February Archives

Section 254(2): Misc Application — mistakes in the order — No opportunity given to assessee to argue alleged violation of rule 46A — In interest of justice matter remanded to CIT(A)

28 Pravir Polymers Private Limited vs. Income Tax Officer 15(2)(4) and Ors.

Writ Petition No. 2440 of 2023 (Bom.) (HC)

Date of Order: 18th December, 2023

[ITAT order dated 21st November, 2022 in MA No. 178/MUM/2022 and MA No. 179/ MUM/2022 for Assessment Years 2011-2012]

Section 254(2): Misc Application — mistakes in the order — No opportunity given to assessee to argue alleged violation of rule 46A — In interest of justice matter remanded to CIT(A).

The two misc. applications were filed by petitioner (assessee) seeking recall of an order dated 29th April, 2022 passed by the ITAT in ITA No. 2595/MUM/2019 along with Cross Objection No. 103/MUM/2021. Following are the mistakes that were alleged to be apparent on record in the impugned order:

“I. Violation of Rule 46A of the Rules: The Revenue had neither raised the violation of the Rule 46A in the grounds of appeal, nor was it argued by the revenue, nor an opportunity was given to the appellant to explain the case there by violating the principle of natural justice.

Without prejudice to the above, If Department has raised the violation of Rule 46A, the respondent would have made an application before the Appellate Tribunal to admit the additional evidence.

II. Sufficient Opportunity of Hearing : The Assessing Officer has not given sufficient opportunity of hearing (Page 51) of paper book I) hence supplementary papers were filed before the CIT(A). Therefore, there is no violation of Rule 46A.

III. Not dealt with the cases relied on by the Applicant: The Hon’ble Tribunal has not dealt with the decision of the Hon’ble Supreme Court, Jurisdictional High Court and Jurisdictional Tribunal, inter alia which were relied on by the Applicant at the time of hearing.

IV. Non-compliance of Daily Order: Direction of the Hon’ble Tribunal via daily Order dated January 24, 2022 to the Departmental Representative to produce information/document to ascertain as to why the assessment was made under section 148 read with section 143(3) of the Act; The same was not complied by the Departmental Representative.”

The misc. applications came to be rejected by the the ITAT, as regards the alleged violation of Rule 46A of the Income Tax Rules, 1962 (the Rules) ITAT has observed that during the course of the hearing before the ITAT, the authorised representative of the assessee was asked whether the assessee could appear before the learned Commissioner of Income Tax (Appeals) [CIT(A)] or the Assessing Officer in case the matter was restored but the counsel of the assessee did not accept that suggestion because according to the assessee’s representative it was not possible for the assessee to produce the parties, from whom the assessee is alleged to have obtained unsecured loans, before the Assessing Officer or the learned CIT(A).

The Assessee contended that it was not within the power of the assessee to produce third parties before the Income Tax officer. If the officer feels presence of certain parties are required for him to probe the matter further or go behind the entries made by the assessee in its books of accounts, the Assessing Officer should exercise his powers under Section 131 of the Act by issuing a summons to those parties. Of course the assessee would provide the address as the assessee may have as on date and also co-operate in tracking those third parties.

As a background, against the Assessing Officer’s order, petitioner had preferred an appeal before the CIT(A). During the proceedings before the CIT(A), the assessee tendered certain documents. Dept contended that the CIT(A), at that stage, should have followed the procedure prescribed under Rule 46A of the Rules, forwarded a copy of those documents to the Assessing Officer and called for a remand report. Instead of calling for such a remand report, the CIT(A) proceeded to consider those documents and passed an order in favour of the assessee. In effect it is the department who is more affected by the CIT(A) not following the procedure prescribed under Rule 46A of the Rules.

The Assessee submitted that no such issue was raised by the Revenue in its grounds of appeal nor an opportunity was given to the assessee to explain the case of violation of principles of natural justice.

The Hon. Court observed that the assessee had relied on certain documents before the CIT(A) whereas the CIT(A) did not follow the procedure prescribed under Rule 46A of the Rules and call for a remand report. Thus instead of making the parties to go back and forth or devoting precious judicial time including in the appeals that have been filed by petitioner against the order dated 29th April, 2022 passed by the ITAT, interest of justice would be meet if the matter is remanded to the CIT(A) for denovo consideration.

The CIT(A) shall follow the procedure as prescribed under Rule 46A of the Rules and may also exercise all powers that he has under the Act to summon third parties to appear before him and record their statements. After hearing the parties, the CIT(A) may pass such orders, as he deems fit, in accordance with law.

In view of the above, the order dated 29th April, 2022 passed by the ITAT in ITA No. 2595/MUM/2019 alongwith Cross Objection No. 103/MUM/2021 for Assessment Years 2011–2012 and also the impugned order dated 21st November, 2022 were quashed and set aside.

BCAJ Admin

Sec 271(1)(c) — Penalty — Mistake while uploading the return — no intention of furnishing any inaccurate particulars or concealment of income

27 Pr. Commissioner of Income Tax-13 vs. Pinstorm Technologies Pvt Ltd.

ITXA NO. 1117 of 2018 (Bom) (HC)

A.Y.: 2010-11

Date of Order: 20th December, 2023

Sec 271(1)(c) — Penalty — Mistake while uploading the return — no intention of furnishing any inaccurate particulars or concealment of income.

The following substantial question of law was proposed:

“Whether on the facts and circumstances and in law, the Hon’ble ITAT erred in appreciating the fact that the error on the part of the assessee was detected during the course of assessment proceeding u/s. 143(3) of the Act on scrutiny by the AO, failing which the error would not had surfaced and therefore, levy of penalty, as a deterrent, was justified and taking any lenient view would encourage the assessee to perpetuate such mistakes?”

The Respondent (assessee) filed the return of income on 14th February, 2012 for A.Y. 2010-2011 declaring loss of ₹16,10,43,542. During the course of assessment, the Assessing Officer (AO) observed that certain expenses which were not allowable expenses under the Act were not added back to the total income in the computation of income to the tune of ₹13,11,45,849. The AO also observed that disallowance of such expenses has been mentioned by the auditors in the tax audit report furnished by assessee. The AO, therefore, disallowed the said expenses of ₹13,11,45,849 and added the same back to the total income of the assessee. During the scrutiny assessment u/s. 143(3) which was completed on 28th February, 2013, a loss of ₹1,81,57,433 was determined.

Subsequently, penalty proceedings were initiated and notice was issued u/s. 274 r.w.s 271 of the Act for concealing/ furnishing inaccurate particulars of income. Assessee responded to the notice and the stand of assessee was that while filing the return electronically, certain disallowances were not properly entered in the column of disallowances and accordingly it showed a loss. Before the Income Tax Appellate Tribunal (ITAT), affidavit of Managing Director of the assessee was filed stating that return was filed by the then CFO Mr. Sudesh Vaidya and the said Mr. Vaidya has since left the company and migrated to United Kingdom, it is assessee’s case that the CFO made an inadvertent error of not considering the disallowances which were mentioned in the tax audit report while uploading the return of income. It was also submitted that the return of income was filed belatedly and, therefore, the same cannot be revised. It was further asserted that even after the subject disallowances, the return of income showed a loss of return and due to delay in filing the return, even the loss could not be carried forward. Therefore, the mistake was not intentional or deliberate and the penalty proceedings were dropped.

The Dept pointed out that the Commissioner of Income Tax (Appeals) (CIT(A)), has made a factual finding that the tax audit report was not filed. The Hon. High court observed that there was an error in such a finding because the AO has accepted that the tax audit report was filed. In fact, even in this appeal in the facts of the case narrated, it is admitted in paragraph 3.1 that the tax audit report was furnished by the assessee.

The Hon. High further court further observed that ITAT has come to a factual finding that there is no intention on the part of assessee to conceal the income or furnish inaccurate particulars of income. It has also accepted the explanation that the CFO was entrusted with the filing of return and the CFO made a mistake in not properly uploading the return by filling up the return with the disallowances which were already reported by the auditors in the tax audit report. The ITAT has come to a factual finding that there was no intention of furnishing any inaccurate particulars or concealment of income as the facts undoubtedly suggest so. The Hon. Court relied on the decision of Apex Court in the case of Price Waterhouse Coopers Pvt Ltd. vs. Commissioner of Income Tax & Anr (2012) 348 ITR 306(SC).

The Hon. Court held that it was only a mistake while uploading the return of income in the given facts and circumstances of the case. The Dept appeal was dismissed.

BCAJ Admin

Refund — Assessment — Limitation — Change in law — Remand by Tribunal — AO failing to give effect to remand order of Tribunal within prescribed time — Assessment barred by limitation — Refund in terms of declared income to be granted with interest

79 Aricent Technologies (Holdings) Ltd. vs. ACIT

[2023] 458 ITR 578 (Del)

A.Ys.: 2006–07 and 2007–08

Date of Order: 27th February, 2023

Ss. 153(3), 237 and 254 of ITA 1961

Refund — Assessment — Limitation — Change in law — Remand by Tribunal — AO failing to give effect to remand order of Tribunal within prescribed time — Assessment barred by limitation — Refund in terms of declared income to be granted with interest.

The assessee filed an appeal before the Tribunal against the order passed u/s. 143(3) read with section 144C(13) for the A.Y. 2007–08 against the entity FSS which had since amalgamated with the assessee. By an order dated 7th January, 2016, the Tribunal partly deleted the disallowance of the project expenses, the disallowance of deduction claimed u/s. 10B and the transfer pricing adjustment of corporate charges and remanded the matter to the Assessing Officer. Pursuant to the order dated 7th January, 2016 passed by the Tribunal, the Transfer Pricing Officer passed an order dated 24th January, 2017. However, the Assessing Officer did not pass any final order.

The Assessee filed writ petition contending that the amount of refund for the A.Y. 2006–07 due to FSS which was amalgamated with the assessee be refunded with applicable interest on the ground that the assessment for the A.Y. 2007–08 was barred by limitation. The Delhi High Court allowed the writ petition and held as under:

“i) Section 153 of the Income-tax Act, 1961 was amended by the Finance Act, 2017 with retrospective effect from June 1, 2016 and in sub-section (3) thereunder the provision regarding limitation for making an assessment pursuant to any order passed by the Tribunal u/s. 254 was included.

ii) Passing a fresh assessment order pursuant to the Tribunal’s order dated January 7, 2016, was barred by limitation under the provisions of section 153(3) and 153(4) and the income as returned by the amalgamated company FSS for the A.Y. 2007–08 would stand accepted. Consequently, any adjustment that would be made against the refund due to FSS for the A.Y. 2006–07 was not sustainable. Therefore, the amount which was due to FSS as refund for the A.Y. 2006–07 was to be refunded to the assessee with applicable interest.”

BCAJ Admin

Refund of tax deducted at source — Payment to non-resident after deducting withholding tax — Refund to the person who made payment and has borne withholding tax — Amount wrongly deducted to be refunded if the person receiving payment not claimed credit therefor — Payee not claiming credit — Assessee deductor to be refunded the amount with interest

78 Grasim Industries Ltd. vs. ACIT

[2023] 458 ITR 1 (Bom.)

A.Ys.: 1990-91 and 1991-92

Date of Order: 1st September, 2023

Ss. 92CA, 144C and 153 of ITA 1961

Refund of tax deducted at source — Payment to non-resident after deducting withholding tax — Refund to the person who made payment and has borne withholding tax — Amount wrongly deducted to be refunded if the person receiving payment not claimed credit therefor — Payee not claiming credit — Assessee deductor to be refunded the amount with interest.

The assessee entered into a foreign technical collaboration agreement with one M/s. D wherein D agreed to render to the assessee outside India certain engineering and other related services in relation to the project set up for Gas based plant in India. The assessee also entered into supervisory agreement with D to provide supervisory services in India. Under the agreement with D, D had agreed to deliver to the assessee necessary design, drawing, data with respect to the sponge iron plant outside India. D also agreed to train outside India certain employees of the assessee so as to make available to the such employees technical information, scientific knowledge, expertise, etc. for the commissioning, operation and maintenance of the plant. The consideration agreed was a sum of US$ 1,62,31,000 net of tax and it was agreed that any withholding tax required to be deducted will be borne by the assessee and D would be paid a net amount of US$ 1,62,31,000. The assessee sought permission from the AO to make remittance to D without deduction of tax at source. However, the AO held that the amount payable to D was taxable as income in India and the assessee was required to deduct tax at source and deposit the tax with the Income-tax Department. The assessee paid under protest a sum of ₹2,73,73,084 and ₹2,81,83,272 as withholding tax on account of two installments of payments made to D. The assessee claimed that since the withholding tax was borne by the assessee and the payment made to D was not chargeable to tax, the assessee would be entitled to refund.

In the return of income filed by D for A.Ys. 1990–91 and 1991–92, D declared NIL income on the ground that the income received by D neither accrued in India nor received in India therefore not chargeable to tax in India. However, in the assessment of D, it was held that amount received by D under the agreement was chargeable to tax in India and accordingly the withholding tax deducted by the assessee was adjusted towards D’s tax liability. The assessee along with D filed a petition before the Bombay High Court challenging, inter alia, the assessment order and the taxability of the amount received by D under the agreement. Vide order dated 5th May, 2010, the Court held that the assessment orders subjecting the amount received by D under the agreement to tax was not correct and the Department was directed to pass a fresh assessment order excluding the income received by D.

Subsequently, the assessee made a request to the AO to pass an order giving effect to the order of the High Court. Reminder letters were sent to the AO time and again. However, there was no action by the AO. Vide order dated 24th August, 2012, the AO refused to give effect to the order of Bombay High Court holding that the assessee was not entitled to the refund of withholding tax deposited by the assessee as the tax was deducted on behalf of D and therefore no effect could be given in the hands of the assessee.

Therefore, the assessee, by way of writ petition, approached the Bombay High Court. The High Court allowed the petition and held as follows:

“i) Section 248 of the Act, amended by the Finance Bill, 2007 ([2007] 289 ITR (St.) 122), envisages and deals with a situation where a refund could be made to the person by whom the income was payable and who has borne the withholding tax. The amount wrongly deducted or paid to the Revenue authorities where it was not required to be paid would become refundable to the assessee. This is subject to the condition that the person receiving the payment had not claimed credit therefor.

ii) For over 13 years neither D nor its successor-in-interest had claimed any amount from the Revenue but had issued its no objection to the Department making the refund to the assessee. The assessee would be entitled to credit of any tax deducted at source both by the banks and the Department while depositing the amounts with the Prothonotary and Senior Master, High Court, Bombay giving effect to the order of this court by arriving at net amount refundable for the A.Ys. 1990–91 and 1991–92 and after deducting tax at source for the A.Ys. 1990–91 and 1991–92. The amounts having been deposited with Prothonotary and Senior Master, High Court, Bombay, the Prothonotary and Senior Master shall foreclose the fixed deposit and pay over the amount including interest to the assessee.”

BCAJ Admin

Reassessment — Notice after three years — Validity — New procedure — Income chargeable to tax — Gross receipt of sale consideration not income chargeable to tax — Notice issued treating gross receipt on export transaction as asset which had escaped assessment — Not sustainable

77 Nitin Nema vs. Principal CCIT

[2023] 458 ITR 690 (MP)

A.Y.: 2016–17

Date of Order: 16th August, 2023

Ss. 147, 148, 148A(b) and 148A(d) of ITA 1961

Reassessment — Notice after three years — Validity — New procedure — Income chargeable to tax — Gross receipt of sale consideration not income chargeable to tax — Notice issued treating gross receipt on export transaction as asset which had escaped assessment — Not sustainable.

Words and phrases — “Income” — “Income chargeable to tax” — Distinction.

For the A.Y. 2016-17, reassessment proceedings were initiated against the assessee on the ground that the assessee had sold 16 scooters and earned ₹72,05,084 which had escaped assessment. The Assessee filed a writ petition challenging the order passed u/s. 148A(d) and the consequential notice issued u/s. 148 of the Act claiming that the income mentioned in the order and the notice was not subject to income tax. What was stated therein was the gross sale consideration and on sale of 16 scooters. The assessee submitted that this income was not subject to tax and therefore sections 148A(d) and 148 did not apply.

The Madhya Pradesh High Court allowed the writ petition and held as follows:

“i) The expression “income chargeable to tax” is not defined in the Income-tax Act, 1961. However, the provisions with respect to computation of business income make clear that the definitions of the expressions “income” and “income chargeable to tax” are at variance with each other. The expression “income” is inclusively defined u/s. 2(24) whereas “income chargeable to tax” denotes an amount which is less than “income”. The “income chargeable to tax” is arrived at after deducting from “income” the permissible deductions under the Act. Therefore, the quantum of “income” is invariably more than “income chargeable to tax”.

ii) The Department had failed to understand the fundamental difference between sale consideration and income chargeable to tax. It had relied upon sections 2(24), 14, 28 and 44AD to emphasize the expression “income”. Neither the notice u/s. 148A(b) nor the order u/s. 148A(d), nor the consequential notice u/s. 148 stated that the income alleged to have escaped assessment included land or buildings or shares or equities or loans or advances. The assessee had filed a reply to the notice u/s. 148A(b) wherein it had submitted that the amount of ₹72,05,084 was the gross receipt of sale consideration of 16 scooters which meant that the amount of ₹72,05,084 was the total sale consideration receipt of the transaction in question, and not income chargeable to tax which would obviously be less than such amount. With the reply the assessee had also furnished the details of items sold and payment receipts, computation of total income and the computation of tax on total income and had submitted these to the Assessing Officer before the passing of the order u/s. 148A(b). There was nothing stated in the provisions of section 148, 148A or 149 which could prevent the assessee from taking advantage of these provisions merely because of his failure to file return of income.

iii) Consequently, this petition stands allowed. The impugned order dated March 25, 2023 u/s. 148A(d) of the Income-tax Act vide annexures P-3 and P-4 are quashed. The notice dated March 25, 2023 vide annexure P-5 u/s. 148 issued by the Income-tax Officer, Ward 1(1), Jabalpur is quashed. However, the Department is at liberty to invoke the provisions of section 148A in accordance with law.”

BCAJ Admin

Reassessment – Notice – Sanction of competent authority :- (a) New procedure – Extension of time limits by 2020 Act – Effect of Supreme Court decision in UOI vs. Ashish Agarwal (2022) 444 ITR 1 (SC) – Notices for reassessment issued after 31st March, 2021 u/s. 148 converted into notice deemed to be issued u/s. 148A(b) – Notices do not relate back to original date – Sanction of specified authority to be obtained in accordance with law existing when sanction obtained; (b) Jurisdictional requirement – Notice for A.Y. 2016-17 issued after April 2021 – More than three years elapsing – Approval to be obtained from Principal Chief Commissioner – Approval taken of Principal Commissioner – Notice issued without sanction of correct authority invalid – CBDT instructions for issue of re-assessment notice between 1st April, 2020 and 30th June, 2021 not applicable – Order and notice quashed

76 Siemens Financial Services Pvt. Ltd. vs. DCIT

[2023] 457 ITR 647 (Bom.)

A.Y.: 2016–17

Date of Order: 25th August, 2023

Ss. 147(1), 148, 148A(d), 149(1)(b), 151(i) and 151(ii) of ITA 1961

Reassessment — Notice — Sanction of competent authority :— (a) New procedure — Extension of time limits by 2020 Act — Effect of Supreme Court decision in UOI vs. Ashish Agarwal (2022) 444 ITR 1 (SC) — Notices for reassessment issued after 31st March, 2021 u/s. 148 converted into notice deemed to be issued u/s. 148A(b) — Notices do not relate back to original date — Sanction of specified authority to be obtained in accordance with law existing when sanction obtained; (b) Jurisdictional requirement — Notice for A.Y. 2016-17 issued after April 2021 — More than three years elapsing — Approval to be obtained from Principal Chief Commissioner — Approval taken of Principal Commissioner — Notice issued without sanction of correct authority invalid — CBDT instructions for issue of re-assessment notice between 1st April, 2020 and 30th June, 2021 not applicable — Order and notice quashed.

Reassessment — No power to review assessment — Assessee providing relevant information — AO considered the information before passing assessment order and allowed deduction of expenditure on software consumables as revenue expenditure — Re-assessment by the AO to treat the expenditure as capital expenditure — Change of opinion — Order for issue of notice and consequent notice to be quashed.

The assessee, a NBFC, filed its return of income for A.Y. 2016–17 declaring total income of ₹44,92,46,370. Subsequently, the return of income was revised declaring total income of ₹50,67,32,580. The assessee’s case was selected for scrutiny. During the course of assessment, the assessee submitted a transaction-wise summary of expenditure on software consumables. On 23rd December, 2018, assessment order u/s. 143(3) of the Income-tax Act, 1961 was passed without any adjustment to the total income reported in the revised return. On 25th June, 2021, almost after 3 years, notice u/s. 148 of the Act was issued stating that there was reason to believe that assessee’s income for A.Y. 2016–17 has escaped assessment within the meaning of section 147 of the Act. Vide letter dated 22nd July, 2021, the assessee replied to the AO that the notice had been issued under the old provisions of the Act and that after 1st April, 2021, the AO should issue notice as per the amended provisions of the Act. The assessee thus requested the AO to drop the proceedings. Thereafter, the AO issued a notice dated 26th November, 2021 u/s. 142(1) which was replied to by the assessee. Subsequently, the AO issued a letter / show cause notice dated 31st May, 2022 u/s. 148A(b) of the Act wherein the earlier notice dated 25th June, 2021 issued u/s. 148 of the Act and the judgment of the Supreme Court in the case of UOI vs. Ashish Agarwal were referred and the AO stated that notice issued u/s. 148 of the Act be deemed to be issued u/s. 148A(b) of the Act. The AO relied upon the information and material which was annexed with the show cause notice to suggest that income chargeable to tax escaped assessment and also relied upon the approval of the competent authority which was attached with the show cause notice. In response to the show cause notice, the assessee made submissions vide letters dated 9th September, 2022 and 7th July, 2022. Vide order dated 31st July, 2022 passed u/s. 148A(d), the AO rejected the submissions and issued an intimation letter for issue of notice u/s. 148 of the Act and thereafter issued notice dated 31st July, 2022 u/s. 148 of the Act.

The assessee filed writ petition before the Bombay High Court challenging the impugned show cause notice dated 31st May, 2022, the order dated 31st July, 2022 passed u/s. 148A(d) of the Act and the notice dated 31st July, 2022 u/s. 148 of the Act. The Bombay High Court allowed the petition and held as follows:

“(i) The findings of the Bombay High Court in Tata Communications Transformation Services Ltd. v. Asst. CIT [2022] 443 ITR 49 (Bom) (to the effect that section 3(1) of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 does not provide that any notice issued u/s. 148 of the Income-tax Act, 1961 after March 31, 2021 will relate back to the original date such that the provision as existing on such date will be applicable to notices issued relying on the provision of the 2020 Act) have not been disturbed by the Supreme Court in UOI v. Ashish Agarwal [2022] 444 ITR 1 (SC). The Supreme Court only modified the orders passed by the respective High Courts to the effect that the notices issued under section 148 of the Act which were subject matter of writ petitions before various High Courts shall be deemed to have been issued u/s. 148A(b) of the Act and the Assessing Officer was directed to provide within 30 days to the respective assessee the information and material relied upon by the Department so that the assessee could reply to the show-cause notices within two weeks thereafter. The Supreme Court held that the Assessing Officer shall thereafter pass orders in terms of section 148A(d) in respect of each of the concerned assessees. Thereafter, after following the procedure as required u/s. 148A may issue notice u/s. 148 (as substituted). The Supreme Court also expressly kept open all contentions which may be available to the assessee including those available u/s. 149 of the Act and all rights and contentions which may be available to the concerned assessee and Department under the Finance Act, 2021 and in law, shall be continued to be available. Even by the finding of the Supreme Court in Ashish Agarwal, only the original notice issued u/s. 148 of the Act was converted into a notice deemed to have been issued u/s. 148A(b) of the Act. The judgment in Ashish Agarwal does not anywhere indicate the notices that could be issued for eternity would be sanctioned by an authority other than the sanctioning authority defined under the Act.

ii) The 2020 Act only seeks to extend the period of limitation and does not affect the scope of section 151. The Assessing Officer cannot rely on the provisions of 2020 Act and the notifications issued thereunder as section 151 has been amended by the Finance Act, 2021 and the provisions of the amended section would have to be complied with by the Assessing Officer, with effect from April 1, 2021. Hence, the Assessing Officer cannot seek to take the shelter of 2020 Act as a subordinate legislation cannot override any statute enacted by Parliament. Further, the notification extending the dates from March 31, 2021 till June 30, 2021 cannot apply once the Finance Act, 2021 is in existence. The sanction of the specified authority has to be obtained in accordance with the law existing when the sanction is obtained. It is not open to the Central Board of Direct Taxes to clarify that the law laid down by the Supreme Court means that the extended reassessment notices will travel back in time to their original date when such notices were to be issued and, then, the new section 149 of the Act is to be applied. The 2020 Act does not envisage travelling back of any notice.

iii) The approval for issuance of notice u/s. 148A(d) of the Act had not been properly obtained because:

‘(a) the petition related to the A.Y. 2016-17, and as the order and notice were issued beyond the period of three years which elapsed on March 31, 2020 the approval as contemplated in section 151(ii) of the Act would have to be obtained which had not been done by the Assessing Officer. The approval had been taken of the Principal Commissioner who was not the specified authority u/s. 151 of the Act. The sanction was required to be obtained by applying the amended section 151(ii) of the Act and since the sanction had been obtained in terms of section 151(i) of the Act, the order and notice are bad in law and should be quashed and set aside.

(b) even assuming that it is held that these notices travel back to the date of the original notice issued on June 25, 2021, the approval of the Principal Chief Commissioner should have to be obtained in terms of section 151(ii) of the Act as a period of three years from the end of the relevant assessment year ended on March 31, 2020 for the A.Y. 2016–17.

(c) Instructions dated May 11, 2022 ([2022] 444 ITR (St.) 43) had no applicability to the facts of this case because they expressly provided that they applied only to the issue of reassessment notice issued by the Assessing Officer during the period beginning April 1, 2020 and ending with June 30, 2021 within the time extended under 2020 Act and various notifications issued thereunder.

(d) since the approval of the specified authority in terms of section 151(ii) of the Act was a jurisdictional requirement and in the absence of compliance with this requirement, the reopening of assessment would fail.’

iv) It is settled law that proceedings u/s. 148 cannot be initiated to review the stand earlier adopted by the Assessing Officer. The Assessing Officer cannot initiate reassessment proceedings to have a relook at the documents that were filed and considered by him in the original assessment proceedings as the power to reassess cannot be exercised to review an assessment. If the change of opinion concept is given a go by, that would result in giving arbitrary powers to the Assessing Officer to reopen assessments. It would in effect be giving power to review which he does not possess. The Assessing Officer has only power to reassess not to review. The concept of change of opinion is an in-built test to check abuse of power by the Assessing Officer.

v) The Assessing Officer did not have any power to review his own assessment when during the original assessment the assessee had provided all the relevant information and the Assessing Officer had considered it before passing the assessment order u/s. 143(3) of the Act dated December 23, 2018. The assessee had debited an amount of ₹6,41,87,931 on account of software consumables in the profit and loss account and a detailed break-up of the expenses were submitted before the Assessing Officer during the course of assessment proceedings. The Assessing Officer having allowed the amount of software consumables as a revenue expenditure now sought to treat it as capital expenditure which was a clear change of opinion. This was not permissible.”

BCAJ Admin

Income — Diversion of income by overriding title — State Government undertaking entrusted with Government funds with strict instructions regarding its usage — Income of undertaking diverted to State Government by overriding title — No income accrued to undertaking

75 Principal CIT vs. Jharkhand Tourism Development Corporation Ltd.

[2023] 458 ITR 497 (Jhar.)

A.Ys.: 2012–13 and 2014–15

Date of Order: 21st February, 2023

Income — Diversion of income by overriding title — State Government undertaking entrusted with Government funds with strict instructions regarding its usage — Income of undertaking diverted to State Government by overriding title — No income accrued to undertaking.

The assessee is an undertaking of the State Government of Jharkhand incorporated with the object to promote tourism in the State and to create, operate and maintain infrastructure for tourism on behalf of Central and State Government. The assessee received funds from the Government for making payments in accordance with the guidelines of the Government for approved projects and the assessee was liable to return the unutilized funds to the Government. Under the directions from the Government as well as under an Office Memorandum dated 6th December, 2006 issued by the Ministry of Tourism, the Government of India directed the assessee that funds released as installments of Central Financial Assistance (CFA) from the Ministry of Tourism were to be deposited in saving accounts or fixed deposits in banks. Further it was also directed to ensure utilization of interest earned on deposits for the execution and completion of concerned projects without deviation towards any other expenditure. In case, there was no scope for utilization of the amount, such amount had to be returned to the Ministry of Tourism.

Assessee’s case for A.Y. 2014–15 was selected for scrutiny where under the interest income of ₹4,63,76,660 earned on fixed deposit was taken as income and added to the total income of the assessee. For A.Y. 2012–13, the interest of ₹3,23,99,958 earned on fixed deposit was added to the total income of the assessee. Separate appeals were preferred for each of the years before the CIT(A) which were allowed by the CIT(A). The Tribunal confirmed the action of the CIT(A).

The Department filed appeals before the High Court and contended that interest income was covered under the head “Income from Other Sources”. The guidelines of the Ministry of Tourism could not override the statutory provisions of the Act. Further, the Department contended that the fixed deposits were in the name of the assessee and the TDS on interest was also shown and claimed by the assessee. The Department therefore contended that the AO had rightly treated the interest to be the income of the assessee.

The High Court dismissed the appeals of the Department and held as follows:

“i) The assessee was a Jharkhand State Government undertaking incorporated with the object to promote tourism in the State to create, operate and maintain infrastructure for tourism on behalf of the Central and State Government. The funds from the Central and State Governments were disbursed to the assessee for making payment in accordance with the guidelines of the Government for approved projects and were liable to be refunded if unutilised funds as and when Government made requisition therefor. Thus, the funds always remained the property of the Government and the assessee was authorised to use the funds as well and was duty bound to obey the direction on how to manage the surplus. The assessee under the directions of the Government kept a portion of unutilised funds in short-term bank deposits and interest earned from these deposits was transferred to the respective fund accounts of the Government. As a matter of fact, an office memorandum dated December 6, 2006 issued by the Joint Secretary, Ministry of Tourism, had directed the assessee to deposit funds released as instalments of Central Financial Assistance from the Ministry of Tourism in saving accounts or fixed deposits in banks and as a result a substantial amount accrued as interest on deposits made out of the Central Financial Assistance. It was also directed to ensure utilisation of interest earned on deposits for the execution and completion of the projects without deviation to any other head of expenditure. In case there was no scope to utilise the amount of interest for execution of the project, such amount could be returned to the Ministry of Tourism.

ii) Thus, the income never reached the assessee and was diverted at source by an overriding title. The orders of assessment for the A.Ys. 2012-13 and 2014-15 were not valid.”

BCAJ Admin

Deduction of tax at source — Interest on compensation awarded by Motor Accidents Claims Tribunal — Effect of sub-section (3) of section 194A — Interest assessable only if it exceeds ₹ 50,000 in a financial year

74 Smt Kuni Sahoo vs. UOI

[2023] 457 ITR 777 (Guj.)

Date of Order: 30th January, 2023

S. 194A of ITA 1961

Deduction of tax at source — Interest on compensation awarded by Motor Accidents Claims Tribunal — Effect of sub-section (3) of section 194A — Interest assessable only if it exceeds ₹ 50,000 in a financial year.

The Petitioners are the wife and the children of the deceased who died in a road accident. Pursuant to the death of the deceased in a road accident on 7th January, 2013, the Petitioners were awarded compensation of ₹17,90,760 along with interest at 7 per cent per annum with effect from date of application till the date of realisation. On appeal by the opposite party, the compensation stood reduced to ₹ 15,00,000 with interest vide order dated 13th July, 2019. The interest pertained to the period 2013–14 to 2019–20, that is, for a period of six years and if the interest was spread over in the case of each petitioner over a period of six years, the annual interest would come around ₹35,944. The said amount being less than ₹ 50,000, no deduction of tax was required in view of section 194A(3)(ixa) as amended. However, the Insurance company deposited cheques after deduction of tax at source on the interest.

The Petitioners filed writ petitions claiming that the Insurance company should have deposited interest without deducting tax at source. The Gujarat High Court allowed the writ petition and held as follows:

“i) Section 194A of the Income-tax Act, 1961 being not a charging provision, deals with deduction of tax at source in respect of “interest other than interest on securities”. Under the provisions of section 145A(b) as it existed prior to amendment by virtue of the and sub-section (1) of section 145B of the Act, after the amendment interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.

ii) However, u/s. 194A(3)(ixa) the provisions of the section would not be applicable to such income credited by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal where the amount of such income or, as the case may be, the aggregate of the amounts of such income paid during the financial year does not exceed fifty thousand rupees.

iii) The interest payable under the Motor Vehicles Act, 1988 was relatable to the period 2013–14 to 2019–20. If the interest were spread over year to year, the amount would not exceed ₹50,000. Under such premise, the deduction of tax at source in respect of interest for delay in deposit of compensation before the Motor Accidents Claims Tribunal would attract the provisions of sub-section (3) of section 194A and no deduction of tax at source was required.”

BCAJ Admin

Commissioner(Appeals) — Power of remand — Scope of s. 251(1)(a) — Commissioner(Appeals) can confirm, reduce, enhance or annul assessment — Finding of Commissioner(Appeals) that AO not justified in making addition and positive direction to delete additions — Order of remand for fresh assessment after further enquiry — Commissioner(Appeals) has no power to remand the matter for fresh assessment after further enquiry — Order of the Tribunal upholding the order of the Commissioner(Appeals) despite noting specific ground by the assessee regarding the powers exceeded by the Commissioner(Appeals) — Order of remand not tenable in law

73 Arun Kumar Bose vs. ITO

[2023] 458 ITR 32 (Cal.)

A.Y.: 2014-15

Date of Order: 2nd August, 2023

S. 251(1)(a) of ITA 1961

Commissioner(Appeals) — Power of remand — Scope of s. 251(1)(a) — Commissioner(Appeals) can confirm, reduce, enhance or annul assessment — Finding of Commissioner(Appeals) that AO not justified in making addition and positive direction to delete additions — Order of remand for fresh assessment after further enquiry — Commissioner(Appeals) has no power to remand the matter for fresh assessment after further enquiry — Order of the Tribunal upholding the order of the Commissioner(Appeals) despite noting specific ground by the assessee regarding the powers exceeded by the Commissioner(Appeals) — Order of remand not tenable in law.

The addition made by the AO with respect to sundry creditors was deleted by the Commissioner(Appeals) holding it to be not justified and remanded the matter to the AO for fresh assessment after enquiry. The Tribunal upheld the order of the Commissioner(Appeals) despite there being a specific ground raised by the Assessee challenging the action of the Commissioner(Appeals) in remanding the matter back to the AO.

In appeal filed by the Assessee, following questions were raised before the High Court:

“(i) Whether on the facts and circumstances of the case the learned Tribunal was justified in upholding the order of the Commissioner of Income-tax (Appeals) when the same is beyond the scope and power vested upon the Commissioner of Income-tax (Appeals) under the provisions of section 251(1)(a) of the said Act ?

(ii) Whether on the facts and circumstances of the case when the additions made in respect of the sundry creditors, namely, M/s. Goodwill Corporation (India), M/s. Quality Udyog and M/s. Swastik Trading and Manufacturing Co. were directed to be deleted as being unsustainable can be subject to the enquiries conducted by the Assessing Officer ?”

The Calcutta High Court allowed the appeal and held as under:

“i) U/s. 251(1)(a) of the Income-tax Act, 1961 the Commissioner (Appeals) may confirm, reduce, enhance or annul the assessment. On a reading of the Finance Act, 2001 (Circular No. 14 of 2001), the Commissioner (Appeals) had no power to remand the matter to the Assessing Officer for fresh assessment in accordance with the direction given by him after making such further enquiry as may be necessary. Though such power was conferred on the Commissioner (Appeals), the said provision stood omitted by the Finance Act, 2001. In the light of the Explanatory Notes to the Provisions related to Direct Taxes, under paragraph 78.1 dealing with the powers of the Commissioner (Appeals) with effect from June 1, 2001, the Commissioner (Appeals) could not have remanded the matter to the Assessing Officer after having decided the case in favour of the assessee in its entirety.

ii) Though in the order passed by the Commissioner (Appeals), the word “prima facie” had been used, from a cumulative reading of an order passed by the Commissioner (Appeals), it was found that the case had been discussed on merits and thereafter, a finding had been recorded that the Assessing Officer was not justified in making the addition and there was a positive direction to delete the addition. Though the assessee had raised a specific ground of exceeding the statutory powers conferred u/s. 251(1)(a) before the Tribunal which had been noted by it in paragraph 3 of the impugned order, this aspect had not been dealt with by the Tribunal. The Tribunal had gone into the correctness of the finding of the Commissioner (Appeals) who held in favour of the assessee and thereafter, had recorded his opinion. Admittedly, the Revenue had not challenged the findings rendered by the Commissioner (Appeals) which was in favour of the assessee.

iii) Thus, not only the Commissioner (Appeals) committed an error of law by remanding the matter to the Assessing Officer for a fresh consideration after having held in favour of the assessee, the Tribunal also did not deal with the said issue. In the light of the statutory embargo, the order of remand passed by the Commissioner (Appeals) is not tenable in law and consequently, was required to be set aside as well as the order passed by the Tribunal.”

BCAJ Admin

Section 9(1)(vi) of the Act; Article 12(3) of India-Sweden DTAA — Since the facts for the relevant year are identical to those of AY 2014–15, where it was held that the receipts in question could not be taxed as “royalty”, both under section 9(1)(vi) of the Act and under Article 12(3) of India-Sweden DTAA, the assessee was not liable to deduct tax

12 Volvo Information Technology AB, Sweden

vs. DCIT, International Taxation, Circle-3(1)(1), New Delhi

ITA Nos.: 393/Del/2018 and 2780/Del/2022

Member: Shri Kul Bharat, Judicial Member and Dr. B.R.R. Kumar

A.Ys.: 2014–15 and 2015–16

Date of Order: 20th December, 2023

Section 9(1)(vi) of the Act; Article 12(3) of India-Sweden DTAA — Since the facts for the relevant year are identical to those of AY 2014–15, where it was held that the receipts in question could not be taxed as “royalty”, both under section 9(1)(vi) of the Act and under Article 12(3) of India-Sweden DTAA, the assessee was not liable to deduct tax.

FACTS

The assessee was a member-company of ‘V Group’, which has global presence. It filed its return of income declaring total income of ₹77.72 crores under the head “income from other sources” and offered the same to tax
@ 10 per cent as per the provisions of DTAA. Subsequently, it revised the return of income declaring nil income.

The AO passed a draft assessment order proposing to assess the total income at ₹77.72 crores by treating the receipts as royalty in terms of section 9(1)(vi) of the Act as well as DTAA and charging tax thereon @ 10 per cent on gross receipts.

The assessee contended that it received the payments for providing facilities to Indian entities of V Group (“Indian entities”), because of which Indian entities were not required to separately obtain right to use the copyright in any of the software / business software / application owned and executed by the assessee.

HELD

The issue pertains to characterising the payments of ₹77.72 crores received by the assessee during the relevant year as royalty and taxing them @ 10 per cent of gross receipts.
The assessee had raised the same issue in its appeal before this Tribunal in respect of A.Y. 2014–15. In A.Y. 2014–15, while the assessee had declared nil income, the AO treated the entire receipts of ₹119.88 crores from India entities as ‘royalty’ in terms of section 9(1)(vi) of the Act as well as under Article 12(3) of India-Sweden DTAA and had charged the same to tax @ 10 per cent on gross receipts.
On the facts and circumstances of the case in respect of A.Y. 2014–15 and in law, this Tribunal held that CIT(A) had erred in treating the payments aggregating to ₹119.88 crores received by the assessee from Indian entities as royalty, both under section 9(1)(vi) of the Act and under Article 12(3) of India-Sweden DTAA.
Since the facts for the relevant year in question are identical to those of A.Y. 2014–15 in the assessee’s own case, where this Tribunal has held that the receipts in question could not be taxed as ‘royalty’. For the same reasons, the entire receipt of ₹77.72 crores received from Indian entities could not be taxed as ‘royalty’. Accordingly, the orders of authorities were set aside.

BCAJ Admin

Sections 9(1)(vii)(b), 195, and 40(a)(i) of the Act — Payments made to foreign service providers for testing, implementation, tutoring and demonstrating services to offshore clients in respect of software developed by the taxpayer is merely a support service and not in the nature of FTS. Even if it is considered to be FTS, still, payment is within the source rule carve out u/s 9(1)(vii)(b) of the Act since: (a) payments were made to foreign service provider who was a non-resident; (b) it had not rendered the services in India; (c) it did not have any permanent establishment in India; and (d) the services were utilised by the taxpayer in business carried on outside India, or for the purpose of making or earning income from a source outside India

11 Dy. CIT/Jt. CIT (OSD), Corporate Circle -1(1) vs. Aspire Systems India (P.) Ltd.

[2023] 157 taxmann.com 699 (Chennai – Trib.)

ITA Nos.: 1069, 1070 & 1071 (Chny.) 2022, 159 & 315 (Chny.) 2023

A.Y.: 2013–14

Date of Order: 13th December, 2023

Sections 9(1)(vii)(b), 195, and 40(a)(i) of the Act — Payments made to foreign service providers for testing, implementation, tutoring and demonstrating services to offshore clients in respect of software developed by the taxpayer is merely a support service and not in the nature of FTS. Even if it is considered to be FTS, still, payment is within the source rule carve out u/s 9(1)(vii)(b) of the Act since: (a) payments were made to foreign service provider who was a non-resident; (b) it had not rendered the services in India; (c) it did not have any permanent establishment in India; and (d) the services were utilised by the taxpayer in business carried on outside India, or for the purpose of making or earning income from a source outside India.

FACTS

The assessee was engaged in the business of providing software development services to offshore customers. In connection with such services, it entered into a contract with a foreign service provider (“F Co”) for providing installation and testing services. As per the agreement between the assessee and F Co, F Co carried out testing, implementation, tutoring and demonstrating services to offshore clients in respect of software developed by the taxpayer. In consideration, the assessee paid outsourcing charges / consultancy charges to F Co in respect of certain American clients of the assessee.

According to the AO, the payments made by the assessee to F Co were in the nature of fee for technical services (FTS) as defined under section 9(1)(vii) of the Act. Accordingly, since the assessee had not deducted tax under section 195 of the Act, the AO disallowed such payments under section 40(a)(i) of the Act.

On appeal, CIT(A) held that the payments made by the assessee to F Co were for rendering services outside India, and hence, they could not be deemed to accrue or arise in India. Therefore, they were not liable for deduction under section 195 of the Act. He further held that services rendered by F Co did not fall under the purview of FTS. Consequently, payments made to F Co could not be disallowed under section 40(a)(i) of the Act for non-deduction of tax at source under section 195 of the Act.

HELD

F Co carried out testing, implementation, tutoring and demonstrating services. Such services by F Co represented services performed on behalf of the assessee for a client of the assessee located in the USA. From the nature of services provided by F Co, it appears that they were support services and not purely technical services for them to fall under the definition of FTS.
Also, for any payment made to a non-resident to be considered as FTS, it should be analysed in light of provisions of section 9(1)(vii) of the Act, read with exceptions thereto. As per clause (b) to section 9(1)(vii) of the Act, payments made by a person who is a non-resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India, or for the purpose of making or earning any income from any source
outside India, is outside the scope of section 9(1)(vii) of the Act. From clause (b), it is evident that the services rendered by F Co clearly fall under the exception whereby the same cannot be deemed to accrue or arise in India.
From perusal of contract between the assesse and F Co, it is clear that payments made by the assessee to F Co are directly related to services rendered to clients of the assessee outside India and income earned by the assessee from such
clients forms part of business income of the assessee. Therefore, it falls under the category of services utilised in a business or profession carried on by such person outside India.
Second aspect of exception in clause (b) to section 9(1)(vii) of the Act is that the services were utilised for the purpose of making or earning any income from any source outside India.
F Co performed services outside India for offshore clients. As the clients were situated outside India and services were utilised for earning income from source outside India, the second part of exception as per section 9(1)(vii)(b) of the Act was also satisfied.
Therefore, payments made to F Co were not chargeable to tax in India as they were covered within exception in section 9(1)(vii)(b) of the Act. Accordingly, provisions of section 195 of the Act were not attracted and the question of disallowance under section 40(a)(i) of the Act did not arise.

BCAJ Admin

Section 9, read with sections 195 and 201, of the Act — Payments made for Live Rights are not payments for copyright as broadcasting Live events does not amount to a work in which copyright subsists — hence, they cannot be charged to tax as royalty under section 9(1)(vi) of the Act

10 Lex Sportel Vision (P.) Ltd. vs. Income Tax Officer

[2024] 158 taxmann.com 129 (Delhi – Trib.)

ITA No.: 2397/Del/2023

A.Y.: 2018–19

Date of Order: 26th December, 2023

Section 9, read with sections 195 and 201, of the Act — Payments made for Live Rights are not payments for copyright as broadcasting Live events does not amount to a work in which copyright subsists — hence, they cannot be charged to tax as royalty under section 9(1)(vi) of the Act.

FACTS

The assessee was engaged in the business of broadcasting or sub-licensing right to broadcast sport events, e.g., golf, cricket, soccer, etc., on live and non-live basis. The assessee filed a return of income for the relevant year declaring nil total income. During the relevant year, the assessee had entered into agreements with certain non-residents for acquiring the following two types of rights.

(a) Right to broadcast live sports events (“Live Rights”).

(b) Right to use audio-visual recording of the sport events for subsequent telecasting, cutting small clips for advertisements, making highlights of the event, etc., (“Non-Live Rights”).

The agreements and the invoices issued by non-residents clearly bifurcated the total consideration between consideration for “Live Rights” and that for “Non-Live Rights”¹.

1. The decision does not mention the respective amounts paid for “Live Rights” and “Non-Live Rights”.

The assessee considered payments towards acquisition of “Non-Live Rights” as “Royalty” in terms of section 9(1)(vi) of the Act. And deducted tax thereon under section 195 of the Act. However, the assessee did not deduct tax under section 195 of the Act on the payments made for “Live Rights”.

In appeal, CIT(A) held that the payment for “Live Rights” was chargeable to tax as “Royalty”.

HELD

Whether payments for Live Rights are for use of copyright?

The Tribunal examined in detail certain judgments² on the subject.
Based on the examination, broadcasting “Live events” does not amount to a work in which copyright subsists, as right to broadcast live events i.e., “Live Rights” is not “copyright”.
Therefore, any payment made towards Live Rights cannot be said to be chargeable to tax as “Royalty” under section 9(1)(vi) of the Act. Further, the judicial authorities have held that when the agreements clearly bifurcate the consideration paid towards Live and Non-Live Rights, it is not open for the Department to deem that the payment made for Live Rights was for a bouquet of rights.

2. CIT vs. Delhi Race Club [2014] 51 taxmann.com 550/[2015] 273 CTR 503/228 Taxman 185 (Hon'ble Delhi HC); Fox Network Group Singapore Pvt. Ltd. vs. ACIT (IT) [2020] 121 taxmann.com 330 (ITAT Delhi); Cricket Australia vs. ACIT (IT) (ITA No. 1179/Delhi/2022) (ITAT Delhi); ESS (formerly known as ESPN Star Sports) vs. ACIT (ITA No. 7903/DEL/2018) (ITAT Delhi); ESPN Star Sports vs. Global Broadcast News Ltd. 2008 (38) PTC 477 (ITA T Delhi); ADIT (IT) vs. Neo Sports Broadcast Pvt. Ltd. [2011] 15 taxmann.com 175/[2011] 133 ITD 468 (ITAT Mumbai); DDIT(IT) vs. Nimbus Communications Ltd (2013) 20 ITR(T) 754 (ITAT Mumbai).

Whether payments were for use of process?

As regards the issue whether the payments were made for the use of “process” or not, the payments in dispute were made to overseas rights holders. The said payments were neither made to any satellite operators nor for use of any satellite. Hence, the payments were not made for use of any “process” as defined under section 9(1)(vi) of the Act. Therefore, they cannot be brought to tax as “Royalty” in the hands of the overseas rights holders.
Accordingly, while passing the order under section 201 of the Act, the AO erred in law by treating the remittances to have been made for use of a “Process”.

BCAJ Admin

Where the firm had borrowed a loan from the bank and raised fresh capital from the incoming partner to settle the debt / capital account of retiring partners, any interest paid on such loan / capital account is allowable under section 36(1)(iii)

57 M/s. Ariff & Company vs. ACIT

ITA No.: 140 / Chny/ 2022

A.Y.: 2007–08

Date of Order: 15th December, 2023

Section: 36(1)(iii)

Where the firm had borrowed a loan from the bank and raised fresh capital from the incoming partner to settle the debt / capital account of retiring partners, any interest paid on such loan / capital account is allowable under section 36(1)(iii).

FACTS

Mr R along with his wife and three children constituted the assessee-partnership firm in 1974, which carried on business of running a hotel called “Hotel President”.

Four partners decided to retire from the firm because they were migrating to the USA, leaving the management completely in the hands of Mr A.

Accordingly, after negotiations, the firm was reconstituted in 2006 with the retirement of four partners and the induction of a new partner, Mrs A.

Before reconstitution of the firm, the assets and liabilities of the firm were revalued and credited in the capital account of partners, and the capital account of the outgoing partners was treated as debt of the partnership firm.

To settle outgoing partners’ capital account, the firm borrowed a loan from Punjab National Bank and paid interest thereon. It had also taken capital contribution from incoming partner, Mrs A and paid interest to her in accordance with section 40(b).

The AO disallowed the interest paid by the assessee-firm to the capital account of partners and on loan borrowed from the Bank on the ground that payment to outgoing partners was nothing but a family settlement.

The disallowance was upheld by CIT(A).

Aggrieved, the assessee filed an appeal before the Tribunal.

HELD

The Tribunal observed as follows:

(a) interest paid on capital account of partners partakes the nature of funds borrowed for the purpose of business of the assessee, and consequently, interest paid thereon is allowable under section 36(1)(iii);

(b) any loan borrowed for the purpose of settling outgoing partners’ capital account which has been treated as debt in the books of accounts of the firm assumes the character of loan borrowed for the purpose of business of the assessee, and consequently, interest paid on borrowed capital account is allowable under section 36(1)(iii);

(c) when the assets were owned by the partnership firm, any settlement of such assets to the outgoing partners cannot be considered as settlement of family property, just because the partners were family members.

(d) merely because the assets of the firm had been revalued before reconstitution of partnership firm (to ascertain the fair market value of assets of the firm and shares of the outgoing partners), it cannot be a reason for the AO to treat the settlement of firm properties among partners as settlement of family property.

In the result, the appeal filed by the assessee was allowed.

BCAJ Admin

Interest under section 244A is to be calculated by first adjusting the amount of refund already granted towards the interest component and balance left, if any, should be adjusted towards the tax component

56 Tata Sons Pvt. Ltd. vs. DCIT

ITA No.: 2362 / Mum / 2023

A.Y.: 1993–94

Date of Order: 6th December, 2023

Section: 244A

Interest under section 244A is to be calculated by first adjusting the amount of refund already granted towards the interest component and balance left, if any, should be adjusted towards the tax component.

FACTS

The return of income of the assessee for A.Y. 1993–94 was filed on 31st December, 1993, returning NIL income.

The return was subject to assessment / re-assessment and rectification over a period of time.

Tribunal, through orders dated 4th February, 2015, and 1st January, 2016, gave relief to the assessee.

The AO passed an order giving effect (OGE) dated 8th March, 2016, granting the refund of ₹30,45,62,594, and the assessee received the said refund on 18th August, 2022.

Aggrieved by the short credit of interest on refund, the assessee filed an appeal before CIT(A) / NFAC.

The CIT(A) / NFAC held against the assessee.

Aggrieved, the assessee filed an appeal before the Tribunal, alleging that:

(a) The AO had incorrectly adjusted the earlier refunds, resulting in a short credit of interest of ₹9,93,09,258;

(b) The AO had not calculated the interest for the interim period from when OGE was passed, that is, 8th March, 2016, and the actual receipt of refund, that is, 18th August, 2022, resulting in short credit of interest of ₹11,27,21,927.

HELD

Dealing with each of the grievances, the Tribunal held as follows:

(a) The amount of interest under section 244A is to be calculated by first adjusting the amount of refund already granted towards the interest component and balance left, if any, shall be adjusted towards the tax component; accordingly, the assessee would be entitled for interest on the unpaid refunds in accordance with the principle laid out in Grasim Industries Ltd vs. DCIT (2021) 123 taxmann.com 312(Mum);

(b) In light of the issue being squarely covered in favour of the assessee in CIT vs. Pfizer Limited (1991) 191 ITR 626 (Bom), City Bank NA Mumbai vs. CIT, ITA No. 6 of 2001 and CIT vs. K.E.C International in ITA No. 1038 of 2000 (Bom HC), the assessee was justified in seeking interest under section 244A up to the date of receipt of the refund order, i.e. 18th August, 2022;

(c) Applying the ratio laid down by coordinate bench in ACIT vs. Bharat Petroleum Corporation Ltd, ITA No. 5231 to 5233 of 2019, section 244A(1A) would be applicable in assessee’s case from 1st June, 2016, till the date of actual receipt of refund.

Accordingly, the Tribunal directed the AO to recompute the interest on refund in accordance with the order and as per law.

BCAJ Admin

In the absence of express mention to operate retrospectively, no retrospective cancellation for earlier years can be done under the amended section 12AB(4) introduced with effect from 1st April, 2022

55 Amala Jyothi Vidya Kendra Trust vs. PCIT

ITA Nos.: 458 / Bang / 2023

A.Y.: 2021–22

Date of Order: 1st December, 2023

Section: 12AB(4)

In the absence of express mention to operate retrospectively, no retrospective cancellation for earlier years can be done under the amended section 12AB(4) introduced with effect from 1st April, 2022.

FACTS

The assessee-trust was registered vide trust deed dated 1st April, 2005.

It was registered under the erstwhile section 12AA. Due to the amended provisions with effect from 1st April, 2021, requiring re-registration, the assessee filed an application for registration under section 12A / 12AB, which was granted to it by DIT from A.Y. 2022–23 to A.Y. 2026–27.

On 28th December, 2021, a search was carried out under section 132 in the office premises of assessee-trust in Bangalore.

During the course of search, various incriminating materials were found which were confronted to the trustees and secretary of the assessee-trust, and it was found that they were using the funds of the trust for personal benefit.

Consequently, assessment proceedings were initiated by the AO for A.Y. 2021–22, calling for various details and confronting the evidence collected during the search.

Subsequently, vide letter dated 20th December, 2022, the AO sent a reference to PCIT for A.Y. 2021–22 communicating her satisfaction as per second proviso to section 143(3) of the Act that this was a fit case for cancellation of registration under section 12AB.

Accordingly, on 28th December, 2022, show cause notice was issued by the PCIT requiring the assessee-trust to explain as to why the registration granted to it should not be cancelled under section 12AB.

After considering the reply, the PCIT, invoking the amended provisions of section 12AB(4)(ii) [introduced by the Finance Act, 2022 w.e.f. 1st April, 2022], cancelled the registration granted to the assessee-trust w.e.f. A.Y. 2020–21 and that of subsequent years.

Aggrieved by this, the assessee-trust filed an appeal before the ITAT.

HELD

The Tribunal observed that:

(a) In income-tax matters, law to be applied is the law in force in the assessment year unless otherwise stated or implied. In the present case, the PCIT cancelled the registration granted under section 12AA/12AB w.e.f. previous year 2020–21 relevant to assessment year 2021–22 and therefore, the law as stated in the A.Y. 2021–22 is to be applied and not the law as stood in A.Y. 2022–23;

(b) No retrospective cancellation could be made under section 12AB(4)(ii) since it has not been provided or is seen to have explicitly provided to have a retrospective character or intended. Therefore, without a specific mention of the amended provisions to operate retrospectively, no cancellation for the earlier years could be made;

(c) Since the PCIT invoked section 12AB(4)(ii) which has been introduced by the Finance Act, 2022 w.e.f. 1st April, 2022, so as to cancel the registration with retrospective effect from A.Y. 2021–22, such order is bad in law and deserved to be quashed.

The Tribunal also noted that the same view has been taken by Mumbai ITAT in the case of Heard Foundation of India, ITA No.1524/Mum/2023 vide order dated 27th July, 2023.

In the result, the appeal of the assessee-trust was allowed.

BCAJ Admin

Section 54F, read with sections 48 and 50C — Where entire actual sales consideration had been invested in purchase and construction of residential house by assessee, capital gain would be exempt under section 54F and provisions of section 50C would not be applicable

54 Lalit Kumar Kalwar vs. Income-tax Officer

[2023] 106 ITR(T) 373 (Jaipur – Trib.)

ITA No.: 379 (JP) OF 2018

A.Y.: 2013–14

Date of Order: 30th May, 2023

Section 54F, read with sections 48 and 50C — Where entire actual sales consideration had been invested in purchase and construction of residential house by assessee, capital gain would be exempt under section 54F and provisions of section 50C would not be applicable.

FACTS

The assessee had sold shops and received actual sale consideration of ₹12 lakhs, which was less than the value accepted by the DLC of ₹20.78 lakhs. The assessee claimed long term capital gain (LTCG) at nil after seeking exemption under section 54F, contending that the entire actual sale consideration was invested in the purchase and construction of the residential house.

The Assessing Officer (AO) disallowed the claim of the assessee for the reason that the assessee had not deposited the sale consideration received on transfer of the property in capital gain account as per provisions of section 54F(4).

Aggrieved, the assessee filed the appeal before the CIT(A). The CIT (A) also upheld the order of the AO.

Aggrieved, the assessee filed an appeal before the ITAT.

HELD

After analysing the provisions of S. 54F(1) of the Act, the ITAT found that in Explanation to S. 54F(1), the term “net consideration” means the full value of consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer. The meaning of full value of consideration in Explanation to S. 54F(1) was not to be governed by the meaning of words “full value of consideration” as mentioned in S. 50C.

The ITAT also held that the fiction under S. 50C of the Act is extended only to the aspect of computation of capital gains and the same does not extend to the charging section or the exemptions to the charging section. The legislature consciously intended to apply the fiction under S. 50C of the Act only to the expression used in S. 48 of the Act and not in any other place. The ITAT further observed that the cost of new asset was not less than the net consideration, and thus, the whole of the capital gains was not to be charged even if the capital gains had been computed by adopting the value adopted by stamp registration authority. The requirement of law is that net consideration is required to be appropriated towards the purchase of the new asset. Thus, deduction under S. 54F was clearly applicable.

In result, the appeal filed by the assessee was allowed.

BCAJ Admin

S.69A r.w.s. 115BBE — Conversion of Miscellaneous business income into other sources by invoking provisions of section 69A without any evidence and taxing such income at special rate as per section 115BBE was improper

53 Deepak Setia vs. Deputy Commissioner of Income-tax

[2023] 106 ITR(T) 125 (Amritsar – Trib.)ITA NO. 112 (ASR.) OF 2023

A.Y.: 2019–20

Date of Order: 17th June, 2023

S.69A r.w.s. 115BBE — Conversion of Miscellaneous business income into other sources by invoking provisions of section 69A without any evidence and taxing such income at special rate as per section 115BBE was improper.

FACTS

A survey was conducted on the assessee’s premises u/s 133A. The assessee surrendered the amount of ₹29 lakhs and offered it for taxation as business income. Subsequently, the case was selected for scrutiny and out of ₹29 lakhs, amount of ₹14.23 lakhs which was related to miscellaneous business income (MBI) was taken as income from an undisclosed source under section 69A, and tax was calculated as per section 115BBE at a special rate. The rest of the surrendered amount was taken as normal business income, and tax was calculated at normal rate.

Aggrieved, the assessee filed the appeal before the CIT(A). The CIT(A) also upheld the order of the AO.

Aggrieved by the CIT(A) order, the assessee filed an appeal before the ITAT.

HELD

The ITAT observed that during survey proceedings, the assessee had surrendered total income of ₹29 lakhs out of which amounted to ₹14.23 lakhs related to other discrepancies / MBI, which was treated as income from undisclosed source u/s 69A and tax thereon was calculated as per section 115BBE at special rate during assessment. The entire addition was certainly without forming proper basis for conversion of business income to non-business income. The revenue was not able to submit any evidence during assessment and appeal proceeding that the said income was not connected with the business income of the assessee or was accumulated from a non-recognising source.

The ITAT held that when all the incomes earned by the assessee were only from the business income of the assessee, there did not arise any question as to the application of provisions of section 69A by following the settled principle that “when there is no other / separate source of income identified during the course of survey or during the course of assessment proceedings, any income arising to the assessee shall be treated to be out of the normal business of the assessee only”.

The ITAT had relied on the following Judicial precedents:

1. Harish Sharma vs. ITO [IT Appeal No. 327 (Chd.) of 2020, dated 11th May, 2021]

2. Daulatram Rawatmull vs. CIT [1967] 64 ITR 593 (Cal.)

3. Mansfield & Sons vs. CIT [1963] 48 ITR 254 (Cal.)

4. Sham Jewellers vs. Dy. CIT [IT Appeal No. 375 (Chd.) of 2022, dated 22nd August, 2022]

The ITAT held that the conversion of business income into other income and application of section 69A was bad and illegal and accordingly, levy of tax u/s 115BBE on the business income was liable to be quashed.

In result, the appeal filed by the assessee was allowed.

BCAJ Admin

S. 69A – Where there was a huge amount available with assessee in form of cash which he had deposited during demonetization, it could not be presumed that cash deposited by assessee was out of some undisclosed source without any adverse material

52 Arun Manohar Pathak vs. ACIT

[2023] 106 ITR(T) 14 (Mumbai – Trib.)

ITA NO.: 489 (MUM.) of 2023

A.Y.: 2017–18

Date of Order: 24th May, 2023

S. 69A – Where there was a huge amount available with assessee in form of cash which he had deposited during demonetization, it could not be presumed that cash deposited by assessee was out of some undisclosed source without any adverse material.

FACTS

The assessee was carrying on the milk distribution business. He deposited cash of a certain amount in his bank account during the demonetization period in old currency notes, i.e. specified bank notes (SBNs). The assessee submitted that he was a retailer of milk and the said cash deposits in SBNs were out of collection from sale of milk to persons during the demonetization period, and the same had been used to make payment towards purchase of milk to Gujarat Co-operative Milk Marketing Ltd. (GCMM) by way of demand drafts as reflected in the bank statement of the assessee. However, the Assessing Officer (AO) treated cash deposited in the bank during the demonetisation period in SBNs as unexplained and added the same under section 69A of the IT act.

Aggrieved, the assessee filed an appeal before the CIT(A). The CIT(A) upheld the order of the AO on the grounds that the assessee was not able to show that he was entitled to claim benefit of Notification No. S.O. 3408(E), issued by the Ministry of Finance (Department of Economic Affairs), dated 8th November, 2016, as the assessee had not filed any material to establish that the assessee qualifies as a milk booth operator under authorisation of Central or State Government.

Aggrieved by the CIT(A) order, the assessee filed an appeal before the ITAT.

HELD

The ITAT observed that the assessee had placed on record all the documents which supported the averments made by the assessee before the AO and CIT(A). The assessee had submitted the following documentary evidences to substantiate that he was carrying out milk distribution services and, therefore, was entitled to claim benefit of the notification:

1. Copy of License No. 11512018000623 issued by Government of Maharashtra.

2. Cash book, bank book and bank statement of the assessee.

3. Ledger Account of purchases made from GCMM.

Upon perusal of documents / details on record, the ITAT held that the assessee was able to substantiate the stand during the assessment proceedings, and the burden of proof was on the Revenue.

The ITAT observed that the CIT(A) had not dealt with the documents / details furnished by the assessee and failed to either carry out any inquiry / verification into purchase / sale of milk by the assessee to controvert the averments made by the assessee, or to point out any infirmity in the aforesaid documents / details.

The ITAT held that AO as well as CIT(A) were incorrect in holding that the assessee was not covered by the notification. Even if for the sake of arguments, it is believed that though the assessee was not covered by the aforesaid notification, the assessee had a bona fide belief that the assessee was entitled to the benefit of the notification, and therefore, permitted to receive SBNs, and that the assessee did accept SBNs as valid tender.

The ITAT held that the averments made by the assessee, supported by the documents furnished, went uncontroverted and, accordingly, deleted the addition made under section 69A of the act.

In result, the appeal filed by the assessee was allowed.

BCAJ Admin

When income is offered for taxation under the head ‘Income from House Property’ but the income is assessed under the head ‘profits and gains of business or profession’, it cannot be said that the assessee has suppressed or under-reported any income

51 D.C. POLYESTER LIMITED vs. DCIT

2023 (10) TMI 971 – ITAT MUMBAI

A.Y.: 2017–18

Date of Order: 17th October, 2023

Section: 270A

When income is offered for taxation under the head ‘Income from House Property’ but the income is assessed under the head ‘profits and gains of business or profession’, it cannot be said that the assessee has suppressed or under-reported any income.

Where the assessee offered an explanation as to why it reported rental income under the head ‘income from house property’ and the explanation of the assessee was not found to be false, the case would be covered by section 270A(6)(a).

FACTS

The assessee filed its return of income declaring total income to be a loss of ₹72,200. In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had offered rental income of ₹29,60,000 under the head ‘income from house property’. The AO noticed that the assessee had declared the rental income from the very same property under the head ‘income from business’ in an earlier year, i.e., in A.Y. 2013–14. However, in the instant year, the assessee had declared rental income under the head ‘income from house property’ and also claimed various other expenses against its business income. He further noticed that there was no business income during the year under consideration.

The assessee submitted that it has reduced its business substantially and all the expenses claimed in the profit and loss accounts are related to the business only. It was submitted that the rental income was rightly offered under the head ‘income from house property’ during the year under consideration. In the alternative, the assessee submitted that it will not object to assessing rental income under the head ‘income from business’. Accordingly, the AO assessed the rental income under the head ‘income from business’.

The AO assessed rental income under the head ‘business’ and consequently, the assessee was not entitled to deduction under section 24(a) of the Act. This resulted in assessed income being greater than returned income.

The AO initiated proceedings for levy of penalty under section 270A. In the course of penalty proceedings, it was submitted that the assessee has not under-reported the income since the addition pertains only to statutory deduction under section 24(a). The AO held that the furnishing of inaccurate particulars of income would have gone undetected, if the return of income of the assessee was not taken up for scrutiny. He also took the view that the claim of statutory deduction as well as expenses in the Profit and Loss account under two different heads of income would tantamount to under-reporting of income under section 270A of the Act. The AO levied a penalty of ₹1,83,550 under section 270A of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A), who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that since section 270A of the Act uses the expression “the Assessing Officer ‘may direct’”, there is merit in the contention of the assessee that levying of penalty is not automatic, and discretion is given to the AO not to initiate penalty proceedings under section 270A of the Act.

It held that it is not a case that the assessee has suppressed or under-reported any income. The addition came to be made to the total income returned by the assessee, due to change in the head of income, i.e., the addition has arisen on account of computational methodology prescribed in the Act. It held that, in its view, this kind of addition will not give rise to under-reporting of income. The Tribunal was of the view that the AO should have exercised his discretion not to initiate penalty proceedings u/s 270A of the Act in the facts and circumstances of the case.

The Tribunal observed that the assessee has offered an explanation as to why it reported the rental income under the head ‘income from house property’ and the said explanation is not found to be false. Accordingly, it held that the case of the assessee is covered by clause (a) of sub-section (6) of section 270A of the Act. The Tribunal noted that the Chennai bench of Tribunal has in the case of S Saroja [2023 (5) TMI 1262 – ITAT CHENNAI] held that a bonafide mistake committed while computing total income, the penalty u/s 270A of the Act should not be levied.

The Tribunal deleted the penalty levied under section 270A of the Act.

BCAJ Admin

Proviso to section 56(2)(vii)(b) providing for considering stamp duty value on the date of agreement applies even in a case where a part of the consideration was paid by the co-owner, and not by the assessee, on or before the date of the agreement

50 Rekha Singh vs. ITO

ITA No. 2406/Mum/2023

A.Y.: 2015–16

Date of Order: 30th October, 2023

Section: 56(2)(vii)(b)

Proviso to section 56(2)(vii)(b) providing for considering stamp duty value on the date of agreement applies even in a case where a part of the consideration was paid by the co-owner, and not by the assessee, on or before the date of the agreement.

FACTS

The assessee, an individual, filed a return of income declaring therein a total income of ₹5,93,520 on 27th August, 2015. The case was subjected to limited scrutiny. In the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee has purchased an immovable property for a consideration of ₹84,15,300 as a co-owner jointly with her husband. The consideration was paid by both co-owners. The assessee was a co-owner for the property being 50 per cent share. The AO noticed that while the consideration was ₹84,15,300 whereas the value of property determined by the stamp valuation authority was ₹1,32,82,000. The AO was of the view that section 56(2)(vii)(b) was to be applied.

The assessee explained that as per the proviso to section 56(2)(vii)(b), the stamp duty value on the date of agreement may be taken for the purpose of this clause. It was explained that the date of agreement (letter of allotment) was 16th December, 2010, whereas the purchase deed was registered on 29th December, 2014, and the first payment of R1 lakh was paid through a banking channel on 18th October, 2010, by the husband of the assessee.

The AO did not agree with the submission of the assessee and since property was transferred for a consideration less than its stamp duty value, therefore, 50 per cent of the total difference was assessable as income in assessee’s hands.

Aggrieved, the assessee preferred an appeal to the CIT(A) who held that since the initial payment before date of registration was made only by the other co-owner, husband of the assessee, the assessee was not entitled to the benefit of the proviso. He, accordingly, confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

In the course of hearing before the Tribunal, on behalf of the assessee, it was submitted that the property was purchased by the assessee in the joint name of the assessee with her husband, and it is immaterial that the initial consideration was paid by the husband of the assessee who was other co-owner. Reliance was placed on the decision of the co-ordinate bench, Mumbai, in the case of Poonam Ramesh Shahjwanv. ITO(IT) 4(2)(1) A.Y. 2014–15 in ITA No. 2252/Mum/2019 and the decision of ITAT, Pune in the case of Sanjay Dattatrya Dapodikarv. ITO, Ward 6(2) [(2019) 107 taxmann.com 219 (Pune Trib.)].

The Tribunal having perused the decision of ITAT in the case of Poonam Ramesh Shahjwan (supra) wherein on the similar facts, the value of the flat was determined on the date of booking of flat after taking into consideration the payment made by the assessee through banking channel before the registration of the flat as laid down in the proviso to section 56(2)(vii)(b) of the Act. The Tribunal also considered the decision of ITAT, Pune bench in the case of Sanjay Dattatraya Dapodikar (supra) wherein it is held that where the date of agreement for fixing the amount of consideration for purchase of a plot of land and the date of registration of sale deed were different but assessee, prior to date of agreement, had paid a part of consideration by cheque, provisos to section 56(2)(vii)(b) being fulfilled, the stamp value as on date of agreement should be applied for purpose of said section.

The Tribunal directed the AO that the stamp duty value on the date of allotment, in the case of the assessee on 16th October, 2010, be taken for the purpose of section 56(2)(vii)(b) of the Act and not stamp value as on the date of registration of sale deed. Further, the Tribunal did not find any merit in the findings of the CIT(A) that before the registration of the flat only other co-owner, i.e., Ajay Kumar Singh, husband of the assessee has made the payment. Since, it was joint property owned by assessee and her husband, it is immaterial who had made payment before the date of registration of the property.

The Tribunal decided this ground of appeal in favour of the assessee.

BCAJ Admin

Section 54B deduction is allowable even if agricultural land is purchased in the name of the wife.

49 Ravinder Kumar vs. ITO

ITA No. 2265/Del/2023

A.Y.: 2011–12

Date of Order: 8th November, 2023

Section: 54B

Section 54B deduction is allowable even if agricultural land is purchased in the name of the wife.

FACTS

The assessee sold agricultural land which gave rise to long-term capital gain of ₹12,78,456. The assessee claimed that it had purchased another agricultural land and, therefore, the entire long term capital gain of ₹12,78,456 is exempt under section 54B of the Act. The Assessing Officer (AO) denied the claim for deduction under section 54B on the grounds that the land had been purchased in the name of the wife of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal where, on behalf of the assessee, reliance was placed on the decision of Ashok Kumar vs. ITO [ITA No. 7460/Del/2018; AY: 2009–10; Order dated 28th December, 2022] and on behalf of the revenue, reliance was placed on dismissal of SLP by the SC in the case of Bahadur Singh vs. CIT(A) [(2023) 154 taxmann.com 457 (SC)] against the decision of the Punjab & Haryana High Court wherein purchase of agricultural land in the name of the assessee’s wife was not allowed under section 54B relief to the assessee.

HELD

The Tribunal noted the ratio of the decision of the Tribunal in the case of Ashok Kumar (supra). The Tribunal observed that in the decision relied upon by the DR, it was a dismissal of SLP simpliciter by Hon’ble Apex Court against the decision of Hon’ble Punjab & Haryana High Court. The Tribunal noted that dismissal of SLP simpliciter by Hon’ble Supreme Court does not merge the order of Hon’ble High Court with that of Hon’ble Supreme Court. It also noted that there is no jurisdictional High Court decision on this issue. Further, in case of conflicting, Hon’ble High Court decision one in favour of assessee has to be adopted as per Hon’ble Supreme Court decision in Vegetable Products. Accordingly, the Tribunal followed the precedent relied upon by the assessee which also draws support from Hon’ble High Court decisions referred therein.

The Tribunal set aside the order of the Revenue authorities and decided the issue in favour of the assessee.

BCAJ Admin

Loan From Promoters: An Insight

This is a less-covered area—the words directors and promoters are used synonymously but this may not be always true and the consequence of these two on loans and deposits under the Companies Act, 2013 (CA 2013) and the Companies (Acceptance of Deposits) Rules, 2014 (AODR) are discussed hereunder:

The term “deposit” is defined in clause (31) of section 2 of the CA 2013 that states that ‘a deposit includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India’.

Rule 2(1)(c) of AODR prescribes categories of amounts which shall not be termed as ‘deposits’ subject to meeting the prescribed conditions. It should be noted that receipt of money in a different form is also covered under the term “Deposit”.

LOAN AND DEPOSIT

Quite often, these two terms are used synonymously and interchangeably but these terms are different. A loan is repayable when it is contracted / incurred. But this is not so with a deposit. Either the repayment will depend upon the maturity date fixed therefore or the terms of the agreement relating to the demand, on making of which the deposit will become repayable. In other words, unlike a loan, there is no immediate obligation to repay in the case of a deposit. That is the essence of the distinction between a loan and a deposit. The loan is usually at the instance of the borrower whereas in the case of a deposit, it is at the instance of the person placing a deposit.

Thus, to simplify: I want a loan. I am a borrower. I approach the bank which is a lender for a loan. I am taking a premises on rent. I place a deposit with the landlord.

Section 143(1)(d) of CA 2013 [Section 227(1A)(d) of the Companies Act, 1956] provides that the auditor shall
inquire “whether loans and advances made by the company have been shown as deposits”. These provisions indicate that it may not be possible to interchange the terms loan and deposit under the Companies Act.

In a transaction of a deposit of money or a loan, a relationship of a debtor and a creditor must come into existence. The term deposit and loan may not be mutually exclusive, but in each case, one needs to consider the intention of the parties and the circumstances. What is required to be noted further is that under the limitation act, the period when limitation begins in the case of deposit and in the case of loan are different. The limitation period in case of a loan starts on a date on which the amount was repayable as per the agreement. As regards deposit, the limitation period starts from the date the depositor claimed repayment of money. In the case of a deposit, the accrual of interest ceases upon maturity, whereas in a loan, interest is payable up to the date of repayment of the loan itself. However, this does not mean that a loan or deposit necessarily will carry an interest. Thus, we come across interest-free loans and deposits. The onus of repayment of loan vests with the person taking the loan. In the case of a deposit, the depositor has to claim the deposit amount.

DEPOSIT

However, for the purpose of CA 2013, the definition of the term ‘Deposit’ clearly states that it includes ‘any receipt of money by way of deposit or loan or in any other form by a company’. Any loan has to fall within the exclusion from the definition of ‘deposit’ if it were to qualify as loan simpliciter.

Rule 2(1)(c) of the AODR prescribes receipts of money that shall not be treated as a deposit. For the purposes of this article, we shall be discussing only 2 such amounts namely:

AMOUNT RECEIVED FROM THE DIRECTOR

Clause (viii) of Rule 2(1)(c) reads as:

(viii) Any amount received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the Private company:

Provided that the director of the company or relative of the director of the private company, as the case may be, from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others and the company shall disclose the details of money so accepted in the Board’s report;

As per Notification dated 15th September, 2015, which amended the rule, any amount received from a director of a company or in the case of a private company, from the relative of the director, shall also be exempt, provided that such person furnishes a written declaration that the amount is not given out of any borrowing or accepting loans or deposits from others …. The reporting in the Board’s report is a condition imposed by the Amendment Rules which are effective from 15th September, 2015. Hence, all reports of the Board of Directors, signed after this date need to give this disclosure.

It is pertinent to note here that a Hindu Undivided Family shall not be regarded as a relative of the director. Rule 16A of ADOR mandates that every company, other than a private company, shall disclose in its financial statement, by way of notes, about the money received from the director.

Thus, the essential conditions for this exemption are as under:

Amount is received from a person who was a director of the company (whether Private or Public) at the time of the receipt of the amount (so subsequent cessation does not affect this exemption) or
In the case of a private company, from the relative of the director.

Such person furnishes a written declaration that the amount is not given out of any borrowing or accepting loans or deposits from others and the same is disclosed in the Board’s Report. (One needs to look into the exemption notification dated 5th June, 2015 and applicable conditions)

AMOUNTS FROM PROMOTERS

Let us now see Clause (xiii) of Rule 2(1)(c) that deals with the amount brought in by promoters.

Unsecured loans received from the promoters (as defined in clause (69) of section 2) or their relatives (as defined in clause (77) of section 2) or both as per the stipulation of any lending financial institution or a bank shall not be treated as deposits.

Hence, when the loan is brought in without any stipulation imposed by the lending institution or the loan brought in beyond the amount stipulated by lending institutions, the same will amount to a ‘Deposit’. This exemption is available only till the loan from the lending institution subsists and not after the same is repaid.

As the exemption is available only till the subsistence of the loan, the amount brought in by promoters needs to be repaid along with the loans from lending institutions.

The rule reads as:

(xiii) Any amount brought in by the promoters of the company by way of unsecured loan in pursuance of the stipulation of any lending financial institution or a bank subject to fulfillment of the following conditions, namely: –

(a) The loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to contribute such finance;

(b) The loan is provided by the promoters themselves or by their relatives or by both; and

(c) The exemption under this sub-clause shall be available only till the loans of financial institution or bank are repaid and not thereafter;

One thus notes that conditions are cumulative. Condition (b) in my view implies that a loan cannot be given by third parties as compliance of the stipulation.

This clause and definition of the word promoter needs little elaboration:

As per section 2 (69) of CA 2013, “promoter” means a person—

(a) Who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or

(b) Who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or

(c) In accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act,

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity.

Before we deal with this definition, we may note that this definition is newly introduced in CA 2013. The term promoter was defined in the Companies Act 1956 only for the limited purpose of fixing liability for a misstatement in the prospectus. So, the definition of promoters under CA 2013 can be analysed in three parts. All the parts are separated by ‘or’ and are thus independent of each other, or mutually exclusive, meaning thereby that for being a promoter, a person may fall within any part of S. 2(69). Suffice it to state as an introduction that the promoter in sub clause (a) covers a factual aspect whereas to identify a person as a promoter in sub clause (b) and sub clause (c), the same has to be established with adequate material.

The first part [contained in sub-clause (a) of sub-section 69 of Section 2] lacks legal certainty in as much as instead of explaining the concept, it appears that it upholds as correct, what is mentioned in the documents referred to in the said sub clause. Without elaborating the essentials of the concept, it merely states that a person is a promoter if the name of that person is mentioned as a ‘promoter’ in the Prospectus or in the Annual Return filed under S. 92 of the Act.

In the second independent clause of the definition of ‘promoter’, we find a little objectivity in the definition, as it talks about the presence of one’s control over the affairs of the company as a prerequisite for being classified as a promoter. Such control may arise out of the position of that person as a shareholder, or a director or otherwise. The control envisaged can be direct or indirect. Undoubtedly, the definition also contemplates a person who may neither be a shareholder nor a director, and yet be a promoter if he has control over the affairs of the company. Thus at the same time, every shareholder or director need not be treated as promoter of the company if he does not exercise any control over the affairs of the company.

In this context, it is notable to look into the definition of ‘control’ given under S. 2(27) of the Act. As per section 2 (27), “control” shall include the right to appoint a majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements or in any other manner.

Thus we are told that if a person has a right to appoint the majority of directors or to control the management or policy decisions of a company, then he/she would be considered to be a promoter. But again, what may be classified as control over management and policy decisions is still ambiguous, uncertain, vague & definitely a matter of academic debate and interpretation and thus may lead to two views.

The last part of the definition states that a promoter is a person “(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act”.

This is again vague and from the perspective of a person who is an outsider to the management of the company and this fact may not be evident very easily. So, applying the rules of literal interpretation on S. 2(69) of the Act, and reading all the parts of the definition together, a person may be a promoter of the company even without being a director or a shareholder, if he / she has been named so in the Prospectus or Annual Return of the Company.

Similarly, a person who has been stated to be a promoter in the prospectus of the company or the Annual Return of the Company, would be treated as a promoter even if he / she does not exercise any control over the affairs of the company or even if doesn’t have any right of appointment of a majority of the directors.

Thus, it can be seen that in the formation of a company, people who initially take an active part to give it a concrete shape are known as promoters in the commercial world. The term “promoters” is more familiar with the business than with law. It “involves the idea of exertion for the purpose of forming and starting a company.”

The individuals who not only conduct the task of promotion but also are responsible for all the affairs of the business are the promoters of a company. A promoter of a company is a person or a group of persons who came together with the objective of setting up a business. The promoter can be an individual, a firm or an association of artificial legal persons. To be a promoter, it is not necessary to be a founder of a business; the person who arranges capital and assists in other important works can be equally regarded as a “promoter of a company”. In another sense, the promoters may be called as the Parents of a company on the ideation of whom a company is born.

A person cannot become a promoter merely because he signed the memorandum as a subscriber for one or more shares. The proviso further carves out an exception as to the professionals such as counsels, solicitors, accountants, engineers or other technicians who will not become promoters by reason of acting unless they exceed their professional function and do something more in promoting the company.

TREATMENT OF LOAN RECEIVED FROM MEMBERS / DIRECTORS / PROMOTERS WHEN THEY ARE THE SAME

Let us consider a small Private limited company that has 2 members / shareholders who are directors of the Company. Consider a situation in which these directors lend money to the company for its operations. Since the loan is from the directors, it shall be considered as exempt only if a declaration is obtained from the directors. It is the duty of the concerned director to give the declaration, but it is equally the duty of the company to obtain the declaration. The sub clause granting exemption nowhere says that the director giving loan should not be a shareholder of the company. It similarly does not say that such a director should not be a Managing Director / Whole Time Director / Independent Director / Non-Executive Director / Employee of the Company. Reading any of these things or anything else will amount to inserting words in a statutory provision which we are not allowed to do. So, when a loan is accepted from a director who is a shareholder too, one needs to look into the exemption from the perspective of a loan from the director and one should not travel to other provisions regarding loan from members. If the intention of the rule-making authorities was to debar a company from accepting deposits/loan from their directors who happen to be shareholders of the company, there would have been a clear and explicit provision to that effect in clause (viii). But in the absence of such a provision, we cannot read it in the clause (viii) on our own. Thus loans from directors subject to compliance of conditions shall be treated as exempt deposit under rule 2(1)(c) (viii) of AODR.

Consider further a situation that this company decides to borrow from the financial institution (FI) a term loan of ₹100 crores and FI imposes a condition that promoters of the Company (in this case same 2 directors) bring in ₹10 Crores and such loan from the promoters shall not be repaid till term loan or part thereof continues. It is interesting to see here that such directors / promoters when they bring in a loan pursuant to a condition stipulated, there is no declaration required, and promoters (directors) in such cases, can place the funds with the company out of borrowed funds.

Thus, it is quite logical that with regards to the loans from promoters (who can be even non-individuals) to the company, there cannot be a condition similar to loan from directors or their relatives that they need to be out of their own funds.

Based on the logic explained in the paragraph on loan from directors, not to be treated as loan from members etc, one can conclude that loan from promoters pursuant to a stipulation cannot be considered as a loan from directors even though such promoters are directors and one need not take a declaration from such promoters since this is not prescribed when loan is from promoters.

Rule 2(1)(c) of AODR provides for certain situations in which the receipt of money shall become a deposit:

Any unsecured loans received from the promoters or their relatives or both as per the stipulation of any lending financial institution or a bank which continues beyond the subsistence of such loan from lending financial institution or a bank, shall become deposit.

Other compliances that need to be looked into in the case of loans and / or deposits:

I. CARO 2020 Clause (v) in Para 3 requires reporting in respect of the following:

in respect of deposits accepted by the company or amounts which are deemed to be deposits, whether the directives issued by the Reserve Bank of India and the provisions of sections 73 to 76 or any other relevant provisions of the Companies Act and the rules made thereunder, where applicable, have been complied with, if not, the nature of such contraventions be stated; if an order has been passed by Company Law Board or National Company Law Tribunal or Reserve Bank of India or any court or any other tribunal, whether the same has been complied with or not;

Thus, if loan from promoters does not fall in the four corners of exception, it needs to be reported in CARO.

II. Pursuant to amendments in Schedule III to the Companies Act, companies are required to give certain ratios which includes a ratio related to debts and equity namely Debt Equity ratio. The notification further mentions that the company shall explain the items included in numerator and denominator for computing the above ratios. Guidance note from ICAI further clarifies that the Debt-to-equity ratio compares a Company’s total debt to shareholders’ equity. Both of these numbers can be found in a Company’s balance sheet. Debt-Equity Ratio is defined to mean Total Debt / Shareholder’s Equity.

Is it possible to hold a view that the loan from promoters can be included in Equity for the purposes of this ratio?

CRISIL in its recent publication titled “CRISIL Ratings approach to financial ratios” mentions as under:

RELEVANT EXTRACTS ARE REPRODUCED

Computation of debt and equity has its nuances, especially in the context of promoter / family-owned unlisted entities where a sizeable portion of promoter funds deployed in the business could be in the form of unsecured loans.

These loans are infused either by promoters or family members and are usually subordinated to external debt. Over the years, CRISIL Ratings has observed that this source of funds has demonstrated a high degree of permanence in times of distress, with promoters deferring interest payments on these loans in order to prioritize the servicing of external debt. Furthermore, unsecured loans from promoters in case of promoter owned, unlisted entities are largely viewed as promoter source of funding by lenders and considered subordinate to all other forms of external debt.

Hence, even though as per accounting conventions, unsecured loans are considered part of debt, the aforementioned factors render some equity-like characteristics to these instruments.

CRISIL Ratings, as part of its analytical treatment of unsecured loans, classifies them into one of the following:

Part of overall debt,
May exclude unsecured loans from computation of debt,
In some circumstances, CRISIL Ratings accords partial equity treatment to around 75% of the unsecured loans, while considering the remaining as debt.

In view of the above, it is possible for a company to calculate the ratio treating unsecured loans from promoters as part of Equity.

CONCLUSION

The loans from Directors and Promoters and conditions related to exemptions from AODR are tabulated below:

Particulars	Loan from Directors	Loan from Promoters
Whether loan from Individuals Only	Yes	Not necessarily
Whether loan can be out of borrowed funds	No	Can be permitted
Whether any declaration required that loan is not out of the borrowed funds	Yes	No
Any Limit on the loan	No	Yes, subject to limits from Financial Institutions / Banks
Can the loan continue after director ceases to be a director of the Company	Yes	Not Applicable
Whether loan from relatives is permitted	Yes (Only in case of private Limited Company)	Yes. Not necessarily in the case of Private Limited Company.
How long loan can continue	No such requirement and can be at the instance of the Company	Loan can continue till Parent loan from FI continues
Reporting in the Board’s report	Yes	No such mandatory requirement

BCAJ Admin

Navigating the Landscape: The Integration of ESG Factors Into Business Valuation

In the dynamic world of finance and investment, the integration of Environmental, Social, and Governance (ESG) factors into business valuation has become a paramount consideration. As the global business community grapples with the requirements of sustainability and responsible corporate practices, investors are increasingly recognizing the need to go beyond traditional financial metrics. This article explores the multifaceted realm of ESG, delving into its significance, the process of integrating these factors into business valuation, challenges encountered in this endeavour, and the highlights of Business Responsibility and Sustainability Reporting (“BRSR”) Core which has been introduced recently.

UNDERSTANDING ESG & ITS IMPORTANCE

ESG encompasses a triad of critical factors that collectively shape a company’s approach to sustainability, ethical practices, and corporate governance. Environmental criteria evaluate a company’s impact on the planet, social criteria gauge its relationships with stakeholders, and governance criteria assess the internal structures guiding decision-making. The importance of ESG lies in its ability to provide a holistic view of a company, reflecting its commitment to long-term resilience, ethical conduct, and positive societal impact. Investors are increasingly recognizing that companies with robust ESG practices are not only better equipped to manage risks but are also likely to be more resilient in the face of evolving market dynamics.

INTEGRATION OF ESG INTO VALUATION

The integration of ESG factors into business valuation marks a paradigm shift in how companies are assessed and valued for investment. Traditional valuation methods are being augmented with ESG considerations, as investors seek a more comprehensive understanding of a company’s performance and its ability to create long-term value. ESG integration involves analyzing a company’s ESG practices and assigning a quantitative value to these tangible and intangible factors. These factors become important for the valuation of a business as their impact can be considerable when taken for long periods of time including on its competitive advantages. Below are ways to incorporate the ESG impact under the market and income approach:

The Market Approach:

To account for ESG considerations, valuation under the market approach should:

1) Identify and assess ESG practices for comparable companies and industries, then

2) Assess the performance of the subject company for such criteria, and

3) Calibrate the market inputs to the subject entity to take into account the relevant performance as compared to the comparable companies.

An example for adjusting the ESG factor under market approach is as follows:

Relevant ESG Factors	GHG Emissions (Co2e)	Workplace Accidents
Competitor 1	0.60	65
Competitor 2	0.70	55
Industry Average (a)	0.65	60
ESF factor for Target Company (b)	0.75	70
Premium/(Discount) for ESG factor in comparision to Industry(c)	(15%)	(17%)
Weights (d)	50%	50%
Industry Average EV/Revenue Multiple (e)*		2.0
Calibrated EV/ Revenue multiple for the Target Company *Considering the ESG Factor (ed(1+c))*		1.7

A significant limitation of this method is that ESG data, disclosures, and rating systems are currently in their early stages of development, particularly for entities that are often private companies. Consequently, the scoring process is subjective, as different practitioners may assign varying weightings or scores to distinct ESG factors and practices implemented by companies.

The Income Approach:

To account for ESG considerations, valuation under the income approach should consider its impact on the discount rate or cash flows itself.

While discount rate adjustments can be used to incorporate ESG into the Discounted Cashflow approach (DCF), adjusting the discount rate may lead to double counting if beta values have reflected the market’s perspectives on ESG risks. A better way of integrating ESG factors in the DCF can be to adjust future cash flows. This helps the investor to integrate the company’s ESG factors into future cash flows and thus to focus on the relevant material issues. Depending on different industries and company performances, the translation of ESG factors to cash flow adjustments varies. Hence industry to industry lens is very critical since there is no standardized benchmark in ESG integration and adopting industry and company-specific value drivers could help avoid the ambiguity of the cash flow adjustments. Some of the adjustments to be considered include:

– The “E” factor can be incorporated by adjusting the cash flows with additional costs and Capex investments in carbon reduction initiatives and cost savings from the adoption of energy/water saving technology.

– The “S” factor can be incorporated through adjusting costs related to employee training programs, hiring contractual employees on a permanent basis, workplace safety measures and research and development investments to ensure quality and safe products among others.

– The “G” factor can be incorporated through adjusting for fines or penalties imposed by regulatory authorities due to weak governance policies of companies.

An example of adjusting the ESG factor under the income approach is as follows:

Cash Flow Items	Amount (INR Mn)	ESG Factor	Explination of Adjustment
Revenue	1,500
Revenue Adjustment	(300)	Social	Reduced sales due to consumer boycott pf its products for unethical labour practises such as child labour, poor working conditions or low wages
Adjusted Revenue	1200
Operating costs and expenses	(250)
Tax Expense	(100)
Tax Adjustment	(40)	Governance	Additional tax payments due to fines imposed by regulatory authorities
Adjusted Net Profits	810
Depreciation and Amortization	80
Changes in Net Working Capital	50
Necessary Capex	(200)
Capex Adjustment	(80)	Environmental	Purchase of machineries necessary to reduce water resource waste
Free cash flow considering ESG Factors	660

ISSUES IN INTEGRATING ESG FACTORS IN VALUATION

While the integration of ESG factors into business valuation is gaining momentum, it is not without its challenges. One key issue is the lack of standardized metrics and reporting frameworks, making it difficult for investors to compare ESG performance across companies. Additionally, there are concerns about “greenwashing,” where companies may overstate their ESG credentials to appear more attractive to investors. Striking a balance between qualitative and quantitative assessment poses another challenge, as some ESG factors are inherently subjective and context-dependent. Overcoming these challenges requires the development of standardized reporting practices, increased transparency, and ongoing dialogue between investors and companies.

BRSR CORE FRAMEWORK

Recent developments in the ESG landscape include the introduction of the BRSR Core Framework by SEBI, an extension of the existing BRSR framework that delves deeper into ESG integration by providing specific requirements for reporting and assurance. This framework aims to enhance transparency and accountability for companies and further elevate the role of ESG in business valuation.

Key Features of BRSR Core:

– Specificity: The framework defines a specific set of ESG indicators that companies must report on, — covering environmental, social, and governance aspects. This specificity ensures consistency and comparability across companies, facilitating easier analysis and assessment for investors.

– Assurance: BRSR Core introduces mandatory assurance requirements for a subset of reported ESG information. This independent verification enhances the credibility and reliability of ESG data, reducing the risk of greenwashing and building investor confidence.

– Value Chain Focus: The framework extends beyond a company’s own operations to include its value chain, requiring reporting on the sustainability practices of its suppliers and partners. This broader scope provides a more comprehensive picture of a company’s overall impact and promotes responsible sourcing practices.

– Phased Implementation: BRSR Core’s implementation is phased, starting with the top 1000 listed entities by market capitalization. This gradual approach allows companies to adapt and implement the framework while minimizing disruption.

Impact on Business Valuation:

– Enhanced Data for Valuation Models: The BRSR Core’s specific and assured ESG data provides valuable input for valuation models, enabling a more comprehensive assessment of a company’s long-term value and risk profile.

– Better Risk Assessment: Deeper insights into a company’s ESG performance through the value chain help identify potential environmental, social, and governance risks that could impact financial performance.

– Improved Comparability: The standardized reporting and assurance requirements facilitate easier comparison of ESG performance across companies, enabling investors to make more informed investment decisions based on ESG considerations.

BRSR Core represents a significant step towards a more integrated and transparent ESG landscape. The BRSR Core framework is still evolving, and its impact on business valuation is likely to grow as companies adapt and investors refine their assessment methods. Ongoing collaboration between regulators, investors, companies, and valuation professionals is crucial to ensure the effectiveness and continued improvement of the framework. Addressing data availability and accessibility, particularly for smaller companies, remains a challenge that needs to be tackled to ensure fair and equitable application of the framework.

CONCLUSION

The integration of ESG factors into business valuation is a transformative trend that reflects the evolving priorities of investors and the broader business ecosystem. ESG considerations are no longer peripheral but integral to evaluating a company’s overall performance and potential for sustained success. While challenges persist, the ongoing evolution of reporting frameworks like BRSR signals a commitment to addressing these issues and advancing the integration of ESG into mainstream financial practices. As businesses navigate this new landscape, embracing ESG not only contributes to a more sustainable future but also positions companies as leaders in an era where responsible practices are synonymous with long-term value creation.

BCAJ Admin

“Wait… What?” Is Singapore Taxing Capital Gains?

A. INTRODUCTION

A.1. To align the tax treatment of gains from the sale of foreign assets to the EU Code of Conduct Group guidance, which aims to address international tax avoidance risks, Singapore has enacted the new Section 10L of the Singapore Income Tax Act (“SITA”), in which gains from the sale of foreign assets that are received in Singapore by businesses without economic substance may be taxable in Singapore.

A.2. The change is in line with the global focus of anchoring substantive economic activities in the relevant jurisdiction.

B. SECTION 10L LAW — GENERAL RULE

B.1. From 1st January, 2024, based on the new Section 10L of the SITA, gains from the sale or disposal by an entity of a relevant group (“Relevant Entity”) of any movable or immovable property situated outside Singapore at the time of such sale or disposal or any rights or interest thereof (“Foreign Assets”) that are received in Singapore from outside Singapore are treated as income chargeable to tax under Section 10(1)(g) if:

a) the gains are not chargeable to tax under Section 10(1)1; or

b) the gains are exempt from tax.

Such gains are referred to in this article as “foreign-sourced disposal gains”.

C. WHAT DOES THIS MEAN?

C.1. Foreign-sourced disposal gains are taxable if all of the following conditions apply:

a) Condition 1: The taxpayer is a “Relevant Entity”;

b) Condition 2: The Relevant Entity is not under a Specified Circumstance; and

c) Condition 3: The disposal gains are “Received in Singapore”.

C.2. To summarise, for the disposal gains to be taxable under Section 10L, the answer to all of the following questions must be “Yes”:

Conditions	Yes
Is the taxpayer an Entity?	?
Is the taxpayer a Relevant Entity?	?
Is the Relevant Entity not an Excluded Entity or a Specified Entity?	?
Have the disposal gains been “received” in Singapore?	?

D. WHAT IS A FOREIGN-SOURCED DISPOSAL GAIN?

D.1. Foreign-sourced disposal gains are gains from the sale or disposal of any movable or immovable property situated outside Singapore.

D.2. Common examples where assets are determined to be situated outside Singapore are as follows:

a) immovable property, or any right or interest in immovable property, is physically located outside Singapore;

b) equity securities and debt securities are registered in a foreign exchange;

c) unlisted shares are issued by a company incorporated outside Singapore;

d) loans where the creditor is a resident in a jurisdiction outside Singapore;

e) any shares, equity interests or securities issued by any municipal or governmental authority, or by anybody created by such authority, or any right or interest in such shares, equity interests or securities, are situated outside Singapore if the authority is established outside Singapore;

f) subject to paragraph (e), any shares in or securities issued by a company, or any right or interest in such shares or securities, are situated outside Singapore if the company is incorporated outside Singapore;

g) subject to paragraph (e), any equity interests in any entity which is not a company, or any right or interest in such equity interests, are situated outside Singapore if the operations of the entity are principally carried on outside Singapore;

h) subject to paragraph (e) (and despite paragraphs (f) and (g)), any registered shares, equity interests or securities, and any right or interest in any registered shares, equity interests or securities, are situated outside Singapore if they are registered outside Singapore or, if registered in more than one register, if the principal register is situated outside Singapore.

E. WHAT IS AN ENTITY?

E.1. An entity is defined under Section 10L(16) as:

a) any legal person (including a limited liability partnership) but not an individual;

b) a general partnership or limited partnership; or

c) a trust.

CONDITION 1: IS THE TAXPAYER A RELEVANT ENTITY?

F.1. A Relevant Entity is defined under Section 10L(5) as an entity that is a member of a group of entities if its assets, liabilities, income, expenses and cash flows are:

a) included in the consolidated financial statements of the parent entity of the group; or

b) excluded from the consolidated financial statements of the parent entity of the group solely on size or materiality grounds or on the grounds that the entity is held for sale; and

F.2. A group is a relevant group if:

a) the entities of the group are not all incorporated, registered or established in a single jurisdiction; or

b) any entity of the group has a place of business in more than one jurisdiction.

G. CONDITION 2: IS THE RELEVANT ENTITY UNDER A SPECIFIC CIRCUMSTANCE?

G.1. Foreign-sourced disposal gains are not chargeable to tax in Singapore under either of the specific circumstances mentioned in Points H and I below.

H. CONDITION 2A: THE RELEVANT ENTITY IS AN EXCLUDED ENTITY

H.1. An Excluded Entity is defined under Section 10L(16) of the SITA as either a:

pure equity-holding entity (“PEHE”); or

non-pure equity-holding entity (“non-PEHE”); and

such an entity has adequate Economic Substance in Singapore.

H.2. A PEHE’s function is to hold shares or equity interests in any other entity and has no income other than dividends, disposal gains and incidental income, i.e., bank interest income, foreign exchange gains arising from dividends or similar payments, sale or disposal of shares and bank interest income.

H.3. For a PEHE to meet the economic substance requirement, the following conditions are to be satisfied in the basis period in which the sale or disposal occurs:

a) the entity submits to a public authority any return, statement or account required under the written law under which it is incorporated or registered, being a return, statement or account which it is required by that law to submit to that authority on a regular basis;

b) the operations of the entity are managed and performed in Singapore (whether by its employees or outsourced to third parties or group entities); and

c) the entity has adequate human resources and premises in Singapore to carry out the operations of the entity.

H.4. A non-PEHE is defined as an entity that does not meet the definition of a PEHE.

H.5. For a non-PEHE to meet the economic substance requirement, the following conditions are to be satisfied
in the basis period in which the sale or disposal occurs:

a) the operations of the entity are managed and performed in Singapore (whether by its employees or outsourced to third parties or group entities); and

b) the entity has adequate economic substance in Singapore, taking into account the following considerations:

i. the number of full-time employees of the entity (or other persons managing or performing the entity’s operations) in Singapore;

ii. the qualifications and experience of such employees or other persons;

iii. the amount of business expenditure incurred by the entity in respect of its operations in Singapore; and

iv. whether the key business decisions of the entity are made by persons in Singapore.

I. CONDITION 2B: THE RELEVANT ENTITY IS A SPECIFIED ENTITY

I.1. Such gain that is carried out as part of, or incidental to, the business activities of:

a) a prescribed financial institution; or

b) specified entities taxed at a concessionary rate of tax / exempt from tax due to an incentive during the basis period in which the sale or disposal occurred.

Note: This currently excludes Section 13O and 13U of the SITA (i.e. the fund / family office exemptions).

J. CONDITION 3: HAVE THE DISPOSAL GAINS BEEN RECEIVED IN SINGAPORE?

J.1. Based on Section 10L(9), foreign-sourced disposal gains are regarded as received in Singapore and chargeable to tax if they are:

a) remitted to, or transmitted or brought into, Singapore;

b) applied in or towards satisfaction of any debt incurred in respect of a trade or business carried on in Singapore; or

c) applied to the purchase of any movable property which is brought into Singapore.

J.2. The foreign-sourced disposal gains are deemed to be received in Singapore only if such gains belong to an entity located in Singapore. Therefore, foreign entities, i.e., not incorporated, registered or established in Singapore, that are not operating in or from Singapore will not be within the scope of Section 10L of the SITA.

J.3. An example of the above would be a foreign entity that only makes use of banking facilities in Singapore and has no operations in Singapore.

K. SECTION 10L LAW — GAINS FROM THE DISPOSAL OF IPRs

K.1 Please note that gains from the disposal of foreign Intellectual Property Rights (“IPRs”) follow different rules than the ones specified above. This will be covered in a separate article in the future.

L. CONCLUSION

L.1 As mentioned above, Singapore has introduced capital gains tax in certain situations where the gains would not have already been taxable under the normal rules of Section 10(1) or where the gains would have been exempt under a specific section of Section 13.

BCAJ Admin

Overview of NFRA Inspection Reports of 2023 on Audit Firms – I

(Editorial Note: Given the increasingly important role played by NFRA in the context of auditing, BCA Journal will be commencing reporting on NFRA developments. This reporting will cover orders, reports, circulars, notifications, rules, inspection reports, discussion papers, etc. BCAJ seeks to bring to light some of the important changes affecting the profession of audit via the NFRA with a view that members and readers can learn from some of these developments. The aim is to enable members to improve their audit processes and reduce their audit risk by improving quality and governance frameworks mandated by applicable standards and regulatory expectations. In this context, you will be pleased to read this article as a prelude to the NFRA Digest, a new feature to cover NFRA updates.)

BACKGROUND

Section 132 (2) of the Companies Act, 2013 (the Act) empowers the National Financial Reporting Authority (NFRA) to oversee the quality of service of the professions associated with ensuring compliance with such standards (previously stated in sub-clause (b)) and suggest measures required for improvement in quality of service and such other related matters as may be prescribed.

The NFRA issued a press release on 11th November, 2022, giving about three pages of Audit Quality Inspection Guidelines (AQIG). The said guidelines (about 2.5 pages of content) state “audit quality inspections are a key tool with the Regulator to fulfil its statutory obligations.” The AQIG also laid out the criteria for such inspections to cover:

Provisions in the Act, Rules and amendments thereof
SQC1 including the Code of Ethics
Standards of Auditing
Policies, guidelines, manuals, etc., of the firm
Ind-AS as may be applicable to selected individual audit engagements
Relevant circulars / directions of other regulators, as applicable
Directions issued by internal quality boards / committees and QRB, ICAI, as may be applicable

The AQIG also specified the inspection process:

a. Inspections will be carried out on site;

b. Questionnaires may be issued to ensure readiness;

c. Entry meeting with senior management and heads of different verticals;

d. Enquiry meeting with audit engagement team of selected audits;

e. Execution cycle will comprise site visits, interviews, review of controls, substantive testing, issue of queries and observations and follow-up of previously issued observations (to be relevant in case of recurring inspections);

f. Inspected Audit Firm / Auditor will be required to provide written responses / confirmations to queries and observations raised by NFRA;

g. Inspection will close with a meeting with the senior management of the firm or auditor;

h. NFRA will then issue a draft report to obtain responses;

i. Responses to be given within 30 days from the draft report;

j. Issuance of final report.

These NFRA guidelines are somewhat akin to the lines of PCAOB Inspection Procedures¹. The Public Company Accounting Oversight Board (PCAOB), USA, has been issuing inspection reports of firms worldwide since the year 2004. It may be noted that in year 1, it issued four reports, but in the year 2005, it issued 172 reports. PCAOB also has cycles and an interesting “deficiency rate”. “This data point indicates, as a percentage of the number of audits reviewed in a particular inspection, the number of audits with respect to which the inspection identified audit deficiencies of such significance that it appeared that the firm, at the time it issued its audit report, had not obtained sufficient appropriate audit evidence to support its opinion on the issuer’s financial statements and/or internal control over financial reporting.”

1. https://pcaobus.org/oversight/inspections/inspection-procedures

Coming back to the NFRA mandate, the Audit Quality Inspections objective² was to evaluate the compliance of the Firm / Auditor with Auditing Standards and Other Regulatory and Professional requirements, and the sufficiency and effectiveness of Quality control systems of the Audit Firm / Auditor, including:

(a) adequacy of the governance framework and its functioning;

(b) effectiveness of the firm’s internal control over audit quality; and

2 AQIG, Dated 11th November, 2022, Para No 2

2023 INSPECTION REPORTS

Here are the common salient features of these first set of inspection reports³:

a. These are the first set of NFRA Inspection Reports.

b. The choices of the firms are based on the extent of public interest involved as evidenced by the size, composition, and nature of the audit firm, the number of audit engagements carried out during the year, the complexity and diversity of preparer companies and other risk indicators.

c. Inspection Reports

d. Engagements covered were statutory audits for FY ended 31st March, 2021.

e. Audit areas selected for each engagement were Revenue, Trade Receivables and Investments due to their “inherent higher risk of material misstatement”.

f. Other details of this round of inspections are as follows:

Report Number	Name of the Firm	# of Pages	Engagements Selected
132.2-2022-01	SRBC & Co LLP (SRBC)	19	Five
132.2-2022-02	Deloitte Haskins and Sells LLP (DHS)	17	Five
132.2-2022-03	BSR & Co LLP (BSR)	15	Five
132.2-2022-04	Price Waterhouse Chartered Accountants LLP (PWC)	22	Four
132.2-2022-05	Walker Chandiok & Co. LLP (WCCL)	20	Five

Note: In the overview presented further down, the last two digits are referred to identify the report.

3. https://nfra.gov.in/document-category/inspection-reports/

TIMELINES (PART D)

a. The NFRA initiated inspections in November / December 2022;

b. The entry meetings were held with each of the firms between 23rd November, 2022 and 7th December, 2022;

c. Inspection time taken was about 30 to 43 days based on start and end dates given;

d. All on-site inspections were completed in January 2023;

e. Final inspection reports were issued between 22nd December, 2023, to 29th December, 2023.

It is worth noting that the time between the initiation of inspection and the issuance of the final report has taken more than one year. A detailed chronology of events / correspondence forms part of the report in Part D.

STRUCTURE OF INSPECTION REPORTS

Each report is made of Parts A, B, C and D. Part A carries an executive summary, overview, inspection approach, methodology, firm profile and acknowledgement. Part B is on Firm-wide Audit Quality Control System. Part C is on Individual Audit Engagement Files with a focus on selected areas. Part D is on the Chronology of Inspection. Reports end with an Annexure that carries the Firm’s response to the final Inspection Report.

The inspection covered a review of firm-wide quality controls, adherence to Standard on Quality Control (SQC)-1, Code of Ethics, applicable laws and rules and a review of individual Audit Engagement Files for the annual statutory audit of financial statements 31st March, 2021. The 2022 inspection emphasised crucial aspects of the Firms’ quality control systems, including leadership responsibilities, auditor independence, the acceptance and continuation of audit clients, engagement quality control and the internal quality inspection program of the Audit Firms.

CAVEAT AND GUIDANCE

NFRA has given an important statement: “Inspections are, however, not designed to review all aspects and identify all weaknesses in the governance framework or system of internal control or audit risk assessment framework; nor are they designed to provide absolute assurance about the Audit Firm’s quality of audit work. In respect of selected audit assignments, inspections are not designed to identify all the weaknesses in the audit work performed by the auditors in the audit of the financial statements of the selected companies.” Further, the NFRA has clarified that these reports are neither marketing tools nor are they a rating of any sort. The report also states that “selected sample of five individual audit engagements is not representative of the Firm’s total population of the audit engagements completed by the Firm for the year under review.”

It emphatically states that reports are “intended to identify areas and opportunities for improvement in the Audit Firm’s system of quality control.”

FIRM PROFILE, STRUCTURE, NETWORK AND INDEPENDENCE (PART B, C)

1) Each Audit Firm was a member of a domestic network bearing the same / similar name.

2) The flagship firm selected for NFRA review carried the identical / similar / abridged name of the network.

3) Many members of the domestic network were firms bearing similar names and in some cases different names.

4) Each Audit Firm was a member of an international network.

5) Non-provision of domestic network details / agreement to NFRA (para 11, Report No. 01), (para 11, Report No. 03).

6) Provision of domestic network agreement registered with ICAI to NFRA (para 10, Report No. 04), (para 23 and 24, Report No. 02).

7) Denial of part of a network as envisaged by SQC 1 clause 6(k) although registered with ICAI as a domestic network (para 15 (viii), Report No. 05).

8) Provision of international network agreements — whether asked or given is not clear from the NFRA Report.

9) Leadership / Governance Structure of Domestic Network:

a) Through the LLP Format (para 12, Report No. 03), however, NFRA observed that “Firm could not provide sufficient evidence about Leadership, Governance and Management structure to demonstrate compliance to element 1 of SQC 1 regarding Leadership Responsibilities for Quality within the Firm”.

b) Common Leadership Team / Assurance Leadership Team, consisting of partners of domestic network firms; however, no documentation was there between individual firms or network agreement that delineated the leader’s duty, responsibility and accountability (para 19 and 20, Report No. 01). The charter of the leadership team seemed to be a recently drawn-up document without authenticity. NFRA pointed out that “there was no clarity on the assignment of responsibilities, authority with individuals claimed to be part of the leadership structure, reporting hierarchy, and accountability of the leaders and their respective legal entities.”

c) The Audit Firm did not have a Board to oversee the Network as stated in the Networking Agreement signed by the Audit Firm (para 23, Report No. 02).

d) Partner Oversight Committee had oversight over the domestic network firms and for coordination / alignment with global network standards and policies. However, it did not have management control (para 18, Report No. 04). The domestic network had an advisory committee with each member having different roles, with a minimum of two registered Chartered Accountants. The advisory committee provided assistance, etc., to the non-executive chair on various matters (Para 16, Report No 04).

10) Information provided about Indian entities of Global Network (para 12, Report No. 04). Other reports do not carry such information.

11) Partners in Audit Firms were also partners in other network firms (para 11, Report No. 04).

12) One Audit Firm displayed inconsistency in reporting to PCAOB about its two network firms. The audit firm said that it had no audit-related affiliation, membership, or similar arrangement with any other entity; it was part of the Indian network of two firms bearing same / similar names. At the same time, another Indian firm (having connected names) told PCAOB that it was affiliated with the Audit Firm (para 15, Report No. 5).

13) There were references to a common brand traced from quality control policies and e-audit software, although the audit firm denied network arrangement as per SQC 1 (para 16 (i), Report No. 5).

14) The Audit firm’s relationship with the global network was not recognised in the independence policies. NFRA observed that such relationships are included in the definition of Network (Para 25, Report No. 1).

15) The Audit firm’s Indian clients were provided with non-audit services by global network firms in India to the auditee group in violation of Sections 144 and 141 of the Companies Act, 2013 (Para 25, Report No. 1).

16) A possible disqualification of the audit firm as auditor was observed in two samples under Section 141(3)(e) of the Companies Act, 2013, due to global network relationship (Para 26, Report No. 1).

17) The Audit Firm did not provide the details of non-audit services provided by its International network’s India entities to the Audit Firm’s audit clients during the course of the on-site inspection (Para 15, Report No 03).

18) The Audit Firm had made its association with the International network’s India entities clear to PCAOB; it did not fully disclose global network entities to the NFRA (Para 16, Report No 03) .

19) The international network’s India entity partners were designated as the Audit Firm’s partners in the audit firm’s audit files (Para 17, Report No 03).

20) International Network’s India entity’s audit work is performed by the Audit Firm’s personnel as per the PCAOB website (Para 18, Report No 03).

21) An audit firm which maintained that it was independent of a global network, and disclosed one entity of the global network in India subsequently, had several indicators to demonstrate the audit firm’s dependence on the global network such as inter-relationship of leadership, common control and governance structure, global network’s India entity accepting audit on behalf of the audit firm, use of global network’s domain name by audit executive team and sharing core functions (Para 17, Report No 03).

22) Inspection noted that the Audit Firm was not independent of International network’s India entities, who are member entities of the international network (Para 19, Report No 03).

23) As per reporting to PCAOB, the audit firm and global network’s India entities carried out audits where part of the audit was carried out by the global network’s India entity and ICAI registered domestic network (Para 18, Report No 03).

24) During the inspection, the Audit Firm did not provide details of International network entities and non-audit services provided by those entities to audit clients. Therefore, the NFRA team was unable to determine whether there was compliance with the fundamental requirements of the Code of Ethics (Para 20, Report No 03). However, the Audit Firm responded that it had decided that all India entities of the International network will not provide non-audit services to the firm’s NFRA-regulated clients from 1st January, 2024 (Para 21, Report No 03).

25) The Audit Firm disclosed that each network firm was distinct, not an agent of the other firms or the international network. The Indian network had signed an admission and license agreement. The global membership provided various resources, methodologies, etc. (Para 13, Report No 04).

26) NFRA appreciated the steps taken by the Audit Firm and advised to take further steps to avoid the provision of non-audit services to holding companies by network entities, whose subsidiary is under purview of NFRA in India (Para 34, Report No 04).

This is the first in the line of articles that cover an overview of the first five NFRA inspection reports. The inspection process, timelines and structure of inspection reports have been covered. This article also covers important NFRA observations on audit firms relating to governance and leadership structures or lack / non-disclosure thereof, international and domestic networks / affiliations. It also covers some issues in that context by NFRA such as non-audit services provided to audit clients and issues related to SQC 1.

This compilation is done with a view to enable auditors and audit firms to understand the focal points and key issues in these NFRA inspections. These key features will help firms take necessary steps to be compliant with applicable regulations.

The next article will cover NFRA observations on audit quality control systems, independence, engagement quality control and points arising from the review of engagement files based on selected areas. From that subsequent article, one will be able to draw practical nuances relating to Standards on Auditing and other applicable laws and regulations.

BCAJ Admin

R७IMA५INE – 75TH YEAR CELEBRATION

A tribute to the past and a precursor of the future

The Bombay Chartered Accountants’ Society (BCAS), established in 1949, serves as a dynamic hub where the brightest minds meet, fostering a culture of continuous learning and innovation. Through seminars, workshops, conferences, publications and other knowledge dissemination mechanisms, BCAS provides its members with a rich reservoir of insights into the ever-evolving realms of accounting, taxation, finance and much more.

At its core, BCAS is more than a professional association, it is a fraternity that nurtures synergy among its members. Over the years, BCAS has adapted to the changing dynamics of the financial, economic and legal landscape, ensuring that its members are well-equipped to navigate new challenges. This year, BCAS celebrates its 75th year of success and to herald the celebration, we began with a beautiful concept of “Reimagine.”

The idea to Reimagine triggers innovation, creativity and the charm of peeking into the future! Reimagine was a three-day celebration hosting more than a thousand professionals and having experts and visionaries sharing their experiences and perspectives.

Reimagine was not just a commemoration of time; it was a jubilant recognition of resilience, growth and the indomitable spirit of the accounting community. Reimagine was the biggest, most spectacular and ambitious event in the history of BCAS.

The organisation of the event was entrusted to a committee that consisted of two parts – the Celebration Committee and the Technical Committee. Both committees comprised a good mix of youth and experience, past presidents, managing committee and, of course, the office bearers. The youth brigade played a prominent part and shouldered responsibility in making this a memorable event. The event was held at the Jio World Convention Centre, at Bandra Kurla Complex. This is probably the best in the country, newly made and studded with the latest facilities and amenities. The participants came from 75 locations, including Dubai. About 34 per cent of the participants were in the up to 40 years age group and about 50 participants were from corporations.

Opening Day, 4th January, 2024

The event started with diverse Indian folk dances from the east, west, north and south, including a beautiful dance in honour of Shri Ganesh. The society’s president, Chirag Doshi, gave an opening speech highlighting the rich legacy and vision of BCAS. After the speeches by organising committee chairpersons, the event was formally inaugurated with the lighting of the lamp. The youngest and the oldest (93 years old) members of BCAS out of the delegates were joined by the chief guest, Padma Bhushan Mr Kumar Mangalam Birla, together with the President and Vice President, chairpersons of the organising committees, to inaugurate the event formally.

KEYNOTE ADDRESS

Shri Kumar Mangalam Birla, also a Chartered Accountant, set the tone of R७ima५ine by delivering his Keynote on Reimagining India. He said: “I believe that we can use 6 levers to reimagine India’s role in the world as a force for global good.” Today, I am going to talk about reimagining India through the lens of SWADES.

S – Sustainability

W – Women Power

A – Artificial Intelligence

D – Digitisation

E – Entrepreneurial Energy

S – Synergies

The Birla scion emphasised the pivotal role of artificial intelligence (AI) and digitisation in India’s future transformation. He identified AI as the “next frontier” crucial for both corporate entities and nations. Highlighting that early AI experiments primarily focused on liberating creative expression, Mr Birla expressed the belief that there is still much-untapped potential for AI’s impact on businesses and nations. He discussed the prospective applications of AI in sectors such as healthcare and agriculture. Mr Birla also spoke about sustainability, women’s empowerment, entrepreneurial energy and the strategic leveraging of synergies as key components for India’s progress. Acknowledging that India’s infrastructure is still in the development phase, he highlighted the unique opportunity to integrate sustainability into the nation’s growth narrative. Mr Birla stressed the critical role of the private sector in realising India’s ambitious goal of achieving net-zero emissions by 2070. This commitment aligns with the broader vision of incorporating sustainable practices and fostering growth in a nation where much of the infrastructure is yet to be established. Seeing the hall full of Chartered Accountants, Mr Birla narrated an important turning point in his life: “…I am reminded of my own CA journey. When I was in high school, I was pretty convinced that I didn’t want to do my CA. The work pressure would be enormous, and I wanted to enjoy college life. But I didn’t have the courage to tell my father that. After a short discussion he said, ‘If you are not a CA, you can’t join me at our work.’ With that the coin dropped. Within a minute, I could see all my aspirations and ambitions fly out of the window. Few days on, and I had a big pile of thick books on my desk. This was two weeks into my holidays after class X exams.”

Day 1, Thursday, 4th January, 2024 – Sessions:

Digital Infrastructure: A Game Changer: Digital Infrastructure has emerged as a transformative force, revolutionising the way India functions and economies thrive. It serves as a game changer, encompassing the interconnected web of digital networks, data centers and communication technologies that power the modern world. From enhancing communication to fostering e-commerce, healthcare, and education, digital infrastructure has become the backbone of progress. As nations invest in their development, the potential for economic growth, efficiency, and inclusive development expands, marking the era of a digitally empowered future. This and much more were the points for discussion in the fireside chat moderated by CA Ninad Karpe founder and Partner of 100X VC with Mr Deepak Sharma, Chief Digital Officer of Kotak Mahindra Bank and Mr Dilip Asbe, MD and CEO of National Payments Corporation of India. The discussion gave the participants a taste of the enormous digital infrastructure that the nation has already built and its role in transforming the country’s destiny. Mr. Asbe mentioned that currently, the primary focus of the payments system is on providing a viable cash alternative and enhancing the acceptance of the Unified Payments Interface (UPI); but going forward, prominent merchants might be subject to charges for UPI-based payments within the next three years. Looking ahead, Mr Asbe emphasised the necessity for substantial investments in innovations, expanding the user base within the ecosystem, and offering incentives such as cashbacks. He highlighted the goal of bringing another 50 crore people into the system to further its growth. Additionally, Mr Asbe advocated for an increase in spending on cybersecurity and information security, suggesting that it should constitute up to 25 per cent of a bank’s IT budget compared to the current 10 per cent. He said that the threat was “very real”.

Perhaps in anticipation of this chat, the organisers had already distributed NFC cards to the participants. These were personalised digital cards that had names of the members and their other data. On tap, contact and other details could automatically be shared via phones. This initiative by the Society boosts the modern use of visiting cards for professionals while promoting paperless visiting cards.

The next session “Reimagine the new age professional firms” was by CA Jamil Khatri, CEO and Co-Founder, Uniqus Consultech. He said that a new-age professional firm is characterised by agility, technology integration and a client-centric approach. Small and nimble, these firms leverage advanced tools and digital platforms to streamline operations and enhance service delivery. With a focus on flexibility and innovation, they adapt swiftly to industry changes, embracing remote work and harnessing the power of data analytics. In this era, professional firms are not merely service providers but strategic partners, navigating the dynamic landscape with adaptability and forward-thinking strategies.

The last session on Day 1 was the CFO Round Table led by CA Sudhir Soni, Partner at BSR & Co. LLP. Discussions included questions on diverse topics like investments in R&D and their pay-back periods, sustainability, professional opportunities in outsourced finance functions, etc. The Round Table consisted of senior corporate leaders: Ms Ashween Anand, CFO, Starbucks; Ms Rajani Kesari, CFO, Nayara Energy Limited; Mr Ritesh Tiwari, ED and CFO, Hindustan Unilever Limited; Mr Deepesh Baxi, CFO, Castrol India Limited and Mr Nitin Parekh, CFO, Zydus Lifesciences Limited. In the ninety-minute session, the veterans shared their insights. The CFOs shared the transformative potential of cutting-edge technologies, exploring ways to enhance financial strategies through innovation. The discussion extended to eco-friendly practices and responsible business operations. The Round Table encapsulated the dual goals of harnessing technological advancements for financial and, therefore, operational efficiency, symbolising a forward-looking alliance between finance, technology and environment.

The first day ended with a lot of excitement amongst members and a networking dinner.

Day 2, Friday, 5th January, 2024:

The first session was moderated by CA Shariq Contractor, past president of BCAS on the Use of AI / Tech-Data As Evidence In Tax Cases. The panellists consisted of CA Pinakin Desai, past president of BCAS and Advocate Nishith Desai, founder of Nishith Desai Associates. Both the panellists shared insights regarding the anticipated challenges for Chartered Accountants (CAs) due to the increased use of AI and technology in tax administration and tax compliances as well as tax representation and litigation. The panellists also delved into the question of whether robots should be treated as separate entities. One of the key highlights of the session was the question surrounding the prospect of robots subjected to taxation. Mr Desai explored the concept of treating robots as separate entities, drawing attention to the global trend of some countries offering citizenship to robots. The use of AI-based evidence during tax litigations poses challenges for tax professionals. While Section 273B of the Income-tax Act, 1961, provides some relief by exempting penalties in cases of sufficient due diligence, the application of this provision in the context of AI remains uncertain. The intersection of AI, technology and taxation introduces challenges that demand careful consideration by tax professionals and auditors. The evolving landscape requires proactive measures to address uncertainties, ensuring a robust and legally compliant approach to the use of AI and tech data in tax cases. Staying abreast of legal developments and adopting best practices will be essential for navigating this dynamic environment.

The second session on Day 2, was titled Reimagining India’s Capital Market Landscape. Mr. Ashish Chauhan, MD and CEO of the National Stock Exchange (NSE) shared an ambitious forecast. Mr Chauhan predicted that India’s economy is set to reach an incredible $100 trillion in the next 50 years, contributing 30 per cent to global wealth. The transformative power of technology took centre stage, with Mr Chauhan emphasising its role in surpassing cumulative wealth created in the last 10,000 years. He cited several examples to highlight the massive increase in the value created by the capital markets of India and how more and more Indians are now being drawn to the stock market. The forecasts and statistics were mind-boggling as India stared at a sparkling future.

The third session on Day 2, titled Changing Corporate Landscape — Professional Opportunities, was moderated by CA Robin Banerjee, Chairman, Nucleon Research Pvt. Ltd. The panel had three senior executives CA Raj Mullick, Sr. Executive Vice President and Controller, Reliance Industries Ltd; Mr Rishi Gupta, MD & CEO, Fino Payment Bank and Mr Satyam Kumar, CEO & Founder, LoanTap Financial Technologies who spoke about the confluence of factors, including technological advancements and changing corporate values which are reshaping business operations. The panellists highlighted the shift towards purpose-driven businesses that integrate ethical practices and contribute positively to societal well-being.

Post lunch, in a captivating session, Padma Vibhushan Vishwanathan Anand, moderated by CA Nandita Parekh, where the chess grandmaster shared his life journey, from being a schoolboy with dreams of becoming a Chartered Accountant to achieving the title of Indian Grandmaster. He gave insights into success and failure and how much hard work and planning go into a single victory. The session was aptly titled “The Victorious — A Model for Leadership”. The grandmaster shared a few real-life examples of mind games playing an important role in his journey and how even a game like chess, which most people would consider as a solo journey, is also a team effort and how he, too, had relied heavily on his own set of team members.

The fifth session on Day 2 was on the intriguing topic of “New Age Wars — The Future of the World”. Advocate M. R. Venkatesh explored this unique idea. He shared the Indian outlook about this. He spoke about two heroes of Indian history where contemplation was a constant, not just “I came, I saw and I conquered”. He offered a glimpse into the challenges and opportunities in the evolving global landscape. He said that Krugman observed at LSE that most macroeconomics of the past 30 years was “spectacularly useless at best” and “harmful at worst”. The world economic crisis is a crisis of economics too. He cited that Dr Manmohan Singh in a previous report said that financial deregulation is bad for developing countries. With powerful examples of how new-age wars are so very different from traditional wars, Mr Venkatesh cautioned participants about the dangers that were lurking around in the modern-day world which could potentially disturb the world order.

Continuing the theme of “Vasudaivaha Kutumbakam,” the sixth and last session was “One World One Tax” moderated by Advocate Mukesh Butani and featured a compelling discussion on global taxation. CA Gautam Doshi was present personally at the venue while international speakers, Mr Pascal Saint-Amans of OECD Centre for Tax Policy and Mr Philip Baker Barrister at Field Court Chambers joined online. They discussed the future of streamlined tax filing processes, envisioning a world where tax authorities have comprehensive visibility into global income.

After two days of intense and insightful sessions, the atmosphere shifted gears as the audience was led to a specially curated “Fountain of Joy” at the Jio Centre. The “Fountain of Joy” is a curated display of lights, water, fire and music, and it lived up to its name, offering a spectacular experience to all present. As the sun set, the allure of the evening was raised to a new level. Participants used the world’s largest lift (elevator) while going down at the Jio Centre, which itself is an architectural marvel of Mumbai if not India.

The day didn’t end there. At 7.30 pm, participants with their families were set for a foot-tapping music extravaganza by popular singer Shaan and his troupe. The stereotype that accountants are good only with numbers was shattered during the cultural entertainment. Participants and their family members showcased their versatility as they sang, danced and tapped their feet on the dance floor. Shaan set the stage on fire, ensuring an exhilarating and enjoyable experience for all. Beyond the discussions and presentations, this show provided a moment of collective joy and celebration, reminding everyone that success and happiness are not only about professional achievements but also about sharing memorable moments with loved ones.

Day 3, Saturday, 6th January, 2024:

Saturday and the last day at BCAS Reimagine commenced with a powerful session “Ride the Capital Market” moderated by Mr Mangalam Maloo, Assistant Editor and Anchor, CNBC TV18. The Panel featured Mr Deven Choksey, Managing Director, DR Choksey Finserv Pvt Ltd; CA Nilesh Shah, Managing Director, Kotak AMC Ltd. and CA Raamdeo Agrawal, Chairman, Motilal Oswal Financial Services Ltd. who expressed confidence in the Indian economy’s potential to thrive in the coming decade. Predicting an extended bull run for the next several years, they highlighted that it was an opportune time for large unlisted companies to go public and exhorted the participants to advise their clients to tap the capital markets at this opportune time. Mr Agrawal termed the surge in demat accounts as a monumental economic event, urging companies to list for sustained growth. All the speakers agreed that in order to successfully ride the capital markets, it was prudent to take a long-term view and not count profits at short intervals. The session ended on a note of caution, urging promoters to uphold integrity and avoid questionable tax practices. They each shared amazing statistics. Nileshbhai shared people come back from Dubai like Bhappi Lahiri when talking about the desire to buy gold. India is a net exporter of capital although better opportunities are here. They each shared their realisations and what they had learned in the last three years. Devenbhai mentioned about Allocation of Capital by companies and how companies that have positive cash flows have compounded wealth for investors. Nileshbhai talked about two things with stories, experiences and humorous anecdotes, with the use of Hindi also. He talked about unlearning and downloading your baggage and appreciating the limitations of other people. Ramdeoji mentioned about his learning from the studies his company does about the use of capital for earning capital, in a capital charge and, therefore, economic profit should be observed for evaluating the value of companies. The concept of economic profit is important although the market is not practicing this.

It was then the turn of auditors to discuss the “Future of Audit Profession”. The panel was moderated by CA P. R. Ramesh, former chairman of Deloitte India. The panel consisting of Mr. Akhilesh Tuteja, Partner and Global Cybersecurity Leader of KPMG India; CA Girish Paranjape, former CEO of Wipro Ltd and independent director and Mr Girdharan Gopalarathnam, Reserve Bank of India had a thought-provoking discussion on the future of the various risks that the audit profession was facing and on the changing expectations from auditors by various stakeholders. The panellists shared their thoughts on whether the ongoing technological revolution poses an existential threat or a game-changing opportunity for the audit profession.

The third post-lunch session was one Giant Leap — Start Ups consisted of Mr Nipun Goel, President at IIFL, Mr Siddharth Shah, Co Founder at PharmEasy, Mr Nitish Mittersain, CEO Nazara Technologies Ltd. and Vamesh Chovatia, Tata Capital Healthcare Fund. The session was led by Ms Avanne Dubash of ET Now. India has attracted $70 B between 2019 and 2023 alone and is home to 950 plus startups started in 2023 alone. While Vamesh shared his take on how as a fund manager they evaluate startups and what he has learnt over the years. Siddharth shared some amazing stories of pledging his family home when he started off and his journey. Nitesh shared his take on all that his successful company has faced. Nipun gave his perspective from the investment banking side on the larger universe of startup challenges.

The final technical session of Day 3, Interchanging Roles delved into how CAs can and have moved from one role to another with ease and met with resounding success. Three speakers gave participants a glimpse into their professional journeys and shared how they had changed and adapted their roles and how they met various challenges in the process. The session shed light on the transitions from practice to CFO roles, CFOs returning to practice, and the broader contribution of CAs to nation-building. CA Charanjit Attra, Gr. COO, Jio Financial Services Ltd; CA Milind Sarwate, Founder & CEO, Increate and Padmashri CA T. N. Manoharan explored the theme of interchanging roles in the professional realm. All the speakers inspired the audience to think out of the box and to take up challenges with the right earnestness and proved that nothing is impossible if one sets out on a journey with determination and conviction.

“Reimagine” not only provided valuable insights into India’s economic future and the corporate landscape but also proved that accounting professionals know how to have a good time. The blend of informative cultural sessions made the event a resounding success, leaving participants enlightened and energised. As the curtains closed on this event, the memories of insightful discussions and lively entertainment lingered, setting the stage for future engagements and collaborations in the dynamic world of finance and business. These were captured in heartfelt articulation in the vote of thanks by Vice President Anand Bathiya, at the end. You had to be there to feel it as a perfectly high ending.

The 75th year celebration also saw BCAS scaling new heights in the use of technology for various matters. The social media presence of the Society was harnessed extremely effectively to market the event as well as to engage with the stakeholders in updating the progress of the events as they unfolded. The use of an online app for seeking live questions from the audience and making them available immediately to the panellists made the sessions engaging. The interesting feature of “upvoting” of questions by the participants on lines similar to the concept of “likes” on Facebook or “upvotes” on Quora ensured that participants thought through their questions and drafted them in an interesting manner so that others upvoted their questions to the top of the list for being answered by the panellists. The commemorative Souvenir (228 pages) was released on this occasion, which every participant carried as a prized possession. During the event, three publications were released. The first was titled “Tax Deduction & Collection at Source — Law & Procedure”, authored by 13 authors and edited by three reviewers (436 pages). The second publication was titled “75 Laws relevant to Direct Taxes”, authored by 16 authors and edited by 12 professionals (896 pages) deals with 75 acts and 924 case laws. A study on Ease of Doing KYC — A Study, authored by Raman Jokhakar, Past President as BCAS’s effort to make a difference to people at large and a study on “Disclosure Overload” issues in Financial Statements by CA (Dr) Anand Banka and CA (Dr) Sushma Vishnani to analyse and advocate rationalisation of disclosures. Two publications are available for sale and two studies are available for free download.

The event concluded with a high tea that matched the grandeur of the entire affair, leaving participants gratified.

“Reimagine” lived up to the expectations, blending profound discussions with moments of joy and appreciation. The diverse sessions touched upon the future of the economy, technological disruptions, professional roles and the essence of gratitude. As participants left with enriched minds and hearts, “Reimagine” marked itself as a truly remarkable and successful mega-event, promising a legacy of knowledge, collaboration and celebration in the years to come.

(The above report was prepared by Nikunj Shah and Eesha Sawla, with inputs from Ameet Patel, Zubin Billimoria and Raman Jokhakar.)

BCAJ Admin

BCAS President CA Chirag Doshi’s Message for the Month of February 2024

“Innovation distinguishes between a leader and a follower.” – Steve Jobs

I am pleased to share with you the outstanding success of our recent Conference ReImagine which took place from 4th to 6th January, 2024 at the Jio World Convention Centre, Mumbai. The event brought together professionals, thought leaders, and experts from Practice and various industries, creating an impactful platform for collaboration, learning, networking, and innovation.

The conference witnessed more than 1000 delegates from 75+ cities and towns. More than 35% were young professionals below the age of 40 years, with an equal number of senior professionals above the age of 60 years participating with full enthusiasm. The Energy, Expertise, and Enthusiasm over the 3 days were mesmerising. On the momentous occasion of the 75th year and the mega conference, our Society also received a commendation letter from the Hon’ble Prime Minister of Bharat, Shri Narendra Modi.

I would like to share key highlights of the ReImagine Conference for the benefit of those who could not be part of this landmark event:

Themes: The themes planned by the technical committee under the able Chairmanship of CA Shariq Contractor and Co chairmanship of CA Anil Sathe and CA Abhay Mehta were well applauded by all. They were very forward-looking and apt to the current scenario where India is marching towards becoming the third-largest economy in the world. Themes covered various areas of business and services where a finance professional plays a very critical role.

Exceptional Attendance: We witnessed an impressive turnout, with delegates from diverse backgrounds, industries, and geographies. The high attendance reflects the relevance and interest in the themes/topics discussed.

Quality Speakers and Presentations: Our line-up of speakers and pane lists delivered insightful and thought-provoking sessions. Their expertise contributed significantly to the overall success of the conference. We had three Padma Awardees, more than five CFOs of large corporations, CEOs, MDs, Founders, and senior professionals sharing their thoughts and experiences over the 3 days.

Innovative Content: The conference showcased cutting-edge trends, best practices, and innovative solutions. Delegates left with a deeper understanding of emerging opportunities and challenges in the profession and business.

Engagement and Networking Opportunities: Delegates actively engaged in networking sessions, fostering valuable connections and collaborations. The feedback on these interactions has been overwhelmingly positive. The use of technology throughout the 3 days kept the delegates engaged. The conference made use of digital apps to post specific questions to panelists and speakers which were posed before them based on upvoting by participants. There were polls that were conducted digitally.

Positive Feedback: Preliminary feedback from attendees has been exceptionally positive, praising the arrangement, content, and overall experience. The meticulous planning by the celebrations committee under the able chairmanship of CA PranayMarfatia and co-chairmanship of CA UdaySathaye and CA Narayan Pasari was par excellence. We have received numerous expressions of gratitude and satisfaction from all over the globe through various letters, emails, chats, and social media messages.

Media Coverage: The conference garnered significant attention from media houses/agencies, further establishing our Society as a thought leader. The conference was covered in 30+ leading media channels, print and digital. The major coverage was for the keynote session, the digital infrastructure as a game changer, the Use of AI in gathering tax evidence, the Impact of technology on the changing corporate landscape and Ride the Capital market sessions. This demonstrated that the conference met the requirements of current and future times.

Publications: The conference also witnessed the launch of the following books and research papersduring the three days:

Tax Deduction & Collection at Source – Law & Procedure
75 Laws relevant to Direct Taxes
Ease of Doing KYC – A Study
Disclosure Overload” issues in Financial Statements

75th-year Celebrations: I am thrilled to share an electrifying aspect of the conference that added a vibrant dimension to our celebration. The program also marked the 75th year of BCAS with an evening of the musical fountain show at Nita MukeshAmbani Cultural Center of Jio World, followed by live entertainment by leading Bollywood singer Shaan and his troop. During the evening festivities, the delegates immersed themselves in the joyous atmosphere, dancing exuberantly to the live music that echoed through the venue. The live music performance, carefully curated to cater to diverse tastes, created an energetic ambience that resonated with the spirit of camaraderie and celebration. Delegates and their family members from various backgrounds and professions came together on the dance floor, breaking down barriers and fostering a sense of unity. The lively dance floor was a symbolic representation of the success and dynamism of our organization. It showcased the collective spirit and shared accomplishments that make our community truly special.

Memorable Closing Ceremony: The evening concluded with a memorable closing remark by Vice President CA Anand Bathiya followed by a video displaying the glimpses of 3 days, symbolizing the end of an exceptional conference and the beginning of new opportunities. Delegates left with a sense of accomplishment and pride in being part of our Society.

I would like to express my gratitude to the entire team of BCAS and the volunteers involved in planning and executing this event. Their dedication and hard work were instrumental in achieving such a resounding success.

As we reflect on the outcomes of ReImagine, I am confident that the knowledge shared and connections made will have a lasting impact on our profession and our Society. I look forward to discussing further insights and potential follow-up actions with the Managing committee in the coming month.

Way forward – BCAS @ 75

This Quarter Theme: Future Ready Firms – Innovation, Growth & Succession.

We are living in times when our profession is constantly experiencing change. Change in many ways – change in technology, change in people’s perceptions, change in stakeholder expectations, change in regulations, and so on.

Under these circumstances, CA firms must embrace change positively. This can happen with being future-ready.

Future-ready firms will need to constantly think about innovation in their firms. Innovation in practice management, client services, people processes, and delivery of products. Overall, firms will need to ensure an elevated client experience.

Firms having senior partners need to have a robust succession plan in place to ensure continuity and stability.

Growth will come to firms who embrace these changes – in time and with efficiency.

Here are some themes that BCAS committees and groups shall be focusing on to give effect to some of the above thoughts by way of lecture meetings/seminars/workshops/articles in BCAJ/social media sharing:

– Creating an Innovation culture in the firm
– Practicing systematic innovation
– Succession plan in practice – the how of it?
– Passing on the baton – the do’s and don’ts
– Experience sharing by senior partner(s) of firms having created succession plans and retirement policies and having implemented them
– Merger of practices – consolidation for growth
– Creating a future-ready firm – case studies, successes, learnings
– The key tenets of ensuring sustainable growth for your CA firm
– Building a professional service firm for Growth

“The future belongs to those who prepare for it today.” – Malcolm X

BCAJ Admin

Occam’s Razor

Now that I am a ‘temping’ as a stopgap Editor for this month, I thought I could write something I have been following for months and enjoying listening to! Budgets are a passé this month as we already had a VOA. Books and Videos and Podcasts I am finding with each passing day have the best ROI over a long period of time as they compound so well. Some 25-odd years ago, you paid lacs of rupees to get information, or to learn live from the smartest / wisest people alive. You travelled far. Say what information a fancy international advisor had is today available freely (if not free) on the internet for a fraction of the cost. In other words, one can learn something that is priceless with about ₹1000 of data!

In November 2023, we lost Charlie Munger, one of the smartest men (super investor) alive, just weeks before he would have turned a hundred. For his age, he had the advantage of being through many more years than most people alive. He was also at a vantage point where most people aren’t – being a top investor in US markets. However, his greatest knack was: seeing what most people didn’t, in a way one needs to see at that point of time and capture and articulate it so brilliantly.

If you haven’t heard of him, read on. If you haven’t heard him, you must. If you have, you should hear him again and read up on him! Just as music is to aficionados of music, so is the light of wisdom to seekers of it. What a way he communicated — a combination of intellectual honesty (churn of learning from experience), with a flow of precise witty directness that penetrates a worthy listener.

In one video, Charlie speaks about ‘tricks’ he learned early in his life. When someone of that stature shares his ninety-plus years of being alive during the most amazing times in human history, one just listens without even blinking their eyes.

I like it when he talks of simple, basic things! In one video, he talks about ‘common sense’. And he calls it – “when a man can operate over a broad range of human territory without making many boners … and that is a very important thing to be good at and the question is how to get it”. We all see how uncommon (common) sense is. Charlie says how he saw someone who was really good at something and he thought he would never be as good as that person. And then he saw all these ‘follies’ out there everywhere. And he thought to himself: “… I suddenly realised (if) I just avoid all the follies, I can get the advantage without having to be really good at anything”. This is a classic Charlie Munger idea which he calls turning something around backwards to find something worthwhile. It is like saying can you stop being stupid, if you can’t be wise; can we stop doing something at least, if we cannot do what should be done?

At another point, he speaks about being a ‘collector of ideas’. “I loved big ideas that had a lot of instructive powers and I didn’t mind when they were in somebody else’s territory.. and I used them to solve problems and do self-education…”. At one point, he says he is a collector of inanities because there are so many of them all around. For all other collections, one needs to put in so much effort. Whereas, collection of inanities and cataloguing them in one’s head, he says has been a wonderful thing. He speaks about interplay of some of these ideas and how the process of synthesis worked in areas other than where the ideas came from.

In his own words, he talks about Occam’s Razor (read more online for this tool for understanding the world) and how things should be made as simple as possible, but not simpler (attributed to Einstein). This is evident from all that Charlie has talked about. How to reduce ideas to irreducible basic elements which are simple and few. Further, he explains how to look at a result that is a lollapalooza. He calls for looking at the ‘confluence of multiple causes’, multiple forces operating in the same direction. He says how with all this he could see more clearly than most experts in that field saw. This is perhaps a key knack to have when investing money apart from everything else in life.

About a specific social science problem, he asks whether we can fix this problem? And, he answers, “Yes.” Then asks whether it is likely to happen? He says, “No.” And this is so true — so many things have absolutely common sense answers that they can be fixed. But when you ask if they are likely to get fixed, the answer is a clear ‘NO’. From a study I did recently on the Ease of Doing KYC, bankers take self-attested PAN cards every two years for KYC, where PAN never changes, and for the existence of customers, they already take a signed form. Now, if you ask the same question – whether this can be fixed by stopping to take self-attested PAN from a biometrically covered nation – the answer is ‘YES’. But if you ask whether this will stop soon, the answer is ‘NO’.

His business partner Buffett says: “Charlie marches to the beat of his own music, and it is music like virtually no one else is listening to.” A good observable generalisation that Charlie points out: “the standard human condition is stupidity … it suffers from mis-cognition”. At another time, he said: “It’s remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” He stretched it further when he said “If people weren’t so often wrong, we wouldn’t be so rich.”

I leave you with my favourite ones:

For its potent obviousness: “The best way to get what you want in life is to deserve what you want”.

For its sarcasm coming from an investor: “The derivative accounting in America is a sewer, is an insult to sewage”.

For its self-deprecating humour: Buffet: Charlie is big on lowering expectations. Charlie: “That’s the way I got married, my wife lowered her expectations”.

About fraudulent accounting: “It’s like what they do in Italy when they have trouble sending mails and they pile up and irritate postal employees, they just throw away a few carloads”.

About Understanding (by Samuel Johnson): “I can give you an argument, but I cannot give you an understanding”.

About Investing in Gold: “I think civilized people don’t buy gold, they invest in productive businesses (unless you were a Jewish family in Vienna in 1939)”.

I won’t mention but I know that you know the type of people this quote is talking about: “When they are talking they are lying and when they are quiet they are stealing”.

BCAJ Admin

धर्मो रक्षति रक्षित:

The literal meaning of this proverbial line is ‘If you protect / preserve / guard / watch / tend / observe Dharma, then Dharma, in turn, protects you.’

In the Mahabharata, while the Pandavas were in exile, there was a well-known episode of a Yaksha (demi-god) asking Yudhishthira philosophical questions. Actually, all four brothers of Yudhishthira had disregarded the warning of the yaksha that if they did not answer his questions, they would be dead as soon as they drank the water of the pool he was protecting. Accordingly, all four brothers were dead. Yudhishthira answers all his questions satisfactorily. Pleased by his replies, Yaksha offers to revive any one of his brothers.

Readers may be aware that Yudhishithira, Bhima, and Arjuna were the sons of Kunti; whereas Nakula and Sahdeva were the sons of Madri (his stepmother, the second wife of Pandu). Yudhishthira requests Yaksha to revive Nakula, his stepbrother, so that at least one son of both mothers could survive. As the eldest brother, it was his duty (dharma). Yaksha was very pleased with this answer and revives all four brothers. Yudhishthira therefore performed his dharma diligently and this behaviour eventually protected him and he received a reward. Incidentally, Yudhishthira is popularly known as Dharmaraj (the one endowed with Dharma!)

The text of the two verses is as follows:

राजानं धर्मगोप्तारं धर्मो रक्षति रक्षित: |

इति मे श्रुतमार्यांणाम् त्वां तु मन्ये न रक्षति ||

And

धर्म एव हतो हन्ति धर्मो रक्षति रक्षित: |

तस्माद्धर्म न त्यजामि मा नो धर्मो हतोSवधीत् ||

The second shloka is the converse of the first one — meaning, if we kill dharma, (disregard dharma or perform actions contrary to righteous duty) it in turn, kills us.

Here, it is necessary to understand the correct meaning of the word dharma. Many wrongly attribute dharma to religion, customary limiting observances of a sect, etc. In law, it refers to usage, practice, custom, ordinance, and statute. The most appropriate and important meaning is duty, prescribed code of conduct, right, justice, equity, impartiality, piety, prosperity, decorum; righteous behaviour; peculiarly characteristic property or attribute e.g. it is the dharma of iron to sink in water while that of wood is to float!

The literal meaning of the first shloka —

We have heard from great people that the dharma which is observed (protected) by a King in turn protects the King (and kingdom). However, one often gets a feeling that dharma is not protecting us.

The literal meaning of the second shloka —

If we destroy dharma (breach it), dharma in turn destroys us. Hence, one should never breach the rules of dharma (the conduct).

I reiterate that dharma in our ancient literature never meant religions like Hindu, Muslim, Christian, etc. In fact, it is recognised in the Indian context to be a way of being and living.

There is a set of rules of conduct for every profession or vocation or every person for that matter. Like the dharma of a mother or father, son, daughter, dharma of a teacher, a neighbour, a Brahmin, Kshatriya, a monk or a householder, and so on. Even nature, fire, wind, sun, and moon have their respective dharmas.

Even in our CA Code of Ethics, it is written that COE is not a burden but a shield to protect us. This is very true. If one shows that one has observed all guidelines of the Institute, he will not be held guilty merely because the final professional judgment is proved to be incorrect. A doctor, for that matter, should diagnose a disease only after conducting proper tests. He should treat a patient without waiting for payment of fees. A teacher should impartially teach all students; so also, a judge should act judiciously and impartially, without fear or favour. Once upon a time, lawyers also had some ‘dharma’!

In Bhagwad Geeta, it is clearly said that one should always remain within one’s dharma (duty). Duty is above all! ‘Duty First’! If all keep on observing their respective duties, society automatically gets protected!

BCAJ Admin

RECENT DECISIONS PART B : VAT

Jyothy Laboratories Limited vs. State of Bihar
and Others, (2019) 60GSTR 71 (Patna High
Court) – Judgment dated 17th July, 2018
Correction in the C Form.

FACTS
The Department had issued incorrect Form C. the Petitioner
had written several letters to the authorities, however
no action was taken to issue correct C Form. Finally, the assesse approached the High Court under Article, 226 of the
Constitution of the India.

HELD
The Hon’ble High Court directed the Commissioner of
Commercial Taxes to either himself take up the issue and
decide the question of correction in the Form C as prayed for
or should assign the matter to any other Statutory Authority
constituted for that purpose. The action was directed to be
taken within Three Weeks from the date of appearance of the Petitioner. It was also directed that in case, the corrected
form C could not be issued to the Petitioner, it would be
incumbent upon the authority to hear the Petitioner, consider
the submissions and pass a speaking order indicating
reasons to the Petitioner as to why his grievance could not
be remedied.

V.V. Shameer vs. State of Kerala(2019) 60 GSTR
73 (Ker)– Judgment dated 3rd July, 2018
Whether a claim can be granted when the Credit
Notes were not issued in the prescribed form?

FACTS
The Petitioner had received incentives from the
manufacturer. Those incentives were received at a later
stage. The Petitioner had shown such incentives in the books
of accounts, however, had not shown them in the returns,
neither had filed revised returns. The Petitioner had claimed
Input Tax Credit without considering the incentives received
by him. During assessment the Petitioner contended that
the manufacturer had paid full tax and had not considered
the incentives given by him to the buyers. Further, Petitioner
had also issued Credit Notes to the manufacturer. However,
the assessing authority disallowed the Input Tax Credit.

HELD
It was held that the Credit Notes as relied on by the Petitioner
were not in the prescribed form. Those did not contain the
details that would be necessary for allowing the claim of
credit to the dealer by the manufacturer. Though the amounts
were disclosed in the book of account and discrepancy was
noticed in the Audit Statement the Petitioner did not attempt to file revised return. Thus, the Credit Notes having not been
issued in the prescribed form the disallowance of Input Tax
Credit having been granted with respect to the incentives
was confirmed by the Court.
Commissioner, Commercial Tax, Uttarakhand
vs. Jai Durge (2019) 60 GSTR 82(Uttarakhand)–
Judgment dated 10th April, 2018
Whether the filing of prescribed form in the case
under consideration was mandatory?

FACTS
The assessee was the Job Worker. He had manufactured
tiles for the Government Department and supplied the
same to them. The Tribunal had given the findings that all
materials were supplied by the Government Department to
the assessee and that what was supplied by the assessee
was actually the labour component. The materials were
made use of by the assessee, who had supplied the labour
to make the tiles to be supplied. The Revenue contended
before the High Court that the assessee had not filed Form
No. IIID which was prescribed for that purpose.

HELD
The Court Noticed that the findings of the Tribunal were not
challenged by the Revenue. The Court also noticed that for
the earlier year the Tribunal as well as the High Court had
decided the same issue in favour of the appellant and had
held that the appellant was doing only a job work. The Court
therefore, held that the submission of Form IIID was not fatal
to the case of the assessee and confirmed the order of the
Tribunal.

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Society News

Dt.23/12/2010 2nd Residential Study Course on IFRS

Accounting & Auditing Committee
The second Residential Study Course on IFRS 2010 was jointly organised by BCAS with IMC. It was held at Hotel Gateway Nashik on Thursday 23rd, Friday 24th, & Saturday 25th December. The winter cold and Christmas mood set the perfect tone for the study course.

There were 82 participants (including 21 from industry) for the RSC and were divided into 3 groups.

Day 1: At the commencement of programme, the President extended welcome to the participants, Paper writers, Group Leaders and members of accounting and auditing committee. He shared the vision statement and exhorted that BCAS shall harness talent and disseminate knowledge to members, build skills and network amongst them. He also expressed that sharpening the knowledge on IFRS is the need of the hour. He complimented the accounting and auditing committee for organising this event.

Chairman Himanshu Kishnadwala, briefly gave information about IFRS and explained the course, and the structure of the current programme.

1st Technical Session:
In the first session the Paper Writer Mr. Ramesh Lakshman made an initial presentation on the topic ‘Introduction and concept of Fair Value methodologies and Applicability’.

In his presentation covering the subject Mr. Ramesh touched upon, various important concepts.

He explained that there are different approaches of determining fair value viz.

a. Market approach, Income approach, and Cost Valuation approach. He suggested to refer to Level 1,2 & 3 of US GAAP.

b. He explained different applicable inputs to be referred to
At Level 1 The quoted prices in active markets, At Level 2 quoted prices of similar assets (in-terest rate, yield curve prepayment Etc.) At Level 3 Inobservable inputs should be referred to e. g. He suggested to follow guidelines covered in Para AG 69 to 82 of IAS 39.

Post Lunch Group Leaders Ashutosh Pednekar, Anagha Thatte and Jayesh Gandhi discussed actual case studies on Forex and commodity derivatives.

Mr. Simarjeet from Reuters who was accompanying the paper writer in his presentation showed live data of cross currency and curves through internet connections and explained how these data can be useful for Level 2 and Level 3 assumptions. In his concluding presentation, the Paper writer Ramesh Lakshman dealt with the uncertainties and peculiaritiesattached with Fair Valuation.

On Day 2: Group Leader Paresh Clerk, Bharat Jain and Anand Paurana led the discussion paper by Sudhir Soni on IFRS 1 “First time adoption of IFRS”. The Group Leaders with their own power point presentations explained the actual accounting enteries and also covered reference para of IFRS, IFRIC and IAS.

The Group Leaders also covered the case studies on consolidation IAS 27. They explained each case studies and made an interactive presentation and shared reference points from IAS 27.

The total discussion time allotted for the above was 4 hours.

In the Post Lunch Session, the Paper writer Sudhir Soni explained the concepts and responded to the queries and posers raised by each groups.

In the evening CA Vaibhav Manek made an interesting presentation on “Leadership in Professional Service” presentation covering people, process, knowledge base, competence mapping, unique identity of professional practice firms etc. He emphasised need of networking, capacity building, amongst professional firms and grooming and mentoring Leadership.

After the presentation participants had sumptuous dinner at Pool side enjoying cold weather and music.

On Day 3: The group leaders Manish Sampat and Vijay Mehta, Gautam Shah and Hasmukh Dedia, Murtuza Vajihi and Nitesh Dedia respectively led the discussion on paper on Revenue recognition. (with focus on Infrastructure and real estate sector) written by Khozema Anajwalla and Atul Deshmukh.

Both paper writers and six group leaders emphasised that to understand standards, first the same have to be read, facts studied and then applied.

In the concluding session participants expressed their satisfaction. The Chairman complimented the convenors and the BCAS staff led by the GM for the excellent co-ordination and arrangements for the RSC.

Dt. 4/01/2011 Book Release (Service Tax)
The revised and updated edition of Service Tax Books were released on 4th January 2011 at the hands of CA. Mayur Nayak, President, CA. Pradip Thanawala, Vice President, CA. Govind Goyal, Chairman – Indirect Taxes and Allied Laws Committee and CA. Suhas Paranjpe, Convenor – Indirect Taxes and Allied Laws Committee. Four books namely, Service Tax – Basic Concepts and Procedures, Service Tax Goods Transport Agency Services, Service Tax – Business Auxiliary Services and Business Support Services and Service Tax – Construction Related Services.

BCAS Foundation Jointly with PCGT, IMC, PCaW
A talk on Whistleblowing was organised by Public Concern for Governance Trust, AntiCorruption Cell of the Indian Merchants’ Chamber (IMC) and BCAS Foundation(Bombay Chartered Accountants’ Society) at the Babubhai Chinai Committee Room,IMC on January 7, 2011.

BCAS Foundation Jointly with PCGT, IMC, PCaW : Gathering listening to the talk

Mr. Julio F. Ribeiro, Chairman, Anti Corruption Cell, welcomed the participants. He spoke about the importance of Whistleblowing. He added that the name ‘Public Concern for Governance Trust’ was taken from ‘Public Concern at Work’ (PCaW) UK.Dr. Dhananjay Samant, Chief Economist, represented IMC and was seated on the dais Mr. Narayan Varma, Trustee, PCGT, explained the concept of Whistleblowing to the participants. He also discussed the recent attacks on RTI activists in Mumbai.Ms. Sukaina Esmail, Program Director, PCGT, introduced Ms. Shonali Routray, Client Services Manager, PCaW. Ms Routray introduced the topic of Whistleblowing in the new cyber age with the Wikileaks story. She spoke about the scope and process of Whistleblower protection in the UK. She discussed the mechanism and scope of Public Interest Disclosure Act,UK and presented statistics on the cases received and the judgments made. Ms Routray discussed Indian law with respect to Whistleblowing and highlighted some of its mechanisms and the protections it offers. Mr. Yeshwant Gawand narrated his own experiences as a whistleblower. He spoke about how he was beaten up for taking on a Shiv Sena corporator over alleged encroachments and undeclared assets. Mr. Ribeiro assured him of support from PCGT. Mr. Nitin Shinghala, Joint Secretary, Bombay Chartered Accountants’ Society thanked Ms. Shonali Routray, the IMC and all the participants for attending the meeting.

Dt. 7/01/2011 Study Tour to Bangalore

Seminar Committee:
Seminar Committee of BCAS organised a Study Tour to Bangalore and Mysore from 7th January, 2011 to 9th January, 2011. 67 participants (including 16 participants from Bangalore) participated. On 7th January, participants visited General Assembly Plant of Toyota Kirloskar Motor Company and then visited campuses of Wipro and Infosys at Bangalore. The company officials at the 3 locations also made detailed presentations. Next day, the participants visited Infosys Technology’s Training Centre and Leadership Facility at Mysore, spread over 344 acres. Participants were amazed to see World Class facilities to train 10,000 trainees at a time at one location with facilities for lodging and boarding. The campus was impeccably maintained. One felt proud as an Indian that an Indian Company could create such a World Class facilities which other leading companies in the world would aspire to have. One was left wondering about the systems and processes at work behind such a large and beautiful facility working with such a clock – work like precision. This is a result of one man’s vision and dedication.

VISIBLE BENEFITS TO THE PARTICIPANTS OF VISITING GROUP OUT OF OBSERVATIONS & PRESENTATIONS AT WIPRO & INFOSYS:

Driven by values and highest adherence to those values, is the ultimate mantra.

Clarity of vision, goals and mission is paramount.

Skills of implementing the large projects are essentials.

Leaders can be groomed and trained.

Excellent infrastructure and energetic working environment are essentials.

Human capital is the most valuable asset class.

World class and excellent training facilities are must for sustainable and impressive growth.

There is no substitute for honesty, integrity, hard work and conducive environment.

Quality….Quality….Quality in every area and everywhere.

Excellent township to house employees is indispensable.

Grit, focused approach and passionate working make the work enjoyable, as well as successful.

The Study Tour held ended with half – day conference jointly with Karnataka State Chartered Accountants’ Association. The following presentations were made:

1. IFRS-Traditional Issues & Implementation Challenges by CA. Vinayak Pai, Bangalore. The session was chaired by CA Krishna Swamy.

2. International Taxation – Recent Developments by Ms. Bijal Ajinkya, Advocate, Mumbai. The session was chaired by CA Padamchand Khincha.

The study tour was organised in cooperation with the Karnataka State Chartered Accountants’ Association. BCAS appreciates efforts of CA H. Padamchand Khincha, CA Prabhu Allama, CA Ganapath Raj, Mr. Laxman and other Office Bearers of KSCAA, who played an active role in the success of the tour.

15th January 2011 Half-Day Workshop on MVAT Audit and Levy of VAT on Builders & Developers

Indirect Taxes and Allied Laws Committee:
BCAS had organised a Half-Day Workshop on MVAT Audit and Levy of VAT on Builders & Developers on 15th January 2011. The faculty for the first session on levy of VAT on Builders and Developers was CA. Rajat Talati. After touching upon the history of levy of VAT on Builders and Developers, the speaker outlined the whole scheme and the different Schemes for taxation under the MVAT Act and the issues and controversies under each scheme. The speaker indicated in a detailed manner how different dates were critical to determine the scope, extent and manner of coverage. The speaker also touched upon Practical Issues relating to the same and explained how in practical scenario even minute details can change the manner of levy.

In the concluding part, the speaker touched upon VAT implications relating to Redevelopment of societies and also guided the participants on their queries. The meeting ended with a vote of thanks to the Speaker.

The faculty for the second session on Revised Form 704 relating to VAT audit, Mr. Kiran Garkar started with a brief outline of Form 704. He then took up Annexure-wise detailed coverage of the revisions made in Form 704 beginning with Annexure J and moving on from Annexure G to I. Lastly, he touched upon the Annexure F pertaining to ratios and explained how the ratios, were in effect partly verifying the same details in different way. He also explained how the ratios had newly added the details pertaining to opening and closing inventory. There were a lot of questions relating to how the data should be input including purchases where set-off was not availed. The speaker clarified on each of them and explained how one would need to use their judgment and at the same time, clearly disclose the manner of arriving at reported figures. The meeting ended with a vote of thanks to the Speaker.

10th January 2011 Lecture Meeting by Sis. Shivani (Brahmakumari) on Unlocking the Treasures of Life

Lecture Meeting (Under the Auspices of Amita Memorial Trust, jointly with Bombay Chartered Accountants’ Society and Chamber of Tax Consultants)

Subject : Unlocking the Treasures of Life
Speaker : Brahma Kumari Shivani
Date : January 10, 2011

Amita Memorial Trust has been created in the memory of Amita Momaya, a young Chartered Accountant and a core group member of BCAS, who passed away on January 31, 1987 at the age of 26 years. Under the auspices of Amita Memorial Trust, Bombay Chartered Accountants’ Society jointly with the Chamber of Tax Consultants, organised a spiritual talk by Brahma Kumari Shivani, on Januray 10, 2011. Shivaniji held the audience spellbound, as she explained that the ability to control one’s mind is the secret of happiness. Through a series of day-to-day incidents, she impressed upon the audience that happiness resides within all of us, and yet we try to find it outside. She compared happiness to a filled glass that we all already possess – and rather than protecting the contents of this glass, many of our reactions result in leakages and spillages from this full glass.

Brahma Kumari Shivani, eloquent speaker of the popular talk show “Awakening with Brahmakumaris” has inspired millions across the globe through her profound insights on spirituality. At this spiritual talk she once again touched many-a-souls and created a unique spiritual experience for the listeners. Her ability to combine practical situations with simple insights makes the audience convinced that spirituality and true happiness is within their reach. Her talk not only enlightened, but also empowered the audience on their inward journey.

BCAJ Admin

GAPs in GAAP

Accounting Standards

Revenue Recognition for Telecommunication Operators

The Research Committee of the Institute of Chartered
Accountants of India has issued an Exposure Draft – “Technical Guide on Revenue
Recognition for Telecommunication Operators” for comment. In this article, we
take a look at some of the contentious issues, and inconsistencies with
International Financial Reporting Standards (IFRS), particularly keeping in mind
that India will adopt IFRS from 2011-12 and onwards.

Whether revenue should be recognized on a gross basis or net
basis could be a very challenging issue for many telecom companies. For example,
a telecom operator may provide share price coverage via SMS as part of its
service offering. The stock exchange provides the data to the telecom operator.
Assuming revenue is Rs100 and payment to the stock exchange is Rs60, a question
arises as to whether the operator recognizes revenue of Rs100 and a cost of
Rs60, or merely recognizes Rs40 as its revenue. The answer to this question
depends on whether the operator acts as a principal or an agent in this
transaction. US GAAP provides guidance on this subject, which has been used in
the Technical Guide. As per the guidance, this decision is based on a cumulative
assessment of a number of factors such as: (a) whether the operator is the
primary obligor in the arrangement? (b) whether the operator has the ability to
control the selling price? (c) whether the operator changes the product or
performs part of the service? (d) who bears the credit risk? (e) whether the
product or service specification is determined by the operator?, etc. It may be
noted that the above criteria are not the same as those contained in IAS 18.
Hence, the answer arrived at based on the Technical Guide/US GAAP may not be the
same as the one arrived at under IFRS.

For most operators, interconnect charges represent the
largest single operating cost and second largest source of revenue. Mobile
operators enter into a number of interconnect agreements with other operators.
These agreements allow them to terminate a particular call or transit the
traffic on another operator’s network. This, essentially, uses network of
contracting parties to facilitate and provide the end-to-end connections
required by customers. The Technical Guide states that accounting of revenue on
gross basis may not be appropriate where net settlement and the legal right of
offset exists between operators. However, in the authors’ view, this is contrary
to industry practice. Industry practice is that interconnect revenues are booked
gross on the basis that the carriers are exposed to the gross risk of the
transaction. Interconnect agreements usually allow carriers to settle on a net
basis, which does not normally change the appropriateness of
recognizing transactions gross, even if periodic cash settlement may be made on
a net basis. For example, the operator may bear the gross credit risk for
non-payment and be obliged to make payments under interconnect arrangements,
irrespective of the level of reciprocal revenues due.

The term Indefeasible Rights of Use (IRU) is very common in
the telecom business. IRU means an exclusive, unrestricted, and indefeasible
right to use the relevant capacity (including equipment, fibres or capacity).
Under Indian GAAP, in many cases, these type of contracts may have been
accounted for as service contracts between the buyer and seller rather than
lease contracts. The technical guide requires evaluation of the IRU contract as
to whether it contains a lease arrangement based on AS-19. Unfortunately, AS-19
does not contain any guidance on the same. Under IFRS standards, this issue is
separately covered under IFRIC 4
Determining whether an
arrangement contains a lease.
Therefore, in the authors’ view, the technical guide with regard to this matter
can be practically implemented, if and only if an IFRIC 4 interpretation is
issued under Indian GAAP. Also it would be inappropriate to apply the
requirements of IFRIC 4 selectively to telecom companies. It may be noted that
IFRIC 4 has a wider application – for example, it would have impact on
outsourcing contracts, power purchase agreements, etc.

Multiple element contracts are pretty common in the case of
telecom business. For example, in the case of mobile operators, the package may
include hand set, talk time, SMS, ring tones, etc. The technical guide basically
requires the allocation of the consideration to the various components based on
the relative fair values of the components. It may be noted that currently, IFRS
does not have any detailed guidance on accounting for multiple element
contracts. However, IASB has recently issued a discussion paper (DP) on the
proposed new standard on revenue recognition – “Discussion
Paper – Preliminary views on Revenue Recognition in contract with customers“.
As per this DP, customer consideration is allocated to the vendor’s contractual
performance obligations on a relative standalone selling price basis, and
revenue is recognized as each performance obligation is satisfied. Where the
standalone selling price is not observable, an entity would estimate them. As
per the DP, suitable estimation methods include (but not limited to) (a)
expected cost plus margin (b) adjusted market assessment approach. Consequently
the Technical Guide and the proposed IFRS standard may result in significant
difference in accounting for multiple element contracts. Telecom operators that
may be required to follow the Technical Guide for Indian GAAP purposes and
subsequently IFRS, will have to unnecessarily undergo change in revenue
recognition accounting twice. This clearly appears unwarranted.

The Technical Guide prohibits recognition of revenue on a
component if the same is contingent upon delivery of additional items. This is
explained using the following example in the Technical Guide.

Example:
A customer purchases an annual contract, offering a free handset and 1,000
minutes (fair value is Rs. 1,500 per month) and 150 free texts (fair value is Rs.
300 per month), for a monthly fee of Rs. 1,500. The handset could be purchased
separately for Rs. 15,000. The allocation of revenue for the entire contract
period should be as follows:

Cash

Total
FV

Relative
FV

FV restricted by contingent

consideration

Handset

–

15,000

7,377

–

Airtime
contract

18,000

Talk time

18,000

8,852

15,000

Text

3,600

1,771

3,000

Total

18,000

36,600

18,000

The relative fair value of the equipment is Rs. 7,377. However, the recognition of this amount should be limited to the amount which is not contingent upon the delivery of additional items (i.e. airtime contract). As a result, the relative fair value allocable to the equipment is reduced to Rs. nil, being the cash consideration, and the difference reallocated to the elements within the airtime contract. It may be noted that under IFRS, there is no such restriction and it is possible to recognize revenue on the handset.

In another example, the Technical Guide prohibits recognition of revenue on hand set in certain circumstances. For example, consider a customer enters into a 12 month tariff plan priced at Rs 2400/- and includes 200 minutes of talk time per month and free hand set worth Rs 2000/-. The Technical Guide prohibits recognition of any revenue on the delivery of the handset, since it is provided free and requires recognition of revenue of Rs 200/-per month for the talk time. In this example, it is unclear from the Technical Guide as to how the accounting is done, if the company would have stated that Rs 2,400/- is received for both the talk time and the handset. Will the accounting change? Under IFRS, it would be possible to recognize revenue on handset, even if the company claims that the same is provided free of cost. This is because under IFRS, the entire consideration would be allocated to different components – in this example, it would be allocated to the handset and the talk time irrespective of the operators’ claim that some of the components are provided free of cost (basically there is no free lunch).

The Technical Guide is more based on US GAAP and may provide results that are different from those under existing or proposed IFRS standards.

Given that India is adopting IFRS, and US itself is looking at IFRS seriously, it does not make any sense to base the Technical Guide on US GAAP. It is recommended that standard setters start a dialogue with the IFRS standard setters and influence the IFRS exposure drafts, rather than rock the boat. It is also inappropriate to have any guidance that is inconsistent with IFRS, since that may require Indian entities to change revenue recognition accounting twice in a short span of time, ie, once to comply with Indian GAAP and in 2011-12 when adopting IFRS.

BCAJ Admin

Miscellaneous

From Published Accounts

5 Audit Report in case of a
company where in earlier years, manipulations admitted by the erstwhile
management and previous years’ audit reports withdrawn by earlier auditors

Satyam Computer Services
Ltd. — (31-3-2009)

Appointment :

1. We have been appointed as
statutory auditors of SATYAM COMPUTER SERVICES LIMITED (‘the Company’) for the
year ended March 31, 2009 by the Board of Directors of the Company (hereinafter
referred to as the ‘Board’) subject to the ratification by the shareholders of
the Company, pursuant to the order of the Honourable Company Law Board (CLB),
dated October 15, 2009. This report is addressed to the members of the Company,
subject to the ratification of our appointment.

Report on the Financial
Statements :

2. We have audited the
attached Balance Sheet of the Company as at March 31, 2009, the Profit and Loss
Account and the Cash Flow Statement of the Company for the year ended on that
date, both annexed thereto.

Management’s responsibility for
the Financial Statements :

3. These financial
statements are the responsibility of the Company’s Management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

Auditors’ responsibility :

4. Subject to the matters
discussed in this report, we conducted our audit in accordance with the auditing
standards generally accepted in India. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and the disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
the significant estimates made by the Management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

Companies (Auditor’s Report)
Order, 2003 (CARO) :

5. As required by the
Companies (Auditor’s Report) Order, 2003 (CARO) issued by the Central Government
in terms of S. 227(4A) of the Companies Act, 1956 (‘the Act’) we give in the
Annexure a statement on the matters specified in paragraphs 4 and 5 of the said
Order, which is subject to the matters discussed in this report.

Basis for opinion :

6. As stated in Note 3 of
Schedule 18 :

(a) On January 7, 2009, in a communication (‘the letter’) addressed to the then-existing Board of Directors of the Company and copied to the Stock Exchanges and Chairman of Securities and Exchange Board of India (‘SEBI’), the then Chairman of the Company, Mr. B. Ramalinga Raju (‘the erstwhile Chairman’) admitted that the Company’s Balance Sheet as at September 30, 2008 carried inflated cash and bank balances, non-existent accrued interest, understated liability and overstated debtors position. As per the letter, the gap in the Company’s Balance Sheet had arisen purely on account of inflated profits over a period of last several years. Consequently, various regulators have initiated their investigations and legal proceedings, which are ongoing and are more fully described in the said Note.

(b) The Government-nominated Board of Directors appointed an independent counsel (‘Counsel’) to conduct an investigation of the financial irregularities that would enable preparation of the financial statements of the Company. The Counsel appointed forensic accountants to assist in the investigation (referred to as ‘forensic investigation’) and preparation of the financial statements. The forensic accountants have expressed certain reservations and limitations in their investigation process, which are more fully described in the said Note.

(c) Pursuant to the investigations conducted by the Central Bureau of Investigation (‘the CBI’)/other regulatory authorities, most of the relevant documents in the possession of the Company were seized by the CBI/other authorities and partial access was granted to the Company including for taking photo-copies of the relevant documents as may be required in the presence of the CBI officials.

(d) The former statutory auditors of the Company vide their letter dated January 13, 2009 to the Board of Directors have indicated that their reports and opinions in relation to the financial statements of the Company from the quarter ended June 30, 2000 until the quarter ended September 30, 2008 should no longer be relied upon.

(e) As confirmed by the order of the CLB, and in accordance with Accounting Standard 5 — ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, adjustments resulting from financial irregularities and errors relating to periods prior to April 1, 2008, to the extent identified, have been accounted for as ‘Prior Period Adjustments’ in these financial statements.

(f) As per the assessment of the Management, based on the forensic investigation carried out through an independent counsel/forensic accountants, and the information available at this stage, all identified/required adjustments/disclosures arising from the financial irregularities, have been made in these financial statements.

The Management is of the view that since matters relating to several of the financial irregularities are sub judice and various investigations are ongoing, any further adjustments/disclosures to the financial statements, if required, would be made in the financial statements of the Company as and when the outcome of the above uncertainties is known and the consequential adjustments/disclosures are identified.

In view of the above, we are unable to comment on the adjustments/disclosures which may become necessary as a result of further findings of the ongoing investigations and the consequential impact, if any, on these financial statements.

7. As stated in Note 3.3(ii) of Schedule 18, the Company has, based on the forensic investigation, accounted for the opening balance differences (net debit) of Rs.11,221 million as at April 1, 2002, other differences (net debit) of Rs.166 million during the period from April 1, 2002 to March 31, 2008 and Rs.7 million relating to the period from April 1 to December 31, 2008 aggregating Rs.11,394 million under ‘Unexplained Differences Suspense Account (Net)’ under Schedule 12 due to non-availability of complete information. These net debit amounts aggregating Rs.11,394 million have been fully provided for on grounds of prudence.

In the absence of complete/required information, we are unable to comment on the accounting treatment/ disclosure for the aforesaid unexplained amounts accounted under ‘Unexplained Differences Suspense Account (Net)’ in these financial statements.

8. As stated in Note 6.1 of Schedule 18, the alleged advances amounting to Rs.12,304 mil-lion (net) have been presented separately under ‘Amounts Pending Investigation Suspense Account (Net)’ in the Balance Sheet. In this regard, there are certain claims by thirty-seven companies seek-ing repayment of the amounts allegedly paid by them to the Company as temporary advances which were earlier not recorded in the books of ac-count of the Company. These companies have also claimed damages/compensation/interest on these amounts. Further, these companies have also filed recovery suits/petitions against the Company. The details of these claims are more fully described in the said Note. The Company has not acknowledged any liability to any of the thirty-seven companies and has replied to the legal notices stating that the claims are legally untenable.

The Directorate of Enforcement (‘ED’), Govern-ment of India, is conducting an investigation under the Prevention of Money Laundering Act, 2002 on the amounts allegedly advanced by the aforesaid parties and has directed the Company not to return the amounts until further instructions from the ED.

The Management has represented that since the matter is sub judice and the investigations by various Government agencies are in progress, the Management, at this point of time is not in a position to predict the ultimate outcome of the legal proceedings initiated by these thirty-seven companies.

In view of the above, we are unable to determine whether any adjustments/disclosures will be required in respect of the aforesaid alleged advances amounting to Rs.12,304 million (net) and in respect of the non-accounting of any damages/compensation/interest in these financial statements.

9. As stated in Note 6.3 of Schedule 18, sub-sequent to the letter by the erstwhile Chairman of the Company relating to various financial irregularities in the Company’s financial statements, a number of persons claiming to have purchased the Company’s securities have filed class action lawsuits in various courts in the United States of America. These class action suits are more fully described in the said Note. Based on the legal advice obtained by the Company, the Company is contesting the above lawsuits.

Since the matter is sub judice, the outcome of which is uncertain at this stage, we are unable to comment on the consequential impact, if any, on these financial statements.

10. As stated in Note 8.1(vi) of Schedule 18, an amount of Rs.674 million has been paid as interim dividend for the year 2008-09. Since there are no profits for the purpose of declaring dividend, there is a non-compliance of S. 205 of the Act. Further, as stated in Note 8.1(vii) of Schedule 18, the consequen-tial transfer of the stipulated minimum amounts of profits to General Reserves in accordance with the Companies (Transfer of Profits to Reserves Rules), 1975, has also not been effected due to inadequate balance in the Profit and Loss Account. The Management is proposing to make an application to the appropriate authority for condoning these non-compliances. Refer to paragraph 17 below also.

The possible impact of these non-compliances in the event the Company’s condonation requests are not granted has not been determined or recognised in these financial statements.

11. Attention is invited to the following matters:

(a) As stated in Note 9.2 of Schedule 18, in the absence of certain documents/information, adjustments required in respect of the opening balances as at April 1, 2008 (including the adjustments consequent to the assessment of consistent application of accounting policies) have been carried out to the extent feasible by the Management, based on available alternate evidences/information.

In the absence of the aforesaid documents/ information for the periods prior to April 1, 2008, we could not perform some of the required auditing procedures on the opening balances to the extent deemed necessary by us. Furthermore, due to inadequate records, we are unable to fully assess whether the Company’s accounting policies have been applied on a basis consistent with that of the preceding period.

(b) As stated in Note 9.3 of Schedule 18, certain reconciliations between the sub-systems/sub-ledgers and the general ledger could not be performed completely due to non-availability of all the required information. The Company has identified certain amounts aggregating Rs.27 million (net debit), comprising of Rs.494 million (gross debits) and Rs.467 million (gross credits) appearing in the general ledger, for which complete details are not available and, hence, these amounts have been accounted under ‘Unexplained Differences Suspense Account (Net)’ under Schedule 12 and the Management has made provision for the net unexplained debit amounts aggregating Rs.27 million as at March 31, 2009 on grounds of prudence. Further, there are certain differences in data between inter-connected sub-systems, ultimately interfaced to the general ledger, for which complete details are not available.

In the absence of the required information, we are unable to determine the additional impact, if any, of such unexplained amounts/ differences on these financial statements.
(c) Responses were not received in 3,047 number of cases out of our total sample of 3,746 number of requests sent out for confirmations of balances/other details in respect of parties reflected under Sundry Debtors, Loans and Advances, Current Liabilities, etc. Further, confirmations could not be sent in 47 number of cases due to the non-availability of complete records/ addresses relating to these parties. Refer Note 9.4 of Schedule 18.

Had all the confirmations been received and reconciled, there may have been additional adjustments required to these financial statements which are not determinable, at this stage.

12. Attention is invited to the following matters:

(a) Further to our comments in paragraph 8 above, the amounts received during the year and shown under ‘Amounts Pending Investigation Suspense Account (Net)’ has been presented in the cash flow statement separately since the Management could not identify the nature of the same and, hence, could not categorise the same as operating, investing or financing cash flows.

This is not in accordance with Accounting Standard (AS) 3 — Cash Flow Statements.
(b) Identification of companies/firms/other parties covered in the Register maintained u/s. 301 of the Act, companies under the same management within the meaning of S. 370(1B) of the Act, firms/ private limited companies in which a director is a member or a partner, the non-scheduled banks where a director of the Company is interested and the related parties as required under AS-18 — Related Party Disclosures as stated in Notes 19(iv) and 30 of Schedule 18 has been done by the Management based on available information. For the reasons stated in the said Notes, there may be additional related parties whose relationship would not have been disclosed to the Company, and, hence, not known to the Management.

We are unable to comment on the completeness/correctness of the above-referred details in the absence of all the required information.

(c) As stated in Note 12.4 of Schedule 18, the Company has given as finance lease, vehicles to the employees under the Associates Car Purchase Scheme, the gross original cost of which aggregates Rs.654 million (net book value Rs.382 million as at March 31, 2009), which have not been accounted for as finance leases in accordance with AS-19 — Leases in the absence of complete/adequate information.

In the absence of complete/adequate information, we are unable to determine the extent to which fixed assets and depreciation have been overstated and the impact of the non-compliance with AS-19 — Leases on these financial statements.
(d) As stated in Notes 14.5 and 37 of Schedule 18, the Company has not maintained proper records of its inventories during the year though the required adjustments to account for the inventory in the books of account were made based on the available information with the Management as at the year end. Further, the Company has not disclosed the quantitative details of purchase and sale of hardware equipment and other items as required under Schedule VI of the Act in the absence of complete information.

13. The Management has evaluated and accounted for certain transactions/made the relevant disclosures based on and to the extent of the information available with the Company in respect of the following Notes of Schedule 18:

(a)   Adjustment of unapplied receipts against Sundry Debtors, classification of Sundry Debtors and provisioning for doubtful debts as stated in Note 14.1.
(b)   Accounting for contracts under percentage of completion method and unbilled revenue as stated in Notes 14.2 and 14.3.
(c)   Accounting for multiple deliverable elements, hardware equipments and other items, etc., as stated in Notes 14.4 and 14.5.

(d) Accounting for unearned revenue as stated in Note 14.7.
(e) Accounting for reimbursements/recoveries from customers as stated in Note 14.9.

In the absence of the required information, we are unable to determine the additional impact, if any, of the above matters on these financial statements.

14. As stated in Note 6.6(vi) of Schedule 18, the Company is carrying a total amount of Rs.4,371 million (net of payments) as at March 31, 2009 towards provision for taxation which was made primarily on the basis of the past financial statements. Considering the effects of financial irregularities, status of disputed tax demands, appeals/claims pending before the various authorities, the consequent uncertainties regarding the outcome of these matters and the significant uncertainties in determining the tax liability, the Company has been professionally advised that it is not appropriate to make adjustments to the outstanding balance of tax provision as at March 31, 2009.

In view of the above, we are unable to comment on the adequacy or otherwise of the provision for taxation carried in these financial statements.

15. In view of the matters described in paragraph 6 above and as stated in Note 39 of Schedule 18, information relating to the previous year has been provided only for the purpose of statutory requirements and the same cannot be used for any comparison purposes or otherwise.

16. Without qualifying our opinion, we invite attention to the following Notes of Schedule 18 relating to various claims and contingencies:

(a) Note 6.2 regarding the settlement amount of Rs.3,274 million (equivalent to USD 70 million) deposited into the escrow account payable to Upaid Systems Limited.
(b) Note 6.4 regarding the Division of Enforcement of the United States Securities and Exchange Commission conducting a formal investigation into misstatements in the financial statements of the Company for the prior years pursuant to the letter of the erstwhile Chairman and recommending enforcement action against the Company.

(c) Notes 6.6 to 6.8 regarding the various demands/disputes raised by the direct and indirect tax authorities both in India as well as overseas jurisdictions.

As stated in Note 6.13 of Schedule 18, the Company has made appropriate provision for contingencies as at March 31, 2009 which, in the opinion of the Management, is adequate to cover any probable losses in respect of the above litigations and claims.

17. Without qualifying our opinion, we invite attention to the following Notes of Schedule 18 relating to certain regulatory non-compliances/breaches:

(a)   Note 8.1 regarding various non-compliances with the provisions of the Act.
(b)   Note 8.2 regarding certain non-compliances of the guidelines issued by the SEBI with respect to allotment of stock options to the employees.
(c)   Note 8.3 regarding certain non-compliances of the provisions of the Foreign Exchange Management Act, 1999.
(d)   Note 8.5 regarding certain non-compliances of the provisions of the Income-tax Act, 1961.

(e) Note 8.6 regarding delay in filing of tax returns in overseas jurisdictions.

The Management has represented that:

(i) the various non-compliances and breaches by the Company of the statutory requirements which have been noticed/observed, duly considering the findings of the forensic investigation/other ongoing regulatory investigations have been summarised in the aforesaid Notes.

(ii) the Company is proposing to make an application to the appropriate authorities, where applicable, for condoning these non-compliances and breaches relatable to the Company.

(iii) the possible impact of these non-compliances and breaches in the event the Company’s condonation requests, where applicable, are not granted has not been determined or recognised in these financial statements.

18. Without qualifying our opinion, we invite attention to the following Notes of Schedule 18 relating to certain accounting and other matters:

(a) Note 9.1 regarding the Management’s identification of several deficiencies in the Company’s internal control over financial reporting as at March 31, 2009 along with certain remediation action taken subsequently.

(b) Note 9.5 regarding various risks and uncertainties relevant to the Company’s financial condition as identified by the Management.

(c) Note 12.8 regarding adjustments that may be required on account of the physical verification of fixed assets conducted subsequent to the year end.

(d) Note 13.9 regarding the provisions made for the diminution in the value of investments and Note 19(iii) regarding the provision made for the dues from the subsidiaries.

19. Without qualifying our opinion, we invite attention to Note 22 of Schedule 18 regarding provision for statutory audit fees of Rs.57 million (including for the audit of prior period items) debited to the profit and loss account which is subject to the approval of the shareholders.

Opinion:

20.   Further to our comments in the Annexure referred to in paragraph 5 above and paragraphs 16 to 19 above and subject to our comments in paragraphs 6 to 15 above, we report that:
(a)   we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit;
(b)   in our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books;
(c)   the Balance Sheet, the Profit and Loss Account and the Cash Flow Statement dealt with by this report are in agreement with the books of account;
(d)   in our opinion, the Balance Sheet, the Profit and Loss Account and the Cash Flow Statement dealt with by this report are in compliance with the Accounting Standards referred to in S. 211(3C) of the Act;
(e)   in our opinion and to the best of our information and according to the explanations given to us, the said Accounts, read together with the notes thereon, give the information required by the Act in the manner so required and, subject to the consequential effects of our comments in paragraphs 6 to 15 above which are not quantifiable, give a true and fair view in conformity with the accounting principles generally accepted in India:

(i) in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 2009;

(ii) in the case of the Profit and Loss Account, of the loss of the Company for the year ended on that date; and

(iii) in the case of the Cash Flow Statement, of the cash flows of the Company for the year ended on that date.

Reporting requirements relating to S. 274(1)(g):

21. Since all the Directors as on March 31, 2009 were Government nominees, the reporting requirement relating to S. 274(1)(g) of the Act does not arise.

Compiler’s Note:

The other disclosures in the Notes to Accounts referred to in the audit report are voluminous and hence not reproduced here. The same can be made available by the compiler on request.

BCAJ Admin

From The President

From the President

One of the seven social sins
as enunciated by Mahatma Gandhi was “Politics without Principles”. In good old
days, our political leaders led a principle centered or value based life. There
was a time when Union Minister Lal Bahadur Shashtri resigned from the cabinet
owning moral responsibility after a railway accident. Jai Prakash Narayan,
co-founder of Praja Socialist Party, quit the party in 1957 when he found that
tickets were distributed on the caste basis and forging ahead to pursue
Sarvodaya (good of all) and Lokniti (Polity of the people) as opposed to Rajniti
(Polity of the State).

Today, food inflation is
skyrocketing and our Agriculture Minister remains unperturbed. Farmers are
committing suicide and Ministers are busy in Rajniti. The head of the Vigilance
Commission (CVC) is under a cloud. Government is unable to declare names of the
holders of secret bank accounts overseas. Accountability is nowhere to be seen.
Punishment to culprits is illusory. Judiciary is our only ray of hope and the
Supreme Court’s pointed questions over 2G scam, secret bank accounts overseas,
CVC etc. have put the Government on the defensive. Despite the spate of scams
and corruption charges hurled about, none of the Ministers resigned voluntarily.

The law and order situation
has gone haywire. There is no safety for whistle blowers. RTI activists are
being killed without compunction. On 25th January 2011, Yashwant Sonawane,
Additional Collector Manmad region (Maharashtra) was burnt alive by the oil
mafia. If this be the fate of a Collector, what about the amm aadmi and what can
he expect at all?

An open letter written by 14
eminent citizens of India on 17th January 2011 aptly describes the present day
scenario. They have amongst other things, expressed grave concern over the
widespread “governance deficit” in every sphere of national activity, namely,
government, business and other institutions. They have alleged that misuse of
discretionary (decision making) power is widespread under extraneous influences.
They have demanded urgent steps to arrest the “malaise of corruption, which is
corroding the moral fabric of the nation”.

In Sanskrit there is a
saying that “Yatha Raja, Tatha Praja” (meaning as is the Ruler so is the Ruled).
Therefore, it is imperative that good governance should start from the top.
People in democratic set up today think it is the opposite – as are the people
so are its representatives e.g. the president/prime minister etc. forgetting
that the primary quality of a leader is his being a role model. The entire
Ramayana is written on this theme, and Rama consistently guarded his character
lest it be anything less than perfection (Maryada Purushottam) – a role model.
The Chief Minister of Bihar, Nitishkumar has set an illustration by first
declaring his assets and then demanding others, his ministers and bureaucrats to
follow suit.

We have a unique example of
Mr. Narayanamurthy, a great visionary, who created an empire which has not
touched him as the lotus remaining untouched by mud. His simplicity and
governance are worth emulating. On 7th and 8th January 2011, members of BCAS and
Karnataka State Chartered Accountants’ Association (KSCAA) visited the Campuses
of Wipro, Bangalore and Infosys, Bangalore and Mysore as part of a study tour.
The vastness of Mysore campus of Infosys and the world class training and other
facilities provided therein widened the horizons of participants. It was amazing
to see how one visionary with his enabling team could achieve in a single
lifetime and that, too, without any strings attached. No wonder, companies like
Infosys and Wipro have brought laurels to home. The participants of the study
tour also visited the manufacturing facilities of Toyota at Bangalore. Thanks to
CA. Padamchand Khincha who arranged these memorable events.

The results of CA Final are
out and as usual, there is more remorse than elation notwithstanding the fact
that the result percentage is now better than last time. The lack of formal
coaching may well be the reason for the poor performance. The ICAI’s initiative
to commence Live Virtual Classes at 25 centres in 22 cities across our country
is indeed laudable.

I think we need to reexamine
our present evaluation system which is more of a memory test. It does not matter
how much a student works hard for the entire year; what really matters is that
which he is able to reproduce at the examination hall. May be, the examinations
prepare us to keep our cool/equilibrium during the critical moments of our life.
What worries one is that a student scores 50 marks in a particular subject in
one attempt but gets five marks in the same subject in the subsequent attempt
–one is up against such an inexplicable result, naturally. Maybe, we need live
with the present system until we find a more balanced and rational way of
evaluation wherein performance of a student is reckoned over a period of time
and not just in three hours. This is true not only of CA examinations but also
of other examinations. As far as the CA curriculum is concerned, we all need to
conjoin our minds and help ICAI in evolving a better system of evaluation. The
problem has been identified and its solution cannot be late in arriving. I
appeal to readers to send their suggestions in this regard to president@bcasonline.org.

The much awaited Residential
Refresher Course (RRC) organised by BCAS was completed successfully at Matheran.
More than 200 members participated. The concept of two parallel sessions, one on
Service tax and the other on International tax elicited good participatory
response. RRC Nostalgia – an audio, visual and live programme, on one of the
evenings, kindled memories of the past RRCs. BCAS TV has been launched whereby
members from far off places would be able to benefit from recorded videos, for a
nominal subscription.

A number of activities have
been planned in the next two months. BCAS has designated February 2011 as an
“Internal Audit Month” wherein many programmes in the field of Internal Audit
are scheduled. The idea is to equip our members in this important and emerging
area of practice.

February is the month for
presentation of the Union Budget in Parliament. The winter session was a wash
out, with opposition demanding Joint Parliamentary Committee (JPC) to
investigate the 2G spectrum scam. Let us hope that Parliament would function
meaningfully during the Budget session and transact various important businesses
listed on its agenda, God willing.

Every year the fifth day (Panchami) of the Indian month Magh (this year it is on 8th February), being the first day of spring is celebrated as Saraswati Pooja day. Hindus on this occasion worship Saraswati – the goddess of knowledge, music and art. I pray that Maa Saraswati gives wisdom to all of us to work for the progress and betterment of our nation and humanity at large.

My greetings to you all on the onset of spring (Vasant Paanchami)!

BCAJ Admin

From The President

Dear BCAJ Lovers,

I began writing this page immediately after returning from
the 43rd RRC of the Society. This year, as you are aware, we went to Gujarat for
the first time and assembled at Gandhinagar in a beautiful resort. There were
about 250 of us from all over the country. The camaraderie among all our members
and the excellent rounds of group discussions and general assembly were the
highlights of the RRC. The excellence achieved by our Seminar & PR Committee
members in organisation of such mega events was very much in evidence
throughout. The RRC was attended by several Regional Council members and two
newly elected members of the Central Council of the ICAI. We also had
participation of several members of various Branches of Regional Councils of the
ICAI. We also had a record turnout from cities other than Mumbai. I welcome all
the new members, who became our members recently, who attended the RRC. I am
sure that they will be our members for a long time to come. A full report on the
RRC, accompanied by photographs is printed in this journal. The Seminar and PR
Committee is now looking at organising more activities in the months to come.

It is said that time flies. I entirely agree with this
statement. It is now six months since I took over as the President of BCAS.
These six months have been very satisfying and the wonderful co-operation that I
have received so far from all our members is very touching. I look forward to
the next six months with the same amount of enthusiasm and vigour that I began
my term with.

Recently, I watched two Bollywood movies, which I felt were
very meaningful. The first was “Paa” and the second was “3 idiots”. The first
movie brought out the best in one of the most successful actors the world has
seen. At the age of nearly 67, he has enacted the role of a 13 year old and that
too with a fatal disease. The extraordinary efforts of Mr. Bachchan are worth
emulating. They tell us that nothing is impossible in this world and that one is
never too old to try out new roles in life. The stories doing the rounds about
the time taken to put on his special make-up and to remove it and the pains that
he took to play this particular character teach us that hard work and total
dedication are what bring success. On the other end of the spectrum, the Vidhu
Vinod Chopra movie saw another brilliant actor conveying an excellent message to
one and all. Aamir Khan exhorted viewers to pursue excellence rather than
success. The entire educational system today has moved in the direction of
pushing students towards a very high pressure life. There is constant peer
pressure and the fear of failure is very strong. The recent news reports of
suicides by several school and college going children are shocking and are a
rude awakening call for all of us. In such a scenario, this movie could not have
come at a better time. The importance given by coaching classes to passing the
exams rather than focussing on gathering knowledge is a malaise that is
destroying the very fabric of India’s strong educational system. Today, if India
is considered a strong economic force, it is because of our past educational
system, which has consistently been producing a large force of intelligent,
English speaking graduates, engineers, doctors, lawyers, accountants and other
professionals. Regrettably, in my opinion, looking at the quality of the current
crop of graduates, I am not sure how long India can be perceived to have an
advantage. The film, “3 idiots” is trying to awaken us. It’s for us to open our
eyes. I do hope our students have seen these films and have appreciated and
understood the socially powerful messages. If they have, then we can all say
with conviction that “all izz Well!”

The BCAS is proposing to lead an initiative to reduce the
consumption of paper. For this, we propose to encourage our members to receive
our communication by e-mail instead of physically. This will substantially
reduce the consumption of paper. As we are all aware, every sheet of paper
manufactured results in destruction of large tracts of forest land. This is
resulting in hazardous global warming, which has become a major international
problem. At present, we have a print order of about 8,000 copies of newsletters.
To begin with, even if we are able to reduce this by 20%, we would be saving
considerable quantity of paper. Therefore, our members will shortly receive a
request to permit us to discontinue sending printed newsletters. This of course,
is entirely optional and we will continue to send printed newsletters to those
who do not reply to us or those who do not wish to discontinue the receipt of
printed copies. Thereafter, we will replicate the process for notices and for
annual reports. I believe that every revolution has a humble beginning. I invite
you to join the BCAS in this noble initiative of reducing the consumption of
paper. Let us try to go paperless to the furthest extent possible.

Like last year, this year too, I participated in the Dream
Run, which is a part of the Mumbai Standard Chartered Marathon, along with a few
other members of the BCAS. The experience is truly exhilarating. Seeing
thousands of Mumbaikars spiritedly turning out in bright colours and holding
flags and placards and participating with such a fantastic spirit of
togetherness, is a heart warming experience. Many of our members even
participated in the full Marathon and in the half Marathon. My heartiest
congratulations to all of them for running this gruelling race.

The Finance Minister is preparing for the annual Budget and
so is BCAS. Our budget lecture meeting to be addressed by Mr. S.E. Dastur and
the budget publication are already planned out. The lecture meeting will be on
3rd March at Dadar in Central Mumbai in the evening. We once again look forward
to the solid support that our members have given us in the past for the same.

Sincerely yours,

Ameet Patel

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BCAJ Admin

From The President

Dear Professional Colleagues,

I write this communication to you having returned from the
42nd Residential Refresher Course (RRC) at Goa. More than 230 delegates from all
over the country participated in the deliberations. The experience was
undoubtedly enriching. It must however be accepted that the shadow of Satyam
loomed large upon the minds of participants.

The editorial deals with the various issues that arise in
regard to the audit function, the perception of the public regarding auditors in
light of the Satyam episode. I will therefore refrain from dwelling on the
subject. I must however state that in my view the situation is serious. Not only
should the ICAI act quickly but it must be seen to act. I am conscious that
there are, and there will be limitations on the speed and extent of actions of
the Institute. I also recognize that a regulator must act with responsibility
and that taking any step without the requisite evidence may cause injustice. I
only hope that these facts are brought to the notice of the public.

The RRC ended on 26th January, 2009 and we rendered the
national anthem. Every time the national anthem is rendered or recited, there is
a surge of patriotism. We feel proud to be Indians. Fifty-nine years ago we
constituted ourselves into a republic. Our nation has now entered the diamond
jubilee year. The next year we will be celebrating the diamond jubilee of our
republic. In the last fifty-nine years how have we fared in regard to the goals
we set out to achieve ?

The Preamble to the Constitution reads

WE, THE PEOPLE OF INDIA, having solemnly resolved to
constitute India into a SOVEREIGN SOCIALIST SECULAR DEMOCRATIC REPUBLIC and to
secure to all its citizens :

JUSTICE, social, economic and political;

LIBERTY of thought, expression, belief, faith and worship;

EQUALITY of status and of opportunity;

and to promote among them all

FRATERNITY assuring the dignity of the individual and the
unity and integrity of the Nation;

Fifty-nine years ago we promised our citizens justice,
liberty, equality and fraternity. Let us look at our performance in each one of
these parameters.

Justice — It is said that justice delayed is justice denied.
On that test alone we have failed miserably. Let alone the time lag, many forums
of redressal are simply not accessible to a vast majority. Judicial
pronouncements are delivered after decades, but many a time do not result in
justice because there is no action by the executive. While it is true that it is
this pillar of democracy that has suffered the minimum decay, justice as
contemplated by the founding fathers of the Constitution is still a mirage.

Liberty — Do our citizens have liberty of expression ? On the
contrary, we seem to have become extremely intolerant. Those whose beliefs do
not conform to beliefs of groups who are powerful, are throttled sometimes
physically. The standards of public morality are set by these groups. They wield
this power because some of them occupy high public office, or on account of
brute force of a mob. Women who constitute half of our citizens have severe
limitations on their freedom and the State seems to be helpless.

Equality — After six decades, disparities both social and
economic persist. On the social front there has been some degree of alleviation,
but on the economic front the gap has widened. Even opportunities are unequal.
Primary education which would have acted as a leveller is not available to vast
majority. As far as higher education is concerned, reservation was expected to
provide relief, but it has been substantially abused, and has created far more
acrimony than the benefits it has bestowed.

Fraternity — We call ourselves Indians, but permit
politicians to divide us on lines of religions, languages, and regional
aspirations. Fraternity is displayed only when a crisis looms large and is
forgotten the moment it blows over.

So our report card is rather dismal. What then is the
solution ? The solution lies in asking questions both to ourselves and the
powers that be and seeking answers again and again from ourselves and those who
are responsible for taking action. For too long we have remained silent. We seem
to have forgotten that 59 years ago we constituted ourselves into a democratic
republic. A democracy can survive and flourish only if every citizen
participates.

So the need is to participate in the democratic process and
it is not limited to elections. It means being accountable to society and
holding others accountable. It is not possible for an individual to carry on
this activity as a sustained programme. In the aftermath of the 26/11 tragedy
very senior and responsible citizens have formed a platform ‘Citizens take
Charge’. It seeks to ask questions and elicit an account from ourselves and the
authorities. Vigilance should become a habit. All of us should join either this
or any similar forum. The name of the forum is not important, the cause that it
promotes is.

I am an eternal optimist. This country has had a glorious
past, and if all of us take a step forward together, I am sure it will have a
brilliant future.

With warm regards,
Anil Sathe

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BCAJ Admin

ICAI And Its Members

1. Companies Bill, 2009 — Appointment and qualifications of directors:

As reported in the earlier issues, the above Bill is pending before the Parliament. The Standing Committee on Finance has submitted its report to the Parliament on 31-10-2010. Several suggestions have been made by this Committee and the Bill is likely to be modified and discussed in the Parliament during the coming few months. Some important changes relating to appointment and qualifications of directors are suggested in the Bill. These are contained in clauses 132-153 of the Bill. The changes suggested are as under:

(i) Clause 132 of the Bill provides that the minimum number of directors shall be three in the case of a public company and two in the case of a private company. As regards one-person company, the minimum number shall be one. It is, further, provided that the maximum number of directors in any company cannot exceed 15, excluding directors nominated by the lending institutions. Further, at least one director should be a resident in India. The company will be entitled to increase the number of directors beyond 15 after passing a special resolution of the shareholders at the general meeting.

(ii) In the case of a listed company, having such amount of paid-up share capital as may be prescribed, the requirement will be that it shall have atleast 1/3rd of the total number of directors as independent directors. The Central Government may prescribe the number of independent directors in case of other public companies and subsidiaries of any public company.

(iii) The term ‘Independent Director’ has been defined in clause 132(5). According to this definition, a nominee director is not to be treated as an independent director. The other conditions for an independent director are as under:

(a) The director should be a person of integrity and should possess relevant expertise and experience; or

(b) The director or his/her relatives —

should not have pecuniary relationship or transaction with the company, its holding, subsidiary or associate company or promotors amounting to 2% or more of its gross turnover or total income during the two immediately preceeding financial years or during the current financial year.

should not hold or should not have held any senior management position or as key managerial personnel or as employee of the company in any three immediately preceeding relevant financial years.

is or has been employee or a partner, in any of the three immediately preceeding financial years, of a firm of auditors, company secretaries or cost auditors of the company or its associates.

is or has been employee or a partner of a legal or consultancy firm which had in any of the three immediately preceeding financial years transaction with the company or its associates amounting to 10% or more of the gross turnover of the firm.

holds, in aggregate, 2% or more of the total voting power of the company.

he is a chief executive or director of any non-profit organisation that receives 25% or more of its income from the company or its associate or holds 2% of more of the total voting power of the company, or

(iv) The role, duties and functions of an independent director will be prescribed by the Central Government by way of rules.

(v) The independent directors shall not be entitled to any remuneration other than sitting fees, reimbursement of expenses, for participation of board and other meetings and profit-related commission, stock option as may be approved by the shareholders.

(vi) An independent director shall not have a tenure exceeding, in the aggregate, a period of six consecutive years on the board of a company. However, after the lapse of three years, he can be appointed as an independent director for up to six years provided that no such director can have or shall have more than two tenures as independent director in any company.

(vii) In clause 146, it is provided that no person shall hold office as director, including any alternate directorship, in more than 10 public limited companies at the same time. Further, it is also provided that, out of the above, maximum number of listed companies in which such a person can be appointed as a director shall not exceed 5.

(viii) Clauses 132-153 contain other provisions relating to mandatory requirement of obtaining DIN, appointment of additional directors, disqualification of directors, duties of directors, their resignation, removal, etc. These provisions are more or less the same as in the existing Companies Act.

2. Treatment of capital expenditure on assets not owned by the company:

A Public sector undertaking registered under the Companies Act, 1956, is engaged in refining and marketing of petroleum products. When a new project by setting up of new refinery is undertaken by the company, it has to incur expenditure on the construction/development of certain assets, like electricity transmission lines, railway sliding, roads, culverts, bridges, oil jetty, etc., in order to facilitate construction of project and subsequently to facilitate its operations. The ownership of such assets (enabling assets) as well as the land on which these assets are situated does not vest with the company.

The existing accounting policy of the company in respect to such ‘enabling assets’ is as under:

(a) Fixed assets which are owned by the company, but built on land not belonging to the company, are treated as fixed assets belonging to the company.

(b) As regards fixed assets constructed, which are not owned by the company, on land not belonging to the company, the expenditure incurred on the constructions of such assets has been classified as ‘Capital Expenditure’ in the balance sheet indicating appropriately, the nature of the expenditure including the fact that the assets are not owned by the company, and after commencement of commercial operations, the same is written off to the profit and loss account.

However, the statutory auditors of the company are of the opinion that existing accounting treatment of such ‘enabling assets’ followed by the company does not appear to be correct. According to them, (a) expenditure should be debited to Capital Work In Progress (CWIP) till the enabling asset is ready for use. (b) On completion of the enabling asset, the same should be capitalised. (c) Such capital expenditure should be reflected as ‘Capital Expenditure on Assets not owned by the Company’. (d) Such capital expenditure should be amortised over the period of its utility, but not exceeding 5 years and (e) Amount amortised should be treated as expenditure during the construction period till the completion of the project, for which the enabling asset was originally created. After the completion of the project, the amortised amount is to be charged to the profit and loss account every year for the balance period of its utility.

Query:

On these facts, the company has sought the opinion of the EAC whether the accounting treatment followed by the company in respect of expenditure incurred on ‘enabling assets’ as CWIP during construction period of the project and charging off the same to the revenue in the year of completion of the project is correct?

EAC opinion:

After considering paragraphs 49 & 88 of the ‘Framework for the Preparation and Presentation of Financial Statements’ the Committee has taken the view that expenditure incurred by an enterprise cannot be recognised as an asset as resource is not controlled by the enterprise. An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise. Further, the Committee has taken the view that an indicator of control of an item of fixed asset would be that the entity can restrict the access of others to the benefit derived from the asset. From the facts of the case it is evident that the ownership of the ‘enabling assets’ does not vest with the company. The assets are available for general public use. Although the company is entitled to use these assets for the purpose of completing its own projects and subsequently for operational purposes, it has no say on the use of such assets by others. Thus, ‘enabling assets’ are not resources controlled by the company and, therefore, the expenditure incurred by the company on such ‘enabling assets’ can not be capitalised as assets either tangible or intangible considering AS-10 and AS-26. Further, the expenditure incurred on ‘enabling assets’ cannot be considered as directly attributable to such assets and therefore the same can not be capitalised.

In view of this, the Committee has taken the view that expenditure incurred on ‘enabling assets’ should be expensed and charged to profit and loss account of the period in which these are incurred.

As far as accounting treatment given by the company in respect of such ‘enabling assets’ which are still lying as CWIP, the Committee has taken the view that the same is an error committed in the prior years by the company, which should be rectified in the financial statements and disclosed as a ‘prior period items’ of the period in which such rectification is carried out in accordance with the requirements of Accounting Standard (AS) 5 “Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”.(Pages 1040 to 1045 of C.A. Journal of January, 2011)

3. ICAI News:

(note : Page nos. given below are from January, 2011 C.a. Journal)

(i) CPE in e-Learning mode:
The Council of ICAI has approved CPE in e-Learning Mode. This decision will facilitate learning for the members just at the click of the mouse. In other words, this will help members to persue CPE Programme conveniently without undertaking the hardship of physical attendance and will prove to be beneficial for each member. (Page 1001)

(ii) Certificate course on valuation:
It is reported that 800 members of our Institute have been registered for certificate course on ‘Valuation’. Examinations are being held in batches at various places all over India. (Page 1001)

(iii) Suggested answers for examination members:
ICAI has hosted suggested answers for the examinations held in November, 2010 on its website. It is reported that the entire study material for the final course has been revised/modified substantially. This will be available to the students in the month of January through their respective branches/regions. (Page 1002)

(iv) Bank branch auditors’ panel for NABARD:
Bank Branch Auditors’ Panel by the Professional Development Committee of ICAI has prepared a Bank Branch Auditors’ Panel for the year 2010-11 and submitted the same to NABARD for appointment of statutory auditors for regional rural bank and state/district central co-operative banks. (Page 1002)

(v) Empanelment of CA firms with C & AG for 2011-12:
C & AG has invited online applications from firms of CAs who wish to empanel for the year 2011-12 for appointment as auditors of Government companies/corporations. Format of the application is available on the website : www.cag.gov.in CA firms can apply or update the data showing status of the firms as on 1-1-2011. This application can be submitted by 31-3-2011. Any changes in the constitution of the firm occuring from 1-1-2011 onwards should continue to be updated by the CA firm in the website which will be available through out the year. (Page 1132)

(vi) New publications of ICAI:

(a) ICAI has published Compendium of Standards on Internal Audit. (As on 1-10-2010)

(b) ICAI has also published Compendium of Opin-ions given by the Expert Advisory Committee (Vol. XXVIII). (Page 1132)

(vii) Grievance cell at WIRC:

A grievance cell has been formed to address issues of members and students related to administrative matters. Members can send the issues by e-mail to grievance@wirc-icai.org or in writing to WIRC. The members of the Grievance Cell are Chairman, Secretary, Shruti Shah, Neel Majithia, (RCMs) and Students Counsellor.

(viii) Extension of CPE Block:

Members may note that ICAI has decided to extend the CPE Block periof of 3 years ending on 31st December, 2010, by three months, i.e., to 31st March, 2011.

(ix) Recognition for Doctoral programme:

IIM Kozhikode & IIM Shillong has recognised Chartered Accountancy qualification as an eligibility to pursue their Doctoral programme i.e., Fellow Programme in Management.

(x) Placement programme:

ICAI has recently organised a special placement programme through video conferencing mode for the organisations functioning in GCC/Middle East countries.

(xi) Arbitration course:

ICAI has created a panel of Arbitrators through the certificate course on Arbitration.

BCAJ Admin

ICAI And Its Members

ICAI and Its Members1.
Disciplinary Case :

In the case of ICAI V/s Shri K.K. Gupta, a complaint was
filed by the RHO Welfare Association against the member. It was alleged that the
member was grossly negligent in the conduct of the audit of books of the
association on the following counts:

(i) The member had written the books of accounts for the
two years under audit and also audited and given audit reports for these two
years. This was against the code of conduct of ICAI.

(ii) In spite of several requests, he did not return the
books of accounts, vouchers, statements, etc., to the association.

(iii) The member did not give effect to various decisions
of the General Body of the Association while preparing and auditing the
accounts.

(iv) When the association managed to collect the books of
accounts for one of the years, it was noticed that some of the balances, as
per the accounts, did not tally with the figures in the audited accounts.

(v) The member did not come forward to explain the above
discrepancies in the accounts and audited statements.

(vi) No provision was made in the accounts for outstanding
liabilities for salaries, wages, electric charges, water charges, etc., and
the audit report was not qualified for this non-provision.

The Disciplinary Committee, after examining the evidence,
held that the member was grossly negligent in the performance of his
professional duties and was also guilty of other misconduct. He had not complied
with the requirements of the Code of Conduct. The council accepted this decision
and recommended to the High Court that the name of the member be removed from
the Register of Members for one year.

The Delhi High Court has held that the member was guilty of
professional misconduct and other misconduct and confirmed that his name be
removed from the Register of Members for a period of one year.

(Refer P. 1065
of the C.A. Journal for January, 2010)

2.
Some Ethical Issues :

The Ethical Standards Committee of the ICAI has clarified
about the publication of a CA’s expertise, specialisation and knowledge in any
particular field when he is appointed as a director on the Board of Directors of
a company as hereunder:

The Council’s attention has been drawn to the fact that more
and more companies are appointing chartered accountants as directors on their
boards. The prospectus or public announcements issued by these companies often
publish descriptions about the chartered accountant’s expertise, specialization
and knowledge in any particular filed or add appellations or adjectives to their
names. Attention of the members in this context is invited to the provisions of
Clause (6) and (7) of Part I of the First Schedule to the CA Act.

In order that the inclusion of the name of a member of the
institute in the prospectus or public announcements or other public
communications issued by the company in which the member is a director, does not
contravene the above noted provisions, it is necessary that members take
necessary steps to ensure that such prospectus or public announcements or public
communications do not advertise his professional attainments; and also that such
prospectus or public announcements or public communications do not directly or
indirectly amount to solicitation of clients for professional work by the
member. While it may be difficult to lay down a rigid rule in this respect,
members must use their good judgement, depending on the facts and circumstances
of each case, to ensure that the above noted provisions are complied with both
in letter and spirit.

It is advisable for a member that as soon as he is appointed
as a director on the board of a company, he should specifically invite the
attention of the management of the company to the aforesaid provisions and
should request that before any such prospectus or public announcements or public
communication mentioning the name of the member concerned is issued, the
material pertaining to the member concerned should, as far as is practicable, be
approved by him.

(Refer P.1052 of the C.A. Journal for January, 2010)

3.
Some instances of non-compliance with reporting obligations

The Financial Reporting Review Board (FRRB) has, during their
review of some published accounts, come across the following instances of common
non-compliance of reporting obligations by our members. These are published on
P. 1158 – 1160
of the C.A. Journal of January, 2010.

(i) AS – 22 – Certain enterprises disclose advance income
tax paid (current tax asset) and provision for income tax (current tax
liability) separately in their balance sheets, i.e., they do not offset the
amounts. This is contrary to AS 22, Accounting for Taxes on Income. Paragraph
27 of AS 22 requires that an enterprise should offset assets and liabilities
representing current tax if the enterprise:

(a) Has a legally enforceable right to set off the
recognised amounts ; and

(b) Intends to settle the asset and the liability on a net
basis.

(ii) AS – 22 – It has been observed in the case of a few
enterprises that the balances of unabsorbed depreciation and/or losses are
being carried forward under tax law, due to which the deferred tax asset has
been recognised in the financial statements. However, it omits to disclose the
nature of evidence that supports the recognition of such deferred tax assets
with virtual certainty.

(iii) As – 22 – In case of the financial statements of a
few enterprises, it is observed that it has disclosed only the opening
balance, addition during the year and the closing balance of the deferred tax
assets and liabilities,. Also thereis no disclosure of the break-up of the
deferred tax assets and liabilities into their major components which is not
as per the requirements of AS 22.

(iv) Schedule VI to the Companies Act

a) In case of the financial statements of a few enterprises, it was noted that the opening balance of certain specified reserves do not tally with their closing balance of the last year. Neither the notes to accounts nor the schedules contain any information regarding the

differences in such balances. It may be noted that pursuant to the instructions given in Part I of Schedule VI to the Companies Act, 1956, under the head “Liabilities”, the additions and deductions since the last balance sheet are to be shown under each of the specified heads. Therefore, such differences should not arise in the financial statements.

Paragraph (xi) of Part II of Schedule VI of the Companies Act, 1956 requires that the amount of income tax deducted from the gross income from investments and interests should be disclosed. Some enterprises in their financial statements do not disclose the amount of income tax deducted from the gross income from investment and the interest. This is not in compliance with the requirements of Schedule VI of the Companies Act, 1956.

Paras 10 and 11 of the above note relate to some discrepancies noticed in audit reports on financial statements. The requirements, AAS28
(The Auditors’ Report on Financial Statements), have been explained.

Paras 12 to 15 of the above note relate to some discrepancies noticed in reporting under CARO
– 2003.

Members are requested to take note of these discrepancies and ensure that they are not repeated.

4. Corporate Governance Task Force Report

The CII had appointed a “Task Force” under the chairmanship of Shri Naresh Chandra on Corporate Governance Code. The Task Force has submitted its draft report to the Corporate Affairs Ministry. The ministry has published this report for the comments of the general public. (Refer the Chartered Secretary Journal for December, 2009, Pages 1768 – 1778). In dealing with “Role of Directors”, this report states:

i) Auditor – Company Relationship

The report of the Naresh Chandra Committee on Corporate Audit and Governance has suggested that auditors refrain from providing non-audit services to their audit clients. It has also recommended an explicit list of prohibited non-audit services. The Task Force noted that the recommendation has been endorsed by the Ministry of Corporate Affairs and has also been proposed under the Companies Bill, 2009. It concurred with the recommendation that the legislation should expressly prohibit auditors from rendering certain services to their audit clients. Audit firms should have to mandatorily disclose network agreements between audit firms and non-audit companies, pecuniary interests exceeding 2% between the audit firm and its affiliate non-audit

service firm or company, and Chinese wall and data protection /confidentially measures that are in place between them. The Task Force noted the existing practice in this regard and found it to be sufficient.

ii) Auditors’ Revenues from the Audit Client

Not more than 10% of the revenues of an audit firm, singly or taken together with its subsidiaries, associates or affiliated entitles, should come from a single corporate client or group with whom there is also an audit engagement.

iii) Certificate of Independence

Every company must obtain a certificate from the auditor certifying the firm’s independence and an arm’s length relationship with the client company. The Certificate of Independence should certify that the firm, together with its consulting and specialized services, affiliates, subsidiaries and associated companies or network or group entities have not /has not undertaken any prohibited non-audit assignments for the company, and are independent vis-à-vis the client company, by reason of revenues earned and the independence test are observed.

iv) Audit Partner Rotation

The Task Force considered the on- going debate on the requirements of rotation of audit versus rotation of audit partner after a specified period of time. The view that audit firms should be changed after 9 or 10 years was discussed. In line with the international practice, the Task Force considered it expedient to recommend mandatory rotation of audit partners after two terms of three years each. This would help discourage creation of any affinity between auditors and controlling shareholders or promoters or the management and may help to prevent “capture” of the audit process by corporate insiders. An initial experience of the impact of rotation of the audit partner should be studied. If this measure does not improve or prevent “capture of audit process by corporate insiders”, then the alternative of rotation of auditor’s after nine years should be made mandatory. Therefore, it is recommended that:

The partners handling the audit assignment of a listed company should be rotated after every six years. The partners, and at least 50% of the audit engagement team responsible for the audit, should be rotated every six years.

A “cooling-off” period of three years should elapse before a partner can resume the same audit assignment.

v) Auditor’s Liability

The firm, as a statutory auditor or internal auditor, has to confidentially disclose its net worth to the listed company appointing it. Each member of the audit firm is liable to an unlimited extent.

vi) Appointment of Auditors

The Audit Committee of the Board of Directors shall be the first point of reference regarding the

appointment of auditors. The Audit Committee should have regard to the entire profile of the audit firm, its responsible audit partner, his or her previous experience of handling audit for similar sized companies and the firm and the audit partner’s assurance that the audit clerks and/or understudy chartered accountants or paralegals appointed for discharge of task for the listed company, shall have done a minimum number of years of study of Accounting Principles and have a minimum prior experience as audit clerks.

In order to discharge the Audit Committee’s duty, the Audit Committee shall:

Discuss the annual work programme and the depth and detailing of the audit plan to be undertaken by the auditor, with the auditor;

Examine and review the documentation and the Certificate for Proof of Independence of the audit firm, and

Recommend to the board, with reasons, the appointment / reappointment or removal of the external auditor, along with the annual audit remuneration.

vii) Qualifications introduced by Statutory Auditors or Internal Auditors in their Audit Reports, Tax Audit Reports or CARO Reports

The Task Force recommended that the ICAI appoint a committee with a significant membership of government directors, and invited management professional and lawyers having an understanding of accounts to standardise the language of disclaimers or qualifications permissible to audit firms. Anything beyond the scope of such permitted language should require the auditor to provide a sufficient explanation and should not create a new escape route for avoiding responsibility for discharging the audit function diligently, as the public relies upon them to do a thorough job.

5. WIRC – Elections

The following members have been elected to WIRC for a 3-year term, from 2010 to 2012.

Sarvashri (i) Agarwal VK, (ii) Apte DM, (iii) Bhandari AS, (iv) Chhaira JA, (v) Gandhi DB, (vi) Hegde NC, (vii) Joshi MM , (viii) Joshi SY, (ix) Kabra DK, Khandelwal DK, (xi) Kinare MP, (xii) Lalan SD, Majithia NP, (xiv) Patel BK, (xv) Patodia SK, Pawar CV, (xvii) Raval PR, (xviii) Shah JM, Shah RN, (xx) Shah SD, (xxi) Shah SJ, and Sharma UR.

ICAI News

(Note : Page nos. given below are from the C.A. Journal of January, 2010)

Accounting Standard (AS – 4) (Revised) Exposure Draft – Events after the Reporting Period

The Exposure Draft of this Standard has been published from Pages 1188 – 1192. Members are requested to send their comments by 1.2.2010. This standard corresponds to IAS 10. When finalized, this standard will supersede existing AS – 4 dealing with “Contingencies and Events Occurring After the Balance Sheet Date”.

ii) Campus Placement Programme

A Campus Placement Programme for newly qualified CAs has been organized by ICAI for those members who have passed the final CA Examination held in May, 2009 and November, 2009. The dates for the programme as reported on Page 1176 are as follows:

iii) Admission of IA & AS Officers in CA Profession

The ICAI Council has decided that Indian Audit and Accounts Service (IA & AS) officers working in C & AG offices can take up the CA course by complying with the prescribed requirements. Any IA & AS officer desiring to acquire CA membership will have to pass CPT, IPCC & CA Final Examination. He will also have to undergo three years Articleship. His service with C & AG office for one year will be considered as industrial training and he will have to undergo two years of Articleship with a practicing CA. (Refer Page 1038)

iv) New Guidelines for opening new branches of ICAI

At present, a branch of ICAI can be opened at a city if there are 150 members or more in that city or within a distance of 50 kms. from the city limits. Now, a new branch can be opened if there are more than 100, but less than 150 members, and there are more than 250 students in the city or within 50 kms. from the city. Further, if there is no branch in any district, a branch can be opened in any city of that district if there are at least 100 members in that district. (Refer Page 1038)

ICAI New Publication

Compendium of Opinions of EAC – Vol. XXVI. (Page 1171).

BCAJ Admin

ICAI And Its Members

ICAI and Its Members

1. Disciplinary case :

In the case of ICAI v. Shri P. U. Patil, the Addl.
Collector of Customs had filed a complaint against the member alleging that the
member had issued false certificates of past exports to several parties without
verifying any supporting records or documents. On the strength of these false
certificates, certain unscrupulous importers were able to obtain import licences
and effect imports without payment of duty.

The allegations were examined by the Disciplinary Committee
of ICAI and it was found that the member was guilty of professional misconduct
under clauses (2), (7), and (8) of Part I of the Second Schedule to the C.A.
Act. The Council of ICAI accepted this finding and referred the case to the
Bombay High Court with recommendation to award punishment of removal of name of
the member for one month.

In the statement made before the customs authorities, the
member stated that his friend one Mr. ’D’ brought one certificate typed on the
letter-head of one of the importers and also brought one form of certificate to
be issued by him on his letter-head. The member requested Mr. ’D’ to produce the
relevant documents and records. However, Mr. ’D’ told him that the said importer
was known to him and, therefore, there was no need to verify the
records/documents. On this basis, the member issued the certificate without any
verification. The member had issued similar certificates to other parties also
on the basis of the recommendation of Mr. ‘D’. The member could not produce any
working papers before the Disciplinary Committee. The member did not attend
before the Bombay High Court. Considering the conduct of the member, the High
Court has ac-cepted the recommendation of the Council and held that the name of
the member be removed for one month. (P. 1198 of C.A. Journal for January,
2009.)

2. Compliance with CPE Credit Hours :

ICAI has made the following announcement.

(i) The time limit for completing the CPE Credit Hours for
2008 has been extended to 31-1-2009. In other words, a member may complete the
required 30 hours (including minimum 20 structured) of learning for 2008 by
31-1-2009. Similarly, members not in practice and senior citizens who have to
complete specified period (15 or 10) of unstructured learning in 2008 can
complete this period by 31-1-2009.

(ii) Members who have not completed the above CPE Credit
Hours of learning in a year will have to complete double the number of deficit
hours in the next year.

(iii) In cases where members holding certificate of practice
do not complete the CPE Credit Hours for 2008, the Council has decided that
names of such members will not be included in any panel that is forwarded by the
Institute, on or after 1st January, 2009, to any regulators or other
authorities. In the case of a firm, if any partner/paid assistant has not
completed the requisite CPE credit hours for the year 2008, the name of the
partner/paid assistant will not be included while considering the eligibility
criteria and this fact will be stated in case the firm is otherwise found
eligible after excluding names of such partners/paid assistants.

3. Accounting Technicians Course :

(i) The C.A. Regulations are amended by a Notification dated
2-12-2008 to give recognition to the above course for students. These amendments
are published on pages 1232-1236 of C.A. Journal for January, 2009. Broadly
stated, this course provides that a student who has passed 10 + 2 examination
can join this course after passing the CPT entrance examination. Thereafter, the
student needs to pass four papers in (a) Accounting, (b) Business Laws, Ethics
and Communication, (c) Cost Accounting and Financial Management, and (d) Direct
& Indirect Taxation after undergoing study course for about 9 months with the
Board of Studies. The student has also to undergo 100 hours computer training
and an orientation course. To ensure that the student has adequate practical
exposure, such student will be required to undergo practical training of one
year under a Chartered Accountant whether in industry or in practice before
he/she is awarded Accounting Technician Certificate (ATC). He/she will be able
to use designation as ‘Accounting Technician’.

(ii) The following categories of candidates are entitled for
grant of Accounting Technician Certificate and such students, for the purpose of
issue of the Certificate are required to make an application to ICAI at Regional
office. No fees are payable for getting this certificate.

(a) Passed Professional Competence Examination, in
entirety, and also completed the prescribed period of practical training, as
applicable at the relevant time including excess leave, if any.

(b) Passed Professional Education (Examination II), in
entirety, and also completed the prescribed period of practical training, as
applicable at the relevant time including excess leave, if any.

(c) Passed Intermediate Examination under the Chartered
Accountants Regulations, 1988, in entirety, and also completed the prescribed
period of practical training, as applicable at the relevant time including
excess leave, if any.

(d) Passed Intermediate Examination under the Chartered
Accountants Regulations, 1964, in entirety, and also completed the prescribed
period of practical training, as applicable at the relevant time including
excess leave, if any.

(e) Passed Intermediate or the First Examination under the
Chartered Accountants Regulations, 1949, in entirety, and also completed the
prescribed period of practical training, as applicable at the relevant time
including excess leave, if any.

(f) Exempted from passing the First Examination under the
Chartered Accountants Regulations, 1949, in entirety, and also completed the
prescribed period of practical training, as applicable at the relevant time
including excess leave, if any.

Note : The above application can be made online and the
relevant Form of Application appears on the website of the Institute at http://www.icai.org/addupdate/dec72008.php.

4. Changes in the C.A. Course for Students:

Some important changes are made in the existing CA. Course for the students. In the new scheme, any CPT pass student can get registered for ‘Integrated Professional Competence Course’ (IPCC) (new name for the course earlier called PCC) without articleship registration and can sit in the new IPCC exam after 9 months of registration. The new IPCC comprises 2 groups. Group 1 has 4 papers and Group 2 has 3 papers.

Though the number of papers of the IPCC has been increased from 6 to 7, there is no change in the syllabus. The existing syllabus on Accounting has been divided into two parts. The first part has been named as Accounting in Group I and the second part has been named as Advanced Accounting in Group H. Only on passing Group I of the IPCC will a student be eligible to get registered for articleship, which shall now be for a period of 3 years as against the existing requirement of 3 1/2. Further, under the new scheme, a student will be eligible to sit in the final exam in last six months of his articleship as against the existing condition to sit in final exam only after the completion of articleship.

The new scheme has come into effect from 10th December 2008.However, an option has been given till 30th June 2009to the existing CPT pass students and to those who appeared in CPT examination held on 14th December 2008to choose between the PCC and the new IPCC.Those students who have passed CPT and have not so far got themselves registered for articleship and also those who pass CPT exam held on 14th December 2008, are free and eligible to get registered under the new scheme for the IPCC after the declaration of CPT result without articleship registration. All such students getting registered for the IPCC on or before 31st January 2009 will be eligible to sit in the new IPCC exam scheduled for November, 2009, as they will have completed 9 months of study by that time.

Details of the new course are given in the Notification dated 2-12-2008published at pages 1232-1236 and on pages 1238-1239of C.A. Journal for January, 2009.

5. Internal Audit – Standards & Exposure Drafts (SIA) :

(Note: Page Nos. below are from CA. Journal for January, 2009)

A. Standards on Internal Audit (SIA) :

(i) SIA-9 Communication with Management (Pages 1253-1255)

(ii) SIA-10 Internal Audit Evidence (Pages 1256-1257)

(iii) SIA-11 Consideration of Fraud in an Internal Audit (Pages 1257-1259)

B. Exposure Drafts on Standards on Internal Audit (SIA) :

i) SIA – Using the Work of an Expert (Pages 1286-1287)

ii) SIA- Internal Audit in an Information Technology Environment (Pages 1288-1292)

iii) SIA – Knowledge of the Entity and its Environment (Pages 1292-1294)

6. Auditing Standards and Exposure Drafts:

(Note: Page Nos. below are from c.A. Journal for January,2009)

A. Standards on Auditing (SA) :
(i) SA-230 (Revised) – Audit Documentation (Pages 1260-1265)
(ii) SA-560 (Revised) – Subsequent Events (Pages 1266-1271)

B. Exposure Drafts of Standards on Auditing (SA) :
(i) SA-320 (Revised) – Materiality in Planning and Performing an Audit (Pages 1272-1276)
(ii) SA-450 – Evaluation of Misstatement Identified During the Audit (Pages 1277-1281)
(iii) SA-610 (Revised) – Using the Work of Internal Auditors (Pages 1282-1285)

7. ICAI News:

(Note: Page Nos. below are from C.A. Journal for January,2009)

i) Enhancing Audit Quality:

Some observations made by Financial Reporting Review Board are listed in order to enable members to improve the quality of audit of corporate bodies. These observations relate to major non-compliances relating to :

AS-18 Related Party Disclosures
AS-19 Leases
AS-20 Earnings per Share
AS-22 Accounting for Taxes on Income
AS-26 Intangible Assets
AS-28 Impairment of Assets (Page 1226)

ii) ICAI to be XBRL Indian Jurisdiction

The Institute has been assigned the Indian jurisdiction of XBRL (eXtensible Business Reporting Language) International. Consequently, the Institute will be the Indian entity which will encourage the development and adoption of XBRL in India and will represent the Indian interest at this international level. The Ministry of Corporate Affairs and the various regulators, namely, RBI, SEBI and IRDA are part of the group constituted by the ICAI and are supporting the Institute in this initiative. XBRL is a novel way of communication of business and financial data that is of immense utility to governments, regulators, stakeholders, etc.

iii) Exclusive T.V. Channel for learning:

The Institute is launching an exclusive TV channel dedicated to learning. This channel will greatly boost the ICAl’s credentials as a pioneer in teaching through the distance education mode. This channel will make quality accountancy education accessible to interested students in the country, and will particularly cater to the needs of the students hailing from lower strata of society. This will also help in conducting CPE programmes on a regular basis. These programmes will also be accessible even in remote/far-flung areas of the country.

iv) New ICAI Secretary:

Shri T. Karthikeyan who joined ICAI in 1978 has been appointed as Secretary of the Institute. He has worked in the Institute in various capacities during the last 30 years and gained popularity with the staff, students and members of the Institute by his efficient and dedicated work. In particular, he has thorough knowledge about the CA. Act and Regulations as well as disciplinary cases. We wish him successful term of office as Secretary of the Institute.

v) ICAI Publications:

a) Implementations Guide to SQC-l (Page 1152)
b) Handbook on Foreign Trade Policy and Guide to Export and Import (Page 1242).

BCAJ Admin

Right to Information

Part A: Decision of CIC

Section 8(1)(b), (d), (e), (h) and (j)

Mr. Rakesh Kumar Gupta of Delhi has sought information regarding matters relating to the income tax of eight parties: (a) Three limited companies including Escorts Ltd (b) Three centers of Escorts Heart Institutes & Research, and (c) Mr. Rajan Nanda and Dr. Naresh Trehan.

Both the PIO and FAA refused to grant information, holding that the information related to third parties, and the third parties, in reply to the notice issued to them, had strongly objected the disclosure of information relating to their income tax records.

According to the PIO, the applicant was not able to substantiate as to what the overriding public interest in disclosing the information relating to third parties is, and that unless the case of public interest is established, the disclosure would lead to an invasion of privacy of the assessees.

It was easy for the Commission to take the decision that clauses (b)(d), (e) and (h) do not apply to this case. The said clauses cover (b) Information forbidden to be published by any court of law, etc. (d) Information which is in the nature of trade secrets, intellectual property, etc. (e) Information held in a fiduciary relationship, etc. (h) Information which would impede the process of investigation, etc.

However, as to applicability of clause (j), the ‘order’ discusses the issue in detail and takes a view contrary to the view taken by many earlier decisions of the Commission. The said clause 8 (1)(j) provides the following: Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen information, which relates to personal information, the disclosure of which has no relation to any public activity or interest, or which would cause unwarranted invasion of the privacy of the individual unless the Central Public Information Officer or the State Public Information Officer or the appellate authority, as the case may be, is satisfied that the larger public interest justifies the disclosure of such information. Provided that the information which cannot be denied to the Parliament or a State Legislature shall not be denied to any person.

As the subject matter of this case is of interest to the profession and as it is a landmark decision, I reproduce this part of the decision almost completely:

“The final exemption claimed by the Department as in the case of Dr. Naresh Trehan and three other third parties is under the Section 8(1)(j). The three other third parties are the Escorts Heart Institute and Research Centre, Delhi, Escorts Heart Institute and Research Centre, Chandigarh, and Escorts Heart Institute and Research Centre Ltd. Section 8(1)(j) is with regard to personal information and, therefore, it can only be claimed by natural persons and not by corporate entities. The three institutes cannot claim to have ‘personal’ information. There is a difference between having a personality, i.e., a legal personality, and owning ‘personal information’. Personal information is information relating to a natural person, not a legal person. Words in a law should normally be given, including the meanings, in common language. In common language, we would ascribe the adjective ‘personal’ to be an attribute, which applies to an individual and not to an institution or a corporate body. From this, it flows that ‘personal’ cannot be related to institutions, organisations or corporates. Hence Section 8(1)(j) cannot be applied when the information concerns institutions, organisations or corporates. Therefore, the Commission is of the opinion that Section 8(1)(j) cannot be relied on by these three third parties, as they are not natural persons.

With regard to the information relating to Dr. Naresh Trehan, it has been argued by his representative that the information sought is personal as it contains personal financial information of the assessee, including various assets, income and expenditure and the disclosure of this information has no relationship with any public activity or interest. It has been alleged that the information has been sought with ill will and malice, with the motive to harass and blackmail the assessee. Furthermore, the Appellant is likely to misuse the information and could endanger the life and property of the assessee if the information goes in the hands of unsocial elements. There is no larger public interest served in disclosing this information to the Appellant.

The Commission has considered the submissions made by the Appellant, the Department and the representative of Dr. Naresh Trehan. To qualify for this exemption, the information must satisfy the following criteria:

1. It must be personal information.

There is no doubt that information with regard to Dr. Naresh Trehan is personal information.

2. It must not have been disclosed to the public authority as part of a public activity

The phrase ‘disclosure of which has no relationship to any public activity or interest’ means that the information must have been given in the course of a public activity. Various public authorities, in performing their functions, routinely ask for ‘personal’ information from citizens, and this is clearly a public activity. When a person applies for a job, or gives information about himself to a public authority as an employee, or asks for permission, licence or authorisation, all these are public activities. Also when a citizen provides information in discharge of a statutory obligation, this too is a public activity. Therefore, information provided by an assessee to the department for purposes of income tax assessment is information disclosed in relation to a public activity and therefore this part of Section 8(1)(j) is inapplicable in the present case..

3. The disclosure of the information would lead to unwarranted invasion of the privacy of the individual.

Certain human rights such as liberty, freedom of expression or right to life are universal and therefore, would apply uniformly to all human beings worldwide. However, the concept of ‘privacy’ is a cultural notion, related to social norms, and different societies would look at these differently. Therefore referring to laws of other countries to define ‘privacy’ cannot be considered a valid exercise to constrain the citizen’s fundamental Right to Information in India.

Parliament has not codified the right to privacy so far, hence in balancing the Right to Information of Citizens and the individual’s Right to Privacy, the Citizen’s Right to Information would be given greater weightage.

The State has no right to invade the privacy of an individual. There are some extraordinary situations where the State may be allowed to invade the privacy of a citizen. In those circumstances, special provisions of the law apply; usually with certain safeguards.

Therefore, where the State routinely obtains information from citizens, this information is in relationship to a public activity and will not be an intrusion on privacy. As this information has been provided by the assessee to meet his legal obligations, there is no unwarranted invasion of his privacy by the state. Therefore the disclosure of the same information to another person cannot be construed as being an unwarranted invasion of the privacy of the individual.

Given our dismal record of misgovernance and rampant corruption which conspires to deny citizens their essential rights and dignity, it is in the fitness of things that the Citizen’s Right to Information is given greater primacy with regard to privacy.

Hence information provided by individuals in fulfillment of statutory requirements will not be covered by the exemption under Section 8 (1) (j).

It has come out during the hearing before the Commission, – and through the submissions made by the various parties, – that the Appellant is an informer for the Department. Escorts has also raised the matter in its written submissions of 17 September 2009, and asked the Commission to decide, ‘Whether an informer of the I.T. department can seek information in respect of the records of a third party for an ulterior motive?’ The ulterior motive being referred to appears to be the reward money, which the appellant might get.

The Appellant has given a list of additions made by various Tax evasion officers relating to the information being sought by him”

The Order then gives details of such additions (same are not reproduced here) running into crores of rupees.

Thus, the appellant has pointed out that Assessing officers have added hundreds of crores as additional income and CIT (A) has also confirmed some of them. He fears that a lot of alleged tax evasion will go unpunished, leading to a loss of revenue and perhaps his reward money. If citizens monitor this through RTI, it could be a major gain for public revenue and perhaps a good check on corrupt officials.

Based on above, Commission directed PIO to provide the inspection of the records and also the other information sought by the appellant before 15th January 2009.

[Mr. Rakesh Kumar Gupta vs. The PIO c/o CIT (Central)-2 New Delhi: No. CIC/ LS/A/2009/000647/SG/5887 of 14-12-2009]

Part B: The RTI Act

Continuing from October to January BCAJ, the summary of two reports:

One
study by PricewaterhouseCoopers (PWC) as appointed by the Department of
Personnel and Training (DOPT), titled “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 a number of other social
bodies including TISS, Mumbai under the title “Safeguarding the Right to
Information”.

DOPT-PWC Report:

Institutionalising third party audit

It
is strongly felt that in the absence of a strong review mechanism,
there is a high probability that the level of RTI implementation would
regress to lower levels.

Key issues observed

Some of the key facts observed during the study:

Limited infrastructure/processes with SIC to carry out
responsibilities under Sections 19(8) (a), 25(1), 25(2), 25(3f) 25(3g)
and 25(5), leading to non-compliance by PAs with regard to RTI
provisions.

No/inadequate mechanism for monitoring
proactive disclosure, resulting in low compliance to Section 4(1b) of
the RTI Act (65% of the PAs have not published their proactive
disclosure on the websites).

Non-adherence to service levels of 30 days causing delay in providing information to the RTI applicant.

Recommendations

To ensure better service delivery by authorities and officials, third
party audits should be institutionalized to support the Information
Commission in carrying out responsibilities under Sections 19(8)(a),
25(1), 25(2), 25(3f), 25(3g) and 25(5). Institutionalising regular
audits would facilitate the Public Authorities’ compliance with the RTI
Act (through the audit findings made available by Information
Commission). In this context, it is recommended to have a third party
audit (at least annually) to support the Information Commissions and RTI
Implementation Cell to monitor the performance of Public Authorities
and to take appropriate action in case of any deviation.

Moreover, it is also suggested that the SIC website should have a list
of all the Public Authorities within the jurisdiction of the Information
Commission. The website should have a feature for citizens to report
noncompliance (through tick-mark options) for a Public Authority. The
reports generated through this application, would be helpful for a
Public Authority and the Information Commission to take appropriate
actions.

Raag & NCPRI Report:

Current status and Preliminary Findings:

(7) RTI and the Courts

This
component is compiling data on court cases, in which appellants have
challenged State or Central Information Commissions. Analysis is being
driven by the following questions:

What types of CIC and SIC rejections are being taken to the High Court and to the Supreme Court?

What types of appellants are tending to do this?

How quickly is the higher judiciary resolving these cases?

Have judicial rulings, by and large, upheld the spirit of the RTI? In
which cases have judicial rulings tended to be in favour of appellants,
and in which against?

Has the referral of such cases to the
court influenced the offending public authority to provide requested
information, even if there is a judicial ruling?

Preliminary findings

Status
– This analysis has commenced with a review of RTI cases in the Delhi
High Court. Since many of the appeals heard by the Central Information
Commission are referred to the Delhi High Court, this makes it potential
representative of the RTI cases being heard by other High Courts as
well. Additionally, many Delhi Right to Information Act cases are
currently also lying before the Delhi High Court.

While 18
RTI cases have been located in the Delhi High Court records so far, only
15 of these have been selected for examination for analysis for the
Interim Report. These were filed before the Delhi High Court and Supreme
Court of India from 2006 to 2008.

In most of these cases,
the applicant—and not the Government—has taken the case to Court. Only
in four cases has the Union of India (UOI) approached the Courts. Even
though the sample size is small, a preliminary analysis reveals that the
Courts have shown sensitivity by admitting Writ petitions that
challenge the decisions of the Central Information Commission. However,
it must be pointed out that it is premature to comment upon the normal
outcome of such cases given that very few have as yet been decided.

But
given the way cases have been progressing, it can be inferred that many
RTI cases are pursued much like regular cases, in a “run of the mill”
manner. In one pending case, in which the applicant sought information
about the responsibilities of MCD officials charged with cleaning public
places of a certain village of Delhi, the judiciary has ignored the
public cause involved and MCD threats to the applicant and his family.
The case has lain before court for more than 1.5 years.

However,
in other cases, landmark judgments have been made, and that too
expeditiously, pointing to the beginning of systemic change in the
judiciary’s approach to RTI. One such is the Bhagat Singh vs. CIC &
Income Tax Department of Dec 2007, in which the judgement is liberal. It
interprets the exemption to information disclosure under Sec 8 (1) (h)
that disallows disclosure on the ground that “information which would
impede the process of investigation or apprehension or prosecution of
offenders”. The judgment is particularly important as it sets a
precedent and strongly supports the spirit and underlying principles of
the Right to Information Law. Further, the judgment was delivered within
8 months of its filing.

RTI and International Donors

Background:
While international donors fund social, infrastructural, and
institutional capacity -building activity, they have historically only
been required to report to the Indian Government. Resultantly, citizens
often have little information or say in how these programmes work or the
impact they have.

This component of the study is studying donor
disclosure policies to understand what kinds of information they require
donors to share directly with the Indian public, how these policies
compare with the requirements that the Right to Information Act places
upon Indian public authorities, and how the Right to Information Act is
shaping donor thinking on this issue. The analysis will also examine
donor disclosure policies in practice, and whether donors are sharing
the maximum information permissible or just their minimum requirement.
Also being studied is donor spending on RTI programmes in India, to
understand the manner in which they are attempting to influence the RTI
regime in the country.

Eleven international donors are being
studied, including nine of the largest multilateral and bilateral
government donors to India (World Bank, Asian Development Bank, Japanese
Bank for Inter-national Cooperation, GTZ, Russians, United Nations
Development Programme, European Union, DFID and USAID) and two of the
world’s largest private grant -giving foundations with operations in
India (Bill and Melissa Gates Foundation, Ford Foundation).

Research
comprises a desk review of the public information disclosure policies
and practices of the selected international donors, complemented by
face-to -face interviews with key stakeholders (including international
donors’ governance and accountability advisors in India, government
officials, beneficiaries, and members of the public).

Research is
still at a preliminary stage, although the desk review of information
disclosure policies and practices of all donors is now almost complete.

Early findings

UNDP, ADB and World Bank disclosure policies were easily available on
the Internet; other donors’ disclosure policies were not so easily found

While UNDP’s, ADB’s and the World Bank’s public disclosure policies
have undergone a series of revisions, ADB was the first to revise its
policy following stakeholder consultations.

With respect to information that is exempt from disclosure:

UNDP – Broad definition of exceptions

ADB – well defined list

WB – everything else apart from documents about WB strategies and programmes is denied / discretionary

UNDP,
ADB and the World Bank all provide a list of documents related to their
operations (strategies, programmes and projects), but only ADB’s policy
appears to have a presumption in favour of disclosure.

Part C : Others News

Important Pronouncements by the Commission :

When
Shailesh Gandhi, CIC, was in the BCAS office addressing RTI activists
and journalists, he distributed compilation of 8 important and pro-found
pronouncements by the Central Information Commission (Continuing from
January 2010)

2. Alternative routes to access information

No
Claim has been made by the PIO of any exemption under the RTI Act to
deny the information. If a public authority has a process by a Citizen
other than the route provided by the Right to Information Act, it is the
Citizens’ right to decide which route he wishes to use. The existence
of another method of accessing information cannot deny the Citizen his
freedom to use his fundamental right codified under the Right to
Information Act. If Parliament wanted to restrict his right, it would
have been stated in the law. Nobody else has the right to constrain the
rights of the Citizen.

There is no Provision in the Right to
Information Act, which restrains the Citizen’s right to use it, if
another route to access information has been of-fered or is available.
It is a Citizen’s right to use the most convenient and efficacious means
avail-able to him.

Section 2(h) of the RTI Act

In
the last issue of BCAJ, under Part A, was cov-ered the Order of CIC on
section 2(h). I had there mentioned that many bodies operate primarily
as service to the citizens of India but they take a negative view that
they are not covered under section 2(h) and hence RTI Act does not apply
to them.

It is reported that following bodies disputing
application of RTI to them are now held by Delhi H.C to be covered under
RTI Act.

Indian Olympic Association

The Commonwealth Games Organizing Committee

Sanskriti School

Justice Bhat stated:

The
RTI Act recognizes that non-state actors may have responsibilities of
disclosing information which would be useful and necessary for the
people they serve as it furthers the process of empowerment, assures
transparency and makes democracy respon-sive and meaningful.

CIC has ruled that the Bar Councils are covered under the RTI Act and
they have been directed to set-up a mechanized for operation of RTI.
CIC’s decision is based on the fact that Bar Councils are set-up under
the Advocate Act 1961, Passed by Parliament.

Against above rulings, it is interesting to note what happened in the Supreme Court early in January’10

The
Supreme Court stayed the Orissa high court order, which had upheld a
2006 order of Naveen Patnaik government bringing Reliance Power owned
two power distribution companies under the purview of RTI Act.

The
advocate of the power distribution companies argued before the Supreme
Court that the RTI Act was applicable only to “public authority”, the
meaning of which was erroneously expanded by the government and agreed
to by the HC to include the power distribution companies under the RTI
Act.

In this connection remarks of Hon. Justice Chandra-chud as
reported in BCAJ of Dec 09 (Page 117) are very relevant. He said:
“Definition of ‘Information’ given in the Act, covers information
relating to any private body which can be accessed by a Public Authority
under any other law for the time being in force”. Thus, what can be
accessed by Public Authority can be accessed by any individual citizen
also. Therefore, though the implementation is presently focused on
Public governance or Public officials, it has to be extended to private
governance in course of time.

Missing File

nine
applicants got jobs with various central government organisations,
1,993 applicants got placement in state government offices,
quasi-government and local bodies affiliated to the state and the
central government provided placement to 1,265 applicants and 1,115
placements came from private sector.

“The exchange does not give
jobs to lakhs of educated youngsters. Only a lucky few get placements.
They have become irrelevant in today’s privatised economy,” said RTI
economist Chetan Kothari who had filed a query.

The Judgement of the Courts

The
Supreme Court ruled that the judge cannot be asked under the RTI Act as
to why and how he came to a conclusion in a judgement.

Said the
bench of Chief Justice K G Balakrishnan and Justice B S Chauhan: ‘A
judge speaks through his judgments and he is not answerable to anyone as
to why he wrote the judgement in a particular manner’.

Renaming of High Courts

The
BMC has lost the file of a controversial South Mumbai building, which
was in the name of Dawood Ibrahim’s wife. This information was revealed
in a reply to the RTI application filed with the municipal
commissioner’s office. In his reply dated December 22, 2009, T M Bhatia,
assistant engineer-building and factories (C ward), said the file
papers pertaining to the building were not traceable/available.

Disclosure of assets held by Public servants

After
politicians and judges of the Supreme Court, now the assets of babus
have also been prised open to public scrutiny by RTI. In a landmark
order, the Central Information Commission (CIC) has said that disclosure
of information such as assets of public servant, routinely collected by
the public authority, should be made available to the public under the
Right To Information Act.

Employment Exchanges – how they operate!

In
reply to an RTI query, it is gathered that only 4,532 of the total
number of 30 lakh-plus job-seekers, who went through the Maharashtra
employment exchanges last year, got jobs. One hundred and fifty

In
reply to the RTI query, the ministry of law and justice has stated that
it has received the proposal to change names of four high courts.

The proposal to change the names of Bombay HC to Mumbai HC, Calcutta
HC to Kolkata HC, Gauhati HC to Guwahati HC and Madras HC to Chennai HC
is under consideration of the government.

RTI Act and Consumer Protection Act (CPA)

Very
interesting and a landmark judgement both for the RTI Act and the CP
Act has been delivered under the CP Act. Issue is whether failure to
furnish information without valid reason constitutes a deficiency in
service for which compensation can be sought by a consumer complaint.

The
applicant, Dr. Rao won the matter before the District Consumer Forum
but lost it before the Karnataka State Commission. The issue has now
been decided by the National Commission in a trend setting judgement.

The
National Commission observed that the settled law was that even if a
particular law barred the jurisdiction of courts, a complaint could
still be filed under the provision of the CPA as it provided an
additional remedy. The RTI Act did not bar the jurisdiction of the
consumer fora. Also, the provisions for appeal under the RTI Act were
restricted to the failure to furnish the information sought, but there
was no provision to claim compensation for deficiency in service. An
applicant under the RTI Act has to pay fees for getting the information,
and hence he acquires the status of a consumer. If there is any
deficiency in service in respect of providing such information, a
complaint could be filed under the CPA for claiming compensation.

BCAJ Admin

Part B — Some recent landmark judgments

New Page 1

I. High Court :

1. Whether order liable to be set aside when issued after
a period of more than four months after hearing ?

Shivsagar Veg. Restaurant v. Asstt. Commr. Of Income-tax,
Mumbai, 2009 (13) STR 11 (Bom.)

The appellant was aggrieved by the order of ITAT as the order
was passed after 4 months of hearing, dismissing the appeal without recording
reasons, propositions of the law urged and case laws relied upon by them.

It was contended that Appellate authority could not just stay
away from its duty of assigning reasons as to why it agreed with the reasons and
findings of the lower authority by just stating that findings of CIT(A) are
just, fair and in accordance with the law and inter alia decisions in the
cases of Jawahar Lal Singh v. Naresh Singh, (1987) 2 SCC 222 and State
of West Bengal v. Atul Krishna Shaw, AIR 1990 SC 2205 were relied upon.
Various judgments had been considered for prejudice caused to the litigant as
regards delayed delivery and even pronouncement. Relying inter alia on
the case of Anil Rai v. State of Bihar, 2002 (3) BCR (SC) 360, the Court
directed the president of the Appellate Tribunal to issue guidelines to all the
Benches of Tribunal to decide matters heard within three months from the date of
closing of judgment. The Appellate Tribunal directed to rehear the said appeal
and give fresh order with sound reasons.

II. Tribunal :

2.
Coaching services provided online
whether classifiable as online information and data based services ?

Burden of
proof on the Department.

Dewsoft Overseas Pvt. Ltd. V. CST, New Delhi 2008 (12)
STR 730 (Tri.-Del.)

(i) The issue in the case related to whether providing online
computer training is classifiable as online information and data-based access
and retrieval service. As the essential character of the service provided
involved computer education through the medium of Internet, the service was not
restricted to merely providing online access to data or information and
therefore was classifiable as commercial training and coaching service. However,
Notification No. 9/03-ST, dated 20-6-2003 exempted computer training institutes,
the appellant’s activity was held as exempt.

(ii) The appellant provided the said services of computer
training through various franchisees. During the period under dispute, four
conditions were required to be fulfilled cumulatively in order to hold the
arrangement as ‘franchise’. The Tribunal held that the burden of proving that
all the conditions were fulfilled lay on the Revenue. Since the Revenue failed
to do so, the Tribunal held that no service tax was payable as the arrangement
could not be considered as ‘franchise’.

3. CENVAT Credit — whether credit for service tax paid on
cell phones, landline and courier services while providing output services of
maintenance and repairs allowable ?

No penalty where dispute relating to interpretation of
statute.

Wiptech Peripherals Pvt. Ltd. V. CCE, Rajkot 2008 (12)
STR 716 (Tri.-Ahmd.)

The Tribunal held that the issue relating to service tax on
cell phones or landlines was no more res integra and stood settled by
various Tribunal decisions. However, since the appellant was unable to establish
that cell phones in the names of individuals were exclusively used in relation
to output services, the matter was remanded to the original authority for
verifying the said facts.

The Tribunal held that no penalty can be levied when the
dispute relates to interpretation of the provisions of law, while setting aside
the penalty.

4. Institutes registered with UGC, whether considered commercial coaching
centre :

ICFAI v. CC & CE, Hyderabad-II, (2008) 17 STT 501
(Bang.-CESTAT)

The appellant, a non-profit society registered under the
State Societies Registration Act imparts education and awards degrees/diplomas
recognised by the law. Service tax was demanded under ‘Commercial Training &
Coaching Service’. The Commissioner held that absence of profit motive was an
immaterial factor and rejected the contention of the appellant. The appellant
contended that the Institutes were societies for educational purposes and their
surplus was pooled back for attainment of their objectives. ICFAI, Dehradun and
ICFAI, Tripura were recognised as universities under the affiliated universities
of Universities Grants Commission and the institutions were exempted from
payment of Income-tax u/s.12A or u/s.10(23C)(vi) of the Act. Circular No.
59/8/2003-ST, dated 20-6-2003 clarified that institutes or establishments which
issued certificate, diploma or degree recognised by law and provided training
for competitive examinations were outside the scope of service tax. The
difference between ‘education’ and ‘coaching or training’ was emphasised and
reliance was placed on Bihar Institute of Mining and Mine Surveying v. CIT,
(1994) 208 ITR 608 (Pat.) for the same. Further, replacement of the word
‘commercial concern’ with ‘any person’ w.e.f. 1-5-2006 had not been effected in
respect of ‘Commercial Training or Coaching Centre’ implied that an activity
could not be commercial in nature but intention to take it up could be, which
was not apparent in the case.

Against this, the Revenue contended that distinction between
‘education’ and ‘training’ was baseless relying on the decision in the case of
JMC Educational and Charitable Trust v. CCE, (2008) 12 STT 308 (Chennai-CESTAT)
where pre-deposit amount was demanded.

It was finally held that the appellant were imparting higher
education and conferred degrees recognised by law and had recognition from
various State Governments and UGC and as such, these services provided by
institutions registered under the Societies Registration Act for educational
purposes were outside the purview of the definition of commercial coaching. The
decision in the case of Great Lakes Institute of Management Ltd. V. CST,
(2008) 12 STT 306 (CESTAT–Chennai) was relied upon. The longer period was not
found invokable as the brochures and information available through website, etc.
Proved that evasion was not the intention.

5. Import of service :

ABS India Ltd. V. Commissioner of Service Tax, Bangalore,
2008 (13) STR 65 (Tri.-Bang.)

The appellant, an Indian company, booked orders for sale of goods manufactured by its subsidiary situated in Singapore and received certain commission for which they paid service tax initially. The appellant argued that service was deemed to be provided abroad as it could not be considered as delivered in India when the recipient was located abroad. Relying on Blue Star Ltd. v. Commissioner, 2008 (11) STR 23 (Tribunal), it was held that if the recipient is located abroad, the company situated abroad utilised the benefit of the service rendered by the Indian company was exported service and therefore not liable for service tax.

Unitech Ltd. v. CST, Delhi 2008 (12)STR752(Tri.-Del.)

The issue in this case related to:

i) Whether the definition of architect under the Act is capable of covering persons not registered as architects in India?

ii) Whether the assessee is liable to pay service tax as receiver of service?

It was held that definition of architect services under the Act is wide enough to cover commercial concerns engaged in rendering services in the field of architecture and therefore, the recipient received taxable services of architect for the purposes of the Finance Act, 1994.

The Tribunal further held that although comprehensive provisions for taxing import of services came when S. 66A was introduced on 18-4-2006and import rules were notified by Notification No. 11/2006-ST from 18-4-2006,but the taxable services provided in India by a foreigner or a non-resident not having any office or business establishment in India to any person in India are liable for service tax even prior to 18-4-2006 u/s.66 read with S. 65(105) of the Act by virtue of Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 read with Notification No. 36/2004-ST, dated 31-12-2004issued u/s.68(2) of the Finance Act, 1994 as recipient in India was liable for service tax with effect from 1-1-2005.

6. Refund:

K. C. Enterprises v. Commissioner of Central Excise, Vadodara 2009.(13) STR 39 (Tri.-Ahmd.)

The appeal was filed on the ground that during the period, the appellant had paid service tax for the amount billed for the services rendered rather than the amount actually received. The appellant was required to produce invoicewise details, date of receipt of actual amount along with cheque numbers or mode of payment, instead of merely submitting monthwise details showing amount billed and received. Further, the appellant failed to substantiate its claim by not submitting TR-6 challan with relevant documents and evidences of payment of tax to enable refund sanctioning. The appeal therefore was rejected.

BCAJ Admin

Right To Information

Right to Information

S. 8(1)(h) :

S. 8(1)(h) reads as under :

8(1) Notwithstanding anything contained in this Act,
there shall be no obligation to give any citizen,

(h) information which would impede the process of
investigation or apprehension or prosecution of offenders;

The petitioner, Bhagat Singh in the writ proceedings
approached High Court of Delhi seeking partial quashing of the Order of CIC and
also petition to direct PIO to supply the information sought by him immediately.

The facts of the case are as follows :

The petitioner was married in 2000 to Smt. Saroj Nirmal. In
November 2000 she filed a criminal complaint alleging that she had spent/paid as
dowry an amount of Rs.10 lakh. Alleging that these claims were false, the
petitioner, with a view to defend the criminal prosecution launched against him,
approached the Income-tax Department with a tax evasion petition (TEP) dated
24-9-2003. Thereafter, in 2004 the Income-tax Department summoned the
petitioner’s wife to present her case before them. Meanwhile, the petitioner
made repeated request to the Director of Income-tax (investigation) to know the
status of the hearing and TEP proceeding. On failing to get a response he moved
an application under the Act in November, 2005. He requested for the following
information :

“(i) Fate of petitioner’s complaint (tax evasion
petition) dated 24-9-2003.

(ii) What is the source of income of petitioner’s wife
Smt. Saroj Nirmal other than from teaching as a primary teacher in a private
school ?

(iii) What action the Department had taken against Smt.
Saroj Nirmal after issuing a notice u/s.131 of the Income-tax Act,
1961/pursuant to the said Tax Evasion petition.”

The application was rejected by PIO u/s.8(1)(j). The first AA
also rejected it not only u/s.8(1)(j) but also u/s.8(1)(h).

In the second appeal before CIC, it rejected the contention,
of PIO & AA that clause (j) applies. As to clause (h), it ruled :

“as the investigation on TEP has been conducted by DIT
(Inv), the relevant report is the outcome of public action which needs to be
disclosed. This, therefore, cannot be exempted u/s.8(1)(j) as interpreted by
the Appellate Authority. Accordingly, DIT (Inv) is directed to disclose the
report as per the provision u/s.10(1) & (2), after the entire process of
investigation and tax recovery, if any, is complete in every respect’’

Before the Court, petitioner submitted that disclosure of the
information sought could not in any way impede the investigation process nor CIC
has given any reason as to how such disclosure would hamper investigation.

The Court in para 12 analysed the Right provided under the
RTI Act, 2005 and in paras 13 & 14 analysed the right of information vs. denial
thereof :

12. The Act is an effectuation of the right to freedom of
speech and expression. In an increasingly knowledge-based society,
information, and access to information holds the key to resources, benefits
and distribution of power. Information, more than any other element, is of
critical importance in a participatory democracy. By one fell stroke, under
the Act, the maze of procedures and officials barriers that had previously
impeded information, has been swept aside. The citizen and information seekers
have, subject to a few exceptions, an overriding right to be given information
on matters in the possession of the state and public agencies that are covered
by the Act. As is reflected in its preamble paragraphs, the enactment seeks to
promote transparency, arrest corruption and to hold the Government and its
instrumentalities accountable to the governed. This spirit of the Act must be
borne in mind while constructing the provisions contained therein.

13. Access to information, u/s.3 of the Act, is the rule
and exemption u/s.8, the exceptions. S. 8 being a restriction on this
fundamental right, must therefore be strictly construed. It should not be
interpreted in manner as to shadow the very right itself. U/s.8, exemption
from releasing information is granted if it would impede the process of
investigation or the prosecution of the offenders. It is apparent that the
mere existence of an investigation process cannot be a ground for refusal of
the offenders; the authority withholding information must show satisfactory
reasons as to why the release of such information would hamper the
investigation process. Such reasons should be germane, and the opinion of the
process being hampered should be reasonable and based on some material. Sans
this consideration, S. 8(1)(h) and other such provisions would become the
heaven for dodging demands for information.

14. A right based enactment is akin to a welfare measure
and like the Act, should receive a liberal interpretation. The contextual
background and history of the Act is such that the exemptions outlined in S.
8, relieving the authorities from the obligation to provide information,
constitute restrictions on the exercise of the rights provided by it.
Therefore such exemption provisions have to be constructed in their terms;
there is some authority supporting this view [see Nathan Devi v. Radha Devi
Gupta, 2005 I AD (SC) 357; VII (2004) SLT 615; 2005 (2) SCC 201; B. R.
Kapoor v. State of Tamil Nadu, VI (2001) SLT 659; 2001 (7) SCC 231 and
V. Tulasamma v. Sesha Reddy, 1977 (3) SCC 99]. Adopting a different
approach would result in narrowing the rights and approving a judicially
mandated class of restriction on the rights under the Act, which is
unwarranted.

The Court then held as under:

“As to the issue of whether the investigation has been complete or not, I think that the authorities have not applied their mind about the nature of information sought. As is submit-ted by the Petitioner, he merely seeks access to the preliminary reports investigation pursuant to which notices u/s.131, u/s.143(2), u/s.148 of the Income -tax Act have been issued and not as to the outcome of the investigation and reassessment carried on by the Assessing Officer. As held in the preceding part of the judgment, without a disclosure as to how the investigation process would be hampered by sharing the materials collected till the notices were issued to the assessee, the respondents could not have rejected the request for granting information. The CIC, even after overruling the objection, should not have imposed the condition that information could be disclosed only after recovery was made.”

The Court then set aside the order of CIC in so for as it withholds information until tax recovery orders are made. It also directed PIO and AA to release the information sought on the basis of the materials available and collected by them within two weeks.

[Bhagat Singh v. CIC and others, WP(C) No. 3114 of 2007 dated 3-12-2007] [RTI R IV (2010) 223 (Delhi)]

PART B?: The RTI Act, 2005

S. 19(8)(a) and implementation of S. 4 of the RTI Act:

S. 19 deals with “Appeal. Ss.(8) grants certain powers to the Information Commission (both central

& state). Ss.(8) reads as under:

(8) In its decision, the Central Information Com-mission or State Information Commission, as the case may be, has the power to:

(a)   require the public authority to take any such steps as may be necessary to secure compliance with the provisions of this Act, including:
(i)   by providing access to information, if so requested, in a particular form;
(ii)   by appointing a Central Public Information Officer or State Public Information Officer, as the case may be;
(iii)   by publishing certain information or categories of information;
(iv)   by making necessary changes to its practices in relation to the maintenance, management and destruction of records;
(v)   by enhancing the provision of training on the right to information for its officials;
(vi)   by providing it with an annual report in compliance with clause (b) of Ss.(i) of S. 4;
(b)   require the public authority to compensate the complainant for any loss or other detriment suffered;
(c)   impose any of the penalties provided under this Act;
(d)   reject the application.

It appears for the first time Commission has is-sued directions to Public Authorities u/s.19(8)(a) of the RTI Act as above jointly signed by 7 Central Information Commissioners. Document is dated 15-11-2010. Brief contents of the said directions are as under:

Commission has been nothing in its decisions that although the RTI Act has now been in place for five years, a key element of the law- voluntary disclosure by public authorities, enshrined in S. 4 of the Act has not been fully implemented in letter and spirit. There are, no-doubt departments and public authorities, which are more transparent and open than the others, but most do not conform to the matrix of disclosure set out in S. 4.

Secrecy in the functioning of the public authority should be the exception and not the norm, since as stated in the preamble to the RTI Act, transparency of information is vital to a functioning democracy.

The first step towards promotion of transparency in the functioning of the public authority should be an improvement in the record-management practices. S. 4 lists out the ingredients of record management in some detail.

The time has now come when the public authorities must start a sustained drive to inform their governance practices with transparency and to take the series of small steps required to put in place a system which promotes it. S. 4 provides only a window to possible actions and much more will need to be done in order to achieve the type of goals which are envisaged.

Based on above introductory write up, the Commission by powers invested

U/s.19(8)(a) of the RTI Act has directed that obligations set out in S. 4 of the RTI Act be discharged by the public authorities as per the time limits set out by it. Its directions pertain to two items:
(1) Record Management Obligation and (2) Personnel related details and functions of public authorities.

S. 4 requires public authority to publish certain information covering above two subjects. Commission notes that action in this regards has been tardy and that it is time that these requirements of S. 4 be fully implemented in a systematic manner and directs

That these actions as ordained above shall be completed by all public authorities within a period of 120 days from the date of this order.

Commission further directed that,

(i) The information in compliance with S. 4 obligation by Public authorities shall be uploaded on a portal to be set up exclusively for this purpose by the CIC.

(ii) Within 30 days of this order, each public authority shall designate one of their senior officers as ‘Transparency Officer’ (with all necessary supporting personnel), whose task it will be
(a) to oversee the implementation of the S. 4 obligation by public authorities, and to apprise the top management of its progress.

(b) to be the interface for the CIC regarding the progress of (a).
(c) help promote congenial condition for positive and timely response to RTI-requests by CPIOS, deemed-CPIOs.

(d) to be a contact point for the public in all RTI-related matters.
(iii) Names of the transparency officers shall be communicated to throw Commission by public authorities.

Each ministry or department of the Government has been directed to forward these directions to public authorities u/s.25(2) of the RTI Act, 2005.

The Commission has written to all secretaries in each ministry or department of the Government of India and has requested them to forward the directions to Public Authority under their jurisdiction exercisable u/s.25(2) of the RTI Act.

In such communication, the Commission writes;

(a) The ultimate aim of the RTI Act is that public should have access to most information held by public authorities without the use of the RTI laws. S. 4 of the RTI Act is an initial, but necessary, prelude to achievement of that objective. Hence the importance of this Section.

The Commission is to set up portal for uploading all S. 4 compliance-related information. The idea is that an average citizen should be able to see for himself as to how public authorities have progressed in complying with the transparency obligations cast on them by S. 4 of the RTI Act.

It is now learnt as reported in media that DiPT has challenged the demand made by the Commission for Pro-active disclosure and appointment of transparency officers by public authorities. DoPT itself has refused to follow CIC’s directions as noted above CIC has now sought legal advice on the objections raised by DoPT.

Citizens and RTI Activists are perplexed at this attitude of DoPT. Now, Chief Information Commissioner, Satyananda Mishra has reacted & stated; “I do feel that the ministry should rise above the technicality and look at the objectives of the CIC order which was to ensure that Government implement the provisions of the Act”.

Let us hope that other ministries. Departments do not flout these directions so boldly and proactively demanded by the Central Information Commission.

INFORMATION ON & AROUND

RTO’s (Regional Transport Office) working in Mumbai:

If you have to wait for days to get a new license or renew an existing one, do not get surprised. Frustrated by delays in issuing licences/duplicate permits and also in the ‘annual passing (clearance)’ of autos/taxis, an auto union led by Thampy Kurlan recently sought data under RTI, which showed a sharp contrast between vehicular population and the RTO staff strength in Mumbai.

In March 1999, the total number of registered vehicles in all three Mumbai RTOs was 9.10 lakh. This rose to 16.74 lakh by March 2009. Similarly, the number of driving licences issued till March 1999 was 33.5 lakh, which increased to 56.77 lakh in March 2009. In comparisons, the staff strength (of RTO) declined from 913 officers and men (in 1999) to just 738 employees in 2009.

Working in MANTRALAYA, Mumbai:

IT pays to be a government servant?! For, where else would you not be sackled if you did not report to duty for even one day in almost two years?

That, unfortunately, is the state of affairs in Mantralaya where action is still pending against such employees, as was revealed in the Law and Judiciary department’s reply to an RTI by MID Day. However, despite filing the RTI application on absenteeism in Mantralaya almost a month back, the 34 other departments have not replied to it at all.

The RTI was sent to the Public Information Officer, General Administration Department (GAD), on November 25, 2010, it sought information on Mantralaya staffers who remained away from duty and the action that was taken against them by the government. On December 6, S. B Dalvi, information officer from the Law and Judiciary department, replied to the RTI and stated that 5 out of the 300-plus employees in the department have been irregular at work and have not been reporting for more than 18 months.

SEBI challenges CIC’s order in Court:

SEBI has moved Bombay High Court against an order of the Central Information Commission (CIC) to make public action by it on a complaint against RIL in 2000 on the sale of 12 crore shares for the benefit of its promoters. The CIC, on an RTI application by Arun Agrawal, had directed SEBI to provide details of action taken on the complaint of S. Gurumurthy of Swadeshi Jagran Manch

Right of service after RTI:

Times of India under ‘YOUR RIGHT TO KNOW’ writes: Without the right to service, the RTI will be rendered meaningless as mere knowledge of what the babu has noted in the files is not enough. It must be supplemented by giving people the right to demand service from civil servants. This alone can make files get dusted out and translate decisions to actual work on the ground.

Youngest Indian to file an RTI query:

At CNN/IBN Citizen Journalist awards ceremony this month an award is given to Aishwarya Sharma, from Lucknow, young girl of 9 years who filed a Right to Information (RTI) query for removal of a garbage disposal site in front of her School.

Her initiative was a success and a Public Library has now been constructed in that place.

BCAJ Admin

Right To Information

r2iRight to Information
is a fundamental right :

One Mr. Mangla Ram Jat of Jaipur had sought the following
information from the PIO of Banaras Hindu University (BHU).

“Kindly make available to me the complete text of the
‘question paper’, provided by the university to the examinees of the pre-P.G.
Medical (M.D/M.S) Examination 2008 held on 17-2-2008 by the Institute of
Medical Sciences, along with standard answer key adopted by the university.”

He received the following reply :

“With reference to the information/document sought by you
under the RTI Act, this is to inform you that the question paper along with
the key answer to M.D/M.S Exam-2008, conducted by the Institute of Medical
Sciences, BHU cannot be given to you as the disclosure of the same is not
favourable in larger public interest.”

First AA also rejected the appeal. Second appeal then was
filed on 31-5-2008, which came for hearing before the Central Information
Commissioner Mr. Shailesh Gandhi. In his order, he has dealt with some basic
issues and the high power of RTI. The order is considered as landmark and hence
many paras thereof are reproduced hereunder :

The Right to Information is one of the most fundamental human
rights recognised by the world community and stands incorporated in the
Universal Declaration of Human Rights and International Covenant on Civil and
Political Rights (Art. 19). This has always been a fundamental right of the
citizens under Article 19 (1)(a) of the Constitution of India, and stands
codified as the Right to Information Act, 2005.

Before going further, it is desirable to look into the
Preamble of the Act and some of its provisions. The Preamble reads as :

“And whereas democracy requires an informed
citizenry and transparency of information which are vital to its functioning
and also to contain corruption and to hold governments and their
instrumentalities accountable to the governed;

“And whereas revelation of information in actual
practice is likely to conflict with other public interests including efficient
operations of the governments, optimum use of limited fiscal resources and the
preservation of confidentiality of sensitive information;

“And whereas it is necessary to harmonise this conflicting
interest while preserving the paramountcy of the democratic ideal;

“Now therefore, it is expedient to provide for furnishing
certain information to citizens who desire to have it.”

The preamble is the soul of the Act and gives an insight into
the minds of the framers of the Act. It clearly spells out the aims and
objectives of the Act. Accountability and transparency are the paramount
objectives of the Act. Right to Information is not only a legal right, but also
a fundamental right as enunciated by the Supreme Court in plethora of judgments.

S. 3 of the Act states : “Subject to the provisions of this
Act, all citizens shall have the right to information.”

As per S. 3 of the Act, citizen’s right to access information
under the Act is absolute, subject only to limitations prescribed under the Act.
This Section forms the core of the Act and is a crisp, unambiguous declaration
of the aims and objectives of the Act. To make this right meaningful and
effective, citizens are not required to give any justification for seeking
information as laid down in S. 6(2) which reads as follows :

“An applicant making request for information shall not be
required to give any reason for requesting the information or any other
personal details except those that may be necessary for contacting him.”

The obligation on the public authority to give information to
the sovereign citizens is absolute and is limited only by S. 8 and S. 9. (the
said Sections not reproduced here).

Any refusal of information has to be only under one or more
grounds mentioned in S. 8 (1) or S. 9. The Act gives no scope to the
adjudicating authorities to import new exemptions other than those that have
been provided under the Act and thereby deny the information. In a democracy the
government belongs to the people and therefore the rights of the owner to access
this information has to be respected very carefully. Since in S. 3 it has been
stated that ‘subject to the provisions of this Act, all citizens shall have the
right to information’, it follows that denial of information can only be on the
basis of the exemptions in the Act and no other grounds for denial are valid.

A similar question relating to revealing information
regarding exam details came up for consideration under the Act before the High
Court of Calcutta in the matter of Pritam Rooj v. University of Calcutta and
Ors., (AIR 2008 Cal. 118). This judgment which was pronounced on 28-3-2008,
after the orders of the Commission which have been relied upon by the
respondent, states :

“The umbra of exemptions must be kept confined to the
specific provisions in that regard and no penumbra of a further body of
exceptions may be conjured up by any strained devise of construction”.

Going through the decision in Appeal No. 845/ICPB/2007 titled
as B. L. Goel v. AIIMS relied upon by the respondent, the Commission
finds that none of the exemptions as required under the Act to deny information
have been relied upon by the Commission while deciding the said appeal. The
Commission is of the view that the aforesaid appeal was decided citing argument
of ‘public interest’, which is not an exemption under the Act. While deciding
the said appeal, the Commission came to the conclusion that ‘by disclosing this
information we will not be able to protect any larger public interest’. However,
this Commission, after going through the above quoted Sections of the Act is of
the view that nothing in the Act envisages denial of information on the ground
that the information will not be able to protect any larger public interest.

The test of public interest is to be applied to give information, only if any of the exemptions of S. 8 apply. Even if the exemptions apply, the Act enjoins that if there is a larger public interest, the information would still have to be given. There is no requirement in the Act of establishing any public interest for information to be obtained by the sovereign citizen; nor is there any requirement to establish ‘protecting of any larger public interest’. Therefore, in view of the above provisions of the Act, the denial of information in the Commission’s orders is ‘per incuriam’. I therefore, respectfully differ with the view taken by the Commission in B. L. Goel v. AIIMS.

This Commission is conscious of the fact that it has been established under the Act and being an adjudicating body under the Act, it cannot take upon itself the role of the legislature and import new exemptions hitherto not provided. The Commission cannot of its own impose exemptions and substitute their own views for those of the Parliament. The Act leaves no such liberty with the adjudicating authorities to read law beyond what it is stated explicitly. There is absolutely no ambiguity in the Act and tinkering with it in the name of larger public inter-est is beyond the scope of the adjudicating authorities. Creating new exemptions by the adjudicating authorities will go against the spirit of the Act.

Under this Act, providing information is the rule and denial an exception. Any attempt to constrict or deny information to the sovereign citizen of India without the explicit sanction of the law will be going against rule of law.

Right to Information as part of the fundamental right of freedom of speech and expression is well established in our constitutional jurisprudence. Any restriction on the fundamental rights of the citizens in a democratic polity is always looked upon with suspicion and is invariably preceded by a great deal of thought and reasoning. Even the Parliament, while constricting any fundamental rights of the citizens, is very wary. Therefore, the Commission is of the view that the Commission, an adjudicating body which is a creation of the Act, has no authority to import new exemptions and in the process curtail the fundamental right of information of citizens.

Even the exemptions u/s.8(1) are not absolute, and are subject to larger public interest as mentioned in S. 8(2) which reads,

“Notwithstanding any of the exemptions permissible in accordance with sub S. (1), a public authority may allow access to information if public interest in disclosure outweighs the harm to protected interest.”

The concept of public interest cannot be invoked for denial of information. The Section empowers the Public Information Officer to provide the exempted information if it is in the larger public interest; meaning thereby that access to the exempted information can be allowed if public interest is served in providing the information.

Therefore, for the reasons stated above, the Commission comes to a conclusion that there can be no sanction of law for denying the information to the appellant.

The appeal is allowed.

The PIO will give the information sought by the appellant in his RTI application before 15 January, 2009.

[Mr. Mangla Ram fat v. CPIO, Banaras Hindu University, Appeal No. CIC/OK/ A/2008/00860 decided on 31-12-2008]

CIC v. SC:

A very interesting, delicate and significant issue has surfaced in the context of jurisdiction of Central Information Commission v. that of Supreme Court of India.

Chief Justice of India (CJI) Balakrishnan had taken the view:

“The Chief Justice is not a public servant. He is constitutional authority. RTI does not govern constitutional authorities”.

While the Chief Central Information Commissioner, Wajahat Habibullah held the view:

“The office of the CJI comes under the purview of the RTI”.

Facts of the appeal which came before the Central Information Commission are:

Shri Subhash Chandra Agrawal submitted an application under the RTI Act in November 2007 requesting the tPIO of Supreme Court of India (SC) to provide him a copy of the resolution dated 7-5-2007 passed by all the Judges of the SC which required every Judge to make a declaration of assets in form of real estate or investments held in their names or in the name of their spouses and any person dependent on them to the CJl. The appellant also requested the CPIO to provide him information on any such declaration of assets, etc. ever filed by the Hon’ble Judges of the Se. The RTI application also covered a request for information concerning any declarations filed by the High Court Judges about their assets to the respective Chief Justices in the various High Courts. While the CPIO of the SC provided a copy of the resolution dated 7-5-1997, as referred to above, he declined to provide the remaining part of the information concerning the declaration of assets by the Hon’ble Judges of the SC and High Courts on the ground that the said information is not held by or under the control of the Registry of the SC of India.

The First AA after hearing the appellant in person and after perusal of the records decided to remand back the matter to the CPIO to consider the question as to whether S. 6(3) of the RTI Act is liable to be invoked by the CPIO. The CPIO heard the appellant again in respect of the applicability of S. 6(3) of RTI Act to the facts and circumstances of the case and after considering the matter decided as follows:

“In the case at hand, you yourself knew that the information sought by you is related to various High Courts in the country and instead of applying to those Public Authorities you have taken a short circuit procedure by approaching the CPIO, SC of India remitting the fee of Rs.lO payable to one authority and getting it referred to all the Public Authorities at the expense of one CPIO. In view of this, the relief sought by you cannot be appreciated and is against the spirit of S. 6(3) of the RTI Act, 2005.

You may, if so advised, approach the concerned Public Authorities for desired information.”

When the second appeal came before the Central Information Commission, it decided to constitute full bench of the Commission and heard the matter. Both the parties were represented by senior advocates, the appellant by Shri Prashant Bhushan and another and the SC by Shri Amarendra Sharan, additional Solicitor General and another. Arguments of both the sides are as under:

Learned counsel appearing on behalf of the Supreme Court of India submitted that the RTI application had two parts, the first part related to copy of Resolution, which has already been provided to the appellant, and the 2nd part relates to declaration of assets by the Supreme Court Judges. CPIO submitted that the Registrar of the Supreme Court does not hold the information. The learned counsel submitted that the Resolution passed by the Judges is an inhouse mechanism. The declaration regarding assets of the Judges is only voluntary. The resolution itself describes submission of such declarations as ‘confidential’. It was also submitted that any disclosure of these declarations would be breach of fiduciary relationship. The learned counsel also submitted that the declarations are submitted to the Chief Justice of India not in his official capacity but in his personal capacity and that any disclosure will be violative of the Resolution of the Hon’ble Judges which seeks to make these declarations ‘confidential’. It was also contended that the disclosure will also be contrary to the provisions of S. 8(1)(e) of the Right to Information Act.

Learned counsel appearing for the appellant submitted that the declaration of assets by the Judges is ‘information’ within the meaning of S. 2(f) of the RTI Act and the same is held by the Supreme Court, which is therefore accessible within the meaning of S. 2(h) of the Act. If the Registrar of the Supreme Court states that the information is not held by them but held by Chief Justice of India, then the Chief Justice of India is a separate Public Authority independent and distinct from the Supreme Court of India. The Commission, therefore, has to decide as to whether the Supreme Court of India and the Chief Justice of India are part of the same Public Authority or the CJI constituted a separate and independent Public Authority. If the two are different and distinct Public Authorities then the CPIO should have transferred the RTI application to the Chief Justice of India under S. 6(3) of the Right to Information Act. He also argued that the information held either by the Supreme Court or by the Chief Justice of India cannot be denied to a citizen seeking the same under the provisions of the Right to Information Act.

Based on the above, the Full Bench consisting of IC A. N. Tiwari, IC Prof. M. M. Ansari and Chief IC-Wajahat Habibullah decided as under:

The Supreme Court of India is an institution created by the Constitution and is, therefore, a Public Authority within the meaning of S. 2(h) of the Right to Information Act.

The status and position of the Chief Justice of India is unique under the RTI Act. The Chief Justice of India is also designated as ‘Competent Authority’ u/s.2(e) of the Right to Information Act.

The Chief Justice of India in case of Supreme Court of India and the Chief Justice of High Court in case of High Court are also thus designated as ‘Competent Authority’ within the meaning of S. 2(e) of the RTI Act and S. 28 of the Right to Information Act empowers them to frame Rules to carry out provisions of Right to Information Act.

It may further be mentioned that while the Rules ” made by the Central Government u/ s.27 are required to be laid before each House of Parliament and the Rules made by the State Governments are required to be laid before each House of Legislature, there is no such requirement in respect of the Rules framed by the Chief Justice of India in case of Supreme Court and Chief Justice of a High Court in case of a High Court u/ s.28 of Right to Information Act.

The rule-making power has been explicitly given for the purpose of carrying out the provisions of the RTI Act. The Act, therefore, empowers the Supreme Court and the other competent authorities under the Act and entrusts upon them an additional responsibility of ensuring that the RTIAct is implemented in letter and spirit. In view of this, the contention of the respondent Public Authority that the provisions of Right to Information Act are not applicable in case of Supreme Court cannot be accepted.

After deciding the above, the Commission went on to decide whether the Chief Justice of India and the Supreme Court of India are two distinct Public Authorities or one Public Authority.

In the order, it records as under:

If the provisions of Article 124 of the Constitution are read in view of the above perspective, it would be clear that the Supreme Court of India, consisting of the Chief Justice of India and such number of Judges as the Parliament may by law prescribe, is an institution or authority of which the Hon’ble Chief Justice of India is the Head. The institution and its Head cannot be two distinct Public Authorities. They are one and the same. Information, therefore, available with the Chief Justice of India must be deemed to be available with the Supreme Court of India. The Registrar of the Supreme Court of India, which is only a part of the Supreme Court, cannot be categorised as a Public Authority, independent and distinct from the Supreme Court itself.

In view of this, the question of transferring an application u/ s.6(3)of the Right to Information Act by the CPIO of the Supreme Court cannot arise. It is the duty of the CPIO to obtain the information that is held by or available with the Public Authority. Each of the sections or department of a Public Authority cannot be treated as a separate or distinct Public Authority. If any information is available with one section or the department, it shall be deemed to be available with the Public Authority as one single entity. The CPIO cannot take a view contrary to this.

It may be noted that the information sought in this case was very limited, the applicant was not seeking a copy of the declarations or the contents therein or even the names, etc. of the judges filing the declaration, nor is he requesting inspection of any such declaration already filed. He is seeking simple information as to whether any such declaration of assets, etc. has ever been filed by the Judges of the Supreme Court or High Courts. The Commission held that what he was seeking cannot be held to attract exemption under clauses (e) or G) of S. 8(1).

Finally, the Commission held as under:

In view of what has been observed above, the CPIO of the Supreme Court is directed to provide the information asked for by the appellant in his RTI application as to whether such declaration of assets, etc. has been filed by the Hon’ble Judges of the Supreme Court or not within ten working days from the date of receipt of this Decision Notice.

[Shri Subhash Chandra Agrawal v. Supreme Court of India, Appeal No. CIC/WB/ A/2008/00426 de-cided on 6-1-2009]

It is reported that SC has moved the High Court over the above order. It is the unusual situation when the Apex Court approaches a lower Court. However, as the decision of CICs can be challenged only in a High Court, such unusual situation is created. It is also reported that the Delhi High Court has stayed an order of Central Information Commission. It is also interesting to note that Justice S. Ravindra Bhat has appointed noted jurist FaH Nariman as the amicus curiae to assist the Court and has fixed February 12 as the date of hearing.

It is further reported in the media:

In his communication to the HC, Nariman said, “1 must regretfullydecline the honour since I have very decided views on the matter”.

Nariman made it clear to the HC that he would not be able to maintain neutrality expected of amicus curiae in the matter.

Interestingly, in his letter to the newspaper titled ‘Chuck it, My Lords’. Nariman recalled his visit to the US when he had come across a US law that mandated each SC Judge not only to make public his assets each year but also about each gift which was worth more than $ 50.

(Full copy of this very interesting and landmark order of the Commission is being posted on www.bcasonline.org for those interested to read the full order.)

Part B : The RTI Act

Standing Committee of the Parliament on RTI Act, 2005 :

National Campaign for People’s Right to Information (NCPRI) has made a presentation before the above committee. Some of the items of the said presentation are worth noting to understand present deficiencies of the RTI Act. I shall reproduce them in this column in 3 parts, starting from this issue:

Level of awareness:

Our study suggests that the level of awareness about the RTI Act is very poor, especially in the rural areas. The Department of Personnel and Training, Government of India seems to have done very little to raise awareness about the Act. Much more needs to be done, especially by roping in the television channels, the print media, the All India Radio, and various NGOs.

Spreading awareness amongst the illiterate radio and television programmes are particularly important for this, as are awareness programmes run by NGOs. Workers of political parties can also spread awareness and facilitate use. In any case, there should be one or two nodal people in each village, perhaps the schoolteacher or the health worker,who have received some training, have some material, and are willing and able to help the rural people, especially the illiterate, to access information.

Another mechanism for spreading awareness of RTI among illiterate segments of the population is through social audits Social audits areincreasingly happening in various states around the NREGA, and attracting a large number of rural people, many of whom are illiterate wage-labourers wanting to get their rights under NREGA. In fact, the NREGA guidelines go beyond the RTI Act by stipulating provision of information to applicants within 7 days, rather than the 30 days stipulated under the RTI. RTI principles can therefore be incorporated as mandatory requirements in various other schemes and this would help even the illiterate to understand and exercise their right to information. The Planning Commission could be requested to mandate this in all central and centrally-sponsored schemes and to provide the resources for training and other requirements to make this implementable.

Use and misuse of the RTI Act:

Our study suggests, by extrapolation, that from October 2005 until October 2008, nearly five lakh RTI applications have been filed in rural areas. The number in urban areas is perhaps double this. Delhi itself has nearly eighty thousand applications filed in the last three years.

Despite an extensive survey, no evidence has emerged on the misuse of the RTI Act. There are instances where RTI applications are vague or requisition vast amounts of information; however, these are adequately covered under the law. In fact, it is not clear how the RTI Act can be misused for it only gives access to the truth and how can the truth be misused?

There are two types of apprehensions, one that officers will be blackmailed and the other that they will be harassed because of too many applications. As far as the first apprehension goes, you can only be blackmailed if you have done something wrong. Therefore, rather than demanding that information should not be shared because wrong acts have been committed, it would be better to stop doing wrong things because information will be shared.

Besides, one way of preventing the use of information accessed through the RTI Act to blackmail officials is to put up copy of the application and of the response on the website (except in those few cases where privacy is involved). Once this information is in the public domain, there would be no scope of blackmail.

Few departments receive a large number of applications. Our survey looked at over three hundred departments across the country and at differing levels. The data that emerges suggests that in almost all these departments, a public information officer does not spend more than one or two hours a week (average of between 12 and 24 minutes per working day) on RTI related work.

In any case, even those few public authorities where there is greater pressure, the department can make things much easier for itself if it periodically assesses the type of information the citizens want, and put this suo moto in the public domain, as required u/ s.4 of the RTI Act.

Part C : Other News

Delay in disposal of appeals in Maharashtra State Information Commission:
Dr. Suresh Joshi has replied 3 questions asked by DNA Journalist after some of us RTI activists met him on 30-12-2008.

Q. Activists feel the RTI Act is losing its relevance they say there are pending cases as old as 2006. What is the value of getting information three years after it was asked for ?

Ans. : That is not the case. Hearings are on and Maharashtra is one of the States that get maximum applications. The problem is of shortage of staff. There was a backlog earlier when we started, as I was the only Commissioner. Last year, people had to wait a year and a’ half for the hearing; now, Commissioners are clearing around 1,400 cases each month.

Q. Does a sympathetic approach towards PIOs mean citizens are cited as flaws, negating the relevance of the RTI Act?

Ans. : That’s not true. There are 300 cases of penalties on PIOs till November 2008, with Rs.21 lakhs collected in fines. This average comes to Rs.6,000 to 7,000. If the case is genuine, we fine up to Rs.25,000, or we give them a chance to give information. We fine people when we see an obvious case where they are violating the Act.

Q. Activists say your argument of less staff is a false, deviating attention from the slow processing of cases. They say that in order to shield erring officials who should be fined, offers of help are not taken up.

Ans. : People have helped us out. Some have even worked with us, but they 0.0 not understand that we need to go through all the files. The way they tell us and the format they make does not work out.

RTI query on online lotteries:

In reply to the RTI query filed by the Maharashtra Rajya Lottery Association President, Nanasaheb Kute-Patil, the State Lottery Department said that there is no Central Government law for single-digit lotteries, commonly known as online lotteries.

Noise pollution:

Tired of noise pollution from the playground opposite his home, Kandivli (West) resident Lennon Miranda used the RTI to find out why the play-ground is being used to organise massive functions and fairs without BMC permission.

After receiving RTI application, BMC first put up a board at one end of the ground stating, “it is in the possession of the BMC”, but some days thereafter washed its hands off the property and says that the ground does not belong to the BMC and is a private property.

Assistant engineer Marathe of the Buildings and Factories Department of the ward seconds the above claim, and says that copies of the RTI reply saying the BMC has not given any permission have been sent to the police stations for further action.

Building plans:

The Civic Administration (BMC) has decided that it will not give out prints of the layout to anyone under the RTI Act.

Kishore Gajbhiye, Additional Municipal Commissioner, said it was feared that the information may be misused by terrorists, “It is a classified document and will not be made available.”

But, civic observers say the terrorist attack is being used by the BMC’s Building Proposal Department to block information. It cannot be a confidential document unless it comes under the Exemption clause of the RTI Act. The civic body’s HQ is not a defence installation, nor does the information affect the security of the country.

BCAJ Admin

From the President

Dear Members,

Come February and anxiety builds up. Every section of the Society talks about the Budget, and is waiting for the Budget with lot of expectations.

I would like you all to ponder over the following Questions, which I often pose before myself and struggle to find answers to it.
• Why do we show so much eagerness and concern for the Budget to be presented ?

• Has the Budget not become an non-event ? If I rightly recollect, in 2006-2007, our present Finance Minister, who was Finance Minister during that period, expressed that he wants the Budget to be an non-event.

• Whether the ritual of presenting the Finance Bill is a Farce ?

I know that our’s is a country of rituals, but it’s time to end the Budget Speech tradition. It serves no purpose. Over the years, it’s been reduced to merely presenting more of a general economic survey and policy statements. The Finance Minister presents the Budget outlining key estimates and proposals. Many times, the gap between the Finance Minister’s speech on the floor of the House and what comes out in fine print may render this ritual to be nothing but a farce.

And the reason why I think in that direction, is based on some of the recent announcements which are made prior to the Budget, and I don’t see any reasons or logic to announce it prior to the Budget, and that they can’t wait till the Budget:

• Deferrment of implementation of GAAR until 2016 announced in mid January.

• Announcement of raising the Import Tariffs on Yellow metal and Duties on Gold ore in the last week of January.

• Across-the-board increase in passenger train fares, in January – a move that will add about 66 billion rupees to the railway revenue. The timing of the increase did raise questions, as it comes less than two months before the railway budget. As you are aware that the Revisions in train fares are usually announced in the rail budget and are implemented from April 1, when India’s fiscal year starts. But the early announcement was with the objective to limit opposition protests since Parliament was not in session.

If that’s what it is, perhaps it’s time to do away with the tradition altogether.

Today, everyone knows that the Tax laws are bad, but administration is worse. It is pitiable that the Economic reforms to strengthen the basis of our economy are being consistently ignored. The Government’s attitude to disrespect the judiciary is becoming a new trend. Furthermore, the Government is under constant pressure or is forced to withdraw or water down it’s Budget proposals, and even policies which are in the interest of the country. Sometimes, it struggles to implement it’s own proposals under the pretext of a review.

Considering the present situation, it’s high time that the following issues which need to be tackled and implemented, be taken up with the Government :

• Why is there a secrecy around the Budget making process?

• Why the pre-budget and post-budget memorandums sent by professional organisations in the interest of the Tax paying public at large for rationalisation, simplifications and reducing hardship are not being deliberated or debated with representatives of such bodies? As there is no inclination for the same, there is a feeling expressed that the process of memorandum making is becoming somewhat of a futile exercise.

• Why is there no machinery to consider proposals on a continuous basis and review the provisions regularly and periodically?

• Why the system is not equipped to make the best use of proposals received from various professional bodies in their right perspective?

• Why can’t we unite to seek our right for accountability in Government Departments?

Let’s hope a day will come where there would be an end to such farce, and a time will come where the Government in power has the courage to share with the country, from the heart, what it truly feels, their true, unedited understanding of the state of the nation and the party’s unexpurgated vision for the country.

Let’s hope that we see stable tax rates, a commitment to fiscal discipline and more reforms focusing on the economic revival in the forthcoming Budget. And await the answer to speculation going around that this would be an ‘Election Budget’ laden with sops and handouts.

With Warm Regards,

Yours truly,
Deepak R. Shah

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BCAJ Admin

Lecture Meeting

Selected Tax Accounting Standards, 20th December 2012, at Indian Merchants’ Chamber

Mr. Kishor B. Karia, Chartered Accountant and past president of the Society, presented an insightful analysis of proposed Tax Accounting Standards (TAS). The learned speaker explained various issues and challenges likely to arise from implementation of proposed TAS in the current form, resulting in increased hardships and litigation. The meeting was attended by over 400 listeners.

Recovery & Stay Proceedings, 2nd January 2013, at Indian Merchants’ Chamber

Dr. K. Shivaram, Advocate, explained legal provisions in respect of Recovery & Stay Proceedings and recent case laws on the subject. The learned speaker covered recovery proceedings before and after assessment, properties that can be and cannot be attached, joint and several liability of directors and partners, remedies against recovery and other related issues. The meeting was attended by over 250 listeners. The webcast of the meeting is available on BCAS Web TV to the subscribers.

Other Programmes

Educate a Child – Create a Personality, 19th December 2012, at the Society’s Office

This programme was jointly organised by the BCAS Foundation and Dharma Bharathi Mission, to encourage volunteers to devote their time to educate the underprivileged children living in slums and at Municipal schools in Mumbai and demonstrate benefits of volunteering. It was an interactive meeting of all stakeholders with young nation builders to hear their experience, to share, to interact and to recognise their good work as well as that of their mentors. Mr. Narayan Varma, Chartered Accountant and Trustee, BCAS Foundation, and Mr. Paramjeet Singh, Trustee, Dharma Bharathi Mission, welcomed and addressed the volunteers who were felicitated at the hands of Mr. Vinay Somani, Founder, Karmayog.

Sports Day, 30th December 2012, at BMC Sports Complex

The Membership & Public Relations Committee organised the First Sports day for members, their families and students. Mr. Dilip V. Lakhani, Chartered Accountant and Past President and a former All India Ranked International Table Tennis Player, inaugurated the event. The Sports Day received enthusiastic response from 65 participants who enjoyed playing games like Badminton, Table Tennis, Carrom and Chess. The programme ended with prize distribution ceremony at the hands of President Mr. Deepak R. Shah, Chartered Accountant, to the following Winners and Runners-Up:

Right to Information
Future Possibilities & Way Forward, 15th January 2013, at the Society’s Office

This meeting was organised by the BCAS Foundation to discuss various challenges being faced by the Right to Information movement and the way forward. The discussion was led by eminent social and RTI activists Ms. Aruna Roy [member of National Advisory Council (NAC) and co-founder of the Mazdoor Kisan Shakti Sanghathan], Mr. Shailesh Gandhi (former central information commissioner), Mr. Nikhil Dey [member of National Council for People’s Right to Information (NCPRI)] and Mr. Shankar Singh [member of Mazdoor Kisan Shakti Sangathan (MKSS)] along with other RTI activists. The forum felt that violence on users, court stay on prominent decisions of the information commission, rulings that limit the scope of RTI and threats from the government through legislations were major challenges being faced. Also, most new laws being framed provide for exemption from the RTI Act diluting the power of the RTI. Also, the Courts have been limiting the scope of RTI with words like ‘intimidating and suppressing’ when information about bureaucrats is sought. While RTI has managed to achieve a lot and people have learnt to use it, the system, too, is learning to resist it. It was agreed that there was a need for a country-wide alliance for transparency and accountability. Mr. Narayan Varma, Chartered Accountant and Trustee of BCAS Foundation, chaired the meeting. He explained the active role played by the Society in RTI movement and assured continued active participation by the Society.

Screening of “AHIMSA-The Strength of Non violence”, 14th January 2013, at the Society’s Office

BCAS Foundation, Dharma Bharathi Mission and Public Concern for Governance Trust jointly arranged the screening of this movie which shows an exemplary story of how after a tenacious, nonviolent struggle, the villagers of Sannai in Madhya Pradesh, India, obtained their rights for land and water. The exemplary story of these tribal people showed the fascinating strength inherent in the principle of Ahimsa: non-violence. In a society where corruption and caste conflicts undermine democratic rights, the Adivasis are supported by activists of the Gandhian Forum for Solidarity: “Ekta Parishad”. To this day, its founder P.V. Rajagopal and his colleagues train young people in non-violence when struggling for a dignified and sustainable social change. The film maker Professor Kari Saurer, from Zuric, Switzerland was present at the screening.

The movie was well appreciated by the audience.

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BCAJ Admin

PART D: Good Governance

How Does One Shame the Shameless in India

It took a horrific rape to expose our politicians. Suddenly the netas of Delhi were stripped naked. And there was no place to hide. Years of strutting around pompously and grand standing during one crisis after another, provided zero protection to these people as enraged citizenry took to the streets crying out for better governance, sickened by the apathy and abuse of power.

Excerpts from the Address of Narendra Modi:

“Development won today,” “There was thinking in our politics thatgood economics is bad politics. It was as if good governance did not suit on politics.”

He quickly added that the people of the country too needed good governance and economic development of the kind seen in Gujarat.

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BCAJ Admin

PART C: Information on & Around

Pratibha Patil on Africa Trip

A month before she left office, the Centre spent a whopping Rs. 18.08 crore on the then president Pratibha Patil’s 10-day official visit to South Africa and Seychelles.

A reply to a RTI query has revealed that the Centre paid Rs. 16.38 crore to Air India for the special aircraft used for the two-nation trip from 29th April to 7th May last year.

The RTI reply revealed that an expenditure of Rs. 1.46 crore was incurred during her visit to the South African capital Pretoria, of which Rs. 71.82 lakh was spent on her local stay, Rs. 52.33 lakh on transportation and Rs. 22.12 lakh on other expenses. In Durban Rs. 23.55 lakh was spent on her visit, with Rs. 18 lakh going towards hotel stay and Rs. 5.27 lakh on transportation.

During her tenure at Rashtrapati Bhavan, Patil incurred expenses of Rs. 205 Crore on 12 trips to 22 countries.

School Principal

An RTI query filed by an activist might lead to the ouster of the current principal of a south Mumbai school. The reply to the RTI shows that the current principal of St Mary’s High School (ICSE) in Mazgaon is still at the post at 68 years of age while the state rules make it clear that school teaching staff and principal have to retire at the age of 58 years.

“I filed an RTI to check the status of 39 nonstate- board schools in the city, and found out that most are not following the rules as prescribed by the state education department,” said Nanasaheb Kute Patil, who filed the RTI query. The questions included whether the schools have all permissions prescribed by the government, annual fees demanded by them, age and qualification of teachers/principals, etc. “My aim is to make sure students don’t suffer because of school authorities,” he added. Following this, the south zone education department has sent a notice to the school asking them to remove the principal from his post.

Ajit Pawar

Ajit Pawar tendered his resignation on 25th September on moral grounds, after allegations of massive irregularities in irrigation projects in Vidharbha during his stint in previous cabinet as Water Resources minister. The governor accepted his resignation on 29th September.

From 30th September to 14th October, the state offered him facilities without any charge, according to the reply to an RTI application filed by Anil Galgali. A government resolution dated 12th October stated that after 14th October, Pawar was to be charged Rs. 5 a square foot if he wanted to avail of accommodation in the bungalow in Malabar Hill with an uninterrupted supply of all amenities – gas, water, power and telephone at state expenses. Officials from the general administration department said the rule/procedure was applicable on all cabinet ministers to allow them find new residences to ensure smooth transition from power.

But Galgali feels otherwise. “The high-voltage drama related to Pawar’s resignation was a well-planned political move,” he said. “If Pawar resigned from his ministerial post on moral grounds, then he should have shown the same morality and should have given back the Devgiri bungalow to the government. In the city’s slums, no one even gets a hut on rent for Rs. 5 a sq ft. If a government regulation (GR) states that outgoing ministers to be charged Rs. 5 a sq. ft for accommodation in a posh area like Malabar Hill, there is something fundamentally wrong and the GR must be amended.”

Security Firm

High-profile private security firm, NISA, with 45,000 guards on its payroll, has failed to file with Mumbai police with basic yet crucial details like how many of its personnel carry firearms. Yogesh Hilkar, a member of the NGO ‘Swabhiman’ run by Congress MLA Nitesh Narayan Rane, has uncovered these facts through a RTI plea.

“It is shocking that the company has not supplied details of all the armed men working with it. This is, potentially, a huge security threat,” when the Deputy Commissioner of Police, Headquarter (II) – who is responsible for maintaining a database of all the security agencies in the city and the Assistant Commissioner of Police from DN Nagar division, where NISA has its corporate office, have failed to furnish any details in this respect.

The company’s website (http://www.nisaeye.com/) notes that it is having 45,000 security personnel in its ranks, based at over 3,500 installations in India, and managed through about 45 branches.

It claims that it’s been administering security to some of the biggest names in the corporate world since 1973.

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BCAJ Admin

PART B: RTI Act , 2005

The Government has decided to conduct a study on the implementation of the Right to Information Act to know the cost to the government in providing information to citizens under the UPA’s showpiece initiative and whether it has helped improve its “public perception about the extent of reduction in corruption”.

As per the RTI Act of 2005, only Rs. 10 fee is required to seek information from any public authority, but various government officials have complained of the huge cost they have to bear to divert resources and effort to answer RTI pleas.

The government has earlier got a study conducted from PricewaterhouseCoopers (PwC) in 2009 on the key issues and constraints in implementing the RTI Act. But, for the first time, the government is attempting to “calculate the cost to government in providing the formation under RTI”, as per the scope of work of the new study for which the Department of Personnel and Training has invited bids on 4th January. “To further strengthen the RTI regime, it has been decided to do a 360-degree study of the implementation of the RTI Act. The study will cover both states and the central government, across various sectors, and will cover public authorities at centre, state, district and panchayat level,” the bid document says. The scope of the study also involves assessing public perception about the extent of reduction in corruption. “Since the implementation of the Act there has been a significant and perceptible change in the level of transparency in the working of the governments at the Centre, state and the sub-state level,” the bid document claims. The scope of the study includes a study of trends in filing of RTI applications or appeals across the country. The government also wants an institution or organisation to study the use of the RTI Act by different types of applicants – in cases where applicant type is identifiable from the application. The study will assess the type of information sought and its classification into “personal information” sought by employees, procurement-related information sought “without any apparent objective/purpose” and general information sought without specificity across sections.

“The implementation of the provisions of the Act has to be studied from the perspective of both the demand and supply side. The approach to achieving the above is viewing RTI applications and their responses from the information seekers’ and providers’ angle,” the bid document says. The study will hence, determine the level of satisfaction among the people with functioning of the Act and the experience of public authorities at different levels in dealing with RTI applications and appeals, the document has mentioned.

[Extracts from ET dated 7-1-2013]

Good News for Mumbai RTI Applicants:

The office of the State Chief Information Commissioner will go paperless in less than a month. “If all goes well then our office will be paperless and we have developed a software for the purpose,” State Chief Information Commissioner, Ratnakar Gaikwad said.

Soon after his appointment in June, when Gaikwad visited the office of the Central Information Commissioner Shailesh Gandhi, he was surprised to see that there were no files on his table.

“I studied his working pattern and felt that it was possible to introduce a paperless office in Mumbai too,” he added. Gaikwad, who has set a target of disposing of 25 complaints/appeals daily, said no purpose will be served if information is not provided to an applicant as early as possible. “I am sure that we will be able to clear all the 2,098 appeals by March, 2013. Once the backlog is cleared, we will clear the appeals within 15days,” he said.

levitra

BCAJ Admin

Representation

7th January 2013

To,
Mr. P. Chidambaram Finance Minister Government of India, North Block, Vijay Chowk, New Delhi – 110 001.

Dear Sir,

Sub: Pre-Budget Memorandum 2013-14

We take this opportunity to present a Pre-Budget Memorandum on Direct Taxes with a request to consider the same while framing proposals in Finance Bill, 2013 for amendments to the Income-tax Act 1961.

We request your honour to consider the suggestions favourably. We will be pleased to present ourselves for any explanation and clarification that may be required by your honour.

Thanking you,
We remain,

Yours truly,
For Bombay Chartered Accountants ’ Society
Deepak R. Shah
President
Gautam S. Nayak
Chairman, Taxation Committee

Pre budget suggestions, 2013-14 On direct tax laws

Index

Sr. No.	Particulars	Page Nos.
1	Amendments required in Section 10(23FB)	2
2	Representation on Section 40A(2)(a)	3
3	Amendments required in Section 47(xiii), (xiiib) and (xiv)	6
4	Deemed speculation loss in case of companies – Explanation to Sec 73	6
5	Provisions Relating to Gift: Section 2(24)(xv) & 56(2)(vii)	7
6	Taxation of Share Premium – Section 56(2)(viib)	8
7	Tax on Long Term Capital Gains-Section 112(1)(c)(iii)-Clarification required	9
8	Tax on Distributed Profits-Sec 115-O – Effect on Non-Resident shareholder	11
9	Increase in threshold limit for TDS – Section 194A	11
10	TDS in respect of Payment to Nonresidents– Section 195(7)	11
11	Clarification required through an amendment to the provisions of Section 269SS & Section 269T	12

Substantial Amendments

1. Amendments required in Section 10(23FB)
1.1 SEBI has notified the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) replacing the extant SEBI (Venture Capital Funds) Regulations, 1996 (“VCF Regulations”) w.e.f May 21, 2012.

1.2 Every fund established in India for the purpose of pooling moneys from investors, Indian or foreign, on a private basis, for investing it further shall fall within the ambit of the AIF Regulations and would have to be registered under these regulations; unless a fund has been specifically excluded in the said regulations.

1.3 With the intention of distinguishing the investment criteria and relevant regulatory concessions that are allowed to AIFs, SEBI has classified AIFs into three categories. The following are the three categories of AIFs: Category I AIF [Venture Capital Fund (VCF), Social Venture Fund, SME Fund, Infrastructure Fund, Other Funds which have a positive spillover effect on the economy]; Category II AIF [Private Equity Fund, Debt Fund, Real Estate Fund] and Category III AIF [Hedge Fund].

1.4 Prior to 2007, VCFs that were registered with SEBI under the VCF Regulations were provided a tax “pass-through” benefit on their entire income. Under Section 10 (23FB) read with Section 115U of the Indian Incometax Act, 1961 (“ITA”), the income of a venture capital fund was exempt from tax in the hands of the fund and was only taxable in the hands of the investors of the fund.

1.5 In 2007, the ITA was amended and this tax “pass-through” benefit was restricted only to income from venture capital undertakings that operated in nine specified sectors. However, in a welcome move, the Finance Act, 2012, has once again reverted to the pre-2007 position by extending this tax “pass-through” benefit to income of a venture capital fund arising from investment in any venture capital undertaking, regardless of the sector in which the venture capital undertaking operates.

1.6 The PE and VC industry lauded this move as a step in the right direction and it was expected that this benefit was to be extended to all AIFs as well. This also appeared to be SEBI’s intent, as gathered from the previous version of the AIF Regulations which specified that SEBI “may represent that similar provision for tax pass through may be provided for AIFs once the VCF Regulations are repealed and the AIF Regulations are notified”. However, at this stage, unfortunately neither the Finance Act, 2012 nor the AIF Regulations extend clarity as to whether the much desired ‘pass-through’ will be available to other categories of AIF other than Category I, for which the AIF Regulation specifically clarify the eligibility under section 10(23FB) of the Income-tax Act, 1961. The assured pass-through is almost a must and right on top of the expectations from the Industry.

A spill-over effect of this restrictive interpretation may also mean that the provisions of section 56(2)(viib) inserted by the Finance Act, 2012, to tax consideration received by a company for issue of shares which exceeds fair market value, will also apply where the payer is a Category II AIF or a Category III AIF. The Finance Act, 2012 has exempted, from such levy, payments made by a “venture capital fund” to a “venture capital undertaking”, an exemption which, given the lack of clarity, may now apply only to Category I AIFs.

1.7 Further, section 10(23FB) of the Income-tax Act has not been amended to refer to AIF Category I Funds, instead of VCFs. Also, the benefit of the pass-through is available only to the income from VCUs. Most Funds also invest their funds in bank deposits, pending investment in companies, and therefore have interest income. This results in a peculiar situation where part of the income by way of bank interest is taxed in the hands of the Fund, while the other income from VCUs is taxed in the hands of the investors.

1.8 It is therefore, strongly suggested that section 10(23FB) should be suitably amended to:

a.    replace the reference to VCFs by AIFs;

b.    extend the provisions to category II & category III AIFs;

c.    extend the pass through status to all income of an AIF.

1.9 Similarly, clause (i) of the proviso to section 56(2)(viib) should be suitably amended to extend the exemption to category II & category III AIFs also.

2. Representation on Section 40A(2)(a)

2.1 The Finance Act, 1968 had introduced a new section 40A in the Income-tax Act, 1961 (‘ITA’) with effect from 1 April 1968. Section 40A(2) provides that an expenditure incurred in business or profession for which payment has been or is to be made to the tax-payer’s relatives or associate concerns is liable to be disallowed in computing the profits of the business or profession to the extent the expenditure is considered to be excessive or unreasonable. The reasonableness of any expenditure is to be judged having regard to the fair market value of the goods, services or facilities for which the payment is made for the legitimate needs of the business or profession or the benefit delivered by, or accruing to, the tax-payer from the expenditure. Such portion of the expenditure which, in the opinion of the Income-tax Officer, is excessive or unreasonable is to be disallowed in computing the profits of the business or profession.

2.2 The Section was inserted with the object to check evasion of tax through excessive or unreasonable payments to relative or any other specified person. The relevant extracts of the Departmental Circular – Circular No. 6-P, Dated 6-7-1968, whereby this Section was introduced, are as under: “Where payment for any expenditure is found to have been made to a relative or associate concern falling within the specified categories, it will be necessary for the Income-tax Officer to scrutinise the reasonableness of the expenditure with reference to the criteria mentioned in the section.

The Income-tax Officer is expected to exercise his judgment in a reasonable and fair manner. It should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner which will cause hardship in bona fide cases.”

2.3 The Assessing officer had all discretion to ensure that payment made or expenditure incurred is based on fair market rates and hence there was no warrant to amend the stated position.

2.4 With the recent insertion of Proviso to sub section (2)(a) of Section 40A by the Finance Act, 2012, w.e.f. 1-4-2013, no disallowance under this clause on account of expenditure being excessive or unreasonable having regard to the fair market value of good, services or facilities shall be made in respect of Specified Domestic Transaction [SDT] referred to in section 92BA, if such transaction is at arm’s length price (‘ALP’) as defined in clause (ii) of section 92F. Hence, with the insertion of this proviso, the section has extended the applicability of the specific concept of arm’s length price instead of a fair market value to determine the value of domestic related party transactions.

2.5 The principles of ALP as propagated by OECD in the context of International Transfer Pricing are purely theoretical and far from reality.

All the methods recommended to achieve results are based on the data base available in public domain, which does not exist and such results are used for Rent-seeking and causes undue harassment to the taxpayers and also increases the compliance costs on the tax payer.

2.6 The limit of payment in excess of Rs. 5 crores is absolutely unrealistic and burdensome as such payment would include even purchase of goods.

2.7 The Administration in India even is not geared up to handle such matters as the law requires reference to T.P.O. which is a specialized wing, which does not exist all over India.

2.8 Finally, domestic Transfer Pricing provisions are introduced in various jurisdictions which are concerned with allocation of Income-tax between Federal and State Governments. India does not have such a system of taxation. In India, Income-tax is recovered only under an all India enactment, administered by Central Government alone and hence there is no allocation of taxing rights granted to various States. It is only after collection of taxes, such collections are distributed amongst the States based on the recommendations of Finance Commission and this has been working well. If at all Domestic Transfer Pricing provisions are required then the principle to be followed should be to ensure that payment made by one tax payer, to another should be subject to full taxation at maximum marginal rate and there should not be any arbitrary apportionment to save taxes. If that is achieved, then the tax officer and tax payer should not be overburdened with compliance of documentation requirement.

2.9 It is therefore strongly recommended that only the transactions of purchase and sale of goods and services should be subject to benchmarking in accordance with the arm’s length methods prescribed under Indian Transfer Pricing regulations. Hence such provisions could be restricted to tax payers availing Chapter VIA deductions or exemptions u/s 10AA but should not be extended to payments covered by Section 40A(2) of the ITA. However, the extension of these provisions to all expenditure incurred by tax-payer on payments to its relatives or associate concerns leads to absurdity. One cannot determine the arm’s length price that should have been paid on various transactions, since the payment may be based on various factors and considerations, like the business market scenario, competition, each individual’s experiences, intellect, etc.

2.10 A few such examples have been listed below, wherein the benchmarking of such transactions may be impossible using arm’s length principle:

a) Managerial Remuneration

b) Services provided free of cost by tax holiday units

c) Applicability of SDT to Companies falling under Presumptive taxation

d) Allocation of expenses between the group entities, following consistent principles and allocation keys

e) Joint Development Agreement

f) Project Management Fees

g) ESOP

h) Corporate Guarantees for the group entities

i) Maintenance and Administrative charged and shares services

Alternatively, it is also suggested:

2.11 The second proviso to Section 92C(4) permits single track adjustment and prohibits consequential adjustment in the hands of the other party. This provision is made applicable to SDT as well. As a result, disallowance of expenditure in the hands of one related party does not mean that there would be co-relative reduction in the hands of recipient. Recipient will be assessed with reference to actual income as earned, even assuming entire expenditure is disallowed in hands of related party. This approach of revenue will lead to unjust enrichment of the State at the cost of the innocent taxpayer.

2.12 It is recommended that even if the above provisions are made applicable and deduction on account of payment to a related party is reduced by application of SDT provisions, the related party’s income should also automatically stand reduced to that extent.

3. Amendments required in Section 47(xiii), (xiiib) and (xiv)

3.1 Section 47 contains provisions in respect of Transactions not regarded as ‘transfer’ for the purposes of capital gains.

3.2 Section 47(xiii) provides that any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, would be an exempt transfer:

provided that the aggregate of the shareholding in the company of the partners of the firm is not less than fifty per cent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession;

3.3 A similar condition regarding period of five years is provided in section 47(xiiib) and Section 47(xiv).

3.4 It is submitted that in today’s fast changing business environment, no useful purpose is being served by keeping a long period of five years for continuing shareholding.

3.5 It is, therefore, strongly suggested that the period of continuing shareholding should be reduced to 2 years from 5 years presently prescribed. This would help the reorganisation / restructuring of small and medium enterprises without fear of losing the exemption.

4. Deemed speculation loss in case of companies – Explanation to Section 73

4.1 As per the provisions of section 73 of the Act, any loss, computed in respect of a speculation business carried on by the assessee, cannot be set off except against profits and gains, if any, of another speculation business.

4.2 As per Explanation 2 to section 28 of the Act, where speculative transactions carried on by an assessee are of a nature so as to constitute a business, the business (referred to as “speculation business”) shall be deemed to be distinct and separate from any other business.

4.3 As per Section 43(5) of the Act, “speculative transaction” means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.

4.4 Accordingly, speculative business is normally understood as business in respect of transactions where settlement takes place without actual delivery.

4.5 However, as per Explanation to section 73 of the Act, where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads, “Interest on securities”, “Income from house property”, “Capital gains” and “Income from other sources” or the company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.

4.6 Accordingly, as per the Explanation to Section 73, in case of most companies, even delivery based share transactions are deemed to be speculative. The present provisions deeming even delivery based purchase and sale of shares as speculative business discriminate between corporate and non-corporate assessees.

4.7 Automation of the trading mechanism, screen based trading, controls on reporting of capital market transactions by share brokers, submission of AIRs, dematerialization and other measures initiated by SEBI over the last few years have brought total transparency in share trading, leaving little scope for manipulation of share trades by transfer of profits/losses from one person to another. In any case, corporates are more regulated compared to non-corporates and hence, disadvantage to companies in terms of the discriminatory tax provision as described above can hardly be justified.

4.8 The need of the hour is to encourage corporatisation which could bring about more transparency and healthy business practices. However, the present provisions act as a disincentive for corporatisation.

4.9 Further, when derivatives which are in the nature of speculative transactions are not considered as speculative transactions, there is no logic in continuing the deeming fiction of treating the transactions in shares entered into by a company as speculative transactions.

4.10 It is, therefore, suggested that the aforesaid Explanation to section 73 of the Act be deleted.

5. Provisions Relating to Gift: Section 2(24)(xv) & 56(2)(vii)

5.1 As per Section 56(2)(vii) and Section 2(24) (xv), any receipt in the nature of gift, subject to certain exceptions, is taxed as income if the aggregate receipts during the year exceed Rs. 50,000/-. Similarly, receipt of certain specified assets without any consideration or for consideration less than fair market value, is also taxed as income, if the difference between the fair market value and the consideration is more than Rs. 50,000/-.

5.2 The gift related provisions were sought to be introduced twice over in the past – but were, for valid reasons, withdrawn after due consideration.

5.3 The Government should not be shy of reconsidering the wisdom and should restore the earlier position. Therefore, the earlier position whereby gifts were not taxed in the hands of the donees unless the said gifts were proved to be bogus should be restored.

5.4 Measures of Rationalisation

In case for any reason, the provision has to remain on the statute, it should be rationalised appropriately. The measures of rationalization suggested are as under:

A) The following receipts should be exempted from the charge:

a) Any receipt which is in the nature of damages or accident compensation or which is received on compassionate grounds.

b) Any receipt which is in the nature of prize or reward for performance at state, national or international level.

c) Any receipt, which is not in the nature of a gift.

d) Such other receipts as may be notified by the CBDT.

B) Further, there is an anomaly in the existing provisions in as much as a gift received by a person from his father’s brother is exempted from tax but if the same person (i.e. the nephew) makes a gift to his father’s brother, then the latter would have to pay tax on the gifted amount if the aggregate gifts received by him exceed Rs. 50,000 in a year. This anomaly needs to be removed immediately.

C) An unintended outcome of the amendment made to Section 56 by the Taxation Laws (Amendment) Act, 2006 is that if a person receives gifts aggregating to more than Rs. 50,000 in a year from persons other than relatives then the entire amount of gifts would be taxed as income in his hands instead of only the amount in excess of Rs. 50,000. It is suggested in order to avoid ambiguity and resulting disputes and litigation, the section be amended to clearly lay down a basic threshold limit for exemption of Rs. 50,000 per year.

6. Taxation of Share Premium – Section 56(2)(viib)

6.1 A new clause (viib) has been added to section 56(2) by the Finance Act, 2012, under which the share premium received by a closely held company from a resident in excess of the fair market value of the shares is deemed to be the income of the company. The fair market value has to be substantiated based on the value of the assets of the company or as per the prescribed method. Exemption has been provided to amounts received by a venture capital undertaking from a venture capital fund or a venture capital company.

6.2 It appears that this provision is intended to target the practice of obtaining investment in a company at a high premium in exchange for other favours granted by the promoters of such company, through the other positions held by them. It is submitted that such misuse has been by only a few companies, but the remedy provided would adversely affect a significantly large number of promising companies all over the country.

6.3 This provision will seriously impact genuine small start-ups and other small and medium-size companies looking to grow rapidly, particularly in the services sector, which depend upon angel investors or private equity funds for their funding. Such funding normally depends upon future prospects of the company, rather than the current value of the assets of the company. This provision would completely destroy the developing culture of angel investors and private equity funds funding promising entrepreneurs, who have the skills, but very few assets.

6.4 There are already sufficient safeguards under section 68 to tax undisclosed income received by companies in the form of share capital. Further, the GAAR provisions are sufficient to check such misuse. It is therefore suggested that such a harsh provision should be deleted.

6.5 Alternatively, an exemption should be provided for such shares allotted at a premium, where the shares are held by the allottee for not less than 3 years from the date of allotment.

7. Tax on Long Term Capital Gains – Section 112(1)(c) (iii) – Clarification required

7.1 Clauses (ii) & (iii) of Section 112(1)(c) substituted by Finance Act, 2012 reads as under:

“(ii) the amount of income-tax calculated on long-term capital gains [except where such gain arises from transfer of capital asset referred to in sub-clause (iii)] at the rate of twenty per cent; and

(iii) the amount of income-tax on long-term capital gains arising from the transfer of a capital asset, being unlisted securities, calculated at the rate of ten per cent on the capital gains in respect of such asset as computed without giving effect to the first and second proviso to section 48;”

7.2 Circular No. 3/2012, dated June 12, 2012 containing Supplementary Memorandum Explaining the Official Amendments moved to the Finance Bill, 2012 as reflected in the Finance Act, 2012, clarifies in this regard as under:

“Concessional rate of taxation on long term capital gain in case of non-resident investors Currently, under the Income-tax Act, a long term capital gain arising from sale of unlisted securities in the case of Foreign Institutional Investors (FIIs) is taxed at the rate of 10% without giving benefit of indexation or of currency fluctuation.

In the case of other non-resident investors, including Private Equity investors, such capital gains are taxable at the rate of 20% with the benefit of currency fluctuation but without indexation. In order to give parity to such non-resident investors, the Finance Act reduces the rate of tax on long term capital gains arising from transfer of unlisted securities from 20% to 10% on the gains computed without giving benefit of currency fluctuations and indexation by amending section 112 of the Income-tax Act.”

7.3 Explanation to Section 112 defines securities, listed securities and unlisted securities as under:

“(a) the expression “securities” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (32 of 1956);

(aa) “listed securities” means the securities which are listed on any recognised stock exchange in India;

(ab) “unlisted securities” means securities other than listed securities;”

7.4 Section 2(h) of the Securities Contracts (Regulation) Act, 1956 [SCRA] defines ‘Securities’ as under:

(h) “securities” include –

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; …..”

7.5 Thus, the intention of the legislature, as clearly mentioned in the memorandum explaining the aforesaid provisions, is to give parity in the case of other non-resident investors [other than the FIIs], including Private Equity investors, where long term capital gains are taxable at the rate of 20% with the benefit of currency fluctuation but without indexation, by reducing the rate of tax on long term capital gains arising from transfer of unlisted securities from 20% to 10% on the gains computed without giving benefit of currency fluctuations and indexation by amending section 112 of the Income-tax Act.

7.6 Based on the literal interpretation of the definition of securities as per SCRA, only shares which are ‘marketable’ i.e. freely transferable, in the nature are covered under the Act. Thus, since the shares of a private company normally have restrictions on the free transferability of shares, they would fail to meet the ‘marketable’ test and hence may not be covered within the ambit if the definition of unlisted securities and would be liable for the higher rate of tax of 20% instead of 10%, as provided in the newly inserted clause (iii) of section 112(1)(c).

7.7 A large number of non-resident investors including private equity investors [other than FIIs] invest in the shares of private limited companies and the aforesaid provisions of section 112(1)(c)(iii) should be applicable to them. However, in view of the import of the definition of securities from SCRA and appearance of the word ‘marketable’, the benefit of the lower rate of tax @ 10% could be denied in such cases, which is contrary to the purpose and intention of insertion of aforesaid clause (iii).

7.8 It is therefore, strongly suggested that suitable amendments should be made to clearly provide that even in the cases of transfer of shares of private limited companies resulting in long term capital gains, the rate of tax applicable would be 10% and not 20%. This would avoid unnecessary and costly litigation and provided much need clarity to the non-residents.

8. Tax on Distributed Profits – Section 115-O – Effect on Non-Resident shareholder

Tax on distributed profits is the liability of the company. Therefore, non-resident shareholders find it difficult to get credit of such tax in tax assessments in their respective countries especially when there is no direct or indirect provision for such credit either in the domestic law of their countries or in the relevant Double Tax Avoidance Agreement. In view of this, effectively, this method of collecting tax on dividend results in a benefit to the Government of the country of the non-resident rather than the non-resident investor. It is therefore, suggested that appropriate specific provisions should be made in the Act to treat such DDT as tax on dividend receipt of non-resident shareholders.

9. Increase in threshold limit for TDS – Section 194A

The threshold limits in respect of payments not subject to deduction of tax at source should be reviewed every 3 years, and should be revised upwards taking into account the impact of inflation. In particular, the limits of Rs. 5,000 and Rs. 10,000 under section 194A for interest have not been revised since June 2007 though limits under other sections were increased in July 2010. It is, therefore, suggested that these limits be revised upwards to Rs. 15,000 and Rs. 30,000 respectively.

10. Tax Deduction at Source in respect of Payment to Non-residents – Section 195(7)

10.1 The new sub-section 195(7) inserted by Fin ance Act, 2012 provides as under:

“(7) Notwithstanding anything contained in sub-section (1) and sub-section (2), the Board may, by notification in the Official Gazette, specify a class of persons or cases, where the person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of sum chargeable, and upon such determination, tax shall be deducted under sub-section (1) on that proportion of the sum which is so chargeable.”[Emphasis supplied]

10.2 From the language of the aforesaid sub-section, it is evident that the same is self contradictory and would lead to further litigation in respect of an issue which has been very well settled by the Supreme Court that where the sum payable to a non-resident is not chargeable to income-tax in India, there is no question of deduction of tax source from the same, at the time of making payment to the non-resident.

10.3 It is not quite clear as to how an assessing officer can, by a general or special order, ‘determine the appropriate proportion of sum chargeable’ where the sum is ‘not chargeable under the provisions of this Act’, as provided in the sub-section 7.

10.4 It is strongly suggested that the Board should not be empowered to notify those cases where the sum payable to a non-resident is not chargeable to tax in India under the Act. Otherwise, the same would lead to avoidable harassment, hardships and would also lead to delays in payments and litigation.

11. Clarification required through an amendment to the provisions of Section 269SS & Section 269T

11.1 The provisions of Section 269SS were introduced for deterring taxpayers from introducing unaccounted money by way of small loans or deposits in cash in their activities. But the Section provides that if deposits or loans are accept by a mode other than account payee cheque or demand draft the provision shall be attracted resulting in imposition of penalty u/s 271D. The clarification circular that was issued by CBDT following the introduction of section 269SS had clearly stated that the provisions were introduced to deter attempts to explain sources of cash deposits or loans or to offer an explanation for apparently unaccounted cash found during a search.

11.2 Lately however, there is a tendency among Assessing Officers [AOs] to invoke the provisions for payments made or settlements effected by other mode like Real Time Gross Settlement [RTGS] National Electronic Funds Transfer [NEFT] and direct wire transfers and to even transfer by journal entries within the sister concerns for normal and effective business needs. The AOs take a very narrow view that such transfers are not by way of a/c payee cheques or Demand Drafts [DDs] for various reasons overlooking the fundamental fact that the source of the money/fund or finance involved is fully accounted for. The AO is solely guided by the fact that the quantum of transfer is large and he should avoid any career risk and most of the times for rent seeking.

11.3 The quantum being usually big results in a large tax/penalty demand that prompts the AO and supervisory authorities to go for coercive recoveries. The large quantum involved also weighs very heavy in the mind of CIT(A) as well. A number of courts and ITAT have held the issue in favour of the taxpayer. For example, the Delhi ITAT in the case of Ruchika Chemicals 88 TTJ 85 clearly held that Section 269SS does not apply to transfer or journal entries. The Delhi High Court [HC] decision in Noida Toll Bridge 262 ITR 260 in this regard has been accepted by the Department and no SLP had been filed. But this stand of the Dept has not been circulated. Present day complex and competitive business compels business entities to transfer funds, rights or liabilities and lack of clarity compels the AO to penalize the business entity even for a genuine business transaction.

11.4 Taxpayers are facing equally hard times in respect of the provisions of Section 269T, that mandates mode of repayment of loans or deposits, violation of which leads to imposition of penalty u/s 271E. If a business credit is squared off or settled by a journal entry, AOs are interpreting it as a repayment of a loan /deposit not by the prescribed mode and hence imposing penalty.

11.5 So common business or trade practices authorized by Accounting Standards are treated as violations of statutory provisions, leading to imposition of penalties, affecting a business entity very drastically. The confusion apparently has been created by incorrect interpretation of different court decisions. In CIT v/s Noida Toll Bridge Co. Ltd., the Delhi HC held clearly that merely because payment was settled by a book entry and not by the mode prescribed u/s 269SS, penalty u/s 271D cannot be attracted. The HC held that this provision shall be attracted only if payment is made in cash. The said decision is accepted by the Dept and no SLP has been filed. But unfortunately this has not been brought to the notice of the officers of the department.

11.6 Subsequently the Bombay HC decided in the case CIT vs Triumph International Finance Ltd. 345 ITR 273 in respect of Section 269T and Section 271E. The HC gave the opinion that repayment of a loan/deposit through journal entries did violate the provisions of Section 269T. However, if it is done for business requirement, that would be a reasonable cause u/s 273B for not imposing penalty u/s 271E. If the AO fails to give a finding that it was not for a business requirement, penalty cannot be levied. But unfortunately AOs tend to come to such a conclusion without giving any finding on facts. They are overawed by the quantum involved or the number of entrees. So either way the Tax payer is hard pressed for recovery and forced to go through various layers of appeal from the department point of view of the entire process only leads to creation of very high uncollectible demands, till the level of appeals before the HC.

11.7 It is therefore strongly suggested that a clarificatory circular as a sequel to the one issued by the CBDT while introducing Section 269SS may be issued that the provisions shall not apply to transfer or journal entries transferring funds, financial rights or liabilities. A similar clarification in respect of repayment of loan or deposit referred to in Section 269T also needs to be issued. The existing circular even did not consider fund transfers by RTGS/NEFT or transfer from one account to another and mentioned only of cheques and DDs and that perhaps has created the confusion. If however, it is decided by the CBDT that the desired clarification can be brought about only by an amendment of the provision, it is submitted that it should be effected at the earliest available opportunity so that the hardship caused to business entities is set to rest at the earliest.

BCAJ Admin

PART A : Decision of the H.C.

The appellant, Mr. Arvind Kejriwal had questioned and challenged the interpretation of Section 11 of the RTI Act.

The Delhi High Court noted:

Section 11 of the Act has been given a marginal heading “third party information”. The term “third party” has been defined in section 2(n) of the Act to mean any other person including a “public authority” except the citizen who makes a request for information. Thus, a public authority which has the information or access to the information can be a third person. Section 8 of the Act provides exemption when information is not to be furnished or given. To interpret section 11, one has to keep in mind and also consider the exemptions provided in section 8(1) of the Act.

The core contention of the appellant is that the expression “relates to or has been supplied by a third party and has been treated as confidential by that third party” in section 11(1) of the Act should be read as “relates to and has been supplied by a third party and has been treated as confidential by the third party”. In other words, the word “or” used in section 11(1) should be read as “and”. In support of the said contention, it is submitted that purposive and not literal interpretation is required and if a restricted or narrow interpretation is given, then in all cases where information relates to third party, the Public Information Officer (“PIO” for short) would be required to issue notice to the third party or parties concerned. This may happen in most cases and it would make the Act unworkable. The appellant has pointed out instances like list of families below the poverty line, copy of contracts or bills, etc. between the public authorities and third parties, marks obtained in an exam, admissions or even information which is already in public domain would attract the procedure stipulated in section 11 unless the word “or” is read as “and”. It is submitted that in such cases, notices will have to be issued to third parties who may be spread all over India and this process itself may take days, if not months to be completed. Dealing with objections raised, in regards to the abovementioned procedure, would also make the Act tedious, result in procedural difficulties and delay furnishing of information and is therefore contrary to the legislative intent.

• The word “or” is normally disjunctive and the word “and” is conjunctive. However, there have been occasions when the Courts have interpreted and read them vice versa to give effect to the manifest intention of the Legislature as disclosed from the context. It is permissible to read word “or” as “and” and vice versa, if the legislative intent is clearly spelt out or some other part of the statute, requires such interpretation (See principles of Statutory Interpretation of G.P. Singh, 11th edition at page 455).

The Court then cited a number of Court decisions including the Supreme Court decisions in:

• People’s Union for Civil Liberties v. Union of India

• Central Board of Secondary Education v. Aditya Bandopadhyay.

The Court then noted and decided:

• Fair and just decision is the essence of natural justice. Issuance of notice and giving an opportunity to the third party serves a salutary purpose and ensures that there is a fair and just decision. In fact issue of notice to a third party may in cases curtail litigation and complications that may arise if information is furnished without hearing the third party concerned. Section 11 prescribes a fairly strict time schedule to ensure that the proceedings are not delayed.

• Thus, section 11(1) postulates two circumstances when the procedure has to be followed. Firstly when the information relates to a third party and can be prima facie regarded as confidential as it affects the right of privacy of the third party. The second situation is when information is provided and given by a third party to a public authority and prima facie the third party who has provided the information has treated and regarded the said information as confidential. The procedure given in section 11(1) applies to both the cases.

• The learned Single Judge in the impugned decision has dealt with and interpreted aspect of annual confidential reports and other factual aspects including the fact that inspection of several files has been allowed to the appellant and what the appellant is today seeking is merely the gradings. We would not like to comment on any of these aspects or issues as they were not specifically argued by either side. As noticed above, the matter has been remitted for fresh decision by the CIC. The observation made in the present appeal should not be construed as binding findings on any of the said aspects. We have interpreted section 11 of the Act and the observations made above are in that context. The appeals are accordingly disposed of.

[Arvind Kejriwal v. CPIO and Anr, Arvind Kejriwal v. Union of India: LPA Nos. 719/2010, 291 & 292/2011 decided on 30.09.2011 – (RTIR IV (2011) 368 (Delhi))]

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BCAJ Admin

From published accounts

Compiler’s Note

Companies incur expenditure on construction/development of certain assets to facilitate construction of a project or to subsequently facilitate its operations. Such assets are referred to as ‘Enabling Assets’. The Expert Advisory Committee of ICAI has in an opinion published in January 2011 issue of ‘The Chartered Accountant’ opined that expenditure on such assets cannot be treated as capital expenditure.

ICAI has recently issued an Exposure Draft of Limited Revision to AS-10 ‘Accounting for Fixed Assets’ which when made applicable may have an impact on treatment of such expenditure.

Given below are disclosures of accounting policies followed by some companies in respect of expenditure on such ‘Enabling Assets’.

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BCAJ Admin

FROM THE PRESIDENT

Dear Members,

The month of February is normally a month in which professionals, businessmen and the media are affected by “budget fever”. On 28th of February , each year the finance minister rises to place before the parliament his expenditure proposals for the ensuing year, and how will he proposes to meet them by way of tax collections and other receipts.

Over the last decade or so, on account of the media hype that surrounds the presentation of a budget it has become an event that is awaited by all. The manner of presentation of a budget has gradually changed over the years. Each finance minister wishes to leave his own mark on the budget. This year there is a change in the date on which the budget will be presented on account of the elections in various states which are scheduled to be held in February. The February budget fever will now raise its head in the month of March.

The year that has gone by has indeed been a difficult one for the ruling government particularly on the economic front. The Finance minister has had to walk the tightrope between two challenges, the first being spiralling inflation and the second being the faltering economy. In regard to the first the government seems to have met with some degree of success while on the latter the failure seems to be continuing. Most core sectors are showing a slowdown in growth which is bound to affect the projected rise in GDP. As a corollary the, share markets have remained depressed and consequently the government has been unable to meet its disinvestment targets. Coupled with this, the growing outlay on subsidies is going to make a hole in the government’s finances. The fiscal deficit therefore is going to cross the budgeted figure. The Reserve Bank of India and has also had to strike a fine balance between regulating money supply to check inflation and in ensuring the requisite liquidity in the money markets to meet demands of business. Consequently in the last announcement by the Reserve Bank of India in regard to monetary policy we found a easing of the CRR norms while the interest rates remained unchanged.

To an extent one can sympathise with the UPA government since some of the problems that it faces are not its own creation but they have been compounded by a total policy paralysis. The government has failed to introduce the policy initiatives which it was expected to do. In regard to these matters it has been unable to keep its flock together, let alone the take the opposition into confidence. The last session of Parliament was devoted to the Lok Pal issue and even that bill has now not seen a passage through the Rajya Sabha. The passing of the Bill would not have ended corruption but at least the government would have sent out a signal that it was a serious in tackling the root of the problem. Unfortunately we are today back to square one on this issue.

Since the Lok Pal Bill took centre stage in the last session, much other important legislation did not get the requisite attention that it deserved. One hopes that now the parliament will get down to the serious business of debating upon and passing the legislations like the Companies Bill and the Direct tax code, the latter being the one which the finance ministry seems to be keen on passing. While the Direct Tax code (DTC) may not be become law in the immediate future it is virtually certain that some provisions of the DTC will find their way into the ensuing budget. One expects that the general anti-avoidance rules will form part of the Finance Bill in this year. If that happens, and the provisions do not have adequate safe guards their introduction would open the floodgates to litigation.

On the direct tax front the Vodafone judgement by the apex court has upset the government’s calculations in a substantial manner. Given the tenor of the Bombay High Court judgement a major section of tax professionals, businessmen and even sections of the media believed that this decision would go the government away. That it did not do so is an indicator of the independence of the last bastion of democracy in our country that is the judiciary. The judgement is being dissected and analysed by professionals for it lays down many significant principles of law. One expects that the effect of the judgement will be overcome by amendments to the law. One cannot have any grudge on the government’s right to legislate if it does not agree with the law laid down by the Supreme Court. One only hopes that these amendments will be prospective in nature and not retrospective because amendments made retrospectively to nullify the effect of Supreme Court judgements tend to undermine the authority of the judiciary. Not being able to collect the tax, which the government believes it is entitled to, will aggravate the problem of a fiscal deficit. However, upholding the independence and moral strength of the judiciary is far more important.

Over the last few years our profession has been facing a lot of flak. As I had said in my last communication the perception of the role of the auditor in the minds of the public as well as other stakeholders is reflected in the proposed amendments to the Companies Act. Both the public and the regulators have substantial expectations from the audit profession, but neither appreciates the limitations within which an auditor functions. The expectation gap instead of being bridged is widening. One expects that the profession will face a lot of new challenges of this nature in future.

In this background it is heartening to note that the powers that be, on the occasion of Republic Day, have recognised the role of Chartered Accountants in Society. The Padma Shri award has been conferred upon Mr. Y. H. Malegam, a doyen of our profession. Mr. Malegam has a number of achievements to his credit and in our profession he stands tall in every sense of the term. Every young Chartered Accountant would look up to Mr. Malegam for his commitment to the profession. One admires him not only for his intellectual abilities but also for the impeccable manner in which he is conducted himself in public life. I have heard number of people in different walks of life shower praise on this great personality. The words of the governor of the RBI at the conference of the Western India Regional council of ICAI, and the utterances of Mr. Chandrababu Naidu, former chief minister of Andhra Pradesh at our recently concluded residential refresher course are two such recent occasions. On behalf of all members of the BCAS and readers of the journal I take this opportunity to heartily congratulate Mr. Malegam on his achievement and wish him a long and healthy life. In his receiving the award the profession has been honoured.

On this happy note let me sign of off with the hope that many such awards are received by many other deserving members of our profession!

Happiness is when what you think, what you say, and what you do are in harmony
— Mahatma Gandhi

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LECTURE METING

Subject : Nurturing Relationships
Speaker : Sister Shivani
Date : 21-12-2011

‘Brahma Kumari’ Shivani addressed the members of the Society and public at large on the subject ‘Nurturing Relationships’ on 21st December, 2011 at K. C. College, Churchgate. She presented her in-depth understanding of the human psychology and relationships.

The speaker started the meeting with a two-minute silence. During that silence she made the audience concentrate on those relationships which are experiencing a tough time. This was something unique on her part which made the audience think.

Then she asked the audience their opinions on why relationships are spoilt. She took the responses of the audience and analysed those responses. It was a very interactive session in that sense.

She got varied responses from the audience. anger, ego, jealousy, hypocrisy, age difference, generation gap, frustration, boredom, etc. are some of the reasons. She came to each of them one after the other. One of the important things that she stressed upon is that the problem is created by only one factor, rest are all chained. If you break the first one, the rest will automatically be broken. She clarified that if we learn to accept things and people around us as they are, without trying to make modifications in them, then our relationships will never be spoilt. In a nutshell we should not expect anything from anyone. If expectations break, then that chain will start to pop up.

To illustrate, if we accept people as they are and do not expect them to behave according to our expectations, then we will not be angry with them, because their actions will not have any power to disturb our mental state. If anger is not there, then ego automatically gets cancelled out. If there is no ego, then jealousy does not come into the picture! Similarly, hypocrisy, age difference, boredom, etc. will all be rendered powerless to create strain in our relationships if we apply the above golden principle in our day-to-day life.

Sister Shivani enlightened everyone that we should have respect for the other soul. The basic problem associated with everyone is that people are always quick to react! We should always learn to respect other people’s acts rather than reacting on them. This will create a win-win situation for us. It will not disturb our mental peace and at the same time our relationships will not get spoiled.

She then explained to the audience that relationships are always maintained by ‘thoughts’ and ‘thinking’. ‘Actions’ play a very minor role in nurturing relationships. In fact, it is well accepted that our actions are guided by our thinking only! So to maintain good relationships we need to always think positive. Our thoughts will determine our relationships. Further, she mentioned that all the negative feelings like anger, ego, hatred, jealousy, etc. pollute our soul, and hence one should keep away from them. She acknowledged that it is not easy and one can always take the help of meditation. Meditation can help one to be nearer to the Almighty. It can give eternal peace and satisfaction.

To conclude, let the relation be of any nature – brother-sister, husband-wife, parent-child and professional-client, but acceptance is the key for successful relations. Accept and do not expect!

Sister Shivani concluded her beautiful session after taking a promise from everyone that they will try to mend their relationships and nurture them. The softness and beauty of her speech was very well acknowledged and appreciated by the audience, which was in large numbers.

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BCAJ Admin

ICAI and its members

1. Code of ethics

The Ethical Standards Board of ICAI has considered some of the ethical issues. These are published in C.A. Journal of January 2012, at pages 1002 and 1004. Some of these issues are as under.

(i) Issue: Can a member publish a change in partnership or change in the address of practice and telephone numbers?

A member can publish a change in partnership or change in the address of practice and telephone numbers. Such announcements should be 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.

(ii) Issue: Can the details of a student passing examination be published in local press?

It is for local papers to publish details of the examination success of local candidates. Some biographical information is often included. The candidate’s name and address, school and local background, examination passed with details of any prize or place gained, the name of the principal, firm and town in which the principal practices may be published.

(iii) Issue: Can a concurrent auditor of a bank also undertake the assignment of quarterly review of the same bank?

The concurrent audit and the assignment of quarterly review of the same entity cannot be taken simultaneously as the concurrent audit is a kind of internal audit and the quarterly review is a kind of statutory audit. It is prohibited in terms of the ‘Guidance Note of Independence of Auditors’.

(iv) Issue: Is a member holding certificate of practice entitled to own agricultural land and continue agricultural activity?

A member holding certificate of practice can own and hold agricultural land and continue agricultural activity through hired labour.

(v) Issue: Can a member act both as tax auditor and internal auditor of an entity?

A tax auditor of an entity cannot act as internal auditor of that entity for the same F.Y. Similarly, an internal auditor cannot accept tax audit assignment of the same entity in the same F.Y.

(vi) Issue: Can a member in practice have a branch office/additional office/temporary office?

A member can have a branch office. In terms of section 27 of the CA Act, if a Chartered Accountant in practice or a firm of Chartered Accountants has more than one office in India, each one of such offices should be in the separate charge of a member of the Institute. Failure on the part of a member or a firm to have a member in charge of its branch and a separate member in case of each of the branches, where there are more than one, would constitute professional misconduct.

However, exemption has been given to members practising in Hill Areas, subject to certain conditions.

It may be clarified that a chartered accountant in charge of the branch of another firm should be associated with him or with the firm either as a partner or as a whole-time employee. However, a member can be in charge of two offices if they are located in one and the same accommodation.

2. Chartered Accountants (Amendment) Act, 2010

The above Act has been passed by both Houses of Parliament in December 2011. It amends the CA Act, 1949 and the amendments shall come into force when the Central Government issues the notification to this effect. Some of the important amendments in the CA Act made by this Amendment Act are as under.

(i) A firm of Chartered Accountants has now been defined to include (a) a sole proprietorship concern, (b) a partnership firm defined in the Indian Partnership Act, 1932 and (c) a limited liability partnership (LLP) as defined in the Limited Liability Partnership Act, 2008.

(ii) For the above purpose —

(a) The proprietor of a sole proprietorship concern should be a chartered accountant in practice.

(b) So far as a partnership firm or LLP is concerned it should have at least one partner who is a chartered accountant in practice and other partners may be members of other recognised professions as may be prescribed.

(iii) Similar provisions are made by amendments in the Cost & Works Accountants Act and the Company Secretaries Act. Therefore, if the councils of ICAI, Cost Accountants and Company Secretaries pass requisite regulations, it will be possible for one or more Chartered Accountants in practice to enter into partnership (including LLP) with Cost Accountants and Company Secretaries in practice. Incidentally, it may be mentioned that the name of the ‘Institute of Cost and Works Accountants of India’ has now been changed to ‘Institute of Cost Accountants of India.’

(iv) At present, the number of partners in a firm cannot exceed 20. The Companies Bill, 2011, which is before the Parliament, has removed this limit when professionals form a firm. Therefore, if this Companies Bill is passed, there will be no limit on the number of partners in a professional firm. Similarly, the LLP Act also provides that there is no limit on the number of partners in a LLP.

3. EAC opinion

Facts
Company ‘A’ Limited, a wholly-owned subsidiary of ‘B’ Ltd., is not a company in which public is substantially interested. ‘B’ Ltd. owns 15% shares in ‘C’ Ltd. With a view to acquire central over ‘C’ Ltd., the balance 85% shares of ‘C’ Ltd. were acquired by ‘A’ Ltd. from the other shareholders of ‘C’ Ltd. These shares were purchased in F.Y. 2010-11 at a value which was less than the prescribed value under Rule 11(UA) of the Income-tax Rules. Since the prescribed value was more than the purchase value of shares of ‘C’ Ltd. and the difference was more than Rs.50,000, the excess of the aggregate difference in value was liable to tax under the head ‘Income from Other Sources.’ ‘A’ Ltd. has paid tax on this deemed income determined u/s.52 (2)(viia). In addition to the above, the company has also incurred expenses on account of stamp duty, franking and bank charges in connection with the said acquisition of shares.

According to the company, the payments of income-tax u/s.56(2)(viia) has arisen out of the transaction of acquisition of shares and the company would not have incurred such an expense otherwise. Therefore, the said cost would be directly associated with purchase of such shares. Had the acquisition of these shares not been made, the company would not have incurred such costs.

On the basis of the above, the company sought the opinion of the Expert Advisory Committee (EAC) whether the payments of tax u/s.56(2)(viia) would qualify to be treated as part of the cost of investment in the balance sheet of the company in view of the explanation provided in paragraph 9 and 43 of Ind AS 39 read along with paragraph AG13 of Appendix to Ind AS 39.

Opinion
The Committee noted that although Ind ASs have been placed on the website of the Ministry of Corporate Affairs, these Standards have not yet been notified by the Ministry. Accordingly, till the Ind ASs are notified by the Ministry, the existing notified Accounting Standards would be applicable. Therefore, in the case of the company, the Committee is of the view that the transaction of acquisition of investment in shares would be governed by the existing notified AS-13.

With regard to accounting for the tax levied u/s.56(2)(viia) of the Income-tax Act, the Committee has considered AS-13, which provides that the cost of an investment ‘includes acquisition charges such as brokerage, fees and duties’. Keeping in view the nature of the item of acquisition charges mentioned in AS- 13, the Committee is of the view that the cost of acquisition should include only those direct charges which are incurred ‘on’ acquisition of investment, i.e., the expenses, without the incurrence of which, the transaction could not have taken place, such as, share transfer fees, stamp duty, registration fees, etc. The Committee has noted that tax paid u/s.56(2)(viia) is levied when consideration paid for acquisition of investment is lower than its fair market value for an amount exceeding Rs.50,000 and such lower consideration paid is deemed to be income of the assessee. Thus, this tax is not a tax ‘on’ acquisition of shares, rather it is a tax on ‘deemed income’ under the Income-tax Act. Accordingly, the Committee is of the view that such tax expense is not a cost incurred ‘on’ acquisition of investment, rather it is incurred after the transaction of the acquisition of investment. In other words, it is not a means of acquiring such investments; rather it is a result of such acquisition. Accordingly, such tax cannot be considered as acquisition-related cost and, therefore, cannot be capitalised as cost of investment. The Committee is further of the view that such tax paid should be treated as normal tax and charged off to profit and loss account in the year in which it is incurred.

The Committee, after considering the proposal Ind AS 39, is of the view that only those transaction costs that are directly attributable to the acquisition of investment can be capitalised with the investment. The Committee is of the view that although the tax levied u/s.56(2)(viia) may be considered as an incremental cost of acquisition of investment, it cannot be considered as ‘a directly attributable cost’.
(Please refer pages 1035 to 1037 of CA Journal, January 2012)

4. ICAI News

(Note: Page Nos. given below are from C.A. Journal for January 2012)

(i) General Amnesty Scheme for Members
The Executive Committee of the ICAI Council has, at its recent meeting, considered the question of putting a General Amnesty Scheme in place for members whose names have been removed on account of non-payment of membership fee with a view to facilitating such members restore their names with retrospective effect. The Committee has recommended to the Council that the members whose names stood removed in the past due to non-payment of membership fee be given an opportunity, by way of a General Amnesty Scheme, to restore their names, irrespective of the period of such removal, retrospectively on payment of applicable membership fees for the years during which the names were removed and for the current year i.e., 2011-2012. For this purpose, application should be made together with fee(s) of the intervening years(s), along with Form ‘9’ and the additional (restoration) fee of Rs.1,200.

The Committee has recommended that the above General Amnesty Scheme be kept in force up to 31st March 2012. (Page 993)

(ii) Empanelment of C.A. firms for audit of PSUS for 2012-13

The C & AG has issued the following Circular which is at page 1101.

Applications are invited from the firms of Chartered Accountants who intend to be empanelled with C & AG for appointment as auditors of Government companies/Corporations for the year 2012-2013. The format of application will be available on our website: www.cag.gov.in from 1st January to 15th February 2012. Chartered Accountant firms can apply/update the data showing the status of their firm as on 1st January 2012 and generate online acknowledgement letter for the year. They are also required to submit related documents (to be notified in this office website) to this office before 28th February 2012. Only the Chartered Accountant firms who have generated online acknowledgement letter for the year 2012-2013 and submitted the documents before the due dates will be considered for empanelment.

Any changes in the constitution of the firm oc-curring after the cut-off date of 1st January 2012 should continue to be updated in the website which will be available throughout the year. However, the changes in the firm occurring after 1st January 2012 till the time of preparing the panel that will lead to a reduction in rank of the applicant firm shall only be taken into account for ranking the CA firms.

(iii) New ICAI publications

(a)    Compendium of Auditing Standards — up-dated to 1-10-2011
(b)    Compendium of Guidance Notes on Auditing — updated to 1-10-2011
(c)    Study Report on Accounting on Food, Fertilisers and Oil subsidy (page 1101)
(d)    Compilation of Registration Provisions under VAT Laws of different States (page 995)
(e)    Technical Guide on Internal Audit of Mutual Fund Industry (page 995)
(f)    Guidance Note on Revised Schedule VI of Companies Act.

BCAJ Admin

From the President

Dear members,

With the POTUS (President of the United States) in LOTUS Land as the Chief Guest for the first time at the Nation’s 66th Republic Day celebrations, there couldn’t have been a louder endorsement of India’s growing global importance. It was indeed a step closer in bringing the world’s largest and oldest democracies together. Let’s hope this defining partnership in the 21st Century will lead to greater good, not only for the two Nations, but also for the World at large.

At our first Republic Day in 1950, the architects of our Constitution gave us the longest written and best possible framework that has kept India moving forward as a Nation, even though, there have been 99 amendments so far and the 100th amendment is in the offing. It may be noted that the Constitutional Amendment Bill for the GST is listed as the 122nd Amendment Bill as several previous bills have lapsed.

Regrettably, the awareness about provisions of our Constitution amongst masses remains inadequate, especially about the rights and the duties of Citizens. Besides the customary grand parade on the Republic Day, it is important for the Government to organise programmes to enhance awareness about our Constitution. The BCAS did publish a concise book titled “Fundamental Rights and Duties of Indian Citizens” under Citizens’ Education Series a few years ago aimed at informing citizens about their fundamental rights and duties under the Indian Constitution, as also how to enforce them, say, by filing a petition under Public Interest Litigation process or invoking provisions of Right to Information Act, as expedient, from time to time. India can grow into a developed nation only when its population is transformed into Citizens.

At the recently held ET Global Business Summit, the Hon’ble Prime Minister Narendra Modi upped the ante and invoked the dream of transforming India’s economy from $ 2 trillion to $ 20 trillion. This vision is indeed courageous, ambitious and inspiring. Its pursuit will indeed transform the whole of India. Several international experts at this summit have endorsed the Prime Minister’s vision. The Nobel-prize winning economist Paul Krugman hailed India as a country of the future. Noted scholar Nassim Nicholas Taleb, a distinguished professor of risk engineering at New York University and University of Oxford, remarked, `Democracy makes India more robust than China’.

Nassim Taleb, who has also authored thought provoking and much acclaimed books – Black Swan and Anti- Fragile, makes interesting points that one cannot forecast anything or everything and that forecasting has killed more businesses than anything else. The massive decline in oil prices of over 50% in a very short span of six months, sinking to its lowest levels in over five years, could not have been foreseen by anyone. Such an enormous crash is considered the black swan event of 2014. The falling oil prices are a bonanza to a developing country such as India that relies heavily on oil imports. However, the low prices appear to suggest that the world has not been able to recover fully from the economic crisis, and the global growth could remain a challenge. In an increasingly interdependent world, this does not bode well for any country including India.

The black swan event such as the one above, does raise questions about various financial decision-making and valuation models we frequently use where the shortcomings of underlying assumptions are largely overlooked. Taleb emphasises the need to be antifragile where the cost of error is small and benefits are big. With growing uncertainties, the accountants too will need to continue to evolve in their tools and techniques to overcome Black Swan challenges for their clients and for themselves.

As per recent statistics, there are approx. 60,500 firms registered with the ICAI. Out of this, nearly 97% firms are small or medium sized practices (SMPs) with almost 70% being proprietary concerns and the balance 27% with up to five partners. As such, the CA profession in India is largely dominated by SMPs and is highly fragmented. Only 244 firms have more than 10 partners. The largest firm has 29 partners.

In contrast, a 2014 survey of accounting firms in the UK shows at least 12 firms where the number of the partners exceeds 100. The number of partners at the largest firm is over 1,000. Interestingly, there are only 6,962 registered audit firms as at 31st December 2013 despite there being over 3,27,000 members of various accounting bodies in the UK and Ireland.

What will be the impact of various changes in various fields such as technology, economy and regulatory environment on our profession? Would rotation of auditors and other restrictions under the Companies Act, 2013 prove to be a Black Swan event for our profession? The rate of change coming from so many different directions must lead us to the conclusion that the future will be nothing like the past. Apparently, time seems to be running out for the mom-and-pop firms. In order to survive and thrive, the Chartered Accountants, especially those running SMPs, will need to adapt quickly and collaborate, and that will require the Chartered Accountants to hone their management skills substantially.

At a lecture meeting held recently, our member Milind Kothari discussed in detail the winds of change the CA profession is facing and shared his experience in successfully strategizing for growth. This vital area of practice management, often overlooked as the SMPs get caught in day to day grind, has been a theme of the annual Power Summits that the Information Technology and 4i Committee has been holding for last several years. I am glad the BCAS is playing an active role and has been a catalyst for meaningful collaboration amongst a large number of firms and members.

A pioneer in collaborative learning, the Residential Refresher Conference (RRC) remains the flagship event of the BCAS and continues its gallant march towards the Golden Jubilee. At the recently concluded 48th RRC at Udaipur, the participants acclaimed the high standard of the technical papers and the faculties. With nearly half of the participants from outside Mumbai and from across India, even the RRC provided an excellent opportunity for pan-India networking.

With barely few weeks left for the presentation of the Union Budget by the Finance Minister, the expectations are running high as this will be the first full-fledged budget of the new Government headed by the Hon’ble Prime Minister Shri Narendra Modi.

The BCAS too is preparing for the annual lecture meeting to be addressed for the record 27th year by respected Mr. S. E. Dastur, Senior Advocate. This meeting will be held on 4th March as usual at Dadar in Central Mumbai and will coincide with the release of our Budget Publication. Team BCAS once again looks forward to receiving your overwhelming support as in the past.

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BCAJ Admin

LETTERS to the editor

The Editor,
BCA
Mumbai

Re: “Make in India” and “Ease of Doing Business in India” – Some Tax Irritants

Dear Sir,

The Prime Minister of India has launched “Make in India” campaign and has given strong indications to make India a friendly place to do business. India has continuously languished in the global ranking of “Ease of Doing Business”, and while foreign investors find India an attractive market, they find operational environmental both chaotic and uncertain. The PM has, during his foreign trips, promised foreign investors that they can look forward to a more congenial, transparent and consistent operating environment.

Amongst the many painful points frequently outlined by MNCs and investors, are the tax rules pertaining to taxation of overseas employees who have been sent on deputation/secondment by an MNC from its Head Office or other major international office to India to establish and streamline Indian operations/projects, as the case may be.

Normally, these seconded employees work under the direct control and supervision of the Board of Directors of the Indian Subsidiary and continue to receive their remuneration with all social security benefits from the parent entity. Such costs and remuneration are reimbursed by the Indian subsidiary to the parent entity.

Generally, it is contended by the Taxpayer (Indian Company) that reimbursement of such remuneration and other related costs of the seconded employees cannot be treated as payment of Fees for Technical Services [FTS] or Fees for Included Services [FIS]. Therefore, the taxpayers contend that such payments are not liable for TDS in India. However, such reimbursement of salary and costs by the Indian subsidiary has been a matter of huge controversy as the Tax Department seeks to tax such payment, as ‘fee for technical services’ or ‘fee for included services’ and holds the Indian subsidiary liable for consequences of not deducting TDS.

In a large/overwhelming number of judicial decisions, it has been held that such payment constitutes “Reimbursement of Expenses” and not “ FTS/FIS” and that even if presence of such Seconded Employees constitutes a Service PE in India, there is no net taxable income in India. The Tax Department has strenuously contested this and raised huge demands on Indian subsidiaries. This increases the cost of doing business in India for the foreign enterprise and devotion of management time and resources for undertaking the unnecessary, time consuming, costly and repetitive litigation, right upto the Apex Court.

Even if the Department’s stand is plausible in Law, such an Interpretation ought to be avoided, particularly in view of Prime Minister’s Modi’s “Make in India” Campaign and his desire to improve India’s Global Ranking on ease of “Doing Business”. Viewed from another angle, what would be our reaction if our Indian Enterprises operating abroad are similarly double taxed in the Foreign Country on the Reimbursement of Costs and Remuneration of Key Personnel deputed from India, in addition to taxation of such remuneration in the hands of the concerned employees.

The Prime Minister, Finance Minister and the CBDT should take cognisance of this burning problem and bring it to rest once and for all.

This would send a positive message and present India as a liberal, pragmatic, positive and matured destination for investment, as much as any other developed country for that matter.

Regards,
Tarun Singhal

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BCAJ Admin

Cancerous Corruption

Global Compact Network India (GCNI)
Shabnam
Siddiqui, Project Director of GCNI who wrote this feature in September
2014 now writes: “We are absolutely delighted to share with you that
Siemens has today named the first group of funded projects for the
second round of the Siemens Integrity Initiative.

Under the
second tranche, the selected projects will operate over a period of
three to five years. Of the five organisations that were announced in
the first round today Global Compact Network India is the only Local
Network to get the honour and one of the very few organisations that
have received repeat support from the Siemens integrity Initiative (UNGC
had won the first round in which CAP India was one part of a five
country UNGC – Siemens project). Siemens Press Release was released
today globally (attached) and GCNI effort singled and lauded on a global
platform.

The other organisations awarded funding includes
Ethics Institute of South Africa, which will work to combat corruption
in South Africa and Mozambique, the Ethics and Reputation Society of
Turkey (TEID, the Berlinbased Transparency International Secretariat and
the International Anti-Corruption Academy (IACA) in Vienna.

The second round of Siemens Integrity Initiative supported work in India will focus on the establishment of a Centre of Excellence for Transparency and Ethics in Business in India.”

Bombay Chartered Accountants’ Society has become business partner in its event in Mumbai on 06.02.2014.

Pope condemns graft in Rome:
Pope
Francis, on 31st December, condemned administrators and criminals in
Rome who allegedly pocketed public funds meant to help poor migrants,
saying the eternal city needed a “spiritual and moral renewal”.

Earlier
this month, the police arrested 37 persons suspected of being part of a
“mafia-like” organisation that guided public contracts to people close
to the alleged boss of the organisation, a right-wing extremist with
longtime ties to Rome’s underworld. Investigators said funds were
pocketed by corrupt city administrators and their criminal cohorts
instead of being used to improve squalid conditions. Pope Francis is
also the bishop of Rome, which is both the Italian capital and the
centre of Christianity Calling it “our city”, Pope Francis said, “We
have to defend the poor, not defend ourselves from the poor. We have to
serve the weak, not use the weak”.

After the arrests Rome’s
mayor, Ignazio Marino, ordered a review of city contracts and Prime
Minister Matteo Renzi proposed tougher national laws against corruption.

Graft & BMC:
If corruption in the civic body
could be rou ted out, prices of flats in Mumbai would fall by at least
Rs. 500 per sq. ft. said anti-corruption bureau director general Pravin
Dixit. “I have been told by an MP that if we can stop corruption in the
BMC, flat prices in Mumbai will be reduced substantially,” Dixit said
during a lecture at Pandharpur in Solapur.

Bristled by the
claim, the Shiv Sena, which controls the civic body, has demanded that
Dixit should provide proof. “He must show proof to substantiate his
claim. If he fails to provide the documents, then the chief minister
should take action against him for making irresponsible statements,” a
senior Sena leader said.

Corruption complaints to Banks:
Noting
irregularities, the Central Vigilance Commission (CVC) has told banks
to follow proper procedure in probing corruption complaints received by
them.

“It has come to the notice of the commission that in some
banks, senior bank executives and CMDs as disciplinary authorities are
treating cases or matters in which vigilance angle is perceived as
non-vigilance without following the due consultative process,” the CVC
said in a directive issued to all public sector banks. All banks are
supposed to set up an internal advisory committee (IAC), to scrutinise
the complaints received by them and also the cases arising out of
inspections and audit and determine the vigilance angle.

“All
CMDs and chief vigilance officers are advised to sensitise senior
executives and disciplinary authorities on various aspects of vigilance
administration to ensure all such matters are considered by the IAC set
up in the respective banks,” the watchdog said.

Pledge taken by the officers and employees of CVC office:
In
the week to celebrate “VIGILANCE AWARENESS WEEK – 2014”, the officers
and employees of the Commission affirmed that they shall continuously
strive to bring about integrity and transparency in all spheres of
activities, work unstintingly for eradication of corruption, remain
vigilant and work towards the growth and reputation of the organisation,
and do their duty conscientiously and act without fear or favour.

Corruption in Irrigation Department, Maharashtra:
The
newly appointed water resources minister Girish Mahajan has
unexpectedly made a sensational disclosure. He said at a public meeting
in his home town in Jalgaon, that after he stopped the payment of Rs.
1,100 crore of leading contractors, a leading developer approached him
with an offer of Rs. 100 crore to release the payment. A senior
anti-corruption bureau sleuth said that if Mahajan is serious about
taking on corruption in the irrigation department, he must disclose the
controversial developer’s name to the ACB for probe. Mahajan had
submitted details of cost escalation of key irrigation projects in north
Maharashtra. When the ACB initiates a probe against Ajit Pawar and
Sunil Tatkare, Mahajan is likely to explain to the ACB the modus
operandi adopted by leading politicians and contractors involved in
corruption. A day after he was entrusted with the water resources
portfolio, Mahajan called for all files of the Kondhane irrigation
project, where the cost of the project increased from Rs. 80 crore to
Rs. 580 crore in a brief span of three months. He then suspended more
than half-a-dozen high-ranking engineers of the water resources
department for dereliction of duty and involvement in corruption.
Significantly, the same file gathered dust in the office of Ajit Pawar,
who was then the deputy CM, in-charge of water resources. The file was
submitted to the then CM, Prithviraj Chavan, who ordered a departmental
probe. Both Pawar and Chavan had an opportunity to suspend, but they
preferred to ignore the proposal.

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BCAJ Admin

ICAI and its Members

C&AG Report about deficiencies in Tax Audit Reports

In its Report No. 32 of 2014 presented to the Parliament by the C & AG, it is stated that there was a short levy of Income tax of Rs. 2,813.11 crore in 367 Cases in the financial years 2010 – 11 to 2012 – 13, as a result of wrong Tax Audit Reports issued by members of ICAI. The C & AG has classified the deficiencies in Tax Audit Reports as under:

(i) Correct information relating to allowance of depreciation not given in 66 cases involving short levy of Rs. 457.79 crore.

(ii) Correct information regarding brought forward losses /depreciation not given in 46 cases which resulted in loss of tax revenue of Rs. 557.79 crore.

(iii) In 42 cases, personal/capital expenditure not reported resulting in loss of tax revenue of Rs. 477.89 crore.

(iv) Certified wrong information/claims in 74 cases for various exemptions having a tax effect of Rs.259.72 crore.

(v) Incorrect/incomplete information given in Tax Audit Reports of 132 cases, which had resulted in loss of tax revenue of Rs. 1037.61 crore.

(vi) Wrong information given in 7 cases for allowance of provisions in Form 3CD, resulting in loss of tax revenue of Rs. 22.31 crore.

(vii) In 27 cases, the tax auditors did not calculate the Book Profit u/s. 115JB.

(viii) In 153 cases, the tax auditors gave incorrect/incomplete information about Transfer pricing transactions.

(ix) In 308 cases, the tax auditor failed to point out the disallowance to be made u/s 40A (3).

(x) In 78 cases, special Audit u/s. 142(2A) was ordered. Income of 16 assessees was increased by Rs.197.79. on the basis of these reports. This indicates that the original Auditor did not perform the task properly.

It appears that the C&AG has taken the view that tax audit u/s. 44AB is to be conducted by an “Accountant” as defined in section 288. If we refer to section 288, such audit can be conducted by a ‘Chartered Accountant’ only and not by a Firm of Chartered Accounts. On this basis, he has pointed out 22 cases where some Chartered Accountants have signed more than 45 tax audit reports for A.Y. 2013-14. The C&AG has given the names of these Chartered Accountants in Para 3.6 of his report. This list shows that one member has signed 2,471 tax audit reports. There are others in the list, who have signed 401 to 990 tax audit reports.

The C&AG has pointed out that according to the guidelines of the ICAI, there is a limit of 45 (now 60) tax audits per member. Therefore, these 22 members have violated the above guidelines.

The C&AG has recommended that the ICAI and the tax department should take disciplinary action against the various members for their negligence in giving tax audit reports. The Report of C&AG contains names and membership numbers of all these members.

It may be noted that earlier, in the case of Vijay V. Meghani vs. DC17, the Mumbai ITA Tribunal had passed serious remarks about deficiencies in the professional services rendered by our members. Recently, the Delhi Tribunal has made similar remarks in the case of Wrigley India Pvt. Ltd vs. ACIT. In this case, the Tribunal has observed that Transfer Pricing Study and certification by a CA does not inspire any confidence. It is also observed that the level of professionalism is “Pathetic”. No purpose is served by relying on such reports.

The above observations by the C&AG and the ITA Tribunal are of a serious nature. It is reported that the ICAI council has decided to take steps against the members in whose cases professional misconduct is observed. Cases of Members who have signed Tax Audit Reports in excess of the limit prescribed by the ICAI will be referred to Disciplinary Directorate. The ICAI will develop an IT based system in co-ordination with the tax authorities, to ensure that members comply with the limit for tax audit prescribed by the ICAI. Issues raised by the C&AG will be studied and discussed with the C&AG. A special cell with proper staff will be created, to deal with such matters in an urgent manner.

2. Swachha Bharat

Prime Minister, Shri Narendra Modi has announced on 25.12.2014 names of nine persons, who will assist the Government in the Swachh Bharat Abhiyan. The name of the ICAI is included in this list. We, as members of the ICAI, have to put in efforts in assisting the Government in its efforts for Swachh Bharat. It appears that the ICAI is drawing up a plan for this purpose.

3. Some Ethical Issues

The Ethical Standards Board has clarified some Ethical issues on Pages 908 and 910 of CA Journal for January, 2015. Some of these issues are as under.

(i) Issue No.1

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?

Response

Council direction under Clause (8) of Part I of First Schedule to the C.A. 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 member who has conducted the statutory audit. (

ii) Issue No.2
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’.

(iii) Issue No.3
Whether the office of a Chartered Accountant is permitted to go in for ISO 9001: 2000 certification or other similar certifications?
Response

There is no bar for a member to go in for ISO 9001:2000 certification or other similar certifications. However, the member cannot use the expression like “ISO Certified” on his professional documents, visiting cards, letter heads or sign boards etc.

(iv) Issue No.4
Whether an auditor is required to provide to the client or to main auditor of the Head Office of the same enterprise access to his audit working papers?

Response:

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.

(v) Issue No.5

Can a Chartered Accountant in Service accept or agree to accept any part of fees, profits or gains from a lawyer, a Chartered Accountant or broker engaged by such company, firm or person or agent or customer of such company firm or person by way of commission or gratification?

Response:

Clause (2) of Part II of First Schedule to the C.A. Act, prohibits a member in service from accepting or agreeing to accept any part of fees, profits or gains from a lawyer, a Chartered Accountant or broker engaged by such company, firm or person or agent or customer or such company, firm or person by way of commission or gratification.

4. EAC Opinion:

Accounting Treatment of Contribution to a Cluster Project

Facts
A company is an unlisted public limited company and an auto-ancillary engaged in the business of manufacture of Cast Iron (C.I.), castings and machining of castings automobile parts. The foundry and the machining facilities are located at Kolhapur in the state of Maharashtra.

The company requires to use substantial quantity of silica sand in the foundry for making moulds. The sand once used cannot be used again and it becomes waste sand.
The disposal of waste sand is becoming difficult due to non – availability of proper place for dumping and on account of environmental issues and stringent restrictions from pollution control department. The problem of disposal of the waste sand is becoming expensive and severe day by day.

The availability of fresh sand is also diminishing owing to measures being taken by the State Government to protect the environment for silica and mining, which in turn, has increased the costs of procurement of silica sand.

To overcome this problem all the foundries from Kolhapur came together through their association and decided to undertake a cluster project mainly to set up a sand reclamation plant. A limited company registered u/s. 25 of the Companies Act, 1956 is formed as Special Purpose Vehicle (SPV). The objectives of the cluster company (i.e. SPV) are not to make profit. The Central and the State Governments have declared incentives and benefits in the form of subsidies for formation of such cluster projects which provide common utilities and services to its members. In the cluster project each member of the cluster has to contribute non refundable amounts calculated based on its requirement of sand reclamation. The com-pany is required to pay a non-refundable one-time contribution on the basis of formula for contribution decided by the cluster.

The company has clarified that it is a general member under ‘Sand Reclamation Category’. The contribution for sand reclamation category is one time at Rs. 6,000/- per metric tonne/ per month of sand reclamation requirement. At this rate, the company desires to make one time contribution of Rs. 42/- lakh with a view of book the capacity of 700 tons. According to the company, the sand reclamation benefits are permanent and it is not envisaged that the entitlement would exhaust any time. The company has paid an advance against its contribution and the balance is required to be paid in five equal installments. The advance paid is shown as advance under long term loans and advances. The company has clarified that it has not received any ownership rights over the SPV and neither the membership nor the benefits can be transferred.

Query:

The company has sought the opinion of the Expert Advisory Committee as to what is the appropriate accounting treatment?

EAC Opinion:

The committee notes that a SPV has been set up by the industrialists in the Kolhapur region in the form of a not-for-profit section 25 company under the Companies Act, 1956, to undertake a cluster project to set project to set up a sand reclamation plant for the benefit of its members including the company. Each member of the SPV Company is required to contribute a non-refundable amount towards the cost of setting up the sand reclamation plant based on its monthly requirement of sand reclamation. The question now arises is whether such contribution can be capitalised as an asset or should be expensed.

After considering the definitions of the terms ‘intangible asset’ and ‘asset’ given in paragraph 6 of AS 26 and meaning of ‘control’ in paragraph 14, the Committee is of the view that an item can be classified as an intangible asset only if it fulfills all the three conditions (a) it is identifiable, (b) the enterprise has control over the resource, and (c) it is expected that future economic benefits will flow to the enterprise. The Committee notes that in the Company’s case, the contribution entitles the company the services of reclamation of sand upto 700 M.T. per month and various other services, utilities and facilities provided by the SPV at a reasonable cost. Thus, contribution made by the company gives rise to a membership right in the SPV for the company, which is identifiable and from which future economic benefits are expected to flow to the company. Further, with regard to control, the Committee notes that to the extent of its entitlement for sand reclamation of 700 M.T. per month, the company enjoys unrestricted services. Thus, although the company does not get any ownership right over the SPV, the company has the control over the reclamation entitlement and other benefits attached with the membership rights. Accordingly, the Committee is of the view that the membership right received as a consideration of the total contribution of Rs. 42 lakh made by the company to the cluster project should be recognised as an intangible asset.

With regard to the amortisation of the intangible asset, after considering the paragraph 63 of AS 26, the Committee is of the view that as the future economic benefits embodied in an intangible asset are consumed over time, the cost of the asset should be systematically allocated over the asset’s useful life. The Committee is of the view that for determining the useful life of an intangible asset, various factors, such as, the expected usage of the asset, the period of control over the asset and legal or similar limits on the use of the asset etc., as indicated in paragraph 64 of AS 26, need to be considered. Accordingly, the Contribution made by the company to the cluster project should be amortised over its useful life rather than the pay-back period or a period of 3-5 years, considered reasonable by the company.

With regard to the company’s contention that the sand reclamation benefits are permanent and it is not envisaged that the entitlement would exhaust any time. The Committee, after considering paragraphs 67 and 68 of AS 26, is of the view that an intangible asset may have a useful life longer than ten years but it is always finite. The company should disclose the reasons if the presumption of useful life of 10 years is rebutted and the factor(s) that played a significant role in determining the useful life of the asset. Thus, keeping in view the facts and circumstances of each case, the useful life of an intangible asset has to be determined. [Page Nos. 940 to 944 of C. A. Journal – January, 2015]

5. New Accounting Standards (IND – AS):

The Ministry of Corporate Affairs has prescribed the road map for the implementation of the new Accounting Stan-dards (IND-AS) for certain specified Companies. Notifica-tion for this will be issued by the Government very soon. IND-AS are close to the International Financial Reporting standards (IFRs). The companies to which these stan-dards will apply are as under.

Companies with a Net worth of Rs. 500 crore or more, can follow IND-AS on voluntary basis in F.Y. 2015-16. IND – AS will be mandatory for such companies from F.Y. 2016-17. This requirement will apply to Holding, Subsidiaries, Joint Venture and Associates of such companies.

Listed Companies with Net Worth of less than Rs. 500 crore and other Companies with Net worth between Rs. 250 crore and Rs. 500 crore can follow IND-AS on voluntary basis in F.Y. 2015-16 and 2016-17. From F.Y. 2017-18, this will be mandatory for such companies.

6. ICAI News:

(Note: Page Nos. given below are from CA. Journal of January 2015)

(i) Revised Format of Auditor’s Report:

ICAI has revised the format of Auditor’s Report as well as the Engagement Letter for statutory Audit of the Financial Statements under the Companies Act, 2013. This is available on the website of the Institute. (P.895)

(ii) Pre-Budget Memorandum:

ICAI has submitted to the Government Pre-Budget Memorandum. Full text is available on ICAI website. (P.895)

(iii) New Overseas Chapter:

ICAI has opened its 24th Chapter in Vancouver in British Columbia in Canada. (P 895)

(iv) ICAI New Publications:

Following new publications are issued by ICAI (P.1026)

Background Material on GST

Technical Guide on Gujarat VAT

Technical Guide on Rajasthan VAT

Technical Guide on Jharkhand VAT

Extension of Last Date for CPE Hours Requirement:

ICAI has extended the last date for compliance with re-quirement for CPE Hours for 2014 from 31/12/2014 to 31/3/2015.

BCAJ Admin

Company Law

Companies (accounts) amendment rules, 2015

The Ministry of Corporate Affairs has vide Notification dated 16th January, 2015 amended the Companies (Accounts) Rules, 2014 with the Companies (Accounts) Amendment Rules, 2015. The following changes have been made:
i) A fter Rule 2 the following is inserted “2A. Notice of address at which books of account are to be maintained.—For the purposes of the first proviso to sub-section (1) of section 128, the notice regarding address at which books of account may be kept shall be in Form AOC-5” and

ii) in Rule 6, after the third proviso, the following proviso shall be inserted

“Provided also that nothing in this rule shall apply in respect of consolidation of financial statement by a company having subsidiary or subsidiaries incorporated outside India only for the financial year commencing on or after 1st April, 2014.”

Form AOC-5 is similar to eForm 23AA as per section 209(1) of the Companies Act, 1956 and if required to be filed when the Board of Directors decides by passing the resolution to keep all or any of the books of account at any other place in India besides the registered office then, the company shall, within seven days of passing the Board Resolution, file this form giving full address of that other place in form AOC-5.

2. Companies (cost records and audit) amendment rules 2014

The Ministry of Corporate Affairs has vide Notification dated 31st December, 2014 made the Companies (Cost Records and Audit) Amendment Rules, 2014 to amend the Companies (Cost Records and Audit) Rules, 2014.

It has inserted in Rule 2 (aa) a clarification that “Central Excise Tariff Act Heading” means the heading as referred to in Additional notes in First Schedule to Central Excise Tariff Act, 1985.

Accordingly, Companies are required to maintain Cost Records if turnover exceeds Rs. 35 crore or more during immediately preceding Financial Year in respect of the products and services specified;

Applicability of Cost Records: The Rules have categorised the entities into Regulated Sector (namely Telecommunication services; Power generation, Transmission, Distribution and Supply; Petroleum products; Drugs and Pharmaceuticals; Fertilisers; Sugar and Industrial alcohol) and Unregulated Sectors (i.e., steel, minerals oil, electrical, education services, health services, textiles, milk powder, medical devices etc businesses);

Applicability of Cost Audit: It will be applicable for entities under the Regulated sectors having overall annual turnover of Rs. 50 crore or more and the aggregate turnover of the individual products or services of Rs. 25 crore whereas Unregulated Sector Audit of Cost Records will be applicable for annual turnover of Rs. 100 crore or more and the aggregate turnover of the individual products or services of Rs. 35 crore or more have to get their Cost Records Audited; for financial years commencing from 01-04-2015.

Exemptions are provided to Companies whose revenue from exports, in foreign exchange, exceeds 75% of total revenue and Companies operating from Special Economic Zones.

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BCAJ Admin

Part C Information on & Around

CDR Cell:
Corporate Debt Restructuring Cell has refused to the RTI query about its operations saying RTI , transparency law, does not apply to it.

CDR is a self-empowered body, which provides broad guidelines and policies to be followed by itself and the administrative, operating and other costs of CDR cell is shared by all financial institutions and Banks.

Based on this, Shailesh Gandhi, former Central Information

Commissioner holds the view that RTI Act applies to them. However, CDR Cell holds the view that it is neither owned, controlled or substantially financed directly or indirectly by funds provided by the appropriate government. Hence, CDR Cell is not a public authority as defined u/s. 2(h) of the RTI Act.

In the first Appeal before FAA, he also ruled that “CDR Cell is not a public authority under the RTI Act, and hence, we are unable to entertain application under the RTI Act”.

Matter would now go to the Central Information Commission.

Information on Netaji Subhash Chandra Bose:

In Jan. 15 issue in Part C this item was carried. Now Mr. S. C. Agrawal, the RTI appellant has reacted on it and has said:

“According to section 8(2), Public interest definitely overweighs the protected as several committees have been formed by the Union government to probe the mystery behind Netaji’s death. The Central Public Information Officer did not even name the country with which relations are likely to be prejudicially affected”.

BCAS RTI Clinic:
Reproducing one letter received by me from one visitor, at BCAS RTI Clinic Aurobindo Das:

I approached your office in January 2014 to seek guidance regarding inflated water bills charged by P/S Ward, Goregaon West, BMC Water Department, for nearly two years to our housing society. The Asst. Engineer, Water Works refused to give us the information about the basis on which and the methods followed by the billing department. Adv. Anilkumar K. Asher has guided me since then till the hearing stage of my 2nd appeal. He accompanied me to the office of the MSIC on 24.09.2014. And I am pleased to inform you that the Order of the appeal was in my favour. Enclosed please find the copy of the Order.

Sir, I am personally grateful and thankful to all of you for the help & guidance that have been accorded to me”.

Note: Copy of the Order received in Marathi is not reproduced here. Many visitors get such positive results by acting on our advice but do not write on their success.

RTI & CPA :
There were conflicting judgements of the National Commission as to whether an applicant seeking information under the RTI Act would be a consumer or not. Certain two member benches had held that an RTI applicant who pays fees for the information would be a consumer, while other benches had held a consumer complaint would not be maintainable since the RTI Act provides its own channel of appeals.

Hence, a three-member bench was constituted to settle the law. The national commission addressed to two issuesfirstly, whether a person seeking information under RTI Act can be said to be a consumer and if it is held that he is a consumer, can a complaint to file under the Consumer Protection Act, or would this remedy be barred by the RTI Act provisions.

The national commission observed that it is a settled legal proposition that when a right is created by a statue which also provides for an adequate and satisfactory remedy to enforce that right, a person must avail of the mechanism available under the relevant act. The Public information officer is actually discharging a statutory function and not rendering any services. Besides, Section 23 of the RTI Act bars the jurisdiction of courts.

By its order of January 8, the national commission concluded that it is not permissible to have two parallel machineries for enforcement of the same rights created by the RTI Act, which a special statute. If a consumer complaint is permitted, it would defeat the purpose of providing a special mechanism under the RTI Act.

An RTI applicant is not entitled to file a consumer complaint for deficiency in service. He must follow the appeal procedure prescribed under the RTI Act.

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BCAJ Admin

Part B RTI act, 2005

In the last two issues of BCAJ, I had briefly summarised chapters 1 & 2 of “PEOPLES’ MONITORIN G OF THE RTI REGIME IN INDIA 2011-13”. Same is being serialised. However, I am postponing it to the next issue to continue on the same. This issue covers report on online RTI facility.

Maharashtra’s launch of facility for filing RTI Application online.

Earlier Central Government had prescribed online facility www.centralrtionline.gov.in.

That of Maharashtra is www.rtionline.maharashtra. gov.in .

Facility has started from 01.01.2015.

http://www.rtionline.maharashtra.gov.in/request/ request.php?lan=E is the site that is in Marathi and English, has the facility for filing application and for first appeal. It also has an option to know the status of one’s application. The mode of payment (RTI application fees) is internet banking, ATM cum debit card and credit card (Master/Visa).

Thirty one of the 37 departments in Mantralaya are shown on the site. All the departments within Mantralaya would be covered first. The facility would be expanded to other public authorities later. Once an application is filed, the applicant will be given a registration number through SMS and email.

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BCAJ Admin

Part A DECISION OF H.C. & CIC

Right of appeal Complaint u/s. 18(1) of the RTI Act :

In January 2015, in part A, I had referred to the Delhi High Court’s order and instead of analysing it, had reproduced an Analysis of that order by Mr. Venkatesh Nayak, Programme Co-coordinator of CHRI. Now I summarise the said HC’s order dated 05.12.2014.

The petitioner, R. K. Jain, inter alia, impugned an order dated 14.02.2014 passed by respondent no. 3 – Central Public Information Officer & Administrative Officer, Income Tax Settlement Commission, denying the information, which was earlier directed to be supplied to the petitioner under the provisions of the Right to Information Act, 2005.

The impugned order indicated that the order dated 26.09.2013 passed by PIO pursuant to an application filed by the petitioner under the RTI Act; and the order dated 21.10.2013 passed by FAA in an appeal preferred by the petitioner against the order dated 26.09.2013, were set aside as being void ab-initio by the Chairman, IT settlement Commission as an administrative head of the Income Tax Settlement Commission.

The principal Controversy to be addressed is whether, respondent no. 1 could declare by an administrative order, the orders passed by respondent nos. 2 (PIO) & 4 (FAA ) as being void ab-initio.

The petitioner had filed RTI application seeking information, inter alia, with respect to disposal and pendency of matters before the Income Tax Settlement Commission. In response to this application, CPIO and Joint Commissioner of Income Tax, the Income Tax Settlement Commission passed an order dated 26.9.2013 furnishing certain information to the petitioner. However, by the said order certain other information as sought for was denied. The petitioner preferred an appeal before the First Appellate Authority. The said appeal was partly allowed by an order dated 21.10.2013.

On response to the reminder letters to PIO by Mr. Jain, received the order from PIO in which he referred to an administrative order passed by the respondent no. 1; the extract of which as quoted in the impugned order reads as under:

“As there has been total no-compliance by the JDIT-II and DIT (Inv) of the provisions of the RTI Act, 2005 and notification by the Chairman, ITSC, New Delhi order no. C-26016/1/05/SC-RTI /1178 dated 29/31-07-2013, the orders of even numbers dated 26.09.2013 and 21.10.2013 passed by the JDIT and DIT (Inv) are ab initio void and are annulled. The RTI application will be disposed of in accordance with the provisions of the RTI Act, 2005 and notification by the Chairman, ITSC, New Delhi order no. C-26016/1/05/SC-RTI /1178 dated 29/31-07-2013 by the Administrative Officer, (CPIO), ITSC, Principal Bench, New Delhi at the earliest.”

The Judge, Hon. Vibhu Bakhru then wrote:

“I am unable to accept that such orders passed in exercise of statutory powers could be declared as a nullity or void by an administrative order without recourse to the hierarchy of authorities as specified in the statute – the RTI Act. In the event, the respondent no. 1 was of the view that the orders passed by PIO & FAA were without authority of law, the proper and the only course would be to file an appeal before the Central Information Commission (hereafter the ‘CIC’) or any other competent judicial forum. However, the said orders could not be nullified by an administrative order”.

“The learned counsel appearing for the respondents further submits that the present writ petition ought not to be entertained as the petitioner would have an alternative remedy to approach the CIC by way of a complaint u/s. 18(1) of the RTI Act”.

“Undoubtedly, the CIC would have the power to enquire into any complaint in respect of matters relating to access of information under the RTI Act. However, it is apparent, in the present, case that respondent no. 1 has acted without authority of law in nullifying orders passed under the RTI Act; thus, interference with the impugned order is warranted in these proceedings”.

The court then ruled:

“In view of the above, the impugned order is set aside. However, it will also be open for the respondents to approach the CIC to assail the orders dated 26.09.2013 and 21.10.2013 passed by PIO & FAA . Needless to mention that if an appeal is filed before the CIC by the public authority (the Income Tax Settlement Commission); the same would be considered in accordance with law”.

[R. K. Jain vs. Chairman, Income Tax Settlement Commission & Ors. in W.P. (C) 2939/2014, in HC of Delhi dated 05.12.2014]

Section 18 of the RTI Act :
The Complainant Raghubir Singh through his RTI application dated 25.09.2013 had sought for information on 2 Points, viz i) Which of the Government Secondary Schools in Delhi under the Directorate of Education, have introduced Punjabi teaching as a third language for the first time afresh in class VI in the academic year 2010- 2014; ii) the number of such students enrolled in Class VI, School-wise. The RTI application of the Complainant was returned to him stating that the Indian Postal Order (IPO) was not in order. Claiming non-furnishing of the information sought, the Complainant has approached the Commission u/s. 18 of RTI Act.

Both the parties made their submissions. The Complainant, Shri Raghubir Singh is a senior citizen of 75-years old and a law teacher who is associated with the making of the RTI Act before its enactment by the Government. The Commission heard him on the telephone as desired by him. He complained that the Directorate of Education had harassed him by raising meaningless technical issues. They returned the Indian Postal Order of Rs. 10/- saying that it is not properly drawn, when he claims to have rightly drawn in favour of the Accounts Officer. The Complainant objected to the returning of the Postal Order by PIO by speed post, for which he had to spend more than Rs. 25. He complained that the Directorate has not updated its web-site and appropriate against whom the Postal Order should be drawn or fee to be paid was not given.

The Commission then reproduced Full Bench Decision of CIC in S. C. Aggrawal vs. Ministry of Home Affairs dated 27.08.2013. Said decision is “a landmark”, very well written in the spirit of the RTI Act. I am posting it on BCAS website www.bcasoline.org and PCGT’s web www.rtiforyou.info . You may also go on CIC’s website to read it.

After the above, the Commission ruled:

The Commission directs the PIOs to check up whether every school has properly replied to the RTI application, if not fulfill the deficiencies. The Commission also directs them to contact the Complainant on the telephone number 011-23363510, given by him, and provide the complete information within 15 days from the date of receipt of this order. ? T he Commission directs the respondents, their PIOs and in charge officers to immediately update their official website as desired by the Complainant and compliance report be sent to the Commission, with a copy to the Complainant, within ten days from the date of receipt of this order.

The Commission directs all the PIOs of Directorate of Education, all other officers concerned, to accept the IPO without raising technical objections and follow all the directions issued in the above referred full bench order of CIC. They should not spend any amount instead of encashing the IPO for Rs. 10 as prescribed-fee.

The Commission directs all the PIOs of Public Authority to submit separate reports to this Commission explaining how many IPOs they have rejected so far and what are the grounds of rejection, from January 2014 to December 10, 2014. Within 15 days from the date of receipt of this order.

The Commission issues a show cause notice to PIO who refused and returned the IPO of appellant, why maximum penalty cannot be imposed against the spirit of RTI and harassing the applicant and for not updating the official website.

[Shri Raghubir Singh vs. Director of Education: CIC/ SA/C/2014/000038 dated 12.12.2014]

Notes:

I am happy to note that Mr. Raghubir Singh, senior citizen made this appeal to CIC. He was associated with the making of the RTI Act before its enactment. That put some more pressure on CIC to pass such favourable order. Same would improve the performance on matters related to RTI by Public Authorities. This judgement and the one referred to in this order need to be circulated widely.

Based on above decision, DOPT (www.persmin.gov.in ) has issued a circular dated 14.01.2015 on the subject “introduction of postal stamps as rti fee/cost – seeking comments from public regarding”. Comments were to be sent latest by 07.02.2015 through email only to Shri. R. K. Girdhar, under Secretary (RTI), at usrti-dopt@nic.in. this issue would reach the readers after that date. May be the date gets extended or DOPT may still accept late communication from you.

BCAJ Admin

Ethics and U

Procedure of Enquiry

Arjun (A) — Hey Shrikrishna! Hey Shrikrishna! Arey, where are you?

Shrikrishna (S) — Yes, yes, my dear. Why are you so panicky? I am here only.

A — Good Lord! Usually, you always arrive at the meeting place before me. Today, you were not to be seen.

S — I am omnipresent, present everywhere. I appear whenever a true devotee remembers me sincerely. Tell me, what is the matter?.

A — Y ou have so far explained to me many items of misconduct. I shared it with my friends. But today, my very close friend received a notice from the Institute. He was asking how to go about it.

S — T hen did you not refer the books?

A — I looked for the procedure in the CA Act as well as Regulations. But couldn’t get the detailed procedure.

S — Which Act you saw? That of 1949?

A — N o. I saw 2006 Act only. That much I know!

S — Good! Many of you may not have referred the CA Act and other books on Ethics ever since you guys passed your CA.

A — What you say is right. When we studied, it was Code of Conduct. Now, it is Code of Ethics. What really is the difference?

S — See, conduct is a generic term. Conduct may be good or bad; but ‘ethics’ denotes something positive. In the context of professionals, ‘ethics’ was thought to be a better word.

A — Y ou mean, the conduct may be ethical or unethical.

S — You are right. And remember; one is either ethical or not ethical. There is no in between stage! One cannot be contented that one is ‘by and large’ ethical!

A — Leave aside the philosophy. Tell me the procedure.

S — F or procedure, you must refer to Chartered Accountants (Procedure of Investigations of Professional and other misconduct and conduct of cases) Rules, 2007 published in the official Gazette of India dated February 28, 2007.

A — Baap re! Such a long name! Better call it misconduct rules?

S — Y es. But before going to these rules, you should know that there are basically four authorities stated in the Act of 2006.

A — What are those?

S — F irstly, the Director Discipline. Then the Board of Discipline and Disciplinary Committee. And thereafter, the Appellate Authority.

A — T ell me the functions of all these.

S — You see, if somebody files a complaint ………..

A — H ow does one do so?

S — I f somebody is not happy with a CA’s work or other behaviour, he has to fill up a very simple form – called Form I. It is to be accompanied by a fee of 2,500/- rupees.

A — But who usually complains?

S — A nybody! Complaint can come from a variety of people and agencies.

A — Such as?

S — R egulators – Tax authorities, ROC, MCA authorities, SEBI, RBI, Registrar of Co-operative societies, then bankers, financial institutions, clients, other members of the Institute.

A — Who else?

S — F urther, even your staff, articles, partners, relatives, friends ………

A — But should he be connected with your work?

S — Not necessarily. Even an altogether stranger can file a complaint. These are quasi –criminal proceedings. Locus standi of complainant is not relevant.

A — Surprising! So anybody under the sun can file a complaint against a member.

S — Y es. There are even professional blackmailers. Beware of them. A — O h God!

S — M oreover, the Council can take suo moto cognisance of any misconduct, based on the information received by it. Information can be received even from public domain and media. So, always be cautious.

A — Y ou were telling me about the functions of those authorities.

S — D isciplinary Directorate, basically receives the complaints; The Director Discipline (DD) acts as a Secretary to the Board of Discipline (BOD) as well as to the Disciplinary Committee (DC). People working in the Directorate are bureaucrats.

A — Oh! S — T hey receive the complaint and forward it to the Respondent. The Respondent is required to submit his explanation. That explanation is sent back to the complainant. He is asked to write his views on the explanation in the form of a rejoinder.

A — T ill that time, they don’t process anything?

S — N ot really. It is only after these three documents are received, that they scrutinise the case. Thereafter, the DD forms a ‘prima facie opinion’ as to whether the Respondent is guilty or not guilty.

A — T hen what happens? It is only a prima facie opinion. Not final. Right?

S — N ow, if it is an item of misconduct stated in the First Schedule, the BOD has jurisdiction. On the other hand, if it is a Second Schedule item, it is within the scope of DC.

A — A nd a mixed one?

S — T hen the DC’s jurisdiction. The prima facie opinion is placed before the BOD or DC as the case may be. BOD or DC may concur with and endorse the views of the DD; or they may disagree. If BOD/DC feel that there is no prima facie guilt, the fact is communicated to both the parties and file is closed.

A — And if they find him prima facie guilty, what next?

S — T hen they direct that a detailed enquiry be conducted. This is the point of time when the disciplinary proceedings are deemed to be commenced.

A — Bhagwan, excuse me. Let me first digest all that you told me just now. We will meet some other time as I wish to understand the whole process. Just now, I am in a little bit of a hurry.

S — Sure. But your friend has to send his explanation in 21 days.

A — See. We CAs never do anything well in time. Can he get extension of time?

S — I was sure, you would ask this question If there is a valid reason, you can get extra time; but not more than 30 additional days.

A — O h! Then I must hurry up. We will meet soon. Bye, Bye. ….. (To be continued)

Note:
This dialogue is based on the procedural rules contained in Chartered Accountants (Procedure of Investigations of Professional and other misconduct and conduct of cases) Rules, 2007 published in official Gazette of India dated 28th February, 2007 (‘Enquiry Rules’).

levitra

BCAJ Admin

From Published Accounts

Section A: Disclosures regarding ‘Going Concern’ in airline companies for FY 2013-14 and unaudited financial results for Q2 2014-15

Jet Airways (India) Ltd . FY 2013-14

From Auditors’ Report
Emphasis of Matter
We draw attention to the following notes to the financial statements:

(a) …. Not reproduced
(b) Note 42 regarding preparation of financial statements of the Company on going concern basis for the reasons stated therein. The appropriateness of assumption of going concern is dependent upon realisation of the synergies from alliance with the Strategic Partner and/ or the Company’s ability to raise requisite finance/ generate cash flows in future to meet its obligations, including financial support to its subsidiary.

From Notes to Financial Statements
42. The Airline Industry has been adversely affected by the general economic slowdown. This coupled with high fuel cost significantly impacted the performance and cash flows of the Company and its major subsidiary resulting in substantial erosion of the net worth. With the strategic investment by Etihad PJSC, the Management expects to improve operating cash flows through cost synergies, revenue management, network synergy, leasing out aircraft etc. These measures are expected to result in sustainable cash flows and accordingly the Financial Statements continue to be presented on a going concern basis, which contemplates realisation of assets and settlement of liabilities in the normal course of business.

Q2 2014-15
From Limited Review Report

Attention is invited to: Note no.7 of the Statement regarding preparation of the Statement on a going concern basis for the reasons stated therein. The appropriateness of assumption of going concern is dependent upon realisation of the synergies from alliance with the Strategic Partner and/or the Company’s ability to raise requisite finance/generate cash flows in future to meet its obligations, including financial support to its subsidiary.

Our report is not qualified in respect of the above matters.

From Notes to Unaudited Financial Results
7. With Strategic investment by Etihad Airways PJSC and gradual implementation of the recommendations provided by a domain expert, the Management expects to achieve required operating cash inflows through cost synergies, revenue management, network synergy, leasing out aircraft, etc. These measures coupled with on-going initiatives to raise funds are expected to result in sustainable cash flows and accordingly the statement of financial results continue to be prepared on a going concern basis, which contemplates realisation of assets and settlement of liabilities in the normal course of business.

SpiceJet Ltd . FY 2013-14

From Auditors’ Report
Emphasis of Matter
Without qualifying our opinion, we draw attention to Note 2 (a) which indicates that the Company has incurred a net loss of Rs. 10,032.44 million during the year ended 31st March, 2014 and as of that date; the Company’s total liabilities exceed its total assets by Rs 10,194.76 million. These conditions, along with other matters as set forth in Note 2 (a), indicate the existence of a material uncertainty regarding the Company’s ability to continue as a going concern. Management’s plans in this regard are more fully described in the said note.

From Notes to Financial Statements

Summary of significant accounting policies
a) Basis of preparation of financial statements

The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in India (‘Indian GAAP’). The Company has prepared these financial statements to comply in all material respects with the accounting standards notified under the Companies Act, 1956, read with General Circular 8/2014 dated 4th April, 2014, issued by the Ministry of Corporate Affairs.

The financial statements have been prepared on an accrual basis and under the historical cost convention. The accounting policies adopted in the preparation of financial statements are consistent with those of previous year. The Company’s operating results continue to be materially affected by various factors, particularly high aircraft fuel costs, significant depreciation in the value of the currency, pricing pressures from competition and general economic slowdown. The Company has incurred a net loss of Rs. 10,032.44 during the year ended 31st March, 2014, and as of that date, the Company’s total liabilities exceeded its total assets by Rs.10,194.76. The Company is implementing various long-term measures to improve its product offering and enhancing customer experience. Considerable investments are also simultaneously being made by the Company to improve selling and distribution channels, revenue management and marketing functions. The Company has undertaken a comprehensive review of its current network to maximise profitability and improve efficiency in its operations. These measures along with consistent improvement in yields and enhancement in ancillary revenues are expected to drive growth in revenues in the future. The Company is also implementing various measures to optimise aircraft utilisation, improving operational efficiencies, renegotiation of contracts and other cost control measures to improve the Company’s operating results and cash flows. In addition, the Company continues to explore various options to raise finance in order to meet its short term and long term obligations. The Company believes that these measures will not only result in sustainable cash flows, but also enhance the Company’s plans for expansion.

The promoters continue to be committed to providing the required operational and financial support to Company in the foreseeable future. During the year, the Promoter has converted 15,000,000 warrants into equity shares of the Company thereby infusing additional funds of Rs. 407.03 into the Company.

Further, the Company’s promoters have subscribed to 64,169,000 warrants (convertible into equivalent no. of equity shares) for which 25% upfront money amounting to Rs. 333.04 has been received in the current year. In addition to the above, the Company has availed of an unsecured loan of Rs. 750.00 from the promoter, as well as an amount of Rs. 250.00 which has been provided as an advance against the remaining subscription money to be received consequent to the conversion of the warrants issued during the year. The Company also believes that the amendment to FDI policy has improved the investor sentiment towards the Indian aviation industry as evidenced by entry of large international players into the Indian market. In view of the foregoing, the Company’s financial statements have been prepared on a going concern basis, whereby the realisation of assets and discharge of liabilities are expected to occur in the normal course of business.

Q2 2014-15
From Limited Review Report

A1. Without qualifying our conclusion, we draw attention to Note 7 of the Statement which indicate that the Company has incurred a net loss of Rs. 1,044.6 lakh during the quarter ended 30th September, 2014, and as of that date, the Company’s total liabilities exceed its total assets by Rs. 145,973.0 lakh. These conditions, along with other matters as set forth in Note 7, indicate the existence of a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern.

From Notes to Unaudited Financial Results

7 (a) The Company has incurred losses of Rs. 31,044.7 lakhs for the quarter ended 30th September, 2014, and has accumulated losses of Rs. 295,829.8 lakh as at that date against shareholder’s funds of Rs. 149,856.7 lakh. As of this date, the Company’s total liabilities exceeded its total assets by Rs. 145,973.1 lakh. The Company’s operating results continue to be materially affected by various factors, particularly high aircraft fuel costs, significant depreciation in the value of the currency, pricing pressures from competition and general economic slowdown. The Company continues to implement various measures to improve its product offering and enhancing customer experience, along with simultaneous investments to improve selling and distribution channels, revenue management and marketing functions. The Company has also terminated certain aircraft leases ahead of schedule in the current and previous quarters in order to rationalise its fleet size and capacity in the near term while it implements its turnaround plan. These measures, along with consistent improvement in aircraft loads and RASK, as well as enhancement in ancillary revenues, are expected to drive growth in revenues in the future. The Company also continues to implement various measures to optimise aircraft utilisation, redeployment of capacity in key focus markets, improving operational efficiencies, renegotiation of contracts and other cost control measures to improve its operating results and cash flows. In addition, the Company continues to explore various options, both operating and strategic to raise financing in order to meet its short term and long term obligations. The Company believes that these measures will not only result in sustainable cash flows, but also enhance its plans for expansion in the future.

7 (b) On account of its operational and financial position, the Company has delayed payments to various parties, including vendors and its dues to statutory authorities. The Company has accrued for any known and determinable amounts of interest on such delays in accordance with contractual terms/applicable laws and regulations. However, it is not practically possible to determine the amount of any other dues, including penalties, consequent to such delays or other non-compliances of contracts or laws and regulations. Further, in view of the proposed plans of management to continue the Company as a going concern as discussed in Note 7(a) above, management is confident that it will be able to negotiate settlements with parties to whom monies are owed, to avoid any penalties. In view of the foregoing, no amounts of penalties have been recorded in these financial results.

BCAJ Admin

From published accounts

Section A: Reporting in case of Managerial Remuneration in excess of statutory limits

1) Jyothy Laboratories Limited (31-03-2013)

From Notes to Financial Statements

Employee benefit expenses include Rs. 1, 113.72 lakh paid/payable during the year towards remuneration payable to its Whole Time Directors. The maximum remuneration payable under para (1) (B) of Section II of Part II of Schedule XIII of the companies Act, 1956(‘Act’) is Rs. 192 lakh. Based on the legal advice received by the Company, management has computed the maximum remuneration payable to Whole Time Directors amounting to Rs. 1, 025 lakh.

The company has filed an application with the Central Government and is in the process of obtaining necessary approval from shareholders for remuneration payable to its Whole Time Directors. Pending receipts of such approval, the excess remuneration paid to the directors is held in trust by the said Directors.

From Auditor’s Report

Emphasis of Matter

Without qualifying our report, we draw attention to Note 40 to the Financial Statements regarding managerial remuneration amounting to Rs. 1,113 lakh paid/provided during the year of which Rs. 921 lakh is in excess of the limits prescribed under Schedule XIII of the companies Act, 1956. As informed to us, the company has filed an application with the central government and is in the process of obtaining necessary approval from shareholders for approval of such excess remuneration.

2) Gillette India Limited 30-6-2013)

From Notes to Financial Statements

Commission to Non – Executive Directors

During the current year, an aggregate amount of Rs. 80 lakh has been paid as commission to the Non – Executive Directors which is within the overall limits of commission payable to such directors under schedule XIII to the Companies Act, 1956. The said payment constitutes 53% of the aggregate amount of Rs. 153 lakh (excluding service tax of Rs. 19 lakh) which is payable to the Non – Executive Directors and is provided for in the financial statements.

The aggregate amount of Commission of Rs. 172 lakh (including service tax Rs. 19 lakh) payable and charged for the year in the financial statements as is stated above, exceeds the maximum amount payable based on 1% of the net profits of the Company amounting to Rs. 148 lakh (as per computation below) for the year ended 30th June, 2013, by an amount of Rs. 24 lakh (including service tax of Rs. 3 lakh). The said excess amount of Rs. 24 lakh which is provided but not paid, is subject to by approval of the Members of the Company by way of a special resolution at the ensuing 29th Annual General Meeting of the Company, and the Central Government.

During the previous year ended 30th June, 2012, also the Company had to paid commission to Non – Executive Directors amounting to Rs. 160 lakhs, of which an amount of Rs. 48 lakh (including service tax of Rs. 10 lakh), being amount in excess of 1% of net profits for the year ended 30th June, 2012. This was paid during the current year and the same was ratified by the members at the 28th Annual General Meeting of the Company. The Company has made an application to the Central Government on 3rd January, 2013 for the waiver of the excess commission, which is as yet pending for approval by the Central Government.

Computation of Net Profit in accordance with section 349 and section 309 (5) of the Companies Act, 1956 (not reproduced here)

From Auditor’s Report

Emphasis of Matter

We draw attention to Note 36(b) to financial statements regarding excess commission provided but not paid to the Executive Directors amounting to Rs. 24 lakh (including Rs. 3 lakh of service tax), which is subject to the approval of the members at the ensuring Annual General Meeting of the company and the Central Government. Further, as reported for previous year ended 30th June, 2012, the Company had provided excess commission amounting to Rs. 48 lakh, (including service tax of Rs. 10 lakh) which was since ratified by the members of the company at the 28th Annual General Meeting of the company and paid during the current year, application for which is as yet pending for approval with Central Government.

3) Jindal Stainless Limited (31-03-2013)

From Notes to Financial Statements

i. For the remuneration amounting to Rs. 16.20 lakh and Rs. 18.11 lakh paid to whole time director for the years 2008-09 and 2009-10 respectively, company’s representation is pending before Central Government;

ii. For the remuneration amounting to Rs. 63.60 lakh and Rs. 160.57 lakh paid to whole time director for year 2011-12 and 2012-13 respectively, company’s representation is pending before the Central Government.

From Auditor’s Report

Emphasis Of Matter

Note no. 51(C) (i) regarding pending necessary approvals for managerial remuneration as explained in the said note.

4) Ranbaxy Laboratories Limited (31-12-2012)

From Notes to Financial Statements

On the basis of a legal advice, the Company is of the view that the appointment and payment of remuneration to Mr. Arun Sawhney, CEO and Managing Director for the full year ended 31st December 2011 is in accordance with the conditions stipulated under the Notification no. GSR 534(E) dated 14th July 2011 read with the clarification dated 16th August 2012 issued by the Ministry of Corporate Affairs.

From Auditor’s Report

Emphasis Of Matter

Without qualifying our opinion, we draw attention to Note 37 of the financial statements, wherein it has been stated that on the basis of a legal advice, the company is of the view that the appointment of and payment of remuneration to Mr. Arun Sawhney, CEO and Managing Director for the full year ended on 31st December, 2011 is in accordance with the stipulated under notification no. GSR 534(e) dated 14th July 2011 read with the clarification dated 16th August 2012 issued by the Ministry of Corporate Affairs.

5) Network 18 Media & Investments Limited (31-03-2013)

From Notes to Financial Statements

Managerial remuneration paid, up to 31st March 2013, by the Company amounting to Rs. 26,388,400 (31st March 2012 – Rs 20,100,400) is in excess of the limits prescribed under the Companies Act, 1956 (“the Act”). The Company is in the process of obtaining the necessary approvals as per the Act.

From Auditor’s Report

Qualified Opinion

The company has paid Rs. 2, 63, 88,400/- as managerial remuneration to its Managing Director upto 31st March 2013 (upto 31st March, 2012 Rs. 1, 01, 00,400/-), which is in excess of the limits prescribed under the Act. Had the company accounted for the remuneration in accordance with the Act, the net loss after tax for the year ended 31st March, 2013 would have been lower by Rs. 2,63,88,400/- and short term loans and advance would have been higher by Rs. 2,63,88,400/-. Our report on the FS for the year ended 31st March, 2012 was also qualified in respect of this matter.

From Director’s Report

In regard to reservations/qualifications in the Auditors’ Report, the relevant notes on the accounts are self- explanatory and therefore do not call for any further comments of Directors. However, your Directors wish to offer the explanations in regard to note no. 6 of the Auditors Report. It is clarified that the Central Government has partially accepted the Company’s application for approval of the remuneration paid to the Managing Director and the Company has filed a representation for reconsideration of the matter and approval is awaited.

6) Mafatlal Industries Limited (31-03-2013)

From Notes to Financial Statements

Mafatlal Denim Limited (MDL), the erstwhile company which has amalgamated with the Company had re – appointed Mr. Rajiv Dayal as Managing Director & Executive Officer and Mr. Vishad P. Mafatlal as Joint Managing Director of MDL with effect from 1st April, 2011 for a term of 5 years. Managerial Remuneration of Rs. 139.28 lakh had been paid during the year 2011-12. As stipulated by the provisions of the Companies Act, 1956 requiring the approval of the Central Government for the appointment and remuneration of Managerial personnel in the case, inter alia, of a company that is in default in payment of its debts, erstwhile MDL had made the applications to the Government on 20th June, 2011 seeking approval for re – appointment and payment of remuneration to Mr. Rajiv Dayal and Mr. Vishad P. Mafatlal.

The erstwhile MDL was technically in default to SICOM Limited, a secured lender pending the Sanction of the section 391 Scheme pending before the Hon’ble Gujarat High Court. SICOM declined to give their No Objection Certificate for the re – appointments for the reason that they already had their debts adjudicated by the Hon’ble Debt Recovery Tribunal, Mumbai. The Government rejected the applications of MDL on 23rd September, 2011 for the reason that MDL had not submitted No Objection Certificate from SICOM, one of the secured lenders. MDL has made an application for reconsideration, as default to the secured lenders no longer exists.

Subsequently, SICOM Limited assigned the entire Debt in favour of M/s. Mishapar Investments Limited (another Company that amalgamated with the company) on 26th July, 2012. Thereafter, MDL obtained the No Objection Certificate from the said assignee and approached the MCA once again on 5th September, 2012. Pursuant to the said letter, MCA advised MDL to file applications afresh. Accordingly, MDL has filed Fresh Applications on 25th October, 2012 and awaits their approval.

From Auditor’s Report

Qualified Opinion
Attention is invited to Note no. 32.1 (a) to the financial statements, in the earlier year, erstwhile Mafatlal Denim Limited (the Amalgamating Company) had made representation to the Ministry of Corporate Affairs against the rejection of application u/s. 269, 198, 309 and 310 of the Act, relating to re – appointment and payment of remuneration with effect from 1st April, 2011 to 31st March, 2013. The said approval is pending from the Ministry Of Corporate Affairs and accordingly, we are unable to comment on the impact, if any arising out of the same in these financial statements.

From Director’s Report

The specific notes forming part of the Accounts referred to in the Auditor’s Report are self – explanatory and give complete information.

BCAJ Admin

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