
In any case, as soon as prosecution is launched, the names and identities of
those being prosecuted would be in the public domain.

Based on the above view, CIC allowed the appeal and ruled :
“The Commission disapproves of the practice of PIOs using the exemptions of S.
8(1) without providing reasoning. The Commission is likely to view such practice
as a denial of information without reasonable cause and take consequent actions
as per the law. This time however, we feel the ends of justice will be met by
directing the Public Authority to be more diligent when using the exemption
clause. The PIO will give the information to the appellant by 10th November
under intimation to the Commission.

[In the matter of Mrs. Shruti Singh Chauhan : Decision No.
CIC/WB/A/2007/01096/SG/0080, decided on 16-10-2008]

Civil work relating to open pit in Mulund (W), Mumbai :

An interesting decision is given by Chief SIC, Maharashtra,
Dr. S. V. Joshi on 10-11-2008.

Shri S. K. Nangia filed a complaint application u/s.18 of the
RTI Act on 9-9-2008. His original application sought information from MMRDA
about details of civil work relating to an open pit in Mulund (W) which caused
an accident of a car falling in a pit on account of the same being left open and
unfenced. In reply, the PIO advised the applicant to seek this information from
police station. In response to the first appeal on PIO’s reply, the AA directed
the PIO to provide the information sought. However, it was still not furnished.
Shri Nangia then filed a complaint with the Commission. SCIC held :

Firstly, it was totally wrong on the part of the PIO to
direct applicant to seek information from the concerned police station. In this
case, information was really with MMRDA, but even if it was with police station,
it was the responsibility of the PIO to send that application to the police
station asking them to provide information directly to the applicant. This is
considered to be serious lapse on the part of PIO.

The applicant’s application is to get information about who
were in charge of work. Police has already registered the offence and judicial
verdict will come in due course. It is pertinent to note that applicant is not
asking who is responsible for this mishap. He is merely asking the names of
officers who were entrusted with overseeing and supervision. This information if
already not given to the applicant be given in 5 days time on the receipt of
this order.

Lastly, applicant has stated that he has spent time, effort
and money for filing an appeal with AA, filing fresh application with police and
making payment of charges to the Police Department for information which all
could have been avoided had the PIO provided correct and complete information
for which he demanded a token compensation of Rs.100. The Commission appreciates
the concern of the applicant that he wants to stress the point of accountability
and is really not interested in financial reimbursement. He ordered that this
amount should be given to the applicant by MMRDA by recovering it from the PIO.

In short, the PIO has to pay penalty for the delay of 38 days
i.e., Rs.250 * 38 of Rs.9,500. This be recovered from his salary in two
instalments and deposited as per the Government’s procedure. The copy of
challans having paid this amount be sent to the Commission for record.

[Shri S. K. Nangia, Mumbai v. PIO, MMRDA : Complaint
No. 2008/622/02, decided on 10-11-2008]

Part B : The RTI Act

Challenges of Change

When we are no longer able to change a situation,

we are challenged to change ourselves.

— Viktor Frankl

This year is the diamond jubilee year of glorious services of
BCAS. Theme of the Diamond Jubilee Conference held on 8th November was :
Challenges of Change — Always ahead.

BCAS has always been ahead in its services to the profession, to its members and other CAs, CA students and society at large : the view endorsed by all speakers at this above conference.

However, at times I think that to be ahead holistically and in real terms, BCAS cannot be a bystander to just watch the changes that have been happening on the national scene and challenges that are being faced by concerned citizens. BCAS and its members can’t limit solving only challenges of change to the professional areas. On that yardstick, I believe that to be ahead, it has to gear itself much more proactively to the challenges of change that the nation faces.

The Right to Information Act has brought in changes which have challenged the sleeping and non-inclusive minds et built up in the governance of this country. Frankly, citizens have also remained passive and maintained a lackadaisical attitude and in keeping with the Indian psyche, have remained tolerant to all injustice, corruption, non-accountability, etc.

There are many stakeholders in the implementation of the RTIAct. They include: (1) Public Authorities and PIOs & AAs (information providers) (2) Information Commissions, States and Central (3) Central and State Governments (4) Indian Citizens (both urban & rural) (Information seekers) (5) Media (6) Activists’ groups, NGOs, CBOs, etc. (7) Competent authorities such as the Courts, the House of the people, etc.

The RTI Act has heralded citizens’ rights to be recognised, has operationalised the fundamental right of the citizen guaranteed under Article 19 of the Constitution of India and has empowered citizens to be part of democratic operation of the country. The Act has thrown a challenge to all stakeholders to get tuned to changes in the governance brought in by this revolutionary and extremely powerful Act, the likes of which India has never witnessed before. Prime Minister, Dr. Manmohan Singh, while inaugurating 3rd Annual Convention of the Central Information Commission on 3rd November talked on various challenges of change brought about by the RTI Act. He said:

There will be a major challenge for public authorities in the arena of information house-keeping. There is a challenge for the information seekers in not misusing the right available in the Act by making vexatious demands and thus deprive genuine information seekers of their legitimate claims on limited public resources and so on.

Mahatma Gandhi had once said: Political freedom has no meaning unless it leads to win economic, social and moral freedom. The Right to Information Act and National Rural Employment Guarantee Act (NREGA) are two acts which are tools to bring social and economic freedom respectively, which would then lead to moral freedom.

Weprofessionals, educated and intellectuals are the major stakeholders for the success of these two Acts. As Barack Obama, the President-elect of the USA said “So tonight, let us ask ourselves – if our children should live to see the next century, what change will they see? What progress will we have made? This is our chance to answer that call. This is our moment. This is our time …. “

We professionals need to raise the same questions to ourselves: How are we going to shoulder challenges of sweeping changes happening on the national scene on account of implementation of these two Acts: RTIand NREGA. Are we going to just witness sea change in the lives of millions of citizens with the operation of those two instruments legislated by the Government of India or be a part of the makers of this change, partners in advancing its benefits to really go ahead? I hope that in coming years BCASFoundation and BCASmembers becomepart of this movement of change and go ahead in bringing new standards of transparency and accountability, bringing positive change that shall give hope for better INDIA, happier inclusive society,so essential for experiencing the value of democracy.

Part C : Other News

• Landlease of Gujarat farmers:

The farmers in Gujarat are moving RTIapplications to the State Government seeking documents related to land ownership. Armed with archaic documents prepared during the British Raj and written in rich Gujarati prevalent during the rule of the Gaikwads, farmers are approaching the State Government with a hope. The farmers are optimistic that the land leased to the then Bombay Province by their fore-fathers in 1912,for 99 years would be returned to them. The State Government, however, is unper-turbed and says the British did compensate the farmers for the land, and that there is no question of the situation taking a Singur-like turn.

Not prepared to wait until the lease period gets over in 2011, the farmers became active with RTI applications ever since they learnt that the State has allotted 1,100acres of land to the Tatas. However, they clarify that they are neither against Nano, nor are they creating a noise because of its arrival. “Documents in our possession are older than Tata Group’s presence in Gujarat. We are not trying to ride the wave and earn an extra buck. We are just seeking our land back, once the lease period is over.”

• RTI Activist Chetan Kothari :

Mr. Chetan Kothari writes in Sunday MID DAYof October 12, 2008: “I was duped to the tune of Rs. 11 lakh that I invested in plantation and holiday packages of Suman Motels Limited in the late 90s. I used RTI to get information about the company,so that I could pursue my case in the Court.” The two RTI applications revealed that despite 200warrants and summons issued in the name of the MD of the company, none of them were executed. This made his case strong as he was representing 600 people who were duped similarly.

Mr. Kothari believes that information is a tool which when used in a positive way can bring about a revolution and zeroing in on subjects requires a lot of reading and general awareness.

• Documentaries on RTI :

The awareness about the RTI Act, 2005 is slowly catching up in the country. Helping this cause is a small tribe of documentary makers, who through the visual medium are trying to make people aware of RTI’s power.

Documentary-filmmaker Priyanka Tiwari, who works for a Delhi-based NGO Kabir that works on RTI,has made 15 short films in the last two years. She says apart from creating awareness, they also portray success stories. (Some of these CDs are available at BCAS Library.)

Satish Shinde from Films Division claims to have made the first feature film on RTI. “The challenge was how to make the act visually appealing,” recalls Shinde. The film has also been dubbed in 12 languages. Like NGO,Kabir, Shinde’s film is also widely used by NGOs. He feels that, generally, the RTI awareness has risen by 30 to 40%.

• BMC becoming Pro-RTI:

Getting information under the RTIAct will soon be just a click away. In a month’s time, citizens will be able to file their RTI application on the website of Brihanmumbai Municipal Corporation.

According to BMC officials, the process will be centralised and the applications will be forwarded to the civic body’s concerned departments. The payments can be made in the same way as property taxes are paid. The website will allow people to post their address, so that they can be provided with the necessary documents.

• Refund for delayed courier charges:

What if an important document couriered to you through the postal services reached you after a day’s delay? You would have either cursed the system or may not even have noticed it as most courier parcels hardly reach their destinations on time. But Dadar resident Milind Mulay decided not to take it lying down. Mulay used the Right to Information (RTI) Act to get a refund when two articles he had sent through speed post reached their destination after a day’s delay. He had sent two couriers to Thane and Kalyan from the Shivaji Park post office at Dadar.

He first did some leg-work and found out from the website of the Indian Postal Service about the rules and regulations in case of delay. The web site also has an option by which one can track the path of the courier. But the web site had not updated the path of his courier. So he went to the post office’s west division headquarters and asked them to give a copy of the delivery slips. The receipts showed that the parcels were not delivered on time. Mulay then wrote a letter to the post office asking for compensation for the delay. The officials at the post office did not bother to answer his letter, he then filed an RTI application.

The senior superintendent of the Mumbai city west division responded within 10 days and refunded the entire amount Rs.50 for the delay. He also said this was in accordance with the money-back guarantee scheme. The delay occurred due to a service fault and a detailed report has been sought from the respective section.

Mulay said he was prompted to file an RTI query as numerous people in the country faced this problem. More than the financial part, he wanted to show that the RTI Act can be put to everyday use and cut the red tape in the Government.

BCAJ Admin

Limited Liability Partnerships

We continue our examination of various laws and the issues arising therein in respect to an LLP.

1. Conversion of firm or company into LLP :

1.1 The LLP Act provides for conversion of a partnership firm and company into an LLP. This conversion is similar to the conversion of a firm into a company under Part IX of the Companies Act. Three issues which arise in respect of this conversion of a firm are the stamp duty, the income-tax liability thereon and the impact on tenancies of the firm/company. All of these contentious issues are very important for healthy growth of LLPs as a form of business in India. The Government must take steps to come out with clear-cut laws in this respect to avoid wasteful litigation.

1.2 Stamp duty :

(a) Para 6(b) of the Third Schedule to the LLP Act on Effect of Registration states that all tangible (movable and immovable) property as well as intangible property vested in the company and the whole of the undertaking of the firm shall be transferred to and shall vest in the LLP without further assurance act or deed.

(b) As explained earlier, stamp duty is on an instrument. If there is no ‘instrument’ of transfer, then no stamp duty can be levied.

(c) If there is a statutory vesting of the assets of the erstwhile firm/company in the newly incorporated LLP, there is no transfer under the Transfer of Property Act. Therefore, no conveyance is required and hence, there should not be any incidence of Stamp Duty.

(d) This view is also supported by the old decision in the case of Rama Sundari Ray v. Syamendra Lal Ray, ILR (1947) 2 Cal. 1 rendered in the context of a Part IX conversion. Applying the same principle, it is submitted that a conversion under Part X of the LLP Act, 2008 would not attract any stamp duty as it amounts to a statutory vesting of the assets of the firm/company in the LLP.

1.3 Income-tax :

(a) There is no transfer between the firm/private and the LLP and the word ‘transfer’ used is not in the sense of a ‘transfer’ as between a transferor and transferee, but is only meant to emphasise the vesting of the assets and liabilities in the LLP. Thus, there is no transfer as understood u/s.2(47) and u/s.45(1) of the Income-tax Act. Since there is no transfer u/s.45(1), the computation of capital gains should not arise.

(c) There is no transfer at the time of conversion of a firm/private company into an LLP as it is a case of a statutory vesting of assets and liabilities under the LLP Act like in case of Part IX of the Companies Act. In fact, it is possible to take a view that at no point of time do both the LLP and the firm/company exist. The firm/company is dissolved and the LLP is created simultaneously and it is the transfer which creates the LLP. Thus, since the two entities are not present at the same time, there is no transfer.

(d) This view has been upheld by the Bombay High Court in its decision of Texspin Engg. & Mfg. Works, 180 CTR 497 (Bom.). The Court held that a partnership firm can convert itself into a company under Part IX of the Companies Act, 1956 and further there would be no incidence of capital gains u/s.45(4) of the Income-tax Act. The ratio decidendi laid down by the Bombay High Court can also be applied in the case of conversion of a firm/company into an LLP. Hence, it is submitted that even though there is no express provision to this effect, the conversion should not attract capital gains tax. Incidentally, the Memorandum Explaining the provisions of the Finance (No. 2) Bill, 2009 provided as under :

“As an LLP and a general partnership is being treated as equivalent (except for recovery purposes) in the Act, the conversion from a general partnership firm to an LLP will have no tax implications if the rights and obligations of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions, the provisions of S. 45 shall apply.”

It may be noted that neither the exemption provision nor restrictive conditions mentioned above are found in the Bill or in the Finance Act 2009.

1.4 Tenancies of the firm :

One of the more contentious issues under the Rent Act is in regard to the position of a partnership firm which is a tenant when there is a change of partners. Can the landlord contend that there is an illegal sub-letting or assignment and hence, he can terminate the tenancy. There are several decisions on this subject and there is no clear-cut touchstone to determine under which situations can it be said that there is an illegal sub-letting and when there is not.

These decisions deal with the case where the partners of the firm change hands. In the case of conversion of a firm into an LLP, the entity remains the same. Only its status undergoes a change. It is not a case where there is a transfer of assets. Hence, in my view, the provisions of illegal sub-letting/ assignment of the Rent Act are not attracted and the tenant would not lose the tenancy. However, the issue is not free from doubt.

1.5 Other issues in relation to conversion :

1.5.1 Some other unanswered issues remain in relation to conversion of a firm/company into an LLP. One is relating to carry forward and set-off of unabsorbed losses. Would S. 79 of the Income-tax Act which denies such a set-off in the case of a change in shareholding apply ?

1.5.2 Another issue is in relation to the continuity of service clause of the employees in the case of a conversion. It is submitted that there would be a continuity of service.

1.5.3 Certain institutions such as the MIDC levy a very huge transfer charge for change of user. However, there is a concession in the case of involuntary transfers done by way of a Court order, e.g., mergers, demergers, etc. Such transfers attract a minimum processing fee of the MIDC. What would be the position in the case of conversion into an LLP is an interesting aspect which needs to be considered.

1.5.4 One issue which may gather steam in the coming years is that of reconversion of an LLP into a company. Can an LLP convert itself into a private/ public company is an aspect on which there is no clarity. The LLP Act is silent on this aspect. Part IX of the Companies Act also does not provide any clear-cut answer. The Companies Bill 2008 has done away with Part IX altogether. Hence, what would happen to a business which selects an LLP structure and after becoming profitable it desires to make an IPO is still a question. Obviously, an LLP cannot make an IPO. Would it ever be possible for the business to access the capital markets? This is one aspect which needs immediate attention or else LLPs would lose some of their sheen.

2. Merger of companies and LLPs:

2.1 One more issue which is worth consideration is whether an LLP can merge into a company or vice-versa. The LLP Act only deals with the amalgamation and restructuring of two or more LLPs.

2.2 However, the Companies Act is much broader in its coverage. It permits the merger of a transferor who is any body corporate with a transferee company which is an Indian company. The Companies Act defines a body corporate to include a company. The LLP Act provides that an LLP is a body corporate. Thus, it stands to reason that an LLP being a body corporate, it can be merged into a company. Since the ultimate authority for both companies and LLPs is the MCA, it would be desirable if they frame rules in this respect.

2.3 As stated above, the Companies Act provides that ‘transferor company’ includes any body corporate, whether a company within the meaning of this Act or not, but a ‘transferee company’ only means a company within the meaning of this Act. Hence, the Transferee Company cannot be an LLP and it must always be a company within the meaning of the Companies Act, 1956. Thus, the merger of a company into an LLP is not possible.

3. VCF regulations:

3.1 One of the main uses of LLPs globally is as Venture Capital Funds. In India, VCFs are regulated by the SEBIunder the SEBI (Venture Capital Funds) Regulations, 1996.

3.2 R.2 of these Regulations defines a Venture Capital Fund to mean a fund established in the form of a trust or a company including a body corporate.

Since an LLP is a body corporate, it can also be one of the forms for a VCF under the SEBI Regulations. However, R.15 provides that the VCF would raise money only through the private placement of its units. S. 32 and S. 33 of the LLP Act state only a partner of an LLP will make contributions to the LLP. There is no provision in the LLP Act for the issue of units. Hence, it is a moot point as to whether an LLP can issue units.

3.3 Further, the Regulations provide that the investee company must be a domestic company only. Hence, an LLP cannot attract funds from a SEBI Registered VCF.

4. Foreign tax credits:

4.1 Assuming that a foreign resident can invest in an LLP under the FEMA Regulations, another question which would arise is what would be the tax treatment of the income received by the foreign partner? An LLP is taxed as a firm and hence, the LLP would pay tax @ 30.9% in India. The draft Direct Taxes Code also continues this system of taxation. When the LLP distributes the after-tax income to its foreign partner, would he be able to claim a credit for the tax paid by the LLP ? Unfortunately, the answer is No. The tax treaty benefits will be lost in such a case and the foreign partner may once again pay tax on the income received by him. This is a great disadvantage for foreigners to invest in LLPs.

4.2 To address the above anomaly, the pass-through system wherein the LLP is ignored as a taxable entity and the partner is directly taxed in proportion to his share was desirable. In fact, press reports indicate that the MCA is keen on such an amendment to the Income-tax Act to bring taxation of LLPs in India at par with several western nations.
(To be continued)

BCAJ Admin

Voices

New Page 2

25. Voices

v
“Reservations in student admissions is much more defensible. We can aspire to
have world standards even with such reservations, but not if they are extended
to the faculty.”

— Montek Singh Ahluwalia, Deputy Chairman of Planning
Commission.

v
“This one gold medal must make us introspect as to why India, a country that has
successfully taken its place in the world as a democracy, is still handicapped
at this level.”

— Sonia Gandhi,
Congress President.

(Source : India Today, dated 15-9-2008)

levitra

BCAJ Admin

New tax haven blacklist likely

New Page 2

24. New tax haven blacklist likely

Seventeen countries led by France and Germany decided to draw
up a new blacklist of tax havens, which could include Switzerland, in a first
step toward rewriting the rules of global finance.

The world’s 40-odd tax havens, such as the Cayman Islands and
Jersey, are known hideaways for undeclared revenue and host many of the
non-regulated hedge funds that came under fire following the recent financial
meltdown.

French budget minister Eric Woerth said the 17 governments at
the Paris meeting agreed to task the OECD with drafting a new expanded blacklist
of countries that fail to cooperate on tax evasion and transparency.

“Banking secrecy has its limits,” Woerth added. “Switzerland
has made progress… but we must take matters farther.”

(Source : The Economic Times, dated 23-10-2008)

levitra

BCAJ Admin

PART d: GOOD GOVERNANCE

Shiv Nadar:

Shiv Nadar, chairman of HCL, states that India Inc is not doing enough at the philanthropy front.

Talking about “Shiv Nadar Foundation”, he says:

“I firmly believe that philanthropy is most effective and outcome-oriented when you ensure that your pledge actually gets spent. Disclosures further help build an environment of trust and transparency. Good governance is therefore not an added bonus; it is at the heart of what makes philanthropy successful. In its journey of two decades, we have operated on our core values of transparency and robust governance systems”.

levitra

BCAJ Admin

PART B: RTI Act, 2005

DoPT of Ministry of Personnel, Public Grievances & Pensions have recently issued one Office Memo as under:

Sub: Disclosure of personal information under the RTI Act:

The
Central Information Commission in one of its decisions (Sh. Manoj Arya
vs. CPIO, Cabinet Secretariat: CIC/SIRS/P/2013/000058 of 25.06.13) has
held that information about the complaints made against an officer of
the Government and any possible action the authorities might have taken
on those complaints, qualifies as personal information within the
meaning of provision of section 8 (1) (j) of the RTI Act, 2005.

The
Central Information Commission while deciding the said case has cited
the decision of Supreme Court of India in the matter of Girish R.
Deshpandevs. CIC and others (SLP (C) no. 27734/2012) in whichit was held
as under:-

“The performance of an employee/Officer in
anorganisation is primarily a matter between theemployee and the
employer and normally those aspects are governed by the service rules
which fall under the expression personal information, the disclosure of
which has no relationship to any public activity or public interest. On
the other hand, the disclosure of which could cause unwarranted invasion
of the privacy of that individual.” The Supreme Court further held that
such information could be disclosed only if it would serve a larger
public interest.

levitra

BCAJ Admin

From published accounts

Section A:

Revision to Financial Statements

Compiler’s Note

The Companies Act, 2013 vide sections 130/131 permits revision of financial statements under the circumstances mentioned in the said sections. The Companies Act, 1956 does not contain similar provisions. However, some companies have resorted to revision of financial statements adopted by the Board of Directors, but before the same were adopted by the shareholders in the Annual General Meeting. Given below is one such instance where the financial statements have been revised for reversing the decision of the Board of Directors for recommendation of dividend. (Readers interested in similar instances can also refer BCAJ February 2013)

Nagarjuna Fertilizers and Chemicals Ltd 31st March 2013

From Notes to Accounts

Revision of Financial Statements

The Board of Directors at their meeting held on 3rd May, 2013 had considered and approved the Audited Financial Statements of the Company comprising of the Balance sheet as on 31st March, 2013, the statement of Profit and Loss and Cash Flow Statement for the year then ended together with significant accounting policies and other explanatory information.

The Directors had recommended a Dividend at a rate of 100% 1.e. Rs. 1/- per share on the fully paid up capital of the Company to be paid in accordance with the Articles of Association of the Company out of the profits of the Company, absorbing a sum of Rs. 5,980.65 lakh, apart from dividend tax of Rs. 1,016.41 lakh.

The recommendation of the Board for payment of Divided was based on Profits available and the expectation of realisation of government subsidy, and market outstanding which ensure the ability of the Company to meet its commitment in respect of Dividend payment and repayment obligations to the Lenders.

Consequent to the approval of the Board of Directors on a review of the financial position of the Company, the Board noted that in view of the non-receipt of subsidy from the Government of India which has accumulated to substantial amounts and the unlikelihood of receipt in the near term having regard to the increasing uncertainty in the economic situation, market realisations not being to the expectations, higher commitments and outlays on account of appreciated value of dollar, there could be a stress on the cash flows as the same would be required for the operations. The Company accordingly may not be able to meet its commitments of payment of dividend which is required to be paid out immediately on approval by the shareholders at the ensuing Annual General Meeting.

In view of the changed circumstances as stated above, the Board has reconsidered the decision to recommend the dividend payment as stated above and resolved to withdraw the recommendation made earlier and accordingly, the Board has resolved to cause revision of the financial statements of the year 2012-2013.

In view of the above decision, financial statements which were considered and approved at the meeting held on 3rd May, 2013 have been revised for reversal of the provisions made for proposed dividend and dividend tax aggregating to Rs. 6,997.06 lakh and consequent reversal of transfer to General Reserve Rs. 850.00 lakh.

From Auditors’ Report

As stated in Note 3, the financial statements for the year ended on March 31, 2013 approved by the Board of Directors and reported by us on May 3, 2013 have been revised to give effect of reversal of provision made for proposed dividend and dividend tax of Rs. 5,980.65 lakh and Rs. 1,016.41 lakhs respectively consequent to the Board’s decision

Your Directors consequent to a review of the financial position of the company, in view of the company facing severe financial stress owing to the non-receipt of subsidy from the Government on India which has accumulated to substantial amounts, market realisations not being to the expectations, higher commitments and outlays on account of appreciated value of dollar, the unlikelihood of the cash flow improving in view of the increasing uncertainty in the economic situation, have re-considered the Audited Annual accounts and Audited Financial Results of the company for the year ended 31st March, 2013.

The Board of Directors after careful re-consideration of the Audited Accounts and having explored all available options have approved the Audited Accounts and decided to withdraw the recommendation for payment of dividend to conserve the funds for the future in view of the present outlook of the Industry.

levitra

BCAJ Admin

LECTURE MEETING

LECTURE MEETING:
Lecture Meeting on Important Provisions under the Companies Act, 2013, 24th October 2013

Investigation Office (SFIO), constitution of National Financial Reporting Authority (NFRA), Class action suits, Corporate Social Responsibility (CSR) etc.

After the success of the previous lecture meeting on the same topic in South Mumbai, the Society organised this second lecture in the suburbs to help members understand the various issues arising from these new provisions. The meeting was addressed by Mr. Himanshu Kishnadwala, Chartered Accountant.

More than 100 participants benefited from the analysis made by the learned speaker.

The Companies Act 2013 has introduced key provisions regarding several topics of importance including duties and liabilities of Directors, Auditor rotation, establishment of Serious Fraud The presentation and video of the Speaker is made available at www.bcasonline.org & www. bcasonline.tv respectively, for the benefit of all members and subscribers.

levitra

BCAJ Admin

ICAI and its members

1. Some Ethical Issues

The Ethical Standards Board of ICAI has given answers to some Ethical Issues as under on Pages 694 and 696.

Issue No.1

Whether the information contained in the website of Chartered Accountants and/or Chartered Accountants’ firm can be circulated on their own or through e-mail or by any other mode or technique?

Response

Sub-paras (3) & (4) of para (m) in the Code of Ethics under commentary to Clause (6) of Part 1 of the first schedule to the C.A. Act prescribes that Chartered Accountants and/or Chartered Accountants’ firms should ensure that none of the information contained in the website be circulated on their own or through E-mail or by any other mode or technique except on a specified “pull” request. ‘Chartered Accountants’ firms would ensure that their websites are run on a “pull” model and not a “push model” of the technology to ensure that any person who wishes to locate the Chartered Accountants or Chartered Accountants’ firms would only have access to the information and the information should be provided only on the basis of specific “pull” request.

(ii) Issue No.2

Can a member put up his photograph on the website?

Response

Revised sub-para (8) of para (m) in the Code of Ethics under commentary to clause (6) of Part 1 of the First Schedule to the C.A. Act provides that display of passport size photograph is permitted.

(iii) Issue No.3

Whether a Chartered Accountant in practice can use expressions like Income Tax Consultant. Cost Accountant, Company Secretary, Cost Consultant or a Management Consultant?

Response

Council direction under Clause (7) of Part 1 of the First schedule to the C.A. Act prescribes that it is improper for a Chartered Accountant to state on his professional documents that he is a Income tax consultant, Cost Accountant , Company Secretary, Cost Consultant, whereas it is permitted to mention his degrees.

(iv) Issue No.4

Can a Chartered Accountant in practice give the date of setting up of the practice or date of establishment on the letterheads and other professional documents, etc.?

Response

Council direction under Clause (7) of Part 1 of the First Schedule to the C.A. Act prescribes that the date of setting up of the firm should not be mentioned on the letterheads and professional documents, etc. However, in the website, the year of establishment can be given on a specific “pull” request.

(v) Issue No.5

Whether a Chartered Accountant in practice can use the designation ‘Corporate Lawyer’?

Response

A Chartered Accountant in practice is not permitted to use the designation ‘Corporate Lawyer’.

2. ICAI Council Affairs

Attention is invited to the following Times of India Newspaper Report of 02-11-2013 from Chennai. Let us hope that the council issues detailed clarification on the issue.

“Holding that all is not well with the functioning of the Institute of Chartered Accountants of India (ICAI)the Madras High Court has decided to hear the CBI and the Chief Vigilance Commission (CVC) before passing Orders on PIL seeking CBI/CVC probe into the irregularities in the establishment of Rs. 97.5 crore centre of excellence at Nagpur.

“The ICAI is supposed to be the apex board to regulate the affairs of the body and monitor the functioning of its members. It also exercises disciplinary jurisdiction over its members. In case the apex body itself violates financial discipline, it is really a serious matter,” observed justice K. K. Sasidharan on Wednesday.

“Records indicate that all is not well with the statutory body. The council members have expressed their strong views and the President and Secretary on account of entering into certain financial dealing without taking the council into confidence. The transaction is not confined to the centre of excellence at Nagpur. There are other land dealings also involving substantial amount,” the judge said.

In his PIL, V. Venkata Siva Kumar wanted the court to order a probe by the CBI or the CVC into the project, and ‘unravel irregularities, conspiracy and criminal breach of trust’ committed by the president and other office bearers of the ICAI.

Minutes of the meeting revealed that the ICAI secretary had told the members that CVC regulations were not applicable to ICAI. The Nagpur land deal was cancelled due to protests by members.”

3. EAC Opinion

Accounting treatment of share application money pending for allotment invested by the holding company in subsidiaries:

Facts:
Consequent to State Electricity Reforms Transfer Scheme 2000. the erstwhile State Electricity Board (SEB) was reorganised into three Corporations namely, State Power Corporation Ltd. (SPCL), State Vidyut Utpadan Nigam Ltd. And State Jal Vidyut Ltd. we.f. 14-01-2000. The City Electricity Supply Area was separated as a subsidiary company of SPCL and christened as the City Electricity Supply Company Limited (CESCO) vide State Transfer of K Zone Electricity Distribution Undertaking Scheme, 2000.

SPCL (hereinafter referred to as ‘the Company’) is dealing with bulk purchase and sale of electrical power in the State and had a turnover of Rs. 12,197.66 crore in the financial year (F.Y)) 2007- 08. It purchases electricity from various power generation utilities. Further, it sells the electrical power to its wholly owned subsidiary companies holding distribution license under the Electricity Act, 2003. The company is a Government company and is holding 100% shares in its subsidiaries, which are also Government companies as ‘Investments’.

The funds received from the State Government are invested by the company in the subsidiary distribution companies as ‘share application money’. The allotment process from share application money to share capital rests with the respective subsidiary distribution companies. Pending allotment of share application money, these subsidiary distribution companies have utilised such amounts in the creation of capital assets.

The subsidiary distribution companies have negative net worth and, accordingly, the auditors advised the company to make suitable provisions in the annual accounts for diminution in the value of investments in accordance with Accountant Standard (AS) 13, “Accounting for Investments” considering that such investments in subsidiary distribution companies was made as long term investment.

Query:
Now, the company has sought the opinion of the Expert Advisory Committee on the issues: (i) Whether share application money is to be considered for making provision for diminution in the value of investments even though the shares for the same are yet to be allotted. (ii) Whether share application money, in respect of which shares are allotted subsequent to the end of the financial year but before the adoption of accounts of the company, should be considered as share capital for the purpose of making the provision for diminution in the value of investments. (iii) For making provision for diminution in the value of investments, whether the company can consider the fact that the revaluation of assets under progress and that the fair market value of assets would be higher than the historical value/cost of assets?

EAC Opinion:

The Committee notes that the erstwhile SEB was restructured into three corporations, one of which is the company. Further, its electricity distribution business has been divested to its wholly owned subsidiary companies. The company as well as its subsidiary companies are Government companies. The company has invested the funds received from the State Government as share application money in subsidiary companies, some of which is pending for allotment. In this regard the issue raised is whether the provision for diminution in the value of investments should made against the share application money, even though the shares for the same are yet to be allotted as on the balance sheet date. The Committee notes the definition of the term ‘Investments’ as defined in AS13, and ‘Advance’ as defined in the ‘Guidance Note on Terms Used in Financial Statements’, issued by ICAI.

After considering the above, the Committee is of the view that although the share application money pending for allotment may not give any benefits to the company (neither dividend, interest, rental nor capital appreciation) till shares are allotted against it to the company. However, since the money has been given to the subsidiary companies, this application money for shares may be considered to be held ‘for other benefits’. Further, the Committee notes that the money so provided has been utilised by the companies for acquisition of capital assets and all the companies being State Government companies operate as per the instructions of the State Government. Further, it indicates existence of a ‘contract of contribution’ to share capital against which shares have been allotted after the balance sheet date but before the approval of accounts. The Committee is therefore, of the view that all this indicates that irrespective of the fact that whether shares are allotted to the company or not, the money given as share application money would not be refundable to the company. Therefore, considering ‘substance over form’, the Committee is of the view that these are of the nature of long term investments. Accordingly, provision for diminution in the value of investments other than temporary should be considered against the same. Further, the Committee is the view that it should be disclosed in the financial statements with an appropriate nomenclature and notes to accounts so as to give the correct picture of the situation, viz., shares are yet to be allotted against these investments. The Committee is also of the view tht even if shares are allotted against such application money after the balance sheet date, but before adoption of accounts, there is no need for disclosing it as ‘shares’ till the date of allotment, as it is taking place in the subsequent year. However, additional disclosures regarding allotment (which takes place in subsequent year before adoption of accounts) may be made in the financial statements. (pages 720-724 of C.A. Journal of November, 2013)

4. ICAI News

(Note: Page Nos. given below are from C.A. Journal of November, 2013)

(i) Announcement:

All the members of the Institute of Chartered Accountants of India (ICAI) are hereby informed that in terms of the authority granted under Section 30(1)(i) of the C.A. Act, the Council of ICAI has prescribed Regulation 47 of the C.A. Regulations, 1988, which reads as under:

“No amount shall be charged from, or be payable by, an articled assistant or any other person on his behalf, directly or indirectly, whether by way of premium or as loan or deposit or in any other form in connection with his engagement as an articled assistant.”

In view of the above, charging of premium from articled assistants is misconduct under the provisions of C.A. Act and punishable u/s. 21B(3) of the C.A. Act (page 696)

(ii) Health Insurance Scheme for Members of ICAI

ICAI has taken a major initiative for arranging in the form of specially designed Health Insurance scheme with the special features like no health check-up, no age limit & entry barrier, premium discount in lieu of cumulative bonus, 5% discount in premium to be paid to the Insurance company, where the Member has not preferred any claim in the expiring policy in case of renewal of the policy, wide coverage for pre-existing diseases etc. for Members & Students of ICAI. The scheme has been in force from 12th March, 2013 for the Members of ICAI. Please visit http:/icai. newindia.co.in, to apply online for Insurance policy and to view other formalities as well as details about the aforesaid insurance scheme. (page 804)

(iii) Professional Indemnity Insurance for Members & CA Firms of ICAI

ICAI has arranged insurance protection for members in practice/firms in the form of specially designed professional indemnity insurance at a reasonable premium i.e. 85% discount in market rate. The scheme has been effective from 12th March, 2013 for the Members in practice/ Firms of the ICAI.

Members and CA firms desirous to avail the benefits of the aforesaid scheme may please visit http:/icai.newindia. co.in & online solution for the same. (page 804)

(iv) 64th Annual Report and Accounts of ICAI

The 64th Annual Report of the Council and the Annual Accounts for the year 2012-13 have been published in the Gazettee of India and will shortly be hosted on the website of the institute – www. icai.org. The same is being e-mailed to the members whose e-mail ids are on the record of the Institute.

In this connection, members who have not furnished their e-mail ids are requested to provide their e-mail ids to enable the said report being sent to them also. Further, hard copy of the above Report would also be forwarded to those desirous of the same. Accordingly, members desirous of a hard copy of the above Report may write, giving their membership number and complete postal address, to Shri G. Ranganathan, Deputy Secretary (e-mail: councilaffairs@icai.in). (page 806)

(v) New ICAI Publication

Compendium of Opinions (Vol XXXI) (Page 813)

BCAJ Admin

FROM THE PRESIDENT

Dear members of BCAS family,

On 5th November 2013, the Indian Space Research Organisation launched Mangalyaan into the earth’s orbit on its 780 million kms journey to Mars from its launch base at Sriharikota. India is only the 4th country in the world to have successfully achieved this. It is indeed a proud moment for all Indians. Amidst all the other achievements and accolades related to this project, the one significant aspect which impressed me was the cost of the project; ? 450 crores, a fraction of what expeditions of other countries cost. This proves a point that India has technological wherewithal to carry out complex projects, innovating on the way. Congratulations to Dr. K. Radhakrishnan and his team for this achievement.

India has an abundance of entrepreneurial resources. But individual enterprise can achieve precious little if the environment is not enabling. There are many shackles that need to be broken. The state needs to play its role of the facilitator. In the times of elections, everyone has their wish list. I have mine too.

India has gained a name for itself for IT/ITES. But its true potential is in the manufacturing services. That’s where value addition happens. That’s where we can use our natural resources and the abundant skilled labour to its potential. And that’s where capital creation will happen. And this sector needs liberalisation in Land, Labour and Licences.

Licence means a permit from an authority to own or use something, do a particular thing, or carry on a trade. After the initial spurt of liberalisation, we have stopped opening up our economy. Whether it pertains to investments, way of doing business, transfer of ownership, access to national natural resources etc. There are restrictions needing multiple permits for most aspects of businesses. One-window-clearance is unheard of. The next government should commit itself to creating an enabling, facilitative, non-interfering and progressive environment.

Labour laws are another area which needs liberalisation. Traditionally, the state has always tried to control the labour force. Reasons are obvious; vote bank, extortion and what not. There are over fifty national laws and many more state-level laws. These laws have hampered the growth of the formal manufacturing sector. According to a World Bank report in 2008, heavy reform would be desirable. The executive summary stated,

“India’s labor regulations – among the most restrictive and complex in the world – have constrained the growth of the formal manufacturing sector where these laws have their widest application. Better designed labor regulations can attract more labor- intensive investment and create jobs for India’s unemployed millions and those trapped in poor quality jobs. Given the country’s momentum of growth, the window of opportunity must not be lost for improving the job prospects for the 80 million new entrants who are expected
to join the work force over the next decade.”

Gone are the days of Zamindari and Maaliki. Labour needs no protection. There are ways to prevent exploitation. Inclusive growth will ensure that capital and labour work in tandem.

In my opinion, land is going to the biggest spoiler for the India Story. Everybody believes in the India story. Some are hugely optimistic, some cautiously optimistic and then a few are cynics. The chief constituents of our GDP are agriculture, services and manufacturing. The contribution of Agriculture to the GDP in terms of percentage will only keep shrinking as other sectors grow faster. More and more agricultural land is being converted to NA for non-agricultural purposes. Moreover due to the restrictive nature corporatisation or cooperative farming is a non-starter. Any progress in agriculture will involve improving yields hence more harvests in a year and more crops from same land. Agriculture will then not be constrained for want of land.

Services are another major contributor to the GDP, who will soon reach a plateau as they are not capital intensive and thrive on cheap labour. Such contracts will flow to other developing countries as labour and real estate become expensive in our country. Even otherwise, this sector is largely urban-centric, as it needs qualified labour and infrastructure. The availability of land for this sector can be easily addressed partly by improving infrastructure and connectivity to peripheral areas or by simply changing Development rules by granting higher FAR/FSI. Vertical development suits this segment. So there seems to be no constraints to this sector for want of land. Same is the case for residential development. High-rise, high-density is a solution to address scarcity of land.

The manufacturing segment will raise its share in GDP significantly. India has great enterprise, talented workforce, availability of many raw material, natural resources and cultivable, development of ports and other infrastructure. However, land for manufacturing segment has special requirements. This facility needs horizontal development, which means it needs higher ground coverage as compared to any other development. The high-rise concept cannot work here. Also, it needs to be away from cities and farms. Hypothetically, if the manufacturing segment doubles its output in the next ten years, it will need twice the land that this segment occupies today. Where is this land? The Land Acquisition Bill makes getting land thatmuch more difficult. The states are shying away from helping aggregation. The courts are taking pro-farmer stands. Barring a few states like Gujarat, no state is in a position to allot land for manufacturing when investors are queuing up with opportunities of setting up large facilities in India. Industrial development Corporations are failing to make land available for manufacturing. In a place like Chakan, off Pune, MIDC has over 7,000 applications pending for allotment of land. SEZ’s, a great vehicle for organised manufacturing, have fizzled out.

Hence, availability of land will be a major bottleneck to India’s growth story.

Solutions are obvious. There is no rocket science. We are not lacking in ideas. We are lacking in our political will. Politicians are playing their game of vote banks. Growth can only benefit all. Thus, I would like my next government to promise liberalisation of Labour, Licences and Land. Here’s wishing everyone happiness and love.

With Warm Regards

Naushad A. Panjwani

levitra

BCAJ Admin

Direct Taxes

Government notifies Cyprus as a “notified jurisdictional area under Section 94A – Notification No. 86/2013 dated 1st November, 2013

The CBDT has issued Order No. 5/FT&TR/2013 dated 04-11-2013 specifying the jurisdiction of the Dispute Resolution Panel at Delhi and Mumbai and the cases or classes of cases that they are assigned. The CBDT has also issued Order No. 6/FT&TR/2013 dated 04-11- 2013 specifying the reserve members of the DRP at Delhi and Mumbai. Both these orders are available at www.bcasonline.org

Procedure for dealing with Revenue objections – CBDT Instruction No. 16/ 2013 dated 31-10-2013

E-returns filed with payment of self-assessment tax to be treated as deemed defective and standard operating procedure notified by CBDT. – F.No. DIT(S)/II/CPC/2013-14/Unpaid self assessment tax/13798 dated 13th November 2013 – available on www.bcasonline.org

Circular clarifying DRP law under section 144C of the Act – Circular no. 9/2013 dated 19th November 2013

On analysis of the existing track record where there are unsatisfactory settlements, despite detailed procedure laid down by the CBDT, it has now fine tuned the procedure by awarding more powers to the supervisory authorities to fasten the process of settlement and prevent revenue loss for the Government as well as harassment to the tax payers.

CBDT has rectified its mistake made in Circular no. 5/2010 where it was inadvertently mentioned that Section 144C would apply from AY 2010-11 onwards. It is now clarified that section 144C is applicable to any order which proposes to make variation in income or loss returned by an eligible assessee, on or after 1st October, 2009 irrespective of the assessment year to which it pertains. Amendments to other sections of the Income-tax Act referred to in para 45.3 of the circular no. 5/2010 dated 3rd June, 2010 shall also apply from 1st October, 2009

levitra

BCAJ Admin

FROM THE PRESIDENT

Dear Members,

By the time this issue reaches you, the mood would be to make plans to celebrate the last festival of the year 2012 – Christmas. It’s time for parties full of fun and high spirits. It’s that time of the year, where everyone is waiting for the year to end and eagerly looking forward for a new and fruitful 2013, by taking vows, setting goals and challenges for the coming year.

The Ministry of Finance has also started formulating plans and proposals for the Union Budget 2013-2014, and has invited suggestions from various Professional bodies and Industry and Trade Associations with respect to direct and indirect taxes. Many of our members must have assisted various industry and trade associations in formulating the suggestions. At BCAS, we are in the process of preparing the Pre-Budget Memorandum, and I invite suggestions on issues or areas that are of concern to large Tax payers, and which if accepted or implemented can bring a sigh of relief.

In order to develop our Society into a learning organisation besides the ongoing professional activities, the entire BCAS team, full of innovative ideas, determination and oneness of purpose, will continue to redefine the manner in which our Society operates towards achieving its vision and mission, albeit maintaining its values and traditions in 2013 as well, and will work towards giving value to members.

We have immensely benefited by the expert guidance and suggestions from our seniors and all of you, and I once again urge you to provide your feedback and suggestions on areas, where you would like your Society to progress and march ahead.

Last month, the death sentence given to Ajmal Kasab, the lone surviving terrorist involved in the 2008 Mumbai attacks, was executed after due process of law and a full and transparent trial. But still, for the victims’ kin, the loss of their dear and near ones is irreplaceable. By awarding the death sentence and executing it, India sent a clear message to the world that anyone who commits an unruly act of terror will not be spared.

Considering the judicial process in our country, the execution of Kasab within a period of four years after commission of the crime, is welcome, and one hopes will act as a precedent. Expeditious disposal of cases related to terrorism must become a rule and not remain an exception. Thereafter, speeding up of the judicial process must percolate to all other pending litigations.

With profound grief I have to inform you that Mrs. Vandana M. Randive, Sr. Accounts Manager of BCAS, working since last 17 years, passed away at a young age of 43 on 23-11-12 after a short period of illness. It is understood that stress was a major cause of this unfortunate and untimely incidence. May her soul rest in eternal peace and may God give her family the strength and courage to bear this irreparable loss.

This is definitely an eye opener for all of us. We must not only accept the fact that today we all are living under some stress or the other, but also take concrete steps to reduce that stress. It may seem that there’s nothing you can do about stress. The bills won’t stop, there will never be more hours in the day, and your career and family responsibilities will always be demanding. But you have more control than you might think. In fact, the simple realisation that you’re in control of your life is the foundation of stress management. Managing stress is all about taking charge: of your thoughts, emotions, schedule, and the way you deal with problems.

To identify your true sources of stress, look closely at your habits, attitude, and excuses:

Do you explain away stress as temporary (“I just have a million things going on right now”) even though you can’t remember the last time you took a breather?

Do you define stress as an integral part of your work or home life (“Things are always crazy around here”) or as a part of your personality (“I have a lot of nervous energy, that’s all”).

Do you blame your stress on other people or outside events, or view it as entirely normal and unexceptional?

Until you accept responsibility for the role you play in creating or maintaining it, your stress level will remain outside your control.

I hope that in the New Year, you all will ponder over this and pay greater attention to your life and stressful situations, which in turn will have a larger impact on one’s health and will help to lead a healthy life. Just remember – We Work for a Living and not Live for Working.

Incidentally, the Theme for BCAS Calendar 2013 is “HEALTHCARE”. Good Health is a kind of Freedom, and being healthy gives us the freedom to live our life the way we want. The 12 months interlaced with subtle preambles of healthcare will guide you throughout 2013 towards Health and wellness.

I would end by a saying of our famous leader Mahatma Gandhi – “It is Health that is real wealth and not pieces of gold and silver”.

Hope you all had a wonderful 2012 and wish you all much purposeful and prosperous 2013 !!

With Warm Regards,
Yours truly,
Deepak R. Shah

levitra

BCAJ Admin

Ethics and u

Shrikrishna (S) – My dear Arjun, how was your Diwali? Enjoyed?

Arjuna (A) – Yeah, it was cool. M-Vat date was extended. So I could relax.

S – But whenever I called, you were always out of your office.

A – Actually, my friend is contesting our Council’s elections. He used to take me along for canvassing.

S – Did you go for voting?

A – No. On the same day, we had a family gettogether. And after all, what is the use of voting!

S – Why? You should be concerned about who sits in your Council.

A – Our Council members do nothing except selfpromotion. They hardly care for the profession.

S – But then, that was all the more reason why all of you should have voted. It means you are yourself not serious about the profession. And then, what is the point in cursing the Council members? And have you enquired as to what they do in the council? I know a few of them who really slog for the members at the cost of their own practice?

A – I know, one should always vote. But the way the candidates were canvassing, it was nauseating. The less said the better!

S – Anyway! A few of my friends have received your Diwali greetings. But they said they don’t know you directly. How did they come on your mailing list?

A – While canvassing for my friend’s election, I thought, why not tap a few strangers for business. I took a few addresses from Satyabhama bhabhi.

S – But it is not permitted to write to such strangers. Don’t you know?

A – Why? What is objectionable about it? Other wise. How can you reach the potential client?

S – It is a misconduct for a professional.

A – This is too much! Whatever we do, you point out some misconduct. I think we should become Sanyasis. See, this is what our Council does. Then why should we vote for them?

S – Arey wah! Brilliant argument! Full of selfcontradictions.

A – Last time you told me, I should not do any business other than my practice. Now in practice, you are saying I should not even send greetings. Then how can I promote my practice?

S – See, your quality of service is your sole advertisement. Nothing else. You should build up reputation by your quality, sincerity and integrity.

A – Too idealistic! Remember, we are presently in Kaliyuga and not in Satyayuga. Who will listen to such orthodox thinking? In foreign countries, all this is permitted.

S – Are you sure about it?

A – I mean I have heard about it.

S – There were pressures on the Council too. But your Council in its wisdom rightly took a decision not to permit any form of advertisement. Unabashed publicity will ultimately work to your own detriment.

A – How?

S – Then resourceful firms will resort to rampant marketing. Can you afford to match that kind of spending?

A – That they are already doing. My friends are working there. They are fed up with the business targets.

S – To have such targets in itself is rather unethical. How can there be monetary targets for a professional firm?

A – Tell me then, what else is prohibited?

S – Just read clause 6 of the First Schedule. You should not solicit clients or professional work by circular, advertisement or even personal communication.

A – What if somebody does it for me?

S – No. The prohibition is for both direct as well as indirect publicity. Also, there is Clause 5 of the First schedule. It says, you cannot secure any work through the services of any person who is not your employee or partner. You cannot use any means which are not open to a CA.

A – Then how will a new entrant get any assignment?

S – You can approach another CA and request him for assignments. That is permitted. So also, you can respond to the tenders or enquiries issued by the users of professional services.

A – But why such restrictions?

S – Only then you can command respect. You can then be independent. Otherwise, you will be viewed by the society as a businessman. Remember, your profession is not a business.

A – It is a very slow process to build up confidence and reputation. Today’s world is so fast.

S – I agree. But your services are of personal and intimate nature. A satisfied client is the best advertisement. Quality alone will attract and retain clients; and not any other gimmick.

A – You mean to say, we should not advertise at all?

S – Not exactly. Certain ads are permitted – like changes in your partnerships; or dissolution; change of address or change in telephone numbers. But these should be in the nature of announcements. A bare statement of facts. Discretion should be used as to in which locality the concerned newspaper or magazine is circulated.

A – What about small classified ads?

S – That is also allowed. But only in the journal or newsletter of the Institute. Through this, you can give information about your services and seek work or even employment. It should contain only basic details like your name, address, phone, fax number and e-mail address.

A – But can we apply for empanelments?

S – Yes. But you cannot enquire whether any organisation is maintaining a panel. So also, having empanelled, you cannot make roving enquiries with such organisations.

A – I had heard that we cannot even quote our fees.

S – No. You can always quote your fees on enquiries being received or respond to tenders.

A – Some guys were after me, to have my name in their yellow-page directory. I refused since I was not very sure. Moreover, it was very expensive.

S – You can have it in the Directories published by Public Bodies or Private Bodies. But there are certain guidelines. Firstly, there should not be any extraordinary payment. It can be in the specified groups also. But it should be in your own town or city. It should be in normal print – but neither in bold font nor in a separate box.

A – Interesting. You mean, it should not be conspicuous.

S – That’s right. It should be in alphabetical or logical order. Not very prominent. No unreasonable payment. And any CA of that locality should be permitted to have his name in it. It cannot be exclusive for a few selected group of CAs. It can also be in electronic media.

A – What if you publish a book or an article?

S – You can mention your name but not the name of your firm. Even in your CVs when you deliver lectures, reference to your firm’s name should be avoided.

A – We started this discussion from my greeting cards. Can I not even mention the designation ‘chartered accountant’?

S – You can. In greeting cards or on invitation cards for marriages, other ceremonies, inauguration of your office, and so on. But remember, it should be sent only to your clients, relatives and friends!

A – I see CAs appearing on TVs, what should they do? Is it not their advertisement?

S – They have to use restraint. The details about themselves or of their firms should not be given in a manner that highlights their professional attainments.

A – And what about websites?

S – Websites are permitted; but I don’t have time to tell you so much in detail. Why don’t you refer to the detailed guidelines of your Council? There are as many as 22 points – about website!

A – In many journals, I see questions being answered by CAs. I feel, that is also a form of advertisement.

S – Yes. It is permitted. It can be in journals or magazines or newspapers or websites or TV channels. But remember, they should not mention anything beyond the fact that the person answering is a chartered accountant. No mention of his contact address; or his professional achievements.

A – My God! So many points involved! But I agree that I would not go to a doctor or a lawyer without any personal reference or recommendation. Certainly not by advertisement. It is futile for a professional.

S – Good. So better concentrate on quality. Growth will follow. More greeting cards will never fetch your clients.

A – I agree; Bhagwan.

Om Shanti.

This is based on Clause nos (5) and (6) of First Schedule

Clause (5) – secure, either through the services of a person who is not an employee of such chartered accountant or who is not his partner or by means which are not open to a chartered accountant, any professional business:

Provided that nothing herein contained shall be construed as prohibiting any arrangement permitted in terms of items (2), (3) and (4) of this Part;

Clause (6) – solicits clients or professional work either directly or indirectly by circular, advertisement, personal communication or interview or by any other means:

Provided that nothing herein contained shall be construed as preventing or prohibiting –

(i) any chartered accountant from applying or requesting for or inviting or securing professional work from another chartered accountant in practice; or
(ii) a member from responding to tenders or enquiries issued by various users of professional services or organisations from time to time and securing professional work as a consequences.

Further, readers may also refer pages 135 to 153 of ICAI’s publication on Code of Ethics, January 2009 edition (reprinted in May 2009).

BCAJ Admin

From the President

Dear readers,

The year 2011 draws to a close. As I write this communication there is a mention in the media of the third anniversary of the dastardly attack by terrorists in Mumbai popularly known as 26 /11. Have things changed. For those who lost their near and dear ones on that day life would never be the same again. However for others that day has merely remained a memory. For some time individuals, organisations kept up the pressure on the government to take serious look at security concerns. Gradually the public went back to its daily struggle for existence and 26/11 was forgotten. Like many other events we now remember the event on anniversary days. There will be a number of reasons for this but the fact leaves one sad. Most of the much-publicised security measures have remained only on paper. As long as this attitude continues we will always be soft targets waiting for another attack to occur.

While the attack in Mumbai is now history, the attack on an eminent leader of Mr. Sharad Pawar brought to light many facets of those whom we term as leaders in public life. While the attack needed to be denounced in the strongest terms and it was, the events thereafter were avoidable. The comment on the attack by a person who is today considered an icon of the movement against corruption brought forth his serious limitations. I believe that the comment was an off-the-cuff remark and a clear mistake. After all every leader is human and is prone to make errors. The best thing to do was to accept the mistake unreservedly. This does not appear to have been done with ego probably being the obstacle. Many may perceive this to be a very harsh assessment but for me the comment is the culmination of the instrangient attitude of the person and those who surround him. It is absolutely essential that the persons leading this movement against corruption do a serious introspection for if they fail to frame a proper strategy, the energy that the movement has been able to galvanise will be frittered away. I hope those in charge of the movement make the necessary changes so that it does not lose focus.

It is now clear that the Direct tax code and GST will not meet their appointed dates. Though there could be substantial debate about the necessity of the Direct tax code itself the delay in implementing it as well as much other legislation is puts a question mark on the sincerity of the government. Innumerable man-hours of bureaucrats, professionals and others have been spent in drafting discussing and suggesting amendments to these proposed legislations. If they do not become law all this effort will go down the drain.

For the past year or so the government seems to be in a deep slumber. None of the decisions regarding policy initiatives which were a part of the UPA manifesto have been taken. One reason for this lack of decision making is said to be the fear of bureaucrats who are afraid of their decision being subject to public scrutiny and malafide intent being attributed to them. To an extent this is on account of the media glare on any event. Anything that goes wrong is attributed to an erroneous decision and an investigation is promptly ordered. We must also accept that it is only those who act will make mistakes. It is often easy to find fault with decisions in hindsight. As long as an action is taken bona fide and with due care the person must not be held responsible if the decision turns out be erroneous. People must understand the distinction between error and fraud.

One way of avoiding this inaction on account of fear is to make the decision making process as transparent as possible. If the rationale behind decisions is made known to the public much before the consequences of the decision occur this may help all concerned. One of our past Presidents always says that change is the only constant thing in life. For nearly two decades Mr.Ratan Tata has been the leader of one of the largest industrial house is in our country. His actions have taken the Tata Empire to new heights. One was therefore curious to know as who would take his place. What one liked most about that change in the leadership of this group was the manner in which it will take place. Mr. Ratan Tata had announced his date of retirement well in advance and his successor has been named a year before Mr. Tata calls it a day. This is the manner in which the baton should be passed. Our political class and others need to take a leaf out of Mr. Tata’s book. If there is an age of retirement for industrialists there ought to be one for those who run this country. We hope that Mr Cyrus Mistry who will now head the group will maintain the standards of ethics, integrity and excellence which his predecessor has set.

The year 2011 has seen turmoil and turbulence in public life. However without churning there is no Amrut. Though there are dark clouds on the economic horizon I am sure that they will pass. I am an optimist. The nation was disappointed when the little master was unable to complete his century of centuries on his home ground. However while achieving that milestone on his own turf would have gladdened hearts, to achieve it overseas and against a challenging side will give him greater satisfaction. Let us wish him all success and hope that his achievement will enable us to begin 2012 on a high note. I take this opportunity to wish all readers a very happy and prosperous 2012!

levitra

BCAJ Admin

MINUTES OF THE MEETING OF REPRESENTATIVES OF ASSOCIATIONS OF TAX CONSULTANTS WITH CHIEF COMMISSIONERS OF INCOME TAX

Bombay Chartered Accountants’ Society
7, Jolly Bhavan No. 2, New Marine Lines, Mumbai-400020.
Tel. : 61377600 to 05 / Fax : 61377666
E-mail : bca@bcasonline.org;
Website : www.bcasonline.org WebTV : www.bcasonline.tv
11th November, 2011

To,
Central Board of Direct Taxes,
New Delhi.
Dear Sir,

Re : Representation on Tax Accounting Standards

With reference to the discussion paper on Tax Accounting Standards and the draft Tax Accounting Standards circulated along with the discussion paper, we enclose herewith our representation in respect thereof.

We trust you will take our suggestions into account.

Thanking you,
Yours faithfully,
For Bombay Chartered Accountants’ Society,

(Pradip K. Thanawala)               (Gautam Nayak)
President                                     Chairman
                                                   Taxation Committee

Representation on Tax Accounting Standards
Bombay Chartered Accountants’ Society

The Central Board of Direct Taxes (‘CBDT’) has released a ‘Discussion Paper on Tax Accounting Standards’. Drafts of Tax Accounting Standards (‘TAS’) on Construction Contracts and Government Grants are annexed to the Discussion Paper (‘DP’). The CBDT has invited comments/suggestions on the DP and the drafts of the TAS.

In respect thereof, we give hereinbelow our comments/suggestions on the above DP and TAS.

1. At the outset, it is submitted that there is absolutely no need for notifying a different set of Accounting Standards (TAS) for the purpose of computing income under the provisions of the Income-tax Act. Though phased introduction of Ind-AS would mean that some taxpayers would be following Ind-AS while others would be following AS notified under the Company Rules, even today the position is that corporates are following Accounting Standards notified under the Company Rules, while non-corporates are following Accounting Standards issued by ICAI. Each set of taxpayers may be permitted to compute their taxable income as per the relevant accounting standards applicable to each of them.

2. If an accounting standard is not to be followed for the purposes of maintenance of accounts but only for computation of taxable income, then it is not an accounting standard, and it is an enactment of computation provisions. It can be compared to section 145A which requires an adjustment to the reported profits based on the specific statutory provision.

3. The standards notified under section 145 are required to be followed while maintaining books of account and it is not open to prescribe standards u/s.145 which are not to be followed while maintaining books of account. This amounts to incorporating computational provisions in the garb of accounting standards.

4. Amendments cannot be made in the computation provisions in the guise of introducing an accounting standard without making a specific provision in the statute in that behalf and without requiring the said accounting standard to be followed while maintaining the books of account.

5. By notifying TAS, there is an attempt to nullify the effect of well-settled legal positions that have stood the ground since more than half a century, namely, the pre-eminence of the commercial accounting standards, which yield only to statutory provisions, e.g., distinction between capital and revenue, etc. The effect of the decisions of the Supreme Court would be nullified by a notification of TAS, which ignores the commercial accounting principles and sets its own subjective standards of accounting.

6. The tax accounting standards are now meant to be the basis of computation of taxable income by a mere notification. This will open the door to amendments in the law without requiring amendments in the Act, and thereby the executive will be encroaching on the powers of the Legislature. This is not permissible.

7. The basic premise on which the new TAS are proposed, as laid down in para 3.2 of the DP, does not hold water. The accounting standards are for correctly arriving at commercial profits and cannot be in harmony with the provisions of the Act, since otherwise there can be no scope for provisions such as section 43B, which drastically alter the commercial profits in order to arrive at the taxable income. Again, the question of accounting standards providing for specific rules to enable computation of income with certainty and clarity does not arise since the purpose of accounting standards, even those to be notified u/s.145(2), is not that. The alternatives remaining in the accounting standards, which have drastically reduced, have been retained after much deliberation, and a lot of thought process has gone into it keeping in mind its need in the Indian scenario.

8. In order to even make the reconciliation statement, in some cases, elaborate workings will be required to be prepared, kept and maintained to the satisfaction of the Assessing Officer which would amount to re-writing accounting entries passed in the books of account and may be equivalent to maintaining separate books of account. This itself would cast a substantial burden on taxpayers.

9. The corresponding effects in some cases not having been made in the books of account may lead to disastrous consequences. For instance, an assessee who has written off the amount due in respect of a construction contract, would not have written off the retention amount, since he has not accounted for the same as his income. In the reconciliation statement, he would be required to add the retention amount as his income, but will he be allowed deduction for bad debts in respect thereof if he is unable to recover it, without having written it off in the books of account?

In view of the above, the justification to prescribe new TAS in the DP itself does not stand and there is absolutely no need to prescribe new TAS.

Further as regards the draft TAS, we give our comments as follows:

Common

Both the TAS contain elaborate requirements as to ‘disclosure’. Since the said Standards are not to be followed while maintaining books of account, nor in the preparation of financial statements, it is not all clear as to where the disclosure is required to be made.

Tax accounting for construction contracts

1. The TAS states that contract revenue shall include retentions; in other words, retentions would become part of the income, even though conditions specified in the contract have not been satisfied. This is clearly against the principle of accrual, where there has to be reasonable certainty of receipt for an income to have accrued.

2. The TAS does away completely with the provision for recognising expected loss and omits the following words which are present in AS-7 “An expected loss on the construction contract should be recognised as an expense immediately”. This is contrary to the principle of ‘prudence’, which has also been recognised as such in the Accounting Standard I relating to disclosure of accounting policies which has been notified u/s.145(2) at para 4(i) which reads as under:
“Prudence — Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information.”

3. The TAS seeks to place an artificial limit of 25% completion beyond which contract cost and revenue should be recognised, even if the outcome of the contract cannot be estimated reliably. It is submitted that costs and revenue should be recognised on 25% completion, only if the outcome of the contract can be estimated reliably.

Tax accounting for government grants
1. The TAS does not provide for the capital approach method for grants. This seeks to do away with the well-established distinction between capital receipt and revenue receipt and is wholly unwarranted. The well-established concept of capital grant, which is not in the nature of income, cannot be nullified by mere notification of a Tax Accounting Standard, without a specific amendment to the definition of income in section 2(24).

2. AS-12 provides that mere receipt of grant is not necessarily conclusive evidence that conditions attached to the grants have been or will be fulfilled. The TAS specifically provides that recognition of a government grant shall not be postponed beyond the date of actual receipt. This is also against the basic principle of accounting that income should not be fully recognised if certain obligations are yet to be performed.

BCAJ Admin

ICAI News

(i) Empanelment to carry out circulation Audits of Publications

Audit Bureau of circulations which certifies figures of Member Publications desires to empanel firms of Chartered Accountants in the States of
(a) Assam & North Eastern States,
(b) Bihar,
(c) Chhatisgarh,
(d) Goa,
(e) Haryana,
(f) Himachal Pradesh,
(g) Madhya Pradesh,
(h) Punjab,
(i) Orissa,
(j) Uttaranchal and
(k) UP.

The criteria for empanelment and other details are given on page 691.

(ii) Tax Audit Reports

It is reported that according to the CBDT, in respect of financial year 2010-11, total number of Tax Audit Returns filed is about 16 lac. These tax audits were conducted by about 59000 audit firms. The data is further being processed with regard to fake membership numbers, members who have exceeded specified number (ceiling) of tax audit assignments, etc. In order to prevent misuse of membership numbers of tax auditors, it is proposed that, from next year, the uploading of tax audit reports along with digital signatures of auditors may be made mandatory. If members have any suggestions in this regard, the same may be forwarded to ICAI.

(iii) ICAI publications

(a) Compendium of Auditing Standards and Auditing Guidance Notes Vol. 1 and 2. (As on 1-10-2011)

(b) Guide to Audit of Complex Financial Instruments.

(d) Study on Manner of IFRS Implementation in EU and General Status of IFRS Implementation in Selected Countries. (Refer pages 787-788)

levitra

BCAJ Admin

EAC Opinion

Accounting for leave salary laibility

Facts

(i) In the case of a public sector company the rules relating to the leave by employees are as under:

(a) The entitlement of Earned Leave (EL) is related to the number of years of service put in by the employee. The earned leave has two components viz. Encashable Leave (EEL) and Non-Encashable Leave (NEL).

(b) The company gives advance credit of leave in terms of EEL and NEL on the standard dates i.e., 25th June and 25th December.

(d) EL can be encashed at any time during the period of 300 days. NEL can be encashed at the time of retirement.

(e) There are similar Rules for Half-Pay Leave (HPL).

(ii) The accounting practice followed by the company in respect of Leave Liability is as under: Liability for encashable earned leave (EEL), nonencashable earned leave (NEL) and half-pay leave (HPL) is provided for in the books on accrual basis for the value of leave outstanding at the end of the year. According to the company, provision for half-pay leave is made for the total leave balance at the year end without restricting it to 480 half days (240 full days) per employee in line with the requirements of AS-15.

(iii) The Auditors were of the view that this was a long-term liability for the reasons that the past pattern indicates that the employees are unlikely to avail/encash the entire carried forward leave during the next twelve months and hence, the benefit would not be short-term. Accordingly, keeping in view of behavioural pattern of the employees, the leave benefit should be considered as long-term benefit and the provision should be made based on actuarial valuation.

Query

Based on the above, the company had sought the opinion of the Expert Advisory Committee of ICAI (EAC)

(a) whether the company’s view that ‘Leave Liability’ is a short-term liability is correct and

(b) if not, how the change in accounting treatment should be accounted in the books.

Opinion

After considering the various provisions of AS-15, the EAC has expressed the following opinion:

a) Short-term employee benefits are those benefits which fall due wholly within 12 months after the end of the period in which the employees render the related service. Therefore, the treatment of ‘Leave Liability’ as ‘short-term employee benefit’ as interpreted by the company is not correct.

(b) The change in the accounting treatment of Leave Liability from ‘short-term employee benefits’ to ‘other long-term employee benefits’ should be treated as ‘prior period item’. Accordingly, the nature and amount thereof should be included and disclosed in the profit and loss account for the period in which the error is revealed as provided in AS-5. (Refer pages 710-714 of C.A. Journal for November, 2011)

levitra

BCAJ Admin

Code of ethics

The Ethical Standards Board of ICAI has considered some of the ethical issues which have been published in C.A. Journal of November, 2011, at pages 771-772. Some of these issues are as under:

(i) Issue: Whether an auditor is required to provide the client or other auditor of the same enterprise access to his audit working papers ? Working papers are the property of an auditor. An auditor is not required to provide the client access to his audit working papers. The main auditors of an enterprise do not have right of access to the audit working papers of the branch auditors, except in case it is required by the regulatory norms.

(ii) Issue: Whether a joint auditor will be responsible for the work done by other joint auditor? Council direction under Clause (2) of Part I of the Second Schedule to the C.A. Act prescribes that in respect of audit work divided among the joint auditors, each joint auditor is responsible only for the work allocated to him, whether or not he has prepared a separate report on the work performed by him. However, on the other hand, all the joint auditors are jointly and severally responsible for the work which is not inter se divided among the auditors, and also for compliance of requirements of relevant statues.

(iii) Issue: Can a member in practice express his opinion on financial statements of any business or enterprises in which he, his firm or a partner in his firm has a substantial interest? As per Clause (4) of Part I of the Second Schedule to the C.A. Act, a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he expresses his opinion on financial statements of any business or any enterprise in which he, his firm or a partner in his firm has substantial interest. The word ‘substantial interest’ is defined in the Resolution passed by the Council in pursuance to Regulation 190A of the CA Regulations (Please refer Appendix F to Code of Ethics — P. 345).

(iv) Issue: Whether a statutory auditor can accept the system audit of the same entity? The statutory auditor can accept the assignment of a system audit of the same entity, provided it did not involve any scrutiny/review of financial data and information.

(v) Issue: Can a Chartered Accountant receive his professional fees in advance party or in full? There is no bar in the C.A. Act or in the CA Regulations as well as the Code of Ethics in taking the fees in advance.

levitra

BCAJ Admin

ICAI and its members

1. Code of Ethics:

The Ethical Standards Board of ICAI has given answers to some of the Ethical Issues raised by our members. These are published on pages 726-728 of the CA Journal for November, 2012. Some of these issues are as under:-

(i) Issue: Whether a Chartered Accountant who is appointed as tax auditor for conducting special audit under the Income-tax Act by the IT Authorities is required to communicate with statutory auditor?

Comment: Council direction under Clause (8) of Part I of First Schedule to the Act, prescribes that it would be a healthy practice, if a tax auditor appointed for conducting special audit under the Income-tax Act, communicates with the members who have conducted the statutory/tax audit.

(ii) Issue: Whether it is obligatory for the auditor appointed to conduct a special Audit u/s. 233A of the Companies Act, 1956 to communicate with the previous auditor, who has conducted the regular audit for the period covered by the special audit.

Comment: Council direction under Clause (8) of Part 1 of the First Schedule to the Act prescribes that it is not obligatory for the auditor appointed to conduct a special audit u/s. 233A of Companies Act, 1956 to communicate with the previous auditor who has conducted the regular audit for the period covered by the special audit.

(iii) Issue: Whether communication with previous auditor is necessary in case of appointment as statutory auditor by nationalised and other banks?

Comment: Clause (8) of Part 1 of the First Schedule to the Act is equally applicable in the case of nationalised and other banks and also to Government agencies.

(iv) Issue: Whether communication by the incoming auditor is mandatory with the previous auditor in respect of various audit assignments, like the concurrent audit, revenue audit, tax audit and special audits, etc?

Comment: The requirement for communicating with the previous auditor would apply to all types of audits viz. statutory audit, tax audit, internal audit, concurrent audit or any other kind of audit. The Council has laid down detailed guidelines in this regard and the same are appearing at pages 166-168 in the Code of Ethics, 2009 edition.

(v) Issue: Whether a Chartered Accountant or a firm of Chartered Accountants can charge or offer to charge professional fees based on a percentage of turnovers?

Comment: In terms of Clause (10) of Part 1 of First Schedule to the Act, it is not permitted to a Chartered Accountant or a firm of Chartered Accountants to charge fees as a percentage of turnover, except in the circumstances provided under Regulation 192 of the CA Regulations, 1988.

“192, Restriction on fees

No Chartered Accountant in practice shall charge or offer to charge, accept or offer to accept, in respect of any professional work, fees which are based on a percentage of profits, or which are contingent upon the findings, or results of such work.

Provided that:
(a) in the case of a receiver or a liquidator, the fees may be based on a percentage of the realisation or disbursement of the assets;

(b) in the case of an auditor of a co-operative society, the fees may be based on a percentage of the paid up capital or the working capital or the gross or net income or profits; and

(c) in the case of a valuer for the purposes of direct taxes and duties, the fees may be based on a percentage of the value of the property valued”.

(vi) Issue: Whether a statutory auditor can be appointed in the adjourned meeting in place of existing statutory auditor, where no special notice for removal or replacement of the retiring auditor is received at the time of the original meeting.

Comment: If any AGM is adjourned without appointing an auditor, no special notice for removal or replacement of the retiring auditor received after the adjournment can be taken note of and acted upon by the Company. U/s 190(1) of the Companies Act, such special notice can be given to the company at least 14 days before the meeting. In this section, reference is to the original meeting and not to an adjourned meeting.

2. EAC Opinion:

Facts:
A company is a wholly owned subsidiary of a listed public sector undertaking (‘the holding company’). The company was incorporated in the year 2002 under the Companies Act. The main object of the company, inter alia, is to acquire, establish and operate electrical systems etc. for distribution and supply of electrical energy, to undertake works on behalf of others and to act as engineers/consultants.

The company has stated that all the personnel of the company are employees on the rolls of the holding company and are under deputation to the company on Secondment basis. Every month, actual share of employees related expenses of the company, like salary, provident fund (PF) contribution, etc. are being debited to the company by the holding company, for payments and accounting purpose. Other employee benefits like retirement benefits are allocated at the year end and accordingly accounted for in the accounts of the company, payable to the holding company. The holding company has constituted separate trusts and administering and managing employee benefits towards gratuity and provident fund.

The company has further stated that the holding company gets the actuarial valuation done, at the year end, for all of its employees together, including those deputed to its subsidiary companies. In other words, no separate valuation report is obtained for the employees of subsidiary companies. Therefore, identifying employee liability and corresponding plan assets attributable to the personnel on deputation to its subsidiaries is not possible. However, the amount being proportionate share of expenses (for the year under consideration) is determined by the actuary and allocated to the subsidiary companies for accounting purpose. Therefore, the company and the auditor of the company rely upon the allocated figure for recognising expenses in the profit and loss account of the company. As a corollary, all the other information required to be disclosed as per paragraphs 119 and 120 of Accounting Standard (AS) 15, ‘Employee Benefits’ is not available, and is not disclosed in the Notes on Accounts. The expenses on account of long term defined benefits included for actuarial valuation are gratuity, leave encashment, post retirement medical benefits, transfer/travelling allowance on retirement/death, long service awards to employees, farewell gift on retirement of economic rehabilitation scheme.

In the case of provident fund, however, the accounting is done on the basis of actual contribution, although the holding company in its financial statements admits it as a defined benefit. The company is of the view that actuarial valuation is not required for provident fund liability. Further, the holding company (sponsor employer) is not making disclosures in its financials as required by paragraphs 19 to 120 of AS 15 in the case of provident fund, unlike in the case of other defined benefits.

Query
On these facts, the company has sought the opinion of the EAC on the issue: (i) whether the position of the company that it is not liable to make complete disclosure in its separate financial statements, in view of the facts that the same have been done by the holding company, is correct? and (ii) Whether the company’s policy of accounting for the provident fund based on actual contribution instead of actuarial valuation basis (and not making disclosures even in its parent’s financial as a defined benefit, as required in paragraph 119 and 120 of AS 15) is correct?

Opinion:
After considering paragraphs 33 to 35 of AS 15, the Committee is of the view that the multi-employer and group administration plans are completely different from each other. In case of group administration plan, it is merely an aggregation of individual employer plans and therefore, the Standard itself states that the accounting related information is readily available with the participating enterprises as any other single employer. Further, the Committee notes from the Facts of the Case that in the case of the company, the holding company gets the actuarial valuation done, at the year end, for all of its employees, including those deputed to its subsidiary companies. The amount being proportionate share of expenses (for the year under consideration) is determined by the actuary and allocated to the subsidiary companies for accounting purpose. This indicates that there is a contractual agreement or stated policy based on which the proportionate issue of expenses is being allocated to the subsidiary company. Further, since there is a common scheme for the employees of the holding company and the subsidiary company, keeping in view the Facts of the Case, it appears to the Committee that in substance, the holding company is running a group administration plan.

The Committee is further of the view that the existence of such contractual agreement or stated policy through which the current service costs and obligations of defined benefit plans for employees of subsidiary company are being allocated to it clearly provides a basis for allocating the assets and obligation of the plan too. The Committee is also of the view that in case there is no such contractual agreement or stated policy to bear entire obligation relating to the employee, as per paragraph 35 of AS 15, the net defined benefit cost should be recognised in the financial statements of the enterprise which is legally the sponsor employer (holding company in the extant case) for plan and other group enterprise (subsidiary company in the extant case) should recognise a cost equal to their contribution payable for the period. Therefore, the contention of the company that it is not liable to make complete disclosures in its financial statements, in view of the fact that the same have been done by the holding company, is not correct.

With regards to accounting for contribution being made to provident fund trust, administered by the holding company, the Committee notes paragraphs 25 to 27 of AS 15 and Issue No. 9 of ‘ASB Guidance on Implementing AS 15, Employee Benefits (revised) 2005, issued by the Accounting Standard Board of the ICAI, and is of the view that (EPF) Act, 1952 empowers the Government to exempt any establishment from the provisions of the Employees’ Provident Scheme, 1952 provided that the rules of the provident fund set up by the establishment are not less favourable than those specified in section 6 of the EPF Act and the employees are also in enjoyment of other provident fund benefits which on the whole are not less favourable to the employees than the benefits provided under the Act. As per AS 15, where in terms of any plan the enterprise’s obligation is to provide the agreed benefits to current and former employees and the actuarial risk (that benefits will cost more than expected) and investment risk fall, in substance, on the enterprise, the plan would be a defined benefit plan. Accordingly, provident funds set up by the employers which require interest shortfall to be met by the employer would be in effect defined benefit plans in accordance with the requirements of paragraph 26(b) of AS 15”. Hence, accounting for such benefit by the subsidiary would be advisable.

3. ICAI News:

(Note: Page Nos. given below are from CA Journal for November, 2012)

(i) International Conference to be held at Mumbai:

ICAI is organising an International Conference on 24th and 25th January, 2013 at Mumbai. Theme of this Conference will be “Accounting Profession: Enablers of Economic Growth”. Delegates from Asia and Pacific Region are expected to participate in this Conference (Page 711).

(ii) The effects of changes in Foreign Exchange Rates (AS-11):

Financial Reporting Review Board (FRRB) has re-ported that in some instances, some companies have not followed the requirements of AS-II. These instances are reported on Page 834.

(iii) ICAI Publications:

(a) Compendium of Opinions – Vol XXX (Page 846)

(b) Guidance Note on Accounting and Auditing of Political Parties.

BCAJ Admin

Direct Taxes

44.Extension of time limit for filing ITR V for AY 2010-11 and AY 2011-12 – Notification No 1/2012 under CPR Scheme 2011 dated 23-10-2012

The time limit for filing ITR V forms relating to returns filed electronically for AY 2010-11 (filed during financial year 2011-12) and AY 2011-12 (filed on or after 1 April 11) is extended. These ITR V forms can now be filed upto 31 December 2012 or 120 days from the date of e-filing the return whichever is later.

45.The Capital Gains Account (First Amendment) Scheme, 2012 – Notification no. 44/2012 dated 25-10-2012

Capital Gains Account Scheme, 1988 is amended to extend the benefit to Individuals and HUF, who have earned capital gains on transfer of a residential property and who intend to claim exemption u/s. 54GB of the Act.

46.Specified companies authorised to issue taxfree, secured, redeemable, Non-convertible Bonds during F.Y. 2012-13 – Notification no. 46/2012 dated 06-11-2012

CBDT has notified the companies eligible to issue bonds as prescribed u/s. 10(15) of the Act. Copy of the notification available on www.bcasonline.org.

47.India and United Kingdom have signed a protocol on 30th October, 2012 to amend the India – UK Treaty.

levitra

BCAJ Admin

From published accounts

Section A:

I. Change in accounting policy in Consolidated Financial Statements (CFS)

II. Adjustment of loss on exiting of business adjusted to Business Restructuring Reserve in Consolidated Financial Statements (CFS)

Hindalco Industries Ltd (31-3-2012)

From Notes to CFS
47. Effective from financial year 2011-12, the Company has changed its accounting policy for preparation of consolidated financial statements relating to actuarial gains or losses arising out of actuarial valuation of long term employee benefits and post employment benefits with respect to one of its overseas subsidiaries (Novelis Inc.). Till the previous year, the amount of actuarial gains or losses was accounted, though the along with related deferred tax have been adjusted against Reserves and Surplus. The adjustment is cash neutral. Had the Company not changed the accounting policy as above, Employee Benefits Expenses would have been higher by Rs. 1,014.91 crore, Tax Expenses would have been lower by Rs. 299.88 crore, Net Profit for the year would have been lower by Rs. 715.03 crore and Foreign Currency Translation Reserve in Reserves and Surplus would have been lower by Rs. 44.39 crore. Consequently, the Basic and Diluted Earnings per Share for the period is higher by Rs. 3.73.

46. Pursuant to a court approved scheme of financial restructuring under sections 391 to 394 of the Companies Act, 1956, Business Reconstruction Reserve (BRR) was established during 2008-09 for adjustment of certain specified expenses. Accordingly, costs in connection with exiting certain business during the year have been adjusted against the BRR in consolidated financial statements. Had this adjustment not been done, Other Expenses would have been higher by Rs. 536.33 crore, Tax Expenses would have been lower by Rs. 35.86 crore and Net Profit for the year would have been lower by Rs. 500.47 crore. A summary of adjustments made so far against BRR is given in the following table Had the Scheme not prescribed aforesaid treatment of certain specified expenses, the Profit for the period and the Earnings per Share (EPS) thereof would have been higher/(lower) by:

Table 2

From Auditor’s Report on CFS

4) Without qualifying our opinion, attention is drawn to the following:

a) Note no.47 of Notes to Consolidated Financial Statement regarding change in accounting policy with respect to recognition of actuarial losses of Rs. 759.42 crore (net of Deferred Tax) relating to pension and other post-retirement benefit plans in the Actuarial Gain/(Loss) Reserve under Reserves and Surplus of Novelis Inc. (the Company) and its subsidiaries and associates (Novelis Group) for reasons as stated therein. Had the Novelis group followed the earlier practice of recognition of actuarial losses on the aforesaid defined benefit plans in the Statement of Profit and Loss as per the Accounting Standard (AS 15) on Employee Benefits, Employee Benefits expenses would have been higher by Rs. 1,014.91 crore, tax expenses would have been lower by Rs. 299.88 crore, the consolidated profit before taxes and minority interest would have been lower by Rs. 1,041.91 crore, Actuarial Gain/(Loss) Reserve would have been Rs. Nil and Foreign Currency Translation Reserve would have been lower by Rs. 44.39 crore.

b) Note no.46 of notes to Consolidated Financial Statement relating to loss on exiting foil and packing business in one of the foreign subsidiaries amounting to Rs. 500.47 crore (Net of deferred tax of Rs. 35.86 crore) has been adjusted with Business Reconstruction Reserve as per the scheme of arrangement u/s.391 of 394 of the Companies Act 1956 as approved by the High Court at Mumbai. Had the aforesaid treatment been not done, the reported group profit before tax would have been lower by Rs. 536.33 crore and Business Reconstruction Reserve would have been higher by Rs. 500.47 crore and deferred tax assets would have been higher by Rs. 35.86 crore.

c) Note no.4 of notes to consolidated financial statements regarding consolidation of accounts of an associate including for the year ended 31st March, 2011, resulting in profit for the year being higher by Rs. 62.02 crore.

From Directors’ Report on CFS

4. Changes in Accounting Policy

Effective from the Financial Year 2011-12, the Company has changed its accounting policy for preparation of the consolidated financial statements relating to actuarial gains or losses arising out of actuarial valuation of long term employee benefits and post employment benefits with respect to one of its overseas subsidiaries (Novelis Inc.). Until the previous year, the amount of actuarial gains or losses was accounted through the Statement of Profit and Loss. Consequent to the change in accounting policy, actuarial gains or loss along with related deferred tax have been adjusted against Reserves and Surplus. This is a noncash item. Had the Company not changed the accounting policy as above, the Employee Benefits Expenses would have been higher by Rs. 1,014.91 crore, Tax Expenses would have been lower by Rs. 299.88 crore, Net Profit for the year would have been lower by Rs. 715.03 crore and Foreign Currency Translation Reserve in Reserves and Surplus would have been lower by Rs. 44.39 crore.

5. Business Reconstruction Reserve

Pursuant to a court approved scheme of financial restructuring u/s. 391 to 394 of the Companies Act, 1956, Business Reconstruction Reserve (BRR) was established during 2008-09 for adjustment of certain specified expenses. Accordingly, costs in connection with exiting certain business during the year have been adjusted against the BRR in the consolidated financial statements. Had this adjustment not been done, Other Expenses would have been higher by Rs. 536.33 crore, Tax Expenses would have been lower by Rs. 35.86 crore and Net Profit for the year would have been lower by Rs. 500.47 crore. A summary of adjustments made so far against BRR is given in the following table:

levitra

BCAJ Admin

ICAI and its members

1. Some Ethical Issues

The Ethical
Standards Board of ICAI has given answers to some Ethical Issues on
pages Page 610 to 612 of C A. Journal for Novemberg 2014. Some of these
issues are as under:

(i) Issue:

Whether sponsorship or prizes be instituted in the name of a Chartered Accountant or a firm of Chartered Accountants?

An
individual Chartered Accountant or firm of Chartered Accountants can
institute or sponsor prizes, provided that the designation ‘Chartered
Accountant’ is not appended to the prize and the Clause (6) of Part I of
the First Schedule to the C. A. Act, regarding advertisement and
publicity is complied with.

(ii) Issue
Can a Chartered
Accountant in practice give the date of setting up the practice or date
of establishment on the letterheads and other professional documents,
etc.?

Council direction under Clause (7) of Part I of the
First Schedule to the C. A. Act, prescribes that the date of setting up
of the firm on the letterheads and the professional documents etc.
should not be mentioned. However, in the website, the year of
establishment can be given on a specific “pull” request.

(iii) Issue
Can
a Chartered Accountant in Practice accept original professional work
emanating from a client introduced to him by another member?

The
first schedule Part 1 Clause (6) (J) of C.A. Act prescribes that a
member should not accept the original professional work emanating from a
client introduced to him by another member. If any professional work of
such client comes to him directly it is his duty to ask the client that
he should come through the member dealing with his original work.

(iv) Issue

Can a Chartered Accountant in practice also practice as an Advocate?

Under
the first schedule Part I Clause(7) of the C.A. Act, the council has
prescribed that a practicing C.A. who is otherwise eligible may practice
as an Advocate subject to permission of the Bar Council. In such a
case, he should not use the designation ‘Chartered Accountant’ in
respect of the matters involving the practice as an Advocate. In respect
of other matters, he can use the designation ‘Chartered Accountant’ but
he should not use the designation ‘Chartered Accountant’ and ‘Advocate’
simultaneously.

2. EAC Opinion

Disclosure of the Revenue as per AS 9

Facts:
A
company is primarily engaged in the business of owning and running
hotels and resorts. The company receives bookings for the hotel and
resort rooms and related facilities from individuals, corporates and
travel agents.

The company has a tariff card (rate list) for all
the room types which is inclusive of all taxes. Ideally, when a
customer approaches the company, he is offered the tariff rate. However,
the company has been using various marketing strategies to attract
guests. As a strategy, the company offers discounts to the guest
discretionally, based on various factors. The company has observed that
when the guest is given a discount, he feels happy about it and becomes a
loyal customers of the resort. This strategy has given to the company
an edge over its competitors and thereby helped the company to increase
its turnover year on year.

The Company has further stated that it is currently recognising revenue at tariff rate and is treating discount as an expense.

Query:
The
Company has requested the EAC to clarify how disclosure of the revenue
would be in compliance with the disclosure required in AS9 (Revenue
Recognition).

Opinion:
The Committee notes that the
basic issue raised by the Company is the accounting treatment of the
discount(s) allowed by the company and its presentation in the statement
of Profit and loss as per AS 9.

After considering the
definitions of ‘cash discount’ and ‘trade discount’ as given in the
Guidance Note on Terms used in Financial Statement issued by ICAI, the
committee is of the view that trade discount is not encompassed within
the definition of revenue since it represents a reduction of cost and
accordingly, the revenue is determined and recognised after deducting
the trade discount. Further, the Committee after considering the
definition of ‘Revenue’ given in Accounting Standard (AS 9) ‘Revenue
Recognition’ is of the view that the revenue is the charge made to
customers which in case of trade discount is the amount of net of
discount. Accordingly, the Committee is of the view that the
presentation by the company to present the revenue on gross basis and
then to present the trade discount as expense is not correct and is not
in accordance with the requirements of AS 9.

[Pl. Refer page nos. 643 to 645 of C. A. Journal – November, 2014]

3. Financial Reporting Review Board (FRRB)

ICAI
has published a “Study on Compliance of Financial Reporting
Requirements”. Some of the observations in this publication relating to
compliance with Accounting Standard (AS) 5 are given below for the
information of Members.

(i) Treatment of Foreign Exchange Loss / Gain (P.43)

It
was noticed that one of the Notes to Accounts given in the Financial
Statements stated that the company has opted to capitalise the Foreign
Exchange Loss/Gain on reporting of Long Term Foreign Currency monetary
items used for depreciable assets retrospectively w.e.f. 01-07-2007 in
view of GSR 225(E) dated 31-03-2009 issued by the Central Government as
regards AS-11, Consequently Rs.xxx lakh (including Rs.xxx lakh relating
to previous years) has been added to the cost of depreciable assets.

Observation of FRRB
Referring
to Para 32 of AS.5 (Net Profit and Loss for the period, prior period
Items and changes in Accounting Policies) it was evident that there are
two distinct aspects for dealing with the situation. The first requires
disclosure of change in the accounting policy which has a material
effect and the second aspect requires the disclosure of the impact of
such changes on the financial statements. In the case of company the
above note indicated that there was a change in an accounting policy but
the impact of such change was only partly disclosed. In this case such a
change had two fold impact due to write back of exchange difference of
earlier years viz., the aggregate impact due to the write back and
additional depreciation thereon on the profit or loss for the year. The
above note only discloses aggregate impact but does not disclose the
impact on the profit or loss of the current year. To this extent
requirement of AS-5 has not been complied with.

(ii) Disclosure of Extra – Ordinary Items (P.45)

In one of the Financial Statements, there is the following note in the Notes to Accounts:-

“FCCB
were considered as non-monetary liability during the previous period,
but keeping in view the provisions of AS-11 and the principle of
prudence as enunciated in AS-1, the foreign exchange loss of Rs.xxx
million arising out of revaluation in respect of outstanding FCCB of USD
xxx million as on 31.03.2008 has been recognized and charged to Profit
and Loss Account of the year as an extra ordinary item”.

Observation of FRRB
Referring
to Para 4.1 and 4.2 of AS-5, it was observed that the foreign exchange
gain or loss arising on outstanding balance of FCCB is an ordinary
activity since FCCB is taken by the company as a part of its business
only. Therefore, classification of the gain or loss on such foreign
exchange fluctuations as extra – ordinary item amounts to non–compliance
with the requirements of AS-5

(iii) Adjustment of earlier year’s provision against general Reserve (P. 46)

In the case of a company excess depreciation charged in earlier years and Leave Encashment liability of earlier years was adjusted against credit balance of General Reserve.

Observation of FRRB
Referring to Para 15 of AS-5, FRRB has observed that the Prior Period items should have been accounted in the Profit and Loss Account instead of adjusting them against the general reserve. Further, it was also noted that no disclosure has been made with regard to such adjustments either in the related schedules or in the notes to the accounts explaining the reasons for such adjustment against the General Reserve.

4. ICAI news
(Note: Page Nos. given below are from C.A. Journal of November 2014)

(i) National Advisory Committee on Accounting Standards (NACAS)

This Committee has been recently reconstituted by the Government under the Chairmanship of C.A. Amarjit Chopra (Former President of ICAI). This committee will advise the Government on Accounting Standards as con- verged with International Financial Reporting Standards which are to be adopted in India from next year (2015-16) on a voluntary basis by companies in India. These stan- dards will become mandatory in 2016-17 (P. 598)

(ii) ICAI initiative in E- learning

The following 10 hi-tech initiatives have been launched.

(a) ICAI Mobile App – Information about all announce- ments, photo gallery, videos, news and other infor- mation about ICAI.

(b) Flexi Working Portal for Women Members- To help women members to find suitable opportunities Part-time/Flexi-Hours Jobs and Jobs with work- from-Home option.
(c) ICAI Knowledge Portal – Offers access of latest publications, announcements, articles, journals etc.

(d) ICAI Video Podcast – Consists of audio, video, PDF, and ePub files that can be subscribed to and downloaded or streamed on line.

(e) ICAI cloud campus – For students in India and abroad who can get education and training at their doorsteps.

(f) ICAI Publications Online – ICAI Publications, ICAI stationery items and ICAI E-learning CDs can be delivered at your home.

(g) ICAI E-learning – This is available to members, students and non-members. It is a self-paced, in- teractive and captivating learning experience.

(h) ICAI Digital Library – This is a repository of various digital Publications, E-books, Journals etc.

(i) ICAI Embraces Social Media – You can follow ICAI on Facebook, Twitter, You Tube and Google to catch up on the latest news, important announcements, press releases and updates.

(j) ICAI TV – you can hear the President’s latest speech, lectures by professionals and important announcements through DTH Service (P. 640-641)

(iii) Get C.A. Journal at your Residence

Members can apply to Editorial Board to get C.A. Journal at Residential Address (P. 652)

(iv) ICAI News Publications.

(a) Handbook of Auditing Pronouncements Compendium of Engagement and Quality Control Standards (As on 1st October,2014) Volume 1.A

(b) Compendium of Statements on Auditing (VoL 1.B)

BCAJ Admin

Company Law

1. Amendment to Schedule VII of the Companies Act, 2013 pertaining to Activities to be undertaken under Corporate Social Responsibility.

The Ministry of Corporate affairs has vide Notification dated 24th October 2014 made the following amendment to the said Schedule:

(i) In item (i) after the words “and sanitation” the words “including contribution to the Swach Bharat Kosh set up by the Central Government for the promotion of sanitation” is inserted
(ii) In item (iv) after the words ”and water” the words including contribution to the Clean Ganga Fund set up by the Central Govt. for the rejuvenation of river Ganga “ is inserted.

2. Amendment to Companies ( Accounts) Rules 2014

The Ministry of Corporate Affairs has on 14th October 2014 issued a notification to amend the Companies (Accounts) Rules 2014, whereby:

The following proviso is inserted after the existing proviso ” Provided further that nothing in this rule shall apply in respect of the preparation of Consolidated Financial statement by an wholly-owned subsidiary, other than a wholly owned subsidiary whose immediate parent is a Company incorporated outside India.

Provided also that nothing contained in this rule shall, subject to any other law or regulation, apply for the financial year commencing from the 1st day of April 2014 and ending on the 31st March 2015, in case of a company which does not have a subsidiary or subsidiaries but has one or more associate companies or joint ventures or both, for the consolidation of financial statement in respect of associate companies or joint ventures or both, as the case may be.”

3. Clarification on matters relating to the Companies ( Cost Records and Audit ) Rules 2014.

The Ministry of Corporate Affairs has vide General Circular No. 42/2014 dated 12th November 2014 made clarification about Rules 5(1) and 6(2) of the Companies (Cost records and Audit) Rules 2014 pertaining to the maintenance of cost records and filing of the notice of appointment of Cost Auditor in Form CRA-2 since there has been a delay in the availability of the said form. The date of filing of the CRA-2 without penalty/late fee has been extended to 31st January 2015. Further, it is clarified that Companies that have filed the Form 23C for the year 2014-15, need not file the fresh CRA 2 for the financial year 2014-15.

4. Issue of Foreign Currency Convertible Bonds (FCCBs and Foreign Currency Bonds (FCBs) – Clarifications regarding applicability of provisions of Chapter III of the Companies Act, 2013

The Ministry of Corporate Affairs has issued clarifications vide Circular No. 43/2014 dated 13th November,2e 2014, for applicability of provisions of Chapter III of the Companies Act, 2013 (Act) to the issue of Foreign Currency Convertible Bonds (FCCBs) and Foreign Currency Bonds (FCBs) by Indian companies exclusively to persons resident outside India in accordance with applicable sectoral regulatory provisions, in consultation with Ministry of Finance and SEBI.

The issue of FCCBs and FCBs by companies is regulated by the Ministry of Finance’s regulations contained in Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipts Mechanism) Scheme, 1993 (Scheme) and Reserve Bank of India through its various directions/regulations. It is, accordingly, clarified that unless otherwise provided in the said Scheme or the directions/regulations issued by Reserve Bank of lndia, provisions of Chapter III of the Act shall not apply to an issue of a FCCB or FCB made exclusively to persons resident outside India in accordance with the above mentioned regulations.

5. Extension for Company Law Settlement Scheme 2014

The Ministry of Corporate Affairs has issued clarifications vide General Circular No. 44/2014, Dated: 14.11.2014, that it has further extended the COMPANY LAW SETTLEMENT SCHEME, 2014 (CLSS-2014) upto 31st December, 2014.

The Ministry has vide General Circular No. 41/2014, issued clarification u/s. 164(2) of the Companies Act 2013. It has clarified that disqualification of Directors pursuant to Clause 164(2) (a) of the Companies Act, 2013 will be applicable for only prospective defaults in case of Companies who have filed Balance Sheets and Annual Returns on or after 01.04.2014 but before the CLSS -2014 came into force i.e., 15.08.2014

6. Extension of time for holding Annual General Meeting (AGM) u/s. 96(1) of the Companies Act, 2013 – Companies registered in State of Jammu and Kashmir.

The Ministry of Corporate Affairs has issued clarifications vide Circular No. 45/2014 dated 18th November 2014, that in view of the exceptional circumstances, advised the Registrar of Companies Jammu & Kashmir to exercise the powers conferred on him under third proviso to section 96(1) of Companies Act 2013 to grant extension of time upto 31st December 2014 to those companies registered in the state of Jammu and Kashmir who could not hold their AGM’s (other than the first AGM0 within the stipulated time.

7. Right of persons other than retiring directors to stand for directorship – Refund of deposit u/s. 160 of the Companies Act, 2013 in certain cases.

The Ministry of Corporate Affairs has vide General Circular No. 38/2014, dated 14th October 2014 issued the clarification that for Companies registered u/s. 8 of the Companies Act, 2013 (corresponding to section 25 of Companies Act, 1956), the manner in which the amount of deposit of Rs. 1 lakh received by them under sub-section (1) of section 160 of the Companies Act, 2013 (Act) is to be handled if the depositor fails to secure more than 25 % of the total valid votes. Since the law is silent in the matter, the Board of directors of a section 8 company is to decide as to whether the deposit made by or on behalf of the person failing to secure more than 25 % of the valid votes is to be forfeited or refunded

8. Amendment to the Companies( Audit and Auditors) Rules, 2014

The Ministry of Corporate Affairs has vide Notification dated 14th October 2014 amended the Companies (Audit and Auditors) Rules, 2014, by inserting after Rule 10, the following

“10A. For the purposes of Clause (i) of sub-section (3) of section 143, for the financial years commencing on or after 1st April, 2015, the report of the auditor shall state about existence of adequate internal financial controls system and its operating effectiveness: Provided that auditor of a company may voluntarily include the statement referred to in this rule for the financial year commencing on or after 1st April, 2014 and ending on or before 31st March, 2015.”

9. Clarification on matters relating to Consolidated Financial Statement.
The Ministry of Corporate Affairs has vide General Circular No. 39/2014 dated 14th October 2014 issued clarification on matters relating to manner of presentation of notes in Consolidated Financial Statements to be prepared under Schedule III to the Companies Act, 2013 (Act). It is clarified that Schedule III to the Act read with the applicable Accounting Standards does not envisage that a company while preparing its CFS merely repeats the disclosures made by it under stand-alone accounts being consolidated. In the CFS, the company would need to give all disclosures relevant for CFS only.

10. Change of Forms

E-form DIR-3C, replacing e-form DIN-3 has been introduced by MCA for filing. This form is for intimating DIN of Directors to ROCs. Some of the companies were facing issues in filing of the forms due to non-availability of signatory details of the Directors in MCA portal. In this regard, Companies which do not have any of their Directors/Signatory details registered in the MCA21 system and who are desirous of filing DIR-3 Form are advised to get atleast one authorised signatory registered by contacting the concerned Registrar of Companies. ROCs have been requested by the MCA to allow entry of details from their offices also.

b) Form ADT-1 (Information to the Registrar by Company for appointment of Auditor, erstwhile Form 23B) is available for filing w.e.f 20th Oct 2014. ADT-1 should not be filed as attachment to Form GNL-2.

11. Amendment to Company Law board (Fees on Applications and Petitions) Rules, 1991

In exercise of the powers conferred by section 642 read with sub-section (2) of section 637A of the Companies Act, 1956 (1 of 1956) and the removal of difficulty Orders issued by the Central Government u/s. 470 of the Companies Act, 2013, the Central Government has vide notifica- tion dated 3rd November 2014 amended the Company Law Board (Fees on Applications and Petitions) Rules, 1991 whereby in the Company Law Board (Fees on Applications and Petitions) Rules, 1991, in the Schedule, after serial number 33 the following shall be inserted, namely:

2(41) of the

Companies Act, 2013

Allowing
any period other than April to March as financial year.

5,000

58 and 59 of the

Companies Act, 2013

73(4) of the

Companies Act, 2013 read with
section 76

Rectification of register
of

members

500

74(2) of the

Companies Act, 2013

Directing
the company to pay the sum due or for any loss or damage incurred as a result
of such non-payment.

100

74(2) of the

Companies Act, 2013

Allow
further time as considered reasonable to the company to repay the deposit.

5,000

12. Companies (Central government’s) general Rules and Forms Amendment Rules, 2014

The Ministry of Corporate Affairs has vide Notification dated 7th November, 2014 made an amendment to the Companies (Central Government’s) General Rules and cations and Petitions) Rules, 1991, in the Schedule, after serial number 33 the following shall be inserted, namely:

Forms, 1956, whereby in Rule 12A, for the brackets and words “(Accounts) in the Department of Company Affairs”, the words “in the Ministry of Corporate Affairs” are substituted.

BCAJ Admin

PART C: Information on & Around

Compensation of Rs. 5 lakh:
The Maharashtra State Information Commission (SCIC) has awarded a compensation of a whopping Rs. 5 lakh to a right to information applicant. The compensation is to be paid by Maharashtra State Electricity Distribution Company Limited (MSEDCL) to Ambernath resident, Nitin Desai for the harassment meted out to him while providing information to him. The amount is the highest ever compensation given to an individual in the state as of now.

Earlier, a compensation of Rs. 1 lakh was given to a charitable trust by state chief information commission. In 2013, it became the highest ever compensation to be given till date. The Rs. 5 lakh compensation order was delivered on 30th October by the state information commissioner (konkan beach), Thanksi Thekkekara. The compensation was awarded after the applicant was first denied information and then given misleading information.

Desai had sought information on the transformer installed on his land. Around 300 sq. ft. of land was taken up to install the transformer and it could not be used. Desai sought information about the permission. The information was sought in 2012. However, MSEDCL’s public information officer (PIO) did not provide any information.

During the hearing, the PIO stated that verbal permission was taken from the applicant before using the land. The commissioner stated, as per rules, provision for verbal permission did not exist at all. During the hearing, a show cause notice was served on the PIO asking why a compensation of Rs. 20 lakh should not be provided to the applicant. During the hearing, the commission was of the view that Rs. 5 lakh compensation should be provided by public authority from its expenses and a report of the same should be given to the commission by 1st December, 2014. A fine of Rs. 25, 000 was also imposed on the PIO.

levitra

BCAJ Admin

PART A: Decision Of CIC

Section 5(4) of the RTI Act- Denial of Information:

[Shri Prithvi M. vs. ICAI, File No. CIC/SS/A/2013/001875/ KY, dated on 27.08.2014]

Decision:
“It would be seen here that the appellant, vide his RTI Application dated 08.02.2013, sought information from the respondents on three issues as contained therein. Respondents vide their response dated 08.03.2013, allegedly provided the required information to the appellant on all issues. Being aggrieved by the aforesaid response, FA was filed by the appellant on 26.03.2013 before the FAA, who vide order dated 25.04.2013, upheld the decision of CPIO. Hence, a Second Appeal before this Commission.

It is pertinent to mention here that the CPIO, vide his response dated 08.03.2013, provided the required information to the appellant against issue no. 1 only. Further, learned FAA, vide his order dated 25.04.2013, disposed of the FA by upholding the views of CPIO. However, it is to be seen here that required information against issues no. 2 & 3 were not provided on the ground of non-availability of the record in respondent’s office.

On being queried by the Commission, as to why the required information was not provided to the appellant against issues no. 2 & 3. On this very aspect, it is submitted by Smt. Seema Gerotra, Deputy Director & PIO, that the records are not available in PIO’s office. However, the relevant information pertaining to issues no. 2 & 3, is available in the office of CBDT.

In view of this, it is clear that the information sought by the appellant, against issue no. 2 & 3, is in existence in the Public Authority of her sister’s Branch i.e. CBDT. For this, PIO of ICAI could have easily invoked section 5(4) of the RTI Act 2005 for obtaining the required information. However, it could not be done by the PIO concerned for reasons best known to her.

The Commission heard the submissions made by respondents at length. The Commission also perused the case-file thoroughly; especially, nature of issues raised by the appellant in his RTI application dated 08.02.2013, respondent’s response dated 08.03.2013, FAA’s order dated 25.04.2013 and also the grounds of memorandum of second appeal.

By virtue of position above and in the circumstances of the case, the Commission is of the considered view that the respondents have failed to provide the required information to the appellant, even after lapse of eighteen months period. Thus, the respondents have, deliberately, defeated the very purpose of the RTI Act 2005 for which it was legislated by Parliament of India. As such, the Commission feels that appellant’s second appeal deserves to be allowed against issues no. 2 & 3 of the RTI application dated 08.02.2013. Therefore, it is allowed accordingly.

In view of the above, the respondents are hereby directed to provide the complete and categorical information, against issue no. 2 & 3 only, to the appellant, within 30 days from the date of receipt of this order under intimation to this Commission. If need be, Section 5(4) of the RTI Act 2005 be also invoked in the matter”.

levitra

BCAJ Admin

PART B: RTI Act, 2005

PEOPLE’S MONITORING OF THE RTI REGIME IN INDIA 2011-13:

In the last issue of BCAJ I had noted as under:

P.S. RTI Assessment and Advisory Group (RAAG) and Samya Center for Equity studies (SAMYA) have published in October 2014 the work titled “PEOPLE’S MONITORING OF THE RTI REGIME IN INDIA: 2011-13 running into 177 pages. Next issue, we will summarise the same. Look forward to it. Briefly looking into the contents of compilation, running into 177 pages of 11 chapters & 10 annexures, I plan to serialise it and cover 1 or 2 chapters in each issue.

This study is part of an ongoing series of studies on various aspects of the implementation of the RTI regime in India. The current study covers the period 2011-13.

Hereunder is the summary of the KEY FINDINGS and RECOMMENDATIONS before I summarise the chapters.

A. Improving awareness: There is poor awareness about the RTI Act, worse in rural areas than in urban areas. In only 36% of the rural focus group discussions (FGDs) and 38% of urban FGDs, was there even one participant who had heard of the RTI Act in the state headquarters, and in Delhi, 61% of the respondents interviewed through street corner interviews said that they had heard about the RTI Act.

B. Gender concerns: The participation of women in the RTI process, especially as applicants, has been minimal, with a national average of 8%. Many reasons can be attributed for this gender imbalance, but there is no scientific understanding of why so few women file RTI applications. If RTI means of empowerment, then there should be a special focus on ensuring that women are aware of the RTI Act and willing and able to use it.

C. The rural-urban divide: Only 14% of the applicants were from rural areas, even though over 70% of India’s population lives in rural areas. Though the sample might have a bias in favour of urban areas, even after adjusting for such a bias, the proportion is too small. Awareness levels about the RTI also seem low in rural areas.

D. Grievance redress mechanism: 80% of respondents in rural FGDs, and 95% in urban FGDs, said that they wanted to use the RTI Act in order to seek redress of their grievances. Analysis of RTI applications showed that at least 16% of the applicants were seeking information that was aimed at getting action on a complaint, getting a response from a public authority, or getting redress for a grievance.

E. Ineffectual first appellate process: Except for first appeals filed with the central government or Delhi government, there is less than 4% chance of getting any information by filing a first appeal.

F. Threats to applicants: Applicants, especially from the weaker segments of society, are often intimidated, threatened and even physically attacked when they go to submit an RTI application, or as a consequence of their submitting such an application.

G. Reducing the need to file RTI applications: Certain public authorities, especially those with extensive public dealing (like municipalities, land and building departments, police departments, etc.) receive a disproportionate share of RTI applications compared to other public authorities. In some cases, there is resentment among PIOs as they have to deal with a large number of RTI applications in addition to their normal work.

H. Proactive disclosure: Despite a very strong provision for proactive (suo motu) disclosure u/s. 4 of the RTI Act, there is poor compliance by public authorities. This forces applicants to file applications for information that should be available to them proactively, and consequently creates extra work for themselves, for the concerned public authorities, and for information commissions. 65% of the PA premises inspected did not have a board with the required proactive disclosures and 59% did not have any publications or other material available in their office which the public could inspect in order to access the information that should be proactively available.

I. Record Management: One major constraint faced by PIOs in providing information in a timely manner is the poor state of record management in most public authorities.

J. Training of PIOs: Nearly 45% of the PIOs have not received any training on the RTI Act. In fact, the PIOs interviewed identified lack of training as their number one constraint. A much larger proportion of non-PIO civil servants, who have to provide information to the PIOs or function as first appellate authorities, have not been oriented and trained towards facilitating the right to information.

K. Delays and pendency: There are huge and growing delays in the disposal of cases in many of the information commissions, with pendency of cases growing every month. At the current levels of pendency and rate of disposal, an appeal filed today with the Madhya Pradesh SIC would be taken up for consideration only after 6 years, while the West Bengal SIC would come to it after nearly 17 years! The main reasons behind the delays seem to be the paucity of commissioners in some of the commissions and the low productivity of some of the other commissioners, mainly due to inadequate support. The additional fact that there is no legally prescribed time limit for disposing second appeals not only allows ICs to be indifferent about delays but also prevents appellants from approaching the high court.

L. Enforcing orders: Often, orders of information commissions are not heeded to by the concerned public authority and even penalties that are imposed are not recovered. Many commissions do not have workable methods of monitoring whether their orders have been complied with; leave alone for ensuring that they are complied with.

M. Imposing penalties: A very small proportion of the penalties imposable under the RTI Act (less than 3.7% on the basis of our current estimate) are actually imposed by commissions. Though further research needs to be done on this aspect, preliminary data suggests that there is a correlation between the number of penalties imposed and both the willingness of PIOs to make information available, and the number of appeals and complaints that land up with information commissions.

N. Practicing transparency: Unfortunately, many of the information commissions do not themselves follow the requirements of section 4 of the RTI act. Most of their websites are outdated with very sparse details and much of the required information missing.

O. Independence of commissions: Many information commissioners feel that their dependence on the government for budgets, sanctions and staff seriously undermines their independence and autonomy, and inhabits their functioning.

P. Composition of commissions: The composition of information commissions across the country has a bias towards retired government servants. It is desirable to have a more balanced composition so that diverse expertise is represented in the commission.

Q. Rationalising rules: All states and union territory governments (a total of 34), all the high courts (23) and legislative assemblies (29), the central government, the Supreme Court and both houses of Parliament have a right to make their own rules. This can result in 90 different sets of rules in the country. In addition, the 28 information commissions also have their own procedures, as formulated by the appropriate governments, resulting in a total of 118 sets of rules relating to the RTI in India! Consequently, an applicant is confronted with the often insurmountable problem of first finding out the relevant rules and then attempting to comply with the application form, identity proof, or mode of fee payment requirement, which differ from state to state and are often virtually impossible to comply with.

R. Monitoring and advisory body: The mechanisms for monitoring the implantation of the RTI Act, and for receiving and assimilating feedback, are almost non- existent.

S. Information publication scheme: There is an Information Publication Scheme provided for in the statute in Australia and later adopted by UK too. In this scheme the Information Commission asks each agency to publish its own information on its functioning. The Commission guides the agency and approves the publication scheme.

T. Political parties and the RTI: Nepal has included the functioning of a political party and only NGO with full/part government funding in the agencies whose information can be accessed.

U. Selecting information commissioners: Process of appointment of information commissioners is comparatively more participatory and open in Canada and Scotland. Both countries go through a series of approvals by the Parliament of candidates who are com- petitively short-listed. The transparent process helps in legitimising the position to a much greater degree than appointments that are seen to come through de- liberations of the Prime Minister or government alone.

V. Implementing IC orders: The orders of the Information Commission are binding on the agency in UK. If necessary, it can issue what are known as enforcement notices which, if not implanted, are treated as contempt of court for the purpose of punishment.

W. Accountability to Parliament: Information Commissions in Canada and UK submit detailed annual reports of their activities to the Parliament. This makes them accountable to the Parliament and also helps in making their activities transparent and available for public scrutiny.

Above are 23 Key Findings. On each finding, the publica- tion gives their recommendations, which are not reproduced here. If any reader desires to have them, a soft copy would be forwarded to him/her.

Report of The Committee To evolve Model Format for RTI Replies:

The Committee constituted vide DoPT O/M/No. 10/1/2013-IR dated 16th October, 2014 to evolve a model format for giving information under the RTI Act, held its meeting on 29th October, 2014 at 11:30 a.m. After ex- amining in detail the provisions of the RTI Act, the ex- isting generally followed by the CPIOs in replying to RTI applications, the Committee has made the following observations:

X. There is neither any provision in the RTI Act or RTI Rules for a model/standard format of RTI applica- tion nor any provision for a model/standard format for reply to the RTI applications.

II. Presently, neither any standard practice nor any standard format is being used by the CPIOs in reply to the RTI applications.

In view of the above observations, the Committee has made the following recommendations:

a) There should not be a model/standard format for reply to the RTI application, as there is no such provision in the RTI Act or the RTI rules.

b) Moreover, keeping in view that there is no standard format for RTI applications, there could not be a standard format for their reply.

c) However, the following points can be uniformly ad- opted by the CPIOs while replying to the RTI applications:

i. The name, designation, official telephone no. and email id of the CPIOs should be clearly mentioned.

ii. In case the information requested for is denied, rea- sons for denial quoting the relevant sections of the RTI Act should be clearly mentioned.

iii. In case the information pertains to other public author- ity and the application is transferred u/s. 6(3) of the RTI Act, details of the public authority to whom the ap- plication is transferred should be given.

iv. In the concluding Para of the reply, it should be clearly mentioned that the First appellate Authority will reply within 30 days of receipt of reply of CPIO.

v. The name, designation, address, official telephone no. and e-mail id of the First Appellate Authority should also be clearly mentioned.

vi. Wherever the applicant has requested for certified copies of the documents or records, the CPIO should certify the documents or records by putting a seal of his name, designation and signing with date. Above the seal, the remarks that “documents/records pro- vided under the RTI Act” should be endorsed.

BCAJ Admin

Ethics and u

(This is one more example of alleged negligence or lack of due diligence)

Shrikrishna (S) — Yes, My dear Partha, what happened to those digital signatures misplaced in your office?

Arjun (A) — Oh Lord, you are Great and kind hearted. I realised that you were testing my devotion towards you, my Lord. I had very anxious moments; but thanks to your mercy, those small pen-drives were located in some working files! God saved me!

S — But then, did you take precautions that we discussed?

A — Of course, yes. Immediately, I obtained necessary letters from all clients who left their tokens with us. I returned most of them to the respective clients. I don’t want any more headache!

S — Good. But then, why are you again looking so tense?

A — Hey Bhagwan! It’s another true story that has frightened me.

S — What is that?

A — My friend is a company secretary. Earlier, he was in a corporate job; but now on his own. He is in deep trouble!

S — Why? What happened to him?

A — He had a client. A small private limited company. The promoters-directors were only a couple. Husband & wife.

S — It is very common. I have seen it in many CAs. But they are not aware that this may be a serious misconduct in terms of clause (11) of First Schedule.

A — Yes. We had discussed it once. But here, they were lay-persons; not CAs or CS’s. Otherwise, I know that it would amount to engaging in other business without seeking permission from the Council.

S — Ok. Then what next?

A — They inducted one more person as a director who promised them to bring some business from abroad.

S — Good. Then?

A — He remained a director for a couple of years; but nothing materialised as promised by him.

S — Then there must be unpleasantness.

A — Yes. The company spent a sizeable amount on exploring the potentials as advised by him. He was drawing a remuneration too!

S — Wasteful!

A — The company had engaged a company secretary as an adviser. He was not involved in the company’s activities on a day-to-day basis. One fine morning, the couple informed him that the third director had tendered his resignation.

S — As expected!

A — Yes. And the CS was asked to complete the formalities of ROC. He advised them that a board meeting should be held. Now that the only continuing directors were husband and wife – staying together (!) – he showed the meeting of the same date and uploaded form No.32 – recording the resignation of the third director.

S — Very normal. But in the so called Board meeting, was that third director invited?

A — No. According to the CS, there was no need. He had resigned and it was pointless calling him. It was a formality that the other directors accept his resignation. Relations were not smooth; but the reality was obvious that he did not contribute anything to the business.

S — You mean that the resignation was a natural consequence of the situation.

A — Exactly. But now that third director has turned around and says that he had not resigned! The signature on the letter is not his! He alleges that it was forged.

S — Oh! The CS had obviously not attempted to verify the signature.

A — True. In practice, we have to proceed in good faith. Everytime we cannot afford to be suspicious. We never consider it necessary to verify signatures of our clients – like a banker does.

S — So now, it is a lesson! But tell me, was the signature at least similar to that in the company’s records?

A — That’s the unfortunate part. There is a variation. But all this is revealed now. At that point of time, when a respectable business-couple produces a letter, and asks to complete the formalities, should the company secretary disbelieve them?

S — True. But this is ‘kaliyug’! Good faith has no place in today’s era. And, from a professional, expectations are more. It is perhaps the ‘professional scepticism’ that gives credibility to a professional’s work.

A — Agreed. Our CAs are also uploading company law forms. This is an eye-opener to all of us.

NOTE:
The above dialogue between Shri Krishna and Arjun is based on Clause (7) of Part I of Second Schedule which is reproduced below.

Clause (7) of Part I of Second Schedule states that a CA in practice shall be deemed to be guilty of professional misconduct, if he – “does not exercise due diligence, or is grossly negligent in the conduct of his professional duties”.

levitra

BCAJ Admin

From published accounts

Section A:
Multiple schemes of arrangement effected during the year Mahindra & Mahindra Ltd. (31-03-2014)

Scheme 1
From Notes to Accounts
Pursuant to the Scheme of Arrangement (‘The Scheme’) between Mahindra Trucks and Buses Limited (MTBL), a subsidiary of the Company, and the Company, as sanctioned by the Honourable High Court of Bombay vide its order dated 7th March 2014, the entire assets and liabilities, duties and obligations of the Trucks Business of MTBL was transferred to and vested in the Company, from 1st April, 2013 (the appointed date). The scheme became effective on 30th March, 2014.

The accounting of this arrangement was done as per the scheme approved by the Honourable High court of Bombay and the same has been given effect to in the financial statements as under:

(a) The assets and liabilities of the Trucks Business of MTBL were recorded in the books of the Company at their book values.

(b) MTBL reorganised its Equity Share Capital and Securities Premium account by writing off it’s accumulated losses and the excess of assets over liabilities given up, first against Securities Premium Account and the Balance against the reorganisation of Share Capital by reducing the face value and paid up value of the Equity Share Capital of Rs. 10 each to Rs. 0.20.

(c) Consequent to the transfer of Trucks Business, the Company reorganised its investment cost in MTBL in proportion to the net worth of the remaining business of MTBL and the net worth of the Trucks Business leading to a reduction in investment value of Rs. 819.79 crore.

(d) The excess of the reduction in investment value over the assets taken over amounting to Rs. 565.85 crore was debited to General Reserve.

The result for the year ended 31st March, 2014 also include a tax benefit of Rs. 297.78 crore arising from the carry forward unabsorbed past losses (including unabsorbed depreciation) and deferred tax positions of the Trucks business of MTBL.

The current year figures are therefore not strictly comparable with that of the previous year.

Scheme 2
From Notes to Accounts
The Board of Directors of the Company during the year approved entering into a transaction in the Auto Components business with CIE Automotive S.A., Spain (CIE). The transaction is to be completed in parts.

The first part involving the following has been completed during the year:

(a) The Company transferred its entire shareholding in Mahindra Gears & Transmissions Private Limited at a fair value determined by an independent valuer to its wholly-owned subsidiary Mahindra Investments (India) Private Limited (MIPL). The excess of Rs. 23.62 crore over the cost has not been recognised in these results having regard to the principles of prudence and the substance of this transaction, and will be dealt with on completion of the related parts.

(b) The Company sold 99.4% of its holdings in Mahindra CIE Automotive Limited (MCIE) (formerly known as Mahindra Forgings Limited) and 100% of its holdings in both Mahindra Composites Limited (MCL) and Mahindra Hinoday Industries Limited (MHIL) to one of the subsidiaries of CIE at a price that is lower than the carrying value of these investments by Rs. 147.76 crore, which amount has been debited to the Investment Fluctuation Reserve (IFR). IFR is expected to be credited, having regard to the substance of the transaction, with an amount not less than the amount debited above, when the second part of the transaction, described below, takes place.

(c) Consequently MHIL, Mahindra Forgings International Limited, Mahindra Forgings Europe AG, Gesenkschmiede Schneider GmbH, JECOJellinghaus GmbH, Falkenroth Umformtechnik GmbH, Stokes Group Limited, Stokes Forgings Dudley Limited, Stokes Forgings Limited, Mahindra Forgings Global Limited, Schoneweiss & Co. GmbH ceased to be subsidiaries of the Company. MCL ceased to be an associate of the Company.

MCIE ceased to be a subsidiary and became an associate of the Company.

(d) The Company acquired a 13.5% stake in CIE through its wholly owned subsidiary Mahindra Overseas Investment Company (Mauritius) Limited (MOICML), making it an associate of the Company, in view of its contractual representation on the Board of CIE.

(e) Completion of open offer by CIE through its subsidiary in both MCIE and MCL.

The second part of the transaction involves the merger of Mahindra Ugine Steel Company Limited, Mahindra Gears International Limited and Mahindra Investments (India) Private Limited, and MHIL, MCL and a CIE subsidiary with MCIE effective 1st October, 2013 through Schemes of Arrangement u/s. 391 to 394 of the Companies Act, 1956. On completion of both parts above:

(a) CIE will hold approximately 53% in MCIE;

(b) The Company will hold 20.04% in MCIE; and

levitra

BCAJ Admin

FROM THE PRESIDENT

India has witnessed an excellent equity market performance in 2014, with the combined market capitalisation of India’s publicly listed companies on BSE touching the Rs.100 lakh crore(One followed by fourteen zeros) mark during November. India now ranks 9th on the league table of market capitalisation with an increase of 39 % so far this year. By far, this is the highest growth in this year compared to the other nine countries in the top 10 list.

Even as the Indian stock market has achieved this remarkable feat, the primary market, considered as a benchmark for new capex in the economy, continues to languish. The capital raised through public and rights issues in 2013-14 by the private sector amounted to Rs.11,681 crore of which capital raised through IPO’s consisted only of Rs.1,236 crore. The comparable data for the half year ended September 2014 at Rs.4,335 crore and Rs.1,031 crore respectively, shows no significant improvement. In stark contrast, the capital raised by the private sector 20 years ago during 1994-95 was much higher at Rs. 26,417 crore even as India’s GDP has increased by nearly ten times over these 20 years.

Another worrisome factor is the very low investment inequities by retail investors. While India reports very high household savings rate of over 20 %, less than 1 % of India’s population invests in equities. The proportion of these total household savings that make it to capital market is less than 2 %.

The below par performance of the primary market remains a concern and is also a symptom of structural bottlenecks faced while doing business in India. The jobless growth witnessed under UPA-I Government reaffirms the need for structural reforms and qualitative improvement in governance to usher in sustainable growth.

A vast majority of today’s youth graduating through rote learning prefer to be job-seekers rather than becoming job-givers and compound this challenge. Even Chartered Accountants are not an exception to this. In the last ten years ending 31st March 2014, the total membership of the ICAI increased by 1,13,055, out of which 80,363, i.e., 71 % of the members opted not to obtain a certificate of practice.

Indeed, it is time for the Modi Government to accelerate the much-promised reforms. The ‘Make in India’ campaign needs to go beyond the rhetoric and ensure de-bottlenecking of procedural and bureaucratic hurdles. The Finance Minister has promised that a whole set of second-generation reforms will be unveiled in the next Union Budget.

Every year, the Taxation and Indirect Tax Committees invite suggestions from the members for inclusion in the prebudget memorandum. The response, however, has been not so encouraging. The dedicated team of committed volunteers at the BCAS burns the mid-night oil to prepare a thoughtful pre-budget memorandum and submits the same to the Government authorities. Let us hope that the new Government will give due consideration to all the suggestions received and implement the deserving ones.

It appears that most Citizens are happy to complain but do not come forth to contribute and respond to government initiatives. This is partly due to inertia and partly due to cynicism. It remains to be seen how the new initiative by Prime Minister Modi through www.MyGov.in is able to bring about a change in this attitude.

The recent enactment of mandatory voting by persons in local body elections by the Government of Gujarat has erupted into a controversy with liberals, calling it totalitarian and some lawyers calling it unconstitutional. The Fundamental Duties of the Citizen in Article 51A of part IV of our Constitution were enacted by the 42nd Constitutional Amendment Act, 1976. Experts are of the view that the constitution does not make any provision to enforce the performance of these duties. Perhaps, we need to take a revisit to this issue and strike an equitable balance between the rights and the duties of the Citizen.

At the recently concluded G20 Brisbane Summit in Australia, a major concern remained around the uneven global recovery not delivering the jobs needed. The leaders agreed to a detailed action plan, aimed at raising the global growth, to deliver better living standards and quality jobs for people across the world. They have set up an ambitious goal of lifting G20’s GDP by at least an additional 2 % by 2018.

The G20 Summit also acknowledged that corruption continues to represent a significant threat to global growth and financial stability. It destroys public trust, undermines the rule of law, skews competition, impedes cross-border investment and trade, and distorts resource allocation. The summit reaffirmed its commitment to building a global culture of intolerance towards corruption. The action plan outlined includes ensuring transparency of beneficial ownership, combating bribery through effective criminal and civil laws and enforcement, private and public sector transparency and integrity and international cooperation. The Summit also identified high-risk sectors such as extractives sector, customs, fisheries and primary forestry, and construction sectors and resolved to identify and develop international best practices to address the risk of corruption. The elaborate agenda of the G20 Summit has resulted in a compilation of a long wish list. The critics have termed the 800-plus policy proposals as a catalogue of measures that are old, vague or unlikely to be implemented and that G20 has failed to deliver on its 2010 commitments. It remains to be seen how G20 Summits travel beyond the annual sojourn and photo opportunities.

The residential programmes pioneered by the BCAS have gained immense popularity over the years. For the past several years, the residential programmes dedicated to specialised subjects such as International Tax, IFRS and Service Tax, are being organised for the targeted group of participants. Last year, the BCAS team pioneered innovation once again. Two residential programmes dedicated to specific age groups were organised-Senior Chartered Accountants’ Meet for seniors above the age of 60 years and Youth RRC for young chartered accountants below 35 years. Both these programmes received encouraging response and are being repeated in 2015 as well.

The conclusion of the annual tax filing season for AY 2014-15 brings a much needed relief to the members. It is time to enjoy the winter chill and ring in the New Year. At this time of the year, we eagerly look forward to the much coveted Annual Residential Refresher Course for learning and bonding in a relaxed atmosphere.This time the 48th RRC will be held from 8th to 11th January 2015 at the scenic Udaipur, and we look forward to seeing some of you there.

levitra

BCAJ Admin

From Published Accounts

Section A: Disclosure in Limited Review Results regarding nonappointment of independent directors, etc. as per Companies Act 2013 and listing agreement

Compiler’s Note
Sections 149, 177 and 178 of the Companies Act, 2013 as well as Clause 49 IIIB of the listing agreement require companies to have a minimum number of independent directors. There are several PSUs where the respective ministry of the Government of India has not appointed / re-appointed the required number of independent directors since several months. Following are 2 instances of listed PSUs where the auditors have given observations in the quarterly limited review reports for same.

Dredging Corporation of India Ltd . (period ended 30th Sept., 2015)

From Notes below unaudited quarterly results

8. Statutory Auditors have qualified in their limited review report as under:
Quote: The Company had not complied with the provisions of section 135, 149(1), 149(4), 177 and 178 of the Companies Act, 2013. At this stage, we are unable to comment on the consequential impact of non-compliance of these provisions if any.

9. Company’s Reply to Statutory Auditor’s Qualification is as under:
The Company is a Government of India Undertaking and as per the Articles of Association of the Company, the Directors are to be appointed by the President of India. The issue of appointment of requisite number of independent directors, women director, has been taken up with the administrative Ministry – Ministry of Shipping and the same is pending with them. Constitution of different committees as required under the Act will be taken up after the appointment of the said Directors by the Ministry of Shipping. The said qualification has no impact on the profit of the Company for the year.

From Limited Review Report

4. Basis for qualified conclusion
The company had not complied with the provisions of section 135, 149(1), 149(4), 177 and 178 of the Companies Act, 2013. At this stage, we are unable to comment on the consequential impact of noncompliance of these provisions if any.

5. Based on our review conducted as above, subject to effect of the non compliance of provisions of the Companies Act, 2013 as mentioned in para 4, nothing has …..

Hindustan Petroleum Corporation Ltd . (period ended 30th Sept., 2015)

From Limited Review Report

Emphasis of Matter
4. Without qualifying our review report, we refer to Note to the Statement relating to review and recommendation of the financial results to the Board of Directors by the Audit Committee of the Company. The Company has only one independent director. The Audit Committee consisting of only one Independent Director recommended the results to the Board of Directors of the Company. However, as per clause 49 III B of the Listing Agreement, minimum two independent members should be present to form quorum of the Audit Committee and accordingly, the said meeting had no requisite quorum in terms of the provision of the Listing Agreement.

BCAJ Admin

Direct Taxes

Clarification regarding transfer of technical manpower in case of units eligible for deduction u/s. 10A/10AA of the Act applicable to the software industry – Circular No. 14 dated 8th October, 2014

As per the provisions of Section 10A/10AA of the Act read along with Circular no. 12/2014, if upto 20% of technical manpower is transferred from existing unit to new SEZ unit within the first year of commencement of business, it will not be construed as splitting up or reconstruction of an existing business. The upper limit of 20% has been enhanced to 50% of the total technical manpower actually engaged in software development or IT enabled products at the end of the financial year. Alternatively the assessee can also demonstrate that it employed new technical manpower in all its units put together which is at least equal to 50% of the technical manpower of the SEZ unit in the previous year. If either of the two conditions are fulfilled deduction u/s. 10A/10AA of the Act cannot be denied.

A – 12 Point Memorandum has been issued by the CBDT to the assessing officers to ensure a non-adversarial tax regime – F. No. 279/ Misc./52/2014-(ITJ) dated 7th November, 2014 (full text available on www.bcasonline.org)

Erstwhile Bank Term Deposit Scheme,2006 has been revived as Bank Term Deposit (Amendment) Scheme, 2014 effective 13th November, 2014 with the investment limit of Rs. 1,50,000/- u/s. 80C of the Act – Notification No. 63/2014 dated 13th November, 2014

levitra

BCAJ Admin

From The President

Dear Members,

The curtains have finally come down on direct tax and corporate law compliance season of FY 14-15. I hope that with the work season cooling down, the weather turning cooler, you all will have some time to relax, reflect and rejuvenate.

Cause for concern
Terror struck again. Since a major city was the target, it caused major furore. A wave of intolerance rhetoric also took centre stage in parts of the media. As intellectuals, we are trained to separate substance from form. It is time for us to pause and assess and see what really matters to us and what difference we can make. My personal understanding is this – anything that creates DIVISIONS will eventually result in CONFLICT. Although human race has amassed tremendous amount of knowledge, we remain fragmented and insecure to the extent that we still kill fellow humans1. Yes, the situation is grim and therefore requires concerted EFFORT . In context of the Paris event, the Dalai Lama put the responsibility on us, saying, prayers will not help, and people should not expect God to sort out the problems created by humans. It is the responsibility of each of us that every division, especially in our minds, is challenged, tested and left only in its right place.

Menace of unemployment
Last month I wrote on unemployment. This is actually a ticking time bomb. With a large unorganised sector (85% of workforce) and data about it not captured adequately, issues get further magnified. Three problems – unemployment, unemployability and the sheer numbers, pose a challenge.

The last Economic Survey of India brings out some startling statistics. No major state in India has achieved more than 6.2% employment from registered manufacturing in last 30 years2 . It further talks about declining industrialisation. Productivity is lowest in unregistered manufacturing and therefore the prospects of its transformation are grim. Although, the returns on education are increasing, the supply of requisite education is ‘notoriously inadequate’. According to government figures, fewer than 5% of India’s 487 million workers have received any formal skills training. In other industrialised countries, this figure is closer to 60%. Add to that the trend of automation and robotics in every manufacturing sector, which can eventually shift the manufacturing bases back to where the markets are. On the other hand, global demand is waning, industrial overcapacities remain bloated. These could prove to be strong challenges for the ‘Make in India’ program.

Chasm between the underprivileged and the wealthy
Juxtapose this to the findings of a recent research report3. 1% of Indian population holds 53% (36.8% in 2000) of the country’s wealth and it will continue to head in that wrong direction. 10% of Indians own 76% (65.9% in 2000) of nation’s wealth. The lower half of the pyramid owns only 4.1% (5.3% in 2000) of the country’s wealth. Even though in the last 15 years, the increase in absolute value of wealth was $2.284 trillion, the top 10% took 81% of it. Unless we deal with this riddle with rapid, simple, and out of the box approach, reversal of this trend could remain a mirage.

Regulators & Regulations
Your Society was invited to meetings with the Mumbai Income Tax Department and RBI. The Tax department has launched e-Sahyog which is being popularised and the members are requested to look up for more data on the portal of the department. The RBI is going digital for certain FDI filings such as FC GPR, FC TRS etc. If the stakeholders, participated well we might see mandatory e-submissions of these RBI forms soon. Even at present, you can file them through EBiz portal.

A special mention must be made about the announcement by the Prime Minister on performance appraisal system in which weightage will be given to a deadline bound quality assessments by the Income Tax Department. With this, the regular assessments of both assessees and officers will eventually become balanced and fair. The PM also spoke about online assessments becoming a reality. Some of this has already begun in northern suburbs of Mumbai, we are informed.

With Bihar election results, the government will be pushing harder for faster reforms. Some recent steps include – committee formation, with a short timeline, to suggest simplification of tax laws, invitation of comments on ICDS implementation, consensus building on GST bill passage, amongst others.

Your Society and Profession
I am sure that each one of you will go out to vote for ICAI elections. The voter turnout in the last election was not befitting the stature of our profession. The challenges before the profession are serious and several. The ICAI recently posted a letter on its website regarding an issue created about appearance by CAs before the tax authorities. These amongst others, are serious challenges faced by the entire profession. A strong, wise and sound Central Council is what we need.

I hope each one of you will be as active as you can, if not already, and write to the Council about your dreams, expectations and what you are willing to work for. I wish to share a few expectations:

1. Technical consultation and discussions on key technical matters be recorded and placed in the public domain. This will serve all stakeholders, show case the technical inputs from various participants in standard setting, and bring about inclusion, transparency and confidence.

2. Further attempts be made to up the competencies of the CAs to a much higher level in both Technical and Ethical spheres. True and long term branding can only come from how a CA performs on the ground. Competence and Credibility alone will create a better image of the profession and ICAI can be an enabler, but it’s a two way street.

3. E nd the CPE monopoly and make it broad based. We all know that today even if you took a course at an IIM or at Harvard, they will not be eligible for CPE. In spite of so many other courses being equivalent and relevant to individual professional education, they are delinked from CPE. With passage of time, such mechanism does not sound reasonable, contemporary and congruent with international best practices.

Your Society has put a new material on its website in the free section. Paper books from past Residential Refresher Courses, Residential Study Courses and other study material is now on the website of the Society. We have put several videos on You Tube channel of the Society. Please subscribe (free) to BCAS You Tube channel and receive update on your email as soon as a new video gets placed there.

Although Diwali and Indian New year just got over, Gregorian New Year holidays are only a few weeks away. Every holiday season calls for giving. For giving makes our consciousness expansive. In the Indian tradition there is a beautiful verse, a thought that brings down every division. May I leave you with its message that we all need every day of the year 2016:

The one with a constricted mindset considers some
to be his own and others to be not. Whereas, the one
with an expansive consciousness considers the entire
Universe as his own family.

Wishing you a Merry Christmas and a Happy New Year!

BCAJ Admin

Ethics and u

Arjun (A) — Prabho! I am sorry, I could not meet you during Diwali; nor could I return your calls. I was so busy!

Shrikrishna (S) — What kept you so busy – even after your extended tax-deadline? I thought, you would be relaxing during Diwali.

A — Actually, I have a few assignments of transfer pricing. Most meaningless exercise! Nothing but deceiving oneself.

S — It may be true. But having accepted the work, one should do justice to it.

A — That is manageable. Actually, my main engrossment was our Institute’s elections.

S — Are you contesting? Nobody told me.

A — No, no… that’s not my cup of tea. I would prefer to remain away from politics. I have many other worthwhile things to do.

S — Good. But then what are you busy with? Where are you running?

A — My friend is standing for Central Council. Poor fellow, he lost his deposit last time even in WIRC elections. Why is he attempting Central Council – God alone knows.

S — But didn’t you advise him?

A — They don’t listen to such advice. I think, even there, there is some dirty politics or some ulterior motive which I will never be able to understand. And he is insisting that I should run along with him everywhere! Including outstation. I have to do it out of courtesy.

S — He must be spending quite a lot! Printing of brochures, posting them, etc. – a massive exercise. And expensive too!

A — Most important is, it is wasteful. And about our members – so called voters – the less said the better!

S — Why? Are they not interested?

A — Interested? Most indifferent. As good as illiterate.

S — Don’t tell me! Very strange!

A — Many of them don’t even know what is Central Council and what is Regional Council. They don’t even know what is the term of the Council. Many believe that the election is directly for the post of President.

S — Do they at least know who is the President?

A — I am doubtful about that also. You will be shocked that during the last election, the percentage of invalid votes was also high.

S — That means they don’t even know how to vote. But you circulate all instructions. Don’t you?

A — Of course, yes. But who bothers? They just throw all such letters into dust-bins! Many in industry are least concerned about Institute. They don’t even take membership.

S — What do these Council members gain?

A — Very few are sincere and dedicated. They don’t have personal agenda. But many of them do it just for publicity, position, public relations. The fact is that they have time and money to spend.

S — That means there is not much difference between our public body elections and your professional elections!

A — You said it! Many candidates spend so lavishly on publicity. Real talented people cannot afford it. They either remain away from the whole activity; or very few good people win it purely on merit. But the situation is worsening.

S — A nd what about their preferences? Do they vote judiciously?

A — Ha! Ha! Ha! – They go by caste, community, language and all such factors that exist in general polls.

S — Oh! That’s very sad.

A — I ndeed, disgusting. All those who have never met you before, suddenly develop so much affection! And they abuse the electronic media – cell-phones, whatsapp, facebook, email! One gets mad. And in that process, even good communications of genuine candidates are overlooked.

S — There should be greater regulation and close monitoring. Printing and stationery is a national waste! I think, we should discuss issues of ethics pertaining to such candidates and representatives.

A — I agree. But now it is too late! We will do it later. Bye. I need to go on my friend’s campaign. Remember, his serial number is 25. Do tell your devotees who are CAs. Please!

Om shanti !!!!!

Note

The above dialogue is intended to reflect the harsh reality of our Institute’s elections. It’s high time that we, particularly the voters, rethink about the whole process of election.

BCAJ Admin

RBI /FEMA

Given below are the highlights of certain RBI Circulars &
Notifications

53. A. P. (DIR Series)
Circular No. 6 dated October 20, 2016

Review of sectoral caps and simplification of Foreign Direct
Investment (FDI) Policy

This circular highlights the salient features of various
amendments made to the Consolidated FDI Policy by the Central Government from
time to time. The effect of these changes to the Consolidated FDI Policy, on
Notification No. FEMA. 20/2000-RB dated 3^rd May 2000 – Foreign
Exchange Management (Transfer or Issue of Security by a Person Resident outside
India) Regulations, 2000, have been notified by RBI vide the following 3
Notifications: –

1. Notification No.
FEMA.354/2015-RB dated October 30, 2015, (c.f. G.S.R No.823 (E) dated October
30, 2015).

2. Notification No. FEMA
361/2016-RB dated February 15, 2016 (c.f. G.S.R No 165(E) dated February 15,
2016).

3. Notification No. FEMA
362/2016-RB dated February 15, 2016, (c.f. G.S.R No. 166 (E) dated February 15,
2016).

54. A. P. (DIR Series)
Circular No. 7 dated October 20, 2016

Notification No. FEMA 363/2016-RB dated April 28, 2016

Investment by a Foreign Venture Capital Investor (FVCI) registered
under SEBI (FVCI) Regulations, 2000

This circular states that Schedule 6 of Notification No. FEMA.
20/2000-RB dated 3^rd May 2000 – Foreign Exchange Management
(Transfer or Issue of Security by a Person Resident outside India) Regulations,
2000, dealing with Investment in India by SEBI registered Foreign Venture Capital
Investors (FVCI) has been amended.

The amendments provide that SEBI registered FVCI: –

1. Will not have to obtain
RBI permission for making investments under this Schedule.

2. Can invest in equity or
equity linked instruments or debt instruments issued by an Indian company whose
shares are not listed on a recognised stock exchange at the time of issue of
the said securities / instruments provided the Company is engaged in any of the
following sectors: –

i)
Biotechnology

ii)
IT related to hardware and software
development

iii)
Nanotechnology

iv)
Seed research and development

v)
Research and development of new chemical
entities in pharmaceutical sector

vi)
Dairy industry

vii)
Poultry industry

viii)
Production of bio-fuels

ix)
Hotel-cum-convention centres with seating capacity of more than three thousand

x)
Infrastructure sector.

3. Can invest in equity or
equity linked instruments or debt instruments issued by an Indian ‘startup’
irrespective of the sector in which the startup is engaged.

4. Can invest in units of a
Venture Capital Fund (VCF) or of a Category I Alternative Investment Fund
(Cat-I AIF) (registered under the SEBI (AIF) Regulations, 2012) or units of a
Scheme or of a fund set up by a VCF or by a Cat-I AIF. However, the VCF or
Cat-I AIF, which has received investment from FVCI, will have to comply with
the provisions for downstream investment as laid down in Schedule 11.

5. Can open a foreign
currency account and / or a rupee account with a designated bank branch for the
purpose of making transactions only and exclusively under this Schedule.

6. Must pay for all
investments out of inward remittance from abroad through normal banking
channels or out of sale / maturity proceeds of or income generated from
investment already made as per details mentioned above.

7. Can, without restriction,
transfer any security / instrument held by it to any person resident in or
outside India.

The entity receiving investment directly from a registered FVCI
must report the investment in form FCGPR.

55. A. P. (DIR Series)
Circular No. 8 dated October 20, 2016

Notification No. FEMA 375/2016-RB dated September 9, 2016

DIPP Press Note No. 6 (2016
Series) dated October 25, 2016

Foreign investment in Other
Financial
Services

Para 5.2.26 – “Non-Banking Financial Companies” – of the
Consolidated FDI Policy for 2016 has been replaced as under: –

Sector/Activity

% of Equity/

FDI cap

Entry Route

Other Financial Services

Financial Services
activities regulated by financial sector regulators, viz., RBI, SEBI, IRDA,
PFRDA, NHB or any other financial sector regulator as may be notified by the
Government of India.

100%

Automatic

Other Conditions

i. Foreign investment in ‘Other Financial Services’ activities
shall be subject to conditionalities, including minimum capitalization norms,
as specified by the concerned Regulator/Government Agency.

ii. ‘Other Financial Services’ activities need to be regulated by
one of the Financial Sector Regulators. In all such financial services
activity which are not regulated by any Financial Sector Regulator or where
only part of the financial services activity is regulated or where there is
doubt regarding the regulatory oversight, foreign investment up to 100% will
be allowed under Government approval route subject to conditions including
minimum capitalization requirement, as may be decided by the Government.

iii. Any activity which is specifically regulated by an Act, the
foreign investment limits will be restricted to those levels/limit that may
be specified in that Act, if so mentioned.

iv. Downstream investments by any of these entities engaged in
“Other Financial Services’ will
be subject to the extant sectoral regulations and provisions of Foreign
Exchange Management (Transfer or Issue of Security by a Person Resident
outside India) Regulations, 2000, as amended from time to time

56. A. P. (DIR Series)
Circular No. 9 dated October 20, 2016

Rupee Drawing Arrangement – Trade related remittance limit

This circular states that the maximum value per trade transaction
under the Rupee Drawing Arrangement cannot be more than Rs. 15 lakh.

57. A. P. (DIR Series)
Circular No. 10 dated October 20, 2016

External Commercial Borrowings (ECB) –
Extension and conversion

Presently, banks are permitted to approve changes in repayment
schedule of ECB prior to its maturity only if the average maturity and
all-in-cost are in conformity with applicable ceilings / norms.

This circular provides that banks can, subject to applicable
guidelines, also (a) grant extension and (b) permit conversion into equity – of
matured but unpaid ECB if: –

i. No additional cost is incurred.

ii. Lender’s
consent is available.

iii.
Reporting requirements are fulfilled.

58. A. P. (DIR Series)
Circular No. 11 [(1)/14(R)] dated
October 20, 2016

Foreign Exchange Management (Manner of
receipt and payment) Regulations, 2016

This circular highlights the changes made to the Foreign Exchange
Management (Manner of receipt and payment) Regulations, 2016 which have been
notified vide Notification No. FEMA 14 (R)/2016-RB dated May 02, 2016.

The changes pertain to: –

1. Manner of receipt in
foreign exchange from: –

a. Members of the Asian
Clearing Union (ACU).

b. All other countries.

2. Manner of payment in
foreign exchange from: –

a. Members of the Asian
Clearing Union (ACU).

b. All other countries.

59. A. P. (DIR Series)
Circular No. 13 dated October 27, 2016

External Commercial Borrowings (ECB) by Startups

This circular contains the framework for raising ECB by Startups
recognised as such by the Central Government. The main highlights of the
framework are: –

Maturity: Minimum average maturity period must be 3 years.

Recognised lender: Lender / investor must be a
resident of a country who is either a member of Financial Action Task Force
(FATF) or a member of a FATF-Style Regional Bodies. However, the lender /
investor must not be: –

1. From a country identified
in the public statement of the FATF as: –

i. A jurisdiction having a
strategic Anti-Money Laundering or Combating the Financing of Terrorism
deficiencies to which counter measures apply; or

ii. A jurisdiction that has
not made sufficient progress in addressing the deficiencies or has not
committed to an action plan developed with the Financial Action Task Force to
address the deficiencies.

2. An Overseas branch /
subsidiary of an Indian bank and / or overseas wholly owned subsidiary / joint
venture of an Indian company.

Forms of Borrowing: Borrowing can be in the form of
loans or non-convertible, optionally convertible or partially convertible
preference shares. Also, the funds must come from a country which qualifies as
a Recognised Lender as mentioned above.

Currency: The borrowing must be denominated in any freely convertible
currency or in Indian Rupees (INR) or a combination of both. In case of
borrowing in INR, the non-resident lender, is required to mobilize INR through
swaps / outright sale undertaken through a bank in India.

Amount: Borrowing per Startup is limited to US $ 3 million or equivalent
per financial year either in INR or any convertible foreign currency or a
combination of both. However, provisions on leverage ratio and ECB liability:
Equity ratio will not be applicable.

All-in-cost: Must be mutually agreed between the borrower
and the lender.

Permitted End-uses: For any expenditure in connection
with the business of the borrower.

Conversion into equity: Subject to applicable Regulations
for foreign investment in Startups, conversion into equity is freely permitted.

Security: The choice of security to be provided to the lender is left to
the borrowing entity. Security can be in the nature of movable, immovable,
intangible assets (including patents, intellectual property rights), financial
securities, etc., and shall comply with foreign direct investment / foreign
portfolio investment / or any other norms applicable for foreign lenders /
entities holding such securities.

Corporate and personal guarantee: Issuance of corporate or
personal guarantee is allowed. Guarantee issued by non-resident(s) is allowed
only if such parties qualify as recognised lender(s) as mentioned above. However,
issuance of guarantee, standby letter of credit, letter of undertaking or
letter of comfort by Indian banks, all India Financial Institutions and NBFC is
not permitted.

Hedging: Where ECB is in INR the overseas lender can hedge its INR
exposure through permitted derivative products with banks in India. The lender
can also access the domestic market through branches / subsidiaries of Indian
banks abroad or branches of foreign bank with Indian presence on a back to back
basis.

Conversion rate: In case of borrowing in INR, the
foreign currency – INR conversion must be at the market rate on the date of
agreement.

Other provisions: The Startup will have to comply
with existing provisions like parking of ECB proceeds, reporting arrangements,
powers delegated to banks, borrowing by entities under investigation, etc.

60. Circular No.
FMRD.DIRD.10/14.03.01/2016-17 dated October 28, 2016

Money Market Futures

Presently, only futures based on the 91-day Treasury Bill, which
is a money market instrument are permitted.

This circular now permits futures based on any money market
instrument or money market interest rate. Notification regarding the same is
enclosed with this Circular.

61. A. P. (DIR Series)
Circular No. 14 dated November 03, 2016

Issuance of Rupee denominated bonds overseas by Indian banks

This circular now permits Indian banks, subject to certain
conditions and within the overall limit for foreign investment in corporate
bonds of Rs. 244,323 crore, to issue: –

i. Perpetual Debt
Instruments (PDI) qualifying for inclusion as Additional Tier 1 capital and
debt capital instruments qualifying for inclusion as Tier 2 capital, by way of
Rupee Denominated Bonds overseas; and

ii. Long term Rupee
Denominated Bonds overseas for financing infrastructure and affordable housing.

62. A. P. (DIR Series)
Circular No. 15 dated November 07, 2016

External Commercial Borrowings (ECB) – Clarifications on hedging

This circular, with respect to hedging of ECB, clarifies as under:
–

i. Coverage: Wherever hedging has been mandated by the RBI,
the ECB borrower will be required to cover principal as well as coupon through
financial hedges. The financial hedge for all exposures on account of ECB
should start from the time of each such exposure (i.e. the day liability is
created in the books of the borrower).

ii. Tenor and rollover: A minimum tenor of one year of
financial hedge would be required with periodic rollover duly ensuring that the
exposure on account of ECB is not unhedged at any point during the currency of
ECB.

iii. Natural Hedge: Natural hedge, in lieu of financial hedge, will be considered only to
the extent of offsetting projected cash flows / revenues in matching currency,
net of all other projected outflows. For this purpose, an ECB may be considered
naturally hedged if the offsetting exposure has the maturity/cash flow within
the same accounting year. Any other arrangements/ structures, where revenues
are indexed to foreign currency will not be considered as natural hedge.

Further, it will be the banks responsibility to verify that 100%
hedging requirement is complied with.

63. A. P. (DIR Series)
Circular No. 16 dated November 09, 2016

Government of India Notification published in the Gazette of India
vide S.O.3408(E) dated November 08, 2016

Withdrawal of the legal tender character of the existing and any
older series banknotes in the denominations of ? 500 and ? 1000

This circular provides that older series banknotes in the
denominations of ? 500 and ? 1000 will continue to be legal tender until
November 11, 2016 to the extent of transactions specified below: –

(i) At international airports, for arriving and departing
passengers, who possess specified bank notes, the value of which does not
exceed ? 5,000 to exchange them for notes which are legal tender; and

(ii) For foreign tourists to exchange foreign
currency or specified bank notes, the value of which does not exceed ? 5,000,
to exchange them for notes which are legal tender.

64. A. P. (DIR Series)
Circular No. 17 dated November 11, 2016

Issue of Pre-Paid Instruments to foreign tourists

This circular permits Authorized Persons may
issue Pre-paid instruments to foreign tourists in terms of the instructions
issued by Department of Payments and Settlement System, Reserve Bank of India,
in exchange of foreign exchange tendered. Passport of the foreign tourist will
be a valid document for issuance of the said instruments.

65. A. P. (DIR New Series)
Circular No. 18 [(1)/12 (R)]dated November 17, 2016

Notification No. FEMA. 12(R)/2015-RB dated December 29, 2015

Foreign Exchange Management (Insurance) Regulations, 2015

This Notification repeals and replaces the earlier Notification
No. FEMA 12/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management
(Insurance) Regulations, 2000.

Annexed to this circular are: –

a. Memorandum of Foreign
Exchange Management Regulations relating to General/Health Insurance (GIM) in
India.

b. Memorandum of Foreign
Exchange Management Regulations relating to Life Insurance (LIM) in India.

66. A. P. (DIR Series) Circular No. 19 dated
November 17, 2016

Notification No. FEMA 374/2016-RB dated October 24, 2016

Investment by Foreign Portfolio
Investors (FPI) in corporate debt securities

This circular permits FPI to invest
in the following additional instruments: –

1. Unlisted corporate debt
securities in the form of non-convertible debentures/bonds issued by public or
private companies subject to minimum residual maturity of three years and end
use-restriction on investment in real estate business, capital market and
purchase of land.

2. Securitised debt
instruments as under: –

(a) any certificate or instrument
issued by a special purpose vehicle (SPV) set up for securitisation of asset/s
where banks, FIs or NBFCs are originators; and/or

(b) any certificate or instrument
issued and listed in terms of the SEBI Regulations on Public Offer and Listing
of Securitised Debt Instruments, 2008.

However, investment by FPI in the
unlisted corporate debt securities and securitised debt instruments must not
exceed Rs. 35,000 crore and must be within the extant investment limits
prescribed for corporate bond – the present limit is Rs. 2,44,323 crore.
Further, investment in securitised debt instruments will not be subject to the
minimum 3-year residual maturity requirement. _

BCAJ Admin

Goods And Services Tax (GST)

4. 2017-TIOL-1679-HC-DEL-MISC – Kundan Care
Products Ltd. & various others vs. Union of India & Anr.

Facts

Various petitioners challenged Notification
No.22/2012-CGST dated 17/08/2017 which inserted Rule 44A in CGST Rules, 2017
requiring reversal of 5/6^th of CENVAT credit which had accrued on
account of payment of additional duty of customs made at the time of gold dore
bar import. The said CVD was allowed by
way of transitional measure u/s. 140 of CGST Act, 2017. Considering the move of
the Government discretionary and unreasonable, writs were filed by various affected
parties.

Held

Considering a prima facie case and
balance of convenience in favour of petitioners, the Hon. High Court granted
interim relief. Further, the Court directed the revenue to refrain from taking
any coercive steps to recover credit already availed by petitioners.

[Also in 2017-TIOL-11-HC-MAD-GST – Salsar
Synthetics MD Overseas Ltd. vs. UOI & ANR on the same ground, the Hon.
Madras High Court provided interim relief and direction for refrainment from
coercive action for recovery].

5. 2017-TIOL-22-HC-DEL-GST
– Jindal Dyechem Industries (P) Ltd. vs. UOI & ORS

Facts

Even post press release dated 06/10/2017
issued by the finance ministry for exporters after the 22^ndMeeting
of GST Council, the petitioner was not permitted to clear gold bars without
payment of IGST of over 58 lakh rupees in respect of Bill of Entry dated
October 10, 2017.

Held

The Court directed petitioner to place the
facts on an affidavit to be filed within 3 days and as an interim measure
directed that in view of the said press release, which prima facie makes
no distinction between an Advance Authorization (AA) issued prior to or after
July 01, 2017, the petitioner would not be required to pay IGST in respect of
gold bars made by it in terms of AAs issued to it. This was granted subject to
the petitioner furnishing letter of undertaking to the authorities that
clearance of the imported goods in terms of AA will be subject to final results
in this petition.

[Note: Subsequent to the above,
Notification No.48/2017-Central Tax dated 18/10/2017 was issued by the
Government].

6.
[2017] 86 taxmann.com 183 (Rajasthan) – Rajasthan Tax Consultants
Association vs. UOI

Facts

A writ petition was filed before the Hon’ble
High Court as applicants could not apply for “composition scheme” u/s. 10 of
CGST Act, 2017 before 16/08/2017 i.e. stipulated due date because the GST
portal/system was not working.

Held

The High Court directed department to accept
the “applications for composition scheme” from those who could not apply upto
16/8/2017 to be effective from 01/07/2017 as composition scheme was extended
upto 30/09/2017. The High Court also directed that when applicant tries to
log-in to system, but the system/GST portal does not respond, applicant would
inform the concerned District Information Officer immediately by email and he
should resolve problems expeditiously.

7. 2017-TIOL-1969-HC-KAR-MISC – M/s. MJS
Enterprises

Facts

Various petitioners, mainly auction
purchasers of the scrap/bidders approached the Karnataka High Court to provide
direction in the nature of writ on an issue of whether sale of scrap buses
would attract GST rate of 28% or the rate of 18% applicable to ferrous waste
and scrap, re-melting scrap ingots of iron or steel. The question emerged
because the Respondent KSRTC had issued tender notice of auction of old and
junk buses wherein applicable rate of 28% was notified.

The prayer was made to the Court that since
the buses were not pliable on the road as normal buses and they would be
auctioned only after obtaining certificate from concerned RTO authorities to
the effect that the buses cannot be plied on road and they can only be
scrapped. In view therefore, they cannot attract 28% rate and hence, the Court
may interfere and direct the Respondent KSRTC to collect the GST at only 18%
under Schedule III heading No.7204.

Held

The Court found the petitions premature and
misconceived to deal with an academic question at the stage of initial tender
process and therefore, refusing to invoke writ jurisdiction, it dismissed all
the petitions. _

BCAJ Admin

From The President

Dear Members,

November has been an eventful month with lots of events both within India and on the global front too. In contrast to the not so pleasant memories of the 26/11 attack; we have had several happy moments where India has scored and fared well. Let us look at some of them.

Moody’s upgrade was possibly the most eagerly anticipated and positive news. After 14 long years, Moody’s revised India’s sovereign rating to Baa2 from Baa3, putting it ahead of Russia, Brazil and South Africa; but behind China.The new rating – India’s highest ever will pave the way for capital inflows into the country and will provide a tremendous boost to the Modi government. The Sensex spiralled upwards and the rupee strengthened reflecting the upgrade.

Kumar M. Birla, Chairman of the Aditya Birla Group and also a Chartered Accountant says, “Moody’s upgrade is a hugely welcome endorsement of the government’s reform policies and the economy’s enormous potential.” The Government’s aggressive and impressive track record in devising and implementing tough economic initiatives is finally paying off. Demonetisation, GST, direct transfer bank accounts, insolvency & resolution laws and recapitalising the banks have all been stepping stones to achieving the new upgrade.

However, Standard & Poor’s maintained a more cautious approach than Moody’s, having kept India at the current rating of BBB-minus. S&P would need to see more evidence that the ongoing reforms would “markedly improve” the government’s finances and reduce its net general government debt to justify an upgrade.

Ease of Doing Business is another benchmark in which India has surprised the world, declining 30 places to reach the top 100 club. Last year, India moved just one spot reaching the 130th position. Realising the importance of scoring in the ease of doing business arena, the government rolled up its sleeves and faced the challenge. The spectacular ascent up the list has now caught the attention of governments and multinational corporations.

The GST Council has been responsive to the difficulties faced by the tax payers in implementation of GST by bringing in the necessary measures. However, many of these including transitional provisions, clarity of provisions, preparedness of IT infrastructure among others could have been envisaged by the Council and even postponed for implementation thereby helping the index of ease of doing business in India.

The Ease of Doing Business Report 2018 is now in its 15th year and currently ranks 190 nations on various parameters. The report mentions that since 2003, India has adopted 37 reforms, out of which nearly half have been implemented in the last four years. On the ten parameters considered, India improved on eight, helping propel its rank upwards. The Insolvency & Bankruptcy Code, 2016 which accelerates the process of winding up loss-making companies has been pivotal to India’s ranking this year. Starting a business, dealing with construction permits, getting credit, protecting minority investors, paying taxes and trading across borders were areas in which India showed great commitment and reform. Enforcing contracts, labour market regulation and getting electricity too were areas in which India made considerable headway and sustained improvement.

Russia tops the BRICS countries ranking 35th, while China retains its 78th place on the list. India has surprised the authors of the list, who say it’s very rare that a major economy makes a massive jump in a single year. India has done it, but Prime Minister Modi is not yet satisfied…he has set a goal of achieving the 50th rank!

Interestingly, recently India got the 1st rank in the Miss World Contest. Manushi Chhillar was recently crowned as Miss World after a gap of 17 years which brought glory to the Nation.

Non-Performing Assets (NPAs) have become a buzz word in Indian banking. The sky-rocketing NPAs have turned the banking industry into a giant problem and the rot is so deep it threatens the buoyancy of the economy. Estimates peg the NPAs at around Rs. 8-10 lakh crore with the biggest defaulters being in the power, steel, infrastructure and textile industry.

In a bid to jumpstart the industry, the government has approved Rs 2.11 lakh crore plans to recapitalise public sector banks. Rs.1.35 lakh crore would come from recapitalisation bonds and 76,000 crore would come from the government or by banks tapping the financial markets. The news sent the public sector banks stock prices shooting up. Moody’s and Fitch hailed the move…so did many corporate veterans.

The big challenge ahead is which of the 22 public sector banks are going to be recapitalised. And more importantly, from where is the money going to come. It will be tough to raise capital for banks that have been for long projected as loss-making and sinking. The other big question is, who will issue the bonds…who will subscribe to these bonds and who will pay the interest on the bonds.

In addition to recapitalising the banks, major reforms are the essential need of the hour, particularly in governance and accountability. The ‘extend and pretend’ policy practised by the banks over so many years has today snowballed into a giant problem because of a lack of accountability. Also most of the loan defaulters – the creators of the NPAs are politically connected individuals who could not be refused! Independence and accountability should become the thrust of reform for a healthy public sector banking industry.

The government’s decision to set up a Committee to review the Income Tax Act, 1961, is unexceptionable. The current statute is bulky, and with multiple court rulings over the past five decades have made Indian tax law confusing and opaque. In any case, direct taxes do need a dosage of reforms to bring them in line with current needs and international best practices. This could include incorporating the latest provisions of base erosion profit shifting (BEPS) and clarity on taxation of new types of business models and digital transactions. Apart from rates and rules, the critical demand from trade and industry is for a sea change in the nature of tax administration, from being enforcement oriented to focusing on simplicity and clarity. The focus should be to address the concerns of uncertainties and needless tax litigation rather than going through another elaborate exercise. The Committee is expected to submit its report within six months.

Last but not the least, I would like to compliment the Income Tax Department for their concerted and well-planned efforts in effectively managing “Operation Clean Money” The key steps taken in the wake of demonetisation were strengthening of data collection and focussed enforcement actions. The mission was to “create a tax compliant society, through a fair, transparent and non-intrusive tax administration, where every Indian takes pride in paying taxes.” I think they have started well and wish them all success in executing their endeavour.

Wishing You All a Merry Christmas and A Happy and Joyous New Year-2018! I urge members to take a well-deserved break and spend quality time with their near and dear ones to start afresh with renewed vigour for the New Year.

Feel free to write to me on president@bcasonline.org

With kind regards

CA. Narayan Pasari

President

BCAJ Admin

Glimpses of Supreme Court Rulings

7. Non-resident – Permanent Establishment – As
per Article 5 of the DTAA with UK, the PE has to be a fixed place of business
‘through’ which business of an enterprise is wholly or partly carried on. Some
examples of fixed place are given in Article 5(2), by way of an inclusion.
Article 5(3), on the other hand, excludes certain places which would not be
treated as PE, i.e. what is mentioned in Clauses (a) to (f) as the ‘negative
list’. A combined reading of sub-articles (1), (2) and (3) of Article 5 would
clearly show that only certain forms of establishment are excluded as mentioned
in Article 5(3), which would not be PEs. Otherwise, sub-article (2) uses the
word ‘include’ which means that not only the places specified therein are to be
treated as PEs, the list of such PEs is not exhaustive. In order to bring any
other establishment which is not specifically mentioned, the requirements laid
down in sub-article (1) are to be satisfied. Twin conditions which need to be
satisfied are: (i) existence of a fixed place of business; and (b) through that
place business of an enterprise is wholly or partly carried out.

Formula
One World Championship Ltd. vs. Commissioner of Income Tax, International
Taxation-3, Delhi and Ors. (2017) 394 ITR 80 (SC)

Brief background of the
factual matrix of this case is: Federation Internationale de l’ Automobile
[FIA], a non- profit association, was established to represent the interest of
motoring organisations and motor car users globally. It is a principal body for
Rules and Regulations for all major international four- wheel motorsports
events and accordingly, was a regulatory body which regulates FIA Formula- One
World Championship [F-1 Championship]. “Formula One” [F-1] is with reference to
set of rules that all participants’ cars must confirm to. This has been the
premier form of motor racing since its inception in 1950. The F-1 Championship
is an annual series of motor racing conducted in the name and style of Grand
Prix over three day duration at purpose-built circuits, etc., in
different countries around the world. The F-1 season consists of series of
races, known as Grand Prix, held across the world on specially designed and
built F-1 circuits. Formula-One World Championship Ltd [FOWC], a UK resident,
entered into an agreement with FIA and Formula-One Asset Management Ltd [FOAM]
under which the FOWC was licensed all commercial rights in the F-1 Championship
for 100 years term and accordingly, FOWC became Commercial Right Holder [CRH]
in respect of F-1 Championship events.

Furthermore, in F-1
Championship events, about 12 to 15 teams typically compete in any one annual
racing season. The teams assemble and construct their vehicle, which complies
with defined technical specifications and engage drivers who can successfully
manoeuvre the F-1 cars in the racing events. All teams are known as
“Constructors” and enter into a contract with FOWC and FIA, known as “Concorde
Agreement”. They also bind themselves in a covenant with FOWC that they would
not participate in any other similar motor racing event what-so-ever nor would
they promote in any name any other rival event. The F-1 racing teams
exclusively participate in about 19 to 21 F-1 annual racing events fixed by the
FIA. As such, on the one hand, participating teams have to enter into Concorde
Agreement with FOWC & FIA and on the other hand, promoters, like Jaypee,
also have to enter in to RPC with FOWC for hosting, promoting and staging F-1
racing events. This is, in effect, a closed circuit event, since no team other
than those bound by a contract with FOWC is permitted participation. Every F-1
racing event is hosted, promoted and staged by a promoter with whom FOWC enters
into contract and whose events is nominated by CRH (i.e. FOWC) to the FIA for
inclusion in the official F-1 racing events calendar. In other words, the FOWC
is the exclusive nominating body at whose instance the event promoter is
permitted participation. Grant of a right to host, stage and promote the F-1
racing event also carries with it a covenant or representation that F-1 racing
teams with their cars, drivers and other ancillary and support staff will
participate in the motor racing event hosted at the promoter’s motor-racing
circuit displaying the highest level of technical skill etc. These teams
and FOWC also represent that the highest level of skill in racing management
and maintenance of cars would be on display in the events. All these would
generally be revealed in the relevant Race Promotion Contract entered into by
promoter with FOWC.

FOWC had entered into a
‘Race Promotion Contract’ (RPC) dated September 13, 2011 with Jaypee Sports
International Ltd, Indian Resident, (Jaypee) granting Jaypee the right to host,
stage and promote the Formula One Grand Prix of India event for a consideration
of US$ 40 million. There was also a prior agreement [RPC] in 2007 between them
[prior RPC] which was replaced by this RPC. Some other agreements were also
entered into between FOWC and Jaypee as well as group companies of FOWC and
Jaypee.

As per the arrangement, the
promoter [Jaypee] was to construct the necessary circuit, as per the
specifications approved by FOWC and FIA, which will meet all the requirements
of the regulations and for which, the final inspection was to be completed by
FIA before the agreed time. In terms of the prior RPC, Buddh International Circuit
in Greater Noida [in National Capital Region (NCR)] was constructed [Buddh
Circuit] and current RPC replaced that RPC. Under the agreement, the promoter
is the owner of the motor racing circuit [in this case Buddh Circuit], which is
capable of hosting various motor racing events. The promoter who wishes to host
various motor racing events at such circuit is bound to include the hosting of
F-1 Grand Prix events. The Jaypee had secured the privilege to host such events
under the RPC. The rights and obligations of both the parties were elaborately
mentioned in the RPC, including the right of access to the circuit by FOWC, as
well as its group concerns, with which also the Jaypee had entered into
separate agreements. Pursuant to this RPC and these agreements, the races were
held in India in 2011, 2012 and 2013.

The applications were filed
by FOWC and Jaypee before the Authority for Advance Rulings (AAR), in which
advance ruling of AAR was solicited on two main questions/queries:

“ (i) whether the payment of consideration
receivable by FOWC in terms of the said RPC from Jaypee was or was not royalty
as defined in Article 13 of the ‘Double Taxation Avoidance Agreement’ (DTAA)
entered into between the Government of United Kingdom and the Republic of
India?; and

(ii) whether FOWC was having any ‘Permanent Establishment’ (PE) in India
in terms of Article 5 of DTAA?

Another
related question was also raised, viz.,

(iii) whether any part of the consideration
received or receivable by FOWC from Jaypee outside India was subject to tax at
source Under section195 of the Indian Income Tax Act, 1961 (hereinafter after
referred to as the ‘Act’).”

AAR answered the first
question holding that the consideration paid or payable by Jaypee to FOWC
amounted to ‘Royalty’ under the DTAA. Second question was answered in favour of
FOWC holding that it did not have any PE in India. As far as the question of
subjecting the payments to deduction of tax at source u/s. 195 of the Act was
concerned, AAR ruled that since the amount received/receivable by FOWC was
income in the nature of Royalty and it was liable to pay tax thereon to the
Income-tax department in India, it was incumbent upon Jaypee to deduct the tax
at source on the payments made to FOWC.

FOWC and Jaypee challenged
the ruling on the first issue by filing writ petitions in the Delhi High Court
contending that the payment would not constitute Royalty Under Article 13 of
the India-UK Double Tax Avoidance Agreement (DTAA). Revenue also filed the writ
petition challenging the answer of the AAR on the second issue by taking the
stand that FOWC had ‘permanent establishment’ (PE) in India in terms of Article
5 of the DTAA and, therefore, tax was payable accordingly.

All these writ petitions
were decided by the High Court vide common judgement dated November 30, 2016
[390 ITR 199]. The High Court reversed the findings of the AAR on both the
issues. Whereas it held that the amount paid/payable under RPC by Jaypee to
FOWC would not be treated as Royalty, as per the High Court FOWC had the PE in
India and, therefore, it is taxable in India. The High Court also held, as the sequitur,
that Jaypee was bound to make appropriate deductions from the amount payable to
FOWC u/s.195 of the Act.

The Court also noted that
the bone of contention before this Court pertains to PE of FOWC in India and
the arguments advanced by both parties before this court was virtually the same
which were advanced before the High Court as well.

Therefore, their main
contentions before the High Court may be worth noting in brief. These are
summarised hereunder.

The broad contentions of
the assessees before the High Court, interalia, include that the FOWC
has only one place of business in its office in UK and did not have any fixed
place of office or business in India. By granting the right to host, stage and
promote the race to Jaypee, it did ‘business with a party that is resident of
India’, it did not undertake any business operations in India. Its business was
limited to a grant outside India of the right to Jaypee and after such grant of
the right, the Jaypee could host, stage and promote the F-1 events in
accordance with F-1 regulations. If limited access at the circuit granted to
FOWC by Jaypee accounted a fixed place, it would come into existence only at
the time when the race is held which is after the grant of right by FOWC: A
mere provision in the RPC for Jaypee to allow access to FOWC for a very short duration and its affiliates
to the circuit for a very short duration prior to and during the F-1 event
could not make the Buddh Circuit [ which belongs to Jaypee] as a place at the
FOWC’s disposal. There was also uncertainty as to staging of event on a regular
basis which could not result in bringing into existence a fixed place PE of
FOWC. Merely because Jaypee had entered into agreement with FOWC’s affiliates,
which were conditions precedent to RPC, it did not extend the scope of its role
nor did it result in its possession or operating from a fixed place of business
in India. The circuit and other rights arose by virtue of the ownership of the
circuit which was that of Jaypee, those rights could be exploited only when
granted by it. The activities were undertaken by each of the affiliates
independently and on their own account and did not constitute its PE.

The broad contentions of
the Revenue before the High Court, interalia, included: for deciding
fixed place of business in terms of Article 5, it is adequate if the place of
business is at the disposal of the enterprise to be used in business. Such
place need not be owned by the enterprise, it could be rented or otherwise
available at the disposal of the enterprise. The mere fact that an enterprise
has certain amount of space at its disposal, which is used for business
activities, is sufficient to constitute a place of business and no formal
/legal right to use the place is necessary. A place of business could
constitute a PE, even if it exists only for a very short period of time because
the nature of the business is such that it will be carried on for that short
period of time. FOWC’s business is to exploit commercial rights arising from
races and this business is carried on through exploitation of these commercial
rights, either by itself or through any one or more of its affiliates as
mentioned in ‘Concorde Agreement’. The fixed place is Buddh Circuit in Greater
Noida, which is owned by Jaypee and which was designed and constructed in terms
of prior RPC of 2007, which was replaced and continued by the current RPC of
2011. The said Buddh Circuit includes not only racing circuit but all the
attached buildings in the complex, including vending areas, hosting and
broadcasting facilities, media centres, etc., as widely defined in the
RPC itself and was available to FOWC and its affiliates (including their
employees and third party contractors appointed by them) for carrying on their
business operations. Under the RPC, Jaypee was obliged to allocate promotional
area in such a manner as FOWC shall specify and access to restricted area is
regulated by passes and tickets issued by FOWC. The FOWC and its affiliates
have complete access to the circuit in all its dimensions for a period
beginning 14 days prior to the event and 7 days after the event. Under the
terms of RPC, the fixed place was available to FOWC for carrying out its
business functions for a period of 5 years, extendable by another period of 5
years. In effect, FOWC had complete control over entire area during the event which
is apparent from the wholesome reading of the RPC and other agreements with
affiliates. Considering the overall arrangement under RPC and agreement with
the affiliates and the actual conduct the FOWC has fixed place of business at
its disposal through which it has carried out business operations and as such
it has a PE in India. For this purpose, the Revenue also relied on various
parts of the commentary of OECD on Article 5.

The judgement of the High
Court was challenged before the Supreme Court.

As per FOWC and Jaypee, no
tax was payable in India on the consideration paid under RPC as it was neither
Royalty nor FOWC had any PE in India. The Revenue did not challenge the
findings of the High Court that the amount paid under RPC does not constitute royalty.
Therefore, that aspect of the matter attained finality. The main question in
the appeals before the Supreme Court, therefore, pertained to PE.

The Supreme Court noted the
scheme of the Act as well as relevant provisions of DTAA on the subject. For
this the Court considered the basic scheme of taxation under sections 4 and 5.
The Court also considered the scope of taxation for non-resident under the Act
and noted that the income tax on non-resident is source based, i.e., source of
such income is India and, therefore, even a non-resident is liable to pay tax
on incomes earned in India. ‘Resident in India’ and ‘Not-ordinarily Resident in
India’ are covered by the provisions contained in section 6.

The Supreme Court further
noted that in the present case, it was concerned with the consideration
received by FOWC as a result of Agreement signed with Jaypee Sports. FOWC,
being a UK Company, was admittedly the non-resident in India. Since the
question was whether the aforesaid consideration/income earned by FOWC was
subject to tax in India or not, it had to be decided as to whether that income
accrued or arose in India. Section 9 contains varied situations where income is
deemed to accrue or arise in India.

The Supreme Court observed
that it was clear from the reading of Clause (i) of sub-section (1) of section
9 of the Act that it includes all those incomes, whether directly or
indirectly, which are accruing or arising through or from any business
connection in India is deemed to accrue in India. Therefore, an income which is
earned directly or indirectly, i.e. even indirectly, is to be deemed to accrue
or earned in India. Further, such an income should have some business
connection in India. Clause (a) of Explanation (1) stipulates that where all
the business operations are not carried in India and only some such operations
of business are carried in India, the income of the business deemed under this
clause to accrue or arise in India shall be only such part of the income as is
reasonably attributable to the operations carried in India. Explanation (2)
makes certain further provisions in respect of ‘business connection’. The
meaning of the expression ‘through’ is again clarified in Explanation (4).

If a non-resident has a PE in India, then
business connection in India stands established. Section 92F of the Act
contains definitions of certain terms, though those definitions have relevance
for the purposes of computation of arms length price, etc. Clause (3) thereof
defines ‘enterprise’ and such an enterprise includes a PE of a person. PE is
defined in Clause (iiia) in the following manner:

(iiia)
“permanent establishment”, referred to in Clause (iii), includes a
fixed place of business through which the business of the enterprise is wholly
or partly carried on;

The Supreme Court also
noted Article 5 of DTAA between India and United Kingdom which lays down as to
what would constitute a PE. As per sub-article (1) of Article 5, a fixed place
of business through which the business of an enterprise is wholly or partly
carried on, is known as ‘permanent establishment’. It requires that there has
to be a fixed place of business. It also requires that from such a place
business of an enterprise (FOWC in the instant case) is carried on, whether
wholly or partly. Sub-Article (2) gives the illustrations of certain places
which will be treated as PEs. Sub-Article (3) excludes certain kinds of places
from the term PE. Sub-Article (4) enumerates the circumstances under which a
person is to be treated as acting on behalf of non-resident enterprise and
shall be deemed to have a PE under sub-article (4) of the enterprise.
Sub-Article (5) excludes certain kinds of agents of enterprise, namely, broker,
general commission agent or agent of an independent status, by clarifying that
if the business is carried on through these persons, the enterprise shall not
be deemed to be a PE. However, one exception thereto is carved out, namely, if
the activities of such an agent are carried out wholly or almost wholly for the
enterprise, or for the enterprise and other enterprises which are controlled by
it or have a controlling interest in it or are subject to same common control,
then, such an agent will not be treated as an agent of an independent status.
It means that if the business is carried out with such a kind of agent, the
enterprise will be deemed to have a PE in India.

The Supreme Court further
stated that as per Article 5 of the DTAA, the PE has to be a fixed place of
business ‘through’ which business of an enterprise is wholly or partly carried
on. Some examples of fixed place are given in Article 5(2), by way of an
inclusion. Article 5(3), on the other hand, excludes certain places which would
not be treated as PE, i.e. what is mentioned in Clauses (a) to (f) is the
‘negative list’. A combined reading of sub-articles (1), (2) and (3) of Article
5 would clearly show that only certain forms of establishment are excluded as
mentioned in Article 5(3), which would not be PEs. Otherwise, sub-article (2)
uses the word ‘include’ which means that not only the places specified therein
are to be treated as PEs, the list of such PEs is not exhaustive. In order to
bring any other establishment which is not specifically mentioned, the
requirements laid down in sub-article (1) are to be satisfied. Twin conditions
which need to be satisfied are: (i) existence of a fixed place of business; and
(b) through that place business of an enterprise is wholly or partly carried
out.

The Supreme Court was of
the firm opinion that it could not be denied that Buddh Circuit is a fixed
place. From this circuit different races, including the Grand Prix is
conducted, which is undoubtedly an economic/business activity. The core
question was as to whether this was put at the disposal of FOWC? Whether this
was a fixed place of business of FOWC was the next question. For this, the
Court first discussed on a crucial parameter, viz., the manner in which
commercial rights which are held by FOWC and its affiliates, have been
exploited in the instance case. In this context, according to the Court, the
entire arrangement between the FOWC and its affiliates on the one hand and
Jaypee on the other hand is to be kept in mind. Various agreements cannot be
looked into by isolating them from each other. Their wholesome reading would
bring out the real transaction between the parties. Such an approach is
essentially required to find out as to who is having the real and dominant
control over the event to determine as to whether Buddh Circuit was at the
disposal of FOWC and whether it carried out any business therefrom or not.
There is a inalienable relevance of witnessing the wholesome arrangement in
order to have a complete picture of the relationship between FOWC and Jaypee.
That would reveal the real essence of the FOWC’s role. Effectively, according
to the Court, in a case like this, what is to be seen is the substance of the
arrangement and not merely the form.

The Apex Court then
observed that a mere running of the eye over the flowchart of these commercial
rights, produced by the Revenue, bring about the following material factors
evidently discernible:

”(i)
FIA had assigned commercial rights in favour of FOAM vide agreement
dated April 24, 2001 and on the same day another agreement was signed between
FOAM and FOWC vide which these rights were transferred to FOWC. Vide another
agreement of 2011, these rights stand transferred in favour of FOWC for a
period of 100 years. Vide Concorde Agreement of 2009, FOWC is authorised to
exploit the commercial rights directly or through its affiliates only.
Significantly, this agreement defines “F-1 Business” to mean exploitation of
various rights, including media rights, hospitality rights, title sponsorship, etc.

(ii) Armed
with the aforesaid rights, FOWC signed first agreement with Jaypee on October
25, 2007 whereby it granted right to promote the event to Jaypee. This is
replaced by race promotion contract dated September, 13, 2011. Under this
agreement, right to host, stage and promote the event are given by FOWC to
Jaypee for a consideration of US $ 40 million. On the same day, another
agreement is signed between Jaypee and three affiliates of FOWC whereby Jaypee
gives back circuit rights, mainly media and title sponsorship, to Beta Prema 2
and paddock rights to Allsports. FOAM is engaged to generate TV Feed. All the
revenues from the aforesaid activities are to go to the said companies, namely,
Beta Prema2, Allsports and FOAM respectively.
These three companies are admittedly affiliates to FOWC.

Though Beta Prema 2 is
given media rights, etc., on September 13, 2011, it had entered in to
title sponsorship agreement dated August 16, 2011 with Bharti Airtel(i.e., more
than a month before getting these rights from Jaypee) whereby it transferred
those rights to Bharti Airtel for a consideration of US$ 8 million.

Service agreement is signed
between FOWC and FOAM on October, 28, 2011 (i.e., on the date of the race)
whereby FOAM engaged FOWC to provide various services like licensing and
supervision of other parties at the event, travel and transport and data
support services. The aforesaid arrangement clearly demonstrates that the
entire event is taken over and controlled by FOWC and its affiliates. There
cannot be any race without participating/competing teams, a circuit and a
paddock. All these are controlled by FOWC and its affiliates. Event has taken
place by conduct of race physically in India. Entire income is generated from
the conduct of this event in India. Thus, commercial rights are with FOWC which
are exploited with actual conduct of race in India.

(iii) Even
the physical control of the circuit was with FOWC and its affiliates from the
inception, i.e. inclusion of event in a circuit till the conclusion of the
event. Omnipresence of FOWC and its stamp over the event is loud, clear and
firm. Mr. Rohatgi is right in his submission that the undisputed facts were
that race was physically conducted in India and from this race income was
generated in India. Therefore, a commonsense and plain thinking of the entire
situation would lead to the conclusion that FOWC had made their earning in
India through the said track over which they had complete control during the
period of race. The appellants are trying to trivialise the issue by harping on
the fact that duration of the event was three days and, therefore, control, if
at all, would be for that period only. His reply was that the duration of the
agreement was five years, which was extendable to another five years. The
question of the permanent establishment has to be examined, keeping in mind
that the aforesaid race was to be
conducted only for three days in a year and for the entire period of race the
control was with FOWC.

(iv) Even
when we examine the matter by examining the race promotion contract agreement
itself, it points towards the same conclusion. The High Court in its judgement
has reproduced relevant clauses of the agreement which we have already
reproduced above. “

The RPC is analysed by the
High Court which brings out the real position and after referring to High
Court’s analysis of various clauses of RPC, the Court stated that it is an
agreement with the same which correctly captures the substance of the relevant
clauses of the RPC. From this, it appears that this seems to be in line with
the above referred material factors brought out by the Court from the flowchart
of commercial rights, produced by the Revenue.

The Supreme Court, after
considering various agreements and nature of business activity involved in this
case, also held that the High Court had rightly concluded that having regard to
the duration of the event, which was for limited days, and for the entire
duration FOWC had full access through its personnel, number of days for which
the access was there would not make any difference. In this context, after
referring to the discussion of the High Court on this aspect, the Court noted
that a stand at a trade fair, occupied regularly for three weeks a year,
through which an enterprise obtained contracts for a significant part of its
annual sales, was held to constitute a PE (Joseph Fowler vs. MNR (1990) 2
CTC 2351 (Tax Court of Canada). Likewise, a temporary restaurant operated
in a mirror tent at a Dutch flower show for a period of seven months was held
to constitute a PE (Antwerp Court of Appeal, 2001 WTD 106-11).

The Supreme Court also
noted the following two judgements referred to by High Court:

(i) In Universal Furniture Ind. AB vs.
Government of Norway, a Swedish company sold furniture abroad that was
assembled in Sweden. It hired an individual tax resident of Norway to look
after its sales in Norway, including sales to a Swedish company, which used to
compensate him for use of a phone and other facilities. Later, the company
discontinued such payments and increased his salary. The Norwegian tax
authorities said that the Swedish company had its place of business in Norway.
The Norwegian court agreed, holding that the salesman’s house amounted to a
place of business: it was sufficient that the Swedish Company had a place at
its disposal, i.e. the Norwegian individual’s home, which could be regarded as
‘fixed’.

(ii) In Joseph Fowler vs. Her Majesty
the Queen 1990 (2) CTC 2351, the issue was whether a United States tax
resident individual who used to visit and sell his wares in a camper trailer,
in fairs, for a number of years had a fixed place of business in Canada. The
fairs used to be once a year, approximately for three weeks each. The court
observed that the nature of the individual’s business was such that he held
sales in similar fares, for duration of two or three weeks, in two other
locales in the United States. The court held that conceptually, the place was
one of business, notwithstanding the short duration, because it amounted to a
place of management or a branch having regard to peculiarities of the business.

Coming to the second aspect
of the issue, namely, whether FOWC carried on any business and commercial
activity in India or not, the Supreme Court held that FOWC is the Commercial
Right Holder (CRH). These rights could be exploited with the conduct of F-1
Championship, which is organised in various countries. It was decided to have
this championship in India as well. In order to undertake conducting of such
races, the first requirement was to have a track for this purpose. Then, teams
would be needed who would participate in the competition. Another requirement
was to have the public/viewers who would be interested in witnessing such races
from the places built around the track. Again, for augmenting the earnings in
these events, there would be advertisements, media rights, etc. as well.
It was FOWC and its affiliates which have been responsible for all the
aforesaid activities. The Concorde Agreement is signed between FIA, FOA and
FOWC whereby not only FOWC became Commercial Rights Holder for 100 years, this
agreement further enabled participation of the teams who agreed for such
participation in the FIA Championship each year for every event and undertook
to participate in each event with two cars. FIA undertook to ensure that events
were held and FOWC, as CRH, undertook to enter into contracts with event
promoters and host such events. All possible commercial rights, including
advertisement, media rights, etc. and even right to sell paddock seats,
were assumed by FOWC and its associates. Thus, as a part of its business, FOWC
(as well as its affiliates) undertook the aforesaid commercial activities in
India.

According to the Supreme
Court, it was difficult to accept the arguments of the Appellants that it was
Jaypee who was responsible for conducting races and had complete control over
the event in question. Mere construction of the track by Jaypee at its expense
would be of no consequence. Its ownership or organising other events by Jaypee
was also immaterial. The examination in the present case was limited to the
conduct of the F-1 Championship and control over the track during that period.

The Supreme Court observed
that, no doubt, FOWC, as CRH of these events, was in the business of exploiting
these rights, including intellectual property rights. However, these became
possible, in the instant case, only with the actual conduct of these races and
active participation of FOWC in the said races, with access and control over
the circuit.

According to the Supreme
Court, the test laid down by the Andhra Pradesh High Court in Visakhapatnam
Port Trust case (1993) 144 ITR 146 (AP) was fully satisfied. Not only the Buddh
Circuit was a fixed place where the commercial/economic activity of conducting
F-1 Championship was carried out, one could clearly discern that it was a
virtual projection of the foreign enterprise, namely, Formula-1 (i.e. FOWC) on
the soil of this country. As per Philip Baker, a PE must have three
characteristics: stability, productivity and dependence. All characteristics
were present in this case. Fixed place of business in the form of physical
location, i.e. Buddh Circuit, was at the disposal of FOWC through which it
conducted business. The taxable event had taken place in India and non-resident
FOWC was liable to pay tax in India on the income it has earned on this soil.

The Supreme Court also
dealt with incidental issues raised by the assessees during the hearing. First
was on the interpretation of section 195 of the Act. It could not be disputed
that a person who makes the payment to a non-resident is under an obligation to
deduct tax u/s.195 of the Act on such payments. The Supreme Court held that the
High Court rightly relying on the judgement in the case of GE India Technology
Centre Private Limited (2010) 327 ITR 456 (SC), held that payments made by
Jaypee to FOWC under the RPC were business income of the FOWC through PE at the
Buddh Circuit, and, therefore, chargeable to tax and Jaypee was bound to make
appropriate deductions from the amounts paid u/s.195 of the Act.

The Supreme Court, however,
accepted the submission of assessee that only that portion of the income of
FOWC, which was attributable to the said PE, would be treated as business
income of FOWC and only from that part of income deduction was required to be
made u/s.195 of the Act. The Supreme Court observed that in GE India Technology
Centre Private Limited, it has been clarified that though there is an
obligation to deduct tax, the obligation is limited to the appropriate portion
of income which is chargeable to tax in India and in respect of other payments
where no tax is payable, recourse is to be made u/s. 195(2) of the Act. It
would be for the Assessing Officer to adjudicate upon the aforesaid aspects
while passing the Assessment Order, namely, how much business income of FOWC
was attributable to PE in India, which was chargeable to tax. At that stage,
Jaypee could also press its argument that penalty etc. be not charged as the
move on the part of Jaypee in not deducting tax at source was bona fide. The
Supreme Court however, made it clear that it had not expressed any opinion on
this either way.

The Court also clarified
that so far as appeal filed by the Revenue is concerned, it was submitted by
the learned counsel appearing for the Revenue that the issue of dependent agent
PE had now become academic. This was in view of the fact that the Court had
already held that the FOWC had a fixed place PE through which it was carrying
on business in India. As such, the Court did not examine that issue and
disposed of the appeal of the Revenue accordingly.

Notes:

i)
In the above case, the Apex Court has accepted the basic principle that
determination of existence of a PE of an enterprise should be based on actual
facts of the relevant case. The above judgements are primarily based on complex
arrangements and factual matrix of the case from which the Court ascertained
the real position relevant for determination of PE etc. [and rendered
its judgement running into more than 50 printed pages of ITR] which has been
briefly digested. In the process, the Court has made various observations
confirming certain internationally accepted principles and tests (such as test
of fixed place of business, disposal test, duration test, virtual projection of
foreign enterprise test, etc.) relating to determination of fixed place
PE under Article 5 of the relevant DTAA. These principles and tests have been
applied to the real facts emerging in this case to come to the conclusion that
the FOWC has PE in India through which it was carrying on business in India.
Effectively, the Court has gone by the substance of the arrangement rather than
merely its form. The Court, in the process, has also referred to relevant
commentaries on this Article given by OECD as well as by learned authors Philip
Baker and Klaus Vogel and also referred to various judicial precedents
including the celebrated judgements of the Apex Court in the cases of Azadi
Bachao Andolan [(2003) 263 ITR 706], Transmission Corporation [(1999) 239 ITR
587] and GE Technology Center [(2010) 327 ITR 456]. All these three judgments
were analysed by us in the column ‘Closements’ (in the months of December,
2003/ January, 2004, October, 1999 and December, 2010 respectively) of this
journal.

ii) The
assessees should become wiser from the approach of the Court in applying those
principles and tests to such complex arrangements and should be cautious in
arranging their factual affairs in such cases. This judgement should be mainly
viewed from this perspective and now, more so with the GAAR provisions becoming
effective from 01.04.2017. In future, in this respect, global developments in
the area of BEPS should also be borne in mind, more particularly, in this
context, Anti-abuse Rules for PEs situated in third Jurisdiction contained in
Article 10 of MLI [Multilateral Convention to Implement Tax Treaty Related
Measures to Prevent Base Erosion and Profit Sharing (BEPS)], which is expected
to become effective for certain Indian covered tax agreement [DTAAs] within
about the next two years.

iii) In this column, generally, as a policy
(decided for various justifiable reasons in the past), the judgements reported
in ITRs are digested. Currently, for this column, we are considering 394/395
ITRs. Whenever it is felt that a particular judgement of the Apex Court lays
down some important relevant principles relating to tax matter, which is of a
general interest for larger readership of the journal, the same is picked up
(on a case to case basis) for analysis in greater detail in our another column
‘Closements’ (which now does not feature every month) even before it is so
reported, like the one relating to ‘deemed dividend’ analysed in that column in
this issue of the journal and Part II thereof will appear in the next issue.

iv) Recently,
another judgement of the Apex Court has also been delivered in the case of
E-funds IT Solution Inc. [which is decided, based on its facts, in favour of
the assessee]. In this also, principles and tests for determination of
existence of PE, in the context of India-USA DTAA, have been considered. In
this, the above judgement has also been considered. The same will be digested
in this column in due course.

8. Closing
Stock-Valuation-With dissolution of the firm, if the business comes to an end,
the cost method of valuing closing stock is not permissible and has to be
valued at the market rate but where the dissolution is by operation of law and
the business does not come to an end, it is not necessary to value the stock in
trade at market prices and could be valued at cost method of valuation.

Revision-Erroneous
and prejudicial to revenue- If the view taken by the Assessing Officer is
plausible view, the CIT cannot exercise his power u/s. 263.

Commissioner
of Income Tax-Gujarat-II vs. Kwality Steel Suppliers Complex (2017) 395 ITR 1
(SC)

The Respondent-Assessee was
a registered firm engaged in the business of sale of scrap of ship materials.
The firm was constituted with two partners, i.e., mother and son. During the
period under consideration, the firm was dissolved on 01.02.1993 on account of
the death of one of the partners. At the time of dissolution, the firm had
valued the closing stock at cost price.

The Respondent-Assessee
filed return of income showing total income of Rs. 16,41,760/- for assessment
year 1993-1994. The relevant previous year is financial year 1992-1993. On this
return, the assessment order was passed by the Assessing Officer on 24.02.1995
u/s. 143(3) of the Act accepting the method of valuation adopted by the
Respondent-Assessee.

Subsequently, the
Commissioner of Income Tax (CIT) in exercise of his revisional jurisdiction
u/s. 263 of the Act issued show cause notice dated 27.02.1997 and directed the
Assessing Officer to value the closing stock at the time of dissolution at the
market price. He further observed in his order that the Assessing Officer had
erred while passing the assessment order for the year 1993-1994. According to
him, during the accounting year under consideration, the firm was dissolved,
and therefore, the closing stock was to be valued at market rate in view of the
decision of the Supreme Court in the case of A.L.A. Firm vs. Commissioner of
Income Tax [(1991) 189 ITR 285]. So, he added the average gross profit of
15 per cent to the disclosed value of the closing of Rs. 12 crore and the same
resulted in addition of Rs. 1.82 crore.

The Respondent-Assessee
questioned the validity of the order passed u/s. 263 of the Act taking the plea
that revisional jurisdiction could not be exercised in this manner. However,
the CIT by his order dated 20.03.1997 rejected the contention of the Assessee
and set aside the assessment order with a direction to the Assessing Officer to
pass fresh order in accordance with the direction given in the order passed by
CIT.

The Assessee
challenged the said order dated
20.03.1997 by filing appeal before the Income Tax Appellate Tribunal (ITAT),
ITAT dismissed the appeal on 28.04.2000.

This order of ITAT was
challenged before the High Court in the form of statutory appeal u/s. 260A of
the Act. The High Court has accepted the contention of the Assessee and,
thereby, set aside the revisional order dated 20.03.1997 passed by CIT. For
this, the High Court referred to various judgments of the Apex Court dealing
with cases of dissolution of the firm including the judgement in the case of
Shakhti Trading Co. [(2001) 250 ITR 871] in which it was effectively held that
if post dissolution the business is continued, the closing stock could be
valued at cost.

The Revenue challenged the
order of the High Court before the Supreme Court.

According to the Supreme
Court, the moot question was as to whether the view taken by the Assessing
officer in accepting the valuation of the closing stock at cost price was a
plausible view in the circumstances of this case. If it was so, then CIT could
not have exercised his revisionary jurisdiction u/s. 263 of the Act.

The Supreme Court observed
that the judgement in ALA Firm’s case proceeded on the basis that with the
dissolution of the firm, the business of the firm comes to an end and in that
situation, the cost method of valuing the stock was not permissible.

The Supreme Court wondered
as to whether this situation would apply in the instant case where the
partnership firm stood dissolved by the operation of law in view of the death
of one of the partners, i.e., the mother, but the business did not come to an
end as the other partner, viz., son, who inherited the share of the mother,
continued with the business. According to the Supreme Court, in a situation
like this, there was no question of selling the assets of the firm including
stock-in-trade and, therefore, it was not necessary to value stock-in-trade at
market price.

The Supreme Court on
consideration of the judgement in Chainrup Sampatram vs. CIT (1953) 24 ITR
481 (SC) observed that the position which emerges from the said judgement
is that when a business continues, it may not be necessary to follow the market
rate to value the closing stock as the reasons, because of which the same is to
be done are not available.

According to the Supreme
Court when this position becomes clear, it follows that in the instant case the
view taken by the Assessing Officer in accepting the book value of the
stock-in-trade was a plausible and permissible view. In this scenario, the CIT
could not have exercised his powers u/s. 263 of the Act.

The Supreme Court dismissed
the appeal of the Revenue with costs.

Note:

The judgements of the Apex
Court in the cases of A.L.A Firm and Shakhti Trading Co. (in which the
judgement of the Apex Court in Chainrup Sampatram was also relied) have been analysed
by us in the column ‘Closements’ (in the months of July, 1991 and September,
2001 respectively) of this journal. It may also be noted that para 24 of ICDS
II (Valuation of Inventories) now specifically provides that in the event of
dissolution of a firm, the inventory on the date of dissolution shall be valued
at Net Realizable Value, notwithstanding the fact whether the business is
discontinued or not. It is also worth noting that recently, the Delhi High
Court in the case of the Chamber of Tax Consultants (vide order dated
11.11.2017) has struck down some of the provisions of certain ICDSs as ultra
vires the Act and this includes the said para 24 of ICDS II.

9. Export markets development allowance –
Weighted deduction – Agreement stated that Mr. Jack Barouk had agreed to work
as an agent of the assessee on payment of the commission and RBI had approved
the same as ‘Selling Agency Agreement’ – Entitled to weighted deduction u/s.
35(1)(b)(iv)

Velvet
Carpet and Co. Ltd. vs. Commissioner of Income Tax (2017) 395 ITR 515 (SC)

In the return filed by the
Assessee for the assessment year 1983-84, it had stated that a sum of Rs.
4,60,433 was paid by the Assessee to one Mr. Jack Barouk of Brussels who was
appointed by the Assessee as its commercial agent in the said country for the
sale of the Assessee’s goods. Section 35B(1)(b)(iv), provides for weighted
deduction that is in addition to the actual amount spent, one-third thereof as
an additional expenditure in case the expenditure is incurred wholly and exclusively
on maintenance outside India of a branch, office or agent for the promotion of
the sale outside India of such goods, services or facilities.

The Appellant had filed
appeal against the order of the Assessing Officer refusing to give benefit of the
aforesaid provision, with the Commissioner of Income-tax (Appeals), which was
dismissed. However, in further appeal preferred before the Income-tax Appellate
Tribunal [ITAT], the Appellant succeeded. The ITAT, looking into the agreement
that was entered into between the Assessee and the aforesaid Mr. Jack Barouk,
found that the agreement was an agency agreement. The ITAT also took into
consideration another supporting fact that as per the legal requirement, the
said agreement was approved by the Reserve Bank of India and the Reserve Bank
of India in its approval had treated this agreement to be an agency agreement.

The High Court while
allowing the appeal of the Department and rejecting the claim of the Assessee,
observed that at no stage, the Assessee had put up a case that it had maintained
branch or agency outside the country.

The Supreme Court observed
that what was not in dispute was that the expenditure was in fact incurred. It
was also incurred wholly and exclusively outside India as the payment was made
to Mr. Jack Barouk a resident of Brussels. It was also not in dispute that this
payment was made against some sales of carpets belonging to the Assessee, made
by the said Mr. Jack Barouk. The only dispute was as to whether he could be
treated as “agent” of the Assessee.

The Supreme Court went
through the agreement that was entered into between the Assessee and Mr. Jack
Barouk. It was in the form of communication dated October 24, 1977 addressed by
Mr. Jack Barouk to the Assessee, stating therein the terms and conditions on
which two parties agreed to work together. In this communication, Mr. Jack
Barouk agreed to keep the goods of the Assessee in his godown, show the said
products to the visiting customers personally and secure orders from the territories
mentioned therein namely, Benelux and France.

This communication further
stated that he will be given 5 %
commission on all goods shipped by the Assessee to the aforesaid
territories on the orders procured by the said Mr. Jack Barouk. The Assessee
had accepted and agreed on the aforesaid terms contained in the said
communication and there was a specific endorsement to this effect by the
Assessee that the said communication, on acceptance by the Assessee, became a
valid and enforceable agreement between the parties.

The aforesaid terms clearly
stated that Mr. Jack Barouk had agreed to work as an agent of the Assessee and
on the orders procured he was to get 5 % commission. The Supreme Court held
that this aspect that the agreement was in fact an agency agreement which stood
conclusively established by the registration given by the Reserve Bank of India
vide its letter dated October 29, 1977. Captioned communication of the Reserve
Bank of India reads as “Registration of Selling Agency Arrangement”.

The Supreme Court observed that the Reserve Bank of India while
giving its accord to the arrangement established between the parties it was
termed as an agency arrangement. The Supreme Court therefore held that Mr. Jack
Barouk was an agent of the Assessee and, therefore, all the conditions
stipulated in section 35B(1)(b)(iv) for giving weighted deduction of
expenditure incurred by the Assessee stood established. The Supreme Court
allowed the appeal and set aside the impugned order of the High Court and
restored the order of the Income-tax Appellate Tribunal. _

BCAJ Admin

Letter To The Editor

Dear Editor,

Recent article on
‘Reporting in Form 3CD for Assessment year 2017-18 – New elements’ published in
October issue of the Journal was timely and informative. I would like to add the following points:

– Income Computation and Disclosure Standards
(‘ICDS’) are applicable to only those assessees who follow mercantile method of
accounting. Thus, if an assessee who maintains his books of account on cash
method of accounting then the ICDS are not applicable to him. Accordingly, such assessees are not required
to adjust their returned income if the same is not strictly in conformity with the ICDS;

– ICDS IX on Borrowing Cost, requires amongst
others, capitalization of borrowing cost under certain circumstances. As per the Standard, the borrowings would be
of two types viz., specific and general.
As per para 5 of the Standard, funds borrowed specifically for
the purposes of acquisition, construction or production of a qualifying asset,
the amount of borrowing costs to be capitalised on that asset shall be the
actual borrowing costs incurred during the period on the funds so borrowed.

– In case of borrowings other than specific
i.e. general borrowings, the amount of borrowing costs to be capitalised
is in proportion to the cost of qualifying assets to average cost of total
assets (See formula as per Para 5 of the Standard). However, for the purpose,
qualifying asset has been defined as the one that necessarily requires a period
of twelve months or more for the acquisition, construction or production (See
Explanation below para 6 of the Standard). The similar condition of 12 months
period does not exist in case of the specific borrowing.

In my view – the above
points are also important and relevant while applying the principles of ICDS, hence, the same are brought to the notice of the readers by this letter.

BCAJ Admin

Ethics And U

Arjun (A) — (Chanting
bhajan) Hare Rama hare Rama, Rama Rama Hare Hare!

Hare
Krishna Hare Krishna, Krishna Krishna Hare Hare!

Shrikrishna (S) — Arey.
Arjun! What makes you chant so ardently? Any serious problem?

A — I have learnt that in this kaliyug,
Namasmaran is the only remedy. Finding it difficult to survive.

S — What
happened? This is your normal grumbling.

A — This
profession is so demanding and absorbing that you can’t think of anything else.
Compliance! Compliance!! and compliance!!! – or else, penalty and prosecution.
There is no other thought in mind!

S — I
had told you, change of work is the best relaxation. That keeps your creativity
alive.

A — But
what else to do? We don’t get time to come out of the work.

S — You
should have developed some hobby. That would keep you mentally at peace.

A — CA
pass hote hote jaan nikal gayi. Hobby ke liye time kidhar tha!

S — You
have to take out some time. Have some social life. Come out of this obsession
of practice.

A — Social
work? That reminds me. My friend is in deep trouble because of this social
work!

S — How?
What happened?

A — He
was helping a social organisation of which he was a member. They were doing
purely social work.

S — Very
good.

A — No.
That only brought him into trouble.

S — How?

A — Since
he is a CA professional, they expected him to streamline the administrative
things. He was neither a trustee nor an office bearer.

S — Then
what was the problem?

A — In
their constitution, there was a mention that the Trust may appoint an
administrator and a token remuneration was also allowed in the bye-laws.

S — Oh!
Then what?

A — They
started calling him `Administrator!’ But he was working purely honorarily. He
did not even think of the remuneration. He never received any such honorarium.

S — Then
where is the problem?

A — Earlier,
there was an office bearer who had committed many irregularities. My friend
exposed his mis-deeds. So he had to leave. He was waiting for vengeance.

S — But
what wrong did your friend commit?

A — Actually,
my friend was a partner in a CA firm. The audit of the trust was pending due to
the disorganised functioning of that old office-bearer. So my friend, with good
intentions, got the audit completed in his firm. The partner did it. My friend
was never involved in the process of audit. As an administrator, he guided and
helped the staff of the institution in complying with the audit requirements.
He was like a friend and guide.

S — Finally
what happened?

A — The
old office-bearer has filed a complaint to ICAI that my friend did the audit of
an organisation of which he was himself the Administrator! They say it is
conflict of interest.

S — Very
sad. One needs to be very cautious.

A — Actually,
he was not a part of decision making nor had any executive powers. He was
described as Administrator merely because he was helping them out to clean up
the old mess.

S — Poor
fellow! I feel, he will be absolved if one considers the scenario in totality.
Things happen inadvertently.

A — It
is a big lesson to all such ‘social workers’ who are practicing as CAs.

S — I
agree with you. But don’t worry. Your friend should come out clean if what you
say is true. If his karma is bonafide, it is my duty to give the fruit
accordingly.

A — Let’s
hope, he will be absolved. He is very nervous now. The ultimate result may be
favourable; but the process of enquiry is very cumbersome. The mental agony in
itself is a punishment.

S — But
that should not deter you from doing good social work. Only a little more
caution is required. For this, these should be a constant hammering of the code
of ethics.

A — True.
I must thank BCAS for making us aware of all such realities of life. I will
certainly think of taking up some good social work.

S — Good.
You are blessed!

Om
shanti.

The purpose of this dialogue is to bring out some real life
situations where things happen inadvertently. _

BCAJ Admin

Corporate Law Corner

7. Navbharat Gasflame Pvt. Ltd. vs. ROC

[2017] 87 taxmann.com 160 (NCLT – New Delhi) Date of Order: 27^thOctober,
2017

Section 560 of Companies Act, 1956 –
Company failed to file its annual return from 1998 to 2014 – There was no proof
of any activities carried out by the company in the said period – ROC’s action
in striking off the name was upheld by the Tribunal.

Section 3(3) of Companies Act, 1956 – No
effort was made by a private company to increase its paid up capital to minimum
amount of Rs. 1 lakh in the time stipulated by Companies (Amendment) Act, 2000
– Company was deemed to be a defunct company.

FACTS

NCo. was a private company incorporated on
24.11.1997 engaged in the business of trading of fabrics, textiles goods and
other related activities. The subscribed capital of NCo was Rs. 300/- divided
into 30 equity shares of Rs. 10/- each. NCo had failed to file its annual
return right from 1998 up to 2014 as per the reply filed by the Registrar of
Companies (ROC). Name of the company was struck off vide notification dated
23.06.2007 published in the official gazette. NCo filed an application for
restoration of its name u/s. 560 of Companies Act, 1956 (the Act). ROC
submitted that company had not filed any annual return or income-tax return
right since its incorporation till 2014.

NCo submitted that it had carried out its
operations and that it had filed its income-tax return for assessment year
2014-15. ROC submitted that there was no acknowledgement of any tax paid or
return filed by NCo. NCo had merely submitted its accounts which was not a
conclusive evidence of any operations being carried out by it.

HELD

The Tribunal examined the provisions of
section 560 of the Act which required that in order to pass the direction for
restoration of name with ROC, the Tribunal needs to be satisfied that the
company at the time of striking off had been carrying on business or in
operation or otherwise it is just that the company be restored to the register
of the Registrar of Companies.

The Tribunal observed that the company did
not give any proof of its operations in the year 2007 when its name was struck
off. Also, there was no explanation furnished as to why the company did not
respond from 2007 to 2014 and the nature of its business activity in the said
period.

Further, the Tribunal examined section
3(1)(iii) of the Act which defined a private company as a company which has a
minimum paid-up capital of one lakh rupees or such higher paid-up capital as
may be prescribed by its articles. The consequence of not enhancing the paid-up
capital was that such a company shall be deemed to be a ‘defunct company’
within the meaning of section 560 and the Registrar would be under a legal
obligation to strike off the name of such a company from its register.

The Tribunal observed that NCo had failed to
increase its paid up capital in the time stipulated under Companies (Amendment)
Act, 2000. Accordingly, it upheld the action of striking off of the name of
company by the ROC and dismissed the petition with a cost of Rs. 20,000.

8. N.
C. Karany & Co. vs. New Timonhabi Tea Co. Pvt. Ltd.

C. P. No. 19/140(1)/140(4)/GB/ 2017

Date of Order: 22^nd November, 2017

Sections 101, 139 and 140 of Companies Act,
2013 – Non-ratification of appointment of an auditor gives rise to a casual
vacancy envisaged u/s. 139 – Auditor should however, be given an opportunity of
being heard – Removal of auditor without applying this principle was held to be
bad in law.

FACTS

N Co was appointed as statutory auditor of
NT Pvt. Ltd. (Respondent) in the AGM held on 26.09.2014. The re-appointment was
confirmed for a block of four years in the AGM held on 26.09.2015. The notice
of said appointment was filed in form ADT-1 with the ROC in due course.
Respondent then proceeded to appoint A Co as the statutory auditor prior to the
term of N Co getting over without any prior intimation of such appointment. On
13.02.2017, NCo received a letter from one of the directors of the Respondent
company stating that A Co had been appointed as its auditor and requested it to
furnish its resignation at the earliest. N Co also received a letter from A Co
on 03.04.2017 seeking its NOC for appointment of A Co. Subsequently, on
08.05.2017, N Co received an email from one of directors of respondent that his
appointment was not ratified in the AGM and therefore, his appointment stands
vacated from the company.

Respondent submitted that appointment of A
Co was arising out of a casual vacancy in light of N Co’s non-reappointment at
the AGM of the company. Accordingly, the subsequent appointment of A Co was in
accordance with section 139(8) of the Companies Act, 2013 (the Act). Accordingly,
the Respondent was not required to follow the procedure laid down u/s. 140 of
the Act. N Co submitted that its removal and subsequent appointment of A Co was
illegal and in violation of provisions of section 101 and 140 of the Act.

HELD

The Tribunal examined the provisions of
sections 139(8), 140(1) and 140(4)(i) of the Act. Section 140(1) provides that
a statutory auditor appointed u/s. 139 can be removed from his office before
the expiry of the term provided a special resolution is passed at the general
meeting and prior approval of Central Government is obtained. Additionally, the
auditor concerned is given an opportunity of being heard.

However, section 139(8) provides that the
procedure laid down u/s. 140(1) need not be followed where a casual vacancy
arises in the office of an auditor.

Respondent submitted that non-ratification
of appointment of N Co gave rise to a casual vacancy; a claim which was
strenuously disputed by N Co; and therefore, the same was duly filled by the
Board of Directors in accordance with section 139(8) of the Act.

The Tribunal examined the meaning of the
term “casual vacancy” using various dictionaries which suggested that “Casual”
means something which occurs without being foreseen or expected. What required
attention of the Tribunal was whether non-ratification of appointment of the
auditor at the AGM constituted casual vacancy. The Tribunal held that
resignation of the auditor was tantamount to a casual vacany arising in the
office of the auditor as a company always expects the auditor to complete his
term of appointment. Non-ratification of appointment of auditor stood on a
similar footing as the company would expect the shareholders to ratify the
appointment already made. Such non-ratification therefore, did give rise to a
casual vacancy.

The Tribunal held it was sine-qua-non
for a company to give an opportunity of being heard to its Auditor who is
sought to be removed from his office prior to the expiry of his term. A
conjoint reading of sections 101 and 146 of the Act makes it imperative that an
auditor is required to be given an opportunity of being heard in case his
appointment is not being ratified by the shareholders in the AGM. A removal
without following the aforesaid procedure would make such an act unsustainable
in law.

In the facts of the present case, the
Respondent did not give a notice of the AGM to its statutory auditor N Co which
is the mandate of section 101 of the Act. The Tribunal observed that
Respondents stand that there was a casual vacancy in the office of auditor did
not hold good on several grounds. Firstly, respondents submitted that they sent
letter dated 13.02.2017 seeking resignation of N Co and notice dated 03.04.2017
seeking NOC of N Co.

This conduct, as per the Tribunal, was
against the stand that casual vacancy arose owing to non-ratification of
appointment of the auditor at the AGM. Secondly, the Act or the Rules do not
give any authority to the Board of directors to seek resignation of the auditor
before the expiry of its term unless procedure laid down u/s. 140 of the Act
has been duly complied with.

The Tribunal further held that N Co had
filed the petition in the time frame stipulated under the Limitation Act, 1963
which was applicable in respect of proceedings under the Act. Claim of the
respondents that conduct of N Co was barred by principle of delay and latches
was wholly without any substance.

Accordingly, the Tribunal held that removal
of N Co was illegal and consequent appointment of ACo as the auditor was
equally illegal and therefore unsustainable in law. The position – N Co was
reinstated as the auditor of the company till expiry of its term, unless it was
removed following due procedure of law.

9. Ramesan Maithiyeri vs. UOI

[2017] 85
taxmann.com 19 (Kerala)
Date of Order: 19^thJuly, 2017

Section 234 of
Companies Act, 1956 – No action can be taken against a person who was
wrongfully named as a director of the company in the annual returns filed by it
until scrutiny and enquiry by ROC is complete.

FACTS

An individual R
was named as a director in the annual returns of company (B Ltd.) from 2005 to
2014 where in fact he was neither a shareholder nor a director. His name was suo
motu deleted as the director from the year 2015 onwards. R contended that
inclusion of his name as director was illegal and he apprehended that he will
be liable for any misdemeanour of the Board of the company for this period. He
therefore filed a writ petition praying that ROC be directed to initiate
proceedings u/s. 234 of the Companies Act, 1956 (the Act) for correction of the
books of the company.

Central
Government accepted that as per the inquiry and investigation conducted by
them, R had never been a director or a shareholder of B Ltd. R further informed
the court that he made investments in B1 Ltd. and purchased a flat in the
property being developed by B1 Ltd. B Ltd and B1 Ltd. had common directors. And
there were separate allegations of manipulation and misappropriation on part of
directors of B Ltd.

HELD

The High Court
examined the provisions of section 234 of Companies Act, 1956 and held that ROC
had powers to cause a scrutiny into books and documents maintained by the
company. These provisions are intended and designed to vest with ROC, the power
of inspection, enquiry and investigation into the affairs of the Company and to
rectify mistakes or deliberate entries in the books and documents maintained by
it. Regulation No. 17 of the Companies Regulations, 1956 also empowers ROC to
examine the documents and to direct the company to rectify the defects and
additionally mandates that no document of the company can be taken on record
unless the defects are rectified.

In light of the
facts, the High Court directed the ROC to carry out scrutiny and investigation
into the books and documents maintained by the company and follow it up with
such action as is warranted and mandated by law.

It was further
held that as name of R was wrongfully inserted as a director from 2005 to 2014,
no action shall be taken against him until the scrutiny by the ROC was
complete. _

BCAJ Admin

Allied Laws

11. Evidence – Doubt that the exported goods were
overpriced cannot be sustained – No business interests between the parties
hence held to be at arm’s length price – Monies received through banking
channel – Cannot be held as hawala. [Customs Act, 1962 – Sections 114, 114A,
127A, 127B, 14, 17, 156, 28]

UOI vs. Padmini Polymers Ltd. and Ors.
2017 (353) E.L.T. 25 (Del.)

The ground on which the impugned order was
challenged is that the settlement commission had erred in overlooking the fact
that during settlement proceedings, it is not for the petitioner to establish
respondent’s guilt beyond reasonable doubt; instead it was for the license
holder to establish its innocence apropos the issues raised in the show
cause notice.

It was held that in the absence of
sufficient proof being led, Revenue’s doubt about the FOB value of the goods
cannot be sustained. It has not substantiated its contention that the exported
goods were overpriced. Furthermore, there was nothing on record to conclude
that there were business interests between Respondent and its importers in
Singapore, United States and USA so as to doubt that the transactions between
them were not in the normal course of trade or that it was not a transaction at
arms’ length. Hence, the declared FOB would have to be accepted.

Since Revenue has not led any evidence to
indicate either a ‘Hawala’ transaction or a back flow of money to Respondent
through illegal means regarding the value of the exported goods, the export
transaction cannot be viewed with suspicion. In any case, all monies were received by
Respondent through the banking channels as have been so certified by its
bankers through remittance certificates. In view of the same, the petition was
dismissed.

12. Interest – No
provision in Act to pay – Govt. to pay interest on currency seized at the time
of refund of such amount. [Central Excise Act]

R.H.L. Profiles Ltd. vs. Commr. of Cus.,
Ex. and Service Tax, Kanpur 2017 (352) E.L.T. 349 (All.)

The only issue was whether the Tribunal was
justified in rejecting the claim of interest on the amount refunded on the
ground that there was no provision for paying interest on such amount?

It was observed that nowhere the Government
can enrich itself at the cost of the others. The Government cannot deny payment
of interest merely for the reason that there is no express statutory provision
for payment of interest on the refund of excess amount/tax collected by the
Revenue.

It was held that the amount which was
illegally confiscated by the Revenue and was ultimately refunded, the
assessee-appellant was entitled to interest and that the department is under
obligation to pay the same.

13.
Money Laundering – Attachment of money alleged to be proceeds of illegal
transactions – No link between sum of money attached and the alleged proceeds
of crime – Fixed deposit receipt to be returned together with the accretions.
[Section 5, PMLA, 2002]

Satish Estate Pvt. Ltd. vs. Union of
India 2017 (353) E.L.T. 21 (P & H)

The Petitioner owns a piece of land which it
sought to sell to TI Ltd. TI Ltd. advanced a sum of Rs. 25 lakh towards earnest
money by two cheques. Disputes and differences arose between the petitioner and
TI Ltd. TI Ltd. filed an FIR against the petitioner for offences inter alia
u/s. 420 of the Indian Penal Code. However, the suit and the FIR filed by TI
Ltd. came to an end and the petitioner forfeited the earnest money of Rs. 25
lakh.

TI Ltd. had entered into another agreement
with a third party for the sale of an entirely different property for a total
consideration of Rs. 3.61 crore and advance/earnest money was paid by third
party of a sum of Rs.11 lakh and Rs. 3.50 crore, respectively, where also,
differences and disputes arose due to which the third party filed an FIR
against TI Ltd. and for the sale of an entirely different property and charges
were framed pursuant to that FIR against the respondent under Sections 420,
467, 468 and 471 of the Indian Penal Code.

The petitioners had forfeited an amount of
Rs.25 lakh, in respect of which the Enforcement Directorate had passed a
provisional attachement order against the director of the petitioner and not
against the petitioner directly.

It was stated that the amount of Rs. 25 lakh
paid to the petitioners by TI Ltd. was from the proceeds of crime i.e. from the
sale of the land to the third party consequent to which the an FIR had been
filed by the third party against TI Ltd., and hence, such amount of Rs. 25 lakh
was to be attached.

The petitioner sought an order for the
return of the sum of Rs. 25 lakh which stood attached by the Directorate of
Enforcement in exercise of powers under the Prevention of Money Laundering Act,
2002.

It was held that the director was not a
party to the transaction in his personal capacity but only as a Director of the
petitioner. The maintainability of such proceedings itself is doubtful.
Secondly, there was no connection between the land which was a subject matter
of the agreement between the petitioner and the Respondent on the one hand, and
the land that was a subject matter of the agreement between the Respondent and
the third party entered on the other hand. Since there was no link between the
said sum of Rs. 25 lakh and the alleged proceeds of crime namely the sum of Rs.
3.61 crore received by Respondent from third party. In the circumstances, the
petition was allowed.

The FDR was directed to be returned together
with the accretions thereto, if any. It was clarified that in the event of any
evidence being obtained by the respondents in respect of the said sum of Rs. 25
lakh, they are always at liberty to take necessary action in accordance with
law.

14. Money
Laundering – Person in possession of proceeds of crime – Not charged with
offence of crime [PMLA, 2002; Sections 3,
24]

Jafar Mohammed Hasanfatta and Ors. vs.
Deputy Director and Ors. 2017 (353) E.L.T. 55 (Guj.)

The allegation against each of the
petitioner is of commission of offence u/s. 3 of PMLA, which is punishable u/s.
4 of PMLA. Section 3 describes the offence of money-laundering where whosoever
directly or indirectly attempts to indulge or knowingly assists or knowingly is
a party or is actually involved in any process or activity connected with the
proceeds of crime including its concealment, possession, acquisition or use and
projecting or claiming it as untainted property shall be guilty of offence of
money-laundering.

It was held
that section 24 shows legislative intent of attachment and confiscation of
proceeds of crime by presuming involvement of proceeds of crime in money
laundering irrespective of whether the person concerned is or not charged with
the offence of money laundering. Thus, there shall be a legal presumption in
any proceeding relating to proceeds of crime under PMLA that such proceeds of
crime are involved in money-laundering. Burden would be on the person concerned
to show to the contrary.

However, section 24 clearly indicates that
even a person in possession or connected with any proceeds of crime may or may
not be charged with the offence of money laundering. Whether a person shall be
charged with money laundering or not shall thus depend only upon satisfying the
requirements of Section 3 of PMLA.

In the instant
case, neither there was anything to raise a presumption of fact or law that any
of the petitioners was aware that the monies received in their bank accounts
through banking channels were ‘proceeds of crime’ derived from any ‘scheduled
offence’, nor is there anything to further presume that the petitioners were
intentionally projecting or claiming any proceeds of crime as untainted one. In
absence of the same, offence of money laundering u/s. 3 of PMLA even on prima
facie basis would not be attracted.

15. Tenancy – Devolution – Brother – Not
family nor heir. [Hindu Succession Act, 1956, S.3(a), S.15(2)(b)].

Durga Prasad vs. Narayan Ramchandani (D)
thr. AIR 2017 SUPREME COURT 915

In the present case, the suit property was
taken on rent by the father-in-law of deceased tenant-Lalita that is Hem Ram
Sharma and after his death, his son Baldev (husband of Lalita) became tenant of
the suit property. Upon his death, Lalita became the tenant of the suit
property. The Appellant is the brother of deceased Lalita, who was the tenant
of the Respondent herein. Upon death of Lalita, in terms of section 15(2)(b) of
the Hindu Succession Act, in the absence of any son or daughter of deceased
Lalita, the tenancy would devolve upon the heirs of her husband. Since the
Appellant is the brother of deceased Lalita and does not fall under the
category of ‘heir’ of Lalita’s husband, the tenancy of the suit property will
not devolve on him nor can he be called as an ‘heir’ u/s. 3(a) of the U.P. Act
XIII of 1972.

Section 3(g) defines ‘family’, in relation
to landlord which includes the spouse that is husband or wife of a person, male
lineal descendants which means his or her son, son’s son, son’s son’s son and
so on, parents, grandparents, unmarried, widowed, divorced daughter or
granddaughter, etc.

The definition given in the Clause is an
inclusive one and is supposed to be construed in its technical meaning which
implies that,what is not given has to be excluded as not forming part of the
family of landlord or tenant.

Therefore, sisters and brothers of landlord
and tenant are excluded from his/her family. In the facts of the present case,
the Appellant being brother of deceased tenant cannot be held to be the
‘family’ as the inclusive list given under the Act clearly omits “brother
and sister” and the same cannot be read therein as the list has to be read
and interpreted strictly. _

BCAJ Admin

From Published Accounts

Miscellaneous

I) Financial statements prepared on ‘Going Concern’ basis on net worth becoming positive post use of fair value option on adoption of Ind AS

Jindal Stainless Ltd. (31-3-2017)

From Notes to Financial Statements

34. Post adoption of Ind AS and due to adoption of fair valuation of assets (including property, plant and equipment as allowed in Ind AS and liabilities) the net worth of the company became positive (refer note no.56). Further, to strengthen its net worth, the Company is taking necessary steps towards full implementation of AMP including conversion of Funded Interest Term Loan (FITL) by the Lenders of the Company into Equity Shares / Optionally Convertible Redeemable Preference Shares (refer note no.32 (A)(ii). Thus, these accounts have been prepared on a going concern basis.

56. Transition to Ind AS

Exemptions availed

As permitted by Ind AS 101, the company has availed following exemptions from the retrospective application of certain requirements under Ind AS. These exemptions are:

– The company has chosen to measure all items of PPE on transition date i.e. 1st April 2015 at fair value as their deemed cost.

– The company has elected to adopt the fair value as a deemed cost of investments (Other than its subsidiaries, associates and joint ventures).

– The company has chosen to continue recognising Exchange difference of other long term outstanding loan/liability (against which there is no depreciable fixed assets that exists) as Foreign Currency Monetary Item Transition Difference Account and amortised over period/remaining period of loan/liability.

– The company has chosen to consider the cumulative transition difference for all foreign operations that existed at the date of transition at zero.

– The company has opted to apply business combination Ind AS 103 post transition date and not retrospectively.

From Auditors’ Report

Emphasis of Matter

(a) to (d) … not reproduced

(e) Net Worth post considering the fair value became positive as stated in Note No. 34 of the financial statements.

II) Life of Goodwill reconsidered from definite to indefinite on adoption of IndAS

Jindal Stainless (Hisar) Ltd.(31-3-2017)

From Note below schedule on Property, Plant and Equipment

Goodwill and Intangible assets

Goodwill was initially recognised and decided by the management to amortise over a period of two years, accordingly Rs. 10.34 Crore was amortised during the earlier year (2014-15). During the year 2016-17, life of goodwill was reconsidered from definite to indefinite as per Ind AS, and accordingly the Goodwill was restated at Rs. 10.34 Crore as at 1st April 2015. (Refer Note No.54)

From Notes to Financial Statements

54 Assets are tested for impairment whenever there are any internal or external indications of impairment. Impairment test is performed at the level of each Cash Generating Unit (‘CGU’) within the Company at which the goodwill or other assets are monitored for internal management purposes, within an operating segment. The impairment assessment is based on higher of value in use and fair value less costs of disposal. During the year, the testing did not result in any impairment in the carrying amount of goodwill and other assets. The measurement of the cash generating units’ value in use is determined based on financial plans that have been used by management for internal purposes. The planning horizon reflects the assumptions for short to mid-term market conditions.

Assumption

Approach
used to determine values

Sales
volume

Average
annual growth rate over the five-year forecast period; based on past
performance and management’s expectations of market development.

Sales
price

Average
annual growth rate over the five-year forecast period; based on current
industry trends and including long term inflation forecasts for each
territory.

Budgeted
gross margin

Based
on past performance and management’s expectations for the future.

Other
operating costs

Fixed
costs of the CGUs, which do not vary significantly with sales volumes or
prices. Management forecasts these
costs based on the current structure of the business, adjusting for
inflationary increases but not reflecting any future restructurings or cost
saving measures. The amounts disclosed
above are the average operating costs for the five-year forecast period.

Annual
capital

Expected
cash costs in the CGUs. This is based on the historical experience of
management, and the planned refurbishment expenditure. No incremental revenue
or cost savings are assumed in the value-in-use model as a result of this
expenditure.

Long-term
growth rate

This
is the weighted average growth rate used to extrapolate cash flows beyond the
budget period. The rates are consistent with forecasts included in industry
reports.

Pre-tax
discount rates

Reflect
specific risks relating to the relevant segments and the countries in which
they operate.

III) Factors considered to assess carrying values and impairment loss for investments in and loans and advances to subsidiaries / JVs (as per Ind AS)

JSW Steel Ltd. (31-3-2017)

From Significant Accounting Policies

First time adoption – mandatory exceptions and optional exemptions (extract)

The Company has elected to continue with the carrying value of all of its investments in subsidiaries, joint ventures and associates recognised as of 1st April, 2015 (transition date) measured as per the previous GAAP as its deemed cost as at the date of transition.

From Notes to Financial Statements

48. In assessing the carrying amounts of Investments in and loans / advances (net of impairment loss / loss allowance) to certain subsidiaries and a JV and financial guarantees to certain subsidiaries (listed below), the Company considered various factors as detailed there against and concluded they are recoverable.

(a) Investments aggregating to Rs. 294.63 crore (Rs. 814.30 crore as at March 31, 2016, Rs. 727.53 crore as at April 1, 2015) in equity and preference shares of NBV, loans of Rs. 105.20 crore (Rs. 70.73 crore as at March 31, 2016, Rs. Nil as at April 1, 2015), Rs. 1,921.70 crore (Rs. 683.39 crore as at March 31, 2016, Rs. 3,063.65 crore as at April 1, 2015) and Rs. 839.92 crore (Rs. 252.41 crore as at March 31, 2016, Rs. 646.18 crores as at April 1, 2015) to NBY, PHL and JPHC respectively and the financial guarantees of Rs. 3,177.08 crore (Rs. 3,900.37 crore as at March 31, 2016, Rs. 3,429.98 crore as at April 1, 2015) and Rs. 198.57 crore (Rs. 319.23 crore as at March 31, 2016, Rs. Nil crore as at April 1, 2015) on behalf of PHL and JSU respectively – Estimate of values of the businesses and assets by independent external valuers based on cash flow projections/implied multiple approach. In making the said projections, reliance has been placed on estimates of future prices of iron ore and coal. mineable resources, and assumptions relating to operational performance including significant improvement in capacity utilisation and margins based on forecasts of demand in local markets, and availability of infrastructure facilities for mines.

(b) Equity shares of JSW Steel Bengal Limited, a subsidiary (carrying amount Rs. 438.34 crore (Rs. 436.04 crore as at March 31, 2016, Rs. 427.98 crore as at April 1, 2015) – Evaluation of the status of its integrated Steel Complex (including power plant) to be implemented in phases at Salboni of district Paschim Medinipur in West Bengal by the said subsidiary, and the projections relating to the said complex considering estimates in respect of future raw material prices, foreign exchange rates, operating margins, etc. and the plans for commencing construction of the said complex.

(c) Equity shares of JSW Jharkhand Steel Limited, a subsidiary (carrying amount of Rs. 80.27 crore as at March 31, 2017; Rs. 76.71 crore as at March 31, 2016, Rs. 76.71 crore as at April 1, 2015) – Evaluation of the status of its integrated Steel Complex to be implemented in phases at Ranchi, Jharkhand by the said subsidiary, and the projections relating to the said complex considering estimates in respect of future raw material prices, foreign exchange rates, operating margins, etc. and the plans for commencing construction of the said complex.

(d) Equity shares of Peddar Realty Private Limited (PRPL) (carrying amount of investments: Rs. 24.04 crore as at March 31, 2017; Rs. 56.72 crore as at March 31, 2016. Rs. 56.72 crore as at April 1, 2015, and loans of Rs. 156.79 crore as at March 31, 2017 Rs. 158.18 crore as at March 31, 2016, Rs. 185.83 crore as at April 1, 2015) -Valuation by an independent valuer of the residential complex in which PRPL holds interest.

(e) Investment on Rs. 3.93 crore (Rs. 3.93 crore as at March 31, 2016, Rs. 3.93 crore as at Aprii 1, 2015) and loan on Rs. 116.70 crore (Rs. 112.42 crore as at March 31, 2016, Rs. 95.25 crore as at April 1, 2015) relating to JSW Natural Resources Mozambique Limitada and JSW ADMS Carvo Limitada (step down subsidiaries) – Assessment of minable reserves by independent experts and cash flow projections based on the plans to commence operations after mining lease arrangements are in place for which application has been submitted to regulatory authorities, and infrastructure is developed.

(f) Equity shares of JSW Severfield Structures Limited, a joint venture (carrying amount Rs. 115.44 crore as at March 31, 2017; Rs. 115.44 crore as at March 31, 2016, Rs. 115.44 crore as at April 1, 2015) – Cash flow projections approved by the said JV which are based on estimates and assumptions relating to order book, capacity utilisation, operational performance, market prices of materials, inflation, terminal value, etc.

From Auditors’ Report

Emphasis of Matter

Attention is invited to note 48 to the standalone Ind AS financial statements regarding the factors considered in the Company’s assessment that the carrying amounts of the investments aggregating to Rs. 956.66 crore in and the loans and advances aggregating to Rs. 3,140.31 crore to certain subsidiaries and a joint venture are recoverable and that no loss allowance is required against the financial guarantees of Rs. 3,375.65 crore.

Our opinion is not modified in respect of this matter.

BCAJ Admin

Allied Laws

9. Abatement of decree in case of death of sole
defendant – Decree passed in ignorance of such death – Held to be null and
void. [Code of Civil Procedure, 1908, Order XXII].

Angadi Srinivasa and Ors. vs. M. Girija AIR 2016 Karn. 176 (HC)

The substantial question of law raised for consideration before the
Karnataka High Court was “whether the decree passed by the Lower Appellate Court, in ignorance of the death of the
respondent before it is sustainable
in law?”

The husband and father of the
appellants – Angadi Srinivasa, was the sole defendant. The suit was filed by
the respondent herein for passing a decree of ejectment against Sri Angadi
Srinivasa and for delivery of vacant possession of the suit premises. The
defendant/respondent died on 25.12.2010. Death of the respondent was not
informed and the legal representatives of the deceased were not brought on
record by the appellant. Upon hearing the arguments, the appeal was allowed and
the judgment and decree passed by the Trial Court was set aside and the suit
was decreed with costs. The defendant was directed to vacate and hand over
vacant possession of the suit property to the plaintiff within a period of
three months and pay damages.

Learned advocate contended that as the sole defendant, who was the
sole respondent in the appeal died during the pendency of the appeal before the
Lower Appellate Court and his L.Rs. having not been brought on record, the
Lower Appellate Court has committed illegality in allowing the appeal and
setting aside the decree of dismissal of the suit passed by the Trial Court.

Learned advocate for the defendant, on the other hand, contended
that the defendant having failed to appear and file written statement to the
suit, that in view of the provision made as per Order 22 Rule 4(4) CPC, the
impugned decree is sustainable.

In the case of MOHD. SAFDAR SHAREEF (DIED) PER L.RS. AND OTHERS
vs. MOHAMMED ALI (DIED) PER L.R. 1993(1) ALT 522, it was held as under:

“The appeal which has abated by
operation of law, cannot be revived and the decree which has become a nullity
being a decree against a dead person, cannot also be revived. Therefore, the
inescapable result of the above discussion is that the appeal before the
learned single Judge has become abated and the decree passed by him is a
nullity.”

In the present case, the appellant in the Lower Appellate Court had
not sought the exemption in terms of sub-Rule (4) of Rule 4 of Order 22 CPC,
prior to the pronouncement of the judgment. The sole respondent having died
during the pendency of the appeal before the Lower Appellate Court and as his
legal representatives were not brought on record, the appeal abated and hence,
the decree passed by the Lower Appellate Court being against a dead person was
a nullity.

In the result, appeal was allowed and the impugned judgment and
decree were declared as null and void.

10. Gift Deed – Revocation of gift based on
unwillingness of daughter to maintain the mother – No condition for maintenance
mentioned in deed – Revocation not proper. [Transfer Of Property Act, 1882;
Section 126,44; Maintenance And Welfare Of Parents And Senior Citizens Act
2007, Section 23]

Jagmeet Kaur Pannu, Jammu vs. Ranjit Kaur Pannu AIR 2016 P &
H 210 (HC)

The revision petition was filed in the High Court against the order
passed by the Tribunal constituted under the Maintenance and Welfare of Parents
and Senior Citizens Act, 2007 (in short the ‘Act’) directing that the gift
executed by the mother in favour of the daughter is voidable at her instance
and hence ordered to be voided.

The Tribunal relied on the assertion of the mother that the daughter
was not behaving with her properly and abused her with filthy language and
treated these assertions as justifying the demand for the document being
declared null and void.

The High Court held that u/s. 23 of Maintenance And Welfare Of
Parents And Senior Citizens Act 2007, the relevant part being stated as under:

If the transferee refuses or fails to provide such amenities and
physical needs as required, the said transfer of property shall be deemed to
have been made by fraud or coercion or under undue influence and shall at the
option of the transferor be declared void by the Tribunal.

Section 126 of the Transfer of Property Act deals with a rule of
public policy that a person who transfers a right to the property cannot set
down his own volition as a basis for his revocation.

There have been views held from decisions of several courts that if
a gift deed is clear and operative to transfer the right of property to another
but also contains expression of desire by the donor that the donee will
maintain the person, the expression contained in a gift deed must be treated as
pious wish and the sheer fact that the donee did not fulfill the condition,
cannot vitiate the gift.

In the present case, order passed by the Tribunal is based only on
the assertion made by the mother that “the daughter is not behaving with
her properly and abused her and used filthy language to her several times on
telephone”. No judicial exercise has been undertaken by the Tribunal to
examine whether the documents contained any condition and whether there had
been any demand made by the mother on the daughter that provided the proof for
the Tribunal to render a finding that the transferee refused to provide such
amenities and physical needs.

Hence the order of the Tribunal was set aside.

11. Interpretation of Statutes – Use of Comma
before the word ‘AND’ –Disjunctive and not Conjunctive [Karnataka Stamp Act,
1957, Section 33]

Gajanan Ramachandra Velangi vs. Teegala Vijaya Irappa and Ors..
AIR 2016 Karn. 163 (HC)

While adjudicating the matter whether an Arbitral Tribunal has the
power to impound documents, not duly stamped, an issue of interpretation came
up before the court where it was contended that the word ‘and’ occurring in
section 33(1) of The Karnataka Stamp Act, 1957, should be understood in a
conjunctive sense, and hence, mere authority to receive evidence is not
sufficient, but the said person should also be in-charge of a public office to
get the power to impound any document. He submitted that an Arbitral Tribunal
cannot be said to be a person in-charge of a public office, and therefore, it
has no power to impound any document u/s. 33 of the Act.

Relevant extract of section 33(1) of the Act is as under :

33. Examination and impounding of instruments.–(1) Every person
having by law or consent of parties authority to receive evidence, and every
person in-charge of a public office, except an officer of police, before whom
any instrument, chargeable in his opinion, with duty, is produced or comes in
the performance of his functions, shall, if it appears to him that such
instrument is not duly stamped, impound the same.

It was held by the Court that the use of comma before the word ‘and’
occurring therein indicates that the word ‘and’ should be understood in a
disjunctive sense. It is not necessary in law that the said person should also
be in-charge of a public office.

The appeal was devoid of merit and was accordingly dismissed.

12. Right to Information – No exemption from
disclosure when information relates to Corruption and violation of Human [Right
to Information Act, 2005, Section 24(4)]

Subhash v. State Information Commission, Haryana and Ors. (AIR
2016 P & H 203) (HC)

a. The petitioner sought for information w.r.t.
the issue of corruption (i.e. cases registered against the officers, action
taken against such officers, benefits withdrawn or given to such officers, etc.)
against the officers under Right to
Information Act, 2005.

b.
Accordingly a Writ Petition has been filed against the order of
Respondent-Commissioner who denied information to the petitioner on the ground
that information sought was qualified to be ‘personal information’ u/s. 8(1)(j)
of the Right To Information Act, 2005 and a finding was recorded that the
information which was sought was primarily between the employee and employer
and therefore the disclosure of which had no relationship to any public authority
or public interest and hence was not required to be disclosed.

Held that reliance upon the judgment of Girish Ramachandra
Deshpande vs. CIC & Ors, 2012(8) SCR 1097 in facts and circumstances of
the case was not justified, since it related to information being sought w.r.t.
‘Personal Information’ which would amount to unwarranted invasion of privacy of
private individual as per section 8(1)(j) of the Right to Information Act(supra),
which gives an exemption from disclosure of personal information which has no
relation to any public activity or interest. However, the Central Public
Information Officer or the State Public Information Officer or the Appellate
Authority, if satisfied, that the larger public interest justifies the
disclosure of such information, they may disclose such information.

Reliance was placed in the case
of First Appellate Authority-cum-Additional Director General of Police and
another vs. Chief Information Commissioner, Haryana and another AIR 2011
(Punjab) 168, where it was held that information pertaining to corruption
is relevant and cannot be denied. In the said case, the Division Bench held
that notification u/s. 24(4) of the Act would not exempt the information which
pertains to corruption since the Act itself provided that the notification
could not include the allegation of corruption and human rights violations.

In the present case, keeping in view the above principles laid down
in First Appellate Authority-cum-Additional Director General of Police’s case (supra)
and fact that the judgment of the Apex Court in Girish Ramchandra Deshpande’s
case (supra) is not applicable in the facts and circumstance of the
present case and hence the impugned order is quashed.

13. Stamp Act – Valuation of Property–Market
value at the time of registration of the property should be considered and not
at the time of Agreement of Sale – Long time of litigation shall not affect
market value of instrument. [Indian Stamp Act, 1899 – Sections 17, 2(12), 27,
3, 47A]

Manoj Kumar Mishra vs. State of Bihar and Ors. AIR 2016 PATNA 155
(HC)

The point which is to be decided by the High Court, “whether
the valuation should be assessed on the market rate prevailing at the time of
registration of the sale deed or when the parties entered into agreement to sale.”

The respondent for the State submitted that u/s. 47. A of the Stamp
Act the petitioner is liable to pay the stamp duty on the present market value
of the property and for considering the stamp duty and registration fee, the
valuation mentioned in the agreement is irrelevant.

The counsel for the petitioner submitted that the petitioner is
liable to pay the stamp duty on the basis of the valuation mentioned in the
agreement between the parties as per the decision of the Division Bench in this
Court in Brij Nandan Singh vs. The State of Bihar & Ors. 2006 (3) PLJR
538.

It was held that from a composite reading of sections 3, 17 and 27
of Indian Stamp Act, 1899, it becomes clear that the valuation given in an
instrument is not the conclusive valuation and the registering authority is not
bound by the valuation mentioned in the deed sought to be registered.

It is settled principles of law that a taxing statute has to be
construed as it is. All the contingencies that the matter was under litigation
and the value of the property by that time became high cannot be taken into
account for interpreting the provisions of a taxing statute.

In the case of the Hon’ble Supreme Court in State of Rajasthan
and Others vs. Khandaka Jain Jewellers, (2007) 14 SCC 339, court decided
the question “whether the valuation should be assessed on the market rate
prevailing at the time of registration of the sale deed or when the parties
entered into agreement to sale” and in answer to this question considering
sections 2(12), 3, 17, 27 and 47-A of the Rajasthan Amendment of Stamp Act held
that a taxing statute has to be construed strictly and hence the plea that the
instrument took a long time to get a decree for execution against the vendor
that consideration cannot weigh with the court for interpreting the provisions
of the taxing statutes. Therefore, simply because the matter has been in the
litigation for a long time that cannot be a consideration to accept the market
value of the instrument when the agreement to sale was entered. The valuation
is to be seen at the time when registration is made.

In view of the decision of the Supreme Court,
the Division Bench decision of this Court Brij Nandan Singh (supra) is
no longer a good law as has been impliedly overruled. Accordingly, the writ
application was dismissed. _

BCAJ Admin

From The President

Dear Members,

8.00 PM, November 8, 2016: Prime Minister Shri Narendra Modi – Addresses the nation, not to inform about any launch of an assault on warring neighbour or any terrorist group, but it’s an assault on the twin evils plaguing and decaying the Indian economy for seven decades viz. unaccounted (‘Black”) money and counterfeit money. The deadly weapon for the attack being “DEMONETISATION.”

He thundered “The 500 and 1,000 rupee notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper.” However, he reassured honest people of the country, “The rights and interests of honest, hard-working people will be fully protected.”

Suddenly, the word ‘Demonetisation’ had become both a buzzword as well as a dreaded word amongst Indian citizens from all walks of life. I was deluged with calls seeking clarifications on the effects and impact of such a monumental step taken by the Government. WhatsApp messages have just not stopped since then. The most surprising moment for me was when my son a student of 10th grade also inquired as to what is Demonetisation? Why should hard-earned money in the form of 500 and 1,000 rupee notes suddenly become invalid? How and when will Government replace my 500 and 1,000 rupee notes?

Yes, Demonetisation is a big word, and on 8th November, the full weight of this word was felt in a big way across the length and breadth of India. This move has come on the heels of a much publicized and successful Income Declaration Scheme. Mr. Modi had been cautioning citizens to fall in line and declare unaccounted money under IDS and not to blame him if later stringent steps are taken. However, his warnings were considered as rhetoric and ignored. But as we all know him to be a man of action, the suddenness of demonetisation had the nation scampering to deposit and exchange their notes.

Mr. Modi’s actions echo the spirit of the statement of Abraham Lincoln – “Determine that the things can and shall be done, and then we shall find the way.”

The effects of demonetisation are still hotly debated not just in India but across the world. The entire world has taken notice of such a bold move with bated breath. Its effects on the Indian economy will be felt and analyzed in the times to come.

Though there may be positives and negatives of the move, we as citizens of India should ensure to be part of this initiative of weeding out corruption and terrorism from our country. We all must act as responsible citizens and avoid getting carried away by the naive analysis and prognosis of vested interests who want this initiative to be scuttled so as to unabashedly generate black money and support terrorism on Indian soil. Yes, the Society wholeheartedly supports demonetisation as a means to beat larger evils of corruption and black money.

Trump – Better sense prevails

The other big news that relentlessly dominates the media is from the land of the big apple. Donald Trump, the US President-elect, is working long hours at Trump Towers as he assembles his cabinet and White House team. In addition to very select media interviews, he has enthusiastically embraced new media. He has over 15 million followers on Twitter and is now using YouTube to get his message across.

In a 150 second infomercial, he chalked out his plans for making America great again. With great conviction, he declared, “I want the next generation of production and innovation to happen right here, in our great homeland: America – creating wealth and jobs for American workers.” In his no-nonsense style, speaking directly into the camera, he vowed to create jobs, re-negotiate trade agreements, end restrictions on energy production and impose ban on lobbying.

What’s interesting was his deliberate silence on many issues which he ranted about in his electoral campaign. There was no mention of the Mexican border wall, deporting illegal immigrants, fighting terrorism or confronting Russian aggression. Instead, there was a rather tame statement about directing the Labour Department to investigate visa abuses.

However, tough-talking Trump is adamant about the fate of many acts and treaties that are now on the death row. The Trans-Pacific Partnership that was seven years in the making, Obama’s Affordable Care Act and the Dodd-Frank Law regulating Wall Street are all set to be dumped by Trump. He is also averse to climate treaties and will most certainly pull the US out of the Paris Climate Agreement and nullify Obama’s global warming regulations. I hope Trump’s arrogance doesn’t lead him into destroying other economies and cause irreversible environmental damage.

Stalemate – Judiciary and Government

Back home, the stalemate between the judiciary and government is snowballing, and the situation that is already in shambles is only growing more dismal. The politicians have been critical of the collegium system which appoints judges under the veil of secrecy. To ensure transparency in the appointing process, the Parliament unanimously passed the National Judicial Appointments Commission Act to appoint judges. The Supreme Court struck down the act and continued with the ambiguous process of appointing judges.

The big tussle is over the revising of the Memorandum of Procedure for judicial appointments. The government proposals focused on bringing transparency, objectivity, and accountability to the appointments, but the Supreme Court has shot down most of the proposals. Currently, the system is absurdly opaque. More importantly, there appear to be no definite criteria for the selection of judges.

The legal logjam continues, and the situation appears to be getting alarming. According to official figures, around 30 million cases await hearings in trial courts where 4,432 out of 20,502 sanctioned posts of judges are yet to be filled. In India’s 24 high courts, there are nearly four million cases pending while 478 out of 1,056 sanctioned posts remain vacant. And in the Supreme Court too, there are only 28 judges against the sanctioned strength of 31 judges to tackle around 60,000 cases.

India is having one of the largest judicial systems in the world, the figures for the future only get more mind-boggling. It is estimated in the next three decades, the number of cases in court will balloon to 15 crores and will require at least 75,000 judges to handle them. It is my hope that a solution will be worked out mutually to provide ease of access to justice system. After all, the world, especially the rating agencies, are closely watching India.

Leading from the front – Voicing concerns

BCAS is always known to voice the concerns of the CA fraternity and also if any particular law is unjust or unwarranted. The Society has requested the Finance Minister to scrap the Income Computation and Disclosure Standards (ICDS) and has launched a petition to urge that the ICDS should not just be deferred but should be withdrawn completely.

The Indian Audit Firms (IAFs) have long being impacted by the manner and way of operating in India by the Multinational Audit Firms (MAFs). It was always felt, and rightly so, that there is no level playing field and MAFs have the upper hand over IAFs due to various reasons. Voicing concerns of the IAFs, the Society has also made a detailed representation to the Experts group set up by the Ministry of Corporate Affairs to examine and make a suitable recommendation on the adverse impact on IAFs. The society is also supporting the concept of Joint Auditors. To create more awareness and garner more support to the representation, the Society has started a digital signature campaign through a survey which is receiving an encouraging response.

I request all my dear members to sign these petitions, the link of which is available on the BCAS website, in support of this movement and create more awareness of this campaign amongst fellow professionals. As they say “Drive the change.”

With warm regards,

Chetan Shah

BCAJ Admin

Part B – Indirect Taxes

Service
Tax Updates

40. Amendment to Place of
Provision of ‘online information and database access or retrieval services’
w.e.f. 01.12.2016

Notification No.46/2016-ST
dated 09. 11. 2016

Central
Government has amended the POPS, 2012 Rules in order to effect that place of
provision for the services provided by way of online information and database
access or retrieval services shall be the location of the service recipient.

41. Withdrawal of
exemption: Online information and database access or retrieval services

Notification No. 47/2016-ST
dated 09. 11. 2016

CBEC has withdrawn the exemption for services by way of online
information database access or retrieval services which being provided by a
person located in a non-taxable territory and received by Government, a local
authority, a governmental authority or an individual in relation to any purpose
other than commerce, industry or any other business or profession.

42. Enhancement of scope of
taxability : Online information and database access or retrieval services

Notification No. 48/2016-ST
dated 09. 11. 2016

CBEC has
defined the terms ‘online information and database access or retrieval
services’ and ‘non-assessee online recipient’. Further, it states that the
person liable to pay service tax is the person located in the taxable territory
in cases where services are provided by a person located in the non-taxable
territory to a person located in the taxable territory.

However, in
cases where services are received by non-assessee online and are provided by a
person located in the non-taxable territory, the person liable for payment of
service tax is that person or his representative in the taxable territory.

If there is
no representative then the said person is liable for taking registration within
a period of thirty days under Form ST-1A from the date on which the service tax
becomes leviable. Registration certificate would be granted under Form ST-2A
and the said registration shall be deemed to be granted from the date of
receipt of the application. Returns for such registration should be filed in
Form ST-3C and the format of which is given, however, online utility will be
released in due course.

43. Amendment under reverse
charge mechanism

Notification No. 49/2016-ST
dated 09. 11. 2016

Services
provided or agreed to be provided by any person who is located in the
non-taxable territory and shall be received by any person other than
non-assessee, online recipient is covered under reverse charge mechanism where
the said service recipient is liable for payment of service tax. Thus, in cases
where service receiver is a non-assesse online recipient, reverse charge
mechanism is not applicable.

44. Exclusive jurisdiction
for cases of online information and database access or retrieval services.

Notification No. 50/2016
dated 22. 11. 2016

In cases,
where services of online information and database access or retrieval services
are provided or agreed to be provided by a person located in the non-taxable
territory and received by a non-assessee online recipient only LTU- Bangalore
unit has exclusive jurisdiction over all the proceedings under Finance act,
1994 in such cases.

45. FAQ: Service tax on
cross-border transactions [w.r.t. online information and database access or
retrieval services (OIDAR)]

Circular No: 202/12/2016
dated 09. 11. 2016

With the
withdrawal of exemption for service tax on cross border online information and
the growing dependency on such transaction for both the categories i.e.
business to business and business to customers some 46 questions are answered which come across very
frequently.

MVAT
Updates

46. e-Returns for Dealers
registered under the The Maharashtra Tax on the Entry of Goods into Local Areas
Act, 2002.

Trade Circular 33T of 2016
dated 27.10.2016

The facility
to file electronic returns for the importers registered under the Maharashtra Tax on the Entry of Goods in to
Local areas Act, 2002 has been made available through Department’s website
www.mahavat.gov.in and details procedure explained in the given circular.

47. Extension of due date
for filing of monthly returns for the period from April 2016 to September 2016.

Trade Circular 34T of 2016
dated 2.11.2016

48. Exemption from payment
of late fee u/s. 20(6) of the Maharashtra Value Added Tax Act,2002 for late
filing of return

Trade Circular 36T of 2016
dated 21.11.2016

Time limit
to file Invoice based monthly mvat & cst returns for the period from April
2016 to October 2016 is extended up to 30.11.2016 and for quarterly returns for
the period April-2016 to June-2016 uploading date has been extended up to
10.12.2016 and for July-2016 to Sept-2016 uploading date has been extended up
to 21.1.2017 so whole of the late fees for the period is exempt if filed on or
before the respective extended date. If dealer has received return in PDF along
with late fees then such late fees is not required to be paid. If such late
fees has been paid by the dealer he may revise such return and carry forward the excess
amount to next period as an excess credit.

49. Distribution of provisional
Login ID and Passwords

Trade Circular 35T of 2016
Dated 12.11.2016

All the
dealers who are presently registered under the Maharashtra Value Added Tax Act,
2002, Central Sales Tax Act, 1956, the Maharashtra Tax on the Entry of Goods
into Local Areas Act, 2002, the Maharashtra Tax on Luxuries Act, 1987 are
required to enrol themselves for GSTIN. .Given circular has explained detail
procedure.

50. Notification about
accepting cash payment

No. VAT. 1516/CR-153/Taxation-1 dated 12.11.2016

Maharashtra
government has amended MVAT Rule 45A thereby dealer may pay tax, interest and
penalty during the period the bank notes
of existing series of denomination of the value of five hundred rupees and one
thousand rupees are permissible to be the legal tender by the central
government by notification under sub-section (2) of section 26 of the Reserve
Bank of India Act, 1934 by way of cash including specified notes in the said
banks.

51. Extension of time limit
till 30th November 2016

Maharashtra Ordinance No.
XXVII of 2016 dated 17.11. 2016

Applicant
who desires to settle the arrears in dispute can make the application under the
Maharashtra Settlement of Arrears in Disputes Act, 2016 up to 30.11-2016

52. Settlement of Disputed
Arrears – Schedule of payment of Requisite amount

SAD 1516/CR 155/Taxation-1.
dated 19.11.2016

By this
Notification, the fifty per cent of the requisite amount payable under the
Maharashtra Settlement of Arrears of Dispute, 2016 shall be paid on or before
the 30.11. 2016 and remaining fifty per cent amount shall be paid on or before
the 31.12.2016. The proof of payment shall be deemed to have been submitted on
the date on which the said payment is made.

BCAJ Admin

Part A – Direct Taxes

31. No TDS on one time lumpsum rental /lease
payment

Circular No. 35 /2016 dated 13.10.2016

CBDT has clarified that TDS provisions will not apply in case
of lump sum lease premium or one-time
upfront lease charges. Since these
charges are not adjustable against periodic rent for acquisition of long-term
leasehold rights over land or any other property, they are capital in nature
and therefore cannot be connoted as rent within the meaning of section 194-1.

32. Extension of time limit till 31.3.2017 for
the returns for AY 2012-13, 2013-14 and 2014-15 having a claim of refund and
not processed under section 143(1) i.e. non scrutiny cases

CBDT Order u/s 119 dated 25.10.16

33. Deduction under Chapter VIA would be eligible
on enhanced income post assessment and hence appeals should not be filed / be
withdrawn / not pressed upon

Circular No. 37/2016 dated 2.11. 2016

34. Revised DTAA between India
and Korea has entered into force from 12^thSeptember 2016 notified

Press Release dated 26^th October 2016

35. Prohibition of Benami
Property Transactions Rules, 2016 notified w.e.f. 1^st November
2016

Notification no. 98/2016
and 99/2016 dated 25.10.16

36. Revised DTAA between India
and Japan

Notification No.102/2016 dated 28.10.16

37. Instruction relating to
The Income Declaration Scheme, 2016
dated 11^th November 2016 (available on www.bcasonline.org)

38. Rules
114B and 114E amended to give effect to Demonetisation as announced by the
Government-

Income–tax (30th Amendment) Rules, 2016 dated 15^th
November 2016

CBDT has amended the above Rules to include specific criteria for
specified authorities for obtaining PAN in light of the withdrawl of Rs. 500
and Rs 1000 notes from the country.

39. Premium paid for Keyman
Insurance of a Partner of a firm is an eligible business expenditure u/s. 37 of
the Act

Circular no. 38/2016 dated 22.11.16

BCAJ Admin

GOODS AND SERVICES TAX (GST)

I.
High Court

11. [2018-TIOL-162-HC-KERALA-GST] Saji S, Proprietor vs.
Commissioner State GST
department dated 12^th November, 2018

Tax
amount wrongly paid under SGST instead of IGST order to be transferred to the
respective head.

Facts

Petitioner, a registered
dealer, purchased goods from Chennai. While transporting the goods to Kerala,
the same were detained while in transit by the Assistant State Tax Officer.
Based on the demand made, the consignor paid tax and penalty but the remittance
was made under the head ‘SGST’. Since the remittance should have been made
under the head IGST, the authorities refused to release the goods hence this
writ petition.

Held

The High Court noted
section 77 of the GST Act dealing with refund of tax paid mistakenly under one
head instead of another. However Rule 4 of the GST Refund Rules speaks of
adjustment. Where the amount of refund is completely adjusted against any
outstanding demand under the Act, an order giving details of the adjustment is
to be issued in Part A of FORM GST RFD-07. Under these circumstances, The High
Court ordered the respondent officials to allow the petitioner’s request and
get the amount transferred from the head ‘SGST’ to ‘IGST’. It was also stated
that it is inequitable for the authorities to let the petitioner suffer on the
count that such transfer may take some time. Further second respondent directed
to release the goods forthwith along with the vehicle and, then, ensure that
the tax and penalty which already stood remitted under the ‘SGST’ is
transferred to the head ‘IGST’.

II.
Authority for Advance Ruling

12. [2018-TIOL-243-AAR-GST]
Premier Vigilance & Security Pvt. Ltd. dated 2^nd November, 2018

GST is
payable on the entire value including toll charges.

Facts

Applicant is a provider of
security services to Banks and also transports cash/coins/bullion in specially
built vehicles or customised cash vans – applicant seeks a ruling on the
chargeability of GST on the Toll taxes reimbursed by its clients or the ability
to claim it as a deduction under Rule 33 of the CGST Rules, 2017 from the value
of supply being expenditure incurred as a pure agent under the CGST Act, 2017.

Held

The Authority noted that
the Applicant owns vehicles. Toll is charged for providing service by way of
access to a road or bridge and applicant being the owner of vehicles is
recipient of the service provisioned on payment of Toll. Expenses so incurred
are cost of the service provided to the banks. Therefore, the same is not
incurred in the capacity of a “pure agent” of the Bank. Such charges are costs
incurred and therefore, are not liable to be excluded from the value of supply
under Rule 33 of the Rules, 2017. GST is therefore, payable at the applicable
rate on the entire value of the supply including Toll charges paid.

13. [2018] 99 taxmann.com 253 (AAR-Maharashtra) VServ Global (P.)
Ltd dated 7^th July, 2018

Back
office administrative and accounting support services, pay-roll processing and
maintenance of employee records, rendered by applicant to overseas client, a
registered person incorporated in India, does not constitute an “export of
service”

Facts

The Applicant an Indian
Company provides back office support services to overseas companies engaged in
trading of chemicals in international trade. The Applicant comes into picture
after finalisation of purchase/sale order by the client. The activities
undertaken include, generating sales and purchase detail forms, creation of
purchase order and sales contract, liaise with the supplier for cargo
readiness, with inspection authorities etc. They also maintain records of their
employees and payroll processing.

The consideration for the
above services is fixed for a month with a variation of 10% or less depending
upon the man hours involved. The question before the authority is whether the
services provided qualify to be considered as a zero rated supply in terms of
section 16 of the Integrated Goods and Services Tax Act, 2017.

Held

The Authority after
perusing the clauses of the Agreement and the activity undertaken held that
applicant arranges or facilitates supply of goods or services or both between
the overseas clients and customers of the overseas client and therefore falls
in the definition of intermediary as defined under the IGST Act.

The place of supply for
intermediary services is covered by section 13(8) of the IGST Act. As per the
said section, the place of supply is the location of the service provider i.e.
the location of the applicant which is Maharashtra. Thus the service does not qualify as export
of service. Further the authority also distinguished the decision in the case
of Godaddy India Web Services Private Ltd [2016] 46 STR 806 (AAR) by
stating that the facts in both the cases are different.

BCAJ Admin

SERVICE TAX

I.
Tribunal

17. [2018] 98 taxmann.com 85 (New Delhi – CESTAT) Executive
Engineer vs. CCE&ST
Dated of Order: 11^th September, 2018

The
Tribunal held that services provided by assessee to its other division having
different service tax registration under same PAN, cannot be said to get
covered within scope of section 67(4) i.e. transaction between associated
enterprises, and therefore, not liable to service tax.

Facts

The appellant provided
telecommunication services under the name Universal Service Operator (USO) to
various telecom operators. They issued monthly debit notes to one of its own
divisions viz CMTS covered under the same PAN for providing telecom services
and booked the amount as income.

However, no service tax was
discharged on the said income as it was from its own division. The department
alleged that obtaining separate registration under service tax law make USO and
CMTS as two different concerns i.e. associated enterprises. Department
contended that even provisions of section 67(4) makes it clear that the book
adjustment qua the transaction of taxable services with any associated
enterprise are taxable.

Held:

The Hon’ble Tribunal held
that the telecom services are provided in different circles in India and
different offices/units under one circle cannot be treated as associated
enterprise as these are not intermediaries in the management of or control or
capital of the other enterprises as required for being associated enterprises
as per section 92A of the Income-tax Act, 1961. Further, the Tribunal observed
that the lower adjudicating authority has failed to appreciate that monthly
advice debit notes are nothing but transfer of expenses to its another unit and
it will not make the gross transaction accounted for between units of the
organisation. It was also noted that since both the entities have the same PAN
number as such both have same incorporation, it is clear that mandatory
requirement for service tax that is of existence of two different entities is
absolutely missing. Consequently, the
Tribunal set aside impugned demand.

18. [2018] 98 taxmann.com 311 (New Delhi – CESTAT) Maulana Azad
National Institute of Technology vs. CCE Date of Order: 12^th September, 2018

The
Tribunal held that construction services provided by Government authority to
unit of educational institute established under the Act of Parliament, cannot
be said to be provision of support service to business entity and thus, not
liable to service tax under reverse charge.

Facts

The
appellant, a central Government authority, being established under an Act of
Parliament namely the National Institute of Technology Act, 2007 is engaged in
imparting education and related technical assistance. They procured services
from Central Public Works Department (CPWD) for construction of hostel blocks,
sports complex, academic blocks, literature hall complex, canteen, hospital,
staff residential quarters etc. in their premises. Department alleged that said
services procured from CPWD are support service related to contract provided by
Government to body corporate holding the appellant as a business entity and
thus are liable to service tax under reverse charge notifications. Accordingly,
in present appeal, the moot questions before tribunal were (i) whether
appellant can be regarded as “business entity” and (ii) whether the services
received by them from CPWD, a Government department, can be regarded as
“support services”.

Held

The Hon’ble Tribunal
observed that appellant is unit of Maulana Azad National Institute of
Technology, Bhopal, which is one of the National Institutes of Technology
established by Central Government under an Act of Parliament i.e. National
Institute of Technology Act, 2007 and also referred to ratio laid down in
decisions in Asstt. Collector of Excise vs. Ramdev Tobacco Co. 1991
taxmann.com 1335 and Senairam Doongamall vs. CIT AIR 1961 SC 1579.
Accordingly, it was held that once the purpose of the parent Institute is to be
engaged in education and in creating and disseminating knowledge through
different mode as that of teaching, seminars, workshop, publications and even
technical consultancy, the unit thereof assisting in the said work becomes part
of the parent institute and stands clothed with the same status. Therefore, the
Tribunal held that appellant cannot be regarded as “business entity”. As
regards next question as to whether services provided can be regarded as
“support services”, It was observed that definition of term “support service”
u/s. 65B(49) makes it clear that for any services received to be called as
support service, the important ingredient is that the support should have
comprised of such functions that the recipient is able to carry out in ordinary
course of operations themselves, however, they have outsourced the same to
someone else. The Tribunal noted that since the appellant in instant case is
carrying out the function of imparting education and the technical
know-how/consultancy but the service received from CPWD is that of construction
of various civil structures, the services received cannot be otherwise said to
be the activity of the appellant themselves. Therefore, the Tribunal held that
availing of such construction services from CPWD will not bring the service received
under the category of “support services” and hence will not attract liability
under reverse charge.

19. [2018] 98 taxmann.com 390 (New Delhi – CESTAT) International
Metro Civil Contractors vs. CST Date of Order: 17th September, 2018

The
Tribunal held that the assessee executing contract with Metro Corporation for
design of rail-based mass rapid transport system by procuring design, execution
and completion and remedying any defects in works of civil engineering
construction, mechanical and electrical installation of station and tunnel
infrastructure and buildings etc., along with supply of materials, would be
chargeable to service tax under category of “works contract services” and not
“erection, commissioning and installation services”.

Facts

The Delhi Metro Corporation
awarded contract for design of rail-based mass rapid transport system by
procuring the design, execution and completion and remedying any defects in the
works of civil engineering contract, mechanical and electrical installation of
the station (including tunnel ventilation and station area conditioning and
ventilation) and tunnel infrastructure and buildings. Revenue alleged that the
activities undertaken would be chargeable to service tax under category of
“erection, commissioning and installation services”. Whereas, appellant
contended that since all work other than erection, commissioning and
installation were also agreed to be executed including as that of design and
even manufacture along with supply of materials, thus, the activities would be
correctly classifiable as “works contract services”.

Held

The Hon’ble Tribunal noted
that the scope of “erection, commissioning and installation services” includes
those services which are service contract simpliciter without any other element
in them. Further, in terms of section 67 of Finance Act, 1994 the value of
taxable services is the gross amount charged by service provider for such
services rendered by them i.e. what is referred to in the charging provision is
the taxation of service contract simpliciter without having any element of
property in goods to be simultaneously transferred i.e. the provision is not
for composite work contracts. The Tribunal noted that in present case,
appellant was cast with the obligation of supplying/providing all equipments,
materials, labour and other facilities requisite for and incidental to the
successful completion of the works and in carrying out all the duties and
obligations imposed by the contract documents. The valuation of the cost of
works was agreed to be the total cost for the work carried out. It is also
noted that the nature of contract is such that erection, commissioning and
installation part cannot be severed from rest of the contractual
responsibility. Thus, the Tribunal held that the contract entered is of a
composite nature rather being the contract for service simpliciter.
Accordingly, following decision of the Hon’ble Supreme Court in Larsen and
Toubro Ltd. vs. State of Karnataka [2013] 38 taxmann.com 453, the Tribunal
held that activities undertaken would be liable for service tax under “works
contract services” and thereby set aside impugned demand.

20. [2018] 98 taxmann.com 121 (New Delhi – CESTAT) Commissioner of
Service Tax vs. Gourmets Food Date of Order: 11^th December, 2017

The activity of providing catering services to the
members of the club in terms of catering contract entered into with the club is
not regarded as revenue sharing agreement and held as chargeable to service tax
under category of “outdoor catering services”.

Facts

Respondent entered into an
agreement with a club for providing catering services in the premises offered
by the club. Proceedings were initiated against the respondent to demand and
recover service tax for such activities under the category of “outdoor caterer’s
service”. The original authority dropped impugned demand by holding that the
arrangement appears to be that of revenue sharing arrangement and as such there
is no service provider and service receiver relationship in such arrangement.
Being aggrieved, revenue filed present appeal.

Held

On perusal of the
agreement, the Tribunal held that various clauses of the agreement make it
clear that it is a service agreement for a consideration entered into between
the two parties. The Tribunal also held that mere fact that payment to be made
to club for various facilities like space, infrastructure is calculated as a
percentage of sales revenue of the assessee, would not per se make it a
joint venture agreement. The Tribunal noted that the agreement between respondent-assessee
and the club makes it clear that the club has no obligation or responsibility
in providing such services of catering by the respondent. There is no shared
responsibility or obligation legally enforceable against the club except the
provisions of terms and conditions inbuilt in the contract. The respondent is
appointed as caterer and is paying considerations for the premises allotted to
them. Consequently, there is no scope for interpreting the agreement as joint
venture agreement. The demand under outdoor catering services was accordingly
upheld.

Note:

Above decision of the
Hon’ble Tribunal has been affirmed by Hon’ble Supreme Court in [2018] 98
taxmann.com 122 (SC) Gourmets Food vs. Commissioner of Service Tax, wherein the
appeal filed by appellant assessee against order of the Tribunal is dismissed
for being devoid of merits.

21. [2018-TIOL-3296-CESTAT-MUM] Tahnee Heights Co-operative
Housing Society Limited vs. Commissioner of CGST, Mumbai South Date of Order: 12^th October, 2018

Incorporated
association and its members being one and the same, the activities undertaken
or the services provided by the former will not be considered as a service,
exigible to service tax under the principle of mutuality.

Facts

The appellant is a co-operative
housing society. The members of the society contribute towards maintenance and
upkeep of the building and common expenses. The amount collected is spent for
the common benefits of all. During the period July 2015 to January, 2017
service tax was paid in respect of the contributions received under protest.
Subsequently refund applications were filed on the ground that there is no
service provider and service receiver relationship existing and on the
principles of mutuality, the activity should not be subjected to service tax.
Show Cause Notice was issued and appeals filed was also rejected on the ground
that in the light of Explanation 3(a) to section 65B(44) of the Finance Act,
1994, the appellant and its members are to be treated as distinct entities and
therefore, the tax is correctly paid.

Held

The Tribunal primarily
noted that for the levy of service tax there must be existence of two parties
i.e. the service provider and the service receiver. As far as the relationship
between an incorporated society or club and its members is concerned, it is an
undisputed fact that such incorporated association is a distinct legal entity.
However, since the association was formed or constituted and existed for the
exclusive purpose of catering/meeting to the requirements of its members, as
per the laid down policy in the bye law, it cannot be said that there is
involvement of two persons. Thus, the incorporated association and its member
being one and the same, the activities undertaken or the services provided by
the former will not be considered as a service, exigible to service tax under
the principle of mutuality. The Tribunal further noted that though various
decisions on principles of mutuality under service tax were delivered under the
pre-negative list but are squarely applicable in the negative list regime. It
was also held that the appellant cannot be termed as an unincorporated
association or a body of persons, for the purpose of consideration as a
“distinct person”.

Accordingly, the
explanation furnished under Clause 3(a) in section 65B of the Act will not
designate the appellant as an entity, separate from its members. Accordingly
the service tax paid was held to be refund.

22. [2018-TIOL-3370-CESTAT-MAD] United India Insurance Company Ltd
vs. CCE, ST LTU, Chennai Date of Order: 1^st June, 2018

Service
tax paid on bill of the authorised service station is valid input service used
to provide output service of vehicle insurance.

Facts

Assessee is engaged in
providing General Insurance Services. Cenvat credit was availed of service tax
paid on repair & maintenance of vehicles by Authorised Service Stations on
vehicles insured by the assessee. The department held such availment of credit
to be invalid on grounds that the same was not valid input service under Rule
2(l) of the CENVAT Credit Rules, 2004.

Held

The Tribunal noted that it
is undisputed that credit was availed only proportionately to the extent of the
amount borne by them. General Insurance Service insures the vehicle against
damages. Such service can be provided to the vehicle owner only through
reimbursement of repair charges. Hence, service tax paid on bill of the
authorised service station is valid input service used to provide output
service of vehicle insurance

Also decision of the Tribunal
in Paul Merchants Ltd. vs. CCE, Chandigarh [2012-TIOL-1877-CESTAT-DEL]
was noted to hold that the assessee becomes the recipient of the services from
the authorised service station even though the beneficiary remains the owner of
the motor vehicle. Accordingly, the demand is set aside.

II. High
Court

23. 2018-TIOL-2195-HC-AHM-ST] Oil Field Warehouse and Service Ltd vs. Union of India Date of Order: 17^th October,
2018

Rule 5A
of Service Tax Rules, 1994 not saved by section 174(2) of CGST Act, 2017
therefore fresh proceedings for audit could not be initiated inexercise of
powers under the said Rule.

Facts

The petitioner has
challenged the communication issued by the Comptroller and Auditor General of
India (CAG) calling upon the petitioner to submit service tax audit at the
hands of the officers of the CAG. Provisions of Rule 5A of the Service Tax
Rules, 1994 were relied upon for exercising the powers of audit. Apart from
challenging the rule itself it was stated that with the introduction of the
Goods and Service Tax Act, the Finance Act, 1994 and the Service Tax provisions
made thereon, stand repealed.

Held

The High Court noted
section 174 of the GST Act dealing with repeal and saving and prima facie noted
that there was no saving of Rule 5A in such manner that fresh proceedings for
audit could be initiated in exercise of powers under the said rule. Under the
circumstances, High Court granted interim relief and ordered that CAG shall not
carry out any further service tax audit of the petitioner.

24. [2018-TIOL-2303-HC-MAD-ST] Ganesan Builders Ltd vs. The Commissioner of Service Tax
Date of Order: 19^th September, 2018

Service
tax paid on insurance services provided to workers is available as CENVAT
credit post 01.04.2011.

Facts

The assessee is a builder.
A Show Cause Notice was issued denying CENVAT credit availed on the ground that
the payment of insurance premium for availing the insurance policy stands
excluded from the definition of “input services”, pursuant to the definition of
“Input Services”, after 01.04.2011. It was contended that the services consumed
by the employees in their official capacity is distinguishable from the
services which are consumed by them purely in their personal capacity.

Held

The High Court primarily
noted that it is important to peruse the nature of the policy, the beneficiary
of the policy and the Statute, under which, the policy is required to be
availed. On perusal of the policies it is evident that these are workmen
Compensation Policies. The insured is the Assessee and the policy specifies the
area where the construction works is carried out. It was further stated that
there is a statutory requirement under the Building and Other Construction
Workers (Regulation of Employment and Conditions of Service) Act, 1996. Under
the said Act, the Workmen’s Compensation Act, 1923 has been included in the
Second Schedule of the 1996 Act and the provisions of Act has been made
applicable to the building workers. The intention of the policy is to protect
the employees, who work in the site and not to drive them to various forums for
availing compensation in the event of an injury or death. Thus, the Appeal is
allowed and CENVAT credit is granted.

BCAJ Admin

OECD – RECENT DEVELOPMENTS – AN UPDATE

In this issue,
we have covered major developments in the field of International Taxation from
July 2018 till date and work being done at OECD in various other related
fields. It is in continuation of our endeavour to update the readers on major
developments at OECD at regular intervals. Various news items included here are
sourced from OECD Newsletters available on its website.

In this
write-up, we have classified the developments into 5 major categories viz.:

1) BEPS Action Plans

2) Transfer Pricing

3) Common Reporting Standard (CRS)

4) Multilateral Convention on Mutual
Administrative Assistance in Tax Matters

5) Exchange of Information

1) BEPS ACTION PLANS

OECD and IGF
release first set of practice notes for developing countries on BEPS risks in
mining industries

For many
resource-rich developing countries, mineral resources present a significant
economic opportunity to increase government revenue. Tax base erosion and
profit shifting (BEPS), combined with gaps in the capabilities of tax
authorities in developing countries, threaten this prospect. The OECD’s Centre
for Tax Policy and Administration and the Intergovernmental Forum on Mining,
Minerals, Metals and Sustainable Development (IGF) are collaborating to address
some of the challenges developing countries face in raising revenue from their
mining sectors. Under this partnership, a series of practice notes and tools
are being developed for governments.

Three practice notes have now been finalised
in October 2018. In addition, interested parties were invited to provide
comments on preliminary versions of these reports. OECD has also published the
public comments submitted. Building on BEPS Action 4, this practice note guides
government policy-makers on how to strengthen their defences against excessive
interest deductions in the mining sector.

2) TRANSFER PRICING (BEPS ACTIONS 8 TO 10)

i) BEPS discussion draft on the transfer
pricing aspects of financial transactions

In July, 2018, OECD
had invited Public comments on a discussion draft on financial transactions,
which deals with follow-up work in relation to Actions 8-10 (” Aligning
transfer pricing outcomes with value creation”) of the BEPS Action Plan.

The 2015 report on
BEPS Actions 8-10 mandated follow-up work on the transfer pricing aspects of financial
transactions. Under that mandate, the discussion draft, which does not yet
represent a consensus position of the Committee on Fiscal Affairs or its
subsidiary bodies, aims to clarify the application of the principles included
in the 2017 edition of the OECD Transfer Pricing Guidelines, in particular, the
accurate delineation analysis under Chapter I, to financial transactions. The
work also addresses specific issues related to the pricing of financial
transactions such as treasury function, intra-group loans, cash pooling,
hedging, guarantees and captive insurance.

ii) OECD releases new guidance on the
application of the approach to hard-to-value intangibles and the transactional
profit split method under BEPS Actions 8-10

The OECD released
on 21.06.2018 two reports containing Guidance for Tax Administrations on the
Application of the Approach to Hard-to-Value Intangibles, under BEPS Action
8; and Revised Guidance on the Application of the Transactional Profit Split
Method, under BEPS Action 10.

In October, 2015,
as part of the final BEPS package, the OECD/G20 published the report on
Aligning Transfer Pricing Outcomes with Value Creation (OECD, 2015), under BEPS
Actions 8-10. The Report contained revised guidance on key areas, such as
transfer pricing issues relating to transactions involving intangibles;
contractual arrangements, including the contractual allocation of risks and
corresponding profits, which are not supported by the activities actually
carried out; the level of return to funding provided by a capital-rich MNE
group member, where that return does not correspond to the level of activity
undertaken by the funding company; and other high-risk areas. The Report also
mandated follow-up work to develop.

Guidance for Tax
Administrations on the Application of the Approach to Hard-to-value Intangibles
(BEPS Action 8)

The new guidance
for tax administration on the application of the approach to hard-to-value
intangibles (HTVI) is aimed at reaching a common understanding and practice
among tax administrations on how to apply adjustments resulting from the
application of this approach. This guidance should improve consistency and
reduce the risk of economic double taxation by providing the principles that
should underlie the application of the HTVI approach. The guidance also
includes a number of examples to clarify the application of the HTVI approach
in different scenarios and addresses the interaction between the HTVI approach
and the access to the mutual agreement procedure under the applicable tax
treaty.

This guidance has
been formally incorporated into the Transfer Pricing Guidelines as an annex to
Chapter VI.

Revised Guidance
on the Application of the Transactional Profit Split Method (BEPS Action 10)

This report
contains revised guidance on the profit split method, developed as part of
Action 10 of the BEPS Action Plan. This guidance has been formally incorporated
into the Transfer Pricing Guidelines, replacing the previous text on the
transactional profit split method in Chapter II. The revised guidance retains
the basic premise that the profit split method should be applied where it is
found to be the most appropriate method to the case at hand, but it
significantly expands the guidance available to help determine when that may be
the case.

It also contains more guidance on how to apply the method, as well as numerous
examples.

3) COMMON REPORTING STANDARDS

i) OECD releases further guidance for tax
administrations and MNE Groups on Country-by-Country reporting (BEPS Action 13)

In September, 2018,
the Inclusive Framework on BEPS has released additional interpretative guidance
to give certainty to tax administrations and MNE Groups alike on the
implementation of Country-by-Country (CbC) Reporting (BEPS Action 13).

The new guidance
includes questions and answers on the treatment of dividends received and the
number of employees to be reported in cases where an MNE uses proportional
consolidation in preparing its consolidated financial statements, which apply
prospectively. The updated guidance also clarifies that shortened amounts
should not be used in completing Table 1 of a country-by-country report and
contains a table that summarises existing interpretative guidance on the
approach to be applied in cases of mergers, demergers and acquisitions.

The complete set of guidance concerning the interpretation of BEPS
Action 13 issued so far is presented in the document released in September
2018. This will continue to be updated with any further guidance that may be
agreed.

ii) OECD clamps down on CRS avoidance through
residence and citizenship by investment schemes

Residence and
citizenship by investment (CBI/RBI) schemes, often referred to as golden
passports or visas, can create the potential for misuse as tools to hide assets
held abroad from reporting under the OECD/G20 Common Reporting Standard (CRS).

In particular,
Identity Cards, residence permits and other documentation obtained through
CBI/RBI schemes can potentially be abused to misrepresent an individual’s
jurisdiction(s) of tax residence and to endanger the proper operation of the
CRS due diligence procedures.

Therefore, and as
part of its work to preserve the integrity of the CRS, the OECD has published
the results of its analysis of over 100 CBI/RBI schemes offered by CRS-committed
jurisdictions, identifying those schemes that potentially pose a high-risk to
the integrity of CRS.

Potentially
high-risk CBI/RBI schemes are those that give access to a low personal tax rate
on income from foreign financial assets and do not require an individual to
spend a significant amount of time in the jurisdiction offering the scheme.
Such schemes are currently operated by Antigua and Barbuda, The Bahamas,
Bahrain, Barbados, Colombia, Cyprus, Dominica, Grenada, Malaysia, Malta,
Mauritius, Monaco, Montserrat, Panama, Qatar, Saint Kitts and Nevis, Saint
Lucia, Seychelles, Turks and Caicos Islands, United Arab Emirates and Vanuatu.

Together with the results of the analysis, the OECD is also publishing
practical guidance that will enable financial institutions to identify and
prevent cases of CRS avoidance through the use of such schemes. In particular,
where there are doubts regarding the tax residence(s) of a CBI/RBI user, the
OECD has recommended further questions that a financial institution may raise
with the account holder.

Moreover, a number
of jurisdictions have committed to spontaneously exchanging information
regarding users of CBI/RBI schemes with all original jurisdiction(s) of tax
residence, which reduces the attractiveness of CBI/RBI schemes as a vehicle for
CRS avoidance. Going forward, the OECD will work with CRS-committed
jurisdictions, as well as financial institutions, to ensure that the guidance
and other OECD measures remain effective in ensuring that foreign income is
reported to the actual jurisdiction of residence.

4) MULTILATERAL CONVENTION ON MUTUAL ADMINISTRATIVE ASSISTANCE IN TAX MATTERS

i) Multilateral
Convention to Implement Tax Treaty Related Measures to Prevent BEPS

In November, 2016,
over 100 jurisdictions concluded negotiations on the Multilateral Convention to
Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit
Shifting (“Multilateral Instrument” or “MLI”) that will
swiftly implement a series of tax treaty measures to update international tax rules
and lessen the opportunity for tax avoidance by multinational enterprises. The
MLI already covers over 75 jurisdictions and has entered into force on 1^st
July, 2018. Signatories include jurisdictions from all continents and all
levels of development.

A number of jurisdictions have also expressed their intention to sign the MLI
as soon as possible and other jurisdictions are also actively working towards
signature.

ii) Signatories
and Parties (MLI Positions)

The MLI offers
concrete solutions for governments to close the gaps in existing international
tax rules by transposing results from the OECD/G20 BEPS Project into bilateral
tax treaties worldwide. The MLI modifies the application of thousands of
bilateral tax treaties concluded to eliminate double taxation. It also
implements agreed minimum standards to counter treaty abuse and to improve
dispute resolution mechanisms while providing flexibility to accommodate
specific tax treaty policies.

The text of the
Multilateral Instrument (MLI) and its Explanatory Statement were developed
through a negotiation involving more than 100 countries and jurisdictions and
adopted on 24^th November, 2016, under a mandate delivered by G20
Finance Ministers and Central Bank Governors at their February 2015 meeting.
The MLI and its Explanatory Statement were adopted in two equally authentic
languages, English and French.

iii) Translation
in Other Languages

Members of the ad
hoc Group have prepared translations of the MLI in Chinese, Dutch, German,
Italian, Japanese, Serbian, Spanish and Swedish. The OECD Secretariat has
prepared a translation of the MLI in Arabic. Other MLI translations, including
translations in Greek and Russian, are being prepared by members of the ad hoc
Group and will be made available shortly and further MLI translations are
expected by year end. The translations of the MLI in other languages are
provided only for information purposes. Only the signed English and French MLI
are the authentic MLI texts applicable.

iv) Saudi
Arabia signs landmark agreement to strengthen its tax treaties

Saudi Arabia has
signed the Multilateral Convention to Implement Tax Treaty Related Measures to
Prevent Base Erosion and Profit Shifting (the Convention) on 18.09.2018. It has
become the 84^th jurisdiction to join the Convention, which now
covers over 1,400 bilateral tax treaties.

5) EXCHANGE OF INFORMATION

i) Major enlargement of the global network for
the automatic exchange of offshore account information as over 100
jurisdictions get ready for exchanges

The OECD has
published on 05.07.2018, a new set of bilateral exchange relationships
established under the Common Reporting Standard Multilateral Competent
Authority Agreement (CRS MCAA).

In total, the international legal network for
the automatic exchange of offshore financial account information under the CRS
now covers over 90 jurisdictions, with the others expected to follow suit in
due course. The network has allowed over 100 committed jurisdictions to
exchange CRS information from September 2018 under more than 3200 bilateral
relationships that are now in place.

The full list of automatic exchange relationships that are currently in
place under the CRS MCAA is available online.

There has been a
significant increase of jurisdictions participating in the multilateral
Convention on Mutual Administrative Assistance in Tax Matters, which is the
prime international instrument for all forms of exchange of information in tax
matters, including the exchange upon request, as well as the automatic exchange
of CRS information and Country-by-Country Reports. The total number of
participating jurisdictions now amount to 124. These recent developments show
that jurisdictions are completing the final steps for being able to commence
CRS exchanges from September 2018, therewith delivering on their commitment
made at the level of the G20 and the Global Forum.

ii) Global Forum publishes compliance ratings on
tax transparency for further seven jurisdictions

The Global Forum is
the leading multilateral body mandated to ensure that jurisdictions around the
world adhere to and effectively implement both the standard of transparency and
exchange of information on request and the standard of automatic exchange of
information. This objective is achieved through a robust monitoring and peer
review process. The Global Forum also runs an extensive technical assistance
programme to provide support to its members in implementing the standards and
helping tax authorities to make the best use of cross-border information
sharing channels. The Global Forum also welcomed Oman as a new member. This
takes its membership to 154 members who have come together to cooperate in the
international fight against cross border tax evasion.

The Global Forum on
Transparency and Exchange of Information for Tax Purposes published on
15-10-2018 seven peer review reports assessing compliance with the
international standard on transparency and exchange of information on request
(EOIR).

These reports
assess jurisdictions against the updated standard which incorporates beneficial
ownership information of all relevant legal entities and arrangements, in line
with the definition used by the Financial Action Task Force Recommendations.

Two jurisdictions –
Bahrain and Singapore – received an overall rating of “Compliant”. Five others
– Austria, Aruba, Brazil, Saint Kitts and Nevis and the United Kingdom were
rated “Largely Compliant”.

The jurisdictions
have demonstrated their progress on many deficiencies identified in the first
round of reviews including improving access to information, developing broader
EOI agreement networks; and monitoring the handling of increasing incoming EOI
requests as well as taking measures to implement the strengthened standard on
the availability of beneficial ownership.

Note: The reader
may visit the OECD website and download various draft reports and Public
Comments referred to in this article for his further studies.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

7. New Okhla Industrial Development Authority
and Ors. vs. Commissioner of Income Tax-Appeals and Ors. (2018) 406 ITR 209
(SC)

Deduction
of tax at source – Rent – Amounts constituting annual lease rent payable to
GNOIDA, expressed in terms of percentage (e.g. 1%) of the total premium for the
duration of the lease, are rent, and therefore subject to TDS

The
Respondent Rajesh Projects (India), a private limited company engaged in the
business of real estate activities of constructing, selling residential units
etc., entered into a long-term lease for 90 years with the Greater Noida
Industrial Development Authority for Plot No. GH-07A for development and
marketing of Group Flats. As per terms of the lease deed, the company partially
paid the consideration amount for the acquisition of the plot to Greater Noida
at the time of execution of the lease deed and is also paying the balance lease
premium annually as per the terms and conditions of the lease deed.

Notice
u/s. 201/201(A) of the Income Tax Act, 1961 was issued by the Income Tax
department inquiring regarding non-deduction of tax at source under section
194-I of the Income Tax Act from the annual lease rent paid to Greater Noida.
The Respondent-company replied to the notices. The Respondents case was that it
did not deduct tax at source as it was advised by Greater Noida that it is a
Government authority, hence the tax deduction at source provisions are not
applicable. The Assessing Officer passed the order dated 31.03.2014 for the
Financial Year 2010-2011 and 2011-2012, whereby the Respondent was held as
“assessee-in-default” for non-deduction/non-deposit of TDS on account
of payment of lease rent and interest made to Greater Noida. Consequent demand
was raised against the Respondents.

Aggrieved by the order, the Respondent-company
filed an appeal before the Commissioner of Income Tax-Appeals. Respondents
prayed to stay the demand which was refused and recovery proceedings were
initiated. Aggrieved by assessment and recovery proceedings emanating
therefrom, the Respondent-company filed a Writ Petition praying for various
reliefs including the relief that Respondent-company be not treated as
“assessee-in-default” under the Income Tax Act for non-deduction/depositing
the tax at source in respect of payment of rent on lease land and in respect of
other charges paid to Greater Noida. Different other entities also filed the
writ petitions in the Delhi High Court praying for more or less the same
reliefs relating to lease rent payment and for payment of interest to Greater
Noida. All the writ petitions involving common questions of law and facts were
heard together and were allowed by the Delhi High Court.

Before the High Court, Greater Noida and the Noida authorities contended
that they are local authorities within the meaning of section 10(20) of the
Income Tax Act, 1961, hence their income is exempt from the Income Tax. It was
further contended that the interest received by them is exempt u/s. 194A(3)(iii)(f)
of the Income Tax Act and they were exempted from payment of any tax on the
interest.

The
revenue refuted the contention of Greater Noida and Noida contending that
w.e.f. 01.04.2003, the Greater Noida and Noida is not a local authority within
the meaning of section 10(20) and further they are also not entitled for the
benefit of notification issued u/s. 194A(3)(iii)(f). It was further contended
that with regard to payment of rent to the Noida and Greater Noida, the
Respondent-company was liable to deduct the tax on payment of interest, no
income-tax was deducted by the Respondent-company while paying rent to Noida
and Greater Noida, hence they are “assessee-in-default”.

The Delhi
Court held as follows:

(1)
Amounts paid as part of the lease premium in terms of the time-schedule(s) to
the Lease Deeds executed between the Petitioners and GNOIDA, or bi-annual or
annual payments for a limited/specific period towards acquisition of lease hold
rights are not subject to TDS, being capital payments;

(2)
Amounts constituting annual lease rent, expressed in terms of percentage (e.g.
1%) of the total premium for the duration of the lease, are rent, and therefore
subject to TDS. Since the Petitioners could not make the deductions due to the
insistence of GNOIDA, a direction is issued to the said authority (GNOIDA) to
comply with the provisions of law and make all payments, which would have been
otherwise part of the deductions, for the periods, in question, till end of the
date of this judgment. All payments to be made to it, henceforth, shall be
subject to TDS.

(3)
Amounts which are payable towards interest on the payment of lump sum lease
premium, in terms of the Lease which are covered by Section 194-A are covered
by the exemption u/s. 194A(3)(f) and therefore, not subjected to TDS.

(4) For
the reason mentioned in (3) above, any payment of interest accrued in favour of
GNOIDA by any Petitioner who is a bank-to the GNOIDA, towards fixed deposits,
are also exempt from TDS.

Aggrieved
by the aforesaid judgment of Delhi High Court, Greater Noida, Noida as well as
Revenue has filed appeals before the Supreme Court.

The
Supreme Court held that insofar as the appeals filed by Noida/Greater Noida
were concerned, the principal submission raised by the Appellant is applicability
of section 10(20) of the Income Tax Act. In New Okhla Industrial Development
Authority vs. Commissioner of Income Tax-Appeals and Ors., (406 ITR 178) it
had been held that Noida was not a “local authority” within the
meaning of section 10(20) of the Income Tax Act as amended by the Finance Act,
2002 w.e.f. 01.04.2003.

Insofar as
the question relating to exemption u/s. 194A(3) (iii)(f) by virtue of
notification dated 24.10.1970, i.e. the exemption of interest income of the
Noida, was concerned, in Commissioner of Income Tax (TDS) Kanpur and Anr.
vs. Canara Bank(406 ITR 161) it had been held that Noida was covered by the
notification dated 22.10.1970, and therefore the judgment of the Delhi High
Court holding that Noida/Greater Noida was entitled for the benefit of section
194A(3)(iii)(f) had to be approved. Coming to the direction of the High Court
regarding deduction of tax at source on the payment of lease rent as per
section 194-I of the Income Tax Act, 1961, the Supreme Court held that a
perusal of the Circular dated 30.01.1995 relied by Noida/Greater Noida indicate
that circular was issued on the strength of section 10(20A) and section 10(20)
as it existed at the relevant time. Section 10(20) has been amended by Finance
Act, 2002 by adding an explanation and further section 10(20A) has been omitted
w.e.f. 01.04.2003. The very basis of the circular has been knocked out by the
amendments made by Finance Act, 2002. Thus, the Circular could not be relied by
Noida/Greater Noida to contend that there was no requirement of deduction of
tax at source u/s. 194-I. Thus, deduction at source is on payment of rent u/s.
194-I, which was clearly the statutory liability of the Respondent-company. The
High Court has adjusted the equities by recording its conclusion and issuing a
direction.

In view of
what has been stated above, the Supreme Court did not find any error in the
judgment of the High Court dated 16.02.2017. In result, all the appeals were
dismissed.

8. Commissioner
of Income Tax (TDS), Kanpur and Ors. vs. Canara Bank (2018) 406 ITR 161 (SC)

Deduction
of tax at source – Payment of interests by the banks to the State Industrial
Development Authority does not require any deduction at source in terms of
section 194A(3)(iii)(f)

The New Okhla Industrial
Development Authority (NOIDA), hereinafter referred to as “Authority”
was constituted by Notification dated 17.04.1976 issued u/s. 3 of the Uttar
Pradesh Industrial Area Development Act, 1976 hereinafter referred to as
“1976 Act”. The Canara Bank, is the banker of the Authority. The Bank
made a payment of Rupees Twenty Crore Ten Lakh as interest to Authority in form
of FDs/Deposits for the financial year 2005-06. The Canara Bank, however, did
not deduct tax at source u/s. 194A of the Income Tax Act, 1961 hereinafter
referred to as “IT Act, 1961”.

Notices
were issued by the Commissioner of Income-tax (TDS) to Canara Bank asking for
information pertaining to interest paid to the Authority on its deposits.
Notices were also issued by the Commissioner of Income-tax (TDS) to the Bank
for showing cause for not deducting tax at source. A writ petition had been
filed by the NOIDA being Writ Petition No. 1338/2005 challenging the notices
issued to the Authority as well as its bankers. Assessment proceeding could not
proceed due to certain interim directions passed by the High Court in the above
writ petition. The writ petition was ultimately dismissed by the High Court on
28.02.2011 holding that the Authority was not a local authority within the
meaning of section 10(20) of IT Act, 1961 and its income was not exempt from
tax. The Assessing Officer thereafter proceeded to pass an order u/s.
201(1)/201(1A) read with section 194A of the IT Act, 1961 dated 28.02.2013.

Income Tax
Authority held that the Bank was an Assessee in default. The default was
computed and demand notice as per section 156 of the IT Act, 1961 was issued.
Penalty proceeding was also separately initiated. The Canara Bank aggrieved by
the order of the Assessing Officer dated 28.02.2013 filed an appeal before the
Commissioner of Income Tax (Appeals). Before the Commissioner, the bank relied
on Notification dated 22.10.1970 issued u/s. 194A(3) (iii)(f) of the IT Act,
1961. The Appellate Authority vide its judgment dated 02.12.2013 allowed the
appeal setting aside the order of the Assessing Officer. The Revenue aggrieved
by the judgment of the Appellate Authority filed an appeal before the Income
Tax Appellate Tribunal. The Tribunal also held that payment of interests by the
banks to the State Industrial Development Authority did not require any
deduction at source in terms of section 194A(3)(iii)(f).

The
Revenue aggrieved by the order of the Tribunal filed an appeal u/s. 260A of the
Act before the High Court. The Division Bench of the High Court vide its
judgment dated 04.04.2016 dismissed the appeal.

The
Supreme Court noted the provisions of section 194A of the IT Act, 1961and the
Notification dated 22.10.1970 issued u/s. 194A(3)(iii)(f).

According to the Supreme Court, to decide the controversy, it was
necessary to ascertain the concept of a Corporation. The Supreme Court observed
that a Corporation is an artificial being which is a legal person. It is a
body/corporate established by an Act of Parliament or a Royal Charter. It
possesses properties and rights which are conferred by the Charter constituting
it expressly or incidentally.

The
Supreme Court noted that before it, there was no issue that the Authority was
not a Corporation. It was also not contended that Authority was not a statutory
corporation. What was contended before it was that Authority having not been
established by a Central, State or Provincial Act was not covered by
Notification dated 22.10.1970 hence, not eligible for the benefit.

The
Supreme Court observed that the Appellant on the one hand submits that the
Authority has not been established by 1976 Act rather it has been established
under the 1976 Act, hence it was not covered by Notification dated 22.10.1970
whereas the Respondent submits that Authority has been established by the 1976
Act and hence, it fulfills the condition as enumerated under Notification dated
2.10.1970. Alternatively, it was submitted that words “by and under”
have been interchangeably used in the IT Act, 1961 and there was no difference,
even if, the Authority was established under the 1976 Act.

The
Supreme Court noted that section 194A(3)(iii) clauses (b), (c) and (d) refer to
expression “established”. In sub clause (b) expression used is
“established by or under a Central, State or Provincial Act”, in sub
clause (c) the expression used is “established under the Life Insurance
Corporation Act” and in sub clause (d) expression used is
“established under the Unit Trust of India Act”. The Supreme Court
held that the section thus uses both the expressions “by or under”.
According to the Supreme Court, the expression established by or under an Act
had come for consideration before it on several occasions. In Sukhdev Singh
vs. Bhagatram Sardar Singh Raghuvanshi (1975) 45 Com Cas 285 (SC), the
Court had occasion to consider the status of company incorporated under the
Companies Act. The Court held that Company incorporated is not a Company
created by the Companies Act. Again in S.S. Dhanoa vs. Muncipal Corporation,
Delhi (1981) 3 SCC 431 the Court had occasion to consider a Registered
Society which was a body/corporate. The question was as to whether the State
Body/corporate is a Corporation within the meaning of Clause Twelfth of section
21 of the Indian Penal Code (Indian Penal Code). The Court again held that
expression Corporation means a Corporation created by the legislature. Another
judgment which had occasion to consider the expression established by or under
the Act was a judgment in Dalco Engineering Private Limited vs. Satish
Prabhakar Padhye and Ors. (2010) 4 SCC 378. The Court had occasion to
examine the provision of section 2k, of the Persons with Disabilities (Equal
Opportunities, Protection of Rights and Full Participation) Act, 1995,
specifically expression “establishment” means a Corporation
established by or under Central, Provincial or State Act. The Court held that
the phrase established by or under the Act is a standard term used in several
enactments to denote a statutory corporation established or brought into
existence by or under the statute. On Company it was held that the company is
not established under the Companies Act and an incorporated company does not
“owe” its existence to the Companies Act.

The Supreme Court reverting back to the provisions of 1976, Act observed
that the very preamble of that Act reads “an Act to provide for the
Constitution of an Authority for the development of certain areas in the State
into industrial and urban township and for masses connected through with”.

According
to the Supreme Court, the Act itself provides for constitution of an authority.
Section 2(b) of the 1976 Act defines Authority as authority constituted u/s. 3
of the Act. The Supreme Court observed that when one compares the provisions of
section 3 of 1976 Act with those of The State Financial Corporations Act, 1951,
it becomes clear that the establishment of Corporation in both the enactments
is by a notification by State Government. In the present case, notification has
been issued in exercise of power of section 3, the Authority has been
constituted.

According to the Supreme Court it having already laid down in Dalco
Engineering (supra) that establishment of various financial corporations
under State Financial Corporation Act, 1951 is establishment of a Corporation
by an Act or under an Act, the above ratio fully covers the present case and
therefore there was no doubt that the Authority have been established by the
1976 Act and it was clearly covered by the Notification dated 22.10.1970.
Further, the composition of the Authority was statutorily provided by section 3
of 1976 Act itself, hence, there was no denying that Authority had been
constituted by Act itself.

The
Supreme Court dismissed the appeal, holding that the High Court did not commit
any error in dismissing the appeal filed by the Revenue.

9. Deputy
Commissioner of Income Tax, Chennai vs. T. Jayachandran (2018) 406 ITR 1 (SC)

Income
–The Respondent had acted only as a broker and could not claim any ownership on
the sum of Rs. 14,73,91,000/- and that the receipt of money was only for the
purpose of taking demand drafts for the payment of the differential interest
payable by Indian Bank and that the assessee had actually handed over the said
money to the Bank itself, the said sum of Rs. 14,73,91,000/- could not be
termed as the income of the Respondent

The Respondent-an individual and the proprietor of Chandrakala and Company, was a stock broker
registered with the Madras Stock Exchange. He was stated to be an approved
broker of the Indian Bank. During the assessment years 1991-92, 1992-93 and
1993-94 the Respondent acted as a broker to the Indian Bank in purchase of the
securities from different financial institutions. It was
the case of the Revenue that the Indian Bank, in order to save itself from
being charged unusually high rate of interest on borrowing money from the
market, lured Public Sector Undertaking (PSUs) to make fixed term deposit with
it on higher rate of interest. The rate of interest offered to the PSUs for
making huge term deposits was to the extent of 12.75% of interest on fixed
deposits against the approved 8% rate of interest in accordance with the RBI
directions.

In order
to pay higher interest to the PSUs who made a fixed term deposit with the
Indian Bank, the bank requested the Respondent to purchase securities on its
behalf at a prescribed price which was unusually high but adequate to cover the
market price of the securities, brokerage/incidental charges to be levied by
the Respondent on these transactions, apart from covering the extra interest
payable to the PSUs. The Respondent, on the instructions of Indian Bank,
purchased securities at a particular rate quoted by the Bank and sold them to
Indian Railways Finance Corporation.

Bank of
Madura was the routing bank through which the securities were purchased and
sold to Indian Bank for which Bank of Madura charged service charges. The
Respondent was paid commission in respect of transactions done on behalf of
Indian Bank. Under instructions from Indian Bank, a portion of the amount
realised from the security transactions carried on behalf of Indian Bank was
paid by way of additional interest to certain Public Sector Undertakings (PSU)
on the deposits made with the Indian Bank and out of eight PSUs three had
confirmed the receipt of such additional interest through demand drafts.

The
Respondent filed his return of income for the Assessment Year 1991-92 declaring
his income at Rs. 4,82,83,620/-. The Assessing Officer passed assessment order
u/s. 143(3) and raised a demand for a sum of Rs. 14,73,91,000/- with regard to
the sum payable to the PSUs while holding that the Respondent has not acted as
a broker in the transactions carried out for the Indian Bank rather as an
independent dealer and that there was no overriding title in favour of the
PSU’s with regard to the additional amount earned out of the securities
transactions and it is a case of application of income after accrual and,
hence, the said amount is liable to be assessed as the income of the
Respondent.

The
Respondent, being dissatisfied with the order, preferred an Appeal before the
Commissioner for Income Tax (Appeals). Learned Commissioner of Income Tax
(Appeals), set aside the demand for additional tax while deciding the issue in
favour of the Respondent and held that the alleged additional interest payable
to the PSUs could not be considered as the income of the Respondent.

Being
aggrieved, the Revenue filed an appeal before the Income Tax Appellate Tribunal
(hereinafter referred to as ‘the Tribunal’). The Tribunal, allowed the appeal
filed by the Revenue and held that the amount received at the hands of the
Respondent which was alleged to be payable to the PSUs was the income of the
Respondent and there was no overriding title existing in favour of the PSUs so
as to cause diversion of income.

In the
meanwhile criminal proceedings were initiated with respect to the present
transactions in question against the Respondent along with others which was
decided by the CBI court.

The court,
while acquitting the Respondent had observed that the relationship between the
Indian Bank and the Respondent was that of principal-agent and with regard to
the transactions in question the Respondent acted in the capacity of a broker
and not as an individual dealer.

However, the Tribunal refused to rely on the evidence produced in the
trial court on the ground that the assessment proceedings were different from
the criminal proceedings and the evidence adduced in the trial court couldn’t
be relied to absolve the Respondent from the tax liability.

Being
aggrieved by the order of the ITAT, the Assessee filed Tax Case Appeal before
the High Court. The High Court, set aside the order of the Tribunal while
relying on the evidence given in the criminal case in this regard.

Being
aggrieved, the Revenue filed an appeal before the Supreme Court.

According
to the Supreme Court, the only point for consideration before it was whether on
the facts and circumstances of the present case the High Court was right in
holding that the alleged additional interest payable to PSUs could not be
assessed as income of the Respondent?

The
Supreme Court was of the view that the answer to the short question whether the
alleged interest payable to the PSUs could be assessed as an income of the
Respondent depended on the determination of true nature of relationship between
the Indian Bank and the Respondent with regard to the transactions in question
and the capacity in which he held the amount of Rs. 14,73,91,000/-.

As to the question of
relationship between the Indian Bank and the Respondent, the Supreme Court
observed that the normal settlement process in Government securities is that
during transaction banks make payments and deliver the securities directly to
each other. The broker’s only function is to bring the buyer and seller
together and help them to negotiate the terms for which he earns a commission
from both the parties. He does not handle either cash or securities. In this
respect, the broker functions like the broker in the interbank foreign exchange
market. The conduct of the Respondent in the transaction in question could not
be termed to be strictly within the normal course of business and the
irregularities could be noticed from the manner in which the whole transactions
were conducted. However, the same could not be basis for holding the Respondent
liable for tax with regard to the sum in question and what was required to be
seen was whether there accrued any real income to the Respondent or not.

According to the Supreme Court, it was required to be seen in what
capacity the Respondent held the said amount-independently or on behalf of the
Indian Bank. The Assessing Officer, while passing assessment order, had held
that there existed no agreement between the Respondent and the Indian Bank
about the payment of additional interest to the PSUs and there was no
overriding title in respect of the additional interest for the PSUs. However,
in the opinion of the Supreme Court, the position in this regard was very much
settled that an agreement need not be in writing but could be oral also and the
same could be inferred from the conduct of the parties.

Further, while considering the claim of the Respondent and the view of
the Assessing Officer, how the bank itself had treated the Respondent, was a
matter of relevance. The relationship between the Indian Bank and the
Respondent was very much clear by the evidence led during the criminal
proceedings. The Executive Director of the Bank had specifically spoken about
the role of the Respondent as a broker specifically engaged by the Bank for the
purchase of securities and that the Bank had included the interest money too in
the consideration paid, for the purpose of taking demand drafts in favour of
PSUs. Further, the evidence led by other bank officials pointed out that the
price of securities itself were fixed by the bank authorities and as per their
directions the Respondent had purchased the securities at the market price and
the differential amount was directed to be used for taking demand drafts from
the bank itself for paying additional interest to the PSUs. Further, the letter
dated 25.03.1994 by the Bank wherein the Bank had acknowledged the receipt of
Demand Drafts taken by the Respondent gave an unblurred picture about the
capacity of the Respondent in holding the amount in question. Consequently, the
conduct of the parties, as recorded in the criminal proceedings showing the
receipt of amount by the broker, the purpose of receipt and the demand drafts
taken by the broker at the instance of the bank were sufficient to prove the
fact that the Respondent acted as a broker to the Bank and, hence, the additional
interest payable to the PSUs could not be held to be his property or income.

According
to the Supreme Court, the income that had actually accrued to the Respondent
was taxable. What income has really occurred to be decided, not by reference to
physical receipt of income, but by the receipt of income in reality. Given the
fact that the Respondent had acted only as a broker and could not claim any
ownership on the sum of Rs. 14,73,91,000/- and that the receipt of money was
only for the purpose of taking demand drafts for the payment of the
differential interest payable by Indian Bank and that the Respondent had
actually handed over the said money to the Bank itself, the Supreme Court held
that the Respondent held the said amount
in trust to be paid to the public sector units on behalf of the Indian Bank
based on prior understanding reached with the bank at the time of sale of
securities and, hence, the said sum of Rs. 14,73,91,000/- could not be termed
as the income of the Respondent. According to the Supreme Court, the decision
rendered by the High Court therefore required no interference.

The Supreme Court dismissed
the appeal.

10. New Okhla Industrial Development Authority
vs. Chief Commissioner of Income Tax and Ors.

(2018)
406 ITR 178 (SC)

Exemption
– Local Authority – After omission of section 10(20A), only provision under
which a Body or Authority can claim exemption is section 10(20) – Local authority having been exhaustively
defined in the Explanation to section 10(20), an entity has to fall u/s. 10(20)
to claim exemption.

The
Appellant-New Okhla Industrial Development Authority (hereinafter referred to
as the “Authority”) has been constituted u/s. 3 of the U.P.
Industrial Area Development Act, 1976 (hereinafter referred to as the ‘Act,
1976’) by notification dated 17.04.1976. The Act, 1976 was enacted by State
Legislature to provide for the constitution of an Authority for the development
of certain areas in the State into industrial and urban township and for
matters connected therewith. Under the Act, 1976 various functions have been
entrusted to the Authorities. Notices u/s. 142 of the Income Tax Act dated
28.07.1998 and 08.08.1998 were issued to the Appellant. The Appellant
challenging the said notices filed writ petition contending that Appellant was
a local authority, hence, was exempted from payment of income tax u/s.10(20)
and section 10(20A) of Income Tax Act, 1961 (hereinafter referred to as
“I.T. Act, 1961).

The writ
petition was allowed by the Division Bench of the Allahabad High Court on
14.02.2000 holding that the Appellant was a local body. It was held that it is
covered by the exemption u/s. 10(20A) of I.T. Act, 1961. The Division Bench,
however, did not go into the question whether it was also exempt u/s. 10(20).

By the Constitution (74^th Amendment) Act, 1992, the
Parliament had inserted Part IXA of the Constitution providing for the
constitution of Municipalities. A notification dated 24.12.2001 was issued by
the Governor in exercise of the power under the proviso to Clause (1) of
Article 243Q of the Constitution of India specifying the Appellant to be an
“industrial township” with effect from the date of the notification
in the Official Gazette. A notice dated 29.08.2005 was issued by the Assistant
Commissioner of Income Tax to the Appellant for furnishing Income Tax Return
for the assessment year 2003-2004 and 2004-2005. Notice mentioned that after
omission of section 10(20A) w.e.f. 01.04.2003 the Authority had become taxable.
Notice u/s. 142(1) was also enclosed for the above purpose.

The
Appellant vide its letter dated 20.09.2005 replied the notice dated 29.08.2005
stating that it was a local authority and exempt from Income Tax hence notice
u/s. 142 be withdrawn. The Appellant filed a writ petition praying for quashing
the notice u/s. 142 of the Income Tax Act dated 29.08.2005. The High Court in
the writ petition decided the question “whether New Okhla Industrial
Development Authority (NOIDA) is a local authority after 01.04.2003 within the
meaning of section 10(20) of the Income Tax Act, 1961”. The Division Bench
of the High Court relying on two judgments of the Supreme Court in Agricultural
Produce Market Committee, Narela, Delhi vs. Commissioner of Income Tax and Anr.
(2008) 9 SCC 434 and Adityapur Industrial Area Development Authority vs.
Union of India and Ors. (2006) 5 SCC 100, held that after 01.03.2003 the
NOIDA is not a local authority within the meaning of section 10(20) of the I.T.
Act, 1961. The writ petition was consequently dismissed.

According
to the Supreme Court, the only issue that arose for consideration in these
appeals was as to whether the Appellant was a local authority within the
meaning of section 10(20) as amended by Finance Act, 2002 w.e.f. 01.04.2003.
According to the Supreme Court, the submissions made by the parties could be
dealt with in the following two heads:

A. The
status of the Authority by virtue of notification dated 24.12.2001 issued under
Clause (1) of Article 243Q issued by the Governor specifying New Okhla
Industrial Area to be an “industrial township”.

B. Whether
the Appellant is a local authority “within the meaning of section 10
sub-section (20) as explained in Explanation added by Finance Act, 2002.

The
Supreme Court held as under:

(A) Part
IXA of the Constitution:

The
proviso is an exception to the constitutional provisions which provide that
there shall be constituted in every State a Nagar Panchayat, a Municipal
Council and a Municipal Corporation. Exception is covered by proviso that where
an industrial township is providing municipal services the Governor having
regard to the size of the area and the municipal services either being provided
or proposed to be provided by an industrial establishment specify it to be an
industrial township.

The words
‘industrial township’ have been used in contradiction of a Nagar Panchayat, a
Municipal Council and a Municipal Corporation. The object of issuance of
notification is to relieve the mandatory requirement of constitution of a
Municipality in a State in the circumstances as mentioned in proviso but
exemption from constituting Municipality does not lead to mean that the
industrial establishment which is providing municipal services to an industrial
township is same as Municipality as defined in Article 243P(e).

Article 243P(e)
defines Municipality as an institution of self-government constituted under
Article 243Q. The word constituted used under Article 243P(e) read with Article
243Q clearly refers to the constitution in every State a Nagar Panchayat, a
Municipal Council or a Municipal Corporation. Further, the words in proviso
“a Municipality under this Clause may not be constituted” clearly
means that the words “may not be constituted” used in proviso are
clearly in contradistinction with the word constituted as used in Article
243P(e) and Article 243Q. Thus, notification under proviso to Article 243Q(1)
is not akin to constitution of Municipality. According to the Supreme Court,
industrial township as specified under notification dated 24.12.2001 is not
akin to Municipality as contemplated under Article 243Q.

B. Section
10(20) as amended by the Finance Act, 2002:

By the Finance Act, 2002 an Explanation has been added to section 10(20)
of the I.T. Act, 1961 and section 10(20A) has been omitted. Prior to Finance
Act, 2002 there being no definition of ‘local authority’ under the I.T. Act,
the provisions of section 3(31) of the General Clauses Act, 1897 were pressed
into service while interpreting the extent and meaning of local authority. The
Explanation having now contained the exhaustive definition of local authority,
the definition of local authority as contained in section 3(31) of General Clauses
Act, 1892 is no more applicable.

The
Explanatory Notes on Finance Act, 2002 clearly indicates that by Finance Act,
2002 the exemption under section 10(20) has been restricted to the Panchayats
and Municipalities as referred to in Articles 243P(d) and 243P(e). Further by
deletion of clause (20A), the income of the Housing Boards of the States and of
Development Authorities became taxable.

After
omission of section 10(20A) only provision under which a Body or Authority can
claim exemption is section 10(20). Local authority having been exhaustively
defined in the Explanation to section 10(20) an entity has to fall u/s. 10(20)
to claim exemption.

In Adityapur Industrial Area Development Authority (supra) after
considering section 10(20) as amended by the Finance Act, 2002 and consequences
of deletion of section 10(20A) it had been held that the benefit, conferred by
section 10(20-A) of the Income Tax Act, 1961 on the Assessee therein, had been
expressly taken away. Moreover, the Explanation added to section 10(20)
enumerates the “local authorities” which did not cover the Assessee
therein.

In Gujarat
Industrial Development Corporation vs. Commissioner of Income Tax, 1997 (7) SCC
17, after considering the provisions of section 10(20A) of I.T. Act it was
held that Gujarat Industrial Development Corporation was entitled for exemption
u/s. 10(20A).

The Gujarat Industrial Development Corporation was held to be entitled
for exemption u/s. 10(20A) at the time when the provision was in existence in
the statute book and after its deletion from the statute book the exemption was
no more available.

Further,
Explanation to section 10(20) uses the word ‘means’ and not the word
‘includes’. Hence, it was not possible to extend the definition of ‘local
authority’ as contained in the Explanation to section 10(20). It was also not
possible to refer to the definitions in other Acts, as the IT Act now
specifically defines ‘local authority’.

The
Supreme Court thus concluded that the Appellant was not covered by the definition
of local authority as contained in Explanation to section 10(20).

BCAJ Admin

Society News

SECOND BCAS LONG-DURATION COURSE ON GST

The second BCAS Long-Duration Course
on GST was conducted at the BCAS Hall from 4^th to 19^th
October, 2019. It was held over three consecutive Fridays and Saturdays with
six sessions per day and a total of 36 technical sessions on important areas
under GST. Each technical session was conducted by experienced faculty having
vast experience and knowledge in the area of indirect taxation. The course was
aimed at imparting basic and middle-level knowledge on conceptual aspects of
GST law and procedures which were explained in interactive sessions along with
talks, practical examples and case studies. The last two sessions were combined
and designed as a ‘Brain Trust’ session, moderated by BCAS Immediate
Past President and present Co-Chairman of the IDT Committee, Sunil
Gabhawalla, along with renowned faculties S.S. Gupta and Parind
Mehta as ‘brain trustees’ who answered innumerable questions put to them by
the participants and highlighted various issues in GST.

The course
received very good response. A total of 71 participants enrolled for it; they
came from 12 different cities. The participants were all praise for the course.

Those who
attended at least 75% of the course were presented with participation
certificates by the Society. The overall verdict from the feedback forms
received was encouraging, as almost all participants appreciated the design,
structure, timing, faculties and so on.

HUMAN RESOURCES DEVELOPMENT COMMITTEE

‘Non-violence
is the greatest force at the disposal of mankind. It is mightier than the
mightiest weapon of destruction’, said Mahatma Gandhi.

The HRD Study
Circle organised a talk on ‘Non-Violent Communication’ (NVC) by Ms Leonie
D’Mello at the BCAS Hall on 10^th October, 2019. (Earlier, in
memory of the Mahatma, BCAS organised a special programme ‘Bapu@150’ on
2^nd October, 2019 in its Conference Hall.)

The speaker
made several key points while delivering her talk. Among them were the
following:

‘Non-Violent Communication is a simple
tool to defuse arguments and create compassionate communication with family,
friends, etc. It is an amazingly effective language for saying what is on your
mind and in your heart. It is simple on the surface, challenging to use in the
heat of the moment and powerful in its results.

Non-Violent
Communication is a way of getting things done in the right way with both sides
willing to dialogue and resolve conflicts.

It involves expressing honestly and
receiving emphatically. When we learn to connect our needs with our feelings,
we empathise with ourselves and others. We learn to be compassionate with
ourselves and with others.

NVC shows us
to focus on what we truly want, rather than on what is wrong with others or
ourselves. It gives the tools and understanding to create a more peaceful state
of mind.

NVC is a very interesting way to
communicate effectively.’

Those who attended the talk expressed a
desire to learn even more about non-violent communication – so that they could
communicate with others successfully and more effectively.

LECTURE
MEETING ON ‘RECENT DEVELOPMENTS IN GST’

A lecture meeting on ’Recent Developments in
GST’ was held on 11^th October, 2019 at Bhatia Wadi, near Savarkar
Garden, Borivali (West), on 11^th October, 2019.

Well over a hundred professionals and others
attended this first-of-its-kind meeting. BCAS President Manish Sampat,
in his opening remarks, underlined the objective of this particular lecture. He
said this was the first initiative to reach out to the suburbs for the benefit
of scores of members and others living and / or working in Borivali and nearby
areas.

Immediate Past President Sunil Gabhawalla
explained the various important developments which had taken place due to the
change in the law and also through various notifications and circulars after
its enactment. In a sense, the members were taken on a ‘GST journey’ starting
from inception to execution, the hurdles and hindrances along the way and so
on. The speakers answered all the queries raised from the floor of the house.

The interactive meeting ended with
announcements about future BCAS events and a vote of thanks proposed by Dushyant
Bhatt.

FEMA STUDY CIRCLE MEETING

FEMA Study Circle Conveners Kirit P.
Dedhia, Niki Shah and Parag Kotak joined hands to organise a
very interesting discussion on ‘ODI Contraventions: Reporting and Regulations’
at the BCAS Conference Hall on 15^th October, 2019.

The choice of Ms Aarti Karwande as
Group Leader proved to be a good decision. For, in the course of her
presentation she covered various case laws pertaining to ODI contraventions.
This paved the way for a lively and thought-provoking discussion on the
applicable FEMA regulations. The topic of discussion being so interesting, the
room was packed with professionals with a sprinkling of students.

Ms Karwande pointed out that Overseas Direct
Investment had rapidly evolved over the years. Therefore, it was important to
understand the regulations and the reporting pertaining to the subject –
because any contravention could have several adverse ramifications.

The Study Circle meeting served to clarify
matters and set the professionals on the right track to tackle this key subject
(Overseas Direct Investment).

‘ESTATE
DUTY – A TRIGGER FOR SUCCESSION PLANNING’

The BCAS organised a lecture meeting
addressed by Mr. Ketan Dalal on ‘Estate Duty – a Trigger for Succession
Planning’ on 16^th October, 2019 in the BCAS Conference Hall.

Introducing the subject, President Manish
Sampat pointed out the importance of estate / succession planning all over
the world and in India, too. He stated that in recent times, the focus on
succession planning had increased amongst high net-worth Indian business
families so as to minimise the loss in value while transferring assets /
businesses from one generation to another.

In the last few years, especially during the
time of the presentation of the Union Budget, there had been a great deal of hype
about the re-introduction of estate duty (which had been abolished in 1985).
That had triggered the need for succession planning. People had started looking
beyond wills and probates and were approaching lawyers, chartered accountants
and attorneys for succession planning, the President pointed out.

Mr. Ketan Dalal started the session with a brief history of estate planning all
over the world, especially in countries like the USA where estate duty laws
have been in force for many years. He then explained the earlier estate duty
law in India and its main features, the challenges it faced and the reasons why it was abolished. He gave an overview
of succession planning and how it was a much wider concept than mere mitigation
of estate duty issues.

He stated that succession planning was very
important in India even without any estate duty law being in place. Various
structures were used by people for succession planning; they faced several
issues in doing so and were being made aware of the timelines involved in the
whole succession planning process.

Mr. Dalal
described the integrated approach to be adopted for structuring such planning
and shared his experience on the issues that arose, on the basis of the
innumerable cases handled by him.

He also explained some of the key issues
that one could come up against under various laws in India dealing with trusts,
family settlements and restructuring. He then answered a plethora of questions
from the eager participants on gifts, nominations, wills, probate, etc.

The meeting was
well appreciated as the speaker articulated several aspects of succession
planning very well.

President Manish introduced the
speaker, Vice-President Suhas Paranjpe presented a memento to him and
Convener Hardik Mehta proposed the vote of thanks.

SUBURBAN STUDY CIRCLE

The Suburban Study Circle organised a
meeting on ‘Amendments to Income-tax Act, 1961’ vide an ordinance, the Taxation
Laws (Amendment) Ordinance, 2019, on 18^th October, 2019 which was
addressed by Mr. Milin Bakhai.

The speaker made a detailed presentation on
the amendments and explained each change clause by clause. The group had a
detailed discussion on the possible outcomes of selecting the option u/s
115BAA.

He walked the participants through a
comparison of companies under different tax rates and the various pros and cons
for selection of the new tax rates. He also examined section 115BAB in detail
and the various references which were drawn from different judicial precedents
to explain the same. He gave examples to describe which arrangements would be
considered as reconstruction and / or splitting.

The participants lauded the speaker for his
erudition and his easy-to-understand presentation.

INTERNATIONAL
ECONOMICS STUDY GROUP

The International Economics Study Group held
its meeting on 5^th November, 2019 to discuss ‘Issues &
Implications of Banking & Financial Crisis in India’. CA Harshad Shah
and CA Paresh Budhdev led the discussions and presented their thoughts
on the subject.

They pointed out that Indian banks (mostly
PSUs and some private banks) had been facing serious NPA crises for the last
five years. Besides, many well-known promoters had been facing huge liquidity
challenges and a few of them had filed for bankruptcy themselves or their
lenders had done so. This got further aggravated and spread to NBFCs and
private banks with problems at some well-known ones. Many more lenders were
likely to be added to the list due to stress in the real estate, automobiles,
MSME sectors and the rural and agricultural economy. At the same time, there
were governance issues in small savings funds, EPF and LIC, too.

As per RBI data, the aggregate gross
advances of PSU banks increased from Rs. 11.33 lakh crores as on 31^st
March, 2008 to Rs. 34.03 lakh crores as on 31^st March, 2014 (a
three-fold increase in six years). The primary reasons for the spurt in
stressed assets had been aggressive lending practices, including phone banking,
directed lendings, wilful default / loan frauds / corruption in some cases and
overall economic slowdown.

India’s banks were grappling with roughly $150
billion in stressed assets (Rs. 10 lakh crores); about 85% of these NPAs
were from the loans and advances of PSU banks. In the last decade, the gross
NPAs of banks had increased from 2.3% of total loans (2008) to 9.5% (in 2019),
indicating that an increasing proportion of a bank’s assets had ceased to
generate income for the banks, lowering their profitability and ability to
grant further credit. Bank NPAs were expected to shrink 350 bps over two years
to 8% by March, 2020, compared with the peak of 11.5% in March, 2018.

The International Economics Study Group also
discussed the NBFC crisis and its domino effect on the Indian economy. There
were 11,400+ shadow banking companies (NBFCs) with a combined balance sheet
worth around Rs. 22.1 trillion ($304 billion) and their loan portfolios had
grown at nearly twice the pace of banks. According to RBI data, gross NPAs
(non-performing assets) or bad loans of NBFCs stood at 6.6% at the end of
March, 2019 against 5.3% a year ago. On the other hand, bank lending to NBFCs
had also seen a substantial rise. NBFCs owed an outstanding amount of Rs. 6.4
lakh crores at the end of March, 2019. This was a 22% increase compared with
the previous year when the debt was Rs. 4.9 lakh crores. NBFCs and HFCs had a
balance sheet of Rs. 36 lakh crores as of March, 2019. If the extent of
under-reporting was around 5% of advances, there could be Rs. 1.8 lakh crores
of more bad news yet to be recognised.

The risks of contagion were rising in the
Indian financial sector and any failure of a large shadow lender could lead to
a ‘solvency shock’ to banks. India’s shadow lenders got a substantial part of
their funding from banks – the weaker ones had seen a sharp rise in their
borrowing costs, and a big drop in their equity values. High business risk is
inherent in NBFC business models that rely on short-term market borrowings for
long-term loans. The resulting risk aversion by lenders had landed NBFCs and
HFCs with high asset-liability mismatches in hot water.

The way forward suggested was: (1) Regulators and investors need to recognise that both the ALM
(asset liability mismatch) and liquidity crises are restricted to a handful of
NBFCs / HFCs which require closer regulatory supervision, along with the firms
accessing public deposits or retail NCDs requiring close scrutiny. (2) With
default and the string of credit rating downgrades, which undermined market
confidence in credit ratings and the accounting practices of NBFCs, regulator/s
need to undertake special audits. This is essential to shore up market
confidence in the sector. (3) NBFCs / HFCs with retail participation and good
quality books may need a liquidity lifeline to ward off solvency issues. (4) It
is not the absence of regulations but ineffectual supervision by the regulators
that has left the doors open for the NBFC crises to play out. Hence, instead of
adding to their voluminous regulations, regulators need to deploy additional
manpower and acquire forensic capabilities to more closely monitor the frequent
statutory filings of these firms.

BCAJ Admin

STATISTICALLY SPEAKING

1. Pendency
of time-barring e-assessments

Jurisdiction

Pending %

Delhi

Mumbai

Gujarat

Madhya Pradesh and Chhattisgarh

Pune

Source: Income Tax
Department – MIS Report

2. Ease of doing business

Particulars

Score
2019

Score 2020

Rank 2019

Rank
2020

Starting a business

81.6

137

136

Dealing with construction permits

72.1

78.7

Getting electricity

89.2

89.4

Registering property

47.9

47.6

166

154

Getting credit

80.0

Protecting minority investors

80.0

Paying taxes

65.4

67.6

121

115

Trading across borders

77.5

82.5

Enforcing contracts

41.2

163

Resolving insolvency

40.8

62.0

108

Overall

67.5

71.0

Source: World Bank

3. GDP Growth 2019

Country

GDP growth %

India

7.3%

China

6.3%

Indonesia

5.2%

Pakistan

2.9%

2.3%

Brazil

2.1%

Spain

2.1%

Nigeria

2.1%

Netherlands

1.8%

Saudi

1.8%

Russia

1.6%

Canada

1.5%

France

1.3%

1.2%

South Africa

1.2%

Germany

0.8%

Italy

0.1%

Japan

Turkey

-2.5%

Iran

-6%

Source: IndiaStatistics
twitter – IMF

4. Highlights of e-filing

Source: Income Tax India
e-filing website

5. ITR filing growth between previous FY and
current FY

Source: Income Tax India
e-filing website

6. Share of informal employment
in total employment (%)

Source: International Labour
Organisation

BCAJ Admin

SOCIETY NEWS

“Long Duration Course on Goods and Services Tax Act” held on 5th, 6th, 12th, 13th, 19th and 20th October, 2018 at BCAS Conference Hall

BCAS, as a NACIN accredited training partner has been at the forefront of creating awareness about GST and supported the Government in ushering this reform by organising various lecture meetings, seminars and workshops related to GST. As a part of this endeavour, Indirect Taxation Committee of BCAS organised a Long Duration Course on Goods and Services Tax Act at BCAS Conference Hall, spread over 4 weeks in the month of October, 2018 on Fridays and Saturdays. The course consisted of 36 sessions of 1hr 15 min each. It was conducted by 34 domain experts in GST who covered various theoretical as well as practical aspects of the GST law.

The Course was attended by 97 participants including outstation participants as under:

The profile of participants consisted of practising chartered accountants, chartered accounts in employment as well as accounts and finance staff of various entities. The course was interactive and participants discussed various issues such as deemed supply, cross charge/ISD, ineligible ITC under the Act, issues concerning valuations, place of supply including zero rated supplies/deemed exports and imports related provisions, computational provisions, penal provisions, assessment provisions and procedural provisions like accounts and documents, payments, E-way bill, returns and Audit.

With the backup of excellent faculties, participants enriched their knowledge and experience in this collective learning process. The course facilitated GST learning of 45 hours per participants.

Students Study Circle on ‘’Benchmarking under Transfer Pricing” held on 23rd October, 2018 at BCAS Conference Hall

The Students Forum under the auspices of HRD Committee organised a Students’ Study Circle on the topic “Benchmarking under Transfer Pricing” on Tuesday, 23rd October, 2018 BCAS Conference Hall which was led by group leaders Mr. Rishabh Jain and Mr. Piyush Randad under the mentorship of CA. Jitendra Gupta. Ms. Neelam Soneja, the student co-ordinator introduced the mentor and group leaders. CA. Jitendra Gupta, the mentor for the session gave his opening remarks and briefly explained the topic.

Both the group leaders discussed the topic with the help of case studies and shared their practical experience in conducting transfer pricing audit. The study circle was very interactive. Overall, it gave a brief insight on various aspects that should be kept in mind while conducting transfer pricing audit.

The mentor CA. Jitendra Gupta then presented the certificates to the Group Leaders and appreciated the meticulous presentation made by them. Mr. Jason Joseph, the student co-ordinator thanked the group leaders and mentor for sharing their knowledge on the subject and briefed the participants about the forthcoming events which will be organised by the Students Forum.

The participants benefitted a lot from the session.

INTERNATIONAL ECONOMICS STUDY GROUP

Meeting on “21 Lessons for the 21st Century & Clean Disruption” held on 24th October, 2018 at BCAS Conference Hall

International Economics Study Group conducted a meeting on 24th October, 2018 at BCAS Conference Hall to discuss the topic “21 Lessons for the 21st Century & Clean Disruption” which was addressed by CA. Abhay Bhagat.

The Speaker presented the findings from the books: (1) Prof. Yuval Noah Harari’s bestselling books: Sapiens- A Brief History of Humankind (2) Homo Deus- A Brief History of Tomorrow and (3) 21 Lessons for the 21st Century. The book 21 Lessons from the 21st Century brings out that in a world deluged by irrelevant information, clarity is power. The Speaker explained that 21 Lessons for the 21st Century cuts through the muddy waters and confronts some of the most urgent questions on today’s global agenda. Some of the main learnings are: Whoever owns the data wins, which is why everyone struggles for it. Education must show us how to navigate information and not give us more of it.

CA. Abhay Bhagat also presented his findings on Tony Saba’s book – Clean Disruption Technology, Mega Trends Disrupting Public & Private transportation wherein the author brings out Technology based disruption – A disruption happens when a new product or service helps create a new market and significantly weakens, transforms or destroys existing market.

The author explains that the key technologies that are disrupting transportation are Self Driving vehicles, Electric Vehicles, Energy Storage, Mobile Internet/Cloud, Sensors /IoT & Big Data. The self-driving cars are disruptive as these would be 5 times more efficient than existing cars, cheaper fuel (10 times), life cycle of car (from currently 1.5 lakh km to 5.0 lakh km), present car has 2000 moving parts and EV has 18 to 20 moving parts and EV is computer tablet on wheel.

The author brings out the case for Self-driving vehicles because (1) Millions of people die from road accident and main cause of the accident is driver’s mistake 2) No parking space required as these Self-driving cars can run 24 hours (3) all cars will talk to one another and decide fastest route and giving direction to nearest car.
The meeting was quite interactive and had a huge takeaway for the participants.

A D Shroff Memorial Lecture on “The Importance of Independent Regulatory Institution The Case of Central Bank” held jointly by Forum of Free Enterprise, A. D. Shroff Memorial Trust, Bombay Chartered Accountants’ Society and Indian Merchants’ Chamber on 26th October, 2018

The A D Shroff Memorial lecture meeting on The Importance of Independent Regulatory Institution ‘The Case of Central Bank’ was held jointly by Forum of Free Enterprise, A. D. Shroff Memorial Trust, BCAS and Indian Merchants’ Chamber on 26th October, 2018 at IMC Hall. The meeting was addressed by Dr Viral V. Acharya, Deputy Governor, Reserve Bank of India.

The Speaker explained that a central bank performs several important functions for the economy. It controls the money supply, sets the rate of interest on borrowing and lending money, manages the external sector including the exchange rate, supervises and regulates the financial sector notably banks, often regulates credit and foreign exchange markets and seeks to ensure financial stability, domestic as well as on the external front.

He also elaborated as to why is the central bank separate from the Government? He mentioned that the world over, the central bank is set up as an institution separate from the Government. Its powers are enshrined as being separate through relevant legislation. Its tasks being somewhat complex and technical, Central Banks are ideally headed and manned by technocrats or field experts–typically economists, academics, commercial bankers and occasionally private sector representatives, appointed by the Government but not elected to the office and they exercise their powers independently.

He also elucidated the role of Reserve Bank in regulating Monetary Policy, Debt Management and Exchange Rate Management and ongoing challenges in maintaining independence of Reserve Bank i.e. regulation of Public Sector Banks, RBI’s Balance Sheet strength and Regulatory Scope.

In his concluding remarks, the Speaker thanked Mr. Malegam for inviting him to address the lecture meeting and extended his warm gratitudes to late A. D. Shroff for his contribution to the economy and in co-founding of Free Forum Enterprise Think Tank in the year 1954. The meeting was a huge takeaway for the participants who got enlightened from the lecture delivered by the learned Speaker.

DIRECT TAX LAWS STUDY CIRCLE

Meeting on ‘E-Assessments” held on 30th October 2018 at BCAS Conference Hall

Direct Tax Laws Study Circle conducted a meeting on E-Assessments Proceedings under the Income Tax Act on 30th October, 2018 at BCAS Conference Hall. The Chairman of the session, CA. Ameet Patel gave his opening remarks and pointed out to various initiatives taken by the Government and Income Tax Department regarding digitalisation and e-governance of various compliances, reporting and proceedings.

The Group leader CA. Romil Jain gave a brief background regarding the rationale of introduction of e-proceedings which has been a part of E-governance initiative, to facilitate ease of communication between the taxpayer and the Tax Authorities through electronic means. He educated as to how the concept of e-assessments was inserted and integrated in the provisions of the Income tax Act. He pointed that currently there are 3 branches of e-proceedings which are in operation – (1) E-return processing (2) E-assessment and (3) E-issue of refund.

CA. Romil Jain also took the group through step-by-step method for making submissions though e-assessment tab available on the income tax website. He pointed out to certain key points which one needs to keep in mind:

Considering the auto-closure of e-filing window 7 days before the time barring date, assessee must act vigilantly and avoid keeping submissions till the last date.
Considering the fact that e-filing portal has idle session time of 15 minutes, assessee should be ready till all the attachments to be uploaded in 1 folder, before login to e-filing website.
Retain exclusive email address and mobile number of the authorised person for communication with Tax authorities.
Any proceedings conducted manually (in case of exceptions, as listed in CBDT Instructions) shall be kept on record by way of mentioning about the same in subsequent online submission.
In the absence of personal hearing, legal issues and commercial rationale should be drafted very clearly and concisely, to avoid any incorrect interpretation.

The meeting was very fruitful for the participants experiencing rich knowledge sharing by the learned Speaker.

BEPS STUDY GROUP

Meeting on “Continuation of Action Plans 8 to 10 – Aligning Transfer Pricing Outcomes with Value Creation” held on 2nd November, 2018 at BCAS Conference Hall.

BEPS Study Group organised the captioned meeting on 2nd November, 2018 at BCAS Conference Hall wherein CA. Ganesh Rajgopalan and CA. Shreyas Shah led the discussion. The Speakers put forth several examples and case studies and explained concepts relating to intangibles and their ownership and also to whom returns from intangibles to be allocated. A short presentation on the concept of risk, the principles of control over risk and capacity to assume risk were also deliberated. Some aspects of hard to value intangibles were explained by the group leaders.

The meeting was very interactive and the participants benefitted a lot from the sessions.

HUMAN RESOURCE DEVELOPMENT STUDY CIRCLE

Meeting on “Eye Health and Eye Vision” held on 13th November, 2018 at BCAS Conference Hall by Presenter: Viram Agrawal of Vision Yoga

Human Resource Development Study Circle organised a meeting on the captioned subject at BCAS Conference Hall which was presented by Mr. Viram Agrawal of Vision Yoga who is working to spread awareness about “better eyesight at any age”.

The Speaker provided some useful insights on the subject as listed below:

(1) Preservation of good eyesight is almost impossible without proper eye education and mental relaxation (2) Keep your eyelids half closed, while reading or watching a distant object (3) Shift your glance constantly from one point to another (4) All errors of refraction are functional and therefore curable (5) Mental strain creates an error of refraction and mental relaxation can cure it (6) Eyewash tones up the eye muscles (7) Vision Yoga is a holistic method of treating eye disorders which is a part of the Vedic tradition as given in the Chakshushopanishad and Netra Dwayam – Upanishads of the eyes (8) This Yoga course benefits all eye disorders like myopia, hypermetropia, presbyopia, squint, cataract, nystagmus, etc.

The Speaker believes that exercises can help to avoid Glasses, Lasik Surgery and improve eye vision and also explained some eye treatments for eye ailments.

The participants were hugely benefitted from the presentation by the learned Speaker.

Intensive Study Course on “Data Analytics for Internal Audit” held on 16th and 17th November, 2018

The GRC subgroup of the Accounting and Auditing Committee organised a 2-day hands-on workshop on “Data Analytics for Internal Audit – using Microsoft Excel at Hotel Parle International, Parle East. The Speaker for the entire 2-day workshop was CA. Nikunj Shah.

This workshop was an immersive learning experience that enabled participants to understand, appreciate and experience the power of MS Excel for performing data analytics for Internal Audit. CA. Nikunj Shah captivated the audiences in his multi-lingual style, narrating anecdotes and stories, spinning a magical web for the spell-bound audiences. The case study based teaching method adopted by the Speaker with real data, enabled the participants to gain a first-hand experience of using data analytics with confidence.

His depth of knowledge, his mastery of MS Excel and his love for teaching together made for a workshop that was insightful, entertaining and educating. Nikunj successfully ignited the fire in the participants to explore and integrate Data Analytics to deliver superior internal audits. The meeting was quite participative and was a huge takeaway for the participants.

FEMA STUDY CIRCLE

Meeting on “Current and Capital Account Transactions” held on 22nd November, 2018 at BCAS Conference Hall

A FEMA Study Circle Meeting was held on 22nd Novemeber, 2018 where CA. Manoj Shah led the discussion on the topic of “Current and Capital Account Transactions”. He deliberated upon the concept of current and capital account transaction which draws its importance from “Balance of Payment”. The members present discussed the definition of the Capital Account Transactions at length and raised various issues arising out of inbound and outbound contingent liabilities. The group leader and members discussed at length an issue as to whether indemnity given by Resident to Non Resident can be treated same as guarantee? The group leader also discussed implications under FEMA in relation to the gift of money, foreign security and immovable property by resident to the non-resident and vice-versa. The discussion also took place on setting up of a Trust where beneficiaries are non-resident Indians. The discussion also took place about trade payable outstanding for more than six months and few compounding orders on the same subject were discussed. The members appreciated the efforts put in by the group leader and requested him to take up the balance slides in the next study circle meeting.

HERITAGE WALK 2018 AT LONAVALA

Heritage Walk 2018 jointly with NGO “SAMPARC (Social Action for Manpower Creation)” held on 25th November, 2018 at Lonavala

A heritage walk was organised by the HRD Committee in association with NGO SAMPARC (Social Action for Manpower Creation) with a vision of enlisting heritage monuments – Bhaje, Karla, Bedse Caves and Visapur & Lohagad Fort in UNESCO heritage list.

Apart from supporting a cause, the walk gave all the participants an opportunity to meet new people from different walks of life and interact with them. The walk was enhanced by folk culture such as cultural events and traditional cuisines.

The aim and vision of SAMPARC Heritage Walk 2018 enshrined:

(1) Spreading awareness about the cleanliness and care requirements of heritage monuments. (2) Enabling citizens and tourists to relate to our varied culture and mesmerising history. (3) Attracting tourists and people from urban areas towards a historical heritage of our country. (4) Encouraging and inspiring people to preserve the precious heritage and help enlist Bhaje, Karla, Bedse Caves and Lohagad, Visapur fort in UNESCO Heritage list. (5) Motivating people from different communities to come together for protecting and supporting underprivileged children.

The walk commenced from footsteps of Bhaje Caves up to Lohagad Fort, which is 3,389 feet above the sea level. Total climb uphill and the same route downhill was approx. 7.2 kms. Along the walk the participants savoured the traditional Maharashtrian delicacies such as pithala-bhakari, thecha, vada pav, corn, etc., and enjoyed the undiscovered panoramic views. They also got an opportunity to feel traditional elegance and view various cultural performances including lavani, bhajan, potraj, tulsi vrundavan, Mallakhamb, etc.

The Heritage Walk was indeed a very pleasant and inspiring experience for the participants to preserve the beauty and identity of our ancient heritage.

INTERNATIONAL ECONOMICS STUDY GROUP

Meeting on “Fear: Trump in the White House” and Current Economic Developments held on 28th November, 2018 at BCAS Conference Hall

International Economics Study Group organised the captioned meeting on 28th November, 2018 at BCAS Conference Hall, to discuss Bob Woodward’s book “Fear: Trump in the White House” and Current Economic Developments. CA Harshad Shah led the discussion and presented his findings of the book. He explained that Bob Woodward is an American journalist and author who reported on the Watergate scandal for The Washington Post which led to Nixon’s resignation. The book chronicles initial years of Trump’s presidency and portrays the Trump White House as chaotic and disloyal to the president. The book’s title is derived from a remark that then-candidate Trump made in an interview with Woodward in 2016, “Real power is Fear”. Woodward has a reputation for meticulous note-taking and interviewing, combined with recording nearly all of his interviews.

The main focus of the book is national security, economic policy, North Korea, Trade, Afghanistan, Syria & the Mueller investigation. Probably the most significant and worrying claims are about Trump’s foreign policy impulses and his not understanding the way the US government debt cycle & balance sheet worked, confused of the federal debt and US monetary policy and trade. The Book brings out that Trump was clueless that orders were removed from his desk. Trump ran a campaign and promised to eliminate the entire federal debt during his presidency and offered a solution “Just run the presses – print money” which would be detrimental to the fiscal and economic health of the US.

The Group also discussed 32 % slide in oil prices over past two months in which Brent crude dropped from $86.70 a barrel to a low of $58.41, lowest levels in over a year (Since October 2017) and this decline happened due to increased supply, lower demand forecast, dilution of American sanctions against Iran, Trump`s prompting to Saudi Arabia & massive unwinding of positions by hedge funds. This would bring relief to India in terms of lower energy prices, inflation, current account deficit & currency.
The Group also deliberated on emerging geo political situations in our neighbourhood such as Pakistan & Afghanistan which might have long term impact on our security concerns.

The meeting was a good learning experience and participants benefitted a lot from the session.

BCAJ Admin

CORPORATE LAW CORNER

7.
Transmission Corporation of Andhra Pradesh Ltd. vs. Equipment Conductors
& Cables Ltd.[2018] 98 taxmann.com 375 (SC) Date of Order: 23^rd October, 2018

Section 9 of Insolvency and Bankruptcy
Code, 2016 – Existence of an undisputed debt is essential to initiate the
Corporate Insolvency Resolution Process – IBC is not intended to substitute
recovery forum – IBC proceedings cannot be initiated if there exists a dispute
with respect to the claim

FACTS

A Co is in the activities relating to
transmission of electricity. It had awarded certain contracts to E Co for
supply of goods and services. Some disputes arose and E Co initiated
arbitration proceedings. 82 claims were filed by E Co and Arbitral Council held
that 57 of those claims were barred by law of limitation and the rest were
awarded in favour of E Co.

E Co challenged
the said part of the award of the Arbitral Council, but was not successful. On
the basis of certain observations made by the High Court of Punjab and Haryana
in its appeal decision dated 29^th January, 2016, E Co further
attempted to recover the amount by filing execution petition before the Civil
Court, Hyderabad. However, that attempt of E Co was also unsuccessful inasmuch
as the High Court of Judicature at Hyderabad categorically held that since that
particular amount was not payable under the award, execution was not
maintainable.

After failing
to recover the amount in the aforesaid manner, E Co issued notice to A Co u/s.
8 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) treating itself as the
operational creditor and A Co as the corporate debtor. Although A Co refuted
this claim, E Co proceeded to file an application u/s. 9 of the IBC which was
dismissed by the NCLT. An appeal was filed before the NCLAT and it passed an
interim order directing the parties to settle the “claim”. A Co filed an appeal
before the Supreme Court against the said order of NCLAT.

HELD

The Supreme Court examined the facts in case
and observed that the NCLAT perceived that A Co owes money to E Co and for this
reason a chance was given to A Co to settle the claim of E Co, failing which
order would be passed for initiation of Corporate Insolvency Resolution Process
(“CIRP”).

Supreme Court reading the provisions of
section 9 of the IBC observed that existence of an undisputed debt is sine qua
non of initiating CIRP. It also follows that the adjudicating authority shall
satisfy itself that there is a debt payable and there is operational debt and
the corporate debtor has not repaid the same.

The Court relying on its own judgment in the
case of Mobilox Innovations Private Limited vs. Kirusa Software Private
Limited [2018] 1 SCC 353 observed that IBC was not intended to be
substitute to a recovery forum. Whenever there was existence of real dispute,
the IBC provisions could not be invoked.

The Appeal was allowed by the Supreme Court
and the order of NCLAT was set aside. After examination of facts, Supreme Court
held that order of NCLT was justified and that no purpose would be served by
remanding the matter back to NCLAT. It accordingly quashed appeal filed by E Co
as also the miscellaneous applications filed by it before the NCLAT.

8. Radius Infratel Pvt. Ltd. vs. Union Bank of
India Company Appeal
(AT) (Insolvency) No. 535 of 2018 Date of Order: 13^th
November, 2018

Section 7 of the insolvency and
bankruptcy code, 2016 – appeal filed by corporate debtor is not maintainable
after order of moratorium is passed and interim resolution professional has
been appointed facts

UBI filed an application for initiating corporate
insolvency resolution process (“CIRP”) u/s. 7 of the Insolvency and Bankruptcy
Code, 2016 (“IBC”) against R Co with National Company Law Tribunal (“NCLT”).
NCLT admitted the said petition; ordered moratorium and appointed the Interim
Resolution Professional.

R Co preferred an appeal against the order
of NCLT.

HELD

NCLAT relied on the decision of Supreme
Court in the case of Innoventive Industries Ltd. vs. ICICI Bank and Ors
(2018)1 SCC 407 and passed an order on 14.09.2018 to hold that an appeal at
the instance of corporate debtor was not maintainable in law. R Co prayed that
one of the shareholders of R Co be made the applicant and transpose R Co
through ‘Resolution Professional’ as the second respondent. NCLAT further
directed that R Co may file an affidavit to show that there was no ‘debt due’
or there was no ‘default’ as on the date of filing of the petition u/s. 7 of
the IBC.

As no affidavit was filed and neither was a
substitution application made, NCLAT on 09.10.2018 passed an order allowing for
extension of time which was prayed by R Co. However, as no one appeared from R
Co on the said date, the appeal filed was dismissed by NCLAT.

It was held that shareholder / director of R
Co could move an appeal in accordance with the law if the same was not barred
by limitation.

BCAJ Admin

ALLIED LAWS

10. Binding Precedent – Lower authorities to
follow the precedent – Contempt action may be taken.

Mangala Ispat (Jaipur) Pvt. Ltd. vs. Union
of India 2018 (15) G.S.T.L. 487 (Raj.)

A matter was remanded back to the Assistant
Commissioner with a direction to pass a fresh order regarding excise duty
liability in the light of the direction given by the Supreme Court. Order of
the Division Bench of this court was not challenged by the Department.
Assistant Commissioner and the commissioner had allowed the credit relying on
the Supreme Court judgment. However, the Commissioner of Excise Department and
the Tribunal made observations against the High Court and the Supreme Court
decisions.

It was held that it was a well settled
principle of law that the law declared by the Supreme Court is binding on all
and when the Division Bench of this Court has held that the judgment is
applicable against which no SLP was preferred, any lower authority in rank
observing that the High Court was not sure about the similarity of the issue in
both the cases otherwise the Bench could have decided the case, in our
considered opinion, these observations by Commissioner (Appeals) in Appeal Memo
is not only objectionable but it is not permissible under law. We were inclined
to grant even the prayer for contempt but to avoid any delay since the sufferer
is the petitioner, we have restrained ourselves from issuing any contempt
notice against the officers.

Even the Tribunal while setting aside the
order of the First two Authorities has not given any reasons and simply
accepted the appeal memo and has allowed the appeal without reversing the
finding arrived at by both the authorities and observed that the Supreme Court
judgment is not binding. In our considered opinion, the first two authorities
rightly observed and allowed the proceedings in favour of petitioner/assessee
and the Tribunal as well as two Commissioners of Excise department exceeded the
jurisdiction and committed an error in making observations against the High
Court and the Supreme Court decisions.

11. Coparcenary Property – Daughter can
become a coparcenor only when the father is alive. [Hindu Succession Act, 1956;
Section 6] Anjalai and Ors. vs. K. Rathina and Ors.
AIR 2018 (NOC) 797 (Mad.)

It was held that the Central Amendment to
section 6 of the Hindu Succession Act, came into force with effect from
09.09.2005. As per the said amendment, from that date onwards, daughters will
be the coparceners along with the sons from their birth. The daughters can
become coparceners only when the father is alive and when the father is not
alive, they cannot become coparceners along with the brother.

12.
Family Arrangement – Document recording division of properties amongst Muslim family may not be registered. [Muslim
Law]

Ajambi vs. Roshanbi and Ors. (2017) 11
Supreme Court Cases 544

Deceased had made arrangements with regard
to his property during his lifetime and the said arrangements had been
subsequently recorded in that document, which had been duly acted upon by the
revenue authorities by dividing the suit property into two different parts. The
property which had been divided by deceased was in occupation of the respective
parties and the said fact has also been recorded in the revenue record.

The question
arose as to whether the High Court erred in agreeing with view expressed by
lower Appellate Court mainly on ground that document had not been registered as
it ought to have been registered as it was compulsorily registrable.

It was held that the said document was not
compulsorily registrable since it was a mere arrangement i.e. The arrangement
so made was duly accepted by the family members and it was also acted upon.
Only thereafter a formal record of the said fact. There is no concept of joint
family in Muslims but it was open to deceased to give his property to his
children in a particular manner during his lifetime, which he rightly did, so
as to avoid any dispute which could have arisen after his death. The
arrangement so made was duly accepted by the family members and it was also
acted upon. Only thereafter a formal record of the said fact was made by late
deceased in the document.

13. Post Office – Delay in delivery –
Liability. [Indian Post Office Act, 1898; Section 6]

Post Master,
Main Post Office, Jagdalpur and Ors. vs. Rajesh Nag and Ors. AIR 2018
Chhattisgarh 156

The short
question involved in the writ petition was whether Permanent Lok Adalat, Public
Utility Services is justified in granting damages to the extent of Rs. 25,000/-
to respondent No. 1 in light of the provisions contained u/s. 6 of the Indian
Post Office Act, 1898 which grant exemption from liability for loss,
misdelivery, delay or damage?

The respondent No. 1 made an application for
a post to the Bastar University, for which he sent an application by speed post
on 22.12.2012 and paid the necessary postal charges, as the last date for
submission of the application was 24.12.2012, but the application reached the
Bastar University on 26.12.2012 and since the application was not received well
in time, respondent No. 1 was not called for interview, leading to filing of
claim before the Permanent Lok Adalat claiming damages to the extent of Rs.
20,00,000/- with interest at the rate of 18% and cost.

It was argued that since the delay was not
caused fraudulently or willingly, the petitioner/Union of India was not
responsible for the damages, if any, in light of section 6 of the Act of 1898.

It was observed that the Post Office which
is run by the Government shall not be liable for delay caused in delivery of
the postal articles either by ordinary or registered post, except the liability
which may be expressed in terms undertaken by the Central Government.

It was held that, the order of the Permanent
Lok Adalat granting damages to the extent of Rs. 25,000/-, along with interest,
cost and Advocate fee deserves to be and was thereby set aside being contrary
to section 6 of the Indian Post Office Act and Rules made thereunder and
consequently, it was thereby quashed.

14. Will – Probate Court – Should have original jurisdiction-Probate is conclusive. [Code of Civil Procedure; Sections 151, 10] Rai Sharwan Kumar vs. Rai Bharat Kumar AIR
2018 Allahabad 257

A question came up before the Court with
respect to deciding the validity of the Will, which was objected to on the
ground that the Civil Court will have no jurisdiction on the original side to
go into the question for validity of the Will, but a competent Court would have
such jurisdiction.

It was argued that a court has inherent
powers to make such orders as may be necessary for the ends of the justice or
to prevent abuse of the process of the court as provided u/s. 151 of the Code
of Civil Procedure.

However the counter-argument taken was based
on section 10 of the Code of Civil Procedure which provides the rule with
regard to stay of suits where things are under consideration or pending
adjudication by a court.

It was observed by the honourable court that
the probate granted by the Competent Court is conclusive of the validity of the
Will until it is revoked and no evidence can be admitted to impeach it except in
a proceeding taken for revoking the probate.

When a probate was granted, it operates upon
the whole estate and establishes the Will from the death of the testator.
Probate is conclusive evidence not only of the factum, but also of the validity
of the Will and after the probate has been granted, in is incumbent on a person
who wants to have the Will declared null and void, to have the probate revoked
before proceeding further. That could be done only before the Probate Court.

It was held that that the Court of Probate
alone has jurisdiction and is competent to grant probate to the Will annexed to
the petition in the manner prescribed under the Succession Act, and that such a
declaration by the Probate Court binds not only the defendants but
everyone else.

BCAJ Admin

FROM PUBLISHED ACCOUNTS

Illustration of Qualified
Opinion on account of alleged improper transactions with related parties

Fortis Healthcare Ltd (31^st March 2018) From Auditors’ Report on Standalone Ind AS Financial Statements

Basis for Qualified Opinion

1. As explained in Note 30 of the Standalone Ind
AS Financial Statements, pursuant to certain events/transactions, the erstwhile
Audit and Risk Management Committee (the ‘ARMC’) of the Company decided to
carry out an independent investigation by an external legal firm on certain
matters more fully described in the said Note. The terms of reference for the
investigation, the significant findings of the external legal firm (including
identification of certain systemic lapses and override of internal controls),
which are subject to the limitations on the information available to the
external legal firm and their qualifications and disclaimers as described in
their Investigation Report, are summarised in the said Note.

Also, as
explained in the said note:

a) As per the assessment of the Board, based on
the investigation carried out through the external legal firm, and the
information available at this stage, all identified / required
adjustments/disclosures arising from the findings in the Investigation Report,
have been made in these Standalone Ind AS Financial Statements.

b) With respect to the other matters identified in
the Investigation Report, the Board intends to appoint an external agency of
repute to undertake a scrutiny of the internal controls and compliance
framework in order to strengthen processes and build a robust governance
framework. They will also assess the additional requisite steps to be taken in
relation to the significant matters identified in the Investigation Report
including, inter alia, initiating an internal enquiry.

c) At this juncture the Board is unable to make a
determination on whether a fraud has occurred on the Company in respect of the
matters covered in the investigation by the external legal firm, considering
the limitations on the information available to the external legal firm and
their qualifications and disclaimers as described in their Investigation
Report.

d) Various regulatory authorities are currently
undertaking their own investigation (refer Note 31 of the Standalone Ind AS
Financial Statements), and it is likely that they may make a determination on
whether any fraud or any other non-compliance/ illegalities have occurred in
relation to the matters addressed in the Investigation Report.

e) Any further
adjustments/disclosures, if required, would be made in the books of account
pursuant to the above actions to be taken by the Board / regulatory
investigations, as and when the outcome of the above is known.

In view of
the above, we are unable to comment on the regulatory non-compliances, if any,
and the adjustments / disclosures which may become necessary as a result of
further findings of the ongoing or future regulatory / internal investigations
and the consequential impact, if any, on these Standalone Ind AS Financial
Statements.

2. As explained in Note 12 of the Standalone Ind
AS Financial Statements, a Civil Suit has been filed by a third party (to whom
the ICDs granted by Fortis Hospitals Limited, a subsidiary of the Company, were
assigned – refer Note 30 of the Standalone Ind AS Financial Statements)
(‘Assignee’ or ‘Claimant’) against various entities including the Company
(together “the Defendants”), before the District Court, Delhi and have, inter
alia, claimed implied ownership of brands “Fortis”, “SRL” and “La-Femme” in
addition to certain financial claims and for passing a decree that consequent
to a Term Sheet dated 6^thDecember, 2017 (‘Term Sheet’) with a
certain party, the Company is liable for claims owed by the Claimant to the
certain party.

The
Company has filed written statement denying all allegations made against it and
prayed for dismissal of the Civil Suit on various legal and factual grounds.
The Company has in its written statement also stated that it has not signed the
alleged binding Term Sheet with the said certain party.

Whilst
this matter was included as part of the investigation carried out by the
external legal firm referred to in paragraph 1 above, the external legal firm
did not report on the merits of the case since the matter was sub judice.

In
addition to the above, the Company has also received four notices from the
Claimant claiming (i) Rs. 1,800.00 lacs
as per notices dated 31^st May, 2018 and 1^st June, 2018
(ii) Rs. 21,582.00 lakh as per notice
dated 4^th June, 2018; and (iii) and Rs 1,962.00 lakh as per notice
dated 4^th June, 2018. All these notices have been responded to by
the Company denying any liability whatsoever.

Separately,
the certain party has also alleged rights to invest in the Company. It has also
alleged failure on part of the Company to abide by the aforementioned Term
Sheet and has claimed ownership over the brands as well.

Since the
Civil Suit is sub-judice, the outcome of which is not determinable at this
stage, we are unable to comment on the consequential impact, if any, of the
above matters on these Standalone Ind AS Financial Statements.

3. As explained in Note 6(5) of the Standalone Ind
AS Financial Statements, related party relationships as required under Ind AS
24 – Related Party Disclosures and the Companies Act, 2013 are as identified by
the Management taking into account the findings and limitations in the
Investigation Report (Refer Notes 30 (d) (iv), (ix) and (x) of the Standalone
Ind AS Financial Statements) and the information available with the Management.
In this regard, in the absence of specific declarations from the erstwhile
directors on their compliance with disclosures of related parties, especially
considering the substance of the relationship rather than the legal form, the
related parties have been identified based on the declarations by the erstwhile
directors and the information available through the known shareholding pattern
in the entities. Therefore, there may be additional related parties whose
relationship may not have been disclosed to the Company and, hence, not known
to the Management.

In the
absence of all required information, we are unable to comment on the
completeness/accuracy of the related party disclosures/details in these
Standalone Ind AS Financial Statements and the compliance with the applicable
regulations and the consequential impact, if any, of the same on these
Standalone Ind AS Financial Statements.

4. As explained in Note 35 of the Standalone Ind
AS Financial Statements, the Company having considered all necessary facts and
taking into account external legal advice, has decided to treat as non-Est the
Letter of Appointment dated 27^th September, 2016, as amended,
(“LoA”) issued to the erstwhile Executive Chairman in relation to his role as
‘Lead: Strategic Initiatives’ in the Strategy
Function. The external legal counsel has also advised that the payments made to
him under this LOA would be considered to be covered under the limits of
section 197 of the Companies Act, 2013. The Company is in the process of taking
suitable legal measures to recover the payments made to him under the LoA as
also to recover all the Company’s assets in his possession. The Company has
sent a letter to the erstwhile Executive Chairman seeking refund of the excess
amounts paid
to him.

In view of
the above, the amounts paid to him under the aforesaid LoA and certain
additional amounts reimbursed in relation to expenses incurred (in excess of
the amounts approved by the Central Government u/s. 197 of the Companies Act,
2013 for remuneration & other reimbursements), aggregating to Rs. 2,002.39
lakh is shown as recoverable in the Standalone Ind AS Financial Statements of
the Company for the year ended 31^st March, 2018.

However,
considering the uncertainty involved on recoverability of the said amounts a
provision of Rs. 2,002.39 lakh has been made which has been shown as an exceptional item.

As stated
above, due to the nature of dispute and uncertainty involved, we are unable to
comment on the tenability of the refund claim, the provision made for the
uncertainty in recovery of the amounts, the recovery of the assets in
possession of the erstwhile Director and other non-compliances, if any, with
the applicable regulations and the consequential impact, if any, of the same on
these Standalone Ind AS Financial Statements.

Qualified Opinion

In our
opinion and to the best of our information and according to the explanations
given to us, except for the effects / possible effects of the matters described
in the Basis for Qualified Opinion paragraphs above, the aforesaid Standalone
Ind AS Financial Statements give the information required by the Act in the
manner so required and, give a true and fair view in conformity with the Ind AS
and other accounting principles generally accepted in India, of the state of
affairs of the Company as at 31^stMarch, 2018, and its loss, total
comprehensive loss, its cash flows and statement of changes in equity for the
year ended on that date.

Emphasis of Matter

We draw
attention to Note 33 of the Standalone Ind AS Financial Statements wherein it
has been explained that the Standalone Ind AS Financial Statements have been
prepared on a going concern basis for the reasons stated in the said Note.

Our
opinion is not modified in respect of this matter.

Report on
Other Legal and Regulatory Requirements

1. As required by section 143(3) of the Act, based
on our audit we report, to the extent applicable that:

a) We have sought and except for the matters
described in the Basis for Qualified Opinion paragraphs above, obtained all the
information and explanations which to the best of our knowledge and belief were
necessary for the purposes of our audit of the aforesaid Standalone Ind AS
Financial Statements.

b) Except for the effects / possible effects of
the matters described in the Basis for Qualified Opinion paragraphs above, in
our opinion proper books of account as required by law relating to preparation
of the aforesaid Standalone Ind AS Financial Statements have been kept so far
as it appears from our examination of those books.

c) The Standalone Balance Sheet, the Standalone
……….

d) Except for the effects/ possible effects of the
matters described in the Basis for Qualified Opinion paragraphs above, in our
opinion the aforesaid Standalone Ind AS Financial Statements comply with the
Indian Accounting Standards prescribed u/s. 133 of the Act

e) The matters described in the Basis for
Qualified Opinion paragraphs and the Emphasis of Matter paragraph above, in our
opinion, may have an adverse effect on the functioning of the Company.

f) On the basis of the written representations
………..

g) The qualification relating to maintenance of
accounts and other matters connected therewith are as stated in the Basis for
Qualified Opinion paragraph above.

h) With respect to the adequacy of the Internal
Financial Controls over Financial Reporting of the Company and the operating
effectiveness of such controls, refer to our separate Report in “Annexure A”.
Our report expresses an adverse opinion on the Internal Financial Controls over
Financial Reporting of the Company, for the reasons stated therein.

i) With respect to the other matters to be
included in the Auditor’s Report in accordance with Rule 11 of the Companies
(Audit and Auditor’s) Rules, 2014, as amended, in our opinion and to the best
of our information and according to the explanations given to us:

a. Except for the possible effects of the matters
described in paragraph 2 of the Basis for Qualified Opinion above, the
Standalone Ind AS Financial Statements disclose the impact of pending
litigations on the financial position of the Company. Refer Note 11 and 12 of
the Standalone Financial Statements

b. Except
for the possible effects of the matters described in paragraph 4 of the Basis
for Qualified Opinion above, the Company did not have any long-term contracts
including derivative contracts for which there were any material foreseeable
losses. Refer Note 9(e) of the Standalone Ind AS Financial Statements

c. There were no amounts which were …………….

2. As required by the Companies (Auditor’s Report)
Order, 2016 (“the Order”) issued by the Central Government in terms of section
143(11) of the Act, we give in “Annexure B” a statement on the matters
specified in paragraphs 3 and 4 of the Order which is subject to the possible
effect of the matters described in the Basis for Qualified Opinion paragraphs
of our Audit Report and the material weakness described in Basis of Adverse
Opinion in our separate Report on the Internal Financial Controls over
Financial Reporting.

From Report on Internal Financial Controls over Financial Reporting

Basis for Adverse opinion

The
matters described in the Basis for Qualified Opinion paragraphs of our Audit
Report on the Standalone Ind AS Financial Statements for the year ended 31^stMarch, 2018, and the control weaknesses observed in the Company’s
financial closing and reporting process in regard to assessment of the
impairment of goodwill and investments, where the Company did not have adequate
internal controls for identifying impairment indicators, selection and
application of various inputs to be used in testing, review and maintaining
documentation for workings used in testing and concluding whether there is any
impairment, have resulted in material weaknesses in the internal financial
controls over financial reporting as the Company have not (a) adhered to their
internal control policies (b) safeguarded their assets (c) prevented and
detected possible frauds and errors (d) ensured the accuracy and completeness of the accounting records, and (e) prepared
reliable financial information on a timely basis.

A
‘material weakness’ is a deficiency, or a combination of deficiencies, in
internal financial control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company’s annual or
interim financial statements will not be prevented or detected on a timely
basis.

Adverse Opinion

In our
opinion, to the best of our information and according to the explanations given
to us, because of the effect/possible effect of the material weaknesses
described in the Basis for Adverse Opinion paragraph above on the achievement
of the objectives of the control criteria, the Company, has not maintained
adequate internal financial controls over financial reporting and the internal
controls were also not operating effectively as of 31^stMarch, 2018
based on the internal financial control over financial reporting criteria
established by the Company considering the essential components of internal
control stated in the Guidance Note on Audit of Internal Financial Controls
Over Financial Reporting issued by the Institute of Chartered Accountants of
India.

We have
considered the material weaknesses identified and reported above in determining
the nature, timing, and extent of audit tests applied in our audit of the
Standalone Ind AS Financial Statements of the Company for the year ended 31^stMarch, 2018 and these material weaknesses have, inter alia,
affected our opinion on the said Standalone Ind AS Financial Statements and we
have issued a qualified opinion on the said Standalone Ind AS Financial
Statements.

From Notes
to Standalone Financial Statements

30) Investigation
initiated by the erstwhile Audit and Risk Management Committee

(a) There were reports in
the media and enquiries from, inter alia, the stock exchanges received
by the Company about certain inter-corporate loans (“ICDs”) given by a wholly
owned subsidiary of the Company. The erstwhile Audit and Risk Management
Committee of the Company in its meeting on 13^th February, 2018
decided to carry out an independent investigation through an external legal
firm.

(b) The terms of reference of the
investigation, inter alia, comprised: (i) ICDs amounting to a total
of Rs. 49,414.00 lakh (principal), placed by the Company’s wholly-owned
subsidiary, Fortis Hospitals Ltd (FHsL), with three borrowing companies as on 1^stJuly, 2017; (ii) the assignment of these ICDs to a third party and the
subsequent cancellation thereof as well as evaluation of legal notice (now a
civil suit) received from such third party (refer Notes 12 above); (iii) review
of intra-group transactions for the period commencing FY 2014-15 and ending on
31^stDecember, 2017 (refer Note 27 above); (iv) investments made in
certain overseas funds by the overseas subsidiaries of the Company (i.e. Fortis
Asia Healthcare Pte. Ltd, Singapore and Fortis Global Healthcare (Mauritius)
Limited); (v) certain other transactions involving acquisition of Fortis
Healthstaff Limited (“Fortis Healthstaff”) from a promoter group company, and
subsequent repayment of loan by said subsidiary to the promoter group company.

(d) The re-constituted Board discussed and
considered the Investigation Report and noted certain significant findings of
the external legal firm, which are subject to the limitations on the
information available to the external legal firm and their qualifications and
disclaimers as described in their investigation report, as follows:

(i) The Investigation Report, on the basis of
documents / emails reviewed and interviews conducted, revealed that the ICDs
were not given under the normal treasury operations of the Company/ FHsL
including under the treasury policy and the mandate of the Treasury Committee;
and were not specifically authorised by the Board of FHsL. All ICDs from
December 2011 were repaid until 31^stMarch, 2016. However, from the
first quarter of the financial year 2016-17, it has been observed that a
roll-over mechanism was devised whereby, the ICDs were repaid by cheque by the
borrower companies at the end of each quarter and fresh ICDs were released at
the start of succeeding quarter under separately executed ICD agreements.
Further, in respect of the roll-overs of ICDs placed on 1^stJuly,
2017 with the borrower companies, FHsL utilised the funds received from the
Company for the purposes of effecting roll-over.

(ii) In respect of ICDs granted, the Investigation
Report revealed that there were certain systemic lapses and override of
controls including shortcomings in executing documents and creating a security
charge. To clarify, the charge was later created in February, 2018 for the ICDs
granted on 1^stJuly, 2017, while the Company/ FHsL was under
financial stress.

(iii) While the Investigation Report did not
conclude on utilisation of funds by the borrower companies, there are findings
in the report to suggest that the ICDs were utilised by the borrower companies
for granting/ repayment of loans to certain additional entities including those
whose current and/ or past promoters/ directors are known to/ connected with
the promoters of the Company.

(iv) In terms of the relationship with the
borrower companies, there was no direct relationship between the borrower
companies and the Company and / or its subsidiaries during the period December
2011 till 14^thDecember, 2017 (these borrower companies became
related parties from 15^thDecember, 2017). The Investigation Report
has made observations where promoters were evaluating certain transactions
concerning certain assets owned by them for the settlement of ICDs thereby
indirectly implying some sort of affiliation with the borrower companies. The
Investigation Report has observed that the borrower companies could possibly
qualify as related parties of the Company and/ or FHsL, given the substance of
the relationship. In this regard, reference was made to Indian accounting
Standards dealing with related party disclosures, which states that for
considering each possible related party relationship, attention is to be
directed to the substance of the relationship and not merely the legal form.

(v) Objections on record indicate that management
personnel and other persons involved were forced into undertaking the ICD
transactions under the repeated assurance of due repayment and it could not be
said that the management was in collusion with the promoters to give ICDs to
the borrower companies. Relevant documents/information and interviews also
indicate that the management’s objections were overruled. However, the former
Executive Chairman of the Company, in his written responses, has denied any
wrongdoing, including override of controls in connection with grant of the
ICDs.

(vi) There were certain systemic lapses in respect
to the assignment of the ICDs from FHsL to a third party in September 2017 (and
subsequent termination of the arrangement in January 2018), viz., no diligence
was undertaken in relation to the assignment, it was not approved by the
Treasury Committee and was antedated. The Board of FHsL took note of the same
only in February 2018.

(vii) Separately, it was also noted in the
Investigation Report that the aforesaid third party to whom the ICDs were
assigned has also initiated legal action against the Company. Whilst the matter
was included as part of the terms of reference of the investigation, the merits
of the case cannot be reported since the matter was sub-judice.

(viii)
During the year, the Company through its subsidiary (i.e. Escorts Heart
Institute and Research Centre Limited (“EHIRCL”)), acquired 71% equity interest
in Fortis Healthstaff Limited at an aggregate consideration of `3.46 lacs. Subsequently,
EHIRCL advanced a loan to Fortis Healthstaff Limited, which was used to repay
the outstanding unsecured loan amount of Rs 794.50 lakh to a promoter group
company. Certain documents suggest that the loan repayment by Fortis
Healthstaff Limited and some other payments to the promoter group company may
have been ultimately routed through various intermediary companies and used for
repayment of the ICDs /vendor advance to FHsL / Company.

(ix) The investigation did not cover all
related party transactions during the period under investigation and focused on
identifying undisclosed parties having direct/indirect relationship with the
promoter group, if any. In this regard, it was observed in internal
correspondence within the Company that transactions with certain other entities
have been referred to as related party transactions. However, no further
conclusions have been made in this regard.

(x) Additionally, it was observed in the
Investigation Report that there were significant fluctuations in the NAV of the
investments in overseas funds by the overseas subsidiaries during a short span
of time. Further, similar to the paragraph above, in the internal
correspondence within the Company, investments in the overseas funds have been
referred to as related party transactions. The investment was realsed in April
2018 with no loss in the principal value of investments.

(e) Other Matters:

In the
backdrop of the investigation, the Management has reviewed some of the past
information/ documents in connection with transactions undertaken by the
Company and certain subsidiaries. It has been noted that the Company through
its subsidiary (i.e. Fortis Hospitals Limited (“FHsL”)) acquired equity
interest in Fortis Emergency Services Limited from a promoter group company. On
the day of the share purchase transaction, FHsL advanced a loan to Fortis
Emergency Services Limited, which was used to repay an outstanding unsecured
loan amount to the said promoter group company. It may be possible that the
loan repayment by Fortis Emergency Services Limited to the said promoter group
company was ultimately routed through various intermediary companies and was
used for repayment of the ICDs /vendor advance to FHsL.

(f) Related party relationships as required under
Ind AS 24 – Related Party Disclosures and the Companies Act, 2013 are as
identified by the Management taking into account the findings and limitations
in the Investigation Report (Refer Notes 30 (d) (iv), (ix) and (x) above) and
the information available with the Management. In this regard, in the absence
of specific declarations from the erstwhile directors on their compliance with
disclosures of related parties, especially considering the substance of the
relationship rather than the legal form, the related parties have been
identified based on the declarations by the erstwhile directors and the
information available through the known shareholding pattern in the entities.
Therefore, there may be additional related parties whose relationship may not
have been disclosed to the Group and, hence, not known to the Management.

(g) As per the assessment of the Board, based
on the investigation carried out through the external legal firm, and the
information available at this stage, all identified/required
adjustments/disclosures arising from the findings in the Investigation Report,
have been made in these Consolidated Ind AS Financial Statements.

(h) With respect to the
other matters identified in the Investigation Report, the Board will appoint an
external agency of repute to undertake a scrutiny of the internal controls and
compliance framework in order to strengthen processes and build a robust
governance framework. Towards this end, they will also evaluate internal
organisational structure and reporting lines, the delegation of powers of the
Board or any committee thereof, the roles of authorised representatives and
terms of reference of executive committees and their functional role. We will
also assess the additional requisite steps to be taken in relation to the
significant matters identified in the Investigation Report, including inter
alia, initiating an internal enquiry.

(i) The regulatory authorities are currently
undertaking their own investigation (refer Note 31 below), and it is likely
that they may make a determination on whether any fraud or any other
non-compliance/ illegalities have occurred in relation to the matters addressed
in the Investigation Report on the basis of facts, including those facts that
the independent investigator would not have had access to, given their limited
role and limitations stated in the Investigation Report. Accordingly, in light
of the foregoing, the Board of Directors at this juncture is unable to make a
determination on whether a fraud has occurred. That said, the Board of Directors
is committed to fully co-operating with the relevant regulatory authorities to
enable them to make a final determination on these matters and to undertake the
remedial action, as required under, and to ensure compliance with, applicable
law and regulations.

Except for
the findings of the Investigation Report, including matters on internal control
described above, and inability of the Board of Directors to, at this juncture
(as stated above), make a determination on whether a fraud has occurred on the
Company considering the limitations on the information available to the
external legal firm and their qualifications and disclaimers as described in
their Investigation Report, proper and sufficient care has been taken for the
maintenance of adequate accounting records in accordance with the provisions of
the Act for safeguarding the assets of the Company and for preventing and
detecting fraud and other irregularities.

In the
event other exposures were to come to light, the Company / FHsL are committed
to appropriately addressing the same, including making additional provisions
where required.

(j) Any further adjustments/disclosures, if
required, would be made in the books of account pursuant to the above actions
to be taken by the Board / regulatory investigations, as and when the outcome
of the above is known.

31) Investigation by Various Regulatory Authorities

(a) The Company received a communication
dated 16^th February, 2018 from the Securities and Exchange Board of
India (SEBI), confirming that an investigation has been instituted by SEBI in
the matter of the Company. In the aforesaid letter, SEBI has summoned the
Company u/s. 11C (3) of the SEBI Act, 1992 to furnish by 26^thFebruary
26, 2018 certain information and documents relating to the short-term
investments of Rs. 473 crore reported in
the media. Failure to produce the information required for investigation could
result in penalties as provided u/s. 15A and criminal proceedings under section
11C(6) of the SEBI Act, 1992. SEBI has also appointed forensic auditors to
conduct a forensic audit, who are also in the process of collating information
from the Company and certain of its subsidiaries. The Company / its
subsidiaries are in the process of furnishing all the requisite information and
documents requested by SEBI and its forensic auditors.

(b) The Registrar of Companies (ROC) u/s.
206(1) of the Companies Act, 2013, inter alia, had also sought information
in relation to the Company. All requisite information in this regard has been
duly shared by the Company with the ROC.

(c) The
Company has also received a letter from the Serious Fraud Investigation Office
(SFIO), Ministry of Corporate Affairs, u/s. 217(1)(a) of the Companies Act,
2013, inter alia, initiating an investigation and seeking information in
relation to the Company, its material subsidiaries, joint ventures and
associates. The Company in the process of submitting all requisite information
in this regard with SFIO and has in this regard requested SFIO for additional
time to submit the information.

(d) The Investigation Report of the external
legal firm has been submitted by the Company to the Securities and Exchange
Board of India, the Serious Frauds Investigation Office (“SFIO”) on 12^thJune,
2018.

The Company is fully co-operating with
the regulators in relation to the ongoing investigations to enable them to make
their determination on these matters. Any further adjustments/disclosures, if required,
would be made in the books of accounts as and when the outcome of the above
investigations is known.

BCAJ Admin

MISCELLANEA

I. Technology

5. Opposition
to data localisation may come down after international tax law

Opposition
to India’s data localisation move from overseas companies may go down once a
globally accepted framework of taxing big technology and digital companies
comes into existence, a senior IT Ministry official has said.

Mr. S.
Gopalakrishnan, Joint Secretary in the Ministry of Electronics and IT, said
that he was referring to a recent proposal by the Organisation for Economic
Co-operation and Development (OECD) to expand government rights to tax
multinationals, especially big internet firms, by releasing a methodology for
such taxation.

He said
that according to the draft personal data protection (PDP) bill, the law would
only set up the framework regarding necessarily localising ‘critical data’ only
in India without a copy of it being elsewhere.

But ‘there
will be a lag between the coming of the law and the implementation since the
regulator would then work out the nitty-gritty of what comprises critical data
and thus needs to be stored only in the country,’ he said, adding that the
entire process would take all the stakeholders into consideration.

The
officer further clarified that even then, the law would allow the Indian
government in the meanwhile to strike bilateral data treaties with other
countries wherein companies from the partner countries could even store the
critical data overseas.

Mr.
Gopalakrishnan was chairing a session on ‘Data Localisation and Global India’.
His comments came during a panel discussion on how some big technology giants
were opposed to the Indian government’s proposed data localisation rules as
outlined in the draft PDP bill which, he said, could soon be tabled in the
Parliament.

Speaking
on the opposition from big technology firms on proposed Indian laws around
privacy and security, he added ‘the global tech companies have so far operated
in a regime without specific privacy laws in the U.S. but are now facing a
situation where there are six states that have come out with privacy laws and a
Federal privacy law is expected. Under such circumstances, legislation of a
privacy law in India should not come as a surprise or a shock to them’.

(Source:
economictimes.indiatimes.com)

6. Now,
ask Alexa to pay utility bills as Amazon adds voice-based feature

In yet
another step towards making online buying and other services completely
voice-based and hinged on its virtual assistant Alexa, Amazon announced that
users in India can now pay their utility bills with Amazon Pay just by voice
commands.

This new
Alexa feature supports payment of bills across categories such as electricity,
water, post-paid mobile, cooking gas, broadband and DTH among others. ‘Users of
Amazon Echo, Fire TV Stick and other devices with Alexa built-in can just say
commands such as “Alexa, pay my mobile bill” or “Alexa, pay my electricity
bill” to get started,’ the company said.

‘This new
integration of Amazon Pay with Alexa will help reduce both time and effort for
customers who use Amazon Pay for bill payments and repeat similar transactions
every month. We are also excited to share that this is an India-first feature
which Alexa customers in India can enjoy before any other international
customers,’ Puneesh Kumar, Country Manager for Alexa Experiences and Devices,
Amazon India, said.

The
company last month announced that Alexa can now speak in Hindi. Going forward,
it is planning to launch its voice assistant in a host of other Indian
languages. Taking the competition to Google Assistant, Amazon is ramping up the
usage of Alexa in India by tying up with speaker manufacturers and mobile phone
companies to make Alexa the primary voice assistant on devices. At the moment
Alexa knows 500 skills in Hindi. In English, Alexa can perform over 30,000
tasks.

(Source:
www.business-standard.com)

II. world news

7. Ex-PCAOB
leader gets prison time for role in KPMG scandal

Former
Public Company Accounting Oversight Board Inspections Leader Jeffrey Wada has
been sentenced to nine months in prison for his role central to the
long-running KPMG inspections scandal.

Wada was
convicted of one count of conspiracy to commit wire fraud and two counts of
wire fraud in March, 2019 for providing KPMG employees with confidential
information on certain of the PCAOB’s 2016 inspection selections in an effort
to cheat the system. In addition to his jail time, he received a three-year
sentence of supervised release.

‘Jeffrey
Wada violated not just the terms of his employment with the PCAOB but also the
law when he provided confidential information about upcoming audit reviews to
co-conspirators at KPMG,’ said U.S. Attorney Geoffrey Berman in a statement.
‘Wada hoped to secure a job at KPMG. What he got was a nine-month prison
sentence.’

Wada is
the third figure in the KPMG scandal to receive jail time for his actions. In
September, David Middendorf, former national managing partner for audit quality
and professional practice at KPMG and the individual found by Berman to be ‘at
the top of a chain of corruption,’ was sentenced to one year and one day in
Federal prison and three years of supervised release. Cynthia Holder, another
ex-KPMG and PCAOB employee to whom Wada provided the confidential information,
was sentenced to eight months in Federal prison and two years of supervised
release in August.

Wada
joined the scheme in the fall of 2015 when he first provided confidential
information to Holder and repeated the crime in January, 2017 after being
passed over for a promotion at the PCAOB. Referring to the confidential
information as the ‘grocery list’ in a voicemail, he again went to Holder in
2017, but this time provided his resume and asked for assistance in gaining
employment at KPMG.

Prior to
the scheme, KPMG fared poorly in PCAOB inspections and in 2014 received
approximately twice as many comments as its competitor firms. The cheating
scandal is documented as having taken place from 2015 to 2017.

In June,
the SEC settled charges related to the scandal with KPMG for $50 million, in addition
to revealing allegations of cheating on internal exams that were also covered
in the settlement.

(Source:
www.complianceweek.com)

8. Can
a new apple take over the world?

When you hear that a new variety of apple is being launched with a
multi-million-dollar marketing campaign, you might wonder if you weren’t
listening properly and that the product is actually an Apple iPhone.

But now, starting to hit grocery shelves in the U.S. and then overseas
early in 2020, is a new American-born apple that its backers are convinced will
become the new global bestseller – the ‘Cosmic Crisp’.

‘The stars are aligning for this apple,’ says Kathryn Grandy, Marketing
Director of U.S. fruit firm Proprietary Variety Management (PVM), the company
handling the $10m (£7.9m) launch of the new variety.

A cross-breed between two existing varieties (the Honeycrisp and the
Enterprise), advocates of the Crisp describe it as some sort of apple holy
grail. It is said to be sweet, crisp and juicy. But as importantly, it is said
to have a previously unheralded shelf life, staying fresh for up to a year if
kept chilled.

You might think that this all sounds like hyperbole, but hundreds of
apple growers in the Crisp’s home state have bet $40m that it is going to be a
hit.

The story of the Crisp began back in 1987 when its breeding programme
started at Washington State University. The idea was to develop a new variety
of apple to help Washington’s then beleaguered apple farmers.

First made available for commercial planting in 2017, Washington’s apple
farmers had long heard of just how good the new variety was supposed to be. So
much so that demand for the Crisp was so high that farmers had to enter a
lottery to be able to get their hands on the first seedlings. Their names were
randomly drawn by a computer programme. Sales of Crisp seedlings subsequently
boomed. Today, more than 12 million Crisp trees are growing across Washington,
with orchards covering some 12,000 acres.

With the first apples now on the shelves, it is estimated that this
giant planting scheme – said to be the biggest and fastest in world apple
history – has cost the growers a combined $30m.

In return for this confidence, the Washington farmers have been given the
exclusive rights to grow and sell the Crisp worldwide until 2027. And as the
Crisp is being marketed as a premium variety, its price reflects this.

The first apples are now on sale in the U.S. for $5 per pound (454
grams), which is more than three times the cost of standard varieties. For
every 40-lb box sold, a royalty of 4.75% is shared between Washington State
University and its commercial partner, the previously mentioned PVM.

More than 467,000 40-lb boxes are now projected to be shipped before the
end of this year, rising to two million in 2020 and 5.6 million by 2021. The
apple even has a trademarked slogan – ‘Imagine the possibilities’.

‘The rate at which Cosmic Crisp is poised to come into the US market in
the next five to eight years is unprecedented,’ says James Luby, a Professor of
Horticultural Science at the University of Minnesota-Twin Cities. ‘If you look
at the past 30 years of apple consumption in the U.S., it’s all flat. And the
profit margins are thin,’ says Prof. Rickard who is an expert in the
agricultural and food sectors. ‘The Cosmic Crisp could increase per capita
consumption of apples in the U.S.’

(Source:
www.bbc.com)

III. Health

9. Kids
and sugary drinks: How clever packaging can deceive parents

Though science has shown that sugary drinks are not healthy for
children, fruit drinks and similar beverages accounted for more than half of
all children’s drink sales in 2018, according to a new report.

Fruit drinks and flavoured waters with added sugars made up 62% of the
year’s $2.2 billion children’s drink sales. Healthier drinks, such as water or
juices made from 100% juice, made up 38% of sales during the same year. Many
sweetened drinks have packaging that highlight fresh fruit, when they only
contain 5% actual fruit juice. Experts say children should mainly be given milk
and water to avoid too much sugar.

And plenty of money was spent on advertising these beverages. Companies
spent $20.7 million to advertise children’s drinks that contained added sugars.
Children aged 2 to 11 saw more than twice as many TV ads for sweetened drinks
than for drinks without added sweeteners.

‘Beverage
companies have said they want to be part of the solution to childhood obesity,
but they continue to market sugar-sweetened children’s drinks directly to young
children on TV and through packages designed to get their attention in the
store,’ said Jennifer L. Harris, PhD, MBA, lead study author and the Rudd
Center’s Director of Marketing Initiatives. ‘Parents may be surprised to know
that paediatricians, dentists and other nutrition experts recommend against
serving any of these drinks to children.’

Dr.
Harris’s team evaluated 67 drinks to see the differences between sweetened
drinks and beverages without added sweeteners.

Experts say that juice and water blends without added sweeteners have
started to hit the market, but the nutrition claims and images can make it
difficult for parents to pinpoint which drinks are healthier.

Sugar-sweetened
fruit drinks marketed to children typically included 5% juice or less, but 80%
of those packages portrayed images of fruit and 60% claimed to have ‘less’ or
‘low’ sugar or ‘no high fructose corn syrup,’ the report said.

(Source:
www.healthline.com)

BCAJ Admin

NAMASKAAR

‘Namaskaar’ means a formal expression of
greeting when we meet someone. It is the beginning of a conversation. A speaker
on the dais starts his speech by saying ‘Namaskaar’. An anchor or a newsreader
says ‘Namaskaar’ and then begins his programme. This happens almost
mechanically in Indian culture. However, the dictionary meaning of the word is ‘bowing
down before somebody with reverence or respect’. It is a ‘pranaam’. That is
why we offer ‘Namaskaar’ to God, to our parents and to the elderly, or to some
great or noble person. In today’s world, finding such great or noble persons is
very difficult. Such persons need not be great heroes who perform some
super-human feats. If we look around us with open eyes, we do come across
people who are highly principled, dedicated to some constructive task, working
untiringly and relentlessly for some positive purpose, and hence respectable.

The reason for
discussing this concept of ‘Namaskaar’ is that we at BCAS are fortunate
to have had such great leaders who dedicated their lives to the noble cause of
spreading knowledge among CA professionals through the activities of the BCAS.
They brought glory to this institution.

One such person was Mr. K.C. Narang who
departed for his heavenly abode only a few weeks ago. I remember him especially
since he was looking after the quality of the BCAS Journal in general
and the feature ‘Namaskaar’ in particular, till he breathed his last.

Just to
recapitulate its history, the late Narayanbhai Varma conceptualised this
feature, the late Pradeepbhai Shah nurtured it by his regular contributions and
the late Narang Saheb looked after it passionately. Two features were very
close to his heart, ‘Is it fair?” and ‘Namaskaar’, and I had the good fortune
of working in close association with him on both these features for a number of
years. Even after crossing the age of 85 there was not even the slightest
reduction in his sincerity and discipline. He used to be simply pushing
everyone to write some quality material. He himself wrote quite a few articles
for this feature. Another amazing quality of Narang Saheb was the promptness of
his response, despite his age and ill-health. This quality was common in all
three leaders. True professionalism!

Actually, he retired from active practice
quite some time ago. But at every journal committee meeting he used to furnish
his written comments on the contents of that month’s issue of the Journal.

The passing away of Narang Saheb is indeed a
great loss to the organisation and the journal, and particularly to this
thought-provoking feature, ‘Namaskaar’.

On this
occasion, let us offer our Namaskaars (in the true sense of the term) to
all these three stalwarts. Taking forward features like ‘Is it fair?’ and ‘Namaskaar’
would indeed be an apt shraddhaanjali (tribute) to Narang Saheb.

BCAJ Admin

Service Tax

I. TRIBUNAL

13. [2019-TIOL-3177-CESTAT-Kol.] M/s. Amit Metaliks Ltd. vs.
Commissioner, CGST Date of order: 25^th October,
2019

Development
of land is a benefit arising out of land and not a service. Compensation
received by way of settlement for revoking development agreement is not a
service, hence not even declared service u/s 66E(e) of the Finance Act, 1994
dealing with toleration of an Act, etc. Further, ‘taxable event’ was time of
entering development agreement and settlement agreement and not date of payment

FACTS

The appellant had entered
into an agreement in May, 2010 as developer with 31 different
landowner-companies whereunder he was to develop the land. However, pieces of
land owned by the landowners did not make up one piece of land for development.
Hence, the landowners assured the appellant that the remaining intermittent
pieces of land would be acquired by them in a specific time frame and would be
handed over to the developer-appellant to make a contiguous piece of land for
development. Since the landowners could not provide this, the appellant became
entitled to compensation as per the said agreement. The landowners eventually
terminated all the development agreements by May, 2012 and agreed for a full
and final settlement for a sum payable by each individual owner of land.

The issue therefore arose
as to whether the compensation received against the settlement amounted to
consideration for any service provided chargeable u/s 65B(44) and it was paid
in lieu of admission of any party’s liability and therefore a declared service
as per section 66E(e), viz., ‘agreeing to obligation to refrain from an act
or to tolerate an act or a situation or to do an act’. The Department,
while alleging this, also scrutinised ST-3 returns and accounts of the
appellant in addition to the development agreement and the settlement
agreement, including compensation reflected in the books.

The Department’s case that
it is a declared service inter alia relied on Rule 5 of the Point of
Taxation Rules, 2011 stating that the date of receipt of money for compensation
in January, 2013 was the time of provision of a new service and the fact was
that the development agreement and the settlement agreement were not registered
and hence could not be relied upon. The Department also advanced the argument
that under the current GST law, liquidated damages attract GST and relied on
AAAR’s ruling in the case of GST Maharashtra State Power Generation Co.
Ltd. [2018 (17) GSTL 451 (APP-AAR-GST)].

The appellant, on the other
hand, pleaded inter alia that:

(a) the compensation was
not against any service by the appellant as cancellation of development
agreement did not amount to service; nor was it a declared service u/s 66E(e)
of the Finance Act, 1994;

(b) further, the agreements
were made in the period prior to 1^st July, 2012, the date of
introduction of declared service and therefore the taxable event, if any, was
rendition of service and which took place prior to this date. In this context,
reliance was placed on Vistar Construction P Ltd. vs. UOI [2013 (31) STR
129 (Del.)]. Thus the date of payment of receipt did not determine the
taxable event.

(c) Relying on the decision
in DLF Commercial Projects Corporation (DCPC) Gurugram, Haryana vs. CST
2019-TIOL-1514-CESTAT-Chd., it was prayed by the appellant that development
of land does not amount to service.

In response to rival
claims, the Bench examined the definition of ‘service’ in the Finance Act, 1994
vis-à-vis the clauses in the development agreement and also the settlement
agreement and examined the decision in DCPC (Supra) and noted, inter
alia, the decision in the case of Premium Real Estate Developers vs.
CST 2019-TIOL-725-CESTAT-Del. which was relied upon in the case of DCPC
(Supra).

HELD

Development
right is not a service but it is a benefit arising out of immovable property.
Compensation received out of settlement claim is not liable for service tax. It
was further noted that compensation received by the appellant was the debt in
present and future for the landowners which, as per Transfer of Property Act,
is in the nature of actionable claim while placing reliance after a detailed
examination of the decision of Kesoram Industries & Cotton Mills Ltd.
vs. CWT 2002-TIOL-1062-SC-IT-LB and Sunrise Associates vs. Govt.
of NCT of Delhi 2006-TIOL-40-SC-CT-LB.

Citing the settlement
agreement, it was also observed that the landowners paid an ascertained amount
to resolve the entire claim of settlement and thus the said settlement
agreement resulted in creation of a debt and so would be in the scope of
actionable claim in terms of section 3 of the Transfer of Property Act, 1892,
and hence not liable for service tax under the 1994 Act, it being beyond
section 65B(44)(iii) of the Finance Act. It was further held that when the
development agreement, settlement agreement and the compensation were outside
the scope of service under the Finance Act, section 66E(e) could not be
applied.

Lastly, it was also noted
that the Revenue’s contention that liquidated damages were liable for CGST as
held as per AAR in the case of Maharashtra State Power General Company
(Supra) as Finance Act and CGST Act are different enactments, besides
the distinguishable fact that in that case, the issue related to performance of
service agreement and not development of land as per development agreement, and
thus the appeal was dismissed.

14. [2019-TIOL-3147-CESTAT-Del.] M/s. Manan Infra Development Pvt. Ltd. vs. Commissioner of Central
Goods and Services Tax, Custom and Central Excise Date of order: 13^th May, 2019

Show
cause notice has not invoked section 73(1) and there is no such proviso u/s 75
and hence the notice is defective and no amount could be recovered

FACTS

The appellant deposited
service tax quarterly and filed the returns with the Department. Subsequently,
while scrutinising them and the documents evidencing the payment of service
tax, it appeared that since it was a private limited company, it was required
to deposit service tax on monthly basis. Thus, on re-calculation on monthly
basis, interest was payable. Show cause notice dated 16^th
January, 2015 was issued for the period
October, 2011 to March, 2013 invoking extended period of limitation demanding
interest u/s 75 of the Act for delay in deposit of service tax. Further, a
penalty was also proposed.

It was primarily argued
that the show cause notice has not invoked section 73(1) and there is no such
proviso u/s 75 and hence the show cause notice is defective and no amount could
be recovered.

HELD

The Tribunal held that the
show cause notice was bad, both for invocation of extended period of limitation
and also for non-invocation or non-mentioning of proper section 73(1) with
proviso. Accordingly, the show cause notice was held to be non-maintainable.
The appeal was allowed.

15. [2019-TIOL-3185-CESTAT-All.] Commissioner of Central Tax vs. Viami Business Solution Pvt. Ltd. Date of order: 22^nd April, 2019

Service
tax demanded under reverse charge available as CENVAT credit leads to a
revenue-neutral situation and therefore the demand is set aside

FACTS

The assessee has failed to
discharge tax under reverse charge mechanism which is available as CENVAT
credit against their output services. Revenue contends that it is a statutory
requirement to first discharge the said service tax on reverse charge basis.
Without payment of service tax, they were not in a position to avail CENVAT
credit. Since the Commissioner (Appeals) set aside the demand on the ground of
Revenue neutrality, the Revenue is in appeal.

HELD

The Tribunal primarily
noted that the service tax required to be paid by the assessee was available to
them as credit. During the period they paid service tax on output services by
way of cash. Had they paid service tax on the input services received by them,
they could have taken the credit and utilised that credit for payment of duty,
instead of paying service tax in cash. Thus, there definitely exists a case of
Revenue neutrality. Further, the Tribunal noted that the reliance placed on the
decision in the case of Jet Airways (I) Ltd. vs. Commissioner of Service
Tax, Mumbai 2016 (44) S.T.R. 465 (Tri.-Mum.) [2016-TIOL-2072-CESTAT-Mum.]
is also upheld by the Supreme Court and thus the appeal of the Revenue
is rejected.

BCAJ Admin

RIGHT TO INFORMATION (r2i)

PART A DECISIONS OF SUPREME COURT

Non-governmental
organisations substantially financed by the appropriate government fall within
the ambit of ‘public authority’ under section 2(h) of the Right to Information
Act, 2005

A civil appeal was filed by D.A.V. College
Trust and Management Society and Ors. stating that it couldn’t be treated as a
public authority. A Division Bench comprising Justice Deepak Gupta and Justice
Aniruddha Bose heard the pleas filed by the appellant on 17^th
September, 2019.

In the Apex Court, Hon’ble Justice Deepak
Gupta, while providing a judgement on Civil Appeal No. 9828 of 2013 stated:

‘In our view, “substantial” means a large
portion. It does not necessarily have to mean a major portion or more than 50%.
No hard and fast rule can be laid down in this regard. Substantial financing
can be both direct and indirect. To give an example, if a land in a city is
given free of cost or on heavy discount to hospitals, educational institutions
or such other body, this in itself could also be substantial financing. The
very establishment of such an institution, if it is dependent on the largesse
of the State in getting the land at a cheap price, would mean that it is
substantially financed. Merely because financial contribution of the State
comes down during the actual funding, will not by itself mean that the indirect
finance given is not to be taken into consideration. The value of the land will
have to be evaluated not only on the date of allotment but even on the date
when the question arises as to whether the said body or NGO is substantially
financed.

Whether an NGO or body is substantially
financed by the government is a question of fact which has to be determined on
the facts of each case. There may be cases where the finance is more than 50%
but still may not be called substantially financed. Supposing a small NGO which
has a total capital of Rs. 10,000 gets a grant of Rs. 5,000 from the
Government; though this grant may be 50%, it cannot be termed to be substantial
contribution. On the other hand, if a body or an NGO gets hundreds of crores of
rupees as grant but that amount is less than 50%, the same can still be termed
to be substantially financed. Another aspect for determining substantial
finance is whether the body, authority or NGO can carry on its activities
effectively without getting finance from the Government. If its functioning is
dependent on the finances of the Government then there can be no manner of
doubt that it has to be termed as substantially financed. While interpreting
the provisions of the Act and while deciding what is substantial finance one
has to keep in mind the provisions of the Act. This Act was enacted with the
purpose of bringing transparency in public dealings and probity in public life.
If NGOs or other bodies get substantial finance from the Government, we find no
reason why any citizen cannot ask for information to find out whether his / her
money which has been given to an NGO or any other body is being used for the
requisite purpose or not.’

[Civil Appeal. No. 9828 of 2013, dated 17^th
September, 2019]

Chief Justice of India’s
office under RTI Act, but conditions apply

A Constitution Bench of the Supreme Court
comprising the Chief Justice of India (CJI) Ranjan Gogoi, Justices N.V. Ramana,
D.Y. Chandrachud, Deepak Gupta and Sanjiv Khanna on 13^th November,
2019 gave a judgement on
the applicability of the Right to Information (RTI) Act, 2005 to itself.

It has been hailed as a landmark judgement
by most people based on the understanding that it was only about accepting that
RTI applies to the office of the CJI. There were actually three petitions which
were decided. Subhash Chandra Agarwal had sought the information in 2007 and
2009.

Justice Chandrachud has acknowledged: ‘Failure
to bring about accountability reforms would erode trust in the courts’
impartiality, harming core judicial functions. Further, it also harms the
broader accountability function that the judiciary is entrusted with in
democratic systems including upholding citizens’ rights and sanctioning
representatives of other branches when they act in contravention of the law.
Transparency and the right to information are crucially linked to the rule of
law itself. There is a fallacy about the postulate that independence and
accountability are conflicting values.’

However, after accepting the right of citizens
to get information from the office of the CJI, the Court has ruled that the
exemption of section 8(1)(j) covers all personal information.

The Supreme Court said that confidentiality
and right to privacy have to be maintained and added that RTI can’t be used as
a tool of surveillance. It also said only names of judges recommended by the
Collegium can be disclosed, not the reasons.

The Bench, headed by the Chief Justice of
India, wrapped up the hearing saying nobody wants a ‘system of opaqueness’,
but the judiciary cannot be destroyed in the name of transparency. ‘Nobody
wants to remain in the state of darkness or keep anybody in the state of
darkness,’ it had said. ‘The question is drawing a line. In the name of
transparency, you can’t destroy the institution.’

[Civil
Appeal No.10044 of 2010 and Civil Appeal No. 2683 of 2010 dated 13^th
November, 2019]

PART B RTI ACT, 2005

Suo motu disclosures

Suo motu, meaning ‘on its own motion’, is a Latin word used mainly as
legalese.

The basic principle
of the RTI Act is the idea that the individual national is a sovereign in her
own particular right and is the proprietor of the government. The textbook
definition of democracy is exemplified by the expression ‘for the people, of
the people and by the people’. In reality, the information provided to the
public is power given in the hands of the citizens. The most important thing
that will be looked after by this is transparency, corruption and arbitrariness
in the governance within an institution.

Certain instructions
have been drawn up by the government to make sure that the public departments /
ministries make suo motu disclosure of information. These instructions
are based on the suggestions of the Task Force set up by the government for
strengthening compliance with provisions for suo motu disclosure u/s 4
of the RTI Act, 2005. The members of civil society, Central Government
Ministries / Departments and the State Governments are prominent members of
this force.

The guidelines have
been based on the following points:

(a) Suo motu
disclosure of more details u/s 4 – This includes detailed instructions on
proactive disclosure of information related to public / private partnerships,
transfer policy and transfer orders, procurement, RTI applications received and
their responses, CAG and PAC paras, citizens’ charter and discretionary and
non-discretionary grants;

(b) Instructions
for digital publication of active disclosure of details to ensure that the
government websites disclose details completely so as to be easily available to
the citizens without any discrepancies;

(c) Detailing of
few sub-clauses of section 4(1)(b) of the RTI Act regarding publishing of
information by the public authority: ‘the procedure followed in the
decision-making process’, ‘norms set by the public authority for the discharge
of its functions’, ‘the budget allocated to each of its agency’ and ‘details in
respect of information, available to or held by it, reduced in an electronic
form’.

The compliance
mechanism for suo motu disclosure under the RTI Act includes yearly
audit of proactive disclosures made by the Ministry / Department by a third
party, examination of such audit report and offering advice / recommendation by
the Central Information Commission and inclusion of compliance details in the
annual report of the Ministry / Department.

Section 4 of the
RTI Act lays down the information which should be disclosed by public
authorities on a suo motu or proactive basis. The main aim of suo
motu disclosure is to retract all the necessary details in public domain on
a proactive basis so that the functioning of the public authorities becomes
more transparent and the need of filing individual RTI applications goes down.

Since the
promulgation of the Act in 2005, large volumes of information relating to
functioning of the government is being put in the public domain. However, the
quality and quantity of proactive disclosures are not being raised to the
desired level. There have been complaints regarding the backlog of cases in the
commissions but it is rarely accepted that mere compliance by the authorities
by providing the necessary information as mandated by the Act would result in a
steep decrease in the number of appeals filed.

It has been
observed that information seekers face problems in making use of the Act and
the officers of the public authorities face problems in implementing its
provisions. Keeping this in mind, Rajasthan has launched the Jan Soochna
portal which will display all information that ought to be voluntarily
disclosed by public authorities under the RTI Act.

The information
will be open to public scrutiny at the click of a mouse and without having to
file an RTI application. It will display issues related to 13 departments
covering around 30 government schemes. These include public distribution and
ration; farm loans; pensions; beneficiaries of Mahatma Gandhi National Rural
Employment Guarantee Act (MNREGA); food grain distribution; government-run
medical and health insurance schemes; and land extracts.

The home page of
the portal http://jansoochna.rajasthan.gov.in/ states: ‘The Government
of Rajasthan is proud to launch the Jan Soochna portal, conceptualised
in collaboration with peoples’ campaigns of Rajasthan’. This is the first
public portal of its kind in the country aimed at disclosing information on a suo
motu basis as required u/s 4(2) of the RTI Act.

The
day every state government follows Rajasthan’s example, the antagonistic
effects of the RTI Amendments, 2019 would be nullified. We appreciate and
congratulate the Rajasthan Government for this citizen-friendly venture, where
governance becomes pro-active and transparent.

PART C INFORMATION ON AND AROUND

RTI reveals Kolhapur floods
caused by tampering with technically established flood-lines to please builders

The flood havoc in
Kolhapur and Sangli districts resulted in the deaths of 54 people and of
thousands of heads of cattle, apart from causing colossal loss to property,
farmlands and standing crops.

Was it the ferocity of nature that caused such a great calamity, or did
human interference aggravate the situation? Right to Information (RTI)
documents reveal that tampering with the red and blue line demarcation of the
Panchganga river in the Kolhapur Development Plan, due to the pressure of the
builder lobby through the Confederation of Real Estate Developers’ Associations
of India (CREDAI), to which the Chief Minister’s Office responded
affirmatively, resulted in turning 1,250 acres of flood-line area, prohibited
for any construction, into a concrete maze.

As per the RTI
documents procured from the Kolhapur Municipal Corporation, the CREDAI,
Kolhapur wrote a letter to Chief Minister Devendra Fadnavis on 9^th
October, 2018 casting doubts about the Water Conservation Department’s red
flood-line report of the Panchganga, whetted by IIT, Mumbai, on new
flood-lines.

The letter claimed
that the new flood-lines may cause confusion and fear-mongering as most of the
areas under the new flood-lines fall under the residential zone and a large
number of structures have been constructed on it. They also claimed that there
is public unrest over drawing the new flood-lines. Hence, the letter urged that
the old flood-lines which were existing (which had no scientific base and were
marked haphazardly) in the Development Plan be maintained.

Further, the Water
Resources Department submitted a technical note on 5^th March, 2019
to the Kolhapur Municipal Corporation. It stated that the flood level has risen
above the present blue line (shown in the Kolhapur Development Plan, which the
builders want to maintain) on ten occasions and above the present red line on
six occasions over the past 30 years. It warned that the Kolhapur Municipal
Corporation and the local administration would have to be on alert during the monsoons
if the old flood-lines are retained.

(Source:https://www.moneylife.in/article/rti-reveals-kolhapur-floods-caused-by-tampering-with-technically-established-flood-lines-to-please-builders/57983.html)

Mumbai police hits record
high in traffic penalties, reveals RTI

The Mumbai Traffic
Police collected record fines totalling nearly Rs. 139 crores in 2018 for
violations of traffic rules, according to an RTI filing. This figure is much
higher compared to the Rs. 8.6 crores collected in 2017, said RTI activist
Jeetendra Ghadge, and the credit for this goes to the ‘e-challan’ system
implemented by the Mumbai Traffic Police in a big way.

‘This technology –
whereby an officer can simply issue an e-challan from his mobile phone – has
not only reduced corruption on the roads, but resulted in a massive collection
of fines for the government coffers,’ Ghadge told IANS.

Interestingly, the
RTI filing also revealed that the number of drunk-driving cases has
considerably decreased over the last three years. While there were 20,768 such
cases in 2016, they came down to 18,056 in 2017 and 11,711
in 2018.

Shockingly, in the
same period, the number of teenagers caught in drunk-driving cases was 1,854;
and 367 women were among those nabbed for drunk driving.

‘The figures
clearly reveal that Mumbaikars are quite an indisciplined lot while driving on
roads and even hefty fines / penalties don’t act as a deterrent. Since time is
more valuable than money for Mumbaikars, brief periods of detention (jail) or
community service, as prevalent in some advanced countries, could teach them a
lesson,’ Ghadge said.

(Source:https://www.moneylife.in/article/mumbai-police-hits-record-high-in-traffic-penalties-reveals-rti/58026.html)

Bharat Electronics
demands fee for information on EVMs under RTI; later says it has no information

Bharat Electronics Ltd. (BEL) and Electronics Corporation of India Ltd.
(ECIL) are manufacturers of electronic voting machines (EVMs), voter-verified
paper trail (VVPAT) units and symbol loading units (SLUs) which have been under
the watchful eye of RTI activists against the backdrop of alleged tampering of
EVMs in the 2019 Lok Sabha elections.

Venkatesh Nayak,
research scholar and programme co-ordinator of the Commonwealth Human Rights
Initiative (CHRI), filed RTI applications to both the organisations, seeking
identical information.

The Central Public
Information Officer (CPIO) of BEL promptly replied in June, 2019 that
information could be supplied at a cost of Rs. 1,434 for the photocopying of
pages. However, a month later, BEL did a complete somersault stating that it
did not hold most of the information and also rejected one of the queries
(pertaining to names of engineers) stating that disclosure would endanger the
life of its engineers and even returned the bank draft that Mr. Nayak had sent
as the fee.

(Source:https://www.moneylife.in/article/bharat-electronics-demands-fee-for-info-on-evms-under-rti-later-says-it-has-no-info/58150.html)

Frauds worth Rs. 32,000
crores rattle 18 public sector banks within three months, reveals RTI

A total of 2,480
cases of fraud involving a huge sum of Rs. 31,898.63 crores rattled 18 public
sector banks between April and June this year, an RTI query has revealed.

The country’s
largest lender, State Bank of India (SBI), remained the biggest prey to frauds
with a 38% share, Neemuch-based activist Chandrashekhar Gaur told PTI, quoting
an official of the RBI who furnished replies to his RTI application. As many as
1,197 cases of cheating involving Rs 12,012.77 crores were detected in SBI in
the first quarter.

After SBI,
Allahabad Bank faced the heat with 381 cheating cases involving Rs. 2,855.46
crores. Punjab National Bank stood third in the list with 99 fraud cases worth
Rs. 2,526.55 crores.

However, the
information provided by the RBI does not give specific details of the nature of
banking frauds and the losses suffered by banks or their customers.

(Source:https://www.indiatoday.in/business/story/frauds-worth-rs-32-000-crore-rattle-18-public-banks-within-three-months-reveals-rti-1596960-2019-09-08)

Government spending more
on ads in Hindi newspapers: RTI

In a clear hint of
its plan to make deeper inroads into the Hindi heartland, the Narendra Modi
government has spent over Rs. 890 crores on advertising in Hindi newspapers
compared to over Rs. 719 crores in English newspapers in the last five years,
an RTI inquiry revealed.

At a time when
print media overall is facing rough weather owing to stiff competition from
digital platforms – chiefly Facebook and Google which together share 68% of
digital ads globally – Hindi and regional newspapers across the spectrum
(large, medium and small) are defying the trend and flourishing.

Leading the pack in
the period between 2014-15 and 2018-19 was Dainik Jagran which received
government advertisements worth over Rs. 100 crores in the given time-frame. Dainik
Bhaskar received advertisements worth Rs. 56.62 crores, while Hindustan garnered
advertisements worth Rs. 50.66 crores in the reported period.

Punjab Kesari was able to obtain government advertisements worth Rs. 50.66 crores
and Amar Ujala Rs. 47.4 crores.

(Source:https://www.indiatoday.in/india/story/government-spending-more-ads-hindi-newspapers-rti-1596821-2019-09-08)

BCAJ Admin

REPRESENTATION

1. Dated: 12^th
November, 2019

To:The Tax policy
and Statistics Division Centre for Tax Policy and Administration OECD

Subject: Comments
and Suggestions for the Unified Approach under Pillar One – Secretariat
proposal

Representation by:
International Taxation Committee of Bombay Chartered Accountants Society

Note: For full Text of the above
Representation, visit our website www.bcasonline.org

BCAJ Admin

ALLIED LAWS

11.
Adverse possession – Gratuitous licensee – No rights acquired in case of
gratuitous possession [Limitation Act, 1963, Article 65]

Lawrence
Ranchhodbhai Christian vs. Gujarat Christian Service Society, AIR 2019, Gujarat
161

The
suit was preferred by the plaintiff. The suit premises were owned by the
defendant institution and the plaintiff was living in the premises since
childhood because he had been adopted by the defendant as an orphan. Since the
acceptance of the plaintiff by the defendants, the physical possession of the
suit premises was handed over to him within the knowledge of the defendant and
trustees of the defendant. Nobody had made any disturbance in the possession of
the plaintiff since the last 25 years or more. It was clarified that he was not
a tenant of the suit premises.

But the plaintiff claimed
that he was in vacant and peaceful possession of the suit premises since the
last 25 years and by way of adverse possession he was the owner of the said
premises.

The Court observed that
admittedly the plaintiff was an orphan and since his childhood was permitted by
the defendant institution to live in the suit premises. He cannot create any
dispute by claiming any ownership of the said premises as he has not acquired
any title. Long possession even of many years or decades could not acquire
(bestow) any rights or interest in the suit premises by the plaintiff. An
orphan can never acquire any interest in the property irrespective of his long
possession. Such possession cannot be protected by a court of law. Such
protection can only be granted or extended to a person who has a valid,
subsisting rent agreement, a lease agreement or a license agreement in his
favour. The plaintiff has acquired no right or interest whatsoever in the suit
property irrespective of his long stay and possession.

It was held that the
appellant shall hand over the vacant possession and mesne profit of the
suit premises to the defendant who is admittedly the owner of the property.

12.
General power of attorney holder (GPA) – When no legal practitioner
appears for the principal and the GPA holder undertakes not only the signing of
pleadings but also the job of a legal practitioner, he must necessarily file
the affidavit of the principal authorising him to do so [Civil Procedure Code,
1908; O. 3, R. 2; Andhra Pradesh Civil Rules of Practice and circular orders,
R. 32]

Ruhina
Khan and Ors. vs. Abdur Rahman Khan and Ors. AIR 2019, Hyderabad 117

The issue was regarding the
nature of the procedure prescribed by Rule 32 which dealt with an agent other
than an advocate appearing for a party and Rule 33 of the Civil Rules of
Practice which dealt only with signing or verification of proceedings by an
agent; and should it be construed to be merely directory or mandatory to the
extent of holding non-compliance therewith to be fatal?

It was
observed by the Court that Rule 32(1) was clear w.r.t. its application to a
situation where a party appears as an agent other than an advocate. Therefore,
the said agent would appear for the party in all respects and not merely for
the purpose of signing and verifying pleadings. When the party appears through
an agent other than an advocate, the agent is required, before he appears or
acts in the Court or makes an application thereto, to file the power of
attorney, or written authority, or a properly authenticated copy thereof along
with an affidavit that the said authority, whereby he is empowered to do so, is
still subsisting. In the event of an agent carrying on a trade or business on
behalf of a party without a written authority, an affidavit stating the
residence of his principal; the trade or business carried on by the agent on
his behalf; the connection of the same with the subject matter of the suit; and
that no other agent is authorised to make or do such appearance, application or
act; shall be filed. Rule 32(2) provides that the Judge may thereupon record in
writing that the agent is permitted to appear and act on behalf of the party
and unless and until the said permission is granted, no appearance, application
or act of the agent shall be recognised by the Court.

Rule 33 deals with an agent
signing and verifying on behalf of his principal and states that if any
proceeding, which under any provision of law or the Civil Rules of Practice, is
required to be signed or verified by a party but is signed or verified by the
agent, a written authority in this behalf signed by the party shall be filed in
Court, together with an affidavit verifying the signature of the party and
stating the reason for his inability to sign or verify the proceedings and
stating the means of knowledge of the facts set out in the proceedings of the
person signing or verifying the same and that such person is a recognised agent
of the party, as defined by Order 3 Rule 2 CPC, and is duly authorised and
competent to do so.

The Division Bench held
that where the GPA holder merely signs the pleadings in a case where the
principal is represented by a legal practitioner, it is sufficient if the Court
satisfies itself that he has the authority to sign such pleadings and the
filing of an affidavit is not mandatory. Any defect in this regard can also be
cured at a later stage by convincing the Court that such GPA holder was duly
authorised by the principal to represent him in the matter. However, in a case
where the GPA holder not only signs the pleadings but also adduces evidence and
advances arguments on behalf of the principal, he would necessarily have to
file an affidavit of the principal affirming that he authorised the GPA holder
to do so.

In
view of the above observations, the Court held that Rule 32 of the Civil Rules
of Practice is not mandatory seems to be an oversight as it is Rule 33 which
was held to be not mandatory, but no mention was made of the said Rule in the
concluding paragraph. Rule 32, on the other hand, was clearly held to be
mandatory as the Bench observed that when no legal practitioner appears for the
principal and the GPA holder undertakes not only the signing of pleadings but
also the job of a legal practitioner, he must necessarily file the affidavit of
the principal authorising him to do so.

13. Hindu Undivided Family (HUF) – Sale
by karta – Failure to prove legal necessity – Sale not binding on
members of joint family [Civil Procedure Code, 1908; O. 32, R. 1]

Sangnath
and Ors. vs. Babu and Ors., AIR 2019 (NOC) 685 (Bom.)

The appeal was filed by the
original defendants. The present respondents No. 1 and 2 were the original
plaintiffs. They had filed a suit for partition and separate possession. They
were minors at that time and therefore the suit was filed through their cousin
as next friend. The original defendant is the father of the plaintiffs.

It was contended that the
plaintiffs and the defendant are the members of a joint Hindu family. However,
after the wife expired, the father (defendant) did not pay attention to the
family. He got addicted to liquor and ganja and in order to fulfil his
vices, he started selling the joint Hindu family properties. It is stated that
there was absolutely no necessity for the defendant to sell the lands. The sale
transactions were not for legal necessity and they were not binding on the
share of the plaintiffs. The defendant filed a written statement and denied the
statement that the defendant was addicted to liquor and in order to satisfy his
vices, he had sold out the lands.

It was
argued that the land which was near a rivulet (nala) was barren and was
not giving any income to the father, therefore he sold it to defendant No. 2.
It was for the necessities of the family. So also a portion of the land was
sold since the father did not have bullocks and other agricultural implements to
cultivate it. Thus, according to defendants No. 2 to 4, the lands had been sold
for legal necessity and those transactions were binding on the plaintiffs.

Taking into consideration
the evidence on record and hearing both sides, the Civil Judge, Junior Division
held that the plaintiffs would get 2/3^rd share. The first appeal
before the Joint District Judge was dismissed.

In the 2^ndappeal
before the High Court, heavy reliance was placed on ratio expounding
that karta of the family can sell the property for legal necessity.

The
High Court held that casual statements made in the sale deed regarding sale of
the land for ‘necessity’ is not sufficient evidence for the simple reason that
the details of the necessity were not given in the recital of the sale deeds.
Further, there was also no need to challenge the sale deeds for the simple
reason that, though the sale deeds were executed by the defendant No. 1 without
any legal necessity, those sale deeds cannot be said to be binding on the share
of the plaintiffs. Accordingly, the appeal was dismissed.

14.
Secured creditors would have priority over all debts and government dues
[Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002; section 35]

Kulbir
Singh Dhaliwal vs. UT Chandigarh, AIR 2019 P&H 151

The earlier owner of the
property in question through its Directors had availed of a loan facility in
the amount of Rs. 13.15 crores from respondent No. 3 – Punjab National Bank – against
security by way of equitable mortgage. The respondent bank had got the details
of the secured asset registered. The loan account subsequently became irregular
as the borrowers could not maintain financial discipline and hence the same was
classified as an NPA (Non-Performing Asset). Thereafter, the respondent bank
initiated recovery proceedings under the provisions of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (SARFAESI Act), which culminated in taking over of the possession of the
secured asset. A public auction was fixed at a reserve price of Rs. 11.50
crores vide a notice in which the petitioners emerged as the highest bidders.
After the deposit of the entire bid amount of Rs. 13.92 crores against the
reserve price of Rs. 11.50 crores, physical possession of the property was
handed over to the petitioners by respondent No. 3 (the bank) along with the
sale certificate under Rule 9(6) of the Security Interest (Enforcement) Rules,
2002. It may be emphasised here that there was no mention at all in the public
notice regarding any dues or encumbrances which may have stood against the said
property.

When the petitioners and
the authorised officer of the secured creditor approached respondent No. 2
(Sub-Registrar, UT) for registration of the sale certificate under the
Registration Act, 1908 (the 1908 Act), he refused to register the same holding
that the property in question already stood attached by the Government of
Maharashtra u/s 4 and 5(1) of the Maharashtra Protection of Interest of
Depositors (in Financial Establishments) Act, 1999 (the MPID Act). On refusal
of registration of the sale certificate, the petitioners impugned the order by
preferring an appeal u/s 72 of the 1908 Act before the Deputy
Commissioner-cum-Registrar, respondent No. 1, who dismissed the same. It was in
this background that the instant writ petition came to be filed before the High
Court.

The question which arose
for consideration was whether the recovery of a secured debt would take
precedence over a crown debt; the issue is no longer res integra.

It was observed that a
reading of section 31-B of the Recovery of Debts and Bankruptcy Act, 1993 which
starts with a non-obstante clause, makes it amply clear that the right
of a secured creditor to realise a secured debt shall have priority over all
debts and government dues including revenues, taxes, cesses and rates due to
the Central Government, State Government or Local Authority.

Accordingly it was held
that it cannot be over-emphasised that the property in question was auctioned
by the respondent bank to recover its secured debts and the attachment order
issued by the Government of Maharashtra must yield to the rights of the
respondent bank. Therefore, the auction proceedings must be taken to their
logical end and no reason was seen as to why the registration of the sale
certificate be refused to the auction purchasers, i.e., the petitioners.

BCAJ Admin

FINANCIAL REPORTING DOSSIER

This article
provides key recent updates in financial reporting in the global space;
insights into an accounting topic, viz., subsequent
accounting of goodwill tracing its roots, developments and upcoming
changes; compliance aspects of tax reconciliation disclosure under Ind
AS; and a peek at an international reporting practice in the Directors’
Remuneration Report

1.
KEY RECENT UPDATES

1.1 Audit quality in a multidisciplinary firm

The International
Federation of Accountants (IFAC) released a publication, Audit Quality in a
Multidisciplinary Firm – What the Evidence Shows, on 25^thSeptember,
2019 aimed at contributing to the debate on multidisciplinary firms. A
multidisciplinary firm provides audit and non-audit services under a single
brand name. The publication strives to provide readers with a better
understanding of how the multidisciplinary model is the most effective
structure to serve the audit function and how the rules that have evolved over
the past decades serve to mitigate risks associated with audit firms providing
non-audit services to some audit clients.

1.2 USGAAP
– Simplifying the classification of debt

The Financial
Accounting Standards Board (FASB) issued an Exposure Draft (ED) on 12^th
September, 2019 proposing changes to Topic 470, Debt, of USGAAP. The
proposed accounting standards update – Simplifying the Classification of
Debt in a Classified Balance Sheet (Current vs. Non-Current) – would shift
the classification of certain debt arrangements between non-current and current
liabilities.

The ED introduces a
principle for determining whether a debt arrangement should be classified as
non-current liability. The principle is that an entity should classify an
instrument as non-current if either of the following criteria is met at the
reporting date: (1) the liability is contractually due to be settled
more than one year (or operating cycle, if longer) after the balance sheet
date; (2) the entity has a contractual right to defer settlement of the
liability for at least one year (or operating cycle, if longer) after the
balance sheet date. As an example of the proposed changes, current USGAAP
requires short-term debt that is refinanced on a long-term basis (after the
balance sheet date but before issue of financial statements) to be classified
as non-current liability. The amendment proposed prohibits an entity from
considering a subsequent financing when determining classification of debt at
the balance sheet date.

1.3 IFRS – Business Combinations Under Common
Control

The International
Accounting Standards Board (IASB) at its 22^nd October, 2019 meeting
finalised its discussion on the scope of the project ‘Business Combinations
Under Common Control’ and is exploring how companies should account for the
same. It tentatively decided that a receiving entity should recognise and
measure assets and liabilities transferred in a business combination under
common control at the carrying amounts included in the financial statements of
the transferred entity. A discussion paper is expected to be published in the
first quarter of 2020.

2. RESEARCH:
DAY 2 GOODWILL ACCOUNTING

2.1 Introduction

The Day 2
(subsequent measurement) accounting for goodwill is a contentious issue in
accounting literature. Over the years, different accounting models have been
evaluated / mandated by global standard setting
bodies. The FASB and the IASB are both currently working on projects involving
research on goodwill and impairment.

Stakeholders
continue their quest to seek answers to related questions that include (a) how
is the consumption of economic benefits embodied in the asset ‘goodwill’
reflected in the financial statements? (b) whether an impairment of goodwill
communicates its periodic consumption or erosion in value, etc.

2.2 Setting the context

Analysis of three sample companies’ data is provided below:

Company 1 –
Microsoft Corporation, US listed (USGAAP)

2019
($ millions)

2018
($ millions)

% change

Goodwill

42,026

35,683

18%

Total equity

102,330

82,718

24%

Goodwill as % of equity

41.1%

43.1%

Company 2 – Tata
Steel, India listed (Ind AS)

2019 (Rs. cr.)

2018 (Rs. cr.)

% change

Goodwill

3,997

4,099

(2)%

Total equity

71,290

61,807

15%

Goodwill as % of equity

5.6%

6.6%

Company 3 –
GlaxoSmithKline plc. (GSK), UK listed (IFRS)

2018
(GBP million)

2017
(GBP million)

% change

Goodwill

5,789

5,734

Total equity

3,672

3,489

Goodwill as % of equity

157.7%

164.3%

As can be seen from
the table above, company 3 has goodwill that is 157.7% of its total
equity. It may be noted that the company uses Alternate Performance
Measures (APMs) in reporting business performance to stakeholders (in
management commentary / presentations, etc.). In arriving at APMs, the company
adjusts its IFRS results for some items that include amortisation of
intangibles and impairment of goodwill. The resultant adjusted measures include
‘Adjusted Operating Profit’, ‘Adjusted PBT’ and ‘Adjusted EPS’. The objective
of reporting APMs is to provide users with useful complementary information to
better understand the financial performance and position of the company.

In the following sections (2.3 to 2.7), an attempt is made to
address the following questions:

Is goodwill an asset or an accounting
‘plug’ figure?

How has Day 2 accounting for goodwill
developed historically in international GAAP?

What are the various models explored /
mandated by standard setters over the years?

What is the current position in India?

Is there consistency in the accounting
concepts underlying Day 2 accounting of goodwill across prominent GAAPs as of
date?

Would amortisation of goodwill be back
under USGAAP / IFRS?

What are the developments expected in
this space?

2.3 Goodwill

IFRS / Ind AS
define goodwill as ‘an asset representing the future economic benefits
arising from other assets acquired in a business combination that are not
individually identified and separately recognised’. The USGAAP definition
of goodwill is in line.

AS has not
specifically defined goodwill but explains as follows:

(a) Goodwill
arising on amalgamation represents a payment made in anticipation of
future income and it is appropriate to treat it as an asset to be amortised to
income on a systematic basis over its useful life. (Para 19, AS 14);

(b) Goodwill arising on acquisition represents a
payment made by an acquirer in anticipation of future economic benefits.
The future economic benefits may result from synergy between the identifiable
assets acquired or from assets that individually do not qualify for recognition
in the financial statements. (Para 79, AS 28).

Goodwill is
invariably an accounting plug as the quantum recorded is a function of the
accounting model and the policy choices adopted on the date of acquisition. At
the same time it is an accounting asset as it represents future economic
benefits arising from other assets in a business combination that are not
separately recognised.

2.4 Accounting models evaluated / mandated by
standard setters

A summary of
various approaches evaluated / mandated by standard setters over the years is
summarised
below:

S.No.

Approach

Immediate charge off to the Profit
and Loss Account

Immediate charge
off to Other Comprehensive Income (OCI)

Immediate charge off to equity

Componentising goodwill and accounting for components
separately

Capitalise goodwill and amortise over estimated period of benefit (with
a rebuttable presumption with respect to period over which benefits derived).
Impairment testing is in addition

Capitalise goodwill and amortise over estimated period of benefit (with
a rebuttable presumption with respect to period over which benefits derived).
No further impairment testing

Capitalise and subject to impairment testing only

Source: (1) IASB’s ‘Goodwill and
Impairment Research Project’; (2) FASB’s ‘Invitation to comment –
Identifiable Intangible Assets and Subsequent accounting for Goodwill’; (3)
European Financial Reporting Advisory Group’s (EFRAG) ‘Discussion Paper –
Goodwill Impairment Test: Can it be improved?’; (4) AS 14 & 28; (5) Ind
AS 36 & 103, (6) IFRS for SMEs and US FRF standards

2.5 Development of Goodwill Day 2 accounting

2.5.1 USGAAP

APB Opinion No. 17,
Intangible Assets issued in August, 1970 by the Financial
Accounting Standards Board (FASB), explained goodwill as the excess of the cost
of an acquired company over the sum of identifiable net assets. Goodwill was
required to be amortised to the income statement on a systematic basis
over the period estimated to be benefited, not exceeding forty years.

In June, 2001
the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets that
prohibited amortisation of goodwill. Goodwill would instead be tested at
least annually for impairment. The impairment of goodwill was based on a two-step
approach. In Step 1, the fair value of a reporting unit (to which goodwill was
assigned) was compared with its carrying amount and in case the carrying value
exceeded the fair value, then the entity undertook Step 2. In Step 2, the
impairment of goodwill was measured as the excess of the carrying amount of
goodwill over its implied fair value. The implied fair value of goodwill was
calculated in the same manner in which goodwill is recognised in a business
combination.

The FASB issued ASU
2017-04 in January, 2017 Simplifying the Test for Goodwill Impairment
(effective for public listed entities for fiscal years beginning after 15^th
December, 2019) eliminating Step 2, thereby requiring the annual goodwill
impairment test to be conducted by comparing the fair value
of a reporting unit with its carrying amount.

At present, non-controlling
interests (NCI), if any, need to be accounted in USGAAP by measuring the
same at their fair value.

2.5.2 IFRS

The current
standard governing the accounting for acquisitions and the resultant
recognition of goodwill as an asset is IFRS 3, Business Combinations,
issued in March, 2004 by the IASB. IFRS 3 treats goodwill as an asset akin to
an indefinite-life intangible asset and permits an
impairment-only approach. Para 90 of IAS 36, Impairment of Assets,
states that a cash-generating unit to which goodwill has been allocated shall
be tested for impairment annually and whenever there is an indication that the
unit may be impaired. The carrying amount of a cash-generating unit (to
which goodwill is allocated) is compared with its recoverable amount to
determine the impairment loss.

Prior to the
addition of IFRS 3 to the authoritative literature, its predecessor, IAS 22,
Business Combinations, required goodwill to be amortised with a
rebuttable presumption that its useful life did not exceed 20 years from
the date of initial recognition. In case a reporting entity rebutted the
presumption, goodwill was compulsorily required to be subject to annual
impairment testing even if there was no indication that it was impaired.

IFRS 3 permits an accounting
policy choice with respect to calculation of NCI at the date of
acquisition. An entity can opt to measure NCI either at fair value
(resulting in recording of ‘full goodwill’) or as its proportionate
share in the acquiree’s identifiable net assets (resulting in recording
of ‘partial goodwill’) per Para 19, IFRS 3. For the purposes of
impairment testing, goodwill needs to be notionally grossed up in
arriving at the carrying amount of the cash-generating unit to which goodwill
has been assigned when the ‘partial goodwill’ method has been adopted (Appendix
C, IAS 36).

2.6 Current positions under various GAAPs for
goodwill accounting

Accounting framework	Accounting model for acquisitions / business combinations giving rise to Day 1 Goodwill	Subsequent accounting of goodwill	Rebuttable presumption (goodwill life)	Standard
USGAAP	Acquisition method	Impairment only	NA	ASC 350 – Intangibles – Goodwill and Other
IFRS	Acquisition method	Impairment only	NA	IAS 36, Impairment of Assets
AS	Purchase method	Amortisation and impairment	5 years	AS 14, Accounting for Amalgamations
Ind AS	Acquisition method	Impairment only	NA	Ind AS 36, Impairment of Assets
IFRS for SMEs¹	Purchase method	Amortisation and impairment	10 years²	Section 19, Business Combinations and Goodwill
US FRF³	Acquisition method	Amortisation only. No impairment	15 years⁴	Chapter 13, Intangible Assets
¹ IFRS for SMEs issued by the IASB ² If the useful life of goodwill cannot be established reliably, the life shall be determined based on management’s best estimate but shall not exceed 10 years ³ US Financial Reporting Framework (US FRF) for small and medium-sized entities issued by the AICPA, a special purpose framework that is a self-contained financial reporting framework not based on USGAAP ⁴ Goodwill should be amortised generally over the same period as that used for federal income tax purposes or, if not amortised for federal income tax purposes, then a period of 15 years

Accounting framework

Accounting model for
acquisitions / business combinations giving rise to Day 1 Goodwill

Subsequent accounting of
goodwill

Rebuttable presumption
(goodwill life)

Standard

USGAAP

Acquisition method

Impairment only

ASC 350 – Intangibles –
Goodwill and Other

IFRS

Acquisition method

Impairment only

IAS 36, Impairment of
Assets

Purchase method

Amortisation and impairment

5 years

AS 14, Accounting for
Amalgamations

Ind AS

Acquisition method

Impairment only

Ind AS 36, Impairment of
Assets

IFRS for SMEs¹

Purchase method

Amortisation and impairment

10 years²

Section 19, Business
Combinations and Goodwill

US FRF³

Acquisition method

Amortisation only.
No impairment

15 years⁴

Chapter 13, Intangible
Assets

¹ IFRS for SMEs issued by the
IASB

² If the useful life of
goodwill cannot be established reliably, the life shall be determined based
on management’s best estimate
but shall not exceed 10 years

³ US Financial Reporting
Framework (US FRF) for small and medium-sized entities issued by the AICPA, a
special purpose framework that is a
self-contained financial reporting framework not based on USGAAP

⁴ Goodwill should be
amortised generally over the same period as that used for federal income tax
purposes or, if not amortised for
federal income tax purposes, then a period of 15 years

2.7 Coming up next

(1) The IASB
(that issues IFRSs) has planned to release a Discussion Paper (DP) in February,
2020 to present its preliminary views on ‘Goodwill and Impairment’ that inter
alia include the following:

Not to reintroduce amortisation of goodwill

Introduce a requirement to present
total equity before goodwill

Provide relief from the mandatory
annual quantitative impairment test

(2) The FASB
(that issues USGAAP) in July, 2019 issued an Invitation to Comment
– Identifiable Intangible Assets and Subsequent Accounting for Goodwill
that includes invitation to comment inter alia on the project area
‘Whether to change the subsequent accounting for goodwill’.

Ind AS and IFRS
preparers and auditors need to watch this space.

3. GLOBAL
ANNUAL REPORT EXTRACTS: ‘RELATIVE IMPORTANCE OF SPEND ON PAY’

3.1 Background

UK Company Law
requires disclosures of ‘The Relative Importance of Spend on Pay’ in the
Directors’ Remuneration Report.

The Large and
Medium-sized Companies and Groups (Accounts and Reports) (Amendment)
Regulations 2013 (effective 1^st October, 2013) require the Directors’
Remuneration Report to set out in a graphical or tabular form the actual
expenditure for the financial year and the immediately preceding financial year
and the difference in spend between those years on – (i) remuneration paid /
payable to employees, (ii) distribution to shareholders by way of dividend and
share buyback, and (iii) any other significant distributions / payments deemed
by the directors to assist in understanding the relative importance of spend on
pay.

3.2 Extracts from the ‘Directors’ Remuneration
Report’ section of an Annual Report

Company: Burberry Group Plc, FTSE 100 Index constituent (2019 Revenues: GBP
2.7 billion)

Relative
importance of spend on pay for 2018/19

The table below
sets out the total payroll costs for all employees over FY 2018/19 compared to
total dividends payable for the year and amounts paid to buy back shares during
the year. The average number of full-time equivalent employees is also shown
for context.

Relative Importance of Spend on Pay

FY 2018/19

FY 2017/18

Dividends paid during the year (total)

GBP million

171.1

169.4

% change

+1.0%

Amounts paid to buy back shares during
the year

GBP million

150.7

355.0

% change

-57.5%

Payroll costs for all employees

GBP million

519.8

515.2

% change

+0.9%

Average number of full-time equivalent
employees

Nos.

9,862

9,752

% change

+1.1%

4.
COMPLIANCE: TAX RECONCILIATION
DISCLOSURE (Ind AS)

Tax reconciliation disclosure

4.1 What is the disclosure
requirement?

Ind AS requires a Tax Reconciliation Disclosure in the
notes. The objective of the disclosure is to enable users understand whether
the relationship between Tax Expense and profit before Tax (PBT)
is unusual and to understand the significant factors that could affect the
relationship in the future. The disclosure facilitates users to model a
long-term forecast tax rate in valuation analysis.

4.2 Where
are the disclosure requirements contained?

The disclosure
requirements are contained in Para 81(c) of Ind AS 12, Income Taxes. An
entity also needs to take into consideration paragraphs 84 to 86, 46 to 52B and
Para 5 of the standard.

4.3 Is the disclosure mandatory?

This disclosure is
mandatory for all entities preparing financial statements under the Ind AS
framework.

4.4 What needs to be disclosed?

An explanation of
the relationship between tax expense and accounting profit (PBT) is required to
be
disclosed and the same is summarised in the table given below:

Disclosure Alternate 1

Numerical reconciliation
between tax expense and the product of accounting profit multiplied by the
applicable tax rate

(Amount in Rs.)

Tax at Applicable Tax Rate¹
on Accounting Profit

(Applicable tax rate X PBT)

xxx

Reconciling items^2,3

+/- xxx

Tax expense

Tax as per P&L (current
tax plus deferred tax)

xxx

Disclosure Alternate 2

Numerical reconciliation
between the average effective tax rate and the applicable tax rate

(%)

Applicable tax rate¹

xx.x%

Reconciling items^2,3

+/- xx.x%

Average effective tax rate

(Tax as per P&L/ PBT)

xx.x%

• An entity can provide the
disclosure in either or both of the above alternates

• The basis of
computing applicable tax rate also needs to be disclosed

¹ The applicable tax rate
used in the reconciliation has to be the one that provides the most
meaningful information to users. The applicable tax rate often is the domestic
rate of tax in the country in which the entity is domiciled. An entity
that operates in several tax jurisdictions may have to aggregate the
reconciliation prepared using domestic rate of tax for each individual tax
jurisdiction in determining the applicable tax rate

² Illustrative list of
reconciling factors include (1) tax effect of non-deductible expenditure,
(2) tax effect of non-taxable income, (3) prior year
adjustments, (4) changes to unrecognised deferred tax assets, (5)
effect of overseas tax rates, (6) re-assessment of deferred tax
assets, (7) effect of tax rate changes related to DTA/DTL, (8) effect
of tax losses, etc.

³ Income taxes relating to
items of Other Comprehensive Income (OCI) do not enter the reconciliation
statement

5. FROM
THE PAST – ‘ROOT CAUSE ANALYSIS OF AUDIT DEFICIENCIES’

Extracts of remarks
made by Mr. Brian T. Croteau (former Deputy Chief Accountant, US Securities
Exchange Commission) before the American Accounting Association Annual Meeting
in August, 2012 is reproduced below:

‘Consider for a
moment the investigation of the tragic crash of the Air France flight on its
way from Brazil to France in June, 2009. Like the National Transportation
Safety Board does in conducting objective, precise accident investigations and
safety studies in the United States, France’s Bureau of Investigation and
Analysis studied this crash. Only recently, three years later and after careful
study, it issued a report detailing its conclusions of the various contributors
and the underlying root cause of the crash. Understanding the root cause
in these circumstances included a challenging two-year relentless search for
the black box and piecing together many pieces of evidence to develop the
entire picture. Doing so has already resulted in changes to the way
pilots are trained in an effort to reduce the risk of future accidents.

I believe with
today’s audit documentation and technology, auditors, academics, standard
setters, regulators and others can continually strive to do more to understand
and assess the contributing factors
and root causes of audit deficiencies so we can
effect improvements in auditor performance and audit quality.’

BCAJ Admin

CORPORATE LAW CORNER

7. Religare Finvest Ltd. vs. Bharat Road Network Ltd. CP(IB) No. 540/KB/2018 & CP(IB) No.
1060/KB/2018 Date of order: 28^thAugust, 2019

Section 7(1),
read with sections 14 and 33 of the Insolvency and Bankruptcy Code, 2016 – An
admission of debt and default was sufficient to initiate the corporate
insolvency resolution process – Any document bypassing such admission was not
to be looked into – Provisions of Indian Stamp Act, 1899 to ascertain the
validity of these documents would not be considered to the extent they are
inconsistent with the Code – A person would be considered as a financial
service provider only when there is license / registration with a regulator to
that effect

FACTS

R Co, a non-banking financial institution
(NBFC), advanced a sum of Rs. 50 crores to B Co as a short-term loan for one
year and executed a memorandum of understanding (MOU) for the same on 14^th
December, 2016. The same was payable with interest on 14^thDecember,
2017. Stamp duty on the MOU was paid by B Co. A loan recovery notice dated 28^th
February, 2018 was issued to B Co.

R Co contended that the genuineness of the
MOU was not in dispute. Further, B Co had in its balance sheet dated 31^st
March, 2019 disclosed the loan payable to R Co and the fact that insolvency
proceedings u/s 7 of the Insolvency and Bankruptcy Code, 2016 (the Code) were
commenced against it.

B Co raised three objections against the
initiation of corporate insolvency resolution proceedings (CIRP). Firstly, the
MOU was a bond within the meaning of the Stamp Act, 1899. Irrespective of the
nomenclature, if the relevant provisions of the Stamp Act applied, it was to be
construed as a bond. Further, if the same was inadequately stamped then the
document would not be enforceable in law and such a document could not be
considered as evidence. Reliance was placed on various decisions to advance
this contention.

The second argument was that B Co was a core
investment company and an NBFC as on 31^stDecember, 2018, and most
certainly it was one on 31^st March, 2019. It was urged that B Co was
a financial service provider within the meaning of the Code. Although
registration as an NBFC from the Reserve Bank of India (RBI) was yet to be
received, the eligibility for authorisation was to be considered as a
requirement to qualify as a financial service provider under the Code.

Thirdly, the person initiating the
proceedings did not have adequate authority to do so.

HELD

The National Company Law Tribunal (NCLT)
heard both the parties at length.

It was taken on record that R Co was a
registered NBFC and in the course of its business granted the short-term loan
to B Co as per the terms and conditions agreed through the MOU. The amount of
loan, the rate of interest and the fact of failure to repay are not in dispute.
Hence, R Co has filed an application for insolvency.

As regards the first contention of B Co,
NCLT examined the meaning of the terms ‘claim’, ‘default’, ‘debt’ and the judicial
precedents on these subjects. It was observed that B Co had obtained a loan,
enjoyed it subject to the MOU and the same constituted a legal and equitable
obligation of B Co. Admitted facts need not be proved and, consequently, there
was no need to examine the legal validity of a document bypassing the admission
of facts made by B Co. Since the facts have been admitted by B Co in its annual
audited statements, there was no need to examine the nature of the MOU or its
enforcement for insufficiency of stamp duty. Further, applicability of the
Stamp Act, 1899 was not to be considered to the extent that its provisions were
inconsistent with the Code.

The NCLT also held that in terms of section
3(17), a financial creditor was a person to whom the authorisation was issued
or registration granted by the regulator. In the facts of the present case, B
Co had merely applied for a license / registration with the RBI. There was no
license or registration either on the date of taking the loan, or on the date
of filing the petition u/s 7, or even on the date of the order by NCLT. Thus,
the contention that B Co was a financial services provider was rejected by
NCLT.

The contention
as to authorisation was discarded by NCLT on the ground that the person filing
the petition had authority vide a board resolution to file a petition before
the adjudication authority. The adjudication authority being NCLT, the petition
was held to be in order.

The contentions raised by B Co were all
discarded and NCLT passed an order admitting the application made by R Co and
initiated the CIRP. A moratorium was declared and an order to make necessary
public announcements was passed by the NCLT.

8. Alliance Commodities (P) Ltd. vs. Office of
Registrar of Companies [2019] 110 taxmann.com 219 (NCLAT, Delhi) Date of order: 9^th July, 2019

ROC was justified in striking off name of
‘A’ company where company had failed to file financial statements and annual
returns for various financial years – At the time of striking off ‘A’ company
was not carrying on business or operations

FACTS

‘A’ company was
incorporated on 1^stFebruary, 2008 with the object of doing business
of trading in all types of commodities. It had been complying with the
statutory requirements of filing returns and financial statements till 2013,
but thereafter failed to abide by the statutory compliances. This resulted in
its name being struck off by the Registrar of Companies.

In its appeal
before the Tribunal, ‘A’ company contended that it was unaware of the notice
issued by the ROC and thus the default committed by it was unintentional. It
sought restoration of its name on the aforesaid ground.

The Registrar
of Companies contested the appeal on the ground that ‘A’ company failed to file
its annual returns and financial statements for more than two consecutive years
and it did not pray for obtaining the status of a ‘Dormant Company’. The ‘A’
company was accordingly struck off after complying with the mandate of section
248 as there were reasonable grounds to believe that the appellant company was
not carrying on any business, or was not in operation for a period of two
immediately preceding financial years.

HELD

It was observed
by the Appellate Tribunal that the notice contemplated u/s 248(1) of the
Companies Act, 2013 read with Rule 3 of the Companies (Removal of names of
companies from the Register of Companies) Rules, 2016 was issued by speed post
to ‘A’ company and its directors. A copy of the notice was published in the
official website calling for objections to the proposed removal / striking off
of the name of the company within 30 days from the publication of the same . A
copy of the notice was published in the official gazette. A public notice was
published in the Times of India and in a regional newspaper. The notice
published in the official website notified that the ‘company stands struck off
from the Register of Companies’. Thus, no legal infirmity or flaw was pointed
out in adherence to the provisions relevant to the process of striking off of
‘A’ company. It was done after following due procedure laid down in the Act.

On the crucial issue of ‘A’ company being in
operation and doing business in consonance with its objects, it was noticed
that the financial statements covering the fiscal period beginning 2013 through
2017 demonstrated that ‘A’ company was not in operation and did not conduct any
business of the nature bearing nexus with its intended object/s. The Tribunal
had tabulated the factual position arising from such financial statements
reflecting the assets, liabilities and turnover of the company as NIL. It was
further observed that indulging in business activity not falling within the
ambit of the objects of the company, or not being incidental or ancillary
thereto, cannot be termed as a legitimate business for demonstrating that the
company was in operation.

‘A’ company has
failed to make out a just ground warranting interference with the order passed
by the Tribunal which is neither shown to be legally infirm, nor the findings
recorded therein shown to be erroneous, much less perverse.

In view of the
above facts and being devoid of merit, the appeal against the order passed by
the ROC was dismissed.

BCAJ Admin

Journal

Brieficles

Resources

About

Reach Us